-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RZQt4j5WQ6yrYJvKq9+hB4XdpNjqj6+kD02sFvdc/AsMIdO2h6aVjP00B8JNc74S h+Mlsgtmu64zzPjF8cwcAg== 0000950137-97-001115.txt : 19970326 0000950137-97-001115.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950137-97-001115 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT LAKES CHEMICAL CORP CENTRAL INDEX KEY: 0000043362 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 951765035 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06450 FILM NUMBER: 97562760 BUSINESS ADDRESS: STREET 1: ONE GREEAT LAKES BLVD CITY: WEST LAFAYETTE STATE: IN ZIP: 47906 BUSINESS PHONE: 3174976219 FORMER COMPANY: FORMER CONFORMED NAME: MCCLANAHAN OIL CO DATE OF NAME CHANGE: 19700925 FORMER COMPANY: FORMER CONFORMED NAME: GREAT LAKES OIL & CHEMICAL CO DATE OF NAME CHANGE: 19700925 10-K 1 FORM 10-K DATED DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 1-6450 GREAT LAKES CHEMICAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-1765035 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE GREAT LAKES BOULEVARD P. O. BOX 2200 WEST LAFAYETTE, INDIANA 47906 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 765-497-6100 ----------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common stock, $1.00 par value New York Stock Exchange Pacific Stock Exchange ----------------------- Securities registered pursuant to Section 12 (g) of the Act: None ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ----------------------- As of March 3, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant was $2,908,528,000. As of March 3, 1997, 60,124,619 shares of the registrant's stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV. Portions of the annual proxy statement dated March 28, 1997 are incorporated by reference into Part III. 2 PART I Item 1. BUSINESS GENERAL Great Lakes Chemical Corporation is a Delaware corporation incorporated in 1933, having its principal executive offices in West Lafayette, Indiana. The Company's operations consist of one dominant industry segment - chemicals and allied products. Within this segment the Company is well diversified focusing on performance chemicals, water treatment chemicals, petroleum additives and specialized services and manufacturing. The Business Profile on page 6 and the Review of Operations on pages 10 through 21 of the 1996 Annual Report to Stockholders are incorporated herein by reference. The term "Great Lakes" as used herein means Great Lakes Chemical Corporation and its Subsidiaries unless the context indicates otherwise. Net sales by Business Unit are set forth in the following table (dollars in millions):
Year ended December 31 1996 1995 1994 ------ ------ ------ Flame Retardants $ 294 $ 300 $ 265 Intermediates and Fine Chemicals 282 302 262 Petroleum Additives 618 656 610 Polymer Stabilizers 242 224 162 Specialized Services and Manufacturing 346 460 383 Water Treatment 430 419 383 ------ ------ ------ Total Net Sales $2,212 $2,361 $2,065 ====== ====== ======
PRODUCTS AND SERVICES The following is a list of the principal products and services provided by Great Lakes:
FLAME RETARDANTS Plants & Major Raw Products & Services Principal Markets Facilities Materials - ------------------- ----------------------- -------------- -------------- Brominated and Computer and ElDorado, AR Bromine intumescent flame Business Equipment, Newport, TN Bisphenol A retardants Consumer Electronics, Aycliffe, U.K. Diphenyl Oxide Textiles, Urethanes and Construction Materials POLYMER STABILIZERS Antioxidants, UV Computer and Business Newport, TN Alkylated absorbers and Equipment, Consumer Persan, France Phenols, Light Stabilizers Electronics, Packaging Catenoy, France Methyl Textiles, Building and Waldkraiburg, Acrylate, Construction, Germany Phosphorus Transportation Pedrengo, Italy Trichloride Ravenna, Italy Pyongtaek, Korea
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INTERMEDIATES AND FINE CHEMICALS Plants & Major Raw Products & Services Principal Markets Facilities Materials - ------------------------------ --------------------------- ----------------- ------------ Bromine, Bromine derivatives Foundry Industry, Lube Oil ElDorado, AR Bromine, and Bromine-based specialty Refining, Pharmaceutical Marysville, AR Agricultural chemicals, Furfural, Furfural Industry, Agrochemical Memphis, TN By-Products derivatives and Furfural-based Industry, Electronics, Soil Omaha, NE Chlorine specialty chemicals, including Crop and Structural Pest Belle Glade, FL furfuryl alcohol , Control, Production of Geel, Belgium POLYMEG(R) Polyols and Photographic Papers and Halebank, U.K. Methyl Bromide Films and Rubber Konstanz, Germany Compounds Newport, TN PETROLEUM ADDITIVES Antiknock octane boosters for Major Oil Refineries and Fuel Ellesmere Port, U.K. Ethylene, leaded gasoline, Cetane Blenders Worldwide Newark, DE Lead, Salt, number improvers, Multi- Electricity functional gasoline and diesel fuel additives, Gasoline and diesel detergents, Petroleum anti-oxidants, stabilizers, and corrosion inhibitors WATER TREATMENT CHEMICALS RECREATIONAL Water sanitizers - Pool and Spa Dealers and Adrian, MI BCDMH BioGuard(R), OMNI(R), Distributors, Mass Market Barbera Del Valles, Chlorinated Hydrotech(R), Guardex(R), Retailers, Builders Spain Isocyanurates Pool Time(R), AquaChem(R) Conyers, GA Calcium Algicides, oxidizers, pH Decatur, GA hypochlorite balancers, mineral balancers Gloster, U.K. Cyanuric acid and specialty chemicals Kyalami, South Africa Munich, Germany Mundolsheim, France Ontario, Canada Victoria, Australia INDUSTRIAL BromiCide(R) and LiquiBrom(TM) Industrial Cooling Water Adrian, MI Bromine Specialty Biocides, Treatment, Industrial and ElDorado, AR Sodium Bromide Biocide dispensing Municipal Wastewater Treat- equipment ment, Pulp and Paper and Food Processing
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SPECIALIZED SERVICES AND MANUFACTURING Plants & Major Raw Products & Services Principal Markets Facilities Materials - ------------------- ----------------- ---------- --------- ENVIRO-ENERGY PERFORMANCE GROUP Completion fluids, Sand Worldwide Oil and Gas Lafayette, LA Bromine, control and filtration, Industry Aberdeen, U.K. Zinc, Sodium, Reservoir analysis, Stravanger, Norway Calcium Down-hole tools Anaco, Venezuela Villahermosa, Mexico Waste management, Petrochemical Companies, Greensboro, NC Contamination assessment Waste Management Firms, Raleigh, NC and remediation, Geotech- Oil Refineries, Forest Baton Rouge, LA nical engineering, Resource Product Companies, Columbus, OH recovery and material Government Agencies Houston, TX handling TOXICOLOGICAL SERVICES All phases of nonclinical Pharmaceutical, Chemical, Ashland, OH toxicological testing and Veterinary, Medical, Agri- bioanalytical services, cultural, Food and Consumer Design of specialized Products Industries toxicological, metabolic and analytical chemistry programs INTERNATIONAL TRADING Organic and inorganic Central and Eastern Budapest, Hungary chemicals, Plastic resins, European Chemical Finished agrochemicals and Industry fertilizers FLUORINE CHEMISTRY Fire extinguishing agent Data Processing ElDorado, AR Fluorine FM-200(R), Organofluorine Telecommunications compounds, Fluorinated Military intermediates
BUSINESS RISKS Great Lakes Chemical Corporation is including the following cautionary statement in this Annual Report of Form 10-K to make applicable and take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and 3 5 the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Taking into account the foregoing, certain factors, including but not limited to, those listed below may cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. - - Economic factors over which the Company has no control, including changes in inflation, tax rates, interest rates and foreign currency exchange rates. - - Competitive factors such as pricing pressures on key products and cost and availability of key raw materials. - - Governmental factors including laws and regulations and judicial decisions related to the production or use of key products such as alkyl lead compounds, bromine and bromine derivatives. - - The difficulties and uncertainties inherent in new product development. New product candidates that appear promising in development may fail to reach the market because of safety concerns, inability to obtain necessary regulatory approvals, difficulty or excessive costs to manufacture, or infringements of the patents or intellectual property rights of others. - - Legal factors including unanticipated litigation of product liability claims; antitrust litigation; environmental matters; and patent disputes with competitors which could preclude commercialization of products or negatively affect the profitability of existing products. - - Inability to obtain existing levels of product liability insurance or denial of insurance coverage following a major product liability claim. - - Changes in tax laws, including future changes in tax laws related to the remittance of foreign earnings or investments in foreign countries with favorable tax rates. - - Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission, and the American Institute of Certified Public Accountants which are adverse to the Company. - - Internal factors such as changes in business strategies and the impact of cost control efforts and business combinations. - - Loss of brine leases or inability to produce bromide ions in commercial quantities due to depletion of resources or other causes beyond the Company's control. - - Future profitability of alkyl lead compounds is highly dependent upon the rate of market decline; the mix of customer and regions where alkyl lead compounds are sold and the economics of refinery customer related to achieving octane ratings. 1996 DEVELOPMENTS The Business Profile on page 6 and the Review of Operations on pages 10 through 21 of the 1996 Annual 4 6 Report to Stockholders are incorporated herein by reference. Raw Materials The sources of essential raw materials for bromine are the brine from company-owned wells in Arkansas and sea water extraction plants in Europe. The Arkansas properties are located atop the Smackover lime deposits, which constitute a vast underground sea of bromine-rich brine. The area between ElDorado and Magnolia, Arkansas, (located about 35 miles west of ElDorado) provides the best known geological location for bromine production and both major domestic bromine manufacturers are located there. Based on projected production rates, the Company's brine reserves are conservatively estimated to be adequate for the foreseeable future. Furfural is extracted from agricultural by-products and waste materials such as corncobs, sugar cane bagasse, rice hulls and oat hulls. Alternative uses for these by-products are becoming increasingly more common which is reducing availability and escalating prices. Other materials used in the chemical processes are obtained from outside suppliers through purchase contracts. Supplies of these materials are believed to be adequate for the Company's future operations. International Operations Great Lakes has a substantial presence in foreign markets. The Company's investment in foreign countries is principally in Western Europe and represents $1.4 billion or 53 percent of total assets. Sales to customers in foreign countries (primarily Europe and the Far East) amount to 61, 64 and 64 percent of total sales for the years ended December 31, 1996, 1995, and 1994, respectively. Approximately 10, 14, and 15 percent of these foreign sales, respectively for the three years shown, are products exported from the U.S., with the balance of the Company's international sales primarily being products manufactured and sold by the Company's European subsidiaries and branches. The profitability on foreign sales (including U.S. exports and foreign manufactured products, except Octel) approximates those for domestic operations. Because of value-added pricing, Octel's alkyl lead products have a higher profitability than do most of the Company's other products. The geographic segment data contained in the note "Industry Segments and Foreign Operations" of Notes to Consolidated Financial Statements on page 39 of the 1996 Annual Report to Stockholders is incorporated herein by reference. Customers and Distribution During the last three years, no single customer accounted for more than 10 percent of Great Lakes' total consolidated sales. The Company has no material contracts or subcontracts with government agencies. A major portion of the Company's sales are sold to industrial or commercial users for use in the production of other products. Some products, such as recreational water treatment chemicals and supplies, are sold to a large number of retail pool stores, mass merchandizers and distributors. Some export sales are marketed through distributors and brokers. The Company's business does not normally reflect any material backlog of orders at year-end. Competition Great Lakes is in competition with businesses producing the same or similar products as well as businesses producing products intended for similar use. There is one other major bromine producer in the United States 5 7 which competes with the Company in varying degrees, depending on the product involved, with respect to the sale of bromine and bromine derivatives. There is also one major overseas manufacturer of bromine and brominated products which competes with the Company in the United States and elsewhere. In addition, there are several small producers in the U.S. and overseas which are competitors in several individual products. The Company is a major producer of furfural and furfuryl alcohol that competes in the major geographic markets. The Company is a major producer of alkyl lead. In the polymer stabilizers area, the Company competes with a significantly larger supplier across this entire product line and with a number of smaller companies in individual product areas. The Company competes with several manufacturers and distributors of swimming pool and spa chemicals and equipment. Principal methods of competition are price, product quality and purity, technical services and ability to deliver promptly. The Company is able to move quickly in providing new products to meet identified market demands, and believes its production costs are among the lowest in the world. These factors, combined with high technical skills, allow the Company to compete effectively. Seasonality and Working Capital The products which the Company sells to the agricultural and swimming pool markets, exhibit some seasonality; however, the effect on overall Company sales and profits is not material. Seasonality results in the need to build inventories for rapid delivery at certain times of the year. The pool product season is strongest during the first six months, requiring a build-up of inventory at the beginning of the year. Except for certain arrangements with distributors and dealers of swimming pool and spa products, customers are not permitted to return unsold material at the end of a season. Extended credit terms are granted only in cases where the Company chooses to do so to meet competition. The alkyl lead products have somewhat larger working capital requirements than do the Company's other major products, because of extended distribution lines and credit terms for large volume refinery customers. The effect of the above items on working capital requirements is not material. Research and Development and Patents Research and development expenditures are included in the note "Research and Development Expense" of the Notes to Consolidated Financial Statements on page 39 of the 1996 Annual Report to Stockholders and is incorporated herein by reference. The Company holds no patents, licenses, franchises or concessions which are essential to its operations. Environmental and Toxic Substances Control The Company recognizes its responsibility for the sound environmental management of its businesses and operations. In partial fulfillment of this responsibility, the Company's domestic chemical manufacturing operations subscribe to the comprehensive environmental stewardship program developed by the Chemical Manufacturers Association known as Responsible Care. The Company is in material compliance with all environmental laws and regulations to which it is subject. Employees The Company has approximately 7,000 employees. 6 8 Item 2. PROPERTIES Great Lakes has plants at 13 locations in 8 states and 18 plants in 11 foreign countries. Most principal plants are owned. Listed under Item 1 above in a table captioned Products and Services are the principal locations at which products are manufactured, distributed or marketed. The Company leases warehouses, distribution centers and space for offices throughout the world. All of the Company's facilities are in good repair, suitable for the Company's businesses, and have sufficient space to meet present marketing demands at an efficient operating level. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company, its subsidiaries or any of its properties. Furthermore, no director, officer or affiliate of the Company, or any associate of any director or officer is involved, or has a material interest in, any proceeding which would have a material adverse effect on the Company. Item 103 of Regulation S-K requires disclosure of administrative or judicial proceedings arising under any federal, state or local provisions dealing with protection of the environment, if the monetary sanctions might exceed $100,000. There are currently no such proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended December 31, 1996. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 3, 1997, there were approximately 4,100 registered holders of Great Lakes Common Stock. Additional information is contained in the 1996 Annual Report to Stockholders, under the captions "Stock Price Data" and "Cash Dividends Paid" on page 41 all of which are incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA This information is contained in the 1996 Annual Report to Stockholders, under the caption "Financial Review" on pages 22 and 23, and is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 24 through 28 of the 1996 Annual Report to Stockholders, is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements together with the report thereon of Ernst & Young LLP dated January 29, 1997, appearing on pages 29 through 40 and the "Quarterly Results of Operations" on page 41 of the 1996 Annual Report to Stockholders, are incorporated herein by reference. 7 9 Item 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE No change of auditors or disagreements on accounting methods have occurred which would require disclosure hereunder. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers
Served as Name and Age Office Officer Since - ------------ ------ ------------ Robert B. McDonald, 60 Chief Executive Officer and President 1981 Robert T. Jeffares, 61 Executive Vice President and Chief Financial Officer 1983 L. Donald Simpson, 61 Executive Vice President 1992 David A. Hall, 52 Group Vice President 1987 Dennis J. Kerrison, 51 Group Vice President 1996 Marshall E. Bloom, 59 Vice President 1994 David R. Bouchard, 53 Vice President 1990 Stephen D. Clark, 51 Vice President 1995 Richard R. Ferguson, 45 Vice President, Treasurer and Assistant Secretary 1991 Otto K. Furuta, 53 Vice President 1996 Robert L. Hollier, 54 Vice President 1991 John V. Lacci, 45 Vice President and General Counsel 1994 J. Larry Robertson, 48 Vice President 1994 John B. Talpas, 53 Vice President 1988 David C. Sanders, 53 Associate Vice President 1990 Mary P. McClanahan, 53 Corporate Secretary 1994 Robert J. Smith, 50 Corporate Controller 1993 Stephen E. Brewer, 47 Assistant Treasurer 1994
Information with respect to directors of the Company is contained under the heading "Proposal One: Election of Directors" in the Great Lakes' Proxy Statement relating to the 1997 Annual Meeting of Stockholders dated March 28, 1997, which is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information under the heading "Executive Compensation and Other Information" in the 1997 Proxy Statement is incorporated by reference in this report. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement is incorporated by reference in this report. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the heading "Compensation Committee Interlocks and Insider Participation" in the 1997 Proxy Statement is incorporated by reference in this report. 8 10 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following Consolidated Financial Statements of Great Lakes Chemical Corporation and Subsidiaries and related notes thereto, together with the report thereon of Ernst & Young LLP dated January 29, 1997, appearing on pages 29 through 40 of the 1996 Annual Report to Stockholders, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income and Retained Earnings - Years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following additional information is filed as part of this report and should be read in conjunction with the 1996 financial statements. Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. 3. Exhibits 13. 1996 Annual Report to Stockholders 21. Subsidiaries - Incorporated herein by reference is the list of subsidiaries appearing on the inside of the back cover of the 1996 Annual Report to Stockholders 23. Consent of Independent Auditors (b) Reports on Form 8-K The Company filed a Form 8-K on May 4, 1996 in connection with a proposed acquisition that was not consummated. (c) Exhibits The response to this section of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this section of Item 14 is submitted as a separate section of this report. 9 11 SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GREAT LAKES CHEMICAL CORPORATION (Registrant) Date February 10, 1997 /s/ Robert B. McDonald -------------------- ---------------------------------------------- Robert B. McDonald, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Date February 10, 1997 /s/ Robert T. Jeffares -------------------- ---------------------------------------------- Robert T. Jeffares, Executive Vice President and Chief Financial Officer Date February 10, 1997 /s/ Robert J. Smith -------------------- ---------------------------------------------- Robert J. Smith, Corporate Controller (Principal Accounting Officer) Date February 10, 1997 /s/ Evan Bayh -------------------- ---------------------------------------------- Evan Bayh, Director Date February 10, 1997 /s/ William H. Congleton -------------------- ---------------------------------------------- William H. Congleton, Director Date February 10, 1997 /s/ John S. Day -------------------- ---------------------------------------------- John S. Day, Director Date February 10, 1997 /s/ Thomas M. Fulton -------------------- ---------------------------------------------- Thomas M. Fulton, Director Date February 10, 1997 /s/ Martin M. Hale -------------------- ---------------------------------------------- Martin M. Hale, Director Date February 10, 1997 /s/ Louis E. Lataif -------------------- ---------------------------------------------- Louis E. Lataif, Director Date February 10, 1997 /s/ Richard H. Leet -------------------- ---------------------------------------------- Richard H. Leet, Director Date February 10, 1997 /s/ Robert B. McDonald -------------------- ---------------------------------------------- Robert B. McDonald, Director Date February 10, 1997 /s/ Jay D. Proops -------------------- ---------------------------------------------- Jay D. Proops, Director 10 12 SCHEDULE II GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1996
Additions Balance at -------------------------------- Balance Beginning Charges to Costs Charged to at End Description of Period and Expenses Other Accounts Deductions of Period - ----------- ----------- ---------------- -------------- ---------- --------- 1996: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 7,659,000 $ 2,174,000 $ -0- $ (386,000)(D) $ 10,219,000 ----------- ----------- -------------- ------------- ------------ Accumulated amortization of goodwill $83,309,000 $32,005,000 $ -0- $ 210,000 (A) $115,104,000 ----------- ----------- -------------- ------------- ------------ 1995: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 7,758,000 $ 410,000 $ -0- $ 509,000 (B) $ 7,659,000 ----------- ----------- -------------- ------------- ------------ Accumulated amortization of goodwill $63,941,000 $22,601,000 $ (686,000)(C) $ 2,547,000 (D) $ 83,309,000 ----------- ----------- -------------- ------------- ------------ 1994: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 7,088,000 $ 1,174,000 $ -0- $ 504,000(B) $ 7,758,000 ----------- ----------- -------------- ------------- ------------ Accumulated amortization of goodwill $43,242,000 $20,699,000 $ -0- $ -0- $ 63,941,000 ----------- ----------- -------------- ------------- ------------
(A) Write-off of E/M goodwill (B) Uncollectible accounts receivable written off, net of recoveries and foreign currency translation. (C) Reclassify OSCA and Chemol intangible amortization. (D) Foreign currency translation. 11 EX-13 2 1996 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 BUSINESS PROFILE FLAME RETARDANTS Great Lakes is the world's leading producer of bromine-based flame retardants used by our customers to impart combustion resistance in a variety of products and applications. The company recently broadened its technology and opened additional market opportunities when it began production of non-brominated flame retardants. Key Products and Services The most comprehensive line of bromine-based flame retardants available on the market. Compounds reacted with or incorporated into combustible materials such as engineered plastics, urethanes and epoxy resins to reduce or eliminate their tendency to burn. Applications and Markets Textiles, furniture, wire and cable, building and construction materials, computers and business equipment, consumer electronics devices,automotive. New Technologies Great Lakes has developed several new generation derivatives of well established proprietary PHT4(TM) technology that enhance the performance of our customers' end products, such as automobile ceiling liners and wire and cable applications. Value-Added Opportunities Building close customer relationships to meet specific requirements, Great Lakes forms strategic alliances with customers to provide performance solutions for their resin systems. These close ties yield new technologies Great Lakes builds upon to develop proprietary products that further strengthen our entire line of polymer additives. INTERMEDIATES AND FINE CHEMICALS Great Lakes produces a broad range of specialty and fine chemicals including bromine and furfural derivatives. With the only bromine supply on two continents and a strategic raw materials position in furfural, Great Lakes has established ISO 9000 certified manufacturing facilities in the United States and Europe to perform complex fine chemical synthesis at a competitive cost. Key Products and Services Bromine and brominated derivatives; furfural-based specialty chemicals; value-added custom compounds; custom manufacturing of fine and specialty chemicals. Applications and Markets World pharmaceutical industry; agrochemical industry; electronics; industrial cleansers; custom manufacturing; soil, crop and structural pest control; photographic papers and films; foundry industry; lube oil refining; engineered plastics and fabrics. New Technologies Advances in manufacturing technology make Great Lakes the leading choice for an increasing number of companies that outsource complex chemical production needs. Established manufacturing capacity in the United States and Europe positions the company to meet customer needs worldwide. Value-Added Opportunities Alkyl bromides--Great Lakes utilizes its bromine chemistry expertise to develop high value-added bromine derivatives, which at the same time benefit the environment and provide several high-margin, environmentally friendly products with high growth market potential. PETROLEUM ADDITIVES Through its Octel Associates subsidiary, Great Lakes is the global leader in the production and distribution of certain high-performance fuel additives and petroleum specialties. Our quality products impart valuable performance-enhancing characteristics in a growing number of diverse applications while satisfying stringent environmental standards. Key Products and Services Gasoline antiknock boosters; cetane number improvers; multifunctional gasoline and diesel fuel additives and detergents; corrosion and static inhibitors; antioxidants; stabilizers. Applications and Markets More than 200 major oil refineries in 65 countries around the globe, and fuel blenders worldwide. New Technologies At our world-class research and development facilities, we test new products such as lead traps and lead-tolerant catalytic converters designed to reduce emissions to the environment. Value-Added Opportunities In addition to producing fuel additives, Octel adapts its manufacturing expertise to other products. Procter & Gamble recently commissioned Octel to manufacture Octaquest(TM), a biodegradable cleaning agent with enhanced stain-removal properties added to several European laundry detergents. POLYMER STABILIZERS Great Lakes is an innovator in the development of specialty chemicals added to polymer systems to deliver precise performance traits such as heat resistance and color consistency. Building on synergies with our flame retardant technology, we engineer value by offering a comprehensive line of polymer modifiers backed by expert technical service to ensure total customer satisfaction. Key Products and Services Antioxidants; ultraviolet (UV) absorbers; hindered amine light stabilizers (HALS); plasticizers; nodust blends (NDB). Applications and Markets Fibers, cables, household appliances, communications equipment, computers and business machines, cosmetics, automotive. New Technologies Recent research and development advances may one day transform the polymer stabilizers business, enabling product customization unlike anything ever before developed. But gaining customer acceptance in this business is challenging, so Great Lakes is working closely with select customers to win the market over on a customer-by-customer basis. Value-Added Opportunities Great Lakes creates value by identifying and penetrating new markets. Working closely with customers, we tailor our innovative and patented stabilizers to meet exacting customer specifications in the high growth market for automobile bumpers and trim--a market historically closed to Great Lakes by competitor patents and lengthy customer approvals. SPECIALIZED SERVICES AND MANUFACTURING Extending Great Lakes' entrepreneurial drive to complementary businesses has added to the company's success and growth potential. These stand-alone businesses open dynamic markets for Great Lakes' high-margin, value-added products and services, and provide significant growth opportunities. Key Products and Services Bromine-based fluids for oil and gas drilling; sand control and filtration; reservoir analysis; environmental remediation; geotechnical engineering; fire extinguishants; specialty refrigerants; pharmaceuticals; toxicological testing and bioanalytical services; international trading of chemicals and plastics. Applications and Markets Enviro-Energy Performance Group--oil and gas industry, waste management firms, forest product companies, government; Fluorine Chemicals--telecommunications, military, data processing, museums, health care; Toxicological Testing--pharmaceutical, chemical, veterinary, agricultural, food, consumer products; International Trading--Central and Eastern European chemical markets. New Technologies OSCA, our oil field services business, is taking steps to meet the growing demand for work boat-based offshore well service in the Gulf of Mexico. OSCA plans to launch two boats fitted with computer-controlled, high-speed service equipment for shallow-water wells and a third boat designed to service deep-water platforms--even in severe weather conditions. Value-Added Opportunities Great Lakes capitalizes on the synergies created through the joint management of a select group of businesses with high growth potential. By dedicating necessary capital and management tools, we ensure the best possible chance for the sustained long-term growth of each of these businesses. WATER TREATMENT Great Lakes is the premier formulator of water treatment biocides. Through its BioLab and Bayrol subsidiaries, Great Lakes markets popular pool and spa products throughout North America, Europe, Australia and South Africa. A growing number of industrial customers worldwide are also discovering the proven value of the company's specialty biocides. Key Products and Services Bromine, chlorine and non-oxidizing water sanitizers: algicides, oxidizers, pH balancers, mineral balancers and specialty chemicals; brand name swimming pool and spa products, including BioGuard(R), OMNI(R), Hydrotech(R), Guardex(R), Pool Time(R) and AQUA CHEM(R); industrial biocides and biocide dispensing equipment. Applications and Markets Pool and spa dealers, mass market retailers, residential and commercial builders, industrial cooling towers, water treatment, industrial and municipal wastewater treatment, pulp and paper processing, food processing, home care products. New Technologies Great Lakes' advancements gained global exposure for Vantage(TM) Commercial Water System, a patented bromine-ozone treatment system, that provided remarkable clarity in the pools at the 1996 Olympic Games in Atlanta. Value-Added Opportunities Adding to BioLab's success in foreign pulp and paper markets, EPA approved BromiCide(R) for use in producing food-contact paper. BromiCide is an environmentally friendly and cost-effective alternative to bleach and other biocides currently used in the $100 million U.S. market. 6 GREAT LAKES CHEMICAL CORPORATION 2 FLAME RETARDANTS Great Lakes' ability to engineer custom flame retardant solutions adds value to customer relationships and creates new opportunities for growth. Year-in-Review In 1996 Great Lakes eclipsed the performance of its competition and maintained its market leadership position in every key flame retardant product. Revenues for the year were essentially even with 1995, when they increased 13 percent to a record level. These results reflect lower demand for products targeted at the consumer electronics and wire and cable industries as customers consumed inventory purchased at the end of 1995. Derivatives of PDBS-80(TM) impart not only flame retardancy, but also thermal stability and color consistency in electronic equipment such as fax machines. Recent advances in new product development enable the production of wire and cable jacketing that remains flexible during cold temperature installations while meeting demanding flame retardant standards. 10 GREAT LAKES CHEMICAL CORPORATION 3 As new products undergo development and testing, customers around the world turn to Great Lakes to develop customized compounds that impart flame retardancy and other characteristics that enhance performance and streamline production. The growing complexity of these solutions, and the proven superiority of bromine derivatives as flame retardant agents, make this a dynamic business with solid growth potential. Great Lakes has leveraged its unmatched raw materials and vast technology resources to build a world leadership position in flame retardant chemistry. Today, customer- and market-focused research and development is keeping Great Lakes on the leading edge and is creating new opportunities for growth. Great Lakes is adding value to customer relationships by helping customers meet highly specific production challenges. For one customer, Great Lakes developed a custom flame retardant additive that improves the performance of a resin system used to manufacture a proprietary product. For another, it is creating a derivative of DP-45(TM) for PVC applications that imparts flame retardancy while giving wire jacketing better flexibility during low-temperature installations. These solutions in turn become the foundations of new Great Lakes products that serve wider applications. In 1996 Great Lakes also continued work on several promising new derivatives of PHT4(TM), a versatile building block molecule. One new derivative, CN-2065 for flexible urethanes, has received regulatory approval and is being adopted by manufacturers of foam and fabric used in automobile headliners. Another compound, CN-1753, is in the final stages of commercialization and will be used in both wire and cable and light-stable packaging film applications. Great Lakes also has a proud heritage of capitalizing on regulatory, product and market opportunities. The company is closely monitoring ongoing regulatory discussions that will shape the future of the consumer furniture, carpet backing and wire and cable industries. Great Lakes currently supplies these industries with flame retardant additives that meet today's regulatory standards. But it has already engineered new families of compounds that will enable customers to respond immediately to the more stringent flammability requirements advocated by fire marshals. Additionally, the recent expansion of Great Lakes' Polymer Stabilizers business into North America and the Pacific Rim will provide new opportunities to introduce flame retardant technology to a broader range of plastics applications. 1997 OUTLOOK In 1996 competitive pressures and a return to more balanced supply and demand produced a slight erosion of pricing for several key products. Great Lakes' strategic decision to protect market share by matching competitive pricing enabled the company to maintain its market share. Strengthening market conditions, however, point to firmer demand and stable pricing in 1997 and a return to recent revenue growth levels. An upturn in the European economy and increased demand in Asia should improve sales for our highest volume flame retardants. Orders from customers in the electronics and wire and cable industries are rebounding with the depletion of inventories. And in the United States, the current low interest rate environment should stimulate demand from the automotive and construction markets. PROCESS IMPROVEMENT Manufacturers are always looking for new ways to increase productivity and improve quality control. Great Lakes developed a custom solution for a producer of small nylon connectors that resulted in greater production volume and a much lower rejection rate. It engineered a new flame retardant additive--a derivative of PDBS-80 --that improves the consistency of the plastic so it flows into the injection mold faster and more smoothly. [PHOTO OF CHAIR] [CAPTION] Great Lakes serves the furniture industry by producing flame retardant additives used in both upholstery and foam cushioning materials. Flame Retardants (in millions) [BAR CHART] GREAT LAKES CHEMICAL CORPORATION 11 4 INTERMEDIATES AND FINE CHEMICALS With research and production facilities on two continents, Great Lakes is emerging as an expert resource for complex chemical synthesis and custom manufacturing. Customers around the world turn to Great Lakes' Intermediates and Fine Chemicals business unit to manufacture chemical intermediates that serve as the building blocks for other compounds, and to engineer highly complex organic molecules that meet specific performance, environmental and quality requirements. These compounds have applications in the dynamic, expanding agrochemical and life sciences industries, as well as in markets such as imaging and photographic chemicals, fibers and specialty resins used by the foundry industry. With eight production centers and four research and development facilities in the United States and Europe, this business is well positioned to perform chemical synthesis and custom manufacturing for the growing number of large companies who choose to outsource these activities. After steady improvement in 1995 across all product categories, revenues for the Intermediates and Fine Chemicals business declined by seven percent as low demand for polyurethanes led to overcapacity in the PTMEG market. Additionally, competitive pressures in the Far East and a softening of the domestic tool market restricted sales of furfuryl alcohol. At the same time, sales of bromine-based fine chemicals and intermediates increased. The company's distinct technological strengths in these areas, its well funded research and development activities and a well timed capacity expansion in South Arkansas and Wales have enabled Great Lakes to capture a much greater share of this fast growing market. Aggressive new product development is a central component of Great Lakes' strategy for building this business. In the life sciences arena, Great Lakes is actively developing and marketing intermediates used in antiviral products and antihypertensive medications. Its Palmer Research facility will soon be supplying a major company with the first commercial amounts of a key building block intermediate used in a new AIDS drug currently awaiting FDA approval that promises to prolong life by arresting the multiplication of the killer virus. Several customers have commissioned Great Lakes to produce new agrochemical intermediates used in herbicides, fungicides and insecticides. These new products focus on a wide variety of crops, from wheat and corn to fruit and vegetables. The company also signed a new seven-year contract to produce a key intermediate of an acaricide that protects a broad range of crops from the devastating effects of spider mites. And after demonstrating its ability to develop and manufacture new intermediates on time and within budget, Great Lakes now produces a range of compounds for DowElanco, a leading agrochemical company. [PHOTO OF GOLFER] [CAPTION] New applications for POLYMEG polyols, a versatile furfural derivative used primarily by the polyurethane industry in a wide range of end uses, include soft spikes on golf shoes as well as certain brands of golf balls. 12 GREAT LAKES CHEMICAL CORPORATION 5 Year-in-Review While weak demand for PTMEG and furfuryl alcohol led to a seven percent decline in revenues for this business unit, Great Lakes introduced several new compounds for the life sciences, agrochemical and photographic markets that helped boost sales of bromine-based intermediates and fine chemicals. 1997 OUTLOOK Continued penetration of the life sciences and agrochemical markets, plus new contracts to supply major photographic chemical companies with fine chemicals used in complex fine-grained photographic development compounds, should boost sales of fine chemicals and bromine-based intermediates well beyond 1996 levels. Great Lakes will also consider opportunities to acquire businesses or technologies that will help it meet the exacting standards of a broader base of customers. Capacity is now in place to support the growth of furfural-based intermediates. Though demand of PTMEG from its largest market, the fibers industry, may remain weak through the first part of 1997, new applications for PTMEG such as soft golf spikes offer additional revenue opportunities going forward. At the same time, we are exploring viable new sources of cheap and abundant raw materials to enhance operating efficiency, reduce costs and improve margins. SAFETY AND PERFORMANCE While chlorofluorocarbons and other ozone-depleting solvents and refrigerants are being phased out worldwide, Great Lakes is capitalizing on its established bromine chemistry and production expertise to develop superior bromine-based alternatives. Certain alkyl bromides offer enhanced performance and environmental characteristics due to their inherently lower toxicity. EPA approval is under way to allow Great Lakes to enter these alkyl bromides into the multi-billion dollar market for high-margin precision cleaning solvents for electronics, aerospace and military applications. INTERMEDIATES AND FINE CHEMICALS (in millions) [BAR CHART] GREAT LAKES CHEMICAL CORPORATION 13 6 PETROLEUM ADDITIVES Octel's focus on new product development continues to produce new growth opportunities in petroleum specialties and industrial and performance chemicals. [PHOTO OF AUTOMOBILE] [CAPTION] Year-in-Review Petroleum Additives endured its most challenging year since Great Lakes acquired a majority interest in Octel in 1989. Revenues of $618 million were down six percent from record sales in 1995, due to a larger-than-expected decline in retail volumes of antiknock compound and lower than trend-line price increases. Octel generated significant cash flows, however, and sales of petroleum specialties and industrial and performance chemicals continue to present sustainable growth potential. Octel America continues to refine its DMA multifunctional series of detergents, which boost engine performance by improving engine and gasoline cleanliness. [PHOTO OF TRUCK] [CAPTION] Octel's new OLI 9000 lubricity improver helps refineries meet growing demand for diesel fuels with reduced levels of sulfur. 14 GREAT LAKES CHEMICAL CORPORATION 7 Great Lakes' Octel Associates subsidiary is the world's foremost producer of lead compound, the most cost-effective and energy-efficient means for delivering antiknock qualities to motor fuel. Additionally, Octel utilizes its expertise in motor fuel technology to develop and manufacture new petroleum specialties. Octel also draws on its abundant supply of elemental bromine to manufacture bromine and sodium derivatives and chlor-alkali products. ANTIKNOCK COMPOUND In 1996 Octel experienced a larger that expected decline in lead compound sales as refiners continue seeking alternative methods to obtain octane improvement. This company's performance was also hampered by volume declines in those regions of the world where pricing and market share position have a greater impact on profitability. Coupled with competitive pressures in these same markets, the combination of factors resulted in Octel posting lower sales and earnings. In response to the unfavorable market conditions, Octel continued its aggressive management of costs by closing two plants and consolidating all production at its highly efficient Ellesmere Port, U.K., facility. It also introduced new working arrangements aimed at reducing costs through increased flexibility and productivity. These and other initiatives enabled Octel to generate strong cash flows. PETROLEUM SPECIALTIES As economic conditions in Europe and North America weakened demand for certain detergent and lubricant products, Octel focused on bringing its performance-enhancing transport fuel additives technology to emerging international markets such as in the Far East and South Africa. As a result, sales of petroleum specialties grew over 1995 revenues. Octel is well positioned to take advantage of new legislation in Europe that mandates reduced levels of sulfur in diesel fuels. The proven ability of Octel's new OLI 9000 lubricity improver to protect engine fuel pumps has resulted in strong and immediate demand from oil companies in Europe, Japan and the United States. INDUSTRIAL AND PERFORMANCE CHEMICALS Natural synergies between Octel and Great Lakes' Intermediates and Fine Chemicals business unit are helping Octel solidify its position as a major supplier of bromine and derivatives to the European market. With its new multi-product bromination plant in Amlwch, Wales, Octel can meet growing demand for chemical intermediates from the pharmaceutical, agricultural and other industries. This unique site provides an integrated approach to bromine chemistry. It produces bromine from seawater, has dedicated and multipurpose bromination facilities, and can recycle bromine from other bromide-containing products. In 1996 Octel began supplying Procter & Gamble's European manufacturing facilities with a new biodegradable chelating agent, Octaquest(TM), that reduces wasteful decomposition in detergent bleach systems while improving their ability to remove organic stains. Octaquest has enabled Procter & Gamble to replace nonbiodegradable phosphonates over its extensive range of laundry detergent brands in Europe. Procter & Gamble also has filed application patents covering uses for Octaquest in automatic dishwashing detergents, fabric softeners, rinse aids and personal care products. 1997 OUTLOOK Octel will continue taking the steps necessary to manage its future in the face of constricting demand for alkyl lead compounds. The combination of an ongoing diversification strategy and an aggressive profit enhancement program will allow Octel to prolong and optimize the cash generated by this business. These resources will be used to build Octel's position in the worldwide petroleum specialties and industrial and performance chemicals markets as well as to support other Great Lakes growth initiatives. [PHOTO OF MAN AT INSTRUMENTS] REFINING NEW PRODUCTS Octel strengthened its foothold in the North American fuel additives market when its wholly owned Octel America subsidiary introduced an innovative new line of efficient fuel additives that meet the performance and regulatory requirements of the North American market. Octel America also continued to refine its DMA multifunctional series of detergents, which reduces emissions by improving engine and gasoline cleanliness. PETROLEUM ADDITIVES (in millions) [BAR CHART] GREAT LAKES CHEMICAL CORPORATION 15 8 POLYMER STABILIZERS With manufacturing and technology centers in the world's three major polymer stabilizers markets, Great Lakes is ready to set a new global standard for innovative products and custom solutions. Great Lakes' antioxidants, UV stabilizers and customized additive blends enable manufacturers around the world to incorporate versatile, cost-effective plastics stabilizers into an expanding array of products. These compounds increase the range of use of plastics by making them more compatible with other polymers, better protected against light degradation, cleaner to process and easier to recycle. Growing use of polymers and new applications in global markets, combined with an ever-changing regulatory environment, provide Great Lakes ample opportunities to continue the four-year growth trend that has produced double-digit increases in revenues. Manufacturing and technical support capabilities in Europe, North America and Asia give Great Lakes direct access to the world's three largest polymer markets and enable us to balance supply and market requirements worldwide. Synergies with our Flame Retardants business provide a competitive advantage in producing safe, efficient and durable polymer systems that impart both flame retardancy and superior stability. Even as the Polymer Stabilizers business unit fell slightly short of its double-digit growth rate in 1996, major polymer producers and compounders embraced several new UV stabilizer products as well as our new antioxidant for tires, Anox(R) HPG. Proprietary silicon-based products such as our patented Uvasil 299 hindered amine light stabilizer also met with increased interest and approval. And customers turned to Great Lakes for custom compounds such as our proprietary No Dust Blends and other additive blends to meet the unique performance requirements of newly developed products. In 1996 Great Lakes continued to position itself to take full advantage of growing global demand in the $2 billion polymer stabilizers market. We took our first steps to penetrate the buoyant North American plastic additives market--which accounts for almost one-fourth of volume worldwide--when our new manufacturing facility in Newport, Tennessee, began shipping high-quality antioxidants during the third quarter. [PHOTOS OF BOTTLE] [CAPTION] Humidity resistant granular antioxidant blends maximize performance and greatly simplify polymer processing operations. POLYMER STABILIZERS (in millions) [BAR CHART] 16 GREAT LAKES CHEMICAL CORPORATION 9 Year-in-Review A strong fourth quarter pushed 1996 revenues to $242 million, up eight percent from 1995, and established momentum for higher growth in 1997. Sales of UV stabilizers improved over the previous year, while sales of antioxidants for plastics also increased. This manufacturing operation, coupled with our Technology Center in West Lafayette, Indiana, will make North American customers much more receptive to our wide range of value-added services--especially our custom additive blends. We also staked our claim to a greater share of the fast-growing Asian and Pacific Rim markets by forming our joint venture Asia Stabilizers Co. Ltd. (ASC) in Korea and establishing a Technology Center in Korea. Antioxidants manufactured by ASC help Great Lakes penetrate these markets with our full range of stabilizers. To further enhance Great Lakes' position in the UV light stabilization and antioxidant markets, we continued our aggressive efforts to expand our product range. Our new product strategy includes offering traditional products in alternative physical forms that offer lower cost, improved safety and greater convenience; extending our innovative line of highly stable, silicon-based light stabilizers and leveraging this silicon technology to develop new antioxidants; exploiting synergies with our global Flame Retardants business to develop value-added formulations; and forming joint research and development agreements with key customers to create molecules modified to meet exact customer requirements. 1997 OUTLOOK In 1996 the Polymer Stabilizers business experienced volume weakness and pricing pressures in Europe, flat global plastics markets, and a longer-than-expected customer approval process for new products such as Lowinox(R) HD-98 and GP-45 and certain Uvasil compounds. Great Lakes enters 1997 well positioned to penetrate new markets, better utilize available production capacities to respond to global supply and market requirements, and reduce importing costs. These factors, plus a strengthening European plastics market and recent customer approval of several new products, should put the Polymer Stabilizers business back on track to double-digit revenue and profit growth. [PHOTO OF PLANT EQUIPMENT] NEW FORMULATIONS FOR NEW MARKETS Great Lakes' new manufacturing facility in Newport is well equipped to serve the needs of the North American market. Today's manufacturers seek better performing products that help them raise productivity while increasing the value of their products, and Great Lakes is responding with antioxidant blends in non-dusting, multicomponent forms that compress multiple additives into mechanically stable granules. [PHOTO OF COMPUTER] [CAPTION] Great Lakes' polymer stabilizers safeguard polymer systems used in such applications as computer housings from ultra-violet ray degradation. GREAT LAKES CHEMICAL CORPORATION 17 10 SPECIALIZED SERVICES AND MANUFACTURING To support its long-term growth objectives, Great Lakes builds and acquires businesses and high growth technologies that serve fast growing markets and produce high returns on equity. Great Lakes views its Specialized Services and Manufacturing business unit as an incubator for new technologies and business opportunities that can contribute to the company's long-term growth. These stand-alone businesses open dynamic markets for Great Lakes' high-margin, high value-added products and services. All afford excellent growth potential while delivering high returns on equity. ENVIRO-ENERGY PERFORMANCE GROUP Great Lakes' expertise in bromine chemistry, its knowledge of drilling operations and its entrepreneurial approach to solving environmental problems have helped the company build leadership positions in the fast growing oil field services and environmental remediation markets. Brominated clear fluids and other related products manufactured by OSCA enhance the productivity of existing oil and gas wells and play an integral role in the discovery of new energy resources around the world. In 1996 OSCA benefited from heightened drilling activity in the North Sea, Venezuela and the Gulf of Mexico, as well as from an increased level of domestic completion work in the second half of the year. In the coming year, OSCA will enhance its capabilities in the marine well service business, an area that promises long-term growth potential, when it commissions two specially equipped service boats. Each vessel features a quality assurance lab and computer-assisted well servicing equipment. To satisfy growing long-term demand, OSCA retained a firm to design and build a third ship capable of providing well servicing for deep-water drilling platforms in the Gulf of Mexico, even in extreme weather and sea conditions. Four Seasons and Aquaterra create value for governmental agencies and commercial companies around the world by applying their expertise in site assessment and evaluation, groundwater treatment systems, soil reclamation, waste minimization and pollution prevention to help customers address environmental concerns. In 1996 the U.S. government put nonessential environmental spending on hold, causing delays on certain projects already under-way. This freeze caused the group to focus on other profitable segments of the business, including Industrial Services and Consulting. FLUORINE CHEMICALS Fluorine chemistry represents one of the company's most promising frontiers for growth, and aggressive research and development has produced a number of compounds that are gaining worldwide recognition for their superior performance. FM-200(R), a high-performance fire extinguishant, creates value for customers by providing an environmentally superior alternative to halon-based products. Industry estimates indicate that as many as 40,000 FM-200 systems have been installed worldwide in over 70 countries, [PHOTO OF WORKER WITH TEST TUBE] [CAPTION] Great Lakes' extensive research and development activities target emerging technologies that meet specific market requirements. [PHOTO OF OIL RIG] [CAPTION] 18 GREAT LAKES CHEMICAL CORPORATION 11 Year-in-Review Great Lakes benefited from growing demand for fluorine-based fire extinguishant compounds and a high volume of oil field drilling activity in several key regions. Revenues declined precipitously, however, as political and economic changes in Hungary sharply restricted sales opportunities for our low-margin international trading business. making FM-200 the most widely accepted and used fire extinguishant worldwide for special hazard applications. Increased demand for this product in 1996 again boosted sales to a record level. Another recently developed fluorine-based compound, HFC-32, has become a key component of environmentally friendly refrigerant blends slated for use in commercial refrigeration applications. To enhance its position as the only world-scale producer of this important CFC replacement, Great Lakes completed a capital project for HFC-32 that will enable the company to accommodate increased demand. TOXICOLOGICAL TESTING At a time when an increasing number of companies are outsourcing product research and development and new product testing, WIL Research Laboratories, Inc. provides fully integrated research and testing services that help assure these products meet tough governmental standards. WIL's expansion of its world-class facilities in 1995 enabled it to manage the strong demand for its services in the second half of 1996 and generate record earnings. WIL anticipates growing worldwide demand for its services as countries adopt more stringent requirements for pharmaceutical, chemical, veterinary medical, agricultural, food and consumer products. 1997 OUTLOOK Several factors point to improved performance in the year ahead. OSCA's introduction of products such as FracPac(R) sand control/well enhancement technology will help drive growth in OSCA's most important market--the U.S. Gulf of Mexico. In addition, Four Seasons expects to resume the environmental remediation projects sponsored by the U.S. government and anticipates further penetration of the private sector. And abundant sales opportunities for new and existing fluorine-based products, and an active new product pipeline, will produce significant growth in fluorine derivatives over the next five years. [PHOTO OF SHIP] PROTECTING STRATEGIC ASSETS After extensive testing, the U.S. Navy selected Great Lakes' FM-200, a fluorine-based fire extinguishant, to safeguard strategic areas on its new "ozone-friendly" ships. The U.S. Army has also specified FM-200 to replace halons in its watercraft and is now completing the required testing to clear the system for use in tactical vehicles as well. SPECIALIZED SERVICES AND MANUFACTURING (in millions) [BAR CHART] GREAT LAKES CHEMICAL CORPORATION 19 12 WATER TREATMENT With its extensive manufacturing, technical support and sales network, BioLab can deliver pool and spa products and services to distributors, consumers and industrial and commercial enterprises around the world. A GOLD MEDAL PERFORMANCE While the world's best swimmers and divers collected medals for their superior performance at last summer's Olympic Games in Atlanta, BioLab's Commercial Water Division earned accolades of its own for the gold medal performance of its Vantage(TM) Commercial Water System in keeping the Olympic pools crystal clear. The Vantage system, introduced in 1994, features a patented bromine-ozone technology that is now used in more than 250 commercial pools around the United States. At the Olympics, the remarkable water clarity helped set a new standard for underwater photography of the events. [PHOTO OF SWIMMING GEAR] [CAPTION] BioLab's comprehensive line of water treatment formulations deliver algae-free water with outstanding clarity for recreational swimming pools and spas. 20 GREAT LAKES CHEMICAL CORPORATION 13 Year-in-Review Revenues for the global Water Treatment business improved three percent to $430 million. Higher sales volumes in the United States, Canada, Australia and South Africa helped generate record revenues from pool and spa products marketed under the BioGuard(R), OMNI(R), Guardex(R), Hydrotech(R), Pool Time(R) and AQUA CHEM(R) brand names. Sales of industrial biocides targeted at applications such as water cooling towers, the pulp and paper industry and wastewater treatment facilities improved slightly over 1995. Great Lakes has systematically built its BioLab subsidiary into the world's leading producer of bromine-based water treatment chemicals and a premier distributor of pool and spa products. One of the keys to BioLab's success in this non-discretionary, non-cyclical market is its ability to anticipate and respond to the full range of customer requirements for product packaging, formulation, safety, presentation and ease of handling. Further, its proven ability to identify, acquire and successfully integrate acquisitions has helped create a manufacturing, technical support and sales network that covers every major global water treatment market. The strong performance characteristics of BioLab's recreational and industrial products and its success in penetrating new markets provide a solid foundation for consistent growth. BioLab continued to manage its business portfolio to the greatest advantage when it sold the assets of BLN, a wholly owned subsidiary, to SCP Pool Corporation and acquired the assets and inventory of SCP's Alliance Packaging subsidiary, which has been consolidated at BioLab's Conyers, Georgia, facility. This transaction allows BioLab to focus on its core value-added activities --formulating and packaging chemicals for swimming pools and spas. BioLab also adds a business that complements its existing packaging operations. The transaction includes a long-term supply agreement under which BioLab will supply a vast majority of SCP's pool chemical requirements. A number of additional initiatives will help BioLab continue to meet its performance objectives in 1997 and beyond. Its ongoing efforts to broaden applications for existing technologies and develop new products for emerging markets led to the development of Smart Sticks(TM), a convenient new BioGuard product that simplifies pool and spa maintenance. BioLab also solidified ties with an important segment of its customer base by sponsoring a conference that introduced authorized BioGuard dealers to the newest products and latest sales and marketing techniques. And it continued to support its industrial customers by helping them proactively manage the implications of changing environmental regulations. 1997 OUTLOOK In 1996 a slow European economy limited the growth of the pool and spa industry, while poor weather conditions in Europe and an unseasonably cool and wet spring in the United States reduced sales to existing customers. These conditions were balanced by increased penetration of the Canadian, Australian and South African markets and the success of new products developed for the industrial market. In 1997 several factors will contribute to BioLab's steady growth, including its acquisition of Alliance Packaging; greater availability of a key building-block compound; and the extension of this technology to new applications such as wood catalysts, hard-surface disinfectants and home care. [PHOTO OF TY-D-BOL DURA BLEACH] [CAPTION] Extending bromine technology to household water sanitizers, Great Lakes manufactures Ty-D-Bol Dura-Bleach(TM), a concentrated automatic toilet bowl cleaner, for Kiwi Brands. WATER TREATMENT (in millions) [BAR CHART] GREAT LAKES CHEMICAL CORPORATION 21 14 Financial Review
- ------------------------------------------------------------------------------------------------------- (in thousands of dollars, except per share data) 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- SUMMARY OF EARNINGS Net sales $ 2,211,704 2,361,069 2,065,008 1,792,042 Percent change from previous year (6.3) 14.3 15.2 19.8 Income from operations $ 445,358 497,343 438,689 424,781 Percent of net sales 20.1 21.1 21.2 23.7 Income before income taxes $ 379,196 437,873 402,675 383,384 Percent of net sales 17.1 18.5 19.5 21.4 Income taxes $ 128,900 142,300 124,000 110,600 Percent of income before income taxes 34.0 32.5 30.8 28.8 Net income $ 250,296 295,573 278,675 272,784 Per share $ 3.94 4.52 4.00 3.82 Percent of net sales 11.3 12.5 13.5 15.2 Percent of stockholders' average 17.2 21.7 21.7 23.6 equity FINANCIAL POSITION AT YEAR-END Working capital $ 743,076 645,783 551,735 489,179 Current ratio 2.7 2.3 2.3 2.3 Capital expenditures $ 237,464 246,639 123,109 79,270 Total assets $ 2,661,339 2,533,672 2,111,465 1,900,864 Long-term debt $ 503,795 340,145 143,661 61,041 Percent of total capitalization 24.1 18.8 9.7 5.1 SHARE DATA Stockholders' equity $ 1,486,899 1,416,183 1,310,948 1,256,563 Per share $ 24.13 21.92 19.48 17.63 Cash dividends per share Declared during year $ .57 .44 .39 .35 Paid during year $ .54 .43 .38 .34 Payout as percent of net income 14.5 9.7 9.8 9.2 Shares outstanding Average during year 63,538,759 65,364,066 69,658,653 71,329,145 At year-end 61,612,851 64,604,377 67,297,420 71,274,796 Stock price High $ 78 5/8 74 5/8 82 84 Low $ 44 1/4 55 3/4 48 3/4 64 1/2 At year-end $ 46 3/4 72 57 74 5/8 - -------------------------------------------------------------------------------------------------------
Share data has been restated to reflect the 100 percent stock dividends on January 30, 1992, and October 31, 1989. Long-term debt in 1991 excludes debt of $125 million incurred to fund an acquisition. 22 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 15
(in thousands of dollars, except per share data) Ten-Year Growth 1992 1991 1990 1989 1988 1987 1986 Percentage - ------------------------------------------------------------------------------------------------------------------------------------ 1,496,478 1,307,607 1,066,298 792,327 557,770 478,386 300,329 22.1 14.4 22.6 34.6 42.1 16.6 59.3 8.4 363,010 309,867 270,452 163,918 92,600 76,120 42,895 26.4 24.3 23.7 25.4 20.7 16.6 15.9 14.3 332,735 225,473 209,449 167,918 143,488 85,036 42,717 24.4 22.2 17.2 19.6 21.2 25.7 17.8 14.2 100,000 68,000 68,600 45,000 40,200 29,500 15,900 30.1 30.2 32.8 26.8 28.0 34.7 37.2 232,735 157,473 140,849 122,918 103,288 55,536 26,817 25.0 3.27 2.23 2.00 1.76 1.48 .83 .44 24.5 15.6 12.0 13.2 15.5 18.5 11.6 8.9 23.8 19.2 21.1 22.9 23.6 18.2 13.0 342,171 338,009 301,092 236,648 100,238 101,083 113,370 20.7 1.8 2.1 2.0 2.1 1.8 1.9 2.4 69,368 71,243 48,565 40,466 47,017 35,186 18,327 1,731,989 1,649,132 1,406,296 1,097,400 663,838 577,087 491,567 18.4 45,642 139,788 76,657 113,700 19,266 42,149 163,319 7.3 4.4 12.8 17.5 3.7 9.4 40.1 1,052,851 900,344 744,158 590,861 482,225 392,602 216,265 21.3 14.75 12.69 10.56 8.42 6.91 5.64 3.60 21.0 .31 .27 .23 .20 .18 .16 .14 15.1 .30 .26 .22 .19 .17 .15 .13 15.2 9.5 12.1 11.5 11.4 12.2 19.3 31.8 71,164,010 70,700,332 70,287,088 69,885,212 69,658,840 66,469,556 59,992,472 71,410,458 70,923,990 70,443,150 70,098,826 69,653,184 69,580,948 60,044,516 71 3/8 58 34 24 16 1/2 19 1/4 11 1/8 50 1/4 30 3/8 20 3/8 14 1/8 12 1/8 9 7 1/2 69 1/4 57 1/4 31 7/8 23 5/8 14 5/8 13 1/2 9 17.9
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 23 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This annual report, including Management's Discussion and Analysis, contains both historical information and forward-looking statements. The forward-looking statements involve risks and uncertainties that affect the Company's operations, markets, products, services, prices and factors as discussed in the Company's Annual Report on Form 10K filed with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, governmental and technological factors. Accordingly, there is no assurance that the Company's expectations will be realized. OPERATING RESULTS 1996 COMPARED WITH 1995 Sales for the year were $2.2 billion, a decline of 6 percent from the $2.4 billion reported in 1995. Sales have grown at a compound rate of 22 percent over the last 10 year period. Sales by business unit are shown in the following table (in millions):
- --------------------------------------------------------------- Percent Inc./ (Dec.)Over 1996 1995 1994 Prior Year - --------------------------------------------------------------- $ % $ % $ % 1996 1995 - --------------------------------------------------------------- Flame Retardants 294 13 300 13 265 13 (2) 13 Intermediates and Fine Chemicals 282 13 302 13 262 13 (7) 15 Petroleum Additives 618 28 656 28 610 30 (6) 8 Polymer Stabilizers 242 11 224 9 162 8 8 38 Specialized Services and Manufacturing 346 16 460 19 383 18 (25) 20 Water Treatment 430 19 419 18 383 18 3 9 - --------------------------------------------------------------- 2,212 100 2,361 100 2,065 100 (6) 14 ===============================================================
The change in sales from the prior year is due to the following (in millions):
- --------------------------------------------------------- Increase/(Decrease) 1996 1995 - --------------------------------------------------------- Selling price $ 34 $ 87 Volume (116) 81 Acquisitions -- 102 Dispositions (45) -- Foreign Exchange (22) 26 - --------------------------------------------------------- $(149) $296 =========================================================
Flame Retardants sales of $294 million were approximately 2 percent short of 1995's record performance. Even though volumes increased, reduced product prices and the negative effects of a strong dollar vis-a-vis both the Japanese yen and the deutsche mark more than offset the improvements. Market demand was weak all year, particularly in automotive, wire and cable and consumer electronics. A sluggish European economy also held down customer requirements. Worldwide market share was maintained in a very competitive environment. Intermediates and Fine Chemicals sales of $282 million were down approximately 7 percent from the prior year due to volume declines in furfural and furfural derivatives. Worldwide demand for furfuryl alcohol and PTMEG declined at an accelerating rate over the course of 1996. Slowdowns in new tooling requirements for the heavy equipment and the machine tool industries negatively affected furfuryl alcohol, while weak polyurethane requirements restricted POLYMEG(R) polyols sales. Both products are under significant price pressure due to the supply demand imbalance. In 1996, the business sacrificed volume and successfully maintained price improvements that were achieved in 1995. Unfortunately, competitive pricing will have to be met in 1997 in order to maintain market share. Sales of agricultural chemicals, bromine and derivatives and fine chemicals were essentially flat following a very strong performance in 1995. Petroleum Additives sales declined $38 million in 1996. Retail alkyl lead compound volumes declined 13 percent for the year which is higher than the 7 to 10 percent annual market decline experienced over the last several years. No single factor accounts for the decline, and the Company believes it maintained its share of the worldwide market. Price improvements for the year averaged about 4 percent, which is lower than what was achieved in the prior year. In part, this reduced rate of increase is attributable to (1) the Company's strategy to extend the life of the product; (2) refinery economics related to achieving octane ratings; (3) a changing mix of customers and regions of the world where alkyl lead compound is sold - compound sold in Western Europe is declining at a faster rate than in other regions; and (4) aggressive pricing by an Eastern European producer with relatively small capacity. Future price increases are expected to be in the low single-digit range, with the average change for a period very dependent on the regional sales mix. Wholesale alkyl lead compound sales relate primarily to supplying Ethyl Corporation's requirements under a 1994 agreement. Wholesale volumes increased approximately 5 percent in 1996, with deliveries to Ethyl Corporation comparable to the prior year. Prices in the wholesale market increased about 6 percent for the year. The relationship of retail to wholesale was 68/32 compared to 72/28 in 1995. Non-lead fuel additives and other chemical sales grew approximately 11 percent due to new product introductions and expanding volume. Polymer Stabilizers sales for the year increased $18 million, or approximately 8 percent. On an overall basis, the sales improvement is attributable to volume gains as market conditions and competitive activity restricted price improvements and the effect of currency fluctuations was negative. The reduced rate of improvement experienced by this business unit in 1996 reflects a stagnant European economy, our largest market, where total plastics output declined about 10 percent in 1996. End-use markets in North America and the Far East grew at a modest rate. The business unit improved market share outside of Europe in part by bringing onstream an antioxidant production facility in Newport, Tennessee, and establishing a production joint venture in Korea. 24 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 17 Specialized Services and Manufacturing sales declined $114 million in 1996. Chemol, our Hungarian-based chemical trading company, experienced a decline in sales of approximately $125 million due to the loss of major suppliers as the privatization process in Hungary continued. The Company anticipates that Chemol will experience some additional contraction in 1997. Other businesses in this unit registered solid improvements. In our Enviro-Energy Performance Group (EEP), oil field services sales improved approximately 35 percent from the prior year as drilling activity in the Gulf of Mexico expanded and the business extended its presence in international markets. The environmental services segment of EEP struggled in 1996 as it was unable to recover from Environmental Protection Agency-related contract delays due to the federal government budget stalemate experienced early in 1996. Fluorine chemicals sales grew approximately 25 percent as the FM-200(R) fire extinguishing product strengthened its worldwide market position. Water Treatment sales gained $11 million primarily due to volume improvement of chemical products which more than offset the divestiture of BLN in September 1996. U.S. recreational water treatment sales posted strong growth to distributors and mass merchandisers in an average weather year. Volumes in Europe suffered due to cool weather conditions during the pool season. Competitive pressure allowed only minimal price improvements which were mostly offset by unfavorable currency effects.
- --------------------------------------------------------- Gross Profits as a Year Percentage of Net Sales - --------------------------------------------------------- 1996 32.8 1995 33.4 1994 33.7
Gross profits of $726 million declined $63 million from the prior year, net of $34 million in price increases. The decline reflects the impact of lower volume (58 percent), higher cost (23 percent), unfavorable currency effects (12 percent), and divestitures (7 percent). The negative impact of volumes is attributable to running polymer stabilizer and certain flame retardant units at reduced rates to adjust inventory levels; reduced requirements for alkyl lead compounds and furfural derivatives, and the contraction of Chemol's trading operations. Manufacturing cost increases result from a one-point increase in the Company's average raw material price index and a $10 million provision for anticipated alkyl lead compound plant closures. Benefits from closing the compound plant in France and reducing staffing levels at the plant in the U.K. will not be fully realized until 1997. Approximately 50 percent of the Company's business is transacted in foreign currencies, principally the pound sterling, deutsche mark and Japanese yen. Currency changes, while not having a significant impact on profit margins, were higher than recent years. The strength of the dollar against the Japanese yen and deutsche mark adversely impacted sales, while the strength of the Italian lira to the deutsche mark adversely affected costs. To minimize the effect of currency fluctuations, the Company uses foreign exchange contracts, average rate options, and other financial instruments. The Company's Octel subsidiary invoices approximately 50 percent of its sales in U.S. dollars; the balance of Octel's billing is in pound sterling which approximates Octel's pound sterling costs. This program is designed to insulate Octel's profits, measured in dollars, from fluctuations in the pound sterling.
- --------------------------------------------------------- SAR Expense as a Percentage of Net Sales Selling & Year Administration R&D Total - --------------------------------------------------------- 1996 9.8 2.9 12.7 1995 9.6 2.7 12.3 1994 9.5 2.9 12.4
Selling, administration and research (SAR) expense in 1996 amounted to $280 million, a decline of $11 million from 1995 as a result of lower costs and the effect of dispositions. As a percentage of sales, SAR expense increased slightly due to lower sales. Research and development spending in 1996 amounted to $64 million, a 2.4 percent increase over 1995. Research and development activities are centered on new and improved flame retardants and polymer stabilizers, pharmaceutical intermediates, non-lead fuel additives and water treatment products.
- ---------------------------------------------------------- Income from Operations as Year a Percentage of Net Sales - ---------------------------------------------------------- 1996 20.1 1995 21.1 1994 21.2
Operating income of $445 million declined 10 percent from 1995. Petroleum Additives were off 8 percent while the core specialty chemicals business declined 14 percent. Equity in earnings of affiliates and other income amounted to $60 million in 1996, double that of 1995. Included in 1996 is a gain of $19 million, net of expenses, resulting from breakup fees received when Nowsco Well Services, Ltd., accepted an acquisition offer that the Company was unwilling to meet and a net gain of $13 million resulting from the sale of the Company's engineered surface treatments business, E/M Corporation. Excluding the aforementioned one-time gains, other income is equivalent to the prior year. Interest and other expenses amounted to $96 million in 1996, $41 million higher than 1995. Included in the 1996 expense is a special charge recorded in the second quarter of almost $14 million primarily related to environmental remediation costs associated with a former plant site sold by the Company in the early 1980s and an approximately $13 million charge in the fourth quarter to write off unused equipment and to provide for redundancies. In addition to the above, other expenses increased due to: (1) interest expense on higher borrowings in support of share repurchases and capital projects; (2) accelerated amortization of goodwill related to the petroleum additives business to better match costs and revenues; and (3) foreign exchange losses, primarily unrealized, resulting from the pound sterling reaching highs vis-a-vis the U.S. dollar near the end of 1996. GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 25 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Minority interest in the income of subsidiaries includes an approximate 12 percent minority interest in Octel and an 11 percent minority interest in Chemol. The minority interest in Octel is before income taxes as earnings are predominantly from a partnership; therefore, taxes are paid by each partner individually.
- --------------------------------------------------------- Effective Tax Rate Year Percentage - --------------------------------------------------------- 1996 34.0 1995 32.5 1994 30.8
Income taxes of $129 million were $13 million lower than 1995; an increase of $6 million due to the higher effective tax rate was offset by lower earnings. The higher effective tax rate is due principally to a reduction in reversals of prior-year reserves. Net income for 1996 was $250 million, or $3.94 per share, compared to $296 million, or $4.52 per share, in 1995. The share repurchase program benefited earnings per share by approximately 3.5 cents. OPERATING RESULTS 1995 COMPARED WITH 1994 Sales for the year were $2.4 billion, an increase of 14 percent over the $2.1 billion reported in 1994. The $296 million improvement is attributable to increased selling prices of $87 million; volume gains of $81 million; sales of acquisitions, $102 million; and favorable foreign exchange of $26 million. Flame Retardants sales reached a record $300 million, an increase of $35 million over 1994. Selling price increases effected in late 1994 and early 1995 were maintained throughout the year. Incremental capacity expansions allowed the unit to satisfy strong market requirements in the United States and the Pacific Rim. Sales volumes in Europe were comparable to the prior year. Intermediates and Fine Chemicals sales increased $40 million, totaling $302 million for the year. Demand was strong across all product lines with furfural and derivatives, bromine and derivatives, and fine chemicals posting double-digit volume gains. All product lines achieved price improvements. Furfural and derivatives led the price improvements, with the combined effect of tight raw material supply and strong market demand for high value-added derivative products. Petroleum Additives sales improved $46 million in 1995 reflecting sales added by the September 1994 acquisition of E. I. du Pont de Nemours (DuPont) fuel additives business. In the alkyl lead compound product line, retail volumes declined approximately 8 percent for the year. Price improvements for the year averaged about 9 percent. Product pricing reflects the Company's strategy to extend the life of the product, refinery economics related to achieving octane ratings and the changing mix of geographic regions where lead fuels are used. During 1995 wholesale compound volumes declined 19 percent while prices improved about 5 percent for the year. The relationship of retail to wholesale compound sales was 72/28 in 1995 compared to 70/30 in 1994. Polymer Stabilizers sales increased 38 percent, or $62 million, during 1995. Approximately half of the improvement is attributable to the April 1994 acquisition of EniChem Synthesis S.p.A.'s (GLCI) polymer additives and associated chemicals business. The business unit successfully expanded its market presence through new product introductions and incremental capacity increases to meet customer requirements. Volume gains made during the first half of the year were offset in part by customer year-end inventory corrections. Product pricing increased over 1994. Specialized Services and Manufacturing posted a $77 million sales improvement over 1994 primarily due to Chemol's expansion of trading activities in Central Europe. The oil field service business registered solid improvements through an expanded presence in international markets and a broader offering of oil and gas well completion services. The fluorine chemicals business, led by expanded market acceptance of the FM-200(R) fire extinguishing product, gained over 40 percent for the year. Water Treatment sales gained $36 million in 1995. The extended summer season and higher than normal temperatures contributed to strong volume gains in recreational water chemical sales. Volume contributed more than 40 percent of the sales improvement with acquisitions adding another 35 percent. Favorable currency effects account for the balance of the improvement as competitive pressures did not allow for price improvement. Gross profits of $788 million increased $93 million over the prior year. Increases in selling prices were more than double manufacturing and raw materials cost increases. Core specialty chemical businesses registered volume gains that more than offset declines in the Petroleum Additives business unit. The contribution from acquisitions accounted for about 30 percent of the overall improvement while foreign exchange had a minimal impact on the increase in gross profits. As a percentage of sales, gross profits declined slightly as a one percentage point improvement in our core businesses was offset by a decline in Petroleum Additives. SAR expenses were $291 million, an increase of $34 million from the $257 million in 1994. As a percentage of sales, SAR expense declined slightly. In absolute terms, about half of the increase is attributable to increased spending associated with the growth of the business, 30 percent is related to acquisitions, and the balance is due to negative foreign exchange impacts. Research and development spending in 1995 amounted to $63 million, an increase of 6 percent over the prior year. Operating income increased 13 percent to $497 million on the strength of the strong showing turned in by the core business units. Operating income of these businesses increased 31 percent over the prior year. 26 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 19 Equity in earnings of affiliates and other income was $29 million in 1995, a decrease of $16 million from the prior year. Nonrecurring 1994 gains from insurance settlements, the disposition of a product line, and the settlement of a natural gas contract-related matter account for half of the decrease with the balance related to converting an equity position in Huntsman Chemical Corporation (HCC) to cumulative preferred shares in March 1995. Interest and other expenses amounted to $55 million in 1995, an increase of $7 million from the prior year. Interest expense, net of capitalized interest on construction projects, increased $5 million due to higher borrowing in support of the Company's share repurchase program and capital investment projects. Other expenses increased due to losses on asset disposals and the settlement of various legal matters. Amortization of intangibles declined slightly as goodwill amortization associated with the investment in HCC was eliminated with the conversion of the equity position in HCC to preferred stock. Foreign exchange gains and losses, which are included in other expenses, were not significant. Income taxes of $142 million increased $18 million over the prior year. The higher effective tax rate is due to a reduction in reversals of prior-year tax reserves and from a change in the mix of earnings from lower to higher tax rate jurisdictions. These items account for approximately $7 million of the increase with the balance related to increased earnings. Net income for 1995 was $296 million, or $4.52 per share, compared to net income of $279 million, or $4.00 per share, in 1994. The increase in net income and earnings per share was 6 percent and 13 percent, respectively. The share repurchase program added approximately $.07 to 1995 earnings per share. FINANCIAL CONDITION AND LIQUIDITY In 1996 the Company fell short of its objective to return 20 percent or more on stockholders' average equity. Management is focusing its efforts on profitability improvements, effective asset utilization and allocation of resources to capital projects, and strategic acquisitions that will return the Company to historic performance levels.
- --------------------------------------------------------- Year Return on Equity - --------------------------------------------------------- 1996 17.2 1995 21.7 1994 21.7
Cash from operating activities amounted to $310 million in 1996, a decrease of $34 million from the prior year. This strong cash flow, supplemented by commercial paper borrowings, was utilized by the Company to expand and improve production capacity, to increase dividends paid to shareholders by 26 percent and to repurchase approximately 3.3 million shares of stock. Cash and cash equivalents were $202 million including $139 million of short-term investments, an increase of $21 million from the prior year. The Company's investment in working capital, excluding cash and equivalents, increased $76 million during the year to $541 million. Total accounts receivable declined $21 million from the prior year. Trade receivables declined $7 million reflecting the decline in sales. Other non-trade receivables declined $11 million, resulting from the recovery of insurance claims and value-added taxes. Average days sales outstanding are essentially unchanged from 1995 at 79 days. Inventories at December 31, 1996 were $427 million, an increase of $51 million from the prior year. Increases are in Petroleum Additives where a number of factors including higher lead stocks and prices and a weak U.S. dollar have caused a temporary increase in inventories, and Intermediates and Fine Chemicals where inventories were built early in the year to compensate for expected tight supplies of furfural. Inventories in other business units are equal to or lower than a year ago. Inventory turnover has slowed from a year ago as a result of lower sales and the aforementioned increases. Spending on plant and equipment in 1996 amounted to $237 million, a $9 million decrease from the prior year. Additional capacity for both new and existing products accounted for approximately 45 percent of the spending, while 25 percent was for capital replacement and cost savings projects. The remainder of the spending was directed toward safety and regulatory compliance, environmental matters and support activities. The Company's capital spending activities are well diversified by product area and geographic location. Key capacity-adding projects include POLYMEG(R) polyols expansion, polymer stabilizers production in the United States and Korea, flame retardants capacity and brine production facilities. Capital spending in 1997 is projected to be about $150 million and will emphasize cost reduction and replacement rather than capacity additions. Spending on environmental-related capital projects was approximately $13 million in 1996 which is slightly higher than the prior year. Capital requirements for environmental-related projects in 1997 should be consistent with 1996 levels. The Company utilizes commercial paper borrowing as its primary source of external financing due to interest rate considerations. Commercial paper borrowings at December 31, 1996, amounted to $467 million compared to $262 million at December 31, 1995. At December 31, 1996, the level of debt to total capitalization was 24.1 percent, up from 18.8 percent at December 31, 1995. The Company has a $600 million, five-year credit facility with various banks, an increase of $200 million over the facility in place a year ago. The credit facility provides back-up to the Company's $600 million commercial paper program. The Company's corporate credit rating is AA-/A2 and its commercial paper rating is A-1+/P1. GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 27 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other noncurrent liabilities of $109 million include a $90 million reserve for expected future plant closures and related personnel reductions and decontamination costs at Octel's alkyl lead plants in the U. K., France, and Italy as demand for this product diminishes. Approximately $20 million was spent in 1996, compared to $6 million in 1995. Operations in Italy were ceased in the first quarter of 1996, and operations in France were ceased in the fourth quarter of 1996. The closures, coupled with staff reductions in the U.K., caused the increased spending in 1996. Spending on plant closures should be in the $20 million range in both 1997 and 1998. Production at the U.K. plants should continue into the next century based on the current rate of market decline. In 1996 the Company applied $62 million of deferred revenue related to pre-payments for product from a dedicated plant, included in other non-current liabilities, against the book value of that facility and certain deferred costs as it has been agreed with the customer that production will not be resumed. A portion of the plant was converted to polymer stabilizer production which started up in the 1996 fourth quarter. Another portion of the plant is being converted to fine chemical production which is expected to come onstream in the second quarter of 1997. During 1996 the Company settled certain issues relating to federal and state tax returns for the years 1989, 1990 and 1991. The settlement resulted in payments totaling approximately $40 million. The settlement had no impact on earnings as the Company had provided for the possible non-allowance of these items in prior years. Stockholders' equity was $1.5 billion, or $24.13 per share, at December 1996, compared to $1.4 billion, or $21.92 per share, at the end of 1995. Over the past 10 years, stockholders' equity has grown at a compound rate of 21 percent. Dividends declared increased for the twenty-fourth consecutive year totaling $36 million, compared with $29 million in the prior year. On a per-share basis, dividends of $.57 per share were increased 30 percent over the $.44 per share declared in 1995. In 1996, the Company purchased 3.3 million shares of its stock for a total cost of $192 million under share repurchase programs authorized by the Board of Directors. The average price per share of the stock purchased was $57.45. During the three-year period ended December 31, 1996, the Company has repurchased 10.3 million shares at a cost of approximately $589 million, or $57.17 per share. As of December 31, 1996, management is authorized to repurchase an additional 2.3 million shares. Management intends to repurchase additional shares as market conditions warrant. The cumulative translation adjustment component of stockholders' equity represents the translation of foreign currency-denominated financial statements into U.S. dollars. The change in the cumulative translation adjustment increased stockholders' equity by $40 million in 1996. The increase primarily related to the strength of the British pound sterling against the dollar. Approximately 50 percent of the Company's net assets are in Europe, predominantly the United Kingdom. OTHER MATTERS The Company's operations, like those of most companies which use or make chemicals, are subject to stringent laws and regulations relating to maintaining or improving the quality of the environment. Such laws and regulations, along with the Company's own internal compliance efforts, have required and will continue to require capital expenditures and associated operating costs. Spending for environmental compliance, including that associated with waste minimization and pollution prevention programs, amounted to approximately $65 million in 1996 and about $62 million in 1995. These amounts include approximately $13 million and $12 million for capital equipment in 1996 and 1995, respectively. Spending for environmental compliance is anticipated to be in the same range in 1997. The Company is a party to several proceedings and lawsuits involving environmental matters, including being named as defendant, respondent or a potentially responsible party, together with other companies, under CERCLA, and similar state laws, in which recovery is sought for the cost of cleanup of contaminated manufacturing and waste disposal sites. Due to the prevailing practices of manufacturing facilities, waste disposal haulers and disposal facilities prior to adoption and implementation of the environmental laws and regulations, evidence is difficult to obtain or evaluate. In each such matter, the Company anticipates, although there can be no assurance, that liability, if any, will eventually be equitably apportioned among the companies found to be responsible. In most of these matters, the Company believes that its responsibility is small relative to other parties and that it may have meritorious claims against these other parties. Based upon current regulation and the information available, management believes that adequate provisions have been made in the financial statements and future costs will not have a material adverse impact on the Company's consolidated financial condition. 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 and can be offset through a combination of price increases and productivity improvements. With the Company's strong balance sheet, substantial free cash flow and access to low-cost external financing, the Company is well positioned to capitalize on opportunities that may arise in 1997. 28 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 21 MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Great Lakes Chemical Corporation is responsible for the preparation and presentation of the accompanying consolidated financial statements and all other information in this Annual Report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts that are based on management's informed judgements and estimates. The Company maintains accounting systems and internal accounting controls which management believes provide reasonable assurance that the Company's financial reporting is reliable, that assets are safegaurded, and that transactions are executed in accordance with proper authorization. This internal control structure is supported by the selection and training of qualified personnel and an organizational structure which permits the delegation of authority and responsibility. The systems are monitored worldwide by an internal audit function that reports its findings to management. The Company's financial statements have been audited by Ernst & Young LLP, independent auditors, in accordance with generally accepted auditing standards. These standards provide for the review of internal accounting control systems to plan the audit and determine auditing procedures and tests of transactions to the extent they deem appropriate. The Audit Committee of the Board of Directors, which consists solely of non-employee directors, is responsible for overseeing the functioning of the accounting systems and related internal controls and the preparation of annual financial statements. The Audit Committee periodically meets with management and the independent auditors to review and evaluate their accounting, auditing and financial reporting activities and responsibilities. The independent auditors and internal auditors have full and free access to the Audit Committee without management's presence to discuss internal accounting controls, results of their audits and financial reporting matters. /s/Robert T. Jeffares Robert T. Jeffares Executive Vice President and Chief Financial Officer REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of the Great Lakes Chemical Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that 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 consolidated financial position of Great Lakes Chemical Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Indianapolis, Indiana January 29, 1997 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 29 22 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(in thousands of dollars, except per share data) YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- NET SALES $2,211,704 $2,361,069 $2,065,008 OPERATING EXPENSES Cost of products sold 1,486,027 1,572,653 1,369,618 Selling, administrative and research expenses 280,319 291,073 256,701 - ------------------------------------------------------------------------------------------------------- 1,766,346 1,863,726 1,626,319 - ------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 445,358 497,343 438,689 EQUITY IN EARNINGS OF AFFILIATES AND OTHER INCOME 59,835 29,353 45,645 INTEREST AND OTHER EXPENSES 96,252 55,149 48,432 MINORITY INTEREST IN INCOME OF SUBSIDIARIES 29,745 33,674 33,227 - ------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 379,196 437,873 402,675 INCOME TAXES 128,900 142,300 124,000 - ------------------------------------------------------------------------------------------------------- NET INCOME 250,296 295,573 278,675 - ------------------------------------------------------------------------------------------------------- RETAINED EARNINGS AT BEGINNING OF YEAR 1,678,834 1,411,890 1,160,173 CASH DIVIDENDS DECLARED 36,026 28,629 26,958 - ------------------------------------------------------------------------------------------------------- RETAINED EARNINGS AT END OF YEAR $1,893,104 $1,678,834 $1,411,890 ======================================================================================================= NET INCOME PER SHARE $ 3.94 $ 4.52 $ 4.00 CASH DIVIDENDS DECLARED PER SHARE $ .57 $ .44 $ .39 AVERAGE SHARES OUTSTANDING 63,538,759 65,364,066 69,658,653 - -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 30 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 23 CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars) December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 202,255 $ 180,970 Accounts and notes receivable, less allowance of $10,219 and $7,659, respectively 506,203 527,014 Inventories 426,658 375,967 Prepaid expenses 42,080 41,060 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 1,177,196 1,125,011 - ------------------------------------------------------------------------------------------------------------------------ PLANT AND EQUIPMENT 858,483 765,311 GOODWILL 435,195 416,632 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 72,767 72,587 OTHER ASSETS 117,698 154,131 - ------------------------------------------------------------------------------------------------------------------------ $2,661,339 $2,533,672 ======================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 288 $ 6,309 Accounts payable 190,853 198,490 Accrued expenses 127,333 122,217 Income taxes payable 98,687 128,891 Dividends payable 9,242 7,430 Current portion of long-term debt 7,717 15,891 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 434,120 479,228 - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT, LESS CURRENT PORTION 503,795 340,145 OTHER NONCURRENT LIABILITIES 109,012 177,820 DEFERRED INCOME TAXES 83,912 88,540 MINORITY INTEREST 43,601 31,756 STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 200,000,000 shares, issued 72,455,051 and 72,109,477 shares, respectively 72,455 72,109 Additional paid-in capital 121,224 113,647 Retained earnings 1,893,104 1,678,834 Cumulative translation adjustment 17,064 (23,179) Less treasury stock, at cost, 10,842,200 and 7,505,100 shares, respectively (616,948) (425,228) ---------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 1,486,899 1,416,183 ---------------------------------------------------------------------------------------------------------------------- $2,661,339 $2,533,672 ======================================================================================================================
See notes to consolidated financial statements. GREAT LAKES CHEMICAL CORPORATION ADN SUBSIDIARIES 31 24 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars) YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $250,296 $295,573 $278,675 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 90,185 83,461 72,663 Amortization of intangible assets 34,186 27,184 29,634 Deferred income taxes (5,444) 12,600 700 Net (unremitted) remitted earnings of affiliates (1,382) (518) 112,312 Loss (gain) on disposition of assets 7,774 (185) (65) Other (10,890) (843) (1,365) Change in operating assets and liabilities, net of effects from business combinations: Accounts receivable 22,157 (34,432) (95,097) Inventories (39,036) (57,565) (9,969) Other current assets (113) (13,948) (6,602) Accounts payable and accrued expenses (10,917) 22,137 35,010 Income taxes and other current liabilities (9,201) 10,504 10,131 Other noncurrent liabilities (17,373) 639 (8,098) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 310,242 344,607 417,929 INVESTING ACTIVITIES Plant and equipment additions (237,464) (246,639) (123,109) Business combinations, net of cash acquired (27,695) (24,399) (198,494) Proceeds from sale of assets 8,738 3,144 11,700 Other 16,871 (47,986) 21,484 - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (239,550) (315,880) (288,419) FINANCING ACTIVITIES Net (repayment) and borrowings under short-term credit lines (15,263) (5,878) 1,243 Net payments of long-term borrowings (7,880) (2,399) (8,026) Net increase in commercial paper and other long-term obligations 175,159 208,081 85,042 Minority interest 6,836 2,345 9,751 Proceeds from stock options exercised 7,923 1,065 3,336 Cash dividends (36,026) (28,629) (26,958) Repurchase of common stock (191,720) (164,816) (232,279) - ------------------------------------------------------------------------------------------------------------------------ NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (60,971) 9,769 (167,891) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 11,564 (2,192) 3,313 - ------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,285 36,304 (35,068) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 180,970 144,666 179,734 - ------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $202,255 $180,970 $144,666 ========================================================================================================================
See notes to consolidated financial statements. Parentheses indicate decrease in cash and cash equivalents. 32 GREAT LAKES CHEMICALL CORPORATION AND SUBSIDIARIES 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) ACCOUNTING POLICIES NATURE OF OPERATIONS The Company is a well diversified specialty chemicals company. Primary manufacturing operations are located in the United States and Europe. Principal product lines ranked in order of sales are: Petroleum Additives, Water Treatment, Specialized Services and Manufacturing, Flame Retardants, Intermediates and Fine Chemicals and Polymer Stabilizers. The Company's products are sold globally. The principal markets include: Oil Refineries, Computer and Business Equipment, Consumer Electronics, Data Processing, Construction Materials, Telecommunications, Pharmaceuticals, and Pool and Spa Dealers and Distributors. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all subsidiaries of the Company after elimination of significant intercompany accounts and transactions. Investments in less than majority-owned companies in which the Company has the ability to exercise significant influence over operating and financial policies of the investees are recorded at cost, plus equity in their undistributed earnings since acquisition. USE OF ESTIMATES The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amount reported in the 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. Revenue from services is recognized when the services are provided to the customer. CASH EQUIVALENTS Investment securities with maturities of three months or less when purchased are considered to be cash equivalents. INVENTORIES Over 90 percent of inventories are stated at the lower of cost (first-in, first-out method) or market. PLANT AND EQUIPMENT Plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line, declining-balance and unit-of-production methods. The costs of gas wells, leases and royalty interests are amortized by the unit-of-production method based upon estimated recoverable reserves and annual volumes of production. GOODWILL Goodwill, the excess of investment over net assets of subsidiaries acquired, is amortized over periods of eight to 40 years. The Company regularly evaluates the realizability of goodwill based on projected undiscounted cash flows and operating income for each business having material goodwill balances. Based on its most recent analysis, the Company believes that no impairment of goodwill exists at December 31, 1996. As of December 31, 1996 and 1995, accumulated amortization was $115 million and $83 million, respectively. 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, except to the extent costs can be capitalized, when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. Environmental costs which improve the condition of a property as compared to the condition when constructed or acquired are capitalized. INCOME TAXES Income taxes are provided on the portion of the income of unconsolidated affiliates that is expected to be remitted to the parent company and be taxable. STOCK OPTIONS The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the stock option equals the market price of the underlying stock on the issuance date, no compensation expense is recognized. Pro forma net income and net income per share is presented in the stock option note as if the alternative fair value method of accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), had been applied to options granted after December 31, 1994. SHARE DATA Net income per share is computed on the weighted average number of shares outstanding for all periods presented. The effect on net income per share resulting from the assumed issuance of outstanding stock options is not material. GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 33 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACQUISITIONS In 1995, the Company completed acquisitions in the Water Treatment and Intermediates and Fine Chemicals business units at a cost of $11 million, including $6 million excess purchase price over the value of net assets acquired. On September 7, 1994, the Company completed the acquisition of E. I. du Pont de Nemours & Company's (DuPont) petroleum additives business including DuPont's North and South American tetraethyl lead business for approximately $50 million. The excess of purchase price over the value of net assets acquired totaled approximately $35 million. The Company's acquisition of EniChem Synthesis S.p.A. (renamed GLCI) was completed on April 21, 1994, for approximately $90 million in cash. The excess of purchase price over the net assets acquired amounted to $25 million. Headquartered in Milan, Italy, GLCI is a leading manufacturer of antioxidants and UV absorbers. Other acquisitions completed in 1994 were in the Water Treatment business unit and the oil field services business. The acquisitions cost approximately $43 million. The excess of purchase price over the net assets acquired amounted to approximately $6 million. The Company's 87.82 percent ownership interest in Octel Associates and The Associated Octel Company, Limited, was acquired in two transactions. In 1989 the Company acquired a 51.15 percent interest with the balance acquired in 1992. The 1989 acquisition agreement provides for profit participation payments for specified periods of time after the date of acquisition. Such profit participation is treated as an adjustment to the purchase price. Profit participation payments for 1996 amounted to $17 million. In early 1997 the Company completed the determination of the profit participation payments for the years 1989 through 1995 resulting in an addition to purchase price of approximately $30 million. Funding for the payment which had been previously set aside and classified as other non-current assets in the 1995 consolidated balance sheet is now classified as goodwill. Total profit participation payments amount to approximately $216 million since inception. All acquisitions have been accounted for as purchases and the results of operations of the acquired businesses are included in the consolidated financial statements from the dates of acquisition. The unaudited pro forma results of operations as if the above-noted 1994 business combinations had occurred at the beginning of that year are as follows: net sales, $2.1 billion; net income, $287 million; and earnings per share, $4.12. Acquisitions consummated in 1996 and 1995 had no material impact on reported results. The pro forma results do not represent the Company's actual operating results had the acquisitions been made at the beginning of the respective years, or the results which may be expected in the future. DISPOSITIONS During 1996 the Company sold its pool equipment distribution business and its engineered surface treatment business. On an annual basis, these operations accounted for approximately $150 million in sales. These transactions did not have a material impact on the Company's results of operations. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following:
- --------------------------------------------------------- December 31 1996 1995 - --------------------------------------------------------- Cash $ 63,452 $ 57,607 Time deposits 138,803 123,363 - --------------------------------------------------------- $202,255 $180,970 =========================================================
INVENTORIES The major components of inventories are as follows:
- --------------------------------------------------------- December 31 1996 1995 - --------------------------------------------------------- Finished products $298,682 $260,293 Raw materials 87,687 82,297 Supplies 40,289 33,377 - --------------------------------------------------------- $426,658 $375,967 =========================================================
PLANT AND EQUIPMENT Plant and equipment consist of the following:
- --------------------------------------------------------- December 31 1996 1995 - --------------------------------------------------------- Land $ 25,125 $ 25,750 Buildings and land improvements 134,732 115,897 Equipment and leasehold improvements 1,086,728 936,383 Construction in progress (estimated additional cost to complete at December 31, 1996, $85,000) 178,011 200,302 - --------------------------------------------------------- 1,424,596 1,278,332 Less allowances for depreciation, depletion and amortization 566,113 513,021 - --------------------------------------------------------- $ 858,483 $ 765,311 =========================================================
The estimated useful lives for purposes of computing depreciation are: buildings and land improvements, 7-40 years; equipment and leasehold improvements, 2-17 years. Maintenance and repairs charged to costs and expenses were $89 million, $98 million and $89 million for 1996, 1995 and 1994, respectively. Rent expense for all operating leases amounted to $23 million, $24 million and $21 million for 1996, 1995 and 1994, respectively. 34 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 27 NOTES PAYABLE Data concerning borrowings are as follows:
- --------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------- Amounts borrowed: Maximum during the year $12,011 $44,969 $34,758 Average for the year $ 623 $10,992 $11,916 Weighted average interest rates: At December 31 7.6% 12.9% 6.6% On borrowings during the year 11.3% 11.0% 6.7% - ---------------------------------------------------------
The Company has no confirmed short-term credit lines, but has available for its use substantial non-confirmed credit lines. LONG-TERM DEBT Long-term debt is summarized as follows:
- ------------------------------------------------------------ December 31 1996 1995 - ------------------------------------------------------------ Commercial paper, 1996 year-end average interest rate of 5.4% $467,283 $262,382 Industrial development bonds, at fixed and variable interest rates from 4.2% to 7.0% at December 31, 1996 (weighted average 4.8%) with maturities to May 2025 21,685 21,685 Other 22,544 71,969 - ------------------------------------------------------------ 511,512 356,036 Less current portion 7,717 15,891 - ------------------------------------------------------------ $503,795 $340,145 ============================================================
During 1996 the Company entered into a five-year $600 million revolving credit agreement with nine banks which serves as a backup for the Company's commercial paper program. The facility replaced a $400 million credit agreement. The agreement provides various interest rate options, including the banks' prime interest rate, and contains restrictive financial covenants, including an interest coverage ratio. The Company's commercial paper is rated A-1+ by Standard and Poor's and P-1 by Moody's. Long-term debt matures as follows: 1997, $7.7 million; 1998, $4.1 million; 1999, $2.0 million; 2000, $11 million; and 2001, $473 million. During 1996, 1995 and 1994 interest costs were $26 million, $21 million and $12 million, respectively, of which $5.8 million, $6.2 million and $1.7 million, respectively, were capitalized as additional costs of equipment and leasehold improvements in connection with the expansion of physical facilities. In these years, interest payments were $27 million, $21 million and $12 million, respectively. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following:
- ---------------------------------------------------------- December 31 1996 1995 - ---------------------------------------------------------- Future estimated closing costs of Octel's TEL manufacturing facilities $ 90,324 $ 97,328 Deferred revenue -- 64,932 Other 18,688 15,560 - ---------------------------------------------------------- $109,012 $177,820 ==========================================================
Prior to 1996 a pension asset of $51 million (resulting from the excess of the fair market value of pension plan assets as compared to the projected benefit obligation at the time of the Octel acquisition) was netted against the future estimated closing costs of Octel's TEL manufacturing facilities. This asset, including subsequent additions, has been classified as other assets in the 1996 balance sheet and prior year balances have been restated. The reclassification has no effect on net income or stockholders' equity. The liability for estimated closing costs of Octel's TEL manufacturing facilities provides for personnel reductions, decontamination and environmental remediation when demand for the product 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 market decline. Closure costs are estimated to be about $145 million. Deferred revenue of $62 million, related to prepayment for products to be delivered to a major customer from a dedicated production facility, was applied against the book value of the facility and related assets. The Company and the customer have agreed that production at the facility will not be resumed. 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. Income Before Income Taxes:
- --------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------- Domestic $135,039 $142,271 $145,351 Foreign 244,157 295,602 257,324 - --------------------------------------------------------- $379,196 $437,873 $402,675 =========================================================
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 35 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Provisions for Income Taxes: - --------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------- Current: Federal $ 40,000 $ 34,900 $ 39,500 State 7,000 5,300 6,000 Foreign 78,500 89,500 77,800 - --------------------------------------------------------------------- 125,500 129,700 123,300 ===================================================================== Deferred: Domestic (3,800) 5,800 (6,100) Foreign 7,200 6,800 6,800 - --------------------------------------------------------------------- 3,400 12,600 700 - --------------------------------------------------------------------- $128,900 $142,300 $124,000 ===================================================================== Provisions for Deferred Income Taxes: - --------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------- Equity in affiliates $ -- $ -- $(8,313) Depreciation 6,000 7,003 4,297 Other (2,600) 5,597 4,716 - --------------------------------------------------------------------- $ 3,400 $12,600 $ 700 ===================================================================== Effective Income Tax Rate Reconciliation: - --------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------- U.S. statutory income tax rate 35.0% 35.0% 35.0% Decrease resulting from: Reversal of prior provisions -- -- (2.0) Other (1.0) (2.5) (2.2) - --------------------------------------------------------------------- Effective income tax rate 34.0% 32.5% 30.8% ===================================================================== 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. Components of Deferred Tax Assets and Liabilities: - -------------------------------------------------------------------- December 31 1996 1995 - -------------------------------------------------------------------- Deferred tax assets $ 30,045 $ 26,231 - -------------------------------------------------------------------- Deferred tax liabilities Depreciation $ 50,000 $ 62,000 Foreign liabilities pending settlements 20,000 20,000 Undistributed affiliate earnings 1,352 1,352 Other 31,933 23,399 - -------------------------------------------------------------------- $103,285 $106,751 ==================================================================== Cash payments for income taxes were $139 million, $126 million and $109 million in 1996, 1995 and 1994, respectively. STOCKHOLDERS' EQUITY Changes in common stock and additional paid-in capital accounts are summarized as follows: - ----------------------------------------------------------------------- Additional Common Stock Paid-In Shares Amount Capital - ----------------------------------------------------------------------- Balance at December 31, 1993 71,817,996 $71,818 $107,268 Exercise of stock options, net of shares exchanged 206,524 207 3,129 Tax benefit from early disposition of stock by optionees -- -- 2,270 - ----------------------------------------------------------------------- Balance at December 31, 1994 72,024,520 72,025 112,667 Exercise of stock options, net of shares exchanged 84,957 84 400 Tax benefit from early disposition of stock by optionees -- -- 580 - ----------------------------------------------------------------------- Balance at December 31, 1995 72,109,477 72,109 113,647 Exercise of stock options, net of shares exchanged 345,574 346 1,357 Tax benefit from early disposition of stock by optionees -- -- 6,220 - ----------------------------------------------------------------------- Balance at December 31, 1996 72,455,051 $72,455 $121,224 ======================================================================= The Company has a Stockholder Rights Plan. Under the Plan, the stockholders have received a right (the "Right") for each outstanding share of common stock of the Company. Each Right entitles the holder under certain circumstances to purchase from the Company at an exercise price of $92.50 per Right (after adjustment pursuant to the Plan) one unit consisting initially of one-tenth of a share of the Company's common stock and a note in a principal amount equal to nine-tenths of the market price of a share of the Company's common stock on the date of exercise. The Rights become exercisable and transferable apart from the common stock if a person acquires 15 percent or more of the Company's outstanding common stock or the Company declares a 10 percent-or-more stockholder an "adverse person" because such stockholder meets certain criteria set forth in the Plan. In such event, each Right entitles the holder, except the acquiring person or adverse person, to purchase, at the Right's then-current exercise price, the number of Great Lakes common shares having a market value equal to twice the Right's exercise price. 36 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 29 If after one of the triggering events described above, the Company is acquired in a merger or other business combination, and the Rights have not been redeemed, the holder of each Right is entitled to purchase, at the Right's then-current exercise price, that number of the acquiring company's common shares having a market value equal to twice the Right's exercise price. Under certain conditions, the Rights may be redeemed by the Company at a price of $.0025 per Right (after adjustment pursuant to the Plan) prior to their expiration on September 22, 1999. The Company has repurchased shares of its common stock as follows: - ----------------------------------------------------------------- Number of Year Shares Cost - ----------------------------------------------------------------- 1996 3,337,100 $191,720 1995 2,778,000 $164,816 1994 4,183,900 $232,279 Changes in the cumulative translation adjustment account are as follows: - ----------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - ----------------------------------------------------------------------------- Balance at beginning of year $(23,179) $(25,222) $(54,563) Translation adjustments and gains and losses from hedging transactions 40,243 2,043 29,341 - ----------------------------------------------------------------------------- Balance at end of year $17,064 $(23,179) $(25,222) ============================================================================= The increase in the cumulative translation adjustment in 1996 was primarily due to the weakening of the U.S. dollar against the British pound sterling. The 1995 and 1994 increase in the cumulative translation adjustment account was principally due to the effect of the weakening U.S. dollar in relation to the currencies of the various foreign countries in which the Company operates. STOCK OPTIONS In May 1993 the stockholders adopted the 1993 Employee Stock Compensation Plan for officers and other key employees, authorizing the issuance of 2 million shares of the Company's common stock upon exercise of incentive stock options, non-qualified stock options or other stock-based awards. The Plan replaced the 1984 Plan which expired in May 1994. Under the Plan, options are granted at the market value at date of grant, become exercisable over periods of one to five years after grant and expire 10 years from the date of grant. The following summarizes the changes in options under the Plans: - ---------------------------------------------------------------------- Shares Weighted Average Under Option Exercise Price - ---------------------------------------------------------------------- Outstanding at December 31, 1994 1,850,637 $39.47 Granted 309,030 59.71 Exercised (98,280) 15.29 Terminated (14,319) 61.94 - ---------------------------------------------------------------------- Outstanding at December 31, 1995 2,047,068 43.53 Granted 260,610 74.94 Exercised (529,039) 26.26 Terminated (77,883) 67.64 - ---------------------------------------------------------------------- Outstanding at December 31, 1996 1,700,756 $52.61 ====================================================================== Currently Exercisable 1,186,170 $45.24 ====================================================================== Options outstanding at December 31, 1996, expire from December 5, 1997, to August 26, 2006. A total of 1.4 million shares are reserved for future grants as of December 31, 1996. The following table summarizes information concerning outstanding and exercisable options at December 31, 1996: - ------------------------------------------------------------------------ Range of Exercise Prices $10-$25 $26-$50 $51-$80 - ------------------------------------------------------------------------ Options Outstanding: Weighted Average Remaining Contractual Life 2.8 yrs. 5.0 yrs. 8.3 yrs. Weighted Average Exercise Price $17.73 $40.71 $69.37 Number 441,795 198,896 1,060,065 Options Exercisable: Weighted Average Exercise Price $17.73 $40.71 $69.17 Number 441,795 198,896 545,479 - ------------------------------------------------------------------------ The weighted average fair value of options granted during 1996 and 1995 is estimated at $24.61 and $22.34 per share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions: - ------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------ Expected volatility 22.80% 26.50% Expected life in years 6.00 5.50 Risk-free interest rate 5.27% 7.34% Dividend yield .60% .64% - ------------------------------------------------------------------------ GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 37 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Had compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been recognized consistent with SFAS 123, the Company's net income and earnings per share for 1996 and 1995 would approximate the pro forma amounts below:
- --------------------------------------------------------- 1996 1995 - --------------------------------------------------------- Net income - as reported $250,296 $295,573 Net income - pro forma $245,788 $292,707 Earnings per share - as reported $ 3.94 $ 4.52 Earnings per share - pro forma $ 3.87 $ 4.48 - ---------------------------------------------------------
For the purpose of pro forma disclosure, the estimated compensation costs are amortized to expense over the options' vesting period, primarily three years. Therefore, because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1998. RETIREMENT PLANS The Company maintains several noncontributory defined benefit pension plans covering substantially all U.S. employees. Benefits are based on total compensation, as defined, 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 meet the funding requirements of federal laws and regulations, as determined by the Company's actuary. The plans' assets are invested by an insurance company, one bank, and nine investment management companies in various commingled and segregated funds holding equities, bonds, guaranteed income contracts and cash or cash equivalents. The Company maintains three contributory defined benefit pension plans 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 plans' assets are invested by three 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 U.S. and U.K. pension plans is as follows:
- ------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------- Service cost $ 17,287 $15,290 $ 16,218 Interest cost on projected benefit obligation 42,838 40,614 37,855 Actual return on plan assets (72,844) (80,636) (16,280) Net amortization and deferral 19,016 31,461 (28,317) - ------------------------------------------------------------- Net pension cost $ 6,297 $ 6,729 $ 9,476 =============================================================
The funded status and accrued pension cost for the U.S. pension plans are as follows:
- ---------------------------------------------------------- December 31 1996 1995 1994 - ---------------------------------------------------------- Actuarial present value of accumulated plan benefits: Vested $52,107 $48,041 $40,219 Non-vested 2,712 1,540 1,241 - ---------------------------------------------------------- Total accumulated benefit obligation 54,819 49,581 41,460 Additional amounts related to projected salary increases 21,979 18,868 12,074 - ---------------------------------------------------------- Total projected benefit obligation 76,798 68,449 53,534 Plan assets at fair value 75,137 62,352 50,975 - ---------------------------------------------------------- Projected benefit obligation in excess of plan assets 1,661 6,097 2,559 Unrecognized net gain (loss) 683 (2,110) 3,418 Unrecognized prior service cost (459) 217 (175) Unrecognized obligation at January 1, 1987, net of amortization (1,261) (1,452) (1,643) - ---------------------------------------------------------- Accrued pension cost $ 624 $ 2,752 $ 4,159 ==========================================================
38 GREAT LAKES CORPORATION AND SUBSIDIARIES 31 The funded status and prepaid pension cost for the U.K. pension plans are as follows:
- --------------------------------------------------------- December 31 1996 1995 1994 - --------------------------------------------------------- Actuarial present value of accumulated plan benefits, all vested $474,909 $392,925 $384,140 Additional amounts related to projected salary increases 52,558 41,540 13,310 - --------------------------------------------------------- Total projected benefit obligation 527,467 434,465 397,450 Plan assets at fair value 677,096 551,645 486,242 - --------------------------------------------------------- Plan assets in excess of projected benefit obligation 149,629 117,180 88,792 Unrecognized net (gain) (92,276) (75,640) (56,532) Unrecognized prior service cost 9,245 9,145 10,649 - --------------------------------------------------------- Prepaid pension cost $ 66,598 $ 50,685 $ 42,909 =========================================================
Assumptions used in determining the actuarial present value of the projected benefit obligations are set forth below. Assumptions used in 1996 are consistent with the prior year. In 1995 the weighted average discount rate for U.S. plans was decreased from 8.7 percent to 7.7 percent, thus increasing the 1995 year-end projected benefit obligation by approximately $9.5 million. In 1994, the weighted-average discount rate for the U.S. plans was increased from 7.5 percent to 8.7 percent thus reducing the 1994 year-end projected benefit obligation by approximately $11 million. Weighted-average discount rates 7.7% to 8.75% Rates of increase in compensation levels 4.8% to 6.5% Expected long-term return on assets 9.0% to 9.5%
Supplemental defined benefit pension plans covering certain officers and directors are also maintained. These plans are non-qualified and unfunded. The pension liability associated with these plans is accrued using the same actuarial methods and assumptions as those used in the qualified U.S. plans. The cost for these plans which is included in the net pension cost shown above amounted to $1.6 million, $1.2 million and $.8 million in 1996, 1995 and 1994, respectively. The unfunded projected benefit obligation amounted to $8.1 million, $5.1 million and $4.5 million in 1996, 1995 and 1994, respectively. Benefits under these plans will be paid from general Company funds. The Company provides no significant postretirement benefits other than pensions. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were approximately $64 million, $63 million and $59 million in 1996, 1995 and 1994, respectively. INDUSTRY SEGMENTS AND FOREIGN OPERATIONS The Company's operations consist of one dominant industry segment, chemicals and allied products. Net sales, income before income taxes and identifiable assets by geographic areas follow:
----------------------------------- 1996 1995 1994 ----------------------------------- Net sales to unaffiliated customers: United States $1,081,257 $1,062,495 $ 938,214 Foreign 1,130,447 1,298,574 1,126,794 ----------------------------------- $2,211,704 $2,361,069 $2,065,008 =================================== Intercompany sales between geographic areas: United States $ 105,758 $ 103,265 $ 96,668 Foreign 37,841 31,924 26,418 ----------------------------------- $ 143,599 $ 135,189 $ 123,086 =================================== Income before income taxes: United States $ 173,812 $172,511 $ 138,123 Foreign 220,854 273,905 258,279 Earnings of affiliates 2,663 4,023 14,765 Corporate interest expense (18,133) (12,566) (8,492) ----------------------------------- $ 379,196 $ 437,873 $ 402,675 =================================== Identifiable assets at year-end: United States $1,165,765 $1,084,117 $ 972,002 Foreign 1,422,807 1,376,968 1,072,984 Affiliates 72,767 72,587 66,479 ----------------------------------- $2,661,339 $2,533,672 $2,111,465 ===================================
Most of the Company's foreign operations are conducted by European subsidiaries or U.S. branch offices. Sales between the United States and its foreign operations are generally priced to recover cost plus an appropriate markup for profit and are eliminated in the consolidated financial statements. Identifiable assets include assets directly identified with operations, principally: accounts receivable, inventories and plant and equipment, plus an allocation of goodwill. Export sales for 1996, 1995 and 1994 amounted to approximately $229 million, $216 million and $199 million, respectively, of which 87 percent, 86 percent and 88 percent, respectively, were outside the Western Hemisphere. GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 39 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVESTMENT IN UNCONSOLIDATED AFFILIATES As of December 31, 1996, the Company's investment in unconsolidated affiliates consists mainly of a 50 percent interest in KAO-Quaker, Co. Ltd., a Japanese marketer of furfural derivatives, and a preferred stock interest in Huntsman Chemical Corporation (HCC). Effective December 29, 1994, the Company's ownership interest in HCC, a producer of polystyrene and compounded specialty plastics, was reduced from 40 percent to 17 percent when the Company elected to receive a $130 million cash dividend while HCC's other shareholder elected to receive additional shares. On March 17, 1995, the Company exchanged its remaining common stock holdings for 58,700 shares of series A cumulative preferred stock with an annual dividend rate of 14 percent. Beginning in the year 2000, the annual dividend rate will increase 1 percent per year to a maximum rate of 25 percent. The preferred shares have a face value of $59 million. The Company's equity in earnings of unconsolidated affiliates was $2.7 million, $4 million and $20 million for 1996, 1995 and 1994, respectively. Preferred dividends from HCC amounted to $8.2 million in 1996 and 1995. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The carrying amounts reported in the balance sheet of cash and cash equivalents, notes payable and long-term debt do not materially differ from their fair value at December 31, 1996. The fair value of the Company's debt was estimated using a discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar borrowing arrangements. The Company hedges certain portions of its exposure to foreign currency fluctuations in revenues and net foreign investments through the use of options and forward exchange contracts. Gains and losses arising from the use of such instruments are recorded in the income statement concurrently with gains and losses arising from the underlying hedged transactions. The Company enters into currency option contracts to hedge anticipated foreign currency transactions, primarily export sales, during the next 12 months. At December 31, 1996, the Company had outstanding option contracts with a notional value of approximately $37 million. The cost to acquire the contracts that hedge 1997 export sales was approximately $.7 million, and that amount was deferred as of December 31, 1996. Had these contracts been acquired at December 31, 1996, their cost to acquire would have been $6 million. The Company did not have any outstanding option contracts in place at December 31, 1995. The Company uses currency swap contracts to hedge long-term intercompany loans and the related interest. The terms of the swap contracts match the loan payment terms. Swap contracts in existence at December 31, 1996, were for French francs, deutsche marks and Italian lira against the British pound sterling. The U.S. dollar equivalent of the notional amount of the contracts outstanding as of December 31, 1996, was approximately $168 million. Liquidating the position at December 31, 1996, would cost the Company approximately $1.9 million. It is the Company's intention to hold the swap contracts to maturity. Counterparties to the currency swap agreements are major financial institutions. Credit losses from counterparty non-performance are not anticipated. The Company sells a broad range of products to a diverse group of customers operating throughout the world. These industries generally are not significantly affected by changes in economic or other factors. Credit limits, ongoing credit evaluation and account monitoring procedures are utilized to minimize the risk of loss. Collateral is generally not required. 40 GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 33 QUARTERLY RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars, except per share data) 1996 THREE MONTHS ENDED MAR. 31 JUN. 30 SEPT. 30 DEC. 31 - ----------------------------------------------------------------------------------------------------------------------------- Net Sales $536,960 $594,949 $564,355 $515,440 Operating Expenses Cost of products sold 351,223 396,101 371,531 367,172 Selling, administrative and research expenses 68,985 72,381 70,998 67,955 - ----------------------------------------------------------------------------------------------------------------------------- 420,208 468,482 442,529 435,127 - ----------------------------------------------------------------------------------------------------------------------------- Income from Operations 116,752 126,467 121,826 80,313 Equity in Earnings of Affiliates and Other Income 7,578 27,021 6,374 18,862 Interest and Other Expenses 16,393 28,067 16,178 35,614 Minority Interest in Income of Subsidiaries 7,615 7,263 8,477 6,390 - ----------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 100,322 118,158 103,545 57,171 Income Taxes 34,100 40,200 35,200 19,400 - ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 66,222 $ 77,958 $ 68,345 $ 37,771 ============================================================================================================================= Net Income per Share $ 1.03 $ 1.20 $ 1.09 $ 0.62 ============================================================================================================================= Cash Dividends Paid $ .115 $ .12 $ .15 $ .15 ============================================================================================================================= Stock Price Data High 78 5/8 69 3/8 62 7/8 57 1/2 Low 65 61 46 1/2 44 1/4 Year-End Close 46 3/4 - ----------------------------------------------------------------------------------------------------------------------------- 1995 THREE MONTHS ENDED MAR. 31 JUN. 30 SEPT. 30 DEC. 31 - ----------------------------------------------------------------------------------------------------------------------------- Net Sales $569,035 $640,851 $586,224 $564,959 Operating Expenses Cost of products sold 385,389 430,576 385,084 371,604 Selling, administrative and research expenses 71,316 74,715 73,787 71,255 - ----------------------------------------------------------------------------------------------------------------------------- 456,705 505,291 458,871 442,859 - ----------------------------------------------------------------------------------------------------------------------------- Income from Operations 112,330 135,560 127,353 122,100 Equity in Earnings of Affiliates and Other Income 6,565 7,936 5,613 9,239 Interest and Other Expenses 9,702 18,710 14,148 12,589 Minority Interest in Income of Subsidiaries 7,966 8,515 8,954 8,239 - ----------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 101,227 116,271 109,864 110,511 Income Taxes 32,900 37,800 35,700 35,900 - ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 68,327 $ 78,471 $ 74,164 $ 74,611 ============================================================================================================================= Net Income per Share $ 1.02 $ 1.20 $ 1.15 $ 1.15 ============================================================================================================================= Cash Dividends Paid $ .10 $ .105 $ .105 $ .115 ============================================================================================================================= Stock Price Data High 62 7/8 64 1/8 69 7/8 74 3/8 Low 56 55 3/4 59 3/8 65 3/4 Year-End Close 72 =============================================================================================================================
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES 41 34 SUBSIDIARIES AND AFFILIATES Bayrol Chemische Fabrik GmbH Swimming Pool and Spa Products 100% Owned Bio-Lab, Inc. Swimming Pool and Spa Products 100% Owned Chemische Werke LOWI Beteiligungs GmbH & Co. Specialty Chemicals 100% Owned Chemol RT Chemical Trading Company 78% Owned Four Seasons Industrial Services, Inc. Environmental Remediation 100% Owned Great Lakes Chemical (Europe), Ltd. Specialty Chemicals 100% Owned Great Lakes Chemical France S.A. Specialty Chemicals 100% Owned Great Lakes Chemical International, Inc. Export Sales-FSC 100% Owned Great Lakes Chemical Italia S.r.l. Specialty Chemicals 100% Owned Great Lakes Fine Chemicals, Ltd. Manufacturer of Fine and Specialty Chemicals and Intermediates 100% Owned KAO-Quaker Co., Ltd. Furfural Derivatives 50% Owned Octel Associates and The Associated Octel Company, Limited Fuel Additives and Specialty Chemicals 87.8% Owned OSCA, Inc. High-Density, Clear Fluids 100% Owned WIL Research Laboratories, Inc. Toxicological Testing 100% Owned SHAREHOLDER INFORMATION TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for Great Lakes' stock is Harris Trust Company of New York. Stockholders who wish to transfer their stock, or change the name in which the shares are registered, should contact: Harris Trust and Savings Bank Attn: Shareholder Services P.O. Box 755 Chicago, Illinois 60690-0755 (312) 461-2421 AUDITORS Ernst & Young LLP Indianapolis, Indiana LISTINGS New York Stock Exchange New York, New York Pacific Stock Exchange Los Angeles and San Francisco, California Ticker Symbol: GLK ANNUAL MEETING The Annual Meeting of the Stockholders will be held at 11:00 a.m., Thursday, May 1, 1997, at the University Place Conference Center and Hotel, 850 West Michigan, Indianapolis, Indiana. FORM 10-K AND OTHER INFORMATION A complimentary copy of the company's 1996 Annual Report to the Securities and Exchange Commission on Form 10-K is available upon request. For this, or for other information concerning the company, please contact: Jeffery Potrzebowski Director, Investor Relations or Gregory J. Griffith Director, Public Affairs and Administration Great Lakes Chemical Corporation One Great Lakes Boulevard West Lafayette, Indiana 47906-0200 Phone: (765) 497-6100 Design: Taylor Bruce Associates, Inc. Inside of back cover EX-23 3 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23 Great Lakes Chemical Corporation and Subsidiaries CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Great Lakes Chemical Corporation of our report dated January 29, 1997, included in the 1996 Annual Report to Stockholders of Great Lakes Chemical Corporation. Our audits also included the financial statement schedule of Great Lakes Chemical Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement Number 33-02069 on Form S-3, dated December 11, 1985, in Post-Effective Amendment Number 1 to the Registration Statement Number 33-02074 on Form S-8, dated February 3, 1995, in Registration Statement Number 33-02075 on Form S-8, dated December 11, 1985, in Registration Statement Number 33-42477 on Form S-3, dated August 28, 1991, in Registration Statement Number 33-57589 on Form S-8, dated February 3, 1995, and in Registration Statement Number 33-300543 on Form S-8, dated January 30, 1996, of our report dated January 29, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Great Lakes Chemical Corporation for the year ended December 31, 1996. ERNST & YOUNG LLP Indianapolis, Indiana March 18, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, and STATEMENT OF CASHFLOW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS DEC-31-1996 DEC-31-1996 202,255 0 516,422 10,219 426,658 1,177,196 1,424,596 566,113 2,661,339 434,120 503,795 0 0 72,455 1,414,444 2,661,339 2,211,704 2,271,539 1,486,027 1,764,172 76,313 2,174 19,939 379,196 128,900 250,296 0 0 0 250,296 3.94 3.94
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