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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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 333-88057
HUNTSMAN INTERNATIONAL HOLDINGS LLC
(Exact name of registrant as specified in charter)
Delaware 87-0630359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
500 Huntsman Way
Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 584-5700
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [_] No [_]
At March 20, 2001, 1,000 membership interests of Huntsman International
Holdings LLC were outstanding.
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
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ITEM 1. BUSINESS..................................................................................... 3
ITEM 2. PROPERTIES................................................................................... 18
ITEM 3. LEGAL PROCEEDINGS............................................................................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS.................................... 19
ITEM 6. SELECTED FINANCIAL DATA...................................................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 31
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K............................. 44
SIGNATURES............................................................................................... 47
2
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
2000 FORM 10-K ANNUAL REPORT
This report contains certain forward-looking statements that involve risks and
uncertainties, including statements about our plans, objectives, goals,
strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements.
Some of the factors that could negatively affect our performance are discussed
in "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cautionary Statement for Forward Looking Information"
and elsewhere in this report.
PART I
ITEM 1. BUSINESS
General
Huntsman International Holdings LLC, formerly known as Huntsman ICI Holdings LLC
("Holdings" or the "Company"), is a global manufacturer and marketer of
specialty and commodity chemicals through our three principal businesses:
Specialty Chemicals, Petrochemicals and Tioxide ("TiO\\2\\"). We believe that
company is characterized by low cost operating capabilities; a high degree
of technological expertise; a diversity of products, end markets and geographic
regions served; significant product integration; and strong growth prospects.
Our company, a Delaware limited liability company, was formed in 1999 in
connection with a transaction between our company, Huntsman International LLC,
our wholly-owned subsidiary that was formerly known as Huntsman ICI Chemicals
LLC ("Huntsman International"), Huntsman Specialty Chemicals Corporation
("HSCC") and Imperial Chemicals Industries PLC ("ICI"). In connection with the
transaction, we acquired, on June 30, 1999, ICI's polyurethane chemicals,
selected petrochemicals and TiO\\2\\ businesses and HSCC's propylene oxide
("PO") business. We also acquired BP Chemicals Limited's ("BP Chemicals") 20%
ownership interest in the Wilton olefins facility and certain related assets. We
transferred the acquired businesses to Huntsman International and to its
subsidiaries. Our membership interests are owned 60% by HSCC, 30% by ICI and its
affiliates and 10% by institutional investors.
Recent Events
Issuance of Eu200 Million Senior Subordinated Notes
On March 13, 2001, Huntsman International completed an offering of its 10-1/8%
Senior Subordinated Notes due 2009, resulting in net proceeds of approximately
Eu204 million, including Eu4.0 million of interest accrued from January 1,
2001 paid by the purchasers. The terms of these notes are substantially similar
to the terms of its outstanding senior subordinated notes. Huntsman
International intends to use the proceeds of this offering to finance our
acquisition of Albright & Wilson's surfactants business. See "--Acquisition of
Surfactants Business."
Expansion of Huelva, Spain Plant
On March 9, 2001, we announced our intention to expand the annual production
capacity of our TiO\\2\\ plant at our Huelva, Spain facility by approximately
17,000 tonnes. Following this $40 million expansion, we will have an annual
TiO\\2\\ production capacity of approximately 97,000 tonnes. The expansion is
expected to be completed in late 2002.
3
Acquisition of Surfactants Business
On February 27, 2001 and pursuant to the terms of a letter of intent, we entered
into a definitive purchase agreement with several affiliates of Rhodia S.A.
relating to our planned purchase of the European surfactants business of
Albright & Wilson, a subsidiary of Rhodia. Albright & Wilson's surfactants
business participates in the anionic sulfonated surfactants and non-ionic
ethoxylated surfactants markets.
The surfactants business that we plan to acquire manufactures, develops and
markets a wide range of surfactants and surfactant intermediates used primarily
in consumer detergents, toiletries, baby shampoos and personal care products. It
also is a major producer of surfactants and specialty products for industrial
uses including leather and textile treatment, foundry and construction,
agriculture, polymers and coatings, and includes a facility for the manufacture
of fatty alcohol, a key surfactants intermediate raw material. The proposed
acquisition will include seven manufacturing facilities: one in the U.K., and
two sites in each of Italy, France and Spain. We anticipate that we will work
cooperatively with Rhodia in the joint operation and management of the U.K.
site.
Under the purchase agreement among us, Rhodia and its affiliates, we will
acquire all of the issued and outstanding stock of Albright & Wilson Srl,
Albright & Wilson Lavera SAS, and Albright & Wilson Iberica S.A. We will also
purchase the assets of several of Albright & Wilson's surfactants manufacturing
and sales sites in Europe, including sites in Whitehaven, Warley and Oldbury in
the U.K. The aggregate purchase price (including the purchase price prepayment
of approximately Eu5.1 million) that we will pay to Rhodia is Eu205 million,
which is subject to adjustment in certain circumstances. We intend to use the
proceeds of Huntsman International's recent offering of senior subordinated
notes to fund the purchase price of this acquisition. If we complete the
acquisition, Rhodia has agreed to indemnify us against a specified list of
matters, including certain contingent liabilities, up to a maximum aggregate
amount equal to seventy-five percent (75%) of the total purchase price paid by
us. Although we expect to complete the acquisition by March 31, 2001, we cannot
give any assurance as to when the transaction will be completed, if at all.
Proposed Investment by Bain Capital in Huntsman Corporation
On February 23, 2001, Huntsman Corporation ("Huntsman"), affiliates of which own
60% of our membership interests, announced that it had entered into a letter of
intent with Bain Capital, Inc. relating to a proposed investment by Bain in
Huntsman. The letter of intent contemplates that Huntsman and Bain will
negotiate definitive agreements pursuant to which Bain will invest over $600
million in Huntsman in exchange for a minority equity interest in Huntsman. If
the parties complete their proposed transaction, then Huntsman intends to use a
substantial portion of the proceeds received from Bain to finance the purchase
of our membership interests that are held by ICI and affiliates of Goldman
Sachs, as described under "--Sale by ICI of Our Equity Interests".
Acquisition of Ethyleneamines Business
On February 9, 2001, we completed our acquisition of the global ethyleneamines
and related businesses of The Dow Chemical Company for an aggregate purchase
price of approximately $33 million, excluding accounts receivable and accounts
payable. We believe that we now have the world's second largest production
capacity for ethyleneamines, which are a family of highly versatile performance
chemicals with a wide variety of end-use applications including lube oil
additives, epoxy hardeners, wet strength resins, chelating agents and
fungicides. The acquisition of this business provides us with ethyleneamines and
aminoethylethanolamines production facilities in Freeport, Texas and a long-term
supply arrangement for up to 50% of the existing production capacity of Dow's
ethyleneamines plant at Terneuzen, Netherlands. The acquired business will be
included in the Specialty Chemicals division of the Company.
Securitization of Receivables
On December 21, 2000, we entered into a securitization program arranged by The
Chase Manhattan Bank under which certain trade receivables were and will be
transferred to a special purpose securitization entity. The acquisition of these
receivables by the entity was financed through the issuance of commercial paper.
We received $175 million in proceeds from the securitization transaction which
were used to reduce our outstanding indebtedness.
4
Sale by ICI of Holdings' Equity Interests
In November 2000 ICI entered into agreements with HSCC, our company and
Huntsman International, under which ICI has an option to transfer to HSCC or its
permitted designated buyers, and HSCC or its permitted designated buyers have a
right to buy, the membership interests in our company that are indirectly held
by ICI for approximately $365 million plus interest from November 30, 2000 until
the completion of such sale. Unless waived by ICI, the right of HSCC or its
designees to buy the membership interests (which expires if not exercised by
July 2001) is contingent upon the completion of the resale by ICI of our 8%
Senior Subordinated Reset Discount Notes. Additionally, ICI may only exercise
its option to transfer the membership interests to HSCC between April 2001 and
July 2001.
In addition, and in the event that ICI completes the transfer of its membership
interests in our company as described in the preceding paragraph, the affiliates
of The Goldman Sachs Group who collectively own 1.1% of our outstanding
membership interests have agreed to transfer those interests to HSCC, or its
designee, in exchange for approximately $13.5 million plus interest from
November 30, 2000 until the completion of such sale.
Our agreements with ICI also permit ICI to resell, subject to certain
conditions, our Senior Subordinated Reset Discount Notes, settle certain
outstanding indemnification matters under the contribution agreement, provide
for the finalization of certain ancillary agreements contemplated by the
contribution agreement and establish new contractual terms with respect to ICI's
obligation to transfer to us its interests in Nippon Polyurethane Industry Co.
Ltd. See "Item 13--Certain Relationships and Related Transactions".
We expect that a substantial portion of the proceeds from the proposed
investment of Bain in Huntsman Corporation will be used by HSCC or other
affiliates of Huntsman Corporation to finance the purchase of our membership
interests held by ICI and the Goldman Sachs affiliates. See "--Proposed
Investment by Bain Capital in Huntsman Corporation".
Specialty Chemicals
General
Our Specialty Chemicals business is composed of the polyurethane chemicals
business that we acquired from ICI, the PO business that we acquired from HSCC,
the thermoplastic polyurethane ("TPU") business that we acquired from Rohm and
Haas Company in August 2000 and the ethyleneamines business that we acquired
from The Dow Chemical Company in February 2001.
We are one of the leading polyurethane chemicals producers in the world in terms
of production capacity. We market a complete line of polyurethane chemicals,
including methylene diphenyl diisocyanate ("MDI"), toluene diisocyanate ("TDI"),
TPU, polyols, polyurethane systems and aniline, with an emphasis on MDI-based
chemicals. We believe that we have the world's second largest production
capacity for MDI and MDI-based polyurethane systems, with an estimated 24%
global MDI market share; the fourth largest producer of TPU, with an estimated
11% global TPU market share; and the second largest producer of ethyleneamines,
with an estimated 23% global ethyleneamines market share. Our customers produce
polyurethane products through the combination of an isocyanate, such as MDI or
TDI, with polyols, which are derived largely from PO and ethylene oxide. Primary
polyurethane end-uses include automotive interiors, refrigeration and appliance
insulation, construction products, footwear, furniture cushioning, adhesives and
other specialized engineering applications.
Our Specialty Chemicals business is widely recognized as an industry leader in
utilizing state-of-the-art application technology to develop new polyurethane
chemical products and applications. Approximately 30% of our 2000 polyurethane
chemicals sales were generated from products and applications introduced in the
previous three years. Our rapid rate of new product and application development
has led to a high rate of product substitution, which in turn has led to MDI
sales volume growth for our business of approximately 9.2% per year over the
past ten years, a rate in excess of the industry growth rate. Largely as a
result of our technological expertise and history of product innovation, we have
enjoyed long-term relationships with a diverse customer base.
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We believe that we own the world's two largest MDI production facilities in
terms of capacity, located in Rozenburg, Netherlands and Geismar, Louisiana.
These facilities receive raw materials from our aniline facilities located in
Wilton, U.K. and Geismar, Louisiana, which in the terms of production capacity
are the world's two largest aniline facilities. Since 1996, we have invested
over $600 million to significantly enhance our production capabilities through
the rationalization of our older, less efficient facilities and the
modernization of our newer facilities at Rozenburg and Geismar.
We are one of three North American producers of PO. Our customers process PO
into derivative products such as polyols for polyurethane products, propylene
glycol ("PG"), and various other chemical products. End uses for these
derivative products include applications in the home furnishings, construction,
appliance, packaging, automotive and transportation, food, paints and coatings
and cleaning products industries. We believe that we are also the third largest
U.S. marketer of PG, which is used primarily to produce unsaturated polyester
resins for bath and shower enclosures and boat hulls, and to produce heat
transfer fluids and solvents. As a co-product of our PO manufacturing process,
we also produce methyl tertiary butyl ether ("MTBE"), which is an oxygenate that
is blended with gasoline to reduce harmful vehicle emissions and to enhance the
octane rating of gasoline.
We use our proprietary technology to manufacture PO and MTBE at our state-of-
the-art facilities in Port Neches, Texas. This facility, which is the most
recently built PO manufacturing facility in North America, was designed and
built under the supervision of Texaco and began commercial operations in August
1994. Since acquiring the facility in 1997, we have increased its PO capacity
by approximately 30% through a series of low cost process improvement projects.
The current capacity of the PO facility is approximately 525 million pounds of
PO per year. We produce PG under a tolling arrangement with Huntsman
Petrochemical Corporation, which has the capacity to produce approximately 130
million pounds of PG per year at a neighboring facility.
Our Specialty Chemicals business accounted for 47% of net sales in 2000, and, on
a pro forma basis, accounted for 48% and 46% of our net sales in 1999 and 1998,
respectively.
Industry Overview
The polyurethane chemicals industry is estimated to be a $24 billion global
market, consisting primarily of the manufacture and marketing of MDI, TDI and
polyols. MDI is used primarily in rigid foam, conversely, TDI is used primarily
in flexible foam applications. Polyols, including polyether and polyester
polyols, are used in conjunction with MDI and TDI in rigid foam, flexible foam
and other non-foam applications. TPU is used in flexible elastomers and other
specialty non-foam applications. PO, one of the principal raw materials for
polyurethane chemicals, is primarily used in consumer durables.
MDI. MDI has a substantially larger market size and a higher growth rate than
TDI. MDI's leadership in the polyurethane chemicals market primarily results
from its superior properties and ability to be used in a more diverse range of
polyurethane applications than TDI. Since 1992, the global consumption of MDI
has grown at a compound rate of 8.1%, which exceeds both GDP growth and TDI
consumption growth during the same period. The U.S. and European markets
consume the largest quantities of MDI. There are four major producers of MDI:
Bayer, Huntsman International, BASF and Dow.
TDI. The TDI market generally grows at a rate consistent with GDP and exhibits
relatively stable prices. The four largest TDI producers supply approximately
60% of global TDI demand. The consumers of TDI consist primarily of numerous
manufacturers of flexible foam blocks sold for use as furniture cushions and
mattresses. Flexible foam is typically the first polyurethane market to become
established in developing countries, and, as a result, development of TDI demand
typically precedes MDI demand.
TPU. In August 2000, we completed our acquisition of the Morton global TPU
business from Rohm and Haas Company. The acquired TPU business adds production
capacity in Osnabruck, Germany and Ringwood, Illinois, which complements our
existing footwear-based TPU business. TPU is high quality material with unique
qualities such as durability, flexibility, strength, abrasion-resistance, shock
absorbency and chemical resistance. We can tailor its performance
characteristics to meet the specific requirements of our customers, such as for
use in injection molding and components for
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the automotive and footwear industries. It is also extruded into films and
profiles and finds a wide variety of applications in the CASE markets.
Polyols. Polyols are reacted with isocyanates, primarily MDI and TDI, to produce
finished polyurethane products. In the U.S., approximately 77% of all polyols
produced are used in polyurethane foam applications. In 2000, approximately two-
thirds of the polyols used in polyurethane applications were processed with TDI
to produce flexible foam blocks and the remaining one-third was processed in
various applications that meet the specific needs of individual customers. The
creation of a broad spectrum of polyurethane products is made possible through
the different combinations of the various polyols with MDI, TDI and other
isocyanates. The market for specialty polyols that are reacted with MDI
consumption has been growing at approximately the same rate as MDI consumption.
We believe that the growth of commodity polyols demand has paralleled the growth
of global GDP.
Ethyleneamines. In February 2001, we completed our acquisition of the global
ethyleneamines business of The Dow Chemical Company. The acquired ethyleneamines
business adds production capacity in Freeport, Texas and a long-term supply
arrangement for up to 50% of the existing production capacity of Dow's
ethyleneamines plant in Terneuzen, Netherlands. Ethyleneamines are highly
versatile performance chemicals with a wide variety of end-use applications
including lube oil additives, epoxy hardeners, wet strength resins, chelating
agents and fungicides.
Aniline. Aniline is an intermediate chemical used primarily as a raw material
to manufacture MDI. Approximately 80% of all aniline produced is consumed by
MDI producers, while the remaining 20% is consumed by synthetic rubber and dye
producers. Generally, most aniline produced is either consumed downstream by
the producers of the aniline or is sold to third parties under long-term supply
contracts.
PO. Demand for PO depends largely on overall economic demand, especially that
for consumer durables. Consumption of PO in the U.S. represents approximately
40% of global consumption. Two U.S. producers, Lyondell and Dow, account for
approximately 90% of North American PO production. We believe that Dow consumes
approximately 70% of their North American PO production in their North American
downstream operations, and that approximately 50% of Lyondell's North American
PO production is consumed internally or sold to Bayer, which recently acquired
Lyondell's polyols business.
MTBE. We currently use our entire production of tertiary butyl alcohol ("TBA"),
a co-product of our PO production process to produce MTBE. MTBE is an oxygenate
that is blended with gasoline to reduce harmful vehicle emissions and to enhance
the octane rating of gasoline. Historically, the refining industry utilized
tetra ethyl lead as the primary additive to increase the octane rating of
gasoline until health concerns resulted in the removal of tetra ethyl lead from
gasoline. This led to the increasing use of MTBE as a component in gasoline
during the 1980s. U.S. consumption of MTBE has grown at a compound annual rate
of 15.2% in the 1990s due primarily to the implementation of federal
environmental standards that require improved gasoline quality through the use
of oxygenates. MTBE has experienced strong growth due to its ability to satisfy
the oxygenation requirement of the Clean Air Act Amendments of 1990 with respect
to exhaust emissions of carbon monoxide and hydrocarbon emissions from
automobile engines. Some regions of the U.S. have adopted this oxygenate
requirement to improve air quality even though they may not be mandated to do so
by the Clean Air Act. While this trend has further increased MTBE consumption,
the use of MTBE is becoming increasingly controversial and may be substantially
curtailed or eliminated in the future by legislation or regulatory action. See
"--MTBE Developments".
Sales and Marketing
We manage a global sales force at 45 locations with a presence in 33 countries,
which sells our polyurethane chemicals to over 2000 customers in 67 countries.
Our sales and technical resources are organized to support major regional
markets, as well as key end-use markets which require a more global approach.
These key end-use markets include the appliance, automotive, footwear,
furniture, construction, binders and coatings, adhesives, sealants and
elastomers ("CASE") industries.
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Approximately 50% of our polyurethane chemicals sales are in the form of
"systems" in which we provide the total isocyanate and polyol formulation to our
customers in a ready-to-use form. Our ability to supply polyurethane systems is
a critical factor in our overall strategy to offer comprehensive product
solutions to our customers. We have strategically located our polyol blending
facilities, commonly referred to in the chemicals industry as "systems houses",
close to our customers, enabling us to focus on customer support and technical
service. We believe this customer support and technical service system
contributes to customer retention and also provides opportunities for
identifying further product and service needs of customers. We intend to
increase the utilization of our systems houses to produce and market greater
volumes of polyols and MDI polyol blends.
We have entered into contractual arrangements with Huntsman Corporation and
Huntsman Petrochemical Corporation under which Huntsman Corporation and Huntsman
Petrochemical Corporation provide us with all of the management, sales,
marketing and production personnel required to operate our PO business and our
MTBE business. See "Item 13 - Certain Relationships and Related Transactions".
We believe that the extensive market knowledge and industry experience of the
sales executives and technical experts provided to us by Huntsman Corporation
and Huntsman Petrochemical Corporation, in combination with our strong emphasis
on customer relationships, has facilitated our ability to establish and maintain
long-term customer contracts. Due to the specialized nature of our markets, our
sales force must possess technical knowledge of our products and their
applications. Our strategy is to continue to increase sales to existing
customers and to attract new customers by providing quality products, reliable
supply, competitive prices and superior customer service.
Based on current production levels, we have entered into long-term contracts to
sell 100% of our PO to customers including Huntsman Petrochemical Corporation
through 2007. Other contracts provide for the sale of our MTBE production to
Texaco and BP Amoco. More than half of our annual MTBE production is committed
to Texaco and BP Amoco, with our contract with Texaco expiring in 2007. In
addition, over 70% of our current annual PG production is sold pursuant to long-
term contracts.
Manufacturing and Operations
Our primary Specialty Chemicals facilities are located at Geismar, Louisiana;
Port Neches, Texas; Rozenburg, Netherlands; and Wilton, U.K. Our Geismar
expansion was completed in 2000, giving it the largest production capacity for
nitrobenzene, aniline and MDI in the world.
The following chart provides information regarding the capacities of our primary
facilities:
Annual Capacities (in millions)
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Location MDI TDI Polyols TPU Aniline Nitrobenzene Ethyleneamines PO PG MTBE
- ------------------------------ --- --- ------- --- ------- ------------ -------------- -- -- ----
(pounds) (gallons)
Geismar, Louisiana(1) 840(1) 90 160 830(2) 1,200(2)
Freeport, Texas 160
Osnabruck, Germany 20 30
Port Neches, Texas. 525 130(3) 260
Ringwood, Illinois. 20
Rozenburg, Netherlands 620 120
Shepton Mallet, U.K. 50
Wilton, U.K. 660 810
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Total 1,460 90 350 50 1,490 2,010 160 525 130 260
=================================================================================================
(1) The Geismar facility is owned as follows: we own 100% of the MDI, TDI and
polyol facilities, and Rubicon, Inc., a manufacturing joint venture with
Crompton Corp. in which we own a 50% interest, owns the aniline and
nitrobenzene facilities. Rubicon is a separate legal entity that operates
both the assets that we own jointly with Crompton Corp. and our wholly-
owned assets at Geismar.
(2) We have the right to approximately 73% of this capacity under the Rubicon
joint venture arrangements.
(3) We produce under a tolling arrangement with Huntsman Petrochemical
Corporation.
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Since 1996, over $600 million has been invested to improve and expand our MDI
production capabilities through the rationalization of older, less efficient
facilities and the modernization of newer facilities. We expect to pursue
future plant expansions and capacity modification projects when justified by
market conditions.
In addition to MDI, we produce TDI and polyols at our Geismar facility and
polyols and polyol blends at our Rozenburg facility. We manufacture TDI and
polyols primarily to support our MDI customers' requirements. We believe the
combination of our PO business, which produces the major feedstock for polyols,
with our polyols business creates an opportunity to expand our polyols business
and market greater volumes of polyols through our existing sales network and
customer base.
We use a proprietary manufacturing process to manufacture PO. We own or license
all technology, processes and patents developed and utilized at this facility.
Our process reacts isobutane and oxygen in proprietary oxidation (peroxidation)
reactors, thereby forming tertiary butyl hydroperoxide ("TBHP") and TBA which
are further processed into PO and MTBE, respectively. Because our PO production
process is less expensive relative to other technologies and allows all of our
PO co-products to be processed into saleable or useable materials, we believe
that our PO production technology possesses several distinct advantages over its
alternatives.
Rubicon Joint Venture. We are a 50% joint venture owner, along with Crompton
Corp., of Rubicon, Inc., which owns aniline, nitrobenzene and diphenlylamine
("DPA") manufacturing facilities in Geismar, Louisiana. In addition to operating
our 100% owned MDI, TDI and polyol facilities at Geismar, Rubicon also operates
the joint venture's aniline, nitrobenzene and DPA facilities and is responsible
for providing other auxiliary services to the entire Geismar complex. We are
entitled to approximately 80% of the nitrobenzene and aniline production
capacity of Rubicon, and Crompton Corp. is entitled to 100% of the DPA
production. As a result of this joint venture, we are able to achieve greater
scale and lower costs for our products than we would otherwise have been able
to obtain.
Raw Materials. The primary raw materials for polyurethane chemicals are
benzene and PO. Benzene is a widely-available commodity that is the primary
feedstock for the production of MDI. Approximately one-third of the raw
material costs of MDI is attributable to the cost of benzene. Our integration
with our suppliers of benzene, nitrobenzene and aniline provides us with a
competitively priced supply of feedstocks and reduces our exposure to supply
interruption.
A major cost in the production of polyols is attributable to the costs of PO.
We believe that the integration of our PO business with our polyurethane
chemicals business will give us access to a competitively priced, strategic
source of PO and the opportunity to further expand into the polyol market. The
primary raw materials used in our PO production process are butane/isobutane,
propylene, methanol and oxygen, which accounted for 61%, 20%, 13%, and 3%,
respectively, of total raw material costs in 2000. We purchase our raw
materials primarily under long-term contracts. While most of these feedstocks
are commodity materials generally available to us from a wide variety of
suppliers at competitive prices in the spot market, we purchase all of the
propylene used in the production of our PO from Huntsman Petrochemical
Corporation, and through Huntsman Petrochemical Corporation's pipeline which is
the only propylene pipeline connected to our PO facility.
Competition
The polyurethane chemicals business is characterized by a small number of
competitors, including BASF, Bayer, Dow and Lyondell. While these competitors
produce various types and quantities of polyurethane chemicals, we focus on MDI
and MDI-based polyurethane systems. We compete based on technological
innovation, technical assistance, customer service, product reliability and
price. In addition, our polyurethane chemicals business also differentiates
itself from its competition in the MDI market in two ways: (1) where price is
the dominant element of competition, our polyurethane chemicals business
differentiates itself by its high level of customer support including
cooperation on technical and safety matters; and (2) elsewhere, we compete on
the basis of product performance and our ability to react to customer needs,
with the specific aim of obtaining new business through the solution of customer
problems. Nearly all the North American PO production capacity is located in
the U.S. and controlled by three producers, Lyondell, Dow, and ourselves. We
compete based on price, product performance and service.
MTBE Developments
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The presence of MTBE in some groundwater supplies in California and other states
(primarily due to gasoline leaking from underground storage tanks) and in
surface water (primarily from recreational watercraft) has led to public concern
about MTBE's potential to contaminate drinking water supplies. Heightened
public awareness regarding this issue has resulted in various state and federal
initiatives to rescind the federal oxygenate requirements for reformulated
gasoline or restrict or prohibit the use of MTBE in particular. For example,
the State of California has requested that the U.S. Environmental Protection
Agency waive the federal oxygenated fuels requirements of the federal Clean Air
Act for gasoline sold in California. Separately, the California Air Resources
Board has adopted regulations that would prohibit the addition of MTBE to
gasoline after 2002. Certain other states have also taken actions to restrict or
eliminate the future use of MTBE. The actual effect of these state action on the
use of MTBE in gasoline is unclear in light of federal law. However, several
bills have been introduced in the U.S. Congress to accomplish similar goals of
curtailing or eliminating the oxygenated fuels requirements in the Clean Air
Act, or of curtailing MTBE use in particular. In 1999, the U.S. Senate also
passed a resolution calling for a phase out of MTBE. While this resolution has
no binding legal effect, there can be no assurance that future Congressional
action will not result in a ban or other restrictions on MTBE use. In addition,
on March 20, 2000, the EPA announced its intention, through an advanced notice
of proposed rulemaking, to phase out the use of MTBE under authority of the
federal Toxic Substances Control Act. In its notice, the EPA also called on the
U.S. Congress to restrict the use of MTBE under the Clean Air Act. Any phase-out
of or prohibition against the use of MTBE in California (in which a significant
amount of MTBE is consumed), in other states, or nationally may result in a
significant reduction in demand for our MTBE and result in a material loss in
revenues or material costs or expenditures.
While the environmental benefits of the inclusion of MTBE in gasoline are widely
debated, we believe that there is no reasonable near term replacement for MTBE
as an octane enhancer and, while its use may no longer be mandated, we believe
that it will continue to be used as an octane enhancer as long as its use is not
prohibited. We believe that our low production costs will put us in a favorable
position relative to other higher cost sources of MTBE (primarily imports and
on-purpose manufacturing facilities). In the event that there should be a
phase-out of MTBE in the U.S., however, we believe we will be able to export
MTBE to Europe or elsewhere or use our co-product TBA to produce saleable
products other than MTBE. If we opt to produce products other than MTBE,
necessary modifications to our facilities may require material capital
expenditures and the sale of the other products may produce a lower level of
cash flow than the sale of MTBE. Furthermore, we cannot give any assurance that
we will not be named in litigation by citizens groups, municipalities or others
relating to the environmental effects of MTBE or that such litigation will not
have a material adverse effect on our business, financial condition, results of
operations or cash flows.
Petrochemicals
General
We are a highly-integrated European olefins and aromatics producer. Olefins,
principally ethylene and propylene, are the largest volume basic petrochemicals
and are the key building blocks from which many other chemicals are made. For
example, olefins are used to manufacture most plastics, resins, adhesives,
synthetic rubber and surfactants which are used in a variety of end-use
applications. Aromatics are basic petrochemicals used in the manufacture of
polyurethane chemicals, nylon, polyester fiber and a variety of plastics.
We believe that our olefins facility at Wilton, U.K. is one of Europe's largest
single-site and lowest cost olefins facilities. Our Wilton facility has the
capacity to produce approximately 1.9 billion pounds of ethylene, 880 million
pounds of propylene and 225 million pounds of butadiene per year. The Wilton
olefins facility benefits from its feedstock flexibility and superior logistics,
which allows for the processing of naphthas, condensates and natural gas liquids
("NGL").
We produce aromatics at our two integrated manufacturing facilities located in
Wilton, U.K. and North Tees, U.K. We believe that we are Europe's largest
cyclohexane producer with 660 million pounds of annual capacity, third largest
paraxylene producer with 750 million pounds of annual capacity and ninth largest
benzene producer with 1,125 million pounds of annual capacity. We also produce
cumene. We use all of the benzene produced by our aromatics business internally
in the production of nitrobenzene for our polyurethane chemicals business and
for the production of cyclohexane and cumene. The balance of our aromatics
products are sold to several key customers. Our aromatics business has entered
into a contract with Shell Trading International Limited for the purchase of
aromatics-rich feedstock. This transaction allowed us to close part of our
aromatics facilities in the fourth quarter of 1999, thereby reducing fixed
production costs while maintaining production of key products. We believe that
this change will improve the future profitability of our aromatics business.
10
Our petrochemicals business accounted for 31% of net sales in 2000, and, on a
pro forma basis, accounted for 26% and 28% of our net sales in 1999 and 1998,
respectively.
Industry Overview
Petrochemical markets are essentially global commodity markets. However, the
olefins market is subject to some regional price differences due to the limited
inter-regional trade resulting from the high costs of product transportation.
The global petrochemicals market is cyclical and is subject to pricing swings
due to supply and demand imbalances, feedstock prices (primarily driven by crude
oil prices) and general economic conditions. The following table sets forth the
primary markets for our petrochemicals.
Product Markets End Uses
------- ------- --------
Ethylene Polyethylene, ethylene oxide, polyvinyl Packaging materials, plastics,
chloride, alpha olefins, styrenes housewares, beverage containers, personal care
Propylene Polypropylene, propylene oxide, acrylonitrile, Clothing fibers, plastics, automotive parts,
isopropanol foams for bedding & furniture
Benzene Polyurethanes, polystyrene, Appliances, automotive components, detergents,
cyclohexane, cumene personal care, packaging materials, carpet
Paraxylene Polyester, purified Fibers, textiles, beverage containers
terephthalic acid ("PTA")
The ethylene market in Western Europe is supplied by numerous producers, none of
whom have a dominant position in terms of their share of Western European
production capacity. The top three Western European producers of ethylene are
AtoFina, Dow and EniChem. Olefins capacity in Western Europe has expanded
moderately in recent years primarily through implementation of low-cost process
improvement projects at existing units. No greenfield olefins capacity has been
constructed in Western Europe since 1994, and to our knowledge, no new olefins
plants have been announced.
Like the ethylene market, the aromatics market, which is comprised of benzene,
paraxylene and cyclohexane, in Western Europe is characterized by numerous
producers. The six largest Western European producers of benzene are AtoFina,
Dow, Shell, EniChem, ExxonMobil and BASF.
Both the benzene and paraxylene markets are currently in a period of
overcapacity. The increasing restrictions imposed by regulatory authorities on
the aromatics content of gasoline in general, and the benzene content in
particular, have led to an increase in supply of aromatics in recent years.
However, demand has increased in 2000 as markets continued to recover from the
economic downturn in Asia.
Sales and Marketing
In recent years, our sales and marketing efforts have focused on developing
long-term contracts with customers to minimize our selling expenses and
administration costs. In 2000, over 85% of our primary petrochemicals sales
volume was made under long-term contracts. We delivered over 70% of our
petrochemical products volume in 2000 by pipeline, and we delivered the balance
of our products by road and ship to either the U.K. or export markets, primarily
in continental Western Europe.
Manufacturing and Operations
We produce olefins at our facility in Wilton, U.K. In addition, we own and
operate two integrated aromatics manufacturing facilities at our Wilton and
North Tees sites at Teesside, U.K. Information regarding these facilities is set
forth in the following chart:
11
Location Product Annual Capacity
-------------------------------------------------------------------
(millions of pounds)
Wilton, U.K. Ethylene 1,900
Propylene 880
Butadiene 225
Paraxylene 750
North Tees, U.K. Benzene 1,125
Cyclohexane 660
Cumene 275
The Wilton olefins facility's flexible feedstock capability, which permits it to
process naphtha, condensates and NGL feedstocks, allows us to take advantage of
favorable feedstock prices arising from seasonal fluctuations or local
availability. In addition to our manufacturing operations, we also operate an
extensive logistics infrastructure in North Tees. This infrastructure includes
both above and below ground storage facilities, jetties and logistics services
on the River Tees. These operations reduce our raw material costs by providing
greater access and flexibility for obtaining feedstocks.
In order to reduce costs and improve the cash performance of our aromatics
business, we entered into a supply contract with Shell in 1999 to purchase large
volumes of refinery by-product streams which are rich in aromatics. Beginning
in the fourth quarter of 1999, we ceased production at our existing aromatics
reformer unit and utilized the remaining assets to extract aromatics from
purchased by-product streams and by-product streams produced at the Wilton
olefins facility.
Raw Materials. Teesside, situated on the North East coast of England, is near
a substantial supply of oil, gas and chemical feedstocks. Due to our location
at Teesside, we have the option to purchase feedstocks from a variety of
sources. However, we have elected to procure the majority of our naphtha,
condensates and NGLs from local producers, as they have been the most economical
sources. In order to secure the optimal mix of the required quality and type of
feedstock for our petrochemical operations at fully competitive prices, we
regularly engage in the purchase and sale of feedstocks and hedging activities.
Competition
The markets in which our petrochemicals business operates are highly
competitive. Our competitors in the olefins and aromatics business are
frequently some of the world's largest chemical companies such as BP Amoco, Dow,
ExxonMobil and Shell. The primary factors for competition in this business are
price, service and reliability of supply. The technology used in these
businesses is widely available and licensed, though new entrants must make
significant capital expenditures in order to participate in this market.
Titanium Dioxide
General
We believe that our TiO\\2\\ business, which operates under the trade name
"Tioxide", has the largest production capacity for TiO\\2\\ in Europe, with an
estimated 31% of European production capacity, and has the third largest
production capacity in the world, with an estimated 14% market share. TiO\\2\\
is a white pigment used to impart whiteness, brightness and opacity to products
such as paints, plastics, paper, printing inks, synthetic fibers and ceramics.
In addition to its optical properties, TiO\\2\\ possesses traits such as
stability, durability and non-toxicity, making it superior to other white
pigments .
We offer an extensive range of products that are sold worldwide to over 3,000
customers in all major TiO\\2\\ end markets and geographic regions. The
geographic diversity of our manufacturing facilities allows our TiO\\2\\
business to service local customers, as well as global customers that require
delivery to more than one location. Our TiO\\2\\ business has an aggregate
annual nameplate capacity of approximately 570,000 tonnes at our eight
production facilities. Five of our TiO\\2\\ manufacturing plants are located in
Europe, one is in North America, one is in Asia, and one is in South Africa. Our
North
12
American operations consist of a 50% interest in a manufacturing joint venture
with NL Industries, Inc. and our South African operations consist of a 60% owned
subsidiary.
We recently commenced construction of a new TiO\\2\\ manufacturing plant at our
Greatham, UK facility. The new plant will allow us to close an older, plant
located at Greatham and will increase our annual production capacity of the
facility to 100,000 tonnes of chloride-based TiO\\2\\. We expect to commence
production at the new plant in mid-2002. In addition, we are in the process of
expanding our Teluk Kalung, Malaysia facility by 6,000 tonnes by mid-2001 and
are in the process of expanding our Huelva, Spain plant by 17,000 tonnes by
late-2002.
We believe that we are one of the lowest cost TiO\\2\\ producers in the world.
We have embarked on a comprehensive cost reduction program which has eliminated
approximately $110 million of annualized costs since 1996, with an additional
$20 million of annualized savings expected to be achieved by the end of 2001. As
part of this program, we have reduced the number of product grades we produce,
focusing on those with wider applications. This program has resulted in reduced
total plant set-up times and further improved product quality, product
consistency, customer service and profitability.
Our TiO\\2\\ business accounted for 22% of our net sales in 2000, and on a pro
forma basis, accounted for 26% of our net sales in both 1999 and 1998.
Industry Overview
The historical long-term growth rate for global TiO\\2\\ consumption has been
generally consistent with global GDP growth. Although short-term influences
such as customer and producer stocking and de-stocking activities in response to
changes in capacity utilization and price may distort this trend, over the long-
term, GDP growth is the primary underlying factor influencing growth in TiO\\2\\
demand. The TiO\\2\\ industry experiences some seasonality in its sales because
paint sales generally peak during the spring and summer months in the northern
hemisphere, resulting in greater sales volumes during the first half of the
year.
The global TiO\\2\\ market is characterized by a small number of large global
producers. As of December 31, 2000, following recent industry consolidation, the
TiO\\2\\ industry had five major producers, (DuPont, Millennium Chemicals,
Huntsman International, Kerr-McGee Chemicals and NL Industries) accounting for
76% of the global market share. The TiO\\2\\ industry has substantial
requirements for entry, including proprietary production technology and world
scale assets requiring significant capital investment. No greenfield TiO\\2\\
capacity has been announced in the last few years. Based upon current price
levels and the long lead times for planning, governmental approvals and
construction, additional greenfield capacity is not expected in the near future.
There are two manufacturing processes for the production of TiO\\2\\, the
sulfate process and the chloride process. Most recent capacity additions have
employed the chloride process technology. However, the global distribution of
sulfate and chloride-based TiO\\2\\ capacity varies by region, with the sulfate
process being predominant in Europe, our primary market. The chloride process is
the predominant process used in North America and both processes are used in
Asia. We believe that approximately 50% of end-use applications can use pigments
produced by either process.
Sales and Marketing
Approximately 95% of our TiO\\2\\ sales are made through our direct sales and
technical services network, enabling us to cooperate more closely with our
customers and to respond to our increasingly global customer base. Our
concentrated sales effort and local manufacturing presence have allowed us to
achieve our leading market shares in a number of the countries where we
manufacture TiO\\2\\.
In addition, we have focused on marketing products to higher growth industries.
For example, we believe that our TiO\\2\\ business is well-positioned to benefit
from the projected growth in the plastics sector, which we expect to grow faster
than the overall TiO\\2\\ market over the next several years. The table below
summarizes the major and markets for our TiO//2// products.
% of 2000 Sales
13
End Markets Volume
Paints and Coatings 8%
Plastics 7%
Inks 5%
Paper 4%
Manufacturing and Operations
Our TiO\\2\\ business has eight manufacturing sites in seven countries with a
total estimated capacity of 570,000 tonnes per year. Approximately 75% of our
TiO\\2\\ capacity is located in Western Europe. During 2000, we closed our
manufacturing plant in Tracy, Canada. This facility was a "finishing" plant,
performing the later steps in the production process for a portion of the
product produced at our European and South African facilities. Following an
increase of our capacity for finishing TiO\\2\\ at our European and South
African facilities, we are able to finish all product produced locally. The
following table presents information regarding our TiO\\2\\ facilities:
Region Site Annual Capacity Process
------ ---- --------------- -------
(tonnes)
Western Europe Calais, France 100,000 Sulfate
Greatham, U.K.(1) 80,000 Chloride
Grimsby, U.K. 80,000 Sulfate
Huelva, Spain(1) 80,000 Sulfate
Scarlino, Italy 80,000 Sulfate
North America Lake Charles, Louisiana(2) 60,000 Chloride
Asia Teluk Kalung, Malaysia(1) 50,000 Sulfate
Southern Africa Umbogintwini, South Africa(3) 40,000 Sulfate
-------
570,000
=======
(1) We have recently announced plans to expand the capacity of these
facilities.
(2) This facility is owned and operated by Louisiana Pigment Company, L.P., a
manufacturing joint venture that is owned 50% by us and 50% by Kronos
Louisiana, Inc., a subsidiary of NL Industries, Inc. The capacity shown
reflects our 50% interest in Louisiana Pigment Company.
(3) This facility is owned by Tioxide Southern Africa (Pty) Limited, a company
that is owned 60% by us and 40% by AECI. We operate this facility and are
responsible for marketing 100% of the production.
Joint Ventures. We own a 50% interest in a manufacturing joint venture located
in Lake Charles, Louisiana. The remaining 50% interest is held by our joint
venture partner Kronos Louisiana, Inc., a wholly-owned subsidiary of NL
Industries, Inc. We share production offtake and operating costs of the plant
equally with Kronos, though we market our share of the production independently.
The operations of the joint venture are under the direction of a supervisory
committee on which each partner has equal representation.
We also own a 60% interest in Tioxide Southern Africa (Pty) Limited, based in
Umbogintwini, near Durban, South Africa. The remaining 40% interest is owned by
AECI, a major South African chemicals and minerals company. We operate this
facility and are responsible for marketing 100% of the production.
Raw Materials. The primary raw materials used to produce TiO\\2\\ are titanium-
bearing ores. There are a limited number of ore suppliers and we purchase ore
under long-term supply contracts. The cost of titanium-bearing ores has been
relatively stable in comparison to TiO\\2\\ prices. Titanium-bearing ore
represents approximately 40% of TiO\\2\\ pigment production costs.
TiO\\2\\ producers extract titanium from ores and process it into pigmentary
TiO\\2\\ using either the chloride or sulfate process. Once an intermediate
TiO\\2\\ pigment has been produced, it is "finished" into a product with
specific performance characteristics for particular end-use applications. The
finishing process is common to both the sulfate and chloride processes and is a
major determinant of the final product's performance characteristics.
The sulfate process generally uses less-refined ores which are cheaper to
purchase but produce more co-product than the chloride process. Co-products
from both processes require treatment prior to disposal in order to comply with
14
environmental regulations. In order to reduce our disposal costs and to
increase our cost competitiveness, we have developed and marketed the co-
products of our TiO\\2\\ business.
Competition
The global markets in which our TiO\\2\\ business operates are highly
competitive. The primary factors of competition are price, product quality and
service. The TiO\\2\\ industry has recently undergone a consolidation process,
where larger global producers have acquired smaller, regional producers. The
major producers against whom we compete are DuPont, Millennium Chemicals, Kerr-
McGee Chemicals and NL Industries. Our low production costs, combined with our
presence in numerous local markets, give us a competitive advantage,
particularly with respect to those global customers demanding presence in the
various regions in which they conduct business.
Significant Customers
In 2000, sales to ICI and its affiliates by our Specialty Chemicals,
Petrochemicals and TiO\\2\\ businesses accounted for approximately 8% of our
consolidated revenue. In 1999, sales to ICI and its affiliates accounted for
approximately 14% of our pro forma consolidated revenue. ICI owns 30% of our
membership interests. See "Item 13 - Certain Relationships and Related
Transactions" for a further discussion of our relationship with ICI.
Research and Development
In 2000, we spent a total of $59 million on research and development of our
products and on a pro forma basis we spent a total of $73 million and $68
million in 1999 and 1998, respectively.
Intellectual Property Rights
Proprietary protection of our processes, apparatuses, and other technology and
inventions is important to our businesses. For our Specialty Chemicals
business, we own approximately 370 U.S. patents and pending applications
(including provisionals) currently pending at the United States Patent and
Trademark Office, and approximately 3,100 foreign counterparts, including both
issued patents and pending patent applications. For our TiO\\2\\ business, we
have approximately 25 U.S. patents and pending patent applications, and
approximately 345 foreign counterparts. For our petrochemicals business, we own
approximately 35 patents and pending applications (both U.S. and foreign). We
also rely upon unpatented proprietary know-how and continuing technological
innovation and other trade secrets to develop and maintain our competitive
position.
In addition to our own patents and patent applications and proprietary trade
secrets and know-how, we have entered into certain licensing arrangements that
authorize us to use certain trade secrets, know-how and related technology
and/or operate within the scope of certain patents owned by other entities. We
also license and sub-license certain intellectual property rights to affiliates
and to third parties. In connection with our transaction with Holdings, ICI and
HSCC (under the terms of a technology transfer agreement and a PO/MTBE
technology transfer agreement), we have licensed back to ICI and Huntsman
Corporation (on a non-exclusive basis) certain intellectual property rights for
use in their respective retained businesses, and ICI and Huntsman Corporation
have each licensed certain retained intellectual property to us.
For our Specialty Chemicals business, we have brand names for a number of our
products, and we own approximately 20 U.S. trademark registrations and
applications for registration currently pending at the United States Patent and
Trademark Office, and approximately 840 foreign counterparts, including both
registrations and applications for registration. For our TiO\\2\\ business, we
have approximately 180 trademark registrations and pending applications,
approximately 110 of which relate to the trademark "Tioxide". Our petrochemicals
business is not dependent on the use of trademarks. We have entered into a
trademark license agreement with Huntsman Corporation under which we have
obtained the rights to use the trademark "Huntsman", subject to certain
restrictions.
Employees
We employ over 5,800 people as of December 31, 2000. Additionally, over 800
people are employed by our U.S. Joint Ventures. Approximately 94% of our
employees (excluding employees of our Joint Ventures) work outside the USA and
15
approximately 48% of our employees are subject to collective bargaining
agreements. Overall, we believe that our relations with our employees are good.
In addition, Huntsman Corporation and Huntsman Petrochemical Corporation are
providing operating, management and administrative services to us for our PO
business similar to the services that it provided to HSCC with respect to the PO
business before it was transferred to us. See "Item 13 - Certain Relationships
and Related Transactions."
Environmental Regulations
We are subject to extensive environmental laws. In the ordinary course of
business, we are subject continually to environmental inspections and monitoring
by governmental enforcement authorities. We may incur substantial costs,
including fines, damages, and criminal or civil sanctions, for actual or alleged
violations arising under environmental laws. In addition, our production
facilities require operating permits that are subject to renewal, modification,
and, in certain circumstances, revocation. Our operations involve the handling,
transportation and use of numerous hazardous substances. From time to time,
these operations may result in violations under environmental laws including
spills or other releases of hazardous substances into the environment. In the
event of a catastrophic incident, we could incur material costs or experience
interruption in our operations as a result of addressing and implementing
measures to prevent such incidents in the future. In 2000, the case brought
against Tioxide by the British Environment Agency (EA) for a February 1999 spill
of acidic wastewater into Greenabella Marsh from its Greatham site was settled
for combined penalties of (Pounds)150,000. Under our indemnity with ICI, ICI
must reimburse us for this amount. 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. While these matters remain pending and could result in fines
of over $100,000 allocable to the PO/MTBE facility, we do not believe any of
these matters will be material to us. However, given the nature of our business,
we cannot give any assurance that violations of environmental laws will not
result in restrictions imposed on our activities, substantial fines, penalties,
damages or other costs.
Under some environmental laws, we may be jointly and severally liable for the
costs of environmental contamination on or from our properties and at off-site
locations where we disposed of or arranged for the disposal or treatment of
hazardous wastes. For example, in the United States under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, and
similar state laws, a current owner or operator of real property may be liable
for such costs regardless of whether the owner or operator owned or operated the
real property at the time of the release of the hazardous substances and
regardless of whether the release or disposal was in compliance with law at the
time it occurred. In addition, under the United States Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"), and similar state laws, as the
holder of permits to treat or store hazardous wastes, we may, under some
circumstances, be required to remediate contamination at our properties
regardless of when the contamination occurred. Similar laws are being developed
or are in effect to varying degrees in other parts of the world, most notably in
the European Union ("EU"). For example, in the U.K., a new contaminated land
regime is expected to come into effect shortly which will provide a detailed
framework for the identification, management and remediation of contaminated
sites. This law may increase governmental scrutiny of our U.K. facilities.
We are aware that there is or may be soil or groundwater contamination at some
of our facilities resulting from past operations at these or neighboring
facilities. Based on available information and the indemnification rights that
we possess (including indemnities provided by HSCC and ICI for the facilities
that each of them transferred to us), we believe that the costs to investigate
and remediate known contamination will not have a material adverse effect on our
business, financial condition, results of operations or cash flows; however, we
cannot give any assurance that such indemnities will fully cover the costs of
investigation and remediation, that we will not be required to contribute to
such costs or that such costs will not be material.
We may also incur future costs for capital improvements and general compliance
under environmental laws, including costs to acquire, maintain and repair
pollution control equipment. See "Item 1 - Specialty Chemicals - MTBE
Developments" for a discussion of the proposed regulations regarding MTBE.
Capital expenditures are planned, for example, under national legislation
implementing the EU Directive on Integrated Pollution Prevention and Control.
Under this directive the majority of our plants will, over the next few years,
be required to obtain governmental authorizations which will regulate air and
water discharges, waste management and other matters relating to the impact of
operations on the environment, and to conduct site assessments to evaluate
environmental conditions. Although the implementing
16
legislation in most Member States is not yet in effect, it is likely that
additional expenditures may be necessary in some cases to meet the requirements
of authorizations under this directive. In particular, we believe that related
expenditures to upgrade our wastewater treatment facilities at several sites may
be necessary and associated costs may be material. Wastewater treatment upgrades
unrelated to this initiative also are planned at certain facilities. In
addition, we may also incur material expenditures, beyond currently anticipated
expenditures, in complying with EU Directives, including the Directive on
Hazardous Waste Incineration and the Seveso II Directive, which governs major
accident hazards. It is also possible that additional expenditures to reduce air
emissions at two of our U.K. facilities may be material. Capital expenditures
and, to a lesser extent, costs and operating expenses relating to environmental
matters will be subject to evolving regulatory requirements and will depend on
the timing of the promulgation and enforcement of specific standards which
impose requirements on our operations. Therefore, we cannot assure you that
material capital expenditures beyond those currently anticipated will not be
required under environmental laws. See "Item 7 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Environmental
Matters".
17
ITEM 2. PROPERTIES
We own or lease chemical manufacturing and research facilities in the locations
indicated in the list below, which we currently believe are adequate for our
short-term and anticipated long-term needs. We own or lease office space and
storage facilities throughout the U.S. and many foreign countries. Our
principal executive offices, which are leased from Huntsman Corporation, are
located at 500 Huntsman Way, Salt Lake City, Utah 84108. The following is a
list of our material owned or leased properties where manufacturing, blending,
research and main office facilities are located.
Location Description of Facility
Geismar, Louisiana MDI, TDI, Nitrobenzene(1), Aniline(1) and Polyols Manufacturing Facilities
Rozenburg, Netherlands(3) MDI Manufacturing Facility, Polyols
Manufacturing Facilities and Systems House
Wilton, U.K. Aniline and Nitrobenzene Manufacturing Facilities
Shepton Mallet, U.K. Polyester Polyols Manufacturing Facility
Peel, Canada(3) Polyurethane Systems House
West Deptford, New Jersey Polyurethane Systems House, Research Facility
and U.S. Regional Headquarters
Auburn Hills, Michigan(3) Polyurethane Office Space and Research Facility
Deerpark, Australia(3) Polyurethane Systems House
Cartagena, Colombia Polyurethane Systems House
Deggendorf, Germany Polyurethane Systems House
Ternate, Italy Polyurethane Systems House
Shanghai, China(2) Polyurethane Systems House
Samuprakam, Thailand(2) Polyurethane Systems House
Kuan Yin, Taiwan(2) Polyurethane Systems House
Tlalnepantla, Mexico Polyurethane Systems House
Everberg, Belgium Polyurethane Research Facility, Global Headquarters and European Headquarters
Gateway West, Singapore(3) Polyurethane Regional Headquarters
Osnabruck, Germany TPU Manufacturing Facility
Ringwood, Illinois(2) TPU Manufacturing Facility
North Andover, Massachusetts(3) TPU Research Facility
Port Neches, Texas PO Manufacturing Facility and MTBE manufacturing facility
Austin, Texas PO/TBA Pilot Plant Facility
Wilton, U.K. Olefins and Aromatics Manufacturing Facilities, Petrochemicals Headquarters
Teesport, U.K.(2) Logistics/Storage Facility
North Tees, U.K.(3) Aromatics Manufacturing Facility and Logistics/Storage Facility
Saltholme, U.K. Underground Cavity Storage Operations
Grimsby, U.K. TiO\\2\\ Manufacturing Facility
Greatham, U.K. TiO\\2\\ Manufacturing Facility
Calais, France TiO\\2\\ Manufacturing Facility
Huelva, Spain TiO\\2\\ Manufacturing Facility
Scarlino, Italy TiO\\2\\ Manufacturing Facility
Teluk Kalung, Malaysia TiO\\2\\ Manufacturing Facility
Westlake, Louisiana(4) TiO\\2\\ Manufacturing Facility
Umbogintwini, South Africa(5) TiO\\2\\ Manufacturing Facility
Billingham, U.K. TiO\\2\\ Research and Technical Facility, and office space
Hammersmith, U.K. TiO\\2\\ Headquarters
(1) 50% owned manufacturing joint venture with Crompton Corp.
(2) Leased.
(3) Leased land and/or building.
(4) 50% owned manufacturing joint venture with Kronos Louisiana, Inc., a
subsidiary of NL Industries, Inc.
(5) 60% owned subsidiary with AECI.
18
ITEM 3. LEGAL PROCEEDINGS
We are a party to various proceedings instituted by governmental authorities and
others arising under provisions of applicable laws, including various
environmental laws. Based in part on the indemnities provided to us by ICI and
HSCC in connection with their transfer of businesses to us and our insurance
coverage, we do not believe that the outcome of any of these matters will have a
material adverse effect on our financial condition or results of operations.
See "Item 1-Business - Environmental Regulations" for a discussion of
environmental proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matter was submitted to a vote of our
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of the date of this report, there was no established public trading market
for any class of our membership interests.
Holders
As of the date of this report, there were six holders of record of our
membership interests. HSCC, an indirect subsidiary of Huntsman Corporation,
owns 60% of the our membership interests, ICI and its affiliates own 30% of our
membership interests and four institutional investors own the remaining 10%.
Distributions
Pursuant to our Limited Liability Company Agreement and the Limited Liability
Company Agreement of Huntsman International, we have a tax sharing arrangement
with all of our membership interest holders. Under the arrangement, because we
are treated as a partnership for U.S. income tax purposes, we make quarterly
payments (with appropriate annual adjustments) to our membership interest
holders, in an amount equal to the U.S. federal and state income taxes we would
have paid had we been a consolidated or unitary group for federal tax purposes.
Except in accordance with the above paragraph, our senior credit facilities
restrict our ability to pay dividends or other distributions on our equity
interests. The indentures governing our notes, and the notes of Huntsman
International, also place certain restrictions on our ability to pay dividends
and make other distributions.
19
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for our company as of the
dates and for the periods indicated. Information should be read in conjunction
with our Consolidated Financial Statements and Notes thereto included on the
pages immediately following the Index to Consolidated Financial Statements
appearing on page F-1. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(Millions of Dollars)
HSCC Predecessor Texaco Predecessor
Company Company
----------------------------------------------------------------------------
Six Months Six Months Ten Months Two Months
Year Ended Ended Ended Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31, December 31, February 28, December 31,
2000 1999 1999 1998 1997 1997 1996
----------------------------------------------------------------------------------------------------------
Consolidated Statements
of Operations Data:
Revenues $ 4,447.9 $ 1,997.3 $ 192.0 $ 338.7 $ 348.5 $ 61.0 $ 415.0
Operating income
(loss) 413.0 198.3 52.6 54.3 40.4 (5.7) 19.0
Net income (loss) 82.0 49.7 21.5 9.4 3.0 (3.7) 12.0
Consolidated Balance
Sheet Data:
Working capital $ 330.6 $ 456.7 $ 32.6 $ 30.4 $ 40.4 $ 39.0
Total assets 4,779.5 4,778.5 577.9 577.6 593.7 292.0
Long-term debt and
other non-current
liabilities 3,375.7 3,433.2 474.6 503.8 524.8 287.0
Members'/Stockholders'
equity 521.1 565.1 49.8 30.6 25.3 5.0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
On June 30, 1999, we received capital contributions of cash and U.S. operating
assets from HSCC, ICI and institutional investors. With this capitalization, we
acquired ICI's polyurethane chemicals, petrochemicals (including ICI's 80%
interest in the Wilton olefins facility), and TiO\\2\\ businesses, and HSCC's PO
business. In addition, we acquired the remaining 20% ownership interest in the
Wilton olefins facility from BP Chemicals (together, the "Transaction").
We derive our 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 three segments:
Specialty Chemicals (the former ICI polyurethanes and HSCC PO businesses);
Petrochemicals (the former ICI petrochemical business and the assets acquired
from BP Chemicals); and Tioxide (the former ICI titanium dioxide business).
The profitability of our three principal business 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 Specialty Chemicals products have grown at rates in excess of global GDP
growth, while the demand for our Petrochemical and Tioxide products has
historically grown at rates that are approximately equal to global GDP growth.
20
HSCC is considered the acquirer and predecessor of the businesses transferred to
us in the Transaction. The Transaction also resulted in the implementation of a
new basis of accounting, resulting in new carrying values for the transferred
ICI and BP Chemicals businesses. Our consolidated financial statements reflect
this new basis of accounting beginning with the date of the Transaction as
follows (in millions of dollars):
HSCC
Predecessor Company
-------------------------------
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
--------------------------------------------------------
Revenues $ 4,447.9 $ 1,997.3 $ 192.0 $ 338.7
Cost of goods sold 3,705.4 1,602.0 134.1 276.6
--------------------------------------------------------
Gross profit 742.5 395.3 57.9 62.1
Expenses of selling, general and
administrative, research and
development 329.5 197.0 5.3 7.8
--------------------------------------------------------
Operating income 413.0 198.3 52.6 54.3
Interest expense, net 292.9 135.9 18.0 39.9
Loss on sale of accounts receivable 1.9
Other income (expense) (3.2) 6.5 - 0.8
--------------------------------------------------------
Net income before income taxes and
minority interest 115.0 68.9 34.6 15.2
Income tax expense 30.2 18.2 13.1 5.8
Minority interests in subsidiaries 2.8 1.0 - -
--------------------------------------------------------
Net income $ 82.0 $ 49.7 $ 21.5 $ 9.4
========================================================
2000 Actual Compared to 1999 (Pro Forma)
In order to present data which is useful for comparative purposes, the following
tabular data for 1999 pro forma and related discussion, have been prepared as if
the Transaction, excluding the acquisition of 20% of the Wilton olefins facility
in June 1999 from BP Chemicals, had taken place in January 1999. These results
do not necessarily reflect the results which would have been obtained if the
Transaction actually occurred on the date indicated, or the results which may be
expected in the future.
(Millions of Dollars)
2000 Actual 1999 Pro Forma
----------------- -----------------
Specialty Chemicals sales $ 2,109 $ 1,855
Petrochemical sales 1,383 1,022
Tioxide sales 956 991
----------------- -----------------
Total revenues 4,448 3,868
Cost of goods sold 3,706 3,096
----------------- -----------------
Gross profit 742 772
Selling, general, administrative, research and development expenses 329 407
----------------- -----------------
Operating income 413 365
Interest expense, net 293 291
Loss on sale of accounts receivable 2 -
Other income (expense) (3) 7
----------------- -----------------
Net income before income taxes and minority interest 115 80
Income tax expense 30 25
Minority interests in subsidiaries 3 1
----------------- -----------------
Net income $ 82 $ 54
================= =================
21
Depreciation and amortization $ 214 $ 193
================= =================
EBITDA (1) $ 622 $ 564
Net reduction in corporate overhead allocation and insurance expenses - 11
Rationalization of TiO\\2\\ operations - 5
Loss on sale of accounts receivable(2) 2 -
================= =================
Adjusted EBITDA $ 624 $ 580
================= =================
(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes. EBITDA is included in
this report because it is a basis on which we assess our financial
performance and debt service capabilities, and because certain covenants in
our borrowing arrangements are tied to similar measures. However, EBITDA
should not be considered in isolation or viewed as a substitute for cash
flow from operations, net income or other measures of performance as
defined by accounting principles generally accepted in the United States
("US GAAP") or as a measure of a company's profitability or liquidity. We
understand that while EBITDA is frequently used by security analysts,
lenders and others in their evaluation of companies, EBITDA as used herein
is not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) For purposes of the Senior Credit Facility's covenants, loss on sale of
accounts receivable related to the securitization program is excluded from
the computation of EBITDA.
Revenues. Revenues for the business in 2000 increased by $580 million, or
15%, to $4,448 million from $3,868 million during 1999.
Specialty Chemicals - Total MDI sales volumes increased by 17% from the 1999
period. A strong recovery in the Asian economies led to an increase in sales
volumes of 41% in that region, while in Europe, sales volumes grew by 19%. In
the Americas, sales volumes grew by 11% from the prior year following the
completion in February, 2000 of the MDI expansion project at our Geismar,
Louisiana facility. Polyol sales volumes grew by 19% with the increase
attributable to the European region. These gains were partially offset by a 9%
decrease in average selling prices for MDI and a 14% decrease in the price of
polyols compared to the same period in 1999, a substantial portion of which was
due to a weakening in the value of the Euro versus the U.S. dollar. PO sales
revenue grew by 4% due to a 7% average selling price increase. MTBE sales
revenue grew by 52% due to a 54% MTBE average selling price increase. The MTBE
average selling price increase is primarily attributable to higher prices in
2000 for gasoline, the principal end-use product for MTBE.
22
Petrochemicals - Sales volumes of ethylene and propylene increased by 27% and
19%, respectively. These increases are primarily attributable to increased
output, stronger customer demand and the impact of additional olefins capacity
acquired from BP Chemicals on June 30, 1999. In aromatics, sales volumes of
benzene, paraxylene and cyclohexane rose by 18%, 13% and 12%, respectively.
Average selling prices for all products rose in response to increases in
feedstock prices. Ethylene, propylene, benzene and paraxylene prices were 35%,
56%, 47% and 40% higher, respectfully. Sales revenues from feedstock trading
fell by $193 million, mainly due to the cessation of crude oil trading following
the Transaction.
Tioxide - Sales volumes decreased by 2% compared to the 1999 period due to
weakening of demand, particularly in the Asian and American markets, in the
fourth quarter of 2000. While selling prices in local currency were higher in
2000 than in 1999, the weakness of the euro against the U.S. dollar more than
offset these local currency selling price increases resulting in overall selling
prices 2% lower than in 1999.
Gross profit. Gross profit in 2000 decreased by $30 million, or 4%, to $742
million from $772 million in 1999. Of this $30 million decrease in gross
profit, approximately $21 million was attributable to increased depreciation
resulting from acquisitions and capital expansions, primarily in the Specialty
Chemicals business. Gross profit benefited from the increase in MTBE sales
revenue.
Specialty Chemicals - While MDI and polyols benefited from increased sales
volumes, however, this benefit was more than offset by a rise in prices for the
major raw materials of MDI, benzene and chlorine. Gross profit on MDI and
polyols decreased 18% and 26%, respectively. The price of benzene increased by
57% in the U.S. market and by 49% in the European market compared to the 1999
period.
Petrochemicals - The Petrochemicals gross profit increased by 98% due to
additional volumes and improved contribution margins. The price increases for
our main raw material, naphtha, were partially offset by our hedging activities.
See "Item 7A-- Quantitative And Qualitative Disclosures About Market Risks".
Tioxide - Despite lower revenues and higher utility costs, gross profit
increased 17% compared to 1999. This increase is due to fixed cost reductions
as a result of our on-going manufacturing excellence program.
Selling, general and administrative expenses (including research and
development expenses). Selling, general and administrative expenses (including
research and development expenses) ("SG&A") in 2000 decreased by $78 million, or
19%, to $329 million from $407 million in 1999.
Specialty Chemicals - There was a 21% decrease in SG&A (including R&D) in 2000
due largely to non-recurring items incurred in 1999. Major SG&A expenses during
1999 included restructuring costs in Asia and certain pension costs. In
addition, a reduction in the costs of insurance under Huntsman ownership also
contributed to the decline in SG&A costs.
Petrochemicals - In Petrochemicals, reduced expenditures on insurance and
consulting fees as well as the elimination of ICI corporate charges resulted in
a 28% reduction of SG&A cost in 2000 as compared to 1999.
Tioxide - A decrease of 22% in SG&A was primarily due to restructuring
activities, including personnel reductions, within selling organizations in
Europe, Asia Pacific and the U.S.
Interest expense. Net interest expense in 2000 was relatively unchanged from
1999 levels.
Income taxes. Income taxes in 2000 increased by $5 million, to $30 million
from $25 million in 1999. Higher taxes were due primarily to higher earnings for
the period. The effective income tax rate in 2000 was relatively unchanged from
1999.
Net income. Net income in 2000 increased by $28 million to $82 million from
$54 million during 1999 as a result of the factors discussed above.
23
1999 (Pro Forma) Compared to 1998 (Pro Forma)
In order to present data which is useful for comparative purposes, the following
pro forma tabular data for 1999 and 1998 and related discussion, have been
prepared as if this Transaction, excluding the acquisition of 20% of the Wilton
olefins facility in June 1999 from BP Chemicals, had taken place in January
1998. These results do not necessarily reflect the results which would have
been obtained if the Transaction had actually occurred on the date indicated, or
the results which may be expected in the future.
(Millions of Dollars)
1999 Pro Forma 1998 Pro Forma
----------------- -----------------
Specialty Chemicals sales $ 1,855 $ 1,691
Petrochemical sales 1,022 1,029
Tioxide sales 991 951
----------------- -----------------
Total revenues 3,868 3,671
Cost of goods sold 3,096 3,014
----------------- -----------------
Gross profit 772 657
Selling, general, administrative, research and development expenses 407 419
----------------- -----------------
Operating income 365 238
Interest expense, net 291 291
Other income 7 9
-----------------------------------
Net income (loss) before income taxes and minority interest 80 (44)
Income tax expense 25 5
Minority interests in subsidiaries 1 2
----------------- -----------------
Net income (loss) $ 54 $ (51)
================= =================
Depreciation and amortization $ 148 $ 177
================= =================
EBITDA(1) $ 569 $ 424
Net reduction in corporate overhead allocation and insurance expenses 11 21
Impact of PO facility turnaround and inspection - 19
Rationalization of TiO\\2\\ operations 5 17
-----------------------------------
Adjusted EBITDA $ 585 $ 481
===================================
(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes. EBITDA is included in
this report because it is a basis on which we assess our financial
performance and debt service capabilities, and because certain covenants in
our borrowing arrangements are tied to similar measures. However, EBITDA
should not be considered in isolation or viewed as a substitute for cash
flow from operations, net income or other measures of performance as
defined by US GAAP or as a measure of a company's profitability or
liquidity. We understand that while EBITDA is frequently used by security
analysts, lenders and others in their evaluation of companies, EBITDA as
used herein is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation.
Revenues. Revenues for the business in 1999 increased by $197 million, or
5%, to $3,868 million from $3,671 million during 1998.
Specialty Chemicals - Total MDI sales volumes increased by 11% from the 1998
period. A strong recovery in the Asian economies led to an increase in sales
volumes of 27%, while in Europe and the Americas sales volumes grew by 7% and
13%, respectively. Polyol sales volumes also grew by 9%, but Aniline sales
volumes fell by 16% as more product was consumed in MDI production. PO sales
volumes increased by 16% due largely to the testing and inspection period in
1998 during which the plant was shut down for two months. Average sales prices
of MTBE increased by 18% compared to 1998 due largely to higher gasoline and
crude oil prices. These gains were partially offset by a decrease in average
selling prices for MDI and polyols compared to 1998.
Petrochemicals - Sales volumes of ethylene and propylene increased by 12% and
5%, respectively, these increases were almost entirely due to the additional
olefins capacity acquired from BP Chemicals on June 30, 1999 which are not
reflected in the pro forma information for periods prior to June 30, 1999. In
aromatics, paraxylene volumes rose by 12% but the impact of this gain was more
than offset by a 66% fall in cumene sales volumes following production problems.
Selling
24
prices in local currency rose in response to increases in feedstock prices -
ethylene, propylene and paraxylene prices were higher by 3%, 5% and 4%,
respectively. Sales revenues from feedstock trading fell by $46 million, mainly
due to the cessation of crude oil trading following the Transaction.
Tioxide - Sales volumes increased by 7% compared to the 1998 period due largely
to strengthening Asian and European markets. These gains were offset by a fall
in average sales prices of 2%, largely due to currency movements. Prices
declined from a peak in the fourth quarter of, 1998 to a low in mid-1999, before
recovering later in 1999 as the market tightened and announced price increases
began to take effect.
Gross profit. Gross profit in 1999 increased by $115 million, or 18%, to
$772 million from $657 million in 1998.
Specialty Chemicals - MDI and Polyols benefited from increased sales volumes as
well as from a reduction in average raw material costs. Prices of the major
raw materials of MDI, benzene and chlorine, declined from a peak at the
beginning of 1998 throughout that period and reached a low in the first quarter
of 1999 from which they have increased throughout the remainder of 1999. Fixed
production costs were lower in 1999 largely attributable to reduced maintenance
expenditures. The increased gross profit in PO was attributable to
significantly higher PO and MTBE production rates and MTBE selling prices
compared to 1998.
Petrochemicals - Petrochemicals gross profit was improved by a reduction in the
amount of purchased finished product for resale. The impact of an increase in
the cost of the main raw material, naphtha, was mitigated by hedging activities.
Tioxide - The benefit of increased volumes was primarily offset by lower sales
prices in 1999.
Selling, general and administrative expenses (including research and
development expenses). SG&A in 1999 decreased by $12 million, or 3%, to $407
million from $419 million in 1998.
Specialty Chemicals - In Specialty Chemicals, there was an increase in SG&A due
to non-capitalizable administrative expenses relating to the polyurethanes MDI
project expansion at the Geismar, Louisiana facility in 1999.
Petrochemicals - In Petrochemicals, reduced expenditures on insurance and
consultancy fees as well as a reduction in ICI corporate charges resulted in
lower total SG&A costs in 1999 as compared to 1998.
Tioxide - The decrease in SG&A was primarily due to restructuring activities
within selling organizations in Europe and Asia Pacific.
Interest expense. Net interest expense in 1999 was relatively unchanged from
1998.
Income taxes. Income taxes in 1999 increased by $20 million, to $25 million
from $5 million in 1998. Higher taxes were due primarily to higher earnings for
the period. The effective income tax rate declined in 1999 from 1998 due to a
greater share of the income being earned in the U.S., which income is not
subject to U.S. Federal income tax at the company level.
Net income (loss). Net income (loss) in 1999 increased by $105 million to net
income of $54 million from net loss of $51 million during 1998 as a result of
the factors discussed above.
Liquidity and Capital Resources
Liquidity
As of December 31, 2000, we had approximately $368 million available under our
revolving credit facility and approximately $66 million in available cash
balances. Huntsman International's senior secured credit facilities provide for
borrowings of up to $[1,922] million, including $400 million under a revolving
facility. The credit facilities are secured by a first priority perfected lien
on substantially all of our assets. As of December 31, 2000, we also had
outstanding approximately $[___] million of our 13.375% Senior Discount Notes
and $[___] million of our 8% Senior Subordinated Reset Discount Notes, and
Huntsman International had outstanding $[785] million of its 10-1/8% Senior
Subordinated
25
Notes. We also maintain $80 million of short-term overdraft facilities, of which
$58 million was available as of December 31, 2000. We anticipate that borrowings
under the credit facilities and cash flow from operations will be sufficient for
us to make required payments of principal and interest on our debt when due, as
well as to fund capital expenditures. See "Item 1--Business--Recent Events--
Issuance of [_]200 Million Senior Subordinated Notes".
Our Senior Discount Notes and our Senior Subordinated Reset Discount Notes do
not pay interest or principal or interest until maturity on December 31, 2009.
The indebtedness of Huntsman International that restricts payments to us will
mature prior to the maturity of our indebtedness. We anticipate that we will
have the funds to pay the principal and interest of our notes at maturity from
Huntsman International's distributions or refinancing of our indebtedness.
However, we can make no assurances that the foregoing will occur.
Securitization of Receivables
On December 21, 2000, we entered into a securitization program arranged by The
Chase Manhattan Bank under which certain trade receivables were and will be
transferred to a special purpose securitization entity. The acquisition of these
receivables by the entity was financed through the issuance of commercial paper.
We received $175 million in proceeds from the securitization transaction which
were used to reduce our outstanding indebtedness.
Capital Expenditures
Capital expenditures for our businesses for the year ended December 31, 2000
were approximately $204.5 million. In 2000, the largest single capital
expenditure was related to the capacity expansion program at our Geismar,
Louisiana facility which was completed in the first quarter of 2000. In
September, 2000, we announced the construction of a new TiO\\2\\ manufacturing
plant at our Greatham, U.K. facility. This new plant is expected to cost
approximately $80 million and is scheduled to commence production in mid-2002.
We estimate our total capital expenditures for 2001, including expenditures
relating to environmental compliance, to be between $250 million and $285
million.
Environmental Matters
The operations of any chemical manufacturing plant and the distribution of
chemical products, and the related production of co-products and wastes, entail
risk of adverse environmental effects, and therefore, we are 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, we are subject continually to environmental inspections and
monitoring by governmental enforcement authorities. The ultimate costs under
environmental laws and the timing of such costs are difficult to predict;
however, potentially significant expenditures could be required in order to
comply with existing or future environmental laws, including any restrictions on
MTBE. See "Item 1--Business--Specialty Chemicals--MTBE Developments."
Our capital expenditures relating to environmental matters for the twelve months
ended December 31, 2000 were approximately $35 million. Capital costs in 2001
are expected to remain at a comparable level for environmental matters. Capital
expenditures are planned to comply with national legislation implementing the EU
Directive on Integrated Pollution Prevention and Control. Under this directive,
the majority of our plants will, over the next few years, be required to obtain
governmental authorizations which will regulate air and water discharges, waste
management and other matters relating to the impact of operations on the
environment, and to conduct site assessments to evaluate environmental
conditions. Although implementing legislation in most Member States is not yet
in effect, it is likely that additional expenditures may be necessary in some
cases to meet the requirements of authorizations under this directive. In
particular, we believe that related expenditures to upgrade our wastewater
treatment facilities at several sites may be necessary and associated costs
could be material. Wastewater treatment upgrades unrelated to this initiative
also are planned at certain facilities. In addition, we may incur material
expenditures, beyond currently anticipated expenditures, in complying with the
EU Directives, particularly the Directive on Hazardous Waste Incineration and
the Seveso II Directive, which govern
26
major accident hazards. It is also possible that additional expenditures to
reduce air emissions at two of our U.K. facilities may be material. Capital
expenditures relating to environmental matters will be subject to evolving
regulatory requirements and will depend on the timing of the promulgation of
specific standards which impose requirements on our operations. Therefore, we
cannot assure you that material capital expenditures beyond those currently
anticipated will not be required under environmental laws.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No.133 established accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as assets or liabilities in
the balance sheet and measure those instruments at fair value. SFAS No.133 is
effective as of January 1, 2001 for the Company. The accounting for changes in
the fair value of a derivative depends on the use of the derivative. Adoption
of this new accounting standard will not have a material effect on our
statements of operations or financial position.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140,
which replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, provides accounting and reporting
standards for securitizations and other transfers of assets. Those standards
are based on consistent application of a financial-components approach that
focuses on control. Under this approach, after a transfer of assets, an entity
recognizes the assts it controls and derecognizes assets when control has been
surrendered. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from those that are secured
borrowings. The accounting requirements of this standard are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and must be applied prospectively. The
disclosures required by this standard are required for fiscal years ending after
December 15, 2000. The Company has provided the disclosures required by this
standard in Note 9 to our consolidated financial statements contained in this
report. Adoption of the accounting requirements of this standard will not have
a material effect on our statements of operations or financial position.
Cautionary Statement for Forward Looking Information
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions and other
information that is not historical information. In some cases, forward-looking
statements can be identified 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. We may also make
additional forward-looking statements from time to time. All such subsequent
forward-looking statements, whether written or oral, by us or on our behalf, are
also expressly qualified by these cautionary statements.
All forward-looking statements, including without limitation, management's
examination of historical operating trends, are based upon our current
expectations and various assumptions. Our expectations, beliefs and projections
are expressed in good faith and we believe there is a reasonable basis for them,
but, there can be no assurance that management's expectations, beliefs and
projections will result or be achieved. All forward-looking statements apply
only as of the date made. We undertake no obligation to publicly update or
revise forward-looking statements which may be made to reflect events or
circumstances after the date made or to reflect the occurrence of unanticipated
events.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in or
contemplated by this report. The following are among the factors that could
cause actual results to differ materially from the forward-looking statements.
There may be other factors, including those discussed elsewhere in this report,
that may cause our actual results to differ materially from the forward-looking
statements. Any forward-looking statements should be considered in light of
these factors.
Substantial Debt. We have incurred substantial debt to acquire our
businesses. A substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our debt. In addition,
our high degree of
27
debt may make it difficult for us to obtain additional financing. Some of our
debt is subject to variable interest rates, which makes us vulnerable to
interest rate increases. Our debt may limit our flexibility to adjust to
changing market conditions and our ability to withstand competitive pressures.
Dependence on Joint Ventures. We conduct a substantial amount of our
operations through our joint ventures. Our ability to meet our debt service
obligations depends, in part, upon the operation of our joint ventures. The
failure of any of our joint venture partners to observe its commitments and
differences in views among the partners may have an adverse effect on the
business and operations of the joint ventures, adversely affecting our business
and operations.
Cyclical Nature of Industry. Historically, the markets for some of our
products, including most of the products of our petrochemicals business, have
experienced alternating periods of tight supply, causing prices and profit
margins to increase, followed by periods of capacity additions, resulting in
oversupply and declining prices and profit margins. Currently, several of our
markets are experiencing periods of oversupply, and the pricing of our products
in these markets is depressed. We cannot guarantee that future growth in demand
for these products will be sufficient to alleviate any existing or future
conditions of excess industry capacity or that such conditions will not be
sustained or further aggravated by anticipated or unanticipated capacity
additions or other events.
Raw Material Supply. The prices for a large portion of our raw materials are
similarly cyclical. Our ability to pass on increases in the cost of raw
materials to our customers is, to a large extent, dependent upon market
conditions. There may be periods of time in which we are not able to recover
increases in the cost of raw materials due to weakness in demand for or
oversupply of our products. Additionally, we obtain some of our raw materials
from a few key suppliers. If any of our key suppliers fails to meet its
obligations, we may be forced to pay higher prices to obtain additional raw
materials, if such raw materials are available at all. Accordingly, any
interruption in supply or price increase for our raw materials could adversely
affect our business and operations.
Competition. The industries in which we operate are highly competitive.
Among our competitors are some of the world's largest chemical companies and
major integrated petroleum companies that have their own raw material resources.
Some of these companies are able to produce products more economically than we
can. If any of our current or future competitors develop proprietary technology
that enables them to produce products at a significantly lower cost, our
technology could be rendered uneconomical or obsolete. Moreover, because
certain of our businesses use technology that is widely available, or if we
cannot protect our proprietary technology, new competitors could emerge in
certain product segments of our business. Further, petroleum-rich countries
have become more significant participants in the petrochemical industry and may
expand this role significantly in the future. Any of these developments could
have a significant impact on our ability to enjoy higher profit margins during
periods of increased demand.
Environmental Regulations. We are subject to extensive federal, state, local
and foreign laws, regulations, rules and ordinances relating to pollution, the
protection of the environment and the use or cleanup of hazardous substances and
wastes. We may incur substantial costs, including fines, damages, criminal or
civil sanctions and investigation and clean-up expenses, or experience
interruptions in our operations for actual or alleged violations arising under
any environmental laws. In addition, we could incur significant expenditures in
order to comply with existing or future environmental laws. Furthermore,
several state and federal initiatives and legislation to rescind the oxygenate
requirements for reformulated gasoline, or to restrict or prohibit the use of
MTBE in particular, have been enacted or are being considered. Any such
environmental costs or any phase-out of or prohibition against the use of MTBE
could have a material adverse effect on our business and operations.
International Operations. We conduct a significant portion of our business
outside the United States. Our operations outside the United States are subject
to risks normally associated with international operations. Our business could
be negatively effected by these risks, which include fluctuations in exchange
rates for foreign currencies, trade barriers, tariffs, exchange controls,
national and regional labor strikes, social and political risks, general
economic risks, required compliance with a variety of foreign laws, and the
difficulty of enforcing agreements and collecting receivables through foreign
legal systems.
28
Other Factors. In addition to the factors described above, we face a number
of other uncertainties, including:
. inability to obtain new customers or retain existing ones,
. ability to integrate the businesses that we acquire,
. conflicts of interest between Huntsman Corporation and ICI,
. significant changes in our relationship with our employees and the
potential adverse effects labor disputes or grievances would occur,
and
. unavailability of, and substantial delays in, transportation of raw
materials and products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risk, including changes in interest rates, currency
exchange rates, and certain commodity prices. Our exposure to foreign currency
market risk is limited since sales prices are typically denominated in Euros or
US dollars. To the extent we have material foreign currency exposure on known
transactions, hedges are put in place monthly to mitigate such market risk. Our
exposure to changing commodity prices is also limited (on an annual basis)
since the majority of raw material is acquired at posted or market related
prices, and sales prices for finished products are generally at market related
prices which are set on a quarterly basis in line with industry practice. To
manage the volatility relating to these exposures, we enter into various
derivative transactions. We hold and issue derivative financial instruments for
economic hedging purposes only.
Our cash flows and earnings are subject to fluctuations due to exchange rate
variation. Historically, the businesses transferred to us by ICI have managed
the majority of their foreign currency exposures by entering into short-term
forward foreign exchange contracts with ICI. In addition, short-term exposures
to changing foreign currency exchange rates at certain of our foreign
subsidiaries were managed, and will continue to be managed, through financial
market transactions, principally through the purchase of forward foreign
exchange contracts (with maturities of six months or less) with various
financial institutions. While the overall extent of our currency hedging
activities has not changed significantly, we have altered the scope of our
currency hedging activities to reflect the currency denomination of our cash
flows. In addition, we are now conducting our currency hedging activities for
our exposures arising in connection with the businesses transferred to us by ICI
with various financial institutions. We do not hedge our currency exposures in
a manner that would entirely eliminate the effect of changes in exchange rates
on our cash flows and earnings. As of December 31, 2000, we had no outstanding
foreign exchange forward contracts with third party banks. Predominantly our
hedging activity is to sell forward the majority of our surplus non-U.S. dollar
receivables for U.S. dollars. Using sensitivity analysis, the foreign exchange
loss due to these derivative instruments from an assumed 10% unfavorable change
in year-end rates, when considering the effects of the underlying hedged firm
commitment, is not material.
Historically, HSCC used interest rate swaps, caps and collar transactions
entered into with various financial institutions to hedge against the movements
in market interest rates associated with its floating rate debt obligations. We
do not hedge our interest rate exposure in a manner that would entirely
eliminate the effects of changes in market interest rates on our cash flow and
earnings. Under the terms of our senior secured credit facilities, we are
required to hedge a significant portion of our floating rate debt. As a result
and as of December 31, 2000, we had entered into approximately $646 million
notional amount of interest rate swap, cap and collar transactions,
approximately $296 million of which have terms ranging from approximately three
years to five years. The majority of these transactions hedge against movements
in U.S. dollar interest rates. The U.S. dollar swap transactions obligate us to
pay fixed amounts ranging from approximately 5.80% to approximately 7.00%. The
U.S. dollar collar transactions carry floors ranging from 5.00% to 6.25% and
caps ranging from 6.60% to 7.50%. We have also entered into a euro-denominated
swap transaction that obligates us to pay a fixed rate of approximately 4.30%.
Assuming a 1% (100 basis point) increase in U.S. dollar interest rates, the
effect on the annual interest expense would be an increase of approximately $15
million. This increase would be reduced by approximately $4.6 million as a
result of the effects of the interest rate swap, cap and collar transactions
described above.
29
In order to reduce our overall raw material costs, our petrochemical business
enters into various commodity contracts to hedge its purchase of commodity
products. We do not hedge our commodity exposure in a manner that would entirely
eliminate the effects of changes in commodity prices on our cash flows and
earnings. At December 31, 2000, we had forward purchase contracts for 105,000
tonnes of naphtha and propane, which qualify for hedge accounting. In addition,
at December 31, 2000, we had forward purchase and sales contracts for 90,000 and
102,067 tonnes (naphtha and other hydrocarbons), respectively, which do not
qualify for hedge accounting. A change of 10% in the market price per tonne of
naphtha at December 31, 2000 would result in a hypothetical gain or loss of
approximately $0.4 million.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements required by this item are included on the
pages immediately following the Index to Consolidated Financial Statements
appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in our external accountants, Deloitte & Touche LLP,
or disagreements with them on matters of accounting or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Members of our current board of managers and executive officers are listed
below. The members of the board of managers are appointed by the owner of our
membership interests and hold office until their successors are duly appointed
and qualified. All officers serve at the pleasure of our board of managers.
Board of Managers and Executive Officers
Name Age Position
- -------------------------------------------------------------------------------------------------------
Jon M. Huntsman* 63 Chairman of the Board of Managers and Manager
Jon M. Huntsman, Jr.* 40 Vice Chairman and Manager
Peter R. Huntsman* 38 President, Chief Executive Officer and Manager
Charles Miller Smith 61 Manager
David Gee 52 Manager
J. Kimo Esplin 38 Executive Vice President and Chief Financial Officer
Thomas G. Fisher 51 Executive Vice President-Tioxide
Michael J. Kern 51 Executive Vice President-EH&S and Manufacturing Excellence
Robert B. Lence 43 Executive Vice President, General Counsel and Secretary
Donald J. Stanutz 50 Executive Vice President-Global Sales and Marketing
L. Russell Healy 45 Senior Vice President and Finance Director
Karen H. Huntsman* 62 Vice President
Curtis C. Dowd 41 Vice President-Corporate Development
James A. Huffman* 32 Vice President-Strategic Planning
Kevin J. Ninow 37 Vice President-Petrochemicals Manufacturing
John B. Prows 47 Vice President-Petrochemicals
Samuel D. Scruggs 41 Vice President and Treasurer
Graham Thompson 49 Vice President and Controller
*Such persons are related as follows: Karen H. Huntsman is the wife of Jon M.
Huntsman. Jon M. Huntsman and Karen H. Huntsman are the parents of Jon M.
Huntsman, Jr. and Peter R. Huntsman. James A. Huffman is a son-in-law of Jon M.
Huntsman and Karen H. Huntsman and brother-in-law of Jon M. Huntsman, Jr. and
Peter R. Huntsman.
Jon M. Huntsman is Chairman of the Board of Managers of both Huntsman
International and Huntsman International Holdings. He has been Chairman of the
Board of Directors of Huntsman Corporation and all Huntsman companies since he
founded his first company in 1970. Mr. Huntsman served as Chief Executive
Officer of Huntsman Corporation and its affiliated companies from 1970 to 2000
and of Huntsman International and Huntsman International Holdings from 1999 to
2000. In addition, Mr. Huntsman serves or has served on numerous corporate and
industry boards, the Chemical Manufacturers Association and the American
Polymers Council. Mr. Huntsman was selected in 1994 as the chemical industry's
top CEO for all businesses in Europe and North America. Mr. Huntsman formerly
served as Special Assistant to the President of the United States and as Vice
Chairman of the U.S. Chamber of Commerce.
Jon M. Huntsman, Jr. is Vice Chairman and a Manager of both Huntsman
International and Huntsman International Holdings. Mr. Huntsman, Jr. also serves
as Vice Chairman and Director of Huntsman Corporation. Mr. Huntsman serves
31
on the board of directors of Owens-Corning Corporation and on numerous corporate
and not-for-profit boards. Previously, Mr. Huntsman, Jr. was Senior Vice
President and General Manager of Huntsman Chemical Corporation. Later he served
as U.S. Deputy Assistant Secretary of Commerce in the International Trade
Administration, U.S. Deputy Assistant Secretary for East Asia and Pacific
Affairs and as the United States Ambassador to the Republic of Singapore. Mr.
Huntsman, Jr. also serves as President of the Huntsman Cancer Foundation.
Peter R. Huntsman is President, Chief Executive Officer and a Manager of both
Huntsman International and Huntsman International Holdings. He also serves as
President, Chief Executive Officer and a Director of Huntsman Corporation.
Previously, Mr. Huntsman was Senior Vice President of Huntsman Chemical
Corporation and a Senior Vice President of Huntsman Packaging Corporation. Mr.
Huntsman also served as Vice President-Purchasing for Huntsman Polypropylene
Corporation, and Senior Vice President and General Manager of Huntsman
Polypropylene Corporation. Mr. Huntsman served as Chief Operating Officer of
Huntsman International and Huntsman International Holdings from 1999 to 2000.
Charles Miller Smith is a Manager. Mr. Miller Smith also serves as Chairman of
Imperial Chemical Industries PLC. He was appointed a Non-Executive Director in
1993 and an Executive Director in 1994, succeeding Sir Ronald Hampel as Chief
Executive in 1995 and a Chairman with effect from April 1999. He was formerly a
Director of Unilever PLC and is Deputy Chairman of Scottish Power PLC and a Non-
Executive Director of HSBC Holdings PLC. He is also a member of the Board of
Overseers of the Lemberg Programme, Brandeis University.
David J. Gee is a Manager. Mr. Gee also serves as Vice President Finance of the
ICI Group. He joined Imperial Chemical Industries PLC in 1974 in its
Pharmaceuticals Business (now AstraZeneca PLC) and has served in numerous roles
including Business Accountant for the Pigments & Chemicals Business of ICI
Organics Division, Chief Accountant of Nobels Explosives, General Manager
Finance of ICI Australia and Chief Financial Officer of ICI Chemicals & Polymers
Limited. Previously, he was Group Controller of Imperial Chemical Industries
PLC.
J. Kimo Esplin is Executive Vice President and Chief Financial Officer. Mr.
Esplin also serves as Senior Vice President and Chief Financial Officer of
Huntsman Corporation. Previously, Mr. Esplin served as Treasurer of Huntsman
Corporation. Prior to joining Huntsman in 1994, Mr. Esplin was a Vice President
in the Investment Banking Division of Bankers Trust Company, where he worked for
seven years.
Thomas G. Fisher is Executive Vice President-Tioxide. Mr. Fisher also serves as
Senior Vice President-Tioxide of Huntsman Corporation. Mr. Fisher has held
several positions with Huntsman that have included the overall management for
Huntsman's PO, maleic anhydride, ethylene oxide, ethylene glycol and butadiene
businesses. Prior to joining Huntsman in 1994, Mr. Fisher served in a variety
of management positions with Texaco Chemical Company.
Michael J. Kern is Executive Vice President-EH&S and Manufacturing Excellence.
Mr. Kern serves as Senior Vice President-Manufacturing Excellence of Huntsman
Corporation. Prior to joining Huntsman, Mr. Kern held a variety of positions
within Texaco Chemical Company, including Area Manager-Jefferson County
Operations from April 1993 until joining the Company, Plant Manager of the Port
Neches facility from August 1992 to March 1993, Manager of the PO/MTBE project
from October 1989 to July 1992, and Manager of Oxides and Olefins from April
1988 to September 1989.
Robert B. Lence is Executive Vice President, General Counsel and Secretary. Mr.
Lence also serves as Senior Vice President and General Counsel of Huntsman
Corporation. Mr. Lence joined Huntsman in December 1991 from Van Cott, Bagley,
Cornwall & McCarthy, a Salt Lake City law firm, where he was a partner.
Donald J. Stanutz is Executive Vice President-Global Sales and Marketing. Mr.
Stanutz also serves as Executive Vice President-Global Sales and Marketing of
Huntsman Corporation. Mr. Stanutz has held several positions with Huntsman that
have included the overall management for Huntsman's performance chemicals
business, specialty polymers business and olefins, oxides and glycols business.
Prior to joining Huntsman in 1994, Mr. Stanutz served in a variety of senior
positions with Texaco Chemical Company.
L. Russell Healy is Senior Vice President and Finance Director. Mr. Healy also
serves as Vice President-Finance of Huntsman Corporation. Previously, Mr. Healy
served as Vice President, Tax for Huntsman Corporation. Prior to joining
Huntsman in 1995, Mr. Healy was a partner with the accounting firm of Deloitte
and Touche, LLP. Mr. Healy is a CPA and holds a masters degree in accounting.
32
Karen H. Huntsman is Vice President. Mrs. Huntsman performs an active role in
all the Huntsman Corporation businesses and currently serves as an officer
and/or board member for many of the Huntsman companies. By appointment of the
Governor of the State of Utah, Mrs. Huntsman serves as a member of the Utah
State Board of Regents. Previously, Mrs. Huntsman served on the board of
directors of First Security Corporation. She also serves on the boards of
directors of various corporate and not-for-profit entities.
Curtis C. Dowd is Vice President-Corporate Development. Mr. Dowd also serves as
Vice President-Corporate Development of Huntsman Corporation. Mr. Dowd
previously served as Vice President and General Counsel of Huntsman
Petrochemical Corporation from 1994 to 1998. From 1991 to 1994, Mr. Dowd was an
associate with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Prior
to attending law school, Mr. Dowd was a CPA with the accounting firm of Price
Waterhouse for over six years.
James A. Huffman is Vice President. Mr. Huffman also serves as Vice
President-Strategic Planning of Huntsman Corporation, a position which he has
held since 1998. Prior to joining Huntsman in 1998, Mr. Huffman worked for the
global management consulting firm of McKinsey & Company as an engagement
manager. Mr. Huffman also worked for Huntsman in a variety of positions from
1991 to 1994, including Director-New Business Development and Manager-Credit for
Huntsman Packaging.
Kevin J. Ninow is Vice President-Petrochemicals Manufacturing. Mr. Ninow also
serves as Vice President-European Petrochemicals of Huntsman Corporation and
since joining Huntsman in 1989, Mr. Ninow has served in a variety of
manufacturing and engineering positions including Vice President of
Manufacturing, Plant Manager-Oxides and Olefins, Plant Manager-C4's, Operations
Manager-C4's, Manager of Technology, Process Control Group Leader, and Project
Engineer.
John B. Prows is Vice President-European Petrochemical Sales. Mr. Prows also
serves as Vice President-European Petrochemical Sales of Huntsman Corporation
and since joining Huntsman in 1994, Mr. Prows has served as Plant
Manager-Polypropylene, Plant Manager-Polystyrene, and Operations Manager-Styrene
Monomer. Previously, Mr. Prows worked for Dupont for 13 years in a number of
management and engineering roles in polyethylene, PVC and other manufacturing
processes.
Samuel D. Scruggs is Vice President and Treasurer. Mr. Scruggs serves as Vice
President and Treasurer of Huntsman Corporation. Mr.Scruggs previously served
as Vice President and Associate General Counsel of Huntsman Corporation. Prior
to joining Huntsman in 1995, Mr. Scruggs was an associate with the law firm of
Skadden, Arps, Slate, Meagher & Flom LLP.
Graham Thompson is Vice President and Controller. Mr. Thompson joined ICI in
1978 in its Organics Division (now AstraZeneca PLC) and served in a number of
positions, including Business Accountant for the Fine Chemicals Manufacturing
Division and Controller of ICI Francolor in Paris. In 1986, Mr. Thompson joined
the polyurethanes business of ICI and until 1999 served as Business Controller.
33
ITEM 11. EXECUTIVE COMPENSATION
Summary of Compensation
The following summary compensation table sets forth information concerning
compensation earned in the fiscal year ended December 31, 2000, by our chief
executive officer and our remaining four most highly compensated executive
officers at the end of the last fiscal year.
All of the compensation of Messrs. Jon M. Huntsman, Peter M. Huntsman and Jon M.
Huntsman, Jr. was paid entirely by Huntsman Corporation, our ultimate parent
company, and we were charged a management overhead allocation with respect to
this compensation. Compensation figures for these executive officers represent
a prorated percentage of Huntsman Corporation compensation attributable to
services rendered to HSCC, the our predecessor. All of the compensation of
Messrs. Thomas and Coombs was paid entirely by Huntsman International.
Summary Compensation Table
Annual Compensation (1) Long Term
Compensation
--------------------
Awards
------------------------------------------------- --------------------
Name and Principal Year Salary Bonus Other Number of All Other
Position Annual Securities Underlying Compensation
Compensation Options/EARs
(2) Granted (21)
- ---------------------------- ---------- ---------------- --------------- ---------------- -------------------- ----------------
Jon M. Huntsman 2000 $611,538 $ 0 $ 71,590 (3)
Chairman of the Board of 1999 $562,500 $1,594,583) $ 250,081 (4)
Managers and Manager 1998 $ 66,000 $ 375,000 $ 44,227 (5)
Peter R. Huntsman 2000 $548,077 $ 125,000 $ 66,160 (6) $ 199,808 (7)
President, Chief 1999 $375,000 $ 600,544 $131,450 (8) $ 179,665 (9)
Executive Officer and 1998 $ 40,170 $ 75,000 $ 11,595(10)
Manager
Jon M. Huntsman, Jr. 2000 $318,750 $ 125,000 $ 27,200(11)
Vice Chairman and 1999 $225,000 $ 413,044 $ 51,949(12)
Manager 1998 $ 32,156 $ 60,000 $ 9,216(13)
Patrick W. Thomas 2000 $372,706 $ 122,706 $ 85,287(14) 7,386 $ 26,345 (15)
President - Huntsman 1999 $146,880 $ 0 $ 31,730(16) 0 $ 0
Specialty Chemicals (17)
Douglas A. L. Coombs 2000 $587,534 $ 244,204 $140,421(18) 0 $ 0
President - Tioxide (20) 1999 $202,272 $ 122,006 $ 81,552(19) 0 $ 0
(1) All compensation for Messrs. Jon M. Huntsman, Peter R. Huntsman, and Jon M.
Huntsman, Jr. was paid entirely by Huntsman Corporation, our parent
company; a charge for management overhead allocation for the fiscal year
2000, in the gross amount of $23,000,000 was paid by the Company to Huntsman
Corporation, which payment included, among other things, a portion of the
2000 annual compensation shown on this table. Compensation figures for
these three executives represent a pro-rated percentage of Huntsman
Corporation compensation attributable to services rendered to the Company
and to HSCC.
34
(2) Any blank items in this column reflect perquisites and other personal
benefits, securities or property received by the named executive officer
which are less than either $50,000 or 10% of the total annual salary and
bonus reported for the named executive officer.
(3) Consists of an employer's contribution of $1,360 to the 401(k) Plan, an
employer's contribution of $10,436 to the Supplemental 401(k) Plan, an
employer's contribution of $5,440 to the Money Purchase Plan, an employer's
contribution of $43,483 to the Supplemental Money Purchase Plan, and an
employer's contribution of $10,871 to an unfunded deferred compensation
plan known as the Equity Deferral Plan.
(4) Consists of $39,141 employer's 401(k) contribution, an employer's money
purchase contribution of $164,065, and an employer's contribution of
$46,875 to the Equity Deferral Plan.
(5) Consists of $8,845 employer's 401(k) contribution and employer's money
purchase contribution of $35,382.
(6) Payment of $66,160 for living expenses.
(7) Consists of an employer's contribution of $1,700 to the 401(k) Plan, an
employer's contribution of $9,262 to the Supplemental 401(k) Plan, an
employer's contribution of $6,800 to the Money Purchase Plan, an employer's
contribution of $57,046 to the Supplemental Money Purchase Plan, and an
employer's contribution of $125,000 to the Equity Deferral Plan.
(8) Perquisites and other personal benefits in the amount of $131,450 were
provided for the named executive officer, including moving expenses of
$58,367 and a relocation payment of $71,002.
(9) Consists of $14,183 employer's 401(k) contribution, an employer's money
purchase contribution of $71,732 and an employer's contribution of $93,750
to the Equity Deferral Plan.
(10) Consists of $2,319 employer's 401(k) contribution and employer's money
purchase contribution of $9,276.
(11) Consists of an employer's contribution of $1,700 to the 401(k) Plan, an
employer's contribution of $6,800 to the Money Purchase Plan, and an
employer's contribution of $18,700 to the Supplemental Money Purchase Plan.
(12) Consists of $3,410 employer's 401(k) contribution and employer's money
purchase contribution of $48,539.
(13) Consists of $1,843 employer's 401(k) contribution and employer's money
purchase contribution of $7,373.
(14) Perquisites and other personal benefits in the amount of $85,287, including
a payment of $60,550 for housing accommodations and a foreign services
payment of $19,979 as a cost of living adjustment for working abroad.
(15) Consists of $26,345 employer's contribution to the Equity Deferral Plan.
(16) Perquisites and other personal benefits in the amount of $31,730, including
a payment of $15,138 for housing accommodations, $7,494 for use of an
automobile, and a foreign services payment of $7,433 as a cost of living
adjustment for working abroad.
(17) Mr. Thomas joined the Company in 1999.
(18) Perquisites and other personal benefits in the amount of $140,421,
including a payment of $87,909 for housing accommodations, $30,832 for
foreign service assignments for taxes in excess of those that would
otherwise be incurred, and $13,497 for use of an automobile.
(19) Perquisites and other personal benefits in the amount of $81,552, including
a payment of $66,618 for housing accommodations and $14,134 for use of an
automobile.
(20) Mr. Coombs joined the Company in 1999.
(21) "EARs" means equity appreciation rights.
Equity Options and Equity Appreciation Rights
The following table sets forth information concerning the grant of equity
appreciation rights ("EARs") to each of the Company's chief executive officer
and its other four most highly compensated executive officers during the last
fiscal year.
Option/EAR Grants in Last Fiscal Year
Individual Grants Potential Realizable Value at Alternative:
Assumed Annual Rates of Grant Date
Equity Price Appreciation for Value
Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
Name Number of % of Total Exercise or Expiration 5% ($) 10% ($) Grant Date
Securities Options/EARs Base Price Date Present Value
Underlying Granted to ($/unit) ($)
Options/EARs Employees in
Granted (#) Fiscal Year
- ------------------------------------------------------------------------------------------------------------------------------------
Jon M. Huntsman 0 0% $ 0 0 $ 0 $ 0 $0
Peter R. Huntsman 0 0% $ 0 0 $ 0 $ 0 $0
Jon M. Huntsman, Jr. 0 0% $ 0 0 $ 0 $ 0 $0
Patrick W. Thomas 7,386 100% $13.54 3/01/10 $62,889 $159,374 N/A
Douglas A. L. Coombs 0 0% $ 0 0 $ 0 $ 0 $0
35
Equity appreciation rights were granted to Mr. Thomas on March 1, 2000, under
the Huntsman Equity Appreciation Rights Plan, and vest at a rate of 25% per
year, beginning with the first anniversary of the date of grant. Vesting of
these equity appreciation rights accelerates upon a change in control, as
defined in the plan.
Exercise of Options and Equity Appreciation Rights
The following table sets forth information concerning the exercise of EARs
during the last fiscal year by each of the Company's chief executive officer and
its other four most highly compensated executive officers and the fiscal year-
end value of unexercised EARs.
Aggregated Option/EAR Exercises in Last Fiscal Year, and FY-End Option/EAR
Values
Name Securities Value Number of Securities Underlying Value of Unexercised
Acquired on Realized Unexercised Options/EARs In-the-Money Options/EARs
Exercise (#) at FY-End (#) at FY-End
------------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ------------ -------- ------------- -------------- ----------- -------------
Jon M. Huntsman 0 $0 0 0 $0 $0
Peter R. Huntsman 0 $0 0 0 $0 $0
Jon M. Huntsman, 0 $0 0 0 $0 $0
Jr.
Patrick W. Thomas 0 $0 7,386 0 $0 $0
Douglas A. L. 0 $0 0 0 $0 $0
Coombs
The following table shows the estimated annual benefits payable under the
Huntsman Corporation's tax-qualified benefit pension plan (the "Huntsman
Corporation Pension Plan") and supplemental pension plan ("SERP") in specified
final average earning and years-of-service classification.
Huntsman Corporation Pension Plans Table
Final Average Years of Benefit Service at Retirement
Compensation 5 10 15 20 25 30 35 40
$400,000 30,000 60,000 90,000 120,000 150,000 180,000 210,000 240,000
$425,000 31,900 63,800 95,600 127,500 159,400 191,300 223,100 255,000
$450,000 33,800 67,500 101,300 135,000 168,800 202,500 236,300 270,000
$475,000 35,600 71,300 106,900 142,500 178,100 213,800 249,400 285,000
$500,000 37,500 75,000 112,500 150,000 187,500 225,000 262,500 300,000
$525,000 39,400 78,800 118,100 157,500 196,900 236,000 275,600 315,000
$550,000 41,300 82,500 123,800 165,000 206,300 247,500 288,800 330,000
$575,000 43,100 86,300 129,400 172,500 215,600 258,800 301,900 345,000
$600,000 45,000 90,000 135,000 180,000 225,000 270,000 315,000 360,000
$625,000 46,900 93,800 140,600 187,500 234,400 281,300 328,100 375,000
$650,000 48,800 97,500 146,300 195,000 243,800 292,500 341,300 390,000
$675,000 50,600 101,300 151,900 202,500 253,100 303,800 354,400 405,000
$700,000 52,500 105,000 157,500 210,000 262,500 315,000 367,500 420,000
$725,000 54,400 108,800 163,100 217,500 271,900 326,300 380,600 435,000
$750,000 56,300 112,500 168,800 225,000 281,300 337,500 393,800 450,000
$775,000 58,100 116,300 174,400 232,500 290,600 348,800 406,900 465,000
$800,000 60,000 120,000 180,000 240,000 300,000 360,000 420,000 480,000
36
The current Huntsman Corporation Pension Plan benefit is based on the following
formula: 1.5% of final average compensation multiplied by years of credited
service, minus 1.5% of estimated Social Security benefits multiplied by years of
credited service (maximum of 50% of Social Security benefits). For years of
credited service prior to 2000, benefits are based on a 1.4% formula. Final
average compensation is based on the highest average of three consecutive years
of compensation. Messrs. Jon M. Huntsman, Peter R. Huntsman and Jon M.
Huntsman, Jr. were participants in the Huntsman Corporation Pension Plan in
2000. For the foregoing named executive officers, covered compensation under
this plan consists of base salary and is reflected in the "Salary" column of the
Summary Compensation Table. Federal regulations require that for the 2000 plan
year, no more than $170,000 in compensation be considered for the calculation of
retirement benefits under the Huntsman Corporation Pension Plan, and the maximum
annual benefit paid from a qualified defined benefit plan cannot exceed
$135,000. Benefits are calculated on a straight life annuity basis. The
benefit amounts under the Huntsman Corporation Pension Plan are offset for
Social Security as described above.
The SERP is a nonqualified supplemental pension plan for designated executive
officers that provides benefits based on certain compensation amounts not
included in the calculation of benefits payable under the Huntsman Corporation
Pension Plan. Messrs. Jon M. Huntsman, Peter R. Huntsman and Jon M. Huntsman,
Jr. were participants in the SERP in 2000. The compensation amounts taken into
account for these named executive officers under the SERP include bonuses (as
reflected in the "Bonus" columns of the Summary Compensation Table) and base
salary in excess of the qualified plan limitations. The SERP benefit is
calculated as the difference between (1) the benefit determined using the
Huntsman Corporation Pension Plan formula with unlimited base salary plus bonus,
and (2) the benefit determined using base salary as limited by federal
regulations.
The number of completed years of credited service as of December 31, 2000 under
the Huntsman Corporation Pension Plan and SERP for the named executive officers
participating in the plans were 30, 17 and 17 years for Messrs. Jon M. Huntsman,
Peter R. Huntsman and Jon M. Huntsman Jr., respectively.
Compensation of Managers
The managers do not receive any additional compensation for their service as
managers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has 1,000 membership interests issued and outstanding. We are a 60%
owned affiliate of an indirect subsidiary of Huntsman Corporation, 500 Huntsman
Way, Salt Lake City, Utah 84108. Huntsman Corporation is owned by Jon M.
Huntsman and his family. ICI directly owns 30% of our membership interests. The
remaining 10% of our membership interests are owned by BT Capital Investors, LP,
Chase Equity Associates, LP, GS Mezzanine Partners, LP and GSMP(HICI), Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
We share numerous services and resources with Huntsman Corporation and ICI. We
also rely on Huntsman Corporation and ICI to supply some of our raw materials
and to purchase a significant portion of our products.
We have entered into an agreement with Huntsman Corporation under which Huntsman
Corporation provides us with administrative support and a range of services,
including treasury and risk management, human resources, technical and legal
services for our businesses in the U.S. and elsewhere. In 2000, we paid $23
million for these services. We also participate in Huntsman Corporation's
worldwide insurance program. Furthermore, we expect to enter into one or more
agreements under which we will provide to Huntsman Corporation and certain of
its subsidiaries a range of support services, including treasury, human
resources, technical and legal services for Huntsman Corporation's businesses in
Europe and elsewhere. These agreements will provide for fees based on an
equitable allocation of the general and administrative costs and expenses.
37
November 2000 Agreements with HSCC and ICI
Sale of Equity Interests in Holdings
On November 2, 2000, ICI entered into agreements with HSCC, our company and
Huntsman International, under which ICI has an option to transfer to HSCC or its
permitted designated buyers, and HSCC or its permitted designated buyers have a
right to buy, our membership interests that are indirectly held by ICI for
$365 million plus interest from November 30, 2000 until the completion of such
sale. ICI's sale of those membership interests is subject to regulatory
approval, receipt of necessary third party consents, the completion by ICI of an
offering of our Senior Subordinated Reset Discount Notes held by ICI, which
condition may be waived by ICI, and other standard conditions. Additionally, ICI
may only exercise its option to transfer the membership interests to HSCC
between April 2001 and July 2001. See "--Description of Put and Call Options".
In addition, and in the event that ICI completes the transfer of our membership
interests as described above, the affiliates of The Goldman Sachs Group who
collectively own a 1.1% membership interest in our company have agreed to
transfer those interests to HSCC, or its designee, in exchange for approximately
$13.5 million plus interest from November 30, 2000 until the completion of such
sale.
ICI has further agreed with us on new contractual terms with respect to ICI's
obligation to transfer its interests in Nippon Polyurethane Industry Co. Ltd.
Holdings and ICI have also agreed to settle certain indemnification matters in
relation to ICI and Holdings has agreed to pay a portion of the costs of an
offering by ICI of our Senior Subordinated Reset Discount Notes held by ICI. See
"-- Amendment of Indenture Governing Our Senior Subordinated Reset Discount
Notes". Furthermore, ICI and our company agreed to finalize other ancillary
agreements contemplated by the contribution agreement in 1999 under which we
acquired certain businesses of ICI and to enter into additional agreements in
order to resolve other issues outstanding since our transaction with ICI in
1999.
Amendment of Indenture Governing Our Senior Subordinated Reset Discount Notes
Pursuant to our November 2000 agreements with ICI, our company and ICI amended
and restated the indenture governing the terms of our Senior Subordinated Reset
Discount Notes. The amendments, among other changes, delayed the date on which
the accretion rate of those notes will be reset until September 30, 2004 and
extended the period during which we can redeem those notes at the then accreted
value until June 30, 2004; the notes will not then be redeemable until the reset
date and will thereafter be redeemable at a declining premium to accreted value.
However, if ICI does not resell our Senior Subordinated Reset Discount Notes by
July 30, 2001 and if neither our company nor ICI exercises its put or call
option prior to July 30, 2001, then we have agreed to further amend the terms of
the Senior Subordinated Reset Discount Notes and the indenture governing those
notes so as to return the indenture and the Senior Subordinated Reset Discount
Notes to their form prior to the amendment and restatement, which primarily will
have the effect of (1) moving forward the date on which the reset of the
accretion rate will occur, (2) changing the method by which the reset accretion
rate is determined, and (3) shortening the period during which we may optionally
redeem the Senior Subordinated Reset Discount Notes.
Adjustments to Consideration
ICI was not in a position to transfer its interests in Nippon Polyurethane
Industry Co. Ltd. and Arabian Polyol Company Limited to us at the closing of the
transaction contemplated by the contribution agreement. Under the terms of the
contribution agreement under which we acquired ICI's and HSCC's businesses, we
did not receive a purchase price adjustment with respect to those retained joint
venture interests. Instead, ICI has agreed to hold the retained joint venture
interests for our benefit and to pay to us any dividends received from the joint
ventures, and we agreed to indemnify ICI for any losses relating to any such
retained joint venture interest from the closing until such time as such
interests are transferred to us or we receive a refund with respect to such
interests. ICI is required to pay us an amount equal to the higher of $3 million
and the fair market value as of the closing of our transaction with ICI of the
Arabian Polyol joint venture interest if either (1) any of the other joint
venture partners exercise a right of first refusal to acquire that joint venture
interest or (2) on or before June 30, 2001, ICI has not obtained all consents
necessary to transfer that interest to us. In addition, and pursuant to the
contribution agreement as modified by our November 2000 agreements with ICI, ICI
has agreed to pay us $31 million in respect of the Nippon Polyurethane joint
venture interest because ICI has determined that it will not be able to obtain
all consents necessary to transfer that interest to us on or before March 31,
2001. We do not
38
believe the failure by ICI to transfer these interests will have a material
adverse impact on our results of operations or cash flows.
Warranties and Indemnification
In connection with our transaction with HSCC and ICI in 1999, both ICI and HSCC
gave standard warranties to us in connection with the businesses being
transferred, including warranties relating to environmental liabilities and
potential environmental liabilities; existence of, or breaches in connection
with, any material contracts; and tax matters. Under our November 2000
agreements with ICI, we also agreed with ICI that the approximately (Pounds)10
million of payments that they had made with respect to our indemnity claims in
relation to emissions from the Greatham site prior to the acquisition
constituted final settlement of that claim. We also waived any rights that we
may have with respect to certain notices of claim that we had previously filed
with ICI, which waived notices we do not believe met the threshold requirements
for recovery under the contribution agreement or were material in meeting such
threshold.
Description of Put and Call Options
Under our November 2000 agreements with ICI, ICI has an option to transfer to
HSCC or its permitted designated buyers, and HSCC or its permitted designated
buyers have a right to buy, the membership interests in our company that are
indirectly held by ICI for $365 million plus interest from November 30, 2000
until the completion of such sale. HSCC may select a buyer approved by ICI and
the other holders of our membership interests to purchase all or a portion of
the membership interests. Pre-approved buyers include Jon M. Huntsman and
members of his family; entities at least 80% owned either by Huntsman
Corporation, members of the Huntsman family, Kerry Packer (a minority interest
holder of Huntsman Petrochemical Corporation), members of the Packer family; a
subsidiary of our company or any affiliate of a financial institution, provided
that such financial institution cannot own more than 14.99% of our outstanding
membership interests. The parties' obligations to complete any such sale will be
subject to receipt of regulatory approval and necessary third party consents.
For three years following the completion of such a sale, ICI has agreed not to
engage in any business in which our company is engaged at the time of such sale.
Unless waived by ICI, the right of HSCC or its permitted designees to buy the
membership interests is contingent (which expires if not exercised by July 2001)
upon the completion of a resale of our Senior Subordinated Reset Discount Notes
that are held by ICI. Additionally, ICI may only exercise its option to transfer
the membership interests to HSCC between April 2001 and July 2001.
If neither party exercises its option to acquire the membership interests of
Holdings as set forth in the preceding paragraph, then, pursuant to the terms of
the Limited Liability Company Agreement for Holdings, HSCC has the option to
purchase, and ICI has the right to require HSCC to purchase, ICI's 30%
membership interest in our company between June 30, 2002 and June 30, 2003
subject to extension under some circumstances. The exercise price for each of
these put and call options will be based partially upon an agreed formula and
the parties' agreed value of our businesses or based upon a third party
valuation at the time of the exercise of a put or a call option. If the put or
call option is exercised and HSCC does not purchase ICI's interests in
accordance with the terms of the put or call option, then ICI has the right to
sell its interest in Holdings in a public offering or a private sale and, if the
proceeds of the sale are less than the put or call option exercise price, ICI
has the right to require HSCC to sell, for the benefit of ICI, sufficient
membership interests in Holdings owned by HSCC as are necessary to provide ICI
with proceeds equal to the shortfall.
Under the terms of an agreement between HSCC and BT Capital Investors, L.P.,
J.P. Morgan Partners (BHCA), L.P., GS Mezzanine Partners, L.P. and GSMP(HICI),
Inc., each of these institutional investors has the right to require HSCC to
purchase their respective membership interests in our company contemporaneously
with any exercise of the HSCC and ICI put and call arrangements, except as
described below. In addition, each such institutional investor has the right to
require HSCC to purchase its membership interest in our company at any time
after June 30, 2004. Each such institutional investor also has an option to
require HSCC to purchase its membership interest in our company following the
occurrence of a change of control of our company or Huntsman Corporation. HSCC
has the option to purchase all outstanding membership interests owned by the
institutional investors at any time after June 30, 2006. The exercise price for
each of these put and call options will be the value of our business as agreed
between HSCC and the institutional investors or as determined by a third party
at the time of the exercise of the put or call option. If HSCC, having used
commercially reasonable efforts, does not purchase such membership interests,
the selling institutional investor will have the right to require us to register
such membership interests for resale under the Securities Act of 1933, as
amended.
39
In addition, and in the event that ICI completes the transfer of its membership
interests in Holdings pursuant to our November 2000 transaction with ICI, GS
Mezzanine Partners, L.P. and GSMP(HICI), Inc., who collectively own a 1.1%
membership interest in our company, have agreed to transfer those interests to
HSCC, or its designee, in exchange for approximately $13.5 million plus interest
from November 30, 2000 until the completion of such sale. Furthermore, BT
Capital and J.P. Morgan Partners have waived their rights, subject to certain
conditions, to require HSCC to purchase their respective membership interests in
our company in connection with the exercise of a put or call arrangement on or
before July 30, 2001.
We expect that HSCC, together with Huntsman Corporation, will use the proceeds
received from Bain Capital, Inc. to finance the purchase of our membership
interests held by ICI and The Goldman Sachs Group. See "Item 1--Business--Recent
Events--Proposed Investment by Bain Capital in Huntsman Corporation". In
addition, our November 2000 arrangements with ICI and the other holders of
membership interests permit our subsidiaries to provide only up to $70 million
of the purchase price for such membership interests.
Specialty Chemicals Business
Acquisition of Polyurethanes Business
On March 14, 2001, we entered into a definitive purchase agreement for the
acquisition of the polyurethanes business of ICI India for an agreed purchase
price of approximately $17 million. Located in Thane (Maharashtra), India, the
business has sales in India and Southern Asia. The business will be integrated
into the Specialty Chemicals division of the Company. The transaction is
expected to close in March 2001.
Supply Contracts
We are interdependent with Huntsman Petrochemical Corporation with respect to
the supply of certain other feedstock, utilities and products. Under a supply
agreement that expires in 2012, we are required to sell, and Huntsman
Petrochemical Corporation is required to purchase, all of the steam that we
generate at our PO facility. Huntsman Petrochemical Corporation reimburses us
for the cost of the steam that it purchases from us. Under separate supply
agreements, we have agreed to purchase our requirements of mono-ethylene glycol
and tri-ethylene glycol from Huntsman Petrochemical Corporation at market prices
for use in our PO operations. Furthermore, in exchange for Huntsman
Petrochemical Corporation's PG tolling services, we pay Huntsman Petrochemical
Corporation a reservation fee, adjusted annually for inflation, plus a variable
toll fee equal to Huntsman Petrochemical Corporation's cost of operating the PG
plant. In 2000, we paid Huntsman Petrochemical Corporation approximately $5.2
million in fees under these contracts and received approximately $12.5 million
in reimbursements from Huntsman Petrochemical Corporation.
PO Supply Agreement
Pursuant to an existing agreement with Huntsman Petrochemical Corporation that
expires in 2012, we are obligated to sell, and Huntsman Petrochemical
Corporation is obligated to buy, all PO produced at our PO facility in Port
Neches, Texas which is not purchased by our other customers. We are entitled to
receive market prices for the PO purchased by Huntsman Petrochemical
Corporation. In 2000, Huntsman Petrochemical Corporation spent approximately
$63 million under this agreement. Based on current market price and the current
commitments of our other customers to purchase our PO, we anticipate that
Huntsman Petrochemical Corporation will spend at least $35 million per year
under this agreement.
Propylene Supply Agreement
Pursuant to an existing agreement that expires in 2012, Huntsman Petrochemical
Corporation is obligated to provide 100% of the propylene required by us for
operation of our PO facility, up to a maximum of 350 million pounds per year.
We pay market prices for the propylene supplied by Huntsman Petrochemical
Corporation. In 2000, we spent approximately $64 million under this agreement.
Services Contracts
40
During 2000 we continued to purchase services under a contract with ICI which
were in reality being delivered by Enron Teesside Operations Limited ("ETOL").
These services include the operation and maintenance of various infrastructure,
effluent disposal, storage of engineering materials, analytical and distribution
assets. We terminated this arrangement in August 2000, at which time we entered
into a new arrangement directly with ETOL.
In addition, during 2000 other services mainly supplied by ICI, such as
occupational health and engineering ,were either assimilated within Huntsman or
renegotiated with new suppliers. The terms of these new agreements generally
reflect market or below market rates.
In order to operate the PO business, we have entered into a series of contracts
with Huntsman Petrochemical Corporation that expire in 2012 under which Huntsman
Petrochemical Corporation operates and maintains the PO facility, including the
provision of management, personnel, transportation, information systems,
accounting, tax and legal services, and research and development to our PO
business. Generally, under these agreements, we pay Huntsman Petrochemical
Corporation an amount equal to its actual costs for providing us with each of
these services. In 2000, we paid Huntsman Petrochemical Corporation
approximately $34 million under these agreements, which we believe to be
equivalent to that which would be paid under arm's length negotiations.
Petrochemicals Business
Naphtha Supply Agreement
We have entered into a product supply agreement with ICI, which requires ICI to
supply and us to buy the entire naphtha output (up to 2.98 billion pounds per
year) of the Phillips Imperial Petroleum Limited refinery at Teesside and
specified amounts of other feedstock available to ICI from operations on
Teesside. We purchase these products on terms and conditions which reflect
market prices. During 2000, we spent approximately $301 million under this
agreement.
In connection with our November 2000 agreements with ICI and because ICI has
disposed of its interests in the refinery, we may terminate our product supply
agreement for naphtha upon one year's prior notice, effective no sooner than
January 4, 2003, and payment of $5 million. If we do not so elect to terminate,
then such contract shall terminate automatically on January 4, 2004.
Supply Contracts
We have entered into several agreements with ICI and an affiliate for the supply
of ethylene and the supply of hydrogen to and from affiliates of ICI. The terms
and conditions of these agreements are substantially the same as agreements or
non-contractual arrangements existing prior to the closing of the transfer of
ICI's petrochemicals business to us, which generally reflect market prices. ICI
has announced the divestment of its interests in these businesses at the end of
2000, with the exception of one ethylene customer. During 2000 we spent
approximately $12 million, and ICI spent approximately $105 million, under these
agreements.
In addition, there are certain supply agreements with ethylene customers which
have not yet been novated from ICI to Huntsman. Until these contracts are
novated, Huntsman continues to invoice ICI who in turn invoice the customer.
During the twelve months ended December 31, 2000, ICI made purchases of
approximately $173 million relating to these agreements.
Utilities Contracts
We have entered into several agreements with ICI and an affiliate of ICI
relating to the provision of certain utilities, including steam, fuel gas,
potable water, electricity, water and compressed air by us to an affiliate. The
terms and conditions of these agreements are substantially the same as
agreements or non-contractual arrangements existing prior to the closing of the
transfer of ICI's businesses to us, which generally reflect either market prices
or prices based upon cost plus a reasonable fee, which we believe, taken
together, reflect market or below market rates. During the twelve months ended
December 31, 2000, ICI spent approximately $4 million under these agreements.
The affiliate concerned was divested by ICI at the end of 2000.
41
Services Contracts
We have entered into several agreements with ICI and its affiliates relating to
a wide range of operational services both to and from ICI or its affiliates,
primarily at Teesside. These operational services include the operation and
maintenance of various infrastructure, effluent disposal, storage, jetty, and
distribution assets. The terms and conditions of these agreements are
substantially the same as agreements or non-contractual arrangements existing
prior to the closing of the transfer of ICI's businesses to us, which generally
reflect either market prices or prices based upon cost plus a reasonable fee,
which we believe, taken together, reflect market or below market rates. The ICI
businesses/affiliates to whom these agreements relate were divested by ICI at
the end of 2000.
In addition, we have entered into agreements relating to the provision by ICI or
its affiliates to us of a range of support services for the efficient transition
of the change of business ownership. These services may include various human
resources, occupational health, analytical, engineering or purchasing services.
The terms and conditions of these agreements are substantially the same as
agreements or non-contractual arrangements existing prior to the closing of the
transfer of ICI's businesses to us, which generally reflect either market prices
or prices based upon cost plus a reasonable fee, which we believe, taken
together, reflect market or below market rates. These services have been
largely discontinued.
During the twelve months ended December 31, 2000, we spent approximately $10
million, and ICI spent approximately $7 million, under the service contracts.
Tioxide Business
Supply Agreement with ICI Paints
We have an existing agreement with the paints business of ICI to supply
TiO\\2\\. At the current level of commitment, we supply approximately 60,000
tonnes of TiO\\2\\ per year at market prices. We have revised and extended the
agreement to ensure that it remains consistent with developments in the market.
The revised agreement expires no earlier than December 31, 2003 upon at least
twelve months' notice. In 2000, ICI spent approximately $98 million under this
agreement.
Feedstock Supply Contracts
Through January 9, 2001, when ICI sold its interest in the supplying businesses
to INEOS, we had several agreements whereby ICI and its affiliates supplied us
with sulphur, sulphuric acid, caustic soda and chlorine. The terms and
conditions of the agreements with ICI were substantially the same as agreements
or non-contractual arrangements existing prior to the closing of the transfer of
ICI's businesses to us, which generally reflect market prices. In 2000, we
spent approximately $14 million under these agreements.
We have also operated an agreement with an affiliate of ICI relating to the
supply of titanium tetrachloride. The terms and conditions of this agreement
with ICI was substantially the same as agreements or non-contractual
arrangements existing prior to the closing of the transfer of ICI's businesses
to us, which generally reflect market prices. In 2000, we spent approximately
$1.6 million under this arrangement. This agreement will continue through
2001.
Utilities Contracts
We have entered into several agreements with ICI and its affiliates relating to
the supply of certain utilities including steam, water and electricity by
affiliates of ICI to us at Billingham. The terms and conditions of these
agreements are substantially the same as agreements or non-contractual
arrangements existing prior to the closing of the transfer of ICI's businesses
to us, which generally reflect either market prices or prices based upon cost
plus a reasonable fee, which we believe, taken together, reflect market or below
market rates. In 2000, we spent approximately $150,000 under these agreements.
Services Contracts
42
We have entered into several agreements with ICI or its affiliates relating to a
wide range of operational services. These operational services will include the
operation and maintenance of various infrastructure, effluent disposal, storage
and distribution assets. The terms and conditions of these agreements are
substantially the same as agreements or non-contractual arrangements existing
prior to the closing of the transfer of ICI's businesses to us, which generally
reflect either market prices or prices based upon cost plus a reasonable fee,
which we believe, taken together, reflect market or below market rates.
In addition, we have entered into several agreements relating to the provision
by ICI or its affiliates to us of a range of support services for the efficient
transition of business ownership. These services include various human
resources, occupational health, analytical, engineering or purchasing services.
The terms and conditions of these agreements to be substantially the same as
agreements or non-contractual arrangements existing prior to the closing of the
transfer of ICI's businesses to us, which generally reflect either market prices
or below market rates. In 2000, we spent approximately $15 million under these
agreements.
Tax Sharing Arrangement
Pursuant to our Limited Liability Company Agreement and the Limited Liability
Company Agreement of Huntsman International, we have a tax sharing arrangement
with all the holders of all of our membership interests. Under the arrangement,
because we are treated as a partnership for U.S. income tax purposes, we will
make payments to holders of our membership interests, in an amount equal to the
U.S. federal and state income taxes we would have paid had we been a
consolidated or unitary group for federal tax purposes. The arrangement also
provides that we will receive cash payments from the membership interest holders
in amounts equal to the amount of U.S. federal and state income tax refunds or
benefit against future tax liabilities equal to the amount we would have
received from the use of net operating losses or tax credits generated by us.
43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(b)
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page F-1
2. Financial Statement Schedule:
See Index to Consolidated Financial Statements on page F-1
3. Description of Exhibits
3.1 Certificate of Formation of Huntsman International Holdings LLC
(incorporated by reference to Exhibit 3.1 to our registration
statement on Form S-4 (File No. 333-88057))
3.2 Amended and Restated Limited Liability Company Agreement of Huntsman
Holdings LLC dated June 30, 1999 (incorporated by reference to Exhibit
3.2 to our registration statement on Form S-4 (File No. 333-88057))
3.3 Certificate of Amendment to Certificate of Formation of Huntsman ICI
Holdings LLC
4.1 Amended and Restated Indenture, dated as of August 2, 1999, between
Huntsman International Holdings LLC (f/k/a Huntsman ICI Holdings LLC)
and Bank One, N.C., as Trustee, relating to the 13.375% Senior
Discount Notes due 2009 (incorporated by reference to Exhibit 4.1 to
our registration statement on Form S-4 (File No. 333-88057))
4.2 Form of certificate of 13.375% Senior Discount Note due 2009 (included
as Exhibit A-3 to Exhibit 4.1)
4.3 First Amendment, dated January 5, 2000, to Indenture dated as of June
30, 1999 among Huntsman International LLC (f/k/a Huntsman ICI
Chemicals), as Issuer, each of the Guarantors named therein and Bank
One, N.A., as Trustee (incorporated by reference to Exhibit 4.4 to our
registration statement on Form S-4 (File No. 333-88057))
10.1 Contribution Agreement, dated as of April 15, 1999, by and among
Imperial Chemical Industries PLC, Huntsman Specialty Chemicals
Corporation, Huntsman International Holdings LLC (f/k/a Huntsman ICI
Holdings LLC) and Huntsman International LLC (f/k/a Huntsman ICI
Chemicals LLC) as amended by the first Amending Agreement, dated June
4, 1999, the second Amending Agreement, dated June 30, 1999, and the
third Amending Agreement, dated June 30, 1999 (incorporated by
reference to Exhibit 10.1 to our registration statement on Form S-4
(File No. 333-88057))
10.2 Purchase and Sale Agreement (PO/MTBE Business), dated March 21, 1997,
among Texaco, Texaco Chemical Inc. and HSCC Chemicals Corporation
(incorporated by reference to Exhibit 10.2 to our registration
statement on Form S-4 (File No. 333-88057))
10.3 Operating and Maintenance Agreement, dated as of March 21, 1997, by
and between Huntsman Specialty Chemicals Corporation and Huntsman
Petrochemical Corporation (incorporated by reference to Exhibit 10.3
to our registration statement on Form S-4 (File No. 333-88057))
10.4 Credit Agreement, dated as of June 30, 1999, by and among Huntsman
International LLC (f/k/a Huntsman ICI Chemicals LLC), Huntsman
International Holdings LLC (f/k/a Huntsman ICI Holdings LLC), Bankers
Trust Company, Goldman Sachs Credit Partners LP, The Chase Manhattan
Bank, and Warburg Dillon Read and various lending institutions party
thereto (incorporated by reference to Exhibit 10.4 to our registration
statement on Form S-4 (File No. 333-88057))
10.5 Asset Sale Agreement, dated June 30, 1999, by and between BP
Chemicals Limited and Huntsman International LLC (f/k/a Huntsman ICI
Chemicals LLC) (incorporated by reference to Exhibit 10.5 to our
registration statement on Form S-4 (File No. 333-88057))
10.6 Joint Venture Agreement, dated as of October 18, 1993, between
Tioxide Americas Inc. and Kronos Louisiana, Inc. (incorporated by
reference to Exhibit 10.6 to our registration statement on Form S-4
(File No. 333-88057))
10.7 Shareholders Agreement, dated as of January 11, 1982, by and among
Imperial Chemical Industries PLC, ICI American Holdings, Inc. and
Uniroyal, Inc. (incorporated by reference to Exhibit 10.7 to our
registration statement on Form S-4 (File No. 333-88057))
10.8 Operating Agreement, dated December 28, 1981, between Uniroyal, Inc.,
Rubicon Chemicals, Inc. and Rubicon, Inc. (incorporated by reference
to Exhibit 10.8 to our registration statement on Form S-4 (File No.
333-88057))
44
10.9 Liability and Indemnity Agreement, dated December 28, 1981, by and
among Rubicon Inc., Rubicon Chemicals Inc., Imperial Chemical
Industries PLC, ICI American Holdings Inc., ICI Americas Inc. and
Uniroyal Inc. (incorporated by reference to Exhibit 10.9 to our
registration statement on Form S-4 (File No. 333-88057))
10.10 Indenture, dated as of June 30, 1999, between Huntsman ICI Holdings
LLC and Bank One, N.A., as Trustee, relating to the 8% Senior
Subordinated Discount Notes due 2009. (incorporated by reference to
Exhibit 10.10 to our registration statement on Form S-4 (File No.
333-88057))
10.11 Form of certificate of 8% Senior Subordinated Discount due 2009
(included in Exhibit A to Exhibit 10.10)(incorporated by reference to
Exhibit 10.11 to our registration statement on Form S-4 (File No.
333-88057))
10.12 Indenture, dated as of June 30, 1999, among Huntsman ICI Chemicals
LLC, the Guarantors party thereto and Bank One, N.A., as Trustee,
relating to the 10 1/8% Senior Subordinated Notes due 2009.
(incorporated by reference to Exhibit 10.12 to our registration
statement on Form S-4 (File No. 333-88057))
10.13 Form of certificate of 10 1/8% Senior Subordinated Notes due 2009
denominated in dollars (included in Exhibit A-3 to Exhibit 10.12)
(incorporated by reference to Exhibit 10.13 to our registration
statement on Form S-4 (File No. 333-88057))
10.14 Form of certificate of 10 1/8% Senior Subordinated Notes due 2009
denominated in euros (included in Exhibit A-4 to Exhibit 10.12)
(incorporated by reference to Exhibit 10.14 to our registration
statement on Form S-4 (File No. 333-88057))
10.15 Form of Guarantee (included in Exhibit E to Exhibit 10.12)
(incorporated by reference to Exhibit 10.15 to our registration
statement on Form S-4 (File No. 333-88057))
10.16 Titanium Dioxide Supply Agreement, dated July 3, 1997, by and between
Imperial Chemicals Industries PLC and Tioxide Group (incorporated by
reference to Exhibit 10.10 to our registration statement on Form S-4
(File No. 333-88057))*
10.17 Slag Sales Agreement, dated July 10, 1997, by and between Richards
Bay Iron and Titanium (Proprietary) Limited and Tioxide S.A. (Pty)
Limited (incorporated by reference to Exhibit 10.11 to our
registration statement on Form S-4 (File No. 333-88057))*
10.18 Slag Sales Agreement, dated April 19, 2000, by and between Qit-Fer Et
Titane Inc. and Tioxide Europe Limited**
10.19 Supply Agreement, dated April 13, 1998, by and between Shell Trading
International Limited and ICI Chemicals & Polymers Limited
(incorporated by reference to Exhibit 10.13 to our registration
statement on Form S-4 (File No. 333-88057))*
10.20 Amendment, dated February 7, 2001, to the Supply Agreement, dated
April 13, 1998, by and between Shell Trading International Limited
and ICI Chemicals & Polymers Limited**
10.21 First Amendment, dated as of December 21, 2000, by and among Huntsman
International LLC, Huntsman International Holdings LLC, the financial
institutions named therein, as Lenders, Bankers Trust Company, as
Lead Arranger, Administrative Agent for the Lenders and Sole Book
Manager, Goldman Sachs Credit Partners L.P., as Syndication Agent and
Co-Arranger and The Chase Manhattan Bank and Warburg Dillon Read (a
division of UBS AG), as Co-Arrangers and as Co-Documentation Agents,
to the Credit Agreement dated as of June 30, 1999
10.22 Second Amendment, dated as of March 5, 2001, is entered into by and
among Huntsman International LLC, Huntsman International Holdings
LLC, the undersigned financial institutions, including Bankers Trust
Company, in their capacities as lenders hereunder, Bankers Trust
Company, as Lead Arranger, Administrative Agent for the Lenders and
Sole Book Manager, Goldman Sachs Credit Partners L.P., as Syndication
Agent and Co-Arranger and The Chase Manhattan Bank and UBS Warburg
LLC (as successor to Warburg Dillon Read), as Co-Arrangers and as Co-
Documentation Agents, to the Credit Agreement dated as of June 30,
1999
45
10.23 Contribution Agreement, among Huntsman International LLC, as
Contributor and Originator, and Huntsman Receivables Finance LLC, as
the Company, dated as of December 20, 2000
10.24 Huntsman Master Trust Pooling Agreement, dated as of December 21,
2000, among Huntsman Receivables Finance LLC, as Company, Huntsman
(Europe) BVBA, as Master Servicer, and Chase Manhattan Bank
(Ireland) Plc, as Trustee
10.25 Huntsman Master Trust, Series 2000-1 Supplement, dated as of
December 21, 2000, to Pooling Agreement dated as of December 21,
2000, among Huntsman Receivables Finance LLC, as Company, Huntsman
(Europe), BVBA, as Master Servicer, The Chase Manhattan Bank, as
Funding Agent, Park Avenue Receivables Corp., as Series 2000-1
Initial Purchaser, the several financial institutions party thereto
from time to time as Series 2000-1 APA Banks, and Chase Manhattan
Bank (Ireland) Plc, as Trustee
10.26 Servicing Agreement, dated as of December 21, 2000, among Huntsman
Receivables Finance LLC, as the Company, Huntsman (Europe) BVBA, as
Master Servicer, Tioxide Americas Inc, Huntsman ICI Holland B.V.,
Tioxide Europe Limited, Huntsman International LLC, Huntsman
Petrochemicals (UK) Limited, Huntsman Propylene Oxide Ltd., Huntsman
International Fuels L.P., as Local Servicers, Chase Manhattan Bank
(Ireland) Plc, as Trustee, Pricewaterhousecoopers, as Liquidation
Servicer, and Huntsman International LLC, as Servicer Guarantor
10.27 U.S. Receivables Purchase Agreement, Huntsman International LLC, as
Purchaser, and Tioxide Americas Inc., Huntsman Propylene Oxide Ltd.
and Huntsman International Fuels L.P., each as a Seller and an
Originator
10.28 Dutch Receivables Purchase Agreement, dated as of December 21, 2000,
between Huntsman International LLC, as Purchaser, Huntsman ICI
Holland B.V., as Originator, Huntsman ICI (Europe) B.V.B.A., as
Master Servicer
10.29 U.K. Receivables Purchase Agreement, dated as of December 20, 2000,
between Huntsman International LLC, as Purchaser, Tioxide Europe
Limited and Huntsman Petrochemicals (UK) Limited, as Originators,
and Huntsman (Europe) B.V.B.A., as Master Servicer
21.1 Subsidiaries of Huntsman International Holdings LLC
* Confidential treatment pursuant to Rule 406 of the Securities Act has been
previously granted by the SEC.
** Portions of this document have been omitted and previously filed separately
with the SEC pursuant to requests for confidential treatment pursuant to
Rule 406 of the Securities Act and Rule 24b-2 of the Exchange Act.
(C) The Company filed no reports on Form 8-K for the year ended December 31,
2000.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Huntsman International Holdings LLC has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Everberg, Country of Belgium, on the 20th day of March, 2001.
Huntsman International Holdings LLC
By: /s/ L. Russell Healy
--------------------------------
L. Russell Healy
Senior Vice President and
Finance Director
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 20th day of March, 2001:
Name Capacities
- --------------------------------------------------------------------------------
/s/ Jon M. Huntsman
- --------------------------------
Jon M. Huntsman Chairman of the Board and Manager
/s/ Jon M. Huntsman, Jr.
- --------------------------------
Jon M. Huntsman, Jr. Vice Chairman and Manager
/s/ Peter R. Huntsman
- --------------------------------
Peter R. Huntsman President, Chief Executive Officer and Manager
(Principal Executive Officer)
/s/ J. Kimo Esplin
- --------------------------------
J. Kimo Esplin Executive Vice President and Chief Financial
Officer
/s/ L. Russell Healy
- --------------------------------
L. Russell Healy Senior Vice President and Finance Director
(Principal Financial and Accounting Officer)
/s/ Graham L. Thompson
- --------------------------------
Graham L. Thompson Vice President and Controller
47
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
ITEMS 8 AND 14(a)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Responsibility for the Consolidated Financial Statements............................................. F-2
Independent Auditors' Report......................................................................... F-3
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999............................ F-4
Consolidated Statements of Operations and Comprehensive Income for the Year Ended December 31, 2000
and Six Months Ended December 31, 1999; and the Six Months Ended June 30, 1999 and the Year Ended
December 31, 1998, (Predecessor Company)............................................................. F-5
Consolidated Statement of Equity for the Year Ended December 31, 2000 and Six Months Ended December
31, 1999; and the Six Months Ended June 30, 1999 and the Year Ended December 31, 1998,
(Predecessor Company)................................................................................ F-6
Consolidated Statements of Cash Flows for the Year Ended December 31, 2000 and Six Months Ended
December 31, 1999; and the Six Months Ended June 30, 1999 and the Year Ended December 31, 1998,
(Predecessor Company)................................................................................ F-7
Notes to Consolidated Financial Statements........................................................... F-9
Schedule to Consolidated Financial Statements, Schedule II - Valuation and Qualifying Accounts....... F-29
F-1
RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Company management is responsible for the preparation, accuracy and
integrity of the consolidated financial statements and other financial
information included in this Annual Report. This responsibility includes
preparing the statements in accordance with accounting principles generally
accepted in the United States of America and necessarily includes estimates
based upon management's best judgment.
To help ensure the accuracy and integrity of Company financial data,
management maintains internal controls which are designed to provide reasonable
assurance that transactions are executed as authorized, that they are accurately
recorded and that assets are properly safeguarded. It is essential for all
Company employees to conduct their business affairs in keeping with the highest
ethical standards as outlined in our code of conduct policy, "Business Conduct
Guidelines". Careful selection of employees, and appropriate divisions of
responsibility also help us to achieve our control objectives.
The financial statements of (1) Huntsman International Holdings LLC,
formerly known as Huntsman ICI Holdings LLC, Holdings as of and for the year
ended December 31, 2000, (2) Huntsman International Holdings LLC as of and for
the six month period ended December 31, 1999, (3) Huntsman Specialty Chemicals
Corporation ("HSCC") for the six months ended June 30, 1999 and as of and for
the year ended December 31, 1998 have been audited by the Company's independent
accountants Deloitte & Touche LLP. Their report is shown on page F-3.
The Board of Managers oversees the adequacy of the Company's control
environment. The Audit Committee meets periodically with representatives of
Deloitte & Touche LLP, internal financial management and the internal auditor to
review accounting, control, auditing and financial reporting matters. The
independent accountants and the internal auditor also have full and free access
to meet privately with the Committee.
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Managers and Members of
Huntsman International Holdings LLC
We have audited the accompanying consolidated balance sheets of Huntsman
International Holdings LLC and Subsidiaries, formerly Huntsman ICI Holdings LLC
(the "Company"), formerly Huntsman Specialty Chemicals Corporation (the "HSCC
Predecessor Company"), as of December 31, 2000 and 1999, and the related
consolidated statements of operations and comprehensive income, equity, and cash
flows for the year ended December 31, 2000 and the six months ended December 31,
1999; and the six months ended June 30, 1999, and the year ended December 31,
1998 (HSCC Precessor Company operations). Our audits also included the
financial statement schedule listed in the table of contents. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Huntsman International Holdings
LLC and Subsidiaries at December 31, 2000 and 1999 and the results of the
Company's operations and its cash flows for the year ended December 31, 2000 and
the six months ended December 31, 1999; and the results of the HSCC Predecessor
Company operations and its cash flows for the six months ended June 30, 1999 and
the year ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 16, 2001, except for Note 19,
as to which the date is March 13, 2001.
F-3
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
Consolidated Balance Sheets
(Millions of Dollars)
December 31, December 31,
2000 1999
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 66.1 $ 138.9
Accounts and notes receivables (net of allowance
for doubtful accounts of $10.6 and $9.5, respectively) 553.9 629.4
Inventories 496.4 381.3
Prepaid expenses 15.2 18.2
Deferred income taxes 0.9 12.9
Other current assets 69.6 48.2
--------------- --------------
Total current assets 1,202.1 1,228.9
Property, plant and equipment, net 2,703.9 2,681.2
Investment in unconsolidated affiliates 156.7 163.9
Intangible assets, net 397.2 355.9
Other noncurrent assets 318.0 348.6
--------------- --------------
Total assets $ 4,777.9 $ 4,778.5
=============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 313.3 $ 338.7
Accrued liabilities 517.0 337.7
Current portion of long-term debt 7.5 51.7
Other current liabilities 33.7 44.1
--------------- --------------
Total current liabilities 871.5 772.2
Long-term debt 2,911.8 2,951.6
Deferred income taxes 332.1 365.4
Other noncurrent liabilities 131.8 116.2
--------------- --------------
Total liabilities 4,247.2 4,205.4
--------------- --------------
Minority interests 9.6 8.0
--------------- --------------
Equity:
Members' equity, 1,000 units 518.1 518.1
Retained earnings 123.7 49.7
Accumulated other comprehensive loss (120.7) (2.7)
--------------- --------------
Total equity 521.1 565.1
--------------- --------------
Total liabilities and equity $ 4,777.9 $ 4,778.5
=============== ==============
See accompanying notes to consolidated financial statements
F-4
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(Millions of Dollars)
HSCC Predecessor Company
------------------------------------
Six Months Year Ended
Year Ended Six Months Ended Ended December 31,
December 31, 2000 December 31, 1999 June 30, 1999 1998
----------------- ----------------- ---------------- ----------------
Revenues:
Trade sales and services $ 3,940.8 $ 1,704.5 $ 134.0 $ 253.2
Related party sales 464.5 269.5 29.0 33.0
Tolling fees 42.6 23.3 29.0 52.5
----------------- ----------------- ---------------- ----------------
Total revenues 4,447.9 1,997.3 192.0 338.7
Cost of goods sold 3,705.4 1,602.0 134.1 276.6
----------------- ----------------- ---------------- ----------------
Gross profit 742.5 395.3 57.9 62.1
Expenses:
Selling, general and
administrative 270.2 153.3 3.3 4.8
Research and development 59.3 43.7 2.0 3.0
----------------- ----------------- ---------------- ----------------
Total expenses 329.5 197.0 5.3 7.8
----------------- ----------------- ---------------- ----------------
Operating income 413.0 198.3 52.6 54.3
Interest expense 297.8 138.1 18.3 40.9
Interest income 4.9 2.2 0.3 1.0
Loss on sale of accounts receivable 1.9 - - -
Other income (expense) (3.2) 6.5 - 0.8
----------------- ----------------- ---------------- ----------------
Income before income taxes 115.0 68.9 34.6 15.2
Income tax expense 30.2 18.2 13.1 5.8
Minority interests in subsidiaries 2.8 1.0 - -
----------------- ----------------- ---------------- ----------------
Net income 82.0 49.7 21.5 9.4
Preferred stock dividends - - 2.2 4.2
Net income available to common
equity holders 82.0 49.7 19.3 5.2
Other comprehensive loss -
foreign currency translation
adjustments (118.0) (2.7) - -
----------------- ----------------- ---------------- ----------------
Comprehensive income $ (36.0) $ 47.0 $ 19.3 $ 5.2
================= ================= ================ ================
See accompanying notes to consolidated financial statements
F-5
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
Consolidated Statements of Equity
(Millions of Dollars)
Common stock/ Accumulated
Members' equity Additional Other
------------------------- Paid-in Retained Comprehensive
Shares/Units Amount Capital Earnings Income Total
------------- --------- ----------- ---------- -------------- ---------
HSCC Predecessor Company:
Balance, January 1, 1998 2,500 $ 25.0 $ 0.4 $ 25.4
Net income 9.4 9.4
Dividends accrued on
mandatorily redeemable
preferred stock (4.2) (4.2)
------------- --------- ---------- ---------- -------------- ---------
Balance, December 31, 1998 2,500 - 25.0 5.6 - 30.6
Net income 21.5 21.5
Dividends accrued on
mandatorily redeemable
preferred stock (2.2) (2.2)
------------- --------- ---------- ---------- -------------- ---------
Balance, June 30, 1999 2,500 $ - $ 25.0 $ 24.9 $ - $ 49.9
============= ========= ========== ========== ============== =========
Huntsman International Holdings:
Transfer of Huntsman Specialty
Chemicals Corp. assets and
liabilities at book value 600 $ 528.1 $ 528.1
Contribution of Imperial Chemical
Industries PLC assets and
liabilities at fair value 300 520.0 520.0
Transfer of cash from equity
investors 100 90.0 90.0
Distribution to Members (620.0) (620.0)
Net income $ 49.7 49.7
Foreign currency translation
adjustments $ (2.7) (2.7)
------------- --------- ---------- ---------- -------------- ---------
Balance, December 31, 1999 1,000 518.1 - 49.7 (2.7) 565.1
Distribution to HSCC (8.0) (8.0)
Net income 82.0 82.0
Foreign currency translation
adjustments (118.0) (118.0)
------------- --------- ---------- ---------- -------------- ----------
Balance, December 31, 2000 1,000 $ 518.1 $ - $ 123.7 $ (120.7) $ 521.1
============= ========= ========== ========== ============== ==========
See accompanying notes to consolidated financial statements
F-6
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Millions of Dollars)
HSCC Predecessor Company
------------------------------------------
Year Ended Six Months Ended Six Months Ended Year Ended
December 31, 2000 December 31, 1999 June 30, 1999 December 31, 1998
-------------------- ------------------ ------------------ --------------------
Cash Flows From Operating Activities:
Net income $ 82.0 $ 49.7 $ 21.5 $ 9.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of investment
in unconsolidated affiliates (0.1) (0.1)
Minority interests in subsidiaries 2.8 1.0
Gain on foreign currency transactions (8.2) (5.0)
Depreciation and amortization 214.3 104.2 15.5 30.5
Deferred income taxes 6.3 11.0 3.6 5.8
Proceeds from initial sale of
receivables 175.0
Interest on subordinated note 70.5 31.9 3.0 7.1
Changes in operating assets and
liabilities - net of effects of acquisitions:
Accounts and notes receivables (104.5) (38.3) (6.1) (1.5)
Inventories (118.9) (21.9) (5.7) 3.4
Prepaid expenses 0.3 (15.4)
Other current assets (13.8) 4.6 0.9 0.1
Accounts payable (27.1) 11.9 (3.4) 2.0
Accrued liabilities 182.4 119.3
Other current liabilities (28.4) 4.5 10.0 3.7
Other noncurrent assets (52.0) (17.3) 0.6 (14.3)
Other noncurrent liabilities 30.9 16.1
---------------- ------------------ ------------------ -------------------
Net cash provided by operating activities 411.5 256.2 39.9 46.2
---------------- ------------------ ------------------ -------------------
Investing activities:
Purchase of businesses from ICI, net of (2,244.8)
cash acquired
Purchase of business from BP Chemicals,
Limited (116.6)
Acquisition of other businesses (149.6)
Cash received from unconsolidated 7.5 2.5
affiliates
Investment in unconsolidated affiliates (1.7)
Advances to unconsolidated affiliates (9.0) (26.5)
Capital expenditures (204.5) (131.8) (4.0) (10.4)
---------------- ---------------- ------------------ -------------------
Net cash used in investing activities (355.6) (2,518.9) (4.0) (10.4)
---------------- ---------------- ------------------ -------------------
F-7
HSCC Predecessor Company
------------------------------------------
Year Ended Six Months Ended Six Months Ended Year Ended
December 31, 2000 December 31, 1999 June 30, 1999 December 31, 1998
-------------------- ------------------ ------------------ --------------------
Financing activities:
Borrowings under senior credit facilities 8.0 1,692.5
Issuance of senior subordinated notes 806.3
Issuance of senior discount notes 242.7
Issuance of senior subordinate discount notes 265.3
Proceeds from other long-term debt 1.0
Repayment of long-term debt (131.0) (34.4) (43.3)
Debt issuance costs (76.4)
Cash contributions by equity investors 90.0
Cash distribution to members (8.0) (620.0)
------------------ ---------------- ----------------- ----------------
Net cash provided by (used in) financing
activities (131.0) 2,401.4 (34.4) (43.3)
------------------ ---------------- ----------------- ----------------
Effect of exchange rate changes on cash 2.3 0.2 - -
------------------ ---------------- ----------------- ----------------
Increase (decrease) in cash and cash
equivalents (72.8) 138.9 1.5 (7.5)
Cash and cash equivalents at beginning of
period 138.9 - 2.6 10.1
------------------ ---------------- ----------------- ----------------
Cash and cash equivalents at end of period $ 66.1 $ 138.9 $ 4.1 $ 2.6
================== ================ ================= ================
Non-Cash Financing and Investing Activities:
Non-cash capital contribution by ICI $ - $ 520.0
See accompanying notes to consolidated financial statements.
F-8
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Effective June 30, 1999, pursuant to a contribution agreement and ancillary
agreements between Huntsman International Holdings LLC, formerly Huntsman ICI
Holdings LLC ("Holdings" or the "Company"), Huntsman Specialty Chemicals
Corporation ("HSCC"), Imperial Chemicals Industries PLC ("ICI") and Huntsman
International LLC, formerly Huntsman ICI Chemicals LLC ("Huntsman
International"), the Company acquired assets and stock representing ICI's
polyurethane chemicals, selected petrochemicals (including ICI's 80% interest in
the Wilton olefins facility) and titanium dioxide businesses and HSCC's
propylene oxide business. In addition, the Company also acquired the remaining
20% ownership interest in the Wilton olefins facility from BP Chemicals, Limited
("BP Chemicals") for approximately $117 million.
The Company, through its wholly-owned subsidiary, Huntsman International, is a
global manufacturer and marketer of specialty and commodity chemicals through
our principal businesses: specialty chemicals, petrochemicals and titanium
dioxide.
In exchange for transferring its business, HSCC retained a 60% common equity
interest in Holdings and received approximately $360 million in cash. In
exchange for transferring its businesses, ICI received a 30% common equity
interest in Holdings, approximately $2 billion in cash that was paid in a
combination of U.S. dollars and euros, and discount notes of Holdings with
approximately $508 million of accreted value at issuance. The cash proceeds of
the Holdings discount notes issued to ICI were contributed by the Company as
equity to Huntsman International. BT Capital Investors, LP, Chase Equity
Associates, LP, and the Goldman Sachs Group acquired the remaining 10% common
equity interest in Holdings for $90 million cash.
The cash sources to finance the above transactions are summarized as follows (in
millions):
Senior secured credit facilities of Huntsman International $ 1,683
Senior subordinated notes of Huntsman International 807
Senior discount notes of the Company 243
Senior subordinated discount notes of the Company 224
($265 million accreted value)
Cash equity from institutional investors 90
--------
Total cash sources $ 3,047
========
HSCC is considered the acquirer and predecessor of the businesses transferred to
the Company in connection with the transaction because the shareholders of HSCC
acquired majority control of the businesses transferred to the Company. The
transactions with ICI and BP Chemicals are accounted for as purchase
transactions. Operating results prior to July 1, 1999 are not comparable to the
operating results subsequent to such date due to the transaction.
The total consideration to ICI of cash and the value of common equity interest
in Holdings was approximately $2.8 billion, including expenses and liabilities
assumed. The excess of the purchase price over the estimated fair value of net
tangible assets acquired has been recorded as identifiable intangibles ($203.6
million) which are being amortized over 5 to 15 years.
The allocation of the purchase price is summarized as follows (in millions):
Current assets $ 970.2
Plant and equipment 2,232.5
Investments in unconsolidated affiliates 192.7
Intangible assets (patents, technology, non-compete
agreements) 206.5
Other assets 292.4
Liabilities assumed (1,020.8)
---------
Total $ 2,873.5
=========
F-9
The total consideration paid to BP Chemicals was allocated to tangible assets,
primarily property and equipment.
The following unaudited pro forma data (in millions) has been prepared assuming
that the transaction (excluding the acquisition of 20% of the Wilton olefins
facility from BP Chemicals) and related financing were consummated at the
beginning of each period.
Year Ended December 31,
1999 1998
-----------------------------
Revenues $ 3,868 $ 3,671
Net income (loss) 54 (51)
2000 Acquisition
On August 31, 2000, the Company acquired the Morton global thermoplastic
polyurethanes business from Rohm and Haas Company for an aggregate purchase
price of $120 million. The allocation of the purchase price to the identifiable
assets and liabilities resulted in approximately $3 million of goodwill.
Sale by ICI of Holdings Equity Interest
On November 2, 2000, HSCC and ICI entered into agreements under which ICI has an
option to transfer to HSCC or its permitted designated buyers, and HSCC or its
permitted designated buyers have a right to buy, the membership interests in
Holdings that are indirectly held by ICI for $365 million plus interest from
November 30, 2000 until the completion of such sale. Unless waived by ICI, the
right of HSCC or its designees to buy the membership interests (which expires if
not exercised by July 2001) is contingent upon the completion of the resale by
ICI of the 8% senior subordinated reset discount notes of Holdings.
Additionally, ICI may only exercise its option to transfer the membership units
to HSCC between April 2001 and July 2001.
In addition, and in the event that ICI completes the transfer of its membership
interests in Holdings as described in the preceding paragraph, the affiliates of
The Goldman Sachs Group who collectively own 1.1% of the outstanding membership
interests in Holdings have agreed to transfer those interests to HSCC, or its
designee, in exchange for approximately $13.5 million plus interest from
November 20, 2000 until the completion of such sale.
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. HSCC is
considered the accounting acquirer and, accordingly, the operating results prior
to July 1, 1999 reflect the historical financial position and results of
operations of HSCC.
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 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.
Cash Flow Information
Highly liquid investments with an original maturity of three months or less when
purchased are considered to be cash equivalents.
Cash paid for interest and income taxes are as follows (in millions):
F-10
HSCC Predecessor Company
Year Ended Six Months ----------------------------------
December 31, Ended Six Months Year Ended
2000 December 31, Ended June 30, December 31,
1999 1999 1998
------------ ------------ -------------- ------------
Cash paid
for interest $ 234.6 $ 62.7 $ 12.4 $ 33.0
Cash paid for
income taxes 22.0 9.8 - -
Securitization of Accounts Receivable
The Company securitizes certain trade receivables in connection with a revolving
securitization program. Losses are recorded on the transaction and depend on the
carrying value of the receivables as 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.
Inventories
Inventories are stated at the lower of cost or market using the weighted average
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. Upon disposal of assets, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in income. Of the total plant and equipment,
approximately $432 million is depreciated using the straight-line method on a
group basis at 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 credited or charged to income. When miscellaneous assets
are disposed of, the difference between asset costs and salvage value is charged
or credited to accumulated depreciation.
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. Interest
expense capitalized as part of plant and equipment was $10.3 million for the
year ended December 31, 2000, $10.1 million and $0.3 million for six months
ended December 31, 1999 and June 30, 1999, respectively, and $0.4 million for
the year ended December 31, 1998.
Investment in Unconsolidated Affiliates
Investments in companies in which the Company exercises significant influence,
generally ownership interests from 20% to 50%, are accounted for using the
equity method.
Intangible Assets
Debt issuance costs are amortized over the term of the related debt agreements,
ranging from six to ten years. Goodwill is amortized over a period of 20 years.
Other intangible assets, which consist of patents, trademarks, technology and
certain other agreements, are stated at their fair market values at the time of
acquisition, and are
F-11
amortized using the straight line method over their estimated useful lives of
five to fifteen years or over the life of the related agreement.
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.
Financial Instruments
The carrying amount reported in the balance sheet for cash and cash equivalents,
accounts receivable and accounts payable approximates fair value because of the
immediate or short-term maturity of these financial instruments. The carrying
value of the senior credit facilities approximates fair value since they bear
interest at a floating rate plus an applicable margin. The fair value of the
senior subordinated notes approximates book value.
The Company uses derivative financial instruments as part of its interest rate
risk management. Interest rate swaps, caps, collars and floors are classified as
matched transactions. The differential to be paid or received as interest rates
change is accrued and recognized as an adjustment to interest expense. The
related amount payable to, or receivable from counterparties, is included in
accounts receivable or accrued liabilities. Gains and losses on terminations of
interest rate agreements are deferred and amortized over the lesser of the
remaining term of the original contract or the life of debt. The premiums paid
for the interest rate agreements are included as other assets and are amortized
to expense over the term of the agreements.
The Company also uses financial instruments to hedge financial risk caused by
fluctuating currency rates. Realized and unrealized gains and losses on foreign
exchange transactions that are designated and effective as hedges are recognized
in the same period as the hedged transaction. The carrying amounts of foreign
currency forward contracts are adjusted for changes in fair value at each
balance sheet date. Foreign exchange contracts not designated as hedges are
marked-to-market at the end of each accounting period. As of December 31, 2000,
the Company had no short term forward contracts to sell various currencies.
The Company enters into various commodity contracts, including futures, option
and swap agreements to hedge its purchase and sale of commodity products. These
contracts are predominantly settled in cash. For those contracts that are
designated and effective as hedges, gains and losses are accounted for as part
of the basis of the related commodity purchases. For contracts accounted for as
hedges that are terminated before their maturity date, gains and losses are
deferred and included in the basis of the related commodity purchases. Commodity
contracts not accounted for as hedges are marked-to-market at the end of each
accounting period with the related gains and losses recognized in cost of goods
sold.
At December 31, 2000 and 1999 the Company had forward purchase contracts for
105,000 and 132,000 tonnes, respectively, of naphtha and propane which qualify
for hedge accounting. Accordingly, an unrealised loss of $1.1 million and an
unrealized gain of $0.8 million on these contracts were deferred at December 31,
2000 and 1999, respectively. In addition, at December 31, 2000, the Company had
forward purchase and sales contracts for 90,000 and 102,067 tonnes (naphtha and
other hydrocarbons), respectively, which do not qualify for hedge accounting.
Unrealized losses and gains on these purchase and sales contracts amounted to
$1.4 million and $1.9 million respectively. At December 31, 1999 the Company had
forward purchase and sales contracts for 137,000 and 177,000 tonnes,
respectively, which do not qualify for hedge accounting. Unrealized gains and
losses on these purchase and sale contracts amounted to $5.5 million and $4.3
million, respectively. During the twelve months ended December 31, 2000 and the
six months ended December 31, 1999, the Company recorded $17.9 million and $21.3
million, respectively, as a reduction to cost of goods sold related to net gains
from settled forward contracts and the movement in unrealized gains and losses
on contracts which do not qualify as hedges. At December 31, 2000, included in
other assets and liabilities for all contracts, were $3.0 million and $2.5
million, respectively. At December 31, 1999, included in other assets and
liabilities for all contracts were $6.3 million and $5.1 million, respectively.
HSCC had no such contracts during the six months and year ended June 30, 1999
and December 31, 1998, respectively.
F-12
The fair values of financial instruments are the amounts at which they could be
settled. The Company calculates the fair value of financial instruments using
quoted market prices whenever available. When quoted market prices are not
available, estimates are obtained from dealers or calculated using the present
value of estimated future cash flows.
The Company is exposed to credit losses in the event of nonperformance by a
counterparty to the financial instruments. The Company anticipates, however,
that the counterparties will be able to fully satisfy obligations under the
contracts.
Income Taxes
The Company and its U.S. subsidiaries are organized as Limited Liability
Companies. These entities are treated similar to a partnership for U.S. income
tax purposes, and therefore are not subject to U.S. federal tax on their income.
Subsidiaries outside the U.S. are generally taxed on the income generated in the
local country.
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 ("SFAS") No. 109,
Accounting for Income Taxes. 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.
The HSCC predecessor company filed a consolidated federal income tax return with
its ultimate parent. The HSCC predecessor company entered into a tax allocation
agreement with its ultimate parent whereby the Company was charged or credited
for an amount that would have been applicable had HSCC filed a separate
consolidated federal income tax return.
Environmental Expenditures
Environmental related restoration and remediation costs are recorded as
liabilities and expensed when site restoration and environmental remediation and
cleanup 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 incurred
and are expensed or capitalized as appropriate.
Preferred Stock
During 1997, HSCC acquired its propylene oxide and methyl/tertiary butyl ether
business from Texaco, Inc. In conjunction with this acquisition, HSCC issued
preferred stock to Texaco with an aggregate liquidation preference of $65
million. The preferred stock has a cumulative dividend rate of 5.5%, 6.5% or a
combination thereof of the liquidation preference per year, which is adjusted on
April 15th of each year, based on HSCC's cash flow in the previous year. During
1998, $35 million of the preferred stock accrued dividends at the rate of 6.5%
while $30 million of the preferred stock accrued dividends at the rate of 5.5%.
Unpaid cumulative dividends will compound at a rate of 5.5% or 6.5% and are
payable commencing July 15, 2002. The preferred stock and its obligations,
including unpaid cumulative dividends, were not transferred to the Company.
Foreign Currency Translation
Generally, the accounts of the Company's subsidiaries outside of the United
States consider local currency to be 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 equity as a
component of accumulated other comprehensive income. Transaction gains and
losses are recorded in the statement of operations and were $8.2 million net
gain for the twelve months ended December 31, 2000, and $5.0 million net gain
for the six months ended December 31, 1999. Prior to the transfer of the
business from ICI on July 1, 1999, the Company had no subsidiaries outside of
the United States.
F-13
Revenue Recognition
The Company generates revenues 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 when
the product is shipped to the customer.
Research and Development
Research and development costs are expensed as incurred.
Earnings per Member Equity Unit
Earnings per member equity unit is not presented because it is not considered
meaningful information due to the Company's ownership by a small number of
non-public shareholders.
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 ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.133
established accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No.133 is effective as of January 1, 2001 for the Company. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Adoption of this new accounting standard will not have a
material effect on the statements of operations or financial position.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140,
which replaces SFAS No. 125 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, provides accounting and reporting
standards for securitizations and other transfers of assets. Those standards are
based on consistent application of a financial-components approach that focuses
on control. Under that approach, after a transfer of assets, an entity
recognizes the assets it controls and derecognizes assets when control has been
surrendered. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from those that are secured
borrowings. The accounting requirements of this standard are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and must be applied prospectively. The
disclosures required by this standard are required for fiscal years ending after
December 15, 2000. The Company has provided the disclosures required by this
standard in Note 9 to the consolidated financial standards. Adoption of the
accounting requirements of this standard will not have a material effect on the
statements of operations or financial position.
3. Inventories
Inventories consist of the following (in millions):
December 31, 2000 December 31, 1999
------------------- -------------------
Raw Materials $ 149.5 $ 97.8
Work in progress 22.8 20.6
Finished goods 302.5 225.6
------------------- -------------------
Total 474.8 344.0
Materials and supplies 21.6 37.3
------------------- -------------------
Net $ 496.4 $ 381.3
=================== ===================
In the normal course of operations, the Company exchanges raw materials with
other companies. No gains or losses are recognized on these exchanges, and the
net open exchange positions are valued at the Company's cost. Net
F-14
amounts deducted from inventory under open exchange agreements owed by the
Company at December 31, 2000 and 1999 were $4.4 million (16.7 million pounds of
feedstock and products) and $3.8 million (8.2 million pounds of feedstock and
products), respectively, which present the net amounts payable by the Company
under open exchange agreements.
4. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and equipment are as
follows (in millions):
December 31, 2000 December 31, 1999
--------------------- -----------------------
35.3
Land $ $ 37.1
Buildings 117.6 109.9
Plant and equipment 2,673.6 2,399.1
Construction in progress 176.3 266.4
--------------------- ----------------------
Total 3,002.8 2,812.5
Less accumulated depreciation (298.9) (131.3)
--------------------- ----------------------
Net $ 2,703.9 $ 2,681.2
===================== ======================
5. Investments in Unconsolidated Affiliates
The Company's ownership percentage and investments in unconsolidated affiliates,
primarily manufacturing joint ventures, are as follows (in millions):
December 31, 2000 December 31, 1999
-------------------------- ---------------------
Louisiana Pigment Company, L.P. $ 151.1 $ 158.7
Rubicon, Inc. (50%) 4.5 4.3
Others 1.1 0.9
-------------------------- ---------------------
Total $ 156.7 $ 163.9
========================== =====================
Summarized approximate financial information of such affiliated companies as a
group as of December 31, 2000 and 1999 and for the years then ended is presented
below (in millions):
December 31, 2000 December 31, 1999
-----------------------------------------
Assets $ 660.1 $ 564.5
Liabilities 334.9 238.5
Revenues 763.4 537.7
Net income 0.4 0.4
The Company's equity in:
Net assets 156.7 163.0
Net income 0.1 0.2
F-15
6. Intangible Assets
Intangible assets, net of accumulated amortization consist of the following (in
millions):
December 31, 2000 December 31, 1999
----------------- -----------------
Patents, trademarks, and technology $ 323.4 $ 296.6
Debt issuance costs 79.2 77.6
Non-compete agreements 50.1 46.3
Other agreements 12.7 -
Goodwill 6.8 -
----------------- -----------------
Total 472.2 393.5
Accumulated amortization (75.0) (37.6)
----------------- -----------------
Net $ 397.2 $ 355.9
================= =================
7. Other Noncurrent Assets
Other noncurrent assets consist of the following (in millions):
December 31, 2000 December 31, 1999
----------------- -----------------
Prepaid pension assets $ 190.9 $ 176.4
Capitalized turnaround expense 14.2 10.5
Prepaid insurance 4.3 8.5
Advances to and receivables from 55.0 123.9
affiliates
Spare parts inventory 32.7 23.9
Other noncurrent assets 20.9 5.4
----------------- -----------------
Total $ 318.0 $ 348.6
================= =================
8. Accrued Liabilities
Accrued liabilities consist of the following (in millions):
December 31, 2000 December 31, 1999
----------------- -----------------
Raw materials and services $ 261.8 $ 128.7
Interest 48.3 50.1
Taxes (income, property and VAT) 51.2 27.6
Payroll, severance and related costs 44.9 40.8
Volume and rebates 46.8 24.1
Other miscellaneous accruals 64.0 66.4
----------------- ------------------
Total $ 517.0 $ 337.7
================= ==================
9. Securitization of Accounts Receivable
On December 21, 2000, the Company initiated a revolving securitization program
under which certain trade receivables were and will be transferred to a special
purpose entity. During December 2000, the Company securitized approximately
$314.8 million of its receivables under this program. The Company will receive
annual servicing fees as compensation for servicing the outstanding receivable
balances. The Company's retained interests are subordinate to investor's
interests. The value of these retained interests are subject to credit and
interest rate risk related to the transferred receivables. During 2000, the
Company recorded a loss of $2 million related to this program.
The table below presents key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions at December 31, 2000. (in millions)
F-16
Carrying amount of retained interests $ 72.8
Weighted average life span (in months) 2.0
Expected credit losses (annual rate) 1.0%
Impact on fair value of 10% adverse change Less than 0.1
Impact on fair value of 20% adverse change Less than 0.1
Residual cash flows discount rate (annual) 9.7%
Impact on fair value of 10% adverse change $ 0.1
Impact on fair value of 20% adverse change $ 0.3
These sensitivities are hypothetical and are presented for illustrative purposes
only. Changes in carrying amount based on a change in assumptions generally can
not be extrapolated because the relationship of the change in assumption to the
change in fair value may not be linear. In addition, the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another, which might magnify or counteract the
sensitivities.
The table below summarizes certain cash flow information under this program (in
millions):
Proceeds from initiation of the program $ 175
Proceeds from collections reinvested 19.1
Servicing fees received -
Cash flows received on interests retained -
10. Long-term Debt
Long-term debt outstanding as of December 31, 2000 and 1999 is as follows (in
millions):
December 31, 2000 December 31, 1999
----------------- -----------------
Senior Secured Credit Facilities:
Revolving loan facility $ 32.3 $ 24.3
Term A dollar loan 195.6 240.0
Term A euro loan (in U.S. dollar
equivalent) 218.5 290.7
Term B loan 553.7 565.0
Term C loan 553.7 565.0
Senior Subordinated Notes 785.3 800.9
Senior Discount Notes 242.7 242.7
Senior Subordinated Discount Notes 265.3 265.3
Less discount (24.4) (34.7)
Accrued interest on Discount Notes 85.2 25.0
Other long-term debt 11.4 19.1
------------------ -----------------
Subtotal 2,919.3 3,003.3
Less current portion (7.5) (51.7)
----------------- -----------------
Total $ 2,911.8 $ 2,951.6
================= =================
The Senior Secured Credit Facilities will allow the Company to borrow up to an
aggregate of $1,921.5 million comprised as follows (in millions):
December 31, 2000 December 31, 1999
----------------- -----------------
Revolving loan facility $ 400.0 $ 400.0
Term A dollar loan 195.6 240.0
Term A euro loan (in U.S. dollar
equivalent) 218.5 290.7
Term B loan 553.7 565.0
Term C loan 553.7 565.0
----------------- -------------------
Total $ 1,921.5 $ 2,060.7
================= ===================
F-17
The revolving loan facility matures on June 30, 2005 with no scheduled
commitment reductions. Both the term A dollar loan facility and the term A euro
loan facility mature on June 30, 2005 and are payable in semi-annual
installments commencing December 31, 2000 with the amortization increasing over
time. The term B loan facility matures on June 30, 2007 and the term C loan
facility matures on June 30, 2008. Both the term B and term C loan facilities
require payments in annual installments of $5.65 million each, commencing June
30, 2000, with the remaining unpaid balance due on final maturity. Maturities
due through December 31, 2001 have been prepaid with proceeds from the sale of
accounts receivable (see note 9).
Interest rates for the Senior Secured Credit Facilities are based upon, at the
Company's option, either a eurocurrency rate or a base rate plus the applicable
spread. The applicable spreads vary based on a pricing grid, in the case of
eurocurrency based loans, from 1.25% to 3.5% per annum depending on the loan
facility and whether specified conditions have been satisfied and, in the case
of base rate loans, from zero to 2.25% per annum. As of December 31, 2000 and
1999 the average interest rates on the Senior Secured Credit Facilities were
9.2% and 8.7%, respectively.
The obligations under the Senior Secured Credit Facilities are supported by
guarantees of certain other subsidiaries (Tioxide Group, Tioxide America, Inc.,
Huntsman Propylene Oxide Holdings LLC, Huntsman Texas Holdings LLC, Huntsman
Propylene Oxide Ltd., Eurofuels LLC, Eurostar Industries LLC, Huntsman
International Fuels, L.P., and Huntsman International Financial LLC)
(collectively the "Guarantors") and Holdings as well as pledges of 65% of the
voting stock of certain non-U.S. subsidiaries. The Senior Secured Credit
Facilities contain covenants relating to incurrence of debt, purchase and sale
of assets, limitations on investments, affiliate transactions and maintenance of
certain financial ratios. The Senior Secured Credit Facilities limit the payment
of dividends generally to the amount required by the members to pay income
taxes.
The Company issued $600 million and Eu200 million 10.125% Senior Subordinated
Notes (the "Notes"). Interest on the Notes is payable semi-annually and the
Notes mature on July 1, 2009. The Notes are fully and unconditionally guaranteed
on a joint and several basis by the Guarantors. The Notes may be redeemed, in
whole or in part, at any time by the Company on or after July 1, 2004, at
percentages ranging from 105% to 100% at July 1, 2007 of their face amount, plus
accrued and unpaid interest. The Notes contain covenants relating to the
incurrence of debt, limitations on distributions, asset sales and affiliate
transactions, among other things. The Notes also contain a change in control
provision requiring the Company to offer to repurchase the Notes upon a change
in control.
Management believes that the Company is in compliance with the covenants of both
the Senior Secured Credit Facilities and the Senior Subordinated Notes.
The scheduled maturities of long-term debt are as follows (in millions):
December 31, 2000
-----------------
2001 $ 7.5
2002 115.0
2003 129.2
2004 138.6
2005 77.5
Later Years 2,451.5
-----------------
$ 2,919.3
=================
The Company issued to ICI Senior Discount Notes and Senior Subordinated Discount
Notes (collectively, the Discount Notes) with accreted value of $242.7 million
and $265.3 million, respectively. The Discount Notes are due December 31, 2009.
Interest on the Senior Discount Notes will accrue at 13.375% per annum and can
be redeemed at the Company's option at 100% of accreted value from 2001 and 2004
and thereafter at stipulated redemption prices declining to 100% of accreted
value in 2007. The Senior Subordinated Discount Notes have a stated rate of 8%
until 2001 and then reset to a market rate and can be redeemed at 100% of
accreted value at any time. For financial reporting purposes, the Senior
Subordinated Discount Notes have been recorded at their estimated fair value of
$224 million based upon prevailing market rates at July 1, 1999. Interest on the
Discount Notes is paid in kind. The Senior Discount Notes contain limits on the
incurrence of debt, restricted payments, liens, transactions with affiliates,
and merger and sales of assets.
F-18
The Company enters into various types of interest rate contracts to manage
interest rate risks on long-term debt. The Company has the following outstanding
at December 31, 2000:
. Pay Fixed Swaps Long Term Duration - $371 million notional amount,
weighted average pay rate of 5.90%, based upon underlying indices at
year end, maturing 2002 through 2004. Increases in underlying indices
could cause the weighted average pay rate to increase to a maximum of
6.37%.
. Interest Rate Collars - $275 million notional amount, weighted average
cap rate of 7%, weighted average floor rate of 5.35%, based upon
underlying indices at year end, maturing 2002 through 2004. Decreases
in underlying indices could cause the weighted average floor rate to
increase to a maximum of 6.12%.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount.
The Company purchases interest rate cap and sells interest rate floor agreements
to reduce the impact of changes in interest rates on its floating-rate long-term
debt. The cap agreements entitle the Company to receive from counterparties
(major banks) the amounts, if any, by which the Company's interest payments on
certain of its floating-rate borrowings exceed 6.6% to 7.5%. The floor agreement
requires the Company to pay to the counterparty (a major bank) the amount, if
any, by which the Company's interest payments on certain of its floating-rate
borrowings are less than 5% to 6.25%.
HSCC Predecessor Company Debt
The weighted average interest rate on the HSCC predecessor company debt was 8.3%
at December 31, 1998. This debt was not transferred to Holdings.
11. Income Taxes
The provision for income taxes consists of the following (in millions):
HSCC Predecessor Company
----------------------------
Year Ended Six Months Ended Six Months Year Ended
December 31, December 31, Ended June 30, December 31,
2000 1999 1999 1998
---------------------------------------------------------------------
U.S.:
Current $ 0.4 $ 0.4 $ - $ -
Deferred - - 13.1 5.8
Foreign :
Current 23.5 6.8 - -
Deferred 6.3 11.0 - -
------------ ---------------- ------------- ------------
Total $ 30.2 $ 18.2 $ 13.1 $ 5.8
============ ================ ============= ============
The following schedule reconciles the differences between the United States
federal income taxes at the United State statutory rate to the Company's
provision for income taxes (in millions):
HSCC Predecessor Company
--------------------------
Six Months
Year Ended Ended Six Months Year Ended
December 31, December 31, Ended June December
2000 1999 30, 1999 31, 1998
------------ ------------ ---------- ----------
Income taxes at U.S.
federal statutory rate $ 40.3 $ 24.1 $ 12.1 $ 5.3
Loss (income) not subject
to U.S. federal income tax 9.4 (9.1) - -
F-19
State income taxes 0.3 0.4 0.2 0.1
Foreign country incentive
tax benefits (13.3) (7.2) - -
Foreign country currency
exchange gain (loss) (4.4) 6.1 - -
Foreign income tax rate in
excess of federal statutory rate 0.4 0.6 - -
Other (2.5) 3.3 0.8 0.4
------------------------------------------------------------
Total provision income
taxes 30.2 $ 18.2 $ 13.1 $ 5.8
============================================================
Effective income tax rate 26% 26% 38% 38%
The components of deferred tax assets and liabilities are as follows (in
millions):
December 31, 2000 December 31, 1999
---------------------------------------------------
Current Long-term Current Long-Term
---------------------------------------------------
Deferred income tax assets:
Net operating loss carryforwards $ $ 81.6 $ $ 63.7
Tax basis of plant and equipment in excess
of book basis 36.9 36.5
Employee benefits 1.0 8.3
Other accruals and reserves 17.0 27.6 -
Valuation allowance (6.7) (40.7) (11.9) (39.0)
---------------------------------------------------
Total 10.3 78.8 15.7 69.5
Deferred income tax liabilities:
Book basis of plant and equipment in
excess of tax basis (354.9) (379.7)
Employee benefits (56.0) (55.2)
Other accruals and reserves (9.4) (2.8)
---------------------------------------------------
Total (9.4) (410.9) (2.8) (434.9)
---------------------------------------------------
Net deferred tax asset (liability) $ 0.9 $ (332.1) $ 12.9 $ (365.4)
===================================================
The Company has net operating loss carryforwards of $207 million in various
foreign jurisdictions. Most of the NOLs have no expiration date. The remaining
NOLs begin to expire in 2006. If the valuation allowance is reversed,
substantially all of the benefit will be allocated to reduce goodwill or other
noncurrent intangibles.
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. In
consideration of the Company's corporate structure, upon distribution of these
earnings, certain of the Company's subsidiaries would be subject to both income
taxes and withholding taxes in the various international jurisdictions. It is
not practicable to estimate the amount of taxes that might be payable upon
distribution.
The Company is treated as a partnership for U.S. federal income tax purposes and
as such is generally not subject to U.S. income tax, but rather such income is
taxed directly to the Company's owners. The net difference of the book basis of
the U.S. assets and liabilities over the tax basis of those assets and
liabilities is approximately $717 million.
12. Employee Benefit Plans
Defined Benefit and Other Postretirement Benefit Plans
The Company sponsors various contributory and non-contributory defined benefit
pension plans covering employees in the US, the UK, Netherlands, Belgium, Canada
and a number of other countries. The Company funds the material plans through
trust arrangements (or local equivalents) where the assets of the fund are held
separately
F-20
from the employer. The level of funding is in line with local practice and in
accordance with the local tax and supervisory requirements. The plan assets
consist primarily of equity and fixed income securities of both US and non-US
issuers.
The Company also sponsors unfunded post-retirement benefit plans other than
pensions which provide medical and life insurance benefits covering certain
employees in the US and Canada. In 2000, the healthcare trend rate used to
measure the expected increase in the cost of benefits was assumed to be 9.0% per
annum decreasing to 5.5% per annum after 5 years.
The HSCC Predecessor sponsored no employee benefit plans.
The following table sets forth the funded status of the plans and the amounts
recognized in the consolidated balance sheets at December 31, 2000 (in
millions):
Defined Benefit Other Postretirement
Plans Benefit Plans
--------------- --------------------
Change in benefit obligation
Benefit obligation as of January 1, 2000 $ 832.2 $ 8.8
Service cost 24.4 0.3
Interest cost 45.9 0.6
Plan losses 51.0 1.4
Foreign exchange impact (62.0) (0.1)
Benefits paid (31.2) (0.3)
Other (3.0) (0.7)
------------ ------------
Benefit obligation as of December 31, 2000 $ 857.3 $ 10.0
============ ============
Change in plan assets
Market value of plan assets as of January 1, 2000 $ 1,095.1 $ -
Actual return on plan assets (2.8) -
Company contributions 19.4 -
Foreign exchange impact (82.8) -
Benefits paid (30.7) -
Other 3.2 -
------------ ------------
Market value of plan assets as of December 31, 2000 $ 1,001.4 $ -
============ ============
Change in funded status
Prepaid (accrued) pension expense as of January 1, 2000 $ 147.0 $ (9.7)
Net periodic pension (cost)/benefit 6.6 (0.9)
Employer contributions 19.4 -
Foreign exchange impact (13.4) 0.1
Benefits paid 0.5 0.4
Other items 12.1 -
------------ ------------
Prepaid (accrued) pension expense as of December 31, 2000 $ 172.2 $ (10.1)
============ ============
Components of net periodic benefit cost
Service cost $ 26.2 0.3
Employee contributions (1.8) -
Interest cost 45.9 0.6
Return on plan assets (74.6) -
Unrecognized gains (2.3) -
------------ ------------
Net periodic pension cost/(benefit) $ (6.6) $ 0.9
============ ============
F-21
The following assumptions were used in the above calculations :
Defined Benefit Other Postretirement
Weighted-average assumptions as of December 31, 2000 Plans Benefit Plans
--------------- --------------------
Discount rate 6.15% 7.30%
Expected return on plan assets 7.34% NA
Rate of compensation increase 3.78% 4.25%
The following table sets forth the funded status of the plans and the amounts
recognized in the consolidated balance sheets at December 31, 1999 (in
millions):
Other
Defined Benefit Postretirement
Plans Benefit Plans
--------------- --------------
Change in benefit obligation
Benefit obligation as of July 1, 1999 $ 813.7 $ 9.3
Service cost 13.7 0.3
Interest cost 23.9 0.3
Employee contributions 0.9 -
Plan gains (7.8) (0.9)
Foreign exchange impact 2.9 -
Benefits paid (15.1) (0.2)
--------- ----------
Benefit obligation as of December 31, 1999 $ 832.2 $ 8.8
========= ==========
Change in plan assets
Market value of plan assets as of July 1, 1999 $ 956.0 $ -
Actual return on plan assets 142.1 -
Company contributions 10.5 0.2
Employee contributions 1.0 -
Foreign exchange impact 0.6 -
Benefits paid (15.1) (0.2)
--------- ----------
Market value of plan assets as of December 31, 1999 $ 1,095.1 $ -
========= ==========
Change in funded status
Prepaid (accrued) pension expense as of July 1, 1999 $ 142.2 $ (9.3)
Net periodic pension cost (4.4) (0.6)
Employer contributions 9.6 -
Foreign exchange impact (1.4) -
Benefits paid 1.0 0.2
--------- ----------
Prepaid (accrued) pension expense as of December 31, 1999 $ 147.0 $ (9.7)
========= ==========
Components of net periodic benefit cost
Service cost $ 14.7 $ 0.3
Employee contributions (1.0) -
Interest cost 23.9 0.3
Return on plan assets (33.2) -
--------- ----------
Net periodic pension cost $ 4.4 $ 0.6
========= ==========
F-22
The following assumptions were used in the above calculations:
Other
Defined Benefit Postretirement
Plans Benefit Plans
--------------- --------------
Weighted-average assumptions as of December 31, 1999
Discount rate 6.17% 7.52%
Expected return on plan assets 7.35% NA
Rate of compensation increase 3.90% 5.50%
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the defined benefit plans with accumulated benefit
obligations in excess of plan assets were $34.3 million, $22.1 million and $6.9
million respectively, as of December 31, 2000.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the defined benefit plans with plan assets in excess of
accumulated benefit obligations were $823.0 million, $753.9 million and $994.5
million respectively, as of December 31, 2000.
Defined Contribution Plans
The Company has defined contribution plans covering its domestic employees and
employees in some foreign subsidiaries who have completed at least two years of
service.
The Company's total combined expense for the above defined contribution plans
for the year ended December 31, 2000 and six months ended December 31, 1999 was
approximately $2.9 million and $0.5 million, respectively. There were no plans
prior to July 1, 1999.
Equity Deferral Plan
Effective July 1, 1999, the Board of Directors of Huntsman Corporation, the
ultimate parent of HSCC, approved the adoption of the Huntsman Equity Deferral
Plan (the "Deferral Plan") and the Huntsman Equity Rights Plan (the "Rights
Plan"), (collectively, the "Equity Plans"). Under the terms of the Equity Plans,
selected Huntsman officers and key employees, including certain of the Company's
management may (1) have a portion of their compensation deferred and contribute
the deferred compensation to the Deferral Plan and (2) be given the right to
receive a benefit equal to the difference between the value of Huntsman
Corporation stock at the grant date and the value of the stock at the exercise
date multiplied by the specific number of shares granted.
For each $1 contributed to the Deferral Plan, Huntsman Corporation credits an
additional $.50 to the account of the contributing plan participant. A plan
participant may defer up to 50% of the participant's salary and up to 100% of
the participant's bonus up to a maximum of $250,000 (which maximum may be
amended to certain employees by the Huntsman Corporation Board of Directors).
The amounts contributed to the Deferral Plan are considered invested in phantom
shares of Huntsman Corporation stock. Benefits under the Equity Plans (including
the matching contribution) vest after five years from the date of the grant and
are exercisable after eight years.
The Company's expense for the Equity Plans for the year ended December 31, 2000
and the six months ended December 31, 1999 was not material.
13. 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 indemnifications, none of such litigation is material to
the Company's financial condition or results of operations.
14. Environmental Matters
F-23
The operation of any chemical manufacturing plant, 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 our 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
catastrophic incident, the Company could incur material costs as a result of
addressing and implementing measures to prevent such incidents. Given the nature
of the Company's business, there can 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. In management's opinion,
after consideration of indemnifications, there are no environmental matters
which are material to the company's financial condition or results of
operations.
15. Related-party Transactions
The Company shares numerous services and resources with Huntsman Corporation
("Huntsman"), ICI, and subsidiaries of both companies. In accordance with
various agreements Huntsman and ICI provide management, operating, maintenance,
steam, electricity, water and other services to the Company. The Company also
relies on Huntsman, ICI and their subsidiaries to supply certain raw materials
and to purchase a significant portion of the facility's product. Rubicon, Inc.,
and Louisiana Pigment Company are non-consolidated 50 percent owned subsidiaries
of the Company. The amounts which the Company purchased from or sold to related
party's are as follows (in millions):
HSCC Predecessor Company
--------------------------------------
Year Ended Six Months Six Months Year Ended
December 31, Ended Ended December 31,
2000 December 31, 1999 June 30, 1999 1998
-----------------------------------------------------------------------------
Purchases Sales Purchases Sales Purchases Sales To Purchases Sales To
From To From To From From
- ------------------------------------------------------------------------------------------------
Huntsman and Subs. $ 194.9 $ 80.3 $42.6 $55.6 $32.1 $29.0 $103.3 $33.0
ICI and Subs. 393.6 370.2 297.8 213.1 - - - -
Unconsolidated
affiliates 580.7 14.0 216.1 0.8 - - - -
Included in purchases from Huntsman and Subsidiaries for the twelve month period
ended December 31, 2000, are $64 million of allocated management costs which are
reported in selling, general and administrative expenses. The amounts which the
Company is owed or owes to related party's are as follows (in millions):
December 31, 2000 December 31, 1999
-------------------------- ------------------------------
Receivables Payables Receivables Payables
----------- ---------- ----------- ----------
Huntsman and Subs. $ 15.9 $ 44.8 $ 1.2 $ 10.33
F-24
ICI and Subs. 111.3 7.6 333.9 243.5
Unconsolidated affiliates 25.2 109.4 93.0 8.6
HSCC Predecessor Company
HSCC had no employees and relied entirely on third parties to provide all goods
and services necessary to operate the Company's business. Certain of such goods
and services were provided by an affiliate of Huntsman.
Service Agreements - In accordance with various service agreements, the terms of
which range from 10 to 29 years, an affiliate of Huntsman provided management,
operating, maintenance and other services to the Company. In connection with
those service agreements, HSCC paid $61 million of fees and expense
reimbursements during the year ended December 31, 1998. Management fees charged
are recorded as selling, general and administrative expenses in the statements
of operations. Operating, maintenance and other service fees and expenses
charged were recorded as $6 million in the year ended December 31, 1998 for
steam purchased by HSCC on an affiliate's behalf.
Supply Agreements - Additionally, HSCC relies on an affiliate to supply certain
raw materials and to purchase a significant portion of the facility's output
pursuant to various agreements. HSCC sold $33 million of product to an
affiliate, and purchased $38 million of raw materials from an affiliate during
the year ended December 31, 1998.
Other Related Party Sales - During 1998, HSCC purchased $5 million of raw
materials from another affiliate of Huntsman.
16. Lease Commitments and Rental Expense
The Company leases a number of assets which are accounted for as operating
leases. The lease obligation reflected in the Company's statement of operations
as rental expense, totaled $23.7 million, $17.7 million, $3.6 million, $5.8
million, for the year ended December 31, 2000, the six months ended December 31,
1999 and June 30, 1999, and the year ended December 31, 1998, respectively. The
minimum future rental payments due under existing agreements are by year (in
millions):
Year Amount
----------------------- -------------------
2001 $ 14.3
2002 10.6
2003 8.7
2004 7.4
2005 5.3
Later years 50.3
17. Industry Segment and Geographic Area 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 manages its businesses in three segments, Specialty Chemicals (the
former ICI polyurethanes business and HSCC's propylene oxide business);
Petrochemicals (businesses acquired from ICI and BP Chemicals); and Tioxide
(acquired from ICI).
The major products of each business group are as follows:
Segment Products
--------------------------------------------------------------------------
Specialty Chemicals MDI, TDI, TPU, polyols, aniline, PO, TBA and
Petrochemicals MTBE Ethylene, propylene, benzene, cyclohexane
and paraxylene
Tioxide TiO2
F-25
Sales between segments are generally recognized at external market prices. For
the year ended December 31, 2000, sales to ICI and its affiliates accounted for
approximately 8% of consolidated revenues.
(In millions)
HSCC Predecessor Company
------------------------------------
Six Months
Year Ended Ended December Six Months Year Ended
December 31, 1999 Ended June 30, December 31,
31, 2000 1999 1998
-----------------------------------------------------------------------------
By Segment
Net Sales:
Specialty Chemicals $ 2,108.5 $ 964.7 $ 192.0 $ 338.7
Petrochemicals 1,485.5 574.2 - -
Tioxide 955.8 500.9 - -
Sales between segments,
Petrochemical sales to
speciality chemicals (101.9) (42.5) - -
----------------------------------------------------------------------------
Total $ 4,447.9 $ 1,997.3 $ 192.0 $ 338.7
============================================================================
Operating Income:
Specialty Chemicals 211.1 135.2 52.6 54.3
Petrochemicals 35.6 6.7 - -
Tioxide 166.3 56.4 - -
----------------------------------------------------------------------------
Total $ 413.0 $ 198.3 $ 52.6 $ 54.3
============================================================================
EBITDA (1):
Specialty Chemicals 332.6 194.5 68.2 85.6
Petrochemicals 82.1 30.6 - -
Tioxide 207.5 83.9 - -
----------------------------------------------------------------------------
Total $ 622.2 $ 309.0 $ 68.2 $ 85.6
============================================================================
Depreciation & Amortization:
Specialty Chemicals 122.5 55.6 15.5 30.5
Petrochemicals 45.8 23.1 - -
Tioxide 46.0 25.5 - -
----------------------------------------------------------------------------
Total $ 214.3 $ 104.2 $ 15.5 $ 30.5
============================================================================
Capital Expenditures:
Specialty Chemicals 83.5 76.2 4.0 10.4
Petrochemicals 33.4 16.7 - -
Tioxide 87.6 38.9 - -
----------------------------------------------------------------------------
Total $ 204.5 $ 131.8 $ 4.0 $ 10.4
============================================================================
Total Assets:
Specialty Chemicals 2,738.2 2,501.1 577.9 577.6
Petrochemicals 786.2 1,040.2 - -
Tioxide 1,253.5 1,237.2 - -
----------------------------------------------------------------------------
Total $ 4,777.9 $ 4,778.5 $ 577.9 $ 577.6
============================================================================
(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes.
F-26
HSCC Predecessor Company
--------------------------------
Year Six Months Six Months Year
Ended Ended Ended Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
----------------------------------------------------------
By Geographic Area
Net Sales:
United States $ 1,537.7 $ 709.8 $ 192.0 $ 338.7
United Kingdom 1,809.7 756.2 - -
Netherlands 802.4 379.7 - -
Other nations 1,116.4 528.0 - -
Adjustments and eliminations (818.3) (376.4) - -
----------------------------------------------------------
Total $ 4,447.9 $ 1,997.3 $ 192.0 $ 338.7
==========================================================
Long-lived Assets:
United States $ 1,278.1 $ 1,116.6 $ 482.5 $ 494.4
United Kingdom 946.0 1,002.5 - -
Netherlands 345.4 365.9 - -
Other nations 534.6 508.7 - -
Corporate 43.9 52.7 - -
-----------------------------------------------------------
Total $ 3,148.0 $ 3,046.6 $ 482.5 $ 494.4
===========================================================
18. Selected Quarterly Financial Data (Unaudited - in millions)
Three Three Three
Months Three Months Months
Ended Months Ended Ended Year Ended
March 31, Ended September 30, December 31, December 31,
2000 June 30, 2000 2000 2000 2000
----------------------------------------------------------------------------------
Revenues $ 1,054.9 $ 1,154.7 $ 1,136.9 1,101.4 $ 4,447.9
Gross profit 181.3 205.8 195.4 160.0 742.5
Operating income 95.8 130.3 107.7 79.2 413.0
Net income 19.7 47.3 23.3 (8.3) 82.0
HSCC Predecessor Company
-----------------------------------------------
Three
Months Three Months Three Months Six Months
Ended Three Months Six Months Ended Ended Ended
March 31, Ended Ended September 30, December 31, December 31,
1999 June 30, 1999 June 30, 1999 1999 1999 1999
--------------------------------------------------------------------------------------------------
Revenues $ 83.4 $ 108.6 $ 192.0 $ 958.9 $ 1,038.4 $ 1,997.3
Gross profit 21.6 36.2 57.9 198.2 197.1 395.3
Operating income 18.9 33.7 52.6 113.9 84.4 198.3
Net income 5.9 15.5 21.4 36.1 10.9 47.0
F-27
19. Subsequent Events
On February 23, 2001, Huntsman affiliates of which indirectly own 60% of
Holdings' common equity interests, announced that it had entered into a letter
of intent with Bain Capital, Inc. relating to a proposed investment by Bain in
Huntsman. The letter of intent contemplates that Huntsman and Bain will
negotiate definitive agreements pursuant to which Bain will invest over $600
million in Huntsman in exchange for a minority equity interest in Huntsman. If
the parties complete their proposed transaction, then Huntsman intends to use a
substantial portion of the proceeds received from Bain to finance the purchase
of the membership interests of Holdings that are held by ICI and affiliates of
Goldman Sachs, as described in Note 1.
On February 27, 2001, the Company entered into a definitive purchase agreement
with an affiliate of Rhodia S.A. for the acquisition of the European surfactants
business of Albright & Wilson, a subsidiary of Rhodia, for approximately $200
million.
On March 13, 2001, the Company completed an offering of Eu200 million notes
(the "Euro Notes") resulting in net proceeds of approximately Eu204 million,
including Eu4 million of interest accrued from January 1, 2001 paid by the
purchasers. The Euro Notes are due July 1, 2009 and bear interest at a stated
rate of 10.125% with semi-annual interest payments due January 1 and July 1. The
Euro Notes are subordinate to the Senior Secured Credit Facilities.
F-28
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
December 31, 2000
Column A Column B Column C Column D Column E
- ---------------- --------------------------- --------------------------- ---------------- ------------------
Balance at End
Balance at of
Description Beginning of Period Additions Deductions Period
- ---------------- --------------------------- --------------------------- ---------------- ------------------
Charged to Charged to
cost and other
expenses accounts
------------- -------------
Allowance for Doubtful Accounts
- ------------------------------------------------
Six Months Ended December 31, 1999 $ - $0.3 $9.2/(1)/ $ - $ 9.5
Year Ended December 31, 2000 $9.5 $2.2 $ - $(1.1) $10.6
(1) Represents specific reserves provided for receivables which were
considered to be uncollectible at the time of acquisition from ICI.
F-29