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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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, 2001, the aggregate market value of registrant's common
stock held by non-affiliates of registrant was approximately $452,799,800.
As of January 31, 2001, 22,140,195, 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 2001 Part III
Annual Meeting of Shareholders
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TABLE OF CONTENTS
FORM 10-K
PAGE
NO.
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PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 10
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6 Selected Financial Data..................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 30
Item 8 Financial Statements and Supplementary Data................. 31
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 59
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 59
Item 11 Executive Compensation...................................... 59
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 59
Item 13 Certain Relationships and Related Transactions.............. 59
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 59
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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 business segments in which the Company
competes are microelectronic chemicals, water chemicals, treatment 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").
In connection with the acquisition of Hickson International PLC, which is
described below, the Company announced that it intends to divest the Hickson's
Organics Division within one year following completion of the Hickson
acquisition. See Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations. Accordingly, the Organics Division has been
classified as an asset held for sale as is more fully discussed in Note 2
"Additional Balance Sheet Information" in Notes to Consolidated Financial
Statements included in Item 8 -- Financial Statements and Supplementary Data and
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K of
Part II of this Report. Accordingly, Item 1 -- Business and Item 2 -- Properties
of Part I of this Report describe the Company's businesses without the Hickson
Organics Division.
The term "Company" as used in Part I and II of this Report means Arch
Chemicals, Inc. and its subsidiaries (but excluding the Hickson Organics
Division) unless the context indicates otherwise.
2000 EVENTS
On April 27, 2000, Arch announced the formation of a joint venture, Planar
Solutions LLC, with Wacker Silicones Corporation, to produce and market Chemical
Mechanical Planarization ("CMP") slurry products used in the advanced computer
chip manufacturing process.
In July 2000, Arch Chemicals UK Holdings Limited ("Arch UK"), a newly
formed, wholly-owned, indirect subsidiary of the Company made a formal cash
offer (the "Offer") for all of the issued shares of UK-based Hickson. The offer,
which was unanimously recommended by Hickson's Board of Directors, was for GBP
0.55 (US $0.82) in cash for each Hickson share. On August 22, 2000, Arch UK
declared the offer wholly unconditional (the "Acquisition Date"). The total
purchase price, including estimated expenses and net debt assumed ($59 million),
was approximately $215 million.
On July 31, 2000, Arch sold substantially all the assets of its subsidiary,
Superior Pool Products, Inc., for approximately $21 million in cash to a
subsidiary of SCP Pool Corporation.
On October 26, 2000, Arch announced that it was reorganizing its business
portfolio into four core segments as a result of the Company's integration of
the former Hickson Protection and Coatings businesses. Arch's four core segments
are:
- Microelectronic Materials -- advanced chemistry and services for
semiconductor manufacturers, permitting them to offer businesses and
consumers leading edge products and capabilities. Arch's portfolio
includes photoresists, polyimides, formulated products, thin film systems
and chemical management
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services, and the chemical mechanical planarization ("CMP") through a
joint venture with Wacker Silicones Corporation.
- HTH Water Products -- products and related equipment and services to
provide people with clean, safe water. Arch's portfolio includes HTH(R)
branded consumer pool chemicals and chemicals and feeder technology for
commercial pools, drinking water and industrial applications.
- Treatment Products -- active ingredients and related services for
industrial and consumer products, which provide biocidal and other
treatment characteristics that promote health, safety, and well being.
Arch's portfolio includes industrial biocides, wood treatment products
and services, and personal care biocides and other personal care
intermediates.
- Performance Products -- chemistry and services for the coatings,
adhesives, sealant, and elastomer markets, making possible a vast array
of products. Arch's portfolio includes specialty polyols and coatings for
wood furniture.
In addition, Arch's businesses include Hydrazine and Sulfuric Acid, as well
as the Hickson Organics division. The Hickson Organics division is being offered
for sale and appears in financial statements as an asset held for sale.
Arch also announced it was restructuring its process chemicals business by
consolidating manufacturing facilities and reducing product offerings to focus
this business on formulated specialty products.
In November 2000, the Company completed the acquisition of Brooks
Industries' personal care intermediates business for approximately $38 million.
The business manufactures standard and specialty personal care products such as
specialty biopolymers, proteins, botanicals, liposomes, lanolin, lanolin
derivatives and emulsifiers.
PRODUCTS AND SERVICES
The Company's principal products and services fall within five business
segments: microelectronic materials, HTH water products, treatment products,
performance products and other specialty products. 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 Materials
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 and 193nm 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, a new 193nm bi-layer thin imaging system (TIS 2000TM) and single-layer
193nm resist materials. In addition, aqueous-based environmentally-safer residue
removers, as well as strippers, edge bead removers, developers, cleaners, post
etch residue removers and post CMP cleaners, are sold throughout the world. The
current focus of the photoresist research and development 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.
Through its joint venture, Planar Solutions LLC, the Company produces and
markets CMP slurry products to advanced chip manufacturers.
The microelectronic chemicals sold by the Company in 2000 also include a
variety of high purity acids, bases, oxidizers, etchants and solvents
(collectively referred to as "process chemicals"). The Company is in the process
of restructuring its process chemicals business to transform it away from a
supplier of commodity-like straight acids and solvents which were low margin to
a more focused position as a supplier of formulated
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products such as buffered hydrofluoric acid and mixed acid etchants used in the
etching of computer wafers. In connection with this restructuring, the Company
is consolidating manufacturing facilities and reducing its process chemical
product offerings.
Another microelectronic materials 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 materials products 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. 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 materials products are sold on a direct basis
or through independent third party distributors. Chemical management services
are offered on a direct basis only.
The Company has a joint venture with Fuji Film in Japan for the manufacture
and sale of photoresists in Asia.
HTH Water Products
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(TM) technology which
enables it to produce calcium hypochlorite with superior dissolving
characteristics and 75% to 78% available chlorine as compared to calcium
hypochlorite with 65% to 70% 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 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 2000, approximately 81% of the Company's water products sales were
within North America, and the remaining 19% were throughout the rest of the
world. In North America, the Company sells water chemical products either
directly to retail or through independent third party distributors. The Company
also has subsidiaries and ownership interests in joint ventures in South Africa
(Aquachlor (Pty) Ltd.) and Brazil (Nordesclor S.A.) which manufacture and
distribute calcium hypochlorite to local markets.
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In addition to the manufacture and sale of HTH water products, the Company
distributes chemicals, equipment, parts and accessories for pools in Europe
mainly through its wholly-owned subsidiary Hydrochim, S.A., located in France.
Treatment Products
Through its treatment products business, the Company manufactures
industrial biocides, wood treatment products and personal care active
ingredients and other intermediates.
The Company 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 serve the metalworking fluids, antifoulant paints 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
antidandruff market. The Company is also uniquely positioned as the only
pyrithione supplier with U.S. Environmental Protection Agency registrations for
metalworking fluids, coatings and antifoulant paints. The manufacturing
flexibility of the biocides assets also permits the Company to offer fine
chemical custom manufacturing services.
Through its acquisition of Hickson, the Company is a leading producer of
wood treatment chemicals, which are solutions to enhance the properties of wood.
Its industrial wood preservatives and fire retardants are sold under the brand
names Wolmanized(R), Dricon(R), Thompsonized(R), Tanalised(R), Vacsol(R), and
Resistol(R) in markets around the world. These products protect wood against
moisture, fungal decay, termites and other insects. The principal customers are
sawmills and treaters of softwoods that require chemical treatment to impart
resistance properties to fungal and insect damage, giving softwoods the
performance of hardwoods in service. In the U.S. and Canada, the majority of the
customers are licensed wood treaters that operate under guidelines and standards
established by the Company. The license program includes the use of the brand
name for sale of the products produced by the licensee as well as an extensive
support package comprised of marketing, technical, engineering and environmental
services. The Company's customers sell their wood-treated products into the
construction, utility and agricultural markets. The products sold by the Company
are critical to the performance and value of the customers' end-use products.
Regulatory pressure, together with growing consumer preferences, is moving the
industry to chrome-free and arsenic-free technology and the Company is offering
such products. The Company is also a 49% owner of a joint venture with Koppers
Industries, Inc. based in Pittsburgh, Pennsylvania, for the manufacture and
distribution of wood treatment chemicals to the Australasia and Asia-Pacific
markets.
Through its acquisition of Brooks Industries personal care intermediates
business, the Company has broadened its position in the personal care market to
include actives and functional products sold primarily to manufacturers of skin
care and hair care products.
Performance Products
The Company's performance products business consists of the manufacture and
sale of a broad range of products with diverse end uses. The performance
products 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
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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.
The Company's performance products 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, Arch Quimica Andina, 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.
Through its acquisition of Hickson, the Company manufactures a wide range
of coatings for a variety of wood applications. These finishes are factory or
brush applied products for the surface decoration and protection of wood,
including stains, polyester-based urethanes (including solvent and water-borne
systems), pigments and colors, and new technology UV systems. These wood
coatings products are sold under the name "Arch Coatings," including the brand
names Sayerlack(R) and Linea Blu(R). The major markets for these products
include home and office furniture, window and door frames, picture frames, and
other specialty markets. The Company is a market leader in several areas of
Europe, including the strategic Italian market as well as France and the United
Kingdom. The company also has operations in Spain and exports to Asia. The major
customers for these coatings require a high degree of applications assistance
and the development of a total coatings solution, including product development,
is key in the growth of this business. As a result, the Company has many
long-standing customers and is well known as a top-tier quality supplier. The
customer base includes many of the leading furniture manufacturers in Europe.
Other Specialty Products
Hydrazine. The Company 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 the Company's Lake Charles, Louisiana production
facility. The hydrazine hydrates are supplied in various concentrations, ranging
from 51-100%, and in packaging containers that include bulk, tote bins and
drums.
The Company 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
Pure(TM) 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.
Sulfuric Acid. The Company is a major regional supplier of sulfuric acid
regeneration services and virgin sulfuric acid 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.
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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, furniture
manufacturers, national and regional chemical and equipment distributors, wood
treaters, sawmills, 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 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 Materials. 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.
HTH Water Products. 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. The balance of the raw materials are
purchased from other suppliers and are readily available.
Treatment Products. The raw materials for industrial biocide treatment
chemicals are pyridine, iodine and propargyl butyl carbamate. The raw materials
for wood protection products include chromic acid, copper oxide, copper
carbonate, arsenic acid, cupric oxide and proprietary organic biocides.
Performance Products. The raw materials for the performance chemicals
business include a variety of chemicals including propylene, propylene oxide and
ethylene oxide. In addition, a wide variety of polyester resin systems, organic
solvents, nitrocellulose, acrylic resins, acrylic and vinyl emulsions, titanium
dioxide, isocyanate, various pigments and colors and stains are used. For this
segment, propylene is the most significant raw material and is subject to price
volatility.
Other Specialty Products. The raw materials for other specialty products
include sulfur, natural gas, soda ash, chlorine, caustic soda and ammonia.
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 U.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 $17.1 million in
2000, $17.7 million in 1999 and $16.2 million in 1998.
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 materials
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(TM) calcium hypochlorite which are materially important to the
HTH water products 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
Pure(TM) hydrazine, the world's purest grade of
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anhydrous hydrazine, which makes it the preferred propellant for monopropellant
satellite thruster applications. This patent expires in 2006.
With respect to its wood protection business, the Company owns two
composition of matter patents, which expire in 2008 and 2014. These include an
additive to the Company's wood preservative chromated copper arsenate ("CCA")
that improves the climbability of utility poles as well as a patent on the
Company's new preservative formulation (Wolman(R)E Natural Select and
Tanalith(R)E).
SEASONALITY
Although the businesses of the Company as a whole are not seasonal in
nature, approximately 45% of the sales in the HTH water products 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 of America between Memorial Day and the Fourth of July. In
addition, the weather can also have a significant effect on water chemical and
wood treatment sales during any given year with unseasonable wet or cool weather
negatively impacting sales.
BACKLOG
The amount of backlog orders is immaterial to the Company as a whole.
U.S. GOVERNMENT CONTRACTS AND REGULATIONS
The Company sells hydrazine to the U.S. Government under a government
contract which is material to the other specialty products segment. This
contract has expired but was recently extended until March 31, 2001 and is the
subject of renegotiation with the Government. 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 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 $61.3 million in 2000, $63.1 million in 1999 and $63.9 million in 1998. 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, 2000, the Company had approximately 3,540 employees,
approximately 1,315 of whom were working in foreign countries. Approximately 350
of the hourly paid employees of the Company located at its Brandenburg,
Kentucky, Lake Charles, Louisiana, Shreveport, Louisiana and Beaumont, Texas
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facilities are represented for purposes of collective bargaining, by several
different labor organizations and the Company is party to seven labor contracts
relating to such employees. These labor contracts extend for three-or four-year
terms which expire in the years 2001, 2003, 2004 and 2006. 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 Company operates manufacturing facilities throughout the world and as a
result is subject to a broad array of environmental laws and regulations in
various countries. The Company also implements a variety of voluntary programs
to reduce air emissions, eliminate or reduce the generation of hazardous wastes
and to decrease the amount of wastewater discharges. The establishment and
implementation of U.S. 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 U.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 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
with respect to the businesses acquired from Olin in the Distribution. The
Company has also become subject to environmental exposures and potential
liabilities in the U.S. and abroad with respect to the businesses it purchased
following the Distribution. In connection with the acquisition of Hickson, the
Company acquired certain environmental exposures and potential liabilities of
current and past operating sites. As a result of the acquisition of Hickson, the
Company's environmental liabilities increased by $17.6 million.
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 2000, 1999 and 1998, 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 prior to the
Distribution. 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 $20.1 million in 2000, $12.5 million in 1999 and $12.0
million in 1998. During 2000, $8.1 million ($2.4 million in 1999; $1.0 million
in 1998) was spent on capital projects, $9.5 million ($9.7 million in 1999;
$10.6 million in 1998) was spent on normal plant operations, and $2.5 million in
2000, ($0.4 million in 1999 and 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
$17.5 million at December 31, 2000, of which $3.0 million are classified as
other current liabilities and $14.5 million are classified as other noncurrent
liabilities, and $2.4 million at December 31, 1999, 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 circum-
9
11
stances 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 $15 million to $20 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.
ITEM 2. PROPERTIES
The table below sets forth the primary locations where the Company has
offices or conducts operations, including some joint venture sites, along with 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. Except for locations identified as
relating to a joint venture which are owned or leased by the joint venture or
unless otherwise noted below, the identified location is owned by the Company.
LOCATION PRIMARY ACTIVITIES
-------- ------------------
McIntosh, Alabama(1) Blending and storage facility for other specialty products
Chandler, Arizona(2) Warehouse and office facility for microelectronic materials
Mesa, Arizona Manufacturing facility for microelectronic materials
Cheshire, Connecticut(2) Research and development facility and offices for treatment
products
Norwalk, Connecticut(2) Worldwide corporate headquarters
Conley, Georgia Technical center and manufacturing facility for treatment
products
Kennesaw, Georgia(2) Office facility for HTH water products
Smyrna, Georgia(2) Office facility for treatment chemicals
Bethalto, Illinois(2) Corporate data center
Brandenburg, Kentucky Manufacturing facility for microelectronic materials,
performance products and treatment products
Lake Charles, Louisiana Manufacturing facility for other specialty products
Shreveport, Louisiana Manufacturing facility for other specialty products
South Plainfield, New Jersey(2) Manufacturing facilities and office space for treatment
products
Rochester, New York Manufacturing facility for treatment products
East Providence, Rhode Island Manufacturing facility and materials research center for
microelectronic materials
North Kingston, Rhode Island Manufacturing facility, North American technical support
center and new product development center for
microelectronic materials
Charleston, Tennessee(3) Manufacturing facility for HTH water products
Beaumont, Texas Manufacturing facility for other specialty products
Trentham, Victoria, Australia Office and manufacturing facility for the Koppers-Hickson
joint venture
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LOCATION PRIMARY ACTIVITIES
-------- ------------------
Zwijndrecht, Belgium(1) Manufacturing facility and European technical support center
for microelectronic materials
Igarassu, Brazil Facility of a joint venture for the manufacture of HTH water
products
Salto, Brazil Blending and repackaging facility for HTH water products and
manufacturing facility for performance products
Castleford, England(3) Manufacturing facilities and technical center for treatment
products
Knottingley, England(2) Office facility and warehouse and technical center for
treatment products and performance products
Preston, England Wood treatment facility for treatment products
Amboise, France(2) Repackaging, distribution and warehouse facility for HTH
water products
Les Mureaux, France Manufacturing and laboratory facility for performance
products
Amsterdam, Holland(2) Wood treatment facility for treatment products
Swords, Ireland Manufacturing facility for treatment products
Mariano Comense, Italy Manufacturing and research and development facility for
performance products
Pianoro, Italy Manufacturing, research and development and office facility
for performance products
Shizuoka, Japan Manufacturing facility for the microelectronic materials'
joint venture with Fuji Film
Auckland, New Zealand Office and manufacturing facility for the Koppers-Hickson
joint venture
Kempton Park, South Africa Facility of a joint venture for the manufacture of HTH water
products
Valencia, Spain Distribution facility for performance products
Maracaibo, Venezuela Manufacturing facility for performance products
- ---------------
(1) Land is leased.
(2) Leased facility.
(3) Portions are leased and portions are owned.
The Company also leases several warehouse facilities in the United States of
America and in foreign countries.
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 part of the land
under of the Charleston facility which are being leased from Olin and except for
properties held by joint ventures or otherwise 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.
Mesa, Arizona. The Company has a state-of-the-art microelectronic
materials manufacturing facility in Mesa, Arizona. This facility manufactures,
purifies, formulates and packages formulated chemical products. This facility is
QS 9000 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
11
13
operations occupy approximately 30 acres of the 52-acre plant site. The
remaining acreage is available for future expansions.
Conley, Georgia. This is the Company's major facility for its wood
treatment business in the U.S. All of the arsenic acid and copper oxide for this
business is produced at this location and sent by truck or rail to the Company's
other two U.S. plant facilities. In addition, this plant produces 50 to 60% CCA
that is bulk shipped to customers in the Southeastern U.S. and to Mexico. A 72%
CCA concentrate is also produced at this facility.
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. 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
Pure(TM) 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 limited alternative fuel burning services and markets sodium bisulfite
solution.
South Plainfield, New Jersey. These leased facilities manufacture and
warehouse products for the recently acquired personal care intermediates
business and provide offices and research facilities for that business.
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 and ISO 14001-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
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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 and ISO 14001-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 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 and aqueous-based polyimides. 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 HTH water products business. There are two distinct manufacturing operations
at this site. One produces the Company's 65% to 70% (nominal) available chlorine
product while the other produces the Company's patented, 75% to 78% 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 alternative waste fuel burning services and markets sodium
bisulfite solution. This facility has achieved and maintained ISO 9002
certification since 1993.
Trentham, Victoria, Australia. This Koppers-Hickson joint venture facility
produces CCA-based wood preservatives for the Australian market. The sales
office services the Victoria, South Australian and Western Australian markets.
The site is ISO 9002-certified.
Zwijndrecht, Belgium. This ISO 9002 and ISO 14001-certified facility
located in Zwijndrecht, Belgium has been operational since 1993 and primarily
manufactures and tests photosensitive polyimides, photoresist developers, and
photoresist strippers used in the semiconductor industry. 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 for photoresist
and polyimides 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 HTH water products 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 the
performance products business. This facility is currently shared with Olin
Reductone operations.
Les Mureaux, France. This ISO 9002-certified facility is located just
northwest of Paris, France and serves as the principal location for the
manufacturing of coatings for the French furniture market. The site produces a
wide range of stains and coatings, as well as repackages and sells a line of
coatings produced by the Company's Italian operations.
Swords, Ireland. This facility is located just north of Dublin, Ireland.
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
products are shipped to customers in Europe and over fifty countries around the
world. This facility is both ISO 9002 and ISO 14001-certified.
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Mariano Comense, Italy. This ISO 9002-certified facility serves as the
primary manufacturing location for the Company's UV-based product line for its
coatings business. It also serves as a distribution location and does some
product development.
Pianoro, Italy. This ISO 9002-certified facility serves as the primary
manufacturing location and R&D center for the coatings business. It produces the
Sayerlack(R) branded products that include both solvent and water-borne urethane
systems, solvents, stains and colors. In addition, the central management for
the distribution of these products throughout Italy and various export markets
is located here.
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 HTH water products 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 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, 2000, would not be material to the
Company's financial position or annual results of operations.
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, 2000.
EXECUTIVE OFFICERS
The biographical information of the executive officers of the Company as of
March 1, 2001 is noted below.
NAME AND AGE OFFICE
- ------------ ------
Michael E. Campbell (53)............. Chairman of the Board, President and Chief Executive Officer
Hayes Anderson (40).................. Corporate Vice President, Human Resources
Louis S. Massimo (43)................ Corporate Vice President and Chief Financial Officer
Sarah A. O'Connor (41)............... Corporate Vice President, General Counsel and Secretary
W. Paul Bush (50).................... Vice President and Treasurer
Paul J. Craney (52).................. Vice President and General Manager, Treatment
Philippe Gouby (51).................. Vice President and General Manager, Microelectronics
John J. Margherio (52)............... Vice President, Operations
John H. Markham (54)................. Vice President, International Operations
James A. Rushton (51)................ Vice President and General Manager, Water Services
Charles W. Shaver (42)............... Vice President and General Manager, Performance
Steven C. Giuliano (31).............. Controller
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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. On July 1, 2000, he was given the additional title of
President. 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. Anderson was elected Corporate Vice President, Human Resources
effective December 1, 2000. Prior to that, he had served as Vice President and
General Manager, Semiconductor Chemicals and Services since June 8, 1999. Prior
to that position 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. 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. From 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.
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. Craney was appointed Vice President and General Manager, Treatment, on
September 13, 2000. Prior to that position he served as Vice President,
Strategic Development since August 31, 1999. From February 7, 1999 until August
31, 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. Gouby was appointed Vice President and General Manager,
Microelectronics on September 13, 2000. Prior to that appointment, he had served
as Vice President and General Manager, Arch Chemicals Semiconductor Materials
Europe since February 8, 1999. Prior to the Distribution and since January 1,
1991, Mr. Gouby was Vice President and General Manager, Semiconductor Materials
Europe of the Olin Ciba Geigy joint venture which Olin acquired 100% of in 1995.
Mr. Margherio was appointed Vice President, Operations on September 13,
2000. Prior to that position and since August 31, 1999, he served as Vice
President and General Manager, Performance Urethanes and Organics. From February
7, 1999 until August 31, 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.
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Mr. Markham was appointed Vice President, International on September 13,
2000. Prior to that time and since October 1999, he served as Group Chief
Executive Officer of Hickson. From October 1995 to October 1999, he was an
Executive Director of the Board of Hickson and Managing Director of Hickson's
Organic Chemicals Division.
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. Shaver was appointed Vice President and General Manager, Performance on
September 13, 2000. Prior to that appointment, he served as Vice President,
Operations since 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, 2001, there were approximately 7,739 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 and 2000 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 Facilities (as defined on page 28) 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, 2000,
dividends and stock repurchases were limited to approximately $32.7 million.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial and
operating information with respect to the Company and is derived from the
Consolidated Financial Statements of the Company. The financial data as of and
for each of the three years ended December 31, 2000 were derived from the
audited financial statements included elsewhere herein. Such historical
financial data may not be indicative of the Company's future performance. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K. The historical financial information for the
periods preceding February 8, 1999 (the "Distribution Date") includes an
allocated share of Olin's historical centralized activities. The following
information is qualified in its entirety by the information and financial
statements appearing elsewhere in this Form 10-K. Sales and Cost of Goods Sold
have been restated to reflect the adoption of Emerging Issues Task Force No.
00-10, "Accounting for
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Shipping and Handling Fees and Costs" ("EITF 00-10"). See Note 1 of the Notes to
Consolidated Financial Statements for additional information.
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- ------ ------ ------ ------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATIONS
Sales........................................ $ 941.2 $912.2 $894.0 $963.4 $949.7
Cost of Goods Sold(1)........................ 691.6 666.0 649.2 706.0 680.0
Selling and Administration(2)................ 172.0 163.8 167.6 153.5 159.0
Amortization of Intangibles.................. 5.9 4.1 4.0 3.8 4.0
Research and Development..................... 17.1 17.7 16.2 21.1 21.0
Equity in (Earnings) of Affiliated
Companies.................................. (7.8) (5.8) (3.4) (7.1) (7.6)
Special Items(3)............................. 56.9 -- -- -- --
Interest Expense (Income), net............... 13.0 4.9 (0.4) (0.1) (0.8)
-------- ------ ------ ------ ------
Income (Loss) Before Taxes and Extraordinary
Gain....................................... (7.5) 61.5 60.8 86.2 94.1
Income Tax Provision (Benefit)............... (8.0) 20.8 20.8 29.9 33.0
-------- ------ ------ ------ ------
Income Before Extraordinary Gain............. 0.5 40.7 40.0 56.3 61.1
Extraordinary Gain, net(4)................... -- 1.3 -- -- --
-------- ------ ------ ------ ------
Net Income................................... $ 0.5 $ 42.0 $ 40.0 $ 56.3 $ 61.1
======== ====== ====== ====== ======
Diluted/Unaudited Proforma Income Per
Share(5)................................... $ 0.02 $ 1.82 $ 1.55 $ 2.26 $ 2.47
Common Dividends Per Share(6)................ 0.80 0.60 -- -- --
OTHER
Capital Expenditures......................... 62.0 58.9 84.3 71.0 53.2
EBITDA....................................... 109.7 110.3 98.0 131.9 137.5
Depreciation................................. 49.8 49.3 43.1 43.6 40.2
Effective Tax Rate(7)........................ 29.2% 33.8% 34.2% 34.7% 35.1%
FINANCIAL POSITION
Working Capital.............................. $ 172.3 $168.5 $147.1 $151.5 $124.9
Property, Plant and Equipment, net........... 330.8 326.7 331.6 280.4 257.3
Total Assets................................. 1,073.6 759.5 721.6 693.2 651.2
Long-Term Debt(5)............................ 247.6 76.8 7.0 5.5 5.5
Shareholders' Equity(5)...................... 419.8 451.8 504.5 455.6 429.6
Capitalization............................... 763.2 549.6 512.4 462.5 436.9
Notes to Selected Financial Data appear on page 18.
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- ---------------
(1) Cost of Goods Sold for 2000 includes $3.0 million to write-down inventory to
net realizable value, including disposal costs, due to the process chemicals
restructuring and the exiting of certain businesses.
(2) 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.
(3) Special Items consist of the following:
Impairment Charge -- $31.0 million related to the write-down of
property, plant and equipment due to the
process chemicals business restructuring.
Restructuring Charge -- $34.0 million charge consists of $8.9 million
related to the restructuring of the process
chemicals business, $14.1 million related to
the write-off of certain costs associated with
the biocides business, and $11.0 million
related to other headcount reductions.
Other (Income) Expense -- Other (income) expense of $(8.1) million is
principally comprised of a pretax gain on the
sale of Superior Pool Products and certain
acquisition-related costs.
(4) 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 the
payment of $3.0 million, net of related taxes of $0.9 million.
(5) In January 1999, Olin borrowed $75 million and on February 8, 1999, the
Company assumed this debt from Olin. Unaudited pro forma net income per
share for the periods 1996 through 1998 reflects the pro forma effects of
borrowings assuming $75 million was outstanding and that the Company has
seasonal weighted average borrowings related to the HTH water products
segment of $20 million at an aggregate effective rate of 7%. Unaudited 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 Prior to the Distribution (Unaudited)" of the Notes to
Consolidated Financial Statements.
(6) The annual dividend rate was $0.80 per share in 2000 and 1999. 1999
dividends represent three quarterly payments in 1999.
(7) The effective tax rate in 2000 of 29.2% excludes special items.
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 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
and shipping and handling costs. In addition, segment operating income includes
the equity in earnings of affiliated companies and excludes special items and
certain unallocated expenses of the corporate headquarters.
In 2000, the Emerging Issues Task Force issued Statement No. 00-10,
"Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). This
statement addresses the income statement classification of shipping and handling
fees which are billed to customers and included in revenue. As a result, the
Company was required to adjust for the costs for shipping and handling which
were previously recorded in Sales. The Company's policy is now to include such
costs in Cost of Goods Sold in the Consolidated Statements of Income. Total
shipping and handling fees included in Sales and Cost of Goods Sold for the
years ended December 31, 2000, 1999 and 1998 were $35.6 million, $32.4 million
and $31.2 million, respectively. This adjustment is an equal increase to Sales
and Cost of Goods Sold and has no impact on income. Sales and Cost of Goods Sold
amounts including segment information, for prior years as well as current year
amounts
18
20
disclosed in previous filings or other publicly disclosed information have been
restated to conform with the requirements of EITF 00-10.
During 2000, Arch reorganized its business portfolio into four core
segments: microelectronic materials, HTH water products, treatment products and
performance products. The Company's fifth segment is other specialty products.
All prior period financial data have been restated to reflect this
reorganization.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
( IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
CONSOLIDATED
Sales..................................................... $941.2 $912.2 $894.0
Gross Margin(1)........................................... 249.6 246.2 244.8
Selling and Administration(2)............................. 172.0 163.8 167.6
Special Items:
Impairment Charge...................................... 31.0 -- --
Restructuring Charge................................... 34.0 -- --
Other (Income) and Expense............................. (8.1) -- --
Research and Development.................................. 17.1 17.7 16.2
Equity in (Earnings) of Affiliated Companies.............. (7.8) (5.8) (3.4)
Interest Expense.......................................... 13.8 5.7 7.2(3)
Extraordinary Gain, net(4)................................ -- 1.3 --
Net Income................................................ 0.5 42.0 35.7(3)
Basic Income Per Share.................................... $ 0.02 $ 1.83 $ 1.55(3)
Diluted Income Per Share.................................. $ 0.02 $ 1.82 $ 1.55(3)
Weighted Average Common Stock Outstanding:
Basic..................................................... 22.3 23.0 23.0(3)
Diluted................................................... 22.3 23.1 23.0(3)
The following table reconciles diluted income per share to
diluted income per share excluding special items and
extraordinary gain:
Diluted Income Per Share.................................. $ 0.02 $ 1.82 $ 1.55(3)
------ ------ ------
Special Items:
Restructuring Charge, Impairment Charge and Other
Income................................................ 1.56 -- --
Inventory Write-down................................... 0.08 -- --
Extraordinary Gain..................................... -- (0.06) --
------ ------ ------
1.64 (0.06) --
------ ------ ------
Diluted Income Per Share Excluding Special Items and
Extraordinary Gain..................................... $ 1.66 $ 1.76 $ 1.55(3)
====== ====== ======
- ---------------
(1) Cost of Goods Sold for 2000 includes $3.0 million to write-down inventory to
net realizable value, including disposal costs, due to the process chemicals
restructuring and the exiting of certain businesses.
(2) 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.
(3) 1998 Unaudited Pro Forma Financial Information -- In January 1999, Olin
borrowed $75 million and on February 8, 1999, the Company assumed this debt
from Olin. Unaudited pro forma net income for 1998 reflects the pro forma
effects of borrowings assuming $75 million was outstanding and that the
Company has seasonal weighted average borrowings related to the HTH water
products segment of $20 million at an aggregate effective rate of 7%.
Unaudited 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
19
21
periods prior to the Distribution. See Note 14 "Pro Forma Financial Information
Prior to the Distribution (Unaudited)" of the Notes to Consolidated Financial
Statements.
(4) 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 million.
Year Ended December 31, 2000 Compared to 1999
Sales increased 3.2%, or $29.0 million. Excluding the net impact of the
acquisitions of Hickson International PLC ("Hickson") and Brooks Industries'
personal care intermediates business ("Brooks") (approximately $69 million), and
the divestiture of Superior Pool Products, Inc. ("SPPI"), sales decreased $10.5
million or 1.3% due to a slight decrease in both volumes and prices. Higher
volumes in the microelectronic materials segment and the biocides business, were
offset by lower volumes in the HTH water products segment and in the hydrazine
business. Slightly higher prices in the performance products and other specialty
products segments were offset by slightly lower prices in the HTH water products
and microelectronic material segments.
Gross margin percentage was 26.5% in 2000 and 27.0% in 1999. Excluding the
$3.0 million inventory write-down in 2000, gross margin percentage was 26.8%, as
higher manufacturing and raw material costs were partially offset by higher
margin contribution from the acquisitions.
Selling and administration expenses as a percentage of sales increased to
18.3% in 2000 from 18.0% in 1999. Excluding the impact of the acquisitions and
divestiture in 2000 and the nonrecurring expenses in 1999, selling and
administration expenses decreased in amount (approximately $2.0 million) and, as
a percentage of sales, were comparable to 1999. The decrease in amount is
primarily due to lower administrative expenses which offset higher selling and
advertising expenses.
In October, the Company concluded its analysis of strategic options related
to its process chemicals business by announcing a major restructuring of this
business. This restructuring plan will consolidate facilities, including the
shutdown of the European process chemicals facility located in Zwijndrecht,
Belgium, reduce product offerings, significantly reduce the workforce, and focus
on a formulated products strategy which will be supplied from the Company's
downsized Mesa, Arizona facility. The restructuring is expected to improve
operating margins to approximately 10% of sales, while reducing sales by more
than 75%. In addition, the Company recorded certain charges related to severance
and other benefit-related costs at other businesses, including corporate, as
well as the write-off of certain costs related to the biocides business.
The impairment charge of $31.0 million represents the charge associated
with the write-down of certain property, plant and equipment to fair value in
connection with the restructuring of the process chemicals business. See Note 13
of the Notes to Consolidated Financial Statements.
Restructuring costs totaling $34.0 million consist of $8.9 million for
costs associated with headcount reductions and contractual vendor obligations of
the process chemicals business, $14.1 million related to the biocides business
for the write-off of certain costs associated with the decision to abandon
construction of a facility in China, the completion of a consolidation study,
and additional headcount reductions, and $11.0 million related to headcount
reductions at other businesses and corporate. Total headcount reductions affect
approximately 450 individuals. The non-cash portion of the restructuring charges
was approximately $13 million. Annual cost savings expected to be realized as a
result of the restructuring programs are estimated at between $10 million and
$15 million.
Other (income) and expense includes $2.5 million of costs related to the
acquisition and integration of Hickson's operations, and a gain of $10.6
million, principally related to the sale of SPPI.
Research and development expenses decreased primarily due to lower
expenditures related to CMP slurry research and development due to the formation
of the Planar Solutions LLC ("Planar") joint venture, partially offset by the
inclusion of expenses related to Hickson and Brooks ($1.5 million).
Equity in earnings of affiliated companies increased $2.0 million due to
the overall favorable performance of the Company's joint ventures, primarily
Fuji Film Arch.
20
22
Interest expense was $13.8 million in 2000 compared to $5.7 million in
1999. The increase was primarily due to higher debt levels directly related to
the Hickson and Brooks acquisitions, and overall higher interest rates.
Excluding special items, the effective tax rate decreased to 29.2% in 2000
from 33.8% in 1999, due to a research and development credit received as a
result of a tax study undertaken in 2000.
The net earnings (losses) related to the organics division during the
holding period are not included in the Consolidated Statements of Income as of
December 31, 2000, but have been recorded as an adjustment to the net asset
value. The post-acquisition loss for the period ended December 31, 2000
associated with these assets held for sale was $3.5 million. In addition,
interest expense of $2.1 million was allocated to the organics division for the
period ended December 31, 2000. See Note 2, "Additional Balance Sheet
Information" of the Notes to Consolidated Financial Statements.
2001 Outlook
The Company expects that the pretax contribution to earnings in 2001 from
the Hickson and the Brooks acquisitions will exceed the loss of earnings from
the completion of the three-year supply agreement with BASF, which expired on
December 31, 2000. Arch further expects the year-over-year improvement in
operating results from the microelectronic materials segment to continue in
2001, and that cost savings resulting from restructuring will benefit 2001
results. Arch also believes the weaker demand for performance urethanes and
organics products, as well as lower HTH water products shipments, will continue
during 2001. As a result, the Company anticipates earnings for the first quarter
of 2001 will be in the $0.40 range compared to $0.57 reported in the first
quarter of 2000. Full-year 2001 earnings are expected to be in the $1.75 range,
an approximate 6% increase from 2000 earnings per share, before special items.
Sales for the full-year of 2001 are expected to increase in excess of 10%
compared to 2000.
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 HTH water products segment. The decrease in pricing
was primarily related to the microelectronic materials and performance products
segments.
Gross margin percentage was 27.0% in 1999 and 27.4% 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 17.7% in 1999 from 18.7% 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.
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.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance products'
surfactants business and a three-year supply agreement.
21
23
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 $30 million payment was recorded as deferred income
and was amortized ratably into operating income over the three-year period. No
future income will be realized with respect to this supply agreement which was
completed on December 31, 2000. Sales and operating income for each of the years
ended December 31, 2000, 1999 and 1998 include $11.4 million, $9.5 million and
$9.5 million, respectively, related to the amortization of deferred income under
the supply agreement.
During 2000, Arch reorganized its business portfolio into four core
segments: microelectronic materials, HTH water products, treatment products and
performance products. The Company's fifth segment is other specialty products.
All prior period financial data have been restated to reflect this
reorganization.
MICROELECTRONIC MATERIALS
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales.................................................. $233.6 $224.9 $236.8
Operating Income (Loss)................................ 10.5 0.9 (0.3)
Year Ended December 31, 2000 Compared to 1999
Sales increased 3.9% and operating income increased significantly.
Excluding the impact of the process chemicals product line, sales increased 7.4%
and operating income improved 42.2% as the increase in sales and favorable joint
venture performance (Fuji Film Arch), more than offset higher manufacturing
costs, including those associated with a new supply agreement. The sales
increase was driven principally by higher volumes of photoresists, including
Deep UV, and ancillaries, as well as strong demand for thin film equipment and
chemical management services. Process chemicals reported sales of $71.3 million
and an operating loss of $6.0 million in 2000 compared with sales of $73.8
million and an operating loss of $10.7 million in 1999.
The Company's restructuring of the process chemicals business is being
achieved through the consolidation of manufacturing facilities, the reduction of
product offerings, and associated workforce reductions. In this regard, the
Company's Belgian process chemicals operation is being shut down and strategic
customers are being supplied from the Company's Mesa, Arizona facility, which is
being downsized. The focus of this business is now on formulated specialty
process chemicals. The restructuring is expected to be completed by the end of
April 2001. As a result of the restructuring of the process chemicals business,
the Company recorded a $42.9 million pretax charge during 2000, including a $3
million charge associated with the write-down of certain inventories (reflected
in Cost of Goods Sold). See Note 13 to the Notes to the Consolidated Financial
Statements for more information regarding the restructuring of process
chemicals.
Year Ended December 31, 1999 Compared to 1998
Sales decreased 5.0%. Operating income in 1999 increased by $1.2 million as
compared to 1998. The results were negatively impacted by the depressed
performance of the process chemicals product line. Process chemicals reported
sales of $73.8 million and incurred an operating loss of $10.7 million in 1999
compared with sales of $82.9 million and an operating loss of $6.6 million in
1998. Excluding the impact of the process chemicals product line, sales
decreased 1.8%. Operating income excluding process chemicals improved
significantly primarily due to lower operating expenses as a result of cost
reduction initiatives and favorable joint venture performance (Fuji Film Arch),
which more than offset the effect of slightly lower sales.
22
24
HTH WATER PRODUCTS
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales:
HTH Water Products.................................. $244.3 $252.6 $230.0
SPPI................................................ 54.1 84.0 69.3
------ ------ ------
Total Sales......................................... 298.4 336.6 299.3
Operating Income:
HTH Water Products.................................. 22.6 27.0 14.9
SPPI................................................ 2.5 3.7 3.3
------ ------ ------
Total Operating Income.............................. 25.1 30.7 18.2
Year Ended December 31, 2000 Compared to 1999
Sales decreased 11.3% and operating income decreased 18.2%. Excluding the
results of SPPI, sales and operating income decreased 3.3% and 16.3%,
respectively. The sales decrease was primarily attributable to lower volumes in
most product lines with the exception of Trichlor (Pace(R)) due to unseasonable
weather conditions that adversely affected sales in the northeastern United
States. The operating income decrease was attributable to the lower sales,
higher selling and advertising expenses, and higher administrative expenses
associated with the relocation of the segment's headquarters to Kennesaw,
Georgia, partially offset by favorable joint venture performance (Nordesclor).
In July 2000, the Company completed the sale of SPPI.
Year Ended December 31, 1999 Compared to 1998
Sales increased 12.5% and operating income increased 68.7%. Excluding the
results of SPPI, sales and operating income increased 9.8% and 81.2%,
respectively. The increase in sales was attributable to higher bulk export and
branded volumes (HTH(R) and Pace(R)), and increased volumes from the Company's
distribution business, Hydrochim. Prices were slightly lower compared to last
year as lower bulk prices were almost entirely offset by higher average brand
prices. The operating income increase was attributable to the additional sales
volumes and favorable joint venture performance, which more than offset higher
advertising expenses.
TREATMENT PRODUCTS
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ----- -----
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales.................................................... $136.7 $95.0 $87.2
Operating Income......................................... 12.3 7.0 8.5
Year Ended December 31, 2000 Compared to 1999
Sales increased $41.7 million or 43.9% due to sales associated with the
acquisitions of Hickson's wood protection business and Brooks' personal care
intermediates business (approximately $36 million), and higher biocides sales.
Biocides sales were higher primarily due to increased volumes related to the
custom chemicals, anti-dandruff and marine paint markets, partially offset by
lower pricing. Operating income was higher primarily due to the impact of the
higher sales and the absence of a nonrecurring charge recorded in 1999.
23
25
Year Ended December 31, 1999 Compared to 1998
Sales increased 8.9% primarily due to increased volumes related to the
anti-dandruff, building products and marine paint markets. Operating income was
lower due to $2.3 million of nonrecurring expenses related to an unfavorable
arbitration award and the decision to delay construction of a facility in China.
Operating income before nonrecurring expenses was higher due to the impact of
higher sales partially offset by higher international operating expenses. In
addition, manufacturing costs were negatively impacted by an unscheduled outage
at the Rochester plant during the first quarter of 1999 resulting from a severe
snowstorm.
PERFORMANCE PRODUCTS
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales.................................................. $196.7 $165.9 $170.9
Operating Income....................................... 21.8 28.0 26.8
Year Ended December 31, 2000 Compared to 1999
Sales increased 18.6% due to the sales associated with the acquisition of
Hickson's coatings business (approximately $33 million), partially offset by
slightly lower performance urethanes and organics sales. Performance urethanes
and organics' sales decreased due to lower volumes in most product lines,
partially offset by higher volumes in Latin America. Operating income decreased
significantly. The operating income contribution from the coatings business was
more than offset by lower results from performance urethanes and organics due to
lower sales, including lower contract manufacturing fees, and higher energy and
raw material costs. These factors were offset somewhat by additional income of
$1.9 million recorded under the BASF contract due to lower than anticipated
expenses incurred upon completion of the contract on December 31, 2000.
Year Ended December 31, 1999 Compared to 1998
Sales decreased 2.9% 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 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.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance products'
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 $30 million payment was recorded as deferred income and was
amortized ratably into operating income over the three-year period. No future
income will be realized with respect to this supply agreement which was
completed on December 31, 2000. Sales and operating income for the years ended
December 31, 2000, 1999 and 1998, include $11.4 million, $9.5 million and $9.5
million, respectively, related to the amortization of deferred income under the
supply agreement.
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OTHER SPECIALTY PRODUCTS
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Sales..................................................... $75.8 $89.8 $99.8
Operating Income.......................................... 6.4 13.9 21.2
Year Ended December 31, 2000 Compared to 1999
Sales decreased 15.6% and operating income decreased 54%.
Hydrazine sales were lower due to significantly lower hydrazine hydrate
volumes (32%), lower propellant volumes, and lower UltraPure(TM) sales,
partially offset by slightly higher hydrazine hydrate pricing. The decrease in
sales was driven by depressed global market conditions which caused the Company
to temporarily reduce shipments in certain markets where pricing was not
advantageous. The business incurred an operating loss in 2000 compared to
operating income in 1999, primarily due to the decrease in sales.
Sulfuric acid sales were slightly higher due to higher volumes while
operating income was slightly lower due to higher manufacturing costs.
Year Ended December 31, 1999 Compared to 1998
Hydrazine sales were lower due to lower hydrazine hydrate pricing and
volumes caused by poor Asian economic conditions and lower UltraPure(TM) 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.
ENVIRONMENTAL
The Company operates manufacturing facilities throughout the world and as a
result is subject to a broad array of environmental laws and regulations in
various countries. The Company also implements a variety of voluntary programs
to reduce air emissions, eliminate or reduce the generation of hazardous wastes
and to decrease the amount of wastewater discharges. The establishment and
implementation of U.S. 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 U.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 Distribution Agreement specifies that the Company is only responsible
for certain environmental liabilities at the Company's current facilities and
certain off-site locations. In connection with the acquisition of Hickson, the
Company acquired certain environmental exposures and potential liabilities of
current and past operating sites. As a result of the acquisition of Hickson, the
Company's environmental liabilities increased by $17.6 million.
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.
25
27
Charges to income for investigatory and remedial efforts were not material to
operating results in 2000, 1999 and 1998 but may be material to net income in
future years.
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
$20.1 million in 2000, $12.5 million in 1999 and $12.0 million in 1998. During
2000, $8.1 million ($2.4 million in 1999; $1.0 million in 1998) was spent on
capital projects, $9.5 million ($9.7 million in 1999; $10.6 million in 1998) was
spent on normal plant operations, and $2.5 million ($0.4 million in both 1999
and 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
$17.5 million at December 31, 2000, of which $3.0 million are classified as
other current liabilities and $14.5 million are classified as other noncurrent
liabilities, and $2.4 million at December 31, 1999, 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 $15 million to $20 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.
LEGAL MATTER
In connection with the acquisition of Hickson, the Company acquired certain
legal obligations, including a trial court judgment of approximately $8.5
million plus interest, currently on appeal, in a lawsuit associated with a wood
preservative spillage in 1994. The judgment and related interest is included in
Accrued Liabilities in the Consolidated Balance Sheet at December 31, 2000.
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 Statement 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.
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28
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
Cash flows from operations supplemented by the Company's credit facilities
were used to finance the Company's working capital requirements and capital and
investment projects. Prior to and up to the Distribution, the Company's
financing requirements were provided by Olin.
CASH FLOW DATA
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------ ------
($ IN MILLIONS)
PROVIDED BY (USED FOR)
Net Operating Activities from Continuing Operations... $ 74.9 $ 58.7 $ 85.2
Capital Expenditures.................................. (62.0) (58.9) (84.3)
Businesses Acquired, net of Cash...................... (178.4) (8.0) --
Net Investing Activities.............................. (217.0) (67.0) (85.3)
Long-term Debt Borrowings............................. 172.3 -- 2.0
Net Financing Activities.............................. 144.2 13.8 (1.2)
For the 2000 year, the increase in cash flow from net operating activities
was primarily attributable to the Company's focus on reduced investment in
working capital. Lower accounts receivable levels due primarily to increased
collection activity, as well as the Company's ability to manage its inventory in
response to decreased demand, were the main contributors to the reduced
investment in working capital.
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.
Cash provided from assets held for sale was $4.8 million for the year ended
December 31, 2000.
Capital spending for 2000 increased 5.3% compared to the prior year,
primarily due to the Hickson acquisition.
Capital spending for 1999 decreased 30.1% compared to the prior year. The
decrease is primarily attributable to the completion of certain capital projects
in the microelectronic materials segment in the prior year and as a result of
the Company's focus on reducing capital spending levels.
Capital spending for 2001 is expected to be in the $65 million range.
On November 30, 2000, the Company completed the acquisition of New
Jersey-based Brooks Industries' personal care intermediates business for
approximately $38 million in cash. The acquisition was financed from borrowings
under the Company's existing credit facilities.
On August 22, 2000, the Company completed the acquisition of UK-based
Hickson. The total purchase price, inclusive of expenses and net of cash
acquired, was $140.4 million and was financed from a new $225 million revolving
credit facility. See below for additional information concerning this revolving
credit facility. For additional information concerning the Hickson acquisition,
including pro forma financial information, see the Form 8-K/A filed by the
Company on November 2, 2000.
On July 31, 2000, the Company completed the sale to SCP Pool Corporation of
Covington, Louisiana of the assets of its subsidiary, SPPI, a distributor of
swimming pool equipment, parts and supplies. Net proceeds from the sale were
approximately $21 million. A pretax gain on the transaction of approximately $11
million was recorded. Net proceeds from the sale were used to reduce existing
debt levels.
In April 2000, the Company formed Planar, a joint venture with Wacker
Silicones Corporation, to produce and market chemical mechanical planarization
slurry products used in the advanced computer chip manufacturing process. The
Company contributed cash of approximately $3.4 million and intellectual property
to the venture.
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29
In March 2000, the Company completed the sale of its building in Cheshire,
Connecticut. Proceeds from the sale were $6.3 million. No gain or loss was
recorded on the transaction. The Company subsequently leased approximately 40%
of the facility from the new owner. This transaction is expected to generate
approximately $1 million in cost savings per year.
In September 1999, the Company purchased the hydroquinone di
(beta-hydroxyethyl) ether ("HQEE") specialty chemicals business from Eastman
Chemical Company of Kingsport, Tennessee.
Cash provided by financing activities in 2000 was primarily due to
increased borrowings associated with the Hickson and Brooks acquisitions,
partially offset by dividends paid to shareholders of $17.8 million, and $9.5
million used to repurchase common stock.
Cash provided by financing in 1999 was due to increased borrowings
associated with higher working capital requirements, partially offset by
dividends paid to shareholders of $13.8 million, and $6.7 million used to
repurchase common stock.
The Company has an unsecured $125 million revolving five-year credit
facility ("Five-year Facility"), which expires in January 2004, an unsecured
$125 million 364-day facility ("364-day Facility"), which expired in January
2001, was subsequently renewed by the Company under the same terms, and now
expires in January 2002, and a $225 million revolving credit facility which
expires in March 2002 which the Company used to finance the Hickson acquisition
and refinance a portion of the assumed Hickson debt (collectively the "Credit
Facilities"). The Credit Facilities contain leverage and interest coverage ratio
covenants, and restrict the payment of dividends and repurchases of stock in
excess of $65 million plus 50% of cumulative net income under certain
circumstances. Facility fees are payable on the Credit Facilities and range from
0.125% to 0.35%. The Company may select various floating rate borrowing options,
including, but not limited to, LIBOR plus 0.325% to 1.15%. At December 31, 2000,
the Company had approximately $170 million of available borrowings under the
Credit Facilities. The Company believes that the Credit Facilities and cash
provided by operations are adequate to satisfy its liquidity needs for the near
future.
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, 2000, the Company had repurchased approximately 893,000
shares under this program at a cost of approximately $16 million. The program
was suspended during 2000 pending the completion of the Hickson acquisition,
including the subsequent sale of the organics business.
The Company is pursuing the sale of the organics business and expects a
transaction to be completed by September 2001. Proceeds from the sale are
expected to be used to reduce debt levels.
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", as amended by SFAS 137 and SFAS 138. 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 became effective January 1, 2001. Based upon the Company's
current policies of hedging market risks as discussed under Item 7A, the
adoption of SFAS 133 is not expected to have a material effect on the Company's
results of operations, cash flows or financial position. However, the adoption
of SFAS 133 may cause increased volatility in the Company's results of
operations in the future, if the Company changes its policies or enters into new
derivative instruments, which do not meet the requirements for "hedge"
accounting under SFAS 133.
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 has not had and is not expected to have a material impact
on the Company's business, operations, or financial position.
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30
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 British pound, 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 the currency derivatives expire within one year and are for United States
dollar equivalents. At December 31, 2000, the Company had forward contracts to
sell foreign currencies with notional amounts of $0.6 million, (1999-$0.9
million), and forward contracts to buy foreign currencies with notional amounts
of $3.9 million, (1999-$2.3 million). At December 31, 2000 and 1999 the Company
had no outstanding option contracts to sell or buy foreign currencies.
In connection with the acquisition of Hickson, the Company acquired forward
contracts to sell foreign currencies with notional amounts of $3.5 million, all
of which are denominated in currencies other than the U.S. dollar. These
contracts expire during the first quarter of 2001. The fair values of these
forward contracts approximated their carrying values at December 31, 2000.
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.
In connection with the acquisition of Hickson, the Company acquired certain
interest rate swaps related to the assumed debt. The counterparties to the swap
agreements were major financial institutions. As a result of the Company's
repayment of substantially all of the acquired debt of Hickson, the Company
cancelled the swaps in January 2001. As of December 31, 2000, the net market
value of the interest rate swaps was $(0.3) million.
The Company is required to adopt Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 137 and SFAS 138 in the first quarter of
2001.
CAUTIONARY STATEMENT UNDER FEDERAL SECURITIES LAWS
Except for historical information contained herein, the information set
forth 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 Arch 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. or European economies;
increases in interest rates; economic conditions in Asia; further strengthening
of the U.S. dollar against the euro; customer acceptance of new products,
efficacy of new technology, changes in
29
31
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; continued improvement in the semiconductor
industry; unfavorable court, arbitration 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; the
occurrence of unexpected manufacturing interruptions/outages at the customer's
or company plants; unfavorable weather conditions for swimming pool use; the
unsuccessful restructuring of the process chemicals business; the inability of
the Company to sell the Hickson organics division at its desired price; and the
unsuccessful integration of acquired businesses.
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 in the normal course of business.
INTEREST RATES
The Company is exposed to interest rate risk on its borrowings, which are
primarily at floating rates. Based upon the expected levels of borrowings under
these facilities in 2001, an increase in interest rates of 100 basis points
would have a material adverse effect on the Company's results of operations and
cash flows of approximately $2 million.
FOREIGN CURRENCY RISK
Approximately 25 percent of the Company's sales and expenses are
denominated in currencies other than the U.S. dollar. As a result, the Company
is subject to risks associated with its 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, translation of the Company's foreign operations for U.S.
GAAP reporting purposes and 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 British pound, euro, Canadian dollar and Japanese
yen). It is the Company's policy to hedge approximately 60% to 80% of these
transactions. The counterparties to the options and contracts are major
financial institutions.
At December 31, 2000, the Company had forward contracts to sell foreign
currencies with notional amounts of $0.6 million and forward contracts to buy
foreign currencies with notional amounts of $3.9 million. The fair values of
these forward contracts approximated their carrying values.
In connection with the acquisition of Hickson, the Company acquired forward
contracts to sell foreign currencies with notional amounts of $3.5 million, all
of which are denominated in currencies other than the U.S. dollar. These
contracts expire during the first quarter of 2001. The fair values of these
forward contracts approximated their carrying values at December 31, 2000.
Holding other variables constant, if there were 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 hedge forward contracts
would be offset by an equal (decrease) increase in cash flows on the underlying
transaction being hedged.
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32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT
To Our Shareholders:
The management of Arch Chemicals is responsible for the integrity and
objectivity of the financial and operating information contained in this annual
report, including the consolidated financial statements covered by the
Independent Auditors' Report. These statements were prepared in conformity with
accounting principles generally accepted in the United States of America and
include amounts that are based on the best estimates and judgments of
management.
The Company has a system of internal accounting controls that provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America. This system includes written
policies and procedures, an organizational structure that segregates duties, and
a comprehensive program of periodic audits by the internal auditors. The Company
also has instituted policies and guidelines that require employees to maintain
the highest level of ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting
solely of outside directors, meets periodically with management, the internal
auditors and the independent public accountants to review internal accounting
controls, audit results and accounting principles and practices, and annually
recommends to the Board of Directors the selection of independent auditors.
Michael E. Campbell Louis S. Massimo
Chairman of the Board, President Vice President and Chief Financial Officer
and Chief Executive Officer
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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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Stamford, CT
January 24, 2001
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ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
2000 1999
--------- -------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 19.1 $ 12.1
Receivables, net:
Trade.................................................. 190.4 156.0
Other.................................................. 22.3 12.6
Inventories, net.......................................... 164.7 147.3
Other Current Assets...................................... 39.2 26.7
Assets Held For Sale...................................... 80.1 --
-------- ------
Total Current Assets.............................. 515.8 354.7
Investments and Advances -- Affiliated Companies at
Equity.................................................... 32.6 20.8
Property, Plant and Equipment, net.......................... 330.8 326.7
Goodwill.................................................... 172.8 37.1
Other Assets................................................ 21.6 20.2
-------- ------
Total Assets...................................... $1,073.6 $759.5
======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings..................................... $ 95.8 $ 21.0
Accounts Payable.......................................... 143.5 108.1
Accrued Liabilities....................................... 104.2 57.1
-------- ------
Total Current Liabilities......................... 343.5 186.2
Long-Term Debt.............................................. 247.6 76.8
Other Liabilities........................................... 62.7 44.7
-------- ------
Total Liabilities................................. 653.8 307.7
Commitments and Contingencies
Shareholders' Equity:
Common Stock, par value $1 per share, Authorized 100.0
shares: 22.1 shares issued and outstanding in 2000
(22.6 in 1999)......................................... 22.1 22.6
Additional Paid-in Capital................................ 423.3 431.9
Retained Earnings from February 8, 1999................... 6.5 23.8
Accumulated Other Comprehensive Loss...................... (32.1) (26.5)
-------- ------
Total Shareholders' Equity........................ 419.8 451.8
-------- ------
Total Liabilities and Shareholders' Equity........ $1,073.6 $759.5
======== ======
See accompanying notes to the consolidated financial statements.
33
35
ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------ ------ ---------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Sales....................................................... $941.2 $912.2 $894.0
Cost of Goods Sold.......................................... 691.6 666.0 649.2
Selling and Administration.................................. 172.0 163.8 167.6
Amortization of Intangibles................................. 5.9 4.1 4.0
Research and Development.................................... 17.1 17.7 16.2
Equity in (Earnings) of Affiliated Companies................ (7.8) (5.8) (3.4)
Special Items:
Impairment Charge......................................... 31.0 -- --
Restructuring Charge...................................... 34.0 -- --
Other (Income) and Expense................................ (8.1) -- --
------ ------ ------
Income Before Interest, Taxes and Extraordinary Gain... 5.5 66.4 60.4
Interest Expense............................................ 13.8 5.7 0.6
Interest Income............................................. 0.8 0.8 1.0
------ ------ ------
Income (Loss) Before Taxes and Extraordinary Gain...... (7.5) 61.5 60.8
Income Tax Expense (Benefit)................................ (8.0) 20.8 20.8
------ ------ ------
Income Before Extraordinary Gain....................... 0.5 40.7 40.0
Extraordinary Gain (net of taxes of $0.9)................... -- 1.3 --
------ ------ ------
Net Income............................................. $ 0.5 $ 42.0 $ 40.0
====== ====== ======
PRO
FORMA
UNAUDITED
---------
Net Income Per Share -- Basic:
Before Extraordinary Gain................................. $ 0.02 $ 1.77 $ 1.55
Extraordinary Gain........................................ -- 0.06 --
------ ------ ------
Net Income................................................ $ 0.02 $ 1.83 $ 1.55
====== ====== ======
Net Income Per Share -- Diluted:
Before Extraordinary Gain................................. $ 0.02 $ 1.76 $ 1.55
Extraordinary Gain........................................ -- 0.06 --
------ ------ ------
Net Income................................................ $ 0.02 $ 1.82 $ 1.55
====== ====== ======
Weighted Average Common Stock Outstanding -- Basic.......... 22.3 23.0 23.0
Weighted Average Common Stock Outstanding -- Diluted........ 22.3 23.1 23.0
See accompanying notes to the consolidated financial statements.
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ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------ ------
($ IN MILLIONS)
OPERATING ACTIVITIES:
Net Income.................................................. $ 0.5 $ 42.0 $ 40.0
Adjustments to Reconcile Net Income to Net Cash and Cash
Equivalents Provided (Used) by Operating Activities:
Equity in Earnings of Affiliates.......................... (7.8) (5.8) (3.4)
Depreciation.............................................. 49.8 49.3 43.1
Amortization of Intangibles............................... 5.9 4.1 4.0
Deferred Taxes............................................ (17.6) 2.1 2.7
Deferred Income........................................... (11.4) (9.5) (9.5)
Impairment Charge......................................... 31.0 -- --
Restructuring Charge...................................... 32.7 -- --
Other (Income) and Expense................................ (8.1) -- --
Change in Assets and Liabilities Net of Purchases and Sale
of Businesses:
Receivables............................................ 7.9 (26.7) 19.9
Inventories............................................ 1.7 (7.9) 0.2
Other Current Assets................................... (1.3) (1.4) 1.4
Accounts Payable and Accrued Liabilities............... (12.0) 7.4 (14.0)
Noncurrent Liabilities................................. 0.5 4.3 2.4
Other Operating Activities.................................. 3.1 0.8 (1.6)
------- ------ ------
Net Operating Activities from Continuing Operations....... 74.9 58.7 85.2
Change in Net Assets Held for Sale.......................... 4.8 -- --
------- ------ ------
Net Operating Activities.................................. 79.7 58.7 85.2
------- ------ ------
INVESTING ACTIVITIES:
Capital Expenditures........................................ (62.0) (58.9) (84.3)
Businesses Acquired in Purchase Transactions, Net of Cash
Acquired.................................................. (178.4) (8.0) --
Proceeds from Sale of Business.............................. 21.1 -- --
Disposition of Property, Plant and Equipment................ 6.3 -- --
Investments and Advances -- Affiliated Companies at
Equity.................................................... (3.4) -- 0.1
Other Investing Activities.................................. (0.6) (0.1) (1.1)
------- ------ ------
Net Investing Activities.................................. (217.0) (67.0) (85.3)
------- ------ ------
FINANCING ACTIVITIES:
Long-Term Debt Assumed from Olin............................ -- 75.0 --
Long-Term Debt Borrowings................................... 172.3 -- 2.0
Long-Term Debt Repayments................................... (73.6) (3.4) (0.3)
Short-Term Borrowings (Repayments).......................... 72.4 20.5 (0.7)
Dividends Paid.............................................. (17.8) (13.8) --
Purchases of Arch Common Stock.............................. (9.5) (6.7) --
Transfers to Olin........................................... -- (58.1) (2.2)
Other Financing Activities.................................. 0.4 0.3 --
------- ------ ------
Net Financing Activities.................................. 144.2 13.8 (1.2)
------- ------ ------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................ 0.1 (0.5) (0.6)
------- ------ ------
Net Increase (Decrease) in Cash and Cash Equivalents...... 7.0 5.0 (1.9)
Cash and Cash Equivalents, Beginning of Year................ 12.1 7.1 9.0
------- ------ ------
Cash and Cash Equivalents, End of Year...................... $ 19.1 $ 12.1 $ 7.1
======= ====== ======
CASH PAID DURING THE YEAR FOR:
Income Taxes, net......................................... $ 8.2 $ 18.4 $ --
Interest.................................................. $ 13.5 $ 5.4 $ 0.5
See accompanying notes to the consolidated financial statements.
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37
ARCH CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EQUITY PRIOR TO THE DISTRIBUTION)
EQUITY IN ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER COMPREHENSIVE
--------------- PAID-IN RETAINED PRIOR TO COMPREHENSIVE INCOME
SHARES AMOUNT CAPITAL EARNINGS DISTRIBUTION LOSS (LOSS)
------ ------ ---------- -------- ------------ ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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
-------
Net Income.................... -- -- -- 0.5 -- -- 0.5
Other Comprehensive Loss...... -- -- -- -- -- (5.6) (5.6)
Stock Options Exercised....... -- -- 0.4 -- -- -- --
Stock Repurchase.............. (0.5) (0.5) (9.0) -- -- -- --
Dividends Paid ($0.80 per
share in 2000).............. -- -- -- (17.8) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31,
2000........................ 22.1 $22.1 $423.3 $ 6.5 $ -- $(32.1) $ (5.1)
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
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38
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 materials, HTH
water products, treatment products, performance products and other specialty
products.
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 businesses.
Microelectronic materials markets advanced chemistry and services for
semiconductor manufacturers permitting them to offer businesses and consumers
leading edge products and capabilities. This portfolio includes photoresists,
polyimides, formulated products, thin film systems, chemical management
services, and the CMP Planar Solutions LLC ("Planar") joint venture. HTH water
products supplies products and related equipment and services to provide people
with clean, safe water. Arch's portfolio includes HTH(R) branded consumer pool
chemicals, and chemicals and feeder technology for commercial pools, drinking
water and industrial applications. Treatment products supplies active
ingredients and related services for industrial and consumer products, which
provide biocidal and other treatment characteristics that promote health,
safety, and well-being. Performance products supplies chemistry and services for
the coatings, adhesives, sealant, and elastomer markets, making possible a vast
array of products. Other specialty products businesses include hydrazine and
sulfuric acid. The hydrazine business supplies propellant grade hydrazine and
hydrazine derivatives for use as fuel in satellites, expendable launch vehicles
and auxiliary and emergency power units. The sulfuric acid business is a major
regional supplier of sulfuric acid regeneration services and virgin sulfuric
acid sales to the U.S. Gulf Coast market.
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 prior to the Distribution except as discussed in the following
paragraph, include only those assets, liabilities, revenues and expenses
attributable to the
37
39
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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 Company has accounted for the organics
division, acquired in connection with the acquisition of Hickson International
PLC ("Hickson"), in accordance with EITF 87-11, "Allocation of Purchase Price to
Assets to be Sold." As such, the fair value of the net assets of this division
have been classified as "Assets Held for Sale" in the Company's Consolidated
Balance Sheet at December 31, 2000.
The Consolidated Financial Statements prior to the Distribution do not
include interest expense associated with the allocation of Olin's consolidated
debt nor do they reflect the $75 of debt assumed by the Company from Olin on
February 8, 1999. For 1998, 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.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 2000 presentation, and to reflect the adoption of EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs."
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.
INVESTMENTS AND ADVANCES -- AFFILIATED COMPANIES AT EQUITY
The Company's investments and advances to affiliated companies at December
31, 2000 include its 49% investment in Fuji Film Arch, its 50% investment in
Planar Solutions LLC ("Planar"), its 50% investment in Nordesclor S.A., its 50%
investment in Aquachlor (Pty) Ltd., and its 49% investment in Koppers. Fuji Film
Arch is located in Japan and manufactures photoresists. Planar produces and
markets chemical mechanical planarization slurry products, and is located in the
United States of America. Nordesclor produces and packages calcium hypochlorite,
and is located in Brazil. Aquachlor produces and packages calcium hypochlorite,
and is located in South Africa. Koppers manufactures copper/chrome/arsenate
based wood preservatives, and is located in Australia.
The amount of cumulative unremitted earnings of joint ventures included in
consolidated retained earnings at December 31, 2000 was $6.6. During the years
ended December 31 2000, 1999 and 1998, distributions of $4.8, $2.2 and $2.7,
respectively, were received from joint ventures.
38
40
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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
Building and building equipment....................... 5 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 over periods ranging
from 20 to 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 $45.1 and $39.2 at December 31, 2000
and 1999, 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 a component of operating income when the carrying value
exceeds the estimated fair 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. In
addition, the Company records net gains or losses on sales of assets as a
component of operating income.
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
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 approximates book value due to its floating rate interest rate
terms. The fair
39
41
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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. Certain of the Company's product lines have extended
payment terms due to the seasonal nature of the business.
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
March 31, 2001. 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 quarter of 2001. 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 2000, 1999 and 1998 the Company's other
specialty products segment sales include $13.9, $17.3 and $17.6, 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 other accumulated 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 SFAS No. 109, "Accounting for Income Taxes."
Allocated income taxes payable were settled with Olin on a current basis.
40
42
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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 less than 0.1 million in 2000, and 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, if they are earned. Stock options with exercise prices
greater than the average market price of the Company's common stock were not
included in the computation of diluted earnings per share.
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 as
incurred. Settlement gains and losses are recognized when significant pension
obligations are settled and the gain or loss is determinable. The Company's
policy is to fund, at a minimum, amounts as are necessary on an actuarial basis
to provide assets sufficient to meet the benefits to be paid to plan members in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974.
SHIPPING AND HANDLING COSTS
In 2000, the Emerging Issues Task Force issued Statement No. 00-10,
"Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). This
statement addresses the income statement classification of shipping and handling
fees which are billed to customers and included in revenue. As a result, the
Company was required to adjust for the costs for shipping and handling which
were previously recorded in Sales. The Company's current policy is to include
such costs in Cost of Goods Sold in the Consolidated Statements of Income. Total
shipping and handling fees included in Sales and Cost of Goods Sold for the
years ended December 31, 2000, 1999 and 1998 were $35.6, $32.4 and $31.2,
respectively. This adjustment is an equal increase to Sales and Cost of Goods
Sold and has no impact on income. Sales and Cost of Goods Sold amounts,
including segment information for prior years as well as current year amounts
disclosed in previous filings or other publicly disclosed information, have been
restated to conform with the requirements of EITF 00-10.
2. ADDITIONAL BALANCE SHEET INFORMATION
TRADE RECEIVABLES
Allowance for doubtful accounts was $9.3 and $5.7 at December 31, 2000 and
1999, respectively. Provision for doubtful accounts charged to operations was
$0.4, $1.2 and $1.4 in 2000, 1999, and 1998,
41
43
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
respectively. Bad debt write-offs, net of recoveries, amounted to $0.1, $2.2 and
$0 in 2000, 1999, and 1998, respectively. In addition, $3.3 attributable to
acquisitions was added in 2000.
INVENTORIES
DECEMBER 31,
----------------
2000 1999
------ ------
Raw materials and supplies................................. $ 65.0 $ 54.9
Work-in-progress........................................... 23.0 13.4
Finished goods............................................. 128.8 129.0
------ ------
Inventories, gross......................................... 216.8 197.3
LIFO reserves.............................................. (52.1) (50.0)
------ ------
Inventories, net........................................... $164.7 $147.3
====== ======
Inventory valued using the LIFO method comprised 53% of the total inventory
at December 31, 2000 and 59% at December 31, 1999. Gross inventory values
approximate replacement cost.
ASSETS HELD FOR SALE
The Company's intention is to divest of the Hickson organics division
within twelve months of acquisition. Accordingly, the Company has accounted for
the organics division in accordance with EITF 87-11, "Allocation of Purchase
Price to Assets to be Sold." As such, the fair value of the net assets of this
division have been classified as "Assets Held for Sale" in the Company's
Consolidated Balance Sheet at December 31, 2000. This valuation includes an
estimate of the cash flows, including estimated net sales proceeds, and an
allocation of interest expense during the holding period. The Company expects a
transaction to be completed no later than the third quarter of 2001. The net
earnings (losses) related to the organics division during the holding period are
not included in the Consolidated Statements of Income as of December 31, 2000,
but have been recorded as an adjustment to the net asset value in accordance
with EITF 87-11. The loss associated with these assets held for sale for the
year ended December 31, 2000 was $3.5. Interest expense allocated to these
assets was $2.1 for the year ended December 31, 2000. Also included in "Assets
Held for Sale" is certain land that the Company is in the process of divesting.
PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------
2000 1999
------ ------
Land and improvements to land.............................. $ 50.3 $ 28.5
Buildings and building equipment........................... 115.7 124.0
Machinery and equipment.................................... 656.0 659.2
Leasehold improvements..................................... 5.3 3.1
Construction-in-progress................................... 40.9 61.9
------ ------
Property, plant and equipment.............................. 868.2 876.7
Less accumulated depreciation.............................. 537.4 550.0
------ ------
Property, plant and equipment, net......................... $330.8 $326.7
====== ======
Leased assets capitalized and included in the previous table are not
significant. Maintenance and repairs charged to operations amounted to $32.7,
$35.1, and $33.7 in 2000, 1999, and 1998, respectively.
42
44
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
ACCRUED LIABILITIES
Included in accrued liabilities are the following items:
DECEMBER 31,
---------------
2000 1999
------ -----
Deferred income............................................. $ -- $ 9.3
Accrued compensation........................................ 17.2 11.0
Restructuring reserves...................................... 21.6 --
Other....................................................... 65.4 36.8
------ -----
Total accrued liabilities................................... $104.2 $57.1
====== =====
Deferred income relates primarily to a $30 payment under a three-year
supply agreement, which expired on December 31, 2000, entered into in connection
with the sale of the surfactants business to BASF in November 1997. Sales and
operating income for the years ended December 31, 2000, 1999 and 1998 include
$11.4, $9.5 and $9.5, related to the amortization of the deferred income under
such supply agreement.
3. DEBT
The Company has an unsecured $125 revolving five-year credit facility
("Five-year Facility"), which expires in January 2004. The Company also has an
unsecured $125 364-day facility ("364-day Facility"), which expired in January
2001, but was subsequently renewed by the Company under the same terms, and now
expires in January 2002, and a $225 revolving credit facility ("Acquisition
Facility") which expires in March 2002 which the Company used to finance the
Hickson acquisition and refinance a portion of the assumed debt, (collectively
the "Credit Facilities"). The Credit Facilities contain leverage and interest
coverage ratio covenants, and restrict the payment of dividends and repurchases
of stock in excess of $65 plus 50% of cumulative net income under certain
circumstances. Facility fees are payable on the Credit Facilities and range from
0.125% to 0.35%. The Company may select various floating rate borrowing options,
including but not limited to LIBOR plus 0.325% to 1.15%. The weighted average
interest rate for the years ended December 31, 2000 and 1999 were 8.1% and 6.6%,
respectively. At December 31, 2000 and 1999, borrowings under the Credit
Facilities were $305.7 and $90.0, respectively, of which $243.5 and $75.0,
respectively, was classified as long-term, and the effective interest rate was
8.0% and 7.4%, respectively.
In addition, at December 31, 2000 and 1999 the Company had $7.3 and $1.8,
respectively, of borrowings outstanding of which $3.2 was short-term at December
31, 2000 with interest rates ranging from 3% to 9%.
At December 31, 2000 and 1999, Arch also had approximately $70 and $30,
respectively, of uncommitted short-term lines of credit available under which
$30.4 and $5.4, respectively, were outstanding at an interest rate of 7.4% and
6.2%, respectively.
The fair value of the Company's long-term debt at December 31, 2000
approximated the book value of $247.6 due to its floating interest rate terms.
The fair value of the Company's short-term debt at December 31, 2000
approximated the book value of $95.8 due to the short maturity of the
instruments.
4. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward sales and purchase contracts and currency
options to manage currency risk resulting from purchase and sale commitments
denominated in foreign currencies (principally British pound, euro, Canadian
dollar and Japanese yen) and relating to particular anticipated but not yet
committed
43
45
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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, 2000, the Company had forward contracts to sell
foreign currencies with notional amounts of $0.6 (1999-$0.9) and forward
contracts to buy foreign currencies with notional amounts of $3.9 (1999-$2.3).
The fair market values of these forward contracts approximated their carrying
values at December 31, 2000 and 1999. At December 31, 2000, 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 connection with the acquisition of Hickson, the Company acquired forward
contracts to sell foreign currencies with notional amounts of $3.5, all of which
are denominated in currencies other than the U.S. dollar. These contracts expire
during the first quarter of 2001. The fair values of these forward contracts
approximated their carrying values at December 31, 2000.
In accordance with Statement of Financial 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 expenses 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 is 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/(losses), net of taxes, were $(1.7) in
2000, $0.2 in 1999, and $0.7 in 1998.
In connection with the acquisition of Hickson, the Company acquired certain
interest rate swaps related to the assumed debt. The counterparties to the swap
agreements were major financial institutions. As a result of the Company's
repayment of substantially all of the acquired debt of Hickson, the Company
cancelled the swaps in January 2001. As of December 31, 2000, the net market
value of the interest rate swaps was $(0.3).
The Company is required to adopt Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 137 and SFAS 138 in the first quarter of
2001.
5. INCOME TAXES
COMPONENTS OF PRETAX INCOME (LOSS)
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ----- -----
Domestic................................................... $(16.6) $45.1 $39.7
Foreign.................................................... 9.1 16.4 21.1
------ ----- -----
Pretax income (loss)....................................... $ (7.5) $61.5 $60.8
====== ===== =====
44
46
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ----- -----
Currently payable:
Federal.................................................. $ 2.9 $ 7.3 $ 7.5
State.................................................... 0.5 1.9 3.0
Foreign.................................................. 6.1 5.0 7.6
Deferred................................................... (17.5) 6.6 2.7
------ ----- -----
Income tax expense (benefit)............................... $ (8.0) $20.8 $20.8
====== ===== =====
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
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Income tax provision (benefit) at U.S. federal income tax
rate...................................................... $(2.6) $21.5 $21.3
Foreign income tax.......................................... (0.6) (2.2) (4.0)
State income taxes, net..................................... (1.2) 1.8 2.2
Goodwill.................................................... 1.0 0.5 0.6
Equity in net income of affiliates.......................... (2.5) (1.9) (0.4)
Research and development credit............................. (2.3) -- --
Other, net.................................................. 0.2 1.1 1.1
----- ----- -----
Income tax provision (benefit).............................. $(8.0) $20.8 $20.8
===== ===== =====
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
DECEMBER 31,
--------------
2000 1999
----- -----
Deferred tax assets:
Postretirement benefits................................... $10.1 $ 8.7
Non-deductible reserves................................... 45.5 18.1
Other miscellaneous items................................. 6.0 6.6
----- -----
Total deferred tax assets......................... 61.6 33.4
----- -----
Deferred tax liabilities:
Property, plant and equipment............................. 23.2 19.3
Other miscellaneous items................................. 3.6 2.2
----- -----
Total deferred tax liabilities.................... 26.8 21.5
----- -----
Net deferred tax asset...................................... $34.8 $11.9
===== =====
Included in Other Current Assets at December 31, 2000 and 1999,
respectively, are $30.3 and $19.2 of net current deferred tax assets. Included
in Other Assets at December 31, 2000 is $4.5 of net noncurrent deferred tax
assets. Included in Other Long-Term Liabilities at December 31, 1999 is $7.3 of
net long-term
45
47
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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, 2000, the Company's share of the cumulative
undistributed earnings of foreign subsidiaries was approximately $119, which
assumes certain tax elections to be made in 2001 related to the Hickson
acquisition. 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 PLANS
STOCK OPTION PLANS
As of December 31, 2000, the Company had five stock-based compensation
plans, which are described below.
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 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 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, continue to vest in accordance
with their vesting schedule so long as the optionee remains employed at the
Company. No additional Company options will be granted under the 1980, 1988 and
1996 Olin Stock Option Plans.
In 1999, the Company adopted the 1999 Long Term Incentive Plan, 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. In
addition, in 1999, the Company adopted the 1999 Stock Plan for Nonemployee
Directors. The Company's policy is to grant options to purchase common stock at
an exercise price representing the fair market value of the common stock on the
grant date. In general, the employee options vest and become exercisable at the
end of a three-year period and the directors' options are exercisable upon
grant. In general, all options are exercisable up to ten years from the date of
grant. In 1999, the Company granted to certain employees approximately 245,000
performance share units. The performance share units will vest if certain
performance measures are met at the end of 2001, 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. At December
31, 2000, total shares authorized for grant under plans established subsequent
to the Distribution Date were 2,298,000.
46
48
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
The following table summarizes stock option activity during 2000 and 1999
(number of options in thousands):
WEIGHTED
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
----- ------ ---------------
Options granted................................ 214 18.52 17.38 - 19.85
Options exercised.............................. 16 19.06 19.06
Options cancelled or forfeited................. 149 20.63 17.38 - 31.92
----- ------ ---------------
Balance, December 31, 2000....................... 2,423 $23.75 $15.68 - $31.92
===== ======
At December 31, 2000 and 1999, options covering 1,281,761 and 1,100,061
shares, respectively, were exercisable at weighted average exercise prices of
$26.57 and $25.89, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2000 (number of options in thousands):
WEIGHTED AVERAGE
--------------------------------------------
OPTION EXERCISE PRICE
RANGE OF NUMBER NUMBER REMAINING -------------------------
EXERCISE PRICES OUTSTANDING EXERCISABLE CONTRACTUAL LIFE OUTSTANDING EXERCISABLE
- --------------- ----------- ----------- ---------------- ----------- -----------
$15.68 - $23.48 1,390 361 7 years $19.19 $18.73
$28.58 - $31.92 1,033 921 6 years $29.88 $29.63
----- -----
2,423 1,282
===== =====
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 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%, risk free interest
rate of 5.5%, expected volatility of 27% 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 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. The
fair value of each Arch
47
49
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
option granted during 2000 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: dividend yield of 4.2%, risk free interest rate of 5.18%,
expected volatility of 40% and an expected life of 7 years. The weighted-average
per share fair value of options granted during 2000, 1999 and 1998 was $5.24,
$5.54 and $11.07, respectively. Pro forma net income (loss) as if the Company
had recorded compensation expense for the Arch and Olin stock options granted
was $(1.0), $40.7, and $39.5 in 2000, 1999 and 1998, respectively. Pro forma
earnings (loss) per share in 2000 and 1999 would have been $(0.05) and $1.76,
respectively.
The 1998 pro forma amounts are not necessarily representative of the
effects of stock-based awards on future 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 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. The
Company's policy is to fund, at a minimum, amounts as are necessary on an
actuarial basis to provide assets sufficient to meet the benefits to be paid to
plan members in accordance with the requirements of the Employee Retirement
Income Security Act of 1974.
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 terms of 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 after the Distribution. The Olin plan was an
unfunded plan; therefore, no assets were transferred, and the Arch plan remains
an unfunded plan.
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, all of which are reflected in the Consolidated
Financial Statements.
48
50
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- --------------
2000 1999 2000 1999
------- ------- ------ -----
RECONCILIATION OF PROJECTED BENEFIT
OBLIGATION:
Projected benefit obligation at beginning of
year........................................ $103.7 $107.1 $ 7.9 $ 8.2
Service cost (benefits earned during the
period)..................................... 5.2 6.1 0.5 0.6
Interest cost on the projected benefit
obligation.................................. 8.2 7.6 0.6 0.5
Plan amendments............................... 1.2 -- -- --
Actuarial (gain)/loss......................... 3.0 (16.8) (0.2) (1.4)
Curtailment................................... 1.6 -- 1.5 --
Benefits paid................................. (1.2) (0.3) (0.2) --
------ ------ ------ -----
Projected benefit obligation at end of year... $121.7 $103.7 $ 10.1 $ 7.9
====== ====== ====== =====
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at beginning of
year........................................ $127.1 $ 87.0
Adjustment to fair value of plan assets....... -- 27.0
Benefits paid................................. (0.9) (0.3)
Actual return on plan assets (net of
expenses)................................... (4.4) 13.4
------ ------
Fair value of plan assets at end of year...... $121.8 $127.1
====== ======
FUNDED STATUS................................. $ 0.1 $ 23.4 $(10.1) $(7.9)
Unrecognized net actuarial (gain)/loss........ (19.8) (41.3) -- 0.2
Unamortized prior service cost................ 4.2 4.1 (0.3) (0.4)
Unrecognized transition asset................. -- (0.5) -- --
------ ------ ------ -----
Accrued benefit cost.......................... $(15.5) $(14.3) $(10.4) $(8.1)
====== ====== ====== =====
2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ----- -----
WEIGHTED AVERAGE RATE ASSUMPTIONS:
Discount rate................................. 7.75% 8.00% 7.00% 7.75% 8.00% 7.00%
Rate of compensation increase................. 4.60% 4.60% 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)..................................... $ 5.2 $ 6.1 $ 5.0 $ 0.5 $ 0.6 $ 0.7
Interest cost on the projected benefit
obligation.................................. 8.2 7.6 6.6 0.6 0.5 0.5
Expected return on plan assets................ (11.3) (10.1) (7.0) -- -- --
Amortization of prior service cost............ 0.7 0.7 0.8 (0.1) (0.1) (0.1)
Amortization of transition obligation......... (0.5) (0.5) (0.5) -- -- --
Curtailment loss.............................. 1.0 -- -- 1.5 -- --
Recognized actuarial (gain)/loss.............. (1.9) (0.2) 0.1 -- -- --
------ ------ ------ ------ ----- -----
Net periodic benefit cost..................... $ 1.4 $ 3.6 $ 5.0 $ 2.5 $ 1.0 $ 1.1
====== ====== ====== ====== ===== =====
The accumulated benefit obligation relating to the Company's unfunded
pension plans was $4.3 and $3.6, as of December 31, 2000 and 1999, respectively.
The curtailment loss was recorded in the Restructuring Charge in the
Consolidated Statement of Income for the year ended December 31, 2000.
49
51
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
For measurement purposes, the assumed health care cost trend rate was 5.4%
and 5.7% for HMO plans, and 6.5% and 7.25% for non-HMO plans, in 2000 and 1999,
respectively, 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 2000, and a $0.4 increase or decrease, respectively, in the
accumulated postretirement benefit obligation at December 31, 2000.
The Company's foreign subsidiaries maintain pension and other benefit plans
that are consistent with statutory practices and are not significant.
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 $2.5, $3.2, and $3.6 in 2000, 1999 and
1998, 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.
At December 31, 2000, the Company has reserved 3,346,000 shares of its
authorized but unissued common stock for possible future issuance in connection
with the exercise of stock options, restricted stock, and performance share
units.
9. SEGMENT REPORTING
During 2000, the Company's reorganized its business portfolio as a result
of the integration of the Hickson acquisition. The Company changed from
reporting in three segments (microelectronic chemicals, water chemicals and
performance chemicals) to reporting in five segments (microelectronic materials,
HTH water products, treatment products, performance products, and other
specialty products). Segment results on this new basis for all periods ended
December 31 were as follows:
2000 1999 1998
-------- ------ ------
SALES:
Microelectronic Materials............................. $ 233.6 $224.9 $236.8
HTH Water Products.................................... 244.3 252.6 230.0
Treatment Products.................................... 136.7 95.0 87.2
Performance Products.................................. 196.7 165.9 170.9
Other Specialty Products.............................. 75.8 89.8 99.8
SPPI.................................................. 54.1 84.0 69.3
-------- ------ ------
TOTAL SALES............................................. $ 941.2 $912.2 $894.0
======== ====== ======
50
52
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
2000 1999 1998
-------- ------ ------
OPERATING INCOME (LOSS), INCLUDING EQUITY INCOME IN
AFFILIATED COMPANIES:
Microelectronic Materials............................. $ 10.5 $ 0.9 $ (0.3)
HTH Water Products.................................... 22.6 27.0 14.9
Treatment Products.................................... 12.3 9.3 8.5
Performance Products.................................. 21.8 28.0 26.8
Other Specialty Products.............................. 6.4 13.9 21.2
SPPI.................................................. 2.5 3.7 3.3
Corporate Unallocated................................. (10.7) (14.1) (14.0)
-------- ------ ------
TOTAL OPERATING INCOME, INCLUDING EQUITY INCOME IN
AFFILIATED COMPANIES BEFORE NONRECURRING EXPENSES AND
SPECIAL ITEMS......................................... 65.4 68.7 60.4
NONRECURRING EXPENSES AND SPECIAL ITEMS............... (59.9) (2.3) --
-------- ------ ------
TOTAL OPERATING INCOME, INCLUDING EQUITY INCOME IN
AFFILIATED COMPANIES.................................. $ 5.5 $ 66.4 $ 60.4
======== ====== ======
EQUITY INCOME IN AFFILIATED COMPANIES:
Microelectronic Materials............................. $ 3.8 $ 2.7 $ 0.9
HTH Water Products.................................... 3.4 3.1 2.5
Treatment Products.................................... 0.6 -- --
-------- ------ ------
TOTAL EQUITY INCOME IN AFFILIATED COMPANIES............. $ 7.8 $ 5.8 $ 3.4
======== ====== ======
DEPRECIATION EXPENSE:
Microelectronic Materials............................. $ 17.3 $ 18.5 $ 14.3
HTH Water Products.................................... 11.1 12.0 11.7
Treatment Products.................................... 8.1 6.5 6.7
Performance Products.................................. 6.8 6.6 5.1
Other Specialty Products.............................. 6.5 5.7 5.3
-------- ------ ------
TOTAL DEPRECIATION EXPENSE.............................. $ 49.8 $ 49.3 $ 43.1
======== ====== ======
AMORTIZATION EXPENSE:
Microelectronic Materials............................. $ 4.0 $ 3.9 $ 3.9
HTH Water Products.................................... 0.1 0.1 0.1
Treatment Products.................................... 0.7 -- --
Performance Products.................................. 1.1 0.1 --
-------- ------ ------
TOTAL AMORTIZATION EXPENSE.............................. $ 5.9 $ 4.1 $ 4.0
======== ====== ======
CAPITAL SPENDING:
Microelectronic Materials............................. $ 15.4 $ 14.8 $ 43.3
HTH Water Products.................................... 13.9 12.2 10.1
Treatment Products.................................... 16.9 17.1 19.1
Performance Products.................................. 8.3 5.8 2.4
Other Specialty Products.............................. 7.5 9.0 9.4
-------- ------ ------
TOTAL CAPITAL SPENDING.................................. $ 62.0 $ 58.9 $ 84.3
======== ====== ======
51
53
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
2000 1999 1998
-------- ------ ------
TOTAL ASSETS:
Microelectronic Materials............................. $ 252.9 $304.5 $309.6
HTH Water Products.................................... 163.0 180.9 166.4
Treatment Products.................................... 244.8 99.8 91.1
Performance Products.................................. 256.8 120.5 99.1
Other Specialty Products.............................. 62.2 62.8 60.8
Other................................................. 93.9 (9.0) (5.4)
-------- ------ ------
TOTAL ASSETS............................................ $1,073.6 $759.5 $721.6
======== ====== ======
INVESTMENT & ADVANCES -- AFFILIATED COMPANIES AT EQUITY:
Microelectronic Materials............................. $ 17.6 $ 11.2 $ 9.2
HTH Water Products.................................... 9.9 9.6 11.9
Treatment Products.................................... 5.1 -- --
-------- ------ ------
TOTAL INVESTMENT & ADVANCES -- AFFILIATED COMPANIES AT
EQUITY................................................ $ 32.6 $ 20.8 $ 21.1
======== ====== ======
Segment operating income includes the equity in earnings of affiliated
companies and an allocation of corporate charges based on various allocation
bases. Segment operating income excludes interest income, interest expense,
extraordinary or special items, and certain unallocated expenses of the
corporate headquarters. 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, assets held for sale, and other assets. Sales by
segment substantially represent sales for the five major product lines of the
Company.
Geographic area information for the periods ended December 31, were as
follows:
2000 1999 1998
------ ------ ------
SALES
United States............................................ $657.5 $674.4 $671.3
Europe................................................... 183.8 144.8 129.7
Other foreign............................................ 99.9 93.0 93.0
------ ------ ------
Total Sales.................................... $941.2 $912.2 $894.0
====== ====== ======
LONG-LIVED ASSETS (EXCLUDES GOODWILL)
United States............................................ $293.6 $280.0 $287.0
Europe................................................... 47.5 54.2 54.3
Other foreign............................................ 43.9 33.5 31.8
------ ------ ------
Total Long-lived Assets........................ $385.0 $367.7 $373.1
====== ====== ======
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 $61.3, $63.1 and $63.9 in 2000,
1999, and 1998, respectively.
10. ACQUISITIONS, DISPOSITION AND JOINT VENTURE
ACQUISITIONS
In July 2000, Arch Chemicals UK Holdings Limited ("Arch UK"), a newly
formed, wholly-owned, indirect subsidiary of the Company made a formal cash
offer (the "Offer") for all of the issued shares of UK-
52
54
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
based Hickson. The Offer, which was unanimously recommended by Hickson's Board
of Directors, was for GBP 0.55 (US $0.82) in cash for each Hickson share. On
August 22, 2000, Arch UK declared the offer wholly unconditional (the
"Acquisition Date"). The total purchase price, including estimated expenses and
net debt assumed ($59), was approximately $215. The acquisition of Hickson was
accounted for as a purchase business combination, and accordingly, the results
of Hickson have been included in the consolidated financial statements since the
Acquisition Date. The related goodwill is being amortized over 30 years.
The Company financed the acquisition, including certain assumed debt
required to be repaid, from the Acquisition Facility. Expenses associated with
the purchase of derivative instruments to mitigate the risk of foreign currency
fluctuations related to the purchase price and the effect of the assumption of
certain foreign-denominated debt on the transaction are classified as a
component of "Other (Income) and Expense" in the Company's Consolidated
Statement of Income for the year ended December 31, 2000. In connection with the
Hickson acquisition, the Company intends to dispose of Hickson's organics
division within one year, and, accordingly, those assets are classified in the
balance sheet as "Assets Held for Sale" (see Note 2). See the Form 8-K/A filed
by the Company on November 2, 2000 for additional information regarding the
acquisition of Hickson.
In addition, in November 2000, the Company completed the acquisition of the
personal care intermediates business of Brooks Industries for approximately $38
in cash. This acquisition was accounted for as a purchase business combination
and the results of operations have been included in the Consolidated Financial
Statements from the date of purchase and were not material in 2000. The related
goodwill is being amortized over 20 years.
Supplemental cash flow information on the businesses acquired is as
follows:
YEAR ENDED
DECEMBER 31, 2000
-----------------
Working capital...................................... $ 2.7
Assets held for sale................................. 84.9
Property, plant and equipment........................ 40.9
Other assets......................................... 13.9
Goodwill............................................. 138.0
Debt................................................. (74.4)
Other liabilities.................................... (27.6)
------
Cash paid for acquisitions, net of cash acquired..... $178.4
======
In September 1999, the Company purchased the hydroquinone di
(beta-hydroxyethyl) ether ("HQEE") specialty chemicals business of Eastman
Chemical Company. This acquisition was accounted for as a purchase business
combination and the results of operations have been included in the Consolidated
Financial Statements from the date of purchase and were not material in 1999.
The related goodwill is being amortized over 20 years.
53
55
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
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
On July 31, 2000, the Company completed the sale to SCP Pool Corporation of
Covington, Louisiana of the assets of its subsidiary, SPPI, a distributor of
swimming pool equipment, parts and supplies. Net proceeds from the sale were
approximately $21 and a pretax gain of approximately $11 was recorded. Net
proceeds from the sale were used to reduce existing debt levels. SPPI's sales
and operating income for the years ended December 31, 2000, 1999 and 1998 were
$54.1 and $2.5, $84.0 and $3.7, and $69.3 and $3.3, respectively.
Supplemental cash flow information on the business sold is as follows:
YEAR ENDED
DECEMBER 31, 2000
-----------------
Net proceeds......................................... $21.1
Working capital...................................... (9.9)
Property, plant and equipment........................ (0.1)
-----
Gain on disposition of business...................... $11.1
=====
PROFORMA FINANCIAL INFORMATION
The table below presents unaudited pro forma financial information in
connection with 2000 acquisitions and disposition as if they had occurred on
January 1, 1999. This unaudited pro forma financial information reflects the
preliminary allocation of the excess of the acquisition cost over the fair value
of the assets and liabilities under the purchase method of accounting for the
acquisition of Hickson. The estimate of fair values is preliminary, and is
subject to change upon receipt of the final results of an appraisal of the fair
value of the assets and liabilities of Hickson, as well as the identification of
certain intangible assets. The final determination of these fair values, which
is anticipated in 2001, could result in purchase accounting adjustments, which
may impact the Company's results of operations and financial position.
The unaudited pro forma information below reflects pro forma adjustments
based upon currently available information and certain estimates and
assumptions, and therefore the actual results may differ from the pro forma
results. However, management believes that the assumptions provide a reasonable
basis for presenting the significant effects of the transaction as contemplated,
and that the pro forma adjustments give appropriate effect to those assumptions
and are properly applied in the pro forma financial information. This
information should be read in conjunction with the form 8-K/A, filed by the
Company on November 2, 2000, in connection with the Hickson acquisition, which
contains unaudited pro forma combined condensed financial statements.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have occurred if the acquisitions and disposition had
54
56
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
been completed at the dates indicated. The information does not necessarily
indicate the future operating results or financial position of the Company.
YEARS ENDED
DECEMBER 31,
--------------------
2000 1999
-------- --------
UNAUDITED
Sales................................................... $1,070.5 $1,080.7
Net income excluding special items and extraordinary
gain.................................................. $ 39.5 $ 43.0
Net income.............................................. $ 2.9 $ 44.3
Diluted income per share excluding special items and
extraordinary gain.................................... $ 1.77 $ 1.86
Diluted income per share................................ $ 0.13 $ 1.92
JOINT VENTURE
In April 2000, the Company formed a joint venture with Wacker Silicones
Corporation, to produce and market chemical mechanical planarization slurry
products used in the advanced computer chip manufacturing process. The joint
venture, called Planar, is expected to provide opportunities in this high growth
area of the semiconductor industry. The Company contributed cash of
approximately $3.4 and intellectual property to the venture, and has guaranteed
up to $5.0 of its debt.
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 $25.2 in
2000, $25.9 in 1999, and $19.8 in 1998 (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, 2000
are as follows: $8.4 in 2001; $6.5 in 2002; $6.1 in 2003; $5.5 in 2004; $3.8 in
2005; and $6.3 thereafter.
There are a variety of non-environmental legal proceedings pending or
threatened against the Company. In connection with the acquisition of Hickson,
the Company acquired certain legal obligations, including a trial court judgment
of approximately $8.5 plus interest, currently on appeal, in a lawsuit
associated with a wood preservative spillage in 1994. The judgment and related
interest is included in Accrued Liabilities in the Consolidated Balance Sheet at
December 31, 2000. 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 results
of operations, financial position or liquidity of the Company.
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
connection with the acquisition of Hickson, the Company acquired certain
environmental exposures and potential liabilities of current and past operating
sites. As a result of the acquisition of Hickson, the Company's environmental
liabilities increased by $17.6.
55
57
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
The Company's Consolidated Balance Sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$17.5 at December 31, 2000, of which $3.0 are classified as other current
liabilities and $14.5 are classified as other noncurrent liabilities, and $2.4
at December 31, 1999, 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.
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 are reflected in cost of goods sold in the
Consolidated Statements of Income. Settlement of these intercompany sales
occurred at the time of shipment 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.
13. SPECIAL ITEMS, EXTRAORDINARY GAIN AND NONRECURRING EXPENSES
SPECIAL ITEMS
Results for 2000 include special items totaling $56.9, of which $39.9 was
the result of the process chemicals restructuring, as described below.
In 2000, due to continued losses and industry over-capacity in a part of
the process chemicals business (part of the microelectronic materials segment),
the Company implemented a restructuring plan in order to eliminate certain
under-performing product lines, including the shut-down of one plant. In
addition, based on certain streamlining and additional cost-saving initiatives,
the Company recorded restructuring charges related to the biocides business
(part of the treatment products segment) and charges for headcount reductions at
corporate and other businesses.
Impairment Charge
As a result of the restructuring plan for the process chemicals business
(part of the microelectronic materials segment), including the idling of certain
assets, the Company reviewed the value of these assets in accordance with SFAS
No. 121, which indicated that an impairment had occurred based upon an analysis
of the undiscounted cash flows of the restructured business. As a result, an
impairment charge of $31.0 was recorded to reduce certain property, plant and
equipment to its fair market value. Fair market value was determined based on a
third party fair market value appraisal.
56
58
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
Restructuring Charge
The restructuring charge of $34.0 included $8.9 of costs associated with
headcount reductions and contractual vendor obligations of the process chemicals
business, $14.1 related to the biocides business for the write-off of certain
costs associated with the abandonment of construction of a facility in China,
the completion of a consolidation study, and additional headcount reductions,
and $11.0 related to headcount reductions at other businesses and corporate.
Total headcount reductions affect approximately 450 individuals. The non-cash
portion of the restructuring charges was approximately $13.
As of December 31, 2000, $12.4 had been charged against the restructuring
reserve and approximately 85 employees had been terminated. At December 31,
2000, $21.6 of restructuring reserves were included in Accrued Liabilities in
the Company's Consolidated Balance Sheet.
The following table summarizes activity related to the restructuring costs:
SEVERANCE COSTS ASSET WRITE-DOWNS OTHER ITEMS TOTAL
--------------- ----------------- ----------- -----
Provision........................ $18.0 $11.0 $5.0 $34.0
2000 Activity:
Payments....................... 1.4 -- -- 1.4
Utilized....................... -- 11.0 -- 11.0
----- ----- ---- -----
Balance at December 31, 2000..... $16.6 $ -- $5.0 $21.6
===== ===== ==== =====
Other (Income) and Expense
Special items in 2000 also include $2.5 of costs related to the acquisition
and integration of Hickson, and a pretax gain of $10.6, principally related to
the sale of SPPI (included in the HTH water products segment).
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 PRIOR TO THE DISTRIBUTION(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 (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 HTH water products
segment of $20 under the Credit Facility at an aggregate effective rate of 7%,
inclusive of facility fees and amortization of initial bank fees.
57
59
ARCH CHEMICALS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)
YEAR ENDED
DECEMBER 31, 1998
-----------------
Pro forma effect on:
Increase to interest expense....................... $6.6
Decrease to net income............................. 4.3
Pro forma income per share was calculated using the number of common shares
that were issued at the Distribution date and assumed that such shares were
outstanding for all periods prior to the Distribution date.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Sales and Cost of Goods Sold for all periods presented have been restated
to reflect the adoption of EITF 00-10, "Accounting for Shipping and Handling
Fees and Costs", during the fourth quarter of 2000.
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
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
2000
Sales......................................... $228.7 $282.1 $208.9 $221.5 $941.2
Cost of goods sold............................ 164.5 202.3 156.3 168.5 691.6
Net income (loss)............................. 12.9 20.1 4.6 (37.1) 0.5
Diluted income (loss) per share(1)............ 0.57 0.91 0.21 (1.66) 0.02
Diluted income (loss) per share before special
items(1)(2)................................. 0.57 0.91 0.18 0.01 1.66
Stock market price:
High........................................ 20 13/16 21 15/16 22 3/16 19 7/8 22 3/16
Low......................................... 15 15/16 17 17 3/8 15 5/8 15 5/8
Close (at end of quarter)................... 20 21 7/8 18 1/4 17 3/4 17 3/4
Common dividend paid per share................ 0.20 0.20 0.20 0.20 0.80
1999
Sales......................................... $232.5 $276.6 $210.5 $192.6 $912.2
Cost of goods sold............................ 164.2 197.8 159.0 145.0 666.0
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
- ---------------
(1) The sum of the quarters do not add to the total due to the weighting of
common shares outstanding.
(2) See Management's Discussion and Analysis of Financial Condition and Results
of Operations and Note 13 for additional information on Special Items.
58
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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 2001 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 12 through 14 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
(but excluding the Report of the Audit Committee which appears on page 9 of the
Proxy Statement).
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
Not applicable.
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
----
Management Report........................................... 31
Independent Auditors' Report................................ 32
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 33
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998.......................... 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 35
Consolidated Statements of Shareholders' Equity (Equity
prior to the Distribution) for the Years Ended December
31, 2000, 1999 and 1998................................... 36
Notes to Consolidated Financial Statements.................. 37
59
61
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
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 -- Exhibit
3.2 to the Company's Report on Form 10-K for the period
ending December 31, 1999.*
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 24, 2001, 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(a) 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.*
- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-14601 unless otherwise
indicated.
60
62
4.7(b) Revolving Credit Agreement, dated as of July 5, 2000, among
the Company, Arch Chemicals UK Holdings Limited, the Lenders
Party thereto and The Chase Manhattan Bank, as
Administrative Agent, and related Assignment and Acceptance,
dated July 21, 2000, among Arch Chemicals, Inc., Arch
Chemicals UK Holdings Limited, The Chase Manhattan Bank, as
Assignor and Administrative Agent, and Bank of America,
N.A., as Assignee, and related Assignment and Acceptance,
dated July 21, 2000, among Arch Chemicals, Inc., Arch
Chemicals UK Holdings Limited, The Chase Manhattan Bank, as
Assignor and Administrative Agent, and Wachovia Bank, N.A.,
as Assignee -- Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the period ending June 30, 2000.*
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.*
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 -- Exhibit
10.8(b) to the Company's Annual Report on Form 10-K for the
period ending December 31, 1999.*
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(a) 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.*
10.11(b) Amendment to Information Technology Agreement, dated as of
February 15, 2000, by and between the Company and
Olin -- Exhibit 10.1 to Company's Quarterly Report on Form
10-Q, for the period ending June 30, 2000.*
10.12 Form of Executive Agreement -- Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the period ending
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.
61
63
10.13 1999 Stock Plan for Non-employee Directors, as amended
January 1, 2000 -- Exhibit 10.13 to Company's Annual Report
on 10-K for period ending December 31, 1999.*
10.14 1999 Long Term Incentive Plan, as amended October 28, 1999
and December 14, 2000.
10.15 Supplemental Contributing Employee Ownership Plan, as
amended through March 1, 2001.
10.16 Supplementary and Deferral Benefit Pension Plan, as amended
July 29, 1999 -- Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1999.*
10.17 Senior Executive Pension Plan, as amended July 29,
1999 -- Exhibit 10.17 to the Company's Annual Report on Form
10-K for the period ending December 31, 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 and April 27, 2000.
10.22 Senior Management Incentive Compensation Plan as amended
January 27, 2000 -- Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1999.*
21. List of Subsidiaries.
23. Consent of KPMG LLP, dated March 9, 2001.
24. Power of Attorney.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2000 except for a Form 8-K/A, filed on November 2, 2000 amending a Form 8-K,
dated August 22, 2000, filed on August 31, 2000.
- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-14601 unless otherwise
indicated.
62
64
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 12, 2001
ARCH CHEMICALS, INC.
By /s/ MICHAEL E. CAMPBELL
------------------------------------
Michael E. Campbell
Chairman of the Board, President 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
--------- -----
/s/ MICHAEL E. CAMPBELL Chairman Of The Board, President, Chief
- ----------------------------------------------------- Executive Officer and Director (Principal
Michael E. Campbell Executive Officer)
/s/ RICHARD E. CAVANAGH Director
- -----------------------------------------------------
Richard E. Cavanagh
/s/ JOHN W. JOHNSTONE, JR. Director
- -----------------------------------------------------
John W. Johnstone, Jr.
JACK D. KUEHLER* Director
- -----------------------------------------------------
Jack D. Kuehler
H. WILLIAM LICHTENBERGER* Director
- -----------------------------------------------------
H. William Lichtenberger
/s/ MICHAEL O. MAGDOL Director
- -----------------------------------------------------
Michael O. Magdol
/s/ JOHN P. SCHAEFER Director
- -----------------------------------------------------
John P. Schaefer
/s/ LOUIS S. MASSIMO Vice President and Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer)
Louis S. Massimo
/s/ STEVEN C. GIULIANO Controller (Principal Accounting Officer)
- -----------------------------------------------------
Steven C. Giuliano
*By: /s/ SARAH A. O'CONNOR
-------------------------------
Sarah A. O'Connor
Attorney-in-fact
Date: March 12, 2001
63
65
EXHIBIT INDEX
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 -- Exhibit
3.2 to the Company's Report on Form 10-K for the period
ending December 31, 1999.*
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 24, 2001, 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(a) 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.*
4.7(b) Revolving Credit Agreement, dated as of July 5, 2000, among
the Company, Arch Chemicals UK Holdings Limited, the Lenders
Party thereto and The Chase Manhattan Bank, as
Administrative Agent, and related Assignment and Acceptance,
dated July 21, 2000, among Arch Chemicals, Inc., Arch
Chemicals UK Holdings Limited, The Chase Manhattan Bank, as
Assignor and Administrative Agent, and Bank of America,
N.A., as Assignee, and related Assignment and Acceptance,
dated July 21, 2000, among Arch Chemicals, Inc., Arch
Chemicals UK Holdings Limited, The Chase Manhattan Bank, as
Assignor and Administrative Agent, and Wachovia Bank, N.A.,
as Assignee -- Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the period ending June 30, 2000.*
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.*
- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-14601 unless otherwise
indicated.
64
66
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.*
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 -- Exhibit
10.8(b) to the Company's Annual Report on Form 10-K for the
period ending December 31, 1999.*
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(a) 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.*
10.11(b) Amendment to Information Technology Agreement, dated as of
February 15, 2000, by and between the Company and
Olin -- Exhibit 10.1 to Company's Quarterly Report on Form
10-Q, for the period ending June 30, 2000.*
10.12 Form of Executive Agreement -- Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the period ending
December 31, 1999.*
10.13 1999 Stock Plan for Non-employee Directors, as amended
January 1, 2000 -- Exhibit 10.13 to Company's Annual Report
on 10-K for period ending December 31, 1999.*
10.14 1999 Long Term Incentive Plan, as amended October 28, 1999
and December 14, 2000.
10.15 Supplemental Contributing Employee Ownership Plan, as
amended through March 1, 2001.
10.16 Supplementary and Deferral Benefit Pension Plan, as amended
July 29, 1999 -- Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1999.*
10.17 Senior Executive Pension Plan, as amended July 29,
1999 -- Exhibit 10.17 to the Company's Annual Report on Form
10-K for the period ending December 31, 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.*
- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-14601 unless otherwise
indicated.
65
67
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 and April 27, 2000.
10.22 Senior Management Incentive Compensation Plan as amended
January 27, 2000 -- Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1999.*
21. List of Subsidiaries.
23. Consent of KPMG LLP, dated March 9, 2001.
24. Power of Attorney.
- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-14601 unless otherwise
indicated.
66