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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 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) 584-5700
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 [] No []
At November 12, 1999, 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, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION.......................................... 3
Item 1. Financial Statements...................................... 3
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998............................ 3
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1999 and 1998 (unaudited) ............... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)................ 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk..................................................16
PART II -- OTHER INFORMATION............................................16
Item 1. Legal Proceedings........................................16
Item 6. Exhibits and Reports on Form 8-K.........................16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
-------------- --------------
(thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts and notes receivables, net 16,902 10,550
Accounts and advances receivable -
affiliates 33,977 19,475
Inventories 69,723 45,888
Other current assets 2,792 2,241
-------------- --------------
Total current assets 123,394 78,154
-------------- --------------
Properties, plant and equipment, net 967,591 951,023
Intangible assets, net 47,138 48,617
Other noncurrent assets 35,932 31,337
-------------- --------------
Total assets $1,174,055 $ 1,109,131
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 65,657 $ 33,443
Accounts payable - affiliates 178 1,142
Accrued liabilities 23,012 17,805
Accrued interest 6,860 1,723
-------------- --------------
Total current liabilities 95,707 54,113
-------------- --------------
Long-term debt 174,882 174,882
Long-term debt - affiliates 287,476 320,130
Deferred income taxes 104,154 124,158
Other noncurrent liabilities 33,743 37,243
-------------- --------------
Total liabilities 695,962 710,526
-------------- --------------
Stockholder's equity:
Common Stock, $0.01 par value, 1 million
shares authorized - -
1,000 shares issued and outstanding
Additional paid-in capital 528,500 423,500
Accumulated deficit (50,407) (24,895)
-------------- --------------
Total stockholder's equity 478,093 398,605
-------------- --------------
Total liabilities and stockholder's
equity $1,174,055 $ 1,109,131
============== ==============
See accompanying notes to consolidated financial statements
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED
ENDED ENDED ENDED SEPTEMBER 30, 1998
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999
--------------------------------------------------------------------
(thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Trade sales and $ 35,538 $ 24,094 $ 90,823 $ 79,392
services
Affiliate sales 93,149 64,389 243,664 200,827
-------------- ------------ -------------- -----------------
128,687 88,483 334,487 280,219
COST OF GOODS SOLD 125,446 84,738 334,221 265,022
-------------- ------------ -------------- -----------------
GROSS PROFIT 3,241 3,745 266 15,197
EXPENSES
Selling, general and 3,988 2,285 11,615 9,542
administrative
Research and 1,639 2,165 4,998 5,804
development
-------------- ------------ -------------- -----------------
OPERATING INCOME (LOSS) (2,386) (705) (16,347) (149)
INTEREST EXPENSE, NET
Affiliate interest (4,543) (1,092) (12,462) (6,871)
Other interest (5,234) (5,278) (15,676) (15,598)
Other income (expense) 2,642 1,641 3,337 8,902
-------------- ------------ -------------- -----------------
NET LOSS BEFORE INCOME
TAXES ( 9,521) (5,434) (41,148) (13,716)
Income tax benefit ( 3,633) (2,201) (15,636) (5,347)
-------------- ------------ -------------- -----------------
NET LOSS $ ( 5,888) $ (3,233) $ (25,512) $ (8,369)
============== ============ ============== =================
</TABLE>
See accompanying notes to consolidated financial statements
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(thousands of dollars)
------------- -------------
OPERATING ACTIVITIES
Net loss $ (25,512) $ (8,369)
Reconciliation to net cash used in operations:
Depreciation and amortization 42,883 31,344
Deferred income taxes (15,673) 3,606
Amortization of debt issuance costs 651 651
Changes in operating working capital:
Receivables (20,854) 7,377
Inventories (23,835) (6,000)
Other current assets (551) 7,192
Accounts payable 31,250 (41,754)
Other current liabilities 6,013 3,523
Deferred charges and other noncurrent (5,664) (3,459)
assets
Deferred credits and other noncurrent (3,500) (719)
liabilities
------------- -------------
Net cash used in operations (14,792) (6,608)
INVESTING ACTIVITIES
Advances receivable - affiliates - (16,456)
Capital expenditures of continuing operations (57,554) (199,474)
------------- -------------
Net cash used in investing activities (57,554) (215,930)
FINANCING ACTIVITIES
Intercompany (repayment to) borrowing from (32,654) 72,538
parent
Proceeds of capital contribution by parent 105,000 150,000
------------- -------------
Net cash provided by financing activities 72,346 222,538
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD - -
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ -
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,274 $ 10,274
Cash paid for income taxes $ 931 $ 180
See accompanying notes to consolidated financial statements
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 (including low density polyethylene ("LDPE") and
linear low density polyethylene ("LLDPE")), polypropylene, amorphous
polyalphaolefin ("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
average cost method.
Property, Plant and Equipment
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. Periodic maintenance and repairs
applicable to major units of manufacturing facilities are accounted for on
the prepaid basis by capitalizing the costs of the turnaround and
amortizing the costs over the estimated period until the next turnaround.
Normal maintenance and repairs of all other plant and equipment are charged
to expense as incurred. Renewals, betterments and major repairs that
materially extend the useful life of the assets are capitalized, and the
assets replaced, if any, are retired. Interest costs 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 the Company, formerly known as Rexene Corporation, was acquired
by Huntsman Corporation 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 amounts in the consolidated financial statements for prior
periods have been reclassified to conform with the current presentation.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which established
accounting and reporting standards for derivatives and for hedging
activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is
currently in the process of evaluating the impact of this statement on its
financial statements.
Income (loss) per Share
Income (loss) per share is not presented because it is not
considered meaningful information due to the Company's ownership by a
single non-public shareholder.
2. INVENTORIES
Inventories consist of the following (in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $ 13,351 $ 7,661
Work in progress 9,083 3,614
Finished goods 47,289 34,613
--------------- -----------------
$ 69,723 $ 45,888
=============== =================
3. PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation of property, plant and
equipment are as follows (in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Property, plant and
equipment $ 1,053,630 $ 996,078
Less accumulated
depreciation (86,039) (45,055)
--------------- -----------------
$ 967,591 $ 951,023
=============== =================
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
September 30,1999 December 31, 1998
----------------- -----------------
Intercompany borrowings $ 228,767 $ 264,495
Capital lease - Affiliate 50,000 50,000
11 3/4% Senior Notes due
2004 174,882 174,882
Other 8,709 5,635
--------------- -----------------
$ 462,358 $ 495,012
=============== =================
5. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization are (in
thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Debt issuance costs $ 7,173 $ 7,173
Less accumulated amortization (3,340) (2,689)
---------------- ------------------
$ 3,833 $ 4,484
- -
---------------- ------------------
Goodwill $ 42,406 $ 42,406
Less accumulated amortization (4,397) $ (2,814)
---------------- ------------------
$ 38,009 $ 39,592
---------------- ------------------
Other intangible assets $ 5,603 $ 4,626
Less accumulated amortization (307) (85)
---------------- ------------------
$ 5,296 $ 4,541
---------------- ------------------
$ 47,138 $ 48,617
================ ==================
6. CONTINGENCIES
ENVIRONMENTAL REGULATION
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 the its
historical expenditures and expected future results of operations, 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 requirements, the Company may be required to make additional
significant site or operational modifications that are not currently
contemplated. 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 reasonable investigation and analysis, management
believes that the approximately $6.7 million accrued in the September 30,
1999 balance sheet is adequate for the total potential environmental
liability of the Company with respect to contaminated sites. Extensive
environmental investigation of the groundwater, soils and solid waste
management units has been conducted at the Odessa Facility. Risk
assessments have been completed for a number of these units and corrective
measures have been defined and conducted. As of September 30, 1999, the
Texas Natural Resources Conservation Commission ("TNRCC") has approved
closure for twenty-nine of the plant's solid waste management units.
OTHER MATTERS
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 remediate such conditions will not be significant to
the Company.
TNRCC FLARE INVESTIGATION
By letter dated January 28, 1999, the TNRCC notified the Company of
allegations that the Company's olefins plant may have violated its air
permit by emitting visible smoke from its process/emergency flare in late
December 1998 or early January 1999. During that period, the olefins plant
was in the midst of start up after extensive construction. As required by
Texas law, the Company had given prior notice to the TNRCC of the startup
and that excess emissions might result. The TNRCC investigated this matter
after receiving numerous complaints from residents of a subdivision near
the Odessa facility. A draft Agreed Order with a proposed $15,000 penalty
was sent to the Company. Following discussions with the Company, the TNRCC
re-drafted the Agreed Order with a proposed $7,000 penalty, $4,000 of which
shall be set aside in light of the Company's contributions to an agreed
supplemental environmental project. The re-drafted Agreed Order will be
submitted in the near future to the TNRCC commissioners for final approval.
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
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. In
general, the markets for the Company's products improved during the first
nine months of 1999. Management believes that market conditions will remain
stable in the fourth quarter of 1999 and will begin improving again early
in 2000. Management also expects to benefit from the operations of its
newly expanded and modernized facilities.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
The Company's revenue increased $40.2 million to $128.7 million for
the three months ended September 30, 1999 from $88.5 million for the same
period in 1998. The major factors contributing to the increase in revenue
were higher sales volumes in all the companies product lines and higher
sales prices in Olefins, Styrene, and polyethylene. Polypropylene, APAO and
FPO experienced lower selling prices during the third quarter. The higher
sales volume was mainly due to the Company's ability to meet increased
demand from its customers due in large part to the Olefins and LLDPE
modernization and expansion projects. Polyethylene revenue increased $25.8
million to $63.7 million due mainly to the modernization and expansion
projects. Olefins revenue increased $6.7 million to $18.6 million due
mainly to 53.1 million pound volume increase resulting from the new
expansion of the ethylene unit. Styrene revenue increased $4.9 million to
$16.6 million due primarily to a 10.3 million pound increase in sales
volume and a 21.2% increase in the average sales price due mainly from the
industry's supply and demand situation.
Gross Profit
The Company's gross profit was substantially unchanged at $3.2
million for the third quarter of 1999 compared to the same period in 1998.
The increase in revenues discussed above was offset by start-up and other
start-up related manufacturing costs.
Selling, General and Administrative Expenses("SG&A")
The Company's selling, general and administrative expenses
increased $1.7 million to $4.0 million for the three
months ended September 30, 1999 from $2.3 million for the same period in
1998. Of the increase, $0.5 million was due to the amortization of goodwill
in 1999 associated with the purchase accounting allocation, which was not
finalized until the end of the third quarter of 1998. The remainder of the
increase was primarily due to a one-time, non-recurring expense credit
relating to executive bonuses, as well as higher SG&A expenses due to the
LLDPE and olefins plant expansions.
Affiliate Interest
The Company's affiliate interest increased $3.4 million to $4.5
million for the three months ended September 30, 1999 from $1.1 million for
the same period in 1998, primarily due to a decrease in capitalized
interest related to lower levels of construction in progress in 1999.
Other Income
The Company's other income increased $1.0 million for the three months
ended September 30, 1999 as compared to the same period in 1998, primarily
due to the receipt in 1999 of the final settlement of an insurance claim
relating to the January 1998 transformer fire.
Income Taxes
The Company's effective tax rate decreased 3% to 38% for the three
months ended September 30, 1999 from 41% for the same period in 1998,
primarily due to the amortization of goodwill in 1999 associated with the
purchase accounting adjustment.
Net Income
The Company's net income decreased $2.7 million to a loss of $5.9
million for the three months ended September 30, 1999 from a loss of $3.2
million for the same period in 1998. The decrease is a result of the
reasons stated above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
The Company's revenue increased $54.3 million to $334.5 million for
the nine months ended September 30, 1999 from $280.2 million for the same
period in 1998. The major factors contributing to the increase in revenue
were higher sales volumes in all product lines as well as the additional
revenue generated from the new and modernized facilities. Polyethylene
sales revenue increased $37.8 million to $156.2 million for the first nine
months of 1999. Olefins revenue increased $7.3 million to $43.5 due mainly
to an 88.0 million pound volume increase resulting from the new expansion
of the ethylene unit. Styrene sales revenue increased $5.0 million to $47.0
million due to higher sales volume and pricing.
Gross Profit
The Company's gross profit decreased $14.9 million to $0.3 million
for the nine months ended September 30, 1999 from $15.2 million for the
same period in 1998. The decrease in gross profit is due mainly to start-up
and other start-up related manufacturing costs.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses
increased $2.1 million to $11.6 million for the nine months ended September
30, 1999 from $9.5 million for the same period in 1998. Of the increase,
$1.6 million was due to nine months of goodwill amortization in 1999
associated with the purchase accounting allocation, which was finalized at
the end of the third quarter of 1998. The remainder of the increase was
primarily due to higher SG&A expenses due to the LLDPE and olefin plant
expansions.
Affiliate Interest
The Company's affiliate interest increased $5.6 million to $12.5
million for the nine months ended September 30, 1999 from $6.9 million for
the same period in 1998, primarily due to a decrease in capitalized
interest related to lower levels of construction in progress in 1999.
Other Income
The Company's other income decreased $5.6 million for the nine months
ended September 30, 1999 as compared to the same period in 1998.
Substantially all of the decrease is due to one-time items relating to the
licensing of technology and settlements of commercial disputes and other
agreements related to production and distribution costs, all of which
occurred in 1998.
Net Income
The Company's net income decreased $17.1 million to a loss of $25.5
million for the nine months ended September 30, 1999 from a loss of $8.4
million for the same period in 1998. The decrease 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, 1999 was $14.8 million, as compared to $6.6 million in the
same period in 1998. This increase is attributable to a larger net loss
during the 1999 period partially offset by higher depreciation and
amortization expenses during the 1999 period associated with the recently
expanded facilities.
Net cash used in investing activities for the nine months ended
September 30, 1999 was $57.6 million, as compared to $215.9 million for the
same period in 1998. This decrease is attributable to a decrease in capital
expenditures in the 1999 period and an increase in the advances receivable
from an affiliate of the Company which occurred during the 1998 period.
Net cash provided by financing activities for the nine months ended
September 30, 1999 was $72.3 million, as compared to $222.5 million for the
same period in 1998. This decrease was primarily attributable to $105.0
million in capital contributions received from the Company's parent in
the1999 period as compared to $150.0 million in the same period in 1998,
and a $32.7 million reduction in intercompany borrowings in the 1999
period.
The Company maintains an intercompany loan agreement (the
"Intercompany Loan Agreement") with Huntsman Group Holdings Finance
Corporation, a wholly-owned subsidiary of Huntsman Corporation. As of
September 30, 1999, the Company owed $287.5 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, 1999 were
$57.6 million. The $141.9 million decrease in capital expenditures for the
nine months ended September 30, 1999 compared to the same period in 1998
was due primarily to a reduction in spending in connection with the
Company's modernization and expansion program, which was substantially
completed in the first quarter of 1999. The Company expects to spend
approximately $5.0 million during the balance of 1999 on capital projects.
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 $6.7
million accrued in the September 30, 1999 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, soil and solid waste
management units has been conducted at the Odessa facility. Risk
assessments have been completed for a number of these units 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 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 READINESS
State of Readiness
In 1998, the Company initiated a project to address its readiness
for the year 2000 (Y2K). The Company has managed its Y2K readiness effort
in four primary areas: (1) management information systems, (2) desktops,
enterprise servers and networks, (3) process operations and control systems
and (4) physical facilities systems.
Management information systems. The Company identified certain Y2K
readiness deficiencies in its Unisys-based customer service application.
These problems were corrected, with testing of the revised system completed
in the second quarter of 1999. In addition, the Company's external data
center operator completed an upgrade of its operating systems software to
achieve Y2K readiness in the second quarter of 1999. The Company believes
the balance of applications in the business support portfolio are ready.
Desktops, enterprise servers and networks. Desktop and network concerns
relating to Y2K were identified and remedied through a new desktop and
network rollout completed in August 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 have been 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 was
completed in the first quarter of 1999. The Company has dedicated the
necessary resources through the modernization and expansion program and
through retaining outside consultants and rendered all of the Company's
major process control systems Y2K ready by the end of the third quarter of
1999. All significant outside suppliers have also been surveyed regarding
their Y2K readiness status. None of these inquiries has revealed
significant deficiencies to date.
Physical facilities systems. The Company has nearly completed a survey of
its physical facilities systems, including telecommunications, 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.
A major test of the Texas power grid of which Texas Utilities is a part was
completed satisfactorily on September 9, 1999. The Company will continue to
monitor these suppliers with respect to their Y2K readiness.
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 modernization and expansion program. Since this
program requires the installation of modern systems which are already fully
Y2K ready, it is impossible to break out the Y2K readiness-specific costs.
Beyond the modernization and expansion program, $1.1 million has already
been spent and an additional $0.1 million will be spent during the
remainder of 1999. Approximately 50% of this $1.2 million of non-program
funds was spent on applications, with the balance to be spent on a third
party inventory and assessment system, desktop systems and manufacturing
distributed control systems ("DCSs").
Risks and contingency plans
The number and age of the Company's previously installed DCSs
introduce the greatest amount of risk. Corrections to these systems were
completed in the third quarter of 1999 through upgrades from the original
vendors. The primary focus of the Company's efforts was on the completion
of the modernization and expansion program by the first quarter of 1999. As
a result, internal experts are in short supply. Upon completion of the
modernization and expansion program, the Company refocused and completed
its Y2K readiness project in the third 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 manual
controls have historically 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 of
and sensitivity to potential Y2K-related disruptions among its employees in
order to minimize operational problems in the event Y2K disruptions occur.
Specific contingency plans have been developed for each operating entity.
Readers are cautioned that forward-looking statements contained
under the heading "Year 2000 Software Readiness" 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 include 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 operat ing 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has interest and market risk with respect to $175
million of its 11 3/4% Senior Notes due 2004. The market value of this debt
was $191 million and $196 million on December 31, 1998 and 1997,
respectively. The senior notes can first be redeemed on December 1, 1999
for $185 million. All other
debt is at floating rates.
The Company's exposure to foreign currency market risk is minimal since
sales prices are typically denominated in US dollars. The Company's
exposure to changing commodity prices is also minimal since substantially
all raw material is acquired at posted or market related prices, and sales
prices for finished products are generally at market related prices.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is 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 1999.
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 12, 1999 By: /s/ J. Kimo Esplin
------------------------
J. Kimo Esplin
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the third 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-31-1999
<PERIOD-START> Jul-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 52,650
<ALLOWANCES> (1,771)
<INVENTORY> 69,723
<CURRENT-ASSETS> 123,394
<PP&E> 1,053,630
<DEPRECIATION> (86,039)
<TOTAL-ASSETS> 1,174,055
<CURRENT-LIABILITIES> 95,707
<BONDS> 174,882
<COMMON> 0
0
0
<OTHER-SE> 478,093
<TOTAL-LIABILITY-AND-EQUITY> 1,174,055
<SALES> 128,687
<TOTAL-REVENUES> 128,687
<CGS> 125,446
<TOTAL-COSTS> 125,446
<OTHER-EXPENSES> 2,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,777
<INCOME-PRETAX> (9,521)
<INCOME-TAX> (3,633)
<INCOME-CONTINUING> (5,888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,888)
<EPS-BASIC> 0
<EPS-DILUTED> 0
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