<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 June 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 June 30, 1999: 14,908 shares
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INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
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 13
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 14
</TABLE>
2
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ARISTECH CHEMICAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 191.8 $ 208.9 $ 375.7 $ 433.1
Operating Costs:
Cost of sales 162.5 167.0 321.4 341.3
Selling, general and administrative expenses 14.6 15.2 31.1 29.6
Depreciation and amortization 14.0 13.0 27.7 26.0
-------- -------- -------- --------
Total Operating Costs 191.1 195.2 380.2 396.9
-------- -------- -------- --------
Operating Income (Loss) 0.7 13.7 (4.5) 36.2
Net Gain (Loss) on Disposal of Assets 0.1 0.2 0.2 (1.2)
Other Expense, Net 0.2 (0.3) -- (0.3)
Interest Income 0.5 0.5 1.0 0.8
Interest Expense (6.5) (7.2) (12.8) (13.9)
-------- -------- -------- --------
Income (Loss) Before Income Taxes (5.0) 6.9 (16.1) 21.6
Provision for (benefit from) Income Taxes -- 3.2 (4.2) 9.2
-------- -------- -------- --------
Income (Loss) Before Minority Interest (5.0) 3.7 (11.9) 12.4
Minority Interest 0.9 0.7 1.5 1.4
-------- -------- -------- --------
Net Income (Loss) $ (5.9) $ 3.0 $ (13.4) $ 11.0
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ARISTECH CHEMICAL CORPORATION
Consolidated Balance Sheets
(Dollars in Millions)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 4.1 $ 1.1
Receivables (less allowance for doubtful accounts of $.3 and
$.2 at June 30, 1999 and December 31, 1998, respectively) 15.8 4.4
Subordinated note receivable-related party 13.6 17.9
Inventories 107.3 124.3
Other current assets 1.3 1.1
Deferred income taxes 10.1 --
---------- ----------
Total Current Assets 152.2 148.8
Property, plant and equipment, net 946.1 845.5
Long-term receivables 7.9 8.0
Excess cost over assets acquired 159.6 162.2
Deferred income taxes 1.4 1.4
Other assets 13.3 16.2
---------- ----------
Total Assets $ 1,280.5 $ 1,182.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 61.8 $ 54.6
Accounts payable-related parties 3.4 3.9
Payroll and benefits payable 10.0 9.3
Accrued taxes 6.7 7.3
Deferred income taxes -- 0.5
Short-term borrowings 68.8 45.9
Long-term debt due within one year 0.7 0.7
Other current liabilities 22.9 21.0
---------- ----------
Total Current Liabilities 174.3 143.2
Long-term debt-related parties 208.0 135.0
Long-term debt-other 315.7 316.0
Deferred income taxes 168.0 160.3
Other liabilities 41.1 38.7
---------- ----------
Total Liabilities 907.1 793.2
---------- ----------
Minority Interest 8.9 7.4
---------- ----------
Common stock ($.01 par value, 20,000 shares authorized, 14,908
shares issued at June 30, 1999 and December 31, 1998) -- --
Additional paid-in capital 382.5 382.5
Retained deficit (18.0) (1.0)
---------- ----------
Total Stockholders' Equity 364.5 381.5
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,280.5 $ 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>
Six Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (13.4) $ 11.0
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 25.1 23.4
Amortization of excess cost over assets acquired 2.6 2.6
Deferred income taxes (2.9) (2.1)
Discount on sale of receivables 3.0 2.0
(Gain) loss on disposal of assets (0.2) 1.4
(Increase) decrease in receivables (5.3) 1.8
(Increase) decrease in inventories 17.0 (1.7)
Increase (decrease) in accounts payable and
other current liabilities 5.0 (23.5)
Minority interest in consolidated subsidiaries 1.5 1.4
Other 3.7 3.3
-------- --------
Net Cash Provided by Operating Activities 36.1 19.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (126.1) (114.0)
Other 0.1 (0.1)
-------- --------
Net Cash Used in Investing Activities (126.0) (114.1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 22.9 2.8
Repayment of long-term debt (56.0) (118.0)
Principal repayments under capital leases (0.3) (0.3)
Proceeds from issuance of long-term debt 129.0 133.0
Net increase (decrease) in receivables financing facility (4.8) 82.4
Dividends paid -- (4.0)
Other 2.1 --
-------- --------
Net Cash Provided by Financing Activities 92.9 95.9
NET INCREASE IN CASH AND EQUIVALENTS 3.0 1.4
Cash and Equivalents, Beginning of Year 1.1 3.9
-------- --------
Cash and Equivalents, End of Period $ 4.1 $ 5.3
======== ========
</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 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 Chemical
Corporation include the accounts of the Company and its 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
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ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
NOTE B - INVENTORIES
Inventories consist of the following at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
(In Millions)
<S> <C> <C>
Raw materials $ 34.2 $ 34.9
Finished products 63.0 79.4
Supplies and sundry items 19.6 19.5
Lower of cost or market reserve (9.5) (9.5)
-------- --------
Total Inventory $ 107.3 $ 124.3
======== ========
</TABLE>
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at June 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
(In Millions)
<S> <C> <C>
Land $ 13.9 $ 14.1
Buildings 70.4 66.7
Machinery and equipment 853.1 831.4
Intangible assets 28.9 28.9
Construction in process 321.7 224.4
-------- --------
1,288.0 1,165.5
Accumulated depreciation (341.9) (320.0)
-------- --------
Property, Plant and Equipment, Net $ 946.1 $ 845.5
======== ========
</TABLE>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Interest June 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 15.6 15.9
Other 1.6 1.7
-------- --------
524.4 451.7
Less amount due within one year (0.7) (0.7)
-------- --------
Total Long-term Debt $ 523.7 $ 451.0
======== ========
</TABLE>
7
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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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
(In millions)
<S> <C> <C> <C> <C>
Sales:
Chemicals $ 105.5 $ 120.2 $ 212.0 $ 254.8
Polymers 88.4 90.4 168.3 181.5
Intersegment sales (2.1) (1.7) (4.6) (3.2)
---------- ---------- ---------- ----------
$ 191.8 $ 208.9 $ 375.7 $ 433.1
========== ========== ========== ==========
Operating income (loss):
Chemicals $ (3.9) $ 10.7 $ (8.4) $ 26.7
Polymers 4.6 3.0 3.9 9.5
---------- ---------- ---------- ----------
$ 0.7 $ 13.7 $ (4.5) $ 36.2
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Total assets:
Chemicals $ 678.2 $ 658.4
Polymers 602.3 523.7
---------- ----------
$ 1,280.5 $ 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 June 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 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999, Aristech entered into an Amended and Restated Term
Loan and Revolving Credit Agreement ("Agreement") with Mitsubishi International
Corporation ("MIC"), dated as of and retroactive to April 1, 1999, that provided
for the conversion of its existing $200.0 million Revolving Loan with MIC into a
$130.0 million Term Loan and a $70.0 million Revolving loan. The Agreement also
provided for a reduction in the variable interest rates charged on the converted
loans. Concurrently, Aristech Acrylics LLC entered into an Amended and Restated
Term Loan Agreement with MIC, dated as of and retroactive to April 1, 1999 that
also provides for a reduction in the variable interest rate on the $50.0 million
Term Loan with MIC. In the aggregate, these Agreements are anticipated to reduce
the Company's annual interest expense by approximately $0.8 million. The stated
maturity date for both Agreements of April 18, 2002 remained unaffected by the
April 1, 1999 amendments.
Note D to the Consolidated Financial Statements reflects the April 1, 1999
conversion of the $200 million Revolving Loan - MIC into the $130.0 million Term
Loan - MIC and the $70.0 million Revolving Loan - MIC.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussions in this quarterly report contain both historical information and
forward-looking statements. The forward-looking statements involve risks and
uncertainties that affect the Company's operations, markets, products, services,
prices and factors discussed in the Company's filings with the Securities and
Exchange Commission. These risks and uncertainties include, but are not limited
to, economic, competitive, governmental and technological factors. Accordingly,
there is no assurance that the Company's expectations will be realized.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998.
During the three-month period ended June 30, 1999 when compared with the same
period for 1998, the Company's net sales decreased by $17.1 million or 8% from
$208.9 million to $191.8 million. This decrease is primarily due to an 8%
decline in average net selling prices per pound shipped. Net sales for Chemicals
decreased by $14.7 million or 12% from the three month period ended June 30,
1998, which was caused primarily by a 12% decline in the average selling price
per pound shipped. Net sales for Polymers decreased by $2.0 million or 2% from
the three month period ended June 30, 1998, which was caused by a 4% decline in
the average selling price per pound shipped, despite a 2% increase in shipment
volumes.
Total operating costs decreased by $4.1 million or 2% from $195.2 million for
the three months ended June 30, 1998 to $191.1 million for the three months
ended June 30, 1999. The decrease in operating costs was primarily caused by a
$4.5 million decrease in the Company's cost of sales for the three month period
ended June 30, 1999 when compared with the same period for 1998. The decrease in
cost of sales was primarily attributable to lower unit raw material prices.
The Company's total interest expense before interest capitalization was $10.6
million for the three month period ended June 30, 1999 and $8.9 million for the
same period in 1998, a $1.7 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 $4.2 million and $1.8
million for the three months ended June 30, 1999 and 1998, respectively.
The Company's provision for income taxes decreased by $3.2 million and was
caused primarily by an $11.9 million decrease in pretax income for the three
month period ended June 30, 1999 when compared with the same period for 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998.
During the six-month period ended June 30, 1999 when compared with the same
period for 1998, the Company's net sales decreased by $57.4 million or 13% from
$433.1 million to $375.7 million. This decrease is primarily due to a 13%
decline in average net selling prices per pound shipped. Net sales for Chemicals
decreased by $42.8 million or 17% from the six month period ended June 30, 1998,
which was caused by an 15% decline in the average selling price per pound
shipped and a 3% decrease in shipment volumes. Net sales for Polymers decreased
by $13.2 million or 7% from the six month period ended June 30, 1998, which was
caused by a 10% decline in the average selling price per pound shipped, despite
a 3% increase in shipment volumes.
10
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED).
Total operating costs decreased by $16.7 million or 4% from $396.9 million for
the six months ended June 30, 1998 to $380.2 million for the six months ended
June 30, 1999. The decrease in operating costs was primarily caused by a $19.9
million decrease in the Company's cost of sales for the six month period ended
June 30, 1999 when compared with the same period for 1998. The decrease in cost
of sales was primarily attributable to an 18% 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 16%, while the Polymers average raw materials price per pound,
which includes primarily propylene, decreased by approximately 21%. 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 $1.4 million from a loss of $1.2
million for the six month period ended June 30, 1998 to a net gain of $0.2
million for the same period in 1999 and was due primarily to the 1998 write-off
of an obsolete asset.
The Company's total interest expense before interest capitalization was $20.4
million for the six month period ended June 30, 1999 and $16.4 million for the
same period in 1998, a $4.0 million increase from 1998. The additional interest
expense primarily reflects net increased short and long-term borrowings of
$162.0 million since June 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 six months ended June 30, 1999 and 1998 was 6.1% and
6.5%, respectively. The Company capitalized interest in connection with the
capacity expansions of $7.6 million and $2.5 million for the six months ended
June 30, 1999 and 1998, respectively.
The Company's provision for income taxes decreased by $13.4 million from an
expense of $9.2 million for the six months ended June 30, 1998 to a benefit of
$4.2 million for the same period in 1999. The decrease in income tax expense was
caused primarily by a $37.7 million decrease in pretax income for the six months
ended June 30, 1999 when compared with the same period for 1998.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1999, the Company's working capital balance decreased
by $27.7 million from $5.6 million at December 31, 1998 to a deficit balance of
$22.1 million at June 30, 1999. The decrease in working capital is due primarily
to net additional short-term borrowings of $22.9 million drawn primarily under
the Company's newly established lines of credit. The Company opted to finance
approximately one-fifth 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 $17.0 million decrease in
inventories, offset by the $10.1 million recognition of a deferred tax asset
resulting from the anticipated utilization of federal income tax net operating
loss carrybacks.
The Company's net cash provided by operating activities increased by $16.5
million from $19.6 million for the six months ended June 30, 1998 to $36.1
million for the six months ended June 30, 1999. The 1999 increase in operating
cash flows occurred primarily as a result of change in the composition of the
items comprising working capital, offset by the $24.4 million decrease in net
income for the six months ended June 30, 1999, when compared with the same
period for 1998.
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 $90.0 million. As
of June 30, 1999, the Company had outstanding borrowings under these lines of
credit totaling $68.8 million. During the second quarter of 1999, Aristech
Acrylics LLC increased the maximum borrowing limit under its short-term
unsecured revolving line of credit from $5.0 million to $15.0 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.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the first half of 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 six months ended June 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 six months ended
June 30, 1999. 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 and additional
borrowings under existing line of credit agreements.
CAPITAL EXPENDITURES
The Company continued to invest in plant capacity expansion during the first
half of 1999 as evidenced by capital expenditures totaling $126.1 million. The
1999 capital expenditures have been funded by cash flows from operating
activities, net short-term borrowings of $22.9 million and net additional
long-term borrowings of $73.0 million, offset by a $4.8 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. The Company
anticipates that these expansions will be completed and placed in service during
late 1999. At June 30, 1999, the Company has remaining outstanding fixed
commitments for capital expenditures totaling $38.0 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. Phases where current efforts are
focused include upgrading or replacing systems, systems testing, and contingency
planning. The Company believes the project will be completed by October 1999.
Costs incurred from inception through June 30, 1999 were approximately $7.3
million. Total Y2K project costs are expected to range from $8.0 million to
$10.0 million. The Company does not expect the Y2K project costs to have a
material effect on its financial position or results of operations. The costs of
the Y2K project and the time by which the Company expects to complete it are
based on management's best estimates, which were derived using numerous
assumptions of future events including the availability of certain resources,
third party modifications, and other factors. There is no guarantee that these
estimates will be achieved and actual results could differ from these plans.
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.
12
<PAGE> 13
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
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 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.
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. A
discussion of certain of these matters is included in Note F to the
Consolidated Financial Statements.
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.
13
<PAGE> 14
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
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
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/ MICHAEL J. PRENDERGAST
--------------------------
Michael J. Prendergast
Senior Vice President and
Chief Financial Officer
August 6, 1999
14
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