FORM 10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
to
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period_________to__________
Commission file number ___________
CLIMACHEM, INC.
(Exact name of Registrant as specified in its Charter)
Oklahoma 73-1528549
_______________________ __________________
(State of Incorporation) (I.R.S. Employer
identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
_______________________________________ _________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(405) 235-4546
_______________
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the Registrant has had
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days. YES X NO
______ _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
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incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________.
All outstanding shares of Common Stock of the registrant are held directly
or indirectly by the registrant's parent company, LSB Industries, Inc.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this Amendment No. 1 to the report on its behalf of this
28th day of April, 1999.
CLIMACHEM, INC.
By: /s/ Jack E. Golsen
_________________________
Jack E. Golsen
Chairman of the Board and
President
(Principal Executive Officer)
By: /s/ Tony M. Shelby
__________________________
Tony M. Shelby
Vice President-Chief Financial Officer
(Principal Financial Officer)
By: /s/ Jim D. Jones
__________________________
Jim D. Jones
Vice President-Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.
Dated: April 28, 1999 By: /s/ Jack E. Golsen
___________________________
Jack E. Golsen, Director
Dated: April 28, 1999 By: /s/ Tony M. Shelby
___________________________
Tony M. Shelby, Director
Dated: April 28, 1999 By: /s/ David R. Goss
___________________________
David R. Goss, Director
Dated: April 28, 1999 By: /s/ Barry H. Golsen
___________________________
Barry H. Golsen, Director
Dated: April 28, 1999 By: /s/ Robert C. Brown
____________________________
Robert C. Brown, Director
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Dated: April 28, 1999 By: /s/ Bernard G. Ille
____________________________
Bernard G. Ille, Director
Dated: April 28, 1999 By: /s/ Jerome D. Shaffer
___________________________
Jerome D. Shaffer, Director
Dated: April 28, 1999 By: /s/ Raymond B. Ackerman
____________________________
Raymond B. Ackerman, Director
Dated: April 28, 1999 By:
_____________________________
Horace Rhodes, Director
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
________ _______________________________________________
<TABLE>
<CAPTION>
The following table sets forth certain information regarding
the directors and executive officers of the Company. Except for
Mr. Wewers, the directors and officers of the Company also serve
as directors and officers of the Company's parent, LSB. Each of
the directors and officers listed below have served in their
respective positions since the Company's formation in 1997. The
executive officers are elected by the Board of Directors. The
term of each director of the Company is one year.
Name Age Office
____ ___ _______
<S> <C> <C>
Jack E. Golsen 70 Chairman of the Board, Chief
Executive Officer and
President
Barry H. Golsen 48 President of LSB's Climate
Control Business and Vice
Chairman of the Board
David R. Goss 58 Vice President and Director
Tony M. Shelby 57 Vice President/Chief Financial
Officer and Director
Jim D. Jones 57 Vice President-Treasurer
David M. Shear 39 Secretary
James L. Wewers 53 Vice President
Raymond B. Ackerman 76 Director
Robert C. Brown, M.D. 68 Director
Bernard G. Ille 72 Director
Horace G. Rhodes 71 Director
Jerome D. Shaffer, M.D. 82 Director
</TABLE>
Jack E. Golsen, the founder of LSB, has served as Chairman
of the Board, Chief Executive Officer and President of LSB since
its inception in 1969. During 1996, Mr. Golsen was inducted into
the Oklahoma Commerce and Industry Hall of Honor as one of
Oklahoma's leading industrialists. Mr. Golsen has a degree from
the University of New Mexico in biochemistry.
Barry H. Golsen has served as the Vice Chairman of the Board
of LSB since August, 1994, and has served for more than five
years as the President of LSB's Climate Control Business. Mr.
Golsen has both his undergraduate and law degrees from the
University of Oklahoma.
Tony M. Shelby, a certified public accountant, has served as
a director of LSB since 1971 and has served as the Senior Vice
President and Chief Financial Officer of LSB for more than five
years. Prior to becoming Senior Vice President and Chief
Financial Officer of LSB, Mr. Shelby served as Chief Financial
Officer of a subsidiary of the Company, and was with the
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accounting firm of Arthur Young & Co., a predecessor to Ernst &
Young LLP. Mr. Shelby is a graduate of Oklahoma City University.
David R. Goss, a certified public accountant, has served as
a director of LSB since 1971 and has served as the Senior Vice
President - Operations of LSB or in a comparable capacity for
more than five years. Mr. Goss is a graduate of Rutgers
University.
Jim D. Jones, a certified public accountant, has served in
his present capacity with LSB since 1976. Prior to that time, he
was an accountant with Arthur Young & Co., a predecessor to Ernst
& Young LLP. Mr. Jones is a graduate of the University of
Central Oklahoma.
David M. Shear has served as the Vice President-General
Counsel of LSB since 1990. Prior to that time, Mr. Shear was in
private practice with a law firm in Boston, Massachusetts, and
served as an attorney with the Federal Trade Commission. Mr.
Shear is a graduate of Brandeis University and has a law degree
from Boston University.
James L. Wewers has served for more than five years as the
President of the Chemical Business. Prior to becoming President
of the Chemical Business, Mr. Wewers was an executive with the
Chemicals Group of Gulf Oil. Mr. Wewers is a graduate of
Rockhurst College.
Raymond B. Ackerman has served as a director of LSB since
1993. Mr. Ackerman has served as Chairman of the Board and
President of Ackerman, McQueen, Inc., the largest public
relations firm in Oklahoma, from 1972 until his retirement in
1992. Mr. Ackerman currently serves as Chairman Emeritus of
Ackerman, McQueen, Inc. Mr. Ackerman retired as a Rear Admiral
from the United States Naval Reserves. Mr. Ackerman is a
graduate of Oklahoma City University, and in 1996, he was awarded
an honorary doctorate from Oklahoma City University.
Robert C. Brown, M.D., has served as a director of LSB since
1969. Dr. Brown has practiced medicine for many years and is
Vice President and Treasurer of Plaza Medical Group, P.C. Dr.
Brown is a graduate of Tufts University and received his medical
degree from Tufts University.
Bernard G. Ille has served as a director of LSB since 1971.
Mr. Ille served as President and Chief Executive Officer of First
Life Assurance Company from May, 1988, until it was acquired in
March, 1994. For more than five years prior to joining First
Life, Mr. Ille served as President of United Founders Life
Insurance Company. Mr. Ille is a director of Landmark Land
Company, Inc., which was the parent company of First Life. Mr.
Ille is currently a private investor. He is a graduate of the
University of Oklahoma.
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Horace G. Rhodes has served as a director of LSB since 1996.
Mr. Rhodes is the managing partner of the law firm of Kerr,
Irvine, Rhodes & Ables and has served in such capacity and has
practiced law for a period in excess of five years. Since 1972,
Mr. Rhodes has served as Executive Vice President and General
Counsel for the Association of Oklahoma Life Insurance Companies,
and since 1982 has served as Executive Vice President and General
Counsel for the Oklahoma Life and Health Insurance Guaranty
Association. Mr. Rhodes received his undergraduate and law
degrees from the University of Oklahoma.
Jerome D. Shaffer, M.D., has served as a director of LSB
since its inception in 1969. He is currently and has been for
the last five years a private investor. Dr. Shaffer is a
graduate of Penn State University and received his medical degree
from Jefferson Medical College.
Jack E. Golsen is the father of Barry H. Golsen. Dr. Robert
C. Brown is the brother-in-law and uncle of Jack E. Golsen and
Barry H. Golsen, respectively.
Item 11. Executive Compensation.
_______ ______________________
<TABLE>
<CAPTION>
The following table shows the aggregate cash compensation
which the Company and its subsidiaries paid or accrued to the
Chief Executive Officer and each of the other most highly-paid
executive officers of the Company (which includes the Vice
Chairman of the Board who also serves as President of the
Company's Climate Control Business), other than the CEO, whose
total annual salary and bonus exceeds $100,000. The table
includes cash distributed for services rendered during 1998, plus
any cash distributed during 1998 for services rendered in a prior
year, less any amount relating to those services previously
included in the cash compensation table for a prior year. The
compensation set forth below is for 1997 and 1998 only, since the
Company was formed in 1997.
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<PAGE>
Summary Compensation Table
__________________________
Long-term
Compen-
sation
Annual Compensation Awards
_________________________ _________
Other All
Annual Securities Other
Compen- Underlying Compen-
Name and Salary Bonus sation Stock sation
Position Year ($)(1) ($)(2) ($)(3) Options ($)
_________________ ____ ______ ______ ______ __________ ______
<S> <C> <C> <C> <C> <C> <C>
Jack E. Golsen(1), 1998 - - - - -
Chairman of the 1997 - - - - -
Board, President
and Chief
Executive Officer
Barry H. Golsen(1), 1998 226,600 - - - -
Vice Chairman of 1997 223,300 - - - -
the Board and
President of the
Climate Control
Business
James L. Wewers(1), 1998 200,850 - - - -
Vice President 1997 197,925 - - - -
<FN>
(1) Although Jack E. Golsen and Tony M. Shelby performed
substantial services for the Company during 1998, the Company did
not reimburse LSB for any of Messrs. Golsen and Shelby's
compensation due to provisions of the Services Agreement between
LSB and the Company ("Services Agreement") which specifically
prohibit the Company from reimbursing LSB for costs and expenses
associated with Messrs. Golsen and Shelby. See "Item 13, Certain
Relationships and Related Transactions" for a discussion of the
Services Agreement and payments to LSB under such agreement. The
Company and LSB are also parties to a Management Agreement under
the terms of which the Company may, under certain conditions,
reimburse LSB for the services of Messrs. Golsen and Shelby. The
Company did not meet the earnings criteria under the Management
Agreement in 1998 to require the Company to make payments to LSB
under this agreement. The Company expects to satisfy the
requirements of the Management Agreement in 1999 and therefore
the Company anticipates paying LSB $1.8 million in 1999 as a
management fee in accordance with the terms of the agreement.
See "Item 13, Certain Relationships and Related Transactions" for
a discussion of the Management Agreement. Barry H. Golsen and
James L. Wewers are paid by LSB, and under the Services Agreement
the Company reimburses LSB for that portion of the compensation
paid to Barry H. Golsen and James L. Wewers relating to the
Company and its subsidiaries. Since all or substantially all of
the services performed by Barry H. Golsen and James L. Wewers
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were related to the Company and/or its subsidiaries, the Company
reimbursed LSB for all compensation paid to Barry H. Golsen and
James L. Wewers during 1997 and 1998.
(2) Bonuses are for services rendered for the prior fiscal
year. No bonuses were paid to the above-named executive officers
for 1996 or 1997, and no bonuses for 1998 performance are to be
paid to the above-named executive officers.
(3) Does not include perquisites and other personal
benefits, securities or property for the named executive officer
in any year if the aggregate amount of such compensation for such
year does not exceed the lesser of either $50,000 or 10% of the
total of annual salary and bonus reported for the named executive
officer for such year.
</FN>
</TABLE>
Option Grants in 1998. There were no grants of stock options
made to the named executive officers in 1998.
Employment Contracts and Termination of Employment and
Change in Control Arrangements.
(a) Termination of Employment and Change in Control Agreements.
The Company does not have any severance agreements with its
officers. However, LSB has entered into severance
agreements with Jack E. Golsen, Barry H. Golsen, Tony M.
Shelby, David R. Goss, David M. Shear, James L. Wewers and
certain other officers of LSB and subsidiaries of LSB.
Each severance agreement provides (among other things) that
if, within twenty-four (24) months after the occurrence of a
change in control (as defined) of LSB, LSB terminates the
officer's employment other than for cause (as defined), or
the officer terminates his employment for good reason (as
defined), LSB must pay the officer an amount equal to 2.9
times the officer's base amount (as defined). The phrase
"base amount" means the average annual gross compensation
paid by LSB to the officer and includable in the officer's
gross income during the period consisting of the most recent
five (5) year period immediately preceding the change in
control. If the officer has been employed by LSB for less
than 5 years, the base amount is calculated with respect to
the most recent number of taxable years ending before the
change in control that the officer worked for LSB.
The severance agreements provide that a "change in control"
means a change in control of LSB of a nature that would
require the filing of a Form 8-K with the Securities and
Exchange Commission and, in any event, would mean when: (1)
any individual, firm, corporation, entity, or group (as
defined in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) becomes the beneficial owner, directly
or indirectly, of thirty percent (30%) or more of the
combined voting power of LSB's outstanding voting securities
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having the right to vote for the election of directors,
except acquisitions by: (a) any person, firm, corporation,
entity, or group which, as of the date of the severance
agreement, has that ownership, or (b) Jack E. Golsen, his
wife; his children and the spouses of his children; his
estate; executor or administrator of any estate, guardian or
custodian for Jack E. Golsen, his wife, his children, or the
spouses of his children, any corporation, trust,
partnership, or other entity of which Jack E. Golsen, his
wife, children, or the spouses of his children own at least
eighty percent (80%) of the outstanding beneficial voting or
equity interests, directly or indirectly, either by any one
or more of the above-described persons, entities, or
estates; and certain affiliates and associates of any of the
above-described persons, entities, or estates; (2)
individuals who, as of the date of the severance agreement,
constitute the Board of Directors of LSB (the "Incumbent
Board") and who cease for any reason to constitute a
majority of the Board of Directors except that any person
becoming a director subsequent to the date of the severance
agreement, whose election or nomination for election is
approved by a majority of the Incumbent Board (with certain
limited exceptions), will constitute a member of the
Incumbent Board; or (3) the sale by the Company of all or
substantially all of its assets.
Except for the severance agreement with Jack E. Golsen, the
termination of an officer's employment with LSB "for cause"
means termination because of: (a) the mental or physical
disability from performing the officer's duties for a period
of one hundred twenty (120) consecutive days or one hundred
eighty days (even though not consecutive) within a three
hundred sixty (360) day period; (b) the conviction of a
felony; (c) the embezzlement by the officer of LSB assets
resulting in substantial personal enrichment of the officer
at the expense of LSB; or (d) the willful failure (when not
mentally or physically disabled) to follow a direct written
order from LSB's Board of Directors within the reasonable
scope of the officer's duties performed during the sixty
(60) day period prior to the change in control. The
definition of "Cause" contained in the severance agreement
with Jack E. Golsen means termination because of: (a) the
conviction of Mr. Golsen of a felony involving moral
turpitude after all appeals have been completed; or (b) if
due to Mr. Golsen's serious, willful, gross misconduct or
willful, gross neglect of his duties has resulted in
material damages to LSB and its subsidiaries, taken as a
whole, provided that (i) no action or failure to act by Mr.
Golsen will constitute a reason for termination if he
believed, in good faith, that such action or failure to act
was in LSB's or its subsidiaries' best interest, and (ii)
failure of Mr. Golsen to perform his duties hereunder due to
disability shall not be considered willful, gross misconduct
or willful, gross negligence of his duties for any purpose.
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The termination of an officer's employment with LSB for
"good reason" means termination because of (a) the
assignment to the officer of duties inconsistent with the
officer's position, authority, duties, or responsibilities
during the sixty (60) day period immediately preceding the
change in control of LSB or any other action which results
in the diminishment of those duties, position, authority, or
responsibilities; (b) the relocation of the officer; (c) any
purported termination by LSB of the officer's employment
with LSB otherwise than as permitted by the severance
agreement; or (d) in the event of a change in control of
LSB, the failure of the successor or parent company to
agree, in form and substance satisfactory to the officer, to
assume (as to a successor) or guarantee (as to a parent) the
severance agreement as if no change in control had occurred.
Except for the severance agreement with Jack E. Golsen, each
severance agreement runs until the earlier of: (a) three
years after the date of the severance agreement, or (b) the
officer's normal retirement date from LSB; however,
beginning on the first anniversary of the severance
agreement and on each annual anniversary thereafter, the
term of the severance agreement automatically extends for an
additional one-year period, unless LSB gives notice
otherwise at least sixty (60) days prior to the anniversary
date. The severance agreement with Jack E. Golsen is
effective for a period of three (3) years from the date of
the severance agreement; except that, commencing on the date
one (1) year after the date of such severance agreement and
on each annual anniversary thereafter, the term of such
severance agreement shall be automatically extended so as to
terminate three (3) years from such renewal date, unless LSB
gives notices otherwise at least one (1) year prior to the
renewal date.
(b) Employment Agreement. The Company does not have employment
agreements with any of its officers. However, in March,
1996, LSB entered into an employment agreement with Jack E.
Golsen. The employment agreement requires LSB to employ
Jack E. Golsen as an executive officer of LSB for an initial
term of three (3) years and provides for two (2) automatic
renewals of three (3) years each unless terminated by either
party by the giving of written notice at least one (1) year
prior to the end of the initial or first renewal period,
whichever is applicable. Under the terms of such employment
agreement, Mr. Golsen shall be paid (i) an annual base
salary at his 1995 base rate, as adjusted from time to time
by the Compensation Committee, but such shall never be
adjusted to an amount less than Mr. Golsen's 1995 base
salary, (ii) an annual bonus in an amount as determined by
the Compensation Committee, and (iii) receive from LSB
certain other fringe benefits. The employment agreement
provides that Mr. Golsen's employment may not be terminated,
except (i) upon conviction of a felony involving moral
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turpitude after all appeals have been exhausted, (ii) Mr.
Golsen's serious, willful, gross misconduct or willful,
gross negligence of duties resulting in material damage to
LSB and its subsidiaries, taken as a whole, unless Mr.
Golsen believed, in good faith, that such action or failure
to act was in the Company's or its subsidiaries' best
interest, and (iii) Mr. Golsen's death; provided, however,
no such termination under (i) or (ii) above may occur unless
and until LSB has delivered to Mr. Golsen a resolution duly
adopted by an affirmative vote of three-fourths of the
entire membership of the Board of Directors at a meeting
called for such purpose after reasonable notice given to Mr.
Golsen finding, in good faith, that Mr. Golsen violated (i)
or (ii) above. If Mr. Golsen's employment is terminated in
breach of this Agreement, then he shall, in addition to his
other rights and remedies, receive and LSB shall pay to
Mr. Golsen (i) in a lump sum cash payment, on the date of
termination, a sum equal to the amount of Mr. Golsen's
annual base salary at the time of such termination and the
amount of the last bonus paid to Mr. Golsen prior to such
termination times (a) the number of years remaining under
the employment agreement or (b) four (4) if such termination
occurs during the last twelve (12) months of the initial
period or the first renewal period, and (ii) provide to
Mr. Golsen all of the fringe benefits that LSB was obligated
to provide during his employment under the employment
agreement for the remainder of the term of the employment
agreement, or, if terminated at any time during the last
twelve (12) months of the initial period or first renewal
period, then during the remainder of the term and the next
renewal period.
If there is a change in control (as defined in the severance
agreement between Mr. Golsen and LSB) and within twenty-four (24)
months after such change in control Mr. Golsen is terminated,
other than for Cause (as defined in the severance agreement),
then in such event, the severance agreement between Mr. Golsen
and LSB shall be controlling.
In the event Mr. Golsen becomes disabled and is not able to
perform his duties under the employment agreement as a result
thereof for a period of twelve (12) consecutive months within any
two (2) year period, LSB shall pay Mr. Golsen his full salary for
the remainder of the term of the employment agreement and
thereafter sixty percent (60%) of such salary until Mr. Golsen's
death.
Compensation Committee Interlocks and Insider Participation.
LSB's Executive Salary Review Committee has the authority to
set the compensation of all officers of the Company. This
Committee generally considers and approves the recommendations of
the President of LSB. The members of the Executive Salary Review
Committee of LSB are the following non-management directors:
Robert C. Brown, M.D., Jerome D. Shaffer, M.D., and Bernard G.
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Ille. During 1998, the Executive Salary Review Committee had one
meeting.
Item 13. Certain Relationships and Related Transactions.
_______ ______________________________________________
Formation and Capitalization of Company
The Company was formed as an Oklahoma corporation and a
wholly owned subsidiary of LSB on October 17, 1997. The Company
acquired its subsidiaries through capital contributions of each
subsidiary's outstanding stock from LSB to the Company, except
Northwest Financial Corporation ("Northwest"), which was
contributed to the Company by Prime, a wholly owned subsidiary of
LSB. LSB owns 95% and Prime owns the remaining 5% of the issued
and outstanding capital stock of the Company.
Leases
Prime, a subsidiary of LSB but not a subsidiary of the
Company, owns the facilities utilized by the fan coil operations
of the Climate Control Business. The Climate Control Business
has leased such facilities from Prime pursuant to a lease
agreement which provides for a term ending on March 6, 2000. The
lease is renewable by the Climate Control Business for an
additional ten-year term on the same terms, including rental
amount. The rental amount is $475,000 per year, payable in
monthly installments. Additionally, the Climate Control Business
leases certain production equipment from Prime, the annual lease
payments of which are approximately $350,000.
EDC Purchase
In 1983, LSB Chemical Corp. ("LSBC"), a subsidiary of the
Company, acquired all of the outstanding stock of EDC from its
then four stockholders ("Ex-Stockholders"). A substantial
portion of the purchase price consisted of an earnout based
primarily on the annual after-tax earnings of EDC for a 10-year
period. During 1989, two of the Ex-Stockholders received LSBC
promissory notes for a portion of their earnout, in lieu of cash,
totaling approximately $896,000, payable $496,000 in January,
1990, and $400,000 in May, 1994. LSBC agreed to a buyout of the
balance of the earnout from the four Ex-Stockholders for an
aggregate purchase amount of $1,231,000. LSBC purchased for cash
the earnout from two of the Ex-Stockholders and issued multi-year
promissory notes totaling $676,000 to the other two Ex-
Stockholders. Jack E. Golsen guaranteed LSBC's payment
obligation under the promissory notes. These promissory notes
have been assigned in their entirety from LSBC to the Company,
and the guarantee by Jack E. Golsen remains in place. The unpaid
balance of these notes at March 31, 1999, was $400,000.
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Purchase of Certain Real Estate and Option
During 1994, a subsidiary of LSB (which is not the Company
or a subsidiary of the Company) obtained an option to acquire all
of the stock of MultiClima, S.A., a French manufacturer of air
conditioning and heating equipment ("MultiClima"). LSB's
subsidiary was granted the option as a result of the subsidiary
loaning to the parent company of MultiClima approximately $2.1
million. Subsequent to the loan of $2.1 million, LSB's
subsidiary has loaned to the parent of MultiClima an additional
$1.7 million. The amount loaned is secured by the stock and
assets of MultiClima. LSB's subsidiary may exercise its option
to acquire MultiClima by converting $150,000 of the amount loaned
into equity. The option is currently exercisable and will expire
June 15, 2005.
As more fully discussed in Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations,
during the latter part of March, 1999, LSB's management began
considering the realignment of certain of LSB's overhead to
better match its focus on the Company and its subsidiaries'
operations. Consistent with this realignment, in April, 1999,
the Company's Board of Directors approved the acquisition from
LSB of a certain parcel of real estate and improvements thereon
in which the Climate Control Business is to perform certain
manufacturing operations and an option to acquire MultiClima, a
French air conditioning manufacturing company (together with the
receivables and stock pledge relating thereto as discussed
above), in accordance with the terms of the Indenture to which
the Company and its subsidiaries are parties to and the loan
agreement that LSB and subsidiaries of the Company are borrowing
under, which assets are materially related to the lines of
business of the Chemical and Climate Control Businesses. The
purchase price paid by the Company for the option (together with
the receivables and stock pledge discussed above) relating to the
French HVAC manufacturer was $2.6 million, and the purchase price
to be paid by the Company to LSB for the real estate and
improvements thereon, when completed, will range from $1.3 million
to $2.1 million.
Contractual Arrangements
Services Agreement
The Company and LSB have entered into a services agreement
(the "Services Agreement"), pursuant to which LSB provides to the
Company and its subsidiaries various services, including
financial and accounting, order entry, billing, credit, payable,
insurance, legal, human resources, advertising and marketing, and
related administrative and management services, that LSB has
historically provided to the operations and businesses of the
Company and its subsidiaries (other than services provided by the
President or Chief Financial Officer of LSB, whose services will
be compensated under the Management Agreement). The Company pays
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to or reimburses LSB for all direct and indirect costs and
expenses incurred by LSB in the performance of the Services
Agreement. The term of the Services Agreement is ten years,
except LSB may terminate the Services Agreement on 30 days'
written notice to the Company if the Company defaults under any
of the terms or provisions of the Services Agreement, and such
default is not cured during the 30-day notice period, or if LSB
sells 50% or more of the issued and outstanding stock of the
Company, or sells, transfers or disposes of all, or substantially
all, of the assets of the Company. The financial statements for
the Company reflect reimbursement to LSB for services of
approximately $2.3 million, $2.0 million and $1.8 million,
respectively, during 1998, 1997 and 1996.
Under the terms of the Services Agreement, the Company pays
to, or reimburses, LSB for the value of the office facilities of
LSB, including LSB's principal offices and financial accounting
offices utilized in the performance of the Services Agreement.
LSB determines the proportionate usage of such facilities by LSB
and the Company, and the Company pays to, or reimburses, LSB for
its proportionate share of such usage.
The Services Agreement provides that LSB will permit
employees of the Company and its subsidiaries to continue to
participate in the benefit plans and programs sponsored by LSB
until the termination of the Services Agreement. So long as
employees of the Company and its subsidiaries continue to
participate in LSB's benefit plans and programs, the
contributions of such employees to such plans and programs and
the costs of participation by such persons in such plans and
programs will be accounted for separately from contributions of,
and costs of participation by, employees of LSB and its other
subsidiaries. The Company pays to, or reimburses, LSB for the
costs associated with participation by the employees of the
Company and LSB's benefit plans and programs. Upon the
termination of the Services Agreement, each of LSB and the
Company will be responsible for all aspects of its respective
benefit plans and programs.
Management Agreement
LSB and the Company have entered into a management agreement
(the "Management Agreement"), which provides that LSB will
provide to the Company, on a nonexclusive basis, managerial
oversight and guidance concerning the broad policies, strategic
decisions and operations of the Company and the subsidiaries and
the rendering of such further managerial assistance as deemed
reasonably necessary by LSB.
The term of the Management Agreement is for a period of ten
years. The Management Agreement may be terminated sooner by LSB
upon 30 days' prior written notice to the Company if (i) the
Company defaults under the Management Agreement, and such default
is not cured to the reasonable satisfaction of LSB prior to the
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expiration of such 30-day period or (ii) LSB sells 50% or more of
the issued and outstanding stock of the Company or sells,
transfers or disposes of all, or substantially all, of the assets
of the Company. LSB has and will continue to engage in
activities, some of which activities may be in competition with
the Company's activities, other than those it will perform under
the Management Agreement. The Management Agreement does not
limit or restrict the terms and provisions of the Services
Agreement.
Under the Management Agreement, the Company is to pay LSB a
Management Fee each calendar year during the term of the
Management Agreement an amount not to exceed $1,800,000, subject
to adjustment under certain conditions and subject to certain
limitations. The Company shall pay LSB such annual Management
Fee on a quarterly basis based on the following: (i) if at the
end of the first quarter of the year (March 31), the Company has
an EBITDA, on a consolidated basis, for the three month period
from January 1 to March 31 of $6,500,000 or more, a Management
Fee equal to the difference between the amount of such EBITDA, on
a consolidated basis, and $6,500,000, but not to exceed $450,000,
(ii) if at the end of the second quarter of the year (June 30)
the Company has an EBITDA, on a consolidated basis, for the six
month period from January 1 to June 30 of such year of
$13,000,000, a Management Fee equal to the amount of such EBITDA,
on a consolidated basis, for the six month period less
$13,000,000, but not to exceed $900,000 less the amount of the
Management Fee paid to LSB by the Company for the first quarter
of such year, (iii) if at the end of the third quarter of the
year (September 30) the Company has an EBITDA, on a consolidated
basis, for the nine month period from January 1 to September 30,
of such year of $19,500,000, a Management Fee equal to the amount
of such EBITDA, on a consolidated basis, for the nine month
period less $19,500,000, but not to exceed $1,350,000 less the
amount of the Management Fee paid to LSB by the Company for the
first and second quarter of such year, and (iv) if at the end of
such year the Company has an EBITDA, on a consolidated basis, for
the twelve months (January 1 to December 31) of $26,000,000, a
Management Fee equal to the amount of such EBITDA, on a
consolidated basis, for such twelve month period less
$26,000,000, but not to exceed $1,800,000 less the amount of the
Management Fee paid to LSB by the Company for the first three
quarters of such year. If the Company's EBITDA, on a
consolidated basis, is less than $26,000,000 for such year, then
LSB shall return to the Company any Management Fees paid to LSB
for the first three quarters of such year. If the Company's
EBITDA for such year, on a consolidated basis, equals or exceeds
$26,000,000 but is less than $26,000,000 plus the amount of
Management Fees paid to LSB for the first three quarters of such
year, LSB shall refund to the Company the difference between
$26,000,000 plus the amount of Management Fees paid to LSB for
the first three quarters of the year and the amount of the
Company's EBITDA, on a consolidated basis, for all of such year.
As of January 1 of each year, the quarterly and annual amount of
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Management Fee to be paid by the Company to LSB shall be
proportionately increased based on the increase, if any, in the
Consumer Price Index during the preceding calendar year.
Tax Sharing Agreement
The Company and LSB have entered into a tax sharing
agreement (the "Tax Sharing Agreement"), to provide for (i) the
allocation of payments of taxes for periods during which the
Company and its subsidiaries and LSB are included in the same
consolidated group for federal income tax purposes or the same
consolidated, combined or unitary returns for state, local or
foreign tax purposes, (ii) the allocation of responsibility for
the filing of tax returns, (iii) the conduct of tax audits and
the handling of tax controversies, and (iv) various related
matters. For tax periods beginning after December, 1996, and
ending ten years thereafter, so long as the Company is included
in LSB's consolidated federal income tax returns or state
consolidated, combined or unitary tax returns, the Company is
required to pay to LSB an amount equal to the Company's
consolidated federal and state income tax liability calculated as
if the Company and its subsidiaries were a separate consolidated
tax group and not part of LSB's consolidated tax group. Such
amount is payable in estimated quarterly installments. If the
sum of the estimated quarterly installments is (a) greater than
the tax liability of the Company, as determined by LSB, under the
Tax Sharing Agreement, then LSB will refund the amount of the
excess to the Company, or (b) less than the Company's tax
liability, as determined by LSB, under the Tax Sharing Agreement,
then the Company will pay to LSB the amount of the deficiency.
As discussed in Note 3 of Notes to Consolidated Financial
Statements included elsewhere in this report, during 1998 the
Company paid approximately $4.2 million to LSB under the services
agreements, management agreements and tax sharing agreements. As
a result of increased services to be provided by LSB on behalf of
the Company during 1999, and the anticipated results of the
Company for 1999, the Company anticipates that the amounts to be
paid to LSB under these agreements will be greater than the
amount paid during 1998.
Industrial Supplies, Machines and Climate Control Equipment
During the year ended December 31, 1998, certain
subsidiaries of LSB that are not subsidiaries of the Company sold
to subsidiaries of the Company approximately $1.6 million in
industrial supplies, machine tools and certain thermostats, and
it is anticipated that such transactions will continue in the
future.
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Affiliated Loans
The Company has, at various times, maintained certain
unsecured borrowings from LSB and its subsidiaries and made loans
and advances to LSB which generally bear interest. At December
31, 1998, the Company had loans and advances due from LSB of
approximately $14.5 million. LSB has loaned US$3.6 million to
TES, which loan is without interest and is payable on demand,
except that under the terms of the TES revolving credit facility
TES is unable to pay, and LSB is unable to demand payment of,
such loan until the TES revolving credit facility has been
terminated.
Revolving Credit Facility
LSB, certain subsidiaries of LSB that are not subsidiaries
of the Company, and certain subsidiaries of the Company are
parties to a revolving credit facility. LSB guarantees all of
the obligations of the Company's subsidiaries under such
revolving credit facility.
Guaranty of Loans
LSB has guaranteed the lease payments due by the Company's
fan coil business under a lease purchase agreement, which
provides for the payment of $960,000 over a term of five years
beginning November, 1996, at an annual interest rate of 7.5%. In
addition, LSB has unconditionally guaranteed repayment by (i) the
Climate Control Business of certain term debt, the principal
amount of which is currently $1.1 million and (ii) the TES
revolving credit facility.
Employee Benefit Plans
Prior to the formation of the Company, the employees of the
Chemical Business and the Climate Control Business were eligible
to participate in LSB's Employee Savings Plan, health insurance
plan, and various stock option plans. LSB has allowed the
employees of the Company to continue to be eligible for all of
such plans on the same terms and conditions as LSB's employees.
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