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Huntsman Corporation

60,227,274 Shares

Common Stock


        This is an initial public offering of our common stock. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "HUN."

        We are selling 55,681,819 shares of common stock and the selling stockholder named in this prospectus is selling 4,545,455 shares. We will not receive any proceeds from the sale of shares by the selling stockholder.

        The selling stockholder has granted the underwriters an option to purchase up to 9,034,091 additional shares of common stock to cover over-allotments.

        Concurrently with this offering, we are also making a public offering of our mandatory convertible preferred stock. The mandatory convertible preferred stock has been approved for listing on the New York Stock Exchange under the symbol "HUNPr." The sale of common stock is not contingent on the completion of our concurrent mandatory convertible preferred stock offering.


         Investing in our common stock involves risks. See "Risk Factors" on page 18.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.


 
  Per Share
  Total
Public Offering Price   $ 23.000   $ 1,385,227,302
Underwriting Discount   $ 1.035   $ 62,335,229
Proceeds to Huntsman Corporation (before expenses)   $ 21.965   $ 1,223,051,154
Proceeds to the Selling Stockholder (before expenses)   $ 21.965   $ 99,840,919

        The underwriters expect to deliver the shares to purchasers on or about February 16, 2005.

Joint Book-runners

Citigroup

                   Credit Suisse First Boston

                                      Merrill Lynch & Co.

                                                          Deutsche Bank Securities

 
   
   
JPMorgan   Lehman Brothers   UBS Investment Bank
 
   
   
   
   
CIBC World Markets   Jefferies & Company, Inc.   Natexis Bleichroeder Inc.   Scotia Capital   WR Hambrecht + Co

The date of this prospectus is February 10, 2005.


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GRAPHIC



        Until March 7, 2005 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.


TABLE OF CONTENTS

 
Prospectus Summary
Risk Factors
Disclosure Regarding Forward-Looking Statements
Our Company
Use of Proceeds
Dividend Policy
Capitalization
Dilution
Selected Historical Financial Data
Unaudited Pro Forma Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Business
Management
Principal and Selling Stockholders
Certain Relationships and Related Transactions
Concurrent Offering of Mandatory Convertible Preferred Stock
Description of Capital Stock
Shares Eligible for Future Sale
Material United States Federal Tax Consequences to Non-U.S. Holders of Common Stock
Underwriting
Legal Matters
Experts
Where You Can Find More Information
Glossary of Chemical Abbreviations
Index to Financial Statements

         You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

Industry and Market Data

        This prospectus includes information with respect to market share, industry conditions and forecasts that we obtained from internal industry research, publicly available information (including industry publications and surveys), and surveys and market research provided by consultants (including Nexant, Inc., an international consulting and research firm ("Nexant"), Chemical Market Associates, Inc., an international consulting and research firm ("CMAI"), International Business Management Associates, an industry research and consulting firm ("IBMA"), and others). The publicly available information and the reports, forecasts and other research provided by consultants generally state that the information contained therein has been obtained from sources believed to be reliable. Our internal research and forecasts are based upon our management's understanding of industry conditions, and such information has not been verified by any independent sources. As is noted, certain statements in this prospectus are based on information provided by consultants that we commissioned to provide us with the referenced information.

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PROSPECTUS SUMMARY

         The following summary highlights selected information from this prospectus and does not contain all of the information that you should consider before investing in our stock. This prospectus contains information regarding our businesses and detailed financial information. You should carefully read this entire prospectus, including the historical and pro forma financial statements and related notes, before making an investment decision.

         Huntsman Corporation is a new company formed to hold the existing businesses of Huntsman Holdings, LLC. Concurrently with the consummation of this offering, Huntsman Holdings, LLC will become a wholly owned subsidiary of Huntsman Corporation as part of a series of transactions we refer to as the "Reorganization Transaction." The pro forma and pro forma as adjusted financial data included in this prospectus give effect to the transactions described in "Unaudited Pro Forma Financial Data."

         We are concurrently offering shares of our common stock and our mandatory convertible preferred stock. The closing of our initial public offering of common stock is not conditioned upon the closing of our offering of mandatory convertible preferred stock, but the closing of our offering of mandatory convertible preferred stock is conditioned upon the closing of our initial public offering of common stock. Unless the context requires otherwise, in this prospectus the term "offering" refers to both our offering of common stock and our offering of mandatory convertible preferred stock.

         In this prospectus, "Huntsman Corporation," the "company," "we," "us" or "our" refers to Huntsman Corporation and its subsidiaries, including our predecessor Huntsman Holdings, LLC, after giving effect to the Reorganization Transaction, except where the context makes clear that the reference is only to Huntsman Corporation itself and not its subsidiaries. Huntsman Holdings, LLC has conducted its operations through three principal subsidiaries: Huntsman LLC, Huntsman International Holdings LLC and Huntsman Advanced Materials LLC. In this prospectus, the term "HLLC" refers to Huntsman LLC and, unless the context otherwise requires, its subsidiaries, the term "HIH" refers to Huntsman International Holdings LLC and, unless the context otherwise requires, its subsidiaries, and the term "Advanced Materials" refers to Huntsman Advanced Materials LLC and, unless the context otherwise requires, its subsidiaries. A glossary of chemical abbreviations used in this prospectus is set forth on page 191.

Overview

        We are among the world's largest global manufacturers of differentiated and commodity chemical products. We manufacture a broad range of chemical products and formulations, which we market in more than 100 countries to a diversified group of consumer and industrial customers. Our products are used in a wide range of applications, including those in the adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining and synthetic fiber industries. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, epoxy-based polymer formulations, maleic anhydride and titanium dioxide. We operate 63 manufacturing facilities located in 22 countries and employ over 11,500 associates. Our businesses benefit from significant vertical integration, large production scale and proprietary manufacturing technologies, which allow us to maintain a low-cost position. We had pro forma revenues for the nine months ended September 30, 2004 and the year ended December 31, 2003 of $8,357.7 million and $9,252.4 million, respectively.

Our Products and Segments

        Our business is organized around our six segments: Polyurethanes, Advanced Materials, Performance Products, Pigments, Polymers and Base Chemicals. These segments can be divided into two broad categories: differentiated and commodity. We produce differentiated products primarily in our Polyurethanes, Advanced Materials and Performance Products segments. These products serve diverse end markets and are generally characterized by historical growth rates in excess of GDP growth

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rates resulting from product substitution and new product development, proprietary manufacturing processes and product formulations and a high degree of customer loyalty. While the demand for these differentiated products is also influenced by worldwide economic conditions and GDP growth, our differentiated products have tended to produce more stable profit margins and higher demand growth rates than our commodity products.

        In our commodity chemical businesses, we produce titanium dioxide derived from titanium-bearing ores in our Pigments segment and petrochemical-based olefins, aromatics and polyolefins products in our Polymers and Base Chemicals segments. Certain industry fundamentals have recently improved and, according to Nexant and IBMA, point to increased profitability in the markets for the major commodity products that we manufacture.

        The following charts set forth information regarding the revenues and EBITDA of our six business segments for the nine months ended September 30, 2004:

Segment Revenues*
  Segment EBITDA*

GRAPHIC

*
Percentage allocations in the segment revenues chart above reflect the allocation of all inter-segment revenue eliminations to our Base Chemicals segment. Percentage allocations in the segment EBITDA chart above do not give effect to $54.1 million of corporate and other unallocated items and exclude $202.4 million of restructuring and plant closing costs. For a detailed discussion of our EBITDA by segment, see Note 26 to the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus. For a discussion of EBITDA and a reconciliation of EBITDA to net income, see "Summary Historical and Pro Forma As Adjusted Financial Data."

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        The following table identifies the key products, their principal end markets and applications and representative customers of each of our segments:

Segment
  Products
  End Markets and Applications
  Representative Customers
Polyurethanes   MDI, PO, polyols, PG, TDI, TPU, aniline and MTBE   automotive interiors, refrigeration and appliance insulation, construction products, footwear, furniture cushioning, adhesives, specialized engineering applications and fuel additives   BMW, Collins & Aikman, Electrolux, Firestone, Lear, Louisiana Pacific, Shell, Weyerhauser

Advanced Materials

 

epoxy resin compounds and formulations; cross-linking, matting and curing agents; epoxy, acrylic and polyurethane-based adhesives and tooling resin formulations

 

adhesives, aerospace, electrical power transmission, consumer electronics, civil engineering, wind power generation and automotive

 

ABB, Akzo, BASF, Boeing, Bosch, Cytec, Hexcel, Rohm & Haas, Sherwin Williams

Performance Products

 

ethyleneamines, ethanolamines,
polyetheramines, carbonates, surfactants, LAB, maleic anhydride, EO and EG

 

detergents, personal care products, agrochemicals, lubricant and fuel additives, paints and coatings, construction, marine and automotive products and PET fibers and resins

 

ChevronTexaco, Colgate, Ecolab, Henkel, Monsanto, Procter & Gamble, Unilever

Pigments

 

titanium dioxide

 

paints and coatings, plastics, paper, printing inks, fibers and ceramics

 

Akzo, Atofina, Clariant, ICI, Jotun, PolyOne

Polymers

 

LDPE and LLDPE, polypropylene, EPS, styrene and APAO

 

flexible and rigid packaging, adhesives and automotive, medical and construction products

 

Ashland, Kerr, Kimberly Clark, Pliant, Polymer Group, PolyOne, Sealed Air

Base Chemicals

 

ethylene, propylene, butadiene, benzene, cyclohexane, paraxylene and MTBE

 

packaging film, polyester and nylon fibers, PVC, cleaning compounds, polymer resins, SBR rubber and fuel additives

 

Bayer, BP, Bridgestone/Firestone, Dow, DuPontSA, Invista, Goodyear, Nova, Shell, Solvay

        We are a leading global manufacturer and marketer of a broad range of polyurethane chemicals, including MDI, PO, polyols, PG, TDI and TPU. Polyurethane chemicals are used to produce rigid and flexible foams, as well as coatings, adhesives, sealants and elastomers. We focus on the higher-margin, higher-growth markets for MDI and MDI-based polyurethane systems. Growth in our Polyurethanes

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segment has been driven primarily by the continued substitution of MDI-based products for other materials across a broad range of applications. As a result, according to Nexant, global consumption of MDI grew at a compound annual growth rate of 7.3% from 1992 to 2003. According to Nexant, we are the lowest-cost and second-largest producer of MDI in the world. We operate four primary Polyurethanes manufacturing facilities in the U.S. and Europe. We also operate 14 Polyurethanes formulation facilities, which are located in close proximity to our customers worldwide. We have a significant interest in a manufacturing joint venture that has recently begun construction of a low-cost, world-scale, integrated MDI production facility near Shanghai, China.

        We are a leading global manufacturer and marketer of technologically advanced epoxy, acrylic and polyurethane-based polymer products. We focus on formulations and systems that are used to address customer-specific needs in a wide variety of industrial and consumer applications. Our products are used either as replacements for traditional materials such as metal, wood, clay, glass, stone and ceramics, or in applications where traditional materials do not meet demanding engineering specifications. Our Advanced Materials segment is characterized by the breadth of our product offering, our expertise in complex chemistry, our long-standing relationships with our customers and our ability to develop and adapt our technology and our applications expertise for new markets and new applications. We market over 6,000 products to more than 5,000 customers. We operate 15 Advanced Materials synthesis and formulating facilities in North America, Europe, Asia, South America and Africa.

        Our Performance Products segment is organized around three business groups, performance specialties, performance intermediates, and maleic anhydride and licensing, and serves a wide variety of consumer and industrial end markets. In performance specialties, we are a leading global producer of amines, carbonates and certain specialty surfactants. Growth in demand in our performance specialties business tends to be driven by the end-performance characteristics that our products deliver to our customers. These products are manufactured for use in a growing number of niche industrial end uses and have been characterized by growing demand and stable profitability. For example, we are one of two significant global producers of polyetheramines, for which our sales volumes have grown at a compound annual rate of over 13% in the last ten years due to strong demand in a number of industrial applications, such as epoxy curing agents, fuel additives and civil construction materials. In performance intermediates, we consume internally produced and third-party-sourced base petrochemicals in the manufacture of our surfactants, LAB and ethanolamines products, which are primarily used in detergent and consumer products applications and EG, which is primarily used in the production of polyester fibers and PET packaging. We believe we are North America's largest and lowest-cost producer of maleic anhydride. Maleic anhydride is the building block for UPRs, mainly used in the production of fiberglass reinforced resins for marine, automotive and construction products. We operate 16 Performance Products manufacturing facilities in North America, Europe and Australia.

        We are a leading global manufacturer and marketer of titanium dioxide, which is a white pigment used to impart whiteness, brightness and opacity to products such as paints, plastics, paper, printing inks, fibers and ceramics. According to IBMA, our Pigments segment, which operates under the trade name "Tioxide®," is the fourth largest producer of titanium dioxide in the world, with an estimated 12% of global production capacity, and the largest producer of titanium dioxide in Western Europe, with an estimated 23% of Western European production capacity. We operate eight chloride-based and

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sulfate-based titanium dioxide manufacturing facilities located in North America, Europe, Asia and Africa.

        We manufacture and market polypropylene, polyethylene, EPS, EPS packaging and APAO. We consume internally produced and third-party-sourced base petrochemicals, including ethylene and propylene, as our primary raw materials in the manufacture of these products. In our polyethylene, APAO and certain of our polypropylene product lines, we pursue a targeted marketing strategy by focusing on those customers and end use applications that require customized polymer formulations. We produce these products at our smaller and more flexible Polymers manufacturing facilities and generally sell them at premium prices. In our other product lines, we maintain leading regional market positions and operate cost-competitive manufacturing facilities. We operate six primary Polymers manufacturing facilities in North America and Australia. We are expanding the geographic scope of our polyethylene business and improving the integration of our European Base Chemicals business through the construction of an integrated, low-cost, world-scale LDPE plant to be located adjacent to our existing olefins facility in Wilton, U.K. Upon completion of this facility, which we expect will occur in late 2007, we will consume approximately 50% of the output from our U.K. ethylene unit in the production of LDPE.

        We are a highly integrated North American and European producer of olefins and aromatics. We consume a substantial portion of our Base Chemicals products, such as ethylene, propylene and benzene, in our Performance Products and Polyurethanes segments. We believe this integration leads to higher operating rates for our Base Chemical assets, improved reliability of raw material supply for our other segments and reduced logistics and transportation costs. We operate four Base Chemicals manufacturing facilities located on the Texas Gulf Coast and in northeast England. These facilities are equipped to process a variety of oil- and natural gas-based feedstocks and benefit from their close proximity to multiple sources of these raw materials. This flexibility allows us to optimize our operating costs. These facilities also benefit from extensive underground storage capacity and logistics infrastructure, including pipelines, deepwater jetties and ethylene liquefaction facilities.

Current Industry Conditions

        Over the past several years, the global chemical industry has generally experienced depressed market conditions due to weak demand, lower capacity utilization rates and high, volatile feedstock costs. In 2004, the profitability of the industry generally improved as demand recovered and additions of new manufacturing capacity were limited.

        Growth in our Polyurethanes and Advanced Materials segments has been driven by the continued substitution of our products for other materials across a broad range of applications as well as the level of global economic activity. In Polyurethanes, this growth, particularly in Asia, has recently resulted in improved demand and higher industry capacity utilization rates for many of our key products, including MDI. In 2004, the profitability of our Polyurethanes and Advanced Materials segments improved due to increased demand in several of our key industrial end markets, including aerospace, automotive and construction products. This allowed us to increase selling prices, which more than offset increases in the cost of our primary raw materials, including benzene, propylene and chlorine.

        In our Performance Products segment, demand for our performance specialties has generally continued to grow at rates in excess of GDP as overall demand is significantly influenced by new product and application development. In 2004, overall demand for most of our performance intermediates was generally stable or improved, but excess surfactant manufacturing capacity in Europe

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and a decline in the use of LAB in new detergent formulations limited our ability to increase prices in response to higher raw material costs. In EG, higher industry capacity utilization rates in 2004 due to stronger demand in the PET resin and Asian fiber markets resulted in higher profitability.

        Our Pigments segment experienced difficult business conditions throughout 2003 and much of 2004, reflecting soft economic conditions, but industry fundamentals have recently strengthened. This has resulted in higher capacity utilization rates and improved product pricing. IBMA currently expects that titanium dioxide industry operating rates will continue to increase as a result of increased demand from improving economic conditions and a lack of significant new planned capacity additions.

        The profitability of our Polymers and Base Chemicals segments has historically been cyclical. The industry has recently operated in a down cycle that resulted from significant new capacity additions, weak demand reflecting soft global economic conditions and high crude oil and natural gas-based raw material costs. Despite continued high feedstock costs, the profitability of our Base Chemicals segment improved in 2004 as demand strengthened and average selling prices and profit margins increased in most of our product lines. Limited new capacity additions have been announced for these products in North America and Western Europe over the next several years. Consequently, Nexant currently expects operating rates and profit margins in the polymers and base chemicals markets to increase as demand continues to recover as a result of improved global economic conditions.

Competitive Strengths

        We derive a substantial portion of our revenues and EBITDA from our Polyurethanes, Advanced Materials and Performance Products segments, which manufacture our differentiated products. For the nine months ended September 30, 2004, these segments accounted for 52% of our revenues and 63% of our segment EBITDA, as described on page 2. We enjoy leading market positions in many of our primary product lines in these segments, including MDI, amines, carbonates, specialty surfactants, maleic anhydride, adhesives and epoxy-based polymer formulations. Demand for many of these products has been relatively resistant to changes in global economic conditions and has historically grown at rates in excess of GDP growth due to new product development and the continued substitution of our products for traditional materials and chemicals. We produce many of these products using our proprietary manufacturing processes, and we own many patents related to our processes, product formulations and their end-use applications. The markets for many of our differentiated products also benefit from a limited number of global producers, significant barriers to entry and a high degree of customer loyalty.

        We are among the world's largest global manufacturers of chemical products. We operate 63 manufacturing facilities located in 22 countries as well as numerous sales, technical service and research facilities. We believe that the scale of our operations enables us to source raw materials and services that we purchase from third parties on terms more advantageous than those available to our smaller competitors. In addition, we are able to leverage selling, administrative and corporate overhead service platforms in order to reduce the operating costs of our businesses, including those that we have acquired. Our scale has also allowed us to rationalize smaller, less efficient capacity in recent years.

        Our businesses also benefit from significant product integration. In 2003, we utilized approximately half of our ethylene production and all our EO production in the manufacturing operations of our Performance Products and Polymers segments. In addition, we utilized substantially all the benzene that we produced in the production of our aromatics and MDI. We believe that our high degree of product integration provides us with a competitive advantage over non-integrated producers by reducing both our exposure to cyclical raw material prices and our raw material transportation costs, as well as

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increasing the operating rates of our facilities. We believe our large production scale and integration enable us to manufacture and market our products at costs that are lower than those achieved by smaller, less integrated producers.

        We sell our products to a highly diverse base of customers who are located in all major geographic regions and represent many end-use industry groups. We have thousands of customers in more than 100 countries. We have developed a global presence, with approximately 47% of our pro forma revenues for the year ended December 31, 2003 from North America, approximately 37% from Europe, approximately 12% from the Asia/Pacific region and approximately 4% from South America and other regions. We believe that this diversity limits our dependence on any particular product line, customer, end market or geographic region.

        We are managed by an experienced group of executives, led by Jon M. Huntsman, our Chairman of the Board, and Peter R. Huntsman, our President and Chief Executive Officer. Jon M. Huntsman is the founder of our company and has over 40 years of experience in the chemicals and plastics industries. Peter Huntsman has over 20 years of experience in the chemicals and plastics industries. Both have been instrumental in leading our company through periods of growth and industry cycles. The balance of our executive management team has extensive industry experience and prior work experience at leading chemical and professional services firms, including Imperial Chemical Industries PLC ("ICI"), Texaco, Inc., Mobil Corporation, Bankers Trust Company and Skadden, Arps, Slate, Meagher & Flom LLP. Throughout our history, our management team has demonstrated expertise and entrepreneurial spirit in expanding our businesses, integrating numerous acquisitions and executing on significant cost cutting programs.

Business Strategy

        Since 1999, we have invested over $500 million in discretionary capital expenditures and completed seven strategic acquisitions to expand our differentiated segments. As a result, for the nine months ended September 30, 2004, these segments produced 52% of our revenues and 63% of our segment EBITDA. We intend to continue to invest our capital in our higher-growth, higher-margin differentiated segments in order to expand the breadth of our product offerings, extend the geographic scope of these businesses and increase our production capacity to meet growing customer demand. As part of this strategy, we have a significant interest in a manufacturing joint venture that has recently begun construction of a world-scale MDI production facility near Shanghai, China. We believe that this will enable us to strengthen our long-standing presence in China and to further capitalize on the growth in demand for MDI in Asia. We intend to continue to invest in our global research and development capabilities in order to meet the increasingly sophisticated needs of our customers in areas of new product development and product application technology. We have recently announced that we will consolidate substantially all of our existing North American Polyurethanes, Advanced Materials and Performance Products research and development, technical service and process technology capabilities in a new, state-of-the-art facility to be constructed in The Woodlands, Texas.

        We derived 48% of our revenues and 37% of our segment EBITDA for the nine months ended September 30, 2004 from our Pigments, Polymers and Base Chemicals segments. We believe we have cost-competitive facilities in each of these segments, which produce primarily commodity products. In

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periods of favorable market conditions, our commodity businesses have historically generated significant amounts of free cash flow. We intend to continue to selectively invest sufficient capital to sustain the competitive position of our existing commodity facilities and improve their cost structure. In addition, we intend to capitalize on the low-cost position of our Wilton, U.K. olefins facility by constructing a world-scale LDPE facility on an adjacent site.

        We continuously focus on identifying opportunities to reduce our operating costs and maximize our operating efficiency. We have completed a number of targeted cost reduction programs and other actions since 1999. These programs have included, among other things, the closing of seven high-cost manufacturing units as well as reducing corporate and administrative costs. More recently, we have announced a comprehensive global cost reduction program, which we refer to as "Project Coronado," with a goal of further reducing our annual fixed manufacturing and selling, general and administrative costs by $200 million by 2006. In connection with Project Coronado, we have recently announced the closure of eight smaller, less competitive manufacturing units in our Polyurethanes, Advanced Materials, Performance Products and Pigments segments. These and other actions have resulted in the reduction of approximately 1,500 employees in these businesses since 2000.

        We intend to use substantially all of the net proceeds of approximately $1,450 million from the concurrent offerings of our common stock and our mandatory convertible preferred stock, together with cash on hand, to reduce our outstanding indebtedness. This will result in a significant reduction in our annual interest expense. If the profitability of our businesses continues to improve, we intend to further reduce the level of our indebtedness. The amount of any further reductions of our indebtedness will depend on a number of factors, including our future profitability and alternative uses for our available cash.

         There are a number of risks that could limit our ability to successfully implement our business strategies, including, but not limited to, our inability to introduce new products or expand the geographic scope of our differentiated segments, our failure to successfully complete the construction of our new facilities in China or the U.K, our failure to effectively implement Project Coronado or any other cost savings initiatives and our inability to further reduce our level of indebtedness. In addition, while we may implement our strategies, the benefits derived from such implementation may be mitigated, in part or in whole, if we suffer from one or more of the risks described in "Risk Factors."

Our History

        Jon M. Huntsman founded the predecessor to our company in the early 1970s as a small packaging company. Since then, we have grown through a series of significant acquisitions and now own a global portfolio of commodity and differentiated businesses. In 1993, we purchased the LAB and maleic anhydride businesses of The Monsanto Company. In 1994, we purchased the global chemical business from what was formerly Texaco Inc. In 1997, we purchased our PO business from Texaco. Also in 1997, we acquired Rexene Corporation, significantly increasing the size of our Polymers business. In 1999, we acquired certain polyurethanes, pigments and European petrochemicals businesses from ICI. In 2000, we completed the acquisition of the Morton global TPU business from The Rohm and Haas Company. In 2001, we completed our acquisition of the global ethyleneamines business of Dow Chemical Company, and we completed our acquisition of the Albright & Wilson European surfactants business from Rhodia S.A. In 2003, we completed our acquisition of 88% of our Advanced Materials business through the purchase of Vantico Group S.A., and we now own approximately 90% of Advanced Materials. Approximately $518 million and $867 million of our revenues for 2003 and the nine months ended September 30, 2004, respectively, were attributable to the acquisition of Vantico Group S.A. Due

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in part to the financing of these acquisitions, our subsidiaries have accumulated a significant amount of indebtedness, which totaled approximately $6,200.7 million as of September 30, 2004. We have also divested certain non-core businesses, including our packaging subsidiary in 1997 and our global styrenics business in 1998. For the years ended December 31, 2002 and 2003 and the nine months ended September 30, 2004, our net loss was $22.2 million, $319.8 million and $226.5 million, respectively.

The Reorganization Transaction

        We will consummate the Reorganization Transaction in connection with the completion of this offering. In the Reorganization Transaction, Huntsman Holdings, LLC will become our wholly owned subsidiary, and the existing beneficial holders of the common and preferred membership interests of Huntsman Holdings, LLC, including the mandatorily redeemable preferred interests, will receive shares of our common stock in exchange for their interests. Huntsman Family Holdings Company LLC ("Huntsman Family Holdings"), which is owned by Jon M. Huntsman and certain members of his family, and MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities B, L.P. and MatlinPatterson Global Oportunities (Bermuda), L.P. (collectively, "MatlinPatterson") will cause all of the shares of our common stock they are entitled to receive in exchange for their membership interests in Huntsman Holdings, LLC to be delivered to HMP Equity Trust, a new entity formed by Huntsman Family Holdings and MatlinPatterson to hold such shares ("Investments Trust"). Immediately following the Reorganization Transaction and the offering, Investments Trust will hold approximately 63% of our outstanding common stock. The beneficiaries of Investments Trust are Huntsman Family Holdings and MatlinPatterson, and Investments Trust will be controlled by Jon M. Huntsman, Peter R. Huntsman, David J. Matlin and Christopher R. Pechock. In addition, as part of the Reorganization Transaction, the holders of warrants in our subsidiary HMP Equity Holdings Corporation ("HMP") will exchange all of their warrants for shares of our common stock following the completion of the offering. See "Our Company—The Reorganization Transaction."

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        The following chart reflects a summary of our organizational structure immediately prior to the Reorganization Transaction and this offering:

GRAPHIC


(1)
The warrants entitle the holders to purchase up to 12% of the common stock of HMP. As part of the Reorganization Transaction, the warrants will be exchanged for shares of our common stock.

(2)
Represents HMP's common equity in Huntsman Advanced Materials LLC. The balance of the common equity of Huntsman Advanced Materials LLC is owned by third parties, including affiliates of SISU Capital Limited. In addition, Huntsman Group Inc. holds preferred equity in Huntsman Advanced Materials LLC with a $513.3 million liquidation preference.

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        The following chart reflects a summary of our organizational structure immediately after the completion of the Reorganization Transaction and this offering.

GRAPHIC


(1)
Includes the former holders of warrants in HMP.

(2)
Represents our common equity in Huntsman Advanced Materials LLC. The balance of the common equity is owned by third parties, including affiliates of SISU Capital Limited.

(3)
In connection with the Reorganization Transaction and this offering, we intend to reorganize the ownership of certain of our operating subsidiaries. We will continue to own 100% of Huntsman International Holdings LLC, and we expect to hold a majority of the interest directly.

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The Offering

Issuer   Huntsman Corporation

Common stock offered by us

 

55,681,819 shares

Common stock offered by the selling stockholder

 

4,545,455 shares

Common stock to be outstanding after this offering and the Reorganization Transaction

 

220,454,546 shares

Use of Proceeds

 

The net proceeds to us from this offering and the concurrent offering of our mandatory convertible preferred stock will be approximately $1,450 million. We intend to use all of such proceeds, together with cash on hand, to repay outstanding indebtedness and to purchase approximately $35.6 million of U.S. treasury securities that we will pledge as collateral to support our obligation to pay dividends on our mandatory convertible preferred stock. See "Use of Proceeds."

 

 

We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholder.

New York Stock Exchange Symbol

 

HUN

Risk Factors

 

See "Risk Factors" in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

        Unless we specifically state otherwise, all information in this prospectus:



        Our principal executive offices are located at 500 Huntsman Way, Salt Lake City, Utah 84108, and our telephone number is (801) 584-5700.

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Concurrent Mandatory Convertible Preferred Stock Offering

        Concurrently with this offering, we are also making a public offering of 5,000,000 shares of our 5% mandatory convertible preferred stock for a public offering price of $50 per share. Such shares will be convertible into an aggregate of up to 10,869,565 shares of our common stock. We have granted the underwriters of that offering an option to purchase up to 750,000 additional shares of mandatory convertible preferred stock to cover over-allotments, which would be convertible into an aggregate of up to 1,630,435 shares of our common stock. Our mandatory convertible preferred stock has been approved for listing on the New York Stock Exchange under the symbol "HUNPr." For a description of the terms of our mandatory convertible preferred stock, see "Concurrent Offering of Mandatory Convertible Preferred Stock."

Recent Developments—Expected Results for the Three Months Ended December 31, 2004

        We are currently in the process of finalizing our consolidated financial results for the three month period ended December 31, 2004, and therefore final results are not yet available. Based on preliminary unaudited financial results for the three month period ended December 31, 2004, we estimate that our revenues for such three month period will be between $3,000 million and $3,200 million and operating income will be between $150 million and $190 million, including restructuring and plant closing costs of $90 million to $100 million. For the same period in 2003, we had revenues of approximately $2,370 million and operating income of approximately $85 million, including restructuring and plant closing costs of approximately $11 million. We estimate that depreciation and amortization expense for the three month period ended December 31, 2004 will be approximately $127 million as compared to approximately $123 million in the same period in 2003. Our financial results for the three month period ended December 31, 2004 have not been reviewed or audited by our independent registered public accounting firm. Our independent public accounting firm is in the process of conducting its audit with respect to our 2004 financial statements and such audit could result in changes to our preliminary estimates indicated above. The foregoing estimates constitute forward looking statements and are subject to risks and uncertainties, including those described under "Risk Factors" in this prospectus. We cannot assure you that our final results for the three months ended December 31, 2004 will be consistent with the foregoing estimates.

13



SUMMARY HISTORICAL AND PRO FORMA AS ADJUSTED FINANCIAL DATA

        The summary historical financial data set forth below presents the historical financial data of our predecessor Huntsman Holdings, LLC. In such financial data, HIH is accounted for using the equity method of accounting through April 30, 2003. Effective May 1, 2003, as a result of the HIH Consolidation Transaction (as defined below), we have consolidated the financial results of HIH. Effective July 1, 2003, as a result of the AdMat Transaction (as defined below), we have consolidated the financial results of Advanced Materials. As a result, the financial information as of and for the year ended December 31, 2003 is not comparable to the prior years' historical financial data presented herein, and the financial information as of and for the nine months ended September 30, 2004 is not comparable to the financial information as of and for the nine months ended September 30, 2003.

        In order to present data that is useful for comparative purposes, we have provided pro forma as adjusted statement of operations data for the year ended December 31, 2003 and the nine months ended September 30, 2003 and 2004, which gives pro forma effect to the following transactions as if each transaction had occurred on January 1, 2003:


and which is adjusted to give effect to the following transactions as if each transaction had occurred on January 1, 2003:

        We have also provided pro forma as adjusted balance sheet data which gives effect to the following transactions as if each transaction had occurred on September 30, 2004:

        In the Reorganization Transaction, the common and preferred interests of Huntsman Holdings, LLC and the warrants to acquire common stock of HMP (the "HMP Warrants") will be exchanged for shares of our common stock. See "Our Company—The Reorganization Transaction."

        The unaudited pro forma as adjusted financial data does not purport to be indicative of the combined financial position or results of operations of future periods or indicative of results that would have occurred had the above transactions been completed on the dates indicated.

        The summary financial data set forth below should be read in conjunction with the Consolidated Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of

14



Operations," "Unaudited Pro Forma Financial Data," and "Selected Historical Financial Data" included elsewhere in this prospectus and, in each case, the notes related thereto.

 
  Year Ended December 31,
  Nine Months Ended September 30,
 
 
   
   
   
  Pro Forma
As Adjusted

   
   
  Pro Forma
As Adjusted

 
 
  2001
  2002
  2003
  2003(a)
  2003
  2004
  2003(a)
  2004(a)
 
 
  (in millions, except per share amounts)

 
Statement of Operations Data:                                                  
Revenues   $ 2,757.4   $ 2,661.0   $ 7,080.9   $ 9,252.4   $ 4,711.1   $ 8,357.7   $ 6,885.2   $ 8,357.7  
Cost of goods sold     2,666.6     2,421.0     6,373.1     8,255.1     4,258.7     7,358.0     6,150.1     7,358.0  
   
 
 
 
 
 
 
 
 
Gross profit     90.8     240.0     707.8     997.3     452.4     999.7     735.1     999.7  
Operating expenses     211.7     174.7     493.4     732.2     333.3     580.9     567.2     580.9  
Restructuring, impairment and plant closing costs (credit)     588.5     (1.0 )   37.9     55.0     27.2     202.4     44.3     202.4  
   
 
 
 
 
 
 
 
 
Operating (loss) income     (709.4 )   66.3     176.5     210.1     91.9     216.4     123.6     216.4  
Interest expense—net     (239.3 )   (181.9 )   (409.1 )   (382.0 )   (260.7 )   (459.5 )   (286.1 )   (292.3 )
Loss on sale of accounts receivable     (5.9 )       (20.4 )   (32.4 )   (11.9 )   (10.2 )   (24.0 )   (10.2 )
Other income (expense)     0.6     (7.6 )       (2.2 )   0.4     (0.8 )   (1.8 )   (0.8 )
Equity in (loss) income of unconsolidated affiliates     (86.8 )   (31.4 )   (37.5 )   1.5     (38.2 )   3.0     0.8     3.0  
Income tax benefit (expense)     184.9     (8.5 )   (30.8 )   (32.1 )   3.8     25.7     2.4     25.7  
Minority interest in subsidiaries' loss (income)     13.1     (28.8 )   1.5     6.8     0.5     (1.1 )   5.8     (1.1 )
   
 
 
 
 
 
 
 
 
Loss from continuing operations     (842.8 )   (191.9 )   (319.8 )   (230.3 )   (214.2 )   (226.5 )   (179.3 )   (59.3 )
Cumulative effect of accounting changes(b)     0.1     169.7                          
   
 
 
 
 
 
 
 
 
Net loss   $ (842.7 ) $ (22.2 ) $ (319.8 ) $ (230.3 ) $ (214.2 ) $ (226.5 ) $ (179.3 ) $ (59.3 )
   
 
 
 
 
 
 
 
 
Basic and diluted per common share(c):                                                  
  Loss from continuing operations   $ (5.69 ) $ (1.42 ) $ (2.66 ) $ (1.04 ) $ (1.82 ) $ (1.97 ) $ (0.81 ) $ (0.27 )
  Cumulative effect of accounting changes         1.15                          
   
 
 
 
 
 
 
 
 
  Net loss   $ (5.69 ) $ (0.27 ) $ (2.66 ) $ (1.04 ) $ (1.82 ) $ (1.97 ) $ (0.81 ) $ (0.27 )
   
 
 
 
 
 
 
 
 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net cash provided by (used in) operating activities   $ (287.0 ) $ 88.7   $ 225.4         $ (36.8 ) $ 55.9              
Net cash (used in) provided by investing activities     86.2     (24.5 )   (908.5 )         (842.1 )   (160.7 )            
Net cash provided by (used in) financing activities     182.2     (93.0 )   786.7           947.7     128.2              
EBITDA(d)     (590.8 )   320.9     473.5   $ 663.5     273.2     617.6   $ 463.3   $ 617.6  
Total unusual items of (expense) income included in EBITDA(e)     (602.0 )   145.4     (63.3 )   (126.2 )   (42.1 )   (220.6 )   (107.1 )   (220.6 )
Depreciation and amortization     197.5     152.7     353.4     479.7     230.5     410.3     358.9     410.3  
Capital expenditures     76.4     70.2     191.0     228.9     129.9     145.0     167.8     145.0  
Ratio of earnings to fixed charges and preferred dividends          (f)        (f)        (f)              (f)        (f)              (f)

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total assets                                 $ 8,993.8         $ 8,983.1  
Total debt                                   6,200.7           5,009.1  
Total liabilities                                   8,724.4           7,559.3  
Stockholders' (deficit) equity                                   (441.4 )         1,394.6  

(a)
For a description of the pro forma adjustments, see "Unaudited Pro Forma Financial Data."

(b)
In 2002, we adopted SFAS No. 141, "Business Combinations," resulting in an increase of $169.7 million in the carrying value of our investment in HIH to reflect the proportionate share of the underlying net assets. In 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," resulting in a cumulative decrease in net loss of $0.1 million. See Note 2 to the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus.

15


(c)
All shares and per share information have been restated to give effect to the shares of common stock to be issued in respect of the outstanding membership interests in Huntsman Holdings, LLC in connection with the Reorganization Transaction. Pro forma per share information also gives effect to the shares of common stock to be issued in connection with this offering.

(d)
EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. We believe that EBITDA enhances an investor's understanding of our financial performance and our ability to satisfy principal and interest obligations with respect to our indebtedness. However, EBITDA should not be considered in isolation or viewed as a substitute for net income, cash flow from operations or other measures of performance as defined by generally accepted accounting principles in the U.S. ("GAAP"). Moreover, EBITDA as used herein is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the method of calculation. Our management uses EBITDA to assess financial performance and debt service capabilities. In assessing financial performance, our management reviews EBITDA as a general indicator of economic performance compared to prior periods. Because EBITDA excludes interest, income taxes, depreciation and amortization, EBITDA provides an indicator of general economic performance that is not affected by debt restructurings, fluctuations in interest rates or effective tax rates, or levels of depreciation and amortization. Accordingly, our management believes this type of measurement is useful for comparing general operating performance from period to period and making certain related management decisions. EBITDA is also used by securities analysts, lenders and others in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be highly dependent on a company's capital structure, debt levels and credit ratings. Therefore, the impact of interest expense on earnings can vary significantly among companies. In addition, the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate. As a result, effective tax rates and tax expense can vary considerably among companies. Finally, companies employ productive assets of different ages and utilize different methods of acquiring and depreciating such assets. This can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. Our management also believes that our investors use EBITDA as a measure of our ability to service indebtedness as well as to fund capital expenditures and working capital requirements. Nevertheless, our management recognizes that there are material limitations associated with the use of EBITDA in the evaluation of our company as compared to net income, which reflects overall financial performance, including the effects of interest, income taxes, depreciation and amortization. EBITDA excludes interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes interest expense has material limitations. EBITDA also excludes taxes. Because the payment of taxes is a necessary element of our operations, any measure that excludes tax expense has material limitations. Finally, EBITDA excludes depreciation and amortization expense. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes depreciation and amortization expense has material limitations. Our management compensates for the limitations of EBITDA by using it to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Our management also uses other metrics to evaluate capital structure, tax planning and capital investment decisions. For example, our management uses credit ratings and net debt ratios to evaluate capital structure, effective tax rate by jurisdiction to evaluate tax planning, and payback period and internal rate of return to evaluate capital investments. Our management also uses trade working capital to evaluate its investment in receivables and inventory, net of payables.

16



We believe that net income (loss) is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA and that cash provided by (used in) operating activities is the liquidity measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA. The following table reconciles EBITDA to our net loss and to our cash provided by (used in) operations:

 
  Year Ended December 31,
  Nine Months Ended September 30,
 
 
   
   
   
  Pro Forma
As Adjusted

   
   
  Pro Forma
As Adjusted

 
 
  2001
  2002
  2003
  2003
  2003
  2004
  2003
  2004
 
 
  (in millions)

 
EBITDA   $ (590.8 ) $ 320.9   $ 473.5   $ 663.5   $ 273.2   $ 617.6   $ 463.3   $ 617.6  
Depreciation and amortization expense     (197.5 )   (152.7 )   (353.4 )   (479.7 )   (230.5 )   (410.3 )   (358.9 )   (410.3 )
Interest expense, net     (239.3 )   (181.9 )   (409.1 )   (382.0 )   (260.7 )   (459.5 )   (286.1 )   (292.3 )
Income tax benefit (expense)     184.9     (8.5 )   (30.8 )   (32.1 )   3.8     25.7     2.4     25.7  
   
 
 
 
 
 
 
 
 
Net loss     (842.7 )   (22.2 )   (319.8 ) $ (230.3 )   (214.2 )   (226.5 ) $ (179.3 ) $ (59.3 )
                     
             
 
 
Cumulative effect of accounting changes     (0.1 )   (169.7 )                              
Equity in losses (income) of investment in unconsolidated affiliates     86.8     31.4     37.5           38.2     (3.0 )            
Depreciation and amortization expense     197.5     152.7     353.4           230.5     410.3              
Non-cash restructuring, plant closing and asset impairment charges (credits)     528.2     (5.3 )   9.7           12.3     109.0              
Non-cash interest     10.4     (5.5 )   90.7           44.5     118.0              
Deferred income taxes     (184.5 )       (3.6 )         (27.8 )   (55.8 )            
Unrealized gains on foreign currency transactions             (58.3 )         (17.4 )   (26.1 )            
Other, net     (4.3 )   34.2     12.2           6.3     6.4              
Changes in operating assets and liabilities     (78.3 )   73.1     103.6           (109.2 )   (276.4 )            
   
 
 
       
 
             
Net cash (used in) provided by operating activities   $ (287.0 ) $ 88.7   $ 225.4         $ (36.8 ) $ 55.9              
   
 
 
       
 
             
(e)
Included in EBITDA are the following unusual items of (expense) income:

 
  Year Ended December 31,
  Nine Months Ended September 30,
 
 
   
   
   
  Pro Forma
As Adjusted

   
   
  Pro Forma
As Adjusted

 
 
  2001
  2002
  2003
  2003
  2003
  2004
  2003
  2004
 
 
  (in millions)

 
Early extinguishment of debt(1)   $ (1.1 ) $ (6.7 ) $   $   $   $ (1.9 ) $   $ (1.9 )
Legal and contract settlement expense, net(2)             (2.0 )   (5.5 )       (6.1 )   (5.5 )   (6.1 )
Loss on sale of accounts receivable(3)     (5.9 )       (20.4 )   (32.4 )   (11.9 )   (10.2 )   (24.0 )   (10.2 )
Asset write down(4)             (3.0 )   (5.8 )   (3.0 )       (5.8 )    
Restructuring, impairment and plant closing costs(5)     (588.5 )   1.0     (37.9 )   (55.0 )   (27.2 )   (202.4 )   (44.3 )   (202.4 )
Reorganization costs(6)     (6.6 )   (18.6 )       (27.5 )           (27.5 )    
Cumulative effect of accounting changes     0.1     169.7                          
   
 
 
 
 
 
 
 
 

Total unusual items of (expense) income included in EBITDA

 

$

(602.0

)

$

145.4

 

$

(63.3

)

$

(126.2

)

$

(42.1

)

$

(220.6

)

$

(107.1

)

$

(220.6

)
   
 
 
 
 
 
 
 
 

    (1)
    Represents charges, primarily the non-cash write-off of deferred debt issuance costs related to early retirement of debt.

    (2)
    Represents expense recognized in connection with legal settlements and contract terminations. See "Business—Legal Proceedings."

    (3)
    We maintain an accounts receivable securitization program under which we grant an undivided interest in certain of our trade accounts receivable to a qualified off-balance sheet entity. We incur losses on the accounts receivable program for the discount on receivables sold into the program and fees and expenses associated with the program. In addition, we retain responsibility for the economic gains and losses on forward contracts mandated by the terms of the program to hedge the currency exposure on the collateral supporting the off-balance sheet debt issued.

    (4)
    Represents non-cash charges for asset impairments not associated with a restructuring program.

    (5)
    Represents cash and non-cash charges for business exit costs, employee termination costs and asset impairments related to various restructuring plans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Restructuring and Plant Closing Costs" and Note 10 to the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus.

    (6)
    Represents costs incurred in connection with debt for equity exchanges and debt and equity restructuring activities.

(f)
For the years ended December 31, 2001, 2002 and 2003, earnings were insufficient to cover fixed charges and preferred dividends by $974.8 million, $149.5 million and $339.9 million, respectively. For the nine months ended September 30, 2003 and 2004, earnings were insufficient to cover fixed charges and preferred dividends by $244.0 million and $312.1 million, respectively. For the nine months ended September 30, 2004 on a pro forma as adjusted basis, earnings were insufficient to cover fixed charges and preferred dividends by $111.5 million.

17



RISK FACTORS

         You should carefully consider the risks described below in addition to all other information provided to you in this prospectus before making an investment decision. Any of the following risks could materially and adversely affect our business, results of operations and financial condition.

Risks Related to Our Business

        We have incurred net losses in each of the last five fiscal years and in the nine months ended September 30, 2004, and we had an accumulated deficit of $1,470 million as of September 30, 2004. We will need to generate additional revenues and/or significantly reduce costs, including interest expense, in order to avoid additional net losses in future periods. If we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis. Failure to achieve or maintain profitability may materially reduce the market price of our stock.

        Following this offering, we will have a substantial amount of indebtedness outstanding at our subsidiaries. As of September 30, 2004, on a pro forma as adjusted basis, we had total consolidated outstanding indebtedness of approximately $5,009.1 million (including the current portion of long-term debt). We may incur substantial additional debt from time to time for a variety of purposes. Our outstanding debt could have important consequences for our businesses, including:

        The existing debt instruments of our subsidiaries contain restrictive covenants that may limit our ability to utilize our cash flow to operate our businesses by restricting our subsidiaries' ability to, among other things, make prepayments of certain debt, pay dividends to us, make investments and merge or consolidate and transfer or sell assets.

        As of September 30, 2004, the current portion of our long term debt totaled $54.8 million. We estimate that, on a pro forma as adjusted basis, our annual interest expense for 2004 will be approximately $390 million. As of September 30, 2004, we had combined outstanding variable rate borrowings of approximately $2,500 million. Assuming a 1% increase in interest rates, without giving effect to interest rate hedges, our annual interest rate expense would increase by approximately $25 million. If we are unable to generate sufficient cash flow or are otherwise unable to obtain the funds required to meet payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of those instruments. In the event of a default, a holder of the indebtedness could elect to declare all the funds borrowed under those instruments to be due and payable together with accrued and unpaid interest, the lenders under our credit facilities could elect to terminate their

18



commitments thereunder and we or one or more of our subsidiaries could be forced into bankruptcy or liquidation. Any of the foregoing consequences could restrict our ability to grow our business and cause the value of our common stock to decline.

        Standard and Poor's Ratings Services and Moody's Investors Service maintain credit ratings for our primary subsidiaries. Each of these ratings is currently below investment grade. Any decision by these or other ratings agencies to downgrade such ratings in the future could result in increased interest and other financial expenses relating to the future borrowings of our subsidiaries and could restrict our ability and the ability of our subsidiaries to obtain additional financing on satisfactory terms. In addition, any downgrade could restrict our access to, and negatively impact the terms of, trade credit extended by our suppliers of raw materials.

        We are a holding company with no business operations, sources of income, indebtedness or assets of our own other than our ownership interests in our subsidiaries. Because all our operations are conducted by our subsidiaries, our cash flow and our ability to repay debt that we may incur after this offering and our ability to pay dividends to our stockholders, including the dividends on the mandatory convertible preferred stock that we are offering concurrently with our common stock offering, are dependent upon cash dividends and distributions or other transfers from our subsidiaries. Payment of dividends, distributions, loans or advances by our subsidiaries to us are subject to restrictions imposed by the current and future debt instruments of our subsidiaries. Moreover, our principal operating subsidiaries, HIH, HLLC and Advanced Materials, are financed separately from each other, and the debt instruments of each such subsidiary limit our ability to allocate cash flow or resources from one subsidiary, and its related group of subsidiaries, to another subsidiary group. Further, payments of dividends and other distributions by Advanced Materials are currently subject to the consent of the holders of minority interests in Advanced Materials. In addition, payments or distributions from our subsidiaries could be subject to restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate. As of September 30, 2004, on a pro forma as adjusted basis, our subsidiaries had total outstanding indebtedness of approximately $5,009.1 million (including the current portion of long-term debt).

        Our subsidiaries are separate and distinct legal entities. Any right that we have to receive any assets of or distributions from any of our subsidiaries upon the bankruptcy, dissolution, liquidation or reorganization of any such subsidiary, or to realize proceeds from the sale of their assets, will be junior to the claims of that subsidiary's creditors, including trade creditors and holders of debt or preferred stock issued by that subsidiary.

        Historically, the markets for many of our products, particularly our commodity products, have experienced alternating periods of tight supply, causing prices and profit margins to increase, followed by periods of capacity additions, resulting in oversupply and declining prices and profit margins. Currently, several of our markets continue to experience conditions of oversupply, and the pricing of our products in these markets is depressed. Future growth in demand for these products may not be sufficient to alleviate any existing or future conditions of excess industry capacity, and such conditions

19


may be sustained or further aggravated by anticipated or unanticipated capacity additions or other events.

        We derive a substantial portion of our revenue from sales of commodity products. Due to the commodity nature of these products, competition in these markets is based primarily on price and to a lesser extent on performance, product quality, product deliverability and customer service. As a result, we may not be able to protect our market position for these products by product differentiation and may not be able to pass on cost increases to our customers. Historically, the prices for our commodity products have been cyclical and sensitive to relative changes in supply and demand, the availability and price of feedstocks and general economic conditions. Our other products may be subject to these same factors, but, typically, the impact of these factors is greatest on our commodity products.

        The prices of the raw materials that we purchase from third parties are cyclical and volatile. We purchase a substantial portion of these raw materials from third party suppliers, and the cost of these raw materials represents a substantial portion of our operating expenses. The prices for a number of these raw materials generally follow price trends of, and vary with market conditions for, crude oil and natural gas feedstocks, which are highly volatile and cyclical. In recent periods, we have experienced significantly higher crude oil prices, which have resulted in increased raw material prices. According to CMAI, the average price of WTI crude oil in the U.S. was $26.09 per barrel in 2002, $31.11 per barrel in 2003 and $39.13 per barrel for the nine months ended September 30, 2004. Similarly, according to CMAI, the average price of natural gas in the U.S. was $3.32 per MMbtu in 2002, $5.45 per MMbtu in 2003 and $5.85 per MMbtu for the nine months ended September 30, 2004.

        Although we frequently enter into supply agreements to acquire these raw materials, these agreements typically provide for market based pricing and provide us only limited protection against price volatility. While we attempt to match cost increases with corresponding product price increases, we are not always able to raise product prices immediately or at all. Timing differences between raw material prices, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, have had and may continue to have a negative effect on profitability. If any of our suppliers is unable to meet its obligations under present supply agreements, we may be forced to pay higher prices to obtain the necessary raw materials from other sources and we may not be able to increase prices for our finished products to recoup the higher raw materials cost. In addition, if any of the raw materials that we use become unavailable within the geographic area from which they are now sourced, then we may not be able to obtain suitable and cost effective substitutes. Any underlying cost increase that we are not able to pass on to our customers or any interruption in supply of raw materials could increase our costs or decrease our revenues, which could reduce our profitability.

        The industries in which we operate are highly competitive. Among our competitors are some of the world's largest chemical companies and major integrated petroleum companies that have their own raw material resources. Some of these companies may be able to produce products more economically than we can. In addition, some of our competitors have greater financial resources, which may enable them to invest significant capital into their businesses, including expenditures for research and development. If any of our current or future competitors develops proprietary technology that enables them to produce products at a significantly lower cost, our technology could be rendered uneconomical or obsolete. Moreover, certain of our businesses use technology that is widely available. Accordingly, barriers to entry, apart from capital availability, are low in certain commodity product segments of our

20


business, and the entrance of new competitors into the industry may reduce our ability to capture improving profit margins in circumstances where capacity utilization in the industry is increasing. Further, petroleum-rich countries have become more significant participants in the petrochemical industry and may expand this role significantly in the future. Increased competition in any of our businesses could compel us to reduce the prices of our products, which could result in reduced profit margins and/or loss of market share and reduce the trading price of our stock.

        Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations are subject to hazards inherent in the manufacturing and marketing of differentiated and commodity chemical products. These hazards include: pipeline leaks and ruptures; explosions; fires; severe weather and natural disasters; mechanical failures; unscheduled downtimes; labor difficulties; transportation interruptions; remediation complications; chemical spills; discharges or releases of toxic or hazardous substances or gases; storage tank leaks; and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties and liabilities. Furthermore, we are subject to present and future claims with respect to workplace exposure, exposure of contractors on our premises as well as other persons located nearby, workers' compensation and other matters.

        We maintain property, business interruption and casualty insurance policies which we believe are in accordance with customary industry practices, but we are not fully insured against all potential hazards and risks incident to our business. We maintain property damage and business interruption insurance policies with aggregate limits of $1 billion per occurrence and products liability and sudden and accidental insurance policies with aggregate per occurrence and annual limits of $600 million. We also maintain insurance policies covering other types of risks, including pollution legal liability insurance. Each of these insurance policies is subject to customary exclusions, deductibles and coverage limits. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could materially increase our operating costs and therefore reduce our profitability.

        In addition, we are subject to various claims and litigation in the ordinary course of business. In conjunction with many of our past acquisitions, we have obtained indemnity agreements from the prior owners addressing liabilities that may arise from operations and events prior to our ownership. We are a party to several pending lawsuits and proceedings. It is possible that a judgment could be rendered against us in these cases or others in which we could be uninsured or not covered by indemnity and beyond the amounts that we currently have reserved or anticipate incurring for such matters. See "Business—Legal Proceedings" and "Business—Environmental, Health and Safety Matters."

        In connection with the audit of our financial statements for the year ended December 31, 2003, our independent registered public accounting firm, or auditors, identified several matters that they deemed to be "material weaknesses" in our internal controls as defined in standards established by the American Institute of Certified Public Accountants. The auditors noted that these material weaknesses had led to restatements of the financial statements of certain of our subsidiaries in recent periods.

        The principal material weakness identified by our auditors was that our controllership function did not have an adequate formal process in place to gather the data required to prepare the financial statements and disclosures required for the numerous financial reporting requirements of our subsidiaries. Specifically, the auditors noted that there was not a detailed review of the data supporting

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the disclosures in our financial statements by a senior member of our controllership function, that supporting documentation for certain disclosures was very limited, that the processes used to aggregate the information varied by subsidiary, without a standard, comprehensive package of supporting disclosure, and that information delivered to senior management and our audit committee was not timely and was often incomplete.

        In addition, the auditors noted that we had made a data entry error during the transition of our PO business to the SAP enterprise resource planning system in April 2003. This error, which was not detected until February 2004, led to the restatement of the third quarter 2003 financial statements of certain of our subsidiaries, resulting in a $12.3 million increase in our net loss for the three months ended September 30, 2003. The auditors also noted that during 2003, loss on sale of accounts receivable related to our receivables securitization program was reported incorrectly due to a failure to properly understand certain aspects of the securitization program and a lack of oversight in the accounting for the program. This error led to the restatement of the financial statements of certain of our subsidiaries for the first three quarters of 2003, resulting in a $17.9 million decrease in our net loss for the three months ended March 31, 2003, a $12.3 million decrease in our net loss for the three months ended June 30, 2003 and a $6.4 million decrease in our net loss for the three months ended September 30, 2003.

        On October 12, 2004, we announced that we had determined to reclassify certain amounts in our consolidated statements of cash flows caused by errors in the automated process by which we determined the effect and classification of foreign exchange rates, the classification of repayment of debt by a subsidiary and the classification of certain fees paid in connection with the AdMat Transaction on our statements of cash flows. These errors led to a restatement of the financial statements of certain of our subsidiaries for the six months ended June 30, 2004 and the years ended December 31, 2003, 2002 and 2001. These reclassifications had no impact on our consolidated statements of operations or balance sheets.

        In connection with the audit of our financial statements for the nine months ended September 30, 2004, our auditors advised us of various matters involving our internal controls, relating to the closing of our books and records, that they considered to be a "reportable condition." Our auditors advised us that they believe this condition contributed to a number of misstatements in our financial statements that individually and in the aggregate were not material. Although our auditors advised us of this reportable condition, they did not judge it to be a material weakness in connection with the audit of our financial statements for the nine months ended September 30, 2004. In conducting such audit our auditors did not undertake to audit our internal controls, and thus we cannot give any assurance that they would not note additional material weaknesses or reiterate the material weaknesses described above had they done so.

        We entered into a number of significant transactions in 2003, including the acquisition of the HIH minority interests and the AdMat Transaction, which significantly increased our financial reporting obligations. To improve our financial accounting organization and processes, we appointed a new independent director as the chairman of the audit committee of each of our principal subsidiaries in December 2003. In addition, since the beginning of 2004, we have replaced our Controller and have added 13 new positions in the areas of finance, treasury, internal controls and internal audit, including a Director of Financial Reporting and a Director of Internal Controls. We intend to add two more positions in internal audit before the end of the first quarter of 2005. We have also adopted and implemented additional policies and procedures to strengthen our financial reporting system. However, the process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. Upon completion of this offering, we will have had only limited operating experience with the improvements we have made to date. The effectiveness of the measures we have taken to address the material weaknesses described above have not been

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independently audited or evaluated. The measures we have taken to date or any measures we take in the future may not be sufficient to remediate the material weaknesses reported by our independent auditors. We may not be able to implement and maintain adequate controls over our financial processes and reporting in the future, which may require us to restate our financial statements in the future. In addition, we may discover additional past, ongoing or future weaknesses or significant deficiencies in our financial reporting system in the future.

        Any failure to remediate the material weaknesses or reportable conditions noted by our independent auditors in connection with our audits or to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure also could adversely affect the results of the periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our "internal control over financial reporting" that will be required when the SEC's rules under Section 404 of the Sarbanes-Oxley Act of 2002 become applicable to us beginning with our Annual Report on Form 10-K for the year ending December 31, 2005 to be filed in the first quarter of 2006. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could result in a lower trading price of our stock.

        We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as, under some environmental laws, the assessment of strict liability and/or joint and several liability. Moreover, changes in environmental regulations could inhibit or interrupt our operations, or require us to modify our facilities or operations. Accordingly, environmental or regulatory matters may cause us to incur significant unanticipated losses, costs or liabilities, which could reduce our profitability. See "Business—Environmental, Health and Safety Matters."

        In addition, we could incur significant expenditures in order to comply with existing or future environmental or safety laws. Capital expenditures and costs relating to environmental or safety matters will be subject to evolving regulatory requirements and will depend on the timing of the promulgation and enforcement of specific standards which impose requirements on our operations. Capital expenditures and costs beyond those currently anticipated may therefore be required under existing or future environmental or safety laws.

        Furthermore, we may be liable for the costs of investigating and cleaning up environmental contamination on or from our properties or at off-site locations where we disposed of or arranged for the disposal or treatment of hazardous materials or from disposal activities that pre-dated our purchase of our businesses. We may therefore incur additional costs and expenditures beyond those currently anticipated to address all such known and unknown situations under existing and future environmental laws. See "Business—Environmental, Health and Safety Matters."

        We produce MTBE, an oxygenate that is blended with gasoline to reduce vehicle air emissions and to enhance the octane rating of gasoline. The use of MTBE is controversial in the U.S. and elsewhere and may be substantially curtailed or eliminated in the future by legislation or regulatory action. For example, California, New York and Connecticut have adopted rules that prohibit the use of MTBE in

23


gasoline sold in those states as of January 1, 2004. Overall, states that have taken some action to prohibit or restrict the use of MTBE in gasoline account for a substantial portion of the "pre-ban" U.S. MTBE market. Additional phase-outs or other future regulation of MTBE may result in a significant reduction in demand for our MTBE, a material loss in revenues or material increase in compliance costs or expenditures. In addition, a number of lawsuits have been filed, primarily against gasoline manufacturers, marketers and distributors, by persons seeking to recover damages allegedly arising from the presence of MTBE in groundwater. While we have not been named as a defendant in any litigation concerning the environmental effects of MTBE, we may in the future become involved in such litigation, which could cause us to incur significant unanticipated losses, costs or liabilities and therefore reduce our profitability. See "Business—Environmental, Health and Safety Matters."

        Some of our subsidiaries conduct a significant portion of their business outside the U.S. These operations outside the U.S. are subject to risks normally associated with international operations. These risks include the need to convert currencies which may be received for our products into currencies in which our subsidiaries purchase raw materials or pay for services, which could result in a gain or loss depending on fluctuations in exchange rates. In addition, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during the reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, our reported international sales and earnings may be reduced because the local currency may translate into fewer U.S. dollars. Because we currently have significant operations located in the United Kingdom and continental Europe, we are primarily exposed to fluctuations in the pound sterling, the euro and the Swiss franc. Furthermore, we anticipate increased exposure to the Chinese renminbi following completion of the construction of our MDI production facilities in China through our Chinese joint ventures, currently expected in 2006.

        Other risks of international operations include trade barriers, tariffs, exchange controls, national and regional labor strikes, social and political risks, general economic risks and required compliance with a variety of foreign laws, including tax laws. Furthermore, in foreign jurisdictions where process of law may vary from country to country, we may experience difficulty in enforcing agreements. In jurisdictions where bankruptcy laws and practices may vary, we may experience difficulty collecting foreign receivables through foreign legal systems. The occurrence of these risks could disrupt the businesses of our international subsidiaries, which could significantly affect their ability to make distributions to us.

        Proprietary protection of our processes, apparatuses and other technology is important to our business. Consequently, we may have to rely on judicial enforcement of our patents and other proprietary rights. While a presumption of validity exists with respect to patents issued to us in the U.S., there can be no assurance that any of our patents will not be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, if any pending patent application filed by us does not result in an issued patent, or if patents are issued to us, but such patents do not provide meaningful protection of our intellectual property, then our ability to compete may be adversely affected. Additionally, our competitors or other third parties may obtain patents that restrict or preclude our ability to lawfully produce or sell our products in a competitive manner, which could result in significantly lower revenues, reduced profit margins and/or loss of market share.

        We also rely upon unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position. While it is our policy to enter into confidentiality agreements with our employees and third parties to protect our intellectual

24



property, these confidentiality agreements may be breached, may not provide meaningful protection for our trade secrets or proprietary know-how, or adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and know-how. In addition, others could obtain knowledge of our trade secrets through independent development or other access by legal means. The failure of our patents or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets or proprietary know-how could result in significantly lower revenues, reduced profit margins and/or loss of market share.

        We depend on the continued employment and performance of our senior executives and other key members of management. If any of these individuals resigns or becomes unable to continue in his present role and is not adequately replaced, our business operations and our ability to implement our growth strategies could be materially disrupted. We generally do not have employment agreements with, and we do not maintain any "key man" life insurance for, any of our executive officers. See "Management."

        The attacks of September 11, 2001, and subsequent events, including the continuing military action in Iraq, have caused instability in the U.S. and other financial markets and have led, and may continue to lead, to further armed hostilities, prolonged military action in Iraq, or further acts of terrorism in the U.S. or abroad, which could cause further instability in financial markets. Current regional tensions and conflicts in various OPEC member nations, including the continuing military action in Iraq, have caused, and may cause further, increases in raw material costs, particularly natural gas and crude oil based feedstocks, which are used in our operations. The uncertainty surrounding the continuing military action in Iraq and the threat of further armed hostilities or acts of terrorism may impact any or all of our physical facilities and operations, which are located in North America, Europe, Australia, Asia, Africa, South America and the Middle East, or those of our customers. Furthermore, terrorist attacks, subsequent events and future developments in any of these areas may result in reduced demand from our customers for our products. In addition, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals, which could result in higher operating costs. These developments will subject our worldwide operations to increased risks and, depending on their magnitude, could result in significant unanticipated costs, lower revenues and/or reduced profit margins.

        In the future we may seek to grow our company and businesses by making acquisitions or entering into partnerships and joint ventures. Any future acquisition, partnership or joint venture may require that we make a significant cash investment, issue stock or incur substantial debt. In addition, acquisitions, partnerships or investments may require significant managerial attention, which may be diverted from our other operations. These capital, equity and managerial commitments may impair the operation of our businesses. Furthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including:

25


We have incurred indebtedness to finance past acquisitions. We may finance future acquisitions with additional indebtedness and/or by issuing additional equity securities. As a result, we could face the financial risks associated with incurring additional indebtedness such as reducing our liquidity and access to financing markets and increasing the amount of cash flow required to service such indebtedness.

Risks Related to the Ownership of Our Common Stock

        Before this offering, there has not been a public market for our common stock. Although our common stock has been approved for listing on the New York Stock Exchange, an active trading market for our shares may not develop or be sustained after this offering. An illiquid market for our common stock may result in volatility and poor execution of buy and sell orders for investors. The initial public offering price for our shares has been determined by negotiations among the underwriters and us. The initial public offering price may not correspond to the price at which our shares will trade in the public market subsequent to this offering. In addition, the price of our shares available in the public market may not reflect our actual financial performance. As a result, you may not be able to resell your shares at or above the initial public offering price. Among the factors that could affect our stock price are:

        The stock markets in general have experienced extreme volatility that has at times been unrelated to the operating performance of particular companies. These broad market fluctuations may also result in a lower trading price of our common stock.

        Sales of a substantial number of shares of our common stock after the offering could result in a lower market price of our common stock by introducing a significant increase in the supply of our common stock to the market. This increased supply could cause the market price of our common stock to decline significantly.

        After the offering and the Reorganization Transaction, we will have outstanding 220,454,546 shares of common stock, we will have reserved 21,590,909 shares of common stock for issuance under the Huntsman Stock Incentive Plan and we will have reserved 10,869,565 shares of our common stock to be issued upon the conversion of our mandatory convertible preferred stock. Subject to the lock-up

26



agreements described in "Underwriting," all the shares of common stock and mandatory convertible preferred stock sold in the offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by one of our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining shares of outstanding common stock, including shares held by Investments Trust and its affiliates, will be "restricted securities" under the Securities Act and will be subject to restrictions on the timing, manner and volume of sales. Subject to any anti-dilution adjustments, up to 10,869,565 shares of common stock will be issuable upon conversion of the shares of mandatory convertible preferred stock (or up to 12,500,000 shares if the underwriters exercise their option to purchase additional shares of mandatory convertible preferred stock in full). All of such shares of common stock will be available for immediate resale in the public market upon conversion, except for any such shares acquired by our affiliates or by persons who are subject to the lock-up agreements described below, which shares will be subject to the terms of such lock-up agreements.

        Our executive officers and directors and substantially all of our other stockholders (including Investments Trust) have entered into lock-up agreements with the underwriters as described in "Underwriting." In addition, in order to receive shares of our common stock in exchange for their HMP Warrants, the holders of the HMP Warrants must enter into the lock-up agreements described in "Shares Eligible for Future Sale." Upon the expiration of these lock-up agreements, the shares outstanding and owned by such persons may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or any applicable exemption under the Securities Act. Under registration rights agreements between Investments Trust, certain other stockholders and our company, Investments Trust and such other stockholders, who will collectively hold 160,227,272 shares of our common stock after this offering, will have the right to require us to register their shares of our common stock following the lock-up period. The possibility that Investments Trust, such other stockholders or any of their or our affiliates may dispose of shares of our common stock, or the announcement or completion of any such transaction, could result in a lower market price of our common stock. See "Certain Relationships and Related Transactions" and "Shares Eligible for Future Sale."

        Purchasers of our common stock in this offering will experience immediate dilution of $17.89 in pro forma net tangible book value per share as of September 30, 2004. Dilution per share represents the difference between the initial public offering price and the net consolidated book value per share immediately after the offering of our common stock. See "Dilution."

        Following the consummation of this offering, Jon M. Huntsman and other members of the Huntsman family and MatlinPatterson will indirectly control, in the aggregate, approximately 63% of our outstanding common stock through their beneficial ownership of Investments Trust and will have the ability to:

        The interests and objectives of our controlling stockholders may be different from those of our company or our other stockholders, and our controlling stockholders may vote their common stock in a

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manner that may adversely affect our other stockholders. In addition, four of our directors, Mr. Jon M. Huntsman, Mr. Peter R. Huntsman, Mr. David J. Matlin and Mr. Christopher R. Pechock, will control Investments Trust. This may create conflicts of interest because these directors have responsibilities to Investments Trust and its beneficial owners. Their duties to Investments Trust and its beneficial owners may conflict with their duties as directors of our company regarding business dealings between Investments Trust and us and other matters. The resolution of these conflicts may not always be in our or our stockholders' best interest.

        Investments Trust's controlling position, as well as provisions contained in our certificate of incorporation and bylaws, such as a classified board of directors, limitations on stockholder proposals at meetings of stockholders and the inability of stockholders to call special meetings, and certain provisions of Delaware law, could make it more difficult for a third party (other than Investments Trust and its affiliates) to acquire control of our company, even if some of our stockholders considered such a change of control to be beneficial. Our certificate of incorporation also authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock that has special voting or other rights, it could make it more difficult for a third party to acquire us. These provisions taken together or individually may reduce or eliminate your ability to sell your shares of common stock at a premium. See "Description of Capital Stock."


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

        All statements other than statements of historical facts included in this prospectus, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "could," "expect," "potential," "plan," "intend," "estimate," "anticipate," "believe" or "continue" or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurances that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed under "Risk Factors" and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus.

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OUR COMPANY

Our History

        Jon M. Huntsman founded the predecessor to our company in the early 1970s as a small packaging company. Since then, we have grown through a series of significant acquisitions and now own a global portfolio of commodity and differentiated businesses. In 1993, we purchased the LAB and maleic anhydride businesses of Monsanto. In 1994, we purchased the global chemical business from what was formerly Texaco. In 1997, we purchased our PO business from Texaco. Also in 1997, we acquired Rexene Corporation, significantly increasing the size of our polymers business. In 1999, we acquired certain polyurethanes, pigments and European petrochemicals businesses from ICI. In 2000, we completed the acquisition of the Morton global TPU business from Rohm and Haas. In 2001, we completed our acquisition of the global ethyleneamines business of Dow, and we completed our acquisition of the Albright & Wilson European surfactants business from Rhodia. In 2003, we completed our acquisition of 88% of our Advanced Materials business, and we now own approximately 90% of Advanced Materials. We have also divested certain non-core businesses, including our packaging subsidiary in 1997 and our global styrenics business in 1998. On September 30, 2002, we completed a series of restructuring transactions that included a debt for equity exchange (the "HLLC Restructuring"), which resulted in the Huntsman family, MatlinPatterson and Consolidated Press Holdings Limited ("Consolidated Press") acquiring substantially all of our equity interests. See "Certain Relationships and Related Transactions—The HLLC Restructuring."

The Reorganization Transaction

        We will consummate the Reorganization Transaction in connection with the completion of this offering. In the Reorganization Transaction, Huntsman Holdings, LLC will become our wholly owned subsidiary, and the existing beneficial holders of the common and preferred membership interests of Huntsman Holdings, LLC, including the mandatorily redeemable preferred interests, will receive shares of our common stock in exchange for their interests. Immediately following the Reorganization Transaction and this offering, such holders will control approximately 65% of our outstanding common stock. Huntsman Family Holdings and MatlinPatterson will cause all of the shares of our common stock they are entitled to receive in exchange for their beneficial interests in Huntsman Holdings, LLC to be delivered to Investments Trust.

        The exchange of membership interests in Huntsman Holdings, LLC for shares of our common stock will be a tax-free transaction. Huntsman Holdings, LLC is treated as a partnership for U.S. federal income tax purposes and as such is generally not subject to U.S. income tax. The only asset held by Huntsman Holdings, LLC is 100% of the common stock of Huntsman Group Inc. ("HGI"). HGI and its subsidiaries file a U.S. federal consolidated tax return with HGI as the parent. Huntsman Holdings, LLC has historically had no taxable income or loss. Therefore, Huntsman Holdings, LLC becoming our subsidiary will have no impact on our future income taxes.

        Immediately following the Reorganization Transaction and the offering, Investments Trust will hold approximately 63% of our outstanding common stock. The economic interest in the shares of our common stock held by Investments Trust will be allocated as follows: $400 million of such shares plus 50% of the remainder of such shares will be allocated to the beneficial interests in Investments Trust owned by MatlinPatterson, 45% of the remainder of such shares will be allocated to the beneficial interests in Investments Trust owned by Huntsman Family Holdings and 5% of the remainder of such shares will be unallocated. The unallocated shares will be allocated between the beneficial interests in Investments Trust owned by Huntsman Family Holdings and MatlinPatterson approximately 18 months after the completion of this offering based on the trading price of our common stock.

        Jon M. Huntsman and Peter R. Huntsman will control the voting of the shares of our common stock held by Investments Trust. However, the shares of our common stock held by Investments Trust

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will not be voted in favor of certain fundamental corporate actions without the consent of MatlinPatterson, through its representatives David J. Matlin or Christopher R. Pechock. In addition, Jon M. Huntsman and Peter R. Huntsman have agreed to cause all of the shares of our common stock held by Investments Trust to be voted in favor of the election to our board of directors of two nominees designated by MatlinPatterson. MatlinPatterson will have control over the disposition of the shares of our common stock held by Investments Trust that are allocated to its beneficial interest in Investments Trust. Huntsman Family Holdings will have control over the disposition of the shares of our common stock held by Investments Trust that are allocated to its beneficial interest in Investments Trust. Huntsman Family Holdings is controlled by Jon M. Huntsman.

        In connection with the consummation of this offering and as part of the Reorganization Transaction, we intend to exercise our right under the HMP Warrants to require that all such warrants and any shares of HMP equity securities issued upon exercise of the HMP Warrants be exchanged for newly issued shares of our common stock. Under the terms of the HMP Warrants, an aggregate of approximately 16.9 million shares of our common stock will be issued in exchange for the outstanding HMP Warrants following the completion of the offering. The right of each holder of HMP Warrants to receive shares of our common stock is conditioned upon such holder's agreeing to a lock-up agreement relating to the sale or other disposition of our common stock for a period commencing from the date of the consummation of this offering and ending on the earlier of (1) 180 days following this offering, and (2) the first date that any other holders of our common stock are generally able to sell their shares. Following the exchange, the former holders of HMP Warrants will be entitled to certain registration rights with respect to their shares of our common stock. See "Shares Eligible for Future Sale—Registration Rights."

Rights Held by Advanced Materials Minority Interestholders

        SISU Capital Ltd. and its affiliates, which indirectly hold approximately 9.6% of the common equity in Advanced Materials, have certain important rights pursuant to the limited liability company agreements of Huntsman Advanced Materials Holdings LLC ("Advanced Materials Holdings") and Advanced Materials relating to the designation of managers and approval rights with respect to the taking of certain actions by Advanced Materials Holdings or Advanced Materials. SISU has the right to designate one of the managers of each of Advanced Materials Holdings and Advanced Materials. Neither Advanced Materials Holdings nor Advanced Materials may, in addition to certain other actions, effect certain redemptions of equity interests in such entities without the approval of SISU.

        In addition, the limited liability company agreements of Advanced Materials Holdings and Advanced Materials require the approval of the conflict committee of the appropriate board of managers for certain actions taken by Advanced Materials Holdings or Advanced Materials. The conflict committee is composed of three managers, one of whom must be designated by SISU, and another of whom must be independent, with decisions determined by majority vote. If no independent manager exists, then the conflict committee is limited to two members, one of whom must be the SISU-designated manager, and its decisions must be unanimous. In general, the approval of the conflict committee is required for the following actions, among others, by Advanced Materials Holdings or Advanced Materials:

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USE OF PROCEEDS

        The proceeds to us from the concurrent offerings of our common stock and our mandatory convertible preferred stock, after deduction of fees and expenses, will be approximately $1,450 million. We intend to use these net proceeds, together with cash on hand, as follows:


(a)
Assumes a redemption date of February 28, 2005 and includes the payment of redemption premiums of $41.3 million. As of September 30, 2004, the carrying amount of the HMP Discount Notes was $389.5 million, which was a discount to the accreted value of $518.2 million, and the assumed redemption premium would have been $38.8 million.

(b)
Assumes redemption dates of February 28, 2005 with respect to 89.5% of the notes and March 14, 2005 with respect to 10.5% of the notes and includes the payment of redemption premiums of $33.9 million. As of September 30, 2004, the carrying amount of the HIH Senior Discount Notes was $489.2 million (which includes $10.0 million of fair value adjustment), and the assumed redemption premium would have been $32.0 million.

(c)
Assumes a repayment date of February 28, 2005 and includes the payment of redemption premiums.

(d)
Assumes a repayment date of February 16, 2005 and includes the payment of accrued interest. As of September 30, 2004, the carrying amount of the HLLC Affiliate Note was $39.5 million.

(e)
Assumes a repayment date of March 14, 2005 and includes the payment of redemption premiums.

        Pending these uses, we intend to invest the net proceeds in short-term interest-bearing, investment-grade securities or money market funds.

        We believe that the indebtedness that will be repaid with the net proceeds of this offering is among the highest cost to us and that the elimination of this indebtedness will result in the most meaningful reduction in our annual interest expense.

        Jon M. Huntsman, our Chairman of the Board, owns all of the equity interests in Horizon Ventures LLC. See "Certain Relationships and Related Transactions."

        We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholder in our common stock offering.


DIVIDEND POLICY

        We do not currently anticipate paying any cash dividends on our common stock. Instead, we currently intend to retain our earnings, if any, to invest in our businesses, to repay indebtedness and to use for general corporate purposes. Subject to the terms of our mandatory convertible preferred stock, our board of directors has the authority to declare and pay dividends on the common stock, in its discretion, as long as there are funds legally available to do so. However, amounts available to pay dividends will be restricted by the terms of the credit agreements and indentures of our subsidiaries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

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CAPITALIZATION

        The following table sets forth our cash and capitalization as of September 30, 2004:

        The information set forth below is derived from unaudited financial information and should be read in conjunction with the audited consolidated financial statements included herein, "Use of Proceeds," "Selected Historical Financial Data," "Unaudited Pro Forma Financial Data" and the Consolidated Financial Statements included elsewhere in this prospectus and, in each case, the notes related thereto.

 
  As of September 30, 2004
 
 
  Actual
  Pro Forma
As Adjusted

 
 
  (in millions)

 
Cash   $ 239.1   $ 203.1 (a)
Restricted investment in marketable securities         35.6  
   
 
 
Debt:              
  Secured credit facilities   $ 2,228.2   $ 2,175.0  
  Secured notes     799.5     640.1  
  Notes     2,075.2     2,014.4  
  Secured discount notes     389.5      
  Discount notes     489.2      
  Note due to affiliate     39.5      
  Other debt     179.6     179.6  
   
 
 
Total debt     6,200.7     5,009.1  
   
 
 
Stockholders' (deficit) equity:              
  Common stock (1,200,000,000 shares of common stock, par value $0.01 per share, authorized, 220,454,546 shares outstanding pro forma as adjusted(b))         2.2  
  Preferred stock (100,000,000 shares of preferred stock, par value $0.01 per share, authorized, 5,000,000 shares mandatory convertible preferred stock outstanding pro forma as adjusted)         250.0  
  Preferred member's interest     195.7      
  Common member's interest          
  Additional paid-in capital     734.4     2,771.7  
  Accumulated deficit     (1,470.0 )   (1,729.7 )(c)
  Accumulated other comprehensive income     98.5     98.5  
   
 
 
Total stockholders' (deficit) equity     (441.4 )   1,392.7  
   
 
 
Total capitalization   $ 5,759.3   $ 6,401.8  
   
 
 

32



(a)
Reflects the use of net proceeds from the offering and cash on hand as follows:

 
  (in millions)
 
Actual cash as of September 30, 2004   $ 239.1  
Proceeds from the offering     1,530.7  
Fees and expenses related to the offering     (79.1 )
Consent fee to HMP warrant holders     (7.8 )
Repayment of HMP Discount Notes—carrying value     (389.5 )
Repayment of HMP Discount Notes—call premium and unamortized discount     (167.5 )
Repayment of HIH Senior Discount Notes—carrying value     (489.2 )
Repayment of HIH Senior Discount Notes—call premium net of fair value adjustment     (22.0 )
Repayment of HLLC Senior Secured Notes—carrying value     (159.4 )
Repayment of HLLC Senior Secured Notes—call premium     (18.5 )
Repayment of HLLC Senior Fixed Rate Notes—carrying value     (78.0 )
Repayment of HLLC Senior Fixed Rate Notes—call premium     (9.0 )
Repayment of HLLC Affiliate Note     (39.5 )
Payment of accrued interest on HLLC Senior Secured Notes     (8.5 )
Payment of accrued interest on HLLC Senior Fixed Rate Notes     (2.5 )
Net cash used in the HI Senior Subordinated Notes Transaction and HI Bank Refinancing     (1.6 )
HI Term Repayment     (59.0 )
Investment in U.S. treasury securities as collateral on preferred stock dividend     (35.6 )
   
 
Pro forma as adjusted cash as of September 30, 2004   $ 203.1  
   
 
(b)
Does not include 749,513 shares of restricted stock to be issued in connection with the consummation of the offering.

(c)
Includes a loss on early retirement of debt of $241.5 million, reflecting the difference between the carrying value of the debt and the redemption price and call premiums, and $18.2 million for the write-off of related deferred debt issuance costs.

33



DILUTION

        If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of September 30, 2004 was a deficit of approximately $730.0 million, or approximately $4.43 per share. Pro forma net tangible book value per share represents the amount of tangible assets less total liabilities, divided by the 164,772,727 shares of common stock that will be outstanding upon completion of the Reorganization Transaction.

        After giving effect to the sale of 60,227,274 shares in this offering at the initial public offering price of $23.00 per share and after deduction of the estimated underwriting discounts and commissions and offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2004 would have been approximately $1,126.5 million, or $5.11 per share. This represents an immediate increase in pro forma net tangible book value of $9.54 per share to existing stockholders and an immediate dilution of $17.89 per share to purchasers of common stock in this offering.

Assumed initial public offering price per share         $ 23.00
  Pro forma net tangible book deficit per share at September 30, 2004   $ (4.43 )    
Increase per share attributable to new investors     9.54      
Pro forma, as adjusted net tangible book value per share after offering           5.11
   
 
Dilution per share to new investors         $ 17.89
         

        The following table sets forth, on a pro forma as adjusted basis as of September 30, 2004, the total consideration paid and the effective cash price per share paid by the existing stockholders and by new investors during the past five years, before deducting estimated underwriting discounts and commissions and offering expenses payable by us at a public offering price of $23.00 per share.

 
  Shares Purchased
  Total Consideration
   
 
  Average
Price Per
Share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders   164,772,727   75 % $ 1,739,700,000   58 % $ 10.56
New investors   55,681,819   25     1,280,681,837   42 % $ 23.00
   
 
 
 
     
  Total   220,454,546   100 % $ 3,020,381,837   100 % $ 13.70
   
 
 
 
     

        The foregoing computations exclude up to 10,869,565 shares of common stock reserved for issuance upon the conversion of our mandatory convertible preferred stock, 2,372,740 shares issuable upon the exercise of stock options, 749,513 shares of restricted stock to be issued in connection with this offering and 18,468,656 shares reserved for future issuance under the Huntsman Stock Incentive Plan. The stock options to be issued in connection with this offering will have an exercise price per share equal to the initial public offering price per share of common stock sold in our common stock offering and therefore will not result in dilution to new investors. If we grant stock options in the future at exercise prices less than the initial public offering price, there will be further dilution to new investors. Giving effect to the issuance of 749,513 shares of restricted stock in connection with the consummation of the offering, dilution per share to new investors would be $17.91 per share.

34



SELECTED HISTORICAL FINANCIAL DATA

        The selected historical financial data set forth below presents the historical financial data of our predecessor Huntsman Holdings, LLC as of and for the dates and periods indicated. The selected financial data as of September 30, 2003 and for the nine months ended September 30, 2003 have been derived from the unaudited consolidated financial statements of Huntsman Holdings, LLC included elsewhere in this prospectus. The selected financial data as of December 31, 2002 and 2003 and September 30, 2004 and for the years ended December 31, 2001, 2002 and 2003 and for the nine months ended September 30, 2004 have been derived from the audited consolidated financial statements of Huntsman Holdings, LLC included elsewhere in this prospectus. The selected financial data as of December 31, 1999, 2000 and 2001 and for the years ended December 31, 1999 and 2000 have been derived from the audited consolidated financial statements of Huntsman Holdings, LLC for these periods, which are not included in this prospectus.

        In such financial data, HIH is accounted for using the equity method of accounting through April 30, 2003. Effective May 1, 2003, as a result of the HIH Consolidation Transaction, we have consolidated the financial results of HIH. Effective July 1, 2003, as a result of the AdMat Transaction, we have consolidated the financial results of Advanced Materials. As a result, the financial information as of and for the year ended December 31, 2003 is not comparable to the prior years' historical financial data presented herein, and the financial information as of and for the nine months ended September 30, 2004 is not comparable to the financial information as of and for the nine months ended September 30, 2003. You should read the selected financial data in conjunction with "Unaudited Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements and accompanying notes of Huntsman Holdings, LLC included elsewhere in this prospectus.

 
  Year Ended December 31,
  Nine Months Ended September 30,
 
 
  1999
  2000
  2001
  2002
  2003
  2003
  2004
 
 
  (in millions, except per share amounts)

 
Statement of Operations Data:                                            
Revenues   $ 2,838.8   $ 3,325.7   $ 2,757.4   $ 2,661.0   $ 7,080.9   $ 4,711.1   $ 8,357.7  
Gross profit     320.3     128.7     90.8     240.0     707.8     452.4     999.7  
Restructuring, impairment and plant closing costs (credit)             588.5     (1.0 )   37.9     27.2     202.4  
Operating income (loss)     74.8     (78.7 )   (709.4 )   66.3     176.5     91.9     216.4  
Loss from continuing operations     (75.6 )   (138.6 )   (842.8 )   (191.9 )   (319.8 )   (214.2 )   (226.5 )
Loss from continuing operations per common share(a)                                            
  Basic and diluted   $ (0.51 ) $ (0.93 ) $ (5.69 ) $ (1.42 ) $ (2.66 ) $ (1.82 ) $ (1.97 )
Average shares outstanding                                            
  Basic and diluted(a)     148.0     148.0     148.0     148.0     148.0     148.0     148.0  
Other Data:                                            
Depreciation and amortization   $ 203.6   $ 200.3   $ 197.5   $ 152.7   $ 353.4   $ 230.5   $ 410.3  
Capital expenditures     150.2     90.3     76.4     70.2     191.0     129.9     145.0  
Ratio of earnings to fixed charges and preferred dividends(b)                              
Balance Sheet Data (at period end):                                            
Total assets   $ 3,565.1   $ 3,543.8   $ 2,357.8   $ 2,747.2   $ 8,737.4   $ 8,430.2   $ 8,993.8  
Total debt     2,136.2     2,268.6     2,450.5     1,736.1     5,910.1     6,002.7     6,200.7  
Total liabilities     3,109.9     3,322.3     3,046.3     2,532.0     8,278.8     8,042.7     8,724.4  

(a)
All share and per share information has been restated to give effect to the shares to be issued in respect of the outstanding membership interests in Huntsman Holdings, LLC in connection with the Reorganization Transaction.

(b)
For the years ended December 31, 1999, 2000, 2001, 2002 and 2003, earnings were insufficient to cover fixed charges and preferred dividends by $156.4 million, $283.3 million, $974.6 million, $148.6 million and $339.9 million, respectively. For the nine months ended September 30, 2003 and 2004, earnings were insufficient to cover fixed charges and preferred dividends by $244.0 million and $312.1 million, respectively.

35



UNAUDITED PRO FORMA FINANCIAL DATA

        The pro forma statements of operations data for the year ended December 31, 2003 and the nine months ended September 30, 2003 and 2004 set forth below gives effect to the following transactions as if each transaction had occurred on January 1, 2003:

    our May 2003 acquisition of the HIH membership interests held by third parties in the HIH Consolidation Transaction;

    our June 2003 acquisition of an 88% equity interest in our Advanced Materials business and related financing transactions in the AdMat Transaction;

    the following debt refinancing transactions that took place in 2003 and 2004 (the "Refinancing Transactions"):

    the issuance by our subsidiary Huntsman International LLC ("HI") in April 2003 of $150 million of its 9.875% senior unsecured notes (the "HI Senior Notes") and the application of the net proceeds therefrom;

    the issuance by HLLC of $380 million and $75.4 million of HLLC Senior Secured Notes in September 2003 and December 2003, respectively, and the application of the net proceeds therefrom;

    the issuance by HLLC of $400 million of senior notes in June 2004 (the "HLLC Senior Notes") and the application of the net proceeds therefrom;

    the refinancing of the senior secured credit facilities of HI in July 2004 and the subsequent amendment to that facility in December 2004 (together, the "HI Bank Refinancing");

    the refinancing of the senior secured credit facilities of HLLC in October 2004 (the "HLLC Bank Refinancing");

    the issuance by HI in December 2004 of $175 million of its 7 3 / 8 % senior subordinated notes due 2015 and €135 million of its 7 1 / 2 % senior subordinated notes due 2015 (together, the "HI Senior Subordinated Notes"), the application of the net proceeds therefrom and the related cross-currency swap transaction entered into in connection therewith (together, the "HI Senior Subordinated Notes Transaction"); and

    the repayment by HI in December 2004 of approximately $59 million of outstanding borrowings under its term facility (the "HI Term Repayment"); and

    other adjustments to reflect the interest expense related to our indebtedness as of September 30, 2004.

The pro forma as adjusted statements of operations data for the year ended December 31, 2003 and the nine months ended September 30, 2003 and 2004 set forth below adjusts the pro forma statements of operations data to give effect to the following transactions as if each transaction had occurred on January 1, 2003:

    the Reorganization Transaction; and

    this offering and the use of the net proceeds to us as described in "Use of Proceeds."

        The pro forma balance sheet data set forth below gives effect to the HLLC Bank Refinancing, the HI Senior Subordinated Notes Transaction and the HI Term Repayment as if each transaction had occurred on September 30, 2004. The pro forma as adjusted balance sheet data set forth below adjusts the pro forma balance sheet data to give effect to the Reorganization Transaction and this offering and the use of net proceeds to us as described in "Use of Proceeds" as if each transaction had occurred on

36


September 30, 2004. In the Reorganization Transaction, the common and preferred interests of Huntsman Holdings, LLC and the HMP Warrants will be exchanged for shares of our common stock.

        The pro forma financial data does not purport to be indicative of the combined financial position or results of operations of future periods or indicative of results that would have occurred had the above transactions been completed on the date indicated. The pro forma and other adjustments, as described in the accompanying notes to the pro forma consolidated condensed balance sheet and statements of operations, are based upon available information and certain assumptions that we believe are reasonable. The pro forma financial data set forth below should be read in conjunction with the Consolidated Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Selected Historical Financial Data" included elsewhere in this prospectus and, in each case, the notes related thereto.

37



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

 
   
  Pro Forma Adjustments
   
   
   
 
 
   
   
  Offering and
Reorganization
Transaction
Adjustments(c)

   
 
 
  Actual
  HIH
Consolidation
Transaction(a)

  AdMat
Transaction(b)

  Other
Pro Forma
Adjustments

  Pro
Forma

  Pro
Forma As
Adjusted

 
 
  (in millions)

 
Revenues   $ 4,711.1   $ 1,733.4   $ 531.8   $ (91.1 )(d) $ 6,885.2         $ 6,885.2  
Cost of goods sold     4,258.7     1,551.9     412.7     (73.2 )(e)   6,150.1           6,150.1  
   
 
 
 
 
 
 
 
Gross profit     452.4     181.5     119.1     (17.9 )   735.1           735.1  
Expenses:                                            
  Operating expenses     333.3     104.6     172.1     (42.8 )(f)   567.2           567.2  
  Restructuring and plant closing costs     27.2     17.1             44.3           44.3  
   
 
 
 
 
 
 
 
  Total expenses     360.5     121.7     172.1     (42.8 )(f)   611.5           611.5  
   
 
 
 
 
 
 
 
Operating income     91.9     59.8     (53.0 )   24.9     123.6           123.6  
Interest expense, net     (260.7 )   (113.2 )   (36.3 )   (23.3 )(g)   (433.5 ) $ 147.4 (g)   (286.1 )
Loss on accounts receivable securitization program     (11.9 )   (12.0 )       (0.1 )   (24.0 )         (24.0 )
Equity in (loss) income of unconsolidated affiliates     (38.2 )           39.0 (h)   0.8           0.8  
Other non-operating expenses     0.4     (2.2 )           (1.8 )         (1.8 )
   
 
 
 
 
 
 
 
Loss before income taxes and minority interest     (218.5 )   (67.6 )   (89.3 )   40.5     (334.9 )   147.4     (187.5 )
Income tax benefit (expense)     3.8     2.4     11.4     (15.2 )(i)   2.4           2.4  
Minority interest in subsidiaries' loss     0.5             5.3   (j)   5.8           5.8  
   
 
 
 
 
 
 
 
Net (loss) income   $ (214.2 ) $ (65.2 ) $ (77.9 ) $ 30.6   $ (326.7 ) $ 147.4   $ (179.3 )
   
 
 
 
 
 
 
 
Basic and diluted (loss) earnings per common share   $ (1.82) (k)                               $ (0.81) (l)
   
                               
 

(a)
Reflects the results of operations of the HIH business for the four months ended April 30, 2003.

(b)
Reflects the results of operations of our Advanced Materials business for the six months ended June 30, 2003.

(c)
Amounts do not include non-recurring charges to earnings for a loss on early extinguishment of debt, the write-off of deferred debt issuance costs and the declaration of $37.5 million of dividends on the mandatory convertible preferred stock. See footnotes (i) and (o) to the Unaudited Pro Forma Condensed Balance Sheet.

(d)
To eliminate intercompany sales between HLLC and HIH.

(e)   To reflect the net effect on cost of goods sold as follows (dollars in millions):        
    Eliminate intercompany cost of goods sold between HLLC and HIH   $ (80.1 )
    Reflect the net adjustment to depreciation and amortization expense as a result of the HIH Consolidation Transaction. The expected useful lives of the assets range from 15 years to 20 years     6.9  
       
 
        $ (73.2 )
       
 

(f)

 

To reflect the net effect on operating expenses as follows (dollars in millions):

 

 

 

 
    Eliminate intercompany charges between HLLC and HIH for management fees   $ (9.0 )
    Eliminate the effect of the unrealized exchange gains (losses) arising from the revaluation of non-functional currency denominated debt as substantially all of such debt has been repaid in connection with the AdMat Transaction     (33.8 )
       
 
        $ (42.8 )
       
 
(g)
Reflects the adjustment to net interest expense resulting from the Refinancing Transactions and other adjustments to interest expense related to our indebtedness as of September 30, 2004. See "—Schedule of Pro Forma and Pro Forma As Adjusted Interest Expense Adjustments" below.

(h)
To eliminate the equity in income (loss) of HIH.

(i)
To reflect the income tax expenses associated with the AdMat Transaction. No tax benefit was recorded related to the HLLC pro forma adjustments as HLLC has a full valuation allowance on its net deferred tax assets. No tax benefit was recorded related to the HIH pro forma adjustments as the adjustments relate to income or expense in the U.S. and the U.S. income tax consequences of HIH are recorded in the consolidated tax returns of HLLC.

(j)
To record the minority interest in Advanced Materials.

(k)
Per share information is calculated using 148.0 million actual shares outstanding, which gives effect to the shares of common stock to be issued in respect of the outstanding membership interests in Huntsman Holdings, LLC in connection with the Reorganization Transaction.

(l)
Per share information is calculated using 220.5 million shares outstanding, which gives effect to the shares to be issued in connection with the Reorganization Transaction and the shares to be issued in connection with this offering.

38



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

 
  Actual
  Pro Forma
Adjustments

  Pro
Forma

  Offering and
Reorganization
Transaction
Adjustments(c)

  Pro Forma
As Adjusted

 
 
  (in millions)

 
Revenues   $ 8,357.7         $ 8,357.7         $ 8,357.7  
Cost of goods sold     7,358.0           7,358.0           7,358.0  
   
 
 
 
 
 
Gross profit     999.7           999.7           999.7  
Expenses:                                
  Operating expenses     580.9           580.9           580.9  
  Restructuring and plant closing costs     202.4           202.4           202.4  
   
 
 
 
 
 
    Total expenses     783.3           783.3           783.3  
   
 
 
 
 
 
Operating income     216.4           216.4           216.4  
Interest expense, net     (459.5 ) $ 19.7 (a)   (439.8 ) $ 147.5 (a)   (292.3 )
Loss on accounts receivable securitization program     (10.2 )         (10.2 )         (10.2 )
Equity in income of unconsolidated affiliates     3.0           3.0           3.0  
Other non-operating expenses     (0.8 )         (0.8 )         (0.8 )
   
 
 
 
 
 
Loss before income taxes and minority interest     (251.1 )   19.7     (231.4 )   147.5     (83.9 )
Income tax benefit     25.7     (b)   25.7           25.7  
Minority interest in subsidiaries' income     (1.1 )         (1.1 )         (1.1 )
   
 
 
 
 
 
Net (loss) income   $ (226.5 ) $ 19.7   $ (206.8 ) $ 147.5   $ (59.3 )
   
 
 
 
 
 
Basic and diluted (loss) earnings per common share   $ (1.97) (d)                   $ (0.27) (e)
   
                   
 

(a)
Reflects the adjustment to net interest expense resulting from the Refinancing Transactions and other adjustments to interest expense related to our indebtedness as of September 30, 2004. See "—Schedule of Pro Forma and Pro Forma As Adjusted Interest Expense Adjustments" below.

(b)
No adjustments were made to income tax expense as we have a full valuation allowance on our net deferred tax assets.

(c)
Amounts do not include non-recurring charges to earnings for a loss on early extinguishment of debt, the write-off of deferred debt issuance costs and the declaration of $37.5 million of dividends on the mandatory convertible preferred stock. See footnotes (i) and (o) to the Unaudited Pro Forma Condensed Balance Sheet.

(d)
Per share information is calculated using 148.0 million shares outstanding, which gives effect to the shares of common stock to be issued in respect of the outstanding membership interests in Huntsman Holdings, LLC in connection with the Reorganization Transaction.

(e)
Per share information is calculated using 220.5 million shares outstanding, which gives effect to the shares to be issued in connection with the Reorganization Transaction and the shares to be issued in connection with this offering.

39



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003

 
   
  Pro Forma Adjustments
   
   
   
 
 
   
   
  Offering and
Reorganization
Transaction
Adjustments(c)

   
 
 
  Actual
  HIH
Consolidation
Transaction(a)

  AdMat
Transaction(b)

  Other
Pro Forma
Adjustments

  Pro
Forma

  Pro
Forma As
Adjusted

 
 
  (in millions)

 
Revenues   $ 7,080.9   $ 1,733.4   $ 531.8   $ (93.7 )(d) $ 9,252.4         $ 9,252.4  
Cost of goods sold     6,373.1     1,551.9     412.7     (82.6 )(e)   8,255.1           8,255.1  
   
 
 
 
 
 
 
 
Gross profit     707.8     181.5     119.1     (11.1 )   997.3           997.3  
Expenses:                                            
  Operating expenses     493.4     104.6     172.1     (37.9 )(f)   732.2           732.2  
  Restructuring and plant closing costs     37.9     17.1             55.0           55.0  
   
 
 
 
 
 
 
 
  Total expenses     531.3     121.7     172.1     (37.9 )(f)   787.2           787.2  
   
 
 
 
 
 
 
 
Operating income     176.5     59.8     (53.0 )   26.8     210.1           210.1  
Interest expense, net     (428.3 )   (113.2 )   (36.3 )   (0.9 )(g)   (578.7 ) $ 196.7 (g)   (382.0 )
Interest income—affiliate     19.2             (19.2 )(h)            
Loss on accounts receivable securitization program     (20.4 )   (12.0 )           (32.4 )         (32.4 )
Equity in (loss) income of unconsolidated affiliates     (37.5 )           39.0 (i)   1.5           1.5  
Other non-operating expenses         (2.2 )           (2.2 )         (2.2 )
   
 
 
 
 
 
 
 
Loss before income taxes and minority interest     (290.5 )   (67.6 )   (89.3 )   45.7     (401.7 )   196.7     (205.0 )
Income tax expense     (30.8 )   2.4     11.4     (15.1 )(j)   (32.1 )         (32.1 )
Minority interest in subsidiaries' loss     1.5             5.3 (k)   6.8           6.8  
   
 
 
 
 
 
 
 
Net (loss) income   $ (319.8 ) $ (65.2 ) $ (77.9 ) $ 35.9   $ (427.0 ) $ 196.7   $ (230.3 )
   
 
 
 
 
 
 
 
Basic and diluted (loss) earnings per common share   $ (2.66) (l)                               $ (1.04) (m)
   
                               
 

(a)
Reflects the results of operations of the HIH business for the four months ended April 30, 2003.

(b)
Reflects the results of operations of our Advanced Materials business for the six months ended June 30, 2003.

(c)
Amounts do not include non-recurring charges to earnings for a loss on early extinguishment of debt, the write-off of deferred debt issuance costs and the declaration of $37.5 million of dividends on the mandatory convertible preferred stock. See footnotes (i) and (o) to the Unaudited Pro Forma Condensed Balance Sheet.

(d)
To eliminate intercompany sales between HLLC and HIH.

(e)
To reflect the net effect on cost of goods sold as follows (dollars on millions):
 
   
 
Eliminate intercompany cost of goods sold between HLLC and HIH   $ (89.5 )
Reflect the net adjustment to depreciation and amortization expense as a result of the HIH Consolidation Transaction. The expected useful lives of the assets range from 15 years to 20 years     6.9  
   
 
    $ (82.6 )
   
 
(f)
To reflect the net effect on operating expenses as follows (dollars in millions):
 
   
 
Eliminate intercompany charges between HLLC and HIH for management fees   $ (4.1 )
Eliminate the effect of the unrealized exchange gains (losses) arising from the revaluation of non-functional currency denominated debt as substantially all of such debt has been repaid in connection with the AdMat Transaction     (33.8 )
   
 
    $ (37.9 )
   
 

40


(g)
Reflects the adjustment to net interest expense resulting from the Refinancing Transactions and other adjustments to interest expense related to our indebtedness as of September 30, 2004. See "—Schedule of Pro Forma and Pro Forma As Adjusted Interest Expense Adjustments" below.

(h)
To eliminate interest income of HMP on the HIH senior subordinated discount notes (the "HIH Senior Subordinated Discount Notes"), which will be canceled in the Reorganization Transaction.

(i)
To eliminate the equity in income (loss) of HIH.

(j)
To reflect the income tax expenses associated with the AdMat Transaction. No tax benefit was recorded related to the HLLC pro forma adjustments as HLLC has a full valuation allowance on its net deferred tax assets. No tax benefit was recorded related to the HIH pro forma adjustments as the adjustments relate to income or expense in the U.S. and the U.S. income tax consequences of HIH are recorded in the consolidated tax returns of HLLC.

(k)
To record the minority interest in Advanced Materials.

(l)
Per share information is calculated using 148.0 million shares outstanding, which gives effect to the shares of common stock to be issued in respect of the outstanding membership interests in Huntsman Holdings, LLC in connection with the Reorganization Transaction.

(m)
Per share information is calculated using 220.5 million shares outstanding, which gives effect to the shares to be issued in connection with the Reorganization Transaction and the shares to be issued in connection with this offering.

41



UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2004

 
  Actual
  Pro Forma
Adjustments

  Pro Forma
  Offering and
Reorganization
Transaction
Adjustments

  Pro Forma As
Adjusted

 
 
  (in millions)

 
Assets                                
Cash and equivalents   $ 239.1   $ (60.6 )(a) $ 178.5   $ 24.6   (e) $ 203.1  
Restricted investment in marketable securities                   35.6   (f)   35.6  
Accounts and notes receivable     1,403.3           1,403.3           1,403.3  
Inventories     1,132.6           1,132.6           1,132.6  
Prepaid expense     70.6           70.6           70.6  
Deferred income taxes     20.6           20.6           20.6  
Other current assets     69.5           69.5           69.5  
   
 
 
 
 
 
Current assets     2,935.7     (60.6 )(a)   2,875.1     60.2     2,935.3  
Property, plant and equipment, net     5,014.8           5,014.8           5,014.8  
Investment in unconsolidated affiliates     167.5           167.5           167.5  
Intangible assets, net     264.8           264.8           264.8  
Goodwill     3.3           3.3           3.3  
Deferred income taxes     21.3           21.3           21.3  
Other noncurrent assets     586.4     4.1 (b)   590.5     (14.4 )(g)   576.1  
   
 
 
 
 
 
  Total assets   $ 8,993.8   $ (56.5 ) $ 8,937.3   $ 45.8   $ 8,983.1  
   
 
 
 
 
 
Liabilities and stockholders' equity                                
Accounts payable   $ 919.7   $     $ 919.7   $     $ 919.7  
Accrued liabilities     689.8           689.8     1.5 (h)   691.3  
Deferred income taxes     18.9           18.9           18.9  
Current portion of long-term debt     54.8           54.8           54.8  
   
 
 
 
 
 
Current liabilities     1,683.2           1,683.2     1.5     1,684.7  
Long-term debt     6,106.4     (36.0) (c)   6,070.4     (1,116.1 )(i)   4,954.3  
Long-term debt—affiliates     39.5           39.5     (39.5 )(i)    
Deferred income taxes     242.1           242.1           242.1  
Other noncurrent liabilities     653.2           653.2     25.0 (j)   678.2  
   
 
 
 
 
 
  Total liabilities     8,724.4     (36.0 )   8,688.4     (1,129.1 )   7,559.3  
   
 
 
 
 
 
Minority interest in common stock of consolidated subsidiaries     29.2           29.2           29.2  
Minority interest in warrants of consolidated subsidiary     128.7           128.7     (128.7 )(k)    
Redeemable preferred members' interest     552.9           552.9     (552.9 )(l)    
   
 
 
 
 
 
  Total minority interests     710.8           710.8     (681.6 )   29.2  
   
 
 
 
 
 
Stockholders' equity                                
Preferred members' interest     195.7           195.7     (195.7 )(m)    
Common members' interest                                
Class A units, 10,000,000 issued and outstanding, no par value                          
Class B units, 10,000,000 issued and outstanding, no par value                          
Common stock (1,200,000,000 shares of common stock, par value $0.01 per share, authorized, 220,454,546 shares outstanding, pro forma as adjusted)                   2.2   (n)   2.2  
Preferred stock (100,000,000 shares of preferred stock, par value $0.01 per share, authorized, 5,000,000 shares mandatory convertible preferred stock outstanding, pro forma as adjusted)                   250.0   (n)   250.0  
Additional paid-in capital     734.4           734.4     1,161.9   (n)   2,773.6  
Accumulated deficit     (1,470.0 )   (20.5 )(d)   (1,490.5 )   (239.2 )(o)   (1,729.7 )
Accumulated other comprehensive income     98.5           98.5           98.5  
   
 
 
 
 
 
  Total stockholders' (deficit) equity     (441.4 )   (20.5 )   (461.9 )   1,174.9     1,394.6  
   
 
 
 
 
 
  Total liabilities and stockholders' equity   $ 8,993.8   $ (56.5 ) $ 8,937.3   $ 45.8   $ 8,983.1  
   
 
 
 
 
 

(a)
To reflect the net use of cash as follows:

HI Bank Refinancing   $ (1.1 )
Net cash used in the HI Senior Subordinated Notes Transaction     (0.5 )
HI Term Repayment     (59.0 )
   
 
Net use of cash   $ (60.6 )
   
 

42


(b)
To reflect the increase in deferred debt issuance costs, net of amounts written off, as a result of the following:

HI Bank Refinancing   $ 1.1
HI Senior Subordinated Notes Transaction     1.0
HLLC Bank Refinancing     2.0
   
Net increase in deferred debt issuance costs   $ 4.1
   
(c)
To reflect the net change in debt from the following:

Proceeds from the HI Senior Subordinated Notes Transaction   $ 348.1  
Repayment of debt in connection with the HI Senior Subordinated Notes Transaction     (330.9 )
HLLC Bank Refinancing     5.8  
HI Term Repayment     (59.0 )
   
 
Net change in debt   $ (36.0 )
   
 
(d)
To reflect a loss on early retirement of debt for the write-off of deferred debt issuance costs in connection with the HLLC Bank Refinancing and HI Senior Subordinated Notes Transaction.

(e)
To reflect the net cash provided in connection with this offering after giving effect to the repayment of debt as described in "Use of Proceeds."

(f)
To reflect the investment in U.S. treasury securities that we will pledge as collateral to support our obligation to pay dividends on our mandatory convertible preferred stock to be issued in the concurrent offering of mandatory convertible preferred stock.

(g)
To reflect the write-off of deferred debt issuance costs related to the debt repaid with the net proceeds from this offering.

(h)
To reflect the net increase in accrued liabilities from the following:

Payment of accrued interest on the HLLC Senior Secured Notes   $ (8.5 )
Payment of accrued interest on HLLC Senior Fixed Rate Notes     (2.5 )
Current portion of accrued dividends payable on our mandatory convertible preferred stock     12.5  
   
 
    $ 1.5  
   
 
(i)
To reflect the net repayment of debt with the net proceeds from this offering.

(j)
To reflect the noncurrent portion of accrued dividends payable on our mandatory convertible preferred stock.

(k)
To reflect the exchange of HMP Warrants for common stock.

(l)
To reflect the exchange of redeemable preferred members' interest for common stock.

(m)
To reflect the exchange of preferred members' interest for common stock.

(n)
To reflect the issuance of common stock and mandatory convertible preferred stock in this offering, net of related fees and expenses, and the issuance of common stock in the Reorganization Transaction.

(o)
Includes a loss on early retirement of debt of $224.8 million, reflecting the difference between the carrying value of the debt and the redemption price and call premiums, and $14.4 million for the write-off of deferred debt issuance costs. Due to the non-recurring nature of these adjustments, they have not been reflected in the pro forma statements of operations.

43


Schedule of Pro Forma and Pro Forma As Adjusted Interest Expense Adjustments

        The following schedule sets forth the interest expense adjustments to the pro forma and pro forma as adjusted financial statements set forth above. For a discussion of the debt obligations shown below, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Debt and Liquidity."

 
   
  Interest Expense(2)
 
 
  Pro Forma
Balance
as of
September 30,
2004(1)

   
  Nine Months Ended September 30,
 
 
  Year Ended December 31, 2003
 
 
  2003
  2004
 
 
  (in millions)

 
Average LIBOR for period           1.209 %   1.235 %   1.287 %
Average dollar/euro exchange rate for period           1.1329     1.1128     1.2259  

Pro forma interest expense adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 
Secured credit facilities:                          
  HLLC Revolving Facility (LIBOR plus 2.25%, unused fee of 0.50%)   $ 98.2   $ 4.6   $ 3.5   $ 3.5  
  HI Revolving Facility (LIBOR plus 3.25%, unused fee of 0.75%)         2.8     2.1     2.1  
  AdMat Revolving Credit Facility (LIBOR plus 3.00%, unused fee of 1.00%)         0.6     0.5     0.5  
  HLLC Term Facility (LIBOR plus 3.50%)     715.0     33.7     25.4     25.7  
  HI Term Facility (LIBOR plus 2.53% effective rate)     1,307.6     48.9     37.0     37.6  
  HCA Facilities (90 Day Bank Bill Swap Rate plus 2.90%)     41.9     2.9     2.2     2.6  
  New HCCA Facility (90 Day Bank Bill Swap Rate plus 2.90%)     12.3     0.8     0.6     0.8  

Secured notes:

 

 

 

 

 

 

 

 

 

 

 

 

 
  HLLC Senior Secured Notes (11.875% effective rate)     451.0     53.6     40.2     40.2  
  AdMat Fixed Rate Notes (11.00%)     250.0     27.5     20.6     20.6  
  AdMat Floating Rate Notes (LIBOR plus 8.00%, 8.50% effective rate)     98.5     10.4     7.8     7.8  

Notes:

 

 

 

 

 

 

 

 

 

 

 

 

 
  HLLC Senior Fixed Rate Notes (11.50%)     300.0     34.5     25.9     25.9  
  HLLC Senior Floating Rate Notes (LIBOR plus 7.25%)     100.0     8.5     6.4     6.4  
  HI Senior Notes (9.478% effective rate)     456.3     43.2     32.4     32.4  
  HI Senior Subordinated Notes (9.24%)     541.0     50.0     37.5     37.5  
  HI Senior Subordinated Notes (€507, 9.21% effective rate)     635.7     52.9     38.9     42.8  
  HLLC Subordinated Fixed Rate Notes (9.50%)     44.2     4.2     3.1     3.1  
  HLLC Subordinated Floating Rate Notes (LIBOR plus 3.25%)     15.1     0.7     0.5     0.5  

Secured discount notes:

 

 

 

 

 

 

 

 

 

 

 

 

 
  HMP Discount Notes (23.658% effective rate)(3)     389.5     92.1     69.1     69.1  

Discount notes:

 

 

 

 

 

 

 

 

 

 

 

 

 
  HIH Senior Discount Notes (13.375%)(3)     479.2     64.1     48.1     48.1  

Note due to affiliate:

 

 

 

 

 

 

 

 

 

 

 

 

 
  HLLC Affiliate Note (15.00%)(3)     39.5     5.9     4.4     4.4  

Other debt:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Huntsman Specialty Chemicals Corporation Subordinated Note (9.298% effective rate)     100.8     9.4     7.0     7.0  
  Other debt (4.98% effective rate)     78.8     3.9     2.9     2.9  

Other items:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Amortization of debt issuance costs           23.7     17.8     17.8  
  Interest rate hedging arrangements (notional amount of $184.3; pay 4.44% weighted average fixed rate, receive LIBOR)           2.5     1.8     1.8  
  Cross currency swap (pay €132 at 6.63%, receive $175 at 7.375%)           (2.7 )   (2.2 )   (1.4 )
         
 
 
 
Total pro forma interest expense         $ 578.7   $ 433.5   $ 439.7  

Less historical interest expense(4)

 

 

 

 

 

(577.8

)

 

(410.2

)

 

(459.5

)
         
 
 
 

Net pro forma interest expense adjustment

 

 

 

 

$

0.9

 

$

23.3

 

$

(19.8

)
         
 
 
 
                           

44



Pro forma as adjusted interest expense adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Adjustment of HLLC Term Facility (0.50% interest rate reduction as a result of this offering)   $ 715.0   $ (3.6 ) $ (2.7 ) $ (2.7 )
  Repayment of HMP Discount Notes (23.658% effective rate)     389.5     (92.1 )   (69.1 )   (69.1 )
  Repayment of HIH Senior Discount Notes (13.375%)     479.2     (64.1 )   (48.1 )   (48.1 )
  Partial repayment of HLLC Senior Secured Notes (11.875% effective rate)     159.4     (18.9 )   (14.2 )   (14.2 )
  Repayment of HLLC Affiliate Note (15.00%)     39.5     (5.9 )   (4.4 )   (4.4 )
  Partial repayment of HLLC Senior Fixed Rate Notes (11.50%)     78.0     (9.0 )   (6.7 )   (6.7 )
  Adjustment to amortization of debt issuance costs           (3.1 )   (2.2 )   (2.2 )
         
 
 
 

Net pro forma as adjusted interest expense adjustment

 

 

 

 

$

(196.7

)

$

(147.4

)

$

(147.4

)
         
 
 
 
Total pro forma as adjusted interest expense         $ 382.0   $ 286.1   $ 292.3  
         
 
 
 


(1) Gives effect to the HLLC Bank Refinancing.

(2) The aggregate effect on annual interest expense of a variance of
1 / 8  percent in our variable rate indebtedness is $3.1 million.

(3) Interest expense for the discount and PIK notes has been
calculated on carrying amounts as of September 30, 2004.
Respective carrying amounts for each period end were as
follows:

 
   
   
  As of
September 30,

 
   
  As of
December 31,
2003

 
   
  2003
  2004
 
   
  (in millions)

  HLLC Affiliate Note       $ 35.5   $ 34.3   $ 39.5
  HMP Discount Notes         329.4     311.5     389.5
  HIH Senior Discount Notes         434.6     421.0     479.2

(4) As adjusted for the HIH Consolidation Transaction and the
AdMat Transaction.

45



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information appearing elsewhere in the prospectus, including "Prospectus Summary—Summary Historical and Pro Forma As Adjusted Financial Data," "Capitalization," "Selected Historical Financial Data" and "Unaudited Pro Forma Financial Data."

Overview

        We are among the world's largest global manufacturers of differentiated and commodity chemical products. We manufacture a broad range of chemical products and formulations, which we market in more than 100 countries to a diversified group of consumer and industrial customers. Our products are used in a wide range of applications, including those in the adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining and synthetic fiber industries. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, epoxy-based polymer formulations, maleic anhydride and titanium dioxide. We operate 63 manufacturing facilities located in 22 countries and employ over 11,500 associates. Our businesses benefit from significant vertical integration, large production scale and proprietary manufacturing technologies, which allow us to maintain a low-cost position. We had pro forma revenues for the nine months ended September 30, 2004 and the year ended December 31, 2003 of $8,357.7 million and $9,252.4 million, respectively.

        Our business is organized around our six segments: Polyurethanes, Advanced Materials, Performance Products, Pigments, Polymers and Base Chemicals. These segments can be divided into two broad categories: differentiated and commodity. Our Polyurethanes, Advanced Materials and Performance Products segments produce differentiated products, and our Pigments, Polymers and Base Chemicals segments produce commodity chemicals. Among our commodity products, our Pigments business, while cyclical, is influenced largely by seasonal demand patterns in the coatings industry. Certain products in our Polymers segment also follow different trends than petrochemical commodities as a result of our niche marketing strategy for such products that focuses on supplying customized formulations. Nevertheless, each of our six operating segments is impacted to some degree by economic conditions, prices of raw materials and global supply and demand pressures.

        Growth in our Polyurethanes and Advanced Materials segments has been driven by the continued substitution of our products for other materials across a broad range of applications as well as the level of global economic activity. Historically, demand for many of these products has grown at rates in excess of GDP growth. In Polyurethanes, this growth, particularly in Asia, has recently resulted in improved demand and higher industry capacity utilization rates for many of our key products, including MDI. In 2004, the profitability of our Polyurethanes and Advanced Materials segments improved due to increased demand in several of our key industrial end markets, including aerospace, automotive and construction products. This allowed us to increase selling prices, which more than offset increases in the cost of our primary raw materials, including benzene, propylene and chlorine.

        The global PO market is influenced by supply and demand imbalances. PO demand is largely driven by growth in the polyurethane industry, and, as a result, growth rates for PO have generally exceeded GDP growth rates. As a co-product of our PO manufacturing process, we also produce MTBE. MTBE is an oxygenate that is blended with gasoline to reduce harmful vehicle emissions and to enhance the octane rating of gasoline. See "—Business—Environmental, Health and Safety Matters—MTBE Developments" below for more information on the legal and regulatory developments that may curtail or eliminate the use of MTBE in gasoline in the U.S.

        In our Performance Products segment, demand for our performance specialties has generally continued to grow at rates in excess of GDP as overall demand is significantly influenced by new

46



product and application development. In 2004, overall demand for most of our performance intermediates was generally stable or improved, but excess surfactant manufacturing capacity in Europe and a decline in the use of LAB in new detergent formulations limited our ability to increase prices in response to higher raw material costs. In EG, higher industry capacity utilization rates in 2004 due to stronger demand in the PET resin and Asian fiber markets resulted in higher profitability.

        Historically, demand for titanium dioxide pigments has grown at rates approximately equal to global GDP growth. Pigment prices have historically reflected industry-wide operating rates but have typically lagged behind movements in these rates by up to twelve months due to the effects of product stocking and destocking by customers and producers, contract arrangements and seasonality. The industry experiences some seasonality in its sales because sales of paints, the largest end use for titanium dioxide, generally peak during the spring and summer months in the northern hemisphere. This results in greater sales volumes in the second and third quarters of the year.

        The profitability of our Polymers and Base Chemicals segments has historically been cyclical in nature. The industry has recently operated in a down cycle that resulted from significant new capacity additions, weak demand reflecting soft global economic conditions and high crude oil and natural gas-based raw material costs. Despite continued high feedstock costs, the profitability of our Base Chemicals segment improved in 2004 as demand strengthened and average selling prices and profit margins increased in most of our product lines. According to Nexant, industry fundamentals currently point to a continued cyclical recovery in the olefins and aromatics industries. Limited new capacity additions have been announced for these products in North America and Western Europe over the next several years. Consequently, Nexant currently expects operating rates and profit margins in the polymers and base chemicals markets to increase as demand continues to recover as a result of improved global economic conditions.

Pro Forma Results of Operations

        The businesses of our predecessor Huntsman Holdings, LLC underwent significant changes as a result of a number of transactions that were completed in 2003. As a result, the financial information as of and for the nine months ended September 30, 2004 is not comparable to the financial information as of and for the nine months ended September 30, 2003. In order to present data that is useful for comparative purposes, we have included pro forma information for the nine month periods ended September 30, 2003 and 2004. The pro forma information for the nine months ended September 30, 2003 has been prepared as if the HIH Consolidation Transaction, the AdMat Transaction and the Refinancing Transactions occurred on January 1, 2003. HIH became a consolidated subsidiary effective as of May 1, 2003, and Advanced Materials became a consolidated subsidiary effective as of June 30, 2003. The Refinancing Transactions occurred between April 2003 and December 2004. The pro forma information for the nine months ended September 30, 2004 has been prepared as if the Refinancing Transaction that occurred in 2004 occurred on January 1, 2004. We believe the use of pro forma results for the periods covered in this report provides a more meaningful comparison of our results between the applicable periods. These results do not necessarily reflect the results that would have been obtained if we had completed the transactions described above on the dates indicated or that may be

47



expected in the future. See "Unaudited Pro Forma Financial Data." For a period to period comparison of our historical results of operations, see "—Historical Results of Operations."

 
  Pro Forma
 
 
  Nine Months Ended September 30,
 
 
  2003
  2004
 
 
  (in millions)

 
Revenues   $ 6,885.2   $ 8,357.7  
Cost of goods sold     6,150.1     7,358.0  
   
 
 
Gross profit     735.1     999.7  
Operating expense     567.2     580.9  
Restructuring, impairment and plant closing costs     44.3     202.4  
   
 
 
Operating income     123.6     216.4  
Interest expense, net     (433.5 )   (439.8 )
Loss on accounts receivable securitization program     (24.0 )   (10.2 )
Equity in income of unconsolidated affiliates     0.8     3.0  
Other non-operating expense     (1.8 )   (0.8 )
   
 
 
Loss before income taxes and minority interest     (334.9 )   (231.4 )
Income tax benefit (expense)     2.4     25.7  
Minority interests in subsidiaries' loss (income)     5.8     (1.1 )
Cumulative effect of accounting change          
   
 
 
Net loss   $ (326.7 ) $ (206.8 )
   
 
 
Interest expense, net     433.5     439.8  
Income tax (benefit) expense     (2.4 )   (25.7 )
Depreciation and amortization     358.9     410.3  
   
 
 
EBITDA(1)   $ 463.3   $ 617.6  
   
 
 

(1)
EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. We believe that EBITDA enhances an investor's understanding of our financial performance and our ability to satisfy principal and interest obligations with respect to our indebtedness. However, EBITDA should not be considered in isolation or viewed as a substitute for net income, cash flow from operations or other measures of performance as defined by GAAP. Moreover, EBITDA as used herein is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the method of calculation. Our management uses EBITDA to assess financial performance and debt service capabilities. In assessing financial performance, our management reviews EBITDA as a general indicator of economic performance compared to prior periods. Because EBITDA excludes interest, income taxes, depreciation and amortization, EBITDA provides an indicator of general economic performance that is not affected by debt restructurings, fluctuations in interest rates or effective tax rates, or levels of depreciation and amortization. Accordingly, our management believes this type of measurement is useful for comparing general operating performance from period to period and making certain related management decisions. EBITDA is also used by securities analysts, lenders and others in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be highly dependent on a company's capital structure, debt levels and credit ratings. Therefore, the impact of interest expense on earnings can vary significantly among companies. In addition, the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate. As a

48


    result, effective tax rates and tax expense can vary considerably among companies. Finally, companies employ productive assets of different ages and utilize different methods of acquiring and depreciating such assets. This can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. Our management also believes that our investors use EBITDA as a measure of our ability to service indebtedness as well as to fund capital expenditures and working capital requirements. Nevertheless, our management recognizes that there are material limitations associated with the use of EBITDA in the evaluation of our company as compared to net income, which reflects overall financial performance, including the effects of interest, income taxes, depreciation and amortization. EBITDA excludes interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes interest expense has material limitations. EBITDA also excludes taxes. Because the payment of taxes is a necessary element of our operations, any measure that excludes tax expense has material limitations. Finally, EBITDA excludes depreciation and amortization expense. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes depreciation and amortization expense has material limitations. Our management compensates for the limitations of using EBITDA by using it to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Our management also uses other metrics to evaluate capital structure, tax planning and capital investment decisions. For example, our management uses credit ratings and net debt ratios to evaluate capital structure, effective tax rate by jurisdiction to evaluate tax planning, and payback period and internal rate of return to evaluate capital investments. Our management also uses trade working capital to evaluate its investment in receivables and inventory, net of payables.


We believe that net income (loss) is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA. We reconcile our net loss to EBITDA in the table above.


We believe that cash provided by (used in) operating activities is the liquidity measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA. For a reconciliation of historical EBITDA to our historical cash provided by (used in) operations, see "—Historical Results of Operations" below.

49



Included in EBITDA are the following unusual items of (expense) income:

 
  Pro Forma
 
 
  Nine Months Ended September 30,
 
 
  2003
  2004
 
 
  (in millions)

 
Early extinguishment of debt   $   $ (1.9 )
Legal and contract settlement income (expense), net     (5.5 )   (6.1 )
Gain (loss) on accounts receivable securitization program     (24.0 )   (10.2 )
Asset write down     (5.8 )    
Reorganization costs     (27.5 )    
Cumulative effect of accounting change          
Restructuring, impairment and plant closing (expense) income:              
  Polyurethanes   $ (22.2 ) $ (32.8 )
  Advanced Materials          
  Performance Products     (20.1 )   (41.2 )
  Pigments     (1.1 )   (111.7 )
  Polymers     (0.9 )   (7.6 )
  Base Chemicals         (9.1 )
  Corporate and other          
   
 
 
    Total   $ (44.3 ) $ (202.4 )
   
 
 

Nine months ended September 30, 2004 (Pro Forma) compared to nine months ended September 30, 2003 (Pro Forma)

        For the nine months ended September 30, 2004, we had a net loss of $206.8 million on revenues of $8,357.7 million compared to a net loss of $326.7 million on revenues of $6,885.2 million for the same period in 2003. The decrease of $119.9 million in net loss was the result of the following items:

    Revenues for the nine months ended September 30, 2004 increased by $1,472.5 million, or 21%, from the same period in 2003 due to higher average selling prices in all of our operating segments and higher sales volumes in our Polyurethanes, Advanced Materials, Pigments, Polymers and Base Chemicals segments. For details of our changes in selling prices and sales volumes from the prior period, see the discussion by operating segment below.

    Gross profit for the nine months ended September 30, 2004 increased by $264.6 million, or 36%, from the same period in 2003. This increase, which occurred in all our segments except Performance Products, was mainly due to higher contribution margins as average selling prices increased more than raw material and energy costs in the 2004 period as compared to the same period in 2003.

    Operating expenses for the nine months ended September 30, 2004 increased by $13.7 million, or 2%, from the same period in 2003. This increase was due in part to a $53.8 million decrease in unallocated foreign exchange gains in the 2004 period. We also incurred reorganization costs of $27.5 million in the nine months ended September 30, 2003 related to a number of cost reduction programs by the predecessor company of Advanced Materials. The remaining decrease of $12.6 million in operating expenses was due primarily to cost savings resulting from our ongoing restructuring efforts.

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    Restructuring and plant closing costs for the nine months ended September 30, 2004 increased by $158.1 million to $202.4 million from $44.3 million in the same period in 2003. For further discussion of restructuring activities, see "—Restructuring and Plant Closing Costs" below.

    Net interest expense for the nine months ended September 30, 2004 increased by $6.3 million, or 1%, from the same period in 2003. See "Unaudited Pro Forma Financial Data—Schedule of Pro Forma and Pro Forma As Adjusted Interest Expense Adjustments."

    In the nine months ended September 30, 2004, losses on our accounts receivable securitization program decreased $13.8 million, or 58%, when compared with the same period in 2003. This decrease is mainly attributable to reduced losses on foreign currency hedge contracts in the 2004 period as compared to the 2003 period, primarily in response to an amendment to our accounts receivable securitization program that permits euro-denominated debt, thereby reducing the need for foreign currency hedge contracts.

    Income tax benefit increased by $23.3 million to $25.7 million for the nine months ended September 30, 2004 as compared to $2.4 million for the same period in 2003. Our tax obligations are affected by the mix of income and losses in the tax jurisdictions in which we operate. Increased tax benefit was largely due to changes in pre-tax income. Substantially all non-U.S. operations of our Advanced Materials subsidiary are treated as branches for U.S. income tax purposes and are, therefore, subject to both U.S. and non-U.S. income tax. The U.S. tax implications of income from Advanced Materials operations are offset by other U.S. losses, which results in no U.S. tax expense or benefit, net of valuation allowances. Application of the statutory rate would result in a non-U.S. tax expense of approximately $17 million on $50.0 million of Advanced Materials pre-tax income. An additional $15.3 million of tax expense was primarily the result of our recognizing losses in jurisdictions where little or no tax benefit was provided. In addition, we recognized a $55.0 million benefit attributable to non-Advanced Materials foreign operations. In particular, during the nine months ended September 30, 2004 we recognized non-recurring benefits in Spain, France and Holland of approximately $27 million associated with enacted changes in tax rates, the settlement of tax authority examinations and the reversal of previously established valuation allowances. In addition, we recognized approximately $24 million of benefit from losses in jurisdictions not subject to valuation allowances as well as treaty negotiated reductions in statutory rates.

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        The following table sets forth the revenues and EBITDA for each of our operating segments:

 
  Pro Forma
   
 
 
  Nine Months Ended
September 30,

   
 
 
  % Change
 
 
  2003
  2004
 
 
  (in millions)

   
 
Revenues                  
Polyurethanes   $ 1,718.1   $ 2,117.4   23 %
Advanced Materials     790.5     866.4   10 %
Performance Products     1,266.3     1,399.7   11 %
Pigments     752.5     794.7   6 %
Polymers     847.7     1,019.6   20 %
Base Chemicals     1,954.2     2,755.8   41 %
Eliminations     (444.1 )   (595.9 ) 34 %
   
 
     
Total   $ 6,885.2   $ 8,357.7   21 %
   
 
     

Segment EBITDA

 

 

 

 

 

 

 

 

 
Polyurethanes   $ 157.1   $ 270.7   72 %
Advanced Materials     (4.7 )   121.3   NM  
Performance Products     90.3     82.9   (8 )%
Pigments     88.3     (53.6 ) NM  
Polymers     53.4     45.6   (15 )%
Base Chemicals     55.8     204.8   267 %
Corporate and other     23.1     (54.1 ) NM  
   
 
     
Total   $ 463.3   $ 617.6   33 %
   
 
     

NM—Not meaningful

    Polyurethanes

        For the nine months ended September 30, 2004, Polyurethanes revenues increased by $399.3 million, or 23%, from the same period in 2003, primarily from higher average selling prices and higher sales volumes for MDI. MDI revenues increased by 30%, resulting from 16% higher sales volumes and 12% higher average selling prices. The increase in MDI average selling prices resulted principally from improved market demand coupled with tighter supply, stronger major European currencies versus the U.S. dollar and in response to higher raw material and energy costs. Higher MDI volumes reflect further extension of markets for MDI and recent improvements in global economic conditions.

        For the nine months ended September 30, 2004, Polyurethanes segment EBITDA increased by $113.6 million, or 72%, from the same period in 2003. Excluding restructuring charges, increased segment EBITDA of $124.2 million resulted mainly from higher contribution margins as average selling prices increased more than raw material and energy costs. For the nine months ended September 30, 2003 and 2004, restructuring charges of $22.2 million and $32.8 million, respectively, were included in segment EBITDA.

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    Advanced Materials

        On a pro forma basis, Advanced Materials revenues for the nine months ended September 30, 2004 increased by $75.9 million, or 10%, from the same period in 2003. Higher revenues were attributable to a 10% increase in average selling prices, with stable sales volumes. Average selling prices were higher due to price increase initiatives in certain markets in response to improved demand, higher raw material costs and the effect of the strength of the major European currencies versus the U.S. dollar.

        For the nine months ended September 30, 2004, Advanced Materials segment EBITDA increased by $126.0 million to $121.3 million from a loss of $4.7 million for the same period in 2003. The 2003 period includes reorganization costs of $27.5 million and foreign currency losses of $33.8 million related to the debt structure of Advanced Materials' predecessor. The remaining $64.7 million increase in segment EBITDA was primarily due to higher contribution margins as average selling prices increased more than raw material costs.

    Performance Products

        For the nine months ended September 30, 2004, Performance Products revenues increased by $133.4 million, or 11%, from the same period in 2003 primarily as a result of higher average selling prices for all products, offset somewhat by lower sales volumes in certain product lines. Overall, average selling prices increased by 14% in response to higher raw material and energy costs, improved market conditions and the strength of European and Australian currencies versus the U.S. dollar. The 3% decrease in sales volumes resulted principally from lower amine and surfactants sales. The reduction in surfactants sales volumes was due to reduced customer demand in certain product lines and increased competition in the marketplace.

        For the nine months ended September 30, 2004, Performance Products segment EBITDA decreased by $7.4 million, or 8%, from the same period in 2003, resulting primarily from higher restructuring charges. During the nine months ended September 30, 2004, we recorded restructuring charges of $41.2 million related to workforce reductions at several of our European surfactants locations and the closure of our Guelph, Canada, Queeny, Missouri and Austin, Texas facilities. In the same period in 2003, we recorded a $20.1 million restructuring charge mainly related to the closure of a number of units at our Whitehaven, U.K. facility. Excluding restructuring charges, EBITDA for the nine months ended September 30, 2004 increased by $13.7 million compared to the same period in 2003. This increase was the result of higher contribution margins as average selling prices more than offset the increase in raw materials and energy costs.

    Pigments

        For the nine months ended September 30, 2004, Pigments segment revenues increased by $42.2 million, or 6%, from the same period in 2003, resulting from a 3% increase in sales volumes and a 2% increase in average selling prices. The growth in sales volumes was primarily due to increased demand in Asia. Average selling prices benefited from the strengthening of major European currencies versus the U.S. dollar.

        Pigments segment EBITDA for the nine months ended September 30, 2004 decreased by $141.9 million to a loss of $53.6 million from $88.3 million for the same period in 2003. The decrease in segment EBITDA is mainly due to restructuring and plant closing costs of $111.7 million and charges of $14.9 million relating to the payment of costs and settlement amounts for claims relating to discoloration of nonplasticized polyvinyl chloride products allegedly caused by our titanium dioxide ("Discoloration Claims") recorded in the 2004 period. The remaining segment EBITDA increase of $16.4 million was primarily due to higher revenues (as discussed above), which were only partially offset by higher costs resulting from the strengthening of the major European currencies versus the U.S.

53



dollar. During the nine months ended September 30, 2003 and 2004, our Pigments segment recorded restructuring charges of $1.1 million and $111.7 million, respectively.

    Polymers

        For the nine months ended September 30, 2004, Polymers revenues increased by $171.9 million, or 20%, from the same period in 2003 due mainly to 15% higher average selling prices and 5% higher sales volumes. Higher average selling prices were primarily in response to higher raw material and energy costs while sales volumes increased principally as a result of stronger customer demand.

        For the nine months ended September 30, 2004, Polymers segment EBITDA decreased by $7.8 million, or 15%, from the same period in 2003. The decrease in segment EBITDA was primarily due to a $7.6 million restructuring charge related to the closure of an Australian manufacturing unit. Higher revenues for the nine months ended September 30, 2004 were offset by increased raw material prices.

    Base Chemicals

        For the nine months ended September 30, 2004, Base Chemicals revenues increased $801.6 million, or 41%, from the same period in 2003 due mainly to a 30% increase in average selling prices and an 8% increase in sales volumes. Higher average selling prices were primarily in response to higher raw material and energy costs and the strengthening of major European currencies versus the U.S. dollar. Sales volumes increased for all key products, driven by increased sales volumes of ethylene, propylene and cyclohexane of 6%, 12% and 12%, respectively, principally as a result of increased demand.

        For the nine months ended September 30, 2004, Base Chemicals segment EBITDA increased by $149.0 million, or 267%, from the same period in 2003 primarily as a result of higher contribution margins as average selling prices increased more than raw material and energy costs. EBITDA for the nine months ended September 30, 2004 included $9.1 million of restructuring charges related to workforce reductions primarily at our Wilton and North Tees, U.K. facilities.

    Corporate and Other

        Corporate and other items includes unallocated corporate overhead, unallocated foreign exchange gains and losses, loss on the sale of accounts receivable, other non-operating income and expense and minority interest in subsidiaries' loss. For the nine months ended September 30, 2004, EBITDA from corporate and other items decreased by $77.2 million to a loss of $54.1 million from $23.1 million for the same period in 2003. Lower EBITDA resulted primarily from a negative impact from unallocated foreign currency gains and losses in the nine months ended September 30, 2004 as compared to the comparable period in 2003.

Historical Results of Operations

        The businesses of our predecessor Huntsman Holdings, LLC underwent significant changes as a result of a number of transactions. In our historical financial data, HIH is accounted for using the equity method of accounting through April 30, 2003. Effective May 1, 2003, as a result of the HIH Consolidation Transaction, we have consolidated the financial results of HIH. Effective July 1, 2003, as a result of the AdMat Transaction, we have consolidated the financial results of Advanced Materials. Effective September 30, 2002, as a result of the HLLC Restructuring, we have consolidated the financial results of Huntsman Chemical Company Australia Pty Ltd. ("HCCA"). See Note 1 to the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus for a discussion of the HLLC Restructuring. As a result, the financial information as of and for the year ended December 31, 2003 is not comparable to the prior years' historical financial data presented

54



herein, and the financial information as of and for the nine months ended September 30, 2004 is not comparable to the financial information as of and for the nine months ended September 30, 2003.

 
  Year Ended December 31,
  Nine Months Ended
September 30,

 
 
  Historical
  Pro Forma
  Historical
 
 
  2001
  2002
  2003
  2003
  2003
  2004
 
 
  (in millions)

 
Revenues   $ 2,757.4   $ 2,661.0   $ 7,080.9   $ 9,252.4   $ 4,711.1   $ 8,357.7  
Cost of goods sold     2,666.6     2,421.0     6,373.1     8,255.1     4,258.7     7,358.0  
   
 
 
 
 
 
 
Gross profit     90.8     240.0     707.8     997.3     452.4     999.7  
Operating expense     211.7     174.7     493.4     732.2     333.3     580.9  
Restructuring, impairment and plant closing costs (credit)     588.5     (1.0 )   37.9     55.0     27.2     202.4  
   
 
 
 
 
 
 
Operating (loss) income     (709.4 )   66.3     176.5     210.1     91.9     216.4  
Interest expense, net     (239.3 )   (181.9 )   (409.1 )   (578.7 )   (260.7 )   (459.5 )
Loss on sale of accounts receivable     (5.9 )       (20.4 )   (32.4 )   (11.9 )   (10.2 )
Equity in (loss) income of unconsolidated affiliates     (86.8 )   (31.4 )   (37.5 )   1.5     (38.2 )   3.0  
Other (expense) income     0.6     (7.6 )       (2.2 )   0.4     (0.8 )
   
 
 
 
 
 
 
Loss before income tax benefit and minority interests     (1,040.8 )   (154.6 )   (290.5 )   (401.7 )   (218.5 )   (251.1 )
Income tax benefit (expense)     184.9     (8.5 )   (30.8 )   (32.1 )   3.8     25.7  
Minority interests in subsidiaries' loss (income)     13.1     (28.8 )   1.5     6.8     0.5     (1.1 )
Cumulative effect of accounting changes     0.1     169.7                  
   
 
 
 
 
 
 
Net loss   $ (842.7 ) $ (22.2 ) $ (319.8 ) $ (427.0 ) $ (214.2 ) $ (226.5 )
   
 
 
 
 
 
 
Interest expense, net     239.3     181.9     409.1     578.7     260.7     459.5  
Income tax (benefit) expense     (184.9 )   8.5     30.8     32.1     (3.8 )   (25.7 )
Depreciation and amortization     197.5     152.7     353.4     479.7     230.5     410.3  
   
 
 
 
 
 
 
EBITDA(1)   $ (590.8 ) $ 320.9   $ 473.5   $ 663.5   $ 273.2   $ 617.6  
   
 
 
 
 
 
 
Net cash provided by (used in) operating activities     (287.0 )   88.7     225.4           (36.8 )   55.9  
Net cash (used in) provided by investing activities     86.2     (24.5 )   (908.5 )         (842.1 )   (160.7 )
Net cash provided by (used in) financing activities     182.2     (93.0 )   786.7           947.7     128.2  

(1)
EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. We believe that EBITDA enhances an investor's understanding of our financial performance and our ability to satisfy principal and interest obligations with respect to our indebtedness. However, EBITDA should not be considered in isolation or viewed as a substitute for net income, cash flow from operations or other measures of performance as defined by GAAP. Moreover, EBITDA as used herein is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the method of calculation. Our management uses EBITDA to assess financial performance and debt service capabilities. In assessing financial performance, our management reviews EBITDA as a general indicator of economic performance compared to prior periods. Because EBITDA excludes interest, income taxes, depreciation and amortization, EBITDA provides an indicator of general economic performance that is not affected

55


    by debt restructurings, fluctuations in interest rates or effective tax rates, or levels of depreciation and amortization. Accordingly, our management believes this type of measurement is useful for comparing general operating performance from period to period and making certain related management decisions. EBITDA is also used by securities analysts, lenders and others in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be highly dependent on a company's capital structure, debt levels and credit ratings. Therefore, the impact of interest expense on earnings can vary significantly among companies. In addition, the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate. As a result, effective tax rates and tax expense can vary considerably among companies. Finally, companies employ productive assets of different ages and utilize different methods of acquiring and depreciating such assets. This can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. Our management also believes that our investors use EBITDA as a measure of our ability to service indebtedness as well as to fund capital expenditures and working capital requirements. Nevertheless, our management recognizes that there are material limitations associated with the use of EBITDA in the evaluation of our company as compared to net income, which reflects overall financial performance, including the effects of interest, income taxes, depreciation and amortization. EBITDA excludes interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes interest expense has material limitations. EBITDA also excludes taxes. Because the payment of taxes is a necessary element of our operations, any measure that excludes tax expense has material limitations. Finally, EBITDA excludes depreciation and amortization expense. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes depreciation and amortization expense has material limitations. Our management compensates for the limitations of using EBITDA by using it to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Our management also uses other metrics to evaluate capital structure, tax planning and capital investment decisions. For example, our management uses credit ratings and net debt ratios to evaluate capital structure, effective tax rate by jurisdiction to evaluate tax planning, and payback period and internal rate of return to evaluate capital investments. Our management also uses trade working capital to evaluate its investment in receivables and inventory, net of payables.


We believe that net income (loss) is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA and that cash provided by (used in) operating activities is the liquidity measure calculated and presented in accordance with

56


    GAAP that is most directly comparable to EBITDA. The following table reconciles EBITDA to our net loss and to our cash provided by (used in) operations:

 
  Year Ended December 31,
   
   
 
 
  Nine Months Ended September 30,
 
 
  Historical
  Pro Forma
 
 
  2001
  2002
  2003
  2003
  2003
  2004
 
 
  (in millions)

 
EBITDA   $ (590.8 ) $ 320.9   $ 473.5   $ 663.5   $ 273.2   $ 617.6  
Depreciation and amortization expense     (197.5 )   (152.7 )   (353.4 )   (479.7 )   (230.5 )   (410.3 )
Interest expense, net     (239.3 )   (181.9 )   (409.1 )   (578.7 )   (260.7 )   (459.5 )
Income tax benefit (expense)     184.9     (8.5 )   (30.8 )   (32.1 )   3.8     25.7  
   
 
 
 
 
 
 
Net loss     (842.7 )   (22.2 )   (319.8 )   (427.0 )   (214.2 )   (226.5 )
                     
             
Cumulative effect of accounting changes     (0.1 )   (169.7 )                  
Equity in losses (income) of investment in unconsolidated affiliates     86.8     31.4     37.5           38.2     (3.0 )
Depreciation and amortization expense     197.5     152.7     353.4           230.5     410.3  
Noncash restructuring, plant closing and asset impairment charges (credits)     528.2     (5.3 )   9.7           12.3     109.0  
Noncash interest (including interest on affiliate debt)     10.4     (5.5 )   90.7           44.5     118.0  
Deferred income taxes     (184.5 )       (3.6 )         (27.8 )   (55.8 )
Unrealized gains on foreign currency transactions             (58.3 )         (17.4 )   (26.1 )
Other, net     (4.3 )   34.2     12.2           6.3     6.4  
Changes in operating assets and liabilities (net of acquisitions)     (78.3 )   73.1     103.6           (109.2 )   (276.4 )
   
 
 
       
 
 
Net cash (used in) provided by operating activities   $ (287.0 ) $ 88.7   $ 225.4         $ (36.8 ) $ 55.9  
   
 
 
       
 
 

Nine months ended September 30, 2004 (Historical) compared to nine months ended September 30, 2003 (Historical)

        For the nine months ended September 30, 2004, we had a net loss of $226.5 million on revenues of $8,357.7 million compared to a net loss of $214.2 million on revenues of $4,711.1 million for the same period in 2003. The increase of $12.3 million in net loss was the result of the following items:

    Revenues for the nine months ended September 30, 2004 increased by $3,646.6 million, or 77%, to $8,357.7 million from $4,711.1 million during the same period in 2003. Approximately 60% of this increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the entire period in 2004. The remaining approximately 40% of the increase was due to higher average selling prices in all our operating segments and higher sales volumes in our Polyurethanes, Advanced Materials, Pigments, Polymers and Base Chemicals segments. For details of the changes in selling prices and sales volumes from the prior year, please see our discussion by operating segment below.

    Gross profit for the nine months ended September 30, 2004 increased by $547.3 million, or 121%, to $999.7 million from $452.4 million in the same period in 2003. Approximately 52% of

57


      this increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the entire period in 2004. The remaining approximately 48% of the increase was due to higher contribution margins as average selling prices increased more than raw material and energy costs in 2004 as compared with the same period in 2003.

    Operating expenses for the nine months ended September 30, 2004 increased by $247.6 million, or 74%, to $580.9 million from $333.3 million in the same period in 2003. Approximately 94% of this increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the entire period in 2004.

    Restructuring, impairment and plant closing costs for the nine months ended September 30, 2004 increased by $175.2 million to $202.4 million from $27.2 million in the same period in 2003. This increase was in part due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. For the nine months ended September 30, 2004, our Polyurethanes segment recorded charges of $24.8 million related to workforce reductions at our Everberg, Belgium, West Deptford, New Jersey and Rozenburg, Netherlands sites; our Advanced Materials segment recorded no charges as charges for its restructuring activities were recorded in Advanced Materials' opening balance sheet; our Performance Products segment recorded charges of $41.2 million primarily related the closure of our Guelph, Canada facility and a workforce reduction across all locations in our European surfactants business; our Pigments segment recorded charges of $111.7 million related to the idling of manufacturing units at Umbogintwini, South Africa and Grimsby, U.K. and the related workforce reductions; our Polymers segment recorded charges of $7.6 million related to the closure of a manufacturing unit in Australia; and our Base Chemicals segment recorded restructuring charges of $9.1 million primarily related to workforce reductions and a change in work shift schedules at our Wilton and North Tees, U.K. facilities.

    Net interest expense for the nine months ended September 30, 2004 increased by $198.8 million to $459.5 million from $260.7 million for the same period in 2003. Approximately 97% of this increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the entire period in 2004.

    Loss on HI's accounts receivable securitization program decreased $1.7 million, or 14%, to a loss of $10.2 million for the nine months ended September 30, 2004 as compared to a loss of $11.9 million for 2003. Losses on the accounts receivable securitization program include the discount on receivables sold into the program, fees and expenses associated with the program and gains (losses) on foreign currency hedge contracts mandated by the terms of the program to hedge currency exposures on the collateral supporting the off-balance sheet debt issued.

    Income tax benefit increased by $21.9 million to a benefit of $25.7 million for the nine months ended September 30, 2004 as compared to income tax benefit of $3.8 million for the nine months ended September 30, 2003. Our tax obligations are affected by the mix of income and losses in the tax jurisdictions in which we operate. Increased tax benefit was largely due to changes in pre-tax income. Substantially all non-U.S. operations of our Advanced Materials subsidiary are treated as branches for U.S. income tax purposes and are, therefore, subject to both U.S. and non-U.S. income tax. The U.S. tax implications of income from Advanced Materials operations are offset by other U.S. losses, which results in no U.S. tax expense or benefit, net of valuation allowances. Application of the statutory rate would result in a non-U.S. tax expense of approximately $17 million on $50.0 million of Advanced Materials pre-tax

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      income. An additional $15.3 million of tax expense was primarily the result of our recognizing losses in jurisdictions where little or no tax benefit was provided. In addition, we recognized a $55.0 million benefit attributable to non-Advanced Materials foreign operations. In particular, during the nine months ended September 30, 2004 we recognized non-recurring benefits in Spain, France and Holland of approximately $27 million associated with enacted changes in tax rates, the settlement of tax authority examinations and the reversal of previously established valuation allowances. In addition, we recognized approximately $24 million of benefit from losses in jurisdictions not subject to valuation allowances as well as treaty negotiated reductions in statutory rates.

        The following table sets forth certain financial information for each of our operating segments:

 
  Historical
   
 
 
  Nine Months Ended September 30,
   
 
 
  % Change
 
 
  2003
  2004
 
 
  (in millions)

   
 
Revenues                  
Polyurethanes   $ 983.3   $ 2,117.4   115 %
Advanced Materials     258.7     866.4   235 %
Performance Products     1,084.4     1,399.7   29 %
Pigments     421.6     794.6   88 %
Polymers     847.7     1,019.6   20 %
Base Chemicals     1,467.0     2,755.8   88 %
Eliminations     (351.6 )   (595.9 ) 69 %
   
 
     
  Total   $ 4,711.1   $ 8,357.7   77 %
   
 
     
Segment EBITDA                  
Polyurethanes   $ 99.8   $ 270.7   171 %
Advanced Materials     19.5     121.3   522 %
Performance Products     87.7     82.9   (5 )%
Pigments     47.6     (53.6 ) NM  
Polymers     53.4     45.6   (15 )%
Base Chemicals     24.8     204.8   726 %
Corporate and other     (59.6 )   (54.1 ) (9 )%
   
 
     
  Total EBITDA   $ 273.2   $ 617.6   126 %
   
 
     

NM—Not Meaningful

    Polyurethanes

        For the nine months ended September 30, 2004, Polyurethanes revenues increased by $1,134.1 million, or 115.5%, from the same period in 2003. Approximately 65% of this increase was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining approximately 35% increase in Polyurethanes revenues was primarily due to higher average selling prices and higher sales volumes for MDI. MDI revenues increased by approximately 31%, resulting from approximately 15% higher sales volumes and approximately 16% higher average selling prices. The increase in MDI average selling prices resulted principally from improved market demand coupled with tighter supply, stronger major European currencies versus the U.S. dollar and in response to higher raw material and energy costs. Higher MDI volumes reflect further extensions of markets for MDI and recent improvements in global economic conditions.

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        For the nine months ended September 30, 2004, Polyurethanes segment EBITDA increased by $170.9 million, or 171%, to $270.7 million from $99.8 million for the same period in 2003, approximately 34% of which was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining approximately 66% of the increase, exclusive of restructuring costs, of $141.2 million resulted mainly from higher contribution margins as average selling prices increased more than raw materials and energy costs. For the nine months ended September 2003 and 2004, restructuring charges of $5.2 million and $32.8 million, respectively, were included in segment EBITDA.

    Advanced Materials

        Advanced Materials revenues for the nine months ended September 30, 2004 increased by $607.7 million, or 235%, from the same period in 2003. Approximately 88% of the increase was attributable to our ownership of Advanced Materials for the entire period in 2004 following the AdMat Transaction on June 30, 2003. The remaining approximately 12% increase in revenues for 2004 as compared to 2003 was due to an approximately 9% increase in average selling prices and an approximately 4% increase in sales volumes. Average selling prices were higher due to improved demand in certain markets in response to higher raw material costs and, in part, to the strength of the major European currencies versus the U.S. dollar.

        For the nine months ended September 30, 2004, Advanced Materials segment EBITDA increased by $101.8 million to $121.3 million from $19.5 million for the same period of 2003. Approximately 24% of the increase was attributable to the our ownership of Advanced Materials for the entire period in 2004 following the AdMat Transaction on June 30, 2003. The remaining approximately 76% increase in segment EBITDA was primarily due to higher contribution margins as average selling prices increased more than raw material costs.

    Performance Products

        For the nine months ended September 30, 2004, Performance Products revenues increased by $315.3 million, or 29%, from the same period in 2003. Approximately 58% of this increase was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining increase in revenues resulted primarily from higher average selling prices for all products, offset somewhat by lower sales volumes in certain product lines. Overall, average selling prices increased by approximately 14% in response to higher raw material and energy costs, improved market conditions and the strength of the Australian dollar versus the U.S. dollar. An approximately 1% decrease in sales volumes resulted principally from lower sales volumes of amines and surfactants. The reduction in surfactants sales volumes was due principally to increased competition in the marketplace.

        For the nine months ended September 30, 2004, Performance Products segment EBITDA decreased by $4.8 million, or 5%, to $82.9 million from $87.7 million for the same period in 2003, approximately 54% of which was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining decrease in EBITDA resulted primarily from restructuring charges. During the nine months ended September 30, 2004, HLLC recorded restructuring charges of $23.3 million related primarily to the closure of our Guelph, Canada, Queeny, Missouri and Austin, Texas facilities. Exclusive of these restructuring costs, EBITDA increased by approximately $21.1 million, most of which resulted from higher contribution margins as average selling prices increased more than raw material and energy costs.

60



    Pigments

        For the nine months ended September 30, 2004, Pigments revenues increased by $373.0 million, or 88%, from the same period in 2003. Approximately 89% of this increase was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining approximately 11% of the increase in revenues was due to approximately 5% higher sales volumes and approximately 1% higher average sales prices. The growth in sales volumes was primarily due to increased demand in Asia. Average selling prices benefited from the strength of major European currencies versus the U.S. dollar.

        Pigments segment EBITDA for the nine months ended September 30, 2004 decreased by $101.2 million to a loss of $53.6 million from income of $47.6 million for the same period in 2003, due primarily to increased restructuring expenses. During the nine months ended September 30, 2004 and 2003, our Pigments segment recorded restructuring and asset impairment charges of $111.7 million and $1.1 million, respectively.

    Polymers

        For the nine months ended September 30, 2004, Polymers revenues increased by $171.9 million, or 20%, to $1,019.6 million from $847.7 million the same period in 2003 due mainly to approximately 15% higher average selling prices and approximately 5% higher sales volumes. Higher average selling prices were primarily in response to higher raw material and energy costs while sales volumes increased principally as a result of stronger customer demand.

        For the nine months ended September 30, 2004, Polymers segment EBITDA decreased by $7.8 million to $45.6 million from $53.4 million for the same period in 2003. The decrease in segment EBITDA was primarily due to a $7.6 million restructuring charge related to the closure of an Australian manufacturing unit. Higher average selling prices were offset by higher raw material costs.

    Base Chemicals

        For the nine months ended September 30, 2004, Base Chemicals revenues increased $1,288.8 million, or 88%, from the same period in 2003. Approximately 38% of this increase was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining increase in revenue is due to approximately 51% higher average selling prices and approximately 3% higher sales volumes. Higher average selling prices were primarily in response to higher raw material and energy costs. Sales volumes increases were principally the result of increased demand.

        For the nine months ended September 30, 2004, Base Chemicals segment EBITDA increased by $180.0 million to $204.8 million from $24.8 million for the same period in 2003, approximately 17% of which was due to our consolidation of HIH for the entire period in 2004 following the HIH Consolidation Transaction effective May 1, 2003. The remaining increase in EBITDA was primarily a result of higher contribution margins as average selling prices increased more than raw material and energy costs.

    Corporate and Other

        Corporate and other items includes unallocated corporate overhead, unallocated foreign exchange gains and losses, loss on the sale of accounts receivable, other non-operating income and expense and minority interest in subsidiaries' loss. For the nine months ended September 30, 2004, EBITDA from corporate and other items increased by $5.5 million to a loss of $54.1 million from loss of $59.6 million for the same period in 2003.

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Year Ended December 31, 2003 (Historical) Compared to Year Ended December 31, 2002 (Historical)

        For the year ended December 31, 2003, we had a net loss of $319.8 million on revenues of $7,080.9 million, compared to net loss of $22.2 million on revenues of $2,661.0 million for 2002. The decrease of $297.6 million in net income was the result of the following items:

    Revenues for the year ended December 31, 2003 increased by $4,419.9 million to $7,080.9 million from $2,661.0 million during 2002. Approximately 87% of this increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the remainder of 2003. The remaining approximately 13% of the increase was due to higher average selling prices in all of our segments and higher sales volumes in our Performance Products and Polymers segments. For details of our changes in selling prices and sales volumes from the prior year, please see our discussion by operating segment below. Pro forma revenues for the year ended December 31, 2003 were $9,252.4 million.

    Gross profit for the year ended December 31, 2003 increased by $467.8 million to $707.8 million from $240.0 million in 2002. This increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the remainder of 2003. Excluding the impact of the HIH Consolidation Transaction and the AdMat Transaction, gross profit declined by approximately 11%. This decrease was primarily attributable to lower contribution margins as average selling prices decreased more than raw material and energy costs. Pro forma gross profit for the year ended December 31, 2003 was $997.3 million.

    Operating expenses for the year ended December 31, 2003 increased by $318.7 million to $493.4 million from $174.7 million in 2002. This increase was due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the remainder of 2003. Excluding the impact of the HIH Consolidation Transaction and the AdMat Transaction, operating expenses declined by approximately 10%. This decline was primarily due to reorganization costs of $18.6 million incurred in 2002. Pro forma operating expenses for the year ended December 31, 2003 were $732.2 million.

    During the year ended December 31, 2003, we recorded restructuring, plant closing and asset impairment charges of $37.9 million. The majority of these costs were incurred in our Polyurethanes and Performance Products segments. Our Polyurethanes segment recorded restructuring charges in connection with the integration of our global flexible products unit into our urethane specialties unit and various cost initiatives at our Rozenburg, Netherlands manufacturing site. Our Performance Products segment recorded restructuring charges relating to the closure of certain production units at our Whitehaven, U.K. facility, the closure of an administrative office in London, U.K., the rationalization of a surfactants technical center in Oldbury, U.K. and the restructuring of our Barcelona, Spain facility. We also reversed $2.4 million of prior years' restructuring charges accrued in connection with our manufacturing operations at our Base Chemicals segment's Jefferson County, Texas facilities to reflect actual cash paid. Pro forma restructuring, impairment and plant closing costs for the year ended December 31, 2003 were $55.0 million.

    Net interest expense for the year ended December 31, 2003 increased by $227.2 million to $409.1 million from $181.9 million for 2002. This increase was entirely due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the remainder of 2003. Excluding the impact of the HIH Consolidation Transaction and the AdMat Transaction, net interest expense decreased to $150.3 million. The decrease was primarily due to

62


      a net reduction of debt as a consequence of our restructuring, which was completed on September 30, 2002. Pro forma net interest expense for the year ended December 31, 2003 was $578.4 million.

    Loss on HI's accounts receivable securitization program increased $20.4 million to a loss of $20.4 million for the year ended December 31, 2003 as compared to a loss of $0.0 million for 2002. This increase was entirely due to our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Losses on the accounts receivable securitization program include the discount on receivables sold into the program, fees and expenses associated with the program and gains (losses) on foreign currency hedge contracts mandated by the terms of the program to hedge currency exposures on the collateral supporting the off-balance sheet debt issued. Pro forma loss on sale of accounts receivable for the year ended December 31, 2003 was $32.4 million.

    Income tax expense increased $22.3 million to an expense of $30.8 million for the year ended December 31, 2003 as compared to an expense of $8.5 million for 2002. This increase was primarily due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003, in each case for the remainder of 2003. Excluding the impact of the HIH Consolidation Transaction and the AdMat Transaction, income tax expense increased by 89%. Our tax obligations are affected by the mix of income and losses in the tax jurisdictions in which we operate. Pro forma income tax expense for the year ended December 31, 2003 was $32.1 million.

    Minority interest in subsidiary losses decreased by $30.3 million to income of $1.5 million for the year ended December 31, 2003 as compared to a loss of $28.8 million for 2002. This decrease was due to our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. We had no minority interests in subsidiaries prior to the HIH Consolidation Transaction. Pro forma minority interest in subsidiaries' income for the year ended December 31, 2003 was $6.8 million.

    Cumulative effect of accounting changes resulted in an increase to net income of $169.7 million for the year ended December 31, 2002. This increase was due to the effects of the initial adoption of SFAS No. 141 " Business Combinations ." The adoption of SFAS No. 141 resulted in the increase in the carrying value of our investment in HIH to reflect our proportionate share of the underlying assets. Effective June 30, 1999, Huntsman Specialty, our consolidated subsidiary, transferred its PO business to HIH. The transfer of our PO business was recorded at the net book value of the assets and liabilities transferred. The carrying value of our investment in HIH was less than our proportionate share of the underlying net assets of HIH at December 31, 2001 by approximately $176.1 million. Prior to the adoption of SFAS No. 141, this difference was being accreted to income over a 20-year period.

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        The following table sets forth certain financial information for each of our operating segments:

 
  Historical
   
   
 
 
  Year Ended December 31,
   
  Pro Forma
Year Ended
December 31,
2003

 
 
  % Change
 
 
  2002
  2003
 
 
  (in millions)

   
   
 
Revenues                        
Polyurethanes   $   $ 1,562.4   NM   $ 2,297.5  
Advanced Materials         517.8   NM     1,049.6  
Performance Products     1,028.2     1,507.7   47 %   1,689.6  
Pigments         678.9   NM     1,009.9  
Polymers     840.2     1,155.5   38 %   1,155.5  
Base Chemicals     996.2     2,152.7   116 %   2,639.9  
Eliminations     (203.6 )   (494.1 ) 143 %   (589.6 )
   
 
     
 
  Total   $ 2,661.0   $ 7,080.9   166 % $ 9,252.4  
   
 
     
 

Segment EBITDA(1)

 

 

 

 

 

 

 

 

 

 

 

 
Polyurethanes   $   $ 176.0   NM   $ 233.4  
Advanced Materials         38.6   NM     48.2  
Performance Products     164.4     125.6   (24 )%   128.3  
Pigments         64.7   NM     105.4  
Polymers     74.7     80.8   8 %   80.8  
Base Chemicals     44.7     40.7   (9 )%   71.7  
Corporate and other     (132.6 )   (52.9 ) 60 %   (4.3 )
   
 
     
 
  Total   $ 151.2   $ 473.5   213 % $ 663.5  
   
 
     
 

(1)
Segment EBITDA is defined as net income (loss) from continuing operations before interest, income taxes and depreciation and amortization. Segment EBITDA for the year ended December 31, 2002 excludes the impacts of a cumulative effect of accounting change credit of $169.7 million.

    Polyurethanes

        For the year ended December 31, 2003, Polyurethanes revenues increased by $1,562.4 million to $1,562.4 million from $0.0 million for 2002. The increase was the result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Pro forma Polyurethanes revenues for the year ended December 31, 2003 were $2,297.5 million.

        For the year ended December 31, 2003, Polyurethanes segment EBITDA increased by $176.0 million to $176.0 million from $0.0 million for the same period in 2002. The increase was the result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Pro forma Polyurethanes segment EBITDA for the year ended December 31, 2003 was $233.4 million.

    Advanced Materials

        Advanced Materials revenues for the year ended December 31, 2003 increased by $517.8 million to $517.8 million from $0.0 million for 2002. The increase was the result of our ownership of Advanced Materials for the remainder of 2003 following the AdMat Transaction on June 30, 2003. Pro forma Advanced Materials revenues for the year ended December 31, 2003 were $1,049.6 million.

        For the year ended December 31, 2003, Advanced Materials segment EBITDA increased by $38.6 million to $38.6 million from $0.0 million for the same period in 2002. The increase was the

64



result of our ownership of Advanced Materials for the remainder of 2003 following the AdMat Transaction on June 30, 2003. Pro forma Advanced Materials segment EBITDA for the year ended December 31, 2003 was $48.2 million.

    Performance Products

        For the year ended December 31, 2003, Performance Products revenues increased by $479.5 million, or 47%, to $1,507.7 million from $1,028.2 million in 2002. Approximately 82% of the increase was the result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Excluding the impact of the HIH Consolidation Transaction, higher revenues resulted mainly from increases in average selling prices of 1% and sales volumes of 6%. Pro forma Performance Products revenues for the year ended December 31, 2003 were $1,689.6 million.

        For the year ended December 31, 2003, Performance Products segment EBITDA fell by $38.8 million to $125.6 million from $164.4 million in 2002, approximately 47% of which was due to our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Excluding the impact of the HIH Consolidation Transaction, lower EBITDA resulted mainly from lower contribution margins as average selling prices decreased more than raw material costs. Pro forma Performance Products segment EBITDA for the year ended December 31, 2003 was $128.3 million.

    Pigments

        For the year ended December 31, 2003, Pigments revenues increased by $678.9 million to $678.9 million from $0.0 million for the same period in 2002. The increase was the result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Pro forma Pigments revenues for the year ended December 31, 2003 were $1,009.9 million.

        For the year ended December 31, 2003, Pigments segment EBITDA increased by $64.7 million to $64.7 million from $0.0 million in 2002. The increase was the result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Pro forma Pigments segment EBITDA for the year ended December 31, 2003 was $105.4 million.

    Polymers

        For the year ended December 31, 2003, Polymers revenues increased by $315.3 million, or 38%, to $1,155.5 million from $840.2 million in 2002. Overall sales volumes increased by 8% and average selling prices increased by 13%. Polyethylene revenues increased by 22%, as average selling prices increased 20% primarily in response to higher underlying raw material and energy costs, and sales volumes increased 2%. After giving effect to the shutdown of a manufacturing line in Odessa, Texas, polypropylene revenues increased by 11%, as average selling prices increased by 11% primarily in response to higher raw material and energy costs and increased industry operating rates. APAO revenues increased by 29%, as average selling prices increased 5% due to changes in product mix, and sales volumes increased 24% as the result of increased export sales and increased sales into the roofing market. EPS revenues increased by 10%, as average selling prices increased 16% primarily in response to higher underlying raw material and energy costs, while sales volumes decreased 6% due to import competition. Australian styrenics revenues increased by 25%, resulting from an increase in average selling prices of 21%, the majority of which was attributable to the strength of the Australian dollar versus the U.S. dollar, and an increase in sales volumes of 4%. Pro forma Polymers revenues for the year ended December 31, 2003 were $1,155.5 million.

        For the year ended December 31, 2003, Polymers segment EBITDA increased by $6.1 million to $80.8 million from $74.7 million in 2002. The increase in EBITDA is due to higher contribution

65



margins as average selling prices increased more than raw material costs. Pro forma Polymers segment EBITDA for the year ended December 31, 2003 was $80.8 million.

    Base Chemicals

        For the year ended December 31, 2003, Base Chemicals revenues increased by $1,156.5 million, or 116%, to $2,152.7 million from $996.2 million in 2002. Approximately 79% of the increase was the result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Excluding the impact of the HIH Consolidation Transaction, higher revenues resulted mainly from increases in average selling prices of 29%, partially offset by a decrease in overall sales volumes of 3%. Average selling prices increased in response to higher raw material and energy costs. Pro forma Base Chemicals revenues for the year ended December 31, 2003 were $2,639.9 million.

        For the year ended December 31, 2003, Base Chemicals segment EBITDA decreased by $4.0 million to $40.7 million from $44.7 million in 2002. Segment EBITDA increased as a result of our consolidation of HIH for the remainder of 2003 following the HIH Consolidation Transaction effective May 1, 2003. Excluding the impact of the HIH Consolidation Transaction, EBITDA decreased by $50.7 million, primarily due to lower contribution margins as average selling prices decreased more than raw material and energy costs, and $19.9 million in costs related to a planned maintenance shutdown. Pro forma Base Chemicals segment EBITDA for the year ended December 31, 2003 was $71.7 million.

    Corporate and Other

        Corporate and other includes corporate overhead, loss on the accounts receivable securitization program, minority interest in earnings of consolidated subsidiaries and unallocated foreign exchange gains and losses. For the year ended December 31, 2003, EBITDA from corporate and other items increased by $79.7 million to a loss of $52.9 million from a loss of $132.6 million in 2002. This increase was primarily due to increased unallocated foreign exchange gains resulting from the HIH Consolidation Transaction on May 1, 2003 and the AdMat Transaction on June 30, 2003. Pro forma EBITDA from corporate and other items for the year ended December 31, 2003 was a loss of $4.3 million.

Year ended December 31, 2003 Pro Forma

        The pro forma financial information for the year ended December 31, 2003 has been prepared as if the HIH Consolidation Transaction, the AdMat Transaction and the Refinancing Transactions occurred on January 1, 2003. HIH became a consolidated subsidiary effective as of May 1, 2003, and Advanced Materials became a consolidated subsidiary effective as of June 30, 2003. The Refinancing Transactions occurred between April 2003 and December 2004. Pro forma revenues, operating income, net loss and EBITDA for 2003 were $9,252.4 million, $210.0 million, $427.0 million and $663.5 million, respectively.

Year ended December 31, 2002 (Historical) compared to year ended December 31, 2001 (Historical)

        For the year ended December 31, 2002, we had a net loss of $22.2 million on revenues of $2,661.0 million, compared to a net loss of $842.7 million on revenues of $2,757.4 million for 2001. The decrease of $820.5 million in net loss was the result of the following items:

    Revenues for the year ended December 31, 2002 decreased $96.4 million, or 3%, to $2,661.0 million from $2,757.4 million for 2001. The decrease was attributable to reduced revenues in the Performance Products and Base Chemicals segments partially offset by higher revenues for Polymers. The increase in Polymers revenues was primarily due to the inclusion of the fourth quarter results of our Australian styrenics operations. Prior to the fourth quarter of 2002, these results were reported under the equity method of accounting. Lower average selling

66


      prices were experienced by all business segments. Lower sales volumes for Polymers were partially offset by higher sales volumes for Performance Products and Base Chemicals. Lower sales volumes in the Polymers segment were primarily due to the permanent closure of our styrene plant in Odessa, Texas in 2001, which resulted in a $40.8 million decrease in revenues for the year ended December 31, 2002 as compared with the same period in 2001.

    Gross profit for the year ended December 31, 2002 increased $149.2 million to $240.0 million from $90.8 million for 2001. The increase was attributable to improved gross profit for the Performance Products and Polymers segments, partially offset by reduced gross profit for the Base Chemicals segment. Performance Products and Polymers margins improved as declining raw material prices outpaced the decline in average selling prices, and fixed costs decreased due to our cost reduction program. In the Base Chemicals segment average selling prices declined more rapidly than raw material prices, but the decline was partially offset by lower fixed costs due to our cost reduction program. In addition, depreciation expense in the 2002 period was lower due to a reduction in depreciable basis as a result of our cost rationalization program and the impairment charges taken in 2001.

    Operating expenses decreased $37.0 million to $174.7 million compared to $211.7 million for 2001. This decrease was primarily due to lower information and technology costs, lower legal expenses and savings due to our cost reduction program. This decrease was also due to $8.6 million in additional write-offs of accounts receivable balances in 2001 as compared with 2002.

    During 2001, we incurred restructuring, plant closing and asset impairment charges of $588.5 million as we closed certain manufacturing facilities and eliminated certain operating, sales and administrative positions. These charges were revised downward during 2002 by $5.3 million, and additional charges of $4.3 million were recorded in 2002 in relation to curtailed production at our Port Neches, Texas and Guelph, Canada operations.

    Other expense for the year ended December 31, 2002 increased by $8.2 million to $7.6 million from income of $0.6 million for 2001. The increase in expense was primarily due to increased loss on extinguishment of long-term debt, loss on sale of non-qualified plan assets and loss on the exchangeable preferred stock, partially offset by income recorded in 2001 that related to insurance settlements and dividends on exchangeable preferred stock of NOVA Chemicals Corporation.

    Equity in losses of unconsolidated affiliates for the year ended December 31, 2002 decreased by $55.4 million to $31.4 million from $86.8 million in 2001. This decrease was primarily due to our 60% ownership of HIH, and HIH's improved results in 2002 as compared to 2001.

    Net interest expense for the year ended December 31, 2002 decreased by $57.4 million to $181.9 million from $239.3 million for 2001. The decrease was primarily due to the restructuring of debt in September 2002, partially offset by an unfavorable impact from adjusting interest rate instruments to fair value.

    Loss on accounts receivable securitization program of $5.9 million was recognized in 2001 resulting from HLLC's domestic accounts receivable securitization program that was discontinued in December of 2001.

    Income tax benefit for the year ended December 31, 2002 decreased by $193.4 million to a charge of $8.5 million as compared to a $184.9 million tax benefit for 2001. No tax benefit has been recorded in 2002 because we have determined not to increase our tax benefit beyond the amount valued at December 31, 2001. The $8.5 million charge that was recorded in the year ended December 31, 2002 was primarily interest expense related to the settlement of federal income taxes for certain prior years.

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        Cumulative effect of accounting changes resulted in an increase to net income of $169.7 million for the year ended December 31, 2002. This increase was due to the effects of the initial adoption of SFAS No. 141 " Business Combinations ." The adoption of SFAS No. 141 resulted in the increase in the carrying value of our investment in HIH to reflect our proportionate share of the underlying assets. Effective June 30, 1999, Huntsman Specialty, our consolidated subsidiary, transferred its PO business to HIH. The transfer of our PO business was recorded at the net book value of the assets and liabilities transferred. The carrying value of our investment in HIH was less than our proportionate share of the underlying net assets of HIH at December 31, 2001 by approximately $176.1 million. Prior to the adoption of SFAS No. 141, this difference was being accreted to income over a 20-year period.

        The following table sets forth certain financial information for each of our operating segments:

 
  Historical
 
 
  Year Ended December 31,
 
 
  2001
  2002
 
 
  (in millions)

 
Net Sales:              
  Performance Products   $ 1,077.6   $ 1,028.2  
  Polymers     820.6     840.2  
  Base Chemicals     1,051.3     996.2  
  Eliminations     (192.1 )   (203.6 )
   
 
 
    $ 2,757.4   $ 2,661.0  
   
 
 

Segment EBITDA:

 

 

 

 

 

 

 
  Performance Products   $ 127.7   $ 164.4  
  Polymers     (550.6 )   74.7  
  Base Chemicals     63.1     44.7  
  Corporate and other     (231.1 )   (132.6 )
   
 
 
    Total   $ (590.9 ) $ 151.2  
   
 
 

    Performance Products

        For the year ended December 31, 2002, Performance Products revenues decreased by $49.4 million to $1,028.2 million from $1,077.6 million in 2001. This decrease was primarily the result of lower revenues in our LAB and amines operations. LAB product revenues decreased by 20% due to lower sales volumes of 12%, coupled with pricing declines of 9%. These decreases were the result of product substitution into lower priced alternatives. Amines chemicals revenues decreased by 4% due to an 8% decrease in sales volumes partially offset by a 4% increase in average selling prices. The increase in average selling prices was due primarily to proactive product and customer mix rationalization efforts. Maleic anhydride revenues increased by 9% as compared to the same period in 2001. Maleic anhydride average selling prices increased by 7% due to increased sales of higher priced maleic catalyst.

        For the year ended December 31, 2002, Performance Products segment EBITDA increased by $36.7 million to $164.4 million from $127.7 million for 2001. This increase resulted from lower ethylene-based feedstock costs, higher sales volumes and fixed cost savings resulting from our cost reduction program. The $36.7 million increase in segment EBITDA is net of $33.6 million received in 2001 from business interruption insurance proceeds relating to a loss sustained in connection with the outage of our EO unit in December of 2000.

    Polymers

        For the year ended December 31, 2002, Polymers revenues increased by $19.6 million to $840.2 million from $820.6 million in 2001. The major factor contributing to the increase in Polymers

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revenues was the inclusion of the fourth quarter results of our Australian styrenics operations in 2002, which resulted in an increase of $35.7 million of revenues. Prior to the fourth quarter 2002, these results were reported under the equity method of accounting. Offsetting this increase, we had lower revenues due to the permanent closure of our Odessa, Texas styrene plant, which resulted in a reduction in revenues of $40.8 million. Changes in U.S. revenues are as follows: Olefins revenues decreased by 19%, with sales volumes down 12% due primarily to lower propane sales resulting from a change in feedstock mix, while average selling prices decreased by 7% due to declining underlying raw material and energy prices. Polyethylene revenues increased by 2%, with sales volumes up by 10% on stronger demand. Increased polyethylene sales volumes were partially offset by a decrease in average selling prices of 7%. Polypropylene revenues increased by 10%, with sales volumes up 7% due to a tighter supply/demand balance and concentrated buying associated with the discontinuation of certain polypropylene products from our Odessa facility. EPS revenue increased 5%, with sales volumes up by 10% due to a tighter supply/demand balance, partially offset by a decrease in average selling prices of 3%.

        For the year ended December 31, 2002, Polymers segment EBITDA increased by $625.3 million to $74.7 million from a segment EBITDA loss of $550.6 million for 2001. The increase in segment EBITDA was primarily due to a $527.0 million restructuring and plant closing charge recorded in the 2001 period and improved market fundamentals in 2002 allowing some margin expansion from earlier trough conditions, coupled with the benefits of our fixed cost reductions and elimination of certain non-competitive assets.

    Base Chemicals

        For the year ended December 31, 2002, Base Chemicals revenues decreased $55.1 million to $996.2 million from $1,051.3 million in 2001. Olefins revenues decreased by 10%, partly due to sales volume decreases of 1%, but primarily because average selling prices decreased by 10% in line with loosening operating rates in the industry and generally declining raw material costs. Benzene revenues decreased by 6% as compared to 2001. Benzene sales volumes decreased by 15% due to a lack of available feedstock. Benzene average selling prices increased by 11%. Cyclohexane revenues increased by 45% as compared to 2001. Cyclohexane sales volumes increased by 37% due to tightening market conditions resulting from steady demand. Cyclohexane average selling prices increased by 7%. Butadiene sales volumes increased by 4% due to increased feedstock availability, while average selling prices decreased by 5%. MTBE sales volumes increased by 5% as a result of tightening market conditions due to steady demand, while average selling prices decreased by 7%.

        For the year ended December 31, 2002, Base Chemicals segment EBITDA decreased $18.4 million to $44.7 million from $63.1 million for 2001. The decrease was primarily due to declines in average selling prices outpacing decreases in raw material prices for most Base Chemicals products, partially offset by cost savings resulting from our cost reduction program and increased demand for cyclohexane and MTBE. In the fourth quarter of 2002, raw material prices increased significantly as a result of the crude oil shortage caused by the strike in Venezuela and the uncertainty regarding war with Iraq. In addition, higher natural gas prices were experienced in the fourth quarter of 2002 due to the unusually cold start to the winter heating season.

    Corporate and Other

        Corporate and other includes corporate overhead, gain (loss) on the accounts receivable securitization program, minority interest in earnings of consolidated subsidiaries and unallocated foreign exchange gains and losses. EBITDA from corporate and other for the year ended December 31, 2002 increased by $98.5 million to an EBITDA loss of $132.6 million from an EBITDA loss of $231.1 million for 2001. The increase was due to a $61.5 million restructuring charge recorded in the 2001 period, a $41.9 million change in minority interest, a $5.6 million increase in loss on extinguishment of long-term debt, a decrease in equity losses of $55.4 million due to reduced losses of

69


HIH, and reductions in corporate overhead expenses of $22.0 million resulting from our cost reduction program. Additionally, we had $8.6 million in additional write-offs of accounts receivable balances in 2001 as compared with 2002, which resulted in lower corporate and other costs in 2002.

Liquidity and Capital Resources

    Nine months ended September 30, 2004 (Historical) compared to nine months ended September 30, 2003 (Historical)

        Net cash provided (used) by operating activities for the nine months ended September 30, 2004 and September 30, 2003 was $55.9 million and $(36.8) million, respectively. The variance is largely attributable to the HIH Consolidation Transaction and the AdMat Transaction that occurred in the 2003 period. The net loss in the 2004 period was $12.3 million higher than in the 2003 period. Offsetting this increased loss were net favorable variances in adjustments to reconcile net loss to net cash used in operating activities, including higher depreciation and amortization by $179.8 million in the 2004 period, higher non cash restructuring charges in the 2004 period by $96.7 million, and higher non cash interest expense by $73.5 million, partially offset by an unfavorable variance in the change in net operating assets and liabilities of $167.2 million in the 2004 period versus the 2003 period. In addition, there were unfavorable variances in adjustments for deferred income taxes and equity in (gain) loss of investment in unconsolidated affiliates of $28.0 million and $41.2 million, respectively.

        Net cash used in investing activities for the nine months ended September 30, 2004 and September 30, 2003 was $160.7 million and $842.1 million, respectively. The variance is largely attributable to the HIH Consolidation Transaction and the AdMat Transaction that occurred in 2003. The investing activities for the nine months ended September 30, 2003 include the acquisition of minority interests in connection with the HIH Consolidation Transaction and the cash paid in connection with the AdMat Transaction. Capital expenditures in the 2004 period were $15.1 million higher in the 2004 period than in the 2003 period, largely attributable to the non-comparative nature of the 2003 results.

        Net cash provided by financing activities for the nine months ended September 30, 2004 and September 30, 2003 was $128.2 million and $947.7 million, respectively. The variance is largely attributable to the HIH Consolidation Transaction and the AdMat Transaction that occurred in 2003. The financing activities for the nine months ended September 30, 2003 include (i) the issuance of the HMP Discount Notes and the HMP Warrants resulting in net cash proceeds of $415 million used to purchase the minority interests in HIH and to complete the purchase of senior subordinated discount notes of HIH, (ii) the issuance of $380 million in aggregate principal amount of the HLLC Senior Secured Notes, the net proceeds of which were used to repay indebtedness under the HLLC senior credit facilities and (iii) the issuance of $350 million in aggregate principal amount of the AdMat Senior Secured Notes (as defined below), the proceeds of which were used to acquire Advanced Materials in the AdMat Transaction. The financing activities for the nine months ended September 30, 2004, include (i) the refinancing of the HI credit facilities, (ii) the issuance of the HLLC Senior Notes in the aggregate principal amount of $400 million, the net proceeds of which were used to repay amounts outstanding under the Original HLLC Credit Facilities and the HCCA Facilities (each as defined below), (iii) the refinancing of the Australian senior credit facilities; and (iv) the repayment, in full, of $36.8 million on the senior unsecured notes of Huntsman Polymers Corporation ("Huntsman Polymers") with borrowings under the HLLC Credit Facilities.

    Year ended December 31, 2003 (Historical) compared to year ended December 31, 2002 (Historical)

        Net cash provided by operating activities for the years ended December 31, 2003 and December 31, 2002 was $225.4 million and $88.7 million, respectively. The variance is largely attributable to the HIH Consolidation Transaction and the AdMat Transaction that occurred in the 2003 period. The net loss in the 2003 period was $297.6 million higher than in the 2002 period. Offsetting this increased loss were net favorable variances in adjustments to reconcile net loss to net

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cash provided by operating activities, including higher depreciation and amortization by $200.7 million in the 2003 period and higher non-cash interest expense by $96.2 million in the 2003 period. In addition, there was a favorable variance in the change in net operating assets and liabilities of $30.5 million in the 2003 period versus the 2002 period, a favorable variance in the adjustment to reconcile net loss to net cash provided by operating activities in the 2003 period of $169.7 million for cumulative effect of accounting change, and an unfavorable variance in the adjustment of the 2003 period for unrealized gains and losses on foreign currency transactions of $58.3 million.

        Net cash used in investing activities for the years ended December 31, 2003 and December 31, 2002 was $908.5 million and $24.5 million, respectively. The increase was largely attributable to the acquisition of minority interests in connection with the HIH Consolidation Transaction as well as the cash paid in connection with the AdMat Transaction. In addition, capital expenditures were higher in 2003 primarily due to the incremental capital expenditures related to the HIH and Advanced Materials businesses.

        Net cash provided by financing activities for the year ended December 31, 2003 was $786.7 million. For the year ended December 31, 2002, net cash used by financing activities was $93.0 million. The variance is largely attributable to the impact of the HIH Consolidation Transaction and the AdMat Transaction. The financing activities for the year ended December 31, 2003 include (i) the issuance of the HMP Discount Notes and the HMP Warrants resulting in net cash proceeds of $415 million, which were used to purchase the minority interests in HIH and complete the purchase of the HIH Senior Subordinated Discount Notes, (ii) the issuance of $455.4 million in aggregate principal amount of the HLLC Senior Secured Notes, the net proceeds of which were used primarily to repay indebtedness under the Original HLLC Credit Facilities (as defined below), (iii) the issuance of $350 million in aggregate principal amount of AdMat Senior Secured Notes (as defined below), the proceeds of which were used to acquire Advanced Materials and (iv) the issuance by HI of $205 million of additional term loans, the net proceeds of which were used to repay existing indebtedness.

    Year ended December 31, 2002 (Historical) compared to year ended December 31, 2001 (Historical)

        Net cash provided by (used in) operating activities for the years ended December 31, 2002 and 2001 was $88.7 million and $(287.0) million, respectively. The variance is largely attributable to a net loss for the year ended December 31, 2002 that was $820.5 million lower than in the 2001 period. Partially offsetting this decreased loss were net unfavorable variances in adjustments to reconcile net loss to net cash provided by operating activities, including lower non-cash restructuring expenses, plant closing and asset impairment charges of $533.5 million, an unfavorable variance in adjustment in 2002 for cumulative effect of accounting change of $169.6 million, lower depreciation and amortization expense of $44.8 million and lower equity in losses of investment in unconsolidated affiliates of $55.4 million. In addition, there was a favorable variance in adjustment to reconcile net loss to net cash provided by operating activities of $184.5 million for deferred income taxes, and in 2002 there was a net favorable variance in the change in net operating assets and liabilities of $151.4 million.

        Net cash provided by (used in) investing activities for the years ended December 31, 2002 and 2001 were $(24.5) million and $86.2 million, respectively. The variance is primarily attributable to proceeds of $191.0 million from the sale of an investment in 2001 and proceeds of $22.8 million from the sale of exchangeable preferred stock in 2001.

        Net cash provided by (used in) by financing activities for the years ended December 31, 2002 and 2001 were $(93.0) million and $182.2 million, respectively. The variance is primarily attributable to our improved operating cash flow in 2002 as discussed above, resulting in a net reduction of borrowings in 2002 versus net borrowings in 2001. During 2001, we used our revolving credit facility to fund our net loss and working capital needs. In addition, in December 2001, we had $110 million of term loan borrowings outstanding under a supplemental credit facility. On September 30, 2002, we borrowed approximately $60 million under a new HLLC revolving facility in connection with the closing of a debt

71



restructuring at HLLC. Such borrowings, together with available cash, were used to repay $110 million of term loan borrowings due on this supplemental credit facility in addition to funding other fees and expenses due at the closing of the restructuring. In addition, in 2001, we received $36.5 million in proceeds from the issuance of preferred stock and a subordinated note to an affiliated party and did not engage in any similar transactions in 2002.

Changes in Financial Condition

    September 30, 2004 compared to December 31, 2003

        The following information summarizes our working capital position as of September 30, 2004 and December 31, 2003 (in millions):

 
  September 30, 2004
  December 31, 2003
  Increase
(Decrease)

 
Current assets:                    
Cash, cash equivalents and restricted cash   $ 239.1   $ 208.3   $ 30.8  
Accounts and notes receivables     1,403.3     1,102.7     300.6  
Inventories     1,132.6     1,039.3     93.3  
Prepaid expenses     70.6     39.6     31.0  
Deferred income taxes     20.6     14.7     5.9  
Other current assets     69.5     108.3     (38.8 )
   
 
 
 
Total current assets     2,935.7     2,512.9     422.8  
   
 
 
 
Current liabilities:                    
Accounts payable     919.7     832.1     87.6  
Accrued liabilities     689.8     702.0     (12.2 )
Deferred income taxes     18.9     15.1     3.8  
Notes payable and current portion of long-term debt     54.8     137.1     (82.3 )
   
 
 
 
Total current liabilities     1,683.2     1,686.3     (3.1 )
   
 
 
 
Working capital   $ 1,252.5   $ 826.6   $ 425.9  
   
 
 
 

        From December 31, 2003 to September 30, 2004, our working capital increased by $425.9 million as a result of the net impact of the following significant changes:

    the increase in cash balances of $30.8 million resulted from the matters identified in the Consolidated Statement of Cash Flows contained in the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus;

    the increase in accounts and notes receivables of $300.6 million is primarily due to higher average selling prices and higher sales volumes;

    the increase in inventories of $93.3 million is mainly due to increases in raw material and energy costs;

    the increase of $31.0 million in prepaid expenses is primarily due to the timing of payments and amortization of corporate insurance premiums in connection with our July 2004 policy renewal;

    accounts payable increased by $87.6 million primarily as a result of increased raw material and energy costs; and

    the decrease in current portion of long-term debt of $82.3 million is primarily attributable to the repayment of the 11 3 / 4 % Senior Notes due 2004 of Huntsman Polymers (the "Huntsman Polymers Notes") of $36.8 million on January 28, 2004, and the refinancing of the HCCA Facility and the HCA Facilities, resulting in substantially all being classified as non-current at September 30, 2004. The entire balances of those facilities were classified as current as of December 31, 2003.

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    December 31, 2003 compared to December 31, 2002

        The following information summarizes our working capital position as of December 31, 2003 and December 31, 2002 (in millions):

 
  December 31,
2003

  December 31,
2002

  Increase
(Decrease)

 
Current assets:                    
Cash, cash equivalents, and restricted cash   $ 208.3   $ 31.6   $ 176.7  
Accounts and notes receivables     1,102.7     396.2     706.5  
Inventories     1,039.3     298.1     741.2  
Prepaid expenses     39.6     27.7     11.9  
Deferred income taxes     14.7     13.0     1.7  
Other current assets     108.3     2.2     106.1  
   
 
 
 
Total current assets     2,512.9     768.8     1,744.1  
   
 
 
 
Current liabilities:                    
Accounts payable     832.1     242.6     589.5  
Accrued liabilities     702.0     200.3     501.7  
Deferred income taxes     15.1         15.1  
Notes payable and current portion of long-term debt     137.1     169.5     (32.4 )
   
 
 
 
Total current liabilities     1,686.3     612.4     1,073.9  
   
 
 
 
Working capital   $ 826.6   $ 156.4   $ 670.2  
   
 
 
 

        From December 31, 2002 to December 31, 2003, our working capital increased by $670.2 million. This increase was primarily due to our consolidation of HIH following the HIH Consolidation Transaction effective May 1, 2003 and our ownership of Advanced Materials following the AdMat Transaction on June 30, 2003. Excluding the impact of the HIH Consolidation Transaction and the AdMat Transaction on our working capital position at December 31, 2003, working capital decreased by $88.9 million. The $88.9 million decrease in working capital is a result of the following significant changes:

    cash balances decreased by $1.6 million;

    accounts and notes receivables increased $32.5 million primarily due to higher average selling prices, mainly in response to an increase in underlying raw material and energy costs;

    inventories decreased by $2.1 million;

    deferred income taxes changed from a deferred tax asset of $13.0 million to a liability of $0.4 million as a result of the matters identified in Note 15 to the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus;

    prepaid and other current assets decreased by $1.5 million;

    accounts payable increased by $16.2 million primarily due to higher raw material and energy costs;

    accrued liabilities increased by $4.3 million; and

    notes payable and current portion of long term debt increased by $68.4 million primarily due to a reclassification of $45.9 million of Australian-based debt to current and a reclassification of $36.8 million of Huntsman Polymers Notes to current which were due in December 2004 and which were redeemed in full prior to maturity in January 2004, which were partially offset by the prepayment of scheduled debt payments on the term portion of the HLLC Credit Facilities in 2003.

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    December 31, 2002 compared to December 31, 2001

        The following information summarizes our working capital position as of December 31, 2002 and December 31, 2001 (in millions):

 
  December 31,
2002

  December 31,
2001

  Increase
(Decrease)

 
Current assets:                    
Cash, cash equivalents, and restricted cash   $ 31.6   $ 110.0   $ (78.4 )
Accounts and notes receivables     396.2     364.3     31.9  
Inventories     298.1     277.2     20.9  
Prepaid expenses and other current assets     42.9     14.4     28.5  
   
 
 
 
Total current assets     768.8     765.9     2.9  
   
 
 
 
Current liabilities:                    
Accounts payable     242.6     178.4     64.2  
Accrued liabilities     200.3     217.0     (16.7 )
Notes payable and current portion of long-term debt     169.5     2,313.9     (2,144.4 )
   
 
 
 
Total current liabilities     612.4     2,709.3     (2,096.9 )
   
 
 
 
Working capital   $ 156.4   $ (1,943.4 ) $ 2,099.8  
   
 
 
 

        At December 31, 2002 our net working capital position was a positive $156.4 million as compared to a negative $1,943.4 million at December 31, 2001, resulting in an increase of $2,099.8 million. Our negative working capital as of December 31, 2001 was primarily due to the reclassification, prior to the debt restructuring at HLLC completed on September 30, 2002, of HLLC's long-term debt as current following certain defaults. The improvement in working capital is primarily attributable to the reclassification and reduction of such debt as a result of the HLLC debt restructuring. The change in working capital is a result of the following significant changes:

    The decrease in cash balances of $78.4 million is primarily the result of matters identified in the Consolidated Statement of Cash Flows contained in the Consolidated Financial Statements of Huntsman Holdings, LLC included elsewhere in this prospectus.

    The increase in accounts receivable of $31.9 million is mainly due to the consolidation of our Australian subsidiary, HCPH Holdings Pty. Limited ("HCPH") which was previously accounted for as an investment using the equity method of accounting. In addition, increased revenues, partially offset by improved collections, contributed to the increase in receivables. The increase is also attributable to higher average selling prices, mainly due to higher underlying raw material prices.

    The increase in inventory of $20.9 million was primarily due to the consolidation of HCPH in 2002, which was previously accounted for as an investment using the equity method of accounting and to higher raw material prices.

    The increase in prepaid expenses and other current assets of $28.5 million is largely due to higher insurance policy renewals in July 2002.

    The increase in trade accounts payable, including affiliates, of $64.2 million is primarily attributable to higher raw material and feedstock prices at December 31, 2002. Additionally, the consolidation of HCPH in 2002, which was previously accounted as an equity method investment, caused an increase in the payable balance.

    The decrease in accrued liabilities of $16.7 million is primarily due to reductions associated with the HLLC debt restructuring in accrued interest on the HLLC senior subordinated notes and the Huntsman Polymers Notes, in addition to accrued default interest on the pre-restructured HLLC credit facilities. This change is also partly attributable to a decrease in restructuring

74


      reserves associated with our cost reduction program and decreased tax liabilities. These decreases were partially offset by an accrual for increased insurance premiums.

    The decrease in notes payable and current portion of long-term debt of $2,144.4 million is primarily attributable to the reclassification of debt from current to long-term, together with the conversion of certain debt to equity as a result of the HLLC debt restructuring. Upon the completion of the HLLC debt restructuring, $678.8 million of principal of the HLLC Subordinated Notes and the Huntsman Polymers Notes was converted to equity, HLLC's $110.0 million term loan under its prior supplemental credit agreement was repaid and, as of December 31, 2002, approximately $1.4 billion of borrowings under the HLLC credit facilities were re-classified as long term. In addition, partially offsetting this decrease, the note payable of $105.7 million to ICI was contributed by MatlinPatterson as part of the HLLC debt restructuring.

Debt and Liquidity

    Secured Credit Facilities

        As of September 30, 2004, HLLC's credit facilities consisted of a revolving facility of up to $275 million maturing on June 30, 2006 and a term loan A of $606.3 million and a term loan B of $96.1 million maturing in March 2007 (together, the "Original HLLC Credit Facilities").

        On October 14, 2004, HLLC completed a $1,065 million refinancing of the Original HLLC Credit Facilities. HLLC's credit facilities (as refinanced, the "HLLC Credit Facilities") now consist of a $350 million revolving facility due 2009 (the "HLLC Revolving Facility"), with an outstanding balance on October 14, 2004 of $105 million, and a $715 million term loan B facility due 2010 (the "HLLC Term Facility"). The HLLC Revolving Facility is secured by a first priority lien on substantially all of the current and intangible assets of HLLC and its restricted domestic subsidiaries and by a second priority lien on substantially all of the property, plant and equipment of HLLC and its restricted domestic subsidiaries and HLLC's equity interest in HIH. The HLLC Term Facility is secured by a first priority lien on substantially all of the property, plant and equipment of HLLC and its restricted domestic subsidiaries and HLLC's equity interest in HIH and by a second priority lien on substantially all of the current and intangible assets of HLLC and its restricted domestic subsidiaries. The proceeds of the refinancing were used to repay in full HLLC's outstanding borrowings under the Original HLLC Credit Facilities.

        Borrowings under the new HLLC Revolving Facility are limited by a borrowing base consisting of eligible accounts receivable and inventory. The new HLLC Term Facility has scheduled annual amortization payments of approximately $7 million, with the remaining balance due at maturity. The HLLC Revolving Facility and HLLC Term Facility bear interest at LIBOR plus 2.25% per year and LIBOR plus 3.50% per year, respectively. In addition, the terms of the HLLC Term Facility provide for a reduction in interest rate margin to LIBOR plus 3.0% per year upon completion of this offering and the use of the net proceeds as described in "Use of Proceeds." The revolving credit and term loan agreements contain customary financial covenants, covenants relating to the incurrence of debt and the purchase and sale of assets, limitations on investments and affiliate transactions, change in control provisions, events of default and acceleration provisions. The HLLC Credit Facilities contain covenants that, as of September 30, 2004, require HLLC to maintain a leverage ratio of consolidated net debt to EBITDA (as defined in the HLLC Credit Facilities) equal to or less than 8.25 to 1.00 and an interest coverage ratio of consolidated EBITDA to cash interest expense (as defined in the HLLC Credit Facilities) equal to or greater than 1.30 to 1.00. As of September 30, 2004, HLLC's leverage ratio of consolidated net debt to EBITDA was 7.65 to 1.00, and its interest coverage ratio of consolidated EBITDA to cash interest expense was 1.53 to 1.00. In addition, the HLLC Credit Facilities contain a limit on calendar year consolidated capital expenditures (as defined in the HLLC Credit Facilities) of $155 million ($135 million annual allowance plus $20 million in prior year carryover) for 2004. For the

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nine months ended September 30, 2004, HLLC's consolidated capital expenditures totaled $46.1 million.

        On July 13, 2004, HI completed an amendment and restatement of its senior secured credit facility (the "HI Credit Facilities"). Pursuant to the amendment and restatement, the revolving loan facility (the "HI Revolving Facility") was reduced from $400 million to $375 million and its maturity was extended from June 2006 to September 2008. The HI Revolving Facility includes a $50 million multicurrency revolving loan facility available in euros, GBP Sterling and U.S. dollars. In addition, HI's then-existing term loans B and C, totaling $1,240.2 million, were repaid and replaced with the new term facility (the "HI Term Facility") consisting of a $1,305 million term portion and a €50 million (approximately $61.6 million) term portion. The additional proceeds from the HI Term Facility of approximately $126.6 million were applied to repay the $82.4 million of outstanding borrowings as of July 13, 2004 on the HI Revolving Facility and for general corporate purposes and to provide a portion of the funds for the construction of a polyethylene production facility at our Wilton, U.K. facility. The HI Credit Facilities are secured by a first priority lien on substantially all the assets of HIH, HI's domestic subsidiaries, and certain of HI's foreign subsidiaries.

        Pursuant to the July 13, 2004 amendment and restatement of the HI Credit Facilities, interest rates on the HI Revolving Facility and the HI Term Facility decreased from a LIBOR spread of 3.50% and 4.125% to 3.25% and 3.25%, respectively. In addition, scheduled amortization of the HI Term Facility is approximately $13.7 million per year, commencing June 30, 2005, with the remaining unpaid balance due at maturity on December 31, 2010. Maturity will be accelerated to December 31, 2008 if HI has not refinanced all of the outstanding HI Senior Notes and HI Senior Subordinated Notes due 2009 (as defined below) on or before December 31, 2008 on terms satisfactory to the administrative agent under the HI Credit Facilities. On December 21, 2004, HI further amended the HI Credit Facilities to, among other things, reduce the applicable base (prime) rate margin for the term loan B dollar loans from a range of 1.75% to 2.00% to a range of 1.00% to 1.25% and to reduce the applicable Eurocurrency (LIBOR) rate margin for the term loan B dollar loans from a range of 3.00% to 3.25% to a range of 2.25% to 2.50%.

        The HI Credit Facilities contain customary financial covenants, covenants relating to the incurrence of debt and the purchase and sale of assets, limitations on investments and affiliate transactions, change in control provisions, events of default and acceleration provisions. The amendment and restatement of the HI Credit Facilities amended certain financial covenants. These amendments, among other things, included changes to the maximum leverage ratio, the minimum interest coverage ratio, and provided for an increase in the permitted amount of annual consolidated capital expenditures from $250 million to $300 million, with a provision for carryover to subsequent years. In addition, the mandatory prepayment level in connection with HI's accounts receivable securitization program was increased from $310 million to $325 million. For more information, see "—Liquidity and Capital Resources—Off-Balance Sheet Arrangements" below. The HI Credit Facilities contain covenants that, as of September 30, 2004, require HI to maintain a leverage ratio of consolidated net debt to consolidated EBITDA (as defined in the HI Credit Facilities) equal to or less than 7.00 to 1.00 and an interest coverage ratio of consolidated EBITDA to consolidated cash interest expense (as defined in the HI Credit Facilities) equal to or greater than 1.70 to 1.00. As of September 30, 2004, HI's leverage ratio of consolidated net debt to consolidated EBITDA was 4.69 to 1.00, and its interest coverage ratio of consolidated EBITDA to consolidated cash interest expense was 2.54 to 1.00. In addition, the HI Credit Facilities contain a limit on calendar year consolidated capital expenditures (as defined in the HI Credit Facilities) of $400 million ($300 million annual allowance plus $100 million in prior year carryover) for 2004. For the nine months ended September 30, 2004, HI's consolidated capital expenditures totaled $96.1 million.

        On June 30, 2003, Advanced Materials entered into a $60 million revolving credit facility (the "AdMat Revolving Credit Facility") with a maturity of June 30, 2007. As of September 30, 2004, Advanced Materials had no outstanding revolving borrowings under the AdMat Revolving Credit

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Facility and approximately $10.9 million of outstanding letters of credit issued under such facility. The AdMat Revolving Credit Facility is secured by a first priority lien on substantially all the assets of Advanced Materials' domestic subsidiaries and certain of Advanced Materials' foreign subsidiaries.

        The AdMat Revolving Credit Facility contains customary financial covenants, covenants relating to the incurrence of debt and the purchase and sale of assets, limitations on investments and affiliate transactions, change of control provisions, events of default and acceleration provisions. The AdMat Revolving Credit Facility contains covenants that, as of September 30, 2004, require Advanced Materials to maintain a leverage ratio of consolidated net debt to consolidated EBITDA (as defined in the AdMat Revolving Credit Facility) equal to or less than 4.50 to 1.00 and a fixed charge coverage ratio of consolidated EBITDA less consolidated capital expenditures to consolidated fixed charges (as defined in the AdMat Revolving Credit Facility) equal to or greater than 1.10 to 1.00. As of September 30, 2004, Advanced Materials' leverage ratio of consolidated net debt to consolidated EBITDA was 2.1 to 1.00, and its fixed charge coverage ratio of consolidated EBITDA less consolidated capital expenditures to consolidated fixed charges was 2.70 to 1.00. In addition, the AdMat Revolving Credit Facility contains a limit on calendar year consolidated capital expenditures (as defined in the AdMat Revolving Credit Facility) of $31.6 million ($25 million annual allowance plus $6.6 million in prior year carryover) for 2004. For the nine months ended September 30, 2004, Advanced Materials' consolidated capital expenditures totaled $7.3 million.

    Notes

        On September 30, 2003, HLLC sold $380 million aggregate principal amount of HLLC Senior Secured Notes due 2010 at an issue price of 98.8%. On December 3, 2003, HLLC sold an additional $75.4 million aggregate principal amount of HLLC Senior Secured Notes at an issue price of 99.5%. Interest on the HLLC Senior Secured Notes is payable semi-annually in April and October of each year. Net proceeds from the sale of these notes were used to repay amounts outstanding under the Original HLLC Credit Facilities and certain other indebtedness. The HLLC Senior Secured Notes rank pari passu with the HLLC Term Facility. The HLLC Senior Secured Notes are redeemable after October 15, 2007 at 105.813% of the principal amount thereof, declining ratably to par on and after October 15, 2009. At any time prior to October 15, 2006, HLLC may redeem up to 35% of the aggregate principal amount of the HLLC Senior Secured Notes at a redemption price of 111.625% of the principal amount thereof, plus accrued and unpaid interest to the redemption date with the net cash proceeds of a qualified equity offering. We intend to use a portion of the net proceeds from this offering to redeem $159.4 million in aggregate principal amount of these notes.

        On June 22, 2004, HLLC sold $400 million of HLLC Senior Notes, consisting of $300 million of senior unsecured notes, which bear interest at 11.5% and mature on July 15, 2012 (the "HLLC Unsecured Fixed Rate Notes"), and $100 million of senior unsecured floating rate notes, which bear interest at a rate equal to LIBOR plus 7.25% and mature on July 15, 2011 (the "HLLC Unsecured Floating Rate Notes"). Interest on the HLLC Unsecured Fixed Rate Notes is payable semi-annually in January and July of each year, and interest on the Unsecured Floating Rate Notes is payable quarterly in January, April, July and October of each year. As of September 30, 2004, the interest rate on the HLLC Unsecured Floating Rate Notes was 8.8%. The net proceeds from the offering were used to repay amounts outstanding under the Original HLLC Credit Facilities and the HCCA Facilities (as defined below). The HLLC Senior Notes are unsecured obligations of HLLC. The HLLC Unsecured Fixed Rate Notes are redeemable after July 15, 2008 at 105.75% of the principal amount thereof, declining ratably to par on and after July 15, 2010. The HLLC Unsecured Floating Rate Notes are redeemable after July 15, 2006 at 104.0% of the principal amount thereof, declining ratably to par on and after July 15, 2008. At any time prior to July 15, 2007, HLLC may redeem up to 40% of the aggregate principal amount of the HLLC Unsecured Fixed Rate Notes, at a redemption price of 111.5% of the principal amount thereof, plus accrued and unpaid interest to the redemption date with the net cash proceeds of a qualified equity offering. We intend to use a portion of the net proceeds

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from this offering to redeem $78 million in aggregate principal amount of the HLLC Unsecured Fixed Rate Notes. At any time prior to July 15, 2006, HLLC may also redeem up to 40% of the aggregate principal amount of the HLLC Unsecured Floating Rate Notes at a redemption price of 100% plus LIBOR plus 7.25% of the principal amount thereof plus accrued and unpaid interest to the redemption date with the net cash proceeds of a qualified public offering.

        Under the terms of a registration rights agreement among HLLC, the guarantors of the HLLC Senior Notes and the initial purchasers of the HLLC Senior Notes, HLLC was required to file a registration statement relating to an exchange offer for the HLLC Senior Notes on or before November 19, 2004 (the "Filing Date"). Under the terms of the registration rights agreement, because HLLC did not file the registration statement by the Filing Date, it is required to pay additional interest on the HLLC Senior Notes at a rate of 0.25% per year for the first 90 day period following the Filing Date. HLLC expects to file the registration statement during the first quarter of 2005.

        In March 2002, HI sold $300 million aggregate principal amount of HI Senior Notes due 2009. On April 11, 2003, HI sold an additional $150 million aggregate principal amount of the HI Senior Notes at an issue price of 105.25%. Net proceeds from the sale of these notes were used to repay amounts outstanding under the HI Credit Facilities. The HI Senior Notes are unsecured obligations of HI. Interest on the HI Senior Notes is payable semi-annually in March and September of each year. The HI Senior Notes are redeemable after March 1, 2006 at 104.937% of the principal amount thereof, declining ratably to par on and after March 1, 2008.

        On December 17, 2004, HI completed an offering of $175 million of its 7 3 / 8 % senior subordinated notes due 2015 and €135 million of its 7 1 / 2 % senior subordinated notes due 2015. HI used all of the net proceeds to redeem part of its outstanding 10 1 / 8 % senior subordinated notes due 2009 (the "HI Senior Subordinated Notes due 2009" and, together with the HI Senior Subordinated Notes due 2015, the "HI Senior Subordinated Notes"). At September 30, 2004, HI had outstanding $600 million and €450 million ($559.6 million, which includes $5.2 million of unamortized premium) of HI Senior Subordinated Notes due 2009. The HI Senior Subordinated Notes due 2009 became redeemable on July 1, 2004 at 105.063% of the principal amount thereof, which declines ratably to par on and after July 1, 2007. In advance of the issuance of the HI Senior Subordinated Notes due 2015, HI gave notice that it would redeem $231 million and €77 million of Senior Subordinated Notes due 2009 on December 31, 2004 and $2,947,000 and €982,000 of Senior Subordinated Notes due 2009 on January 3, 2005. HI completed these redemptions as scheduled. In connection with these redemptions, HI paid approximately $17.0 million and $0.2 million in U.S. dollar equivalents in redemption premiums on December 31, 2004 and January 3, 2005, respectively.

        Following the partial redemptions of the HI Senior Subordinated Notes due 2009, HI has outstanding $366.1 million and €372 million of Senior Subordinated Notes due 2009 and $175 million and €135 million of Senior Subordinated Notes due 2015, for a combined total of $541.1 million and €507 million of Senior Subordinated Notes plus $5.2 million of unamortized premium. The $175 million and €135 million HI Senior Subordinated Notes due 2015 are redeemable on or after January 1, 2010 at 103.688% and 103.750%, respectively, of the principal amount thereof, which declines ratably to par on and after January 1, 2013. In addition, at any time prior to January 1, 2008, HI may redeem up to 40% of the aggregate principal amount of the $175 million and €135 million Senior Subordinated Notes due 2015 at redemption prices of 107.375% and 107.500% plus accrued and unpaid interest, respectively. The HI Senior Subordinated Notes are unsecured and interest is payable semi-annually in January and July of each year.

        On June 30, 2003, in connection with the AdMat Transaction, Advanced Materials issued $350 million aggregate principal amount of its senior secured notes (the "AdMat Senior Secured Notes"), consisting of 11% fixed rate notes with an aggregate principal amount of $250 million due 2010 (the "AdMat Fixed Rate Notes") and floating rate notes with an aggregate principal amount of $100 million due 2008, which bear interest at a rate equal to LIBOR plus 8.00% (but not lower than

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10.00%) (the "AdMat Floating Rate Notes"). The AdMat Floating Rate Notes were issued with an original issue discount of 2%, or for $98 million. As of September 30, 2004, the interest rate on the Floating Rate Notes was 10.0%. Interest on the AdMat Senior Secured Notes is payable semi-annually in January and July of each year. The AdMat Senior Secured Notes are secured by a second lien on substantially all of the assets that secure the AdMat Revolving Credit Facility and are guaranteed on a senior basis by the AdMat Guarantors. The AdMat Fixed Rate Notes are redeemable on or after July 15, 2007 at 105.5% of the principal amount thereof, declining ratably to par on or after July 15, 2009. The AdMat Floating Rate Notes are redeemable on or after July 15, 2005 at 105.0% of the principal amount thereof, declining ratably to par on or after July 15, 2007. At any time prior to July 15, 2006, Advanced Materials may redeem up to 35% of the aggregate principal amount of the AdMat Fixed Rate Notes at 111% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of a qualified equity offering. At any time prior to July 15, 2005, Advanced Materials may redeem up to 35% of the aggregate principal amount of the AdMat Floating Rate Notes at 111% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of a qualified equity offering.

        Under the terms of a registration rights agreement among Advanced Materials, the AdMat Guarantors and the initial purchasers of the AdMat Senior Secured Notes, Advanced Materials was required to cause a registration statement relating to an exchange offer for the AdMat Senior Secured Notes to become effective on or before July 9, 2004 (the "Effectiveness Date") and to complete the exchange offer on or before August 23, 2004 (the "Completion Date"). Due to a delay in the completion of predecessor period audited financial statements for certain subsidiaries of Advanced Materials, the registration statement did not become effective by the Effectiveness Date and the exchange offer was not completed by the Completion Date. Accordingly, under the registration rights agreement, Advanced Materials was required to pay additional interest on the AdMat Senior Secured Notes at a rate of 0.25% per year for the first 90-day period following the Effectiveness Date and 0.50% per year for the second 90-day period and is currently paying additional interest at a rate of 0.75% per year. Once the registration statement becomes effective, Advanced Materials will be required to continue paying additional interest until the exchange offer is completed. Advanced Materials filed an amended registration statement on December 22, 2004 and expects that the exchange offer will be completed approximately 30 days after the registration statement becomes effective.

        On September 30, 2004, HLLC had outstanding $44.2 million of 9.5% fixed rate and $15.1 million of variable rate senior subordinated notes due 2007 (collectively the "HLLC Subordinated Notes"). The HLLC Subordinated Notes are unsecured subordinated obligations of HLLC. Interest is payable on the HLLC Subordinated Notes semi-annually on January 1 and July 1 of each year at an annual rate of 9.5% on the fixed rate notes and LIBOR plus 3.25% on the floating rate notes. The HLLC Subordinated Notes are redeemable at the option of HLLC after July 1, 2002 at a price declining from 104.75% to 100% of par value as of July 1, 2005.

    Discount Notes

        On May 9, 2003, in connection with the HIH Consolidation Transaction, HMP issued HMP Discount Notes with an accreted value of $423.5 million and the HMP Warrants providing for the purchase of approximately 12% of HMP's common stock. Cash proceeds from the offering were $415 million. We have recorded the HMP Discount Notes at an original carrying value of $285.0 million, and we have recorded the HMP Warrants at an original carrying value of $130.0 million. As of September 30, 2004, the HMP Discount Notes had a book value of $389.5 million and an accreted value of $518.2 million. We intend to use the proceeds from the concurrent offerings to redeem the HMP Discount Notes in full.

        On June 30, 1999, HIH issued the HIH Senior Discount Notes with initial stated value of $242.7 million. The HIH Senior Discount Notes are due December 31, 2009. Interest on the HIH Senior Discount Notes accrues at 13 3 / 8 % per year and is paid in kind. As of September 30, 2004, the accreted value of the HIH Senior Discount Notes was $479.2 million. We intend to use the proceeds from the concurrent offerings to redeem all of the HIH Senior Discount Notes.

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        On July 2, 2001, HLLC entered into the HLLC Affiliate Note payable with Horizon Ventures LLC, an affiliated entity controlled by Jon M. Huntsman, in the amount of $25.0 million. The HLLC Affiliate Note is due and payable on the earlier of: (1) July 2, 2011, or (2) the date of repayment in full in cash of all indebtedness under the HLLC Credit Facilities and the HLLC Subordinated Notes. Interest is not paid in cash but is accrued at a designated rate of 15% per year, compounded annually. As of September 30, 2004, accrued interest added to the principal balance was $14.5 million. We intend to use the proceeds from the concurrent offerings to repay this note in full.

    Other Debt

        Certain of our Australian subsidiaries maintain credit facilities. Huntsman Australia Holdings Corporation ("HAHC") and certain of its subsidiaries hold our Australian surfactants assets. On August 31, 2004, Huntsman Corporation Australia Pty Ltd ("HCA"), an indirect subsidiary of HAHC, refinanced the secured credit facility of HAHC with a A$30.0 million ($21.4 million) revolving credit line supported by a borrowing base of eligible accounts receivable and inventory, and a A$44.0 million ($31.4 million) term facility (the "HCA Facilities"). As of September 30, 2004, borrowings under the HCA Facility totaled A$58.6 million ($41.9 million).

        HCCA and certain Australian affiliates hold our Australian styrenics assets. On June 24, 2004, HLLC used $25 million of proceeds from the offering of the HLLC Senior Notes to repay a portion of the secured credit facilities of HCCA (the "HCCA Facilities"), including repaying in full the working capital facility and reducing the term facility to $14.4 million (A$20.9 million). On August 31, 2004, HCCA refinanced the HCCA Facilities with a A$30.0 million ($21.4 million) revolving credit line supported by a borrowing base of eligible accounts receivable (the "New HCCA Facility"). As of September 30, 2004, borrowings under the New HCCA Facility totaled A$17.2 million ($12.3 million).

        The HCA Facilities and the New HCCA Facility are secured by a lien on substantially all their respective assets, bear interest at a rate of 2.9% above the Australian base rate and mature in August 2007. As of September 30, 2004, the interest rate on the HCA Facilities and the New HCCA Facility was 8.38%.

        On March 21, 1997, Huntsman Specialty executed a 7.0% subordinated note in the amount of $75 million, payable to BASF Capital Corporation and maturing on April 30, 2008. Under the terms of the note, accrued interest from inception through April 30, 2002 was not paid in cash and was added to the note for a total principal amount of $106.6 million. Interest that accrued after April 30, 2002 is payable quarterly in cash, beginning on July 30, 2002. For financial reporting purposes, the note was initially recorded at its estimated fair value of $58.2 million, based on prevailing market rates at that time. As of September 30, 2004 and December 31, 2003, the unamortized discount on the note is $5.8 million and $6.9 million, respectively.

        HI maintains a $25 million multicurrency overdraft facility for its European subsidiaries (the "HI European Overdraft Facility"), all of which was available as of September 30, 2004. As of December 31, 2003, HI had approximately $7.5 million outstanding under the HI European Overdraft Facility included within trade payables. The HI European Overdraft Facility is used for daily working capital needs.

        As of September 30, 2004, HLLC had $24.3 million outstanding in short term notes payable for financing a portion of our insurance premiums. Such notes have monthly scheduled amortization payments through April 1, 2005, bear interest at rates ranging from 3.65% to 4.0%, and are secured by unearned insurance premiums.

        Included within other debt is debt associated with one of HI's Chinese MDI joint ventures. In January 2003, HI entered into a joint venture agreement with Shanghai Chlor-Alkali Chemical Company, Ltd. to build MDI production facilities near Shanghai, China. HI owns 70% of the joint venture, Huntsman Polyurethanes Shanghai Ltd. (the "Chinese Splitting JV"), which is a consolidated affiliate. On September 19, 2003, the Chinese Splitting JV obtained secured financing for the construction of the production facilities consisting of various committed loans in the aggregate amount

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of approximately $119 million in U.S. dollar equivalents. As of September 30, 2004, there were $7.0 million outstanding in U.S. dollar borrowings and 10.0 million in RMB borrowings ($1.2 million) under these facilities. The interest rate on these facilities is LIBOR plus 0.48% for U.S. dollar borrowings and 90% of the Peoples Bank of China rate for RMB borrowings. As of September 30, 2004, the interest rates for U.S. dollar borrowings and RMB borrowings were approximately 2.6% and 5.2%, respectively. The loans are secured by substantially all the assets of the Chinese Splitting JV and will be repaid in 16 semi-annual installments, beginning no later than June 30, 2007. The financing will be non-recourse to HI, but is guaranteed during the construction phase by us. We unconditionally guarantee 70% of any amounts due and unpaid by the Chinese Splitting JV under the loans described above. Our guarantee remains in effect until the Chinese Splitting JV has commenced production of at least 70% of capacity for at least 30 days and achieved a debt service coverage ratio of at least 1.5:1.

    Receivables Securitization

        HI has an accounts receivable securitization program, under which interests in certain of its trade receivables are transferred to a qualified off-balance sheet entity. As of September 30, 2004, the qualified off-balance sheet entity had issued $197 million in medium term notes and $37 million in commercial paper. See "—Off-Balance Sheet Arrangements."

Short-Term and Long-Term Liquidity; Compliance with Covenants

        We depend upon our credit facilities and other debt instruments to provide liquidity for our operations and working capital needs. As of September 30, 2004, we had approximately $905 million of combined cash and combined unused borrowing capacity, consisting of approximately $167 million attributable to HLLC, approximately $629 million attributable to HI and approximately $109 million attributable to Advanced Materials. In compliance with applicable provisions in its credit facilities, on December 31, 2004, HI prepaid $59 million on the HI Term Facility in the HI Term Repayment. Such prepayment has been applied in accordance with the provisions of the HI Credit Facilities in such a manner that there will be no scheduled maturities under the HI Credit Facilities due until June 2006 and such that all remaining scheduled maturities under the HI Term Facility shall be reduced pro rata.

        We believe our current liquidity, together with funds generated by our businesses, is sufficient to meet the short-term and long-term needs of our businesses, including funding operations, making capital expenditures and servicing our debt obligations in the ordinary course. We believe that we are currently in compliance with the covenants contained in the agreements governing our senior secured credit facilities and the indentures governing our notes.

Certain Credit Support Issues

        Our subsidiaries HIH and HI have not guaranteed or provided any other credit support to HLLC's obligations under the HLLC Credit Facilities or its outstanding notes, and HLLC has not guaranteed or provided any other credit support to the obligations of HI under the HI Credit Facilities or to the obligations of HI and HIH under their outstanding notes. Because of restrictions contained in the financing arrangements of HIH and HI, these subsidiaries are presently unable to make any loans or "restricted payments" to HLLC, including dividends, distributions or other payments in respect of equity interests or payments to purchase, redeem or otherwise acquire or retire for value any of their equity interests, subject to exceptions contained in such financing arrangements. Events of default under the HI Credit Facilities, or under the outstanding notes of HIH and HI or the exercise of any remedy by the lenders thereunder will not cause any cross-defaults or cross-accelerations under the HLLC Credit Facilities or HLLC's outstanding notes. Additionally, any events of default under the HLLC Credit Facilities or HLLC's outstanding notes or the exercise of any remedy by the lenders thereunder will not cause any cross-defaults or cross-accelerations under the outstanding notes of HIH or HI or the HI Credit Facilities, except insofar as foreclosure on certain subsidiary equity interests pledged to secure our obligations under the HLLC Credit Facilities or the HLLC 2003 Secured Notes, would constitute a "change of control" and an event of default under the HI Credit Facilities and

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would give rise to certain put rights in favor of the holders of outstanding notes of HI or HIH. Advanced Materials is also financed separately from HLLC and HIH, HLLC and HIH's debt is non-recourse to Advanced Materials and Advanced Materials has no contractual obligation to fund HLLC or HIH's operations and vice versa.

Contractual Obligations and Commercial Commitments

        Our obligations under long-term debt (including current portion), lease agreements and other contractual commitments as of December 31, 2003 are summarized below:

 
   
  2004
  2005-2007
  2008-2009
  After 2009
  Total
 
   
  (in millions)

Long-term debt(1)   $ 135.1   $ 1,816.8   $ 3,209.1   $ 732.6   $ 5,893.6
Capital lease obligations     2.1     4.6     4.9     4.9     16.5
Operating leases     44.4     95.2     40.8     92.0     272.4
Purchase commitments(2)     1,069.4     1,956.6     300.4     356.4     3,682.8
       
 
 
 
 
  Total(1)(3)   $ 1,251.0   $ 3,873.2   $ 3,555.2   $ 1,185.9   $ 9,865.3
       
 
 
 
 

(1)
On a pro forma as adjusted basis, our obligations under our long-term debt (including current portion) and capital lease obligations as of September 30, 2004 would be as follows:

 
  2005-2007
  2008-2009
  After 2009
  Total
 
  (in millions)

  Long-term debt and capital lease obligations   $ 213.3   $ 1,535.7   $ 3,260.1   $ 5,009.8
  Interest on long-term debt, assuming September 30, 2004 interest rates on variable rate debt obligations   $ 1,190.3   $ 668.6   $ 457.7   $ 2,316.6
(2)
We have various purchase commitments extending through 2017 for materials, supplies and services entered into in the ordinary course of business. Included in the purchase commitments table above are contracts which require minimum volume purchases that extend beyond one year or are renewable annually and have been renewed for 2004. Certain contracts allow for changes in minimum required purchase volumes in the event of a temporary or permanent shutdown of a facility. To the extent the contract requires a minimum notice period, such notice period has been included in the above table. The contractual purchase price for substantially all of these contracts is variable based upon market prices, subject to annual negotiations. We have estimated our contractual obligations by using the terms of our 2002 pricing for each contract. We also have a limited number of contracts which require a minimum payment, even if no volume is purchased. These contracts approximate $35 million annually through 2005, declining to approximately $16 million after 2011, and are included in the table above. We believe that all of our purchase obligations will be utilized in our normal operations.

(3)
Totals do not include commitments pertaining to our pension and other postretirement obligations. Our estimated future obligations are as follows:

 
  2005-2007
  2008-2009
  Average Annual
Amount For Next
Five Years

 
  (in millions)

  Pension plans   $ 180.0   $ 166.6   $ 90.5
  Other postretirement obligations   $ 31.9   $ 21.8   $ 11.1

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Off-Balance Sheet Arrangements

    Receivables Securitization

        HI maintains an off-balance sheet receivables securitization facility to provide liquidity for its operations and working capital needs. Under the accounts receivable securitization facility, interests in certain of its trade receivables are transferred to a qualified off-balance sheet entity (the "Receivables Trust"). The Receivables Trust is not our affiliate. The acquisitions of these receivables by the Receivables Trust are financed through the issuance of dollar- or euro-denominated commercial paper and/or medium term notes of the Receivables Trust. The debt associated with the commercial paper and medium term notes is not reflected on HI's balance sheet. The accounts receivable securitization program is an important source of liquidity to HI.

        A portion of the medium term notes (€90.5 million) is denominated in euros and is subject to fluctuation in currency rates versus the U.S. dollar. The total outstanding balance of medium term notes was approximately $197 million in U.S. dollar equivalents as of September 30, 2004. In addition to medium term notes, the Receivables Trust also maintains an annual commitment with a third party to issue commercial paper for an amount up to $125 million. As of September 30, 2004, the total outstanding balance of such commercial paper was approximately €30 million ($37 million). The commercial paper facility matures on March 31, 2007, and the medium term notes mature in June 2006.

        Subject to the annual seasonality of HI's accounts receivable, we estimate that the total availability to HI from the sale of accounts receivable under the securitization program may range between $280 million to $325 million (the mandatory prepayment limit under the HI Credit Facilities—see further discussion below) at certain periods during a calendar year. The weighted average interest rates on the medium term notes and commercial paper was approximately 2.5% as of September 30, 2004. Losses on the accounts receivable securitization program in the nine months ended September 30, 2004 were $10.2 million. Losses on the accounts receivable securitization program include the discount on receivables sold into the program, fees and expenses associated with the program and gains (losses) on foreign currency hedge contracts mandated by the terms of the program to hedge currency exposures on the collateral supporting the off-balance sheet debt issued. For the nine months ended September 30, 2004, losses on the accounts receivable securitization program include losses of $1.0 million on foreign currency hedge contracts mandated by the accounts receivable securitization program. We believe that the multicurrency commercial paper facility discussed above has enabled it to better naturally hedge the off-balance sheet debt to the underlying collateral supporting such debt and thereby reduce the impact on, and need for, foreign currency hedges as experienced in prior periods under the accounts receivable securitization program.

        The HI Credit Facilities require a mandatory prepayment to the extent that the proceeds to HI from the sale of accounts receivable under the securitization program exceed $325 million at any time, except if such excess is attributed to the change in foreign currency rates within a 30-day period. HI does not guarantee the medium term notes or commercial paper issued under the program, but HI is responsible for dilution adjustments and ensuring that the collection policies relating to the receivables are followed. HI also indemnifies the Receivables Trust if account debtors raise defenses, disputes, offsets or counterclaims, HI breaches its administrative and other obligations with respect to accounts or an account ceases to be an eligible receivable for purposes of the program. In addition, while HI does not anticipate it, if at any time it were unable to sell sufficient receivables into the program to support the volume of commercial paper and medium term notes issued under the program, HI may be required to inject cash into the program as collateral. Under such circumstance, and depending on the timing of such circumstance, the requirement to provide cash collateral to the program could have a negative effect on our liquidity.

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    Financing of Chinese MDI Facilities

        In 2003, we entered into two related joint venture agreements to build MDI production facilities near Shanghai, China. One joint venture, with BASF AG and three Chinese chemical companies, and known as Shanghai Lianheng Isocyanate Company Limited (the "Chinese Manufacturing JV"), will build three plants to manufacture MNB, aniline, and crude MDI. We effectively own 35% of the Chinese Manufacturing JV. The Chinese Splitting JV, the other joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd., will build a plant to manufacture pure MDI, polymeric MDI and MDI variants. We own 70% of the Chinese Splitting JV.

        On September 19, 2003, the joint ventures obtained secured financing for the construction of the production facilities. The Chinese Splitting JV is our consolidated subsidiary, and the details of its financing are described in "—Debt and Liquidity—Other Debt" above. The Chinese Manufacturing JV is not our consolidated subsidiary. The Chinese Manufacturing JV obtained various committed loans in the aggregate amount of approximately $224 million in U.S. dollar equivalents. As of September 30, 2004, there were no outstanding U.S. dollar borrowings and 30 million in outstanding RMB ($3.6 million) borrowings under these facilities. The interest rate on these facilities is LIBOR plus 0.48% for U.S. dollar borrowings and 90% of the Peoples Bank of China rate for RMB borrowings. The loans are secured by substantially all the assets of the Chinese Manufacturing JV and will be paid in 16 semi-annual installments, beginning no later than June 30, 2007. The financing will be non-recourse to us, but during the construction phase we unconditionally guarantee 35% of any amounts due and unpaid by the Chinese Manufacturing JV under the loans described above (except for a VAT facility of approximately $1.5 million which is not guaranteed). Our guarantee remains in effect until the Chinese Manufacturing JV has commenced production of at least 70% of capacity for at least 30 days and achieved a debt service coverage ratio of at least 1:1. As noted above in "Debt and Liquidity—Other Debt," we also unconditionally guarantee 70% of the amounts due and unpaid by the Chinese Splitting JV.

Restructuring and Plant Closing Costs

        During the periods discussed below, we have pursued two major cost reduction programs to improve operational efficiencies, the HLLC Restructuring (2001-2002) and Project Coronado (2003-2004). We have conducted, and with respect to Project Coronado continue to conduct, numerous discrete, but frequently individually immaterial, restructuring projects in connection with these two major programs.

        As of September 30, 2004, accrued restructuring and plant closing costs by type of cost and activity consisted of the following (dollars in millions):

 
  Workforce
reductions(1)

  Demolition and
decommissioning

  Non-cancelable
lease costs

  Other
restructuring
costs

  Total(2)
 
Accrued liabilities as of January 1, 2001   $   $   $   $   $  
  Charges for 2001 activities     44.2     2.8     6.9     6.4     60.3  
  Payments(3)                      
   
 
 
 
 
 
Accrued liabilities as of December 31, 2001     44.2     2.8     6.9     6.4     60.3  
  Charges for 2001 activities         1.0     (4.6 )   (1.7 )   (5.3 )
  Charges for 2002 activities     1.6     2.7             4.3  
  Payments for 2001 activities(3)     (40.3 )   (0.5 )   (1.7 )   (4.7 )   (47.2 )
  Payments for 2002 activities(3)     (1.6 )   (2.7 )           (4.3 )
   
 
 
 
 
 
Accrued liabilities as of December 31, 2002     3.9     3.3     0.6         7.8  
  HIH balance at consolidation on May 1, 2003(4)     24.2                 24.2  
  AdMat opening balance sheet liabilities at June 30, 2003(5)     53.2     1.5         6.1     60.8  
  Charges for 2001 activities     (2.0 )   (0.3 )   (0.2 )       (2.5 )
  Charges for 2003 activities     28.1                 28.1  
  Payments for 2001 activities(3)     (1.9 )   (0.4 )   (0.2 )       (2.5 )
                                 

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  Payments for 2003 activities(3)     (39.1 )               (39.1 )
   
 
 
 
 
 
Accrued liabilities as of December 31, 2003     66.4     4.1     0.2     6.1     76.8  
  Adjustment to the opening balance sheet of AdMat     0.6             2.0     2.6  
  Charges for 2003 activities     27.2                 27.2  
  Charges for 2004 activities     60.8     1.9         3.5     66.2  
  Payments for 2001 activities(3)             (0.2 )       (0.2 )
  Payments for 2003 activities(3)     (27.3 )   (0.2 )       (7.5 )   (35.0 )
  Payments for 2004 activities(3)     (20.3 )               (20.3 )
   
 
 
 
 
 
Accrued liabilities as of September 30, 2004   $ 107.4   $ 5.8   $   $ 4.1   $ 117.3  
   
 
 
 
 
 

(1)
Substantially all of the employees terminated in connection with the restructuring programs were terminated under ongoing termination benefit arrangements. Accordingly, the related liabilities were accrued as a one-time charge to earnings in accordance with Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits."

 
  2001
  2002
  2003
  2004
(2)    Accrued liabilities by activities as of
December 31, are as follows:
                       
  2001 activities   $ 60.3   $ 7.8   $ 2.8   $ 2.6
  2002 activities                  
  2003 activities                 74.0     68.8
  2004 activities                       45.9
   
 
 
 
    Total   $ 60.3   $ 7.8   $ 76.8   $ 117.3
   
 
 
 
(3)
Includes impact of foreign currency translation.

(4)
Prior to May 1, 2003, our investment in HIH was recorded on the equity method. Effective May 1, 2003, HIH is recorded as a consolidated subsidiary. HIH accrued liabilities for workforce reductions include a $7.1 million liability at December 31, 2002 related to a prior period and a $19.1 million charge recorded in the first quarter of 2003 offset by $2.0 million in cash payments through May 1, 2003.

(5)
Advanced Materials' restructuring liabilities were recorded on its opening balance sheet.

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        Details with respect to our reserves for restructuring and plant closing costs are provided