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 JUNE 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 o
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ( ) No ( )
At August 13, 1999, 1,000 Shares of Common Stock, par value $0.01
per Share, of Huntsman Polymers Corporation were outstanding.
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..............................................3
Item 1. Financial Statements..................................... 3
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998.............................3
Consolidated Statements of Operations for the Six
Months Ended June 30, 1999 and 1998 (unaudited) ..............4
Consolidated Statements of Cash Flows for the Six
Months Ended June 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............................................15
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
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 December 31, 1998
-------------- -------------------
(thousands of dollars)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ - $ -
Accounts and notes receivables, net 13,679 10,550
Accounts and advances receivable - affiliates 28,534 19,475
Inventories 59,533 45,888
Other current assets 48 2,241
---------------- -----------------
Total current assets 101,794 78,154
---------------- -----------------
Properties, plant and equipment, net 975,165 951,023
Intangible assets, net 47,056 48,617
Other noncurrent assets 35,979 31,337
---------------- -----------------
Total assets $1,159,994 $ 1,109,131
================ =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 47,540 $ 33,443
Accounts payable - affiliates 680 1,142
Accrued liabilities 21,098 17,805
Accrued interest 1,723 1,723
---------------- -----------------
Total current liabilities 71,041 54,113
---------------- -----------------
Long-term debt 174,882 174,882
Long-term debt - affiliates 286,696 320,130
Deferred income taxes 107,640 124,158
Other noncurrent liabilities 35,754 37,243
---------------- -----------------
Total liabilities 676,013 710,526
---------------- -----------------
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 (44,519) (24,895)
---------------- -----------------
Total stockholder's equity 483,981 398,605
---------------- -----------------
Total liabilities and stockholder's equity $1,159,994 $ 1,109,131
================ =================
See accompanying notes to consolidated financial statements
</TABLE>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
--------------------------------------------------------------------------------------
(thousands of dollars)
REVENUES
<S> <C> <C> <C> <C>
Trade sales and services $ 32,828 $ 26,908 $ 55,285 $ 55,298
Affiliate sales 79,266 64,468 150,515 136,438
-------------------- ------------------ ------------------- ------------------------
112,094 91,376 205,800 191,736
COST OF GOODS SOLD 109,393 86,522 208,775 180,284
-------------------- ------------------ ------------------- ------------------------
GROSS PROFIT 2,701 4,854 (2,975) 11,452
EXPENSES
Selling, general and 3,459 3,684 7,627 7,257
administrative
Research and development 1,613 1,874 3,359 3,639
-------------------- ------------------ ------------------- ------------------------
OPERATING INCOME (LOSS) (2,371) (704) (13,961) 556
INTEREST EXPENSE, NET
Affiliate interest (4,760) (2,988) (7,919) (5,779)
Other interest (5,182) (5,148) (10,442) (10,320)
Other income (expense) (467) 7,264 695 7,261
-------------------- ------------------ ------------------- ------------------------
NET LOSS BEFORE INCOME TAXES (12,780) (1,576) (31,627) (8,282)
Income tax benefit (4,723) (600) (12,003) (3,148)
-------------------- ------------------ ------------------- ------------------------
NET LOSS $ (8,057) $ (976) $ (19,624) $ (5,134)
==================== ================== =================== ========================
See accompanying notes to consolidated financial statements
</TABLE>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------- ------------------
(thousands of dollars)
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (19,624) $ (5,135)
Reconciliation to net cash used in operations:
Depreciation and amortization 27,368 22,301
Deferred income taxes (12,003) 2,642
Amortization of debt issuance costs 435 434
Changes in operating working capital:
Receivables (12,188) 10,505
Inventories (13,645) 3,831
Other current assets 2,193 (4,476)
Accounts payable 13,635 (29,807)
Other current liabilities (1,221) (4,250)
Deferred charges and other noncurrent assets (4,642) (3,053)
Deferred credits and other noncurrent liabilities (1,490) (2,251)
------------------- ------------------
Net cash used in operations (21,182) (9,259)
INVESTING ACTIVITIES
Advances receivable - affiliates - 49,029
Capital expenditures of continuing operations (50,384) (107,812)
------------------- ------------------
Net cash used in investing activities (50,384) (58,783)
FINANCING ACTIVITIES
Intercompany (repayment to) borrowing from parent (33,434) 23,042
Proceeds of capital contribution by parent 105,000 45,000
------------------- ------------------
Net cash provided by financing activities 71,566 68,042
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 $ 920 $ 19
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 (including low density polyethylene ("LDPE") and
linear low density polyethylene ("LLDPE")), 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 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):
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 8,367 $ 7,661
Work in progress 12,184 3,614
Finished goods 38,982 34,613
------------ -----------
$ 59,533 $ 45,888
============ ============
3. PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation of property, plant and
equipment are as follows (in thousands):
June 30, 1999 December 31, 1998
-------------- -----------------
Property, plant and equipment $ 1,046,462 $ 996,078
Less accumulated depreciation (71,297) (45,055)
------------ -----------
$ 975,165 $ 951,023
============ ===========
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
June 30,1999 December 31, 1998
-------------- -----------------
Intercompany borrowings $ 229,011 $ 264,495
Capital lease - Affiliate 50,000 50,000
11 3/4% Senior Notes due 2004 174,882 174,882
Other 7,685 5,635
------------- --------------
$ 461,578 $ 495,012
============= ==============
5. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization are (in
thousands):
June 30, 1999 December 31, 1998
--------------- -----------------
Debt issuance costs $ 7,173 $ 7,173
Less accumulated amortization (3,124) (2,689)
------------- ------------
$ 4,049 $ 4,484
------------- ------------
Goodwill $ 42,406 $ 42,406
Less accumulated amortization (3,869) $ (2,814)
------------- ------------
$ 38,537 $ 39,592
------------- ------------
Other intangible assets $ 4,626 $ 4,626
Less accumulated amortization (156) (85)
------------- ------------
$ 4,470 $ 4,541
------------- ------------
$ 47,056 $ 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 $7.3 million accrued in the June
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 June 30, 1999, the Texas
Natural Resources Conservation Commission ("TNRCC") has approved closure
for sixteen 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.
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. The Company is seeking to negotiate a satisfactory
Agreed Order with the TNRCC. Those negotiations are ongoing.
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 LDPE 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 strengthening trends in the LDPE market exhibited during the first half
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 JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
Revenues
The Company's revenue increased $20.7 million to $112.1 million
for the three months ended June 30, 1999 from $91.4 million for the same
period in 1998. The major factors contributing to the increase in revenue
were higher sales volumes in all product lines except LDPE which was
essentially unchanged during the period and higher sales prices in all
product lines except APAO. 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 project. LLDPE
revenue increased $10.2 million to $10.9 million due entirely to the new
LLDPE product unit coming on line in the second quarter of 1999. Olefins
revenue increased $3.5 million to $15.9 million due mainly to an 11.2
million pound volume increase resulting from the new expansion of the
ethylene unit. Styrene revenue increased $3.4 million to $17.1 million due
primarily to a 13.1 million pound increase in sales volume and a 3.7%
increase in the average sales price. Polypropylene revenue increased $2.6
million to $18.6 million due to a 5.4 million pound volume increase and a
2.5% increase in the average selling price.
Gross Profit
The Company's gross profit decreased $2.2 to a gross profit of
$2.7 million from $4.9 million for the same period in 1998. The decrease in
gross profit is primarily due to the start up delays associated with the
LLDPE expansion and higher feedstock costs.
Other Income (Expense)
The Company's other income (expense) decreased $7.7 million for
the three months ended June 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 settlement of commercial disputes and
other agreements related to production and distribution costs, all of which
occurred in 1998.
Affiliate Interest
The Company's affiliate interest increased $1.8 million to $4.8
million for the three months ended June 30, 1999 from $3.0 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 $7.1 million to a loss of
$8.1 million for the three months ended June 30, 1999 from a loss of $1.0
million for the same period in 1998. The decrease is a result of the
reasons stated above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
The Company's revenue increased $14.1 million to $205.8 million
for the six months ended June 30, 1999 from $191.7 million for the same
period in 1998. The major factors contributing to the increase in revenue
were higher sales volumes in all product lines except LDPE as well as the
additional revenue generated from the new LLDPE Plant that came on line in
the second quarter of 1999. LLDPE sales revenue increased $20.8 million to
$21.8 million for the first six months of 1999. Polypropylene revenue
increased $1.9 million due primarily to a 9.6 million pound sales volume
increase resulting from improved plant output. LDPE sales decreased $8.9
million to $70.6 million as a result of lower sales volume of 15.3 million
pounds, mostly in the first quarter of 1999. The sales volume was adversely
affected by the start-up phase of the Company's expansion and modernization
projects, which affected production capability.
Gross Profit
The Company's gross profit decreased $14.5 million to a loss of
$3.0 million for the six months ended June 30, 1999 from a profit of $11.5
for the same period in 1998. The decrease in gross profit is due mainly to
higher per unit manufacturing costs attributed to lower production rates
resulting from the start up of the modernization and expansion projects,
higher feedstocks prices, as well as the factors described above.
Affiliate Interest
The Company's affiliate interest increased $2.1 million to $7.9
million for the six months ended June 30, 1999 from $5.8 million for the
same period in 1998, primarily due to higher levels of debt outstanding in
1999.
Other Income (Expense)
The Company's other income (expense) decreased $6.6 million for
the six months ended June 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 $14.5 million to a loss of
$19.6 million for the six months ended June 30, 1999 from a loss of $5.1
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 six months ended
June 30, 1999 was $21.2 million, as compared to $9.3 million in the same
period in 1998. This decrease is attributable to a larger net loss during
the 1999 period partially offset by higher depreciation and amortization
expense during the 1999 period.
Net cash used in investing activities for the six months ended
June 30, 1999 was $50.4 million, as compared to $58.8 million for the same
period in 1998. This decrease is attributable to a decrease in capital
expenditures in the 1999 period, partially offset by a decrease in the
advances receivable from an affiliate of the Company which occurred during
the 1998 period.
Net cash provided by financing activities for the six months
ended June 30, 1999 was $71.6 million, as compared to $68.0 million for the
same period in 1998. This increase was primarily attributable to $105.0
million in capital contributions received from the Company's parent in
the1999 period as compared to $45.0 million in the same period in 1998,
partially offset by a $33.4 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 June
30, 1999, the Company owed $286.7 million under the Intercompany Loan
Agreement. Subject to certain terms and condi tions, 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 six months ended June 30, 1999 were
$50.4 million. The $57.4 million decrease in capital expenditures for the
six months ended June 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 $17.7
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 $7.3
million accrued in the June 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 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 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 compliance 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 by the end of 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
substantially 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 end of
the third quarter of 1999. All significant outside suppliers have also been
surveyed regarding their Y2K compliance status. None of these inquiries
have revealed significant deficiencies to date.
Physical facilities systems. The Company has completed testing of its
telecommunications and security systems; no significant Y2K concerns have
been identified in these areas. Testing of the uninterruptible power supply
system will be completed in August 1999. 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 program,
$0.9 million has already been spent and an additional $0.3 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. 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 completion of the modernization and expansion program, the
Company refocused 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 of and sensitivity to 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 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
second 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: August 13, 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 second quarter 10-Q and is qualified in its entirety by
reference to such 10-Q.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 44,037
<ALLOWANCES> (1,824)
<INVENTORY> 59,533
<CURRENT-ASSETS> 101,794
<PP&E> 1,046,462
<DEPRECIATION> (71,297)
<TOTAL-ASSETS> 1,159,994
<CURRENT-LIABILITIES> 71,041
<BONDS> 174,882
<COMMON> 0
0
0
<OTHER-SE> 483,981
<TOTAL-LIABILITY-AND-EQUITY> 1,159,994
<SALES> 205,800
<TOTAL-REVENUES> 205,800
<CGS> 208,775
<TOTAL-COSTS> 208,775
<OTHER-EXPENSES> 11,681
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,361
<INCOME-PRETAX> (31,627)
<INCOME-TAX> (12,003)
<INCOME-CONTINUING> (19,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,624)
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