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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(AMENDMENT NO. 1)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 1-12091
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MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of 22-3436215
incorporation or organization) (I.R.S. Employer Identification No.)
20 Wight Avenue, Suite 100
Hunt Valley, MD 21030
(Address of principal executive offices)
410-229-4400
(Registrant's telephone number, including area code)
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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 is 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 64,970,023 shares of Common
Stock, par value $.01 per share, as of April 30, 2004, excluding 12,926,563
shares held by the registrant, its subsidiaries and certain Company trusts that
are not entitled to vote.
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MILLENNIUM CHEMICALS INC.
TABLE OF CONTENTS
Page
----
Explanatory Note............................................... 2
Part I FINANCIAL INFORMATION
Item 1 Financial Statements.................................... 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 26
Item 4 Controls and Procedures................................. 39
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K........................ 40
Signature...................................................... 41
Explanatory Note
In this Quarterly Report, the terms "our", "we", and "the Company" refer to
Millennium Chemicals Inc. and its consolidated subsidiaries, except as the
context otherwise requires.
Millennium Chemicals Inc. (the "Company") is filing this Amendment No. 1 to
its Quarterly Report on Form 10-Q/A for the period ended March 31, 2004 to
reflect the restatement of its financial statements for the first quarter of
2004. Included herein are restated consolidated balance sheets as of March 31,
2004 and December 31, 2003. The restatement corrects errors in the computation
of deferred income taxes relating to the Company's investment in Equistar
Chemicals, LP ("Equistar"), a partnership in which the Company owns a 29.5%
interest. This restatement decreased the Company's liability for deferred income
taxes and its Shareholders' deficit at March 31, 2004 and December 31, 2003 by
$15 million. The restatement did not affect the Company's cash flow or operating
income for any period.
The restatement was initially reported by the Company on July 29, 2004, in
a press release, a copy of which was appended as an exhibit to a Current Report
on Form 8-K of the same date.
A discussion of the restatement is set forth in Note 17 to the unaudited
Consolidated Financial Statements included in this Amendment No. 1. Changes also
have been made to the following items in this Amendment No. 1 as a result of the
restatement:
o Item 1, Financial Statements has been revised to reflect this
restatement;
o Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations has been revised to reflect this
restatement. (The only revisions to this item are: (1) the addition of
two paragraphs to the end of "Introduction - Restatement of Financial
Statements" to describe this restatement; and (2) cross-references to
the original Form 10-Q for the quarter ended March 31, 2004.); and
o Item 4, Controls and Procedures, has been updated to reflect the
evaluation made in connection with this Amendment No. 1.
This Amendment No. 1 does not reflect events that have occurred after May
14, 2004, the date the Quarterly Report on Form 10-Q was originally filed.
Information with respect to those events has been or will be set forth, as
appropriate, in the Company's Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K.
2
The Company is also filing with the Securities and Exchange Commission
Amendment No. 2 to its Annual Report on Form 10-K/A for the year ended December
31, 2003 to reflect changes required as a result of the restatement.
Non-GAAP Financial Measures
Financial measures based on accounting principles generally accepted in the
United States of America ("GAAP") are commonly referred to as GAAP financial
measures. A non-GAAP financial measure is generally defined by the Securities
and Exchange Commission as one that purports to measure historical or future
financial performance, financial position, or cash flows, but excludes or
includes amounts that would not be so adjusted in the most comparable GAAP
measure. From time to time the Company discloses non-GAAP financial measures,
primarily EBITDA. EBITDA represents income from operations before interest,
taxes, depreciation and amortization, other income items, equity earnings, and
the cumulative effect of accounting changes. EBITDA is a key measure used by the
banking and investing communities in their evaluation of economic performance.
Accordingly, management believes that disclosure of EBITDA provides useful
information to investors because it is frequently cited by financial analysts in
evaluating companies' performance. EBITDA identified above is not a measure of
operating performance computed in accordance with GAAP and should not be
considered as a substitute for GAAP measures. Additionally, these measures may
not be comparable to similarly named measures of other companies.
The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding designated items. Management believes that
excluding these items generally helps investors to compare operating performance
between two periods. Such adjusted data are not reported without an explanation
of the items that are excluded.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Millions, except share data)
March 31, December 31,
2004 2003
------------ ------------
(Restated - (Restated -
See Note 17) See Note 17)
ASSETS
Current assets
Cash and cash equivalents............................................................... $ 196 $ 209
Trade receivables, net.................................................................. 323 277
Inventories............................................................................. 417 457
Other current assets.................................................................... 77 65
------ ------
Total current assets................................................................. 1,013 1,008
Property, plant and equipment, net......................................................... 753 766
Investment in Equistar..................................................................... 471 469
Other assets............................................................................... 54 51
Goodwill................................................................................... 104 104
------ ------
Total assets......................................................................... $2,395 $2,398
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Notes payable........................................................................... $ 6 $ --
Current maturities of long-term debt.................................................... 5 6
Trade accounts payable.................................................................. 260 236
Income taxes payable.................................................................... 3 5
Accrued expenses and other liabilities.................................................. 146 124
------ ------
Total current liabilities............................................................ 420 371
Long-term debt............................................................................. 1,409 1,461
Deferred income taxes...................................................................... 269 272
Other liabilities.......................................................................... 324 325
------ ------
Total liabilities.................................................................... 2,422 2,429
------ ------
Commitments and contingencies (Note 13)
Minority interest.......................................................................... 28 27
Shareholders' deficit
Preferred stock (par value $.01 per share, authorized 25,000,000 shares, none issued and
outstanding)......................................................................... -- --
Common stock (par value $.01 per share, authorized 225,000,000 shares; issued 77,896,586
shares at March 31, 2004 and December 31, 2003) ..................................... 1 1
Paid in capital......................................................................... 1,289 1,292
Accumulated deficit..................................................................... (972) (962)
Accumulated other comprehensive loss.................................................... (131) (141)
Treasury stock, at cost (13,224,871 and 13,905,687 shares at March 31, 2004 and December
31, 2003, respectively).............................................................. (247) (260)
Unearned restricted shares.............................................................. (2) (1)
Deferred compensation................................................................... 7 13
------ ------
Total shareholders' deficit.......................................................... (55) (58)
------ ------
Total liabilities and shareholders' deficit....................................... $2,395 $2,398
====== ======
See Notes to Consolidated Financial Statements (Unaudited).
4
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Millions, except per share data)
Three Months Ended
March 31,
------------------
2004 2003
------ ------
Net sales........................................................ $ 465 $ 415
Operating costs and expenses
Cost of products sold......................................... 388 331
Depreciation and amortization................................. 24 27
Selling, development and administrative expense............... 33 30
Asset impairment charges...................................... 3 --
Combination costs............................................. 3 --
Reorganization and office closure costs....................... 1 --
------ ------
Operating income........................................... 13 27
Interest expense................................................. (27) (23)
Interest income.................................................. 2 1
Earnings (loss) on Equistar investment........................... 2 (43)
Other expense, net............................................... (1) --
------ ------
Loss before income taxes, minority interest and cumulative effect
of accounting change.......................................... (11) (38)
Benefit from income taxes........................................ 2 15
------ ------
Loss before minority interest and cumulative effect of accounting
change........................................................ (9) (23)
Minority interest................................................ (1) (3)
------ ------
Loss before cumulative effect of accounting change............... (10) (26)
Cumulative effect of accounting change........................... -- (1)
------ ------
Net loss......................................................... $ (10) $ (27)
====== ======
Basic and diluted loss per share:
Before cumulative effect of accounting change................. $(0.16) $(0.41)
From cumulative effect of accounting change................... -- (0.02)
------ ------
After cumulative effect of accounting change.................. $(0.16) $(0.43)
====== ======
See Notes to Consolidated Financial Statements (Unaudited).
5
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Millions)
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss ........................................................................ $(10) $(27)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Cumulative effect of accounting change ....................................... -- 1
Asset impairment charges ..................................................... 3 --
Depreciation and amortization ................................................ 24 27
Deferred income tax benefit .................................................. (5) (21)
(Earnings) loss on Equistar investment ....................................... (2) 43
Minority interest ............................................................ 1 3
Other, net ................................................................... (9) (2)
Changes in assets and liabilities:
Increase in trade receivables ............................................. (44) (13)
Decrease in inventories ................................................... 41 18
(Increase) decrease in other current assets ............................... (8) 1
Increase (decrease) in trade accounts payable ............................. 25 (36)
Increase in accrued expenses and other liabilities and
income taxes payable ................................................... 26 4
Decrease in other liabilities ............................................. (5) (12)
---- ----
Cash provided by (used in) operating activities .............................. 37 (14)
---- ----
Cash flows from investing activities:
Capital expenditures ............................................................ (10) (8)
---- ----
Cash used in investing activities ............................................ (10) (8)
---- ----
Cash flows from financing activities:
Dividends to shareholders ....................................................... -- (9)
Proceeds from long-term debt .................................................... 16 96
Repayment of long-term debt ..................................................... (70) (66)
Increase (decrease) in notes payable ............................................ 6 (1)
Proceeds from exercise of stock options ......................................... 3 --
---- ----
Cash (used in) provided by financing activities .............................. (45) 20
---- ----
Effect of exchange rate changes on cash ............................................ 5 2
---- ----
Decrease in cash and cash equivalents .............................................. (13) --
Cash and cash equivalents at beginning of year ..................................... 209 125
---- ----
Cash and cash equivalents at end of period ......................................... $196 $125
==== ====
See Notes to Consolidated Financial Statements (Unaudited).
6
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in millions, except share data)
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the accompanying unaudited interim consolidated financial statements
do not include all of the disclosures normally required by accounting principles
generally accepted in the United States of America for complete financial
statements. The accompanying consolidated financial statements should be read in
conjunction with the financial statements and disclosures included in the Annual
Report on Form 10-K of Millennium Chemicals Inc. (the "Company") for the year
ended December 31, 2003, as amended by Amendment No. 2 on Form 10-K/A filed with
the Securities and Exchange Commission on August 9, 2004. In the opinion of
management, all adjustments considered necessary to present fairly the financial
position and results of operations for the interim periods are included in the
accompanying unaudited consolidated financial statements.
The unaudited consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Minority interest represents the
minority ownership of the Company's Brazilian subsidiary and the La Porte
Methanol Company. All significant intercompany accounts and transactions have
been eliminated. The Company's 29.5% investment in Equistar Chemicals, LP
("Equistar"), a joint venture between the Company and Lyondell Chemical Company
("Lyondell"), is accounted for by the equity method; accordingly, the Company's
share of Equistar's pre-tax net income or loss is included in net income or
loss.
Note 2 - Agreement for a Stock-for-Stock Business Combination
On March 29, 2004, Lyondell and the Company announced that their Boards of
Directors had approved, and the companies had executed, a definitive agreement
for a stock-for-stock business combination of the companies, expected to be
tax-free to the Company, Lyondell and their respective shareholders.
The Company's shareholders will receive between 0.95 and 1.05 shares of
Lyondell common stock for each share of the Company's Common Stock, depending on
the volume-weighted average price for the Lyondell shares for the 20 trading
days ending on the third trading day before closing. The Company's shareholders
will receive 0.95 shares of Lyondell stock if the average Lyondell stock price
is $20.50 per share or greater, and 1.05 shares if it is $16.50 per share or
less. Between the two prices, the exchange ratio varies proportionately. The new
shares will be entitled to receive the same cash dividend as existing
outstanding Lyondell shares. The Company's 4.00% convertible senior debentures
(the "4.00% Convertible Senior Debentures") will become convertible into
Lyondell common stock in accordance with the terms of the convertible debenture
indenture following the closing of the transaction.
The transaction is subject to customary conditions, including approval by
both companies' shareholders and receipt of required regulatory approvals and
amendments to each of Lyondell's and the Company's credit agreements and
Lyondell's receivables sales facility. The transaction is expected to close in
the third quarter of 2004. The transaction involves the merger of Millennium
Subsidiary LLC, a newly created subsidiary of the Company, into the Company, in
which the Company's Common Stock now held by its public shareholders will be
converted into common stock of Lyondell, and the Company's preferred stock to be
issued to Lyondell immediately before the merger will be converted into common
stock of the surviving entity. As a result, the Company will become a
wholly-owned subsidiary of Lyondell. After the close of the transaction, the
combined company will be called "Lyondell Chemical Company" and will be
headquartered in Houston, Texas.
For the three months ended March 31, 2004, the Company has incurred
approximately $3 of professional services costs in connection with the proposed
combination, which are included in Combination costs in the accompanying
unaudited Consolidated Statements of Operations.
7
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 3 - Loss per Share and Stock-Based Compensation
The weighted-average number of equivalent shares of common stock
outstanding used in computing loss per share is as follows:
Three Months Ended
March 31,
-----------------------
2004 2003
---------- ----------
Weighted-average common stock outstanding - basic and diluted... 64,497,266 63,852,822
========== ==========
The calculation of diluted loss per share for the three months ended March
31, 2004 does not include 83,119 restricted shares, 135,211 options to purchase
Common Stock, 196,050 shares held in trust for the Company's employee benefit
plans, and shares associated with the Company's 4.00% Convertible Senior
Debentures, as more fully described in Note 9. The calculation of diluted loss
per share for the three months ended March 31, 2003 does not include 53,957
restricted shares and 219,140 shares held in trust for the Company's employee
benefit plans. The effect of including these options and shares would be
antidilutive due to the reported net losses in each of these periods.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), encourages a fair value based
method of accounting for employee stock options and similar equity instruments,
which generally would result in the recording of additional compensation expense
in the Company's financial statements. SFAS No. 123 also allows the Company to
continue to account for stock-based compensation using the intrinsic value for
equity instruments under Accounting Principles Board Opinion No. 25 ("APB
Opinion No. 25"). The Company has elected to account for such instruments using
APB Opinion No. 25 and related interpretations, and thus has adopted the
disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for the stock option plans in the accompanying financial
statements as all options granted had an exercise price equal to the market
value of the underlying Common Stock on the date of grant.
Disclosure on a pro forma basis of net loss and related per-share amounts
as if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based compensation is omitted because the effect on pro forma net
loss is not significant.
Note 4 - Recent Accounting Developments
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets. This standard
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. Accretion expense and depreciation expense related to the liability and
capitalized asset retirement costs, respectively, are recorded in subsequent
periods. The Company's asset retirement obligations arise from activities
associated with the eventual remediation of sites used for landfills and mining
and include estimated liabilities for closure, restoration, and post-closure
care. None of the Company's assets are legally restricted for purposes of
settling these obligations. As these liabilities are settled, a gain or loss is
recognized for any difference between the settlement amount and the liability
recorded. The amount of the asset retirement obligations was $13 at each of
March 31, 2004 and December 31, 2003. The Company reported an after-tax
transition charge of $1 in the first quarter of 2003 as the cumulative effect of
this accounting change. The impact of adoption was to increase the Company's
reported assets and liabilities by $2 and $3, respectively.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
revised FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51,
`Consolidated Financial Statements'" ("FIN 46R"). FIN 46R requires the assets,
liabilities, and results of operations of a variable interest entity ("VIE") to
be consolidated in the financial statements of the enterprise considered to be
the primary beneficiary of that entity. The Company evaluated material
relationships with certain entities that were considered potential VIEs. The
Company concluded, with one possible exception discussed below, that those
8
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
entities are not VIEs or the Company is not the primary beneficiary of the VIE.
As such, in accordance with FIN 46R, the Company is not required to consolidate
those entities.
The Company evaluated its long-term obligations with one entity that may be
a VIE. The Company has no equity interest in this entity and has confirmed that
the entity is consolidated by an equity owner. The Company has not been able to
obtain the financial information from the entity necessary to determine whether
the Company is the primary beneficiary of the entity. Management of the entity
cited confidentiality considerations with regard to the decision not to provide
the Company with certain financial information. The Company pays approximately
$3 in plant and equipment rental charges on an annual basis to this entity.
In March 2004, the Emerging Issues Task Force ("EITF") of the FASB issued
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128, Earnings per Share" ("EITF 03-6"). EITF 03-6 addresses a
number of questions regarding the computation of earnings per share by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the company when, and if,
it declares dividends on its common stock. EITF 03-6 becomes effective for
periods beginning after March 31, 2004. The Company is currently evaluating the
impact of implementing EITF 03-6 on its financial statements.
In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" ("FSP No. FAS 106-1"). FSP No.
FAS 106-1 permits a sponsor of a postretirement healthcare plan that provides a
prescription drug benefit to make a one-time election to defer recognition and
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Act of 2003"), which was signed into
law on December 8, 2003, under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and SFAS No. 109, "Accounting for
Income Taxes" as well as in making disclosures related to its plans as required
by SFAS No. 132 (Revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" until the FASB develops and issues authoritative
guidance on accounting for the Federal subsidies provided by the Medicare Act of
2003. The Medicare Act of 2003 introduces a prescription drug benefit under
Medicare ("Medicare Part D") as well as a Federal subsidy to sponsors of retiree
healthcare benefit plans that provide a medical benefit that is at least
actuarially equivalent to Medicare Part D. The Company elected to make the
one-time deferral and, accordingly, the measures of its accumulated
postretirement benefit obligation and net periodic postretirement benefit cost
included in its financial statements and accompanying notes thereto do not
reflect the effects of the Medicare Act of 2003. On March 16, 2004, the FASB
issued proposed FSP No. FAS 106-b, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" ("Proposed FSP No. FAS 106-b"). The Proposed FSP No. FAS 106-b provides
guidance on the accounting for the effects of the Medicare Act of 2003 for
employers that sponsor postretirement healthcare plans that provide prescription
drug benefits, including related income tax accounting and rules for transition,
under which some companies may have to restate previous quarters' financial
statements in certain circumstances. If the Proposed FSP No. FAS 106-b is
approved, its provisions will go into effect for most companies as of the first
interim or annual period beginning after June 15, 2004. The Company is currently
evaluating the possible economic effects of the Medicare Act of 2003, if any, on
its postretirement benefit plan accounting.
Note 5 - Asset Impairment Charges
Asset impairment charges in the first quarter of 2004 of $3 represented the
write off of expenditures for property, plant and equipment at the Company's
Le Havre, France TiO[u]2 manufacturing plant. In the fourth quarter of 2003,
the carrying value of the property, plant and equipment at the Le Havre TiO[u]2
manufacturing plant was determined to be impaired, and a charge was required to
write down the basis in those assets to zero. Capital expenditures at this plant
for the three months ended March 31, 2004 were capitalized as property, plant
and equipment and then immediately written off as asset impairment charges as a
result of evaluating those assets for impairment under the guidance of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Since the
basis of all of the property, plant and equipment for this plant has been
written down to zero, no depreciation expense for this plant is recorded in
manufacturing and other costs of sales.
9
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 6 - Reorganization and Office Closure Costs
On July 21, 2003, the Company announced that it would implement a program
to reduce costs. This program included a reduction of approximately 5% in the
number of the Company's employees worldwide. The Company closed its executive
offices in Red Bank, New Jersey, effective September 1, 2003, and relocated its
headquarters to Hunt Valley, Maryland, where the Company has existing
administrative offices. In addition, the Company announced the suspension of
payment of dividends on its Common Stock.
The Company has recorded cumulative charges related to the program of $19
(including $1 for the three months ended March 31, 2004), of which $18 was for
severance-related costs and $1 was for contractual commitments for ongoing lease
costs, net of expected sublease income, associated with the closure of the Red
Bank, New Jersey office for the remaining term of the lease agreement. All costs
associated with this program are accounted for in accordance with SFAS No. 112,
"Employer's Accounting for Postemployment Benefits" or SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities", as appropriate.
Cumulative severance-related cash payments of $22 for the implementation of this
program were made through March 31, 2004, including $8 in the first quarter of
2004. Substantially all of the remainder of the cash payments relating to this
program, which are estimated to be approximately $4, will be disbursed during
the next several quarters. No significant charges associated with this program
are expected in future periods. Accrued liabilities associated with this program
and included in Accrued expenses and other liabilities were $2 at March 31,
2004. The cumulative charges of $19 associated with the cost reduction program
are less than the cumulative severance-related cash payments of $22 because some
of the cash payments made under the program, primarily for retirement benefits,
were related to expenses and liabilities that were recorded through the normal
course of business in periods prior to the implementation of this program in
mid-2003.
Note 7 - European Receivables Securitization Program
From March 2002 until November 2003, the Company had been transferring its
interest in certain European trade receivables to an unaffiliated third party as
its basis for issuing commercial paper under a revolving securitization
arrangement (annually renewable for a maximum of five years on April 30 of each
year at the option of the third party) with maximum availability of 70 million
euro, which was treated, in part, as a sale under accounting principles
generally accepted in the United States of America. In November 2003, the
Company terminated this securitization arrangement and there were no balances
outstanding at March 31, 2004 or December 31, 2003. The cumulative gross
proceeds from this securitization arrangement through March 31, 2003 was $95.
Cash flows from this securitization arrangement were reflected as operating
activities in the Consolidated Statement of Cash Flows. For the quarter ended
March 31, 2003, the aggregate loss on sale associated with this arrangement was
$1 and was included in selling, development and administrative ("S,D&A") costs.
Servicing liabilities associated with the transaction were not significant.
Note 8 - Inventories
Inventories are stated at the lower of cost or market value.
March 31, December 31,
2004 2003
--------- ------------
Finished products................ $240 $258
In-process products.............. 36 38
Raw materials.................... 73 96
Maintenance parts and supplies... 68 65
---- ----
$417 $457
==== ====
10
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 9 - Long-Term Debt and Credit Arrangements
The maturities of the Company's long-term debt through 2009 and thereafter
are as follows:
April 1- Total at Total at
December 31, March 31, December 31,
2004 2005 2006 2007 2008 2009 Thereafter 2004 2003
------------ ---- ---- ---- ---- ---- ---------- --------- ------------
Revolving loans................ $-- $-- $ -- $-- $ -- $-- $ -- $ -- $ 52
7.00% Senior Notes............. -- -- 500 -- -- -- -- 500 500
7.625% Senior Debentures....... -- -- -- -- -- -- 250 250 250
9.25% Senior Notes............. -- -- -- -- 475 -- -- 475 475
4.00% Convertible Senior
Debentures.................. -- -- -- -- -- -- 150 150 150
Other long-term debt........... 4 5 5 2 1 1 3 21 23
--- --- ---- --- ---- --- ---- ------ ------
Maturities of long-term debt... $ 4 $ 5 $505 $ 2 $476 $ 1 $403 1,396 1,450
=== === ==== === ==== === ====
Non-cash components of
long-term debt.............. 18 17
------ ------
Total debt..................... 1,414 1,467
Less: current maturities of
long-term debt.............. (5) (6)
------ ------
Total long-term debt........... $1,409 $1,461
====== ======
On November 25, 2003, the Company received approximately $125 in gross
proceeds and, on December 2, 2003, received an additional $25 in gross proceeds
from the sale by Millennium Chemicals Inc. ("Millennium Chemicals") of $150
aggregate principal amount of the 4.00% Convertible Senior Debentures, which are
guaranteed by Millennium America Inc. ("Millennium America"), a wholly-owned
indirect subsidiary of Millennium Chemicals. The gross proceeds of the sale were
used to repay all of the $47 of outstanding borrowings at that time under the
term loan portion (the "Term Loan") of the Company's five-year credit agreement
expiring June 18, 2006 (the "Credit Agreement") and $103 of outstanding
borrowings under the revolving loan portion (the "Revolving Loans") of its
Credit Agreement, which currently has a maximum availability of $150. The
Company used $4 of cash to pay the fees relating to the sale of the 4.00%
Convertible Senior Debentures.
On April 25, 2003, the Company received approximately $107 in net proceeds
($109 in gross proceeds) from the issuance and sale by Millennium America of
$100 additional principal amount at maturity of its 9.25% Senior Notes due June
15, 2008 (the "9.25% Senior Notes"), which are guaranteed by Millennium
Chemicals. The net proceeds were used to repay all of the $85 of outstanding
borrowings at that time under the Revolving Loans and for general corporate
purposes. Millennium Chemicals and Millennium America guarantee the obligations
under the Credit Agreement. Under the terms of this issuance and sale,
Millennium America and Millennium Chemicals entered into an exchange and
registration rights agreement with the initial purchasers of the $100 additional
principal amount of these 9.25% Senior Notes. Pursuant to this agreement, each
of Millennium America and Millennium Chemicals agreed to: (1) file with the
Securities and Exchange Commission on or before July 24, 2003 a registration
statement relating to a registered exchange offer for the notes, and (2) use its
reasonable efforts to cause this exchange offer registration statement to be
declared effective under the Securities Act on or before October 22, 2003. On
June 13, 2003, Millennium America and Millennium Chemicals, as guarantor,
initially filed a registration statement with the Securities and Exchange
Commission, and on December 15, 2003, filed an amended registration statement.
However, as of March 31, 2004, the exchange offer registration statement had not
yet been declared effective. As a result, since October 22, 2003, Millennium
America has been obligated to pay additional interest at the annualized rate of
approximately 1.00% to each holder of the $100 additional amount of notes. This
additional interest will be paid until such time as the registration statement
becomes effective.
11
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
The Company had $21 of outstanding undrawn standby letters of credit and no
outstanding borrowings under the Revolving Loans and, accordingly, had $129 of
unused availability under such facility at March 31, 2004. In addition to
letters of credit outstanding under the Credit Agreement, the Company also had
outstanding undrawn standby letters of credit and bank guarantees under other
arrangements of $6 at March 31, 2004. The Company had unused availability under
short-term uncommitted lines of credit, other than the Credit Agreement, of $43
at March 31, 2004.
The Revolving Loans are available in US dollars, British pounds and euros.
The Revolving Loans may be borrowed, repaid and reborrowed from time to time.
The Revolving Loans include a $50 letter of credit subfacility and a swingline
facility in the amount of $25. As of March 31, 2004, $21 was outstanding under
the letter of credit subfacility, and no amount under the swingline facility.
The Term Loans were entirely prepaid on November 25, 2003, which effectively
retired the Term Loans as any such amounts prepaid may not be reborrowed. The
interest rates on the Revolving Loans and the Term Loans are floating rates
based upon margins over LIBOR, NIBOR, or the Administrative Agent's prime
lending rate, as the case may be. Such margins, as well as the facility fee, are
based on the Company's Leverage Ratio, as defined.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. The Company was in compliance with all covenants under the
Credit Agreement in effect at March 31, 2004.
The financial covenants in the Credit Agreement, prior to the amendment
consummated in the fourth quarter of 2003, which is described below, included a
Leverage Ratio and an Interest Coverage Ratio. The Leverage Ratio is the ratio
of Total Indebtedness to cumulative EBITDA for the prior four fiscal quarters,
each as defined in the Credit Agreement prior to the amendment in the fourth
quarter of 2003. The Interest Coverage Ratio is the ratio of cumulative EBITDA
for the prior four fiscal quarters to Net Interest Expense, for the same period,
each as defined in the Credit Agreement prior to the amendment in the fourth
quarter of 2003. To permit the Company to be in compliance, these covenants were
also amended in the fourth quarter of 2001, in the second quarter of 2002, and
in the second quarter of 2003. The amendment in the second quarter of 2002 was
conditioned upon the consummation of an offering in June 2002 of $100 additional
principal amount of the 9.25% Senior Notes and using such proceeds for the
repayment of all of the $35 of outstanding borrowings at that time under the
Revolving Loans and to repay $65 outstanding under the Term Loans. The amendment
in the second quarter of 2003 was not conditioned on the sale of $100 additional
principal amount of the 9.25% Senior Notes in April 2003. The amendment in the
fourth quarter of 2003 was conditioned on the Company obtaining at least $110 of
long-term financing in the capital markets, which the Company satisfied by the
sale by Millennium Chemicals of the 4.00% Convertible Senior Debentures. The
amendment in the fourth quarter of 2003 amended, among other things, the maximum
availability under the Credit Agreement from $175 to $150, the performance
criteria for the Interest Coverage Ratio, the definition of EBITDA, and replaced
the Leverage Ratio with a Senior Secured Leverage Ratio. Under the financial
covenants now in effect, the Company is required to maintain a Senior Secured
Leverage Ratio, defined as the ratio of Senior Secured Indebtedness, as defined,
to cumulative EBITDA for the prior four fiscal quarters, each as defined, of no
more than 1.25 to 1.00 for each of the remaining quarters of 2004 and 1.00 to
1.00 for the first quarter of 2005 and thereafter, and an Interest Coverage
Ratio, defined as the ratio of cumulative EBITDA for the prior four fiscal
quarters to Net Interest Expense, for the same period, each as defined, of no
less than 1.35 to 1.00 for the first and second quarters of 2004; 1.40 to 1.00
for the third quarter of 2004; 1.50 to 1.00 for the fourth quarter of 2004; and
1.75 to 1.00 for the first quarter of 2005 and thereafter. The covenants in the
Credit Agreement also limit, among other things, the ability of the Company
and/or certain subsidiaries of the Company to: (i) incur debt and issue
preferred stock; (ii) create liens; (iii) engage in sale/leaseback transactions;
(iv) declare or pay dividends on, or purchase, the Company's stock; (v) make
restricted payments; (vi) engage in transactions with affiliates; (vii) sell
assets; (viii) engage in mergers or acquisitions; (ix) engage in domestic
accounts receivable securitization transactions; and (x) enter into restrictive
agreements. In the event the Company sells certain assets as specified in the
Credit Agreement, and the Leverage Ratio is equal to or greater than 3.75 to
1.00, the outstanding Revolving Loans must be prepaid with a portion of the Net
Cash Proceeds, as defined, of such sale. In addition, the maximum availability
under the Credit Agreement will be decreased by 50% of the aggregate Net Cash
Proceeds received from such asset sales in excess of $100 from November 18,
2003, the effective date of the fourth quarter 2003 amendment. Any sale
involving Equistar or certain inventory or accounts receivable will reduce the
maximum availability under the Credit Agreement by 100% of such Net Cash
Proceeds received. The obligations under the Credit Agreement are collateralized
by: (1) a pledge of 100% of the stock of the Company's existing and future
12
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
domestic subsidiaries and 65% of the stock of certain of the Company's existing
and future foreign subsidiaries, in both cases other than subsidiaries that hold
immaterial assets (as defined in the Credit Agreement); (2) all the equity
interests held by the Company's subsidiaries in Equistar and the La Porte
Methanol Company (which pledges are limited to the right to receive
distributions made by Equistar and the La Porte Methanol Company, respectively);
and (3) all present and future accounts receivable, intercompany indebtedness
and inventory of the Company's domestic subsidiaries, other than subsidiaries
that hold immaterial assets. As a result of the announced stock-for-stock
business combination with Lyondell, the Company will have to obtain amendments
or waivers of certain provisions of its Credit Agreement prior to the closing of
the proposed transaction. At a minimum, the Company expects that it will have to
obtain a waiver of Section 6.05 of the Credit Agreement, which relates to the
convenant that the Company will not consolidate with or merge into any other
person or sell or otherwise dispose of certain assets, as defined, and Section
7(m), which relates to a Change in Control triggering an Event of Default, each
as defined.
Millennium America also has outstanding $500 aggregate principal amount of
7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes") and $250
aggregate principal amount of 7.625% Senior Debentures due November 15, 2026
(the "7.625% Senior Debentures" and, together with the 7.00% Senior Notes and
the 9.25% Senior Notes the "Senior Notes"), that are fully and unconditionally
guaranteed by Millennium Chemicals. The indenture under which the 7.00% Senior
Notes and 7.625% Senior Debentures were issued contains certain covenants that
limit, among other things: (i) the ability of Millennium America and its
Restricted Subsidiaries (as defined) to grant liens or enter into sale/leaseback
transactions; (ii) the ability of the Restricted Subsidiaries to incur
additional indebtedness; and (iii) the ability of Millennium America and
Millennium Chemicals to merge, consolidate or transfer substantially all of
their respective assets. This indenture allows Millennium America and its
Restricted Subsidiaries, as defined, to grant security on loans of up to 15% of
Consolidated Net Tangible Assets ("CNTA"), as defined, of Millennium America and
its consolidated subsidiaries. Accordingly, based upon CNTA and secured
borrowing levels at March 31, 2004, any reduction in CNTA below approximately
$1,000 would decrease the Company's availability under the Revolving Loans by
15% of any such reduction. CNTA was approximately $2,000 at March 31, 2004. The
7.00% Senior Notes and the 7.625% Senior Debentures can be accelerated by the
holders thereof if any other debt in excess of $20 is in default and is
accelerated.
The 9.25% Senior Notes were issued by Millennium America and are guaranteed
by Millennium Chemicals. The indenture under which the 9.25% Senior Notes were
issued contains certain covenants that limit, among other things, the ability of
the Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." Although the Company has no intention at the
present time to pay dividends or make distributions, repurchase its Common
Stock, or make other restricted payments, the Company would be prohibited by
this covenant from making any such payments at the present time. The indenture
also requires the calculation of a Consolidated Coverage Ratio, defined as the
ratio of the aggregate amount of EBITDA, as defined, for the four most recent
fiscal quarters to Consolidated Interest Expense, as defined, for the four most
recent quarters. The Company must maintain a Consolidated Coverage Ratio of 2.25
to 1.00. Currently, the Company's Consolidated Coverage Ratio is below this
threshold and, therefore, the Company is subject to certain restrictions that
limit the Company's ability to incur additional indebtedness, pay dividends,
repurchase capital stock, make certain other restricted payments, and enter into
mergers or consolidations. However, if the 9.25% Senior Notes were to receive
investment grade credit ratings from both Moody's Investors Service ("Moody's")
and Standard & Poor's ("S&P") and meet certain other requirements as specified
in the indenture, certain of these covenants would no longer apply. The 9.25%
Senior Notes can be accelerated by the holders thereof if any other debt in
excess of $30 is in default and is accelerated.
The consummation of the announced stock-for-stock business combination with
Lyondell is expected to give each holder of the 9.25% Senior Notes the right to
require the Company to purchase all or part of such holder's securities at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase.
13
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
The 4.00% Convertible Senior Debentures were issued by Millennium Chemicals
and are guaranteed by Millennium America. Holders may convert their debentures
into shares of the Company's Common Stock at a conversion price, subject to
adjustment upon certain events, of $13.63 per share, which is equivalent to a
conversion rate of 73.3568 shares per one thousand dollar principal amount of
debentures. The conversion privilege may be exercised under the following
circumstances:
o prior to November 15, 2018, during any fiscal quarter commencing
after December 31, 2003, if the closing price of the Company's
Common Stock on at least 20 of the 30 consecutive trading days
ending on the first trading day of that quarter is greater than
125% of the then current conversion price;
o on or after November 15, 2018, at any time after the closing
price of the Company's Common Stock on any date is greater than
125% of the then current conversion price;
o if the debentures are called for redemption;
o upon the occurrence of specified corporate transactions,
including a consolidation, merger or binding share exchange
pursuant to which the Company's Common Stock would be converted
into cash or property other than securities;
o during the five business-day period after any period of ten
consecutive trading days in which the trading price per one
thousand dollar principal amount of debentures on each day was
less than 98% of the product of the last reported sales price of
the Company's Common Stock and the then current conversion rate;
and
o at any time when the long-term credit rating assigned to the
debentures is either Caa1 or lower, in the case of Moody's, or B-
or lower in the case of S&P, or either rating agency has
discontinued, withdrawn or suspended its rating.
The debentures are redeemable at the Company's option beginning November
15, 2010 at a redemption price equal to 100% of their principal amount, plus
accrued interest, if any. On November 15 in each of 2010, 2013 and 2018, holders
of debentures will have the right to require the Company to repurchase all or
some of the debentures they own at a purchase price equal to 100% of their
principal amount, plus accrued interest, if any. The Company may choose to pay
the purchase price in cash or shares of the Company's Common Stock or any
combination thereof. In the event of a conversion request upon a credit ratings
event as described above, after June 18, 2006, the Company has the right to
deliver, in lieu of shares of Common Stock, cash or a combination of cash and
shares of Common Stock. Holders of the debentures will also have the right to
require the Company to repurchase all or some of the debentures they own at a
cash purchase price equal to 100% of their principal amount, plus accrued
interest, if any, upon the occurrence of certain events constituting a
Fundamental Change, as defined in the indenture. This indenture also limits the
Company's ability to consolidate with or merge with or into any other person, or
sell, convey, transfer or lease properties and assets substantially as an
entirety to another person, except under certain circumstances. The consummation
of the announced stock-for-stock business combination with Lyondell is not
expected to be considered a Fundamental Change, as defined in the indenture.
However, the Company does expect to be required to execute with the trustee a
supplemental indenture providing that each debenture shall be convertible into
Lyondell's common stock at a conversion ratio, as adjusted in accordance with
the Agreement of Merger between the Company and Lyondell.
Although the Company does not currently pay a dividend to its common
stockholders, Lyondell does currently pay a dividend. If the Company executes a
supplemental indenture with the trustee, as described above, and Lyondell
continues to pay a dividend to its common stockholders, the conversion rate, as
defined, will be adjusted. The conversion rate will be increased by a percentage
calculated by dividing the average of the last reported sales price of Common
Stock for the ten consecutive trading days prior to the business day immediately
preceding the record date by this average less the amount in cash per share that
Lyondell distributes to holders of Common Stock. At the current market prices of
Lyondell common stock, this percentage would be approximately 1.4% per quarter.
14
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
At March 31, 2004, the Company was in compliance with all covenants in the
indentures governing the 9.25% Senior Notes, 7.00% Senior Notes, 7.625% Senior
Debentures, and 4.00% Convertible Senior Debentures.
The Company, as well as the Senior Notes and the 4.00% Convertible Senior
Debentures are currently rated BB- by S&P with a stable outlook. Moody's has
assigned the Company a senior implied rating of Ba3, and the Senior Notes and
the 4.00% Convertible Senior Debentures a rating of B1 with a negative outlook.
These ratings are non-investment grade ratings.
On March 29, 2004, S&P placed the Company's ratings on Credit Watch with
negative implications reflecting the future ownership by the highly leveraged
Lyondell and the strong likelihood that the ratings of the Company will be
lowered modestly upon completion of the proposed transaction. On March 30, 2004,
Moody's placed the Company's credit ratings under review for possible downgrade
following the announcement by Lyondell and the Company that the two companies
have signed a definitive agreement that, if completed, will result in the
acquisition of the Company by Lyondell in a stock-for-stock transaction. Moody's
cited concerns over the potential impact that future distributions by the
Company, as an operating subsidiary of Lyondell, to Lyondell will have on the
Company's credit profile over the long term, primarily the potential for
elevated debt levels over the next several years while Lyondell seeks to
de-lever its balance sheet.
Note 10 - Derivative Instruments and Hedging Activities
The Company is exposed to market risk, such as changes in currency exchange
rates, interest rates and commodity pricing. To manage the volatility relating
to these exposures, the Company selectively enters into derivative transactions
pursuant to the Company's policies for hedging practices. Designation is
performed on a specific exposure basis to support hedge accounting. The changes
in fair value of these hedging instruments are offset in part or in whole by
corresponding changes in the fair value or cash flows of the underlying
exposures being hedged. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes.
Foreign Currency Exposure Management: The Company manufactures and sells
its products in a number of countries throughout the world and, as a result, is
exposed to movements in foreign currency exchange rates. The primary purpose of
the Company's foreign currency hedging activities is to manage the volatility
associated with foreign currency purchases and foreign currency sales. The
Company utilizes forward exchange contracts with various terms. As of March 31,
2004, these contracts had expiration dates no later than October 25, 2004.
The Company utilizes forward exchange contracts with contract terms
normally lasting less than three months to protect against the adverse effect
that exchange rate fluctuations may have on foreign currency denominated trade
receivables and trade payables. These derivatives have not been designated as
hedges for accounting purposes. The gains and losses on both the derivatives and
the foreign currency denominated trade receivables and payables are recorded in
current earnings. Net amounts included in earnings, which offset similar amounts
from foreign currency denominated trade receivables and payables, were gains of
$2 for the three months ended March 31, 2004 and were not significant for the
three months ended March 31, 2003.
In addition, the Company utilizes forward exchange contracts that qualify
as cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales and inventory purchases. Gains and losses on
these instruments are deferred in other comprehensive income ("OCI") until the
underlying transaction is recognized in earnings. The earnings impact is
reported either in Net sales or Cost of products sold to match the underlying
transaction being hedged. Net amounts on forward exchange contracts designated
as cash flow hedges reclassified to earnings to match the gain or loss on the
underlying transaction being hedged were insignificant for each of the three
months ended March 31, 2004 and 2003. Hedge ineffectiveness had no impact on
earnings for the first quarter of 2004 or 2003. No forward exchange contract
cash flow hedges were discontinued during the first quarter of 2004 or 2003. The
Company currently estimates that net gains of approximately $1 on foreign
currency cash flow hedges included in OCI at March 31, 2004 will be reclassified
to earnings during the next twelve months.
Commodity Price Risk Management: Raw materials used by the Company are
subject to price volatility caused by demand and supply conditions and other
unpredictable factors. The Company selectively uses commodity swap arrangements
and commodity options with various terms to manage the volatility related to
anticipated purchases of natural gas and certain commodities, a portion of which
exposes the Company to natural gas price risk. As of March 31, 2004, there were
no such contracts outstanding. The mark-to-market gains or losses on qualifying
hedges were included in OCI to the extent effective, and reclassified into Cost
of products sold in the
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
period during which the hedged transaction affected earnings. The mark-to-market
gains or losses on ineffective portions of hedges are recognized in Cost of
products sold immediately. Net amounts on commodity swaps designated as cash
flow hedges reclassified to Cost of products sold to match the gain or loss on
the underlying transaction being hedged were insignificant for the three months
ended March 31, 2004, and were gains of $1 for the three months ended March 31,
2003. Hedge ineffectiveness had no impact on earnings for the first quarter of
2004 or 2003. No commodity swap cash flow hedges were discontinued in the first
quarter of 2004, and commodity swap cash flow hedges that were discontinued in
the first quarter of 2003 were not significant. The Company had no gains or
losses on commodity swaps included in OCI at March 31, 2004.
In addition, the Company utilizes commodity swap and option arrangements to
manage price volatility related to anticipated purchases of certain commodities,
a portion of which exposes the Company to natural gas price risk. These
derivatives have not been designated as hedges for accounting purposes. The
gains and losses on these instruments are recorded in current earnings. Net
gains and losses included in earnings were not significant in each of the three
months ended March 31, 2004 and 2003.
Interest Rate Risk Management: The Company selectively uses derivative
instruments to manage its ratio of debt bearing fixed interest rates to debt
bearing variable interest rates. At March 31, 2004, the Company had outstanding
interest rate swap agreements with a notional amount of $225, which are
designated as fair value hedges of underlying fixed-rate obligations. The fair
value of these interest rate swap agreements was approximately $6 at March 31,
2004 resulting in an increase in the carrying value of long-term debt and the
recognition of a corresponding swap asset. The gains and losses on both the
interest rate swaps and the hedged portion of the underlying debt are recorded
in Interest expense. Hedge ineffectiveness had no significant impact on earnings
for the first quarter of 2004 or 2003.
Note 11 - Pension and Other Postretirement Benefits
The following table provides the components of net periodic benefit cost
and the amount of contributions and benefits paid:
Other Postretirement
Pension Benefits Benefits
For the Three Months Ended For the Three Months Ended
March 31, March 31,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net periodic benefit cost (income)
Service cost, including interest.......... $ 3 $ 3 $-- $--
Interest on PBO........................... 13 13 -- 1
Return on plan assets..................... (16) (17) -- --
Amortization of unrecognized net loss..... 3 2 -- --
Amortization of prior service cost........ -- -- (1) --
---- ---- --- ---
Net periodic benefit cost (income)........ 3 1 (1) 1
Defined contribution plans................ 1 1 -- --
---- ---- --- ---
Net periodic benefit cost (income)........ $ 4 $ 2 $(1) $ 1
==== ==== === ===
Company pension trust contributions.......... $ 5 $ 2
==== ====
Company other postretirement benefits paid... $ 3 $ 2
=== ===
The Company expects to contribute approximately $12 to pension plan trusts
during 2004.
As a result of rising medical benefit costs and competitive business
conditions, the Company announced in the first quarter of 2004 that, effective
April 1, 2004, it will reduce the level of retiree medical benefits provided to
essentially all of its retirees by offering a monthly subsidy to retirees that
enroll in designated preferred provider organization plans or Medicare
supplement insurance plans. This change will reduce the Company's accumulated
postretirement benefit obligation by approximately $45. Beginning in 2004, the
Company is recognizing this reduction ratably over approximately thirteen years
through other postretirement employee benefit ("OPEB") net periodic benefit
cost. Estimated OPEB net periodic benefit cost for the year ending December 31,
2004, after giving effect to this change, will be income of approximately $4
compared to a benefit cost of $2 for the year ended
16
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
December 31, 2003. The Company estimates that cash payments for retiree medical
and insurance benefits for the year ending December 31, 2004 will be
approximately $11, which is slightly less than such payments made for the year
ended December 31, 2003, as the Company transitions to the subsidy plan. Cash
payments for retiree medical and insurance benefits in subsequent years are
estimated to be significantly less than in 2003.
Note 12 - Comprehensive Income (Loss)
The following table sets forth the components of other comprehensive income
and total comprehensive income (loss):
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Net loss .................................................... $(10) $(27)
Other comprehensive income
Net gains (losses) on derivative financial instruments ... 1 (3)
Currency translation adjustment .......................... 9 13
---- ----
Total comprehensive income (loss) ........................... $ -- $(17)
==== ====
Note 13 - Commitments and Contingencies
Legal and Environmental: The Company and various Company subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. These include several proceedings alleging injurious exposure
of plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries. Typically, such
proceedings involve claims made by many plaintiffs against many defendants in
the chemical industry. Millennium Petrochemicals is one of a number of
defendants in 100 active premises-based asbestos cases (i.e., where the alleged
exposure to asbestos-containing materials was to employees of third-party
contractors or subcontractors on the premises of certain facilities, and did not
relate to any products manufactured or sold by the Company or any of its
predecessors). Millennium Petrochemicals is responsible for these premises-based
cases as a result of its indemnification obligations under the Company's
agreements with Equistar; however, Equistar will be required to indemnify
Millennium Petrochemicals for any such claims filed on or after December 1, 2004
related to the assets or businesses contributed by Millennium Petrochemicals to
Equistar. Millennium Inorganic Chemicals is one of a number of defendants in 80
premises-based asbestos cases filed in late 2003 in Baltimore County, Maryland.
Approximately half of these claims are on the active docket and half are on an
inactive docket of claims for which no legal obligations attach and no defense
costs are being incurred. With respect to the active docket, at the current
rate, cases filed in 2003 are not likely to be scheduled to be tried for at
least 10 years. To date, no premises-based asbestos case has been tried in the
State of Maryland. Defunct indirect Company subsidiaries are among a number of
defendants in 65 premises-based asbestos cases in Texas.
Together with other alleged past manufacturers of lead-based paint and lead
pigments for use in paint, the Company, a current subsidiary, as well as alleged
predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, counties, school districts, individuals and the State of
Rhode Island, and seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and public nuisance. Legal proceedings
relating to lead pigment or paint are in various procedural stages or pre-trial,
post-trial and post-dismissal settings.
The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has not accrued
any liabilities for any lead-based paint and lead pigment litigation. The
Company has insurance policies that potentially provide approximately $1,000 in
indemnity coverage for lead-based paint and lead pigment litigation. That
estimate of indemnity coverage would depend upon the timing of any request for
indemnity and the solvency of the various insurance carriers that are part of
the coverage block at the time of such a request. As a result of insurance
coverage litigation initiated by the Company,
17
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
an Ohio trial court issued a decision in 2002 effectively requiring certain
insurance carriers to resume paying defense costs in the lead-based paint and
lead pigment cases. Indemnity coverage was not at issue in the Ohio court's
decision. The insurance carriers may appeal the Ohio decision regarding defense
costs, and they have in the past and may in the future attempt to deny indemnity
coverage if there is ever a settlement or an adverse judgment in any lead-based
paint or lead pigment case.
In 1986, a predecessor of a company that is now a subsidiary of the Company
sold its recently acquired Glidden Paints business. As part of that sale, the
seller agreed to indemnify the purchaser against certain claims made during the
first eight years after the sale; the purchaser agreed to indemnify the seller
against such claims made after the eight-year period. With the exception of two
cases, all pending lead-based paint and lead pigment litigation involving the
Company and its subsidiaries, including the Rhode Island case, was filed after
the eight-year period. Accordingly, the Company believes that it is entitled to
full indemnification from the purchaser against lead-based paint and lead
pigment cases filed after the eight-year period. The purchaser disputes that it
has such an indemnification obligation, and claims that the seller must
indemnify it. Since the Company's defense costs to date largely have been
covered by insurance and there never has been a settlement paid by, nor any
judgment rendered against, the Company (or any other company sued in any
lead-based paint or lead pigment litigation), the parties' indemnification
claims have not been ruled on by a court.
The Company's businesses are subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances concerning, among other things,
emissions to the air, discharges and releases to land and water, the generation,
handling, storage, transportation, treatment and disposal of wastes and other
materials and the remediation of environmental pollution caused by releases of
wastes and other materials (collectively, "Environmental Laws"). The operation
of any chemical manufacturing plant and the distribution of chemical products
entail risks under Environmental Laws, many of which provide for substantial
fines and criminal sanctions for violations. There can be no assurance that
significant costs or liabilities will not be incurred with respect to the
Company's operations and activities. In particular, the production of TiO[u]2,
TiCl[u]4, VAM, acetic acid, methanol and certain other chemicals involves the
handling, manufacture or use of substances or compounds that may be considered
to be toxic or hazardous within the meaning of certain Environmental Laws, and
certain operations have the potential to cause environmental or other damage.
Significant expenditures including facility-related expenditures could be
required in connection with any investigation and remediation of threatened or
actual pollution, triggers under existing Environmental Laws tied to production
or new requirements under Environmental Laws.
The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flow in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the eight-county Houston/Galveston region has been
designated a severe non-attainment area for ozone by the U.S. Environmental
Protection Agency ("EPA") under a "one-hour" ozone standard. Emission reduction
controls for nitrogen oxides ("NOx"), which contribute to ozone formation, must
be installed at each of Equistar's six plants located in the Houston/Galveston
region prior to a November 2007 compliance deadline for the one-hour ozone
standard. Revised rules adopted by the regulatory agencies changed the required
NOx emission reduction levels from 90% to 80%. Under the revised 80% standard,
Equistar estimates that the incremental capital expenditures would range between
$165 and $200. Equistar's cumulative capital expenditures through March 31, 2004
totaled $80. This estimate could be affected by increased costs for stricter
proposed controls over highly reactive, volatile organic compounds ("HRVOCs").
The regulatory agency for the state of Texas, the Texas Commission on
Environmental Quality, or "TCEQ," plans to finalize the HRVOC rules by December
2004. Equistar is still assessing the impact of the proposed HRVOC revisions. In
addition, in April 2004, the EPA designated the eight-county Houston/Galveston
region a moderate non-attainment area under an "eight-hour" ozone standard. As a
result, the TCEQ must submit a plan to the EPA in 2007 to demonstrate compliance
with the eight-hour ozone standard in 2010. The TCEQ will continue with its
current plan to revise the HRVOC rules in 2004. The timing and amount of the
estimated expenditures are subject to these regulatory and other uncertainties,
as well as to obtaining the necessary permits and approvals. There can be no
assurance as to the ultimate cost of implementing any plan developed to comply
with the final ozone standards.
18
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Certain Company subsidiaries have been named as defendants, potentially
responsible parties (the "PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites or facilities currently owned,
operated or used by the Company's current or former subsidiaries or
predecessors. The Company's estimated individual exposure for potential cleanup
costs, damages for personal injury or property damage related to these
proceedings has been estimated to be between $0.01 for several small sites and
$22 for the Kalamazoo River Superfund Site in Michigan. A subsidiary of the
Company is named as one of four PRPs at the Kalamazoo River Superfund Site. The
site involves contamination of river sediments and floodplain soils with
polychlorinated biphenyls. In October 2000, the Kalamazoo River Study Group (the
"KRSG"), of which one of the Company's subsidiaries is a member, submitted to
the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study
(the "Draft Study"), which evaluated a number of remedial options. The cost for
these remedial options ranged from $0 to $2,500; however, the Company strongly
believes that the likelihood of the cost being either $0 or $2,500 is remote. At
the end of 2001, the EPA took responsibility for the site at the request of the
State. Based upon an interim allocation, the Company is paying 35% of costs
related to studying and evaluating the environmental condition of the river.
Guidance as to how the EPA will likely proceed with any further evaluation and
remediation at the Kalamazoo site is not expected until late 2004 at the
earliest. At the point in time when the EPA announces how it intends to proceed,
the Company's estimate of its liability at the Kalamazoo site will be
re-evaluated. The Company's ultimate liability for the Kalamazoo site will
depend on many other factors that have not yet been determined, including the
ultimate remedy selected by the EPA, the number and financial viability of the
other members of the KRSG as well as of other PRPs outside the KRSG, and the
determination of the final allocation among the members of the KRSG and other
PRPs. Recently, the EPA identified 14 private entities and 7 municipalities and
sent them formal requests for information regarding their possible connection
with the Kalamazoo site.
On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit against
Millennium Inorganic Chemicals Inc., a wholly-owned operating subsidiary of the
Company, alleging breach of contract and other related causes of action arising
out of a contract between the two parties for the supply of packaging equipment.
In the suit, Slidell seeks unspecified monetary damages. The Company believes it
has substantial defenses to these allegations and has filed a counterclaim
against Slidell.
The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities, is between $49 and $78 and has accrued $62 as of March 31, 2004.
Expenses or benefits associated with these contingencies including changes in
estimated costs to resolve these contingencies are included in the Company's
S,D&A costs. Expenses resulting from changes in estimated liabilities for these
contingencies for the three months ended March 31, 2004 were $6 and for the
three months ended March 31, 2003 were not significant. The Company expects that
cash expenditures related to these potential liabilities will be made over a
number of years, and will not be concentrated in any single year. This accrual
also reflects the fact that certain Company subsidiaries have contractual
obligations to indemnify other parties against certain environmental and other
liabilities. For example, the Company agreed as part of its Demerger to
indemnify Hanson and certain of its subsidiaries against certain of such
contractual indemnification obligations, and Millennium Petrochemicals agreed as
part of the December 1, 1997 formation of Equistar to indemnify Equistar for
certain liabilities related to the assets contributed by Millennium
Petrochemicals to Equistar in excess of $7, which threshold was exceeded in
2001. The terms of these indemnification agreements do not limit the maximum
potential future payments to the indemnified parties. The maximum amount of
future indemnification payments is dependent upon many factors and is not
practicable to estimate.
No assurance can be given that actual costs for environmental matters will
not exceed accrued amounts or that estimates made with respect to
indemnification obligations will be accurate. In addition, it is possible that
costs will be incurred with respect to contamination, indemnification
obligations or other environmental matters that currently are unknown or as to
which it is currently not possible to make an estimate.
19
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 14 - Operations by Business Segment
The Company's principal operations are managed and grouped as three
separate business segments: Titanium Dioxide and Related Products, Acetyls and
Specialty Chemicals. Operating income and expense not identified with the three
separate business segments, including certain of the Company's S,D&A costs not
allocated to its three business segments, employee-related costs from
predecessor businesses and certain other expenses, are grouped under the heading
Other. The following is a summary of the Company's operations by business
segment:
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Net sales
Titanium Dioxide and Related Products... $333 $288
Acetyls................................. 106 102
Specialty Chemicals..................... 26 25
---- ----
Total................................ $465 $415
==== ====
Operating income (loss)
Titanium Dioxide and Related Products... $ 12 $ 21
Acetyls................................. 9 7
Specialty Chemicals..................... 2 2
Other................................... (10) (3)
---- ----
Total................................ $ 13 $ 27
==== ====
Depreciation and amortization
Titanium Dioxide and Related Products... $ 19 $ 22
Acetyls................................. 3 3
Specialty Chemicals..................... 2 2
---- ----
Total................................ $ 24 $ 27
==== ====
Capital expenditures
Titanium Dioxide and Related Products... $ 9 $ 7
Acetyls................................. 1 --
Specialty Chemicals..................... -- 1
Other................................... -- --
---- ----
Total................................. $ 10 $ 8
==== ====
March 31, December 31,
2004 2003
--------- ------------
Goodwill
Titanium Dioxide and Related Products... $ 56 $ 56
Acetyls................................. 48 48
---- ----
Total................................ $104 $104
==== ====
20
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 15 - Information on Equistar
The following is summarized financial information for Equistar:
March 31, December 31,
2004 2003
--------- ------------
Current assets....................................................... $1,225 $1,261
Noncurrent assets.................................................... 3,741 3,767
------ ------
Total assets...................................................... $4,966 $5,028
====== ======
Current liabilities.................................................. $ 688 $ 754
Noncurrent liabilities............................................... 2,674 2,673
Partners' capital.................................................... 1,604 1,601
------ ------
Total liabilities and partners' capital........................... $4,966 $5,028
====== ======
Three Months Ended
March 31,
------------------
2004 2003
------ ------
Net sales................. $1,962 $1,641
Operating income (loss)... 61 (96)
Net income (loss)......... 5 (146)
On March 31, 2003, Equistar completed transactions involving a 15-year
propylene supply arrangement and the sale of a polypropylene production facility
in Pasadena, Texas. Equistar received total cash proceeds of approximately $194,
including the value of the polypropylene inventory sold. Approximately $159 of
the total cash proceeds represented a partial prepayment for product to be
delivered under a long-term supply arrangement, primarily at cost-based prices.
Equistar will recognize this deferred revenue over 15 years, as the associated
product is delivered.
Note 16 - Supplemental Financial Information
Millennium America, a wholly-owned indirect subsidiary of the Company, is a
holding company for all of the Company's operating subsidiaries other than its
operations in the United Kingdom, France, Brazil and Australia. Millennium
America is the issuer of the 7% Senior Notes, the 7.625% Senior Debentures, and
the 9.25% Senior Notes, and is the principal borrower under the Credit
Agreement. Millennium Chemicals is the issuer of the 4% Convertible Senior
Debentures. Millennium America fully and unconditionally guarantees all
obligations under the Credit Agreement and the 4.00% Convertible Senior
Debentures. The 7% Senior Notes, the 7.625% Senior Debentures and the 9.25%
Senior Notes, as well as outstanding amounts under the Credit Agreement, are
fully and unconditionally guaranteed by Millennium Chemicals. Accordingly, the
following Condensed Consolidating Balance Sheets at March 31, 2004 and December
31, 2003, and the Condensed Consolidating Statements of Operations and Cash
Flows for each of the three month periods ended March 31, 2004 and 2003, are
provided for the Company as supplemental financial information to the Company's
consolidated financial statements to disclose the financial position, results of
operations and cash flows of (i) Millennium Chemicals, (ii) Millennium America,
and (iii) all subsidiaries of Millennium Chemicals other than Millennium America
(the "Non-Guarantor Subsidiaries"). The investment in subsidiaries of Millennium
America and Millennium Chemicals are accounted for by the equity method;
accordingly, the shareholders' deficit of Millennium America and Millennium
Chemicals are presented as if each of those companies and their respective
subsidiaries were reported on a consolidated basis.
21
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information - Continued
Millennium
Condensed Consolidating Millennium Millennium Non-Guarantor Chemicals Inc.
Balance Sheets America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
March 31, 2004 (Restated - See Note 17)
ASSETS
Inventories .............................. $ -- $ -- $ 417 $ -- $ 417
Other current assets ..................... 80 1 515 -- 596
Property, plant and equipment, net ....... -- -- 753 -- 753
Investment in Equistar ................... -- -- 471 -- 471
Investment in subsidiaries ............... 354 101 -- (455) --
Other assets ............................. 15 3 36 -- 54
Goodwill ................................. -- -- 104 -- 104
Due from parent and affiliates, net ...... 655 -- -- (655) --
------ ---- ------ ------- ------
Total assets .......................... $1,104 $105 $2,296 $(1,110) $2,395
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
EQUITY
Current maturities of long-term debt ..... $ -- $ -- $ 5 $ -- $ 5
Other current liabilities ................ 34 8 373 -- 415
Long-term debt ........................... 1,245 150 14 -- 1,409
Deferred income taxes .................... -- -- 269 -- 269
Other liabilities ........................ -- -- 324 -- 324
Due to parent and affiliates, net ........ -- 2 653 (655) --
------ ---- ------ ------- ------
Total liabilities ..................... 1,279 160 1,638 (655) 2,422
Minority interest ........................ -- -- 28 -- 28
Shareholders' (deficit) equity ........... (175) (55) 630 (455) (55)
------ ---- ------ ------- ------
Total liabilities and shareholders'
(deficit) equity ................... $1,104 $105 $2,296 $(1,110) $2,395
====== ==== ====== ======= ======
December 31, 2003 (Restated - See Note 17)
ASSETS
Inventories .............................. $ -- $ -- $ 457 $ -- $ 457
Other current assets ..................... 24 1 526 -- 551
Property, plant and equipment, net ....... -- -- 766 -- 766
Investment in Equistar ................... -- -- 469 -- 469
Investment in subsidiaries ............... 369 95 -- (464) --
Other assets ............................. 12 3 36 -- 51
Goodwill ................................. -- -- 104 -- 104
Due from parent and affiliates, net ...... 733 -- -- (733) --
------ ---- ------ ------- ------
Total assets .......................... $1,138 $ 99 $2,358 $(1,197) $2,398
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
EQUITY
Current maturities of long-term debt ..... $ -- $ -- $ 6 $ -- $ 6
Other current liabilities ................ 9 1 355 -- 365
Long-term debt ........................... 1,295 150 16 -- 1,461
Deferred income taxes .................... -- -- 272 -- 272
Other liabilities ........................ -- -- 325 -- 325
Due to parent and affiliates, net ........ -- 6 727 (733) --
------ ---- ------ ------- ------
Total liabilities ..................... 1,304 157 1,701 (733) 2,429
Minority interest ........................ -- -- 27 -- 27
Shareholders' (deficit) equity ........... (166) (58) 630 (464) (58)
------ ---- ------ ------- ------
Total liabilities and shareholders'
(deficit) equity .................. $1,138 $ 99 $2,358 $(1,197) $2,398
====== ==== ====== ======= ======
22
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information - Continued
Millennium
Condensed Consolidating Millennium Millennium Non-Guarantor Chemicals Inc.
Statements of Operations America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
Three Months Ended
March 31, 2004
Net sales ................................ $ -- $ -- $465 $-- $465
Cost of products sold .................... -- -- 388 -- 388
Depreciation and amortization ............ -- -- 24 -- 24
Selling, development and
administrative expense ................ -- -- 33 -- 33
Asset impairment charges ................. -- -- 3 -- 3
Combination costs ........................ -- -- 3 -- 3
Reorganization and office closure
costs ................................. -- -- 1 -- 1
---- ---- ---- --- ----
Operating income ...................... -- -- 13 -- 13
Interest expense, net .................... (23) (2) -- -- (25)
Intercompany interest income
(expense), net ........................ 25 -- (25) -- --
Earnings on Equistar investment .......... -- -- 2 -- 2
Equity in loss of subsidiaries ........... (12) (9) -- 21 --
Other expense, net ....................... -- -- (2) -- (2)
(Provision for) benefit from
income taxes .......................... (1) 1 2 2
---- ---- ---- --- ----
Net loss .............................. $(11) $(10) $(10) $21 $(10)
==== ==== ==== === ====
Three Months Ended
March 31, 2003
Net sales ................................ $ -- $ -- $415 $-- $415
Cost of products sold .................... -- 331 -- 331
Depreciation and amortization ............ -- -- 27 -- 27
Selling, development and
administrative expense ................ -- -- 30 -- 30
---- ---- ---- --- ----
Operating income ...................... -- -- 27 -- 27
Interest expense, net .................... (22) -- -- -- (22)
Intercompany interest income
(expense), net ........................ 24 (1) (23) -- --
Loss on Equistar investment .............. -- -- (43) -- (43)
Equity in loss of subsidiaries ........... (41) (25) -- 66 --
Other expense, net ....................... -- (3) -- (3)
(Provision for) benefit from
income taxes .......................... (1) -- 16 -- 15
Cumulative effect of accounting
change ................................ 1 (1) (1) -- (1)
---- ---- ---- --- ----
Net loss .............................. $(39) $(27) $(27) $66 $(27)
==== ==== ==== === ====
23
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information - Continued
Millennium
Condensed Consolidating Millennium Millennium Non-Guarantor Chemicals Inc.
Statements of Cash Flow America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
Three Months Ended March 31, 2004
Cash flows from operating activities......... $ 22 $(1) $ 16 $-- $ 37
---- --- ---- --- ----
Cash flows from investing activities
Capital expenditures...................... -- -- (10) -- (10)
---- --- ---- --- ----
Cash used in investing activities..... -- -- (10) -- (10)
---- --- ---- --- ----
Cash flows from financing activities
Proceeds from long-term debt.............. 16 -- -- -- 16
Repayment of long-term debt............... (68) -- (2) -- (70)
Intercompany.............................. 85 (8) (77) -- --
Increase in notes payable................. -- 6 -- -- 6
Proceeds from exercise of stock options... -- 3 -- -- 3
---- --- ---- --- ----
Cash provided by (used in) financing
activities.......................... 33 1 (79) -- (45)
---- --- ---- --- ----
Effect of exchange rate changes on cash...... -- -- 5 -- 5
---- --- ---- --- ----
Increase (decrease) in cash and cash
equivalents............................... 55 -- (68) -- (13)
Cash and cash equivalents at beginning of
year..................................... 20 -- 189 -- 209
---- --- ---- --- ----
Cash and cash equivalents at end of period... $ 75 $-- $121 $-- $196
==== === ==== === ====
Three Months Ended March 31, 2003
Cash flows from operating activities......... $ 25 $(1) $(38) $-- $(14)
---- --- ---- --- ----
Cash flows from investing activities
Capital expenditures...................... -- -- (8) -- (8)
---- --- ---- --- ----
Cash used in investing activities...... -- -- (8) -- (8)
---- --- ---- --- ----
Cash flows from financing activities
Dividends to shareholders................. -- (9) -- -- (9)
Proceeds from long-term debt.............. 95 -- 1 -- 96
Repayment of long-term debt............... (61) -- (5) -- (66)
Intercompany.............................. (64) 10 54 -- --
Increase in notes payable................. -- -- (1) -- (1)
---- --- ---- --- ----
Cash (used in) provided by financing
activities.......................... (30) 1 49 -- 20
---- --- ---- --- ----
Effect of exchange rate changes on cash...... -- -- 2 -- 2
---- --- ---- --- ----
(Decrease) increase in cash and cash
equivalents............................... (5) -- 5 -- --
Cash and cash equivalents at beginning of
year...................................... 6 -- 119 -- 125
---- --- ---- --- ----
Cash and cash equivalents at end of period... $ 1 $-- $124 $-- $125
==== === ==== === ====
24
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 17 - Restatement of Financial Statements
The Company restated its financial statements for the first quarter of 2004
to correct errors in the computation of its deferred income taxes relating to
its Equistar investment. This restatement decreased the Company's liability for
deferred income taxes and its Shareholders' deficit at March 31, 2004 and
December 31, 2003 by $15. The restatement did not affect the Company's cash flow
or operating income for any period.
A summary of the aggregate effect of this restatement on the Company's
Consolidated Balance Sheets for the periods presented herein is shown below.
As of March 31, 2004 As of December 31, 2003
------------------------- -------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
(Audited)
Changes to Consolidated Balance Sheets:
Deferred income taxes............... $ 284 $ 269 $ 287 $ 272
Total liabilities................... 2,437 2,422 2,444 2,429
Accumulated deficit................. (987) (972) (977) (962)
Total shareholders' deficit......... (70) (55) (73) (58)
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company restated its financial statements for the first quarter of 2004
to correct errors in the computation of its deferred income taxes relating to
its Equistar investment. This restatement decreased the Company's liability for
deferred income taxes and its Shareholders' deficit at March 31, 2004 and
December 31, 2003 by $15 million. The restatement did not affect the Company's
cash flow or operating income for any period.
Disclosure Concerning Forward-Looking Statements
The statements in this Quarterly Report that are not historical facts are,
or may be deemed to be, "forward-looking statements" ("Cautionary Statements")
as defined in the Private Securities Litigation Reform Act of 1995. Some of
these statements can be identified by the use of forward-looking terminology
such as "prospects," "outlook," "believes," "estimates," "intends," "may,"
"will," "should," "anticipates," "expects" or "plans," or the negative or other
variation of these or similar words, or by discussion of trends and conditions,
strategy or risks and uncertainties. In addition, from time to time, Millennium
Chemicals Inc. and its majority-owned subsidiaries ("the Company") or its
representatives have made or may make forward-looking statements in other
filings that the Company makes with the Securities and Exchange Commission, in
press releases or in oral statements made by or with the approval of one of its
authorized executive officers.
These forward-looking statements are only present expectations as at
May 14, 2004, the date the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 was originally filed with the Securities and
Exchange Commission. Actual events or results may differ materially. Factors
that could cause such a difference include:
o the ability of the Company to complete its proposed business
combination with Lyondell Chemical Company ("Lyondell"), as described
in more detail in "Agreement for a Stock-for-Stock Business
Combination" below.
o the cyclicality and volatility of the chemical industries in which the
Company and Equistar Chemicals, LP ("Equistar") operate, particularly
fluctuations in the demand for ethylene, its derivatives and acetyls
and the sensitivity of these industries to capacity additions;
o general economic conditions in the geographic regions where the
Company and Equistar generate sales, and the impact of government
regulation and other external factors, in particular, the events in
the Middle East;
o the ability of Equistar to distribute cash to its partners and
uncertainties arising from the Company's shared control of Equistar
and the Company's contractual commitments regarding possible future
capital contributions to Equistar;
o changes in the cost of energy and raw materials, particularly natural
gas and ethylene, and the ability of the Company and Equistar to pass
on cost increases to their customers;
o the ability of raw material suppliers to fulfill their commitments;
o the ability of the Company and Equistar to achieve their productivity
improvement, cost reduction and working capital targets, and the
occurrence of operating problems at manufacturing facilities of the
Company or Equistar;
o risks of doing business outside the United States, including currency
fluctuations;
o the cost of compliance with the extensive environmental regulations
affecting the chemical industry and exposure to liabilities for
environmental remediation and other environmental matters relating to
the Company's and Equistar's current and former operations;
o pricing and other competitive pressures;
o legal proceedings relating to present and former operations (including
proceedings based on alleged exposure to lead-based paints and lead
pigments, asbestos and other materials), ongoing or future tax audits,
and other claims; and
o the Company's substantial indebtedness and its impact on the Company's
cash flow, business operations and ability to obtain additional
financing;
26
A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, as initially filed with the Securities and
Exchange Commission.
Some of these Cautionary Statements are discussed in more detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Quarterly Report. Readers are cautioned not to place undue
reliance on forward-looking or Cautionary Statements, which reflect present
expectations as at May 14, 2004, the date the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004 was originally filed with the
Securities and Exchange Commission. The Company undertakes no obligation to
update any forward-looking or Cautionary Statement. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements in this Quarterly Report. Readers are advised to consult
any further disclosures the Company may make on related subjects in subsequent
10-Q, 8-K and 10-K reports, including amendments thereto, to the Securities and
Exchange Commission.
Agreement for a Stock-for-Stock Business Combination
On March 29, 2004, Lyondell and the Company announced that their Boards of
Directors had approved, and the companies had executed, a definitive agreement
for a stock-for-stock business combination of the companies, expected to be
tax-free to the Company, Lyondell and their respective shareholders.
The Company's shareholders will receive between 0.95 and 1.05 shares of
Lyondell common stock for each share of the Company's Common Stock, depending on
the volume-weighted average price for the Lyondell shares for the 20 trading
days ending on the third trading day before closing. The Company's shareholders
will receive 0.95 shares of Lyondell stock if the average Lyondell stock price
is $20.50 per share or greater, and 1.05 shares if it is $16.50 per share or
less. Between the two prices, the exchange ratio varies proportionately. The new
shares will be entitled to receive the same cash dividend as existing
outstanding Lyondell shares. The Company's 4.00% convertible senior debentures
(the "4.00% Convertible Senior Debentures") will become convertible into
Lyondell common stock in accordance with the terms of the convertible debenture
indenture following the closing of the transaction.
The transaction is subject to customary conditions, including approval by
both companies' shareholders and receipt of required regulatory approvals and
amendments to each of Lyondell's and the Company's credit agreements and
Lyondell's receivables sales facility. The transaction is expected to close in
the third quarter of 2004. The transaction involves the merger of Millennium
Subsidiary LLC, a newly created subsidiary of the Company, into the Company, in
which the Company's common stock now held by its public shareholders will be
converted into common stock of Lyondell, and the Company's preferred stock to be
issued to Lyondell immediately before the merger will be converted into common
stock of the surviving entity. As a result, the Company will become a
wholly-owned subsidiary of Lyondell. After the close of the transaction, the
combined company will be called "Lyondell Chemical Company" and will be
headquartered in Houston, Texas. Dan F. Smith, Lyondell's current President and
Chief Executive Officer, and Dr. William T. Butler, Lyondell's Chairman of the
Board of Directors, will each continue in their respective roles. Two
independent members of the Company's current Board will join the Lyondell Board,
effective at the time of the closing.
In addition, in connection with the proposed transaction Lyondell and
Millennium have filed relevant materials with the Securities and Exchange
Commission, including Lyondell's registration statement containing a preliminary
joint proxy statement/prospectus, which was filed on April 26, 2004. The
definitive joint proxy statement/prospectus will be sent to holders of
Lyondell's and the Company's common stock when it becomes available. Investors
and security holders are urged to read the preliminary joint proxy
statement/prospectus on file with the Securities and Exchange Commission, the
definitive joint proxy statement/prospectus when it becomes available and any
other relevant documents filed by Lyondell or the Company because they contain,
or will contain, important information. Investors and security holders may
obtain a free copy of the preliminary joint proxy statement/prospectus and the
definitive joint proxy statement/prospectus (when it becomes available) and
other documents filed by Lyondell and the Company with the Securities and
Exchange Commission for free at the Securities and Exchange Commission's website
at www.sec.gov. The preliminary joint proxy statement/prospectus and the
definitive joint proxy statement/prospectus (when it becomes available) and the
other documents filed by the Company may be obtained free from the Company by
calling the Company's Investor Relations Department at (410) 229-8113. The
preliminary joint proxy statement/prospectus and the definitive joint proxy
statement/prospectus (when it becomes available) and the other documents filed
by Lyondell may also be obtained free from Lyondell by calling Lyondell's
Investor Relations Department at (713) 309-4590.
27
For additional information relating to the proposed transaction, including
risk factors, please refer to the preliminary joint proxy statement/prospectus
and the definitive joint proxy statement/prospectus (when it becomes available).
The respective executive officers and directors of Lyondell and the Company
and other persons may be deemed to be participants in the solicitation of
proxies in respect of the proposed transaction. Information regarding Lyondell's
executive officers and directors is available in its proxy statement filed with
the Securities and Exchange Commission by Lyondell on March 16, 2004, and
information regarding the Company's directors and executive officers is
available in its Amendment No. 1 to its Annual Report on Form 10-K for the year
ended December 31, 2003, filed with the Securities and Exchange Commission on
April 27, 2004. Other information regarding the participants in the proxy
solicitation and a description of their direct and indirect interests, by
security holdings or otherwise, will be contained in the joint proxy
statement/prospectus and other relevant materials filed with the Securities and
Exchange Commission.
For the three months ended March 31, 2004, the Company has incurred
approximately $3 million of professional services costs in connection with the
proposed combination, which are included in Combination costs in the
accompanying unaudited Consolidated Statements of Operations.
Cost Reduction Program; Suspension of Dividend
On July 21, 2003, the Company announced that it would implement a program
to reduce costs. This program included a reduction of approximately 5% in the
number of the Company's employees worldwide. The Company closed its executive
offices in Red Bank, New Jersey, effective September 1, 2003, and relocated its
headquarters to Hunt Valley, Maryland, where the Company has existing
administrative offices. In addition, the Company announced the suspension of
payment of dividends on its Common Stock. Given the volatile industry in which
it operates, the Company initiated these actions to reduce expenses and
strengthen its balance sheet.
The Company expects to realize approximately $20 million of annual
operating expense savings from the cost reduction program announced on July 21,
2003. The Company has recorded cumulative charges related to the program of $19
million (including $1 million for the three months ended March 31, 2004), of
which $18 million was for severance-related costs and $1 million was for
contractual commitments for ongoing lease costs, net of expected sublease
income, associated with the closure of the Red Bank, New Jersey office for the
remaining term of the lease agreement. Cumulative severance-related cash
payments of $22 million for the implementation of this program were made through
March 31, 2004, including $8 million in the first quarter of 2004. Substantially
all of the remainder of the cash payments relating to this program, which are
estimated to be approximately $4 million, will be disbursed during the next
several quarters. No significant charges associated with this program are
expected in future periods. The cumulative charges of $19 million associated
with the cost reduction program are less than the cumulative severance-related
cash payments of $22 million because some of the cash payments made under the
program, primarily for retirement benefits, were related to expenses and
liabilities that were recorded through the normal course of business in periods
prior to the implementation of this program in mid-2003.
Operating Results
The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls, and Specialty
Chemicals. Operating income and expense not identified with the three separate
business segments, including certain of the Company's selling, development and
administrative ("S,D&A") costs not allocated to its three business segments,
employee-related costs from predecessor businesses and certain other expenses,
are grouped under the heading Other. The Company also holds a 29.5% interest in
Equistar, which is accounted for using the equity method (see Note 1 to the
unaudited Consolidated Financial Statements included in this Quarterly Report.)
A discussion of Equistar's financial results for the relevant period is included
below, as the Company's interest in Equistar represents a significant component
of the Company's assets and Equistar's results can have a significant effect on
the Company's consolidated results of operations.
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the discussion included
in its Annual Report on Form 10-K for the fiscal year ended December 31, 2003,
as amended by Amendment No. 2 on Form 10-K/A filed with the Securities and
Exchange Commission on August 9, 2004.
28
Results of Consolidated Operations
Three Months Ended
March 31,
-----------------------------
2004 2003
------------ --------------
(Millions, except share data)
Net sales............................................ $ 465 $ 415
Operating income..................................... 13 27
Earnings (loss) on Equistar investment............... 2 (43)
Loss before cumulative effect of accounting change... (10) (26)
Net loss............................................. (10) (27)
Basic and diluted loss per share:
Before cumulative effect of accounting change..... (0.16) (0.41)
After cumulative effect of accounting change...... (0.16) (0.43)
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
The Company's net loss was $10 million or $0.16 per share for the three
months ended March 31, 2004 and $27 million or $0.43 per share for the
corresponding period in 2003. In the first quarter of 2003, the Company reported
a charge of $1 million or $0.02 per share for the cumulative effect of an
accounting change for the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", due
to required changes in the method for recognizing asset retirement obligations.
The Company's pre-tax loss decreased by $27 million in the first quarter of 2004
compared to the corresponding period in 2003, primarily due to a $45 million
improvement in earnings (loss) from the Company's investment in Equistar,
partially offset by a $14 million decrease in operating income and a $3 million
increase in net interest expense.
The Company's operating income in the first quarter of 2004 of $13 million
decreased $14 million, from $27 million in the first quarter of 2003, due to a
decrease in operating income of $9 million in the Titanium Dioxide and Related
Products business segment and an increase of $7 million in Other operating loss
not identified with the three separate business segments, partially offset by a
$2 million increase in operating income in the Acetyls business segment.
Operating income in the Specialty Chemicals business segment for the first
quarter of 2004 was consistent with the corresponding period in the prior year.
Net sales of $465 million in the first quarter of 2004 increased by $50
million, or 12%, from the same period in the prior year primarily due to higher
sales volume in all three of the Company's business segments, particularly the
Titanium Dioxide and Related Products business segment, and foreign currency
strength against the US dollar in the Titanium Dioxide and Related Products and
Acetyls business segments.
Manufacturing and other costs of sales were generally higher in the first
quarter of 2004 compared to the corresponding quarter of the prior year
primarily due to the unfavorable effect of translating local currency
manufacturing costs into a weaker US dollar, partially offset by higher fixed
cost absorption due to higher plant operating rates, particularly in the
Titanium Dioxide and Related Products business segment. Despite lower natural
gas costs in the first quarter of 2004, manufacturing and other costs of sales
in the Acetyls business segment were higher compared to the first quarter of
2003 primarily due to higher ethylene costs and higher inventory costs carried
into the first quarter of 2004.
S,D&A costs of $33 million in the first quarter of 2004 increased by $3
million from the first quarter of 2003 due to a net increase in expenses not
identified with the three separate business segments, including expenses of $6
million in the first quarter of 2004 resulting from changes in estimated
liabilities for legal and environmental contingencies related to predecessor
businesses. Certain S,D&A costs are lower as the result of the Company's cost
reduction program announced in July 2003 (see "Cost Reduction Program;
Suspension of Dividend" above); however, certain other S,D&A costs are higher,
including pension costs.
Asset impairment charges in the first quarter of 2004 of $3 million
represented expenditures for property, plant and equipment at the Company's Le
Havre, France titanium dioxide ("TiO[u2]") manufacturing plant. In the fourth
quarter of 2003, the carrying value of the property, plant and equipment at the
Le Havre manufacturing plant was determined to be impaired, and a charge was
required to write down the basis in those assets to zero. Capital expenditures
at this plant
29
for the three months ended March 31, 2004 were capitalized as property, plant
and equipment and then immediately written off as asset impairment charges as a
result of evaluating those assets for impairment under the guidance of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). Since the basis of all of the property, plant and equipment for this
plant has been written down to zero, no depreciation expense for this plant is
recorded in manufacturing and other costs of sales.
Combination costs in the first quarter of 2004 of $3 million represented
professional services costs incurred in connection with the proposed
stock-for-stock business combination announced on March 29, 2004 that, if
completed, will result in the acquisition of the Company by Lyondell (see
"Agreement for a Stock-for-Stock Business Combination" above).
The Company reported pre-tax earnings from its investment in Equistar of $2
million for the three months ended March 31, 2004, an improvement of $45 million
compared to the pre-tax loss of $43 million for the three months ended March 31,
2003. The loss in the first quarter of 2003 included the Company's share of a
loss on the sale of a polypropylene production facility of $4 million. The
increase in Equistar's results for the first quarter of 2004 compared to the
same period of 2003 is primarily due to higher product margins as a result of
higher sales prices, especially for co-products propylene and benzene, which
increased more than increases in the costs of raw materials. In addition, the
first quarter of 2004 benefited from 5% higher ethylene and derivative sales
volume. The improving economic conditions and tight supply and demand balances
in several of Equistar's products contributed to improved operating results at
Equistar during the first quarter of 2004 compared to the first quarter of 2003.
Despite first quarter 2004 crude oil prices that exceeded those experienced
during the first quarter of 2003, the economics of ethylene production from
Equistar's liquid-based crackers improved compared to the first quarter of 2003.
This was due to the significantly higher co-product sales prices in the first
quarter of 2004 that more than offset the impact of the higher crude oil prices.
Outlook for 2004
The Company expects seasonally higher TiO[u]2 sales volume and improved
TiO[u]2 average selling prices in local currencies in the second quarter of
2004 compared to the first quarter of 2004 in the Titanium Dioxide and Related
Products business segment. The Company expects to realize higher selling prices
as a result of implementing previous price announcements. Lower production
volume is expected in the second quarter of 2004 due to the scheduling of
planned maintenance activities.
In the second quarter of 2004, sales volume for the Acetyls business
segment is expected to be similar to the first quarter of 2004 and average
selling prices in local currency are expected to be slightly higher. In the
second quarter of 2004, scheduled maintenance shutdowns will reduce production
volume. Additionally, quarter-to-date prices paid and future prices indicate
higher costs in the second quarter of 2004 for natural gas, Acetyls' primary raw
material. These higher costs may compress margins.
In the second quarter of 2004, business conditions in the Specialty
Chemicals business segment are expected to be similar to the first quarter of
2004.
Improving industry conditions have enabled Equistar to deal with continuing
high and volatile raw material and energy prices more successfully than at any
other time in the past three years. Although it may be premature to say that the
economy and the chemical industry have entered a sustained strong upturn, with
continued solid global economic growth and some stabilization of energy prices,
Equistar could benefit from improvement in both demand and product margins
during the course of 2004. Equistar's sales volume for key products has improved
thus far in the second quarter of 2004. Equistar completed a major maintenance
turnaround in the second quarter of 2004, which will have some effect on the
quarter's operating results.
30
Segment Analysis
Titanium Dioxide and Related Products
Three Months Ended
March 31,
------------------
2004 2003
---- ----
(Millions)
Net sales............................................ $333 $288
Operating income..................................... 12 21
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Operating income in the Titanium Dioxide and Related Products business
segment for the first quarter of 2004 was $12 million, a decrease of $9 million,
or 43%, compared to the corresponding quarter of 2003 as higher sales volume ($7
million) and higher selling prices ($1 million) were more than offset by higher
manufacturing and other costs of sales ($13 million) and higher S,D&A expenses
($1 million). Additionally, operating income for the first quarter of 2004
included asset impairment charges of $3 million, which represented the write off
of expenditures for property, plant and equipment at the Company's Le Havre,
France manufacturing plant. In the fourth quarter of 2003, the carrying value of
the property, plant and equipment at the Le Havre manufacturing plant was
determined to be impaired, and a charge was required to write down the basis in
those assets to zero. Capital expenditures at this plant for the three months
ended March 31, 2004 were capitalized as property, plant and equipment and then
immediately written off as asset impairment charges as a result of evaluating
those assets for impairment under the guidance of SFAS No. 144. Since the basis
of all the property, plant and equipment for this plant has been written down to
zero, no depreciation expense for this plant is recorded in manufacturing and
other costs of sales.
Sales revenue in the first quarter of 2004 of $333 million increased by $45
million, or 16%, compared to the prior year quarter primarily due to higher
sales volume and the favorable effect of translating sales denominated in
stronger foreign currencies into US dollars. TiO[u]2 sales volume in the first
quarter of 2004 was 15% higher than the prior year quarter, with increases
reported in all major geographic regions globally except Central and South
America. Overall, the Company estimates that the global TiO[u]2 market increased
approximately 3% to 5% compared to the first quarter of the prior year due to
improved global economic conditions. The Company's average TiO[u]2 selling price
for the first quarter of 2004 in local currencies was 7% lower than the first
quarter of the prior year, but was similar to the prior year quarter in US
dollar terms.
Manufacturing and other costs of sales in the first quarter of 2004 were
higher than the corresponding quarter of 2003 due to the unfavorable effect of
translating manufacturing costs incurred in stronger foreign currencies into US
dollars, partially offset by higher fixed cost absorption due to increased
production volume, lower depreciation expense due to the writedown of assets at
the Le Havre manufacturing plant, and lower energy and raw material costs. The
overall operating rate of the Company's TiO[u]2 plants was 93% in the first
quarter of 2004 compared to 88% in the same period of 2003. The increase in
operating rates was due to strong operating performance across the operating
facilities in response to increased demand.
S,D&A expenses in the first quarter of 2004 increased by $1 million or 5%
compared to the prior year quarter.
Acetyls
Three Months Ended
March 31,
------------------
2004 2003
---- ----
(Millions)
Net sales............................................ $106 $102
Operating income..................................... 9 7
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Operating income in the Acetyls business segment of $9 million for the
three months ended March 31, 2004 increased by $2 million, or 29%, compared to
operating income of $7 million in the first quarter of 2003 primarily due
31
to higher average selling prices ($3 million) and higher sales volume ($1
million), partially offset by higher manufacturing and other costs of sales ($2
million). Net sales for the first quarter of 2004 of $106 million increased by
$4 million, or 4%, from the prior year quarter primarily due to slightly higher
average selling prices. The aggregate weighted-average selling price in US
dollars for vinyl acetate monomer ("VAM") and acetic acid increased by 4% from
the first quarter of 2003 primarily due to the favorable effect of translating
sales denominated in stronger foreign currencies into US dollars. Aggregate
sales volume for VAM and acetic acid for the first quarter of 2004 was 8% higher
than the first quarter of 2003.
Manufacturing and other costs of sales for VAM and acetic acid in the first
quarter of 2004 were higher than the first quarter of 2003, despite lower
natural gas costs in the first quarter of 2004, primarily due to higher ethylene
costs and higher-cost inventory carried into the first quarter of 2004 compared
to the first quarter of 2003 due to higher average feedstock costs in December
2003, particularly natural gas and ethylene.
S,D&A expenses in the first quarter of 2004 were similar to S,D&A
expenses in the same period of 2003.
Specialty Chemicals
Three Months Ended
March 31,
------------------
2004 2003
---- ----
(Millions)
Net sales............................................ $26 $25
Operating income..................................... 2 2
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Operating income in the Specialty Chemicals business segment for the three
months ended March 31, 2004 of $2 million was similar to operating income for
the three months ended March 31, 2003. Lower average selling prices in the first
quarter of 2004 were offset by lower S,D&A costs.
Net sales for the three months ended March 31, 2004 of $26 million
increased by $1 million, or 4%, compared to the three months ended March 31,
2003. Sales volume in the first quarter of 2004 was 8% higher than the first
quarter of 2003 as sales volume increased across most product lines. However,
the weighted average selling price for Specialty Chemicals products decreased by
4% from the first quarter of 2003. The combination of competitive pricing and
proportionally higher sales volume in lower-priced product lines contributed to
the decrease in average selling prices in the first quarter of 2004 compared to
the same period of 2003.
Manufacturing and other costs of sales in the first quarter of 2004 were
similar to the first quarter of 2003. The average cost of crude sulfate
turpentine ("CST"), the principal raw material used in the business, and costs
for raw materials other than CST were higher in the first quarter of 2004 than
in the prior year quarter. However, the increase in manufacturing costs per unit
was offset by lower distribution costs per unit.
S,D&A costs for the three months ended March 31, 2004 were $1 million,
or 33%, lower than the same period of 2003.
Other
Three Months Ended
March 31,
------------------
2004 2003
---- ----
(Millions)
Operating loss....................................... $(10) $(3)
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Operating loss not identified with the three separate business segments for
the three months ended March 31, 2004 was $7 million higher than the three
months ended March 31, 2003 primarily due to expenses of $6 million in the first
quarter of 2004 resulting from changes in estimated liabilities for legal and
environmental contingencies related to predecessor businesses, $3 million of
professional services costs incurred in connection with the proposed
stock-for-
32
stock business combination announced on March 29, 2004 that, if completed, will
result in the acquisition of the Company by Lyondell (see "Agreement for a
Stock-for-Stock Business Combination" above), and $1 million of reorganization
and office closure charges associated with the Company's cost reduction program
announced in July 2003, partially offset by $1 million higher income from
employee benefit plans related to predecessor businesses and a $2 million
reduction in other expenses not allocated to the separate business segments.
Equistar
Three Months Ended
March 31,
------------------
2004 2003
---- -----
(Millions)
Income (loss), as reported by Equistar............... $5 $(146)
Earnings (loss) on Equistar investment, as reported
by the Company.................................... $2 $ (43)
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
The Company reported pre-tax earnings from its investment in Equistar of $2
million for the three months ended March 31, 2004, an increase of $45 million
compared to the pre-tax loss of $43 million for the three months ended March 31,
2003.
Equistar reported net income of $5 million in the first quarter of 2004
compared to a net loss of $146 million in the first quarter of 2003. Equistar's
loss in the first quarter of 2003 included a $12 million loss on the sale of a
polypropylene production facility. The remaining increase in Equistar's results
in the first quarter of 2004 compared to the corresponding period in the prior
year is primarily due to higher product margins as a result of higher sales
prices, especially for co-products propylene and benzene, which increased more
than increases in the costs of raw materials. In the first quarter 2004,
ethylene producers experienced significantly higher prices for co-products such
as propylene and benzene, contributing to a lower net cost of ethylene
production for producers using liquid raw materials, which yield a higher ratio
of co-products. Supply and demand fundamentals have also improved as evidenced
by higher operating rates for ethylene producers.
Equistar's Petrochemicals segment reported operating income of $104 million
for the first quarter of 2004, an increase of $136 million compared to an
operating loss of $32 million in the first quarter of the prior year. The
increase in operating income was primarily due to higher product margins.
Revenues for Equistar's Petrochemicals segment increased 21% in the first
quarter of 2004 compared to the corresponding period in the prior year due to
higher sales prices and an 8% increase in sales volume. Benchmark ethylene sales
prices averaged 11% higher in the first quarter of 2004 compared to the first
quarter of 2003, while benchmark propylene sales prices averaged 21% higher.
Costs of sales increased 13% due to the higher sales volume and an increase in
the cost of crude oil-based liquid raw materials, which increased due to a 3%
increase in the cost of crude oil. Equistar also used a higher proportion of
liquid raw materials in the first quarter of 2004 as a result of the timing of
scheduled maintenance turnarounds of liquids-based ethylene plants in the first
quarter of 2004 relative to the first quarter of 2003, which also contributed to
higher sales of co-products, such as propylene.
Equistar's Polymers segment reported an operating loss of $14 million
compared to an operating loss of $35 million in the first quarter 2003. The
operating loss in the first quarter of 2003 included a $12 million loss on the
sale of a polypropylene production facility in Pasadena, Texas. The remaining
improvement in results in the first quarter of 2004 compared to the first
quarter of 2003 was primarily due to higher product margins as sales prices
increased more than raw material costs. Revenues in Equistar's Polymers segment
in the first quarter of 2004 increased 9% due to higher average sales prices,
which increased in response to higher raw material costs. While sales volume in
both periods were comparable, first quarter 2003 sales volume included
approximately 85 million pounds of sales related to the Pasadena, Texas
polypropylene plant, which was sold on March 31, 2003. On a comparable basis,
sales volume increased 7% in the first quarter of 2004 compared to the first
quarter of 2003. Costs of sales increased 7% in the first quarter of 2004
compared to the corresponding period in the prior year due to higher raw
material costs, primarily ethylene.
33
Liquidity and Capital Resources
The Company has historically financed its operations primarily through cash
generated from its operations and cash distributions from Equistar, as well as
debt financings. In 2003, the Company financed its foreign operations through
cash generated from those foreign operations and its domestic operations through
cash generated from domestic operations and cash from various sources of
external financing. Cash generated from operations is to a large extent
dependent on economic, financial, competitive and other factors affecting the
Company's businesses. The amount of cash distributions received from Equistar is
affected by Equistar's results of operations and current and expected future
cash flow requirements. The Company has not received any cash distributions from
Equistar since 2000 and it is unlikely the Company will receive any cash
distributions from Equistar in 2004.
Cash provided by operating activities for the quarter ended March 31, 2004
was $37 million compared to $14 million of cash used in the quarter ended March
31, 2003. The $51 million increase in cash provided by operating activities was
primarily due to favorable movements in trade working capital (defined as trade
accounts receivable, inventory and trade accounts payable) in the first quarter
of 2004 compared to unfavorable movements in the same period of the prior year
($53 million) and movements in accrued expenses and other liabilities in the
first quarter of 2004 that were favorable to a greater extent than the first
quarter of 2003 ($22 million), partially offset by lower operating income before
depreciation and amortization ($17 million) and various other net unfavorable
changes ($7 million).
Cash used in investing activities for capital expenditures in the quarter
ended March 31, 2004 was $10 million compared to $8 million used for capital
expenditures in the first quarter of 2003. The low level of capital spending in
the first quarter of both 2004 and 2003 reflects the Company's continued focus
on optimization of its asset base. Capital spending for 2004 is expected to be
approximately $60 million. The Company expects to finance its planned capital
spending using cash generated from operations and through availability under its
Credit Agreement, if necessary.
Cash used in financing activities was $45 million in the first quarter of
2004 compared to $20 million of cash provided by financing activities in the
first quarter of 2003. Financing activities in the first quarter of 2004
included $54 million of net repayments of debt, while the first quarter of 2003
included $30 million of net debt proceeds. In the first quarter of 2004, the
Company repatriated cash of approximately $107 million from Australia and Europe
to the US. This cash was used to reduce outstanding borrowings under the
Company's Credit Agreement and for general corporate purposes. Dividends paid to
shareholders totaled $9 million for the first quarter of 2003 and no dividends
were paid in the first quarter of 2004. In July 2003, the Company announced the
suspension of the payment of dividends on its Common Stock, as more fully
described in "Cost Reduction Program; Suspension of Dividend" above.
The maturities of the Company's long-term debt through 2009 and thereafter
are as follows:
April 1 - Total at Total at
December 31, March 31, December 31,
2004 2005 2006 2007 2008 2009 Thereafter 2004 2003
------------ ---- ---- ---- ---------- ---- ---------- --------- ------------
(Millions)
Revolving loans................ $-- $-- $ -- $-- $ -- $-- $ -- $ -- $ 52
7.00% Senior Notes............. -- -- 500 -- -- -- -- 500 500
7.625% Senior Debentures....... -- -- -- -- -- -- 250 250 250
9.25% Senior Notes............. -- -- -- -- 475 -- -- 475 475
4.00% Convertible Senior
Debentures.................. -- -- -- -- -- -- 150 150 150
Other long-term debt........... 4 5 5 2 1 1 3 21 23
--- --- ---- --- ---- --- ---- ------ ------
Maturities of long-term debt... $ 4 $ 5 $505 $ 2 $476 $ 1 $403 1,396 1,450
=== === ==== === ==== === ====
Non-cash components of
long-term debt.............. 18 17
------ ------
Total debt..................... 1,414 1,467
Less: current maturities of
long-term debt.............. (5) (6)
------ ------
Total long-term debt........... $1,409 $1,461
====== ======
34
On November 25, 2003, the Company received approximately $125 million in
gross proceeds and, on December 2, 2003, received an additional $25 million in
gross proceeds from the sale by Millennium Chemicals Inc. ("Millennium
Chemicals") of $150 million aggregate principal amount of the 4.00% Convertible
Senior Debentures, which are guaranteed by Millennium America Inc. ("Millennium
America"), a wholly-owned indirect subsidiary of Millennium Chemicals. The gross
proceeds of the sale were used to repay all of the $47 million of outstanding
borrowings at that time under the term loan portion (the "Term Loan") of the
Company's five-year credit agreement expiring June 18, 2006 (the "Credit
Agreement") and $103 million of outstanding borrowings under the revolving loan
portion (the "Revolving Loans") of its Credit Agreement, which currently has a
maximum availability of $150 million. The Company used $4 million of cash to pay
the fees relating to the sale of the 4.00% Convertible Senior Debentures.
On April 25, 2003, the Company received approximately $107 million in net
proceeds ($109 million in gross proceeds) from the issuance and sale by
Millennium America of $100 million additional principal amount at maturity of
its 9.25% Senior Notes due June 15, 2008 (the "9.25% Senior Notes"), which are
guaranteed by Millennium Chemicals. The net proceeds were used to repay all of
the $85 million of outstanding borrowings at that time under the Revolving Loans
and for general corporate purposes. Millennium Chemicals and Millennium America
guarantee the obligations under the Credit Agreement. Under the terms of this
issuance and sale, Millennium America and Millennium Chemicals entered into an
exchange and registration rights agreement with the initial purchasers of the
$100 million additional principal amount of these 9.25% Senior Notes. Pursuant
to this agreement, each of Millennium America and Millennium Chemicals agreed
to: (1) file with the Securities and Exchange Commission on or before July 24,
2003 a registration statement relating to a registered exchange offer for the
notes, and (2) use its reasonable efforts to cause this exchange offer
registration statement to be declared effective under the Securities Act on or
before October 22, 2003. On June 13, 2003, Millennium America and Millennium
Chemicals, as guarantor, initially filed a registration statement with the
Securities and Exchange Commission, and on December 15, 2003, filed an amended
registration statement. However, as of March 31, 2004, the exchange offer
registration statement had not yet been declared effective. As a result, since
October 22, 2003, Millennium America has been obligated to pay additional
interest at the annualized rate of approximately 1.00% to each holder of the
$100 million additional amount of notes. This additional interest will be paid
until such time as the registration statement becomes effective.
The Company depends on its Credit Agreement as its primary source of
liquidity for its operations and working capital needs. At April 30, 2004, the
Company had $21 million of outstanding undrawn standby letters of credit and no
outstanding borrowings under the Revolving Loans and, accordingly, had $129
million of unused availability under such facility. At that date, in addition to
letters of credit outstanding under the Credit Agreement, the Company also had
outstanding undrawn standby letters of credit and bank guarantees under other
arrangements of $6 million. The Company had unused availability under short-term
uncommitted lines of credit, other than the Credit Agreement, of $42 million at
April 30, 2004.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. The Company was in compliance with all covenants under the
Credit Agreement in effect at March 31, 2004.
The financial covenants in the Credit Agreement, prior to the amendment
consummated in the fourth quarter of 2003, which is described below, included a
Leverage Ratio and an Interest Coverage Ratio. The Leverage Ratio is the ratio
of Total Indebtedness to cumulative EBITDA for the prior four fiscal quarters,
each as defined in the Credit Agreement prior to the amendment in the fourth
quarter of 2003. The Interest Coverage Ratio is the ratio of cumulative EBITDA
for the prior four fiscal quarters to Net Interest Expense, for the same period,
each as defined in the Credit Agreement prior to the amendment in the fourth
quarter of 2003. To permit the Company to be in compliance, these covenants were
also amended in the fourth quarter of 2001, in the second quarter of 2002, and
in the second quarter of 2003. The amendment in the second quarter of 2002 was
conditioned upon the consummation of an offering in June 2002 of $100 million
additional principal amount of the 9.25% Senior Notes and using such proceeds
for the repayment of all of the $35 million of outstanding borrowings at that
time under the Revolving Loans and to repay $65 million outstanding under the
Term Loans. The amendment in the second quarter of 2003 was not conditioned on
the sale of $100 million additional principal amount of the 9.25% Senior Notes
in April 2003. The amendment in the fourth quarter of 2003 was conditioned on
the Company obtaining at least $110 million of long-term financing in the
capital markets, which the Company satisfied by the sale by Millennium Chemicals
of the 4.00% Convertible Senior Debentures. The amendment in the fourth quarter
of 2003 amended, among other things, the maximum availability under the Credit
Agreement from $175 million to $150 million, the performance criteria for the
Interest Coverage Ratio, the definition of EBITDA, and replaced the Leverage
Ratio with a Senior Secured Leverage Ratio. Under the financial covenants now in
effect, the Company is required to maintain a Senior Secured Leverage Ratio,
defined as the ratio of Senior Secured Indebtedness, as defined, to cumulative
EBITDA for the prior four fiscal quarters, each as defined, of no
35
more than 1.25 to 1.00 for each of the remaining quarters of 2004 and 1.00 to
1.00 for the first quarter of 2005 and thereafter, and an Interest Coverage
Ratio, defined as the ratio of cumulative EBITDA for the prior four fiscal
quarters to Net Interest Expense, for the same period, each as defined, of no
less than 1.35 to 1.00 for the first and second quarters of 2004; 1.40 to 1.00
for the third quarter of 2004; 1.50 to 1.00 for the fourth quarter of 2004; and
1.75 to 1.00 for the first quarter of 2005 and thereafter. The covenants in the
Credit Agreement also limit, among other things, the ability of the Company
and/or certain subsidiaries of the Company to: (i) incur debt and issue
preferred stock; (ii) create liens; (iii) engage in sale/leaseback transactions;
(iv) declare or pay dividends on, or purchase, the Company's stock; (v) make
restricted payments; (vi) engage in transactions with affiliates; (vii) sell
assets; (viii) engage in mergers or acquisitions; (ix) engage in domestic
accounts receivable securitization transactions; and (x) enter into restrictive
agreements. In the event the Company sells certain assets as specified in the
Credit Agreement, and the Leverage Ratio is equal to or greater than 3.75 to
1.00, the outstanding Revolving Loans must be prepaid with a portion of the Net
Cash Proceeds, as defined, of such sale. In addition, the maximum availability
under the Credit Agreement will be decreased by 50% of the aggregate Net Cash
Proceeds received from such asset sales in excess of $100 million from November
18, 2003, the effective date of the fourth quarter 2003 amendment. Any sale
involving Equistar or certain inventory or accounts receivable will reduce the
maximum availability under the Credit Agreement by 100% of such Net Cash
Proceeds received. The obligations under the Credit Agreement are collateralized
by: (1) a pledge of 100% of the stock of the Company's existing and future
domestic subsidiaries and 65% of the stock of certain of the Company's existing
and future foreign subsidiaries, in both cases other than subsidiaries that hold
immaterial assets (as defined in the Credit Agreement); (2) all the equity
interests held by the Company's subsidiaries in Equistar and the La Porte
Methanol Company (which pledges are limited to the right to receive
distributions made by Equistar and the La Porte Methanol Company, respectively);
and (3) all present and future accounts receivable, intercompany indebtedness
and inventory of the Company's domestic subsidiaries, other than subsidiaries
that hold immaterial assets. As a result of the announced stock-for-stock
business combination with Lyondell, the Company will have to obtain amendments
or waivers of certain provisions of its Credit Agreement prior to the closing of
the proposed transaction. At a minimum, the Company expects that it will have to
obtain a waiver of Section 6.05 of the Credit Agreement, which relates to the
covenant that the Company will not consolidate with or merge into any other
person or sell or otherwise dispose of certain assets, as defined, and Section
7(m), which relates to a Change in Control triggering an Event of Default, each
as defined.
Millennium America also has outstanding $500 million aggregate principal
amount of 7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes")
and $250 million aggregate principal amount of 7.625% Senior Debentures due
November 15, 2026 (the "7.625% Senior Debentures" and, together with the 7.00%
Senior Notes and the 9.25% Senior Notes the "Senior Notes"), that are fully and
unconditionally guaranteed by Millennium Chemicals. The indenture under which
the 7.00% Senior Notes and 7.625% Senior Debentures were issued contains certain
covenants that limit, among other things: (i) the ability of Millennium America
and its Restricted Subsidiaries (as defined) to grant liens or enter into
sale/leaseback transactions; (ii) the ability of the Restricted Subsidiaries to
incur additional indebtedness; and (iii) the ability of Millennium America and
Millennium Chemicals to merge, consolidate or transfer substantially all of
their respective assets. This indenture allows Millennium America and its
Restricted Subsidiaries, as defined, to grant security on loans of up to 15% of
Consolidated Net Tangible Assets ("CNTA"), as defined, of Millennium America and
its consolidated subsidiaries. Accordingly, based upon CNTA and secured
borrowing levels at March 31, 2004, any reduction in CNTA below approximately $1
billion would decrease the Company's availability under the Revolving Loans by
15% of any such reduction. CNTA was approximately $2 billion at March 31, 2004.
The 7.00% Senior Notes and the 7.625% Senior Debentures can be accelerated by
the holders thereof if any other debt in excess of $20 million is in default and
is accelerated.
The 9.25% Senior Notes were issued by Millennium America and are guaranteed
by Millennium Chemicals. The indenture under which the 9.25% Senior Notes were
issued contains certain covenants that limit, among other things, the ability of
the Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." Although the Company has no intention at the
present time to pay dividends or make distributions, repurchase its Common
Stock, or make other restricted payments, the Company would be prohibited by
this covenant from making any such payments at the present time. The indenture
also requires the calculation of a Consolidated Coverage Ratio, defined as the
ratio of the aggregate amount of EBITDA, as defined, for the four most recent
fiscal quarters to Consolidated Interest Expense, as defined, for the four most
recent quarters. The Company must maintain a Consolidated Coverage Ratio of 2.25
to 1.00. Currently, the Company's
36
Consolidated Coverage Ratio is below this threshold and, therefore, the Company
is subject to certain restrictions that limit the Company's ability to incur
additional indebtedness, pay dividends, repurchase capital stock, make certain
other restricted payments, and enter into mergers or consolidations. However, if
the 9.25% Senior Notes were to receive investment grade credit ratings from both
Moody's Investors Service ("Moody's") and Standard & Poor's ("S&P") and meet
certain other requirements as specified in the indenture, certain of these
covenants would no longer apply. The 9.25% Senior Notes can be accelerated by
the holders thereof if any other debt in excess of $30 million is in default and
is accelerated.
The consummation of the announced stock-for-stock business combination with
Lyondell is expected to give each holder of the 9.25% Senior Notes the right to
require the Company to purchase all or part of such holder's securities at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase.
The 4.00% Convertible Senior Debentures were issued by Millennium Chemicals
and are guaranteed by Millennium America. Holders may convert their debentures
into shares of the Company's Common Stock at a conversion price, subject to
adjustment upon certain events, of $13.63 per share, which is equivalent to a
conversion rate of 73.3568 shares per one thousand dollar principal amount of
debentures. The conversion privilege may be exercised under the following
circumstances:
o prior to November 15, 2018, during any fiscal quarter commencing
after December 31, 2003, if the closing price of the Company's
Common Stock on at least 20 of the 30 consecutive trading days
ending on the first trading day of that quarter is greater than
125% of the then current conversion price;
o on or after November 15, 2018, at any time after the closing
price of the Company's Common Stock on any date is greater than
125% of the then current conversion price;
o if the debentures are called for redemption;
o upon the occurrence of specified corporate transactions,
including a consolidation, merger or binding share exchange
pursuant to which the Company's Common Stock would be converted
into cash or property other than securities;
o during the five business-day period after any period of ten
consecutive trading days in which the trading price per one
thousand dollar principal amount of debentures on each day was
less than 98% of the product of the last reported sales price of
the Company's Common Stock and the then current conversion rate;
and
o at any time when the long-term credit rating assigned to the
debentures is either Caa1 or lower, in the case of Moody's, or B-
or lower in the case of S&P, or either rating agency has
discontinued, withdrawn or suspended its rating.
The debentures are redeemable at the Company's option beginning November
15, 2010 at a redemption price equal to 100% of their principal amount, plus
accrued interest, if any. On November 15 in each of 2010, 2013 and 2018, holders
of debentures will have the right to require the Company to repurchase all or
some of the debentures they own at a purchase price equal to 100% of their
principal amount, plus accrued interest, if any. The Company may choose to pay
the purchase price in cash or shares of the Company's Common Stock or any
combination thereof. In the event of a conversion request upon a credit ratings
event as described above, after June 18, 2006, the Company has the right to
deliver, in lieu of shares of Common Stock, cash or a combination of cash and
shares of Common Stock. Holders of the debentures will also have the right to
require the Company to repurchase all or some of the debentures they own at a
cash purchase price equal to 100% of their principal amount, plus accrued
interest, if any, upon the occurrence of certain events constituting a
Fundamental Change, as defined in the indenture. This indenture also limits the
Company's ability to consolidate with or merge with or into any other person, or
sell, convey, transfer or lease properties and assets substantially as an
entirety to another person, except under certain circumstances. The consummation
of the announced stock-for-stock business combination with Lyondell is not
expected to be considered a Fundamental Change, as defined in the indenture.
However, the Company does expect to be required to execute with the trustee a
supplemental indenture providing that each debenture shall be convertible into
Lyondell's common stock at a conversion ratio as adjusted in accordance with the
Agreement of Merger between the Company and Lyondell.
Although the Company does not currently pay a dividend to its common
stockholders, Lyondell does currently pay a dividend. If the Company executes a
supplemental indenture with the trustee, as described above, and Lyondell
37
continues to pay a dividend to its common stockholders, the conversion rate, as
defined, will be adjusted. The conversion rate will be increased by a percentage
calculated by dividing the average of the last reported sales price of Common
Stock for the ten consecutive trading days prior to the business day immediately
preceding the record date by this average less the amount in cash per share that
Lyondell distributes to holders of Common Stock. At the current market prices of
Lyondell common stock, this percentage would be approximately 1.4% per quarter.
At March 31, 2004, the Company was in compliance with all covenants in the
indentures governing the 9.25% Senior Notes, 7.00% Senior Notes, 7.625% Senior
Debentures, and 4.00% Convertible Senior Debentures.
The Company, as well as the Senior Notes and the 4.00% Convertible Senior
Debentures are currently rated BB- by S&P with a stable outlook. Moody's has
assigned the Company a senior implied rating of Ba3, and the Senior Notes and
the 4.00% Convertible Senior Debentures a rating of B1 with a negative outlook.
These ratings are non-investment grade ratings.
On March 29, 2004, S&P placed the Company's ratings on Credit Watch with
negative implications reflecting the future ownership by the highly leveraged
Lyondell and the strong likelihood that the ratings of the Company will be
lowered modestly upon completion of the proposed transaction. On March 30, 2004,
Moody's placed the Company's credit ratings under review for possible downgrade
following the announcement by Lyondell and the Company that the two companies
have signed a definitive agreement that, if completed, will result in the
acquisition of the Company by Lyondell in a stock-for-stock transaction. Moody's
cited concerns over the potential impact that future distributions by the
Company, as an operating subsidiary of Lyondell, to Lyondell will have on the
Company's credit profile over the long term, primarily the potential for
elevated debt levels over the next several years while Lyondell seeks to
de-lever its balance sheet.
The Company's focus in 2004 is to sustain the benefits of cost reduction
efforts achieved to date, achieve further benefits from cost reduction actions
announced in the third quarter of 2003, and manage working capital and capital
spending to levels deemed reasonable given the current state of business
performance. In the first quarter of 2004, the Company repatriated approximately
$107 million from its Australian and European businesses to the US. This cash
was used primarily to reduce outstanding borrowings under the Company's Credit
Agreement and for general corporate purposes. The Company believes these
efforts, along with the borrowing availability under the Credit Agreement, and
considering the suspension of the payment of dividends on the Company's Common
Stock announced in the third quarter of 2003, will be sufficient to fund the
Company's cash requirements until 2006. At that time, the Company must repay or
refinance the 7% Senior Notes and renegotiate or refinance the Credit Agreement.
Critical Accounting Estimates
The preparation of the Company's financial statements requires management
to apply accounting principles generally accepted in the United States of
America to the Company's specific circumstances and make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
There have been no revisions to the critical accounting estimates as
originally filed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, and as amended by Amendment No. 2 on Form 10-K/A filed with
the Securities and Exchange Commission on August 9, 2004.
Recent Accounting Developments
See Note 4 to the unaudited Consolidated Financial Statements included in
this Quarterly Report for discussion of recent accounting developments.
38
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures that are designed
to provide reasonable assurance that information required to be disclosed
in the Company's filings under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the periods specified
in the rules and forms of the Securities and Exchange Commission and that
such information is accumulated and communicated to the Company's
management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
As a result of activities relating to the Company's proposed business
combination with Lyondell, the Company discovered errors in the computation
of its tax basis in Equistar used to compute the Company's deferred income
taxes. The restatement reflected in this Amendment No. 1 decreased the
Company's liability for deferred income taxes and Shareholders' deficit
at March 31, 2004 and December 31, 2003 by $15 million. The restatement did
not affect the Company's cash flow or operating income in any period.
The Company believes that the errors resulted from a "material weakness" in
internal controls relating to the computation of deferred income taxes for
its investment in Equistar.
As a result of the Company's decision to restate its financial statements,
the Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as of March 31, 2004. Based on this evaluation, the
Company's principal executive officer and principal financial officer
concluded that, solely as a result of the material weakness referred to
above, the Company's disclosure controls and procedures were not effective
as of March 31, 2004.
(b) There were no changes in the Company's internal controls over financial
reporting that occurred during the most recent fiscal quarter covered by
this Quarterly Report that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
issued thereunder (collectively, the "Section 404 Requirements"), the
Company will be required to include in its Annual Report on Form 10-K for
the year ending December 31, 2004 a report on management's assessment of
the effectiveness of the Company's internal controls over financial
reporting. As part of the process of preparing for compliance with the
Section 404 Requirements, in 2003, the Company initiated a review of its
internal controls over financial reporting. This review is being conducted
under the direction of senior management. As a result, management has made
improvements to the Company's internal controls through the date of the
filing of this Amendment No. 1 as part of its normal review process. The
Company's management does not believe these changes have materially
affected, or are reasonably likely to materially affect, the Company's
internal controls over financial reporting. The Company anticipates that
improvements will continue to be made as part of the ongoing review.
As a result of the errors discovered as discussed in paragraph (a) above,
the Company performed a thorough analysis and re-computation of the
Company's tax basis in Equistar to correct the Company's deferred income
taxes. Additionally, the Company is establishing formal procedures for the
regular review of the Company's tax basis relating to its investment in
Equistar. These procedures will be evaluated for effectiveness and
implemented in the third quarter.
39
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certificate of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in accordance
with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).*
32.2 Certificate of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in accordance
with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).*
* Filed or furnished herewith.
(b) Reports on Form 8-K.
Current Reports on Form 8-K dated March 29, 2004 and May 5, 2004 were filed
or furnished during the quarter ended March 31, 2004 and through May 14,
2004, the date the original Quarterly Report on Form 10-Q was filed with
the Securities and Exchange Commission. Such Current Reports either filed
or furnished information to the Securities and Exchange Commission.
40
SIGNATURE
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.
MILLENNIUM CHEMICALS INC.
Date: August 9, 2004 By: /s/ JOHN E. LUSHEFSKI
------------------------------------
John E. Lushefski
Executive Vice President and Chief
Financial Officer
(as duly authorized officer and
principal financial officer)
41
Exhibit Index
Exhibit
Number Description of Document
------- -----------------------
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in accordance
with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).
32.2 Certificate of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in accordance
with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).
42
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as.................................. 'SS'
Characters normally expressed as subscript shall be preceded by........... [u]