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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 March 31, 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 May 14, 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 MARCH 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION....................................... 3
Item 1. Financial Statements............................... 3
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998......................... 3
Consolidated Statements of Operations (unaudited)......... 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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.................................. 15
PART II --OTHER INFORMATION.......................................... 15
Item 1. Legal Proceedings.................................. 15
Item 6. Exhibits and Reports on Form 8-K................... 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, 1999 December 31, 1998
-------------------- --------------------
(thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ -
Accounts and notes receivables, net 10,744 10,550
Accounts and advances receivable - affiliates 91,118 19,475
Inventories 46,789 45,888
Deferred income taxes 7,778 -
Other current assets 11,690 2,241
-------------------- -----------------
Total current assets 168,119 78,154
-------------------- -----------------
Properties, plant and equipment, net 964,014 951,023
Intangible assets, net 48,361 48,617
Other noncurrent assets 35,168 31,337
==================== =================
Total assets $1,215,662 $ 1,109,131
==================== =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 24,703 $ 33,443
Accounts payable - affiliates - 1,142
Accrued liabilities 23,344 17,805
Accrued interest 6,859 1,723
-------------------- -----------------
Total current liabilities 54,906 54,113
-------------------- -----------------
Long-term debt 174,882 174,882
Long-term debt - affiliates 352,084 320,130
Deferred income taxes 134,417 124,158
Other noncurrent liabilities 37,335 37,243
-------------------- -----------------
Total liabilities 753,624 710,526
-------------------- -----------------
Stockholder's equity:
Common Stock, $0.01 par value, 1 million shares - -
authorized
1,000 shares issued and outstanding
Additional paid-in capital 498,500 423,500
Accumulated deficit (36,462) (24,895)
-------------------- -----------------
Total stockholder's equity 462,038 398,605
-------------------- -----------------
Total liabilities and stockholder's equity $1,215,662 $ 1,109,131
==================== =================
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------------------------ ----------------------------
(thousands of dollars)
<S> <C> <C>
Revenues
Trade sales and services $ 22,457 $ 28,390
Affiliate sales 71,249 71,970
----------------------------- ----------------------------
93,706 100,360
Cost of goods sold 99,382 93,762
----------------------------- ----------------------------
Gross profit (5,676) 6,598
Expenses
Selling, general and administrative 4,168 3,573
Research and development 1,746 1,765
----------------------------- ----------------------------
Operating income (loss) (11,590) 1,260
Interest expense, net
Affiliate interest (3,159) (2,791)
Other interest (5,260) (5,172)
Other income (expense) 1,162 (3)
----------------------------- ----------------------------
Net loss before income taxes (18,847) (6,706)
Income tax benefit (7,280) (2,548)
----------------------------- ----------------------------
Net loss $ (11,567) $(4,158)
============================= ============================
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
------------------ -------------------
(thousands of dollars)
<S> <C> <C>
Operating Activities
Net loss $ (11,567) $ (4,158)
Reconciliation to net cash used in operations:
Depreciation and amortization 12,325 10,958
Deferred income taxes 1,330 1,330
Amortization of debt issuance costs 217 -
Changes in operating working capital:
Receivables (9,381) (3,775)
Inventories (901) 7,854
Other current assets (9,449) 677
Accounts payable (9,882) (10,249)
Income taxes payable - (3,878)
Other current liabilities 11,826 566
Deferred charges and other noncurrent assets (4,355) (814)
Deferred credits and other noncurrent liabilities 92 (1,975)
------------------ -------------------
Net cash used in operations (19,745) (3,266)
Investing Activities
Advances receivable - affiliates (62,456) 26,162
Capital expenditures of continuing operations (24,753) (63,606)
------------------ -------------------
Net cash used in investing activities (87,209) (37,444)
Financing Activities
Intercompany borrowing from parent 31,954 40,710
Proceeds of capital contribution by parent 75,000 -
------------------ -------------------
Net cash provided by financing activities 106,954 40,710
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 $ - $ -
Cash paid for income taxes $ 5 $ -
See accompanying notes to consolidated financial statements
</TABLE>
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, 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.
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 required 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, 1999. 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 acquisition by a single
non-public shareholder.
2. Inventories
Inventories consist of the following (in thousands):
March 31, 1999 December 31, 1998
--------------------- ---------------------
Raw materials $8,562 $7,661
Work in progress 6,855 3,614
Finished goods 31,372 34,613
--------------------- ---------------------
$46,789 $45,888
====================== =====================
3. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and
equipment are as follows (in thousands):
March 31, 1999 December 31, 1998
--------------------- ------------------
Property, plant and equipment $1,020,873 $996,078
Less accumulated depreciation (56,859) (45,055)
--------------------- ------------------
$964,014 $951,023
===================== ==================
4. Long-Term Debt
Long-term debt consists of the following (in thousands):
March 31,1999 December 31, 1998
--------------------- ------------------
Intercompany borrowings $295,424 $264,495
Capital lease - Affiliate 50,000 50,000
11 3/4% Senior Notes due 2004 174,882 174,882
Other 6,660 5,635
--------------------- ------------------
$526,966 $495,012
===================== ==================
5. Intangible Assets
Intangible assets, net of accumulated amortization are (in
thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------- ------------------------
<S> <C> <C>
Debt issuance costs $ 7,173 $ 7,173
Less accumulated amortization (2,907) (2,689)
---------------------- ------------------------
$ 4,266 $ 4,484
---------------------- ------------------------
Goodwill $ 42,406 $ 42,406
Less accumulated amortization (3,342) $ (2,814)
---------------------- ------------------------
$ 39,064 $ 39,592
---------------------- ------------------------
Other intangible assets $ 5,148 $ 4,626
Less accumulated amortization (117) (85)
---------------------- ------------------------
$ 5,031 $ 4,541
---------------------- ------------------------
$ 48,361 $ 48,617
====================== ========================
</TABLE>
6. Contingencies
Environmental Regulation
The Company, and the industry in which it competes, is 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 $7.4 million accrued in the March 31, 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 March 31, 1999, the Texas Natural Resources
Conservation Commission ("TNRCC") has approved closure for ten of the
plant's solid waste management units.
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.
In conjunction with the City of Odessa and the Gulf Coast Waste
Disposal Authority, the Company brought the refurbished Odessa South
Wastewater Treatment Facility on-line in 1997 to provide a long-range, cost
effective wastewater disposal solution. Wastewater is pumped to 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 reuse.
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 named 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. Two other similar lawsuits were also filed in the Chancery
Court. All three shareholder lawsuits were dismissed by orders of the court
dated March 8, 1999.
TNRCC Flare Investigation
By letter dated January 28, 1999, the TNRCC notified the Company that
the TNRCC has concluded 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 start up 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 has been sent to the Company. The Company will seek to
negotiate a satisfactory Agreed Order with the TNRCC.
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. Managements 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.
Management believes that many of the factors contributing to the lower
selling prices experienced by the industry in 1998 will continue throughout
the balance of 1999 for many of the Company's products. However, the
Company believes that the positive strengthening trends in the polyethylene
market exhibited during the first quarter of 1999 will continue through the
remainder of the year. Like most 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.
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31,
1998
Revenues
The Company's revenue decreased $6.6 million to $93.7 million
for the three months ended March 31, 1999 from $100.3 million for the same
period in 1998. The major factors contributing to the decline in revenue
were lower sales volume due in part to the re-starting of the olefins plant
following the planned turnaround during the first quarter of 1999 to
perform maintenance work and tie in the olefins and LLDPE expansions, as
well as ongoing industry over-capacity resulting from new capacity
additions and lower demand, principally from Asia. Sales revenues were
lower in all of the Company's product lines except polyethylene. Styrene
sales decreased $3.3 million to $13.3 million primarily due to lower sales
price and lower volume resulting from the turnaround discussed above.
Olefin sales decreased $2.6 million to $9.2 million due to lower sales
prices and lower volume also resulting from the turnaround discussed above.
APAO sales decreased $1.1 million to $5.2 million due primarily to market
conditions. Polypropylene sales decreased $0.7 million to $18.6 million
primarily because of a decrease in sales price. Polyethylene sales revenue
increased $1.3 million to $42.6 million due primarily to an increase in the
average selling price of 4.3 cents. The Company continues to achieve
pricing for its polyethylene and polypropylene products which is
significantly greater than current commodity prices.
Gross Profit
The Company's gross profit decreased $12.3 million to a loss of
$5.7 million for the three months ended March 31, 1999 from $6.6 million
for the same period in 1998. This decrease in gross profit is due mainly to
higher unit costs attributed to lower production rates resulting from the
turnaround and expansion projects, as well as the factors described above.
Selling, General and Administrative
The Company's selling, general and administrative expenses
increased $0.6 million to $4.2 million for the three months ended March 31,
1999 from $3.6 million for the same period in 1998, primarily due to higher
information service outsourcing charges, higher marketing allocations from
the parent company due to increased LLDPE and FPO marketing efforts, and
higher depreciation and amortization resulting from goodwill amortization
in the 1999 period.
Other Income (Expense)
The Company's other income (expense) increased $1.2 million for
the three months ended March 31, 1999 as compared to the same period in
1998. The change is primarily due to the receipt of a $1.5 million
insurance claim receipt in 1999 relating to the January 1998 transformer
fire.
Affiliate Interest
The Company's affiliate interest increased $0.4 million to $3.2
million for the three months ended March 31, 1999 from $2.8 million for the
same period in 1998, primarily due to higher levels of debt outstanding in
1999.
Net Income
The Company's net income decreased $7.4 million to a loss of
$11.6 million for the three months ended March 31, 1999 from a loss of $4.2
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 three months ended
March 31, 1999 was $19.7 million, as compared to $3.3 million in the same
period in 1998. This increase is attributable to a larger net loss and net
investment in working capital during the 1999 period as well as an increase
in deferred charges and other non current assets.
Net cash used in investing activities for the three months ended
March 31, 1999 was $87.2 million, as compared to $37.4 million for the same
period in 1998. This increase is attributable to an increase in advances
receivable due from an affiliate of the Company in the 1999 period as
compared to a decrease during 1998, partially offset by a decrease in
capital expenditures.
Net cash provided by financing activities for the three months
ended March 31, 1999 was $107.0 million, as compared to $40.7 million for
the same period in 1998. This increase was primarily attributable to $75.0
million in capital contributions received from the Company's parent 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 March
31, 1999, the Company owed $352.1 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 three months ended March 31, 1999
were $24.8 million. The $38.9 million decrease in capital expenditures for
the three months ended March 31, 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 $25 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 $7.4
million accrued in the March 31, 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 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 1998, the Company initiated a project to address its
readiness for the year 2000 (Y2K). The Company has managed its Y2K
compliance 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
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 second 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 second 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 the second quarter of 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 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 the third quarter
of 1999. All significant outside suppliers have also been surveyed
regarding their Y2K compliance 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.
The Company will continue to investigate these suppliers with respect to
their Y2K compliance.
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 compliant, it is impossible to break out the Y2K
compliance-specific costs. Beyond the modernization and expansion costs,
the Company expects to spend an additional $1.2 million. Of this amount,
approximately 50% was spent on applications. The balance will be spent on a
third party inventory and assessment system ("TAVA"), 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. The Company expects the corrections
to these systems to be 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 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 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
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
under the heading "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 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 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 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
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 named 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. Two other similar lawsuits were also filed in the Chancery
Court. All three shareholder lawsuits were dismissed by orders of the court
dated March 8, 1999.
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 8K
(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 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: May 14, 1999 By: /s/ J. Kimo Esplin
--------------------------------
J. Kimo Esplin
Senior Vice President and
Chief Financial Officer
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<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.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 103,685
<ALLOWANCES> (1,823)
<INVENTORY> 46,789
<CURRENT-ASSETS> 168,119
<PP&E> 1,020,873
<DEPRECIATION> (56,859)
<TOTAL-ASSETS> 1,215,662
<CURRENT-LIABILITIES> 54,906
<BONDS> 174,882
<COMMON> 0
0
0
<OTHER-SE> 462,038
<TOTAL-LIABILITY-AND-EQUITY> 1,215,662
<SALES> 93,706
<TOTAL-REVENUES> 93,706
<CGS> 99,382
<TOTAL-COSTS> 99,382
<OTHER-EXPENSES> 4,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,419
<INCOME-PRETAX> (18,847)
<INCOME-TAX> (7,280)
<INCOME-CONTINUING> (11,567)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,567)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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