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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
1000 Ashland Drive
Russell, Kentucky 41169
Telephone Number: (606) 329-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g): None
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / X /
At October 30, 1998, based on the New York Stock Exchange closing
price, the aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $3,249,504,576. In determining this
amount, the Registrant has assumed that directors, certain of its executive
officers, and persons known to it to be the beneficial owners of more than
five percent of its common stock are affiliates. Such assumption shall not
be deemed conclusive for any other purpose.
At October 30, 1998, there were 75,057,315 shares of Registrant's
common stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's Annual Report to Shareholders for the fiscal
year ended September 30, 1998 are incorporated by reference into Parts I
and II.
Portions of Registrant's definitive Proxy Statement for its January
28, 1999 Annual Meeting of Shareholders are incorporated by reference into
Part III.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business ....................................................... 1
Ashland Chemical....................................... 1
APAC................................................... 3
Valvoline.............................................. 4
Refining and Marketing................................. 5
Arch Coal.............................................. 7
Miscellaneous.......................................... 9
Item 2. Properties...................................................... 12
Item 3. Legal Proceedings............................................... 12
Item 4. Submission of Matters to a
Vote of Security Holders...................................... 13
Item X. Executive Officers of Ashland................................... 13
PART II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters....................................... 14
Item 6. Selected Financial Data......................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 14
Item 8. Financial Statements and Supplementary Data..................... 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 14
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 14
Item 11. Executive Compensation.......................................... 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 14
Item 13. Certain Relationships and Related Transactions.................. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................... 15
PART I
ITEM 1. BUSINESS
Ashland Inc. is a Kentucky corporation, organized on October 22, 1936,
with its principal executive offices located at 1000 Ashland Drive,
Russell, Kentucky 41169 (Mailing Address: P.O. Box 391, Ashland, Kentucky
41114) (Telephone: (606) 329-3333). Effective January 4, 1999, Ashland's
principal executive offices will be located at 50 E. RiverCenter Boulevard,
Covington, Kentucky 41012 (Mailing Address: 50 E. RiverCenter Boulevard,
P.O. Box 391, Covington, Kentucky 41012-0391) (Telephone: (606) 815-3333).
The terms "Ashland" and the "Company" as used herein include Ashland Inc.
and its consolidated subsidiaries, except where the context indicates
otherwise.
Ashland's businesses are grouped into five industry segments: Ashland
Chemical, APAC, Valvoline, Refining and Marketing and Arch Coal. Financial
information about these segments for the three fiscal years ended September
30, 1998 is set forth on Pages 60 and 61 of Ashland's Annual Report to
Shareholders for the fiscal year ended September 30, 1998 ("Annual
Report").
Ashland Chemical distributes industrial chemicals, solvents,
thermoplastics and resins, and fiberglass materials, and manufactures and
sells a wide variety of specialty chemicals and certain petrochemicals.
APAC performs contract construction work, including highway paving and
repair, excavation and grading, and bridge construction, and produces
asphaltic and ready-mix concrete, crushed stone and other aggregate,
concrete block and certain specialized construction materials in the
southern and midwestern United States.
Valvoline is a marketer of branded, packaged motor oil and automotive
chemicals, automotive appearance products, antifreeze, filters, rust
preventives and coolants. In addition, Valvoline is engaged in the "fast
oil change" business through outlets operating under the Valvoline Instant
Oil Change(R) name.
Effective January 1, 1998, Ashland and USX-Marathon completed a
transaction to form Marathon Ashland Petroleum LLC ("MAP"), which combined
major portions of the supply, refining, marketing and transportation
operations of the two companies. Marathon has a 62% interest in MAP, and
Ashland holds a 38% interest. MAP operates seven refineries with a total
crude oil refining capacity of 935,000 barrels per day. Refined products
are distributed through a network of independent and company-owned outlets
in the Midwest, the upper Great Plains and the southeastern United States.
Ashland accounts for its investment in MAP using the equity method of
accounting.
Ashland's coal operations are conducted by Arch Coal, Inc., which is
owned 55% by Ashland and is publicly traded. Arch Coal produces,
transports, processes and markets bituminous coal produced in Central
Appalachia and the western and midwestern United States. Ashland accounts
for its investment in Arch Coal using the equity method of accounting.
At September 30, 1998, Ashland and its consolidated subsidiaries had
approximately 21,200 employees (excluding contract employees).
ASHLAND CHEMICAL
Ashland Chemical Company, a division of Ashland, is engaged in the
manufacture, distribution and sale of a wide variety of chemicals, fine
ingredients and plastic products. Ashland Chemical owns and operates 36
manufacturing facilities and participates in 13 manufacturing joint
ventures in 11 states and 19 foreign countries. In addition, Ashland
Chemical owns or leases approximately 100 distribution facilities in North
America and 25 distribution facilities in 17 foreign countries. Ashland
Chemical is comprised of the following operations:
DISTRIBUTION
INDUSTRIAL CHEMICALS & SOLVENTS DIVISION - This division markets
specialty chemicals, additives and solvents to industrial chemical users in
major markets through distribution centers in the United States, Canada,
Mexico and Puerto Rico. It distributes approximately 7,000 chemicals,
solvents, additives and raw materials made by many of the nation's leading
chemical manufacturers and a growing number of offshore producers. It
specializes in supplying mixed truckloads and less-than-truckload
quantities to many industries, including the paint and coatings, inks,
adhesives, polymer, rubber, industrial and institutional compounding,
automotive, appliance and paper industries. It also offers customers
chemical waste collection, disposal and recycling services, working in
cooperation with major chemical waste services companies.
1
GENERAL POLYMERS DIVISION - This division markets a broad range of
thermoplastic resins to injection molding, extruders, blow molders, and
rotational molders in the plastics industry through distribution locations
in the United States, Canada, Mexico and Puerto Rico. It also provides
plastic material transfer and packaging services and less-than-truckload
quantities of packaged thermoplastics. The division's basic resins group
markets bulk wide-spec and off-grade thermoplastic resins to a variety of
proprietary processors in North America.
FRP SUPPLY DIVISION - This division markets to customers in the
reinforced plastics and cultured marble industries mixed truckload and
less-than-truckload quantities of polyester resins, fiberglass and other
specialty reinforcements, catalysts and allied products from distribution
locations located throughout North America.
FINE INGREDIENTS DIVISION - This division distributes cosmetic and
pharmaceutical specialty chemicals and food-grade and nutritional additives
and ingredients across North America.
ASHLAND PLASTICS EUROPE - This division markets a broad range of
thermoplastics to processors in Europe. Ashland Plastics Europe has
distribution centers located in Belgium, Finland, France, Germany, Ireland,
Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom and
has compounding manufacturing facilities located in Italy and Spain.
SPECIALTY CHEMICALS
COMPOSITE POLYMERS DIVISION - This division manufactures and sells a
broad range of chemical-resistant, fire-retardant and general-purpose
grades of unsaturated polyester and vinyl ester resins for the reinforced
plastics industry. Key markets include the transportation, construction and
marine industries. It has manufacturing plants in Jacksonville, Arkansas;
Los Angeles, California; Bartow, Florida; Ashtabula, Ohio; Philadelphia,
Pennsylvania; Kelowna, British Columbia, Canada; Benicarlo, Spain; and
through a joint venture in Jeddah, Saudi Arabia. In addition, the division
also manufactures products through other Ashland Chemical facilities
located in Mississauga, Ontario, Canada and Neville Island, Pennsylvania.
FOUNDRY PRODUCTS DIVISION - This division manufactures and sells
foundry chemicals worldwide, including sand-binding resin systems,
refractory coatings, release agents, engineered sand additives, riser
sleeves, and die lubricants. This division serves the global metal casting
industry from 22 locations in 18 countries.
DREW INDUSTRIAL DIVISION - This division supplies specialized
chemicals and consulting services for the treatment of boiler water,
cooling water, steam, fuel and waste streams. It also supplies process
chemicals and technical services to the pulp and paper and mining
industries and additives to manufacturers of latex and paint. It conducts
operations throughout North America, Europe and the Far East through
subsidiaries, joint venture companies and distributors. The division has
manufacturing plants in Kansas City, Kansas; Kearny, New Jersey; Houston,
Texas; Ajax, Ontario, Canada; Somercotes, England; Singapore; Sydney and
Perth, Australia; and Auckland, New Zealand.
ELECTRONIC CHEMICALS DIVISION - This division manufactures and sells a
variety of ultrapure chemicals for the worldwide semiconductor industry
through various manufacturing locations and also custom blends and packages
ultrapure liquid chemicals to customer specifications. It recently opened a
new $45 million state-of-the-art manufacturing facility in Pueblo,
Colorado. The division also operates manufacturing plants in Newark,
California; Milan, Italy; Easton, Pennsylvania; and Dallas, Texas. In
addition, it enters into long-term agreements to provide complete on-site
chemical management services, including purchasing, warehousing and
delivering chemicals for in-plant use, at major facilities of large
consumers of high purity chemicals. This division formed a joint venture
with Union Petrochemical Corporation of Taipei, Taiwan to build and operate
an ultrapure process chemicals manufacturing facility in Taiwan. In
addition, the division has acquired property in Korea to build a facility
to manufacture specialty stripper products for semiconductor manufacturing.
SPECIALTY POLYMERS & ADHESIVES DIVISION - This division manufactures
and sells specialty phenolic resins for paper impregnation and friction
material bonding; acrylic polymers for pressure-sensitive adhesives;
emulsion polymer isocyanate adhesives for structural wood bonding;
polyurethane and epoxy structural adhesives for bonding fiberglass
reinforced plastics, composites, thermoplastics and metals in automotive,
recreational, and industrial applications; induction bonding systems for
thermoplastic materials; elastomeric polymer adhesives and butyl rubber
roofing tapes for commercial roofing applications; and vapor curing,
high-performance urethane coatings systems. It has manufacturing plants in
Calumet City, Illinois; Norwood, New Jersey; Ashland and Columbus, Ohio;
and Totowa, New Jersey.
2
DREW MARINE DIVISION - This division supplies specialty chemicals for
water and fuel treatment and general maintenance, as well as sealing
products, welding and refrigerant products and fire fighting and safety
services to the world's merchant marine fleet. Drew Marine currently
provides shipboard technical service for more than 10,000 vessels from more
than 100 locations serving 600 ports throughout the world.
PETROCHEMICALS
This division manufactures maleic anhydride at Neal, West Virginia,
and Neville Island, Pennsylvania, and methanol near Plaquemine, Louisiana.
Its Energy Services business unit provides industrial and commercial
businesses with expert management of their total energy requirements, by
sourcing and supplying natural gas and natural gas liquids.
OTHER MATTERS
DUBLIN, OHIO HEADQUARTERS TECHNICAL CENTER EXPANSION - In October
1998, Ashland Chemical completed construction of a 115,000-square-foot
facility expanding its Technical Center in Dublin, Ohio.
For information on Ashland Chemical and federal, state and local
statutes and regulations governing releases into the environment or
protection of the environment, see "Item 1. Miscellaneous - Environmental
Matters" and "Item 3. Legal Proceedings - Environmental Proceedings."
APAC
The APAC group of companies performs construction work such as
paving, repairing and resurfacing highways, streets, airports, residential
and commercial developments, sidewalks and driveways; grading and base
work; and excavation and related activities in the construction of bridges
and structures, drainage facilities and underground utilities in 14
southern and midwestern states. APAC also produces and sells construction
materials, such as hot-mix asphalt and ready-mix concrete, crushed stone
and other aggregate and, in certain markets, concrete block and specialized
construction materials, such as architectural block.
To deliver its services and products, APAC utilizes extensive
aggregate-producing properties and construction equipment. It currently has
24 permanent operating quarry locations, 32 other aggregate production
facilities, 46 ready-mix concrete plants, 167 hot-mix asphalt plants and a
fleet of over 10,000 mobile equipment units, including heavy construction
equipment and transportation-related equipment.
Raw aggregate generally consists of sand, gravel, granite, limestone
and sandstone. About 24% of the raw aggregate produced by APAC is used in
APAC's own contract construction work and the production of various
processed construction materials. The remainder is sold to third parties.
APAC also purchases substantial quantities of raw aggregate from other
producers whose proximity to the job site render it economically feasible.
Most other raw materials, such as liquid asphalt, portland cement and
reinforcing steel, are purchased from third parties. APAC is not dependent
upon any one supplier or customer.
Approximately 60% of APAC's revenues are derived directly from highway
and other public sector sources. The other 40% are derived from industrial
and commercial customers, private developers and other contractors to the
public sector. The 1998 highway funding authorization package increased
federal funding for highways by $52 billion over a six-year period. More
importantly, the states in which APAC operates should see an average
increase in annual funding of 59% or $3.3 billion, based on current
estimates.
Climate and weather significantly affect revenues in the construction
business. Due to its location, APAC tends to enjoy a relatively long
construction season. Most of APAC's operating income is generated during
the construction period of May to October.
Total backlog at September 30, 1998 was $838 million, compared to $693
million at September 30, 1997. The backlog orders at September 30, 1998 are
considered firm, and a major portion is expected to be filled during fiscal
1999.
3
VALVOLINE
The Valvoline Company, a division of Ashland, is a marketer of
automotive and industrial oils, automotive chemicals, automotive appearance
products and automotive and environmental services, with sales in more than
140 countries. The Valvoline(R) trademark was federally registered in 1873
and is the oldest trademark for a lubricating oil in the United States.
Valvoline is comprised of the following business units:
NORTH AMERICAN PRODUCTS - This unit, Valvoline's largest division,
markets automotive, commercial, and industrial lubricants, automotive
chemicals and automotive appearance products to a broad network of North
American customers. This unit markets Valvoline branded motor oil, one of
the top selling brands in the U.S. private passenger car and light truck
market. In 1998, this unit introduced a line of premium synthetic
SynPower(R) automobile chemicals for "under-the-hood" use.
North American Products also markets Eagle One(R) automotive
appearance products, Zerex(R) antifreeze and Pyroil(R) automotive
chemicals. Zerex is the second leading antifreeze brand in the United
States. This division also markets R-12, an automotive refrigerant that was
phased out of production in 1995. R-12 is being replaced in the market by a
new generation of refrigerants.
The domestic commercial/fleet group of the North American Products
unit continued its strategic alliance with Cummins Engine Company to
distribute heavy-duty lubricants to the commercial market.
EAGLE ONE - Acquired in February 1998, Eagle One is a brand of premium
automobile chemicals for "above-the-hood" applications. Products include
waxes, polishes and wheel cleaners. Managed by Valvoline as a separate
business unit, Eagle One markets its products through Valvoline's North
American Products and Valvoline International divisions.
VALVOLINE INTERNATIONAL - Valvoline International markets Valvoline
branded products, TECTYL(R) rust preventives and Eagle One automotive
appearance products worldwide through company-owned affiliates or divisions
in Argentina, Australia, Austria, Belgium, Denmark, France, Germany, Great
Britain, Italy, the Netherlands, Poland, South Africa, Sweden and
Switzerland. Licensees and distributors market products in other parts of
Europe, Mexico, Central and South America, the Far East, the Middle East
and certain African countries. Joint ventures have been established in
Ecuador, India and the Netherlands. Packaging and blending plants and
distribution centers in Australia, Canada, Denmark, the Netherlands, Sweden
and the United States supply international customers.
VALVOLINE INSTANT OIL CHANGE(R) ("VIOC") - VIOC is one of the largest
competitors in the expanding U.S. "fast oil change" service business,
providing Valvoline with a significant share of the installed segment of
the passenger car and light truck motor oil market. As of September 30,
1998, 391 company-owned and 183 franchised service centers were operating
in 34 states.
In 1998, VIOC continued it's customer service innovation through its
Maximum Vehicle Performance program ("MVP"). MVP is a computer-based
program that maintains system-wide service records on all customer
vehicles. MVP also contains a database on all car models, which allows
employees to make service recommendations based on vehicle owner's manual
recommendations.
ECOGARD, INC. - Ecogard, Inc. through its First Recovery division,
collects used motor oil from a network of automotive aftermarket retailers
and service businesses in 48 states and Puerto Rico. Completing Valvoline's
"total fluid management" approach to customer service, First Recovery
provides an environmental service to Valvoline customers in the United
States, collecting used antifreeze and oil filters as well.
As a fulfillment of its strategy to market premium branded products
worldwide, Valvoline began construction in 1998 of a $4 million new product
development laboratory at its headquarters complex in Lexington, Kentucky.
The laboratory is expected to open in early calendar 1999.
4
REFINING AND MARKETING
Refining and Marketing operations are conducted by MAP and its
subsidiaries, including its wholly-owned subsidiary, Speedway SuperAmerica
LLC. As previously discussed, effective January 1, 1998, the major elements
of Ashland's and USX-Marathon's refining, marketing and transportation
operations were conveyed to MAP. Marathon has a 62% interest in MAP, and
Ashland holds a 38% interest.
REFINING
MAP owns and operates seven refineries with an aggregate refining
capacity of 935,000 barrels of crude oil per calendar day. The table below
sets forth the location and daily throughput capacity of each of MAP's
refineries as of September 30, 1998:
Garyville, Louisiana........................................ 232,000
Catlettsburg, Kentucky...................................... 222,000
Robinson, Illinois.......................................... 192,000
Detroit, Michigan.......................................... 74,000
Canton, Ohio............................................... 73,000
Texas City, Texas.......................................... 72,000
St. Paul Park, Minnesota................................... 70,000
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935,000
=======
MAP's refineries include crude oil atmospheric and vacuum
distillation, fluid catalytic cracking, catalytic reforming,
desulfurization and sulfur recovery units. The refineries have the
capability to process a wide variety of crude oils and to produce typical
refinery products, including reformulated gasoline ("RFG"). In addition to
typical refinery products, the Catlettsburg refinery manufactures
lubricating oils and a wide range of petrochemicals. During the nine months
ended September 30, 1998, 73% of MAP's production of lubricating oils was
purchased by Valvoline and 38% of MAP's production of petrochemicals was
purchased by Ashland Chemical.
MAP also produces asphalt cements, polymerized asphalt, asphalt
emulsions and industrial asphalts. Additionally, MAP manufactures petroleum
pitch, primarily used in the graphite electrode, clay target and refractory
industries.
The table below sets forth MAP's refinery input and refinery
production by product group for the nine months ended September 30, 1998.
Due to the recent formation of MAP, comparative information is not
available.
For the Nine Months ended
-------------------------
September 30, 1998
------------------
Refinery Input (In thousands of barrels per day)................................. 1,023.3
------------------------------------------------
Refined Product Yields (In thousands of barrels per day)
-------------------------------------------------------
Gasoline......................................................................... 539.8
Distillates...................................................................... 269.2
Propane.......................................................................... 20.9
Feedstocks & Special Products.................................................... 71.7
Heavy Fuel Oil................................................................... 47.4
Asphalt.......................................................................... 69.3
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Total............................................................ 1,018.3
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MAP and Epsilon Products Company have agreed to develop facilities
to produce 800 million pounds per year of polymer grade propylene and
polypropylene at the Garyville refinery. MAP will build and operate
facilities to produce polymer grade propylene. Production of the polymer
grade propylene is scheduled to begin in the second quarter of calendar
1999. Epsilon Products Company will construct and own the polypropylene
facilities and market its output.
5
MARKETING
MAP's principal marketing areas for gasoline, kerosene and light oils
include the Midwest, the upper Great Plains and the southeastern United
States. MAP's production of gasoline, kerosene and light fuel oils is sold
in 26 states through wholesale channels of distribution (including
company-owned and exchange terminals in 25 states) and at retail through
jobber and dealer-operated locations under the brand names Marathon(R) and
Ashland(R). Gasoline is sold at wholesale primarily to independent
marketers, jobbers and chain retailers who resell through several thousand
retail outlets principally under their own names, and also under the
Marathon and Ashland brand names. MAP also supplies lessee-dealer outlets
using the Marathon and Ashland brand names. Gasoline, kerosene, distillates
and aviation products are also sold to utilities, railroads, river towing
companies, commercial fleet operators, airlines and governmental agencies.
The table below shows the volume of MAP's consolidated refined product
sales for the nine months ended September 30, 1998.
For the Nine Months ended
-------------------------
September 30, 1998
------------------
Refined Product Sales (In thousands of barrels per day)
------------------------------------------------------
Gasoline......................................................................... 659.1
Distillates...................................................................... 312.9
Propane.......................................................................... 20.8
Feedstocks & Special Products.................................................... 68.8
Heavy Fuel Oil................................................................... 48.4
Asphalt.......................................................................... 73.7
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Total............................................................ 1,183.7
========
Matching Buy/Sell Volumes included in above...................................... 38.4
To comply with provisions of the 1990 Amendments to the Clean Air Act,
MAP sells RFG in a small part of its marketing territory where RFG is
required, primarily Chicago, Illinois; Louisville, Kentucky; Northern
Kentucky and Milwaukee, Wisconsin.
Retail sales of gasoline and diesel fuel are also made through MAP's
wholly-owned subsidiary, Speedway SuperAmerica LLC, which operates 2,291
stores in 19 states in the Southeast and Midwest under brand names
including Speedway(R), SuperAmerica(R), Rich(R), United, Bonded(R) and
others. The convenience store-gasoline locations offer consumers gasoline,
diesel fuel (at selected locations) and a broad mix of other products and
services, such as fresh-baked goods, automated teller machines, video
rentals, automotive accessories and a line of private-label items. The
truck stops offer diesel fuel, gasoline and a variety of other services
associated with such locations. Several truck stop and convenience store
locations also have on-premises brand-name restaurants.
During the nine months ended September 30, 1998, 64% of the revenues
(excluding excise taxes) of the Speedway SuperAmerica LLC stores were
derived from the sale of gasoline and diesel fuel and 36% of such revenues
were derived from the sale of merchandise.
SUPPLY AND TRANSPORTATION
The crude oil processed in MAP's refineries is obtained from
negotiated lease, contract and spot purchases or exchanges. For the nine
months ended September 30, 1998, MAP's negotiated lease, contract and spot
purchases of U.S. crude oil for refinery input averaged 333,900 barrels per
day (1 barrel = 42 United States gallons) including an average of 25,600
barrels per day acquired from Marathon Oil Company. For the nine months
ended September 30, 1998, MAP's foreign crude oil requirements were met
largely through purchases from various foreign national oil companies,
producing companies and traders. Purchases of foreign crude oil represented
63% of MAP's crude oil requirements for the nine months ended September 30,
1998.
In addition, MAP, through its subsidiaries, is actively engaged in
purchasing, selling and trading crude oil, principally at Midland, Texas;
Cushing, Oklahoma; and St. James, Louisiana, three of the major
distribution points for U.S. crude oil, as well as at major trading and
distribution hubs in western Canada.
6
MAP's ownership or interest in domestic pipeline systems in its
refining and marketing areas is significant. MAP owns, leases or has an
ownership interest in 9,981 miles of active pipeline in 16 states. This
network transports crude oil and refined products to and from terminals,
refineries and other pipelines. It includes 2,639 miles of crude oil
gathering lines, 4,485 miles of crude oil trunk lines and 2,857 miles of
refined product lines.
MAP has a 46.7% ownership interest in LOOP LLC ("LOOP"), which is the
owner and operator of the only U.S. deepwater port facility capable of
receiving crude oil from very large crude carriers. Ashland has retained a
4% ownership interest in LOOP. MAP also owns a 49.9% ownership interest in
LOCAP INC. ("LOCAP"), which is the owner and operator of a crude oil
pipeline connecting LOOP to the Capline system. Ashland has retained an
8.6% ownership interest in LOCAP. In addition, MAP has a 37.169% ownership
interest in the Capline system. These port and pipeline systems provide MAP
with access to common carrier transportation from the Louisiana Gulf Coast
to Patoka, Illinois. At Patoka, the Capline system connects with other
common carrier pipelines owned or leased by MAP which provide
transportation to MAP's refineries in Illinois, Kentucky, Michigan and
Ohio.
MAP also has a stock interest in Minnesota Pipe Line Company, which
owns a crude oil pipeline in Minnesota. Minnesota Pipe Line Company
provides MAP with access to 270,000 barrels per day nominal capacity of
crude oil common carrier transportation from Clearbrook, Minnesota to
Cottage Grove, Minnesota, which is in the vicinity of MAP's St. Paul Park,
Minnesota, refinery.
MAP's marine transportation operations include towboats and barges
that transport refined products on the Ohio, Mississippi and Illinois
rivers, their tributaries, and the Intracoastal Waterway. In addition, MAP
leases on a long-term basis two 80,000 deadweight ton tankers, which are
primarily used for third-party delivery of foreign crude oil to the United
States. These tankers are not essential for MAP to satisfy its own crude
oil requirements.
MAP leases rail cars in various sizes and capacities for movement of
petroleum products and chemicals. MAP also owns a large number of
tractor-trailers, tank trailers and general service trucks.
In addition, MAP owns and operates 88 terminal facilities from which
it sells a wide range of petroleum products. These facilities are supplied
by a combination of barges, pipeline, truck and rail. MAP also owns or
operates a number of other terminals that are used in connection with the
transportation of petroleum products or crude oil.
OTHER MATTERS
MAP experiences normal seasonal variations in its sales and operating
results. This seasonality is due primarily to increased demand for gasoline
during the summer driving season, higher demand for distillate during the
winter heating season and increased demand for asphalt from the road paving
industry during the construction season.
For information on MAP and federal, state and local statutes and
regulations governing releases into the environment or protection of the
environment, see "Item 1. Miscellaneous-Environmental Matters." For
information relating to certain environmental litigation retained by
Ashland, see "Item 3. Legal Proceedings-Environmental Proceedings."
ARCH COAL
Ashland owns approximately 55% of Arch Coal, Inc. ("Arch Coal"), a
publicly-traded corporation (NYSE:ACI) resulting from the merger of Ashland
Coal, Inc. and Arch Mineral Corporation on July 1, 1997. Arch Coal files
periodic reports, including annual reports on Form 10-K, pursuant to the
Securities Exchange Act of 1934.
Arch Coal is engaged in the production, transportation, processing and
marketing of bituminous and sub-bituminous coal produced in Central
Appalachia and the western and midwestern United States. Arch Coal is the
nation's second largest coal producer, with annual production that accounts
for almost 10% of annual U.S. coal production. Arch Coal concentrates
primarily on acquiring and developing low-sulfur steam coal reserves for
sale to electric utility customers in the United States and abroad. Arch
Coal relies on third-party rail, barge and truck transportation to deliver
coal to its domestic customers. Shipments to international customers are
made primarily from a terminal facility in Newport News, Virginia, and a
terminal facility in Los Angeles, California.
On June 1, 1998, Arch Coal acquired the Colorado and Utah coal
operations of Atlantic Richfield Company ("ARCO") and simultaneously
combined the acquired ARCO operations, Arch Coal's Wyoming operations and
ARCO's Wyoming operations in a new joint venture named Arch Western
Resources, LLC ("Arch Western"). Arch Western is 99% owned by Arch Coal and
1% owned by ARCO. All of the domestic coal reserves acquired from ARCO are
compliance coal, meeting the sulfur dioxide emissions requirements of Phase
II of the Clean Air Act.
7
The following discussion includes pro forma combined operating data
which gives effect to the merger of Ashland Coal and Arch Mineral (which
occurred on July 1, 1997) as if it had occurred at the beginning of each
period presented and to the acquisition of ARCO's U.S. operations as of
June 1, 1998. The pro forma combined operating data does not purport to
represent the operating results which would have been achieved had the
merger of Ashland Coal, Inc. and Arch Mineral Corporation actually occurred
as of the beginning of the periods presented or dates indicated, or of the
operating results which may be achieved in the future.
Arch Coal and its independent operating subsidiaries sold 67.3 million
tons of coal in the twelve months ended September 30, 1998, as compared to
53.7 and 50.6 million tons sold in the twelve months ended September 30,
1997 and 1996, respectively. Of the total tonnage sold in the twelve months
ended September 30, 1998 (which does not include tons sold by Canyon Fuel
as Arch Coal's interest therein is accounted for on the equity method),
approximately 76.5% was sold under long term contracts, as compared to
72.4% and 74.7% for the twelve months ended September 30, 1997 and 1996,
respectively, with the balance being sold on the spot market. In the twelve
months ended September 30, 1998, Arch Coal and its independent operating
subsidiaries sold 3.8 million tons of coal in the export market (which does
not include tons sold by Canyon Fuel), compared to 2.7 and 3.1 million tons
in the twelve months ended September 30, 1997 and 1996, respectively.
During the twelve months ended September 30, 1998, Arch Coal's
combined sales to affiliates of The Southern Company and affiliates of
American Electric Power accounted for approximately 13.1% and 12.9%,
respectively, of combined revenues from coal sales for such period. The
loss of such customers could have a material adverse effect on Arch Coal.
As of September 30, 1998, Arch Coal estimates it owned or controlled
measured (proven) and indicated (probable) coal reserves of approximately
3.4 billion tons, as set forth in the following table. Reserve estimates
are prepared by Arch Coal's engineers and geologists and are reviewed and
updated periodically. Total reserve estimates will change from time to time
reflecting mining activities, analysis of new engineering and geological
data, changes in reserve holdings and other factors. Anticipated losses
from extraction and, where applicable, washing of the coal have been
eliminated from the estimate. Arch Coal believes that a majority of these
reserves have a sulfur content of less than 1.6 pounds of sulfur dioxide
per million Btu, and a substantial portion have a sulfur content of less
than 1.2 pounds of sulfur dioxide per million Btu. Ashland has not made an
independent verification of the reserve estimate or sulfur content of the
estimated reserves.
RECOVERABLE COAL*
Measured Indicated Total
---------- --------- -----
(Thousands of Tons)
Central Appalachia ......................................... 1,018,098 436,789 1,454,887
Illinois ................................................... 308,579 101,499 410,078
Colorado ................................................... 120,917 25,872 146,789
Utah ....................................................... 135,082 91,454 226,536**
Wyoming .................................................... 1,067,510 43,449 1,110,959
Other ...................................................... 0 28,815 28,815
--------- ------- ---------
Total..................................... 2,650,186 727,878 3,378,064
========= ======= =========
* Does not include reserves associated with the Thundercloud Tract acquired in October, 1998.
** Represents 100% of the reserves held by Canyon Fuel Company, LLC, in which Arch Coal holds a 65%
interest.
8
On October 1, 1998, Arch Coal was the successful bidder on the
3,546 acre Thundercloud Tract in the Powder River Basin of Wyoming. The
Thundercloud Tract contains an estimated 412 million tons of demonstrated
coal reserves and is contiguous with Arch Coal's Black Thunder mine. Final
approval of this coal lease is expected following routine governmental
review.
Arch Coal's coal properties are either owned outright or controlled by
lease. Royalties paid to lessors on leased properties are either on a fixed
price per ton basis or on a percentage of the gross sales price basis. Most
of these leases run until the exhaustion of mineable and merchantable coal.
The remaining leases have primary terms ranging from one to 40 years from
the date of their execution, with most containing options to renew.
Approximately 73,778 acres of Arch Coal's total 638,518 acres of coal land
(which totals include 100% of the acreage held by Canyon Fuel Company, LLC,
in which Arch Coal holds a 65% interest) are leased from the federal
government with terms expiring between January 1, 1999 and October 1, 2015,
subject to readjustment and/or extension and to earlier termination for
failure to meet diligent development requirements. Those term and federal
leases covering principal reserves under Arch Coal's current mining plans
are not scheduled to expire prior to expiration of those plans in 2003 (at
Arch Coal's Coal Mac, Inc. operations) and 2006 (at the balance of Arch
Coal's operations). Mining plans are not necessarily indicative of the life
of the mine. The extent to which reserves will eventually be mined depends
upon a variety of factors, including future economic conditions and
governmental actions affecting both the mining and marketability of
low-sulfur steam coal.
Arch Coal's Apogee Coal Company and Hobet Mining, Inc. subsidiaries
are members of the Bituminous Coal Operators Association, and each is a
signatory to a collective bargaining agreement with the United Mine Workers
of America that expires on December 31, 2002. Two other Arch Coal
subsidiaries are signatories to collective bargaining agreements with
independent employee associations. Employees of the remainder of Arch
Coal's operating subsidiaries are not represented by labor unions.
For information on federal and state statutes and regulations
governing the coal industry, see "Item 1. Miscellaneous - Environmental
Matters."
MISCELLANEOUS
ENVIRONMENTAL MATTERS
Ashland has implemented a company-wide environmental policy overseen
by the Public Policy - Environmental Committee of Ashland's Board of
Directors. Ashland's Environmental, Health and Safety group has the
responsibility to ensure that Ashland's operating groups maintain
environmental compliance in accordance with applicable laws and
regulations.
Federal, state and local laws and regulations relating to the
protection of the environment have a significant impact on how Ashland
conducts its businesses. These include the Clean Air Act ("CAA") with
respect to air emissions, the Clean Water Act ("CWA") with respect to water
discharges, the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste generation, treatment, storage and
disposal, the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") and the Superfund Amendments and Reauthorization
Act of 1986 ("SARA") with respect to releases and remediation of hazardous
substances (CERCLA and SARA are sometimes referred to collectively as
"Superfund"), the Toxic Substances Control Act ("TSCA") with respect to
chemical formulation and use, the Oil Pollution Act of 1990 ("OPA 90") with
respect to oil pollution, spill response and financial assurance
requirements for marine operations, the Surface Mining Control and
Reclamation Act of 1977 ("SMCRA") with respect to surface mining, the
Federal Occupational Safety and Health Act ("OSHA") with respect to
workplace health and safety standards, the Federal Mine Safety and Health
Act of 1977 ("MSHA") with respect to health and safety standards on mining
operations, and various other federal, state and local laws related to the
environment, health and safety. In addition, many foreign countries have
laws dealing with the same matters.
In connection with the formation of MAP, Marathon and Ashland each
retained responsibility for certain environmental costs arising out of
their respective prior ownership and operation of the facilities
transferred to MAP. In certain situations, various threshold provisions
apply, eliminating or reducing the financial responsibility of the
contributing party until certain levels of expenditure have been reached.
In other situations, sunset provisions gradually diminish the level of
financial responsibility of the contributing party over time.
9
Ashland's capital expenditures for air, water and solid waste control
facilities amounted to $25 million in fiscal 1998, $26 million in 1997 and
$38 million in 1996. The amounts for 1998 include expenditures for air,
water and solid waste control facilities transferred to MAP for which
Ashland has retained responsibility.
At September 30, 1998, Ashland's reserves for environmental
assessments and remediation efforts were $172 million, reflecting Ashland's
current estimate of the costs which are most likely to be incurred over the
period during which the clean-up will be performed to remediate identified
environmental conditions for which costs are reasonably estimable.
Based on current environmental regulations, Ashland estimates that
capital expenditures for air, water and solid waste control facilities will
be $30 million in fiscal 1999. Expenditures for investigatory and remedial
efforts in future years are subject to the uncertainties associated with
environmental exposures, including identification of new environmental
sites and changes in laws and regulations and their application. Such
expenditures, however, are not expected to have a material adverse effect
on Ashland's consolidated financial position, cash flow or liquidity. For
information regarding the 1996 multimedia inspections which were conducted
by the United States Environmental Protection Agency ("EPA") at Ashland's
three former refineries, see "Item 3. Legal Proceedings - Environmental
Proceedings."
AIR - The CAA imposes stringent limits on air emissions, establishes a
federally mandated operating permit program and allows for civil and
criminal enforcement sanctions. The requirements of the CAA have a major
impact on both the day-to-day activities of the refining, distribution and
marketing operations of MAP and MAP's product formulation decisions. CAA
requirements have a lesser effect on the other operations of Ashland. The
CAA establishes air quality attainment deadlines and control requirements
based on the severity of air pollution in a geographical area. In addition,
the standards for RFG will become even more stringent in the year 2000,
when Phase II RFG will be required.
In July 1997, the EPA promulgated revisions to the National Ambient
Air Quality Standards for ground level ozone and particulate matter, both
of which are primarily associated with auto emissions. The ground level
ozone is also associated with the use of certain volatile organic compounds
used and distributed in Ashland's chemical business. The impact of these
revised standards could be significant and lead to additional reduction of
ozone precursors, but the potential financial effects on Ashland and MAP
cannot be reasonably estimated until the states develop and implement State
Implementation Plans covering their standards.
WATER - Ashland's businesses maintain numerous discharge permits as
required under the National Pollutant Discharge Elimination System of the
CWA, and have implemented systems to oversee their compliance efforts. In
addition, MAP is regulated under OPA 90 which amended the CWA. OPA 90
requires the owner or operator of a tank vessel or a facility to maintain
an emergency plan to respond to discharges of oil or hazardous substances.
Also, in case of such spills, OPA 90 requires responsible companies to pay
removal costs and damages, including damages to natural resources, provides
for substantial civil penalties, and allows for the imposition of criminal
sanctions. Additionally, OPA 90 requires that new tank vessels entering or
operating in domestic waters be double-hulled, and that existing tank
vessels that are not double-hulled be retrofitted or removed from domestic
service, according to a phase-out schedule.
SOLID WASTE - Ashland's businesses are subject to RCRA, which
establishes standards for the management of solid and hazardous wastes.
Besides affecting current waste disposal practices, RCRA also addresses the
environmental effects of certain past waste disposal operations, the
recycling of wastes and the regulation of underground storage tanks
("USTs") containing regulated substances. Under RCRA, USTs used for retail
distribution of petroleum products must be brought into compliance with a
variety of engineering specifications and leak protection technologies by
calendar year end 1998. MAP anticipates that its USTs will be in timely
compliance. In addition, new laws are being enacted and regulations are
being adopted by various regulatory agencies on a continuing basis, and the
costs of compliance with these new rules cannot be estimated until the
manner in which they will be implemented has been more accurately defined.
REMEDIATION - MAP operates certain retail outlets where, during the
normal course of operations, releases of petroleum products from USTs have
occurred. Federal and state laws require that contamination caused by such
releases at these sites be assessed and, if necessary, remediated to meet
applicable standards. The enforcement of the UST regulations under RCRA has
been delegated to the states, which administer their own UST programs.
10
Ashland also currently or has in the past operated various facilities
where, during the normal course of operations, releases of hazardous
constituents have occurred. Federal and state laws, including but not
limited to RCRA and various remediation laws, require that contamination
caused by such releases be assessed and, if necessary, remediated to meet
applicable standards.
SURFACE MINING - SMCRA was enacted to regulate the surface mining of
coal and the surface effects of underground coal mining. All states in
which Arch Coal's subsidiaries operate have similar laws and regulations
enacted pursuant to SMCRA. These laws impose, among other requirements,
environmental performance standards and requirements to perform
reclamation.
A lawsuit brought by private individuals has challenged the legality
of surface mining in West Virginia which results in the construction of
"valley fills." A valley fill is an engineered work located at a lower
elevation from the surface mine where the excess rock and earth is placed
during mining. Arch Coal is contesting this legal challenge vigorously, but
it is impossible to predict the outcome of these proceedings with
certainty. If these proceedings result in substantial changes in permits,
significant delays in obtaining new permits, or substantial new
restrictions on Arch Coal's existing operations, such changes, delays or
restrictions would have a material adverse affect on Arch Coal's
operations.
RESEARCH
Ashland conducts a program of research and development to invent and
improve products and processes and to improve environmental controls for
its existing facilities. It maintains its primary research facilities in
Dublin, Ohio. Research and development costs are expensed as they are
incurred and totaled $28 million in fiscal 1998 ($29 million in 1997 and
$28 million in 1996).
COMPETITION
In all its operations, Ashland is subject to intense competition both
from companies in the industries in which it operates and from products of
companies in other industries. In most of these segments, competition is
based primarily on price, with factors such as reliability of supply,
service and quality also being considered. Ashland Chemical competes in a
number of chemical distribution, specialty chemical and petrochemical
markets. Its chemicals and solvents distribution businesses compete with
national, regional and local companies throughout North America. Its
plastics distribution businesses compete worldwide. Ashland Chemical's
specialty chemicals businesses compete globally in selected niche markets,
largely on the basis of technology and service, while holding proprietary
technology in virtually all their specialty chemicals businesses.
Petrochemicals are largely commodities, with pricing and quality being the
most important factors. The majority of the business for which APAC
competes is obtained by competitive bidding.
Valvoline competes primarily with domestic oil companies and, to a
lesser extent, with international oil companies on a worldwide basis.
Valvoline's brand recognition and increasing market share in the "fast oil
change" market are important competitive factors. MAP competes primarily
with other domestic refiners and, to a lesser extent, with imported
products. MAP's refineries are located close to its market areas, giving
MAP a geographic advantage in supplying these regions. MAP's retail
operations compete with major oil companies, independent oil companies and
independent marketers. The coal industry is highly competitive, and Arch
Coal competes (principally in price, location and quality of coal) with
other coal producers.
FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents incorporated by reference contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including various information within the "Capital Resources,"
"Derivative Instruments," "Year 2000 Readiness" and "Outlook" sections in
Management's Discussion and Analysis in Ashland's Annual Report. Words such
as "anticipates," "believes," "estimates," "expects," "is likely,"
"predicts," and variations of such words and similar expressions are
intended to identify such forward-looking statements. Although Ashland
believes that its expectations are based on reasonable assumptions, it
cannot assure that the expectations contained in such statements will be
achieved. Important factors which could cause actual results to differ
materially from those contained in such statements are discussed under
"Risks and Uncertainties" in Note A of Notes to Consolidated Financial
Statements in Ashland's Annual Report. Other factors and risks affecting
Ashland's revenues and operations are discussed below, as well as in other
portions of this Form 10-K.
11
Ashland's operations are affected by domestic and international
political, legislative, regulatory and legal actions. Such actions may
include changes in the policies of OPEC or other developments affecting
oil-producing countries, changes in tax laws, and changes in environmental,
health and safety laws.
Domestic and international economic conditions, such as recessionary
trends, inflation, interest and monetary exchange rates, as well as changes
in demand for products and services, can also have a significant effect on
Ashland's operations. Although Ashland maintains reserves for anticipated
liabilities and carries various levels of insurance, Ashland could be
affected by civil, criminal, regulatory or administrative actions, claims
or proceedings. In addition, climate and weather can significantly affect
Ashland in several of its operations such as its construction activities,
MAP's heating oil businesses and Arch Coal's sales and production of coal.
ITEM 2. PROPERTIES
Ashland's corporate headquarters, which is leased, is located in
Russell, Kentucky. Effective January 4, 1999, Ashland's corporate
headquarters, which will be leased, will be located in Covington, Kentucky.
Principal offices of other major operations are located in Dublin, Ohio
(Chemical); Atlanta, Georgia (APAC); and Lexington, Kentucky (Valvoline),
all of which are leased. Ashland's principal manufacturing, marketing and
other materially important physical properties are described under the
appropriate segment under Item 1. Additional information concerning certain
leases may be found in Note H of Notes to Consolidated Financial Statements
in Ashland's Annual Report.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - (1) As of September 30, 1998, Ashland had
been identified as a "potentially responsible party" ("PRP") under
Superfund or similar state laws for potential joint and several liability
for clean-up costs in connection with alleged releases of hazardous
substances in connection with 83 waste treatment or disposal sites. These
sites are currently subject to ongoing investigation and remedial
activities, overseen by the EPA or a state agency, in which Ashland is
typically participating as a member of a PRP group. Generally, the type of
relief sought includes remediation of contaminated soil and/or groundwater,
reimbursement for past costs of site clean-up and administrative oversight,
and/or long-term monitoring of environmental conditions at the sites.
Ashland carefully monitors the investigatory and remedial activity at many
of these sites. Based on its experience with site remediation, its
familiarity with current environmental laws and regulations, its analysis
of the specific hazardous substances at issue, the existence of other
financially viable PRPs and its current estimates of investigatory,
clean-up and monitoring costs at each site, Ashland believes that its
liability at these sites, either individually or in the aggregate, after
taking into account its insurance coverage and established reserves, will
not have a material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity. However, such matters could have a
material effect on results of operations in a particular quarter or fiscal
year as they develop or as new issues are identified. Estimated costs for
these matters are recognized in accordance with generally accepted
accounting principles governing the likelihood that costs will be incurred
and Ashland's ability to reasonably estimate future costs.
(2) In 1996, the EPA conducted so-called multimedia inspections of
Ashland's three refineries in which it evaluated virtually all aspects of
the environmental operations of these facilities. The EPA and Ashland have
reached an agreement and have finalized a settlement document with respect
to alleged violations discovered during these inspections. Ashland has
agreed to pay $5.864 million in civil penalties. Ashland will also
undertake specific remedial projects and improvements at the refinery
sites, as well as a number of supplemental environmental projects involving
improvements to the facilities' operations, which will exceed current state
and federal environmental requirements. The total cost of these projects is
expected to be $26 million. In connection with the formation of MAP,
Ashland agreed to retain responsibility for matters arising out of the
multimedia inspections.
LOCKHEED LITIGATION - Ashland is a defendant in a series of cases
involving more than 600 former workers at the Lockheed aircraft
manufacturing facility in Burbank, California. The plaintiffs allege
personal injuries resulting from exposure to chemicals sold to Lockheed by
Ashland, and inadequate labeling of such chemicals. The cases are being
tried in the Superior Court of the State of California for the County of
Los Angeles. To date, five trials involving approximately 130 plaintiffs
have resulted in total verdicts adverse to Ashland, after taking into
consideration a reduction of the punitive damages award in the fifth trial
ordered by the trial judge, of $79.4 million ($73.9 million of which is
punitive damages). The damage awards have been, or will be, appealed.
Ashland continues to believe, upon advice of counsel, that there is a
substantial probability that the punitive damage awards will be reversed or
substantially further reduced, and that, after taking into account probable
recoveries under insurance policies, these cases will not have a material
adverse effect on Ashland's consolidated financial position, cash flow or
liquidity.
12
In addition, Ashland filed an action in Kentucky against approximately
44 insurance carriers to confirm coverage for liabilities under the
Lockheed cases. One of the insurance carriers in turn filed an action in
California seeking to deny insurance coverage for liabilities in these
cases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September
30, 1998.
ITEM X. EXECUTIVE OFFICERS OF ASHLAND
The following is a list of Ashland's executive officers, their ages
and their positions and offices during the last five years (listed
alphabetically after the top two officers as to other Senior Vice
Presidents, Administrative Vice Presidents and other executive officers.)
PAUL W. CHELLGREN* (age 55) is Chairman of the Board, Chief Executive
Officer and Director of Ashland and a Director of Arch Coal, Inc. and has
served in such capacities since 1997, 1996, 1992 and 1997, respectively.
During the past five years, he has also served as President and Chief
Operating Officer of Ashland.
JOHN A. BROTHERS* (age 58) is Executive Vice President of Ashland and
has served in such capacities since 1997. During the past five years, he
has also served as Senior Vice President and Group Operating Officer - The
Valvoline Company and Ashland Chemical Company.
JAMES R. BOYD* (age 52) is Senior Vice President and Group Operating
Officer of Ashland - APAC, Inc. and a Director of Arch Coal, Inc., having
served in such capacities since 1989, 1993 and 1997, respectively.
DAVID J. D'ANTONI* (age 53) is Senior Vice President of Ashland and
President of Ashland Chemical Company and has served in such capacities
since 1988.
THOMAS L. FEAZELL* (age 61) is Senior Vice President, General Counsel
and Secretary of Ashland and a Director of Arch Coal, Inc. and has served
in such capacities since 1992, 1981, 1992 and 1997, respectively.
JAMES J. O'BRIEN (age 44) is Senior Vice President of Ashland and
President of The Valvoline Company and has served in such capacities since
1997 and 1995, respectively. During the past five years, he has also served
as Vice President of Ashland, Vice President of Ashland Petroleum Company
and Executive Assistant to the Chief Executive Officer.
CHARLES F. POTTS (age 54) is Senior Vice President of Ashland and
President of APAC, Inc. and has served in such capacities since 1992.
J. MARVIN QUIN* (age 51) is Senior Vice President and Chief Financial
Officer of Ashland and a Director of Arch Coal, Inc. and has served in such
capacities since 1992 and 1997, respectively.
KENNETH L. AULEN (age 49) is Administrative Vice President and
Controller of Ashland and has served in such capacities since 1992.
PHILIP W. BLOCK* (age 51) is Administrative Vice President - Human
Resources of Ashland and has served in such capacity since 1992.
LAMAR M. CHAMBERS (age 44) is Auditor of Ashland and has served in
such capacity since September 1998. During the past five years, he has also
served as Vice President and Controller of MAP, Administrative Vice
President - Finance of Ashland Petroleum, Executive Assistant to the Chief
Executive Officer and Assistant Controller of Ashland.
DANIEL B. HUFFMAN (age 53) is Treasurer of Ashland and has served in
such capacity since November 1998. During the past five years, he has also
served as Assistant Treasurer of Ashland.
Each executive officer (other than Vice Presidents who are appointed
by Ashland's management) is elected by the Board of Directors of Ashland to
a term of one year, or until his or her successor is duly elected, at the
annual meeting of the Board of Directors, except in those instances where
the officer is elected other than at an annual meeting of the Board of
Directors, in which case his or her tenure will expire at the next annual
meeting of the Board of Directors unless the officer is re-elected.
- -----------------------
*Member of Ashland's Executive Committee
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
There is hereby incorporated by reference the information appearing in
Note O of Notes to Consolidated Financial Statements in Ashland's Annual
Report.
At September 30, 1998, there were approximately 20,900 holders of
record of Ashland's Common Stock. Ashland Common Stock is listed on the New
York and Chicago stock exchanges (ticker symbol ASH) and has trading
privileges on the Boston, Cincinnati, Pacific, Philadelphia and Amsterdam
stock exchanges.
ITEM 6. SELECTED FINANCIAL DATA
There is hereby incorporated by reference the information appearing
under the caption "Five-Year Selected Financial Information" on Page 62 in
Ashland's Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
There is hereby incorporated by reference the information appearing
under the caption "Management's Discussion and Analysis" on Pages 34 to 41
in Ashland's Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There is hereby incorporated by reference the information appearing
under the caption "Derivative Instruments" on Page 39 in Ashland's Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
There is hereby incorporated by reference the consolidated financial
statements appearing on Pages 43 through 61 in Ashland's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear
under the caption "Ashland Inc.'s Board of Directors" in Ashland's
definitive Proxy Statement for its January 28, 1999 Annual Meeting of
Shareholders, which will be filed with the SEC within 120 days after
September 30, 1998 ("Proxy Statement"). See also the list of Ashland's
executive officers and related information under "Executive Officers of
Ashland" in Part I - Item X herein.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear
under the captions "Executive Compensation," "Compensation of Directors"
and "Personnel and Compensation Committee Interlocks and Insider
Participation" in Ashland's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information to appear
under the caption "Stock Ownership of Directors and Certain Officers of
Ashland" and the information regarding the ownership of securities of
Ashland in Ashland's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information to appear
under the caption "Business Relationships" in Ashland's Proxy Statement.
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented or incorporated by reference in this report are listed in
the index on Page 19.
(3) Exhibits
3.1 - Second Restated Articles of Incorporation of Ashland,
as amended to January 30, 1998 (filed as Exhibit 3 to
Ashland's Form 10-Q for the quarter ended December 31,
1997, and incorporated herein by reference).
3.2 - Bylaws of Ashland, as amended to March 19, 1998
(filed as Exhibit 3 to Ashland's Form 10-K/A (Amendment
No. 1) for the fiscal year ended September 30, 1998
filed on May 1, 1998, and incorporated herein by
reference).
4.1 - Ashland agrees to provide the SEC, upon request,
copies of instruments defining the rights of holders of
long-term debt of Ashland, and all of its subsidiaries
for which consolidated or unconsolidated financial
statements are required to be filed with the SEC.
4.2 - Indenture, dated as of August 15, 1989, as amended
and restated as of August 15, 1990, between Ashland and
Citibank, N.A., as Trustee (filed as Exhibit 4(a) to
Ashland's Form 10-K for the fiscal year ended September
30, 1991, and incorporated herein by reference).
4.3 - Rights Agreement, dated as of May 16, 1996, between
Ashland Inc. and Harris Trust and Savings Bank,
together with Form of Right Certificate (filed as
Exhibits 4(a) and 4(c), respectively, to Ashland's Form
8-A filed with the SEC on May 16, 1996, and
incorporated herein by reference).
The following Exhibits 10.1 through 10.18 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 - Amended Stock Incentive Plan for Key Employees of
Ashland Inc. and its Subsidiaries (filed as Exhibit
10.1 to Ashland's Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by
reference).
10.2 - Ashland Inc. Deferred Compensation and Stock
Incentive Plan for Non-Employee Directors.
10.3 - Ashland Inc. Director Retirement Plan (filed as
Exhibit 10(c).3 to Ashland's Form 10-K for the fiscal
year ended September 30, 1988, and incorporated herein
by reference).
10.4 - Ninth Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Key Executive
Employees.
10.5 - Ashland Inc. Amended Performance Unit Plan (filed as
Exhibit 10.5 to Ashland's Form 10-K for the fiscal year
ended September 30, 1994, and incorporated herein by
reference).
10.6 - Ashland Inc. Incentive Compensation Plan (filed as
Exhibit 10.6 to Ashland's Form 10-K for the fiscal year
ended September 30, 1993, and incorporated herein by
reference).
10.7 - Ashland Inc. Director Death Benefit Program (filed as
Exhibit 10(c).10 to Ashland's Form 10-K for the fiscal
year ended September 30, 1990, and incorporated herein
by reference).
10.8 - Ashland Inc. Salary Continuation Plan (filed as
Exhibit 10(c).11 to Ashland's Form 10-K for the fiscal
year ended September 30, 1988, and incorporated herein
by reference).
15
10.9 - Forms of Ashland Inc. Executive Employment Contract
between Ashland Inc. and certain executive officers of
Ashland (filed as Exhibit 10(c).12 to Ashland's Form
10-K for the fiscal year ended September 30, 1989, and
incorporated herein by reference).
10.10 - Form of Indemnification Agreement between Ashland
Inc. and each member of its Board of Directors (filed
as Exhibit 10(c).13 to Ashland's Form 10-K for the
fiscal year ended September 30, 1990, and incorporated
herein by reference).
10.11 - Ashland Inc. Nonqualified Excess Benefit Pension Plan.
10.12 - Ashland Inc. Long-Term Incentive Plan (filed as
Exhibit 10.12 to Ashland's Form 10-K for the fiscal
year ended September 30, 1996, and incorporated herein
by reference).
10.13 - Ashland Inc. Directors' Charitable Award Program
(filed as Exhibit 10.13 to Ashland's Form 10-K for the
fiscal year ended September 30, 1996, and incorporated
herein by reference).
10.14 - Ashland Inc. 1993 Stock Incentive Plan (filed as
Exhibit 10.14 to Ashland's Form 10-K for the fiscal
year ended September 30, 1996, and incorporated herein
by reference).
10.15 - Ashland Inc. 1995 Performance Unit Plan (filed as
Exhibit 10.15 to Ashland's Form 10-K for the fiscal
year ended September 30, 1996, and incorporated herein
by reference).
10.16 - Ashland Inc. Incentive Compensation Plan for Key
Executives (filed as Exhibit 10.16 to Ashland's Form
10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference).
10.17 - Ashland Inc. Deferred Compensation Plan (filed as
Exhibit 10.17 to Ashland's Form 10-K for the fiscal
year ended September 30, 1997, and incorporated herein
by reference).
10.18 - Ashland Inc. 1997 Stock Incentive Plan.
11 - Computation of Earnings Per Share (appearing on Page
49 of Ashland's Annual Report to Shareholders,
incorporated by reference herein, for the fiscal year
ended September 30, 1998).
13 - Portions of Ashland's Annual Report to Shareholders,
incorporated by reference herein, for the fiscal year
ended September 30, 1998.
21 - List of subsidiaries.
23 - Consent of independent auditors.
24 - Power of Attorney, including resolutions of the Board
of Directors.
27.1 - Financial Data Schedule for the fiscal year ended
September 30, 1998.
27.2 - Restated Financial Data Schedule for the fiscal year
ended September 30, 1997.
27.3 - Restated Financial Data Schedule for the fiscal year
ended September 30, 1996.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) REPORTS ON FORM 8-K
None
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
ASHLAND INC.
(Registrant)
By: /s/ Kenneth L. Aulen
--------------------------------
(Kenneth L. Aulen, Administrative
Vice President and Controller)
Date: November 30, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT, IN THE CAPACITIES INDICATED, ON NOVEMBER 30, 1998.
Signatures Capacity
---------- --------
/s/ PAUL W. CHELLGREN
- ------------------------ Chairman of the Board, Chief Executive Officer
PAUL W. CHELLGREN and Director
/s/ J. MARVIN QUIN
- ------------------------ Senior Vice President and Chief Financial Officer
J. MARVIN QUIN
/s/ KENNETH L. AULEN
- ------------------------ Administrative Vice President, Controller and
KENNETH L. AULEN Principal Accounting Officer
*
- ------------------------ Director
SAMUEL C. BUTLER
*
- ------------------------ Director
FRANK C. CARLUCCI
*
- ------------------------ Director
ERNEST H. DREW
*
- ------------------------ Director
JAMES B. FARLEY
*
- ------------------------ Director
RALPH E. GOMORY
17
*
- ------------------------ Director
BERNADINE P. HEALY
*
- ------------------------ Director
MANNIE L. JACKSON
*
- ------------------------ Director
PATRICK F. NOONAN
*
- ------------------------ Director
JANE C. PFEIFFER
*
- ------------------------ Director
MICHAEL D. ROSE
*
- ------------------------ Director
WILLIAM L. ROUSE , JR.
* By: /s/ Thomas L. Feazell
--------------------------
Thomas L. Feazell
Attorney-in-Fact
Date: November 30, 1998
18
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE
PAGE
Consolidated financial statements:
Statements of consolidated income ...................................*
Consolidated balance sheets .........................................*
Statements of consolidated stockholders' equity .....................*
Statements of consolidated cash flows ...............................*
Notes to consolidated financial statements ..........................*
Information by industry segment .....................................*
Consolidated financial schedule:
II - Valuation and qualifying accounts..............................21
-----------
*The consolidated financial statements appearing on Pages 43
through 61 in Ashland's Annual Report are incorporated by reference in this
Annual Report on Form 10-K.
Schedules other than that listed above have been omitted because
of the absence of the conditions under which they are required or because
the information required is shown in the consolidated financial statements
or the notes thereto. Separate financial statements for MAP and Arch Coal
required by Rule 3-09 of Regulation S-X will be filed as an amendment to
this Form 10-K within 90 days after the end of these entities' fiscal years
ending December 31, 1998. Separate financial statements of other
unconsolidated affiliates are omitted because each company does not
constitute a significant subsidiary using the 20% tests when considered
individually. Summarized financial information for such affiliates is
disclosed in Note D of Notes to Consolidated Financial Statements in
Ashland's Annual Report.
19
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements and schedule of
Ashland Inc. and consolidated subsidiaries listed in the accompanying index
to financial statements and financial schedule (Item 14(a)). These
financial statements and schedule are the responsibility of Ashland's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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 listed in the accompanying
index to financial statements (Item 14(a)) present fairly, in all material
respects, the consolidated financial position of Ashland Inc. and
consolidated subsidiaries at September 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Louisville, Kentucky
November 4, 1998
20
- ---------------------------------------------------------------------------------------------------------------------------------
Ashland Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions) Balance at Provisions Balance
beginning charged to Reserves Other at end
Description of year earnings utilized changes of year
===================================================================================================================================
YEAR ENDED SEPTEMBER 30, 1998
Reserves deducted from asset accounts
Accounts receivable $25 $ 8 $(10) (F1) $ (4) $19
Inventories 11 2 (2) - 11
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997
Reserves deducted from asset accounts
Accounts receivable $27 $ 9 $(10) (F1) $ (1) $25
Inventories 10 2 (1) - 11
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1996
Reserves deducted from asset accounts
Accounts receivable $25 $10 $ (8) (F1) $ - $27
Inventories 6 6 (2) - 10
- -----------------------------------------------------------------------------------------------------------------------------------
(F1) Uncollected amounts written off, net of recoveries of $2 million in 1998, 1997 and 1996.
21
EXHIBIT INDEX
Exhibit No. Description
10.2 - Ashland Inc. Deferred Compensation and Stock
Incentive Plan for Non-Employee Directors.
10.4 - Ninth Amended and Restated Ashland Inc.
Supplemental Early Retirement Plan for Certain Key
Executive Employees.
10.11 - Ashland Inc. Nonqualified Excess Benefit Pension
Plan.
10.18 - Ashland Inc. 1997 Stock Incentive Plan.
13 - Portions of Ashland's Annual Report to
Shareholders, incorporated by reference herein, for
the fiscal year ended September 30, 1998.
21 - List of subsidiaries.
23 - Consent of independent auditors.
24 - Power of Attorney, including resolutions of the
Board of Directors.
27.1 - Financial Data Schedule for the fiscal year ended
September 30, 1998.
27.2 - Restated Financial Data Schedule for the fiscal year
ended September 30, 1997.
27.3 - Restated Financial Data Schedule for the fiscal year
ended September 30, 1996.