EX-99.2 13 l17879aexv99w2.txt EXHIBIT 99.2 AUDITED FINANCIALS STATEMENTS OF SUNBELT CHLOR EXHIBIT 99.2 AUDITED FINANCIAL STATEMENTS SUNBELT CHLOR ALKALI PARTNERSHIP DECEMBER 31, 2005 . . . SUNBELT CHLOR ALKALI PARTNERSHIP AUDITED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005 AND 2004 CONTENTS Audited Financial Statements Report of Independent Registered Public Accounting Firm..... 1 Balance Sheets.............................................. 2 Income Statements........................................... 3 Statements of Partners' Deficit............................. 4 Statements of Cash Flows.................................... 5 Notes to Financial Statements............................... 6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Partners SunBelt Chlor Alkali Partnership We have audited the accompanying balance sheets of SunBelt Chlor Alkali Partnership as of December 31, 2005 and 2004, and the related statements of income, partners' deficit, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SunBelt Chlor Alkali Partnership at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. February 10, 2006 1 SUNBELT CHLOR ALKALI PARTNERSHIP BALANCE SHEETS
DECEMBER 31 --------------------------- 2005 2004 ------------ ------------ ASSETS Current assets: Cash...................................................... $ 44,013 $ 22,609 Receivable from Oxy Vinyls, LP............................ 7,015,455 7,261,416 Receivables from partners................................. 17,936,644 8,429,290 Inventories............................................... 2,069,896 2,111,018 Prepaids and other current assets......................... 1,291,601 1,116,377 ------------ ------------ Total current assets........................................ 28,357,609 18,940,710 Property, plant, and equipment, net......................... 119,565,930 124,415,109 Deferred financing costs, net............................... 961,774 1,041,922 ------------ ------------ Total assets................................................ $148,885,313 $144,397,741 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Amounts payable to partners............................... $ 7,217,313 $ 5,811,337 Current portion of long-term debt......................... 12,187,500 12,187,500 ------------ ------------ Total current liabilities................................... 19,404,813 17,998,837 Long-term debt.............................................. 134,062,500 146,250,000 Partners' deficit........................................... (4,582,000) (19,851,096) ------------ ------------ Total liabilities and partners' deficit..................... $148,885,313 $144,397,741 ============ ============
See notes to financial statements. 2 SUNBELT CHLOR ALKALI PARTNERSHIP INCOME STATEMENTS
YEARS ENDED DECEMBER 31 ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------ Revenues........................................... $166,967,651 $105,764,129 $ 97,021,661 Operating costs and expenses: Cost of sales.................................... 48,699,088 45,281,281 41,699,987 Depreciation and amortization.................... 14,347,268 14,150,729 13,632,976 Administrative and general....................... 11,694,524 10,701,137 9,744,589 ------------ ------------ ------------ 74,740,880 70,133,147 65,077,552 ------------ ------------ ------------ Operating income................................... 92,226,771 35,630,982 31,944,109 Interest expense................................... (11,455,031) (12,336,188) (13,217,344) Interest income.................................... 537,421 161,168 69,215 ------------ ------------ ------------ Net income......................................... $ 81,309,161 $ 23,455,962 $ 18,795,980 ============ ============ ============
See notes to financial statements. 3 SUNBELT CHLOR ALKALI PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT
PARTNERS ---------------------------- 1997 OLIN SUNBELT CHLOR ALKALI INC. VENTURE, INC. TOTAL ------------ ------------- ------------ Balance at December 31, 2002....................... $(19,773,097) $(19,773,097) $(39,546,194) Cash contributions by partners................... 10,883,627 14,069,753 24,953,380 Asset contributions by partner................... 3,186,126 -- 3,186,126 Cash distributions to partners................... (17,996,146) (17,996,146) (35,992,292) Net income....................................... 9,397,990 9,397,990 18,795,980 ------------ ------------ ------------ Balance at December 31, 2003....................... (14,301,500) (14,301,500) (28,603,000) Cash distributions to partners................... (7,352,029) (7,352,029) (14,704,058) Net income....................................... 11,727,981 11,727,981 23,455,962 ------------ ------------ ------------ Balance at December 31, 2004....................... (9,925,548) (9,925,548) (19,851,096) Cash distributions to partners................... (33,020,033) (33,020,033) (66,040,065) Net income....................................... 40,654,581 40,654,581 81,309,161 ------------ ------------ ------------ Balance at December 31, 2005....................... $ (2,291,000) $ (2,291,000) $ (4,582,000) ============ ============ ============
See notes to financial statements. 4 SUNBELT CHLOR ALKALI PARTNERSHIP STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------ OPERATING ACTIVITIES Net income......................................... $ 81,309,161 $ 23,455,962 $ 18,795,980 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation..................................... 14,267,120 14,070,581 13,552,828 Amortization..................................... 80,148 80,148 80,148 Loss on disposal of assets....................... 164,435 289,883 134,897 Changes in assets and liabilities: Receivable from Oxy Vinyls, LP................ 245,961 (3,834,085) 1,477,074 Receivables from partners..................... (9,507,354) (2,040,479) (156,701) Inventories................................... 41,122 371,758 323,839 Amounts payable to partners................... 1,405,976 (746,222) 313,383 Prepaid expenses and other current assets..... (175,224) (156,657) (707,898) ------------ ------------ ------------ Net cash provided by operating activities.......... 87,831,345 31,490,889 33,813,550 INVESTING ACTIVITIES Purchases of property, plant, and equipment........ (9,645,152) (4,588,322) (10,575,538) Proceeds on sale of property, plant, and equipment........................................ 62,776 -- -- ------------ ------------ ------------ Net cash used in investing activities.............. (9,582,376) (4,588,322) (10,575,538) FINANCING ACTIVITIES Cash contributions by partners..................... -- -- 24,953,380 Cash distributions to partners..................... (66,040,065) (14,704,058) (35,992,292) Principal payments on long-term debt............... (12,187,500) (12,187,500) (12,187,500) ------------ ------------ ------------ Net cash used in financing activities.............. (78,227,565) (26,891,558) (23,226,412) ------------ ------------ ------------ Net increase in cash............................... 21,404 11,009 11,600 Cash at beginning of year.......................... 22,609 11,600 -- ------------ ------------ ------------ Cash at end of year................................ $ 44,013 $ 22,609 $ 11,600 ============ ============ ============
See notes to financial statements. 5 SUNBELT CHLOR ALKALI PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 1. ORGANIZATION SunBelt Chlor Alkali Partnership (the Partnership) was formed on August 23, 1996 under a Partnership Agreement, between 1997 Chlor Alkali Venture, Inc. and Olin SunBelt Inc. (the Partners). 1997 Chlor Alkali Venture, Inc. is a wholly owned subsidiary of PolyOne Corporation (formerly The Geon Company) and Olin SunBelt Inc. is a wholly owned subsidiary of the Olin Corporation. Each of the Partners has a 50% interest in the Partnership. The Partnership Agreement provides that the capital investment of the Partners will be maintained and the Partnership's income or loss will be allocated to the Partners based on their ownership interest percentages. The Partnership was formed for the purpose of construction and operation of a Chlor-Alkali facility. The facility, which is located in McIntosh, Alabama produces chlorine, caustic soda and hydrogen. 2. SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENT The Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT, AND EQUIPMENT AND DEPRECIATION Property, plant, and equipment are carried at cost. Major renewals and betterments are capitalized. Maintenance and repair expenditures which do not improve or extend the life of the respective assets are expensed as incurred. Depreciation for all plant and equipment is computed using the straight-line method over their estimated useful lives. The ranges of estimated useful lives are as follows: Land improvements........................................... 20 years Buildings................................................... 20 years Machinery and equipment..................................... 15-20 years
Long-lived assets are assessed for impairment when operating profits for the related business or a significant change in the use of an asset indicate that their carrying value may not be recoverable. DEFERRED FINANCING COSTS The costs incurred by the Partnership in obtaining its long-term debt have been capitalized and are being amortized over the term of the debt using the effective interest method. FINANCIAL INSTRUMENTS The carrying amount of long-term debt approximates its fair value. The fair value of the debt is estimated based on the present value of the underlying cash flow discounted at the Partnership's estimated borrowing rate. REVENUE RECOGNITION The Partnership recognizes revenues at the point of passage of title which is based on shipping terms. 6 SUNBELT CHLOR ALKALI PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) SHIPPING AND HANDLING COSTS Shipping and handling costs are reflected in costs of sales. INCOME TAXES No provision is made for income taxes as the Partnership's results of operations are includable in the tax returns of the Partners. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES Since the Partnership's major products are commodities, significant changes in the prices of chemical products could have a significant impact on the results of operations for any particular period. The Partnership had one major chlorine customer, Oxy Vinyls LP, during the periods presented, which accounted for 45.7%, 58.3%, and 53.7% of total sales for the years ended December 31, 2005, 2004, and 2003, respectively. 3. INVENTORIES Inventories are comprised as follows:
DECEMBER 31 ----------------------- 2005 2004 ---------- ---------- Finished goods.............................................. $ 619,117 $ 521,364 Parts....................................................... 1,450,779 1,589,654 ---------- ---------- $2,069,896 $2,111,018 ========== ==========
4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are comprised as follows:
DECEMBER 31 --------------------------- 2005 2004 ------------ ------------ Land and land improvements............................... $ 4,862,826 $ 4,862,826 Building................................................. 3,869,389 3,507,389 Machinery and equipment.................................. 209,229,631 200,964,285 Construction in process.................................. 3,734,366 3,968,774 ------------ ------------ 221,696,212 213,303,274 Less allowance for depreciation.......................... 102,130,282 88,888,165 ------------ ------------ $119,565,930 $124,415,109 ============ ============
5. TRANSACTIONS WITH AFFILIATES The Partnership has various management service agreements, dated August 23, 1996, with the Olin Corporation. These agreements, which include compensation for managing the facility, an asset utilization fee, a fleet fee and a distribution fee, have terms from five to ten years with five year price adjustment renewals. 7 SUNBELT CHLOR ALKALI PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Charges for these services were approximately $7,551,933, $7,199,412, and $6,813,237 for 2005, 2004, and 2003, respectively, and have been included within administrative and general expenses in the statement of operations. The Partnership also received contributions from its partners totaling $28,139,506 in 2003, which was used for working capital purposes and to pay for costs incurred in constructing the production facility. The cash policy was changed during 2003 to not make distributions to the partners until the cash balance was sufficient to cover both the principal payment and the interest expense for the year. Contributions from the partners were discontinued with this policy change and the manufacturing costs were paid from receipts. The Partnership made distributions to its partners totaling $66,040,065, $14,704,058, and $35,992,292 in 2005, 2004, and 2003, respectively. In accordance with the Partnership Operating Agreement, the majority of chlorine produced by the Partnership is sold to Oxy Vinyls LP, which is 24% owned by PolyOne Corporation. The remaining chlorine and all of the caustic soda produced by the Partnership is marketed and distributed by the Olin Corporation. 6. LONG-TERM DEBT On December 23, 1997, the Partnership borrowed $195,000,000 in a private placement of debt. The debt is secured by the property, plant, equipment, and inventory of the Partnership. The term of the loan is 20 years at an interest rate of 7.23%. The first principal payment of $12,187,500 was paid on December 22, 2002 with equal annual payments due through December 22, 2017. Interest payments are payable semi-annually in arrears on each June 22 and December 22. Interest payments totaled $11,455,031, $12,336,188, and 13,217,344 in 2005, 2004, and 2003, respectively. The debt is guaranteed by the Partners. 7. LEASES The Partnership has operating leases for certain property, machinery, and equipment. At December 31, 2005, future minimum lease payments under noncancelable operating leases are as follows: 2006........................................................ $ 2,156,701 2007........................................................ 2,269,468 2008........................................................ 1,986,528 2009........................................................ 1,932,708 2010........................................................ 1,681,248 Thereafter.................................................. 8,464,282 ----------- Total minimum future lease payments......................... $18,490,935 ===========
Rent expense was approximately $722,695, $599,720, and $557,260 for the years ended December 31, 2005, 2004, and 2003 respectively. 8. COMMITMENTS AND CONTINGENCIES The Partnership is subject to legal proceedings and claims that arise in the ordinary course of its business. Management evaluates each claim and provides for any potential loss when the claim is probable to be paid and reasonably estimable. In the opinion of management, the ultimate liability with respect to these actions will not materially affect the financial condition, results of operations or cash flows of the Partnership. 8