Exhibit 99.1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors of
Huntsman Corporation and Subsidiaries:

 

We have audited the accompanying consolidated balance sheets of Huntsman Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive loss, members’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004.  Our audits also included the financial statement schedules I and II on pages 47 through 49. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements of Huntsman Corporation presented herein, the consolidated financial statements reflect the financial position and results of operations and cash flows as if Huntsman Holdings LLC and Huntsman Corporation were combined for all periods presented.

 

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of computing depreciation for certain assets effective January 1, 2003. In addition, the Company adopted Statements of Financial Accounting Standards Nos. 141 and 142 effective January 1, 2002.

 

/s/ Deloitte & Touche LLP

 

Houston, Texas

March 14, 2005 (September 21, 2005 as to the effects of the discontinued operations described in Note 27)

 

1

 

CONSOLIDATED
BALANCE SHEETS

 

		December 31,
(Dollars in Millions)		2004			2003
ASSETS
Current assets:
Cash and cash equivalents		$	243.2		$	197.8
Restricted cash		8.9			10.5
Accounts and notes receivables (net of allowance for doubtful accounts of $25.8 and $26.5, respectively)		1,528.3			1,096.1
Accounts receivable from affiliates		12.1			6.6
Inventories		1,253.9			1,039.3
Prepaid expenses		45.0			39.6
Deferred income taxes		11.9			14.7
Other current assets		95.8			108.3
Total current assets		3,199.1			2,512.9
Property, plant and equipment, net		5,150.9			5,079.3
Investment in unconsolidated affiliates		170.9			158.0
Intangible assets, net		245.6			316.8
Goodwill		3.3			3.3
Deferred income taxes		34.5			28.8
Notes receivable from affiliates		23.6			25.3
Other noncurrent assets		608.6			613.0
Total assets		$	9,436.5		$	8,737.4
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	992.0		$	812.0
Accounts payable to affiliates		30.6			20.1
Accrued liabilities		782.1			702.0
Deferred income taxes		10.8			15.1
Current portion of long-term debt		37.5			135.8
Current portion of long-term debt—affiliates		—			1.3
Total current liabilities		1,853.0			1,686.3
Long-term debt		6,221.1			5,737.5
Long-term debt—affiliates		40.9			35.5
Deferred income taxes		217.9			234.8
Other noncurrent liabilities		745.3			584.7
Total liabilities		9,078.2			8,278.8
Minority interests in common stock of consolidated subsidiary		36.8			30.5
Warrants issued by consolidated subsidiary		128.7			128.7
Redeemable preferred members’ interest		574.8			487.1
Commitments and contingencies (Notes 20 and 22)
Stockholders’ equity (deficit):
Preferred members’ interest (liquidation preference of $513.3)		195.7			194.4
Common members’ interest:
Class A units, 10,000,000 issued and outstanding, no par value		—			—
Class B units, 10,000,000 issued and outstanding, no par value		—			—
Additional paid-in capital		712.5			800.2
Accumulated other comprehensive income		181.0			61.2
Accumulated deficit		(1,471.2		)	(1,243.5		)
Total stockholders’ deficit		(382.0		)	(187.7		)
Total liabilities and stockholders’ deficit		$	9,436.5		$	8,737.4

 

See accompanying notes to consolidated financial statements.

 

2

 

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 

		Year Ended December 31,
(Dollars in Millions)		2004			2003			2002
Revenues:
Trade sales		$	11,378.5		$	6,927.9		$	2,494.8
Related party sales		47.9			90.7			166.2
Total revenues		11,426.4			7,018.6			2,661.0
Cost of goods sold		10,022.0			6,308.2			2,421.0
Gross profit		1,404.4			710.4			240.0
Expenses:
Selling, general and administrative		694.8			482.8			151.9
Research and development		83.0			65.6			23.8
Other operating income		(80.9		)	(55.0		)	(1.0		)
Restructuring and plant closing costs (credits)		299.3			37.9			(1.0		)
Total expenses		996.2			531.3			173.7
Operating income		408.2			179.1			66.3
Interest expense		(607.2		)	(428.3		)	(195.0		)
Interest (expense) income—affiliate		(5.4		)	19.2			13.1
Loss on sale of accounts receivable		(15.6		)	(20.4		)	—
Equity in income (losses) of investment in unconsolidated affiliates		4.0			(37.5		)	(31.4		)
Other expense		(25.8		)	—			(7.6		)
Loss from continuing operations before income tax benefit, minority interest and accounting change		(241.8		)	(287.9		)	(154.6		)
Income tax (benefit) expense		(29.1		)	30.8			8.5
Loss from continuing operations before minority interest and accounting change		(212.7		)	(318.7		)	(163.1		)
Minority interest in subsidiaries’ (income) loss		(7.2		)	1.5			(28.8		)
Loss from continuing operations before accounting change		(219.9		)	(317.2		)	(191.9		)
Loss from discontinued operations, net of tax		(7.8		)	(2.6		)	—
Loss before accounting change		(227.7		)	(319.8		)	(191.9		)
Cumulative effect of accounting change		—			—			169.7
Net loss		(227.7		)	(319.8		)	(22.2		)
Preferred members’ interest dividend		(87.7		)	(74.3		)	(17.8		)
Net loss available to common stockholders		$	(315.4	)	$	(394.1	)	$	(40.0	)
Net loss		$	(227.7	)	$	(319.8	)	$	(22.2	)
Other comprehensive income		70.5			241.6			10.2
Comprehensive loss		$	(157.2	)	$	(78.2	)	$	(12.0	)
Basic and diluted loss per share:
Loss from continuing operations before accounting change		$	(1.40	)	$	(1.78	)	$	(0.95	)
Loss from discontinued operations, net of tax		(0.03		)	(0.01		)	—
Cumulative effect of accounting change		—			—			0.77
Net loss		$	(1.43	)	$	(1.79	)	$	(0.18	)

 

See accompanying notes to consolidated financial statements.

 

3

 

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIT)

 

								Class A			Class B									Accumulated						Mandatorily
					Preferred			Common			Common			Additional						Other						Redeemable
		Common			Members’			Members’			Members’			Paid-In			Accumulated			Comprehensive						Preferred
(Dollars in Millions)		Stock			Interest			Interest			Interest			Capital			Deficit			Income (Loss)			Total			Members’ Interest
Balance, January 1, 2002		$	181.0		$	100.0		$	—		$	—		$	—		$	(901.5	)	$	(141.3	)	$	(761.8	)	$	—
Recapitalization and member contribution for/of:
Initial capitalization of Huntsman Holdings		(181.0		)	(100.0		)	—			—			274.0			—			—			(7.0		)	7.0
Exchange of debt for equity		—			—			—			—			361.7			—			—			361.7			391.4
Expense of exchange of debt		—			—			—			—			(4.9		)	—			—			(4.9		)	(5.2		)
Acquisition of minority interests in affiliates (Note 1)		—			—			—			—			71.1			—			—			71.1			—
Notes receivable from HIH and payable to ICI		—			—			—			—			169.7			—			—			169.7			—
Cash contribution		—			—			—			—			3.4			—			—			3.4			—
Net loss		—			—			—			—			—			(22.2		)	—			(22.2		)	—
Other comprehensive income																				10.2			10.2			1.8
Dividends accrued on mandatorily redeemable preferred members’ interest		—			—			—			—			(17.8		)	—			—			(17.8		)	17.8
Balance, December 31, 2002		—			—			—			—			857.2			(923.7		)	(131.1		)	(197.6		)	412.8
Acquisition of subsidiary at less carrying amount		—			—			—			—			19.5			—			—			19.5			—
Distribution to member		—			—			—			—			(2.2		)	—			—			(2.2		)	—
Preferred shares issued in exchange for investment in Advanced Materials		—			194.4			—			—			—			—			—			194.4			—
Net loss		—			—			—			—			—			(319.8		)	—			(319.8		)	—
Other comprehensive income		—			—			—			—			—			—			241.6			241.6			—
Accumulated other comprehensive loss of HIH at May 1, 2003 (date of consolidation)		—			—			—			—			—			—			(49.3		)	(49.3		)	—
Dividends accrued on mandatorily redeemable preferred members’ interest		—			—			—			—			(74.3		)	—			—			(74.3		)	74.3
Balance, December 31, 2003		—			194.4			—			—			800.2			(1,243.5		)	61.2			(187.7		)	487.1
Net loss		—			—			—			—			—			(227.7		)	—			(227.7		)	—
Purchase accounting adjustment		—			1.3			—			—			—			—			49.3			50.6			—
Other comprehensive income		—			—			—			—			—						70.5			70.5			—
Dividends accrued on redeemable preferred members’ interest		—			—			—			—			(87.7		)	—			—			(87.7		)	87.7
Balance, December 31, 2004		$	—		$	195.7		$	—		$	—		$	712.5		$	(1,471.2	)	$	181.0		$	(382.0	)	$	574.8

 

See accompanying notes to consolidated financial statements

 

4

 

CONSOLIDATED STATEMENTS OF
CASH FLOWS

 

		Year Ended December 31,
(Dollars in Millions)		2004			2003			2002
Cash Flows From Operating Activities:
Net loss		$	(227.7	)	$	(319.8	)	$	(22.2	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Cumulative effect of accounting change		—			—			(169.7		)
Equity in (income) losses of investment in unconsolidated affiliates		(4.0		)	37.5			31.4
Depreciation and amortization		536.8			353.4			152.7
Provision for losses on accounts receivable		0.7			11.3			(1.8		)
Non-cash restructuring and plant closing charges (credits)		138.0			9.7			(5.3		)
Loss (gain) on disposal of plant and equipment		2.4			2.4			0.5
Loss on early extinguishment of debt		25.6			—			6.7
Noncash interest expense		160.6			111.8			7.6
Noncash interest on affiliate debt		5.4			(21.1		)	(13.1		)
Deferred income taxes		(64.5		)	(3.6		)	—
Unrealized gains on foreign currency transactions		(111.7		)	(58.3		)	—
Minority interests in subsidiaries income (loss)		6.2			(1.5		)	28.8
Other		(13.0		)	—			—
Changes in operating assets and liabilities (net of acquisitions):
Accounts and notes receivables		(200.4		)	81.0			(48.2		)
Change in receivables sold, net		(90.0		)	(11.5		)	—
Inventories		(158.9		)	87.8			1.3
Prepaid expenses		31.0			(2.8		)	(12.3		)
Other current assets		45.4			(15.9		)	—
Other noncurrent assets		(49.0		)	(24.3		)	(6.4		)
Accounts payable		49.8			(71.5		)	56.9
Accrued liabilities		91.4			71.5			67.5
Other noncurrent liabilities		6.7			(10.7		)	14.3
Net cash provided by operating activities		180.8			225.4			88.7
Investing Activities:
Capital expenditures		(226.6		)	(191.0		)	(70.2		)
Proceeds from sale of plant & equipment		5.2			0.3			—
Cash paid for intangible asset		—			(2.3		)	—
Advances to unconsolidated affiliates		(21.9		)	(7.8		)	(7.5		)
Net borrowings under revolving loan facilities		2.1			—			—
Net cash received from unconsolidated affiliates		8.6			—			—
Acquisition of minority interest		—			(286.0		)	—
Loans and other assets		1.0			—
Change in restricted cash		1.6			(1.4		)	53.2
Cash portion of AdMat acquisition		—			(397.6		)	—
Purchase of Vantico senior notes		—			(22.7		)	—
Net cash used in investing activities		$	(230.0	)	$	(908.5	)	$	(24.5	)

 

5

 

		Year Ended December 31,
(Dollars in Millions)		2004			2003			2002
Financing Activities:
Net borrowings (repayment) under revolving loan facilities		$	113.8		$	(201.4	)	$	32.1
Net (repayment) borrowings on overdraft		(10.6		)	7.5			—
Repayment of long-term debt		(2,489.4		)	(426.6		)	(121.6		)
Proceeds from long-term debt		2,515.3			1,288.6			—
Repayment of note payable		(19.6		)	(105.7		)	—
Proceeds from issuance of subsidiary warrants		—			130.0			—
Cash paid for reacquired subsidiary warrants		—			(1.3		)	—
Proceeds from subordinated note issued to an affiliated entity		—			—			—
Shares of subsidiary issued to minority interests for cash		5.4			1.7			—
Cost of raising subsidiary equity capital		—			(10.1		)	—
Debt issuance costs		(35.5		)	(58.2		)	(16.6		)
(Distribution to) capital contribution from members		—			(2.2		)	5.2
Cash contributed to subsidiary later exchanged for preferred tracking stock		—			164.4			—
Repayments of senior notes		(333.4		)	—			—
Issuance of senior notes		354.5			—			—
Cash acquired in acquisition of equity method affiliate		—			—			7.9
Costs of early extinguishment of debt		(17.0		)	—			—
Net cash provided by (used in) financing activities		83.5			786.7			(93.0		)
Effect of exchange rate changes on cash		11.1			9.5			3.6
Increase (decrease) in cash and cash equivalents		45.4			113.1			(25.2		)
Cash and cash equivalents at beginning of period		197.8			22.5			47.7
Cash and cash equivalents of HIH at May 1, 2003 (date of consolidation)		—			62.2			—
Cash and cash equivalents at end of period		$	243.2		$	197.8		$	22.5
Supplemental cash flow information:
Cash paid for interest		$	455.6		$	263.9		$	104.4
Cash paid for (received from) income taxes		29.2			8.4			(1.5		)

 

See accompanying notes to consolidated financial statements.

 

6

 

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. GENERAL

 

Description of Business

 

Huntsman Corporation (the “Company” and, unless the context otherwise requires, including its predecessors and subsidiaries) is a global manufacturer and marketer of differentiated and commodity chemicals. The Company produces a wide range of products for a variety of global industries, including the chemical, plastics, automotive, aviation, footwear, paints and coatings, construction, technology, agriculture, healthcare, consumer products, textile, furniture, appliance and packaging industries. The Company operates at facilities located in North America, Europe, Asia, Australia, South America and Africa. The Company’s business is organized into six reportable operating segments: Polyurethanes, Advanced Materials, Performance Products, Pigments, Polymers and Base Chemicals.

 

Certain Definitions

 

In this report, “HMP” refers to HMP Equity Holdings Corporation (a 100% owned subsidiary of the Company) and, unless the context otherwise requires, its subsidiaries, “HLLC” or “Huntsman LLC” refers to Huntsman LLC (a 100% owned subsidiary of HMP) and, unless the context otherwise requires, its subsidiaries, “Huntsman Polymers” refers to Huntsman Polymers Corporation (a 100% owned subsidiary of HLLC) and, unless the context otherwise requires, its subsidiaries, “Huntsman Specialty” refers to Huntsman Specialty Chemicals Corporation (a 100% owned subsidiary of HLLC), “HCCA” refers to Huntsman Chemical Company Australia Pty. Ltd. (a 100% owned indirect subsidiary of HLLC) and, unless the context otherwise requires, its subsidiaries, “HIH” refers to Huntsman International Holdings LLC (a subsidiary, which as of February 16, 2005, is owned 58% by the Company and 42% by Huntsman LLC) and, unless the context otherwise requires, its subsidiaries, “HI” refers to Huntsman International LLC (a 100% owned subsidiary of HIH) and, unless the context otherwise requires, its subsidiaries, “AdMat” refers to Huntsman Advanced Materials LLC (a 90.3% owned indirect subsidiary of the Company) and, unless the context otherwise requires, its subsidiaries, “Vantico” refers to Vantico Group S.A. (a 100% owned subsidiary of AdMat) and, unless the context otherwise requires, its subsidiaries, “Investments Trust” refers to HMP Equity Trust (59% holder of the common stock of the Company), “Huntsman Family Holdings” refers to Huntsman Family Holdings LLC (an owner with MatlinPatterson of Investments Trust), “MatlinPatterson” refers to MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. and MatlinPatterson Global Opportunities Partners B L.P. (collectively, an owner with Huntsman Family Holdings of Investments Trust), and “ICI” refers to Imperial Chemical Industries PLC (a former indirect owner of certain of HIH’s membership interests) and its subsidiaries.

 

Company

 

The Company was formed in 2004 to hold, among other things, the equity interests of Huntsman LLC and AdMat. The formation was between entities under common control. The transfer of the net assets of Huntsman LLC and AdMat was recorded at historical carrying value. The consolidated financial statements of the Company presented herein reflect the financial position, results of operations and cash flows as if Huntsman LLC, AdMat and the Company were combined for all periods presented.

 

On February 16, 2005, the Company completed an initial public offering of 55,681,819 shares of its common stock sold by it and 13,579,546 shares of its common stock sold by a selling stockholder, in each case at a price to the public of $23 per share, and 5,750,000 shares of its 5% mandatory convertible preferred stock sold by it at a price to the public of $50 per share. Each share of preferred stock will be convertible into between approximately 1.77 and approximately 2.17 shares of the Company’s common stock, subject to anti-dilution adjustments, depending upon the trading price of its common stock prior to the third anniversary of the initial public offering. This will result in between approximately 10.2 million and approximately 12.5 million additional shares of the Company’s common stock outstanding upon conversion.

 

The net proceeds to the Company from its initial public offering of common and preferred stock were approximately $1,500 million, substantially all of which are being used to repay outstanding indebtedness of certain of the Company’s subsidiaries, including HMP, Huntsman LLC and HIH, as follows:

 

•                On February 16, 2005, the Company used $41.6 million of net proceeds from the offering to redeem in full the subordinated note due Horizon Ventures LLC.

 

•                On February 28, 2005, the Company used $1,216.7 million of net proceeds from the offering, along with $35.0 million in available cash, to redeem

 

•               all of the outstanding 15% senior secured discount notes due 2008 of HMP (the “HMP Senior Discount Notes”);

 

•               $452.3 million of the outstanding 13.375% senior discount notes due 2009 of HIH (the “HIH Senior Discount Notes”); and

 

•               $159.4 million of the outstanding 11.625% senior secured notes due 2010 of Huntsman LLC (the “HLLC Senior Secured Notes”).

 

7

 

•                On March 14, 2005, the Company expects to use $151.7 million of net cash proceeds from the offering to redeem the remaining outstanding HIH Senior Discount Notes, $78.0 million of the outstanding 11.5% senior notes due 2012 of Huntsman LLC (the “HLLC Senior Notes”) and to pay $7.8 million to HMP warrant holders for a consent fee pursuant to an amendment in connection with the Reorganization Transaction. On March 17, 2005, the Company expects to use $26.8 million of the net cash proceeds from the offering to redeem an additional $24.0 million of the HLLC Senior Notes.

 

In connection with the repayment of indebtedness discussed above, the Company expects to record a loss on early extinguishment of debt in the first quarter of 2005 of approximately $235 million.

 

In connection with the completion of its initial public offering, the Company consummated a reorganization transaction (the “Reorganization Transaction”). In the Reorganization Transaction, the Company’s predecessor, Huntsman Holdings, became its wholly owned subsidiary, and the existing beneficial holders of the common and preferred membership interests of Huntsman Holdings received shares of common stock in exchange for their interests.

 

As a result of the Company’s cash contributions that were used to redeem the HIH Senior Discount Notes and its contribution to HIH of the senior subordinated reset discount notes due 2009 of HIH that were originally issued to ICI (the “HIH Senior Subordinated Discount Notes”), the Company’s ownership interest in HIH increased from 40% to 58%, and, accordingly, Huntsman LLC’s interest in HIH decreased from 60% to 42%.

 

In connection with its initial public offering and as part of the Reorganization Transaction, the Company exercised its right under the outstanding warrants to purchase common stock of HMP (the “HMP Warrants”) to require that all the HMP Warrants and any shares of HMP equity securities issued upon exercise of the HMP Warrants be exchanged for newly issued shares of the Company’s common stock. Under the terms of the HMP Warrants, an aggregate of approximately 16.9 million shares of the Company’s common stock will be issued in exchange for the outstanding HMP Warrants on March 14, 2005.

 

Investments Trust holds approximately 59% of the Company’s common stock. Jon M. Huntsman and Peter R. Huntsman control the voting of the shares of the Company’s common stock held by Investments Trust. However, the shares of common stock held by Investments Trust will not be voted in favor of certain fundamental corporate actions without the consent of MatlinPatterson, through its representatives David J. Matlin or Christopher R. Pechock, and Jon M. Huntsman and Peter R. Huntsman have agreed to cause all of the shares of common stock held by Investments Trust to be voted in favor of the election to the Company’s board of directors of two nominees designated by MatlinPatterson.

 

The Company operates its businesses through three principal operating subsidiaries: Huntsman LLC, HIH and AdMat. Each of the Company’s principal operating subsidiaries is separately financed, its debt is non-recourse to the Company (with the exception of certain limited guarantees executed by the Company in connection with the construction financing of certain manufacturing facilities in China), and the Company has no contractual obligations to fund its respective operations. Moreover, the debt of Huntsman LLC is non-recourse to HIH and AdMat, the debt of HIH is non-recourse to Huntsman LLC and AdMat, and the debt of AdMat is non-recourse to Huntsman LLC and HIH.

 

HLLC Restructuring

 

Prior to September 30, 2002, Huntsman LLC was owned by members of the Huntsman family and by certain affiliated entities. On September 30, 2002, Huntsman LLC and its subsidiary, Huntsman Polymers, completed debt for equity exchanges (the “HLLC Restructuring”). Pursuant to the HLLC Restructuring, the Huntsman family contributed all their equity interests in Huntsman LLC and its subsidiaries, including minority interests acquired from Consolidated Press Holdings Limited (“Consolidated Press”) and the interests described in the second following paragraph, to the Company in exchange for equity interests in the Company. MatlinPatterson and Consolidated Press exchanged approximately $679 million in principal amount of Huntsman LLC’s outstanding subordinated notes and Huntsman Polymers’ outstanding senior notes they held into equity interests in the Company. There was also approximately $84 million in accrued interest that was cancelled as a result of the exchange. The net book value of the $763 million of principal and accrued interest, after considering debt issuance costs, was $753 million. The Company contributed its investment in Huntsman LLC to HMP.

 

In the HLLC Restructuring, the effective cancellation of debt was recorded as a capital contribution because MatlinPatterson and Consolidated Press received equity of the Company in exchange. The fair value of the equity received approximated the carrying value of the debt exchanged. No gain was recorded on the HLLC Restructuring.

 

As mentioned above, on September 30, 2002, the Company effectively acquired the following interests:

 

•                The remaining 20% interest in JK Holdings Corporation and the remaining 20% interest in Huntsman Surfactants Technology Corporation, both previously accounted for as consolidated subsidiaries;

 

•                The remaining 50% interest in Huntsman Chemical Australia Unit Trust (“HCA Trust”) and HCPH Holdings Pty Limited (“HCPH”), formerly accounted for as an investment in unconsolidated affiliates using equity method accounting; and

 

•                The remaining 19.9% interest in Huntsman Specialty Chemicals Holdings Corporation (“HSCHC”).

 

8

 

The Company accounted for the acquisition of the minority interests as an equity contribution with a value of $71.1 million (including cash of $7.9 million and net of debt assumed of $35.3 million).

 

Also related to the HLLC Restructuring, in June 2002, MatlinPatterson entered into an agreement with ICI (the “Option Agreement”). The Option Agreement provided BNAC, Inc. (“BNAC”), then a MatlinPatterson subsidiary, with an option to acquire the ICI subsidiary that held a 30% membership interest in HIH (the “ICI 30% Interest”) on or before May 15, 2003 upon the payment of $180 million plus accrued interest from May 15, 2002, and subject to completion of the purchase of the HIH Senior Subordinated Discount Notes. Concurrently, BNAC paid ICI $160 million to acquire the HIH Senior Subordinated Discount Notes, subject to certain conditions, including the obligation to make an additional payment of $100 million plus accrued interest to ICI. The HIH Senior Subordinated Discount Notes were pledged to ICI as collateral security for such additional payment. BNAC’s sole business purpose was to acquire both the HIH Senior Subordinated Discount Notes and the ICI 30% Interest, and to participate in the HLLC Restructuring.

 

In connection with the HLLC Restructuring, all the shares in BNAC were contributed to HMP. The Company caused BNAC to be merged into HMP. As a result of its merger with BNAC, HMP held the interests formerly held by BNAC in the HIH Senior Subordinated Discount Notes and the option to acquire the subsidiary of ICI that held the ICI 30% Interest. The HIH Senior Subordinated Discount Notes were valued at $273.1 million (including accrued interest of $13.2 million) and the note payable to ICI of $103.5 million (including accrued interest of $3.5 million) was recorded by the Company. The net contribution to HMP of $169.7 million (the $160 million paid by BNAC for the HIH Senior Subordinated Discount Notes plus net accrued interest) was accounted for as an equity contribution.

 

HIH Consolidation Transaction

 

Prior to May 9, 2003, the Company owned, indirectly, approximately 61% of the membership interests of HIH. The Company accounted for its investment in HIH on the equity method due to the significant management participation rights formerly granted to ICI pursuant to the HIH limited liability company agreement. On May 9, 2003, the Company’s indirect subsidiary, HMP, exercised the option under the Option Agreement and purchased the ICI subsidiary that held ICI’s 30% membership interest in HIH, and, at that time, HMP also purchased approximately 9% of the HIH membership interests held by institutional investors (the “HIH Consolidation Transaction”). The total consideration paid in connection with the HIH Consolidation Transaction was approximately $286 million. As a result of the HIH Consolidation Transaction, the Company (indirectly through HMP and its subsidiaries) owns 100% of the HIH membership interests. Accordingly, as of May 1, 2003, HIH is a consolidated subsidiary of the Company and is no longer accounted for on an equity basis.

 

The Company accounted for the acquisition using the purchase method. Accordingly, the results of operation and cash flows of the acquired interests were consolidated with those of the Company beginning in May 2003. During the second quarter of 2004, the Company finalized the allocation of the purchase price. As part of its final purchase price allocation, the Company valued the related pension liabilities, recorded deferred taxes and reclassified certain other amounts resulting in a corresponding increase in property, plant and equipment of approximately $286 million. The following is a summary of the final allocation of the purchase price to assets acquired and liabilities assumed (dollars in millions):

 

Current assets		$	533.6
Property, plant and equipment, net		1,605.9
Noncurrent assets		194.5
Current liabilities		(344.3		)
Long-term debt		(1,427.6		)
Deferred taxes		(145.4		)
Noncurrent liabilities		(130.7		)
Cash paid for acquisition		$	286.0

 

AdMat Acquisition

 

On June 30, 2003, the Company, MatlinPatterson, SISU Capital Ltd. (“SISU”), Huntsman Group Inc., and Morgan Grenfell Private Equity Limited (“MGPE”) completed a restructuring and business combination involving Vantico, whereby ownership of the equity of Vantico was transferred to AdMat in exchange for substantially all of the issued and outstanding Vantico senior notes (“Vantico Senior Notes”) and approximately $165 million of additional equity (the “AdMat Transaction”). The Company entered into the AdMat Transaction in order to expand its liquid epoxy resins product lines and to integrate its polyurethanes products into liquid epoxy resins. In connection with the AdMat Transaction, AdMat issued $250 million aggregate principal amount of its 11% senior secured notes due 2010 (the “AdMat Fixed Rate Notes”) and $100 million aggregate principal amount of its senior secured floating rate notes due 2008 at a discount of 2%, or for $98 million (the “AdMat Floating Rate Notes” and, collectively with the AdMat Fixed Rate Notes, the “AdMat Senior Secured Notes”). Proceeds from the issuance of the AdMat Senior Secured Notes, along with a portion of the additional equity, were used to purchase 100% of the Vantico senior secured credit facilities (the “Vantico Credit Facilities”). Also in connection with the AdMat Transaction, AdMat entered into a $60 million senior secured revolving credit facility (the “AdMat Revolving Credit Facility”). The AdMat Transaction was completed as follows:

 

•                MatlinPatterson and SISU, as holders of the majority of the Vantico Senior Notes, exchanged their Vantico Senior Notes for equity in AdMat Holdings;

 

•                MatlinPatterson and SISU contributed cash and a short-term bridge loan to Vantico, with a total value of approximately $165 million, prior to June 30, 2003 for equity of AdMat Holdings;

 

9

 

•                MGPE exchanged its interest as lender under an existing bridge loan to Vantico for equity in AdMat Holdings;

 

•                AdMat Holdings contributed cash, its interest in the bridge loan and the Vantico Senior Notes, valued at $67.8 million, to AdMat in exchange for equity of AdMat;

 

•                AdMat acquired substantially all of the remaining Vantico Senior Notes for cash of $22.7 million;

 

•                As part of acquisition of Vantico, AdMat was required to purchase 100% of the outstanding Vantico Credit Facilities and other credit facilities, including a revolving credit facility and a restructuring facility;

 

•                AdMat exchanged substantially all the Vantico Senior Notes and its interest under the bridge loan, valued at $67.8 million, for equity in Vantico, acquiring all of the outstanding equity interests in Vantico;

 

•                MatlinPatterson formed AdMat Investment and contributed all of its equity in AdMat Holdings to AdMat Investment in return for preferred equity with a liquidation preference of $513.3 million and all of the common equity of AdMat Investment;

 

•                MatlinPatterson transferred its preferred and common equity in AdMat Investment to the Company, and the Company then contributed the preferred and common equity in AdMat Investment to Huntsman Group Inc. The value assigned to the preferred membership units was equal to the fair value of the net assets acquired as shown below:

 

Cash		$	164.4
Vantico Senior Notes		67.8
MatlinPatterson contributed assets		232.2
Acquisition subsidiary organization costs		(10.1		)
Purchase accounting adjustments		1.5
Minority interest		(29.2		)
Preferred members’ interest as of December 31, 2003		194.4
Purchase accounting adjustment		1.3
Preferred members’ interest at December 31, 2004		$	195.7

 

•                HGI owns the preferred equity of AdMat Investment and contributed the common equity of AdMat Investment to us.

 

The AdMat Transaction has been accounted for as follows:

 

•                For financial reporting purposes, the equity contribution of the AdMat Investment equity of $195.7 million has been allocated to preferred members’ interest.

 

•                For financial reporting purposes, the 9.7% of AdMat Holdings not owned by the Company is shown in the accompanying consolidated balance sheet as “Minority interest in common stock of consolidated subsidiary” of $29.2 million.

 

•                The results of operations of AdMat Investment for the six months ended December 31, 2003 and the year ended December 31, 2004 are included in the consolidated statements of operations.

 

There were no contingent payments or commitments in connection with the AdMat Transaction. The total purchase price of AdMat was derived from the fair value of equity exchanged or debt instruments acquired as follows (dollars in millions):

 

Cash paid for the Vantico Credit Facilities and other credit facilities		$	431.3
Equity issued for Vantico Senior Notes		67.8
Cash paid for Vantico Senior Notes		22.7
Total purchase price of AdMat		$	521.8

 

The Company has completed its allocation of the purchase price to the assets and liabilities of AdMat, which is summarized as follows (dollars in millions):

 

Current assets		$	415.8
Current liabilities		(242.4		)
Property, plant and equipment, net		397.9
Intangible assets, net		37.0
Deferred taxes		(8.6		)
Other noncurrent assets		44.2
Other noncurrent liabilities		(122.1		)
Total purchase price of AdMat		521.8
Minority interest		(29.2		)
Preferred members’ interest		(195.7		)
Net assets acquired		$	296.9

 

The acquired intangible assets represent trademarks and patents which have a weighted-average useful life of approximately 15–30 years. The following table reflects the Company’s results of operations on a pro forma basis as if the business combination of HIH and AdMat had been completed at the beginning of the periods presented utilizing HIH and AdMat’s historical results (dollars in millions, except per unit amounts):

 

		2003			2002
Revenue		$	9,190.1		$	8,012.2
Loss before minority interest and cumulative effect of accounting change		(367.0		)	(359.3		)
Net loss		(395.6		)	(166.8		)
Net loss per common share		(1.79		)	(0.76		)

 

The pro forma information is not necessarily indicative of the operating results that would have occurred had the HIH Consolidation Transaction and the AdMat Transaction been consummated at the beginning of the period presented, nor are they necessarily indicative of future operating results.

 

10

 

The HIH Consolidation Transaction and the AdMat Transaction have resulted in changes in the Company’s operating segments. Prior to the HIH Consolidation Transaction, the Company reported its operations through three principal operating segments. After the HIH Consolidation Transaction but prior to the AdMat Transaction, the Company reported its operations through five segments. The Company now reports its operations through six segments: Polyurethanes, Advanced Materials, Performance Products, Pigments, Polymers and Base Chemicals.

 

On March 19, 2004, the Company acquired MGPE’s 2.1% equity in AdMat Holdings for $7.2 million.

 

As of December 31, 2004, the Company owned approximately 90% of AdMat Holdings, directly and indirectly. The remaining approximately 10% of the equity of AdMat Holdings is owned by unrelated third parties.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements of the Company include the accounts of the Company and its majority wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

 

The Company generates substantially all of its revenues through sales in the open market and long-term supply agreements. The Company recognizes revenue when it is realized or realizable, and earned. Revenue for product sales is recognized when a sales arrangement exists, risk and title to the product transfer to the customer, collectibility is reasonably assured, and pricing is fixed or determinable. This occurs at the time shipment is made.

 

Cost of Goods Sold

 

The Company classifies the costs of manufacturing and distributing its products as cost of goods sold. Manufacturing costs include variable costs, primarily raw materials and energy, and fixed expenses directly associated with production. Manufacturing costs include, among other things, plant site operating costs and overhead, production planning and logistics costs, repair and maintenance costs, plant site purchasing costs, and engineering and technical support costs. Distribution, freight and warehousing costs are also included in cost of goods sold.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and Cash Equivalents

 

The Company considers cash in checking accounts and cash in short-term highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.

 

Securitization of Accounts Receivable

 

HI securitizes certain trade receivables in connection with a revolving accounts receivable securitization program in which HI grants a participating undivided interest in certain of its trade receivables to a qualified off-balance sheet entity. HI retains the servicing rights and a retained interest in the securitized receivables. Losses are recorded on the sale and are based 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. For more information, see “Note 11. Securitization of Accounts Receivable.”

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost determined using last-in first-out, first-in first-out, and average costs methods for different components of inventory.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives or lease term as follows:

 

Buildings and equipment		10–60 years
Plant and equipment		3–25 years
Furniture, fixtures and leasehold improvements		5–20 years

 

Until January 1, 2003, approximately $1.3 billion of the total plant and equipment was depreciated using the straight-line method on a group basis at a 4.7% composite rate. When capital assets representing complete groups of property were disposed of, the difference between the disposal proceeds and net book value was credited or charged to income. When miscellaneous assets were disposed of, the difference between asset costs and salvage value was charged or credited to accumulated depreciation. Effective January 1, 2003, the Company changed its method of accounting for depreciation for the assets previously recorded on a group basis to the component method. Specifically, the net book value of all the assets on January 1, 2003 were allocated to individual components and are being depreciated over their remaining useful lives and gains and losses are recognized when a component is retired. This change encompassed both a change in accounting method and a change in estimate and resulted in a decrease to depreciation expense for the year ended December 31, 2003 by $43.0 million. The change from the group method to the composite method was made in order to reflect more precisely overall depreciation expense based on the lives of individual components rather than overall depreciation expense based on the average lives for large groups of related assets.

 

11

 

Interest expense capitalized as part of plant and equipment was $6.7 million, $5.1 million and $3.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

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 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.

 

Investment in Unconsolidated Affiliates

 

Investments in companies in which the Company exercises significant management influence are accounted for using the equity method.

 

Intangible Assets and Goodwill

 

Intangible assets are stated at cost (fair value at the time of acquisition) and are amortized using the straight-line method over the estimated useful lives or the life of the related agreement as follows:

 

Patents and technology		5–30 years
Trademarks		15–30 years
Licenses and other agreements		5–15 years
Other intangibles		5–15 years

 

Prior to January 2002, the Company amortized goodwill over periods ranging from 10—20 years. Effective January 1, 2002, the Company ceased amortizing goodwill in accordance with SFAS No. 142. All goodwill is recorded within the Base Chemicals segment.

 

Other Noncurrent Assets

 

Other noncurrent assets consist primarily of spare parts, deferred debt issuance costs, employee benefit assets and capitalized turnaround costs. Debt issuance costs are amortized using the interest method over the term of the related debt.

 

Carrying Value of Long-Term Assets

 

Upon the occurrence of a triggering event, 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 are 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. Fair value is generally estimated by discounting estimated future cash flows using a discount rate commensurate with the risks involved. See “Note 10. Restructuring and Plant Closing Costs.”

 

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 secured credit facilities of the Company’s subsidiaries approximates fair value since they bear interest at a variable rate plus an applicable margin. The fair value of the fixed rate and floating rate notes of the Company’s subsidiaries is estimated based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. See “Note 22. Fair Value of Financial Instruments.”

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. The Company evaluates the resulting deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances have been established against the entire U.S. and a material portion of the non-U.S. deferred tax assets due to an uncertainty of realization. Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets.

 

Subsequent to the AdMat Transaction, substantially all non-U.S. operations of AdMat are treated as the Company’s branches for U.S. income tax purposes and are, therefore, subject to both U.S. and non-U.S. income tax. Until the Company has sufficient U.S. taxable income to utilize U.S. foreign tax credits, most AdMat income will continue to be effectively taxed in both the U.S. and in the non-U.S. jurisdictions in which it is earned.

 

For non-U.S. entities that are not treated as branches for U.S. tax purposes, the Company does not provide for income taxes on the undistributed earnings of these subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely. The undistributed earnings of foreign subsidiaries that are deemed to be permanently invested were $30.0 million at December 31, 2004. It is not practicable to determine the unrecognized deferred tax liability on those earnings.

 

Derivatives and Hedging Activities

 

The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated in a fair-value hedge, the changes in the fair value of the derivative and the hedged items are recognized in earnings. If the derivative is designated in a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income and will be recognized in the income statement when the hedged item affects earnings. SFAS No. 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value are recognized in earnings.

 

12

 

Environmental Expenditures

 

Environmental related restoration and remediation costs are recorded as liabilities when site restoration and environmental reme-diation and clean-up obligations are either known or considered probable and the related costs can be reasonably estimated. Other environmental expenditures that are principally maintenance or preventative in nature are recorded when expended and expensed or capitalized as appropriate. See “Note 23. Environmental Matters.”

 

Asset Retirement Obligations

 

The Company accrues for asset retirement obligations, which consist primarily of landfill closure costs in the period in which the obligations are incurred and the Company has sufficient information to estimate a range of potential settlement dates for the obligation. These costs are accrued at estimated fair value. When the related liability is initially recorded, the Company capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company will recognize a gain or loss for any difference between the settlement amount and the liability recorded.

 

Asset retirement obligations consist primarily of landfill capping and closure and post-closure costs. The Company is legally required to perform capping and closure and post-closure care on the landfills and reclamation on the quarries. In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” each landfill the Company recognizes the fair value of a liability for an asset retirement obligation and capitalizes that cost as part of the cost basis of the related asset. The related assets are being depreciated on a straight-line basis over 27 years. The Company has additional asset retirement obligations with indeterminate settlement dates; the fair value of these asset retirement obligations cannot be estimated due to the lack of sufficient information to estimate a range of potential settlement dates for the obligation. An asset retirement obligation related to these assets will be recognized when the Company knows such information.

 

The following table describes changes to the asset retirement obligation liability:

 

		Year Ended
		December 31, 2004
Asset retirement obligation at the beginning of the period		$	—
Liabilities incurred		6.7
Accretion expense		0.5
Liabilities settled		—
Revisions in estimated cash flows		—
Asset retirement obligation at the end of the period		$	7.2

 

If the asset retirement obligation and measurement provisions of SFAS No. 143 had been in effect on January 1, 2002, the aggregate carrying amount of those obligations would have been $5.0 million. The amortization of the asset retirement cost and accretion of asset retirement obligation for each of 2002 and 2003 would have been immaterial.

 

Research and Development

 

Research and development costs are expensed as incurred.

 

Foreign Currency Translation

 

The accounts of the Company’s subsidiaries outside of the United States, except for those operating in highly inflationary economic environments, consider local currency to be the functional currency. Accordingly, assets and liabilities are translated at rates prevailing at the balance sheet date. Revenues, expenses, gains and losses are translated at a weighted average rate for the period. Cumulative translation adjustments are recorded to stockholders’ equity as a component of accumulated other comprehensive income (loss).

 

Subsidiaries that operate in economic environments that are highly inflationary consider the U.S. dollar to be the functional currency and include gains and losses from translation to the U.S. dollar from the local currency in the statement of operations.

 

Transaction gains and losses are recorded in the statement of operations and were a net gain of $118.8 million, a net gain of $67.8 million and a net loss of $3.2 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

Net Income (Loss) Per Share

 

Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Dilutive income (loss) per share reflects potential dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding if the potential dilutive units had been exercised.

 

In connection with the initial public offering of common stock on February 16, 2005, the Company issued 203,604,545 shares of common stock. On March 14, 2005, the Company will issue 16,850,001 shares of common stock in exchange for the HMP Warrants. In addition, the Company issued 749,513 shares of restricted stock in connection with the initial public offering. All share and per share data reflected in these financial statements have been retroactively restated to give effect to the shares issued in connection with the initial public offering and the shares to be issued in connection with the exchange of the HMP Warrants on March 14, 2005.

 

13

 

Basic and diluted loss per share is calculated as follows (in millions, except per unit amounts):

 

		Year Ended December 31,
		2004			2003			2002
Loss from continuing operations before accounting change		$	(219.9	)	$	(317.2	)	$	(191.9	)
Preferred members’ interest dividend		(87.7		)	(74.3		)	(17.8		)
Loss from continuing operations before accounting change available to stockholders		$	(307.6	)	$	(391.5	)	$	(209.7	)
Net loss		$	(227.7	)	$	(319.8	)	$	(22.2	)
Preferred members’ interest dividend		(87.7		)	(74.3		)	(17.8		)
Net loss available to stockholders		$	(315.4	)	$	(394.1	)	$	(40.0	)
Basic and diluted weighted average shares		220.5			220.5			220.5
Basic and diluted loss per share:
Loss from continuing operations before accounting change		$	(1.40	)	$	(1.78	)	$	(0.95	)
Loss from discontinued operations, net of tax		(0.03		)	(0.01		)	—
Cumulative effect of accounting change		—			—			0.77
Net loss		$	(1.43	)	$	(1.79	)	$	(0.18	)

 

Because the Company reported a loss for each year, diluted loss per share excludes 749,513 shares of restricted stock since their effect is antidilutive.

 

Recently Issued Accounting Standards

 

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. FIN No. 46 provides guidance for determining the primary beneficiary for entities with multiple economic entities with multiple economic interests. Transfers to a qualifying special purpose entity are not subject to this interpretation. In December 2003, the FASB issued a complete replacement of FIN 46 (FIN 46R) to clarify certain complexities. The Company adopted this standard on January 1, 2005. The impact of FIN 46R on the Company’s financial statements was not significant.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial statements.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43.” SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The requirements of the standard will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is reviewing SFAS No. 151 to determine the statement’s impact on its consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 addresses the measurement of exchanges of non-monetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this standard are effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company will apply this standard prospectively.

 

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which the employee is required to provide services in exchange for the award. This standard eliminates the alternative to use the intrinsic value method of accounting for share-based payments as previously provided in APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This standard is effective for the Company beginning in January 2006. The Company is reviewing SFAS No. 123R to determine the statement’s impact on its consolidated financial statements.

 

3. INVENTORIES

 

Inventories consist of the following (dollars in millions):

 

		December 31,
		2004			2003
Raw materials and supplies		$	332.0		$	283.6
Work in progress		90.1			32.7
Finished goods		924.1			749.5
Total		1,346.2			1,065.8
LIFO reserves		(91.9		)	(15.5		)
Lower of cost or market reserves		(0.4		)	(11.0		)
Net		$	1,253.9		$	1,039.3

 

14