-----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, VNtYh461JOgyQe/I27OkeG4YKN9GJtrgqlrHaQlVBVzw3/mK5HMY1T5QvYJ4bh1K DHxDjXC26QiteAbfmU6/4w== 0001005477-00-002610.txt : 20020514 0001005477-00-002610.hdr.sgml : 20020514 ACCESSION NUMBER: 0001005477-00-002610 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 DATE AS OF CHANGE: 20020514 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12547 FILM NUMBER: 00583564 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-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 333-15789 ChemFirst Inc. (Exact name of Registrant as specified in its charter) Mississippi 64-0679456 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 North Street, P. O. Box 1249 Jackson, Mississippi 39215-1249 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (601) 948-7550 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, Par Value $1 New York Stock Exchange Common Stock, Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_|. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 16, 2000 (based on the closing sale price of $21.00 of the Registrant's Common Stock, as reported on the New York Stock Exchange Composite Tape on such date) was approximately $315,267,498. The number of shares of the Registrant's Common Stock outstanding as of March 16, 2000 was 16,392,205. DOCUMENTS INCORPORATED BY REFERENCE Certain information required to be disclosed in this Form 10-K is incorporated by reference to the Company's 1999 Annual Report to Stockholders and the Company's definitive Proxy Statement for the May 23, 2000 annual meeting of stockholders. The location of the incorporated information is as follows: Part I of Form 10-K Location in Annual Report - ------------------- ------------------------ Item 1. Business Notes 2 and 12 Part II of Form 10-K - -------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Inside back cover Item 6. Selected Financial Data p. 2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations p. 13-15 Item 7A. Quantitative and Qualitative Disclosures about Market Risk See Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data p. 16-35 Location in Definitive Proxy Part III of Form 10-K Statement - --------------------- ---------------------------- Item 10. Directors and Executive Officers of the Registrant pp. 3; 4-8; 10; 12 Item 11. Executive Compensation pp. 10; 11; 13-20 Item 12. Security Ownership of Certain Beneficial Owners and Management pp. 2; 8-10 Item 13. Certain Relationships and Related Transactions p. 16 2 PART I ITEM 1. BUSINESS General The principal businesses of ChemFirst Inc. (the "Company") involve the production of electronic and other specialty chemicals for use in the semiconductor industry and in pharmaceutical, polymer, photographic, photosensitive and agricultural applications, as well as the production of polyurethane chemicals. The Company had previously reclassified the engineered products and services segment and the steel segment as discontinued operations pending disposition of these businesses. The Company completed disposition of the engineered products and services operation in December 1999 and its steel operation in February 2000. See the discussion under Recent Developments below for more information regarding these dispositions. At March 1, 2000, the Company had 678 employees, which includes employees of the parent company and all subsidiaries. Recent History The Company was incorporated in Mississippi in 1983 under the name Omnirad, Inc., as a wholly-owned subsidiary of First Mississippi Corporation ("First Mississippi"). In November 1996, in anticipation of the Distribution (as defined below), the Company's name was changed from Omnirad, Inc. to ChemFirst Inc. On December 23, 1996 (the "Distribution Date"), First Mississippi contributed all of its assets and subsidiaries, other than those relating to its fertilizer business, to the Company, which at that time was a wholly owned subsidiary of First Mississippi and had engaged in no activities during the previous five years. First Mississippi then spun off the Company in a tax-free distribution of the Company's common stock to First Mississippi shareholders (the "Distribution") on the Distribution Date. The Distribution occurred immediately prior to and in connection with the merger of First Mississippi with a wholly owned subsidiary of Mississippi Chemical Corporation on December 24, 1996, pursuant to an Agreement and Plan of Merger and Reorganization dated as of August 27, 1996. The Company has operated as a publicly held entity since the Distribution Date. Prior to the Distribution Date, the Company's subsidiaries were subsidiaries of First Mississippi and the Company's operations were conducted through subsidiaries of First Mississippi. Recent Developments On December 31, 1997, the Company acquired the acylation derivatives business of Clariant Corporation. This business is conducted through TriQuest, L.P., a limited partnership in which the Company owns an 87.5% interest, with the remaining 12.5% interest owned by former members of Clariant Corporation's acylation derivatives employee group who are now employees of TriQuest. The Company is involved in the development and marketing of derivatives of 4-hydroxyacetophenone for electronic chemicals, polymer enhancement chemicals and specialty resins. The electronic chemical products are resins used in deep ultraviolet ("DUV") photoresist applications to produce advanced semiconductors with line geometries at or below 0.25 microns. Also on December 31, 1997, the Company acquired certain chemical mechanical planarization ("CMP") assets of Baikowski International Corporation, a subsidiary of Baikowski Chimie, SA, and the CMP assets of Moyco Technologies, Inc. and its affiliate, Sweet Pea Technologies, Inc. The acquisition of these CMP assets provided the Company with an entrance into the CMP market, which involves mechanical polishing of silicon wafers utilizing a slurry of abrasives and chemicals to produce a flatter surface. Acylation derivatives and CMP are included in the Company's Electronic and Other Specialty Chemicals segment. On January 22, 1998, the Company sold its 50% interest in Power Sources, Inc. ("PSI") to Trigen Energy Corporation for approximately $20.0 million in cash. Previously reported contingencies regarding this sale were resolved without adjustment to the sales proceeds. The Company no longer has an ownership interest in PSI. Effective December 1, 1999, the Company sold its wholly owned subsidiaries, Callidus Technologies, Inc. and Plasma Energy Corporation, to Howe-Baker International, Inc., a subsidiary of Wedge Group Incorporated, for 3 approximately $8.0 million, subject to certain immaterial post-closing adjustments. These subsidiaries comprised the Company's engineered products and services business which had previously been classified and reported as a discontinued operation. On February 15, 2000, the Company completed the sale of its wholly owned subsidiary, FirstMiss Steel, Inc., which comprised the Company's discontinued steel business, to Hoganas North America, Inc., a subsidiary of Hoganas AB of Sweden. Proceeds from the sale were approximately $13.0 million, subject to certain post-closing working capital adjustments. The Company's disposition of its engineered products and services business and steel business furthers the Company's strategy to focus on chemicals. Forward-Looking Statements In addition to historical information, this Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other forward-looking statements made from time to time by the Company in the Company's press releases, Annual Report to Stockholders and other filings with the U.S. Securities and Exchange Commission, are based on certain underlying assumptions and expectations of management. These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those expressed in such forward-looking statements. Such risks and uncertainties include, but are not limited to, general economic conditions, availability and pricing of raw materials, supply/demand balance for key products, new product development, manufacturing efficiencies, conditions of and product demand by key customers, the timely completion and start-up of construction projects, pricing pressure as a result of international market forces, the inability of the Company to either resolve Year 2000 issues that may subsequently arise or to accurately estimate the costs associated with such issues, although the Company has experienced no significant Year 2000 issues or problems to date and is not aware of any such issues or problems, and other factors as may be discussed herein and in the Management's Discussion and Analysis of Financial Condition and Results of Operations. The following contains further discussion of the Company's business and properties as grouped by its Electronic and Other Specialty Chemicals segment and its Polyurethane Chemicals segment. Financial information regarding the Company's segments, which includes sales, pretax operating results and identifiable assets, is provided in Note 12 of the Consolidated Financial Statements, incorporated by reference. As used in this report, the term "Company" includes subsidiaries of the registrant. Electronic and Other Specialty Chemicals General The Company's Electronic and Other Specialty Chemicals segment produces specialty chemicals for use by others in electronic, pharmaceutical, polymer, photosensitive and agricultural applications and provides associated contract research and development. These chemicals are typically produced by multi-step batch processing. These products are sold both on specification and performance and must typically be qualified for use by the customer in addition to meeting certain specifications. Generally, chemicals in this segment are sold in smaller volumes and contribute a higher added-value to end products than polyurethane chemicals. Another common characteristic of the chemicals sold in this segment is the Company's focus on applied research. Whereas the primary focus for many of the Company's customers in this segment is on basic discovery, much of the Company's focus is on development of products and processes for our customers' next generation semiconductors, pharmaceutical, agricultural or consumer products. These electronic and other specialty chemicals are produced at Company-owned facilities in Hayward, California; East Kilbride, Scotland; Pascagoula, Mississippi; Tyrone, Pennsylvania; and Dayton, Ohio. Purchasers of electronic chemicals, who are typically end users, acquire the product to achieve a specific performance objective. As with the other specialty chemicals, these chemicals have very specific uses, although the customer base is often larger than for other specialty chemicals. The production and sale of these chemicals are labor intensive and are usually dependent on highly technical proprietary formulae and a sophisticated, well- 4 trained applications engineering staff. The Company's electronic chemicals are used in the semiconductor and related industries. These chemicals include organic post metal cleaning solutions which remove photoresist and dry-etch residue during the manufacture of semiconductors, post-dry-etch residue removers, specialty resins used in DUV photoresists, and other performance chemicals and materials for cleaning and polishing silicon wafers in semiconductor manufacturing. During 1999, the Company acquired a choline product line for use in electronic chemicals. Choline is an ingredient in photoresist strippers used to manufacture printed wire boards and other electronic interconnects. Most of the Company's other specialty chemicals are sold to a narrow base of customers, which are either end users or producers of performance chemicals. Because of their specialized, complex molecular structure, many of these products are designed for specific end use by one or two customers and significant technical service is expected by the customer. The key to successful production of these specialty chemicals is developing an efficient, low cost production process. These chemicals are sold as intermediates to other specialty chemical producers and to electronic, pharmaceutical, polymer, cosmetics and agricultural companies for use in herbicides, a plant growth regulator, plastic curatives, cosmetics, protease inhibitors, rubber processing chemicals, optical brighteners, dyestuffs and pigments, microchip packaging materials and photoinitiators. The Company owns and operates electronic chemical manufacturing facilities in Hayward, California and East Kilbride, Scotland. The Company's 65,000 square foot California facility includes offices, research and development labs and manufacturing and packaging facilities. An additional 13,400 square-feet of office and warehouse space is leased in an adjacent facility. The California facility currently utilizes approximately 60% of production capability on a two-shift, five-day basis. The second shift was added in February 2000 in response to increased demand for remover product, due to semiconductor industry growth. During 1998, the Company completed an expansion at its Scotland facility which increased square footage to 26,300. The expansion was equipped in 1999 with new production systems designed to meet the semiconductor industry's requirements for ultra pure chemicals. The Scotland facility currently utilizes approximately 80% of available production capability on a one-shift, five-day basis. Utilization is expected to drop to about 50% within the first quarter of 2000, when full capacity and expected operating efficiencies from the 1999 manufacturing systems installation are brought fully online. Thus, the Company has substantial capacity to expand production. The Company also produces select products through toll manufacturers in California, North Carolina and Japan. The Company leases office and applications engineering lab space in Kawasaki City, Japan to provide marketing and technical support for the Japanese electronic chemical market. A new applications laboratory was constructed in the Hayward facility in the second quarter of 1999 for the development of CMP products. The Company produces specialty and electronic chemicals and provides related contract research services at Tyrone, Pennsylvania; Dayton, Ohio; and Pascagoula, Mississippi. All of these facilities are owned by the Company. Annual production capacity at the Tyrone facility is between 4.5 million and 6.0 million pounds, depending on the product mix and the type of processing required. Production in 1999 was approximately 4.0 million pounds. During 1998, the Company completed an expansion at the Dayton facility for the production of DUV photoresist resins. The Dayton facility also includes a current Good Manufacturing Practices (cGMP) pilot plant for scale-up work and production of small quantities of fine and pharmaceutical chemicals. Annual production capacity at Dayton is between 1.5 million and 2.0 million pounds depending on the product mix and the type of processing required. Production in 1999 was approximately 700,000 pounds. Specialty chemical production capacity at Pascagoula is between 70 and 80 million pounds, depending on the product mix and the processing required. Production at this facility was approximately 67 million pounds during 1999. At these sites, the Company has differentiated itself by its capacity to manufacture electronic and/or other specialty chemicals using multi-step batch processing combined with the capability to produce specialty chemicals in continuous process facilities. In addition, the Company outsources the manufacture of selected intermediates, electronic chemical products and other specialty chemicals. The Company produces fine chemicals manufactured to the specifications and performance criteria of its customers ranging from gram to commercial quantities. The Company's multifunctional manufacturing facilities enable multi-step batch and continuous processing of specialties and custom production of complex fine chemicals. The Company has versatile facilities that use numerous reactors capable of producing custom fine chemicals in quantities ranging from the very small amounts needed for initial product testing or toxicity studies, through 5 pilot plant production of developmental quantities or clinical trials and continuing through commercial production. Although historically customers have purchased relatively small quantities of certain specialty chemicals, primarily for their new product development and market testing, recently the sale of commercial quantities of product has increased significantly as the trend to outsource strengthens. Companies involved in the mass production of chemically based electronic, pharmaceutical, agricultural and consumer products often find it expensive and inefficient to manufacture small quantities of the complex chemicals required for new product development or products with limited markets. By providing a versatile array of manufacturing capabilities, related services and capacity to a number of such companies, the Company achieves economies of scale and is able to manufacture certain fine specialty chemicals more economically and timely than they can be manufactured by its customers. As a result, customers can often reduce the time to market and capital exposure associated with the manufacture and marketing of their new developmental products and are better able to utilize and focus their own manufacturing capacity and research and development abilities. In conjunction with its production and sale of electronic and other specialty chemicals, the Company also provides contract research services primarily for the pharmaceutical and electronic chemical industries in the United States and Europe. These services are highly specialized, requiring a team of research and development experts. These services allow our customers to expand and support their internal research and development efforts and are provided on a fee basis or by purchase order for small quantities (less than 10 kgs.). The cGMP pilot plant, discussed above, is used extensively to support this effort. The Company's electronic and other specialty chemicals accounted for approximately 56%, 60%, and 61% of the Company's consolidated net sales for 1999, 1998 and 1997, respectively. Marketing and Sales Electronic chemicals are marketed domestically and internationally in Europe and the Pacific Rim. With the exception of the DUV resin product line, the California facility serves North America and the Pacific Rim, and the Scotland facility serves the European community. These chemicals are distributed in gallon, liter, returnable drum or large volume dedicated containers. In the U.S., the Company's electronic chemicals are principally sold through its internal sales force although the Company utilizes independent sales representatives and distributors as well. In the Pacific Rim and Europe, sales are generally conducted through distributors or sales agents supported by the Company's regional technical sales representatives. In early 1999, the Company began manufacturing products for the Japanese market in a tolling arrangement with the Company's Japanese distributor. DUV resins are manufactured at the Dayton site and shipped directly to photoresist manufacturers. These products are distributed in the form of dry powder or in specialty solutions shipped in appropriate small volume containers. The choline electronic materials are sold through formulators supplying the printed wire board market. Electronic chemicals are typically sold by purchase order. The Company's other specialty chemicals are marketed globally. Most of these chemicals are sold by purchase order or short-term agreements although the Company has long-term contracts with a number of its customers. These chemicals sales are made primarily through the Company's internal sales force. These specialty chemicals are typically sold in drums, or, for larger volume products, in bulk. Domestic shipments are typically by truck or rail. Exported products are shipped in ocean-going tankers, iso-containers or drums to European, Japanese and South American markets. Raw Materials Except for DUV resins, the primary raw materials for the manufacture of electronic chemicals include free-base hydroxylamine, catechol, diglycolamine, trimethylamine, N-methylpyrrolidone and alumina powders. With the exception of hydroxylamine and catechol, raw materials are generally available in adequate quantities from several suppliers, subject to market variation in price. Hydroxylamine and catechol are each currently available from single suppliers, located in Japan. The Company is seeking additional sources of hydroxylamine and catechol and is currently evaluating samples supplied by alternative manufacturers. The primary raw material for the Company's DUV resin business, 4-hydroxyacetophenone, is available from a single source under a long-term contract. 6 Primary raw materials for the production of its other specialty chemicals include hydrogen, hydrogen peroxide, caustic, toluene, ethyl trifluoroacetoacetate, 2-Fluorophenylhydrazine, o-aminophenol, formaldehyde, ethanol, ammonia and natural gas. These raw materials are available from a number of different sources. The Company does not believe that any one source for raw materials used in the production of these chemicals is material to the Company's business. Competition The Company is one of the largest producers of post-metal cleaning solutions for semiconductor production. The Company believes that although there are approximately 12 companies participating in this market worldwide, only the Company and three others have significant market share for advanced and post metal cleaning solutions required by the current state of the art semiconductor and related industries. Competition is based on service, product performance, quality, product development capabilities and cost of ownership. The Company has entered into a cross-licensing agreement with a major competitor whereby the Company licenses its HDA(R) (hydroxylamine) patented post ash residue remover technology. The agreement results from a patent infringement complaint brought by the Company against the competitor in federal court. The agreement allows the competitor to continue to market its products which utilize the Company's hydroxylamine technology, but provides for the Company to receive a royalty and license fee. The agreement also requires the Company to pay to the competitor royalties on the Company's HDA(R) products under certain circumstances, which are currently the subject of arbitration between the Company and the competitor. The Company has approximately eight U.S. and four foreign patents regarding its HDA(R) technology. The earliest of these patents expires in 2011. Regarding CMP, the Company believes that the oxide slurry world market is dominated by two other companies, with the larger company holding an estimated 80% market share. In the tungsten slurry world market, the Company is now estimated to be the third largest supplier for this application. The Company is one of the largest suppliers of DUV resins and the only known U.S. producer. There are two major competitors selling resins in the merchant market in direct competition with the Company. Both competitors are Japanese companies who produce resins in Japan and market resins on a global basis. In addition, two Japanese companies who produce and supply DUV photoresists also produce resins as a captive supply source. The Company competes domestically and internationally with numerous producers of specialty chemicals. Major competitors are both smaller and larger companies. Competition is fierce and is based on service, quality, manufacturing capabilities and expertise in batch chemical production, research and development capabilities and price. The Company's large batch manufacturing sites allow it the flexibility and breadth of service to meet a wide variety of customer needs, including the ability to provide gram and multi-ton quantities in either cGMP or ISO-9000 manufacturing environments. Seasonality of Business Generally, certain of the Company's electronic chemicals may be subject to seasonally lower sales during the first quarter, but other specialty chemical sales are generally not seasonal, and working capital requirements do not vary significantly from period to period. Polyurethane Chemicals General The Company produces aniline and nitrobenzene by continuous production processes at its facilities in Pascagoula, Mississippi and Baytown, Texas. Unlike electronic and other specialty chemicals, these chemicals generally require additional processing steps and chemical reactions by the Company's customers to produce the end product used by consumers and are primarily sold under long-term contracts. Typically, polyurethane chemicals are more sensitive to the business cycle and the cost of raw materials than are most electronic and specialty chemicals, although the Company's sales contracts provide some protection from fluctuation in raw material price for most of the aniline sold. These chemicals are typically sold in large volumes to industrial customers that purchase on the basis of product specifications. The key to successful production of 7 these chemicals is efficient chemical conversion of large quantities of raw materials and productive use of plant capacity. Providing technical services to customers is generally less important than for specialty products. The Company's manufacturing facility in Pascagoula is supported by storage, rail, truck, barge and ship distribution facilities. This facility utilizes nitration technology and a proprietary process for continuous hydrogenation. The annual polyurethane chemical production capacity at the facility, less internal consumption, is between 315 and 350 million pounds depending on the product mix being produced. Production of polyurethane chemicals at the Pascagoula facility during 1999 was approximately 300 million pounds. In 1996, the Company entered into a long-term agreement with Bayer Corporation (`'Bayer") to build, own and operate a world scale nitrobenzene and aniline facility at Bayer's Baytown, Texas chemical complex to supply Bayer's MDI (methylene diphenyl diisocyanate) manufacturing operations. Phase I of the facility, with a design capacity of 250 million pounds of aniline, was completed in 1998 and is now operating at design capacity. If a potential Phase II to the facility is constructed, it would add another 250 million pounds of capacity. A majority of the Company's current aniline production from the Pascagoula facility is sold to Bayer under a long-term contract. If Phase II of the Baytown facility is constructed, Bayer may terminate this contract and take its future requirements from the Baytown facility. Bayer is the Company's largest customer. Aniline is the Company's largest volume product. The Company is the largest merchant marketer of aniline in the U.S. Most of the aniline produced in the U.S. is used to manufacture MDI. MDI's primary end use is in rigid polyurethane foam, an insulation material that is widely used in residential and commercial construction. MDI is also used in the manufacture of impact-resistant plastic that is used as a replacement for metal in automobile parts such as bumpers, where flexibility and impact resistance are important. Aniline's other primary applications are in the production of an antioxidizing (anti-cracking) agent used in the manufacture of synthetic rubber and in a widely used herbicide for corn and soybeans. Nitrobenzene is used to make aniline and is also sold separately for the manufacture of an intermediate used in the production of a large volume over-the-counter analgesic (acetaminophen), and in the production of iron-oxide pigments used in decorative and protective coating architectural applications. Polyurethane chemicals accounted for approximately 44%, 40%, and 39% of the Company's consolidated net sales for 1999, 1998 and 1997, respectively. Marketing and Sales The Company's polyurethane chemicals are sold primarily in the U.S. under long-term contracts to a small number of customers. The Company's internal sales force accounts for essentially all of the sales in this segment. These products are generally sold in bulk. Domestic shipments are by barge, rail or tank trucks and exports are shipped in ocean-going tankers, iso-containers or drums. Raw Materials Benzene, which is a principal raw material for polyurethane chemicals production, is a readily available commodity by-product of oil refining. Like most commodities, the price of benzene is subject to fluctuation. Benzene prices are affected by the demand for a variety of products, principally including styrene and phenolic resins and the underlying cost of crude oil. The Company is protected from fluctuations in raw material prices under the contracts in which most of its aniline production is sold. The remainder of its production is sold under contracts with price protection for major raw material price fluctuations, or under short-term contracts or purchase orders at prices that generally reflect its actual raw material cost. Other significant raw materials include toluene, ammonia and natural gas. The Company purchases ammonia at market prices. The Company purchases natural gas in the spot market for use in producing the hydrogen necessary for its manufacturing processes. This gas is transported into the Pascagoula plant through an interstate pipeline under firm and interruptible contracts. Competition The Company is one of five major U.S. producers of aniline, with approximately 21.1% of current domestic capacity and an estimated 6.8% of current world capacity. In February 2000 one of the Company's competitors 8 brought on line a new aniline plant. In addition, another competitor has announced that a plant currently under construction will be brought on line in late 2000 or early 2001, after which the Company will have an estimated 20.5% of domestic capacity and 6.7% of world capacity. Major competitors are large chemical companies. Competition for the products produced in this segment is based on price, service, quality, marketing and research and development support capabilities. Seasonality of Business Generally, the Company's polyurethane chemical sales are not seasonal and working capital requirements do not vary significantly from period to period. Company Research and Development The Company conducts research and development to improve existing products, to develop and produce new specialty and performance chemicals and to develop and improve production processes, as well as a contract service. The Company spent approximately $7.4 million, $7.5 million, and $5.0 million on research and development in 1999, 1998 and 1997, respectively. Research facilities include laboratories, pilot plant and semi-works for process research and development with gram to multi-pound sample production capabilities. The Company maintains a radiation curing applications laboratory in Pascagoula to evaluate new products and provide customer technical support. The Company's electronic chemicals applications engineering and research and development labs in California, Texas, Scotland and Japan are strategically located near key regional semiconductor production centers, enabling application engineers to work closely with customers to develop unique chemical solutions to semiconductor manufacturing needs and to test developmental products. The Company's cGMP pilot plant in Dayton is utilized in the Company's research and development efforts. The Company continues to focus research efforts on developing new and improved electronic chemicals, including remover products, CMP and DUV resins. The Company also sponsors applied research at leading universities in the U.S., the U.K. and Canada. These closely directed programs have led to the development and introduction of proprietary technology in electronic and other specialty chemicals. In 1999, the Company obtained an exclusive license to further develop and commercialize a potential process that utilizes light in combination with metallic compounds to directly deposit metal and metal oxides on a substrate. Research on this technology is being conducted in cooperation with two North American universities. In addition, the Company has entered into a joint development arrangement with an industry consortium to develop advanced products to meet future semiconductor manufacturing technology. Company Patents The Company owns, or is licensed under, a number of patents, patent applications and trade secrets covering its products and processes. The Company believes that, in the aggregate, the rights under such patents and licenses are important to its operations, but, with the exception of the HDA(R) etch residue remover patents referenced above, does not consider any patent, or license, or group thereof related to a specific process or product, to be of material importance when viewed from the standpoint of the Company's total business. Environmental Considerations Company operations are subject to a wide variety of environmental laws and regulations governing emissions to the air, discharges to water sources, and the handling, storage, treatment and disposal of waste materials, as well as other laws and regulations concerning health and safety conditions. The Company holds a number of environmental permits and licenses regulating air emissions, water discharges and hazardous waste disposal and, to the best of its knowledge, is in material compliance with such requirements at all locations. The Company makes capital and other expenditures in a continuing effort to comply with environmental laws and regulations, or changing interpretations of existing laws and regulations. The Company's environmental capital expenditures for 1999 were $600,000. Projected environmental capital expenditures for 2000 and 2001 are $1.3 million and $1.1 million, respectively. While these expenditures are necessary to comply with environmental laws and regulations, they may also reduce operating expenses and improve efficiencies. 9 The Company monitors and participates in the environmental regulatory development process which enables the Company to evaluate new laws and regulations. The Company does not anticipate a material increase in expenses related to current environmental regulations, but because federal and state environmental laws and regulations are constantly changing, the Company is unable to predict their future impact. The Company has received notices from the United States Environmental Protection Agency or similar state agencies that it has been deemed a potentially responsible party (`'PRP") under Superfund or a comparable state statute at several sites and, thus, may be liable for a share of the associated remediation cost. It is difficult to estimate the Company's ultimate liability relating to these sites due to several uncertainties such as, but not limited to, the method and extent of remediation, the percentage of material attributable to the Company at the site relative to that attributable to other parties, and the financial capabilities of the other PRPs. Based on currently available information, however, the Company does not believe that its future liability at these sites will be material to its financial condition, results of operations, cash flow or competitive position. ITEM 2. PROPERTIES A description of various properties and the segments to which they relate is included in the Business discussion. In addition to those described above, the Company owns or leases the following properties: The Company owns an approximately 26,000 square-foot office building in Jackson, Mississippi, which is its corporate headquarters. The Company leases 4.2 acres from Bayer Corporation within Bayer's complex for the Baytown aniline plant with a term equivalent to the aniline contractual supply agreement. The Company leases 7 acres of waterfront property from the Jackson County Port Authority. This property is used for loading and unloading ocean-going vessels and barges at its Pascagoula, Mississippi facility. The lease expires in 2003. The Company owns 70 acres of undeveloped industrial land within 2 miles of the Pascagoula plant and 23 acres directly adjacent to the Pascagoula plant. The Company also owns approximately 78 acres of undeveloped industrial land directly adjacent to its Tyrone, Pennsylvania facility. The Company leases research and development laboratory space in Corpus Christi, Texas, to support its DUV resin and other specialty chemicals businesses. The Company was a party to a long-term lease agreement covering office space in Jackson, Mississippi. During 1999, a new tenant was found for this space and the lease was cancelled. The Company has no further obligations under that lease agreement. The Company believes that its properties are suitable and adequate for the purposes for which they are used. ITEM 3. LEGAL PROCEEDINGS The Company has pending several claims incurred against it in the normal course of business which, in the opinion of management and legal counsel, can be disposed of without material effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company, through the solicitation of proxies or otherwise, during the fourth quarter of 1999. 10 PART II ITEMS 5-8. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, AND FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by Part II, Items 5-8, has been included in the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1999, which has been furnished to the Commission and portions of which are incorporated herein by reference. See "Documents Incorporated by Reference" on Page 2 hereof for the locations of such information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Part III, Items 10-13, has been included in the Registrant's definitive Proxy Statement for the May 23, 2000 Annual Meeting of Stockholders, which will be filed with the Commission by March 30, 2000, pursuant to Regulation 14A, and is incorporated herein by reference. See "Documents Incorporated by Reference" on Page 2 hereof for the location of such information. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Schedules (a)(1) Financial Statements incorporated by reference to the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1999 and Supplementary Data. Pages in 1999 Annual Report to Stockholders Incorporated Herein by Reference ------------ Consolidated Balance Sheets as of December 31, 1999 and 1998. p. 16 Consolidated Statements of Operations, years ended December 31, 1999, 1998 and 1997 .......................... p. 17 Consolidated Statements of Stockholders' Equity, years ended December 31, 1999, 1998 and 1997 .......................... p. 18 Consolidated Statements of Cash Flows, years ended December 31, 1999, 1998 and 1997 .......................... p. 19 Notes to Consolidated Financial Statements .................. pp. 20-34 Independent Auditors' Report ................................ p. 35 (a)(2) Additional schedules are either not required under the applicable instructions or are inapplicable and have therefore been omitted. 11 (a)(3) EXHIBITS 2(a) Agreement and Plan of Merger and Reorganization, dated as of August 27, 1996, among Mississippi Chemical Corporation, MISS SUB, INC. and First Mississippi Corporation, was filed as Exhibit 2.1 to Amendment No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on November 18, 1996, and is incorporated herein by reference. 2(b) Agreement and Plan of Distribution between First Mississippi Corporation and the Company dated December 18, 1996 was filed as Exhibit 2.2, Form of Agreement and Plan of Distribution, to Amendment No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on November 18, 1996, and is incorporated herein by reference. The only modification to the text of the Form of Agreement and Plan of Distribution which is incorporated herein by reference was the substitution of "ChemFirst Inc." for "Newco" as a party to this agreement and the dating of the agreement as of December 18, 1996. 2(c) Tax Disaffiliation Agreement between First Mississippi Corporation and the Company dated December 18, 1996 was filed as Exhibit 2.3, Form of Tax Disaffiliation Agreement, to Amendment No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on November 18, 1996, and is incorporated herein by reference. The only modification to the text of the Form of Tax Disaffiliation Agreement which is incorporated herein by reference was the substitution of "ChemFirst Inc." for "Newco" as a party to this Agreement and the dating of the agreement as of December 18, 1996. 2(d) Employee Benefits and Compensation Agreement between First Mississippi Corporation and the Company dated December 18, 1996 was filed as Exhibit 2.4, Form of Employee Benefits and Compensation Agreement, to Amendment No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on November 18, 1996, and is incorporated herein by reference. The only modification to the text of the Form of Employee Benefits and Compensation Agreement which is incorporated herein by reference was the substitution of "ChemFirst Inc." for "Newco" as a party to this Agreement and the dating of the agreement as of December 18, 1996. 3(a) Amended and Restated Articles of Incorporation of the Company were filed as Exhibit 3.1 to Amendment No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on November 18, 1996, and is incorporated herein by reference. 3(b) Bylaws of the Company as amended were filed as Exhibit 4.3 to the Company's Form S-8 (Registration No. 333-69965) filed on December 30, 1998, and is incorporated herein by reference. 4(a) Articles III, IV, V, VI, VII, VIII, IX and X of the Company's Charter of Incorporation and the Statements of Resolution establishing the Company's 1987-A, 1988-A, 1988-1, 1989-A, 1989-1, 1989-2, 1990-1, 1990-2, 1991-1, 1991-2, and 1992-1 Series Convertible Preferred Stock and the Company's Series X Junior Participating Preferred Stock are included in Exhibit 3(a). 4(b) Articles II, IV, IX and XII of the Company's Bylaws are included in Exhibit 3(b). 4(c) ChemFirst Inc. 401(k) Savings and Employee Stock Ownership Plan and Trust, as amended and restated on January 1, 1997, was filed as Exhibit 4.6 to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-8 (Registration No. 333-18691) filed on July 27, 1999 and is incorporated herein by reference. 4(d) First Amendment to ChemFirst Inc. 401(k) and Employee Stock Ownership Plan and Trust was filed as Exhibit 4.7 to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-8 (Registration No. 333-18691) filed on July 27, 1999, and is incorporated herein by reference. 4(e) Second Amendment to ChemFirst Inc. 401(k) and Employee Stock Ownership Plan and Trust was filed as Exhibit 4.10 to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-8 (Registration No. 333-18691) filed on July 27, 1999, and is incorporated herein by reference. 4(f) Rights Agreement, dated as of October 30, 1996, between the Company and KeyCorp Shareholder Services, Inc., was filed as Exhibit 4 to Amendment No. 1 to the Company's Form S-1 (Registration No. 333-15789) filed on November 18, 1996 and is incorporated herein by reference. 12 4(g) First Amendment to Rights Agreement dated effective May 1, 1997, by and among the Company, KeyCorp Shareholders Services, Inc. and The Bank of New York, was filed as Exhibit 4.5 to the Company's Form S-8 (File No. 333-69965) filed on December 30, 1998, and is incorporated herein by reference. 4(h) Post Spin-Off Agreement between First Mississippi and FirstMiss Gold Inc. dated as of September 24, 1995, which was assigned to the Company in connection with the Distribution, was filed as Exhibit 99.1 to First Mississippi's Form 8-K dated September 24, 1995, and is incorporated herein by reference. 4(i) Tax Ruling Agreement between First Mississippi and FirstMiss Gold Inc. dated as of September 24, 1995, which was assigned to the Company in connection with the Distribution, was filed as Exhibit 99.2 to First Mississippi's Form 8-K dated September 24, 1995, and is incorporated herein by reference. 4(j) Loan Agreement between First Mississippi and FirstMiss Gold Inc., dated as of September 24, 1995, which was assigned to the Company in connection with the Distribution, was filed as Exhibit 99.3 to First Mississippi's Form 8-K dated September 24, 1995, and is incorporated herein by reference. 4(k) Amended Tax Sharing Agreement between First Mississippi and FirstMiss Gold Inc. dated as of September 24, 1995, which was assigned to the Company in connection with the Distribution, was filed as Exhibit 99.4 to First Mississippi's Form 8-K dated September 24, 1995, and is incorporated herein by reference. 4(l) Note Purchase Agreement between ChemFirst Inc., State Farm Life Insurance Company and Nationwide Life Insurance Company dated October 15, 1998, was filed as Exhibit 4(j) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and is incorporated herein by reference. 10(a)* Termination Agreement, dated May 29, 1996 and effective June 1, 1996, and amended March 15, 1999 between the Company and its Chief Executive Officer, was filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and is incorporated herein by reference. 10(b)* Form of Termination Agreement between the Company and each of the following executive officers of the Company, which was assigned to the Company in connection with the Distribution and which form the Company continues to use, was filed as Exhibit 10(d) to First Mississippi's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and is incorporated herein by reference. The Company has executed a Termination Agreement with each of the following executive officers: Daniel P. Anderson, J. Steven Chustz, Paul J. Coder, George M. Simmons and R. Michael Summerford, each dated effective June 1, 1996; Scott A. Martin, dated effective December 1, 1996; Max P. Bowman, Troy B. Browning, William B. Kemp and James L. McArthur, each dated effective July 1, 1997; and William R. Jordan, dated effective May 25, 1999. 10(c)* ChemFirst Inc. 1980 Long-Term Incentive Plan was filed as Exhibit 4.6 to the Company's Registration Statement on Form S-8 (Registration No. 333-18693) filed on December 24, 1996, and is incorporated herein by reference. 10(d)* ChemFirst Inc. 1988 Long-Term Incentive Plan was filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 (Registration No. 333-18693) filed on December 24, 1996, and is incorporated herein by reference. 10(e)* ChemFirst Inc. 1995 Long-Term Incentive Plan was filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 (Registration No. 333-18693) filed on December 24, 1996, and is incorporated herein by reference. 10(f)* ChemFirst Inc. 1998 Long-Term Incentive Plan was included as Appendix A to the Company's Proxy Statement filed in connection with the Annual Meeting of Stockholders held on May 27, 1998, and is incorporated herein by reference. 10(g)* 1991 Restatement of the First Mississippi Directors' Retirement Plan, as revised and restated on May 14, 1991, which was assigned to and assumed by the Company pursuant to the Benefits Agreement, was filed as Exhibit 10(f) to First Mississippi's Annual Report on Form 10-K for the fiscal year ended June 30, 1991, and is incorporated herein by reference. 13 10(h)* First Mississippi Corporation 1989 Deferred Compensation Plan for Outside Directors, as amended on September 12, 1994, which was assigned to and assumed by the Company pursuant to the Benefits Agreement, was filed as Exhibit 10(g) to First Mississippi's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and is incorporated herein by reference. 10(i)* A description of the Company's Deferred Income Plan for Directors, Officers and Key Employees ("Plan A") is included in the Company's Proxy Statement filed in connection with the Annual Meeting of Stockholders to be held on May 25, 1999, and is incorporated herein by reference. 10(j)* Form of Indemnification Agreement between the Company and the following former directors or executive officers of the Company, which was assigned to and assumed by the Company in connection with the Distribution (Company's Indemnification Agreements with each such individual contains substantially identical provisions to those contained in the form): Charles R. Gibson, Charles P. Moreton, Maurice T. Reed, Jr., Frank G. Smith, O. E. Wall, Charles M. McAuley, and Thomas G. Tepas was filed as Exhibit 10(t) to First Mississippi's Annual Report on Form 10-K for the fiscal year ended June 30, 1988, and is incorporated herein by reference. 10(k)* Form of Indemnification Agreement entered between the Company and the following directors or executive officers of the Company on March 17, 1999 or subsequently thereto (Company's Indemnification Agreement with each such individual contains substantially identical provisions to those contained in the form): Richard P. Anderson, Paul A. Becker, James W. Crook, Michael J. Ferris, James E. Fligg, Robert P. Guyton, Paul W. Murrill, William A. Percy, II, Dan R. Smith, Leland R. Speed, R. Gerald Turner, J. Kelley Williams, Daniel P. Anderson, Max P. Bowman, Troy B. Browning, J. Steve Chustz, P. Jerry Coder, William R. Jordan, William B. Kemp, Scott A. Martin, James L. McArthur, George M. Simmons, R. M. Summerford, and Roger Van Duyne. 10(l) ChemFirst Inc. 1997 Employee Stock Purchase Plan was filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Registration No. 333-35221) filed on September 9, 1997, and is incorporated herein by reference. 13 ChemFirst Inc. 1999 Annual Report to Stockholders (such Annual Report is not, except for those portions thereof which are expressly incorporated by reference, to be deemed "filed" as part of this Form10-K). 21 List of the subsidiaries of the Company. 23 Consent regarding incorporation of auditor's report into Registration Statement Nos. 333-18691, 333-18693, 333-35221, and 333-69965. 27(a) Financial Data Schedule. 27(b) Financial Data Schedule (restated). 27(c) Financial Data Schedule (restated). - ---------- * Indicates management contract or compensatory plan or arrangement. Certain debt instruments have not been filed. The Company agrees to furnish a copy of such agreement(s) to the Commission upon request. (b) No Reports on Form 8-K were filed by the Company during the fourth quarter of 1999. (c) Please see (a)(3) above. The exhibits filed with the Commission are not included in the printed copy of the Form 10-K. A copy of the exhibits will be provided upon payment of a reasonable fee, to be specified at the time a request is made. (d) Please see (a)(2) above. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHEMFIRST INC. Date: March 20, 2000 BY: /s/ J. Kelley Williams ---------------------- J. Kelley Williams, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ J. Kelley Williams Chairman of the Board of Directors, Chief March 20, 2000 - -------------------------------- Executive Officer (Principal Executive J. Kelley Williams Officer) and Director /s/ R. M. Summerford President and Chief Operating Officer March 20, 2000 - -------------------------------- R. M. Summerford /s/ Max P. Bowman Vice President, Finance and Treasurer March 20, 2000 - -------------------------------- (Principal Financial Officer) Max P. Bowman /s/ Troy B. Browning Controller (Principal Accounting Officer) March 20, 2000 - -------------------------------- Troy B. Browning /s/ Richard P. Anderson Director March 20, 2000 - -------------------------------- Richard P. Anderson /s/ Paul A. Becker Director March 20, 2000 - -------------------------------- Paul A. Becker /s/ James W. Crook Director March 20, 2000 - -------------------------------- James W. Crook /s/ Michael J. Ferris Director March 20, 2000 - -------------------------------- Michael J. Ferris /s/ James E. Fligg Director March 20, 2000 - -------------------------------- James E. Fligg /s/ Robert P. Guyton Director March 20, 2000 - -------------------------------- Robert P. Guyton /s/ Paul W. Murrill Director March 20, 2000 - -------------------------------- Paul W. Murrill /s/ William A. Percy, II Director March 20, 2000 - -------------------------------- William A. Percy, II /s/ Dan F. Smith Director March 20, 2000 - -------------------------------- Dan F. Smith /s/ Leland R. Speed Director March 20, 2000 - -------------------------------- Leland R. Speed /s/ R. Gerald Turner Director March 20, 2000 - -------------------------------- R Gerald Turner
15 EXHIBITS INDEX TO EXHIBITS Exhibit Number - -------------- 10(k)* Form of Indemnification Agreement entered between the Company and the following directors or executive officers of the Company on March 17, 1999 or subsequently thereto (Company's Indemnification Agreement with each such individual contains substantially identical provisions to those contained in the form): Richard P. Anderson, Paul A. Becker, James W. Crook, Michael J. Ferris, James E. Fligg, Robert P. Guyton, Paul W. Murrill, William A. Percy, II, Dan R. Smith, Leland R. Speed, R. Gerald Turner, J. Kelley Williams, Daniel P. Anderson, Max P. Bowman, Troy B. Browning, J. Steve Chustz, P. Jerry Coder, William R. Jordan, William B. Kemp, Scott A. Martin, James L. McArthur, George M. Simmons, R. M. Summerford, and Roger Van Duyne. 13 ChemFirst Inc. 1999 Annual Report to Stockholders (such Annual Report is not, except for those portions thereof which are expressly incorporated by reference, to be deemed "filed" as part of this Form 10-K). 21 List of the subsidiaries of the Registrant. 23 Consent regarding incorporation of auditor's report into Registration Statement Nos. 333-18691, 333-18693, 333-35221 and 333-69965. 27(a) Financial Data Schedule [For EDGAR filing only]. 27(b) Financial Data Schedule (restated) [For EDGAR filing only]. 27(c) Financial Data Schedule (restated) [For EDGAR filing only]. 16 EX-10.(K) 2 INDEMNIFICATION AGREEMENT Exhibit 10(k) INDEMNIFICATION AGREEMENT This Agreement made and entered into effective the ____day of _____, ____, by and between CHEMFIRST INC., a Mississippi corporation, (hereinafter "the COMPANY"), and ___________________________, (hereinafter "the INDEMNITEE"). WHEREAS, competent and experienced persons are becoming more reluctant to serve as directors or officers of publicly-held corporations, or as directors or officers of their subsidiaries or affiliates, unless they are provided with adequate protection against claims asserted against them for their activities on behalf of such corporations, generally through insurance and indemnification; and WHEREAS, uncertainty in the interpretation of statutes, regulations, case law and public policies relating to indemnification of corporate directors and officers makes difficult an adequate and reliable assessment of the risks to which such directors and officers may be exposed particularly in light of the proliferation of lawsuits against directors and officers; and WHEREAS, the Board of Directors of the COMPANY, based upon its business experience, has concluded that the continuation of present trends in litigation against corporate directors and officers inevitably makes it more difficult for the COMPANY to attract and retain directors and officers of the highest degree of competence committed to the active and effective direction and supervision of the business of the COMPANY, its subsidiaries, or affiliates, and the Board deems such consequences to be so detrimental to the best interests of the COMPANY's stockholders that it has concluded that the COMPANY should act to provide its directors, officers and certain officers of its subsidiaries with enhanced protection against inordinate risks attendant with their positions to assure that the most capable persons otherwise available will be attracted to such positions and, in such connection, said Board of Directors has further concluded that it is reasonable, prudent and necessary for the COMPANY to obligate itself contractually to indemnify its directors, officers, and certain officers of its subsidiaries to the maximum extent permitted by applicable law, for expenses and liabilities that might be incurred by such directors and officers in connection with claims lodged against them for their decisions and actions as directors or officers; and WHEREAS, the Mississippi Business Corporation Act authorizes a corporation to indemnify any director or officer or former director or officer or any person who may have served at its request as a director or officer in another corporation in which it owns shares of capital stock against expenses actually and reasonably incurred by him in connection with any defense of any action, suit or proceeding, civil, criminal, administrative, arbitrative or investigative, in which he is made a party by reason of having been such a director or officer, with certain exceptions set forth therein; and WHEREAS, the Mississippi Business Corporation Act also authorizes the corporation to obligate itself in advance to provide indemnification to the fullest extent permitted by law by a provision in its Articles of Incorporation or by any Bylaw or resolution adopted or contract approved by its Board of Directors or by its stockholders after notice; and WHEREAS, Article XI of the COMPANY's Amended and Restated Articles of Incorporation limits certain personal liabilities of directors, and further, Article VII "Indemnification" of the COMPANY's Bylaws provide for indemnifying directors, officers and employees (such provisions attached hereto as Exhibit A (hereinafter, the "Indemnification Policy")); and WHEREAS, the COMPANY desires INDEMNITEE to serve or continue to serve as a director or officer of the COMPANY or as a director or officer of a subsidiary, of which he has been or is serving, or will serve, at the request of the COMPANY, free from undue concern for unpredictable, inappropriate or unreasonable claims for damages by reason of his being a director or officer of the COMPANY or of a subsidiary; and WHEREAS, INDEMNITEE is willing to serve, or to continue to serve, or to take on additional service for, the COMPANY or its subsidiaries in such capacities if he be indemnified as provided for herein; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the COMPANY and INDEMNITEE do hereby covenant and agree that the INDEMNITEE shall be indemnified to the fullest extent permitted by applicable law and the Indemnification Policy as follows: 1. Agreement to Serve. INDEMNITEE will serve and continue to serve at the will of the COMPANY as a director or officer of the COMPANY or any other company, partnership, joint venture, trust, employee benefit plan at the request of the COMPANY, faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws; provided that INDEMNITEE may at any time and for any reason resign from such position (subject to any contractual obligations which INDEMNITEE shall have assumed apart from this Agreement) and provided further that the COMPANY shall have no obligation to continue the INDEMNITEE in any such position. 2. Indemnification. (a) The COMPANY shall, as promptly as practicable, indemnify to the fullest extent permitted by applicable law the INDEMNITEE as a director or officer of the COMPANY or any other company, partnership, joint venture, trust, employee benefit plan or other enterprise for which INDEMNITEE is or was serving at the request of the COMPANY, against any and all liabilities, expenses (including attorney's fees), judgments, 2 fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with the foregoing), that may actually and reasonably be incurred by the INDEMNITEE in connection with or resulting from or arising out of any claim, action, suit or proceeding (actual or threatened), in which the INDEMNITEE may be involved as a party or otherwise, by reason of serving in his capacity as a director or officer whether before or after adoption of this Agreement provided that such INDEMNITEE (i) in the case of a former or present director (A) is wholly successful, on the merits or otherwise, with respect thereto, or (B) acted in good faith and, in the case of conduct in his official capacity with the COMPANY, in a manner that such INDEMNITEE reasonably believed to be in the best interests of the COMPANY, or, in all other cases, not opposed to, the best interests of the COMPANY, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such conduct was unlawful or (ii) in the case of a former or present officer who is not also a director or is also a director but is involved in the proceeding only in his capacity as an officer, (A) meets the standards of clause (i)(A) or (B) above and (B) has not been found liable for (I) receipt of a financial benefit to which he is not entitled, (II) an intentional infliction of harm on the COMPANY or its shareholders, or (III) an intentional violation of criminal law. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, in itself, create a presumption that the INDEMNITEE did not meet the standard of conduct described above. (b) With respect to any completed action or suit by or in the right of the COMPANY to procure a judgment in its favor, any INDEMNITEE otherwise entitled to indemnification shall not be entitled to indemnification, except for reasonable expenses incurred in connection with the proceeding if it is determined in accordance with Paragraphs 2(d), 2(e) or 2(h), as applicable, that the INDEMNITEE has met the relevant standard of conduct in Paragraph (a), unless and only to the extent that the court in which the action or suit was brought, or another court of competent jurisdiction, shall determine upon application that either the INDEMNITEE is entitled to indemnification or an advance of expenses pursuant to applicable law or, in view of all circumstances of the case, such INDEMNITEE is fairly and reasonably entitled to indemnity for such liabilities and expenses which such court shall deem to be proper. (c) To the extent that the INDEMNITEE has been successful on the merits or otherwise in the defense of any action, suit or proceeding, or any claim, issue or matter therein, such INDEMNITEE shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. 3 (d) Indemnification hereunder shall be made by the COMPANY only after a determination that it is proper in the circumstances because the INDEMNITEE met the applicable standard of conduct in Paragraph (a) above. That determination, subject to Paragraphs 2(e) and 2(h) below, shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to or otherwise a subject of the proceeding or having a familial, financial, professional or employment relationship with the director whose indemnification or advance for expenses is the subject of the decision being made, which relationship would, in the circumstances, reasonably be expected to exert an influence on the director's judgment when voting on the decision being made (each such director meeting the foregoing criteria, a "Disinterested Director"), or by a duly authorized committee thereof consisting of two or more Disinterested Directors, (ii) by special legal counsel selected in the manner prescribed in clause (i) or if such counsel cannot be so selected, by special counsel selected by a majority vote of the entire Board of Directors, or (iii) by the stockholders, but shares owned by or voted under the control of directors who at the time do not qualify as a Disinterested Director, may not be voted in the determination. (e) The COMPANY agrees that if there is a Change in Control (as defined below) of the COMPANY then with respect to all matters thereafter arising concerning the rights of the INDEMNITEE to indemnity payments, including the advancement of expenses, under this Agreement or any other agreement or COMPANY Bylaws now or hereafter in effect, the COMPANY shall seek legal advice only from independent legal counsel selected by INDEMNITEE and approved by the COMPANY (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the COMPANY and INDEMNITEE as to whether and to what extent the INDEMNITEE would be permitted to be indemnified under applicable law. The COMPANY agrees to pay the reasonable fees and expenses of the independent legal counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. A "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the COMPANY or a corporation owned directly or indirectly by the stockholders of the COMPANY in substantially the same proportions as their ownership of stock of the COMPANY, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the COMPANY representing 45% or more of the total voting power represented by the COMPANY's then outstanding securities which vote generally in the election of directors (the "Voting Securities"), (ii) 4 during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the COMPANY and any new director whose election by the Board of Directors or nomination for election by the COMPANY's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the COMPANY approve a merger or consolidation of the COMPANY with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the COMPANY outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of the COMPANY or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the COMPANY approve a plan of complete liquidation of the COMPANY or an agreement for the sale or disposition by the COMPANY of (in one transaction or a series of transactions) all or substantially all the COMPANY's assets. (f) The INDEMNITEE seeking indemnity hereunder must promptly notify the Board of Directors of the COMPANY of all relevant facts after becoming aware of a claim or potential claim, and except in the case of a claim by or on behalf of the COMPANY, must permit the COMPANY, at its option, to participate in and jointly control the defense of such claim and any resulting suit or action. (g) Expenses incurred in connection with any claim, action, suit or proceeding, actual or threatened, other than a direct action by the COMPANY against the INDEMNITEE (1) may, prior to a Change in Control, be paid by the COMPANY in advance of the final disposition of such claim, action, suit or proceeding if authorized by (i) the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors or by a duly authorized committee thereof consisting of two or more Disinterested Directors, (ii) special legal counsel selected in the manner prescribed in (i) above or if such counsel cannot be so selected, by special counsel selected by a majority vote of the entire Board of Directors or (iii) by the stockholders, but shares owned by or voted under the control of directors who at the time do not qualify as a Disinterested Director may not be voted on the determination and upon receipt of (i) a written affirmation by the INDEMNITEE of his good faith belief that he has met the relevant standard of conduct described in Paragraph 2(a) above or that the proceeding involves conduct for which liability has been eliminated under a provision of the COMPANY's Amended and Restated Articles of Incorporation and (ii) a written undertaking by or on behalf of the 5 INDEMNITEE to repay such amount if he is not wholly successful on the merits or otherwise in his defense which would entitle him to mandatory indemnification under Paragraph 2(c) hereof and unless it shall ultimately be determined in accordance with Paragraphs 2(d) or 2(h) that INDEMNITEE has not met the applicable standard of conduct described in Paragraph 2(a) hereof or (2) shall, after a Change in Control, be paid by the COMPANY in advance of the final disposition of such claim, action, suit or proceeding upon receipt of (i) a written affirmation by the INDEMNITEE of his good faith belief that he has met the relevant standard of conduct described in Paragraph 2(a) above or that the proceeding involves conduct for which liability has been eliminated under a provision of the COMPANY's Amended and Restated Articles of Incorporation and (ii) a written undertaking by or on behalf of the INDEMNITEE to repay such amounts if he is not wholly successful on the merits or otherwise in his defense which would entitle him to mandatory indemnification under Paragraph 2(c) hereof and unless it shall ultimately be determinated in accordance with Paragraphs 2(e) or 2(h) that INDEMNITEE has not met the applicable standard of conduct described in Paragraph 2(a) hereof. (h) The applicable party reviewing the claim for indemnification pursuant to Paragraph 2(d)(i), (ii) or (iii) or, pursuant to Paragraph 2(e) or pursuant to Paragraph 2(g)(1) shall be referred to herein as the "Reviewing Party." Any determination by the applicable Reviewing Party that the INDEMNITEE is not (i) entitled to an advancement of expenses pursuant to Paragraph 2(g) or (ii) entitled to indemnification pursuant to Paragraph 2(d) shall not become binding until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has been no determination by the applicable Reviewing Party or if the Reviewing Party determines that the INDEMNITEE substantively would not be permitted to be indemnified in whole or in part under applicable law or would not be entitled to the advancement of expenses, the INDEMNITEE shall have the right to commence litigation in any court in the State of Mississippi having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the COMPANY hereby consents to service of process and to appear in any such proceeding. 3. Enforcement. (a) The COMPANY expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the COMPANY to induce the INDEMNITEE to continue as a director or officer of the COMPANY or of any other corporation, company, 6 partnership, joint venture, trust, employee benefit plan, or other enterprise for which INDEMNITEE was or is serving at the request of the COMPANY, and acknowledges that the INDEMNITEE is relying upon this Agreement in continuing in such capacity or capacities. (b) The COMPANY shall reimburse the INDEMNITEE for all the INDEMNITEE's costs and expenses incurred in connection with successfully establishing his right to indemnification under this Agreement in whole and in part. 4. Exclusivity. The indemnification provided hereunder shall not be deemed exclusive of, or diminish or otherwise restrict, any other rights to which those indemnified may be entitled under any provision of law, the Articles of Incorporation or Bylaws of the COMPANY, this Agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity referred to in Paragraph 2 of this Agreement and shall continue after INDEMNITEE has ceased to occupy such position or positions. 5. Multiplicity of Claims. If several claims, issues or courses of action are involved, the INDEMNITEE may be entitled to indemnification as to some matters even though such INDEMNITEE is not entitled to indemnification as to other matters. 6. Purchase of Insurance. The COMPANY may purchase and maintain insurance on behalf of any INDEMNITEE covered hereunder where insurance is obtainable, against any liability, or part thereof, asserted against such INDEMNITEE and incurred by such INDEMNITEE in any capacity or arising out of such INDEMNITEE's status as such, whether or not the COMPANY would have the power to indemnify INDEMNITEE against such liability hereunder or otherwise. 7. Severability. If any of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality or enforceability of the remaining provisions of this Agreement (including without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in anyway be affected or impaired thereby, and to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing such provision to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect the intent manifested by the provision held invalid, illegal or unenforceable. 7 8. Binding Effect. This Agreement shall be binding upon the INDEMNITEE and the COMPANY, its successors and assigns, (including any transferees of all or substantially all of its assets and any successor by merger or operation of law), and shall inure to the benefit of the INDEMNITEE, his heirs, personal representatives, estate or assigns. 9. Amendment and Termination. No amendments, modifications, terminations or cancellations of this Agreement shall be effective unless signed in writing by both the INDEMNITEE and the COMPANY. 10. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement or to affect the construction thereof. 11. Change in Law. To the extent that a change in the Mississippi Business Corporation Act (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the COMPANY's Bylaws and this Agreement, it is the intent of the parties hereto that the INDEMNITEE shall enjoy by this Agreement the greater benefits so afforded by such change. 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Mississippi applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. 13. Disputes. All claims and controversies arising out of or in connection with this Agreement shall be subject to binding arbitration by a single arbitrator in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA") or the existing Rules of Practice and Procedures of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"). Any arbitration shall occur in Jackson, Mississippi and any judgment on the award rendered in such arbitration shall be entered in any state or federal court having jurisdiction. The party filing the arbitration shall have the right to select either AAA or JAMS. 14. Notification. The INDEMNITEE agrees to notify the COMPANY promptly in writing upon being served any citation, complaint, indictment or other document covered hereunder, either civil or criminal. 15. Notices. All notices, requests, demand and other communication hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand and receipted for by the party to whom said notice or other communication shall be directed, or by mail certified or registered with postage prepaid on the third business day after which so is mailed. 8 If to INDEMNITEE: ___________________________ ___________________________ ___________________________ If to COMPANY: J. Steve Chustz, General Counsel ChemFirst Inc. Post Office Box 1249 Jackson, MS 39215-1249 IN WITNESS WHEREOF, the parties have caused this Agreement to be entered into on the day and year first above written. CHEMFIRST INC. INDEMNITEE By:________________________ _______________________ 9 EX-13 3 ANNUAL REPORT [LOGO] ChemFirst Inc. [PHOTOS OMITTED] 1999 ANNUAL REPORT [LOGO] ChemFirst produces chemicals for semiconductor, life science, and polyurethane applications. The company's stock trades on the New York Stock Exchange under the symbol CEM. CONTENTS - -------------------------------------------------------------------------------- Financial Highlights 1 - -------------------------------------------------------------------------------- Selected Financial Data 2 - -------------------------------------------------------------------------------- Letter to Shareholders 3 - -------------------------------------------------------------------------------- Electronic and Other Specialty Chemicals 7 - -------------------------------------------------------------------------------- Polyurethane Chemicals 11 - -------------------------------------------------------------------------------- Management's Discussion and Analysis 13 - -------------------------------------------------------------------------------- Consolidated Financial Statements and Notes 16 - -------------------------------------------------------------------------------- ChemFirst Companies 36 - -------------------------------------------------------------------------------- Directors and Officers 36 - -------------------------------------------------------------------------------- Corporate Information 37 - -------------------------------------------------------------------------------- Financial Highlights
Years ended December 31, (In Thousands Except Per Share Amounts) --------------------------------------- 1999 1998 % Change --------------------------------------- Results of Operations: Sales $311,786 296,509 5 Earnings from continuing operations (a) $ 22,473 18,976 18 Depreciation and amortization $ 26,988 23,688 14 Capital expenditures $ 24,645 43,786 (44) Financial Position: Total assets $402,387 443,434 (9) Total debt $ 31,892 70,561 (55) Shareholders' equity $288,723 285,482 1 Total debt as percent of total capitalization 10% 20% (50) Per Common Share: Earnings from continuing operations (a) $ 1.22 .98 24 Cash dividends declared $ .40 .40 -- Book value $ 16.13 15.48 4 Closing market price at December 31 $ 21.875 19.750 11
(a) Prior year results exclude the after tax effect of special items of $5,684 ($.29 per share), primarily related to the sale of Power Sources, Inc. in 1998. - -------------------------------------------------------------------------------- Earnings From Continuing Operations* Millions of Dollars [The following table was represented as a bar chart in the printed material.] 95 12 96 16 97 26 98 19 99 22 Cash Flows Provided By Continuing Operations Millions of Dollars [The following table was represented as a bar chart in the printed material.] 95 23 96 35 97 23 98 40 99 39 Capital Expenditures Millions of Dollars [The following table was represented as a bar chart in the printed material.] 95 28 96 49 97 91 98 44 99 25 * Adjusted for Power Sources gain and aluminum dross note provision in 1998, Melamine gains and equity earnings in 1997, and equity earnings in years 1995 - 1996. - -------------------------------------------------------------------------------- 1 Selected Financial Data
Years ended December 31 (In Thousands of Dollars, Except Per Share Amounts) 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------- % % % % % -------------------------------------------------------------------------------- Sales to unaffiliated customers: Electronic and Other Specialty Chemicals $173,663 55 176,688 58 176,353 60 148,272 61 131,044 62 Polyurethane Chemicals 138,123 44 119,821 40 112,465 39 91,335 37 75,205 35 -------------------------------------------------------------------------------- Total sales 311,786 99 296,509 98 288,818 99 239,607 98 206,249 97 Other revenues 3,642 1 5,194 2 3,586 1 5,015 2 6,717 3 -------------------------------------------------------------------------------- Total revenues $315,428 100 301,703 100 292,404 100 244,622 100 212,966 100 ================================================================================ Operating profit from continuing operations before income taxes and investee earnings: Electronic and Other Specialty $ 18,048 17,796 27,617 22,536 25,583 Chemicals Polyurethane Chemicals 31,034 22,648 24,071 21,057 15,067 -------------------------------------------------------------------------------- 49,082 40,444 51,688 43,593 40,650 Unallocated corporate expenses (11,811) (9,781) (11,347) (13,324) (15,888) Interest income (expense), net (782) 213 3,010 (3,926) (3,777) Other income (expense), net (536) 9,224 14,997 259 1,324 -------------------------------------------------------------------------------- 35,953 40,100 58,348 26,602 22,309 Income taxes 13,480 15,440 23,050 10,471 10,327 Equity in net earnings of equity investees -- -- 2,497 846 1,096 -------------------------------------------------------------------------------- Earnings from continuing operations 22,473 24,660 37,795 16,977 13,078 Earnings (loss) from discontinued operations, net of taxes -- (2,618) 1,103 9,144 44,389 Net gain (loss) on disposal of of businesses, net of taxes 646 (11,950) -- 223,739 -- -------------------------------------------------------------------------------- Net earnings $ 23,119 10,092 38,898 249,860 57,467 ================================================================================ Earnings (loss) per common share: Continuing operations $ 1.23 1.28 1.85 .83 .64 Discontinued operations -- (.14) .06 .44 2.16 Gain (loss) on disposal of businesses .03 (.62) -- 10.85 -- -------------------------------------------------------------------------------- Net earnings $ 1.26 0.52 1.91 12.12 2.80 ================================================================================ Earnings (loss) per common share, assuming dilution: Continuing operations $ 1.22 1.27 1.81 .81 .63 Discontinued operations -- (.14) .05 .44 2.12 Gain (loss) on disposal of businesses .03 (.61) -- 10.70 -- -------------------------------------------------------------------------------- Net earnings $ 1.25 .52 1.86 11.95 2.75 ================================================================================ Net working capital $112,970 116,936 79,936 136,901 127,009 Long-term debt $ 24,224 64,956 3,941 606 80,598 Total assets $402,387 443,434 433,097 394,164 390,346 Stockholders' equity $288,723 285,482 321,697 308,486 226,757 Cash dividend payout rate 31 76 20 3 14 Return on average equity - continuing operations 8 8 12 6 6 Return on sales - continuing operations 7 8 13 7 6 Long-term debt/equity ratio .08 .23 .01 -- .36 Current ratio 3.54 3.66 2.19 3.85 3.81 Cash dividends per share $ .40 .40 .40 .40 .39 Book value per share $ 16.13 15.48 16.06 14.92 11.02
2 Dear Fellow Shareholders 1999 was a good year. Earnings from continuing operations were up 18% excluding special items in the prior year. We completed the restructuring begun several years ago with the recent sales of our steel and engineered products and services businesses. ChemFirst is now focused on chemicals. We combined custom manufacturing and fine chemicals to simplify the organization and serve our customers better. We added new products and began development of new technologies in electronic chemicals and materials for the semiconductor industry. Financial Results Earnings from continuing operations were $22.5 million or $1.22 per share versus $.98 excluding $.29 in special items last year. Sales increased 5% to $312 million. Improvement was mainly due to record sales of polyurethane chemicals. Electronic and other specialty chemicals operating results also improved. But better specialty results were offset by expenses for product development and R&D and engineering facilities added last year. Electronic chemical remover volume was up 17%. We maintained electronic chemical gross margins despite lower prices by improving production efficiencies and cutting raw materials costs. However, development expenses for chemical mechanical planarization (CMP) and deep ultra violet (DUV) photoresist resins hit earnings about $.14 per share. These efforts should begin to pay off this year. Electronic and Other Specialty Chemicals ChemFirst is a global leader in advanced cleaners for back-end-of-the-line high value applications in semiconductor production. We are also the leading supplier of DUV photoresist resins for 248 nanometer photolithography. We are a growing supplier - -------------------------------------------------------------------------------- Total Sales Millions of Dollars [The following table was represented as a bar chart in the printed material.] 95 206 96 240 97 289 98 297 99 312 Electronic and Other Specialty Sales Millions of Dollars [The following table was represented as a bar chart in the printed material.] 95 131 96 148 97 176 98 177 99 174 Polyurethane Sales Millions of Dollars [The following table was represented as a bar chart in the printed material.] 95 75 96 91 97 112 98 120 99 138 - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- Employees [The following table was represented as a pie chart in the printed material.] Polyurethane 23% Corporate 9% Electronic & Other Specialty 68% Capital Expenditures [The following table was represented as a pie chart in the printed material.] Polyurethane 13% Corporate 20% Electronic & Other Specialty 67% Identifiable Assets [The following table was represented as a pie chart in the printed material.] Polyurethane 25% Corporate 11% Electronic & Other Specialty 63% Discontinued 1% - -------------------------------------------------------------------------------- of chemistries and materials for CMP. Growth of these products is based on new semiconductor technologies for consumer electronics and Internet applications. Semiconductor chip geometries have shrunk from 0.25 to 0.18 microns about 18 months ahead of the industry roadmap. CMP creates the flat surfaces required for shorter wavelength, high-resolution DUV photolithography to produce 0.18 micron feature sizes. Other specialty chemicals include products for pharmaceutical, agricultural, polymer, electronic and photosensitive applications. We produce proprietary chemicals and we custom manufacture chemicals for others. Custom sales have been hurt the last two years by declining demand for conventional ag chemicals due to growth of genetically modified seeds and companion herbicides. So we have shifted emphasis to pharma, electronic chemical and polymer markets. In 1998, we added a contract research and small-scale manufacturing unit to support rapidly growing outsourcing by these industries. This unit is exceeding our expectations. We also reorganized the custom and fine chemicals businesses as ChemFirst Fine Chemicals to simplify customer contacts. R&D spending in 1999 was primarily focused on electronic chemicals, including new CMP products for tungsten and copper applications and DUV resins for new photoresists. We are working with major semiconductor equipment suppliers, materials suppliers, and key customers to develop technologies for the next generation chips. We also sponsor research at leading universities. We are working to commercialize a novel photoimaging technology recently licensed from Simon Fraser University. This could lead to major new applications and markets. Polyurethane Chemicals Polyurethane Chemicals includes aniline and mononitrobenzene. This segment had record operating results, reflecting the first full year of operations at the new Baytown, TX aniline facility. Improved operations at the Pascagoula, MS plant also helped. Aniline is primarily used to make polyurethane for residential and commercial construction, appliances and autos. Demand 4 is growing about 5% annually. Most of our aniline production is sold under long-term contracts that protect us from changes in raw materials prices. Capital Expenditures Capital expenditures for 1999 were $25 million, mostly for routine maintenance, plant updates and process improvements. This is down from $44 million, in 1998, when we completed a three-year program of record capital expenditures that increased capacity of major products 40% to 100%. Planned capital expenditures in 2000 are $37 million, including the initial cost for engineering a proposed Phase II expansion at Baytown, process debottlenecking and incremental capacity additions in specialty chemicals, and manufacturing and equipment upgrades in electronic chemicals. Financial Structure Our balance sheet remains strong. Debt is 10% of total capitalization versus the 43% average of our peers. Cash flow from operations and proceeds from the sale of our steel plant should more than cover planned capital expenditures. We do not anticipate major acquisitions. Our focus is on product-line and technology additions that build on and extend our existing base of products and technologies. We spent $16.7 million to repurchase 758,100 shares of ChemFirst stock during 1999. Since inception of the repurchase program in 1997, we've spent $79 million to acquire 3.4 million shares. We believe stock repurchases are a tax efficient way to return value to shareholders when cash flow exceeds other attractive investment opportunities. We intend to continue aggressive purchases of the company's stock. Outlook The outlook is good. The company has an excellent mix of products and services for fast-growing markets. Earnings for the year 2000 should be better than 1999. Our challenge and focus is to execute well on the attractive opportunities we have developed. - -------------------------------------------------------------------------------- [PHOTO OMITTED] - -------------------------------------------------------------------------------- /s/ J. Kelley Williams J. Kelley Williams Chairman and Chief Executive Officer - -------------------------------------------------------------------------------- [PHOTO OMITTED] - -------------------------------------------------------------------------------- /s/ R. Michael Summerford R. Michael Summerford President and Chief Operating Officer - -------------------------------------------------------------------------------- 5 State of the art production facilities and engineering and development labs such as the CMP applications lab pictured below in Hayward, CA and similar facilities in East Kilbride, Scotland, and Kawasaki-City, Japan, are strategically located near key regional semiconductor production centers to better serve customers. We have invested $35 million over the last 3 years in R&D facilities, new product development and expansion of production capacity to build on market and technology leadership in electronic chemicals. [GRAPHIC OMITTED] Electronic and Other Specialty Chemicals The company produces chemicals used in the manufacture of semiconductor devices, and for pharmaceutical, cosmetic, polymer, photosensitive, and agricultural applications. The company also offers custom manufacturing services from research and development to small-scale commercial production of fine chemicals. Emphasis is on chemicals and services for the semiconductor industry, where rapid technology change is creating opportunities for strong growth. ChemFirst produces organic photoresist removers, post-dry-etch residue removers, resins for production of deep ultra violet photoresists, and other performance chemicals for cleaning and polishing silicon wafers. The semiconductor industry is moving rapidly to smaller design rules to meet the increasing demand for faster, smaller, and cheaper devices for Internet, communications, computer, and consumer electronics applications. As devices shrink, new materials and more layers of interconnect wire are used to reach performance goals - up to 10,000 feet or almost two miles of wire may be embedded in today's advanced integrated circuit. The company's challenge and opportunity in this dynamic climate is to offer innovative chemical solutions for semiconductor manufacturers' process problems. The company is focused on three of the industry's highest growth areas: [LOGO] Photoresist and Post-dry-etch Residue Removers Removers are our most important electronic chemicals. These products are used to remove residues produced during the photolithography and etching process steps in wafer fabrication. Removal of the residues is critical to device performance. We have a global presence and about 25% world market share in advanced wafer cleaners. The company is 1 in market share in the U.S. and Europe and growing in the Far East. Remover product sales have historically grown at double-digit rates and - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] RECENT DEVELOPMENTS - -------------------------------------------------------------------------------- We established a competitive raw material position, important technology platform, and market leadership in copper cleaners with the acquisition of a choline product line for electronic markets. We are realizing immediate benefits as a material supplier to formulators of dry-film strippers used in printed wire board production. Longer-term, we expect to develop new applications for choline as a remover for advanced interconnect metals and in the production of copper lead frames. Photosensitive Metal Oxide Deposition or PMOD is a new technology we recently licensed from Simon Fraser University in Vancouver, British Columbia. The patented process forms metal or metal oxide features for integrated circuits and printed wire boards using a simple photosensitive technique. Advantages of the new process include low temperature processing, elimination of vacuum processing steps, and lower capital costs. Applications research and development to find ways to commercialize this technology are currently underway at Microelectronic Research Center and National Science Foundation Packaging Research Center at Georgia Tech. - -------------------------------------------------------------------------------- 7 [PHOTO OMITTED] In Chemical Mechanical Planarization (CMP), the wafer is placed between a rotating platen and pad (shown above) and a slurry of abrasives and chemicals is introduced as the polishing agent. The primary CMP application today is to polish the silicon dioxide dielectric (non-conducting or insulating layer) between metal layers on the wafer. However, the use of aluminum, tungsten, and copper interconnects in multilevel circuits is growing. The company is working closely with leading CMP equipment manufacturers to qualify oxide and metal slurries on their equipment and has developed post-CMP cleaners to use in tandem with the slurries. Alliances with equipment manufacturers are important since semiconductor producers expect a complete CMP system from their suppliers. are expected to continue to grow rapidly based on increasing chip complexity and use of new fabrication materials. [LOGO] Resins for Deep Ultra Violet Photoresists The most widely used optical process to make semiconductor devices with feature sizes at 0.25 microns and below is 248 nanometer deep ultra violet (DUV) photolithography. Chips manufactured with these smaller features are expected to drive the highest growth segment in semiconductor sales for the next several years. DUV photoresists contain resins that are key to process performance. We are the world market leader in resins for DUV photoresists. The company has a strong competitive position based on proprietary and patented technology, and raw material sourcing, and is the exclusive U.S. manufacturer of these resins. [LOGO] Chemical Mechanical Planarization (CMP) As the number of metal layers in chips increases and feature sizes decrease, CMP is used to produce flatter surfaces for sharper focus of photolithographic images and to reduce interconnect lengths for increased speed and lower power consumption. A wafer may be planarized ten times or more as interconnect layers are added. Our competitive advantages include extensive experience with complex chemistries in semiconductor manufacturing, state of the art R&D and applications labs, access to proprietary abrasives and strong customer relationships. Our strategy is to win customers with better products, strong technical support, and low cost of ownership. Other Specialty Chemicals The company produces proprietary chemicals, provides contract research, and custom manufactures chemicals for other companies. We are a world-scale producer of nitrated aromatics used as intermediates in a wide variety of applications, including polyurethanes, rubber chemicals, dyes, pigments, herbicides and photographic chemicals. The company also produces photosensitive chemicals and chemicals for pharmaceuticals. ChemFirst is the sole U.S. producer of many nitrotoluenes and derivatives. These are high volume products with mature end-use markets that are generally sold under annual contracts to long-standing customers. - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] ChemFirst's patented HDA(R) removers are #1 in market share in the U.S. and Europe. The photos above and below, enlarged 30,000 times, illustrate the effectiveness of the company's remover products. The company is the second largest supplier of removers in the world. We have established chemicals, materials, and service capabilities to solve the interrelated process problems of semiconductor manufacturers worldwide, a strong intellectual property portfolio and a development pipeline of new products and technologies to meet future challenges. [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- 9 In custom manufacturing we offer manufacturing capabilities to pharmaceutical, electronic, and other chemical companies who want to focus on research and marketing, cut costs and time to market and speed product innovation. We recently established the capability to provide contract research, developmental samples, and small-scale production for pharmaceutical and electronic chemical customers. We are an integrated single-source provider with the ability to take products from R&D to commercial production in an ultra-pure, cGMP or ISO-9000-2 environment. With approximately 300 dedicated employees, state of the art R&D facilities, and over 120,000 gallons of reactor capacity within its three sites, ChemFirst operates one of the most versatile fine chemical companies in North America. [GRAPHIC OMITTED] Our proprietary FirstCure(R) product line includes photoinitiators, cure accelerators, amine synergists, and polymerization inhibitors used in printing inks, varnishes, lacquers, and adhesives. These offer advantages of energy savings, shorter curing cycles, and higher quality, more durable finishes. They are also more environmentally friendly than conventional processes that contain volatile organic compounds. Our custom manufacturing and research capabilities cover a broad spectrum - from contract R&D and delivery of gram samples, to multi-ton production. We offer customers broad technology platforms, innovative process development, and efficient batch production in a cGMP environment. Polyurethane Chemicals The company produces mononitrobenzene and aniline based on nitration and hydrogenation chemistry. Aniline is our major product and is primarily sold as a feedstock for MDI (methylene diphenyl diisocyanate). MDI is used in polyurethane foams for insulation in home and commercial construction, in urethane elastomers for automobile body components, in adhesives, and as a binder in the manufacture of oriented strand board. Other significant markets for aniline include tire and agricultural chemicals and plastics for consumer goods. Mononitrobenzene is primarily used to make aniline, but is sold separately for the manufacture of iron oxide pigments, black dyes, and as an intermediate for the production of acetaminophen. U.S. aniline demand is growing at about 5% annually, driven primarily by MDI, which consumes about 80% of U.S. aniline production. Domestic MDI growth is predicted to remain steady at around 6% annually, driven mainly by demand from the construction and automotive industries. Other aniline markets are growing at GDP growth rates. The company is well positioned in this business as a low-cost producer with innovative technology and long-term customer relationships. ChemFirst is the largest merchant supplier of aniline in the U.S. - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] The company more than doubled aniline production capacity with the addition of a plant in Baytown, TX. The 250MM lb plant was built inside Bayer Corporation's Baytown chemical complex. Bayer is the company's largest customer. ChemFirst supplies all of Bayer's North American aniline requirements under long-term contract from plants in Pascagoula, MS and Baytown, TX. Engineering is scheduled to begin this year on a proposed project that would double aniline capacity at Baytown, and bring company-wide aniline production capacity to approximately 750MM lbs. [GRAPHIC OMITTED] Most of the company's aniline is used to make polyurethane for residential and commercial construction, appliances, and autos. - -------------------------------------------------------------------------------- 11 Financial Report - -------------------------------------------------------------------------------- CONTENTS Management's Discussion and Analysis 13-15 Consolidated Balance Sheets 16 Consolidated Statements of Operations 17 Consolidated Statements of Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes To Consolidated Financial Statements 20-34 Independent Auditors' Report 35 ChemFirst Companies 36 Directors and Officers 36 Corporate Information 37 - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is based upon and should be read in conjunction with ChemFirst Inc.'s ("the Company's") financial statements, including the notes thereto. 1999 VERSUS 1998 Consolidated Results Earnings from continuing operations for 1999 were $22.5 million versus $24.7 million for the prior year. Results for 1998 include other income of $9.3 million ($5.7 million after tax), primarily related to the gain on the sale of 50% owned Power Sources, Inc. ("PSI"). Excluding this other income, earnings from continuing operations for 1999 were up 18% from 1998, primarily due to record sales of polyurethane chemicals, reflecting a full year of production from the Baytown, TX aniline facility. Segments Electronic and Other Specialty Chemicals pretax operating profits for 1999 were $18.0 million, up $0.3 million from the prior year, while sales declined 2% to $173.7 million. Operating results for the year improved only slightly as higher gross profits, primarily from remover products, were offset by higher costs from recent investments in new facilities in the U.S. and Japan. Remover product sales volume was up 17% for the year, while average prices declined 8%. Margins were maintained, however, by improving production efficiencies and cutting raw material costs. Polyurethane Chemicals pretax operating profits for 1999 were $31.0 million, up 37% from 1998, while sales were $138.1 million, up 15%, reflecting the first full year of production from the Baytown, TX aniline facility, which began operations in March 1998. Results in 1999 also benefited from improved Pascagoula operations. Sales of aniline purchased for resale declined approximately $6.8 million from the prior year. However, these aniline sales do not contribute significantly to operating profits. Unallocated corporate expenses for 1999 were $11.8 million, up 21% from the prior year. Expenses were lower in 1998, primarily due to a reduction in compensation accruals indexed to the Company's stock price. Net interest expense of $0.8 million was reflected for 1999, as compared with net interest income of $0.2 million in 1998, due to higher average borrowings and lower interest income from the Getchell Gold note, which was collected in full in May 1999 (see note 3 to the Consolidated Financial Statements). Other income in 1999 included recognition of $1.6 million in additional income related to the 1998 sale of PSI. This income was deferred at the time of the 1998 sale pending resolution of contingencies. In 1998, a $10.1 million gain was recorded related to the PSI sale. In 1999 and 1998 other expenses included $1.0 million and $0.8 million, respectively, in loss provisions for a note received in the disposition of Plasma Processing Corporation in January 1997. Other expenses in 1999 also include approximately $1.0 million from termination of a corporate lease obligation. 1998 VERSUS 1997 Consolidated Results Earnings from continuing operations for 1998 were $24.7 million, down 35% from 1997. Results for 1998 include other income of $9.3 million ($5.7 million after tax), primarily related to the gain on the sale of the Company's 50% interest in PSI in the first quarter of 1998. Results for 1997 include a $14.7 million gain ($8.8 million after tax) from the fourth quarter sale by the Company of its 23% interest in Melamine Chemicals, Inc. ("Melamine") and $2.5 million equity in net earnings of PSI and Melamine (see note 3 to the Consolidated Financial Statements). Excluding these gains and equity earnings, earnings from continuing operations for 1998 were $19.0 million, down 28% from $26.5 million in 1997 primarily due to lower margins, increased research and development and higher interest expense. Sales for 1998 were up 3%, primarily due to higher aniline volume. Segments Electronic and Other Specialty Chemicals pretax operating profits for 1998 were $17.8 million on sales of $176.7 million. In 1998, sales of chemical mechanical planarization and acylation derivatives products (used primarily in the manufacture of integrated circuits) from acquisitions in December 1997, were $14.9 million and pretax operating losses were $2.6 million. Pretax operating profits and sales, excluding the above acquisitions, were down 26% and 8%, respectively, due to lower demand for an agricultural chemical intermediate and lower prices from many products due to competitive pressure. Remover product sales volume was up 4% and average unit prices were unchanged despite an estimated 4% decline in worldwide silicon consumption and a downturn in the semiconductor industry. Polyurethane Chemicals pretax operating profits for 1998 were $22.6 million, down 6% from 1997. Operating profits declined in 1998 as lower production and higher costs at the Pascagoula, MS, facility and 17% lower average nitrobenzene prices more than offset the additional production from the Baytown, TX, facility. Sales for 1998 were $119.8 million, up 7% as a 16% increase in sales volume was partially offset by lower average sales prices. The increased volume was due to the added production from the Company's new 250-million-pound-per-year aniline facility in Baytown, which began operations in March 1998. The additional Baytown production was partially offset by reduced aniline production at Pascagoula mostly due to production inefficiencies and unscheduled plant maintenance in the first quarter of 1998 and a scheduled plant turnaround in the second quarter of 1998. Hurricane Georges struck the Pascagoula facility on September 28, 1998, and shut down operations for 18 days. However, the Company's insurance covered most of the facility's repairs and lost profits incurred during that period. 13 Management's Discussion and Analysis of Financial Condition and Results of Operations Unallocated corporate expenses for 1998 were $9.8 million, down 14% from 1997 primarily due to a reduction in compensation accruals indexed to the Company's stock price. Net interest income was down $2.8 million due to $1.7 million in higher interest expense, net of capitalized interest, and $1.1 million in lower interest income. Capitalized interest in 1998 was up $0.8 million over 1997. Interest expense was up on higher debt while interest income declined as cash proceeds received in 1996 from the fertilizer disposition were used for capital expenditures and share repurchases. Other income and expense in 1998 included a $10.1 million gain on the sale of PSI and a $0.8 million loss provision for a note received in the disposition of Plasma Processing Corporation in January 1997. Other income for 1997 included the $14.7 million gain on the sale of Melamine. Discontinued Operations In December 1999, the Company sold two of its wholly owned subsidiaries, Callidus Technology, Inc. ("CTI") and Plasma Energy Corporation in an all cash transaction. Proceeds of the transaction were approximately $8.0 million and resulted in an after tax loss of $2.7 million. The loss was primarily attributable to costs associated with the shutdown of CTI's European operations, which increased expenses during the disposal period. This transaction completed the disposition of the Engineered Products and Services segment. On February 15, 2000, the Company sold its steel operation for approximately $13.0 million in cash, subject to certain post-closing working capital adjustments. Since December 31, 1998, net assets of the business, excluding deferred taxes, were reduced approximately $9.5 million, primarily through reductions in inventory and accounts receivable. In 1998, the Company recorded an estimated after tax loss from disposal of steel operations of $12.0 million, primarily related to the writedown of assets to their estimated net realizable value. In the fourth quarter of 1999, this valuation adjustment was reduced by approximately $0.8 million, to reflect terms of the pending sale. On October 20, 1995, the Company's gold operations were discontinued through the distribution to its shareholders of its entire ownership of Getchell Gold Corporation. A reduction in estimated tax liabilities of $2.4 million was recorded in the fourth quarter of 1999 following final settlement of federal tax examinations covering Getchell Gold's operations through that period. Losses from discontinued operations in 1998 were primarily from steel operations, while the earnings in 1997 came from Engineered Products and Services (see note 2 to the Consolidated Financial Statements). Environmental Matters The Company's operations are subject to a wide variety of constantly changing environmental laws and regulations governing emissions to the air, discharges to water sources, and the handling, storage, treatment and disposal of waste materials, as well as other laws and regulations concerning health and safety conditions for which it must incur certain costs. The Company's capital expenditures for environmental protection were $0.6 million in 1999. Environmental capital expenditures are projected to be $1.3 million and $1.1 million for 2000 and 2001, respectively. In addition, the Company accrues for anticipated costs associated with investigatory and remediation efforts relating to the environment. At December 31, 1999, the Company's accrued liability for these matters totaled $1.6 million, $1.4 million of which is for discontinued operations and $0.2 million for continuing operations. Based on information presently available, the Company believes any amounts paid in excess of the accrued liabilities will not have a material adverse effect on its financial position or results of operations. Capital Resources and Liquidity Net cash provided by operating activities for 1999 was $44.7 million, up $10.6 million from 1998, primarily due to a reduction in working capital in discontinued operations. Net cash provided by continuing operations was down slightly from the prior year, as increases in working capital more than offset higher earnings. Investing activities for the year include $29.6 million in proceeds from collection of a note with Getchell Gold Corporation and $17.9 million from the disposal of discontinued operations. These proceeds were used to reduce debt, which declined a net $38.7 million. In 1998, investing activities included $19.0 million in proceeds from the sale of PSI. Capital expenditures for 1999 were $24.6 million, down 44% from 1998, which included the final expenditures for the Baytown aniline facility. In March 2000, the board of directors authorized an additional $60.0 million for stock repurchases to follow the $50.0 million repurchase program authorized in August 1998. This latest approval for expenditure brings total authorizations since the stock repurchase program was initiated in January 1997 to $170.0 million. As of December 31, 1999, the Company had acquired 3.4 million shares at a cost of $78.6 million. Projected capital expenditures for 2000 are approximately $37.0 million. The Company believes that its cash flow from operations, combined with access to its existing or additional bank credit facilities, adequately provides for its cash requirements. Additional sources of cash in 2000 include proceeds of approximately $13.0 million related to the disposal of FirstMiss Steel, Inc., which occurred in February 2000. Accounting Developments In March 1998, the Accounting Standards Executive Committee ("AcSEC") released Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP identifies the characteristics of internal-use software and provides guidance for accounting treatment of costs for computer software developed or obtained for internal use as related to capitalization or expense decisions. The statement is effective for fiscal years beginning after December 15, 1998. In April 1998, AcSEC released SOP 98-5, "Reporting 14 Management's Discussion and Analysis of Financial Condition and Results of Operations on the Costs of Start-Up Activities." The SOP broadly defines start-up activities and provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. The statement is effective for fiscal years beginning after December 15, 1998. Adoption of these statements did not have a material impact on the Company's financial statements. Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998, and is effective for fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. All derivatives are required to be recognized as either assets or liabilities in the statement of financial position and measured at fair value. Changes in fair value will be reported either in earnings or outside earnings depending on the intended use of the derivative and the resulting designation. Entities applying hedge accounting are required to establish, at the inception of the hedge, the method used to assess the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The Company currently follows SFAS No. 52, "Foreign Currency Translation," and applies hedge accounting treatment to certain foreign currency transactions by entering into foreign currency option contracts and forward exchange contracts. Gains and losses associated with currency rate changes on contracts hedging foreign currency transactions are recorded in income and generally offset the transaction losses or gains on the foreign currency cash flows that they are intended to hedge. Gains and losses on contracts hedging firm sales commitments are deferred until the related transactions are consummated. The effect of adopting the Statement is currently being evaluated, however, based on current activity, the Company does not believe the effects of adoption will be material to its financial position or results of operations. Market Risk The Company is exposed to changes in financial market conditions in the normal course of its business, including changes in interest rates and foreign currency exchange rates. At December 31, 1999 and 1998, the Company's derivative and other financial instruments included long-term debt denominated in U.S. dollars, short-term notes denominated in Japanese yen and a series of yen option collars hedging 20,000,000 yen per month with contract expiration dates ranging from March 2000 through January 2001. Due to the short-term nature of the bulk of these contracts and size of these yen obligations, the Company does not consider its exposure to foreign currency or interest rate fluctuations on these instruments to be material. The Company utilizes fixed and variable-rate debt to maintain liquidity and fund its business operations, with the terms and amounts based on business requirements, market conditions and other factors. At December 31, 1999 and 1998, the market values of the Company's fixed-rate borrowings were approximately $24.2 million and $24.0 million, respectively. A 100 basis point change in interest rates (all other variables held constant) as of December 31, 1999 and 1998, would result in an approximate $1.0 million change in fair market values for both years but would not affect interest expense or cash flow. There was no variable-rate debt outstanding at December 31, 1999. At December 31, 1998 the Company had $41.0 million in variable-rate debt. A 100 basis point change in interest rates (all other variables held constant) on this portion of the Company's debt, would result in a change in interest expense of approximately $0.4 million. Year 2000 In 1996, the Company began a study which led to the purchase in 1997 of a company-wide Enterprise Resource Planning ("ERP") system to integrate the Company's information systems, replacing small, stand-alone purchased systems. This ERP system is Year 2000 compliant. As of December 31, 1999, the Company has spent $12.6 million on this project, with all scheduled sites operating under this system. A corporate-wide survey and assessment of other information technology ("IT") and non-IT equipment and systems utilizing date or time functions was completed in 1999. The Company also assessed critical key customers, as well as service and raw material suppliers, regarding their Year 2000 readiness. Total expenditures for assessment and remediation were approximately $0.3 million, with all remediations occurring prior to December 31, 1999. Most of this cost was related to remediating process control systems. Based on information to date, the Company has not encountered any significant disruptions related to the Year 2000 rollover. Forward-Looking Statements Certain statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations that relate to the proceeds from the discontinuance of Steel operations, as well as other statements in this Annual Report that are not historical in nature, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other forward-looking statements made from time to time by the Company, or in the Company's press releases and filings with the U.S. Securities and Exchange Commission, are based on certain underlying assumptions and expectations of management. These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those expressed in such forward-looking statements. Such risks and uncertainties include, but are not limited to, general economic conditions, availability and pricing of raw materials, supply/demand balance for key products, new product development, manufacturing efficiencies, conditions of and product demand by key customers, the timely completion and start up of construction projects, pricing pressure as a result of international market forces, the inability of the Company to either resolve Year 2000 issues that may subsequently arise or to accurately estimate the cost associated with such issues, and other factors as may be discussed in the Company's Form 10-K for the fiscal year ended December 31, 1999. 15 Consolidated Balance Sheets
December 31, (In Thousands of Dollars) ------------------------- 1999 1998 ------------------------- Assets Current assets: Cash and cash equivalents $ 14,551 11,226 Receivables: Trade, less allowance for doubtful accounts of $345 and $317, respectively 54,248 40,646 Other 13,665 3,152 ------------------------- Total receivables 67,913 43,798 ------------------------- Inventories: Finished products 36,860 32,872 Work in process 3,565 7,045 Raw materials and supplies 22,238 11,378 ------------------------- Total inventories 62,663 51,295 ------------------------- Prepaid expenses and other current assets 9,794 8,274 Net current assets of discontinued operations 2,532 46,309 ------------------------- Total current assets 157,453 160,902 ------------------------- Investments 1,552 32,769 Intangible and other assets, at cost less amortization 17,637 16,362 Property, plant and equipment, net 225,745 227,401 Noncurrent assets of discontinued operations -- 6,000 ------------------------- $402,387 443,434 ========================= Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 7,668 5,354 Current installments of long-term debt -- 251 Deferred revenue 373 104 Accounts payable - trade (including book overdrafts of $2,883 and $6,673, respectively) 18,919 22,020 Accrued expenses and other current liabilities 17,523 16,237 ------------------------- Total current liabilities 44,483 43,966 ------------------------- Long-term debt, excluding current installments 24,224 64,956 Other long-term liabilities 26,130 24,783 Noncurrent liabilities of discontinued operations -- 10,097 Deferred income taxes 18,178 13,501 Minority interest 649 649 Stockholders' equity: Serial preferred stock. Authorized 20,000,000 shares; none issued -- -- Common stock of $1 par value. Authorized 100,000,000 shares; outstanding 17,901,323 and 18,445,391 shares, respectively 17,901 18,445 Additional paid-in capital 25,543 22,212 Accumulated other comprehensive income (loss) 287 (293) Retained earnings 244,992 245,118 ------------------------- Total stockholders' equity 288,723 285,482 ------------------------- $402,387 443,434 =========================
See accompanying notes to consolidated financial statements. 16 Consolidated Statements of Operations
Years ended December 31, (In Thousands of Dollars, Except Per Share Amounts) ----------------------------------- 1999 1998 1997 ----------------------------------- Sales $ 311,786 296,509 288,818 Cost of sales 220,118 217,016 206,946 ----------------------------------- Gross margin 91,668 79,493 81,872 General, selling and administrative 50,605 46,538 33,702 Research and development expenses 7,433 7,487 4,966 Other operating income (expense), net 3,641 5,195 (2,863) ----------------------------------- Operating earnings 37,271 30,663 40,341 Interest income 1,363 2,199 3,293 Interest expense 2,145 1,986 283 Other income (expense), net (536) 9,224 14,997 ----------------------------------- Earnings from continuing operations before income taxes and investee earnings 35,953 40,100 58,348 Income tax expense 13,480 15,440 23,050 Equity in net earnings of affiliated companies -- -- 2,497 ----------------------------------- Earnings from continuing operations 22,473 24,660 37,795 Earnings (loss) from discontinued operations, net -- (2,618) 1,103 Gain (loss) on disposal of businesses, net 646 (11,950) -- ----------------------------------- Net earnings $ 23,119 10,092 38,898 =================================== Earnings (loss) per common share: Earnings from continuing operations $ 1.23 1.28 1.85 Earnings (loss) from discontinued operations, net -- (.14) .06 Gain (loss) on disposal of businesses, net .03 (.62) -- ----------------------------------- Net earnings $ 1.26 .52 1.91 =================================== Earnings (loss) per common share, assuming dilution: Earnings from continuing operations $ 1.22 1.27 1.81 Earnings (loss) from discontinued operations, net -- (.14) .05 Gain (loss) on disposal of businesses, net .03 (.61) -- ----------------------------------- Net earnings $ 1.25 .52 1.86 ===================================
See accompanying notes to consolidated financial statements. 17 Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 (In Thousands of Dollars, Except Share Amounts) --------------------------------------------------------------------- Accumulated Common Stock Additional Other ------------------------- Paid-In Comprehensive Retained Shares Amount Capital Income Earnings --------------------------------------------------------------------- Balance, December 31, 1996 20,672,778 $ 20,673 16,586 -- 271,227 Net earnings -- -- -- -- 38,898 Dividends declared - $.40 per share -- -- -- -- (8,147) Common stock issued: Employee stock options 65,620 66 881 -- -- Convertible debentures 93,317 93 516 -- -- Purchase and retirement of common shares (800,776) (801) -- (19,181) Income tax benefit on exercise of stock options and convertible debentures -- -- 886 -- -- --------------------------------------------------------------------- Balance, December 31, 1997 20,030,939 20,031 18,869 -- 282,797 ===================================================================== Net earnings -- -- -- -- 10,092 Dividends declared - $.40 per share -- -- -- -- (7,659) Common stock issued: Employee stock options 43,102 43 724 -- -- Convertible debentures 148,930 149 1,008 -- -- Employee Stock Purchase Plan 51,417 51 933 -- -- Purchase and retirement of common shares (1,828,997) (1,829) -- -- (40,112) Income tax benefit on exercise of stock options and convertible debentures -- -- 678 -- -- Foreign currency translation adjustments -- -- -- (293) -- --------------------------------------------------------------------- Balance, December 31, 1998 18,445,391 18,445 22,212 (293) 245,118 ===================================================================== Net earnings -- -- -- -- 23,119 Dividends declared - $.40 per share -- -- -- -- (7,276) Common stock issued: Employee stock options 36,770 37 607 -- -- Convertible debentures 129,811 130 988 -- -- Employee Stock Purchase Plan 47,451 47 963 -- -- Purchase and retirement of common shares (758,100) (758) -- -- (15,969) Income tax benefit on exercise of stock options and convertible debentures -- -- 773 -- -- Foreign currency translation adjustments -- -- -- 580 -- --------------------------------------------------------------------- Balance, December 31, 1999 17,901,323 $ 17,901 25,543 287 244,992 ===================================================================== Total comprehensive income: Net earnings for year ended December 31, 1999 23,119 Foreign currency translation adjustment, net of taxes of $142 237 Reclassification adjustment for foreign currency translation adjustment included in net earnings, net of taxes of $206 343 -------- Total comprehensive income for year ended December 31, 1999 $ 23,699 ======== Net earnings for year ended December 31, 1998 10,092 Foreign currency translation adjustment, net of taxes of $183 (293) -------- Total comprehensive income for year ended December 31, 1998 $ 9,799 ========
See accompanying notes to consolidated financial statements 18 Consolidated Statements of Cash Flows
Years ended December 31, (In Thousands of Dollars) -------------------------------- 1999 1998 1997 -------------------------------- Cash flows from operating activities: Net earnings $ 23,119 10,092 38,898 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 26,988 23,688 17,254 Provision for losses on receivables 133 203 505 Deferred income taxes 5,533 3,057 (1,254) Net (gain) loss on disposal of businesses, net of taxes (benefit) (646) 11,950 -- Gain on sale of equity investees (1,605) (10,069) (14,684) Undistributed earnings of affiliates, net of taxes -- -- (2,497) Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Receivables (5,920) 15,237 (11,365) Inventories (11,368) (12,481) (2,184) Prepaid expenses (2,042) (320) 2,291 Accounts payable (3,101) (7,943) 4,275 Accrued expenses and other current liabilities 814 1,588 (8,826) Deferred revenue and other long-term liabilities 6,176 3,301 3,296 Other, net 1,390 (800) (2,034) Net (earnings) loss from discontinued operations -- 2,618 (1,103) -------------------------------- Net cash provided by continuing operations 39,471 40,121 22,572 Net cash provided by (used in) discontinued operations 5,245 (5,970) 965 -------------------------------- Net cash provided by operating activities 44,716 34,151 23,537 -------------------------------- Cash flows from investing activities: Capital expenditures (24,645) (43,786) (91,442) Acquisitions of businesses (3,000) -- (11,166) Proceeds from disposal of businesses 17,857 -- 2,100 Proceeds from collection of note receivable 29,569 -- -- Proceeds from sale of equity investees -- 18,986 26,138 Other, net -- 736 1,006 -------------------------------- Net cash provided by (used in) investing activities of continuing operations 19,781 (24,064) (73,364) Net cash used in investing activities of discontinued operations -- (3,204) (4,041) -------------------------------- Net cash provided by (used in) investing activities 19,781 (27,268) (77,405) -------------------------------- Cash flows from financing activities: Net borrowings (repayments) on notes payable (38,691) 46,354 20,000 Principal repayments of long-term debt (23) (22) (22) Repayments of other notes payable -- (700) -- Dividends (7,276) (7,659) (8,147) Purchase of common stock (16,676) (42,617) (19,312) Proceeds from issuance of common stock 1,536 1,669 1,475 -------------------------------- Net cash used in financing activities, continuing operations (61,130) (2,975) (6,006) Net cash used in financing activities, discontinued operations -- (441) (745) -------------------------------- Net cash used in financing activities (61,130) (3,416) (6,751) -------------------------------- Effect of exchange rate changes on cash (42) (7) -- -------------------------------- Net increase (decrease) in cash and cash equivalents 3,325 3,460 (60,619) Cash and cash equivalents at beginning of year 11,226 7,766 68,385 -------------------------------- Cash and cash equivalents at end of year $ 14,551 11,226 7,766 ================================ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 2,144 1,814 288 ================================ Income taxes, net $ 272 7,283 20,832 ================================
See accompanying notes to consolidated financial statements. 19 Notes To Consolidated Financial Statements December 31, 1999, 1998 and 1997 (In thousands of dollars, except share data and option contract strike prices; disclosures included in the Notes to Consolidated Financial Statements relate to continuing operations, unless otherwise indicated). 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The principal businesses of the Company involve the production of electronic and other specialty chemicals for use in the semiconductor industry and in pharmaceutical, polymer, photographic, photosensitive and agricultural applications, as well as the production of polyurethane chemicals. Further descriptions of the Company's products and the relative significance of its operations are included in the segment information data in note 12. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Equity investments are accounted for by the equity method. Recognition of Revenue Revenues are recorded when title and risk of ownership pass. Long-term construction-type contracts of certain discontinued operations are accounted for under the percentage-of-completion method. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and weighted average methods. Long-Lived Assets Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment when the facts and circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Depreciation and Amortization Depreciation of plant and equipment and depreciable investments is based on cost and the estimated useful lives of the separate units of property. The straight-line method is used in determining the amount of depreciation charged to expense. Goodwill of businesses acquired is generally amortized up to 20 years using the straight-line method. Other intangibles are amortized over their estimated useful lives (5-17 years) using the straight-line method. Loan costs are amortized over the terms of related loans using the interest method. Pension Plans Pension cost is determined using the "projected unit credit" actuarial method for financial reporting purposes. The Company's funding policy is to contribute annually at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974. Incentive Compensation All outstanding stock options are nonqualified and require no charges to expense upon grant or exercise. The Company receives a tax benefit from option exercises, resulting in ordinary income to option recipients, that is included in stockholders' equity. Phantom share unit compensation plan discounts are amortized over various holding periods of up to three years. The share units are credited with equivalent dividends equal to cash dividends paid by the Company. The equivalent dividends are expensed through the statement of operations. Phantom share units require no charge to expense upon grant, or subsequently, as the Company, as described by the plan, at its discretion determines the means of distribution as either stock or cash upon redemption by participants. Cash and Cash Equivalents The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. 20 Notes To Consolidated Financial Statements Investments Realized gains and losses on investments are determined on the basis of specific costs. Contingencies Estimates of loss contingencies, including environmental liability costs for remediation, are charged to expense when it is probable an asset has been impaired or a liability incurred and the amount can be reasonably estimated. If a potentially material loss contingency is reasonably possible, or probable but cannot be estimated, then the nature of the contingency and an estimated range of possible loss, if determinable and material, are disclosed. Foreign Currency Translation Financial statements of foreign subsidiaries are translated into U.S. dollars at current rates, except that revenues, costs and expenses are translated at average current rates during each reporting period. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are accumulated net of taxes in other comprehensive income. Derivative Financial Instruments The Company uses foreign currency option contracts and forward exchange contracts to hedge certain foreign receivables and firm sales commitments to be denominated in currencies other than the functional currency of the entity involved. The contracts are designated and effective as hedges. Gains and losses on contracts that hedge recorded receivables activity offset the exchange rate fluctuations of the underlying hedged transaction. Accounting for gains and losses on contracts designated as hedges of identifiable foreign currency sales commitments involves deferring recognition until the related transactions are consummated. When consummated, these gains and losses are recorded in net income (see note 15). Future Impact of Recent Accounting Pronouncements SFAS No. 133 - "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998 and is effective for all fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. All derivatives are required to be recognized as either assets or liabilities in the statements of financial position and measured at fair value. Changes in fair value will be reported either in earnings or outside earnings depending on the intended use of the derivative and the resulting designation. Entities applying hedge accounting are required to establish, at the inception of the hedge, the method used to assess the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The Company currently follows SFAS No. 52, "Foreign Currency Translation," and applies hedge accounting treatment to certain foreign currency transactions by entering into foreign currency option contracts and forward exchange contracts. Gains and losses associated with currency rate changes on contracts hedging foreign currency transactions are recorded in income and generally offset the transaction losses or gains on the foreign currency cash flows that they are intended to hedge. Gains and losses on contracts hedging firm sales commitments are deferred until the related transactions are consummated. The effect of adopting the Statement is currently being evaluated, however, based on current activity, the Company does not believe the effects of adoption will be material to its financial position or results of operation. Reclassifications Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation. 2. ACQUISITIONS AND DISPOSALS Acquisitions On December 31, 1997, the Company acquired from Clariant Corporation an acylation derivatives business involved in the development and marketing of photoresist resins, as well as the chemical mechanical planarization assets of Baikowski International Corporation and Moyco Technologies, Inc. The aggregate purchase price of these three businesses was approximately $14,900, including approximately $11,200 in cash and contingent consideration of approximately $3,700 (approximately $5,000 face value before discounting) payable in five years. Goodwill is amortized on a straight-line basis over the period assigned to each acquisition, ranging from five to 15 years. In September of 1999, the Company acquired a choline raw material business from DCV, a holding company established by a joint venture between DuPont and ConAgra, for approximately $3,000 in cash. Choline is an ingredient in photoresist strippers used to manufacture printed wire boards and other electronic interconnects. 21 Notes To Consolidated Financial Statements Disposals Effective December 1, 1999, the Company sold its wholly owned subsidiaries, Callidus Technology, Inc.("CTI") and Plasma Energy Corporation, to Howe-Baker International Inc., for approximately $8,000 in cash, subject to certain immaterial post-closing adjustments. A plan for disposal of this business was adopted in the fourth quarter of 1998. A pretax loss of $4,500 was recognized in 1999 on the disposal as operating results during the disposal period were lower than projected, primarily due to the decision to exit CTI's European operations. This sale completes the disposition of the Company's Engineered Products and Services segment. In 1996, the Company recorded pretax charges of $20,402 related to disposal of the other major portion of this segment, Plasma Processing Corporation. This company was sold in January 1997 for $4,100 resulting in no additional gain or loss. In December 1998, an additional accrual of $1,465 was made to dispose of unprocessed inventory. In 1999, following disposal of the inventory, the Company reversed $343 of this accrual, leaving an accrued balance of $125 at December 31, 1999. In the third quarter of 1998, the Company's board of directors approved a plan to discontinue its steel operations and in February 2000, the Company sold its wholly owned subsidiary FirstMiss Steel, Inc. for approximately $13,000, subject to certain post-closing working capital adjustments. An estimated loss on disposal of $18,000 was recorded in the third quarter of 1998, which included accruing $3,128 of estimated costs to exit this business. In the fourth quarter of 1999, the estimated loss on disposal was reduced by approximately $1,281 to reflect the estimated proceeds of the anticipated sale. On October 20, 1995, the Company's gold operations were discontinued through the distribution to its shareholders of its entire ownership of Getchell Gold Corporation. A reduction in estimated tax liabilities of $2,388 was recorded in the fourth quarter of 1999 following final settlement of federal tax examinations covering Getchell Gold's operations through the distribution date. The net assets and liabilities of discontinued operations included in the consolidated financial statements are classified as current assets, noncurrent assets and noncurrent liabilities by segment as follows:
Engineered Products Steel and Services and Other Total December 31, December 31, December 31, -------------------------------------------------------------------- 1999 1998 1999 1998 1999 1998 -------------------------------------------------------------------- Current assets $ 3,090 24,766 1,656 33,172 4,746 57,938 Investments and other assets -- -- -- 359 -- 359 Property, plant and equipment, net 11,000 9,300 -- 8,489 11,000 17,789 Current liabilities (1,631) (7,036) (11,583) (22,276) (3,214) (29,312) Long-term debt, excluding current installments -- (465) -- -- -- (465) -------------------------------------------------------------------- Net current assets of discontinued operations $ 12,459 26,565 (9,927) 19,744 2,532 46,309 ==================================================================== Investments and other assets $ -- -- -- 6,000 -- 6,000 ==================================================================== Noncurrent assets of discontinued operations $ -- -- -- 6,000 -- 6,000 ==================================================================== Deferred income taxes and other, net $ -- -- -- 10,097 -- 10,097 ==================================================================== Noncurrent liabilities of discontinued operations $ -- -- -- 10,097 -- 10,097 ====================================================================
In 1999, the noncurrent liability of $10,097 associated with Engineered Products and Services and Other in 1998 was reclassed as part of current liabilities. 22 Notes To Consolidated Financial Statements The statements of operations have been reclassified to separate discontinued and continuing operations. Revenues and net earnings (losses) of the discontinued operations, by segment, for the years ended December 31, 1998 and 1997 were as follows:
1998 1997 -------------------- Steel Sales and revenues $ 54,620 75,304 ==================== Loss from operations before taxes $ (1,499) (1,134) Income tax benefit (585) (444) -------------------- Loss from discontinued operations, net $ (914) (690) ==================== Engineered Products and Services and Other Sales and revenues $ 68,011 72,798 ==================== Earnings (loss) from operations before taxes $ (2,705) 2,952 Income tax expense (benefit) (1,001) 1,159 -------------------- Earnings (loss) from discontinued operations, net $ (1,704) 1,793 ==================== Total operating results of discontinued operations $ (2,618) 1,103 ====================
Earnings (loss) from operations of discontinued businesses included interest expense allocations (based on the ratio of net assets of discontinued operations to consolidated net assets plus debt) of $0, $309 and $41 in 1999, 1998 and 1997, respectively. 3. INVESTMENTS On January 22, 1998, the Company sold its 50% interest in Power Sources, Inc. ("PSI") to Trigen Energy Corporation for a net cash amount of $18,986 after payments of incentives to former PSI management. A pretax gain of $10,069 was recognized in 1998, with an additional gain of $1,605, including interest, recognized in 1999 following resolution of contingencies related to the transaction. In November 1997, the Company sold its 23% interest in Melamine Chemicals, Inc. to Borden Chemical Inc. for $26,138 in cash, recognizing a pretax gain of $14,684. Equity earnings, net of taxes, were $2,497 for the year ended December 31, 1997. The Company received a promissory note from Getchell Gold Corporation, a former subsidiary, in October 1995. Subsequently, Getchell and Placer Dome Inc. merged in May 1999, and Getchell paid $29,569 representing all principal and interest due on the note to the Company. At December 31, 1998, the aggregate unpaid principal amount of the note, with accrued interest at 5.625% based on the London Interbank Offered Rate, was $28,918 and was included in investments. The terms of the January 1997 sale of Plasma Processing Corporation included a note for $2,000. A tax provision for $1,000 and $750 (see note 11) was made in 1999 and 1998, respectively, related to the note based on management's estimate of collectibility. 4. INTANGIBLE AND OTHER ASSETS The major classes of intangible and other assets are summarized below: December 31, ----------------------- 1999 1998 ----------------------- Goodwill $30,207 26,343 Other 963 1,055 ----------------------- 31,170 27,398 Less accumulated amortization 13,533 11,036 ----------------------- $17,637 16,362 ======================= The net carrying amounts of goodwill at December 31, 1999 and 1998 were $16,965 and $15,890, respectively. Amortization expense related to the above amounted to $1,921 in 1999, $2,106 in 1998 and $1,204 in 1997. 23 Notes To Consolidated Financial Statements 5. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment, at cost, follows:
Estimated December 31, useful lives 1999 1998 -------------------------------------------- Land and land improvements 10-20 $ 7,031 6,856 Buildings 20-45 34,002 31,075 Plant facilities and equipment 5-20 286,992 270,505 Other facilities and equipment 5-12 50,784 36,276 Construction in progress 11,520 22,102 ---------------------- Total property, plant and equipment 390,329 366,814 Less accumulated depreciation and amortization 164,584 139,413 ---------------------- Net property, plant and equipment $225,745 227,401 ======================
Depreciation and amortization expense related to the above was $25,067 in 1999, $21,582 in 1998 and $16,050 in 1997. Construction in progress is primarily related to plant and other facilities. Completion of current projects is estimated to occur by year end 2000, at an estimated cost of approximately $5,000. Capitalized interest related to construction in progress amounted to $739 in 1999, $915 in 1998 and $141 in 1997. 6. LONG-TERM DEBT A summary of long-term debt follows:
December 31, ----------------- 1999 1998 ----------------- Unsecured: Senior notes payable: Tranche A, 6.50%, due October 30, 2003 $15,000 15,000 Tranche B, 6.75%, due October 30, 2005 5,000 5,000 Revolving credit facility, expiring May 2002 -- 41,000 BK International Corporation note, 6.25%, due December 2002 4,224 3,956 Other -- 228 ----------------- 24,224 65,184 Secured -- 23 ----------------- 24,224 65,207 Less current installments of long-term debt -- 251 ----------------- $24,224 64,956 =================
There were no compensating balance requirements under loan agreements in effect at December 31, 1999. The above obligations mature in various amounts through 2005, including $4,224 in 2002, $15,000 in 2003 and $5,000 in 2005. In November 1998, the Company entered into a $20,000 private placement of senior notes with two institutional investors. The Tranche A and B notes have interest-only payments until October 30, 2003 and October 30, 2005, at interest rates of 6.50% and 6.75%, respectively. The Company has a $100,000 bank revolving credit facility originating June 1997, which is committed until May 2002. At December 31, 1999, there was no outstanding balance under the facility. At December 31, 1998, there was a balance of $41,000 outstanding at a weighted average interest rate of 5.85%. Outstanding letters of credit under the facility were $9,379 and $8,678, leaving $90,621 and $50,322 available for borrowings at December 31, 1999 and 1998, respectively. Interest rates are based on either the London Interbank Offered Rate or the prime rate. A facility fee ranging from .125 to .150 of 1% per annum is charged. The facility fee was $125, $126 and $125 for the years ended December 31, 1999, 1998 and 1997, respectively. Prior to June 1997, the Company had a $65,000 bank revolving credit facility. Interest rates were based on either the London Interbank Offered Rate or the prime rate. The senior notes and the revolving credit facility contain certain covenants, the most significant of which require a specified ratio of earnings before interest and taxes to cover fixed charges, maintaining a minimum net worth amount, and a specified debt to capitalization ratio. At December 31, 1999, the Company was in compliance with these covenants. 24 Notes To Consolidated Financial Statements The Company has access to a $10,000 short-term uncommitted facility for foreign or trade related borrowings. The facility, which originated during 1998 and expires annually, is renewable at the Company's request and the bank's option with a current expiration of October 2000. The total outstanding at December 31, 1999 and 1998, was $7,668 and $5,354, respectively. Interest rates are based on either the London Interbank Offered Rate or the Tokyo Interbank Offered Rate. The average interest rate for the short-term facility was 1.11% and 1.15% at year-ends 1999 and 1998, respectively. The Company also has access to an uncommitted facility for the issuance of foreign currency letters of credit. The total outstanding at December 31, 1999 and 1998, was $1,458 and $1,642, respectively. The possibility of default is considered remote but would cause these letters of credit to come due immediately. If this occurred, payments would be made from available cash or borrowings under the revolving credit facility. Total interest costs incurred for the years ended December 31, 1999, 1998 and 1997, were $2,884, $2,901 and $424, respectively. The Company is potentially restricted by covenants related to its senior note debt and credit facility borrowings that could limit dividend payments. A fixed cost coverage covenant, which includes dividends and scheduled debt principal and interest payments, requires that the company maintain a fixed cost coverage ratio of two and a half times annual earnings before interest and taxes. Compliance with the covenant allows for Company retained earnings to be free of restrictions for potential dividend payments up to an amount of $13,094 for the year ended December 31, 1999. 7. INCOME TAXES Total income tax expense (benefit) for the years ended December 31, 1999, 1998 and 1997, was allocated as follows:
1999 1998 1997 -------------------------------- Continuing operations $ 13,480 15,440 23,050 Discontinued operations (1,124) (7,636) 715 Stockholders' equity related to compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (773) (678) (886) -------------------------------- $ 11,583 7,126 22,879 ================================
Income tax expense differs from the statutory federal rate of 35% applied to earnings from continuing operations before income taxes and investee earnings for the years ended December 31, 1999, 1998 and 1997 as follows:
1999 1998 1997 -------------------------------- Computed "expected" tax expense $ 12,584 14,035 20,422 State income taxes, net of federal income tax benefit 928 1,407 1,658 Amortization of goodwill 267 394 388 Exempt earnings of Foreign Sales Corporation (149) (94) (172) Increase in net cash surrender value of life insurance (381) (362) (331) Tax provision adjustments for pending Internal Revenue Service matters -- -- 400 Other, net 231 60 685 -------------------------------- Actual tax expense of continuing operations $ 13,480 15,440 23,050 ================================
25 Notes To Consolidated Financial Statements Components of income tax expense for the years ended December 31, 1999, 1998 and 1997 are as follows: 1999 1998 1997 ---------------------------------------- Current: Federal $ 6,120 8,950 20,539 State 765 2,169 2,515 Foreign 1,062 1,264 1,250 ---------------------------------------- 7,947 12,383 24,304 ---------------------------------------- Deferred: Federal 4,870 3,062 (1,290) State 663 (5) 36 Foreign -- -- -- ---------------------------------------- 5,533 3,057 (1,254) ---------------------------------------- Total: Federal 10,990 12,012 19,249 State 1,428 2,164 2,551 Foreign 1,062 1,264 1,250 ---------------------------------------- $13,480 15,440 23,050 ======================================== The significant components of deferred income tax expense attributable to earnings from continuing operations for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ------------------------ Deferred tax expense (benefit) from changes in temporary differences $5,533 3,057 (1,254) ========================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and the deferred tax liabilities are as follows:
December 31, -------------------- 1999 1998 -------------------- Deferred tax assets: Note and accounts receivable, principally due to allowance for doubtful accounts $ 33 317 Deferred compensation 5,748 5,060 Accrued incentive compensation 493 464 Inventory costs 1,500 1,803 State net operating loss carryforward 184 92 Accrued vacation costs 772 767 Accrued pension costs 3,245 980 Other, net 1,503 1,103 -------------------- Total deferred tax assets 13,478 10,586 -------------------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation (27,120) (19,235) State income taxes (2,254) (1,714) -------------------- Total gross deferred tax liabilities (29,374) (20,949) -------------------- Net deferred tax liability $(15,896) (10,363) ====================
The net deferred tax liability at December 31, 1999 and 1998, consists of a long-term deferred tax liability of $18,178 and $13,501, respectively, and a current deferred tax asset of $2,282, and $3,138, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, recoverable taxes paid, projected taxable income and tax planning strategies in making this assessment. Based on the reversal of existing deferred tax liabilities and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefit of these deductible differences. 26 Notes To Consolidated Financial Statements Current refundable income taxes of $10,580 at December 31, 1999, and current income taxes payable of $3,569 at December 31, 1998, are included in other receivables and accrued expenses and other current liabilities, respectively, in the accompanying consolidated balance sheets. The Company's federal income tax returns have been examined through June 30, 1996, and all years through June 30, 1994 are closed. In October 1999, the Company agreed to a resolution of the remaining disputed issues for the years ended June 30, 1995 and June 30, 1996. Management believes that adequate provision has been made for any adjustments which might be assessed for open years through December 31, 1999. 8. EMPLOYEE BENEFIT AND INCENTIVE PLANS The Company has a noncontributory defined benefit pension plan covering substantially all full-time permanent employees. The benefits are based on years of service and participants' compensation during the last five years of employment. The following tables present plan information at December 31, 1999 and 1998, and for the years ended December 31, 1999, 1998 and 1997: 1999 1998 ---------------------- Change in Benefit Obligation Benefit obligation at beginning of year $ 40,825 37,494 Service cost 3,684 2,958 Interest cost 2,680 2,749 Actuarial (gain) loss (1,602) 3,350 Benefits paid (1,506) (2,934) Curtailment gain -- (2,792) ---------------------- Benefit obligation at end of year $ 44,081 40,825 ====================== Change in Plan Assets Fair value of plan assets at beginning of year $ 39,531 36,206 Actual return on plan assets 4,173 6,154 Employer contribution 1,712 105 Benefits paid (1,506) (2,934) ---------------------- Fair value of plan assets at end of year $ 43,910 39,531 ====================== Reconciliation of Funded Status Funded status $ (171) (1,294) Unrecognized net actuarial gain (7,938) (5,968) Unrecognized transition asset (1,567) (1,872) Unrecognized prior service cost 409 457 ---------------------- Accrued pension liability $ (9,267) (8,677) ====================== Weighted-Average Assumptions as of December 31 1999 1998 1997 -------------------------------- Discount rate - net periodic pension cost 7.00% 7.50% 7.75% Discount rate - benefit obligations 8.00% 7.00% 7.50% Expected return on plan assets 9.50% 9.50% 9.00% Rate of compensation increase 4.00% 4.00% 4.00% Components of Net Periodic Pension Cost Service cost $ 3,684 2,958 2,376 Interest cost 2,680 2,747 2,157 Expected return on plan assets (3,691) (3,369) (2,631) Recognized net actuarial gain (116) (645) (243) Amortization of transition asset (304) (304) (304) Amortization of prior service cost 49 89 89 -------------------------------- Net periodic pension cost $ 2,302 1,476 1,444 ================================ 27 Notes To Consolidated Financial Statements Net annual pension expense allocated to discontinued operations was $1,123, $1,211 and $1,162 for the years ended December 31, 1999, 1998 and 1997, respectively. Plan assets are invested primarily in equity securities and U.S. Government and corporate bonds. The Company has a contributory 401(k) savings and employee stock ownership plan which covers substantially all eligible employees who have completed six months of service. Total expense under the plan amounted to approximately $1,255, $1,116 and $1,038 for the years ended December 31, 1999, 1998 and 1997, respectively. This plan and the pension plan invest in the Company's stock. The total number of shares held by the plans at December 31, 1999 and 1998, was 367,609 and 387,261, respectively. The Company has various nonqualified plans that act to restore earned benefits limited by income tax regulations, or allow for other compensation deferrals. Beginning in July 1997, participants in certain of these plans could elect to convert existing deferred balances and/or future deferrals, at the start of each new year, into phantom share units tracking the performance of the Company's stock. Additionally, a 15 percent discount on the market value of the stock at the original conversion date and each new plan year is given to those participants making this election. Beginning in 1998, Company officers could elect to defer a portion of salary and/or bonuses into phantom share units on a pretax basis at a 15 percent discount. The total liability for these deferrals at December 31, 1999 and 1998 is $1,252 and $936, respectively. The nonqualified supplemental pension plan provides for incremental pension payments from the Company's funds. The total liability relating to this unfunded plan at December 31, 1999 and 1998, was $2,026 and $1,689, respectively. Net annual pension expense for this plan was $337, $311 and $77 (net of an actuarial adjustment of $233 in 1997) for the years ended December 31, 1999, 1998 and 1997, respectively. The cost of the nonqualified 401(k) and ESOP plans was $314, $355 and $622 for the years ended December 1999, 1998 and 1997, respectively. Individual life insurance contracts were purchased, with the Company as beneficiary, to assist in the funding of portions of certain nonqualified deferred compensation plans covering directors, officers and key employees. The expense for these plans was $964, $896 and $795 for the years ended December 31, 1999, 1998 and 1997, respectively. Directors, officers and certain key employees of the Company participate in the long-term incentive plans (the "Plans") under which the Company has reserved shares of common stock for issuance. Awards under the Plans include stock options, options to purchase debentures convertible into preferred stock and then convertible into common stock of the Company, stock appreciation rights, performance units, restricted stock, supplemental cash and such other forms as the Board of Directors may direct. Options under all plans are granted at the market price of the shares on the date of the grants, with vesting occurring no earlier than six months after grant and expiration no later than 10 years after grant. At December 31, 1999, shares available for grant under the referenced plans totaled 176,118 shares of common stock. Outstanding debentures totaled $0 and $228 at December 31, 1999 and 1998, respectively. Debentures are no longer granted under the Company's plans. SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by the Company in 1996. In accounting for employee stock options and similar equity instruments, companies are given the choice of either recognizing related compensation cost by adopting the fair value method, or to continue using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," and supplementally disclose the proforma effect on earnings and earnings per share using SFAS No. 123 measurement criteria. The Company elected to continue to follow the requirements of APB No. 25, and accordingly, there is no effect on the results of operations. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants made during the years ended December 31, 1999, 1998 and 1997, respectively: dividend yields of 2.0, 1.5 and 1.7 percent; expected volatilities of 27, 33 and 26 percent; risk-free interest rates of 6.1, 6.1 and 6.8 percent, and expected option lives of four years for all periods presented. 28 Notes To Consolidated Financial Statements A summary of the status of the Company's stock option plans at December 31, 1999, 1998 and 1997, and changes during the years ended on those dates is presented below:
1999 1998 1997 -------------------------------------------------------------------------------------- Weighted-avg. Weighted-avg. Weighted-avg. Shares exercise price Shares exercise price Shares exercise price -------------------------------------------------------------------------------------- Stock options: Outstanding at beginning of year 1,202,015 $ 22.26 1,012,904 $ 20.84 551,212 $ 18.33 Granted 545,168 $ 19.02 394,108 $ 26.02 518,010 $ 23.18 Exercised (54,153) $ 15.71 (77,982) $ 20.18 (49,518) $ 16.98 Forfeited (33,735) $ 23.73 (127,015) $ 23.93 (6,800) $ 23.13 --------- --------- --------- Outstanding at end of year 1,659,295 $ 21.38 1,202,015 $ 22.26 1,012,904 $ 20.84 ========= ========= ========= Exercisable at end of year 1,407,079 634,474 501,694 ========= ========= ========= Weighted-average fair value of grants during year $ 4.88 $ 7.86 $ 6.11 ======== ======== ========
The following table summarizes information about stock options for the period ended December 31, 1999:
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-$26.75 1,659,295 7.1 years $20.29 1,407,079 $20.31 =================================================================== ============================
Under the Company's application of APB Opinion 25 and related interpretations in accounting for its plans, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Company's net income, earnings per common share and earnings per common share, assuming dilution, would have been reduced to the pro forma amounts indicated below for the years ended December 31:
1999 1998 1997 ------------------------------- Net earnings As reported $ 23,119 $ 10,092 $ 38,898 Pro forma $ 20,434 $ 8,998 $ 37,955 Earnings per common share As reported $ 1.26 $ .52 $ 1.91 Pro forma $ 1.12 $ .47 $ 1.86 Earnings per common share, assuming dilution As reported $ 1.25 $ .52 $ 1.86 Pro forma $ 1.11 $ .46 $ 1.82
29 Notes To Consolidated Financial Statements 9. STOCKHOLDERS' EQUITY The annual earnings per common share ("EPS") calculation is based on the collective averages of the weighted-average number of common shares outstanding during each quarter for earnings per common share and the collective averages of the weighted-average number of outstanding common shares and common share equivalents during each quarter for earnings per common share, assuming dilution. A reconciliation of the numerators and denominators for basic and diluted per share computations from continuing operations for the years ended December 31, 1999, 1998 and 1997, follows:
Weighted-avg. Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic EPS Earnings from continuing operations - 1999 $ 22,473 18,242,021 $ 1.23 Effect of Dilutive Securities Options -- 143,243 -- Convertible debentures -- 84,705 -- ---------- Diluted EPS Earnings from continuing operations - 1999 $ 22,473 18,469,969 $ 1.22 ========== Basic EPS Earnings from continuing operations - 1998 $ 24,660 19,255,344 $ 1.28 Effect of Dilutive Securities Options -- 79,178 -- Convertible debentures -- 144,300 -- ---------- Diluted EPS Earnings from continuing operations - 1998 $ 24,660 19,478,822 $ 1.27 ========== Basic EPS Earnings from continuing operations - 1997 $ 37,795 20,395,060 $ 1.85 Effect of Dilutive Securities Options -- 195,867 -- Convertible debentures -- 296,825 -- ---------- Diluted EPS Earnings from continuing operations - 1997 $ 37,795 20,887,752 $ 1.81 ==========
Options to purchase 313,920 shares of the Company's common stock were outstanding at December 31, 1999 but were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of the common shares. Of these potentially dilutive options, 20,900 expire in 2007 and 293,020 expire in 2008. In connection with the Shareholder Rights Plan adopted by the Company on October 30, 1996, preferred stock purchase rights were distributed to stockholders and are deemed to be attached to the outstanding shares of common stock of the Company. Under certain conditions, each right may be exercised to purchase one one-hundredth (1/100) of a share of a new series of preferred stock, at an exercise price of $100 per share (subject to adjustment). The rights, which do not have voting rights, expire in 2006, and may be redeemed by the Company at a price of $0.01 per right prior to a specified period of time after the occurrence of certain events. In certain events, each right (except certain rights beneficially owned by 10% or more owners, which rights are voided) will entitle its holder to purchase shares of common stock with a value of twice the then-current exercise price. In August 1998, the Company's directors authorized a $50,000 stock repurchase program. As of December 31, 1999, total repurchase authorizations were $110,000. 30 Notes To Consolidated Financial Statements 10. COMMITMENTS AND CONTINGENT LIABILITIES The Company has entered into various operating leases for transportation equipment (primarily railroad tank cars), chemical pipelines and storage facilities, office buildings and land and other miscellaneous items of equipment. The following is a schedule by year of future minimum rental payments for those operating leases with initial or remaining noncancelable terms in excess of one year, as of December 31, 1999: Years ending Operating December 31, Leases ------------ --------- 2000 $ 1,481 2001 1,344 2002 1,299 2003 605 2004 53 Later years -- --------- Total minimum payments required $ 4,782 ========= Provisions applicable to certain transportation equipment leases provide for mileage credits computed on the basis of usage. No recognition has been given to the effect of such credits in the amounts presented above. Rental expense, including short-term rentals (net of mileage credits of approximately $365, $483 and $407 for the years ended December 31, 1999, 1998 and 1997, respectively), was approximately $1,820, $1,590 and $781 for the years ended December 31, 1999, 1998 and 1997, respectively. In most cases management expects that leases will be renewed or replaced by other leases in the normal course of business. Company operations are subject to a wide variety of environmental laws and regulations governing emissions to the air, discharges to water sources, and the handling, storage, treatment and disposal of waste materials, as well as other laws and regulations concerning health and safety conditions. The Company accrues for anticipated costs associated with investigatory and remediation efforts relating to the environment. At December 31, 1999 and 1998, the Company's estimated liability for these matters totaled $1,333 and $1,338, respectively, for discontinued operations. The estimated liability related to continuing operations at December 31, 1999 and 1998, was $244, for both years. The Company has pending several claims incurred in the normal course of business which, in the opinion of management and legal counsel, should be disposed of without material effect on the accompanying consolidated financial statements. 11. OTHER INCOME (EXPENSE) Components of other income (expense), net, for the years ended December 31 are as follows:
1999 1998 1997 ----------------------------- Gain on sale of Melamine Chemicals, Inc. (see note 3) $ -- -- 14,684 Gain on sale of Power Sources, Inc. (see note 3) 1,605 10,069 -- Loss on note receivable (1,000) (750) -- Other (1,141) (95) 313 ----------------------------- $ (536) 9,224 14,997 =============================
31 Notes To Consolidated Financial Statements 12. SEGMENT INFORMATION The Company operates in two segments: Electronic and Other Specialty Chemicals and Polyurethane Chemicals. The Electronic and Other Specialty Chemicals segment produces specialty chemicals for use by others in electronic, agricultural, pharmaceutical, polymer and photosensitive applications. These chemicals are typically produced by multi-step processing with products sold both on specification and performance. This segment includes research and development for new products and processes. The Polyurethane Chemicals segment produces aniline and nitrobenzene by a continuous production process. These chemicals generally require more processing to produce the end product used by consumers and are primarily sold under long-term contracts to industrial customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance and allocates resources based on the segment's profit or loss from operations before interest income and expense and income taxes. The Company's reportable segments are based on similarities in products and services, type and class of customers, production processes and methods of distribution. The polyurethane chemicals segment had unaffiliated major customer sales of $111,151, $99,522, and $86,806 for the years ended December 31, 1999, 1998 and 1997, respectively. The following is a breakdown by segment of the Company's consolidated financial statements at December 31, 1999, 1998 and 1997 and for each of the years then ended:
1999 1998 1997 ----------------------------------- Sales to unaffiliated customers: Electronic and Other Specialty Chemicals $ 173,663 176,688 176,353 Polyurethane Chemicals 138,123 119,821 112,465 ----------------------------------- Total $ 311,786 296,509 288,818 =================================== Operating profit before income taxes and investee earnings: Electronic and Other Specialty Chemicals $ 18,048 17,796 27,617 Polyurethane Chemicals 31,034 22,648 24,071 ----------------------------------- 49,082 40,444 51,688 Unallocated corporate expenses (11,811) (9,781) (11,347) Interest income (expense), net (782) 213 3,010 Other income (expense), net (536) 9,224 14,997 ----------------------------------- Total $ 35,953 40,100 58,348 =================================== Depreciation and amortization: Electronic and Other Specialty Chemicals $ 18,117 14,623 12,541 Polyurethane Chemicals 7,316 8,148 4,341 Corporate 1,555 917 372 ----------------------------------- Total $ 26,988 23,688 17,254 =================================== Identifiable assets: Electronic and Other Specialty Chemicals $ 253,014 214,192 224,778 Polyurethane Chemicals 100,976 113,217 81,844 ----------------------------------- 353,990 327,409 306,622 Corporate 45,865 63,716 62,305 Discontinued operations 2,532 52,309 64,170 ----------------------------------- Total $ 402,387 443,434 433,097 =================================== Capital expenditures: Electronic and Other Specialty Chemicals $ 16,399 25,306 36,692 Polyurethane Chemicals 3,245 11,421 47,910 Corporate 5,001 7,059 6,840 ----------------------------------- Total $ 24,645 43,786 91,442 ===================================
32 Notes To Consolidated Financial Statements Revenues from sales to all foreign countries were $47,345, $46,207 and $43,096 in 1999, 1998 and 1997, respectively, and are attributed to those countries based on ship-to location of customers. Identifiable assets in foreign countries were $21,943, $17,386 and $7,736. Identifiable assets by segment are those assets used in the Company's operations. Corporate assets and investments are principally cash and cash equivalents, nontrade receivables and certain other investments. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on trade receivables. The Company believes that adequate allowances are maintained for any uncollectible trade receivables. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating segments. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data follows:
Quarters ended Year ended -------------------------------------------------------------- 03/31 06/30 09/30 12/31 12/31 -------------------------------------------------------------- 1999: Sales $ 69,844 80,341 79,275 82,326 311,786 ============================================================== Gross profit $ 19,494 22,139 24,761 25,274 91,668 ============================================================== Earnings from continuing operations $ 4,641 5,473 5,962 6,397 22,473 ============================================================== Net earnings $ 4,641 5,473 5,962 7,043 23,119 ============================================================== Earnings per common share: Continuing operations $ .25 .30 .33 .35 1.23 ============================================================== Net earnings $ .25 .30 .33 .38 1.26 ============================================================== Earnings per common share, assuming dilution: Continuing operations $ .25 .30 .32 .35 1.22 ============================================================== Net earnings $ .25 .30 .32 .38 1.25 ==============================================================
Quarters ended Year ended --------------------------------------------------------------- 03/31 06/30 09/30 12/31 12/31 --------------------------------------------------------------- 1998: Sales $ 71,924 75,688 72,760 76,137 296,509 =============================================================== Gross profit $ 18,253 20,416 20,104 20,720 79,493 =============================================================== Earnings from continuing operations $ 9,445 3,853 5,107 6,255 24,660 =============================================================== Net earnings (loss) $ 9,753 3,954 (7,687) 4,072 10,092 =============================================================== Earnings (loss) per common share: Continuing operations $ .47 .20 .27 .33 1.28 =============================================================== Net earnings (loss) $ .49 .20 (.41) .22 .52 =============================================================== Earnings (loss) per common share, assuming dilution: Continuing operations $ .47 .19 .27 .33 1.27 =============================================================== Net earnings (loss) $ .48 .20 (.40) .22 .52 ===============================================================
Net earnings during the first quarter of 1998 included the gain on the sale of Power Sources, Inc. (see note 3), while results in the third quarter of 1998 reflect charges related to the discontinuance of steel operations. The above quarterly earnings (loss) per share calculations are based on the weighted-average number of common shares outstanding during each quarter for earnings (loss) per common share and the weighted-average number of outstanding common shares and common share equivalents during each quarter for the earnings (loss) per common share, assuming dilution. 33 Notes To Consolidated Financial Statements 14. VALUATION AND QUALIFYING ACCOUNTS Details regarding the valuation allowances for discontinued operations and doubtful trade accounts and notes receivable for continuing operations are as follows: Charged to Other Beginning Costs and Additions Ending Balance Expenses (Deductions)* Balance ------------------------------------------------ Year ended December 31, 1999 $25,314 2,008 (105) 27,217 Year ended December 31, 1998 $10,222 15,063 29 25,314 Year ended December 31, 1997 $24,433 12 (14,223) 10,222 * Businesses disposed and/or amounts written off. 15. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments At December 31, 1999 and 1998, cash and cash equivalents, trade receivables, notes receivable, letters of credit, trade payables, accrued liabilities, foreign currency contracts and notes payable are reflected in the financial statements at fair value. The $20,000 senior notes, placed with institutional investors in November 1998, approximate fair value based on current rates offered the Company for debt of similar characteristics and maturities. The revolving credit facility is based on floating interest rates and approximates fair value. Derivative Financial Instruments The Company enters into foreign currency option contracts and forward exchange contracts to minimize its exposure related to receivables denominated in yen. To lessen the short-term effect of exchange rate fluctuations on consolidated performance, the Company hedges a portion of these yen-denominated receivables and future sales commitments. Gains and losses on contracts related to future sales commitments are deferred and subsequently recorded in net earnings in the period in which the related transactions are consummated. The open option collars at December 31, 1999, represent total option puts and calls of 220,000,000 yen each, with a minimum U.S. dollar value of $1,973 and a maximum U.S. dollar value of $2,303. The contracts hedge 20,000,000 yen per month with floor rates ranging from 98.08 to 93.21 and the cap rates ranging from 114.0 to 109.0, with expiration dates from March 2000 to January 2001, respectively. There are no open forward exchange contracts at December 31, 1999. The open forward exchange contracts at December 31, 1998, represent forward sales of 664,500,000 yen with a U.S. dollar value of $5,857 and terms of one year or less. For 1999 and 1998 the net realized and unrealized losses associated with these instruments were immaterial. 16. YEAR 2000 In 1996, the Company began a study which led to the purchase in 1997 of a company-wide Enterprise Resource Planning ("ERP") system to integrate the Company's information systems, replacing small, stand-alone purchased systems. This ERP system is Year 2000 compliant. As of December 31, 1999, the Company has spent approximately $12,600 on this project with all scheduled sites operating under this system. A corporate-wide survey and assessment of other information technology ("IT") and non-IT equipment and systems utilizing date or time functions was completed in 1999. The Company also assessed critical key customers, as well as service and raw material suppliers, regarding their Year 2000 readiness. Total expenditures for assessment and remediation was approximately $300, with all remediations occurring prior to December 31, 1999. Most of this cost was related to process control systems. To date, the Company has not encountered any significant disruptions related to the Year 2000 rollover. 34 Independent Auditors' Report The Board of Directors and Stockholders ChemFirst Inc. We have audited the consolidated balance sheets of ChemFirst Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ChemFirst Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Jackson, Mississippi February 25, 2000 35 ChemFirst Companies, Directors and Officers CHEMFIRST COMPANIES First Chemical Corporation (Intermediate Chemicals and Aniline) P.O. Box 7005 Pascagoula, Mississippi 39568-7005 - -and- First Chemical Texas, L.P. (Aniline) P. O. Box 1607 Baytown, Texas 77520 George M. Simmons, President ChemFirst Fine Chemicals, Inc. (Electronic and Fine Chemicals) P.O. Box 216 Tyrone, Pennsylvania 16686-0216 - -and- 1515 Nicholas Road Dayton, Ohio 45418 Scott Martin, President First Chemical Corporation dba ChemFirst Fine Chemicals (Electronic and Fine Chemicals) P. O. Box 7005 Pascagoula, MS 39568-7005 Scott Martin, Vice President EKC Technology, Inc. (Electronic Chemicals) 2520 Barrington Court Hayward, California 94545-3703 P. Jerry Coder, President EKC Technology, Ltd. (Electronic Chemicals) 19 Law Place Nerston, Industrial Estate East Kilbride Glasgow G74 4QL Scotland Connell Boyle, Managing Director EKC Technology, K.K. (Electronic Chemicals) KSP R&D D3 42 3-2-1 Sakado, Takatsu-ky, Kawasaki Kanawaga, 213-0012 Japan Satoshi Kumasaka, Managing Director TriQuest, L.P. (Electronic and Fine Chemicals) P. O. Box 819005 Dallas, Texas, 75381-9005 Roger L. Van Duyne, President DIRECTORS Richard P. Anderson 2, 3 Maumee, Ohio Chairman The Andersons Inc. Agribusiness Paul A. Becker 1 Vero Beach, Florida President, Summit Investment Management James W. Crook 3, 4 Dataw, South Carolina Retired, Former Chairman of the Board, Melamine Chemicals, Inc. (Retiring as director in April 2000) Michael J. Ferris 2 Houston, Texas President and Chief Executive Officer, Pioneer Companies, Inc. James E. Fligg 2 Naples, Florida Retired, Former Senior Executive Vice President, BP Amoco, p.l.c. Robert P. Guyton 1 Sea Island, Georgia Financial Consultant Dr. Paul W. Murrill 1 Baton Rouge, Louisiana Professional Engineer William A. Percy, II 2, 4 Greenville, Mississippi Chairman of the Board, Staple Cotton Cooperative Association Dan F. Smith 1 Houston, Texas President and Chief Executive Officer, Lyondell Chemical Company Leland R. Speed 3 Jackson, Mississippi Chairman, EastGroup Properties Parkway Properties Real Estate Trust Companies Dr. R. Gerald Turner 3, 4 Dallas, Texas President, Southern Methodist University J. Kelley Williams Jackson, Mississippi Chairman and Chief Executive Officer, ChemFirst Inc. 1 Audit Committee 2 Compensation and Human Resources Committee 3 Committee on Director Affairs 4 ChemFirst Foundation Inc. Board of Trustees OFFICERS J. Kelley Williams Chairman Chief Executive Officer R. Michael Summerford President Chief Operating Officer Max P. Bowman Vice President, Finance Treasurer Daniel P. Anderson Vice President Health, Safety & Environmental Affairs William B. Kemp Vice President Human Resources J. Steve Chustz General Counsel Troy B. Browning Controller James L. McArthur Secretary 36 Corporate Information STOCK LISTING New York Stock Exchange Trading Symbol: CEM Note: The Wall Street Journal and many other major daily newspapers list the stock as ChemFst. TRANSFER AGENTS FOR COMMON STOCK The Bank of New York 1-800-524-4458 e-mail: Shareowner-svcs@bankofny.com Internet: http://stock.bankofny.com Address shareholder inquiries to: Shareholder Relations Department - 11E P.O. Box 11258 Church Street Station New York, NY 10286 Send certificates for transfer and address changes to: Receive and Deliver Department - 11W P.O. Box 11002 Church Street Station New York, NY 10286 ChemFirst Inc. Stock Transfer Department P.O. Box 1249 Jackson, MS 39215-1249 (601) 948-7550 e-mail: ir@chemfirst.com COMMON STOCK REGISTRARS The Bank of New York Investor Relations Department P.O. Box 11258 Church Street Station New York, NY 10286 AmSouth Bank 210 East Capitol Street Eighth Floor Jackson, MS 39205-1200 INVESTOR RELATIONS If you have questions concerning ChemFirst Inc. or your investment in the company, we will be pleased to assist you. Contact: James L. McArthur Secretary, Manager, Investor Relations ChemFirst Inc. P.O. Box 1249 Jackson, MS 39215-1249 (601) 949-0285 or (601) 948-7550 e-mail: ir@chemfirst.com FORM 10-K Stockholders may obtain without charge a copy of the ChemFirst Inc. 10-K as filed with the Securities and Exchange Commission by calling or writing the company's Investor Relations Department, or on the company's Internet site, located at www.chemfirst.com. INDEPENDENT PUBLIC ACCOUNTANTS KPMG LLP 1100 One Jackson Place Jackson, MS 39201-9988 STOCKHOLDER REPORTS Stockholders with stock in brokerage accounts who wish to receive quarterly stockholder reports and other information directly from the company, may do so by writing, calling or e-mailing the company's Investor Relations Department. Quarterly earnings reports may also be accessed via the company's Internet site, located at www.chemfirst.com. ANNUAL MEETING The Annual Meeting of Stockholders will be held May 23, 2000, at 1:30 p.m. at the Hilton Jackson, 1001 East County Line Rd., Jackson, MS. Stockholders are cordially invited to attend and participate in the business of the meeting. Those who are unable to attend are requested to return their proxy cards to the Registrar in the envelope that accompanies the proxy. [LOGO] ChemFirst Inc. STOCK MARKET INFORMATION The high and low recorded prices of the company's common stock and cash dividends declared during 1999 and 1998 are presented in the table below. There were approximately 3,756 shareholders of record as of March 3, 2000. 1999 1998 -------------------------------------------------------------- Dividend Dividend High Low Rate High Low Rate -------------------------------------------------------------- 1st Quarter 23 7/8 18 1/8 .10 28 3/8 23 3/4 .10 2nd Quarter 24 13/16 22 9/16 .10 27 1/16 24 7/8 .10 3rd Quarter 27 3/8 24 3/16 .10 25 5/8 15 7/8 .10 4th Quarter 28 19 7/8 .10 21 15 9/16 .10 For the Year 28 18 1/8 .40 28 3/8 15 9/16 .40 37 ChemFirst Inc. Post Office Box 1249 Jackson, Mississippi 39215-1249 EX-21 4 SUBSIDIARIES OF CHEMFIRST INC. SUBSIDIARIES OF CHEMFIRST INC. Jurisdiction of Company Name Organization ------------ ------------ Burmar Chemical, Inc....................................... California CEM Investment, Inc........................................ Mississippi ChemFirst Fine Chemicals, Inc.............................. Mississippi ChemFirst Foundation, Inc.................................. Mississippi ChemFirst Texas, Inc....................................... Texas Dew Resources, Inc......................................... Mississippi EKC Technology, Inc........................................ California EKC Technology International, Inc.......................... California EKC Technology K K......................................... Japan EKC Technology Limited .................................... Scotland FCC Acquisition Corporation................................ California FEC Marketing, Inc......................................... Texas First Chemical Corporation................................. Mississippi First Chemical Corporation dba ChemFirst Fine Chemicals ............................... Mississippi First Chemicals Holdings, Inc.............................. Mississippi First Chemical Texas, L.P.................................. Delaware First Energy Corporation................................... Mississippi FirstMiss, Inc............................................. Iowa FRM, Inc................................................... Mississippi FRM International, Inc. ................................... U.S. Virgin Islands FT Chemical, Inc........................................... Texas Industrial Insulations of Texas, Inc....................... Texas Maxadyne Corporation....................................... California Maxadyne Corporation of Louisiana.......................... Louisiana Micropel, Inc.............................................. California Mycosil, Inc............................................... California Plasma Processing Corporation.............................. Delaware SCE Technologies, Inc...................................... Delaware Star Corrosion & Refractory, Inc........................... Louisiana TriQuest, L.P. ............................................ Delaware TriQuest Japan K K......................................... Japan EX-23 5 INDEPENDENT AUDITORS' 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, 333-35221 and 333-69965) of our report dated February 25, 2000 relating to the consolidated balance sheets of ChemFirst Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report is incorporated by reference in the December 31, 1999 annual report on Form 10-K of ChemFirst Inc. Jackson, Mississippi March 20, 2000 /s/ KPMG LLP ------------- KPMG LLP EX-27.(A) 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 14,551 0 68,258 345 62,663 157,453 390,329 164,584 402,387 44,483 24,224 17,901 0 0 270,822 402,387 311,786 316,790 220,118 220,118 7,969 0 2,145 35,953 13,480 22,473 646 0 0 23,119 1.26 1.25
EX-27.(B) 7 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 11,226 0 44,115 317 51,295 160,902 366,814 139,413 443,434 43,966 64,956 18,445 0 0 267,037 443,434 296,509 313,127 217,016 217,016 7,487 203 1,986 40,100 15,440 24,660 (14,568) 0 0 10,092 0.52 0.52
EX-27.(C) 8 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 7,766 0 53,159 97 39,253 147,166 323,541 118,964 433,097 67,230 3,941 20,031 0 0 301,666 433,097 288,818 307,108 206,946 206,946 7,829 505 283 58,348 23,050 37,795 1,103 0 0 38,898 1.91 1.86
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