16
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
to
FORM 10-K/A
(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, 1999
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 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.
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,
2000.
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, 2000 By:
/s/ Jack E. Golsen
Jack E. Golsen, Director
Dated: April 28, 2000 By:
/s/ Tony M. Shelby
Tony M. Shelby, Director
Dated: April 28, 2000 By:
/s/ David R. Goss
David R. Goss, Director
Dated: April 28, 2000 By:
/s/ Barry H. Golsen
Barry H. Golsen, Director
Dated: April 28, 2000 By:
/s/ Robert C. Brown
Robert C. Brown, Director
Dated: April 28, 2000 By:
/s/ Bernard G. Ille
Bernard G. Ille, Director
Dated: April 28, 2000 By:
/s/ Jerome D. Shaffer
Jerome D. Shaffer, Director
Dated: April 28, 2000 By:
/s/ Raymond B. Ackerman
Raymond B. Ackerman, Director
Dated: April 28, 2000 By:
/s/ Horace Rhodes
Horace Rhodes, Director.
PART III
Item 10. Directors and Executive Officers of the Company.
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
Jack E. Golsen 71 Chairman of the Board, Chief Executive
Officer and President
Barry H. Golsen 49 President
of LSB's Climate Control
Business and Vice Chairman of
the Board
David R. Goss 59 Vice President and Director
Tony M. Shelby 58 Vice President/Chief Financial
Officer and Director
Jim D. Jones 58 Vice President-Treasurer
David M. Shear 40 Secretary
James L. Wewers 54 Vice President
Raymond B. Ackerman 77 Director
Robert C. Brown, M.D. 69 Director
Bernard G. Ille 73 Director
Horace G. Rhodes 72 Director
Jerome D. Shaffer, M.D. 83 Director
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
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 also a director for Quail Creek Bank, N.A. Mr. Ille is
currently a private investor. He is a graduate of the University
of Oklahoma.
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.
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 $100,000. The table
includes cash distributed for services rendered during 1999, plus
any cash distributed during 1999 for services rendered in a prior
year, less any amount relating to those services previously
included in the cash compensation table for a prior year. The
compensation set forth below is for 1997, 1998 and 1999 only,
since the Company was formed in 1997 (See Note 1 on following
table).
Summary Compensation Table(1)
Annual Compensation Long-term
Compen-
sation
Awards
Name and Year Salary Bonus Other Securities All
Postion ($) ($)(3) Annual Underlying Other
Compen- Stock Compen-
sation Options sation
($)(4) ($)
Jack E. Golsen 1999 -(2) - - 132,500 -
Chairman of 1998 -(2) - - - -
the 1997 - - - - -
Board,
President
and Chief
Executive
Officer
Barry H. 1999 226,60 - - 93,000 -
Golsen 1998 226,600 - - - -
Vice Chairman 1997 223,300 - - - -
of
the Board and
President of the Climate Control Business
James L. 1999 200,850 - - 30,000 -
Wewers, 1998 200,850 - - - -
Vice President 1997 197,925 - - - -
(1) As discussed at Item 13 "Services Agreement", executive
officers, (excluding Jack E. Golsen and Tony Shelby) which have
been paid by LSB in prior years, will be compensated directly by
the Company for periods subsequent to December 31, 1999. The
Company has previously reimbursed LSB for such compensations
under the terms of the "Services Agreement".
(2) For 1999, 1998 and 1999, LSB paid to Jack E. Golsen a
salary of $477,400, $477,400 and $470,450. Although Jack E.
Golsen performed substantial services for the Company during
1999, the Company did not reimburse LSB for any of Mr. Golsen's
compensation due to provisions of the Services Agreement between
LSB and the Company (AServices Agreement@) which specifically
prohibit the Company from reimbursing LSB for costs and expenses
associated with Mr. Golsen. See AItem 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 Mr. Golsen. The Company did
not meet the earnings criteria under the Management Agreement in
1998 or 1999 to require the Company to make payments to LSB under
this agreement. See AItem 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 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, 1998 and
1999. For periods subsequent to December 31, 1999, Barry H. Golsen
and James L. Wewers will be compensated directly by the Company
in lieu of the Company reimbursing LSB, see Note (1) above for
their compensations.
(3) Bonuses are for services rendered for the prior fiscal
year. No bonuses were paid to the above-named executive officers
for 1996, 1997 or 1998, and no bonuses for 1999 performance are
to be paid to the above-named executive officers.
(4) 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 $50,000 or 10% of the
total of annual salary and bonus reported for the named executive
officer for such year.
Directors' Compensation. Due to LSB and the Company holding
joint Board of Director meetings and also due to the revised
allocations of costs discussed further at Item 13 "Services
Agreement", effective January 1, 2000, allocation of 75% of the
directors' fees paid to the members of the Board of Directors that
are not employees of LSB or the Company and that are directors of
both the Company and LSB compensation will be paid by the Company.
The Company believes that this allocation is fair and reasonable as
substantial portion of the businesses of LSB are owned by the Company.
Option Grants in 1999. The following table sets forth
information relating to individual grants of LSB stock options
made to each of the named executive officers in the above Summary
Compensation Table during the last fiscal year:
Individual Grants
Name Number % of Exercise Expiration Potential
of Total Price Date Realizable
Shares Options ($/sh) Value at
of Granted Assumed Annual
Common Employees Rates of Stock
Stock in 1999 Price
underlying Appreciation
Options for Option Term
Granted (2)
(#) (1) 5% ($) 10%
Jack E. Golsen 132,500 14.0 1.375 7-8-04 29,197 84,553
Barry H. Golsen 93,000 9.8 1.375 7-8-04 20,493 59,347
James L. Wewers 30,000 3.2 1.25 7-8-09 23,584 59,765
(1) The Company has adopted a 1981 Incentive Stock Option Plan
(the 1981 plan), a 1986 Incentive Stock Option Plan (the
1986 plan), a 1993 Incentive Stock Option Plan (the 1993
plan), and a 1998 Incentive Stock Option Plan (the 1998
plan). The 1981 plan, the 1986 plan, the 1993 plan, and the
1998 plan are collectively designated as the Plans. The
Plans provide that the Company may grant options under the
Plans to key salaried employees of the Company. The option
price for all options granted under the Plans cannot equal
less than 100% (or 110% for persons possessing more than 10%
of the voting stock of the Company) of the market value of
the Company's Common Stock on the date of the grant. The
Company could grant options under the 1981 Plan until
November 30, 1991, until April 10, 1996 under the 1986 Plan,
and can grant options until August 5, 2003 under the 1993
Plan, and until August 13, 2008 under the 1998 Plan. The
holder of an option granted under the Plans may not exercise
the option after ten (10) years from the date of grant of
the option (or five (5) years for persons possessing more
than 10% of the voting stock of the Company). The options
become exercisable approximately 20% after one year from the
date of the grant, an additional 20% after two years, an
additional 30% after three years, and the remaining 30%
after four years.
(2) The potential realizable value of each grant of options
assumes that the market price of the Company's Common Stock
appreciates in value from the date of grant to the end of
the option term at the annualized rates shown above each
column. The actual value that an executive may realize, if
any, will depend on the amount by which the market price of
the Company's Common Stock at the time of exercise exceeds
the exercise price of the option. As of April 7, 2000, the
closing price of a share of the Company's Common Stock as
quoted on the Over-the-Counter Bulletin Board was $.718.
There is no assurance that any executive will receive the
amounts estimated in this table.
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
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.
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
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.
Ille. During 1999, the Executive Salary Review Committee had one
meeting.
Item 12. Security Ownership of Certain Benficial Owners and Management.
(a) and (b) All of the outstanding shares of the Company's voting
securities are owned by LSB. (c) If change in control occurs at LSB,
such would result in a change in control of the Company.
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 (ANorthwest@), 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
The Company's Climate Control manufacturing subsidiaries are
leasing facilities from Prime, a subsidiary of LSB but not a
subsidiary of the Company, under various operating leases and a
capital lease. Approximately 270,000 square feet are being leased
by the Company or its subsidiaries from Prime. Rental expense
associated with the operating leases and the capital lease
aggregated $1,806,000 for the year ended December 31,
1999. In addition to the leases described above, in December
1999, a subsidiary of the Climate Control Business entered into a
capital lease with Prime ("December 1999 Lease") to lease a
manufacturing facility. The lease agreement is for a term of
sixteen (16) years and required an initial payment of $2 million
to reimburse Prime for capital improvements required at the
facility previously made by Prime for the Climate Control
Business, which was paid in January 2000, and requires 112
monthly payments of $20,291 commencing on September 1, 2006.
EDC Purchase
In 1983, LSB Chemical Corp. (ALSBC@), a subsidiary of the
Company, acquired all of the outstanding stock of EDC from its
then four stockholders (AEx-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, 2000, was $400,000.
Purchase of Certain Real Estate and Option
In 1995, a subsidiary of LSB invested approximately $2.8
million to purchase a fifty percent (50%) limited partner
interest in an energy conservation joint venture (the "Project").
The Project was to retrofit residential housing units at a U.S.
Army base, which it completed during 1996. The completed
contract was for installation of energy-efficient equipment
(including air conditioning and heating equipment), which would
reduce utility consumption. For the installation and management,
the project will receive a percentage of all energy and
maintenance savings during the twenty (20) year contract term.
In January 1999, the Company acquired this investment by
purchasing from LSB the stock of the LSB subsidiary that owned
the Project. The Company paid $3.1 million to LSB in connection
with this purchase. This amount equaled the book value of the
investment on the books of LSB's subsidiary, which management of
the Company believes approximated the investment's fair value, at
the date of purchase.
In April 1999, the Company's Board of Directors approved the
acquisition of certain assets from LSB, which assets are
materially related to the lines of the Climate Control Business.
As a result, in April 1999 the Company purchased from a
subsidiary of LSB (not the Company or a subsidiary of the
Company), an option to acquire a French HVAC manufacturing
company and all amounts due and payable from such French
manufacturer or its parent to LSB. The Company paid LSB $2.6
million for the option and receivables due from the French
manufacturer and its parent. This amount equaled the net book
value of the investment on the books of LSB's subsidiary, which
management of the Company believes approximated the investment's
fair value, at the date of purchase.
Contractual Arrangements
Services Agreement
On November 21, 1997, the company and LSB entered into a
services agreement (the "Services Agreement") pursuant to which
LSB will continue to provide to the Company 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. The Company will pay to , or
reimburse, LSB for the costs and expenses incurred by LSB in the
performance of the Services Agreement.
Under the terms of the Services Agreement, the Company will
pay to, or reimburse, 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 will determine the proportionate usage of such
facilities by LSB and the Company, and the Company will pay to,
or reimburse, LSB for its proportionate share of such usage.
Charges for such services aggregate $4,780,000, $2,265,000
and $1,950,000 for the years ended December 31, 1999, 1998 and
1997, respectively. Management of the Company believes these
charges from LSB reasonably approximate additional general and
administrative costs, which would have been incurred if the
Company had been an independent entity during such periods.
These amounts do not include reimbursements for costs described
in the next paragraph or amounts paid by LSB relating to certain
of the Company's payroll that are directly charged to the Company
by LSB.
The Services Agreement also 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.
The Company will pay to, or reimburse, LSB for the costs
associated with participation by the employees of the Company in
LSB's benefit plans and programs.
In addition, the Services Agreement allows for purchases of
other goods and services to the extent that the amount paid
approximate fair value that would be paid to a third party. In
1999, subsidiaries of the Company purchased certain raw materials
with LSB's assistance and paid $461,000 to LSB in commissions on
such purchases. The Company also purchased $1,076,000 in
industrial supplies, in 1999, from subsidiaries of LSB which are
not subsidiaries of the Company.
LSB is focusing its efforts and resources on its core
businesses, which represents that of the Company. LSB is also
realigning its overhead to better match its focus on the Chemical
and Climate Control Businesses of the Company. In connection with
such restructuring, effective January 1, 2000, the Company began
paying certain executive officers of both LSB and the Company
and certain other employees of both LSB and the Company formerly
paid by LSB, and reimbursed by the Company, as well as operating
costs previously paid by LSB and reimbursed by the Company
pursuant to the "Services Agreement".
Management Agreement
On November 21, 1997, LSB and the Company entered into a
management agreement (the "Management Agreement"), which provides
that LSB will provide to the Company, 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. Under the Management Agreement, the Company is
to pay LSB a fee for such services, which will not exceed $1.8
million annually. The fee will be paid quarterly based upon the
excess of actual earnings before interest, income taxes,
depreciation and amortization ("EBITDA") for the quarter minus
$6,500,000, not to exceed $450,000. If at the end of the
calendar year, EBITDA is less than $26 million, management fees
paid to LSB during the year shall be refunded to the Company for
the first three quarters of the year, not to exceed $1,350,000.
The maximum management fee amount to be paid to LSB by the
Company is adjusted annually commensurate with the percentage
change, if any, in the Consumer Price Index during the preceding
calendar year. No payments were made to LSB under the Management
Agreement in 1999, 1998, or 1997.
Tax Sharing Agreement
On November 21, 1997, the Company and LSB entered into a tax
sharing agreement (the "Tax Sharing Agreement") which provides
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 will be 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) 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 Sharing Agreement, then the Company
will pay to LSB the amount of the deficiency. The Company paid
approximately $1.0 million to LSB in 1997 (none in 1999 and 1998)
under the tax sharing agreement.
Directors' Compensation
Due to LSB and the Company holding joint Board of Director meetings
and also due to the revised allocations of costs discussed further
at Item 13 "Servcies Agreement", effective January 1, 2000, allocation
of 75% of the director's fees paid to the members of the Board of
Directors that are not employees of LSB or the Company and that are
directors of both the Company and LSB compensation will be paid by
the Company. The Company believes that this allocation is fair and
reasonable as a substantial portion of the businesses of LSB are owned
by the Company.
Industrial Supplies, Machines and Climate Control Equipment
During the year ended December 31, 1999, certain
subsidiaries of LSB that are not subsidiaries of the Company sold
to subsidiaries of the Company approximately $1.5 million in
industrial supplies, machine tools and certain thermostats, and
it is anticipated that such transactions will continue in the
future.
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, 1999 the Company had loans and advances due from LSB of
approximately $13.4 million, $10.0 million and bears interest at
10 3/4%, maturing November 2007 and $3.4 million due from LSB and
affiliates related to cash advances from the Company to LSB and
affiliates prior tot he sale of the Notes, as defined, from
borrowings on the Company's credit facilities. This loan is due
by its terms in November 2007 and bears interest at 7% per annum.
At December 31, 1999 the Company had $2.4 million due from LSB
and affiliates included in current assets related to advances as
discussed previously, interest and refunds due associated with
operations under the Service Agreement or refunds under the
management agreement. At December 31, 1999, LSB had not made the
December 1 interest payment to the Company for the loans
described above. LSB made the December 1 interest payment in
March 2000. The Company earned interest income on net
$1,474,000, $1,316,000 and $357,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
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
As of December 31, 1999, LSB has guaranteed the lease
payments due by the Company=s fan coil business under a lease
purchase agreement of $279,000. In addition, LSB has
unconditionally guaranteed repayment by the Climate Control
Business of certain term debt, the principal amount of which is
currently $1.0 million.
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.
