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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________________
to _____________________________
COMMISSION FILE NUMBER 1-14601
ARCH CHEMICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Virginia 06-1526315
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
501 Merritt 7 06851
Norwalk, CT (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 229-2900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Series A Participating Cumulative New York Stock Exchange
Preferred Stock Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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: [_]
As of January 31, 2000, the aggregate market value of registrant's common
stock held by non-affiliates of registrant was approximately $359,920,104.
As of January 31, 2000, 22,538,963, shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE
IN THIS FORM 10-K AS INDICATED HEREIN:
PART OF 10-K
DOCUMENT INTO WHICH INCORPORATED
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Proxy Statement relating to Arch's 2000
Annual Meeting of Shareholders Part III
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TABLE OF CONTENTS
FORM 10-K
PART I
PAGE NO.
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Item 1 Business ......................................................... 1
Item 2 Properties ....................................................... 7
Item 3 Legal Proceedings ................................................ 9
Item 4 Submission of Matters to a Vote of Security Holders .............. 10
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 12
Item 6 Selected Financial Data .......................................... 12
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 7A Quantitative and Qualitative Disclosures
about Market Risk 22
Item 8 Financial Statements and Supplementary Data ...................... 24
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III
Item 10 Directors and Executive Officers of the Registrant ............... 44
Item 11 Executive Compensation ........................................... 44
Item 12 Security Ownership of Certain Beneficial Owners
and Management 44
Item 13 Certain Relationships and Related Transactions ................... 44
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .. 44
PART I
ITEM 1. BUSINESS
GENERAL
Arch Chemicals, Inc. ("Arch" or the "Company") is a specialty chemicals
manufacturer which supplies value added products and services to several
industries on a worldwide basis, including the consumer products and the
semiconductor industries. The principal businesses in which the Company competes
are microelectronic chemicals, water chemicals and performance chemicals. The
Company's ability and willingness to provide superior levels of technical
customer support, the manufacturing flexibility of many of its facilities, and
the cultivation of close customer relationships are the common skills on which
the Company relies in servicing its global markets and customers.
The Company was organized under the laws of the Commonwealth of Virginia on
August 25, 1998 as a wholly-owned subsidiary of Olin Corporation ("Olin") for
the purpose of effecting a tax-free distribution of Olin's Specialty Chemical
Businesses ("Distribution") to the shareholders of Olin. The Distribution
occurred on February 8, 1999 ("Distribution Date") upon which the Company became
a separate, independent company. In the Distribution, for every two shares of
Olin Common Stock held by a shareholder of record as of February 1, 1999, the
shareholder received one share of the Company's Common Stock ("Common Stock")
(such one share for every two being the "Distribution Ratio").
Information as to sales and income (loss) of, and the total assets
attributable to, each of the Company's segments as of the last three fiscal
years appears in Note 9 "Segment Reporting" to the Notes to Consolidated
Financial Statements contained in Item 8 of Part II of this Report.
The term "Company" as used herein means Arch Chemicals, Inc. and its
subsidiaries unless the context indicates otherwise.
1999 EVENTS
In September 1999, the Company purchased the hydroquinone di
(beta-hydroxyethyl) ether ("HQEE") business of Eastman Chemical Company. HQEE is
an aromatic chain extender used in high performance applications for
thermoplastic urethanes and cast elastomers.
On October 28, 1999, the Company's Board of Directors approved a stock
repurchase program, whereby the Company is authorized to buy back up to 1.2
million shares of its Common Stock, representing approximately five percent of
its then outstanding shares. Shares are expected to be repurchased from time to
time in the open market, or otherwise, as conditions warrant.
PRODUCTS AND SERVICES
The Company's principal products and services fall within three businesses:
microelectronic chemicals, water chemicals and performance chemicals. For
financial information about each of the Company's industry segments, and foreign
and domestic and export sales, see Note 9 "Segment Reporting" to the Notes to
Consolidated Financial Statements contained in Item 8 of Part II of this Report.
The principal products of each business are described below.
MICROELECTRONIC CHEMICALS
The Company manufactures and supplies a range of products and services to
semiconductor manufacturers and to flat panel display manufacturers throughout
the world.
The Company manufactures a wide range of photoresist and ancillary products
encompassing negative, g-line, i-line and 248nm deep UV technologies to meet the
constantly evolving needs of the semiconductor industry. The Company has
recently announced new products based on two new series of 248nm deep UV
resists, new advanced i-line products and environmentally-friendly residue
removers and has begun sampling both thin imaging systems (TIS2000) and
single-layer 193nm resist materials. The current focus of the photoresist
research and development
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efforts is aimed at evolving the technology platforms underlying these products
through modification of the respective materials chemistries to meet the ongoing
demands of the semiconductor industry. The Company is pursuing advanced
photoresist development through internal development, strategic alliances and
licensing agreements.
The microelectronic chemicals sold by the Company also include a variety of
high purity acids, bases, oxidizers, etchants and solvents (collectively
referred to as "process chemicals"). The industry structure in which the process
chemicals business operates results in low profitability at present. Its
customer group is concentrated and enjoys significant purchasing leverage.
Manufacturing overcapacity exists and, unless the industry rationalizes, will
exist in the foreseeable future. This results in unsatisfactory pricing. In
addition, the industry suffers from inefficiencies in manufacturing, asset
utilization, logistics, research and development, and selling and administrative
costs.
Another microelectronic chemical product line, referred to as thin film
systems, includes film deposition precursors, dopants, chlorine sources and
chemical delivery equipment.
In addition to the range of products offered, the Company provides
semiconductor manufacturers with a variety of chemical usage related services,
known as chemical management services, including inventory management and
chemical handling.
The Company's microelectronic chemicals business competes against other
suppliers on the basis of performance, product quality, service, technology and
pricing. The Company has a broad patent portfolio encompassing the technologies
underlying the design of its products which the Company believes provides a
competitive advantage against other suppliers. The Company enhances its
technological competitive advantage by entering into technology licenses and
joint development agreements with third parties to meet the rapidly evolving
needs of the semiconductor industry. Numerous programs have been implemented,
are planned or are in progress which are expected to improve the cost structure
and are designed to make this business a low cost industry supplier. The
Company's extensive product line and global infrastructure are distinct
advantages that enhance its competitiveness. This enables this business to
service virtually all semiconductor industry wet chemical requirements on a
worldwide basis. Product performance and quality and the technology associated
with quality are generally considered an industry prerequisite. The high quality
standards of the semiconductor industry serve as a hurdle, which limit the
number of new entrants as suppliers to the market.
The Company's microelectronic chemicals are sold on a direct basis or
through independent third party distributors. Chemical management services are
offered on a direct basis only.
WATER CHEMICALS
The Company manufactures and sells chemicals and distributes equipment on a
worldwide basis for the sanitization and recreational use of residential and
commercial pool water, and the purification of potable water. The Company sells
both calcium hypochlorite and chlorinated isocyanurates for the sanitization of
residential and commercial pool water. The Company is a leading worldwide
producer of calcium hypochlorite with 65% to 70% available chlorine. The Company
has a competitive advantage through ownership of the J3 technology which enables
it to produce calcium hypochlorite with superior dissolving characteristics and
75% available chlorine as compared to calcium hypochlorite with 65% available
chlorine. The Company owns widely recognized brand names for both calcium
hypochlorite (HTH(R)) and chlorinated isocyanurates (Pace(R)). The Company's
water chemical products are sold under a variety of brand names, including
Company-owned trademarks such as Sock-It(R), Super Sock-It(R), Duration(R) and
Pulsar(R). The Company's water chemical products are also distributed as private
label brands. In addition to the pool water sanitizers, calcium hypochlorite and
chlorinated isocyanurates, the Company sells ancillary chemicals and accessories
for the maintenance and recreational use of residential and commercial pools.
The Company's water chemical products are also sold in the municipal water
market for the purification of potable water. The Company sells calcium
hypochlorite to purify potable water mainly in a number of countries outside the
U.S. The Company has plans to expand its presence in the municipal water market
both domestically and internationally.
In 1999, approximately 78% of the Company's water chemical sales were
within North America, and the remaining 22% were throughout the rest of the
world. In North America, the Company sells water chemical products
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either directly to retail or through independent third party distributors. The
Company also has subsidiaries and ownership interests in joint ventures in South
Africa and Brazil which manufacture and distribute calcium hypochlorite to local
markets.
In addition to the manufacture and sale of water chemicals, the Company
distributes chemicals, equipment, parts and accessories for pools mainly through
two wholly-owned subsidiaries. One subsidiary, Superior Pool Products, Inc., is
headquartered in Anaheim, California with 19 locations throughout Arizona,
California and Nevada. Another subsidiary, Hydrochim, S.A., located in France,
distributes chemicals and equipment throughout Europe. The Company is currently
pursuing a sale of Superior Pool Products, Inc.
PERFORMANCE CHEMICALS
The Company's performance chemicals business consists of the manufacture
and sale of a broad range of products with diverse end uses. The performance
chemicals sold by the Company are critical to the performance and value of the
customer's end use products. As a result, there is a high level of operational
integration with many customers. The performance chemicals business is
characterized by technology driven product solutions that benefit specific
customers and provide manufacturing flexibility. In addition, the business is
characterized by close customer relationships with entities who are leaders in
the markets in which they compete. The flexibility afforded by batch
manufacturing in some operations combined with the Company's ability and
willingness to provide superior technical support enables it to respond to the
specific needs of a diverse group of customers. This gives the Company a
competitive advantage over competitors whose manufacturing processes and related
cost structure constrain their ability to respond cost effectively to smaller
volume customers. Customers, however, include industry leaders such as Procter &
Gamble, Unilever and Uniroyal.
The Company's performance chemicals business manufactures flexible polyols,
specialty polyols, urethane systems and glycols and glycol ethers. Flexible
polyols, which are used in the furniture, bedding, carpet and packaging
industries, are manufactured by the Company's wholly-owned, Venezuelan
subsidiary, Etoxyl, C.A., for South American markets. Specialty polyols, which
are used as an ingredient for elastomers, adhesives, coatings, sealants and
rigid foam, are manufactured at the Company's Brandenburg, Kentucky site, as
well as by its Venezuelan subsidiary. The Brandenburg facility also manufactures
glycols and glycol ethers for use as an ingredient in cleaners, personal care
products and antifreeze and provides custom manufacturing of specialty chemicals
for a small group of companies.
The performance chemicals business also manufactures biocides that control
the growth of micro-organisms, particularly fungi and algae, and control
dandruff on the scalp. All of the biocide products are marketed under the well
recognized trademarks, Omadine(R), Omacide(R) and Triadine(R) biocides. The
majority of the biocide chemicals produced by the Company are based on the zinc,
sodium and copper salts of the pyrithione molecule. These pyrithione-based
biocides include over twenty products with differing concentrates, forms and
salts and the Company is a worldwide leader in these biocide products. Other
biocide chemicals are based on iodopropargyl-n-butylcarbamate ("IPBC"), a broad
spectrum fungicide, and serves the metalworking fluids and coatings markets. The
IPBC-based biocides currently consist of five variations with others in the
development stages. Biocides make up a small portion of the customers' end
products, and therefore must be highly effective at low concentrations as well
as compatible with the formulation's other components. Meeting the biocide
customer's needs requires a high degree of technical support and the expertise
to do business in a highly regulated environment. The Company's ability to meet
these needs makes it a preferred supplier in the high growth, anti-dandruff
market. The Company is also uniquely positioned as the only pyrithione supplier
with U.S. Environmental Protection Agency registrations for metalworking fluids,
coatings and anti-foulant paints. The manufacturing flexibility of the biocides
assets also permits the Company to offer fine chemical custom manufacturing
services.
The Company's performance chemicals business also supplies hydrazine
hydrates as well as propellant grade hydrazine and hydrazine derivatives.
Hydrazine hydrate products are sold for use in chemical blowing agents, water
treatment chemicals, agricultural products, pharmaceutical intermediates and
other chemical products. Hydrazine hydrates are produced at its Lake Charles,
Louisiana production facility. The hydrazine hydrates are supplied in various
concentrations, ranging from 51-100%, and packaging containers including bulk,
tote bins and drums.
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The performance chemicals business also supplies propellant grade hydrazine
and hydrazine derivatives for use as fuel in satellites, expendable launch
vehicles and auxiliary and emergency power units. These propellant grade
hydrazine products include Ultra PureTM Hydrazine (UPH), anhydrous hydrazine
(AH), unsymmetrical dimethyl hydrazine (UDMH), monomethyl hydrazine (MMH) and
hydrazine fuel blends. In addition to space-related applications in satellites
and launch vehicles, auxiliary power from hydrazine-driven units is supplied to
the NASA Space Shuttle for maneuvering its rocket engine nozzles and for
operating valves, control surfaces, brakes and landing gear on the Shuttle
Orbiter. Emergency power from hydrazine is also provided to jet aircraft like
the F-16 to operate electrical and hydraulic units in the event of an engine
flameout. The Company also supplies launch services and special packaging
containers including cylinders to improve the safe handling and storage of
propellants and to reduce launch costs.
The Company's performance chemicals business is also a major regional
supplier of sulfuric acid regeneration services and virgin sulfuric acid sales
to the U.S. Gulf Coast market with manufacturing facilities located in Beaumont,
Texas and Shreveport, Louisiana. The Company supplies sulfuric acid to
refineries for their petroleum alkylation process and to pulp and paper
manufacturers for use as a reagent for chlorine dioxide generation and water
treatment neutralization for pH control.
CUSTOMERS
No single customer has accounted for more than 10% of the Company's total
annual sales over the last three fiscal years. The Company's customer base is
diverse and includes semiconductor manufacturers, flat panel display
manufacturers, world-renowned consumer product companies, national and regional
chemical and equipment distributors, other chemical manufacturers and the U.S.
Government.
RAW MATERIALS AND ENERGY
The Company utilizes a variety of raw materials in the manufacture of
products for its three businesses. The Company has not experienced any
difficulty in securing raw materials. Outlined below are the principal raw
materials for the product businesses. The majority of the Company's raw material
requirements are purchased and many are provided under the terms and conditions
of written agreements.
MICROELECTRONIC CHEMICALS. The principal raw materials for the
microelectronic chemicals business include sulfuric acid, hydrofluoric acid,
nitric acid, phosphoric acid, hydrochloric acid, hydrogen peroxide, ammonia,
isopropyl alcohol, acetone, tetraethylorthosilicate (TEOS), dichloroethylene
(DCE), trichloroethane (TCA), phosphorous oxychloride (POCL3),
hexamethyldisilazone (HMDS), custom polymers, photoinitiators, tetra methyl
ammonium hydroxide (TMAH) and custom polyimide resins and photosensitizers.
WATER CHEMICALS. The principal raw materials for the water chemicals
business include chlorine, caustic soda, lime and chlorinated isocyanurates.
Chlorine and caustic soda are provided by Olin pursuant to a long term
chlor-alkali supply agreement with Olin and with respect to the Company's
Charleston facility, are delivered via a pipeline from the adjacent Olin
facility. The balance of the raw materials are purchased from other suppliers
and are readily available.
PERFORMANCE CHEMICALS. The raw materials for the performance chemicals
business include a variety of chemicals including propylene, propylene oxide,
ethylene oxide, pyridine, iodine, propargyl butyl carbamate, chlorine, caustic
soda, sulfur and ammonia. For this segment, propylene is the most significant
raw material and is subject to price volatility.
Electricity is the predominant energy source for the Company's
manufacturing facilities and is primarily supplied to the Company by public or
government utilities. Natural gas used for steam production is an important
energy source for many of the Company's manufacturing sites and is purchased
from multiple suppliers.
RESEARCH AND DEVELOPMENT AND PATENTS
The Company's research activities are conducted at a number of facilities.
Company-sponsored research expenditures were approximately $17.7 million in
1999, $16.2 million in 1998 and $21.1 million in 1997.
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In general, intellectual property is important to the Company, but no one
technology, patent, or license or group thereof related to a specific process or
product is of material importance to the Company as a whole. The Company
believes that its broad patent portfolio in the microelectronic chemicals
segment provides a sustainable competitive advantage for that product line. The
Company owns three process patents for the technology relating to the
manufacture of J3 calcium hypochlorite which are materially important to the
water chemicals business. One of these patents expires in 2010 and the others
expire in 2009. The Company owns a patent covering a process for producing Ultra
PureTM hydrazine, the world's purest grade of anhydrous hydrazine, which makes
it the preferred propellant for monopropellant satellite thruster applications.
This patent expires in 2006.
SEASONALITY
Although the businesses of the Company as a whole are not seasonal in
nature, approximately 40% of the sales in the water chemicals business occur in
the second quarter of the calendar year. The purchase of water chemical products
by consumers in the residential pool market is concentrated in the United States
between Memorial Day and the Fourth of July. In addition, the weather can also
have a significant effect on water chemical sales during any given year.
BACKLOG
The amount of backlog orders is immaterial to the Company as a whole.
U.S. GOVERNMENT CONTRACTS AND REGULATIONS
The Company's performance chemicals business sells hydrazine to the U.S.
Government. Consequently, as a government contractor, the Company is subject to
extensive and complex U.S. Government procurement laws and regulations. These
laws and regulations provide for ongoing government audits and reviews of
contract procurement, performance and administration. Failure to comply, even
inadvertently, with these laws and regulations and with laws governing the
export of controlled products and commodities could subject the Company or one
or more of its businesses to civil and criminal penalties and under certain
circumstances, suspension and debarment from future government contracts and the
exporting of products for a specified period of time.
COMPETITION
The Company's microelectronic chemicals, water chemicals and performance
chemicals businesses are in highly competitive industries, and the Company
encounters strong competition with respect to each of its product lines from
other manufacturers worldwide. This competition, from other manufacturers of the
same products and from manufacturers of different products designed for the same
uses, is expected to continue in both U.S. and foreign markets. Depending on the
product involved, various types of competition are encountered, including price,
delivery, service, performance, product innovation, product recognition and
quality. Overall, the Company regards its principal product groups to be
competitive with many other products of other producers, and believes that it is
an important producer of many such product groups.
EXPORT SALES
The Company's export sales from the United States to unaffiliated customers
were $63.1 million in 1999, $63.9 million in 1998 and $93.6 million in 1997. The
financial information about geographic areas contained in Note 9 "Segment
Reporting" to the Notes to the Consolidated Financial Statements found in Item 8
of Part II of this Report is incorporated herein by reference.
EMPLOYEES
As of December 31, 1999, the Company had approximately 3,100 employees,
approximately 740 of whom were working in foreign countries. Approximately 376
of the hourly paid employees of the Company located at its Brandenburg,
Kentucky, Lake Charles, Louisiana, Shreveport, Louisiana and Beaumont, Texas
facilities are
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represented for purposes of collective bargaining, by several different labor
organizations and the Company is party to nine labor contracts relating to such
employees. These labor contracts extend for three- or four-year terms which
expire in the years 2000, 2001, 2002 and 2003. No major work stoppages have
occurred in the last three years. While relations between the Company and its
employees and their various representatives are generally considered
satisfactory, there can be no assurance that new labor contracts can be entered
into without work stoppages.
ENVIRONMENTAL MATTERS
The establishment and implementation of Federal, state and local standards
to regulate air and water quality and to govern contamination of land and
groundwater has affected, and will continue to affect, substantially all of the
Company's manufacturing locations. Federal legislation providing for regulation
of the manufacture, transportation, use and disposal of hazardous and toxic
substances has imposed additional regulatory requirements on industry in
general, and particularly on the chemicals industry. In addition, the
implementation of environmental laws, such as the Resource Conservation and
Recovery Act, the Clean Air Act and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, has required and will continue to require new
capital expenditures and will increase operating costs. The Company employs
waste minimization and pollution prevention programs at its manufacturing sites.
The Distribution Agreement, dated as of February 1, 1999 (the "Distribution
Agreement"), between the Company and Olin relating to the Distribution,
specifies that the Company is only responsible for certain environmental
liabilities at the Company's current facilities and certain off-site locations.
Associated costs of investigatory and remedial activities are provided for
in accordance with generally accepted accounting principles governing
probability and the ability to reasonably estimate future costs. Charges to
income for investigatory and remedial efforts were not material to operating
results in 1999, 1998 and 1997, but may be material to net income in future
years. In 1997, in connection with the sale of the surfactants businesses to
BASF, a $2.3 million provision was recorded to provide for future environmental
spending at the Brandenburg, Kentucky site.
Cash outlays for remedial and investigatory activities associated with
former waste sites and past operations were incurred by Olin. Cash outlays for
normal plant operations for the disposal of waste and the operation and
maintenance of pollution control equipment and facilities to ensure compliance
with mandated and voluntarily imposed environmental quality standards were
charged to income. Cash outlays for environmental related activities totaled
$12.5 million in 1999, $12.0 million in 1998 and $10.8 million in 1997. During
1999, $2.4 million ($1.0 million in 1998; $2.8 million in 1997) was spent on
capital projects, $9.7 million ($10.6 million in 1998; $8.0 million in 1997) was
spent on normal plant operations, and $0.4 million ($0.4 million in 1998) was
spent on remedial activities. Historically, the Company has funded its
environmental capital expenditures through cash flow from operations and expects
to do so in the future.
The Company's consolidated balance sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$2.4 million at December 31, 1999 and $2.8 million at December 31, 1998, all of
which were classified as other noncurrent liabilities. These amounts did not
take into account any discounting of future expenditures, any consideration of
insurance recoveries or any advances in technology. These liabilities are
reassessed periodically to determine if environmental circumstances have changed
or if the costs of remediation efforts can be better estimated. As a result of
these reassessments, future charges to income may be made for additional
liabilities.
Annual environmental-related cash outlays for site investigation and
remediation, capital projects and normal plant operations are expected to range
from $10 to $15 million over the next several years. While the Company does not
anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
and the Company's ability to obtain contributions from other parties and the
lengthy time periods over which site remediation occurs.
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ITEM 2. PROPERTIES
The table below sets forth the locations where the Company conducts its
business and a brief description of the activities conducted at each identified
location. A more detailed description of the Company's principal manufacturing
facilities follows the table. The Company believes that its facilities are
sufficiently maintained and suitable and adequate for its immediate needs and
that additional space is available to accommodate expansion. Unless otherwise
noted below, the identified location is owned by the Company.
LOCATION PRIMARY ACTIVITIES
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McIntosh, Alabama(1) Blending and storage facility for performance
chemicals
Chandler, Arizona(2) Warehouse and office facility for
microelectronic chemicals
Mesa, Arizona Manufacturing facility for microelectronic
chemicals
Anaheim, California(2) Office and warehouse space for water chemicals
Cheshire, Connecticut(3) Research and development facility and offices
Norwalk, Connecticut(2) Corporate headquarters
Bethalto, Illinois(2) Corporate data center
Naperville, Illinois(2) Water chemicals service center
Brandenburg, Kentucky Manufacturing facility for microelectronic and
performance chemicals
Lake Charles, Louisiana Manufacturing facility for performance
chemicals
Shreveport, Louisiana Manufacturing facility for performance
chemicals
Rochester, New York Manufacturing facility for performance
chemicals
East Providence, Rhode Island Manufacturing facility and materials research
center for microelectronic chemicals
North Kingston, Rhode Island Manufacturing facility of microelectronic
chemicals; North American technical support
center; new product development center for
microelectronic chemicals
Charleston, Tennessee(1) Manufacturing facility for water chemicals
Beaumont, Texas Manufacturing facility for performance
chemicals
Zwijndrecht, Belgium(1) Manufacturing facility for microelectronic
chemicals and European technical support center
Igarassu, Brazil Facility of a joint venture for the manufacture
of water chemicals
Salto, Brazil Repackaging facility for water chemicals and
manufacturing facility for performance
chemicals
Amboise, France Repackaging, distribution and warehouse
facility for water chemicals
Swords, Ireland Manufacturing facility for performance
chemicals
Kempton Park, South Africa Facility of a joint venture for the manufacture
of water chemicals
Maracaibo, Venezuela Manufacturing facility for performance
chemicals
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(1) Land is leased.
(2) Leased facility.
(3) Subject to a contract of sale. If sold, will become a leased facility.
The Company also leases several warehouse facilities in Arizona,
California, Idaho, Nevada and Texas and several overseas sales offices and
warehouses.
PRINCIPAL MANUFACTURING FACILITIES
The principal manufacturing properties of the Company described below are
all owned by the Company, except for the land under the Belgium facility which
is leased until 2041, the land under the McIntosh plant and Charleston facility
which are being leased from Olin and except for properties held by joint
ventures as noted below.
MCINTOSH, ALABAMA. The Company's facility located in McIntosh, Alabama
blends, packages and stores propellant grade hydrazine products. Special
hydrazine fuel blends are produced as the principal propellant for several U.S.
Air Force launch vehicle programs including the Titan and Delta rockets.
7
MESA, ARIZONA. The Company has a state-of-the-art microelectronic chemical
manufacturing facility in Mesa, Arizona. This facility manufactures, purifies,
formulates and packages extensive product lines of ultra high purity process
chemicals. This facility is ISO 9002-certified. A second facility for thin film
systems was constructed at Mesa in 1999.
In addition to manufacturing operations, the Company has extensive
analytical testing, applications testing and warehousing capabilities for both
process and thin film chemicals at the Mesa plant site. Current operations
occupy approximately 30 acres of the 52 acre plant site. The remaining acreage
is available for future expansions.
BRANDENBURG, KENTUCKY. The ISO 9002-certified Brandenburg plant covers an
area of 200 acres, surrounded by 1,200 acres of land which provides both a
buffer zone and expansion capability. The plant contains multiple manufacturing
facilities producing a wide range of products. Many of these products are
derivatives of ethylene oxide and propylene oxide. A broad line of specialty
polyols are produced in a flexible batch facility and sold into urethane
coatings, adhesives, sealant and elastomer applications. Chemical intermediates
for the Company's microelectronic materials business are produced in a separate
manufacturing facility dedicated to this purpose. There is a research and
development center at the site which supports the development and technical
service needs of the polyol and glycol products and new product scale up for the
microelectronics business. Ethylene oxide is produced on site in a facility
owned by Sun Company and operated by the Company. The Company also operates
other facilities on the site to produce commodity and specialty chemicals for
third parties under long-term contractual arrangements.
LAKE CHARLES, LOUISIANA. The Company's facility located in Lake Charles,
Louisiana consists of three manufacturing plants that produce various hydrazine
products. One ISO 9002-certified plant, built in 1979, produces solution grade
hydrazine products for use in chemical blowing agents, water treatment
chemicals, agricultural products, pharmaceutical intermediates and other
chemical products. A second ISO 9002-certified plant, built in 1953, produces
propellant grade hydrazine products including anhydrous hydrazine (AH),
unsymmetrical dimethyl hydrazine (UDMH) and monomethyl hydrazine (MMH) for use
as fuel in satellites, expendable launch vehicles and auxiliary power units.
Additional equipment of the Company at this site produces propellant grade Ultra
PureTM Hydrazine (UPH), the world's purest grade of anhydrous hydrazine, for
satellite propulsion.
SHREVEPORT, LOUISIANA. This ISO 9002-certified plant produces industrial
grade virgin sulfuric acid for delivery to the U.S. Gulf Coast and provides
regeneration services primarily to local refineries. In addition, this site
provides alternative fuel burning services and markets sodium bisulfite
solution.
ROCHESTER, NEW YORK. This facility manufactures a large number of chemicals
for the specialty chemicals industry. Many of these chemicals are biocides used
to control the growth of microorganisms, particularly, fungi and algae and to
control dandruff on the scalp. The largest 2-chloropyridine production facility
in the world is located here. 2-Chloropyridine is the key intermediate used to
produce the Company's Omadine(R) biocides. These products are based on the salts
of the pyrithione molecule. The Company manufactures over a dozen pyrithione
products at this site by modifying these salts by concentration, form or
combining them with other biocides. The Company's Triadine(R) brand of biocides
is a combination of pyrithione and triazine, a bactericide purchased from a
supplier. This facility also produces the Omacide(R) IPBC brand, which is based
upon iodopropargyl-n-butylcarbamate (IPBC), a broad-spectrum fungicide. In
addition, this facility also manufactures several chemicals custom-made for
specific customers for widely diverse markets.
EAST PROVIDENCE, RHODE ISLAND. This ISO 9001-certified facility is located
in an industrial park in East Providence, Rhode Island. Originally built as a
materials research center in 1974, the facility was expanded in 1984 to
manufacture photoresists, photoresist developers, and photoresist strippers used
in the semiconductor industry. The materials research center at this site
develops new compounds used in the manufacture of photoactive products and has
on-site capabilities for chemical synthesis, testing, and product formulation.
This capability allows for rapid commercialization of new technologies and is
augmented by scale-up facilities at the Brandenburg, Kentucky site. The
manufacturing plant at the site receives raw materials, formulates, filters and
packages finished goods in a high purity, clean environment. Full quality
control capabilities are located on-site or at the nearby Quonset Point
facility. The high degree of flexibility required to custom manufacture specific
products is maintained through the number of multiple sized formulation vessels
available here.
NORTH KINGSTON, RHODE ISLAND. This ISO 9001-certified facility is located
in a new industrial park in North Kingston, Rhode Island (Quonset Point
Industrial Park) which originally housed a distribution warehouse. A new
8
state-of-the-art manufacturing facility and product development center for
advanced photoresists has been built on-site to expand the Company's
capabilities in the development and manufacture of advanced technology
photoresists. A technical service center is located on-site with advanced
photolithography equipment identical to that of the customer base and provides
technical service support to North America. The equipment is also used by the
advanced product development groups to develop state-of-the-art products in
anticipation of customer requirements. The manufacturing plant receives raw
materials and formulates, filters and packages finished goods in a high purity,
clean environment. Full test capabilities are located on-site. The high degree
of flexibility required to custom manufacture specific products is maintained
through the number of multiple sized formulation vessels available here.
Packaging and manufacturing facilities were designed for a new generation of
purity requirements.
CHARLESTON, TENNESSEE. The Company's ISO 9002-certified facility located in
Charleston, Tennessee produces, packages, and stores calcium hypochlorite for
the water chemicals business. There are two distinct manufacturing operations at
this site. One produces the Company's 65% (nominal) available chlorine product
while the other produces the Company's patented, 75% high available chlorine
product. Products are packaged into containers that range in size from 5 pounds
to 2,000 pounds per container. The site also stores as much as 10-14 million
pounds of product during peak periods.
BEAUMONT, TEXAS. The Company's facility is a major regional manufacturer
and supplier of industrial grade virgin sulfuric acid to the U.S. Gulf Coast and
provides regeneration services primarily to local refineries. In addition, the
Company provides limited alternative waste fuel burning services and markets
sodium bisulfite solution. This facility has achieved and maintained ISO 9002
certification since 1993.
ZWIJNDRECHT, BELGIUM. The original facility located in Zwijndrecht, Belgium
has been operational since 1993 and primarily manufactures, tests, and provides
technical support for photoresists, photoresist developers, and photoresist
strippers used in the semiconductor industry. In 1998, the facility was expanded
to manufacture and test high purity acids, etchants, and thin film chemicals
also used in the semiconductor industry. This expanded facility is ISO
9002-certified. A technical service center is also located on the site with
photolithography equipment identical to that of the customer base and provides
technical service support to European customers.
IGARASSU, BRAZIL. The Company's facility located in Igarassu, Brazil is a
joint venture operation (Nordesclor S.A.) that produces and packages calcium
hypochlorite for the water chemicals business within Brazil. Products for the
swimming pool market and the water treatment market are manufactured and
packaged at this site. The Company also has a small repackaging facility in
Salto, Brazil. The Salto facility also blends and manufactures products for
performance chemicals. This facility is currently shared with Olin Reductone
operations.
SWORDS, IRELAND. This facility is located just north of Dublin, Ireland and
has been producing biocides for over twenty-five years. 2-Chloropyridine is
imported from the Company's Rochester, New York plant and converted into zinc,
copper and sodium salts of the pyrithione molecule. The finished product is
shipped to customers in over fifty countries around the world. This facility is
both ISO 9002- and ISO 14001-certified.
KEMPTON PARK, SOUTH AFRICA. The Company's facility located in Kempton Park,
South Africa is a joint venture operation (Aquachlor (Pty) Ltd.), that produces
and packages calcium hypochlorite for the water chemicals business within the
Southern Africa region. Products for the swimming pool and water treatment
markets are also packaged at this site.
MARACAIBO, VENEZUELA. The Company's ISO 9002-certified facility in
Venezuela is a multi-product manufacturing plant producing a broad range of
polyols, demulsifiers, and specialty surfactants to support regional markets.
Specialty polyols are also produced for local consumption and export.
ITEM 3. LEGAL PROCEEDINGS
In connection with the Distribution, the Company assumed substantially all
non-environmental liabilities for legal proceedings relating to the Company's
businesses as conducted prior to the Distribution Date. In addition, in the
normal course of business, the Company is subject to proceedings, lawsuits and
other claims, including proceedings under laws and regulations related to
environmental and other matters. All such matters are subject to many
uncertainties and outcomes that are not predictable with assurance. While these
matters could materially affect
9
operating results when resolved in future periods, it is management's opinion
that after final disposition, any monetary liability or financial impact to the
Company beyond that provided in the consolidated balance sheet as of December
31, 1999 would not be material to the Company's financial position, annual
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the three
months ended December 31, 1999.
EXECUTIVE OFFICERS
The biographical information of the executive officers of the Company as of
March 1, 2000 are noted below.
NAME AND AGE OFFICE
------------- ------
Michael E. Campbell (52) Chairman of the Board and Chief Executive
Officer
Leon B. Anziano (57) President and Chief Operating Officer
Mark A. Killian (52) Corporate Vice President, Human Resources
Louis S. Massimo (42) Corporate Vice President and Chief Financial
Officer
Sarah A. O'Connor (40) Corporate Vice President, General Counsel and
Secretary
W. Paul Bush (49) Vice President and Treasurer
Hayes Anderson (39) Vice President and General Manager,
Semiconductor Chemicals and Services
Paul J. Craney (51) Vice President, Strategic Development
John E. Culbertson (45) Vice President and General Manager, Biocides
Roderick C. Flint (34) Vice President and General Manager, Acids and
Hydrazine and International Operations
James P. LaCasse (48) Vice President and General Manager,
Photopolymers
John J. Margherio (51) Vice President and General Manager,
Performance Urethanes and Organics
James A. Rushton (50) Vice President and General Manager, Water
Chemicals
Alfred C. Schmidt (54) Vice President, Information Technology
Carl G. Seefried (55) Vice President and Chief Technologist
Charles W. Shaver (41) Vice President, Operations
Steven C. Giuliano (30) Controller
No family relationship exists between any of the above named executive
officers or between any of them and any Director of the Company. Such officers
were elected or appointed to serve as such, subject to the Bylaws, until their
respective successors are chosen.
Mr. Campbell was elected Chairman of the Board and Chief Executive Officer
on February 7, 1999. Prior to the Distribution, he was Executive Vice President
of Olin and had global management responsibility for all of Olin's businesses.
Prior to his election as an Executive Vice President of Olin, Mr. Campbell
served as President of Olin's Microelectronic Materials Division. Prior to that
time and since 1987, he served as Olin's Corporate Vice President, Human
Resources.
Mr. Anziano was elected President and Chief Operating Officer on February
7, 1999. Prior to the Distribution and since April 1993, he was a Corporate Vice
President of Olin and since April 30, 1998 had the title of President Specialty
Chemicals at Olin. Since 1988, he served Olin in the following management
capacities: Group Vice President & General Manager, Industrial Chemicals; Group
Vice President & General Manager, Urethanes; and President, Basic Chemicals
Division. Mr. Anziano has announced his intention to retire from the Company
effective mid-2000.
Mr. Killian was elected Corporate Vice President, Human Resources on
February 7, 1999. Prior to the Distribution, Mr. Killian served as Director,
Human Resources for Olin since his appointment in February 1991.
Mr. Massimo was elected a Corporate Vice President and Chief Financial
Officer on January 27, 1999. Prior to the Distribution, he served as Controller
of Olin since April 1, 1996 and, in addition, a Corporate Vice President since
January 1, 1997. Since November 1994 until April 1996, he served as Olin's
Director of Corporate Accounting. Prior to November 1994, he was an Audit Senior
Manager for KPMG LLP.
10
Ms. O'Connor was elected Corporate Vice President, General Counsel and
Secretary on February 7, 1999. She was elected a Vice President of the Company
on October 13, 1998 when the Company was a wholly-owned subsidiary of Olin.
Prior to the Distribution and since 1995, Ms. O'Connor served as Olin's
Director, Planning and Development. Ms. O'Connor became an Associate Counsel in
the Olin Corporate Legal Department in 1989 and was promoted to Counsel in 1992
and to Senior Counsel in January 1995.
Mr. Bush was elected Treasurer on February 7, 1999 and also appointed a
Vice President on that date. Prior to the Distribution and since February 1998,
Mr. Bush was a consultant to Olin. Prior to February 1998, and since March 1994,
he was Vice President, Treasurer and then Vice President, Investments of Johnson
& Higgins, an insurance brokerage and benefits consulting firm. Prior to 1994,
he held various managerial positions, including Vice President and Treasurer and
Vice President, Financial Planning and Analysis for Squibb Corporation.
Mr. Anderson was appointed Vice President and General Manager,
Semiconductor Chemicals and Services on June 8, 1999. Prior to that time and
since February 19, 1999, Mr. Anderson was Business Director, Process Chemicals
and Chemical Management Services. Prior to serving as Business Director and
prior to the Distribution, Mr. Anderson served as Business Director, Chemicals
Management Services of Olin since 1995 and from 1993 to 1995 was Business
Manager, Chemical Management Services at Olin.
Mr. Craney was appointed Vice President, Strategic Development on August
31, 1999. From February 7, 1999 until August 30, 1999, he was Vice President and
General Manager, Urethane Products. Prior to the Distribution and since May
1996, Mr. Craney served as Vice President and General Manager, Urethane Products
Chemicals Division, at Olin. Prior to May 1996, he served as Vice President,
Business Development and Materials Management Chemicals Division, at Olin.
Mr. Culbertson was appointed Vice President and General Manager, Biocides
on March 1, 1999. He joined the Company on February 25, 1999 and prior to that
time he served in various management capacities at Colgate Palmolive, including
Director, Strategic Planning-Global (1998-1999), General Manager, Colgate Costa
Rica (1995-1998) and Director, Marketing-Latin America (1994-1995).
Mr. Flint was appointed Vice President and General Manager, Hydrazine and
Sulfuric Acid on February 7, 1999. On August 31, 1999, he was given the
additional title of General Manager, International Operations. Prior to the
Distribution and since January 1997, Mr. Flint served as General Manager of
Hydrazine at Olin. Prior to 1997 and since March 1996, Mr. Flint served as
Olin's Manager of Planning and Development for Performance Urethanes. Prior to
March 1996 and since February 1995, he served as Olin's International Marketing
Manager, Alphatic Diisocyanates. Prior to February 1995 and since January 1994,
he served as Olin's Business Evaluator for Performance Urethanes.
Mr. LaCasse was appointed Vice President and General Manager, Photopolymers
on February 7, 1999. Prior to the Distribution and since 1996, Mr. LaCasse
served as Vice President and General Manager, Photopolymers at Olin and from
1991 to 1996 as Vice President, Asia-Pacific for both Olin Microelectronic
Materials and OCG Microelectronic Materials.
Mr. Margherio was appointed Vice President and General Manager, Performance
Urethanes and Organics on August 31, 1999. From February 7, 1999 until August
30, 1999, he was Vice President, International. Prior to the Distribution and
since December 1997, Mr. Margherio served as Olin's Vice President,
International. Prior to December 1997 and since February 1996, he served as Vice
President and General Manager of Polychrome, a division of Sun Chemical. Prior
to February 1996, he served as Olin's General Manager, Urethanes & Hydrazine.
Mr. Rushton was appointed Vice President and General Manager, Water
Chemicals on February 7, 1999. Prior to the Distribution and since 1996, Mr.
Rushton served as Director for Aquachlor. Prior to 1996 and since 1988, he
served as Director, International Marketing, Pool Chemicals.
Mr. Schmidt was appointed Vice President, Information Technology on
February 7, 1999. Prior to the Distribution, and since 1997, Mr. Schmidt served
as Olin's Vice President, Information Technology. Prior to 1997, he was
Executive Director, Software and Systems Engineering of Pitney Bowes.
11
Dr. Seefried was appointed Vice President and Chief Technologist on
February 7, 1999. Prior to the Distribution, Dr. Seefried was Vice
President-Technology, Planning and Development at Olin. Prior to that time, he
was Vice President-Technology of Olin's Chemicals Division.
Mr. Shaver was appointed Vice President, Operations on April 29, 1999. From
September 1996 to December 1998, he held several progressive positions with MMT
Environmental, Inc., an environmental R&D company, including Vice
President-Manufacturing, Chief Operating Officer and President. From 1980 to
1996, he held various positions with Dow Chemical Co., serving since 1995 as
Engineering and Technology Manager, Epoxy Products and Intermediates.
Mr. Giuliano was elected Controller on January 27, 1999. Prior to the
Distribution, Mr. Giuliano was an Audit Senior Manager for KPMG LLP, an
accounting firm and prior to that and since 1991, he held various positions of
increasing responsibility for KPMG LLP, where he had overall responsibility for
services provided in connection with audits, SEC filings, private offerings and
other services for certain domestic and multinational clients.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
As of January 31, 2000, there were approximately 8,200 record holders of
Company Common Stock.
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "ARJ." The Company's Common Stock began "regular way"
trading on the NYSE on February 9, 1999.
Information concerning the high and low sales prices of the Company's
Common Stock and dividends paid on Common Stock during each quarterly period in
1999 is set forth in Note 15 "Quarterly Financial Data (Unaudited)" to the Notes
to Consolidated Financial Statements in Item 8 of Part II of this Report. Data
on sales prices and dividends paid for earlier periods are not presented because
no "regular way" stock trading occurred and no cash dividends were paid prior to
February 1999.
Among the provisions of the Credit Facility (as defined on page 20) are
restrictions relating to the payments of dividends and the acquisition of the
Company's Common Stock based on a financial formula. As of December 31, 1999,
dividends and stock repurchases were limited to approximately $83 million.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial and
operating information with respect to the Company and is derived from the
Consolidated Financial Statements of the Company. The financial data as of and
for each of the three years ended December 31, 1999 were derived from the
audited financial statements included elsewhere herein. Such historical
financial data may not be indicative of the Company's future performance. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K. The historical financial information for the
periods preceding February 8, 1999 (the "Distribution Date") include an
allocated share of Olin's historical centralized activities. The following
information is qualified in its entirety by the information and financial
statements appearing elsewhere in this Form 10-K.
12
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATIONS
Sales ..................................................... $879.8 $862.8 $929.9 $913.5 $872.8
Cost of Goods Sold ........................................ 637.7 622.0 676.3 647.8 659.6
Selling and Administration (1) ............................ 163.8 167.6 153.5 159.0 141.1
Research and Development .................................. 17.7 16.2 21.1 21.0 17.4
------ ------ ------ ------ ------
Operating Income .......................................... 60.6 57.0 79.0 85.7 54.7
Interest and Other Income, net (2) ........................ 0.9 3.8 7.2 8.4 12.6
------ ------ ------ ------ ------
Income Before Taxes and Extraordinary Gain ................ 61.5 60.8 86.2 94.1 67.3
Income Tax Provision ...................................... 20.8 20.8 29.9 33.0 23.4
------ ------ ------ ------ ------
Income Before Extraordinary Gain .......................... 40.7 40.0 56.3 61.1 43.9
Extraordinary Gain, net (3) ............................... 1.3 -- -- -- --
------ ------ ------ ------ ------
Net Income ................................................ 42.0 40.0 56.3 61.1 43.9
------ ------ ------ ------ ------
Diluted/Unaudited Proforma Income Per Share (4) ........... 1.82 1.55 2.26 2.47 1.72
Common Dividends Per Share (5) ............................ 0.60 -- -- -- --
OTHER
Capital Expenditures ...................................... 58.9 84.3 71.0 53.2 65.4
Depreciation .............................................. 49.3 43.1 43.6 40.2 41.4
Effective Tax Rate ........................................ 33.8% 34.2% 34.7% 35.1% 34.8%
FINANCIAL POSITION
Working Capital ........................................... $168.5 $147.1 $151.5 $124.9 $129.9
Property, Plant and Equipment, net ........................ 326.7 331.6 280.4 257.3 261.4
Total Assets .............................................. 759.5 721.6 693.2 651.2 624.1
Long-Term Debt (4) ........................................ 76.8 7.0 5.5 5.5 5.5
Shareholders' Equity (4) .................................. 451.8 504.5 455.6 429.6 411.4
Capitalization ............................................ 549.6 512.4 462.5 436.9 417.0
- ----------
Notes:
(1) Selling and administration expenses for 1999 include $2.3 million of
nonrecurring expenses related to an unfavorable arbitration award and the
decision to delay construction of a facility in China.
(2) Interest and other income, net in 1995 includes a gain ($7.0) from the sale
of the Sun(R) brand trademark, a dry sanitizer plant in Charleston, West
Virginia and a related tableting facility in Livonia, Michigan and includes
equity in earnings of affiliates for all years.
(3) Extraordinary gain, net in 1999 represents a gain on the extinguishment of
debt related to the settlement of a $5.2 million face value note through a
payment of $3.0 million, net of related taxes of $0.9.
(4) In January 1999, Olin borrowed $75 million and on February 8, 1999, the
Company assumed this debt from Olin. Pro forma net income for the periods
1995 through 1998 reflects the pro forma effects of borrowings assuming $75
million was outstanding and that the Company had seasonal weighted average
borrowings related to the Water Chemicals segment of $20 million at an
aggregate effective rate of 7%. Pro forma common stock outstanding
represents the number of common shares issued at the Distribution Date and
assumes that such shares were outstanding for all periods prior to the
Distribution. See Note 14 "Pro Forma Financial Information (unaudited)" to
the Notes to Consolidated Financial Statements.
(5) The annual dividend rate is $0.80 per share. 1999 dividends represent three
quarterly payments in 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations covers certain periods when the Company operated as the
specialty chemical businesses of Olin. However, this Management's Discussion and
Analysis of Financial Condition and Results of Operations has been prepared as
if the Company were
13
a separate entity for all periods discussed. It should be read in conjunction
with the Company's historical Consolidated Financial Statements and Notes
thereto included elsewhere herein. Sales consist of sales to third parties net
of any discounts. Gross Margin is defined as Sales less Cost of Goods Sold,
which includes raw materials, labor, overhead and depreciation associated with
the manufacture of the Company's various products. Other operating expenses
include selling, administration, research and development. In addition, segment
operating income includes the equity in earnings of affiliated companies.
RESULTS OF OPERATIONS
CONSOLIDATED
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Sales ................................ $879.8 $862.8 $929.9
Gross Margin ......................... 242.1 240.8 253.6
Selling and Administration ........... 161.5 167.6 153.5
Nonrecurring Expenses (1) ............ 2.3 -- --
Research and Development ............. 17.7 16.2 21.1
Equity in Earnings of
Affiliated Companies ............... 5.8 3.4 7.1
Interest Expense (2) ................. 5.7 7.2 7.5
Extraordinary Gain, net (3) .......... 1.3 -- --
Net Income (2) ....................... 42.0 35.7 52.0
Basic Income Per Share (2) ........... $ 1.83 $ 1.55 $ 2.26
Diluted Income Per Share (2) ......... $ 1.82 $ 1.55 $ 2.26
Weighted Average Common Stock
Outstanding:
Basic (2) ............................ 23.0 23.0 23.0
Diluted (2) .......................... 23.1 23.0 23.0
- ----------
Notes:
(1) Represents nonrecurring expenses related to an unfavorable arbitration
award and the decision to delay construction of a facility in China.
(2) Pro Forma Financial Information--In January 1999, Olin borrowed $75 million
and on February 8, 1999, the Company assumed this debt from Olin. Pro forma
net income for 1998 and 1997 reflects the pro forma effects of borrowings
assuming $75 million was outstanding and that the Company had seasonal
weighted average borrowings related to the Water Chemicals segment of $20
million at an aggregate effective rate of 7%. Pro forma common stock
outstanding represents the number of common shares issued at the
Distribution Date and assumes that such shares were outstanding for all
periods prior to the Distribution. See Note 14 "Pro Forma Financial
Information (unaudited)" to the Notes to Consolidated Financial Statements.
(3) Extraordinary gain, net in 1999 represents a gain on the extinguishment of
debt related to the settlement of a $5.2 million face value note through a
payment of $3.0 million, net of related taxes of $0.9.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Sales increased 2.0%. The sales increase was due to a 4.7% increase in
volumes partially offset by a 2.7% decrease in prices. The increase in volumes
was primarily related to the water chemicals segment. The decrease in pricing
was primarily related to the microelectronic chemicals and performance chemicals
segments.
Gross margin percentage was 27.5% in 1999 and 27.9% in 1998. Higher raw
materials and manufacturing costs more than offset the impact of higher volumes.
Selling and administration expenses, excluding nonrecurring expenses, as a
percentage of sales decreased to 18.4% in 1999 from 19.4% in 1998 due to higher
sales and lower expenditures. Selling and administration expenses decreased in
amount due to the effect of cost-cutting initiatives implemented by the Company
in 1999, which more than offset incremental public company costs.
14
Research and development expenses increased due to higher expenditures
associated with the photopolymers business.
Equity in earnings of affiliated companies increased $2.4 million due to
the favorable performance of both of the Company's joint ventures.
Interest expense was $5.7 million in 1999 compared to pro forma interest
expense of $7.2 million in 1998. The decrease was primarily due to lower average
working capital borrowings and lower rates on such borrowings than those assumed
in the prior year.
The effective tax rate decreased to 33.8% in 1999 from 34.2% in 1998 as a
result of higher equity in earnings of affiliated companies, partially offset by
lower foreign tax credits.
Results for 1999 include an extraordinary gain on the extinguishment of
debt of $1.3 million after-tax, or $0.06 per share, and nonrecurring charges of
$1.5 million after-tax, or $0.07 per share.
The Company's sales and operating income for 2000 are expected to be higher
than 1999. Sales for 2000 are expected to be 4% to 6% higher than 1999. Diluted
income per share for 2000 is expected to be 12% to 15% higher than 1999. These
estimates are based upon expected improved financial performance across a number
of Arch's businesses. In microelectronic chemicals, the recovery in the
semiconductor industry, added new photopolymer product qualifications and
actions to improve the short-term performance of process chemicals should
benefit this segment. In water chemicals, the Company expects improved
performance as a result of strategically focusing on our branded business. As
for the performance chemicals segment, recovery in the Asian markets should
benefit the hydrazine business, and organic growth within the segment is
expected to improve 2000 results. The Company also expects to derive additional
benefits overall from continuing cost reduction initiatives.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Sales decreased 7.2%. The decrease was attributable to a 1.1% decrease in
prices and a 6.1% decrease due to the sales of the surfactants, fluids,
non-urethane polypropylene glycol and polyethylene glycol (collectively,
"surfactants") business and the conversion of the flexible polyol business to a
tolling operation. Under the tolling operation, the Company does contract
manufacturing for a third party who sells the manufactured product to other
parties.
Gross margin percentage was 27.9% in 1998 and 27.3% in 1997. Higher gross
margin as a result of the impact of the surfactants supply agreement and the
conversion of the polyols business to a tolling operation were primarily the
main contributors to the increased gross margin percentage. Excluding the
results of the surfactants business which was sold in 1997 and the related
supply agreement, the gross margin percentage for 1998 and 1997 would have been
27.1% and 27.3%, respectively.
Selling and administration expenses as a percentage of sales increased to
19.4% in 1998 from 16.5% in 1997 due to lower sales and higher expenses. Selling
and administration expenses increased in amount due to higher administration
expenses for information technology systems (primarily SAP implementation) and
increased international operating expenses.
Research and development expenses decreased due to the consolidation of the
foreign research efforts for photopolymers into the U.S. operations and the sale
of the surfactants businesses to BASF in November 1997.
The effective tax rate decreased to 34.2% in 1998 from 34.7% in 1997,
resulting from the utilization of higher foreign tax credits and lower state
taxes in 1998.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance chemicals'
surfactants business and a three-year supply agreement. Of the proceeds
received, $12 million was allocated to the sale of the surfactants business
based on the fair value of such business and $30 million was allocated to the
supply agreement. No gain or loss was recorded on the sale. In the supply
agreement, the Company agreed to reserve production capacity for surfactants
products at its Brandenburg, Kentucky facility and to supply BASF with such
products in exchange for a $30 million payment made at the time of signing the
agreement, plus recovery of all fixed and variable costs during the term of the
agreement. The
15
agreement expires on December 31, 2000 unless extended; the Company does not
believe it will be extended. The $30 million payment was recorded as deferred
income and is being amortized ratably into operating income over the three-year
period. Unless the supply agreement is extended beyond 2000, which the Company
does not expect to happen, no future income will be realized with respect to
this supply agreement after December 31, 2000. Sales and operating income for
each of the years ended December 31, 1999 and 1998 include $9.5 million related
to the amortization of deferred income under the supply agreement.
MICROELECTRONIC CHEMICALS
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
----- ----- -----
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales ................................ $ 214.8 $ 227.6 $ 242.6
Operating Income (Loss) .............. (3.0) (4.1) 9.5
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Sales decreased 5.6% and the operating loss decreased in 1999. The results
were negatively impacted by the depressed performance of the process chemicals
product line. Process chemicals reported sales of $67.8 million and incurred an
operating loss of $11.6 million in 1999 compared with sales of $77.6 million and
an operating loss of $8.0 million in 1998. The industry structure in which the
process chemicals business operates results in low profitability at present. The
customer group is concentrated and enjoys significant purchasing leverage.
Manufacturing overcapacity exists and, unless the industry rationalizes, will
exist in the foreseeable future. This results in unsatisfactory pricing. In
addition, the industry suffers from inefficiencies in manufacturing, asset
utilization, logistics, research and development, and selling and administrative
costs. The Company has initiated actions to improve process chemicals
performance in the near-term, which include structural reengineering to
eliminate costs, significant improvement in manufacturing operations and better
inventory management. In addition, the Company is pursuing other various
strategic options.
Excluding the impact of the process chemicals product line, sales decreased
2.0%. Operating income excluding process chemicals improved significantly
primarily due to lower operating expenses as a result of cost reduction
initiatives and favorable joint venture performance (Fuji Photo Film), which
more than offset the effect of slightly lower sales.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Sales decreased 6.2% with an operating loss occurring in 1998 compared to
an operating profit in 1997. Sales of all products weakened during 1998 as the
Company's businesses were adversely impacted by the poor conditions in the
worldwide semiconductor market. Also, major semiconductor customers underwent
extended shutdowns and some delayed or canceled fab construction projects
resulting in decreased sales. In addition to the poor market condition of the
semiconductor industry, start-up costs for the Company's new process chemicals
facility in Belgium and photoresist facility in Rhode Island, unfavorable
operating performance from its foreign affiliate and higher administration
expenses for information technology systems (SAP implementation) contributed to
the operating loss. These were slightly offset by lower R&D spending resulting
from the consolidation of its overseas photopolymers R&D operations to existing
facilities in the U.S.
WATER CHEMICALS
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
------ ------ ------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales .................................. $326.8 $290.3 $286.9
Operating Income ....................... 26.3 13.8 26.5
16
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Sales increased 12.6% and operating income increased 90.6%. The increase in
sales was attributable to increased volumes from the distribution businesses,
Superior Pool Products and Hydrochim, and higher bulk export and branded volumes
(HTH(R) and Pace(R)). Prices were slightly lower compared to last year as lower
bulk prices were almost entirely offset by higher average brand prices. The
operating income increase was attributable to the additional sales volumes and
favorable joint venture performance which more than offset higher advertising
expenses.
The Company is currently pursuing a sale of one of its distribution
businesses, Superior Pool Products, Inc. ("SPPI") due to its lack of strategic
connection with any of Arch's other businesses. SPPI had sales and operating
income of $84 million and $3.7 million, respectively, in 1999. The Company
expects to complete a transaction during the second quarter of 2000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Sales increased 1.2% while operating income decreased 47.9%. Increased
sales from North America branded calcium hypochlorite, higher volumes of Pace(R)
brand products (chlorinated isocyanurates) and higher distribution sales more
than offset lower bulk and export volumes and lower prices. Chinese calcium
hypochlorite producers increased their exports of product, which disrupted the
supply/demand balance and affected prices on a worldwide basis. The decrease in
operating income was primarily attributable to the decline in calcium
hypochlorite prices and higher manufacturing costs and operating expenses. Lower
production volumes, higher depreciation expense and other plant costs, legal
expenses, along with higher distribution costs in connection with a new customer
accounted for the increased operating costs.
PERFORMANCE CHEMICALS
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
------ ------ ------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales .................................. $338.2 $344.9 $400.4
Operating Income:
Before Nonrecurring Expenses ........ 45.4 50.7 50.1
Nonrecurring Expenses ............... (2.3) -- --
------ ------ ------
Operating Income ....................... 43.1 50.7 50.1
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Sales decreased 1.9%, while operating income decreased 15%. Excluding $2.3
million of nonrecurring expenses incurred in the third quarter of 1999 related
to an unfavorable arbitration award and the decision to delay construction of a
facility in China, both of which are associated with the Biocides product line,
operating income decreased 10.5% primarily due to lower hydrazine hydrate
pricing.
Performance urethanes and organics sales decreased due to lower pricing and
volumes for nonfoam polyols and lower pricing for propylene glycol products
combined with lower volumes and pricing in Latin America, principally related to
the surfactants business. Operating income increased slightly from the prior
year as increased contract manufacturing fees, improved domestic product mix and
favorable operating expenses due to cost reduction programs more than offset the
lower volumes, pricing and higher raw material costs.
Biocides sales were higher primarily due to increased volumes related to
the anti-dandruff, building products and marine paint markets. Operating income
before nonrecurring expenses was higher due to the impact of higher sales
partially offset by higher international operating expenses. In addition,
manufacturing costs were negatively impacted by an unscheduled outage at the
Rochester plant during the first quarter of 1999 resulting from a severe
snowstorm.
17
Hydrazine sales were lower due to lower hydrazine hydrate pricing and
volumes caused by poor Asian economic conditions and lower Ultra PureTM sales
due to the timing of launch schedules. Operating income decreased from the prior
year due to the sales shortfall and an unanticipated, extended plant outage
earlier in the year, resulting in unfavorable manufacturing costs.
Sulfuric acid sales were comparable to prior year as higher pricing offset
lower volumes. Operating income increased primarily as a result of lower
manufacturing costs and operating expenses due to cost reduction efforts.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Sales decreased 13.9%, while operating income increased 1.2%. The sales
decrease was attributable primarily to the sale of the surfactants businesses to
BASF in November 1997 and the conversion of the flexible polyols business from a
merchant business to a tolling operation. Higher sales of IPBC-based biocide,
which is used primarily in metalworking and the coatings markets, and Copper
Omadine(R) biocide, which is used in the marine antifoulant paint market, were
partially offset by a decline in volume in the Asian anti-dandruff agent market
along with lower pricing due to the relatively stronger value of the U.S.
dollar.
The operating income increase was attributable primarily to the conversion
of the flexible polyols business to a tolling operation. In addition, operating
income increased by $4 million due to the conversion of the surfactants business
to a contract manufacturing arrangement under a supply agreement with BASF
which, unless extended, expires on December 31, 2000. This increase along with
the profit impact from higher IPBC-based biocide and Copper Omadine(R) biocide
volumes were offset in part by lower anti-dandruff agent volumes to the Asian
market, and higher administration expense for additional international
personnel.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance chemicals'
surfactants business and a three-year supply agreement. Of the proceeds
received, $12 million was allocated to the sale of the surfactants business
based on the fair value of such business and $30 million was allocated to the
supply agreement. No gain or loss was recorded on the sale. In the supply
agreement, the Company agreed to reserve production capacity for surfactants
products at its Brandenburg, Kentucky facility and to supply BASF with such
products in exchange for a $30 million payment made at the time of signing the
agreement, plus recovery of all fixed and variable costs during the term of the
agreement. The agreement expires on December 31, 2000 unless extended; the
Company does not believe it will be extended. The $30 million payment was
recorded as deferred income and is being amortized ratably into operating income
over the three-year period. Unless the supply agreement is extended beyond 2000,
which the Company does not expect to happen, no future income will be realized
with respect to this supply agreement after December 31, 2000. Sales and
operating income for each of the years ended December 31, 1999 and 1998 include
$9.5 million related to the amortization of deferred income under the supply
agreement.
ENVIRONMENTAL
The establishment and implementation of Federal, state and local standards
to regulate air and water quality and to govern contamination of land and
groundwater has affected, and will continue to affect, substantially all of the
Company's manufacturing locations. Federal legislation providing for regulation
of the manufacture, transportation, use and disposal of hazardous and toxic
substances has imposed additional regulatory requirements on industry in
general, and particularly on the chemicals industry. In addition, the
implementation of environmental laws, such as the Resource Conservation and
Recovery Act, the Clean Air Act and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, has required and will continue to require new
capital expenditures and will increase operating costs. The Company employs
waste minimization and pollution prevention programs at its manufacturing sites.
The Distribution Agreement specifies that the Company is only responsible
for certain environmental liabilities at the Company's current facilities and
certain off-site locations.
Associated costs of investigatory and remedial activities are provided for
in accordance with generally accepted accounting principles governing
probability and the ability to reasonably estimate future costs. Charges to
income for
18
investigatory and remedial efforts were not material to operating results in
1999, 1998 and 1997 but may be material to net income in future years. In 1997,
in connection with the sale of the surfactants businesses to BASF, a $2.3
million provision was recorded to provide for future environmental spending at
the Brandenburg, Kentucky site.
Cash outlays for remedial and investigatory activities associated with
former waste sites and past operations were incurred by Olin. Cash outlays for
normal plant operations for the disposal of waste and the operation and
maintenance of pollution control equipment and facilities to ensure compliance
with mandated and voluntarily imposed environmental quality standards were
charged to income. Cash outlays for environmental related activities totaled
$12.5 million in 1999, $12.0 million in 1998 and $10.8 million in 1997. During
1999, $2.4 million ($1.0 million in 1998; $2.8 million in 1997) was spent on
capital projects, $9.7 million ($10.6 million in 1998; $8.0 million in 1997) was
spent on normal plant operations, and $0.4 million ($0.4 million in 1998) was
spent on remedial activities. Historically, the Company has funded its
environmental capital expenditures through cash flow from operations and expects
to do so in the future.
The Company's Consolidated Balance Sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$2.4 million at December 31, 1999, and $2.8 million at December 31, 1998, all of
which were classified as other noncurrent liabilities. These amounts did not
take into account any discounting of future expenditures, any consideration of
insurance recoveries or any advances in technology. These liabilities are
reassessed periodically to determine if environmental circumstances have changed
or if the costs of remediation efforts can be better estimated. As a result of
these reassessments, future charges to income may be made for additional
liabilities.
Annual environmental-related cash outlays for site investigation and
remediation, capital projects and normal plant operations are expected to range
from $10 to $15 million over the next several years. While the Company does not
anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
and the Company's ability to obtain contributions from other parties and the
lengthy time periods over which site remediation occurs.
INCOME TAXES
The Company provides for deferred taxes on temporary differences between
the financial statement and tax bases of assets using the enacted tax rates
which are expected to apply to taxable income when the temporary differences are
expected to reverse.
Prior to the Distribution, the Company's operations were included in the
U.S. Federal consolidated income tax returns of Olin. The provision for income
taxes prior to the Distribution includes the Company's allocated share of Olin's
consolidated income tax provision and is calculated on a separate Company basis
consistent with the requirements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Allocated current income taxes payable were
settled with Olin on a current basis. Olin and the Company entered into a Tax
Sharing Agreement that provides that Olin is responsible for the Federal tax
liability of the Company for each year that the Company and its subsidiaries
were included in Olin's consolidated Federal income tax return, and for state,
local and foreign taxes of the Company and its subsidiaries attributable to
periods prior to the Distribution, in each case including tax subsequently
assessed pursuant to the audit of, or other adjustment to, previously filed tax
returns.
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
Cash flows from operations supplemented by the Company's credit facility
were used to finance the Company's working capital requirements and capital and
investment projects. Prior and up to the Distribution, the Company's financing
requirements were provided by Olin.
19
CASH FLOW DATA
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
------ ------ ------
($ IN MILLIONS)
PROVIDED BY (USED FOR)
Net Operating Activities ............. $ 58.7 $ 85.2 $ 83.5
Capital Expenditures ................. (58.9) (84.3) (71.0)
Net Investing Activities ............. (67.0) (85.3) (59.4)
Net Financing Activities ............. 13.8 (1.2) (21.6)
For the 1999 year, the reduction in cash flow provided by net operating
activities was primarily attributable to higher accounts receivable due to
increased fourth quarter sales and an increase in the overall days sales
outstanding as compared to 1998.
For the 1998 year, the increase in cash flow from net operating activities
was primarily attributable to a reduced investment in working capital. Lower
accounts receivable levels due primarily from exiting the merchant flexible
polyols business and the lower accounts receivable and reduced sales resulting
from the depressed semiconductor industry, as well as the Company's ability to
manage its inventory in response to the decreased demand, were the main
contributors to the reduced investment in working capital. These more than
offset the effect of lower net income and BASF payments received in 1997.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance chemicals'
surfactants business and a three-year supply agreement.
Capital spending for the 1999 year decreased 30.1% compared to the prior
year. The decrease is primarily attributable to the completion of certain
capital projects in the microelectronic chemicals segment in the prior year and
as a result of the Company's focus on reducing capital spending levels.
In September 1999, the Company purchased the Hydroquinone di
(beta-hydroxyethyl) ether ("HQEE") specialty chemicals business from Eastman
Chemical Company of Kingsport, Tennessee.
Capital spending for the 1998 year increased 18.7% over the prior year. In
microelectronic chemicals, there were three major capital projects: an ultra
high-purity chemicals plant and distribution center in Zwijndrecht, Belgium to
better serve the semiconductor industry in Europe, a photoresist facility in
North Kingston, Rhode Island to support the rapid commercialization of advanced
photoresist products and a diffusion facility in Mesa, Arizona which will
replace an existing facility and support the development of advanced
semiconductor devices. The high-purity chemicals plant in Belgium started up
operations in the third quarter of 1998, the photoresist facility in Rhode
Island started up operations in the fourth quarter of 1998 while the diffusion
facility started up during 1999. These three projects represent a total
investment of approximately $58 million, of which approximately $36 million was
spent during 1998. During 1998, $10.4 million was spent at the Rochester, New
York; Swords, Ireland; and Suzhou, China facilities related to the expanded
capacity for key intermediate materials.
Capital spending for 2000 is expected to be in the $65 million range.
Cash provided by financing in 1999 was due to increased borrowings
associated with higher working capital requirements, dividends paid to
shareholders of $13.8 million, and $6.7 million used to repurchase common stock.
Net financing activities in 1998 and 1997 related to intercompany activity
with Olin.
On January 27, 1999, Olin obtained an unsecured $125 million revolving
five-year credit facility, which expires in January 2004 and an unsecured $125
million, 364-day facility, which expired in January 2000 (collectively, the
"Credit Facility"). Olin borrowed $75 million under the Credit Facility. On
February 8, 1999, the Company succeeded to the Credit Facility and assumed the
$75 million of debt. The unsecured $125 million, 364-day facility was renewed by
the Company under the same terms, and now expires in January 2001.
20
The Credit Facility contains leverage and interest coverage ratio
covenants, and restricts the payment of dividends in excess of $65 million plus
50% of cumulative net income under certain circumstances. Fees are payable on
the Credit Facility and range from 0.125% to 0.30%. The Company may select
various floating rate borrowing options, including but not limited to, LIBOR
plus 0.325% to 1.00% and the prime rate. At December 31, 1999, the Company had
$160 million of available borrowings under this Credit Facility. The Company
believes that the Credit Facility is adequate to satisfy its liquidity needs for
the near future.
Arch also currently has approximately $30 million of uncommitted lines of
credit.
On October 28, 1999, Arch's Board of Directors approved a stock repurchase
program whereby the Company is authorized to buy back up to 1.2 million shares
of its common stock, representing approximately 5% of outstanding shares.
Through December 31, 1999, the Company had repurchased approximately 391,000
shares under this program at a cost of $6.7 million. The Company believes that
its current financing ability and liquidity are more than adequate to fund this
program and allow it to continue to pursue strategic acquisitions.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company is currently evaluating the effect this statement will have on its
financial position and results of operations in the period of adoption.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the euro as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the euro.
Conversion to the euro is not expected to have a material impact on the
Company's business, operations, or financial position.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward sales and purchase contracts and currency
options to manage currency risk resulting from purchase and sale commitments
denominated in foreign currencies (principally euro, Canadian dollar and
Japanese yen) and relating to particular anticipated but not yet committed
purchases and sales expected to be denominated in those currencies. All of the
currency derivatives expire within one year and are for United States dollar
equivalents. At December 31, 1999, the Company had forward contracts to sell
foreign currencies with face values of $0.9 million (1998-$5.3 million) and
forward contracts to buy foreign currencies with face values of $2.3 million
(1998-$3.1 million). At December 31, 1999 and 1998 the Company had no
outstanding option contracts to sell or buy foreign currencies.
In accordance with Statement of Financial Accounting Standards No. 52
("SFAS 52"), "Foreign Currency Translation," a transaction is classified as a
hedge when the foreign currency transaction is designated as, and is effective
as, a hedge of a foreign currency commitment and the foreign currency commitment
is firm. A hedge is considered by the Company to be effective when the
transaction reduces the currency risk on its foreign currency commitments. If a
transaction does not meet the criteria to qualify as a hedge, it is considered
to be speculative. For a foreign currency commitment that is classified as a
hedge, any gain or loss on the commitment is deferred and included in the basis
of the underlying instrument. Any realized and unrealized gains or losses
associated with foreign currency commitments that are classified as speculative
are recognized in the current period and are included in Selling and
Administration in the Consolidated Statements of Income. If a foreign currency
transaction previously considered as a hedge is terminated before the
transaction date of the related commitment, any deferred gain or loss shall
continue to be deferred and included in the basis of the underlying transaction.
Premiums paid for currency options and gains or losses on forward sales and
purchase contracts are not material to operating results.
21
YEAR 2000 COMPUTER SYSTEMS
The Company's year 2000 initiatives have been successful to date. The
Company's approach was to subdivide its Year 2000 program into four distinct
segments: 1) Business Systems; 2) Manufacturing; 3) Supply Chain; and 4)
Infrastructure. The Company has transitioned all of its systems to the new
millennium without experiencing significant problems in any of its business
systems, manufacturing, supply chain or infrastructure areas.
In addition, the Company believes it has identified, tested and developed a
plan to respond to all known Year 2000 concerns in accordance with its
contractural obligations and operational requirements. The Company currently is
not aware of any significant Year 2000 or similar problems that have arisen for
its customers or suppliers. Therefore, management believes it has minimized its
risk related to future exposure concerning Year 2000 issues. The Company intends
to continue to monitor Year 2000 issues and does not believe such future costs
will be material to the Company's results of operations, financial position or
liquidity.
CAUTIONARY STATEMENT UNDER FEDERAL SECURITIES LAWS
The information contained in this Form 10-K contains forward-looking
statements that are based on management's beliefs, certain assumptions made by
management and management's current expectations, estimates and projections
about the markets and economy in which the Company and its various businesses
operate. Words such as "anticipates," "believes," "estimates," "expects,"
"forecasts," "opines," "plans," "predicts," "projects," "should," "targets,"
"will," and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expected or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of future events,
new information or otherwise. Future factors which could cause actual results to
differ materially from those discussed include but are not limited to: general
economic and business and market conditions, lack of moderate growth in the U.S.
economy or even a slight recession in 2000; the continued recovery of economic
conditions in Asia; customer acceptance of new products, efficacy of new
technology, changes in U.S. laws and regulations, increased competitive and/or
customer pressure; the Company's ability to maintain chemical price increases;
higher-than-expected raw material costs for certain chemical product lines;
increased foreign competition in the calcium hypochlorite markets; lack of
stability or growth in the semiconductor industry; unfavorable court or jury
decisions, the supply/demand balance for the Company's products, including the
impact of excess industry capacity; failure to achieve targeted cost reduction
programs; unsuccessful entry into new markets for electronic chemicals; capital
expenditures in excess of those scheduled; environmental costs in excess of
those projected; and the occurrence of unexpected manufacturing
interruptions/outages.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
INTEREST RATES
The Company is exposed to interest rate risk primarily from its Credit
Facility which is based upon various floating rates. Based upon the expected
levels of borrowings under this facility in 2000, an increase in interest rates
of 100 basis points would not have a material adverse effect on the Company's
results of operations or cash flows (approximately $1.0 million).
FOREIGN CURRENCY RISK
The Company operates manufacturing facilities in six countries and sells
products in over 60 countries. Approximately 15 percent of the Company's sales
are denominated in currencies other than the U.S. dollar. As a result, the
Company is subject to risks associated with these foreign operations, including
currency devaluations and fluctuations in currency exchange rates. These
exposures from foreign exchange fluctuations can affect the Company's equity
investments and its respective share of earnings (losses), the Company's net
investment in foreign subsidiaries,
22
translation of the Company's foreign operations for U.S. GAAP reporting purposes
and from purchase and sales commitments denominated in foreign currencies. The
Company enters into forward sales and purchase contracts and currency options to
manage currency risk from actual and anticipated purchase and sales commitments
denominated or expected to be denominated in a foreign currency (principally
euro, Canadian dollar and Japanese yen). It is the Company's policy to hedge
approximately 60% to 80% of these transactions. All of the currency derivatives
expire within one year and are for United States dollar equivalents. The
counterparties to the options and contracts are major financial institutions.
At December 31, 1999, the Company had forward contracts to sell foreign
currencies with face values of $0.9 million and forward contracts to buy foreign
currencies with face values of $2.3 million. The fair values of these forward
contracts approximated face values.
Holding other variables constant, if there was a 10 percent adverse change
in foreign currency exchange rates, the net effect on the Company's cash flows
would be a decrease of between $1 million to $2 million, as any increase
(decrease) in cash flows resulting from the Company's hedged forward contracts
would be offset by an equal increase (decrease) in cash flows on the underlying
transaction being hedged.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Arch Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Chemicals, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity (equity prior to
the distribution) 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Arch
Chemicals, 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
Stamford, CT
January 26, 2000
24
ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1999 1998
------ ------
(IN MILLIONS,
EXCEPT PER
SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and Cash Equivalents ........................... $ 12.1 $ 7.1
Receivables, net:
Trade ............................................. 156.0 130.3
Other ............................................. 12.6 11.4
Inventories, net .................................... 147.3 139.3
Other Current Assets ................................ 26.7 25.6
------ ------
Total Current Assets .............................. 354.7 313.7
Investments & Advances--Affiliated Companies
at Equity ........................................... 20.8 21.1
Property, Plant and Equipment, net .................... 326.7 331.6
Goodwill .............................................. 37.1 34.8
Other Assets .......................................... 20.2 20.4
------ ------
Total Assets ...................................... $759.5 $721.6
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings ............................... $ 21.0 $ 0.9
Accounts Payable .................................... 108.1 106.7
Accrued Liabilities ................................. 57.1 59.0
------ ------
Total Current Liabilities ......................... 186.2 166.6
Long-Term Debt ........................................ 76.8 7.0
Other Liabilities ..................................... 44.7 43.5
------ ------
Total Liabilities ................................. 307.7 217.1
Commitments & Contingencies
Shareholders' Equity:
Common Stock, par value $1 per share,
Authorized 100.0 shares:
22.6 shares issued and outstanding
at December 31, 1999 ............................ 22.6 --
Additional Paid-in Capital .......................... 431.9 --
Retained Earnings from February 8, 1999 ............. 23.8 --
Equity .............................................. -- 519.0
Accumulated Other Comprehensive Loss ................ (26.5) (14.5)
------ ------
Total Shareholders' Equity ........................ 451.8 504.5
------ ------
Total Liabilities and Shareholders' Equity ........ $759.5 $721.6
====== ======
See accompanying notes to the consolidated financial statements
25
ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Sales ......................................... $879.8 $862.8 $929.9
Operating Expenses:
Cost of Goods Sold .......................... 637.7 622.0 676.3
Selling and Administration .................. 163.8 167.6 153.5
Research and Development .................... 17.7 16.2 21.1
------ ------ ------
Operating Income .............................. 60.6 57.0 79.0
Equity in Earnings of Affiliated Companies .. 5.8 3.4 7.1
Interest Expense ............................ 5.7 0.6 0.9
Interest Income ............................. 0.8 1.0 1.0
------ ------ ------
Income Before Taxes and Extraordinary Gain .... 61.5 60.8 86.2
Income Taxes ................................ 20.8 20.8 29.9
------ ------ ------
Income Before Extraordinary Gain .............. 40.7 40.0 56.3
Extraordinary Gain (net of taxes of $0.9) ... 1.3 -- --
------ ------ ------
Net Income .................................... $ 42.0 $ 40.0 $ 56.3
====== ====== ======
PRO FORMA
UNAUDITED
------------------
Basic Income Per Share:
Before Extraordinary Gain ................... $ 1.77 $ 1.55 $ 2.26
Extraordinary Gain .......................... 0.06 -- --
------ ------ ------
Net Income .................................. $ 1.83 $ 1.55 $ 2.26
====== ====== ======
Diluted Income Per Share:
Before Extraordinary Gain ................... $ 1.76 $ 1.55 $ 2.26
Extraordinary Gain .......................... 0.06 -- --
------ ------ ------
Net Income .................................. $ 1.82 $ 1.55 $ 2.26
====== ====== ======
Weighted Average Common Stock
Outstanding--Basic .......................... 23.0 23.0 23.0
Weighted Average Common Stock
Outstanding--Diluted ........................ 23.1 23.0 23.0
See accompanying notes to the consolidated financial statements
26
ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
----- ----- -----
($ IN MILLIONS)
OPERATING ACTIVITIES:
Net Income .................................... $42.0 $40.0 $56.3
Adjustments to Reconcile Net Income to
Net Cash and Cash Equivalents
Provided (Used) by Operating Activities:
Earnings of Non-consolidated Affiliates ... (5.8) (3.4) (7.1)
Depreciation .............................. 49.3 43.1 43.6
Amortization of Intangibles ............... 4.1 4.0 3.8
Deferred Taxes ............................ 2.1 2.7 (5.2)
Change in Assets and Liabilities Net of
Purchases and Sales of Businesses:
Receivables ............................. (26.7) 19.9 (13.7)
Inventories ............................. (7.9) 0.2 (14.9)
Other Current Assets .................... (1.4) 1.4 0.7
Accounts Payable & Accrued Liabilities .. 7.4 (14.0) (8.4)
Noncurrent Liabilities .................. (5.2) (7.1) 17.4
Other Operating Activities .................... 0.8 (1.6) 11.0
----- ----- -----
Net Operating Activities .................... 58.7 85.2 83.5
----- ----- -----
INVESTING ACTIVITIES:
Capital Expenditures .......................... (58.9) (84.3) (71.0)
Business Acquired in Purchase Transaction ..... (8.0) -- --
Proceeds from Sales of Businesses ............. -- -- 12.0
Investments and Advances-Affiliated Companies
at Equity ................................... -- 0.1 (0.2)
Other Investing Activities .................... (0.1) (1.1) (0.2)
----- ----- -----
Net Investing Activities .................... (67.0) (85.3) (59.4)
----- ----- -----
FINANCING ACTIVITIES:
Long-Term Debt Assumed from Olin .............. 75.0 -- --
Long-Term Debt Borrowings (Repayments) ........ (3.4) 1.7 --
Short-Term Debt Borrowings (Repayments) ....... 20.5 (0.7) (0.2)
Dividends Paid ................................ (13.8) -- --
Purchases of Arch Common Stock ................ (6.7) -- --
Transfers to Olin ............................. (58.1) (2.2) (21.4)
Other Financing Activities .................... 0.3 -- --
----- ----- -----
Net Financing Activities .................... 13.8 (1.2) (21.6)
----- ----- -----
Effect of Exchange Rate Changes on Cash
and Cash Equivalents ...................... (0.5) (0.6) 1.0
----- ----- -----
Net Increase (Decrease) in Cash and
Cash Equivalents .......................... 5.0 (1.9) 3.5
Cash and Cash Equivalents, Beginning of Year .. 7.1 9.0 5.5
----- ----- -----
Cash and Cash Equivalents, End of Year ........ $12.1 $ 7.1 $ 9.0
===== ===== =====
CASH PAID DURING THE YEAR FOR:
Income Taxes, net ........................... $18.4 $ -- $ --
Interest .................................... $ 5.4 $ 0.5 $ 0.8
See accompanying notes to the consolidated financial statements
27
ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EQUITY PRIOR TO THE DISTRIBUTION)
EQUITY IN ACCUMULATED COMPRE-
COMMON STOCK ADDITIONAL EARNINGS OTHER HENSIVE
---------------- PAID-IN RETAINED PRIOR TO COMPREHENSIVE INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SHARES AMOUNT CAPITAL EARNINGS DISTRIBUTION LOSS (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ........................ -- -- -- -- $436.9 $(7.3) --
Net Intercompany Activity ........................... -- -- -- -- (21.4) -- --
Net Income .......................................... -- -- -- -- 56.3 -- $56.3
Other Comprehensive Loss ............................ -- -- -- -- -- (8.9) (8.9)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ........................ -- -- -- -- 471.8 (16.2) 47.4
----
Net Intercompany Activity ........................... -- -- -- -- 7.2 -- --
Net Income .......................................... -- -- -- -- 40.0 -- 40.0
Other Comprehensive Income .......................... -- -- -- -- -- 1.7 1.7
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 ........................ -- -- -- -- 519.0 (14.5) 41.7
----
Net Intercompany Activity ........................... -- -- -- -- (62.6) -- --
Net Income Prior to the Distribution ................ -- -- -- -- 4.4 -- 4.4
Capitalization of Divisional Equity ................. 23.0 $23.0 $437.8 -- (460.8) -- --
Net Income Subsequent to the Distribution ........... -- -- -- $37.6 -- -- 37.6
Other Comprehensive Loss ............................ -- -- -- -- -- (12.0) (12.0)
Stock Options Exercised ............................. -- -- 0.4 -- -- -- --
Stock Repurchase .................................... (0.4) (0.4) (6.3) -- -- -- --
Dividends Paid ($0.60 per share in 1999) ............ -- -- -- (13.8) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ........................ 22.6 $22.6 $431.9 $23.8 $ -- $(26.5) $30.0
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
28
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF ARCH CHEMICALS, INC.
Arch Chemicals, Inc. ("Arch" or the "Company") was organized under the laws
of the Commonwealth of Virginia on August 25, 1998 as a wholly-owned subsidiary
of Olin Corporation ("Olin") for the purpose of effecting the distribution of
Olin's Specialty Chemical Businesses ("Distribution") to the shareholders of
Olin. The Company is a specialty chemicals manufacturer which supplies
value-added products and services to several industries on a worldwide basis,
including the consumer products and semiconductor industries. The principal
businesses in which the Company competes are microelectronic chemicals, water
chemicals and performance chemicals.
Prior to the Distribution, the Company operated the Specialty Chemicals
Division of Olin. The Company has organized its segments around differences in
products and services, which is how the Company manages its business.
The microelectronic chemicals segment supplies a range of products and
services to semiconductor manufacturers and flat panel display manufacturers.
These include a variety of high purity acids, bases, oxidizers, etchants,
solvents, photoresists, polyimides and ancillary products. The water chemicals
segment manufactures and sells chemicals and distributes equipment for the
sanitization and recreational use of residential and commercial pool water and
the purification of potable water. The performance chemicals segment
manufactures and sells a broad range of products with diverse end uses.
Performance chemicals are characterized by technology-driven product solutions
that benefit specific customers and provide manufacturing flexibility. The
products include flexible and specialty polyols, glycols, glycol ethers,
pyrithione-based and IPBC-based biocides, hydrazine hydrates, propellants and
virgin and regenerated sulfuric acid.
Olin and the Company entered into a Tax Sharing Agreement that provides
that Olin is responsible for the Federal tax liability of the Company for each
year that the Company and its subsidiaries were included in Olin's consolidated
Federal income tax return, and for state, local and foreign taxes of the Company
and its subsidiaries attributable to periods prior to the Distribution, in each
case including tax subsequently assessed pursuant to the audit of, or other
adjustment to, previously filed tax returns.
Olin and the Company entered into a Chlor-Alkali Supply Agreement that
provides for the supply by Olin of chlorine and caustic soda. Under the terms of
the agreement, Olin will supply all the Company's requirements for chlorine and
caustic soda for a five-year period ending in 2003, with extensions unless
cancelled on two years' prior notice by either party. Purchases of
electrochemical units of chlorine and caustic soda will be at a fixed price.
BASIS OF PRESENTATION
The preparation of the Consolidated Financial Statements requires estimates
and assumptions that affect amounts reported and disclosed in the Consolidated
Financial Statements and related Notes. Actual results could differ from those
estimates.
The accompanying Consolidated Financial Statements, which have been
prepared as if the Company had operated as a separate stand-alone entity for all
periods presented except as discussed in the following paragraph, include only
those assets, liabilities, revenues and expenses attributable to the Company's
operations. The Consolidated Financial Statements include the accounts of the
Company and certain majority-owned subsidiaries. Intercompany balances and
transactions between entities included in these Consolidated Financial
Statements have been eliminated. Investments in 20-50% owned affiliates are
accounted for on the equity method.
The Consolidated Financial Statements prior to the Distribution do not
include an allocation of Olin's consolidated debt and interest expense nor do
they reflect the $75 of debt assumed by the Company from Olin on February 8,
1999. For 1998 and 1997, an assessment of corporate overhead is included in
selling and administration expenses with the allocation based on either effort
committed or number of employees. Management believes that the allocation
methods used to allocate the costs and expenses are reasonable, however, such
allocated amounts may or may not necessarily be indicative of what selling and
administration expenses would have been if the Company operated independently of
Olin.
29
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value.
Certain inventories are valued by the dollar value last-in, first-out (LIFO)
method of inventory accounting. Costs for other inventories have been determined
principally by the first-in, first-out (FIFO) method. Elements of costs in
inventories include raw materials, direct labor and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
computed on a straight-line basis over the following estimated useful lives:
Improvements to land ................................ 10 to 20 years
Buildings and building equipment .................... 10 to 25 years
Machinery and equipment ............................. 3 to 12 years
Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less. Start-up costs are
expensed as incurred.
GOODWILL AND OTHER INTANGIBLES
Goodwill, the excess of the purchase price of the acquired businesses over
the fair value of the respective net assets, is amortized principally over 30
years on a straight-line basis. Other intangibles, which consist primarily of
patents, trademarks, non-compete agreements, and various technology licensing
agreements, are amortized on a straight-line basis principally over 3 to 15
years. Accumulated amortization was $39.2 and $35.3 at December 31, 1999 and
1998, respectively.
VALUATION OF ASSETS
The impairment of tangible and intangible assets is assessed when changes
in circumstances indicate that their current carrying value may not be
recoverable. Under SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," a determination of
impairment, if any, is made based on the undiscounted value of estimated future
cash flows, salvage value or expected net sales proceeds, depending on the
circumstances. The Company periodically reviews the value of its goodwill to
determine if any impairment has occurred. It is the Company's policy to record
asset impairment losses, and any subsequent adjustments to such losses as
initially recorded, as well as net gains or losses on sales of assets as a
component of operating income when the estimated fair value exceeds the carrying
value of such assets. Under Accounting Principles Board Opinion No. 17,
"Intangible Assets," the Company also periodically evaluates the future period
over which the benefit of goodwill will be received, based on the undiscounted
value of future cash flows, and records an impairment if necessary based on the
undiscounted value of estimated future cash flows.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based upon current law and existing technologies. These amounts,
which are not discounted and are exclusive of claims against third parties, are
adjusted periodically as assessment and remediation efforts progress or
additional technical or legal information becomes available. Environmental
30
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
remediation costs are charged to expense. Environmental costs are capitalized if
the costs increase the value of the property and/or mitigate or prevent
contamination from future operations.
FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable, and short-term borrowings approximated fair values due to the
short-term maturities of these instruments. The fair value of the Company's
long-term debt was determined based on current market rates for debt of the same
risk and maturity. The fair values of currency forward and option contracts were
estimated based on quoted market prices for contracts with similar terms.
REVENUE RECOGNITION
Revenues are principally recognized when services are rendered or products
are delivered to customers.
U.S. GOVERNMENT CONTRACTS
The Company had entered into a contract with the United States Department
of the Air Force to supply hydrazine-based propellant. It was a one-year
contract with four one-year renewal options beginning January 1, 1995, which
expired on December 31, 1999. The Company is currently in the process of
renegotiating this contract and has received an extension of the contract until
June 30, 2000. The new contract is expected to be a three-year contract with two
one-year renewal options. Negotiations are expected to be completed during the
first half of 2000. The current contract consists of a fixed price facility
management fee and a product purchase arrangement whereby the Company supplies
product at a fixed price per pound of product adjusted annually for agreed-upon
cost escalations. In 1999, 1998 and 1997 the Company's performance chemicals
segment sales include $17.3, $17.6 and $20.2, related to this agreement.
FOREIGN CURRENCY TRANSLATION
Foreign affiliate balance sheet amounts are translated at the exchange
rates in effect at year-end, and income statement and cash flow amounts are
translated at the average rates of exchange prevailing during the year.
Translation adjustments are included in the accumulated other comprehensive loss
component of shareholders' equity. Where foreign affiliates operate in highly
inflationary economies non-monetary amounts are translated at historical
exchange rates while monetary assets and liabilities are translated at the
current rate with the related adjustments reflected in the Consolidated
Statements of Income.
STOCK OPTIONS
The Company accounts for stock-based compensation under Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation." As allowed under SFAS No. 123, the Company has chosen to account
for stock-based compensation cost in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Pro forma
information regarding net income and earnings per share, as calculated under the
provisions of SFAS No. 123, is disclosed in Note 6.
INCOME TAXES
The Company provides for deferred taxes on temporary differences between
the financial statement and tax bases of assets using the enacted tax rates,
which are expected to apply to taxable income when the temporary differences are
expected to reverse.
Prior to the Distribution, the Company's operations were included in the
U.S. Federal consolidated tax returns of Olin. The provision for income taxes
prior to the Distribution, includes the Company's allocated share of Olin's
consolidated income tax provision and is calculated on a separate company basis
consistent with the requirements of
31
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
SFAS No. 109, "Accounting for Income Taxes." Allocated income taxes payable were
settled with Olin on a current basis.
EARNINGS PER COMMON SHARE
All earnings per share computations and presentations are in accordance
with SFAS No. 128, "Earnings Per Share." Basic earnings per common share is
computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per common share is calculated in a similar manner except that the
weighted-average number of common shares outstanding during the period includes
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised. The number of shares included for the
potential issuance of common shares was 0.1 million in 1999. Performance Shares
are not presently included in the calculation of diluted earnings per share, but
may potentially dilute earnings per share in the future.
COMPREHENSIVE INCOME (LOSS)
The Company's other comprehensive income (loss) consists solely of foreign
currency translation gains and losses. The Company does not provide for U.S.
income taxes on foreign currency translation adjustments since it does not
provide for such taxes on undistributed earnings of foreign subsidiaries.
EMPLOYEE BENEFIT PLANS
Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of employees
expected to receive benefits. Curtailment gains and losses are recognized when
they occur. Settlement gains and losses are recognized when significant pension
obligations are settled and the gain or loss is determinable.
2. ADDITIONAL BALANCE SHEET INFORMATION
TRADE RECEIVABLES
Allowance for doubtful accounts was $5.7 and $6.7 at December 31, 1999 and
1998, respectively. Provision for doubtful accounts charged to operations was
$1.2, $1.4 and $1.3 in 1999, 1998, and 1997, respectively. Bad debt write-offs,
net of recoveries, amounted to $2.2, $0 and $0.3 in 1999, 1998, and 1997,
respectively.
INVENTORIES
DECEMBER 31,
------------------
1999 1998
------ ------
Raw materials and supplies ........................ $ 54.9 $ 55.4
Work-in-progress .................................. 13.4 14.2
Finished goods .................................... 129.0 121.7
------ ------
Inventories, gross ................................ 197.3 191.3
LIFO reserves ..................................... (50.0) (52.0)
------ ------
Inventories, net .................................. $147.3 $139.3
====== ======
Inventory valued using the LIFO method comprised 59% of the total inventory
at December 31, 1999 and 65% at December 31, 1998. Gross inventory values
approximate replacement cost.
32
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------
1999 1998
------ ------
Land and improvements to land .................... $ 28.5 $ 34.0
Buildings and building equipment ................. 124.0 117.7
Machinery and equipment .......................... 659.2 624.3
Leasehold improvements ........................... 3.1 4.4
Construction-in-progress ......................... 61.9 81.6
------ ------
Property, plant and equipment .................... 876.7 862.0
Less accumulated depreciation .................... 550.0 530.4
------ ------
Property, plant and equipment, net ............... $326.7 $331.6
====== ======
Leased assets capitalized and included in the previous table are not
significant. Maintenance and repairs charged to operations amounted to $35.1,
$33.7, and $37.9 in 1999, 1998, and 1997, respectively.
ACCRUED AND OTHER NON-CURRENT LIABILITIES
Included in accrued liabilities are the following items:
DECEMBER 31,
------------------
1999 1998
------ ------
Deferred income .................................. $ 9.3 $ 9.6
Accrued compensation ............................. 11.0 10.3
Other ............................................ 36.8 39.1
------ ------
Total accrued liabilities ...................... $ 57.1 $ 59.0
====== ======
Included in other non-current liabilities are the following items:
DECEMBER 31,
------------------
1999 1998
------ ------
Deferred income .................................. $ 1.6 $ 12.8
Other ............................................ 43.1 30.7
------ ------
Total other non-current liabilities ............ $ 44.7 $ 43.5
====== ======
Deferred income relates primarily to a $30 payment under a three-year
supply agreement expiring on December 31, 2000, unless extended, entered into in
connection with the sale of the surfactants business to BASF in November 1997.
Sales and operating income for the years ending December 31, 1999 and 1998
include $9.5, related to the amortization of the deferred income under such
supply agreement (see Note 10).
3. DEBT
On January 27, 1999, Olin obtained an unsecured $125 revolving five-year
credit facility ("Five-year Facility"), which expires in January 2004 and an
unsecured $125 364-day facility ("364-day Facility"), which expired in January
2000, was subsequently renewed by the Company under the same terms, and now
expires in January 2001 (collectively the "Credit Facility"). Olin borrowed $75
under the Credit Facility. On February 8, 1999, the Company succeeded to the
Credit Facility and assumed the $75 of debt.
The Credit Facility contains leverage and interest coverage ratio
covenants, and restricts the payment of dividends in excess of 50% of cumulative
net income under certain circumstances. Fees are payable on the Credit Facility
and range from 0.125% to 0.30%. The Company may select various floating rate
borrowing options, including but not limited to LIBOR plus 0.325% to 1.00% and
Prime. The weighted average interest rate for the year ended December 31, 1999
was 6.6%. At December 31, 1999, borrowings under the Credit Facility were $90.0
of which $75.0 was classified as long-term, and the effective interest rate was
7.4%.
33
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
In addition, at December 31, 1999 the Company had $1.8 of long-term
borrowings outstanding floating with LIBOR.
At December 31, 1999, Arch also had approximately $30 of uncommitted
short-term lines of credit available under which $5.4 was outstanding at an
interest rate of 6.2%.
The fair value of the Company's long-term debt was $76.8 at December 31,
1999 and $5.1 at December 31, 1998.
4. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward sales and purchase contracts and currency
options to manage currency risk resulting from purchase and sale commitments
denominated in foreign currencies (principally euro, Canadian dollar and
Japanese yen) and relating to particular anticipated but not yet committed
purchases and sales expected to be denominated in those currencies. All of the
currency derivatives expire within one year and are for United States dollar
equivalents. At December 31, 1999, the Company had forward contracts to sell
foreign currencies with face values of $0.9 (1998-$5.3) and forward contracts to
buy foreign currencies with face values of $2.3 (1998-$3.1). The fair market
values of these forward contracts approximated face values at December 31, 1999
and 1998. At December 31, 1999, the Company had no outstanding option contracts
to sell or buy foreign currencies. The counterparties to the contracts and
options are major financial institutions. The risk of loss to the Company in the
event of nonperformance by a counterparty is not significant. The Company does
not use financial instruments for speculative or trading purposes nor is the
Company a party to leveraged derivatives.
In accordance with Statement of Accounting Standards No. 52 ("SFAS No.
52"), "Foreign Currency Translation," a transaction is classified as a hedge
when the foreign currency transaction is designated as, and is effective as, a
hedge of a foreign currency commitment and the foreign currency commitment is
firm. A hedge is considered by the Company to be effective when the transaction
reduces the currency risk on its foreign currency commitments. If a transaction
does not meet the criteria to qualify as a hedge, it is considered to be
speculative. For a foreign currency commitment that is classified as a hedge,
any gain or loss on the commitment is deferred and included in the basis of the
underlying transaction. Any realized and unrealized gains or losses associated
with foreign currency commitments that are classified as speculative are
recognized in the current period and are included in selling and administration
in the Consolidated Statements of Income. If a foreign currency transaction
previously considered as a hedge is terminated before the transaction date of
the related commitment, any deferred gain or loss shall continue to be deferred
and included in the basis of the underlying transaction. Premiums paid for
currency options and gains or losses on forward sales and purchase contracts are
not material to operating results.
Foreign currency exchange gains, net of taxes, were $0.2 in 1999, $0.7 in
1998, and $0.5 in 1997.
5. INCOME TAXES
COMPONENTS OF PRETAX INCOME
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
----- ----- -----
Domestic ................................ $45.1 $39.7 $64.4
Foreign ................................. 16.4 21.1 21.8
----- ----- -----
Pretax income ........................... $61.5 $60.8 $86.2
===== ===== =====
COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)
Currently payable:
Federal ............................... $ 7.3 $ 7.5 $20.5
State ................................. 1.9 3.0 6.8
Foreign ............................... 5.0 7.6 7.8
Deferred ................................ 6.6 2.7 (5.2)
----- ----- -----
Income tax expense ...................... $20.8 $20.8 $29.9
===== ===== =====
34
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 35% to the income before taxes.
EFFECTIVE TAX RATE RECONCILIATION (PERCENT)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
----- ----- -----
Statutory federal tax rate .............. 35.0 35.0 35.0
Foreign income tax ...................... (3.7) (6.6) (3.5)
State income taxes, net ................. 3.0 3.6 4.2
Goodwill ................................ 0.8 1.0 0.7
Equity in net income of affiliates ...... (3.2) (0.6) (1.5)
Other, net .............................. 1.9 1.8 (0.2)
----- ----- -----
Effective tax rate ...................... 33.8 34.2 34.7
===== ===== =====
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
DECEMBER 31,
------------------
1999 1998
------ ------
Deferred tax assets:
Postretirement benefits ........................ $ 8.7 $ 7.0
Non-deductible reserves ........................ 18.1 21.9
Other miscellaneous items ...................... 6.6 3.7
------ ------
Total deferred tax assets ................... 33.4 32.6
------ ------
Deferred tax liabilities:
Property, plant and equipment .................. 19.3 12.7
Other miscellaneous items ...................... 2.2 1.4
------ ------
Total deferred tax liabilities .............. 21.5 14.1
------ ------
Net deferred tax asset ........................... $ 11.9 $ 18.5
====== ======
Included in Other Current Assets at December 31, 1999 and 1998,
respectively, are $19.2 and $19.5 of net current deferred tax assets. Included
in Other Long-Term Liabilities at December 31, 1999 and 1998, respectively, are
$7.3 and $1.0 of net long-term deferred tax liabilities. Taxable income is
expected to be sufficient to recover the net benefit within the period in which
these differences are expected to reverse and, therefore, no valuation allowance
was established.
The Company provides for deferred taxes on temporary differences between
the financial statement and tax bases of assets using the enacted tax rates that
are expected to apply to taxable income when the temporary differences are
expected to reverse. At December 31, 1999, the Company's share of the cumulative
undistributed earnings of foreign subsidiaries was approximately $84. No
provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries since the Company intends to
continue to reinvest these earnings. Foreign tax credits would be available to
substantially reduce or eliminate any amount of additional U.S. tax that might
be payable on these foreign earnings in the event of distributions or sale.
6. STOCK OPTION AND SHAREHOLDER RIGHTS PLAN
STOCK OPTION PLAN
At the time of the Distribution, stock options issued by Olin were
converted into both an option to purchase Company common stock ("Company
Options") and an option to purchase Olin common stock ("New Olin Options") with
the same aggregate "intrinsic value" at the time of the Distribution as the old
award. The conversion of the options did not result in a charge to earnings as
no new measurement date was created. The Company is
35
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
responsible for delivering shares of Company common stock upon exercise of
Company Options, and Olin is responsible for the delivery of shares of Olin
Common stock upon exercise of New Olin Options. Options granted under the Olin
1980 Stock Option Plan to Olin employees who became Company employees upon the
Distribution will terminate upon the earlier of (i) the end of their term or
(ii) two years following the Distribution. Options granted to such employees
under the Olin 1988 Stock Option Plan or the Olin 1996 Stock Option Plan will
retain the original term of the option. Options granted to such employees under
the Olin 1996 Stock Option Plan, which were not vested at the time of the
Distribution, will continue to vest in accordance with their vesting schedule so
long as the optionee remains employed at the Company.
The Company has adopted a long-term incentive plan to encourage selected
salaried employees to acquire a proprietary interest in the Company's growth and
performance and to attract and retain qualified individuals. The plan will
provide for the ability to issue stock options, restricted stock and restricted
stock units, and performance awards.
On February 9, 1999, the Company granted to certain employees approximately
968,000 options to purchase common stock at an exercise price of $19.41 (fair
market value of the common stock on the grant date). In addition, the Company
granted to certain employees approximately 245,000 performance share units. All
these grants were made under the Company's 1999 Long Term Incentive Plan. The
options vest and become exercisable at the end of a three-year period and are
exercisable up to ten years from the date of grant. The performance share units
will vest if certain performance measures are met at the end of a three-year
performance period and upon vesting are paid out in shares of common stock.
Units may be paid out in shares on a basis of up to 1.5 shares for every unit
depending on the Company's performance.
The following table summarizes stock option activity during 1999 (number of
options in thousands):
STOCK AVERAGE
OPTIONS PRICE RANGE OF PRICES
----- ------ -------------
Olin stock options converted
as of the Distribution ............... 1,557 $26.84 $15.68-$34.88
Options granted .................... 1,032 19.51 19.41-22.72
Options exercised .................. 34 19.38 19.38
Options cancelled or forfeited ..... 181 23.82 19.38-34.88
----- ------ -------------
Balance, December 31, 1999 ............. 2,374 $23.99 $15.68-$31.92
===== ====== =============
At December 31, 1999, options covering 1,100,061 shares were currently
exercisable at a weighted average exercise price of $25.89. The average
remaining contractual life was approximately seven years.
Pursuant to APB No. 25, compensation cost is recorded when the fair market
value of the Company's stock at the date of grant for fixed options exceeds the
exercise price of the stock option. Olin's policy was, and Arch's policy is, to
grant stock options with an exercise price equal to its common stock fair value
on the date of grant. Accordingly, there are no charges reflected herein for
stock options granted to employees. Compensation cost for restricted stock
awards is accrued over the life of the award based on the quoted market price of
the Company's stock at the date of the award. Compensation cost for performance
share units is estimated based on the number of shares to be earned. The
ultimate cost will be based on the market price of the Company's stock at the
settlement date. Prior to the Distribution, certain employees of the Company
received restricted stock unit awards under Olin's stock-based compensation
plans. The cost associated with the employees participating in these plans is
included in the Consolidated Statements of Income and is not material to
operating results.
Pro forma net income was calculated based on the following assumptions as
if the Company had recorded compensation expense for the Olin stock options
granted to those employees of the Specialty Chemicals business since 1996. The
fair value of each Olin option granted during 1998 and 1997 was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used: dividend yield of 3.2% in 1998 and 2.8% in
1997, risk free interest rate of 5.5% in 1998 and 1997, expected volatility of
27% in 1998, and 21% in 1997 and an expected life of 7 years. The fair value of
each Arch option granted during 1999 was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
36
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
assumptions used: dividend yield of 4.2%, risk free interest rate of 6.25%,
expected volatility of 40% and an expected life of 7 years. Pro forma net income
as if the Company had recorded compensation expense for the Arch and Olin stock
options granted was $40.7, $39.5, and $55.6 in 1999, 1998 and 1997,
respectively. Pro forma earnings per share in 1999 would have been $1.76 per
share.
The 1998 and 1997 pro forma amounts are not necessarily representative of
the effects of stock-based awards on future pro forma net income because (1)
future grants of employee stock options to Arch management may not be comparable
to awards made to employees while Arch was a part of Olin and (2) the
assumptions used to compute the fair value of any stock option awards may not be
comparable to the Olin assumptions used.
SHAREHOLDER RIGHTS PLAN
The Company has adopted a Shareholder Rights Plan, which is designed to
prevent an acquiror from gaining control of the Company without offering a fair
price to all shareholders.
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS AND RETIREMENT BENEFITS
Effective February 8, 1999, the Company established the Arch pension
benefit plan, a defined benefit pension plan covering virtually all U.S.
employees. Prior to the Distribution, these employees were participants in one
of several Olin pension benefit plans covering employees of other Olin
businesses. The Arch pension benefit plan provides benefits based on service
with Olin and with the Company. The Company is liable for the payment of all
pension plan benefits earned by Company employees prior to and following the
Distribution who retire after the Distribution. Olin transferred assets to the
Company's pension plan. The amount of the assets transferred was calculated in
accordance with Section 4044 of the Employee Retirement Income Security Act of
1974, as amended. The assets of the Arch plan consist primarily of investments
in commingled funds administered by independent investment advisors.
Olin is liable for postretirement medical and death benefits provided to
former employees of the Company who retired prior to the Distribution.
Subsequent to the Distribution, the Company adopted a retiree medical and death
benefits plan, that largely replicated the Olin retiree medical and death
benefit program. The Company is liable for the payment of all retiree medical
and death benefits earned by Company employees prior to and following the
Distribution who retire. The Olin plan was an unfunded plan; therefore, no
assets were transferred.
The following tables provide a reconciliation of the changes in the plans'
projected benefit obligations, fair value of plan assets, funded status, certain
assumptions and components of net periodic pension expense of the Arch
retirement plan, which prior to the Distribution represents Arch's portion of
Olin's pension benefit plans, and are reflected in the Consolidated Financial
Statements.
37
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------- --------------------------------
1999 1998 1999 1998
------ ------ ------ ------
RECONCILIATION OF PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at beginning of year .... $107.1 $ 81.0 $ 8.2 $ 6.4
Service cost (benefits earned during the period) ..... 6.1 5.0 0.6 0.7
Interest cost on the projected benefit obligation .... 7.6 6.6 0.5 0.5
Plan amendments ...................................... -- 1.8 -- --
Actuarial (gain)/loss ................................ (16.8) 12.7 (1.4) 0.6
Benefits paid ........................................ (0.3) -- -- --
------ ------ ------ ------
Projected benefit obligation at end of year .......... $103.7 $107.1 $ 7.9 $ 8.2
====== ====== ====== ======
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at beginning of year ....... $ 87.0 $ 73.4
Adjustment to fair value of plan assets .............. 27.0 --
Benefits paid ........................................ (0.3) --
Actual return on plan assets (net of expenses) ....... 13.4 13.6
------ ------
Fair value of plan assets at end of year ............. $127.1 $ 87.0
====== ======
FUNDED STATUS ........................................ $ 23.4 $(20.1) $ (7.9) $ (8.2)
Unrecognized net actuarial loss/(gain) ............... (41.3) 5.5 0.2 1.6
Unamortized prior service cost ....................... 4.1 4.8 (0.4) (0.5)
Unrecognized transition asset ........................ (0.5) (1.0) -- --
------ ------ ------ ------
Accrued benefit cost ................................. $(14.3) $(10.8) $ (8.1) $ (7.1)
====== ====== ====== ======
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
WEIGHTED AVERAGE RATE ASSUMPTIONS:
Discount rate ........................................ 8.00% 7.00% 7.25% 8.00% 7.00% 7.25%
Rate of compensation increase ........................ 4.60% 4.50% 4.50% -- -- --
Long-term rate of return on assets ................... 9.50% 9.50% 9.50% -- -- --
NET PERIODIC BENEFIT EXPENSE:
Service cost (benefits earned during the period) ..... $ 6.1 $ 5.0 $ 6.1 $ 0.6 $ 0.7 $ 0.4
Interest cost on the projected benefit obligation .... 7.6 6.6 4.6 0.5 0.5 0.4
Expected return on plan assets ....................... (10.1) (7.0) (5.8) -- -- --
Amortization of prior service cost ................... 0.7 0.8 0.7 (0.1) (0.1) (0.1)
Amortization of transition obligation ................ (0.5) (0.5) (0.5) -- -- --
Recognized actuarial (gain)/loss ..................... (0.2) 0.1 -- -- -- --
------ ------ ------ ------ ------ ------
Net periodic benefit cost ............................ $ 3.6 $ 5.0 $ 5.1 $ 1.0 $ 1.1 $ 0.7
====== ====== ====== ====== ====== ======
The accumulated benefit obligation relating to the Company's unfunded
pension plans was $3.6 and $4.1, as of December 31, 1999 and 1998, respectively.
For measurement purposes, the assumed health care cost trend rate was 5.7%
for HMO plans and 7.25% for non-HMO plans in 1999, which reduce ratably to 4.5%
for the HMO plans and 5% for the non-HMO plans in the years 2003 and 2002,
respectively. The assumed health care cost trend rate assumptions can have a
significant impact on the amounts reported. A one percent increase or decrease
each year in the health care cost trend rate utilized would have resulted in a
$0.1 increase or decrease, respectively, in the aggregate service and interest
cost components of expense for the year 1999, and a $0.4 increase or decrease,
respectively, in the accumulated postretirement benefit obligation at December
31, 1999.
The Company's foreign subsidiaries maintain pension and other benefit plans
that are consistent with statutory practices and are not significant.
38
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
CONTRIBUTING EMPLOYEE OWNERSHIP PLAN
Prior to the Distribution, Company employees participated in the Olin
Corporation Contributing Employee Ownership Plan ("Olin CEOP"), which is a
defined contribution plan available to essentially all domestic Olin employees
and provides a match of employee contributions. Subsequent to the Distribution,
the Olin CEOP was converted into a multiple employer plan in which both Olin and
the Company participate. The matching contribution allocable to the Company
employees has been included in costs and expenses in the accompanying
Consolidated Statements of Income and was $3.4, $3.6, and $3.1 in 1999, 1998 and
1997, respectively.
8. SHAREHOLDERS' EQUITY
On February 8, 1999, Olin, the sole shareholder of the Company, distributed
(on a 1-for-2 basis) all the issued and outstanding shares of common stock, par
value $1 per share, of the Company, to the shareholders of record of Olin's
common stock as of February 1, 1999, upon which the Company became a separate,
independent company. The total shares distributed was approximately 22,980,000.
9. SEGMENT REPORTING
Segment results for the periods ended December 31 were as follows:
1999 1998 1997
------ ------ ------
SALES:
Microelectronic Chemicals ................ $214.8 $227.6 $242.6
Water Chemicals .......................... 326.8 290.3 286.9
Performance Chemicals .................... 338.2 344.9 400.4
------ ------ ------
TOTAL SALES ................................... $879.8 $862.8 $929.9
====== ====== ======
OPERATING INCOME (LOSS), INCLUDING
EQUITY INCOME IN AFFILIATED COMPANIES:
Microelectronic Chemicals ................ $ (3.0) $ (4.1) $ 9.5
Water Chemicals .......................... 26.3 13.8 26.5
Performance Chemicals .................... 45.4 50.7 50.1
------ ------ ------
TOTAL OPERATING INCOME, INCLUDING
EQUITY INCOME IN AFFILIATED COMPANIES
BEFORE NONRECURRING EXPENSES ................ 68.7 60.4 86.1
NONRECURRING EXPENSES ....................... (2.3) -- --
------ ------ ------
TOTAL OPERATING INCOME, INCLUDING
EQUITY INCOME IN AFFILIATED COMPANIES ....... $ 66.4 $ 60.4 $ 86.1
====== ====== ======
EQUITY INCOME IN AFFILIATED COMPANIES:
Microelectronic Chemicals ................ $ 2.7 $ 0.9 $ 4.5
Water Chemicals .......................... 3.1 2.5 2.6
------ ------ ------
TOTAL EQUITY INCOME IN AFFILIATED COMPANIES ... $ 5.8 $ 3.4 $ 7.1
====== ====== ======
DEPRECIATION EXPENSE:
Microelectronic Chemicals ................ $ 18.5 $ 14.3 $ 13.1
Water Chemicals .......................... 12.0 11.7 10.4
Performance Chemicals .................... 18.8 17.1 20.1
------ ------ ------
TOTAL DEPRECIATION EXPENSE .................... $ 49.3 $ 43.1 $ 43.6
====== ====== ======
AMORTIZATION EXPENSE:
Microelectronic Chemicals ................ $ 3.9 $ 3.9 $ 3.7
Water Chemicals .......................... 0.1 0.1 0.1
Performance Chemicals .................... 0.1 -- --
------ ------ ------
TOTAL AMORTIZATION EXPENSE .................... $ 4.1 $ 4.0 $ 3.8
====== ====== ======
CAPITAL SPENDING:
Microelectronic Chemicals ................ $ 14.8 $ 43.3 $ 39.8
Water Chemicals .......................... 12.2 10.1 16.2
Performance Chemicals .................... 31.9 30.9 15.0
------ ------ ------
TOTAL CAPITAL SPENDING ........................ $ 58.9 $ 84.3 $ 71.0
====== ====== ======
39
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
1999 1998 1997
------ ------ ------
TOTAL ASSETS:
Microelectronic Chemicals ............... $304.5 $309.6 $286.5
Water Chemicals ......................... 180.9 166.4 182.1
Performance Chemicals ................... 283.1 251.0 235.3
Other ................................... (9.0) (5.4) (10.7)
------ ------ ------
TOTAL ASSETS ................................. $759.5 $721.6 $693.2
====== ====== ======
INVESTMENT & ADVANCES--
AFFILIATED COMPANIES AT EQUITY:
Microelectronic Chemicals ............... $ 11.2 $ 9.2 $ 10.0
Water Chemicals ......................... 9.6 11.9 11.1
------ ------ ------
TOTAL INVESTMENT & ADVANCES--
AFFILIATED COMPANIES AT EQUITY ............. $ 20.8 $ 21.1 $ 21.1
====== ====== ======
Segment operating income includes the equity in the earnings of investees
accounted for by the equity method and does not include interest income,
interest expense or extraordinary items. Segment operating income includes an
allocation of corporate charges based on various allocation bases. Segment
assets include only those assets that are directly identifiable to a segment and
do not include such items as cash, deferred taxes, LIFO reserves, and other
assets. Sales by segment substantially represent sales for the three major
product lines of the Company.
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
SALES
United States .......................... $647.9 $646.2 $719.8
Foreign ................................ 231.9 216.6 210.1
Transfers between areas:
United States .......................... 69.7 57.6 68.9
Foreign ................................ 2.1 1.7 1.9
Eliminations ........................... (71.8) (59.3) (70.8)
------ ------ ------
Total Sales ......................... $879.8 $862.8 $929.9
====== ====== ======
DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
TOTAL ASSETS
United States .......................... $569.9 $560.1 $503.9
Foreign ................................ 218.9 243.7 234.1
Investments ............................ 11.2 9.5 10.5
Eliminations ........................... (40.5) (91.7) (55.3)
------ ------ ------
Total Assets ........................ $759.5 $721.6 $693.2
====== ====== ======
Transfers between geographic areas are priced generally at prevailing
market prices. Export sales from the United States to unaffiliated customers
(included in United States sales above) were $63.1, $63.9 and $93.6 in 1999,
1998, and 1997, respectively.
10. ACQUISITIONS AND DISPOSITIONS
ACQUISITION
In September 1999, the Company purchased the Hydroquinone Di
(Beta-hydroxyethyl) Ether ("HQEE") specialty chemicals business of Eastman
Chemical Company. This acquisition was accounted for as a purchase and
40
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
the results of operations have been included in the Consolidated Financial
Statements from the date of purchase and were not material in 1999. The related
goodwill is being amortized over 20 years.
Supplemental cash flow information on the business acquired is as follows:
YEAR ENDED
DECEMBER 31, 1999
-----------------
Working capital ....................................... $ 0.1
Property, plant and equipment ......................... 0.2
Other assets .......................................... 3.3
Goodwill .............................................. 4.4
-----
Cash paid for acquisition ............................. $ 8.0
=====
DISPOSITION
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 for the sale of its performance chemicals' surfactants
business and a three-year supply agreement. Of the proceeds received, $12 was
allocated to the sale of the surfactants business based on the fair value of
such business and $30 was allocated to the supply agreement. No gain or loss was
recorded on the sale. In the supply agreement, the Company agreed to reserve
production capacity for surfactants products at its Brandenburg, Kentucky
facility and to supply BASF with such products in exchange for a $30 payment
made at the time of signing the agreement plus recovery of all fixed and
variable costs during the term of the agreement. The agreement expires on
December 31, 2000 unless extended; the Company does not believe it will be
extended. The $30 payment was recorded as deferred income and is being amortized
ratably into operating income over the three-year period. Unless the supply
agreement is extended beyond 2000, which the Company does not expect to happen,
no future income will be realized with respect to this supply agreement after
December 31, 2000.
Supplemental cash flow information on the business sold is as follows:
YEAR ENDED
DECEMBER 31, 1997
-----------------
Proceeds .............................................. $12.0
Working capital ....................................... (9.0)
Property, plant and equipment ......................... --
Other assets .......................................... (0.2)
Other liabilities ..................................... (2.8)
-----
Gain on disposition of business ....................... $ --
=====
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain properties, such as manufacturing, warehousing
and office space and data processing and office equipment. Leases covering these
properties generally contain escalation clauses based on increased costs of the
lessor, primarily property taxes, maintenance and insurance and have renewal or
purchase options. Total rent expense charged to operations amounted to $27.7 in
1999, $19.8 in 1998, and $19.2 in 1997 (sublease income is not significant).
Future minimum rent payments under operating leases having initial or
remaining noncancelable lease terms in excess of one year at December 31, 1999
are as follows: $6.6 in 2000; $5.5 in 2001; $4.2 in 2002; $3.6 in 2003; $3.5 in
2004; and $1.2 thereafter.
There are a variety of non-environmental legal proceedings pending or
threatened against the Company. Those matters that are probable have been
accrued for in the accompanying Consolidated Financial Statements. Any
contingent amounts in excess of amounts accrued are not expected to have a
material adverse effect on annual results of operations, financial position or
liquidity of the Company.
41
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
ENVIRONMENTAL
Olin and the Company have entered into an agreement, which specifies that
the Company is only responsible for environmental liabilities at the Company's
current operating plant sites and certain offsite locations. Olin retained the
liability for all former plant sites and former waste disposal sites. In 1997,
in connection with the sale of the surfactants business, a $2.3 provision was
recorded to provide for future environmental spending at the Brandenburg,
Kentucky site. The Consolidated Balance Sheets include liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$2.4 and $2.8 at December 31, 1999 and 1998, respectively, all of which are
classified as other noncurrent liabilities.
Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting from
investigatory studies, advances in technology, changes in environmental laws and
regulations and their application, the scarcity of reliable data pertaining to
identified sites, the difficulty in assessing the involvement and financial
capability of other potentially responsible parties and the Company's ability to
obtain contributions from other parties and the length of time over which site
remediation occurs.
12. RELATED PARTY TRANSACTIONS PRIOR TO THE DISTRIBUTION
Olin sells chlorine and caustic soda to the Company, which is used
primarily in the production of calcium hypochlorite. These product purchases
aggregated $20.7 in 1998, and $22.8 in 1997, and are reflected in cost of goods
sold in the Consolidated Statements of Income for the respective periods.
Settlement of these intercompany sales occurred at the time of shipments by way
of the intercompany account.
The Company was charged by Olin for the Company's share of expenses of
certain centralized activities using various allocation bases. These activities
include, but are not limited to, administration of employee benefit programs,
tax compliance, management information systems, treasury, legal and general
corporate functions. Aggregate charges to the Company for centralized corporate
services were $30.6 in 1998, and $31.8 in 1997.
13. EXTRAORDINARY GAIN AND NONRECURRING EXPENSES
EXTRAORDINARY GAIN
During the fourth quarter of 1999, Arch recorded an after-tax gain of $1.3
(net of taxes of $0.9), or $0.06 per diluted share related to the early
extinguishment of a $5.2 face value note through a payment of $3.0.
NONRECURRING EXPENSES
During the third quarter of 1999, Arch recorded $2.3 of nonrecurring
expenses related to an unfavorable arbitration award and the decision to delay
construction of a facility in China. These nonrecurring expenses reduced diluted
earnings per share $0.07.
14. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
On January 27, 1999, Olin obtained an unsecured $125 revolving five-year
credit facility which expires in January 2004 and an unsecured $125 364-day
facility, which expired in January 2000 (collectively, the "Credit Facility").
Olin borrowed $75 under the Credit Facility. On February 8, 1999, the Company
succeeded to the Credit Facility and assumed the $75 of debt.
The following represents the pro forma effects of borrowings assuming $75
was outstanding under the Credit Facility for one full year and that the Company
had seasonal weighted average borrowings related to the Water Chemicals Segment
of $20 under the Credit Facility at an aggregate effective rate of 7%, inclusive
of facility fees and amortization of initial bank fees.
42
ARCH CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
------ ------
Pro forma effect on:
Increase to interest expense ................... $ 6.6 $ 6.6
Decrease to net income ......................... 4.3 4.3
Pro forma income per share was calculated using the number of common shares
that were issued at the Distribution date and assuming that such shares were
outstanding for all periods prior to the Distribution date.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's common stock began trading on the New York Stock Exchange on
a "regular way" basis on February 9, 1999.
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER YEAR
- ---- ------ ------ ------ ------ ------
Sales ..................................................... $225.0 $268.2 $201.6 $185.0 $879.8
Cost of goods sold ........................................ 157.7 190.4 151.0 138.6 637.7
Income before extraordinary gain .......................... 13.5 20.9 4.1 2.2 40.7
Extraordinary gain ........................................ -- -- -- 1.3 1.3
Net income ................................................ 13.5 20.9 4.1 3.5 42.0
Diluted income per share:
Before extraordinary gain ............................... 0.59 0.90 0.18 0.09 1.76
Extraordinary gain ...................................... -- -- -- 0.06 0.06
Net income .............................................. 0.59 0.90 0.18 0.15 1.82
Stock market price:
High .................................................... 23 1/4 25 5/16 24 3/8 21 5/8 25 5/16
Low ..................................................... 15 15/16 15 1/2 16 13 15/16 13 15/16
Close (at end of quarter) ............................... 16 3/4 24 5/16 16 3/16 20 15/16 20 15/16
Common dividend paid per share ............................ -- 0.20 0.20 0.20 0.60
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER YEAR
- ---- ------ ------ ------ ------ ------
Sales ..................................................... $220.4 $270.4 $203.6 $168.4 $862.8
Cost of goods sold ........................................ 150.1 190.7 152.9 128.3 622.0
Net income (loss) ......................................... 16.3 21.1 4.0 (1.4) 40.0
Pro forma net income (loss) ............................... 15.0 19.8 3.2 (2.3) 35.7
Pro forma diluted income (loss) per share ................. 0.65 0.86 0.14 (0.10) 1.55
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the Company's Directors under the paragraphs
entitled "Who are the persons nominated by the Board in this election to serve
as directors?" and "Who are the other remaining directors and when are their
terms scheduled to end?" under the heading "Item 1--Election of Directors" in
the Proxy Statement relating to the Company's 2000 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated by reference in this
Report. See also the list of executive officers following Item 4 of this Report.
The information regarding compliance with Section 16 of the Securities Exchange
Act of 1934, as amended, contained in the paragraph entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" under the heading "Security Ownership
of Directors and Officers" in the Proxy Statement is incorporated by reference
in this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Executive Compensation" in the Proxy
Statement (but excluding the Report of the Compensation Committee on Executive
Compensation appearing on pages 11 through 12 of the Proxy Statement and the
graph appearing on page 16 of the Proxy Statement) is incorporated by reference
in this Report. The information under the heading "Additional Information
Regarding the Board of Directors--What are the directors paid for their
services?" in the Proxy Statement is incorporated by reference in this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning holdings of Company stock by certain beneficial
owners contained under the heading "Certain Beneficial Owners" in the Proxy
Statement and the information concerning beneficial ownership of Common Stock by
directors and officers of the Company under the heading "Security Ownership of
Directors and Officers" in the Proxy Statement are incorporated by reference in
this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the paragraph entitled "Certain Relationships and
Related Transactions" under the heading "Executive Compensation" in the Proxy
Statement are incorporated by reference in this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following is a list of the Financial Statements included in Item 8 of
Part II of this Report:
PAGE
Independent Auditors' Report .............................................. 24
Consolidated Balance Sheets as of December 31, 1999 and 1998 .............. 25
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 ........................................ 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 ........................................ 27
Consolidated Statements of Shareholders' Equity
(Equity prior to the Distribution) for the
Years Ended December 31, 1999, 1998 and 1997 .............................. 28
Notes to Consolidated Financial Statements ................................ 29
44
2. FINANCIAL STATEMENT SCHEDULES
Schedules not included herein are omitted because they are inapplicable or
not required or because the required information is given in the consolidated
financial statements and notes thereto.
Separate financial statements of 50% or less owned subsidiaries accounted
for by the equity method are not summarized herein and have been omitted
because, in the aggregate, they would not constitute a significant subsidiary.
3. EXHIBITS
Management contracts and compensatory plans and arrangements are listed as
Exhibits 10.12 through 10.22 below.
The Company is party to other instruments defining the rights of holders of
long-term debt. No such instrument authorizes an amount of securities in excess
of 10% of the total assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of each instrument to the Commission
upon request.
3.1 Amended and Restated Articles of Incorporation of the Company-Exhibit
3.1 to the Company's Current Report on Form 8-K, filed February 17,
1999.*
3.2 Bylaws of the Company as amended January 27, 2000.
4.1 Specimen Common Share certificate-Exhibit 4.1 to the Company's
Registration Statement on Form 10, as amended.*
4.2 Amended and Restated Articles of Incorporation of the Company (filed as
Exhibit 3.1 hereto).
4.3 Bylaws of the Company (filed as Exhibit 3.2 hereto).
4.4(a) Rights Agreement dated as of January 29, 1999 between the Company and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent-Exhibit 4.1
to the Company's Current Report on Form 8-K, filed February 17, 1999.*
4.4(b) Amendment No. 1, dated July 25, 1999, to Rights Agreement, dated as of
January 29, 1999-Exhibit 4 to the Company's Quarterly Report on Form
10-Q, for the period ending June 30, 1999.*
4.5 Form of Rights Certificate (attached as Exhibit B to the Rights
Agreement filed as Exhibit 4.4(a) hereto).*
4.6(a) 364-Day Credit Agreement, dated as of January 27, 1999, among the
Company, Olin, the Lenders party thereto, Bank of America, National
Trust and Savings Association, as Syndication Agent, Wachovia Bank,
N.A., as Documentation Agent, The Chase Manhattan Bank, as
Administrative Agent and Chase Securities Inc., as Arranger-Exhibit
10.1 to the Company's Current Report on Form 8-K, filed February 17,
1999.*
4.6(b) Extension Agreement, dated as of January 26, 2000, among the Company,
the Lenders party thereto, Bank of America, National Trust and Savings
Association, as Syndication Agent, Wachovia Bank, N.A., as
Documentation Agent and The Chase Manhattan Bank, as Administrative
Agent, relating to the 364-Day Credit Agreement.
4.7 Five-year Credit Agreement, dated as of January 27, 1999, among the
Company, Olin, the Lenders party thereto, Bank of America, National
Trust and Savings Association, as Syndication Agent, Wachovia Bank,
N.A., as Documentation Agent, The Chase Manhattan Bank, as
Administrative Agent and Chase Securities Inc., as Arranger-Exhibit
10.2 to the Company's Current Report on Form 8-K, filed February 17,
1999.*
10.1 Distribution Agreement, dated as of February 1, 1999, between the
Company and Olin--Exhibit 2 to the Company's Current Report on Form
8-K, filed February 17, 1999.*
10.2 Chlor-Alkali Supply Agreement, dated as of February 8, 1999, between
the Company and Olin--Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the period ending December 31, 1998.*
10.3 Covenant Not To Compete Agreement, dated as of February 8, 1999,
between the Company and Olin--Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the period ending December 31, 1998.*
10.4 Form of Employee Benefits Allocation Agreement between the Company and
Olin--Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
period ending December 31, 1998.*
10.5 Form of Intellectual Property Transfer and License Agreement between
the Company and Olin--Exhibit 10.9 to the Company's Registration
Statement on Form 10, as amended.*
10.6 Form of Sublease between the Company and Olin--Exhibit 10.5 to the
Company's Registration Statement on Form 10, as amended.*
45
10.7 Form of Trade Name License Agreement between the Company and
Olin--Exhibit 10.11 to the Company's Registration Statement on Form 10,
as amended.*
10.8(a) Transition Services Agreement, dated as of February 8, 1999, between
the Company and Olin--Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the period ending December 31, 1998.*
10.8(b) Amendment to Transition Services Agreement, dated as of December 29,
1999, between the Company and Olin.
10.9 Tax Sharing Agreement, dated as of February 8, 1999, between the
Company and Olin--Exhibit 10.9 to the Company's Annual Report on Form
10-K for the period ending December 31, 1998.*
10.10 Charleston Services Agreement, dated as of February 8, 1999, between
the Company and Olin--Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the period ending December 31, 1998.*
10.11 Information Technology Services Agreement, dated as of February 8,
1999, between the Company and Olin--Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the period ending December 31, 1998.*
10.12 Form of Executive Agreement.
10.13 1999 Stock Plan for Non-employee Directors, as amended January 1, 2000.
10.14 1999 Long Term Incentive Plan, as amended October 28, 1999.
10.15 Supplemental Contributing Employee Ownership Plan, as amended through
January 27, 2000.
10.16 Supplementary and Deferral Benefit Pension Plan, as amended July 29,
1999.
10.17 Senior Executive Pension Plan, as amended July 29, 1999.
10.18 Employee Deferral Plan-Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the period ending December 31, 1998.*
10.19 Key Executive Death Benefits-Exhibit 10.19 to the Company's
Registration Statement on Form 10, as amended.*
10.20 Form of Endorsement Split Dollar Agreement-Exhibit 10.20 to the
Company's Registration Statement on Form 10, as amended.*
10.21 Arch Chemicals, Inc. Annual Incentive Plan, as amended December 9,
1999.
10.22 Senior Management Incentive Compensation Plan as amended January 27,
2000.
21. List of Subsidiaries.
23. Consent of KPMG LLP, dated March 8, 2000.
24. Power of Attorney.
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-14601 unless
otherwise indicated.
46
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.
Date: March 8, 2000
ARCH CHEMICALS, INC.
By MICHAEL E. CAMPBELL
-------------------------
Michael E. Campbell
Chairman of the Board and
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 date indicated.
SIGNATURE TITLE
-------- -----
MICHAEL E. CAMPBELL Chairman Of The Board, Chief Executive
- ---------------------------- Officer and Director (Principal
Michael E. Campbell Executive Officer)
RICHARD E. CAVANAGH*
- ----------------------------
Richard E. Cavanagh Director
JOHN W. JOHNSTONE, JR.*
- ----------------------------
John W. Johnstone, Jr. Director
JACK D. KUEHLER
- ----------------------------
Jack D. Kuehler Director
H. WILLIAM LICHTENBERGER
- ----------------------------
H. William Lichtenberger Director
MICHAEL O. MAGDOL
- ----------------------------
Michael O. Magdol Director
JOHN P. SCHAEFER
- ----------------------------
John P. Schaefer Director
LOUIS S. MASSIMO Vice President and Chief Financial
- ---------------------------- Officer (Principal Financial Officer)
Louis S. Massimo
STEVEN C. GIULIANO Controller
- ---------------------------- (Principal Accounting Officer)
Steven C. Giuliano
*By: Sarah A. O'Connor
- ----------------------------
Sarah A. O'Connor
Attorney-in-fact
Date: March 8, 2000
47
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.2 Bylaws of the Company as amended January 27, 2000.
4.6(b) Extension Agreement, dated as of January 26, 2000, among the
Company, the Lenders party thereto, Bank of America, National Trust
and Savings Association, as Syndication Agent, Wachovia Bank, N.A.,
as Documentation Agent and The Chase Manhattan Bank, as
Administrative Agent, relating to the 364-Day Credit Agreement.
10.8(b) Amendment to Transition Services Agreement, dated as of December
29, 1999, between the Company and Olin.
10.12 Form of Executive Agreement.
10.13 1999 Stock Plan for Non-employee Directors, as amended January 1,
2000.
10.14 1999 Long Term Incentive Plan, as amended October 28, 1999.
10.15 Supplemental Contributing Employee Ownership Plan, as amended
through January 27, 2000.
10.16 Supplementary and Deferral Benefit Pension Plan, as amended July
29, 1999.
10.17 Senior Executive Pension Plan, as amended July 29, 1999.
10.21 Arch Chemicals, Inc. Annual Incentive Plan, as amended December 9,
1999.
10.22 Senior Management Incentive Compensation Plan, as amended
January 27, 2000.
21. List of Subsidiaries.
23. Consent of KPMG LLP, dated March 8, 2000.
24. Power of Attorney
27. Financial Data Schedule.