-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WlBd8Ybb2jpIHxrJsE3ntepQ2Wdq3iORXGOJvCqCc6abMxwB/YToy9c40CCk0gJ4 c59of/yXrNmNrocxeVrb4Q== 0001305014-05-000071.txt : 20050808 0001305014-05-000071.hdr.sgml : 20050808 20050808171318 ACCESSION NUMBER: 0001305014-05-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050808 DATE AS OF CHANGE: 20050808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASHLAND INC. CENTRAL INDEX KEY: 0001305014 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CHEMICALS & ALLIED PRODUCTS [5160] IRS NUMBER: 200865835 STATE OF INCORPORATION: KY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32532 FILM NUMBER: 051006598 BUSINESS ADDRESS: STREET 1: 50 EAST RIVERCENTER BLVD., 16TH FLOOR CITY: COVINGTON STATE: KY ZIP: 41012 BUSINESS PHONE: 859-815-3483 MAIL ADDRESS: STREET 1: 50 EAST RIVERCENTER BLVD., 16TH FLOOR CITY: COVINGTON STATE: KY ZIP: 41012 FORMER COMPANY: FORMER CONFORMED NAME: New EXM Inc. DATE OF NAME CHANGE: 20041004 10-Q 1 form10q.txt FORM 10-Q JUNE 30, 2005 ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 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 1-32532 ASHLAND INC. (a Kentucky corporation) I.R.S. No. 20-0865835 50 E. RiverCenter Boulevard P.O. Box 391 Covington, Kentucky 41012-0391 Telephone Number (859) 815-3333 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |X| No |_| At June 30, 2005, there were 74,199,816 shares of Registrant's Common Stock outstanding. One Right to purchase one-thousandth of a share of Series A Participating Cumulative Preferred Stock accompanies each outstanding share of Registrant's Common Stock. ============================================================================== PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------ ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME - ------------------------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended June 30 June 30 ------------------------ ------------------------ (In millions except per share data) 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------- ------------------------ REVENUES Sales and operating revenues $ 2,492 $ 2,206 $ 6,731 $ 5,967 Equity income 315 221 530 277 Other income 14 12 49 34 ----------- ---------- ---------- ----------- 2,821 2,439 7,310 6,278 COSTS AND EXPENSES Cost of sales and operating expenses 2,074 1,844 5,678 5,002 Selling, general and administrative expenses 337 303 957 882 ----------- ---------- ---------- ----------- 2,411 2,147 6,635 5,884 ----------- ---------- ---------- ----------- OPERATING INCOME 410 292 675 394 Gain on the MAP Transaction - Note D (1) 1,295 - 1,295 - Loss on early retirement of debt - Note D (143) - (145) - Net interest and other financial costs (31) (29) (89) (88) ----------- ---------- ---------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,531 263 1,736 306 Income taxes 236 (96) 157 (111) ----------- ---------- ---------- ----------- INCOME FROM CONTINUING OPERATIONS 1,767 167 1,893 195 Results from discontinued operations (net of income taxes) - Note B - (6) - (16) ----------- ---------- ---------- ----------- NET INCOME $ 1,767 $ 161 $ 1,893 $ 179 =========== ========== ========== =========== BASIC EARNINGS PER SHARE - Note A Income from continuing operations $ 24.13 $ 2.38 $ 26.11 $ 2.80 Results from discontinued operations - (.09) - (.23) ----------- ---------- ---------- ----------- Net income $ 24.13 $ 2.29 $ 26.11 $ 2.57 =========== ========== ========== =========== DILUTED EARNINGS PER SHARE - Note A Income from continuing operations $ 23.65 $ 2.35 $ 25.48 $ 2.75 Results from discontinued operations - (.09) - (.22) ----------- ---------- ---------- ----------- Net income $ 23.65 $ 2.26 $ 25.48 $ 2.53 =========== ========== ========== =========== DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .825 $ .825 - ------------------------------------------------------------------------------------------------------------------------------
(1) "MAP Transaction" refers to the June 30, 2005 transfer of Ashland's 38% interest in Marathon Ashland Petroleum LLC (MAP), Ashland's maleic anhydride business and 60 Valvoline Instant Oil Change centers in Michigan and northwest Ohio to Marathon Oil Corporation in a transaction valued at approximately $3.7 billion. See Note D for further information. SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2
- -------------------------------------------------------------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------------------------------------------------------- June 30 September 30 June 30 (In millions) 2005 2004 2004 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS ------ CURRENT ASSETS Cash and cash equivalents $ 692 $ 243 $ 183 Accounts receivable proceeds from the MAP Transaction - Note D 913 - - Accounts receivable 1,564 1,331 1,256 Allowance for doubtful accounts (44) (41) (39) Inventories - Note A 567 458 510 Deferred income taxes 113 103 115 Other current assets 125 208 204 -------------- -------------- -------------- 3,930 2,302 2,229 INVESTMENTS AND OTHER ASSETS Investment in Marathon Ashland Petroleum LLC (MAP) - 2,713 2,568 Goodwill 576 513 513 Asbestos insurance receivable (noncurrent portion) 374 399 400 Deferred income taxes 160 - - Other noncurrent assets 501 319 339 -------------- -------------- -------------- 1,611 3,944 3,820 PROPERTY, PLANT AND EQUIPMENT Cost 3,219 3,104 3,043 Accumulated depreciation, depletion and amortization (1,839) (1,848) (1,825) -------------- -------------- -------------- 1,380 1,256 1,218 -------------- -------------- -------------- $ 6,921 $ 7,502 $ 7,267 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Debt due within one year $ 78 $ 439 $ 204 Trade and other payables 1,358 1,362 1,384 Income taxes 71 14 15 -------------- -------------- -------------- 1,507 1,815 1,603 NONCURRENT LIABILITIES Long-term debt (less current portion) 90 1,109 1,338 Employee benefit obligations 444 428 394 Deferred income taxes - 367 313 Reserves of captive insurance companies 190 179 196 Asbestos litigation reserve (noncurrent portion) 534 568 565 Other long-term liabilities and deferred credits 409 330 358 Commitments and contingencies - Notes G -------------- -------------- -------------- 1,667 2,981 3,164 COMMON STOCKHOLDERS' EQUITY 3,747 2,706 2,500 -------------- -------------- -------------- $ 6,921 $ 7,502 $ 7,267 ============== ============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3
- --------------------------------------------------------------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------------- Accumulated other Common Paid-in Retained comprehensive (In millions) stock capital earnings loss Total - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT OCTOBER 1, 2003 $ 68 $ 350 $ 1,961 $ (126) $ 2,253 Total comprehensive income (1) 179 22 201 Cash dividends (57) (57) Issued 2,698,722 common shares under stock incentive and other plans 3 100 103 -------------- -------------- -------------- -------------- -------------- BALANCE AT JUNE 30, 2004 $ 71 $ 450 $ 2,083 $ (104) $ 2,500 ============== ============== ============== ============== ============== BALANCE AT OCTOBER 1, 2004 $ 72 $ 478 $ 2,262 $ (106) $ 2,706 Total comprehensive income (1) 1,893 11 1,904 Cash dividends (60) (60) Distribution of Marathon shares from the MAP Transaction - Note D (936) (936) Issued 2,620,653 common shares under stock incentive and other plans 2 131 133 -------------- -------------- -------------- -------------- -------------- BALANCE AT JUNE 30, 2005 $ 74 $ 609 $ 3,159 $ (95) $ 3,747 ============== ============== ============== ============== ============== - ---------------------------------------------------------------------------------------------------------------------------------
(1) Reconciliations of net income to total comprehensive income follow.
Three months ended Nine months ended June 30 June 30 ------------------------------- ------------------------------- (In millions) 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 1,767 $ 161 $ 1,893 $ 179 Unrealized translation adjustments (27) (12) 11 22 Related tax benefit (expense) (1) - 1 - Net unrealized gains (losses) on cash flow hedges (2) - (1) - -------------- -------------- -------------- -------------- Total comprehensive income $ 1,737 $ 149 $ 1,904 $ 201 ============== ============== ============== ============== -----------------------------------------------------------------------------------------------------------------------------
At June 30, 2005, the accumulated other comprehensive loss of $95 million (after tax) was comprised of net unrealized translation gains of $35 million, a minimum pension liability of $129 million and net unrealized losses on cash flow hedges of $1 million. SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4
- -------------------------------------------------------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS - -------------------------------------------------------------------------------------------------------------------------- Nine months ended June 30 ------------------------ (In millions) 2005 2004 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATIONS Income from continuing operations $ 1,893 $ 195 Adjustments to reconcile to cash flows from operations Depreciation, depletion and amortization 141 144 Deferred income taxes (515) 70 Equity income from affiliates (530) (277) Distributions from equity affiliates 277 156 Gain on the MAP Transaction - Note D (1,295) - Loss on early retirement of debt - Note D 145 - Change in operating assets and liabilities (1) (128) (213) Other items (5) 2 ---------- ----------- (17) 77 CASH FLOWS FROM FINANCING Proceeds from issuance of common stock 100 86 Repayment of long-term debt (1,477) (75) Increase (decrease) in short-term debt (40) 8 Cash dividends paid (60) (57) ---------- ----------- (1,477) (38) CASH FLOWS FROM INVESTMENT Additions to property, plant and equipment (285) (121) Purchase of operations - net of cash acquired - Note E (152) (5) Proceeds from sale of operations - Notes D and E 2,397 48 Other - net 9 13 ---------- ----------- 1,969 (65) ---------- ----------- CASH PROVIDED (USED) BY CONTINUING OPERATIONS 475 (26) Cash used by discontinued operations (26) (14) ---------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 449 (40) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 243 223 ---------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 692 $ 183 ========== =========== - --------------------------------------------------------------------------------------------------------------------------
(1) Excludes changes resulting from operations acquired or sold. SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE A - SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL REPORTING The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Although such statements are subject to any year-end audit adjustments which may be necessary, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with Ashland's annual report on Form 10-K, as amended, for the fiscal year ended September 30, 2004. Results of operations for the periods ended June 30, 2005, are not necessarily indicative of results to be expected for the year ending September 30, 2005. INVENTORIES
------------------------------------------------------------------------------------------------------------- June 30 September 30 June 30 (In millions) 2005 2004 2004 ------------------------------------------------------------------------------------------------------------- Chemicals and plastics $ 449 $ 370 $ 390 Construction materials 85 71 76 Petroleum products 76 61 73 Other products 70 45 50 Supplies 8 6 6 Excess of replacement costs over LIFO carrying values (121) (95) (85) -------------- -------------- -------------- $ 567 $ 458 $ 510 ============== ============== ==============
EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (EPS) from continuing operations.
----------------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended June 30 June 30 ------------------------ ------------------------ (In millions except per share data) 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------------- Numerator Numerator for basic and diluted EPS - Income from continuing operations $ 1,767 $ 167 $ 1,893 $ 195 =========== ========== ========== =========== Denominator Denominator for basic EPS - Weighted average common shares outstanding 73 70 72 70 Common shares issuable upon exercise of stock options 2 1 2 1 ----------- ---------- ---------- ----------- Denominator for diluted EPS - Adjusted weighted average shares and assumed conversions 75 71 74 71 =========== ========== ========== =========== Earnings per share from continuing operations Basic $ 24.13 $ 2.38 $ 26.11 $ 2.80 Diluted $ 23.65 $ 2.35 $ 25.48 $ 2.75
6 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE B - DISCONTINUED OPERATIONS Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation, a former subsidiary. During the nine months ended June 30, 2004, Ashland recorded charges of $44 million to increase its reserve for asbestos claims, the effect of which was partially offset by credits of $22 million to increase its asbestos insurance receivable. The resulting $22 million pretax charge to income, net of deferred income tax benefits of $9 million, was reflected as an after-tax loss from discontinued operations of $13 million in the Statement of Consolidated Income for the nine months ended June 30, 2004. No increases to the asbestos reserve or insurance receivable were recorded in the nine months ended June 30, 2005. See Note G for further discussion of Ashland's asbestos-related litigation. Also during the nine months ended June 30, 2004, Ashland recorded a $3 million decrease to the gain recorded in 2003 on the sale of its Electronic Chemicals business. Components of amounts reflected in the income statements related to discontinued operations are presented in the following table.
------------------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended June 30 June 30 ----------------------- ------------------------ (In millions) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------ Pretax loss from discontinued operations Reserves for asbestos-related litigation $ - $ (7) $ - $ (22) Loss on disposal of Electronic Chemicals - (2) - (3) Income taxes Reserves for asbestos-related litigation - 3 - 9 Loss on disposal of Electronic Chemicals - - - - ---------- ---------- ---------- ---------- Results from discontinued operations (net of income taxes) $ - $ (6) $ - $ (16) ========== ========== ========== ==========
NOTE C - UNCONSOLIDATED AFFILIATES Under Rule 3-09 of Regulation S-X, Ashland filed audited financial statements for Marathon Ashland Petroleum LLC (MAP) for the year ended December 31, 2004, on a Form 10-K/A on March 15, 2005. Unaudited income statement information for MAP is shown below. MAP is organized as a limited liability company that has elected to be taxed as a partnership. Therefore, the parents are responsible for income taxes applicable to their share of MAP's taxable income. The net income reflected below for MAP does not include any provision for income taxes that will be incurred by its parents.
----------------------------------------------------------------------------------------------------------- Three months ended Nine months ended June 30 June 30 ------------------------ ------------------------ (In millions) 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------- Sales and operating revenues $ 14,282 $ 11,155 $ 38,195 $ 29,773 Income from operations 823 585 1,408 734 Net income 823 583 1,396 725 Ashland's equity income 309 216 518 261
7 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE D - MAP TRANSACTION On June 30, 2005, Ashland completed the transfer of its 38% interest in MAP and two other businesses to Marathon Oil Corporation in a transaction valued at approximately $3.7 billion. The two other businesses were Ashland's maleic anhydride business and 60 Valvoline Instant Oil Change (VIOC) centers in Michigan and northwest Ohio. This transaction is being referred to in this document as the "MAP Transaction." As a result of this transaction Ashland shareholders of record as of the close of business on June 30, 2005, received .2364 Marathon shares per Ashland share. In total, Ashland's shareholders received 17,538,815 shares of Marathon common stock with an aggregate value of $936 million based upon the June 30 closing price of Marathon stock. Ashland received cash of $2,407 million and MAP trade accounts receivable of $913 million. These amounts include approximately $2.8 billion of cash and accounts receivable included in the $3.7 billion transaction value, and $518 million of cash and accounts receivable representing 38% of MAP's distributable cash and other adjustments as of June 30, 2005. Proceeds net of expenses of $26 million exceeded the book investment and resulted in a pretax gain of $1,295 million. Even though the Marathon common stock distribution went directly to Ashland shareholders, for financial reporting purposes the Marathon stock is reflected as non-cash proceeds from the transaction, included in the gain computation, and then shown as a distribution to shareholders out of retained earnings in Ashland's stockholders' equity progression. The pretax gain is shown on a separate line caption on the income statement below Operating Income and labeled Gain on the MAP Transaction. Because none of the businesses qualify as discontinued operations under FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the gain is reported in Income from Continuing Operations, with no restatement of prior results. The MAP Transaction was structured to be generally tax-free to Ashland shareholders and tax-efficient to Ashland. Ashland and Marathon entered into a closing agreement with the Internal Revenue Service (IRS) with respect to various tax consequences of the transaction. Pursuant to a Tax Matters Agreement (TMA) with Marathon, any tax payable under Section 355(e) of the Internal Revenue Code on the transaction up to $200 million will be borne by Marathon, with the next $175 million being borne by Ashland, and any tax over $375 million being split equally between the two companies. Current estimates of the tax due are approximately $96 million, so Ashland has recorded no tax due as part of the transaction. Due to the structure of the transaction, Marathon is entitled to the tax deductions for Ashland's future payments of certain contingent liabilities related to previously owned businesses of Ashland. However, pursuant to the terms of the TMA, Marathon has agreed to compensate Ashland for these tax deductions. Ashland recorded a discounted receivable of $65 million for the estimated present value of probable recoveries from Marathon for the portion of these future tax deductions which is not dependent upon Marathon's ability to utilize these deductions. The receivable is included in the $1,295 million pretax gain on the transaction and is included in other noncurrent assets on Ashland's balance sheet at June 30, 2005. Deferred tax assets previously recorded on these contingent liabilities were reversed through the income tax provision for the transaction. Going forward, adjustments to the receivable resulting from changes in the liability estimates will go through the Gain on the MAP Transaction line caption on the income statement, while the accretion of the discount will be reflected in interest income. Net deferred tax liabilities totaling $328 million were reversed through the income tax provision for the transaction. The reversal of deferred taxes, including those deferred tax assets related to the contingent liabilities discussed above, reflects the fact that Marathon assumes Ashland's tax basis in these net assets as a result of the MAP Transaction. 8 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE D - MAP TRANSACTION (CONTINUED) Ashland used a substantial portion of the proceeds of the MAP Transaction to retire most of its debt and certain other financial obligations. In addition to the payoff of $250 million of receivables financing and the purchase of $101 million of assets that were formerly leased under operating leases, Ashland retired approximately $1.54 billion of balance sheet debt as of June 30, 2005 and incurred a loss on the early retirement of debt of $143 million. The loss consisted of debt repayment premiums of $137 million, a tender fee of $3 million and the write-off of deferred debt issuance costs of $3 million. On a year-to-date basis, an additional $2 million loss on the early retirement of a capitalized lease in the December 2004 quarter was added to the Loss on Early Retirement of Debt line caption on the income statement. A tax benefit of $56 million in the quarter and $57 million for the nine months ended June 30, 2005 was recorded for the loss on early retirement of debt. Ashland expects to retire additional debt and other financial obligations in the September and December 2005 quarters. The gain on the MAP Transaction and the loss on early retirement of debt, net of their respective tax effects, increased net income by $1,536 million, or $20.56 per share, for the three months and $1,535 million, or $20.66 per share, for the nine months ended June 30, 2005. As additional refinements to the gain are determined, expected to be primarily in the tax area due to the unique and complicated tax aspects of the transaction, adjustments to the gain will be reflected in the quarter they are determined. Due to the continuing nature of certain tax issues, the gain will continue to be adjusted in future periods. NOTE E - ACQUISITIONS AND OTHER DIVESTITURES During the nine months ended June 30, 2005, Ashland Specialty Chemical acquired Dow Chemical's DERAKANE(R) epoxy vinyl ester resins business for approximately $90 million. With this acquisition, Ashland Specialty Chemical's composite polymers business continues to build its innovative line of resin chemistries for composite manufacturing. The purchase included all technology and intellectual property assets associated with the DERAKANE resin business. No physical assets were transferred to Ashland. Also during the period, Valvoline acquired Car Brite, a leading marketer of products for the U.S. professional automotive reconditioning industry. In addition, Ashland Distribution acquired the North American distribution business of Albis Plastics and sold its ingestibles business, while APAC made four small acquisitions and one small divestiture. Following is a progression of goodwill by segment for the nine months ended June 30, 2005, which reflects Ashland's preliminary allocation of purchase price.
-------------------------------------------------------------------------------------------------------------------- Ashland Ashland Specialty (In millions) APAC Distribution Chemical Valvoline Total -------------------------------------------------------------------------------------------------------------------- Balance at October 1, 2004 $ 411 $ - $ 96 $ 6 $ 513 Goodwill acquired 2 1 43 17 63 Currency translation adjustments - - - - - ---------- ---------- ---------- ---------- ----------- Balance at June 30, 2005 $ 413 $ 1 $ 139 $ 23 $ 576 ========== ========== ========== ========== ===========
NOTE F - EMPLOYEE BENEFIT PLANS On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. Among other things, the Act will expand Medicare to include an outpatient prescription drug benefit beginning in 2006, as well as provide a subsidy for sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the Medicare Act benefits. In May 2004, the Financial Accounting Standards Board issued Staff Position No. FAS 106-2, "Accounting and 9 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE F - EMPLOYEE BENEFIT PLANS (CONTINUED) Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." Regulations implementing major provisions of the Act, including the determination of actuarial equivalency, were issued in January 2005. Effective May 1, 2005, Ashland amended its health care plan for retirees age 65 or older so that the company will always qualify for the subsidy and remeasured its postretirement benefit obligation as of that date. The remeasurement reduced the postretirement benefit obligation by $58 million and will reduce postretirement benefit costs by $3 million over the last five months of the fiscal year 2005. Presently, Ashland anticipates contributing $86 million to its U.S. pension plans and $33 million to its non-U.S. pension plans during fiscal 2005. As of June 30, 2005, contributions of $25 million have been made to the U.S. plans and $8 million to the non-U.S. plans. In addition to the remaining contributions to be made during the last quarter of fiscal 2005, Ashland plans on contributing an additional $75 million to its U.S. plans around October 1, 2005. The following table details the components of pension and other postretirement benefit costs.
---------------------------------------------------------------------------------------------------------------------- Other postretirement Pension benefits benefits ------------------------- ------------------------ (In millions) 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------------------------- Three months ended June 30 Service cost $ 13 $ 13 $ 2 $ 1 Interest cost 20 20 4 4 Expected return on plan assets (21) (19) - - Amortization of prior service credit - - (2) (3) Amortization of net actuarial loss 8 9 - 1 ----------- ----------- ----------- ---------- $ 20 $ 23 $ 4 $ 3 =========== =========== =========== ========== Nine months ended June 30 Service cost $ 40 $ 38 $ 7 $ 8 Interest cost 59 55 12 15 Expected return on plan assets (59) (51) - - Amortization of prior service credit - - (7) (14) Amortization of net actuarial loss 24 25 3 4 ----------- ----------- ----------- ---------- $ 64 $ 67 $ 15 $ 13 =========== =========== =========== ==========
NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES ASBESTOS-RELATED LITIGATION Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary. Although Riley was neither a producer nor a manufacturer of asbestos, its industrial boilers contained some asbestos-containing components provided by other companies. 10 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED) A summary of asbestos claims activity follows. Because claims are frequently filed and settled in large groups, the amount and timing of settlements and number of open claims can fluctuate significantly from period to period.
--------------------------------------------------------------------------------------------------------------------- Nine months ended June 30 Years ended September 30 --------------------------- ------------------------------------------ (In thousands) 2005 2004 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Open claims - beginning of period 196 198 198 160 167 New claims filed 10 24 29 66 45 Claims settled (5) (6) (7) (7) (15) Claims dismissed (16) (17) (24) (21) (37) ----------- ----------- ----------- ----------- ----------- Open claims - end of period 185 199 196 198 160 =========== =========== =========== =========== ===========
Since October 1, 2001, Riley has been dismissed as a defendant in 74% of the resolved claims. Amounts spent on litigation defense and claim settlements averaged $1,675 per claim resolved in the nine months ended June 30, 2005, compared to $1,736 in the nine months ended June 30, 2004, and annual averages of $1,655 in 2004, $1,610 in 2003 and $723 in 2002. A progression of activity in the asbestos reserve is presented in the following table.
--------------------------------------------------------------------------------------------------------------------- Nine months ended June 30 Years ended September 30 --------------------------- ------------------------------------------ (In millions) 2005 2004 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Asbestos reserve - beginning of period $ 618 $ 610 $ 610 $ 202 $ 199 Expense incurred - 44 59 453 41 Amounts paid (34) (39) (51) (45) (38) ------------ ----------- ----------- ----------- ----------- Asbestos reserve - end of period $ 584 $ 615 $ 618 $ 610 $ 202 ============ =========== =========== =========== ===========
During the December 2002 quarter, Ashland increased its reserve for asbestos claims by $390 million to cover the litigation defense and claim settlement costs for probable and reasonably estimable future payments related to existing open claims, as well as an estimate of those that may be filed in the future. Prior to December 31, 2002, the asbestos reserve was based on the estimated costs that would be incurred to settle existing open claims. A range of estimates of future asbestos claims and related costs using various assumptions was developed with the assistance of Hamilton, Rabinovitz & Alschuler, Inc. (HR&A). The methodology used by HR&A to project future asbestos costs was based largely on Ashland's recent experience, including claim-filing and settlement rates, disease mix, open claims, and litigation defense and claim settlement costs. Ashland's claim experience was compared to the results of previously conducted epidemiological studies estimating the number of people likely to develop asbestos-related diseases. Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos. Using that information, HR&A estimated a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims. From the range of estimates, Ashland recorded the amount it believed to be the best estimate, which represented the expected payments for litigation defense and claim settlement costs during the next ten years. Subsequent updates to this estimate have been made, with the assistance of HR&A, based on a combination of a number of factors including the actual volume of new claims, recent settlement costs, 11 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED) changes in the mix of alleged disease, enacted legislative changes and other developments impacting Ashland's estimate of future payments. Ashland's reserve for asbestos claims on an undiscounted basis amounted to $584 million at June 30, 2005, compared to $618 million at September 30, 2004 and $615 million at June 30, 2004. Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards. Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens. In light of these inherent uncertainties, Ashland believes its asbestos reserve represents the best estimate within a range of possible outcomes. As a part of the process to develop Ashland's estimates of future asbestos costs, a range of long-term cost models is developed that assumes a run-out of claims through 2056. These models are based on national studies that predict the number of people likely to develop asbestos-related diseases and are heavily influenced by assumptions regarding long-term inflation rates for indemnity payments and legal defense costs, as well as other variables mentioned previously. The total future litigation defense and claim settlement costs on an undiscounted basis has been estimated within a reasonably possible range of $400 million to $1.9 billion, depending on the number of years those costs extend and other combinations of assumptions selected. If actual experience is worse than projected relative to the number of claims filed, the severity of alleged disease associated with those claims or costs incurred to resolve those claims, Ashland may need to increase further the estimates of the costs associated with asbestos claims and these increases could potentially be material over time. Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide substantially all of the coverage currently being accessed. As a result, increases in the asbestos reserve have been largely offset by probable insurance recoveries. The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland's insurance coverage. Ashland retained the services of Tillinghast-Towers Perrin to assist management in estimating the value of probable insurance recoveries associated with Ashland's estimate of its asbestos liabilities. Such recoveries are based on management's assumptions and estimates surrounding the available or applicable insurance coverage. One such assumption is that all solvent insurance carriers remain solvent. Although coverage limits are resolved in the coverage-in-place agreement with Equitas Limited (Equitas) and other London companies, which collectively provide a significant portion of Ashland's insurance coverage for asbestos claims, there is a disagreement with these companies over the timing of recoveries. The resolution of this disagreement could have a material effect on the value of insurance recoveries from those companies. In estimating the value of future recoveries, Ashland has used the least favorable interpretation of this agreement under which the ultimate recoveries are extended for many years, resulting in a significant discount being applied to value those recoveries. Ashland will continue to apply this methodology until such time as the disagreement is resolved. On July 21, 2004, Ashland filed a demand for arbitration to resolve the dispute concerning the interpretation of this agreement. 12 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED) At June 30, 2005, Ashland's receivable for recoveries of litigation defense and claim settlement costs from its insurers amounted to $404 million, of which $57 million relates to costs previously paid. Receivables from insurance companies amounted to $435 million at September 30, 2004 and $430 million at June 30, 2004. About 35% of the estimated receivables from insurance companies at June 30, 2005, are expected to be due from Equitas and other London companies. Of the remainder, approximately 90% is expected to come from companies or groups that are rated A or higher by A. M. Best. ENVIRONMENTAL PROCEEDINGS Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations. At June 30, 2005, such locations included 102 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, approximately 130 current and former operating facilities (including certain operating facilities conveyed to MAP) and about 1,220 service station properties. Ashland's reserves for environmental remediation amounted to $177 million at June 30, 2005, compared to $152 million at September 30, 2004 and $169 million at June 30, 2004. Such amounts reflect Ashland's estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable, without regard to any third-party recoveries. Engineering studies, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland's ability to estimate its share of the costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites. Ashland regularly adjusts its reserves as environmental remediation continues. Environmental remediation expense amounted to $39 million for the nine months ended June 30, 2005, compared to $16 million for the nine months ended June 30, 2004, and annual expense of $2 million in 2004, $22 million in 2003 and $30 million in 2002. No individual remediation location is material to Ashland, as its largest reserve for any site is less than 10% of the remediation reserve. As a result, Ashland's exposure to adverse developments with respect to any individual site is not expected to be material, and these sites are in various stages of ongoing remediation. Although environmental remediation could have a material effect on results of operations if a series of adverse developments occurs in a particular quarter or fiscal year, Ashland believes that the chance of such developments occurring in the same quarter or fiscal year is remote. OTHER LEGAL PROCEEDINGS In addition to the matters described above, there are various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability, and other environmental matters, which seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable. 13
- ----------------------------------------------------------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES INFORMATION BY INDUSTRY SEGMENT - ----------------------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended June 30 June 30 ------------------------ ------------------------ (In millions) 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------------- REVENUES Sales and operating revenues APAC $ 713 $ 698 $ 1,713 $ 1,755 Ashland Distribution 987 840 2,837 2,326 Ashland Specialty Chemical 484 366 1,318 1,017 Valvoline 354 330 987 945 Intersegment sales Ashland Distribution (5) (5) (17) (14) Ashland Specialty Chemical (40) (23) (106) (61) Valvoline (1) - (1) (1) ----------- ---------- ---------- ----------- 2,492 2,206 6,731 5,967 Equity income APAC 3 3 6 11 Ashland Specialty Chemical 2 2 6 5 Valvoline 1 - - - Refining and Marketing 309 216 518 261 ----------- ---------- ---------- ----------- 315 221 530 277 Other income APAC 7 9 11 20 Ashland Distribution 2 1 7 8 Ashland Specialty Chemical 2 3 20 8 Valvoline 2 2 5 3 Refining and Marketing - (2) 2 (7) Corporate 1 (1) 4 2 ----------- ---------- ---------- ----------- 14 12 49 34 ----------- ---------- ---------- ----------- $ 2,821 $ 2,439 $ 7,310 $ 6,278 =========== ========== ========== =========== OPERATING INCOME APAC $ 46 $ 43 $ 6 $ 41 Ashland Distribution 36 23 95 56 Ashland Specialty Chemical 43 22 104 63 Valvoline 26 30 69 75 Refining and Marketing (1) 290 205 486 232 Corporate (31) (31) (85) (73) ----------- ---------- ---------- ----------- $ 410 $ 292 $ 675 $ 394 =========== ========== ========== =========== June 30 Sept. 30 June 30 2005 2004 2004 -------------------------------------- ASSETS APAC $ 1,517 $ 1,428 $ 1,424 Ashland Distribution 1,058 922 933 Ashland Specialty Chemical 1,004 842 824 Valvoline 707 658 656 Refining and Marketing 89 2,742 2,599 Corporate (2) 2,546 910 831 ---------- ---------- ----------- $ 6,921 $ 7,502 $ 7,267 ========== ========== =========== - -----------------------------------------------------------------------------------------------------------------------------
(1) Includes Ashland's equity income from MAP, amortization related to Ashland's excess investment in MAP, and other activities associated with refining and marketing. (2) Includes cash, cash equivalents, accounts receivable proceeds from the MAP Transaction and other unallocated assets. 14
- ------------------------------------------------------------------------------------------------------------------------------ ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES INFORMATION BY INDUSTRY SEGMENT - ------------------------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended June 30 June 30 ----------------------- ------------------------ 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING INFORMATION APAC Construction backlog at June 30 (millions) (1) $ 2,100 $ 1,869 Net construction job revenues (millions) (2) $ 424 $ 409 $ 966 $ 982 Hot-mix asphalt production (million tons) 9.5 9.9 21.0 22.7 Aggregate production (million tons) 8.3 8.1 22.6 21.0 Ashland Distribution (3) Sales per shipping day (millions) $ 15.4 $ 13.3 $ 15.1 $ 12.3 Gross profit as a percent of sales 10.0% 9.8% 9.8% 9.7% Ashland Specialty Chemical (3) Sales per shipping day (millions) $ 7.6 $ 5.8 $ 7.0 $ 5.3 Gross profit as a percent of sales 27.6% 27.3% 26.3% 28.8% Valvoline Lubricant sales (million gallons) 48.1 50.0 131.4 141.3 Premium lubricants (percent of U.S. branded volumes) 24.3% 22.0% 23.5% 21.0% Refining and Marketing (4) Refinery runs (thousand barrels per day) Crude oil refined 1,012 1,013 970 900 Other charge and blend stocks 175 142 182 174 Refined product yields (thousand barrels per day) Gasoline 636 623 619 596 Distillates 328 323 316 285 Asphalt 97 85 83 70 Other 140 138 150 136 -------- -------- -------- -------- Total 1,201 1,169 1,168 1,087 Refined product sales (thousand barrels per day) (5) 1,477 1,440 1,421 1,367 Refining and wholesale marketing margin (per barrel) (6) $ 6.69 $ 5.27 $ 4.58 $ 2.87 Speedway SuperAmerica (SSA) Retail outlets at June 30 1,647 1,746 Gasoline and distillate sales (million gallons) 822 802 2,360 2,371 Gross margin - gasoline and distillates (per gallon) $ .1211 $ .1192 $ .1165 $ .1161 Merchandise sales (millions) $ 645 $ 600 $ 1,786 $ 1,668 Merchandise margin (as a percent of sales) 25.2% 23.4% 25.2% 24.4% - ------------------------------------------------------------------------------------------------------------------------------
(1) Includes APAC's proportionate share of the backlog of unconsolidated joint ventures. (2) Total construction job revenues, less subcontract costs. (3) Sales are defined as sales and operating revenues. Gross profit is defined as sales and operating revenues, less cost of sales and operating expenses. (4) Amounts represent 100% of MAP's operations, in which Ashland owned a 38% interest until June 30, 2005. (5) Total average daily volume of all refined product sales to MAP's wholesale, branded and retail (SSA) customers. (6) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- RESULTS OF OPERATIONS Current Quarter - Ashland reported net income and income from continuing operations of $1,767 million for the quarter ended June 30, 2005, including a net gain of $1,536 million from the MAP Transaction and a related loss on the early retirement of debt, as described in Note D to the Condensed Consolidated Financial Statements. For the quarter ended June 30, 2004, Ashland reported net income of $161 million and income from continuing operations of $167 million. Results from discontinued operations, consisting primarily of charges for asbestos liabilities, accounted for the difference in net income and income from continuing operations for the 2004 period. In addition to the gain on the MAP Transaction, the improved results reflect a 41% increase in operating income from refining and marketing and a 40% increase in operating income from the Chemical Sector, which consists of the Ashland Distribution, Ashland Specialty Chemical, and Valvoline divisions. In addition, the Transportation Construction Sector, which consists of Ashland Paving And Construction, Inc. (commercially known as APAC), recorded a 7% increase in operating income to a record $46 million, in spite of higher energy prices. Year-to-Date - Ashland reported net income and income from continuing operations of $1,893 million for the nine months ended June 30, 2005, including a net gain of $1,535 million from the MAP Transaction and a related loss on the early retirement of debt, as described in Note D to the Condensed Consolidated Financial Statements. For the nine months ended June 30, 2004, Ashland reported net income of $179 million and income from continuing operations of $195 million. Results from discontinued operations, consisting primarily of charges for asbestos liabilities, accounted for the difference in net income and income from continuing operations for the 2004 period. In addition to the gain on the MAP Transaction, the improved results reflect a 109% increase in operating income from refining and marketing and a 38% increase in operating income from the Chemical Sector. However, the Transportation Construction Sector experienced an 85% decrease in operating income due to lower production resulting from poor weather conditions during the first six months of the fiscal year, and higher hydrocarbon costs. An analysis of operating income by industry segment follows. APAC Current Quarter - APAC reported record operating income of $46 million for the June 2005 quarter, compared to $43 million for the June 2004 quarter, despite rising hydrocarbon costs. Net construction job revenues (total construction job revenues less subcontract costs) increased 4% from the prior year period. Production of hot-mix asphalt decreased 4%, while aggregate production increased 2%. Energy-related costs for liquid asphalt and fuel increased 10%. At June 30, 2005, APAC's construction backlog, which consists of work awarded and funded but not yet performed, was $2.1 billion, up 12% from June 30, 2004. 16 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- APAC (CONTINUED) Year-to-Date - APAC reported operating income of $6 million for the nine months ended June 30, 2005, compared to $41 million for the nine months ended June 30, 2004. The decline reflects reduced production of hot-mix asphalt and increased hydrocarbon costs. Net construction job revenues decreased 2% from the prior year period. Production of hot-mix asphalt decreased 7%, while aggregate production increased 8%. Energy-related costs for liquid asphalt and fuel increased 7%. Equity income from APAC's joint venture project at Atlanta's Hartsfield Airport declined $5 million as that project nears completion. ASHLAND DISTRIBUTION Current Quarter - Ashland Distribution achieved its sixth consecutive record quarter, with operating income of $36 million for the June 2005 quarter, up 57% over the $23 million reported for the June 2004 quarter. Record sales revenues were up 18% due to the division's ability to pass through price increases. Gross profit as a percent of sales improved to 10.0%, compared to 9.8% in the prior year quarter. Ashland Distribution has sustained its exceptional performance by maintaining margins in the face of rising raw material costs, managing expenses and aggressively expanding its sales reach. Margin improvement more than offset a volume decline of 4%. Year-to-Date - Ashland Distribution achieved all-time record operating income of $95 million for the nine months ended June 30, 2005, up 70% over the $56 million reported for the same period a year ago. The increase reflects the same factors described in the current quarter comparison. Sales revenues increased 22% and gross profit as a percent of sales increased to 9.8%, compared to 9.7% for the prior year period. Volumes declined 1% reflecting the sale of Ashland Distribution's ingestibles business in January 2005. ASHLAND SPECIALTY CHEMICAL Current Quarter - Ashland Specialty Chemical achieved an all-time record quarter, with operating income of $43 million for the June 2005 quarter, up 95% over the $22 million reported for the June 2004 quarter. Strong performance resulted from better margins coupled with a 6% increase in thermoset resins volumes. Margin improvement reflects rising prices and partial abatement of rising raw material costs. Operating income from the thermoset resins businesses increased $23 million, or 152%, due to a strong performance from Composite Polymers, which has benefited from the acquisition of Dow Chemical's DERAKANE(R) epoxy vinyl ester resins business. Year-to-Date - Ashland Specialty Chemical reported operating income of $104 million for the nine months ended June 30, 2005, a 65% improvement compared to $63 million for the nine months ended June 30, 2004. Operating income from the thermoset resins businesses increased $43 million, or 90%, reflecting a strong performance from Composite Polymers. In addition, the 2005 period included approximately $4 million in net, non-recurring gains principally related to the termination of a product supply contract in the December 2004 quarter, in addition to a $7 million pretax gain on the sale of an idle plant in Plaquemine, La., in the March 2005 quarter. Although Ashland Specialty Chemical's sales and operating revenues were up 30%, reflecting in part a 7% increase in sales volumes for the thermoset resins businesses, gross profit as a percent of sales declined from 28.8% to 26.3%. Tightness in certain petrochemical markets caused raw material costs to escalate at a faster pace than could be recovered through increased selling prices. 17 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- VALVOLINE Current Quarter - Operating income from the Valvoline division was $26 million in the June 2005 quarter, a 13% decline compared to $30 million for the June 2004 quarter. The decline was primarily due to the combination of a 4% decrease in lubricant sales volumes in a soft motor oil market and higher raw material costs. Valvoline International reported a record quarter, with operating income improving by 31% due mainly to better earnings from operations in Europe. During the quarter, Valvoline acquired Car Brite, a leading marketer of professional automotive reconditioning products. Car Brite's product line includes a broad array of interior and exterior cleaners, paint restorers and protectants, and detail dressings. Year-to-Date - Operating income from the Valvoline division was $69 million for the nine months ended June 30, 2005, an 8% decline compared to $75 million for the nine months ended June 30, 2004. The decline was primarily due to a 7% decrease in lubricant sales volumes due to a soft motor oil market. Partially offsetting this decrease was a 28% improvement in international results, primarily in Europe and Latin America. REFINING AND MARKETING Current Quarter - Operating income from Refining and Marketing, which consisted primarily of equity income from Ashland's 38% ownership interest in MAP through June 30, 2005, amounted to $290 million for the June 2005 quarter, a 41% improvement compared to $205 million for the June 2004 quarter. Equity income from MAP's refining and wholesale marketing operations increased $79 million, reflecting a $1.42 per barrel increase in MAP's refining and wholesale marketing margin. Equity income from MAP's retail operations (Speedway SuperAmerica and a 50% interest in the Pilot Travel Centers joint venture) increased $8 million, reflecting higher product and merchandise sales volumes and margins for SSA. Equity income from MAP's transportation operations increased $3 million, reflecting increased revenues. Ashland's administrative and other costs related to Refining and Marketing amounted to $20 million for the June 2005 quarter, compared to $11 million for the June 2004 quarter. The June 2005 quarter included increases in environmental reserves of $16 million, while the June 2004 quarter included losses of $2 million on margin hedges and costs associated with the MAP Transaction of $5 million. Year-to-Date - Operating income from Refining and Marketing amounted to $486 million for the nine months ended June 30, 2005, a 109% improvement compared to $232 million for the nine months ended June 30, 2004. Equity income from MAP's refining and wholesale marketing operations increased $232 million. MAP's refining and wholesale marketing margin increased $1.71 per barrel and crude oil throughput increased 8% compared to the prior year period. Equity income from MAP's retail operations increased $22 million, reflecting higher merchandise sales volumes and margins for SSA, and higher distillate sales volumes and margins and higher merchandise sales volumes for PTC. Equity income from MAP's transportation operations increased $7 million, reflecting increased revenues. Ashland's administrative and other costs related to Refining and Marketing amounted to $32 million for the 2005 period, compared to $29 million for the 2004 period. The 2005 period included increases in environmental reserves of $20 million, while the 2004 period included increases in environmental reserves of $2 million, losses of $7 million on margin hedges and costs associated with the MAP Transaction of $8 million. As described in Note D to the Condensed Consolidated Financial Statements, Ashland transferred its 38% interest in MAP to Marathon on June 30, 2005. Ashland retains certain costs associated with its former Refining and Marketing activities discussed in the current quarter and year-to-date comparisons above. 18 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- CORPORATE Corporate expenses amounted to $31 million in both the June 2005 and June 2004 quarters. Corporate expenses amounted to $85 million for the nine months ended June 30, 2005, compared to $73 million for the nine months ended June 30, 2004. The increase for the year-to-date period reflects a $5 million loss recognized in the March 2005 quarter on a foreign-currency-denominated prepaid royalty payment received in 2002 and a $7 million charge in the December 2004 quarter for estimated future obligations to make certain insurance premium payments related to past loss experience. GAIN ON THE MAP TRANSACTION See Note D to the Condensed Consolidated Financial Statements for a discussion of the MAP Transaction and the resulting pretax gain of $1,295 million recorded in the June 2005 quarter. LOSS ON EARLY RETIREMENT OF DEBT See Note D to the Condensed Consolidated Financial Statements for a discussion of the early retirement of debt associated with the MAP Transaction, which resulted in a pretax loss of $143 million recorded in the June 2005 quarter and $145 million for the nine months ended June 30, 2005. NET INTEREST AND OTHER FINANCIAL COSTS Net interest and other financial costs amounted to $31 million in the June 2005 quarter, compared to $29 million in the June 2004 quarter. For the nine months ended June 30, 2005, net interest and other financial costs amounted to $89 million, compared to $88 million for the nine months ended June 30, 2004. The increases in both periods reflected increased short-term borrowings during the period when distributions from MAP were suspended due to the pending closing of the MAP Transaction. As described in Note D to the Condensed Consolidated Financial Statements, Ashland repaid most of its outstanding debt and certain other financial obligations with the proceeds of the MAP Transaction. Interest and other financial costs of $28 million in the June 2005 quarter and $82 million in the nine months ended June 30, 2005, will not be incurred in future periods because of these repayments. In addition, Ashland will receive increased interest income from the investment of remaining cash proceeds from the transaction. INCOME TAXES As discussed in Note D to the Condensed Consolidated Financial Statements, the MAP Transaction resulted in the reversal of $328 million of net deferred tax liabilities through the income tax provision that distorts the normal relationship of income taxes to pretax income. Excluding the pretax gain and the associated deferred tax benefit, the effective tax rate for the nine months ended June 30, 2005 was 38.8%, which is essentially equal to a combined U.S. federal and state statutory rate. DISCONTINUED OPERATIONS As described in Notes B and G to the Condensed Consolidated Financial Statements, Ashland's results from discontinued operations for the quarter and nine months ended June 30, 2004, include charges associated with estimated future asbestos liabilities less probable insurance recoveries, as well as negative adjustments to the gain recorded in fiscal 2003 on the disposal of Ashland's discontinued Electronic Chemicals business. Such amounts are summarized below. 19 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- DISCONTINUED OPERATIONS (CONTINUED)
------------------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended June 30 June 30 ----------------------- ------------------------ (In millions) 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------------------ Pretax loss from discontinued operations Reserves for asbestos-related litigation $ - $ (7) $ - $ (22) Loss on disposal of Electronic Chemicals - (2) - (3) Income taxes Reserves for asbestos-related litigation - 3 - 9 Loss on disposal of Electronic Chemicals - - - - ---------- ---------- ---------- ---------- Results from discontinued operations (net of income taxes) $ - $ (6) $ - $ (16) ========== ========== ========== ==========
FINANCIAL POSITION LIQUIDITY Cash flows from operations, a major source of Ashland's liquidity, amounted to a deficit of $17 million for the nine months ended June 30, 2005, compared to positive cash flows of $77 million for the nine months ended June 30, 2004. As a part of the repayment of debt and other financial obligations associated with the MAP Transaction, Ashland repurchased accounts receivable previously sold under its sale of receivables facility, which reduced cash flows from operations by $150 million in the nine months ended June 30, 2005. Ashland received cash distributions from MAP of $271 million in the 2005 period, compared to distributions of $146 million in the 2004 period. Ashland has made $173 million in net federal tax payments in the 2005 period, compared to $42 million in the 2004 period. Pension contributions amounted to $33 million in the 2005 period compared to $89 million in the 2004 period. Ashland's financial position has enabled it to obtain capital for its financing needs. As anticipated, on June 29, 2005, following shareholder approval of the MAP Transaction, Moody's cut Ashland's senior debt rating to Ba1, the highest non-investment grade rating, and cut Ashland's commercial paper rating to N-P (Not-Prime). Ratings downgrades below investment grade can significantly increase a company's borrowing costs. Standard & Poor's maintained its investment grade rating of BBB on Ashland's senior debt and A-2 on its commercial paper. Ashland has two revolving credit agreements providing for up to $650 million in borrowings. The agreement providing for up to $350 million in borrowings expires on March 21, 2010. The agreement providing for up to $300 million in borrowings expires on March 20, 2006. Though Ashland utilized the latter facility to fund maturing long-term debt, the early retirement of a capital lease, and certain other lease payments prior to the completion of the MAP Transaction, no borrowings were outstanding under either facility at June 30, 2005. The borrowing capacity under the $350 million facility is reduced by $15 million of letters of credit outstanding at June 30, 2005. While the revolving credit agreements contain covenants limiting new borrowings based on Ashland's stockholders' equity, these agreements would have permitted an additional $5.5 billion of borrowings at June 30, 2005. Additional permissible borrowings are increased (decreased) by 150% of any increase (decrease) in stockholders' equity. At June 30, 2005, working capital (excluding debt due within one year) amounted to $2,501 million, compared to $926 million at September 30, 2004, and $830 million at June 30, 2004. Ashland's working capital is affected by its use of the LIFO method of inventory valuation. That method valued inventories 20 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- LIQUIDITY (CONTINUED) below their replacement costs by $121 million at June 30, 2005, compared to $95 million at September 30, 2004, and $85 million at June 30, 2004. Liquid assets (cash, cash equivalents and accounts receivable) amounted to 207% of current liabilities at June 30, 2005, compared to 84% at September 30, 2004, and 87% at June 30, 2004. The increase in working capital and liquidity reflects the remaining cash and accounts receivable proceeds from the MAP Transaction after retirement of most of Ashland's debt, certain operating leases and repayment of its accounts receivable financing facility. Ashland intends to retire additional debt and possibly additional operating leases, as well as make additional contributions to its pension plans in the next three to six months. Remaining proceeds will be invested in held-to-maturity marketable securities and cash equivalents. CAPITAL RESOURCES For the nine months ended June 30, 2005, property additions amounted to $285 million, including $101 million in purchases of previously leased assets with proceeds of the MAP Transaction. This compares with property additions of $121 million for the same period last year. Ashland anticipates meeting its remaining 2005 capital requirements for property additions of approximately $70 million, excluding any additional buyouts of current leases, and dividends of approximately $20 million, from internally generated funds, supplemented by proceeds from the MAP transaction as necessary. In 2004, Ashland initiated a multi-year SAP enterprise resource planning (ERP) project that is expected to be implemented world-wide across Ashland's Chemical Sector to achieve increased efficiency and effectiveness in supply chain, financial, and environmental, health and safety processes. Overall costs for this project through 2007 are expected to total approximately $90 million, of which approximately $80 million will be capitalized, including $25 million of capitalized costs expected to be spent in 2005. While extensive planning is underway to support a smooth implementation of the ERP system, such implementations carry substantial project risk, including the potential for business interruption and associated adverse impacts on operating results. Ashland's debt level amounted to $168 million at June 30, 2005, compared to $1,548 million at September 30, 2004, and $1,542 million at June 30, 2004. Debt as a percent of capital employed amounted to 4.3% at June 30, 2005, compared to 36.4% at September 30, 2004, and 38.1% at June 30, 2004. At June 30, 2005, Ashland's debt included $29 million of floating-rate obligations. On July 25, 2005, Ashland's board of directors authorized the purchase of its common shares in an amount up to $270 million. The stock repurchase program is designed to purchase shares from time to time in the open market in compliance with contractual, IRS and other applicable restrictions. ASBESTOS-RELATED LITIGATION AND ENVIRONMENTAL REMEDIATION For a discussion of Ashland's asbestos-related litigation and environmental remediation matters, see Note G to the Condensed Consolidated Financial Statements. 21 - --------------------------------------------------------------------------- ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS Management's Discussion and Analysis contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include those that refer to Ashland's operating performance, earnings, benefits expected to be obtained through the SAP ERP implementation and expectations about the use of proceeds from the MAP Transaction. Although Ashland believes its expectations are based on reasonable assumptions, it cannot assure the expectations reflected herein will be achieved. These forward-looking statements are based upon internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, weather, operating efficiencies and economic conditions, such as prices, supply and demand, cost of raw materials, and legal proceedings and claims (including environmental and asbestos matters) and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from those we describe in the forward-looking statements. The risks, uncertainties, and assumptions include the risks associated with the ERP implementation, including the potential for business interruption and associated adverse impacts on operating results; and other risks that are described from time to time in the Securities and Exchange Commission (SEC) reports of Ashland. Other factors and risks affecting Ashland are contained in Risks and Uncertainties in Note A to the Consolidated Financial Statements in Ashland's annual report on Form 10-K, as amended, for the fiscal year ended September 30, 2004. Ashland undertakes no obligation to subsequently update or revise these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Ashland's market risk exposure at June 30, 2005 is generally consistent with the types and amounts of market risk exposures presented in Ashland's annual report on Form 10-K, as amended, for the fiscal year ended September 30, 2004. ITEM 4. CONTROLS AND PROCEDURES (a) As of the end of the period covered by this quarterly report, Ashland, under the supervision and with the participation of its management, including Ashland's Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of Ashland's disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective. (b) There were no significant changes in Ashland's internal control over financial reporting, or in other factors, that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, Ashland's internal control over financial reporting. 22 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Asbestos-Related Litigation - Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation ("Riley"), a former subsidiary. Although Riley was neither a producer nor a manufacturer of asbestos, its industrial boilers contained some asbestos-containing components provided by other companies. The majority of lawsuits filed involve multiple plaintiffs and multiple defendants, with the number of defendants in many cases exceeding 100. The monetary damages sought in the asbestos-related complaints that have been filed in state or federal courts vary as a result of jurisdictional requirements and practices, though the vast majority of these complaints either do not specify monetary damages sought or merely recite that the monetary damages sought meet or exceed the required jurisdictional minimum in which the complaint was filed. Plaintiffs have asserted specific dollar claims for damages in approximately 5% of the 52,100 active lawsuits pending as of June 30, 2005. In these active lawsuits, less than 0.2% of the active lawsuits involve claims between $0 and $100,000; approximately 1.5% of the active lawsuits involve claims between $100,000 and $1 million; less than 1% of the active lawsuits involve claims between $1 million and $5 million; less than 0.2% of the active lawsuits involve claims between $5 million and $10 million; approximately 2% of the active lawsuits involve claims between $10 million and $15 million; and less than 0.02% of the active lawsuits involve claims between $15 million and $100 million. The variability of requested damages, coupled with the actual experience of resolving claims over an extended period, demonstrates that damages requested in any particular lawsuit or complaint bear little or no relevance to the merits or disposition value of a particular case. Rather, the amount potentially recoverable by a specific plaintiff or group of plaintiffs is determined by other factors such as product identification or lack thereof, the type and severity of the disease alleged, the number and culpability of other defendants, the impact of bankruptcies of other companies that are co-defendants in claims, specific defenses available to certain defendants, other potential causative factors and the specific jurisdiction in which the claim is made. For additional information regarding liabilities arising from asbestos-related litigation, see Note G of "Notes to Condensed Consolidated Financial Statements" in this quarterly report on Form 10-Q. U.S. Department of Justice ("USDOJ") Antitrust Division Investigation - - In November 2003, Ashland received a subpoena from the USDOJ relating to a foundry resins grand jury investigation. Ashland has provided responsive records to the subpoena. As is frequently the case when such investigations are in progress, a number of civil actions have since been filed in multiple jurisdictions, most of which are seeking class action status for classes of customers of foundry resins. These cases have been consolidated for pretrial purposes in the United States District Court, Southern District of Ohio. Ashland will vigorously defend the actions. Environmental Proceedings - (1) Under the federal Comprehensive Environmental Response Compensation and Liability Act (as amended) and similar state laws, Ashland may be subject to joint and several liability for clean-up costs in connection with alleged releases of hazardous substances at sites where it has been identified as a "potentially responsible party" ("PRP"). As of June 30, 2005, Ashland had been named a PRP at 102 waste treatment or disposal sites. These sites are currently subject to ongoing investigation and remedial activities, overseen by the United States Environmental Protection Agency (the "USEPA") or a state agency, in which Ashland is typically participating as a member of a PRP group. Generally, the type of relief sought includes remediation of contaminated soil and/or groundwater, reimbursement for past costs of site clean-up and administrative oversight, and/or long-term monitoring of environmental conditions at the sites. The ultimate costs are not predictable with assurance. For additional information regarding environmental matters and reserves, see Note G of "Notes to Condensed Consolidated Financial Statements" in this quarterly report on Form 10-Q. (2) On May 13, 2002, Ashland entered into a plea agreement with the U.S. Attorney's Office for the District of Minnesota and the U.S. Department of Justice regarding a May 16, 1997, sewer fire at the St. Paul Park, Minnesota refinery, which is now owned by MAP. As part of the plea agreement, Ashland entered guilty pleas to two misdemeanors, paid a $3.5 million fine related to violations of the Clean Air Act ("CAA"), paid $3.55 million as restitution to the employees injured in the fire, and paid $200,000 as restitution to the responding rescue units. Ashland also agreed to complete certain upgrades to the St. Paul Park refinery's process sewers, junction boxes and 23 drains to meet standards established by Subpart QQQ of the New Source Performance Standards of the CAA (the "Refinery Upgrades"). The Refinery Upgrades, completed in 2004, have been acknowledged and accepted by the appropriate agencies. As part of the plea agreement, Ashland entered into and satisfied the terms and conditions of a deferred prosecution agreement so that the deferred prosecution was dismissed by the court on February 22, 2005. As part of its sentence, Ashland was placed on probation for five years. The primary condition of probation is an obligation not to commit future federal, state, or local crimes. If Ashland were to commit such a crime, it would be subject not only to prosecution for that new violation, but the government could also seek to revoke Ashland's probation. The probation office has retained an independent environmental consultant to review and monitor Ashland's compliance with applicable environmental requirements and the terms and conditions of probation. The court also included other customary terms and restrictions of probation in its probation order (3) In 1990, contamination of groundwater at Ashland's former Canton, Ohio, refinery (now owned and operated by MAP) was first identified and reported to Ohio's Environmental Protection Agency ("OEPA"). Since that time, Ashland has voluntarily conducted investigation and remediation activities and regularly communicated with OEPA regarding this matter. Ashland and the state of Ohio have exchanged Consent Order drafts and have met to negotiate the terms of such an order. The state filed a complaint in February 2004, but simultaneously expressed an interest in continuing Consent Order settlement discussions. Following the filing of the complaint, Ashland, OEPA and Ohio's Office of the Attorney General have continued to work to finalize a Consent Order. The state has advised that it will assess a penalty as part of the overall settlement and has made an initial request for $650,000. Class Action Lawsuit Related to MAP Transaction - On April 8, 2005, Shiva Singh filed a complaint in the Supreme Court of the State of New York in New York County, individually and on behalf of others similarly situated, against Ashland and the individual members of Ashland's Board of Directors. The complaint also names Marathon Oil Corporation ("Marathon"), MAP and Credit Suisse First Boston LLC ("CSFB") as defendants. On May 19, 2005, Ashland removed the action to the United States District Court for the Southern District of New York. The action arose out of a proposed transaction, which was announced on March 19, 2004, in which Ashland was to transfer its entire 38% interest in MAP as well as certain other businesses to Marathon. The proposed transaction was valued at approximately $3 billion. The complaint alleges breach of fiduciary duties against Ashland, its directors, Marathon and MAP as well as negligence and breach of fiduciary duties against CSFB. The complaint also alleges aiding and abetting breach of fiduciary duties and/or negligence against each of the defendants. The plaintiff seeks to recover from defendants an unspecified amount of damages. The plaintiff also seeks to enjoin the proposed transaction between Ashland and Marathon (and any related shareholder vote); to require defendants to make a full and fair disclosure of all material facts before completion of the proposed transaction; and to require defendants to obtain a current, independent fairness opinion concerning the proposed transaction. In the event that the proposed transaction is consummated prior to the entry of the court's final judgment, the plaintiff seeks rescission of the proposed transaction as well as damages. The plaintiff also seeks the costs and disbursements of the action, including reasonable fees and expenses of plaintiff's attorneys and expert. Ashland believes the lawsuit is without merit. As stated in its May 2, 2005 Form 8-K, on April 27, 2005, Ashland signed an amendment to its agreement to transfer its 38% interest in MAP and two other businesses to Marathon. Under the amended agreement, Ashland's interest in these businesses was valued at approximately $3.7 billion (compared to $3 billion in the original proposed transaction). As noted in Item 5 to this quarterly report on Form 10-Q, Ashland transferred its 38% interest in MAP and two other businesses to Marathon on June 30, 2005. On July 8, 2005, Ashland moved to dismiss the complaint. CSFB joined Ashland's motion to dismiss and, on July 8, 2005, Marathon filed a separate motion to dismiss the complaint. Other Legal Proceedings - In addition to the matters described above, there are various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability, and other environmental matters, which seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Ashland's Special Meeting of Shareholders was held on June 29, 2005 at the Metropolitan Club, 50 E. RiverCenter Boulevard, Covington, Kentucky at 10:30 a.m. 24 (b) Ashland's shareholders at said meeting approved the previously announced agreement to transfer Ashland's 38-percent interest in MAP and two other businesses to Marathon by a vote of 57,529,512 affirmative to 1,022,090 negative and 450,666 abstention votes. ITEM 5. OTHER INFORMATION On June 30, 2005, Ashland completed its previously announced agreement with Marathon to transfer Ashland's 38-percent interest in MAP and two other businesses to Marathon in a transaction valued at approximately $3.7 billion. The two other businesses were Ashland's maleic anhydride business and 60 Valvoline Instant Oil Change centers in Michigan and northwest Ohio. As a result of the transaction, Ashland shareholders of record as of the close of business on June 30, 2005, received .2364 Marathon shares per Ashland share. In total, Ashland's shareholders received 17,538,815 shares of Marathon common stock with an aggregate value of $936 million based upon the June 30 closing price of Marathon stock. Additionally, the transaction resulted in Ashland's receipt of $2,407 million in cash and MAP accounts receivable of $913 million. These amounts included approximately $2.8 billion of cash and accounts receivable included in the $3.7 billion transaction value, and $518 million of cash and accounts receivable representing 38 percent of MAP's distributable cash and other adjustments as of June 30, 2005. For additional information regarding the MAP Transaction, see Note D of "Notes to Condensed Consolidated Financial Statements" in this quarterly report on Form 10-Q. ITEM 6. EXHIBITS (a) Exhibits 3(i) Second Restated Articles of Incorporation of Ashland, effective July 21, 2005. 3(ii) By-laws of Ashland, effective June 30, 2005. 12 Computation of Ratio of Earnings to Fixed Charges. 31.1 Certificate of James J. O'Brien, Chief Executive Officer of Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certificate of James J. O'Brien, Chief Executive Officer of Ashland, and J. Marvin Quin, Chief Financial Officer of Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Ashland Inc. ------------------------------------ (Registrant) Date: August 8, 2005 /s/ J. Marvin Quin ------------------------------------- J. Marvin Quin Senior Vice President and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) 26 EXHIBIT INDEX Exhibit No. Description - -------- -------------------------------------------------------------- 3(i) Second Restated Articles of Incorporation of Ashland, effective July 21, 2005. 3(ii) By-laws of Ashland, effective June 30, 2005. 12 Computation of Ratio of Earnings to Fixed Charges. 31.1 Certificate of James J. O'Brien, Chief Executive Officer of Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certificate of James J. O'Brien, Chief Executive Officer of Ashland, and J. Marvin Quin, Chief Financial Officer of Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27 EX-3 2 secresart.txt EXHIBIT 3(I) RESTATED ARTICLES OF INCORPORATION EXHIBIT 3(i) ARTICLES OF RESTATEMENT restating the RESTATED ARTICLES OF INCORPORATION OF ASHLAND INC. Pursuant to the provisions of KRS Section 271B.10-070, Ashland Inc. hereby adopts these Articles of Restatement for the purpose of restating its Restated Articles of Incorporation, as amended to date. First: The name of the corporation is Ashland Inc. Second: The text of the corporation's Second Restated Articles of Incorporation is set forth on Exhibit A attached hereto. CERTIFICATE Pursuant to KRS Section 271B.10-070(4), the undersigned hereby certifies that: (1) the text of the corporation's Second Restated Articles of Incorporation set forth on Exhibit A attached hereto does not contain an amendment to the articles requiring shareholder approval; and (2) the board of directors adopted the Second Restated Articles of Incorporation. These Articles of Restatement restating the Restated Articles of Incorporation of Ashland Inc. have been executed as of the 21st day of July, 2005. ASHLAND INC. By: /s/ David L. Hausrath ----------------------------------------- David L. Hausrath Senior Vice President THIS INSTRUMENT PREPARED BY: /s/ Linda L. Foss - --------------------------------- Linda L. Foss 50 E. RiverCenter Boulevard Covington, Kentucky (859) 815-3483 EXHIBIT A SECOND RESTATED ARTICLES OF INCORPORATION OF ASHLAND INC. - ---------------------------------------------------------------------------- ARTICLE I The name of the corporation is Ashland Inc. (hereinafter called the "Company" or the "Corporation"). ARTICLE II The purpose for which the Company is organized is the transaction of any or all lawful businesses for which corporations may be organized under the Kentucky Business Corporation Act, or any act amendatory thereof, supplemental thereto or substituted therefor (hereinafter called the "Act"), and to do all things necessary, convenient, proper or desirable in connection with or incident to any of the Company's businesses. ARTICLE III A. The Company shall have all the powers conferred upon a corporation organized under the Act and shall have all powers necessary, convenient or desirable in order to fulfill and further the purpose of the Company. B. The Company shall have the power to purchase shares of the stock of the Company to the extent of unreserved and unrestricted capital and earned surplus of the Company and to any greater extent permitted by the Act. C. The Board of Directors of the Company may distribute to the shareholders of the Company a portion of the Company's assets, in cash or property, out of capital surplus of the Company and from any other source permitted by the Act. ARTICLE IV A. The aggregate number of shares which the Company is authorized to issue is 30,000,000 shares of Cumulative Preferred Stock (hereinafter called the "Preferred Stock"), and 200,000,000 shares of Common Stock, par value $0.01 per share (hereinafter called the "Common Stock"). B. Preferred Stock (1) To the extent permitted by the Act, the Board of Directors is authorized, by resolution, to cause the Preferred Stock to be divided into and issued from time to time in one or more series and to fix and determine the designation and number of shares, and the relative rights and preferences of the shares, of each such series, and to change shares of one series that have been redeemed or reacquired into shares of another series. (2) All shares of Preferred Stock shall rank equally and be identical in all respects except as to the relative rights and preferences of any series fixed and determined by the Board of Directors, which may vary to the extent permitted by the Act. (3) The Preferred Stock shall be preferred over the Common Stock as to payment of dividends. Before any dividends or distributions (other than dividends or distributions payable in Common Stock) on the Common Stock shall be declared and set apart for payment or paid, the holders of shares of each series of Preferred Stock shall be entitled to receive dividends (either in cash, shares of Common Stock or Preferred Stock, or otherwise) when, as and if declared by the Board of Directors, at the rate and on the date or dates fixed in the resolution adopted by the Board of Directors establishing such series, and no more. With respect to each series of Preferred Stock, the dividends on each share of such series shall be cumulative from the date of issue of such share unless some other date is fixed in the resolution adopted by the Board of Directors establishing such series. Accruals of dividends shall not bear interest. (4) The Preferred Stock shall be preferred over the Common Stock as to assets so that the holders of each series of Preferred Stock shall be entitled to be paid, upon the voluntary or involuntary liquidation, dissolution or winding up of the Company and before any distribution is made to the holders of Common Stock, the amount fixed in the resolution adopted by the Board of Directors establishing such series, but in such case the holders of such series of Preferred Stock shall not be entitled to any other or further payment. If upon any such liquidation, dissolution or winding up of the Company its net assets shall be insufficient to permit the payment in full of the respective amounts to which the holders of all outstanding Preferred Stock are entitled, the entire remaining net assets of the Company shall be distributed among the holders of each series of Preferred Stock in amounts proportionate to the full amounts to which the holders of each such series are respectively so entitled. For purposes of this paragraph (4), the voluntary sale, lease, exchange or transfer of all or substantially all of the Company's property or assets to, or its consolidation or merger with, one or more corporations shall not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company. (5) All shares of any series of Preferred Stock shall be redeemable to the extent permitted by the Act and fixed in the resolution adopted by the Board of Directors establishing such series. All shares of any series of Preferred Stock shall be convertible into shares of Common Stock or into shares of any other series of Preferred Stock to the extent permitted by the Act and fixed in the resolution adopted by the Board of Directors establishing such series. (6) Unless otherwise provided herein or by the Act, or unless otherwise provided in the resolution adopted by the Board of Directors establishing any series of Preferred Stock, the holders of shares of Preferred Stock shall be entitled to one vote for each share of Preferred Stock held by them on all matters properly presented to shareholders, the holders of Common Stock and the holders of all series of Preferred Stock voting together as one class. (7) So long as any shares of Preferred Stock are outstanding, the Company shall not: (a) Redeem, purchase or otherwise acquire any shares of Common Stock if at the time of making such redemption, purchase or acquisition, the Company shall be in default with respect to any dividends accrued on, or any obligation to retire, shares of Preferred Stock. A-2 (b) Without the affirmative vote or consent of the holders of at least 66-2/3% of the number of shares of Preferred Stock at the time outstanding, voting or consenting (as the case may be) separately as a class without regard to series, given in person or by proxy, either in writing or by resolution adopted at a meeting called for the purpose, (i) create any class of stock ranking prior to the Preferred Stock as to dividends or upon liquidation or increase the authorized number of shares of any such class of stock or (ii) alter or change any of the provisions of these Articles of Incorporation so as adversely to affect the relative rights and preferences of the Preferred Stock or (iii) increase the authorized number of shares of Preferred Stock. (c) Without the affirmative vote or consent of the holders of at least 66-2/3% of the number of shares of any series of Preferred Stock at the time outstanding, voting or consenting (as the case may be) separately as a series, given in person or by proxy, either in writing or by resolution adopted at a meeting called for the purpose, alter or change any of the provisions of these Articles of Incorporation so as adversely to affect the relative rights and preferences of such series. (8) Series A Participating Cumulative Preferred Stock I. Designation and Number of Shares. This series of the Cumulative Preferred Stock shall be designated as "Series A Participating Cumulative Preferred Stock" (the "Series A Preferred Stock"). The number of shares initially issuable as the Series A Preferred Stock shall be 500,000; provided, however, that, if more than a total of 500,000 shares of Series A Preferred Stock shall be issuable upon the exercise of Rights (the "Rights") issued pursuant to the Rights Agreement dated as of May 16, 1996, between Ashland Inc., a Kentucky corporation, and National City Bank, as Rights Agent (the "Rights Agreement"), as amended as of March 18, 2004 and April 27, 2005, the Board of Directors of the Corporation, pursuant to Section 271B.10-060 of the Kentucky Business Corporation Act, shall direct by resolution or resolutions that Articles of Amendment of the Articles of Incorporation of the Corporation be properly executed and filed with the Secretary of State of Kentucky providing for the total number of shares issuable as Series A Preferred Stock to be increased (to the extent that the Articles of Incorporation then permit) to the largest number of whole shares (rounded up to the nearest whole number) issuable upon exercise of such Rights. II. Dividends or Distributions. (a) Subject to the prior and superior rights of the holders of shares of any other series of Preferred Stock or other class of capital stock of the Corporation ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of the Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of the assets of the Corporation legally available therefor, (i) quarterly dividends payable in cash on the last day of each fiscal quarter in each year, or such other dates as the Board of Directors of the Corporation shall approve (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or a fraction of a share of Series A Preferred Stock, in the amount of $.01 per whole share (rounded to the nearest cent), less the amount of all cash dividends declared on the Series A Preferred Stock pursuant to the following clause (ii) since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock (the total of which shall not, in any event, be less A-3 than zero) and (ii) dividends payable in cash on the payment date for each cash dividend declared on the Common Stock in an amount per whole share (rounded to the nearest cent) equal to the Formula Number (as hereinafter defined) then in effect times the cash dividends then to be paid on each share of Common Stock. In addition, if the Corporation shall pay any dividend or make any distribution on the Common Stock payable in assets, securities or other forms of non-cash consideration (other than dividends or distributions solely in shares of Common Stock), then, in each such case, the Corporation shall simultaneously pay or make on each outstanding whole share of Series A Preferred Stock a dividend or distribution in like kind equal to the Formula Number then in effect times such dividend or distribution on each share of the Common Stock. As used herein, the "Formula Number" shall be 1,000; provided, however, that, if at any time after the Master Agreement Closing Date (as defined below), the Corporation shall (x) declare or pay any dividend on the Common Stock payable in shares of Common Stock or make any distribution on the Common Stock in shares of Common Stock, (y) subdivide (by a stock split or otherwise) the outstanding shares of Common Stock into a larger number of shares of Common Stock or (z) combine (by a reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Formula Number shall be adjusted to a number determined by multiplying the Formula Number in effect immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event (and rounding the result to the nearest whole number); and provided further, that, if at any time after the Master Agreement Closing Date, the Corporation shall issue any shares of its capital stock in a merger, share exchange, reclassification, or change of the outstanding shares of Common Stock, then, in each such event, the Formula Number shall be appropriately adjusted to reflect such merger, share exchange, reclassification or change so that each share of Preferred Stock continues to be the economic equivalent of a Formula Number of shares of Common Stock prior to such merger, share exchange, reclassification or change. For purposes of this subsection (a), the term "Master Agreement Closing Date" shall mean the date the merger of EXM LLC into the Corporation pursuant to the plan of merger contained in that certain Master Agreement, dated as of March 18, 2004, among Ashland Inc., ATB Holdings Inc., EXM LLC, the Corporation, Marathon Oil Corporation, Marathon Oil Company, Marathon Domestic LLC, and Marathon Ashland Petroleum LLC, as amended by Amendment No. 1, dated as of April 27, 2005, is effective. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in Section (2) (a) immediately prior to or at the same time it declares a dividend or distribution on the Common Stock (other than a dividend or distribution solely in shares of Common Stock); provided, however, that, in the event no dividend or distribution (other than a dividend or distribution in shares of Common Stock) shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a dividend or distribution declared thereon, which record date shall be the same as the record date for any corresponding dividend or distribution on the Common Stock. A-4 (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from and after the Quarterly Dividend Payment Date next preceding the date of original issue of such shares of Series A Preferred Stock; provided, however, that dividends on such shares that are originally issued after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and on or prior to the next succeeding Quarterly Dividend Payment Date shall begin to accrue and be cumulative from and after such Quarterly Dividend Payment Date. Notwithstanding the foregoing, dividends on shares of Series A Preferred Stock that are originally issued prior to the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend on the first Quarterly Dividend Payment Date shall be calculated as if cumulative from and after the last day of the fiscal quarter next preceding the date of original issuance of such shares. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding and entitled to receive such dividends. (d) So long as any shares of the Series A Preferred Stock are outstanding, no dividends or other distributions shall be declared, paid or distributed, or set aside for payment or distribution, on the Common Stock, unless, in each case, the dividend required by this Section II to be declared on the Series A Preferred Stock shall have been declared and paid. (e) The holders of the shares of Series A Preferred Stock shall not be entitled to receive any dividends or other distributions, except as provided herein. III. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Each holder of Series A Preferred Stock shall be entitled to a number of votes equal to the Formula Number then in effect, for each share of Series A Preferred Stock held of record on each matter on which holders of the Common Stock or shareholders generally are entitled to vote, multiplied by the maximum number of votes per share which any holder of the Common Stock or shareholders generally then have with respect to such matter (assuming any holding period or other requirement to vote a greater number of shares is satisfied). (b) Except as otherwise provided herein or by applicable law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one voting group for the election of directors of the Corporation and on all other matters submitted to a vote of shareholders of the Corporation. (c) If, at the time of any annual meeting of shareholders for the election of directors, the equivalent of six quarterly dividends (whether or not consecutive) payable on any share or shares of Series A Preferred Stock are in default, the number of directors constituting the Board of Directors of the Corporation shall be increased by two. In addition to voting together with the holders of Common Stock for the election of other directors of the Corporation, the holders of record of the Series A Preferred Stock, voting separately as a voting group to the exclusion of the holders of Common Stock, shall be entitled at said meeting of shareholders (and at each subsequent annual meeting of shareholders), unless all dividends in arrears have been A-5 paid or declared and set apart for payment prior thereto, to vote for the election of two directors of the Corporation, the holders of any Series A Preferred Stock being entitled to cast a number of votes per share of Series A Preferred Stock equal to the Formula Number. Until the default in payments of all dividends that permitted the election of said directors shall cease to exist, any director who shall have been so elected pursuant to the next preceding sentence may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares of Series A Preferred Stock at the time entitled to cast such number of votes as are required by law for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled only by the vote of such holders. If and when such default shall cease to exist, the holders of the Series A Preferred Stock shall be divested of the foregoing special voting rights, subject to revesting in the event of each and every subsequent like default in payments of dividends. Upon the termination of the foregoing special voting rights, the terms of office of all persons who may have been elected directors pursuant to said special voting rights shall forthwith terminate to the extent permitted by law, and the number of directors constituting the Board of Directors shall be reduced by two. The voting rights granted by this Section III(c) shall be in addition to any other voting rights granted to the holders of the Series A Preferred Stock in this Section III. (d) Except as provided herein, in Section XI or by applicable law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for authorizing or taking any corporate action. IV. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section II are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock; provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or A-6 (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section IV, purchase or otherwise acquire such shares at such time and in such manner. V. Liquidation Rights. Upon the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received an amount equal to the accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an amount equal to the greater of (i) $.01 per whole share or (ii) an aggregate amount per share equal to the Formula Number then in effect times the aggregate amount to be distributed per share to holders of Common Stock or (b) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. VI. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, share exchange, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash or any other property, then, in any such case, the then outstanding shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share equal to the Formula Number then in effect times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is exchanged or changed. In the event both this Section VI and Section II appear to apply to a transaction, this Section VI will control. VII. No Redemption; No Sinking Fund. (a) The shares of Series A Preferred Stock shall not be subject to redemption by the Corporation or at the option of any holder of Series A Preferred Stock; provided, however, that the Corporation may purchase or otherwise acquire outstanding shares of Series A Preferred Stock in the open market or by offer to any holder or holders of shares of Series A Preferred Stock. (b) The shares of Series A Preferred Stock shall not be subject to or entitled to the operation of a retirement or sinking fund. A-7 VIII. Ranking. The Series A Preferred Stock shall rank junior to all other series of Preferred Stock of the Corporation, unless the Board of Directors shall specifically determine otherwise in fixing the powers, preferences and relative, participating, optional and other special rights of the shares of such series and the qualifications, limitations and restrictions thereof. IX. Fractional Shares. The Series A Preferred Stock shall be issuable upon exercise of the Rights issued pursuant to the Rights Agreement in whole shares or in any fraction of a share that is one-thousandth (1/1,000) of a share or any integral multiple of such fraction which shall entitle the holder, in proportion to such holder's fractional shares, to receive dividends, exercise voting rights, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Stock. In lieu of fractional shares, the Corporation, prior to the first issuance of a share or a fraction of a share of Series A Preferred Stock, may elect (a) to make a cash payment as provided in the Rights Agreement for fractions of a share other than one-thousandth (1/1,000) of a share or any integral multiple thereof or (b) to issue depository receipts evidencing such authorized fraction of a share of Series A Preferred Stock pursuant to an appropriate agreement between the Corporation and a depository selected by the Corporation; provided that such agreement shall provide that the holders of such depository receipts shall have all the rights, privileges and preferences to which they are entitled as holders of the Series A Preferred Stock. X. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, without par value, of the Corporation, undesignated as to series, and may thereafter be reissued as part of a new series of such Preferred Stock as permitted by law. XI. Amendment. None of the powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock as provided herein or in the Articles of Incorporation shall be amended in any manner that would alter or change the powers, preferences, rights or privileges of the holders of Series A Preferred Stock so as to affect such holders adversely without the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of Series A Preferred Stock, voting as a separate voting group; provided, however, that no such amendment approved by the holders of at least 66-2/3% of the outstanding shares of Series A Preferred Stock shall be deemed to apply to the powers, preferences, rights or privileges of any holder of shares of Series A Preferred Stock originally issued upon exercise of a Right after the time of such approval without the approval of such holder. C. Common Stock (1) The holders of Common Stock of the Company shall be entitled to one vote for each share of Common Stock held by them on all matters properly presented to shareholders, except as otherwise provided herein or by the Act. (2) Subject to the preferential rights of Preferred Stock set forth herein or in the resolution adopted by the Board of Directors establishing any series of Preferred Stock, such dividends (either in cash, shares of Common Stock or Preferred Stock, or otherwise) as may be A-8 determined by the Board of Directors may be declared and paid on the Common Stock from time to time in accordance with the Act. (3) Subject to the preferential rights of Preferred Stock set forth herein or in the resolution adopted by the Board of Directors establishing any series of Preferred Stock, the holders of Common Stock shall be entitled to receive the net assets of the Company upon dissolution. D. No holder of shares of any class of stock of the Company shall have any preemptive right to subscribe to stock, obligations, warrants, subscription rights or other securities of the Company of any class, whether now or hereafter authorized. ARTICLE V The Company shall have perpetual existence. ARTICLE VI Subject to the restriction that the number of directors shall not be less than the number required by the laws of the Commonwealth of Kentucky, the number of directors may be fixed, from time to time, pursuant to the By-laws of the Company. The members of the Board of Directors (other than those who may be elected by the holders of any class or series of capital stock of the Company having a preference over the Common Stock as to dividends or upon liquidation pursuant to the terms of these Articles of Incorporation or of such class or series of stock) shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the By-laws of the Company, one class to be originally elected for a term expiring at the first annual meeting of the shareholders after their election, another class to be originally elected for a term expiring at the second annual meeting of the shareholders after their election, and another class to be originally elected for a term expiring at the third annual meeting of the shareholders after their election, with each class to hold office until the successors of such class are elected and qualified. At each annual meeting of the shareholders, the date of which shall be fixed by or pursuant to the By-laws of the Company, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Subject to any requirements of law and the rights of any class or series of capital stock of the Company having a preference over the Common Stock as to dividends or upon liquidation pursuant to the terms of these Articles of Incorporation or of such class or series of stock (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the terms of such class or series), the affirmative vote of the holders of 80% or more of the voting power of the then outstanding voting stock of the Company, voting together as a single class, shall be required to remove any director without cause. For purposes of this Article VI, "cause" shall mean the willful and continuous failure of a director to substantially perform such director's duties to the Company, other than any such failure resulting from incapacity due to physical or mental illness, or the willful engaging by a director in gross A-9 misconduct materially and demonstrably injurious to the Company. As used in these Articles of Incorporation, "voting stock" shall mean shares of capital stock of the Company entitled to vote generally in an election of directors. Subject to any requirements of law and the rights of any class or series of capital stock of the Company having a preference over the Common Stock as to dividends or upon liquidation pursuant to the terms of these Articles of Incorporation or of such class or series of stock, newly created directorships resulting from any increase in the number of directors may be filled by the Board of Directors, or as otherwise provided in the By-laws, and any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, or as otherwise provided in the By-laws. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successors shall have been elected and qualified. ARTICLE VII In furtherance and not in limitation of the powers conferred upon it by law, the Board of Directors is expressly authorized to: A. adopt any By-laws that the Board of Directors may deem necessary or desirable for the efficient conduct of the affairs of the Company, including, but not limited to, provisions governing the conduct of, and the matters which may properly be brought before, annual or special meetings of the shareholders and provisions specifying the manner and extent to which prior notice shall be given of the submission of proposals to be considered at any such meeting or of nominations for election of directors to be held at any such meeting; and B. repeal, alter or amend the By-laws. In addition to any requirements of law and any other provisions of these Articles of Incorporation or the terms of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the terms of such class or series), the affirmative vote of the holders of 80% or more of the voting power of the then outstanding voting stock of the Company, voting together as a single class, shall be required to amend, alter or repeal any provision of the By-laws. ARTICLE VIII A. A higher than majority vote of shareholders for certain Business Combinations shall be required as follows: (1) In addition to any affirmative vote otherwise required by law or these Articles of Incorporation or the terms of any class or series of capital stock of the Company having a preference over the Common Stock as to dividends or upon liquidation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the terms A-10 of such class or series) and except as otherwise expressly provided in Section B of this Article VIII: (a) any merger or consolidation of the Company or any Subsidiary with an Interested Shareholder or with any other corporation, whether or not itself an Interested Shareholder, which is, or after such merger or consolidation would be, an Affiliate of an Interested Shareholder who was an Interested Shareholder prior to the transaction; (b) any sale, lease, transfer, or other disposition, other than in the ordinary course of business, in one transaction or a series of transactions in any twelve-month period, to any Interested Shareholder or any Affiliate of an Interested Shareholder, other than the Company or any Subsidiary, of any assets of the Company or any Subsidiary having, measured at the time the transaction or transactions are approved by the Board of Directors, an aggregate book value as of the end of the Company's most recently ended fiscal quarter of 5% or more of the total market value of the outstanding stock of the Company or of its net worth as of the end of its most recently ended fiscal quarter; (c) the issuance or transfer by the Company or any Subsidiary, in one transaction or a series of transactions in any twelve-month period, of any equity securities of the Company or any Subsidiary which have an aggregate market value of 5% or more of the total market value of the outstanding stock of the Company, determined as of the end of the Company's most recently ended fiscal quarter prior to the first such issuance or transfer, to any Interested Shareholder or any Affiliate of any Interested Shareholder, other than the Company or any Subsidiary, except pursuant to the exercise of warrants or rights to purchase securities offered pro rata to all holders of the Company's voting stock or any other method affording substantially proportionate treatment to the holders of voting stock; (d) the adoption of any plan or proposal for the liquidation or dissolution of the Company in which anything other than cash will be received by an Interested Shareholder or any Affiliate of an Interested Shareholder; or (e) any reclassification of securities, including any reverse stock split; any recapitalization of the Company; any merger or consolidation of the Company with any Subsidiary; or any other transaction which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by 5% or more the proportionate amount of the outstanding shares of any class of equity securities of the Company or any Subsidiary which is directly or indirectly beneficially owned by any Interested Shareholder or any Affiliate of any Interested Shareholder; shall require the recommendation of the Board of Directors and the affirmative vote of the holders of at least (i) 80% of the voting power of the then outstanding voting stock of the Company, voting together as a single class, and (ii) two-thirds of the voting power of the then outstanding voting stock other than voting stock beneficially owned by the Interested Shareholder who is, or whose Affiliate is, a party to the Business Combination or by an Affiliate or Associate of such Interested Shareholder, voting together as a single class. A-11 (2) The term "Business Combination" as used in this Article VIII shall mean any transaction which is referred to in any one or more of clauses (a) through (e) of paragraph (1) of Section A of this Article VIII. B. The provisions of Section A of this Article VIII shall not be applicable to any Business Combination, and such Business Combination shall require only such affirmative vote (if any) as is required by law, any other provision of these Articles of Incorporation or the terms of any class or series of capital stock of the Company having a preference over the Common Stock as to dividends or upon liquidation, if all conditions specified in either of the following paragraphs (1) or (2) are met: (1) The Business Combination shall have been approved by resolution by a majority of the Continuing Directors at a meeting of the Board of Directors at which a quorum consisting of at least a majority of the then Continuing Directors was present; or (2) All the following five conditions have been met: (a) The aggregate amount of the cash and the market value as of the Valuation Date of consideration other than cash to be received per share by holders of Common Stock in such Business Combination is at least equal to the highest of the following: (i) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of Common Stock (a) within the two-year period immediately prior to the Announcement Date or (b) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii) the market value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher; and (iii) the price per share equal to the market value per share of Common Stock determined pursuant to clause (ii) immediately preceding, multiplied by the fraction resulting from (a) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date, over (b) the market value per share of Common Stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of Common Stock. (b) The aggregate amount of the cash and the market value as of the Valuation Date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding stock other than Common Stock is at least equal to the highest of the following, whether or not the Interested Shareholder has previously acquired any shares of a particular class or series of stock: (i) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of such class of stock acquired by it (a) within the two-year period immediately prior to the Announcement Date or (b) in the transaction in which it became an Interested Shareholder, whichever is higher; A-12 (ii) the highest preferential amount per share to which the holders of shares of such class of stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company; (iii) the market value per share of such class of stock on the Announcement Date or on the Determination Date, whichever is higher; and (iv) the price per share equal to the market value per share of such class of stock determined pursuant to clause (iii) immediately preceding, multiplied by the fraction resulting from (a) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of any class of voting stock acquired by it within the two-year period immediately prior to the Announcement Date over (b) the market value per share of the same class of voting stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of the same class of voting stock. (c) In making any price calculation under paragraph (2) of this Section B, appropriate adjustments shall be made to reflect any reclassification or stock split (including any reverse stock split), stock dividend, recapitalization or any similar transaction which has the effect of increasing or reducing the number of outstanding shares of the stock. The consideration to be received by holders of any class or series of outstanding stock is to be in cash or in the same form as the Interested Shareholder has previously paid for shares of the same class or series of stock. If the Interested Shareholder has paid for shares of any class of stock with varying forms of consideration, the form of consideration for such class of stock shall be either in cash or the form used to acquire the largest number of shares of such class or series of stock previously acquired by it. (d) After the Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (i) there shall have been no failure to declare and pay at the regular date therefor any full periodic dividends, whether or not cumulative, on any outstanding Preferred Stock of the Company or other capital stock entitled to a preference over the Common Stock as to dividends or upon liquidation; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock, except as necessary to reflect any subdivision of the Common Stock, and no failure to increase the annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or other similar transaction which has the effect of reducing the number of outstanding shares of Common Stock; and (iii) the Interested Shareholder did not become the beneficial owner of any additional shares of stock of the Company except as part of the transaction which resulted in such Interested Shareholder or by virtue of proportionate stock splits or stock dividends. The provisions of clauses (i) and (ii) immediately preceding shall not apply if neither an Interested Shareholder nor any Affiliate or Associate of an Interested Shareholder voted as a director of the Company in a manner inconsistent with such clauses and the Interested A-13 Shareholder, within ten days after any act or failure to act inconsistent with such clauses, notifies the Board of Directors of the Company in writing that the Interested Shareholder disapproves thereof and requests in good faith that the Board of Directors rectify such act or failure to act. (e) After the Interested Shareholder has become an Interested Shareholder, the Interested Shareholder shall not have received the benefit, directly or indirectly, except proportionately as a shareholder, of any loans, advance, guarantees, pledges or other financial assistance provided by the Company or any Subsidiary, whether in anticipation of or in connection with such Business Combination or otherwise. C. For purposes of this Article VIII: (1) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 2005 (the term "registrant" in such Rule 12b-2 meaning in this case the Company). (2) "Announcement Date" means the first general public announcement of the proposal or intention to make a proposal of the Business Combination or its first communication generally to shareholders of the Company, whichever is earlier. (3) "Beneficial owner" when used with respect to any voting stock, means a person who, individually or with any Affiliate or Associate has: (i) the right to acquire voting stock, whether such right is exercisable immediately or only after the passage of time and whether or not such right is exercisable only after specified conditions are met pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; (ii) the right to vote voting stock pursuant to any agreement, arrangement, or understanding; or (iii) any agreement, arrangements, or understanding for the purpose of acquiring, holding, voting or disposing of voting stock with any other person who beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such shares of voting stock. (4) "Continuing Director" means any member of the Board of Directors who is not an Affiliate or Associate of an Interested Shareholder or any of its Affiliates, other than the Company or any Subsidiary, and who was a director of the Company prior to the time the Interested Shareholder became an Interested Shareholder, and any other member of the Board of Directors who is not an Affiliate or Associate of an Interested Director or any of its Affiliates, other than the Company or any Subsidiary, and was recommended or elected by a majority of the Continuing Directors at a meeting at which a quorum consisting of a majority of the Continuing Directors is present. (5) "Determination Date" means the date on which an Interested Shareholder first became an Interested Shareholder. A-14 (6) "Equity Security" means: (a) any stock or similar security, certificate of interest, or participation in any profit-sharing agreement, voting trust certificate, or certificate of deposit for the foregoing; (b) any security convertible, with or without consideration, into an equity security, or any warrant or other security carrying any right to subscribe to or purchase an equity security; or (c) any put, call, straddle, or other option, right or privilege of acquiring an equity security from or selling an equity security to another without being bound to do so. (7) "Interested Shareholder" means any person, other than ATB Holdings Inc., a corporation incorporated under the laws of Delaware on March 9, 2004 ("HoldCo"), the Company or any Subsidiary, who: (a) is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting stock of the Company; or (b) is an Affiliate of the Company and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock of the Company. For the purpose of determining whether a person is an Interested Shareholder, the number of shares of voting stock deemed to be outstanding shall include shares deemed owned by the person through application of paragraph (3) of this Section C but shall not include any other shares of voting stock which may be issuable pursuant to any agreement, arrangement, or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. Furthermore, any such beneficial ownership or voting power arising solely out of a trustee or custodial relationship of any person in connection with a Company "employee benefit or stock plan" shall be excluded for purposes of determining whether or not any such person is an Interested Stockholder. For purposes hereof, the term "employee benefit or stock plan" of the Company shall mean any option, bonus, appreciation, profit sharing, retirement, incentive, thrift, employee stock ownership, dividend reinvestment, savings or similar plan of the Company. (8) "Market Value" means: (a) in the case of stock, the highest closing sale price during the 30 calendar day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange listed stocks, or, if such stock is not quoted on such Composite Tape, on the New York Stock Exchange, or if such stock is not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30 calendar day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotation is available, the fair market value on the date in question of a share of such stock as A-15 determined by a majority of the Continuing Directors at a meeting of the Board of Directors at which a quorum consisting of at least a majority of the then Continuing Directors is present; and (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors at a meeting of the Board of Directors at which a quorum consisting of at least a majority of the then Continuing Directors is present. (9) "Subsidiary" means any corporation of which voting stock having a majority of the votes entitled to be cast is owned, directly or indirectly, by the Company. (10) "Valuation Date" means: (a) for a Business Combination voted upon by shareholders, the later of the day prior to the date of the shareholders' vote or the date 20 business days prior to the consummation of the Business Combination; and (b) for a Business Combination not voted upon by shareholders, the date of the consummation of the Business Combination. (11) "Voting Stock" means shares of capital stock of the Company entitled to vote generally in an election of directors. D. In addition to any requirements of law and any other provisions of these Articles of Incorporation or the terms of any class or series of capital stock of the Company entitled to a preference over the Common Stock as to dividends or upon liquidation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the terms of such class or series), the affirmative vote of (1) the holders of at least 80% of the voting power of the then outstanding voting stock of the Company, voting together as a single class, and (2) the holders of at least two-thirds of the voting power of the then outstanding voting stock of the Company other than the Interested Shareholder, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article VIII. E. In addition to the higher voting requirements contained in this Article VIII, the Kentucky Business Combination statutes (Sections 271B.12-200 through 271B.12-230 of the Act, as amended or supplemented) shall apply to any Business Combination (as defined therein) of the Company or any Subsidiary in accordance with their terms, provided that HoldCo shall be excluded from the definition of an "Interested Shareholder" of the Corporation thereunder. A-16 ARTICLE IX In addition to any requirements of law and any other provisions of these Articles of Incorporation or the terms of any class or series of capital stock of the Company having a preference over the Common Stock as to dividends or upon liquidation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the terms of such class or series), the affirmative vote of the holders of 80% or more of the voting power of the then outstanding voting stock of the Company, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article IX or Article VI or VII of these Articles of Incorporation. Subject to the foregoing provisions of this Article IX and Section D of Article VIII, the Company reserves the right from time to time to amend, alter, change, add to or repeal any provision contained in these Articles of Incorporation in any manner now or hereafter prescribed by law and in these Articles of Incorporation, and all rights and powers at any time conferred upon shareholders, directors and officers of the Company by these Articles of Incorporation or any amendment thereof are subject to the provisions of this Article IX and Section D of Article VIII. ARTICLE X The Company may, to the maximum extent permitted by law, indemnify any director, officer, employee or agent of the Company against costs and expenses (including but not limited to attorneys' fees) and any liabilities (including but not limited to judgments, fines, penalties and settlements) paid by or imposed against any such person in connection with any actual or threatened claim, action, suit or proceeding, whether civil, criminal, administrative, legislative, investigative or other (including any appeal relating thereto) and whether made or brought by or in the right of the Company or otherwise, in which any such person is involved, whether as a party, witness, or otherwise, because he or she is or was a director, officer, employee or agent of the Company or a predecessor of the Company or a director, officer, partner, trustee, employee or agent of any other corporation, partnership, employee benefit plan or other entity. The indemnification authorized by this Article X shall not supersede or be exclusive of any other right of indemnification which any such person may have or hereafter acquire under any provision of these Articles of Incorporation or the By-laws of the Company, agreement, vote of shareholders or disinterested directors or otherwise. The Company may take such steps as may be deemed appropriate by the Board of Directors to provide indemnification to any such person, including, without limitation, entering into contracts for indemnification between the Company and individual directors, officers, employees or agents which may provide rights to indemnification which are broader or otherwise different than the rights authorized by this Article X. The Company may take such steps as may be deemed appropriate by the Board of Directors to secure, subject to the occurrence of such conditions or events as may be determined by the Board of Directors, the payment of such amounts as are required to effect any indemnification permitted or authorized by this Article X, including, without limitation, purchasing and maintaining insurance, creating a trust fund, granting security interests or using other means (including, without limitation, irrevocable letters of credit). A-17 Any amendment or repeal of this Article X shall operate prospectively only and shall not affect any action taken, or failure to act, by the Company or any such person prior to such amendment or repeal. ARTICLE XI No director shall be personally liable to the Company or its shareholders for monetary damages for breach of his or her duties as a director except to the extent that the applicable law from time to time in effect shall provide that such liability may not be eliminated or limited. Neither the amendment nor repeal of this Article XI shall affect the liability of any director of the Company with respect to any act or failure to act which occurred prior to such amendment or repeal. This Article XI is not intended to eliminate or limit any protection otherwise available to the directors of the Company. ARTICLE XII The name of the Incorporator is Linda L. Foss, and the mailing address of the Incorporator is 50 E. RiverCenter Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391. ARTICLE XIII The mailing address of the principal office of the Company is 50 E. RiverCenter Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391. A-18 EX-3 3 bylaws.txt EXHIBIT 3(II) BY-LAWS EXHIBIT 3(ii) BY-LAWS OF ASHLAND INC. as amended and restated OFFICES - ---------------------------------------------------------------------------- The principal office of the Corporation in the Commonwealth of Kentucky shall be at 50 E. RiverCenter Boulevard, City of Covington, County of Kenton. The Corporation may also have offices at other places either within or without the Commonwealth of Kentucky as may be useful in the business of the Corporation. ARTICLE I MEETINGS OF SHAREHOLDERS SECTION 1. Annual Meetings. The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at the principal office of the Corporation on the last Thursday of January, annually, at the hour of 10:30 a.m., or at such other place (within or without the Commonwealth of Kentucky), date and hour as fixed by the Board of Directors of the Corporation (the "Board") and designated in the notice thereof. SECTION 2. Annual Meeting Business. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board; (ii) otherwise properly brought before the meeting by or at the direction of the Board; or (iii) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation, not later than ninety days in advance of such meeting (provided that if the annual meeting of shareholders is held earlier than the last Thursday in January, such notice must be given within ten days after the first public disclosure, which may include any public filing with the Securities and Exchange Commission, of the date of the annual meeting). Any such notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and in the event that such business includes a proposal to amend either the articles of incorporation or By-laws of the Corporation, the language of the proposed amendment; (ii) the name and address of the shareholder proposing such business; (iii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business; (iv) any material interest of the shareholder in such business; and (v) a representation as to whether or not the shareholder will solicit proxies in support of the proposal. No business shall be conducted at an annual meeting of shareholders except in accordance with this paragraph and the chairman of any annual meeting of shareholders may refuse to permit any business to be brought before an annual meeting which fails to comply with the foregoing procedures or, in the case of a shareholder proposal, if the shareholder fails to comply with the representations set forth in the notice. SECTION 3. Special Meetings. A special meeting of the shareholders may be called by a majority of the members of the Board, the Chairman of the Board or the President, at such place (within or without the Commonwealth of Kentucky), date and hour as shall be designated in the notice thereof. A special meeting of the shareholders shall be called by the Secretary on the written request of the holders of not less than one-third of all the shares entitled to vote at such meeting. Such request shall set forth: (i) the action proposed to be taken at such meeting and the reasons for the action; (ii) the name and address of each of such holders who intends to propose action be taken at such meeting; (iii) a representation that each is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose the action specified in the request; (iv) any material interest of any shareholder in such action; and (v) in the event that any proposed action consists of or includes a proposal to amend either the articles of incorporation or the By-laws of the Corporation, the language of the proposed amendment. The Secretary shall determine the place (within or without the Commonwealth of Kentucky), date and hour of such meeting. The Secretary may refuse to call a special meeting unless the request is made in compliance with the foregoing procedure. SECTION 4. Notice of Meetings. Notice stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each shareholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting by any form of notice permitted by Kentucky law. Except as otherwise expressly required by law, notice of any adjourned meeting of the shareholders need not be given if the date, hour and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than 120 days or, unless after the adjournment a new record date is fixed for the adjourned meeting. SECTION 5. Record of Shareholders. It shall be the duty of the officer or agent of the Corporation who shall have charge of its stock transfer books to prepare and make a complete record of the shareholders entitled to vote at any meeting of shareholders or adjournment thereof, arranged by voting group (and within each voting group by class or series), and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such record shall be produced at the time and place of the meeting and shall be open to the inspection of any shareholder entitled to vote at such meeting or any adjournment thereof during the whole time of such meeting or adjournment for the purposes thereof. SECTION 6. Fixing Date for Determination of Shareholders of Record. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof or entitled to receive payment of any dividend or other 2 distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be less than ten days before the date of such meeting, nor more than seventy days prior to any other action. A determination of shareholders entitled to notice of or to vote at a meeting of the shareholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting if the meeting is adjourned to a date 120 days or less after the date fixed for the original meeting. The Board shall fix a new record date if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SECTION 7. Quorum. At each meeting of the shareholders or adjournment thereof, except as otherwise expressly required by law, these By-laws or the articles of incorporation, shareholders holding a majority of the shares of the Corporation issued and outstanding and entitled to be voted thereat shall be present in person or by proxy to constitute a quorum for the transaction of business. The shareholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 8. Organization. At each meeting of the shareholders, one of the following shall act as chairman of the meeting and preside thereat, in the following order of precedence: (a) the Chairman of the Board; (b) the President; or (c) any other officer of the Corporation designated by the Board or the executive committee of the Board to act as chairman of such meeting and to preside thereat if the Chairman of the Board and the President shall be absent from such meeting. The Secretary or, if the Secretary shall be absent from such meeting, the person (who shall be an Assistant Secretary of the Corporation, if one of such officers shall be present thereat) whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. SECTION 9. Order of Business. The chairman of any meeting of shareholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure. SECTION 10. Voting. Except as otherwise expressly required by law, these By-laws, or the articles of incorporation, each shareholder entitled to vote shall, at each meeting of the shareholders, have one vote, in person or by proxy, for each share of the Corporation held by the shareholder and registered in the shareholder's name on the books of the Corporation: 3 (a) on the date fixed pursuant to the provisions of these By-laws as the record date for the determination of shareholders who shall be entitled to receive notice of and to vote at such meeting, or (b) if no record date shall have been so fixed, then at the close of business on the day on which notice of such meeting shall be given. Any vote of shares of the Corporation may be given at any meeting of the shareholders by the shareholders entitled thereto in person or by proxy appointed by the shareholder. The attendance at any meeting of a shareholder shall not have the effect of revoking a previously given proxy unless the shareholder shall give the Secretary written notice of the revocation. At all meetings of the shareholders each matter, except as otherwise expressly required by law, these By-laws or the articles of incorporation, shall be approved if the votes cast in favor of such matter exceed the votes cast opposing such matter. Except as otherwise expressly required by law, the vote at any meeting of the shareholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot, each ballot shall be signed by the shareholder voting, or by the shareholder's proxy, if there be such proxy, and shall state the number of shares voted. ARTICLE II BOARD OF DIRECTORS SECTION 1. General Powers. The business and affairs of the Corporation shall be managed under the direction of the Board. SECTION 2. Number and Term of Office. Except as otherwise provided by law, the number of directors which shall constitute the Board shall be fixed from time to time by a resolution adopted by a majority of the Board; provided, however, that a vote of the shareholders is required to increase or decrease by more than 30% the number of directors from that number last fixed by the shareholders. The directors shall be classified with respect to the time for which they shall severally hold office, by dividing them into three classes, as nearly equal in number as possible. The terms of office of the initial directors of the Corporation shall expire at the first meeting of shareholders at which directors are elected. At such meeting, the directors shall be elected into classes as provided in the Articles of Incorporation. Thereafter, at each annual meeting, successors to the class of directors whose term then expires shall be elected to serve for a term expiring at the annual meeting of shareholders held in the third year following the year of their election and until their successors shall have been elected and qualified. The Board shall increase or decrease the number of directors in one or more classes as may be appropriate whenever it increases or decreases the number of directors in order to ensure that the three classes remain as nearly equal in number as possible. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. 4 SECTION 3. Nomination. Nominations for the election of directors may be made by the Board or by any shareholder entitled to vote for the election of directors. Any shareholder entitled to vote for the election of directors at a meeting may nominate a person or persons for election as directors only if written notice of such shareholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary, not later than (i) with respect to an to be held at an annual meeting of shareholders, ninety days in advance of such meeting (provided that if the annual meeting of shareholders is held earlier than the last Thursday in January, such notice must be given within ten days after the first public disclosure, which may include any public filing with the Securities and Exchange Commission, of the date of the annual meeting) and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a shareholder of record of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated by the Board; (e) the consent of each nominee to serve as a director of the Corporation if so elected; and (f) a representation as to whether or not the shareholder will solicit proxies in support of the shareholder's nominee(s). The chairman of any meeting of shareholders to elect directors and the Board may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the shareholder fails to comply with the representations set forth in the notice. SECTION 4. Election. Except as otherwise expressly provided in the articles of incorporation, at each meeting of the shareholders for the election of directors at which a quorum is present, the persons receiving the greatest number of votes, up to the number of directors to be elected, shall be the directors. SECTION 5. Resignation, Removal and Vacancies. Any director may resign at any time by giving written notice of such resignation to the Chairman of the Board, the President or the Secretary. Any such resignation shall be effective when the notice is delivered unless the notice specifies a later effective date. Any or all directors may be removed at a meeting of the shareholders called expressly for that purpose. In the case of a removal of a director without cause, removal shall require a vote of the holders of at least 80% of the voting power of the then outstanding voting stock of the Corporation, voting together as a single voting group. For purposes of this Section, "cause" shall mean the willful and continuous failure of a director to substantially perform such director's duties to the Corporation (other than any failure resulting from incapacity due to physical or mental illness) or the willful engaging by a director in gross misconduct materially and 5 demonstrably injurious to the Corporation. As used in these By-laws, "voting stock" shall mean shares of capital stock of the Corporation entitled to vote generally in the election of directors. Any vacancy occurring on the Board may be filled by a majority of the directors then in office, though less than a quorum, and the director elected to fill such vacancy shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until the director's successor is elected and qualified. SECTION 6. Meetings. (a) Annual Meetings. As soon as practicable after each annual election of directors, the Board shall meet for the purpose of organization and the transaction of other business. (b) Regular Meetings. Regular meetings of the Board shall be held at such dates, times and places as the Board shall from time to time determine. (c) Special Meetings. Special meetings of the Board shall be held whenever called by the Chairman of the Board, the President or upon the written request of a majority of the members of the whole Board filed with the Secretary. Any and all business may be transacted at a special meeting which may be transacted at a regular meeting of the Board. (d) Place of Meeting. The Board may hold its meetings at such place or places within or without the Commonwealth of Kentucky as the Board may from time to time by resolution determine or as shall be designated in the respective notices or waiver of notices thereof. (e) Notice of Meetings. Notices of regular meetings of the Board or of any adjourned meeting need not be given. Notices of special meetings of the Board, or of any meeting of any committee of the Board which has not been fixed in advance as to hour and place by such committee, shall be sent by the Secretary to each director, or member of such committee, by any form of notice permitted by Kentucky law at the director's residence or usual place of business at least two days before the day on which such meeting is to be held. Such notice shall include the date, hour and place of such meeting, but any such notice need not specify the business to be transacted at, or the purpose of, any such meeting. Notice of any such meeting need not be given to any director or member of any committee, however, if waived by the director in writing, whether before or after such meeting shall be held, or if the director shall be present at such meeting, unless the director at the beginning of the meeting (or promptly upon such director's arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. (f) Quorum and Manner of Acting. A majority of the number of directors fixed by or in the manner provided in these By-laws or in the articles of incorporation shall be present at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the vote of a majority of those directors shall be necessary for the passage of any resolution or act of the Board, except as otherwise expressly required by law, these By-laws or the articles of incorporation. The directors present at a duly organized meeting 6 can continue to do business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. (g) Action by Consent. Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and such writings are filed with the minutes of the proceedings of the Board or committee. (h) Presence at a Meeting. Any or all directors may participate in any meeting of the Board or any committee thereof, or conduct the meeting through the use of, any means of communication by which all persons participating may simultaneously hear and speak to each other during the meeting. Any director participating in a meeting by such means shall be deemed to be present in person at the meeting for all purposes. SECTION 7. Compensation. The Board may, from time to time, fix such amount per annum and such fees to be paid by the Corporation to Directors for attendance at meetings of the Board or of any committee, or both. The Board may likewise provide that the Corporation shall reimburse each director or member of a committee for any expenses incurred by the director on account of the director's attendance at any such meeting. Nothing contained in this Section shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 8. Committees. The Board may, by resolution adopted by a majority of the Board, designate committees, each committee to consist of one or more directors and to have such duties and functions as shall be provided in such resolution. The Board shall have the power to change the members of any such committee at any time, to fill vacancies and to discharge any such committee, either with or without cause, at any time. The Board may establish an executive committee in accordance with and subject to the restrictions set out in the statutes of the Commonwealth of Kentucky. ARTICLE III OFFICERS SECTION 1. Officers. The officers of the Corporation shall be determined by the Board and, to the extent provided in Section 2 of this Article IV, the Chairman of the Board. The officers of the Corporation may include: (a) a Chairman of the Board; (b) a President; (c) one or more Executive Vice Presidents; (d) one or more Senior Vice Presidents; (e) one or more Administrative Vice Presidents; 7 (f) one or more Vice Presidents; (g) a Secretary and one or more Assistant Secretaries; (h) a Treasurer and one or more Assistant Treasurers; (i) a Controller and one or more Assistant Controllers; and (j) an Auditor and one or more Assistant Auditors. In addition, the Board may elect such other officers as it deems necessary or appropriate and such other officers shall have such powers, authority, and duties as may be delegated or assigned to such officer, from time to time, by the Board, the Chairman of the Board, or the President. The Board shall designate which of the officers shall be executive officers of the Corporation. SECTION 2. Election and Appointment and Term of Office. Each officer shall be elected by the Board at its annual meeting and hold office until the next annual meeting of the Board and until the officer's successor is elected or until the officer's earlier death, resignation or removal in the manner hereinafter provided. If additional officers are elected by the Board during the year, each of them shall hold office until the next annual meeting of the Board at which officers are regularly elected and until the officer's successor is elected or appointed or until the officer's earlier death, resignation or removal in the manner hereinafter provided. In addition to the foregoing, the Chairman of the Board, by written designation filed with the Secretary, may appoint one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers and Assistant Auditors of the Corporation. If appointed during the year, each of them shall hold office until the next annual meeting of the Board at which officers are regularly elected and until the officer's successor is elected or appointed or until the officer's earlier death, resignation or removal in the manner hereinafter provided. Subject to the authority of the Board, the Chairman of the Board shall also have authority to fix the salary of such officer. SECTION 3. Resignation, Removal and Vacancies. Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or the Secretary, and such resignation shall be effective when the notice is delivered, unless the notice specifies a later effective date. All officers and agents elected or appointed shall be subject to removal at any time by the Board with or without cause. All appointed officers may be removed at any time by the Chairman of the Board acting jointly with the President or any Executive or Senior Vice President, by written designation filed with the Secretary. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election or appointment to such office. 8 SECTION 4. Duties and Functions. (a) Chairman of the Board. The Chairman of the Board, if present, shall preside at all meetings of the shareholders and the Board. If designated by Board resolution, the Chairman of the Board shall be Chief Executive Officer of the Corporation, and if so designated, shall be vested with executive control and management of the business and affairs of the Corporation and have the direction of all other officers, agents and employees. The Chairman of the Board shall perform all such other duties as are incident to the office or as may be properly required of the Chairman by the Board, subject in all matters to the control of the Board. (b) The President. The President, in the absence of the Chairman of the Board, shall preside at all meetings of the shareholders and the Board. If designated by Board resolution, the President shall be Chief Executive Officer of the Corporation, and if so designated, shall be vested with executive control and management of the business and affairs of the Corporation and have the direction of all other officers, agents and employees. The President shall have such powers, authority and duties as may be delegated or assigned to the President from time to time by the Board or the Chairman of the Board. (c) Vice Presidents. The Executive Vice Presidents, Senior Vice Presidents, Administrative Vice Presidents and Vice Presidents shall have such powers, authority and duties as may be delegated or assigned to them from time to time by the Board, the Chairman of the Board or the President. (d) Secretary. The Secretary shall attend to the giving and serving of all notices required by law or these By-laws, shall be the custodian of the corporate seal and shall affix and attest the same to all papers requiring it; shall have responsibility for preparing minutes of the meetings of the Board and shareholders; shall have responsibility for authenticating records of the Corporation; and shall in general perform all the duties incident to the office of the Secretary, subject in all matters to the control of the Board. (e) Treasurer. The Treasurer shall have custody and control of the funds and securities of the Corporation and shall perform all such other duties as are incident to the office of the Treasurer or that may be properly required of the Treasurer by the Board, the Chairman of the Board or the President. (f) Controller. The Controller shall maintain adequate records of all assets, liabilities and transactions of the Corporation; shall see that adequate audits thereof are currently and regularly made; shall have general supervision of the preparation of the Corporation's balance sheets, income accounts and other financial statements or records; and shall perform such other duties as shall, from time to time, be assigned to him, by the Board, the Chairman of the Board or the President. These duties and powers shall extend to all subsidiary corporations and, so far as the Board, the Chairman of the Board or the President may deem practicable, to all affiliated corporations. (g) Auditor. The Auditor shall review the accounting, financial and related operations of the Corporation and shall be responsible for measuring the effectiveness of various controls established for the Corporation. The Auditor's duties shall include, without limitation, 9 the appraisal of procedures, verifying the extent of compliance with formal controls and the prevention and detection of fraud or dishonesty and such other duties as shall, from time to time, be assigned to the Auditor by the Board, the Chairman of the Board or the President. These duties and powers shall extend to all subsidiary corporations and, so far as the Board, the Chairman of the Board or the President may deem practicable, to all affiliated corporations. (h) General Provision. The powers, authorities, and duties established pursuant to this Section 4 may be delegated or assigned, directly or indirectly by the Board of Directors, the Chairman of the Board or the President, as the case may be. ARTICLE IV BOOKS AND RECORDS The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, the Board and the committees of the Board. ARTICLE V CONTRACTS, CHECKS, AND DEPOSITS SECTION 1. Contracts and Agreements. The Board may authorize any officer or agent to enter into any contract or agreement or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or limited to specific instances. SECTION 2. Checks, Drafts, Orders, Etc. All checks, drafts, or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation and in such manner as shall from time to time be prescribed by the Board in a duly authorized resolution. SECTION 3. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories in such manner as shall from time to time be prescribed by the Board in a duly authorized resolution. ARTICLE VI SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares. The shares of the Corporation may be represented by certificates or may be uncertificated. Certificates representing shares of the Corporation shall be in such form as the Board shall prescribe. Such certificates shall be in the name of the Corporation and signed by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary and shall be sealed with the corporate seal or contain a facsimile thereof. In case any officer who has signed or whose facsimile signature has been 10 placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if the person were such officer at the date of issue. Where any such certificate is manually countersigned by a transfer agent or registrar (other than the Corporation itself or an employee of the Corporation), any of the other signatures on the certificate may be a facsimile. SECTION 2. Record. The Corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, as required by applicable law. Except as otherwise expressly required by law, the person in whose name shares stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. SECTION 3. Transfer of Shares. Transfers of shares of the Corporation shall be made only on the books of the Corporation by the registered shareholder thereof, or by the registered shareholder's attorney thereunto duly authorized by written power of attorney duly executed and filed with the Secretary or with a transfer agent appointed as provided in Section 4 of this Article, and on the surrender of any certificate or certificates for such shares properly endorsed. SECTION 4. Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of shares of the Corporation. The Board may appoint or authorize any officer or officers to appoint one or more transfer agents and one or more registrars and may require all certificates for shares to bear the signature or signatures of any of them. ARTICLE VII FISCAL YEAR SECTION 1. The fiscal year of the Corporation shall begin on the first day of October in each year. ARTICLE VIII INDEMNIFICATION SECTION 1. Every person who is or was an officer or employee of the Corporation or a director, officer or employee of any other corporation or entity in which that person served as a director, officer or employee at the request of the Corporation (hereinafter collectively referred to as a "Covered Person"), shall be indemnified by the Corporation against any and all reasonable costs and expenses (including but not limited to attorney's fees) and any liabilities (including but not limited to judgments, fines, penalties and reasonable settlements) that may be paid by or imposed against that Covered Person in connection with or resulting from any pending, threatened or completed claim, action, suit or proceeding (whether brought by or in the right of the Corporation or such other corporation or entity or otherwise), and whether civil, criminal, administrative, investigative or legislative (including any appeal relating thereto), in which the Covered Person may be involved, as a party or witness or otherwise, by reason of the Covered 11 Person's being or having been an officer or employee of the Corporation or a predecessor of the Corporation or a director, officer or employee of such other corporation or entity, or by reasons of any action taken or not taken in such capacity, whether or not the Covered Person continues to be such at the time such liability or expense shall have been paid or imposed, if the Covered Person: (a) has been successful on the merits or otherwise with respect to such claim, action, suit or proceeding; or (b) acted in good faith, in what the Covered Person reasonably believed to be the best interests of the Corporation or such other corporation or entity, as the case may be, and in addition, in any criminal action or proceeding, had no reasonable cause to believe that the Covered Person's conduct was unlawful. As used in this Article, the terms "expense" and "liability" shall include, but not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against, and reasonable amounts paid in settlement by, a Covered Person. The termination of any claim, action, suit or proceeding by judgment, settlement (whether with or without court approval), conviction or upon a plea of guilty or nolo contendere, or its equivalent, shall not create a presumption that a Covered Person did not meet the standards of conduct set forth in paragraph (b) of this Section 1. SECTION 2. Indemnification under paragraph (b) of Section 1 shall be made unless it is determined by any of the following that the Covered Person has not met the standard of conduct set forth in paragraph (b) of Section 1: (a) the Board, acting by a quorum consisting of directors who were not parties to (or who are determined to have been successful with respect to) the claim, action, suit or proceeding; (b) a committee of the Board established pursuant to Article III Section 8 of the By-laws consisting of directors who were not parties to (or who are determined to have been successful with respect to) the claim, action, suit or proceeding; (c) any officer or group of officers of the Corporation who, by resolution adopted by the Board, has been given authority to make such determinations; or (d) either of the following selected by the Board if a disinterested committee of the Board (as described in paragraph (b) of this Section 2) cannot be obtained or by the person(s) designated in paragraphs (a), (b) or (c) of this Section 2: SECTION 3. independent legal counsel (who may be the regular counsel of the Corporation) who has delivered to the Corporation a written determination; or SECTION 4. an arbitrator or a panel of arbitrators (which panel may include directors, officers, employees or agents of the Corporation) who has delivered to the Corporation a written determination. 12 SECTION 5. Expenses incurred with respect to any claim, action, suit or proceeding of the character described in Section 1 of this Article shall be advanced to a Covered Person by the Corporation prior to the final disposition thereof, but the Covered Person shall be obligated to repay such advances if it is ultimately determined that the Covered Person is not entitled to indemnification. As a condition to advancing expenses hereunder, the Corporation may require the Covered Person to sign a written instrument acknowledging such obligation to repay any advances hereunder if it is ultimately determined the Covered Person is not entitled to indemnity. Notwithstanding the preceding paragraph, the Corporation may refuse to advance expenses or may discontinue advancing expenses to a Covered Person if such advancement is determined by the Corporation, in its sole and exclusive discretion, not to be in the best interest of the Corporation. SECTION 6. Notwithstanding anything in this Article to the contrary, no person shall be indemnified in respect of any claim, action, suit or proceeding initiated by such person or such person's personal or legal representative, or which involved the voluntary solicitation or intervention of such person or such person's personal or legal representative (other than an action to enforce indemnification rights hereunder or an action initiated with the approval of a majority of the Board). SECTION 7. The rights of indemnification provided in this Article shall be in addition to any other rights to which any Covered Person may otherwise be entitled to by contract, vote of shareholders or disinterested directors, other corporate action or otherwise; and in the event of any such Covered Person's death, such rights shall extend to the Covered Person's heirs and legal representatives. ARTICLE IX AMENDMENTS Any By-law may be adopted repealed, altered or amended by the Board at any regular or special meeting thereof. The shareholders of the Corporation shall have the power to amend, alter or repeal any By-law only to the extent and in the manner provided in the articles of incorporation of the Corporation. 13 EX-12 4 ex12.txt EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 ASHLAND INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In millions)
Nine months ended Years ended September 30 June 30 --------------------------------------------------------- ---------------------- 2000 2001 2002 2003 2004 2004 2005 ---------- --------- --------- --------- ---------- ---------- ---------- EARNINGS - -------- Income from continuing operations $ 272 $ 390 $ 115 $ 94 $ 398 $ 195 $ 1,893 Income taxes 179 266 68 44 150 111 (157) Interest expense 189 160 133 121 112 84 85 Interest portion of rental expense 39 40 35 33 35 25 29 Amortization of deferred debt expense 2 2 2 2 2 1 2 Distributions in excess of (less than) earnings of unconsolidated affiliates (113) (91) 20 (98) (263) (121) (253) ---------- --------- --------- --------- ---------- ---------- ---------- $ 568 $ 767 $ 373 $ 196 $ 434 $ 295 $ 1,599 ========== ========= ========= ========= ========== ========== ========== FIXED CHARGES - ------------- Interest expense $ 189 $ 160 $ 133 $ 121 $ 112 $ 84 $ 85 Interest portion of rental expense 39 40 35 33 35 25 29 Amortization of deferred debt expense 2 2 2 2 2 1 2 ---------- --------- --------- --------- ---------- ---------- ---------- $ 230 $ 202 $ 170 $ 156 $ 149 $ 110 $ 116 ========== ========= ========= ========= ========== ========== ========== RATIO OF EARNINGS TO FIXED CHARGES 2.47 3.80 2.19 1.26 2.91 2.68 13.78
EX-31 5 ex311.txt EXHIBIT 31.1 SECTION 302 CERTIFICATION EXHIBIT 31.1 CERTIFICATION Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. I, James J. O'Brien, Chief Executive Officer of Ashland Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Ashland Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August ___, 2005 /s/ James J. O'Brien ------------------------------------- Chief Executive Officer EX-31 6 ex312.txt EXHIBIT 31.2 SECTION 302 CERTIFICATION EXHIBIT 31.2 CERTIFICATION Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. I, J. Marvin Quin, Chief Financial Officer of Ashland Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Ashland Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August ___, 2005 /s/ J. Marvin Quin -------------------------------------- Chief Financial Officer EX-32 7 ex32.txt EXHIBIT 32 SECTION 906 CERTIFICATION EXHIBIT 32 ASHLAND INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ashland Inc. (the "Company") on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, James J. O'Brien, Chief Executive Officer of the Company, and J. Marvin Quin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies, in all material respects, with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the report. The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002 and is not intended to be used or relied upon for any other purpose. /s/ James J. O'Brien - ----------------------------------------- James J. O'Brien Chief Executive Officer August ___, 2005 /s/ J. Marvin Quin - ----------------------------------------- J. Marvin Quin Chief Financial Officer August ___, 2005 A signed original of this written statement required by Section 906 has been provided to Ashland Inc. and will be retained by Ashland Inc. and furnished to the Securities and Exchange Commission or staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----