<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
Commission file number 1-13879
OCTEL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0181725
----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Global House
Bailey Lane
Manchester
United Kingdom M90 4AA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011-44-161-498-8889
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
----------
No
__________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding as of July 31, 1999
Common Stock, par value $0.01 13,863,266 Shares
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
(Unaudited)
--------------------- ---------------------
(millions of dollars)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 16.0 $ 26.5
Accounts receivable, less allowance
of $2.1 (1998 - $0.8) 141.8 120.6
Inventories
Finished products 46.1 61.1
Raw materials and work in progress 24.9 27.8
--------------------- ---------------------
Total inventories 71.0 88.9
Prepaid expenses 4.8 4.9
--------------------- ---------------------
Total current assets 233.6 240.9
Property, plant and equipment 140.4 147.0
Less accumulated depreciation 34.2 30.9
--------------------- ---------------------
Net property, plant and equipment 106.2 116.1
Goodwill 339.9 360.5
Prepaid pension cost 70.1 73.5
Deferred financing costs 12.7 15.7
Other assets 7.8 -
--------------------- ---------------------
$ 770.3 $ 806.7
===================== =====================
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
2
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
(Unaudited)
------------------- ---------------------
(millions of dollars)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 67.7 $ 78.6
Accrued expenses 14.0 13.0
Accrued income taxes 54.9 42.6
Current portion of long-term debt 60.0 71.0
------------------- ---------------------
Total current liabilities 196.6 205.2
Plant closure provisions (note 4) 33.3 47.1
Deferred income taxes 22.8 21.6
Long-term debt 209.0 229.8
Other liabilities 1.4 1.9
Minority interest 0.9 -
Stockholders' equity
Common stock, $0.01 par value (note 2) 0.1 0.1
Additional paid-in capital 276.1 276.1
Treasury stock (note 2) (14.2) (13.2)
Retained earnings 62.0 39.9
Accumulated other comprehensive income (17.7) (1.8)
------------------- ---------------------
Total stockholders' equity 306.3 301.1
------------------- ---------------------
$ 770.3 $ 806.7
=================== =====================
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
3
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
(millions of dollars except per share data)
<S> <C> <C> <C> <C>
Net sales $ 129.8 $ 115.6 $ 257.8 $ 238.8
Cost of goods sold 80.6 59.9 159.2 123.7
------------ ------------ ------------- -------------
Gross profit 49.2 55.7 98.6 115.1
Operating expenses
Selling, general and admin. 11.9 8.8 24.1 17.8
Research and development 0.9 0.8 2.0 1.6
Amortization of intangible assets 10.9 10.2 22.9 18.8
------------ ------------ ------------- -------------
23.7 19.8 49.0 38.2
------------ ------------ ------------- -------------
Operating income 25.5 35.9 49.6 76.9
Interest expense 6.3 7.5 13.3 9.6
Other expenses 0.1 - 2.0 1.4
Interest income (1.4) (0.7) (1.8) (1.3)
Other income (1.6) (0.2) (5.6) (0.3)
------------ ------------ ------------- -------------
Income before income taxes and minority
interest 22.1 29.3 41.7 67.5
Minority interest 0.1 - 0.2 -
------------ ------------ ------------- -------------
Income before income taxes 22.0 29.3 41.5 67.5
Income taxes (note 3) 10.3 12.7 19.4 25.3
------------ ------------ ------------- -------------
Net income $ 11.7 $ 16.6 $ 22.1 $ 42.2
============ ============ ============= =============
Earnings per share:
Basic $ 0.84 $ 1.12 $ 1.59 $ 2.86
------------ ------------ ------------- -------------
Diluted $ 0.81 $ 1.12 $ 1.54 $ 2.86
------------ ------------ ------------- -------------
Weighted average shares
outstanding (in thousands)
Basic (note 2) 13,889 14,763 13,911 14,763
------------ ------------ ------------- -------------
Diluted (note 2) 14,434 14,763 14,291 14,763
------------ ------------ ------------- -------------
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
4
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30
-------
1999 1998
---- ----
(millions of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22.1 $ 42.2
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 32.5 29.0
Deferred income taxes 1.2 -
Other - (0.1)
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses (27.7) 37.9
Inventories 14.1 1.8
Accounts payable and accrued expenses (4.2) (12.6)
Income taxes and other current liabilities 13.0 25.0
Other non-current assets and liabilities (11.0) (8.4)
--------------- ----------------
Net cash provided by operating activities 40.0 114.8
Cash flows from Investing Activities
Capital expenditures (5.8) (8.1)
Business combinations, net of cash acquired (3.9) -
Other (6.0) (7.3)
--------------- ----------------
Net cash used in investing activities (15.7) (15.4)
Cash flows from Financing Activities
Net cash paid to GLCC - (468.5)
Receipt of long-term borrowings 16.0 430.0
Repayment of long-term borrowings (47.7) -
Fees related to spin financing - (40.0)
Repurchase of common stock (1.0) -
Minority interest 0.9 (11.0)
--------------- ----------------
Net cash used in financing activities (31.8) (89.5)
Effect of exchange rate changes on cash (3.0) 2.4
--------------- ----------------
Net change in cash and cash equivalents (10.5) 12.3
Cash and cash equivalents at beginning of period 26.5 29.7
--------------- ----------------
Cash and cash equivalents at end of period $ 16.0 $ 42.0
=============== ================
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
5
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
(Unaudited)
(millions of dollars)
<TABLE>
<CAPTION>
Additional Total
Common ---------- -----
------ Treasury Paid-in Retained CTA* Comprehensive
Stock -------- ------- -------- ---- -------------
----- Stock Capital Earnings Income
----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at $0.1 $(13.2) $276.1 $39.9 $ (1.8) $38.1
January 1, 1999
Net Income - - - 22.1 - 22.1
Net CTA* change - - - - (15.9) (15.9)
Share buy-back - (1.0) - - - -
---- ------ ------ ----- ------ -----
Balance at June
30, 1999 $0.1 $(14.2) $276.1 $62.0 $(17.7) $44.3
---- ------ ------ ----- ------ -----
</TABLE>
* Cumulative translation adjustment
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
OCTEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
Octel Corp., a Delaware corporation (the "Company") is a major manufacturer and
distributor of fuel additives and other specialty chemicals. Its primary
manufacturing operation is located at Ellesmere Port, Cheshire, United Kingdom.
The Company's products are sold globally, primarily to oil refineries.
Principal product lines are lead alkyl antiknock compounds (TEL), and specialty
chemicals.
Until May 22, 1998, the Company was a wholly-owned subsidiary of Great Lakes
Chemical Corporation, a Delaware corporation (GLCC). On May 22, 1998, Great
Lakes consummated the spin off of its petroleum additives business by
distributing shares in the Company to the stockholders of GLCC in a ratio of one
Company share for every four GLCC shares held (the spin off). In connection
with the spin off, the Company issued 14,762,417 shares of common stock on May
26, 1998. A further 969 shares were subsequently issued in respect of late
notified changes in GLCC stockholders at the record date of the spin off issue.
On April 27, 1998, the Company entered into a $300 million secured credit
facility consisting of a $280 million senior secured term loan and a $20 million
revolving credit facility. The credit facility will mature on December 31, 2001
and the term loan is amortized in quarterly instalments to December 31, 2001
subject to early repayment conditions. The term loan is secured on the
Company's UK assets. Loans under the credit facility bear interest at LIBOR
plus 1.75 per cent, reducing to LIBOR plus 1.25 per cent when the outstanding
balance under the credit facility is below $140 million or 12 months from first
drawdown (whichever is the later).
Also on April 27, 1998 the Company issued $150 million of Senior Notes due 2006.
The Company is required to redeem $37.5 million principal amount of Notes in
each of the years 2003, 2004 and 2005. The notes bear interest at a fixed rate
of 10%.
6
<PAGE>
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position and
results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring accruals) have been made which are necessary for a fair
financial statement presentation. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K filed on March 26, 1999.
The unaudited combined financial statements for the six months ended June 30,
1998, give effect to the spin off as a transfer of ownership interests between
two entities under common control. Accordingly, the financial statements
reflect the assets, liabilities, revenues and expenses of GLCC's petroleum
additives business, adjusted only for those parts of that business which
remained part of GLCC after the spin off. The financial statements have been
prepared as if the Company had existed as an independent entity and include
certain GLCC expenses prior to the spin off. Management believes that these
allocations are reasonable.
On March 1, 1999, the Company formed a joint venture between its subsidiary,
Octel America Inc., and Starreon Corporation. The joint venture, Octel Starreon
L.L.C., has been accounted for as a consolidated, partly-owned subsidiary to
reflect the nature of the joint venture agreement.
The results for the interim period are not necessarily indicative of the results
to be expected for the full year.
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
At June 30, 1999, the Company had authorised common stock of 40 million shares
(December 31, 1998 - 40 million). Issued shares at June 30, 1999, were
14,766,386 (December 31, 1998 - 14,766,386) and treasury stock amounted to
903,120 (December 31, 1998 - 832,052).
In February 1999 the Company granted zero cost share options to senior
management under the terms of the Octel Corp. Time Restricted Stock Option Plan
(TRSOP) and the Octel Corp. Performance Related Stock Option Plan (PRSOP). The
181,521 options granted under the TRSOP represent bonuses that were designed to
reward the management of the Company for managing the spin off program and
continuing in employment through December 31, 1999. They were authorised by the
Board of Great Lakes Chemical Corporation prior to the spin off and agreed in
principle by the Compensation Committee of Octel Corp. in May 1998. They are
exercisable from December 31, 1999 through December 31, 2007. The 107,079
options granted under the PRSOP are exercisable from January 1, 2001 through
January 1, 2008.
In April 1999 the Company granted zero cost options to senior management under
the terms of the PRSOP scheme. The 167,826 options granted are exercisable from
January 1, 2002 through December 31, 2008. This grant completes the PRSOP
program and it is the intention of the Compensation Committee to grant
traditional fair value options in future. There will be no further grants of
zero cost share options. Also in April 1999 the Company granted options at the
price of $13.275 per share to non-employee directors under the terms of the
Octel Corp. Non Employee Directors Stock Option Plan. The 57,807 options granted
are exercisable from January 1, 2002 through December 31, 2008. No stock options
were exercised under any Company scheme in the quarter.
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period, while diluted earnings per share includes
the effect of options and restricted stock that are dilutive and outstanding
during the period.
7
<PAGE>
Prior to the spin off, the Company was not a separate operating company with a
capital structure of its own. Weighted average shares for the six months ended
June 30, 1998 have therefore been based on shares issued on the spin off (see
note 1).
NOTE 3 - INCOME TAXES
A reconciliation of the U.S. statutory income tax rate to the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
---- ----
<S> <C> <C>
Statutory US Federal tax rate 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential (4.7) (3.9)
Amortization of goodwill 15.8 5.9
Other 0.7 0.5
---- ----
46.8% 37.5%
==== ====
</TABLE>
NOTE 4 - PLANT CLOSURE PROVISIONS
<TABLE>
<CAPTION>
(millions of dollars) 1999 1998
---- ----
<S> <C> <C>
Balance at January 1 $47.1 $57.2
Exchange effect (4.1) 0.4
Charge for the period 7.0 6.7
Expenditure (16.7) (14.6)
----- -----
Balance at June 30 $33.3 $49.7
===== =====
</TABLE>
Expenditure of $13.5 million in the first six months of 1999 related to
personnel severance costs incurred as part of the Company's ongoing program of
downsizing and restructuring of operations to respond to declining demand for
TEL. The balance of $3.2 million related to environmental remediation
activities.
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is at present
evaluating the impact of SFAS 133 on its operations.
NOTE 6 - RELATED PARTY TRANSACTIONS
Prior to the spin off on May 22, 1998, sales of product between the Company and
GLCC were reported in the financial statements at estimated market value. In
the first six months of 1998 the value of sales from the Company to GLCC
amounted to $3.3 million and the value of purchases by the Company from GLCC
amounted to $7.1 million.
Prior to the spin off, interest charges from GLCC, in respect of funding
provided primarily for acquisitions, amounted to $3.4 million in the first six
months of 1998.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------
Some of the information presented in the following discussion constitutes
forward-looking comments within the meaning of the Private Litigation Reform Act
of 1995. Although the Company believes its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations. Factors which could cause actual results to differ from
expectations include, without limitation, the timing of orders received from
customers, the gain or loss of significant customers, competition from other
manufacturers and changes in the demand for the Company's products, including
the rate of decline in demand for TEL. In addition, increases in the cost of
product, changes in the market in general and significant changes in new product
introduction could result in actual results varying from expectations.
RECENT DEVELOPMENTS
- -------------------
In December 1998, the Company concluded an agreement with Veba Oel AG for the
acquisition of its petroleum specialties subsidiary, Chemische Betriebe Pluto
GmbH, now renamed Octel Deutschland GmbH (Octel Deutschland). Based in Herne,
Germany, Octel Deutschland manufactures and sells fuel additives mainly based on
ferrocene, an iron-based metal organic product used as a combustion improver and
octane enhancer.
On March 1, 1999, the Company formed a joint venture between its subsidiary,
Octel America Inc., and Starreon Corporation. The joint venture, Octel Starreon
L.L.C., combines the finished fuel additives businesses of both companies in the
USA and Canada but will exclude TEL.
The Company continues to reduce TEL costs in line with the market decline and
the Company announced another voluntary severance program in September 1998
which was completed in June 1999. The Company closed one TEL building at the
end of 1998 and has announced a formal review into the economics of
manufacturing raw materials currently produced to support the manufacture of
TEL.
Following the completion of the third phase of the UK voluntary severance
program, the number of group employees at June 30, 1999 was 1,072 compared to
1,305 at December 31, 1998. The net decrease of 233 includes an additional 14
employees included in group headcount as a result of the Octel Starreon L.L.C.
joint venture.
The Company, through its subsidiary The Associated Octel Company Limited, has
signed a conditional agreement to purchase the UK company OBOAdler Company
Limited (OBOA). OBOA owns the shares and assets of the Alcor group of
companies, which manufacture and market TEL. Alcor is headquartered in Baar,
Switzerland and includes a TEL manufacturing plant in Germany. Pursuant to an
existing Consent Decree the Company has notified the Federal Trade Commission
(FTC) in advance of the purchase. Once the Company has satisfied the FTC and
any other regulatory requests, the agreement will become unconditional. Octel
expects to complete the purchase during the second half of fiscal 1999. The
acquisition will be funded by additional senior debt on similar terms to Octel's
existing debt.
9
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Operating income for the second quarter and first half of 1999 and 1998 may be
analysed as follows:-
(millions of dollars)
<TABLE>
<CAPTION>
1999 1998
Second Quarter TEL Specialty Specialty Total
Chemicals Total TEL Chemicals
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 101.1 $ 28.7 $ 129.8 $ 95.7 $ 19.9 $ 115.6
-------- --------- --------- --------- -------- ---------
Gross Profit 41.1 8.1 49.2 50.6 5.1 55.7
-------- --------- --------- --------- -------- ---------
Operating Income $ 24.9 $ 0.6 $ 25.5 $ 36.2 $ (0.3) $ 35.9
-------- --------- --------- --------- -------- ---------
</TABLE>
(millions of dollars)
<TABLE>
<CAPTION>
1999 1998
Year to date TEL Specialty Total TEL Specialty Total
Chemicals Chemicals
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 199.5 $ 58.3 $ 257.8 $ 198.2 $ 40.6 $ 238.8
-------- --------- --------- --------- -------- ---------
Gross Profit 82.0 16.6 98.6 105.3 9.8 115.1
-------- --------- --------- --------- -------- ---------
Operating Income $ 47.8 $ 1.8 $ 49.6 $ 77.5 $ (0.6) $ 76.9
-------- --------- --------- --------- -------- ---------
</TABLE>
All figures have been restated to reflect the aggregation of Petroleum
Specialties and Performance Chemicals into a combined Specialty Chemicals
Business Unit which represents the markets where Octel Corp. is focusing on
building its position. Within these categories the sodium and chlorine products
(Intermediates), which are manufactured as raw materials for the TEL business
but are also sold on the open market, have been reclassified. They were part of
Performance Chemicals Business Unit but have now been included as TEL to reflect
their close relationship with TEL markets and the manufacturing cycle.
Overall TEL sales for the first six months of fiscal 1999 have increased by $1.3
million (0.7%) over 1998 levels. Sales of intermediates fell by $1.0 million but
TEL compound sales rose by $2.3 million. Sales volume for the second quarter
1999 at 14,546 metric tons was consistent with first quarter levels. Total
volumes for the six months were 28,802 metric tons, compared to 33,583 metric
tons for the first six months of 1998. The decrease of 14.2% reflects the
anticipated annual decline in markets but is offset by the effects of the
marketing agreement with Ethyl Corporation (Ethyl) which came into force in the
fourth quarter 1998. The adverse volume variance was $27.3 million against which
there is a positive price variance of $29.6 million. Sales in the lower priced
wholesale market in the first half of fiscal 1999 were 624 metric tons compared
to 7,938 metric tons in the first half of 1998.
TEL gross profit of $82.0 million was $23.3 million (22.1%) below 1998 levels,
reflecting the compensation now payable to Ethyl on all sales made under the
marketing agreement.
Specialty Chemicals turnover and gross profit for the half year have increased
over 1998 levels by $17.7 million (43.6%) and $6.8 million (69.4%) respectively.
This reflects the performance of Octel Deutschland and the Octel Starreon L.L.C.
joint venture which were not part of the Octel group in 1998, plus organic
growth in other business.
Selling, general and administrative costs for the second quarter 1999 were $11.9
million compared to $12.2 million for the three months to March 31, 1999. The
total for the six month period of $24.1 million is $6.3 million higher than
those for the period to June 30, 1998. This increase is mainly due to costs
incurred by the new companies to the group, Octel Deutschland and Octel Starreon
L.L.C. Amortization charges of $22.9 million for the first six months of 1999
are $4.1 million above 1998 levels reflecting the growth in the cost of goodwill
and the charge relating to capitalized spin finance costs from May 1998.
10
<PAGE>
Interest expense at $13.3 million is $3.7 million above 1998, reflecting the
charge which related to the Senior Debt and Senior Notes which arose as a result
of the spin off.
The principal change in other income and expenses relates to exchange variances,
the net loss of $0.7 million in 1998 being included in other expenses whereas
the 1999 gain of $5.6 million is included in other income.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Net cash provided by operating activities in the first half of fiscal 1999 was
$40.0 million compared to $114.8 million in 1998. Net income reductions account
for $20.1 million of the total $74.8 million decrease. The largest component of
the change is $65.6 million relating to accounts receivable and prepaid
expenses. This arose due to the fact that the December 1997 opening balance of
receivables was unusually high at $174.2 million (109 days sales), resulting in
a large reduction in receivables in 1998 of $37.9 million, whereas in 1999, due
to the effect of the marketing alliance, receivables have increased by $27.7
million. Receivables at June 30, 1999 represent 100 days sales compared to 103
days at June 30, 1998.
The reduction in inventories of $10.4 million for the second quarter of 1999
leaves a cumulative reduction of $14.1 million for the six months to June 30,
1999. This movement includes an exchange translation difference. The balance
sheet reduction in inventory for the period is $17.9 million which includes a
$15.0 million reduction in finished products. The Company believes that it is on
program to reverse the increase of $25.4 million which arose in finished
products in fiscal 1998 by December 31, 1999.
In connection with the conditional agreement to purchase OBOA, an additional
$10.0 million of Senior Debt has been advanced to the Company. This has been
used to meet transaction expenses to date of $1.8 million and to make advances
to OBOA, which are recoverable should the agreement fail to become
unconditional, of $6.0 million. The expenses and advances are included in other
investing activities.
An amount of $6.0 million was drawn down under the Revolving Credit Facility in
the first quarter 1999, but the whole $17.0 million was repaid in the second
quarter. A total of $30.7 million of Senior Debt has been repaid in the six
months to June 30, 1999.
YEAR 2000
- ---------
Octel is implementing a program of work, the objective of which is to ensure
that the Company is not adversely affected by "Date Discontinuity" problems in
computers, software and embedded processors during the transition from 1999 to
2000 and as a result of 2000 being a leap year.
Date discontinuity occurs when time as expressed by a system or its software
does not move forward successfully in line with true time. The most commonly
known manifestation of this occurs in systems that recognize years as two digits
and, when moving from '99' to '00', recognise '00' as 1900 or fail altogether.
Additionally, some systems fail to recognise 2000 as a leap year, omitting Feb
29th from their calendars.
The scope of the project covers Information Technology (IT) systems, embedded
processors, supply chain and business continuity.
11
<PAGE>
. IT systems include central and network hardware, business systems and desktop
hardware and software. Octel has very little bespoke software, the majority
being industry standard packages, customized only where necessary.
. Embedded processors include, for example, plant instruments, laboratory
equipment, control systems, data acquisition systems, vehicles and
telecommunications.
. Supply chain considerations include liaison with suppliers and customers
about our respective states of readiness for the Year 2000.
. Business continuity will consider all areas of the business and put in place
contingency plans to mitigate the consequences arising from key risks
identified.
The project covers all Octel Corp. sites.
Work is divided into the following key stages:-
1. Inventory of hardware, software and embedded systems
2. Analysis of compliance
3. Defining and planning of solutions
4. Implementation and testing of solutions
5. Confirmation of major suppliers' and customers' state of readiness
6. Business continuity and contingency planning
Steps 1, 2 and 3 are substantially complete. Constant monitoring of compliance
statements will continue to capture those suppliers that modify or revoke
information.
In the UK there are two key IT legacy system replacement programs (Step 4), both
of which are complete:
. Replacement of the existing purchasing and sales order processing system.
. Introduction of Windows NT environment, which has resulted in a substantial
replacement of desktop hardware and software.
In Step 5, all current suppliers of goods and services have been approached and
analysis of their Year 2000 status is well advanced. Critical suppliers are now
the subject of more detailed scrutiny to monitor the progress of their programs.
Liaison with key customers is ongoing.
Business continuity and contingency planning (Step 6) is progressing well.
Octel Corp. will adopt a normal end of year operating regime, while maintaining
the ability to respond promptly to external circumstances as they arise. The
comprehensive planning supporting this operating regime uses a risk based
approach, taking account of internal, external and resource issues.
Octel Corp. is on program to be in full Year 2000 readiness for critical systems
by the end of the third quarter 1999 and will then continue to monitor all areas
through January 2000 and beyond.
Costs
- -----
It is estimated that the total cost of achieving Year 2000 compliance will be
approximately $8.0 million of which $6.5 million will be on IT systems and $1.5
million on embedded processors. This figure is subject to ongoing review and
throughout the project life cycle the business benefit of systems is constantly
challenged and redundant systems will be decommissioned prior to the Year 2000.
Approximately $5.0 million has been spent to date.
12
<PAGE>
Risks
- -----
The most reasonably likely worst case scenario is an event which would shut down
the sodium manufacturing process. It has been estimated that this would reduce
TEL production for up to six months. During this time the Company would be able
to maintain supplies to its customers but the cost to the business would be
approximately $7 million. This figure has been reduced from $11 million as a
result of risk mitigation work carried out by the Company.
Through its internal and supplier Year 2000 projects, the Company is working to
minimize the probability of such an event occurring and, through its contingency
planning, to mitigate the consequences.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
There has been no material change in the Company's exposure to market risk as
described in the Form 10-K filed on March 26, 1999.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
The Company's UK subsidiary, The Associated Octel Company Limited, has
been charged by the Health and Safety Executive with two offences under
the Health and Safety at Work Act 1974 and by the Environment Agency with
three offences under the Environment Act 1990 in respect of a bromine gas
emission on July 19, 1997, from a plant situated in Amlwch, North Wales,
which was operated by that company at that time. A preliminary hearing
took place on June 24, 1999 when the case was adjourned for hearing at
Mold Crown Court on September 1, 1999. No remedies are being sought under
civil law. External legal counsel has advised that the aggregate of fines
and prosecution costs in respect of all such offences is unlikely to
exceed US$650,000. Provision has been made for this amount in the
accounts of the Company.
The plant concerned was retained by GLCC when the Company was spun off in
May 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
- ------------------------------------------------------------
At the Company's Annual Meeting of Stockholders held on May 11, 1999, two
items were submitted to a vote of the security holders, which are more
fully described in the Company's proxy statement dated March 30, 1999.
The matters voted on at the meeting and the results of those votes were
as follows:-
1. To elect two directors to serve until the 2002 Annual Meeting:
Director For Withheld
-------- --- --------
Thomas M Fulton 11,328,971 1,497,607
Charles M Hale 11,332,872 1,493,705
2. To ratify the appointment of PricewaterhouseCoopers as the
Corporation's independent public accountants for the fiscal year
ending December 31, 1999.
For Against Abstained
--- ------- ---------
12,780,686 33,990 11,902
13
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
27 Combined Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorised.
Date: August 12, 1999 By /s/ _______________
-----------------------
Dennis J Kerrison
President and
Chief Executive Officer
Date August 12, 1999 By /s/ _______________
-----------------------
Alan G Jarvis
Chief Financial Officer
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
27 Combined Financial Data Schedule 16
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, STATEMENTS OF INCOME AND STATEMENTS OF CASH FLOWS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> $16,000
<SECURITIES> 0
<RECEIVABLES> 143,900
<ALLOWANCES> 2,100
<INVENTORY> 71,000
<CURRENT-ASSETS> 233,600
<PP&E> 140,400
<DEPRECIATION> 34,200
<TOTAL-ASSETS> 770,300
<CURRENT-LIABILITIES> 196,600
<BONDS> 209,000
0
0
<COMMON> 100
<OTHER-SE> 306,200
<TOTAL-LIABILITY-AND-EQUITY> 770,300
<SALES> 257,800
<TOTAL-REVENUES> 265,200
<CGS> 159,200
<TOTAL-COSTS> 208,200
<OTHER-EXPENSES> 15,300
<LOSS-PROVISION> 1,300
<INTEREST-EXPENSE> 13,300
<INCOME-PRETAX> 41,500
<INCOME-TAX> 19,400
<INCOME-CONTINUING> 22,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $22,100
<EPS-BASIC> $1.59
<EPS-DILUTED> $1.54
</TABLE>
