UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission File Number 333-57170
Resolution Performance Products LLC
(Exact name of registrant as specified in its charter)
Delaware 76-0607613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Commission File Number 333-57170-01
RPP Capital Corporation
(Exact name of registrant as specified in its charter)
Delaware 76-0660306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1600 Smith Street, Suite 2400
Houston, Texas 77002
(888) 949-2502
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have 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 Registrants was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----------
At October 31, 2001, there were 1,000,000 outstanding membership units of
Resolution Performance Products LLC and 1,000 outstanding shares of
common stock of RPP Capital Corporation.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000...............3
Consolidated and Combined Statements of Income and Comprehensive Income for the three and six
month periods ended September 30, 2001 and 2000 (unaudited)..........................................4
Consolidated Statement of Owner's Deficit for the nine month period ended September 30, 2001
(unaudited)..........................................................................................5
Consolidated and Combined Statements of Cash Flows for the nine month periods ended September 30,
2001 and 2000 (unaudited)............................................................................6
Notes to Consolidated and Combined Financial Statements (unaudited)..................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................23
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders..................................................24
Item 6. Exhibits and Reports on Form 8-K.....................................................................24
Signatures............................................................................................................25
Exhibits..............................................................................................................26
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED BALANCE SHEETS
(in millions of U. S. dollars, except for Units)
September 30, December 31,
2001 2000
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ................................................................ $ 24 $ 19
Receivables, less allowance of $4 and $3, respectively ................................... 117 148
Due from related parties ................................................................. 3 3
Prepaid assets ........................................................................... 3 6
Inventories, less allowance of $4 and $7, respectively ................................... 131 149
Deferred income taxes .................................................................... - 1
----- -----
Total current assets ............................................................. 278 326
Property and equipment, at cost, less accumulated depreciation ............................. 398 411
Intangible assets, at cost, less accumulated amortization .................................. 18 20
Investments in equity affiliate ............................................................ 9 10
Deferred income taxes ...................................................................... 35 25
----- -----
Total assets ..................................................................... $ 738 $ 792
===== =====
Liabilities and Owner's Deficit
Current liabilities:
Accounts payable-trade ................................................................... $ 94 $ 118
Other payables and accruals .............................................................. 33 27
Taxes payable ............................................................................ 6 -
Current portion of long-term debt ........................................................ 4 7
----- -----
Total current liabilities ...................................................... 137 152
----- -----
Capital lease obligation ................................................................... 1 -
Deferred income taxes ...................................................................... 7 5
Interest rate swap obligation .............................................................. 6 -
Pensions and other retirement plan obligations ............................................. 33 27
Long-term debt ............................................................................. 597 674
----- -----
Total liabilities .............................................................. 781 858
Commitments and contingencies (Note 8)
Owner's deficit:
Member interest, 1,000,000 units authorized and issued ................................... - -
Accumulated deficit ...................................................................... (7) (37)
Accumulated other comprehensive loss ..................................................... (36) (29)
----- -----
Total owner's deficit ............................................................ (43) (66)
----- -----
Total liabilities and owner's deficit ............................................ $ 738 $ 792
===== =====
See accompanying notes to consolidated and combined financial statements.
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (unaudited)
(in millions of U.S. dollars)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
----- ----- ----- -----
As adjusted As adjusted
(See Note 3) (See Note 3)
Revenue ................................................................................. $ 207 $ 240 $ 670 $ 709
Cost and expenses:
Purchase and variable product costs ............................................ 108 161 388 440
Operating expenses ............................................................. 36 43 111 126
Selling, general and administrative ............................................ 18 18 45 40
Depreciation and amortization .................................................. 8 8 25 25
Research and development ....................................................... 7 7 20 18
Special charges ................................................................ 2 (1) 11 2
----- ----- ----- -----
Total ..................................................................... 179 236 600 651
----- ----- ----- -----
Operating income ........................................................................ 28 4 70 58
Income from equity investment ........................................................... - - 1 2
Interest expense, net ................................................................... 18 - 53 -
----- ----- ----- -----
Income before income taxes ............................................................. 10 4 18 60
Income tax expense ...................................................................... 4 2 7 23
----- ----- ----- -----
Net income .............................................................................. $ 6 $ 2 $ 11 $ 37
===== ===== ===== =====
Comprehensive income (loss):
Net income ..................................................................... $ 6 $ 2 $ 11 $ 37
Currency translation gain (loss), net of tax ................................... 9 (16) - (28)
Interest rate swap, net of tax ................................................. (4) - (7) -
----- ----- ----- -----
Comprehensive income (loss) .................................................... $ 11 $ (14) $ 4 $ 9
===== ===== ===== =====
See accompanying notes to consolidated and combined financial statements.
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED STATEMENT OF OWNER'S DEFICIT
(in millions of U. S. dollars)
Accumulated Other
Member Accumulated Comprehensive
Units Deficit Loss Total
---------- ------------ ------------------- -------
Balance, December 31, 2000........................................ $ - $ (37) $ (29) $ (66)
Net income........................................................ - 11 - 11
Purchase price adjustments........................................ - 19 - 19
Other comprehensive loss, net of tax.............................. - - (7) (7)
--------- ------------ ------------------- --------
Balance, September 30, 2001 (unaudited)........................... $ - $ (7) $ (36) $ (43)
========= ============ =================== ========
See accompanying notes to consolidated and combined financial statements.
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions of U. S. dollars)
Nine Months Ended
September 30,
2001 2000
----- -----
As adjusted
(See Note 3)
Cash flows provided by (used for) operating activities:
Net income ................................................................................ $ 11 $ 37
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ........................................................... 25 25
Amortization of deferred finance costs .................................................. 2 -
Equity earnings in affiliates ........................................................... (1) (2)
Deferred income taxes ................................................................... (7) (3)
Pensions and other retirement plans obligation .......................................... 7 (3)
Changes in operating assets and liabilities::
Receivables, net ........................................................................ 30 (16)
Due from related parties ................................................................ - 3
Prepaid assets .......................................................................... 3 -
Inventories ............................................................................. 17 (11)
Payables and accruals ................................................................... (16) 15
Taxes payable ........................................................................... 6 13
----- -----
Net cash provided by operating activities....................................... 77 58
----- -----
Cash flows provided by (used for) investing activities:
Capital expenditures .................................................................... (14) (9)
Purchase price adjustments .............................................................. 19 -
Purchase of France subsidiary ........................................................... (1) -
Purchase of Elenac ...................................................................... - (6)
Distributions from equity affiliates .................................................... 1 3
----- -----
Net cash provided by (used for) investing activities............................ 5 (12)
----- -----
Cash flows provided by (used for) financing activities:
Capital lease obligation ................................................................ 1 -
Net cash distributions to owner ......................................................... - (46)
Proceeds from long-term debt ............................................................ 167 -
Repayments of long-term debt ............................................................ (245) -
----- -----
Net cash used for financing activities.......................................... (77) (46)
----- -----
Net increase in cash ...................................................................... 5 -
Cash and cash equivalents at beginning of period .......................................... 19 -
----- -----
Cash and cash equivalents at end of period ................................................ $ 24 $ -
===== =====
See accompanying notes to consolidated and combined financial statements.
RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Unaudited)
September 30, 2001
1. Organization, Formation and Basis of Presentation
The consolidated and combined financial statements include the
consolidated operations of Resolution Performance Products LLC ("RPP LLC", or
the "Company"), and its wholly owned subsidiaries including RPP Capital
Corporation ("RPP CC") since November 1, 2000. Prior to November 1, 2000, the
financial statements include the operations of the resins business ("Resins
Business") of the Royal Dutch/Shell Group of Companies ("Shell"). RPP LLC is a
wholly owned subsidiary of Resolution Performance Products Inc. ("RPPI").
RPP CC is a wholly owned finance subsidiary of RPP LLC that was formed
in October 2000 to co-issue the 13-1/2% Senior Subordinated Notes jointly and
severally with RPP LLC. RPP CC has nominal assets and no operations.
On November 14, 2000, with an effective date of November 1, 2000, RPP
LLC acquired all of the Resins Business from Shell. On the same dates,
simultaneous with the above acquisition, RPPI was acquired by RPP Holdings LLC,
an affiliate of Apollo Management IV, L.P. ("Apollo") in a recapitalization
transaction.
The accompanying unaudited consolidated and combined financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States of America for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated and combined financial statements and notes thereto for the year
ended December 31, 2000 included in the Resolution Performance Products LLC
Registration Statement on Form S-4, as amended (File No. 333-57170), declared
effective by the Securities and Exchange Commission on May 11, 2001. Certain
amounts from prior periods have been reclassified to conform to the current
period presentation.
The accompanying unaudited consolidated and combined financial
statements as of September 30, 2000 and for the three and nine months ended
September 30, 2000 have been prepared from Shell's historical accounting records
and are presented on a carve-out basis to include the historical operations
applicable to the Resins Business of Shell. In addition, the unaudited
consolidated and combined financial statements have been restated to reflect the
accounting change from LIFO to FIFO method of costing inventory. See Note 3.
In July 1999, Shell commenced a corporate restructuring program in
preparation for the sale of the Resins Business. Under this program, all of the
Resins Business manufacturing operations and certain of its marketing activities
were transferred into new legal entities within the Shell Group. This program
included the transfer of the manufacturing operations in The Netherlands, the
U.S. and the United Kingdom to Shell Epoxy Resins LLC and Shell Epoxy Resins
Holdings B.V. and its various non-U.S. subsidiaries. No gains or losses were
recognized on the transfer of assets and operations pursuant to this program,
given the related party nature of such transactions. The tax effects of these
transactions, resulting from changes to the tax basis of assets, have been
recorded through owner's net investment.
The unaudited combined financial statements include all revenues and
costs directly attributable to the Resins Business, including costs for
facilities, functions and services used by the Resins Business at shared Shell
sites and costs for certain functions and services performed by centralized
Shell organizations and directly charged to the Resins Business based on usage.
The results of operations for the three and nine months ended September 30, 2000
also include allocations of Shell's general corporate expenses.
In addition, in 2000 Shell provided cash management services to the
Resins Business through centralized treasury systems. As a result, all charges
and cost allocations for facilities, functions and services performed by Shell
organizations for the Resins Business are deemed to have been paid by the Resins
Business to Shell, in cash, during the period in which the cost was recorded in
the unaudited combined financial statements. Allocations of current income taxes
receivable or payable are deemed remitted, in cash, by or to Shell in the year
2000 in which the related income taxes were recorded.
All of the allocations and estimates in the unaudited combined
financial statements as of September 30, 2000 and for the three and nine months
ended September 30, 2000 were based on assumptions that Shell management
believed was reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if the Resins Business had been operated as a separate entity. It
is not practicable to estimate the costs and expenses that would have resulted
on a stand-alone basis.
The Company is engaged in manufacturing and marketing resins in the
U.S. and internationally. Resins include epoxy resins, versatic acids and
derivatives. Epoxy resins are chemicals primarily used in the manufacture of
coatings, adhesives, printed circuit boards; fiber reinforced plastics and
construction materials.
Products containing epoxy resins serve a wide range of end-users;
including automotive, aerospace, electrical, construction and industrial
maintenance. Versatic acid and derivatives are specialty products that
complement epoxy resins product offerings in the coatings, adhesives and
construction industries.
2. New Accounting Standards
Commencing January 1, 2001, the Company adopted SFAS 133 (Accounting
for Derivative Instruments and Hedging Activities). SFAS 133, as amended by SFAS
138, requires that derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on the type
of derivative and the effectiveness of the hedge. The Company does not enter
into derivative instruments for trading purposes; however, interest rate swaps
were entered into during 2001 in connection with the Company's credit facility.
The Company uses interest rate swaps to protect against interest rate
fluctuation by fixing the variable portion of interest rates in its credit
facility. By using the interest rate swaps to hedge interest rate cash flows,
the Company exposes itself to market risk; however market risk is managed
through the setting and monitoring of parameters that limit the types and
degree of market risk which are acceptable.
As mentioned above, the Company entered into interest rate swap
agreements related to the term loan B for notional amounts of $50 million, $75
million, $100 million, $25 million and $50 million that fix the LIBOR portion of
our interest rates at 5.41%, 5.25%, 5.41%, 4.61% and 4.39%, respectively. The
remaining duration of the interest rate swap agreements range from 5 months to
17 months. The unaudited consolidated statement of income for the three and nine
months ended September 30, 2001 includes interest expense at the fixed rates
stated above. The Company did not hedge interest rate cash flows in the prior
year period. For the nine months ended September 30, 2001, the Company has
recognized a net $7 million charge in the unaudited comprehensive income
relating to SFAS 133. This charge was due to the change in the fair market value
of the Company's interest rate swaps as a result of declining interest rates.
In July 2001, the FASB issued SFAS 142 (Goodwill and Other Intangible
Assets). This statement requires that goodwill no longer be amortized but should
be intermittently tested for impairment at least on an annual basis. Other
intangible assets are to be amortized over their useful life and reviewed for
impairment in accordance with the provisions of SFAS No. 121, (Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of).
Intangible assets with an indefinite useful life can no longer be amortized
until its useful life becomes determinable. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001; however, it does apply to any goodwill
acquired in a business combination completed after June 30, 2001. Based upon its
review to date of SFAS 142, the Company does not believe that any changes will
be required in its current practices or procedures. The Company will complete
its evaluation of the provisions of SFAS 142 during the remainder of 2001.
In August 2001, the FASB issued SFAS 143 (Accounting for Obligations
associated with the Retirement of Long-Live Assets). This statement requires the
following: (a). An existing legal obligation associated with the retirement of a
tangible long-lived asset be recognized as a liability when incurred and the
amount of the liability be initially measured at fair value, (b). An entity
recognize subsequent changes in the liability that result from the passage of
time and revisions in either the timing or amount of estimated cash flows, and
(c). upon initially recognizing a liability for an asset retirement obligation,
an entity capitalize the cost by recognizing an increase in the carrying amount
of the related long-live asset. SFAS 143 will be effective for financial
statements issued for fiscal years beginning after June 15, 2002. We are
currently evaluating the effects of this pronouncement.
In October 2001, the FASB issued SFAS 144 (Accounting for the
Impairment or Disposal of Long-lived Assets). This statement supersedes SFAS
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. The requirements of this statement provide that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. The scope of discontinued operations
will be expanded to include all components of an entity with operations that can
be distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. The provisions of
this statement are effective for fiscal years beginning after December 15, 2001.
The Company will complete its evaluation of the provision of SFAS 143 during the
remainder of 2001.
3. Inventories of Products
Product inventories are valued at the lower of cost or net realizable
value, cost being determined using either a weighted-average or FIFO (First In
First Out) method. Effective November 1, 2000, the Company changed its inventory
accounting policy in the U. S. from LIFO (Last In First Out) to FIFO. The change
was made to provide a better matching of revenues and expenses.
A retroactive restatement of prior period financial statements was made
to present financial results on a consistent basis. The change decreased cost of
sales for the nine months ended September 30, 2000 by $1 million.
Total inventories at September 30, 2001 and December 31, 2000 were
comprised of the following (in millions of U. S. dollars):
September 30, December 31,
2001 2000
--------------- --------------
Raw materials............. $ 9 $ 17
Finished products......... 111 121
Materials and supplies.... 11 11
-------------- -------------
Total............. $ 131 $ 149
============== =============
4. Long-Term Debt
Long-term debt at September 30, 2001 and December 31, 2000 consisted
of the following (in millions of U. S. dollars):
September 30, December 31,
2001 2000
-------------------- -------------------
Senior Subordinated Notes, net of discount $ 197 $ 197
Term Loan A 104 108
Term Loan B 300 350
European Revolver - 23
U.S. Revolver - 3
-------------------- -------------------
Total long-term debt 601 681
Less current portion of long-term debt...... (4) (7)
-------------------- -------------------
$ 597 $ 674
==================== ===================
During the nine months ended September 30, 2001, our operating cash
flow was more than our working capital needs, and we used this excess cash
to make $49.1 million in voluntary principal payments that reduced the
amount of long-term debt outstanding under the credit agreement.
5. Segment Information
Using guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has identified three
reportable segments based on geographic and customer information: (i) America,
(ii) Europe and Africa, and (iii) Asia Pacific and Middle East. Management
operates its business through geographic regions and is not organized nor does
it prepare discreet financial information by product line within the geographic
regions.
Selected financial data by geographic region are presented below (in millions
of U. S. dollars):
Asia
Pacific
Europe And
and Middle Inter-
America Africa East segment Total
------------------------------------------------------
As of and for the three months ended
September 30, 2001:
Revenues from external customers. ...................... $ 108 $ 91 $ 8 $ - $ 207
Intersegment revenues. ................................. 5 36 (2) (39) -
Operating income. ...................................... 32 (4) - - 28
Total assets. .......................................... 415 315 8 - 738
As of and for the three months ended
September 30, 2000:
Revenues from external customers. ...................... $ 126 $ 107 $ 7 $ - $ 240
Intersegment revenues. ................................. 4 60 - (64) -
Operating income. ...................................... (2) 5 1 - 4
Total assets. .......................................... 399 307 10 - 716
Asia
Pacific
Europe And
and Middle Inter-
America Africa East segment Total
------------------------------------------------------
As of and for the nine months ended
September 30, 2001:
Revenues from external customers. ...................... $ 350 $ 304 $ 16 $ - $ 670
Intersegment revenues. ................................. 13 177 - (190) -
Operating income. ...................................... 47 23 - - 70
Total assets. .......................................... 415 315 8 - 738
As of and for the nine months ended
September 30, 2000:
Revenues from external customers. ...................... $ 392 $ 299 $ 18 $ - $ 709
Intersegment revenues. ................................. 17 188 2 (207) -
Operating income. ...................................... 29 30 (1) - 58
Total assets. .......................................... 399 307 10 - 716
Sales revenues are attributed to geographic regions based on the
location of the manufacturing facility and/or marketing company, and are not
based on location of customer. Intersegment amounts represent sales transactions
within and between geographic regions.
6. Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of the assets and
liabilities.
Prior to recapitalization of the Company, the Resins Business of Shell,
and the related tax effects thereof, were included in a number of tax returns
submitted by various Shell operating companies. There was no formal tax
allocation agreement between the various Shell operating companies and the
Resins Business. Accordingly, the tax amounts reflected in the three and nine
months ended September 30, 2000 have been allocated based on the amounts
expected to be paid or received from the various Shell operating companies
filing tax returns in which the Resins Business is included, with net operating
loss and credit carryforwards recorded in the event such benefits are expected
to be realized by the Shell operating companies. The provision for income taxes
represents income taxes deemed paid or received for the current year plus the
change in deferred taxes during the year, excluding effects related to Shell's
corporate restructuring program. The pro forma effect on the unaudited
consolidated and combined statement of income and comprehensive income and
consolidated statement of owner's deficit of reflecting the provision for income
taxes on a separate return basis is not material.
Deferred taxes result from differences between the financial and tax
basis assets and liabilities, and are adjusted for changes in tax rates and tax
laws when changes are enacted. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not
be realized.
7. Special Charges
In connection with the recapitalization and related cost restructure
program, the Company expensed certain costs totaling $11 million for the nine
months ended September 30, 2001. These costs were primarily transitional costs
that are non-recurring in nature and relate to $3 million of severance costs and
$8 million of exit/relocation costs. As a result of the restructure program, 35
employees were terminated in 2001. In addition, seven foreign locations have
been targeted and are in the process of being closed as of September 30, 2001.
As of September 30, 2001 the remaining accrued severance and exit/relocation
costs was $3 million. The Company expects to complete the restructure program by
the end of 2002.
8. Commitments and Contingencies
In the ordinary course of business, the Company is subject to various
laws and regulations and, from time to time, litigation. In the opinion of
management, compliance with existing laws and regulations will not materially
affect the financial position or results of operations of the Company.
Management is not aware of any pending actions against the Company.
The Company is also subject to various environmental laws and
regulations. Similar to other companies in the chemicals industry, the Company
incurs costs for routine preventive and corrective actions at facilities and
waste disposal sites, and those environmental costs of operations and
remediation activities are accrued on a basis consistent with the Company's
accounting policy. The Company may be obligated to take remedial action as a
result of the enactment of laws or the issuance of new regulations or to correct
the effects on the environment of disposal practices or releases of chemical
substances. Most of the expenditures to fulfill these obligations relate to
facilities and sites where past operations followed practices and procedures
that were considered appropriate under regulations, if any, existing at the
time, but may now require investigatory or remedial work to adequately protect
the environment or address new regulatory requirements.
The fact that no additional accrual was provided in 2000 or in the nine
months ended September 30, 2001 is influenced by agreements associated with
transactions whereby Shell generally will indemnify us for environmental damages
associated with environmental conditions that occurred or existed before the
closing date of the recapitalization. In addition, management believes that we
maintain adequate insurance coverage, subject to deductibles, for environmental
redemption activities.
9. Obligations Under Capital Leases
During the quarter ending September 30, 2001, the Company has entered
into a five to seven year leases for equipment at an aggregate annual rental of
$0.3 million. The equipment has been capitalized at its fair market value of
$1.2 million, which approximates the present value of the minimum lease
payments.
10. Supplemental Cash Flow Information
The Company translates its foreign subsidiaries financial statements
for consolidation in accordance with SFAS 52, (Foreign Currency Translation)
using the current rate method. As a result, the statement of cash flows is
affected by the non-cash foreign currency translation adjustments that are
pervasive in the consolidated balance sheet. The statement
of cash flows has been adjusted to exclude the non-cash effects of the foreign
currency translation adjustments.
11. Purchase Price Adjustments
In connection with the recapitalization transaction described in Note
1, a working capital settlement in the amount of $16 million was received in
2001. Of the $16 million, $15 million was related to a purchase price adjustment
for a working capital true up at date of acquisition in accordance with the
purchase agreement. The acquisition had been accounted for as a leveraged
recapitalization and the excess of the purchase price over the net assets
acquired was recorded in Owner's Equity. In addition, included in the purchase
price adjustments is $4 million that represents additional amounts recorded in
connection with the January 2001 purchase of the French subsidiary.
12. Stock Option Plan
RPP Inc. has adopted a stock option plan, effective as of November 14,
2000, pursuant to which options with respect to a total of 54,000 shares of RPP
Inc.'s common stock will be available for grant to employees of, consultants to,
or directors of RPP Inc. or RPP LLC. The option plan is administered by the
board of directors of RPP Inc. or a compensation committee appointed from time
to time by the board of directors. The right to grant options under the option
plan will expire on November 14, 2010 and options granted under the plan are
either nonqualified or incentive stock options.
Options are granted in amounts and at such times and to such eligible
persons as determined by the board of directors of RPP Inc. or the compensation
committee. As of October 15, 2001, RPP Inc. granted nonqualified options
covering 51,282 shares, representing approximately 8% of its total common stock
outstanding on a fully diluted base. Options will vest in accordance with a
schedule as determined by the board of directors of RPP Inc. or the compensation
committee and this vesting schedule will be outlined in the optionee's option
agreement.
13. Subsequent Event
On November 14, 2001, the Company, with RPP Capital Corporation, its
wholly-owned subsidiary, as co-issuer, completed an offering of $75 million
aggregate principal amount of their 13 1/2% Senior Subordinated Notes Due 2010
(the "Notes"). The Notes, together with the $200 million aggregate principal
amount of Notes which were originally issued on November 14, 2000, are treated
as a single class of securities under the Company's existing indenture. The
proceeds from the offering of the Notes were used to repay borrowings under the
Company's credit agreement. In connection with the offering, the Company amended
the credit agreement with respect to the financial covenants.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statement Regarding Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other items in this Quarterly Report on Form 10-Q contain
forward-looking statements and information that are based on management's
beliefs, as well as assumptions made by, and information currently available to,
management. When used in this document, the words "believe", "anticipate",
"estimate", "expect", "intend", and similar expressions are intended to identify
forward-looking statements. Although management believes that the expectations
reflected in these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to have been correct. These
statements are subject to certain risks, uncertainties and assumptions,
including those discussed under the heading
"-Cautionary Statements for Forward Looking Information" and elsewhere in this
report. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated. The Company undertakes no obligation to
release publicly any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in conjunction with the corresponding
sections included in the Company's Registration Statement on Form S-4 (File No.
333-57170), as amended, which was declared effective by the SEC on May 11, 2001.
The Form S-4, as amended, also includes the Company's audited consolidated and
combined financial statements and the notes thereto as of December 31, 2000 and
for each of the three years ended December 31, 2000, 1999 and 1998, as well as
other financial and operating information about our business.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated and combined statements of operations,
expressed as a percentage of revenue. Our historical results of operations for
the three and nine months ended September 30, 2000 may not necessarily reflect
what would have occurred if our business, then owned by Shell, had been a
separate, stand-alone entity during that period. Accordingly, there can be no
assurance that the trends in the operating results will continue in the future.
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenue..................................................... 100% 100% 100% 100%
Cost and expenses:
Purchase and variable product costs................... 52 67 58 62
Operating expenses................................. 17 18 17 18
Selling, general and administrative................ 9 7 7 6
Depreciation and amortization...................... 4 3 4 4
Research and development........................... 3 3 3 2
Special charges................................... 1 - 1 -
----------- ----------- ----------- -----------
Total...................................... 86 98 90 92
Operating income............................................ 14 2 10 8
Income from equity investment............................... - - - -
Interest expense, net....................................... 9 - 7 -
----------- ----------- ----------- -----------
Income before income taxes.................................. 5 2 3 8
Income tax expense......................................... 2 1 1 3
----------- ----------- ----------- -----------
Net income................................................. 3% 1% 2% 5%
=========== =========== =========== ===========
Consolidated EBITDA (1) .................................... 18% 5% 16% 12%
=========== =========== =========== ===========
(1) Consolidated EBITDA represents income before income taxes, interest expense,
net, special charges and depreciation and amortization. Consolidated EBITDA for
the periods presented corresponds with the identically titled definition used as
a measure in both the indenture and our credit agreement for determining our
compliance with covenants contained in those agreements. In addition,
Consolidated EBITDA is presented because it is used by investors to analyze and
compare operating performance and to determine a company's ability to service
and/or incur debt. However, Consolidated EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other income or cash
flow data prepared in accordance with generally accepted accounting principles
or as a measure of a company's profitability or liquidity. Consolidated EBITDA
is not calculated under GAAP and therefore is not necessarily comparable to
similarly titled measures of other companies.
During the latter part of the fourth quarter of 2000 and continuing
through the nine months ended September 30, 2001, the global economy began to
experience a slow down in the manufacturing sectors. Significant portions of our
customers in the United States and internationally operate in these sectors. As
a result, the chemical industry in general and we, to a lesser extent,
experienced softness in product demand apart from expected seasonality. We
believe that we experienced less product demand softness than the chemical
industry overall because epoxy resins continue to substitute against other
products as a result of its growing number of new end-use applications. Further,
the multitude of epoxy resins end-use markets and the replacement of other
materials with epoxy resins have served to soften demand declines in any one
end-use market. There can be no assurances that this trend will continue during
the remainder of 2001 and beyond nor that we will be able to realize margins we
have historically achieved as feedstock costs decline.
The following is a discussion of significant financial statement items
related to our consolidated and combined statements of income. See note 5 of the
consolidated and combined financial statements for segment information.
Revenue
Our revenue is primarily generated through the sale of our three main
product lines: (1) epoxy resins, (2) versatic acids and derivatives, and (3)
sales of BPA. In addition, we sell small amounts of ECH. Revenue has
historically been driven by volumes, market prices and foreign currency
fluctuations. Revenue also includes other income derived primarily from royalty
income and commission income.
Purchases and Variable Product Costs
Purchases and variable product costs are primarily comprised of
feedstock costs. Feedstock costs are driven primarily by market conditions and
exchange rates as volumes are generally consistent year over year. The
significant feedstocks for which we are highly sensitive to the market prices
are phenol, acetone, propylene and chlorine. We purchase chlorine, a primary raw
material for ECH, under long-term supply contracts with third parties which
provide us with producer-like economics by allowing us to buy this raw material
at a margin above production cost and thereby lowering our manufacturing costs.
We also purchase propylene, the other primary raw material for ECH, under
long-term supply agreements with Shell that are based on market price less
negotiated volume discounts. We purchase phenol and acetone, the primary raw
materials for BPA, under attractive supply contracts with Shell and other third
parties that are based on discounted market prices and input-cost formula.
Because we are co-located with Shell at several of our facilities, our
transportation and logistics costs for certain raw materials supplied by Shell
are reduced. Variable manufacturing costs, which are primarily utilities, are
also a significant component of this line item. Purchases and variable product
costs are reduced by the sale of by-products generated during the manufacturing
process, primarily hydrochloric acid.
Operating Expenses
Operating expenses represents the costs associated with the
non-variable operations of our manufacturing facilities. Included in operating
costs are personnel related costs, manufacturing overhead, periodic maintenance,
turnaround costs, and environmental costs. Depreciation relating to
manufacturing assets is included within depreciation and amortization expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are comprised primarily of
costs associated with non-manufacturing, non-research and development
operations, including management, accounting, treasury, information technology,
marketing and sales, and legal. This includes costs associated with health,
safety and environmental projects.
Depreciation and Amortization
Depreciation is computed on a straight-line basis over the estimated
useful lives of the respective assets. Estimated useful lives for plant and
equipment, office buildings, tanks and pipelines are twenty years and range from
three to ten years for other assets. Amortization is computed on a straight-line
basis for intangibles such as patents.
Research and Development Expenses
Research and development expenses are costs associated with product or
customer specific initiatives and costs associated with projects that seek
improvements in manufacturing processes. Primarily all of our research and
development expenses are generated in one of our three research facilities. To
improve the investment return on our significant research and development
expenditures and improve global sharing of ideas within our business, we intend
to centrally manage all such costs.
Special Charges
Special charges consist of non-recurring type costs such as
transaction, transition and severance costs related to restructuring or cost
reduction programs.
Income from Equity Investment
Income from equity investment is related to an unconsolidated equity
investee.
Interest Expense, net
For periods after the recapitalization, interest expense, net consists
of interest expense with respect to borrowings under our credit agreement and
the notes, offset by our interest income from short-term cash investments.
Interest expense also includes amortization of deferred financing costs and
amortization of the discount for the notes. Historically, as part of Shell, we
did not have any debt allocated to us except for operational accounts payable.
As such, we did not have any interest expense prior to November 14, 2000.
Income Taxes
Prior to November 1, 2000, our operations have been included in the tax
returns submitted by various Shell operating companies. The tax amounts
reflected in the combined historical results have been allocated based on the
amounts expected to be paid or received from the various Shell operating
companies filing tax returns in which our operations were included.
Additionally, we have made a Section 338(h)(10) election to allow our
recapitalization to be treated as an acquisition of assets for tax purposes.
Accordingly, for tax purposes the basis of our U.S. assets will be stepped-up to
their fair market values, and we will be able to depreciate our assets using
higher basis than the historical amount. This tax basis step-up will reduce cash
payments for income taxes over the next five years.
Three months Ended September 30, 2001 Compared to Three months Ended
September 30, 2000
Revenue
Revenue decreased by $33 million, or 13.8%, to $207 million for the
three months ended September 30, 2001 from $240 million in the prior year
period. The decrease in revenue is a result of lower volume, partially offset by
increased prices. The increase in prices was attributable to increases in
Resins, partially offset by decreases in BPA, ECH and Versatics. Overall average
prices increased by 1% from the prior year period. The increase in prices is
primarily driven by the Company's ability to negotiate and pass on certain
increased costs of feedstock. Overall volumes decreased by 13% from the prior
year period. Decreased volumes are primarily the result of a slowing global
economy.
Purchases and Variable Product Costs
Purchases and variable product costs decreased by $53 million, or
32.9%, to $108 million from $161 million in the prior year period. This decrease
was largely driven by lower prices for feedstocks due to the decreasing price of
crude oil and related petrochemical products and lower sales volume.
Operating Expenses
Operating expenses decreased by $7 million, or 16.3%, to $36 million
from $43 million in the prior year period. The decrease in operating expenses is
primarily a result of lower costs for maintenance associated with several
agreements with Shell that were not in place for the full prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses remained unchanged at $18
million.
Depreciation and Amortization
Depreciation and amortization remained unchanged at $8 million.
Research and Development Expenses
Research and development costs remained unchanged at $7 million.
Special Charges
Special charges increased by $3 million to $2 million from ($1) million
in the prior year period. Special charges of $3 million for the current period
consisted of exit and relocation costs related to the cost-restructuring
program. As a result of the restructure program, 35 employees were terminated in
2001. In addition, seven foreign locations have been targeted and are in the
process of being closed as of September 30, 2001. As of September 30, 2001 the
remaining accrued severance and exit/relocation costs was $3 million. The
Company expects to complete the restructure program by the end of 2002. The
prior year period reflects adjustments to previously recorded amounts as the
commencement of the transition to become an independent entity progressed.
Operating Income
Operating income increased by $24 million to $28 million from $4
million in the prior year period. The increase was primarily due to decreases in
purchase and variable product costs and operating expenses, partially offset by
decreased revenue and increased special charges.
Interest Expense, Net
Interest expense, net, increased by $18 million primarily due to the
increase in long-term debt resulting from the leveraged buy out
recapitalization. No debt was outstanding in the prior year period.
Income before Income Taxes
Income before taxes increased by $6 million to $10 million from $4
million in the prior year period. The increase is due to the increase in
operating income, partially offset by increased interest expense, net.
Income Tax Expense
Income tax expense increased by $2 million, or 100.0%, to $4 million
from $2 million in the prior year period. The increase is primarily related to
increased taxable income resulting from increased operating income, partially
offset by increased interest expense, net.
Net Income
Net income increased by $4 million to $6 million from $2 million in the
prior year period. The increase was due to increased income before income taxes,
partially offset by increased income tax expense.
Consolidated EBITDA
Consolidated EBITDA increased $27 million to $38 million from $11
million in the prior year period. The increase was primarily due to decreases in
purchase and variable product costs and operating expenses and increased special
charges, partially offset by decreased revenue.
This financial information is being presented because it is an
important measure that, (i) management uses to analyze the business, (ii) is
used in the calculation of the covenants under the indenture and the credit
facility, and (iii) is relevant to the bondholders and lenders to analyze our
financial performance. This financial information should not be construed as
being more important than the GAAP financial data included in this filing.
Nine months Ended September 30, 2001 Compared to Nine months Ended
September 30, 2000
Revenue
Revenue decreased by $39 million, or 5.5%, to $670 million for the nine
months ended September 30, 2001 from $709 million in the prior year period. The
decrease in revenue is a result of lower volume, partially offset by increased
prices. The increase in prices was attributable to increases in Resins, BPA, and
ECH, partially offset by decreases in Versatics. Overall average prices
increased by 3% from the prior year period. The increase in prices is primarily
driven by the Company's ability to negotiate and pass on certain increased costs
of feedstock. Overall volumes decreased by 8% from the prior year period.
Decreased volumes are primarily the result of a slowing global economy.
Purchases and Variable Product Costs
Purchases and variable product costs decreased by $52 million, or
11.8%, to $388 million from $440 million in the prior year period. This decrease
was largely driven by lower sales volume and lower prices for feedstocks due to
the decreasing price of crude oil and related petrochemical products.
Operating Expenses
Operating expenses decreased by $15 million, or 11.9%, to $111 million
from $126 million in the prior year period. The decrease in operating expenses
is primarily a result of lower costs for maintenance associated with several
agreements with Shell that were not in place for the full prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5 million,
or 12.5%, to $45 million from $40 million in the prior year period. The increase
is primarily a result of costs related to becoming an independent entity, which
exceeds the historical allocations in the prior year period.
Depreciation and Amortization
Depreciation and amortization remained unchanged at $25 million.
Research and Development Expenses
Research and development costs increased by $2 million, or 11.1%, to
$20 million from $18 million in the prior year period. The increase is primarily
due to increased personnel and the absence of cost allocations made by Shell to
other business units in the prior year period.
Special Charges
Special charges increased by $9 million to $11 million from $2 million
in the prior year period. Transition costs for the current period consisted of
$3 million for severance costs and $8 million for exit and relocation costs
related to the cost restructure program compared to $2 million in the prior year
period. As a result of the restructure program, 35 employees were terminated in
2001. In addition, seven foreign locations have been targeted and are in the
process of being closed as of September 30, 2001. As of September 30, 2001 the
remaining accrued severance and exit/relocation costs was $3 million. The
Company expects to complete the restructure program by the end of 2002. The
prior year period reflects the commencement of the transition to become an
independent entity.
Operating Income
Operating income increased by $12 million, or 20.7%, to $70 million
from $58 million in the prior year period. The increase was primarily due to the
decreases in purchase and variable product costs and operating expenses,
partially offset by decreased revenue and increases in selling, general and
administrative expenses, research and development costs and special charges.
Income from Equity Investment
Income from equity investment decreased by $1 million to $1 million
from $2 million in the prior year period.
Interest Expense, Net
Interest expense, net, increased by $53 million primarily due to the
increase in long-term debt resulting from the leveraged buy out
recapitalization. No debt was outstanding in the prior year period.
Income before Income Taxes
Income before taxes decreased by $42 million, or 70.0%, to $18 million
from $60 million in the prior year period. The decrease is due to increased
interest expense, net, partially offset by increased operating income.
Income Tax Expense
Income tax expense decreased by $16, or 69.6%, to $7 million from $23
million in the prior year period. The decrease is primarily related to the
decreased taxable income resulting from increased interest expense, net,
partially offset by increased operating income.
Net Income
Net income decreased by $26 million, or 70.3%, to $11 million from net
income of $37 million in the prior year period. The decrease was due to
decreased income before income taxes, partially offset by decreased income tax
expense.
Consolidated EBITDA
Consolidated EBITDA increased $20 million, or 23.0%, to $107 million
from $87 million in the prior year period. Consolidated EBITDA has not been
adjusted by the annual $7 million of previously announced projected cost
savings. The increase was primarily due to the decreases in purchase and
variable product costs and operating expenses and increased special charges,
partially offset by decreases revenue and income from equity investment,
increases in selling, general and administrative expenses, research and
development costs. Consolidated EBITDA has not been adjusted by the annual $7
million of previously announced projected cost savings. During the nine months
ended September 30, 2001, we achieved $2 million of these projected cost savings
and project that we would have achieved an additional $3 million of cost savings
if these cost savings programs were in effect at the beginning of the period.
Including the effect of the previously announced cost savings, Consolidated
EBITDA would have been $109 million.
This financial information is being presented because it is an
important measure that, (i) management uses to analyze the business, (ii) is
used in the calculation of the covenants under the indenture and the credit
facility, and (iii) is relevant to the bondholders and lenders to analyze our
financial performance. This financial information should not be construed as
being more important than the GAAP financial data included in this filing.
Liquidity and Capital Resources
Prior to the consummation of the recapitalization, we financed our
operations through net cash provided by operating activities and contributions
and advances from Shell. We also had participated in Shell's centralized
treasury management system whereby all of our cash receipts were remitted to
Shell and all of our cash disbursements were paid by Shell. While we were owned
by Shell, we did not incur any long-term debt to fund our operations.
After the consummation of the recapitalization, we established our own
centralized treasury management system. Instead of making distributions of our
excess operating cash flow to Shell as done previously, we have been able to
retain all of our operating cash flow to finance the working capital and other
needs of our business. During the nine months ended September 30, 2001, our
operating cash flow was more than our working capital needs, and we used this
excess cash to make $49.1 million in voluntary principal payments that reduced
the amount of long-term debt outstanding under the credit agreement. We expect
to continue to finance our operations through net cash provided by operating
activities, existing cash on hand and borrowings under our revolving credit
facility. As a result of the high level of debt incurred as part of the
recapitalization, we will have to continue to generate significant cash flows to
meet our current debt service requirements.
In November 2000, RPP LLC and RPP CC issued $200 million aggregate
principal amount of 13-1/2% Senior Subordinated Notes due 2010 in a private
offering pursuant to Rule 144A under the Securities Act of 1933. The notes were
issued to bondholders at a discount of $3 million, and accordingly, we received
gross proceeds of $197 million from the offering of the notes. Subsequently, the
Company registered an identical series of notes with the Securities and Exchange
Commission and completed an exchange of the notes for the registered notes. The
notes may be redeemed in whole at any time or in part from time to time, on and
after November 15, 2005, at specified redemption prices.
The notes are senior subordinated unsecured obligations ranking junior
in right of payment to all of our existing and future senior debt and all
liabilities of our subsidiaries that do not guarantee the notes. The proceeds
from the issuance of the notes were used to finance in part the recapitalization
and related transaction costs and expenses. Interest on the notes is payable
semi-annually in cash on each May 15 and November 15, beginning May 15, 2001.
The notes mature on November 15, 2010.
On November 14, 2000, RPP Inc., RPP LLC, RPP CC and Resolution
Nederland B.V. entered into a $600 million credit agreement with a syndicate of
financial institutions. The credit agreement provides for a six-year euro
equivalent $100 million (at issuance) A term loan and an eight-year $350 million
B term loan. Each term loan was fully drawn on November 14, 2000 and used to
finance the recapitalization, including certain related costs and expenses. In
addition, the credit agreement provides for a six-year $150 million revolving
credit facility, the euro equivalent of which is also available, to be used for,
among other things, working capital and general corporate purposes of us and our
subsidiaries, including without limitation, certain permitted acquisitions. The
revolving credit facility also includes a sub-limit for letters of credit in an
amount not to exceed $50 million. At September 30, 2001, we had no amounts
outstanding under the revolving credit facility and $1 million outstanding in
letters of credit that resulted in additional borrowing capacity of $149
million.
The credit agreement is secured by substantially all current and future
assets of RPP LLC, including a pledge of 100% of the stock of our domestic
subsidiaries and 66 2/3% of the stock of our foreign subsidiaries. Our
borrowings and those of our subsidiaries under the credit agreement are
guaranteed by RPPI and borrowings by our indirect subsidiary, Resolution
Nederland B.V., are also guaranteed by us. The credit agreement requires us to
maintain certain minimum financial covenants including a minimum interest
coverage ratio and a maximum total leverage ratio. Consolidated EBITDA is a
measure used in the calculation of certain covenants under the credit agreement
and the indenture. See the "Results of Operations" section for a discussion of
Consolidated EBITDA. As of September 30, 2001, we were in compliance with each
of our financial covenants under the credit agreement. In addition, the credit
agreement is not subject to advance rates or borrowing base limits on
availability.
Borrowings that are maintained as dollar term loans or loans under the
revolving credit facility denominated in dollars, accrue interest at either
Citibank's prime lending base rate or the eurodollar rate plus, in each case, a
margin ranging from 1.25% to 3.75%, which margin is dependent upon our leverage,
as determined on a quarterly basis. Interest rates on the borrowings maintained
as euro term loans or loans under the revolving credit facility denominated in
euros, accrue interest at the euro rate plus associated costs plus, in each
case, a margin ranging from 2.25% to 3.0% depending our leverage, as determined
on a quarterly basis.
Interest period elections generally range from one to six months, or to
the extent available, nine or twelve months for eurodollar and euro rate loans.
With respect to eurodollar loans and euro rate loans, interest is payable at the
end of each interest period or, for interest periods longer than three months,
at least every three months. During the first three quarters of 2001, the
Company entered into interest rate swap agreements related to the term loan B
for notional amounts of $50 million, $75 million, $100 million, $25 million and
$50 million. The interest rate swap agreements fix the LIBOR portion of our
interest rates at 5.41%, 5.25%, 5.41%, 4.61% and $4.39% respectively.
With respect to base rate loans, interest is payable quarterly on the
last business day of each fiscal quarter or whenever a loan is repaid.
Calculation of all interest expense is based on the actual number of days
elapsed in a year comprising 360 days. For each drawn letter of credit, we are
required to pay a per annum fee equal to the spread over the eurodollar rate for
the revolving credit facility, a fronting fee equal to 1/4 of 1% on the
aggregate daily stated amount of each letter of credit, plus administrative
charges. Additionally, we will pay a commitment fee ranging from 0.375% to
0.500% per annum, depending on our leverage ratio, which commitment fee is
payable quarterly on the unused available portion of the revolving credit
facility.
Term loan A under the credit agreement requires quarterly principal
reductions that began on March 31, 2001 and will continue through November 14,
2006. As a result of the voluntary prepayments related to term loan B, quarterly
principal reductions are no longer required. The next scheduled principal
payment related to term loan B is $300 million on November 14, 2008. Also, we
may be required to make mandatory additional principal reductions, based on our
excess cash flow and other events described in the credit agreement.
On November 14, 2001, the Company, with RPP Capital Corporation, its
wholly-owned subsidiary, as co-issuer, completed an offering of $75 million
aggregate principal amount of their 13 1/2% Senior Subordinated Notes Due 2010
(the "Notes"). The Notes, together with the $200 million aggregate principal
amount of Notes which were originally issued on November 14, 2000, are treated
as a single class of securities under the Company's existing indenture. The
proceeds from the offering of the Notes were used to repay borrowings under the
Company's credit agreement. In connection with the offering, the Company amended
the credit agreement with respect to the financial covenants.
During the quarter ended September 30, 2001, the Company entered into a
five to seven year leases for equipment at an aggregate annual rental of $0.3
million. The equipment has been capitalized at its fair market value of $1.2
million, which approximates the present value of the minimum lease payments. The
Company will continue to review capital leases as alternate sources of financing
with favorable interest rates as opportunities arise.
For the nine months ended September 30, 2001, we generated net cash
provided by operating activities of $77 million, provided cash in investing
activities of $5 million and used cash in financing activities of $77 million.
Investing activities for the nine months ended September 30, 2001 and 2000
primarily consisted of expenditures for property, plant and equipment. In
addition, we received a purchase price adjustment in connection with the
recapitalization transaction in the amount of $19 million. For the nine months
ended September 30, 2000, we generated net cash provided by operating activities
of $58 million, used cash in investing activities of $12 million and used cash
in financing activities of $46 million.
Expenditures for property, plant and equipment totaled $14 million and
$9 million for the nine months ended September 30, 2001, and 2000, respectively.
Of the $14 million, $5 million was related to maintenance and $9 million was for
projects related to growth and improved profitability, primarily related to an
investment in our versatics business to improve the quality of these
manufacturing assets. In addition, in January 2001 the Company spent $1 million
in connection with the purchase of Shell Epoxy Resins France SAS.
Because we have an established infrastructure in place, our capital
expenditures are generally not for the building of new plants but for their
maintenance and occasional incremental expansion where justified by the expected
return on investment. Capital expenditures for maintenance have historically
been relatively low at $9 million to $16 million per year, and we expect this to
continue for the next three to five years.
During the third quarter ended September 30, 2001, a comprehensive
information technology project was approved and commissioned, and will encompass
new globally integrated software, hardware, networks and phone systems that will
support the Company's business at a higher level. The Company estimates that the
project will run through the end of 2002 and will cost approximately $38
million. Of the $38 million, certain costs will be capitalized and certain other
costs will be expensed to special charges depending upon various factors such as
the type of financing arrangement, the phase of the project, and nature of the
costs.
The high level of debt incurred as a result of the recapitalization may
preclude us from borrowing any more funds. Based on our current level of
operations and anticipated growth and cost savings, management believes that our
cash flow from operations, together with existing cash and cash equivalents on
hand and future borrowings under our revolving credit facility, if necessary,
will be sufficient to fund our working capital needs and expenditures, for
property, plant and equipment and debt service obligations, although no
assurance can be given in this regard.
Environmental
Our business is subject to various federal, state, local and foreign
laws and regulations which govern environmental health and safety-related
matters. Compliance with these laws and regulations requires substantial
continuing financial commitments and planning. Moreover, the laws and
regulations directly affect how we operate our business.
As of September 30, 2001, the Company has assessed that an
environmental liability accrual is not needed based on the current available
facts, present laws and regulations, and current technology. The Company accrues
for environmental liabilities when the liability is probable and the costs are
reasonably estimable.
The fact that no accrual was provided as of September 30, 2001 is
influenced by agreements associated with the recapitalization whereby Shell
generally will indemnify us for environmental damages associated with certain
environmental conditions that occurred or existed before the closing date of the
recapitalization, subject to certain limitations. In addition, management
believes that we maintain adequate insurance coverage, with deductibles, for
environmental remediation activities.
Inflation and Seasonality
Certain of our expenses, such as feedstocks and other raw materials
used in the production of final products, supplies, maintenance and repairs and
compensation and benefits are subject to normal inflationary pressures. Although
to date we have been able to offset inflationary cost increases through
operating efficiencies and price increases, there can be no assurance that we
will be able to offset any future inflationary cost increases through these or
similar means. Our revenues and earnings are moderately seasonal, with the
second and third quarters generally providing stronger results. Such seasonality
has also been customary in the chemical industry in general, and we expect this
trend to continue in future periods.
Cautionary Statements for Forward-Looking Information
Certain information set forth in this report contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. 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, business trends, and other information that
is not historical information in particular, appear under the heading "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". When used in this report, the words "estimates," "expects,"
"anticipates," "forecasts," "plans," "intends," "believes" and variations of
such words or similar expressions are intended to identify forward-looking
statements. 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. However, there can be no assurance that management's
expectations, beliefs and projections will result or be achieved. All
forward-looking statements apply only as of the date made. We undertake no
obligation to publicly update or revise forward-looking statements which may be
made to reflect events or circumstances after the date made or to reflect the
occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our
actual results to differ materially from the forward-looking statements
contained in or contemplated by this report. Such risks, uncertainties and other
important factors include, among others:
o general economic and business conditions;
o industry trends;
o increases in our leverage;
o changes in our ownership structure;
o restrictions contained in our debt agreements;
o the cost of developing our own stand-alone systems and infrastructure;
o the continuity or replacement of systems and services being provided
to us by Shell or its affiliates;
o changes in business strategy, development plans or cost savings plans;
o competition;
o changes in distribution channels or competitive conditions in the
markets or countries where we operate;
o the highly cyclical nature of the end-use markets in which we
participate;
o the loss of any of our major customers;
o raw material costs and availability;
o ability to attain and maintain any price increases for our products;
o changes in demand for our products;
o availability of qualified personnel;
o foreign currency fluctuations and devaluations and political
instability in our foreign markets;
o the loss of our intellectual property rights;
o availability, terms and deployment of capital;
o changes in, or the failure or inability to comply with, government
regulation, including environmental regulations; and
o increases in the cost of compliance with laws and regulations,
including environmental laws and regulations.
These risks and certain other uncertainties are discussed in more
detail in our Registration Statement on Form S-4, as amended (File No.
333-57170), which was declared effective by the SEC on May 11, 2001.
There may be other factors, including those discussed elsewhere in this
report, that may cause our actual results to differ materially from the
forward-looking statements. Any forward-looking statements should be
considered in light of these factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are engaged in manufacturing and marketing resins in the U. S. and
internationally. As a result, the Company is exposed to certain market risks
that include financial instruments such as foreign currency, short-term
investments, trade receivables, and long-term debt. The Company does not enter
into derivative instruments for trading purposes; however, interest rate swaps
were entered into during the nine months ended September 30, 2001 in connection
with the Company's credit facility. The interest rate swap protects the Company
against interest rate fluctuation by fixing the credit facility interest rate
from a variable interest rate. The credit facility balance includes $104 million
at September 30, 2001 that is subject to variable interest rates. Assuming no
change in credit facility borrowings, a one hundred basis point change in
interest rates would impact net interest expense by approximately $1.0 million
per year.
Effects of Currency Fluctuations
We conduct operations in countries around the world. Therefore, our
results of operations are subject to both currency transaction risk and currency
translation risk. We incur currency transaction risk whenever we enter into
either a purchase or sales transaction using a currency other than the local
currency of the transacting entity. With respect to currency translation risk,
our financial condition and results of operations are measured and recorded in
the relevant domestic currency and then translated into U.S. dollars for
inclusion in our consolidated and combined financial statements. Exchange rates
between these currencies and U.S. dollars in recent years have fluctuated
significantly and may do so in the future. The majority of our revenues and
costs are denominated in U.S. dollars, with euro-related currencies also being
significant. For the nine months ended September 30, 2001, 48% of our total
revenues and 50% of our total expenses were from companies incorporated outside
the United States. For the nine months ended September 30, 2000, 45% of our
total revenues and 44% of our total expenses were from companies incorporated
outside the United States. The net depreciation of the Netherlands Guilder
against the U.S. dollar and other world currencies since 1997 has had a negative
impact on our earnings, as reported in U.S. dollars in our consolidated and
combined financial statements. Historically, we have not undertaken hedging
strategies to minimize the effect of currency fluctuations. Significant changes
in the value of the Netherlands Guilder relative to the U.S. dollar could also
have an adverse effect on our financial condition and results of operations and
our ability to meet interest and principal payments on euro-denominated debt,
including certain borrowings under the credit agreement, and U.S. dollar
denominated debt, including the Notes and certain borrowings under the credit
agreement.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report
Exhibit Number Description
10.1 Employment agreement dated July 16, 2001 between Resolution Performance
Product LLC and Jeffrey M. Nodland. (Filed herewith.)
10.2 Secured promissory note dated August 10, 2001 from Jeffrey M. Nodland to
Resolution Performance Product LLC. (Filed herewith.)
10.3 Pledge agreement dated August 10, 2001 between Jeffrey M. Nodland and
Resolution Performance Products LLC. (Filed herewith.)
10.4 Secured promissory note dated June 18, 2001 from Mark S. Antonvich to
Resolution Performance Products LLC. (Filed herewith.)
10.5 Pledge agreement dated June 18, 2001 between Mark S. Antonvich to Resolution
Performance Products LLC. (Filed herewith.)
10.6 First amendment dated as of November 5, 2001 to the Credit Agreement dated
November 14, 2000 among Resolution Performance Product, Inc. and Resolution
Performance Products LLC various lenders and Morgan Stanley as administrative
Agent. (Exhibit 10.1 to the Company's Form 8-K filed on November 7, 2001, is
hereby incorporated by reference.)
(b) Reports on Form 8-K.
None
.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOLUTION PERFORMANCE PRODUCTS LLC
Date: November 14, 2001 By: /s/ J. Travis Spoede
--------------------
J. Travis Spoede, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
RPP CAPITAL CORPORATION
Date: November 14, 2001 By: /s/ J. Travis Spoede
--------------------
J. Travis Spoede, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
10.1 Employment agreement dated July 16, 2001 between Resolution Performance
Product LLC and Jeffrey M. Nodland.
10.2 Secured promissory note dated August 10, 2001 from Jeffrey M. Nodland to
Resolution Performance Product LLC.
10.3 Pledge agreement dated August 10, 2001 between Jeffrey M. Nodland and
Resolution Performance Products LLC.
10.4 Secured promissory note dated June 18, 2001 from Mark S. Antonvich to
Resolution Performance Products LLC.
10.5 Pledge agreement dated June 18, 2001 between Mark S. Antonvich to Resolution
Performance Products LLC.