-----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, Qz1U/Dj7pm1Yv5aYAZOJiA+5FSJNEch99tiEshrvfdZ3HgqG7wlVnjyGsRcyRyPD Q0cGZOUdfR1B1Y1RR2p+pw== 0001047469-98-011363.txt : 19980326 0001047469-98-011363.hdr.sgml : 19980326 ACCESSION NUMBER: 0001047469-98-011363 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGIA GULF CORP /DE/ CENTRAL INDEX KEY: 0000805264 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 581563799 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09753 FILM NUMBER: 98572599 BUSINESS ADDRESS: STREET 1: 400 PERIMETER CTR TERRACE STREET 2: STE 595 CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 4043954500 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________ Commission File Number 1-9753 ---------------- GEORGIA GULF CORPORATION (Exact name of Registrant as specified in its Charter) DELAWARE 58-1563799 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Perimeter Center Terrace, Suite 595, Atlanta, Georgia 30346 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 395-4500 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: Title of each class Name of each exchange on which registered -------------------- ----------------------------------------- Common Stock, $0.01 par value New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate 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 the 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. Aggregate market value of the voting stock held by nonaffiliates of the Registrant, computed using the closing price on the New York Stock Exchange for the Registrant's common stock on March 18, 1998, was $905,268,000. Indicate the number of shares outstanding of the Registrant's common stock as of the latest practicable date. Class Outstanding at March 18, 1998 ------ ----------------------------- Common Stock, $0.01 par value 32,187,322 shares DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein) 1997 Annual Report to Stockholders in Parts II and IV of this Form 10-K. Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 1998, in Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I
PAGE ITEM NUMBER - ---- --------- 1) Business General Description of Business ..................................... 1 Electrochemical Products ............................................ 2 - 3 Aromatic Chemical Products .......................................... 3 Methanol ............................................................ 4 Great River Oil & Gas Corporation ................................... 4 Georgia-Pacific Contract ............................................ 4 Marketing and Sales ................................................. 4 Raw Materials ....................................................... 4 Competition ......................................................... 5 Employees ........................................................... 5 Environmental Regulation ............................................ 5 Year 2000 Conversion ................................................ 5 Forward-Looking Statements .......................................... 5 - 6 2) Properties ..................................................................... 6 - 7 3) Legal Proceedings .............................................................. 7 4) Submission of Matters to a Vote of Security Holders ............................ 7 PART II 5) Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters ..................................... 8 6) Selected Financial Data ........................................................ 8 7) Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 8 7A) Quantitative and Qualitative Disclosures about Market Risk ...................... 8 8) Financial Statements and Supplementary Data .................................... 8 9) Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............................................ 8 PART III 10) Directors and Executive Officers of the Registrant ............................. 9 11) Executive Compensation ......................................................... 10 12) Security Ownership of Certain Beneficial Owners and Management ................. 10 13) Certain Relationships and Related Transactions ................................. 10 PART IV 14) Exhibits, Financial Statement Schedule and Reports on Form 8-K ................. 11 - 14 SIGNATURES ............................................................................ 15
PART I Item 1. BUSINESS. General Description of Business Georgia Gulf Corporation (the "Company") is a major manufacturer and worldwide marketer of quality chemical and plastic products. The Company manufactures products through two highly integrated lines categorized into electrochemicals and aromatic chemicals; and also a third product line, methanol, a natural gas chemical. The Company's electrochemical products include chlorine, caustic soda, sodium chlorate, vinyl chloride monomer ("VCM"), and polyvinyl chloride ("PVC") resins and compounds; the Company's aromatic chemical products include cumene, phenol, acetone and alpha-methylstyrene ("AMS"). The Company has operated as an independent corporation since its acquisition on December 31, 1984, of a major portion of the business and assets of the chemical division of Georgia-Pacific Corporation ("Georgia-Pacific"). The Company's operations include production units at four locations, several marketing organizations responsible for the sale of the Company's products, a technical service laboratory and a purchasing organization responsible for the acquisition of all major raw materials. At the Company's four manufacturing locations, there are ten plants, six of which are located in Plaquemine, Louisiana. The Company also owns an air separation plant located in Plaquemine, Louisiana, which supplies all of the oxygen and nitrogen requirements for the complex. The Company leases a cogeneration facility that supplies essentially all of the electricity and steam requirements for the Plaquemine, Louisiana, complex and also leases storage terminals and warehouses from which a portion of its products are distributed to customers. The Company's products are generally intermediate chemicals that are sold for further processing into a wide variety of end-use applications. Some of the more significant end-use markets include plastic piping, siding and window frames made from PVC resins and compounds; bonding agents for wood products and high quality plastics made from phenol; acrylic sheeting for automotive and architectural products made from acetone; and MTBE, a gasoline additive produced from methanol. The following percentages of sales were made in 1997 to manufacturers in the following industries: 30% housing and construction, 25% plastics and fibers, 21% solvents and chemicals, 14% consumer products, 3% pulp and paper and 7% miscellaneous. The Company's major capital projects during 1997 included the completion of the expansions of the phenol/acetone and VCM plants in Plaquemine, Louisiana; the completion of the air separation plant in Plaquemine, Louisiana; and the completion of the second phase of the PVC compound expansion at Gallman, Mississippi. The major planned capital expenditures for 1998 will be directed toward certain environmental projects and increased efficiency of existing operations. In the commodity chemical industry, a company's cost position as well as the balance of overall industry supply (i.e., capacity) and demand for particular product lines significantly affect pricing of products, and accordingly, the Company's earnings and cash flow. The Company has invested $608 million in the past five years to maintain, expand and/or improve the efficiency of its operating facilities. Management believes that with its low-cost position and integrated product lines, the Company is well-positioned to compete in its various markets. The Company's long-term strategy is to continue to concentrate its efforts on products and services in the chemical and plastic industries, particularly production additions or enhancements in its core product areas. The Company will continue to make investments that will improve or maintain its low-cost position, as well as selective and prudent capacity additions and expansions, and will consider acquisitions, joint ventures or similar transactions that management believes will promote profitable growth in present and closely related product lines. 1 Electrochemical Products Chlorine/Caustic Soda/Sodium Chlorate. The Company's facility at Plaquemine, Louisiana, has the annual capacity to produce approximately 450 thousand tons of chlorine and 500 thousand tons of chlorine's co-product, caustic soda, as well as 27 thousand tons of sodium chlorate. The major raw materials for these products are salt and electric power. The Company has a long-term lease on a salt dome near the Plaquemine, Louisiana, facility with sufficient salt reserves to last over thirty years at current rates of production. Electric power is the most significant cost component in the production of chlorine, caustic soda and sodium chlorate. During 1997, the Company completed the construction of a 250-megawatt cogeneration facility located at the Plaquemine, Louisiana, complex, which supplies, under a long-term lease agreement, essentially all the electricity and steam requirements for that site. The primary cost component of producing electricity in the cogeneration facility is natural gas. Chlorine is used in the production of various chemicals, including those used to make plastics and PVC resins. Other applications include water purification, waste water disinfection, pulp and paper bleaching, agricultural products, laundry aids and pharmaceuticals. In 1997, approximately 90 percent of the Company's chlorine production was consumed by the Company in the production of VCM, which was then used to produce PVC resins. The Company sells the remaining chlorine principally to the pulp and paper and chemical industries. The major uses of caustic soda are in the production of pulp and paper, aluminum, oil, soaps and detergents. Caustic soda also has significant applications in the production of other chemicals and in chemical processes where caustic soda is used to control pH levels aiding in waste neutralization. Another use is in the textile industry where it makes fabrics more absorbent and improves the strength of dyes. Caustic soda is also used, to a lesser extent, in food processing and electroplating. Sodium chlorate is a key chemical used in the bleaching process for pulp and paper and, to a lesser extent, as an ingredient in blasting agents, explosives and solid rocket fuels. Vinyl Chloride Monomer ("VCM"). The Company produces VCM at its Plaquemine, Louisiana, complex. The major raw materials used to produce VCM are purchased ethylene and Company-produced chlorine. The VCM plant's annual capacity is approximately 1.6 billion pounds with the capability of also producing an additional 400 million pounds of ethylene dichloride ("EDC"), the precursor to VCM. Approximately 80 percent of the VCM production in 1997 was used by the Company's PVC resins operations with the remainder being sold to other PVC resins producers, particularly in the export market. Polyvinyl Chloride ("PVC") Resins. The Company operates a world-scale PVC resins plant in Plaquemine, Louisiana. The plant is located adjacent to its major raw material supplier, the Company's VCM facility, thereby minimizing transportation and handling costs. The annual production capacity is approximately 1.12 billion pounds, of which approximately one-fourth was used internally in 1997 to produce PVC compounds. PVC resins are one of the most widely used plastics in the world today. After being formulated to desired properties, PVC resins are heated and shaped into finished products by various extrusion, calendaring and molding processes. Applications are diverse and include pipe and fittings, window frames, siding, flooring, shower curtains, packaging, bottles, film, medical tubing, business machine housings and credit cards. Vinyl resins are also important to the automotive industry for use in seats, trim, floormats and wire and cable insulation. Polyvinyl Chloride ("PVC") Compounds. The Company's PVC compounding plants have an aggregate annual capacity of approximately 380 million pounds and are located in Gallman, Mississippi, and Tiptonville, Tennessee. During the last half of 1997, the Company completed the second phase of the PVC compound expansion at Gallman, Mississippi. 2 PVC compounds are formulated to provide specific end-use properties that allow the material to be processed directly into a finished product. All sales of PVC compounds are to outside customers. The product line can be segregated into four major product areas according to the following process applications: Blow Molding -- The Company is a supplier of blow molding compounds, which are primarily used for both food-grade and general purpose bottles. Supplied in both clear and opaque colors, the materials are used to package cosmetics, shampoos, charcoal lighter fluid, bottled water and edible oils. Injection Molding -- The Company supplies various PVC compounds, which are used in the business machine market for computer housings and keyboards. It also supplies PVC compounds to produce electrical outlet boxes. These proprietary compounds, with extensive approval procedures by customers or regulatory bodies, are sold to some of the leading international producers of injection molded products. The Company also manufactures PVC compounds for use in pipe fittings. Extrusion -- The Company supplies extrusion markets, which have applications in window and furniture profiles and extruded sheets for household fixtures and decorative overlays. Extrusions are an end-product for both pelletized and powder compounds. Chlorinated Polyvinyl Chloride ("CPVC") -- The Company supplies Protherm-Registered Trademark- CPVC compounds to the extrusion and injection molding markets, mainly for pipe and pipe fittings. Aromatic Chemical Products Cumene. Cumene is produced at the Company's Pasadena, Texas, facility located on the Houston ship channel. The Company's cumene plant, one of the world's largest, has an annual stated capacity of approximately 1.5 billion pounds. Cumene is produced from benzene and propylene, which are purchased from various suppliers in the surrounding area. Slightly more than 50 percent of the Company's 1997 cumene output was consumed internally in the production of phenol and its co-product, acetone, with the balance being sold into the merchant market to other phenol and acetone manufacturers. Phenol/Acetone. Phenol and acetone are produced at the Company's Plaquemine, Louisiana, facility, which has approximately 500 million pounds of annual phenol capacity and 308 million pounds of annual acetone capacity, as well as at the Pasadena, Texas, facility, where annual capacity is 160 million pounds of phenol and 100 million pounds of acetone. During 1997, the Plaquemine, Louisiana, phenol/acetone plant was upgraded for product quality and expanded by sixty million pounds of phenol and thirty-eight million pounds of acetone. The Company does not consume any phenol or acetone internally. Phenol is a major ingredient in phenolic resins, which are used extensively as bonding agents and adhesives for wood products such as plywood and granulated wood panels, as well as in insulation, electrical parts, nylon carpeting, oil additives and pharmaceuticals. Phenol is also a precursor to high performance plastics used in automobiles, household appliances, electronics and protective coating applications. The primary uses for acetone are as a key ingredient to methyl methacrylate, which is used to produce acrylic sheeting, and as an ingredient for surface coating resins for automotive and architectural markets. Acetone is also an intermediate for the production of engineering plastics and several major industrial solvents. Other uses range from wash solvents for automotive and industrial applications to pharmaceuticals and cosmetics. As a result of the phenol/acetone manufacturing process, the Company also produces and markets small amounts of a by-product, AMS, which is primarily used as a polymer modifier and as a chemical intermediate. 3 Methanol Methanol is produced at the Company's facility at Plaquemine, Louisiana, which has an annual capacity of approximately 160 million gallons. Natural gas represents the majority of the cost of the production of methanol. The Plaquemine facility is in the center of Louisiana's oil and gas producing region and has two separate pipeline systems delivering gas to the plant. Natural gas is purchased by the Company under contracts at market prices from both producers and gas pipeline suppliers. A key use for methanol is in the production of methyl tertiary-butyl ether, or MTBE, an additive that promotes cleaner burning gasoline by adding oxygen. Methanol is also used as a raw material in the manufacture of formaldehyde, which is an ingredient in bonding agents for building materials such as granulated wood panels and plywood. Other applications for methanol include windshield washer fluid, solvents, and components of acrylic sheeting, coatings, fibers and household adhesives. Great River Oil & Gas Corporation In July 1997, the Company completed the sale of certain oil and gas properties representing substantially all of the assets of Great River Oil & Gas Corporation ("GROG"), a subsidiary of the Company. Net proceeds from this sale were $16,477,000, on which the Company recorded a pretax gain of $8,600,000 ($5,300,000, net of income taxes). GROG is a small oil and gas exploration company with activities centered in southern Louisiana. Historically, the operating results for this subsidiary have not been material to the operating results or financial condition of the Company. Georgia-Pacific Contract The Company has supply contracts, subject to certain limitations, for substantial percentages of Georgia-Pacific's requirements for caustic soda, methanol and phenol at prices approximating the market. These supply contracts have various expiration dates (depending on the product) from 1998 through 2003 and may be extended year-to-year upon expiration. Total sales to Georgia-Pacific for the years ended December 31, 1997, 1996 and 1995 amounted to approximately 12%, 15% and 14% of the Company's sales, respectively. Marketing and Sales The Company's marketing program is aimed at expanding and diversifying its customer base both domestically and internationally. Other than Georgia-Pacific, no single customer represents more than 10% of the Company's net sales. Export sales accounted for approximately 15%, 12% and 15% of the Company's net sales for the years ended December 31, 1997, 1996 and 1995, respectively. The principal international markets served by the Company include Canada, Mexico, Latin America, Europe and Asia. The Company markets its products primarily to industrial customers. The Company's products are sold by its sales force, which is organized by product line. The sales organization, located predominantly in the southeastern and midwestern United States, is supported by the Company's technical service staff. Raw Materials The most important raw materials purchased by the Company are natural gas, ethylene, benzene, propylene, electricity and salt. Raw materials used for production of the Company's products are usually purchased from various suppliers at market prices under supply contracts, some of which are long-term take or pay agreements. Since raw materials account for a significant portion of the Company's total production cost, the Company's ability to pass on increases in these costs to its customers has a significant impact on operating results which is, to a large extent, related to industry capacity and market demand. Additionally, due to the completion of the cogeneration plant in 1997, the Company substantially increased its natural gas requirements. Management believes the Company has a reliable supply base of raw materials under normal market conditions. The impact of any future raw material shortages cannot be accurately predicted. 4 Competition The Company experiences competition from numerous manufacturers in all of its product lines. Some of the Company's competitors have substantially greater financial resources and are more highly diversified than the Company. The Company competes on a variety of factors such as price, product quality, delivery and technical service. Management believes that the Company is well-positioned to compete as a result of integrated product lines, the operational efficiency of its plants and the location of its facilities near major water and/or rail transportation terminals. Employees As of December 31, 1997, the Company had 1,041 full-time employees. The Company has one collective bargaining agreement, which covered fifty-six employees at the Tiptonville, Tennessee, facility as of December 31, 1997. Environmental Regulation The Company's operations are subject to increasingly stringent federal, state and local laws and regulations relating to environmental quality. These regulations, which are enforced principally by the United States Environmental Protection Agency and comparable state agencies, govern the management of solid hazardous waste, emissions into the air and discharges into surface and underground waters, and the manufacture of chemical substances. Management believes that the Company is in material compliance with all current environmental laws and regulations. The Company estimates that any expenses incurred in maintaining compliance with these requirements will not materially effect earnings or cause the Company to exceed its level of anticipated capital expenditures. However, there can be no assurance that regulatory requirements will not change, and therefore it is not possible to accurately predict the aggregate cost of compliance resulting from any such changes. Year 2000 Conversion The Company recognizes the need to ensure its operations will not be adversely impacted by the year 2000 date conversion problem common in many processing systems. Georgia Gulf's information processing systems are believed to be year 2000 compliant. The Company continues to review and analyze other areas with exposure to potential year 2000 risks, including operational process control systems. Based upon current information, the Company believes all significant software systems within its control will be year 2000 compliant by the end of 1998. The costs associated with compliance with year 2000 conversion are not expected to be material. Forward-Looking Statements This Form 10-K and other communications to stockholders, as well as oral statements made by representatives of the Company, may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the Company's outlook for future periods, supply and demand, pricing trends and market forces within the chemical industry, cost reduction strategies and their results, planned capital expenditures, long-term objectives of management and other statements of expectations concerning matters that are not historical facts. 5 Predictions of future results contain a measure of uncertainty and, accordingly, actual results could differ materially due to various factors. Factors that could change forward-looking statements are, among others, changes in the general economy, changes in demand for the Company's products or increases in overall industry capacity that could affect production volumes and/or pricing, changes and/or cyclicality in the industries to which the Company's products are sold, availability and pricing of raw materials, technological changes affecting production, difficulty in plant operations and product transportation, governmental and environmental regulations and other unforseen circumstances. A number of these factors are discussed in this Form 10-K. Item 2. PROPERTIES. The Company's asset base was established from 1971 to the present with construction of the Plaquemine, Louisiana, complex; the construction of the Pasadena, Texas, cumene plant; the purchase of the PVC compound plants and the purchase of the Bound Brook, New Jersey, phenol/acetone facility subsequently relocated to Pasadena, Texas, and modernized in 1990. In 1996, the Company sold its vinyl emulsion business including the property and buildings at the Delaware City location. In 1997, the Company completed construction of cogeneration and air separation plants in Plaquemine, Louisiana, in order to supply all of its requirements for electricity, oxygen and nitrogen at that location. The cogeneration plant is leased under an operating lease agreement. The Company continues to explore ways to expand both its plant capacities and product lines. The Company believes current and additional planned capacity will adequately meet anticipated demand requirements. Average capacity utilization of the Company's production facilities in 1997 was 93%. The following table sets forth the location of each chemical manufacturing facility owned by the Company, the products manufactured at each facility and the approximate processing capability of each, assuming normal plant operations, as of December 31, 1997:
Locations Products Annual Capacity - --------- ------------ ---------------- Gallman, MS Polyvinyl Chloride Compounds 380 million pounds Tiptonville, TN Pasadena, TX Cumene 1.5 billion pounds Phenol 160 million pounds Acetone 100 million pounds Plaquemine, LA Chlorine 450 thousand tons Caustic Soda 500 thousand tons Sodium Chlorate 27 thousand tons Vinyl Chloride Monomer 1.6 billion pounds Polyvinyl Chloride Resins 1.12 billion pounds Phenol 500 million pounds Acetone 308 million pounds Methanol 160 million gallons
The Company's manufacturing facilities are located near major water and/or rail transportation terminals, facilitating efficient delivery of raw materials and prompt shipment of finished products. In addition, the Company has a fleet of 2,348 railcars of which 713 are owned and the remainder leased pursuant to operating leases with varying terms through the year 2010. The total lease expense for the Company's railcars and other transportation equipment was approximately $9,849,000 for 1997. In October 1997, the Company began making lease payments under an operating lease agreement for the 250-megawatt cogeneration facility at the Company's Plaquemine, Louisiana, complex. The lease expense under the operating lease agreement for 1997 was $3,025,000. 6 The Company leases office space for its principal executive offices in Atlanta, Georgia, and for information services in Baton Rouge, Louisiana. Space is leased for sales and marketing offices in Houston, Texas, Schaumburg, Illinois, and Lawrenceville, New Jersey. Space for numerous storage terminals is leased throughout the United States, and in the Netherlands, Canada and New Zealand. Item 3. LEGAL PROCEEDINGS . The Company is a party to numerous individual and several class-action lawsuits filed against the Company, among other parties, arising out of an incident that occurred in September 1996 in which workers were exposed to a chemical substance on the Company's premises in Plaquemine, Louisiana. The substance was later identified to be a form of mustard agent, a chemical which is not manufactured as part of the Company's ordinary operations and which apparently resulted from the unexpected introduction into the Company's feedstocks of one or more impurities from sources unknown. The lawsuits are pending in the 18th Judicial District, Iberville Parish. The Company has filed answers in the cases in which it has been served. Discovery also has been served in the cases. All of the actions claim one or more forms of compensable damages, including past and future lost wages and past and future physical and emotional pain and suffering. At the present time, the Company does not know, and it is not possible to estimate, the number of persons making claims, the merit of any such claims, the nature or extent of damages that will be sought, the defenses available to the Company, or the liability of other persons, or to make a factual or legal assessment of the Company's ultimate exposure. Notwithstanding the foregoing, the Company believes it has meritorious defenses to the claims asserted and intends to assert and pursue those defenses vigorously; further, the Company believes any liability ultimately imposed would be covered by its liability insurance. In addition, the Company is subject to other claims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability, if any, with respect to these other claims and legal actions, will not have a material effect on the financial position or on results of operations of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1997. 7 PART II Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information set forth under the captions "Corporate Information--Common Stock Data and Dividend Policy" and in Notes 6, 7, 8 and 16 of the "Notes to Consolidated Financial Statements" of the Company's 1997 Annual Report to Stockholders is hereby incorporated by reference herein in response to this item. Item 6. SELECTED FINANCIAL DATA. The information set forth under the caption "Ten-Year Selected Financial Data" of the Company's 1997 Annual Report to Stockholders is hereby incorporated by reference herein in response to this item. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth under the caption "Management's Discussion and Analysis" of the Company's 1997 Annual Report to Stockholders is hereby incorporated by reference herein in response to this item. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information for this item will be required for the Company commencing in the fiscal year ending December 31, 1998, due to the Company's market capitalization being below $2.5 billion. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information set forth on pages 23 through 37 of the Company's 1997 Annual Report to Stockholders is hereby incorporated by reference herein in response to this item. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has not changed its independent public accountants and has had no disagreements with its independent public accountants on accounting and financial disclosure during the Registrant's two most recent fiscal years prior to, or in any period subsequent to, the date of the most recent financial statements included herein. 8 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 1998, is hereby incorporated by reference in response to this item. The following is certain information regarding the executive officers of the Company who are not Directors: Richard B. Marchese, 56, has served as Vice President Finance, Chief Financial Officer and Treasurer of the Company since May 1989, and prior thereto served as Corporate Controller from its inception. Joel I. Beerman, 48, has served as Vice President, General Counsel and Secretary since February 1994 and as General Counsel since February 1992. Prior thereto, Mr. Beerman served as Associate General Counsel for the Company since its inception. Gary L. Elliott, 53, has served as Vice President, Marketing and Sales Commodity Chemicals Group since August 1993. Mr. Elliott served as Business Manager -- Electrochemicals and Midwest Regional Sales Manager from June 1989 until August 1993. Prior thereto, Mr. Elliott served as Northeast Regional Sales Manager from May 1987 until June 1989; as VCM Product Manager from November 1985 to May 1987; and as a Sales Representative for the Company from its inception until November 1985. Mark J. Seal, 46, has served as Vice President, Polymer Group since August 1993. Mr. Seal served as Business and Manufacturing Director -- PVC Resins from May 1992 until August 1993 and as Business Manager -- PVC Resins and Compounds from May 1989 until May 1992. Prior thereto, Mr. Seal served as Business Manager -- Electrochemicals from January 1987 until May 1989 and as Midwest Regional Sales Manager for the Company from its inception until January 1987. Thomas G. Swanson, 56, has served as Vice President Supply and Corporate Development since August 1993. Mr. Swanson served as Vice President -- Commodity Chemicals Group from December 1989 to August 1993; as General Manager -- Commodity Chemicals Group from November 1988 until December 1989; as Director of Corporate Development for the Company from July 1987; and prior thereto, was Manager -- Supply and Distribution for the Company since its inception. Executive officers are elected by, and serve at the pleasure of, the Board of Directors. 9 Item 11. EXECUTIVE COMPENSATION. The information set forth under the captions "Election of Directors" and "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 1998, is hereby incorporated by reference in response to this item. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the captions "Principal Stockholders" and "Security Ownership of Management" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 1998, is hereby incorporated by reference in response to this item. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has not had any transactions required to be reported under this item for the calendar year 1997, or for the period from January 1, 1998, to the date of this report. 10 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this 1997 Annual Report for Georgia Gulf Corporation: (1) The Consolidated Financial Statements, the Notes to Consolidated Financial Statements, the Report of Management and the Report of Independent Public Accountants listed below are incorporated herein by reference from pages 23 through 37 of the Company's 1997 Annual Report to Stockholders: Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Management Report of Independent Public Accountants (2) Financial Statement Schedules: Report of Independent Public Accountants on Financial Statement Schedule The following financial statement schedule is for the years ended December 31, 1997, 1996 and 1995: II Valuation and Qualifying Accounts Schedules other than the one listed above are omitted because they are not required and are inapplicable or the information is otherwise shown in the Consolidated Financial Statements or notes thereto. (3) Exhibits. Each management contract or compensatory plan or arrangement is preceded by an asterisk. 11 The following exhibits are filed as part of this Form 10-K Annual Report: EXHIBIT NO. DESCRIPTION -------- ----------- 13 1997 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Independent Public Accountants The following exhibit is incorporated herein by reference to the Company's 1996 Form 10-K Annual Report filed March 28, 1997: EXHIBIT NO. DESCRIPTION -------- ----------- 10(i) Receivables Transfer Agreement dated December 4, 1996, between the Company, as Transferor, and Dynamic Funding Corporation. The following exhibits are incorporated herein by reference to the Company's 1995 Form 10-K Annual Report filed March 28, 1996: EXHIBIT NO. DESCRIPTION -------- ----------- The following exhibits relate to the Company's operating lease agreement for its cogeneration project: 10(a) Trust Agreement dated February 6, 1996, between NationsBanc Leasing Corporation of North Carolina and First Security Bank of Utah, N.A. 10(b) Leasehold Mortgage, Assignment of Leases, Security Agreement and Financing Statement dated February 16, 1996, between the Company, First Security Bank of Utah, N.A., and Val T. Orton. 10(c) Participation Agreement dated February 6, 1996, between the Company, First Security Bank of Utah, N.A., NationsBanc Leasing Corporation of North Carolina, NationsBank, N.A. (South), ABN AMRO Bank N.V., Bank of Montreal, Bank of New York, Bank of Nova Scotia, Bank of Tokyo Trust Company, Chase Manhattan Bank, The Dai-Ichi Kangyo Bank, Limited, Atlanta Agency, The Fuji Bank, Ltd., The Industrial Bank of Japan, Limited, the Sakura Bank Limited, Atlanta Agency, Rabobank Nederland, New York Branch, The Tokai Bank, Limited, Atlanta Agency, Wachovia Bank of Georgia, N.A., and Val T. Orton. 10(d) Lease Agreement (Tax Retention Operating Lease) dated February 6, 1996, between the Company and First Security Bank of Utah, N.A. 10(e) Credit Agreement dated February 6, 1996, between First Security Bank of Utah, N.A. and NationsBank, N.A. (South). 12 10(f) Security Agreement dated February 6, 1996, between First Security Bank of Utah, N.A., Val T. Orton, NationsBank, N.A. (South), and NationsBanc Leasing Corporation of North Carolina. 10(g) Ground Lease Agreement dated February 16, 1996, between the Company and First Security Bank of Utah, N.A. The following exhibit is incorporated herein by reference to the Company's Form S-8 (File No. 33-64749) filed December 5, 1995: EXHIBIT NO. DESCRIPTION -------- ----------- 10 Georgia Gulf Corporation Employee Stock Purchase Plan The following exhibit is incorporated herein by reference to the Company's Form S-3 (File No. 33-63051) filed September 28, 1995: EXHIBIT NO. DESCRIPTION -------- ----------- 4 Indenture, dated as of November 15, 1995, between the Company and LaSalle National Bank, as trustee (including form of Notes). The following exhibit is incorporated by reference to the Company's 1995 Form 10-Q Quarterly Report for the period ending June 30, 1995, filed August 2, 1995. EXHIBIT NO. DESCRIPTION -------- ----------- 10(i) Term Loan Agreement, dated June 29, 1995, between the Company and The Industrial Bank of Japan, Limited as Administrative Agent. The following exhibit is incorporated by reference to the Company's 1995 Form 10-Q Quarterly Report for the period ending March 31, 1995, filed May 15, 1995. EXHIBIT NO. DESCRIPTION -------- ----------- 10 Credit Agreement, dated March 30, 1995, between the Company and The Chase Manhattan Bank (National Association) as Administrative Agent. 13 The following exhibits are incorporated herein by reference to the Company's 1991 Form 10-K Annual Report filed March 30, 1992. EXHIBIT NO. DESCRIPTION -------- ----------- 3(a) Certificate of Amendment of Certificate of Incorporation 3(b) Amended and Restated By-Laws *10 Georgia Gulf Corporation 1990 Incentive Equity Plan The following exhibit is incorporated herein by reference to Exhibit 2 to the Company's Registration Statement on Form 8-A filed May 11, 1990, as amended: EXHIBIT NO. DESCRIPTION -------- ----------- 4 Amended and Restated Rights Agreement effective as of August 31, 1990 The following exhibits are incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-9902) declared effective on December 17, 1986: EXHIBIT NO. DESCRIPTION -------- ----------- 3(a) Certificate of Agreement of Merger, with Certificate of Incorporation of Company as Exhibit A thereto, dated December 31, 1984, and amendments thereto 10(f) Chemical Sales Agreement between the Company and Georgia-Pacific dated December 31, 1984, and Letter re: Chemical Sales Agreement dated December 31, 1984 10(g) Agreement re: Liabilities among Georgia-Pacific, Georgia-Pacific Chemicals, Inc., and others dated, December 31, 1984 10(o) Georgia Gulf Savings and Capital Growth Plan 10(p) Georgia Gulf Salaried Employees Retirement Plan 10(q) Georgia Gulf Hourly Employees Retirement Plan *10(u) Executive Retirement Agreements 10(v) Salt Contract (b) Reports on Form 8-K No report on Form 8-K was filed with the Securities and Exchange Commission during the last quarter of 1997. 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. GEORGIA GULF CORPORATION (Registrant) Date: March 20, 1998 By: /s/ Jerry R. Satrum -------------------- -------------------- Jerry R. Satrum, 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.
SIGNATURE TITLE DATE ---------- ------ ----- /s/ Jerry R. Satrum - ----------------------------- Jerry R. Satrum Chief Executive Officer and Director March 20, 1998 (Principal Executive Officer) /s/ Edward A. Schmitt - ----------------------------- Edward A. Schmitt President, Chief Operating Officer March 20, 1998 and Director /s/ Richard B. Marchese - ----------------------------- Richard B. Marchese Vice President Finance, Chief Financial March 20, 1998 Officer and Treasurer (Principal Financial and Accounting Officer) /s/ James R. Kuse - ----------------------------- James R. Kuse Chairman of the Board and Director March 20, 1998 /s/ John D. Bryan - ----------------------------- John D. Bryan Director March 20, 1998 /s/ Dennis M. Chorba - ----------------------------- Dennis M. Chorba Director March 20, 1998 /s/ Alfred C. Eckert III - ----------------------------- Alfred C. Eckert III Director March 20, 1998 /s/ Robert E. Flowerree - ----------------------------- Robert E. Flowerree Director March 20, 1998 /s/ Edward S. Smith - ----------------------------- Edward S. Smith Director March 20, 1998
15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Georgia Gulf Corporation: We have audited, in accordance with generally accepted auditing standards, the financial statements included in Georgia Gulf Corporation's Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 12, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 of this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia February 12, 1998 GEORGIA GULF CORPORATION AND SUBSIDIARIES SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Additions ----------------------- Charged Balance at Charged to to other Balance at beginning costs and accounts-- Deductions end of Description of period expenses describe --describe period - ----------- --------- ----------- ---------- ----------- ---------- 1995 Allowance for doubtful accounts $2,400 $1,000 $-- $(1,000)(1) $2,400 ------- ------ --- ----------- ------ ------- ------ --- ----------- ------ 1996 Allowance for doubtful accounts $2,400 $ 300 $-- $(300)(1) $2,400 ------- ------ --- ----------- ------ ------- ------ --- ----------- ------ 1997 Allowance for doubtful accounts $2,400 $ 184 $-- $(184)(1) $2,400 ------- ------ --- ----------- ------ ------- ------ --- ----------- ------
NOTES: (1) Accounts receivable balances written off during the period. INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE(1) - ------- ------------ ------- 13 1997 Annual Report to Stockholders ___ 21 Subsidiaries of the Registrant ___ 23 Consent of Independent Public Accountants ___
(1) Page numbers appear on the manually signed Form 10-K's only. EX-13 2 EXHIBIT 13 FINANCIALS 18 Ten-Year Selected Financial Data 20 Management's Discussion and Analysis 23 Consolidated Balance Sheets 24 Consolidated Statements of Income 25 Consolidated Statements of Cash Flows 26 Consolidated Statements of Changes in Stockholders' Equity 27 Notes to Consolidated Financial Statements 37 Report of Management 37 Report of Independent Public Accountants 17 TEN-YEAR SELECTED FINANCIAL DATA GEORGIA GULF CORPORATION AND SUBSIDIARIES
Year Ended December 31, In Thousands, Except Per Share --------------------------------------------------------------------------- Data, Ratios & Employees 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Results of Operations Net sales $ 965,650 $ 896,186 $ 1,081,576 $ 955,305 $ 768,902 Cost of sales 773,129 718,327 705,259 677,919 619,540 Selling and administrative 45,720 41,586 48,371 47,164 38,901 ----------- ----------- ----------- ----------- ----------- Operating income 146,801 136,273 327,946 230,222 110,461 Recapitalization expense(1) -- -- -- -- -- Gain on sale of assets 8,600 -- -- -- -- Interest expense (24,693) (20,833) (25,114) (37,557) (44,779) Interest income 60 67 244 113 106 ----------- ----------- ----------- ----------- ----------- Income before income taxes, extraordinary charge and cumulative effect of accounting change 130,768 115,507 303,076 192,778 65,788 Provision for income taxes 49,567 43,887 116,582 70,618 23,560 ----------- ----------- ----------- ----------- ----------- Income before extraordinary charge and cumulative effect of accounting change 81,201 71,620 186,494 122,160 42,228 Extraordinary charge on early retirement of debt -- -- -- -- (13,267) Cumulative effect of accounting change for income taxes -- -- -- -- 12,973 ----------- ----------- ----------- ----------- ----------- Net income $ 81,201 $ 71,620 $ 186,494 $ 122,160 $ 41,934 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic earnings per share $ 2.41 $ 2.00 $ 4.82 $ 2.95 $ 1.04 Diluted earnings per share $ 2.39 $ 1.98 $ 4.73 $ 2.89 $ 1.01 Dividends per common share $ 0.32 $ 0.32 $ 0.32 $ -- $ -- Financial Highlights Working capital $ 57,472 $ 49,395 $ 73,370 $ 126,668 $ 67,674 Property, plant and equipment, net 410,860 394,737 312,536 255,608 222,835 Total assets 612,703 587,999 507,332 508,447 405,287 Total debt 393,040 395,600 292,400 314,081 379,206 Stockholders' equity (deficit)(1) 35,603 18,570 50,628 31,138 (110,577) Cash provided by operating activities 109,017 114,689 278,641 111,595 88,268 Cash used in financing activities (67,980) (2,688) (191,049) (54,336) (58,490) Depreciation and amortization 37,871 39,431 32,068 27,774 27,062 Capital expenditures 56,591 119,895 86,278 59,142 29,583 Maintenance expenditures 58,675 57,064 51,558 46,033 43,141 Other Selected Data Earnings before interest, taxes, depreciation and amortization (EBITDA)(2) $ 193,272 $ 175,704 $ 360,014 $ 257,996 $ 137,523 Weighted average common shares 33,629 35,759 38,728 41,427 40,515 Weighted average common shares and equivalents 33,947 36,248 39,428 42,255 41,476 Common shares outstanding 32,781 34,585 37,240 42,013 40,952 Sales per employee $ 928 $ 870 $ 946 $ 834 $ 684 Current ratio 1.5 1.4 1.6 2.0 1.6 Return on assets 13.5% 13.1% 36.7% 26.7% 10.2% Return on sales 8.4% 8.0% 17.2% 12.8% 5.5% Ratio of operating income to interest expense 5.9 6.5 13.1 6.1 2.5 Employees 1,041 1,030 1,143 1,146 1,124 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(1) All years subsequent to 1989 include the effects of the recapitalization, which occurred in April 1990. (See Note 7 to the consolidated financial statements.) 18
Year Ended December 31, In Thousands, Except Per Share --------------------------------------------------------------------------- Data, Ratios & Employees 1992 1991 1990 1989 1988 ----------- ----------- ----------- ----------- ----------- Results of Operations Net sales $ 779,455 $ 838,336 $ 932,104 $ 1,104,468 $ 1,060,612 Cost of sales 616,802 626,672 661,448 753,255 698,009 Selling and administrative 33,827 41,129 42,087 52,204 49,489 ----------- ----------- ----------- ----------- ----------- Operating income 128,826 170,535 228,569 299,009 313,114 Recapitalization expense(1) -- -- (17,869) -- -- Gain on sale of assets -- -- -- -- -- Interest expense (61,216) (80,772) (63,161) (961) (3,373) Interest income 73 492 2,505 2,045 2,594 ----------- ----------- ----------- ----------- ----------- Income before income taxes, extraordinary charge and cumulative effect of accounting change 67,683 90,255 150,044 300,093 312,335 Provision for income taxes 21,346 28,782 54,700 108,103 118,731 ----------- ----------- ----------- ----------- ----------- Income before extraordinary charge and cumulative effect of accounting change 46,337 61,473 95,344 191,990 193,604 Extraordinary charge on early retirement of debt -- -- -- -- -- Cumulative effect of accounting change for income taxes -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net income $ 46,337 $ 61,473 $ 95,344 $ 191,990 $ 193,604 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic earnings per share $ 1.22 $ 1.82 $ 3.11 $ 7.96 $ 7.43 Diluted earnings per share $ 1.18 $ 1.77 $ 3.08 $ 7.58 $ 6.75 Dividends per common share $ -- $ -- $ -- $ 1.00 $ 0.65 Financial Highlights Working capital $ 57,465 $ 20,676 $ 50,131 $ 132,097 $ 125,642 Property, plant and equipment, net 217,781 226,746 220,851 215,182 175,358 Total assets 419,420 415,585 456,657 472,989 457,327 Total debt 444,416 639,153 726,481 856 42,603 Stockholders' equity (deficit)(1) (161,165) (357,512) (424,476) 330,341 256,083 Cash provided by operating activities 60,385 112,148 127,752 225,255 191,948 Cash used in financing activities (45,729) (86,889) (176,183) (165,118) (83,753) Depreciation and amortization 29,583 26,447 19,834 18,667 15,589 Capital expenditures 14,261 28,273 58,111 54,159 25,062 Maintenance expenditures 47,664 42,853 42,985 40,400 41,469 Other Selected Data Earnings before interest, taxes, depreciation and amortization (EBITDA)(2) $ 158,409 $ 196,982 $ 248,403 $ 317,676 $ 328,703 Weighted average common shares 37,873 33,690 30,676 24,111 26,072 Weighted average common shares and equivalents 39,215 34,721 30,942 25,327 28,663 Common shares outstanding 40,294 33,711 33,608 24,437 24,523 Sales per employee $ 691 $ 760 $ 868 $ 818 $ 776 Current ratio 1.4 1.1 1.3 2.2 2.0 Return on assets 11.1% 14.1% 20.5% 41.3% 50.6% Return on sales 5.9% 7.3% 10.2% 17.4% 18.3% Ratio of operating income to interest expense 2.1 2.1 3.6 311.1 92.8 Employees 1,128 1,103 1,074 1,350 1,367 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(2) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is commonly used by certain investors to measure a company's ability to service its indebtedness. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance or to cash flow as a measure of liquidity. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS GEORGIA GULF CORPORATION AND SUBSIDIARIES Results of Operations Georgia Gulf is a major manufacturer and worldwide marketer of several highly integrated lines of commodity chemicals and polymers including aromatic, natural gas, and electrochemical products. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the Company's consolidated financial statements and related notes. 1997 Compared with 1996 Net sales in 1997 were $965.7 million, an increase of 8 percent from $896.2 million in 1996. Operating income also increased 8 percent to $146.8 million in 1997 from $136.3 million in 1996. Diluted earnings per share for 1997 were $2.39 on net income of $81.2 million, compared to diluted earnings per share and net income for 1996 of $1.98 and $71.6 million, respectively. Results for 1997 include a pretax gain of $8.6 million from the sale of certain oil and gas properties, which resulted in an increase to net income of $5.3 million, or $0.16 per share on a diluted basis. The Company generated the increase in net sales during 1997 from a 12 percent increase in sales volume, which was partially offset by a 4 percent reduction in the average sales price of the Company's products. The Company's recently completed plant expansions in cumene and vinyl chloride monomer ("VCM") drove the sales volume increase; however, sales volumes also increased for the Company's other products, except for vinyl resins and compounds where sales volumes declined. Overall, the Company operated its plants at 93 percent of capacity in 1997. Stronger demand led to higher pricing for nearly all of the Company's products, with the exception of caustic soda, which experienced a significant price decline, resulting in the decrease in the overall average sales price of the Company's products. Raw material prices were up in 1997, with the exception of natural gas, where prices were level with 1996. The Company's new cogeneration facility and air separation plant, both completed in 1997 and located at the Plaquemine, Louisiana complex, reduced the cost of previously purchased electricity, nitrogen and oxygen. Overall, the Company's gross margin increased 8 percent from $177.9 million in 1996 to $192.5 million in 1997, as the increase in combined sales volume more than offset the net increase in raw material costs and the reduction in average sales prices. Selling and administrative expenses increased $4.1 million in 1997 primarily as a result of higher compensation expense relating to profit sharing programs and increased legal and environmental expenses. Interest expense increased $3.9 million in 1997 due to less interest being capitalized in connection with capital expansion activity and a higher average outstanding debt balance. Diluted earnings per share increased 21 percent in 1997 due to higher net income and fewer shares outstanding resulting from the Company's share repurchase program. 1996 Compared with 1995 Net sales of $896.2 million for 1996 were down 17 percent from $1.1 billion in 1995, resulting in a 58 percent decline in operating income to $136.3 million from the record level of $327.9 million reported in 1995. Diluted earnings per share for 1996 were $1.98 on net income of $71.6 million as compared to diluted earnings per share and net income for 1995 of $4.73 and $186.5 million, respectively. The decline in net sales during 1996 primarily resulted from a 14 percent reduction in the average sales price of the Company's products, accompanied by a 3 percent decrease in sales volumes. Although generally all selling prices were below 1995 levels, vinyl products experienced the sharpest drop, followed by methanol. These sales price declines were primarily related to increased industry capacity. The decrease in sales volumes was largely attributable to lower production volumes in 1996 as a result of planned and unplanned plant downtime, primarily from tie-ins of capacity expansions during the year and freeze damage during the earlier part of the year. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES Overall, raw material prices were lower in 1996 as the Company was able to offset higher natural gas costs with reductions in other raw materials. However, the impact of the lower raw material costs was insignificant in comparison with the declines in selling prices. Selling and administrative expenses decreased $6.8 million in 1996 primarily as a result of lower compensation expense related to profit-sharing programs. Interest expense declined $4.3 million in 1996 due to increased interest capitalized during 1996 in connection with capital expansion activity and a lower average interest rate on the Company's debt portfolio. Diluted earnings per share decreased 58 percent in 1996 due to lower net income, which was partially offset by fewer shares outstanding resulting from the Company's share repurchase program. Liquidity and Capital Resources Georgia Gulf's primary liquidity focus is to maintain debt at a manageable level, regardless of the Company's position in the economic cycle. Management believes that cash provided by operations and the availability of borrowings under the Company's revolving credit facility will provide sufficient funds to support planned capital expenditures, dividends, stock repurchases, working capital fluctuations and debt service requirements. In 1997, Georgia Gulf generated $109 million from operating activities, down $5.7 million from 1996. Major sources of cash flow from operating activities in 1997 were net income of $81.2 million, noncash provisions of $37.9 million for depreciation and amortization and $11.7 million for deferred income taxes. The items affecting net income are discussed in the "Results of Operations" section. Total working capital at year-end was $57.5 million versus $49.4 million at the end of 1996. The Company expended cash in financing activities in 1997 to repurchase common stock for $59.3 million and pay dividends of $10.7 million. The Company invested cash in 1997 in capital expenditures of $56.6 million which were offset by proceeds of $16.5 million received from the sale of certain oil and gas properties. Major capital expenditures for 1997 included $10.1 million for the completion of the expansion of the phenol/acetone plant in Plaquemine, Louisiana; $9.6 million for the completion of the air separation plant in Plaquemine, Louisiana; $4.1 million for the completion of the expansion of the VCM plant in Plaquemine, Louisiana; and $2 million for the completion of the second phase of the vinyl compound expansion at Gallman, Mississippi. The Company estimates that capital expenditures for 1998 will approximate $45 million. Capital expenditures will be directed toward projects increasing the efficiency of existing operations and certain environmental projects. Georgia Gulf repurchased and retired 2.1 million shares of its common stock during 1997. As of December 31, 1997, the Company had authorization to repurchase an additional one million shares under its stock repurchase program. In February 1998, the Company's Board of Directors authorized another share repurchase program for an additional 6.5 million shares. Debt decreased slightly during 1997 to a level of $393 million. Georgia Gulf's debt portfolio primarily consists of a $100 million term loan, $100 million principal amount 7 5/8% Notes, $155 million outstanding under its $350 million revolving credit agreement and $38 million in other debt agreements. The Company has interest rate swap agreements to fix the interest rate on the term loan at a rate ranging from 6.71 percent to 7.04 percent. The Company does not use interest rate swap agreements or any other derivatives for trading purposes. As of December 31, 1997, the Company had availability of $195 million under its $350 million revolving credit facility. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES In 1996, Georgia Gulf generated $114.7 million from operating activities, down significantly from $278.6 million in 1995. Cash flow decreased due to lower earnings in 1996, offset in part by a decrease in working capital. The majority of the change in working capital in 1996 was attributable to lower receivables and higher inventory at the end of 1996 resulting from lower sales. Other changes include higher accounts payable at the end of 1996 due to increased capital expenditure activity and lower accrued compensation costs as a result of a reduction in employee profit sharing expense for 1996. Net cash used in financing activities was $2.7 million in 1996, as incremental borrowings of $103.2 million were used to fund repurchases of common stock of $99.6 million and dividends of $11.4 million. Net cash used in investing activities was $113.8 million in 1996, and was primarily attributable to capital expenditure requirements of $119.9 million for several plant expansions. Inflation The most significant components of the Company's cost of sales are raw materials and energy, which consist of basic commodity items. The cost of raw materials and energy is based primarily on market forces and has not been significantly affected by inflation. Inflation has not had a material impact on the Company's sales or income from operations. Environmental The Company's operations are subject to increasingly stringent federal, state and local laws and regulations relating to environmental quality. These regulations, which are enforced principally by the United States Environmental Protection Agency and comparable state agencies, govern the management of solid hazardous waste, emissions into the air and discharges into surface and underground waters, and the manufacture of chemical substances. Management believes that the Company is in material compliance with all current environmental laws and regulations. The Company estimates that any expenses incurred in maintaining compliance with these requirements will not materially affect earnings or cause the Company to exceed its level of anticipated capital expenditures. However, there can be no assurance that regulatory requirements will not change, and therefore, it is not possible to accurately predict the aggregate cost of compliance resulting from any such changes. 22 CONSOLIDATED BALANCE SHEETS GEORGIA GULF CORPORATION AND SUBSIDIARIES
December 31, ------------------- In Thousands, Except Share Data 1997 1996 -------- -------- Assets Cash and cash equivalents $ 1,621 $ 698 Receivables, net of allowance for doubtful accounts of $2,400 in 1997 and 1996 67,553 64,131 Inventories 92,921 89,196 Prepaid expenses 6,508 9,934 Deferred income taxes 7,409 6,410 -------- -------- Total current assets 176,012 170,369 -------- -------- Property, plant and equipment, at cost 650,968 646,144 Less accumulated depreciation 240,108 251,407 -------- -------- Property, plant and equipment, net 410,860 394,737 -------- -------- Other assets 25,831 22,893 -------- -------- Total assets $612,703 $587,999 -------- -------- -------- -------- Liabilities and Stockholders' Equity Accounts payable $ 92,588 $ 94,767 Interest payable 2,218 2,910 Accrued income taxes 564 2,039 Accrued compensation 7,281 5,637 Accrued pension 2,257 2,139 Other accrued liabilities 13,632 13,482 -------- -------- Total current liabilities 118,540 120,974 -------- -------- Long-term debt 393,040 395,600 -------- -------- Deferred income taxes 65,520 52,855 -------- -------- Stockholders' equity Preferred stock-$0.01 par value; 75,000,000 shares authorized; no shares issued -- -- Common stock-$0.01 par value; 75,000,000 shares authorized; shares issued and outstanding: 32,781,439 in 1997 and 34,584,800 in 1996 328 346 Retained earnings 35,275 18,224 -------- -------- Total stockholders' equity 35,603 18,570 -------- -------- Total liabilities and stockholders' equity $612,703 $587,999 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 23 CONSOLIDATED STATEMENTS OF INCOME GEORGIA GULF CORPORATION AND SUBSIDIARIES
Year Ended December 31, -------------------------------------------- In Thousands, Except Share Data 1997 1996 1995 ------------ ------------ ------------ Net sales $ 965,650 $ 896,186 $ 1,081,576 ------------ ------------ ------------ Operating costs and expenses Cost of sales 773,129 718,327 705,259 Selling and administrative 45,720 41,586 48,371 ------------ ------------ ------------ Total operating costs and expenses 818,849 759,913 753,630 ------------ ------------ ------------ Operating income 146,801 136,273 327,946 Other income (expense) Gain on sale of assets 8,600 -- -- Interest expense (24,693) (20,833) (25,114) Interest income 60 67 244 ------------ ------------ ------------ Income before income taxes 130,768 115,507 303,076 Provision for income taxes 49,567 43,887 116,582 ------------ ------------ ------------ Net income $ 81,201 $ 71,620 $ 186,494 ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share $ 2.41 $ 2.00 $ 4.82 ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings per share $ 2.39 $ 1.98 $ 4.73 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common shares 33,628,875 35,758,587 38,728,311 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common shares and equivalents 33,946,750 36,247,534 39,427,943 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS GEORGIA GULF CORPORATION AND SUBSIDIARIES
Year Ended December 31, ----------------------------------- In Thousands 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income $ 81,201 $ 71,620 $ 186,494 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,871 39,431 32,068 Gain on sale of assets (8,600) -- -- Provision for deferred income taxes 11,666 4,102 9,435 Tax benefit related to stock plans 1,252 2,210 2,364 Change in operating assets and liabilities: Receivables (3,422) 25,283 67,671 Inventories (3,725) (17,408) (4,382) Prepaid expenses 3,426 2,174 1,774 Accounts payable (2,179) 15,906 5,090 Interest payable (692) 173 (3,687) Accrued income taxes (1,475) (1,257) (18,241) Accrued compensation 1,644 (9,078) 2,991 Accrued pension 118 (168) (969) Accrued liabilities 150 1,552 5,411 Other (8,218) (19,851) (7,378) --------- --------- --------- Net cash provided by operating activities 109,017 114,689 278,641 --------- --------- --------- Cash flows from financing activities: Long-term debt proceeds 187,440 268,500 559,400 Long-term debt payments (190,000) (165,300) (581,081) Proceeds from issuance of common stock 4,598 5,084 5,481 Repurchase and retirement of common stock (59,307) (99,586) (162,565) Dividends paid (10,711) (11,386) (12,284) --------- --------- --------- Net cash used in financing activities (67,980) (2,688) (191,049) --------- --------- --------- Cash flows from investing activities: Capital expenditures (56,591) (119,895) (86,278) Proceeds from the sale of assets 16,477 6,062 -- --------- --------- --------- Net cash used in investing activities (40,114) (113,833) (86,278) --------- --------- --------- Net change in cash and cash equivalents 923 (1,832) 1,314 Cash and cash equivalents at beginning of year 698 2,530 1,216 --------- --------- --------- Cash and cash equivalents at end of year $ 1,621 $ 698 $ 2,530 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY GEORGIA GULF CORPORATION AND SUBSIDIARIES
Additional Retained Total Common Stock Paid-in Earnings Stockholders' In Thousands, Except Share Data Shares Amount Capital (Deficit) Equity ---------- ----------- ----------- ----------- ----------- Balance, December 31, 1994 42,013,116 $ 420 $ 185,984 $ (155,266) $ 31,138 Net income -- -- -- 186,494 186,494 Dividends paid -- -- -- (12,284) (12,284) Tax benefit realized from stock option plans -- -- 2,364 -- 2,364 Common stock issued upon exercise of stock options 270,214 3 2,139 -- 2,142 Common stock issued under stock purchase plan 127,722 1 3,338 -- 3,339 Repurchase and retirement of common stock (5,170,800) (52) (162,513) -- (162,565) ---------- ----------- ----------- ----------- ----------- Balance, December 31, 1995 37,240,252 372 31,312 18,944 50,628 Net income -- -- -- 71,620 71,620 Dividends paid -- -- -- (11,386) (11,386) Tax benefit realized from stock option plans -- -- 2,210 -- 2,210 Common stock issued upon exercise of stock options 340,770 3 1,662 -- 1,665 Common stock issued under stock purchase plan 152,178 2 3,417 -- 3,419 Repurchase and retirement of common stock (3,148,400) (31) (38,601) (60,954) (99,586) ---------- ----------- ----------- ----------- ----------- Balance, December 31, 1996 34,584,800 346 -- 18,224 18,570 Net income -- -- -- 81,201 81,201 Dividends paid -- -- -- (10,711) (10,711) Tax benefit realized from stock option plans -- -- 1,252 -- 1,252 Common stock issued upon exercise of stock options 185,045 2 1,435 -- 1,437 Common stock issued under stock purchase plan 140,694 1 3,160 -- 3,161 Repurchase and retirement of common stock (2,129,100) (21) (5,847) (53,439) (59,307) ---------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 32,781,439 $ 328 $ -- $ 35,275 $ 35,603 ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GEORGIA GULF CORPORATION AND SUBSIDIARIES 1. Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Georgia Gulf Corporation and its subsidiaries (the "Company"). All significant intercompany balances and transactions are eliminated in consolidation. Nature of Operations - The Company is a manufacturer and worldwide marketer of chemical and plastic products. The Company's products are primarily intermediate chemicals sold for further processing into a wide variety of end-use applications including plastic piping, siding and window frames, bonding agents for wood products, high-quality plastics, acrylic sheeting and gasoline additives. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - The Company considers all highly liquid investment instruments with an original maturity of three months or less to be the equivalent of cash for the purposes of financial statement presentation. Inventories - Inventories are valued at the lower of cost (first-in, first-out) or market. Costs include raw materials, direct labor and manufacturing overhead. Market is based on current replacement cost for raw materials and supplies and on net realizable value for finished goods. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred, and major renewals and improvements are capitalized. Interest expense attributable to funds used in financing the construction of major plant and equipment is capitalized. Interest expense capitalized during 1997, 1996 and 1995 was $2,802,000, $4,826,000 and $1,602,000, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets for book purposes, with accelerated methods being used for income tax purposes. The estimated useful lives of the assets are as follows: Buildings and land improvements 20-30 years Machinery and equipment 3-15 years
Other Assets - Other assets are comprised primarily of deposits for long-term raw material purchase contracts and debt issuance costs. In 1997, deposits began being amortized as additional raw material cost over the remaining 15-year life of the related contracts in proportion to raw material delivery. Debt issuance costs are amortized to expense using the effective interest rate method over the term of the related indebtedness. Financial Instruments - The Company does not use derivatives for trading purposes. Interest rate swap agreements, a form of derivative, are used by the Company to manage interest costs on certain portions of the Company's long-term debt (see Note 13). These financial statements do not reflect temporary market gains and losses on derivative financial instruments, although the estimated fair value is disclosed in Note 13. Amounts paid or received on the interest rate swap agreements are recorded to interest expense as incurred. As of December 31, 1997 and 1996, interest rate swap agreements were the only form of derivative financial instrument outstanding. Environmental Expenditures - Environmental expenditures related to current operations or future revenues are expensed or capitalized consistent with the Company's capitalization policy. Expenditures that relate to an existing condition caused by past operations and that do not contribute to future revenues are expensed. Liabilities are recognized when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Earnings Per Share - The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective December 31, 1997. Basic earnings per share is computed based on the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share is computed based on the weighted average number of common shares outstanding, adjusted for dilutive potential issuances of common stock. All prior period earnings per share amounts have been restated to comply with SFAS No. 128. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES 2. Receivables In 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The impact of the adoption was not material to the financial statements. The Company has entered into an agreement pursuant to which it sold a percentage ownership interest in a defined pool of the Company's trade receivables. As collections reduce accounts receivable included in the pool, the Company sells participating interests in new receivables to bring the amount in the pool up to the $50,000,000 maximum permitted by the agreement. The receivables are sold at a discount, which approximates the purchaser's financing cost of issuing its own commercial paper backed by these accounts receivable. The ongoing costs of this program of $3,045,000, $2,882,000 and $2,003,000 for 1997, 1996 and 1995, respectively, were charged to selling and administrative expense in the accompanying consolidated statements of income. 3. Inventories The major classes of inventories were as follows :
December 31, In Thousands 1997 1996 ------- ------- Raw materials and supplies $34,451 $38,803 Finished goods 58,470 50,393 ------- ------- Inventories $92,921 $89,196 ------- ------- ------- -------
4. Property, Plant and Equipment Property, plant and equipment consisted of the following:
December 31, In Thousands 1997 1996 -------- -------- Machinery and equipment $596,974 $470,039 Land and improvements 23,009 23,009 Buildings 20,771 17,365 Construction in progress 10,214 135,731 -------- -------- Property, plant and equipment $650,968 $646,144 -------- -------- -------- --------
5. Other Assets Other assets consisted of the following:
December 31, In Thousands 1997 1996 -------- -------- Deposits $ 23,473 $ 16,330 Accumulated amortization (2,789) -- -------- -------- 20,684 16,330 Debt issuance costs, net of accumulated amortization 3,035 3,483 Other 2,112 3,080 -------- -------- Other assets $ 25,831 $ 22,893 -------- -------- -------- --------
Debt issuance costs amortized as interest expense during 1997, 1996 and 1995 were $448,000, $440,000 and $420,000, respectively. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES 6. Long-term Debt Long-term debt consisted of the following:
December 31, In Thousands 1997 1996 -------- -------- Revolving credit loan $155,000 $167,000 Term Loan 100,000 100,000 7 5/8% Notes due 2005 100,000 100,000 Other 38,040 28,600 -------- -------- Long-term debt $393,040 $395,600 -------- -------- -------- --------
The Company's credit agreement (the "Credit Agreement") provides for an unsecured revolving credit facility, which permits borrowings of up to $350,000,000. The revolving credit facility terminates and related outstanding loans, if any, are due in March 2000. As of December 31, 1997, the Company had availability to borrow up to $195,000,000 under the terms of the revolving credit facility. An annual commitment fee, which ranges from 0.10 percent to 0.25 percent, is required to be paid on the revolving credit facility commitment. The interest rate on the revolving credit facility is based on LIBOR and averaged 5.98 percent and 5.77 percent for 1997 and 1996, respectively. The Company has a $100,000,000 unsecured term loan agreement (the "Term Loan") with an average rate of 6.99 percent and 6.88 percent for 1997 and 1996, respectively. Required principal payments under the Term Loan are $25,000,000 in June 2001 and $75,000,000 in June 2002. The LIBOR-based variable interest rate on the Term Loan has been fixed at a rate ranging from 6.71 percent to 7.04 percent using interest rate swap agreements. The Company has $100,000,000 principal amount of unsecured 7 5/8 percent notes (the "Notes") outstanding, which are due in November 2005. Interest on the Notes is payable semiannually on May 15 and November 15 of each year. The Notes are not redeemable prior to maturity. Under the Credit Agreement, Term Loan and Notes, the Company is subject to certain restrictive covenants, the most significant of which require the Company to maintain certain financial ratios and limit the amount the Company can pay for dividends and repurchases of common stock. The Company's limit for dividends and repurchases of common stock was $103,240,000 as of December 31, 1997. Cash payments for interest during 1997, 1996 and 1995 were $27,739,000, $22,945,000 and $28,336,000, respectively. 7. Stockholders' Equity In April 1990, the Company's stockholders approved a plan of recapitalization (the "Recapitalization"), which resulted in a distribution to stockholders of $864,733,000. The distribution for the Recapitalization, net of certain tax benefits, was charged against retained earnings. During 1997 and 1996, the Company repurchased 2,129,100 shares of its common stock for $59,307,000 and 3,148,400 shares for $99,586,000, respectively. As of December 31, 1997, the Company had authorization to repurchase up to 1,021,700 additional shares under the current common stock repurchase program. In connection with the stock purchase rights described below, 30,000,000 of the authorized shares of preferred stock are designated Junior Participating Preferred Stock. If issued, the Junior Participating Preferred Stock would be entitled, subject to the prior rights of any senior preferred stock, to a dividend equal to the greater of $0.01 or that which is paid on the common shares. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES Each outstanding share of common stock is accompanied by a preferred stock purchase right, which entitles the holder to purchase from the Company 1/100 of a share of Junior Participating Preferred Stock for $45.00, subject to adjustment in certain circumstances. The rights become exercisable only after a person or group acquires beneficial ownership of 15 percent or more of the Company's outstanding shares of common stock, or commences a tender or exchange offer that would result in such person or group beneficially owning 15 percent or more of the Company's outstanding shares of common stock. The rights expire on April 27, 2000, and may be redeemed by the Company for $0.01 per right until ten days following the earlier to occur of the announcement that a person or group beneficially owns 15 percent or more of the Company's outstanding shares of common stock, or the commencement, or announcement by any person or group of an intent to commence, a tender offer which would result in any person or group beneficially owning 15 percent or more of the Company's outstanding shares of common stock. Subject to certain conditions, if a person or group becomes the beneficial owner of 15 percent or more of the Company's outstanding shares of common stock, each right will entitle its holder (other than certain acquiring persons) to receive, upon exercise, common stock having a value equal to two times the right's exercise price. In addition, subject to certain conditions, if the Company is involved in a merger or certain other business combination transactions, each right will entitle its holder (other than certain acquiring persons) to receive, upon exercise, common stock of the acquiring company having a value equal to two times the right's exercise price. 8. Stock Option and Purchase Plans Options to purchase common stock of the Company have been granted to employees under plans adopted in 1987 and 1990. Option prices are equal to the closing price of the Company's stock on date of grant. Options vest ratably over a three- or five-year period from the date of grant and expire no more than ten years after grant. The following is a summary of all stock option information:
Year Ended December 31, 1997 1996 1995 ------------ ------------ ------------ Stock options: Outstanding at beginning of year 956,561 1,299,031 1,569,245 Exercised (185,045) (340,770) (270,214) Forfeited or canceled (3,400) (1,700) -- ------------ ------------ ------------ Outstanding at year end 768,116 956,561 1,299,031 ------------ ------------ ------------ ------------ ------------ ------------ Option exercise price per share range $7.75-$36.50 $6.36-$36.50 $3.07-$36.50 Options exercisable 684,116 830,561 1,131,031 Options available for grant 18,927 15,527 13,827 ------------ ------------ ------------ ------------ ------------ ------------
The Company's stockholders have approved a qualified, noncompensatory employee stock purchase plan, which allows employees to acquire shares of common stock through payroll deductions over a twelve-month period. The purchase price is equal to 85 percent of the fair market value of the common stock on either the first or last day of the subscription period, whichever is lower. Purchases under the plan are limited to 15 percent of an employee's base salary. In connection with this stock purchase plan, 507,128 shares of common stock are reserved for future issuances. Under this plan and similar plans, 140,694, 152,178 and 127,722 shares of common stock were issued at $22.47, $22.47 and $26.14 per share during 1997, 1996 and 1995, respectively. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under these provisions, no compensation was recognized in 1997, 1996 and 1995 for the Company's stock option plans or its stock purchase plans. Options issued under the plan adopted in 1987 were granted with related cash compensation awards. No compensation expense was recognized subsequent to 1994 relating to options issued under this 1987 plan. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES In accordance with the disclosure requirements of SFAS No. 123, the Company is required to calculate the pro forma compensation cost of all stock options and purchase rights granted after December 31, 1994, using an option pricing model. Since no stock options have been granted since December 31, 1994, only stock purchase rights granted in connection with the Company's stock purchase plan are subject to the calculation. For SFAS No. 123 purposes, the fair value of each stock purchase right for 1997, 1996 and 1995 has been estimated as of the date of the right using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.66 percent, 5.09 percent and 7.43 percent; dividend yields of 1.20 percent, 1.04 percent and 0.82 percent; expected volatilities of 0.23, 0.30 and 0.32; and an expected life of one year for each of the three years. Using these assumptions, the fair values of the stock purchase plan rights for 1997, 1996 and 1995 were $977,000, $1,062,000 and $1,544,000, respectively. Had compensation cost been determined consistently with SFAS No. 123, utilizing the assumptions detailed above, the Company's net income and earnings per common share would have been reduced to the following pro forma amounts:
In thousands, Except Year Ended December 31, Per Share Data 1997 1996 1995 ---------- ---------- ----------- Net income As reported $ 81,201 $ 71,620 $ 186,494 Pro forma 80,594 70,962 185,537 Basic earnings per share As reported 2.41 2.00 4.82 Pro forma 2.40 1.98 4.79 Diluted earnings per share As reported 2.39 1.98 4.73 Pro forma 2.37 1.96 4.71 ---------- ---------- ----------- ---------- ---------- -----------
9. Employee Benefit Plans The Company has certain pension, savings and profit sharing plans that cover substantially all of its employees. The expense incurred for these plans was approximately $3,798,000, $4,522,000 and $5,551,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Employees are covered by defined contribution plans under which the Company makes contributions to individual employee accounts and by defined benefit plans for which the benefits are based on years of service and the employee's compensation or for which the benefit is a specific monthly amount for each year of service. The Company's policy on funding the defined benefit plans is to contribute an amount within the range of the minimum required and the maximum tax-deductible contribution. The net pension costs for the defined benefit plans include the following components:
Year Ended December 31, In Thousands 1997 1996 1995 ------- ------- ------- Service cost for benefits earned during the year $ 1,765 $ 2,060 $ 1,776 Interest cost on projected benefit obligation 2,867 2,730 2,527 Actual return on assets (9,176) (5,056) (7,983) Net amortization and deferrals 5,110 1,814 5,920 ------- ------- ------- Net pension cost $ 566 $ 1,548 $ 2,240 ------- ------- ------- ------- ------- -------
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES Pension expenses were calculated using assumed discount rates of 7.25 percent in 1997, 7.0 percent in 1996 and 7.5 percent in 1995; assumed long-term compensation increase rates of 4.0 percent in 1997 and 5.5 percent in 1996 and 1995; and assumed long-term rates of return on plan assets of 9.0 percent in 1997, 1996 and 1995. The funded status of the defined benefit plans at December 31, 1997 and 1996 was as follows:
1997 1996 ---------------------------- --------------------------- Unfunded Unfunded Fully Funded Executive Fully Funded Executive In Thousands Benefit Plans Benefit Plans Benefit Plans Benefit Plans ------------- ------------- ------------- ------------- Actuarial present value of: Vested benefit obligation $(25,849) $ (5,530) $(22,087) $ (4,607) Nonvested benefit obligation (356) (170) (372) (621) -------- -------- -------- -------- Accumulated benefit obligation $(26,205) $ (5,700) $(22,459) $ (5,228) -------- -------- -------- -------- -------- -------- -------- -------- Projected benefit obligation $(35,168) $ (7,423) $(30,718) $ (7,010) Plan assets at fair value 53,705 -- 45,093 -- -------- -------- -------- -------- Fair value of assets in excess of (less than) projected benefit obligation 18,537 (7,423) 14,375 (7,010) Unrecognized net (gains) and losses (15,655) (286) (11,786) (518) Unrecognized prior service cost (696) 1,450 (750) 1,607 Unrecognized transition obligation 1,861 711 2,058 856 Additional minimum liability -- (672) -- (673) -------- -------- -------- -------- Prepaid pension expense (liability) $ 4,047 $ (6,220) $ 3,897 $ (5,738) -------- -------- -------- -------- -------- -------- -------- --------
The projected benefit obligations for the defined benefit plans were determined using assumed discount rates of 7.25 percent in 1997 and 7.0 percent in 1996 and an assumed long-term compensation increase rate of 4.0 percent in 1997 and 5.5 percent in 1996. The plan assets are invested in a diversified portfolio that consists primarily of equity and debt securities. 10. Income Taxes The provision for income taxes was as follows:
Year Ended December 31, ------------------------------ In Thousands 1997 1996 1995 -------- -------- -------- Current: Federal $ 34,320 $ 35,903 $ 94,068 State 3,581 3,882 13,079 -------- -------- -------- 37,901 39,785 107,147 -------- -------- -------- Deferred: Federal 10,141 2,884 8,812 State 1,525 1,218 623 -------- -------- -------- 11,666 4,102 9,435 -------- -------- -------- Provision for income taxes $ 49,567 $ 43,887 $116,582 -------- -------- -------- -------- -------- --------
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES The difference between the statutory federal income tax rate and the Company's effective income tax rate is summarized as follows:
Year Ended December 31, In Thousands 1997 1996 1995 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.5 2.9 2.9 Other 0.4 0.1 0.6 ---- ---- ---- Effective income tax rate 37.9% 38.0% 38.5% ---- ---- ---- ---- ---- ----
Cash payments for income taxes during 1997, 1996 and 1995 were $38,124,000, $28,685,000 and $133,170,000, respectively. The Company's net deferred tax liability consisted of the following major items:
December 31, In Thousands 1997 1996 -------- -------- Deferred tax assets: Receivables $ 858 $ 715 Inventories 1,691 1,323 Vacation accruals 1,393 1,315 Other 3,467 3,057 Total deferred tax assets 7,409 6,410 -------- -------- Deferred tax liability: Property, plant and equipment (65,520) (52,855) -------- -------- Net deferred tax liability $(58,111) $(46,445) -------- -------- -------- --------
The Company has determined, based on its history of operating earnings and expectations for the future, that it is more likely than not that future taxable income will be sufficient to fully utilize the deferred tax assets at December 31, 1997. 11. Commitments and Contingencies Leases - The Company leases railcars, storage terminals, computer equipment, manufacturing facilities and warehouse and office space under noncancelable operating leases with varying maturities through the year 2010. Future minimum payments under these noncancelable operating leases as of December 31, 1997 were $24,045,000 for 1998, $20,916,000 for 1999, $15,347,000 for 2000, $4,952,000 for 2001, $4,006,000 for 2002 and $17,664,000 thereafter. Total lease expense was approximately $16,414,000, $13,275,000 and $12,465,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In October 1997, the Company began making lease payments under an operating lease agreement for a 250-megawatt cogeneration facility at the Company's Plaquemine, Louisiana complex. The total cost of assets covered by the lease is $115,000,000. The initial lease term is three years with options to renew the lease for two one-year periods and to purchase the facility at its estimated fair market value at any time during the lease term. The lease provides for substantial residual value guarantees by the Company at the termination of the lease if the then estimated fair value of the facility is not recovered by the owner via sale to a third party. Purchase Commitments - The Company has certain take-or-pay raw material purchase agreements with various terms extending through 2014. The aggregate amount of the fixed and determinable portion of the required payments under these agreements as of December 31, 1997 was $7,143,000 for each of the years 1998 through 2002 and $40,364,000 thereafter. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES Legal Proceedings - The Company is a party to numerous individual and several class-action lawsuits filed against the Company, among other parties, arising out of an incident that occurred in September 1996 in which workers were exposed to a chemical substance on the Company's premises in Plaquemine, Louisiana. The substance was later identified to be a form of mustard agent, a chemical which is not manufactured as part of the Company's ordinary operations and which apparently resulted from the unexpected introduction into the Company's feedstocks of one or more impurities from sources unknown. The lawsuits are pending in the 18th Judicial District, Iberville Parish. The Company has filed answers in the cases in which it has been served. Discovery also has been served in the cases. All of the actions claim one or more forms of compensable damages, including past and future lost wages and past and future physical and emotional pain and suffering. At the present time, the Company does not know, and it is not possible to estimate, the number of persons making claims, the merit of any such claims, the nature or extent of damages that will be sought, the defenses available to the Company, or the liability of other persons, or to make a factual or legal assessment of the Company's ultimate exposure. Notwithstanding the foregoing, the Company believes it has meritorious defenses to the claims asserted and intends to assert and pursue those defenses vigorously. In addition, the Company is subject to other claims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability, if any, with respect to these other claims and legal actions, will not have a material effect on the financial position or on results of operations of the Company. 12. Significant Customer and Export Sales Significant Customer - The Company has supply contracts, subject to certain limitations, for a substantial percentage of Georgia-Pacific Corporation's requirements for certain chemicals at prices approximating market. These supply contracts have various expiration dates (depending on the product) from 1998 through 2003 and may be extended year-to-year upon expiration. The sales to Georgia-Pacific Corporation under these supply contracts for the years ended December 31, 1997, 1996 and 1995 amounted to approximately 12 percent, 15 percent and 14 percent of net sales, respectively. Receivables outstanding from these sales were $11,807,000 and $11,226,000 at December 31, 1997 and 1996, respectively. Export Sales - Export sales were approximately 15 percent, 12 percent and 15 percent of the Company's net sales for the years ended December 31, 1997, 1996 and 1995, respectively. The principal international markets served by the Company include Canada, Mexico, Latin America, Europe and Asia. 13. Derivative Financial Instruments and Fair Value of Financial Instruments The Company entered into two interest rate swap agreements in June 1995, for a total notional amount of $100,000,000 maturing in June 2000, to fix the interest rate on the Term Loan. The fixed interest rate paid on the two interest rate swap agreements was 6.31 percent, while the floating interest rate received averaged 5.68 percent and 5.57 percent for 1997 and 1996, respectively. The Company also entered into an interest rate swap agreement for a notional amount of $100,000,000 as a cash flow hedge for the cogeneration facility operating lease agreement. This interest rate swap agreement became effective in August 1997 and will mature in August 2002 with a fixed interest rate to be paid of 5.88 percent. The floating interest rate received averaged 5.73 percent for 1997. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Debt - The fair value of the Notes was based on quoted market prices. The carrying amounts of the revolving credit loan and the Term Loan were assumed to approximate fair value due to the floating market interest rates to which the respective agreements are subject. Interest Rate Swap Agreements - The fair value of the interest rate swap agreements was estimated by obtaining quotes from brokers. The estimated fair value of financial instruments was as follows:
December 31, ----------------------------------------- 1997 1996 ------------------- -------------------- Carrying Fair Carrying Fair In Thousands Amount Value Amount Value -------- -------- -------- -------- Debt: Revolving credit loan $155,000 $155,000 $167,000 $167,000 Term Loan 100,000 100,000 100,000 100,000 7 5/8% Notes due 2005 100,000 102,419 100,000 100,144 Other 38,040 38,040 28,600 28,600 Interest rate swap agreements in receivable (payable) position -- (971) -- 2,741 -------- -------- -------- -------- -------- -------- -------- --------
14. Earnings Per Share Income available to common stockholders, the numerator in the basic and diluted earnings per share computations, is $81,201,000, $71,620,000 and $186,494,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of income:
Years Ended December 31, ------------------------ In Thousands 1997 1996 1995 ------ ------ ------ Weighted average common shares 33,629 35,759 38,728 Plus incremental shares from assumed conversions: Options 289 446 674 Employee stock purchase plan rights 29 43 26 ------ ------ ------ Weighted average common shares and equivalents 33,947 36,248 39,428 ------ ------ ------ ------ ------ ------
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GEORGIA GULF CORPORATION AND SUBSIDIARIES 15. Dispositions In July 1997, the Company completed the sale of certain oil and gas properties representing substantially all of the assets of Great River Oil & Gas Corporation, a subsidiary of the Company. Net proceeds from this sale were $16,477,000, on which the Company recorded a pretax gain of $8,600,000 ($5,300,000, net of income taxes). Historically, the operating results for this subsidiary have not been material to the financial statements of the Company. In April 1996, the Company completed the sale of its Delaware City, Delaware facility, and its emulsion resin business. The majority of the Delaware City vinyl compound production has been transferred to the Company's vinyl compound plant in Gallman, Mississippi. The proceeds from the sale approximated the net book value of the disposed assets. 16. Quarterly Financial Data (Unaudited) The following table sets forth certain quarterly financial data for the periods indicated:
1997 1996 -------------------------------------------- ----------------------------------------- In Thousands, Except First Second Third Fourth First Second Third Fourth Per Share Data Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- -------- -------- -------- -------- Net sales $239,225 $258,208 $235,915 $232,302 $208,036 $231,387 $237,946 $218,817 Gross margin 35,765 51,778 53,640 51,338 40,918 47,093 47,578 42,270 Operating income 24,667 39,904 42,304 39,926 30,110 36,167 37,601 32,395(2) Net income 12,061 20,580 27,724(1) 20,836 15,806 19,286 19,871 16,657 Basic earnings per share 0.35 0.61 0.83 0.63 0.43 0.53 0.57 0.48 Diluted earnings per share 0.35 0.60 0.83 0.63 0.42 0.52 0.56 0.48 Dividends per common share 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(1) Includes a pretax gain of $8,600,000 from the sale of certain oil and gas properties, which resulted in an increase to net income of $5,300,000. (2) Includes the reversal of certain environmental tax liabilities accrued during 1996 for $4,000,000 and the recording of a favorable insurance settlement claim for $3,200,000. 36 REPORT OF MANAGEMENT GEORGIA GULF CORPORATION AND SUBSIDIARIES To the Stockholders of Georgia Gulf Corporation: The accompanying consolidated financial statements of Georgia Gulf Corporation and subsidiaries are the responsibility of and have been prepared by the Company in conformity with generally accepted accounting principles. The financial information displayed in other sections of this 1997 Annual Report is consistent with the consolidated financial statements. The integrity and the objectivity of the data in these consolidated financial statements, including estimates and judgments relating to matters not concluded by year-end, are the responsibility of management. The Company and its subsidiaries maintain accounting systems and related internal controls, including a budgeting and reporting system, to provide reasonable assurance that financial records are reliable for preparing the consolidated financial statements and for maintaining accountability for assets. The system of internal controls also provides reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorization. Periodic reviews of the systems and of internal controls are performed by the Company's internal audit department. The Audit Committee of the Board of Directors, composed solely of outside directors who are not officers or employees of the Company, has the responsibility of meeting periodically with management, the Company's internal auditors and Arthur Andersen LLP, the Company's independent public accountants that are approved by the stockholders, to review the scope and results of the annual audit and the general overall effectiveness of the internal accounting control system. The independent public accountants and the Company's internal auditors have direct access to the Audit Committee, with or without the presence of management, to discuss the scope and results of their audits, as well as any comments they may have related to the adequacy of the internal accounting control system and the quality of financial reporting. Richard B. Marchese Vice President Finance, Chief Financial Officer and Treasurer February 12, 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Georgia Gulf Corporation: We have audited the accompanying consolidated balance sheets of Georgia Gulf Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 financial position of Georgia Gulf Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia February 12, 1998 37 DIRECTORS GEORGIA GULF CORPORATION AND SUBSIDIARIES James R. Kuse Chairman of the Board, Retired Chief Executive Officer Georgia Gulf Corporation Jerry R. Satrum Chief Executive Officer Georgia Gulf Corporation Edward A. Schmitt(1) President and Chief Operating Officer Georgia Gulf Corporation John D. Bryan Retired Vice President Operations Georgia Gulf Corporation Dennis M. Chorba Retired Vice President, General Counsel Georgia Gulf Corporation Alfred C. Eckert III* President Greenwich Street Capital Partners, Inc. Robert E. Flowerree* Retired Chairman of the Board Georgia-Pacific Corporation Holcombe T. Green, Jr.*(2) Chairman and Chief Executive Officer Westpoint Stevens, Inc. Edward S. Smith* Retired Chairman and Chief Executive Officer Omark Industries - ------------------- * Audit Committee (1) Elected to Board of Directors effective February 10, 1998 (2) Resigned from Board of Directors effective February 10, 1998 OFFICERS GEORGIA GULF CORPORATION AND SUBSIDIARIES Jerry R. Satrum Chief Executive Officer Edward A. Schmitt President and Chief Operating Officer Richard B. Marchese Vice President Finance, Chief Financial Officer and Treasurer Joel I. Beerman Vice President, General Counsel and Secretary Gary L. Elliott Vice President Marketing and Sales, Commodity Chemicals Group Mark J. Seal Vice President, Polymer Group Thomas G. Swanson Vice President Supply and Corporate Development 38 CORPORATE INFORMATION GEORGIA GULF CORPORATION AND SUBSIDIARIES Corporate Headquarters 400 Perimeter Center Terrace Suite 595 Atlanta, Georgia 30346 (770) 395-4500 Auditors Arthur Andersen LLP Atlanta, Georgia Transfer Agent and Registrar Wachovia Bank of North Carolina, N.A. P.O. Box 3001 Winston-Salem, North Carolina 27102 1-800-633-4236 Changes of address, questions regarding lost certificates, requests for changes in registration and other general correspondence concerning stockholder accounts should be directed to the Transfer Agent. Annual Meeting The Annual Meeting of Stockholders of Georgia Gulf Corporation will be held in the Conference Center of the South Terraces Building,115 Perimeter Center Place, Atlanta, Georgia, on Tuesday, May 19, 1998 at 1:30 p.m. Stockholders are cordially invited to attend. Dividend Policy Dividends on Georgia Gulf Corporation's common stock are usually declared quarterly by the Board of Directors and paid shortly thereafter. Annual Report on Form 10-K Form 10-K is a report filed annually with the Securities and Exchange Commission. Much of the information contained therein is included in this Annual Report, though the Form 10-K includes some supplementary material. Upon receipt of a written request from a stockholder to the Investor Relations Department, Georgia Gulf Corporation, P.O. Box 105197, Atlanta, Georgia 30348, Georgia Gulf will furnish a copy of its Form 10-K, excluding exhibits, without charge. Common Stock Data Georgia Gulf Corporation's common stock is listed on the New York Stock Exchange under the symbol "GGC." At December 31, 1997, there were 1,202 common stockholders of record. The following table sets forth the New York Stock Exchange high, low and closing stock prices for the Company's common stock for the years 1997 and 1996.
In Dollars High Low Close ------ ------ ------ 1997 First quarter 29 24 3/4 25 1/4 Second quarter 29 1/2 23 29 1/16 Third quarter 33 1/2 27 3/4 30 5/8 Fourth quarter 32 3/8 28 1/2 30 5/8 1996 First quarter 39 1/2 28 1/4 37 1/2 Second quarter 38 3/4 28 1/2 29 1/4 Third quarter 32 7/8 27 7/8 29 7/8 Fourth quarter 30 1/4 25 3/4 26 7/8 ------ ------ ------ ------ ------ ------
39 EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT GG Terminal Management Corporation Georgia Gulf Export Corporation Great River Oil & Gas Corporation GGRC Corp. EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8, file no. 33-14696, file no. 33-27365, file no. 33-40952, file no. 33-42008 and file no. 33-64749. ARTHUR ANDERSEN LLP Atlanta, Georgia March 18, 1998 EX-27 5 FDS EX-27
5 1,000 YEAR DEC-31-1997 DEC-31-1998 1,621 0 69,953 2,400 92,921 176,012 650,968 240,108 612,703 118,540 393,040 0 0 328 35,275 612,703 965,650 965,650 773,129 773,129 0 184 24,693 130,768 49,567 81,201 0 0 0 81,201 2.41 2.39
-----END PRIVACY-ENHANCED MESSAGE-----