-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VL7ZmyAB4WDZs4JSVqBeF7xRQ9rq7Nro3k2gO3lZBWkCRMvHZy/o4ZeOuThVXRsC gVRLJ32Dl/gpfHdtSvXJfg== 0000899243-98-000486.txt : 20020501 0000899243-98-000486.hdr.sgml : 20020501 ACCESSION NUMBER: 0000899243-98-000486 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 DATE AS OF CHANGE: 20020501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMFIRST INC CENTRAL INDEX KEY: 0001026601 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 640679456 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12547 FILM NUMBER: 98577258 BUSINESS ADDRESS: STREET 1: P O BOX 1249 CITY: JACKSON STATE: MS ZIP: 39202 BUSINESS PHONE: 6019487550 MAIL ADDRESS: STREET 1: P O BOX 1249 CITY: JACKSON STATE: MS ZIP: 39202 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 ------------------- ----------------------------------------- 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 5, 1998 is approximately $490,396,035. The number of shares of the Registrant's Common Stock outstanding as of March 5, 1998 is 19,909,594. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CHEMFIRST INC. SECURITIES AND EXCHANGE COMMISSION FORM 10-K CROSS REFERENCE SHEET Location in Annual Report to Stockholders and Definitive Proxy Statement of Items of Form 10-K ANNUAL DEFINITIVE REPORT TO PROXY FORM 10-K ITEM STOCKHOLDERS STATEMENT - -------------- ------------ ----------- Part I. 1. Business........................ pp. 9-11; Notes 2 and 3 in Financial Review Insert Part II. 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... p. 18 6. Selected Financial Data......... p. 2 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... Financial Review Insert 8. Financial Statements and Financial Supplementary Data................ Review Insert Part III. 10. Directors and Executive Officers of the Registrant........ pp. 4-8; 13-14 11. Executive Compensation.................................... pp. 15-18 12. Security Ownership of Certain Beneficial Owners and Management................................................ pp. 1-2; 8-11 13. Certain Relationships and Related Transactions............ pp. 4-8; 18 2 PART I ITEM 1. BUSINESS GENERAL The principal businesses of ChemFirst Inc. (the "Company") at December 31, 1997 involve the continuous production of aniline, nitrobenzene, nitrotoluene and toluidines; custom production of fine chemicals for chemical, agricultural and pharmaceutical companies; production of electronic and performance chemicals for the semiconductor and related industries; and the design and production of low-emission burners, flares, incinerators and thermal plasma equipment for the refining, chemical, petrochemical, pharmaceutical, wood products, steel and waste treatment industries. The Company also produces steel ingots and billets from melted scrap. At December 31, 1997, the Company had 1,175 employees, which includes employees of the parent company and all wholly-owned 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 January 14, 1997, the Company sold its aluminum dross processing business to a subsidiary of Philip Environmental Inc. ("Philip"). The assets acquired by Philip included proprietary technology and licenses, the Millwood, West Virginia plant and related equipment, and a 50% interest in the Newminco Joint Venture. The assets acquired by Philip did not include inventories of nonmetallic product; however, Philip is obligated to purchase from the Company its requirements of nonmetallic product until the Company's supply of nonmetallic product is exhausted. The purchase price for the assets acquired by Philip was $4.1 million ($2.0 million of which is in the form of a 5-year interest-bearing balloon note) plus an annual royalty equal to 10% of Philip's share of the profit from sales of certain products by the Newminco Joint Venture. In addition, Philip is obligated to make certain other payments in the event it receives a payment in connection with the sale, transfer or termination of the Newminco Joint Venture. In November 1997, the Company sold its approximately 23% interest in Melamine Chemicals, Inc. ("MCI"), consisting of 1,275,000 common shares, to Borden Chemical, Inc. for approximately $26.1 million cash. This sale was effected pursuant to Borden Chemical, Inc.'s $20.50 per share cash tender offer for MCI shares. The Company no longer has an ownership interest in MCI. On December 31, 1997, the Company acquired the acylation derivatives business of Clariant Corporation. This business will be conducted through a limited partnership of which the Company owns an 87.5% interest, with the remaining 12.5% interest owned by former members of Clariant Corporation's acylation derivatives management group who are also employees of this limited partnership. This acylation derivatives business is 3 involved in the development and marketing of derivatives of 4-hydroxyacetophenone for deep ultraviolet ("DUV") photoresist resin applications for 248-nanometer geometry integrated circuits and for polymer additives and specialty adhesives. Also on December 31, 1997, the Company acquired certain chemical mechanical planarization ("CMP") assets of Baikowski International Corporation ("BIC"), 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 provides the Company with an entrance into the CMP market, which includes mechanical polishing of silicon wafers utilizing a slurry of abrasives and chemicals to produce a flatter surface for shorter wavelength lithography along with other electronics applications. Initial cash consideration plus acquisition-related expenditures for these three transactions totaled $11.2 million, with contingent consideration of approximately $3.7 million due in five years. These acquisitions are included in the Chemicals segment. On January 22, 1998, the Company sold its 50% interest in Power Sources, Inc. ("PSI") to Trigen Energy Corporation ("Trigen") for approximately $20.0 million. In addition, there are contingencies specified in the purchase and sale agreement with Trigen that could result in the Company refunding as much as $3.0 million of the proceeds referenced above. The Company no longer has an ownership interest in PSI. The Company's disposition of its interests in PSI and MCI is in furtherance of the Company's strategy to focus on chemicals and related products and services. 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, condition of and product demand by key customers, the timely completion and start-up of construction projects, including the nitrobenzene and aniline facility at Bayer Corporation's Baytown, Texas chemical complex, and pricing pressure and lower demand for Company products as a result of the recent downturn in Asian financial markets. The following contains further discussion of the Company's business and properties as grouped by its segments: Chemicals, Engineered Products and Services and Steel. Financial information regarding the Company's segments, which includes sales, pretax operating results and identifiable assets, is provided in Note 13 of the Consolidated Financial Statements incorporated by reference in Part II of this Form 10-K. As used in this report, the term "Company" includes subsidiaries of the registrant. CHEMICALS General The Company's Chemical segment includes industrial chemical intermediates and specialty chemicals and is operated through four subsidiaries: First Chemical Corporation ("FCC"); Quality Chemicals, Inc. ("QCI"); EKC Technology, Inc. ("EKC"); and TriQuest, L.P. ("TriQuest"). Industrial chemical intermediates include aniline and nitrobenzene. The Company's specialty chemicals include fine, performance and electronic chemicals for use by companies for agricultural, pharmaceutical, polymer, electronic and photosensitive applications and in the manufacture of integrated circuits. The primary distinction between the two categories is that intermediates require more processing to produce the end product used by consumers. Certain specialty chemicals, such as performance chemicals, are not consumed into the end product but are instead used during a manufacturing process for a specific purpose. 4 Of these two categories, industrial chemical intermediates are more affected by changes in the business cycle and the cost of raw materials. These chemicals are typically sold in large volumes to industrial customers that purchase on the basis of the chemical's molecular content. The key to successful production of 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. Industrial Chemical Intermediates Through its manufacturing facility in Pascagoula, Mississippi, the Company is engaged in the continuous production of aniline and nitrobenzene. This facility is supported by storage, rail, truck and barge distribution facilities. This facility utilizes state-of-the-art technology for nitration and a proprietary process for continuous hydrogenation. The Company is among the largest merchant marketers of aniline in the United States, and its Pascagoula complex is one of the largest aniline production facilities in the United States. Aniline's primary end use is in rigid polyurethane foam, an insulation material derived from MDI (methylene diphenyl diisocyantate) that is widely used in residential and commercial construction. Aniline 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. Aniline accounted for approximately 21%, 20% and 19% of the Company's consolidated sales for 1997, 1996 and 1995, respectively. Most of the Company's aniline production is sold under contracts containing price- adjustment mechanisms that substantially protect the Company from fluctuations in the prices of raw materials. 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 manufacturing operations. Phase I of the facility is under construction and is scheduled for completion in 1998. Phase II, which is estimated to cost less than Phase I, may be completed later. A majority of the Company's current aniline production from the Pascagoula facility is sold to Bayer under a long- term contract. If a potential Phase II is completed, it is intended that this aniline sales contract with Bayer will terminate and that future aniline production for sale to Bayer will be produced at the Baytown facility. The estimated cost to the Company of Phase I is in excess of $50.0 million. Specialty Chemicals The Company's specialty chemicals include fine, performance and electronic chemicals for use by companies in agricultural, pharmaceutical, polymer and photosensitive applications and in the manufacture of integrated circuits. These chemicals are produced at the Pascagoula facility, the Company's custom manufacturing facilities located in Tyrone, Pennsylvania and Dayton, Ohio, the Company's electronic chemical production facilities in Hayward, California and East Kilbride, Scotland, and through the use of toll manufacturers. Fine chemicals are sold in relatively small volumes to a narrow base of customers, which are either end-users or producers of performance chemicals. Because of their specialized, complex molecular content, there are typically few uses for fine chemicals and significantly more technical service is expected from the customer. The key to successful production of fine chemicals is identifying the markets for the product and developing a highly exacting chemical synthesis for use in the production process. Profit margins typically are higher than those associated with the production of industrial chemical intermediates. Purchasers of performance and electronic chemicals, who are end-users, acquire the product to achieve a specific performance objective. As with fine chemicals, these chemicals are typically sold in relatively small volumes and have relatively few uses, although the customer base is often larger than that for fine chemicals. 5 The production and sale of these chemicals are labor intensive and are usually dependent on a highly technical proprietary formulae and a sophisticated, well-trained applications engineering staff. Profit margins are relatively high and are usually not significantly affected by increases in the price of raw materials. In its custom manufacturing operation, the Company is a batch producer of fine and performance chemicals manufactured to the specifications of its customers. Facilities for this custom manufacturing include equipment for multi-step batch processing to custom produce complex fine chemicals used by chemical, agricultural, electronic, pharmaceutical and cosmetic companies. Although historically customers have purchased small quantities of custom manufactured production capacity primarily for their new product development and market testing, recently the amount of production capacity sold for the production of commercially marketed products has increased significantly. Companies involved in the mass production of chemically based 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 custom services and capacity to a number of such companies, the Company achieves economies of scale and is able to manufacture certain fine and performance chemicals more economically and timely than they can be manufactured by its customers. As a result, customers can reduce the time to market and capital exposure associated with the manufacture and marketing of their products. Current production is based on multi-step organic syntheses. The Company's custom manufacturing facilities use numerous reactors capable of producing custom fine chemicals in quantities ranging from the very small amounts needed for initial product testing, through pilot plant production of developmental quantities and continuing through commercial production. A substantial portion of the Company's custom manufacturing revenue in 1997 was derived from sales of a herbicide ingredient to one manufacturer under an agreement that will expire in 2002 with a substantial portion of the remaining custom manufacturing revenue derived from a group of agricultural intermediates and actives. In 1997, the largest growth in product mix was in advanced pharmaceutical intermediates. Other significant products include diphenyl isopthalate, an intermediate used in the production of fibers for fire-retardant fabrics and in transparent, heat-resistant plastics; rubber additives used in the manufacture of chemical-resistant rubber; and deep ultraviolet photoresist for use in the semiconductor industry. The Company also manufactures specialty chemicals used in high growth markets such as radiation curing and polymer additives. Nitrotoluene derivatives are used in herbicides, rubber processing chemicals, photographic chemicals, optical brighteners, dyestuffs and pigments, and photoinitiators. The Company is the second largest producer of nitrotoluenes in the world and the only producer of nitrotoluenes in the United States. Other specialties are used as intermediates in the production of pharmaceutical, personal care and agricultural products. These specialty chemicals are manufactured in large scale, integrated batch facilities using proprietary processes. During 1997, the Company completed a 25% capacity expansion for batch specialty chemicals at its Pascagoula facility. This additional specialty chemicals capacity will enable the Company to expand production of new specialty chemicals used as intermediates in pharmaceutical and agricultural chemicals and to meet increasing demand for performance polymer products. With the recent acquisition of Clariant Corporation's acylation derivatives business, the Company is now a producer and marketer of products derived from 4-hydroxyacetophenone ("4HAP") and used in the semiconductor and specialty polymer industries. Applications for these products include deep ultraviolet photresist resins, coatings and polymer applications, antioxidants, surface active materials, fuel and lubricant additives and new polymers for high temperature performance. These products are currently produced by third party custom manufacturers utilizing an extensive portfolio of intellectual properties which includes over 35 patents. Out-sourcing the manufacture of these products allows the Company to benefit from rapid time to market and minimum capital exposure while capitalizing on the unique expertise of individual contract manufacturers. The Company also produces electronic and performance chemicals used in the semiconductor and related industries. These chemicals include organic photoresist removers, which are cleaning solutions that remove photoresist and dry-etch residue during the manufacture of semiconductors. As a result of the recent acquisition 6 of CMP assets from BIC and Moyco Technologies, Inc., the Company is now supplying slurries and oxidizer chemicals for use in the CMP process, which is currently the fastest growing segment in semiconductor materials. Approximately 6% of electronic and performance chemical sales for 1997 were outside of the United States. In conducting its electronic chemicals business, the Company owns and operates manufacturing facilities in Hayward, California and East Kilbride, Scotland. During 1997, the Company completed construction of a new research and development laboratory at its 65,000 square-foot California facility and made other improvements which allow for additional manufacturing and packaging capabilities. The Company is also expanding and adding storage facilities at its 26,300 square-foot Scotland facility with completion of this project expected in 1998. The Company also leases office space in Tokyo, Japan to provide marketing and technical support for the Japanese electronic chemical markets and utilizes an applications laboratory in Phoenix, Arizona for the development of CMP products. Marketing and Sales Chemicals are marketed globally. Approximately 7% of the Company's Chemical sales in 1997 were exports from the United States. The Company has long-term contracts with a number of its largest customers. A majority of chemicals sales are made through the Company's internal sales force. Products are sold in drums and in bulk as intermediates into construction, transportation, semiconductor, agricultural chemical, pharmaceutical, pigment, photographic, specialty polymer and ultra violet (U.V.) curing markets such as powder coatings, printing inks and overprint varnishes. Exported product is shipped in ocean-going tankers, iso-containers or drums to European, Japanese and South American markets. Domestic shipments are by barge, rail or tank trucks. As discussed above, a significant amount of the Company's aniline is sold to a single customer under a long-term contract. See "Industrial Chemical Intermediates." Fine chemical products are sold into pharmaceutical, electronic chemical, agricultural chemical, DUV resin and specialty polymer markets, both domestically and in the Pacific Rim. A significant amount of custom manufacturing sales are to three customers under long-term contracts. Electronic and performance chemicals are marketed domestically and internationally within Europe and the Pacific Rim. Approximately 56% of these sales are outside the United States. The California facility services North America and the Pacific Rim and the Scotland facility services the European community. Approximately 40% of all international electronic and performance chemical sales are into Europe and 60% of such sales are into the Pacific Rim. These chemicals are distributed in gallon, liter, returnable drum or large volume dedicated containers. In Japan, the Company's electronic chemicals are repackaged from bulk containers into returnable containers by the Company's Japanese distributor. Raw Materials Two of the principal raw materials for production at the Company's Pascagoula facility, benzene and toluene, are readily available commodity by- products of oil refining. Like most commodities, the prices of benzene and toluene are subject to fluctuation. Benzene prices are affected by the demand for a variety of products, principally including styrene and phenolic resins. The price of toluene, an octane-enhancing additive for unleaded gasoline, is directly affected by the demand for and price of unleaded gasoline. The Company is protected from fluctuations in raw material prices in the contracts under which most of its aniline production is sold. The remainder of its production is sold under short-term contracts or purchase orders at prices that generally reflect its actual raw material cost. Other significant raw materials include ammonia, natural gas and ethanol. The Company purchases ammonia and ethanol 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. Prices paid by the Company for natural gas are affected by the degree of interruptibility of the gas supply. 7 Fine chemicals primary raw materials include hydrogen, hydrogen peroxide, o-aminophenol, o-nitrophenol, formaldehyde, butaldehyde and natural gas. These raw materials are obtained from a number of different sources. The Company does not believe that any one source of raw materials is material to the Company's business. The Company currently has a ten (10) year contract in place to secure supply of 4HAP, a primary raw material for the Company's acylation derivatives business. The primary raw materials for the manufacture of electronic and performance chemicals include free-base hydroxylamine, diglycolamine, N-methylpyrro-lidone and alumina powders. With the exception of hydroxlyamine, raw materials are generally available in adequate quantities from several suppliers, subject to market variation in price. Hydroxylamine is currently available from one supplier, located in Japan. Two major manufacturers have announced plans to construct facilities capable of manufacturing aqueous hydroxylamine with production anticipated to begin within the next two years. Research and Development The Company conducts research and development to improve existing products and to produce new specialty and performance chemicals. The Company spent approximately $5.8 million, $6.9 million and $6.3 million on research and development in 1997, 1996 and 1995, 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 also sponsors applied research at leading universities in the United States and the U.K. and maintains a radiation curing applications laboratory in Pascagoula to evaluate new products and provide customer technical support. These closely directed programs have led to the development and introduction of proprietary technology in fine chemicals and in the FirstCure(R) line of performance polymer products. In addition, the Company has entered into a joint development agreement with an industry consortium to develop advanced products to meet future semiconductor manufacturing technology. Competition The Company is one of five major United States producers of aniline, with approximately 16% of domestic capacity and an estimated 5% of world capacity and is the only United States producer of nitrotoluenes, with an estimated 12% of world capacity. Major competitors are large chemical companies. Competition is based on price, service, quality, marketing and research and development support capabilities. Based on market share, the Company is among the top 10 custom chemical manufacturing companies in the United States. Major competitors are both smaller and larger companies. Competition is based on service, quality, manufacturing expertise in batch chemical production, research and development capabilities and price. The Company is also one of the world's largest producers of post-metal cleaning solutions for semiconductor production. Although there are approximately 12 companies participating in this market worldwide, only the Company and three others have significant market share for advanced and postmetal 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 price. The Company has entered into a licensing agreement with a major competitor whereby the Company licenses its HDA(TM) (hydroxylamine) 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. Within CMP, the oxide slurry market is dominated by two companies, with the larger company holding a 90% market share. In the tungsten slurry market, the Company is now the third largest supplier for this application. Seasonality of Business Generally, chemical sales are not seasonal and working capital requirements do not vary significantly from period to period. 8 ENGINEERED PRODUCTS AND SERVICES General The Engineered Products and Services segment principally includes the development and marketing of proprietary equipment and systems for industrial applications. These include design and production of low-emission burners, flares, incinerators and thermal plasma equipment. Raw materials and components for these operations are available from numerous vendors. The businesses are not considered materially seasonal. This segment is operated primarily through the Company's subsidiary, Callidus Technologies Inc. Combustion Equipment and Services Principal products and services are custom designed and fabricated gas/liquid incinerators, flares, solid waste systems, vapor recovery units, burners and predictive emissions monitoring and process optimization software services. The Company also provides engineering and consulting services for environmental and combustion applications. The Company markets these products and services worldwide to refining, petrochemical, chemical, pharmaceutical, wood products and other industries requiring disposal of gas, liquid and solid wastes. Marketing is primarily through a combination of manufacturers' representatives and company personnel. The market is well established but growing through advancements of existing technology, driven primarily by increasingly strict environmental regulations both in the United States and abroad. Approximately 25% of these sales during 1997 were made in the Pacific Rim. Competition is based on a wide variety of factors, with the most prominent being price, technological innovation and delivery schedule. The Company competes with the John Zink Company, which has a significant share of the burner, flare and vapor recovery markets. Numerous competitors exist in the gas and liquids incineration market. Primary competition in the solid waste systems market comes from alternative technologies. The Company offers predictive emissions monitoring and process optimization software services utilizing products licensed by its customers. The Company is affected by a variety of factors beyond its control, including governmental control of environmental standards and compliance deadlines, competitor pricing strategies and changing technology, any one of which could impact operating results. In conducting this combustion equipment and services business, the Company leases office space in Tulsa, Oklahoma, owns a manufacturing and test facility in Beggs, Oklahoma and has leased foreign offices in Belgium, England, Italy, France, Germany and Japan. Thermal Plasma The Company is a leading international supplier of plasma heating systems to the metals and waste industries. Plasma heating systems instantly, and without combustion, convert electrical energy into high temperature thermal energy. The Company develops, manufactures, sells and services these systems for use in steel manufacturing, specialty metals refinement and various environmental waste recycling processes, including municipal solid waste ash vitrification. The Company holds more than 20 patents in 10 countries, including several in steel, vacuum melting and waste applications. Domestic marketing is performed directly, with international sales supported by overseas representatives. The Company owns a testing facility used for system integration, system and process development and customer training. This operation has two principal domestic competitors and four foreign competitors. Price competition is intense and competitors' pricing strategies may impact operating results. The thermal plasma operations, which have been conducted in Raleigh, North Carolina, are being functionally and operationally merged with the combustion equipment and services business by relocating Raleigh personnel and operations to Tulsa, Oklahoma. It is anticipated that the thermal plasma test facility will also be relocated to Oklahoma. The Company expects the consolidation of these operations to result in a more efficient utilization of Company personnel and other efficiencies. 9 STEEL The Company's Steel segment is operated through its subsidiary, FirstMiss Steel, Inc. This segment's operations are conducted through a 400,000 square- foot steel melting and production facility in Hollsopple, Pennsylvania, which is approximately 100 miles east of Pittsburgh. The Company is actively seeking a buyer for this facility. The Company leases the land on which the facility is located, but has the right to purchase the land for a nominal price at the conclusion of the lease. Following upgrades to one of two electric arc furnaces in January 1995, annual capacity of the operation now includes 150,000 tons of carbon, alloy and specialty grade, bottom-poured ingots and 50,000 tons of high-grade steel billets through a horizontal continuous caster. In January 1996, the second electric arc furnace was removed and a NOD converter was constructed, which combined with the newly upgraded electric arc furnace and the existing VOD units form the "Triplex" process for producing stainless steel. The NOD converter, which was commissioned in July 1996, will increase stainless steel capacity and lower stainless steel costs. The value- added product line was introduced in 1992 and includes specialty stainless and tool steel ingots or billets, which are converted into forged billets, bars and plates by outside processors. Small quantities of cobalt, nickel, copper and iron-based alloys in bars and wire are also produced from two small horizontal continuous casters, small bottom-poured forging ingots and remelt sand ingots. Raw materials consist of steel scrap and various alloys, of which there is an adequate supply in the North American market. Carbon and alloy steel ingots are sold directly to the forging industry, ring rollers, extruders and integrated steel producers. The Company competes primarily with three other steel companies in this market and, within the group, ranks second in total steel production capacity. Specialty steel products are primarily sold to steel service centers and forgers. Ten customers account for approximately 60% of the Company's steel revenue. Alloy products are sold as feedstock directly to forgers, extruders and investment casters. There are numerous competitors, both domestic and foreign, that compete with the Company in the specialty steel and ferrous and non-ferrous metals markets. Competitive factors include price, quality and service. Carbon steel ingots and billets are commodities and are extremely price competitive. Stainless and tool steel long product pricing is currently being pressured by strong import penetration. ENVIRONMENTAL CONSIDERATIONS The 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 1997 were $2.3 million. Projected environmental capital expenditures for 1998 and 1999 are $1.1 million and $1.5 million, respectively. While these expenditures are necessary to comply with environmental laws and regulations, they may also reduce operating expenses and improve efficiencies. The Company monitors and participates in the environmental regulatory development process which assists it in evaluating 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 a similar state agency 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. The Company paid $183,000 as its full share of the cost of cleanup of one of these sites during 1996. During 1997, the Company did not contribute any funds toward cleanup of these sites but did receive rebates relating to the cleanup of one site because actual cleanup costs have been less than previously projected. It is difficult to 10 estimate the Company's ultimate liability relating to the remaining 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 or cash flow. The Company has been informed of another potential claim and is evaluating the facts and circumstances relating to such claim in an effort to ascertain the extent, if any, to which the Company might be liable for such claim. However, preliminary information indicates that any future liability in connection with this claim will not be material to the Company's financial condition, results of operations or cash flow. ITEM 2. PROPERTIES A description of various properties and the segments to which they relate is included in the Business discussion located on pages 3 through 11 of this Form 10-K. 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. FCC leases 7 acres of waterfront property from the Jackson County Port Authority. This property is used by FCC for loading and unloading ocean-going vessels and barges. The lease expires in 2003. FCC owns 70 acres of undeveloped industrial land within 2 miles of FCC's Pascagoula plant and 23 acres directly adjacent to the Pascagoula plant. QCI owns approximately 78 acres of undeveloped industrial land directly adjacent to its Tyrone, Pennsylvania facility. ITEM 3. LEGAL PROCEEDINGS The Company has pending several claims incurred 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 1997. 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, 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, 1997 (or the Financial Review insert attached thereto), which has been furnished to the Commission. See the Cross Reference Sheet 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. 11 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, which will be mailed to the Commission by March 30, 1998, pursuant to Regulation 14A, and is incorporated herein by reference. See the Cross Reference Sheet 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 Financial Review insert which is attached to the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997 and Supplementary Data
PAGES IN FINANCIAL REVIEW INSERT TO THE 1997 ANNUAL REPORT TO STOCKHOLDERS INCORPORATED HEREIN BY REFERENCE -------------------------------- Consolidated Balance Sheets as of December 31, 1997 and 1996........................... p. 4 Consolidated Statements of Operations, years ended December 31, 1997, 1996 and 1995 ..... p. 5 Consolidated Statements of Stockholders' Equity, years ended December 31, 1997, 1996 and 1995.................................... p. 6 Consolidated Statements of Cash Flows, years ended December 31, 1997, 1996 and 1995...... p. 7 Notes to Consolidated Financial Statements... pp. 8-24 Independent Auditors' Report................. p. 24
(a)(2) Additional schedules are either not required under the applicable instructions or are inapplicable and have therefore been omitted. (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 12 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 were filed as Exhibit 3.2 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. 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 Plan was filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 (Registration No. 333- 18691) filed on December 24, 1996 and is incorporated herein by reference. 4(d)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. 4(e)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(f)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(g)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. 13 4(h)Amended Tax Sharing Agreement between First Mississippi and FirstMiss Gold Inc. dated as of September 24, 1995, which was assinged 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. 10(a)* Termination Agreement, dated May 29, 1996 and effective June 1, 1996, between the Company and its Chief Executive Officer, which was assigned to the Company in connection with the Distribution, was filed as Exhibit 10(c) to First Mississippi's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and is incorporated herein by reference. 10(b)* Form of Termination Agreement, dated May 29, 1996 and effective June 1, 1996, between the Company and each of the following executive officers of the Company: Daniel P. Anderson, Robert P. Barker, William P. Bartlett, Max P. Bowman, Troy B. Browning, J. Steven Chustz, Paul J. Coder, Samir A. Hakooz, William B. Kemp, Scott A. Martin, James L. McArthur, George M. Simmons, R. Michael Summerford and Thomas G. Tepas, which was assigned to the Company in connection with the Distribution, 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. (Company's Termination Agreement with each such officer contains terms identical to those contained in the form of Agreement filed.) 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)* 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. 10(g)* 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(h)Form of Indemnification Agreement between the Company and the following Directors or 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): Richard P. Anderson, Paul A. Becker, James W. Crook, James E. Fligg, Charles R. Gibson, Robert P. Guyton, Charles P. Moreton, Paul W. Murrill, William A. Percy, II, Maurice T. Reed, Jr., Frank G. Smith, Leland R. Speed, R. Gerald Turner, J. Kelley Williams, R. Michael Summerford, O. E. Wall, Charles M. McAuley, J. Steve Chustz, James L. McArthur, Danny P. Anderson 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(i)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. 14 13 ChemFirst Inc. 1997 Annual Report to Stockholders and Financial Review insert attached thereto (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 Company. 23 Consent regarding incorporation of auditor's report into Registration Statement Nos. 333-18691, 333-18693 and 333-35221. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule. - -------- *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 1997. (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. 15 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 27, 1998 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. SIGNATURE TITLE DATE /s/ J. Kelley Williams Chairman of the Board March 27, 1998 - ----------------------------------- of Directors, Chief J. KELLEY WILLIAMS Executive Officer (Principal Executive Officer) and Director /s/ Thomas G. Tepas President and Chief March 27, 1998 - ----------------------------------- Operating Officer THOMAS G. TEPAS /s/ R. Michael Summerford Vice President and March 27, 1998 - ----------------------------------- Chief Financial R. MICHAEL SUMMERFORD Officer (Principal Financial Officer) /s/ Troy B. Browning Controller (Principal March 27, 1998 - ----------------------------------- Accounting Officer) TROY B. BROWNING /s/ Richard P. Anderson Director March 27, 1998 - ----------------------------------- RICHARD P. ANDERSON /s/ Paul A. Becker Director March 27, 1998 - ----------------------------------- PAUL A. BECKER /s/ James W. Crook Director March 27, 1998 - ----------------------------------- JAMES W. CROOK /s/ Michael J. Ferris Director March 27, 1998 - ----------------------------------- MICHAEL J. FERRIS /s/ James E. Fligg Director March 27, 1998 - ----------------------------------- JAMES E. FLIGG /s/ Robert P. Guyton Director March 27, 1998 - ----------------------------------- ROBERT P. GUYTON 16 SIGNATURE TITLE DATE /s/ Paul W. Murrill Director March 27, 1998 - ----------------------------------- PAUL W. MURRILL /s/ William A. Percy, II Director March 27, 1998 - ----------------------------------- WILLIAM A. PERCY, II /s/ Dan F. Smith Director March 27, 1998 - ----------------------------------- DAN F. SMITH /s/ Leland R. Speed Director March 27, 1998 - ----------------------------------- LELAND R. SPEED /s/ R. Gerald Turner Director March 27, 1998 - ----------------------------------- R. GERALD TURNER 17 EXHIBITS INDEX TO EXHIBITS
EXHIBIT NUMBER ------- 13 ChemFirst Inc. 1997 Annual Report to Stockholders and Financial Review insert attached thereto (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 and 333-35221. 27.1 Financial Data Schedule [For EDGAR filing only]. 27.2 Restated Financial Data Schedule [For EDGAR filing only].
- -------- (Note: The exhibits filed with the Commission are not included in this 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.)
EX-13 2 ANNUAL REPORT EXHIBIT 13 [CHEMFIRST INC. LOGO APPEARS HERE] ANNUAL REPORT ------------- 1997 Post Office Box 1249 Jackson, Mississippi 39215-1249 [CHEMFIRST INC. LOGO APPEARS HERE] CHEMFIRST CHEMICALS TECHNOLOGY SERVICE NYSE:CEM Designed by GodwinGroup, Jackson, Mississippi Printed by [Hederman Brothers, Ridgeland, Mississippi] Inside pages printed on [50%] recycled paper. CORPORATE INFORMATION - --------------------- Transfer Agents for Common Stock THE BANK OF NEW YORK 1-800-524-4458 Address shareholder inquiries to: Shareholder Relations Department - 11E P. O. Box 11258 Church Street Station New York, New York 10286 Send certificates for transfer and address changes to: Receive and Deliver Department - 11W P. O. Box 11002 Church Street Station New York, New York 10286 e-mail: shareowner-svcs@email.bony.com Internet: http://stkxfer.bankofny.com CHEMFIRST INC. Shareholder Services Department P. O. Box 1249 Jackson, Mississippi 39215-1249 (601) 948-7550 e-mail: ir@chemfirst.com Common Stock Registrars THE BANK OF NEW YORK Investor Relations Department P. O. Box 11258 Church Street Station New York, New York 10286 DEPOSIT GUARANTY NATIONAL BANK One Deposit Guaranty Plaza Jackson, Mississippi 39205-1200 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. 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, Mississippi 39215-1249 (601) 949-0285 or (601) 948-7550 e-mail: ir@chemfirst.com Independent Public Accountants KPMG PEAT MARWICK, LLP 1100 One Jackson Place Jackson, Mississippi 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 contacting the Company's Investor Relations Department. Annual Meeting The Annual Meeting of Stockholders will be held May 27, 1998, at 2 p.m. in the Garden Room at Dennery's, 330 Greymont Avenue, Jackson, Mississippi. 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. Stock Market Information The high and low recorded prices of the Company's common stock and cash dividends declared during 1996 and 1997 are presented in the table below. There were approximately 4,330 shareholders of record as of March 2, 1998. 1997 1996 ----------------------------------------------------- Dividend Dividend High Low Rate High Low Rate ----------------------------------------------------- 1st Quarter 24 1/8 20 1/2 .10 27 1/4 20 1/4 .10 2nd Quarter 27 5/16 20 1/8 .10 25 1/4 21 .10 3rd Quarter 28 5/8 25 .10 28 1/4 21 1/8 .10 4th Quarter 28 5/8 24 1/4 .10 30 1/4 22 1/4* .10 For the Year 28 5/8 20 1/8 .40 30 1/4 20 1/4 .40 ----------------------------------------------------- *Stock price reflects December 1996 merger/disposition of Fertilizer operations. [Photo Appears Here] FINANCIAL HIGHLIGHTS 1 SELECTED FINANCIAL DATA 2 DEAR FELLOW SHAREHOLDERS 3 CHEMICALS 6 ENGINEERED PRODUCTS & SERVICES 12 STEEL 14 HEALTH, SAFETY & ENVIRONMENT 15 CHEMFIRST COMPANIES 16 DIRECTORS AND OFFICERS 17 CORPORATE INFORMATION 18 FINANCIAL REVIEW INSERT BATCH CAPACITY FOR SPECIALTY CHEMICALS AT PASCAGOULA, MISSISSIPPI WAS EXPANDED 25%. KEY MARKETS INCLUDE PHARMACEUTICAL AND AGRICULTURAL CHEMICALS AND PERFORMANCE POLYMER PRODUCTS. - ---------------------------- [Photo appears here] CHEMFIRST INC. MILESTONES - ------------------------- ALL OF OUR BUSINESSES ARE GROWING, AS ARE THE MARKETS THEY SERVE. [Logo appears here] 1957 Founded as First Mississippi Corporation with $5 million initial public offering. 1958 Entered fertilizer business with 50% interest in 25,000-ton-per-year anhydrous ammonia plant in Arizona. 1965 Pioneered the single train Kellogg ammonia plant technology in Donaldsonville, Louisiana. [Logo appears here] 1967 Started chemicals business with aniline production at First Chemical Corporation in Pascagoula, Mississippi. 1973 Acquired Atlantic Richfield's fertilizer operations in Fort Madison, Iowa, which tripled the size of the company. Earnings exploded from $3.2 million in FY73 to $42.1 million in FY75. 1975 The first Mississippi-chartered company to be listed on the New York Stock Exchange. [Logo appears here] Mid-1970s Diversified into other commodities - oil & gas in 1974, coal in 1981 and gold in 1983 - to reduce dependence on fertilizer. 1980 Money magazine named the Company a stock "winner" for the decade of the seventies, with the biggest 10-year gain (1,725%) among 2,200 stocks traded on the New York and American exchanges and 830 major over-the-counter stocks. [Logo appears here] 1981 Began internal research and development program for specialty chemicals. 1986 Purchased Quality Chemicals, Inc., a custom chemical manufacturer in Tyrone, Pennsylvania. 1989 Entered the electronic chemicals business with the acquisition of EKC Technology, Inc., with operations in Hayward, California, and East Kilbride, Scotland. 1989 Founded Callidus Technologies Inc. to produce low emission burners, flares and incinerators for environmental applications. [Logo appears here] 1992 Acquired Monsanto's Dayton, Ohio, pilot plant and manufacturing facility to expand custom manufacturing capability. 1992 Began a major restructuring effort to focus on chemicals and related businesses. 1993 Sold oil and gas assets and coal business. 1995 Spun off Getchell Gold Corporation (formerly FirstMiss Gold Inc.). [CHEMFIRST INC. LOGO APPEARS HERE] 1996 Spun off chemicals and nonfertilizer businesses to shareholders as ChemFirst Inc., a new debt-free, publicly traded company, and First Mississippi fertilizer operations and debt were acquired by Mississippi Chemical Corporation in a stock-for-stock merger. 1997 Acquired deep ultraviolet (DUV) resins and chemical mechanical planarization (CMP) assets for semiconductor applications. Achieved record sales and earnings for chemicals and engineered products and services. Total return to shareholders for the five years ended December 31, 1997, was 631% versus 151% for the S&P 500. DIRECTORS AND OFFICERS - ---------------------- DIRECTORS RICHARD P. ANDERSON /2, 3/ Maumee, Ohio Chairman and Chief Executive Officer, The Andersons Inc. Agribusiness PAUL A. BECKER /1/ New York, New York Managing Director, Mitchell Hutchins Asset Management, Inc. JAMES W. CROOK /3, 4/ Yazoo City, Mississippi Former Chairman of the Board, Melamine Chemicals, Inc. MICHAEL J. FERRIS /2/ Houston, Texas President and Chief Executive Officer Pioneer Companies, Inc. JAMES E. FLIGG /2/ Chicago, Illinois Senior Executive Vice President, Strategic Planning and International Development Amoco Corporation ROBERT P. GUYTON /1/ St. Simon's Island, Georgia Financial Consultant DR. PAUL W. MURRILL /1/ Baton Rouge, Louisiana Professional Engineer WILLIAM A. PERCY, II /2, 4/ Greenville, Mississippi General Partner, Trail Lake Enterprises President & Chief Executive Officer, Greenville Compress Company Chairman of the Board, Staple Cotton Cooperative Association DAN F. SMITH /1/ Houston, Texas President and Chief Executive Officer, Lyondell Petrochemical Company Chief Executive Officer Equistar Chemicals, L.P. LELAND R. SPEED /3/ Jackson, Mississippi Chairman, EastGroup Properties Real Estate Investment Trust The Parkway Company Real Estate Company DR. R. GERALD TURNER /3, 4/ Dallas, Texas President, Southern Methodist University J. KELLEY WILLIAMS Jackson, Mississippi Chairman and Chief Executive Officer, ChemFirst Inc. OFFICERS J. KELLEY WILLIAMS Chairman Chief Executive Officer THOMAS G. TEPAS President Chief Operating Officer R. MICHAEL SUMMERFORD Vice President Chief Financial Officer DANIEL P. ANDERSON Vice President Health, Safety & Environmental Affairs ROBERT B. BARKER Vice President Corporate Development and Acquisitions WILLIAM B. KEMP Vice President Human Resources J. STEVE CHUSTZ General Counsel MAX P. BOWMAN Treasurer Manager, Risk Management TROY B. BROWNING Controller JAMES L. MCARTHUR Secretary Manager, Investor Relations - ----------------- /1/ Audit Committee /2/ Compensation and Human Resources Committee /3/ Committee on Director Affairs /4/ ChemFirst Foundation Inc. Board of Trustees CHEMFIRST ANNUAL REPORT ----------------------- 1997 /17/ FINANCIAL HIGHLIGHTS - --------------------
(In Thousands of Dollars, Except Per Share Amounts) Years ended December 31, --------------------------------------------- 1997 1996 Change --------------------------------------------- RESULTS OF OPERATIONS: Sales $ 445,821 $ 383,637 16% Earnings (loss) from continuing operations/(a)/ $ 38,898 $ (10,441) /(b)/ Depreciation and amortization $ 20,642 $ 18,056 14% Capital expenditures $ 95,570 $ 53,732 78% FINANCIAL POSITION: Total assets $ 459,346 $ 423,090 9% Total debt $ 26,443 $ 3,095 /(b)/ Shareholders' equity $ 321,697 $ 308,486 4% Total debt as percent of total capitalization 8% 1% /(b)/ PER COMMON SHARE: Earnings (loss) from continuing operations/(a)/ $ 1.86 $ (.50) /(b)/ Cash dividends declared $ .40 $ .40 _ Book value $ 16.06 $ 14.92 8% Closing market price at December 31 $ 28.250 $ 23.125 22% - ---------------------------------------------------------------------------------------------------------------------------- /(a)/ Includes the after tax effect of the following items: Aluminum Dross Processing (sold January 1997) Provision for facility writedowns and other costs $ _ $ (12,971) Operating losses $ _ $ (3,421) Asset writedowns in Steel operations $ _ $ (6,075) Changes in organizational structure $ _ $ (600) Gain on Melamine technology sale $ 1,502 $ _ Gain on sale of Melamine $ 8,810 $ _ ---------------------------- TOTAL $ 10,312 $ (23,067) ============================ Per common share: $ .50 $ (1.10) ============================ /(b)/ Computation not meaningful. EARNINGS FROM CAPITAL SALES CONTINUING OPERATIONS* EXPENDITURES (MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS) [GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE] *Adjusted for Melamine gains in 1997, special charges in 1996, and operating losses of aluminum dross recovery business for 1993 through 1996. CHEMFIRST ANNUAL REPORT ----------------------- 1997 /1/
SELECTED FINANCIAL DATA - -----------------------
Years ended December 31 (In Thousands of Dollars, Except Per Share Amounts) ---------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------- % % % % % ---------------------------------------------------------------------------- Sales to unaffiliated customers: Chemicals $ 297,822 64 246,014 63 214,234 59 186,890 64 151,341 65 Engineered Products and Services 72,712 16 64,538 17 65,926 18 42,299 14 29,365 13 Steel 75,287 15 73,085 18 72,839 20 59,941 20 47,272 20 ---------------------------------------------------------------------------- Total sales 445,821 95 383,637 98 352,999 97 289,130 98 227,978 98 Other revenues 22,233 5 6,571 2 7,403 3 4,043 2 4,010 2 ---------------------------------------------------------------------------- Total revenues $ 468,054 100 390,208 100 360,402 100 293,173 100 231,988 100 ============================================================================ Operating profit (loss) from continuing operations before income taxes (benefit), investee earnings (loss) and cumulative effect of change in accounting principle: Chemicals $ 51,688 43,593 40,650 36,551 27,390 Engineered Products and Services 2,926 (31,897) (5,198) (9,297) (7,198) Steel (1,003) (10,495) 856 (2,639) (3,960) ---------------------------------------------------------------------------- 53,611 1,201 36,308 24,615 16,232 Unallocated corporate expenses (11,347) (13,324) (16,242) (8,847) (6,857) Interest income (expense), net 2,904 (5,055) (3,915) (7,070) (9,776) Other income (expense), net 14,998 259 517 569 (300) ---------------------------------------------------------------------------- 60,166 (16,919) 16,668 9,267 (701) Income taxes (benefit) 23,765 (5,632) 8,240 4,985 692 Equity in net earnings (loss) of equity investees 2,497 846 1,096 410 (531) ---------------------------------------------------------------------------- Earnings (loss) from continuing operations 38,898 (10,441) 9,524 4,692 (1,924) Earnings from discontinued operations, net of taxes - 36,562 47,943 37,066 8,328 Net gain (loss) on disposal of businesses, net of taxes - 223,739 - - (6,800) Cumulative effect of change in accounting principle - - - - 2,850 ---------------------------------------------------------------------------- Net earnings $ 38,898 249,860 57,467 41,758 2,454 ============================================================================ Earnings (loss) per common share: Continuing operations $ 1.91 (.50) .46 .23 (.10) Discontinued operations - 1.77 2.34 1.85 .42 Gain (loss) on disposal of businesses - 10.85 - - (.34) Cumulative effect of change in accounting principle - - - - .14 ---------------------------------------------------------------------------- Net earnings $ 1.91 12.12 2.80 2.08 .12 ============================================================================ Earnings (loss) per common share, assuming dilution: Continuing operations $ 1.86 (.50) .46 .23 (.10) Discontinued operations - 1.77 2.29 1.82 .42 Gain (loss) on disposal of businesses - 10.85 - - (.34) Cumulative effect of change in accounting principle - - - - .14 ---------------------------------------------------------------------------- Net earnings $ 1.86 12.12 2.75 2.05 .12 ============================================================================ Net working capital $ 78,059 130,480 127,009 100,421 60,855 Long-term debt $ 4,865 2,122 82,871 97,687 112,168 Total assets $ 459,346 423,090 414,335 390,209 354,555 Stockholders' equity $ 321,697 308,486 226,759 204,709 165,953 Cash dividend payout rate 22 3 14 15 250 Return on average equity - continuing operations 12 (4) 4 3 (1) Return on sales - continuing operations 9 (3) 3 2 (1) Long-term debt/equity ratio .02 .01 .37 .48 .68 Current ratio 1.82 2.57 2.84 3.18 2.17 Cash dividends per share $ .40 .40 .39 .31 .30 Book value per share $ 16.06 14.92 11.02 10.07 8.30
DEAR FELLOW SHAREHOLDERS - ------------------------ OUR BUSINESS MIX IS SIMPLER AND IS FOCUSED ON CHEMICALS WITH HIGH MARGIN AND HIGH GROWTH POTENTIAL AND EMPHASIS ON TECHNOLOGY. Earnings from continuing operations excluding special items more than doubled to $28.6 million on 16% higher sales in our first year as ChemFirst. Continuing operations are comprised of the chemical and other nonfertilizer businesses spun off to shareholders prior to the December 1996 merger of First Mississippi Corporation's fertilizer operations into Mississippi Chemical Corporation. The largest segment of continuing operations is Chemicals, which had record sales and operating profits. Except for the planned disposition of Steel, the merger completed a five- year restructuring program that has transformed the company. Our business mix is simpler and is focused on chemicals with high margin and high growth potential and emphasis on technology. Our balance sheet is stronger. Earnings are less cyclical and more predictable. Our price earnings multiple has increased, reflecting investor recognition of these accomplishments. Five-year total return to shareholders at year end was 631% versus 151% for the S&P 500, driven by restructuring efforts and growth in chemicals and related businesses. This year we made major capacity additions, technology investments, and complementary product line acquisitions to drive future growth. Financial Results Earnings from continuing operations were $38.9 million, or $1.86 per share, including special items of $10.3 million, or 50 cents per share, from the sale of Melamine Chemicals, Inc. stock to Borden Chemical, Inc. and a gain on a second quarter Melamine technology agreement. Sales increased 16% to $446 million. Capital Expenditures A $200 million expansion program begun in 1996 will double plant and equipment investment by 1999 and will increase capacities of major product lines from 40% to 100%. Capital expenditures for 1997 were $96 million versus $54 million in 1996. About 90% of 1997 expenditures were in Chemicals. Most of this was for the world scale aniline facility at Bayer Corporation's Baytown, Texas, chemical complex and for additional batch specialty chemicals capacity at Pascagoula, Mississippi. The specialty expansion was completed mid-year 1997, and the aniline plant was completed first quarter 1998. Other 1997 capital projects included new laboratory facilities for custom manufacturing and for electronic chemicals. These investments will support process development for custom projects and research and development of new chemicals for semiconductor manufacturing. We plan to invest about $70 million in plant and equipment in 1998 to complete the capital expenditure program begun in 1996. CHEMFIRST ANNUAL REPORT ----------------------- 1997 /3/ DEAR FELLOW SHAREHOLDERS - ------------------------ CAPITAL EXPENDITURES [GRAPH APPEARS HERE] IDENTIFIABLE ASSETS [GRAPH APPEARS HERE] SALES [GRAPH APPEARS HERE] EMPLOYEES [GRAPH APPEARS HERE] CHEMICALS [GRAPH APPEARS HERE] CORPORATE EP&S [GRAPH APPEARS HERE] STEEL Acquisitions In December 1997, we completed three acquisitions that complement and extend our successful electronic and performance chemicals business. Two of the acquisitions are product lines of high purity, ultra fine abrasives for the chemical mechanical planarization (CMP) step in the manufacture of integrated circuits. CMP is a fast growing technology, with the same customers and similar requirements for service and technical support as electronic chemicals. We are adding CMP to our electronic chemicals portfolio to strengthen our competitive position and drive future growth. The other acquisition is a business that manufactures and markets deep ultraviolet (DUV) photoresist resins and other products. This business is the largest supplier of resin components for the manufacture of DUV photoresist products used in new "nanolithographic" technology for leading edge semiconductor chip manufacture. Demand for DUV photoresist resins is growing rapidly as the semiconductor industry applies the new DUV technology. Financial Structure Our balance sheet is strong despite record capital expenditures, recent acquisitions, and stock repurchases. Debt is 8% of total capitalization. This is below our long-term target of 35% and the 30% average of peer companies. We expect debt to increase over time as we develop and implement other attractive capital projects, find and make other acquisitions that fit, and repurchase stock. We spent nearly $20 million to repurchase just over 800,000 ChemFirst shares in 1997 and are now working on an additional $40 million repurchase authorization recently approved by the board. We believe stock repurchases are a tax efficient way to return cash to shareholders when other attractive investment opportunities are not available. Chemicals Chemicals had record sales and operating profits for the year as all businesses improved. Pretax operating profits were up 19% to $51.7 million on a 21% increase in sales. Electronic chemicals sales were up about 20%. We invested in manufacturing capabilities and efficiencies to meet growing demand from new semiconductor fabrication lines in the United States and the Far East. Demand for aniline remained strong during the year due to continued growth in isocyanate production. We are the industry's largest merchant producer of aniline. The 25% increase in batch specialty chemical capacity will enable us to meet growing demand for specialty chemicals. We supply a key intermediate for the leading AIDS protease inhibitor and expect to begin production of another protease inhibitor intermediate in 1998. We are developing proprietary products for fast growing ultraviolet curing applications. Custom manufacturing had record operating profits from high utilization of capacity expansions completed in December 1996. During the year the first bulk active pharmaceutical product was produced in the new cGMP pilot plant at Dayton, Ohio. We have begun a $4.5 million expansion at Dayton for production of DUV resins to meet growing demand. Engineered Products and Services Pretax operating profits were a record $2.9 million on a 13% increase in sales. Results improved significantly from a prior year loss due to better project management. During the year combustion and thermal plasma operations were combined to gain greater efficiencies. In January 1998, we sold our 50% interest in Power Sources Inc. to Trigen Energy Corporation (NYSE: TGN). Power Sources, which develops and operates biomass-to-energy power plants, was jointly owned by ChemFirst and Canal Industries. After tax gain on the sale was approximately $5 million, or 25 cents per share. Net proceeds were approximately $11 million. Outlook We think 1998 continuing earnings will be up on a stronger second half. However, first half results may be off due to some unusual events and lower custom manufacturing sales. We also have some price pressure from Asian semiconductor manufacturers and have seen a drop in Asian inquiries for Engineered Products and Services. We expect improvement in the Asian market with economic recovery there. /s/ J. KELLEY WILLIAMS J. Kelley Williams Chairman and Chief Executive Officer /s/ THOMAS G. TEPAS Thomas G. Tepas President and Chief Operating Officer SALES BY INDUSTRY SEGMENT (MILLIONS OF DOLLARS) [GRAPH APPEARS HERE] CHEMICALS [GRAPH APPEARS HERE] EP&S [GRAPH APPEARS HERE] STEEL [GRAPH APPEARS HERE] VALUE OF $100 INVESTED ON DECEMBER 31, 1992 (CUMULATIVE RETURN TO SHAREHOLDERS INCLUDING SHARE PRICE AND DIVIDENDS) [GRAPH APPEARS HERE] CHEMFIRST [GRAPH APPEARS HERE] S&P 500 [GRAPH APPEARS HERE] CHEMFIRST ANNUAL REPORT ----------------------- 1997 /5/ THIS WORLD SCALE ANILINE PLANT AT BAYER CORPORATION'S BAYTOWN, TEXAS, CHEMICAL COMPLEX, SHOWN HERE UNDER CONSTRUCTION, WAS COMPLETED IN FIRST QUARTER 1998. THE PLANT IS AN INTEGRAL PART OF BAYER'S U.S. MDI MANUFACTURING OPERATIONS. IT WILL MORE THAN DOUBLE THE COMPANY'S ANILINE CAPACITY. - ------------------------------------------------------------------------- [Photo Appears here] CHEMICALS - --------- CHEMFIRST MANUFACTURES SPECIALTY CHEMICALS FOR USE IN AGRICULTURAL, PHARMACEUTICAL, POLYMER, AND PHOTOSENSITIVE APPLICATIONS, AND IN THE MANUFACTURE OF INTEGRATED CIRCUITS. - ------------------------------------------------------ RESULTS OF OPERATIONS In Thousands of Dollars - ------------------------------------------------------ 1997 1996 Change - ------------------------------------------------------ Sales $ 297,822 $ 246,014 21% Pretax operating results 51,688 43,593 19% Capital expenditures 84,602 48,670 74% U.S. exports 11% 11% - ------------------------------------------------------ Highlights - ------------------------------------------------------ .. Record sales and operating profits .. Construction of 250-million-pound per year aniline facility at Baytown, Texas, on budget and on schedule for completion first quarter 1998 .. Acquired chemical mechanical planarization assets from Baikowski Chimie and Moyco Technologies .. Acquired acylation derivatives business from Clariant Corporation Chemicals operations include the production and sale of specialty chemicals and chemical intermediates, and research and development for new products and production processes. Objectives are to develop and market proprietary, high- value specialty chemicals, and to be a low-cost producer of intermediate chemicals primarily sold under long-term contracts. The company manufactures specialty chemicals for use in agricultural, pharmaceutical, polymer, and photosensitive applications, and in the manufacture of integrated circuits. Aniline and nitrotoluene derivatives are produced in efficient, continuous process facilities and are primarily sold to industrial customers for automotive, agricultural, construction, pigment, pharmaceutical, and photochemical applications. Outlook The outlook is good for Chemicals. Demand for aniline remains strong. The new 250-million-pound aniline plant at Baytown, Texas, started up ahead of schedule in March 1998. New batch specialty capacity was started up mid-1997 to meet growing demand for agricultural chemical intermediates, pharmaceutical chemicals, photoinitiators, and polymerization inhibitors. At Dayton, Ohio, capability to produce deep ultraviolet (DUV) photoresist resins for manufacture of integrated circuits is being expanded. Electronic chemicals sales are at record levels and growing, and new and improved products for leading edge sub-0.25-micron technology integrated circuits are being developed. Rapid growth rates are expected from the recently acquired chemical mechanical planarization (CMP) businesses, which are being driven by the trend toward integrated circuits with more and thinner layers and smaller feature geometries. CHEMFIRST ANNUAL REPORT ----------------------- 1997 /7/ CHEMICALS - --------- - ------------------------------------------------------------------------------- INTEGRATED CIRCUIT The company produces electronic and performance chemicals used in production of integrated circuits (ICs). IC fabrication begins with silicon, a major ingredient of common sand. Silicon wafers progress through a complex series of steps to become ICs. Today's technology enables thinner layers and smaller feature geometries to produce the complex ICs used in a wide variety of consumer and business products such as wireless communications, multimedia personal computers, and in many home and automotive applications. - ------------------------------------------------------------------------------- [ILLUSTRATION APPEARS HERE] IC Fabrication 1. Deposition POLYMER REMOVERS AND WAFER CLEANING The company's proprietary HDA(TM) 2. Photoresist hydroxylamine products remove residue formed by dry etching during 3. Masking wafer fabrication. These critical cleaning processes inhibit circuit-damaging 4. Patterning corrosion by removing even the smallest particles. 5. Developing 6. Etching DEEP UV (DUV) RESINS POLYMER REMOVERS CMP SLURRIES AND WAFER CLEANING 7. Polymer Removal and Wafer Cleaning 8. Chemical Mechanical DEEP UV (DUV) RESINS Planarization A highly polished, ultra-pure silicon wafer is coated with a thin film of 9. Electrical test DUV photoresist solution containing the company's proprietary resin. 10. Dicing This film is then exposed to DUV light through a pattern mask to create 11. Packaging circuit tracings onto the wafer. 12. Final test CMP SLURRIES Chemical mechanical planarization involves mechanical polishing of wafers using a slurry of abrasives and chemicals manufactured by the company, enabling ultra-high resolution lithography. Illustration by The Loomis Group, Inc. EKC4000(TM), A NEW PROPRIETARY PRODUCT USED IN SUBMICRON AND DEEP SUBMICRON PROCESSING, REMOVES METAL ION CONTAMINATION AND ELIMINATES CORROSION BETTER THAN CONVENTIONAL RINSES. BECAUSE IT IS WATER-BASED, EKC4000(TM) ELIMINATES THE RISK OF FIRE, A MAJOR CONCERN WITH SOLVENT-BASED PRODUCTS. ELECTRONIC AND PERFORMANCE CHEMICALS The company produces organic photoresist removers, post-dry etch polymer removers, and performance chemicals for cleaning and polishing silicon wafers in semiconductor manufacturing. Products are sold on the basis of product function, purity, and cleanness. The company's applications engineers work closely with customers to develop unique chemical solutions to today's advanced semiconductor manufacturing issues. Since 1994, silicon acreage, a leading indicator of semiconductor production, has grown a compounded average of 10.7% annually, and industry forecasts indicate continued strong growth for the remainder of the decade. This growth is being driven by the broad acceptance and proliferation of electronic devices such as wireless communications, mass storage, network systems, and multimedia personal computers. In addition, new electronic devices are being developed and introduced routinely for an increasing [Photo Appears Here] THE NEW LAB AT THE CUSTOM MANUFACTURING PLANT IN TYRONE, PENNSYLVANIA, FOR RESEARCH AND DEVELOPMENT, ENVIRONMENTAL, AND QUALITY CONTROL ALSO PRODUCES KILO QUANTITIES FOR CUSTOMER NEEDS. THE NEW FACILITY INCREASED LAB SPACE BY 200%. - ------------------------------------------------------------------------------- number of home and automotive applications. All of these devices require high performance integrated circuits. The company is the world's second largest supplier of photoresist removers and the largest supplier of post-dry etch polymer removers. Approximately 40% of the world's semiconductors are produced in the Far East and Pacific Rim, while about 14% are produced in Europe. The company has offices in Asia and Europe to support these markets. Product performance, applications engineering support, and customer service are key to customer satisfaction and competitive advantage. Patented HDA(TM) polymer removers effectively remove residues formed during dry etching of silicon wafers and continue to be the fastest-growing products in the history of the company. They increase yields and improve chip performance, which translates into lower costs and higher margins for chip manufacturers. This technology has established the company as a leader in the electronic chemicals industry. During the year, the company acquired CMP technology and assets from Baikowski Chimie and Moyco Technologies. The CMP process involves mechanical polishing of silicon wafers using a slurry of abrasives and chemicals to produce a flatter surface. This enables use of shorter wavelength lithography such as the new deep ultraviolet (DUV) lithography to create the smaller line-width geometries needed for future generations of smaller, faster integrated circuits. The company will develop, produce, and market these slurries. In addition, the company and Baikowski will jointly develop new CMP applications through a strategic alliance that utilizes Baikowski's broad expertise in precision polishing materials. The company also acquired Clariant Corporation's acylation derivatives business, including a portfolio of 37 patents, through a newly created company called TriQuest. This business develops, manu- CHEMFIRST ANNUAL REPORT ----------------------- 1997 /9/ CHEMICALS - --------- [Photo Appears Here] THE cGMP PILOT PLANT AT THE COMPANY'S DAYTON, OHIO, CUSTOM MANUFACTURING FACILITY PRODUCES KILO TO CLINICAL TRIAL-SCALE PRODUCTION FOR CUSTOMER NEEDS. THe cGMP DESIGNATION IS REQUIRED BY CUSTOMERS FOR PRODUCTION OF PHARMACEUTICAL OR FOOD RELATED CHEMICALS. - -------------------------------------------------------------------------------- factures, and markets derivatives of 4-Hydroxyacetophenone (4HAP) for production of DUV photoresists, which enable integrated circuit fabrication at or below 0.25-micron resolution. In addition, 4HAP derivatives are used in other high- growth applications such as polymer additives and specialty adhesives. Custom Manufacturing The company manufactures fine chemicals using both proprietary and customer-developed technology for agricultural, pharmaceutical, polymer, personal care, and electronic chemical applications. Innovative process development, broad technology platforms, efficient production in continuous and batch processes, compliance excellence, and superior customer service give the company a competitive advantage and have made the company a leader in the custom manufacturing industry. Custom manufactured products are generally sold as fine chemical intermediates in drums and in bulk for further processing. Demand for custom manufacturing services is growing 10% - 15% per year and is expected to continue as major chemical and pharmaceutical companies outsource production to concentrate on research and marketing, cut costs, and speed product introductions. The utilization of capacity expansions completed in December 1996 produced record profits in 1997. At Tyrone, Pennsylvania, reactor capacity of 55,000 gallons and a new laboratory facility together create one of the most versatile custom manufacturing sites in North America. The new cGMP (current Good Manufacturing Practices) pilot plant at Dayton, Ohio, produced its first bulk active pharmaceutical project during the year. In addition, Dayton is expanding capability to produce ultra pure chemicals for the electronics industry and will be producing DUV resins for the recently acquired TriQuest business. Other Specialties The company manufactures specialty chemicals for high growth markets such as radiation curing and polymer additives and for use as intermediates in the production of pharmaceutical, personal care, and agricultural products. These products are manufactured using proprietary processes in large scale, integrated batch facilities, which were expanded by 25% during the year. Nitrotoluene derivatives are used in herbicides, rubber processing chemicals, photographic chemicals, optical brighteners, dyestuffs and pigments, and photoinitiators. Aniline and Nitrobenzene The company is a major producer of aniline and nitrobenzene, with world scale plants and long-term supply relationships with major chemical companies. Primary markets for aniline include manufacture of MDI (methylene diphenyl diisocyanate) used in polyurethane foam for insulation in refrigerators, freezers and hot water heaters, commercial and residential construction, and in urethane elastomers used in automobile body components. Other significant markets for aniline include tire and agricultural chemicals and plastics for consumer goods. Aniline and nitrobenzene are sold in bulk and distributed by rail, truck, barge, and ship depending on the size of the shipment or geographic location. The company has completed construction of a world scale, 250-million-pound per year aniline facility located at Bayer Corporation's Baytown, Texas, chemical complex. The facility will be an integral part of Bayer's U.S. MDI manufacturing operations and will more than double the company's current aniline capacity. As demand grows, a planned second phase at Baytown will double aniline capacity there and bring total aniline capacity to approximately 740 million pounds. Research and Development R&D activities identify new markets and applications, new and improved process technologies, and new products. Each business is responsible for its own product and technology development. Applied research is sponsored at several leading universities in the United States and Europe to complement in-house efforts. University research programs have led to the successful development and introduction of patented semiconductor wafer cleaners and performance polymers. During the year a new laboratory was completed at the company's electronic and performance chemicals facility in Hayward, California, which will facilitate research and development on semiconductor cleaning products, and chemicals and abrasives for chemical mechanical planarization. A new lab was also completed at the company's custom manufacturing facility in Tyrone, Pennsylvania, increasing lab space by 200%. The company plans to increase chemicals R&D and technology spending 86% to about $17 million in 1998, including expenses related to the recent CMP and acylation derivatives acquisitions and for product testing and engineering support in Hayward, California, and Kawasaki-City, Japan. Compliance Excellence All of the company's facilities have received certification for quality management or environmental standards. Currently four facilities have International Organization for Standardization ISO 9002 certification for high standards of quality management systems. One plant is also certified for ISO 9001, which covers product design systems. The company's custom chemical manufacturing plant in Tyrone has received ISO 14001 for environmental standards systems and procedures, and electronic chemicals operations in Glascow, Scotland, have received BS7750 certification, the British Standards equivalent. The ISO9000 benchmarks have become a world standard and, in some cases, a requirement for securing new business. Custom manufacturing facilities at Dayton operate under cGMP (current Good Manufacturing Practices) standards for production of pharmaceutical or food related chemicals. CHEMICAL SALES (MILLIONS OF DOLLARS) [GRAPH APPEARS HERE] CHEMFIRST ANNUAL REPORT ----------------------- 1997 /11/ [Photo Appears Here] THE COMPANY'S IS/3/ FLARE SYSTEM (LEFT) EFFICIENTLY BURNS WASTE GASES PRODUCED AT THIS ETHYLENE PLANT SITE. THE 60-INCH FLARE TIP OPERATES QUIETLY AND WITHOUT SMOKE, A KEY CHARACTERISTIC OF ITS DESIGN. THE COMPANY CUSTOM BUILT THE HIGH-TEMPERATURE BURNERS USED IN THE ETHYLENE CRACKER (FAR RIGHT). THIS PLANT PRODUCES ETHYLENE AND PROPYLENE, BUILDING BLOCKS OF POLYETHYLENE AND POLYPROPYLENE PLASTICS. - ----------------------------- ENGINEERED PRODUCTS AND SERVICES - -------------------------------- CHEMFIRST PROVIDES PROVEN DESIGN AND ENGINEERING SKILLS AND INNOVATIVE HARDWARE AND SOFTWARE SOLUTIONS TO CUSTOMERS' ENVIRONMENTAL AND PROCESS REQUIREMENTS. - ------------------------------------------------------------ RESULTS OF OPERATIONS In Thousands of Dollars - ------------------------------------------------------------ 1997 1996 Change - ------------------------------------------------------------ Sales $ 72,712 $ 64,538 13% Pretax operating results 2,926 (6,065)* ** Capital expenditures 1,787 1,822 (2)% U.S. exports 35% 39% *Excluding $25,832 in writedowns and losses related to aluminum dross processing business sold in January 1997 ** Computation not applicable due to loss in 1996 - ------------------------------------------------------------ HIGHLIGHTS - ------------------------------------------------------------ .. 13% sales increase in 1997 .. Five-year compound annual sales growth rate of 35% .. Sold unprofitable aluminum dross processing business in January 1997 - ------------------------------------------------------------ The company provides proven design and engineering skills and innovative hardware and software solutions to customers' environmental and process requirements. Products include low-emission burners, flares, incinerators, rotary kilns, thermal plasma equipment, and software for predictive emissions monitoring and process optimization. Customers include refining, chemical, petrochemical, pharmaceutical, and wood product companies; steel producers; waste remediation companies; and engineering and construction contractors. Objectives are to develop and market innovative, proprietary products for industrial and environmental applications. Outlook Engineered Products and Services should continue to grow as the company builds recognition in the global marketplace. Margins should improve through more efficient product design and effective project management. Lower sales are expected in Asia until economic conditions there improve. The company is focusing on healthy markets in Europe, the Middle East, and the United States to compensate for the anticipated shortfall. Operations Combustion equipment and services enable customers to comply with changing emissions requirements and other environmental regulations. Proprietary low- emission burners reduce nitrogen oxide emissions from process heaters in refineries and petrochemical plants. Flare systems burn gaseous hydrocarbon releases due to process imbalances and operational upsets in refining, petrochemical, and chemical plants. Incinerators dispose of a variety of gas and liquid wastes. Rotary kiln systems reduce the volume of solid wastes by 90% or more, and recover heat to improve process economics. Vapor recovery systems collect and recycle gasoline and petrochemical vapors released during bulk transfer from truck loading terminals to tank trucks. Thermal plasma torches convert electricity into thermal energy using an ionized gas, or "plasma," to pro- CHEMFIRST ANNUAL REPORT ----------------------- 1997 /13/ ENGINEERED PRODUCTS AND SERVICES - -------------------------------- duce much higher temperatures than fossil fuel combustion without combustion by- products. Commercial applications include ladle and tundish heating for steel production and waste treatment and reduction where landfill capacity is limited. Potential commercial applications include low-level radioactive and hazardous waste treatment and treatment of medical and chemical wastes. Combustion and thermal plasma equipment and systems are custom engineered for most applications. Engineers typically design the process, structures, and sophisticated control systems to meet customer needs. Industrial-scale test facilities simulate actual process conditions for customer demonstrations, process development and engineering, equipment testing, and research and development. The company offers computer models and application services to optimize plant processes and to measure, predict, and control emissions with minimal additional plant equipment. The company's controls and process expertise facilitate rapid implementation and attainment of performance targets. Global marketing efforts are directed primarily toward end users and engineering and construction firms for new plants or facility upgrades. ENGINEERED PRODUCTS AND SERVICES (MILLIONS OF DOLLARS) [GRAPH APPEARS HERE] STEEL - ----- RESULTS OF OPERATIONS In Thousands of Dollars - ------------------------------------------------------------ 1997 1996 Change - ------------------------------------------------------------ Sales $ 75,287 $ 73,085 3% Pretax operating results (1,003) (370)* (171)% Capital expenditures 2,341 3,021 (23)% U.S. exports 8% 7% *Excluding $10,125 in asset writedowns - ------------------------------------------------------------ HIGHLIGHTS - ------------------------------------------------------------ * Order backlog at December 31 up 63% versus last year - ------------------------------------------------------------ The company operates a 400,000-square-foot steel melting and production facility, which has the capability of producing 50,000 tons of cast high-grade steel billets and 150,000 tons of carbon, alloy, and specialty grade bottom- poured ingots. Some ingots are upgraded, using outside processors, for sale as bar billet, plate, and wire rod. Average price improved due to better product mix. Capital investments were made to upgrade environmental systems. Outlook The U.S. steel market continues to benefit from high demand. However, domestic pricing is under pressure from imports of specialty steel, which are at historically high levels and may increase if Far East steel demand declines. Productivity, quality, and mix improvements in 1998 should help results. Because of the company's focus on chemicals and related products, efforts continue to sell this business. STEEL SALES (MILLIONS OF DOLLARS) [GRAPH APPEARS HERE] HEALTH, SAFETY, AND ENVIRONMENT - ------------------------------- [LOGO APPEARS HERE](R) The company endorses and is actively implementing the Chemical Manufacturers Association's (CMA) Responsible Care(R) initiative in all chemicals operations. Responsible Care(R) is a multi-step discipline to continuously improve performance in health, safety, and environmental protection. The Codes of Management Practices establish guidelines to assist companies in meeting goals in the following areas: .. Community awareness and emergency response .. Sale and distribution of products .. Protection of employee health and safety .. Safety of manufacturing processes .. Pollution prevention and environmental protection .. Product hazards .. Risk characterization and management While the public recognizes that chemicals contribute greatly to a high standard of living, community concern for safety and environmental practices will always exist. To address these concerns on a local level, the company, through its custom manufacturing operations at Tyrone, Pennsylvania, voluntarily participated in CMA's Management Systems Verification (MSV) process to assess the company's practices against each of the Responsible Care(R) codes. The three-day evaluation was performed by a team of experienced industry professionals and two citizens selected by the local Community Advisory Council and specifically addressed the following: .. Product evaluation and testing .. Evaluation and control of process risks and hazards .. Employee training .. Protection of the environment .. Product packaging and shipping .. Anticipation and preparedness for possible emergency situations Results of the MSV evaluation concluded that the company has well-deve loped management systems for the implementation of Responsible Care(R). The company is dedicated to a continuous effort to attain the goals of each Responsible Care(R) practice. The company's commitment to improving health, safety, and environmental practices is key to earning the trust of the communities where we operate. Community trust enables the company to grow, create competitive advantage, and deliver additional value to shareholders. CHEMFIRST ANNUAL REPORT ----------------------- 1997 /15/ FINANCIAL REVIEW CHEMFIRST ANNUAL REPORT ----------------------- 1997 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of January 1, 1997, the Company's fiscal year end was changed from June 30 to December 31. Previously reported amounts have been restated and/or reclassified to conform with the 1997 presentation. The following discussion is based upon and should be read in conjunction with the selected historical financial information and the Company's financial statements, including the notes thereto. 1997 VERSUS 1996 Consolidated Results Income from continuing operations for 1997 was $38.9 million versus a loss of $10.4 million for 1996. Results for 1997 include a $14.7 million gain ($8.8 million after tax) in the fourth quarter from the sale by the Company of its 23% interest in Melamine Chemicals and $1.5 million after tax from Melamine Chemical's gain from a technology exchange agreement in the second quarter, which is included in equity in net earnings of affiliated companies (see note 4 to the Consolidated Financial Statements). Prior year results include $31.5 million in losses ($19.7 million after tax) due to restructuring costs and asset writedowns, primarily related to aluminum recovery and steel, and $3.4 million in after tax operating losses related to the aluminum recovery operations, which were sold in January 1997 (see note 3 to the Consolidated Financial Statements). Excluding the Melamine gains, special charges and aluminum recovery operating losses, earnings from continuing operations improved to $28.6 million in 1997 from $12.6 million in 1996, primarily due to higher sales and operating profits from both Chemicals and Engineered Products and Services and lower interest expense. Interest expense was down $7.3 million from the prior year due to the extinguishment of most of the debt of the Company in conjunction with the disposal of Fertilizer in December 1996 (see note 7 to the Consolidated Financial Statements). Segment Operations Chemical sales for 1997 were up 21% over the prior year to $297.8 million. Approximately 78% of the sales gain was due to increased volume, as intermediate and electronic chemicals volumes rose 21% and 20%, respectively. The higher intermediate volumes were due to increased nitrobenzene production and an increase in aniline purchased for resale. Operating earnings were up 19% to $51.7 million, primarily due to improved margins in custom manufacturing operations and the increased intermediate sales. Engineered Products and Services sales for 1997 were up 13% over the prior year to $72.7 million. Operating results for 1997 were a profit of $2.9 million. Results for the prior year, excluding $20.4 million in writedowns and $5.4 million in operating losses related to disposed aluminum recovery operations, were a loss of $6.1 million. The approximately $9.0 million improvement was primarily due to higher margins from better project management. Steel sales for 1997 were $75.3 million, up 3% over the prior year due to higher average sales prices. Operating results were a loss of $1.0 million versus $10.5 million in the prior year, which included a $10.1 million writedown to reflect the estimated net realizable value of the steel assets. The Company is continuing its efforts to sell its steel assets, but does not have a formal plan or timetable for disposal. Unallocated corporate expenses for 1997 were $11.3 million, down 8% from the prior year excluding approximately $1.0 million in 1996 expenses related to the change in organizational structure. The Company had net interest income in 1997 versus net interest expense in 1996, primarily due to the assumption of debt by Mississippi Chemical Corporation related to the disposal of Fertilizer in December 1996 and higher interest income from the invested cash proceeds of the transaction. Other income for 1997 included a $14.7 million gain related to the sale of the Company's 23% interest in Melamine. 1996 VERSUS 1995 Consolidated Results Results of continuing operations for 1996 were a loss of $10.4 million, including $31.5 million ($19.7 million after tax) in restructuring costs and asset writedowns, primarily related to aluminum dross processing and steel operations. Excluding these charges, as well as the after tax operating losses of aluminum recovery operations of $3.4 million in 1996 and $5.0 million in 1995, results of continuing operations in 1996 were a profit of $12.6 million versus $14.5 million for 1995, as losses in Engineered Products and Services and lower interest income more than offset higher Chemicals profits and lower unallocated corporate expenses. Segment Operations Chemicals sales for 1996 were $246.0 million, up 15% over 1995 as higher volume in all groups offset lower prices in custom manufacturing operations. Operating profits were $43.6 million, up 7% on higher intermediate chemicals volume due to increased production following capacity additions in the prior year. CHEMFIRST ANNUAL REPORT ----------------------- 1 1997 Engineered Products and Services sales for 1996 were $64.5 million, down slightly from 1995. Operating results were a loss in 1996 of $6.1 million versus a profit of $3.0 million in 1995, excluding losses of $25.8 million and $8.2 million in 1996 and 1995, respectively, related to aluminum recovery operations. The lower results were primarily due to cost overruns in several large projects and $4.9 million in increased general, selling and administrative expenses due to operations growth. The 1996 aluminum recovery losses included $20.4 million in writedowns and accruals related to the shutdown and disposal of these operations, which were sold in January 1997. Steel operating results were a loss of $0.4 million in 1996, excluding a $10.1 million provision to reflect the estimated net realizable value of the Steel assets, versus a profit of $0.9 million in 1995. The profit in 1995 was primarily due to insurance recoveries and gains related to asset sales. Unallocated corporate expenses were $12.3 million in 1996, excluding approximately $1.0 million in reorganization expenses, down 24% from 1995. The higher expense in 1995 was primarily due to compensation expenses from appreciation of stock options and debenture options. Net interest expense increased 29% in 1996 as interest income decreased $2.9 million on lower average investments. Discontinued Operations On December 24, 1996, First Mississippi Corporation completed the spinoff of ChemFirst Inc. and the combination of its fertilizer operations with Mississippi Chemical Corporation. On October 20, 1995, the Company completed the spinoff of its 81% owned subsidiary, Getchell Gold Corporation, to shareholders. The historical results of these businesses, and the gain on disposal of fertilizer operations, are reflected in discontinued operations (see notes 1 and 2 to the Consolidated Financial Statements). Fertilizer net after tax income for 1996 was $36.6 million, down 34% from 1995. The decrease in income was due to lower average sales prices and higher natural gas cost. In addition, 1995 results include $7.8 million in losses related to gold operations. The gold losses included impairment and abandonment charges of $11.5 million for an inactive silver exploration property and assets associated with termination of mining in its main pit. Net gain on disposal of businesses in 1996 includes $225.4 million in gain from the disposal of fertilizer operations, net of $1.7 million in losses related to operations discontinued in prior years. 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 $2.3 million in 1997. Capital expenditures are projected to be $1.1 million and $1.5 million for 1998 and 1999, respectively. In addition, the Company accrues for anticipated costs associated with investigatory and remediation efforts relating to the environment. At December 31, 1997, the Company's accrued liability for these matters totaled $1.4 million. 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. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities." This statement provides guidance in applying existing accounting literature to calculating, recording and disclosing environmental remediation liabilities. The adoption of this standard did not have a material effect on the Company's 1997 financial statements. Capital Resources and Liquidity The Company began the year with a $68.4 million cash and cash equivalents balance, which was primarily due to the receipt of proceeds related to the disposition of fertilizer operations in December 1996 (see notes 1,2 and 7 to the Consolidated Financial Statements). Cash and cash equivalents decreased $60.6 million in 1997, primarily due to increased investing activities, repurchases of the Company's common stock and increased working capital. Investing activities included $95.6 million in capital expenditures, primarily for Chemicals expansion, $11.2 million in expenditures for three acquisitions made in December 1997 and pretax proceeds of $26.1 million related to the sale of the Company's 23% interest in Melamine Chemicals in November 1997. The higher capital expenditures were primarily for a new aniline facility in Baytown, Texas, and a specialty chemicals expansion in Pascagoula, Mississippi. Stock repurchases of $19.3 million effectively completed the Company's $20.0 million stock repurchase program announced in January 1997. Working capital, excluding cash and cash equivalents, increased from the prior year end as trade receivables rose 15% on a 16% increase in sales and 1996 accrued expenses CHEMFIRST ANNUAL REPORT 2 ----------------------- 1997 related to the disposition of fertilizer and aluminum recovery operations were paid. Projected 1998 capital expenditures are approximately $71.0 million, primarily related to Chemicals operations. Also, an additional $40.0 million stock repurchase plan was approved in November 1997. The Company believes that its cash flow from operations, combined with access to existing or available bank credit facilities adequately provide for its cash requirements. Cash flow in 1998 will also include proceeds from the disposal of the Company's 50% interest in Power Sources, Inc. in January 1998 (see note 4 to the Consolidated Financial Statements). Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," was issued June 1997 to be effective for fiscal years beginning after December 15, 1997. The statement requires reporting comprehensive income (components include net income plus all changes to equity except those resulting from investments and distributions) directly in the financial statements and deals only with reporting and display issues versus recognition and measurement issues. Accordingly, there will be no effect on the results of operations when adopted. Comparative financial statements for earlier periods will be reclassified to reflect the provisions of this statement. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was also issued June 1997 to be effective for fiscal years beginning after December 15, 1997. This statement uses a "management approach," based on the way that management organizes segments within a company for making operating decisions and assessing performance, to provide selected reporting information. Some additional elements of disclosure could be required based on certain types of transactions at the segment level. Adoption of this statement will have no effect on the statement of operations. Far East Currencies The Company's 1997 sales to the Far East were approximately $39.0 million, or 9% of total sales, and were primarily in U.S. dollars. Recent devaluations of certain Far East currencies will have an effect on future product sales into these countries; however, the extent of such is presently unknown. Order inquiries for Engineered Products and Services from the Far East have declined and prices for electronic chemicals have come under pressure. To date, the Company has not experienced collection problems on its Far East sales. Year 2000 The advent of the Year 2000 poses significant risks to many companies because of the calculation limitations imposed by software and databases limited to storing a year as a two-digit field (e.g. 1997 as "97"), which leads to computational errors when the years 2000 or later are used in calculations. In its analysis, the Company determined that, while important, the cost to upgrade systems to be Year 2000 compliant was not material. Separately, the Company has elected to initiate installation of a company-wide Enterprise Resource Planning ("ERP") system to integrate all of the Company's information systems. This system will be Year 2000 compliant. In 1997 the Company expended $3.0 million, and is projecting to spend approximately $6.0 million in 1998 and $3.0 million in 1999, with the material portion of the system planned for completion by mid- 1999. It is important that this project meet this timetable to avoid the risks posed by the Year 2000. Forward-Looking Statements Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations which relate to projected capital expenditures and sources of cash, potential effect of devaluations of certain Far East currencies and the projected completion date for the Company's ERP system, as well as other statements in this Annual Report which are not historical in nature, 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 Comp any 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, condition of and product demand by key customers, the timely completion and start-up of construction projects, including the nitrobenzene and aniline facility at Bayer Corporation's Baytown, Texas, chemical complex, and pricing pressure and lower demand for Company products as a result of the recent downturn in Asian financial markets. CHEMFIRST ANNUAL REPORT ----------------------- 3 1997 CONSOLIDATED BALANCE SHEETS - ---------------------------
(In Thousands of Dollars) December 31, ---------------------- 1997 1996 ---------------------- Assets Current assets: Cash and cash equivalents $ 7,766 68,385 Receivables: Trade, less allowance for doubtful accounts of $991 and $404, respectively 71,227 61,874 Affiliated companies (note 4) 303 216 Other (note 8) 5,996 2,555 ---------------------- Total receivables 77,526 64,645 ---------------------- Inventories: Finished products 30,022 28,434 Work in process 21,768 22,772 Raw materials and supplies 23,592 18,815 ---------------------- Total inventories 75,382 70,021 ---------------------- Prepaid expenses and other current assets (notes 2 and 8) 12,741 10,786 ---------------------- Total current assets 173,415 213,837 ---------------------- Investments and other assets: Investments in affiliated companies (note 4) 7,138 14,471 Other investments (note 4) 32,075 31,384 Intangible and other assets, at cost less amortization (note 5) 18,242 10,316 ---------------------- Total investments and other assets 57,455 56,171 ---------------------- Property, plant and equipment, net (notes 6 and 7) 228,476 153,082 ---------------------- $459,346 423,090 ====================== Liabilities and Stockholders' Equity Current liabilities: Notes payable (note 7) $ 20,700 - Current installments of long-term debt (note 7) 878 973 Deferred revenue 2,964 7,778 Accounts payable - trade (including book overdrafts of $10,793, and $6,798, respectively) 46,229 37,236 Accrued expenses and other current liabilities 24,585 37,370 ---------------------- Total current liabilities 95,356 83,357 ---------------------- Long-term debt, excluding current installments (note 7) 4,865 2,122 Other long-term liabilities (note 9) 19,076 15,661 Deferred income taxes (note 8) 18,352 13,464 Stockholders' equity (notes 7, 9 and 10): Serial preferred stock. Authorized 20,000,000 shares; none issued Common stock of $1 par value. Authorized 100,000,000 shares; outstanding 20,030,939 and 20,672,778 shares, respectively 20,031 20,673 Additional paid-in capital 18,869 16,586 Retained earnings 282,797 271,227 ---------------------- Total stockholders' equity 321,697 308,486 ---------------------- Commitments and contingent liabilities (notes 8, 9 and 11) $459,346 423,090 ====================== See accompanying notes to consolidated financial statements.
CHEMFIRST ANNUAL REPORT 4 ----------------------- 1997 CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------
(In Thousands of Dollars, Except Per Share Amounts) Years ended December 31, --------------------------------- 1997 1996 1995 --------------------------------- Revenues: Sales (note 13) $ 445,821 383,637 352,999 Interest and other income, net (notes 4 and 12) 22,233 6,571 7,403 --------------------------------- 468,054 390,208 360,402 --------------------------------- Costs and expenses: Cost of sales 338,873 299,340 271,936 General, selling and administrative expenses 62,296 61,056 55,439 Other operating expenses 6,322 7,469 6,913 Restructuring costs and asset writedowns (note 3) - 31,527 - Interest expense (note 7) 397 7,735 9,446 --------------------------------- 407,888 407,127 343,734 --------------------------------- Earnings (loss) from continuing operations before income taxes (benefit) and investee earnings 60,166 (16,919) 16,668 Income tax expense (benefit) (note 8) 23,765 (5,632) 8,240 --------------------------------- Equity in net earnings of affiliated companies (note 4) 2,497 846 1,096 --------------------------------- Earnings (loss) from continuing operations 38,898 (10,441) 9,524 Earnings from discontinued operations, net of taxes (note 2) - 36,562 47,943 Net gain on disposal of businesses, net of taxes (note 2) - 223,739 - --------------------------------- Net earnings $ 38,898 249,860 57,467 ================================= Earnings (loss) per common share (note 10): Earnings (loss) per common share: Continuing operations $ 1.91 (.50) .46 Discontinued operations - 1.77 2.34 Net gain on disposal of businesses - 10.85 - --------------------------------- Net earnings $ 1.91 12.12 2.80 ================================= Earnings (loss) per common share, assuming dilution: Continuing operations $ 1.86 (.50) .46 Discontinued operations - 1.77 2.29 Net gain on disposal of businesses - 10.85 - --------------------------------- Net earnings $ 1.86 12.12 2.75 =================================
See accompanying notes to consolidated financial statements. CHEMFIRST ANNUAL REPORT ----------------------- 5 1997 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -----------------------------------------------
(In Thousands of Dollars, Except Share Amounts) Years ended December 31, 1997, 1996 and 1995 --------------------------------------------------- Common stock Additional --------------------- paid-in Retained Shares Amount capital earnings --------------------------------------------------- Balance, December 31, 1994 20,338,108 $ 20,338 5,469 178,902 Net earnings - - - 57,467 Dividends declared - $.39 per share - - - (7,867) Distribution of common stock of Getchell Gold Corp. (note 2) - - - (31,277) Common stock issued: Employee stock options 128,583 128 1,054 - Convertible debentures 353,700 354 3,923 - Purchase and retirement of common shares (235,400) (235) - (5,253) Income tax benefit on exercise of stock options and convertible debentures - - 3,756 - --------------------------------------------------- Balance, December 31, 1995 20,584,991 20,585 14,202 191,972 Net earnings - - - 249,860 Dividends declared - $.40 per share - - - (8,246) Distribution of common stock of Mississippi Chemical Corp. (note 2) - - - (162,346) Common stock issued: Employee stock options 41,704 42 768 - Convertible debentures 46,583 47 308 - Purchase and retirement of common shares (500) (1) - (13) Income tax benefit on exercise of stock options and convertible debentures - - 1,308 - --------------------------------------------------- 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 ===================================================
See accompanying notes to consolidated financial statements. CHEMFIRST ANNUAL REPORT 6 ----------------------- 1997 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
(In Thousands of Dollars) Years ended December 31, --------------------------------- 1997 1996 1995 --------------------------------- Cash flows from operating activities: Net earnings $ 38,898 249,860 57,467 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 20,642 18,056 18,251 Restructuring costs and asset writedowns (note 3) - 31,527 - Provision for losses on receivables 1,290 1,218 266 Deferred income taxes 4,212 (5,297) (1,606) Net gain on disposal of businesses, net of tax benefit (note 2) - (223,739) - Gain on sale of equity investee (note 4) (14,684) - - Gain on sale of property, plant and equipment - (515) (360) Undistributed earnings of affiliates, net of taxes (2,497) (846) (1,096) Changes in current assets and liabilities, net of effects of acquisitions and dispositions: Receivables (10,807) 3,839 (15,398) Inventories (573) (6,448) (13,564) Prepaid expenses (1,188) (645) 253 Accounts payable 6,962 (1,695) 1,868 Accrued expenses and other current liabilities (13,709) 7,588 5,609 Deferred revenue (1,381) 8,270 1,203 Other, net (3,670) (2,410) (1,055) Net earnings from discontinued operations (note 2) - (36,562) (47,943) --------------------------------- Net cash provided by continuing operations 23,495 42,201 3,895 Net cash provided by discontinued operations 41 38,700 64,256 --------------------------------- Net cash provided by operating activities 23,536 80,901 68,151 --------------------------------- Cash flows from investing activities: Proceeds from sale of subsidiary 2,100 142,665 - Capital expenditures (95,570) (53,732) (33,479) Acquisitions of businesses (note 2) (11,166) - - Collection of note receivable - - 15,000 Proceeds from sale of equity investee 26,138 - - Other investing 1,094 971 (767) --------------------------------- Net cash provided by (used in) investing activities of continuing operations (77,404) 89,904 (19,246) Net cash used in investing activities of discontinued operations - (44,532) (24,143) --------------------------------- Net cash provided by (used in) investing activities (77,404) 45,372 (43,389) --------------------------------- Cash flows from financing activities: Proceeds of revolving credit agreement borrowings 20,000 11,000 - Principal repayments of long-term debt (note 7) (769) (106,292) (1,035) Dividends (note 9) (8,147) (8,246) (7,867) Purchase of common stock (19,312) (12) (5,479) Proceeds from issuance of common stock 1,477 914 4,818 --------------------------------- Net cash used in financing activities (6,751) (102,636) (9,563) --------------------------------- Net increase (decrease) in cash and cash equivalents (60,619) 23,637 15,199 Cash and cash equivalents at beginning of year 68,385 44,748 29,549 --------------------------------- Cash and cash equivalents at end of year $ 7,766 68,385 44,748 ================================= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 402 8,370 9,620 ================================= Income taxes, net $ 20,832 11,132 32,424 =================================
Material noncash investing and financing activities are disclosed in notes 2 and 7. See accompanying notes to consolidated financial statements. CHEMFIRST ANNUAL REPORT ----------------------- 7 1997 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ December 31, 1997, 1996 and 1995 (In Thousands of Dollars, Except Amounts Per Share) 1. Basis of Presentation and Summary of Significant Accounting Policies Change in Organization ChemFirst Inc. (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 described below), the Company's name was changed from Omnirad, Inc. to ChemFirst Inc. Prior to December 23, 1996, the Company's subsidiaries were subsidiaries of First Mississippi and the Company's operations were conducted through subsidiaries of First Mississippi. 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 which had engaged in no operating 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 ("MCC"), pursuant to an Agreement and Plan of Merger and Reorganization dated as of August 27, 1996 (the "Merger"). The Company has operated as a publicly held entity since the Distribution Date. For financial reporting purposes, this transaction has been accounted for as a disposal of the fertilizer business. Accordingly, the Company's financial statements prior to the Distribution are the historical financial statements of First Mississippi restated to present the fertilizer business as a discontinued operation. For further information, see note 2. Basis of Presentation The Company produces specialty chemicals and chemical intermediates for industry and agriculture, and provides engineered products and services to chemical and other industries. Further descriptions of the Company's products and the relative significance of its operations are included in the industry segment information data in note 13. 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. Fiscal Year Change As of January 1, 1997, the Company's fiscal year end was changed from June 30 to December 31. Previously reported amounts have been restated and/or reclassified to conform with the 1997 presentation. 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. Investments in joint ventures, partnerships and other equity investments are accounted for by the equity method. Recognition of Revenue Revenues generally are recorded when title and risk of ownership pass, except for long-term construction type contracts, which 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. Depreciation and Amortization Depreciation of plant and equipment and depreciable investments is based on cost and the estimated useful lives (or term of lease, if shorter) of the separate units of property. The straight-line and accelerated methods are primarily used in determining the amount of depreciation charged to expense. Goodwill of businesses acquired is generally amortized over 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. CHEMFIRST ANNUAL REPORT 8 ----------------------- 1997 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. Stock Options All outstanding stock options are nonqualified and require no charges against income upon grant or exercise. The tax benefit the Company receives from dispositions that result in ordinary income to option recipients is reflected in stockholders' equity. Phantom Share Units The discount resulting from participant conversions from certain nonqualified compensation plans to phantom share units is amortized over a two- year holding period. Phantom share units are credited with equivalent dividends equal to cash dividends paid by the Company. Equivalent dividends and phantom share market value changes are included in the statement of operations. Cash and Cash Equivalents The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Investments Realized gains and losses on investments are determined on the basis of specific costs and have been aggregated in net gain on disposition of other noncurrent assets (see note 12). 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. Accounting Changes Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," were adopted by the Company in 1995 and 1996, respectively, with no material effect to the Company. 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 (see note 9). SFAS No. 128, "Earnings per Share," was adopted by the Company in 1997. This Statement's objective is to simplify and standardize, relative to other countries, the computation of earnings per share ("EPS") previously required by APB Opinion No. 15, "Earnings per Share." It requires dual presentation of basic and diluted EPS on the face of the income statement and a reconciliation of basic and diluted EPS for continuing operations. Adoption of this Statement did not have a material effect on the Company's EPS. SFAS No. 129, "Disclosure of Information about Capital Structure," was adopted by the Company in 1997 relative to descriptive disclosure of securities outstanding. The Company's disclosure requirements are unchanged from previous requirements. 2. Acquisitions and Disposals Acquisitions On December 31, 1997, the Company acquired an acylation derivatives business involved in the applications development and marketing of products for deep ultraviolet photoresist from Clariant Corporation as well as the chemical mechanical planarization assets of Baikowski International Corporation and of Moyco Technologies, Inc. The aggregate purchase price of these three businesses was approximately $14,900, including $11,200 in cash and contingent consideration of approximately $3,700 payable in five years (see note 7). Goodwill is to be amortized on a straight-line basis over the period assigned to each acquisition, ranging from five to 15 years. CHEMFIRST ANNUAL REPORT ----------------------- 9 1997 FINANCIAL NOTES - --------------- Disposals As discussed in note 1, on December 23, 1996, First Mississippi completed the spinoff of the Company and on December 24, 1996, First Mississippi and its fertilizer operations ("Fertilizer") were merged with a wholly owned subsidiary of MCC. Prior to the completion of the transaction, First Mississippi borrowed $150,500, which was used to refinance First Mississippi's existing indebtedness and pay certain transaction costs. This debt remained the obligation of First Mississippi, which became a subsidiary of MCC as a result of the Merger. As part of the transaction, for each share of First Mississippi common stock outstanding at the close of trading on December 23, 1996, First Mississippi shareholders received one share of ChemFirst Inc. common stock and approximately one-third share of MCC common stock. The total value of the transaction was approximately $313,000, based on the value of the assumed indebtedness of $150,500 and the value, approximately $162,000, of the shares of MCC distributed to First Mississippi shareholders. These total proceeds, less the net book value of the Fertilizer assets and related transaction costs, resulted in a pretax gain of approximately $222,000 and an after tax gain of approximately $225,000. The gain on disposition of the Fertilizer assets is included in gain on disposal of businesses in the December 31, 1996, consolidated statement of operations. The tax benefit from the transaction was for certain tax deductible expenses incurred by the Company. The distribution of MCC shares to First Mississippi shareholders is reported as a reduction of stockholders' equity in the accompanying December 31, 1996, financial statements. On October 20, 1995, First Mississippi distributed to its shareholders its entire ownership of Getchell Gold Corporation ("Getchell"), formerly known as FirstMiss Gold Inc. Each First Mississippi shareholder received approximately seven-tenths of a common share of Getchell for each share of First Mississippi owned. The net assets and liabilities of discontinued operations, which are included in "Prepaid expenses and other current assets" in the consolidated financial statements, were $507 and $412, respectively, at December 31, 1997 and 1996, consisting of prepaid expenses and other current assets of $2,550 and accrued expenses of $2,043; and prepaid expenses and other current assets of $2,640, accounts payable of $38 and accrued expenses of $2,190, respectively. The statements of operations have been reclassified to separate discontinued and continued operations. Revenues and net earnings of the discontinued operations for the years ended December 31, 1996 and 1995, were as follows: December 31, -------------------- 1996 1995 -------------------- Fertilizer Sales and revenues $231,195 235,328 ==================== Income from operations before taxes $ 57,725 87,114 Income tax expense 21,356 31,425 Equity in net earnings of equity investees 193 74 -------------------- Earnings from discontinued operations, net $ 36,562 55,763 ==================== Getchell Sales and revenues $ - 49,720 ==================== Loss from operations before taxes $ - (18,425) Income tax benefit - (7,050) Minority interests - 3,555 -------------------- Loss from discontinued operations, net $ - (7,820) ==================== Total operating results of discontinued operations $ 36,562 47,943 ==================== A pretax loss of $2,700 was also recorded during the year ended December 31, 1996, related to previously discontinued businesses and is included in gain on disposal of businesses, net of applicable income tax benefit of $954, in the consolidated statement of operations. Such loss resulted from revised estimates of environmental remediation costs and settlements of operating costs related to previously discontinued phosphate fertilizer (1982) and oil and gas (1993) businesses. CHEMFIRST ANNUAL REPORT 10 ----------------------- 1997 3. Restructuring Costs and Asset Writedowns During the year ended December 31, 1996, the Company recorded charges of $31,527 related to the disposition of aluminum dross processing, asset writedowns in steel operations and changes in organizational structure. On January 14, 1997, the Company sold its aluminum dross processing operations, which were included in the Engineered Products and Services segment, for $4,100. The terms of the sale included a cash payment in the amount of $2,100, and a note for $2,000. Interest on the note is calculated at prime and is payable quarterly beginning April 1, 1997, with the entire principal balance and any unpaid interest due and payable on January 13, 2002. In 1996, the Company recorded pretax charges of $20,402, ($18,256 during the second quarter and $2,146 during the fourth quarter) related to a plan adopted in May 1996, to close and dispose of these operations. These charges included $13,941 in asset writedowns and $6,461 in accruals. The accruals included $4,146 in estimated costs in excess of market value to process inventory to meet contractual obligations, $500 for disposal of marketable inventory, $525 for severance and $1,290 for contract cancellations and other estimated costs. In 1997 and 1996, the Company expended $2,305 and $3,293, respectively, in cash against these accruals, primarily related to inventory processing and severance payments. Although the Company does not have a formal plan or timetable for disposal, it is seeking a buyer for its steel melting and production facility operated by FirstMiss Steel, Inc. During the quarter ended December 31, 1996, the Company reduced the carrying amount of its steel assets by $10,125 based on indications of interest received in that quarter. The net book value of the steel assets was $44,259 at December 31, 1997. The Company is continuing its efforts to sell this operation, but is uncertain as to whether a sale can be completed on terms acceptable to the Company. The Company does not believe it will incur a material loss if a sale is closed. Other charges during the quarter ended December 31, 1996, included $1,000 for estimated corporate expenses related to the change in organization, which was mostly paid in 1997 (note 1). 4. Investments In November 1997, the Company sold its 23% interest in Melamine Chemicals, Inc. ("MCI") to Borden Chemical, Inc. for $26,138 in cash, recognizing a pretax gain of $14,684. At December 31, 1996, the MCI investment had a quoted market value of $10,519 and a carrying amount of $8,623. On January 22, 1998, the Company sold its 50% interest in Power Sources, Inc. to Trigen Energy Corporation for approximately $20,000 in cash. The Company will recognize a pretax gain of approximately $8,500 in the first quarter of 1998 and defer recognition of approximately $3,000 in pretax gain, pending resolution of contingencies related to the transaction. Investments in affiliated companies accounted for by the equity method were $7,138 and $14,471, respectively, at December 31, 1997 and 1996. Equity earnings, net of taxes, were $2,497, $846 and $1,096, respectively, for the years ended December 31, 1997, 1996 and 1995. The following is a summary of financial information related to affiliated companies: December 31, ---------------------- 1997 1996 ---------------------- Current assets $ 2,300 30,021 Noncurrent assets 22,004 44,156 Current liabilities 1,900 7,491 Noncurrent liabilities 8,129 18,131 ---------------------- Net equity $ 14,275 48,555 ====================== At the date of the Getchell spinoff, the Company received a promissory note in the amount of $52,507 from Getchell in settlement of all prior cash advances. The note bears interest at a rate based on the London Interbank Offered Rate (6.6875% at December 31, 1997). Interest and principal are due in September 2000. Subsequent to the spinoff date, the note principal amount was reduced by a cash repayment of $15,000 and an offset of $13,939 representing settlement of tax attributes utilized by the Company during the time Getchell was included in the Company's consolidated income tax returns. The aggregate unpaid principal amount of the note (including accrued interest) was $27,138 and $25,446 at December 31, 1997 and 1996, respectively, and is included in other investments. CHEMFIRST ANNUAL REPORT ----------------------- 11 1997 FINANCIAL NOTES - --------------- 5. Intangible and Other Assets The major classes of intangible and other assets are summarized below: December 31, -------------------- 1997 1996 -------------------- Goodwill $ 25,766 16,868 Other 3,013 10,001 -------------------- 28,779 26,869 Less accumulated amortization 10,537 16,553 -------------------- $ 18,242 10,316 ==================== The net carrying amount of goodwill at December 31, 1997 and 1996, was $17,036 and $9,231, respectively, and is all related to the chemical segment. Amortization expense related to the above amounted to $1,252 in 1997, $1,876 in 1996 and $2,207 in 1995. 6. Property, Plant and Equipment A summary of property, plant and equipment follows: December 31, Estimated -------------------- useful lives 1997 1996 ------------------------------------ Assets owned, at cost: Land and land improvements 10-20 $ 7,319 8,561 Buildings 20-45 26,359 20,819 Plant facilities and equipment 5-20 196,782 168,643 Other facilities and equipment 5-12 54,537 69,468 Construction in progress 72,196 16,453 -------------------- Total assets owned 357,193 283,944 -------------------- Assets leased, at cost: Land improvements 10-20 509 509 Buildings 10 216 216 Other facilities and equipment 20 8,958 8,958 -------------------- Total capital leases 9,683 9,683 -------------------- Total property, plant and equipment 366,876 293,627 Less accumulated depreciation and amortization 138,400 140,545 -------------------- Net property, plant and equipment $228,476 153,082 ==================== Depreciation and amortization expense related to the above was $19,390 in 1997, $16,180 in 1996 and $16,044 in 1995. Interest capitalized amounted to $162 in 1997, $1,072 in 1996 and $135 in 1995. CHEMFIRST ANNUAL REPORT 12 ----------------------- 1997 7. Long-Term Debt A summary of long-term debt follows:
December 31, -------------------- 1997 1996 -------------------- Unsecured notes (includes $3,693 noncash 6.25% note for 1997 acquisition, due 2002) $ 4,185 753 Secured: Capital lease obligations, with interest rates at 4.0%, due in monthly installments through May 2000 1,515 2,084 Other notes 43 258 -------------------- 5,743 3,095 Less current installments of long-term debt 878 973 -------------------- Long-term debt, excluding current installments $ 4,865 2,122 ====================
Under loan agreements in effect at December 31, 1997, there were no compensating balance requirements. The above obligations mature in various amounts through 2002, including approximately $878 in 1998, $863 in 1999, $309 in 2000, $0 in 2001 and $3,693 in 2002. At the close of the Merger with MCC described in notes 1 and 2, the debt of First Mississippi was refinanced and increased to $150,500. This debt was assumed by MCC as part of the merger transaction. Proceeds from the refinancing were used to prepay the 9.42% senior notes of $79,714 and make-whole penalties of $6,613. In addition, existing credit facility borrowings of $5,000 were repaid. The Company has a $100,000 bank revolving credit facility originating June 1997, that is committed until May 2002. At December 31, 1997, there was a balance of $20,000 outstanding under the facility. Outstanding letters of credit under the facility were $5,826, leaving $74,174 available for borrowings. 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 on the amount of each participating bank's commitment. The facility fee for the $100,000 bank revolving credit facility was $80 for the period from May 1997, to December 31, 1997. 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. A commitment fee ranging from .225 to .375 of 1% per annum was charged on the daily average unused commitment under the facility. Commitment fees for the period January 1997, through May 1997, were $45. Commitment fees for the years ended December 31, 1996 and 1995, were $133 and $211, respectively. The revolving credit agreement in affect at December 31, 1997, contains certain convenants, the most significant of which require a specified ratio of earnings before interest and taxes to cover fixed charges, and a specified capitalization ratio to debt. At December 31, 1997, the Company was in compliance with these covenants. The Company also has access to an uncommitted facility for the issuance of foreign currency letters of credit. The total outstanding at December 31, 1997, was $1,219. The possibility of default is considered remote but would act to trigger these letters of credit becoming 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, 1997, 1996 and 1995, were $559, $8,807 and $9,581, respectively. CHEMFIRST ANNUAL REPORT ----------------------- 13 1997 FINANCIAL NOTES - --------------- 8. Income Taxes Total income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995, was allocated as follows:
December 31, -------------------------------- 1997 1996 1995 -------------------------------- Continuing operations $ 23,765 (5,632) 8,240 Discontinued operations - 20,402 24,375 Fertilizer disposition - (2,975) - Stockholders' equity related to compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (886) (1,308) (3,756) -------------------------------- $ 22,879 10,487 28,859 ================================
Income tax expense (benefit) differs from the statutory federal rate of 35% applied to earnings (loss) from continuing operations before income taxes (benefit) and investee earnings for the years ended December 31, 1997, 1996 and 1995, as follows:
December 31, -------------------------------- 1997 1996 1995 -------------------------------- Computed "expected" tax expense (benefit) $ 21,058 (5,921) 5,834 State income taxes, net of federal income tax benefit 2,202 537 1,146 Amortization of goodwill 388 337 402 Exempt earnings of Foreign Sales Corporation (172) (153) (236) Increase in net cash surrender value of life insurance (331) (318) (289) Tax provision adjustments for pending Internal Revenue Service (IRS) matters 400 150 1,275 Other, net 220 (264) 108 -------------------------------- Actual tax expense (benefit) - continuing operations $ 23,765 (5,632) 8,240 ================================ Components of income tax expense (benefit) are as follows: December 31, -------------------------------- 1997 1996 1995 -------------------------------- Current: Federal $ 14,814 (1,513) 8,625 State 3,489 1,335 1,345 Foreign 1,250 (157) (124) -------------------------------- 19,553 (335) 9,846 -------------------------------- Deferred: Federal 4,297 (4,768) (2,016) State (85) (508) 419 Foreign - (21) (9) -------------------------------- 4,212 (5,297) (1,606) -------------------------------- Total: Federal 19,111 (6,281) 6,609 State 3,404 827 1,764 Foreign 1,250 (178) (133) -------------------------------- $ 23,765 (5,632) 8,240 ================================
CHEMFIRST ANNUAL REPORT 14 ----------------------- 1997 The significant components of deferred income tax expense (benefit) attributable to income (loss) from continuing operations are as follows:
December 31, ---------------------------- 1997 1996 1995 ---------------------------- Deferred tax expense (benefit) from changes in temporary differences and the valuation allowance $ 4,212 (5,297) (1,606) ============================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and the deferred tax liabilities at December 31, 1997 and 1996, are as follows:
December 31, --------------------- 1997 1996 --------------------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 529 288 Deferred compensation 4,003 3,275 Incentive compensation accrual 1,313 748 Inventory costs 2,803 1,502 State net operating loss carryforward 3,410 2,700 Accrued vacation costs 892 688 Accrued pension costs 2,399 2,123 Other, net 189 3,639 --------------------- Total gross deferred tax assets 15,538 14,963 Less: valuation allowance (3,197) (2,592) --------------------- Net deferred tax assets 12,341 12,371 --------------------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation (16,023) (9,169) Investment in affiliated companies, principally due to undistributed earnings (7,704) (10,160) State income taxes (1,332) (1,548) --------------------- Total gross deferred tax liabilities (25,059) (20,877) --------------------- Net deferred tax liability $(12,718) (8,506) =====================
The net deferred tax liability at December 31, 1997 and 1996, consists of a long-term deferred tax liability of $18,352 and $13,464, respectively, and a current deferred tax asset of $5,634, and $4,958, respectively. The current deferred tax asset is included in prepaid expenses and other current assets in the consolidated balance sheets. The net change in the valuation allowance was an increase of $605 and $219 for the periods ending December 31, 1997 and 1996, respectively. The valuation allowance is related to certain state net operating losses which the Company believes are less than likely to be recognized. Subsequently recognized tax benefits relating to the allowance for deferred tax assets will be reported in the consolidated statement of operations. 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, net of the existing valuation allowance at December 31, 1997. Refundable income taxes of $2,655 and $788 at December 31, 1997 and 1996, respectively, are included in other current receivables in the accompanying consolidated financial statements. CHEMFIRST ANNUAL REPORT ----------------------- 15 1997 FINANCIAL NOTES - --------------- As a result of the Merger, the Company assumed liability for the prior tax returns of First Mississippi. The federal income tax returns have been examined through June 30, 1994, and all years prior to June 30, 1989, are closed. Issues relating to the years ended June 30, 1989 through June 30, 1994, are being contested through various stages of administrative appeal. The federal income tax returns for the years ended June 30, 1995 and 1996, are currently under examination. Management believes that adequate provision has been made for any adjustments which might be assessed for open years through December 31, 1997. Prior to the Getchell spinoff, First Mississippi filed a consolidated federal income tax return that included Getchell. In accordance with a Tax Sharing Agreement dated October 1, 1987 between First Mississippi and Getchell, Getchell recomputed its income tax provision each year on a separate return basis and paid to First Mississippi amounts approximating the federal income taxes Getchell would have paid if Getchell filed an independent consolidated return. The Tax Sharing Agreement also applied to certain state and franchise tax returns which the Company filed on a combined or consolidated basis. Based on the June 30, 1995, income tax returns, Getchell had approximately $19,472 of unused tax assets which First Mississippi was required to reimburse under the terms of the Tax Sharing Agreement. Prior to the distribution of Getchell shares to First Mississippi shareholders, a negotiated settlement of $13,939 (note 4) was made in cancellation of the Tax Sharing Agreement. 9. 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. Net annual pension expense for this plan for the years ended December 31, 1997, 1996 and 1995, included the following components: December 31, --------------------------------- 1997 1996 1995 --------------------------------- Service cost $ 2,376 2,290 2,021 Interest cost 2,158 1,944 1,752 Actual return on plan assets (7,310) (4,294) (3,898) Net amortization and deferral 4,220 1,707 1,607 --------------------------------- $ 1,444 1,647 1,482 ================================= The assumptions used in calculating the expense for the years ended December 31, 1997, 1996 and 1995, included a discount rate of 7.75%, a rate of increase in compensation levels of 4% and a 9% expected long-term rate of return on assets. Net annual pension expense allocated to discontinued operations was $144 and $330 for the years ended December 31, 1996 and 1995, respectively. Plan assets are invested primarily in equity securities and U. S. Government and corporate bonds. The following table sets forth the funded status of the plan at December 31, 1997 and 1996:
December 31, ---------------------- 1997 1996 ---------------------- Actuarial present value of benefit obligations: Vested benefit obligations $ 26,347 18,806 ====================== Accumulated benefit obligations $ 29,337 20,101 ====================== Projected benefit obligations $ 37,494 27,035 Plan assets at fair value 36,207 29,619 ---------------------- Plan assets in excess of (less than) projected benefit obligations (1,287) 2,584 Unrecognized net gain from past experience (4,882) (7,356) Unrecognized prior service cost 1,040 1,128 Unrecognized transition credit, net (2,177) (2,482) ---------------------- Pension liability $ (7,306) (6,126) ======================
CHEMFIRST ANNUAL REPORT 16 ----------------------- 1997 The Company has a contributory 401(k) savings plan and an employee stock ownership plan, both of which cover substantially all eligible employees who have completed six months of service. Total expense under the plans amounted to approximately $1,517, $1,366 and $1,404 for the years ended December 31, 1997, 1996 and 1995, respectively. These plans and the pension plan invest in the Company's stock. The approximate total number of shares held by the plans at December 31, 1997 and 1996, was 463,903 and 377,000, respectively. The Company has various nonqualified plans that act to restore earned benefits reduced due to income tax regulations, or allow for other compensation deferrals. In 1997, participants in certain of these plans were offered the opportunity to convert existing balances and/or future deferrals into phantom share units pegged to the performance of the Company's stock. Additionally, a 15% discount on the market value of the stock at the conversion date was given to those participants making this election. The nonqualified supplemental pension plan provides for incremental pension payments from the Company's funds. The total accrual relating to this unfunded plan at December 31, 1997 and 1996, was $1,378 and $1,305, respectively. Net annual pension expense for this plan was $77, net of an actuarial adjustment of $233 in 1997, $250 and $216 (including expense allocated to discontinued operations of $73 and $49) for the years ended December 31, 1996 and 1995, respectively. The cost of the nonqualified restorations of the 401(k) and ESOP plans was $622, $274 and $245 for the years ended December 1997, 1996 and 1995, respectively. Individual life insurance contracts were purchased, with the Company as beneficiary, to assist in the funding of certain nonqualified deferred compensation plans covering directors, officers and key employees. The expense for these plans was $795, $802 and $641 for the years ended December 31, 1997, 1996 and 1995, 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 expiring no later than 10 years after grant. At December 31, 1997, options available for grant totaled 89,638 shares of common stock. Additional information follows:
Stock options Debenture options ------------------------------------------------------- Average Average Number option price Number option price of shares per share of shares per share ------------------------------------------------------- Balance, December 31, 1994 169,900 $ 11.81 518,000 $ 12.81 Options granted before spinoff 93,600 32.81 - - Options exercised before spinoff (140,500) 11.49 (309,200) 11.76 Option conversion adjustment - Getchell* 75,034 - 127,368 - Options granted after spinoff 119,200 23.13 - - Options exercised after spinoff (483) 9.36 - - Options forfeited (300) 23.13 - - ------------------------------------------------------- Balance, December 31, 1995 316,451 19.64 336,168 8.92 Options granted before spinoff 227,050 24.05 - - Options exercised before spinoff (41,704) 19.42 (10,143) 10.12 Option conversion adjustment - MCC* 120,902 - 81,525 - Options forfeited (18,251) 22.34 - - ------------------------------------------------------- Balance, December 31, 1996 604,448 17.30 407,550 7.10 Options granted 518,010 23.18 - - Options exercised (65,620) 14.43 (78,492) 6.74 Options forfeited (6,800) 23.13 - - ------------------------------------------------------- BALANCE, DECEMBER 31, 1997 1,050,038 $ 20.34 329,058 $ 7.19 ======================================================= EXERCISABLE, DECEMBER 31, 1997 532,028 329,058 ========= ======= CHEMFIRST ANNUAL REPORT ----------------------- 17 1997
FINANCIAL NOTES - --------------- *The number of shares of common stock underlying outstanding debentures, debenture options and nonqualifying stock options, as well as stock option prices, were adjusted to reflect the distribution values (note 2) of the MCC and Getchell shares. These adjustments, which increased the number of shares underlying the outstanding awards and reduced the exercise prices by factors of 1.25 and 1.61, respectively, are reflected in the total number of shares and ending average option prices at December 31, 1997, 1996 and 1995. In accordance with SFAS No. 123, the following additional disclosures are required related to options granted during the three-year period ended December 31, 1997: 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, 1997, 1996 and 1995, respectively: dividend yields of 1.7, 2.1 and 2.3 percent; expected volatilities of 26, 25 and 25 percent; risk-free interest rates of 6.8, 6.9 and 6.7 percent; and expected option lives of four years for all periods presented. A summary of the status of the Company's stock option plan at December 31, 1997, 1996 and 1995, and changes during the years ended on those dates is presented below:
1997 WEIGHTED-AVG. 1996 Weighted-avg. 1995 Weighted-avg. Stock options Shares EXERCISE PRICE Shares exercise price Shares exercise price ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of period 551,212 $ 18.33 269,598 $ 21.59 - - Granted 518,010 23.18 227,050 24.05 212,800 $ 27.39 Exercised before spinoff - - (37,437) 20.56 - - Spinoff conversion adjustments - - 110,252 - 57,098 - Exercised after spinoff (49,518) 16.98 - - - - Forfeited (6,800) 23.13 (18,251) 22.34 (300) 23.13 ----------------------------------------------------------------------------------------- Outstanding at end of period 1,012,904 $ 20.84 551,212 $ 18.33 269,598 $ 21.59 ========================================================================================= Options exercisable at end of period 501,694 283,773 - ========= ======= ======= Weighted-average fair value of options granted during period $ 6.11 $ 4.93 $ 4.29 ======= ======= ========
The following table summarizes information about fixed stock options for the period ended December 31, 1997:
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 - ------------------------------------------------------------------------------------------------------------------ $16.30-$26.63 1,012,904 8.4 years $20.84 501,694 $18.46 ==================================================================================================================
CHEMFIRST ANNUAL REPORT 18 ----------------------- 1997 The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plan. 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:
December 31, -------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------- Net earnings As reported $ 38,898 $ 249,860 $ 57,467 Pro forma $ 37,955 $ 248,902 $ 57,030 Earnings per common share As reported $ 1.91 $ 12.12 $ 2.80 Pro forma $ 1.86 $ 12.07 $ 2.78 Earnings per common share, assuming dilution As reported $ 1.86 $ 12.12 $ 2.75 Pro forma $ 1.82 $ 12.07 $ 2.73
10. Stockholders' Equity Earnings per common share calculations are based on the weighted average number of common shares outstanding during each period; 20,395,060, 20,615,087, and 20,515,058 for the years ended December 31, 1997, 1996 and 1995, respectively. Calculations for diluted earnings per common share are based on the weighted average number of outstanding common shares and common share equivalents during the periods; 20,887,752, 20,615,087 and 20,916,078 for the years ended December 31, 1997, 1996 and 1995, respectively. A reconciliation of the numerators and denominators for basic and diluted per share computations from continuing operations for the years ended December 31, 1997, 1996 and 1995 follows:
Income (loss) Shares Per share (numerator) (denominator) amount --------------------------------------------------- BASIC EPS Earnings from continuing operations - 1997 $ 38,898 20,395,060 $ 1.91 EFFECT OF DILUTIVE SECURITIES Options - 195,867 - Convertible debentures - 296,825 - --------------------------------------------------- DILUTED EPS Earnings from continuing operations - 1997 $ 38,898 20,887,752 $ 1.86 =================================================== BASIC EPS Loss from continuing operations - 1996 $(10,441) 20,615,087 $ (.50) EFFECT OF DILUTIVE SECURITIES (NOT APPLICABLE DUE TO LOSS) - - - --------------------------------------------------- DILUTED EPS Loss from continuing operations - 1996 $(10,441) 20,615,087 $ (.50) =================================================== BASIC EPS Earnings from continuing operations - 1995 $ 9,524 20,515,058 $ .46 EFFECT OF DILUTIVE SECURITIES Options - 76,816 - Convertible debentures - 324,204 - --------------------------------------------------- DILUTED EPS Earnings from continuing operations - 1995 $ 9,524 20,916,078 $ .46 ===================================================
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 (subject to adjustment). The rights, which do not have voting rights, expire in 2006 and may be CHEMFIRST ANNUAL REPORT ----------------------- 19 1997 FINANCIAL NOTES - --------------- 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. 11. Commitments and Contingent Liabilities The Company has entered into various capital and 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 years of future minimum rental payments for all capital leases and those operating leases with initial or remaining noncancelable terms in excess of one year, as of December 31, 1997: Years ending Operating Capital December 31, leases leases ------------------------------------------------------------------ 1998 $ 1,032 641 1999 933 641 2000 753 321 2001 693 - 2002 325 - Later years 6 - -------------------------- Total minimum payments required $ 3,742 1,603 Less imputed interest ======= 88 ------- $ 1,515 ======= 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 and short-term subleases of approximately $407, $306 and $387 for the years ended December 31, 1997, 1996 and 1995, respectively), was approximately $2,061, $3,865 and $4,156 for the years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996, the Company's estimated liability for these matters totaled $1,399 and $1,575, respectively. The Company has several pending legal claims incurred in the normal course of business which, in the opinion of management and legal counsel, can be disposed of without material effect on the accompanying consolidated financial statements. 12. Interest and Other Income Interest and other income, net, items are as follows:
December 31, --------------------------------- 1997 1996 1995 --------------------------------- Interest income $ 3,301 2,642 5,531 Royalty, license, rental and fee income 3,896 2,733 1,233 Gain on sale of Melamine Chemicals, Inc. (note 4) 14,684 - - Net gain on disposition of other noncurrent assets 158 555 360 Other 194 641 279 --------------------------------- $22,233 6,571 7,403 =================================
CHEMMFIRST ANNUAL REPORT 20 ----------------------- 1997 13. Industry Segment Information The Company operates principally in the following industry segments: Chemicals, Engineered Products and Services (formerly Combustion and Thermal Plasma), and Steel. The chemicals segment includes operations in the production and sale of specialty chemicals and organic chemical intermediates, research and development for new products and production processes for specialty chemicals, and production and sale of electronic performance chemicals and slurries used in chemical mechanical planarization processes. The engineered products and services segment develops and markets combustion and thermal plasma equipment for manufacturing and environmental applications. The steel segment produces steel ingots and billets from melted scrap. The chemicals segment had unaffiliated major customer sales of $86,806, $75,910 and $58,088 for the years ended December 31, 1997, 1996 and 1995, respectively. The following is a breakdown by industry segment of the Company's consolidated financial statements at 1997, 1996 and 1995, and for each of the years then ended:
December 31, ----------------------------------------- 1997 1996 1995 ----------------------------------------- Sales to unaffiliated customers: Chemicals $ 297,822 246,014 214,234 Engineered Products and Services 72,712 64,538 65,926 Steel 75,287 73,085 72,839 ----------------------------------------- Total $ 445,821 383,637 352,999 ========================================= Operating profit (loss) before income taxes (benefit) and investee earnings: Chemicals $ 51,688 43,593 40,650 Engineered Products and Services 2,926 (31,897) (5,198) Steel (1,003) (10,495) 856 ----------------------------------------- 53,611 1,201 36,308 Unallocated corporate expenses (11,347) (13,324) (16,242) Interest income (expense), net 2,904 (5,055) (3,915) Other income, net 14,998 259 517 ----------------------------------------- Total $ 60,166 (16,919) 16,668 ========================================= Depreciation and amortization: Chemicals $ 16,888 13,646 12,336 Engineered Products and Services 835 1,637 2,723 Steel 2,547 2,330 2,555 Corporate 372 443 637 ----------------------------------------- Total $ 20,642 18,056 18,251 ========================================= CHEMFIRST ANNUAL REPORT ----------------------- 21 1997
FINANCIAL NOTES - --------------- December 31, ----------------------------------------- 1997 1996 1995 ----------------------------------------- Identifiable assets: Chemicals $ 306,623 208,181 157,556 Engineered Products and Services 30,533 37,708 53,907 Steel 58,674 55,194 62,736 ------------------------------------------ 395,830 301,083 274,199 Corporate assets and investments 63,009 121,595 103,902 Discontinued operations 507 412 36,234 ------------------------------------------ Total $ 459,346 423,090 414,335 ========================================== Capital expenditures: Chemicals $ 84,602 48,670 27,281 Engineered Products and Services 1,787 1,822 3,586 Steel 2,341 3,021 2,382 Corporate 6,840 219 230 ------------------------------------------ Total $ 95,570 53,732 33,479 ========================================== Export sales to unaffiliated customers: North, Central and South America $ 12,295 9,320 6,149 Europe and Asia 50,289 47,226 39,942 Africa and Australia 358 115 184 ------------------------------------------ Total $ 62,942 56,661 46,275 ==========================================
Total segment research and development expenses were $5,825, $6,938 and $6,347 in 1997, 1996 and 1995, respectively. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating segments. Identifiable assets by industry segment are those assets used in the Company's operations in each industry and include investments in joint ventures. Corporate assets and investments are principally cash and cash equivalents, nontrade receivables and certain other investments. The Company's trade receivables are primarily concentrated with the chemicals segment. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on trade receivables. The Company believes that consolidated trade receivables are well diversified, thereby reducing potential credit risk, and that adequate allowances are maintained for any uncollectible trade receivables. The Company has revenue-producing operations in foreign countries. These operations and related foreign currency translation adjustments are not material. CHEMFIRST ANNUAL REPORT 22 ----------------------- 1997 14. Quarterly Financial Data (Unaudited) Selected quarterly financial data follows:
Quarters ended Year ended ------------------------------------------------------------------------ Mar 31 Jun 30 Sep 30 Dec 31 Dec 31 ------------------------------------------------------------------------ 1997: Sales $ 110,720 111,179 106,088 117,834 445,821 ======================================================================== Gross profit $ 25,602 25,568 26,718 29,060 106,948 ======================================================================== Earnings from continuing operations $ 8,119 7,875 6,800 16,104 38,898 ======================================================================== Net earnings $ 8,119 7,875 6,800 16,104 38,898 ======================================================================== Earnings per common share: Continuing operations $ .39 .39 .33 .80 1.91 ======================================================================== Net earnings $ .39 .39 .33 .80 1.91 ======================================================================== Earnings per common share, assuming dilution: Continuing operations $ .39 .38 .33 .78 1.86 ======================================================================== Net earnings $ .39 .38 .33 .78 1.86 ========================================================================
Net earnings increased during the fourth quarter ended December 31, 1997, due to the gain on the sale of Melamine Chemicals, Inc. (note 4).
Quarters ended Year ended ------------------------------------------------------------------------ Mar 31 Jun 30 Sep 30 Dec 31 Dec 31 ------------------------------------------------------------------------ 1996: Sales $ 97,137 98,068 95,432 93,000 383,637 ======================================================================== Gross profit $ 20,425 20,621 22,892 20,359 84,297 ======================================================================== Earnings (loss) from continuing operations $ 2,384 (10,578) 4,090 (6,337) (10,441) ======================================================================== Net earnings (loss) $ 11,618 (4,036) 12,789 229,489 249,860 ======================================================================== Earnings (loss) per common share: Continuing operations $ .12 (.51) .20 (.30) (.50) ======================================================================== Net earnings (loss) $ .56 (.20) .62 11.12 12.12 ======================================================================== Earnings (loss) per common share, assuming dilution: Continuing operations $ .11 (.51) .20 (.30) (.50) ======================================================================== Net earnings (loss) $ .56 (.20) .61 11.12 12.12 ========================================================================
Net earnings increased during the fourth quarter ended December 31, 1996, due to the gain on the disposal of fertilizer operations (note 2). There were losses reflected in the second quarter of 1996 due to charges related to the shutdown of aluminum dross processing operations (note 3). 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. The annual earnings (loss) per share calculations are based on the weighted average number of common shares outstanding during each year for earnings (loss) per common share and the weighted average number of outstanding common shares and common share equivalents during each year for earnings (loss) per common share, assuming dilution. CHEMFIRST ANNUAL REPORT ----------------------- 23 1997 FINANCIAL NOTES - --------------- 15. Valuation and Qualifying Accounts Details regarding the allowance for doubtful accounts are as follows:
Charged to Other Beginning Costs and Additions Ending Balance Expenses (Deductions)* Balance ---------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 $ 404 1,290 (703) 991 Year ended December 31, 1996 $ 588 1,218 (1,402) 404 Year ended December 31, 1995 $ 517 266 (195) 588 *Accounts written off
16. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments approximate their fair values. 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Jackson, Mississippi KPMG Peat Marwick LLP February 13, 1998 CHEMFIRST INC. POST OFFICE BOX 1249 JACKSON, MISSISSIPPI 39215-1249 CHEMFIRST COMPANIES - ------------------- CHEMICALS FIRST CHEMICAL CORPORATION (Aniline, Intermediates & Specialties) P.O. Box 7005 Pascagoula, Mississippi 39568-7005 -and- FIRST CHEMICAL OF TEXAS, L.P. (Aniline) P.O. Box 1607 Baytown, Texas 77520 George M. Simmons, President QUALITY CHEMICALS, INC. (Fine Chemicals, Custom Manufacturing) P.O. Box 216 Tyrone, Pennsylvania 16686-0216 -and- 1515 Nicholas Road Dayton, Ohio 45418 Scott A. Martin, 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 TRIQUEST, LP (Specialty Performance Chemicals) 14785 Preston Road, Suite 480 Dallas, Texas 75240 Roger L. Van Duyne, President ENGINEERED PRODUCTS AND SERVICES CALLIDUS TECHNOLOGIES INC. (Burners, Flares, Incinerators, and Thermal Plasma Equipment) 7130 South Lewis, Suite 635 Tulsa, Oklahoma 74136-5488 William P. Bartlett, President STEEL FIRSTMISS STEEL, INC. (Steel Melting and Casting) P.O. Box 509 Hollsopple, Pennsylvania 15935-0509 Frank D. Winter, President
EX-21 3 SUBSIDIARIES OF CHEMFIRST INC. EXHIBIT 21 SUBSIDIARIES OF CHEMFIRST INC. JURISDICTION OF COMPANY NAME ORGANIZATION - ------------ ------------------- Burmar Chemical, Inc.................................... California Callidus Technologies Inc............................... Oklahoma Callidus Technologies International, Inc................ Delaware CEM Investment, Inc..................................... Mississippi ChemFirst Foundation, Inc............................... Mississippi ChemFirst Texas, Inc.................................... Texas Dew Resources, Inc...................................... Mississippi EKC Technology, Inc..................................... California EKC Technology, Ltd..................................... Scotland FCC Acquisition Corporation............................. California FEC Marketing, Inc...................................... Texas First Chemical Corporation.............................. Mississippi First Chemical Holdings, Inc............................ Mississippi First Chemical Texas, L.P............................... Delaware First Energy Corporation................................ Mississippi FirstMiss, Inc.......................................... Iowa FirstMiss Steel, Inc.................................... Pennsylvania FRM, Inc................................................ Mississippi FRM Industries, Inc..................................... Delaware 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 Energy Corporation............................... North Carolina Plasma Energy Technologies Corporation.................. North Carolina Quality Chemicals, Inc.................................. Pennsylvania Star Corrosion & Refractory, Inc........................ Louisiana SCE Technologies, Inc................................... Delaware TriQuest, L.P........................................... Delaware EX-23 4 INDEPENDENT AUDITOR'S CONSENT 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 and 333-35221) of our report dated February 13, 1998 relating to the consolidated balance sheets of ChemFirst Inc. and subsidiaries as of December 31, 1997 and 1996 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, 1997, which report is incorporated by reference in the December 31, 1997 annual report on Form 10-K of ChemFirst Inc. KPMG Peat Marwick LLP Jackson, Mississippi March 27, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 7,766 0 78,517 991 75,382 173,415 366,876 138,400 459,346 95,356 4,865 0 0 20,031 301,666 459,346 445,821 0 338,873 338,873 6,322 1,290 397 60,166 23,765 38,898 0 0 0 38,898 1.91 1.86
EX-27.2 6 RESTATED FINANCIAL DATA SCHEDULES
5 0001026601 CHEMFIRST INC. 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 68,385 44,748 0 0 65,049 67,128 404 305 70,021 68,911 213,837 196,192 293,627 250,316 140,545 112,494 423,090 414,335 83,357 69,183 2,122 82,871 0 0 0 0 20,673 20,585 287,813 206,172 423,090 414,335 383,637 352,999 0 0 299,340 271,936 299,340 271,936 38,996 6,913 1,281 266 7,735 9,446 (16,919) 16,668 (5,632) 8,240 (10,441) 9,524 260,301 47,943 0 0 0 0 249,860 57,467 12.12 2.80 12.12 2.75
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