<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-17961
ARISTECH CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 25-1534498
(State of Incorporation) (I.R.S. Employer Identification Number)
600 Grant Street, Pittsburgh, Pennsylvania 15219-2704
(Address of principal executive offices)
Registrant's Telephone Number: (412) 433-2747
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES[X] NO [ ]
Common Stock outstanding at September 30, 1999: 14,908 shares
<PAGE> 2
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Selected Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
2
<PAGE> 3
ARISTECH CHEMICAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 192.0 $ 198.2 $ 567.7 $ 631.3
Operating Costs:
Cost of sales 172.2 160.6 493.6 501.9
Selling, general and administrative expenses 10.6 15.1 41.7 44.7
Depreciation and amortization 15.7 13.3 43.4 39.3
------- ------- ------- -------
Total Operating Costs 198.5 189.0 578.7 585.9
------- ------- ------- -------
Operating Income (Loss) (6.5) 9.2 (11.0) 45.4
Net Gain (Loss) on Disposal of Assets 1.5 - 1.7 (1.2)
Other Expense, Net - (0.8) - (1.1)
Interest Income 0.5 0.5 1.5 1.3
Interest Expense (8.0) (6.7) (20.8) (20.6)
------- ------- ------- -------
Income (Loss) Before Income Taxes (12.5) 2.2 (28.6) 23.8
Provision for (Benefit from) Income Taxes (5.6) (1.2) (9.8) 8.0
------- ------- ------- -------
Income (Loss) Before Minority Interest (6.9) 3.4 (18.8) 15.8
Minority Interest 1.0 0.6 2.5 2.0
------- ------- ------- -------
Net Income (Loss) $ (7.9) $ 2.8 $ (21.3) $ 13.8
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ARISTECH CHEMICAL CORPORATION
Consolidated Balance Sheets
(Dollars in Millions)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents $ 2.1 $ 1.1
Receivables (less allowance for doubtful accounts of $.3 and
$.2 at September 30, 1999 and December 31, 1998, respectively) 22.1 4.4
Subordinated note receivable-related party 14.4 17.9
Inventories 109.6 124.3
Other current assets 1.6 1.1
Deferred income taxes 12.8 -
--------- ---------
Total Current Assets 162.6 148.8
Property, plant and equipment, net 959.7 845.5
Long-term receivables 7.8 8.0
Excess cost over assets acquired 158.3 162.2
Deferred income taxes 1.5 1.4
Other assets 13.1 16.2
--------- ---------
Total Assets $ 1,303.0 $ 1,182.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 76.5 $ 54.6
Accounts payable-related parties 2.7 3.9
Payroll and benefits payable 8.1 9.3
Accrued taxes 7.9 7.3
Deferred income taxes 0.5 0.5
Short-term borrowings 84.9 45.9
Long-term debt due within one year 0.7 0.7
Other current liabilities 26.6 21.0
--------- ---------
Total Current Liabilities 207.9 143.2
Long-term debt-related parties 208.0 135.0
Long-term debt-other 315.5 316.0
Deferred income taxes 164.5 160.3
Other liabilities 40.6 38.7
--------- ---------
Total Liabilities 936.5 793.2
--------- ---------
Minority Interest 9.9 7.4
--------- ---------
Common stock ($.01 par value, 20,000 shares authorized, 14,908
shares issued at September 30, 1999 and December 31, 1998) - -
Additional paid-in capital 382.5 382.5
Retained deficit (25.9) (1.0)
--------- ---------
Total Stockholders' Equity 356.6 381.5
--------- ---------
Total Liabilities and Stockholders' Equity $ 1,303.0 $ 1,182.1
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
ARISTECH CHEMICAL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (21.3) $ 13.8
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 39.5 35.4
Amortization of excess cost over assets acquired 3.9 3.9
Deferred income taxes (8.7) (4.3)
Discount on sale of receivables 4.5 3.6
(Gain) loss on disposal of assets (1.7) 1.2
(Increase) decrease in receivables (10.3) 1.6
Decrease (increase) in inventories 14.7 (2.4)
Increase (decrease) in accounts payable and
other current liabilities 22.7 (19.5)
Minority interest in consolidated subsidiaries 2.5 2.0
Other 2.2 0.4
------- ------
Net Cash Provided by Operating Activities 48.0 35.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (154.2) (173.4)
Proceeds from disposal of asset 1.8 -
Other 0.2 (0.1)
------- ------
Net Cash Used in Investing Activities (152.2) (173.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 39.0 (2.1)
Repayment of long-term debt (78.0) (91.0)
Principal repayments under capital leases (0.5) (0.4)
Proceeds from issuance of long-term debt 151.0 150.0
Net (decrease) increase in receivables financing facility (8.4) 83.9
Dividends paid - (4.0)
Other 2.1 -
------- ------
Net Cash Provided by Financing Activities 105.2 136.4
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1.0 (1.4)
Cash and Equivalents, Beginning of Year 1.1 3.9
------- ------
Cash and Equivalents, End of Period $ 2.1 $ 2.5
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aristech Chemical Corporation ("Aristech") was incorporated under the laws of
the State of Delaware on October 14, 1986 as a wholly owned subsidiary of USX
Corporation ("USX"). On December 4, 1986, USX transferred substantially all of
the assets and liabilities of its USS Chemicals Division to Aristech, and
Aristech's common stock was offered and sold to the public. The USS Chemicals
Division was formed by USX in 1966. On March 7, 1990, Mitsubishi Corporation
("MC"), certain other investors and certain members of Aristech's management
acquired Aristech in a going-private transaction. The interest of certain of the
investors, including the management investors, has subsequently been reacquired
and MC beneficially owns 82.3% of Aristech's outstanding common stock. The
"Company" refers to Aristech and its wholly and majority-owned consolidated
subsidiaries.
NATURE OF OPERATIONS
The Company is a producer and marketer of chemical and polymer products that are
generally sold for further processing by manufacturers of various products which
include automotive components, construction materials and consumer products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Aristech include the
accounts of the Company and its wholly and majority-owned consolidated
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation. Investments in unconsolidated subsidiaries over which the Company
does not exercise control are accounted for under the equity method.
In the opinion of management, the unaudited financial information reflects all
adjustments necessary to fairly state the results of operations and the changes
in financial position for such interim period. Such adjustments are of a normal
recurring nature.
Certain reclassifications were made to the prior years' consolidated financial
statements to conform to the classifications used in the 1999 consolidated
financial statements.
ACCOUNTING CHANGES
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS No. 133, as amended by SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", is effective for fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet determined the effect of
this standard on its financial reporting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
6
<PAGE> 7
ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
NOTE B - INVENTORIES
Inventories consist of the following at September 30, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
(In Millions)
Raw materials $ 44.6 $ 34.9
Finished products 55.2 79.4
Supplies and sundry items 19.3 19.5
Lower of cost or market reserve (9.5) (9.5)
---------- -----------
Total Inventory $ 109.6 $ 124.3
========== ===========
</TABLE>
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
(In Millions)
Land $ 13.9 $ 14.1
Buildings 74.7 66.7
Machinery and equipment 1,151.1 831.4
Intangible assets 28.9 28.9
Construction in process 47.3 224.4
--------- ----------
1,315.9 1,165.5
Accumulated depreciation (356.2) (320.0)
--------- ----------
Property, Plant and Equipment, Net $ 959.7 $ 845.5
========= ==========
</TABLE>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
Interest September 30 December 31,
Maturity Rate 1999 1998
-------------- -------------- ------------------ -----------------
(Unaudited)
(In Millions)
<S> <C> <C> <C> <C>
Revolving Loan - MIC 2002 Variable $ 28.0 $ 85.0
Term Loan - MIC 2002 Variable 130.0 -
Term Loan - MIC 2002 Variable 50.0 50.0
Revolving Loan - GFC/BCC 2001 Variable 150.0 150.0
6 7/8% Notes 2006 6.875% 149.2 149.1
Capital lease obligations 1999-2017 15.4 15.9
Other 1.6 1.7
---------- ------------
524.2 451.7
Less amount due within one year (0.7) (0.7)
---------- ------------
Total Long-term Debt $ 523.5 $ 451.0
========== ============
</TABLE>
7
<PAGE> 8
ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
NOTE E - SEGMENT INFORMATION
Financial information about the Company's industry segments is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
(In millions)
Sales:
Chemicals $ 105.3 $ 114.2 $ 317.3 $ 369.0
Polymers 88.9 85.8 257.2 267.3
Intersegment sales (2.2) (1.8) (6.8) (5.0)
---------- ---------- ---------- ----------
$ 192.0 $ 198.2 $ 567.7 $ 631.3
========== ========== ========== ==========
Operating income (loss):
Chemicals $ (4.6) $ 8.8 $ (13.0) $ 35.5
Polymers (1.9) 0.4 2.0 9.9
---------- ---------- ---------- ----------
$ (6.5) $ 9.2 $ (11.0) $ 45.4
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Total assets:
Chemicals $ 693.9 $ 658.4
Polymers 609.1 523.7
---------- ----------
$ 1,303.0 $ 1,182.1
========== ==========
</TABLE>
NOTE F - COMMITMENTS AND CONTINGENCIES
Aristech is obligated to indemnify USX against certain claims or liabilities
which USX may incur relating to USX's prior ownership and operation of the
business and facilities transferred to Aristech in 1986, including liabilities
under laws relating to the protection of the environment and the workplace. Such
known liabilities have been provided for in the consolidated financial
statements.
As of September 30, 1999 and December 31, 1998, the Company had outstanding
irrevocable standby letters of credit and surety bonds in the amount of $1.2
million and $4.7 million, respectively, primarily in connection with
environmental matters.
The Company is subject to pervasive environmental laws and regulations
concerning the production, handling, storage, transportation, emission and
disposal of waste materials and is also subject to other federal and state laws
and regulations regarding health and safety matters. These laws and regulations
are constantly evolving, and it is impossible to predict accurately the effect
these laws and regulations will have on the Company in the future.
The Company is also the subject of, or party to, a number of other pending or
threatened legal actions involving a variety of matters. In the opinion of
management, any ultimate liability arising from these contingencies, to the
extent not otherwise provided for, should not have a material adverse effect on
the consolidated financial position, results of operations, or cash flows of the
Company.
8
<PAGE> 9
ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
NOTE G - SHORT-TERM BORROWINGS
In December of 1996, Aristech arranged for a $50.0 million short-term
discretionary line of credit with a commercial bank bearing interest at a
variable rate. Effective September 17, 1999, the amount of the discretionary
line of credit was reduced by the commercial bank from $50.0 million to $44.9
million. Short-term borrowings drawn under this line of credit amounted to $44.9
million and $45.9 million at September 30, 1999 and December 31, 1998,
respectively. Total short-term borrowings drawn under all existing lines of
credit amounted to $84.9 million and $45.9 million at September 30, 1999 and
December 31, 1998, respectively.
NOTE H - SUBSEQUENT EVENTS
On October 20, 1999, the commercial bank notified Aristech that in view of
conditions in the chemical markets in which Aristech participates in general,
the recent financial performance of Aristech in particular, and the bank's
insufficient returns on its loaned capital, it was terminating the $44.9 million
discretionary line of credit. Pursuant to an agreement between Aristech and the
commercial bank regarding such termination of the facility, on October 29, 1999,
Aristech made a principal repayment of $15.0 million, and on November 30, 1999,
Aristech will repay the remaining principal amount outstanding on this facility
of $29.9 million.
MC has confirmed with Aristech that they intend to fully support Aristech,
including providing any necessary replacement financing at competitive rates.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or verbal
forward-looking statements, including any statements that may be contained in
the following "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and including statements contained elsewhere in this and
other Company filings with the Securities and Exchange Commission. The Company
does not undertake to update or revise any forward-looking statement to reflect
changed assumptions, the occurrence of unanticipated events or changes to
operating results over time. All statements which address operating performance,
events or developments that we expect or anticipate will occur in the future,
including statements relating to sales growth and earnings growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance. The following are some of the factors
that could cause actual results to differ materially from estimates contained in
the Company's forward-looking statements: The ability to generate sufficient
cash flows to support capital expansion plans and general operating activities.
Competitive product and pricing pressures. A change in laws and regulations,
including changes in accounting standards, taxation requirements (including tax
rate changes, new tax laws and revised tax law interpretation) and laws in
domestic or foreign jurisdictions. Fluctuations in the cost and availability of
raw materials to the Company or to the Company's vendors and the ability to
maintain favorable supplier arrangements and relationships. The ability to
achieve earnings forecasts, which are generated based on projected sales of
different product types, some of which are more profitable than others. There
can be no assurance that we will achieve the projected level or mix of product
sales. The ability to penetrate new markets, which also depends on economic and
political conditions. The effectiveness of our marketing programs. The
uncertainties of litigation, as well as other risks and uncertainties detailed
from time to time in the Company's Securities and Exchange Commission filings.
The ability of the Company and its suppliers to replace, modify or upgrade
computer programs in ways that adequately address the Year 2000 issue. The
foregoing list of important factors is not exclusive.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
During the three-month period ended September 30, 1999 when compared with the
same period for 1998, the Company's net sales decreased by $6.2 million or 3%
from $198.2 million to $192.0 million. This decrease is primarily due to a 5%
decline in average net selling prices per pound shipped. Net sales for Chemicals
decreased by $8.9 million or 8% from the three month period ended September 30,
1998, which was caused primarily by a 11% decline in the average selling price
per pound shipped, despite a 4% increase in Chemicals shipment volumes. Net
sales for Polymers increased by $3.1 million or 4% from the three month period
ended September 30, 1998, which was caused by a 5% increase in the average
selling price per pound shipped, despite a 2% decrease in shipment volumes.
Total operating costs increased by $9.5 million or 5% from $189.0 million for
the three months ended September 30, 1998 to $198.5 million for the three months
ended September 30, 1999. The increase in operating costs was primarily caused
by a $11.6 million increase in the Company's cost of sales for the three month
period ended September 30, 1999 when compared with the same period for 1998. The
increase in cost of sales was primarily attributable to higher unit raw material
prices and start-up costs associated with the Company's new polypropylene
facility at LaPorte, Texas.
The Company's total interest expense before interest capitalization was $11.1
million for the three month period ended September 30, 1999 and $9.2 million for
the same period in 1998, a $1.9 million increase from 1998. The additional
interest expense primarily reflects net increased short and long-term borrowings
during 1999 necessary to finance the Company's ongoing production capacity
expansions, partially offset by a reduction in interest rates. The Company
capitalized interest in connection with the capacity expansions of $3.0 million
and $2.5 million for the three months ended September 30, 1999 and 1998,
respectively.
The Company's provision for income taxes decreased by $4.4 million and was
caused primarily by an $14.7 million decrease in pretax income for the three
month period ended September 30, 1999 when compared with the same period for
1998.
10
<PAGE> 11
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998.
During the nine-month period ended September 30, 1999 when compared with the
same period for 1998, the Company's net sales decreased by $63.6 million or 10%
from $631.3 million to $567.7 million. This decrease is primarily due to a 11%
decline in average net selling prices per pound shipped. Net sales for Chemicals
decreased by $51.7 million or 14% from the nine month period ended September 30,
1998, which was caused by an 14% decline in the average selling price per pound
shipped. Net sales for Polymers decreased by $10.1 million or 4% from the nine
month period ended September 30, 1998, which was primarily caused by a 5%
decline in the average selling price per pound shipped, despite a 2% increase in
shipment volumes.
Total operating costs decreased by $7.2 million or 1% from $585.9 million for
the three months ended September 30, 1998 to $578.7 million for the nine months
ended September 30, 1999. The decrease in operating costs was primarily caused
by a $8.3 million decrease in the Company's cost of sales for the nine month
period ended September 30, 1999 when compared with the same period for 1998.
Included in cost of sales for the nine months ended September 30, 1998 was a
$7.3 million aggregate lower of cost or market inventory adjustment. The
decrease in cost of sales was primarily attributable to a 4% decrease in the
Company's average price per pound for raw materials. The Chemicals operating
segment's average raw materials price per pound, which includes primarily
cumene, decreased by approximately 3%, while the Polymers average raw materials
price per pound, which includes primarily propylene, decreased by approximately
5%. Partially offsetting the decrease in the average price per pound for raw
materials was the recognition of $5.0 million in costs associated with the
Company's voluntary early retirement and involuntary separation programs, and
increased depreciation expense due to the Company's ongoing efforts to expand
its business.
Net loss on disposal of assets decreased by $2.9 million from a loss of $1.2
million for the nine month period ended September 30, 1998 to a net gain of $1.7
million for the same period in 1999 and was due primarily to the 1999 gain on
sale of the Company's specialty polymers division and the 1998 write-off of an
obsolete asset.
The Company's total interest expense before interest capitalization was $31.5
million for the nine month period ended September 30, 1999 and $25.6 million for
the same period in 1998, a $5.9 million increase from 1998. The additional
interest expense primarily reflects net increased short and long-term borrowings
of $133.4 million since September 30, 1998 necessary to finance the Company's
ongoing production capacity expansions, partially offset by a reduction in
interest rates. The Company's weighted-average cost of borrowing before interest
capitalization for the nine months ended September 30, 1999 and 1998 was 6.1%
and 6.5%, respectively. The Company capitalized interest in connection with the
capacity expansions of $10.6 million and $5.0 million for the nine months ended
September 30, 1999 and 1998, respectively.
The Company's provision for income taxes decreased by $17.8 million from an
expense of $8.0 million for the nine months ended September 30, 1998 to a
benefit of $9.8 million for the same period in 1999. The decrease in income tax
expense was caused primarily by a $52.4 million decrease in pretax income for
the nine months ended September 30, 1999 when compared with the same period for
1998.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 30, 1999, the Company's working
capital balance decreased by $50.9 million from $5.6 million at December 31,
1998 to a deficit balance of $45.3 million at September 30, 1999. The decrease
in working capital is due primarily to net additional short-term borrowings of
$39.0 million drawn primarily under the Company's short-term lines of credit
(see Notes G and H to the Consolidated Financial Statements). The Company opted
to finance approximately one-fourth of its 1999 year-to-date capital
expenditures on a short-term basis primarily to utilize the benefit of cost
effective short-term financing over its available long-term financing. Other
factors that contributed to the decreased working capital include a $14.7
million decrease in inventories and increased current liabilities associated
with the start-up of the Company's new polypropylene facility at LaPorte, Texas.
The Company's net cash provided by operating activities increased by $12.3
million, despite the negative cash flow effect of the $35.1 million decrease in
net income for the nine month period ended September 30, 1999
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
when compared with the same period for 1998. The 1999 increase in operating cash
flows occurred primarily as a result of the positive cash flow effect of the
decreased inventories, a change in the composition of the items comprising
accounts payable and other current liabilities, and increased depreciation
expense associated with the Company's increased investment in property, plant
and equipment.
The Company generally funds its working capital requirements on a short-term
basis primarily through borrowings under its discretionary line of credit
agreements that have an aggregate available borrowing limit of $40.0 million.
The Company intends to refinance a portion of the outstanding short-term
borrowings on a long-term basis to the extent rates under available long-term
financing decline below rates currently available under short-term financing.
In December of 1996, Aristech arranged for a $50.0 million short-term
discretionary line of credit with a commercial bank bearing interest at a
variable rate. Effective September 17, 1999, the amount of the discretionary
line of credit was reduced by the commercial bank from $50.0 million to $44.9
million. Short-term borrowings drawn under this line of credit amounted to $44.9
million and $45.9 million at September 30, 1999 and December 31, 1998,
respectively.
On October 20, 1999, the commercial bank notified Aristech that in view of
conditions in the chemical markets in which Aristech participates in general,
the recent financial performance of Aristech in particular, and the bank's
insufficient returns on its loaned capital, it was terminating the $44.9 million
discretionary line of credit. Pursuant to an agreement between Aristech and the
commercial bank regarding such termination of the facility, on October 29, 1999,
Aristech made a principal repayment of $15.0 million, and on November 30, 1999,
Aristech will repay the remaining principal amount outstanding on this facility
of $29.9 million.
MC has confirmed with Aristech that they intend to fully support Aristech,
including providing any necessary replacement financing at competitive rates.
In September and October 1999, Aristech entered into three interest rate swap
agreements aggregating $100.0 million in notional principal amount with a
commercial bank as swap counterparty. The swap structure involves the exchange
of interest cash flows for a minimum of three years and potentially a maximum of
seven years. For the first three years starting November 15, 1999, Aristech will
pay a weighted average fixed rate of 6.185% in exchange for receiving a fixed
rate of 6.875%, resulting in total savings to Aristech approximating $2.1
million. Subsequently, for the last four years, Aristech is obligated to pay a
variable rate equal to six-month LIBOR in exchange for receiving a fixed rate of
6.875%. The swap counterparty has the option to terminate the arrangement on
selected dates during the final four years of the arrangement.
During 1999, the Company implemented measures to reduce certain of its future
operating and selling, general and administrative expenses. As one of the
measures, an incentive was offered to employees covered under the Aristech
Salaried Pension Plan to voluntarily elect early retirement in exchange for
certain increased pension and severance benefits. The additional costs incurred
by the Company for the voluntary retirees, totaled $2.4 million for the nine
months ended September 30, 1999. In addition to the cost reduction measures
under the voluntary retirement program, the Company commenced an involuntary
separation program. The additional costs incurred by the Company for the
involuntary separation program totaled $2.6 million for the nine months ended
September 30, 1999. Any remaining costs associated with the involuntary
separation program will not have a material adverse effect on the Company's
financial position, results of operations or its cash flows. The benefits of the
Company's cost reduction measures will primarily affect years subsequent to
1999.
On March 10, 1999, the Company's Board of Directors declared a cash dividend of
$242 per common share payable on March 31, 2000, to stockholders of record as of
March 10, 1999. The total amount of the dividend was $3.6 million.
The Company anticipates that the remaining outstanding fixed capital commitments
connected to the capacity expansion program, and future working capital
requirements will be funded by cash flows from operations, additional borrowings
under existing line of credit agreements, and an agreement to be arranged with
MC.
12
<PAGE> 13
CAPITAL EXPENDITURES
The Company continued to invest in plant capacity expansion during 1999 as
evidenced by capital expenditures totaling $154.2 million. The 1999 capital
expenditures have been funded by cash flows from operating activities, net
short-term borrowings of $39.0 million and net additional long-term borrowings
of $73.0 million, offset by a $8.4 million reduction in the accounts receivable
financing facility. Both the 1999 and 1998 capital expenditures reflect planned
production capacity expansions within its phenol product line at Haverhill,
Ohio, its polypropylene product line at LaPorte, Texas, and its acrylic sheet
product line at Florence, Kentucky. During the third quarter of 1999, the
Company completed and placed in service its new polypropylene facility at
LaPorte, Texas. At September 30, 1999, the Company has remaining outstanding
fixed commitments for capital expenditures totaling $13.9 million.
YEAR 2000 READINESS DISCLOSURE
The Company's Year 2000 ("Y2K") project team is working on making the Company's
systems, both information technology and non-information technology, ready for
the next millennium. The team has completed its assessment phase for Y2K impacts
and costs of upgrading or replacing systems that are not Y2K ready, and testing
and monitoring systems for Y2K readiness. Current efforts are focused on testing
and reviewing work that has been completed. The Company believes that its
internal systems are ready for the millennium change to occur, and will not
cause any significant disruption to its ability to do business. Costs incurred
from inception through September 30, 1999 were approximately $7.7 million.
The Company is contacting major customers and suppliers to seek assurance of
their intent to be Y2K ready, and is responding to customer requests for
information on the Company's Y2K project. The Company cannot control whether
third parties, including governments, upon which the Company relies will be
fully Y2K compliant by December 31, 1999.
Despite the Company's belief that its systems are Y2K ready, the failure to
correct a material Y2K problem could result in an interruption in, or a failure
of, certain normal business activities or operations. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Y2K
problem, resulting in part from the uncertainty of Y2K readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Y2K failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Company's Y2K
project is expected to significantly reduce its level of uncertainty about the
Y2K problem including the possibility of significant interruptions of normal
operations and, in particular, about the Y2K compliance and readiness of others
with whom it has material commercial arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On an annual basis, approximately 85-90% of the Company's sales are sold
domestically, with the remaining 10-15% representing export sales. Sales in
currencies other than the US dollar are insignificant thereby minimizing any
market risk exposure due to changes in foreign exchange rates.
The Company does not currently engage in any significant investing activities as
available funds are used for business expansion, thereby eliminating any
investment-related market risk exposure.
The Company does, however, focus on its interest rate risk management primarily
to minimize risk and reduce the overall cost of funding provided to the Company.
The Company has strategically financed its business expansion with diverse and
cost-effective debt instruments at both fixed and variable interest rates. The
majority of the Company's variable rate long-term debt is currently based on the
London Interbank Offered Rate ("LIBOR"). A hypothetical 1% increase in the
interest rate for the Company's variable rate long-term debt would increase
annual interest expense by approximately $3.6 million. Actual changes in
interest rates may differ from hypothetical changes. This analysis does not take
into effect other changes that might occur in the economic environment due to
such changes in short-term interest rates. The Company's debt instruments are
monitored continually to eliminate, to the extent possible, any significant
interest rate risk exposure.
13
<PAGE> 14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The Company does not enter into any material fixed purchase or fixed supply
contracts with its suppliers or customers, or engage in any material hedging
activities to mitigate any related commodity price risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company becomes involved from time to time in various claims and
lawsuits incidental to the ordinary course of its business.
The Company is subject to pervasive environmental laws and regulations
concerning the production, handling, storage, transportation, emission
and disposal of waste materials and is also subject to other federal
and state laws and regulations regarding health and safety matters.
These laws and regulations are constantly evolving, and it is
impossible to predict accurately the effect these laws and regulations
will have on the Company in the future.
The Company is also the subject of, or party to, a number of other
pending or threatened legal actions involving a variety of matters. In
the opinion of management, any ultimate liability arising from these
contingencies, to the extent not otherwise provided for, should not
have a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the Company.
Aristech is involved, often along with other defendants, in product
liability lawsuits filed in federal and state courts in several
jurisdictions; many of these cases involve multiple plaintiffs.
Although Aristech is sometimes a named defendant, more typically
Aristech has assumed the defense for USX Corporation in these cases as
a result of contractual obligations to do so for claims arising out of
the business of the former USS Chemicals Division of USX Corporation. A
majority of these cases have typical and similar factual allegations,
that during the course of the plaintiffs' employment with other
companies they were exposed to benzene or benzene-containing products
manufactured by the various defendants, including the former USS
Chemicals Division of USX Corporation or Aristech. Plaintiffs contend
that the alleged exposures caused physical injuries. Plaintiffs in
these cases typically seek relief in the form of monetary damages,
often in unspecified amounts. The claimed monetary damages in these
cases, when taken in the aggregate may be substantial; however,
Aristech does not believe that the claimed monetary damages are a
realistic measure of either the cost to defend or resolve the cases.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Effective October 6, 1999, the employment of Charles P. Costanza was
terminated as a result of the elimination of the position of Senior
Vice President - Manufacturing.
Effective October 7, 1999, the employment of Mark K. McNally was
terminated as a result of the elimination of the position of Senior
Vice President - General Counsel and Secretary.
14
<PAGE> 15
OTHER INFORMATION (CONTINUED)
Effective October 8, 1999, Matthew C. Cairone was elected as General
Counsel and Secretary by the Executive Committee of the Board of
Directors of Aristech.
On November 2, 1999, Michael J. Prendergast informed Aristech of his
intention to resign as Senior Vice President, Chief Financial Officer
and Treasurer. Mr. Prendergast will continue to serve in his current
capacity with Aristech until November 8, 1999.
Effective November 8, 1999, Michael P. DiClemente was elected Treasurer
by the Executive Committee of the Board of Directors of Aristech.
Effective November 8, 1999, Gregory Cummings, currently the Corporate
Comptroller, was appointed by the Executive Committee of the Board of
Directors of Aristech to serve as the Acting Chief Financial Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
On October 21, 1999, H. Patrick Jack, Aristech's President and Chief
Operating Officer executed a Form of Change in Control Agreement with
Aristech Chemical Corporation which is hereby incorporated by reference
(See Exhibit 10.06 of the Company's Form S-4 filed December 16, 1996) and
which is effective as of September 28, 1998.
On November 12, 1999, Dennis R. Henderson, Aristech's Senior Vice
President-Chemicals executed a Form of Change in Control Agreement with
Aristech Chemical Corporation which is hereby incorporated by reference
(See Exhibit 10.06 of the Company's Form S-4 filed December 16, 1996) and
which is effective as of July 1, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aristech Chemical Corporation
By /s/ GREGORY CUMMINGS
----------------------
Gregory Cummings
Corporate Comptroller and
Acting Chief Financial Officer
November 12, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 22,446
<ALLOWANCES> 341
<INVENTORY> 109,594
<CURRENT-ASSETS> 162,525
<PP&E> 1,315,950
<DEPRECIATION> 356,273
<TOTAL-ASSETS> 1,302,954
<CURRENT-LIABILITIES> 207,853
<BONDS> 523,495
0
0
<COMMON> 0
<OTHER-SE> 356,630
<TOTAL-LIABILITY-AND-EQUITY> 1,302,954
<SALES> 567,662
<TOTAL-REVENUES> 567,662
<CGS> 493,503
<TOTAL-COSTS> 578,665
<OTHER-EXPENSES> 685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,820
<INCOME-PRETAX> (31,138)
<INCOME-TAX> (9,813)
<INCOME-CONTINUING> (21,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,325)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
