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: 011-44-151-355-3611
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.
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OCTEL CORP.
INFORMATION REQUIRED IN REGISTRATION STATEMENT:
CROSS-REFERENCE BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
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Item Number Caption Location in Information Statement
- ----------- ------- ----------------------------------
Item 1. Business Summary; Introduction; The Distribution; Risk
Factors; Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Combined Financial
Statements.
Item 2. Financial Information Summary; Risk Factors; Pro Forma
Capitalization; Pro Forma Combined Financial
Statements; Selected Historical Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Combined Financial Statements.
Item 3. Properties Business.
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; Liability and Indemnification of
Directors and Officers.
Item 6. Executive Compensation Management; 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.
Item 9. Market Price of and Dividends on Summary; The Distribution; Risk Factors;
the Registrant's Common Equity Management; Security Ownership of Certain
and Related Stockholder Matters 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 Combined Financial
Supplementary Data Statements; 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 Combined Financial Statements; Exhibit
Index.
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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.
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 Great Lakes and Octel as highly focused, independent
publicly traded companies.
Sincerely,
Mark P. Bulriss
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 has applied for listing of its shares on the New York Stock
Exchange under the symbol "OTL".
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 CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENTS.
SUBJECT TO COMPLETION, DATED APRIL 10, 1998
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").
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 has applied for listing of the shares of Octel Common Stock on the
New York Stock Exchange under the symbol "OTL."
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 Independen Public Company.......................................19
Dependence on Key Personnel.............................................20
Absence of Prior Trading Market for Octel Common Stock..................20
Dividends and Share Repurchases.........................................20
Possible Anti-takeover Effects of Certain Charter and
By-Law Provisions and Other Matters...................................21
FTC Investigation.......................................................21
RELATIONSHIP BETWEEN GREAT LAKES AND
THE COMPANY AFTER THE DISTRIBUTION....................................23
Distribution Agreement..................................................23
Tax Disaffiliation Agreement............................................23
Corporate Services Transition Agreement.................................24
Supply and Toll Manufacturing Agreements................................24
DESCRIPTION OF FINANCINGS...............................................26
PRO FORMA CAPITALIZATION................................................28
PRO FORMA COMBINED FINANCIAL STATEMENTS.................................30
SELECTED HISTORICAL FINANCIAL DATA......................................35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................37
BUSINESS................................................................48
Description of the Company..............................................48
Reasons for the Distribution............................................49
Cost Reduction Initiatives..............................................49
Lead Alkyls Business ...................................................50
Petroleum Specialities Business.........................................53
Performance Chemicals Business..........................................54
Raw Materials...........................................................54
Technology..............................................................55
Patents and Intellectual Property.......................................55
Health, Safety and Environmental Matters................................56
Human Resources.........................................................56
Properties..............................................................57
Legal Proceedings.......................................................57
MANAGEMENT..............................................................59
Directors...............................................................59
Classified Board of Directors...........................................61
Committees of the Board of Directors....................................61
Compensation of Directors...............................................62
Executive Officers......................................................62
Compensation of Executive Officers......................................64
Stock Options Table.....................................................64
Option Exercises and Year-End Value Table...............................66
Employment Agreements...................................................66
Compensation Under Retirement Plans.....................................66
Stock Plan..............................................................67
TREATMENT OF GREAT LAKES EMPLOYEE STOCK OPTIONS IN
THE DISTRIBUTION......................................................69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................69
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.........................69
BENEFICIAL OWNERSHIP OF MANAGEMENT......................................70
DESCRIPTION OF COMPANY CAPITAL STOCK....................................71
Common Stock............................................................71
Preferred Stock.........................................................71
No Preemptive Rights....................................................72
Transfer Agent and Registrar............................................72
Certain Provisions of the Certificate of Incorporation and By-Laws......72
Preferred Stock Purchase Rights.........................................76
LIABILITY AND INDEMNIFICATION OF DIRECTORS
AND OFFICERS..........................................................78
INDEPENDENT AUDITORS....................................................79
ADDITIONAL INFORMATION..................................................79
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 intends
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 includes 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 Payments (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 82% of the Company's 1997 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 1997 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 6% of the Company's
1997 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 1997, the Company had sales of $539.1 million and an operating
income of $194.7 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
1,419 employees worldwide as of December 31, 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
011-44-151-355-3611
RECENT DEVELOPMENTS
Although management expects TEL sales volumes to decrease for the
full year 1998, sales volumes in the first quarter of 1998 are expected to
be comparable to the first quarter of 1997. Operating income for the first
quarter of 1998 is expected to increase slightly from the first quarter of
1997 due to a higher percentage of retail TEL sales versus wholesale TEL
sales in the first quarter of 1998. Retail selling prices in the first
quarter of 1998 are expected to be flat as compared to the first quarter of
1997.
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.
RELATED FINANCINGS................... Prior to the Distribution, certain
of the Company's subsidiaries will
enter into a $300 million senior
credit facility (the "Credit
Facility"), consisting of a
revolving credit facility (the
"Revolving Facility") of $20 million
and a term loan facility (the "Term
Facility") of $280 million, and will
issue $150 million of senior 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 $12 million of
expenses incurred by the Company in
connection with the Distribution and
the Financings. The $20 million
Revolving 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 $29.7
million of available cash as of
December 31, 1997 and cash generated
by Octel between January 1, 1998 and
the Distribution Date, to make a
$467.7 million payment to Great
Lakes, consisting of $116.8 million
for the repayment of a loan used to
purchase a 10.65% interest in
subsidiaries of the Company held by
Chevron Chemical Company ("Chevron")
and $350.9 million as a special
dividend (the "Special Dividend"
and, collectively, the "Special
Payments").
LISTING AND TRADING MARKET........... The Company has applied for listing
of the shares of Octel Common Stock
on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "OTL."
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.
FRACTIONAL SHARE INTERESTs........... If a stockholder owns fewer than four
shares of Great Lakes Common Stock,
such stockholder will receive cash
in lieu of a fractional share. The
account of each Great Lakes
stockholder owning more than four
shares of Great Lakes Common Stock
will be credited with all whole and
fractional shares of Octel Common
Stock such stockholder is entitled
to receive, unless a stockholder
requests and receives physical
certificates (in which case a
stockholder will receive physical
certificates for all whole shares
which such stockholder is entitled
to receive and cash in lieu of
fractional shares).
DISTRIBUTION AGENT................... First Chicago Trust Company of New
York (the "Distribution Agent").
TAX CONSEQUENCES..................... Great Lakes has received a private
letter ruling from the U.S. Internal
Revenue Service to the effect that,
among other things, the Distribution
will 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 AND SHARE REPURCHASE
POLICY............................. The payment and amount of cash
dividends and/or share repurchases,
if any, on or with respect to, the
Octel Common Stock after the
Distribution will be subject to the
discretion of the Company's Board of
Directors. The Company's 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.
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 and the Supply and Toll
Manufacturing Agreements (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 17 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, 1997 are derived from the audited 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, 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 December 31, 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.
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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
------------------------
UNAUDITED
PRO FORMA
1997 1997 1996 1995
--------- ---- ---- ----
INCOME STATEMENT DATA:
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Net sales................................... $539.1 $539.1 $597.4 $628.3
Cost of goods sold.......................... 274.4 274.4 298.8 307.0
----- ----- ----- -----
Gross profit................................ 264.7 264.7 298.6 321.3
Selling, general and administrative ........ 41.6 38.6 40.2 42.1
Research and development.................... 3.8 3.8 5.6 5.6
Amortization of intangible assets........... 37.2 27.6 26.7 19.0
------ ---- ---- ----
Operating income............................ 182.1 194.7 226.1 254.6
Interest expense............................ 34.1 2.2 1.6 10.3
Other expenses.............................. 5.6 5.6 7.5 4.4
Interest income............................. (0.1) (3.9) (3.5) (5.1)
Other income................................ (7.9) (7.9) (1.2) (4.1)
------- --------- ----- -----
Income before income taxes and minority
interest.................................... 150.4 198.7 221.7 249.1
Minority interest........................... - 24.3 29.6 32.3
------- -------- ------ ------
Income before income taxes.................. 150.4 174.4 192.1 216.8
Income taxes................................ 48.9 56.7 63.8 71.7
------- -------- ------ ------
Net income.................................. $101.5 $117.7 $128.3 $145.1
====== ====== ====== ======
BALANCE SHEET DATA (AS OF END OF YEAR):
Total working capital....................... $206.2 $179.9 $216.1 $175.8
Property, plant and equipment, net.......... 106.0 106.0 113.4 107.3
Total assets................................ 818.0 832.9 841.0 798.4
Total debt.................................. 430.0 - - -
Total liabilities........................... 540.4 180.1 256.4 267.6
Total equity................................ 277.6 652.8 584.6 530.8
STATEMENT OF CASH FLOWS DATA:
EBITDA(1)................................... $240.8 $243.8 $262.7 $287.0
Depreciation................................ 19.2 19.2 16.2 13.7
Net cash provided by operating activities... - 167.5 127.8 175.8
Capital expenditures........................ - 17.8 20.6 31.5
Business combinations net of cash acquired.. - 130.8(2) 17.0 18.8
Other....................................... - (1.6) 14.9 31.1
-------- ---- ----
Net cash used in investing activities....... - $147.0 $52.5 $81.4
Net cash paid to GLCC....................... 31.4 103.0 104.6
</TABLE>
(1) EBITDA represents income before income taxes and minority interest plus
depreciation, amortization of intangible assets and interest expense, less
interest income. EBITDA is not a substitute for operating income, net
earnings and cash flow from operating activities as determined in
accordance with generally accepted accounting principles as a measure of
profitability or liquidity. EBITDA is presented as additional information
because management believes it to be a useful indicator of the Company's
ability to service and/or incur indebtedness. EBITDA amounts may not be
fully available for management's discretionary use, due to certain
requirements to conserve funds for capital replacement, debt service and
other commitments.
(2) Includes $116.8 million for the purchase of Chevron's 10.65% interest
in subsidiaries of the Company. See "The Distribution - Special Payments
to Great Lakes."
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, please contact
the Distribution Agent at: (800) 317-4445.
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: Octel Corp. Investor Relations Department, P.O. Box 17, Oil
Sites Road, Ellesmere Port, South Wirral, United Kingdom (telephone:
011-44-151-356-6100).
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 1997
approximately 82% 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 increase prices, the Company's ability to
succeed and maintain or increase earnings is dependent primarily upon its
ability to control and/or reduce costs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview". 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."
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."
Since the Company will use a direct registration system to
implement the Distribution, the Distribution Agent will credit the shares
of Octel Common Stock distributed on the Distribution Date, including
fractional interests for those stockholders who receive at least one whole
share of Octel Common Stock, to book-entry accounts established for all
Company stockholders and will mail an account statement to each stockholder
stating the number of shares of Octel Common Stock, including such
fractional interests, received by such stockholder in the Distribution.
Following the Distribution, stockholders may request the transfer of their
interests to a brokerage or other account or may request delivery of
physical stock certificates for their shares of Octel Common Stock.
If a stockholder owns fewer than four shares of Great Lakes Common
Stock and therefore is entitled to receive less than one whole share of
Octel Common Stock, such stockholder will receive cash instead of a
fractional share of Octel Common Stock. If a stockholder requests physical
certificates for shares of Octel Common Stock, such stockholder will
receive physical certificates for all whole shares of Octel Common Stock
and cash instead of any fractional share interest. The Distribution Agent
will, promptly after the Distribution Date, aggregate all such fractional
share interests in Octel Common Stock with those of other similarly
situated stockholders and sell such fractional share interests in Octel
Common Stock at then-prevailing prices. The Distribution Agent will
distribute the cash proceeds to stockholders entitled to such proceeds pro
rata based upon their fractional interests in Octel Common Stock. No
interest will be paid on any cash distributed in lieu of fractional shares.
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences of the Distribution to Great Lakes' stockholders. Great Lakes
has received a private letter ruling (the "Private Letter Ruling") from the
U.S. 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 and therefore that
for U.S. federal income tax purposes:
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 requests physical
certificates for shares of Octel Common Stock and 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. Also, a stockholder who owns
fewer than four shares of Octel Common Stock will receive cash for
such stock and will recognize a gain or loss equal to the
difference between the cash so received and his tax basis in such
stock. In either circumstance, 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.
The Private Letter Ruling is based on certain representations made
by Great Lakes with respect to itself and the Company. The failure of any
such representation to be true and correct in any material respect could
alter the tax consequences described herein. Neither Great Lakes nor the
Company is aware of any present facts or circumstances that would cause any
such representations to be untrue in any material respect.
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, CORPORATIONS (OR OTHER
ENTITIES TAXABLE AS CORPORATIONS) ORGANIZED UNDER THE LAWS OF THE UNITED
STATES OR ANY STATE THEREIN (INCLUDING THE DISTRICT OF COLUMBIA) 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 has applied for listing of the shares of Octel Common
Stock on the NYSE under the symbol "OTL." 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 1997, approximately 82% 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 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--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."
SUBSTANTIAL LEVERAGE AND RESTRICTIVE COVENANTS
In connection with the Distribution, certain of the Company's
subsidiaries will enter into a $300 million Credit Facility (including a
$20 million Revolving Facility). Concurrently with the Distribution, the
Company also intends to issue $150 million of Notes. As of December 31,
1997, on a pro forma basis after giving effect to the Distribution, the
Company would have had $430 million principal amount of long-term
indebtedness and total common stockholders' equity of $277.6 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 with respect to the Notes (the
"Indenture"), the ability of the Company to sell assets will be restricted.
See "Description of Financings."
The U.K. has enacted legislation (contained within the 1996
Finance Act) altering the rules concerning the deductibility of interest
for corporate tax purposes. Under this new legislation the U.K. tax
authorities may disallow the deductibility of interest for tax purposes
with respect to any loan that is found not to have been entered into for a
business purpose. The Company and Great Lakes believe that the Financings
have been entered into for a valid business purpose. Moreover, the Company
and Great Lakes have received advice from their tax advisors that the U.K.
tax authorities are unlikely to seek to apply this legislation to the
Financings. However there is limited experience and precedent available to
determine how such legislation might impact on the deductibility of
interest incurred in connection with the Financings. If the legislation was
found to limit the deductibility of interest incurred in connection with
the Financings, it could have an adverse effect on the Company's cash flow
or its ability to pay its debts. 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 also will contain restrictive covenants, including
restrictions, under certain circumstances, on the ability of the Company to
pay dividends and repurchase shares. 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 94% of the Company's sales in 1997 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--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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Derivative and Other
Financial Instruments" for a more detailed discussion of the Company's
exposure to foreign currency fluctuations.
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." 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--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 has applied 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.
DIVIDENDS AND SHARE REPURCHASES
The payment and amount of cash dividends or share repurchases, 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 policy
will be reviewed by the Company's Board of Directors at such future times
as may be appropriate, and payment of dividends on or share repurchases of
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.
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND
OTHER MATTERS
Certain provisions of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and
Amended and Restated 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 of 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 purchase
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--Certain Provisions of the
Certificate of Incorporation and By-Laws" and "--Preferred Stock Purchase
Rights."
Furthermore, for a period of two years following the Distribution,
the Company will be prohibited under the terms of the Tax Disaffiliation
Agreement from engaging in certain transactions that may result in a change
of control unless it obtains a supplemental ruling from the Internal
Revenue Service, reasonably satisfactory to Great Lakes in form and
content, that such actions will not adversely affect the qualification of
the Distribution as a tax-free transaction. See "Relationship Between Great
Lakes and the Company After the Distribution-Tax Disaffiliation Agreement."
FTC INVESTIGATION
In December 1997, the Company, Great Lakes and the United States
Federal Trade Commission ("FTC") staff reached an agreement in principle
with respect to a consent decree governing sales of TEL by the Company to
Ethyl for resale in the United States. The agreement was provisionally
approved by the FTC on March 30, 1998, subject to the FTC's discretion to
review and modify the agreement following a sixty (60) day public-comment
period. If the consent decree is not finally accepted by the FTC after the
public comment period, the agency could continue its investigation and, if
after completion of its investigation the FTC has reason to believe that a
violation of law has occurred, it could issue an administrative complaint
alleging violation of Section 5 of the Federal Trade Commission Act. As
only a small portion of the TEL sales of Ethyl and the Company are directed
to the U.S. market, the outcome of the FTC matter is not expected to have a
material adverse effect upon the Company's business, results of operations
or financial condition. See "Business - Legal Proceedings."
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, and various of their respective subsidiaries, have entered
or will enter into various agreements and relationships, including those
described in this section. The agreements summarized in this section are
included as exhibits to the Registration Statement of which this
Information Statement forms a part. For purposes of agreements described
below, the term "Great Lakes" refers to Great Lakes and its respective
subsidiaries and the term "Company" refers to Octel Corp. and its
respective subsidiaries.
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 or transferred to 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 January 1, 1998.
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 generally will require Great Lakes to pay, and indemnify the
Company against, all federal, state, local and foreign taxes relating to
the businesses conducted by Great Lakes or its subsidiaries for any taxable
period, other than the following taxes which will be paid by the Company
and against which the Company will indemnify Great Lakes:
(i) taxes relating to the Company and its U.S. subsidiaries for
periods after the Distribution Date;
(ii) taxes relating to the Company's non-U.S. subsidiaries or
any predecessor or successor thereof for all periods
before and after the Distribution Date (other than with
respect to certain restructuring transactions incident to
the Distribution);
(iii) taxes arising out of certain actions taken by, or in
respect of, the Company or any of its subsidiaries that
adversely affect the tax consequences to Great Lakes, the
Company or their respective subsidiaries with respect to
the Distribution or the transactions related thereto,
provided, however, that under certain limited
circumstances the Company's indemnification obligation
described in this paragraph (iii) may be reduced; and
(iv) 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, reasonably 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% 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 for a transitional period following the Distribution Date. The
services to be provided by the Company include accounting, payroll,
treasury, management information systems, engineering, regulatory and
medical. The services will be provided for varying periods of time,
provided that no services will be undertaken after December 31, 1999. 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 and Toll Manufacturing Agreements") providing for the supply by
Great Lakes to the Company of dibromoethane ("DBE"), hydrogen bromide
("HBR") and the toll manufacture by Great Lakes for the Company of
Stadis(R) products and the supply by the Company to Great Lakes of caustic
soda.
Each of the Supply and Toll Manufacturing Agreements contain
representations, warranties, covenants and agreements and are on terms that
are customary for similar agreements in the chemical industry. The Supply
and Toll Manufacturing Agreements provide for, among other things, the
following:
(i) Great Lakes will supply certain specified quantities of
DBE to the Company for three years. The Company has the
right to extend the agreement for two additional one year
periods. Pursuant to the agreement, Great Lakes has
certain rights to acquire the Company's chlorine membrane
plant if the Company decides to either sell or shut-down
the plant. During the first eighteen months of the
agreement, Great Lakes has agreed to make certain
payments to subsidize the Company's operation of the
chlorine membrane plant;
(ii) Subject only to the Company's obligation to purchase
certain minimum quantities based upon the Company's
forecasts, Great Lakes is required to supply HBR to the
Company in quantities determined by the Company. The
agreement has an initial four year term with automatic
renewal for subsequent one year periods until canceled by
either party with one year's prior notice;
(iii) The Company will supply caustic soda to Great Lakes on an
on-going basis, subject to either party's right to
terminate the agreement on six months' prior notice or,
at Great Lakes' option, at any time subject only to an
obligation for Great Lakes to acquire all then existing
inventory and work-in-process; and
(iv) Great Lakes will toll manufacture Stadis(R)425 and
Stadis(R)450 (Enhanced) for the Company. The agreement
may be terminated by either party after December 31, 2001
on one year's prior notice. The Company is obligated,
subject to certain exceptions, to purchase certain
specified minimum amounts of Stadis(R) products from
Great Lakes.
DESCRIPTION OF FINANCINGS
Prior to the Distribution, certain subsidiaries of the Company
will enter into a $300 million Credit Facility and issue $150 million of
Notes. Proceeds from the Term Facility and the net proceeds from sale of
the Notes, together with available cash, will be used by the Company to
make the Special Payments to Great Lakes and to pay approximately $12
million of expenses incurred by the Company in connection with the
Distribution and the Financings, and the Revolving Facility will be used
for working capital and general corporate purposes of the Company following
the Distribution. The Company has received a commitment letter (the
"Commitment Letter") from Goldman Sachs International (the "Lender")
pursuant to which the Lender has agreed, subject to the terms and
conditions set forth in the Commitment Letter, to provide (i) a senior
secured Term Facility of up to $280 million and (ii) a senior secured
Revolving Facility of up to $20 million to certain subsidiaries of the
Company (the "Borrowers"). The Company anticipates that the definitive
documentation for the Credit Facility will be executed prior to the
Distribution.
The obligations of the Borrowers under the Credit Facility will be
unconditionally guaranteed by the Company and certain subsidiaries of the
Company. The Credit Facility and the guarantees will be secured by
substantially all of the assets of the Borrowers and certain U.K.
subsidiaries of the Borrowers, including real property not subject to other
mortgages and personal property (including inventory), and also will be
secured by the capital stock of the Borrowers.
The Credit Facility will mature on December 31, 2001. The Term
Facility will amortize in quarterly installments commencing on June 30,
1998, subject to prepayment as described below.
The loans under the Credit Facility will bear interest at LIBOR
(as defined in the Credit Facility) plus 1.75%, subject to adjustment under
certain circumstances. The interest rate, under certain circumstances, will
adjust to 1.25% over LIBOR when the outstanding balance under the Credit
Facility has been reduced to $140 million. Following the occurrence and
during the continuance of an event of default under the Credit Facility,
the loans will bear interest at LIBOR plus 2.75%.
The Credit Facility will contain a number of covenants that, among
other things, will restrict the ability of the Company and its subsidiaries
to engage in amalgamations, mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates, amend or waive terms of the
agreements entered into in connection with the Distribution, dispose of
assets, create liens on assets, incur additional indebtedness, incur
guarantee obligations, make loans, enter into leases, make investments,
issue or acquire its shares, pay dividends or make capital distributions,
repay the Notes and otherwise restrict corporate activities. In addition,
the Credit Facility will require compliance with certain financial
covenants, including an interest coverage ratio, a fixed coverage ratio and
a leverage ratio.
The Credit Facility will contain customary events of default
including the failure to pay principal when due or any interest or other
amount that becomes due within one business day after the due date, a
default in the performance of certain covenants, any representation or
warranty being incorrect, invalidity of any guarantee or security document,
certain insolvency events, cross default and certain change of control
events.
Also, in connection with the Distribution, a subsidiary of the
Company intends to issue $150 million in aggregate principal amount of
Notes in a private placement pursuant to Rule 144A and Regulation S under
the Securities Act. The Notes will be general, unsecured obligations of the
Company, and will rank pari passu in right of payment with all existing and
future unsecured senior indebtedness of the Company and senior in right of
payment to all existing and future subordinated indebtedness of the
Company. The issuer of the Notes will be a wholly-owned subsidiary of the
Company, which will fully and unconditionally guarantee the Notes on a
senior basis. The Notes will be subject to limited payment blockage
provisions exercisable by the lenders under the Credit Facility in the
event of certain defaults under the Credit Facility.
The Indenture will contain certain covenants which 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 Indenture will also
contain customary events of default.
The Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after the fourth anniversary of
issuance at stated redemption prices plus accrued and unpaid interest and
Additional Interest (as defined in the Indenture), if any, thereon to the
date of repurchase. Prior to 2002, the Notes will be redeemable, in whole
or in part, at the option of the Company on any date, at a redemption price
equal to the greater of (i) 100% of the principal amount of the Notes to be
redeemed and (ii) the sum of the present values of (A) the redemption price
of such Note in 2002, and (B) the remaining scheduled payments of principal
and interest thereon to 2002 (exclusive of interest accrued to such
redemption date) discounted to such redemption date on a semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at the
Treasury Rate (as defined in the Indenture) plus 50 basis points, plus, in
either case, accrued and unpaid interest on the principal amount being
redeemed to such redemption date. The Company is required to redeem $37.5
million principal amount of the Notes in each of 2003, 2004 and 2005, in
each case at a redemption price equal to 100% of the principal amount
thereof, plus accrued interest to the redemption date, subject to the
Company's right to credit against any such redemption Notes acquired by it
otherwise than through such redemption. Such redemptions are calculated to
retire approximately 75% of the principal amount of the Notes prior to
maturity.
PRO FORMA CAPITALIZATION
(DOLLARS IN MILLIONS)
(UNAUDITED)
The following table sets forth the unaudited pro forma
capitalization of the Company at December 31, 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 December 31, 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 December 31, 1997
-----------------------
Pro Forma
Historical Adjustments Pro Forma
Total debt
<S> <C> <C> <C>
Credit Facility (a)............. - $280.0 (b) $280.0
Senior Notes.................... - 150.0 (b) 150.0
------- ------- -------
Total debt.................... - 430.0 (b) 430.0
Equity
Great Lakes investment.......... 652.8 (444.9) (c) -
69.7 (d)
(277.6) (e)
Common stock..................... 0.1 (e) 0.1
Additional paid-in capital....... 277.5 (e) 277.5
------ -----
Total equity..................... 652.8 (375.2) 277.6
Total capitalization............. $652.8 $54.8 $707.6
====== ===== ======
</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 Revolving Facility. In
addition, management estimates that between January 1, 1998 and
the Distribution Date, the Company will have generated
approximately $ million of cash, $22.8 million of which will be
utilized for the Special Dividend, with the remaining $__________
million available to the Company.
(b) Reflects an estimated $430 million of debt the Company expects to
incur on or before the Distribution Date. Approximately $116.8
million of the $430 million to be borrowed will be used to repay
Great Lakes for amounts borrowed to complete the acquisition of
Chevron's 10.65% interest in subsidiaries of the Company. An
additional $12 million is expected to be used to pay transaction
fees associated with the Distribution and the Financings. The
balance of the borrowing, together with $29.7 million of available
cash, will be used to fund $328.1 million of the Special Dividend
to Great Lakes. The remaining $22.8 million of the $350.9 million
Special Dividend will be funded out of cash generated by the
Company between January 1, 1998 and the Distribution Date.
(c) Payment to Great Lakes, consisting of $116.8 million for the
repayment of a loan used to acquire Chevron's 10.65% interest in
subsidiaries of the Company and $328.1 million to partially fund
the Special Dividend.
(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, 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 Statement of Income for
the year ended December 31, 1997 gives effect to the Distribution as if it
had occurred as of January 1, 1997 and the Unaudited Pro Forma Combined
Balance Sheet gives effect to the Distribution as if it had occurred as of
December 31, 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.
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
----------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO
FORMA
<S> <C> <C> <C>
Net sales................................... $ 539.1 $ $ 539.1
Cost of goods sold.......................... 274.4 274.4
----- -----
Gross profit................................ 264.7 264.7
Operating expenses:
Selling, general and administrative......... 38.6 3.0 (a) 41.6
Research and development.................... 3.8 3.8
---- ------ ----
42.4 3.0 45.4
Amortization of intangible assets........... 27.6 8.1 (c) 37.2
1.5 (d)
----- --------- -----
Operating income............................ 194.7 (12.6) 182.1
Interest expense............................ 2.2 31.9 (b) 34.1
Other expenses.............................. 5.6 5.6
Interest income............................. (3.9) 3.8 (e) (0.1)
Other income................................ (7.9)
------ -------- -----
Income before income taxes and minority
interest.................................... 198.7 (48.3) 150.4
Minority interest........................... 24.3 (24.3)(c) -
----- ------ -----
Income before income taxes.................. 174.4 (24.0) 150.4
Income taxes................................ 56.7 (7.8)(f) 48.9
----- ------- -----
Net income.................................. $117.7 $(16.2) $101.5
====== ======= ------
Net income per share (g).................... $ 6.90
=======
</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 $280 million
outstanding under the Credit Facility and the $150 million of
Notes. The interest rates assumed were 8.6% and 9.5% 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. In determining the
pro forma interest expense, the Company has assumed a $112 million
repayment of the Credit Facility.
(c) Represents the following effects of the Company's purchase of
Chevron's interest in subsidiaries of the Company: (i)
amortization of $81.1 million over 10 years and (ii) elimination
of Chevron's minority interest in the earnings of such
subsidiaries.
(d) Represents the additional amortization of the estimated $12
million transaction fees relating to the Distribution and the
Financings, amortized over eight years.
(e) Represents the estimated reduction in interest income 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.
<TABLE>
<CAPTION>
PRO FORMA BALANCE SHEET
(AS OF DECEMBER 31, 1997)
(DOLLARS IN MILLIONS)
(UNAUDITED)
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS:
Current assets
<S> <C> <C> <C>
Cash and cash items......................... $29.7 $ 430.0 (a) $ -
(12.0)(b)
(444.9)(c)
(2.8)(d)
Accounts receivable......................... 169.8 169.8
Inventories................................. 78.8 78.8
Prepaid expenses............................ 4.4 4.4
-------- -------- -------
Total current assets........................ 282.7 (29.7) 253.0
Property, plant and equipment.................. 106.0 106.0
Goodwill and other intangible assets........... 379.3 12.0(b) 394.1
2.8(d)
Other assets................................... 64.9 64.9
---- -------- -------
Total assets................................... $ 832.9 $ (14.9) $ 818.0
======= ======== =======
LIABILITIES AND EQUITY:
Current liabilities
Accounts payable............................ 40.0 40.0
Accrued expenses............................ 9.0 9.0
Accrued income taxes........................ 53.8 (56.0) (e) (2.2)
------- ------ -----
Total current liabilities................... 102.8 (56.0) 46.8
Other liabilities.............................. 57.2 57.2
Deferred income taxes.......................... 20.1 (13.7)(e) 6.4
Long-term debt
Credit facility.............................. 280.0(a) 280.0
Notes........................................ 150.0(a) 150.0
----- -----
Total debt............................... 430.0(a) 430.0
Equity:
Great Lakes investment..................... 652.8 (444.9) (c)
69.7 (e)
(277.6) (f)
Common stock............................... 0.1 (f) 0.1
Additional paid-in capital................. 277.5 (f) 277.5
----- ------- -----
Total equity............................... 652.8 (375.2) 277.6
----- ------- -----
Total liabilities and equity............... $ 832.9 $ (14.9) $ 818.0
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
NOTES TO PRO FORMA BALANCE SHEET
(a) Reflects an estimated $430 million of debt the Company expects to
incur on or before the Distribution Date. Approximately $116.8
million of the $430 million to be borrowed will be used to repay
Great Lakes for amounts borrowed to complete the acquisition of
Chevron's 10.65% minority interest in subsidiaries of the Company.
An additional $12 million is expected to be used to pay
transaction fees associated with the Distribution and the
Financings. The balance of the borrowing, together with $29.7
million of available cash, will be used to fund $328.1 million of
the Special Dividend. The remaining $22.8 million of the $350.9
million Special Dividend will be funded out of cash generated by
the Company between January 1, 1998 and the Distribution Date.
(b) Estimated transaction fees of $12 million associated with the
Financings. Transaction fees will be amortized over the term of
the borrowings, eight years.
(c) Payment to Great Lakes, consisting of $116.8 million for the
repayment of a loan used to acquire Chevron's interest in
subsidiaries of the Company and $328.1 million to partially
fund the Special Dividend.
(d) Reflects the cost of interest rate swaps arranged to fix a portion
of the interest rate on the borrowing described in (a) above.
(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 COMBINED 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 four year period ended December 31, 1997 have been
derived from the historical financial statements audited by Ernst & Young
L.L.P., independent auditors. The selected historical financial data for
the year 1993 has 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 1993.
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 years presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales...................................... $539.1 $597.4 $628.3 $603.1 $569.9
Gross profit................................... 264.7 298.6 321.3 307.1 309.4
Selling, general and administrative
expenses..................................... 38.6 40.2 42.1 37.5 38.1
Research and development....................... 3.8 5.6 5.6 6.7 9.6
Amortization of intangible assets.............. 27.6 26.7 19.0 16.7 15.0
Operating income............................... 194.7 226.1 254.6 246.2 246.7
Income before income taxes and minority
interest..................................... 198.7 221.7 249.1 247.2 235.0
Net income..................................... 117.7 128.3 145.1 142.4 163.9
BALANCE SHEET DATA (AT END OF YEAR):
Total working capital.......................... $179.9 $216.1 $175.8 $190.8 $154.5
Property, plant and equipment.................. 106.0 113.4 107.3 84.0 67.1
Total assets................................... 832.9 841.0 798.4 732.6 643.3
Total liabilities.............................. 180.1 256.4 267.6 244.2 226.7
Total equity................................... 652.8 584.6 530.8 488.4 416.6
</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 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 166 employees as of December 31, 1997 and will result in a
further reduction of 59 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 525 people resulting in
annual payroll savings of approximately $25 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>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Cost of goods sold................................... 50.9 50.0 48.9
---- ---- -----
Gross profit......................................... 49.1 50.0 51.1
Operating expenses
Selling, general and administrative 7.2 6.7 6.7
expenses........................................ 0.7 1.0 0.9
--- --- ---
Research and development..........................
Total operating expenses............................. 7.9 7.7 7.6
Amortization of intangible assets.................... 5.1 4.5 3.0
Operating income..................................... 36.1 37.8 40.5
Interest and other expenses.......................... 1.4 1.5 2.3
Other income........................................ (2.2) (0.8) (1.5)
----- ----- -----
Income before income taxes and minority 36.9 37.1 39.7
interests............................................
Minority Interests................................... 4.5 4.9 5.2
--- ---
Income before income taxes........................... 32.4 32.2 34.5
Income taxes......................................... 10.6 10.7 11.4
---- ---- ----
Net income........................................... 21.8 21.5 23.1
==== ==== ====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales decreased $58.3 million (or 10%) in 1997 to $539.1
million from $597.4 million in 1996. Net sales by business are set forth in
the following table ($ in millions):
<TABLE>
<CAPTION>
PERCENTAGE
1997 1996 INCREASE (DECREASE)
---- ---- ------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C> <C>
TEL.............................. 442.0 82 505.1 85 (12)
Petroleum Specialities........... 62.6 12 70.9 12 (12)
Performance Chemicals............ 34.5 6 21.4 3 61
---- - ---- -- ---
Total......................... 539.1 100 597.4 100 (10)
===== === ===== === ====
</TABLE>
This total decrease was primarily attributable to a decline in
sales volumes of $67.9 million, which was partly offset by a price increase
of $8.7 million and foreign exchange gains of $0.9 million. In 1997 the
retail volume of TEL sold was 55.8 thousand metric tons as compared to 63.8
thousand metric tons in 1996, a decline of approximately 12% which was
slightly improved from the 13% annual volume decline experienced in 1996.
Reduced retail sales in Western Europe, the Middle East and Australia were
partly offset by increases in Eastern Europe and Central America, but the
Company believes it maintained its share of the worldwide retail TEL market
during this period. Retail sales prices of TEL increased by approximately
2% in 1997 as compared to 1996. 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 difference 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
decreased by approximately 20% in 1997 as compared to 1996, declining from
30.2 thousand metric tons in 1996 to 24.2 thousand metric tons in 1997.
This higher than normal rate of decline mainly resulting from a Mexican
phase out of leaded gasoline, which market had been supplied by E.I. du
Pont de Nemours & Company ("DuPont") with TEL purchased from the Company.
The ratio between the Company's retail TEL sales and wholesale TEL sales
was 70/30 in 1997 as compared to 68/32 in 1996. Net sales of Petroleum
Specialities declined 12% in 1997 as compared to 1996 because of the loss
of a major customer, while net sales of Performance Chemicals increased 61%
in 1997 because of increased demand for Octaquest(R), a biodegradable
chelating agent used in laundry products.
Gross profit decreased $33.9 million (or 11%) in 1997 to $264.7
million from $298.6 million in 1996 because lower TEL volumes and adverse
currency effects offset selling price gains and cost improvements. As a
percentage of net sales, gross profit decreased to 49.1% in 1997 as
compared to 50% in 1996. This decrease reflects TEL being a lower
percentage of total sales in 1997.
Operating expenses decreased $3.4 million (or 7%) in 1997 to $42.4
million from $45.8 million in 1996 primarily as a result of cost reduction
programs, including a decrease in research and development expenses of $1.8
million, net of unfavorable currency translations. As a percentage of net
sales, operating expense increased slightly in 1997 to 7.9% as compared to
7.7% in 1996.
Other income increased $6.7 million to $7.9 million in 1997 from
$1.2 million in 1996 mainly due to foreign currency gains of $6.8 million.
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 (8)
Petroleum Specialities............. 70.9 12 65.0 10 9
Performance Chemicals.............. 21.4 3 16.2 3 32
---- - ---- - --
Total........................... 597.4 100 628.3 100 (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 average 8% to 10% decline experienced over
the previous four years. 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 32% 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 in 1996 to 50% as compared to 51.1% 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%) 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 in the aggregate 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.
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 $167.5 million in 1997, $127.8 million in 1996 and $175.8
million in 1995. The $39.7 million increase in 1997 compared to 1996 was
primarily attributable to reduced working capital requirements, offset in
part by lower net income and increased spending on plant closure costs. The
$48.0 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.
Accounts receivable at December 31, 1997 decreased $26.6 million
to $169.8 million from $196.4 million at December 31, 1996. This reduction
was attributable to lower sales in 1997 compared to 1996 and a weaker pound
sterling vis-a-vis the U.S. dollar. Days sales outstanding were 109 at the
end of 1997, a slight increase from 107 days in 1996. 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 $7.5
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 days sales outstanding reflected the
greater number of large bulk customers that received extended payment
terms.
Inventories at December 31, 1997 were $78.8 million, a decrease of
$5.2 million from December 31, 1996. Approximately $3.4 million of this
decrease was attributable to currency translation, with the balance
attributable to lower lead costs offset by quantity increases. Inventory
turnover for 1997 was 3.5 times, which was consistent with 1996 at 3.6
times. Inventories as at December 31, 1996 were $84 million, an increase of
$21.9 million from December 31, 1995. Approximately $6.5 million of this
increase were 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 build-up of raw materials.
Investing activities include capital expenditures and
acquisitions. Capital expenditures decreased $2.8 million to $17.8 million
in 1997 as compared to $20.6 million in 1996. Capital spending in 1997 was
primarily for capacity maintenance, whereas in 1996 and 1995 capital
expenditures also included the construction of facilities for the
production of Octaquest(R). Capital spending for environmental projects in
1997, 1996 and 1995 was $0.6 million, $1.0 million and $0.8 million
respectively. Capital expenditures for 1998 and 1999 are expected to be
approximately $20 million in each year, including approximately $8.0
million, in the aggregate, for environmental compliance. In 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 remainder of investment spending for 1997 and all of
the spending 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.
Total current liabilities have varied with the volume of business.
There is a reduction of approximately $8.0 million in accrued expenses from
1996 to 1997 following the determination of the profit participation
payments in 1997 as described in Note 4 of the Combined Financial
Statements.
Other noncurrent liabilities in 1997 represented a reserve of
$57.2 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
$35 million was spent in 1997, as compared to $20 million in 1996. The
closures, coupled with staff reductions in the U.K., were primarily
responsible for the increased spending levels in 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 $430 million of indebtedness. $116.8 million of the
borrowings will be used to repay the loan from Great Lakes utilized to
acquire the Chevron interest and approximately $12 million will be used to
pay fees and expenses related to the Distribution and the Financings. The
remainder of the borrowing, together with $29.7 million of available cash
at December 31, 1997 and additional cash generated by the Company between
January 1, 1998 and the date of the Distribution, will be distributed to
Great Lakes in the form of the Special Payments.
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.
DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
Between 50% and 60% of the Company's sales are in U.S. dollars.
Foreign currency sales, primarily in U.K. pounds sterling, offset most of
the Company's costs, which are also in U.K. pounds sterling. To the extent
required by the Company, dollars are sold forward to cover local currency
needs. The instruments utilized by the Company in its hedging activities
are considered risk management tools, and are not used for trading or
speculative purposes. The Company diversifies the counterparties used and
monitors the concentration of risk to limit its counterparty exposure.
Historically, management of foreign currency exposures has been
coordinated by Great Lakes. The Company forecasts foreign currency
denominated cash flow for 12-month periods and aggregates these flows by
currency to determine the amount of exposure. Hedging decisions are made
based on the amount of exposure and the near-term outlook for each
currency. Hedges are set to mature coincident with the estimated timing of
the underlying transactions. The Company does not hedge foreign currency
net asset positions currently. Considering the Company's operating profile,
a uniform 10% change in the value of the dollar from December 31, 1997
would result in approximately a $6 million change in annual net income.
This calculation assumes that each exchange rate would change in the same
direction relative to the U.S. dollar, and does not factor in any potential
changes in sales levels or local currency prices which may result from
changes in exchange rates.
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. In addition, the Company will have access to the $20 million
Revolving Facility.
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 689 employees between January
1, 1996 and December 31, 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 $17.8 million in 1997, $20.6 million in 1996 and
$31.5 million in 1995.
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.
Management has considered the current economic conditions in the
Asia-Pacific region and does not believe that they will have a material
impact on the Company or its operations.
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, 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 $0.6 million in
1997, $0.1 million in 1996 and a negligible amount 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 compliance with Environmental Law, and the Company
expects that it will be required to continue to incur such costs and
expenses in the future. The Company made environmental capital expenditures
of $0.6 million in 1997, $1.0 million in 1996 and $0.8 million in 1995 and
other expenditures of approximately $9.8 million in 1997, approximately
$9.7 million in 1996 and approximately $8.2 million in 1995. The Company
estimates that other expenses related to these matters will amount to
approximately $10 million in 1998 and approximately $10 million in 1999 and
environmental capital expenditures are estimated to be 0 in 1998 and $7.6
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 Environment 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 involves 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 will involve 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 estimates that the Decontamination and Decommissioning
Projects (both at the closed sites in France, Italy and Germany and at the
Ellesmere Port Facility) will cost approximately $52 million. 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 $12.4 million in 1997, $2.8 million in
1996 and $2.8 million in 1995. 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 1997, $0.9 million in 1996
and $1.8 million in 1995. 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 $21.8 million in 1997, $16
million in 1996 and $0.8 million in 1995. The Company estimates further
costs of this nature of approximately $7.6 million in 1998 and $2.3 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 ($52 million),
site management during the final closure phase ($5 million) and personnel
severance ($50 million) plus a $20 million capital expenditure relating to
compliance matters. As of December 31, 1997, the Company had accrued $57.2
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.
SINGLE EUROPEAN CURRENCY
In 1999, certain European countries begin the transition to the
Euro. The transition to the Euro will have both internal recordkeeping and
external commercial aspects, neither of which are expected to have a
material effect on the Company's business or results of operations.
BUSINESS
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 82%
of the Company's 1997 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 1997 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 6% of the Company's 1997 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. The
Company is required by the terms of the Financings to utilize approximately
$175 million of the Company's cash flow over the next two years to repay
debt. Under the terms of the Financings, the Company is permitted, subject
to certain conditions, to use up to $15 million per year for dividends
and/or share repurchases. The balance of the Company's cash flow will be
used for general corporate purposes.
In 1997, the Company had sales of $539.1 million and an operating
income of $194.7 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
1,419 employees worldwide as of December 31, 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 - Executive Officers") which has
effectively implemented a number of cost-reduction measures focused on
maintaining profit margins of TEL, including (i) a 29% reduction of the
work force in the U.K. resulting in estimated annual payroll savings of $25
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 82% (or $442 million) of the Company's 1997 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 gPb/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>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- --------------
Source: Chem Systems, Ltd.
</TABLE>
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, Spain and Portugal.
The following chart shows the decline of leaded gasoline sales as
a percentage of total automobile gasoline sales by region from 1990 to
1996:
<TABLE>
<CAPTION>
Estimate of Leaded Gasoline
Sales as Percentage of Total Gasoline Sales
-------------------------------------------
1990 1996
---- ----
<S> <C> <C>
Europe................................... 80 41
Latin America............................ 71 35
Asia..................................... 53 30
Africa................................... 100 93
Middle East.............................. 100 94
- --------------
Source: Chem Systems, Ltd.
</TABLE>
The decline in TEL volume since 1990 has averaged approximately
12% 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 1997, 70% of Octel's sales volume was directed to retail refinery
customers, with the remaining 30% 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. The Company, Ethyl and Great Lakes
recently reached an agreement in principle with FTC staff 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 which agreement was
provisionally approved by the FTC on March 30, 1998, subject to the FTC's
discretion to review and modify the agreement following a sixty (60) day
public comment period. See "Risk Factors - FTC Proceeding" and "Legal
Proceedings."
PETROLEUM SPECIALTIES BUSINESS
The Company's Petroleum Specialties business, with revenues in
1997 of $62.6 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 cetane
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 1997 sales of
$34.5 million, is comprised of the following two distinct product lines:
Industrial and Intermediate Chemicals, which accounted for
approximately 35% of total Performance Chemical sales in 1997, consists of
a small range of industrial chemicals comprising metallic sodium and
chlorine derivatives (caustic liquor, chlorine, sodium hypochlorite). These
products are either precursors or by-products of the TEL manufacture and
are expected to be phased down consistent with the phase down of TEL. The
Company's strategy with respect to these industrial chemicals is to
optimize profits consistent with maximizing overall corporate financial
performance at its Ellesmere Port facility.
Specialty Chemicals, which accounted for approximately 65% of
total sales of Performance Chemicals in 1997, is currently comprised of
Octaquest(R). The Company, in conjunction with Proctor & Gamble, its
primary customer, has developed and patented a manufacturing process for
Octaquest(R), a biodegradable chelating agent developed for use in laundry
products. The Company believes that Octaquest(R) has potential for wider
application in pulp and paper, cosmetics, personal care, photographic and
other industries. The Company is seeking to expand its Specialty 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, exploitation of current products into new
markets, licensing agreements, custom synthesis of specialty products and
acquisitions of products and/or businesses.
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 $3.8 million,
$5.6 million and $5.6 million in 1997, 1996 and 1995, 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 all applicable Environmental Laws,
and does not anticipate that the continued costs of compliance with
Environmental Laws will be material. Nevertheless, there can be no
assurance that changes in existing Environmental Laws, or the discovery of
additional liabilities associated with the Company's current or former
operations will not have a material adverse effect on the Company's
business, results of operations or financial condition. 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 December 31, 1997 consisted of 1,419
employees, of which 1,279 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 525 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
The Ellesmere Port facility, which includes 94 acres of land,
houses the administrative headquarters and offices for AOC, Research and
Development laboratories and all the Company's manufacturing facilities.
These manufacturing facilities consist of a chlorine plant (capacity-40,000
metric tons per annum), a sodium plant (capacity-24,000 metric tons per
annum), an ethyl chloride plant (capacity-44,000 metric tons, per annum),
an EDDS plant for the manufacture of Octaquest(R) (capacity-2,200 metric
tons per annum), a detergents plant for the Petroleum Specialties Business
(capacity-5,000 metric tons per annum) and lead alkyls plants for the
manufacture of TEL (capacity-90,000 metric tons per annum).
- ----------
* 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, which agreement
was provisionally approved by the FTC on March 30, 1998, subject to the
FTC's discretion to review and modify the agreement following a sixty (60)
day public comment period. 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 finally 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" and "Risk Factors - FTC Investigation."
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
DIRECTORS
Currently, the Board of Directors of the Company is comprised of
Dennis J. Kerrison, Martin M. Hale and Thomas J. Fulton. As of the
Distribution Date, the Board of Directors of the Company will consist of
the seven persons listed below, 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. Each of the persons
designated that does not currently serve on the Board has agreed to serve
as a director of the Company effective as of the Distribution Date.
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
- ---- --- ---------------------------------
Dr. Robert E. Bew 61 2001
Dennis J. Kerrison 53 2001
Martin M. Hale 57 2001
Thomas M. Fulton 64 1999
James Puckridge 62 2000
Dr. Benito Fiore 60 2000
Charles M. Hale 62 1999
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:
DR. ROBERT E. BEW will serve as Non-Executive Chairman of Octel
Corp. He is currently Chairman of both EPICC Ltd., an organization
specializing in increasing competitiveness in process industries and The
Teeside Chemical Initiative (TCI) Ltd. which focuses on building and
improving investment and competitiveness of the Chemical sector in the
region. He spent 35 years with ICI most recently as CEO of ICI's Chemicals
& Polymer division in Teeside U.K. Previously he served as head of
Corporate Planning and between 1995 and 1997 was Chairman of Phillips
Imperial Petroleum Ltd., a refinery JV between ICI and Phillips.
DENNIS J. KERRISON will serve as President and Chief Executive
Officer of Octel Corp. and Managing Director, AOC. From May 1996 to the
Distribution Date, Mr. Kerrison was the Managing Director of AOC and a
Group Vice President and Officer of Great Lakes. Between 1992 and 1996 he
was a Director and Officer of Hickson International plc, latterly as Chief
Executive Officer. Prior to this he worked in senior management roles for
Specialty Chemical Companies, in Europe and the United States notably,
Rhone Poulenc, Rohm & Haas and RTZ Chemicals.
MARTIN M. HALE has been the 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 since 1983. 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 has
been Chairman of the Board of Directors of Great Lakes since 1995 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.
JAMES PUCKRIDGE is Chairman of Elf Atochem UK Ltd., a position he
assumed in 1990. Prior to that he was Managing Director of the same
organization. He is also Chairman of Ato Findlay UK and Non-Executive
Director of Thomas Swan, a UK specialty chemical company. He serves as a
Member of Council for both the British Plastic Federation and the Chemical
Industry Association where he is Chairman of the General Purpose and
Finance Committee.
DR. BENITO FIORE is a Director of A.T. Kearney, the consultancy
company specializing in the chemical industry. Between 1990 and 1995 he was
Chief Executive Officer of Enichem UK Ltd. Prior to this he held a number
of directorships in the Montedison Group working in Denmark, Canada, Italy
and the USA. He is a Member of Council of the Italian Chamber of Commerce
and a member of the Accademia Italian della Cucina.
CHARLES M. HALE is Chairman of Donaldson, Lufkin & Jenrette
International, the London based subsidiary of Donaldson, Lufkin & Jenrette
Inc., a major New York based investment bank. Prior to 1984, he was a
general partner of Lehman Brothers Kuhn Leob and Managing Director of A.G.
Becker International. Mr. Hale is a graduate of Stanford University and
Harvard Business School.
Following the Distribution, the Company may expand the Board of
Directors to include additional independent directors. The identities of
such additional independent directors have not yet been determined and will
not be determined prior to 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 Thomas M. Fulton
and Charles M. Hale; the Class II directors will be Dr. Benito Fiore and
James Puckridge; and the Class III directors will be Dr. Robert E. Bew,
Dennis Kerrison and Martin M. Hale. 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, non-employee directors will receive an
annual fee of $23,000. The Chairman of the Board, who is not employed by
the Company, will receive an annual fee of $110,500. Committee chairman,
not employed by the Company, will receive an additional fee of $5,000 per
year. Non-employee directors will be paid $1,650 for attendance at each
meeting of the Board of Directors and $825 for attendance at each Committee
meeting. A percentage of the annual fee may be paid in the form of a stock
grant, as established by the Compensation Committee.
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 Managing Director, 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, Lead Alkyls, AOC
Geoff J. Hignett......... 47 Commercial Directors, Specialty Chemicals,
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
November 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, Lead Alkyls of
AOC. From February 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 Commercial Director, Specialty
Chemicals 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 1997 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
--------------------------
Long-Term Compensation
----------------------
Annual 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 $287,966 $129,665 - 0,000
Steve W. Williams 152,212 44,848 - 2,000
Geoff J. Hignett 137,264 31,598 46,897(4) 1,200
Graham M. Leathes 130,106 25,299 - 1,000
Robert A. Lee 114,090 26,534 - 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) Bonus paid in 1998 for services rendered in 1997.
(3) Amounts paid do not exceed $50,000 or 10% of salary plus bonus for
any of the Named Executive Officers, except Mr. Hignett.
(4) Payment of starting bonus.
STOCK OPTIONS TABLE
The following table shows for the Named Executive Officers the
specified information with respect to grants of options to purchase Great
Lakes Common Stock ("Great Lakes Options") during 1997.
<TABLE>
<CAPTION>
Option Grants In 1997*
Individual Potential Realizable Value
Grants % of at
Total Exercise Assumed Annual Rates of
Options or Stock Price Appreciation
Options Granted to Base for Option Term(3)(4)
Granted Employees in Price Expiration -------------------------
Name (#)(1) Fiscal Year ($/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 $0.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table shows for each Named Executive Officer the
specified information with respect to exercises of Great Lakes Options
during 1997 and the value of unexercised options at the end of 1997.
<TABLE>
<CAPTION>
Aggregated Great Lakes Option Exercises During 1997
And 1997 Fiscal Year End Option Values
---------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Options in-The-Money at Fiscal
Share Value Year-end Year-end ($)
Acquired on Realized --------- --------
Name Exercise ($) 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 - - 1,370 1,760 - $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 $616,200, $572,600,
$440,171 and $594,400, respectively, pursuant to such agreements.
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.
<TABLE>
<CAPTION>
Final
Earnings 5 years 10 years 15 years 20 years 25 years
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$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
</TABLE>
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"), which will
provide for the grant of various types of equity-based compensation 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 promote the success of the Company's business by
more closely aligning the interests of management and the Company's
stockholders through the provision of equity-based incentives to those
individuals who are or will be responsible for such success.
The total number of shares of Common Stock that may be issued or
awarded under the Stock Plan may not exceed 1,175,000, subject to
adjustment as described below.
The Stock Plan provides for the granting of options, including
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Code and non-qualified stock options, and the granting of other stock-based
awards (collectively, "Awards"). All Awards will be evidenced by an award
agreement setting forth the terms and conditions applicable thereto.
Awards may generally be granted to individuals who are (a)
executive officers, (b) other key employees (including those who are also
directors) or (c) non-employee directors, in each case of the Company or
any of its subsidiaries.
The Stock Plan will be administered by the Board of Directors of
the Company, which may act through its Compensation Committee (such Board
of Directors or committee is referred to herein as the "Plan
Administrator"). Eligibility criteria, the number of participants, and the
number of shares subject to Awards and all other terms and conditions of
Awards will be determined by the Plan Administrator.
The option price payable for the shares of Common Stock subject to
each ISO or non-qualified stock option shall not be less than the fair
market value of the Common Stock on the date such option is granted.
The following table sets forth the estimated number of restricted
stock units to be granted to certain employees under the Stock Plan within
six months of the Distribution:
Name Number of Restricted Stock Units
Dennis J. Kerrison........................ 115,071
Alan G. Jarvis............................ 50,873
Steve W. Williams......................... 44,090
Geoff J. Hignett.......................... 40,699
Robert A. Lee............................. 42,394
Alan Hanslip.............................. 32,559
Richard T. Shone.......................... 30,396
Graham M. Leathes......................... 30,396
All executive officers as a group
(-persons).............................. 386,478
All other employees....................... 46,851
The restricted stock grant described above has been estimated
based on a multiple of the proposed salaries to be paid to such persons
following the Distribution Date, which salaries will be reviewed and
approved by the Board of Directors of Octel at the time of the
Distribution. The actual number of restricted stock units granted will
change depending upon the price of Octel Common Stock at the time of such
grant.
The Stock Plan will be filed as an exhibit to the Registration
Statement of which this Information Statement is a part.
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:
<TABLE>
<CAPTION>
Percent of
Name and Address Common Stock
of Beneficial Owner Number of Shares Outstanding
------------------- ---------------- ------------
<S> <C> <C>
T. Rowe Price Associates, Inc. (1)
100 East Pratt Street
Baltimore, Maryland 21202........................ 1,675,646 11.2%
State Farm Mutual Automobile Insurance
Company and Related Entities (2)
One State Farm Plaza
Bloomington, Illinois 61710-0001................. 1,135,900 7.6%
</TABLE>
(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 50
million, consisting of 10 million shares of preferred stock, par value $.01
per share ("Preferred Stock") and 40 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 First Chicago Trust Company of
New York (the "Rights Agreement").
The Rights remain non-exercisable, nontransferable and
non-separable from Octel Common Stock until the earlier of (i) 10 days
after the first date (such date being the "Stock Acquisition Date") of
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, 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 or (iii)
10 business days after the Board of Directors determines that a person is
an Adverse Person (to make such a determination the Board of Directors must
determine that a substantial shareholder intends to cause the Company to
repurchase its shares or to take action intended to provide such person
with short-term financial gain inconsistent with the best long-term
interest of the Company, or ownership of shares by such person is
reasonable likely to cause a material adverse impact on the Company) (the
earliest of such dates being referred as the "Distribution Date").
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. After the Declaration Date, in the event that a person becomes
an Acquiring Person (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") or an Adverse Person, each
holder of a Right will thereafter have the right to receive (in lieu of
Series A Junior Participating Preferred Stock), 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. 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 a Qualifying Offer and meets
certain other requirements), or (ii) a person consolidates with, or mergers
into, the Company, and although the Company is the continuing or surviving
corporation, all or part of the outstanding shares of Common Stock are
changed into or exchanged for stock or securities of such other person, or
cash or any other property, or (iii) more than 50% of the Company's assets
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 15 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; provided, however, that the Rights may not be
redeemed following a determination that any person is an Adverse Person.
Moreover, the Board of Directors may, at its option, at any time after any
person becomes an Acquiring Person or is determined to be an Adverse Person
exchange all or part of the then outstanding Rights for shares of Common
Stock at an exchange ratio of one share of Common Stock per Right;
provided, however, that the Rights may not be so exchanged a any time after
any person becomes a beneficial owner of 50% or more of the Company's
Common Stock then outstanding. In the event any person becomes an Acquiring
Person (except pursuant to a Qualifying Offer) or an Adverse Person, Rights
beneficially owned by such person shall become null and void.
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. Quarterly
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. If at any time
dividends on any Series A Junior Participating Preferred Stock shall be in
arrears for six quarters or more, all holders of Preferred Stock (including
holders of the Series A Junior Participating Preferred Stock) voting as a
class, shall have the right to elect two directors until all such accrued
and unpaid dividends have been declared and paid. Upon liquidation,
dissolution or winding up of the Company, no distribution may be made to
holders of the Common Stock unless, prior thereto, holders of the Series A
Junior Participating Preferred Stock shall have received an amount equal to
1,000 times the Purchase Price, plus accrued and unpaid dividends to the
date of such payment. 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 share 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, 1997 and 1996
and for each of the three years in the period ended December 31, 1997.
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. With respect to each
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 each of the
three years in the period ended December 31, 1997.....F-3
Combined Balance Sheets as of December 31, 1997 and 1996......F-4
Combined Statements of Cash Flows for each of the
three years in the period ended December 31, 1997.....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, 1997 and 1996, and the related
combined statements of income and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the combined
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
April 4, 1998
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales................................... $539.1 $597.4 $628.3
Cost of goods sold.......................... 274.4 298.8 307.0
------ ------- ------
Gross profit........................... 264.7 298.6 321.3
Operating expenses:
Selling, general and administrative.... 38.6 40.2 42.1
Research and development............... 3.8 5.6 5.6
------ ------ ------
Total.................................. 42.4 45.8 47.7
Amortization of intangible assets........... 27.6 26.7 19.0
Operating income............................ 194.7 226.1 254.6
Interest expense............................ 2.2 1.6 10.3
Other expenses.............................. 5.6 7.5 4.4
Interest income............................. (3.9) (3.5) (5.1)
Other income................................ (7.9) (1.2) (4.1)
----- ----- -----
Income before income taxes and minority
interest.................................... 198.7 221.7 249.1
Minority interest........................... 24.3 29.6 32.3
------ ------- -------
Income before income taxes.................. 174.4 192.1 216.8
Income taxes................................ 56.7 63.8 71.7
------ ------- -------
Net income.................................. $117.7 $128.3 $145.1
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
COMBINED BALANCE SHEETS
(IN MILLIONS)
AT DECEMBER 31,
1997 1996
---- ----
ASSETS
Current assets
Cash and cash equivalents................. $ 29.7 $ 54.9
Accounts receivable....................... 169.8 196.4
Inventories............................... 78.8 84.0
Prepaid expenses.......................... 4.4 4.3
--------- ---------
Total current assets........................ 282.7 339.6
Property, plant and equipment................ 106.0 113.4
Goodwill..................................... 379.3 319.0
Other assets................................. 64.9 69.0
--------- ----------
$832.9 $841.0
======= ========
LIABILITIES AND GREAT LAKES INVESTMENT
Current liabilities
Accounts payable.......................... $40.0 $37.6
Accrued expenses.......................... 9.0 20.5
Accrued income taxes...................... 53.8 65.4
------ -------
Total current liabilities.................... 102.8 123.5
Other liabilities............................ 57.2 90.3
Deferred income taxes........................ 20.1 7.5
Minority interest............................ -- 35.1
Great Lakes investment....................... 652.8 584.6
------- -------
$832.9 $841.0
====== ======
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income........................................... $ 117.7 $128.3 $145.1
Non-cash items included in net income:
Depreciation.................................... 19.2 16.2 13.7
Amortization.................................... 27.6 26.7 19.0
Deferred income taxes........................... 13.3 4.0 6.0
Other........................................... 0.5 1.3 (0.5)
Changes in operating assets and liabilities:
Accounts receivable............................. 26.6 9.2 (16.9)
Inventories..................................... 1.6 (12.4) (5.1)
Accounts payable and accrued expenses........... (2.6) (19.0) 19.3
Income taxes and other current liabilities...... (11.6) (9.8) 3.0
Other non-current liabilities................... (24.8) (16.7) (7.8)
------ ------ -----
Net cash provided by operating activities............ 167.5 127.8 175.8
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................. (17.8) (20.6) (31.5)
Business combinations, net of cash acquired.......... (130.8) (17.0) (18.8)
Other................................................ 1.6 (14.9) (31.1)
--- ------ ------
Net cash used in investing activities................ (147.0) (52.5) (81.4)
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash paid to Great Lakes......................... (31.4) (103.0) (104.6)
Minority interest.................................... 3.3 7.1 4.8
------ ------- --------
Net cash used in financing activities................ (28.1) (95.9) (99.8)
Effect of exchange rate changes on cash.............. (17.6) 21.1 (6.8)
------ ------ ---------
Net change in cash and cash equivalents.............. (25.2) 0.5 (12.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 54.9 54.4 66.6
------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 29.7 $ 54.9 $ 54.4
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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.
Prior to the Distribution, the Company anticipates that certain of
its subsidiaries will enter into a $300 million senior secured credit
facility (the "Credit Facility") and issue $150 million of Senior Notes due
2006 (the "Notes"). The Credit Facility will consist of a $280 million
senior secured term loan and a $20 million senior secured revolving credit
facility. The Credit Facility will mature on December 31, 2001, with the
term loan amortizing in quarterly installments. The loans under the Credit
Facility will bear interest at LIBOR plus 1.75%, subject to adjustment
under certain circumstances. The Notes will mature in 2006. The Company is
required to redeem $37.5 million principal amount of Notes in each of 2003,
2004 and 2005. Both the Credit Facility and the Notes will be guaranteed by
the Company and will contain substantial restrictions on the Company's
operations.
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 Company's combined statements of income include all material
costs of doing business including costs related to Great Lakes services.
Charges for such services are based on a number of factors including time
and effort which Management believes to be
reasonable.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various derivative instruments including forward
contracts and options to manage certain foreign currency exposures. These
instruments are entered into under the Company's corporate risk management
policy to minimize exposure and are not for speculative trading purposes.
Management periodically reviews the effectiveness of the use of the
derivative instruments.
Derivatives used for hedging purposes must be designed as, and
effective as, a hedge of the identified risk exposure at the inception of
the contract. Accordingly, changes in the market value of the derivative
contract must be highly correlated with changes in the market value of the
underlying hedged item at inception of the hedge and over the life of the
hedge contract. Any derivative instrument designated but no longer
effective as a hedge would be reported at market value and the related
gains and losses would be recognized in earnings.
Derivatives that are designated as, and effective as, a hedge of
firm foreign currency commitments are accounted for using the deferral
method. Gains and losses from instruments that hedge firm commitments are
deferred and recognized as part of the economic basis of the transactions
underlying the commitments when the associated hedged transaction occurs.
Gains and losses from instruments that hedge foreign-currency-denominated
receivables, payables and debt instruments are reported in earnings and
offset the effects of foreign exchange gains and losses from the associated
hedged items.
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,
1997.
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.
<TABLE>
<CAPTION>
NOTE 3--SUPPLEMENTAL BALANCE SHEET INFORMATION
- ----------------------------------------------
1997 1996
---- ----
(Millions)
ACCOUNTS RECEIVABLE
<S> <C> <C>
Accounts receivable.................................................. $170.7 $197.3
Less allowances...................................................... 0.9 0.9
------- -------
$169.8 $196.4
====== ======
INVENTORIES
Finished goods....................................................... $ 35.7 $ 35.8
Work in progress..................................................... 10.2 11.3
Raw materials and supplies........................................... 32.9 36.9
------ ------
$ 78.8 $ 84.0
======= =======
PROPERTY, PLANT AND EQUIPMENT
Land................................................................. $ 2.8 $ 3.0
Buildings............................................................ 0.6 2.2
Equipment............................................................ 101.0 117.1
Construction in progress (estimated additional cost to complete
at December 31, 1997, $17.6)....................................... 18.4 12.8
------- -------
122.8 135.1
Less accumulated depreciation........................................ 16.8 21.7
------- -------
$106.0 $113.4
====== ======
The estimated useful lives for purposes of computing depreciation are:
buildings, 7-25 years; equipment, 5-14 years.
GOODWILL
Goodwill............................................................. $496.9 $411.8
Less accumulated amortization........................................ 117.6 92.8
-------- -------
$379.3 $319.0
====== ======
OTHER ASSETS
Prepaid pension cost................................................. $ 63.3 $ 67.5
Other................................................................ 1.6 1.5
-------- --------
$ 64.9 $ 69.0
======= =======
OTHER LIABILITIES
Provisions for estimated closure costs of TEL
manufacturing facilities........................................... $ 57.2 $ 90.3
======= =======
</TABLE>
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, 1997 were estimated to be
approximately $124 million.
NOTE 4--ACQUISITIONS
- --------------------
The Company's 100% ownership interest in Octel Associates and the
Associated Octel Company Limited ("AOC") was acquired in three
transactions. The Company acquired a 51.15% interest in 1989, a further
36.67% interest in 1992, with the balance acquired in 1997. 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 1997 amounted to $14 million. In 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. Total profit participation payments amount to approximately
$230 million since inception. 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 $81 million and this amount has been added to
goodwill and is to be amortized over a ten year period with effect from
January 1, 1998.
On October 31, 1997, the Company acquired certain fractional
interests in the Company's subsidiaries held by the Vendor Partners for a
nominal amount.
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. The unaudited
pro forma net income for 1997 and 1996, as if the Chevron acquisition had
occurred at the beginning of the respective year would have been $123.8
million and $137.9 million respectively. The pro forma results do not
represent the Company's actual operating results had the acquisition been
made at the beginning of the respective years, or the results which may be
expected in future.
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>
1997 1996 1995
---- ---- ----
INCOME (LOSS) BEFORE INCOME TAXES:
<S> <C> <C> <C>
Domestic.......................................... $ (1.2) $ 1.7 $ (0.6)
Foreign........................................... 175.6 190.4 217.4
----- ----- -----
$174.4 $192.1 $216.8
====== ====== ======
PROVISIONS FOR INCOME TAXES:
Current:
Federal........................................... $ 0.1 $ 0.1 $ --
Foreign........................................... 43.3 59.6 65.7
----- ---- ----
43.4 59.7 65.7
Deferred:
Domestic.......................................... -- 0.4 0.3
Foreign........................................... 13.3 3.7 5.7
----- -------- --------
13.3 4.1 6.0
----- -------- --------
$ 56.7 $ 63.8 $ 71.7
======= ======= =======
PROVISIONS (CREDITS) FOR DEFERRED INCOME TAXES:
Pension costs.................................. $ (3.7) $ 1.5 $ 2.0
Amortization of goodwill....................... 0.9 0.8 1.1
Plant closure costs............................ 12.1 1.2 3.2
Other.......................................... 4.0 0.6 (0.3)
------- -------- --------
$ 13.3 $ 4.1 $ 6.0
======== ======== =======
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................. (3.5) (2.9) (1.4)
Amortization of goodwill...................... 2.1 1.3 (0.3)
Other......................................... (1.1) (0.2) (0.2)
----- ----- -----
Effective income tax rate....................... 32.5% 33.2% 33.1%
==== ==== ====
</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.
1997 1996
---- ----
(Millions)
COMPONENTS OF DEFERRED TAX
ASSETS AND LIABILITIES:
Deferred tax assets - closure costs................... $17.7 $29.8
----- -----
Deferred tax liabilities:
Pension costs...................................... $18.6 $22.3
Amortization of goodwill........................... 4.1 3.2
Other.............................................. 15.1 11.8
------ ------
Total........................................... $37.8 $37.3
===== =====
Cash payments for income taxes were $62.0 million, $58.0 million
and $69.0 million in 1997, 1996 and 1995, respectively.
NOTE 6--GREAT LAKES INVESTMENT
- ------------------------------
Changes in Great Lakes Investment during each of the years ended
December 31 were as follows:
(Millions)
BALANCE AT DECEMBER 31, 1994......................................$ 488.4
Net income................................................... 145.1
Net amount paid to GLCC including exchange effect of $7.9.... (96.7)
Net change in cumulative translation......................... (6.0)
-------
BALANCE AT DECEMBER 31, 1995...................................... 530.8
Net income................................................... 128.3
Net amount paid to GLCC including exchange effect of $0.7.... (102.3)
Net change in cumulative translation......................... 27.8
------
BALANCE AT DECEMBER 31, 1996...................................... 584.6
Net income................................................... 117.7
Net amount paid to GLCC including exchange effect of $0.4.... (31.0)
Net change in cumulative translation......................... (18.5)
-------
BALANCE AT DECEMBER 31, 1997...................................... $652.8
======
The net amount of $31.0 million paid to GLCC in 1997 includes the
receipt of a short term loan from GLCC of $116.8 million used to fund the
acquisition of the Chevron interest described in Note 4: Acquisitions.
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>
1997 1996 1995
---- ---- ----
(Millions)
NET SALES TO UNAFFILIATED CUSTOMERS (BY ORIGIN):
<S> <C> <C> <C>
United States....................................... $ 32.1 $ 36.3 $ 33.9
United Kingdom...................................... 441.1 477.5 484.9
Rest of Europe...................................... 65.9 83.6 109.5
------ ------ ------
Total.......................................... $539.1 $597.4 $628.3
====== ====== ======
INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS:
United States....................................... $ 6.9 $ 7.3 $ 7.3
United Kingdom...................................... 71.1 49.8 53.9
Rest of Europe...................................... 37.6 54.9 72.2
------ ------ ------
Total.......................................... $115.6 $112.0 $133.4
====== ====== ======
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST:
United States....................................... $ (1.2) $ 1.7 $ (0.6)
United Kingdom...................................... 198.1 208.3 222.7
Rest of Europe...................................... 1.8 11.7 27.0
----- ------ ------
Total.......................................... $198.7 $221.7 $249.1
====== ====== ======
IDENTIFIABLE ASSETS AT YEAR-END:
United States....................................... $ 30.8 $ 34.8 $ 31.0
United Kingdom...................................... 741.2 717.3 663.0
Rest of Europe...................................... 60.9 88.9 104.4
------ ------ -----
Total.......................................... $832.9 $841.0 $798.4
====== ====== ======
</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
(the "Octel 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:
1997 1996 1995
---- ---- ----
(Millions)
Service cost $ 13.4 $ 12.0 $10.9
Interest cost on projected benefit 39.7 35.2 33.5
obligation (103.4) (60.6) (66.3)
Actual return on plan assets 50.8 14.1 23.6
---- ---- ----
Net amortization and deferral $ 0.5 $ 0.7 $ 1.7
===== ===== =====
Net pension cost
The funded status and prepaid pension cost for the U.K. pension
plan is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
1997 1996 1995
---- ---- ----
(Millions)
<S> <C> <C> <C>
Actuarial present value of accumulated plan benefits,
all vested.............................................. $455.8 $446.1 $368.9
Additional amounts related to projected salary increases 38.8 49.5 38.6
------ ------ ------
Total projected benefit obligation...................... 494.6 495.6 407.5
Plan assets at fair value............................... 708.2 644.2 525.5
------ ------ ------
Plan assets in excess of projected benefit obligation... 213.6 148.6 118.0
Unrecognized net gain................................... (151.3) (83.2) (69.1)
Unrecognized prior service cost......................... 8.0 9.6 9.4
----- ----- -----
Prepaid pension cost.................................... 70.3 75.0 58.3
Estimated transfer...................................... (7.0) (7.5) (5.8)
------- ------ ------
$63.3 $67.5 $52.5
===== ===== =====
</TABLE>
The estimated transfer represents prepaid pension cost attributable
to employees who participate in the octel retirement plans that will remain
with Great Lakes. Final 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 1997
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 7.75%, 5.5% and 8.5%, 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, 1997.
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, prior to November 20,
1997, Chevron Chemical Company to hedge the dollar income and thereby hedge
the quarterly dollar profit distributions made to both parties. At December
31, 1997 and 1996, open foreign exchange contracts totaled $53.4 million
and $55.3 million, respectively. If valued at year-end rates of exchange,
the contracts would have been valued at $53.5 million and $57.3 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.
In October 1997, the Company entered into interest rate swaps to
fix a portion of the interest rate relative to the Notes. The notional
amount of the debt to which the interest rate swaps apply is $125 million.
The notional amount of the agreements are used to measure interest to be
paid or received and do not represent an exposure to the Company. For
interest rate instruments that effectively hedge interest rate exposures
the net cash paid or received on the agreements are accrued and recognized
as an adjustment to interest expense over the term of the loan. If the
contracts were closed at December 31, 1997, the Company would incur a cash
cost of about $2.8 million.
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 1997 these accounted for 11.4% of net revenues. At
December 31, 1997 amounts owing by Ethyl Corporation to the Company were
less than 5% 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, who ceased to be related parties on October 31,
1997 and November 20, 1997, respectively. 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 1997, 1996 and 1995 such sales
amounted to $80.2 million, $94.7 million and $116.2 million respectively.
Amounts due in respect of these sales amounted to $26.3 million and $35.0
million at December 31, 1997 and December 31, 1996, respectively.
Sales of product between the Company and Great Lakes are reported
in the financial statements at estimated market value. In the years 1997,
1996 and 1995 the value of sales from the Company to Great Lakes amounted
to $7.4 million, $6.4 million and $5.8 million, respectively, and the value
of purchases by the Company from Great Lakes amounted to $18.5 million,
$15.7 million and $12.1 million respectively.
Interest charges from Great Lakes in respect of funding provided
for acquisitions amounted to $2.1 million, $1.5 million and $9.9 million in
the years 1997, 1996 and 1995, respectively. At December 31, 1997, the
balance owing to Great Lakes was $141.2 million.
NOTE 12 - FUTURE ACCOUNTING CHANGES
- -----------------------------------
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. The statement must be adopted in the first quarter of 1998. Under
provisions of this statement, the Company will be required to change the
financial statement presentation of comprehensive income and its components
to conform to these new requirements. As a consequence of this change,
certain reclassifications will be necessary for previously reported amounts
to achieve the required presentation of comprehensive income.
In June 1997, SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," was issued. Under provisions of this
statement, the Company will be required to provide financial statement
disclosures for operating segments, products and services, and geographic
areas beginning in 1998.
In December 1997, SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," was issued and is effective
for the Company's 1998 fiscal year. The statement revises current
disclosure requirements for employers' pension and other retiree benefits.
Implementation of these disclosure standards will not affect the
Company's financial position or results of operations.
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.
April 6, 1998 By: /s/ Dennis J. Kerrison
------------------------
Name: Dennis J. Kerrison
Title: President and Chief Executive Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1* Form of Transfer and Distribution Agreement, dated as of _________,
1998, between Great Lakes Chemical Corporation ("Great Lakes") and
the Registrant.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Amended and Restated By-Laws of the Registrant.
4.1* Form of Common Stock Certificate
4.2* Rights Agreement between the Registrant and First Chicago Trust
Company of New York, as Rights Agent.
4.3* Form of Certificate of Designations, Rights and Preferences of Series
A Junior Participating Preferred Stock of the Registrant.
4.4* Form of Indenture with respect to Senior Notes due 2006 of Octel
Finance Co..
10.1* Form of Tax Disaffiliation Agreement between Great Lakes and the
Registrant.
10.2* Form of Corporate Services Transition Agreement between Great Lakes
and the Registrant.
10.3* Form of Supply Agreement between Great Lakes and the
Registrant for the supply of ethylene dibromide.
10.4* Form of Supply Agreement between Great Lakes and the
Registrant for the Supply of anhydious hydrogen bromide.
10.5* Form of Supply Agreement for the Supply of 10% sodium hydroxide
solution.
10.6* Form of Agreement between Great Lakes and the Registrant for the
Toll Manufacture of Stadis Product.
10.7* Form of Octel Corp. 1998 Stock Compensation Plan.
10.8* Form of Employment Agreement between Associated Octel Limited and
Dennis J. Kerrison, Steve W. Williams, Geoff J. Hignett,
Graham M. Leathes and Robert A. Lee.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- -----------------
* To be filed by amendment
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the use of our report dated April 4, 1998 in Amendment No. 1
to Form 10/A with respect to the combined financial statements of Octel
Corp. appearing in this Information Statement dated April 6, 1998.
Indianapolis, Indiana
April 4, 1998
Exhibit 27.1
OCTEL CORP.
COMBINED FINANCIAL DATA SCHEDULE
--------------------------------
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS, STATEMENTS OF INCOME, AND
STATEMENTS OF CASH FLOWS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Period Covered 12 Months 12 Months 12 Months
Fiscal Year-End 12/31/97 12/31/96 12/31/95
Fiscal Year-Starts 01/01/97 01/01/96 01/01/95
Balance at Balance at Balance at
(thousands of dollars, except per share data) 12/31/97 12/31/97 12/31/97
Item No. Item Description
- -------- ----------------
<S> <C> <C> <C> <C>
5-02(1) Cash and cash items $ 29,700 54,900 54,400
5-02(2) Marketable securities 0 0 0
5-02(3)(a)(1) Notes and accounts receivable - trade 170,700 197,300 195,500
5-02(4) Allowances for doubtful accounts 900 900 900
5-02(6) Inventory 78,800 84,000 62,100
5-02(9) Total current assets 282,700 339,600 314,600
5-02(13) Property, plan and equipment 122,800 135,100 110,000
5-02(14) Accumulated depreciation 16,800 21,700 2,700
5-02(18) Total assets 832,900 841,000 798,400
5-02(21) Total current liabilities 102,800 123,500 138,800
5-02(22) Bonds, mortgages and similar debt 0 0 0
5-02(28) Preferred stock - mandatory redemption 0 0 0
5-02(29) Preferred stock - no mandatory redemption 0 0 0
5-02(30) Common stock 0 0 0
5-02(31) Other stockholders' equity 652,800 584,600 530,800
5-02(32) Total liabilities and stockholders' equity 832,900 841,000 798,400
5-03(b)1(a) Net sales of tangible products 539,100 597,400 628,300
5-03(b)1 Total revenues 550,900 602,100 637,500
5-03(b)2(a) Cost of tangible goods sold 274,400 298,800 307,000
5-03(b)2 Total costs and expenses applicable to sales and
revenues 316,800 344,600 354,700
5-03(b)3 Other costs and expenses 33,200 34,200 23,400
5-03(b)5 Provision for doubtful accounts and notes 0 0 0
5-03(b)(8) Interest and amortization of debt discounts 2,200 1,600 10,300
5-03(b)(10) Income before taxes and other items 174,400 192,100 216,800
5-03(b)(11) Income tax expense 56,700 63,800 71,700
5-03(b)(14) Income/loss continuing operations 117,700 128,300 145,100
5-03(b)(15) Discontinued operations 0 0 0
5-03(b)(17) Extraordinary items 0 0 0
5-03(b)(18) Cumulative effect - changes in accounting principles 0 0 0
5-03(b)(19) Net income or loss $117,700 128,300 145,100
5-03(b)(20) Earnings per share - primary $ 0.00 0.00 0.00
5-03(b)(20) Earnings per share - fully diluted $ 0.00 0.00 0.00
</TABLE>
