-----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, KpXLq2zjOk3HCly8uObTsE0ZE1PvJCiQFVMDRfJmACxL6AGLcE7nBIRX6t27ou1x U+ZOb8tpYwadV0v2qANzRA== 0000950137-99-000757.txt : 19990406 0000950137-99-000757.hdr.sgml : 19990406 ACCESSION NUMBER: 0000950137-99-000757 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT LAKES CHEMICAL CORP CENTRAL INDEX KEY: 0000043362 STANDARD INDUSTRIAL CLASSIFICATION: 2890 IRS NUMBER: 951765035 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06450 FILM NUMBER: 99582312 BUSINESS ADDRESS: STREET 1: ONE GREAT LAKES BLVD STREET 2: P O BOX 2200 CITY: WEST LAFAYETTE STATE: IN ZIP: 47996 BUSINESS PHONE: 3177153000 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 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, 1998 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.) 500 East 96th Street, Suite 500 Indianapolis, IN 46240 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 317-715-3000 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 Section13 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 8, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was $2,368,209,072. As of March 8, 1999, 58,384,199 shares of the registrant's stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV. Portions of the annual proxy statement expected to be filed on March 31, 1999, 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 Indianapolis, Indiana. The Company is organized into four global business units: Polymer Additives, Performance Chemicals, Water Treatment and Energy Services and Products. Recently, the Company took a number of actions to continue the process of focusing on its core specialty chemicals businesses and positioning these operations to achieve higher growth and profitability, including: - - - appointing a new chief executive officer and senior management team; - - - realigning the business units to focus more directly on customer needs; - - - completing the spin-off of the Company's Petroleum Additives business unit (Octel) as well as disposing of the Eastern European trading operation (Chemol) and the environmental services business; and, - - - initiating a restructuring program that targets a $40 million annual improvement in operating income. Unless otherwise indicated, the information herein refers to the continuing business of the Company. The Review of Operations on pages 8 through 15 and Great Lakes At A Glance on pages 16 and 17 of the 1998 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. PRODUCTS AND SERVICES The following is a list of the principal products and services provided by Great Lakes: POLYMER ADDITIVES
PRODUCTS & SERVICES PRINCIPAL MARKETS FACILITIES MAJOR RAW MATERIALS - - ------------------- ----------------- ---------- ------------------- FLAME RETARDANTS Brominated, intumescent and Computer and Business ElDorado, AR Bromine antimony based flame retardants Equipment, Consumer Newport, TN Bisphenol A Electronics, Textiles, Laredo, TX Diphenyl Oxide Urethanes and Construction Reynosa, Mexico Antimony Materials Aycliffe, U.K. POLYMER STABILIZERS Antioxidants, UV absorbers and Computer and Business Newport, TN Alkylated Phenols Light Stabilizers Equipment, Consumer Catenoy, France Methyl Acrylate Appliances, Packaging, Persan, France Phosphorus Trichloride Textiles, Building and Waldkraiburg, Germany Construction, Transportation Pedrengo, Italy Ravenna, Italy Pyongtaek, Korea
3 PERFORMANCE CHEMICALS
PRODUCTS & SERVICES PRINCIPAL MARKETS FACILITIES MAJOR RAW MATERIALS - - ------------------- ----------------- ---------- ------------------- AG PRODUCTS Methyl Bromide Soil Crop and Structural Pest ElDorado, AR Bromine Control BROMINE INTERMEDIATES Bromine, Bromine derivatives and Electronics, Photographic Papers ElDorado, AR Bromine Bromine-based specialty chemicals and Films and Rubber Compounds Marysville, AR Chlorine Amlwch, U.K. FLUORINE CHEMISTRY Fire extinguishing agent Data Processing ElDorado, AR Fluorine FM-200(R), Organo-fluorine Telecommunications compounds, Fluorinated Military intermediates FINE CHEMICALS Specialty and Fine Chemical Pharmaceutical and Konstanz, Germany Intermediates Agrochemical Industry Newport, TN Halebank, U.K. Holywell, U.K. 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
WATER TREATMENT
PRODUCTS & SERVICES PRINCIPAL MARKETS FACILITIES MAJOR RAW MATERIALS - - ------------------- ----------------- ---------- ------------------- RECREATIONAL Water sanitizers - Pool and Spa Dealers and Conyers, GA BCDMH, BioGuard(R),OMNI(R), Distributors, Mass Market Decatur, GA Chlorinated Guardex(R)Pool Time(R), Retailers, Builders Lake Charles, LA Isocyanurates, Calcium AquaChem(R), Vantage(R), Adrian, MI Hypochlorite, Cyanuric AquaBrom(R), Bayrol(R), Melbourne, Australia Acid Hydrotech(R), Toronto, Canada Algicides, oxidizers, pH Mundolsheim, France balancers, mineral Planegg, Germany balancers and Barbera Del Valles, Spain specialty chemicals Kyalami, South Africa Andoversford, U.K.
4 WATER TREATMENT (CONTINUED)
PRODUCTS & SERVICES PRINCIPAL MARKETS FACILITIES MAJOR RAW MATERIALS - - ------------------- ----------------- ---------- ------------------- COMMERCIAL & SPECIALTIES BromiCide(R) and LiquiBrom(R) Industrial Cooling Water Adrian, MI BCDMH, Sodium Bromide, Specialty Biocides, Biocide Treatment, Industrial and ElDorado, AR Formulated dispensing equipment, Hydantoin Municipal Wastewater Treat- Conyers, GA Isocyanurates, DMH derivatives and Formulated ment, Pulp and Paper and oxidizers Food Processing, Preservative Intermediates and Home Care
ENERGY SERVICES AND PRODUCTS
PRODUCTS & SERVICES PRINCIPAL MARKETS FACILITIES MAJOR RAW MATERIALS - - ------------------- ----------------- ---------- ------------------- Completion products and services, Worldwide Oil and Gas Lafayette, LA Calcium Bromide including reservoir analysis, Industry New Orleans, LA Sodium Bromide solids-free fluids, sand control, Houston, TX Zinc Bromide filtration, downhole tools, Milan, Italy stimulation and marine well Villahermosa, Mexico services Stravanger, Norway Aberdeen, U.K. Caracas, Venezuela
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 "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 with respect to any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but do not necessarily constitute 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 bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases 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 the cost and availability of key raw materials. 5 Governmental factors including laws and regulations and judicial decisions related to the production or use of key products such as 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 the bromide ion in required quantities due to depletion of resources or other causes beyond the Company's control. 1998 DEVELOPMENTS The Review of Operations on pages 8 through 15 and Great Lakes At A Glance on page 16 and 17 of the 1998 Annual 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 a sea water extraction plant 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 estimated to be adequate for the foreseeable future. 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 significant presence in foreign markets, principally Western Europe and Asia. Approximately one third of the Company's assets and sales are outside the United States. The geographic segment data contained in Note 15: "Segment Information" of the Notes to Consolidated Financial Statements on page 38 and 39 of the 1998 Annual Report to Stockholders is incorporated herein by reference. 6 Customers and Distribution During the last three years, no single customer accounted for more than 10% 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 merchandisers 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 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. There are several small producers in the U.S. and overseas which are competitors in several individual products. In addition, there are numerous manufacturers of alternatives that compete with the Company. In polymer stabilizers, 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. 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 which is reflected in relatively higher sales and profits in the first half of each year. 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 effect of the above items on working capital requirements is not material. Research and Development and Patents Research and development expenditures are included in Note 14: "Research and Development Expenses" of the Notes to Consolidated Financial Statements on page 38 of the 1998 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 7 The Company recognizes its responsibility for the sound environmental management of its businesses and operations. In addressing 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. 8 Employees The Company has approximately 5,100 employees. Item 2. PROPERTIES Great Lakes has plants at 11 locations in 7 states and 17 plants in 8 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, 1998. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 8, 1999, there were approximately 3,200 registered holders of Great Lakes Common Stock. Additional information is contained in the 1998 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 1998 Annual Report to Stockholders under the caption "Financial Review" on page 19, and is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 through 26 of the 1998 Annual Report to Stockholders is incorporated herein by reference. Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK This information is included in the "Market Risks" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 25 of the 1998 Annual Report to Stockholders, and is incorporated herein by reference. 9 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, together with the report thereon of Ernst & Young LLP dated February 26, 1999, appearing on pages 27 through 40 and the "Quarterly Results of Operations" on page 41 of the 1998 Annual Report to Stockholders, are incorporated herein by reference. 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
Officer Name and Age Office Since - - ------------ ------ ----- Mark P. Bulriss , 47 Chief Executive Officer and President. Mr. Bulriss joined Great 1998 Lakes in April 1998 from AlliedSignal, Inc. where he was president of the Polymers Division since 1996. He joined AlliedSignal in 1993 as president of the Laminates business unit, moving to president of the Electronic Materials Division in 1995. Prior to AlliedSignal, Mr. Bulriss spent 16 years with GE Plastics. He holds a B.S. in chemical engineering from Clarkson University Marshall E. Bloom, 61 Executive Vice President and Chief Executive Officer of Water 1994 Treatment. Mr. Bloom is a graduate of the University of Georgia receiving his B.B.A. He joined BioLab in 1955 and Great Lakes in 1990. Louis M. Maresca, 47 Executive Vice President and President of Performance 1998 Chemicals. Dr. Maresca joined the Company in August 1998. From 1991 to 1998 he was with The Geon Company where he served most recently as vice president and general manager of the resins business. Prior to 1991 he held technology and general management positions with Union Carbide Corporation and GE Plastics. Dr. Maresca holds a Ph. D. in organic chemistry from Columbia University and an M.B.A. from Case Western Reserve University. C. Hugh Morton, 46 Executive Vice President and President of Polymer Additives. Mr. 1998 Morton joined the Company in July 1998 after a 13 year career with GE Plastics most recently as General Manager of Manufacturing and Engineering for GE Silicones. Mr. Morton holds a B.S. in mechanical engineering from the University of New Orleans.
10 L. Donald Simpson, 63 Executive Vice President - Global Supply Chain Management. He 1992 joined the Company in 1992. He is a graduate of Rose Hulman Institute of Technology with a B.S. in Chemical Engineering. Richard Boehner, 51 Senior Vice President of Corporate Development and Strategic 1998 Planning. Mr. Boehner rejoined the Company in April 1998. Prior to joining the Company Mr. Boehner was director of corporate development for AlliedSignals' specialty chemicals operations. Previously he held a similar position with Rhone-Poulenc. Mr. Boehner hold a B.S. in industrial engineering and an M.B.A. from Colorado State University. Mark E. Tomkins, 43 Senior Vice President and Chief Financial Officer. Mr. Tomkins 1998 joined the Company in August 1998 from AlliedSignal, Inc. where he was vice president of finance and business development of the Polymers Division since 1996 and held the same position with their Electronic Materials Division in 1996. Prior to joining Allied Signal, Mr. Tomkins held various corporate and operating finance positions with Monsanto. He holds an M.B.A. and B.S. in business from Eastern Illinois University. Stephen D. Clark, 53 Vice President, General Manager Asia/Pacific. He joined the 1995 Company in 1995. He holds a B.S. in Chemistry from Seattle University and a Ph.D. in Organic Chemistry from the Massachusetts Institute of Technology. Mark Esselman, 42 Vice President, Human Resources. Mr. Esselman came to Great 1997 Lakes from U.S. Robotics in 1997 with nearly 20 years of human resources experience. He received his B.S. and M.S. degrees from the University of Wisconsin. Robert L. Hollier, 56 Vice President and President of OSCA, Inc. He joined the 1991 Company in 1982. He graduated from the University of Southwestern Louisiana with a B.S. in Business Administration. John V. Lacci, 47 Vice President, General Counsel. He has been with the Company 1994 since 1986. He received his B.A. from Georgetown University and a J.D. from Georgetown University School of Law. Robert J. Smith, 52 Vice President, Controller. He joined the Company in 1993 and 1993 received a B.A. in Economics from Fairfield University. Mary P. McClanahan, 55 Corporate Secretary. She joined the Company in 1978 and was 1994 educated in England. Stephen E. Brewer, 50 Assistant Treasurer He joined the Company in 1991. He received 1994 a B.S. in Chemical Engineering from Purdue University and an M.B.A. from Northwestern University.
11 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 1999 Annual Meeting of Stockholders expected to be filed on March 31, 1999, which is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information under the heading "Executive Compensation and Other Information" in the 1999 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 1999 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 1999 Proxy Statement is incorporated by reference in this report. 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, February 26, 1999 appearing on pages 27 through 40 of the 1998 Annual Report to Stockholders, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules The following additional information is filed as part of this report and should be read in conjunction with the 1998 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. 12 (a)(3) Exhibits: Exhibit No. Description ----------- ----------- (3)(i) Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit (3)(i) to the Company's Form 10-K for the year ended December 31, 1997) (3)(ii) By-Laws of the Company, as amended though May 7, 1998 (incorporated by referenced to Exhibit (3)(ii) to the Company's Form 10-Q for the period ended June 30, 1998) (4) Shareholders Rights Plan dated as of February 15, 1999 (incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed March 23, 1999) (10)(i) Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit (10)(i) to the Company's Form 10-K for the year ended December 31, 1997) (10)(ii) Deferred Compensation Plan, as amended and restated effective January 1, 1997 (incorporated by reference to Exhibit (10)(ii) to the Company's Form 10-K for the year ended December 31, 1997) (10)(iii) Supplemental Savings Plan effective January 1, 1995 (incorporated by reference to Exhibit (10)(iii) to the Company's Form 10-K for the year ended December 31, 1997) (10)(iv) Standard Form of Severance Agreements (incorporated by reference to Exhibit (10)(iv) to the Company's Form 10-K for the year ended December 31, 1997) (10)(v) Non Employee Directors' Deferred and Long Term Compensation Plan (incorporated by reference to Exhibit (10)(vi) the Company's Form 10-K for the year ended December 31, 1997) (10)(vi) Split-Dollar Life Insurance (incorporated by reference to Exhibit (10)(vii) to the Company's Form 10-K for the year ended December 31, 1997) (10)(vii) Standard Form of Change in Control Agreement (incorporated by reference to Exhibit (10)(viii) to the Company's Form 10-K for the year ended December 31, 1997) (10)(viii) Directors Retirement Plan, effective January 1, 1993 (incorporated by reference to Exhibit (10)(ix) to the Company's Form 10-K for the year ended December 31, 1997) (10)(ix) 1998 Employee Stock Compensation Plan (incorporated by reference to Exhibit 99.1 the Company's Form S-8 filed August 17, 1998) (10)(x) 1993 Employee Stock Compensation Plan as amended on November 21, 1997 (incorporated by reference to Exhibit (10)(x) to the Company's Form 10-K for December 31, 1997) (10)(xi) 1984 Employee Stock Option Plan as amended February 10, 1997 (incorporated by reference to Exhibit (10)(xi) to the Company's Form 10-K for the period ended December 31, 1997) (10)(xii) Employment Agreement with Mark P. Bulriss effective April 1, 1998 (incorporated by reference to Exhibit (10)(b) to the Company's Form 10-Q fo the period ended March 31, 1998) (10)(xiii) Stock Option and Restricted Stock Agreements with Mark P. Bulriss effective April 1, 1998 (incorporated by reference Exhibit (10)(a) to the Company's Form 10-Q for the period ended June 30, 1998) (10)(xiv) Employment Agreements with various officers (incorporated by reference to Exhibit (10)(b) to the Company's Form 10-Q for the period ended June 30, 1998) (10)(xv) Great Lakes Savings Plan (incorporated by reference to the Company's Form S-8 filed April 1, 1998) 13 (13) 1998 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 1998 Annual Report to Stockholders (23) Consent of Independent Auditors (27) Financial Data Schedules December 31, 1998 Exhibit No. 23 is included herewith. Exhibits No. 13 and 27 are included herewith as part of the electronic filing. (b) Reports on Form 8-K The Company filed a Form 8-K on October 28,1998 in connection with the restructuring of the Company's operations. (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. 14 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 17, 1999 /s/ Mark Bulriss -------------------------- ---------------------------------------------------- Mark Bulriss, 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 17, 1999 /s/ Mark E. Tomkins ------------------------------- ---------------------------------------------------------------- Mark E. Tomkins, Senior Vice President and Chief Financial Officer Date February 17, 1998 /s/ Robert J. Smith ------------------------------- ---------------------------------------------------------------- Robert J. Smith, Vice President - Controller (Principal Accounting Officer) Date February 17, 1998 s/ Thomas M. Fulton ------------------------------- ---------------------------------------------------------------- Thomas M. Fulton, Director Date February 17, 1998 /s/ Martin M. Hale ------------------------------- ---------------------------------------------------------------- Martin M. Hale, Director Date February 17, 1998 /s/ Louis E. Lataif ------------------------------- ---------------------------------------------------------------- Louis E. Lataif, Director Date February 17, 1998 /s/ Richard H. Leet ------------------------------- ---------------------------------------------------------------- Richard H. Leet, Director Date February 17, 1998 /s/ Robert B. McDonald ------------------------------- ---------------------------------------------------------------- Robert B. McDonald, Director Date February 17, 1998 /s/ Jay D. Proops ------------------------------- ---------------------------------------------------------------- Jay D. Proops, Director
15 SCHEDULE II GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1998
Additions Balance at ----------------------------------- Balance Beginning Charges to Costs Charged to at End Description of Period and Expenses Other Accounts Deductions of Period - - ----------- ---------- ---------------- --------------- ---------- --------- 1998: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 5,803,000 $ 94,000 $ -0- $ 1,763,000 (A) $ 4,134,000 Accumulated amortization of goodwill $12,645,000 $ 4,288,000 $ -0- $ 129,000 (B) $ 16,804,000 1997: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 7,321,000 $ (352,000) $ -0- $ 1,166,000 (A) $ 5,803,000 Accumulated amortization of goodwill $10,712,000 $ 2,645,000 $ -0- $ 712,000 (B) $ 12,645,000 1996: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 5,998,000 $ 1,931,000 $ -0- $ 608,000 (A) $ 7,321,000 Accumulated amortization of goodwill $ 8,166,000 $ 2,805,000 $ -0- $ 259,000 (B) $ 10,712,000
(A) Uncollectible accounts receivable written off, net of recoveries and foreign currency translation. (B) Foreign currency translation. EX-13 2 1998 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 1998 Annual Report Great Lakes Chemical Corporation [PHOTO] How does Great Lakes create shareholder value? By focusing on our customers, by involving our people, by leveraging our competitive strengths and by accelerating product innovation. 2 Great Lakes Chemical Corporation is a customer-focused supplier of innovative specialty chemical solutions. Its broad range of products includes flame retardants and other polymer additives, water treatment chemicals, performance and fine chemicals, fire extinguishants, and products and services for oil and gas drilling. The company serves customers and markets through a global network of integrated sales, production, research, technical service and distribution facilities. 1 1998 Highlights 2 Message to Shareholders 4 Chairman's Message 7 Customers First 8 Review of Operations 16 Great Lakes At A Glance 18 Financial Contents 3 - - ------------------------------------------------------------------------------ 1998 Financial Highlights (millions, except per share data) 1998 1997 1996 - - ------------------------------------------------------------------------------ RESULTS OF OPERATIONS, INCLUDING SPECIAL CHARGES: Net sales $1,394.3 $1,311.2 $1,352.3 Operating income $ 73.9 $ 141.8 $ 183.9 Net income from continuing operations $ 56.4 $ 71.8 $ 120.6 Net income $ 89.0 $ 56.9 $ 250.3 Diluted earnings per share from continuing operations $ 0.95 $ 1.19 $ 1.89 Diluted earnings per share $ 1.50 $ 0.94 $ 3.91 - - ------------------------------------------------------------------------------ RESULTS OF CONTINUING OPERATIONS, EXCLUDING SPECIAL CHARGES: Net sales $1,394.3 $1,311.2 $1,352.3 Operating income $ 190.4 $ 191.6 $ 183.9 Net income $ 131.2 $ 110.4 $ 120.6 Diluted earnings per share $ 2.21 $ 1.83 $ 1.89 - - ------------------------------------------------------------------------------ 1998 Performance Highlights [ ] Increased sales by $83 million, or 6 percent over last year, at a time when the chemical industry generated flat revenue growth. [ ] Increased net income from continuing operations by 19 percent before special charges and discontinued operations. [ ] Posted 8 percent sales gains in the Water Treatment business unit, or almost three times the market's growth rate. [ ] Generated 11 percent income growth in the Performance Chemicals business unit. [ ] Realigned our Polymer Additives research and development and sales offices to improve customer focus. [ ] Exited the tetraethyl lead business and generated net cash of $300 million with the spin-off of Octel. [ ] Assembled a new management team with the leadership qualities necessary to drive change deep into our business organization. [ ] Reorganized the company's portfolio into four strategic business units. [ ] Initiated a repositioning plan that will generate savings of $40 million annually. - - ------------------------------------------------------------------------------ 1 4 [PHOTO] Mark P. Bulriss, Chief Executive Officer and President "We're bringing a new sense of urgency and accountability to the way we identify new opportunities and turn them into solutions. Throughout our organization, we're focusing on technology and marketing as never before and using best practices to deliver greater total value, everywhere in the world." 2 5 MESSAGE TO SHAREHOLDERS When I arrived at Great Lakes last April, I saw an organization with tremendous potential. I liked the company's proud tradition of success, built largely on the strength of reliable, stand-alone specialty chemical businesses. I was equally impressed by the company's financial strength, and by its promising growth platforms that serve a broad range of end markets such as electronics, life sciences, water treatment, automotive and energy. But the company needed a spark - and a new vision of how to compete and win now and in the next millennium. In 1998, Great Lakes took its first important steps to turn this vision into reality. Though there's much more hard work ahead, early results indicate that our new organization has what it takes to give our shareholders the sustainable, profitable growth they expect. In 1998, Great Lakes showed that even under tough economic conditions, our portfolio of businesses could still deliver results. This year, we faced pricing pressures in several key areas: a global economic slowdown that engulfed Asia, South America and to some extent Europe; unfavorable currency effects; and higher systems costs as we prepare for year 2000. But even as these conditions limited sales growth within the specialty chemicals sector, our total sales grew by six percent to $1.4 billion and earnings per share from continuing operations before special charges increased 21 percent from a year ago. At the same time, we strengthened our balance sheet significantly. We used the proceeds from our successful spin-off of Octel to reduce our net debt by $380 million to just $100 million. As such, we enter 1999 with one of our industry's strongest balance sheets and with the financial flexibility we need to fund the aggressive growth initiatives already under way. A NEW VISION In team sports, there's a critical difference between playing to win and playing not to lose. When you play to win, you focus doggedly on a single goal. You're hungry and aggressive. You take controlled risks. You stay flexible and adjust your game plan to take advantage of emerging opportunities. You lay it all on the line - every time. That's exactly what we're doing at Great Lakes. We've clearly established creating shareholder value as our singular goal, and we're using Economic Value Added(R) (EVA) to measure our success. At the end of the day, Great Lakes and our shareholders will win when we maximize our return on every new product we develop and every dollar we invest. 3 6 Our strategy for creating shareholder value centers on engaging the brain power and dedication of all our employees to create an involved and driven team focused on delivering results. We've brought a new sense of urgency and accountability to the way we identify and pursue opportunities to impact our EVA performance. Equally important, we're focusing relentlessly on our customers and markets, and we're leveraging every resource we have to create solutions that meet each customer's broad and changing needs. Great companies grow with their customers and grow faster than the markets they serve. To meet this standard, we're giving customers a leading voice as we establish our research and development priorities. Every new product initiative we launch meets a defined customer need and also passes rigid financial hurdles so that our resources are concentrated on the most profitable opportunities. But customer focus is important for other reasons as well. First, customers depend on our special expertise to help them clear specific hurdles they face in bringing their own new products to market. We build new molecules or create custom formulations that impart highly specific performance characteristics, and then produce these compounds to meet the customer's high quality standards and growing volume requirements. These new products in turn help us generate organic growth, the lifeblood of great companies. Second, strong customer relationships hold the key to sustainable revenue growth. Today's customers seek suppliers who can help them maintain their competitive edge by delivering value at every contact point. The better we understand each customer's business, the more effective we are in leveraging our broad product lines, global sourcing capabilities and competitive cost positions to their advantage. Outstanding performance in this area creates loyalty and helps us capture the full potential of each customer relationship. We understand fully that Great Lakes can win only if our customers are winning. CHAIRMAN'S MESSAGE Great Lakes entered a dynamic new era in 1998 when Mark Bulriss accepted the Board's invitation to join our company as its new chief executive officer and president. We believe Mark has the experience, drive and vision to excel in this role - and to lead the company back to sustainable growth. Following the successful spin-off of Octel Corp., Great Lakes is once again a focused specialty chemicals company with leadership positions in solid, growing markets. Mark and his team have worked long hours to ensure that each of our businesses has the strong leadership and sound strategy in place to meet their aggressive goals for revenue growth and improved productivity. After two years of distinguished service, former Indiana Governor Evan Bayh left our Board of Directors to focus on his new responsibilities as a United States Senator. His unique insights proved invaluable during a time of enormous change at Great Lakes. With the transition to a new management team now virtually complete, Great Lakes is concentrating its energy on the Board's most important goal - enhancing shareholder value. I have never been more confident that the many changes under way have placed Great Lakes on track to deliver on this promise. Sincerely, /s/ Martin M. Hale - - ------------------------------------- Martin M. Hale, Chairman of the Board 4 7 [PHOTO] Mark E. Tomkins, Senior Vice President and Chief Financial Officer Mark Tomkins is on a mission to drive Economic Value Added(R) (EVA) deep into the organization. According to Tomkins, "EVA has proven its worth time and again as an effective formula for creating shareholder value. By taking a disciplined, focused, and even relentless approach to EVA, we'll ensure that Great Lakes shareholders receive an optimal return on every capital investment we make." MAKING IT WORK To help bring this vision to life, we formed a new executive management team by melding proven Great Lakes talent with an infusion of proven leaders with outstanding track records in the chemical industry. Beyond their commitment to hard work and personal accountability, each possesses the qualities necessary to drive change deep into their business organizations. Each senior executive is assembling the management team needed to run a global business, establish productivity targets and proactively identify additional avenues for growth. As we build our new business model, we're paying close attention to several factors that will ultimately drive its success. First, we're creating an infrastructure to help us deliver what we promise - both internally and externally with greater speed and efficiency. Its foundation is an Enterprise Resource Planning (ERP) system that allows us to manage the company as a unified global business. It will also provide the necessary information to serve our customers more completely and expeditiously. 5 8 To jump start our push for productivity, we restructured our operations to strengthen our competitive position and enhance our long-term growth prospects. We rationalized manufacturing operations to lower production costs and protect our margins in the face of continued pricing pressures. This process also helped us identify redundancies and reduce our workforce by 10 percent. We also realigned our Polymer Additives research and development and sales offices and consolidated all European applications-based research and development into a single location. These moves will improve customer focus and facilitate the sharing of ideas and best practices. Even as we focus on productivity as a pathway to greater profitability, we continue to assess opportunities to grow earnings through strategic acquisitions, alliances and joint ventures. Though our deep financial resources and flexible balance sheet place us in an enviable position, we will consider only those acquisition opportunities that help us expand our core businesses and advance our clearly established goals for earnings growth and higher EVA. In the final analysis, however, our people will carry the torch for delighting our customers and maximizing shareholder value. They've accepted the challenge by rolling up their sleeves and channeling their energy toward meeting or exceeding very specific EVA performance targets. We have broadened employee involvement by removing obstacles, providing training and creating a new system that gives employees the continuous feedback they need to excel. REACHING NEW TARGETS Great Lakes covered a tremendous amount of ground in 1998, and we've set our sights on a new, even more ambitious set of goals for 1999 and beyond. With the foundation now firmly in place, we'll strive to boost revenues by at least 10 percent a year for the next three years. We'll improve operating margins by three percentage points during this period by focusing on operational excellence, increased productivity and aggressive management of purchasing and logistics. We'll ensure that new products are generating 30 percent of our revenues by 2001. We'll drive continuous improvement in safety, health and environmental stewardship. And we'll create opportunities for, and reward, employees who accept the challenge of making a difference. From the outset, my goal - and the goal of our Board of Directors - has been to make Great Lakes great again. Our strategy for getting there is simple: deliver shareholder value both by harnessing and focusing the talents of our employees and by growing with our customers and markets. Executing this strategy effectively is far more challenging and something too few companies achieve. But Great Lakes can and will win. We have strong positions in dynamic growth markets. We have the right product lines and services. And we have the grit, the resiliency and the sheer determination it takes to surpass the high expectations of our shareholders, our customers and ourselves. Sincerely, /s/ Mark P. Bulriss - - ------------------------------------- Mark P. Bulriss Chief Executive Officer and President March 29, 1999 6 9 Customers First. By definition, all specialty chemical companies are customer-focused organizations. After all, we make our living developing custom compounds that meet highly specific performance requirements. But at Great Lakes, we're taking customer focus to a new level. We're empowering our employees to add value at every contact point. Collaborating with our customers up-front so our research and development projects deliver faster and better solutions. Making technology investments that improve operations, logistics and service around the world. And adopting best practices to enhance quality and productivity. These actions show our customers - one success at a time - that we'll do whatever it takes to earn their respect and their business. And these actions send a clear signal to our shareholders that we're on track to deliver the sustainable, profitable growth they expect. 7 10 POLYMER ADDITIVES [PHOTO] - - -------------------------------------------------------------------------------- "In our business, there's only one way to drive organic growth: constantly find new ways to delight our customers. We've strengthened the link between our polymer additives customers and our research and development team so that every new product initiative targets a specific market, meets a specific customer need, and moves from concept to market as quickly as possible." -C. Hugh Morton - - -------------------------------------------------------------------------------- Hugh Morton, Executive Vice President and President Polymer Additives, and Cheryl Crawford, Vice President of Marketing and Technology. A BLUEPRINT FOR SUCCESS Whether it's North America, Europe, Asia or the Middle East, each market has its own unique characteristics that shape each customer's needs and expectations. That's why we work so hard to cultivate the business relationship necessary to help customers achieve their business goals. Each time we target a new market, we establish a local presence, build relationships, gather market information and turn our insights into new product and service concepts. This approach lets us respond quickly to local conditions and effectively leverage our applications knowledge and efficient manufacturing operations on a global basis. This blueprint has already paid dividends in Europe and North America, and it's helping us gain ground in dynamic markets around the world. In 1998, we brought this blueprint to Asia to meet growing long-term demand for plastics additives used in products such as computers, business equipment and consumer electronic devices. In Korea, for example, many manufacturers emphasize that in today's tough economic environment, they must lower their operating costs to survive. We're answering the call by delivering integrated products and services that meet tough performance and cost criteria. We're well on our way to building the foundation we need to serve this dynamic market. A customer service center in Hong Kong, linked to our Enterprise Resource Planning system, will open in early 1999 and an applications lab will open later in the year. Our joint venture manufacturing operation in Korea has clearly demonstrated success in helping customers meet ever increasing demand from the market. Meanwhile, we're targeting the Middle East - one of the world's fastest growing markets for polyolefin production - as our next emerging growth opportunity. In 1998, we established a new joint venture company in Saudi Arabia, Gulf Stabilizers Co. Limited, that will produce and market phenolic and phosphite antioxidants for plastics, blends and special physical forms. This world scale facility will use the best-in-class technology to exceed the most demanding international quality standards. 8 11 - - -------------------------------------------------------------------------------- QUICK RESPONSE Global manufacturers need suppliers who can deliver dependable, seamless service anywhere in the world. In 1998, we took several important steps to give customers the fast, responsive service they deserve. We are consolidating our 16 European customer service centers into four strategically located facilities and linking these centers through a new, Y2K compliant Enterprise Resource Planning system programmed to support the new euro. Now, every service representative will have instant online access to each customer's complete account history. Representatives can also access information on current pricing and available inventory, so customers can better manage their costs and inventory. [PHOTO] Ravi Shankar and Rachael Wall, LINX applications support representatives, review the extensive capabilities of our Enterprise Resource Planning system. THE RIGHT BLEND For a specialty chemical company like Great Lakes, there's no greater success than developing a new concept that combines savings, convenience and safety all in one efficient package. For years, we noticed that many customers who purchased our flame retardant compounds combined them with polymer stabilizers and other additives before engineering them into products such as polystyrene foam, computer monitors and resins. And our experience told us this was far from an ideal solution. First, there's the added nuisance of placing multiple orders from many different suppliers - an inefficient process in this age of purchasing leverage and supplier rationalization. Then there's the host of cost and safety issues that arise when customers mix their own custom blends. Spillage and inefficient mixing can drive high materials costs even higher, while dust from these powdered compounds can result in high maintenance and housekeeping costs in addition to potentially exposing workers to health and safety risks. Great Lakes developed its patented No Dust Blends product line, sold under the ANOX NDB(TM) trademark, to address all these problems. We're able to take the plastics additives that customers need for their specific applications, custom mix them in the precise ratios required and deliver them in a pelletized "no dust" form that is safe and easy to use. This innovative approach helps customers leverage their purchasing ability and streamline procurement and inventory management. But equally important, our line of ANOX NDB(TM) is the right blend to help customers lower their total costs while optimizing their operations. [PHOTO] Building strategic relationships is vital to surpassing our customers' requirements. Here, Ann Greskovich, Great Lakes Sales Representative (left), meets with Mike Burzminski, Corporate Materials Director of RTP Company, to discuss our broad line of polymer additives. - - -------------------------------------------------------------------------------- 9 12 PERFORMANCE CHEMICALS [PHOTO] - - -------------------------------------------------------------------------------- "In 1998, we reorganized our business structure to provide, on a global basis, a more diversified package of value-added products and services to the dynamic life sciences industries. Today, we are better positioned to leverage our expertise in a broad range of chemical synthesis, process development, manufacturing and toxicological testing activities to deliver superior, single-sourced solutions to our customers." -Louis M. Maresca - - -------------------------------------------------------------------------------- Lou Maresca, Executive Vice President and President Performance Chemicals (center); Jim Hieserman, General Manager Fine Chemicals (left); and Joe Holson, President of WIL Research Laboratories, Inc. INVESTING IN GROWTH Customers are always looking for new ways to stretch their resources. Some turn to Great Lakes to engineer a new molecule that meets specific performance criteria. Others ask us to develop and pilot economical new manufacturing processes that meet their exacting quality standards. Still others depend on us to provide additional volume of chemical intermediates they produce themselves, or take over the manufacture of these compounds so they can channel their resources elsewhere. Lately, more and more customers are tapping into our unique expertise in fluorine chemistry to help them reach the next level. By working closely with our customers, we've developed a robust pipeline of over 40 new fluorine-based products we will introduce over the next four years. To meet growing demand for our new and existing products, we commissioned a new multipurpose facility in Arkansas that will manufacture everything from specialty fluorinated monomers to agricultural intermediates to environmentally acceptable CFC replacements. This low-cost, high-technology facility promises a positive EVA from the first day it was commissioned and gives us the flexibility and production capabilities to meet the specialty fluorine product needs of customers around the world. We're also breaking new ground in fluorine chemistry by bringing our patented FM-200 fire suppression technology to new markets and applications where customers seek an environmentally superior alternative to traditional halogenated products. In 1998, we successfully defended our FM-200(R) patent in Europe when three of the world's largest fluorine companies challenged it on environmental grounds. Great Lakes can now accelerate the pace of our efforts to bring this high-performance technology to customers throughout Europe. Already, the world-famous Eiffel Tower in Paris has converted to an FM-200(R) fire suppression system. - - -------------------------------------------------------------------------------- 10 13 - - -------------------------------------------------------------------------------- Dean Storkan, President of Trical, Inc. (left), one of the largest distributors of our agricultural products, discusses with Gery Holloway, [PHOTO] Packaging Supervisor at our El Dorado Central Plant, our tamper evident shrink wrap technique, our latest innovation to protect the safety of our customers. TAKING CARE We attach "handle with care" labels to the agricultural products we produce to remind end users to take special precautions whenever they handle and use these critically important pesticides. But the sign carries additional meaning for Great Lakes as the manufacturer and product steward and for the distributors who market it. We, too, must handle these products with special care by doing everything we can to protect the health and safety of end users. To this end, we've developed a number of innovations to packaging solutions such as easy, convenient six-packs of one-and-a-half-pound cans. Each six-pack contains the right amount of Brom-O-Gas(R) to treat an entire transplant seedbed, so customers can limit their excess inventory. On another front, we're helping distributors limit their liability by attaching an electronic chip to every returnable canister we produce. That enables distributors to track every canister they sell so they can retrieve and return them. Dean Storkan, President of Trical, Inc., a major distributor of our agricultural products, appreciates everything we do to help him manage his risk and educate his end user customers. "Great Lakes is implementing a long-term program to maintain quality and safety. This program is important to distributors and consumers alike since it ensures the continued viability of these essential products for agriculture." Research conducted by Julie Sacarias, Fluorine [PHOTO] Chemicals R&D Chemist, helps Great Lakes stay at the forefront of fluorine technology and meet growing world demand for its fluorine-based products. TAKING CONTROL Sometimes it's the moves you make behind the scenes that have the greatest impact on customers. Our new approach to global supply chain management is a case in point. We've integrated purchasing, logistics and customer service on a global basis so we can deliver the products our customers want, when and where they need them. On the front end, our global sourcing commodity teams are helping us fully leverage our size when procuring raw materials and supplies. To streamline logistics, we rationalized our warehouses so we can deliver combined shipments that simplify our customers' ordering and inventory management processes. And we consolidated our Customer Service Call Centers to give customers a single point of contact for ordering, tracking, invoicing and technical support. - - -------------------------------------------------------------------------------- 11 14 WATER TREATMENT [PHOTO] - - ------------------------------------------------------------------------------- "Even though our customers are mass merchants, professional swimming pool and spa retailers and distributors, we're never far from the consumers who use our products. That's why we work so hard to make `do-it-yourself' swimming pool and spa care a comfortable and satisfying experience. We do so by offering products that are exceptionally effective and easy to handle, and by giving all our customers and their retail consumers the information and support they need." -Marshall Bloom - - ------------------------------------------------------------------------------- Larry Bloom, President and COO (left), and Marshall Bloom, Chairman and CEO, of BioLab, Inc., stay close to customers by attending such functions as the BioGuard Authorized Dealer Conferences. WHATEVER IT TAKES Mass merchant customers rely on a time-tested business model to succeed: sell large quantities, protect margins through highly efficient operations, and build customer loyalty by delivering service and value at every turn. BioLab maintains its leadership role as the number one supplier of swimming pool and spa products by supplying the products and programs their customers need to grow their businesses. Each BioLab customer has available a team of experts to help them manage their swimming pool and spa programs at all levels. We provide all the necessary tools for success: strategic shipping points throughout the country, field support specialists to tailor our customers' inventories and marketing information to enhance their sales efforts in all locations. To help drive retail purchases, we also make available to our customers a computerized water analysis system that makes it easy for consumers to determine which pool chemicals they need. In-store displays helped several customers set new sales records for pool chemicals in 1998. Customers certainly appreciate the value we deliver. In 1998, our Recreational Water Products division earned four awards for excellence in sales, manufacturing and service from Kmart Corporation. "Kmart is pleased with the terrific performance by Recreational Water Products in 1998 and is looking for more partners like them to enhance the growth and success of Kmart in the years to come," said Larry Martin, Kmart's Divisional Vice President, Toy/Hobbies/Seasonal/Stationery. - - ------------------------------------------------------------------------------- 12 15 - - ------------------------------------------------------------------------------- EASY ACCESS Owners of swimming pools and spas all share one common objective: keep their maintenance time to a minimum so they can spend as much time as possible enjoying the pleasures of pool ownership. We support this goal by giving pool and spa dealers and their customers easy access to all the information they need. For our BioGuard(R) dealers, we supplement our extensive training programs with marketing materials they can use to educate retail customers about specific products. We also operate a customer service hotline that gives their customers instant access to a wide range of information - including how to troubleshoot problems. Or they can direct their consumers to our pool and spa care brand websites for information on our products, including where to find them, how to use them and how to keep water sparkling clean. [PHOTO] Alan Harrison, Manager Applications Technology (left), demonstrates a Powder Delivery Unit to Ken Voytell Jr., Market Manager Industrial Water Treatment (center), and Glen Heedy, Vice President Commercial & Specialties Division. Paper mills use Powder Delivery Units to distribute BromiCide(R), which recently gained FDA clearance. MAKING A DIFFERENCE Pulp and paper manufacturers have long understood the positive correlation between water quality management, operational efficiency and product quality. It can be difficult and costly, however, to control the growth of detrimental microbiological organisms during the manufacturing process. Recently, BioLab application professionals partnered with key customers to develop important new technologies that promise to significantly improve all that. Because industrial water treatment is an applications-intensive business, BioLab technicians routinely work side by side with water treatment companies, consultants and university researchers to study how effectively biocides combat specific microorganisms, affect equipment used at various stages of the manufacturing process, and interact with other chemicals. Recently, a specialty water treatment company collaborated with our technicians at a paper mill in Canada to analyze its current water treatment process. Working together with our customer, we discovered we could significantly reduce the impact of detrimental microorganisms on the entire manufacturing process by applying measured doses of BioLab's bromine-based oxidizing biocide, BromiCide(R), at the point where incoming water enters the mill. This solution substantially reduced the need for more expensive non-oxidizing biocides later in the manufacturing process, allowing the mill to reduce its total biocide costs by over 20 percent. Already, BioLab has received regulatory approvals to market this specialty biocide to pulp and paper manufacturers in Japan, Europe, Mexico and Canada. At the end of 1998, the U.S. Food and Drug Administration released new tolerance levels that will enable BioLab to offer BromiCide(R) to U.S. paper manufacturers as well. [PHOTO] Jed Olson, BioGuard Sales- person of the Year, discusses the ease and effectiveness of BioGuard's Accu-Scan(TM) Test Strip Reader with Kelly Reed of Contemporary Watercrafters, Inc., a BioGuard Authorized Dealer. - - ------------------------------------------------------------------------------- 13 16 ENERGY SERVICES AND PRODUCTS [PHOTO] - - ------------------------------------------------------------------------------ "Energy Services is a tough, demanding business. But there are three sure-fire ways to earn customer goodwill. You can find new ways to lower their costs, deliver value through innovative solutions and products, and provide best-in-class service on a consistent basis. We're building a name for ourselves by doing all three." -Robert L. Hollier - - ------------------------------------------------------------------------------ Robert Hollier, Chief Executive Officer and President of OSCA, Inc., Great Lakes' oil field services subsidiary. GOING DEEP Until recently, energy companies confined their drilling activity in the Gulf of Mexico to a narrow band within 75 miles off the coastline. Then they discovered huge reserves of oil and gas much farther out, in what's called the deepwater regime. That changed everything...and created a tremendous new opportunity for OSCA. In the past, work boats supporting these rigs and platforms had plenty of time to move from supplier to supplier, loading up with the fuel, water, chemicals and other supplies necessary to keep rigs operating. But it takes three or four times as long to reach today's deepwater platforms from shore, and that creates serious problems with logistics and costs. Oil companies found themselves leasing additional boats to compensate for much slower cycle times. They also watched their costs for hardware, chemicals and other supplies soar because of the unique nature of deepwater drilling. Today, OSCA is part of an innovative operation that solves these problems. We're the exclusive supplier of completion fluids at C-Port, a giant logistics management facility in Fourchon, LA, that serves British Petroleum, Conoco, Shell and Texaco. We built a new blending and distribution plant adjacent to this facility so we could mix custom blends of brominated fluids to meet the specific requirements of individual wells and deliver them efficiently to save time and money. Boats dock in one of the nine covered slips at this giant oil services superstore, and as they're being loaded with all the other supplies they need, we pump our completion fluids into these boats through a pipeline that runs directly from our plant. By bringing our product directly to our customers, we save them up to twelve hours of travel and loading time - and help them reduce the number of boats they need to support their operations. This solution is fast emerging as the new logistics model for energy companies operating in the Gulf of Mexico. Another facility - C-Port 2 - is now under construction, and OSCA has been invited to be an exclusive supplier there, too. - - -------------------------------------------------------------------------------- 14 17 - - ------------------------------------------------------------------------------- Ben Marchive, Division Engineering Manager for [PHOTO] Kerr-McGee Corporation (left), hears more about OSCA's blending and distribution plant adjacent to the new C-Port oil services facility from OSCA's Houston Sales Manager, Robert Pike. TOUGH ENOUGH Deepwater drilling in the Gulf of Mexico is a high-overhead business. With $300,000 to $400,000 per rig in operating costs on the line each day, it's no wonder customers place a high premium on continuous operations - and on suppliers who come through when others can't. OSCA's new fleet of marine service vessels is uniquely equipped to deliver fast, effective services in dangerous, hard-to-reach places. They're large enough to carry all the equipment and chemicals they need to operate offshore for weeks at a time, so they can move quickly and efficiently between platforms. They're also specially designed to operate in hazardous level-five sea-state conditions. So now, when dangerous weather forces other boats back to shore, customers can depend on OSCA to deliver the goods. [PHOTO] Jeff Jackson, Quality Assurance Inspector at OSCA's tool manufacturing facility in Mansfield, TX, ensures that the oil drilling tools built by OSCA meet the most exacting specifications. TOOLS OF THE TRADE Oil platforms look sturdy and formidable on the surface, but the wells they support require delicate operations four or five miles underground where the oil resides. To service these wells, we analyze each well's unique environmental characteristics, then select downhole tools that can stand up under these conditions. Our new Research and Technology Center in Houston will help us make these critical decisions with more confidence than ever before. The new center brings all our oil field design engineers under one roof so they can pool their expertise in analyzing how tools perform under a wide variety of environmental conditions. We've created a new "laboratory" that houses a series of mini-wells that replicate the exact conditions of actual wells. We design new tools with very specific performance characteristics, produce them in our manufacturing plant and test how they withstand pressure and stress. This way, we can give customers the expert advice they want and back our recommendations with specific test results. - - -------------------------------------------------------------------------------- 15 18 GREAT LAKES CHEMICAL CORPORATION AT A GLANCE DESCRIPTION PRODUCTS AND SERVICES ================================================================================ POLYMER ADDITIVES Great Lakes is the world's The most comprehensive leading producer of integrated line of bromine-based polymer additives that include flame retardants on the flame retardants, polymer market today; patented No stabilizers and antimony-based Dust Blends (NDB) derivatives. We engineer technology; antioxidants; customer solutions that impart ultraviolet (UV) performance enhancing absorbers; hindered amine characteristics such as light stabilizers (HALS); combustion resistance, heat and plasticizers. resistance and color consistency. Behind every value-added product is quality-driven manufacturing and expert technical service to guarantee total customer satisfaction. ================================================================================ PERFORMANCE Great Lakes produces a broad Bromine and bromine CHEMICALS range of specialty and fine derivatives; fumigants chemicals for dynamic markets for agricultural and food that offer significant growth applications; fire opportunities for our extinguishants and high-margin, value-added fluorinated monomers; products. Advances in toxicological testing and manufacturing technology make bioanalytical Great Lakes the leading choice services;and specialty for companies that outsource and fine chemical complex chemical production intermedi-ates used by needs. customers to produce finished products. ================================================================================ WATER TREATMENT Through its BioLab, Inc., BioLab's swimming pool subsidiary, Great Lakes is the and spa brands, which world's premier formulator of include BioGuard(R), water treatment biocides. The SpaGuard(R), OMNI(R), company markets popular pool Hydrotech(R), Guardex(R), and spa products throughout Pool Time(R) and AQUA North America, Europe, South CHEM(R), contain products Africa and Australia. BioLab's such as bromine, chlorine industrial customers are and non-oxidizing water continuing to recognize the sanitizers, algicides, value of the company's oxidizers, pH balancers, specialty oxidizing biocides mineral balancers and for a number of applications, specialty chemicals. particularly the cooling water Specialty oxidizing and paper segments. biocides, including BromiCide(R) and LiquiBrom(R), are principal products of BioLab's Commercial & Specialties Division, along with formulated oxidizers for certain consumer markets. ================================================================================ ENERGY SERVICES A wholly owned subsidiary of Bromine-based fluids for AND PRODUCTS Great Lakes, OSCA, Inc., is a oil and gas drilling; leading marketer of sand control and bromine-based clear workover filtration; coiled tubing and completion fluids used in and nitrogen services; the production of oil and subsea excavation and natural gas. Building on its pipeline services; and worldwide leadership position downhole completion in fluids with the addition of tools. Marine Well Service, OSCA now offers a unique suite of completion services, including downhole tools and coiled tubing service. 16 19 APPLICATIONS AND MARKETS GROWTH OPPORTUNITIES =============================================================================== Consumer electronics, business Advance the company's [PIE CHART] machines, fibers, wire and patented NDB technology cable, communications marketed under the trade equipment, automotive and name ANOX NDB(TM); expand cosmetics. our presence in Asia by establishing in Hong Kong a customer service center to accelerate our response to customer requirements in this part of the world; target the rapidly emerging markets in the Middle East through a manufacturing joint venture in Saudi Arabia. =============================================================================== Industrial cleansers, Introduce HyperSolve(TM) [PIE CHART] electronics and photographic line of environmentally papers and films; soil, suitable solvent commodity, processed food and replacements (pending structural pest control; regulatory approval); telecommunications, military, launch new delivery and data processing, and health recovery systems for care; veterinary and consumer agricultural products; products; and pharmaceutical expand our line of and agrochemical industries. fluorine derivatives manufactured at the company's recently commissioned multipurpose facility; broaden capabilities at WIL Research Laboratories, Inc.; focus our synergies to develop new products that serve the dynamic life sciences industry. =============================================================================== BioLab will continue to target Significant growth [PIE CHART] pool and spa dealers, mass opportunities in the market retailers, residential industrial water business and commercial pool builders, identified in Europe, water treatment service Asia and North America; companies, manufacturers of growing new segment personal care products, and exists in development of marketers of household and novel dispensing institutional cleaners. equipment and favorable regulatory clearance for use of BromiCide(R) products in U.S. food contact paper manufacturing. Our commitment to the technological development of innovative new products and programs continues, such as BioGuard's Accu-Scan(TM) Test Strip Reader for faster and more accurate pool and spa water analysis. =============================================================================== Oil and gas industry. Supply on-site completion [PIE CHART] fluids for C-Port operations; expand deepwater marine services to serve an even broader segment of energy exploration; leverage recently acquired tool manufacturing facility in Mansfield, TX, to fortify OSCA's complete line of products and services. 17 20 19 Financial Review 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Management's Statement of Responsibility for Financial Statements 27 Report of Ernst & Young LLP, Independent Auditors 28 Consolidated Statements of Income 29 Consolidated Balance Sheets 30 Consolidated Statements of Cash Flows 31 Consolidated Statements of Stockholders' Equity 32 Notes to Consolidated Financial Statements 41 Quarterly Results of Operations 42 Corporate Officers and Directors GREAT LAKES CHEMICAL CORPORATION 18 21 - - -------------------------------------------------------------------------------- Financial Review - - -------------------------------------------------------------------------------- (millions, except per share data) 1998 1997 1996 1995 1994 ================================================================================ [S] [C] [C] [C] [C] [C] SUMMARY OF EARNINGS Net sales $ 1,394.3 1,311.2 1,352.3 1,291.6 1,097.1 Operating income before special charges $ 190.4 191.6 183.9 198.3 151.6 Operating income(1) $ 73.9 141.8 183.9 198.3 151.6 Income from continuing operations before income taxes $ 66.2 117.2 184.0 200.2 169.7 Income taxes $ 9.8 45.4 63.4 68.0 44.0 Percent of income before income taxes 14.8 38.7 34.5 34.0 25.9 Net income from continuing operations $ 56.4 71.8 120.6 132.2 125.7 Net income (loss) from discontinued operations $ 32.6 (14.9) 129.7 163.4 153.0 ================================================================================ Total net income $ 89.0 56.9 250.3 295.6 278.7 Percent of average stockholders' equity 7.5 4.1 17.2 21.7 21.7 FINANCIAL POSITION AT YEAR-END Working capital $ 649.0 364.2 424.1 399.7 286.8 Current ratio 2.9 2.2 2.5 2.4 2.3 Capital expenditures $ 160.6 133.0 168.7 182.9 86.0 Total assets $ 2,004.6 2,270.4 2,352.7 2,179.9 1,810.8 Long-term debt $ 519.3 566.6 502.2 345.5 132.7 Percent of total capitalization 31.9 29.1 24.4 18.9 8.8 Stockholders' equity $ 1,054.3 1,307.4 1,486.9 1,416.2 1,310.9 Per share $ 18.05 22.18 24.13 21.92 19.48 SHARE DATA Basic earnings (loss) per share Continuing operations $ 0.96 1.20 1.90 2.02 1.80 Discontinued operations 0.55 (0.25) 2.04 2.50 2.20 ================================================================================ Total $ 1.51 0.95 3.94 4.52 4.00 Diluted earnings (loss) per share Continuing operations $ 0.95 1.19 1.89 2.00 1.79 Discontinued operations 0.55 (0.25) 2.02 2.48 2.17 ================================================================================ Total $ 1.50 0.94 3.91 4.48 3.96 Cash dividends per share Declared during year $ 0.40 0.63 0.57 0.44 0.39 Paid during year $ 0.48 0.62 0.54 0.43 0.38 Payout as percent of net income 26.5 66.3 14.5 9.7 9.8 Shares outstanding (basic) Average during year 59.0 60.0 63.5 65.4 69.7 At year-end 58.4 59.0 61.7 64.6 67.3 Stock price(2) High $54 3/16 54 7/8 78 5/8 74 5/8 82 Low $36 11/16 41 1/2 44 1/4 55 3/4 48 3/4 At year-end $ 40 44 7/8 46 3/4 72 57 ================================================================================ (1) After special charges of $116.5 million in 1998 and $49.8 million in 1997. (2) Stock prices prior to May 22, 1998, do not reflect the Octel spin-off. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 19 22 - - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - - -------------------------------------------------------------------------------- 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 could affect the Company's operations, markets, products, services, prices and other factors as discussed in the Company's Annual Report on Form 10-K 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. CONTINUING OPERATIONS The following table sets forth the percentage relationship to net sales of certain income statement items for the Company's continuing operations: ================================================================================ Years Ended December 31 1998 1997 1996 ================================================================================ Net Sales 100.0% 100.0% 100.0% Gross Profit 27.5 28.5 28.3 Selling and Administrative Expense 10.8 10.7 11.5 Research and Development Expense 3.0 3.2 3.2 ================================================================================ Operating Contribution 13.7 14.6 13.6 Special Charges 8.4 3.8 -- ================================================================================ Operating Income 5.3 10.8 13.6 Interest and Other Income 2.7 2.4 4.2 Interest and Other Expense 3.2 4.2 4.2 ================================================================================ Income before Income Taxes 4.8 9.0 13.6 Income Taxes 0.7 3.5 4.7 Net Income from Continuing Operations 4.1% 5.5% 8.9% ================================================================================ RESULTS OF CONTINUING OPERATIONS -- CURRENT YEAR REVIEW Sales increased 6% to $1,394 million from $1,311 million in 1997. The growth in sales was driven primarily by strong volume growth in the Performance Chemicals and Water Treatment business units. Volume for the Company grew 9% including the acquisition of Anzon, a producer of antimony based flame retardants which accounted for 3 percentage points of the year over year volume growth. The volume growth was partially offset by a 1% overall decline in selling prices and a 1% effect from unfavorable foreign currency fluctuations. Gross profit increased $9 million to $383 million while gross margin decreased 1 percentage point from 28.5% to 27.5%. Gross margin benefited from volume growth, lower manufacturing costs resulting from cost productivity programs and increased asset utilization and favorable raw material prices. These benefits were more than offset by lower selling prices and a shift in product mix, primarily in Polymer Additives where the lower margin Anzon business was added to the portfolio. 23 - - -------------------------------------------------------------------------------- Research and development spending was even with 1997 and declined slightly as a percentage of sales. The Company has refocused and streamlined the development process to ensure optimal allocation of resources enabling accelerated commercialization of new products. Selling and administrative expenses increased $10 million as compared to prior year, but remained flat as a percentage of sales. The increase is due to a conscious effort to increase the Company's sales and marketing presence in several key businesses and geographic areas and higher spending on information technology related to implementation of a new ERP information system and year 2000 remediation and readiness. In 1998, the Company recorded special charges of $116.5 million to consolidate manufacturing operations, write down or dispose of underperforming or underutilized assets and product lines, consolidate sales offices and research and development facilities and replace the chief executive officer and other members of the executive leadership team. The restructuring will result in approximately a 10% reduction of the work force. As part of the reorganization the number of positions in sales, marketing and research and development was increased to provide renewed focus on new products and the customer. Operating income margin, including special charges, was 5.3% as compared to 10.8% in 1997. Excluding special charges, 1998 operating income margin was 13.7%, a decline of 1 percentage point from the prior year. Strong growth in Performance Chemicals and Water Treatment and savings from productivity programs initiated in the second half of 1998 were more than offset by the effects of competitive pricing pressure in Polymer Additives, lower oil prices on the Energy Services and Products business and the addition of the lower margin Anzon antimony business acquired in the fourth quarter of 1997. Interest and other income increased $5 million to $37 million in 1998. Interest income increased $9 million due to higher average investment balances resulting from cash generated by operations and proceeds received in connection with the spin-off of the Octel business. This increase was partially offset by lower earnings from equity affiliates. Interest and other expenses decreased by $12 million to $45 million in 1998. The decline was due in part to lower interest expense resulting from reduced borrowings. A $1 million increase in goodwill amortization resulting from the Anzon acquisition was offset by favorable foreign exchange. Both 1998 and 1997 include environmental provisions of approximately $10 million related to former operating sites. Income taxes were $10 million or 14.8% of income before taxes compared to 38.7% in 1997. The lower effective tax rate was due to a favorable $10 million tax credit related to foreign taxes and the magnitude of the special charges. Excluding the effect of special charges in 1998 and 1997 and the favorable $10 million foreign tax credit noted above, the effective tax rate in both years would have been 34%. Net income from continuing operations was $56 million, or $0.95 per share, in 1998, as compared to $72 million, or $1.19 per share, in 1997. Excluding the after tax effect of special charges of $75 million and $38 million in 1998 and 1997, respectively, net income was $131 million, or $2.21 per share, in 1998, as compared to $110 million, or $1.83 per share, in 1997. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 20 24 - - -------------------------------------------------------------------------------- SEGMENT INFORMATION Set forth below is a discussion of the operations of the Company's business segments: Polymer Additives, Performance Chemicals, Water Treatment and Energy Services and Products. Operating income, which is the income measure the Company uses to evaluate business segment performance, represents net sales less costs of products sold, selling, administrative and research expenses. Bromine used by each of the Company's segments as a raw material in their production processes is reflected at cost. Polymer Additives The Polymer Additives business unit is a leading worldwide developer, producer and marketer of brominated, intumescent and antimony based flame retardants and antioxidants, UV absorbers and light stabilizers. These products have unique properties which improve quality in a variety of products including computer and business equipment, consumer appliances, packaging, textile, building and construction and transportation. ================================================================================ Polymer Additives 1998 1997 ================================================================================ Net Sales $584 $554 Operating Income $ 79 $ 93 ================================================================================ Polymer Additives sales increased 5% to $584 million in 1998. Volume improved by 10% including the acquisition of Anzon which contributed 8 percentage points of the increase. Expanded production capabilities, particularly in the U.S., and demand for the Company's proprietary blends and physical forms in polymer stabilizers fueled the growth. The increase was partially offset by a 3% decline in selling prices due to competitive price pressures, primarily in polymer stabilizers, and the effects of unfavorable currency fluctuations. Operating income in 1998 decreased $14 million to $79 million. The decrease was the result of the aforementioned price decline, higher spending for implementation of the Company's new ERP information system, year 2000 remediation and readiness and the effects of unfavorable currency fluctuations partially offset by improving manufacturing costs. The business unit made major strides in improving manufacturing costs and efficiency, particularly in the South Arkansas bromine and flame retardant facility and in the European polymer stabilizers operations. However, the improvements were predominantly in the fourth quarter of 1998 and the full effect, as well as the effects of the Company's restructuring plan, will not be fully realized until the end of 1999. Additionally, operating margin was unfavorably affected by the addition of the lower margin Anzon antimony business. Performance Chemicals The Performance Chemicals business unit is a collection of individual businesses providing products and services that meet highly specific requirements -- from creating complex organic molecules to developing and piloting economical manufacturing processes for pharmaceutical, agrochemical and industrial chemical applications. ================================================================================ Performance Chemicals 1998 1997 ================================================================================ Net Sales $315 $283 Operating Income $70 $51 ================================================================================ As a group, Performance Chemicals sales grew 11% to $315 million in 1998. Leading the way was the record performance of the Fluorine group, which continues to gain worldwide recognition and acceptance of its fluorine-based compounds, FM-200(R) and HFC-32. A stronger second half of 1998 in the OEM segment coupled with a recovery in Asian demand toward the end of the year boosted fluorine sales by 21% in 1998. Sales at WIL Research Labs, our toxicological testing service business, also reached record levels. Increased demand for developmental and reproductive studies and higher facility utilization drove a 17% sales improvement. Fine Chemicals sales were essentially flat with the prior year as volume improvements were offset by lower pricing as the end use products of which the group's intermediates are a part, moved to commercialization. In 1998, the Fine Chemicals group initiated steps that move it along a path from simply providing building block materials to supplying more complex intermediates and proprietary compounds which typically offer the greatest potential to capture value for the organization. Agricultural Products sales posted a 9% sales gain primarily as a result of higher selling prices. The Bromine Intermediates group benefited from stronger volume in its base products as well as from Hypersolve(TM), the Company's new bromine-based solvent, to achieve double digit growth. Sales of this new offering will accelerate once the EPA ruling under its Significant New Alternatives Policy is issued. Operating income in 1998 rose 37%, reflecting strong volume growth across most units comprising this segment. Fine Chemicals achieved a 71% increase in operating income and a 63% increase in operating margin from selective price increases, a better mix of value added product offerings, plant debottlenecking and strict cost controls. These factors plus higher selling prices for the business unit's Bromine Intermediates and - - -------------------------------------------------------------------------------- 25 - - -------------------------------------------------------------------------------- Agricultural Products groups pushed operating margins four percentage points higher reaching a level of 22% for the year. Water Treatment The Water Treatment business unit is the world's leading provider of recreational water care products to the consumer. This vertically integrated organization sells generally non-discretionary products and services including sanitizers, oxidizers, balancers and algaecides for applications in pools, spas, hot tubs, fountains and other recreational markets such as theme parks. In addition, this business unit is the world's leading provider of bromine-based biocides for industrial water treatment applications. ================================================================================ Water Treatment 1998 1997 ================================================================================ Net Sales $379 $350 Operating Income $ 55 $ 46 ================================================================================ 1998 represented another exceptional year for Water Treatment, with both sales and operating income exceeding 1997 record levels. Water Treatment sales increased 8% to $379 million in 1998. A volume increase of 10% far exceeded the effects of unfavorable currency fluctuations and resulted in gains almost three times the inherent growth rate for this market. The success of Water Treatment's new technology product SHOCK Plus(R), a higher penetration in the important mass market and a strong early season for cooling tower biocides drove the growth. Operating income in 1998 surged 20% to a record $55 million. The aforementioned record volumes and a richer mix of value-added products leveraging the unit's customer first approach, coupled with an improvement in manufacturing costs, drove the record performance. The 1997 restructuring efforts by Bayrol Europe were integral to the manufacturing improvements as Bayrol showed a significant improvement in the second half of 1998. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 21 26 Energy Services and Products The Energy Services and Products business unit provides completion products and services to oil and gas well operators. The business unit produces bromine-based clear fluids and completion fluids and provides ancillary well completion services such as gravel packing, high-pressure fracturing, packing, well stimulation and coil-tube intervention. Sales increased 3% in 1998 to $116 million as depressed oil prices and adverse weather conditions in the Gulf of Mexico during the second half of the year significantly reduced drilling activity and increased competitive price pressure. Crude oil prices ended the year at $11 per barrel, down $4 per barrel from July. ================================================================================ Energy Services and Products 1998 1997 ================================================================================ Net Sales $116 $113 Operating Income $ 11 $ 20 ================================================================================ Operating income declined $9 million as the result of price pressure from the reduced drilling activity, lost drilling days caused by adverse weather conditions in the Gulf of Mexico and higher overhead from capacity expansion in the latter part of 1997 and first half of 1998. The business unit, as part of the Company's overall reorganization plan, has taken aggressive action to bring its cost structure in line with market conditions. RESULTS OF CONTINUING OPERATIONS -- 1997 COMPARED WITH 1996 Sales in 1997 were $1,311 million, a decrease of $41 million, or 3% compared to sales reported in 1996. Volume gains of $155 million, or 11% and the addition of Anzon's $9 million in sales were more than offset by the following: dispositions of $155 million; adverse foreign currency effects totaling $27 million; and lower average selling prices amounting to $23 million. Gross profits for 1997 amounted to $374 million, compared to $383 million in 1996. The change in gross profit from the prior year resulted primarily from volume increases of $55 million, offset by selling price decreases of $23 million, production and raw material cost increases amounting to $11 million and dispositions totaling $29 million. Cost increases resulted from higher cost of raw materials, primarily chlorine and energy, and increased depreciation. Capacity utilization increased in most facilities. As a percentage of sales, gross profit was 28.5%, a slight improvement over the 28.3% in the prior year. Selling, administrative and research expenditures amounted to $182 million in 1997, versus $199 million in 1996, a decrease of $17 million from the prior year. The reduction reflected the benefits of divestitures of $24 million and favorable foreign exchange totaling $5 million, offset, in part, by cost increases including a $3 million provision for potential litigation settlements. As a percentage of sales, SAR improved about 1 percentage point, amounting to approximately 14% for 1997. This improvement resulted from the disposition of a business that had a disproportionately high selling and administrative cost structure. The special charge of $50 million in 1997 provided for, among other things, the restructuring of the Company's European water treatment business, closing a BCDMH manufacturing facility in Louisiana and a pharmaceutical intermediates plant in Arkansas and withdrawing from a European joint venture. Operating income, including the special charge, amounted to 11% of sales. Excluding the special charge, operating income was 15% of sales, a 1 percentage point improvement from the 14% achieved in 1996. Interest and other income amounted to $32 million for 1997 compared to $57 million for the prior year. During 1996, the Company realized a gain of $19 million from breakup fees when NOWSCO Well Service Ltd. accepted an acquisition offer and a gain of $13 million from the sale of the Company's subsidiary, E/M Corporation. Excluding the aforementioned items, the $7 million increase in 1997 was attributable to increased interest income, in part, related to loans to Octel to finance the acquisition of minority owners and the increased earnings of equity affiliates. Interest and other expenses in both 1997 and 1996 amounted to approximately $56 million. Interest expense in 1997 increased $10 million over the prior year as a result of additional borrowings to finance acquisitions, capital expenditures and share repurchases. An $11 million charge for asset write-off and redundancy costs was included in 1996. Income taxes were $45 million, or effectively 38.7% of income, for 1997, compared to $63 million, or effectively 34.5%, for 1996. The increase in the effective rate is primarily related to the lower tax rate on the special charge of approximately 22% because certain charges are not expected to result in tax benefits. Excluding the effect of the special charge, the effective tax rate was 34%. Reported net income for 1997 was $72 million, or $1.19 per share, compared to $121 million, or $1.89 per share, in 1996. Excluding the after-tax effect of the special charge, net income amounted to $110 million, or 27 - - -------------------------------------------------------------------------------- $1.83 per share, as compared to 1996 net income of $120 million, or $1.88 per share, after adjusting for the after-tax effects of miscellaneous charges, the gain on the sale of E/M, and the NOWSCO breakup fee. SEGMENT INFORMATION A review of operations by business segments follows. Businesses sold or disposed of that were not part of one of the four reportable business segments had sales of $7 million in 1997 and $43 million in 1996 and are included as part of corporate and other. Polymer Additives Polymer Additives net sales of $554 million increased $17 million or 3% over the prior year including the acquisition of Anzon which contributed 2 percentage points of the increase. Volume gains amounted to 12% and were partially offset by lower average unit selling prices of 5% and adverse foreign currency effects of 5%. ================================================================================ Polymer Additives 1997 1996 ================================================================================ Net Sales $554 $537 Operating Income $ 93 $ 97 ================================================================================ Volume for key brominated flame retardant products was strong throughout the year in the U.S. and Asian markets. European markets showed improvement in the latter part of the year. The negative foreign exchange impact reflects the strengthened U.S. dollar vis-a-vis the Japanese yen and the German mark. Polymer stabilizers sales volume was also strong, increasing about 16% over 1996. This improvement was offset by a decline in average selling prices of 8% and unfavorable currency effects. Antioxidant volume gains led a volume expansion that was achieved across all product areas. The growth in antioxidants resulted from customer acceptance of new proprietary products and physical forms and expanded presence in both the U.S. and Asian markets. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 22 28 - - ------------------------------------------------------------------------------ Operating income of $93 million declined $4 million from 1996 as the effect of lower selling prices, adverse foreign currency movements and cost increases overshadowed the effect of improved volume. Performance Chemicals Performance Chemicals sales increased 15% to $283 million in 1997. Strong volume growth essentially drove all of this increase. New product launches for Fine Chemicals, coupled with an 18% sales increase in the fluorine business as the FM-200(R) fire extinguishing product expanded its geographic and market process, fueled the growth. WIL Research Labs increased sales 27% by reaching a higher utilization of its expanded facilities in addition to achieving a better mix of the types of testing services it provided. ================================================================================ Performance Chemicals 1997 1996 ================================================================================ Net Sales $283 $247 Operating Income $ 51 $ 38 ================================================================================ Operating income increased 34% to $51 million in 1997, driven by a better mix of sales and volume gains. These gains also pushed Performance Chemicals operating margins higher by 20%. Water Treatment Water Treatment sales decreased 19% to $350 million in 1997. Included in 1996 sales were $126 million related to a pool products distribution business that was sold in September 1996. Excluding the divestiture, sales increased 15% as compared to 1996. ================================================================================ Water Treatment 1997 1996 ================================================================================ Net Sales $350 $430 Operating Income $ 46 $ 35 ================================================================================ Strong volume gains in the U.S. recreational market for both branded and distributor channels plus higher selling prices more than offset the effects of a stronger U.S. dollar. Excluding the negative impact of the stronger U.S. dollar, sales increased 18% during the year. Operating income in 1997 increased $11 million to a record $46 million. The 31% increase was due primarily to the aforementioned volume and selling price gains during the year. Water Treatment's operating margin increased 63% as a result of these gains coupled with the divestiture of the low margin pool products distribution business. Energy Services and Products Energy Services and Products posted sales gains of 18% to $113 million in 1997 as the oil exploration market remained strong. The strong growth was led by expansion of the service business into the deepwater well marine service market in the Gulf of Mexico. ================================================================================ Energy Services and Products 1997 1996 ================================================================================ Net Sales $113 $96 Operating Income $ 20 $19 ================================================================================ 1997 operating income grew 5% as increased profitability from sales growth was partially offset by increased infrastructure costs to support the expanded service business and anticipated expansion into other markets. FINANCIAL CONDITION AND LIQUIDITY Cash flow from the operating activities of the continuing operations amounted to $140 million in 1998, including a $54 million payment for tax liabilities of Octel, compared to the $193 million generated in 1997. The decrease is primarily attributable to payments against tax liabilities of Octel assumed by the Company as discussed below. The 1997 tax payments associated with Octel were included in discontinued operations. Excluding these payments for Octel tax liabilities, cash flow from operating activities of continuing operations was essentially flat as compared to the prior year. The Octel spin-off on May 22, 1998, generated net cash of approximately $300 million after associated debt repayment of approximately $50 million and tax liabilities of Octel of $108 million assumed by Great Lakes. The $462 million received by Great Lakes before associated debt and tax payments is included in discontinued operations in 1998. Stockholders' equity (retained earnings and cumulative translation adjustment) was reduced approximately $292 million, representing the remaining net book value of the Octel asset distribution to the Great Lakes stockholders. The Company's investment in working capital, excluding cash and cash equivalents, decreased approximately $53 million. Accounts receivable were essentially unchanged from the prior year as were day sales outstanding in accounts receivable of 70 days. Inventories at December 31, 1998, were $293 million, a decrease of approximately $5 million from the prior year. Inventory turnover at 3.4 times per year improved slightly from the prior year. Accounts payable and accrued liabilities increased $18 million from the prior year due, in part, to liabilities related to the special charge. Capital spending in 1998 amounted to $161 million compared to $133 million in 1997. Spending in 1998 was directed primarily towards the addition of new or expanded capacity, cost productivity projects and completing the ERP system. Capital spending on environmental projects was $2 million in 1998 compared to $4 million in 1997. Capital requirements in 1999 for environmental-related projects is estimated to be about $2 million. The Company utilizes commercial paper borrowings as its primary source of external financing which, because of our predictably strong cash flows, substantially reduces its cost of debt. Commercial paper borrowings at December 31, 1998, amounted to $481 million, compared to $530 million at December 31, 1997. At December 31, 1998, debt to total capitalization was 32%, compared to 29% at December 31, 1997. The Company has a $600 million, five-year credit facility with various banks. The credit facility provides back-up to the Company's $600 million commercial paper program. At December 31, 1998, the Company's senior debt rating is A/A2 and its commercial paper rating is A/P1. In late March the Company intends to file a Registration Statement on Form S-3 with the Securities and Exchange Commission using a "shelf" registration process. Under the process the Company may sell various unsecured debt securities, common stock or rights or warrants to purchase common stock individually or in combination up to a total dollar value of $500 million. The registration provides the Company with increased flexibility to finance its operations. It is anticipated that the registration will become effective by May 1999. - - ------------------------------------------------------------------------------ GREAT LAKES CHEMICAL CORPORATION 23 29 - - -------------------------------------------------------------------------------- Stockholders' equity was $1.1 billion, or $18.05 per share, at December 31, 1998, as compared to $1.3 billion, or $22.18 per share at the end of 1997. The decrease was a result of the reduction in book value from the Octel spin-off. Dividends declared totaled $24 million, compared with $38 million in the prior year. On a per-share basis, dividends declared of $0.40 per share compared to the $0.63 per share declared in 1997. The dividend was adjusted in the second quarter of 1998 to take into account the effect of the spin-off of Octel in May 1998. Under a share repurchase authorization from the Board of Directors, the Company purchased 0.7 million shares of its stock in 1998 for a total cost of $29 million. The average price per share of the stock purchased was $39. During the five-year period ended December 31, 1998, the Company has repurchased 13.8 million shares at a cost of approximately $746 million, or $54 per share. As of December 31, 1998, management is authorized to repurchase an additional 5.8 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 1998 change in the cumulative translation adjustment increased stockholders' equity by $23 million due primarily to the effect of the spin-off of Octel. Excluding the distribution the change in the cumulative translation adjustment decreased stockholders' equity by $6 million. Approximately 50% of the Company's net assets are in Europe. OTHER MATTERS Special Charges In the first quarter of 1998, the Board of Directors appointed a new chief executive officer and, over the following months, a new senior management team was assembled. Beginning in the third quarter, the Company began work on a plan to fundamentally alter how the Company conducts business around the world and to improve operating income by repositioning the business to enhance competitiveness and productivity and increase responsiveness to customer needs. As a result of these efforts, a repositioning plan was approved by the Board of Directors which was intended to increase the Company's focus on its core specialty chemicals businesses and to position these operations to achieve higher growth and profitability. As of result of the plan, the Company recognized a special charge of $117 million, $74 million after income taxes, or $1.26 per share. The principal components of the charge are: asset impairments of $57 million; severance of $18 million; plant closure costs of $10 million; senior management transition costs of $21 million and other related costs of $12 million. Additional information regarding the special charge is provided in Note 2 to the consolidated financial statements on page 33 of this annual report. It is anticipated that the plan will be fully implemented by the end of 1999 and the Company will realize improvements in operating income of approximately $40 million on an annual basis. These improvements will result primarily from improved utilization of the manufacturing base, elimination of under performing or unprofitable operations, reduction in personnel-related costs and a reduction in the carrying costs of plant and equipment. The plan affects the Company's Polymer Additives, Performance Chemicals and Energy Services and Products business unit. Outlined below is an overview of the conditions each of the units is encountering and the actions being taken to achieve the expected improvements. The Polymer Additives business unit was formed in mid-1998 through the combination of the flame retardants business, a historical core business and the polymer stabilizers business that had been built through acquisitions over the 1993-1996 period. The Polymer Stabilizers business focused on expansion and did not effectively integrate the acquisitions, develop internal synergy or consolidate its manufacturing base. These factors provide a significant opportunity to improve manufacturing efficiency, reduce cost and increase the focus on the customer. As a result, the repositioning plan provided for the downsizing of two operating facilities in France; consolidating brominated flame retardant manufacturing in El Dorado, Arkansas; eliminating excess production capacity; and reducing the number of sales offices and research and development facilities. In connection with these activities, the workforce will be reduced by approximately 260 employees. In the Performance Chemicals business unit, the Company is eliminating certain nonperforming product lines and underutilized assets. As a result, selected non-strategic products will be discontinued and the work force will be reduced by approximately 100 employees. The decline in the world oil market has significantly reduced near term requirements for oil well completion fluids and services. As a result, the Company's Energy Services and Products business unit abandoned a lease on a deepwater service vessel, decommissioned the related service equipment, will close a small facility and will reduce its work force by approximately 100 employees. Cash outlays are expected to be substantially complete by the end of 1999. Operating cash flows are expected to be sufficient to finance the repositioning activities. The 1997 consolidated statement of income includes pre-tax charges of $50 million related to restructuring the Company's European water treatment business; closing a BCDMH manufacturing facility in Louisiana and a pharmaceutical intermediates production plant in Arkansas; and withdrawing from a bromine production joint venture in Europe. The components of the pre-tax charges were composed of $2 million for employee severance costs, $2 million for facility closure costs, $5 million for joint venture withdrawal expenses and $41 million for asset write-offs. As of December 31, 1998, approximately $3 million remains to be spent in 1999 to complete the planned actions. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 24 30 - - -------------------------------------------------------------------------------- Spin-Off of Octel The Board of Directors declared a stock dividend pursuant to which each Great Lakes stockholder received one share of Octel common stock for every four shares of Great Lakes common stock owned on the record date of May 15, 1998. Dispositions In December 1997, the Board of Directors approved a restructuring plan including exiting the furfural and derivatives, Eastern European Trading and environmental services businesses. A pre-tax charge of $145 million, $96 million after income taxes, was recorded in connection with these actions. The Company completed the disposition of the Eastern European Trading business during 1998; sold the environmental services business in January 1999 and anticipates completing the sale of the furfural and derivatives business by mid-year 1999. Market Risks The Company's operations are exposed to changes in foreign currency exchange and interest rates primarily in its cash, debt and foreign currency transactions. The derivative instruments, including swaps, forward contracts and options, are held to manage certain foreign currency exposures. The derivative instruments utilized by the Company in its hedging activities are considered risk management tools, involve little complexity and are not used for trading or speculative purposes. The Company diversifies the counterparties used and monitors the concentration of risk to limit its counterparty exposure. International operations, including U.S. export sales, constitute a significant portion of revenues and identifiable assets. These operations result in a large volume of foreign currency commitment and transaction exposures and foreign currency net asset exposures. Management of commitment and transaction exposures is coordinated at the corporate level and exposures that are not offset are hedged. Hedges are set to mature concurrently with the estimated timing of the underlying transactions. The Company does not hedge foreign currency net asset positions currently. Considering the Company's operating profile, a uniform 10% change in the value of the dollar from December 31, 1998, would result in approximately a $1 million change in annual net income. A similar change in 1997 would have had a like effect on annual net income. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar, and does not factor in any potential changes in sales levels or local currency prices which may result from changes in exchange rates. Currently, commercial paper is the primary source of external financing, which exposes the Company to changes in short-term interest rates. The Company carefully monitors interest rate trends for volatility. The Company currently does not hold interest rate derivative contracts against its debt portfolio. Based on the commercial paper balances outstanding at December 31, 1998, and December 31, 1997, a hypothetical 1% change in interest rates for a one-year period would change net income by $3 million. The sensitivity does not consider any effect change in interest rates would have on overall economic activity nor management actions to mitigate interest rate changes. As of December 31, 1998, the Company had short-term time deposits of $323 million representing investment securities with maturities of three months or less. A hypothetical 1% change in interest rates earned on these deposits for a one-year period would change net income by $2 million. Environmental The Company's operations, like those of most companies which use or make chemicals, are subject to various laws and regulations relating to maintaining or protecting 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 expenditures associated with waste minimization and pollution prevention programs, amounted to approximately $34 million in 1998 and about $40 million in 1997. These amounts include approximately $2 million and $4 million for capital equipment in 1998 and 1997, respectively. Spending for environmental compliance is anticipated to be approximately $45 million in 1999. 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 various environmental laws and regulations, it is difficult to accurately determine the Company's liability with respect to these sites. 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 defenses to or claims against these other parties. Based upon current regulation and the information available, management - - -------------------------------------------------------------------------------- 31 - - -------------------------------------------------------------------------------- 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 Inflation has not been a significant factor for the Company over the last several years. Management believes that inflation will continue to be moderate over the next several years. Year 2000 Readiness The Year 2000 Issue (Y2K) is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or any hardware that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a temporary inability to process transactions or engage in normal manufacturing or other business activities. Failure by the Company or any of its significant suppliers or customers to complete year 2000 readiness activities in a timely manner could have a material adverse effect on the Company's business and results of operations. Great Lakes is actively engaged in a company-wide effort to achieve year 2000 readiness for both information technology (IT) and non-information technology (Non-IT) systems and to determine the readiness of significant suppliers and customers. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 25 32 - - ------------------------------------------------------------------------------- The Company's approach to addressing its Y2K issues consists of the following: - - - Inventory -- identification of items to be assessed for Y2K readiness. - - - Assessment -- prioritizing the inventoried items, assessing their Y2K readiness, defining corrective actions and developing contingency plans. - - - Deployment -- implementing corrective actions, verifying implementation and finalizing contingency plans. The Company's IT systems are comprised of business computer systems, end user systems and technical infrastructure. In 1996, the Company determined that the IT systems supporting its Polymer Additives and Performance Chemicals business units were inadequate to meet the business requirements and embarked on a project to replace all critical systems for these businesses. In the Water Treatment and Energy Services and Products business units, IT systems inventories and assessments were completed in the first part of 1998 and replacement of non-conforming systems started during the fourth quarter of 1998. Deployment of all critical systems is expected to be completed by the end of the third quarter of 1999. The Company is developing contingency plans for these critical systems and expects them to be completed by the end of the first quarter of 1999. Non-IT systems are comprised of manufacturing and warehousing systems and facility support systems. The Company has completed the inventory and assessment of all critical systems in this area. All essential corrective actions are expected to be completed by September 30, 1999. Contingency plans are expected to be completed at approximately the same time. In 1998 Great Lakes began contacting its suppliers regarding their Y2K readiness. The suppliers readiness program focuses on those suppliers considered essential for the prevention of material disruption of Great Lakes business operations. The program is expected to be completed by the end of the second quarter of 1999. Contingency plans should be in place by September 30, 1999. The Company is using both internal and external resources to complete its Y2K readiness plan. The Company currently estimates that the total cost of resolving the year 2000 issues including computer systems, facilities infrastructure and supplier readiness will be approximately $15 to $20 million. Of this amount, the Company spent approximately $3 million in 1998. Approximately 50% of the total year 2000 costs will be for equipment or software replacement and the remainder on assessment and remediation. The Company expects all costs will be funded out of operating cash flow. Year 2000 costs are expensed except for new systems and equipment. Such costs are capitalized and charged to expense over the estimated useful life of the asset in accordance with existing Company policy. The estimated costs are based on currently available information and may be subject to change. While the Company believes its efforts to address Y2K issues will be completed in a timely manner, the Company recognizes that failing to resolve Y2K issues on a timely basis would, in a reasonably likely worst case scenario, significantly limit the Company's ability to manufacture and distribute its products and process business transactions. Also, the Company could be adversely affected by the failure of suppliers or customers to conduct their operations due to Y2K-related issues. Adverse effects on the Company could include, among other things, disruption of manufacturing operations, increased costs and loss of business which can not be reasonably quantified. The Euro Effective January 1, 1999, member states of the European Economic and Monetary Union converted to a common currency known as the Euro. Modifications to certain of the Company's information systems software were required in connection with this conversion. The Company has completed these modifications at a nominal cost, and does not anticipate that the conversion to the Euro will have any significant operational impact. Additionally, the Company does not expect the conversion to the Euro to have a material impact on results of operations, financial position or liquidity of its European businesses. Future Accounting Changes In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This accounting standard, which is effective for fiscal years beginning after December 15, 1998, specifically defines the criteria under which costs incurred in connection with internal-use computer software projects are to be treated as a current period expense or to be capitalized. While the adoption of SOP 98-1 is not expected to have a material effect on the Company's financial position or results of operations, it will increase operating costs by approximately $5 million in 1999. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." This accounting standard, which is effective for fiscal years beginning after December 15, 1998, requires that certain costs of start-up activities and organization costs be expensed as incurred. The adoption of SOP 98-5 is not expected to have a material effect on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This accounting standard, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, requires that all derivatives be recognized as either assets or liabilities at fair value. The Company is evaluating the new statement's provisions and has not yet determined either the date on which it will adopt SFAS No. 133 or the impact of adoption on the results of operations or financial position. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 26 33 - - -------------------------------------------------------------------------------- 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 safeguarded, 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/ Mark E. Tomkins - - ------------------------------------------------- Mark E. Tomkins Senior 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, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP - - ----------------------------- Indianapolis, Indiana February 26, 1999 - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 27 34 - - -------------------------------------------------------------------------------- Consolidated Statements of Income - - -------------------------------------------------------------------------------- (millions, except per share data) YEAR ENDED DECEMBER 31 1998 1997 1996 ================================================================================ NET SALES $1,394.3 $1,311.2 $1,352.3 OPERATING EXPENSES Cost of products sold 1,011.5 937.5 969.0 Selling, administrative and research expenses 192.4 182.1 199.4 Special charges 116.5 49.8 -- - - -------------------------------------------------------------------------------- 1,320.4 1,169.4 1,168.4 ================================================================================ OPERATING INCOME 73.9 141.8 183.9 INTEREST AND OTHER INCOME 37.0 31.7 56.6 INTEREST AND OTHER EXPENSES 44.7 56.3 56.5 ================================================================================ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 66.2 117.2 184.0 INCOME TAXES 9.8 45.4 63.4 ================================================================================ NET INCOME FROM CONTINUING OPERATIONS 56.4 71.8 120.6 NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS 32.6 (14.9) 129.7 ================================================================================ NET INCOME $ 89.0 $ 56.9 $ 250.3 ================================================================================ EARNINGS (LOSS) PER SHARE: BASIC Continuing operations $ 0.96 $ 1.20 $ 1.90 Discontinued operations 0.55 (0.25) 2.04 - - -------------------------------------------------------------------------------- $ 1.51 $ 0.95 $ 3.94 ================================================================================ DILUTED Continuing operations $ 0.95 $ 1.19 $ 1.89 Discontinued operations 0.55 (0.25) 2.02 - - -------------------------------------------------------------------------------- $ 1.50 $ 0.94 $ 3.91 ================================================================================ CASH DIVIDENDS DECLARED PER SHARE $ 0.40 $ 0.63 $ 0.57 ================================================================================ See notes to consolidated financial statements. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 28 35 - - -------------------------------------------------------------------------------- Consolidated Balance Sheets - - -------------------------------------------------------------------------------- (millions) DECEMBER 31 1998 1997 ================================================================================ ASSETS CURRENT ASSETS Cash and cash equivalents $ 411.6 $ 73.7 Accounts and notes receivable, less allowance of $4.1 and $5.8, respectively 258.0 256.9 Inventories 293.2 298.2 Prepaid expenses 32.8 39.8 - - -------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 995.6 668.6 ================================================================================ PLANT AND EQUIPMENT 689.5 658.6 GOODWILL 115.6 114.9 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 80.3 72.7 OTHER ASSETS 21.1 29.1 NET ASSETS OF DISCONTINUED OPERATIONS 102.5 726.5 - - -------------------------------------------------------------------------------- $2,004.6 $2,270.4 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 129.3 $ 140.3 Accrued expenses 163.8 134.6 Income taxes payable 44.2 13.5 Dividends payable 4.7 9.4 Notes payable and current portion of long-term debt 4.6 6.6 - - -------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 346.6 304.4 ================================================================================ LONG-TERM DEBT, LESS CURRENT PORTION 515.3 561.5 OTHER NONCURRENT LIABILITIES 37.1 28.7 DEFERRED INCOME TAXES 51.3 68.4 STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 200 shares 72.7 72.6 Additional paid-in capital 128.6 123.4 Retained earnings 1,657.1 1,912.5 Accumulated other comprehensive income (32.9) (55.5) Less treasury stock, at cost (771.2) (745.6) - - -------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 1,054.3 1,307.4 - - -------------------------------------------------------------------------------- $2,004.6 $2,270.4 ================================================================================ See notes to consolidated financial statements. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 29 36 - - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - - -------------------------------------------------------------------------------- (millions) YEAR ENDED DECEMBER 31 1998 1997 1996 ================================================================================ OPERATING ACTIVITIES Net income from continuing operations $ 56.4 $ 71.8 $ 120.6 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 78.6 69.9 61.2 Amortization of intangible assets 4.9 3.8 4.1 Deferred income taxes (14.1) (0.5) 0.9 Net remitted (unremitted) earnings of affiliates 1.7 (1.9) (1.1) Loss on disposition of assets 0.7 0.3 7.6 Special charges 116.5 49.8 -- Other (0.4) (6.8) (11.2) Change in operating assets and liabilities, net of effects from business combinations: Accounts receivable (3.3) 1.9 1.0 Inventories 9.8 (22.3) 4.5 Other current assets (2.6) (7.9) (3.6) Accounts payable and accrued expenses (32.7) 40.5 18.8 Income taxes and other current liabilities (76.8) (15.9) 5.0 Other noncurrent liabilities 1.6 10.3 1.0 ================================================================================ NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 140.3 193.0 208.8 DISCONTINUED OPERATIONS (see note below): Net income (loss) 32.6 (14.8) 129.7 Change in net assets 433.6 78.7 (98.1) ================================================================================ NET CASH PROVIDED BY OPERATING ACTIVITIES 606.5 256.9 240.4 INVESTING ACTIVITIES Plant and equipment additions (160.6) (133.0) (168.7) Business combinations, net of cash acquired 0.6 (91.1) (6.3) Proceeds from sale of assets 1.8 1.2 2.7 Other (9.2) (2.1) 23.3 ================================================================================ NET CASH USED IN INVESTING ACTIVITIES (167.4) (225.0) (149.0) FINANCING ACTIVITIES Net (repayments) and borrowings under short-term credit lines (2.4) 3.6 (15.0) Net proceeds from and (payments) of long-term borrowings 6.7 6.6 (8.0) Net (decrease) increase in commercial paper and other long-term obligations (53.0) 58.1 175.1 Proceeds from stock options exercised 5.3 2.3 7.9 Cash dividends paid (28.4) (37.6) (36.0) Repurchase of common stock (28.5) (128.6) (191.7) Other (1.0) -- -- ================================================================================ NET CASH USED IN FINANCING ACTIVITIES (101.3) (95.6) (67.7) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 0.1 (4.0) 1.3 ================================================================================ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337.9 (67.7) 25.0 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 73.7 141.4 116.4 ================================================================================ Cash and Cash Equivalents at End of Year $ 411.6 $ 73.7 $ 141.4 ================================================================================ Cash flow from discontinued operations was $466.2 million of which $461.9 was received from Octel. See notes to consolidated financial statements. Parentheses indicate decrease in cash and cash equivalents. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 30 37 - - -------------------------------------------------------------------------------- Consolidated Statements of Stockholders' Equity - - --------------------------------------------------------------------------------
(millions) 1998 1997 1996 ================================================================================================== Shares Amount Shares Amount Shares Amount COMMON STOCK Balance at January 1 72.6 $ 72.6 72.5 $ 72.5 72.1 $ 72.1 Exercise of stock options net of shares exchanged 0.1 0.1 0.1 0.1 0.4 0.4 - - -------------------------------------------------------------------------------------------------- Balance at December 31 72.7 72.7 72.6 72.6 72.5 72.5 ================================================================================================== ADDITIONAL PAID-IN CAPITAL Balance at January 1 123.4 121.2 113.6 Exercise of stock options net of shares exchanged 1.1 1.2 1.4 Tax benefits of early disposition of stock by optionees 0.9 1.0 6.2 Restricted stock activity 3.2 -- -- - - -------------------------------------------------------------------------------------------------- Balance at December 31 128.6 123.4 121.2 ================================================================================================== RETAINED EARNINGS Balance at January 1 1,912.5 1,893.1 1,678.8 Net income 89.0 56.9 250.3 Dividends (23.6) (37.5) (36.0) Spin-off of Octel (320.8) -- -- - - -------------------------------------------------------------------------------------------------- Balance at December 31 1,657.1 1,912.5 1,893.1 ================================================================================================== TREASURY STOCK Balance at January 1 (13.6) (745.6) (10.8) (617.0) (7.5) (425.3) Shares repurchased (0.7) (28.5) (2.8) (128.6) (3.3) (191.7) Shares issued -- 2.9 -- -- -- -- - - -------------------------------------------------------------------------------------------------- Balance at December 31 (14.3) (771.2) (13.6) (745.6) (10.8) (617.0) ================================================================================================== ACCUMULATED OTHER COMPREHENSIVE INCOME Cumulative Translation Adjustment Balance at January 1 (52.9) 17.1 (23.1) Translation adjustment (6.2) (70.0) 40.2 Spin-off of Octel 29.0 -- -- ================================================================================================== Balance at December 31 (30.1) (52.9) 17.1 Minimum Pension Liability Balance at January 1 (2.6) -- -- Minimum pension liability adjustment (0.2) (2.6) -- - - -------------------------------------------------------------------------------------------------- Balance at December 31 (2.8) (2.6) -- - - -------------------------------------------------------------------------------------------------- Total Balance at December 31 (32.9) (55.5) 17.1 - - -------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 58.4 $1,054.3 59.0 $ 1,307.4 61.7 $ 1,486.9 ================================================================================================== COMPREHENSIVE INCOME Net income $ 89.0 $ 56.9 $ 250.3 Translation adjustment (6.2) (70.0) 40.2 Minimum pension liability adjustment (0.2) (2.6) -- - - -------------------------------------------------------------------------------------------------- Total Comprehensive Income (Loss) $ 82.6 $ (15.7) $ 290.5 ==================================================================================================
- - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 31 38 Notes to Consolidated Financial Statements (in millions, except as indicated) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Consolidated results of continuing operations, financial position and cash flows refer to the specialty chemical operations of the Company. Reported as discontinued operations are the petroleum additives business (Octel), which was spun off to stockholders in May 1998; the Eastern European Trading business (Chemol), whose operations were concluded in 1998; the environmental services business, sold in January 1999; and the furfural and derivatives business, which is expected to be sold during 1999. Nature of Operations The Company is a diversified specialty chemical company. Primary manufacturing operations are located in the United States and Europe. The Company has organized its business segments around differences in products and services, which is the way the Company manages its business. The Company's segments are Polymer Additives, Performance Chemicals, Water Treatment and Energy Services and Products. The Company's products are sold globally. The principal markets include: 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 in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts 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 title passes 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 The Company values its inventories at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. 39 - - -------------------------------------------------------------------------------- Plant and Equipment Plant and equipment are stated at cost. Depreciation of buildings and equipment is provided over the estimated useful lives of the assets using the straight-line method. The estimated useful lives for purposes of computing depreciation are: buildings, 10 - 40 years; manufacturing equipment, 7 - 20 years; and office equipment, 3 - 5 years. Goodwill Goodwill, the excess of investment over net assets of subsidiaries acquired, is amortized over periods of 8 to 40 years. As of December 31, 1998 and 1997, accumulated amortization was $17 million and $13 million, respectively. Impairment of Long-Lived Assets When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is determined based on discounted cash flow or appraised values, as appropriate. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. Income Taxes Income taxes are provided on the portion of the income of foreign affiliates that is expected to be remitted to the parent company and be taxable. Unremitted earnings of foreign affiliates, not considered to be permanently reinvested, where taxes have not been provided are immaterial. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As provided for under SFAS No. 123, the Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for restricted stock awards is recorded over the requisite vesting periods based on the market value on the date of grant. Derivative Financial Instruments The Company uses various derivative instruments including swaps, forward contracts and options to manage certain foreign currency exposures. These instruments are entered into under the Company's corporate risk management policy to minimize exposure and are not for speculative trading purposes. Management periodically reviews the effectiveness of the use of derivative instruments. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 32 40 - - -------------------------------------------------------------------------------- Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the market value of the derivative contract must be highly correlated with changes in the market value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Any derivative instrument designated but no longer effective as a hedge would be reported at market value and the related gains and losses would be recognized in earnings. Derivatives that are designated as, and effective as, a hedge of firm foreign currency commitments are accounted for using the deferral method. Gains and losses from instruments that hedge firm commitments are deferred and recognized as part of the economic basis of the transactions underlying the commitments when the associated hedged transaction occurs. Gains and losses from instruments that hedge foreign-currency-denominated receivables, payables and debt instruments are reported in earnings and offset the effects of foreign exchange gains and losses from the associated hedged items. New Accounting Standards Effective January 1, 1998, SFAS No. 130, "Reporting Comprehensive Income," was adopted by the Company. Under provisions of this statement, the Company has included a financial statement presentation of comprehensive income to conform to these new requirements. Statement 130 requires the minimum pension liability and the foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Implementation of this disclosure standard did not affect the Company's financial position or results of operations. Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires reporting information about operating segments in the annual financial statements and in the interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of Statement 131 did not affect the Company's financial position or results of operations. Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." Statement 132 revises the disclosure requirements for employers' pensions and other retiree benefits. Implementation of this disclosure standard did not affect the Company's financial position or results of operations. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP, which is effective beginning January 1, 1999, specifically defines the criteria under which costs incurred in connection with internal-use computer software projects are to be accounted for as a current period expense or to be capitalized. The Company's current policy is to capitalize computer software development costs. While the adoption of SOP 98-1 is not expected to have a material effect on the Company's financial position or results of operations, it will increase operating costs by approximately $5 million in 1999 compared to 1998. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." The SOP, which is effective beginning January 1, 1999, requires that certain costs of start-up activities and organization costs previously capitalized be written off and all future costs be expensed as incurred. The adoption of SOP 98-5 is not expected to have a material effect on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This accounting standard, which is effective for fiscal years beginning after June 15, 1999, requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge ineffectiveness, the amount by which the change in the value of a hedge does not exactly offset the change in the value of the hedged item, will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company or when the statement will be adopted. NOTE 2: SPECIAL CHARGES In the first quarter of 1998, the Board of Directors appointed a new chief executive officer and over the following months, a new senior management team was assembled. Beginning in the third quarter, the Company began work on a plan to fundamentally alter how the Company conducts business around the world and to improve operating income by repositioning the business to enhance competitiveness and productivity and increase responsiveness to customer needs. As a result of these efforts, a repositioning plan was approved by the Board of Directors that is intended to increase the Company's focus on its core specialty chemicals businesses and to position these operations to achieve higher growth and profitability. The repositioning plan affects the Polymer Additives, Performance Chemicals and Energy Services and Products business units and includes both domestic and international operations primarily in France, Italy and the United Kingdom. The plan provides for improving manufacturing productivity; the closing of production units at four sites; and the consolidation of U.S. flame retardant production. Additionally, the consolidation of sales offices and research and development facilities is planned. As a result of these actions, approximately 500 positions will be eliminated. The Company expects to be substantially complete with the planned actions by the end of 1999. Accordingly, the Company recognized a special charge of $116.5 million, $74.7 million after income taxes, or $1.26 per share during 1998. This special charge is reflected in the consolidated statement of income as a separate component of operating income. Of the $116.5 million, $48.3 million was recorded for actions taken in the third quarter and another $52.7 million was recorded in the fourth quarter. Additionally, $15.5 million related to costs associated with the transition of the chief executive officer was recorded in the first quarter and is included in the special charge. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 33 41 - - -------------------------------------------------------------------------------- Details of the 1998 special charge activities by business segment are as follows: ================================================================================ Amount of Reserve Description Charge Activity Balance ================================================================================ Asset Impairment (non cash): Polymer Additives $ 25.9 $25.9 $ -- Performance Chemicals 12.7 12.7 -- Energy Services and Products 7.9 7.9 -- Corporate and Other 10.0 10.0 -- ================================================================================ 56.5 56.5 -- Severance Costs: Polymer Additives 10.9 -- 10.9 Performance Chemicals 3.3 1.6 1.7 Energy Services and Products 0.4 0.3 0.1 Corporate and Other 3.0 0.2 2.8 ================================================================================ 17.6 2.1 15.5 Plant Closures: Polymer Additives 3.2 -- 3.2 Performance Chemicals 6.9 -- 6.9 ================================================================================ 10.1 -- 10.1 Senior Management Transition (Corporate) 20.5 11.2 9.3 Lease Costs (Energy Services and Products) 4.4 0.8 3.6 Other 7.4 3.4 4.0 - - -------------------------------------------------------------------------------- $116.5 $74.0 $42.5 ================================================================================ Asset impairment losses relate to consolidation of certain product lines, primarily in the Polymer Additives business unit, where the Company has sufficient capacity to meet anticipated requirements and the shutdown of certain unprofitable operating units. Approximately $41.4 million of the asset impairment loss is related to assets to be held and used until the facility closures can be affected, which are expected to be completed by the end of 1999. The balance of the asset impairment loss relates primarily to certain components of the Company's data processing software which has no future use. The Company recorded an impairment loss to write down the carrying value of these assets to fair value. Fair value was determined using appraised values. The adjusted carrying value of the assets will be depreciated over the remaining life of the assets. Severance costs include the cost of separation payments to certain employees who have been or will be terminated. Certain of these costs have been individually negotiated with the employee, while others have been determined based upon the provisions of statutory or contractual severance plans. The Company will be eliminating approximately 500 positions and it is expected that all terminations will be substantially completed by the end of 1999. While all areas of the Company will be effected by the work force reductions, the majority of the terminations will occur in manufacturing. As of December 31, 1998, approximately 125 people have been terminated or have been given specific notice of termination dates. Notifications to affected European employees have been made through their unions and workers councils. The decision to abandon facilities results in closure costs, such as dismantling, decontamination and remediation. Spending related to these costs will begin after the facility has been closed. Included in the senior management transition costs is $15.5 million for the change in the chief executive officer. The majority of the payments will be completed by 2001. The lease component of the repositioning plan represents remaining lease payments on one of the Energy Services and Products business unit's deepwater oil well service vessels that was returned to the lessor. Payments under the lease agreement extend through 2001. In accordance with a plan approved by the Board of Directors in December 1997, the Company took a series of actions to restructure its Water Treatment business and eliminate underperforming assets. The total charge in 1997 amounted to $49.8 million, of which $38.0 million related to asset impairments. The restructuring reserve at December 31, 1997 totaled $7.1 million. A progression of the cash portion of the charge follows: ================================================================================ Description 1997 Activity 1998 ================================================================================ Severance Costs $1.9 $1.0 $0.9 Other 5.2 2.9 2.3 - - -------------------------------------------------------------------------------- $7.1 $3.9 $3.2 ================================================================================ The asset impairment related primarily to the abandonment of a BCDMH manufacturing facility in Louisiana, a pharmaceutical intermediates production plant in South Arkansas, a pool chemicals plant in Germany and certain mineral leases. Severance costs are for involuntary termination payments to approximately 20 Water Treatment business unit employees. Such payments are being made over a two-year period. The original provision for Other included $5.0 million for the cost of exiting a European bromine joint venture and $2.5 million to terminate a facility lease. The Company expects that essentially all spending associated with the charge will be completed in 1999. NOTE 3: DISCONTINUED OPERATIONS During 1997, the Board of Directors approved a plan to spin off Octel to the stockholders and to exit the furfural and derivatives, Chemol and environmental services businesses. These operations are included in discontinued operations. The 1997 results include a special provision of $137 million net of income tax benefits of $49 million related to the estimated losses on divestitures and an income tax provision of $38 million related to the anticipated repatriation of Octel earnings. Reserves for the discontinued operations amounted to $145 million at both December 31, 1998 and 1997. The Octel spin-off was completed on May 22, 1998, through a tax-free distribution of one share of Octel common stock for every four shares of the Company's common stock outstanding. Prior to the spin-off, the Company received a distribution from Octel of approximately $462 million and assumed tax liabilities of approximately $108 million. Stockholders' equity (retained earnings and cumulative translation adjustment) was reduced by approximately $292 million representing the net book value of the distribution to the stockholders. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 34 42 - - ------------------------------------------------------------------------------- A portion of the Chemol business was sold during 1998 and essentially all remaining operations were concluded during the year. The environmental services business was sold in January 1999. The Company expects to sell the furfural and derivatives business during the first half of 1999. Summary statements of income and financial position for the discontinued operations are set forth below: Summary Statements of Income ================================================================================ Year Ended December 31 1998 1997 1996 ================================================================================ Net Sales $352 $769 $866 Income before Income Taxes 49 181 196 Income Taxes 16 59 66 ================================================================================ Income from Operations (Net of Taxes) 33 122 130 Special Provision (Net of Taxes) -- 137 -- - - -------------------------------------------------------------------------------- Net Income (Loss) from Discontinued Operations $ 33 $(15) $130 ================================================================================ Summary Statements of Net Assets ================================================================================ December 31 1998 1997 1996 ================================================================================ Current Assets $148 $ 434 $ 473 Net Plant & Equipment 92 205 222 Goodwill and Other Assets 40 480 438 ================================================================================ Total Assets 280 1,119 1,133 Reserve for Losses 145 145 -- Current Liabilities 15 161 151 Other Liabilities 17 86 147 - - -------------------------------------------------------------------------------- Net Assets $103 $ 727 $ 835 ================================================================================ NOTE 4: ACQUISITION AND DISPOSITIONS On November 3, 1997, the Company completed the acquisition of Cookson Group plc's global antimony products business, Anzon, for $90 million including approximately $46 million of goodwill which will be amortized over a period of 40 years. Anzon is a global producer of antimony-based flame retardants. The acquisition was accounted for as a purchase and the results of operations are included in the consolidated financial statements from the date of acquisition. The following represents the unaudited pro forma results of continuing operations as if the acquisition had occurred as of January 1, 1996. ================================================================================ Year Ended December 31 1997 1996 ================================================================================ Net Sales $1,376.9 $1,430.1 Net Income 73.9 123.2 Earnings per share $ 1.23 $ 1.93 ================================================================================ The pro forma results do not represent the Company's actual operating results had the acquisition been made at the beginning of the respective years, or the results which may be expected in the future. 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. Note 5: CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following: ================================================================================ December 31 1998 1997 ================================================================================ Cash $ 88.4 $ 38.7 Time deposits 323.2 35.0 - - -------------------------------------------------------------------------------- $ 411.6 $ 73.7 ================================================================================ NOTE 6: INVENTORIES The major components of inventories are as follows: ================================================================================ December 31 1998 1997 ================================================================================ Finished products $ 211.3 $ 217.4 Raw materials 50.0 52.0 Supplies 31.9 28.8 - - -------------------------------------------------------------------------------- $ 293.2 $ 298.2 ================================================================================ NOTE 7: PLANT AND EQUIPMENT Plant and equipment consist of the following: ================================================================================ December 31 1998 1997 ================================================================================ Land $ 19.8 $ 19.9 Buildings 121.9 122.5 Equipment 939.8 871.7 Construction in Progress 160.1 126.5 - - -------------------------------------------------------------------------------- 1,241.6 1,140.6 Less allowances for depreciation, depletion and amortization 552.1 482.0 - - -------------------------------------------------------------------------------- $ 689.5 $ 658.6 ================================================================================ Maintenance and repairs charged to costs and expenses were $57 million, $60 million and $63 million for 1998, 1997 and 1996, respectively. NOTE 8: DEBT Long-term debt is summarized as follows: ================================================================================ December 31 1998 1997 ================================================================================ Commercial paper $ 481.3 $ 529.6 Industrial development bonds 12.3 14.2 Other 25.7 22.8 ================================================================================ 519.3 566.6 Less current portion 4.0 5.1 - - -------------------------------------------------------------------------------- $ 515.3 $ 561.5 ================================================================================ The average rate of interest on commercial paper borrowing was 5.1% at December 31, 1998. The interest rate on industrial development bonds was 3.7% at December 31, 1998. The bonds have maturities through 2025. The Company has a $600 million revolving credit agreement with eleven banks which serves as a backup for the Company's commercial paper program that expires in 2001. 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: 2000, $13 million; 2001, $485 million; 2002, $3 million; 2003, $3 million; and 2004, $11 million. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 35 43 - - -------------------------------------------------------------------------------- The Company has no confirmed short-term credit lines, but has available for its use substantial non-confirmed credit lines. During 1998, 1997 and 1996, interest costs were $31 million, $34 million and $24 million, respectively, of which $6 million per year was capitalized as additional costs of plant and equipment. In these years, interest payments were $32 million, $34 million and $25 million, respectively. NOTE 9: INCOME TAXES The following is a summary of domestic and foreign income before income taxes, the components of the provisions for income taxes, a reconciliation of the U.S. federal 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 1998 1997 1996 ================================================================================ Domestic $ 18.3 $ 79.9 $ 145.5 Foreign 47.9 37.3 38.5 - - -------------------------------------------------------------------------------- $ 66.2 $ 117.2 $ 184.0 ================================================================================ Provisions for Income Taxes: ================================================================================ Year Ended December 31 1998 1997 1996 ================================================================================ Current: Federal $ 6.5 $ 32.8 $ 42.5 State 4.9 4.4 6.9 Foreign 12.5 8.7 13.1 - - -------------------------------------------------------------------------------- 23.9 45.9 62.5 ================================================================================ Deferred: Domestic (20.5) (2.8) (2.6) Foreign 6.4 2.3 3.5 - - -------------------------------------------------------------------------------- (14.1) (0.5) 0.9 - - -------------------------------------------------------------------------------- $ 9.8 $ 45.4 $ 63.4 ================================================================================ Effective Income Tax Rate Reconciliation: ================================================================================ Year Ended December 31 1998 1997 1996 ================================================================================ U.S. federal income tax rate 35.0% 35.0% 35.0% Change resulting from: State income tax 4.8 2.4 2.5 Depletion (3.3) (2.2) (1.3) Foreign Sales Corporation (4.8) (3.5) (1.4) Tax exempt interest (1.7) -- (0.1) Dividends received deduction (3.3) (2.5) (1.2) Low income housing credit (3.2) (1.5) (0.7) International operations (5.5) 1.5 0.8 Statutory tax rate changes -- (2.1) -- Special charge rate differential 2.7 4.8 -- Other (5.9) 6.8 0.9 - - -------------------------------------------------------------------------------- Effective income tax rate 14.8% 38.7% 34.5% ================================================================================ 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 1998 1997 ================================================================================ Deferred tax assets Accrued expenses $13.0 $ 8.9 Special charges 15.6 9.4 Other 13.6 10.5 - - -------------------------------------------------------------------------------- $42.2 $28.8 ================================================================================ Deferred tax liabilities Depreciation $40.1 $46.2 Foreign liabilities pending settlements 20.0 20.0 Other 19.6 20.1 - - -------------------------------------------------------------------------------- $79.7 $86.3 ================================================================================ Cash payments for income taxes were $109 million, $36 million and $73 million in 1998, 1997 and 1996, respectively. NOTE 10: STOCKHOLDERS' EQUITY The Company is authorized to issue up to 200 million shares of common stock with a par value of one dollar per share. On February 15, 1999, the Company's Board of Directors approved a new Stockholders' Rights Plan, replacing a plan which was scheduled to expire in September 1999. The outstanding rights under the prior Stockholders' Rights Plan will be redeemed at a price of $0.0025 per right, payable to stockholders of record on April 1, 1999. Under the new Stockholders' Rights Plan, the stockholders will receive one right (the "Right") for each outstanding share of common stock of the Company that they owned on the record date. The new Rights have an exercise price of $170 per right, subject to adjustment. Until the Rights become exercisable, they are attached to, and will trade with, the common stock. The Rights become exercisable and transferable apart from the common stock if a person becomes the beneficial owner of, or offers to acquire, 15 percent or more of the Company's outstanding common stock or the Board declares a 10 percent-or-more stockholder an "Adverse Person" based on certain criteria set forth in the Plan. After a person becomes the beneficial owner of 15% or more of the Company's outstanding common stock or is declared an adverse person (each such event is referred to as a "triggering event"), each Right would entitle 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. 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 previously 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 $0.01 per Right (subject to adjustment) prior to their expiration on February 15, 2009. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 36 44 - - -------------------------------------------------------------------------------- NOTE 11: EARNINGS PER SHARE Basic earnings per share is based on the weighted-average number of common shares outstanding during the period, while diluted earnings per share includes the effect of options and restricted stock that were dilutive and outstanding during the period. The computation of basic and diluted earnings per share is determined using net income or loss as reported as the numerator, and the number of shares included in the denominator is calculated as follows: ================================================================================ Year Ended December 31 1998 1997 1996 ================================================================================ Denominator for basic earnings per share -- weighted-average shares 59.0 60.0 63.5 Effect of dilutive securities 0.2 0.3 0.4 - - -------------------------------------------------------------------------------- Denominator for diluted earnings per share 59.2 60.3 63.9 ================================================================================ Options to purchase shares of common stock of 1.4 million, 1.1 million and 0.8 million in 1998, 1997 and 1996, respectively were outstanding, but were excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares during those years, and therefore the effect would have been antidilutive. NOTE 12: STOCK COMPENSATION PLANS The Company has three plans that provide for the granting of stock awards to officers and key employees. The 1998 and the 1993 Stock Compensation Plans have stock awards available for grant; the third plan has options exercisable as of December 31, 1998. The Company is authorized to grant options for up to 4.3 million shares under the plans, of which 1.5 million have been granted. Options under the plans have been granted at the market value at the date of grant, become exercisable over periods of one to five years and expire ten years from the date of grant. In addition to the options awarded under the plans, the Company on April 6, 1998, granted the Chief Executive Officer an option to acquire 0.7 million shares of the Company's stock. The options were granted at market value on the date of grant; 0.2 million of the shares became exercisable upon grant with the balances becoming exercisable, ratably over four years. The options expire ten years from the grant date. The status of the Company's stock options is summarized below: ================================================================================ Weighted- Shares Under Average Option Exercise Price ================================================================================ Outstanding at January 1, 1996 2.0 $ 43.53 Granted 0.3 74.94 Exercised (0.5) 26.26 Terminated (0.1) 67.64 - - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 1.7 52.61 Granted 0.4 43.05 Exercised (0.1) 16.82 Terminated (0.1) 55.89 - - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 1.9 52.79 Granted 1.3 43.46 Exercised (0.2) 22.05 Terminated (0.6) 57.02 Adjustment for Octel Spin-off 0.3 -- - - -------------------------------------------------------------------------------- Outstanding at December 31, 1998 2.7 $ 43.57 - - -------------------------------------------------------------------------------- Currently Exercisable 1.4 $ 45.32 ================================================================================ Concurrent with the May 1998 spin-off of Octel, the number of options outstanding was increased by 14 percent or 0.3 million shares and grant prices were reduced by approximately 14 percent to maintain the total value of the options at pre-spin-off levels. In the preceding table, prior years' information has not been restated. During 1998 the Company awarded restricted stock totaling 0.2 million shares to directors and other key employees. These awards become exercisable over a period of one to twelve years. The Company recognizes compensation expense consistent with the vesting of each award. The compensation expense incurred in 1998 related to those awards totaled $3.2 million. Options outstanding at December 31, 1998, expire from March 1999, to November 2008. A total of 2.8 million shares are reserved for future grants as of December 31, 1998. The following table summarizes information concerning outstanding and exercisable options at December 31, 1998: ================================================================================ Range of Exercise Prices $13-$30 $31-$50 $51-$69 ================================================================================ Options Outstanding: Weighted-Average Remaining Contractual Life 1.5 yrs. 8.9 yrs. 6.7 yrs. Weighted-Average Exercise Price $ 17.66 $ 40.32 $ 61.84 Number 0.2 1.9 0.6 Options Exercisable: Weighted-Average Exercise Price $ 17.66 $ 39.77 $ 61.50 Number 0.2 0.6 0.6 ================================================================================ The Company accounts for stock compensation costs in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation cost has been recognized for its fixed stock option plans. The following table sets forth pro forma information as if compensation cost had been determined based on the fair value at the grant date for awards under the Company's stock plans consistent with the requirements of SFAS No. 123, "Accounting for Stock-Based Compensation". For the purposes of the pro forma disclosure the estimated compensation costs are amortized to expense over the options' vesting period, principally three years. Therefore, because SFAS 123 is applicable to options granted subsequent to December 31, 1994, its pro forma effect is only fully reflected in 1998. ================================================================================ December 31 1998 1997 1996 ================================================================================ Weighted average fair value per share of options granted during the year(1) $ 13.96 $ 13.14 $ 24.61 Net Income from continuing operations: As reported $ 56.4 $ 71.8 $ 120.6 Proforma $ 47.6 $ 67.5 $ 116.1 Diluted Earnings per share: As reported $ 0.95 $ 1.19 $ 1.89 Proforma $ 0.81 $ 1.12 $ 1.82 Assumptions: Expected volatility 23.9% 21.0% 22.8% Expected life in years 6.5 6.5 6.0 Risk free interest rate 5.5% 6.2% 5.3% Dividend yield 0.9% 1.4% 0.6% ================================================================================ (1) on date of grant using the Black-Scholes option pricing model - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 37 45 - - ------------------------------------------------------------------------------- NOTE 13: RETIREMENT PLANS The Company sponsors various defined benefit pension plans. The following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the periods ended September 30, 1998, 1997 and 1996, and the funded status to the amounts recognized in the financial statements for those years. ================================================================================ 1998 1997 1996 ================================================================================ Reconciliation of benefit obligation: Benefit obligation at beginning of year $ 121.9 $ 108.6 $ 95.4 Service cost 6.7 5.7 5.3 Interest cost 9.1 8.5 7.6 Plan participants' contributions 0.4 0.4 0.3 Amendments and terminations 2.1 0.4 0.8 Net actuarial loss/(gain) 20.8 4.0 (0.7) Benefits paid (4.8) (4.2) (3.7) Foreign currency translation loss/(gain) 0.6 (1.5) 3.6 - - -------------------------------------------------------------------------------- Benefit obligation at end of year $ 156.8 $ 121.9 $ 108.6 ================================================================================ Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year $ 130.6 $108.0 $88.5 Actual return on plan assets (1.7) 24.9 12.3 Employer contributions 4.6 3.5 8.0 Benefits and expenses paid (5.4) (4.9) (4.3) Foreign currency translation (loss)/gain 1.2 (0.9) 3.5 - - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 129.3 $ 130.6 $ 108.0 ================================================================================ Funded status: Funded status $ (27.5) $ 8.7 $ (0.6) Unrecognized prior service cost 0.9 0.2 0.5 Unrecognized transition obligation 0.9 1.1 1.2 Unrecognized net actuarial loss/(gain) 12.6 (20.1) (9.8) Estimated transfers from discontinued operations -- 7.1 7.5 - - -------------------------------------------------------------------------------- Net accrued benefit cost $ (13.1) $ (3.0) $ (1.2) ================================================================================ Amounts recognized in the balance sheets consist of: Prepaid benefit costs $ 2.4 $ 1.1 $ 1.7 Accrued benefit liability (21.7) (16.6) (13.5) Intangible asset 1.9 1.5 1.6 Accumulated other comprehensive income 4.3 3.9 1.5 Estimated transfers from discontinued operations -- 7.1 7.5 - - -------------------------------------------------------------------------------- Net accrued benefit cost $ (13.1) $ (3.0) $ (1.2) ================================================================================
- - ---------------------------------------------------------------------------------------- 1998 1997 1996 - - ---------------------------------------------------------------------------------------- Weighted-average assumptions at end of year: Discount rates 6.0% to 6.75% 7.7% to 7.75% 7.7% to 8.75% Expected return on plan assets 7.0% to 9.0% 8.5% to 9.0% 9.0% to 9.5% Rates of compensation increases 4.0% to 4.8% 4.8% to 5.5% 4.8% to 6.5% Components of net periodic benefit cost: Service cost $ 6.7 $ 5.7 $ 5.3 Interest cost 9.1 8.5 7.6 Expected return on plan assets (11.6) (9.6) (8.0) Amortization of prior service cost 0.2 0.1 0.1 Amortization of transition obligation 0.2 0.2 0.2 Recognized net actuarial loss 0.1 0.2 0.4 Termination benefits 1.4 -- (0.1) Net benefit costs transferred from discontinued operations -- 1.2 -- - - ---------------------------------------------------------------------------------------- Net periodic benefit cost $ 6.1 $ 6.3 $ 5.5 ========================================================================================
The decrease in the discount rate assumption in 1998 increased the projected benefit obligation by approximately $22 million. The projected benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $10.2 million and $0.2 million respectively, as of December 31, 1997, $7.9 million and $0.1 million, respectively for December 31, 1996. As of December 31, 1998 all plans have a projected benefits obligation greater than plan assets. The accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $54.0 million and $38.7 million, respectively, as of December 31, 1998, $9.0 million and $0.2 million, respectively as of December 31, 1997, and $5.1 million and $0.1 million, respectively as of December 31, 1996. The Company provides no significant post-retirement benefits other than pensions. The estimated transfers from discontinued operations represents benefit cost attributable to employees who participated in Octel pension plans and remained with the Company after the spin-off. In 1998, the benefits for these employees have been incorporated into the Company plans. NOTE 14: RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were approximately $42 million, $42 million and $43 million in 1998, 1997 and 1996, respectively. NOTE 15: SEGMENT INFORMATION The Company is organized in the four global segments: Polymer Additives, Performance Chemicals, Water Treatment and Energy Services and Products. These segments are strategic business units that offer products and services that are intended to satisfy specific customer requirements. The units are organized and managed to deliver a distinct group of products, technology and services. The Polymer Additives segment produces brominated and antimony based flame retardants, UV and antioxidant stabilizers and impact modifiers. The segment serves manufacturers in the following markets: electrical and electronic; construction; automotive; and, furnishings. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 38 46 - - -------------------------------------------------------------------------------- The Performance Chemicals segment produces chemicals to exact specifications or to meet specific applications requirements. The product offering is characterized by technology based product solutions that benefit specific customers. The businesses included in the segment are: fine chemicals for pharmaceutical and life sciences companies; fluorine chemicals for use in fire suppression systems, refrigerants and medical and pharmaceutical products; brominated intermediates and agricultural products and toxicological testing services for chemical, pharmaceutical and food additive producers. The Water Treatment segment is a producer of water treatment chemicals for the recreational swimming pool and spas water treatment industry. These products are sold to pool and spa dealers, distributors and mass market retailers. The Water Treatment segment also produces specialty biocides for use in cooling tower water treatment, wastewater treatment and pulp and paper production. The Energy Services and Products segment provides products and services to oil and gas well operators. The segment produces bromine-based clear fluids and completion fluids and provides ancillary well completion services such as gravel packing, high-pressure fracturing, packing, well stimulation and coil-tube intervention. The Company evaluates business unit performance and allocates resources based on operating income which represents net sales less costs of products sold, selling, administrative and research expenses. Each of the Company's segments uses bromine as a raw material in their production processes. Bromine is transferred at cost and assets used in the production of bromine are allocated to business units based on the percentage of production consumed. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Corporate and Other includes the corporate offices in 1998, 1997 and 1996 in addition to businesses that were not part of the current segment organization and were sold. Segment assets primarily include accounts receivable; inventory; net plant and equipment and other miscellaneous assets. Assets included in Corporate and Other principally are cash and cash equivalents; insurance receivables; deferred income taxes; certain investments and other assets; and certain unallocated plant and equipment, including the Company's new ERP software system. Geographic sales information is reported based on the location which invoices the external customer. Geographic long-lived assets are grouped by the location of the reporting country. Intersegment sales are insignificant and are eliminated in consolidation. ================================================================================ Year Ended December 31 1998 1997 1996 ================================================================================ Net Sales by Segment to External Customers: Polymer Additives $ 584.2 $ 553.9 $ 536.8 Performance Chemicals 314.8 282.7 247.2 Water Treatment 378.7 350.1 429.5 Energy Services and Products 115.7 112.9 95.9 ================================================================================ Total Sales of Reportable Segments 1,393.4 1,299.6 1,309.4 Corporate and Other 0.9 11.6 42.9 - - -------------------------------------------------------------------------------- 1,394.3 1,311.2 1,352.3 ================================================================================ ================================================================================ Year Ended December 31 1998 1997 1996 ================================================================================ Segment Profit: Polymer Additives $ 78.9 $ 92.9 $ 97.2 Performance Chemicals 70.2 51.1 38.5 Water Treatment 54.5 46.3 34.6 Energy Services and Products 11.0 20.3 19.1 ================================================================================ Total Profits of Reportable Segments 214.6 210.6 189.4 Corporate and Other (24.2) (19.0) (5.5) Special Charges (116.5) (49.8) -- - - -------------------------------------------------------------------------------- Operating Income 73.9 141.8 183.9 ================================================================================ Interest and Other Income 37.0 31.7 56.6 Interest and Other Expense 44.7 56.3 56.5 - - -------------------------------------------------------------------------------- Income before Income Taxes $ 66.2 $ 117.2 $ 184.0 ================================================================================ Depreciation Expense: Polymer Additives $ 37.9 $ 32.6 $ 29.7 Performance Chemicals 20.8 18.9 15.2 Water Treatment 9.1 10.4 9.6 Energy Services and Products 8.7 6.9 5.6 Corporate and Other 2.1 1.1 1.1 - - -------------------------------------------------------------------------------- $ 78.6 $ 69.9 $ 61.2 ================================================================================ Segment Assets: Polymer Additives $ 664.3 $ 650.6 $ 551.8 Performance Chemicals 302.4 307.2 298.6 Water Treatment 227.7 239.3 279.9 Energy Services and Products 147.3 128.1 108.3 Corporate and Other 560.4 218.7 279.3 Net Assets of Discontinued Operations 102.5 726.5 834.8 - - -------------------------------------------------------------------------------- $2,004.6 $2,270.4 $2,352.7 ================================================================================ Investment in Equity Method Investees: Polymer Additives $ 10.7 $ 11.3 $ 8.5 Expenditures for Long-lived Assets: Polymer Additives $ 52.0 $ 118.9 $ 88.7 Performance Chemicals 29.4 27.4 43.7 Water Treatment 11.1 7.0 18.8 Energy Services and Products 28.7 21.0 15.8 Corporate and Other 39.4 33.7 7.9 - - -------------------------------------------------------------------------------- $ 160.6 $ 208.0 $ 174.9 ================================================================================ Geographic Information Net Sales to External Customers: United States $ 880.8 $ 826.0 $ 860.1 United Kingdom 313.1 271.8 271.5 Other Foreign 200.4 213.4 220.7 - - -------------------------------------------------------------------------------- $1,394.3 $1,311.2 $1,352.3 ================================================================================ Long-lived Assets: $ 644.9 $ 622.6 $ 532.9 United States 240.5 223.6 248.8 Foreign 240.5 223.6 248.8 - - -------------------------------------------------------------------------------- $ 885.4 $ 846.2 $ 781.7 ================================================================================ - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 39 47 - - -------------------------------------------------------------------------------- NOTE 16: INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES As of December 31, 1998, the Company's investment in unconsolidated affiliates consists mainly of a 50% interest in Tetrabrom Technologies, Ltd., an Israeli manufacturer of tetrabromobisphenol-A, and a preferred stock interest in Huntsman Chemical Corporation (HCC) consisting of 58,700 shares of series A cumulative preferred stock with an annual dividend rate of 14%. Beginning in the year 2000, the annual dividend rate will increase 1% per year to a maximum rate of 25%. The preferred shares have a face value of $59 million. The Company is a limited partner in certain low income housing investments that generate benefits in the form of tax credits. The Company's equity in earnings (losses) of unconsolidated affiliates was $(0.2) million, $2 million and $1 million for 1998, 1997 and 1996, respectively. Preferred dividends from HCC amounted to $8 million a year for the last 3 years. NOTE 17: FINANCIAL INSTRUMENTS Foreign Exchange Risk Management In the normal course of business, operations of the Company are subject to risks associated with changing foreign exchange rates. These fluctuations can vary the costs of financing, investing and operating. Accordingly, the Company hedges certain portions of its exposure to foreign currency fluctuations through the use of option strategies and forward exchange contracts to protect the value of its existing foreign currency assets and liabilities commitments and anticipated foreign currency revenues. It's the Company's policy to enter into foreign currency hedging transactions only to the extent considered necessary to achieve the objectives stated above. The Company does not enter into foreign currency transactions for speculative purposes. The Company enters into currency option and forward contracts to hedge anticipated foreign currency transactions during the next 12 months. The principal currencies hedged are the Japanese yen, French franc, German mark, Italian lira and the British pound. The Company uses currency swap contracts to hedge long-term intercompany loans and the related interest. These contracts hedge the French franc, German mark and Italian lira against the British pound. The terms of the swap contracts match the loan payment terms. As of December 31, the stated, or notional amounts of the Company's outstanding derivative financial instruments and the respective fair values were as follows: ================================================================================ 1998 1997 Stated Fair Stated Fair Value Value Value Value ================================================================================ Foreign currency options and forward contracts $ 13.3 $ 7.8 $ 5.9 $ 1.2 Foreign currency swap contracts $108.8 $115.6 $117.5 $128.8 ================================================================================ 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. At December 31, 1998 and 1997, the Company had deferred losses related to hedging activities of $0.2 million and zero, respectively. Deferred amounts to be recognized can change with market conditions and will be substantially offset by changes in the value of the related hedged transactions. The impact of currency options used for foreign exchange risk management on pretax income in 1998 and in 1997 was a net gain of approximately $0.9 million and $4.4 million, respectively. Fair Value of Financial Instruments The Company's financial instruments, exclusive of certain derivative financial instruments as discussed above, generally consist of cash and cash equivalents, accounts and notes receivable, accounts and notes payable and long-term debt. At December 31, 1998 and 1997, the fair values of cash and cash equivalents, accounts and notes receivable, accounts and notes payable approximated carrying values due to the short-term nature of these instruments. The Company currently uses commercial paper borrowing for most of its financing requirements. Interest rates on commercial paper approximate current market rates. The majority of the Company's long-term debt is commercial paper with interest rates that approximate current market rates resulting in a fair value that approximated the carrying value at December 31, 1998 and 1997. Concentrations of Credit Risk 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. Counterparties to the currency swap agreements are major financial institutions. Credit losses from counterparty non-performance are not anticipated. NOTE 18: COMMITMENTS AND CONTINGENCIES The Company has various purchase commitments for raw materials, supplies and plant and equipment incident to the ordinary conduct of business. None of the raw material and supply commitments represent unconditional purchase obligations. In the aggregate, such commitments are not at prices in excess of current market. At December 31, 1998, the Company had committed approximately $82 million to complete capital projects. The Company has various operating leases primarily for the use of office space, computer equipment and services and marine service vessels. Future minimum lease payments under these non-cancelable operating leases totaled $61 million at December 31, 1998 as follows: 1999 - $19 million; 2000 - $16 million; 2001 - $12 million; 2002 - $9 million; 2003 - $5 million. Rent expense for all operating leases amounted to $24 million, $16 million and $19 million for 1998, 1997 and 1996, respectively. The Company is subject to various lawsuits and claims with respect to matters such as governmental regulations, income taxes and other actions arising out of the normal course of business. The Company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Environmental remediation costs that relate to current operations are expensed or capitalized as appropriate. Costs that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments are made or remedial efforts are probable and the costs can be reasonably estimated. Environmental liabilities and litigation accruals of approximately $40 million have been reflected in the Company's consolidated balance sheet at December 31, 1998. While it is not possible to predict or determine the outcome of actions brought against the Company or the ultimate cost of environmental matters, the Company believes that the costs associated with all such matters will not have a material adverse effect on its consolidated financial position or consolidated results of operations. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 40 48 - - ------------------------------------------------------------------------------- Quarterly Results of Operations
- - ---------------------------------------------------------------------------------------------------------------------------- (millions, except per share data) 1998 - THREE MONTHS ENDED Mar. 31 Jun. 30 Sept. 30 Dec. 31 ============================================================================================================================ Net Sales $334.7 $401.9 $340.5 $317.2 Operating Expenses Cost of products sold 241.4 286.6 249.8 233.7 Selling, administrative and research expenses 46.0 54.9 48.2 43.3 Special charges 15.5 -- 48.3 52.7 - - ---------------------------------------------------------------------------------------------------------------------------- 302.9 341.5 346.3 329.7 ============================================================================================================================ Operating Income (Loss) 31.8 60.4 (5.8) (12.5) Interest and Other Income 8.1 8.1 12.3 8.5 Interest and Other Expenses 12.4 11.0 4.8 16.5 ============================================================================================================================ Income (Loss) from Continuing Operations before Income Taxes 27.5 57.5 1.7 (20.5) Income Taxes 10.3 19.6 0.5 (20.6) ============================================================================================================================ Net Income from Continuing Operations 17.2 37.9 1.2 0.1 Net Income from Discontinued Operations 25.5 7.1 -- -- - - ---------------------------------------------------------------------------------------------------------------------------- Net Income $42.7 $45.0 $1.2 $0.1 ============================================================================================================================ Earnings per Share: Basic Continuing Operations $0.29 $0.64 $0.02 -- Discontinued Operations 0.44 0.12 -- -- - - ---------------------------------------------------------------------------------------------------------------------------- $0.73 $0.76 $0.02 -- ============================================================================================================================ Diluted Continuing Operations $0.29 $0.64 $0.02 -- Discontinued Operations 0.43 0.12 -- -- - - ---------------------------------------------------------------------------------------------------------------------------- $0.72 $0.76 $0.02 -- ============================================================================================================================ Cash Dividends Paid per Share $0.16 $0.16 $0.08 $0.08 - - ---------------------------------------------------------------------------------------------------------------------------- Stock Price Data(1) High 54 54 3/16 41 1/2 45 7/16 Low 40 37 13/16 36 11/16 37 7/16 Year-End Close 40 - - ---------------------------------------------------------------------------------------------------------------------------- 1997 - THREE MONTHS ENDED Mar. 31 Jun. 30 Sept. 30 Dec. 31 ============================================================================================================================ Net Sales $319.5 $356.4 $309.6 $325.7 Operating Expenses Cost of products sold 230.7 253.8 220.5 232.5 Selling, administrative and research expenses 44.6 45.7 42.2 49.6 Special charges -- -- -- 49.8 - - ---------------------------------------------------------------------------------------------------------------------------- 275.3 299.5 262.7 331.9 ============================================================================================================================ Operating Income (Loss) 44.2 56.9 46.9 (6.2) Interest and Other Income 5.9 6.5 8.4 10.9 Interest and Other Expenses 9.1 11.5 10.2 25.5 ============================================================================================================================ Income (Loss) from Continuing Operations before Income Taxes 41.0 51.9 45.1 (20.8) Income Taxes 14.7 18.8 16.0 (4.1) ============================================================================================================================ Net Income (Loss) from Continuing Operations 26.3 33.1 29.1 (16.7) Net Income (Loss) from Discontinued Operations 26.5 29.3 29.7 (100.4) ============================================================================================================================ Net Income (Loss) $52.8 $62.4 $58.8 $(117.1) - - ---------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) per Share: Basic Continuing Operations $0.43 $0.55 $0.48 $(0.28) Discontinued Operations 0.44 0.49 0.50 (1.68) - - --------------------------------------------------------------------------------------------------------------------------- $0.87 $1.04 $0.98 $(1.96) =========================================================================================================================== Diluted Continuing Operations $0.43 $0.55 $0.48 $(0.28) Discontinued Operations 0.43 0.49 0.50 (1.68) - - ---------------------------------------------------------------------------------------------------------------------------- $0.86 $1.04 $0.98 $(1.96) - - ---------------------------------------------------------------------------------------------------------------------------- Cash Dividends Paid per Share $0.15 $0.15 $0.16 $0.16 ============================================================================================================================ Stock Price Data(1) High 50 3/4 52 7/8 54 7/8 53 Low 41 5/8 41 1/2 45 9/16 42 1/16 Year-End Close 44 7/8 - - ----------------------------------------------------------------------------------------------------------------------------
(1) Stock prices prior to May 22, 1998, do not reflect the Octel spin-off. - - -------------------------------------------------------------------------------- GREAT LAKES CHEMICAL CORPORATION 41 49 CORPORATE OFFICERS Mark P. Bulriss Chief Executive Officer and President Louis M. Maresca Executive Vice President and President of Performance Chemicals C. Hugh Morton Executive Vice President and President of Polymer Additives L. Donald Simpson Executive Vice President, Global Supply Chain Management, Engineering and Systems Marshall Bloom Executive Vice President and Chief Executive Officer of Water Treatment Richard L. Boehner Senior Vice President, Corporate Development and Strategic Planning Mark E. Tomkins Senior Vice President and Chief Financial Officer Stephen D. Clark Vice President, General Manager, Asia/Pacific - Polymer Additives Mark S. Esselman Vice President, Human Resources Robert L. Hollier Vice President and Chief Executive Officer of OSCA, Inc. John V. Lacci Vice President and General Counsel Robert J. Smith Vice President and Controller Mary P. McClanahan Corporate Secretary Stephen E. Brewer Assistant Treasurer 50 BOARD OF DIRECTORS Mark P. Bulriss 4,5,6 Chief Executive Officer and President Director since 1998 Thomas M. Fulton 2,3,4 President and Chief Executive Officer Landauer, Inc. Director since 1995 Martin M. Hale 1,4,5,6 Chairman of the Board of Great Lakes; Executive Vice President Hellman Jordan Management Company, Inc. Investment advisors Director since 1978 Louis E. Lataif 1,2 Dean of the School of Management, Boston University Director since 1995 Richard H. Leet 2,3,4 Retired Vice Chairman and Director Amoco Corporation Director since 1994 Robert B. McDonald 3 Retired Chief Executive Officer and President of Great Lakes Director since 1994 Mack G. Nichols 1,2 President and Chief Operating Officer Mallinckrodt Inc. Director since 1998 Jay D. Proops 4,5,6 Former Vice Chairman The Vigoro Corporation Director since 1996 1 Audit Committee 2 Compensation and Incentive Committee 3 Environmental, Safety and Health Committee 4 Executive Committee 5 Finance Committee 6 Succession Planning Committee Economic Value Added/R/ Responsible Care/R/ 42 51 Wholly Owned Subsidiaries Bayrol Chemische Fabrik GmbH Swimming Pool and Spa Products Bio-Lab, Inc. Swimming Pool and Spa Products Great Lakes Chemical (Europe), Ltd. Specialty Chemicals Great Lakes Chemical France S.A. Specialty Chemicals Great Lakes Chemical International, Inc. Export Sales-FSC Great Lakes Chemical Italia S.r.l. Specialty Chemicals Great Lakes Fine Chemicals, Ltd. Manufacturer of Fine and Specialty Chemicals and Intermediates LOWI Polymer Stabilizers GmbH Specialty Chemicals OSCA, Inc. Oil Field Services WIL Research Laboratories, Inc. Toxicological Testing Shareholder Information Transfer Agent and Registrar The stock transfer agent and registrar for Great Lakes' stock is Harris Trust and Savings Bank. 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 311 West Monroe Street, 11th Floor Chicago, Illinois 60606-4607(312) 461-6001 hearing impaired: (312) 461-5633 www.harrisbank.com Independent 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 6, 1999, at the Parkwood IV, 500 East 96th Street, Conference Center, Indianapolis, Indiana. Form 10-K and Other Information A complimentary copy of the company's 1998 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: Jeffrey Potrzebowski Director, Investor Relations or Gregory J. Griffith Director, Public Affairs and Administration Great Lakes Chemical Corporation 500 E. 96th Street, Suite 500 Indianapolis, Indiana 46240 USA Phone: (317) 715-3000 www.greatlakeschem.com Great Lakes Chemical Corporation 500 E. 96th Street, Suite 500 Indianapolis, Indiana 46240 USA (317) 715-3000 EX-23 3 COSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 CONSENT OF 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 February 26, 1999, included in the 1998 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, in Registration Statement Number 33-300543 on Form S-8, dated January 30, 1996, in Registration Statement Number 333-49127 on Form S-8 dated April 1, 1998, and in Registration Statement Number 333-61609 on Form S-8, dated August 17, 1998, of our report dated February 26, 1999, 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, 1998. /s/ ERNST & YOUNG LLP Indianapolis, Indiana March 26, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM 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-31-1998 JAN-01-1998 $411,559 0 262,117 4,134 293,245 995,591 1,241,537 552,056 2,004,598 346,571 515,251 0 0 72,745 981,575 2,004,598 1,394,294 1,431,365 1,011,447 1,320,284 19,892 94 24,820 66,275 9,800 56,475 32,591 0 0 $89,046 $1.51 $1.50
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