UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number 333-15789
ChemFirst Inc.
(Exact name of Registrant as specified in its charter)
Mississippi 64-0679456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 North Street, P. O. Box 1249
Jackson, Mississippi 39215-1249
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 948-7550
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, Par Value $1 New York Stock Exchange
Common Stock, Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 16, 2000 (based on the closing sale price of $21.00 of
the Registrant's Common Stock, as reported on the New York Stock Exchange
Composite Tape on such date) was approximately $315,267,498.
The number of shares of the Registrant's Common Stock outstanding as of March
16, 2000 was 16,392,205.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information required to be disclosed in this Form 10-K is
incorporated by reference to the Company's 1999 Annual Report to Stockholders
and the Company's definitive Proxy Statement for the May 23, 2000 annual meeting
of stockholders. The location of the incorporated information is as follows:
Part I of Form 10-K Location in Annual Report
- ------------------- ------------------------
Item 1. Business Notes 2 and 12
Part II of Form 10-K
- --------------------
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters Inside back cover
Item 6. Selected Financial Data p. 2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations p. 13-15
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk See Management's Discussion
and Analysis of Financial
Condition and Results of
Operations
Item 8. Financial Statements and
Supplementary Data p. 16-35
Location in Definitive Proxy
Part III of Form 10-K Statement
- --------------------- ----------------------------
Item 10. Directors and Executive Officers
of the Registrant pp. 3; 4-8; 10; 12
Item 11. Executive Compensation pp. 10; 11; 13-20
Item 12. Security Ownership of Certain
Beneficial Owners and Management pp. 2; 8-10
Item 13. Certain Relationships and
Related Transactions p. 16
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PART I
ITEM 1. BUSINESS
General
The principal businesses of ChemFirst Inc. (the "Company") involve the
production of electronic and other specialty chemicals for use in the
semiconductor industry and in pharmaceutical, polymer, photographic,
photosensitive and agricultural applications, as well as the production of
polyurethane chemicals. The Company had previously reclassified the engineered
products and services segment and the steel segment as discontinued operations
pending disposition of these businesses. The Company completed disposition of
the engineered products and services operation in December 1999 and its steel
operation in February 2000. See the discussion under Recent Developments below
for more information regarding these dispositions.
At March 1, 2000, the Company had 678 employees, which includes employees
of the parent company and all subsidiaries.
Recent History
The Company was incorporated in Mississippi in 1983 under the name
Omnirad, Inc., as a wholly-owned subsidiary of First Mississippi Corporation
("First Mississippi"). In November 1996, in anticipation of the Distribution (as
defined below), the Company's name was changed from Omnirad, Inc. to ChemFirst
Inc. On December 23, 1996 (the "Distribution Date"), First Mississippi
contributed all of its assets and subsidiaries, other than those relating to its
fertilizer business, to the Company, which at that time was a wholly owned
subsidiary of First Mississippi and had engaged in no activities during the
previous five years. First Mississippi then spun off the Company in a tax-free
distribution of the Company's common stock to First Mississippi shareholders
(the "Distribution") on the Distribution Date. The Distribution occurred
immediately prior to and in connection with the merger of First Mississippi with
a wholly owned subsidiary of Mississippi Chemical Corporation on December 24,
1996, pursuant to an Agreement and Plan of Merger and Reorganization dated as of
August 27, 1996. The Company has operated as a publicly held entity since the
Distribution Date. Prior to the Distribution Date, the Company's subsidiaries
were subsidiaries of First Mississippi and the Company's operations were
conducted through subsidiaries of First Mississippi.
Recent Developments
On December 31, 1997, the Company acquired the acylation derivatives
business of Clariant Corporation. This business is conducted through TriQuest,
L.P., a limited partnership in which the Company owns an 87.5% interest, with
the remaining 12.5% interest owned by former members of Clariant Corporation's
acylation derivatives employee group who are now employees of TriQuest. The
Company is involved in the development and marketing of derivatives of
4-hydroxyacetophenone for electronic chemicals, polymer enhancement chemicals
and specialty resins. The electronic chemical products are resins used in deep
ultraviolet ("DUV") photoresist applications to produce advanced semiconductors
with line geometries at or below 0.25 microns. Also on December 31, 1997, the
Company acquired certain chemical mechanical planarization ("CMP") assets of
Baikowski International Corporation, a subsidiary of Baikowski Chimie, SA, and
the CMP assets of Moyco Technologies, Inc. and its affiliate, Sweet Pea
Technologies, Inc. The acquisition of these CMP assets provided the Company with
an entrance into the CMP market, which involves mechanical polishing of silicon
wafers utilizing a slurry of abrasives and chemicals to produce a flatter
surface. Acylation derivatives and CMP are included in the Company's Electronic
and Other Specialty Chemicals segment.
On January 22, 1998, the Company sold its 50% interest in Power Sources,
Inc. ("PSI") to Trigen Energy Corporation for approximately $20.0 million in
cash. Previously reported contingencies regarding this sale were resolved
without adjustment to the sales proceeds. The Company no longer has an ownership
interest in PSI.
Effective December 1, 1999, the Company sold its wholly owned
subsidiaries, Callidus Technologies, Inc. and Plasma Energy Corporation, to
Howe-Baker International, Inc., a subsidiary of Wedge Group Incorporated, for
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approximately $8.0 million, subject to certain immaterial post-closing
adjustments. These subsidiaries comprised the Company's engineered products and
services business which had previously been classified and reported as a
discontinued operation.
On February 15, 2000, the Company completed the sale of its wholly owned
subsidiary, FirstMiss Steel, Inc., which comprised the Company's discontinued
steel business, to Hoganas North America, Inc., a subsidiary of Hoganas AB of
Sweden. Proceeds from the sale were approximately $13.0 million, subject to
certain post-closing working capital adjustments.
The Company's disposition of its engineered products and services business
and steel business furthers the Company's strategy to focus on chemicals.
Forward-Looking Statements
In addition to historical information, this Form 10-K contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, as well as other
forward-looking statements made from time to time by the Company in the
Company's press releases, Annual Report to Stockholders and other filings with
the U.S. Securities and Exchange Commission, are based on certain underlying
assumptions and expectations of management. These forward-looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed in such forward-looking statements. Such risks
and uncertainties include, but are not limited to, general economic conditions,
availability and pricing of raw materials, supply/demand balance for key
products, new product development, manufacturing efficiencies, conditions of and
product demand by key customers, the timely completion and start-up of
construction projects, pricing pressure as a result of international market
forces, the inability of the Company to either resolve Year 2000 issues that may
subsequently arise or to accurately estimate the costs associated with such
issues, although the Company has experienced no significant Year 2000 issues or
problems to date and is not aware of any such issues or problems, and other
factors as may be discussed herein and in the Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The following contains further discussion of the Company's business and
properties as grouped by its Electronic and Other Specialty Chemicals segment
and its Polyurethane Chemicals segment. Financial information regarding the
Company's segments, which includes sales, pretax operating results and
identifiable assets, is provided in Note 12 of the Consolidated Financial
Statements, incorporated by reference. As used in this report, the term
"Company" includes subsidiaries of the registrant.
Electronic and Other Specialty Chemicals
General
The Company's Electronic and Other Specialty Chemicals segment produces
specialty chemicals for use by others in electronic, pharmaceutical, polymer,
photosensitive and agricultural applications and provides associated contract
research and development. These chemicals are typically produced by multi-step
batch processing. These products are sold both on specification and performance
and must typically be qualified for use by the customer in addition to meeting
certain specifications. Generally, chemicals in this segment are sold in smaller
volumes and contribute a higher added-value to end products than polyurethane
chemicals. Another common characteristic of the chemicals sold in this segment
is the Company's focus on applied research. Whereas the primary focus for many
of the Company's customers in this segment is on basic discovery, much of the
Company's focus is on development of products and processes for our customers'
next generation semiconductors, pharmaceutical, agricultural or consumer
products. These electronic and other specialty chemicals are produced at
Company-owned facilities in Hayward, California; East Kilbride, Scotland;
Pascagoula, Mississippi; Tyrone, Pennsylvania; and Dayton, Ohio.
Purchasers of electronic chemicals, who are typically end users, acquire
the product to achieve a specific performance objective. As with the other
specialty chemicals, these chemicals have very specific uses, although the
customer base is often larger than for other specialty chemicals. The production
and sale of these chemicals are labor intensive and are usually dependent on
highly technical proprietary formulae and a sophisticated, well-
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trained applications engineering staff. The Company's electronic chemicals are
used in the semiconductor and related industries. These chemicals include
organic post metal cleaning solutions which remove photoresist and dry-etch
residue during the manufacture of semiconductors, post-dry-etch residue
removers, specialty resins used in DUV photoresists, and other performance
chemicals and materials for cleaning and polishing silicon wafers in
semiconductor manufacturing. During 1999, the Company acquired a choline product
line for use in electronic chemicals. Choline is an ingredient in photoresist
strippers used to manufacture printed wire boards and other electronic
interconnects.
Most of the Company's other specialty chemicals are sold to a narrow base
of customers, which are either end users or producers of performance chemicals.
Because of their specialized, complex molecular structure, many of these
products are designed for specific end use by one or two customers and
significant technical service is expected by the customer. The key to successful
production of these specialty chemicals is developing an efficient, low cost
production process. These chemicals are sold as intermediates to other specialty
chemical producers and to electronic, pharmaceutical, polymer, cosmetics and
agricultural companies for use in herbicides, a plant growth regulator, plastic
curatives, cosmetics, protease inhibitors, rubber processing chemicals, optical
brighteners, dyestuffs and pigments, microchip packaging materials and
photoinitiators.
The Company owns and operates electronic chemical manufacturing facilities
in Hayward, California and East Kilbride, Scotland. The Company's 65,000 square
foot California facility includes offices, research and development labs and
manufacturing and packaging facilities. An additional 13,400 square-feet of
office and warehouse space is leased in an adjacent facility. The California
facility currently utilizes approximately 60% of production capability on a
two-shift, five-day basis. The second shift was added in February 2000 in
response to increased demand for remover product, due to semiconductor industry
growth. During 1998, the Company completed an expansion at its Scotland facility
which increased square footage to 26,300. The expansion was equipped in 1999
with new production systems designed to meet the semiconductor industry's
requirements for ultra pure chemicals. The Scotland facility currently utilizes
approximately 80% of available production capability on a one-shift, five-day
basis. Utilization is expected to drop to about 50% within the first quarter of
2000, when full capacity and expected operating efficiencies from the 1999
manufacturing systems installation are brought fully online. Thus, the Company
has substantial capacity to expand production. The Company also produces select
products through toll manufacturers in California, North Carolina and Japan. The
Company leases office and applications engineering lab space in Kawasaki City,
Japan to provide marketing and technical support for the Japanese electronic
chemical market. A new applications laboratory was constructed in the Hayward
facility in the second quarter of 1999 for the development of CMP products.
The Company produces specialty and electronic chemicals and provides
related contract research services at Tyrone, Pennsylvania; Dayton, Ohio; and
Pascagoula, Mississippi. All of these facilities are owned by the Company.
Annual production capacity at the Tyrone facility is between 4.5 million and 6.0
million pounds, depending on the product mix and the type of processing
required. Production in 1999 was approximately 4.0 million pounds. During 1998,
the Company completed an expansion at the Dayton facility for the production of
DUV photoresist resins. The Dayton facility also includes a current Good
Manufacturing Practices (cGMP) pilot plant for scale-up work and production of
small quantities of fine and pharmaceutical chemicals. Annual production
capacity at Dayton is between 1.5 million and 2.0 million pounds depending on
the product mix and the type of processing required. Production in 1999 was
approximately 700,000 pounds. Specialty chemical production capacity at
Pascagoula is between 70 and 80 million pounds, depending on the product mix and
the processing required. Production at this facility was approximately 67
million pounds during 1999. At these sites, the Company has differentiated
itself by its capacity to manufacture electronic and/or other specialty
chemicals using multi-step batch processing combined with the capability to
produce specialty chemicals in continuous process facilities. In addition, the
Company outsources the manufacture of selected intermediates, electronic
chemical products and other specialty chemicals.
The Company produces fine chemicals manufactured to the specifications and
performance criteria of its customers ranging from gram to commercial
quantities. The Company's multifunctional manufacturing facilities enable
multi-step batch and continuous processing of specialties and custom production
of complex fine chemicals. The Company has versatile facilities that use
numerous reactors capable of producing custom fine chemicals in quantities
ranging from the very small amounts needed for initial product testing or
toxicity studies, through
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pilot plant production of developmental quantities or clinical trials and
continuing through commercial production. Although historically customers have
purchased relatively small quantities of certain specialty chemicals, primarily
for their new product development and market testing, recently the sale of
commercial quantities of product has increased significantly as the trend to
outsource strengthens. Companies involved in the mass production of chemically
based electronic, pharmaceutical, agricultural and consumer products often find
it expensive and inefficient to manufacture small quantities of the complex
chemicals required for new product development or products with limited markets.
By providing a versatile array of manufacturing capabilities, related services
and capacity to a number of such companies, the Company achieves economies of
scale and is able to manufacture certain fine specialty chemicals more
economically and timely than they can be manufactured by its customers. As a
result, customers can often reduce the time to market and capital exposure
associated with the manufacture and marketing of their new developmental
products and are better able to utilize and focus their own manufacturing
capacity and research and development abilities. In conjunction with its
production and sale of electronic and other specialty chemicals, the Company
also provides contract research services primarily for the pharmaceutical and
electronic chemical industries in the United States and Europe. These services
are highly specialized, requiring a team of research and development experts.
These services allow our customers to expand and support their internal research
and development efforts and are provided on a fee basis or by purchase order for
small quantities (less than 10 kgs.). The cGMP pilot plant, discussed above, is
used extensively to support this effort.
The Company's electronic and other specialty chemicals accounted for
approximately 56%, 60%, and 61% of the Company's consolidated net sales for
1999, 1998 and 1997, respectively.
Marketing and Sales
Electronic chemicals are marketed domestically and internationally in
Europe and the Pacific Rim. With the exception of the DUV resin product line,
the California facility serves North America and the Pacific Rim, and the
Scotland facility serves the European community. These chemicals are distributed
in gallon, liter, returnable drum or large volume dedicated containers. In the
U.S., the Company's electronic chemicals are principally sold through its
internal sales force although the Company utilizes independent sales
representatives and distributors as well. In the Pacific Rim and Europe, sales
are generally conducted through distributors or sales agents supported by the
Company's regional technical sales representatives. In early 1999, the Company
began manufacturing products for the Japanese market in a tolling arrangement
with the Company's Japanese distributor. DUV resins are manufactured at the
Dayton site and shipped directly to photoresist manufacturers. These products
are distributed in the form of dry powder or in specialty solutions shipped in
appropriate small volume containers. The choline electronic materials are sold
through formulators supplying the printed wire board market. Electronic
chemicals are typically sold by purchase order.
The Company's other specialty chemicals are marketed globally. Most of
these chemicals are sold by purchase order or short-term agreements although the
Company has long-term contracts with a number of its customers. These chemicals
sales are made primarily through the Company's internal sales force. These
specialty chemicals are typically sold in drums, or, for larger volume products,
in bulk. Domestic shipments are typically by truck or rail. Exported products
are shipped in ocean-going tankers, iso-containers or drums to European,
Japanese and South American markets.
Raw Materials
Except for DUV resins, the primary raw materials for the manufacture of
electronic chemicals include free-base hydroxylamine, catechol, diglycolamine,
trimethylamine, N-methylpyrrolidone and alumina powders. With the exception of
hydroxylamine and catechol, raw materials are generally available in adequate
quantities from several suppliers, subject to market variation in price.
Hydroxylamine and catechol are each currently available from single suppliers,
located in Japan. The Company is seeking additional sources of hydroxylamine and
catechol and is currently evaluating samples supplied by alternative
manufacturers. The primary raw material for the Company's DUV resin business,
4-hydroxyacetophenone, is available from a single source under a long-term
contract.
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Primary raw materials for the production of its other specialty chemicals
include hydrogen, hydrogen peroxide, caustic, toluene, ethyl
trifluoroacetoacetate, 2-Fluorophenylhydrazine, o-aminophenol, formaldehyde,
ethanol, ammonia and natural gas. These raw materials are available from a
number of different sources. The Company does not believe that any one source
for raw materials used in the production of these chemicals is material to the
Company's business.
Competition
The Company is one of the largest producers of post-metal cleaning
solutions for semiconductor production. The Company believes that although there
are approximately 12 companies participating in this market worldwide, only the
Company and three others have significant market share for advanced and post
metal cleaning solutions required by the current state of the art semiconductor
and related industries. Competition is based on service, product performance,
quality, product development capabilities and cost of ownership. The Company has
entered into a cross-licensing agreement with a major competitor whereby the
Company licenses its HDA(R) (hydroxylamine) patented post ash residue remover
technology. The agreement results from a patent infringement complaint brought
by the Company against the competitor in federal court. The agreement allows the
competitor to continue to market its products which utilize the Company's
hydroxylamine technology, but provides for the Company to receive a royalty and
license fee. The agreement also requires the Company to pay to the competitor
royalties on the Company's HDA(R) products under certain circumstances, which
are currently the subject of arbitration between the Company and the competitor.
The Company has approximately eight U.S. and four foreign patents regarding its
HDA(R) technology. The earliest of these patents expires in 2011. Regarding CMP,
the Company believes that the oxide slurry world market is dominated by two
other companies, with the larger company holding an estimated 80% market share.
In the tungsten slurry world market, the Company is now estimated to be the
third largest supplier for this application.
The Company is one of the largest suppliers of DUV resins and the only
known U.S. producer. There are two major competitors selling resins in the
merchant market in direct competition with the Company. Both competitors are
Japanese companies who produce resins in Japan and market resins on a global
basis. In addition, two Japanese companies who produce and supply DUV
photoresists also produce resins as a captive supply source.
The Company competes domestically and internationally with numerous
producers of specialty chemicals. Major competitors are both smaller and larger
companies. Competition is fierce and is based on service, quality, manufacturing
capabilities and expertise in batch chemical production, research and
development capabilities and price. The Company's large batch manufacturing
sites allow it the flexibility and breadth of service to meet a wide variety of
customer needs, including the ability to provide gram and multi-ton quantities
in either cGMP or ISO-9000 manufacturing environments.
Seasonality of Business
Generally, certain of the Company's electronic chemicals may be subject to
seasonally lower sales during the first quarter, but other specialty chemical
sales are generally not seasonal, and working capital requirements do not vary
significantly from period to period.
Polyurethane Chemicals
General
The Company produces aniline and nitrobenzene by continuous production
processes at its facilities in Pascagoula, Mississippi and Baytown, Texas.
Unlike electronic and other specialty chemicals, these chemicals generally
require additional processing steps and chemical reactions by the Company's
customers to produce the end product used by consumers and are primarily sold
under long-term contracts.
Typically, polyurethane chemicals are more sensitive to the business cycle
and the cost of raw materials than are most electronic and specialty chemicals,
although the Company's sales contracts provide some protection from fluctuation
in raw material price for most of the aniline sold. These chemicals are
typically sold in large volumes to industrial customers that purchase on the
basis of product specifications. The key to successful production of
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these chemicals is efficient chemical conversion of large quantities of raw
materials and productive use of plant capacity. Providing technical services to
customers is generally less important than for specialty products.
The Company's manufacturing facility in Pascagoula is supported by
storage, rail, truck, barge and ship distribution facilities. This facility
utilizes nitration technology and a proprietary process for continuous
hydrogenation. The annual polyurethane chemical production capacity at the
facility, less internal consumption, is between 315 and 350 million pounds
depending on the product mix being produced. Production of polyurethane
chemicals at the Pascagoula facility during 1999 was approximately 300 million
pounds.
In 1996, the Company entered into a long-term agreement with Bayer
Corporation (`'Bayer") to build, own and operate a world scale nitrobenzene and
aniline facility at Bayer's Baytown, Texas chemical complex to supply Bayer's
MDI (methylene diphenyl diisocyanate) manufacturing operations. Phase I of the
facility, with a design capacity of 250 million pounds of aniline, was completed
in 1998 and is now operating at design capacity. If a potential Phase II to the
facility is constructed, it would add another 250 million pounds of capacity. A
majority of the Company's current aniline production from the Pascagoula
facility is sold to Bayer under a long-term contract. If Phase II of the Baytown
facility is constructed, Bayer may terminate this contract and take its future
requirements from the Baytown facility. Bayer is the Company's largest customer.
Aniline is the Company's largest volume product. The Company is the
largest merchant marketer of aniline in the U.S. Most of the aniline produced in
the U.S. is used to manufacture MDI. MDI's primary end use is in rigid
polyurethane foam, an insulation material that is widely used in residential and
commercial construction. MDI is also used in the manufacture of impact-resistant
plastic that is used as a replacement for metal in automobile parts such as
bumpers, where flexibility and impact resistance are important. Aniline's other
primary applications are in the production of an antioxidizing (anti-cracking)
agent used in the manufacture of synthetic rubber and in a widely used herbicide
for corn and soybeans.
Nitrobenzene is used to make aniline and is also sold separately for the
manufacture of an intermediate used in the production of a large volume
over-the-counter analgesic (acetaminophen), and in the production of iron-oxide
pigments used in decorative and protective coating architectural applications.
Polyurethane chemicals accounted for approximately 44%, 40%, and 39% of
the Company's consolidated net sales for 1999, 1998 and 1997, respectively.
Marketing and Sales
The Company's polyurethane chemicals are sold primarily in the U.S. under
long-term contracts to a small number of customers. The Company's internal sales
force accounts for essentially all of the sales in this segment. These products
are generally sold in bulk. Domestic shipments are by barge, rail or tank trucks
and exports are shipped in ocean-going tankers, iso-containers or drums.
Raw Materials
Benzene, which is a principal raw material for polyurethane chemicals
production, is a readily available commodity by-product of oil refining. Like
most commodities, the price of benzene is subject to fluctuation. Benzene prices
are affected by the demand for a variety of products, principally including
styrene and phenolic resins and the underlying cost of crude oil. The Company is
protected from fluctuations in raw material prices under the contracts in which
most of its aniline production is sold. The remainder of its production is sold
under contracts with price protection for major raw material price fluctuations,
or under short-term contracts or purchase orders at prices that generally
reflect its actual raw material cost. Other significant raw materials include
toluene, ammonia and natural gas. The Company purchases ammonia at market
prices. The Company purchases natural gas in the spot market for use in
producing the hydrogen necessary for its manufacturing processes. This gas is
transported into the Pascagoula plant through an interstate pipeline under firm
and interruptible contracts.
Competition
The Company is one of five major U.S. producers of aniline, with
approximately 21.1% of current domestic capacity and an estimated 6.8% of
current world capacity. In February 2000 one of the Company's competitors
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brought on line a new aniline plant. In addition, another competitor has
announced that a plant currently under construction will be brought on line in
late 2000 or early 2001, after which the Company will have an estimated 20.5% of
domestic capacity and 6.7% of world capacity. Major competitors are large
chemical companies. Competition for the products produced in this segment is
based on price, service, quality, marketing and research and development support
capabilities.
Seasonality of Business
Generally, the Company's polyurethane chemical sales are not seasonal and
working capital requirements do not vary significantly from period to period.
Company Research and Development
The Company conducts research and development to improve existing
products, to develop and produce new specialty and performance chemicals and to
develop and improve production processes, as well as a contract service. The
Company spent approximately $7.4 million, $7.5 million, and $5.0 million on
research and development in 1999, 1998 and 1997, respectively. Research
facilities include laboratories, pilot plant and semi-works for process research
and development with gram to multi-pound sample production capabilities. The
Company maintains a radiation curing applications laboratory in Pascagoula to
evaluate new products and provide customer technical support. The Company's
electronic chemicals applications engineering and research and development labs
in California, Texas, Scotland and Japan are strategically located near key
regional semiconductor production centers, enabling application engineers to
work closely with customers to develop unique chemical solutions to
semiconductor manufacturing needs and to test developmental products. The
Company's cGMP pilot plant in Dayton is utilized in the Company's research and
development efforts.
The Company continues to focus research efforts on developing new and
improved electronic chemicals, including remover products, CMP and DUV resins.
The Company also sponsors applied research at leading universities in the U.S.,
the U.K. and Canada. These closely directed programs have led to the development
and introduction of proprietary technology in electronic and other specialty
chemicals. In 1999, the Company obtained an exclusive license to further develop
and commercialize a potential process that utilizes light in combination with
metallic compounds to directly deposit metal and metal oxides on a substrate.
Research on this technology is being conducted in cooperation with two North
American universities. In addition, the Company has entered into a joint
development arrangement with an industry consortium to develop advanced products
to meet future semiconductor manufacturing technology.
Company Patents
The Company owns, or is licensed under, a number of patents, patent
applications and trade secrets covering its products and processes. The Company
believes that, in the aggregate, the rights under such patents and licenses are
important to its operations, but, with the exception of the HDA(R) etch residue
remover patents referenced above, does not consider any patent, or license, or
group thereof related to a specific process or product, to be of material
importance when viewed from the standpoint of the Company's total business.
Environmental Considerations
Company operations are subject to a wide variety of environmental laws and
regulations governing emissions to the air, discharges to water sources, and the
handling, storage, treatment and disposal of waste materials, as well as other
laws and regulations concerning health and safety conditions. The Company holds
a number of environmental permits and licenses regulating air emissions, water
discharges and hazardous waste disposal and, to the best of its knowledge, is in
material compliance with such requirements at all locations. The Company makes
capital and other expenditures in a continuing effort to comply with
environmental laws and regulations, or changing interpretations of existing laws
and regulations. The Company's environmental capital expenditures for 1999 were
$600,000. Projected environmental capital expenditures for 2000 and 2001 are
$1.3 million and $1.1 million, respectively. While these expenditures are
necessary to comply with environmental laws and regulations, they may also
reduce operating expenses and improve efficiencies.
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The Company monitors and participates in the environmental regulatory
development process which enables the Company to evaluate new laws and
regulations. The Company does not anticipate a material increase in expenses
related to current environmental regulations, but because federal and state
environmental laws and regulations are constantly changing, the Company is
unable to predict their future impact.
The Company has received notices from the United States Environmental
Protection Agency or similar state agencies that it has been deemed a
potentially responsible party (`'PRP") under Superfund or a comparable state
statute at several sites and, thus, may be liable for a share of the associated
remediation cost. It is difficult to estimate the Company's ultimate liability
relating to these sites due to several uncertainties such as, but not limited
to, the method and extent of remediation, the percentage of material
attributable to the Company at the site relative to that attributable to other
parties, and the financial capabilities of the other PRPs. Based on currently
available information, however, the Company does not believe that its future
liability at these sites will be material to its financial condition, results of
operations, cash flow or competitive position.
ITEM 2. PROPERTIES
A description of various properties and the segments to which they relate
is included in the Business discussion. In addition to those described above,
the Company owns or leases the following properties:
The Company owns an approximately 26,000 square-foot office building in
Jackson, Mississippi, which is its corporate headquarters.
The Company leases 4.2 acres from Bayer Corporation within Bayer's complex
for the Baytown aniline plant with a term equivalent to the aniline contractual
supply agreement.
The Company leases 7 acres of waterfront property from the Jackson County
Port Authority. This property is used for loading and unloading ocean-going
vessels and barges at its Pascagoula, Mississippi facility. The lease expires in
2003.
The Company owns 70 acres of undeveloped industrial land within 2 miles of
the Pascagoula plant and 23 acres directly adjacent to the Pascagoula plant. The
Company also owns approximately 78 acres of undeveloped industrial land directly
adjacent to its Tyrone, Pennsylvania facility.
The Company leases research and development laboratory space in Corpus
Christi, Texas, to support its DUV resin and other specialty chemicals
businesses.
The Company was a party to a long-term lease agreement covering office
space in Jackson, Mississippi. During 1999, a new tenant was found for this
space and the lease was cancelled. The Company has no further obligations under
that lease agreement.
The Company believes that its properties are suitable and adequate for the
purposes for which they are used.
ITEM 3. LEGAL PROCEEDINGS
The Company has pending several claims incurred against it in the normal
course of business which, in the opinion of management and legal counsel, can be
disposed of without material effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
1999.
10
<PAGE>
PART II
ITEMS 5-8. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS, SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK, AND FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Part II, Items 5-8, has been included in the
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1999, which has been furnished to the Commission and portions of which are
incorporated herein by reference. See "Documents Incorporated by Reference" on
Page 2 hereof for the locations of such information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Part III, Items 10-13, has been included in
the Registrant's definitive Proxy Statement for the May 23, 2000 Annual Meeting
of Stockholders, which will be filed with the Commission by March 30, 2000,
pursuant to Regulation 14A, and is incorporated herein by reference. See
"Documents Incorporated by Reference" on Page 2 hereof for the location of such
information.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules
(a)(1) Financial Statements incorporated by reference to the Registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1999 and
Supplementary Data.
Pages in
1999 Annual Report
to Stockholders
Incorporated Herein
by Reference
------------
Consolidated Balance Sheets as of December 31, 1999 and 1998. p. 16
Consolidated Statements of Operations, years ended
December 31, 1999, 1998 and 1997 .......................... p. 17
Consolidated Statements of Stockholders' Equity, years ended
December 31, 1999, 1998 and 1997 .......................... p. 18
Consolidated Statements of Cash Flows, years ended
December 31, 1999, 1998 and 1997 .......................... p. 19
Notes to Consolidated Financial Statements .................. pp. 20-34
Independent Auditors' Report ................................ p. 35
(a)(2) Additional schedules are either not required under the applicable
instructions or are inapplicable and have therefore been omitted.
11
<PAGE>
(a)(3) EXHIBITS
2(a) Agreement and Plan of Merger and Reorganization, dated as of August 27,
1996, among Mississippi Chemical Corporation, MISS SUB, INC. and First
Mississippi Corporation, was filed as Exhibit 2.1 to Amendment No. 1 to
the Company's Form S-1 (Registration No. 333-15789) filed on November 18,
1996, and is incorporated herein by reference.
2(b) Agreement and Plan of Distribution between First Mississippi Corporation
and the Company dated December 18, 1996 was filed as Exhibit 2.2, Form of
Agreement and Plan of Distribution, to Amendment No. 1 to the Company's
Form S-1 (Registration No. 333-15789) filed on November 18, 1996, and is
incorporated herein by reference. The only modification to the text of
the Form of Agreement and Plan of Distribution which is incorporated
herein by reference was the substitution of "ChemFirst Inc." for "Newco"
as a party to this agreement and the dating of the agreement as of
December 18, 1996.
2(c) Tax Disaffiliation Agreement between First Mississippi Corporation and
the Company dated December 18, 1996 was filed as Exhibit 2.3, Form of Tax
Disaffiliation Agreement, to Amendment No. 1 to the Company's Form S-1
(Registration No. 333-15789) filed on November 18, 1996, and is
incorporated herein by reference. The only modification to the text of
the Form of Tax Disaffiliation Agreement which is incorporated herein by
reference was the substitution of "ChemFirst Inc." for "Newco" as a party
to this Agreement and the dating of the agreement as of December 18,
1996.
2(d) Employee Benefits and Compensation Agreement between First Mississippi
Corporation and the Company dated December 18, 1996 was filed as Exhibit
2.4, Form of Employee Benefits and Compensation Agreement, to Amendment
No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on
November 18, 1996, and is incorporated herein by reference. The only
modification to the text of the Form of Employee Benefits and
Compensation Agreement which is incorporated herein by reference was the
substitution of "ChemFirst Inc." for "Newco" as a party to this Agreement
and the dating of the agreement as of December 18, 1996.
3(a) Amended and Restated Articles of Incorporation of the Company were filed
as Exhibit 3.1 to Amendment No. 1 to the Company's Form S-1 (Registration
No. 333-15789) filed on November 18, 1996, and is incorporated herein by
reference.
3(b) Bylaws of the Company as amended were filed as Exhibit 4.3 to the
Company's Form S-8 (Registration No. 333-69965) filed on December 30,
1998, and is incorporated herein by reference.
4(a) Articles III, IV, V, VI, VII, VIII, IX and X of the Company's Charter of
Incorporation and the Statements of Resolution establishing the Company's
1987-A, 1988-A, 1988-1, 1989-A, 1989-1, 1989-2, 1990-1, 1990-2, 1991-1,
1991-2, and 1992-1 Series Convertible Preferred Stock and the Company's
Series X Junior Participating Preferred Stock are included in Exhibit
3(a).
4(b) Articles II, IV, IX and XII of the Company's Bylaws are included in
Exhibit 3(b).
4(c) ChemFirst Inc. 401(k) Savings and Employee Stock Ownership Plan and
Trust, as amended and restated on January 1, 1997, was filed as Exhibit
4.6 to Post-Effective Amendment No. 2 to the Company's Registration
Statement on Form S-8 (Registration No. 333-18691) filed on July 27, 1999
and is incorporated herein by reference.
4(d) First Amendment to ChemFirst Inc. 401(k) and Employee Stock Ownership
Plan and Trust was filed as Exhibit 4.7 to Post-Effective Amendment No. 2
to the Company's Registration Statement on Form S-8 (Registration No.
333-18691) filed on July 27, 1999, and is incorporated herein by
reference.
4(e) Second Amendment to ChemFirst Inc. 401(k) and Employee Stock Ownership
Plan and Trust was filed as Exhibit 4.10 to Post-Effective Amendment No.
2 to the Company's Registration Statement on Form S-8 (Registration No.
333-18691) filed on July 27, 1999, and is incorporated herein by
reference.
4(f) Rights Agreement, dated as of October 30, 1996, between the Company and
KeyCorp Shareholder Services, Inc., was filed as Exhibit 4 to Amendment
No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on
November 18, 1996 and is incorporated herein by reference.
12
<PAGE>
4(g) First Amendment to Rights Agreement dated effective May 1, 1997, by and
among the Company, KeyCorp Shareholders Services, Inc. and The Bank of
New York, was filed as Exhibit 4.5 to the Company's Form S-8 (File No.
333-69965) filed on December 30, 1998, and is incorporated herein by
reference.
4(h) Post Spin-Off Agreement between First Mississippi and FirstMiss Gold Inc.
dated as of September 24, 1995, which was assigned to the Company in
connection with the Distribution, was filed as Exhibit 99.1 to First
Mississippi's Form 8-K dated September 24, 1995, and is incorporated
herein by reference.
4(i) Tax Ruling Agreement between First Mississippi and FirstMiss Gold Inc.
dated as of September 24, 1995, which was assigned to the Company in
connection with the Distribution, was filed as Exhibit 99.2 to First
Mississippi's Form 8-K dated September 24, 1995, and is incorporated
herein by reference.
4(j) Loan Agreement between First Mississippi and FirstMiss Gold Inc., dated
as of September 24, 1995, which was assigned to the Company in connection
with the Distribution, was filed as Exhibit 99.3 to First Mississippi's
Form 8-K dated September 24, 1995, and is incorporated herein by
reference.
4(k) Amended Tax Sharing Agreement between First Mississippi and FirstMiss
Gold Inc. dated as of September 24, 1995, which was assigned to the
Company in connection with the Distribution, was filed as Exhibit 99.4 to
First Mississippi's Form 8-K dated September 24, 1995, and is
incorporated herein by reference.
4(l) Note Purchase Agreement between ChemFirst Inc., State Farm Life Insurance
Company and Nationwide Life Insurance Company dated October 15, 1998, was
filed as Exhibit 4(j) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and is incorporated herein by
reference.
10(a)* Termination Agreement, dated May 29, 1996 and effective June 1, 1996, and
amended March 15, 1999 between the Company and its Chief Executive
Officer, was filed as Exhibit 10(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, and is
incorporated herein by reference.
10(b)* Form of Termination Agreement between the Company and each of the
following executive officers of the Company, which was assigned to the
Company in connection with the Distribution and which form the Company
continues to use, was filed as Exhibit 10(d) to First Mississippi's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and
is incorporated herein by reference. The Company has executed a
Termination Agreement with each of the following executive officers:
Daniel P. Anderson, J. Steven Chustz, Paul J. Coder, George M. Simmons
and R. Michael Summerford, each dated effective June 1, 1996; Scott A.
Martin, dated effective December 1, 1996; Max P. Bowman, Troy B.
Browning, William B. Kemp and James L. McArthur, each dated effective
July 1, 1997; and William R. Jordan, dated effective May 25, 1999.
10(c)* ChemFirst Inc. 1980 Long-Term Incentive Plan was filed as Exhibit 4.6 to
the Company's Registration Statement on Form S-8 (Registration No.
333-18693) filed on December 24, 1996, and is incorporated herein by
reference.
10(d)* ChemFirst Inc. 1988 Long-Term Incentive Plan was filed as Exhibit 4.5 to
the Company's Registration Statement on Form S-8 (Registration No.
333-18693) filed on December 24, 1996, and is incorporated herein by
reference.
10(e)* ChemFirst Inc. 1995 Long-Term Incentive Plan was filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-8 (Registration No.
333-18693) filed on December 24, 1996, and is incorporated herein by
reference.
10(f)* ChemFirst Inc. 1998 Long-Term Incentive Plan was included as Appendix A
to the Company's Proxy Statement filed in connection with the Annual
Meeting of Stockholders held on May 27, 1998, and is incorporated herein
by reference.
10(g)* 1991 Restatement of the First Mississippi Directors' Retirement Plan, as
revised and restated on May 14, 1991, which was assigned to and assumed
by the Company pursuant to the Benefits Agreement, was filed as Exhibit
10(f) to First Mississippi's Annual Report on Form 10-K for the fiscal
year ended June 30, 1991, and is incorporated herein by reference.
13
<PAGE>
10(h)* First Mississippi Corporation 1989 Deferred Compensation Plan for Outside
Directors, as amended on September 12, 1994, which was assigned to and
assumed by the Company pursuant to the Benefits Agreement, was filed as
Exhibit 10(g) to First Mississippi's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, and is incorporated herein by reference.
10(i)* A description of the Company's Deferred Income Plan for Directors,
Officers and Key Employees ("Plan A") is included in the Company's Proxy
Statement filed in connection with the Annual Meeting of Stockholders to
be held on May 25, 1999, and is incorporated herein by reference.
10(j)* Form of Indemnification Agreement between the Company and the following
former directors or executive officers of the Company, which was assigned
to and assumed by the Company in connection with the Distribution
(Company's Indemnification Agreements with each such individual contains
substantially identical provisions to those contained in the form):
Charles R. Gibson, Charles P. Moreton, Maurice T. Reed, Jr., Frank G.
Smith, O. E. Wall, Charles M. McAuley, and Thomas G. Tepas was filed as
Exhibit 10(t) to First Mississippi's Annual Report on Form 10-K for the
fiscal year ended June 30, 1988, and is incorporated herein by reference.
10(k)* Form of Indemnification Agreement entered between the Company and the
following directors or executive officers of the Company on March 17,
1999 or subsequently thereto (Company's Indemnification Agreement with
each such individual contains substantially identical provisions to those
contained in the form): Richard P. Anderson, Paul A. Becker, James W.
Crook, Michael J. Ferris, James E. Fligg, Robert P. Guyton, Paul W.
Murrill, William A. Percy, II, Dan R. Smith, Leland R. Speed, R. Gerald
Turner, J. Kelley Williams, Daniel P. Anderson, Max P. Bowman, Troy B.
Browning, J. Steve Chustz, P. Jerry Coder, William R. Jordan, William B.
Kemp, Scott A. Martin, James L. McArthur, George M. Simmons, R. M.
Summerford, and Roger Van Duyne.
10(l) ChemFirst Inc. 1997 Employee Stock Purchase Plan was filed as Exhibit 4.3
to the Company's Registration Statement on Form S-8 (Registration No.
333-35221) filed on September 9, 1997, and is incorporated herein by
reference.
13 ChemFirst Inc. 1999 Annual Report to Stockholders (such Annual Report is
not, except for those portions thereof which are expressly incorporated
by reference, to be deemed "filed" as part of this Form10-K).
21 List of the subsidiaries of the Company.
23 Consent regarding incorporation of auditor's report into Registration
Statement Nos. 333-18691, 333-18693, 333-35221, and 333-69965.
27(a) Financial Data Schedule.
27(b) Financial Data Schedule (restated).
27(c) Financial Data Schedule (restated).
- ----------
* Indicates management contract or compensatory plan or arrangement.
Certain debt instruments have not been filed. The Company agrees to
furnish a copy of such agreement(s) to the Commission upon request.
(b) No Reports on Form 8-K were filed by the Company during the fourth
quarter of 1999.
(c) Please see (a)(3) above.
The exhibits filed with the Commission are not included in the printed
copy of the Form 10-K. A copy of the exhibits will be provided upon payment of a
reasonable fee, to be specified at the time a request is made.
(d) Please see (a)(2) above.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHEMFIRST INC.
Date: March 20, 2000
BY: /s/ J. Kelley Williams
----------------------
J. Kelley Williams, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ J. Kelley Williams Chairman of the Board of Directors, Chief March 20, 2000
- -------------------------------- Executive Officer (Principal Executive
J. Kelley Williams Officer) and Director
/s/ R. M. Summerford President and Chief Operating Officer March 20, 2000
- --------------------------------
R. M. Summerford
/s/ Max P. Bowman Vice President, Finance and Treasurer March 20, 2000
- -------------------------------- (Principal Financial Officer)
Max P. Bowman
/s/ Troy B. Browning Controller (Principal Accounting Officer) March 20, 2000
- --------------------------------
Troy B. Browning
/s/ Richard P. Anderson Director March 20, 2000
- --------------------------------
Richard P. Anderson
/s/ Paul A. Becker Director March 20, 2000
- --------------------------------
Paul A. Becker
/s/ James W. Crook Director March 20, 2000
- --------------------------------
James W. Crook
/s/ Michael J. Ferris Director March 20, 2000
- --------------------------------
Michael J. Ferris
/s/ James E. Fligg Director March 20, 2000
- --------------------------------
James E. Fligg
/s/ Robert P. Guyton Director March 20, 2000
- --------------------------------
Robert P. Guyton
/s/ Paul W. Murrill Director March 20, 2000
- --------------------------------
Paul W. Murrill
/s/ William A. Percy, II Director March 20, 2000
- --------------------------------
William A. Percy, II
/s/ Dan F. Smith Director March 20, 2000
- --------------------------------
Dan F. Smith
/s/ Leland R. Speed Director March 20, 2000
- --------------------------------
Leland R. Speed
/s/ R. Gerald Turner Director March 20, 2000
- --------------------------------
R Gerald Turner
</TABLE>
15
<PAGE>
EXHIBITS
INDEX TO EXHIBITS
Exhibit Number
- --------------
10(k)* Form of Indemnification Agreement entered between the Company and the
following directors or executive officers of the Company on March 17,
1999 or subsequently thereto (Company's Indemnification Agreement with
each such individual contains substantially identical provisions to those
contained in the form): Richard P. Anderson, Paul A. Becker, James W.
Crook, Michael J. Ferris, James E. Fligg, Robert P. Guyton, Paul W.
Murrill, William A. Percy, II, Dan R. Smith, Leland R. Speed, R. Gerald
Turner, J. Kelley Williams, Daniel P. Anderson, Max P. Bowman, Troy B.
Browning, J. Steve Chustz, P. Jerry Coder, William R. Jordan, William B.
Kemp, Scott A. Martin, James L. McArthur, George M. Simmons, R. M.
Summerford, and Roger Van Duyne.
13 ChemFirst Inc. 1999 Annual Report to Stockholders (such Annual Report is
not, except for those portions thereof which are expressly incorporated
by reference, to be deemed "filed" as part of this Form 10-K).
21 List of the subsidiaries of the Registrant.
23 Consent regarding incorporation of auditor's report into Registration
Statement Nos. 333-18691, 333-18693, 333-35221 and 333-69965.
27(a) Financial Data Schedule [For EDGAR filing only].
27(b) Financial Data Schedule (restated) [For EDGAR filing only].
27(c) Financial Data Schedule (restated) [For EDGAR filing only].
16
Exhibit 10(k)
INDEMNIFICATION AGREEMENT
This Agreement made and entered into effective the ____day of _____, ____,
by and between CHEMFIRST INC., a Mississippi corporation, (hereinafter "the
COMPANY"), and ___________________________, (hereinafter "the INDEMNITEE").
WHEREAS, competent and experienced persons are becoming more reluctant to
serve as directors or officers of publicly-held corporations, or as directors or
officers of their subsidiaries or affiliates, unless they are provided with
adequate protection against claims asserted against them for their activities on
behalf of such corporations, generally through insurance and indemnification;
and
WHEREAS, uncertainty in the interpretation of statutes, regulations, case
law and public policies relating to indemnification of corporate directors and
officers makes difficult an adequate and reliable assessment of the risks to
which such directors and officers may be exposed particularly in light of the
proliferation of lawsuits against directors and officers; and
WHEREAS, the Board of Directors of the COMPANY, based upon its business
experience, has concluded that the continuation of present trends in litigation
against corporate directors and officers inevitably makes it more difficult for
the COMPANY to attract and retain directors and officers of the highest degree
of competence committed to the active and effective direction and supervision of
the business of the COMPANY, its subsidiaries, or affiliates, and the Board
deems such consequences to be so detrimental to the best interests of the
COMPANY's stockholders that it has concluded that the COMPANY should act to
provide its directors, officers and certain officers of its subsidiaries with
enhanced protection against inordinate risks attendant with their positions to
assure that the most capable persons otherwise available will be attracted to
such positions and, in such connection, said Board of Directors has further
concluded that it is reasonable, prudent and necessary for the COMPANY to
obligate itself contractually to indemnify its directors, officers, and certain
officers of its subsidiaries to the maximum extent permitted by applicable law,
for expenses and liabilities that might be incurred by such directors and
officers in connection with claims lodged against them for their decisions and
actions as directors or officers; and
WHEREAS, the Mississippi Business Corporation Act authorizes a corporation
to indemnify any director or officer or former director or officer or any person
who may have served at its request as a director or officer in another
corporation in which it owns shares of capital stock against expenses actually
and reasonably incurred by him in connection with any defense of any action,
suit or proceeding, civil, criminal, administrative, arbitrative or
investigative, in which he is made a party by reason of having been such a
director or officer, with certain exceptions set forth therein; and
<PAGE>
WHEREAS, the Mississippi Business Corporation Act also authorizes the
corporation to obligate itself in advance to provide indemnification to the
fullest extent permitted by law by a provision in its Articles of Incorporation
or by any Bylaw or resolution adopted or contract approved by its Board of
Directors or by its stockholders after notice; and
WHEREAS, Article XI of the COMPANY's Amended and Restated Articles of
Incorporation limits certain personal liabilities of directors, and further,
Article VII "Indemnification" of the COMPANY's Bylaws provide for indemnifying
directors, officers and employees (such provisions attached hereto as Exhibit A
(hereinafter, the "Indemnification Policy")); and
WHEREAS, the COMPANY desires INDEMNITEE to serve or continue to serve as a
director or officer of the COMPANY or as a director or officer of a subsidiary,
of which he has been or is serving, or will serve, at the request of the
COMPANY, free from undue concern for unpredictable, inappropriate or
unreasonable claims for damages by reason of his being a director or officer of
the COMPANY or of a subsidiary; and
WHEREAS, INDEMNITEE is willing to serve, or to continue to serve, or to
take on additional service for, the COMPANY or its subsidiaries in such
capacities if he be indemnified as provided for herein;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the COMPANY and INDEMNITEE do hereby covenant and agree that
the INDEMNITEE shall be indemnified to the fullest extent permitted by
applicable law and the Indemnification Policy as follows:
1. Agreement to Serve. INDEMNITEE will serve and continue to serve at
the will of the COMPANY as a director or officer of the COMPANY or
any other company, partnership, joint venture, trust, employee
benefit plan at the request of the COMPANY, faithfully and to the
best of his ability so long as he is duly elected and qualified in
accordance with the provisions of the Bylaws; provided that
INDEMNITEE may at any time and for any reason resign from such
position (subject to any contractual obligations which INDEMNITEE
shall have assumed apart from this Agreement) and provided further
that the COMPANY shall have no obligation to continue the INDEMNITEE
in any such position.
2. Indemnification.
(a) The COMPANY shall, as promptly as practicable, indemnify
to the fullest extent permitted by applicable law the INDEMNITEE as
a director or officer of the COMPANY or any other company,
partnership, joint venture, trust, employee benefit plan or other
enterprise for which INDEMNITEE is or was serving at the request of
the COMPANY, against any and all liabilities, expenses (including
attorney's fees), judgments,
2
<PAGE>
fines, penalties and amounts paid in settlement (including all
interest, assessments and other charges paid or payable in
connection with the foregoing), that may actually and reasonably be
incurred by the INDEMNITEE in connection with or resulting from or
arising out of any claim, action, suit or proceeding (actual or
threatened), in which the INDEMNITEE may be involved as a party or
otherwise, by reason of serving in his capacity as a director or
officer whether before or after adoption of this Agreement provided
that such INDEMNITEE (i) in the case of a former or present director
(A) is wholly successful, on the merits or otherwise, with respect
thereto, or (B) acted in good faith and, in the case of conduct in
his official capacity with the COMPANY, in a manner that such
INDEMNITEE reasonably believed to be in the best interests of the
COMPANY, or, in all other cases, not opposed to, the best interests
of the COMPANY, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that such conduct was
unlawful or (ii) in the case of a former or present officer who is
not also a director or is also a director but is involved in the
proceeding only in his capacity as an officer, (A) meets the
standards of clause (i)(A) or (B) above and (B) has not been found
liable for (I) receipt of a financial benefit to which he is not
entitled, (II) an intentional infliction of harm on the COMPANY or
its shareholders, or (III) an intentional violation of criminal law.
The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, in itself, create a presumption that the
INDEMNITEE did not meet the standard of conduct described above.
(b) With respect to any completed action or suit by or in the
right of the COMPANY to procure a judgment in its favor, any
INDEMNITEE otherwise entitled to indemnification shall not be
entitled to indemnification, except for reasonable expenses incurred
in connection with the proceeding if it is determined in accordance
with Paragraphs 2(d), 2(e) or 2(h), as applicable, that the
INDEMNITEE has met the relevant standard of conduct in Paragraph
(a), unless and only to the extent that the court in which the
action or suit was brought, or another court of competent
jurisdiction, shall determine upon application that either the
INDEMNITEE is entitled to indemnification or an advance of expenses
pursuant to applicable law or, in view of all circumstances of the
case, such INDEMNITEE is fairly and reasonably entitled to indemnity
for such liabilities and expenses which such court shall deem to be
proper.
(c) To the extent that the INDEMNITEE has been successful on
the merits or otherwise in the defense of any action, suit or
proceeding, or any claim, issue or matter therein, such INDEMNITEE
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection
therewith.
3
<PAGE>
(d) Indemnification hereunder shall be made by the COMPANY
only after a determination that it is proper in the circumstances
because the INDEMNITEE met the applicable standard of conduct in
Paragraph (a) above. That determination, subject to Paragraphs 2(e)
and 2(h) below, shall be made (i) by the Board of Directors by a
majority vote of a quorum consisting of directors not at the time
parties to or otherwise a subject of the proceeding or having a
familial, financial, professional or employment relationship with
the director whose indemnification or advance for expenses is the
subject of the decision being made, which relationship would, in the
circumstances, reasonably be expected to exert an influence on the
director's judgment when voting on the decision being made (each
such director meeting the foregoing criteria, a "Disinterested
Director"), or by a duly authorized committee thereof consisting of
two or more Disinterested Directors, (ii) by special legal counsel
selected in the manner prescribed in clause (i) or if such counsel
cannot be so selected, by special counsel selected by a majority
vote of the entire Board of Directors, or (iii) by the stockholders,
but shares owned by or voted under the control of directors who at
the time do not qualify as a Disinterested Director, may not be
voted in the determination.
(e) The COMPANY agrees that if there is a Change in Control
(as defined below) of the COMPANY then with respect to all matters
thereafter arising concerning the rights of the INDEMNITEE to
indemnity payments, including the advancement of expenses, under
this Agreement or any other agreement or COMPANY Bylaws now or
hereafter in effect, the COMPANY shall seek legal advice only from
independent legal counsel selected by INDEMNITEE and approved by the
COMPANY (which approval shall not be unreasonably withheld). Such
counsel, among other things, shall render its written opinion to the
COMPANY and INDEMNITEE as to whether and to what extent the
INDEMNITEE would be permitted to be indemnified under applicable
law. The COMPANY agrees to pay the reasonable fees and expenses of
the independent legal counsel referred to above and to indemnify
fully such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto. A
"Change in Control" shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the COMPANY or a corporation owned directly or indirectly by the
stockholders of the COMPANY in substantially the same proportions as
their ownership of stock of the COMPANY, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the COMPANY representing
45% or more of the total voting power represented by the COMPANY's
then outstanding securities which vote generally in the election of
directors (the "Voting Securities"), (ii)
4
<PAGE>
during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the
COMPANY and any new director whose election by the Board of
Directors or nomination for election by the COMPANY's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the COMPANY approve a
merger or consolidation of the COMPANY with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the COMPANY outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 50% of the total voting power represented by the Voting
Securities of the COMPANY or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the COMPANY approve a plan of complete liquidation of the COMPANY
or an agreement for the sale or disposition by the COMPANY of (in
one transaction or a series of transactions) all or substantially
all the COMPANY's assets.
(f) The INDEMNITEE seeking indemnity hereunder must promptly
notify the Board of Directors of the COMPANY of all relevant facts
after becoming aware of a claim or potential claim, and except in
the case of a claim by or on behalf of the COMPANY, must permit the
COMPANY, at its option, to participate in and jointly control the
defense of such claim and any resulting suit or action.
(g) Expenses incurred in connection with any claim, action,
suit or proceeding, actual or threatened, other than a direct action
by the COMPANY against the INDEMNITEE (1) may, prior to a Change in
Control, be paid by the COMPANY in advance of the final disposition
of such claim, action, suit or proceeding if authorized by (i) the
Board of Directors by a majority vote of a quorum consisting of
Disinterested Directors or by a duly authorized committee thereof
consisting of two or more Disinterested Directors, (ii) special
legal counsel selected in the manner prescribed in (i) above or if
such counsel cannot be so selected, by special counsel selected by a
majority vote of the entire Board of Directors or (iii) by the
stockholders, but shares owned by or voted under the control of
directors who at the time do not qualify as a Disinterested Director
may not be voted on the determination and upon receipt of (i) a
written affirmation by the INDEMNITEE of his good faith belief that
he has met the relevant standard of conduct described in Paragraph
2(a) above or that the proceeding involves conduct for which
liability has been eliminated under a provision of the COMPANY's
Amended and Restated Articles of Incorporation and (ii) a written
undertaking by or on behalf of the
5
<PAGE>
INDEMNITEE to repay such amount if he is not wholly successful on
the merits or otherwise in his defense which would entitle him to
mandatory indemnification under Paragraph 2(c) hereof and unless it
shall ultimately be determined in accordance with Paragraphs 2(d) or
2(h) that INDEMNITEE has not met the applicable standard of conduct
described in Paragraph 2(a) hereof or (2) shall, after a Change in
Control, be paid by the COMPANY in advance of the final disposition
of such claim, action, suit or proceeding upon receipt of (i) a
written affirmation by the INDEMNITEE of his good faith belief that
he has met the relevant standard of conduct described in Paragraph
2(a) above or that the proceeding involves conduct for which
liability has been eliminated under a provision of the COMPANY's
Amended and Restated Articles of Incorporation and (ii) a written
undertaking by or on behalf of the INDEMNITEE to repay such amounts
if he is not wholly successful on the merits or otherwise in his
defense which would entitle him to mandatory indemnification under
Paragraph 2(c) hereof and unless it shall ultimately be determinated
in accordance with Paragraphs 2(e) or 2(h) that INDEMNITEE has not
met the applicable standard of conduct described in Paragraph 2(a)
hereof.
(h) The applicable party reviewing the claim for
indemnification pursuant to Paragraph 2(d)(i), (ii) or (iii) or,
pursuant to Paragraph 2(e) or pursuant to Paragraph 2(g)(1) shall be
referred to herein as the "Reviewing Party." Any determination by
the applicable Reviewing Party that the INDEMNITEE is not (i)
entitled to an advancement of expenses pursuant to Paragraph 2(g) or
(ii) entitled to indemnification pursuant to Paragraph 2(d) shall
not become binding until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have
been exhausted or lapsed). If there has been no determination by the
applicable Reviewing Party or if the Reviewing Party determines that
the INDEMNITEE substantively would not be permitted to be
indemnified in whole or in part under applicable law or would not be
entitled to the advancement of expenses, the INDEMNITEE shall have
the right to commence litigation in any court in the State of
Mississippi having subject matter jurisdiction thereof and in which
venue is proper seeking an initial determination by the court or
challenging any such determination by the Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and
the COMPANY hereby consents to service of process and to appear in
any such proceeding.
3. Enforcement.
(a) The COMPANY expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on
the COMPANY to induce the INDEMNITEE to continue as a director or
officer of the COMPANY or of any other corporation, company,
6
<PAGE>
partnership, joint venture, trust, employee benefit plan, or other
enterprise for which INDEMNITEE was or is serving at the request of
the COMPANY, and acknowledges that the INDEMNITEE is relying upon
this Agreement in continuing in such capacity or capacities.
(b) The COMPANY shall reimburse the INDEMNITEE for all the
INDEMNITEE's costs and expenses incurred in connection with
successfully establishing his right to indemnification under this
Agreement in whole and in part.
4. Exclusivity. The indemnification provided hereunder shall not be
deemed exclusive of, or diminish or otherwise restrict, any other
rights to which those indemnified may be entitled under any
provision of law, the Articles of Incorporation or Bylaws of the
COMPANY, this Agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity
and as to action in another capacity referred to in Paragraph 2 of
this Agreement and shall continue after INDEMNITEE has ceased to
occupy such position or positions.
5. Multiplicity of Claims. If several claims, issues or courses of
action are involved, the INDEMNITEE may be entitled to
indemnification as to some matters even though such INDEMNITEE is
not entitled to indemnification as to other matters.
6. Purchase of Insurance. The COMPANY may purchase and maintain
insurance on behalf of any INDEMNITEE covered hereunder where
insurance is obtainable, against any liability, or part thereof,
asserted against such INDEMNITEE and incurred by such INDEMNITEE in
any capacity or arising out of such INDEMNITEE's status as such,
whether or not the COMPANY would have the power to indemnify
INDEMNITEE against such liability hereunder or otherwise.
7. Severability. If any of the provisions of this Agreement shall be
held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality or enforceability of the
remaining provisions of this Agreement (including without
limitation, all portions of any paragraph of this Agreement
containing any such provision held to be invalid, illegal or
unenforceable) shall not in anyway be affected or impaired thereby,
and to the fullest extent possible, the provisions of this Agreement
(including, without limitation, all portions of any paragraph of
this Agreement containing such provision to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or
unenforceable) shall be construed so as to give effect the intent
manifested by the provision held invalid, illegal or unenforceable.
7
<PAGE>
8. Binding Effect. This Agreement shall be binding upon the INDEMNITEE
and the COMPANY, its successors and assigns, (including any
transferees of all or substantially all of its assets and any
successor by merger or operation of law), and shall inure to the
benefit of the INDEMNITEE, his heirs, personal representatives,
estate or assigns.
9. Amendment and Termination. No amendments, modifications,
terminations or cancellations of this Agreement shall be effective
unless signed in writing by both the INDEMNITEE and the COMPANY.
10. Headings. The headings of the paragraphs of this Agreement are
inserted for convenience only and shall not be deemed to constitute
a part of this Agreement or to affect the construction thereof.
11. Change in Law. To the extent that a change in the Mississippi
Business Corporation Act (whether by statute or judicial decision)
permits greater indemnification by agreement than would be afforded
currently under the COMPANY's Bylaws and this Agreement, it is the
intent of the parties hereto that the INDEMNITEE shall enjoy by this
Agreement the greater benefits so afforded by such change.
12. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Mississippi
applicable to contracts made and to be performed in such state
without giving effect to the principles of conflicts of laws.
13. Disputes. All claims and controversies arising out of or in
connection with this Agreement shall be subject to binding
arbitration by a single arbitrator in accordance with the commercial
arbitration rules of the American Arbitration Association ("AAA") or
the existing Rules of Practice and Procedures of the Judicial
Arbitration and Mediation Services, Inc. ("JAMS"). Any arbitration
shall occur in Jackson, Mississippi and any judgment on the award
rendered in such arbitration shall be entered in any state or
federal court having jurisdiction. The party filing the arbitration
shall have the right to select either AAA or JAMS.
14. Notification. The INDEMNITEE agrees to notify the COMPANY promptly
in writing upon being served any citation, complaint, indictment or
other document covered hereunder, either civil or criminal.
15. Notices. All notices, requests, demand and other communication
hereunder shall be in writing and shall be deemed to have been duly
given if delivered by hand and receipted for by the party to whom
said notice or other communication shall be directed, or by mail
certified or registered with postage prepaid on the third business
day after which so is mailed.
8
<PAGE>
If to INDEMNITEE: ___________________________
___________________________
___________________________
If to COMPANY: J. Steve Chustz, General Counsel
ChemFirst Inc.
Post Office Box 1249
Jackson, MS 39215-1249
IN WITNESS WHEREOF, the parties have caused this Agreement to be entered
into on the day and year first above written.
CHEMFIRST INC. INDEMNITEE
By:________________________ _______________________
9
[LOGO] ChemFirst Inc.
[PHOTOS OMITTED]
1999
ANNUAL REPORT
<PAGE>
[LOGO] ChemFirst produces chemicals for semiconductor, life science, and
polyurethane applications. The company's stock trades on the New York
Stock Exchange under the symbol CEM.
CONTENTS
- --------------------------------------------------------------------------------
Financial Highlights 1
- --------------------------------------------------------------------------------
Selected Financial Data 2
- --------------------------------------------------------------------------------
Letter to Shareholders 3
- --------------------------------------------------------------------------------
Electronic and Other Specialty Chemicals 7
- --------------------------------------------------------------------------------
Polyurethane Chemicals 11
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 13
- --------------------------------------------------------------------------------
Consolidated Financial Statements and Notes 16
- --------------------------------------------------------------------------------
ChemFirst Companies 36
- --------------------------------------------------------------------------------
Directors and Officers 36
- --------------------------------------------------------------------------------
Corporate Information 37
- --------------------------------------------------------------------------------
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Years ended December 31,
(In Thousands Except Per Share Amounts)
---------------------------------------
1999 1998 % Change
---------------------------------------
<S> <C> <C> <C>
Results of Operations:
Sales $311,786 296,509 5
Earnings from continuing operations (a) $ 22,473 18,976 18
Depreciation and amortization $ 26,988 23,688 14
Capital expenditures $ 24,645 43,786 (44)
Financial Position:
Total assets $402,387 443,434 (9)
Total debt $ 31,892 70,561 (55)
Shareholders' equity $288,723 285,482 1
Total debt as percent of total capitalization 10% 20% (50)
Per Common Share:
Earnings from continuing operations (a) $ 1.22 .98 24
Cash dividends declared $ .40 .40 --
Book value $ 16.13 15.48 4
Closing market price at December 31 $ 21.875 19.750 11
</TABLE>
(a) Prior year results exclude the after tax effect of special items of
$5,684 ($.29 per share), primarily related to the sale of Power Sources,
Inc. in 1998.
- --------------------------------------------------------------------------------
Earnings From Continuing Operations*
Millions of Dollars
[The following table was represented as a bar chart in the printed material.]
95 12
96 16
97 26
98 19
99 22
Cash Flows Provided By Continuing Operations
Millions of Dollars
[The following table was represented as a bar chart in the printed material.]
95 23
96 35
97 23
98 40
99 39
Capital Expenditures
Millions of Dollars
[The following table was represented as a bar chart in the printed material.]
95 28
96 49
97 91
98 44
99 25
* Adjusted for Power Sources gain and aluminum dross note provision in
1998, Melamine gains and equity earnings in 1997, and equity earnings in
years 1995 - 1996.
- --------------------------------------------------------------------------------
1
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Years ended December 31
(In Thousands of Dollars, Except Per Share Amounts)
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
% % % % %
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers:
Electronic and Other Specialty
Chemicals $173,663 55 176,688 58 176,353 60 148,272 61 131,044 62
Polyurethane Chemicals 138,123 44 119,821 40 112,465 39 91,335 37 75,205 35
--------------------------------------------------------------------------------
Total sales 311,786 99 296,509 98 288,818 99 239,607 98 206,249 97
Other revenues 3,642 1 5,194 2 3,586 1 5,015 2 6,717 3
--------------------------------------------------------------------------------
Total revenues $315,428 100 301,703 100 292,404 100 244,622 100 212,966 100
================================================================================
Operating profit from continuing
operations before income taxes and
investee earnings:
Electronic and Other Specialty $ 18,048 17,796 27,617 22,536 25,583
Chemicals
Polyurethane Chemicals 31,034 22,648 24,071 21,057 15,067
--------------------------------------------------------------------------------
49,082 40,444 51,688 43,593 40,650
Unallocated corporate expenses (11,811) (9,781) (11,347) (13,324) (15,888)
Interest income (expense), net (782) 213 3,010 (3,926) (3,777)
Other income (expense), net (536) 9,224 14,997 259 1,324
--------------------------------------------------------------------------------
35,953 40,100 58,348 26,602 22,309
Income taxes 13,480 15,440 23,050 10,471 10,327
Equity in net earnings of equity investees -- -- 2,497 846 1,096
--------------------------------------------------------------------------------
Earnings from continuing operations 22,473 24,660 37,795 16,977 13,078
Earnings (loss) from discontinued
operations, net of taxes -- (2,618) 1,103 9,144 44,389
Net gain (loss) on disposal of
of businesses, net of taxes 646 (11,950) -- 223,739 --
--------------------------------------------------------------------------------
Net earnings $ 23,119 10,092 38,898 249,860 57,467
================================================================================
Earnings (loss) per common share:
Continuing operations $ 1.23 1.28 1.85 .83 .64
Discontinued operations -- (.14) .06 .44 2.16
Gain (loss) on disposal of businesses .03 (.62) -- 10.85 --
--------------------------------------------------------------------------------
Net earnings $ 1.26 0.52 1.91 12.12 2.80
================================================================================
Earnings (loss) per common share,
assuming dilution:
Continuing operations $ 1.22 1.27 1.81 .81 .63
Discontinued operations -- (.14) .05 .44 2.12
Gain (loss) on disposal of businesses .03 (.61) -- 10.70 --
--------------------------------------------------------------------------------
Net earnings $ 1.25 .52 1.86 11.95 2.75
================================================================================
Net working capital $112,970 116,936 79,936 136,901 127,009
Long-term debt $ 24,224 64,956 3,941 606 80,598
Total assets $402,387 443,434 433,097 394,164 390,346
Stockholders' equity $288,723 285,482 321,697 308,486 226,757
Cash dividend payout rate 31 76 20 3 14
Return on average equity - continuing operations 8 8 12 6 6
Return on sales - continuing operations 7 8 13 7 6
Long-term debt/equity ratio .08 .23 .01 -- .36
Current ratio 3.54 3.66 2.19 3.85 3.81
Cash dividends per share $ .40 .40 .40 .40 .39
Book value per share $ 16.13 15.48 16.06 14.92 11.02
</TABLE>
2
<PAGE>
Dear Fellow Shareholders
1999 was a good year. Earnings from continuing operations were up 18% excluding
special items in the prior year. We completed the restructuring begun several
years ago with the recent sales of our steel and engineered products and
services businesses. ChemFirst is now focused on chemicals. We combined custom
manufacturing and fine chemicals to simplify the organization and serve our
customers better. We added new products and began development of new
technologies in electronic chemicals and materials for the semiconductor
industry.
Financial Results
Earnings from continuing operations were $22.5 million or $1.22 per share versus
$.98 excluding $.29 in special items last year. Sales increased 5% to $312
million. Improvement was mainly due to record sales of polyurethane chemicals.
Electronic and other specialty chemicals operating results also improved. But
better specialty results were offset by expenses for product development and R&D
and engineering facilities added last year. Electronic chemical remover volume
was up 17%. We maintained electronic chemical gross margins despite lower prices
by improving production efficiencies and cutting raw materials costs. However,
development expenses for chemical mechanical planarization (CMP) and deep ultra
violet (DUV) photoresist resins hit earnings about $.14 per share. These efforts
should begin to pay off this year.
Electronic and Other Specialty Chemicals
ChemFirst is a global leader in advanced cleaners for back-end-of-the-line high
value applications in semiconductor production. We are also the leading supplier
of DUV photoresist resins for 248 nanometer photolithography. We are a growing
supplier
- --------------------------------------------------------------------------------
Total Sales
Millions of Dollars
[The following table was represented as a bar chart in the printed material.]
95 206
96 240
97 289
98 297
99 312
Electronic and Other Specialty Sales
Millions of Dollars
[The following table was represented as a bar chart in the printed material.]
95 131
96 148
97 176
98 177
99 174
Polyurethane Sales
Millions of Dollars
[The following table was represented as a bar chart in the printed material.]
95 75
96 91
97 112
98 120
99 138
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Employees
[The following table was represented as a pie chart in the printed material.]
Polyurethane 23%
Corporate 9%
Electronic & Other Specialty 68%
Capital Expenditures
[The following table was represented as a pie chart in the printed material.]
Polyurethane 13%
Corporate 20%
Electronic & Other Specialty 67%
Identifiable Assets
[The following table was represented as a pie chart in the printed material.]
Polyurethane 25%
Corporate 11%
Electronic & Other Specialty 63%
Discontinued 1%
- --------------------------------------------------------------------------------
of chemistries and materials for CMP. Growth of these products is based
on new semiconductor technologies for consumer electronics and Internet
applications. Semiconductor chip geometries have shrunk from 0.25 to 0.18
microns about 18 months ahead of the industry roadmap. CMP creates the flat
surfaces required for shorter wavelength, high-resolution DUV photolithography
to produce 0.18 micron feature sizes.
Other specialty chemicals include products for pharmaceutical, agricultural,
polymer, electronic and photosensitive applications. We produce proprietary
chemicals and we custom manufacture chemicals for others. Custom sales have been
hurt the last two years by declining demand for conventional ag chemicals due to
growth of genetically modified seeds and companion herbicides. So we have
shifted emphasis to pharma, electronic chemical and polymer markets. In 1998, we
added a contract research and small-scale manufacturing unit to support rapidly
growing outsourcing by these industries. This unit is exceeding our
expectations. We also reorganized the custom and fine chemicals businesses as
ChemFirst Fine Chemicals to simplify customer contacts.
R&D spending in 1999 was primarily focused on electronic chemicals, including
new CMP products for tungsten and copper applications and DUV resins for new
photoresists. We are working with major semiconductor equipment suppliers,
materials suppliers, and key customers to develop technologies for the next
generation chips. We also sponsor research at leading universities. We are
working to commercialize a novel photoimaging technology recently licensed from
Simon Fraser University. This could lead to major new applications and markets.
Polyurethane Chemicals
Polyurethane Chemicals includes aniline and mononitrobenzene. This segment had
record operating results, reflecting the first full year of operations at the
new Baytown, TX aniline facility. Improved operations at the Pascagoula, MS
plant also helped. Aniline is primarily used to make polyurethane for
residential and commercial construction, appliances and autos. Demand
4
<PAGE>
is growing about 5% annually. Most of our aniline production is sold under
long-term contracts that protect us from changes in raw materials prices.
Capital Expenditures
Capital expenditures for 1999 were $25 million, mostly for routine maintenance,
plant updates and process improvements. This is down from $44 million, in 1998,
when we completed a three-year program of record capital expenditures that
increased capacity of major products 40% to 100%. Planned capital expenditures
in 2000 are $37 million, including the initial cost for engineering a proposed
Phase II expansion at Baytown, process debottlenecking and incremental capacity
additions in specialty chemicals, and manufacturing and equipment upgrades in
electronic chemicals.
Financial Structure
Our balance sheet remains strong. Debt is 10% of total capitalization versus the
43% average of our peers. Cash flow from operations and proceeds from the sale
of our steel plant should more than cover planned capital expenditures. We do
not anticipate major acquisitions. Our focus is on product-line and technology
additions that build on and extend our existing base of products and
technologies.
We spent $16.7 million to repurchase 758,100 shares of ChemFirst stock during
1999. Since inception of the repurchase program in 1997, we've spent $79 million
to acquire 3.4 million shares. We believe stock repurchases are a tax efficient
way to return value to shareholders when cash flow exceeds other attractive
investment opportunities. We intend to continue aggressive purchases of the
company's stock.
Outlook
The outlook is good. The company has an excellent mix of products and services
for fast-growing markets. Earnings for the year 2000 should be better than 1999.
Our challenge and focus is to execute well on the attractive opportunities we
have developed.
- --------------------------------------------------------------------------------
[PHOTO OMITTED]
- --------------------------------------------------------------------------------
/s/ J. Kelley Williams
J. Kelley Williams
Chairman and Chief Executive Officer
- --------------------------------------------------------------------------------
[PHOTO OMITTED]
- --------------------------------------------------------------------------------
/s/ R. Michael Summerford
R. Michael Summerford
President and Chief Operating Officer
- --------------------------------------------------------------------------------
5
<PAGE>
State of the art production facilities and engineering and development labs such
as the CMP applications lab pictured below in Hayward, CA and similar facilities
in East Kilbride, Scotland, and Kawasaki-City, Japan, are strategically located
near key regional semiconductor production centers to better serve customers. We
have invested $35 million over the last 3 years in R&D facilities, new product
development and expansion of production capacity to build on market and
technology leadership in electronic chemicals.
[GRAPHIC OMITTED]
<PAGE>
Electronic and Other
Specialty Chemicals
The company produces chemicals used in the manufacture of semiconductor devices,
and for pharmaceutical, cosmetic, polymer, photosensitive, and agricultural
applications. The company also offers custom manufacturing services from
research and development to small-scale commercial production of fine chemicals.
Emphasis is on chemicals and services for the semiconductor industry, where
rapid technology change is creating opportunities for strong growth. ChemFirst
produces organic photoresist removers, post-dry-etch residue removers, resins
for production of deep ultra violet photoresists, and other performance
chemicals for cleaning and polishing silicon wafers.
The semiconductor industry is moving rapidly to smaller design rules to meet the
increasing demand for faster, smaller, and cheaper devices for Internet,
communications, computer, and consumer electronics applications. As devices
shrink, new materials and more layers of interconnect wire are used to reach
performance goals - up to 10,000 feet or almost two miles of wire may be
embedded in today's advanced integrated circuit. The company's challenge and
opportunity in this dynamic climate is to offer innovative chemical solutions
for semiconductor manufacturers' process problems.
The company is focused on three of the industry's highest growth areas:
[LOGO] Photoresist and Post-dry-etch Residue Removers
Removers are our most important electronic chemicals. These products are used to
remove residues produced during the photolithography and etching process steps
in wafer fabrication. Removal of the residues is critical to device performance.
We have a global presence and about 25% world market share in advanced wafer
cleaners. The company is 1 in market share in the U.S. and Europe and growing in
the Far East. Remover product sales have historically grown at double-digit
rates and
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
RECENT DEVELOPMENTS
- --------------------------------------------------------------------------------
We established a competitive raw material position, important technology
platform, and market leadership in copper cleaners with the acquisition of a
choline product line for electronic markets. We are realizing immediate benefits
as a material supplier to formulators of dry-film strippers used in printed wire
board production. Longer-term, we expect to develop new applications for choline
as a remover for advanced interconnect metals and in the production of copper
lead frames.
Photosensitive Metal Oxide Deposition or PMOD is a new technology we recently
licensed from Simon Fraser University in Vancouver, British Columbia. The
patented process forms metal or metal oxide features for integrated circuits and
printed wire boards using a simple photosensitive technique. Advantages of the
new process include low temperature processing, elimination of vacuum processing
steps, and lower capital costs. Applications research and development to find
ways to commercialize this technology are currently underway at Microelectronic
Research Center and National Science Foundation Packaging Research Center at
Georgia Tech.
- --------------------------------------------------------------------------------
7
<PAGE>
[PHOTO OMITTED]
In Chemical Mechanical Planarization (CMP), the wafer is placed between a
rotating platen and pad (shown above) and a slurry of abrasives and chemicals is
introduced as the polishing agent. The primary CMP application today is to
polish the silicon dioxide dielectric (non-conducting or insulating layer)
between metal layers on the wafer. However, the use of aluminum, tungsten, and
copper interconnects in multilevel circuits is growing. The company is working
closely with leading CMP equipment manufacturers to qualify oxide and metal
slurries on their equipment and has developed post-CMP cleaners to use in tandem
with the slurries. Alliances with equipment manufacturers are important since
semiconductor producers expect a complete CMP system from their suppliers.
<PAGE>
are expected to continue to grow rapidly based on increasing chip complexity and
use of new fabrication materials.
[LOGO] Resins for Deep Ultra Violet Photoresists
The most widely used optical process to make semiconductor devices with feature
sizes at 0.25 microns and below is 248 nanometer deep ultra violet (DUV)
photolithography. Chips manufactured with these smaller features are expected to
drive the highest growth segment in semiconductor sales for the next several
years. DUV photoresists contain resins that are key to process performance. We
are the world market leader in resins for DUV photoresists. The company has a
strong competitive position based on proprietary and patented technology, and
raw material sourcing, and is the exclusive U.S. manufacturer of these resins.
[LOGO] Chemical Mechanical Planarization (CMP)
As the number of metal layers in chips increases and feature sizes decrease, CMP
is used to produce flatter surfaces for sharper focus of photolithographic
images and to reduce interconnect lengths for increased speed and lower power
consumption. A wafer may be planarized ten times or more as interconnect layers
are added. Our competitive advantages include extensive experience with complex
chemistries in semiconductor manufacturing, state of the art R&D and
applications labs, access to proprietary abrasives and strong customer
relationships. Our strategy is to win customers with better products, strong
technical support, and low cost of ownership.
Other Specialty Chemicals
The company produces proprietary chemicals, provides contract research, and
custom manufactures chemicals for other companies. We are a world-scale producer
of nitrated aromatics used as intermediates in a wide variety of applications,
including polyurethanes, rubber chemicals, dyes, pigments, herbicides and
photographic chemicals. The company also produces photosensitive chemicals and
chemicals for pharmaceuticals.
ChemFirst is the sole U.S. producer of many nitrotoluenes and derivatives. These
are high volume products with mature end-use markets that are generally sold
under annual contracts to long-standing customers.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
ChemFirst's patented HDA(R) removers are #1 in market share in the U.S. and
Europe. The photos above and below, enlarged 30,000 times, illustrate the
effectiveness of the company's remover products. The company is the second
largest supplier of removers in the world.
We have established chemicals, materials, and service capabilities to solve the
interrelated process problems of semiconductor manufacturers worldwide, a strong
intellectual property portfolio and a development pipeline of new products and
technologies to meet future challenges.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
9
<PAGE>
In custom manufacturing we offer manufacturing capabilities to pharmaceutical,
electronic, and other chemical companies who want to focus on research and
marketing, cut costs and time to market and speed product innovation. We
recently established the capability to provide contract research, developmental
samples, and small-scale production for pharmaceutical and electronic chemical
customers. We are an integrated single-source provider with the ability to take
products from R&D to commercial production in an ultra-pure, cGMP or ISO-9000-2
environment.
With approximately 300 dedicated employees, state of the art R&D facilities, and
over 120,000 gallons of reactor capacity within its three sites, ChemFirst
operates one of the most versatile fine chemical companies in North America.
[GRAPHIC OMITTED]
<PAGE>
Our proprietary FirstCure(R) product line includes photoinitiators, cure
accelerators, amine synergists, and polymerization inhibitors used in printing
inks, varnishes, lacquers, and adhesives. These offer advantages of energy
savings, shorter curing cycles, and higher quality, more durable finishes. They
are also more environmentally friendly than conventional processes that contain
volatile organic compounds.
Our custom manufacturing and research capabilities cover a broad spectrum - from
contract R&D and delivery of gram samples, to multi-ton production. We offer
customers broad technology platforms, innovative process development, and
efficient batch production in a cGMP environment.
Polyurethane Chemicals
The company produces mononitrobenzene and aniline based on nitration and
hydrogenation chemistry. Aniline is our major product and is primarily sold as a
feedstock for MDI (methylene diphenyl diisocyanate). MDI is used in polyurethane
foams for insulation in home and commercial construction, in urethane elastomers
for automobile body components, in adhesives, and as a binder in the manufacture
of oriented strand board.
Other significant markets for aniline include tire and agricultural chemicals
and plastics for consumer goods. Mononitrobenzene is primarily used to make
aniline, but is sold separately for the manufacture of iron oxide pigments,
black dyes, and as an intermediate for the production of acetaminophen.
U.S. aniline demand is growing at about 5% annually, driven primarily by MDI,
which consumes about 80% of U.S. aniline production. Domestic MDI growth is
predicted to remain steady at around 6% annually, driven mainly by demand from
the construction and automotive industries. Other aniline markets are growing at
GDP growth rates. The company is well positioned in this business as a low-cost
producer with innovative technology and long-term customer relationships.
ChemFirst is the largest merchant supplier of aniline in the U.S.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
The company more than doubled aniline production capacity with the addition of a
plant in Baytown, TX. The 250MM lb plant was built inside Bayer Corporation's
Baytown chemical complex. Bayer is the company's largest customer. ChemFirst
supplies all of Bayer's North American aniline requirements under long-term
contract from plants in Pascagoula, MS and Baytown, TX. Engineering is scheduled
to begin this year on a proposed project that would double aniline capacity at
Baytown, and bring company-wide aniline production capacity to approximately
750MM lbs.
[GRAPHIC OMITTED]
Most of the company's aniline is used to make polyurethane for residential and
commercial construction, appliances, and autos.
- --------------------------------------------------------------------------------
11
<PAGE>
Financial Report
- --------------------------------------------------------------------------------
CONTENTS
Management's Discussion and Analysis 13-15
Consolidated Balance Sheets 16
Consolidated Statements of Operations 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes To Consolidated Financial Statements 20-34
Independent Auditors' Report 35
ChemFirst Companies 36
Directors and Officers 36
Corporate Information 37
- --------------------------------------------------------------------------------
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is based upon and should be read in conjunction with
ChemFirst Inc.'s ("the Company's") financial statements, including the notes
thereto.
1999 VERSUS 1998
Consolidated Results
Earnings from continuing operations for 1999 were $22.5 million versus $24.7
million for the prior year. Results for 1998 include other income of $9.3
million ($5.7 million after tax), primarily related to the gain on the sale of
50% owned Power Sources, Inc. ("PSI"). Excluding this other income, earnings
from continuing operations for 1999 were up 18% from 1998, primarily due to
record sales of polyurethane chemicals, reflecting a full year of production
from the Baytown, TX aniline facility.
Segments
Electronic and Other Specialty Chemicals pretax operating profits for 1999 were
$18.0 million, up $0.3 million from the prior year, while sales declined 2% to
$173.7 million. Operating results for the year improved only slightly as higher
gross profits, primarily from remover products, were offset by higher costs from
recent investments in new facilities in the U.S. and Japan. Remover product
sales volume was up 17% for the year, while average prices declined 8%. Margins
were maintained, however, by improving production efficiencies and cutting raw
material costs.
Polyurethane Chemicals pretax operating profits for 1999 were $31.0 million, up
37% from 1998, while sales were $138.1 million, up 15%, reflecting the first
full year of production from the Baytown, TX aniline facility, which began
operations in March 1998. Results in 1999 also benefited from improved
Pascagoula operations. Sales of aniline purchased for resale declined
approximately $6.8 million from the prior year. However, these aniline sales do
not contribute significantly to operating profits.
Unallocated corporate expenses for 1999 were $11.8 million, up 21% from the
prior year. Expenses were lower in 1998, primarily due to a reduction in
compensation accruals indexed to the Company's stock price. Net interest expense
of $0.8 million was reflected for 1999, as compared with net interest income of
$0.2 million in 1998, due to higher average borrowings and lower interest income
from the Getchell Gold note, which was collected in full in May 1999 (see note 3
to the Consolidated Financial Statements).
Other income in 1999 included recognition of $1.6 million in additional income
related to the 1998 sale of PSI. This income was deferred at the time of the
1998 sale pending resolution of contingencies. In 1998, a $10.1 million gain was
recorded related to the PSI sale. In 1999 and 1998 other expenses included $1.0
million and $0.8 million, respectively, in loss provisions for a note received
in the disposition of Plasma Processing Corporation in January 1997. Other
expenses in 1999 also include approximately $1.0 million from termination of a
corporate lease obligation.
1998 VERSUS 1997
Consolidated Results
Earnings from continuing operations for 1998 were $24.7 million, down 35% from
1997. Results for 1998 include other income of $9.3 million ($5.7 million after
tax), primarily related to the gain on the sale of the Company's 50% interest in
PSI in the first quarter of 1998. Results for 1997 include a $14.7 million gain
($8.8 million after tax) from the fourth quarter sale by the Company of its 23%
interest in Melamine Chemicals, Inc. ("Melamine") and $2.5 million equity in net
earnings of PSI and Melamine (see note 3 to the Consolidated Financial
Statements). Excluding these gains and equity earnings, earnings from continuing
operations for 1998 were $19.0 million, down 28% from $26.5 million in 1997
primarily due to lower margins, increased research and development and higher
interest expense. Sales for 1998 were up 3%, primarily due to higher aniline
volume.
Segments
Electronic and Other Specialty Chemicals pretax operating profits for 1998 were
$17.8 million on sales of $176.7 million. In 1998, sales of chemical mechanical
planarization and acylation derivatives products (used primarily in the
manufacture of integrated circuits) from acquisitions in December 1997, were
$14.9 million and pretax operating losses were $2.6 million. Pretax operating
profits and sales, excluding the above acquisitions, were down 26% and 8%,
respectively, due to lower demand for an agricultural chemical intermediate and
lower prices from many products due to competitive pressure. Remover product
sales volume was up 4% and average unit prices were unchanged despite an
estimated 4% decline in worldwide silicon consumption and a downturn in the
semiconductor industry.
Polyurethane Chemicals pretax operating profits for 1998 were $22.6 million,
down 6% from 1997. Operating profits declined in 1998 as lower production and
higher costs at the Pascagoula, MS, facility and 17% lower average nitrobenzene
prices more than offset the additional production from the Baytown, TX,
facility. Sales for 1998 were $119.8 million, up 7% as a 16% increase in sales
volume was partially offset by lower average sales prices. The increased volume
was due to the added production from the Company's new
250-million-pound-per-year aniline facility in Baytown, which began operations
in March 1998. The additional Baytown production was partially offset by reduced
aniline production at Pascagoula mostly due to production inefficiencies and
unscheduled plant maintenance in the first quarter of 1998 and a scheduled plant
turnaround in the second quarter of 1998. Hurricane Georges struck the
Pascagoula facility on September 28, 1998, and shut down operations for 18 days.
However, the Company's insurance covered most of the facility's repairs and lost
profits incurred during that period.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Unallocated corporate expenses for 1998 were $9.8 million, down 14% from 1997
primarily due to a reduction in compensation accruals indexed to the Company's
stock price. Net interest income was down $2.8 million due to $1.7 million in
higher interest expense, net of capitalized interest, and $1.1 million in lower
interest income. Capitalized interest in 1998 was up $0.8 million over 1997.
Interest expense was up on higher debt while interest income declined as cash
proceeds received in 1996 from the fertilizer disposition were used for capital
expenditures and share repurchases. Other income and expense in 1998 included a
$10.1 million gain on the sale of PSI and a $0.8 million loss provision for a
note received in the disposition of Plasma Processing Corporation in January
1997. Other income for 1997 included the $14.7 million gain on the sale of
Melamine.
Discontinued Operations
In December 1999, the Company sold two of its wholly owned subsidiaries,
Callidus Technology, Inc. ("CTI") and Plasma Energy Corporation in an all cash
transaction. Proceeds of the transaction were approximately $8.0 million and
resulted in an after tax loss of $2.7 million. The loss was primarily
attributable to costs associated with the shutdown of CTI's European operations,
which increased expenses during the disposal period. This transaction completed
the disposition of the Engineered Products and Services segment.
On February 15, 2000, the Company sold its steel operation for approximately
$13.0 million in cash, subject to certain post-closing working capital
adjustments. Since December 31, 1998, net assets of the business, excluding
deferred taxes, were reduced approximately $9.5 million, primarily through
reductions in inventory and accounts receivable. In 1998, the Company recorded
an estimated after tax loss from disposal of steel operations of $12.0 million,
primarily related to the writedown of assets to their estimated net realizable
value. In the fourth quarter of 1999, this valuation adjustment was reduced by
approximately $0.8 million, to reflect terms of the pending sale.
On October 20, 1995, the Company's gold operations were discontinued through the
distribution to its shareholders of its entire ownership of Getchell Gold
Corporation. A reduction in estimated tax liabilities of $2.4 million was
recorded in the fourth quarter of 1999 following final settlement of federal tax
examinations covering Getchell Gold's operations through that period.
Losses from discontinued operations in 1998 were primarily from steel
operations, while the earnings in 1997 came from Engineered Products and
Services (see note 2 to the Consolidated Financial Statements).
Environmental Matters
The Company's operations are subject to a wide variety of constantly changing
environmental laws and regulations governing emissions to the air, discharges to
water sources, and the handling, storage, treatment and disposal of waste
materials, as well as other laws and regulations concerning health and safety
conditions for which it must incur certain costs. The Company's capital
expenditures for environmental protection were $0.6 million in 1999.
Environmental capital expenditures are projected to be $1.3 million and $1.1
million for 2000 and 2001, respectively. In addition, the Company accrues for
anticipated costs associated with investigatory and remediation efforts relating
to the environment. At December 31, 1999, the Company's accrued liability for
these matters totaled $1.6 million, $1.4 million of which is for discontinued
operations and $0.2 million for continuing operations. Based on information
presently available, the Company believes any amounts paid in excess of the
accrued liabilities will not have a material adverse effect on its financial
position or results of operations.
Capital Resources and Liquidity
Net cash provided by operating activities for 1999 was $44.7 million, up $10.6
million from 1998, primarily due to a reduction in working capital in
discontinued operations. Net cash provided by continuing operations was down
slightly from the prior year, as increases in working capital more than offset
higher earnings. Investing activities for the year include $29.6 million in
proceeds from collection of a note with Getchell Gold Corporation and $17.9
million from the disposal of discontinued operations. These proceeds were used
to reduce debt, which declined a net $38.7 million. In 1998, investing
activities included $19.0 million in proceeds from the sale of PSI. Capital
expenditures for 1999 were $24.6 million, down 44% from 1998, which included the
final expenditures for the Baytown aniline facility.
In March 2000, the board of directors authorized an additional $60.0 million for
stock repurchases to follow the $50.0 million repurchase program authorized in
August 1998. This latest approval for expenditure brings total authorizations
since the stock repurchase program was initiated in January 1997 to $170.0
million. As of December 31, 1999, the Company had acquired 3.4 million shares at
a cost of $78.6 million.
Projected capital expenditures for 2000 are approximately $37.0 million. The
Company believes that its cash flow from operations, combined with access to its
existing or additional bank credit facilities, adequately provides for its cash
requirements. Additional sources of cash in 2000 include proceeds of
approximately $13.0 million related to the disposal of FirstMiss Steel, Inc.,
which occurred in February 2000.
Accounting Developments
In March 1998, the Accounting Standards Executive Committee ("AcSEC") released
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP identifies the
characteristics of internal-use software and provides guidance for accounting
treatment of costs for computer software developed or obtained for internal use
as related to capitalization or expense decisions. The statement is effective
for fiscal years beginning after December 15, 1998. In April 1998, AcSEC
released SOP 98-5, "Reporting
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
on the Costs of Start-Up Activities." The SOP broadly defines start-up
activities and provides guidance on the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
fiscal years beginning after December 15, 1998. Adoption of these statements did
not have a material impact on the Company's financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998, and is
effective for fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. All derivatives are required to be recognized as either
assets or liabilities in the statement of financial position and measured at
fair value. Changes in fair value will be reported either in earnings or outside
earnings depending on the intended use of the derivative and the resulting
designation. Entities applying hedge accounting are required to establish, at
the inception of the hedge, the method used to assess the effectiveness of the
hedging derivative and the measurement approach for determining the ineffective
aspect of the hedge. The Company currently follows SFAS No. 52, "Foreign
Currency Translation," and applies hedge accounting treatment to certain foreign
currency transactions by entering into foreign currency option contracts and
forward exchange contracts. Gains and losses associated with currency rate
changes on contracts hedging foreign currency transactions are recorded in
income and generally offset the transaction losses or gains on the foreign
currency cash flows that they are intended to hedge. Gains and losses on
contracts hedging firm sales commitments are deferred until the related
transactions are consummated. The effect of adopting the Statement is currently
being evaluated, however, based on current activity, the Company does not
believe the effects of adoption will be material to its financial position or
results of operations.
Market Risk
The Company is exposed to changes in financial market conditions in the normal
course of its business, including changes in interest rates and foreign currency
exchange rates. At December 31, 1999 and 1998, the Company's derivative and
other financial instruments included long-term debt denominated in U.S. dollars,
short-term notes denominated in Japanese yen and a series of yen option collars
hedging 20,000,000 yen per month with contract expiration dates ranging from
March 2000 through January 2001. Due to the short-term nature of the bulk of
these contracts and size of these yen obligations, the Company does not consider
its exposure to foreign currency or interest rate fluctuations on these
instruments to be material.
The Company utilizes fixed and variable-rate debt to maintain liquidity and fund
its business operations, with the terms and amounts based on business
requirements, market conditions and other factors. At December 31, 1999 and
1998, the market values of the Company's fixed-rate borrowings were
approximately $24.2 million and $24.0 million, respectively. A 100 basis point
change in interest rates (all other variables held constant) as of December 31,
1999 and 1998, would result in an approximate $1.0 million change in fair market
values for both years but would not affect interest expense or cash flow. There
was no variable-rate debt outstanding at December 31, 1999. At December 31, 1998
the Company had $41.0 million in variable-rate debt. A 100 basis point change in
interest rates (all other variables held constant) on this portion of the
Company's debt, would result in a change in interest expense of approximately
$0.4 million.
Year 2000
In 1996, the Company began a study which led to the purchase in 1997 of a
company-wide Enterprise Resource Planning ("ERP") system to integrate the
Company's information systems, replacing small, stand-alone purchased systems.
This ERP system is Year 2000 compliant. As of December 31, 1999, the Company has
spent $12.6 million on this project, with all scheduled sites operating under
this system.
A corporate-wide survey and assessment of other information technology ("IT")
and non-IT equipment and systems utilizing date or time functions was completed
in 1999. The Company also assessed critical key customers, as well as service
and raw material suppliers, regarding their Year 2000 readiness. Total
expenditures for assessment and remediation were approximately $0.3 million,
with all remediations occurring prior to December 31, 1999. Most of this cost
was related to remediating process control systems. Based on information to
date, the Company has not encountered any significant disruptions related to the
Year 2000 rollover.
Forward-Looking Statements
Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that relate to the proceeds from
the discontinuance of Steel operations, as well as other statements in this
Annual Report that are not historical in nature, may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements, as well as other forward-looking
statements made from time to time by the Company, or in the Company's press
releases and filings with the U.S. Securities and Exchange Commission, are based
on certain underlying assumptions and expectations of management.
These forward-looking statements are subject to risks and uncertainties which
could cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, general economic conditions, availability and pricing of raw
materials, supply/demand balance for key products, new product development,
manufacturing efficiencies, conditions of and product demand by key customers,
the timely completion and start up of construction projects, pricing pressure as
a result of international market forces, the inability of the Company to either
resolve Year 2000 issues that may subsequently arise or to accurately estimate
the cost associated with such issues, and other factors as may be discussed in
the Company's Form 10-K for the fiscal year ended December 31, 1999.
15
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In Thousands of Dollars)
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,551 11,226
Receivables:
Trade, less allowance for doubtful accounts of $345 and $317, respectively 54,248 40,646
Other 13,665 3,152
-------------------------
Total receivables 67,913 43,798
-------------------------
Inventories:
Finished products 36,860 32,872
Work in process 3,565 7,045
Raw materials and supplies 22,238 11,378
-------------------------
Total inventories 62,663 51,295
-------------------------
Prepaid expenses and other current assets 9,794 8,274
Net current assets of discontinued operations 2,532 46,309
-------------------------
Total current assets 157,453 160,902
-------------------------
Investments 1,552 32,769
Intangible and other assets, at cost less amortization 17,637 16,362
Property, plant and equipment, net 225,745 227,401
Noncurrent assets of discontinued operations -- 6,000
-------------------------
$402,387 443,434
=========================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 7,668 5,354
Current installments of long-term debt -- 251
Deferred revenue 373 104
Accounts payable - trade (including book overdrafts of
$2,883 and $6,673, respectively) 18,919 22,020
Accrued expenses and other current liabilities 17,523 16,237
-------------------------
Total current liabilities 44,483 43,966
-------------------------
Long-term debt, excluding current installments 24,224 64,956
Other long-term liabilities 26,130 24,783
Noncurrent liabilities of discontinued operations -- 10,097
Deferred income taxes 18,178 13,501
Minority interest 649 649
Stockholders' equity:
Serial preferred stock. Authorized 20,000,000 shares; none issued -- --
Common stock of $1 par value. Authorized 100,000,000 shares;
outstanding 17,901,323 and 18,445,391 shares, respectively 17,901 18,445
Additional paid-in capital 25,543 22,212
Accumulated other comprehensive income (loss) 287 (293)
Retained earnings 244,992 245,118
-------------------------
Total stockholders' equity 288,723 285,482
-------------------------
$402,387 443,434
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
(In Thousands of Dollars, Except Per Share Amounts)
-----------------------------------
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Sales $ 311,786 296,509 288,818
Cost of sales 220,118 217,016 206,946
-----------------------------------
Gross margin 91,668 79,493 81,872
General, selling and administrative 50,605 46,538 33,702
Research and development expenses 7,433 7,487 4,966
Other operating income (expense), net 3,641 5,195 (2,863)
-----------------------------------
Operating earnings 37,271 30,663 40,341
Interest income 1,363 2,199 3,293
Interest expense 2,145 1,986 283
Other income (expense), net (536) 9,224 14,997
-----------------------------------
Earnings from continuing operations before
income taxes and investee earnings 35,953 40,100 58,348
Income tax expense 13,480 15,440 23,050
Equity in net earnings of affiliated companies -- -- 2,497
-----------------------------------
Earnings from continuing operations 22,473 24,660 37,795
Earnings (loss) from discontinued operations, net -- (2,618) 1,103
Gain (loss) on disposal of businesses, net 646 (11,950) --
-----------------------------------
Net earnings $ 23,119 10,092 38,898
===================================
Earnings (loss) per common share:
Earnings from continuing operations $ 1.23 1.28 1.85
Earnings (loss) from discontinued operations, net -- (.14) .06
Gain (loss) on disposal of businesses, net .03 (.62) --
-----------------------------------
Net earnings $ 1.26 .52 1.91
===================================
Earnings (loss) per common share, assuming dilution:
Earnings from continuing operations $ 1.22 1.27 1.81
Earnings (loss) from discontinued operations, net -- (.14) .05
Gain (loss) on disposal of businesses, net .03 (.61) --
-----------------------------------
Net earnings $ 1.25 .52 1.86
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended December 31, 1999, 1998 and 1997
(In Thousands of Dollars, Except Share Amounts)
---------------------------------------------------------------------
Accumulated
Common Stock Additional Other
------------------------- Paid-In Comprehensive Retained
Shares Amount Capital Income Earnings
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 20,672,778 $ 20,673 16,586 -- 271,227
Net earnings -- -- -- -- 38,898
Dividends declared - $.40 per share -- -- -- -- (8,147)
Common stock issued:
Employee stock options 65,620 66 881 -- --
Convertible debentures 93,317 93 516 -- --
Purchase and retirement of common shares (800,776) (801) -- (19,181)
Income tax benefit on exercise of stock
options and convertible debentures -- -- 886 -- --
---------------------------------------------------------------------
Balance, December 31, 1997 20,030,939 20,031 18,869 -- 282,797
=====================================================================
Net earnings -- -- -- -- 10,092
Dividends declared - $.40 per share -- -- -- -- (7,659)
Common stock issued:
Employee stock options 43,102 43 724 -- --
Convertible debentures 148,930 149 1,008 -- --
Employee Stock Purchase Plan 51,417 51 933 -- --
Purchase and retirement of common shares (1,828,997) (1,829) -- -- (40,112)
Income tax benefit on exercise of stock
options and convertible debentures -- -- 678 -- --
Foreign currency translation adjustments -- -- -- (293) --
---------------------------------------------------------------------
Balance, December 31, 1998 18,445,391 18,445 22,212 (293) 245,118
=====================================================================
Net earnings -- -- -- -- 23,119
Dividends declared - $.40 per share -- -- -- -- (7,276)
Common stock issued:
Employee stock options 36,770 37 607 -- --
Convertible debentures 129,811 130 988 -- --
Employee Stock Purchase Plan 47,451 47 963 -- --
Purchase and retirement of common shares (758,100) (758) -- -- (15,969)
Income tax benefit on exercise of stock
options and convertible debentures -- -- 773 -- --
Foreign currency translation adjustments -- -- -- 580 --
---------------------------------------------------------------------
Balance, December 31, 1999 17,901,323 $ 17,901 25,543 287 244,992
=====================================================================
Total comprehensive income:
Net earnings for year ended December 31, 1999 23,119
Foreign currency translation adjustment, net of taxes of $142 237
Reclassification adjustment for foreign currency
translation adjustment included in net earnings, net of taxes of $206 343
--------
Total comprehensive income for year ended December 31, 1999 $ 23,699
========
Net earnings for year ended December 31, 1998 10,092
Foreign currency translation adjustment, net of taxes of $183 (293)
--------
Total comprehensive income for year ended December 31, 1998 $ 9,799
========
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(In Thousands of Dollars)
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 23,119 10,092 38,898
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 26,988 23,688 17,254
Provision for losses on receivables 133 203 505
Deferred income taxes 5,533 3,057 (1,254)
Net (gain) loss on disposal of businesses, net of taxes (benefit) (646) 11,950 --
Gain on sale of equity investees (1,605) (10,069) (14,684)
Undistributed earnings of affiliates, net of taxes -- -- (2,497)
Changes in operating assets and liabilities, net of effects
of acquisitions and dispositions:
Receivables (5,920) 15,237 (11,365)
Inventories (11,368) (12,481) (2,184)
Prepaid expenses (2,042) (320) 2,291
Accounts payable (3,101) (7,943) 4,275
Accrued expenses and other current liabilities 814 1,588 (8,826)
Deferred revenue and other long-term liabilities 6,176 3,301 3,296
Other, net 1,390 (800) (2,034)
Net (earnings) loss from discontinued operations -- 2,618 (1,103)
--------------------------------
Net cash provided by continuing operations 39,471 40,121 22,572
Net cash provided by (used in) discontinued operations 5,245 (5,970) 965
--------------------------------
Net cash provided by operating activities 44,716 34,151 23,537
--------------------------------
Cash flows from investing activities:
Capital expenditures (24,645) (43,786) (91,442)
Acquisitions of businesses (3,000) -- (11,166)
Proceeds from disposal of businesses 17,857 -- 2,100
Proceeds from collection of note receivable 29,569 -- --
Proceeds from sale of equity investees -- 18,986 26,138
Other, net -- 736 1,006
--------------------------------
Net cash provided by (used in) investing activities of
continuing operations 19,781 (24,064) (73,364)
Net cash used in investing activities of discontinued operations -- (3,204) (4,041)
--------------------------------
Net cash provided by (used in) investing activities 19,781 (27,268) (77,405)
--------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable (38,691) 46,354 20,000
Principal repayments of long-term debt (23) (22) (22)
Repayments of other notes payable -- (700) --
Dividends (7,276) (7,659) (8,147)
Purchase of common stock (16,676) (42,617) (19,312)
Proceeds from issuance of common stock 1,536 1,669 1,475
--------------------------------
Net cash used in financing activities, continuing operations (61,130) (2,975) (6,006)
Net cash used in financing activities, discontinued operations -- (441) (745)
--------------------------------
Net cash used in financing activities (61,130) (3,416) (6,751)
--------------------------------
Effect of exchange rate changes on cash (42) (7) --
--------------------------------
Net increase (decrease) in cash and cash equivalents 3,325 3,460 (60,619)
Cash and cash equivalents at beginning of year 11,226 7,766 68,385
--------------------------------
Cash and cash equivalents at end of year $ 14,551 11,226 7,766
================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 2,144 1,814 288
================================
Income taxes, net $ 272 7,283 20,832
================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Notes To Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(In thousands of dollars, except share data and option contract strike prices;
disclosures included in the Notes to Consolidated Financial Statements relate to
continuing operations, unless otherwise indicated).
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The principal businesses of the Company involve the production of electronic and
other specialty chemicals for use in the semiconductor industry and in
pharmaceutical, polymer, photographic, photosensitive and agricultural
applications, as well as the production of polyurethane chemicals. Further
descriptions of the Company's products and the relative significance of its
operations are included in the segment information data in note 12.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation. Equity investments are accounted for by the equity method.
Recognition of Revenue
Revenues are recorded when title and risk of ownership pass. Long-term
construction-type contracts of certain discontinued operations are accounted for
under the percentage-of-completion method.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out and weighted average methods.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment when the facts and circumstances
indicate that the carrying amount of an asset may not be recoverable. Long-lived
assets and certain identifiable intangibles to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
Depreciation and Amortization
Depreciation of plant and equipment and depreciable investments is based on cost
and the estimated useful lives of the separate units of property. The
straight-line method is used in determining the amount of depreciation charged
to expense. Goodwill of businesses acquired is generally amortized up to 20
years using the straight-line method. Other intangibles are amortized over their
estimated useful lives (5-17 years) using the straight-line method. Loan costs
are amortized over the terms of related loans using the interest method.
Pension Plans
Pension cost is determined using the "projected unit credit" actuarial method
for financial reporting purposes. The Company's funding policy is to contribute
annually at amounts not less than the minimum requirements of the Employee
Retirement Income Security Act of 1974.
Incentive Compensation
All outstanding stock options are nonqualified and require no charges to expense
upon grant or exercise. The Company receives a tax benefit from option
exercises, resulting in ordinary income to option recipients, that is included
in stockholders' equity.
Phantom share unit compensation plan discounts are amortized over various
holding periods of up to three years. The share units are credited with
equivalent dividends equal to cash dividends paid by the Company. The equivalent
dividends are expensed through the statement of operations. Phantom share units
require no charge to expense upon grant, or subsequently, as the Company, as
described by the plan, at its discretion determines the means of distribution as
either stock or cash upon redemption by participants.
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities of
three months or less to be cash equivalents.
20
<PAGE>
Notes To Consolidated Financial Statements
Investments
Realized gains and losses on investments are determined on the basis of specific
costs.
Contingencies
Estimates of loss contingencies, including environmental liability costs for
remediation, are charged to expense when it is probable an asset has been
impaired or a liability incurred and the amount can be reasonably estimated. If
a potentially material loss contingency is reasonably possible, or probable but
cannot be estimated, then the nature of the contingency and an estimated range
of possible loss, if determinable and material, are disclosed.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S. dollars at
current rates, except that revenues, costs and expenses are translated at
average current rates during each reporting period. Net exchange gains or losses
resulting from the translation of foreign financial statements and the effect of
exchange rate changes on intercompany transactions of a long-term investment
nature are accumulated net of taxes in other comprehensive income.
Derivative Financial Instruments
The Company uses foreign currency option contracts and forward exchange
contracts to hedge certain foreign receivables and firm sales commitments to be
denominated in currencies other than the functional currency of the entity
involved. The contracts are designated and effective as hedges. Gains and losses
on contracts that hedge recorded receivables activity offset the exchange rate
fluctuations of the underlying hedged transaction. Accounting for gains and
losses on contracts designated as hedges of identifiable foreign currency sales
commitments involves deferring recognition until the related transactions are
consummated. When consummated, these gains and losses are recorded in net income
(see note 15).
Future Impact of Recent Accounting Pronouncements
SFAS No. 133 - "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and is effective for all fiscal years beginning after
June 15, 2000. The statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. All derivatives are required
to be recognized as either assets or liabilities in the statements of financial
position and measured at fair value. Changes in fair value will be reported
either in earnings or outside earnings depending on the intended use of the
derivative and the resulting designation. Entities applying hedge accounting are
required to establish, at the inception of the hedge, the method used to assess
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company currently follows
SFAS No. 52, "Foreign Currency Translation," and applies hedge accounting
treatment to certain foreign currency transactions by entering into foreign
currency option contracts and forward exchange contracts. Gains and losses
associated with currency rate changes on contracts hedging foreign currency
transactions are recorded in income and generally offset the transaction losses
or gains on the foreign currency cash flows that they are intended to hedge.
Gains and losses on contracts hedging firm sales commitments are deferred until
the related transactions are consummated. The effect of adopting the Statement
is currently being evaluated, however, based on current activity, the Company
does not believe the effects of adoption will be material to its financial
position or results of operation.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform with the 1999
presentation.
2. ACQUISITIONS AND DISPOSALS
Acquisitions
On December 31, 1997, the Company acquired from Clariant Corporation an
acylation derivatives business involved in the development and marketing of
photoresist resins, as well as the chemical mechanical planarization assets of
Baikowski International Corporation and Moyco Technologies, Inc. The aggregate
purchase price of these three businesses was approximately $14,900, including
approximately $11,200 in cash and contingent consideration of approximately
$3,700 (approximately $5,000 face value before discounting) payable in five
years. Goodwill is amortized on a straight-line basis over the period assigned
to each acquisition, ranging from five to 15 years.
In September of 1999, the Company acquired a choline raw material business from
DCV, a holding company established by a joint venture between DuPont and
ConAgra, for approximately $3,000 in cash. Choline is an ingredient in
photoresist strippers used to manufacture printed wire boards and other
electronic interconnects.
21
<PAGE>
Notes To Consolidated Financial Statements
Disposals
Effective December 1, 1999, the Company sold its wholly owned subsidiaries,
Callidus Technology, Inc.("CTI") and Plasma Energy Corporation, to Howe-Baker
International Inc., for approximately $8,000 in cash, subject to certain
immaterial post-closing adjustments. A plan for disposal of this business was
adopted in the fourth quarter of 1998. A pretax loss of $4,500 was recognized in
1999 on the disposal as operating results during the disposal period were lower
than projected, primarily due to the decision to exit CTI's European operations.
This sale completes the disposition of the Company's Engineered Products and
Services segment. In 1996, the Company recorded pretax charges of $20,402
related to disposal of the other major portion of this segment, Plasma
Processing Corporation. This company was sold in January 1997 for $4,100
resulting in no additional gain or loss. In December 1998, an additional accrual
of $1,465 was made to dispose of unprocessed inventory. In 1999, following
disposal of the inventory, the Company reversed $343 of this accrual, leaving an
accrued balance of $125 at December 31, 1999.
In the third quarter of 1998, the Company's board of directors approved a plan
to discontinue its steel operations and in February 2000, the Company sold its
wholly owned subsidiary FirstMiss Steel, Inc. for approximately $13,000, subject
to certain post-closing working capital adjustments. An estimated loss on
disposal of $18,000 was recorded in the third quarter of 1998, which included
accruing $3,128 of estimated costs to exit this business. In the fourth quarter
of 1999, the estimated loss on disposal was reduced by approximately $1,281 to
reflect the estimated proceeds of the anticipated sale.
On October 20, 1995, the Company's gold operations were discontinued through the
distribution to its shareholders of its entire ownership of Getchell Gold
Corporation. A reduction in estimated tax liabilities of $2,388 was recorded in
the fourth quarter of 1999 following final settlement of federal tax
examinations covering Getchell Gold's operations through the distribution date.
The net assets and liabilities of discontinued operations included in the
consolidated financial statements are classified as current assets, noncurrent
assets and noncurrent liabilities by segment as follows:
<TABLE>
<CAPTION>
Engineered Products
Steel and Services and Other Total
December 31, December 31, December 31,
--------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 3,090 24,766 1,656 33,172 4,746 57,938
Investments and other assets -- -- -- 359 -- 359
Property, plant and equipment, net 11,000 9,300 -- 8,489 11,000 17,789
Current liabilities (1,631) (7,036) (11,583) (22,276) (3,214) (29,312)
Long-term debt, excluding
current installments -- (465) -- -- -- (465)
--------------------------------------------------------------------
Net current assets of discontinued operations $ 12,459 26,565 (9,927) 19,744 2,532 46,309
====================================================================
Investments and other assets $ -- -- -- 6,000 -- 6,000
====================================================================
Noncurrent assets of discontinued operations $ -- -- -- 6,000 -- 6,000
====================================================================
Deferred income taxes and other, net $ -- -- -- 10,097 -- 10,097
====================================================================
Noncurrent liabilities of discontinued operations $ -- -- -- 10,097 -- 10,097
====================================================================
</TABLE>
In 1999, the noncurrent liability of $10,097 associated with Engineered Products
and Services and Other in 1998 was reclassed as part of current liabilities.
22
<PAGE>
Notes To Consolidated Financial Statements
The statements of operations have been reclassified to separate discontinued and
continuing operations. Revenues and net earnings (losses) of the discontinued
operations, by segment, for the years ended December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Steel
Sales and revenues $ 54,620 75,304
====================
Loss from operations before taxes $ (1,499) (1,134)
Income tax benefit (585) (444)
--------------------
Loss from discontinued operations, net $ (914) (690)
====================
Engineered Products and Services and Other
Sales and revenues $ 68,011 72,798
====================
Earnings (loss) from operations before taxes $ (2,705) 2,952
Income tax expense (benefit) (1,001) 1,159
--------------------
Earnings (loss) from discontinued operations, net $ (1,704) 1,793
====================
Total operating results of discontinued operations $ (2,618) 1,103
====================
</TABLE>
Earnings (loss) from operations of discontinued businesses included interest
expense allocations (based on the ratio of net assets of discontinued operations
to consolidated net assets plus debt) of $0, $309 and $41 in 1999, 1998 and
1997, respectively.
3. INVESTMENTS
On January 22, 1998, the Company sold its 50% interest in Power Sources, Inc.
("PSI") to Trigen Energy Corporation for a net cash amount of $18,986 after
payments of incentives to former PSI management. A pretax gain of $10,069 was
recognized in 1998, with an additional gain of $1,605, including interest,
recognized in 1999 following resolution of contingencies related to the
transaction. In November 1997, the Company sold its 23% interest in Melamine
Chemicals, Inc. to Borden Chemical Inc. for $26,138 in cash, recognizing a
pretax gain of $14,684. Equity earnings, net of taxes, were $2,497 for the year
ended December 31, 1997.
The Company received a promissory note from Getchell Gold Corporation, a former
subsidiary, in October 1995. Subsequently, Getchell and Placer Dome Inc. merged
in May 1999, and Getchell paid $29,569 representing all principal and interest
due on the note to the Company. At December 31, 1998, the aggregate unpaid
principal amount of the note, with accrued interest at 5.625% based on the
London Interbank Offered Rate, was $28,918 and was included in investments.
The terms of the January 1997 sale of Plasma Processing Corporation included a
note for $2,000. A tax provision for $1,000 and $750 (see note 11) was made in
1999 and 1998, respectively, related to the note based on management's estimate
of collectibility.
4. INTANGIBLE AND OTHER ASSETS
The major classes of intangible and other assets are summarized below:
December 31,
-----------------------
1999 1998
-----------------------
Goodwill $30,207 26,343
Other 963 1,055
-----------------------
31,170 27,398
Less accumulated amortization 13,533 11,036
-----------------------
$17,637 16,362
=======================
The net carrying amounts of goodwill at December 31, 1999 and 1998 were $16,965
and $15,890, respectively. Amortization expense related to the above amounted to
$1,921 in 1999, $2,106 in 1998 and $1,204 in 1997.
23
<PAGE>
Notes To Consolidated Financial Statements
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment, at cost, follows:
<TABLE>
<CAPTION>
Estimated December 31,
useful lives 1999 1998
--------------------------------------------
<S> <C> <C> <C>
Land and land improvements 10-20 $ 7,031 6,856
Buildings 20-45 34,002 31,075
Plant facilities and equipment 5-20 286,992 270,505
Other facilities and equipment 5-12 50,784 36,276
Construction in progress 11,520 22,102
----------------------
Total property, plant and equipment 390,329 366,814
Less accumulated depreciation and amortization 164,584 139,413
----------------------
Net property, plant and equipment $225,745 227,401
======================
</TABLE>
Depreciation and amortization expense related to the above was $25,067 in 1999,
$21,582 in 1998 and $16,050 in 1997.
Construction in progress is primarily related to plant and other facilities.
Completion of current projects is estimated to occur by year end 2000, at an
estimated cost of approximately $5,000. Capitalized interest related to
construction in progress amounted to $739 in 1999, $915 in 1998 and $141 in
1997.
6. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-----------------
<S> <C> <C>
Unsecured:
Senior notes payable:
Tranche A, 6.50%, due October 30, 2003 $15,000 15,000
Tranche B, 6.75%, due October 30, 2005 5,000 5,000
Revolving credit facility, expiring May 2002 -- 41,000
BK International Corporation note, 6.25%, due December 2002 4,224 3,956
Other -- 228
-----------------
24,224 65,184
Secured -- 23
-----------------
24,224 65,207
Less current installments of long-term debt -- 251
-----------------
$24,224 64,956
=================
</TABLE>
There were no compensating balance requirements under loan agreements in effect
at December 31, 1999. The above obligations mature in various amounts through
2005, including $4,224 in 2002, $15,000 in 2003 and $5,000 in 2005.
In November 1998, the Company entered into a $20,000 private placement of senior
notes with two institutional investors. The Tranche A and B notes have
interest-only payments until October 30, 2003 and October 30, 2005, at interest
rates of 6.50% and 6.75%, respectively.
The Company has a $100,000 bank revolving credit facility originating June 1997,
which is committed until May 2002. At December 31, 1999, there was no
outstanding balance under the facility. At December 31, 1998, there was a
balance of $41,000 outstanding at a weighted average interest rate of 5.85%.
Outstanding letters of credit under the facility were $9,379 and $8,678, leaving
$90,621 and $50,322 available for borrowings at December 31, 1999 and 1998,
respectively. Interest rates are based on either the London Interbank Offered
Rate or the prime rate. A facility fee ranging from .125 to .150 of 1% per annum
is charged. The facility fee was $125, $126 and $125 for the years ended
December 31, 1999, 1998 and 1997, respectively. Prior to June 1997, the Company
had a $65,000 bank revolving credit facility. Interest rates were based on
either the London Interbank Offered Rate or the prime rate. The senior notes and
the revolving credit facility contain certain covenants, the most significant of
which require a specified ratio of earnings before interest and taxes to cover
fixed charges, maintaining a minimum net worth amount, and a specified debt to
capitalization ratio. At December 31, 1999, the Company was in compliance with
these covenants.
24
<PAGE>
Notes To Consolidated Financial Statements
The Company has access to a $10,000 short-term uncommitted facility for foreign
or trade related borrowings. The facility, which originated during 1998 and
expires annually, is renewable at the Company's request and the bank's option
with a current expiration of October 2000. The total outstanding at December 31,
1999 and 1998, was $7,668 and $5,354, respectively. Interest rates are based on
either the London Interbank Offered Rate or the Tokyo Interbank Offered Rate.
The average interest rate for the short-term facility was 1.11% and 1.15% at
year-ends 1999 and 1998, respectively.
The Company also has access to an uncommitted facility for the issuance of
foreign currency letters of credit. The total outstanding at December 31, 1999
and 1998, was $1,458 and $1,642, respectively. The possibility of default is
considered remote but would cause these letters of credit to come due
immediately. If this occurred, payments would be made from available cash or
borrowings under the revolving credit facility.
Total interest costs incurred for the years ended December 31, 1999, 1998 and
1997, were $2,884, $2,901 and $424, respectively.
The Company is potentially restricted by covenants related to its senior note
debt and credit facility borrowings that could limit dividend payments. A fixed
cost coverage covenant, which includes dividends and scheduled debt principal
and interest payments, requires that the company maintain a fixed cost coverage
ratio of two and a half times annual earnings before interest and taxes.
Compliance with the covenant allows for Company retained earnings to be free of
restrictions for potential dividend payments up to an amount of $13,094 for the
year ended December 31, 1999.
7. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997, was allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Continuing operations $ 13,480 15,440 23,050
Discontinued operations (1,124) (7,636) 715
Stockholders' equity related to compensation
expense for tax purposes in excess
of amounts recognized for financial reporting purposes (773) (678) (886)
--------------------------------
$ 11,583 7,126 22,879
================================
</TABLE>
Income tax expense differs from the statutory federal rate of 35% applied to
earnings from continuing operations before income taxes and investee earnings
for the years ended December 31, 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 12,584 14,035 20,422
State income taxes, net of federal income tax benefit 928 1,407 1,658
Amortization of goodwill 267 394 388
Exempt earnings of Foreign Sales Corporation (149) (94) (172)
Increase in net cash surrender value of life insurance (381) (362) (331)
Tax provision adjustments for pending
Internal Revenue Service matters -- -- 400
Other, net 231 60 685
--------------------------------
Actual tax expense of continuing operations $ 13,480 15,440 23,050
================================
</TABLE>
25
<PAGE>
Notes To Consolidated Financial Statements
Components of income tax expense for the years ended December 31, 1999, 1998 and
1997 are as follows:
1999 1998 1997
----------------------------------------
Current:
Federal $ 6,120 8,950 20,539
State 765 2,169 2,515
Foreign 1,062 1,264 1,250
----------------------------------------
7,947 12,383 24,304
----------------------------------------
Deferred:
Federal 4,870 3,062 (1,290)
State 663 (5) 36
Foreign -- -- --
----------------------------------------
5,533 3,057 (1,254)
----------------------------------------
Total:
Federal 10,990 12,012 19,249
State 1,428 2,164 2,551
Foreign 1,062 1,264 1,250
----------------------------------------
$13,480 15,440 23,050
========================================
The significant components of deferred income tax expense attributable to
earnings from continuing operations for the years ended December 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------
<S> <C> <C> <C>
Deferred tax expense (benefit) from changes in temporary differences $5,533 3,057 (1,254)
========================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and the deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------------------
<S> <C> <C>
Deferred tax assets:
Note and accounts receivable, principally due to
allowance for doubtful accounts $ 33 317
Deferred compensation 5,748 5,060
Accrued incentive compensation 493 464
Inventory costs 1,500 1,803
State net operating loss carryforward 184 92
Accrued vacation costs 772 767
Accrued pension costs 3,245 980
Other, net 1,503 1,103
--------------------
Total deferred tax assets 13,478 10,586
--------------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation (27,120) (19,235)
State income taxes (2,254) (1,714)
--------------------
Total gross deferred tax liabilities (29,374) (20,949)
--------------------
Net deferred tax liability $(15,896) (10,363)
====================
</TABLE>
The net deferred tax liability at December 31, 1999 and 1998, consists of a
long-term deferred tax liability of $18,178 and $13,501, respectively, and a
current deferred tax asset of $2,282, and $3,138, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, recoverable taxes paid,
projected taxable income and tax planning strategies in making this assessment.
Based on the reversal of existing deferred tax liabilities and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefit of these deductible differences.
26
<PAGE>
Notes To Consolidated Financial Statements
Current refundable income taxes of $10,580 at December 31, 1999, and current
income taxes payable of $3,569 at December 31, 1998, are included in other
receivables and accrued expenses and other current liabilities, respectively, in
the accompanying consolidated balance sheets.
The Company's federal income tax returns have been examined through June 30,
1996, and all years through June 30, 1994 are closed. In October 1999, the
Company agreed to a resolution of the remaining disputed issues for the years
ended June 30, 1995 and June 30, 1996. Management believes that adequate
provision has been made for any adjustments which might be assessed for open
years through December 31, 1999.
8. EMPLOYEE BENEFIT AND INCENTIVE PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time permanent employees. The benefits are based on years
of service and participants' compensation during the last five years of
employment. The following tables present plan information at December 31, 1999
and 1998, and for the years ended December 31, 1999, 1998 and 1997:
1999 1998
----------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 40,825 37,494
Service cost 3,684 2,958
Interest cost 2,680 2,749
Actuarial (gain) loss (1,602) 3,350
Benefits paid (1,506) (2,934)
Curtailment gain -- (2,792)
----------------------
Benefit obligation at end of year $ 44,081 40,825
======================
Change in Plan Assets
Fair value of plan assets at beginning of year $ 39,531 36,206
Actual return on plan assets 4,173 6,154
Employer contribution 1,712 105
Benefits paid (1,506) (2,934)
----------------------
Fair value of plan assets at end of year $ 43,910 39,531
======================
Reconciliation of Funded Status
Funded status $ (171) (1,294)
Unrecognized net actuarial gain (7,938) (5,968)
Unrecognized transition asset (1,567) (1,872)
Unrecognized prior service cost 409 457
----------------------
Accrued pension liability $ (9,267) (8,677)
======================
Weighted-Average Assumptions
as of December 31 1999 1998 1997
--------------------------------
Discount rate - net periodic pension cost 7.00% 7.50% 7.75%
Discount rate - benefit obligations 8.00% 7.00% 7.50%
Expected return on plan assets 9.50% 9.50% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
Components of Net Periodic Pension Cost
Service cost $ 3,684 2,958 2,376
Interest cost 2,680 2,747 2,157
Expected return on plan assets (3,691) (3,369) (2,631)
Recognized net actuarial gain (116) (645) (243)
Amortization of transition asset (304) (304) (304)
Amortization of prior service cost 49 89 89
--------------------------------
Net periodic pension cost $ 2,302 1,476 1,444
================================
27
<PAGE>
Notes To Consolidated Financial Statements
Net annual pension expense allocated to discontinued operations was $1,123,
$1,211 and $1,162 for the years ended December 31, 1999, 1998 and 1997,
respectively. Plan assets are invested primarily in equity securities and U.S.
Government and corporate bonds.
The Company has a contributory 401(k) savings and employee stock ownership plan
which covers substantially all eligible employees who have completed six months
of service. Total expense under the plan amounted to approximately $1,255,
$1,116 and $1,038 for the years ended December 31, 1999, 1998 and 1997,
respectively. This plan and the pension plan invest in the Company's stock. The
total number of shares held by the plans at December 31, 1999 and 1998, was
367,609 and 387,261, respectively.
The Company has various nonqualified plans that act to restore earned benefits
limited by income tax regulations, or allow for other compensation deferrals.
Beginning in July 1997, participants in certain of these plans could elect to
convert existing deferred balances and/or future deferrals, at the start of each
new year, into phantom share units tracking the performance of the Company's
stock. Additionally, a 15 percent discount on the market value of the stock at
the original conversion date and each new plan year is given to those
participants making this election. Beginning in 1998, Company officers could
elect to defer a portion of salary and/or bonuses into phantom share units on a
pretax basis at a 15 percent discount. The total liability for these deferrals
at December 31, 1999 and 1998 is $1,252 and $936, respectively. The nonqualified
supplemental pension plan provides for incremental pension payments from the
Company's funds. The total liability relating to this unfunded plan at December
31, 1999 and 1998, was $2,026 and $1,689, respectively. Net annual pension
expense for this plan was $337, $311 and $77 (net of an actuarial adjustment of
$233 in 1997) for the years ended December 31, 1999, 1998 and 1997,
respectively. The cost of the nonqualified 401(k) and ESOP plans was $314, $355
and $622 for the years ended December 1999, 1998 and 1997, respectively.
Individual life insurance contracts were purchased, with the Company as
beneficiary, to assist in the funding of portions of certain nonqualified
deferred compensation plans covering directors, officers and key employees. The
expense for these plans was $964, $896 and $795 for the years ended December 31,
1999, 1998 and 1997, respectively.
Directors, officers and certain key employees of the Company participate in the
long-term incentive plans (the "Plans") under which the Company has reserved
shares of common stock for issuance. Awards under the Plans include stock
options, options to purchase debentures convertible into preferred stock and
then convertible into common stock of the Company, stock appreciation rights,
performance units, restricted stock, supplemental cash and such other forms as
the Board of Directors may direct. Options under all plans are granted at the
market price of the shares on the date of the grants, with vesting occurring no
earlier than six months after grant and expiration no later than 10 years after
grant. At December 31, 1999, shares available for grant under the referenced
plans totaled 176,118 shares of common stock. Outstanding debentures totaled $0
and $228 at December 31, 1999 and 1998, respectively. Debentures are no longer
granted under the Company's plans.
SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by the
Company in 1996. In accounting for employee stock options and similar equity
instruments, companies are given the choice of either recognizing related
compensation cost by adopting the fair value method, or to continue using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees," and supplementally
disclose the proforma effect on earnings and earnings per share using SFAS No.
123 measurement criteria. The Company elected to continue to follow the
requirements of APB No. 25, and accordingly, there is no effect on the results
of operations.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made during the years ended December 31, 1999, 1998
and 1997, respectively: dividend yields of 2.0, 1.5 and 1.7 percent; expected
volatilities of 27, 33 and 26 percent; risk-free interest rates of 6.1, 6.1 and
6.8 percent, and expected option lives of four years for all periods presented.
28
<PAGE>
Notes To Consolidated Financial Statements
A summary of the status of the Company's stock option plans at December 31,
1999, 1998 and 1997, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
Weighted-avg. Weighted-avg. Weighted-avg.
Shares exercise price Shares exercise price Shares exercise price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stock options:
Outstanding at beginning of year 1,202,015 $ 22.26 1,012,904 $ 20.84 551,212 $ 18.33
Granted 545,168 $ 19.02 394,108 $ 26.02 518,010 $ 23.18
Exercised (54,153) $ 15.71 (77,982) $ 20.18 (49,518) $ 16.98
Forfeited (33,735) $ 23.73 (127,015) $ 23.93 (6,800) $ 23.13
--------- --------- ---------
Outstanding at end of year 1,659,295 $ 21.38 1,202,015 $ 22.26 1,012,904 $ 20.84
========= ========= =========
Exercisable at end of year 1,407,079 634,474 501,694
========= ========= =========
Weighted-average fair value of
grants during year $ 4.88 $ 7.86 $ 6.11
======== ======== ========
</TABLE>
The following table summarizes information about stock options for the period
ended December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------------------------- ----------------------------
Weighted-avg.
Range of Number remaining Weighted-avg. Number Weighted-avg.
exercise prices outstanding contractual life exercise price exercisable exercise price
------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$16.30-$26.75 1,659,295 7.1 years $20.29 1,407,079 $20.31
=================================================================== ============================
</TABLE>
Under the Company's application of APB Opinion 25 and related interpretations in
accounting for its plans, no compensation cost has been recognized for its stock
option plans. Had compensation cost been determined based on the fair value at
the grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Company's net income, earnings per common share and
earnings per common share, assuming dilution, would have been reduced to the pro
forma amounts indicated below for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
<S> <C> <C> <C> <C>
Net earnings As reported $ 23,119 $ 10,092 $ 38,898
Pro forma $ 20,434 $ 8,998 $ 37,955
Earnings per common share As reported $ 1.26 $ .52 $ 1.91
Pro forma $ 1.12 $ .47 $ 1.86
Earnings per common share, assuming dilution As reported $ 1.25 $ .52 $ 1.86
Pro forma $ 1.11 $ .46 $ 1.82
</TABLE>
29
<PAGE>
Notes To Consolidated Financial Statements
9. STOCKHOLDERS' EQUITY
The annual earnings per common share ("EPS") calculation is based on the
collective averages of the weighted-average number of common shares outstanding
during each quarter for earnings per common share and the collective averages of
the weighted-average number of outstanding common shares and common share
equivalents during each quarter for earnings per common share, assuming
dilution. A reconciliation of the numerators and denominators for basic and
diluted per share computations from continuing operations for the years ended
December 31, 1999, 1998 and 1997, follows:
<TABLE>
<CAPTION>
Weighted-avg.
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Earnings from continuing operations - 1999 $ 22,473 18,242,021 $ 1.23
Effect of Dilutive Securities
Options -- 143,243 --
Convertible debentures -- 84,705 --
----------
Diluted EPS
Earnings from continuing operations - 1999 $ 22,473 18,469,969 $ 1.22
==========
Basic EPS
Earnings from continuing operations - 1998 $ 24,660 19,255,344 $ 1.28
Effect of Dilutive Securities
Options -- 79,178 --
Convertible debentures -- 144,300 --
----------
Diluted EPS
Earnings from continuing operations - 1998 $ 24,660 19,478,822 $ 1.27
==========
Basic EPS
Earnings from continuing operations - 1997 $ 37,795 20,395,060 $ 1.85
Effect of Dilutive Securities
Options -- 195,867 --
Convertible debentures -- 296,825 --
----------
Diluted EPS
Earnings from continuing operations - 1997 $ 37,795 20,887,752 $ 1.81
==========
</TABLE>
Options to purchase 313,920 shares of the Company's common stock were
outstanding at December 31, 1999 but were not included in the computation of
diluted EPS because their exercise prices were greater than the average market
price of the common shares. Of these potentially dilutive options, 20,900 expire
in 2007 and 293,020 expire in 2008.
In connection with the Shareholder Rights Plan adopted by the Company on October
30, 1996, preferred stock purchase rights were distributed to stockholders and
are deemed to be attached to the outstanding shares of common stock of the
Company. Under certain conditions, each right may be exercised to purchase one
one-hundredth (1/100) of a share of a new series of preferred stock, at an
exercise price of $100 per share (subject to adjustment). The rights, which do
not have voting rights, expire in 2006, and may be redeemed by the Company at a
price of $0.01 per right prior to a specified period of time after the
occurrence of certain events. In certain events, each right (except certain
rights beneficially owned by 10% or more owners, which rights are voided) will
entitle its holder to purchase shares of common stock with a value of twice the
then-current exercise price.
In August 1998, the Company's directors authorized a $50,000 stock repurchase
program. As of December 31, 1999, total repurchase authorizations were $110,000.
30
<PAGE>
Notes To Consolidated Financial Statements
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has entered into various operating leases for transportation
equipment (primarily railroad tank cars), chemical pipelines and storage
facilities, office buildings and land and other miscellaneous items of
equipment. The following is a schedule by year of future minimum rental payments
for those operating leases with initial or remaining noncancelable terms in
excess of one year, as of December 31, 1999:
Years ending Operating
December 31, Leases
------------ ---------
2000 $ 1,481
2001 1,344
2002 1,299
2003 605
2004 53
Later years --
---------
Total minimum payments required $ 4,782
=========
Provisions applicable to certain transportation equipment leases provide for
mileage credits computed on the basis of usage. No recognition has been given to
the effect of such credits in the amounts presented above.
Rental expense, including short-term rentals (net of mileage credits of
approximately $365, $483 and $407 for the years ended December 31, 1999, 1998
and 1997, respectively), was approximately $1,820, $1,590 and $781 for the years
ended December 31, 1999, 1998 and 1997, respectively. In most cases management
expects that leases will be renewed or replaced by other leases in the normal
course of business.
Company operations are subject to a wide variety of environmental laws and
regulations governing emissions to the air, discharges to water sources, and the
handling, storage, treatment and disposal of waste materials, as well as other
laws and regulations concerning health and safety conditions. The Company
accrues for anticipated costs associated with investigatory and remediation
efforts relating to the environment. At December 31, 1999 and 1998, the
Company's estimated liability for these matters totaled $1,333 and $1,338,
respectively, for discontinued operations. The estimated liability related to
continuing operations at December 31, 1999 and 1998, was $244, for both years.
The Company has pending several claims incurred in the normal course of business
which, in the opinion of management and legal counsel, should be disposed of
without material effect on the accompanying consolidated financial statements.
11. OTHER INCOME (EXPENSE)
Components of other income (expense), net, for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Gain on sale of Melamine Chemicals, Inc. (see note 3) $ -- -- 14,684
Gain on sale of Power Sources, Inc. (see note 3) 1,605 10,069 --
Loss on note receivable (1,000) (750) --
Other (1,141) (95) 313
-----------------------------
$ (536) 9,224 14,997
=============================
</TABLE>
31
<PAGE>
Notes To Consolidated Financial Statements
12. SEGMENT INFORMATION
The Company operates in two segments: Electronic and Other Specialty Chemicals
and Polyurethane Chemicals. The Electronic and Other Specialty Chemicals segment
produces specialty chemicals for use by others in electronic, agricultural,
pharmaceutical, polymer and photosensitive applications. These chemicals are
typically produced by multi-step processing with products sold both on
specification and performance. This segment includes research and development
for new products and processes. The Polyurethane Chemicals segment produces
aniline and nitrobenzene by a continuous production process. These chemicals
generally require more processing to produce the end product used by consumers
and are primarily sold under long-term contracts to industrial customers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
and allocates resources based on the segment's profit or loss from operations
before interest income and expense and income taxes. The Company's reportable
segments are based on similarities in products and services, type and class of
customers, production processes and methods of distribution.
The polyurethane chemicals segment had unaffiliated major customer sales of
$111,151, $99,522, and $86,806 for the years ended December 31, 1999, 1998 and
1997, respectively.
The following is a breakdown by segment of the Company's consolidated financial
statements at December 31, 1999, 1998 and 1997 and for each of the years then
ended:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
Electronic and Other Specialty Chemicals $ 173,663 176,688 176,353
Polyurethane Chemicals 138,123 119,821 112,465
-----------------------------------
Total $ 311,786 296,509 288,818
===================================
Operating profit before income taxes and investee earnings:
Electronic and Other Specialty Chemicals $ 18,048 17,796 27,617
Polyurethane Chemicals 31,034 22,648 24,071
-----------------------------------
49,082 40,444 51,688
Unallocated corporate expenses (11,811) (9,781) (11,347)
Interest income (expense), net (782) 213 3,010
Other income (expense), net (536) 9,224 14,997
-----------------------------------
Total $ 35,953 40,100 58,348
===================================
Depreciation and amortization:
Electronic and Other Specialty Chemicals $ 18,117 14,623 12,541
Polyurethane Chemicals 7,316 8,148 4,341
Corporate 1,555 917 372
-----------------------------------
Total $ 26,988 23,688 17,254
===================================
Identifiable assets:
Electronic and Other Specialty Chemicals $ 253,014 214,192 224,778
Polyurethane Chemicals 100,976 113,217 81,844
-----------------------------------
353,990 327,409 306,622
Corporate 45,865 63,716 62,305
Discontinued operations 2,532 52,309 64,170
-----------------------------------
Total $ 402,387 443,434 433,097
===================================
Capital expenditures:
Electronic and Other Specialty Chemicals $ 16,399 25,306 36,692
Polyurethane Chemicals 3,245 11,421 47,910
Corporate 5,001 7,059 6,840
-----------------------------------
Total $ 24,645 43,786 91,442
===================================
</TABLE>
32
<PAGE>
Notes To Consolidated Financial Statements
Revenues from sales to all foreign countries were $47,345, $46,207 and $43,096
in 1999, 1998 and 1997, respectively, and are attributed to those countries
based on ship-to location of customers. Identifiable assets in foreign countries
were $21,943, $17,386 and $7,736.
Identifiable assets by segment are those assets used in the Company's
operations. Corporate assets and investments are principally cash and cash
equivalents, nontrade receivables and certain other investments.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on trade receivables. The Company believes that
adequate allowances are maintained for any uncollectible trade receivables.
Certain corporate expenses, primarily those related to the overall management of
the Company, were not allocated to the operating segments.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data follows:
<TABLE>
<CAPTION>
Quarters ended Year ended
--------------------------------------------------------------
03/31 06/30 09/30 12/31 12/31
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999:
Sales $ 69,844 80,341 79,275 82,326 311,786
==============================================================
Gross profit $ 19,494 22,139 24,761 25,274 91,668
==============================================================
Earnings from continuing operations $ 4,641 5,473 5,962 6,397 22,473
==============================================================
Net earnings $ 4,641 5,473 5,962 7,043 23,119
==============================================================
Earnings per common share:
Continuing operations $ .25 .30 .33 .35 1.23
==============================================================
Net earnings $ .25 .30 .33 .38 1.26
==============================================================
Earnings per common share, assuming dilution:
Continuing operations $ .25 .30 .32 .35 1.22
==============================================================
Net earnings $ .25 .30 .32 .38 1.25
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Quarters ended Year ended
---------------------------------------------------------------
03/31 06/30 09/30 12/31 12/31
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Sales $ 71,924 75,688 72,760 76,137 296,509
===============================================================
Gross profit $ 18,253 20,416 20,104 20,720 79,493
===============================================================
Earnings from continuing operations $ 9,445 3,853 5,107 6,255 24,660
===============================================================
Net earnings (loss) $ 9,753 3,954 (7,687) 4,072 10,092
===============================================================
Earnings (loss) per common share:
Continuing operations $ .47 .20 .27 .33 1.28
===============================================================
Net earnings (loss) $ .49 .20 (.41) .22 .52
===============================================================
Earnings (loss) per common share, assuming dilution:
Continuing operations $ .47 .19 .27 .33 1.27
===============================================================
Net earnings (loss) $ .48 .20 (.40) .22 .52
===============================================================
</TABLE>
Net earnings during the first quarter of 1998 included the gain on the sale of
Power Sources, Inc. (see note 3), while results in the third quarter of 1998
reflect charges related to the discontinuance of steel operations.
The above quarterly earnings (loss) per share calculations are based on the
weighted-average number of common shares outstanding during each quarter for
earnings (loss) per common share and the weighted-average number of outstanding
common shares and common share equivalents during each quarter for the earnings
(loss) per common share, assuming dilution.
33
<PAGE>
Notes To Consolidated Financial Statements
14. VALUATION AND QUALIFYING ACCOUNTS
Details regarding the valuation allowances for discontinued operations and
doubtful trade accounts and notes receivable for continuing operations are as
follows:
Charged to Other
Beginning Costs and Additions Ending
Balance Expenses (Deductions)* Balance
------------------------------------------------
Year ended December 31, 1999 $25,314 2,008 (105) 27,217
Year ended December 31, 1998 $10,222 15,063 29 25,314
Year ended December 31, 1997 $24,433 12 (14,223) 10,222
* Businesses disposed and/or amounts written off.
15. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
At December 31, 1999 and 1998, cash and cash equivalents, trade receivables,
notes receivable, letters of credit, trade payables, accrued liabilities,
foreign currency contracts and notes payable are reflected in the financial
statements at fair value. The $20,000 senior notes, placed with institutional
investors in November 1998, approximate fair value based on current rates
offered the Company for debt of similar characteristics and maturities. The
revolving credit facility is based on floating interest rates and approximates
fair value.
Derivative Financial Instruments
The Company enters into foreign currency option contracts and forward exchange
contracts to minimize its exposure related to receivables denominated in yen. To
lessen the short-term effect of exchange rate fluctuations on consolidated
performance, the Company hedges a portion of these yen-denominated receivables
and future sales commitments. Gains and losses on contracts related to future
sales commitments are deferred and subsequently recorded in net earnings in the
period in which the related transactions are consummated. The open option
collars at December 31, 1999, represent total option puts and calls of
220,000,000 yen each, with a minimum U.S. dollar value of $1,973 and a maximum
U.S. dollar value of $2,303. The contracts hedge 20,000,000 yen per month with
floor rates ranging from 98.08 to 93.21 and the cap rates ranging from 114.0 to
109.0, with expiration dates from March 2000 to January 2001, respectively.
There are no open forward exchange contracts at December 31, 1999. The open
forward exchange contracts at December 31, 1998, represent forward sales of
664,500,000 yen with a U.S. dollar value of $5,857 and terms of one year or
less. For 1999 and 1998 the net realized and unrealized losses associated with
these instruments were immaterial.
16. YEAR 2000
In 1996, the Company began a study which led to the purchase in 1997 of a
company-wide Enterprise Resource Planning ("ERP") system to integrate the
Company's information systems, replacing small, stand-alone purchased systems.
This ERP system is Year 2000 compliant. As of December 31, 1999, the Company has
spent approximately $12,600 on this project with all scheduled sites operating
under this system.
A corporate-wide survey and assessment of other information technology ("IT")
and non-IT equipment and systems utilizing date or time functions was completed
in 1999. The Company also assessed critical key customers, as well as service
and raw material suppliers, regarding their Year 2000 readiness. Total
expenditures for assessment and remediation was approximately $300, with all
remediations occurring prior to December 31, 1999. Most of this cost was related
to process control systems. To date, the Company has not encountered any
significant disruptions related to the Year 2000 rollover.
34
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ChemFirst Inc.
We have audited the consolidated balance sheets of ChemFirst Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ChemFirst Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Jackson, Mississippi
February 25, 2000
35
<PAGE>
ChemFirst Companies, Directors and Officers
CHEMFIRST COMPANIES
First Chemical Corporation
(Intermediate Chemicals and Aniline)
P.O. Box 7005
Pascagoula, Mississippi 39568-7005
- -and-
First Chemical Texas, L.P.
(Aniline)
P. O. Box 1607
Baytown, Texas 77520
George M. Simmons, President
ChemFirst Fine Chemicals, Inc.
(Electronic and Fine Chemicals)
P.O. Box 216
Tyrone, Pennsylvania 16686-0216
- -and-
1515 Nicholas Road
Dayton, Ohio 45418
Scott Martin, President
First Chemical Corporation dba
ChemFirst Fine Chemicals
(Electronic and Fine Chemicals)
P. O. Box 7005
Pascagoula, MS 39568-7005
Scott Martin, Vice President
EKC Technology, Inc.
(Electronic Chemicals)
2520 Barrington Court
Hayward, California 94545-3703
P. Jerry Coder, President
EKC Technology, Ltd.
(Electronic Chemicals)
19 Law Place
Nerston, Industrial Estate
East Kilbride
Glasgow G74 4QL Scotland
Connell Boyle, Managing Director
EKC Technology, K.K.
(Electronic Chemicals)
KSP R&D D3 42
3-2-1 Sakado, Takatsu-ky, Kawasaki
Kanawaga, 213-0012 Japan
Satoshi Kumasaka, Managing Director
TriQuest, L.P.
(Electronic and Fine Chemicals)
P. O. Box 819005
Dallas, Texas, 75381-9005
Roger L. Van Duyne, President
DIRECTORS
Richard P. Anderson 2, 3
Maumee, Ohio
Chairman
The Andersons Inc.
Agribusiness
Paul A. Becker 1
Vero Beach, Florida
President,
Summit Investment Management
James W. Crook 3, 4
Dataw, South Carolina
Retired, Former Chairman of the Board,
Melamine Chemicals, Inc.
(Retiring as director in April 2000)
Michael J. Ferris 2
Houston, Texas
President and Chief Executive Officer,
Pioneer Companies, Inc.
James E. Fligg 2
Naples, Florida
Retired, Former Senior Executive Vice President,
BP Amoco, p.l.c.
Robert P. Guyton 1
Sea Island, Georgia
Financial Consultant
Dr. Paul W. Murrill 1
Baton Rouge, Louisiana
Professional Engineer
William A. Percy, II 2, 4
Greenville, Mississippi
Chairman of the Board,
Staple Cotton Cooperative Association
Dan F. Smith 1
Houston, Texas
President and Chief Executive Officer,
Lyondell Chemical Company
Leland R. Speed 3
Jackson, Mississippi
Chairman, EastGroup Properties
Parkway Properties
Real Estate Trust Companies
Dr. R. Gerald Turner 3, 4
Dallas, Texas
President, Southern Methodist University
J. Kelley Williams
Jackson, Mississippi
Chairman and Chief Executive Officer,
ChemFirst Inc.
1 Audit Committee
2 Compensation and Human
Resources Committee
3 Committee on Director Affairs
4 ChemFirst Foundation Inc. Board
of Trustees
OFFICERS
J. Kelley Williams
Chairman
Chief Executive Officer
R. Michael Summerford
President
Chief Operating Officer
Max P. Bowman
Vice President, Finance
Treasurer
Daniel P. Anderson
Vice President
Health, Safety & Environmental Affairs
William B. Kemp
Vice President
Human Resources
J. Steve Chustz
General Counsel
Troy B. Browning
Controller
James L. McArthur
Secretary
36
<PAGE>
Corporate Information
STOCK LISTING
New York Stock Exchange
Trading Symbol: CEM
Note: The Wall Street Journal and many other
major daily newspapers list the stock as ChemFst.
TRANSFER AGENTS FOR COMMON STOCK
The Bank of New York
1-800-524-4458
e-mail: [email protected]
Internet: http://stock.bankofny.com
Address shareholder inquiries to:
Shareholder Relations Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
Send certificates for transfer and
address changes to:
Receive and Deliver Department - 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
ChemFirst Inc.
Stock Transfer Department
P.O. Box 1249
Jackson, MS 39215-1249
(601) 948-7550
e-mail: [email protected]
COMMON STOCK REGISTRARS
The Bank of New York
Investor Relations Department
P.O. Box 11258
Church Street Station
New York, NY 10286
AmSouth Bank
210 East Capitol Street
Eighth Floor
Jackson, MS 39205-1200
INVESTOR RELATIONS
If you have questions concerning ChemFirst Inc. or your investment in the
company, we will be pleased to assist you. Contact:
James L. McArthur
Secretary, Manager, Investor Relations
ChemFirst Inc.
P.O. Box 1249
Jackson, MS 39215-1249
(601) 949-0285 or (601) 948-7550
e-mail: [email protected]
FORM 10-K
Stockholders may obtain without charge a copy of the ChemFirst Inc. 10-K as
filed with the Securities and Exchange Commission by calling or writing the
company's Investor Relations Department, or on the company's Internet site,
located at www.chemfirst.com.
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG LLP
1100 One Jackson Place
Jackson, MS 39201-9988
STOCKHOLDER REPORTS
Stockholders with stock in brokerage accounts who wish to receive quarterly
stockholder reports and other information directly from the company, may do so
by writing, calling or e-mailing the company's Investor Relations Department.
Quarterly earnings reports may also be accessed via the company's Internet site,
located at www.chemfirst.com.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held May 23, 2000, at 1:30 p.m. at
the Hilton Jackson, 1001 East County Line Rd., Jackson, MS.
Stockholders are cordially invited to attend and participate in the business of
the meeting. Those who are unable to attend are requested to return their proxy
cards to the Registrar in the envelope that accompanies the proxy.
[LOGO] ChemFirst Inc.
STOCK MARKET INFORMATION
The high and low recorded prices of the company's common stock and cash
dividends declared during 1999 and 1998 are presented in the table below. There
were approximately 3,756 shareholders of record as of March 3, 2000.
1999 1998
--------------------------------------------------------------
Dividend Dividend
High Low Rate High Low Rate
--------------------------------------------------------------
1st Quarter 23 7/8 18 1/8 .10 28 3/8 23 3/4 .10
2nd Quarter 24 13/16 22 9/16 .10 27 1/16 24 7/8 .10
3rd Quarter 27 3/8 24 3/16 .10 25 5/8 15 7/8 .10
4th Quarter 28 19 7/8 .10 21 15 9/16 .10
For the Year 28 18 1/8 .40 28 3/8 15 9/16 .40
37
<PAGE>
ChemFirst Inc. Post Office Box 1249 Jackson, Mississippi 39215-1249
SUBSIDIARIES OF CHEMFIRST INC.
Jurisdiction
of
Company Name Organization
------------ ------------
Burmar Chemical, Inc....................................... California
CEM Investment, Inc........................................ Mississippi
ChemFirst Fine Chemicals, Inc.............................. Mississippi
ChemFirst Foundation, Inc.................................. Mississippi
ChemFirst Texas, Inc....................................... Texas
Dew Resources, Inc......................................... Mississippi
EKC Technology, Inc........................................ California
EKC Technology International, Inc.......................... California
EKC Technology K K......................................... Japan
EKC Technology Limited .................................... Scotland
FCC Acquisition Corporation................................ California
FEC Marketing, Inc......................................... Texas
First Chemical Corporation................................. Mississippi
First Chemical Corporation dba
ChemFirst Fine Chemicals ............................... Mississippi
First Chemicals Holdings, Inc.............................. Mississippi
First Chemical Texas, L.P.................................. Delaware
First Energy Corporation................................... Mississippi
FirstMiss, Inc............................................. Iowa
FRM, Inc................................................... Mississippi
FRM International, Inc. ................................... U.S. Virgin Islands
FT Chemical, Inc........................................... Texas
Industrial Insulations of Texas, Inc....................... Texas
Maxadyne Corporation....................................... California
Maxadyne Corporation of Louisiana.......................... Louisiana
Micropel, Inc.............................................. California
Mycosil, Inc............................................... California
Plasma Processing Corporation.............................. Delaware
SCE Technologies, Inc...................................... Delaware
Star Corrosion & Refractory, Inc........................... Louisiana
TriQuest, L.P. ............................................ Delaware
TriQuest Japan K K......................................... Japan
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
ChemFirst Inc.:
We consent to incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-18691, 333-18693, 333-35221 and 333-69965) of our report
dated February 25, 2000 relating to the consolidated balance sheets of ChemFirst
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999, which report
is incorporated by reference in the December 31, 1999 annual report on Form 10-K
of ChemFirst Inc.
Jackson, Mississippi
March 20, 2000 /s/ KPMG LLP
-------------
KPMG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,551
<SECURITIES> 0
<RECEIVABLES> 68,258
<ALLOWANCES> 345
<INVENTORY> 62,663
<CURRENT-ASSETS> 157,453
<PP&E> 390,329
<DEPRECIATION> 164,584
<TOTAL-ASSETS> 402,387
<CURRENT-LIABILITIES> 44,483
<BONDS> 24,224
<COMMON> 17,901
0
0
<OTHER-SE> 270,822
<TOTAL-LIABILITY-AND-EQUITY> 402,387
<SALES> 311,786
<TOTAL-REVENUES> 316,790
<CGS> 220,118
<TOTAL-COSTS> 220,118
<OTHER-EXPENSES> 7,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,145
<INCOME-PRETAX> 35,953
<INCOME-TAX> 13,480
<INCOME-CONTINUING> 22,473
<DISCONTINUED> 646
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,119
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
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