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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 333-85141
HUNTSMAN INTERNATIONAL LLC
(Exact name of registrant as specified in its charter)
Delaware 87-0630358
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700
(Address of principal executive offices and telephone number)
Indicate by 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 / /
On August 14, 2002, 1,000 member equity units of Huntsman International LLC were
outstanding. As of such date, all such member equity units were held by Huntsman
International Holdings LLC, an affiliate of Huntsman International LLC. There is
no established trading market for the membership interests of Huntsman
International LLC.
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HUNTSMAN INTERNATIONAL LLC
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION.................................................................................1
Item 1. Financial Statements.........................................................................1
Consolidated Balance Sheets..................................................................1
Consolidated Statements of Operations and Comprehensive Income (Loss)........................2
Consolidated Statement of Equity.............................................................3
Consolidated Statements of Cash Flows........................................................4
Notes to Consolidated Financial Statements...................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......28
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................45
PART II - OTHER INFORMATION...................................................................................46
Item 6. Exhibits and Reports on Form 8-K............................................................46
Some of the statements contained in this report are forward-looking in
nature. In some cases, you can identify forward-looking statements by
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative of such terms or other comparable terminology, or
by discussions of strategy. You are cautioned that our business and operations
are subject to a variety of risks and uncertainties, and, consequently, our
actual results may differ materially from those projected by any forward-looking
statements. Some of those risks and uncertainties are discussed below in "Item
2--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement for Forward-Looking Information" and elsewhere
in this report. We make no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN MILLIONS)
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 66.3 $ 83.9
Accounts and notes receivable (net of allowance for
doubtful accounts of $18.1 and $15.2, respectively) 603.8 501.6
Inventories 459.4 501.4
Prepaid expenses 13.4 10.7
Other current assets 52.1 47.4
----------- -----------
TOTAL CURRENT ASSETS 1,195.0 1,145.0
Property, plant and equipment, net 2,987.3 2,839.5
Investment in unconsolidated affiliates 144.7 147.0
Intangible assets, net 415.9 424.9
Other noncurrent assets 335.6 305.7
----------- -----------
TOTAL ASSETS $ 5,078.5 $ 4,862.1
=========== ===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 325.9 $ 266.7
Accrued liabilities 470.0 495.2
Current portion of long-term debt 3.4 6.8
Deferred income taxes -- 5.7
Other current liabilities 65.8 61.1
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TOTAL CURRENT LIABILITIES 865.1 835.5
Long-term debt 2,733.7 2,643.1
Deferred income taxes 276.5 262.6
Other noncurrent liabilities 126.9 121.4
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TOTAL LIABILITIES 4,002.2 3,862.6
COMMITMENTS AND CONTINGENCIES (NOTE 9)
MINORITY INTERESTS 0.1 7.8
----------- -----------
EQUITY:
Member's equity, 1,000 units 1,026.1 1,026.1
Retained earnings 168.3 166.4
Accumulated other comprehensive loss (118.2) (200.8)
----------- -----------
TOTAL EQUITY 1,076.2 991.7
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 5,078.5 $ 4,862.1
=========== ===========
See accompanying notes to consolidated financial statements
1
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (DOLLARS IN MILLIONS)
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES:
Trade sales and services $ 1,084.4 $ 1,173.5 $ 2,006.0 $ 2,219.6
Related party sales 90.6 110.6 166.9 216.1
---------- ---------- ---------- ----------
TOTAL REVENUES 1,175.0 1,284.1 2,172.9 2,435.7
COST OF GOODS SOLD 1,017.4 1,113.5 1,889.8 2,099.1
---------- ---------- ---------- ----------
GROSS PROFIT 157.6 170.6 283.1 336.6
EXPENSES:
Selling, general and administrative 62.1 73.6 150.8 154.4
Research and development 13.7 15.5 26.0 31.9
---------- ---------- ---------- ----------
Total expenses 75.8 89.1 176.8 186.3
---------- ---------- ---------- ----------
OPERATING INCOME 81.8 81.5 106.3 150.3
Interest expense, net 57.9 54.6 107.7 114.2
Loss (gain) on sale of accounts receivable (3.5) 3.2 0.1 5.4
Other expense (income) 0.4 0.9 -- (5.5)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 27.0 22.8 (1.5) 36.2
Income tax expense (benefit) 28.2 0.5 (3.2) 3.2
Minority interests in subsidiaries (1.0) 0.3 (0.2) 1.0
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (0.2) 22.0 1.9 32.0
Cumulative effect of accounting change -- -- -- (1.5)
---------- ---------- ---------- ----------
NET INCOME (LOSS) (0.2) 22.0 1.9 30.5
Other comprehensive loss - foreign currency
translation adjustments 104.8 (31.2) 84.2 (91.5)
Cumulative effect of accounting change -- -- -- (1.1)
Net unrealized loss on derivative instruments (1.3) (3.0) (1.6) (10.7)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 103.3 $ (12.2) $ 84.5 $ (72.8)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
2
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED) (DOLLARS IN MILLIONS)
ACCUMULATED
MEMBER'S EQUITY OTHER
--------------------------- RETAINED COMPREHENSIVE
UNITS AMOUNT EARNINGS LOSS TOTAL
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2002 1,000 $ 1,026.1 $ 166.4 $ (200.8) $ 991.7
Net income 1.9 1.9
Other comprehensive income 82.6 82.6
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 1,000 $ 1,026.1 $ 168.3 $ (118.2) $ 1,076.2
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
3
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN MILLIONS)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1.9 $ 30.5
Adjustments to reconcile net income to net cash from operating activities:
Equity in earnings of investment in unconsolidated affiliates (0.1) (0.1)
Minority interests in subsidiaries (0.2) 1.0
Loss (gain) on foreign currency transactions (24.5) (2.2)
Depreciation and amortization 125.9 116.8
Deferred income taxes (10.1) (11.7)
Changes in operating assets and liabilities - net of effects of acquisitions:
Accounts and notes receivables (55.5) (23.8)
Inventories 67.3 (29.6)
Prepaid expenses (2.1) (10.1)
Other current assets (0.3) (1.4)
Accounts payable 25.8 (40.1)
Accrued liabilities (56.3) 37.9
Other current liabilities 3.9 7.1
Other noncurrent assets 4.2 24.5
Other noncurrent liabilities 0.3 (0.5)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80.2 98.3
---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses -- (209.5)
Acquisition of minority interest (9.0) --
Capital expenditures (94.8) (113.4)
Cash received from unconsolidated affiliates 2.2 4.9
Advances to unconsolidated affiliates (1.6) (1.3)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (103.2) (319.3)
---------- ----------
FINANCING ACTIVITIES:
Borrowings under credit facilities 121.1 5.4
Repayments of credit facilities (410.5) --
Issuance of senior notes 300.0 --
Issuance of senior subordinated notes -- 233.2
Debt issuance costs (10.3) (4.6)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0.3 234.0
---------- ----------
Effect of exchange rate changes on cash 5.1 (11.8)
---------- ----------
Increase (decrease) in cash and cash equivalents (17.6) 1.2
Cash and cash equivalents at beginning of period 83.9 66.1
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66.3 $ 67.3
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 103.3 $ 104.1
Cash paid for taxes $ 3.8 $ 8.4
See accompanying notes to consolidated financial statements
4
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS
Huntsman International LLC and its subsidiaries (collectively, the
"Company") are global manufacturers and marketers of specialty and commodity
chemicals. The Company is a Delaware limited liability company and is a
wholly-owned subsidiary of Huntsman International Holdings LLC ("Huntsman
International Holdings").
The Company operates through four principal operating segments:
Polyurethanes, Pigments, Base Chemicals and Performance Products. During 2002,
the Company realigned its principal operating segments. The most significant
change was the split of the former Specialty Chemicals segment into two
segments: Polyurethanes and Performance Products. The former Tioxide segment was
renamed Pigments, and the former Petrochemicals segment was renamed Base
Chemicals.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the Company are
unaudited. However, in management's opinion, all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of results of
operations, financial position and cash flows for the periods shown, have been
made. Results for interim periods are not necessarily indicative of those to be
expected for the full year. These consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
to consolidated financial statements included in the Company's annual report on
form 10-K for the year ended December 31, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include its
majority-owned subsidiaries. Intercompany transactions and balances are
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers cash in
checking accounts and cash in short-term highly liquid investments with an
original maturity of three months or less to be cash and cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
using the weighted average cost method.
5
PLANT AND EQUIPMENT
Plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives or lease term as follows:
Buildings 20 years
Plant and equipment 3-20 years
Approximately $439.6 million of plant and equipment is depreciated using
the straight-line method on a group basis with depreciation based on a 5%
composite rate. When capital assets representing complete groups of property are
disposed of, the difference between the disposal proceeds and net book value is
recorded to income. When individual assets recorded on the group basis are
disposed of, the difference between historical cost and the disposal proceeds is
recorded to accumulated depreciation. When individual assets not recorded on the
group basis are disposed of, the difference between historical cost and the
disposal proceeds is recorded to income.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
Investments in companies in which the Company exercises significant
influence, generally ownership interests of 20% to 50%, are accounted for using
the equity method.
INTANGIBLE ASSETS
Intangible assets are stated at cost (fair value at the time of
acquisition) and are amortized using the straight-line method over the estimated
useful lives or over the life of the related agreement, ranging from five to
fifteen years. Effective January 1, 2002, goodwill is no longer amortized. In
2001, goodwill was amortized over 20 years.
OTHER ASSETS
Other assets consist primarily of spare parts, capitalized loan fees,
non-qualified employee benefit assets and turnaround costs. Capitalized loan
fees are amortized using the straight-line method over the term of the related
debt, ranging from six to ten years.
Periodic maintenance and repairs applicable to major units of manufacturing
facilities are accounted for on the prepaid basis by deferring the costs of the
turnaround and expensing the costs over the estimated period until the next
turnaround.
CARRYING VALUE OF LONG-TERM ASSETS
The Company evaluates the carrying value of long-term assets based upon
current and anticipated undiscounted cash flows, and recognizes an impairment
when such estimated cash flows will be less than the carrying value of the
asset. Measurement of the amount of impairment, if any, is based upon the
difference between carrying value and fair value.
DERIVATIVES AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES." SFAS No. 133 requires that an entity recognize all
derivative instruments as assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for the change in the fair value
depends on the use of the instrument. The adoption of SFAS No. 133 resulted in a
cumulative increase in net loss of $1.5 million and a cumulative increase to
accumulated other comprehensive loss of $1.1 million. See "Note 7-Derivatives
and Hedging Activities."
6
ENVIRONMENTAL EXPENDITURES
Environmental related restoration and remediation costs are recorded as
liabilities and expensed when the 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 that are
principally maintenance or preventive in nature, are recorded when expended and
expensed or capitalized as appropriate.
INCOME TAXES
The Company and its U.S. subsidiaries are organized as limited liability
companies and limited partnerships. These entities are treated as partnerships
for U.S. income tax purposes, and therefore are not subject to U.S. federal
tax on their income. Subsidiaries outside the United States are generally
taxed on the income generated in the local country.
The Company uses the asset and liability method of accounting for income
taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
and tax reporting purposes. The Company does not provide for income taxes or
benefits on the undistributed earnings of its international subsidiaries as
earnings are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities include accrued pension and other
post-retirement benefits, environmental reserves, and other liabilities.
FOREIGN CURRENCY TRANSLATION
Generally, the accounts of the Company's subsidiaries outside the United
States consider local currency to be the functional currency. Accordingly,
assets and liabilities are translated at rates prevailing at the balance sheet
date. Revenues, expenses, gains, and losses are translated at a weighted average
rate for the period. Cumulative translation adjustments are recorded to
stockholder's equity as a component of accumulated other comprehensive loss.
Transaction gains (losses) are recorded in the statement of operations and were
$24.5 and $2.2 million for the six months ended June 30, 2002 and 2001,
respectively.
REVENUE RECOGNITION
The Company generates revenue through sales in the open market, raw
material conversion agreements and long-term supply contracts. The Company
recognizes revenue when it is realized or realizable and earned, which is
generally upon shipment of product in fulfillment of a customer order.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
SECURITIZATION OF ACCOUNTS RECEIVABLE
In September 2000, Statement of Financial Accounting Standards ("SFAS") No.
140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES," was issued. SFAS No. 140 provides consistent
standards for distinguishing transfers of financial assets that are sales from
those that are secured borrowings. The Company adopted SFAS No. 140 during the
year ended December 31, 2001 as required. Adoption of the accounting
requirements of this standard did not have a material impact on the statement of
operations or financial position.
The Company securitizes certain trade receivables in connection with a
revolving securitization program. The Company retains the servicing rights which
are a retained interest in the securitized receivables. Losses are recorded on
the sale and depend on the carrying value of the receivables as
7
allocated between the receivables sold and the retained interests and their
relative fair value at the date of the transfer. Retained interests are
subsequently carried at fair value which is estimated based on the present value
of expected cash flows, calculated using management's best estimates of key
assumptions including credit losses and discount rates commensurate with the
risks involved.
RECLASSIFICATIONS
Certain 2001 amounts have been reclassified to conform to the 2002
presentation.
RECENT FINANCIAL ACCOUNTING STANDARDS
On January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." SFAS No. 142 changes the accounting for goodwill and
intangible assets with indefinite lives from an amortization method to an
impairment-only approach. Upon adoption of SFAS No. 142, the Company is required
to reassess the useful lives of all acquired intangibles and perform an
impairment test on goodwill. In the first quarter of 2002, the Company completed
the assessment of useful lives and concluded that no adjustments to the
amortization period of intangible assets were necessary.
SFAS No. 142 provides for a six-month transitional period for the Company
to perform an initial assessment of whether there is an indication that goodwill
is impaired. The Company has completed its initial assessment of goodwill
impairment as of June 30, 2002 and has concluded that there is no indication of
impairment.
The Company has elected to test goodwill for impairment annually as of
April 1 as required by SFAS No. 142. The annual assessment has been completed as
of April 1, 2002 and the Company has concluded that there is no indication of
impairment.
The initial adoption of SFAS No. 142 had no impact on the Company's
financial statements for the six months ended June 30, 2002. The pro forma net
income, assuming the change in accounting principle was applied retroactively to
January 1, 2001, would not have been materially different for the six months
ended June 30, 2001.
There were no changes in the carrying amount of goodwill for the six months
ended June 30, 2002. At June 30, 2002, the carrying amount of goodwill was $26.2
million and all of such amount was in the Polyurethanes segment.
On January 1, 2002, the Company adopted SFAS No. 144, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." This statement establishes
a single accounting model for the impairment or disposal of long-lived
assets. The impact of adopting this pronouncement was not material.
In August 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. This statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred by capitalizing it as part of the carrying
amount of the long-lived assets. As required by SFAS No. 143, the Company will
adopt this new accounting standard on January 1, 2003. The Company is currently
evaluating the effects of adopting this pronouncement.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally
before an actual liability has been incurred. Adoption of this statement is
required effective January 1, 2003. The Company has not yet completed its
evaluation of the impact of adopting this statement.
8
3. INVENTORIES
Inventories as of June 30, 2002 and December 31, 2001 consisted of the
following (dollars in millions):
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Raw materials $ 112.6 $ 132.5
Work in progress 23.9 20.4
Finished goods 295.3 328.7
-------- ------------
Subtotal 431.8 481.6
Materials and supplies 27.6 19.8
-------- ------------
Net $ 459.4 $ 501.4
======== ============
4. PROPERTY, PLANT, AND EQUIPMENT
The cost and accumulated depreciation of property, plant, and equipment are
as follows (dollars in millions):
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
Land $ 39.9 $ 36.3
Buildings 138.3 129.9
Plant and equipment 3,091.6 2,919.0
Construction in progress 323.6 231.4
--------- ------------
Total 3,593.4 3,316.6
Less accumulated depreciation (606.1) (477.1)
--------- ------------
Net $ 2,987.3 $ 2,839.5
========= ============
5. INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of intangible assets
as of June 30, 2002 were as follows (dollars in millions):
CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
-------- ------------ -------------
Patents, trademarks, and
technology $ 356.6 $ (77.9) $ 278.7
Non-compete agreements 48.8 (27.2) 21.6
Other intangibles 125.7 (36.3) 89.4
-------- ------------ -------------
Subtotal 531.1 (141.4) 389.7
Goodwill 26.2 -- 26.2
-------- ------------ -------------
Total $ 557.3 $ (141.4) $ 415.9
======== ============ =============
9
Estimated future amortization expense for intangible assets through
December 31, 2006 is as follows (dollars in millions):
ANNUAL EXPENSE
--------------
2002 through 2004 $ 46.7
2005 through 2006 $ 38.1
6. LONG-TERM DEBT
Long-term debt outstanding as of June 30, 2002 and December 31, 2001 is as
follows (dollars in millions):
JUNE 30, DECEMBER 31,
2002 2001
------------ -------------
Senior Secured Credit Facilities:
Revolving loan facility $ 67.0 $ 110.6
Term A dollar loan 109.7 195.6
Term A euro loan (in United States dollar equivalent) 130.6 208.6
Term B loan 526.3 553.7
Term C loan 526.3 553.7
Senior Notes 300.0 --
Senior Subordinated Notes 1,049.8 1,003.1
Other long-term debt 27.4 24.6
------------ -------------
Subtotal 2,737.1 2,649.9
Less current portion (3.4) (6.8)
------------ -------------
Total $ 2,733.7 $ 2,643.1
============ =============
SENIOR NOTES OFFERING
On March 18, 2002, the Company sold $300 million aggregate principal amount
of 9.875% Senior Notes due 2009 (the "2002 HI Notes") in a transaction exempt
from the registration requirements of the Securities Act of 1933. The Company
used approximately $58 million of the net proceeds to repay outstanding
indebtedness under the revolving portion of its senior secured credit facilities
(the "HI Credit Facilities"). The balance of the net proceeds was used to repay
amounts due under the term loan portion of the HI Credit Facilities, eliminating
scheduled term loan amortization requirements in 2002 and substantially reducing
scheduled term loan amortization requirements in 2003.
AMENDMENT OF HI CREDIT FACILITIES
On March 15, 2002, the Company entered into an amendment to the HI Credit
Facilities. This amendment, among other things, allowed the Company to (i) issue
the 2002 HI Notes, (ii) apply a portion of the proceeds of the offering of the
2002 HI Notes to substantially reduce the amortization payments on the term loan
portion of the HI Credit Facilities due in 2002 and 2003, and (iii) temporarily
repay outstanding principal amounts under the revolving portion of its senior
secured credit facilities. This amendment also adjusted certain financial
covenant levels in 2002 and 2003. Additionally, this amendment provides that the
Company will not, and will not permit any of its subsidiaries to, amend, modify
or terminate any provisions of the 2002 HI Notes.
10
7. DERIVATIVES AND HEDGING ACTIVITIES
The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates and commodity pricing. As a result, the Company enters
into transactions, including derivative instruments, to manage these risks. The
overall risk management philosophy of the Company is to manage the downside
risks of these activities. Primary goals of the Company's risk management
activities include: (1) reducing the impact of fluctuations in variable interest
rates and meeting the requirements of certain credit agreements; (2) reducing
the short-term impact from certain movements in foreign exchange rates on
earnings; (3) reducing the short-term impact of fluctuations in the purchase
price of certain feedstocks; and (4) hedging the net investments position in
euro functional currency entities.
INTEREST RATE HEDGING
Through the Company's borrowing activities, it is exposed to interest rate
risk. Such risk arises due to the structure of the Company's debt portfolio,
including the duration of the portfolio and the mix of fixed and floating
interest rates. Actions taken to reduce interest rate risk include managing the
mix and rate characteristics of various interest bearing liabilities as well as
entering into interest rate swaps, collars and options.
As of June 30, 2002 and 2001, the Company maintained interest rate swaps
and collars with a fair value of approximately $12.4 million and $8.5 million,
respectively, which have been designated as cash flow hedges of variable rate
debt obligations. These amounts are recorded as other current liabilities in the
accompanying balance sheet. The effective portion of unrealized losses of
approximately $1.6 million and $8.1 million were recorded as a component of
other comprehensive loss, with the ineffective portion of approximately $2.7
million recorded as interest income and $0.4 million of interest expense in the
accompanying statements of operations for the six months ended June 30, 2002 and
2001, respectively. The effective portion of the mark-to-market effects is
recorded in other comprehensive loss until the underlying interest payments
affect earnings.
Swaps and collars not designated as hedges are also recorded at fair value
on the balance sheet and resulted in an increase in interest income and a
decrease in other current liabilities of approximately $0.8 million for the six
months ended June 30, 2002 and an increase in interest expense and other current
liabilities of approximately $4.5 million for the six months ended June 30,
2001.
FOREIGN CURRENCY RATE HEDGING
The Company enters into foreign currency derivative instruments to minimize
the short-term impact of movements in foreign currency rates. These contracts
are not designated as hedges for financial reporting purposes and are recorded
at fair value. As of June 30, 2002 and 2001, the fair value of outstanding
contracts was immaterial. During the six months ended June 30, 2002, the Company
recognized $0.3 million in loss from these activities.
COMMODITY PRICE HEDGING
Because feedstocks used by the Company are subject to price volatility, the
Company uses commodity futures and swaps to reduce the risk associated with
certain of these feedstocks. These instruments are designated as cash flow
hedges of future inventory purchases, fair value hedges of inventory currently
held and trading activities. The mark-to-market gains and losses of qualifying
cash flow hedges are recorded as a component of other comprehensive loss until
the underlying transactions are recognized in earnings. The mark-to-market gains
and losses of non-qualifying, excluded and ineffective portions of hedges are
recorded in cost of goods sold in the accompanying statements of operations. For
the six months ended June 30, 2002, the net loss on derivatives qualifying as
cash flow hedges are $0.1 million and are recorded in other comprehensive
income. All such amounts are expected to be reclassed to cost of goods sold in
the next 12 months. The fair value of all commodity derivatives included as
other current assets was $0.2 million as of June 30, 2002. The fair value of
commodity derivatives included in other current liabilities was $0.1 million as
of June 30, 2002.
11
During the six months ended June 30, 2002, the Company recorded $0.4
million as a decrease in cost of goods sold related to net gains from settled
contracts and the change in fair value (unrealized gains and losses) on the
contracts that are effective economic hedges of commodity price exposures, but
do not meet the SFAS No. 133 definition of hedging instruments. As of June 30,
2002, $0.6 million was included in other current assets and $0.2 in other
current liabilities. For the six months ended June 30, 2001, these activities
were not material.
NET INVESTMENT HEDGING
The Company hedges its net investment position in euro functional currency
entities. To accomplish this, a portion of the Company's debt is euro
denominated and designated as a hedge of net investments. Currency effects of
these hedges produced a net loss of approximately $76.8 million and a net gain
of approximately $64.1 million in other comprehensive loss (foreign currency
translation adjustments) for the six months ended June 30, 2002 and 2001,
respectively. As of June 30, 2002 and 2001, there was a cumulative net loss of
approximately $13.6 and a cumulative net gain of approximately $90.3 million,
respectively.
8. RESTRUCTURING AND PLANT CLOSING COSTS
As of December 31, 2001, the Company had a reserve for restructuring costs
and plant closing costs of $31.3 million recorded in accrued liabilities. The
reserve consisted of $30.5 million for workforce reductions and $0.8 million for
other exit costs. During the six months ended June 30, 2002, the Company made
cash payments of approximately $18.8 million in workforce reductions. At June
30, 2002 there was $12.5 million remaining in accrued liabilities consisting of
$11.7 million for workforce reductions and $0.8 million for other exit costs.
9. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials and supplies
entered into in the ordinary course of business. These agreements extend from
three to ten years and the purchase price is generally based on market prices
subject to certain minimum price provisions.
The Company is involved in litigation from time to time in the ordinary
course of its business. In management's opinion, after consideration of
indemnification arrangements, none of such litigation is material to the
Company's financial condition or results of operations.
10. ENVIRONMENTAL MATTERS
The operation of chemical manufacturing plants, the distribution of
chemical products and the related production of by-products and wastes, entail
risk of adverse environmental effects. The Company is subject to extensive
federal, state, local and foreign laws, regulations, rules and ordinances
relating to pollution, the protection of the environment and the generation,
storage, handling, transportation, treatment, disposal and remediation of
hazardous substances and waste materials. In the ordinary course of business,
the Company is subject continually to environmental inspections and monitoring
by governmental enforcement authorities. The Company may incur substantial
costs, including fines, damages and criminal or civil sanctions, or experience
interruptions in its operations for actual or alleged violations arising under
any environmental laws. In addition, production facilities require operating
permits that are subject to renewal, modification and, in some circumstances,
revocation. Violations of permit requirements can also result in restrictions or
prohibitions on plant operations, substantial fines and civil or criminal
sanctions. The Company's operations involve the generation, handling,
transportation, use and disposal of numerous hazardous substances. Changes in
regulations regarding the generation, handling, transportation, use and disposal
of hazardous substances could inhibit or interrupt operations and have a
material adverse effect on business. From time to time, these operations may
result in violations under environmental laws, including spills or other
releases of hazardous substances to the environment. In the event of a
significant incident, the Company could incur material costs to address and
remediate the incident. In addition, following any such incident, the Company
may incur higher costs to implement measures to prevent future incidents. Given
the nature of the Company's business, there can
12
be no assurance that violations of environmental laws will not result in
restrictions imposed on the Company's operating activities, substantial fines,
penalties, damages or other costs. In addition, potentially significant
expenditures could be necessary in order to comply with existing or future
environmental laws.
The Company has established financial reserves relating to environment
restoration and remediation programs, which the Company believes, are sufficient
for known requirements. Liabilities are recorded when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable and can be reasonably estimated. These liabilities are based
upon all available facts, existing technology, past experience, and cost-sharing
arrangements (as to which, the Company consider the viability of other parties).
A total of approximately $15 million has been accrued related to environmental
matters as of June 30, 2002. The Company does not anticipate that any future
costs, in excess of those that have been accrued by the Company, will be
material to the results of operations or financial position as a result of
compliance with current environmental laws and regulations.
In connection with its acquisitions, the Company generally has entered into
agreements that provide it with indemnification for environmental pollution
existing on the date of the applicable acquisition.
A spill at the Company's North Tees facility was discovered on March 27,
2001. The U.K. Environmental Agency ("EA") issued an enforcement notice with
respect to the spill on March 30, 2001, following an investigation into an
alleged leak of a mixture consisting of approximately 60% benzene into the River
Tees, allegedly following a dewatering procedure at the site. The requirements
of that notice were complied with, to the satisfaction of the EA, by the end of
May 2001. The Company contained the spill and conducted a program to reclaim the
material. On August 1, 2002, the Company received a summons issued by the EA
charging the Company with three counts of environmental violations in connection
with the spill: one count of polluting the river and two counts of violating its
environmental authorization. A hearing before a Magistrate has been set for
August 28, 2002. If, as a result of this prosecution, the Company is found
legally responsible for the spill, the Company will face penalties. Although the
Company can give no assurances, based on currently available information and the
Company's understanding of similar investigations and penalties in the past,
management believes that, if the Company is ultimately found to be legally
responsible, the probable penalties would not be material to the Company's
financial position or results of operations.
The Texas Natural Resource Conservation Commission ("TNRCC") has issued
certain notices of violation relating to air emissions and wastewater issues at
the Port Neches facility, and filed an amended administrative petition with
respect to certain of these violations on January 12, 2001. The Company met with
the TNRCC on several occasions in 2001 and early 2002 and has reached a
tentative settlement with the agency on penalties. Under the tentative
settlement, a fine of no more than $100,000 would be allocable to the PO/MTBE
facility. It is possible, however, that the terms of an air permit, which are
still being negotiated as part of the settlement, may cause the Company to incur
costs related to equipment charges serving this plant and others in the vicinity
that could be material.
The Company is aware that there is or may be soil or groundwater
contamination at some of its facilities resulting from past operations. Based on
available information and the indemnification rights (including indemnities
provided by Huntsman Specialty Chemicals Corporation ("Huntsman Specialty") and
Imperial Chemicals Industries PLC ("ICI") for the facilities that each of them
transferred to us), the Company believes that the costs to investigate and
remediate known contamination will not have a material adverse effect on the
financial condition, results of operations, or cash flows; however, the Company
cannot give any assurance that such indemnities will fully cover the costs of
investigation and remediation, that the Company will not be required to
contribute to such costs or that such costs will not be material.
11. OPERATING SEGMENT INFORMATION
The Company derives its revenues, earnings and cash flows from the
manufacture and sale of a wide variety of specialty and commodity chemical
products. The Company has four reportable operating
13
segments: Polyurethanes, Pigments, Base Chemicals and Performance Products.
During 2002 the Company realigned its principal operating segments. The most
significant change was the split of the former Specialty Chemicals segment into
two segments: Polyurethanes and Performance Products. The former Tioxide segment
was renamed Pigments and the former Petrochemicals segment was renamed Base
Chemicals.
The major products of each reportable operating segment are as follows:
SEGMENT PRODUCTS
-------------------------- ------------------------------------------------------------
Polyurethanes MDI, TDI, TPU, polyols, aniline, PO, TBA, and MTBE
Pigments Titanium dioxide
Base Chemicals Ethylene, propylene, benzene, cyclohexane and paraxylene
Performance Surfactants, ethyleneamines and other performance chemicals
Products
Sales between segments are generally recognized at external market prices.
For the six months ended June 30, 2002 and 2001, sales to ICI and its affiliates
accounted for approximately 6% and 7%, respectively, of consolidated revenues.
14
The net sales, segment income and EBITDA for each of the Company's
reportable operating segments are as follows (dollars in millions):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------ ------------- -------------
Net sales:
Polyurethanes $ 523.0 $ 546.8 $ 1,011.4 $ 1,114.3
Pigments 234.5 230.4 436.7 458.4
Base Chemicals 274.1 354.0 487.7 721.6
Performance Products 171.8 177.8 283.5 191.2
Eliminations (28.4) (24.9) (46.4) (49.8)
---------- ---------- ---------- ----------
Total $ 1,175.0 $ 1,284.1 $ 2,172.9 $ 2,435.7
========== ========== ========== ==========
Segment income (loss)(1):
Polyurethanes $ 78.1 $ 55.0 $ 132.2 $ 85.8
Pigments 2.5 32.4 2.7 72.7
Base Chemicals (19.2) (2.0) (38.0) 16.6
Performance Products 9.7 7.2 14.5 9.6
---------- ---------- ---------- ----------
Total $ 71.1 $ 92.6 $ 111.4 $ 184.7
========== ========== ========== ==========
EBITDA (2):
Polyurethanes $ 111.0 $ 87.8 $ 198.2 $ 151.9
Pigments 13.2 40.6 24.1 91.3
Base Chemicals (7.7) 8.6 (15.2) 38.1
Performance Products 12.4 8.7 19.3 11.2
Unallocated administrative
and other items (3) 19.3 (9.8) 5.7 (25.3)
---------- ---------- ---------- ----------
Total EBITDA 148.2 135.9 232.1 267.2
Depreciation and amortization (63.3) (58.5) (125.9) (116.8)
Interest expense, net (57.9) (54.6) (107.7) (114.2)
---------- ---------- ---------- ----------
Income (loss) before
income taxes $ 27.0 $ 22.8 $ (1.5) $ 36.2
========== ========== ========== ==========
(1) Segment income is defined as operating income excluding unallocated
corporate overhead.
(2) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization and taxes.
(3) Unallocated administrative and other items includes unallocated corporate
overhead, loss on the sale of accounts receivable and other non-operating
income (expense).
12. RECENT EVENTS
SENIOR NOTES OFFERING
On March 18, 2002, the Company sold $300 million aggregate principal amount
of its 2002 HI Notes in a transaction exempt from the registration requirements
of the Securities Act of 1933. The Company used approximately $58 million of the
net proceeds to repay outstanding indebtedness under the revolving portion of
the HI Credit Facilities. The balance of the net proceeds was used to repay
amounts due under
15
the term loan portion of the HI Credit Facilities, eliminating scheduled term
loan amortization requirements in 2002 and substantially reducing scheduled term
loan amortization requirements in 2003.
On May 31, 2002, pursuant to its obligations under the Registration Rights
Agreement, dated March 21, 2002, with the initial purchasers of the 2002 HI
Notes, the Company filed a registration statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") to publicly
register the 2002 HI Notes which will then be exchanged for the outstanding
privately issued 2002 HI Notes. On June 12, 2002 the Division of Corporation
Finance of the SEC informed the Company that it would not review the
Registration Statement and that the Company could request effectiveness of the
Registration Statement at any time. The Company expects to file a pre-effective
amendment to the Registration Statement following the filing of this quarterly
report on Form 10-Q and will request that the SEC declare the Registration
Statement effective at that time. The Company will commence the exchange offer
in respect of the 2002 HI Notes following the effectiveness of the Registration
Statement.
ACQUISITION OF MINORITY INTEREST IN TIOXIDE SOUTHERN AFRICA (PTY.) LTD.
In June 2002, the Company acquired the 40% minority interest in Tioxide
Southern Africa (Pty.) Ltd. that was held by AECI Limited. The purchase price
for this interest was approximately $9 million. Tioxide Southern Africa (Pty.)
Ltd. is now an indirect, wholly-owned subsidiary of the Company.
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
The Company is currently attempting to expand its accounts receivable
securitization program by including the receivables of several additional
subsidiaries. The expansion of the program requires amendments to the agreements
governing the program. Although there can be no assurance that the Company will
be successful in obtaining the necessary amendments, the Company hopes to
complete the amendments during the third quarter 2002. If the amendment is
approved, the Company anticipates that the special purpose entity used in the
program could issue up to approximately $100 million in additional commercial
paper. For more information, see "--Liquidity and Capital
Resources--Securitization of Accounts Receivable" below.
PLEDGE OF THE MEMBERSHIP INTERESTS OF THE COMPANY'S PARENT
On November 2, 2000, ICI, Huntsman Specialty, Huntsman International
Holdings and the Company entered into agreements pursuant to which ICI had an
option to transfer to Huntsman Specialty or its permitted designated buyers
ICI's 30% membership interest in Huntsman International Holdings, the Company's
parent (the "ICI 30% Interest"). Pursuant to these agreements, on October 30,
2001, ICI exercised its put right requiring Huntsman Specialty or its nominee to
purchase the ICI 30% Interest. On December 20, 2001, ICI and Huntsman Specialty
amended ICI's put option arrangement under these agreements to, among other
things, provide that the purchase of the ICI 30% Interest would occur on July 1,
2003, or earlier under certain circumstances, and to provide for certain
discounts to the purchase price for the ICI 30% Interest. The amended option
agreement also requires Huntsman Specialty to cause Huntsman International
Holdings to pay up to $112 million of dividends to its members, subject to
certain conditions. These conditions include the receipt of consent from the
Company's senior secured lenders and the Company's ability to make restricted
payments under the indentures governing its outstanding senior notes and senior
subordinated notes (collectively, the "HI Notes"), as well as the outstanding
high yield notes of Huntsman International Holdings (the "HIH Notes"). At June
30, 2002, the terms of the indentures governing the HIH Notes do not permit
Huntsman International Holdings to make restricted payments.
In addition, in order to secure its obligation to pay the purchase price
for the ICI 30% Interest, Huntsman Specialty granted ICI a lien on 30% of the
outstanding membership interests in Huntsman International Holdings. As
discussed below in "--Certain Events Affecting Huntsman Corporation and Huntsman
Polymers Corporation," Huntsman Specialty's agreements with ICI may effectively
be modified in important respects as a result of an agreement between Matlin
Patterson Global Opportunities Partners, L.P. ("GOP") (formerly known as CSFB
Global Opportunities Partners, L.P.) and ICI. This
16
agreement provides GOP with an option to acquire the ICI 30% Interest on or
before May 15, 2003. In connection with the proposed restructuring of Huntsman
Corporation's debt described below, GOP has agreed to contribute its rights
under this agreement to a new holding entity to be formed by GOP, the Huntsman
family and others ("Huntsman Holdings"). Huntsman Holdings would also hold,
directly or indirectly, all the common stock and substantially all the preferred
stock of Huntsman Corporation. If Huntsman Holdings does not exercise its option
and if Huntsman Specialty does not satisfy its obligation to ICI with respect to
ICI's put right, ICI could foreclose on Huntsman Specialty's pledge. Such a
foreclosure by ICI could result in a "change of control" under the indentures
governing the HI Notes and the HIH Notes and under the HI Credit Facilities. A
"change of control" would constitute a default under the HI Credit Facilities.
It would also entitle both the holders of the HI Notes and the holders of the
HIH Notes to exercise their rights to require the respective company to
repurchase these notes from them. Under such circumstances there can be no
assurance that the Company or Huntsman International Holdings would have
sufficient funds to purchase all the notes.
CERTAIN EVENTS AFFECTING HUNTSMAN CORPORATION AND HUNTSMAN POLYMERS CORPORATION
Huntsman Corporation, which together with its affiliates indirectly
holds 60% of the Company's membership interests, failed to make the interest
payments on its senior subordinated notes due on January 1, 2002 and on July
1, 2002. Huntsman Polymers Corporation, a wholly-owned subsidiary of Huntsman
Corporation ("Huntsman Polymers"), failed to make the interest payments on
its senior notes due on December 1, 2001 and June 1, 2002. In addition,
during 2001, Huntsman Corporation was not in compliance with certain
financial covenants contained in its credit facilities. As a result, Huntsman
Corporation entered into discussions with its bank lenders regarding a
comprehensive restructuring of its debt.
Effective as of December 20, 2001, Huntsman Corporation and its bank
lenders entered into forbearance, waiver and amendment agreements
(collectively, as amended, the "Amendment Agreement"). Under the Amendment
Agreement, substantially all the existing defaults and some future defaults
were waived and the bank lenders agreed to forbear exercising certain rights
and remedies until March 15, 2002 (the "Forbearance Period"). The Forbearance
Period has been extended until October 15, 2002. In addition, in connection
with extending the Forbearance Period, Huntsman Corporation's bank lenders
have agreed to postpone an amortization payment due under one of its bank
credit facilities to October 15, 2002.
In June, 2002, ICI announced that it had reached an agreement with GOP
regarding the sale to BNAC, Inc., a subsidiary of GOP ("BNAC"), of
- the senior subordinated reset discount notes due 2009 of Huntsman
International Holdings (the "B Notes") that were originally issued to
ICI, and
- the subsidiary of ICI that holds the ICI 30% Interest.
Pursuant to this agreement, GOP and BNAC have paid $160 million of a total
purchase price of $440 million. GOP and BNAC's remaining purchase price under
their option arrangement for the ICI 30% Interest is due on May 15, 2003. The
failure of GOP and BNAC to make at least a partial payment of the purchase
price in respect of the option arrangement by May 15, 2003 could result in
the forfeiture of the B Notes to ICI. Moreover, Huntsman Holdings could lose
all of the $160 million payment previously made by GOP and BNAC to ICI if it
does not exercise the option or timely pay the option consideration.
GOP and CPH have collectively purchased, in the aggregate, approximately
88% of the outstanding Huntsman Corporation and Huntsman Polymers bonds. In
June 2002, Huntsman Corporation reached agreements with GOP and CPH to
restructure its debt.
On July 15, 2002, Huntsman Corporation solicited the consent of its
existing bank lenders, seeking, among other things, their consent to a plan to
restructure Huntsman Corporation's debt (the "Proposed Restructuring"), without
the intervention of a bankruptcy court, that would involve the following:
- Members of the Huntsman family who own equity interests in Huntsman
Corporation and any of its subsidiaries, together with certain
affiliated entities that own such equity interests (collectively, the
"Huntsman Family"), would contribute all their
17
equity interests in Huntsman Corporation and its subsidiaries to a
new entity ("Huntsman Holdings") in exchange for equity interests in
Huntsman Holdings.
- As of June 30, 2002, GOP and Consolidated Press Holdings Limited
("CPH") held, in the aggregate, $746 million principal and accrued
interest of Huntsman Corporation's and Huntsman Polymers' bonds.
Subject to certain conditions, GOP and CPH have agreed to convert
these bonds, directly or indirectly, into shares of Huntsman
Corporation. These bonds would then be canceled. The Huntsman
Corporation shares received would be exchanged, directly or
indirectly, for equity interests in Huntsman Holdings.
- GOP would exchange its shares of BNAC, which holds the B Notes, the
option to acquire the ICI 30% Interest and cash, for equity interests
in Huntsman Holdings.
- Amendments to Huntsman Corporation's current bank credit facilities
which would be comprised of the following:
- A term loan facility maturing in 2007 which would be secured by a
second lien on substantially all the assets of Huntsman
Corporation and its domestic restricted subsidiaries; and
- A $275 million priority revolving credit facility maturing in
2006 (the "Priority Facility"). Subject to certain conditions,
Deutsche Bank Securities Inc. and Deutsche Bank Trust Company
Americas have agreed to underwrite the Priority Facility. The
Priority Facility would replace Huntsman Corporation's existing
$150 million supplemental accounts receivable facility, and fund
certain payments at closing and would be available for general
corporate purposes. The Priority Facility would be limited by a
borrowing base consisting of eligible accounts receivable and
inventory and would have a first lien on substantially all the
assets of Huntsman Corporation and its domestic restricted
subsidiaries.
- The reinstatement of the approximately $59 million in principal
amount of Huntsman Corporation's and approximately $37 million in
principal amount of Huntsman Polymers' bonds not held
by GOP and CPH. The non-payment of interest defaults on these bonds
would be cured by paying approximately $5 million of interest that
has accrued on Huntsman Polymers' bonds to be reinstated since
December 2001 and approximately $5 million of interest that has
accrued on Huntsman Corporation's bonds to be reinstated since
January 2002.
- Pursuant to previously adopted amendments to the indentures governing
the Huntsman Corporation and Huntsman Polymers bonds, which will
become effective upon completion of the Proposed Restructuring, most
of the restrictive covenants in these indentures would be eliminated.
Huntsman Corporation is in the process of seeking to complete the
Proposed Restructuring on an out-of-court basis before October 15, 2002. This
will require the consent of all of Huntsman Corporation's bank lenders (the
"100% Consent"). Huntsman Corporation has received significant support from
its bank lenders for the out-of-court restructuring. Huntsman Corporation is
confident that it will complete the restructuring on an out-of-court basis
but there can be no assurance that Huntsman Corporation will obtain the 100%
Consent and be able to complete the Proposed Restructuring on an out-of-court
basis. If Huntsman Corporation is unable to secure the 100% Consent, Huntsman
Corporation may seek to achieve the Proposed Restructuring by filing a
prepackaged plan of reorganization in a Chapter 11 proceeding under the
United States Bankruptcy Code. Huntsman Corporation must satisfy certain
statutory requirements in order for its prepackaged plan of reorganization to
be confirmed. Huntsman Corporation believes that, as of August 14, 2002, it
has sufficient votes from its bank lenders to permit it to seek confirmation
of a prepackaged plan of reorganization on or before October 15, 2002 should
it not obtain the 100% Consent. However, there can be no assurance that the
prepackaged plan of reorganization would be confirmed. Pursuant to its
agreement with GOP, Huntsman Corporation could be required to file Chapter 11
Cases on or after October 15, 2002 if it has not received the 100% Consent to
the Proposed Restructuring and it has obtained irrevocable votes in favor of
the prepackaged plan of reorganization from at least two-thirds in principal
amount and a majority of its bank lenders. Huntsman believes that, as of
August 14, 2002, it has obtained these votes.
Unless Huntsman Corporation completes the Proposed Restructuring or
otherwise restructures its debt before October 15, 2002, Huntsman Corporation's
lenders could pursue certain remedies against it, including foreclosure on a
pledge of Huntsman Corporation's 80.1% equity interest in Huntsman Specialty
Chemicals Holdings Corporation ("HSCHC"). HSCHC owns 100% of Huntsman Specialty,
18
which in turn owns 60% of the equity interests of Huntsman International
Holdings, the Company's direct parent. Foreclosure on the HSCHC equity would
result in a "change of control" within the meaning of the indentures governing
the HI Notes, the HIH Notes and the HI Credit Facilities. In addition, although
the Proposed Restructuring is intended to avoid this result, it could result in
a "change of control" within the meaning of the indentures governing the HI
Notes and the HIH Notes and under the HI Credit Facilities.
As noted in "--Pledge of Membership Interests in the Company's Parent"
above, a "change of control" would constitute a default under the HI Credit
Facilities. It would also entitle both the holders of the HI Notes and the
holders of the HIH Notes to exercise their rights to require the respective
company to repurchase these notes from them. Under such circumstances there can
be no assurance that the Company or Huntsman International Holdings would have
sufficient funds to purchase all the notes. Further, there can be no assurance
that Huntsman Corporation will successfully complete the transactions which will
be necessary to avoid a "change of control" within the meaning of the indentures
governing the HI Notes and the HIH Notes and under the HI Credit Facilities.
Neither the Company nor Huntsman International Holdings has guaranteed or
provided any other credit support to Huntsman Corporation under its credit
facilities or notes. No events of default under Huntsman Corporation's credit
facilities or its notes, nor the exercise of any remedy by the lenders
thereunder will cause any cross-defaults or cross-accelerations under the
indentures governing the HI Notes or the HIH Notes or under the HI Credit
Facilities, except insofar as foreclosure on Huntsman Corporation's pledge of
its interest in HSCHC would result in a "change of control" as described above.
13. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
The following consolidating condensed financial statements present, in
separate columns, financial information for: Huntsman International LLC (on a
parent only basis), with its investment in subsidiaries recorded under the
equity method; the guarantors, under the Company's indenture, on a combined,
or where appropriate, consolidated basis, with its investment in the
non-guarantors recorded under the equity method; and the non-guarantors on a
consolidated basis. Additional columns present eliminating adjustments and
consolidated totals as of June 30, 2002 and December 31, 2001 and for the
three and six months ended June 30, 2002 and 2001. There are no contractual
restrictions limiting transfers of cash from guarantor and non-guarantor
subsidiaries to the Company. The combined guarantors are wholly-owned
subsidiaries of the Company and have fully and unconditionally guaranteed the
senior notes and the senior subordinated notes on a joint and several basis.
The Company has not presented separate financial statements and other
disclosures for each of the guarantors because management believes that such
information is not material to investors.
19
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
JUNE 30, 2002 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
ASSETS INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ------------ ------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 10.4 $ 0.3 $ 55.6 $ -- 66.3
Accounts and notes receivable, net 62.3 109.3 523.3 (91.1) 603.8
Inventories 40.1 59.7 359.6 -- 459.4
Other current assets 195.6 177.2 63.0 (370.3) 65.5
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 308.4 346.5 1,001.5 (461.4) 1,195.0
Property, plant and equipment, net 578.3 348.9 2,060.1 -- 2,987.3
Investment in unconsolidated affiliates 2,897.7 810.0 1.3 (3,564.3) 144.7
Other noncurrent assets 405.9 1,419.6 332.1 (1,406.1) 751.5
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 4,190.3 $ 2,925.0 $ 3,395.0 $ (5,431.8) $ 5,078.5
============ ============ ============ ============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 151.7 $ 80.7 $ 686.2 $ (122.7) $ 795.9
Current portion of long-term debt 1.5 -- 1.9 -- 3.4
Other current liabilities 164.1 9.2 231.2 (338.7) 65.8
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 317.3 89.9 919.3 (461.4) 865.1
Long-term debt 2,748.8 -- 1,391.0 (1,406.1) 2,733.7
Other noncurrent liabilities 48.0 4.0 351.4 -- 403.4
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES 3,114.1 93.9 2,661.7 (1,867.5) 4,002.2
------------ ------------ ------------ ------------ ------------
MINORITY INTERESTS -- -- 0.1 -- 0.1
------------ ------------ ------------ ------------ ------------
EQUITY:
Member's equity, 1,000 units 1,026.1 -- -- -- 1,026.1
Subsidiary equity -- 2,352.3 740.1 (3,092.4) --
Retained earnings 168.3 587.8 61.3 (649.1) 168.3
Accumulated other comprehensive loss (118.2) (109.0) (68.2) 177.2 (118.2)
------------ ------------ ------------ ------------ ------------
TOTAL EQUITY 1,076.2 2,831.1 733.2 (3,564.3) 1,076.2
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND EQUITY $ 4,190.3 $ 2,925.0 $ 3,395.0 $ (5,431.8) $ 5,078.5
============ ============ ============ ============ ============
20
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 2001 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
ASSETS INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ------------ ------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 21.0 $ 2.8 $ 60.1 $ -- $ 83.9
Accounts and notes receivable, net 65.8 87.2 450.0 (101.4) 501.6
Inventories 52.0 55.8 393.6 -- 501.4
Other current assets 131.2 131.4 57.5 (262.0) 58.1
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 270.0 277.2 961.2 (363.4) 1,145.0
Property, plant and equipment, net 590.8 359.5 1,889.2 -- 2,839.5
Investment in unconsolidated affiliates 2,714.0 821.4 1.5 (3,389.9) 147.0
Other noncurrent assets 417.5 1,302.8 296.5 (1,286.2) 730.6
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 3,992.3 $ 2,760.9 $ 3,148.4 $ (5,039.5) $ 4,862.1
============ ============ ============ ============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 162.8 $ 79.4 $ 651.4 $ (131.7) $ 761.9
Current portion of long-term debt 1.5 -- 5.3 -- 6.8
Other current liabilities 125.4 18.1 155.0 (231.7) 66.8
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 289.7 97.5 811.7 (363.4) 835.5
Long-term debt 2,664.4 -- 1,264.9 (1,286.2) 2,643.1
Other noncurrent liabilities 46.5 3.8 333.7 -- 384.0
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES 3,000.6 101.3 2,410.3 (1,649.6) 3,862.6
------------ ------------ ------------ ------------ ------------
MINORITY INTERESTS -- -- 7.8 -- 7.8
------------ ------------ ------------ ------------ ------------
EQUITY:
Member's equity, 1,000 units 1,026.1 -- -- -- 1,026.1
Subsidiary equity -- 2,400.5 720.5 (3,121.0) --
Retained earnings 166.4 513.6 103.2 (616.8) 166.4
Accumulated other comprehensive loss (200.8) (254.5) (93.4) 347.9 (200.8)
------------ ------------ ------------ ------------ ------------
TOTAL EQUITY 991.7 2,659.6 730.3 (3,389.9) 991.7
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND EQUITY $ 3,992.3 $ 2,760.9 $ 3,148.4 $ (5,039.5) $ 4,862.1
============ ============ ============ ============ ============
21
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2002 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ------------ ------------ ------------ ------------
REVENUES:
Trade sales and services $ 177.3 $ 167.8 $ 739.3 $ -- $ 1,084.4
Related party sales 32.8 32.2 90.4 (64.8) 90.6
------------ ------------ ------------ ------------ ------------
TOTAL REVENUE 210.1 200.0 829.7 (64.8) 1,175.0
COST OF GOODS SOLD 138.6 159.2 784.4 (64.8) 1,017.4
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 71.5 40.8 45.3 -- 157.6
EXPENSES:
Selling, general and administrative 38.8 (3.8) 27.1 -- 62.1
Research and development 9.4 0.7 3.6 -- 13.7
------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 48.2 (3.1) 30.7 -- 75.8
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 23.3 43.9 14.6 -- 81.8
Interest expense (income), net 59.4 (28.6) 27.1 -- 57.9
Loss (gain) on sale of accounts receivable (0.5) 0.8 (3.8) -- (3.5)
Equity in earnings of unconsolidated
affiliates 35.8 (42.3) -- 6.5 --
Other expense (income) 0.4 (0.4) 0.4 -- 0.4
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (0.2) 29.8 (9.1) 6.5 27.0
Income tax expense -- -- 28.2 -- 28.2
Minority interests in subsidiaries -- -- (1.0) -- (1.0)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) (0.2) 29.8 (36.3) 6.5 (0.2)
Other comprehensive income 103.5 160.4 37.5 (197.9) 103.5
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 103.3 $ 190.2 $ 1.2 $ (191.4) $ 103.3
============ ============ ============ ============ ============
22
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2001 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ------------ ------------ ------------ ------------
REVENUES:
Trade sales and services $ 160.2 $ 202.1 $ 811.2 $ -- $ 1,173.5
Related party sales 39.1 44.9 101.9 (75.3) 110.6
------------ ------------ ------------ ------------ ------------
TOTAL REVENUE 199.3 247.0 913.1 (75.3) 1,284.1
COST OF GOODS SOLD 153.7 206.0 829.1 (75.3) 1,113.5
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 45.6 41.0 84.0 -- 170.6
EXPENSES:
Selling, general and administrative 29.0 6.9 37.7 -- 73.6
Research and development 11.0 1.0 3.5 -- 15.5
------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 40.0 7.9 41.2 -- 89.1
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 5.6 33.1 42.8 -- 81.5
Interest expense (income), net 56.8 (27.7) 25.5 -- 54.6
Loss on sale of accounts receivable 0.8 1.3 1.1 -- 3.2
Equity in earnings of unconsolidated affiliates 74.0 14.5 -- (88.5) --
Other expense -- -- 0.9 -- 0.9
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 22.0 74.0 15.3 (88.5) 22.8
Income tax expense -- -- 0.5 -- 0.5
Minority interests in subsidiaries -- -- 0.3 -- 0.3
------------ ------------ ------------ ------------ ------------
NET INCOME 22.0 74.0 14.5 (88.5) 22.0
Other comprehensive loss (34.2) (60.3) (26.5) 86.8 (34.2)
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (12.2) $ 13.7 $ (12.0) $ (1.7) $ (12.2)
============ ============ ============ ============ ============
23
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ------------ ------------ ------------ ------------
REVENUES:
Trade sales and services $ 326.2 $ 309.1 $ 1,370.7 $ -- $ 2,006.0
Related party sales 59.3 59.7 170.1 (122.2) 166.9
------------ ------------ ------------ ------------ ------------
TOTAL REVENUE 385.5 368.8 1,540.8 (122.2) 2,172.9
COST OF GOODS SOLD 263.9 296.6 1,451.5 (122.2) 1,889.8
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 121.6 72.2 89.3 -- 283.1
EXPENSES:
Selling, general and administrative 73.6 1.5 75.7 -- 150.8
Research and development 17.4 0.9 7.7 -- 26.0
------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 91.0 2.4 83.4 -- 176.8
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 30.6 69.8 5.9 -- 106.3
Interest expense (income), net 110.4 (56.0) 53.3 -- 107.7
Loss (gain) on sale of accounts receivable 1.3 1.5 (2.7) -- 0.1
Equity in earnings of unconsolidated affiliates 82.9 (50.5) -- (32.3) 0.1
Other expense (income) (0.1) (0.4) 0.6 -- 0.1
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1.9 74.2 (45.3) (32.3) (1.5)
Income tax benefit -- -- 3.2 -- 3.2
Minority interests in subsidiaries -- -- (0.2) -- (0.2)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) 1.9 74.2 (41.9) (32.3) 1.9
Other comprehensive income 82.6 133.3 13.0 (146.3) 82.6
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 84.5 $ 207.5 $ (28.9) $ (178.6) $ 84.5
============ ============ ============ ============ ============
24
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ------------ ------------ ------------ ------------
REVENUES:
Trade sales and services $ 315.3 $ 362.7 $ 1,541.6 $ -- $ 2,219.6
Related party sales 87.0 83.2 211.9 (166.0) 216.1
------------ ------------ ------------ ------------ ------------
TOTAL REVENUE 402.3 445.9 1,753.5 (166.0) 2,435.7
COST OF GOODS SOLD 320.5 390.5 1,554.1 (166.0) 2,099.1
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 81.8 55.4 199.4 -- 336.6
EXPENSES:
Selling, general and administrative 55.0 16.1 83.3 -- 154.4
Research and development 27.2 2.1 2.6 -- 31.9
------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 82.2 18.2 85.9 -- 186.3
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (0.4) 37.2 113.5 -- 150.3
Interest expense (income), net 118.3 (54.4) 50.3 -- 114.2
Loss on sale of accounts receivable 1.1 2.8 1.5 -- 5.4
Equity in earnings of unconsolidated affiliates 151.6 62.7 -- (214.2) 0.1
Other expense (income) (0.2) -- (5.2) -- (5.4)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 32.0 151.5 66.9 (214.2) 36.2
Income tax expense -- -- 3.2 -- 3.2
Minority interests in subsidiaries -- -- 1.0 -- 1.0
------------ ------------ ------------ ------------ ------------
INCOME BEFORE ACCOUNTING CHANGE 32.0 151.5 62.7 (214.2) 32.0
Cumulative effect of accounting change (1.5) -- -- -- (1.5)
------------ ------------ ------------ ------------ ------------
NET INCOME 30.5 151.5 62.7 (214.2) 30.5
Other comprehensive loss (103.3) (142.8) (53.5) 196.3 (103.3)
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (72.8) $ 8.7 $ 9.2 $ (17.9) $ (72.8)
============ ============ ============ ============ ============
25
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ---------- ---------- ------------ -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (26.2) $ 107.0 $ (0.6) $ -- $ 80.2
---------- ---------- ---------- ----------- ----------
INVESTING ACTIVITIES:
Acquisition of minority interest -- -- (9.0) -- (9.0)
Capital expenditures (6.3) (1.2) (87.3) -- (94.8)
Cash received from unconsolidated affiliates -- 2.2 -- -- 2.2
Advances to unconsolidated affiliates (1.6) -- -- -- (1.6)
---------- ---------- ---------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (7.9) 1.0 (96.3) -- (103.2)
---------- ---------- ---------- ----------- ----------
FINANCING ACTIVITIES:
Borrowings under credit facilities 115.1 -- 6.0 -- 121.1
Repayments of credit facilities (406.1) -- (4.4) -- (410.5)
Issuance of senior subordinated notes 300.0 -- -- -- 300.0
Debt issuance costs (10.3) -- -- -- (10.3)
Cash contributions by parent -- 110.0 1,406.0 (1,516.0) --
Cash distributions from subsidiaries 1,559.2 -- -- (1,559.2) --
Cash distributions to parent -- (156.8) (1,402.4) 1,559.2 --
Cash distributions to subsidiaries (1,516.0) -- -- 1,516.0 --
Intercompany advances - net of repayments (18.0) (69.7) 87.7 -- --
---------- ---------- ---------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 23.9 (116.5) 92.9 -- 0.3
---------- ---------- ---------- ----------- ----------
Effect of exchange rate changes
on cash (0.4) 6.0 (0.5) -- 5.1
---------- ---------- ---------- ----------- ----------
Decrease in cash and
cash equivalents (10.6) (2.5) (4.5) -- (17.6)
Cash and cash equivalents at
beginning of period 21.0 2.8 60.1 -- 83.9
---------- ---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 10.4 $ 0.3 $ 55.6 $ -- $ 66.3
========== ========== ========== =========== ==========
26
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) (DOLLARS IN MILLIONS)
PARENT ONLY CONSOLIDATED
HUNTSMAN NON- HUNTSMAN
INTERNATIONAL GUARANTORS GUARANTORS ELIMINATIONS INTERNATIONAL
------------- ---------- ---------- ------------ -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (90.8) $ 79.1 $ 110.0 $ -- $ 98.3
---------- ---------- ---------- ----------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses -- (29.1) (180.4) -- (209.5)
Capital expenditures (12.3) (2.2) (98.9) -- (113.4)
Cash received from unconsolidated affiliates 4.9 -- -- -- 4.9
Advances to unconsolidated affiliates (1.3) -- -- -- (1.3)
---------- ---------- ---------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (8.7) (31.3) (279.3) -- (319.3)
---------- ---------- ---------- ----------- ----------
FINANCING ACTIVITIES:
Borrowings under credit facilities 1.5 -- 3.9 -- 5.4
Issuance of senior subordinated notes 233.2 -- -- -- 233.2
Debt issuance costs (4.6) -- -- -- (4.6)
Cash contributions by parent -- 585.9 1,783.5 (2,369.4) --
Cash distributions from subsidiaries 2,192.5 -- -- (2,192.5) --
Cash distributions to parent -- (484.9) (1,707.6) 2,192.5 --
Cash distributions to subsidiaries (2,318.2) (51.2) -- 2,369.4 --
Intercompany advances - net of repayments (1.7) (93.4) 95.1 -- --
---------- ---------- ---------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 102.7 (43.6) 174.9 -- 234.0
---------- ---------- ---------- ----------- ----------
Effect of exchange rate changes
on cash (8.8) (4.2) 1.2 -- (11.8)
---------- ---------- ---------- ----------- ----------
Increase (decrease) in cash and
cash equivalents (5.6) -- 6.8 -- 1.2
Cash and cash equivalents at
beginning of period 5.7 -- 60.4 -- 66.1
---------- ---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 0.1 $ -- $ 67.2 $ -- $ 67.3
========== ========== ========== =========== ==========
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Huntsman International LLC and its subsidiaries (collectively, the
"Company," "our," "us" or "we") derive their revenues, earnings and cash flow
from the manufacture and sale of a wide variety of specialty and commodity
chemical products. These products are manufactured at facilities located in the
Americas, Europe, Africa and Asia and are sold throughout the world. We manage
our businesses in four operating segments: Polyurethanes (our polyurethanes and
PO business); Base Chemicals (our olefins and aromatics business in the United
Kingdom); Pigments (our titanium dioxide business); and Performance Products
(our surfactants, ethyleneamines and other performance chemicals business).
During 2002, we realigned our principal operating segments. The most significant
change was the split of the former Specialty Chemicals segment into two
segments: Polyurethanes and Performance Products. The former Tioxide segment was
renamed Pigments, and the former Petrochemicals segment was renamed Base
Chemicals.
The profitability of our four principal operating segments is impacted to
varying degrees by economic conditions, prices of raw materials, customers'
inventory levels, global supply and demand pressures as well as other seasonal
and, to a limited extent, cyclical factors. Generally, the global market for our
polyurethanes and performance products has grown at rates in excess of global
GDP growth, while the demand for our petrochemical and pigments products has
historically grown at rates that are approximately equal to global GDP growth.
RECENT EVENTS
SENIOR NOTES OFFERING
On March 18, 2002, we sold $300 million aggregate principal amount of our
9.875% Senior Notes due 2009 (the "2002 HI Notes") in a transaction exempt from
the registration requirements of the Securities Act of 1933. We used
approximately $58 million of the net proceeds to repay outstanding indebtedness
under the revolving portion of our senior secured credit facilities (the "HI
Credit Facilities"). The balance of the net proceeds was used to repay amounts
due under the term loan portion of the HI Credit Facilities, eliminating
scheduled term loan amortization requirements in 2002 and substantially reducing
scheduled term loan amortization requirements in 2003.
On May 31, 2002, pursuant to our obligations under the Registration Rights
Agreement, dated March 21, 2002, with the initial purchasers of the 2002 HI
Notes, we filed a registration statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") to publicly
register 2002 HI Notes which will be exchanged for the outstanding privately
issued 2002 HI Notes. On June 12, 2002 the Division of Corporation Finance of
the SEC informed us that they would not review the Registration Statement and
that we could request effectiveness of the Registration Statement at any time.
We expect to file a pre-effective amendment to the Registration Statement
following the filing of this quarterly report on Form 10-Q and will request that
the SEC declare the Registration Statement be effective at that time. We will
commence the exchange offer in respect of the 2002 HI Notes following the
effectiveness of the Registration Statement.
ACQUISITION OF MINORITY INTEREST IN TIOXIDE SOUTHERN AFRICA (PTY.) LTD.
In June 2002, we acquired the 40% minority interest in Tioxide Southern
Africa (Pty.) Ltd. that was held by AECI Limited. The purchase price for this
interest was approximately $9 million. Tioxide Southern Africa (Pty.) Ltd. is
now our indirect, wholly-owned subsidiary.
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
We are currently attempting to expand our accounts receivable
securitization program by including the receivables of several addition
subsidiaries. The expansion of the program requires amendments to
28
the agreements governing the program. Although there can be no assurance that we
will be successful in obtaining the necessary amendments, we hope to complete
the amendments during the third quarter of 2002. If the amendment is approved,
we anticipate that the special purpose entity used in the program could issue up
to approximately $100 million in additional commercial paper. For more
information, see "--Liquidity and Capital Resources--Securitization of
Receivables" below.
PLEDGE OF THE MEMBERSHIP INTERESTS OF OUR PARENT COMPANY
On November 2, 2000, Imperial Chemical Industries PLC ("ICI"), Huntsman
Specialty Chemicals Corporation ("Huntsman Specialty"), Huntsman International
Holdings and our Company entered into agreements pursuant to which ICI had an
option to transfer to Huntsman Specialty or its permitted designated buyers
ICI's 30% membership interest in our parent company, Huntsman International
Holdings, that is indirectly held by ICI (the "ICI 30% Interest"). Pursuant to
these agreements, on October 30, 2001, ICI exercised its put right requiring
Huntsman Specialty or its nominee to purchase the ICI 30% Interest. On December
20, 2001, ICI and Huntsman Specialty amended ICI's put option arrangement under
these agreements to, among other things, provide that the purchase of the ICI
30% Interest would occur on July 1, 2003, or earlier under certain
circumstances, and to provide for certain discounts to the purchase price for
the ICI 30% Interest. The amended option agreement also requires Huntsman
Specialty to cause Huntsman International Holdings to pay up to $112 million of
dividends to its members, subject to certain conditions. These conditions
include the receipt of consent from our senior secured lenders and our ability
to make restricted payments under the indentures governing our outstanding
senior notes and senior subordinated notes (collectively, the "HI N