SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g)
of the Securities Exchange Act of 1934
OCTEL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 98-0181725
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
P.O. Box 17, Oil Sites Road L65 4HF
Ellesmere Port, South Wirral --------------------
United Kingdom (Zip Code)
- ---------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 44-151-355-6192
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
Common Stock
par value $0.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act: None.
OCTEL CORP.
INFORMATION REQUIRED IN REGISTRATION STATEMENT:
CROSS-REFERENCE BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
Item Number Caption Location in Information Statement
<S> <C> <C>
Item 1. Business Summary; Introduction; The Distribution; Risk
Factors; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business of the Company; Financial Statements.
Item 2. Financial Information Summary; Risk Factors; Pro Forma
Capitalization; Pro Forma Financial Statements;
Selected Historical Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Financial Statements.
Item 3. Properties Business of the Company.
Item 4. Security Ownership of Certain Security Ownership of Certain Beneficial
Beneficial Owners and Management Owners; Beneficial Ownership of Management.
Item 5. Directors and Executive Officers Management of the Company; Liability and
Indemnification of Directors and Officers.
Item 6. Executive Compensation Management of the Company; Security
Ownership of Certain Beneficial Owners.
Item 7. Certain Relationships and Related Summary; The Distribution; Relationship
Transactions Between Great Lakes and the Company after the
Distribution; Certain Relationships and Related
Transactions.
Item 8. Legal Proceedings Business of the Company.
Item 9. Market Price of and Dividends on Summary; The Distribution; Risk Factors;
the Registrant's Common Equity Management of the Company; Security
and Related Stockholder Matters Ownership of Certain Beneficial Owners;
Beneficial Ownership of Management;
Description of Company Capital Stock.
Item 10. Recent Sales of Unregistered Not Applicable.
Securities
Item 11. Description of Registrant's Description of Company Capital Stock.
Securities to be Registered
Item 12. Indemnification of Directors and Liability and Indemnification of Directors and
Officers Officers.
Item 13. Financial Statements and Summary; Pro Forma Financial Statements;
Supplementary Data Selected Historical Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Financial Statements.
Item 14. Changes in and Disagreements with Not Applicable.
Accountants on Accounting and
Financial Disclosure
Item 15. Financial Statements and Exhibits Index to Financial Statements; Exhibit Index.
</TABLE>
GREAT LAKES LETTERHEAD
_______________, 1998
Dear Stockholder:
I am pleased to inform you that the Board of Directors of
Great Lakes Chemical Corporation has approved a distribution to our
stockholders of all of the outstanding shares of common stock of Octel
Corp. ("Octel"). The stock distribution will be made to holders of record
of Great Lakes common stock on __________, 1998. You will receive one
share of Octel common stock for every four shares of Great Lakes common
stock you hold on such date (plus a cash payment in lieu of any
fractional share interests).
Following completion of the distribution, Octel and its
affiliates will own and operate substantially all of the businesses which
presently comprise Great Lakes' Petroleum Additives Business Unit,
including the lead alkyls, petroleum specialties and performance
chemicals businesses.
Your Board of Directors believes that the distribution will
enable Great Lakes and Octel to focus their respective management teams
on enhancing each company's competitive position in its respective
industries with a view towards increasing the value of each of its
businesses, thereby producing greater total stockholder value over the
long term. In addition, the implementation of an Octel equity-based
incentive plan will better enable Octel to attract, retain and motivate
the employees necessary to achieve its business objectives by offering
additional economic rewards tied directly to Octel's performance.
The enclosed Information Statement explains the proposed
distribution in greater detail and provides financial and other important
information regarding Octel. We urge you to read it carefully. Holders of
Great Lakes common stock are not required to take any action to
participate in the distribution. A stockholder vote is not required in
connection with this matter and, accordingly, your proxy is not being
sought.
We are enthusiastic about the distribution and look forward
to the future success of Octel and Great Lakes as highly focused,
independent publicly traded companies.
Sincerely,
Robert B. McDonald
Chief Executive Officer
and President
OCTEL LETTERHEAD
________, 1998
Dear Stockholder:
I am very pleased that you will soon be a stockholder of
Octel Corp. ("Octel"), and I want to take this opportunity to introduce
you to your company.
Octel is predominantly the business which was historically
the Petroleum Additives Business Unit of Great Lakes Chemical
Corporation.
The Company is a global leader in the production and
marketing of tetraethyl lead (TEL), an octane enhancer in gasoline.
Additionally, it develops, manufactures and markets specialized chemicals
used as fuel additives and performance chemicals.
Going forward, Octel will strive to maintain its leadership
position in TEL through service differentiation, product stewardship and
customer satisfaction.
I believe that, as a free-standing entity, Octel can more
effectively focus on and better manage its business during what is
expected to be a period of declining global demand for TEL. We plan to
manage and optimize the cash generation from the TEL business to pay down
debt and return value to our stockholders through the repurchase of stock
and/or the payment of cash dividends, as and when appropriate, and
through the profitable growth of our non-TEL related businesses.
Particular attention will be given to improving efficiency
and controlling costs as we implement plans to downsize the manufacturing
units.
Octel will apply for listing of its shares on the New York
Stock Exchange under the symbol "OCT".
Your Board, our management and our employees are excited
about our future as an independent company and look forward to your
participation in our success.
Sincerely,
Dennis J. Kerrison
President and Chief Executive Officer
INFORMATION STATEMENT
Octel Corp.
Common Stock
Par Value $0.01 Per Share
This Information Statement is being furnished in connection
with the distribution (the "Distribution") by Great Lakes Chemical
Corporation ("Great Lakes") to holders of record of Great Lakes common
stock, par value $1.00 per share (the "Great Lakes Common Stock"), at the
close of business on _____________, 1998 (the "Record Date"), of one
share of common stock, par value $0.01 per share (the "Octel Common
Stock"), of Octel Corp. ("Octel" or the "Company") for every four shares
of Great Lakes Common Stock owned on the Record Date. The Distribution
will result in 100% of the outstanding shares of Octel Common Stock being
distributed to holders of Great Lakes Common Stock on a pro rata basis.
The Distribution will be effective on ______________, 1998 (the
"Distribution Date"). It is expected that statements evidencing ownership
of shares of Octel Common Stock will be mailed to Great Lakes
stockholders on or about _______________, 1998.
The Company is a newly formed company which, as a result of
transactions entered into in connection with the Distribution, will own
substantially all of the businesses and assets of, and will be
responsible for substantially all of the liabilities associated with,
Great Lakes' lead alkyls, petroleum specialities and performance
chemicals businesses, as more fully described herein.
No consideration will be paid by Great Lakes' stockholders
for the shares of Octel Common Stock. There is no current public trading
market for the shares of Octel Common Stock, although it is expected that
a "when-issued" trading market will develop on or about the Record Date.
The Company will apply for listing of the shares of Octel Common Stock on
the New York Stock Exchange under the symbol "OCT."
In reviewing this Information Statement, you should carefully
consider the matters described under the caption "Risk Factors."
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH
THIS DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is __________, 1998.
TABLE OF CONTENTS
PAGE
SUMMARY...................................................................2
INTRODUCTION..............................................................11
THE DISTRIBUTION..........................................................11
Reasons for the Distribution..............................................11
Manner of Effecting the Distribution......................................13
Certain Federal Income Tax Consequences...................................14
Listing and Trading of Octel Common Stock.................................15
RISK FACTORS..............................................................16
Contracting Demand for TEL Products.......................................16
Competition...............................................................17
Substantial Leverage and Restrictive Covenants............................17
Absence of Great Lakes Financial Support..................................18
Environmental Matters and Plant Closures..................................18
International Operations..................................................19
Operating History and Future Prospects; Transition to an Independent
Public Company..........................................................19
Dependence on Key Personnel...............................................20
Absence of Prior Trading Market for Octel Common Stock....................20
Dividend Policy...........................................................20
Possible Anti-takeover Effects of Certain Charter and
By-Law Provisions and Other Matters.....................................21
RELATIONSHIP BETWEEN GREAT LAKES AND
THE COMPANY AFTER THE DISTRIBUTION......................................22
Distribution Agreement....................................................22
Tax Disaffiliation Agreement..............................................22
Corporate Services Transition Agreement...................................23
Supply and Toll Manufacturing Agreements..................................23
Option Agreement..........................................................23
DESCRIPTION OF FINANCINGS.................................................24
PRO FORMA CAPITALIZATION..................................................25
PRO FORMA COMBINED FINANCIAL STATEMENTS...................................27
SELECTED HISTORICAL FINANCIAL DATA........................................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................34
BUSINESS OF THE COMPANY..................................................45
Description of the Company...............................................45
Reasons for the Distribution.............................................46
Cost Reduction Initiatives...............................................46
Lead Alkyls Business ....................................................46
Petroleum Specialities Business..........................................49
Performance Chemicals Business...........................................50
Raw Materials............................................................50
Technology...............................................................51
Patents and Intellectual Property........................................51
Health, Safety and Environmental Matters.................................51
Human Resources..........................................................52
Properties...............................................................53
Legal Proceedings........................................................53
MANAGEMENT OF THE COMPANY................................................54
Directors................................................................54
Classified Board of Directors............................................55
Committees of the Board of Directors.....................................55
Compensation of Directors................................................56
Executive Officers.......................................................56
Compensation of Executive Officers.......................................57
Stock Options Table......................................................58
Option Exercises and Year-End Value Table................................59
Employment Agreements....................................................60
Compensation Under Retirement Plans......................................60
Stock Plan...............................................................61
TREATMENT OF GREAT LAKES EMPLOYEE STOCK OPTIONS IN
THE DISTRIBUTION.......................................................62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS..........................62
BENEFICIAL OWNERSHIP OF MANAGEMENT.......................................63
DESCRIPTION OF COMPANY CAPITAL STOCK.....................................64
Common Stock.............................................................64
Preferred Stock..........................................................64
No Preemptive Rights.....................................................65
Transfer Agent and Registrar.............................................65
Certain Provisions of the Certificate of Incorporation and By-Laws.......65
Preferred Stock Purchase Rights..........................................68
LIABILITY AND INDEMNIFICATION OF DIRECTORS
AND OFFICERS...........................................................69
INDEPENDENT AUDITORS.....................................................70
ADDITIONAL INFORMATION...................................................70
INDEX TO FINANCIAL STATEMENTS...........................................F-1
Forward-Looking Statements
This Information Statement contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Great
Lakes and the Company intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and
include this statement for purposes of such safe harbor provisions.
Forward-looking statements, which are based upon certain assumptions and
describe future plans, strategies and expectations of Great Lakes and the
Company, respectively, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or
similar expressions. The ability of Great Lakes and the Company,
respectively, to predict results or the actual effect of future plans or
strategies is inherently uncertain. Important factors which may cause
actual results to differ materially from the forward-looking statements
contained herein or in other public statements by Great Lakes or the
Company are described in the section entitled "Risk Factors."
SUMMARY
The following is a summary of certain information contained
elsewhere in this Information Statement. Reference is made to, and this
summary is qualified by, the more detailed information set forth in this
Information Statement, which should be read in its entirety. Unless the
context otherwise requires, (i) references in this Information Statement
to Great Lakes or the Company shall include Great Lakes' or the Company's
respective subsidiaries, (ii) references in this Information Statement to
the Company prior to the Distribution Date shall refer to the Octel
Businesses as operated as part of the Petroleum Additives Business Unit
of Great Lakes and (iii) references in this Information Statement to the
Distribution shall, unless the context indicates otherwise, include the
Financings (as defined) and the Special Payment (as defined). See
"Description of Financings."
The Company
The Company is an international chemical company specializing
in the manufacture, distribution and marketing of fuel additives. The
Company is comprised of three primary operating businesses: Lead Alkyls,
Petroleum Specialties and Performance Chemicals. The Lead Alkyls
business, which accounted for 85% of the Company's 1996 sales, is the
world's leading producer of tetraethyl lead antiknock compounds, or
"TEL," that are used by oil refineries worldwide to boost the octane
levels in gasoline, allowing fuel to burn more efficiently and preventing
engine knock during the combustion cycle. The Company manufactures 80% of
the global demand for TEL. The Petroleum Specialties business, which
accounted for 12% of the Company's 1996 sales, supplies a broad range of
petroleum additives, including combustion improvers, fuel detergents and
functional performance products (such as corrosion inhibitors and
conductivity improvers). The Performance Chemicals business, which
accounted for 3% of the Company's 1996 sales, manufactures and
distributes a range of chemicals including sodium, chlor-alkali and
Octaquest(R), a biodegradable chelating agent supplied to Procter &
Gamble, which is used in several European laundry products.
Worldwide use of TEL has declined since 1973 following the
enactment of the U.S. Clean Air Act in 1970 and increasing health and
environmental concerns and political pressures to increase the usage of
unleaded gasoline and reduce the lead content of leaded fuels. Usage of
TEL is expected to continue to decline and the Company's corporate
objective is to optimize the cash flows from sales of TEL to pay down
debt and return value to its stockholders by (a) the repurchase of stock
and/or the payment of cash dividends and (b) the development of its
Petroleum Specialties and Performance Chemicals businesses. To achieve
its corporate objective, the Company's strategy is to: (i) manage
profitably the decline of the TEL market through the implementation of
cost control initiatives and the provision of additional technical and
environmental support for customers; (ii) expand the Petroleum
Specialties and Performance Chemical businesses through the development
of core competencies, product innovation and enhanced focus on satisfying
customers and market needs; (iii) efficiently manage its operations and
manufacturing sites consistent with the decline of TEL demand and the
growth of specialty and performance products, and (iv) seek, where
feasible, synergistic opportunities through joint ventures, alliances,
collaborative arrangements or acquisitions.
In 1996, the Company had sales of $597.4 million and an
operating profit of $252.8 million. The Company has its administrative
headquarters and principal manufacturing site in Ellesmere Port
(Cheshire, U.K.) with subsidiaries in Europe, Africa and North America.
The Company employed 1,485 employees worldwide as of September 30, 1997.
The Company was formed in January 1998 for the purpose of
effecting the Distribution and, prior to the Distribution, was a wholly
owned subsidiary of Great Lakes. As a result of the Distribution, Great
Lakes will own no shares of Octel Common Stock, and the Company will
operate as an independent publicly traded company. The Company's
principal executive offices are located in the United Kingdom at Oil
Sites Road, Ellesmere Port, South Wirral L65 4HF, and its telephone
number is 44-151-356-6192.
The Distribution
Distributing Corporation..................... Great Lakes Chemical
Corporation, a
Delaware corporation
("Great Lakes").
Distributed Corporation...................... Octel Corp., a
Delaware corporation
("Octel" or the
"Company"), which, as
of the Distribution
Date, will have
transferred to it
substantially all of
the businesses and
assets of, and will be
responsible for
substantially all of
the liabilities
associated with, Great
Lakes' lead alkyls,
petroleum specialities
and performance
chemicals businesses,
as more fully
described herein (the
"Octel Businesses").
Principal Businesses to be
Retained by Great Lakes ................... Great Lakes will
retain its other
businesses, consisting
of all of its current
businesses other than
the Octel Businesses
(the "Core
Businesses").
Primary Purpose
of the Distribution........................ To separate the Octel
Businesses from the
Core Businesses so
that each can (i)
adopt strategies and
pursue objectives
appropriate to its
specific businesses
and the industries in
which it operates;
(ii) be recognized and
appropriately valued
by the financial
community as a
separate and distinct
business; and (iii)
implement more focused
incentive compensation
arrangements that are
tied more directly to
the results of its
operations.
Shares to be Distributed..................... Approximately
14,736,075 shares of
Octel Common Stock,
based on the number of
shares of Great Lakes
Common Stock
outstanding on
December 31, 1997. The
shares to be
distributed will
constitute 100% of the
outstanding shares of
Octel Common Stock on
the Distribution Date.
Distribution Ratio........................... Each Great Lakes
stockholder will
receive one share of
Octel Common Stock for
every four shares of
Great Lakes Common
Stock held on the
Record Date.
Fractional Share
Interests.................................. Fractional share
interests will be sold
by the Distribution
Agent and the cash
proceeds distributed
to those stockholders
entitled to a
fractional interest.
See "The
Distribution--Manner
of Effecting the
Distribution."
Related Financings........................... Prior to the
Distribution, the
Company or one or more
of its subsidiaries
will enter into a $320
million senior credit
facility, consisting
of a revolving credit
facility of $20
million and a term
loan facility of $300
million (the "Credit
Facility"), and issue
$150 million of senior
subordinated notes
(the "Notes")
(collectively, the
"Financings").
Proceeds from the
Financings will be
used to make the
Special Payments (as
defined herein) to
Great Lakes and to pay
approximately $17
million of expenses
incurred by the
Company in connection
with the Distribution
and the Financings.
The $20 million
revolving credit
facility will be
available to the
Company for working
capital and general
corporate purposes.
See "Risk
Factors--Substantial
Leverage and
Restrictive Covenants"
and "Description of
Financings."
Special Payments to
Great Lakes.................................. Prior to the
Distribution, the
Company will use the
proceeds of the
Financings, together
with the $30 million
of available cash, to
repay approximately
$116.8 million of
outstanding
indebtedness incurred
by Great Lakes in
connection with its
purchase of Chevron
Chemical Company's
10.65% interest in
subsidiaries of the
Company and to pay a
special dividend of
$346.2 million to
Great Lakes
(collectively, the
"Special Payments").
Listing and Trading Market................... The Company will apply
for listing of the
shares of Octel Common
Stock on the New York
Stock Exchange, Inc.
(the "NYSE") under the
symbol "OCT."
Record Date.................................. Close of business on
_____________, 1998.
Distribution Date............................ ______________, 1998.
Manner of Effecting
the Distribution........................... The Company currently
intends to use a
direct registration
system to implement
the distribution of
shares of Octel Common
Stock. On the
Distribution Date, a
certificate
representing all
issued and outstanding
shares of Octel Common
Stock will be
delivered to the
Distribution Agent (as
defined). An account
statement will be
mailed to each Great
Lakes stockholder as
soon as practicable
thereafter stating the
number of shares of
Octel Common Stock
received by such
stockholder in the
Distribution.
Distribution Agent........................... First Chicago Trust
Company of New York
(the "Distribution
Agent").
Tax Consequences............................. The Distribution is
expected to qualify as
a tax-free
distribution under
Section 355 of the
Internal Revenue Code
of 1986, as amended
(the "Code"). See "The
Distribution--Certain
Federal Income Tax
Consequences."
Dividend Policy.............................. The payment and amount
of cash dividends, if
any, on the Octel
Common Stock after the
Distribution will be
subject to the
discretion of the
Company's Board of
Directors. The
Company's dividend
policy will be
determined and
reviewed by the
Company's Board of
Directors at such
future times as may be
appropriate, and
payment of dividends,
if any, on Octel
Common Stock will
depend upon the
Company's ongoing
financial position,
capital requirements,
profitability, cash
flow, restrictive
covenants contained in
the Credit Facility
and the Notes and such
other factors as the
Company's Board of
Directors deems
relevant. The Company
does not have any
intention to pay
dividends in the
immediate future.
Relationship with Great Lakes
After the Distribution .................... Following the
Distribution, Great
Lakes and the Company
will be operated as
independent publicly
traded companies.
Great Lakes and the
Company will, however,
continue to have a
relationship as a
result of the various
agreements being
entered into between
Great Lakes and the
Company in connection
with the Distribution,
including the
Distribution
Agreement, the Tax
Disaffiliation
Agreement, the
Corporate Services
Transition Agreement,
the Supply and Toll
Manufacturing
Agreements and the
Option Agreement (each
as defined). Except as
referred to above or
as otherwise described
herein, Great Lakes
and the Company will
cease to have any
material contractual
or other material
relationships with
each other. See
"Relationship Between
Great Lakes and the
Company After the
Distribution."
Risk Factors
Stockholders should carefully consider the matters discussed
under the section entitled "Risk Factors" beginning on page 16 of this
Information Statement.
Summary Historical and Pro Forma Combined Financial Data
(Dollars in millions except per share data)
The following tables set forth summary historical statement
of income data and balance sheet data and corresponding pro forma data
for the Company. The historical financial data for the three years ended
December 31, 1996 are derived from the audited Combined Financial
Statements of the Company, and the historical financial data for the nine
months ended September 30, 1997 are derived from the unaudited Combined
Financial Statements of the Company, all of which are included elsewhere
in this Information Statement. This historical financial data relate to
the Octel Businesses as they were operated as part of the Petroleum
Additives Business Unit of Great Lakes and have been adjusted for those
parts of the Petroleum Additives Business Unit which are to remain under
Great Lakes' ownership and management after the Distribution.
The pro forma financial data were derived from the "Pro Forma
Combined Financial Statements" that give pro forma effect to the
Distribution. The pro forma adjustments are based upon available
information and certain assumptions that management believes are
reasonable. The pro forma statement of income data (i) for the year ended
December 31, 1996 give effect to the Distribution as if it had occurred
as of January 1, 1996 and (ii) for the nine months ended September 30,
1997 give effect to the Distribution as if it had occurred as of January
1, 1997. The pro forma balance sheet data give effect to the Distribution
as if it had occurred as of September 30, 1997. The pro forma financial
data do not purport to represent what the financial position or results
of operations of the Company would actually have been had the
Distribution in fact occurred on the assumed dates or to project the
financial position or results of operations of the Company for any future
period or date. These tables should be read in conjunction with "Pro
Forma Combined Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Combined Financial Statements included elsewhere herein.
Summary Historical Financial Data
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------- ------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
Income Statement Data:
Net sales:
<S> <C> <C> <C> <C> <C>
Lead Alkyls..................................... $321.4 $364.1 $505.1 $547.1 $541.1
Petroleum Specialties........................... 48.0 51.2 70.9 65.0 43.4
Performance Chemicals........................... 25.6 11.8 21.4 16.2 18.6
------ ------- ------- ------- ------
Total.............................................. 395.0 427.1 597.4 628.3 603.1
Cost of goods sold................................. 197.7 197.5 298.8 307.0 296.0
Gross profit....................................... 197.3 229.6 298.6 321.3 307.1
Selling, general and administrative
expenses........................................ 29.3 31.1 40.2 42.1 37.5
Research and development........................... 2.5 3.7 5.6 5.6 6.7
--- --- --- --- ---
Operating income................................... 165.5 194.8 252.8 273.6 262.9
Income before income taxes and
minority interest............................... 151.0 175.9 221.7 249.1 247.2
Net income......................................... $86.8 $101.3 $128.3 $145.1 $142.4
Balance Sheet Data (as of end of period):
Total working capital.............................. $137.6 $216.1 $175.8
Property, plant and equipment, net................. 103.3 113.4 107.3
Total assets....................................... 756.6 841.0 798.4
Total liabilities.................................. 245.0 256.4 267.6
Total equity....................................... $511.6 $584.6 $530.8
Statement of Cash Flows Data:
Depreciation....................................... $13.3 $10.0 $16.2 $13.7 $12.9
Amortization....................................... 20.3 20.0 26.7 19.0 16.7
Net cash provided by operating
activities.................................... 158.5 143.4 128.6 175.4 161.9
Net cash used in investing
activities.................................... 19.0 36.5 44.6 83.4 86.9
Net cash paid to GLCC.............................. $145.0 $118.8 $103.8 $104.9 $83.0
</TABLE>
Summary Pro Forma Financial Data
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1997 December 31, 1996
----------------- -----------------
Income Statement Data:
<S> <C> <C>
Net sales............................................. $ 395.0 $ 597.4
Gross profit.......................................... 197.3 298.6
Selling, general and administrative
expenses......................................... 31.5 43.2
Research and development.............................. 2.5 5.6
------ -----
Operating income...................................... 163.3 249.8
Income before income taxes and
minority interest................................ 108.3 165.7
Net income............................................ $71.9 $110.8
Balance Sheet Data (as of end of
period):
Total working capital................................. $207.3
Property, plant and equipment, net.................... 103.3
Total assets.......................................... 824.7
Total debt............................................ 450.0
Total liabilities..................................... 552.8
Total equity.......................................... $271.9
</TABLE>
INTRODUCTION
On __________, 1998, the Board of Directors of Great Lakes
declared a dividend payable to holders of record of Great Lakes Common
Stock at the close of business on the Record Date of one share of Octel
Common Stock for every four shares of Great Lakes Common Stock held on
the Record Date. The Distribution will be effective on ------------,
1998. An account statement will be mailed to each Great Lakes stockholder
as soon as practicable thereafter stating the number of shares of Octel
Common Stock received by such stockholder in the Distribution. As a
result of the Distribution, 100% of the outstanding shares of Octel
Common Stock will be distributed to Great Lakes stockholders.
The Company was formed for the purpose of effecting the
Distribution. On or prior to the Distribution Date, Great Lakes will have
transferred to the Company substantially all of the assets and
liabilities of the Octel Businesses. Prior to the Distribution, Great
Lakes generally operated the Octel Businesses as part of its Petroleum
Additives Business Unit.
If you have questions relating to the Distribution and
delivery of certificates representing shares of Octel Common Stock,
please contact the Distribution Agent at:
[DISTRIBUTION AGENT 800 TELEPHONE NUMBER]
For other information relating to Great Lakes, please
contact: Great Lakes Investor Relations Department, Great Lakes Chemical
Corporation, One Great Lakes Boulevard, West Lafayette, Indiana
47996-2220 (telephone: (765) 497-6100). For questions related
specifically to Octel, please contact: Investor Relations at the Company
[ADDRESS AND TELEPHONE NUMBER TO COME].
THE DISTRIBUTION
Reasons for the Distribution
The Board of Directors of Great Lakes has determined that it
is in the best interest of Great Lakes and its stockholders to undertake
the Distribution, thereby separating the Octel Businesses from Great
Lakes, for the reasons described herein.
The Distribution will permit management of each of the
Company and Great Lakes to focus its exclusive attention on its
respective core businesses. In addition, the Distribution will allow each
of the Company and Great Lakes to allocate its financial resources to
address its particular business needs and capitalize on its business
opportunities. With respect to the Company, the Distribution is designed
to establish Octel as a stand alone independent company that can adopt
strategies and pursue objectives appropriate to its specific businesses.
In 1996, approximately 85% of the Company's revenues were derived from
the sale of tetraethyl lead antiknock compounds ("TEL"), a specialized
commodity utilized primarily as an octane enhancer for automobile
gasoline. Businesses, such as the Company, that sell specialized
commodity chemical products must meet certain marketplace standard
specifications. Since the Company is not generally able to command a
premium over the prevailing market price, the Company's ability to
succeed and maintain or increase earnings is dependent primarily upon its
ability to control and/or reduce costs. As an independent company, the
Company's management should be better able to structure and operate the
Company in a manner more directly and appropriately tailored to meet the
business opportunities and challenges presented by the competitive TEL
environment in which the Company operates.
Great Lakes believes that the separation of the Octel
Businesses from its speciality chemicals businesses will allow the two
entities to be recognized and appropriately valued by the financial
community as distinct businesses with different investment risk and
return profiles. As a result of the Distribution, Great Lakes should
develop and enhance its following in the financial community primarily as
a diversified global specialty chemicals business while the Company
should develop its following primarily as a petroleum additives and
performance chemicals business. In this regard, investors will be better
able to evaluate the merits and future prospects of the businesses of
Great Lakes and the Company, enhancing the likelihood that each will
achieve appropriate market recognition and valuation for its performance
and potential. In addition, current stockholders and potential investors
will be better able to direct their investments to their specific areas
of interest. The Distribution will also enable the Company, as and when
appropriate, to explore the possibility of engaging in strategic
acquisitions, joint ventures and other collaborative arrangements.
The Distribution is also designed to allow the Company and
Great Lakes to each establish and tailor its own equity-based
compensation plans so that there will be a more direct alignment between
the performance of each business and the compensation of its management.
Among other things, the implementation of a separate Octel equity-based
compensation plan is intended to strengthen and enhance the Company's
ability to achieve cost savings, enhance efficiencies and better leverage
sales opportunities. Following the Distribution, the Company's management
will receive equity-based incentives which will be more closely aligned
with the financial results of the Company, thereby linking each
employee's financial success more directly to the financial success of
the Company. See "Management of the Company."
For the reasons stated above, the Great Lakes Board of
Directors believes that the Distribution is in the best interest of Great
Lakes and the Company.
Manner of Effecting the Distribution
The general terms and conditions relating to the Distribution
are set forth in a Transfer and Distribution Agreement, dated as of
_______________, 1998 (the "Distribution Agreement"), between Great Lakes
and the Company.
The Distribution will be made on the basis of one share of
Octel Common Stock for every four shares of Great Lakes Common Stock held
on the Record Date. The actual total number of shares of Octel Common
Stock to be distributed will depend on the number of shares of Great
Lakes Common Stock outstanding on the Record Date. Based upon the shares
of Great Lakes Common Stock outstanding on December 31, 1997,
approximately 14,736,075 shares of Octel Common Stock will be distributed
to Great Lakes stockholders. The shares of Octel Common Stock will be
fully paid and nonassessable and the holders thereof will not be entitled
to preemptive rights. See "Description of Company Capital Stock."
The Company currently intends to use a direct registration
system to implement the distribution of shares of Octel Common Stock. On
the Distribution Date, a certificate representing all issued and
outstanding shares of Octel Common Stock will be delivered to the
Distribution Agent. An account statement will be mailed to each Great
Lakes stockholder as soon as practicable thereafter stating the number of
shares of Octel Common Stock received by such stockholder in the
Distribution. Following the Distribution, stockholders may request
physical certificates for their shares of Octel Common Stock.
Instructions for requesting physical stock certificates will be provided
with the account statements distributed to each stockholder.
No holder of Great Lakes Common Stock will be required to pay
any cash or other consideration for the shares of Octel Common Stock
received in the Distribution or to surrender or exchange shares of Great
Lakes Common Stock in order to receive shares of Octel Common Stock.
No certificates or scrip representing fractional shares of
Octel Common Stock will be issued to Great Lakes stockholders as part of
the Distribution. The Distribution Agent will aggregate fractional shares
into whole shares and sell them in the open market at then prevailing
prices on behalf of holders who otherwise would be entitled to receive
fractional share interests, and such persons will receive instead a cash
payment in the amount of their pro rata share of the total sale proceeds,
less applicable taxes and commissions. Such sales are expected to be made
on, or as soon as practicable after, the Distribution Date.
Certain Federal Income Tax Consequences
Great Lakes has requested a private letter ruling (the
"Private Letter Ruling") from the Internal Revenue Service (the
"Service") to the effect that, among other things, the Distribution will
qualify as a tax-free spin-off to Great Lakes and its stockholders under
Section 355 of the Code. The following is a summary of the material
federal income tax consequences to Great Lakes stockholders expected to
result from the Distribution:
1. A Great Lakes stockholder will not recognize any
income, gain or loss as a result of the Distribution, except,
as described below, in connection with cash received in lieu
of fractional shares of Octel Common Stock.
2. A Great Lakes stockholder will apportion his tax
basis for his Great Lakes Common Stock on which Octel Common
Stock is distributed between Great Lakes Common Stock and the
Octel Common Stock received in the Distribution (including
any fractional shares of Octel Common Stock deemed received)
in proportion to the relative fair market values of such
Great Lakes Common Stock and Octel Common Stock on the
Distribution Date.
3. A Great Lakes stockholder's holding period for the
Octel Common Stock received in the Distribution will include
the period during which such stockholder held the Great Lakes
Common Stock, provided that such Great Lakes Common Stock is
held as a capital asset by such stockholder as of the
Distribution Date.
4. A Great Lakes stockholder who receives cash in lieu
of fractional shares of Octel Common Stock as a result of the
sale of such shares by the Distribution Agent will be treated
as if such fractional shares had been received by the
stockholder as part of the Distribution and then sold by such
stockholder. Accordingly, such stockholder will recognize a
gain or loss equal to the difference between the cash so
received and the portion of the tax basis in the Octel Common
Stock that is allocable to such fractional shares. Such gain
or loss will be capital gain or loss, provided that such
fractional shares were held by such stockholder as a capital
asset at the time of the Distribution.
Current Treasury regulations require each Great Lakes
stockholder who receives Octel Common Stock pursuant to the Distribution
to attach to his federal income tax return for the year in which the
Distribution occurs a detailed statement setting forth such data as may
be appropriate in order to show the applicability of Section 355 of the
Code to the Distribution. Great Lakes will convey the appropriate
information to each stockholder of record as of the Record Date.
The summary of federal income tax consequences set forth
above is for general information only and may not be applicable to
stockholders who are not citizens or residents of the United States or
who are otherwise subject to special treatment under the Code. All
stockholders should consult their own tax advisors as to the particular
tax consequences of the Distribution to them, including the applicability
and effect of state, local and foreign tax laws.
Listing and Trading of Octel Common Stock
The Company will apply for listing of the shares of Octel
Common Stock on the NYSE under the symbol "OCT." The Company is expected
to have initially approximately _________ holders of record, based on the
number of stockholders of record of Great Lakes on ____________, 1998.
A "when-issued" trading market is expected to develop on or
about the Record Date. The term "when-issued" means that shares can be
traded prior to the time certificates are actually available or issued.
Prices at which the shares of Octel Common Stock may trade on a
"when-issued" basis or after the Distribution cannot be predicted. See
"Risk Factors--Absence of Prior Trading Market for Octel Common Stock."
The shares of Octel Common Stock distributed to Great Lakes
stockholders will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of the Company within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Persons who may be deemed to be affiliates of the Company after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with the Company and may
include the directors and principal executive officers of the Company as
well as any principal stockholder of the Company. Persons who are
affiliates of the Company will be permitted to sell their shares of Octel
Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of
the Securities Act, such as the exemptions afforded by Section 4(2) of
the Securities Act and Rule 144 thereunder.
RISK FACTORS
Contracting Demand for TEL Products
In 1996, approximately 85% of the Company's revenues were
derived from the sale of TEL antiknock compounds, a specialized commodity
utilized primarily as an octane enhancer for automobile gasoline. The
Company's Lead Alkyls business operates in a gasoline market
characterized by contracting demand for TEL products. The market for TEL
products is contracting primarily as a result of health and environmental
concerns and political pressures to increase the usage of unleaded
gasoline and reduce the lead content of leaded fuels. Global demand for
TEL has decreased and is expected to continue to decrease as a result of
various regulatory initiatives around the world to phase out the use of
gasoline containing TEL ("leaded gasoline"). From 1990 to 1997, total
annual sales volume in the global TEL market decreased from approximately
230,000 metric tons to approximately 100,000 metric tons as many
industrialized countries either banned TEL or limited allowable TEL
levels in gasoline in response to concerns over health-related issues
surrounding TEL. Demand for TEL has also been depressed by the
incompatibility of leaded gasoline and catalytic converters, which have
been increasingly used to minimize automobile exhaust emissions. The
Company believes that the rate of TEL volume decline over the next four
to five years will be between 10% and 15% per year; however, there can be
no assurance that such rate of decline will not be more than the
Company's current estimates. The United States began phasing out the use
of TEL in the early 1970s and the use of leaded gasoline in the United
States is now restricted to piston-engined aircraft and certain other
vehicles. Similarly, other industrialized countries, including, among
others, Germany, Switzerland, South Korea, Sweden and New Zealand, have
banned the use of leaded gasoline. In addition, some other countries have
limited the level of TEL in gasoline and are considering initiatives to
phase out the use of leaded gasoline completely.
As a result of contracting world demand for TEL, the
Company's primary product, the Company intends to develop new sources of
revenue and growth through the internal development of new products or
through acquisitions, joint ventures or other collaborative arrangements.
The Company does not believe that the revenues from sales of new products
will fully offset the decline in TEL sales and earnings in the
foreseeable future. There can be no assurance that the Company will be
successful in developing and marketing new products that achieve market
acceptance or that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and
marketing of such new products. Further, there can be no assurance that
the Company's competitors will not succeed in developing or marketing
products that are more effective or commercially attractive than any that
are being developed by the Company, or that such competitors will not
succeed in obtaining any required regulatory approvals for introducing or
commercializing any such products before the Company is able to do so.
Additionally, there can be no assurance that the Company will be able to
identify and successfully consummate any acquisitions, joint ventures or
collaborative arrangements, or that revenues, if any, from such
acquisitions, joint ventures or other collaborative arrangements would
offset the decline in TEL sales and earnings in the foreseeable future.
Competition
The Company's Lead Alkyls business operates in a contracting
market. See "--Contracting Demand for TEL Products." The Company competes
in the sale of TEL primarily with Alcor Chemie Vertriebs AG ("Alcor"),
Ethyl Corporation ("Ethyl") and Syntez. See "Business of the Company -
Lead Alkyls Business - Competition." In recent years, competition has
intensified as the demand for TEL has declined, price increases have
slowed and existing competitors have aggressively engaged in price
competition. Although the Company currently has a worldwide TEL market
share of approximately 60% with respect to retail TEL sales, there can be
no assurance that it will be able to maintain such market share or its
current level of gross margins and profitability as the market for TEL
products continues to contract and/or its competitors continue to compete
aggressively based on price. In addition to the above retail sales, the
Company supplies Ethyl with substantial quantities of TEL under two
long-term wholesale agreements, which also limit the Company's ability to
improve gross margins. See "Business of the Company--Lead Alkyls
Business--Ethyl Agreements."
The Company's Petroleum Specialties and Performance Chemicals
businesses operate in highly competitive markets, with competitors which
are both larger and smaller than the Company in terms of resources and
market share. The Company's ability to compete effectively in those
markets in the future will depend upon, among other things, its ability
to continue to finance research and development of new products and
technologies, and its ability to improve existing products and
technologies. See "Business of the Company."
Substantial Leverage and Restrictive Covenants
In connection with the Distribution, the Company or one or
more of its subsidiaries will enter into a $320 million Credit Facility
(including a $20 million revolving credit facility). Concurrently with
the Distribution, the Company also intends to issue $150 million of
Notes. As of September 30, 1997, on a pro forma basis after giving effect
to the Distribution, the Company would have had $450.0 million principal
amount of long-term indebtedness and total common stockholders' equity of
$271.9 million. See "Pro Forma Capitalization."
The degree to which the Company is leveraged could have
important consequences to the holders of Octel Common Stock, including
the following: (i) the Company will have significant cash interest
expense and principal repayment obligations with respect to outstanding
indebtedness, including the Credit Facility and the Notes, with the
result that a substantial portion of the Company's cash flow from
operations will be required to meet these obligations, thereby reducing
funds available to the Company for other purposes, (ii) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or other purposes could be adversely affected
and (iii) the Company's substantial degree of leverage could hinder its
flexibility in planning for or reacting to changes in market conditions.
In addition, pursuant to the terms of the Credit Facility and the
Indenture (as defined), the ability of the Company to sell assets will be
restricted. See "Description of Financings."
The Credit Facility will require the Company to, among other
things, achieve and maintain certain financial ratios. In addition, the
Credit Facility will contain financial and operating covenants, including
restrictions on the ability of the Company to incur indebtedness, merge,
consolidate or transfer all or substantially all of its assets, to make
certain sales of assets, to create, incur or permit the existence of
certain liens and to pay dividends. The failure to maintain the required
ratios or to comply with the covenants would result in a default under
the Credit Facility and permit the lenders under the Credit Facility to
accelerate the maturity of the indebtedness governed by such instrument.
The indenture with respect to the Notes (the "Indenture") also will
contain restrictive covenants, including restrictions, under certain
circumstances, on the ability of the Company to pay dividends. See
"Description of Financings."
Absence of Great Lakes Financial Support
Following the Distribution, the Company will be responsible
for obtaining its own financing and will experience a higher cost of
capital than was historically available to the Company as a subsidiary of
Great Lakes. In addition, the Company will not be able to draw upon the
resources, financial or otherwise, generally available to it prior to the
Distribution as a subsidiary of Great Lakes. See "Description of
Financings."
Environmental Matters and Plant Closures
The Company is subject to laws, regulations and legal
requirements relating to the use, storage, handling, generation,
transportation, emission, discharge, disposal and remediation of, and
exposure to, hazardous and non-hazardous substances and wastes in all of
the countries in which it does business. The nature of the Company's
existing and historical operations exposes it to the risk of liabilities
or claims with respect to environmental matters, including on- and
off-site releases and emissions of hazardous and non-hazardous substances
and wastes. Such liabilities or claims include costs associated with
environmental investigations and remediation activities, as well as plant
closure and restoration projects, at closed manufacturing sites in
France, Italy and Germany, and, ultimately, at the Company's existing
manufacturing facility in Ellesmere Port, U.K. (the "Ellesmere Port
Facility"). Such liabilities or claims also include capital and other
costs associated with environmental compliance matters at the Ellesmere
Port Facility.
There can be no assurance that material costs will not be
incurred in connection with such liabilities or claims. Changes in
existing laws or regulations, or the discovery of additional
environmental liabilities associated with the Company's existing or
historical operations, could require the Company to incur material costs
or could otherwise have a material adverse effect on the Company's
business, results of operations, or financial condition. See
"--Contracting Demand for TEL Products," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental
Matters and Plant Closures" and "Business--Health, Safety and
Environmental Matters."
International Operations
Approximately 95% of the Company's sales in 1996 were derived
from operations outside the United States. A substantial portion of the
Company's international sales are to developing nations in which the TEL
market is expected to decline at a slower rate than in developed
countries. See "Business of the Company--Lead Alkyls Business--Industry
Overview." Sales outside of the United States, particularly sales to
these developing nations, may be subject to various risks which are not
present in the United States market, including political and economic
instability, governmental embargos and foreign exchange risks.
Operating History and Future Prospects; Transition to an Independent Public
Company
The Company was formed for the purpose of effecting the
Distribution and does not have an operating history as an independent
public company. Accordingly, the financial statements included herein may
not necessarily reflect the results of operations, financial condition
and cash flows that would have been achieved had the Octel Businesses
been operated independently during the periods presented. Such
information has also been adjusted for the parts of Great Lakes'
Petroleum Additives Business Unit that will remain under Great Lakes
ownership and management following the Distribution. The Company has
historically provided substantially all of its own corporate services.
However, following the Distribution, the Company will also be responsible
for the additional costs associated with being an independent public
company, including costs related to corporate governance, listed and
registered securities and investor relations issues.
Moreover, the financial statements included herein do not
reflect many changes that may occur in the operations of the Company as a
result of the Company's future business strategies. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business of the Company." The Company believes
that these changes, when implemented, will make a positive contribution
to the results of operations of the Company. However, there can be no
assurance as to the timing or amount of any positive contribution which
may be realized or that these changes might not result in material
adverse consequences.
The Company's future results of operations will also depend
upon a number of factors and events, including the following: (i) the
levels of demand for the Company's existing products, the Company's
ability to develop new products and to adapt existing products to new
uses to offset declining TEL sales, the Company's ability to maintain
acceptable margins on product sales and the Company's ability to control
its costs and repay its indebtedness (see "--Contracting Market for TEL
Products," "--Competition" and "--Substantial Leverage and Restrictive
Covenants"); (ii) the substantial competition encountered by the Company
in all of its lines of business (see "--Competition"); (iii) the effect
of future regulatory changes; (iv) the Company's transition to an
independent public company and the costs associated therewith; and (v)
possible changes in economic and political conditions affecting foreign
sales (see "--International Operations"). The Company does not believe
that sales attributable to newly developed products and other operational
changes will be sufficient to offset the decline in TEL sales and
earnings for the foreseeable future.
Dependence on Key Personnel
The Company believes that its success will depend to a
significant extent upon the abilities and continued efforts of its senior
management to execute its business strategy. The loss of the services of
any of such individuals could have a material adverse effect upon the
Company's results of operations and financial condition. See "Management
of the Company--Executive Officers."
Absence of Prior Trading Market for Octel Common Stock
There has not been any established public trading market for
Octel Common Stock, although it is expected that a "when-issued" trading
market will develop on or about the Record Date. The Company will apply
for listing of the Octel Common Stock on the NYSE. However, there can be
no assurance either as to the prices at which shares of Octel Common
Stock will trade before or after the Distribution Date. Until the Octel
Common Stock is fully distributed and an orderly market for those shares
develops, the prices at which such shares trade may fluctuate
significantly. Prices for shares of Octel Common Stock will be determined
in the marketplace and may be influenced by many factors, including the
nature and liquidity of the market for the shares, investor perception of
the Company, the competitive environment of the industries in which the
Company participates, and general economic and market conditions.
Dividend Policy
The payment and amount of cash dividends, if any, on the
Octel Common Stock after the Distribution will be subject to the
discretion of the Company's Board of Directors. The Company's dividend
policy will be reviewed by the Company's Board of Directors at such
future times as may be appropriate, and payment of dividends on the Octel
Common Stock will depend upon the Company's financial position, capital
requirements, profitability, cash flows, restrictive covenants contained
in the Credit Facility and the Indenture and such other factors as the
Company's Board of Directors deems relevant. The Company does not have
any intention to pay dividends in the immediate future.
Possible Anti-takeover Effects of Certain Charter and By-Law Provisions
and Other Matters
Certain provisions of the Company's Certificate of
Incorporation (the "Certificate of Incorporation") and By-Laws (the
"By-Laws"), including provisions classifying the Board of Directors,
prohibiting stockholder action by written consent, governing business
transactions with certain stockholders and requiring advance notice for
nomination of directors and stockholder proposals, may inhibit changes in
control of the Company that are not approved by the Company's Board of
Directors. In addition, preferred stock purchase rights which will attach
to the Octel Common Stock could have similar effects. Such Certificate of
Incorporation and By-Law provisions and preferred stock purchase rights
could diminish the opportunities for a stockholder to participate in
certain tender offers, including tender offers at prices above the
then-current fair market value of the Octel Common Stock, and may also
inhibit fluctuations in the market price of the Octel Common Stock that
could result from takeover attempts. In addition, the Company's Board of
Directors, without further stockholder approval, may issue preferred
stock that could have the effect of delaying, deferring or preventing a
change in control of the Company. The issuance of preferred stock could
also adversely affect the voting power of the holders of Octel Common
Stock, including the loss of voting control to others. The Company has no
present plans to issue any preferred stock. The provisions of the
Certificate of Incorporation and By-Laws and the preferred stock rights
may have the effect of discouraging or preventing an acquisition of the
Company or a disposition of certain of the Company's businesses. See
"Description of Company Capital Stock."
RELATIONSHIP BETWEEN GREAT LAKES
AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of facilitating an orderly transfer on the
Distribution Date of the Octel Businesses to the Company and an orderly
transition to the status of two separate independent companies, Great
Lakes and the Company have entered or will enter into various agreements
and relationships, including those described in this section. The forms
of agreements summarized in this section are included as exhibits to the
Registration Statement of which this Information Statement forms a part,
and the following summaries are qualified in their entirety by reference
to the agreements as filed.
Distribution Agreement
Prior to the Distribution, Great Lakes and the Company will
enter into the Distribution Agreement, which will provide for, among
other things, the amount of Octel Common Stock to be issued in connection
with the Distribution, the transfer to the Company of the Octel
Businesses, the transfer to Great Lakes of the Company's Amlwch and
Palmer Research Laboratories facilities, the allocation between Great
Lakes and the Company of certain obligations and liabilities relating to
the Octel Businesses and the businesses being retained by Great Lakes and
the execution of certain other agreements governing the relationship
between Great Lakes and the Company following the Distribution. The
Distribution Agreement generally provides for the transfer by Great Lakes
to the Company of the assets used in the Octel Businesses, and for the
assumption by the Company of substantially all of the liabilities
relating to the Octel Businesses for periods before, on or after the
Distribution Date. The Company will also remain responsible, up to a
maximum aggregate amount of $5 million, for liabilities relating to the
Amlwch and Palmer Research Laboratories facilities to be transferred to
Great Lakes in connection with the Distribution to the extent that such
liabilities arise from acts or omissions occurring on or prior to the
Distribution Date.
Tax Disaffiliation Agreement
Great Lakes and the Company will enter into a Tax
Disaffiliation Agreement (the "Tax Disaffiliation Agreement"), detailing
their respective obligations concerning various tax liabilities. The Tax
Disaffiliation Agreement will require Great Lakes to pay, and indemnify
the Company against, all federal, state, local and foreign income taxes
relating to the businesses conducted by Great Lakes or its subsidiaries
for any taxable period, other than the following income taxes which will
be paid by the Company and against which the Company will indemnify Great
Lakes:
(i) income taxes relating to the Company and its U.S.
subsidiaries for periods after the Distribution Date;
(ii) income taxes payable for all periods by the Company's
non-U.S. subsidiaries or any predecessor or successor
thereof;
(iii) income taxes arising out of the failure of the
Distribution or any of the transactions related
thereto to qualify as tax-free as a result of certain
actions taken by, or in respect of, the Company or any
of its subsidiaries; and
(iv) income taxes due and payable by Great Lakes or its
subsidiaries with respect to their interests in Octel
Associates for the period from January 1, 1998 to the
Distribution Date.
The Tax Disaffiliation Agreement will further provide for cooperation
with respect to certain tax matters, the exchange of information and
retention of records which may affect the tax liability of either party.
In addition, the Tax Disaffiliation Agreement will require that the
Company refrain from certain actions during the two-year period
commencing on the day after the Distribution Date, unless it obtains a
supplemental ruling from the Internal Revenue Service, satisfactory to
Great Lakes in form and content, that such actions will not adversely
affect the qualification of the Distribution as a tax-free distribution
under Section 355 of the Code. These actions include (i) a
discontinuation of any material portion of the Company's or its
subsidiaries' business and (ii) participation in any transaction within
such two-year period which results in one or more persons owning 50
percent or more of the stock of the Company or any of its subsidiaries.
Corporate Services Transition Agreement
Great Lakes and the Company will enter into a Corporate
Services Transition Agreement (the "Corporate Services Transition
Agreement") pursuant to which the Company will agree to provide to Great
Lakes certain services, including administrative and other support
services, for a transitional period following the Distribution Date. The
Company will be compensated by Great Lakes on an arm's length basis for
the provision of such services.
Supply and Toll Manufacturing Agreements
Great Lakes and the Company will enter into agreements (the
"Supply Agreements") providing for the supply by Great Lakes to the
Company of Ethylene Dibromide ("EDB"), Hydrogen Bromide ("HBR") and the
toll manufacturing by Great Lakes for the Company of Stadis(R) 450 and
the supply by the Company to Great Lakes of caustic soda. The pricing and
other terms contained in the Supply Agreements generally will reflect
arm's length commercial considerations.
Option Agreement
Great Lakes and the Company will enter into an Option
Agreement with respect to the Company's chlorine membrane cell assets in
Ellesmere Port. Pursuant to the Option Agreement, Great Lakes will have
an option to purchase the Company's chlorine membrane cell assets should
the Company elect to sell such assets or terminate chlorine production
using such assets.
DESCRIPTION OF FINANCINGS
Prior to the Distribution Date, a subsidiary of the Company
will enter into a $320 million Credit Facility consisting of a revolving
credit facility of $20 million and a term loan facility of $300 million.
The Credit Facility will contain certain representations and warranties,
conditions, affirmative and negative financial covenants and events of
default customary for such facilities. The Credit Facility, may under
certain circumstances, restrict the Company's ability to pay dividends on
Octel Common Stock or impose other restrictions on the operations of the
Company's business. See "Risk Factors--Substantial Leverage and
Restrictive Covenants."
Also, in connection with the Distribution, a subsidiary of
the Company intends to issue $150 million of Notes due in 2006. The Notes
will be subordinated, unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as
defined in the Indenture) of the Company. The Notes will rank pari passu
with all existing and future senior subordinated indebtedness of the
Company. The Indenture will limit or preclude, among other things, (i)
the incurrence of additional indebtedness, (ii) the making of restricted
payments, (iii) the incurrence of liens, (iv) certain asset sales, (v)
the issuance and sale of subsidiary stock, (vi) transactions with
affiliates, (vii) mergers, consolidations and sales and transfers of all
or substantially all the assets of the Company and (viii) engaging in
unrelated lines of business. The Notes will also contain customary events
of default.
Proceeds from the Credit Facility and the net proceeds from
sale of the Notes will be used by the Company to make the Special
Payments to Great Lakes and to pay approximately $17 million of expenses
incurred by the Company in connection with the Distribution and the
Financings, and the revolving credit facility will be used for working
capital and general corporate purposes of the Company following the
Distribution.
PRO FORMA CAPITALIZATION
(Dollars in millions)
(Unaudited)
The following table sets forth the unaudited pro forma
capitalization of the Company at September 30, 1997. This data should be
read in conjunction with the pro forma balance sheet and the introduction
to the pro forma financial statements appearing elsewhere in this
Information Statement. The pro forma information may not reflect the
capitalization of the Company in the future or as it would have been had
the Company been a separate, independent company on September 30, 1997.
Assumptions regarding the number of shares of Octel Common Stock may not
reflect the actual number of shares at the Distribution Date. See "Pro
Forma Financial Statements."
<TABLE>
<CAPTION>
As of September 30, 1997
------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Long-term debt
<S> <C> <C> <C>
Credit facility (a)....................... $300.0 (b)
Senior Subordinated Notes................. 150.0 (b)
-------
Total debt.............................. 450.0 (b) $450.0
Equity
Great Lakes investment.................... 511.6 (346.2) (c)
106.5 (d)
(271.9) (e)
Common stock............................... 0.1 (e) 0.1
Additional paid-in capital................. 271.8 (e) 271.8
------ -----
Total equity............................... 511.6 (239.7) 271.9
----- ------- -----
Total capitalization....................... $511.6 $210.3 $721.9
====== ====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
Notes to Pro Forma Capitalization Table
(a) As of the Distribution Date, the Company estimates that $20
million will be available to the Company under the Credit
Facility.
(b) Reflects an estimated $450 million of debt the Company
expects to incur on or before the Distribution Date.
Approximately $116.8 million of the $450 million to be
borrowed will be used to repay Great Lakes for amounts paid
by Great Lakes to complete the acquisition of Chevron
Chemical Company's 10.65% minority interest in subsidiaries
of the Company. An additional $17 million is expected to be
used to pay transaction fees associated with the Distribution
and the Financings. The balance of the borrowing together
with $30 million of available cash will be used to pay a
special dividend of $346.2 million to Great Lakes.
(c) Special dividend to Great Lakes, $346.2 million.
(d) Transfer of the income tax liabilities to the Great Lakes
investment.
(e) Reflects the issuance of an estimated 14.7 million shares of
common stock, par value $0.01 per share. This is based on
approximately 58.9 million shares of Great Lakes Common Stock
outstanding at December 31, 1997 and an assumed distribution
of one share of the Company's common stock for every four
shares of Great Lakes Common Stock outstanding. Additional
paid-in capital represents the excess of the historical
carrying values of the Company's net assets at the
Distribution Date over the amount reflected as Common Stock.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
The Company was formed by Great Lakes for the purpose of
effecting the Distribution and has no operating history as a separate,
independent company. The historical financial statements of the Company
reflect periods during which the Company did not operate as a separate,
independent company, and certain assumptions were made in preparing such
financial statements. Therefore, such historical financial statements may
not reflect the results of operations or financial position that would
have been achieved had the Company been a separate, independent company.
The following unaudited pro forma combined financial
statements (the "Pro Forma Financial Statements") are based on the
historical financial statements of the Company for and as of the year
ended December 31, 1996 and for and as of the nine months ended September
30, 1997 included elsewhere in this Information Statement, adjusted to
give effect to the Distribution, which includes (i) the Financings and
(ii) the Special Payments. The Unaudited Pro Forma Combined Statements of
Income for the year ended December 31, 1996 give effect to the
Distribution as if it had occurred as of January 1, 1996 and the
Unaudited Pro Forma Combined Statements of Income for the nine months
ended September 30, 1997 give effect to the Distribution as if it had
occurred as of January 1, 1997. The Unaudited Pro Forma Combined Balance
Sheet gives effect to the Distribution as if it had occurred as of
September 30, 1997. The Distribution and the related adjustments are
described in the accompanying notes. The Pro Forma Financial Statements
are based upon available information and certain assumptions that
management believes are reasonable. The Pro Forma Financial Statements do
not purport to represent what the Company's results of operations or
financial condition would actually have been had the Distribution in fact
occurred on such dates or to project the Company's results of operations
or financial condition for any future period or date. The Pro Forma
Financial Statements should be read in conjunction with the historical
financial statements of the Company included elsewhere in this
Information Statement and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Pro Forma Financial Statements assume the completion of
the transactions contemplated by the Distribution Agreement and the
agreements to be entered into pursuant to the Distribution Agreement
including the completion of all the asset transfers and contract
assignments contemplated thereby. Assumptions regarding the number of
shares of Octel Common Stock may not reflect the actual numbers at the
Distribution Date.
Pro Forma Statements of Income
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 Year Ended December 31, 1996
------------------------------------ ----------------------------
Pro Forma Pro Forma
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $ 395.0 $ $ 395.0 $ 597.4 $ $ 597.4
Cost of goods sold............... 197.7 197.7 298.8 298.8
----- ------ ----- ----- ------- -----
Gross profit.................. 197.3 197.3 298.6 298.6
Operating expenses:
Selling, general and
administrative.............. 29.3 2.2 (a) 31.5 40.2 3.0 (a) 43.2
Research and
development................. 2.5 2.5 5.6 5.6
--- ----- --- --- ------ ---
Total......................... 31.8 2.2 34.0 45.8 3.0 48.8
Operating income................. 165.5 (2.2) 163.3 252.8 (3.0) 249.8
Interest and other
expenses..................... 3.6 29.8 (b) 33.4 9.1 39.8 (b) 48.9
Amortization of
intangible assets............. 20.3 6.1 (c) 28.0 26.7 8.1 (c) 36.9
1.6 (d) 2.1 (d)
Other income..................... (9.4) 3.0 (e) (6.4) (4.7) 3.0 (e) (1.7)
----- ---- ----- ----- --- -----
Income before income
taxes and minority
interest.................... 151.0 (42.7) 108.3 221.7 (56.0) 165.7
Minority interest................ 20.3 (20.3) (c) -- 29.6 (29.6) (c) --
---- ------ ------- ---- ------- ----
Income before income
taxes........................ 130.7 (22.4) 108.3 192.1 (26.4) 165.7
Income taxes..................... 43.9 (7.5) (f) 36.4 63.8 (8.9) (f) 54.9
---- ----- ---- ---- ----- ----
Net income....................... $ 86.8 $(14.9) $ 71.9 $ 128.3 $(17.5) $ 110.8
======= ========= ======= ======== ======== ========
Net income per share (g)......... $ 4.89 $ 7.54
========= =======
</TABLE>
The accompanying notes are an integral part of this statement.
Notes to Pro Forma Statements of Income
(a) Represents an estimate of the additional annual costs to be
incurred by the Company with respect to U.S. corporate
governance and securities-related issues, including issues
relating to publicly-traded stock, Board of Directors
responsibilities, and other related costs.
(b) Represents the estimated interest expense the Company would
have experienced during the periods with respect to the $300
million outstanding under the Credit Facility and the $150
million of Notes. The interest rates assumed were 8.6% and
10% with respect to the Credit Facility and the Notes,
respectively, for both periods. Interest previously paid to
Great Lakes on borrowings is replaced by the Credit Facility
and the Notes.
(c) Represents the following effects of the Company's purchase of
Chevron Chemical Company's interest in subsidiaries of the
Company: (i) amortization of $81.1 million over 10 years and
(ii) eliminating Chevron's minority interest in the earnings
of such subsidiaries.
(d) Represents the additional amortization of the estimated $17.0
million transaction fees relating to the Distribution and the
Financings, amortized over eight years.
(e) Represents the estimated reduction in interest receivable due
to reduced cash balances.
(f) Represents the adjustments to the income tax provision to
reflect the additional expenses and the elimination of the
minority interest.
(g) Assumes approximately 14.7 million shares of Octel Common
Stock outstanding.
Pro Forma Balance Sheet
(As of September 30, 1997)
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
Assets:
Current assets
<S> <C> <C> <C>
Cash and cash items........................... $ 41.0 $ 450.0(a) $ 11.0
(116.8)(b)
(17.0)(c)
(346.2)(d)
Accounts receivable, net...................... 152.6 152.6
Inventories................................... 82.0 82.0
Prepaid expenses.............................. 2.4 2.4
-------- --------- ---------
Total current assets.......................... 278.0 (30.0) 248.0
Property, plant and equipment, net............... 103.3 103.3
Goodwill and other intangible assets, net........ 306.6 81.1 (b) 404.7
17.0 (c)
Other assets..................................... 68.7 ------- 68.7
---- ----
Total assets..................................... $ 756.6 $68.1 $ 824.7
======= ====== =======
Liabilities and Equity:
Current liabilities
Accounts payable.............................. 25.2 25.2
Accrued expenses.............................. 7.0 7.0
Accrued income taxes.......................... 108.2 (106.5) (e) 1.7
-------- ------- -------
Total current liabilities..................... 140.4 (106.5) 33.9
Other liabilities................................ 60.9 60.9
Deferred income taxes............................ 8.0 8.0
Long-term debt
Credit facility................................ 300.0 (a) 300.0
Notes.......................................... 150.0 (a) 150.0
----- -----
Total debt.................................. 450.0 (a) 450.0
Minority interest................................ 35.7 (35.7) (b) --
Equity:
Great Lakes investment....................... 511.6 (346.2) (a) --
106.5 (e)
(271.9) (f)
Common stock................................. -- 0.1 (f) 0.1
Additional paid-in capital................... - 271.8 (f) 271.8
------ ----- -----
Total equity................................. 511.6 (239.7) 271.9
----- ------- -----
Total liabilities and equity................. $ 756.6 $ 68.1 $ 824.7
======== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
Notes to Pro Forma Balance Sheet
(a) Reflects an estimated $450 million of debt the Company
expects to incur on or before the Distribution Date.
Approximately $116.8 million of the $450 million to be
borrowed will be used to repay Great Lakes for amounts paid
by Great Lakes to complete the acquisition of Chevron
Chemical Company's 10.65% minority interest in the
subsidiaries of the Company. An additional $17 million is
expected to be used to pay transaction fees associated with
the Distribution and the Financings. The balance of the
borrowing together with $30 million of available cash will be
paid to Great Lakes in the form of a special distribution.
(b) Purchase of Chevron Chemical Company's interest in
subsidiaries of the Company for $116.8 million including
their undistributed share of earnings (minority interest),
$35.7 million, and recognition of goodwill, $81.1 million.
(c) Estimated transaction fees associated with the borrowings,
$17.0 million. Transaction fees will be amortized over the
term of the borrowings, eight years.
(d) Special dividend to Great Lakes, $346.2 million.
(e) Transfer of the income tax liabilities to the Great Lakes
investment.
(f) Reflects the issuance of an estimated 14.7 million shares of
common stock, par value $0.01 per share. This is based on
approximately 58.9 million shares of Great Lakes Common Stock
outstanding at December 31, 1997 and an assumed distribution
of one share of the Company's common stock for every four
shares of Great Lakes Common Stock outstanding. Additional
paid-in capital represents the excess of the historical
carrying values of the Company's net assets at the
Distribution Date over the amount reflected as Common Stock.
SELECTED HISTORICAL FINANCIAL DATA
(Dollars in millions)
The following selected historical financial data of the
Company should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this Information
Statement. The selected historical financial data relates to the Octel
Businesses as they were operated as part of the Petroleum Additives
Business Unit of Great Lakes and as described in Note 1 to the historical
financial statements. The following selected historical financial data
are derived from the historical financial statements of the Company. The
annual historical financial information has been adjusted for those parts
of the Petroleum Additives Business Unit which are to remain under Great
Lakes ownership and management after the Distribution. The selected
historical financial data that relate to the three year period ended
December 31, 1996 have been derived from the historical financial
statements audited by Ernst & Young L.L.P., independent auditors. The
selected historical financial data for the nine-month periods ended
September 30, 1997 and 1996, respectively, and for the years 1993 and
1992 have been derived from unaudited historical financial statements. In
the opinion of management, the unaudited historical financial statements
reflect all normal recurring adjustments necessary to present fairly the
financial position of the Company for the periods noted in the preceding
sentence.
The historical financial data of the Company may not reflect
the results of operations or financial position that would have been
achieved had the Company been a separate, independent company for the
periods presented. The results of operations for the nine months ended
September 30, 1997 should not necessarily be taken as indicative of the
results of operations that may be expected for the entire year 1997.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Years Ended December 31,
_____________ _____________________________________
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................................... $395.0 $427.1 $597.4 $628.3 $603.1 $569.9 $564.9
Gross profit................................... 197.3 229.6 298.6 321.3 307.1 309.4 283.0
Selling, general and administrative
expenses..................................... 29.3 31.1 40.2 42.1 37.5 38.1 41.6
Research and development....................... 2.5 3.7 5.6 5.6 6.7 9.6 10.5
Operating income............................... 165.5 194.8 252.8 273.6 262.9 261.7 230.9
Amortization of intangible assets.............. 20.3 20.0 26.7 19.0 16.7 15.0 6.1
Income before income taxes and minority
interest..................................... 151.0 175.9 221.7 249.1 247.2 235.0 201.1
Net income..................................... $86.8 $101.3 $128.3 $145.1 $142.4 $163.9 $123.8
Balance Sheet Data (at end of period):
Total working capital.......................... $137.6 $216.1 $175.8 $188.8 $154.5 $162.8
Property, plant and equipment, net............. 103.3 113.4 107.3 84.0 67.1 68.9
Total assets................................... 756.6 841.0 798.4 742.0 643.3 619.3
Total liabilities.............................. 245.0 256.4 267.6 256.0 226.7 218.2
Total equity................................... $511.6 $584.6 $530.8 $486.0 $416.6 $401.1
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with,
and is qualified in its entirety by reference to, the Combined Financial
Statements of the Company, including the notes thereto, appearing
elsewhere in this Information Statement.
Overview
The following discussion is based upon the separate financial
statements of the Company, which present the Company's results of
operations, financial position and cash flows. These financial statements
include the assets, liabilities, income and expenses that were directly
related to the Octel Businesses as they were operated as a part of the
Petroleum Additives Business Unit of Great Lakes, and the Company's
statement of income includes all the related costs of doing business,
including charges for the use of facilities and for employee benefits.
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of
the Company as it will operate in the future or the results of
operations, financial position and cash flows that would have been
achieved if the Company had been an independent company during the
periods presented. The historical financial information included herein
also does not reflect the changes in the Company's operations that may
occur following the Distribution.
The Company has three businesses - Lead Alkyls (TEL),
Petroleum Specialties and Performance Chemicals. TEL is the Company's
principal product, and the Company is the world's leading manufacturer of
TEL. Over the last few years, approximately 70% of the Company's TEL
production has been sold on a retail basis to oil refineries, and the
remaining 30% has been sold to distributors, principally Ethyl, under
long-term wholesale contracts. Pricing to distributor customers is
substantially below pricing to retail refinery customers. See
"Description of Business."
From 1989 to 1995, the Company was able to substantially
offset the financial effects of the declining demand for TEL through
higher TEL pricing. The magnitude of these price increases reflected the
cost effectiveness of TEL as an octane enhancer as well as the high cost
of converting refineries to produce higher octane grades of fuel. More
recently, however, as the optimum TEL levels in gasoline have been
reached, and as competition has intensified due to the decline in demand
for TEL, it has been increasingly difficult for the Company to secure
general price increases. The Company expects that this trend will
continue in the foreseeable future.
As world demand for TEL has declined, the Company has been
reducing its cost base in an attempt to maintain its margins. In 1989,
the Company closed its German manufacturing facility. In 1996, the
Company ceased production at its Italian and French manufacturing
facilities. The closure of the Italian and French facilities has reduced
the Company's workforce by 154 employees as of September 30, 1997 and
will result in a further reduction of 71 employees upon substantial
completion of site remediation activities in France. All of the Company's
current TEL requirements are now produced at its sole remaining TEL
manufacturing facility which is located in Ellesmere Port in the United
Kingdom. Since 1996, the Company's cost reduction efforts and operating
improvement programs in the U.K. have reduced the workforce by 470 people
resulting in annual savings of approximately $20 million which have been
used to maintain margins. The Company will continue to downsize its
manufacturing and operating cost base and restructure its operations as
the TEL market continues to decline. See "--Future Outlook."
Results of Operations
The following table sets forth, for the periods indicated,
the percentage relationship to net sales of certain items included in the
Company's statement of income:
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
-----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................ 50.0 46.2 50.0 48.9 49.1
---- ---- ---- ---- ----
Gross profit...................... 50.0 53.8 50.0 51.1 50.9
Operating expenses
Selling, general and
administrative expenses........... 7.5 7.3 6.7 6.7 6.2
--- --- --- --- ---
Research and development....... 0.6 0.9 1.0 0.9 1.1
--- --- --- --- ---
Total operating expenses.......... 8.1 8.2 7.7 7.6 7.3
Operating income.................. 41.9 45.6 42.3 43.6 43.6
Interest and other expenses....... 1.0 0.7 1.5 2.3 1.8
Amortization of intangible assets. 5.1 4.7 4.5 3.0 2.8
Other income...................... (2.4) (1.0) (0.8) (1.4) (2.0)
----- ----- ----- ----- ------
Income before income taxes and
minority interests................ 38.2 41.2 37.1 39.7 41.0
Minority Interests................ 5.1 5.4 4.9 5.2 5.4
--- --- --- --- ---
Income before income taxes........ 33.1 35.8 32.2 34.5 35.6
Income taxes...................... 11.1 12.1 10.7 11.4 12.0
---- ---- ---- ---- ----
Net income........................ 22.0 23.7 21.5 23.1 23.6
==== ==== ==== ==== ====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net sales decreased $32.1 million (or 8%) in the first nine
months of 1997 to $395.0 million from $427.1 million in the corresponding
period of 1996. Net sales by business are set forth in the following
table ($ in millions).
<TABLE>
<CAPTION>
Percentage
1997 1996 Increase (Decrease)
---- ---- -------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C> <C>
- -TEL.......................... 321.4 81.0 364.1 85.0 (12.0)
Petroleum Specialities....... 48.0 12.0 51.2 12.0 (6.0)
Performance Chemicals........ 25.6 7.0 11.8 3.0 117.0
---- --- ---- --- -----
Total..................... 395.0 100.0 427.2 100.0 (8.0)
===== ===== ===== ===== =====
</TABLE>
This decrease was primarily attributable to a decline of
approximately 13% in volumes of TEL sold on a retail basis to refineries,
with 40.7 thousand metric tons sold in 1997 as compared to 46.7 thousand
metric tons sold in 1996. Management believes that this decline reflects
the timing of deliveries in the first nine months of 1997. Retail sales
prices of TEL for the first nine months of 1997 increased by
approximately 1% as compared to the corresponding period of 1996,
reflecting a change in the mix of customers and continuing price
competition. In addition, sales of TEL on a wholesale basis to
distributors declined from 19.9 thousand metric tons in 1996 to 17.8
thousand metric tons in 1997, or approximately 11%, because of a Mexican
phaseout of leaded gasoline, which market had been supplied by E.I. du
Pont de Nemours & Company ("DuPont") with TEL purchased from the Company.
The Company's ratio of retail to wholesale TEL sales was approximately
70/30 for the first nine months of 1997 and 1996. Net sales of Petroleum
Specialties declined for the first nine months of 1997 as compared to the
corresponding period of 1996 because of the loss of a major customer,
while net sales of Performance Chemicals more than doubled over the same
period because of increased demand for Octaquest(R), a biodegradable
chelating agent used in laundry products.
Gross profit decreased $32.3 million (or 14%) in the first
nine months of 1997 to $197.3 million from $229.6 million in the
corresponding period of 1996 because lower TEL volumes and adverse
currency effects offset gains from lower production costs. As a
percentage of net sales, gross profit decreased in the first nine months
of 1997 to 50.0% as compared to 53.8% in the corresponding period of
1996. This decrease reflects TEL being a lower percentage of total sales
in 1997.
Operating expenses decreased $3.0 million in the first nine
months of 1997 to $31.8 million from $34.8 million in the corresponding
period of 1996 because of cost reduction programs.
Other income increased $5.2 million in the first nine months
of 1997 to $9.4 million from $4.2 million in the corresponding period of
1996 due to currency gains.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales decreased $30.9 million (or 4.9%) in 1996 to $597.4
million from $628.3 million in 1995. Net sales by business are set forth
in the following table ($ in millions):
<TABLE>
<CAPTION>
Percentage
1996 1995 Increase (Decrease)
---- ---- --------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C> <C>
TEL............................ 505.1 85 547.1 87 (7)
Petroleum Specialities......... 70.9 12 65.0 10 9
Performance Chemicals.......... 21.4 3 16.2 3 24
---- --- ---- --- --
Total....................... 597.4 100 628.5 100 (5)
- -------- ===== === ===== === ===
</TABLE>
This decrease was primarily attributable to a decline in
sales volumes of $47.6 million, which was partly offset by a price
increase of $19.4 million. In addition, foreign exchange losses totaled
$2.7 million. In 1996, the retail volume of TEL sold was 63.8 thousand
metric tons as compared to 73.5 thousand metric tons in 1995, a decline
of approximately 13%, which was higher than the 8 to 10% annual market
decline experienced previously. No single factor accounted for the
decline, and the Company believes it maintained its share of the
worldwide retail TEL market during this period. Retail sales prices of
TEL increased by approximately 4% in 1996 as compared to 1995, which is
lower than the rate of increase in 1995. Product pricing reflects (i) the
Company's strategy to extend the life of TEL by reducing or foregoing
price increases, (ii) changing refinery economics related to achieving
octane ratings by using different production processes, (iii) a changing
mix of customers and regions of the world where TEL is sold (e.g.,TEL
demand in higher priced regions declined at a faster rate than in other
regions), and (iv) aggressive pricing by competitors. Sales of TEL on a
wholesale basis increased approximately 5% in 1996 as compared to 1995,
growing from 28.7 thousand metric tons in 1995 to 30.2 thousand metric
tons in 1996. The ratio between the Company's retail TEL sales and
wholesale TEL sales was 68/32 in 1996 as compared to 72/28 in 1995.
Finally, net sales of Petroleum Specialties increased 9% in 1996 because
of a 7% increase in sales quantities combined with an improvement in the
average prices of detergent formulations. Net sales of Performance
Chemicals increased 24% in 1996 because of the successful introduction of
Octaquest(R) during 1996, which was offset in part by lower sales of
chlor-alkali products.
Gross profit decreased $22.7 million (or 7%) in 1996 to
$298.6 million from $321.3 million in 1995 because lower TEL volumes were
only partially offset by increased sales prices. As a percentage of net
sales, gross profit decreased 1996 to 51.1% as compared to 50.0% in 1995.
The decline was also attributable to an increase of approximately $10
million in the provision for the future closure of TEL manufacturing
plants and an increase in raw materials prices, especially lead and
ethylene. No benefits from plant closures or the staff reductions in the
United Kingdom are reflected in this period.
Operating expenses decreased $1.9 million (or 4.2%) in 1996
to $45.8 million from $47.7 million in 1995 primarily as a result of cost
reduction programs and foreign exchange gains. Research and development
expenses in 1996 remained unchanged from 1995 at $5.6 million. As a
percentage of net sales, operating expense increased slightly in 1996 to
7.7% as compared to 7.6% in 1995.
Interest and other expenses decreased $5.6 million in 1996 to
$9.1 million from $14.7 million in 1995 as loans from Great Lakes were
repaid. This gain was partially offset by unrealized foreign exchange
losses.
Amortization of goodwill increased $7.7 million to $26.7
million in 1996 from $19.0 million in 1995 as the Company accelerated
amortization in line with the anticipated decline of the TEL business.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased $25.2 million (or 4.0%) in 1995 to $628.3
million from $603.1 million in 1994. Net sales by business are set forth
in the following table ($ in millions):
Percentage
1996 1995 Increase (Decrease)
---- ---- -------------------
$ % $ %
- - - -
TEL..................... 547.1 87 541.1 90 1
Petroleum Specialities.. 65.0 10 43.4 7 50
Performance Chemicals... 16.2 3 18.6 3 13
----- ---- ---- --- --
Total................ 628.5 100 603.1 100 4
===== === ===== === ==
This increase was primarily attributable to increases in
sales prices of $47.5 million, additional sales of $43.3 million relating
to the acquisition in August 1994 of the fuel additives business of
DuPont, and foreign exchange gains of $8.1 million. These gains were
offset in part by a $40.1 million decline in sales volumes. Sales volumes
of TEL on a retail basis amounted to 73.5 thousand tons in 1995 as
compared to 79.7 thousand metric tons in 1994, a decline of approximately
8%. Prices increased by an average of 9%, a lower rate of increase than
achieved in prior years. Product pricing reflected (i) the Company's
strategy to extend the life of TEL by reducing or foregoing price
increases, (ii) changing refinery economics related to achieving octane
ratings by using different production processes and (iii) the changing
geographic regions where leaded fuels were used. Wholesale sales volumes
declined from 28.7 thousand metric tons in 1995 as compared to 35.6
thousand metric tons in 1994, or 19%, while prices increased by
approximately 5% during the same period. These volume declines resulted
from the adjustment of inventory levels by a major wholesale customer.
The relationship of the Company's retail to wholesale sales volumes of
TEL was 72/28 in 1995 as compared to 70/30 in 1994. Net sales of
Petroleum Specialties in 1995 increased approximately 50% in 1995 as
compared to 1994 primarily as a result of the acquisition of the Du Pont
fuel additives business. Excluding the effects of the acquisition, net
sales of Petroleum Specialties improved because of new product
introductions and foreign exchange gains. Net sales of Performance
Chemicals decreased 13% in 1995 as compared to 1994 as a result of
changed transportation regulations making the shipment of sodium to
continental Europe less economically favorable.
Gross profit increased $14.2 million (or 4.6%) in 1995 to
$321.3 million from $307.1 million in 1994 because increased sales
prices, the acquisition of the DuPont fuel additives business and foreign
exchange gains were only partially offset by reduced sales volumes and
high manufacturing and raw materials costs. As a percentage of net sales,
gross profit increased slightly in 1995 to 51.1% as compared to 50.9% in
1994.
Operating expenses increased $3.5 million (or 7.9%) to $49.7
million in 1995 from $49.2 million in 1994 primarily because of the
acquisition of DuPont fuel additives business.
Interest and other expenses increased $3.6 million to $14.7
million in 1995 from $11.1 million in 1994 because of losses on the
disposal of fixed assets.
Amortization of goodwill increased $3.7 million to $19.0
million in 1995 from $16.7 million in 1994 because of the acquisition of
the DuPont fuel additives business.
Other income decreased $2.9 million to $9.2 million in 1995
from $12.1 million in 1994 because 1994 included a one-time insurance
settlement.
Financial Condition and Liquidity
Historically, the Company has not required financing and has
transferred significant amounts of cash to Great Lakes as described in
Note 6 to the Combined Financial Statements. Cash provided by operating
activities was $128.6 million in 1996, $175.4 million in 1995 and $161.9
million in 1994. The $46.8 million decrease in 1996 compared to 1995 was
primarily attributable to lower income, increased investment in working
capital and higher spending on plant closures, which were partially
offset by increased non-cash charges for depreciation and amortization.
The $13.5 million increase in 1995 as compared to 1994 primarily resulted
from lower investment in working capital. For the nine months ended
September 30, 1997, cash provided by operating activities amounted to
$158.5 million, an increase of $15.1 million over the $143 million
generated in the 1996 period. The improvement reflected reduced working
capital investments offset in part by lower net income and increased
spending on plant closure costs.
Accounts receivable at December 31, 1996 increased $1.8
million to $196.4 million from $194.6 million at December 31, 1995. This
slight increase resulted from an $11.4 million increase in trade accounts
receivable and a $5.7 million decrease in other receivables because of
the recovery of insurance claims. In addition, days sales outstanding
were 107 days at the end of 1996 compared to 98 days in 1995. The
increase in day sales outstanding reflected the greater number of large
bulk customers that received extended payment terms. Accounts receivable
as of September 30, 1997, amounted to $152.6 million, a decrease of $43.8
million from December 31, 1996, reflecting lower sales, a weaker pound
sterling vis-a-vis the U.S. dollar and a reduction in days sales
outstanding to 99 days.
Inventories at December 31, 1996 were $84 million, an
increase of $21.9 million from December 31, 1995. Approximately $6.5
million of this increase was attributable to currency translation with
the balance attributable to increased lead costs and stocking levels.
Inventory turnover for 1996 was 3.6 times, down from 4.9 times the prior
year, reflecting the buildup of raw materials. At September 30, 1997
inventories amounted to $82 million, a $2 million decrease from December
31, 1996. The decrease reflected the effects of currency translations and
lower lead costs offset by quantity increases to meet anticipated
requirements for fourth quarter deliveries to customers.
Investment activities include capital expenditures and
acquisitions. Capital expenditures decreased $10.1 million to $20.6
million in 1996 as compared to $31.5 million in 1995. Capital spending in
1996 was primarily for capacity maintenance and the completion of
facilities for the production of Octaquest(R). In 1995, capital spending
included capacity maintenance and the initial construction of the
Octaquest(R) project. Capital expenditures of $7.4 million in the 1997
period were mainly attributable to capacity maintenance. Capital spending
for environmental projects in 1996 and 1995 was $10.8 million and $9
million, respectively. Capital expenditures for 1998 and 1999 are
expected to be approximately $20 million in each year, including
approximately $10 million, in the aggregate, for environmental
compliance. The remainder of investment spending for the nine month
period ended September 30, 1997 and for 1996 and 1995 was related to the
payment of profit participation payments required to be made as part of
the 1989 acquisition of a majority interest in Octel Associates. See Note
4 to the Combined Financial Statements. Spending in 1994 included the
acquisition of the DuPont petroleum additives business.
Total current liabilities have varied with the volume of
business. The increase as of September 30, 1997 compared to December 31,
1996 reflected the timing of the United Kingdom tax payments.
Other noncurrent liabilities in 1996 represented a reserve of
$90.3 million for expected future plant closures and related personnel
reductions and decontamination costs at the Company's TEL plants in the
U.K., France, Italy and Germany as demand for TEL diminishes.
Approximately $20 million was spent in 1996, as compared to $6 million in
1995. The closures, coupled with staff reductions in the U.K., were
primarily responsible for the increased spending levels in 1996. Spending
on plant closures amounted to $24.2 million through September 30, 1997.
Management believes that production at the U.K. plant should continue
well into the next century based on the current rate of market decline.
As part of the Distribution, the Company is expected to incur
approximately $450 million of indebtedness. Approximately $17 million of
the borrowings will be used to pay fees and expenses related to the
Distribution and the Financings. The remainder of the borrowing, together
with $30 million of available cash will be distributed to Great Lakes in
the form of the Special Payment.
The Company believes that cash generated by operating
activities and funds available to it through a revolving credit facility
of $20 million provided under the Credit Facility will be sufficient to
meet the Company's anticipated funding requirements.
Future Outlook
The Company is, and for the next several years is likely to
remain, highly dependent on its principal product, TEL. Over the last
three years, TEL has represented more than 80% of the Company's net sales
and has provided essentially all the Company's profits and cash flow. The
Company expects that its strong, although declining, cash flow in the
foreseeable future will be adequate to fund the Company's future capital
and operating needs.
World demand for TEL has been in decline since the 1970s, and
this trend is expected to continue. Through the mid-1990's the Company
was able, in part, to offset the effects of declining volumes with
selling price increases. More recently, however, the Company has reduced
or forgone price increases in order to extend the life of the product and
to remain competitive with other TEL marketers and alternate methods of
achieving higher octane levels in gasoline. The Company expects a
competitive pricing environment to continue which will increasingly limit
the ability of the Company to partially offset the effects of future
declines in TEL volumes with price increases.
The Company has and will continue to downsize and restructure
its operations consistent with declining demand for TEL. The recent
cessation of TEL production in France and Italy and the restructuring of
the U.K. operations have reduced total employment by 624 employees
between January 1, 1996 and September 30, 1997 and reduced the cost base
to maintain operating margins. Notwithstanding the Company's continuing
downsizing and productivity improvement programs, management expects the
fixed cost per ton of TEL, which currently represents 27% of total cost
per ton, to increase in the future as cost reductions are not expected to
keep pace with declining TEL sales volume.
Raw materials, particularly lead, ethylene and salt, account
for a substantial portion of total manufacturing costs of TEL. These
materials are commodities and are subject to significant price
fluctuations over time. While the Company may or may not be able to pass
through to its customers the impact of any such fluctuations in raw
material prices in the future, management does not believe any such
fluctuations will have a material effect on the Company's results of
operations.
A strong, although declining, cash flow is expected in future
years. The Company does not anticipate any significant capital
expenditures, other than maintenance and environmental compliance costs
in the foreseeable future. See "--Environmental Matters and Plant
Closures." Capital expenditures were $20.6 million in 1996, $31.5 million
in 1995 and $22.6 million in 1994. The Company spent $7.4 million for
capital expenditures during the first nine months of 1997.
Although the Company anticipates significant sales growth
from the Petroleum Specialties business and the Performance Chemicals
business in the future, earnings from these businesses will not be
sufficient to fully offset the projected decline in TEL sales and
earnings at least over the next several years.
Environmental Matters and Plant Closures
The Company is subject to laws, regulations and legal
requirements relating to the use, storage, handling, generation,
transportation, emission, discharge, disposal and remediation of, and
exposure to, hazardous and non-hazardous substances and wastes
("Environmental Laws") in all of the countries in which it does business.
Under certain Environmental Laws, the Company is responsible for the
remediation of hazardous substances or wastes at currently-or
formerly-owned or operated properties. Although the Company believes that
it is in material compliance with all applicable Environmental Laws, and
there can be no assurance that the Company will not incur costs in the
future relating to Environmental Laws that will have a material adverse
effect on the Company's business, results of operations or financial
condition.
The manufacturing operations of the Company have been
conducted entirely outside the United States and, therefore, any
liability of the Company pertaining to the investigation and remediation
of contaminated properties is likely to be determined under non-U.S. law.
The Company is conducting environmental and remediation activities to
address soil and groundwater contamination at its manufacturing facility
in Ellesmere Port, U.K. (the "Ellesmere Port Facility"), and at its
closed manufacturing sites in France, Italy and Germany ("Remediation
Projects"). Although the Company has developed estimates for the costs of
the Remediation Projects which management believes to be reasonable
(based upon its internal review and its review of the reports of
recognized independent experts), there can be no assurance that the
actual costs will not materially exceed the Company's estimates. The
Company incurred costs of approximately $0.4 million in the nine months
ended September 30, 1997, $0.1 million in 1996 and negligible amounts in
1995 relating to the Remediation Projects, and anticipates that it will
incur costs of approximately $3.0 million and $3.6 million in 1998 and
1999, respectively, in connection with the Remediation Projects.
Management believes (based upon its internal review and its
review of the reports of recognized independent experts) that the Company
is in material compliance with all applicable Environmental Laws. The
Company makes capital expenditures and incurs other expenses at the
Ellesmere Port Facility to maintain such compliance, and the Company
expects that it will be required to continue to do so in the future. The
Company made environmental capital and other expenditures of
approximately $7.5 million in the nine months ended September 30, 1997,
approximately $10.8 million in 1996, approximately $9.0 million in 1995
and approximately $8.0 million in 1994. The Company estimates that
environmental capital expenditures and other expenses related to these
matters will amount to approximately $12.0 million in 1998 and
approximately $17.0 million in 1999. There can be no assurance, however,
that these estimates will prove accurate or that the Company will not
incur costs materially in excess of these estimates. Additionally, there
can be no assurance that changes in existing laws or regulations, or the
discovery of additional environmental liabilities associated with the
Company's current or historical operations, will not require the Company
to incur material costs or will not otherwise materially and adversely
affect the Company's business, results of operations, or financial
condition.
The Health and Safety Executive and the Environmental Agency
in the U.K. are investigating a July 1997 bromine emission from the
Company's bromine manufacturing facility in Amlwch, U.K., which facility
is being transferred to Great Lakes in connection with the Distribution.
Although neither agency has indicated whether enforcement action will be
initiated against the Company, such an action could result in monetary
penalties being imposed upon the Company which are not likely to exceed
$100,000. Although it cannot predict the severity of any such penalties,
management believes that the release was accidental and therefore that
the Company is not likely to incur material penalties or costs in
connection with this matter.
In addition to the Remediation Projects, the Company is
engaged in plant closure and restoration programs to dismantle and
decontaminate process equipment, perform building demolition, and
generally decommission ("Decontamination and Decommissioning Projects")
closed manufacturing facilities in France, Italy, and Germany. The
Decontamination and Decommissioning Projects are necessary to facilitate
the ultimate disposition of these sites.
The Company has also developed a two-phase Decontamination
and Decommissioning Project for the Ellesmere Port Facility. The first
phase of the Ellesmere Port Decontamination and Decommissioning Project
is for the dismantling, decontamination, and removal of TEL process
equipment over time as volumes of TEL decline. The second phase of the
Ellesmere Port Decontamination and Decommissioning Project is for final
dismantling and decontamination of process equipment, building
demolition, and general decommissioning of the Ellesmere Port Facility
if, and when, all manufacturing operations there cease.
The Company has developed cost estimates of approximately $51
million, which are believed by management to be reasonable, for the
Decontamination and Decommissioning Project (both at the closed sites in
France, Italy and Germany and at the Ellesmere Port Facility). In
concluding that these estimates are reasonable, management has relied
upon its internal review and the reports of recognized independent
experts. This amount includes approximately $33 million, the estimated
cost of phase two of the Company's Decontamination and Decommissioning
Project at Ellesmere Port (final dismantling, building demolition, and
general decommissioning), which will not be incurred until and unless all
manufacturing operations at Ellesmere Port cease. The Company incurred
costs associated with the Decontamination and Decommissioning projects at
the closed sites in France, Italy and Germany of approximately $9.8
million in the nine months ended September 30, 1997, $2.8 million in
1996, $2.8 million in 1995 and $5.1 million in 1994. To date, the Company
has incurred costs at the Ellesmere Port Facility, mainly related to the
decommissioning of bulk ships, totaling approximately $0.4 million in the
nine months ended September 30, 1997, $0.9 million in 1996, 1.8 million
in 1995 and $0.5 million in 1994. The Company does not anticipate making
any material expenditures in 1998 or 1999 on the first phase of the
Ellesmere Port Decontamination and Decommissioning Project.
During the process of reducing production capacity, the
Company has also significantly reduced the number of personnel employed.
The costs of personnel severance were approximately $18 million in the
nine months ended September 30, 1997, $16 million in 1996, 0.8 million in
1995 and $1.8 million in 1994. The Company estimates further costs of
this nature of approximately $8.0 million in 1998 and $2.0 million in
1999.
The Company estimates a total cost of $124 million for
Environmental Matters and Plant Closures consisting of Remediation
Projects ($17 million), Decontamination and Decommissioning Projects ($57
million) and personnel severance ($50 million). As of September 30, 1997,
the Company had accrued $60.9 million on the balance sheet for such costs
and is providing for the difference over the remaining life of the TEL
business. These estimates do not take into account future inflation and
have not been reduced to present value. The Company estimates that the
total spending on Environmental Matters and Plant Closures will be
approximately $15 million in 1998 and $9 million in 1999.
Inflation
Inflation has not been a significant factor for the Company
over the last several years. Management believes that inflation will
continue to be moderate over the next several years.
Year 2000
The Company is aware of the computer systems issues
associated with the transition of dates from 1999 to 2000. The Company
has retained consultants to assist in the evaluation of the impact of
these issues on the Company's operations in order to ensure that all
issues are addressed in a timely manner. On the basis of its preliminary
evaluation, the Company does not believe that the transition to the Year
2000 or the cost of addressing this transition will have a material
impact on its results of operations.
BUSINESS OF THE COMPANY
Description of the Company
The Associated Octel Company Limited ("AOC"), the Company's
principal subsidiary, was formed in 1938 to manufacture and market TEL as
an antiknock additive for gasoline. The Company is an international
chemical company specializing in the manufacture, distribution and
marketing of fuel additives. The Company is comprised of three primary
operating businesses: Lead Alkyls, Petroleum Specialties and Performance
Chemicals. The Lead Alkyls business, which accounted for approximately
85% of the Company's 1996 sales, is the world's leading producer of TEL
that is used by oil refineries worldwide to boost the octane levels in
gasoline which allows fuel to burn more efficiently and prevents engine
knock during the combustion cycle. The Company manufactures approximately
80% of the global demand for TEL. The Petroleum Specialties business,
which accounted for approximately 12% of the Company's 1996 sales,
supplies a broad range of petroleum additives, including combustion
improvers, fuel detergents and functional performance products (such as
corrosion inhibitors and conductivity improvers). The Performance
Chemicals business, which accounted for approximately 3% of the Company's
1996 sales, manufactures and distributes a range of chemicals including
sodium, chlor-alkali and Octaquest(R), a biodegradable chelating agent
supplied to Procter & Gamble, which is used in several European laundry
products.
Worldwide use of TEL has declined since 1973 following the
enactment of the U.S. Clean Air Act in 1970 and similar legislation in
other countries and increasing pressure from legislators and
environmental groups. Usage of TEL is expected to continue to decline and
the Company's corporate objective is to optimize the cash flows from
sales of TEL in order to repay debt and return value to its stockholders
by (a) the repurchase of stock and/or the payment of cash dividends and
(b) the development of its Petroleum Specialties and Performance
Chemicals businesses. To achieve its corporate objective, the Company's
strategy is to: (i) manage profitably the decline of the TEL market
through the implementation of cost control initiatives and the provision
of additional technical and environmental support for customers; (ii)
expand the Petroleum Specialties and Performance Chemical businesses
through the development of core competencies, product innovation and
enhanced focus on satisfying customers and market needs; (iii)
efficiently manage its operations and manufacturing sites consistent with
the decline of TEL demand and the growth of petroleum specialty and
performance chemicals products, and (iv) seek, where feasible,
synergistic opportunities through joint ventures, alliances,
collaborative arrangements or acquisitions.
In 1996, the Company had sales of $597.4 million and an
operating profit of $252.8 million. The Company has its administrative
headquarters and principal manufacturing site in Ellesmere Port
(Cheshire, U.K.) with subsidiaries in Europe, Africa and North America.
The Company employed 1,485 employees worldwide as of September 30, 1997.
Reasons for the Distribution
In July 1997, Great Lakes announced its intention to spin off
its Petroleum Additives Business Unit to its stockholders, thereby
creating the Company as a new independent public company.
Management believes that, as an independent company, the
Company will be able to anticipate and respond to its market conditions
faster and more effectively and will also be able to better motivate its
employees to execute its business strategies by more closely aligning its
compensation and incentive programs with the unique opportunities and
challenges presented by its business. Consequently, it is believed that
the Company's management team will be better able to develop and
implement a plan to maximize cash flow and earnings from the TEL business
and also to grow the non-TEL portions of the Company. See "The
Distribution--Reasons for the Distribution."
Cost Reduction Initiatives
Since January 1, 1996, the Company has assembled an
experienced senior management team (see "Management of the Company -
Executive Officers") which has effectively implemented a number of
cost-reduction measures focused on maintaining profit margins of TEL,
including (i) a 26% reduction of the work force in the U.K. resulting in
estimated annual labor savings of $20 million, (ii) the closure of two
foreign manufacturing facilities and (iii) an improved safety record
evidenced by a 40% reduction in lost time accidents. The Company has
established an integrated Supply Chain Department to improve customer
service, to utilize its purchasing power to improve terms and conditions
from suppliers and to improve quality and inventory control.
The Company has developed a plan for downsizing manufacturing
capacity at its Ellesmere Port facility as demand for TEL continues to
decline. The TEL manufacturing plant consists of multiple parallel
autoclaves housed in three discrete buildings. This design lends itself
to the sequential shutdown of operating plants and the progressive
reduction of fixed costs as demand declines. The shutdown plan
capitalizes on the experience gained by management from prior plant
closures.
Lead Alkyls Business
Industry Overview
TEL, the most significant of the Company's products,
accounted for approximately 85% (or $505.1 million) of the Company's 1996
sales. TEL was first developed in 1928 and introduced into the European
market for internal combustion engines to boost octane levels in gasoline
allowing it to burn more efficiently and eliminating engine knock. TEL
remains the most cost-effective octane enhancer for motor gasoline and
has the added benefit of acting as a lubricity aid, reducing engine wear.
This product is supplied to customers in various blends. TEL is used as a
gasoline additive in various concentrations, usually between 0.1and 0.4
mg/liter dosage, depending on the intrinsic nature of the base fuel and
the targeted octane number.
While TEL remains the most cost-effective and
energy-efficient additive from an octane-boosting perspective, management
expects a steady decline in worldwide demand for TEL on the basis of
increasing pressure from regulators and environmental groups regarding
the alleged harmful effects on human health of leaded gasoline.
Additionally, leaded gasoline undermines the effectiveness of catalytic
converters, which are increasingly being used to reduce automobile
exhaust emissions. Environmental agencies and the World Bank are also
advocating the elimination of TEL in automotive gasoline. As a result,
many countries have passed legislation which has resulted in either the
complete phaseout of leaded automotive gasoline or the establishment of a
timetable for its phaseout. An exception to the overall declining
consumption of TEL is for piston engine aviation gasoline, where only TEL
provides the necessary performance levels for this small market.
The following chart sets forth estimated annual worldwide use
of gasoline and leaded gasoline, respectively, for the periods noted
based on an analysis by a recognized industry expert (in millions of
metric tons):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
Total Gasoline Demand....... 739 741 737 745 751 768 784 805
Leaded Gasoline............. 317 300 271 249 228 209 183 166
TEL equivalent usage........ 0.23 0.20 0.18 0.17 0.14 0.13 0.11 0.10
</TABLE>
- --------------
Source: Chem Systems, Ltd.
Despite regulatory pressures to reduce the use of TEL, the
Company believes there are a number of factors which may prolong the use
of leaded gasoline, and therefore the market for TEL. First, it is costly
for refineries to switch their gasoline production process to unleaded
gasoline. Studies undertaken by the World Bank and others estimate that
upgrading an average refinery to nonleaded gasoline production would
require approximately $100 million in capital expenditures, which equals
approximately $.03-.08 per gallon. Because upgrading some refineries may
not be economically justifiable, these refineries may decide to continue
operating until reduced demand for leaded gasoline forces their closure.
Second, there are significant costs and delays in converting automobiles
and gasoline stations to accommodate the increased use of unleaded fuels.
The Company believes these factors may limit the rate of
decline in the consumption of leaded gasoline, especially in the Middle
East, Southeast Asia and Africa where the proportion of unleaded gasoline
to leaded gasoline is very low and where TEL phaseout legislation has not
generally been introduced. Moreover, even in Western Europe, where
legislation mandating a leaded gasoline phaseout by year 2000 exists,
extensions have been applied for by Italy, Greece and Spain.
The following chart shows the decline of leaded gasoline
sales as a percentage of total automobile gasoline sales by region from
1990 to 1996:
Estimate of Leaded Gasoline
Sales as Percentage of Total Gasoline Sales
-------------------------------------------
1990 1996
---- ----
Europe...................... 80 41
Latin America............... 71 35
Asia........................ 53 30
Africa...................... 100 93
Middle East................. 100 94
- --------------
Source: Chem Systems, Ltd.
The decline in TEL volume since 1990 has averaged
approximately 10% per annum, and management believes that TEL volume will
continue to decline at a rate of between 10% and 15% per year, although,
because of the uncertain regulatory environment surrounding TEL, the
Company is unable to estimate with any degree of certainty the rate at
which TEL is likely to decline in the future.
While management believes that TEL is the most cost-effective
octane enhancer, the Company is currently exploring, both through its own
research efforts and in collaborative ventures, other octane enhancing
additives for motor gasoline. Although these alternatives, to date, have
proven less effective and more expensive than TEL, they do not present
the environmental problems associated with TEL.
Competition
The Company has three primary competitors. Alcor and Syntez
also manufacture TEL, while Ethyl purchases its requirements from,
principally, the Company pursuant to two long-term wholesale supply
contracts. See "--Ethyl Agreements." Management estimates the current
market shares of the Company and its principal competitors are as
follows:
Sales to Refineries TEL Manufacture
------------------- ---------------
Octel.............. 59% 80%
Ethyl.............. 21 -
Alcor.............. 11 11
Syntez............. 9 9
Factors influencing TEL customers' purchasing decisions
include price, quality, reliability and service. While the Company
competes on each factor, management believes the Company has the
following advantages: (i) the Company is the only manufacturer of TEL
which markets and distributes on a global basis (e.g., the Company can
supply in bulk, ISO containers and drums globally), which is important
for multisited global oil companies, (ii) the Company has a full set of
support and auxiliary services for environmental, decommissioning and
refinery assistance, which is not offered by all of its competitors, and
(iii) the Company provides technical support to oil companies and
individual refineries evaluating the economics of dosage levels of TEL
and alternative octane enhancers tied to specific refinery streams and
blends.
Customers
Sales of TEL by the Company are made either to the retail
refinery market or to Ethyl pursuant to two long-term wholesale supply
agreements. In 1996, 68% of Octel's sales were directed to retail
refinery customers, with the remaining 32% of its sales being made to
Ethyl. The Company's retail customers consist of approximately 200
independent, state or major oil company-owned refineries located
throughout the world. Within the retail market, refineries owned or
managed by British Petroleum, Mobil Oil and Texaco Oil, three former
partners in Octel Associates and former shareholders of AOC (the "Vendor
Partners"), are entitled to profit-participation payments under the terms
of the Octel Sale and Purchase Agreement, dated February 21, 1989, based
upon their ongoing purchases of TEL from the Company. See Note 4 to
Combined Financial Statements. Selling prices to other refineries are
principally negotiated under long-term supply agreements, with varying
prices and terms of payment.
Ethyl Agreements
The Company supplies Ethyl on a wholesale basis with
substantial quantities of TEL for resale to customers under two separate
long-term supply agreements at prices adjusted annually through agreed
formulas. Under one of these agreements (the "U.S. TEL Supply
Agreement"), effective January 1, 1998, Ethyl purchases its requirements
for resale to its customers in the United States from the Company. In the
other agreement, dated December 22, 1993, Ethyl purchases TEL for resale
to customers located outside the United States. The maximum quantities of
TEL Ethyl can purchase under the non-U.S. agreement is 35,000 metric tons
per year through 1998 and, thereafter, is set at a fixed percentage of
the Company's annual production capacity. Pursuant to a Bulk
Transportation Agreement, dated March 17, 1994, Ethyl supplies the
Company with all of its bulk transportation requirements for TEL.
Petroleum Specialties Business
The Company's Petroleum Specialties business, with revenues
in 1996 of $70.9 million, develops, produces and markets a range of
specialty products used as fuel additives. These fuel additives fall into
three main product groups within the Petroleum Specialties business.
Diesel octane improvers aid the efficient combustion of fuel in diesel
engines. Detergent-based packages for both gasoline and diesel fuels
inhibit formation of deposits in engines, improving engine efficiency.
Functional products, such as corrosion inhibitors, improve the physical
and/or chemical properties of fuels allowing refineries to be operated
safely and efficiently and fuel marketers to meet market specifications.
The global market for fuel additives (excluding TEL) is
approximately $1 billion. Usage of fuel additives is expected to grow
over the next five to ten years driven primarily by legislation placing
increasingly stringent limitations on exhaust emissions. The Company's
strategy is to grow this business over time, utilizing its global sales
and distribution network, its strong technical development capability and
its knowledge of current and future customer needs.
The customers of the Petroleum Specialties business are
comprised of multinational oil companies and fuel retailers.
Traditionally, a large portion of the total market was captive to oil
companies which had fuel additives divisions providing supplies directly
to their respective refinery customers. As a result of recent corporate
restructurings and various mergers, joint ventures and other
collaborative arrangements involving downstream refining and marketing
operations, the tied supply arrangements between oil companies and their
captive fuel additive divisions have been weakened and many refineries
are increasingly looking to purchase their fuel additive requirements on
the open market. This trend is creating new opportunities for independent
additive marketers such as the Company.
The business operates in a competitive environment with its
main competitors being large oil and chemical companies, such as
Lubrizol, Ethyl, BASF, Chevron and Exxon. No one company holds a dominant
overall market share. The Company considers its competitive strengths are
in its strong technical development capability, independence from the
major oil companies and its strong, long-term relationships with refinery
customers in the TEL market which provide synergies with the Petroleum
Additives business.
Performance Chemicals Business
The Company's Performance Chemicals business, with 1996 sales
of $21.4 million, manufactures and markets a small range of industrial
chemicals comprising metallic sodium and chlorine derivatives (caustic
liquor, chlorine, sodium hypochlorite), which products are either
precursors or by-products of TEL manufacture. The Company's strategy for
these industrial chemicals is to optimize profits consistent with
maximizing overall corporate financial performance at its Ellesmere Port
facility.
The Company is also seeking to expand its Performance
Chemicals business and is currently evaluating opportunities to implement
this strategy. Growth will be sought from a combination of internal and
external sources, including the in-house development of new products
through research and development, licensing agreements and acquisitions
of products and/or businesses. The Company, in conjunction with Proctor &
Gamble as its main customer, has developed and patented a manufacturing
process for Octaquest(R), a biodegradable chelating agent developed for
use in laundry products, and has potential for wider application in pulp
and paper, cosmetics, personal care, photographic and other industries.
Raw Materials
The Company's major purchased raw materials are lead,
ethylene and salt, all of which are commodities that can be readily
obtained from a number of different sources. While changes in the prices
of raw materials will have an impact on the Company's costs, which the
Company may or may not be able to reflect fully in its pricing structure,
they are unlikely to have a significant impact on the profitability of
operations.
Technology
The Company's research and development facilities are located
at Ellesmere Port, U.K., while its advanced fuel testing facility to
support the Lead Alkyls and Petroleum Specialties businesses is located
at Bletchley, U.K. The Company's research and development activity has
been, and will continue to be, focused primarily on development of new
products and formulations for the Petroleum Specialties and the
Performance Chemicals businesses. Technical customer support is also
provided for the TEL business. Expenditures to support research,
product/application development and technical support services to
customers were $5.6 million, $5.6 million and $6.7 million in 1996, 1995
and 1994, respectively. The Company considers that its strong technical
capability provides it with a significant competitive advantage. In the
last three years, the Petroleum Specialties business has developed new
detergent, lubricity and combustion improver products, in addition to the
introduction of several new cost effective fuel additive packages. A new
patented process for manufacturing Octaquest(R) has enabled the Company
to enter into a new market in the performance chemicals area.
Patents and Intellectual Property
The Company has a portfolio of trademarks and patents,
granted and in the application stage, covering products and processes.
These trademarks and patents relate primarily to the Petroleum
Specialties and the Performance Chemicals businesses, in which
intellectual property forms a significant part of the Company's
competitive strength. The majority of these patents were developed by the
Company. Most patents have more than ten years life remaining. The
Company also holds a license for the manufacture of fuel detergents. The
Company has trademark registrations for the use of the name "Octel(R)"
and for the Octagon device in Classes 1 and 4 of the "International
Classification of Goods and Services for the Purposes of the Registration
of Marks" in all countries in which its has a significant market presence
except for the U.S. in respect of which the appropriate applications have
been made. Octel also has trademark registrations for Octaquest(R).
Octel America Inc., a subsidiary of the Company, has
trademarks for Stadis (R), an aviation and ground fuel conductivity
improver, Ortholeum (R), a lube oil additive antioxidant and metal
deactivator, Ocenol (R), an antifoam for refinery use, and Valve Master
(R), a valve seat recession additive. The Company does not consider its
business as a whole to be dependent on any one trademark, patent or
licence.
Health, Safety and Environmental Matters
The Company is subject to Environmental Laws in all of the
countries in which it does business. The principal Environmental Laws to
which the Company is subject in the U.K. are the Environmental Protection
Act 1990, the Water Resources Act 1991, the Health and Safety at Work Act
1974 and regulations and amendments thereto. Management believes that the
Company is in material compliance with applicable Environmental Laws, and
does not anticipate that the continued costs of compliance with
Environmental Laws will have a material adverse effect on the Company's
business, results of operations or financial condition, absent any
changes in existing Environmental Laws, or the discovery of additional
liabilities associated with the Company's current or former operations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Environmental Matters and Plant Closures."
Human Resources
The Company's workforce at September 30, 1997 consisted of
1,485 employees, of which 1,331 were in the U.K. Approximately half of
the Company's employees in the U.K. are represented by unions, including
the Transport and General Workers Union and the Amalgamated Engineering
and Electrical Union.
The Company has a major employee communication program to
help its employees understand the business issues surrounding the
Company, the TEL business and the corporate downsizing program that has
been implemented to respond to declining TEL demand. Regular monthly
briefings are conducted by line managers where Company-wide and
departmental issues are discussed. More formal communication takes place
with the trade unions which the Company recognizes for negotiating and
consultative purposes.
Management believes that the communication program has been
highly successful and has contributed to maintaining maximum output at
Ellesmere Port while at the same time achieving a reduction of 470
employees in the Company's U.K. workforce since January 1, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations-Environmental Matters and Plant Closures." The Company has
implemented an extensive retraining program which will enable further
improvements in the productivity and flexibility of the Company's U.K.
workforce. A major change in working practices was introduced during 1996
whereby the workforce began an annualized hours contract, monthly pay and
staff status. This program reflects the cooperative employee relations
climate which exists at Ellesmere Port. A further example of the positive
working relationship is the signing of a two-year salary contract on
January 1, 1998, which fixes wage rates and gives predictability of
employment costs through January 1, 2000.
Properties
A summary of the Company's principal facilities is shown in
the following table. Each of these properties is owned by the Company,
except where otherwise noted:
Location Principal Operations
- -------- --------------------
Newark, Delaware, U.S.* Octel Corp. Headquarters; Petroleum
Specialties regional office
London, U.K.* Sales & Marketing
Ellesmere Port, U.K. AOC Headquarters; Business Teams;
Manufacturing; Research & Development;
Administration
Bletchley, U.K. Fuel Technology Center
- ----------
* Leased property
Legal Proceedings
In December 1997, the Company, Great Lakes and the U.S.
Federal Trade Commission (the "FTC") staff reached an agreement in
principle with respect to the terms of a consent decree governing sales
of TEL by the Company to Ethyl for resale in the United States market.
The proposed consent decree, if finally approved by the FTC, will not
constitute an admission of wrongdoing on Great Lakes' or the Company's
part and will provide, among other things, that the Company will continue
to supply Ethyl with its requirements of TEL for resale in the United
States market in accordance with the U.S. TEL Supply Agreement, effective
January 1, 1998. Under the proposed order, both the Company and Ethyl
will be required to provide prior notice to the FTC with respect to any
changes or modifications to the U.S. TEL Supply Agreement, as well as
with respect to certain transactions. The Company does not believe that
the proposed consent decree, if approved by the FTC, will have a material
adverse effect on the Company's results of operations and financial
condition. See "--Lead Alkyls Business - Ethyl Agreements."
Other than the above-referenced FTC investigation, the
Company is not party to any legal proceedings or administrative actions.
In the opinion of the Company's management, there are no legal
proceedings, pending or threatened, which could have any material adverse
effect on the results of operations or financial condition of the Company
or its ability to conduct its operations as presently conducted.
MANAGEMENT OF THE COMPANY
Directors
As of the Distribution Date, the Board of Directors of the
Company will consist of --- persons, each of whom will be elected for a
term expiring at the annual meeting of stockholders indicated below and
until his successor shall have been elected and qualified. The following
table sets forth information concerning the individuals who will serve as
directors of the Company following the Distribution:
Name Age Term Expires at Annual Meeting In
- ---- --- ---------------------------------
Dennis J. Kerrison 53
Martin M. Hale 57
Thomas M. Fulton 64
Set forth below is a brief description of the present and
past business experience of each of the persons who will serve as
directors of the Company:
Dennis J. Kerrison will serve as President and Chief
Executive Officer of Octel Corp. and AOC. From May 1996 to the
Distribution Date, Mr. Kerrison was the Managing Director of AOC. From
April 1992 to April 1996, he was Chief Executive Officer of Hickson Int.
PLC, a U.K.-based international specialty chemical company. Prior thereto
he served as the Managing Director-Fine & Performance Chemicals Division
at Hickson.
Martin M. Hale is Executive Vice President and Director of
Hellman Jordan Management Co. Inc., a registered investment advisor
specializing in asset management and a wholly owned subsidiary of United
Asset Management Company. Prior to 1983, he was President and Chief
Executive Officer of Marsh & McClennan Asset Management Company. He also
serves as a Director of the Student Conservation Association; as Chairman
of the Board of Governors of the School of The Museum of Fine Arts,
Boston; and as a Trustee of The Museum of Fine Arts. Mr. Hale is
currently a Director of Great Lakes and has served on the Great Lakes
Board of Directors since 1978.
Thomas M. Fulton serves as President and Chief Executive
Officer of Landauer, Inc., a provider of radiation monitoring services.
Prior to joining Landauer in 1978, his career included various management
positions at Union Carbide Corporation, BASF Corporation and ICN
Pharmaceuticals, Inc. Mr. Fulton serves on the Boards of The Advocate
South Suburban Hospital and the Bethel Community Facility and as Chairman
of the Board of Directors of the Chicago Theological Seminary. Mr. Fulton
is currently a Director of Great Lakes and has served on the Great Lakes
Board of Directors since 1995.
Following the Distribution, the Company intends to expand the
Board of Directors to include _____ additional independent directors. The
identities of such additional independent directors have not yet been
determined and may not be determined until after completion of the
Distribution.
Classified Board of Directors
The Company's Certificate of Incorporation will provide for a
classified Board of Directors consisting of three classes as nearly equal
in number as possible with the directors in each class serving staggered
three-year terms. Initially, the Class I directors will be ; the Class II
directors will be ; and the Class III directors will be . The terms of
the Class I, Class II and Class III Directors will expire initially in
1999, 2000 and 2001, respectively. At each annual meeting of the
stockholders of the Company, the successors to the class of directors
whose term expires will be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following their
election. See "Description of Company Capital Stock."
Committees of the Board of Directors
The Board of Directors of the Company currently intends to
establish an Executive Committee, an Audit Committee, a Finance
Committee, a Compensation Committee and an Environmental, Safety and
Health Committee.
The Executive Committee will have all the powers and
authority of the Board of Directors except those powers specifically
reserved to the Board of Directors by Delaware law, the Certificate of
Incorporation or the By-laws of the Company.
The Audit Committee will, among other things, recommend
independent certified public accountants; review the scope of the audit
examination, including fees and staffing; review the independence of the
auditors; review and approve non-audit services provided by the auditors;
review findings and recommendations of auditors and management's
response; review the internal audit and control function; and review
compliance with the Company's ethical business practices policy.
The Finance Committee will review and assess the financial
affairs of the Company and present recommendations for action to the
Board of Directors.
The Compensation Committee will review management
compensation programs, approve compensation changes for senior executive
officers, review compensation changes for senior management, and
administer management stock plans.
The Environmental, Safety and Health Committee will assess
the Company's environmental, safety and health policies and performance,
and will make recommendations to the Board of Directors regarding the
promotion and maintenance of standards of compliance and performance.
Compensation of Directors
Following the Distribution, directors who are not employed by
the Company will receive an annual fee of $___________. Committee
chairmen, not employed by the Company, will receive an additional fee of
$_____________ per year. Non-employee directors will be paid $__________
for attendance at each meeting of the Board of Directors and
$--------------- for attendance at Committee meetings. No directors' fees
will be paid to directors who are also employees of the Company.
Directors will also be reimbursed for all reasonable travel and other
expenses of attending meetings of the Board or a Committee thereof.
Executive Officers
The following table sets forth certain information concerning
the persons who will serve as executive officers of the Company and its
principal subsidiary following the Distribution Date. Each such person
will be elected to the indicated office with the Company on or prior to
the Distribution Date and will serve at the pleasure of the Board of
Directors.
Name Age Title
- ---- --- -----
Dennis J. Kerrison.... 53 President and Chief Executive Officer,
Octel Corp. and AOC
Alan G. Jarvis........ 48 Chief Financial Officer, Octel Corp. and
Finance Director, AOC
Graham M. Leathes..... 48 Company Secretary and General Counsel,
Octel Corp. and AOC
Steve W. Williams..... 42 Operations Director, AOC
Robert A. Lee......... 50 Commercial Director, AOC
Geoff J. Hignett...... 47 Business Director, AOC
Alan Hanslip.......... 50 Human Resources Director, AOC
Richard T. Shone...... 49 Safety, Health & Environment Director, AOC
Set forth below is a description of the position presently
held with the Company or its subsidiaries by each executive officer as
well as positions held prior to the Distribution Date.
Dennis J. Kerrison - See description above under the heading
"--Directors."
Alan G. Jarvis will serve as Chief Financial Officer of Octel
Corp. and Finance Director, AOC. From October 1997 until the Distribution
Date, Mr. Jarvis served as Finance Director for AOC. Prior to his tenure
with AOC, Mr. Jarvis served from 1995 to 1997 as Group Finance Director
of the Power Plant Group of GEC Alsthom, an Anglo-French joint venture in
the power generation business worldwide. From 1987 to 1994, Mr. Jarvis
served at different times as Property Director, Group Finance Director
and Group Financial Controller for Simon Engineering PLC, a British
engineering company specializing in hydraulic platforms, process plant
contracting and chemical storage.
Graham M. Leathes will serve as Corporate Secretary and
General Counsel for Octel Corp. and AOC. From July 1989 until the
Distribution Date, Mr. Leathes served in this position for AOC.
Steve W. Williams will serve as Operations Director of AOC.
From November 1995 to the Distribution Date, Mr. Williams served as
Director of Manufacturing for AOC. Prior to his tenure with AOC, Mr.
Williams served for 18 years at the Fawley Oil Refinery of Exxon/Esso,
most recently as Operations Manager.
Alan Hanslip will serve as Human Resources Director of AOC.
From January 1996 to the Distribution Date, Mr. Hanslip served as
Director, Human Resources, for AOC. Prior to his tenure with AOC, Mr.
Hanslip served from 1991 to 1996 as Director of Human Resources for
British Nuclear Fuels, PLC.
Robert A. Lee will serve as Commercial Director of AOC. From
January 1997 to the Distribution Date, Mr. Lee served as Director, Supply
Chain, for AOC. Prior to his tenure with AOC, Mr. Lee spent 27 years with
Dow Chemical Corporation, a multinational chemical and petrochemical
manufacturer most recently as Marketing and Sales Director of its
worldwide hydrocarbon business based in Zurich, Switzerland.
Geoff J. Hignett will serve as Business Director of AOC. From
February 1997 to the Distribution Date, Dr. Hignett served as Director -
Petroleum Specialties and Acting Director - Corporate Development for
AOC. Prior to his tenure with AOC, Dr. Hignett served from 1992 to 1997
as Director of Technology & Business and Director of Water Additives for
the Process Additives Division of FMC Corporation, a multinational
engineering, manufacturing and chemicals concern.
Richard T. Shone will serve as Safety, Health & Environment
Director of AOC. From May 1997 until the Distribution Date, Mr. Shone
served in this position for AOC. Prior to his tenure with AOC, Mr. Shone
was employed from 1986 to 1995 by Laporte PLC, an international
speciality chemicals company where he served as General Manager - Group
Safety, Hazards & Environment.
Compensation of Executive Officers
All of the information set forth in the following tables
reflects compensation earned based upon services rendered to Great Lakes
by the Company's Chief Executive Officer and the four other most highly
paid executive officers of the Company. The services rendered by such
individuals to Great Lakes were, in some instances, in capacities not
equivalent to those positions in which they will serve for the Company or
its subsidiaries. Therefore, these tables do not reflect the compensation
which will be paid to the executive officers of the Company. The
following tabulation shows compensation for services rendered in all
capacities to the Petroleum Additives Business Unit of Great Lakes and
its subsidiaries during 1997 by the Chief Executive Officer and the next
four highest paid executive officers (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------------- Awards
------
Options Granted
Name and Profit Sharing Other Annual (#-Number)
Principal Position Salary(1) Cash (Bonus)(1)(2) Compensation(3) of Shares)
- ------------------ --------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Dennis J. Kerrison $287,963 $158,379 - 10,000
Steve W. Williams 152,620 53,274 - 2,000
Geoff J. Hignett 135,754 44,675 - 1,200
Graham M. Leathes 130,106 39,032 - 1,000
Robert A. Lee 120,669 39,492 - 1,000
</TABLE>
- ----------------
(1) Converted from pounds sterling to U.S. dollars based on an exchange
rate of $1.6455:Li.1.00 on December 31, 1997.
(2) Target bonus to be paid for 1997.
(3) Amounts paid do not exceed $50,000 or 10% of salary plus bonus for
any of the Named Executive Officers.
Stock Options Table
The following table shows for the Named Executive Officers
the specified information with respect to grants of options to purchase
Great Lakes Common Stock ("Great Lakes Options") during 1997.
<TABLE>
<CAPTION>
Option Grants In 1997*
Individual Grants % Potential Realizable Value at
of Total Assumed Annual Rates of Stock
Options Price Appreciation for Option
Granted to Exercise or Term(3)(4)
Options Employees in Base Price Expiration ------------------------------
Name Granted(#)(1) Fiscal Year ($/Sh)(2) Date 5%($) 10%($)
- ------------------ -------------- -------------------- ----------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Dennis J. Kerrison 10,000 2.18% $42.50 2/10/07 267,750 675,750
Steve W. Williams 2,000 .44% 42.50 2/10/07 53,550 135,150
Geoff J. Hignett 1,200 .26% 42.50 2/10/07 32,130 81,090
Graham M. Leathes 1,000 .22% 42.50 2/10/07 26,775 67,575
Robert A. Lee 1,000 .22% 42.50 2/10/07 26,775 67,575
</TABLE>
- ----------------
* See "Treatment of Great Lakes Employee Stock Options in the
Distribution" for a description of the effect of the Distribution
on such options.
(1) All options were granted pursuant to the 1993 Great Lakes Employee
Stock Compensation Plan and have a term of 10 years. Each Named
Executive Officer received one option grant in 1997. These options
vest and become exercisable in cumulative 33% installments
commencing no less than one year from date of grant, with full
vesting occurring on the earlier of the third anniversary date or
on the retirement of an employee over 62 years of age.
(2) The exercise price may be paid for by remitting cash or already
owned shares of Great Lakes Common Stock, or by a combination
thereof.
(3) The potential realizable value portion of the foregoing table
indicates the value that might be realized upon exercise of options
immediately prior to the expiration of their term, assuming the
specified amount of compounded rates of appreciation on Great Lakes
Common Stock over the term of the options. This calculation does
not take into account that any shortfall between the current stock
price and the option exercise price will have to be made up before
any value can be realized.
(4) Absent an appreciation in stock price over the option
exercise price, the optionee will not realize any gain. A 0%
increase in stock price will result in an option value of $0.
Option Exercises and Year-End Value Table
The following table shows for each Named Executive Officer
the specified information with respect to exercises of Great Lakes
Options during 1997 and the value of unexercised options at the end of
1997.
<TABLE>
<CAPTION>
Aggregated Great Lakes Option Exercises During 1997
And 1997 Fiscal Year End Option Values
Number of Securities Underlying
Unexercised Options at Fiscal Value of Unexercised Options in-
Year-end The-Money at Fiscal Year-end ($)
Shares ------------------------------- --------------------------------
Acquired on Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable*
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis J. Kerrison - - - 17,000 - $23,750
Steve W. Williams - - - 3,600 - $4,750
Geoff J. Hignett - - - 1,200 - $2,850
Graham M. Leathes - - - 1,000 - $2,375
Robert A. Lee - - - 1,000 - $2,375
</TABLE>
* Based on a closing price of $44.875 as reported on the NYSE
on December 31, 1997 and after deduction of the exercise
price of each such option multiplied by the number of
shares covered by each such option.
Employment Agreements
Currently, each of the Named Executive Officers is party to a
contract of employment between such officer and AOC. The contracts
provide for salary, holidays and vacations and perquisites. Each of the
Named Executive Officers is entitled to 30 days of vacation, private
health insurance, permanent health insurance and a car. Additionally,
other than with respect to Mr. Kerrison, each agreement provides that in
the event of a takeover or fundamental restructuring of the business
which results in a loss of the officer's position, such officer is
entitled to two years' salary plus 25% plus approximately U.S.$49,365. In
the event of a qualifying termination following a change of control,
Messrs. Williams, Hignett, Leathes and Lee would be entitled to receive
$584,152, $543,015, $440,171 and $543,015, respectively, pursuant to such
agreements.
Prior to the Distribution, the Company intends to enter into
employment agreements with the Chief Executive Officer and certain other
executive officers. The Company also intends to enter into agreements
with the Chief Executive Officer and certain other officers providing for
certain payments in the event of a change of control of the Company. The
terms of such agreements have not yet been finally determined.
Compensation Under Retirement Plans
The following table sets forth the estimated annual benefits
payable upon retirement to Messrs. Williams, Hignett, Leathes and Lee,
for the specified compensation and years of service classifications,
under the combined formulas of the Octel Pension Plan, the Octel Top Hat
and the Octel Funded Unapproved Retirement Benefit Plan. The pension
benefits are calculated based upon years of service and "Final Earnings,"
which is calculated as final base salary or, if higher, the average base
salary for the last three years of service. Mr. Kerrison's benefits
payable under such plans are calculated on the same basis, but at a 33%
higher rate. The amounts shown have been converted from pounds sterling
to U.S. dollars based on an exchange rate of $1.6455:Li.1.00 on December
31, 1997.
Final
Earnings 5 years 10 years 15 years 20 years 25 years
- -------- ------- -------- -------- -------- --------
$164,550 $20,569 $ 41,138 $ 61,706 $ 82,275 $ 102,844
246,825 30,853 61,706 92,971 123,413 154,266
329,100 41,138 82,275 123,413 164,550 205,688
411,375 51,422 102,844 154,266 205,688 257,109
493,650 61,706 123,413 185,119 246,825 308,531
As of January 1, 1998, the final base salary (converted to
U.S. dollars using the same exchange rate as specified above) and the
eligible years of credited service for each of the Named Executive
Officers were as follows: Mr. Kerrison, $287,963 - 1 year; Mr. Williams,
$162,485 - 1 year; Dr. Hignett, $156,745 - 0 years; Mr. Leathes, $135,309
- - 8 years; and Mr. Lee, $137,240 - 0 years.
Stock Plan
Prior to the Distribution Date, the Company expects to adopt
the Octel Corp. 1998 Stock Compensation Plan (the "Stock Plan"), pursuant
to which the Compensation Committee of the Board of Directors may grant
equity-based awards relating to Octel Common Stock to employees of the
Company. The Stock Plan will be approved by Great Lakes, as sole
stockholder of the Company, prior to the Distribution Date. The Stock
Plan is designed to provide incentives to employees to become
stockholders of the Company through equity-based awards and grants. The
terms of such Stock Plan have not yet been finalized.
Concurrent with the Distribution, certain employees of the
Company will be granted restricted stock units for an aggregate of
approximately 261,758 restricted stock units under the Stock Plan,
assuming a fair market value for Octel Common Stock of $18.00 per share.
The following table sets forth the number of restricted stock
units to be granted to certain employees under the Stock Plan concurrent
with the Distribution:
Name Number of Restricted Stock Units
---- --------------------------------
Dennis J. Kerrison.................. 59,992
Alan G. Jarvis...................... 28,796
Steve W. Williams................... 24,957
Geoff J. Hignett.................... 23,997
Robert A. Lee....................... 23,997
Alan Hanslip........................ 18,430
Richard T. Shone.................... 17,369
Graham M. Leathes................... 17,369
All executive officers as a group
(-persons)........................ 214,907
All other employees................. 46,851
A pool of stock will be established to enable the Board of
Directors of Octel Corp. to incentivize key individuals to meet
performance criteria set by the Board over the next five years. The size
of the pool has not yet been determined, but will be approximately 8% of
the share capital and will include annual performance-related stock
awards already agreed to by the Board of Directors of Great Lakes.
The Stock Plan will be included as an exhibit to the
Registration Statement of which this Information Statement is a part. The
preceding description is subject in all respects to the provisions of the
Stock Plan.
TREATMENT OF GREAT LAKES EMPLOYEE
STOCK OPTIONS IN THE DISTRIBUTION
Certain employees of Great Lakes (including certain employees
who, as a result of the Distribution, will become employees of the
Company) currently hold Great Lakes Options pursuant to the Great Lakes
1984 Employee Stock Option Plan and the Great Lakes 1993 Employee Stock
Compensation Plan (collectively, the "Great Lakes Stock Plans").
In connection with the Distribution, and pursuant to the
Great Lakes Stock Plans and the related option agreements, the number of
shares subject to each Great Lakes Option and the exercise prices thereof
will be equitably adjusted to reflect the Distribution. Great Lakes will
remain solely responsible for satisfying all exercises of Great Lakes
Options. All Great Lakes Options held by employees who are or will become
employees of Octel will be immediately vested as of the Distribution
Date.
In addition, the option agreements with respect to Great
Lakes Options held by certain executive officers of Octel will be amended
to extend the period during which such options may be exercised following
the Distribution from three months to three years.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The businesses to be conducted by the Company have in the
past engaged in transactions with Great Lakes and its businesses.
Following the Distribution, Great Lakes will continue to have a
significant relationship with the Company as a result of the agreements
being entered into by Great Lakes and the Company in connection with the
Distribution. Except as referred to above or as otherwise described in
this Information Statement, Great Lakes and the Company will cease to
have any material contractual or other material relationships with each
other. See "Relationship Between Great Lakes and the Company After the
Distribution."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Based on information which has been obtained from Great
Lakes' records and a review of statements filed with the Securities and
Exchange Commission pursuant to Sections 13(d) and 13(g) of the Exchange
Act with respect to Great Lakes Common Stock, the following persons will
be the beneficial owner of more than 5% of the outstanding voting
securities of any class of the Company upon completion of the
Distribution:
Percent of
Name and Address Common Stock
of Beneficial Owner Number of Shares Outstanding
------------------- ---------------- ------------
T. Rowe Price Associates, Inc. (1)
100 East Pratt Street
Baltimore, Maryland 21202............... 6,702,584 11.2%
State Farm Mutual Automobile Insurance
Company and Related Entities (2)
One State Farm Plaza
Bloomington, Illinois 61710-0001........ 4,543,600 7.6%
(1) Based on a Schedule 13G, dated February 12, 1998, filed with the
Securities and Exchange Commission by T. Rowe Price Associates, Inc.
("Price Associates"). These securities are owned by various
individual and institutional investors for which Price Associates
serves as investment advisor with power to direct investments and/or
sole power to vote the securities. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, Price
Associates expressly disclaims that it is, in fact, the beneficial
owner of such securities.
(2) Based on a Schedule 13G, dated January 22, 1998, filed with the
Securities and Exchange Commission by State Farm Mutual Automobile
Insurance Company. Each of the following State Farm entities has
reported sole voting power and sole disposition power and disclaims
"beneficial ownership" as to all shares as to which each has no
right to receive the proceeds of sale of the security and disclaims
that it is part of a group: State Farm Mutual Automobile Insurance
Company; State Farm Life Insurance Company; State Farm Investment
Management Corporation; and State Farm Insurance Companies Savings
and Thrift Plan for U.S. Employees. State Farm Life Insurance
Company is a wholly owned subsidiary of State Farm Mutual Automobile
Insurance Company. State Farm Investment Management Corporation is a
wholly owned subsidiary of State Farm Fire and Casualty Company
which, in turn, is a wholly owned subsidiary of State Farm Life
Insurance Company.
BENEFICIAL OWNERSHIP OF MANAGEMENT
Based upon their respective holdings of Great Lakes Common
Stock as of _____________, 1998, and excluding restricted stock to be
granted in connection with the Distribution, no director or officer will
own beneficially, as of the Distribution Date, any shares of Octel Common
Stock at such date and all directors and executive officers as a group
will beneficially own less than 1% of the Octel Common Stock outstanding
at such date.
DESCRIPTION OF COMPANY CAPITAL STOCK
Under the Certificate of Incorporation, the total number of
shares of all classes of stock that the Company has authority to issue is
____ million, consisting of _____ million shares of preferred stock, par
value $ per share ("Preferred Stock") and _____ million shares of Octel
Common Stock. Based on the number of shares of Great Lakes Common Stock
outstanding at December 31, 1997, approximately 14,736,075 shares of
Octel Common Stock will be issued to stockholders of Great Lakes.
Common Stock
The holders of Octel Common Stock will be entitled to one
vote for each share on all matters voted on by stockholders, and the
holders of such shares will possess all voting power, except as otherwise
required by law or provided in any resolution adopted by the Board of
Directors of the Company with respect to any series of Preferred Stock.
It is currently expected that the first annual meeting of stockholders of
the Company will be held in _______ of 1999. Subject to any preferential
or other rights of any outstanding series of Company preferred stock that
may be designated by the Board of Directors of the Company, the holders
of Octel Common Stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company from
funds available therefor, and upon liquidation will be entitled to
receive pro rata all assets of the Company available for distribution to
such holders. See "Risk Factors -- Dividend Policy."
Preferred Stock
The Board of Directors of the Company will be authorized to
provide for the issuance of shares of Preferred Stock, in one or more
series, and to determine, with respect to any series, the terms and
rights of such series, including the following: (i) the designation of
such series; (ii) the rate and time of, and conditions and preferences
with respect to, dividends, and whether such dividends are cumulative;
(iii) the voting rights, if any, of shares of such series; (iv) the
price, timing and conditions regarding the redemption of shares of such
series and whether a sinking fund should be established for such series;
(v) the rights and preferences of shares of such series in the event of
voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company; and (vi) the right, if any, to convert or
exchange shares of such series into or for stock or securities of any
other series or class.
The Company believes that the availability of the Preferred
Stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions, and in meeting other
corporate needs which might arise. Having such authorized shares
available for issuance will allow the Company to issue shares of
Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of
Octel Common Stock, will be available for issuance without further action
by the Company's stockholders, unless action is required by applicable
law or the rules of any stock exchange on which the Company's securities
may be listed or unless the Company is restricted by the Preferred Stock.
No Preemptive Rights
No holder of any stock of the Company of any class authorized
at the Distribution Date will then have any preemptive right to subscribe
to any securities of the Company of any kind or class.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Octel Common Stock
will be First Chicago Trust Company of New York.
Certain Provisions of the Certificate of Incorporation and By-Laws
The Certificate of Incorporation and By-laws will contain
certain provisions that could make more difficult the acquisition of
control of the Company by means of a tender offer, open market purchases,
a proxy contest or otherwise. Set forth below is a description of such
provisions contained in the Certificate of Incorporation and By-laws.
Such description is intended as a summary only and is qualified in its
entirety by reference to the Certificate of Incorporation and By-laws,
the forms of which are included as exhibits to the Registration Statement
of which this Information Statement forms a part.
Classified Board of Directors. The Certificate of
Incorporation will provide that the number of directors shall be fixed
from time to time by the Board of Directors of the Company. The directors
shall be divided into three classes, as nearly equal in number as is
reasonably possible, serving staggered terms so that directors' initial
terms will expire either at the 1999, 2000 or 2001 annual meeting of the
Company stockholders. Starting with the 1999 annual meeting of the
Company stockholders, one class of directors will be elected each year
for a three-year term. See "Management -- Directors of the Company."
The Company believes that a classified Board of Directors
will help to assure the continuity and stability of the Company's Board
of Directors and the Company's business strategies and policies as
determined by the Board of Directors of the Company, since a majority of
the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will
permit the Board of Directors to more effectively represent the interests
of stockholders.
With a classified Board of Directors, at least two annual
meetings of stockholders, instead of one, will generally be required to
effect a change in a majority of the Board of Directors. As a result, a
classified Board of Directors of the Company may discourage proxy
contests for the election of directors or purchases of a substantial
block of Octel Common Stock because its provisions could operate to
prevent obtaining control of the Board of Directors of the Company in a
relatively short period of time. The classification provisions could also
have the effect of discouraging a third party from making a tender offer
or otherwise attempting to obtain control of the Company. In addition,
because Section 141(k)(1) of the Delaware General Corporation Law (the
"DGCL") provides that a director serving on a classified Board of
Directors may be removed only for cause, a classified Board of Directors
would delay stockholders who do not agree with the policies of the Board
of Directors from replacing a majority of the Board of Directors for two
years unless they can demonstrate that the directors should be removed
for cause and obtain the requisite vote. Such a delay may help ensure
that the Board of Directors of the Company, if confronted by a holder
conducting a proxy contest or an extraordinary corporate transaction,
will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes is the best
interests of the Company's stockholders.
Special Meetings of Stockholders; Action by Written Consent;
Advance Notice Provisions. The By-laws will provide that special meetings
of stockholders of the Company may be called only by the Board of
Directors of the Company or the Chairman of the Board. The Certificate of
Incorporation also requires that stockholder action be taken at a meeting
of stockholders and prohibits action by written consent.
Stockholder Nominations. The By-Laws will establish
procedures that must be followed for a stockholder to nominate
individuals for election to the Company's Board of Directors. Nominations
of persons for election to the Board will be required to be made by
delivering written notice to the Secretary of the Company not less than
60 nor more than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the
event that the annual meeting is called for a date that is not within 10
days before or after such anniversary date, notice by the stockholder to
be timely will be required to be so received before the later of the
close of business on the 10th day following the day on which such annual
notice was made, whichever first occurs and the close of business on the
day which is 60 days prior to the date of the annual meeting. The
nomination notice will be required to set forth certain background
information about the persons to be nominated, including the nominees'
principal occupation or employment and the class and number of shares of
capital stock of the Company that are beneficially owned by such person.
If the presiding officer at the annual meeting determines that a
nomination was not made in accordance with these procedures, he may so
declare at the meeting and the nomination may be disregarded.
Stockholder Proposals. The By-Laws establish procedures that
must be followed for a stockholder to submit a proposal at an annual
meeting of the stockholders of the Company. Under these procedures, no
proposal for a stockholder vote will be able to be submitted to the
stockholders unless the submitting stockholder has timely filed with the
Secretary of the Company a written statement setting forth specified
information, including the names and addresses of the persons making the
proposal, the class and number of shares of capital stock of the Company
beneficially owned by such persons, a description of the proposal and the
reasons for bringing such business before the annual meeting and any
material interest of the stockholder in such business. If the presiding
officer at any stockholder meeting determines that any such proposal was
not made in accordance with these procedures or is otherwise not in
accordance with applicable law, he may so declare at the meeting and such
defective proposal may be disregarded.
Certain Business Combination Transactions. The Certificate of
Incorporation generally provides that, whether or not a vote of the
stockholders is otherwise required, the affirmative vote of the holders
of not less than eighty percent (80%) of the outstanding shares of Octel
Common Stock shall be required for the approval or authorization of any
Business Transaction with a Related Person, or any Business Transaction
in which a Related Person has an interest; provided, however, that the
eighty percent (80%) voting requirement shall not be applicable if (1)
the Business Transaction is approved by the Continuing Directors, or (2)
all of the following conditions are satisfied:
(a) the Business Transaction is a merger or consolidation or
sale of substantially all of the assets of the Company, and the aggregate
amount of cash to be received per share by holders of Octel Common Stock
in connection with such Business Transaction is at least equal in value
to the highest amount of consideration paid by such related person for a
share of Octel Common Stock in the transaction in which such person
became a Related Person, or within one year prior to the date such
related Person became a Related Person, whichever is higher; and
(b) after such Related Person has become the beneficial owner
of not less than ten percent (10%) of the voting power of the stock of
the Company entitled to vote generally in the election of directors, and
prior to the consummation of such Business Transaction, such Related
Person shall not have become the Beneficial Owner of any additional
shares of voting stock or securities convertible into voting stock,
except (i) as a part of the transaction which resulted in such Related
Person becoming the beneficial owner of not less than ten percent (10%)
of the voting power of the voting stock or (ii) as a result of a pro rata
stock dividend or stock split; and
(c) prior to the consummation of such Business Transaction,
such Related Person shall not have, directly or indirectly, (i) received
the benefit (other than only a proportionate benefit as a stockholder of
the Company) of any loans, advances, guarantees, pledges, or other
financial assistance or tax credits provided by the Company or any of its
subsidiaries, (ii) caused any material change in the Company's business
or equity capital structure, including, without limitation, the issuance
of shares of capital stock of the Company, or (iii) except as approved by
the Continuing Directors, caused the Company to fail to declare and pay
(y) at the regular date therefor any full quarterly dividends on any
outstanding preferred stock or (z) quarterly cash dividends on the
outstanding Octel Common Stock on a per share basis at least equal to the
cash dividends being paid thereon by the corporation immediately prior to
the date on which the Related Person became a Related Person.
The term "Business Transaction" is generally defined as: (a)
any merger or consolidation involving the Company or a subsidiary of the
Company; (b) any sale, lease, exchange, transfer, or other disposition
(in one transaction or a series of related transactions), including,
without limitation, a mortgage or any other security device, of all or
any substantial part of the assets either of the Company or of a
subsidiary of the Company; (c) any sale, lease, exchange, transfer, or
other disposition (in one transaction or a series of related
transactions) of all or any substantial part of the assets of an entity
to the Company; (d) the issuance, sale, exchange, transfer, or other
disposition (in one transaction or a series of related transactions) by
the Company or a subsidiary of the Company of any securities of the
Company or any subsidiary of the Company; (e) any recapitalization or
reclassification of the securities of the Company or other transaction
that would have the effect of increasing the voting power of a Related
Person or reducing the number of shares of each class of voting stock
outstanding; (f) any liquidation, spin-off, split-off, split-up, or
dissolution of the Company; and (g) any agreement, contract, or other
arrangement providing for any of the transactions described in this
definition of Business Transaction. "Continuing Director" is generally
defined as a member of the Board of Directors on the Distribution Date
and any member of the Board of Directors whose election was approved by
the Continuing Directors. "Related Person" generally is defined as any
individual or entity which, together with is affiliates and associates
owns not less than 10% of the voting power of the voting stock of the
Company.
Preferred Stock Purchase Rights
Prior to the Distribution Date, the Board of Directors of the
Company will declare a dividend distribution of one right (a "Right") to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock for each outstanding share of Octel Common Stock to
stockholders of record of the Company on the Record Date. The description
and terms of the Rights are set forth in a Rights Agreement, dated as of
____________, 1998, between the Company and ________________ (the "Rights
Agreement").
The Rights remain non-exercisable, nontransferable and
non-separable from Octel Common Stock until the earlier of (i) 10 days
after a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding
shares of Octel Common Stock (the "Stock Acquisition Date") or (ii) 10
business days (or such later date as may be determined by the Board of
Directors) after the commencement of a tender offer or exchange offer for
15% or more of the Octel Common Stock.
In the event that a person becomes the beneficial owner of
15% or more of the then outstanding shares of Octel Common Stock (except
pursuant to an offer for all outstanding shares of Octel Common Stock
that the independent directors of the Company determine to be fair to and
otherwise in the best interests of the Company and its stockholders (a
"Qualifying Offer"), each holder of a Right will thereafter have the
right to receive, upon exercise, shares of Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Rights. Each Right,
when exercisable, currently entitles the registered holder to purchase
from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock at a price of $ , subject to adjustment. In
the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction
in which the Company is not the surviving corporation (other than a
merger that follows an Qualifying Offer and meets certain other
requirements) or (ii) more than 50% of the Company's assets, cash flows
or earning power is sold or transferred, each holder of a Right shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of
the Right.
In general, at any time prior to their expiration on , 2008
or until 10 days following the Stock Acquisition Date, the Board of
Directors in its discretion may redeem the Rights in whole, but not in
part, at a price of $.01 per Right.
Each share of Series A Junior Participating Preferred Stock,
when issued, will be nonredeemable and entitled to cumulative dividends
and will rank junior to any series of Preferred Stock senior to it.
Dividends are payable on the Series A Junior Participating Preferred
Stock in an amount equal to the greater of (i) $1.00 per share or (ii)
1,000 times the aggregate per share amount of all cash and noncash
dividends (other than dividends payable in Common Stock) declared on the
Common Stock since the last quarterly dividend payment date or, with
respect to the first such date, since the first issuance of the Series A
Junior Participating Preferred Stock. Each share of Series A Junior
Participating Preferred Stock will entitle the holder (subject to
adjustment) to 1,000 votes on all matters submitted to a vote of the
stockholders of the Company. The number of shares constituting the series
of Series A Junior Participating Preferred Stock will be 1,000,000.
The Rights may have certain anti-takeover effects, including
deterring someone from acquiring control of the Company in a manner or on
terms not approved by the Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the
Board of Directors, since the Rights generally may be redeemed at any
time by the Company as set forth above.
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS
Officers and directors of the Company are covered by certain
provisions of the DGCL, the Certificate of Incorporation, the By-laws and
insurance policies which serve to limit, and, in certain instances, to
indemnify them against, certain liabilities which they may incur in such
capacities. None of such provisions would have retroactive effect for
periods prior to the Distribution Date, and the Company is not aware of
any claim or proceeding in the last three years, or any threatened claim,
which would have been or would be covered by these provisions. These
various provisions are described below.
Elimination of Liability in Certain Circumstances. In June
1986, Delaware enacted legislation which authorizes corporations to limit
or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors'
fiduciary duty of care. This duty of care requires that, when acting on
behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them.
Absent the limitations now authorized by such legislation, directors are
accountable to corporations and their stockholders for monetary damages
for conduct constituting negligence or gross negligence in the exercise
of their duty of care. Although the statute does not change directors'
duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by such legislation.
Specifically, the directors of the Company will not be personally liable
for monetary damages for breach of a director's fiduciary duty as
director, except for liability: (i) for any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL;
or (iv) for any transaction from which the director derived an improper
personal benefit.
Indemnification and Insurance. As a Delaware corporation, the
Company has the power, under specified circumstances generally requiring
the director or officer to act in good faith and in a manner he
reasonably believes to be in or not opposed to the Company's best
interests, to indemnify its directors and officers in connection with
actions, suits or proceedings brought against them by a third party or in
the name of the Company, by reason of the fact that they were or are such
directors or officers, against expenses, judgments, fines and amounts
paid in settlement in connection with any such action, suit or
proceeding. The By-laws generally provide for mandatory indemnification
of the Company's directors and officers to the full extent provided by
Delaware corporate law.
The Company intends to purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Company,
or is or was a director or officer of the Company serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not the Company would have the power or obligation to
indemnify him against such liability under the provisions of the By-laws.
INDEPENDENT AUDITORS
The Company has appointed Ernst & Young L.L.P. as the
Company's independent auditors to audit the Company's financial
statements as of and for the year ending December 31, 1997. Ernst & Young
L.L.P. has audited the Company's historical financial statements as of
December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration
Statement on Form 10 (the "Registration Statement," which term shall
include any amendments or supplements thereto) under the Exchange Act
with respect to the shares of Octel Common Stock being received by Great
Lakes stockholders in the Distribution. This Information Statement does
not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is
hereby made. Statements made in this Information Statement as to the
contents of any contract, agreement or other document referred to herein
are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by
the Company with the Commission may be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the Regional Offices of the Commission at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, 13th Floor, New York, New York 10048.
The Commission maintains a web site that contains reports, proxy
statements, registration statements and other information regarding
registrants that file electronically with the Commission at
http://www.sec.gov.
Following the Distribution, the Company intends to furnish to
its stockholders annual reports containing consolidated financial
statements audited by an independent public accounting firm accompanied
by an opinion expressed by such independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information, in each case
prepared in accordance with generally accepted accounting principles.
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors.....................................F-2
Combined Statements of Income for the nine month
periods ended September 30, 1997 and 1996 (unaudited)
and for each of the three years in the period
ended December 31, 1996.........................................F-3
Combined Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 and 1995......................F-4
Combined Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996
(unaudited) and for each of the three years in the
period ended December 31, 1996..................................F-5
Notes to Combined Financial Statements.............................F-6
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
Octel Corp.
We have audited the accompanying combined balance sheets of
the businesses that comprise Octel Corp. as of December 31, 1996 and
1995, and the related combined statements of income and cash flows for
each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial position
of the businesses that comprise Octel Corp. at December 31, 1996 and
1995, and the combined results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
, 1998
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
Nine Months
Ended September 30, Years ended December 31,
----------------- ------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $395.0 $427.1 $597.4 $628.3 $603.1
Cost of goods sold......................... 197.7 197.5 298.8 307.0 296.0
------ ------ ------ ------ ------
Gross profit.......................... 197.3 229.6 298.6 321.3 307.1
Operating expenses:
Selling, general and administrative... 29.3 31.1 40.2 42.1 37.5
Research and development.............. 2.5 3.7 5.6 5.6 6.7
------ ------ ------ ------ ------
Total................................. 31.8 34.8 45.8 47.7 44.2
Operating income........................... 165.5 194.8 252.8 273.6 262.9
Interest and other expenses................ 3.6 3.1 9.1 14.7 11.1
Amortization of goodwill................... 20.3 20.0 26.7 19.0 16.7
Other income............................... (9.4) (4.2) (4.7) ( 9.2) (12.1)
------ ------- ------- ------- -------
Income before income taxes and
minority interest.......................... 151.0 175.9 221.7 249.1 247.2
Minority interest.......................... 20.3 23.2 29.6 32.3 32.4
------ ------- ------ ------ ------
Income before income taxes................. 130.7 152.7 192.1 216.8 214.8
Income taxes............................... 43.9 51.4 63.8 71.7 72.4
------ ------- ------ ------ ------
Net income................................. $86.8 $101.3 $128.3 $145.1 $142.4
===== ====== ====== ====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
COMBINED BALANCE SHEETS
(IN MILLIONS)
At September 30 At December 31
--------------- --------------
1997 1996 1995
---- ---- ----
(unaudited)
Assets
Current assets
Cash and cash equivalents......... $ 41.0 $ 54.9 $ 54.4
Accounts receivable............... 152.6 196.4 194.6
Inventories....................... 82.0 84.0 62.1
Prepaid expenses.................. 2.4 4.3 3.5
--------- ------- -------
Total current assets.............. 278.0 339.6 314.6
Property, plant and equipment..... 103.3 113.4 107.3
Goodwill.......................... 306.6 319.0 296.0
Other assets...................... 68.7 69.0 80.5
--------- ------- -------
$756.6 $841.0 $798.4
======= ======= =======
Liabilities and Great Lakes Investment
Current liabilities
Accounts payable.................. $25.2 $37.6 $47.2
Accrued expenses.................. 7.0 20.5 16.7
Accrued income taxes.............. 108.2 65.4 74.9
------- ------- -------
Total current liabilities............ 140.4 123.5 138.8
Other liabilities.................... 60.9 90.3 97.3
Deferred income taxes................ 8.0 7.5 3.5
Minority interest.................... 35.7 35.1 28.0
Great Lakes investment............... 511.6 584.6 530.8
------- ------- -------
$756.6 $841.0 $798.4
====== ====== ======
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
Nine Months
Ended September 30, Years ended December 31,
------------------- ------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash Flows from Operating Activities
<S> <C> <C> <C> <C> <C>
Net income....................................... $ 86.8 $101.3 $128.3 $145.1 $142.4
Non-cash items included in net income:
Depreciation................................ 13.3 10.0 16.2 13.7 12.9
Amortization................................ 20.3 20.0 26.7 19.0 16.7
Deferred income taxes....................... 1.3 3.3 4.1 6.0 5.4
Other....................................... (0.8) - 1.3 (0.5) 0.1
Changes in operating assets and liabilities:
Accounts receivable......................... 44.6 28.4 9.2 (16.9) (27.0)
Inventories................................. (3.2) (20.2) (12.4) (5.1) 6.8
Accounts payable and accrued expenses....... (26.6) (35.4) (19.0) 19.3 (5.4)
Income taxes and other current liabilities.. 47.0 44.9 (9.1) 2.6 11.9
Other non-current liabilities............... (24.2) (8.9) (16.7) (7.8) (1.9)
------ ----- ------ ----- -----
Net cash provided by operating activities........ 158.5 143.4 128.6 175.4 161.9
Cash Flows from Investing Activities
Capital expenditures............................. (7.4) (12.5) (20.6) (31.5) (22.6)
Business combinations, net of cash acquired...... (11.1) (16.0) (17.0) (18.8) (66.7)
Other............................................ (0.5) (8.0) (7.0) (33.1) 2.4
----- ----- ----- ------ ---
Net cash used in investing activities............ (19.0) (36.5) (44.6) (83.4) (86.9)
Cash Flows from Financing Activities
Net cash paid to Great Lakes..................... (145.0) (118.8) (103.8) (104.9) (83.0)
Minority interest................................ 0.7 5.0 7.1 4.8 7.4
Other............................................ - - - 0.6 -
Net cash used in financing activities............ (144.3) (113.8) (96.7) (99.5) (75.6)
Effect of exchange rate changes on cash.......... (9.1) 2.0 13.2 (4.7) 6.1
----- --- ---- ----- ---
Net change in cash and cash equivalents.......... (13.9) (4.9) 0.5 (12.2) 5.5
Cash and cash equivalents at beginning of period. 54.9 54.4 54.4 66.6 61.1
------- ------ ---- ---- ----
Cash and cash equivalents at end of period....... $ 41.0 $ 49.5 $ 54.9 $ 54.4 $ 66.6
======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--BACKGROUND & BASIS OF PRESENTATION
Octel Corp. ("the Company") is a recently-formed Delaware
corporation, which prior to the Distribution was a wholly-owned
subsidiary of Great Lakes Chemical Corporation ("Great Lakes"). In July
1997, the Board of Directors approved a plan to spin off the Company's
petroleum additives business as an independent, publicly owned company.
The transaction will be effected through the distribution of shares in
the Company to the Great Lakes' stockholders and is expected to be tax
free to stockholders. The transaction is subject to the receipt of a
favorable tax ruling from the Internal Revenue Service, and the final
approval by the Great Lakes Board of Directors of the structure and
financing of the Company.
Basis of Presentation
The combined financial statements reflect the assets,
liabilities, revenues and expenses of the Petroleum Additives Business
Unit ("Petroleum Additives") of Great Lakes, adjusted only for those
parts of Petroleum Additives Business Unit which are to remain part of
Great Lakes after the Distribution. The financial statements are prepared
using the historical cost of Great Lakes.
The accompanying unaudited combined financial statements as
of and for the periods ended September 30, 1996 and 1997, respectively,
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all the information and footnotes necessary for a comprehensive
presentation of financial position and results of operations. It is
management's opinion, however, that all material adjustments (consisting
of normal recurring accruals) have been made which are necessary for a
fair financial statement presentation. The results for the interim period
are not necessarily indicative of the results to be expected for the
year.
The financial information included herein may not necessarily
be indicative of the financial position, results of operations or cash
flows of the Company in the future or the financial position, results of
operations or cash flows that would have been achieved if the Company had
been a separate, independent company during the periods presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a major manufacturer and distributor of TEL,
Petroleum Specialties and Performance Chemicals. Its primary
manufacturing operation is located at Ellesmere Port in the United
Kingdom. The Company's products are sold globally, primarily to oil
refineries. Principal product lines are lead alkyl antiknock compounds
(TEL), other petroleum additives and performance chemicals.
Principles of Combination
The combined financial statements include all subsidiaries of
the Company after elimination of significant intercompany accounts and
transactions.
Use of Estimates
The preparation of the combined financial statements requires
management to make estimates and assumptions that affect the amount
reported in the combined financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Revenue from sales of products is recognized at the time
products are shipped to the customer or, in the case of bulk shipments,
at the time of delivery to the customer.
Cash Equivalents
Investment securities with maturities of three months or less
when purchased are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (FIFO method) or
market price.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is provided over the estimated useful lives of the assets using the
straight-line method.
Goodwill
Goodwill, the excess of investment over net assets of
subsidiaries acquired, is amortized over periods of up to 40 years. The
majority of the goodwill relates to the TEL business and is being
amortized over approximately 10 years, the expected remaining life of the
business. The Company regularly evaluates the realizability of goodwill
based on projected undiscounted cash flows and operating income for each
business having material goodwill balances. Based on its most recent
analysis, the Company believes that no impairment of goodwill exists at
December 31, 1996.
Environmental Compliance and Remediation
Environmental compliance costs include ongoing maintenance,
monitoring and similar costs. Such costs are expensed as incurred.
Environmental remediation costs are accrued when environmental
assessments or remedial efforts are probable and the cost can be
reasonably estimated.
Minority Interest
Minority interest represents income before income taxes as
earnings is predominantly from a partnership; therefore, taxes are paid
by each partner individually.
NOTE 3--SUPPLEMENTAL BALANCE SHEET INFORMATION
1996 1995
---- ----
(Millions)
Accounts receivable
Accounts receivable................... $197.3 $195.5
Less allowances....................... 0.9 0.9
------- -------
$196.4 $194.6
====== ======
Inventories
Finished goods........................ $ 35.8 $ 27.5
Work in progress...................... 11.3 9.0
Raw materials and supplies............ 36.9 25.6
------ ------
$ 84.0 $ 62.1
======= =======
Property, plant and equipment
Land.................................. $ 3.0 $ 1.0
Buildings............................. 2.2 0.8
Equipment............................. 117.1 71.0
Construction in progress.............. 12.8 37.2
------- ------
135.1 110.0
Less accumulated depreciation......... 21.7 2.7
------- -------
$113.4 $107.3
====== ======
The estimated useful lives for purposes
of computing depreciation are:
buildings, 7-25 years; equipment,
5-14 years.
Goodwill
Goodwill.............................. $411.8 $360.6
Less accumulated amortization......... 92.8 64.6
------- -------
$319.0 $296.0
====== ======
Other Assets
Prepaid pension cost.................. $ 67.5 $ 52.5
Cash held pending settlement with
vendors............................. -- 26.5
Other................................. 1.5 1.5
-------- --------
$ 69.0 $ 80.5
======= =======
Provisions for estimated closure costs
of TEL manufacturing facilities..... $ 90.3 $ 97.3
======= =======
The liability for estimated closure costs of Octel's TEL
manufacturing facilities includes costs for personnel reductions,
decontamination and environmental remediation activities when demand for
TEL diminishes. Estimated closing costs are regularly evaluated.
Adjustments to the liability are prorated over the estimated remaining
life of the business in proportion to the expected rate of the TEL market
decline. Closure costs as of December 31, 1996 were estimated to be
approximately $145 million.
NOTE 4--ACQUISITIONS
The Company's 87.82% ownership interest in Octel Associates
and the Associated Octel Company Limited ("AOC") was acquired in two
transactions. In 1989 the Company acquired a 51.15% interest with the
balance acquired in 1992. The 1989 acquisition agreement provides for
profit participation payments to be made to certain former owners through
2006. Such profit participation payments are treated as an adjustment to
the purchase price. Profit participation payments for 1996 amounted to
$17 million. In early 1997 the Company completed the determination of the
profit participation payments for the years 1989 through 1995 resulting
in an addition to purchase price of approximately $30 million. Funding
for the payment which had been previously set aside and classified as
other non-current assets in the 1995 combined balance sheet is now
classified as goodwill. Total profit participation payments amount to
approximately $216 million since inception. In November 1997, the Company
acquired the balance of Octel Associates and AOC. See Note 12--Subsequent
Events.
On August 31, 1994 the Company completed the acquisition of
E.I. du Pont de Nemours & Company's ("DuPont") petroleum additives
business including DuPont's North and South American TEL business for
approximately $50 million. The excess of purchase price over the value of
net assets acquired totaled approximately $35 million.
All acquisitions have been accounted for as purchases and the
results of operations of the acquired businesses are included in the
combined financial statements from the dates of acquisition.
NOTE 5--INCOME TAXES
The following is a summary of domestic and foreign income
before income taxes, the components of the provisions for income taxes
and deferred income taxes, a reconciliation of the U.S. statutory income
tax rate to the effective income tax rate, and the components of deferred
tax assets and liabilities.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Millions)
Income (Loss) before Income Taxes:
<S> <C> <C> <C>
Domestic............................... $ 1.7 $ (0.6) $ --
Foreign................................ 190.4 217.4 214.8
----- ----- -----
$192.1 $216.8 $214.8
====== ====== ======
Provisions for Income Taxes:
Current:
Federal................................ $ 0.1 $ -- $ --
Foreign................................ 59.6 65.7 67.0
---- ---- ----
59.7 65.7 67.0
Deferred:
Domestic............................... 0.4 0.3 --
Foreign................................ 3.7 5.7 5.4
-------- -------- --------
4.1 6.0 5.4
-------- -------- --------
$ 63.8 $ 71.7 $ 72.4
======= ======= =======
Provisions (Credits) for Deferred
Income Taxes:
Pension costs...................... $ 1.5 $ 2.0 $ 1.1
Amortization of goodwill........... 0.8 1.1 1.2
Plant closure costs................ 1.2 3.2 3.1
Other.............................. 0.6 (0.3) --
-------- ------- --------
$ 4.1 $ 6.0 $ 5.4
======== ======= ========
Effective Income Tax Rate
Reconciliation:
U.S. statutory income tax rate....... 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential...... (2.9) (1.4) (1.5)
Amortization of goodwill........... 1.3 (0.3) -
Other.............................. (0.2) (0.2) 0.1
----- ----- ---
Effective income tax rate............ 33.2% 33.1% 33.7%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used
for income tax purposes.
1996 1995
---- ----
(Millions)
Components of Deferred Tax
Assets and Liabilities:
Deferred tax assets - closure costs...... $29.8 $ 32.1
----- ------
Deferred tax liabilities:
Pension costs......................... $22.3 $17.3
Accrued expenses...................... 4.4 2.7
Amortization of goodwill.............. 3.2 2.2
Other................................. 7.4 13.4
----- -----
Total.............................. $37.3 $35.6
===== =====
Cash payments for income taxes were $60.7 million, $72.9
million and $86.8 million in 1996, 1995 and 1994, respectively.
NOTE 6--GREAT LAKES INVESTMENT
Changes in Great Lakes Investment during each of the years
ended December 31 were as follows:
(Millions)
Balance at December 31, 1993............................. $ 416.5
Net income.................................... 142.4
Net amount paid to GLCC including exchange
effect of $0.4.............................. (82.6)
Net change in cumulative translation.......... 12.1
------
Balance at December 31, 1994............................. 488.4
Net income.................................... 145.1
Net amount paid to GLCC including exchange
effect of $8.5.............................. (96.4)
Net change in cumulative translation.......... (6.3)
-------
Balance at December 31, 1995............................. 530.8
Net income.................................... 128.3
Net amount paid to GLCC including
exchange effect of $0.7..................... (103.1)
Net change in cumulative translation.......... 28.6
------
Balance at December 31, 1996............................. $584.6
======
NOTE 7--INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
The Company's operations consist of one dominant industry
segment: petroleum additives. Net sales, income before income taxes and
minority interest and identifiable assets by geographic areas are shown
below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Millions)
Net sales to unaffiliated customers (by origin):
<S> <C> <C> <C>
United States................................. $ 36.3 $ 33.9 $ 11.1
United Kingdom................................ 477.5 484.9 481.0
Rest of Europe................................ 83.6 109.5 111.0
------ ------ ------
Total.................................... $597.4 $628.3 $603.1
====== ====== ======
Intercompany sales between geographic areas:
United States................................. $ 7.3 $ 7.3 $ 2.5
United Kingdom................................ 49.8 53.9 31.6
Rest of Europe................................ 54.9 72.2 56.4
------ ------ ------
Total.................................... $112.0 $133.4 $ 90.5
====== ====== =======
Income (loss) before income taxes and minority
interest:
United States................................. $ 1.7 $ (0.6) $ --
United Kingdom................................ 208.3 222.7 220.9
Rest of Europe................................ 11.7 27.0 26.3
------ ------ ------
Total.................................... $221.7 $249.1 $ 247.2
====== ====== =======
Identifiable assets at year-end:
United States................................. $ 34.8 $ 31.0 $ 28.6
United Kingdom................................ 717.3 663.0 596.0
Rest of Europe................................ 88.9 104.4 108.0
------ ----- -----
Total.................................... $841.0 $798.4 $732.6
====== ====== ======
</TABLE>
The majority of the Company's operations are conducted by its
U.K. enterprises. Sales are reported in the geographic area where the
transaction originates, rather than where the final sale to customers is
made. Inter-company sales are priced to recover cost plus an appropriate
mark-up for profit and are eliminated in the combined financial
statements.
NOTE 8--RETIREMENT PLANS
The Company maintains a contributory defined benefit pension
plan covering substantially all U.K. employees. Benefits are based on
final salary and years of credited service, reduced by social security
benefits according to a plan formula. Normal retirement age is 65, but
provisions are made for early retirement. The Company's funding policy is
to contribute amounts to the plans to cover service costs to date as
recommended by the Company's actuary. The plan's assets are invested by
two investment management companies in funds holding U.K. and overseas
equities, U.K. and overseas fixed interest securities, index linked
securities, property unit trusts and cash or cash equivalents.
A summary of the components of net periodic pension cost for
the U.K. pension plan is as follows:
1996 1995 1994
---- ---- ----
(Millions)
Service cost $ 12.0 $10.9 $11.7
Interest cost on projected benefit
obligation 35.2 33.5 31.7
Actual return on plan assets (60.6) (66.3) (14.9)
Net amortization and deferral 14.1 23.6 (24.4)
---- ---- ------
Net pension cost $ 0.7 $ 1.7 $ 4.1
===== ===== =====
The funded status and prepaid pension cost for the U.K.
pension plan is as follows:
As of December 31
-----------------
1996 1995 1994
---- ---- ----
(Millions)
Actuarial present value of accumulated
plan benefits, all vested............... $446.1 $368.9 $364.1
Additional amounts related to projected
salary increases........................ 49.5 38.6 11.6
------ ------ ------
Total projected benefit obligation........ 495.6 407.5 375.7
Plan assets at fair value................. 644.2 525.5 467.6
------ ------ ------
Plan assets in excess of projected
benefit obligation...................... 148.6 118.0 91.9
Unrecognized net gain..................... (83.2) (69.1) (52.0)
Unrecognized prior service cost........... 9.6 9.4 10.7
----- ----- -----
Prepaid pension cost...................... $75.0 $58.3 $50.6
Estimated transfer........................ (7.5) (5.8) (5.0)
------- ------- -------
$67.5 $52.5 $45.6
===== ===== =====
The estimated transfer represents prepaid pension cost
attributable to employees who participate in the Octel retirement plans
that will remain with Great Lakes. Financial determination of the
transfer is subject to, among other things, a final actuarial evaluation
and election of the employee.
Assumptions used in determining the actuarial present value
of the projected benefit obligations are set forth below. Assumptions
used in 1996 are consistent with the prior year. The weighted average
discount rate, rate of increase in compensation levels and expected
long-term return on assets were assumed to be 8.75%, 6.5% and 9.5%,
respectively.
NOTE 9--EMPLOYEE STOCK PLANS
In October 1995, the Financial Accounting Standards Board
issued "Accounting for Stock-Based Compensation" (SFAS 123). The
statement is effective for fiscal years beginning after December 1995.
Under SFAS 123, stock-based compensation expense is measured using either
the intrinsic-value method as prescribed by Accounting Principle Board
Opinion No. 25 (APB 25) or the fair-value method described in SFAS 123.
The Company intends to follow APB 25.
Prior to the Distribution, certain employees of the Company
participated in the Great Lakes 1984 Employee Stock Option Plan and the
Great Lakes 1993 Employee Stock Compensation Plan which cover officers
and key employees of Great Lakes. The Company intends to grant to its
employees who would otherwise have been eligible to receive grants under
such plans, restricted stock units under the Stock Plan of the Company,
which is to be approved by Great Lakes, as the sole stockholder of the
Company, prior to Distribution.
NOTE 10--FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
The carrying amounts of cash and cash equivalents reported in
the balance sheet do not materially differ from their fair value at
December 31, 1996.
The Company hedges certain portions of its exposure to
foreign currency fluctuations in revenues through the use of forward
exchange contracts. The Company invoices between 50% and 60% of its sales
in U.S. dollars; the balance of the Company's billing is invoiced in
pound sterling in an effort to match the Company's pound sterling costs.
Foreign exchange contracts are taken out with both Great Lakes and
Chevron Chemical Company to hedge the dollar income and thereby hedge the
quarterly dollar profit distributions made to both parties. At December
31, 1996 and 1995, open foreign exchange contracts totaled $55.3 million
and $74.0 million, respectively. If valued at year-end rates of exchange,
the contracts would have been valued at $57.3 million and $73.4 million,
respectively. Gains and losses arising from the use of such instruments
are recorded in the income statement concurrently with gains and losses
arising from the underlying hedged transactions.
The Company sells a range of petroleum additives, including
significant quantities of TEL, to major oil refineries throughout the
world. Significant sales of TEL are also made to Ethyl Corporation on
wholesale terms, and in 1996 these accounted for 11.2% of net revenues.
At December 31, 1996 amounts owing by Ethyl Corporation to the Company
amounted to 5.4% of accounts receivable. Credit limits, ongoing credit
evaluation and account monitoring procedures are utilized to minimize the
risk of loss. Generally, collateral is not required.
Approximately 60% of the Company's labor force are covered by
a collective bargaining agreement, which expires on January 1, 2000.
NOTE 11--RELATED PARTY TRANSACTIONS
The Company sells significant quantities of TEL to refineries
wholly or partially owned by BP, Texaco and Mobil (the Vendor Partners)
and Chevron Chemical Company. Such sales are made at arm's-length and at
prices which vary according to individual customers and the markets in
which they operate. In the years 1996, 1995 and 1994 such sales amounted
to $94.7 million, $116.2 million and $132.1 million respectively. Amounts
due in respect of these sales amounted to $35.9 million and $39.4 million
at December 31, 1996 and December 31, 1995 respectively.
Sales of product between the Company and Great Lakes are
reported in the financial statements at estimated market value. In the
years 1996, 1995 and 1994 the value of sales from the Company to Great
Lakes amounted to $6.4 million, $5.8 million and $6.6 million,
respectively, and the value of purchases by the Company from Great Lakes
amounted to $15.7 million, $12.1 million and $20.5 million respectively.
Interest charges from Great Lakes in respect of funding
provided for acquisitions in prior years amounted to $1.5 million, $9.9
million and $12.1 million in the years 1996, 1995 and 1994, respectively.
At December 31, 1996, the balance owing to Great Lakes was $24.4 million.
NOTE 12--SUBSEQUENT EVENTS
On November 20, 1997, the Company completed the acquisition
of the outstanding minority interest in the Company's subsidiaries
previously owned by Chevron Chemical Company for $116.8 million. The
excess of purchase price over the value of net assets acquired totaled
approximately $80 million and this amount will be added to goodwill.
During 1997 the Company acquired certain fractional interests
in the Company's subsidiaries held by the Vendor Partners for a nominal
amount.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
OCTEL CORP.
February 13, 1998 By: /s/ Dennis J. Kerrison
------------------------
Name: Dennis J. Kerrison
Title: President and Chief Executive Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1* Transfer and Distribution Agreement, dated as of _________,
1998, between Great Lakes Chemical Corporation ("Great
Lakes") and the Registrant.
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.1* Rights Agreement, dated as of _________, 1998, between
the Registrant and _______________, as Rights Agent.
4.2* Form of Certificate of Designations, Rights and
Preferences of Series A Junior Participating
Preferred Stock of the Registrant.
10.1* Tax Disaffiliation Agreement, dated as of ____________,
1998, between Great Lakes and the Registrant.
10.2* Corporate Services Transition Agreement, dated as of
____________, 1998, between Great Lakes and the Registrant.
10.3* Supply Agreement, dated as of ____________, 1998, between
Great Lakes and the Registrant.
10.4* Toll Manufacturing Agreement, dated as of ____________,
1998, between Great Lakes and the Registrant.
10.5* Option Agreement, dated as of ____________, 1998, between
Great Lakes and the Registrant.
10.5* Form of Octel Corp. 1998 Stock Compensation Plan.
21.1* Subsidiaries of the Registrant.
- -----------------
* To be filed by amendment
