10-Q 1 a2087218z10-q.txt 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 1-9988 HUNTSMAN POLYMERS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2104131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Huntsman Way Salt Lake City, Utah 84108 (801) 584-5700 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO CORPORATE ISSUERS: On August 14, 2002, 1,000 shares of the Common Stock, par value $0.01 per share, of Huntsman Polymers Corporation were outstanding. As of such date, all such shares were held by Huntsman Polymers Holding Corporation, an affiliate of Huntsman Polymers Corporation. There is no established trading market for the shares of Huntsman Polymers Corporation. ================================================================================ HUNTSMAN POLYMERS CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 TABLE OF CONTENTS

Some of the statements contained in this report are forward-looking in nature. In some cases, you can identify forward-looking statements by terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative of such terms or other comparable terminology, or by discussions of strategy. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, and, consequently, our actual results may differ materially from those projected by any forward-looking statements. Some of those risks and uncertainties are discussed below in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations-Cautionary Statement for Forward-Looking Information" and elsewhere in this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements 1 HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements 2 HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (UNAUDITED) (Dollars and Shares In Thousands)

See accompanying notes to consolidated financial statements 3 HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements 4 HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION DESCRIPTION OF BUSINESS Huntsman Polymers Corporation and its subsidiaries (collectively, the "Company") manufacture products used in a wide variety of industrial and consumer-related applications. The Company's principal products are polyethylene (including low density polyethylene ("LDPE") and linear low density polyethylene ("LLDPE")), polypropylene and amorphous polyalphaolefin ("APAO"). The Company is a wholly-owned subsidiary of Huntsman Polymers Holding Corporation ("Parent" or "HPHC"). Huntsman Corporation owns all of the stock of HPHC BASIS OF PRESENTATION The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classifications of recorded amounts of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern depends on a number of significant factors, including, but not limited to, the restructuring of Huntsman Corporation's debt, the restructuring of the Company's 11 3/4% Senior Notes due 2004 (the "Senior Notes"), obtaining additional debt and/or equity financing and generating sufficient cash flows from operations to meet its obligations. As of June 30, 2002, the Company's current liabilities exceeded current assets by $505.1 million, due primarily to the classification of all of its outstanding debt as a current liability as discussed below. The Company has sustained net losses in each of the prior three years and its stockholder's deficit is $150.6 million. Historically, the Company's primary source of funding has been the intercompany loan agreement (the "Intercompany Loan Agreement") from a subsidiary of Huntsman Corporation, the ultimate parent of the Company. As of June 30, 2002, the Company has classified the outstanding borrowings under the Intercompany Loan Agreement of $280.5 million as a current liability because repayment may be accelerated by Huntsman Corporation's lenders. On December 1, 2001 and June 1, 2002, the Company failed to make interest payments on its $174.9 million of Senior Notes. As a result of the failure to pay interest as scheduled, the debt may be accelerated and has also been classified as a current liability. As of June 30, 2002, Huntsman Corporation had borrowings of approximately $1.5 billion outstanding under its senior secured credit facilities. As collateral for its obligations under its bank credit facilities, Huntsman Corporation has pledged its 100% ownership interest in HPHC, and HPHC has pledged its 100% ownership interest in the Company. In addition, the Company and HPHC are guarantors of Huntsman Corporation's obligations under its bank credit facilities. The Company has granted security interests and liens on substantially all of its assets to secure its obligations under its guaranty to Huntsman Corporation's bank lenders, subject to certain limitations provided for in the indenture governing the Senior Notes (the "Indenture"). The guaranty provides that the Company's maximum liability thereunder at any time will not exceed the amount permitted to exist at such time under the Indenture. At this time, because of the restrictions on incurring indebtedness and making investments contained in the Indenture, the Company does not have any liability under the guaranty. 5 During 2001, Huntsman Corporation was not in compliance with certain financial covenants contained in its bank credit facilities. As a result, Huntsman Corporation entered into discussions with its bank lenders regarding a comprehensive restructuring of its debt. Effective as of December 20, 2001, Huntsman Corporation and its bank lenders entered into forbearance, waiver and amendment agreements (collectively, as amended, the "Amendment Agreement"). Under the Amendment Agreement, substantially all existing defaults and some future defaults were waived and the bank lenders agreed to forbear exercising certain rights and remedies until March 15, 2002 (the "Forbearance Period"). The Forbearance Period has been extended until October 15, 2002. In addition, in connection with extending the Forbearance Period, Huntsman Corporation's bank lenders have agreed to postpone an amortization payment due under one of its credit facilities to October 15, 2002. Matlin Patterson Global Opportunities Partners L.P. ("GOP") (formerly known as CSFB Global Opportunities Partners, L.P.) and Consolidated Press Holdings Limited ("CPH") have collectively purchased, in the aggregate, approximately 88% of the outstanding Senior Notes and Senior Subordinated Notes due 2007 of Huntsman Corporation (the "HC Subordinated Notes"). In June 2002, Huntsman Corporation reached agreements with GOP and CPH to restructure its debt. On July 15, 2002, Huntsman Corporation solicited the consent of its existing bank lenders seeking, among other things, their consent to a plan to restructure Huntsman Corporation's debt (the "Proposed Restructuring"), without the intervention of a bankruptcy court, that would involve the following: - Members of the Huntsman family who own equity interests in Huntsman Corporation and any of its subsidiaries, together with certain affiliated entities that own equity interests, (collectively, the "Huntsman Family") would contribute all their equity interests in Huntsman Corporation and its subsidiaries to a new entity ("Huntsman Holdings") in exchange for equity interests in Huntsman Holdings. - As of June 30, 2002, GOP and CPH held, in the aggregate, $746 million principal and accrued interest of the HC Subordinated Notes and the Senior Notes, of which $155 million was of the Senior Notes. Subject to certain conditions, GOP and CPH have agreed to convert these notes, directly or indirectly, into shares of Huntsman Corporation. These notes would then be canceled. The Huntsman Corporation shares received would be exchanged, directly or indirectly, for equity interests in Huntsman Holdings. - Amendments to Huntsman Corporation's current bank credit facilities which would be comprised of the following: - A term loan facility maturing in 2007 which would be secured by a second lien on substantially all the assets of Huntsman Corporation and its domestic restricted subsidiaries; and - A $275 million priority revolving credit facility maturing in 2006 (the "Priority Facility"). Subject to certain conditions, Deutsche Bank Securities Inc. and Deutsche Bank Trust Company Americas have agreed to underwrite the Priority Facility. The Priority Facility would replace Huntsman Corporation's existing $150 million supplemental accounts receivable facility (the "HC Supplemental Credit Agreement"), fund certain payments at closing and be available for general corporate purposes. The Priority Facility would be limited by a borrowing base consisting of eligible accounts receivable and inventory and would have a first lien on substantially all the assets of Huntsman Corporation and its domestic restricted subsidiaries. - The reinstatement of the approximately $59 million in principal amount of HC Subordinated Notes and approximately $37 million in principal amount of Senior Notes not held by GOP and CPH. The non-payment of interest defaults on these notes would be cured by paying 6 approximately $5 million of interest that has accrued on the Senior Notes since December 2001 and approximately $5 million of interest that has accrued on the HC Subordinated Notes since January 2002. - Pursuant to previously adopted amendments to the indentures governing the HC Subordinated Notes and the Senior Notes which will become effective upon completion of the Proposed Restructuring, most of the restrictive covenants in these indentures would be eliminated. This would permit, among other things, the following: - a subsidiary of Huntsman Corporation to pledge all of the equity of Huntsman Specialty Chemicals Corporation ("Huntsman Specialty"), and enter into a senior secured guaranty in favor of Huntsman Corporation's bank lenders; Huntsman Specialty to pledge a 30% membership interest stake that it holds in Huntsman International Holdings LLC and enter into a senior secured guaranty in favor of the bank lenders. - the Company to guarantee, on a full senior secured basis, Huntsman Corporation's bank debt without the senior secured debt limitations formerly contained in the Indenture. The Proposed Restructuring has been designed to avoid a "change of control" under the indentures governing the HC Subordinated Notes or the Senior Notes. Huntsman Corporation is in the process of seeking the consent of all of its bank lenders (the "100% consent") which is necessary to achieve the Proposed Restructuring on an out-of-court basis and is confident that it will obtain the 100% Consent from its bank lenders before October 15, 2002. However, there can be no assurance that Huntsman Corporation will obtain the 100% Consent. In the event Huntsman Corporation does not obtain the 100% Consent, it may seek to achieve the Proposed Restructuring by filing a prepackaged plan of reorganization (the "Plan") in a Chapter 11 proceeding under the United States Bankruptcy Code ("Chapter 11 Cases"). Pursuant to its agreement with GOP, Huntsman Corporation is required to file Chapter 11 Cases on or after October 15, 2002 if it has not received the 100% Consent to the Proposed Restructuring. If the Proposed Restore during is effected, Huntsman Corporation's bank credit facilities would be restructured as specified above. The key changes to the existing bank credit facilities would be as follows: - the existing loans would be continued as a $938 million Term Loan A and a $450 million Term Loan B, with the latter anticipated to be refinanced with a high-yield debt financing on a post-closing basis, - the term loans would be extended to March 31, 2007, - the amortization schedule would be modified, - the interest rate would be increased, - the financial covenants would be modified, and - the bank lenders would be granted additional credit support, including additional guaranties and collateral. In connection with the Proposed Restructuring, the shareholders of Huntsman Corporation may form a Delaware corporation ("Equity Holdings") to hold all the outstanding stock of Huntsman Corporation (and Huntsman Corporation may be converted into a limited liability company). Equity Holdings would then guarantee the HC Subordinated Notes held by GOP and CPH. Thereafter, for federal income tax planning reasons, Equity Holdings may commence a proceeding in the Delaware Court of Chancery 7 under Section 102(b)(2) of the Delaware General Corporation Law. The action would seek the court's sanction of Equity Holdings' compromise of its guarantee obligations in the manner contemplated by certain agreements among Huntsman Corporation, GOP and CPH. There can be no assurance that Equity Holdings will undertake such a proceeding or that the court would grant Equity Holdings' application. If filed, such a procedding in the Delaware Court of Chancery will not affect Huntsman Corporation's obligations to its creditors, other than GOP and CHP. Cunsummation of the Proposed Restructuring is not conditioned on the initiation of any such proceeding or upon the court granting any application therewith. The Company currently expects that cash generated by its business will provide it with sufficient liquidity to allow it to continue its operations for the near term. The Company anticipates that it will continue to fund its operations in this manner until Huntsman Corporation completes the Proposed Restructuring out-of-court or until Huntsman Corporation files the Chapter 11 Cases. Accordingly, the Company intends to meet its operating and capital needs in 2002 through a combination of: - improved operating performance resulting from improved industry conditions and the reduction of fixed costs in connection with our operational restructuring; - borrowings under the Intercompany Loan Agreement, to the extent permitted; - sales of inventory to Huntsman Corporation as permitted under the HC Supplemental Credit Agreement and the Amendment Agreement; and - targeted reductions in working capital and reduced capital expenditures. There can be no assurance that Huntsman Corporation will be able to successfully complete the Proposed Restructuring. INTERIM FINANCIAL STATEMENTS The accompanying consolidated financial statements of the Company are unaudited. However, in management's opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the periods shown, have been made. Results for interim periods are not necessarily indicative of those to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Company's annual report on form 10-K for the year ended December 31, 2001. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 For purposes of the statements of cash flows, the Company considers cash in checking accounts and cash in short-term highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. 8 INVENTORIES Inventories are stated at the lower of cost or market, with cost determined using the average cost method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided utilizing the straight line method over the estimated useful lives of the assets. Plant and equipment have useful lives ranging from 3 to 15 years, and buildings have useful lives ranging from 15 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 other income. INTANGIBLE ASSETS Intangible assets are stated at cost (fair value at the time of acquisition) and are amortized using the straight-line method over the estimated useful lives or over the life of the related agreement, ranging from five to fifteen years. OTHER ASSETS Other assets consist primarily of spare parts, capitalized loan fees and turnaround costs. Capitalized loan fees are amortized using the straight-line method over the term of the related debt, ranging from five to ten years. Periodic maintenance and repairs applicable to major units of manufacturing facilities are accounted for on the prepaid basis by capitalizing the costs of the turnaround and amortizing the costs over the estimated period until the next turnaround. 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. For more information, see "Note 9-Restructuring Costs and Impairment Charges." DERIVATIVES AND HEDGING ACTIVITIES The Company has no financial instruments or other contracts that are derivatives. 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. OTHER LONG-TERM LIABILITIES Other long-term liabilities include accrued pension and other post-retirement benefits, environmental reserves, insurance reserves and other liabilities. 9 FOREIGN CURRENCY TRANSLATION The Company has no subsidiaries outside the United States. REVENUE RECOGNITION The Company generates revenue through sales in the open market, raw material conversion agreements and long-term supply contracts. The Company recognizes revenue when it is realized or realizable and earned, which is generally upon shipment of product in fulfillment of a customer order. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. ENVIRONMENTAL EXPENDITURES Environmental related restoration and remediation costs and governmental assessments are recorded as liabilities and expensed when site restoration and environmental remediation, clean-up and assessment obligations are either known or considered probable and the related costs can be reasonably estimated. Other environmental expenditures, which are principally maintenance or preventative in nature, are recorded when expended and are expensed or capitalized as appropriate. RECLASSIFICATIONS Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current presentation. RECENT FINANCIAL ACCOUNTING STANDARDS On January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS." SFAS No. 142 changes the accounting for goodwill and intangible assets with indefinite lives from an amortization method to an impairment-only approach. With the adoption of SFAS No. 142, the Company reassessed the useful lives of all acquired intangible assets. Based on the assessment, no adjustments were made to the amortization period of intangible assets. As discussed below in "Note 9-Restructuring Costs and Impairment Charges," the Company recorded an impairment charge in 2001 which reduced recorded goodwill to zero. As a result, the adoption of SFAS No. 142 had no impact on the Company's financial statements. The pro forma effect on net loss, assuming the change in this accounting principle was applied retroactively to January 1, 2001, would not be significant. In October 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." This statement establishes a single accounting model for the impairment or disposal of long-lived assets. As required by SFAS No. 144, the Company adopted this new accounting standard on January 1, 2002. Adoption of this pronouncement did not have a material effect on the Company's financial statements. 10 In August 2001, FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. As required by SFAS No. 143, the Company will adopt this new accounting standard on January 1, 2003. The Company is currently evaluating the effects of adopting this pronouncement. In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this statement is required effective January 1, 2003. The Company has not yet completed its evaluation of the impact of adopting this statement. 3. INVENTORIES Inventories consist of the following (dollars in thousands):

4. PROPERTY, PLANT AND EQUIPMENT The cost and accumulated depreciation of property, plant and equipment are as follows (dollars in thousands):

5. INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, are (dollars in thousands):

In the third quarter of 2001, goodwill was written off as part of plant closing and restructuring costs. For additional information, see "Note 9-Restructuring Costs and Impairment Charges" below. Estimated future amortization expense for intangible assets through December 31, 2006 is as follows (dollars in millions):

11 6. LONG-TERM DEBT Long-term debt consists of the following (dollars in thousands):

INTERCOMPANY BORROWING As of June 30, 2002, the Company owed $280.5 million under the Intercompany Loan Agreement that it maintains with Huntsman Group Holdings Finance Corporation ("HGHFC"), a subsidiary of Huntsman Corporation. The intercompany loans accrue interest at the prime rate (4.75% at June 30, 2002) plus a margin of 0.75% and are payable upon demand. The Intercompany Loan Agreement is the Company's principal source of financing. The Company's ability to borrow under the Intercompany Loan Agreement is subject to the limitations imposed by the Indenture. In addition, under Huntsman Corporation's bank credit arrangements, the Company's ability to obtain additional financing under the Intercompany Loan Agreement has been significantly limited. CAPITAL LEASE On March 8, 1997, the Company entered into a Capital Lease Agreement with the Estherwood Corporation to finance the construction of the Company's flexible polyolefins ("FPO") facility at Odessa, Texas. On August 27, 1997, the Capital Lease Agreement was amended and Estherwood Corporation assigned all of its rights under the agreement to HGHFC. The principal economic terms of the Capital Lease Agreement were not altered. Interest accrues on the unpaid lease amount ($50 million at June 30, 2002) at the prime rate plus an applicable margin (0.5% to 2.0%) or at a Eurocurrency rate (as defined in the Capital Lease Agreement) plus an applicable margin (1.5% to 3.0%). On September 30, 2002, the maturity date of the Capital Lease Agreement, the Company is obligated to pay the unpaid lease amount as well as all interest owed on that amount. The Company has the option at the end of the lease period to acquire the facility for a nominal amount. The Capital Lease Agreement is secured by all of the fixed assets associated with the FPO facility, which facility has been written off by the Company. On December 12, 2001, the Capital Lease Agreement was amended and HGHFC assigned all of its rights under the agreement to Huntsman Corporation. The principal economic terms of the Capital Lease Agreement were not altered. Although there can be no assurance that the Company will obtain an extension, the Company is currently in discussions with Huntsman Corporation concerning an extension of the maturity date of the Capital Lease Agreement. SENIOR NOTES The 11 3/4% Senior Notes due 2004 rank PARI PASSU in right of payment with all senior unsecured borrowings of the Company, including a portion of the borrowings under the Intercompany Loan Agreement. The Senior Notes rank senior in right of payment to any subordinated indebtedness of the Company. Interest is payable on the Senior Notes semiannually on June 1 and December 1 at an annual interest rate of 11 3/4%. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Senior Notes. 12 The Indenture governing the Senior Notes contains certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness and to repurchase subordinated indebtedness, incur or suffer to exist certain liens, pay dividends, make certain investments, sell significant fixed assets and engage in mergers and consolidations. As discussed above in "Note 1-Organization and Basis of Presentation," concurrent with the completion of the Proposed Restructuring, GOP has consented to an amendment to the Indenture that would eliminate virtually all restrictive covenants contained in the Indenture. On December 1, 2001 and June 1, 2002, the Company failed to make interest payments on the Senior Notes. As a result of the failure to make interest payments, the debt may be accelerated and has been classified as a current liability. 7. 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 2 to 6 years and the purchase price is generally based on market prices. On August 30, 2001, following arbitration and court proceedings and mediation, the Company settled a dispute with S&B Engineers and Constructors, Ltd. ("S&B") for a total amount of $22.1 million. Under the terms of the settlement agreement, the Company paid S&B $10.0 million on September 14, 2001. In accordance with agreements with its lenders, Huntsman Corporation paid S&B $6.1 million on December 31, 2001, taking a partial assignment of the mechanics' lien securing the Company's obligations to S&B. On April 2, 2002, Huntsman Corporation paid S&B $6.3 million, the remaining portion under the settlement agreement including interest, and at that time took a complete assignment of the mechanic's lien. The Company currently owes Huntsman Corporation $12.4 million with respect to this matter, which is secured by such mechanics' lien that covers the Company's polypropylene facility. This amount is shown as an advance from affiliates. The Company is also a party to various lawsuits arising in the ordinary course of business and does not believe that the outcome of any of these lawsuits will have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company continually reviews its estimates of potential contingent liabilities. However, no assurance can be given that all potential liabilities arising out of the Company's present or past operations have been identified or fully assessed or that the amounts that might be required to resolve such matters will not be significant to the Company. 8. ENVIRONMENTAL MATTERS GENERAL The operation of chemical manufacturing plants, the distribution of chemical products and the related production of by-products and wastes, entail risk of adverse environmental effects. The Company is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, the protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. In the ordinary course of business, the Company is subject continually to environmental inspections and monitoring by governmental enforcement authorities. The Company may incur substantial costs, including fines, damages and criminal or civil sanctions, or experience interruptions in its operations for actual or alleged violations arising under any environmental laws. In addition, production facilities require operating permits that are subject to renewal, modification and, in some circumstances, revocation. Violations of permit requirements can also result in restrictions or prohibitions on plant operations, substantial fines and civil or criminal sanctions. The Company's operations involve the generation, handling, transportation, use and disposal of numerous hazardous substances. Changes in regulations regarding the generation, handling, transportation, use and disposal of hazardous substances could inhibit or interrupt operations and have a material adverse effect on business. From time to time, these operations may result in 13 violations under environmental laws, including spills or other releases of hazardous substances to the environment. In the event of a significant incident, the Company could incur material costs to address and remediate the incident. In addition, following any such incident, the Company may incur higher costs to implement measures to prevent future incidents. Given the nature of the Company's business, there can be no assurance that violations of environmental laws will not result in restrictions imposed on the Company's operating activities, substantial fines, penalties, damages or other costs. In addition, potentially significant expenditures could be necessary in order to comply with existing or future environmental laws. The Company has established financial reserves relating to environmental restoration and remediation programs, which the Company believes are sufficient for known requirements. Liabilities are recorded when site restoration and environmental remediation and clean-up obligations are either known or considered probable and can be reasonably estimated. These liabilities are based upon all available facts, existing technology, past experience, and cost-sharing arrangements (as to which, the Company considers the viability of other parties). A total of $6.7 million has been accrued related to environmental matters as of June 30, 2002. The Company does not anticipate that any future costs, in excess of those that have been accrued by the Company, will be material to results of operations or financial position as a result of compliance with current environmental laws and regulations. The Company may also incur future costs for capital improvements and general compliance under environmental laws, including costs to acquire, maintain and repair pollution control equipment. Environmental capital spending is estimated at $2.9 million for 2002. Generally, the Company expects to incur between $1.5 million and $6.0 million annually in capital spending to address the requirements of environmental laws. However, the Company cannot ensure that material capital expenditures beyond those currently anticipated will not be required under environmental laws. The Company carries pollution legal liability insurance to address many potential environmental liabilities from its operations. Such coverage is subject to customary terms, limits, exclusions and deductibles. The Company also carries pollution legal liability and closure and post-closure insurance on certain facilities at its Odessa, Texas facility, which are regulated by the Texas Natural Resources Conservation Commission (the "TNRCC"). This insurance satisfies the requirements of the TNRCC governing the operation of these facilities. CERCLA MATTERS The Company, along with many other companies, has been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), in connection with past disposal of waste at certain sites. The Company believes that its financial reserves are sufficient for its known requirements. TNRCC FLARE INVESTIGATION By letter dated January 28, 1999, the TNRCC notified the Company of allegations that the Company's olefins plant may have violated its air permit by emitting visible smoke from its process/emergency flare in late December 1998 and early January 1999. During that period, the olefins plant was in the midst of start up after extensive construction. As required by Texas law, the Company had given prior notice to the TNRCC of the start up and that excess emissions might result. The TNRCC investigated this matter after receiving numerous complaints from residents of a subdivision near the Odessa facility. In addition, since January 1999, the Company's Odessa facility experienced upsets on several occasions that led to flaring or excess emissions which the TNRCC claims were in violation of state law. The TNRCC sought penalties for all alleged violations. On January 30, 2002, the claims asserted by the TNRCC were settled in an agreed order. In the order, the Company denied any liability, but agreed to a $140,000 penalty, $70,000 of which was paid to the State and $70,000 of which was paid to the City of Odessa to fund a supplemental environmental project. 14 As a result of the start-up flaring during late December 1998 and early January 1999, certain complaining citizens hired counsel to consider bringing legal action to recover damages alleged to have been caused by that flaring. Five such actions have been filed. Three of the filed cases, involving over 4,200 plaintiffs, have been settled. Many of those plaintiffs have now filed an action against certain of the Company's contractors and design engineers, one of whom has sought indemnity against the Company. The remaining filed cases involve a total of about 192 claimants. Although counsel to the Company believes that it has strong defenses to the remaining suits, it is too early to predict the outcome of such litigation. ADDITIONAL ENVIRONMENTAL ISSUES As a result of a third-party environmental audit of the Company's Odessa operations starting in November 2000, the Company voluntarily disclosed to the United States Environmental Protection Agency ("EPA") and the TNRCC certain potential violations of environmental law. EPA and the TNRCC have evaluated those disclosures to determine whether the disclosures qualify for penalty mitigation under federal policy and state law. EPA has proposed a civil penalty of about $8,500. As a result of an inspection of the Odessa facility in April 1997 and follow-up information requests from EPA, an enforcement action alleging Clean Air Act violations has been threatened by the United States Department of Justice. A tentative settlement involving civil penalties in the amount of $475,000 for this case in addition to the $8,500 discussed in the preceding paragraph has been tentatively reached subject to final review by the Company and the negotiation of final settlement language acceptable to all parties. 9. RESTRUCTURING COSTS AND IMPAIRMENT CHARGES The Company incurred restructuring costs and impairment charges of $525.4 million during the second, third and fourth quarters of 2001. The restructuring costs were recorded in two phases. - Phase I, which resulted in a charge of $29.8 million during the second quarter of 2001, was the result of the closure of the Company's styrene production unit and the concurrent cost restructuring and elimination initiative, both of which were announced on April 23, 2001. The program included a workforce reduction at the Odessa facility of 97 regular employees. Approximately $5.2 million was accrued for termination benefits, all of which had been paid as of September 30, 2001. Additionally, decommissioning costs of $2.6 million for the styrene unit, $4.8 million in non-cancelable lease charges, an $8.9 million write-down of the styrene unit fixed assets and a $7.6 million write-off of unusable material and supplies inventory were recorded in connection with Phase I. Phase I was substantially completed by the end of the third quarter of 2001. - Phase II of the restructuring was announced by the Company on July 31, 2001 and resulted in a total charge of $110.2 million in the third quarter of 2001. This phase encompassed the closure of the polypropylene Line 1 unit (representing 30% of total polypropylene production at the time), the write-off of the FPO unit which had been under evaluation for alternative product use, and the further elimination of redundant costs in the maintenance, technical services and overhead cost structure. This program has resulted in the discharge of 93 regular employees at the Odessa facility. Approximately $5.9 million was accrued for termination benefits. Additionally, $68.7 million related to the write-off of fixed assets, $33.8 million related to the write-off of goodwill, $0.2 million for the polypropylene unit decommissioning, $0.6 million in non-cancelable lease charges and $1.0 million related to the write-off of unusable supplies inventory were recorded in connection with Phase II. Phase II is substantially complete. Under SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," companies must review the carrying amount of long-lived assets and certain 15 intangibles, including related goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. The Company recorded an asset impairment charge of $385.4 million in the fourth quarter of 2001 related to its property, plant and equipment. During 2001, the Company experienced significant declines in sales prices and operating cash flow. The declining results were primarily due to lower sales prices, coupled with difficulty in passing on raw material and energy costs to customers. The lower sales prices were primarily due to decreased demand in industrial and consumer related applications, which resulted in increased competition and reduced operating rates. The lower operating rates had a significant effect on margins, and margins were not expected to improve until after 2003 unless industry-wide plant capacity declines. Additionally, opportunities for new applications of the Company's products did not materialize at a rate necessary to offset the declining margins on current products. In early October 2001, as a result of the above factors and as part of the Company's restructuring efforts, the Company performed a review of its remaining polyethylene, polypropylene and APAO businesses. During this time, Huntsman Corporation engaged a financial advisor and investment banker to assist it and its domestic, restricted subsidiaries in identifying and exploring strategic alternatives, including developing out-of-court or court-sanctioned financial restructuring plans. In February 2002, the financial advisor provided a valuation report to the Company's management which indicated an impairment of the Company's assets. As a result, in the fourth quarter of 2001, the Company assessed certain fixed assets for impairment as required under SFAS No. 121. The Company performed an evaluation of the recoverability of its assets as described in SFAS No. 121. Management concluded from the results of this evaluation that a significant impairment of long-lived assets had occurred. An impairment charge was required because the estimated fair value of these assets was less than their carrying value. The fair value of the Company's net assets was determined by discounting estimated future cash flows using a discount rate commensurate with the risks involved. Fair value estimates, by their very nature, rely upon considerable management judgment; accordingly, actual results may vary significantly from the Company's estimates. The restructuring costs and impairment charges were recorded against the following accounts: $463.0 million against property, plant and equipment; $33.8 million against goodwill; $5.4 million against inventories; and $23.2 million against cash and accrued liabilities. A summary of the combined Phase I and II costs follows (dollars in thousands):

Cash expenditures relating to workforce reductions and plant decommissioning will be substantially completed by the end of the third quarter of 2002. Cash outlays related to non-cancelable railcar leases will be completed by 2008. The Company currently expects pretax savings in operating expenses will approximate $34 million on an annualized basis by December 2003. 10. RECENT EVENTS FAILURE TO PAY INTEREST We did not make the December 1, 2001 and June 1, 2002 interest payments due on our 11 3/4% Senior Notes due 2004 (the "Senior Notes"). Also, our ultimate parent corporation, Huntsman Corporation, did not make the January 1 and July 1, 2002 interest payments due on its Senior Subordinated Notes due 2007 (the "HC Subordinated Notes"). The failure to make these interest payments within 30 days of the respective due dates constituted an event of default under the Senior Notes and the HC Subordinated Notes. For more information, see "--Liquidity and Capital Resources--Debt" and "--Financial Restructuring" below. PROPOSED RESTRUCTURING OF HUNTSMAN CORPORATION AND THE COMPANY During 2001, Huntsman Corporation was not in compliance with certain financial covenants contained in its bank credit facilities. As a result, Huntsman Corporation entered into discussions with its bank lenders regarding a comprehensive restructuring of its debt. Effective as of December 20, 2001, Huntsman Corporation and its bank lenders entered into forbearance, waiver and amendment agreements (collectively, as amended, the "Amendment Agreement"). Under the Amendment Agreement, substantially all existing defaults and some future defaults were waived and the bank lenders agreed to forbear exercising certain rights and remedies until March 15, 2002 (the "Forbearance Period"). The Forbearance Period has been extended until October 15, 2002. In addition, in connection with extending the Forbearance Period, Huntsman Corporation's bank lenders have agreed to postpone an amortization payment due under one of its bank credit facilities to October 15, 2002. Huntsman Corporation is in the process of seeking to complete the proposed restructuring described in "--Liquidity and Capital Resources--Financial Restructuring" below on an out-of-court basis before October 15, 2002. This will require the consent of all of Huntsman Corporation's bank lenders (the "100% Consent"). As of August 14, 2002, significantly more than a majority of the bank lenders have approved the terms of the out-of-court restructuring. Huntsman Corporation is hopeful that it will complete the restructuring on an out-of-court basis but there can be no assurance that Huntsman Corporation will obtain the 100% Consent and be able to complete the proposed restructuring on an out-of-court basis. If Huntsman Corporation is unable to secure the 100% Consent, Huntsman Corporation may seek to achieve the proposed restructuring by filing a prepackaged plan of reorganization in a Chapter 11 proceeding under the United States Bankruptcy Code. Huntsman Corporation must satisfy certain statutory requirements in order for its prepackaged plan of reorganization to be confirmed. Huntsman Corporation believes that, as of August 14, 2002, it has sufficient votes from its bank lenders to permit it to seek confirmation of a prepackaged plan of reorganization should it not obtain the 100% Consent. However, there can be no assurance that the prepackaged plan of reorganization would be confirmed. GOP and CPH have collectively purchased, in the aggregate, approximately 88% of the outstanding HC Subordinated Notes and Senior Notes. In June 2002, Huntsman Corporation reached agreements with GOP and CPH to restructure its debt. In addition, pursuant to its agreement with GOP, Huntsman Corporation could be required by GOP to file a Chapter 11 proceeding under the United States Bankruptcy Code on or after October 15, 2002 if it has not received the 100% Consent to the out-of-court restructuring and it has obtained irrevocable votes in favor of the prepackaged plan of reorganization from at least two-thirds in principal amount and a majority of its bank lenders. Huntsman believes that, as of August 14, 2002, it has obtained these votes. For more information, see "--Liquidity and Capital Resources--Debt" and "--Financial Restructuring" below. ISSUANCE OF PATENT TO COMPETITOR On April 2, 2002, a United States patent was issued to one of our competitors. This patent contains claims to certain processes for manufacturing copolymers. We, together with our counsel, have evaluated the scope, validity and enforceability of this patent, and we do not believe the issuance of this patent will have a material impact on our business. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Huntsman Polymers Corporation and its subsidiaries (collectively, the "Company," "our," "us" or "we") manufacture chemical products used in a wide variety of industrial and consumer-related applications. Our principal products are polyethylene (including low density polyethylene ("LDPE") and linear low density polyethylene ("LLDPE")), polypropylene and amorphous polyalphaolefin ("APAO"). The markets in which we compete are generally cyclical markets that are sensitive to relative changes in supply and demand as well as general economic conditions. Historically, these products have experienced alternating periods of tight supply, rising prices and increased profits followed by periods of large capacity additions resulting in oversupply, lower selling prices and lower profits. Certain of our products, such as APAO, are generally less sensitive to economic cycles. In addition, our polyethylene and polypropylene businesses are geared toward higher value-added, specialty grades, which are less sensitive to cyclical swings experienced by commodity grades. Our sales of polyethylene, polypropylene and APAO are made to Huntsman Corporation. These products are sold at market prices with payment terms of net 30 days from the end of the month. This arrangement allows receivables from the resale by Huntsman Corporation of these products to be included in its supplemental accounts receivable credit facility. The principal raw materials that we purchase for the polyethylene, polypropylene and APAO businesses consist of ethane and propane extracted from natural gas liquids and propylene (all of which are referred to as "feedstocks"). We believe that the feedstock supplies available in Odessa, Texas are currently adequate for our requirements. RECENT EVENTS FAILURE TO PAY INTEREST We did not make the December 1, 2001 and June 1, 2002 interest payments due on our 11 3/4% Senior Notes due 2004 (the "Senior Notes"). Also, our ultimate parent corporation, Huntsman Corporation, did not make the January 1 and July 1, 2002 interest payments due on its Senior Subordinated Notes due 2007 (the "HC Subordinated Notes"). The failure to make these interest payments within 30 days of the respective due dates constituted an event of default under the Senior Notes and the HC Subordinated Notes. For more information, see "-Liquidity and Capital Resources-Debt" and "-Financial Restructuring" below. PROPOSED RESTRUCTURING OF HUNTSMAN CORPORATION AND THE COMPANY During 2001, Huntsman Corporation was not in compliance with certain financial covenants contained in its bank credit facilities. As a result, Huntsman Corporation entered into discussions with its bank lenders regarding a comprehensive restructuring of its debt. Effective as of December 20, 2001, Huntsman Corporation and its bank lenders entered into forbearance, waiver and amendment agreements (collectively, as amended, the "Amendment Agreement"). Under the Amendment Agreement, substantially all existing defaults and some future defaults were waived and the bank lenders agreed to forbear exercising certain rights and remedies until March 15, 2002 (the "Forbearance Period"). The Forbearance Period has been extended until October 15, 2002. In addition, in connection with extending the Forbearance Period, Huntsman Corporation's bank lenders have agreed to postpone an amortization payment due under one of its bank credit facilities to October 15, 2002. Huntsman Corporation is in the process of seeking to complete the proposed restructuring described in "-Liquidity and Capital Resources-Financial Restructuring" below on an out- 17 of-court basis before October 15, 2002. This will require the consent of all of Huntsman Corporation's bank lenders (the "100% Consent"). Huntsman Corporation has received significan support from its bank lenders for the out-of-court restructuring. Huntsman Corporation is confident that it will complete the restructuring on an out-of-court basis but there can be no assurance that Huntsman Corporation will obtain the 100% Consent and be able to complete the proposed restructuring on an out-of-court basis. If Huntsman Corporation is unable to secure the 100% Consent, Huntsman Corporation may seek to achieve the proposed restructuring by filing a prepackaged plan of reorganization in a Chapter 11 proceeding under the United States Bankruptcy Code. Huntsman Corporation must satisfy certain statutory requirements in order for its prepackaged plan of reorganization to be confirmed. Huntsman Corporation believes that, as of August 14, 2002, it has sufficient votes from its bank lenders to seek confirmation of a prepackaged plan of reorganization on or before October 15, 2002 should it not obtain the 100% consent. However, there can be no assurance that the prepackaged plan of reorganization would be confirmed. Matlin Patterson Global Opportunities Partners L.P. ("GOP") (formerly known as CSFB Global Opportunities Partners, L.P.) and Consolidated Press Holdings Limited ("CPH") have collectively purchased, in the aggregate, approximately 88% of the outstanding HC Subordinated Notes and Senior Notes. In June 2002, Huntsman Corporation reached agreements with GOP and CPH to restructure its debt. In addition, pursuant to its agreement with GOP, Huntsman Corporation could be required by GOP to file a Chapter 11 proceeding under the United States Bankruptcy Code on or after October 15, 2002 if it has not received the 100% Consent to the out-of-court restructuring and it has obtained irrevocable votes in favor of the prepackaged plan of reorganization from at least two-thirds in principal amount and a majority in number of its bank lenders. Huntsmen believes that, as of August 14, 2002, it has obtained these votes. For more information, see "--Liquidity and Capital Resources--Debt" and "--Financial Restructuring" below. ISSUANCE OF PATENT TO COMPETITOR On April 2, 2002, a United States patent was issued to one of our competitors. This patent contains claims to certain processes for manufacturing copolymers. We, together with our counsel, have evaluated the scope, validity and enforceability of this patent, and we do not believe the issuance of this patent will have a material impact on our business. RESTRUCTURING COSTS AND IMPAIRMENT CHARGES We incurred restructuring costs and impairment charges of $525.4 million during the second, third and fourth quarters of 2001. The restructuring costs were recorded in two phases. - Phase I, which resulted in a charge of $29.8 million during the second quarter of 2001, was the result of the closure of our styrene production unit and the concurrent cost restructuring and elimination initiative, both of which were announced on April 23, 2001. The program included a workforce reduction at our Odessa facility of 97 regular employees. Approximately $5.2 million was accrued for termination benefits, all of which had been paid as of September 30, 2001. Additionally, decommissioning costs of $2.6 million for the styrene unit, $4.8 million in non-cancelable lease charges, an $8.9 million write-down of the styrene unit fixed assets and a $7.6 million write-off of unusable material and supplies inventory were recorded in connection with Phase I. Phase I was substantially completed by the end of the third quarter of 2001. - Phase II of the restructuring was announced by the Company on July 31, 2001 and resulted in a total charge of $110.2 million in the third quarter of 2001. This phase encompassed the closure of the polypropylene Line 1 unit (representing 30% of total polypropylene production at the time), the write-off of the FPO unit which had been under evaluation for alternative product use, and the further elimination of redundant costs in the maintenance, technical services and overhead cost structure. This program has resulted in the discharge of 93 regular employees at our Odessa facility. Approximately $5.9 million was accrued for termination benefits. Additionally, $68.7 million related to the write-off of fixed assets, $33.8 million related to the write-off of goodwill, $0.2 million for the polypropylene unit decommissioning, $0.6 million in non-cancelable lease charges and $1.0 million related to the write-off of unusable supplies inventory were recorded in connection with Phase II. Phase II is substantially complete. Under SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," companies must review the carrying amount of long-lived assets and certain intangibles, including related goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. 18 We recorded an asset impairment charge of $385.4 million in the fourth quarter of 2001 related to our property, plant and equipment. During 2001, we experienced significant declines in sales prices and operating cash flow. The declining results were primarily due to lower sales prices, coupled with difficulty in passing on raw material and energy costs to customers. The lower sales prices were primarily due to decreased demand in industrial and consumer related applications, which resulted in increased competition and reduced operating rates. The lower operating rates had a significant effect on margins, and margins are not expected to improve until after 2003 unless industry-wide plant capacity declines. Additionally, opportunities for new applications of our products did not materialize at a rate necessary to offset the declining margins on current products. In early October 2001, as a result of the above factors and as part of our restructuring efforts, we performed a review of our remaining polyethylene, polypropylene and APAO businesses. During this time, Huntsman Corporation engaged a financial advisor and investment banker to assist it and its domestic subsidiaries, including the Company, in identifying and exploring strategic alternatives, including developing out of court or court sanctioned financial restructuring plans. In February 2002, the financial advisor provided a valuation report to our management which indicated an impairment of our assets. As a result, in the fourth quarter of 2001, we assessed certain fixed assets for impairment as required under SFAS No. 121. We performed an evaluation of the recoverability of our assets as described in SFAS No. 121. Management concluded from the results of this evaluation that a significant impairment of long-lived assets had occurred. An impairment charge was required because the estimated fair value of these assets was less than their carrying value. The fair value of our net assets was determined by discounting estimated future cash flows using a discount rate commensurate with the risks involved. Fair value estimates, by their very nature, rely upon considerable management judgment; accordingly, actual results may vary significantly from our estimates. The restructuring costs and impairment charges were recorded against the following accounts: $463.0 million against property, plant and equipment; $33.8 million against goodwill; $5.4 million against inventories; and $23.2 million against cash and accrued liabilities. A summary of the combined Phase I and II costs follows (dollars in thousands):

INCOME TAX BENEFIT Our income tax benefit decreased $24.3 million for the three months ended June 30, 2002 from the same period in 2001. In 2002, the income tax benefit is fully offset by a valuation allowance which reduces the benefit to zero. NET LOSS The Company's net loss decreased $31.7 million to $7.9 million for the second quarter of 2002 from $39.6 million for the same period in 2001. The decreased net loss is a result of the reasons stated above. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 REVENUES Our revenues decreased $50.1 million to $220.0 million for the six months ended June 30, 2002 from $270.1 million for the same period in 2001, primarily due to the permanent closure of our styrene plant and a decrease in sales prices and volumes in by-product sales. The styrene plant closure resulted in a reduction of sales of $31.7 million. Olefins sales revenue decreased $26.0 million to $34.8 million, due primarily to lower by-product sales resulting from lower ethylene production and feedstock slates. Polypropylene sales revenue increased $9.4 million to $47.2 million due to improved pricing and increased volumes. The additional sales were due to improved customer demand caused by pre-buying as a result of the closure of Line 1 effective May 25, 2002. GROSS PROFIT (LOSS) Our gross profit increased $63.4 million to profit of $20.5 million for the six months ended June 30, 2002 from a loss of $42.9 million in the same period in 2001. The increase in gross profit was mainly due to the decrease in raw material and energy pricing attributable to lower natural gas prices, and reduced indirect fixed costs outpacing the drop in our selling prices. The indirect fixed cost savings are the direct result of our program to reduce fixed costs through job eliminations and consolidations. Olefins gross profit increased $18.3 million and polyethylene gross profit increased $16.2 million, each because raw materials and energy costs improved more than our selling prices declined. Polypropylene gross profit increased $15.3 million due to pre-buying as a result of our Line 1 closure and lower raw material and manufacturing costs. Gross profit increased $11.2 million due to the permanent closure of the styrene and FPO units. APAO gross profit increased $1.5 million due primarily to lower raw material costs and product mix. 21 SELLING, GENERAL AND ADMINISTRATIVE Our selling, general and administrative expenses decreased $4.8 million to $9.5 million for the six months ended June 30, 2002 from $14.3 million for the same period in 2001. The decrease in selling, general and administrative expenses was mainly due to reduced costs resulting from plant closure and restructuring costs incurred during 2001 described below. INTEREST EXPENSE, NET Interest expense, net in the six months ended June 30, 2002 decreased $2.0 million to $21.6 million from $23.6 million in the six months ended June 30, 2001 as a result of reductions in market interest rates, partially offset by an increase in average outstanding balances on affiliate debt and accrued interest on the unpaid interest on the Senior Notes. The average amount of debt outstanding and the average interest rate for the Senior Notes, the affiliate capital lease and the intercompany borrowing for the six months ended June 30, 2002 and 2001 were as follows:

INCOME TAX BENEFIT Our income tax benefit decreased $41.4 million for the six months ended June 30, 2002 from the same period in 2001. In 2002, the income tax benefit is fully offset by a valuation allowance which reduces the benefit to zero. NET LOSS The Company's net loss decreased $58.7 million to $10.6 million for the six months ended June 30, 2002 from $69.3 million for the same period in 2001. The decreased net loss is a result of the reasons stated above. LIQUIDITY AND CAPITAL RESOURCES CASH Net cash provided by operating activities in the six months ended June 30, 2002 was $5.8 million, as compared to $67.0 million used in operating activities in the same period in 2001. This $72.8 million change is primarily attributable to a $63.4 million improvement in gross profit over the same period in 2001, as explained above, partially offset by a corresponding decrease in the Company's income tax benefit for the same period. Depreciation was also lower in the first half of 2002 as compared to the same period in 2001 due to the impairment charge taken on fixed assets at the end of 2001. Operating working capital increased $2.8 million in the six months ended June 30, 2002 as compared to a decrease of $1.1 million in the same period in 2001. The net change of $3.9 million is primarily the result of - a $30.7 million net negative change in receivables resulting from increasing sales in 2002 versus declining sales in 2001; 22 - a net positive change in inventories of $16.2 million due to improved supply chain management versus a modest build up of product in 2001; and - a net favorable change in accounts payable of $12.1 million due to a less dramatic decline in raw material and energy costs in 2002 versus 2001. Net cash used in investing activities for the six months ended June 30, 2002 was $3.2 million, as compared to $6.1 million used in the same period in 2001. This decrease was attributable to a decrease in the Company's capital expenditures. Net cash used in financing activities for the six months ended June 30, 2002 was $2.5 million, as compared to $73.1 million provided by financing activities in the same period in 2001. The net change of $75.6 million is primarily attributable to the fact that we received no capital contributions from Huntsman Corporation in the first half of 2002, compared to $31.0 million contributed in the same period in 2001. Also, we generated positive operating cash flow in 2002 and repaid $2.5 million on our intercompany borrowings as compared to $42.1 million of borrowings received in the same period in 2001. DEBT As of June 30, 2002, we owed $280.5 million under the Intercompany Loan Agreement that we maintain with HGHFC, $174.9 million under our Senior Notes and $70.0 million pursuant to a capital lease with Huntsman Corporation. On September 30, 2002, the maturity date of the Capital Lease Agreement, the Company is obligated to pay the unpaid lease amount as well as all interest owed on that amount. The Company has the option at the end of the lease period to acquire the facility for a nominal amount. The Capital Lease Agreement is secured by all of the fixed assets associated with the FPO facility, which we have written off. On December 12, 2001, the Capital Lease Agreement was amended and HGHFC assigned all of its rights under the agreement to Huntsman Corporation. The principal economic terms of the Capital Lease Agreement were not altered. Although there can be no assurance that the Company will obtain an extension, the Company is currently in discussions with Huntsman Corporation concerning an extension of the maturity date of the Capital Lease Agreement. As of June 30, 2002, Huntsman Corporation had borrowings of approximately $1.5 billion outstanding under its bank credit facilities. As collateral for its obligations under its bank credit facilities, Huntsman Corporation has pledged its 100% ownership interest in our Parent, and our Parent has pledged its 100% ownership interest in the Company. In addition, we and our Parent are guarantors of Huntsman Corporation's obligations under its bank credit facilities. We have granted security interests and liens on substantially all of our assets to secure our obligations under our guaranty to Huntsman Corporation's lenders, subject to certain limitations in effect until such time as all of the Senior Notes have been indefeasibly repaid, redeemed or repurchased in full. The guaranty provides that our maximum liability thereunder at any time will not exceed the amount permitted to exist at such time under the indenture governing the Senior Notes (the "Indenture"). At this time, because of the restrictions on incurring indebtedness and making investments contained in the Indenture, we do not have any liability under the guaranty. During 2001, Huntsman Corporation was not in compliance with certain financial covenants contained in its bank credit facilities. As a result, Huntsman Corporation entered into discussions with its bank lenders regarding a comprehensive restructuring of its debt. Effective as of December 20, 2001, Huntsman Corporation and its bank lenders entered into the Amendment Agreement. Under the Amendment Agreement, substantially all existing defaults and some future defaults were waived and the bank lenders agreed to forbear exercising certain rights and remedies during the Forbearance Period. The Forbearance Period has been extended until October 15, 2002. In addition, in connection with 23 extending the Forbearance Period, Huntsman Corporation's bank lenders have agreed to postpone an amortization payment due under one of its bank credit facilities to October 15, 2002. Unless Huntsman Corporation's debt is restructured before October 15, 2002 or the Forbearance Period is further extended by the bank lenders, Huntsman Corporation's lenders could pursue certain remedies under the credit facilities, including accelerating the debt due, enforcing our guaranty and the guaranty of our Parent, foreclosing on the pledge of the equity of our Parent and the Company, and foreclosing on the security interests and liens on the assets securing our obligations under the guaranty to the extent we have any liability under the guaranty at the time of the foreclosure and subject to the limitations on the security interests and liens referred to above. The acceleration by Huntsman Corporation's lenders of the debt under Huntsman Corporation's credit facilities would cause an acceleration of our obligations under the Intercompany Loan Agreement. As a result, as of June 30, 2001, we reclassified the intercompany borrowings portion of affiliate debt as a current liability. We have granted security interests and liens on substantially all of our assets to secure our obligations under the Intercompany Loan Agreement, subject to certain limitations currently set forth in the Indenture. Acceleration of the debt under Huntsman Corporation's credit facilities and of our obligations under the Intercompany Loan Agreement would constitute an event of default under the Senior Notes, which could result in an acceleration of our obligations under the Senior Notes by the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes. A foreclosure on the pledge of our equity or the equity of our Parent would constitute a "change of control" under the Indenture. If a "change of control" occurs, each holder of the Senior Notes would have the right to require our Company to purchase all or any part of the Senior Notes held by such holder at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. Under such circumstances, there can be no assurance that we would have sufficient funds to purchase all or part of the Senior Notes. Huntsman International Holdings LLC ("Huntsman International Holdings") and Huntsman International LLC ("Huntsman International") have not guaranteed or provided any other credit support to the obligations of Huntsman Corporation under its credit facilities or under the HC Subordinated Notes. Neither events of default under Huntsman Corporation's credit facilities or its Senior Subordinated Notes nor the exercise of any remedy by the lenders thereunder will cause any cross-defaults or cross-accelerations under the outstanding high-yield notes of Huntsman International Holdings or Huntsman International or the senior secured credit facilities of Huntsman International, except insofar as foreclosure on the stock of Huntsman Specialty Chemicals Holdings Corporation ("HSCHC"), pledged to secure the obligations of Huntsman Corporation under its credit facilities, would constitute a "change in control" under the senior secured credit facilities of Huntsman International and would give certain put rights to the holders of the high-yield notes of Huntsman International Holdings and Huntsman International FINANCIAL RESTRUCTURING GOP and CPH have collectively purchased, in the aggregate, approximately 88% of the outstanding HC Subordinated Notes and Senior Notes. In June 2002, Huntsman Corporation reached agreements with GOP and CPH to restructure its debt. On July 15, 2002, Huntsman Corporation solicited the consent of its existing bank lenders seeking, among other things, their consent to a plan to restructure Huntsman Corporation's debt (the "Proposed Restructuring"), without the intervention of a bankruptcy court, that would involve the following: - Members of the Huntsman family who own equity interests in Huntsman Corporation and any of its subsidiaries, together with certain affiliated entities that own such equity interests, (collectively, the "Huntsman Family") would contribute all their equity interests in Huntsman Corporation and its subsidiaries to a new entity ("Huntsman Holdings") in exchange for equity interests in Huntsman Holdings. 24 - As of June 30, 2002, GOP and CPH held, in the aggregate, $746 million principal and accrued interest of the HC Subordinated Notes and the Senior Notes, of which $155 million was of the Senior Notes. Subject to certain conditions, GOP and CPH have agreed to convert these notes, directly or indirectly, into shares of Huntsman Corporation. These notes would then be canceled. The Huntsman Corporation shares received would be exchanged directly or indirectly for equity interests in Huntsman Holdings. - Amendments to Huntsman Corporation's current bank credit facilities which would be comprised of the following: - a term loan facility maturing in 2007 which would be secured by a second lien on substantially all the assets of Huntsman Corporation and its domestic restricted subsidiaries; and - a $275 million priority revolving credit facility maturing in 2006 (the "Priority Facility"). Subject to certain conditions, Deutsche Bank Securities Inc. and Deutsche Bank Trust Company Americas have agreed to underwrite the Priority Facility. The Priority Facility would replace Huntsman Corporation's existing $150 million supplemental accounts receivable facility (the "HC Supplemental Credit Agreement"), and fund certain payments at closing and would be available for general corporate purposes. The Priority Facility would be limited by a borrowing base consisting of eligible accounts receivable and world inventory and would have a first lien on substantially all the assets of Huntsman Corporation and its domestic restricted subsidiaries. - The reinstatement of the approximately $59 million in principal amount of HC Subordinated Notes and approximately $37 million in principal amount of Senior Notes not held by GOP and CPH. The non-payment of interest defaults on these notes would be cured by paying approximately $5 million of interest that has accrued on the Senior Notes to be reinstated since December 2001 and approximately $5 million of interest that has accrued on the HC Subordinated Notes to be reinstated since January 2002. - Pursuant to previously adopted amendments to the indentures governing the HC Subordinated Notes and the Senior Notes which will become effective upon completion of the Proposed Restructuring, most of the restrictive covenants in these indentures would be eliminated. This would permit, among other things, the following: - subsidiary of Huntsman Corporation to pledge all of the equity of Huntsman Specialty Chemicals Corporation ("Huntsman Specialty"), and enter into a senior secured guaranty in favor of Huntsman Corporation's bank lenders; Huntsman Specialty to pledge a 30% membership interest stake that it holds in Huntsman International Holdings LLC and enter into a senior secured guaranty in favor of the bank lenders. - our Company to guarantee, on a full senior secured basis, Huntsman Corporation's bank debt without the senior secured debt limitations formerly contained in the Indenture. The Proposed Restructuring has been designed to avoid a "change of control" under the indentures governing the HC Subordinated Notes or the Senior Notes. Huntsman Corporation is in the process of seeking the 100% Consent necessary to achieve the Proposed Restructuring on an out-of-court basis and is confident that it will obtain the 100% Consent from its bank lenders before October 15, 2002. However, there can be no assurance that Huntsman Corporation will obtain the 100% Consent. In the event Huntsman Corporation does not obtain the 100% 25 Consent, it may seek to achieve the Proposed Restructuring by filing a prepackaged plan of reorganization (the "Plan") in a Chapter 11 proceeding under the United States Bankruptcy Code ("Chapter 11 Cases"). Pursuant to its agreement with GOP, Huntsman Corporation could be required to file Chapter 11 Cases on or after October 15, 2002 if it has not received the 100% Consent to the Proposed Restructuring and it has obtained irrevocable rates in favor of the prepackaged plan of reorganization from at least two-thirds in principal amount and a majority of its bank lenders. Huntsman Corporation believes that, as of August 14, 2002, it has obtained these votes. If the Proposed Restructuring is effected, Huntsman Corporation's bank credit facilities would be restructured as specified above. The key changes to the existing bank credit facilities would be as follows: - the existing loans would be continued as a $938 million Term Loan A and a $450 million Term Loan B, with the latter anticipated to be refinanced with a high-yield debt financing on a post-closing basis; - the term loans would be extended to March 31, 2007; - the amortization schedule would be modified; - the interest rate would be increased; - the financial covenants would be modified; and - the bank lenders would be granted additional credit support, including additional guaranties and collateral. POTENTIAL DELAWARE CHANCERY COURT PROCEEDING In connection with the Proposed Restructuring, the shareholders of Huntsman Corporation may form a Delaware corporation ("Equity Holdings") to hold all the outstanding stock of Huntsman Corporation (and Huntsman Corporation may be converted into a limited liability company). Equity Holdings would then guarantee the HC Subordinated Notes held by GOP and CPH. Thereafter, for federal income tax planning reasons, Equity Holdings may commence a proceeding in the Delaware Court of Chancery under Section 102(b)(2) of the Delaware General Corporation Law. This action would seek the court's sanction of Equity Holdings' compromise of its guarantee obligations in the manner contemplated by certain agreements among Huntsman Corporation, GOP and CPH. There can be no assurance that Equity Holdings will undertake such a proceeding or that the court would grant Equity Holdings' application. If filed, such a proceeding in the Delaware Court of Chancery will not affect Huntsman Corporation's obligations to its creditors, other than GOP and CPH. Consummation of the Proposed Restructuring is not conditioned on the initiation of any such proceeding or upon the court granting any application in connection therewith. LIQUIDITY We currently expect that cash generated by our business will provide us with sufficient liquidity to allow us to continue our operations for the near term. We anticipate that we will continue to fund our operations in this manner until Huntsman Corporation completes the Proposed Restructuring out-of-court or until it files the Chapter 11 Cases. Accordingly, we intend to meet our operating and capital needs in 2002 through a combination of: - improved operating performance resulting from improved industry conditions and the reduction of fixed costs in connection with our operational restructuring; - borrowings under the Intercompany Loan Agreement, to the extent permitted; - sales of inventory to Huntsman Corporation as permitted under the HC Supplemental Credit Agreement and the Amendment Agreement; and - targeted reductions in working capital and reduced capital expenditures. 26 There can be no assurance that Huntsman Corporation will be able to successfully complete the Proposed Restructuring, whether in-court or out-of-court. If the Proposed Restructuring or a similar restructuring is not completed, there would be a material adverse effect on our liquidity. CAPITAL EXPENDITURES Capital expenditures for the six months ended June 30, 2002 were $3.2 million, as compared to $6.7 million for the six months ended June 30, 2001. We expect to spend approximately $10 million during 2002 on capital projects. ENVIRONMENTAL MATTERS GENERAL Our capital expenditures relating to environmental matters for the six months ended June 30, 2002 and 2001 were approximately $0.6 and $0.2 million, respectively. Capital costs relating to environmental matters in 2002 are expected to total approximately $2.9 million. Generally, we expect to incur between $1.5 million and $6.0 million annually in capital spending to address the requirements of environmental laws. Nevertheless, capital expenditures relating to environmental matters are subject to evolving regulatory requirements and will depend on the timing of the promulgation of specific standards which impose requirements on our operations. As a result, capital expenditures beyond those currently anticipated may be required under applicable environmental laws. The operation of chemical manufacturing plants, the distribution of chemical products and the related production of by-products and wastes, entail risk of adverse environmental effects. 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. We may incur substantial costs, including fines, damages and criminal or civil sanctions, or experience interruptions in its operations for actual or alleged violations arising under any environmental laws. In addition, our 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 our plant operations, substantial fines and civil or criminal sanctions. Our 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 our business. From time to time, these operations may result in violations under environmental laws, including spills or other releases of hazardous substances to the environment. In the event of a significant incident, we could incur material costs to address and remediate the incident. In addition, following any such incident, we may incur higher costs to implement measures to prevent future incidents. Given the nature of our business, there can be no assurance that violations of environmental laws will not result in restrictions imposed on our 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. We have established financial reserves relating to environmental restoration and remediation programs, which we believe, are sufficient for known requirements. Liabilities are recorded when site restoration and environmental remediation and clean-up obligations are either known or considered probable and can be reasonably estimated. These liabilities are based upon all available facts, existing technology, past experience, and cost-sharing arrangements (as to which, we consider the viability of other parties). A total of $6.7 million has been accrued related to environmental matters as of June 30, 2002. We do not anticipate that any future costs, in excess of those that have been accrued, will be material to our results of operations or financial position as a result of compliance with current environmental laws and regulations. 27 We carry pollution legal liability insurance to address many potential environmental liabilities from our operations. Such coverage is subject to customary terms, limits, exclusions and deductibles. We also carry pollution legal liability and closure and post-closure insurance on certain facilities at our Odessa, Texas facility, which are regulated by the Texas Natural Resources Conservation Commission (the "TNRCC"). This insurance satisfies the requirements of the TNRCC governing the operation of these facilities. POTENTIAL LIABILITIES We, along with many other companies, have been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), in connection with past disposal of waste at certain sites. We believe that our financial reserves are sufficient for our known requirements. By letter of April 24, 2002, from counsel for Agrium U.S. Inc., Nu-West Industries, Inc., and Nu-West Mining, Inc., we were put on notice of a potential contribution claim against our Company for site investigation, remediation and other costs and fees relating to closure of a former industrial site in Georgetown Canyon, Bear Lake County, Idaho. The potential claim allegedly arises out of the allegation that El Paso Natural Gas Products Company owned mining claims and lots at the site during the 1960s. The site was apparently known as the Idaho Phosphate Works. We have retained counsel and are evaluating the potential claim. Whether we have any liability for the costs and fees at issue is unclear. Moreover, what the potential magnitude of the investigative and remedial and related costs will be is unknown since we know of no comprehensive site investigation having been done to date. By letter of August 2, 2002, Agrium notified us that a proposed consent judgment has been proposed to Agrium by the Idaho Attorney General. Under that consent judgment, Agrium would have to perform a site investigation and remedial action relating to any contaminants found to be at actionable levels on the site. We were sued on December 6, 2001, by Lyondell Chemical Company and Atlantic Richfield Company in the United States District Court for the Eastern District of Texas, for contribution with regard to remediation expenses at the Turtle Bayou (Petro Chemical Systems, Inc.) superfund site in Liberty County, Texas. Based upon the facts known to us, we believe that our Company has one or more complete defenses to the suit and that even if the court rejects those defenses, the percentage contribution we would likely be required to pay would not be material to our financial condition. Nevertheless, the potential exists for significant liability in such a case because of joint and several liability. In December of 2000, the New Mexico Environmental Bureau's Oil Conservation Division ("OCD") gave notice that it is alleging that we may be a responsible party in the cleanup of an abandoned refinery located in Bloomfield, New Mexico. Although the site is contaminated and was evaluated in about 1990 under the state's superfund program and the federal superfund program, it was not pursued under either of those programs. The site was previously owned by El Paso Energy, El Paso Products and Kimbell and McNutt. We notified the OCD that we have never had an ownership interest in the site and do not believe that we acquired any liability relating to the site from its previous owners. In addition, the State of New Mexico contacted Rexene Corporation about the site in 1990, had notice of the Rexene bankruptcy in 1991-1992, made a claim against Rexene regarding another site, but did not make a claim in the bankruptcy proceeding regarding this site. Consequently, even if the OCD had a claim against Rexene at one time, the claim may have been extinguished by the bankruptcy. However, if a court ultimately finds that OCD does have an actionable claim, the potential exists for significant remediation liability. By letter dated January 28, 1999, the TNRCC notified us of allegations that our olefins plant may have violated its air permit by emitting visible smoke from its process/emergency flare in late December 1998 and early January 1999. During that period, the olefins plant was in the midst of start up after extensive construction. As required by Texas law, we had given prior notice to the TNRCC of the start up and that excess emissions might result. The TNRCC investigated this matter after receiving numerous complaints from residents of a subdivision near the Odessa facility. In addition, since January 1999, our Odessa facility experienced upsets on several occasions that led to flaring or excess emissions which the 28 TNRCC claims were in violation of state law. The TNRCC sought penalties for all alleged violations. On January 30, 2002, the claims asserted by the TNRCC were settled in an agreed order. In the order, we denied any liability, but agreed to a $140,000 penalty, $70,000 of which was paid to the State and $70,000 of which was paid to the City of Odessa to fund a supplemental environmental project. As a result of the start-up flaring during late December 1998 and early January 1999, certain complaining citizens hired counsel to consider bringing legal action to recover damages alleged to have been caused by that flaring. Five such actions have been filed. Three of the filed cases, involving over 4,200 plaintiffs, have been settled. Many of those plaintiffs have now filed an action against certain of our contractors and design engineers, one of whom has sought indemnity against us. The remaining filed cases involve a total of about 192 claimants. Although our counsel believes that we have strong defenses to the remaining suits, it is too early to predict the outcome of such litigation. As a result of a third-party environmental audit of our Odessa operations starting in November 2000, we voluntarily disclosed to the United States Environmental Protection Agency ("EPA") and the TNRCC certain potential violations of environmental law. EPA and the TNRCC have evaluated those disclosures to determine whether the disclosures qualify for penalty mitigation under federal policy and state law. EPA has proposed a civil penalty of about $8,500. As a result of an inspection of the Odessa facility in April 1997 and follow-up information requests from EPA, an enforcement action alleging Clean Air Act violations has been threatened by the United States Department of Justice. A tentative settlement involving civil penalties in the amount of $475,000 for this case in addition to the $8,500 discussed in the preceding paragraph has been tentatively reached subject to final review by us and the negotiation of final settlement language acceptable to all parties. CHANGES IN FINANCIAL CONDITION

At June 30, 2002, our net working capital position was a negative $505.1 million, as compared to a negative $509.4 million at December 31, 2001, resulting in an increase of $4.3 million. The $4.3 million increase is primarily the result of positive operating cash flow in the second quarter of 2002. The primary reason for the negative working capital reflected above is the Company's long-term debt of $525.4 and $527.9 million as of June 30, 2002 and December 31, 2001, respectively, being reclassified as current for the reasons discussed in "-Liquidity and Capital Resources-Debt" above. 29 We generally maintain a daily cash balance of approximately zero because of our participation in a consolidated Huntsman Corporation cash management system wherein Huntsman Corporation's domestic subsidiaries' daily cash surpluses and deficits are generally swept to Huntsman Corporation. In the past, we have used the Intercompany Loan Agreement as our primary source of financing. However, as noted in "-Liquidity and Capital Resources-Debt" above, pursuant to the Amendment Agreement and the HC Supplemental Credit Agreement, there are limitations that will prevent us from obtaining additional equity investments from Huntsman Corporation and will limit our ability to obtain other financing under the Intercompany Loan Agreement. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of the 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 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 the risk factors specified in our 2001 annual report on Form 10-K, some of which are summarized below. - Our financial condition, and the current financial condition of Huntsman Corporation, create a number of serious risks and uncertainties for our business, and the failure by Huntsman Corporation to complete the Proposed Restructuring would likely have material adverse effects on our business. - Our failure to pay interest on our Senior Notes within 30 days of the December 1, 2001 and June 1, 2002 constituted an event of default under the Senior Notes and could result in an acceleration of the obligations thereunder. - Our financial circumstances, including without limitation the issues noted under "-Changes in Financial Condition" above and the receipt of our independent auditor's "going concern" qualification in the audit opinion on our Consolidated Financial Statements for the year ended December 31, 2001 may have an adverse effect on our business. - A "change of control" could be triggered by certain events affecting Huntsman Corporation. 30 - The markets for our products are cyclical, and, currently, several of our markets are experiencing periods of oversupply, causing depressed pricing for our products in these markets. - The prices for a large portion of our raw materials are similarly cyclical, and we may not be able to pass on increases in the cost of raw materials to our customers. - The industries in which we operate are highly competitive. - We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and the use or cleanup of hazardous substances and wastes. - Terrorist attacks, such as the attacks in New York and Washington, D.C., on September 11, 2001, and other attacks or acts of war may adversely affect the markets in which we operate, our operations and our profitability. - We also face a number of other uncertainties, including: - changes in economic conditions, - inability to obtain new customers or retain existing ones, - changes in product mix and utilization of production facilities, - significant changes in our relationship with our employees and the adverse effects of labor disputes or grievances, should they occur, - unavailability of, and substantial delays in, transportation of raw materials and products, - significant changes in tax rates or policies or in rates of inflation or interest, - changes in management or control of the Company, and - changes in accounting principles and/or the application of such principles to the Company. RECENT FINANCIAL ACCOUNTING STANDARDS In August 2001, FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. As required by SFAS No. 143, the Company will adopt this new accounting standard on January 1, 2003. The Company is currently evaluating the effects of adopting this pronouncement. In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this statement is required effective January 1, 2003. We have not yet completed our evaluation of the impact of adopting this statement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has interest and market risk with respect to certain intercompany debt, which bears interest at floating rates. The Company's remaining Senior Notes bear interest at fixed rates. The Company's exposure to foreign currency market risk is minimal because sales prices for the Company's products are typically denominated in U. S. dollars. 31 The Company is exposed to commodity price market risk. The Company's exposure to changing commodity prices may be limited by the fact that substantially all raw materials are acquired at posted or market related prices, and, generally, sales prices for the Company's finished products are at market prices which reflect changes in underlying commodity prices. Nevertheless, the Company may be negatively impacted in markets where economic conditions do not permit it to pass on increased raw material costs to its customers. The Company typically does not enter into fixed-price long-term contracts. The Company also typically does not hedge against commodity price market risk. The following table summarizes the Company's fixed and variable rate debt obligations by contractual maturity date as of June 30, 2002:

PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On June 14, 2002, GOP, which at that time held 78.9% of the outstanding Senior Notes, consented to, and our Company and HSBC Bank USA, as trustee, entered into, an Amended and Restated Indenture, dated as of June 14, 2002, which will eliminate substantially all the restrictive covenants set forth in the Indenture governing the Senior Notes upon completion of the Proposed Restructuring. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In the fourth quarter of 2001, we did not make the December 1, 2001 interest payment due on our Senior Notes. During the second quarter of 2002, we did not make the June 1, 2002 interest payment due on our Senior Notes. Our failure to make these scheduled interest payments within 30 days of the due date constitutes an event of default under the Senior Notes. Our next scheduled interest payment on the Senior Notes is due December 1, 2002. The payment of interest on the Senior Notes would result in a termination of the Forbearance Period under the Amendment Agreement; therefore it is unlikely that we will make the upcoming interest payments on our Senior Notes. See "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Debt" and "-Financial Restructuring." As of the date of this report, the total amount of interest in arrears on the Senior Notes is $23.1 million. The total outstanding principal amount of the Senior Notes is $174.9 million. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the second quarter 2002, the Company solicited the consent of GOP, which at that time held, and currently holds, 78% of the outstanding Senior Notes, and, on June 14, 2002, GOP consented to an Amended and Restated Indenture, dated as of June 14, 2002, which will eliminate substantially all the restrictive covenants set forth in the Indenture governing the Senior Notes upon completion of the Proposed Restructuring. 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amended and Restated Indenture between Huntsman Polymers Corporation (formerly Rexene Corporation) and the trustee named therein, dated as of June 14, 2002 (filed as Exhibit 10.1 to the Company's report filed on Form 8-K on June 17, 2002 and incorporated herein by reference) 10.2 Term Sheet Agreement, dated June 14, 2002 (filed as Exhibit 10.2 to the Company's report filed on Form 8-K on June 17, 2002 and incorporated herein by reference) 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer (b) Reports Submitted on Form 8-K: We filed a report on Form 8-K on June 17, 2002 to report that we did not make the June 1, 2002 interest payment on our Senior Notes and that we had obtained the consent of the largest holder of the Senior Notes to amend and restate Indenture governing the Senior Notes. We filed a report on Form 8-K on July 2, 2002 to report that, on June 28, 2002, Huntsman Corporation's bank lenders had agreed to extend the Forbearance Period until August 15, 2002. We also reported that the Amendment Agreement contained a condition that would cause the Forbearance Period to terminate if Huntsman Corporation makes any interest payments on the HC Subordinated Notes or if the Company makes any interest payments on its outstanding Senior Notes. We further reported that Huntsman Corporation was then in discussions with its lenders concerning an amendment and restatement of its bank credit facilities. 33 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HUNTSMAN POLYMERS CORPORATION /s/ J. Kimo Esplin ------------------------------------- J. KIMO ESPLIN Senior Vice President and Chief Financial Officer (Authorized Signatory and Principal Financial and Accounting Officer) Date: August 14, 2002 34 Exhibit Index 10.1 Amended and Restated Indenture between Huntsman Polymers Corporation (formerly Rexene Corporation) and the trustee named therein, dated as of June 14, 2002 (filed as Exhibit 10.1 to the Company's report filed on Form 8-K on June 17, 2002 and incorporated herein by reference) 10.2 Term Sheet Agreement, dated June 14, 2002 (filed as Exhibit 10.2 to the Company's report filed on Form 8-K on June 17, 2002 and incorporated herein by reference) 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer

HUNTSMAN POLYMERS CORP 10-Q