FORM 10-K
UNITED STATES
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 (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 from __________ to __________
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1015226
___________________________ ___________________
(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:
Name of Each Exchange
Title of Each Class On Which Registered
___________________________________ _________________________
Common Stock, Par Value $.10 New York Stock Exchange
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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(Facing Sheet Continued)
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. __________.
As of February 28, 1999, the aggregate market value of the
7,650,412 shares of voting stock of the Registrant held by
non-affiliates of the Company equaled approximately $22,951,236
based on the closing sales price for the Company's common stock as
reported for that date on the New York Stock Exchange. That amount
does not include the 1,463 shares of voting Convertible Non-
Cumulative Preferred Stock (the "Non-Cumulative Preferred Stock")
held by non-affiliates of the Company. An active trading market
does not exist for the shares of Non-Cumulative Preferred Stock.
As of February 28, 1999, the Registrant had 11,866,486 shares
of common stock outstanding (excluding 3,242,190 shares of common
stock held as treasury stock).
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FORM 10-K OF LSB INDUSTRIES, INC.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 1
Chemical Business 1
Climate Control Business 7
Automotive Products Business 11
Industrial Products Business 12
Employees 13
Research and Development 13
Environmental Matters 13
Item 2. Properties
Chemical Business 16
Climate Control Business 17
Automotive Products Business 18
Industrial Products Business 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 4A. Executive Officers of the Company 21
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 22
Stockholders 22
Dividends 22
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 28
Results of Operations 32
Liquidity and Capital Resources 36
Year 2000 Issues 43
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Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
General 45
Interest Rate Risk 46
Raw Material Price Risk 48
Foreign Currency Risk 48
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 48
Special Note Regarding Forward-Looking Statements 49
PART III 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 52
iv
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PART I
______
Item 1. BUSINESS
________
General
_______
LSB Industries, Inc. (the "Company") was formed in 1968 as an
Oklahoma corporation, and in 1977 became a Delaware corporation.
The Company is a diversified holding company which is engaged,
through its subsidiaries, in (i) the manufacture and sale of
chemical products for the explosives, agricultural and industrial
acids markets (the "Chemical Business"), (ii) the manufacture and
sale of a broad range of hydronic fan coils and water source heat
pumps as well as other products used in commercial and residential
air conditioning systems (the "Climate Control Business"), and
(iii) the manufacture or purchase and sale of certain automotive
and industrial products, including automotive bearings and other
automotive replacement parts (the "Automotive Products Business")
and the purchase and sale of machine tools (the "Industrial
Products Business").
As previously announced, the Company is continuing with its
evaluation of the spin-off of the Automotive Products Business
("Automotive") to its shareholders as a dividend. The spin-off of
Automotive will require, among other things, commitment to a formal
plan, receipt by the Company from the Internal Revenue Service of
a favorable ruling or an opinion of counsel confirming tax-free
treatment, certain Securities and Exchange Commission filings,
arrangement for lines of credit for Automotive, and LSB Board of
Directors' approval. Subject to completion of the above
conditions, management believes there is a strong likelihood that
the spin-off will be completed during 1999. However, there are no
assurances that the Company will spin-off Automotive.
Segment Information and Foreign and Domestic Operations and Export
Sales
__________________________________________________________________
Schedules of the amounts of sales, operating profit and loss,
and identifiable assets attributable to each of the Company's lines
of business and of the amount of export sales of the Company in the
aggregate and by major geographic area for each of the Company's
last three fiscal years appear in Note 13 of the Notes to
Consolidated Financial Statements included elsewhere in this
report.
A discussion of any risks attendant as a result of a foreign
operation or the importing of products from foreign countries
appears below in the discussion of each of the Company's business
segments.
Chemical Business
_________________
General
_______
The Company's Chemical Business manufactures three principal
product lines that are derived from anhydrous ammonia: (1)
fertilizer grade ammonium nitrate for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric acid
for commercial applications primarily in the paper industry. The
Chemical Business' products are sold in niche markets where the
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Company believes it can establish a position as a market leader.
See "Special Note Regarding Forward-Looking Statements".
The Chemical Business' principal manufacturing facility is
located in El Dorado, Arkansas ("El Dorado Facility"), and its
other manufacturing facilities are located in Hallowell, Kansas,
Wilmington, North Carolina, and four locations in Australia.
For each of the years 1998, 1997 and 1996, approximately 26%
of the sales of the Chemical Business consisted of sales of
fertilizer and related chemical products for agricultural purposes,
which represented approximately 12%, 13% and 14% of the Company's
consolidated sales for each respective year, and approximately 52%,
61% and 61% of the sales of the Chemical Business consisted of
sales of ammonium nitrate and other chemical-based blasting
products for the mining industry, which represented approximately
23%, 31% and 33% of the Company's 1998, 1997 and 1996 consolidated
sales, respectively. The Chemical Business accounted for
approximately 45%, 50% and 54% of the Company's 1998, 1997 and 1996
consolidated sales, respectively.
Agricultural Products
_____________________
The Chemical Business produces ammonium nitrate, a nitrogen-
based fertilizer, at the El Dorado Facility. In 1998, the Company
sold approximately 143,000 tons of ammonium nitrate fertilizer to
farmers, fertilizer dealers and distributors located primarily in
the south central United States.
Ammonium nitrate is one of several forms of nitrogen-based
fertilizers which include anhydrous ammonia and urea. Although, to
some extent, the various forms of nitrogen-based fertilizers are
interchangeable, each has its own characteristics which produce
agronomic preferences among end users. Farmers decide which type
of nitrogen-based fertilizer to apply based on the crop planted,
soil and weather conditions, regional farming practices and
relative nitrogen fertilizer prices.
The Chemical Business is a major manufacturer of fertilizer
grade ammonium nitrate, which it markets primarily in Texas,
Arkansas and the surrounding regions. This market, which is in
close proximity to its El Dorado Facility, includes a high
concentration of pasture land and row crops which favor ammonium
nitrate over other nitrogen-based fertilizers. The Company has
developed the leading market position in Texas by emphasizing high
quality products, customer service and technical advice. Using a
proprietary prilling process, the Company produces a high
performance ammonium nitrate fertilizer that, because of its
uniform size, is easier to apply than many competing nitrogen-based
fertilizer products. The Company believes that its "E-2" brand
ammonium nitrate fertilizer is recognized as a premium product
within its primary market. In addition, the Company has developed
long term relationships with end users through its network of 22
owned and operated wholesale and retail distribution centers.
In 1998, the Chemical Business has been adversely affected by
the extreme drought conditions in the mid-south market during the
primary fertilizer season, followed by excess wet conditions and
floods in the fall season, resulting in substantially lower volume
and lower sales prices for certain of its products sold in its
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agricultural markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Special Note
Regarding Forward-Looking Statements".
Explosives
__________
The Chemical Business manufactures low density ammonium
nitrate-based explosives including bulk explosives used in surface
mining. In addition, the Company manufactures and sells a branded
line of packaged explosives used in construction, quarrying and
other applications, particularly where controlled explosive charges
are required. The Company's bulk explosives are marketed primarily
through five Company-owned distribution centers, three of which are
located in close proximity to the customers' surface mines in the
coal producing states of Kentucky, Missouri, and West Virginia.
Additionally, the Company, through its Australian subsidiary,
manufactures and distributes bulk and packaged explosives in
Australia. The Company emphasizes value-added customer services
and specialized product applications for its bulk explosives. Most
of the sales of bulk explosives are to customers who work closely
with the Company's technical representatives in meeting their
specific product needs. In addition, the Company sells bulk
explosives to independent wholesalers and to other explosives
companies. Packaged explosives are used for application requiring
controlled explosive charges and typically command a premium price
and produce higher margins. The Company believes its Slurry
packaged explosive products are among the most widely recognized in
the industry. Slurry packaged explosive products are sold
nationally and internationally to other explosive companies and
end-users.
The Company has received an offer in 1999, the terms of which
it is presently negotiating with the company that made the offer,
to sell the Australian subsidiary; however, there are no assurances
that the Company will sell the Australian subsidiary.
Industrial Acids
________________
The Chemical Business manufactures and sells industrial acids,
primarily to the food, paper, chemical and electronics industries.
The Company is the leading supplier to third parties of
concentrated nitric acid which is a special grade of nitric acid
used in the manufacture of plastics, pharmaceuticals, herbicides,
explosives, and other chemical products. In addition, the Company
produces and sells regular, blended and mixed nitric acid and a
variety of grades of sulfuric acid. The Company competes on the
basis of price and service, including on-time reliability and
distribution capabilities. The Company operates the largest fleet
of tankcars in the concentrated nitric acid industry which provides
it with a significant competitive advantage in terms of
distribution costs and capabilities. In addition, the Company
provides inventory management as part of the value-added services
it offers to its customers.
The Company has identified concentrated nitric acid as a
strategic product line for its Chemical Business due to attractive
levels of profitability, increased diversity of end markets and the
ability to compete on a value added service basis. To support
further growth in its nitric acid business, the Company constructed
the DSN Plant located at the El Dorado Facility. The DSN Plant
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uses a newer and more efficient process to produce concentrated
nitric acid directly from anhydrous ammonia, in contrast to the
conventional process which requires the input of regular nitric
acid, an intermediate step to produce concentrated nitric acid.
DSN Plant
_________
During the four years commencing January 1, 1994, the Chemical
Business spent approximately $32.0 million to construct and install
the DSN Plant. The DSN Plant began limited operations in 1995, and
such limited operations continued due to certain mechanical and
design problems associated with the plant's construction and
installation. As a result of such problems, production at the DSN
Plant was limited to approximately 170 and 223 tons per day for the
years ended December 31, 1997 and 1998, respectively. These
production rates approximate 60% and 80%, respectively, of the
stated capacity of 285 tons per day assuming 338 days of annual
production. In October, 1998, management completed certain
corrective actions at the DSN Plant. As a result of these
corrective actions, the DSN Plant has since produced at rates equal
to or above the stated capacity of 285 tons per day. While the
Company will seek to market the additional capacity of concentrated
nitric acid output to commercial markets, there can be no assurance
that the Company will be able to sell all of the additional
capacity in this market. However, to the extent that there is
insufficient demand for concentrated nitric acid, the Company
believes it can profitably use the concentrated nitric acid in the
production of mixed and blended acids and ammonium nitrate based
fertilizer and explosives (although at lower margins than if the
production were sold as concentrated nitric acid). See "Special
Note Regarding Forward-Looking Statements".
EDNC Baytown Plant
__________________
In June, 1997, two wholly owned subsidiaries of the Company,
El Dorado Chemical Company ("EDC") and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer")(collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC will act as an agent to construct and,
upon completion of construction, will operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC has guaranteed the performance of EDNC's obligations
under the Bayer Agreement.
Under the terms of the Bayer Agreement, EDNC is to lease the
EDNC Baytown Plant pursuant to a leveraged lease from an unrelated
third party with an initial lease term of ten years from the date
on which the EDNC Baytown Plant becomes fully operational. Bayer
will purchase from EDNC all of its requirements for nitric acid to
be used by Bayer at its Baytown, Texas facility for ten years from
the date on which the EDNC Baytown Plant becomes fully operational.
EDNC will purchase from Bayer its requirements for anhydrous
ammonia for the manufacture of nitric acid as well as utilities and
other services. Subject to certain conditions, EDNC will be
entitled to sell the amount of nitric acid manufactured at the EDNC
Baytown Plant which is in excess of Bayer's requirements to third
parties. The Bayer Agreement provides that Bayer will make certain
net monthly payments to EDNC which will be sufficient for EDNC to
recover all of its costs plus a profit. The Company estimates
that, after the initial start-up phase of operations of the EDNC
Baytown Plant, at full production capacity based on terms of the
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Bayer Agreement and subject to the price of anhydrous ammonia, the
EDNC Baytown Plant is anticipated to generate approximately $35
million to $50 million in annual gross revenues. Unlike the
Chemical Business' regular sales volume, the market risk on this
additional volume is much less since the contract provides for
recovery of costs, as defined, plus a profit. See "Special Note
Regarding Forward-Looking Statements". Upon expiration of the
initial ten-year term from the date the EDNC Baytown Plant becomes
operational, the Bayer Agreement may be renewed for up to six
renewal terms of five years each; however, prior to each renewal
period, either party to the Bayer Agreement may opt against
renewal.
Under the original Bayer Agreement, if operations at the EDNC
Baytown Plant were not commenced by February 1, 1999, or upon a
change in control of LSB, EDC or EDNC, Bayer had an option to
terminate the Bayer Agreement. EDNC has an option to terminate the
Bayer Agreement upon the occurrence of certain events of default
which remain uncured. Bayer retains the right of first refusal
with respect to any bona fide third-party offer to purchase any
voting stock of EDNC or any portion of the EDNC Baytown Plant.
In January, 1999, the contractor constructing the EDNC Baytown
Plant informed the Company that it could not complete construction
alleging a lack of financial resources. The Company and certain
other parties involved in this project have demanded the
contractor's bonding company to provide funds necessary for
subcontractors to complete construction. The Company, the
contractor, the bonding company and Bayer have entered into an
agreement which provides that the bonding company will pay $12.9
million for payments to subcontractors for work performed prior to
February 1, 1999. In addition, the contractor has agreed to
provide, on a no cost basis, labor and to incur certain other
additional costs through the completion of the contract. Because
of this delay, an amendment was entered into in connection with the
Bayer Agreement. The amendment extended the requirement date that
the plant be in production by May 31, 1999, and fully operational
by June 30, 1999. The amendment also requires the Company to
reimburse Bayer for certain increased costs incurred by Bayer due
to the failure to complete the construction of the EDNC Baytown
Plant by February 1, 1999. The anticipated construction cost of
the EDNC Baytown Plant, not including the $12.9 million paid to
subcontractors by the bonding company, is currently anticipated to
be approximately $69 million. The Company anticipates that
construction of the EDNC Baytown Plant will be mechanically
complete and making acid by April 15, 1999, and, after completion
of certain performance tests, be fully operational by June 1, 1999.
Construction financing of the EDNC Baytown Plant is being provided
by an unaffiliated lender up to $75 million. Neither the Company
nor EDC has guaranteed any of the lending obligations for the EDNC
Baytown Plant. See "Special Note Regarding Forward-Looking
Statements".
Raw Materials
-------------
Anhydrous ammonia represents the primary component in the
production of most of the products of the Chemical Business. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Chemical business currently purchases
approximately 220,000 tons of anhydrous ammonia per year for use in
its manufacture of its products. The Company has contracts with
three suppliers of anhydrous ammonia. One contract expires in
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April, 2000, one expires in June, 2000, and the other expires in
December, 2000. The Chemical Business is required to buy at least
120,000 tons of its annual requirements of anhydrous ammonia under
the contract expiring in April, 2000, at least 24,000 tons of its
annual requirements of anhydrous ammonia under the contract
expiring in June, 2000, and at least 60,000 tons of its annual
requirements of anhydrous ammonia under the contract expiring in
December, 2000, with additional quantities of anhydrous ammonia
available under each contract. Anhydrous ammonia is not being
currently supplied under the contract expiring in December, 2000,
due to that supplier's declaration of an event of force majeure as
a result of a temporary shut down of its plant caused by mechanical
problems. The Company has been able to, on a temporary basis,
obtain anhydrous ammonia from other sources on similar terms as
provided in the contract expiring in December, 2000.
During 1995, 1996, 1997, and the first half of 1998, there
were substantial increases in the price for anhydrous ammonia.
During each of these periods, the Chemical Business was unable to
increase its sales prices to cover all of the higher anhydrous
ammonia costs incurred by the Company, and in the future the
Chemical Business may not be able to pass along to its customers
the full amount of increases in anhydrous ammonia costs.
Accordingly, the Company's results of operations and financial
condition have in the past been adversely affected by cost
increases of raw materials, including anhydrous ammonia. During
the second half of 1998, cost for anhydrous ammonia decreased. The
ammonia industry added an additional one million tons of capacity
of anhydrous ammonia in the western hemisphere in 1998, and the
Company believes there is approximately one million tons of
additional annual capacity of anhydrous ammonia being constructed
in the western hemisphere scheduled for completion in 1999. The
Company believes this additional capacity may contribute to a
decline in the future market price of anhydrous ammonia. See
"Special Note Regarding Forward-Looking Statements".
The Company believes that it could obtain anhydrous ammonia
from other sources in the event of a termination of the above-
referenced contracts, but such may not be obtainable on as
favorable terms.
Seasonality
___________
The Company believes that the only seasonal products of the
Chemical Business are fertilizer and related chemical products sold
to the agricultural industry. The selling seasons for those
products are primarily during the spring and fall planting seasons,
which typically extend from February through May and from September
through November in the geographical markets in which the majority
of the Company's agricultural products are distributed. As a
result, the Chemical Business increases its inventory of ammonium
nitrate prior to the beginning of each planting season. Sales to
the agricultural markets depend upon weather conditions and other
circumstances beyond the control of the Company.
Patents
_______
The Company believes that the Chemical Business does not
depend upon any patent or license; however, the Chemical Business
does own certain patents that it considers important in connection
with the manufacture of certain blasting agents and high
explosives. These patents will expire in 1999.
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Regulatory Matters
__________________
Each of the Chemical Business' domestic blasting product
distribution centers are licensed by the Bureau of Alcohol, Tobacco
and Firearms in order to manufacture and distribute blasting
products. The Australian distribution centers are subject to
comparable licensing requirements imposed by their controlling
government authorities. The Chemical Business is also subject to
extensive federal, state and local environmental laws, rules and
regulations. See "Environmental Compliance", "Environmental
Matters" and "Legal Proceedings".
Competition
___________
The Chemical business competes with other chemical companies
in its markets, many of whom have greater financial and other
resources than the Company. The Company believes that competition
within the markets served by the Chemical Business is primarily
based upon price, service, warranty and product performance. The
Company believes that the Chemical Business is the leader in the
Texas ammonium nitrate market and is the leading producer of
concentrated nitric acid in the United States for third party
sales. See "Special Note Regarding Forward-Looking Statements".
Developments in Asia
____________________
The Chemical Business' Australian subsidiaries' results of
operations have been adversely affected during 1997 and 1998 due to
economic developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Chemical Business services. The
Company received in 1999 an offer for the purchase of the
Australian subsidiary, and, as of the date of this report, the
Company is negotiating with the company that made the offer. There
are no assurances that the Company will sell the Australian
subsidiary.
Climate Control Business
_________________________
General
_______
The Company's Climate Control Business manufactures and sells
a broad range of standard and custom designed hydronic fan coils
and water source heat pumps as well as other products for use in
commercial and residential heating ventilation and air conditioning
("HVAC") systems. Demand for the Climate Control Business'
products is driven by the construction of commercial, institutional
and residential buildings, the renovation of existing buildings and
the replacement of existing systems. The Climate Control Business'
commercial products are used in a wide variety of buildings, such
as: hotels, motels, office buildings, schools, universities,
apartments, condominiums, hospitals, nursing homes, extended care
facilities, supermarkets and superstores. Many of the Company's
products are targeted to meet increasingly stringent indoor air
quality and energy efficiency standards. The Climate Control
Business accounted for approximately 37%, 34% and 29% of the
Company's 1998, 1997 and 1996 consolidated sales, respectively.
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Hydronic Fan Coils
__________________
The Climate Control Business is the leading provider of
hydronic fan coils targeted to the commercial and institutional
markets in the U.S. Hydronic fan coils use heated or chilled water,
provided by a centralized chiller or boiler through a water pipe
system, to condition the air and allow individual room control.
Hydronic fan coil systems are quieter and have longer lives and
lower maintenance costs than comparable systems used where
individual room control is required. The Company believes that its
product line of hydronic fan coils is the most extensive offered by
any domestic producer. The breadth of this product line coupled
with customization capability provided by a flexible manufacturing
process are important components of the Company's strategy for
competing in the commercial and institutional renovation and
replacement markets. See "Special Note Regarding Forward-Looking
Statements".
Water Source Heat Pumps
_______________________
The Company is a leading U.S. provider of water source heat
pumps to the commercial construction and renovation markets. These
are highly efficient heating and cooling units which enable
individual room climate control through the transfer of heat
through a water pipe system which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to
large sized buildings with many small, individually controlled
spaces. The Company believes the market for commercial water
source heat pumps will continue to grow due to the relative
efficiency and long life of such systems as compared to other air
conditioning and heating systems, as well as to the emergence of
the replacement market for those systems. See "Special Note
Regarding Forward-Looking Statements".
Geothermal Products
___________________
The Climate Control Business is a pioneer in the use of
geothermal water source heat pumps in residential and commercial
applications. Geothermal systems, which circulate water or
antifreeze through an underground heat exchanger, are among the
most energy efficient systems available. The Company believes that
an aging installed base of residential HVAC systems, coupled with
the longer life, lower cost to operate, and relatively short
payback periods of geothermal systems will continue to increase
demand for its geothermal products, particularly in the residential
replacement market. See "Special Note Regarding Forward-Looking
Statements".
Hydronic Fan Coil and Water Source Heat Pump Market
___________________________________________________
The Company has pursued a strategy of specializing in hydronic
fan coils and water source heat pump products. The annual U.S.
market for hydronic fan coils and water source heat pumps is
approximately $273 million. Demand in these markets is generally
driven by levels of repair, replacement, and new construction
activity. The U.S. market for fan coils and water source heat pump
products has grown on average 14% per year over the last 4 years.
This growth has been fueled by new construction, the aging of the
installed base of units, the introduction of new energy efficient
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systems, upgrades to central air conditioning and increased
governmental regulations restricting the use of ozone depleting
refrigerants in HVAC systems.
Production and Backlog
______________________
Most of the Climate Control Business' production of the above-
described products occurs on a specific order basis. The Company
manufactures the units in many sizes and configurations, as
required by the purchaser, to fit the space and capacity
requirements of hotels, motels, school, hospitals, apartment
buildings, office buildings and other commercial or residential
structures. As of December 31, 1998, the backlog of confirmed
orders for the Climate Control Business was approximately $21.1
million as compared to approximately $28.8 million at December 31,
1997. A customer generally has the right to cancel an order prior
to the order being released to production. Past experience
indicates that customers generally do not cancel orders after the
Company receives them. As of March 31, 1999, the Climate Control
Business had released substantially all of the December 31, 1998
backlog to production. All of the December 31, 1998 backlog is
expected to be filled by December 31, 1999. See "Special Note
Regarding Forward-Looking Statements".
Marketing and Distribution
__________________________
Distribution
____________
The Climate Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors.
The Company's sales to mechanical contractors primarily occur
through independent manufacturer's representatives, who also
represent complementary product lines not manufactured by the
Company. Original equipment manufacturers generally consist of
other air conditioning and heating equipment manufacturers who
resell under their own brand name the products purchased from the
Climate Control Business in competition with the Company. Sales to
original equipment manufacturers accounted for approximately 25% of
the sales of the Climate Control Business in 1998 and approximately
9% of the Company's 1998 consolidated sales.
Market
______
The Climate Control Business depends primarily on the
commercial construction industry, including new construction and
the remodeling and renovation of older buildings. In recent years
this Business has introduced geothermal products designed for
residential markets for both new and replacement markets.
Raw Materials
_____________
Numerous domestic and foreign sources exist for the materials
used by the Climate Control Business, which materials include
aluminum, copper, steel, electric motors and compressors. The
Company does not expect to have any difficulties in obtaining any
necessary materials for the Climate Control Business. See "Special
Note Regarding Forward-Looking Statements".
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Competition
___________
The Climate Control Business competes with approximately eight
companies, some of whom are also customers of the Company. Some of
the competitors have greater financial and other resources than the
Company. The Climate Control Business manufactures a broader line
of fan coil and water source heat pump products than any other
manufacturer in the United States, and the Company believes that it
is competitive as to price, service, warranty and product
performance.
Joint Ventures and Options to Purchase
______________________________________
The Company has obtained an option to acquire 80% of the
issued and outstanding stock of an Entity ("Entity") that performs
energy savings contracts, primarily on US government facilities
(the "Option"). For the Option, the Company has paid $1.3 million
as of the date of this report. The term of the Option expires May
4, 1999. The Company is currently negotiating to extend the
expiration date of its Option. As of the date of this report, the
Company has not decided whether it will exercise the Option. If
the Company is unsuccessful in negotiating an extension of the
Option exercise date, and, if the Company decides to exercise the
Option, the Company may pay an exercise price of $4.0 million, less
the amount already paid toward the Option ("Option Price"), with a
portion of the unpaid exercise price being payable in cash and the
balance over a certain period of time. The grantors of the Option
have entered into an employment agreement with the Entity. Under
the terms of the employment agreements, each of the three grantors
will receive, among other things, 12 1/2% of the net profits of the
Entity for a period of three to five years following the date of
exercise of the Option. If the Company is unsuccessful in
negotiating an extension of the Option exercise date, and, if the
Company decides not to exercise the Option, the grantors of the
Option have agreed to repay to the Company the amounts paid by the
Company in connection with the Option up to a total of $1.0
million, which obligation is secured by the stock of the Entity and
other affiliates of the Entity. There is no assurance that the
grantors of the Option will have funds necessary to repay to the
Company the amount paid for the Option in the event they are
required to pay such amounts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Through the date of this report, the Company has loaned the Entity
approximately $1.4 million. The Company has recorded reserves of
approximately $1.3 million against the loans and option payments.
For its year ended June 30, 1998, the Entity reported an audited
net income of approximately $.9 million.
During 1994, a subsidiary of the Company obtained an option to
acquire all of the stock of a French manufacturer of air
conditioning and heating equipment. The Company's subsidiary was
granted the option as a result of the subsidiary loaning to the
parent company of the French manufacturer approximately $2.1
million. Subsequent to the loan of $2.1 million, the Company's
subsidiary has loaned to the parent of the French manufacturer an
additional $1.7 million. The amount loaned is secured by the stock
and assets of the French manufacturer. The Company's subsidiary
may exercise its option to acquire the French manufacturer by
converting approximately $150,000 of the amount loaned into equity.
The option is currently exercisable and will expire June 15, 2005.
As of the date of this report, the Company has not decided whether
it will exercise the option.
10
<PAGE>
For 1998 and 1997, the French manufacturer had revenues of
$17.2 million and $14.3 million, respectively, and reported net
income in 1998 and 1997 of approximately $100,000 and $300,000,
respectively. As a result of cumulative losses by the French
manufacturer, the Company established reserves against the loans
aggregating approximately $1.5 million through December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
Automotive Products Business
____________________________
General
_______
The Automotive Products Business is primarily engaged in the
manufacture and sale of a line of anti-friction bearings, which
includes straight-thrust and radial-thrust ball bearings, angular
contact ball bearings, and certain other automotive replacement
parts (including universal joints, motor mounts, and clutches).
This Business also manufactures power train and drive line parts
for original equipment manufacturers. These products are used in
automobiles, trucks, trailers, tractors, farm and industrial
machinery, and other equipment. The Automotive Products Business
accounted for approximately 13% and 11% of the Company's 1998 and
1997 sales, respectively. In 1998, the Automotive Products
Business manufactured approximately 44% of the products it sold,
and approximately 40% in 1997, and purchased the balance of its
products from other sources, including foreign sources.
As discussed in "Item 1 - Business - General", the Company is
continuing with its evaluation of the spin-off of Automotive to its
shareholders as a dividend. The spin-off of Automotive will
require, among other things, commitment to a formal plan, receipt
by the Company from the Internal Revenue Service of a favorable
ruling or an opinion of counsel confirming tax-free treatment,
certain Securities and Exchange Commission filings, arrangement for
lines of credit for Automotive, and LSB Board of Directors'
approval. Subject to completion of the above conditions,
management believes there is a strong likelihood that the spin-off
will be completed during 1999. However, there are no assurances
that the Company will spin-off Automotive.
Distribution and Market
_______________________
The automotive, truck and agricultural equipment replacement
markets serve as the principal markets for the Automotive Products
Business. This Business sells its products domestically and for
export, principally through independent manufacturers'
representatives who also sell other automotive products. Those
manufacturers' representatives sell to retailers (including major
chain stores), wholesalers, distributors and jobbers. The
Automotive Products Business also sells its products directly to
original equipment manufacturers and certain major chain stores.
Inventory
_________
The Company generally produces or purchases the products sold
by the Automotive Products Business in quantities based on a
general sales forecast, rather than on specific orders from
11
<PAGE>
customers. The Company fills most orders for the automotive
replacement market from inventory. The Company generally produces
products for original equipment manufacturers after receiving an
order from the manufacturer.
Raw Materials
_____________
The principal materials that the Automotive Products Business
needs to produce its products consist of high alloy steel tubing,
steel bars, flat strip coil steel and bearing components produced
to specifications. The Company acquires those materials from a
variety of domestic and foreign suppliers at competitive prices.
The Company does not anticipate having any difficulty in obtaining
those materials in the near future. See "Special Note Regarding
Forward-Looking Information".
Foreign Risk
____________
By purchasing a significant portion of the bearings and other
automotive replacement parts that it sells from foreign
manufacturers, the Automotive Products Business must bear certain
import duties and international economic risks, such as currency
fluctuations and exchange controls, and other risks from political
upheavals and changes in United States or other countries' trade
policies. Contracts for the purchase of foreign-made bearings and
other automotive replacement parts provide for payment in United
States dollars. Circumstances beyond the control of the Company
could eliminate or seriously curtail the supply of bearings or
other automotive replacement parts from any one or all of the
foreign countries involved.
Competition
___________
The Automotive Products Business engages in a highly
competitive business. Competitors include other domestic and
foreign bearing manufacturers, which sell in the original equipment
and replacement markets. Many of those manufacturers have greater
financial and other resources than the Company.
Industrial Products Business
____________________________
General
_______
The Industrial Products Business purchases and markets a
proprietary line of machine tools. The current line of machine
tools distributed by the Industrial Products Business includes
milling, drilling, turning and fabricating machines. The
Industrial Products Business purchases most of the machine tools
marketed by it from foreign companies, which manufacture the
machine tools to the Company's specifications. This Business
manufactures CNC bed mills and electrical control panels for
machine tools. The Company has eliminated in the past, and
continues to eliminate, certain categories of machinery from its
product line by not replacing them when sold. The Industrial
Products Business accounted for approximately 5% of the Company's
consolidated sales in each of the years 1998 and 1997.
12
<PAGE>
Distribution and Market
_______________________
The Industrial Products Business distributes its machine tools
in the United States, Mexico, Canada and certain other foreign
markets. The Industrial Products Business also sells its machine
tools through independent machine tool dealers throughout the
United States and Canada, who purchase the machine tools for resale
to end users. The principal markets for machine tools, other than
machine tool dealers, consist of manufacturing and metal working
companies, maintenance facilities, and utilities.
Foreign Risk
____________
By purchasing a majority of the machine tools from foreign
manufacturers, the Industrial Products Business must bear certain
import duties and international economic risks, such as currency
fluctuations and exchange controls, and other risks from political
upheavals and changes in United States or other countries' trade
policies. Contracts for the purchase of foreign-made machine tools
provide for payment in United States dollars. Circumstances beyond
the control of the Company could eliminate or seriously curtail the
supply of machine tools from any one or all of the foreign
countries involved.
Competition
___________
The Industrial Products Business competes with manufacturers,
importers, and other distributors of machine tools many of whom
have greater financial resources than the Company. The Company's
machine tool business generally is competitive as to price,
warranty and service, and maintains personnel to install and
service machine tools.
Employees
_________
As of December 31, 1998, the Company employed 1,723 persons.
As of that date, (a) the Chemical Business employed 578 persons,
with 133 represented by unions under agreements expiring in August,
2001 and February, 2002, (b) the Climate Control Business employed
686 persons, none of whom are represented by a union, and (c) the
Automotive Products Business employed 344 persons, with 21
represented by unions under an agreement expiring in July, 2000.
Research and Development
________________________
The Company incurred approximately $409,000 in 1998, $394,000
in 1997, and $532,000 in 1996 on research and development relating
to the development of new products or the improvement of existing
products. All expenditures for research and development related to
the development of new products and improvements are expensed by
the Company.
Environmental Matters
_____________________
The Company and its operations are subject to numerous
Environmental Laws and to other federal, state and local laws
regarding health and safety matters ("Health Laws"). In
particular, the manufacture and distribution of chemical products
are activities which entail environmental risks and impose
13
<PAGE>
obligations under the Environmental Laws and the Health Laws, many
of which provide for substantial fines and criminal sanctions for
violations, and there can be no assurance that material costs or
liabilities will not be incurred by the Company in complying with
such laws or in paying fines or penalties for violation of such
laws. The Environmental Laws and Health Laws and enforcement
policies thereunder relating to the Chemical Business have in the
past resulted, and could in the future result, in penalties,
cleanup costs, or other liabilities relating to the handling,
manufacture, use, emission, discharge or disposal of pollutants or
other substances at or from the Company's facilities or the use or
disposal of certain of its chemical products. Significant
expenditures have been incurred by the Chemical Business at the El
Dorado Facility in order to comply with the Environmental Laws and
Health Laws. The Chemical Business may be required to make
additional significant site or operational modifications at the El
Dorado Facility, potentially involving substantial expenditures and
reduction, suspension or cessation of certain operations. See
"Special Note Regarding Forward-Looking Statements"; "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Chemical Business" and "Legal Proceedings."
Due to a consent order entered into with the Arkansas
Department of Pollution Control & Ecology ("ADPC&E"), the Chemical
Business has installed additional monitoring wells at the El Dorado
Facility in accordance with a workplan approved by the ADPC&E, and
submitted the test results to ADPC&E. The results indicated that a
risk assessment should be conducted on nitrates present in the
shallow groundwater. The Chemical Business' consultant has
completed this risk assessment, and has forwarded it to the ADPC&E
for approval. The risk assessment concludes that, although there
are contaminants at the El Dorado Facility and in the groundwater,
the levels of such contaminants at the El Dorado Facility and in
the groundwater do not present an unacceptable risk to human health
and the environment. Based on this conclusion, the Chemical
Business' consultant has recommended continued monitoring at the
site for five years.
A second consent order was entered into with ADPC&E in August,
1998 (the "Wastewater Consent Order"), which required installation
of an interim groundwater treatment system (which is now operating)
and certain improvements in the wastewater collection and treatment
system (discussed below). Twelve months after all improvements are
in place, the risk will be reevaluated, and a final decision will
be made on what additional groundwater remediation, if any, is
required. There can be no assurance that the risk assessment will
be approved by the ADPC&E, or that further work will not be
required.
In addition, in accordance with the consent order, the
Chemical Business currently plans to upgrade the El Dorado
Facility's wastewater treatment plant. Current estimates of the
cost of the planned upgrade are that approximately $4.6 million in
future capital expenditures will be incurred to complete this
project. Furthermore, the El Dorado Facility's new wastewater
permit currently is being reviewed for renewal by the ADPC&E. The
new permit may impose additional or more stringent limitations on
the plant's wastewater discharges. The Company believes, although
there can be no assurance, that any such new limitations would not
have a material adverse effect on the Company. See "Special Note
Regarding Forward-Looking Statements."
14
<PAGE>
During May, 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel located at the El
Dorado Facility failed, resulting in a release of such material to
a stormwater drain, and according to ADPC&E records, a minor fish
kill in a creek near the El Dorado Facility. In 1998, the Chemical
Business entered into a Consent Administrative Order (the
"Wastewater Consent Order") with the ADPC&E to resolve this event,
as well as certain violations of the facility's NPDES permit for
wastewater discharge. The Wastewater Consent Order also resolved
several issues relating to a Consent Administrative Order that the
Chemical Business had entered into in May, 1995, which ordered
closure of a solid waste landfill. The Wastewater Consent Order
requires the Chemical Business to complete a waste minimization
plan and characterize the wastewater before obtaining a new NPDES
permit, which is expected to have more restrictive effluent limits,
to install additional treatment to meet the new effluent limits by
August 1, 2001, and achieve compliance with the new effluent limits
by February 1, 2002. The Chemical Business is currently
undertaking the waste minimization activities. The Wastewater
Consent Order recognizes the presence of nitrate contamination in
the groundwater and requires the Chemical Business to undertake on-
site bioremediation, which is currently underway. Upon completion
of the waste minimization activities referenced above, a final
remedy for groundwater contamination will be selected, based on an
evaluation of risk. There are no known users of groundwater in the
area, and preliminary risk assessments have not identified any risk
that would require additional remediation. The Wastewater Consent
Order included a $183,700 penalty assessment, of which $125,000
will be satisfied over five years at expenditures of $25,000 per
year for waste minimization activities. The Chemical Business has
documented in excess of $25,000 on expenditures for the first year,
1998. An additional $57,000 of the assessed penalty was satisfied
by funding approved supplemental environmental projects and the
$1,700 required monetary civil penalty has been paid.
The El Dorado Facility's air permit required it to cease
operation of certain older nitric acid concentrators (the "Older
Nitric Acid Concentrators") within a certain period of time after
the initiation of operations of the DSN Plant. Due to certain
start-up problems with the DSN Plant, including excess emissions
from various emission sources, the Chemical Business and the ADPC&E
entered into certain agreements, including an administrative
consent order (the "Air Consent Order") in 1995 to resolve certain
of the Chemical Business' past violations and to permit the
Chemical Business to operate the Older Nitric Acid Concentrators
until the ADPC&E has made a final decision regarding the El Dorado
Facility's air permit, including whether the Older Nitric Acid
Concentrators may continue to operate. Although the Company
expects that the Chemical Business will be able to continue to
operate the Older Nitric Acid Concentrators, there can be no
assurance that the ADPC&E will allow it to continue to do so. The
Air Consent Order also provides for payment of a civil penalty of
$50,000, which the Chemical Business has paid, and requires
installation of certain pollution control equipment and completion
of certain maintenance activities at the El Dorado Facility to
eliminate certain off-site hazing problems. The Air Consent Order
was amended in 1996 and 1997. The second amendment to the Air
Consent Order (the "1997 Amendment") provided for certain
stipulated penalties of $1,000 per hour to $10,000 per day for
continued off-site emission events and deferred enforcement for
other alleged air permit violations. The 1997 Amendment
acknowledges that the Chemical Business has completed the
15
<PAGE>
installation of the pollution control equipment and maintenance
activities required under the Air Consent Order. Nonetheless, the
Chemical Business was assessed an additional penalty of $150,000,
as well as a payment of an additional $50,000 to fund certain
environmental projects, with respect to a number of alleged permit
violations relating to off-site emissions and other air permit
conditions. The Chemical Business has paid both the penalty and
the additional sums required by the 1997 Amendment. Since the 1997
Amendment and as of the date of this report, the Chemical Business
has been assessed stipulated penalties of approximately $67,000 by
the ADPC&E for violations of certain provisions of the 1997
Amendment. In 1998, a third amendment to the Air Consent Order
provided for the stipulated penalties to be reset at $1,000 per
hour after ninety (90) days without any confirmed events. The
Chemical Business believes that the El Dorado Facility has made
progress in controlling certain off-site emissions; however, such
off-site emissions have occurred, and may continue, from time to
time, which could result in the assessment of additional penalties
against the Chemical Business by the ADPC&E and could have a
material adverse effect on the Company. In addition, prior to
1998, the El Dorado Facility was identified as one of 33
significant violators of the federal Clean Air Act in a review of
Arkansas air programs by the EPA Office of Inspector General. The
Company is unable to predict the impact, if any, of such
designation. See "Special Note Regarding Forward-Looking
Statements."
During 1997 and 1998, the Chemical Business expended
approximately $1.1 million and $.7 million, respectively, in
connection with capital expenditures relating to compliance with
federal, state and local Environmental Laws at its El Dorado
Facility, including, but not limited to, compliance with the Air
Consent Order, as amended. The Company anticipates that the
Chemical Business will spend approximately $4.6 million for capital
expenditures relating to environmental control facilities at its El
Dorado Facility to comply with Environmental Laws, including, but
not limited to, the Air Consent Order, as amended, with $2.4
million being spent in 1999 and the balance being spent in 2000.
No assurance can be made that the actual expenditures of the
Chemical Business for such matters will not exceed the estimated
amounts by a substantial margin, which could have a material
adverse effect on the Company and its financial condition. The
amount to be spent during 1999 for capital expenditures related to
compliance with Environmental Laws is dependent upon a variety of
factors, including, but not limited to, the occurrence of
additional releases or threatened releases (particularly air
emissions) into the environment, or changes in the Environmental
Laws (or in the enforcement or interpretation by any federal or
state agency or court of competent jurisdiction). See "Special
Note Regarding Forward-Looking Statements." Failure to
satisfactorily resolve the pending noncompliance issues with the
ADPC&E, or additional orders from the ADPC&E imposing penalties, or
requiring the Chemical Business to spend more for environmental
improvements or curtail production activities at the El Dorado
Facility, could have a material adverse effect on the Company.
Item 2. PROPERTIES
___________________
Chemical Business
_________________
The Chemical Business primarily conducts manufacturing
operations (i) on 150 acres of a 1,400 acre tract of land located
16
<PAGE>
in El Dorado, Arkansas (the "El Dorado Facility"), (ii) in a
facility of approximately 60,000 square feet located on ten acres
of land in Hallowell, Kansas ("Kansas Facility") and (iii) in a
mixed acid plant in Wilmington, North Carolina ("Wilmington
Plant"). The Chemical Business owns all of its manufacturing
facilities, with the El Dorado Facility and the Wilmington Plant
subject to mortgages. In addition, the Chemical Business has four
manufacturing facilities in Australia that produce bulk and
packaged explosives.
As of December 31, 1998, the El Dorado Facility was utilized
at approximately 74% of capacity, based on continuous operation.
The Chemical Business operates its Kansas Facility from
buildings located on an approximate ten acre site in southeastern
Kansas, and a research and testing facility comprising
approximately ten acres, including buildings and equipment thereon,
located in southeastern Kansas, which it owns.
In addition, the Chemical Business distributes its products
through 32 agricultural and explosive distribution centers. The
Chemical Business currently operates 22 agricultural distribution
centers, with 16 of the centers located in Texas (13 of which the
Company owns and three of which it leases); one center located in
Oklahoma which the Company owns; two centers located in Missouri
(one of which the Company owns and one of which it leases); and
three centers located in Tennessee (all of which the company owns).
The Chemical Business currently operates six domestic explosives
distribution centers located in Hallowell, Kansas (owned); Bonne
Terre, Missouri (owned); Poca, West Virginia (leased); Owensboro
and Combs, Kentucky (leased); and Pryor, Oklahoma (leased). The
Chemical Business also has four explosives distribution centers in
Australia, all of which are leased.
Climate Control Business
________________________
The Climate Control Business conducts its fan coil
manufacturing operations in a facility located in Oklahoma City,
Oklahoma, consisting of approximately 265,000 square feet. The
Company owns this facility subject to a mortgage. As of December
31, 1998, the Climate Control Business was using the productive
capacity of the above referenced facilities to the extent of
approximately 87%, based on three, eight-hour shifts per day and a
five-day week in one department and one and one half eight-hour
shifts per day and a five-day week in all other departments.
The Climate Control Business manufactures most of its heat
pump products in a leased 270,000 square foot facility in Oklahoma
City, Oklahoma, which it leases from an unrelated party. The lease
term began March 1, 1988, after renewal in October 1997, and
expires February 28, 2003, with options to renew for additional
five-year periods, and currently provides for the payment of rent
in the amount of $52,389 per month. The Company also has an option
to acquire the facility at any time in return for the assumption of
the then outstanding balance of the lessor's mortgage. As of
December 31, 1998, the productive capacity of this manufacturing
operation was being utilized to the extent of approximately 81%,
based on two twelve-hour shifts per day and a seven-day week in one
department and one eight-hour shift per day and a five-day week in
all other departments.
17
<PAGE>
All of the properties utilized by the Climate Control Business
are considered by the Company management to be suitable and
adequate to meet the current needs of that Business.
Automotive Products Business
____________________________
The Automotive Products Business conducts its operations in
plant facilities principally located in Oklahoma City, Oklahoma
which are considered by Company management to be suitable and
adequate to meet its needs. One of the manufacturing facilities
occupies a building owned by the Company, subject to mortgages,
totaling approximately 178,000 square feet. The Automotive
Products Business also uses additional manufacturing facilities
located in Oklahoma City, Oklahoma, owned and leased by the Company
totaling approximately 158,000 square feet. During 1998, the
Automotive Products Business under utilized the productive capacity
of its facilities.
International Bearings, Inc. ("IBI"), a subsidiary of the
Company operating as a separate entity within the Automotive
Products Division, operates from a Company owned warehouse of
approximately 45,000 square feet in an industrial park section of
Memphis, Tennessee.
Industrial Products Business
____________________________
The Company owns several buildings, some of which are subject
to mortgages, totaling approximately 360,000 square feet located in
Oklahoma City and Tulsa, Oklahoma, which the Industrial Products
Business uses for showrooms, offices, warehouse and manufacturing
facilities. The Company also owns real property located near or
adjacent to the above-referenced buildings in Oklahoma City,
Oklahoma, which the Industrial Products Business uses for parking
and storage. The Company also leases facilities in Middletown, New
York containing approximately 25,000 square feet for manufacturing
operations.
The Industrial Products Business also leases a facility from
an entity owned by the immediate family of the Company's President,
which facility occupies approximately 30,000 square feet of
warehouse and shop space in Oklahoma City, Oklahoma. The
Industrial Products Business also leases an office in Europe to
coordinate its European activities.
All of the properties utilized by the Industrial Products
Business are considered by Company management to be suitable and
adequate to meet the needs of the Industrial Products Business.
Item 3. LEGAL PROCEEDINGS
__________________________
In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with numerous
other companies, of potential responsibility for clean-up of a
waste disposal site in Oklahoma. In 1990, the EPA added the site
to the National Priorities List. Following the remedial
investigation and feasibility study, in 1992 the Regional
Administrator of the EPA signed the Record of Decision ("ROD") for
the site. The ROD detailed EPA's selected remedial action for the
site and estimated the cost of the remedy at $3.6 million. In
1992, the Company made settlement proposals which would have
18
<PAGE>
entailed a collective payment by the subsidiaries of $47,000. The
site owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The EPA
rejected the Company's offer, allocating 60% of the cleanup costs
to the potentially responsible parties and 40% to the site
operator. The EPA estimated the total cleanup costs at $10.1
million as of February 1993. The site owner rejected all
settlements with the EPA, after which the EPA issued an order to
the site owner to conduct the remedial design/remedial action
approved for the site. In August, 1997, the site owner issued an
"invitation to settle" to various parties, alleging the total
cleanup costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the cleanup of the site is unknown
due to continuing changes in the estimated total cost of cleanup of
the site and the percentage of the total waste which was alleged to
have been contributed to the site by the Company. As of December
31, 1998, the Company has accrued an amount based on a recent
preliminary settlement proposal by the alleged potential
responsible parties; however, there is no assurance such proposal
will be accepted. Such amount is not material to the Company's
financial position or results of operations. This estimate is
subject to material change in the near term as additional
information is obtained. The subsidiary's insurance carriers have
been notified of this matter; however, the amount of possible
coverage, if any, is not yet determinable.
Arch Mineral Corporation, et al. v. ICI Explosives USA, Inc.,
et al. On May 24, 1996, the plaintiffs filed this civil cause of
action against EDC and five other unrelated commercial explosives
manufacturers alleging that the defendants allegedly violated
certain federal and state antitrust laws in connection with alleged
price fixing of certain explosive products. This cause of action
is pending in the United States District Court, Southern District
of Indiana. The plaintiffs are suing for an unspecified amount of
damages, which, pursuant to statute, plaintiffs are seeking be
trebled, together with costs. Plaintiffs are also seeking a
permanent injunction enjoining defendants from further alleged
anti-competitive activities. Based on the information presently
available to EDC, EDC does not believe that EDC conspired with any
party, including, but not limited to, the five other defendants, to
fix prices in connection with the sale of commercial explosives.
This action has been consolidated, for discovery purposes only,
with several other actions in a multi-district litigation
proceeding in Utah. Discovery in this litigation is in process.
EDC intends to vigorously defend itself in this matter. See
"Special Note Regarding Forward-Looking Statements."
ASARCO v. ICI, et al. The U. S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and consolidated
with other lawsuits in Utah, leave to add EDC as a defendant in
that lawsuit. This lawsuit alleges a national conspiracy, as well
as a regional conspiracy, directed against explosive customers in
Missouri and seeks unspecified damages. EDC has been included in
this lawsuit because it sold products to customers in Missouri
during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has been
sued in the Arch case discussed above. Based on the information
19
<PAGE>
presently available to EDC, EDC does not believe that EDC conspired
with any party, to fix prices in connection with the sale of
commercial explosives. EDC intends to vigorously defend itself in
this matter. See "Special Note Regarding Forward-Looking
Statements."
Eugene Lowe, et al. v. Teresa Trucking, Inc., pending in the
Circuit Court of Lincoln County, West Virginia. During the third
quarter of 1997, EDC was served with this lawsuit in which
approximately 27 plaintiffs have sued approximately 13 defendants,
including EDC, alleging personal injury and property damage for
undifferentiated compensatory and punitive damages of approximately
$7,000,000. Specifically, the plaintiffs assert property damage to
their residence and wells, annoyance and inconvenience, and
nuisance as a result of daily blasting and round-the-clock mining
activities. The plaintiffs are residents living near the Heartland
Coal Company ("Heartland") strip mine in Lincoln County, West
Virginia, and an unrelated mining operation operated by Pen Coal
Inc. During the first quarter of 1999, the plaintiffs withdrew all
personal injury claims previously asserted in this litigation.
Heartland employed EDC to provide blasting materials and personnel
to load and shoot holes drilled by employees of Heartland. Down
hole blasting services were provided by EDC at Heartland's premises
from approximately August 1991, until approximately August 1994.
Subsequent to August 1994, EDC supplied blasting materials to the
reclamation contractor at Heartland's mine. In connection with
EDC's activities at Heartland, EDC has entered into a contractual
indemnity to Heartland to indemnify Heartland under certain
conditions for acts or actions taken by EDC or for which EDC failed
to take, and Heartland is alleging that EDC is liable thereunder
for Heartland's defense costs and any losses to, or damages
sustained by, the plaintiffs in this lawsuit as a result of EDC's
operations.
Discovery in this litigation is in process. The Company
intends to vigorously defend itself in this matter. EDC has
provided notification of this lawsuit to its two insurance carriers
providing primary insurance coverage to EDC during the period
covered by the plaintiff's allegations. Based on information
provided to EDC by its counsel handling this matter, the Company
does not believe that this matter will have a material adverse
effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
____________________________________________________________
Not applicable.
20
<PAGE>
<PAGE>
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
___________________________________________
Identification of Executive Officers
</TABLE>
<TABLE>
<CAPTION>
The following table identifies the executive officers of the Company.
Position and Served as
Offices with an Officer
Name Age the Company from
_______________ ___ ______________ ______________
<S> <C> <C> <C>
Jack E. Golsen 70 Board Chairman December, 1968
and President
Barry H. Golsen 48 Board Vice Chairman August, 1981
and President of the
Climate Control
Business
David R. Goss 58 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 57 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 57 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 39 Vice President and March, 1990
General Counsel
__________________________________________________________
</TABLE>
The Company's officers serve one-year terms, renewable on an
annual basis by the Board of Directors. All of the individuals
listed above have served in substantially the same capacity with
the Company and/or its subsidiaries for the last five years. In
March 1996, the Company executed an employment agreement (the
"Agreement") with Jack E. Golsen for an initial term of three years
followed by two additional three year terms. The Agreement
automatically renews for each successive three year term unless
terminated by either the Company or Jack E. Golsen giving written
notice at least one year prior to the expiration of the then three
year term.
Family Relationships
____________________
The only family relationship that exists among the executive
officers of the Company is that Jack E. Golsen is the father of
Barry H. Golsen.
21
<PAGE>
<PAGE>
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_____ _________________________________________________
Market Information
__________________
<TABLE>
<CAPTION>
The Company's Common Stock trades on the New York Stock
Exchange, Inc. ("NYSE"). The following table shows, for the
periods indicated, the high and low closing sales prices for the
Company's Common Stock.
Fiscal Year Ended
December 31,
________________________
1998 1997
____ ____
Quarter High Low High Low
_______ ____ ___ ____ ____
<S> <C> <C> <C> <C>
First 4 1/2 3 13/16 5 1/4 4 1/8
Second 4 9/16 3 13/16 5 4
Third 4 3/8 3 1/8 5 3 5/8
Fourth 3 9/16 2 15/16 5 13/16 3 5/8
</TABLE>
Stockholders
____________
As of February 28, 1999, the Company had 981 record holders of
its Common Stock.
Other Information
_________________
The Company's Common Stock and its $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2 (the "Series 2
Preferred") are currently listed for trading on the New York Stock
Exchange ("NYSE"). The Company recently fell below the NYSE
continued listing criteria for net tangible assets available to the
holders of the Company's Common Stock and the three year average
net income. Based on a business plan submitted to the NYSE, the
NYSE has agreed to continue the listing of the Company's Common
Stock and Series 2 Preferred subject to certain quarterly reviews.
There are no assurances that the Company will be able to comply
with the business plan presented to the NYSE and that the Company's
Common Stock and Series 2 Preferred will continue to be listed on
the NYSE.
Dividends
_________
Under the terms of a loan agreement between the Company and
its lender, the Company may, so long as no event of default has
occurred and is continuing under the loan agreement, make currently
scheduled dividends and pay dividends on its outstanding Preferred
Stock and pay annual dividends on its Common Stock equal to $.06
per share. In addition, the loan agreement with the lender
includes as an event of default an ownership change if any Person
(except Jack E. Golsen or members of his Immediate Family, as
defined below, and any entity controlled by Jack E. Golsen or
members of his Immediate Family together with such Person's
22
<PAGE>
affiliates and associates), is or becomes the beneficial owner,
directly or indirectly, of more than fifty percent (50%) of the
outstanding Common Stock of the Company. The term "Immediate
Family" of any Person means the spouse, siblings, children, mothers
and mothers-in-law, fathers and fathers-in-law, sons and daughters-
in-law, daughters and sons-in-law, nieces, nephews, brothers and
sisters-in-law, and sisters and brothers-in-law.
The Company is a holding company and, accordingly, its ability
to pay dividends on its Preferred Stock and its Common Stock is
dependent in large part on its ability to obtain funds from its
subsidiaries. The ability of the Company's wholly-owned subsidiary
ClimaChem, Inc. ("ClimaChem") (which owns substantially all of the
companies comprising the Chemical Business and the Climate Control
Business) and its wholly-owned subsidiaries to pay dividends and to
make distributions to the Company is restricted by certain
covenants contained in the Indenture to which they are parties.
Under the terms of the Indenture, ClimaChem cannot transfer
funds to the Company in the form of cash dividends or other
distributions or advances, except for (i) the amount of taxes that
ClimaChem would be required to pay if they were not consolidated
with the Company and (ii) an amount not to exceed fifty percent
(50%) of ClimaChem's cumulative net income from January 1, 1998,
through the end of the period for which the calculation is made for
the purpose of proposing a payment and (iii) the amount of direct
and indirect costs and expenses incurred by the Company on behalf
of ClimaChem pursuant to a certain services agreement and a certain
management agreement to which ClimaChem and the Company are
parties. For 1998, ClimaChem had a net loss of $2.6 million. See
Note 5 of Notes to Consolidated Financial Statements and Item 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Under the loan agreement, the Company and its subsidiaries,
other than ClimaChem and its subsidiaries, have the right to borrow
on a revolving basis up to $24 million, based on eligible
collateral. At December 31, 1998, the Company and its
subsidiaries, except ClimaChem and its subsidiaries, had
availability for additional borrowings of $2.7 million. See Item
7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the financial covenants
which the Company's failure to maintain could result in an event of
default.
Holders of the Company's Common Stock are entitled to receive
dividends only when, as, and if declared by the Board of Directors.
No dividends may be paid on the Company's Common Stock until all
required dividends are paid on the outstanding shares of the
Company's Preferred Stock, or declared and amounts set apart for
the current period, and, if cumulative, prior periods. The Company
has issued and outstanding as of December 31, 1998, 915,000 shares
of $3.25 Convertible Exchangeable Class C Preferred Stock, Series
2 ("Series 2 Preferred"), 1,463 shares of a series of Convertible
Non Cumulative Preferred Stock ("Non Cumulative Preferred Stock")
and 20,000 shares of Series B 12% Convertible, Cumulative Preferred
Stock ("Series B Preferred"). Each share of Preferred Stock is
entitled to receive an annual dividend, if, as and when declared by
the Board of Directors, payable as follows: (i) Series 2 Preferred
at the rate of $3.25 a share payable quarterly in arrears on March
15, June 15, September 15 and December 15, which dividend is
23
<PAGE>
cumulative, (ii) Non Cumulative Preferred Stock at the rate of
$10.00 a share payable April 1, and (iii) Series B Preferred at the
rate of $12.00 a share payable January 1, which dividend is
cumulative. The Company has a policy as to the payment of annual
cash dividends on its outstanding Common Stock of an amount per
share to be determined by the Board of Directors from time to time.
The Company paid a cash dividend of $.01 a share on its outstanding
Common Stock on July 1, 1998, and January 1, 1999; however, there
are no assurances that this policy will not be terminated or
changed by the Board of Directors. As of the date of this report,
management is considering, but has not made its final decision,
recommending to the Board of Directors that the Company discontinue
payments of cash dividends on its Common Stock for periods
subsequent to January 1, 1999. Due to ClimaChem's net loss for
1998, the restrictions contained in the Indenture and certain
borrowing limitations upon the Company, other than ClimaChem and
its subsidiaries, under the Company's loan agreements, management
has not, as of the date of this report, determined whether the
Company will have adequate liquidity to declare and pay each of the
quarterly dividends on its outstanding Preferred Stock during 1999.
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources" for further discussion of the Company's payment of cash
dividends. Also see Notes 7, 8 and 9 of Notes to Consolidated
Financial Statements.
On February 17, 1989, the Company's Board of Directors
declared a dividend to its stockholders of record on February 27,
1989, of one Preferred Stock purchase right on each of the
Company's outstanding shares of Common Stock (the "Preferred Shares
Purchase Rights Plan"). The rights expire on February 27, 1999.
On January 5, 1999, the Company's Board of Directors approved the
renewal of the Company's existing Preferred Share Purchase Rights
Plan (with certain exceptions) through the execution and delivery
of a Renewed Rights Agreement, dated January 6, 1999, which expires
January 6, 2009 ("Renewed Rights Plan"). The Company issued the
rights, among other reasons, in order to assure that all of the
Company's stockholders receive fair and equal treatment in the
event of any proposed takeover of the Company and to guard against
partial tender abusive tactics to gain control of the Company. The
rights under the Renewed Rights Plan (the "Renewed Rights") will
become exercisable only if a person or group acquires beneficial
ownership of 20% or more of the Company's Common Stock or announces
a tender or exchange offer the consummation of which would result
in the ownership by a person or group of 20% or more of the Common
Stock, except pursuant to a tender or exchange offer which is for
all outstanding shares of Common Stock at a price and on terms
which a majority of outside directors of the Board of Directors
determines to be adequate and in the best interest of the Company
in which the Company, its stockholders and other relevant
constituencies, other than the party triggering the rights (a
"Permitted Offer"), except acquisitions by the following excluded
persons (collectively, the "Excluded Persons"): (i) the Company,
(ii) any subsidiary of the Company, (iii) any employee benefit plan
of the Company or its subsidiaries, (iv) any entity holding Common
Stock for or pursuant to the employee benefit plan of the Company
or its subsidiary, (v) Jack E. Golsen, Chairman of the Board and
President of the Company, his spouse and children and certain
related trusts and entities, (vi) any party who becomes the
beneficial owner of 20% or more of the Common Stock solely as a
result of the acquisition of Common Stock by the Company, unless
such party shall, after such share purchase by the Company, become
the beneficial owner of additional shares of Common Stock
24
<PAGE>
constituting 1% or more of the then outstanding shares of Common
Stock, and (vii) any party whom the Board of Directors of the
Company determines in good faith acquired 20% or more of the Common
Stock inadvertently and such person divests within 10 business days
after such determination, a sufficient number of shares of Common
Stock and no longer beneficially own 20% of the Common Stock.
Each Renewal Rights, when triggered, (other than the Renewal
Rights, owned by the acquiring person or members of a group that
causes the Renewal Rights to become exercisable, which became void)
will entitle the stockholder to buy one one-hundredth of a share of
a new series of participating Preferred Stock at an exercise price
of $20.00 per share. Each one one-hundredth of a share of the new
Preferred Stock purchasable upon the exercise of a right has
economic terms designed to approximate the value of one share of
the Company's Common Stock. If another person or group acquires
the Company in a merger or other business combination transaction,
each Renewal Right will entitle its holder (other than Renewal
Rights owned by the person or group that causes the Renewal Rights
to become exercisable, which become void) to purchase at the
Renewal Right's then current exercise price, a number of the
acquiring company's common shares which at the time of such
transaction would have a market value two times the exercise price
of the Renewal Right. In addition, if a person or group (with
certain exceptions) acquires 20% or more of the Company's
outstanding Common Stock, each Renewal Right will entitle its
holder (other than the Renewal Rights owned by the acquiring person
or members of the group that results in the Renewal Rights becoming
exercisable, which become void) to purchase at the Renewal Right's
then current exercise price, a number of shares of the Company's
Common Stock having a market value of twice the Renewal Right's
exercise price in lieu of the new Preferred Stock.
Following the acquisition by a person or group of beneficial
ownership of 20% or more of the Company's outstanding Common Stock
(with certain exceptions) and prior to an acquisition of 50% or
more of the Company's Common Stock by the person or group, the
Board of Directors may exchange the Renewal Rights (other than
Renewal Rights owned by the acquiring person or members of the
group that results in the Renewal Rights becoming exercisable,
which become void), in whole or in part, for shares of the
Company's Common Stock. That exchange would occur at an exchange
ratio of one share of Common Stock, or one one-hundredth of a share
of the new series of participating Preferred Stock, per Renewal
Right.
Prior to the acquisition by a person or group of beneficial
ownership of 20% or more of the Company's Common Stock (with
certain exceptions) the Company may redeem the Renewal Rights for
one cent per Renewal Right at the option of the Company's Board of
Directors. The Company's Board of Directors also has the authority
to reduce the 20% thresholds to not less than 10%.
25
<PAGE>
<PAGE>
Item 6. SELECTED FINANCIAL DATA
_______________________
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(Dollars in Thousands,
except per share data)
<S> <C> <C> <C> <C> <C>
Selected Statement of Operations Data:
Net sales $310,037 $313,929 $307,160 $267,391 $245,025
======== ======== ======== ======== ========
Total revenues $324,320 $319,096 $313,425 $274,115 $249,969
======== ======== ======== ======== ========
Interest expense $ 17,327 $ 14,740 $ 10,017 $ 10,131 $ 6,949
======== ======== ======== ======== ========
Income (loss) from
continuing oper-
ations before
extraordinary
charge $ (1,920) $(18,446) $ (3,845) $ (3,732) $ 983
========= ========= ========= ========= ========
Net income (loss) $ (1,920) $(23,065) $ (3,845) $ (3,732) $ 24,467
========= ========= ========= ========= =========
Net income (loss)
applicable to
common stock $ (5,149) $(26,294) $ (7,074) $ (6,961) $ 21,232
========= ========= ========= ========= ========
Basic and diluted
earnings (loss)
per common share:
Loss from con-
tinuing oper-
ations before
extraordinary
charge $ (.42) $ (1.68) $ (.55) $ (.54) $ (.17)
======== ======== ========= ======== =========
Net income (loss) $ (.42) $ (2.04) $ (.55) $ (.54) $ 1.57
======== ======== ========= ======== =========
</TABLE>
26
<PAGE>
<PAGE>
Item 6. SELECTED FINANCIAL DATA (Continued)
______ ___________________________________
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(Dollars in Thousands,
except per share data)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $248,647 $270,653 $261,560 $238,176 $221,281
======== ======== ======== ======== ========
Long-term debt,
including current
portion $169,642 $180,941 $132,284 $118,280 $ 91,681
======== ======== ======== ======== ========
Redeemable preferred
stock $ 139 $ 146 $ 146 $ 149 $ 152
======== ======== ======== ======== ========
Stockholders' equity $ 35,059 $ 44,496 $ 74,018 $ 81,576 $ 90,599
======== ======== ======== ======== ========
Selected other data:
Cash dividends
declared per
common share $ .02 $ .06 $ .06 $ .06 $ .06
======== ======== ======== ======== ========
</TABLE>
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
______ _________________________________________________
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with a review of the Company's December 31, 1998
Consolidated Financial Statements, Item 6 "SELECTED FINANCIAL DATA"
and Item 1 "BUSINESS" included elsewhere in this report.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
Overview
________
General
_______
The Company is pursuing a strategy of focusing on its core
businesses and concentrating on product lines in niche markets
where the Company has established or believes it can establish a
position as a market leader. In addition, the Company is seeking
to improve its liquidity and profits through liquidation of
selected assets that are on its balance sheet and on which it is
not realizing an acceptable return and does not reasonably expect
to do so. In this connection, the Company has come to the
conclusion that its Automotive and Industrial Products Businesses
are non-core to the Company and the Company is exploring various
alternatives to maximize shareholder value from these assets. The
Company is also considering the sale of other assets that are non-
core to its Chemical and Climate Control Businesses.
As discussed in "Item 1 - Business - General", the Company is
continuing with its evaluation of the spin-off of Automotive to its
shareholders as a dividend. The spin-off of Automotive will
require, among other things, commitment to a formal plan, receipt
by the Company from the Internal Revenue Service of a favorable
ruling or an opinion of counsel confirming tax-free treatment,
certain Securities and Exchange Commission filings, arrangement for
lines of credit for Automotive, and LSB Board of Directors'
approval. Subject to completion of the above conditions,
management believes there is a strong likelihood that the spin-off
will be completed during 1999. However, there are no assurances
that the Company will spin-off Automotive.
Certain statements contained in this Overview are forward-looking
statements, and future results could differ materially from such statements.
28
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
The following table contains certain of the information from Note 13 of
Notes to the Company's Consolidated Financial Statements about the Company's
operations in different industry segments for each of the three years in the
period ended December 31, 1998.
1998 1997 1996
________ _________ __________
(In Thousands)
<S> <C> <C> <C>
Sales:
Chemical $139,942 $ 156,949 $ 166,163
Climate Control 115,786 105,909 89,275
Automotive Products 39,994 35,499 37,946
Industrial Products 14,315 15,572 13,776
________ _________ _________
$310,037 $ 313,929 $ 307,160
======== ========= =========
Gross profit: (1)
Chemical $ 18,274 $ 19,320 $ 25,885
Climate Control 32,278 29,552 21,961
Automotive Products 8,670 3,299 5,868
Industrial Products 3,731 3,776 3,058
________ _________ _________
$ 62,953 $ 55,947 $ 56,772
======== ========= =========
Operating profit (loss): (2)
Chemical $ 3,675 $ 5,479 $ 10,971
Climate Control 10,493 8,895 5,362
Automotive Products (1,827) (7,251) (4,134)
Industrial Products (403) (993) (2,685)
________ _________ _________
11,938 6,130 9,514
General corporate expenses, net (9,424) (9,786) (3,192)
Interest expense (17,327) (14,740) (10,017)
Gain on sale of the Tower 12,993 - -
_________ _________ _________
Loss from continuing
operations before provision
for income taxes and extra-
ordinary charge $ (1,820) $ (18,396) $ (3,695)
========= ========= =========
Total assets:
Chemical $124,577 $ 137,570 $ 132,718
Climate Control 49,516 49,274 50,623
Automotive Products 41,967 42,718 43,212
Industrial Products 11,662 9,929 13,614
________ _________ _________
227,722 239,491 240,167
Corporate assets and other 20,925 31,162 21,393
________ _________ _________
Total assets $248,647 $ 270,653 $ 261,560
======== ========= =========
<FN>
(1) Gross profit by industry segment represents net sales less
cost of sales.
(2) Operating profit by industry segment represents revenues less
operating expenses before deducting general corporate
expenses, interest expense and income taxes and, in 1998,
before gain on sale of the Tower.
</FN>
</TABLE>
29
<PAGE>
<PAGE>
Chemical Business
_________________
Although sales in the Chemical Business have declined from
$156.9 million in the twelve months ended December 31, 1997, to
$139.9 million in the twelve months ended December 31, 1998 (a
decrease of 10.8%) and the gross profit has decreased from $19.3
million in 1997 to $18.3 million in 1998, the gross profit
percentage has increased from 12.3% in 1997 to 13.1% in 1998.
In 1998, the Chemical Business was adversely affected by the
extreme drought conditions in the mid-south market during the
primary fertilizer season, followed by excess wet conditions and
floods in the fall season, resulting in substantially lower volume
and lower sales prices for certain of its products sold in its
agricultural markets. The operating profit of the Chemical
Business decreased from $5.5 million in 1997 to $3.7 million in
1998 (a decrease of 32.9%). The decline in sales volume explains
approximately $1.0 million of this decrease. The remaining
$800,000 decrease is primarily attributable to a provision for
possible loss on a note receivable recorded in the fourth quarter
of 1998.
During 1997, limitations on production, as a result of certain
mechanical and design problems relating to the construction and
start-up of a concentrated nitric acid plant, resulted in
significant fixed costs being expended as period costs rather than
being absorbed as cost of product being produced and sold. In
addition, significant amounts were expended for engineering,
consulting, and other costs to bring the nitric acid plant up to
its stated capacity.
Additionally, the cost of the Chemical Business' primary raw
material, anhydrous ammonia, averaged approximately $184 per ton in
1997, compared to approximately $154 per ton in 1998. The Chemical
Business purchases approximately 220,000 tons of anhydrous ammonia
per year under three contracts expiring in April, 2000, June, 2000,
and December, 2000, respectively. The Company's purchase price of
anhydrous ammonia under these contracts can be higher or lower than
the current market spot price of anhydrous ammonia. Pricing is
subject to variations due to numerous factors contained in these
contracts. Based on the price calculations contained in the
contracts, one contract is presently priced above the current
market spot price. The Chemical Business is required to purchase
120,000 tons of its requirements under the contract expiring in
April, 2000, at least 24,000 tons of its requirements under the
contract expiring in June, 2000, and 60,000 tons of its
requirements under the contract expiring in December, 2000, with
additional quantities of anhydrous ammonia available under each
contract. Anhydrous ammonia is not being currently supplied under
the contract expiring in December, 2000, due to that supplier's
declaration of an event of force majeure as a result of a temporary
shut down of its plant due to mechanical problems. The Company has
been able to, on a temporary basis, obtain anhydrous ammonia from
other sources on similar terms as provided in the contract expiring
in December, 2000.
The anhydrous ammonia industry added an additional one million
tons of capacity of anhydrous ammonia in the western hemisphere in
1998, and the Company believes there is approximately one million
tons of additional annual capacity of anhydrous ammonia being
constructed in the western hemisphere scheduled for completion in
1999. The Company believes this additional capacity may contribute
30
<PAGE>
to a decline in the future market price of anhydrous ammonia. See
"Special Note Regarding Forward-Looking Statements".
In June, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries is acting as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant, when constructed, will be operated by the
Company's subsidiary and will supply nitric acid for Bayer's
polyurethane business under a long-term supply contract.
Management estimates that, after the initial startup phase of
operations at the plant, at full production capacity based on terms
of the Bayer Agreement and dependent upon the price of anhydrous
ammonia, based on the price of anhydrous ammonia as of the date of
this report, the plant should generate approximately $35 million to
$50 million in annual gross revenues. Unlike the Chemical
Business' regular sales volume, the market risk on this additional
volume is much less since the contract provides for recovery of
costs, as defined, plus a profit. It is anticipated that the
construction of the nitric acid plant at Bayer's facility in
Baytown, Texas, will cost approximately $69 million and
construction is scheduled to be completed in the second quarter of
1999. The Company's subsidiary is to lease the nitric acid plant
pursuant to a leverage lease from an unrelated third party for an
initial term of ten (10) years from the date that the plant becomes
fully operational, and the construction financing of this plant is
being provided by an unaffiliated lender. (See Item 1 - "Business
- - - Chemical Business" for a further discussion of the Baytown, Texas
nitric acid plant facility.)
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, such have had an adverse effect on the Company's
consolidated results of operations in 1998. The Company received
an offer in 1999 to purchase its Australian subsidiary. As of the
date of this report, the Company is negotiating with the company
that offered to buy the Australian subsidiary. During 1998, TES
had net sales of $14.2 million, and reported a net loss of $2.9
million. There are no assurances that the Company will sell the
Australian subsidiary.
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pump, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
As indicated in the above table, the Climate Control Business
reported improved sales (an increase of 9.3%) and improved
operating profit (an increase of 18.0%) for 1998, as compared to
1997.
31
<PAGE>
Automotive and Industrial Products Businesses
_____________________________________________
As indicated in the above table, during 1998, 1997, and 1996,
the Automotive and Industrial Products Businesses recorded combined
sales of $54.3 million, $51.1 million, and $51.7 million,
respectively, and reported operating losses (as defined above) of
$2.2 million, $8.2 million, and $6.8 million in 1998, 1997, and
1996, respectively. The net investment in assets of these
Businesses was $53.6 million, $52.6 million, and $56.8 million at
year end 1998, 1997, and 1996, respectively. While the Company's
investment in the assets of these businesses has declined from
$56.8 million in 1996 to $53.6 million in 1998, the Company expects
to realize further reductions in future periods as it implements
its proposed plan to dispose of non-core and non-earning assets.
See "Overview - General" for a discussion of the Company's intent
to spin-off the Automotive Business, subject to numerous conditions
precedent. During 1998, the Automotive Business had net sales of
$40.0 million, and an operating loss (as defined) of approximately
$1.8 million. The Company continues to eliminate certain
categories of machinery from the Industrial Products' product line
by not replacing machines when sold.
Results of Operations
_____________________
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
_____________________________________________________________________
Revenues
________
Total revenues for 1998 and 1997 were $324.3 million and
$319.1 million, respectively (an increase of $5.2 million). Sales
decreased $3.9 million and other income decreased $3.9 million.
Additionally, in March, 1998, a subsidiary of the Company closed
the sale of an Oklahoma City office building (the "Tower"). The
Company recognized a pre-tax gain on the sale of the Tower of
approximately $13.0 million in the first quarter of 1998. The
decrease in other income of $3.9 million was primarily due to non-
recurring operations of the Tower, which was sold in March, 1998,
and certain valuation reserve adjustments recorded against
specifically identified investments in the fourth quarter of 1998.
Net Sales
_________
Consolidated net sales included in total revenues for 1998
were $310.0 million, compared to $313.9 million for 1997, a
decrease of $3.9 million. This decrease in sales resulted
principally from: (i) decreased sales in the Industrial Products
Business of $1.3 million due to decreased sales of machine tools,
and (ii) decreased sales in the Chemical Business of $17.0 million
primarily due to lower sales volume in the U.S. of agricultural and
blasting products and decreased business volume of its Australian
subsidiary. Sales were lower in the Chemical Business during 1998,
compared to 1997, as a result of adverse weather conditions in its
agricultural markets during the spring and fall planting seasons.
Blasting sales in the Chemical Business declined as a result of
elimination of certain low profit margin sales and decreased volume
in the Australian subsidiary resulting from adverse economic
developments in Asia. These decreases were offset by (i) increased
32
<PAGE>
sales in the Climate Control Business of $9.9 million, primarily
due to increased volume and price increases in both the heat pump
and fan coil product lines, and (ii) increased sales in the
Automotive Products Business of $4.5 million primarily due to
increased volume of units being shipped to original equipment
manufacturers and new customers.
Gross Profit
____________
Gross profit increased $7.0 million and was 20.3% of net sales
for 1998, compared to 17.8% of net sales for 1997. The gross
profit percentage improved in the Chemical, Automotive Products and
Industrial Products Businesses. It was consistent from 1997 to
1998 in the Climate Control Business.
The increase in the gross profit percentage was due primarily
to (i) increased absorption of costs due to higher production
volumes and improved experience with returns and allowances in the
Automotive Products Business, (ii) lower production costs in the
Chemical Business due to the effect of lower prices of anhydrous
ammonia in 1998, (iii) lower unabsorbed overhead costs caused by
excessive downtime related to problems associated with mechanical
failures at the Chemical Business' primary manufacturing plant in
the first half of 1997, and (iv) higher gross profit product mix of
machine tools sold in the Industrial Products Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative expenses ("SG&A"), as a
percent of net sales, were 19.9% in 1998, and 20.6% in 1997. SG&A,
as a percent of sales, was approximately 11.5% in 1998, compared to
9.8% in 1997 for the Chemical Business; 20.3% in 1998, compared to
21.0% in 1997 for the Climate Control Business; 26.5% in 1998,
compared to 32.1% in 1997 for the Automotive Products Business; and
33.3% in 1998, compared to 33.4% in 1997 for the Industrial
Products Business.
The increase in the Chemical Business was the result of lower
sales in 1998 with relatively constant SG&A expenses. Within SG&A
of the Chemical Business, higher provisions for uncollectible
accounts receivable in 1998 were offset by decreased expenses at
the Company's Australian subsidiary in anticipation of sustaining
a lower level of business activity. The decrease in the Climate
Control Business' SG&A as a percentage of sales was the result of
increases in sales. The Climate Control Business' amount of SG&A
increased in 1998 due to additional information technology
personnel to support management information systems changes and
higher variable costs due to a change in sales mix toward greater
domestic sales which carry a higher SG&A percent. The decrease in
the Automotive Products Business was due to higher sales and
decreased expenses pursuant to a comprehensive cost reduction
program implemented by the Company.
In addition to the variances described above, approximately
$1.7 million of the total SG&A decrease of $3.0 million is due to
the reduction of costs associated with the Tower which was sold in
March of 1998 compared to a full year in 1997 and approximately
$1.0 million is due to legal fees in 1997 over 1998 to assert the
Company's position in various legal proceedings.
Interest Expense
________________
Interest expense for the Company, before deducting capitalized
interest, was $17.3 million during 1998, compared to $15.9 million
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during 1997. During 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant. The
increase of $1.4 million before the effect of capitalization
primarily resulted from increased borrowings. The increased
borrowings were necessary to support capital expenditures, higher
accounts receivable balances and to meet the operational
requirements of the Company. See "Liquidity and Capital Resources"
of this Management's Discussion and Analysis.
Extraordinary Charge
____________________
In 1997, in connection with the issuance of the 10 3/4%
unsecured senior notes due 2007 by a subsidiary of the Company, a
subsidiary of the Company retired the outstanding principal
associated with a certain financing arrangement and incurred a
prepayment fee. The prepayment fee and loan origination costs
expensed in 1997 related to the financing arrangement aggregated
approximately $4.6 million.
Net Loss
________
The Company had a net loss of $1.9 million in 1998, compared
to a net loss of $23.1 million in 1997. The decreased loss of
$21.2 million was primarily due to the gain on the sale of the
Tower in 1998, increased gross profit in 1998, decreased SG&A in
1998, and the extraordinary charge in 1997 offset by increased
interest expense in 1998, as discussed above.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
_____________________________________________________________________
Revenues
________
Total revenues for 1997 and 1996 were $319.1 million and
$313.4 million, respectively (an increase of $5.7 million or 1.8%).
Sales increased $6.8 million or 2.2%.
Net Sales
_________
Consolidated net sales for 1997 were $313.9 million, compared
to $307.2 million for 1996, an increase of $6.8 million or 2.2%.
This sales increase resulted principally from: (i) increased sales
in the Climate Control Business of $16.6 million, primarily due to
increased sales of heat pumps; and (ii) increased sales of $1.8
million in the Industrial Products Business due to increased
machine tool sales; partially offset by (iii) decreased sales of
$2.4 million in the Automotive Products Business due to less units
being shipped and product mix; and (iv) decreased sales in the
Chemical Business of $9.2 million primarily due to reduced sales of
the Company's wholly-owned Australian subsidiary, because of the
expiration of certain customer contracts and recent economic
developments in Asia.
Gross Profit
____________
Gross profit decreased $.8 million and was 17.8% of net sales
for 1997, compared to 18.5% of net sales for 1996. The gross
profit percentage declined in the Automotive Products and Chemical
Businesses, but improved in the Climate Control and Industrial
Products Businesses.
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The gross profit of the Chemical Business was adversely
affected by higher production costs due to (i) the higher cost of
anhydrous ammonia which was only partially passed on in the form of
higher selling prices, (ii) unabsorbed overhead costs caused by
down time related to modifications made to resolve problems
associated with mechanical failures, and (iii) environmental
matters at the Chemical Business' primary manufacturing plant.
These increased costs in 1997 were partially offset by a reduction
in cost of sales of $2.1 million through recapture of manufacturing
variances of the Chemical Business in the form of business
interruption insurance settlements.
The primary reasons for the decline in gross profit percentage
in the Automotive Products Business were (i) less favorable
customer mix (i.e., decreased sales to higher margin retail
customers, and increased sales to Original Equipment Manufacturer
(OEM) customers which are lower margin customers), and (ii)
increases in manufacturing expenses in excess of increases in
production cost absorption attributable to new product lines that
have been developed.
These gross profit declines have been partially offset by
gross profit percentage increases due to sales of machine tools
carrying a higher gross profit percentage in the Industrial
Products Business and increased absorption of costs due to higher
production volumes and focus on sales of more profitable product
lines in the Climate Control Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative expenses ("SG&A"), as a
percent of net sales, were 20.6% in 1997 and 18.5% in 1996. SG&A,
as a percent of sales, was approximately 9.8% in 1997 compared to
9.3% in 1996 for the Chemical Business; 21.0% in 1997 compared to
19.8% in 1996 for the Climate Control Business; 32.1% in 1997
compared to 29.5% in 1996 for the Automotive Products Business; and
33.4% in 1997 compared to 44.4% in 1996 for the Industrial
Products Business.
The increase in the Chemical Business was the result of lower
sales in 1997 with relatively constant SG&A expenses. Within SG&A
of the Chemical Business, lower provisions for uncollectible
accounts receivable in 1997 were offset by increased expenses at
the Company's Australian subsidiary in anticipation of sustaining
a higher level of business activity. The increase in the Climate
Control Business' SG&A was the result of increases in sales
personnel costs to support higher sales in future periods,
additional information technology personnel to support management
information systems changes and higher freight costs due to a
change in sales mix toward greater domestic sales which carry a
higher SG&A percent. The increase in the Automotive Products
Business was due to lower sales and increased advertising expenses
expected to benefit future periods. The decrease in the Industrial
Products Business resulted from lower bad debt expenses and lower
advertising expenses compounded by higher sales.
In addition to the variances described above, approximately
$2.2 million of the total SG&A increase of $8.1 million is due to
the operations of the Tower in 1997 as discussed elsewhere in this
report and approximately $2.4 million is due to increased legal
fees, settlement accruals and loss reserves in 1997 over 1996 to
35
<PAGE>
assert the Company's position in various legal proceedings and
joint ventures.
Interest Expense
________________
Interest expense for the Company, before deducting capitalized
interest, was $15.9 million during 1997, compared to $12.4 million
during 1996. During 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant,
compared to $2.4 million in 1996. The increase of $3.5 million
before the effect of capitalization primarily resulted from
increased borrowings and higher interest rates. The increased
borrowings were necessary to support capital expenditures, higher
accounts receivable balances and to meet the operational
requirements of the Company.
Extraordinary Charge
____________________
In 1997, in connection with the issuance of the 10 3/4%
unsecured senior notes due 2007 by a subsidiary of the Company, a
subsidiary of the Company retired the outstanding principal
associated with a certain financing arrangement and incurred a
prepayment fee. The prepayment fee and loan origination costs
expensed in 1997 related to the financing arrangement aggregated
approximately $4.6 million.
Net Loss
________
The Company had a net loss of $23.1 million in 1997 compared
to a net loss of $3.8 million in 1996. The increased loss of $19.3
million was primarily due to decreased gross profit, increased
SG&A, increased interest expense and the extraordinary charge as
discussed above.
Liquidity and Capital Resources
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow and borrowings under its revolving
credit facilities, and more recently, by issuance of senior
unsecured notes by a wholly owned subsidiary.
Net cash used by operations for the year ended December 31,
1998 was $4.2 million, after $13.2 million for noncash depreciation
and amortization, $4.9 million in provisions for possible losses on
accounts receivable, inventory, notes receivable and a loan
guarantee, $1.1 million of increase in cash surrender value on
certain life insurance policies and $13.9 million in gains from the
sales of real estate and other assets and including the following
changes in assets and liabilities: (i) accounts receivable
increases of $2.3 million; (ii) inventory decreases of $1.3
million; (iii) increases in supplies and prepaid items of $1.0
million; and (iv) decreases in accounts payable and accrued
liabilities of $3.5 million. The increase in accounts receivable
is due to increased sales and extended credit terms to new
customers in the Automotive Products Business and initial sales
36
<PAGE>
under the Bayer Agreement in the Chemical Business. The decrease
in inventory was due primarily to measures taken in all of the
Company's Businesses to decrease their inventory levels. The
increase in supplies and prepaid items resulted primarily from an
increase in maintenance and manufacturing supplies in the Chemical
Business. The decrease in accounts payable and accrued liabilities
was primarily due to timing of payments for inventory purchases in
the Chemical Business.
Cash Flow from Investing and Financing Activities
_________________________________________________
Cash provided by investing activities for the year ended
December 31, 1998 included cash proceeds of $29.3 million received
on the sale of the Tower (see Note 2 of Notes to the Company's
Consolidated Financial Statements) and proceeds from sales of other
property of $1.8 million offset by $9.6 million in capital
expenditures and $2.1 million used to increase other assets. The
capital expenditures took place primarily in the Chemical and
Climate Control Businesses to enhance production and product
delivery capabilities. The increase in other assets includes
approximately $.9 million of cash advances to a start-up aviation
company as discussed later in this report under "Debt Guarantee"
and approximately $.7 million of deposits made in connection with
an interest rate hedge contract related to the agreement with
Bayer.
Net cash used by financing activities included: (i) payments
on long-term debt of $20.3 million, including the $12.6 million
payoff of the mortgage on the Tower, (ii) long-term and other
borrowings, net of origination fees, of $.6 million, (iii) net
increases in revolving debt of $7.7 million, after application of
net proceeds of $16.5 million from the sale of the Tower, (iv)
dividends of $3.5 million, and (v) treasury stock purchases of $3.6
million.
Source of Funds
_______________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by four separate loan
agreements ("Revolving Credit Agreements") with an unrelated lender
("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of certain
of the subsidiaries that are borrowers under the Revolving Credit
Agreements. The Revolving Credit Agreements, as amended, provide
for revolving credit facilities ("Revolver") for total direct
borrowings up to $65.0 million, including the issuance of letters
of credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Revolving Credit Agreements, as amended, provide for interest at
the lender's prime rate plus .5% per annum or, at the Company's
option, on the Lender's LIBOR rate plus 2.875% per annum (which
rates are subject to increase or reduction based upon achieving
specified availability and adjusted tangible net worth levels). At
December 31, 1998, the effective interest rate was 8.11%. The term
of the Revolving Credit Agreements is through December 31, 2000,
and is renewable thereafter for successive thirteen month terms.
At December 31, 1998, the availability for additional borrowings,
37
<PAGE>
based on eligible collateral approximated $22 million. Borrowings
under the Revolver outstanding at December 31, 1998, were $26.3
million. The Revolving Credit Agreements, as amended, require the
Company to maintain certain financial ratios and contain other
financial covenants, including tangible net worth requirements and
capital expenditure limitations. At December 31, 1998, the Company
was not in compliance with certain of these financial covenants.
Subsequent to December 31, 1998, the Company obtained waivers of
such noncompliance and amendments to reset the financial covenants
through maturity. The annual interest on the outstanding debt
under the Revolver at December 31, 1998 at the rates then in effect
would approximate $2.1 million. The Revolving Credit Agreements
also require the payment of an annual facility fee of 0.5% of the
unused revolver.
In addition to the Revolving Credit Agreements discussed
above, as of December 31, 1998, the Company's wholly-owned
subsidiary, DSN Corporation ("DSN"), is a party to several loan
agreements with a financial company (the "Financing Company") for
three projects. At December 31, 1998, DSN had outstanding
borrowings of $11.0 million under these loans. The loans have
repayment schedules of 84 consecutive monthly installments of
principal and interest through maturity in 2002. The interest rate
on each of the loans is fixed and range from 8.2% to 8.9%. Annual
interest, for the three notes as a whole, at December 31, 1998, at
the agreed to interest rates would approximate $1.0 million. The
loans are secured by the various DSN property and equipment. The
loan agreements require the Company to maintain certain financial
ratios, including tangible net worth requirements.
As previously discussed, the Company is a holding company and,
accordingly, its ability to pay dividends on its outstanding Common
Stock and Preferred Stocks is dependent in large part on its
ability to obtain funds from its subsidiaries. The ability of the
Company's wholly owned subsidiary, ClimaChem (which owns all of the
stock of substantially all of the Company's subsidiaries comprising
the Chemical Business and the Climate Control Business) and its
subsidiaries to transfer funds to the Company is restricted by
certain covenants contained in the Indenture to which they are
parties. Under the terms of the Indenture, ClimaChem and its
subsidiaries cannot transfer funds to the Company, except for (i)
the amount of income taxes that they would be required to pay if
they were not consolidated with the Company, (ii) an amount not to
exceed fifty percent (50%) of ClimaChem's consolidated net income
for the year in question, and (iii) the amount of direct and
indirect costs and expenses incurred by the Company on behalf of
ClimaChem and ClimaChem's subsidiaries pursuant to a certain
services agreement and a certain management agreement to which the
companies are parties. During 1998, ClimaChem reported a
consolidated net loss of approximately $2.6 million. Accordingly,
ClimaChem and its subsidiaries were unable to transfer funds to the
Company in 1998 except for reimbursement of costs and expenses
incurred by the Company on their behalf or in connection with
certain agreements.
Under the Revolving Credit Agreements discussed above, the
Company and its subsidiaries, other than ClimaChem and its
subsidiaries, have the right to borrow on a revolving basis up to
$24 million, based on eligible collateral. At December 31, 1998,
the Company and its subsidiaries, except ClimaChem and its
subsidiaries, had availability for additional borrowings based on
eligible collateral of approximately $2.7 million (borrowings
under the Revolver outstanding at December 31, 1998, were $14.5
million).
38
<PAGE>
Due to ClimaChem's net loss for 1998 and the Company's (other
than ClimaChem and its subsidiaries) limited borrowing ability
under the Revolver, management is considering, but has not made its
final decision, recommending to the Board of Directors that the
Company discontinue payment of cash dividends on its Common Stock
for periods subsequent to January 1, 1999, until the Board of
Directors determines otherwise. In addition, as of the date of
this report, management has not determined whether the Company will
have adequate liquidity to declare and pay each of the quarterly
dividends on its outstanding Preferred Stock during 1999.
Future cash requirements (other than cash dividends) include
working capital requirements for anticipated sales increases in all
Businesses and funding for future capital expenditures. Funding
for the higher accounts receivable resulting from anticipated sales
increases will be provided by cash flow generated by the Company
and the revolving credit facilities discussed elsewhere in this
report. Inventory requirements for the higher anticipated sales
activity should be met by scheduled reductions in the inventories
of the Industrial Products Business and in the inventories of the
Automotive Products Business. In addition, the Company is also
considering the sale of certain assets which it does not believe
are critical to its Chemical and Climate Control Businesses. In
1999, the Company has planned capital expenditures of approximately
$10 million, primarily in the Chemical and Climate Control
Businesses, a certain amount of which it anticipates will be
financed by equipment finance contracts on a term basis and in a
manner allowed under its various loan agreements. Such capital
expenditures include approximately $2.4 million, which the Chemical
Business anticipates spending related to environmental control
facilities at its El Dorado Facility, as previously discussed in
this report. The Company currently has no material commitments for
capital expenditures.
During the latter part of March 1999, the Company's management
is considering the realignment of certain of the Company's overhead
to better match its focus on its core businesses. Consistent with
this realignment, in April 1999, the Company's Board of Directors
approved the sale of certain assets to ClimaChem in accordance with
the terms of the Indenture to which ClimaChem and its subsidiaries
are parties to and the loan agreement that the Company and
subsidiaries of ClimaChem are borrowing under, which assets are
materially related to the lines of businesses of the Chemical and
Climate Control Businesses. In addition, the Company is negotiating
with an asset based lender to provide the Automotive Business with
a new credit facility of up to $20.0 million, with a term loan of
$2.0 million and a revolving line of credit of up to $18.0 million.
If this new credit facility is finalized as currently structured, it
would have provided the Automotive Business borrowing ability of
approximately $14.3 million as of March 31, 1999, as compared to borrowing
ability of $12.7 million under the Automotive Business' current
credit facility as of March 31, 1999. Borrowings outstanding under
the current credit facility at March 31, 1999, approximated $12.5
million. Such borrowings will be repaid from proceeds of this new
credit facility if it is finalized. Further, the Company's
Revolver provides for the elimination of its financial covenants
upon the sale, disposal or spin-off of the Automotive Business by
the Company as long as the Company maintains a minimum aggregate
availability under the Revolver of at least $15 million.
39
<PAGE>
Management believes that the Company will have adequate cash
flow from operations, its revolving line of credit and other
sources to meet its present anticipated working capital and debt
service requirements.
If the spin-off of the Automotive Business is to be completed,
the Company anticipates that the Company will be required to make
a capital contribution to the Automotive Business prior to the
spin-off in the form of a reduction of the amount the Automotive
Business owes the Company so as to enable the Automotive Business
after the spin-off to have a positive stockholders' equity. The
balance of the amount the Automotive Business owes the Company is
expected to be evidenced by a promissory note.
The spin-off being evaluated by the Company of the Automotive
Business would be accomplished in the form of a dividend to the
holders of the Company's Common Stock. In order to declare and pay
a dividend upon shares of capital stock, the Delaware General
Corporation Law ("Delaware Law") requires that such either be
declared and paid (1) out of "surplus", as defined under the
Delaware Law, or (2) in case there is no "surplus", out of net
profits of the Company for the fiscal year in which the dividend is
declared or the preceding fiscal year. The Company is presently
reviewing with its investment banker as to whether it has
sufficient "surplus" to accomplish the spin-off of the Automotive
Business to its holders of its Common Stock after the capital
contribution by the Company to the Automotive Business as discussed
above. The Company does not believe that it will be able to pay
such dividend out of net profits. If the Company's investment
banker is unable to opine that the Company has sufficient "surplus"
to accomplish the spin-off, under Delaware Law the Company could
reduce its "capital" (as defined under Delaware Law) represented by
issued shares of its capital stock without par value and transfer
the amount of such reduction to "surplus", as long as the assets of
the Company remaining after such reduction shall be sufficient to
pay the Company's debts for which payment has not otherwise been
provided. The terms of the Company's Series B 12% Cumulative
Convertible Preferred Stock ("Series B Preferred") provides, in
part, that "In the event of any voluntary or involuntary
liquidation, dissolution or winding up of LSB, or any reduction in
its capital resulting in any distribution of assets to its
stockholders, the holders of the Series B Preferred Stock shall be
entitled to receive in cash out of assets of LSB, whether from
capital or from earnings available for distribution to the
stockholders, before any amount shall be paid to the holder of
Common Stock of LSB the sum of One Hundred & No/100 Dollars ($100)
(the par value of the Series B Preferred Stock) per share, plus an
amount equal to all accumulated and unpaid cash dividends thereon
to the date fixed for payment of such distributive amount".
Counsel to the Company has advised the Company that a transfer from
"capital" to "surplus" to distribute the stock of the Automotive
Business to the holders of the Company's Common Stock would trigger
a payment of $100 per outstanding share of Series B Preferred.
There are currently outstanding 20,000 shares of Series B
Preferred, all of which are owned by Jack E. Golsen or members of
his immediate family and/or entities wholly owned by members of Mr.
Golsen's immediate family. Mr. Golsen has advised the Company that
if the Company is required to transfer from "capital" to "surplus"
an amount necessary to complete the spin-off and such triggers the
payment under the Series B Preferred, he would not require the
Company to pay such in cash but would be willing to receive such
amount in a form other than cash, with the form to be determined
based on negotiations with independent members of the Company's
40
<PAGE>
Board of Directors. The Series B Preferred was issued by the
Company in 1987 in connection with a transaction approved by the
Board of Directors and the stockholders of the Company.
Accordingly, as of the date of this report, there are no assurances
that the Company will ultimately commit to a formal plan to spin-
off the Automotive Business.
Pursuant to the Company's previously announced repurchase
plan, the Company purchased during 1998, 909,300 shares of Common
Stock, for an aggregate purchase price of $3,567,026. From
January 1, 1999, through March 31, 1999, the Company has purchased
under its repurchase plan a total of 80,400 shares of Common Stock
for an aggregate amount of $232,555. As of the date of this
report, management and the Board of Directors are considering
whether to continue with its repurchase plan to purchase shares of
its Common Stock and if so, to what extent for the balance of 1999.
Foreign Subsidiary
__________________
The Company's wholly-owned Australian subsidiary, TES, has a
revolving credit working capital facility (the "TES Revolving
Facility") with Bank of New Zealand, Australia, in the amount of
AUS$10.5 million (approximately US$6.5 million). The TES Revolving
Facility allows for borrowings based on specific percentages of
qualified eligible assets. Based on the effective exchange rate at
December 31, 1998, approximately US$5.0 million (AUS$8.1 million
approximately) was borrowed at December 31, 1998. Such debt is
secured by substantially all the assets of TES, plus an unlimited
guarantee and indemnity from LSB and certain subsidiaries of TES.
The interest rate on this debt is dependent upon the borrowing
option elected by TES and had a weighted average rate of 7.01% at
December 31, 1998. TES is in technical noncompliance with a
certain financial covenant contained in the loan agreement
involving the TES Revolving Facility. However, this covenant was
not met at the time of closing of this loan and the Bank of New
Zealand, Australia has continued to extend credit under the
Facility. The outstanding borrowing under the TES Revolving
Facility at December 31, 1998 has been classified as due within one
year in the accompanying consolidated financial statements. As
previously noted in this report, the Company has received an offer
in 1999, the terms of which it is presently negotiating with the
company that made the offer, to purchase TES; however, there are no
assurances that the Company will sell TES. Under the terms of
the Indenture to which ClimaChem is bound by, the net cash proceeds
from the sale of TES, if completed, are required (1) within 270
days from the date of the sale to be applied to the redemption of
the notes issued under the Indenture or to the repurchase of such
notes, or (2) within 240 days from the date of such sale, the
amount of the net cash proceeds be invested in a related business
of ClimaChem or the Australian subsidiary or used to reduce
indebtedness of ClimaChem.
Joint Ventures and Options to Purchase
______________________________________
Prior to 1997, the Company, through a subsidiary, loaned $2.8
million to a French manufacturer of HVAC equipment whose product
line is compatible with that of the Company's Climate Control
Business in the USA. Under the loan agreement, the Company has the
option to exchange its rights under the loan for 100% of the
borrower's outstanding common stock. The Company obtained a
41
<PAGE>
security interest in the stock of the French manufacturer to secure
its loan. During 1997 the Company advanced an additional $1
million to the French manufacturer bringing the total of the loan
at December 31, 1997 to $3.8 million. Parties to the option have
agreed to extend the exercise date of the option to June 15, 2005.
As of the date of this report, the decision has not been made to
exercise such option and the $3.8 million loan, less a $1.5 million
valuation reserve, is carried on the books as a note receivable in
other assets.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The Project
had been awarded a contract to retrofit residential housing units
at a US 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 an average of seventy-seven percent (77%)
of all energy and maintenance savings during the twenty (20) year
contract term. The Project spent approximately $17.5 million to
retrofit the residential housing units at the US Army base. The
Project received a loan from a lender to finance approximately
$14.0 million of the cost of the Project. The Company is not
guaranteeing any of the lending obligations of the Project.
During 1995, the Company executed a stock option agreement to
acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company"), which owns the remaining fifty
percent (50%) equity interest in the Project discussed above, to
enhance the marketing of the Company's air conditioning products.
The stock option has a four (4) year term, and a total option
granting price of $1.0 million and annual $100,000 payments for
yearly extensions of the stock option thereafter for up to three
(3) years. The Company is currently negotiating to extend the
Option expiration date. Through the date of this report the
Company has made option payments aggregating $1.3 million and has
loaned the Optioned Company approximately $1.4 million. The
Company has recorded reserves of $1.3 million against the loans and
option payments. Upon exercise of the stock option by the Company,
or upon the occurrence of certain performance criteria which would
give the grantors of the stock option the right to accelerate the
date on which the Company must elect whether to exercise, the
Company shall pay certain cash and issue promissory notes for the
balance of the exercise price of the subject shares. The total
exercise price of the subject shares is $4.0 million, less the
amounts paid for the granting and any extensions of the stock
option. As of the date of this report, no decision to exercise
this option has been reached by the Company.
Debt Guarantee
______________
At December 31, 1998, the Company and one of its subsidiaries
had outstanding guarantees of approximately $2.6 million of
indebtedness of a startup aviation company in exchange for an
ownership interest. The debt guarantee relates to two note
instruments. The subsidiary has guaranteed up to $600,000 on one
of the note instruments. The other note in the amount of $2.0
million requires monthly principal payments.
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<PAGE>
In 1998 and during the first quarter of 1999, the aviation
company made capital calls on its shareholders. In 1998 and 1999,
in contemplation of a sale of the aviation company and pursuant to
such capital calls, the Company invested an additional $1,046,000
in the aviation company. This additional investment increased the
Company's ownership interest to approximately 45%. The Company has
reserves for losses equal to its direct investment and contingent
liabilities under the guarantees.
Subsequent to December 31, 1998, the Company was called upon
to perform on both guarantees. The Company paid approximately
$600,000 to the lender in satisfaction of the guarantee and assumed
the obligation for the $2.0 million note, which is due in equal
monthly principal payments, plus interest, through August, 2004.
In connection with the demand on the Company to perform under its
guarantee, the Company and the other guarantors formed a new
company ("KAC") and acquired the assets of the aviation company
through foreclosure.
The Company and the other shareholders of KAC are attempting
to sell the assets acquired in foreclosure. If they are successful
in selling these assets, it is expected that the Company will
recover a portion of its investment in and advances to the aviation
company which have been previously fully reserved.
Availability of Company's Loss Carry-overs
__________________________________________
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carry-overs from prior periods to reduce the federal income tax
payments which it would otherwise be required to make with respect
to income generated in such future years. Such benefit, if any is
dependent on the Company's ability to generate taxable income in
future periods, for which there is no assurance. Such benefit if
any, will be limited by the Company's reduced NOL for alternative
minimum tax purposes which is approximately $31.4 million at
December 31, 1998. As of December 31, 1998, the Company had
available regular tax NOL carry-overs of approximately $63.8
million based on its federal income tax returns as filed with the
Internal Revenue Service for taxable years through 1998. These NOL
carry-overs will expire beginning in the year 1999. As of December
31, 1998 and 1997, due to its recent history of reporting net
losses, the Company has established a valuation allowance on a
portion of its NOLs and thus has not recognized the full benefit of
its NOLs in the accompanying Consolidated Financial Statements.
The amount of these carry-overs has not been audited or
approved by the Internal Revenue Service and, accordingly, no
assurance can be given that such carry-overs will not be reduced as
a result of audits in the future. In addition, the ability of the
Company to utilize these carry-overs in the future will be subject
to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations. These include, in particular,
limitations imposed by Code Section 382 and the consolidated return
regulations.
Year 2000 Issues
________________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
43
<PAGE>
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, the Company undertook a project to enhance
certain of its Information Technology ("IT") systems and install
certain other technologically advanced communication systems to
provide extended functionality for operational purposes. A major
part of the Company's program was to implement a standardized IT
system purchased from a national software distributor at all of the
Company and subsidiary operations, and to install a Local Area
Network ("LAN"). The IT system and the LAN necessitated the
purchase of additional hardware, as well as software. The process
implemented by the Company to advance its systems to be more
"state-of-the-art" had an added benefit in that the software and
hardware changes necessary to achieve the Company's goals are Year
2000 compliant.
Starting in 1996 through December 31, 1998, the Company has
capitalized approximately $1.0 million in costs to accomplish its
enhancement program. The capitalized costs include $425,000 in
external programming costs, with the remainder representing
hardware and software purchases. The Company anticipates that the
remaining cost to complete this IT systems enhancement project will
be less than $100,000, and such costs will be capitalized.
The Company's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing,
and implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing scheduling systems,
the Company is 100% complete on the assessment and remediation
phases. As of the date of this report, the Company has completed
its testing and has implemented its remediated systems for all of
its businesses except a portion of the Industrial Products
Business. The uncompleted testing and remediation procedures
represent approximately 2% and 5%, respectively, of the total Year
2000 Program testing and remediation phase. Completion of the
remaining testing and implementation phase is expected by August
31, 1999. The assessments also indicated that limited software and
hardware (embedded chips) used in production and manufacturing
systems ("operating equipment") also are at limited risk. The
Company has completed its assessment and identified remedial action
which will be completed in the second quarter 1999. In addition,
the Company has completed its assessment of its product line and
determined that the products it has sold and will continue to sell
do not require remediation to be Year 2000 compliant. Accordingly,
based on the Company's current assessment, the Company does not
believe that the Year 2000 presents a material exposure as it
relates to the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
44
<PAGE>
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company; however, management does not believe that, under the most
reasonably likely worst case scenario, such potential impact would
be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company. See "Special Note Regarding Forward-
Looking Statements".
Contingencies
_____________
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome. The preceding sentence is a forward-looking statement
that involves a number of risks and uncertainties that could cause
actual results to differ materially, such as, among other factors,
the following: the EIL Insurance does not provide coverage to the
Company and the Chemical Business for any material claims made by
the claimants, the claimants alleged damages are not covered by the
EIL Policy which a court may find the Company and/or the Chemical
Business liable for, such as punitive damages or penalties, a court
finds the Company and/or the Chemical Business liable for damages
to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company. See "Business", "Legal
Proceedings" and Note 10 of Notes to Consolidated Financial
Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
_______ __________________________________________________________
General
_______
The Company's results of operations and operating cash flows
are impacted by changes in market interest rates and raw material
prices for products used in its manufacturing processes. The
Company also has a wholly-owned subsidiary in Australia, for which
the Company has foreign currency translation exposure. The
derivative contracts used by the Company are entered into to hedge
these risks and exposures and not for trading purposes. All
45
<PAGE>
information is presented in U.S. dollars. See Item 1. - "Business
- - - Chemical" for a discussion of an offer to purchase the Australian
subsidiary which the Company received in 1999.
Interest Rate Risk
__________________
The Company's interest rate risk exposure results from its
debt portfolio which is impacted by short-term rates, primarily
prime rate-based borrowings from commercial banks, and long-term
rates, primarily fixed-rate notes, some if which prohibit
prepayment or require substantial prepayment penalties.
The Company is also a party to a series of agreements under
which, upon completion of construction, it will lease a nitric acid
plant. The minimum lease payments associated therewith until
execution will be directly impacted by the change in interest
rates. To mitigate a portion of the Company's exposure to adverse
market changes related to this leveraged lease, in 1997 the Company
entered into a interest rate forward agreement whereby the Company
is the fixed rate payor on notional amounts aggregating $25
million, net to its 50% interest, with a weighted average of 7.12%.
The Company accounts for this forward under the deferral method, so
long as high correlation is maintained, whereby the net gain or
loss upon settlement will adjust the item being hedged, the minimum
lease rentals, in periods commencing with the lease execution. As
of December 31, 1998, the fair value of this interest rate forward
agreement represented a liability of approximately $3.3 million,
net to the Company's 50% interest. The following table provides
information about the Company's interest rate sensitive financial
instruments as of December 31, 1998.
46
<PAGE>
<TABLE>
<CAPTION>
Years Ending December 31,
1999 2000 2001 2002 2003 Thereafter Total
through
2007
______________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Expected maturities of long-term debt:
Variable rate
debt $ 5,725 $26,969 $ 272 $ 116 $ 126 $ 1,009 $ 34,217
Weighted
averages
interest
rate(1) 8.05% 8.13% 8.28% 8.25% 8.25% 8.25% 8.10%
Fixed rate
debt $ 8,229 $ 9,852 $7,641 $2,813 $ 550 $106,340 $135,425
Weighted
average
interest
rate(2) 10.44% 10.51% 10.61% 10.69% 10.72% 10.74% 10.65%
<FN>
(1) Interest rate is based on the aggregate rate of debt
outstanding as of December 31, 1998. Interest is at floating
rate based on the lender's prime rate plus percentages ranging
from .5% to 1.5% per annum, or at the Company's option, on its
Revolving Credit Agreements on the lender's LIBOR rate plus
2.875% per annum (rates under its Revolving Credit Agreements
are subject to change based upon specified availability and
adjusted tangible net worth levels).
(2) Interest rate is based on the aggregate rate of debt
outstanding as of December 31, 1998.
</FN>
</TABLE>
47
<PAGE>
<PAGE>
As of December 31, 1998, the Company's variable rate and fixed
rate debt which aggregated $169.6 million approximated their fair
value. The fair value of the Company's Senior Notes was determined
based on a market quotation for such securities.
Raw Material Price Risk
_______________________
The Company enters into long-term supply agreements with
certain third parties to insure availability of certain raw
materials used in its manufacturing processes. To mitigate a
portion of its price risk, the Company has entered into swap
agreements whereby it receives a floating price and pays a fixed
price. As of December 31, 1998, the Company had outstanding natural
gas contracts requiring settlement in January and February 1999
involving notional amounts of 590,000 MMBtu for which the fair
value represented a liability of approximately $255,000. The
Company follows the deferral method of accounting for these swap
agreements.
Foreign Currency Risk
_____________________
The Company has a wholly-owned subsidiary located in
Australia, for which the functional currency is the local currency,
the Australian dollar. Since the Australian subsidiary accounts are
converted into U.S. dollars upon consolidation using the end of the
period exchange rate, declines in value of the Australian dollar to
the U.S. dollar result in translation loss to the Company.
Additionally, any cumulative foreign currency translation loss will
impact operating results in the period the Company sells or
disposes of substantially all of its investment in the subsidiary.
As of December 31, 1998, the Company's net investment in this
Australian subsidiary was $5.8 million with the cumulative
translation loss not recognized in results of operations
aggregating approximately $1.6 million.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
_______ ___________________________________________
The Company has included the financial statements and
supplementary financial information required by this item
immediately following Part IV of this report and hereby
incorporates by reference the relevant portions of those statements
and information into this Item 8.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
_______ _________________________________________________
No disagreements between the Company and its accountants have
occurred within the 24-month period prior to the date of the
Company's most recent financial statements.
48
<PAGE>
<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) ability to improve operations and become
profitable on an annualized basis, (ii) establishing a position as
a market leader, (iii) construction costs of the EDNC Baytown Plant
will approximate $69 million (excluding the $12.9 million paid to
subcontractors by the bonding company) and will be completed by the
second quarter of 1999, (iv) ability to continue to operate the DSN
Plant at the rate of approximately 285 tons per day, (v) increase
demand for, and growth relating to, the Company's products, (vi)
certain of the Company's product lines possibly being the most
extensive offered, (vii) production of backlog, (viii) amount to be
spent in 1999 relating to compliance with federal, state and local
Environmental laws at the El Dorado Facility, (ix) Year 2000
issues, (x) improving liquidity and profits through liquidation of
assets or realignment of assets, (xi) the Company's ability to
develop or adopt new and existing technologies in the conduct of
its operations, (xii) anticipated financial performance, (xiii)
ability to comply with the Company's general working capital
requirements, (xiv) spin-off the Automotive Products Business, (xv)
ability to be able to continue to borrow under the Company's
revolving line of credit, (xvi) ability to enter into a new line of
credit for the Automotive Business, and (xvii) ability of the EDNC
Baytown Plant to guarantee $35 to $50 million in gross revenues
once operational. While the Company believes the expectations
reflected in such Forward-Looking Statements are reasonable, it can
give no assurance such expectations will prove to have been
correct. There are a variety of factors which could cause future
outcomes to differ materially from those described in this report,
including, but not limited to, (i) decline in general economic
conditions, both domestic and foreign, (ii) material reduction in
revenues, (iii) inability to collect in a timely manner a material
amount of receivables, (iv) increased competitive pressures, (v)
inability to meet the "Year 2000" compliance of the computer system
by the Company, its key suppliers, customers, creditors, and
financial service organization, (vi) changes in federal, state and
local laws and regulations, especially environmental regulations,
or in interpretation of such, pending (vii) additional releases
(particularly air emissions into the environment), (viii) potential
increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (ix) inability to retain
management or to develop new management, (x) the requirement to use
internally generated funds for purposes not presently anticipated,
(xi) inability to become profitable, or if unable to become
profitable, the inability to secure additional liquidity in the
form of additional equity or debt, (xii) the effect of additional
production capacity of anhydrous ammonia in the western hemisphere,
49
<PAGE>
(xiii) the cost for the purchase of anhydrous ammonia not reducing
or continuing to increase, (xiv) changes in competition, (xv) the
loss of any significant customer, (xvi) changes in operating
strategy or development plans, (xvii) inability to implement on a
permanent basis the corrective actions necessary for the DSN Plant
to operate at its stated capacity or inability to produce at the
DSN Plant in an efficient manner, (xviii) inability to fund the
working capital and expansion of the Company's businesses, (xix)
adverse results in any of the Company's pending litigation, on
claims described under "Legal Proceedings", (xx) inability to
finalize the settlements of the environmental litigation in terms
described in "Legal Proceedings", (xxi) inability to obtain
necessary raw materials, (xxii) inability to satisfy the NYSE
continued listing requirements, (xxiii) the requirement to pay a
dividend on the Series B Preferred as a result of the spin-off of
the Automotive Products Business, (xxiv) inability to recover the
Company's investment in the aviation company, and (xxiv) other
factors described in "Business", "Legal Proceedings" or
"Management's Discussion and Analysis of Financial Condition and
Results of Operation" contained in this report. Given these
uncertainties, all parties are cautioned not to place undue
reliance on such Forward-Looking Statements. The Company disclaims
any obligation to update any such factors or to publicly announce
the result of any revisions to any of the Forward-Looking
Statements contained herein to reflect future events or
developments.
50
<PAGE>
<PAGE>
PART III
The Company hereby incorporates by reference the information
required by Part III of this report except for the information on
the Company's executive officers included under Part 4A of Part I
of this report, from the definitive proxy statement which the
Company intends to file with the Securities and Exchange
Commission on or before April 30, 1999, in connection with the
Company's 1999 annual meeting of stockholders.
51
<PAGE>
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
_______ _________________________________________________________
(a)(1) Financial Statements
The following consolidated financial statements of the
Company appear immediately following this Part IV:
Pages
_________
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998
and 1997 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1998 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1998 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1998 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-46
Quarterly Financial Data (Unaudited) F-47
(a)(2) Financial Statement Schedule
The Company has included the following schedule in this
report:
II - Valuation and Qualifying Accounts F-48
The Company has omitted all other schedules because the
conditions requiring their filing do not exist or because the
required information appears in the Company's Consolidated
Financial Statements, including the notes to those statements.
52
<PAGE>
<PAGE>
(a)(3) Exhibits
2.1. Stock Option Agreement dated as of May 4, 1995,
between optionee, LSB Holdings, Inc., an Oklahoma
Corporation and the shareholders of a specialty sales
organization, an option which the Company hereby
incorporates hereby by reference from Exhibit 2.1 to the
Company's Form 10-K for fiscal year ended December 31, 1995.
2.2. Stock Purchase Agreement and Stock Pledge
Agreement between Dr. Hauri AG, a Swiss Corporation, and LSB
Chemical Corp., which the Company hereby incorporates by
reference from Exhibit 2.2 to the Company's Form 10-K for
fiscal year ended December 31, 1994.
3.1. Restated Certificate of Incorporation, the
Certificate of Designation dated February 17, 1989, and
certificate of Elimination dated April 30, 1993, which the
Company hereby incorporates by reference from Exhibit 4.1 to
the Company's Registration Statement, No. 33-61640;
Certificate of Designation for the Company's $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2,
which the Company hereby incorporates by reference from
Exhibit 4.6 to the Company's Registration Statement, No. 33-
61640.
3.2. Bylaws, as amended, which the Company hereby
incorporates by reference from Exhibit 3(ii) to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.1. Specimen Certificate for the Company's Non-
cumulative Preferred Stock, having a par value of $100 per
share, which the Company hereby incorporates by reference
from Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended June 30, 1983.
4.2. Specimen Certificate for the Company's Series B
Preferred Stock, having a par value of $100 per share, which
the Company hereby incorporates by reference from Exhibit
4.27 to the Company's Registration Statement No. 33-9848.
4.3. Specimen Certificate for the Company's Series 2
Preferred, which the Company hereby incorporates by
reference from Exhibit 4.5 to the Company's Registration
Statement No. 33-61640.
4.4. Specimen Certificate for the Company's Common
Stock, which the Company incorporates by reference from
Exhibit 4.4 to the Company's Registration Statement No. 33-
61640.
4.5. Renewed Rights Agreement, dated January 6, 1999,
between the Company and Bank One, N.A., which the Company
hereby incorporates by reference from Exhibit No. 1 to the
Company's Form 8-A Registration Statement, dated January 27,
1999.
4.6. Indenture, dated as of November 26, 1997, by and
among ClimaChem, Inc., the Subsidiary Guarantors and Bank
One, NA, as trustee, which the Company hereby incorporates
by reference from Exhibit 4.1 to the Company's Form 8-K,
dated November 26, 1997.
53
<PAGE>
4.7. Form 10 3/4% Series B Senior Notes due 2007 which
the Company hereby incorporates by reference from Exhibit
4.3 to the ClimaChem Registration Statement, No. 333-44905.
4.8. Amended and Restated Loan and Security Agreement,
dated November 21, 1997, by and between BankAmerica Business
Credit, Inc., and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and
Slurry Explosive Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the ClimaChem
Form S-4 Registration Statement, No. 333-44905.
4.9. Amended and Restated Loan and Security Agreement,
dated November 21, 1997, by and between BankAmerica Business
Credit, Inc., and the Company, which the Company hereby
incorporates by reference from Exhibit 4.11 to the Company's
Form 10-K for the fiscal year ended December 31, 1997.
Substantially identical Amended and Restated Loan and
Security Agreements dated November 21, 1997, were entered
into by each of L&S Bearing Co., and Summit Machine Tool
Manufacturing Corp., with BankAmerica Business Credit, Inc.,
and are hereby omitted and such will be provided upon the
Commission's request.
4.10. First Amendment to Amended and Restated Loan and
Security Agreement, dated March 12, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation which the Company
hereby incorporates by reference from Exhibit 10.53 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.11. First Amendment to Amended and Restated Loan and
Security Agreement, dated March 12, 1998, between
BankAmerica Business Credit, Inc., and the Company, which
the Company hereby incorporates by reference from Exhibit
4.13 to the Company's Form 10-K for the fiscal year ended
December 31, 1997. Substantially identical First Amendments
to Amended and Restated Loan and Security Agreements, dated
March 12, 1998, were entered into by each of L&S Bearing Co.
and Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
4.12. Third Amendment to Amended and Restated Loan and
Security Agreement, dated August 14, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.13. Third Amendment to Amended and Restated Loan and
Security Agreement, dated August 14, 1998, between
BankAmerica Business Credit, Inc., and the Company, which
the Company hereby incorporates by reference from Exhibit
4.2 to the Company's Form 10-Q for the quarter ended June
30, 1998. Substantially identical Third Amendments to
Amended and Restated Loan and Security Agreements, dated
August 14, 1998, were entered into by each of L&S Bearing
Co. and Summit Machine Tool Manufacturing Corp. with
BankAmerica Business Credit, Inc., and are hereby omitted
and such will be provided upon the Commission's request.
54
<PAGE>
4.14. Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental Corporation,
El Dorado Chemical Company and Slurry Explosive Corporation, which the
Company hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30, 1998.
4.15. Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica Business Credit,
Inc., and the Company, which the Company hereby incorporates by
reference from Exhibit 4.2 to the Company's Form 10-Q for the quarter
ended September 30, 1998. Substantially identical Fourth Amendments to
Amended and Restated Loan and Security Agreements, dated November 19,
1998, were entered into by each of L&S Bearing Co. and Summit Machine
Tool Manufacturing Corp. with BankAmerica Business Credit, Inc., and are
hereby omitted and such will be provided upon the Commission's request.
4.16. Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental Corporation,
El Dorado Chemical Company and Slurry Explosive Corporation.
4.17. Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica Business Credit,
Inc., and the Company. Substantially identical Fifth Amendments to
Amended and Restated Loan and Security Agreements, dated April 8, 1999,
were entered into by each of L&S Bearing Co. and Summit Machine Tool
Manufacturing Corp. with BankAmerica Business Credit, Inc., and are
hereby omitted and such will be provided upon the Commission's request.
4.18. Waiver Letter, dated March 16, 1998, from BankAmerica
Business Credit, Inc. which the Company hereby incorporates by reference
from Exhibit 10.55 to the ClimaChem Form S-4 Registration Statement, No.
333-44905.
4.19. First Supplemental Indenture, dated February 8, 1999, by
and between ClimaChem, Inc., the Guarantors, and Bank One, N.A.
10.1. Form of Death Benefit Plan Agreement between the Company
and the employees covered under the plan, which the Company hereby
incorporates by reference from Exhibit 10(c)(1) to the Company's Form
10-K for the year ended December 31, 1980.
10.2. The Company's 1981 Incentive Stock Option Plan, as
amended, and 1986 Incentive Stock Option Plan, which the Company hereby
incorporates by reference from Exhibits 10.1 and 10.2 to the Company's
Registration Statement No. 33-8302.
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<PAGE>
10.3. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1981 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.10 to the Company's Form 10-K for the fiscal year ended December 31,
1984.
10.4. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1986 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Registration Statement No. 33-9848.
10.5. The 1987 Amendments to the Company's 1981 Incentive Stock
Option Plan and 1986 Incentive Stock Option Plan, which the Company
hereby incorporates by reference from Exhibit 10.7 to the Company's Form
10-K for the fiscal year ended December 31, 1986.
10.6. The Company's 1993 Stock Option and Incentive Plan which
the Company hereby incorporates by reference from Exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1993.
10.7. The Company's 1993 Non-employee Director Stock Option Plan
which the Company hereby incorporates by reference from Exhibit 10.7 to
the Company's Form 10-K for the fiscal year ended December 31, 1993.
10.8. Union Contracts, dated August 5, 1995, between EDC and the
Oil, Chemical and Atomic Workers, and the United Steel Workers of
America, dated November 1, 1995 which the Company hereby incorporates by
reference from Exhibit 10.7 to the Company's Form 10-K for the fiscal
year ended December 31, 1995.
10.9. Lease Agreement, dated March 26, 1982, between Mac
Venture, Ltd. and Hercules Energy Mfg. Corporation, which the Company
hereby incorporates by reference from Exhibit 10.32 to the Company's
Form 10-K for the fiscal year ended December 31, 1981.
10.10. Limited Partnership Agreement dated as of May 4, 1995,
between the general partner, and LSB Holdings, Inc., an Oklahoma
Corporation, as limited partner which the Company hereby incorporates by
reference from Exhibit 10.11 to the Company's Form 10-K for the fiscal
year ended December 31, 1995.
10.11. Lease Agreement dated November 12, 1987, between Climate
Master, Inc. and West Point Company and amendments thereto, which the
Company hereby incorporates by reference from Exhibits 10.32, 10.36, and
10.37, to the Company's Form 10-K for fiscal year ended December 31,
1988.
10.12. Severance Agreement, dated January 17, 1989, between the
Company and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.48 to the Company's Form 10-K for fiscal year
ended December 31, 1988. The Company also entered into identical
agreements with Tony M. Shelby, David R. Goss, Barry H. Golsen, David M.
Shear, and Jim D. Jones and the Company will provide copies thereof to
the Commission upon request.
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<PAGE>
10.13. Third Amendment to Lease Agreement, dated as of December
31, 1987, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.49 to the Company's Form 10-K for fiscal year ended December
31, 1988.
10.14. Employment Agreement and Amendment to Severance Agreement
dated January 12, 1989 between the Company and Jack E. Golsen, dated
March 21, 1996 which the Company hereby incorporates by reference from
Exhibit 10.15 to the Company's Form 10-K for fiscal year ended December
31, 1995.
10.15. Non-Qualified Stock Option Agreement, dated June 1, 1992,
between the Company and Robert C. Brown, M.D. which the Company hereby
incorporates by reference from Exhibit 10.38 to the Company's Form 10-K
for fiscal year ended December 31, 1992. The Company entered into
substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer and C.L.Thurman, and the Company will provide copies thereof to
the Commission upon request.
10.16. Loan and Security Agreement (DSN Plant) dated October 31,
1994 between DSN Corporation and The CIT Group which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Form 10-Q
for the fiscal quarter ended September 30, 1994.
10.17. Loan and Security Agreement (Mixed Acid Plant) dated April
5, 1995 between DSN Corporation and The CIT Group, which the Company
hereby incorporates by reference from Exhibit 10.25 to the Company's
Form 10-K for the fiscal year ended December 31, 1994.
10.18. First Amendment to Loan and Security Agreement (DSN
Plant), dated June 1, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.13 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.19. First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.15 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.20 Loan and Security Agreement (Rail Tank Cars), dated
November 15, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc. which the Company hereby incorporates by reference from
Exhibit 10.16 to the ClimaChem Form S-4 Registration Statement, No. 333-
44905.
57
<PAGE>
10.21. First Amendment to Loan and Security Agreement (Rail Tank
Cars), dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.17 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.22. Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment Financing,
Inc. which the Company hereby incorporates by reference from Exhibit
10.1 to the Company's Form 10-Q for the fiscal quarter ended March 31,
1997.
10.23. Amendment to Loan and Security Agreement, dated November
21, 1997, between DSN Corporation and The CIT Group/Equipment Financing,
Inc. which the Company hereby incorporates by reference from Exhibit
10.19 to the ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.24. First Amendment to Non-Qualified Stock Option Agreement,
dated March 2, 1994, and Second Amendment to Stock Option Agreement,
dated April 3, 1995, each between the Company and Jack E. Golsen, which
the Company hereby incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended March 31, 1995.
10.25. Facility Letter, dated August 20, 1997, between Bank of
New Zealand, Australia, and Total Energy Systems Limited which the
Company hereby incorporates by reference from Exhibit 10.38 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.26. Variation Letter, dated February 10, 1998, between Bank of
New Zealand, Australia, and Total Energy Systems Limited which the
Company hereby incorporates by reference from Exhibit 10.39 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.27. Debenture Charge, dated March 7, 1995, between Total
Energy Systems Limited and Bank of New Zealand which the Company hereby
incorporates by reference from Exhibit 10.40 to the ClimaChem Form S-4
Registration Statement, No. 333-44905. T.E.S. Mining Services Pty. Ltd.
and Total Energy Systems (NZ) Limited are each parties to substantially
identical Debentures, copies of which will be provided to the Commission
upon request.
10.28. Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to
be effective January 1, 1997, between Koch Nitrogen Company and El
Dorado Chemical Company which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT
UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED.
58
<PAGE>
10.29. Baytown Nitric Acid Project and Supply Agreement dated
June 27, 1997, by and among El Dorado Nitrogen Company, El Dorado
Chemical Company and Bayer Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10.30. First Amendment to Baytown Nitric Acid Project and Supply
Agreement, dated February 1, 1999, between El Dorado Nitrogen Company,
El Dorado Chemical Company, and Bayer Corporation. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION
HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE
COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.31. Service Agreement, dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10.32. Ground Lease dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.4 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10.33. Participation Agreement, dated as of June 27, 1997, among
El Dorado Nitrogen Company, Boatmen's Trust Company of Texas as Owner
Trustee, Security Pacific Leasing corporation, as Owner Participant and
a Construction Lender, Wilmington Trust Company, Bayerische Landesbank,
New York Branch, as a Construction Lender and the Note Purchaser, and
Bank of America National Trust and Savings Association, as Construction
Loan Agent which the Company hereby incorporates by reference from
Exhibit 10.5 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25,
1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.34. Lease Agreement, dated as of June 27, 1997, between
Boatmen's Trust Company of Texas as Owner Trustee and El Dorado Nitrogen
59
<PAGE>
Company which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1997.
10.35. Security Agreement and Collateral Assignment of
Construction Documents, dated as of June 27, 1997, made by El Dorado
Nitrogen Company which the Company hereby incorporates by reference from
Exhibit 10.7 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997.
10.36. Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company
and consented to by Bayer Corporation which the Company hereby
incorporates by reference from Exhibit 10.8 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997.
10.37. Amendment to Loan and Security Agreement, dated March 16,
1998, between The CIT Group/Equipment Financing, Inc., and DSN
Corporation which the Company hereby incorporates by reference from
Exhibit 10.54 to the ClimaChem Form S-4 Registration Statement, No. 333-
44905.
10.38. Fifth Amendment to Lease Agreement, dated as of December
31, 1998, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation.
10.39. Sales Contract, dated December 7, 1998, between Solutia,
Inc. and El Dorado Chemical Company. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.40. Agreement for Purchase and Sale of Anhydrous Ammonia,
dated January 1, 1999, between El Dorado Chemical Company and Farmland
Industries, Inc. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER
THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN FILED
SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION
FOR PURPOSES OF SUCH REQUEST.
10.41. Agreement, dated March 23, 1999, among El Dorado Chemical
Company, El Dorado Nitrogen Company, Bayer Corporation, ICF Kaiser
Engineers, Inc., ICF Kaiser International, Inc., and Acstar Insurance
Company.
10.42. Union Contract, dated August 1, 1998, between El Dorado
Chemical Company and the International Association of Machinists and
Aerospace Workers.
60
<PAGE>
10.43. Non-Qualified Stock Option Agreement, dated April 22,
1998, between the Company and Robert C. Brown, M.D. The Company entered
into substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer, Raymond B. Ackerman, Horace G. Rhodes, Gerald J. Gagner, and
Donald W. Munson. The Company will provide copies of these agreements
to the Commission upon request.
10.44. The Company's 1998 Stock Option and Incentive Plan.
10.45. Letter Agreement, dated March 12, 1999, between Kestrel
Aircraft Company and LSB Industries, Inc., Prime Financial Corporation,
Herman Meinders, Carlan K. Yates, Larry H. Lemon, Co-Trustee Larry H.
Lemon Living Trust.
10.46. Covenant Waiver Letter, dated April 13, 1999, between The
CIT Group and DSN Corporation.
21.1. Subsidiaries of the Company
23.1. Consent of Independent Auditors
27.1. Financial Data Schedule
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the fourth quarter of 1998.
61
<PAGE>
<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 report on
its behalf of this 15th day of April, 1999.
LSB INDUSTRIES, 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
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
_________________________________
Jim D. Jones
Vice President, Controller and
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 15, 1999 By: /s/ Jack E. Golsen
__________________________________
Jack E. Golsen, Director
Dated: April 15, 1999 By: /s/ Tony M. Shelby
__________________________________
Tony M. Shelby, Director
Dated: April 15, 1999 By: /s/ David R. Goss
__________________________________
David R. Goss, Director
Dated: April 15, 1999 By: /s/ Barry H. Golsen
__________________________________
Barry H. Golsen, Director
62
<PAGE>
Dated: April 15, 1999 By: /s/ Robert C. Brown
___________________________________
Robert C. Brown, Director
Dated: April 15, 1999 By: /s/ Bernard G. Ille
____________________________________
Bernard G. Ille, Director
Dated: April 15, 1999 By: /s/ Jerome D. Shaffer
____________________________________
Jerome D. Shaffer, Director
Dated: April 15, 1999 By: /s/ Raymond B. Ackerman
_____________________________________
Raymond B. Ackerman, Director
Dated: April 15, 1999 By: /s/ Horace Rhodes
______________________________________
Horace Rhodes, Director.
Dated: April 15, 1999 By: /s/ Gerald J. Gagner
______________________________________
Gerald J. Gagner, Director
Dated: April 15, 1999 By: /s/ Donald W. Munson
______________________________________
Donald W. Munson, Director
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
Consolidated Financial Statements
Years ended December 31, 1998, 1997, and 1996
Contents
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . .F-1
Consolidated Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations. . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity. . . . . . . .F-5
Consolidated Statements of Cash Flows. . . . . . . . . . . . .F-7
Notes to Consolidated Financial Statements . . . . . . . . . .F-9
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
LSB Industries, Inc.
We have audited the accompanying consolidated balance sheets of LSB
Industries, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements
and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of LSB Industries, Inc. at December 31, 1998 and
1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
February 19, 1999,
except for paragraphs (A) and (C) of Note 5 and Note 14, as to
which the date is
April 14, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
<PAGE>
LSB INDUSTRIES, INC.
Consolidated Balance Sheets
December 31
1998 1997
____________________
(In Thousands)
<S> <C>
Assets
Current assets (Note 5):
Cash and cash equivalents $ 1,555 $ 4,934
Trade accounts receivable, net 52,730 52,191
Inventories (Note 3) 63,845 66,374
Supplies and prepaid items 7,809 7,595
___________________
Total current assets 125,939 131,094
Property, plant and equipment, net
(Notes 4 and 5) 99,228 119,331
Other assets, net 23,480 21,228
_____________________
$248,647 $270,653
=====================
</TABLE>
(Continued on following page)
F-2
<TABLE>
<CAPTION>
<PAGE>
LSB INDUSTRIES, INC.
Consolidated Balance Sheets (continued)
December 31
1998 1997
____________________
(In Thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Drafts payable $ 758 $ 737
Accounts payable 24,043 28,137
Accrued liabilities 19,006 16,196
Current portion of long-term debt
(Note 5) 13,954 15,874
___________________
Total current liabilities 57,761 60,944
Long-term debt (Note 5) 155,688 165,067
Commitments and contingencies (Note 10)
Redeemable, noncumulative, convertible
preferred stock, $100 par value; 1,463
shares issued and outstanding (1,539
in 1997) (Note 8) 139 146
Stockholders' equity (Notes 5, 7 and 9):
Series B 12% cumulative, convertible,
preferred stock, $100 par value; 20,000
shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 15,108,676 shares
issued (15,042,356 in 1997) 1,511 1,504
Capital in excess of par value 38,329 38,257
Accumulated other comprehensive loss (1,559) (1,003)
Accumulated deficit (35,166) (29,773)
____________________
51,115 56,985
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares 200 200
Common stock, 3,202,690 shares
(2,293,390 in 1997) 15,856 12,289
____________________
Total stockholders' equity 35,059 44,496
____________________
$248,647 $270,653
====================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB Industries, Inc.
Consolidated Statements of Operations
Year ended December 31,
1998 1997 1996
__________________________________
(In Thousands, Except Per Share
Amounts)
<S> <C> <C> <C>
Revenues:
Net sales $310,037 $313,929 $307,160
Other income 1,290 5,167 6,265
Gain on sale of The Tower
(Note 2) 12,993 - -
__________________________________
324,320 319,096 313,425
Costs and expenses:
Cost of sales 247,084 257,982 250,388
Selling, general and
administrative 61,729 64,770 56,715
Interest 17,327 14,740 10,017
__________________________________
326,140 337,492 317,120
__________________________________
Loss before provision for
income taxes and extra-
ordinary charge (1,820) (18,396) (3,695)
Provision for income taxes
(Note 6) 100 50 150
__________________________________
Loss before extraordinary
charge (1,920) (18,446) (3,845)
Extraordinary charge - 4,619 -
__________________________________
Net loss (1,920) (23,065) (3,845)
Preferred stock dividends 3,229 3,229 3,229
__________________________________
Net loss applicable to
common stock $ (5,149) $(26,294) $ (7,074)
==================================
Loss per common share--basic
and diluted:
Loss before extraordinary
charge $(.42) $(1.68) $(.55)
Extraordinary charge - (.36) -
__________________________________
Net loss $(.42) $(2.04) $(.55)
==================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
<PAGE>
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Non-
_________________ redeemable Capital in
Par Preferred Excess of
Shares Value Stock Par Value
______________________________________________
<S> <C> <C> <C> <C>
Balance at December 31, 1995 14,757 $1,476 $48,000 $37,567
Net loss - - - -
Foreign currency translation
adjustment - - - -
Total comprehensive loss
Conversion of 27 shares of
redeemable preferred stock
to common stock 1 - - 2
Exercise of stock options:
Cash received 85 8 - 185
Stock tendered and added
to treasury at market
value 45 5 - 89
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
Redeemable preferred stock
($10.00 per share) - - - -
Common stock ($.06 per
share) - - - -
Series 2 preferred stock
($3.25 per share) - - - -
Purchase of treasury stock - - - -
_____________________________________________
Balance at December 31, 1996 14,888 1,489 48,000 37,843
(Continued on following page)
<PAGE>
Accumulated Retained
Other Earnings Treasury Treasury
Comprehensive (Accumulated) Stock-- Stock--
Income (Loss) Deficit) Common Preferred Total
_______________________________________________________________________
(In Thousands)
<S> <C> <C> <C> <C> <C>
$ 278 $ 5,148 $(10,415) $ (200) $ 81,854
- (3,845) - - (3,845)
(2) - - - (2)
_________
(3,847)
- - - - 2
- - - - 193
- - (94) - -
- (240) - - (240)
- (16) - - (16)
- (780) - - (780)
- (2,973) - - (2,973)
- - (175) - (175)
_______________________________________________________________________
276 (2,706) (10,684) (200) 74,018
</TABLE>
F-5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock Non-
____________________ redeemable Capital in
Par Preferred Excess of
Shares Value Stock Par Value
________________________________________________
<S> <C> <C> <C> <C>
Net loss - $ - $ - $ -
Foreign currency translation
adjustment - - - -
Total comprehensive loss
Exercise of stock options:
Cash received 67 6 - 190
Stock tendered and added
to treasury at market
value 87 9 - 224
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
Redeemable preferred stock
($10.00 per share) - - - -
Common stock ($.06 per
share) - - - -
Series 2 preferred stock
($3.25 per share) - - - -
Purchase of treasury stock - - - -
_______________________________________________
Balance at December 31, 1997 15,042 1,504 48,000 38,257
Net loss - - - -
Foreign currency translation
adjustment - - - -
Total comprehensive loss
Conversion of 76.5 shares of
redeemable preferred stock
to common stock 3 - - 7
Exercise of stock options:
Cash received 64 7 - 65
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
Redeemable preferred stock
($10.00 per share) - - - -
Common stock ($.02 per
share) - - - -
Series 2 preferred stock
($3.25 per share) - - - -
Purchase of treasury stock - - - -
________________________________________________
Balance at December 31, 1998 15,109 1,511 48,000 38,329
================================================
(See accompanying notes)
<PAGE>
Accumulated Retained
Other Earnings Treasury Treasury
Comprehensive (Accumulated) Stock-- Stock--
Income (Loss) Deficit) Common Preferred Total
_______________________________________________________________________
(In Thousands)
$ - $(23,065) $ - $ - $(23,065)
(1,279) - - - (1,279)
________
(24,344)
- - - - 196
- - (233) - -
- (240) - - (240)
- (16) - - (16)
- (773) - - (773)
- (2,973) - - (2,973)
- - (1,372) - (1,372)
_________________________________________________________________________
(1,003) (29,773) (12,289) (200) 44,496
- (1,920) - - (1,920)
(556) - - - (556)
_________
(2,476)
- - - - 7
- - - - 72
- (240) - - (240)
- (16) - - (16)
- (244) - - (244)
- (2,973) - - (2,973)
- - (3,567) - (3,567)
______________________________________________________________________
$(1,559) $(35,166) $(15,856) $(200) $35,059
======================================================================
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
<PAGE>
LSB Industries, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
1998 1997 1996
________________________________
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,920) $(23,065) $ (3,845)
Adjustments to reconcile net loss to
net cash provided (used) by operations:
Extraordinary charge related to
financing activities - 4,619 -
Depreciation of property, plant and
equipment 11,651 11,142 8,655
Amortization 1,549 1,308 1,124
Provision for possible losses:
Accounts receivable 1,544 1,544 1,450
Inventory 173 68 578
Notes receivable 1,480 1,093 1,565
Environmental matters - 300 100
Loan guarantee 1,662 1,093 626
Recapture of prior period provisions
for loss on loans receivable
secured by real estate and other (1,081) (1,383) -
Loss (gain) on sale of assets (13,872) 57 (1,574)
Cash provided (used) by changes
in assets and liabilities:
Trade accounts receivable (2,301) (3,805) (8,267)
Inventories 1,341 (1,960) (2,295)
Supplies and prepaid items (1,010) (476) (1,533)
Accounts payable (4,016) (13,549) 13,288
Accrued liabilities 559 2,530 3,441
__________________________________
Net cash provided (used) by operating
activities (4,241) (20,484) 13,313
Cash flows from investing activities
Capital expenditures (9,620) (12,633) (19,950)
Principal payments on loans receivable 427 283 742
Proceeds from sale of The Tower, sales
of equipment and real estate
properties 31,057 1,957 417
Proceeds from the sale of investment
securities - - 1,524
Other assets (2,082) (5,293) (3,745)
_________________________________
Net cash provided (used) by investing
activities 19,782 (15,686) (21,012)
(Continued on following page)
</TABLE>
F-7
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
1998 1997 1996
__________________________________
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities
Payments on long-term and other debt $(20,338) $(75,846) $(11,985)
Long-term and other borrowings, net
of origination fees 617 162,451 25,029
Debt prepayment charge - (4,619) -
Net change in revolving debt
facilities 7,748 (37,525) (1,266)
Net change in drafts payable 21 201 112
Dividends paid:
Preferred stocks (3,229) (3,229) (3,229)
Common stock (244) (773) (780)
Purchase of treasury stock (3,567) (1,372) (175)
Net proceeds from issuance of
common stock 72 196 193
_________________________________
Net cash provided (used) by financing
activities (18,920) 39,484 7,899
_________________________________
Net increase (decrease) in cash and
cash equivalents from all activities (3,379) 3,314 200
Cash and cash equivalents at beginning
of year 4,934 1,620 1,420
___________________________________
Cash and cash equivalents at end of year $ 1,555 $ 4,934 $ 1,620
===================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
<PAGE>
LSB INDUSTRIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries. The Company is a
diversified holding company which is engaged, through its subsidiaries, in the
manufacture and sale of chemical products (the "Chemical Business"), the
manufacture and sale of a broad range of air handling and heat pump products
(the "Climate Control Business"), the manufacture or purchase and sale of
certain automotive products (the "Automotive Business") and the purchase and
sale of machine tools (the "Industrial Products Business"). See Note 13
Segment Information.
All material intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to the financial statements for the
years ended December 31, 1997 and 1996 to conform to the consolidated
financial statement presentation for the year ended December 31, 1998.
2. Accounting Policies
Use of Estimates
The preparation of consolidated 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
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories
Purchased machinery and equipment are carried at specific cost plus duty,
freight and other charges, not in excess of net realizable value. All other
inventory is priced at the lower of cost or market, with cost being determined
using the first-in, first-out (FIFO) basis, except for certain heat pump
products with a value of $7,095,000 at December 31, 1998 ($8,151,000 at
December 31, 1997), which are priced at the lower of cost or market, with cost
being determined using the last-in, first-out (LIFO) basis. The difference
between the LIFO basis and current cost was $1,062,000 and $1,223,000 at
December 31, 1998 and 1997, respectively.
Depreciation
For financial reporting purposes, depreciation is primarily computed using the
straight-line method over the estimated useful lives of the assets.
F-9
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Capitalization of Interest
Interest costs of $1,113,000 and $2,405,000 related to the construction of a
nitric acid plant were capitalized in 1997 and 1996, respectively (none in
1998), and are amortized over the plant's estimated useful life.
Loans Receivable
In February 1997, a subsidiary of the Company foreclosed on a loan receivable
with a carrying amount of $14.0 million and exercised its option to acquire the
related office building located in Oklahoma City, known as "The Tower."
In March 1998, the subsidiary closed the sale of The Tower and realized
proceeds of approximately $29.3 million from the sale, net of transaction costs.
Proceeds from the sale were used to retire the outstanding indebtedness of
approximately $13 million in March 1998, for which this property served as
collateral. Approximately $15 million of the remaining proceeds were used to
reduce indebtedness outstanding under the Company's Revolving Credit Facility.
The Company recognized a gain on the sale of the property of approximately $13
million in the first quarter of 1998.
Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired, which is included in
other assets in the accompanying balance sheets, were $2,895,000 and $3,287,000,
net of accumulated amortization, of $4,033,000 and $3,641,000 at December 31,
1998 and 1997, respectively, and is amortized by the straight-line method over
periods of 10 to 22 years. The carrying value of the excess of purchase price
over net assets acquired is reviewed (using estimated future net cash flows,
including proceeds from disposal) if the facts and circumstances indicate that
it may be impaired. No significant impairment provisions were required in 1998,
1997 or 1996.
Debt Issuance Costs
Debt issuance costs are amortized over the term of the associated debt
instrument using the straight-line method. Such costs, which are included in
other assets in the accompanying balance sheets, were $4,084,000 and $4,272,000
net of accumulated amortization of $1,141,000 and $683,000 as of December 31,
1998 and 1997, respectively.
F-10
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Research and Development Costs
Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $409,000 in 1998, $394,000 in 1997 and
$532,000 in 1996.
Advertising Costs
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $2,123,000 in 1998,
$2,430,000 in 1997 and $1,814,000 in 1996.
Translation of Foreign Currency
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are recorded as cumulative
translation adjustments, a separate component of stockholders' equity. Revenues
and expenses are translated using average exchange rates prevailing during the
year.
Hedging
In 1997, the Company entered into interest rate forward contracts to effectively
fix the interest rate on a long-term lease commitment to become effective in
1999 (not for trading purposes). The Company accounts for these contracts under
the deferral method, whereby the net gain or loss upon settlement will adjust
the item being hedged, the minimum lease rentals, in periods commencing with
the lease execution. If the necessary correlation (generally a correlation
coefficient of between 80% and 125%) ceases, the differential between the market
value and the carrying value will be recognized in operations as a gain or loss.
Under the interest rate forward agreement, the Company is the fixed rate payor
on notional amounts aggregating $50 million with a weighted average interest
rate of 7.12%. The agreement requires a net settlement on maturity in 1999, of
which an unrelated third party is contractually obligated for 50%. The
Company is required to post margin in the form of bank letters of credit or
treasury bills under this interest rate hedge agreement equal to the loss in
market value of the contracts since inception. See Note 10 -- Commitments and
Contingencies and Note 12 -- Fair Value of Financial Instruments.
F-11
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
In August 1998, the Company entered into a three month natural gas swap
agreement at a price of $2.56 per MMBtu for the months of December 1998 through
February 1999 to hedge the price volatility of ammonia (not for trading
purposes). Under these swap agreements, the Company is the fixed-price payor.
Monthly payments are made or received based on the differential between the
fixed price and the specified index price of natural gas on the settlement date.
Gains or losses resulting from the settlement of the swap transactions are
recognized in cost of sales when the inventory is sold. At December 31, 1998,
the Company had outstanding commodity contracts involving notional amounts of
590,000 MMBtu that are not reflected in the accompanying balance sheet. These
notional amounts do not represent amounts exchanged by the parties; rather,
they are used as the basis to calculate the amounts due under the agreements.
Loss Per Share
Net loss applicable to common stock is computed by adjusting net loss by the
amount of preferred stock dividends. Basic loss per common share is based upon
the weighted average number of common shares outstanding during each period
after giving appropriate effect to preferred stock dividends. Diluted loss per
share is based on the weighted average number of common shares and dilutive
common equivalent shares outstanding, if any, and the assumed conversion of
dilutive convertible securities outstanding, if any, after appropriate adjust-
ment for interest, net of related income tax effects on convertible notes
payable, as applicable. All potentially dilutive securities were antidilutive
for all periods presented and have thus, been excluded from diluted loss per
share. See Note 7 -- Stockholders' Equity, Note 8 -- Redeemable Preferred Stock,
and Note 9 -- Non-redeemable Preferred Stock for a full description of
securities which may have a dilutive effect in future periods.
Average common shares outstanding used in computing loss per share are as
follows:
1998 1997 1996
___________________________________
Basic and diluted 12,372,770 12,876,064 12,925,649
Changes in Accounting
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The provisions
of SFAS 130 require the Company to classify items of other comprehensive income
in the financial statements
F-12
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
and display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. The Company has also made similar reclassifications for all
prior periods for comparative purposes.
Effective January 1, 1998, the Company changed its method of accounting for the
costs of computer software developed for internal use to capitalize costs
incurred after the preliminary project stage as outlined in Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). These capitalized costs will be
amortized over their estimated useful life. Prior to 1998, these costs were
expensed as incurred. The effect of this change on net income for the year
ended December 31, 1998 was not material.
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(Statement 131). Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of Statement 131 did not affect results of operations
or financial position, but did affect the disclosure of segment information
(Note 13).
Recently Issued Pronouncements
In the second quarter of 1998, the Accounting Standards Executive Committee of
the Securities and Exchange Commission released Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires
that the costs of start-up activities, including organization costs, be expensed
as incurred. As of December 31, 1998, the start-up costs capitalized on the
balance sheet are immaterial. SOP 98-5 is effective for fiscal years ending
after December 15, 1998 and, accordingly, will be adopted January 1, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt this new Statement January 1, 2000.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value
F-13
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what all of the effects of SFAS 133 will be on the earnings and
financial position of the Company; however, the Company expects that the
interest rate forward contracts, discussed under Accounting Policies Hedging,
will be accounted for as a cash flow hedge upon adoption of SFAS 133, with the
effective portion of the hedge being classified in equity in accumulated other
comprehensive income or loss. The amount included in accumulated other
comprehensive income or loss will be amortized to operations over the initial
term of the leveraged lease.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash,
overnight funds and interest bearing deposits with maturities when purchased by
the Company of 90 days or less.
<TABLE>
<CAPTION>
Supplemental cash flow information includes:
1998 1997 1996
___________________________
(In Thousands)
<S> <C> <C> <C>
Cash payments for:
Interest on long-term debt and other $17,333 $14,804 $12,038
Income taxes, net of refunds 65 86 345
Noncash financing and investing
activities-
Long-term debt issued for property,
plant and equipment 523 1,108 2,226
</TABLE>
F-14
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Inventories
<TABLE>
<CAPTION>
Inventories at December 31, 1998 and 1997 consist of:
Finished
(or
Purchased) Work-In- Raw
Goods Process Materials Total
___________________________________________
(In Thousands)
<S> <C> <C> <C> <C>
1998:
Chemical products $10,934 $3,848 $10,281 $25,063
Climate Control products 3,233 2,442 6,673 12,348
Automotive products 13,992 888 5,477 20,357
Machinery and industrial
supplies 6,077 - - 6,077
___________________________________________
Total $34,236 $7,178 $22,431 $63,845
===========================================
1997 total $36,429 $8,582 $21,363 $66,374
===========================================
</TABLE>
4. Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, plant and equipment, at cost, consist of:
December 31
1998 1997
____________________
(In Thousands)
<S> <C> <C>
Land and improvements $ 2,910 $ 5,425
Buildings and improvements(A) 20,130 34,648
Machinery, equipment and automotive 161,337 154,727
Furniture, fixtures and store equipment 8,098 7,159
Other 3,132 3,246
_____________________
195,607 205,205
Less accumulated depreciation, depletion,
and amortization 96,379 86,874
_____________________
$ 99,228 $118,331
=====================
<FN>
(A) Includes The Tower in 1997 acquired through foreclosure in
February 1997 and sold in March 1998 as discussed in Note 2 --
Accounting Policies, Loans Receivable.
</FN>
</TABLE>
F-15
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31,
1998 1997
____________________
(In Thousands)
<S> <C> <C>
Secured revolving credit facility with interest
at a base rate plus a specified percentage
(8.1% aggregate rate at December 31, 1998)(A) $ 26,333 $ 19,275
10-3/4% Senior Notes due 2007(B) 105,000 105,000
Secured loan with interest payable monthly(C) 9,570 11,806
Secured revolving credit facility (weighted
average interest rate of 7.1% at December 31,
1998)(D) 5,009 4,592
Note payable to bank, due in monthly installments
of principal and interest through May 2001 - 12,622
Other, with interest at rates of 7.5% to 10.9%,
most of which is secured by machinery and
equipment(E) 23,730 27,646
________________________
169,642 180,941
Less current portion of long-term debt 13,954 15,874
________________________
Long-term debt due after one year $155,688 $165,067
========================
</TABLE>
(A) In December 1994, the Company, certain subsidiaries of the
Company (the "Borrowing Group") and a bank entered into a
series of six asset-based revolving credit facilities which
provided for an initial term of three years. In November 1997,
the Company amended the agreement. The amended agreement
provides for a $65 million revolving credit facility (the
"Revolving Credit Facility") with four separate loan
agreements (the "Credit Facility Agreements"), for the
Company and its subsidiaries. Under the Revolving Credit
Facility, certain conditions exist which restrict intercompany
transfers of amounts borrowed between subsidiaries. Borrowings
under the Revolving Credit Facility bear an annual rate of
interest at a floating rate based on the lender's prime rate
plus .5% per annum or, at the Company's option, on the
lender's LIBOR rate plus 2.875% per annum (which rates are
subject to increase or reduction based upon specified
availability and adjusted tangible net worth levels). The
Revolving Credit Facility will terminate on December 31, 2000,
subject to automatic renewal for terms of 13 months each,
unless terminated by either party. The Credit Facility
Agreements also require the payment of an annual facility fee
equal to 0.5% of the unused Revolving Credit Facility. The
Company may terminate the Revolving Credit Facility prior to
F-16
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
maturity; however, should the Company do so, it would be required
to pay a termination fee of $500,000.
Each of the Credit Facility Agreements specify a number of
events of default and require the Company to maintain certain
financial ratios (including adjusted tangible net worth and
debt ratios), limits the amount of capital expenditures, and
contains other covenants which restrict, among other things,
(i) the incurrence of additional debt; (ii) the payment of
dividends and other distributions; (iii) the making of certain
investments; (iv) certain mergers, acquisitions and
dispositions; (v) the issuance of secured guarantees; and (vi)
the granting of certain liens.
Events of default under the Revolving Credit Facility include,
among other things, (i) the failure to make payments of
principal, interest, and fees, when due; (ii) the failure to
perform covenants contained therein; (iii) the occurrence of
a change in control if any party is or becomes the beneficial
owner of more than 50% of the total voting securities of the
Company, except for Jack E. Golsen or members of his immediate
family; (iv) default under any material agreement or
instrument (other than an agreement or instrument evidencing
the lending of money) which would have a material adverse
effect on the Company and its subsidiaries which are borrowers
under the Revolving Credit Facility, taken as a whole, and
which is not cured within the grace period; (v) a default
under any other agreement relating to borrowed money exceeding
certain limits; and (vi) customary bankruptcy or insolvency
defaults. In November 1998, the Company and its subsidiaries
amended the financial covenants of the Revolving Credit
Facility (the "Amended Covenants"). The Amended Covenants
provide for elimination of financial covenants upon the sale,
disposal or spin-off of LSB's Automotive subsidiaries so long
as the remaining borrowing group maintains a minimum aggregate
availability under the Revolving Credit Facility of $15
million.
At December 31, 1998, the Company and its subsidiaries were
not in compliance with certain of the financial covenants of
the Revolving Credit Facility. In April 1999, the Company
obtained waivers of noncompliance and amendments to reset the
financial covenants through maturity.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of the
Company.
F-17
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
(B) In 1997, a subsidiary of the Company (ClimaChem, Inc., "CCI")
completed the sale of $105 million principal amount of 10 3/4%
Senior Notes due 2007 (the "Notes"). The Notes bear interest
at an annual rate of 10 3/4% payable semiannually in arrears
on June 1 and December 1 of each year. The Notes are senior
unsecured obligations of CCI and rank pari passu in right of
payment to all existing senior unsecured indebtedness of CCI
and its subsidiaries. The Notes are effectively subordinated
to all existing and future senior secured indebtedness of CCI.
The Notes were issued pursuant to an Indenture, which contains
certain covenants that, among other things, limit the ability
of CCI and its subsidiaries to: (i) incur additional
indebtedness; (ii) incur certain liens; (iii) engage in
certain transactions with affiliates; (iv) make certain
restricted payments; (v) agree to payment restrictions
affecting subsidiaries; (vi) engage in unrelated lines of
business; or (vii) engage in mergers, consolidations or the
transfer of all or substantially all of the assets of CCI to
another person. In addition, in the event of certain asset
sales, CCI will be required to use the proceeds to reinvest in
the Company's business, to repay certain debt or to offer to
purchase Notes at 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon, plus liquidated
damages, if any, to the date of purchase.
Under the terms of the Indenture, CCI cannot transfer funds to
the Company in the form of cash dividends or other
distributions or advances, except for (i) the amount of taxes
that CCI would be required to pay if they were not
consolidated with the Company and (ii) an amount not to exceed
fifty percent (50%) of CCI's cumulative net income from
January 1, 1998 through the end of the period for which the
calculation is made for the purpose of proposing a payment and
(iii) the amount of direct and indirect costs and expenses
incurred by the Company on behalf of CCI pursuant to a certain
services agreement and a certain management agreement to which
CCI and the Company are parties.
Except as described below, the Notes are not redeemable at
CCI's option prior to December 1, 2002. After December 1,
2002, the Notes will be subject to redemption at the option of
CCI, in whole or in part, at the redemption prices set forth
in the Indenture, plus accrued and unpaid interest thereon,
plus liquidated damages, if any, to the applicable redemption
date. In addition, until December 1, 2000, up to $35 million
in aggregate principal amount of Notes are redeemable, at the
option of CCI, at a price of 110.75% of the principal amount
of the Notes, together with accrued and unpaid interest, if
any, thereon, plus liquidated damages, if any, to the date of
the redemption, with the net cash proceeds of a public equity
offering; provided, however, that at least $65 million in
aggregate principal amount of the Notes remain outstanding
following such redemption.
F-18
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
In the event of a change of control of the Company or CCI,
holders of the Notes will have the right to require CCI to
repurchase the Notes, in whole or in part, at a redemption
price of 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon, plus liquidated damages,
if any, to the date of repurchase.
CCI is a holding company with no assets (other than that
related to the notes receivable from LSB and affiliates,
specified below, and the Notes origination fees which have a
net book value of $3.7 million as of December 31, 1998) or
operations other than its investments in its subsidiaries, and
each of its subsidiaries is wholly owned, directly or
indirectly. CCI's payment obligations under the Notes are
fully, unconditionally and joint and severally guaranteed by
all of the existing subsidiaries of CCI, except for El Dorado
Nitrogen Company ("EDNC"). The assets, equity, and earnings of
EDNC are inconsequential for all periods presented. Separate
financial statements and other disclosures concerning the
guarantors are not presented herein because management has
determined they are not material to investors. Summarized
financial information of CCI and its subsidiaries as of
December 31, 1998 and 1997 and the results of operations for
each of the three years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
____________________
(In Thousands)
<S> <C> <C>
Balance sheet data:
Current assets(1)(2) $ 88,695 $ 88,442
Property, plant and equipment 82,389 84,329
Notes receivable from LSB and
affiliates(1) 13,140 13,443
Other assets 10,480 14,661
___________________
Total assets $194,704 $200,875
===================
Current liabilities $ 33,895 $ 38,004
Long-term debt 127,471 126,346
Other 9,580 9,236
Stockholders' equity 23,758 27,289
___________________
Total liabilities and stockholders'
equity $194,704 $200,875
==================
<FN>
(1) Notes receivable from LSB and affiliates is eliminated when
consolidated with the Company.
(2) Current assets include income tax and other receivables due
from LSB which aggregate $3.4 million and $4.3 million at
December 31, 1998 and 1997, respectively.
</FN>
</TABLE>
F-19
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
________________________________
(In Thousands)
<S> <C> <C> <C>
Operations data:
Total revenues $257,198 $263,740 $255,618
Costs and expenses:
Costs of sales 205,148 213,772 207,828
Selling, general and administrative 40,283 37,854 33,122
Interest 13,944 9,788 6,247
________________________________
259,375 261,414 247,197
________________________________
Income (loss) before provision for
income taxes and extraordinary
charge (2,177) 2,326 8,421
Provision for income taxes 392 1,429 2,668
________________________________
Income (loss) before extraordinary
charge (2,569) 897 5,753
Extraordinary charge, net of income tax
benefit of $1,750,000 - 2,869 -
________________________________
Net income (loss) $ (2,569) $ (1,972) $ 5,753
================================
</TABLE>
In February 1997, certain subsidiaries of the Chemical
Business of the Company entered into a $50 million financing
arrangement with John Hancock. The financing arrangement
consisted of $25 million of fixed rate notes and $25 million
of floating rate notes. In November 1997, in connection with
the issuance of the Notes described above, the subsidiaries
retired the outstanding principal associated with the John
Hancock financing arrangement and incurred a prepayment fee.
The prepayment fee paid and loan origination costs expensed in
1997 related to the John Hancock financing arrangement
aggregated approximately $4.6 million.
(C) This agreement, as amended, between a subsidiary of the
Company and an institutional lender provides for a loan, the
proceeds of which were used in the construction of a nitric
acid plant, in the aggregate amount of $16.5 million requiring
84 equal monthly payments of principal plus interest, with
interest at a fixed rate of 8.86% through maturity in 2002.
This agreement is secured by the plant, equipment and
machinery, and proprietary rights associated with the plant
which has an approximate carrying value of $28.7 million at
December 31, 1998.
F-20
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
This agreement, as amended, contains covenants (i) requiring
maintenance of an escalating tangible net worth, (ii)
restricting distributions and dividends, (iii) restricting a
change of control of the subsidiary and the Company and (iv)
requiring maintenance of a reducing debt to tangible net worth
ratio. In November 1998, the subsidiary of the Company
received a waiver for noncompliance of the tangible net worth
and debt to tangible net worth ratio through the period ended
September 30, 1999. In April 1999, the subsidiary of the
Company obtained a waiver of the covenants through June 2000.
(D) At December 31, 1998, the Company's wholly-owned Australian
subsidiary, TES, had an AUS $10.5 million (U.S. $6.5 million)
revolving credit facility with a bank (the "Amended TES
Revolver") which is renewed by the bank on an annual basis.
The Amended TES Revolver provides for borrowings based on
specified percentages of qualified eligible assets. The
interest rate on the Amended TES Revolver is dependent upon
the borrowing option elected by TES. Borrowings under an
overdraft option, as defined, generally bear interest at the
bank's base lending rate (which approximates the U.S. prime
rate) plus .5% per annum. Borrowings under the commercial bill
option generally bear interest at the bank's yield rate, as
defined, plus 1.5% per annum.
The Amended TES Revolver contains certain financial covenants
with which the subsidiary must comply. At December 31, 1998,
the Company was in technical noncompliance with certain
financial covenants contained in the Amended TES Revolver;
however, the bank has confirmed that it will not act on any
default so long as, in its opinion, such default will not
impact the ability of TES or the Company to continue
operations or service and repay its borrowings outstanding
under the Amended TES Revolver. At December 31, 1998 and 1997,
all borrowings outstanding under the Amended TES Revolver have been
classified as due within one year in the consolidated balance
sheets.
The Amended TES Revolver is secured by substantially all of
the assets of TES, plus an unlimited guarantee and indemnity
from the Company and certain subsidiaries.
(E) Includes a $2.6 million note payable in 1998 ($3.0 million at
December 31, 1997), to an unconsolidated related party. The
note is unsecured, bears interest at 10.75% per annum payable
monthly, and requires principal payments of $300,000 in 1999
and $2.3 million in 2000.
Maturities of long-term debt for each of the five years after
December 31, 1998 are: 1999 $13,954; 2000 $36,821; 2001 $7,913;
2002 $2,929; 2003 $676 and thereafter $107,349.
F-21
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
<TABLE>
<CAPTION>
The provision for income taxes before extraordinary charge consists
of the following for the year ended December 31:
1998 1997 1996
______________________________
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 77 $ - $ 54
State 23 50 96
_______________________________
$100 $50 $150
===============================
</TABLE>
<TABLE>
<CAPTION>
The approximate tax effects of each type of temporary difference
and carryforward that are used in computing deferred tax assets and
liabilities and the valuation allowance related to deferred tax
assets at December 31, 1998 and 1997 are as follows:
1998 1997
_________________
(In Thousands)
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts and
other asset impairments not
deductible for tax purposes $ 6,864 $ 5,361
Capitalization of certain costs as
inventory for tax purposes 2,546 2,836
Net operating loss carryforward 25,235 25,390
Investment tax and alternative
minimum tax credit carryforwards 1,424 1,397
Other 1,150 956
__________________
Total deferred tax assets 37,219 35,940
Less valuation allowance on deferred
tax assets 25,534 25,511
__________________
Net deferred tax assets $11,685 $10,429
==================
Deferred tax liabilities
Accelerated depreciation used for tax
purposes $ 9,546 $ 8,288
Inventory basis difference resulting
from a business combination 2,139 2,139
Other - 2
__________________
Total deferred tax liabilities $11,685 $10,429
==================
</TABLE>
The Company is able to realize deferred tax assets up to an amount
equal to the future reversals of existing taxable temporary
differences. The taxable temporary differences will turn around in
F-22
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
the loss carryforward period as the differences are
depreciated or amortized. Other differences will turn around
as the assets are disposed in the normal course of business.
<TABLE>
<CAPTION>
The differences between the amount of the provision for income
taxes and the amount which would result from the application
of the federal statutory rate to "Loss before provision for
income taxes and extraordinary charge" for each of the three
years in the period ended December 31, 1998 are detailed
below:
1998 1997 1996
_________________________
(In Thousands)
<S> <C> <C> <C>
Benefit for income taxes at
federal statutory rate $(637) $(8,055) $(1,293)
Changes in the valuation allow-
ance related to deferred
tax assets, net of rate
differential 23 7,313 1,591
State income taxes, net of
federal benefit 15 33 62
Permanent differences 30 534 364
Foreign subsidiary loss
(income) 617 191 (635)
Alternative minimum tax 77 - 54
Other (25) 34 7
_________________________
Provision for income taxes $ 100 $ 50 $ 150
=========================
At December 31, 1998, the Company has regular-tax net
operating loss ("NOL") carryforwards of approximately
$63.8 million (approximately $31.4 million alternative minimum
tax NOLs). Certain amounts of regular-tax NOL expire beginning
in 1999.
7. Stockholders' Equity
Stock Options
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
generally recognized.
F-23
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Pro forma information regarding net income and earnings per
share is required by Statement 123, which also requires that
the information be determined as if the Company has accounted
for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for 1998, 1997
and 1996, respectively: risk-free interest rates of 5.75%,
6.2% and 6.0%; a dividend yield of .5%, 1.43% and 1.38%;
volatility factors of the expected market price of the
Company's common stock of .57, .42 and .41; and a weighted
average expected life of the option of 8.0, 8.0 and 6.8 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
</TABLE>
<TABLE>
<CAPTION>
For purposes of pro forma disclosures, the estimated fair
value of the qualified and non-qualified stock options is
amortized to expense over the options' vesting period. The
Company's pro forma information follows:
Year ended December 31,
1998 1997 1996
___________________________
(In Thousands, Except Per
Share Data)
<S> <C> <C> <C>
Net loss applicable to
common stock $(5,943) $(26,715) $(7,184)
Loss per common share (.48) (2.07) (.56)
Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect was not fully
reflected until 1998.
F-24
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Qualified Stock Option Plans
In November 1981, the Company adopted the 1981 Incentive Stock
Option Plan (1,350,000 shares), in March 1986, the Company adopted
the 1986 Incentive Stock Option Plan (1,500,000 shares) and, in
September 1993, the Company adopted the 1993 Stock Option and
Incentive Plan (850,000 shares). Under these plans, the Company is
authorized to grant options to purchase up to 3,700,000 shares of
the Company's common stock to key employees of the Company and its
subsidiaries. The 1981 and 1986 Incentive Stock Option Plans have
expired and, accordingly, no additional options may be granted from
these plans. Options granted prior to the expiration of these plans
continue to remain valid thereafter in accordance with their terms.
At December 31, 1998, there are 149,000 of options outstanding
related to these two plans. At December 31, 1998, there are 838,500
options outstanding related to the 1993 Stock Option and Incentive
Plan which continues to be effective. These options become
exercisable 20% after one year from date of grant, 40% after two
years, 70% after three years, 100% after four years and lapse at
the end of ten years. The exercise price of options to be granted
under this plan is equal to the fair market value of the Company's
common stock at the date of grant. For participants who own 10% or
more of the Company's common stock at the date of grant, the option
price is 110% of the fair market value at the date of grant and the
options lapse after five years from the date of grant.
In August 1998, the Company adopted the 1998 Incentive Stock Option
Plan (1,000,000 shares) subjective to shareholder approval. If
approved, the 1998 Plan would have the same terms as described
above under the 1993 Stock Option and Incentive Plan.
On April 22, 1998, the Company terminated 116,000 qualified stock
options (the "terminated options"), previously granted under the
1993 Plan and replaced the terminated options with newly granted
options under and pursuant to the terms of the 1993 Plan (the
"replacement options"). The replacement options were granted at the
fair market value of the Company's stock on April 22, 1998, have a
life and vesting schedule based on the terminated options.
F-25
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
</TABLE>
<TABLE>
<CAPTION>
Activity in the Company's qualified stock option plans during each
of the three years in the period ended December 31, 1998 is as
follows:
1998 1997
______________________ ____________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
_____________________________________________
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,048,760 $4.25 1,176,640 $4.08
Granted 119,500 4.19 - -
Exercised (63,260) 1.13 (118,880) 2.81
Canceled, forfeited or expired (117,500) 6.07 (9,000) 6.05
____________ __________
Outstanding at end of year 987,500 4.23 1,048,760 4.25
============ ==========
Exercisable at end of year 532,400 4.09 414,960 3.81
============ =========
Weighted average fair value
of options granted during
year 2.16 -
<PAGE>
1996
____________________
Weighted
Average
Exercise
Shares Price
______________________
<S> <C> <C>
611,140 $3.40
720,500 4.33
(120,000) 2.13
(35,000) 4.21
__________
1,176,640 4.08
==========
354,540 3.76
==========
2.00
</TABLE>
Outstanding options to acquire 954,500 shares of stock at
December 31, 1998 had exercise prices ranging from $1.13 to $4.88
per share (507,500 of which are exercisable at a weighted average
price of $3.93 per share), had a weighted average exercise price of
$4.13 and a remaining contractual life of 5.9 years. The balance of
options outstanding at December 31, 1998 had exercise prices
ranging from $5.36 to $9.00 per share (24,900 of which are
exercisable at a weighted average price of $7.54 per share), had a
weighted average exercise price of $7.01 and a remaining
contractual life of 4.7 years.
Non-qualified Stock Option Plans
The Company's Board of Directors approved the grant of non-
qualified stock options to the Company's outside directors,
President and certain key employees, as detailed below. The option
price was based on the market value of the Company's common stock
at the date of grant. These options have vesting terms and lives
specific to each grant but generally vest over 48 months and expire
five or ten years from the grant date (except for the 1994
extension and 1998 grants discussed below). In June 1994, the Board
of Directors extended the expiration date on the grant of options
for 165,000 shares to the Company's Chairman for an additional five
years. The option price and terms of the option were unchanged
except that, in consideration of the extension of time to exercise,
the Chairman agreed to a revised vesting schedule for exercise of
20% of the option shares in each of the years 1995, 1996 and 1997
and 40% of the option shares in 1998.
F-26
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
In 1998, the Board of Directors granted 175,000 stock options, at
the price equivalent to the Company's stock price at the date of
grant. Options to two key employees for 100,000 shares have a nine-
year vesting schedule while the remaining 75,000 vest over 48
months. These options expire ten years from the date of grant. In
1997, the Board of Directors granted 50,000 options to two key
employees that vest over 60 months and expire ten years from the
date of grant.
In September 1993, the Company adopted the 1993 Nonemployee
Director Stock Option Plan (the "Outside Director Plan"). The
Outside Director Plan authorizes the grant of non-qualified stock
options to each member of the Company's Board of Directors who is
not an officer or employee of the Company or its subsidiaries. The
maximum number of shares of common stock of the Company that may be
issued under the Outside Director Plan is 150,000 shares (subject
to adjustment as provided in the Outside Director Plan).
The Company shall automatically grant to each outside director an
option to acquire 5,000 shares of the Company's common stock on
April 30 following the end of each of the Company's fiscal years in
which the Company realizes net income of $9.2 million or more for
such fiscal year. The exercise price for an option granted under
this plan shall be the fair market value of the shares of common
stock at the time the option is granted. Each option granted under
this plan to the extent not exercised shall terminate upon the
earlier of the termination as a member of the Company's Board of
Directors or the fifth anniversary of the date such option was
granted. During 1998, the Company granted 105,000 options (none in
1997 or 1996), respectively, under the Outside Director Plan.
<TABLE>
<CAPTION>
Activity in the Company's non-qualified stock option plans during
each of the three years in the period ended December 31, 1998 is as
follows:
1998 1997
______________________ ____________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
_____________________________________________
<S> <C> <C> <C> <C>
Outstanding at beginning of year 280,000 $3.44 265,000 $3.31
Granted 280,000 4.19 50,000 4.19
Exercised - - (35,000) 3.13
Surrendered, forfeited or expired - - - -
____________ __________
Outstanding at end of year 560,000 3.82 280,000 3.44
============ ==========
Exercisable at end of year 335,000 3.37 164,000 3.55
============ ==========
Weighted average fair value
of options granted during
year 2.62 2.00
<PAGE>
1996
____________________
Weighted
Average
Exercise
Shares Price
______________________
<S> <C> <C>
285,000 $3.44
- -
(10,000) 3.13
(10,000) 7.19
__________
265,000 3.31
==========
166,000 3.64
==========
-
</TABLE>
F-27
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Outstanding options to acquire 520,000 shares of stock at
December 31, 1998 had exercise prices ranging from $1.38 to $4.25 per
share (295,000 of which are exercisable at a weighted average price
of $3.08 per share), had a weighted average exercise price of $3.56
and a remaining contractual life of 7.7 years. The balance of options
outstanding at December 31, 1998 had exercise prices ranging from
$5.38 to $9.00 per share (40,000 of which are exercisable at a
weighted average price of $7.19 per share), had a weighted average
exercise price of $7.19 and a remaining contractual life of 5.8
years.
Preferred Share Purchase Rights
In January 1999, the Company's Board of Directors approved the
renewal (the "Renewed Rights Plan") of the Company's existing
Preferred Share Purchase Rights Plan ("Existing Rights Plan") and
declared a dividend distribution of one Renewed Preferred Share
Purchase Right (the "Renewed Preferred Right") for each outstanding
share of the Company's common stock outstanding upon the Existing
Rights Plan's expiration date. The Renewed Preferred Rights are
designed to ensure that all of the Company's stockholders receive
fair and equal treatment in the event of a proposed takeover or
abusive tender offer.
The Renewed Preferred Rights are generally exercisable when a person
or group, other than the Company's Chairman and his affiliates,
acquire beneficial ownership of 20% or more of the Company's common
stock (such a person or group will be referred to as the "Acquirer").
Each Renewed Preferred Right (excluding Renewed Preferred Rights
owned by the Acquirer) entitles stockholders to buy one one-hundredth
(1/100) of a share of a new series of participating preferred stock
at an exercise price of $20. Following the acquisition by the
Acquirer of beneficial ownership of 20% or more of the Company's
common stock, and prior to the acquisition of 50% or more of the
Company's common stock by the Acquirer, the Company's Board of
Directors may exchange all or a portion of the Renewed Preferred
Rights (other than Renewed Preferred Rights owned by the Acquirer)
for the Company's common stock at the rate of one share of common
stock per Renewed Preferred Right. Following acquisition by the
Acquirer of 20% or more of the Company's common stock, each Renewed
Preferred Right (other than the Renewed Preferred Rights owned by the
Acquirer) will entitle its holder to purchase a number of the
Company's common shares having a market value of two times the
Renewed Preferred Right's exercise price in lieu of the new preferred
stock.
If the Company is acquired, each Renewed Preferred Right (other than
the Renewed Preferred Rights owned by the Acquirer) will entitle its
holder to purchase a number of the Acquirer's common shares having a
market value at the time of two times the Renewed Preferred Right's
exercise price.
F-28
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Prior to the acquisition by the Acquirer of beneficial ownership of
20% or more of the Company's stock, the Company's Board of Directors
may redeem the Renewed Preferred Rights for $.01 per Renewed
Preferred Right.
8. Redeemable Preferred Stock
Each share of the noncumulative redeemable preferred stock, $100 par
value, is convertible into 40 shares of the Company's common stock at
any time at the option of the holder; entitles the holder to one vote
and is redeemable at par. The redeemable preferred stock provides for
a noncumulative annual dividend of 10%, payable when and as declared.
Dividend payments were current at December 31, 1998 and 1997.
9. Non-redeemable Preferred Stock
The 20,000 shares of Series B cumulative, convertible preferred
stock, $100 par value, are convertible, in whole or in part, into
666,666 shares of the Company's common stock (33.3333 shares of
common stock for each share of preferred stock) at any time at the
option of the holder and entitles the holder to one vote per share.
The Series B preferred stock provides for annual cumulative dividends
of 12% from date of issue, payable when and as declared. Dividend
payments were current at December 31, 1998 and 1997. The terms of the
Company's Series B Preferred Stock provides, in part, that in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, or any reduction in its capital resulting
in any distribution of assets to its stockholders, the holders of the
Series B Preferred Stock shall be entitled to receive in cash out of
assets of the Company, whether from capital or from earnings
available for distribution to the stockholders, before any amount
shall be paid to the holder of Common Stock of the Company the sum of
One Hundred & No/100 Dollars ($100) per share, plus an amount equal
to all accumulated and unpaid cash dividends thereon to the date
fixed for payment of such distributive amount.
The Class C preferred stock, designated as a $3.25 convertible
exchangeable Class C preferred stock, Series 2, has no par value
("Series 2 Preferred"). The Series 2 Preferred has a liquidation
preference of $50.00 per share plus accrued and unpaid dividends and
is convertible at the option of the holder at any time, unless
previously redeemed, into common stock of the Company at an initial
conversion price of $11.55 per share (equivalent to a conversion rate
of approximately 4.3 shares of common stock for each share of Series
2 Preferred), subject to adjustment under certain conditions. Upon
the mailing of notice of certain corporate actions, holders will have
special conversion rights for a 45-day period.
F-29
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Non-redeemable Preferred Stock (continued)
The Series 2 Preferred is redeemable at the option of the Company, in
whole or in part, at prices decreasing annually to $50.00 per share
on or after June 15, 2003, plus accrued and unpaid dividends to the
redemption date. The redemption price at December 31, 1998 was $51.63
per share. Dividends on the Series 2 Preferred are cumulative and are
payable quarterly in arrears. Dividend payments were current at
December 31, 1998 and 1997.
The Series 2 Preferred also is exchangeable in whole, but not in
part, at the option of the Company on any dividend payment date
beginning June 15, 1996, for the Company's 6.50% Convertible
Subordinated Debentures due 2018 (the "Debentures") at the rate of
$50.00 principal amount of Debentures for each share of Series 2
Preferred. Interest on the Debentures, if issued, will be payable
semiannually in arrears. The Debentures will, if issued, contain
conversion and optional redemption provisions similar to those of the
Series 2 Preferred and will be subject to a mandatory annual sinking
fund redemption of five percent of the amount of Debentures initially
issued, commencing June 15, 2003 (or the June 15 following their
issuance, if later).
At December 31, 1998, the Company is authorized to issue an
additional 248,538 shares of $100 par value preferred stock and an
additional 5,000,000 shares of no par value preferred stock. Upon
issuance, the Board of Directors of the Company will determine the
specific terms and conditions of such preferred stock.
10. Commitments and Contingencies
Operating Leases
<TABLE>
<CAPTION>
The Company leases certain property, plant and equipment under
noncancelable operating leases. Future minimum payments on operating
leases with initial or remaining terms of one year or more at
December 31, 1998 are as follows:
(In Thousands)
<S> <C>
1999 $ 2,718
2000 2,394
2001 2,139
2002 1,887
2003 1,236
After 2003 4,774
_______
$15,148
=======
</TABLE>
Rent expense under all operating lease agreements, including month-
to-month leases, was $3,866,000 in 1998, $4,085,000 in 1997 and
$4,337,000 in 1996. Renewal options are available
<PAGE>
F-30
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
under certain of the lease agreements for various periods at
approximately the existing annual rental amounts. Rent expense paid
to related parties was $90,000 in each of 1998, 1997 and 1996.
In June 1997, two wholly owned subsidiaries of the Company, El Dorado
Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement").
Under the Bayer Agreement, EDNC will act as an agent to construct,
and upon completion of construction, will operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC has guaranteed the performance of EDNC's obligations
under the Bayer Agreement. Under the terms of the Bayer Agreement,
EDNC is to lease the EDNC Baytown Plant pursuant to a leveraged lease
from an unrelated third party with an initial lease term of ten years
from the date on which the EDNC Baytown Plant becomes fully
operational. Upon expiration of the initial ten-year term from the
date the EDNC Baytown Plant becomes operational, the Bayer Agreement
may be renewed for up to six renewal terms of five years each;
however, prior to each renewal period, either party to the Bayer
Agreement may opt against renewal. It is anticipated that
construction cost of the EDNC Baytown Plant will approximate $69
million and will be completed in the second quarter of 1999.
Construction financing of the EDNC Baytown Plant is to be provided by
an unaffiliated lender. Neither the Company nor EDC has guaranteed
any of the lending obligations for the EDNC Baytown Plant.
In January 1999, the contractor constructing the EDNC Baytown Plant
under a turnkey agreement, informed the Company that it could not
complete construction alleging a lack of financial resources. The
parties to this agreement have demanded the contractor's bonding
company to provide funds necessary for subcontractors to complete
construction. The Company believes that a substantial portion of the
costs to complete the EDNC Baytown Plant, which were to be funded by
the construction contractor, will ultimately be funded by proceeds
from the bonding company; however, the cost to the Company through
its leveraged lease is expected to be impacted by these events. As a
result of the delay in completion of the EDNC Baytown Plant, the
Company, through EDNC and EDC, has entered into an interim supply
agreement with Bayer to provide product from its manufacturing
facility in El Dorado, Arkansas. Performance by the Company under
this supply agreement will cause the Company to realign its
production mix at its El Dorado manufacturing facility. While there
are no assurances, the realignment of production mix is not presently
anticipated to adversely impact the Company's existing chemical
business or the results of operations related thereto.
In connection with the EDNC Baytown Plant, EDNC had entered into a
long-term production and supply agreement with Bayer. This agreement
provided for a commencement date of February 1, 1999. As mentioned
above, EDNC is to provide product under an interim supply
F-31
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
agreement until the EDNC Baytown Plant becomes operational; however,
EDNC will be responsible to Bayer for certain lost operating profits
during this time period as reasonably agreed-upon by the parties. The
possible loss, if any, associated with these agreements and contract
provisions is not presently determinable; however, they may be
material.
Purchase Commitments
A subsidiary of the Company purchases substantial quantities of
anhydrous ammonia for use in manufacturing its products. The
subsidiary has contracts with three suppliers of ammonia. One
contract requires a subsidiary of the Company to purchase not less
than 24,000 tons nor more than 72,000 tons of anhydrous ammonia
during the contract term which expires on June 30, 2000. A second
contract requires a subsidiary of the Company to purchase not less
than 5,000 tons of anhydrous ammonia each contract month and is for
a term expiring in December 2000. The third contract requires a
subsidiary of the Company to take or pay for an average of 10,000
tons of anhydrous ammonia per month and expires April 2000. These
contracts are at floating prices. Purchases of anhydrous ammonia
under two contracts with similar terms aggregated $31.9 million in
1998 ($40.1 million and $30.4 million in 1997 and 1996, respectively,
under similar arrangements). At December 31, 1998, the subsidiary was
required to make a deficiency payment of $1.3 million for quantities
not taken as deliveries in 1998. The Company is allowed two years to
take delivery of product. The subsidiary believes that their demand
for ammonia will exceed current purchase requirements and thus the
subsidiary will take delivery of the 1998 deficiency prior to
expiration of the recovery period. The pricing volatility of such raw
material directly affects the operating profitability of a subsidiary
of the Company. A subsidiary of the Company also enters into
agreements with suppliers of raw materials which require a subsidiary
of the Company to provide finished goods in exchange therefore. The
subsidiary did not have a significant commitment to provide finished
goods with its suppliers under these exchange agreements at
December 31, 1998. At December 31, 1998, the Company has a standby
letter of credit outstanding related to its Chemical Business of $3.5
million.
A subsidiary of the Company leases certain precious metals for use in
the subsidiary's manufacturing process. The agreement at December 31,
1998 requires rentals generally based on 7.5% of the leased metals'
market values from January 1999 through July 1999, contract
expiration.
In July 1995, a subsidiary of the Company entered into a product
supply agreement with a third party whereby the subsidiary is
required to make monthly facility fee and other payments which
aggregate $71,965. In return for this payment, the subsidiary is
entitled to certain quantities of compressed oxygen produced by the
third party. Except in circumstances as defined by the agreement, the
monthly payment is payable regardless of the quantity of compressed
F-32
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
oxygen used by the subsidiary. The term of this agreement, which has been
included in the above minimum operating lease commitments, is for a
term of 15 years; however, after the agreement has been in effect for
60 months, the subsidiary can terminate the agreement without cause
at a cost of approximately $4.5 million. Based on the subsidiary's
estimate of compressed oxygen demands of the plant, the cost of the
oxygen under this agreement is expected to be favorable compared to
floating market prices.
Debt Guarantee
The Company has guaranteed approximately $2.6 million of indebtedness
of a start-up aviation company, Kestrel Aircraft Company ("Kestrel"),
in exchange for a 44.9% ownership interest. The Company's advances
and investment in the aviation company amount to $1,371,000 at
December 31, 1998 ($341,000 at December 31, 1997). At December 31,
1998, the Company has accrued the full amount of its commitment under
the debt guarantees and fully impaired its investment and advances to
Kestrel. The Company recorded losses of $1,662,000 in 1998,
$1,093,000 in 1997 and $626,000 in 1996 related to its investment and
the debt guarantee. The debt guarantee relates to a $2 million term
note and a $2 million revolving credit facility. The $2 million
revolving credit facility, on which a subsidiary of the Company has
guaranteed $600,000 of indebtedness is expected to be funded by the
Company in the first quarter of 1999. Upon demand of the Company's
guarantee, the $2 million note guarantee agreement requires monthly
principal payments of $11,111 plus interest through maturity in
August 2004. At December 31, 1998, Kestrel was in default of the
covenants of this term note.
Should demand be made on the Company to perform under its guarantee,
the Company expects to foreclose on the assets of Kestrel, along with
the other guarantors to enable the Company and the other guarantors
to negotiate with potential buyers of Kestrel's stock and/or
technology. Proceeds received by the Company, if any, from the sale
of its ownership interest in Kestrel will be recognized in the
results of operations when realized.
Legal Matters
Following is a summary of certain legal actions involving the
Company:
A. In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with numerous
other companies, of potential responsibility for clean-up of a
waste disposal site in Oklahoma. In 1990, the EPA added the site
to the National Priorities List. Following the remedial
investigation and feasibility study, in 1992 the Regional
Administrator of the EPA signed the Record of Decision ("ROD")
for the site. The ROD detailed EPA's selected remedial action
for the site and estimated the cost of the remedy at $3.6
million. In 1992, the Company made settlement proposals which
would have entailed a collective payment by the subsidiaries of
$47,000. The site
F-33
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The EPA
rejected the Company's offer, allocating 60% of the cleanup
costs to the potentially responsible parties and 40% to the site
operator. The EPA estimated the total cleanup costs at $10.1
million as of February 1993. The site owner rejected all
settlements with the EPA, after which the EPA issued an order to
the site owner to conduct the remedial design/remedial action
approved for the site. In August 1997, the site owner issued an
"invitation to settle" to various parties, alleging the total
cleanup costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the Company's
cost associated with the clean-up of the site is unknown due to
continuing changes in the estimated total cost of clean-up of
the site and the percentage of the total waste which was alleged
to have been contributed to the site by the Company. As of
December 31, 1998, the Company has accrued an amount based on a
recent preliminary settlement proposal by the alleged potential
responsible parties; however, there is no assurance such
proposal will be accepted. Such amount is not material to the
Company's financial position or results of operations. This
estimate is subject to material change in the near term as
additional information is obtained. The subsidiary's insurance
carriers have been notified of this matter; however, the amount
of possible coverage, if any, is not yet determinable.
B. On February 12, 1996, the Chemical Business entered into a
Consent Administrative Agreement ("Administrative Agreement")
with the state of Arkansas to resolve certain compliance issues
associated with nitric acid concentrators. Pursuant to the
Administrative Agreement, the Chemical Business installed
additional pollution control equipment to address the compliance
issues. The Chemical Business was assessed $50,000 in civil
penalties associated with the Administrative Agreement. In the
summer of 1996 and then on January 28, 1997, the subsidiary
executed amendments to the Administrative Agreement ("Amended
Agreements"). The Amended Agreements imposed a $150,000 civil
penalty, which penalty has been paid. Since the 1997 amendment,
the Chemical Business has been assessed stipulated penalties of
approximately $67,000 by the Arkansas Department of Pollution
Control and Ecology ("ADPC&E") for violations of certain
provisions of the 1997 Amendment. The Chemical Business believes
that the El Dorado Plant has made progress in controlling
certain off-site emissions; however, such off-site emissions
have occurred and may continue from time to time, which could
result in the assessment of additional penalties against the
Chemical Business by the ADPC&E for violation of the 1997
Amendment.
During May 1997, approximately 2,300 gallons of caustic material
spilled when a valve in a storage vessel failed, which was
released to a stormwater drain, and according to ADPC&E
F-34
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
records, resulted in a minor fish kill in a drainage ditch near
the El Dorado Plant. In 1998, the ADPC&E issued a Consent
Administrative Order ("1998 CAO") to resolve the event. The 1998
CAO includes a civil penalty in the amount of $183,700 which
includes $125,000 to be paid over five years in the form of
environmental improvements at the El Dorado Plant. The remaining
$58,700 has been paid prior to December 31, 1998. The 1998 CAO
also requires the Chemical Business to undertake a facility-wide
wastewater evaluation and pollutant source control program and
wastewater minimization program. The program requires that the
subsidiary complete rainwater drain-off studies including
engineering design plans for additional water treatment
components to be submitted to the ADCP&E by August 2000. The
construction of the additional water treatment components shall
be completed by August 2001 and the El Dorado Plant has been
mandated to be in compliance with final effluent limits on or
before February 2002. The wastewater program is currently
expected to require future capital expenditures of approximately
$4.6 million.
C. In 1996, three lawsuits were filed against the Company's
Chemical Business by certain groups of residents of El Dorado,
Arkansas, asserting a citizens' suit and two toxic tort lawsuits
against the Chemical Business. The citizens' suit alleged
violations of the Clean Air Act, the Clean Water Act, the
Chemical Business' air and water permits and certain other
environmental laws, rules and regulations. The toxic tort
lawsuits alleged that the plaintiffs suffered certain injuries
and damages as a result of alleged releases of toxic substances
from the Chemical Business' El Dorado, Arkansas, manufacturing
facility.
The Company and the Chemical Business maintain an Environmental
Impairment Insurance Policy ("EIL Insurance") that provides
coverage through June 30, 2001 to the Company and the Chemical
Business for certain discharges, dispersals, releases, or
escapes of certain contaminants and pollutants into or upon
land, the atmosphere or any water course or body of water from
the Site, which has caused bodily injury, property damage or
contamination to others or to other property not on the Site.
The EIL Insurance provides limits of liability for each loss up
to $20.0 million, except $5.0 million for all remediation
expenses, with the maximum limit of liability for all claims
under the EIL Insurance not to exceed $20.0 million for each
loss or remediation expense and $40.0 million for all losses and
remediation expenses. The EIL Insurance also provides a
retention of the first $500,000 per loss or remediation expense
that is to be paid by the Company. Previous to 1998, the
Company's Chemical Business incurred and expensed $500,000 in
legal, expert and other costs in connection with the toxic tort
and citizen lawsuits described above.
F-35
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
During 1998, the Company's Chemical Business settled all claims
asserted in the citizens' and toxic tort lawsuits. The
settlements required cash payments to the plaintiffs.
Substantially all of such payments were funded directly by the
Company's EIL Insurance carrier.
The amount of the settlements of the toxic tort cases as
discussed above paid by the EIL Insurance and the amount paid
under the EIL Insurance for legal and other expenses relating to
the defense of the toxic tort cases and the citizen suit case
reduce the coverage amount available under the policy then in
effect.
D. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the defendants allegedly
violated certain federal and state antitrust laws in connection
with alleged price fixing of certain explosive products. The
plaintiffs are suing for an unspecified amount of damages,
which, pursuant to statute, plaintiffs are requesting be
trebled, together with costs. Based on the information presently
available to the Company, the Company does not believe that the
Chemical Business conspired with any party, including but not
limited to, the five (5) other defendants, to fix prices in
connection with the sale of commercial explosives. This
litigation has been consolidated, for discovery purposes only,
with several other actions in a multi-district litigation
proceeding in Utah. Discovery in this litigation is in process.
The Chemical Business intends to vigorously defend itself in
this matter.
The Company's Chemical Business has been added as a defendant in
a separate lawsuit pending in Missouri. This lawsuit alleges a
national conspiracy, as well as a regional conspiracy, directed
against explosive customers in Missouri and seeks unspecified
damages. The Company's Chemical Business has been included in
this lawsuit because it sold products to customers in Missouri
during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has
been sued in the preceding described lawsuit. Based on the
information presently available to the Company, the Company does
not believe that the Chemical Business conspired with any party,
to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously defend
itself in this matter.
During the third quarter of 1997, a subsidiary of the Company
was served with a lawsuit in which approximately 27 plaintiffs
have sued approximately 13 defendants, including a subsidiary of
the Company alleging personal injury and property damage for
undifferentiated compensatory and punitive damages of
approximately $7,000,000. Specifically, the plaintiffs assert
property damage to their residence and wells, annoyance
F-36
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
and inconvenience, and nuisance as a result of daily blasting
and round-the-clock mining activities. The plaintiffs are
residents living near the Heartland Coal Company ("Heartland")
strip mine in Lincoln County, West Virginia, and an unrelated
mining operation operated by Pen Coal Inc. During 1999, the
plaintiffs withdrew all personal injury claims previously
asserted in this litigation. Heartland employed the subsidiary
to provide blasting materials and personnel to load and shoot
holes drilled by employees of Heartland. Down hole blasting
services were provided by the subsidiary at Heartland's premises
from approximately August 1991, until approximately August 1994.
Subsequent to August 1994, the subsidiary supplied blasting
materials to the reclamation contractor at Heartland's mine. In
connection with the subsidiary's activities at Heartland, the
subsidiary has entered into a contractual indemnity to Heartland
to indemnify Heartland under certain conditions for acts or
actions taken by the subsidiary for which the subsidiary failed
to take, and Heartland is alleging that the subsidiary is liable
thereunder for Heartland's defense costs and any losses to or
damages sustained by, the plaintiffs in this lawsuit as a result
of the subsidiary's operations. Discovery in this litigation is
in process. The Company intends to vigorously defend itself in
this matter. Based on limited information available, the
subsidiary's counsel believes that the subsidiary's possible
loss, if any, related to this litigation is not presently
expected to have a material adverse effect on the Company.
The Company, including its subsidiaries, is a party to various other
claims, legal actions, and complaints arising in the ordinary course
of business. In the opinion of management after consultation with
counsel, all claims, legal actions (including those described above)
and complaints are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such
amounts that unfavorable disposition is not presently expected to
have a material effect on the financial position of the Company, but
could have a material impact to the net loss of a particular quarter
or year, if resolved unfavorably.
Other
In 1989 and 1991, the Company entered into severance agreements with
certain of its executive officers that become effective after the
occurrence of a change in control, as defined, if the Company
terminates the officer's employment or if the officer terminates
employment with the Company for good reason, as defined. These
agreements require the Company to pay the executive officers an
amount equal to 2.9 times their average annual base compensation, as
defined, upon such termination.
The Company has retained certain risks associated with its
operations, choosing to self-insure up to various specified amounts
under its automobile, workers' compensation, health and general
F-37
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
liability programs. The Company reviews such programs on at least an
annual basis to balance the cost-benefit between its coverage and
retained exposure.
11. Employee Benefit Plan
The Company sponsors a retirement plan under Section 401(k) of the
Internal Revenue Code under which participation is available to
substantially all full-time employees. The Company does not
contribute any significant amounts to this plan.
12. Fair Value of Financial Instruments
The following discussion of fair values is not indicative of the
overall fair value of the Company's balance sheet since the
provisions of the SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," do not apply to all assets, including
intangibles.
The following methods and assumptions were used by the Company in
estimating its fair value of financial instruments:
Borrowed Funds: Fair values for fixed rate borrowings, other
than the Notes, are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on
borrowings of similar amounts and terms to those currently
outstanding. The fair value of the Notes was determined based on
a market quotation for such securities. As of December 31, 1998
and 1997, carrying values of variable rate and fixed-rate long-
term debt which aggregated $169.6 million and $180.9 million,
respectively, approximate their fair value.
Hedging Agreements: The fair value of the interest rate forward
agreement is estimated based on quoted market prices of
instruments with similar terms. As of December 31, 1998, the
financial instruments' fair value (which is not reflected on the
accompanying balance sheet), net to the Company's 50% interest,
represented a liability of approximately $3.3 million ($1.8
million at December 31, 1997). The fair value of the natural gas
swap agreements was estimated based on market prices of natural
gas for the periods covered by the agreements. At December 31,
1998 and 1997, the fair values of such agreements represented a
liability of approximately $255,000 and $165,000, respectively.
As of December 31, 1998, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued
liabilities approximated their estimated fair value.
F-38
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information
Factors Used By Management to Identify the Enterprise's Reportable
Segments and Measurement of Segment Profit or Loss and Segment Assets
LSB Industries, Inc. has four reportable segments: the Chemical
Business, Climate Control Business, Automotive Business, and
Industrial Products Business. The Company's reportable segments are
based on business units that offer similar products and services. The
reportable segments are each managed separately because they
manufacture and distribute distinct products with different
production processes.
The Company evaluates performance and allocates resources based on
profit or loss from operations before allocation of corporate
overhead, interest expense and income taxes. The accounting policies
of the reportable segments are the same as those described in the
summary of significant accounting policies.
Description of Each Reportable Segment
Chemical
This segment manufactures and sells fertilizer grade ammonium
nitrate for the agriculture industry, explosive grade ammonium
nitrate for the mining industry and concentrated, blended and
mixed nitric acid for industrial applications. Production from
the Company's primary manufacturing facility in El Dorado,
Arkansas, for the year ended December 31, 1998 comprises
approximately 86% of the chemical segment's sales. Sales to
customers of this segment primarily include farmers in Texas and
Arkansas, coal mining companies in Kentucky, Missouri and West
Virginia and industrial users of acids in the South and East
regions of the United States.
The Chemical Business is subject to various federal, state and
local environmental regulations. Although the Company has
designed policies and procedures to help reduce or minimize the
likelihood of significant chemical accidents and/or
environmental contamination, there can be no assurances that the
Company will not sustain a significant future operating loss
related thereto.
The Chemical Business' Australian subsidiary's results of
operations have been adversely affected due to the recent
economic developments in certain countries in Asia. These
economic developments in Asia have had a negative impact on the
mining industry in Australia, which this subsidiary services. In
February 1999, the Company received a nonbinding offer to
acquire the stock of the Australian subsidiary. At the present
F-39
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
time the parties are in negotiation; however, there are no assurances
that the transaction will ultimately be consummated. If the
Company does not ultimately consummate this sale and the
operating results of the Australian subsidiary do not reflect
markedly improved conditions, in the near term, it is reasonably
possible that the Company will recognize an impairment charge
related to the recovery of such net assets.
Further, the Company purchases substantial quantities of
anhydrous ammonia for use in manufacturing its products. The
pricing volatility of such raw material directly affects the
operating profitability of the chemical segment.
Climate Control
This business segment manufactures and sells, primarily from its
various facilities in Oklahoma City, a variety of hydronic fan
coil, water source heat pump products and other HVAC products
for use in commercial and residential air conditioning and
heating systems. The Company's various facilities in Oklahoma
City comprise substantially all of the Climate Control segment's
operations. Sales to customers of this segment primarily include
original equipment manufacturers, contractors and independent
sales representatives located throughout the world which are
generally secured by a mechanic's lien, except for sales to
original equipment manufacturers.
Automotive Products
This segment manufactures and sells anti-friction bearings,
clutch sets, universal joints and other products for automotive
applications to wholesalers, retailers and original equipment
manufacturers located throughout the world. Net sales from the
Company's primary facility in Oklahoma City comprises
approximately 90% of the automotive products segment sales.
At December 31, 1998, the automotive segment has $22.7 million
of inventory, a portion of which is in excess of current
requirements based on recent sales levels and has been
classified with other assets. Management has developed a program
to reduce this inventory to desired levels over the near term
and believes no significant loss will be incurred on
disposition.
In 1998, one customer accounted for 21.1% of Automotive Products
net sales. In 1997, two customers accounted for an aggregate of
24.1% of net sales, 12.8% and 11.3% individually and in 1996 one
customer accounted for 12.1% of net sales.
F-40
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Industrial Products
This segment manufactures and purchases machine tools and
purchases industrial supplies for sale to machine tool dealers
and end users throughout the world. Sales of industrial supplies
are generally unsecured, whereas the Company generally retains
a security interest in machine tools sold until payment is
received.
The industrial products segment attempts to maintain a full line
of certain product lines, which necessitates maintaining certain
products in excess of management's successive year expected
sales levels. Inasmuch as these products are not susceptible to
rapid technological changes, management believes no loss will be
incurred on disposition.
Credit, which is generally unsecured, is extended to customers based
on an evaluation of the customer's financial condition and other
factors. Credit losses are provided for in the financial statements
based on historical experience and periodic assessment of outstanding
accounts receivable, particularly those accounts which are past due.
The Company's periodic assessment of accounts and credit loss
provisions are based on the Company's best estimate of amounts which
are not recoverable. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers
comprising the Company's customer bases, and their dispersion across
many different industries and geographic areas. As of December 31,
1998 and 1997, the Company's accounts and notes receivable are shown
net of allowance for doubtful accounts of $10.2 million and $9.2
million, respectively.
<TABLE>
<CAPTION>
Information about the Company's operations in different industry
segments for each of the three years in the period ended December 31,
1998 is detailed below.
1998 1997 1996
_______________________________
(In Thousands)
<S> <C> <C> <C>
Sales:
Chemical $139,942 $156,949 $166,163
Climate Control 115,786 105,909 89,275
Automotive Products 39,994 35,499 37,946
Industrial Products 14,315 15,572 13,776
_____________________________
$310,037 $313,929 $307,160
=============================
</TABLE>
F-41
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>:
1998 1997 1996
_______________________________
(In Thousands)
<S> <C> <C> <C>
Gross profit:
Chemical $ 18,274 $ 19,320 $ 25,885
Climate Control 32,278 29,552 21,961
Automotive Products 8,670 3,299 5,868
Industrial Products 3,731 3,776 3,058
_____________________________
$ 62,953 $ 55,947 $ 56,772
=============================
Operating profit (loss):
Chemical $ 3,675 $ 5,479 $ 10,971
Climate Control 10,493 8,895 5,362
Automotive Products (1,827) (7,251) (4,134)
Industrial Products (403) (993) (2,685)
_____________________________
11,938 6,130 9,514
General corporate expenses and
other, net (9,424) (9,786) (3,192)
Interest expense (17,327) (14,740) (10,017)
Gain on sale of Tower 12,993 - -
_____________________________
Loss before provision for income
taxes and extraordinary charge $ (1,820) $(18,396) $ (3,695)
=============================
Depreciation of property, plant
and equipment:
Chemical $ 7,992 $ 6,581 $ 5,504
Climate Control 1,602 1,544 1,552
Automotive Products 1,230 1,637 994
Industrial Products 102 190 126
Corporate assets and other 725 1,190 479
Total depreciation of property, _____________________________
plant and equipment $ 11,651 $ 11,142 $ 8,655
=============================
</TABLE>
F-42
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
1998 1997 1996
_______________________________
(In Thousands)
<S> <C> <C> <C>
Additions to property, plant
and equipment:
Chemical $ 5,233 $ 8,390 $ 19,137
Climate Control 3,868 1,127 1,551
Automotive Products 619 936 1,306
Industrial Products 130 109 37
Corporate assets and other 293 17,528 145
_____________________________
Total additions to property,
plant and equipment $ 10,143 $ 28,090 $ 22,176
=============================
Total assets:
Chemical $124,577 $137,570 $132,718
Climate Control 49,516 49,274 50,623
Automotive Products 41,967 42,718 43,212
Industrial Products 11,662 9,929 13,614
Corporate assets and other 20,925 31,162 21,393
_____________________________
Total assets $248,647 $270,653 $261,560
============================
</TABLE>
Revenues by industry segment include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Intersegment revenues, which are accounted for at transfer prices
ranging from the cost of producing or acquiring the product or
service to normal prices to unaffiliated customers, are not
significant.
Gross profit by industry segment represents net sales less cost of
sales. Operating profit by industry segment represents revenues
less operating expenses. In computing operating profit, none of the
following items have been added or deducted: general corporate
expenses, income taxes or interest expense and, in 1998, before the
gain on the sale of The Tower.
Total assets by industry segment are those assets used in the
operations of each industry. Corporate assets are those principally
owned by the parent company or by subsidiaries not involved in the
four identified industries. All corporate assets leased by the
Company's subsidiaries have been included in the identified
segments' assets.
F-43
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Information about the Company's domestic and foreign operations for
each of the three years in the period ended December 31, 1998 is
detailed below:
Geographic Region 1998 1997 1996
_______________________________________________________________
(In Thousands)
<S> <C> <C> <C>
Sales:
Domestic $292,740 $285,805 $270,675
Foreign:
Australia/New Zealand 14,184 26,482 32,917
Others 3,113 1,642 3,568
____________________________
$310,037 $313,929 $307,160
============================
Income (loss) before provision
for income taxes and extra-
ordinary charge:
Domestic $ 408 $(17,270) $ (5,174)
Foreign:
Australia/New Zealand (2,898) (772) 1,705
Others 670 (354) (226)
____________________________
$ (1,820) $(18,396) $ (3,695)
============================
Long-lived assets:
Domestic $ 94,560 $111,177 $ 94,752
Foreign:
Australia/New Zealand 4,665 6,046 6,398
Others 3 1,108 1,993
____________________________
$ 99,228 $118,331 $103,143
============================
</TABLE>
Revenues by geographic region include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Revenues earned from sales or transfers between affiliates in
different geographic regions are shown as revenues of the
transferring region and are eliminated in consolidation.
F-44
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Revenues from unaffiliated customers include foreign export sales
as follows:
Geographic Area 1998 1997 1996
_______________________________________________________________
(In Thousands)
<S> <C> <C> <C>
Mexico and Central and South
America $ 8,126 $ 8,604 $ 9,084
Canada 8,400 5,609 9,703
Middle East 5,135 6,167 6,019
Other 5,774 7,359 8,498
____________________________
$27,435 $27,739 $33,304
============================
</TABLE>
14. Liquidity and Management's Plan
As discussed in Note 5(B), the Company and its subsidiaries (other
than CCI and subsidiaries of CCI) (the "Non-CCI Entities") are
dependent upon their separate cash flows and the restricted funds
which can be distributed by CCI to the Company under various
agreements CCI and its subsidiaries are parties to. As of December
31, 1998, the Non-CCI Entities had working capital of $13.7 million
(including $26.5 million of inventories and $13.9 million of
accounts receivable), stockholders' equity of $11.3 million
(exclusive of their equity in CCI) and long-term debt of $31.7
million ($3.5 million of which is due within one year). For the
year ended December 31, 1998, the Non-CCI Entities had net income
of $.6 million, inclusive of a gain on the sale of The Tower of
$13.0 million, and used cash in operating activities approximating
$8.1 million. As previously announced, the Company is focusing its
efforts and resources on its core businesses, Climate Control and
Chemical, and is evaluating the possible spin-off of its Automotive
Business and the most appropriate means of realizing its
investments in certain other non-core assets. These non-core assets
include the Company's Automotive and Industrial Products
Businesses.
Management is also realigning the Company's overhead to better
match its focus on the core businesses. This realignment will
include the sale of certain Non-CCI Entity assets to CCI, which
assets are materially related to the lines of businesses of the
Chemical and Climate Control Businesses and create opportunities
for CCI and its subsidiaries to expand upon their strengths. The
Company is currently negotiating with an asset-based lender, for a
$20 million credit facility for the Automotive Business. This
facility, if completed as currently structured, would provide for
a $2 million term loan and an $18 million revolving credit facility
(an increase of availability calculated as of March 31, 1999 of
$1.6 million compared to the Automotive Business' current
facility). Further, as discussed in Note 5(A), the Company's
Revolving Credit Facility provides for the elimination of its
financial covenants upon the sale, disposal or spin-off of the
F-45
<PAGE>
<PAGE>
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Liquidity and Management's Plan (continued)
Automotive Business so long as the remaining borrowing group
maintains a minimum aggregate availability under such facility of
at least $15 million.
Based on these plans, management believes the Non-CCI Entities will
have sufficient operating capital to meet their obligations as they
come due. If management is not successful in executing this plan
including realignment of overhead to reduce its operating costs or
realizing certain excess and non-core assets, it is reasonably
possible that this evaluation could change in the near term.
F-46
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
Three months ended
March 31 June 30 September 30 December 31
______________________________________________________
<S> <C> <C> <C> <C>
Total revenues $92,139 $87,646 $78,919 $ 65,616
======================================================
Gross profit on net
sales $15,917 $20,379 $15,628 $ 11,029
======================================================
Net income (loss) $ 9,278 $ 1,421 $(3,196) $ (9,423)
======================================================
Net income (loss)
applicable to
common stock $ 8,462 $ 618 $(3,999) $(10,230)
======================================================
Earnings (loss) per
common share:
Basic $.66 $.05 $(.33) $(.85)
======================================================
Diluted $.53 $.05 $(.33) $(.85)
======================================================
1997
Total revenues $74,864 $91,437 $77,927 $ 75,961
======================================================
Gross profit on net
sales $10,922 $19,380 $14,541 $ 11,104
======================================================
Income (loss) before
extraordinary
charge $(5,438) $ 1,467 $(4,779) $ (9,696)
======================================================
Net income (loss) $(5,438) $ 1,467 $(4,779) $(14,315)
======================================================
Net income (loss)
applicable to common
stock $(6,241) $ 648 $(5,582) $(15,119)
======================================================
Basic and diluted
earnings (loss) per
common share:
Earnings (loss)
before extra-
ordinary charge $(0.48) $0.05 $(0.43) $(0.82)
Extraordinary
charge - - - (0.36)
______________________________________________________
Net income (loss) $(0.48) $0.05 $(0.43) $(1.18)
======================================================
</TABLE>
In the first quarter of 1998, a subsidiary of the Company closed the
sale of an office building located in Oklahoma City, known as "The
Tower." The subsidiary realized proceeds from the sale of
approximately $29 million, net of transaction costs.
In the fourth quarter of 1998, the Company's Climate Control group
recorded an adjustment to inventory which reduced gross profit by
$1.5 million and the Company's Chemical group recorded a provision
for loss of approximately $.8 million for a note receivable which
increased the Company's net loss.
In the fourth quarter of 1997, in connection with the issuance of
$105 million, 10 3/4% Senior Notes due in 2007, a subsidiary of the
Company retired the outstanding principal associated with a $50
million financing arrangement and incurred a prepayment fee. The
prepayment fee paid and loan origination costs expensed in 1997
relating to the financing arrangement aggregated approximately $4.6
million.
F-47
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB Industries, Inc.
Schedule II -- Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Additions Deductions
__________ ____________
Balance at Charged to Write-offs/ Balance
Beginning Costs and Costs at End
Description of Year Expenses Incurred of Year
___________________________________________________________________________
<S> <C> <C> <C> <C>
Accounts receivable --
allowance for doubtful
accounts:(1)
1998 $4,007 $1,544 $1,998 $3,553
================================================
1997 $3,291 $1,544 $ 828 $4,007
================================================
1996 $2,584 $1,451 $ 744 $3,291
================================================
Inventory -- reserve for
slow-moving items:
1998 $1,531 $ 173 $ - $1,704
================================================
1997 $1,709 $ 68 $ 246 $1,531
================================================
1996 $1,318 $ 578 $ 187 $1,709
================================================
Notes receivable -- allowance
for doubtful accounts:
1998 $5,158 $1,480 $ - $6,638
================================================
1997 $4,065 $1,093 $ - $5,158
================================================
1996 $2,500 $1,565 $ - $4,065
================================================
<FN>
(1) Deducted in the balance sheet from the related assets to which
the reserve applies.
</FN>
</TABLE>
Other valuation and qualifying accounts are detailed in the Company's
notes to consolidated financial statements.
F-48
<PAGE>
<PAGE>
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
______ ___________ __________
2.1 Stock Option Agreement dated as of May 4, 1995, between
optionee, LSB Holdings, Inc., an Oklahoma Corporation and
the shareholders of a specialty sales organization, an
option which the Company hereby incorporates hereby by
reference from Exhibit 2.1 to the Company's Form 10-K for
fiscal year ended December 31, 1995.
2.2 Stock Purchase Agreement and Stock Pledge Agreement between
Dr. Hauri AG, a Swiss Corporation, and LSB Chemical Corp.,
which the Company hereby incorporates by reference from
Exhibit 2.2 to the Company's Form 10-K for fiscal year
ended December 31, 1994.
3.1 Restated Certificate of Incorporation, the Certificate of
Designation dated February 17, 1989, and certificate of
Elimination dated April 30, 1993, which the Company hereby
incorporates by reference from Exhibit 4.1 to the Company's
Registration Statement, No. 33-61640; Certificate of
Designation for the Company's $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, which the
Company hereby incorporates by reference from Exhibit 4.6
to the Company's Registration Statement, No. 33-61640.
3.2 Bylaws, as amended, which the Company hereby incorporates
by reference from Exhibit 3(ii) to the Company's Form 10-Q
for the quarter ended June 30, 1998.
4.1 Specimen Certificate for the Company's Non-cumulative
Preferred Stock, having a par value of $100 per share,
which the Company hereby incorporates by reference from
Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended June 30, 1983.
4.2 Specimen Certificate for the Company's Series B Preferred
Stock, having a par value of $100 per share, which the
Company hereby incorporates by reference from Exhibit 4.27
to the Company's Registration Statement No. 33-9848.
4.3 Specimen Certificate for the Company's Series 2 Preferred,
which the Company hereby incorporates by reference from
Exhibit 4.5 to the Company's Registration Statement No. 33-
61640.
4.4 Specimen Certificate for the Company's Common Stock, which
the Company incorporates by reference from Exhibit 4.4 to
the Company's Registration Statement No. 33-61640.
4.5 Renewed Rights Agreement, dated January 6, 1999, between
the Company and Bank One, N.A., which the Company hereby
incorporates by reference from Exhibit No. 1 to the
Company's Form 8-A Registration Statement, dated
January 27, 1999.
4.6 Indenture, dated as of November 26, 1997, by and among
ClimaChem, Inc., the Subsidiary Guarantors and Bank One,
NA, as trustee, which the Company hereby incorporates by
reference from Exhibit 4.1 to the Company's Form 8-K,
dated November 26, 1997.
64
<PAGE>
4.7 Form 10 3/4% Series B Senior Notes due 2007 which the
Company hereby incorporates by reference from Exhibit 4.3
to the ClimaChem Registration Statement, No. 333-44905.
4.8 Amended and Restated Loan and Security Agreement, dated
November 21, 1997, by and between BankAmerica Business
Credit, Inc., and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and
Slurry Explosive Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.9 Amended and Restated Loan and Security Agreement, dated
November 21, 1997, by and between BankAmerica Business
Credit, Inc., and the Company, which the Company hereby
incorporates by reference from Exhibit 4.11 to the
Company's Form 10-K for the fiscal year ended December 31,
1997. Substantially identical Amended and Restated Loan
and Security Agreements dated November 21, 1997, were
entered into by each of L&S Bearing Co., and Summit Machine
Tool Manufacturing Corp., with BankAmerica Business Credit,
Inc., and are hereby omitted and such will be provided upon
the Commission's request.
4.10 First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation which the Company
hereby incorporates by reference from Exhibit 10.53 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.11 First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica
Business Credit, Inc., and the Company, which the Company
hereby incorporates by reference from Exhibit 4.13 to the
Company's Form 10-K for the fiscal year ended December 31,
1997. Substantially identical First Amendments to Amended
and Restated Loan and Security Agreements, dated March 12,
1998, were entered into by each of L&S Bearing Co. and
Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
4.12 Third Amendment to Amended and Restated Loan and Security
Agreement, dated August 14, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.13 Third Amendment to Amended and Restated Loan and Security
Agreement, dated August 14, 1998, between BankAmerica
Business Credit, Inc., and the Company, which the Company
hereby incorporates by reference from Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
Substantially identical Third Amendments to Amended and
Restated Loan and Security Agreements, dated August 14,
1998, were entered into by each of L&S Bearing Co. and
Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
65
<PAGE>
4.14 Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30,
1998.
4.15 Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica
Business Credit, Inc., and the Company, which the Company
hereby incorporates by reference from Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30,
1998. Substantially identical Fourth Amendments to Amended
and Restated Loan and Security Agreements, dated November
19, 1998, were entered into by each of L&S Bearing Co. and
Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
4.16 Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation.
4.17 Fifth Amendment to Amended and Restated Loan and Security Agreement,
dated April 8, 1999, between BankAmerica Business Credit, Inc., and
the Company. Substantially identical Fifth Amendments to Amended and
Restated Loan and Security Agreements, dated April 8, 1999, were
entered into by each of L&S Bearing Co. and Summit Machine Tool
Manufacturing Corp. with BankAmerica Business Credit, Inc., and are
hereby omitted and such will be provided upon the Commission's
request.
4.18 Waiver Letter, dated March 16, 1998, from BankAmerica
Business Credit, Inc. which the Company hereby incorporates
by reference from Exhibit 10.55 to the ClimaChem Form S-4
Registration Statement, No. 333-44905.
4.19 First Supplemental Indenture, dated February 8, 1999, by and
among ClimaChem, Inc., the Guarantors, and Bank One, N.A.
10.1 Form of Death Benefit Plan Agreement between the Company
and the employees covered under the plan, which the Company
hereby incorporates by reference from Exhibit 10(c)(1) to
the Company's Form 10-K for the year ended December 31,
1980.
10.2 The Company's 1981 Incentive Stock Option Plan, as amended,
and 1986 Incentive Stock Option Plan, which the Company
hereby incorporates by reference from Exhibits 10.1 and
10.2 to the Company's Registration Statement No. 33-8302.
66
<PAGE>
10.3 Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1981 Incentive
Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.10 to the Company's Form 10-K for
the fiscal year ended December 31, 1984.
10.4 Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1986 Incentive
Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.6 to the Company's Registration
Statement No. 33-9848.
10.5 The 1987 Amendments to the Company's 1981 Incentive Stock
Option Plan and 1986 Incentive Stock Option Plan, which the
Company hereby incorporates by reference from Exhibit 10.7
to the Company's Form 10-K for the fiscal year ended
December 31, 1986.
10.6 The Company's 1993 Stock Option and Incentive Plan which
the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Form 10-K for the fiscal year ended
December 31, 1993.
10.7 The Company's 1993 Non-employee Director Stock Option Plan
which the Company hereby incorporates by reference from
Exhibit 10.7 to the Company's Form 10-K for the fiscal year
ended December 31, 1993.
10.8 Union Contracts, dated August 5, 1995, between EDC and the
Oil, Chemical and Atomic Workers, and the United Steel
Workers of America, dated November 1, 1995 which the
Company hereby incorporates by reference from Exhibit 10.7
to the Company's Form 10-K for the fiscal year ended
December 31, 1995.
10.9 Lease Agreement, dated March 26, 1982, between Mac Venture,
Ltd. and Hercules Energy Mfg. Corporation, which the
Company hereby incorporates by reference from Exhibit 10.32
to the Company's Form 10-K for the fiscal year ended
December 31, 1981.
10.10 Limited Partnership Agreement dated as of May 4, 1995,
between the general partner, and LSB Holdings, Inc., an
Oklahoma Corporation, as limited partner which the Company
hereby incorporates by reference from Exhibit 10.11 to the
Company's Form 10-K for the fiscal year ended December 31,
1995.
10.11 Lease Agreement dated November 12, 1987, between Climate
Master, Inc. and West Point Company and amendments thereto,
which the Company hereby incorporates by reference from
Exhibits 10.32, 10.36, and 10.37, to the Company's Form 10-
K for fiscal year ended December 31, 1988.
10.12 Severance Agreement, dated January 17, 1989, between the
Company and Jack E. Golsen, which the Company hereby
incorporates by reference from Exhibit 10.48 to the
Company's Form 10-K for fiscal year ended December 31,
1988. The Company also entered into identical agreements
with Tony M. Shelby, David R. Goss, Barry H. Golsen, David
M. Shear, and Jim D. Jones and the Company will provide
copies thereof to the Commission upon request.
67
<PAGE>
10.13 Third Amendment to Lease Agreement, dated as of December
31, 1987, between Mac Venture, Ltd. and Hercules Energy
Mfg. Corporation, which the Company hereby incorporates by
reference from Exhibit 10.49 to the Company's Form 10-K for
fiscal year ended December 31, 1988.
10.14 Employment Agreement and Amendment to Severance Agreement
dated January 12, 1989 between the Company and Jack E.
Golsen, dated March 21, 1996 which the Company hereby
incorporates by reference from Exhibit 10.15 to the
Company's Form 10-K for fiscal year ended December 31,
1995.
10.15 Non-Qualified Stock Option Agreement, dated June 1, 1992,
between the Company and Robert C. Brown, M.D. which the
Company hereby incorporates by reference from Exhibit 10.38
to the Company's Form 10-K for fiscal year ended December
31, 1992. The Company entered into substantially identical
agreements with Bernard G. Ille, Jerome D. Shaffer and
C.L.Thurman, and the Company will provide copies thereof to
the Commission upon request.
10.16 Loan and Security Agreement (DSN Plant) dated October 31,
1994 between DSN Corporation and The CIT Group which the
Company hereby incorporates by reference from Exhibit 10.1
to the Company's Form 10-Q for the fiscal quarter ended
September 30, 1994.
10.17 Loan and Security Agreement (Mixed Acid Plant) dated April
5, 1995 between DSN Corporation and The CIT Group, which
the Company hereby incorporates by reference from Exhibit
10.25 to the Company's Form 10-K for the fiscal year ended
December 31, 1994.
10.18 First Amendment to Loan and Security Agreement (DSN Plant),
dated June 1, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.13 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.19 First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation
and The CIT Group/Equipment Financing, Inc. which the
Company hereby incorporates by reference from Exhibit 10.15
to the ClimaChem Form S-4 Registration Statement, No. 333-
44905.
10.20 Loan and Security Agreement (Rail Tank Cars), dated
November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.16 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
68
<PAGE>
10.21 First Amendment to Loan and Security Agreement (Rail Tank
Cars), dated November 15, 1995, between DSN Corporation and
The CIT Group/Equipment Financing, Inc. which the Company
hereby incorporates by reference from Exhibit 10.17 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.22 Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1997.
10.23 Amendment to Loan and Security Agreement, dated
November 21, 1997, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.19 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.24 First Amendment to Non-Qualified Stock Option Agreement,
dated March 2, 1994, and Second Amendment to Stock Option
Agreement, dated April 3, 1995, each between the Company
and Jack E. Golsen, which the Company hereby incorporates
by reference from Exhibit 10.1 to the Company's Form 10-Q
for the fiscal quarter ended March 31, 1995.
10.25 Facility Letter, dated August 20, 1997, between Bank of New
Zealand, Australia, and Total Energy Systems Limited which
the Company hereby incorporates by reference from Exhibit
10.38 to the ClimaChem Form S-4 Registration Statement, No.
333-44905.
10.26 Variation Letter, dated February 10, 1998, between Bank of
New Zealand, Australia, and Total Energy Systems Limited
which the Company hereby incorporates by reference from
Exhibit 10.39 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.27 Debenture Charge, dated March 7, 1995, between Total Energy
Systems Limited and Bank of New Zealand which the Company
hereby incorporates by reference from Exhibit 10.40 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
T.E.S. Mining Services Pty. Ltd. and Total Energy Systems
(NZ) Limited are each parties to substantially identical
Debentures, copies of which will be provided to the
Commission upon request.
10.28 Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to
be effective January 1, 1997, between Koch Nitrogen Company
and El Dorado Chemical Company which the Company hereby
incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
69
<PAGE>
10.29 Baytown Nitric Acid Project and Supply Agreement dated
June 27, 1997, by and among El Dorado Nitrogen Company, El
Dorado Chemical Company and Bayer Corporation which the
Company hereby incorporates by reference from Exhibit 10.2
to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF
#5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.30 First Amendment to Baytown Nitric Acid Project and Supply
Agreement, dated February 1, 1999, between El Dorado
Nitrogen Company, El Dorado Chemical Company, and Bayer
Corporation. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION
FOR PURPOSES OF SUCH REQUEST.
10.31 Service Agreement, dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the
Company hereby incorporates by reference from Exhibit 10.3
to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF
#5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.32 Ground Lease dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.4 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.33 Participation Agreement, dated as of June 27, 1997, among
El Dorado Nitrogen Company, Boatmen's Trust Company of
Texas as Owner Trustee, Security Pacific Leasing
corporation, as Owner Participant and a Construction
Lender, Wilmington Trust Company, Bayerische Landesbank,
New York Branch, as a Construction Lender and the Note
Purchaser, and Bank of America National Trust and Savings
Association, as Construction Loan Agent which the Company
hereby incorporates by reference from Exhibit 10.5 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.34 Lease Agreement, dated as of June 27, 1997, between
Boatmen's Trust Company of Texas as Owner Trustee and El
Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.6 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997.
70
<PAGE>
10.35 Security Agreement and Collateral Assignment of
Construction Documents, dated as of June 27, 1997, made by
El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.7 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997.
10.36 Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado
Nitrogen Company and consented to by Bayer Corporation
which the Company hereby incorporates by reference from
Exhibit 10.8 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997.
10.37 Amendment to Loan and Security Agreement, dated March 16,
1998, between The CIT Group/Equipment Financing, Inc., and
DSN Corporation which the Company hereby incorporates by
reference from Exhibit 10.54 to the ClimaChem Form S-4
Registration Statement, No. 333-44905.
10.38 Fifth Amendment to Lease Agreement, dated as of
December 31, 1998, between Mac Venture, Ltd. and Hercules
Energy Mfg. Corporation.
10.39 Sales Contract, dated December 7, 1998, between Solutia,
Inc. and El Dorado Chemical Company. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT
OF A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN FILED
SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND
EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.40 Agreement for Purchase and Sale of Anhydrous Ammonia, dated
January 1, 1999, between El Dorado Chemical Company and
Farmland Industries, Inc. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION
ACT. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY
WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE
COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.41 Agreement, dated March 23, 1999, among El Dorado Chemical
Company, El Dorado Nitrogen Company, Bayer Corporation, ICF
Kaiser Engineers, Inc., ICF Kaiser International, Inc., and
Acstar Insurance Company.
10.42 Union Contract, dated August 1, 1998, between El Dorado
Chemical Company and the International Association of
Machinists and Aerospace Workers.
71
<PAGE>
10.43 Non-Qualified Stock Option Agreement, dated April 22, 1998,
between the Company and Robert C. Brown, M.D. The Company
entered into substantially identical agreements with
Bernard G. Ille, Jerome D. Shaffer, Raymond B. Ackerman,
Horace G. Rhodes, Gerald J. Gagner, and Donald W. Munson.
The Company will provide copies of these agreements to the
Commission upon request.
10.44 The Company's 1998 Stock Option and Incentive Plan.
10.45 Letter Agreement, dated March 12, 1999, between Kestrel
Aircraft Company and LSB Industries, Inc., Prime Financial
Corporation, Herman Meinders, Carlan K. Yates, Larry H.
Lemon, Co-Trustee Larry H. Lemon Living Trust.
10.46 Covenant Waiver Letter, dated April 13, 1999, between The
CIT Group and DSN Corporation.
21.1. Subsidiaries of the Company
23.1. Consent of Independent Auditors
27.1. Financial Data Schedule
FIFTH AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (the "Amendment") is dated as of April 8, 1999, and
entered into by and between BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (successor-in-interest to BANKAMERICA BUSINESS
CREDIT, INC.) ("Lender") and CLIMATE MASTER, INC. ("Climate
Master"), INTERNATIONAL ENVIRONMENTAL CORPORATION ("IEC"), EL
DORADO CHEMICAL COMPANY ("EDC") and SLURRY EXPLOSIVE CORPORATION
("Slurry") (Climate, IEC, EDC, and Slurry being collectively
referred to herein as "Borrower").
WHEREAS, Lender and Borrower have entered into that certain
Amended and Restated Loan and Security Agreement dated as of
November 21, 1997 as amended by that certain First Amendment to
Amended and Restated Loan and Security Agreement dated as of March
12, 1998, that certain Second Amendment to Amended and Restated
Loan and Security Agreement dated as of June 30, 1998, that certain
Third Amendment to Amended and Restated Loan and Security Agreement
dated as of August 14, 1998, and that certain Fourth Amendment to
Amended and Restated Loan and Security Agreement dated as of
November 19, 1998 (as so amended, the "Agreement");
WHEREAS, two Events of Default have occurred under the
Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events
of Default and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default
and amend the Agreement subject to the terms and conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in the Agreement and this Amendment, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this
Amendment, to the extent not otherwise defined herein, shall have
the same meanings as in the Agreement, as amended hereby.
Section 1.02. Amendment to Name of Lender. Effective as of
April 1, 1999 Bank of America National Trust and Savings
Association became the successor-in-interest to Bank America
Business Credit, Inc. All references in the Agreement and in each
Loan Document to "BankAmerica Business Credit, Inc." or "BABC" are
now amended to refer to "Bank of America National Trust and Savings
Association" which is the "Lender" under the Agreement and the
other Loan Documents.
<PAGE>
Section 1.03. New Definition. The following definition is
hereby added to the Agreement:
"Early Termination Fee" means a single fee of $500,000
which shall be jointly and severally due and owing from the
LSB Consolidated Borrowing Group if, prior to December 31,
2000, any of the LSB-Related Loan Agreements are terminated
other than in accordance with their terms.
ARTICLE II
Amendments
Section 2.01 Amendment to Section 9.16. Section 9.16 of the
Agreement is hereby amended to read in its entirety as follows:
"9.16 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
CCI Adjusted Tangible Net Worth. The CCI Adjusted
Tangible Net Worth will not be less than the following amounts
at the end of each of the Fiscal Quarters during the following
Fiscal Years:
Fiscal Quarters in the
Following Fiscal Years Amount
______________________ _______
First Fiscal Quarter during
Fiscal Year Ending
December 31, 1999 $14,500,000*
Second Fiscal Quarter during
Fiscal Year Ending
December 31, 1999 $19,500,000*
Third Fiscal Quarter during
Fiscal Year Ending
December 31, 1999 $21,500,000*
Fourth Fiscal Quarter during
Fiscal Year Ending
December 31, 1999 $23,500,000*
-2-
<PAGE>
<PAGE>
Fiscal Quarters in the
Following Fiscal Years Amount
______________________ _______
First Fiscal Quarter during Fiscal The CCI Adjusted Tangible Net
Year Ending December 31, 2000 Worth as of December 31, 1999
and each Fiscal Quarter during plus fifty percent (50%) of
each Fiscal Year ending thereafter: CCI's profits for the fiscal
quarter then ending without
taking into account any losses,
plus all cash dividends to LSB
from December 31, 1999."
* Includes all Distributions to LSB made after January 1, 1999
Section 2.02. Amendment to Section 9.17. Section 9.17 of the
Agreement is hereby amended to read in its entirety as follows:
"9.17 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
Debt Ratio. The ratio of Debt of the CCI Consolidated
Group to the CCI Adjusted Tangible Net Worth will not be
greater than the following ratios at the end of each of the
Fiscal Quarters during the following Fiscal Years:
Fiscal Quarters in the 1st 2nd 3rd 4th
Following Fiscal Years Quarter Quarter Quarter Quarter
______________________ ________ _______ _______ _______
Fiscal Year Ending
December 31, 1999 10:1 7.6:1 6.9:1 6.3:1
Fiscal Year Ending
December 31, 1999 and 6.3:1 6.3:1 6.3:1 6.3:1
Each Fiscal Quarter during each Fiscal Year ending thereafter: 6.3:1
Section 2.03. Amendment to Article 12. Article 12 of the
Agreement is hereby amended to read in its entirety as follows:
"12. TERM AND TERMINATION. The term of this Agreement shall extend
until December 31, 2000 (the "Termination Date"). This Agreement shall
automatically be renewed thereafter for successive terms of thirteen (13)
months each, unless this Agreement is terminated as provided below. The
Lender and the Borrower shall each have the right to terminate this
Agreement, without premium or penalty, at the end of the initial term or
at the end of any renewal term by giving the other written notice not less
than sixty (60) days prior to the end of such term by registered or
certified mail. The Borrower may also terminate this Agreement at any
time during its initial term or any renewal periods if: (a) it gives
the Lender sixty (60) days prior written notice of termination by
registered or certified mail; (b) it pays and performs all Obligations on
or prior to the effective date of termination; and (c) except as otherwise
provided herein, it pays the Lender, on or prior to the effective date of
termination, the Early Termination Fee if such termination is made prior
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<PAGE>
to the Termination Date. The Lender may also terminate this Agreement
without notice upon an Event of Default that has not been cured or other-
wise waived to Lender's satisfaction. Upon the effective date of termina-
tion of this Agreement for any reason whatsoever, all Obligations shall
become immediately due and payable. Notwithstanding the termination of
this Agreement, until all Obligations are paid and performed in full, the
Lender shall retain all its rights and remedies hereunder (including,
without limitation, in all then existing and after-arising Collateral)."
ARTICLE III
Waivers
Section 3.01. Waiver of Events of Default.
(a) The Lender hereby waives the following Events of
Default: (i) the CCI Adjusted Tangible Net Worth for the Fiscal
Quarter ending December 31, 1998 was less than $18,500,000, in
breach of Section 9.16 of the Loan Agreement; and (ii) the CCI
Consolidated Group's Debt Ratio for the Fiscal Quarter ending
December 31, 1998 was greater than 7.75 to 1.0, in breach of
Section 9.17 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and shall
only be effective to the extent described above. The waiver is
limited to the facts and circumstances referred to herein and shall
not operate as (i) a waiver of or consent to non-compliance with
any other section or provision of the Loan Agreement, (ii) a waiver
of any right, power, or remedy of the Lender under the Loan
Agreement (except as provided herein), or (iii) a waiver of any
other Event of Default or Event which may exist under the Loan
Agreement.
ARTICLE IV
Ratifications, Representations and Warranties
Section 4.01. Ratifications. The terms and provisions set
forth in this Amendment shall modify and supersede all inconsistent
terms and provisions set forth in the Agreement and, except as
expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement, including, without limitation, all
financial covenants contained therein, are ratified and confirmed
and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower
hereby represents and warrants to Lender that the execution,
delivery and performance of this Amendment and all other loan,
amendment or security documents to which Borrower is or is to be a
party hereunder (hereinafter referred to collectively as the "Loan
Documents") executed and/or delivered in connection herewith, have
been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower.
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<PAGE>
ARTICLE V
Conditions Precedent
Section 5.01. Conditions. The effectiveness of this
Amendment is subject to the satisfaction of the following
conditions precedent (unless specifically waived in writing by the
Lender):
(a) Lender shall have received all of the following,
each dated (unless otherwise indicated) as of the date of this
Amendment, in form and substance satisfactory to Lender in its
sole discretion:
(i) Company Certificate. A certificate executed by
the Secretary or Assistant Secretary of Borrower
certifying (A) that Borrower's Board of Directors has met
and adopted, approved, consented to and ratified the
resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the
Amendment and the Loan Documents, (B) the names of the
officers of Borrower authorized to sign this Amendment
and each of the Loan Documents to which Borrower is to be
a party hereunder, (C) the specimen signatures of such
officers, and (D) that neither the Articles of
Incorporation nor Bylaws of Borrower have been amended
since the date of the Agreement;
(ii) No Material Adverse Change. There shall have
occurred no material adverse change in the business,
operations, financial condition, profits or prospects of
Borrower, or in the Collateral since January 31, 1999,
and the Lender shall have received a certificate of
Borrower's chief executive officer to such effect;
(iii) Other Documents. Borrower shall agree to
execute and deliver such other documents and instruments
including, but not limited to, UCC assignments reflecting
"Bank of America National Trust and Savings Association"
as assignee, as well as such record searches as Lender
may require.
(b) All corporate proceedings taken in connection with
the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender and its legal counsel,
Jenkes & Gilchrist, a Professional Corporation.
(c) Amendment Fee. Borrower shall have paid to Lender
a fee of $100,000.
ARTICLE VI
Miscellaneous
Section 6.01. Survival of Representations and Warranties.
All representations and warranties made in the Agreement or any
other document or documents relating thereto, including, without
limitation, any Loan Document furnished in connection with this
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<PAGE>
Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and
warranties or the right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of
the Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended
hereby.
Section 6.03. Severability. Any provision of this Amendment
held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision
so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER
LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF OKLAHOMA AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF OKLAHOMA.
Section 6.05. Successors and Assigns. This Amendment is
binding upon and shall inure to the benefit of Lender and Borrower
and their respective successors and assigns; provided, however,
that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
Lender may assign any or all of its rights or obligations hereunder
without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed
in one or more counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
Section 6.07. Effect of Waiver. No consent or waiver,
express or implied, by Lender to or of any breach of or deviation
from any covenant or condition of the Agreement or duty shall be
deemed a consent or waiver to or of any other breach of or
deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in
exercising, and no course of dealing with respect to, any right,
power, or privilege under this Amendment, the Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or privilege
under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege. The rights and remedies
provided for in the Agreement and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by
law.
Section 6.08. Headings. The headings, captions and
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
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<PAGE>
Section 6.09. Releases. As a material inducement to Lender
to enter into this Amendment, Borrower hereby represents and
warrants that there are no claims or offsets against, or defenses
or counterclaims to, the terms and provisions of and the other
obligations created or evidenced by the Agreement or the other Loan
Documents. Borrower hereby releases, acquits, and forever
discharges Lender, and its successors, assigns, and predecessors in
interest, their parents, subsidiaries and affiliated organizations,
and the officers, employees, attorneys, and agents of each of the
foregoing (all of whom are herein jointly and severally referred to
as the "Released Parties") from any and all liability, damages,
losses, obligations, costs, expenses, suits, claims, demands,
causes of action for damages or any other relief, whether or not
now known or suspected, of any kind, nature, or character, at law
or in equity, which Borrower now has or may have ever had against
any of the Released Parties, including, but not limited to, those
relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the
Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of
commercial reasonableness or special relationships, such as
fiduciary, trust or confidential relationships, (d) allegations of
dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference
or negligence, (e) allegations of tortious interference with
present or prospective business relationships or of antitrust, or
(f) slander, libel or damage to reputation, (hereinafter being
collectively referred to as the "Claims"), all of which Claims are
hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on
demand (i) all costs and expenses reasonably incurred by Lender in
connection with the preparation, negotiation and execution of this
Amendment and the other Loan Documents executed pursuant hereto and
any and all subsequent amendments, modifications, and supplements
hereto or thereto, including, without limitation, the costs and
fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any
rights under the Agreement, this Amendment and/or other Loan
Documents, including, without limitation, the costs and fees of
Lender's legal counsel and the allocated cost of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER
WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL
AGREEMENTS BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
LENDER AND BORROWER.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER":
CLIMATE MASTER, INC.
By: /s/ Tony M. Shelby
___________________________________
Tony M. Shelby
Vice President
INTERNATIONAL ENVIRONMENTAL
CORPORATION
By: /s/ Tony M. Shelby
____________________________________
Tony M. Shelby
Vice President
EL DORADO CHEMICAL COMPANY
By: /s/ Tony M. Shelby
_____________________________________
Tony M. Shelby
Vice President
SLURRY EXPLOSIVE CORPORATION
By: /s/ Tony M. Shelby
______________________________________
Tony M. Shelby
Vice President
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<PAGE>
"LENDER"
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Michael J. Jasaitis
____________________________________
Michael J. Jasaitis, Vice President
9
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
The undersigned hereby acknowledges the execution of, and
consents to, the terms and conditions of that certain Fifth
Amendment to Amended and Restated Loan and Security Agreement dated
as of April 8, 1999, between Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Corporation, Slurry
Explosive Corporation and Bank of America National Trust and
Savings Association ("Creditor") and reaffirms its obligations
under that certain Continuing Guaranty (the "Guaranty") dated as
of November 21, 1997, made by the undersigned in favor of the
Creditor, and acknowledges and agrees that the Guaranty remains in
full force and effect and the Guaranty is hereby ratified and
confirmed.
Dated as of April 8, 1999.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
____________________________
Tony M. Shelby, Vice President
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<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Fifth
Amendment to Amended and Restated Loan and Security Agreement dated
as of April 8, 1999, between Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Corporation, Slurry
Explosive Corporation and Bank of America National Trust and
Savings Association ("Creditor") and each reaffirms its obligations
under that certain Continuing Guaranty with Security Agreement (the
"Guaranty") dated as of November 21, 1997, and acknowledges and
agrees that such Guaranty remains in full force and effect and each
Guaranty is hereby ratified and confirmed.
Dated as of April 8, 1999.
LSB INDUSTRIES, INC.
LSB CHEMICAL CORP.
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
MOREY MACHINERY MANUFACTURING
CORPORATION
CHP CORPORATION
KOAX CORP.
APR CORPORATION
CLIMATE MATE, INC.
THE ENVIRONMENTAL GROUP, INC.
UNIVERSAL TECH CORPORATION
By: /s/ Tony M. Shelby
___________________________________
Tony M. Shelby, Vice President
acting on behalf of each of
the above
L&S AUTOMOTIVE PRODUCTS CO.
L&S BEARING CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
By: /s/ David R. Goss
_________________________________
David R. Goss, Vice Chairman
acting on behalf of each of
the above
-11-
FIFTH AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (the "Amendment") is dated as of April 8, 1999, and
entered into by and between BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (successor-in-interest to BANKAMERICA BUSINESS
CREDIT, INC.) ("Lender") and LSB INDUSTRIES, INC. ("Borrower").
WHEREAS, Lender and Borrower have entered into that certain
Amended and Restated Loan and Security Agreement dated as of
November 21, 1997 as amended by that certain First Amendment to
Amended and Restated Loan and Security Agreement dated as of
March 12, 1998, that certain Second Amendment to Amended and
Restated Loan and Security Agreement dated as of June 30, 1998,
that certain Third Amendment to Amended and Restated Loan and
Security Agreement dated as of August 14, 1998, and that certain
Fourth Amendment to Amended and Restated Loan and Security
Agreement dated as of November 19, 1998 (as so amended, the
"Agreement");
WHEREAS, two Events of Default have occurred under the
Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events
of Default and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default
and amend the Agreement subject to the terms and conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in the Agreement and this Amendment, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this
Amendment, to the extent not otherwise defined herein, shall have
the same meanings as in the Agreement, as amended hereby.
Section 1.02. Amendment to Name of Lender. Effective as of
April 1, 1999 Bank of America National Trust and Savings
Association became the successor-in-interest to Bank America
Business Credit, Inc. All references in the Agreement and in each
Loan Document to "BankAmerica Business Credit, Inc." or "BABC" are
now amended to refer to "Bank of America National Trust and Savings
Association" which is the "Lender" under the Agreement and the
other Loan Documents.
Section 1.03. New Definition. The following definition is
hereby added to the Agreement:
<PAGE>
"Early Termination Fee" means a single fee of $500,000
which shall be jointly and severally due and owing from the
LSB Consolidated Borrowing Group if, prior to December 31,
2000, any of the LSB-Related Loan Agreements are terminated
other than in accordance with their terms.
ARTICLE II
Amendments
Section 2.01. Amendment to Section 9.16. Section 9.16 of the
Agreement is hereby amended to read in its entirety as follows:
"9.16 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
LSB Adjusted Tangible Net Worth. The LSB Adjusted
Tangible Net Worth increased by an amount equal to the
purchase price paid by Borrower for its treasury stock for
purchases from January 1, 1998 through termination of this
Agreement, which amount shall not exceed $6,000,000, will not
be less than the following amounts at the end of each of the
Fiscal Quarters during the following Fiscal Years:
Fiscal Quarters in 1st 2nd 3rd 4th
Following Fiscal Years Quarter Quarter Quarter Quarter
______________________ ________ _______ _______ ________
Fiscal Quarter during
Fiscal Year Ending
December 31, 1999: $21,300,000 $23,600,000 $24,000,000 $23,500,000
First Fiscal Quarter The LSB Adjusted Tangible Net Worth as of
during Fiscal Year December 31, 1999 less $4,500,000 and less all
Ending December 31, dividends paid by LSB in cash from January 1,
2000: 2000 until the date of calculation.
Second Fiscal Quarter The LSB Adjusted Tangible Net Worth as of March
during Fiscal Year 31, 2000 plus fifty percent (50%) of the profits
Ending December 31, for the fiscal quarter then ending, if any, with
2000: no deductions for losses, less all dividends
paid by LSB in cash from January 1, 2000 until
the date of calculation.
Third Fiscal Quarter The LSB Adjusted Tangible Net Worth as of June
during Fiscal Year 30, 2000 plus fifty percent (50%) of the profits
Ending December 31, for the fiscal quarter then ending, if any, with
2000 and each Fiscal no deductions for losses, less all dividends
Quarter during each paid by LSB in cash from January 1, 2000 until
Fiscal Year ending the date of calculation.
thereafter
Section 2.02. Amendment to Section 9.17. Section 9.17 of the
Agreement is hereby amended to read in its entirety as follows:
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<PAGE>
"9.17 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
LSB Debt Ratio. The ratio of Debt of the LSB
Consolidated Borrowing Group to the LSB Adjusted Tangible Net
Worth increased by an amount equal to the purchase price paid
by Borrower for its treasury stock for purchases from January
1, 1998 through termination of this Agreement, which amount
shall not exceed $6,000,000, will not be greater than the
following ratios at the end of each of the Fiscal Quarters
during the following Fiscal Years:
Fiscal Quarters in the 1st 2nd 3rd 4th
Following Fiscal Years Quarter Quarter Quarter Quarter
______________________ _______ _______ _______ _______
Fiscal Year Ending
December 31, 1999 9.3:1 8.4:1 8.1:1 8.1:1
Fiscal Year Ending
December 31, 2000 8.1:1 8.1:1 8.1:1 8.1:1
Each Fiscal Quarter during each Fiscal Year ending thereafter: 8.1:1
Section 2.03. Amendment to Article 12 of the Agreement.
Article 12 of the Agreement is hereby amended to read in its
entirety as follows:
"12. TERM AND TERMINATION. The term of this Agreement
shall extend until December 31, 2000 (the "Termination Date").
This Agreement shall automatically be renewed thereafter for
successive terms of thirteen (13) months each, unless this
Agreement is terminated as provided below. The Lender and the
Borrower shall each have the right to terminate this
Agreement, without premium or penalty, (i) at the end of the
initial term or at the end of any renewal term by giving the
other written notice not less than sixty (60) days prior to
the end of such term by registered or certified mail, or (ii)
as provided in Section 6.16. The Borrower may also terminate
this Agreement at any time during its initial term or any
renewal periods if: (a) it gives the Lender sixty (60) days
prior written notice of termination by registered or certified
mail; (b) it pays all Revolving Loans and reimburses Lender
for all Letter of Credit obligations under this Agreement on
or prior to the effective date of termination; and (c) except
as otherwise provided herein, it pays the Lender, on or prior
to the effective date of termination, the Early Termination
Fee if such termination is made prior to the Termination Date.
The Lender may also terminate this Agreement without notice
upon an Event of Default that has not been cured or otherwise
waived to Lender's satisfaction. Upon the effective date of
termination of this Agreement for any reason whatsoever, all
Obligations shall become immediately due and payable.
Notwithstanding the termination of this Agreement, until all
Obligations are paid and performed in full, the Lender shall
retain all its rights and remedies hereunder (including,
without limitation, in all then existing and after-arising
Collateral) except as otherwise provided in Section 6.16 of
this Agreement."
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<PAGE>
ARTICLE III
Waivers
Section 3.01. Waiver of Events of Default.
(a) The Lender hereby waives the following Events of
Default: (i) the LSB Consolidated Borrowing Group's Adjusted
Tangible Net Worth for the Fiscal Quarter ending December 31, 1998
was less than $34,500,000, in breach of Section 9.16 of the Loan
Agreement; and (ii) the LSB Consolidated Borrowing Group's Debt
Ratio for the Fiscal Quarter ending December 31, 1998 was greater
than 5.00 to 1.0, in breach of Section 9.17 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and shall
only be effective to the extent described above. The waiver is
limited to the facts and circumstances referred to herein and shall
not operate as (i) a waiver of or consent to non-compliance with
any other section or provision of the Loan Agreement, (ii) a waiver
of any right, power, or remedy of the Lender under the Loan
Agreement (except as provided herein), or (iii) a waiver of any
other Event of Default or Event which may exist under the Loan
Agreement.
ARTICLE IV
Ratifications, Representations and Warranties
Section 4.01. Ratifications. The terms and provisions set
forth in this Amendment shall modify and supersede all inconsistent
terms and provisions set forth in the Agreement and, except as
expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement, including, without limitation, all
financial covenants contained therein, are ratified and confirmed
and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower
hereby represents and warrants to Lender that the execution,
delivery and performance of this Amendment and all other loan,
amendment or security documents to which Borrower is or is to be a
party hereunder (hereinafter referred to collectively as the "Loan
Documents") executed and/or delivered in connection herewith, have
been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower.
ARTICLE V
Conditions Precedent
Section 5.01. Conditions. The effectiveness of this
Amendment is subject to the satisfaction of the following
conditions precedent (unless specifically waived in writing by the
Lender):
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<PAGE>
(a) Lender shall have received all of the following,
each dated (unless otherwise indicated) as of the date of this
Amendment, in form and substance satisfactory to Lender in its
sole discretion:
(i) Company Certificate. A certificate executed by
the Secretary or Assistant Secretary of Borrower
certifying (A) that Borrower's Board of Directors has met
and adopted, approved, consented to and ratified the
resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the
Amendment and the Loan Documents, (B) the names of the
officers of Borrower authorized to sign this Amendment
and each of the Loan Documents to which Borrower is to be
a party hereunder, (C) the specimen signatures of such
officers, and (D) that neither the Articles of
Incorporation nor Bylaws of Borrower have been amended
since the date of the Agreement;
(ii) No Material Adverse Change. There shall have
occurred no material adverse change in the business,
operations, financial condition, profits or prospects of
Borrower, or in the Collateral since January 31, 1999,
and the Lender shall have received a certificate of
Borrower's chief executive officer to such effect;
(iii) Other Documents. Borrower shall agree to
execute and deliver such other documents and instruments
including, but not limited to, UCC assignments reflecting
"Bank of America National Trust and Savings Association"
as assignee, as well as such record searches as Lender
may require.
(b) All corporate proceedings taken in connection with
the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender and its legal counsel,
Jenkens & Gilchrist, a Professional Corporation.
ARTICLE VI
Miscellaneous
Section 6.01. Survival of Representations and Warranties.
All representations and warranties made in the Agreement or any
other document or documents relating thereto, including, without
limitation, any Loan Document furnished in connection with this
Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and
warranties or the right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of
the Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended
hereby.
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<PAGE>
Section 6.03. Severability. Any provision of this Amendment
held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision
so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER
LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF OKLAHOMA AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF OKLAHOMA.
Section 6.05. Successors and Assigns. This Amendment is
binding upon and shall inure to the benefit of Lender and Borrower
and their respective successors and assigns; provided, however,
that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
Lender may assign any or all of its rights or obligations hereunder
without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed
in one or more counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
Section 6.07. Effect of Waiver. No consent or waiver,
express or implied, by Lender to or of any breach of or deviation
from any covenant or condition of the Agreement or duty shall be
deemed a consent or waiver to or of any other breach of or
deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in
exercising, and no course of dealing with respect to, any right,
power, or privilege under this Amendment, the Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or privilege
under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege. The rights and remedies
provided for in the Agreement and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by
law.
Section 6.08. Headings. The headings, captions and
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
Section 6.09. Releases. As a material inducement to Lender
to enter into this Amendment, Borrower hereby represents and
warrants that there are no claims or offsets against, or defenses
or counterclaims to, the terms and provisions of and the other
obligations created or evidenced by the Agreement or the other Loan
Documents. Borrower hereby releases, acquits, and forever
discharges Lender, and its successors, assigns, and predecessors in
interest, their parents, subsidiaries and affiliated organizations,
and the officers, employees, attorneys, and agents of each of the
foregoing (all of whom are herein jointly and severally referred to
as the "Released Parties") from any and all liability, damages,
losses, obligations, costs, expenses, suits, claims, demands,
causes of action for damages or any other relief, whether or not
now known or suspected, of any kind, nature, or character, at law
or in equity, which Borrower now has or may have ever had against
any of the Released Parties, including, but not limited to, those
relating to (a) usury or penalties or damages therefor, (b)
-6-
<PAGE>
allegations that a partnership existed between Borrower and the
Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of
commercial reasonableness or special relationships, such as
fiduciary, trust or confidential relationships, (d) allegations of
dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference
or negligence, (e) allegations of tortious interference with
present or prospective business relationships or of antitrust, or
(f) slander, libel or damage to reputation, (hereinafter being
collectively referred to as the "Claims"), all of which Claims are
hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on
demand (i) all costs and expenses reasonably incurred by Lender in
connection with the preparation, negotiation and execution of this
Amendment and the other Loan Documents executed pursuant hereto and
any and all subsequent amendments, modifications, and supplements
hereto or thereto, including, without limitation, the costs and
fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any
rights under the Agreement, this Amendment and/or other Loan
Documents, including, without limitation, the costs and fees of
Lender's legal counsel and the allocated cost of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER
WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL
AGREEMENTS BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER"
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
_________________________________
Tony M. Shelby, Vice President
"LENDER"
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Michael J. Jasaitis
___________________________________
Michael J. Jasaitis, Vice President
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<PAGE>
<PAGE>
ACKNOWLEDGED AND AGREED TO:
Each of the following "LSB Guarantor Subsidiaries" hereby acknowledges the
execution of and consents to the terms and conditions of that certain Fifth
Amendment to Amended and Restated Loan and Security Agreement dated as of
April 8, 1999 between LSB Industries, Inc., and Lender.
MOREY MACHINE TOOL MANUFACTURING
CORPORATION
By: /s/ Tony M. Shelby
____________________________________
Tony M. Shelby,
Vice President acting on behalf of
each of the above.
L&S AUTOMOTIVE PRODUCTS, CO.
LSB EXTRUSION CO.
INTERNATIONAL BEARINGS, INC.
ROTEX CORPORATION
TRIBONETICS CORPORATION
By: /s/ David R. Goss
_____________________________________
David R. Goss,
Vice Chairman acting on behalf of
each of the above.
-8-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Fifth
Amendment to Amended and Restated Loan and Security Agreement dated
as of April 8, 1999, between LSB Industries, Inc. and Bank of
America National Trust and Savings Association ("Creditor") and
reaffirms its obligations under (i) that certain Continuing
Guaranty with Security Agreement (the "Guaranty") dated as of
November 21, 1997, and (ii) that certain Cross-Collateralization
and Cross-Guaranty Agreement (the "Cross-Collateralization
Agreement") dated as of November 21, 1997, each made by the
undersigned in favor of the Creditor, and acknowledges and agrees
that the Guaranty and the Cross-Collateralization Agreement remain
in full force and effect and the Guaranty and the Cross-
Collateralization Agreement are hereby ratified and confirmed.
Dated as of April 8, 1999.
LSB INDUSTRIES, INC.
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
MOREY MACHINERY MANUFACTURING
CORPORATION
By: /s/ Tony M. Shelby
______________________________
Tony M. Shelby, Vice President
acting on behalf of each of
the above
L&S BEARING CO.
L&S AUTOMOTIVE PRODUCTS CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
By: /s/ David R. Goss
_______________________________
David R. Goss, Vice Chairman
acting on behalf of each of
the above
-9-
CLIMACHEM, INC.
as Issuer
THE GUARANTORS
named herein
and
BANK ONE, N.A.
As Trustee
_________________________
FIRST SUPPLEMENTAL INDENTURE
Dated as of February 8, 1999
_________________________
Supplementing and Amending the Indenture
Dated as of November 26, 1997
$105,000,000 10 3/4% Senior Notes Due 2007
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
This First Supplemental Indenture, dated as of February 8, 1999, is
by and among ClimaChem, Inc., an Oklahoma corporation (the "Company"),
The Environmental Group, Inc., an Oklahoma corporation, International
Environmental Corporation, an Oklahoma corporation, Climate Master, Inc.,
a Delaware corporation, CHP corporation, an Oklahoma corporation, KOAX
Corp., an Oklahoma corporation, APR Corporation, an Oklahoma corporation,
Climate Mate, Inc., a corporation organized under the laws of Canada, The
Environmental Group International Limited, a corporation organized under the
laws of England, LSB Chemical Corp., an Oklahoma corporation, El Dorado
Chemical Company, an Oklahoma corporation, Slurry Explosive Corporation,
an Oklahoma corporation, Universal Tech Corporation, an Oklahoma corporation,
Total Energy Systems Limited, a corporation organized under the laws of
Queenstown, Australia, Total Energy Systems (NZ) Ltd., a corporation
organized under the laws of New Zealand, T.E.S. Mining Services Pty. Ltd.,
a corporation organized under the laws of Queensland, Australia, Northwest
Financial Corporation, an Oklahoma corporation, DSN Corporation, an Oklahoma
corporation (collectively, the "Guarantors"), Total Energy Systems
(International) Pty Ltd., a corporation organized under the laws of
Queensland, Australia ("TESI"), ClimateCraft, Inc., an Oklahoma corporation
("CLCR"), ACP Manufacturing Corp., an Oklahoma corporation ("ACP"),
ThermalClime, Inc., an Oklahoma corporation ("Thermal"), and Bank One,
N.A., as trustee (the "Trustee").
RECITALS
________
WHEREAS, the Company, the Guarantors and the Trustee are parties to
that certain Indenture, dated as of November 26, 1997, (the "Indenture"),
pursuant to which the 10 3/4% Senior Notes due 2007 (the "Notes") were
issued; and
WHEREAS, the Company was issued all of the issued and outstanding
shares of stock of CLCR, ACP and Thermal, thereby causing CLCR, ACP
and Thermal to be Wholly Owned Subsidiaries of the Company; and
WHEREAS, Total Energy Systems Limited, a Wholly Owned Subsidiary
of the Company, was issued all of the issued and outstanding shares of
stock of TESI, thereby causing TESI to be an indirect Wholly Owned
Subsidiary of the Company; and
WHEREAS, Section 11.5 of the Indenture provides that the Company
shall cause any person that becomes a Subsidiary of the Company or
any Guarantor to promptly execute and deliver to the Trustee a
supplemental indenture pursuant to which such Subsidiary shall become
a Guarantor under Article 11 of the Indenture and shall guarantee the
Notes pursuant to the terms thereof; and
1
<PAGE>
WHEREAS, capitalized terms used herein and not otherwise defined
are used as defined in the Indenture.
NOW, THEREFORE, in consideration of these premises and for other
good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the Company, the Guarantors, TESI, CLCR, ACP and
Thermal agree as follows for the benefit of each other, the Trustee
and the equal and ratable benefit of the Holders of the Notes, and
hereby amend and supplement the Indenture as follows:
Section 1. Addition of Guarantors. In accordance with Section
11.5 ofthe Indenture, TESI, CLCR, ACP and Thermal
each agree to become a Guarantor under Article 11
of the Indenture and hereby guarantees the Notes
pursuant to the terms thereof.
Section 2. Modification of Indenture. Upon the execution and
delivery of this First Supplemental Indenture, the
Indenture shall be modified to reflect the addition
of TESI, CLCR, ACP and Thermal as Guarantors under
the Indenture, and this First Supplemental Indenture
shall form a part of the Indenture for all purposes.
Section 3. Ratification. Except to the extent amended by or
inconsistent with this First Supplemental Indenture,
the Company, the Guarantors, TESI, CLCR, ACP, Thermal
and the Trustee hereby ratify and reconfirm the Indenture
in its entirety.
Section 4. Miscellaneous.
A. Counterparts. This First Supplemental Indenture
may be executed in any number of counterparts, each
of which so executed shall be an original, but all
such counterparts shall together constitute but one
and the same instrument.
B. Meaning of Terms. Any capitalized terms used in
this First Supplemental Indenture and not defined
herein shall have the meanings specified in the
Indenture, unless the context shall otherwise require.
C. Governing Law. THIS FIRST SUPPLEMENTAL INDENTURE
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAW OF THE STATE
OF NEW YORK.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be executed as of the date first above
written.
CLIMACHEM, INc.
By: /s/ James L. Wewers
_______________________________
Title: Vice President
___________________________
THE ENVIRONMENTAL GROUP, INC.
By: /s/ Barry H. Golsen
_______________________________
Title: Executive Vice President
___________________________
INTERNATIONAL ENVIRONMENTAL
CORPORATION
By: /s/ Barry H. Golsen
______________________________
Title: Chief Executive Officer
___________________________
CLIMATE MASTER, INC.
By: /s/ Barry H. Golsen
______________________________
Title: Executive Vice President
___________________________
CHP CORPORATION
By: /s/ Barry H. Golsen
_____________________________
Title: President
__________________________
3
<PAGE>
KOAX CORP.
By: /s/ Barry H. Golsen
_____________________________
Title: President
__________________________
APR CORPORATION
By: /s/ Barry H. Golsen
_____________________________
Title: President
__________________________
CLIMATE MATE, INC.
By: David R. Goss
____________________________
Title: President
_________________________
THE ENVIRONMENTAL GROUP
INTERNATIONAL LIMITED
By: /s/ Barry H. Golsen
___________________________
Title: Director
________________________
LSB CHEMICAL CORP.
By: James L. Wewers
_________________________
Title: President
_______________________
EL DORADO CHEMICAL COMPANY
By: /s/ James L. Wewers
__________________________
Title: President
_______________________
4
<PAGE>
SLURRY EXPLOSIVE CORPORATION
By: /s/ James L. Wewers
__________________________
Title: Vice President
_______________________
UNIVERSAL TECH CORPORATION
By: /s/ James L. Wewers
__________________________
Title: Vice President
_______________________
TOTAL ENERGY SYSTEMS LIMITED
By: /s/ James L. Wewers
___________________________
Title: Vice President
_________________________
TOTAL ENERGY SYSTEMS (NZ) LTD.
By: /s/ James L. Wewers
____________________________
Title: Director
_________________________
T.E.S. MINING SERVICES PTY. LTD.
By: /s/ James L. Wewers
____________________________
Title: Director
_________________________
NORTHWEST FINANCIAL
CORPORATION
By: /s/ David R. Goss
____________________________
Title: Vice President
_________________________
5
DSN CORPORATION
By: /s/ Barry H. Golsen
___________________________
Title: President
TOTAL ENERGY SYSTEMS
(INTERNATIONAL) PTY LTD
By:
___________________________
Title: Director
_______________________
CLIMATECRAFT, INC.
By: /s/ Barry H. Golsen
_________________________
Title: Vice President
______________________
ACP MANUFACTURING CORP.
By: /s/ Barry H. Golsen
_________________________
Title: Vice President
______________________
THERMALCLIME, INC.
By /s/ Barry H. Golsen
__________________________
Title: President
_______________________
BANK ONE, N.A., AS TRUSTEE
By: /s/ David B. Knox
_________________________
Title: Authorized Signer
_______________________
6
<PAGE>
GUARANTEE
For value received, ThermalClime, Inc., an Oklahoma company, hereby
irrevocably, unconditionally guarantees on a senior basis to the Holder of
the Security upon which this Guarantee is endorsed the due and punctual
payment, as set forth in the Indenture pursuant to which such Security
and this Guarantee were issued, of the principal of, premium (if any) and
interest on such Security when and as the same shall ecome due and payable
for any reason according to the terms of such Security and Article XI of the
Indenture. The Guarantee of the Security upon which this Guarantee is
endorsed will not become effective until the Trustee signs the Certificate
of authentication on such Security.
THERMALCLIME, INC.
By: /s/ Barry H. Golsen
___________________________
Name: Barry H. Golsen
_________________________
Title: President
__________________________
FIRST AMENDMENT TO
BAYTOWN NITRIC ACID PROJECT AND SUPPLY AGREEMENT*
________________________________________________
This First Amendment to Baytown Nitric Acid Project and Supply
Agreement (this "Agreement") is made and entered into on
February 16, 1999 and effective as of February 1, 1999 (the
"Effective Date"), by and among EL DORADO NITROGEN COMPANY, an
Oklahoma corporation ("EDNC"), EL DORADO CHEMICAL COMPANY, an
Oklahoma corporation ("El Dorado") and BAYER CORPORATION, an
Indiana corporation ("Bayer").
Preamble
EDNC, El Dorado and Bayer are parties to that certain Baytown
Nitric Acid Project and Supply Agreement dated June 27, 1997 (the
"Project and Supply Agreement"). The parties have agreed to amend
the Project and Supply Agreement upon and subject to the terms and
conditions set forth herein. Therefore, in consideration of the
premises and the mutual covenants and agreements set forth herein,
the parties hereto, intending to be legally bound, agree as
follows:
Agreement
1. Defined Terms and Condition Precedent to Effectiveness.
Capitalized terms used herein not otherwise defined herein shall
have the meanings ascribed to them in the Project and Supply
Agreement.
2. Amendment to Section 1.1 Definition of Additional
Capital Investment. Section 1.1 of the Project and Supply
Agreement is hereby amended to add the following phrase to the
parenthetical clause in the second line of such section, following
the words "other than Initial Capital Investments:"
". . . and any other capital investments necessary to render
the EDNC Baytown Plant Fully Operational) . . ."
3. Amendment to Section 1.42 Definition of Initial Capital
Investment.
(a) Section 1.42 of the Project and Supply Agreement is
hereby amended to add a semicolon and the following clause to
the end of Section 1.42(ii)(b) thereof (following the words
"Base Amount"):
". . . provided, however, that no amount incurred in respect
of consulting fees or other Capital Costs Subject to Sharing
(other than any costs that were contemplated at the inception
of the Project and Supply Agreement and that were not caused
by the delay in performance of ICF Kaiser Engineers, Inc. (the
"Contractor")) in respect of services rendered to EDNC from
and after February 1, 1999 shall be included in the
calculation of the Initial Capital Investment under this
Section 1.42(ii). Fees paid to Benham Engineering Company in
*INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED FROM THIS PUBLIC
FILING PURSUANT TO A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
<PAGE>
<PAGE>
respect of construction supervision services incurred
after February 1, 1999 shall not be considered consulting
fees under this subsection, and shall be included in
calculating the Base Amount in the manner specified in
subsection 1.42(ii)(c) hereof."
(b) Section 1.42 of the Project and Supply Agreement is
further amended to add the following new paragraph (c) to the
end of such Section:
"(c) In addition, the Base Amount (as it may be
adjusted pursuant to this Section 1.42) shall also be
increased by an amount equal to fifty percent (50%) of
any capital costs incurred by EDNC in excess of the
amounts contemplated by Subparagraph (A) of
Schedule 1.42(A) in connection with the completion and
commissioning of the EDNC Baytown Plant, not to exceed
Three Million U.S. Dollars (U.S. $3,000,000) in the
aggregate. The adjustment to the Base Amount
contemplated by the preceding sentence shall be subject
to and contingent upon the following conditions:
(a) Bayer shall have the continuing right to a full and
complete audit of the costs associated with the
completion and commissioning of the EDNC Baytown Plant,
as contemplated by Section 34 hereof; (b) the foregoing
adjustment to the Base Amount shall only apply to items
actually incurred by EDNC that may be capitalized and
which would not have been incurred but for the failure in
performance by the Contractor under the Turnkey
Engineering, Procurement and Construction Agreement dated
August 26, 1997 between EDNC and the Contractor ("Turnkey
Contract"); (c) the adjustment to the Base Amount shall
only be made if, from and after the date EDNC shall have
rendered the EDNC Baytown Plant Fully Operational;
(d) all sources of recourse, including without limitation
any rights that EDNC might have against the Contractor
(including any right to liquidated or delay damages), any
issuer of any payment or performance bond supporting the
construction and completion of the EDNC Baytown Plant,
and any insurance carrier or the Contractor or
subcontractors or materialmen against which EDNC might
now or hereafter have a valid claim, shall be pursued
diligently by EDNC; (e) any recoveries by EDNC from the
Contractor and third parties pursuant to rights under the
Turnkey Agreement under the preceding clause (d) other
than recoveries under any payment or performance bonds
("Third Party Recoveries"), shall be applied as set forth
in Exhibit C to reduce the Base Amount (but not by more
than Three Million U.S. Dollars (U.S. $3,000,000)), and
the Base Amount shall be retroactively and prospectively
adjusted to reflect such recoveries; (f) if Bayer
exercises its rights under Articles 16 or 17 hereof, the
appropriate termination fee shall not be adjusted to
reflect any additional capital contemplated by this
paragraph; (g) increased capital under this paragraph
shall have no effect upon the calculation of the Profit
Component under Section 1.57 hereof; and (h) project
change orders requested and approved after February 1,
1999 shall be considered capitalizable items under
paragraph (A) of Schedule 1.42(A), unless such project
change orders are related to the failure in performance
of Contractor under the Turnkey Contract. The parties
agree to execute an appropriate amendment to
Schedule 1.42(A) to reflect any adjustment contemplated
by this paragraph.
4. Amendment to Section 2.1 - Supply. The third sentence of
Section 2.1 of the Project and Supply Agreement is hereby amended
and restated to read in its entirety as follows: "In the event of
any planned or unplanned outage, Bayer, EDNC and El Dorado agree
that the Back Up Supply Plan, attached hereto as Exhibit D, shall
- 2 -
<PAGE>
<PAGE>
become operative." Section 2.1 of the Project and Supply Agreement
is further amended to add the following sentence to the end of
Section 2.1 thereof:
"EDNC shall substantially complete construction of and
commence operations of the EDNC Baytown Plant no later than
May 31, 1999, and shall render the EDNC Baytown Plant Fully
Operational no later than June 30, 1999. For purposes of this
sentence, the "commencement of operations" shall be defined as
the production of Nitric Acid meeting the specifications in
merchantable quantities."
4A. Amendment to Section 5.3. Section 5.3 of the Project and
Supply Agreement is hereby deleted and replaced with the word
"[Reserved]."
5. Amendments to Section 17.1 Bayer's Optional Termination
Rights and Schedule 1.42(A) Initial Capital Investment.
(a) Section 17.1(A) of the Project and Supply Agreement
is hereby amended to read in its entirety as follows:
"(A) Failure by EDNC (i) to complete construction and
commence the operations of the EDNC Baytown Plant prior
to May 31, 1999; or (ii) to render the EDNC Baytown Plant
Fully Operational prior to June 30, 1999 (provided, in
each case, that such failure is not substantially related
to a material breach by Bayer of its obligations under
the Project Agreements); provided, however, that if such
failure is by reason of a Force Majeure Event occurring
after February 1, 1999, then Bayer shall not have the
option to terminate this Agreement if (x) EDNC provides
to Bayer, within ten (10) days of the occurrence of such
Force Majeure Event, a plan reasonably acceptable to
Bayer to remedy such Force Majeure Event as soon as
practicable but no later than June 30, 1999, (y) EDNC
remedies such Force Majeure Event as soon as practicable
but no later than June 30, 1999 pursuant to such plan,
and (z) neither the Owner Participant nor the Indenture
Trustee serves a Triggering Notice on Bayer during the
pendency of such Force Majeure Event pursuant to Section
1 of the Agreement dated June 27, 1997 among Bayer,
Security Pacific Leasing Corporation as Owner
Participant, Bayerische Landesbank, New York Branch,
EDNC, El Dorado, Wilmington Trust Company, as Indenture
Trustee, and Boatmen's Trust Company of Texas, as Owner
Trustee (the "Three Option Agreement")."
(b) The date "February 1, 1999" set forth in
Section 17.1(D) of the Project and Supply Agreement is hereby
deleted and replaced with "June 30,1999."
(c) The period at the end of subsection (D) of
Section 17.1 of the Project and Supply Agreement is hereby
deleted and replaced with "; or".
(d) The following subsection (E) hereby is added to
Section 17.1 of the Project and Supply Agreement:
"(E) in the event that (1) material adverse
developments or changes occurring after the date hereof
(including without limitation any material adverse
- 3 -
<PAGE>
<PAGE>
development or change in conditions now existing, whether
or not foreseeable) in connection with the construction,
testing or operation of the EDNC Baytown Plant or the
financing of the project give Bayer reasonable grounds to
believe that EDNC will not (a) fulfill its covenants
contained herein and meet the dates specified in
Sections 17.1(A) or 17.1(D) and (b) EDNC fails to provide
assurances satisfactory to Bayer (in the exercise of its
reasonable discretion) of such performance within
ten (10) days of written demand therefor by Bayer, or
(2) EDNC acknowledges in writing to any party its
inability to meet the dates specified in Section 17.1(A)
or 17.1(D) hereof."
6. Amendments to Schedule 1.42. Item (E) of
Schedule 1.42(A) is hereby amended to reflect that Construction
Interest Charges shall be those charges actually incurred, not to
exceed $4,440,000. In addition, the note at the conclusion of this
Schedule shall be revised to read as follows:
"Items B, D, F and G are estimates and are subject to
adjustment to the actual incurred costs on or prior to
the Commencement Date. Item (E) is a not-to-exceed
estimate and shall be adjusted to actual incurred costs
(not to exceed the specified amount) on or prior to the
Commencement Date."
7. Payment to Bayer.
(a) EDNC acknowledges and agrees that Bayer will incur
substantial monetary costs as a direct result of the delays
addressed by this Agreement, and that such costs are in amounts
difficult to ascertain. As a consequence, and in consideration of
the foregoing amendments reflected herein, EDNC hereby agrees to
indemnify and hold harmless Bayer from and against its actual net
losses incurred between February 1, 1999 and the date the EDNC
Baytown Plant is able to produce Bayer's requirements of Nitric
Acid (the "Requirements Date") under the Cost Categories described
on Exhibit A hereto. Such indemnification shall not amend, modify
or be in lieu of Bayer's rights specified in the Project and Supply
Agreement. The calculation of the hypothetical cost to produce
Nitric Acid at the EDNC Baytown Plant during the subject period
shall be calculated in conformity with Exhibit B hereto, using
actual volumes taken by Bayer during this period to measure the
differential between the cost of Nitric Acid, had it been produced
at the EDNC Baytown Plant, and the cost of nitric acid purchased
from EDNC under the Start Up Supply Plan or the Interim Supply
Agreement (as the case may be) between EDNC and Bayer. EDNC shall
reimburse Bayer for such actual net costs incurred as calculated in
the manner specified in the following subsections 7(b) and 7(c).
(b) Bayer's actual net costs shall be calculated by the
parties hereto and reimbursed by EDNC in the manner specified in
subsections Section 7(b) and (c). On or prior to the date which is
fifteen (15) days following the Requirements Date, Bayer shall
deliver to EDNC its written calculation of the actual net cost
Impact of Delayed Start Up of the EDNC Baytown Plant, calculating
costs in the Cost Categories set forth on Exhibit A hereto (the
"Impact Statement"). The Impact Statement (x) shall reflect the
actual costs and other expenses incurred by Bayer during the period
from February 1, 1999 through and including the Requirements Date
(the "Delay Period") as a consequence of the delay in EDNC's
substantial completion and commencement of operations of the EDNC
Baytown Plant; (y) shall be prepared using the same methodology
employed in preparing Exhibit B hereto and shall be delivered
without prejudice to the right of Bayer to recoup costs and
expenses thereafter ascertained or determined; and (z) shall be
prepared using actual volumes, actual prices, incurred freight,
handling and unloading expenses, idle equipment fees and other
- 4 -
<PAGE>
verifiable charges wherever possible. EDNC shall have fifteen (15)
days to object in writing to any line item contained in the Impact
Statement, and barring any objection such Impact Statement shall
become final and binding upon all parties. Any objection by EDNC
shall be stated with specificity, shall set forth any differences
from EDNC's calculations, and shall be resolved in the manner
specified in Section 22 of the Project and Supply Agreement. EDNC
agrees to pay (in the manner specified by subsection 7(c) hereof)
any amount reflected on the Impact Statement as to which no
objection is lodged.
(c) EDNC shall render payment of the amounts determined under
this Section 7 as follows: (i) twenty percent (20%) of the amount
determined under Section 7(a) hereof (or, in the event of a dispute
under the preceding subsection, twenty percent (20%) of any amount
not in controversy) shall be paid to Bayer by EDNC without offset
or counterclaim of any kind whatsoever in immediately available
funds on or before the twenty-fifth (25th) day following the
delivery of the Impact Statement; and (ii) the balance of the
relevant amount (or, in the event of a dispute under the preceding
subsection, the balance of the amount not in controversy) shall be
paid by EDNC and El Dorado to Bayer in the form of a credit (the
"Credit"), which Credit shall bear interest at the rate of 7.11%
per annum on the outstanding principal balance thereof until
reduced to zero (0) as hereinafter provided. The principal balance
of, and accrued interest on, the Credit shall be reduced
exclusively by application in the form of credits to Nitric Acid
purchases by Bayer through the period that is (y) twenty-four (24)
months following the Requirements Date, if the initial principal
balance of the Credit is less than or equal to Three Million
U.S. Dollars (U.S. $3,000,000), and (z) thirty-six (36) months
following the Requirements Date, if the initial principal balance
of the Credit exceeds Three Million U.S. Dollars (U.S. $3,000,000),
whereupon any remaining principal and interest not reduced by
credit to Nitric Acid purchases shall be due and payable in full in
immediately available funds. In the event any line item of the
Impact Statement is disputed by EDNC under subsection 7(b), the
disputed amount shall, immediately following resolution under
Section 22 of the Project and Supply Agreement, be reflected in a
supplemental cash payment and supplemental Credit determined as
provided above.
(d) The Credit (and any supplemental Credit), as it may be
hereafter adjusted under subsection (e) hereof, shall be taken
against Nitric Acid purchases on a unit basis, calculated and
re-adjusted semi-annually, by dividing the remaining principal
balance and accrued interest of the Credit, as it may be hereafter
adjusted under subsection (e) hereof, by the actual (for past
months commencing on the Requirements Date) and budgeted (for those
months for which actual figures are not yet available through the
termination date of the subject Credit, as established under the
preceding clause (c)(y) or (z), as appropriate) consumption of
nitric acid by Bayer during the period from the Requirements Date
through the termination date of the subject Credit, as established
under the preceding clause (c)(y) or (z), as appropriate.
(e) The Credit allowed Bayer pursuant to this Section 7 shall
be reduced, retroactively and prospectively, effective on
January 1, 2000, by an amount to be established by agreement of the
parties in respect of those cost savings realized by Bayer during
the period September 1, 1998 through January 31, 1999 as a
consequence of the delayed start-up of the EDNC Baytown Plant, and
shall be calculated without prejudice to the right of EDNC to
recoup credits which would reduce actual costs and other expenses
incurred by Bayer. The amount of this adjustment shall be
- 5 -
<PAGE>
<PAGE>
calculated utilizing the Cost Categories identified on Exhibit A
hereto and the same methodology utilized by the parties in
calculating the Credit and preparing the Impact Statement.
(f) In the event Bayer elects to terminate the Project and
Supply Agreement and the related documents, the obligation of the
parties to pay the amounts or allow any credits otherwise payable
or allowable under this Section 7 shall be extinguished; provided,
however that any such extinguishment shall not affect the right of
Bayer to seek indemnifiable damages or other amounts to which it is
otherwise entitled under the Project and Supply Agreement. The
method of calculation of costs set forth in this Section 7 and the
fact that EDNC has agreed in this Agreement to pay any such amounts
hereunder shall not be deemed an admission by either party as to
the level of damages, if any, incurred by Bayer in connection with
the delayed start-up of the EDNC Baytown Plant.
8. Waiver of Cure Periods. As a consequence of and as
additional consideration for the extensions and forbearances hereby
granted by Bayer, EDNC hereby waives the cure period applicable to
any default by EDNC in its obligations to render Fully Operational
the EDNC Baytown Plant.
9. Representations and Warranties. Bayer hereby represents
and warrants to EDNC, and EDNC represents to Bayer as follows:
(a) this Agreement (and the Interim Supply Agreement) have
been duly and validly authorized, executed and delivered by such
party (including, in the case of EDNC, authorized by unanimous
approval of all of its directors) and constitute legal, valid and
binding obligations of such party enforceable against it in
accordance with their respective terms; and
(b) the execution, delivery and performance of this Agreement
(and the Interim Supply Agreement) by such party will not:
(i) violate or conflict with its charter or bylaws;
(ii) breach or result in a default (or an event which,
with the giving of notice or the passage of time, or both, would
constitute a default) under, require any consent under, result in
the imposition of any lien under or give to others any rights of
termination, acceleration, suspension, revocation, cancellation or
amendment of any agreement to which it is a party;
(iii) breach or otherwise violate any order, writ,
judgment, injunction or decree issued by any governmental person or
entity which names such party or is directed to such party or any
of its respective properties or assets;
(iv) violate any Laws; or
(v) require any consent, authorization, approval,
exemption or other action by, or any filing, registration or
qualification with, any governmental person or entity other than
those which have been made or obtained prior to the date hereof.
-6-
<PAGE>
<PAGE>
10. Effect of Breach by EDNC. The extensions and
forbearances granted herein represent a conditional waiver by Bayer
of its rights under the Project and Supply Agreement; in the event
of any breach or failure of compliance EDNC with the terms and
conditions of this Agreement, the extension and waiver granted by
Bayer in this Agreement shall be null and void and Bayer shall be
free to pursue its rights and remedies under the Project and Supply
Agreement as if the extension and waiver granted herein had not
been granted.
11. Other Provisions. The parties acknowledge that the
payment by EDNC of the amounts described in Section 7 is in
consideration of the agreement by Bayer to forbear from the
exercise of its termination rights under Section 17.1 of the
Project and Supply Agreement for the limited period of time
described herein. Neither Bayer nor EDNC, by virtue of this
Amendment, agrees to waive, relinquish, amend, restate or release
any of its remaining rights under the Project and Supply Agreement,
and Bayer does not, by this Amendment, agree to further extensions
beyond the date specified in Section 5 hereof. Subject to the
amendments set forth herein, all other provisions of the Project
and Supply Agreement shall remain in full force and effect as they
are currently set forth in the Project and Supply Agreement. All
references to the Project and Supply Agreement in any document,
instrument or agreement described in, referred to, annexed to,
contemplated by or incorporated by reference in the Project and
Supply Agreement or this Agreement shall be deemed to mean the
Project and Supply Agreement as amended hereby. Without limiting
the foregoing, upon execution of this Agreement, each reference in
the Project and Supply Agreement to "this Agreement," "hereunder,"
"hereof," "herein," or words of like import, and each reference in
any document related thereto or executed in connection therewith,
shall mean and be a reference to the Project and Supply Agreement
as amended hereby, and the Project and Supply Agreement and this
Agreement shall be read together and construed as one single
instrument. Any dispute regarding the terms or provisions of this
Amendment shall be resolved in the manner specified in Section 22
of the Project and Supply Agreement.
12. Counterparts; Telefacsimile Execution. This Agreement
may be executed in any number of counterparts, and by each of the
parties on separate counterparts, each of which, when so executed,
shall be deemed an original, but all of which shall constitute but
one and the same instrument. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any
party delivering an executed counterpart of this Agreement by
telefacsimile also shall deliver a manually executed counterpart of
this Agreement, but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability or
binding effect of this Agreement.
13. Effect on Ground Lease. Bayer agrees not to exercise its
right of termination under the Ground Lease for so long as the
waivers and forbearances reflected herein hereof remain in force
and effect.
[signature page follows]
- 7 -
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
First Amendment to Baytown Nitric Acid Project and Supply Agreement
as of the date first above written.
BAYER CORPORATION
By:
________________________________
Name:
_______________________________
Title:
______________________________
EL DORADO NITROGEN COMPANY
By:
________________________________
Name:
______________________________
Title:
_____________________________
El Dorado Chemical Company
hereby consents and agrees to the
amendment represented hereby and
executes this First Amendment to
Baytown Nitric Acid and Supply
Agreement solely for purposes of
confirming its continuing guaranty
as set forth in Section 35 of the
Project and Supply Agreement.
EL DORADO CHEMICAL COMPANY
By:
________________________________
Name:
______________________________
Title:
______________________________
- 8 -
<PAGE>
EXHIBIT A
__________
Cost Categories
_______________
Start Up Expenses
Handling & Unloading Expenses
Idle Ammonia Pipeline Expenses
Purchased Acid Costs under Start-Up Supply Plan
Idle Equipment fees, Etc., Associated with Purchased Acid Costs
under Start Up Supply Plan
Purchased Acid Costs if Acid had been produced on site
Loss of Dilution benefit to Bayer on EDNC 3rd Party Sales
Bayer Security Services
Bayer Management SG&A Expense
Bayer Legal Fees
Net Steam Exported (after 2/1/99)
Miscellaneous other costs (subject to review and agreement by the
parties)
<PAGE>
<PAGE>
EXHIBIT B
_________
Calculation of Nitric Acid Costs if Produced on Site
____________________________________________________
1
<PAGE>
<PAGE>
Exhibit B
Estimated Nitric Acid Costs
Assuming acid produced at Baytown
Sep Oct Nov Dec Jan
Volume ST
***
Fixed Costs
Variable Cost
Ammonia
Terminal Fee
Pipeline Fee
Net Capital Amt.
Profit Component
Lost Steam Credit
Ammonia Inefficiency
Miscellaneous
Total Cost/ST
Total Cost $
Ammonia Price/ST
***THE REMAINDER OF THIS EXHIBIT HAS BEEN OMITTED FROM THIS PUBLIC
FILING PURSUANT TO A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
<PAGE>
Exhibit B
Continued
Estimated Nitric Acid Costs
Assuming acid produced at Baytown
Feb Mar Apr May Jun
Volume ST
***
Fixed Costs
Variable Cost
Ammonia
Terminal Fee
Pipeline Fee
Net Capital Amt.
Profit Component
Lost Steam Credit
Ammonia Inefficiency
Miscellaneous
Total Cost/ST
Total Cost $
Ammonia Price/ST
***THE REMAINDER OF THIS EXHIBIT HAS BEEN OMITTED FROM THIS PUBLIC
FILING PURSUANT TO A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
<PAGE>
<PAGE>
EXHIBIT C
Third Party Recoveries by EDNC under subsection (d) of
Section 1.42(c) shall be applied to reduce the Base Amount as
follows:
***
***THE REMAINDER OF THIS EXHIBIT HAS BEEN OMITTED FROM THIS PUBLIC
FILING PURSUANT TO A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
2
FIFTH AMENDMENT
TO
LEASE AGREEMENT
3200 W. Reno
Oklahoma City, Oklahoma
This Fifth Amendment to Lease Agreement, dated as of the
____ day of October, 1998, by and between MAC VENTURE, LTD., an
Oklahoma limited partnership ("Owner"), and HERCULES ENERGY MFG.
CORPORATION, an Oklahoma corporation ("Tenant").
WITNESSETH
WHEREAS, Owner has leased to Tenant certain real property
known as 3200 W. Reno, Oklahoma City, Oklahoma, along with
certain appurtenances and improvements located thereon (the
"Leased Premises"), pursuant to the terms and conditions of a
Lease Agreement, dated March 26, 1982, as amended by an Amendment
to Lease Agreement dated August 31, 1983, and by a Second
Amendment to Lease Agreement dated June 6, 1985, and by a Third
Amendment to Lease Agreement dated December 31, 1987, and by a
Fourth Amendment to Lease Agreement dated December 14, 1993,
between Owner and Tenant (said Agreements are hereinafter
collectively referred to as "Lease Agreement"); and
WHEREAS, the parties desire to reduce the size of the Leased
Premises to 30,000 square feet of warehouse and shop space which
will be leased at a monthly rental amount of $3,750.00; and
WHEREAS, the parties desire to extend the term of the Lease
Agreement with said extension commencing January 1, 1999 and
expiring December 31, 1999.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the receipt and sufficiency of which
is hereby acknowledged, the Owner and Tenant do hereby amend the
Lease Agreement as follows:
<PAGE>
1. Effective as of January 1, 1999, the Leased Premises
are reduced in size to 30,000 square feet of warehouse and shop
space which will be leased at a monthly rental amount of
$3,750.00 per month.
2. Effective as of December 31, 1998, the term of the
Lease Agreement is extended for a period commencing January 1,
1999 and expiring December 31, 1999, on the same terms and
conditions as set forth in the Lease Agreement, except for those
changes set forth in paragraph 1 above.
3. Except as expressly amended herein, the Lease Agreement
shall remain in full force and effect and is hereby confirmed and
ratified by the Owner and Tenant.
IN WITNESS WHEREOF, this Fifth Amendment to Lease Agreement
is dated as of the ____ day of October, 1998.
MAC VENTURE, LTD., an Oklahoma
limited partnership, by First
Industries Capital Corporation,
General Partner
_______________________________
President
HERCULES ENERGY MFG. CORPORATION
________________________________
President
2
Solutia (SELLER)
________________________________________________________________
10300 Olive Boulevard
P.O. Box 66760
St. Louis, Missouri 63166-6760
(314) 674-1000
SALES CONTRACT
SOLD TO El Dorado Chemical (BUYER)
P.O. Box 1373
Oklahoma City, OK 73101
THE FOLLOWING GOODS, SUBJECT TO TERMS AND CONDITIONS AS STATED
BELOW AND ON THE REVERSE SIDE HEREOF.
PERIOD January 1, 1999 through December 31, 2000 and
continuing calendar year to calendar year
thereafter unless canceled, in writing, by
either party prior to the preceding
October 1st.
GOODS Anhydrous Ammonia
QUANTITY minimum of 5,000 tons per month
additional quantities available provided such
quantities are mutually agreed to by both
parties.
PRICE ***
***
***
***
***
***
PAYMENT TERMS Net 15 days from date of invoice, with end of
month billing
F.O.B. Seller's *** plant
ADDITIONAL TERMS
AND CONDITIONS A pipeline freight allowance (PA) of $*** is
included to match the current competitive
freight position for delivery into El Dorado
Chemical's plant. The pipeline freight
allowance will reduced by the amount that the
freight can be reduced below $***.
This contract shall not be binding on Seller unless executed by
Buyer and an authorized representative of Seller and delivered to
Seller within thirty days from the date below.
EXECUTED BY Dated
________________________
EL DORADO CHEMICAL COMPANY, BUYER SOLUTIA, INC., SELLER
_________________________________
By By
______________________________ ___________________________
Title Title
____________________________ _________________________
***INDICATES INFORMATION IN THIS DOCUMENT WHICH HAS BEEN OMITTED
FROM THIS PUBLIC FILING PURSUANT TO A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION
HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND
EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
<PAGE>
<PAGE>
1. EXCUSE OF PERFORMANCE. (a) Deliveries may be suspended
by either party in the event of: Act of God, war, riot, fire,
explosion, accident, flood, sabotage; lack of adequate fuel, power,
raw materials, labor, containers or transportation facilities;
compliance with governmental requests, laws, regulations, orders or
actions; breakage or failure of machinery or apparatus; national
defense requirements or any other event, whether or not of the
class or kind enumerated herein, beyond the reasonable control of
such party; or in the event of labor trouble, strike, lockout or
injunction (provided that neither party shall be required to settle
a labor dispute against its own best judgment); which event makes
impracticable the manufacture, transportation, acceptance or use of
a shipment of the goods or of a material upon which the manufacture
of the goods is dependent.
(b) If Seller determines that its ability to supply the total
demand for the goods, or obtain any or a sufficient quantity of any
material used directly or indirectly in the manufacture of the
goods, is hindered, limited or made impracticable, Seller may
allocate its available supply of the goods or such material
(without obligation to acquire other supplies of any such goods or
material) among itself and its purchasers on such basis as Seller
determines to be equitable without liability for any failure of
performance which may result therefrom.
(c) Deliveries suspended or not made by reason of this
section shall be canceled without liability, but this contract
shall otherwise remain unaffected.
2. BUYER'S CREDIT. Seller reserves the right, among other
remedies, either to terminate this contract or to suspend further
deliveries under it in the event Buyer fails to pay for any one
shipment when same becomes due. Should Buyer's financial
responsibility become unsatisfactory to Seller, cash payments or
security satisfactory to Seller may be required by Seller for
future deliveries and for the goods theretofore delivered.
3. WEIGHTS AND CONTAINERS. In the case of bulk carload,
tank car, tank truck or barge shipments, Seller's weights shall
govern unless proved to be in error. Where returnable containers
are used in shipment, title to such containers shall remain in
Seller, and a deposit in the amount required by Seller must be made
at the time payment is tendered for the goods. Such containers
must be kept in good condition, must not be used for any material
other than the good shipped therein and must be returned within
sixty (60) days from date of shipment. On such containers being so
returned in good condition, a refund of the deposit will be made.
4. SHIPMENTS. The quantity shipped in any contract month
may be limited by Seller to either (a) the average of the monthly
quantities purchased by Buyer for the preceding contract months or
(b) the maximum quantity covered by this contract divided by the
number of months in the period of this contract (provided, however,
that if different quantities apply to different time periods within
the period of this contract, Seller may limit shipments based upon
the current maximum quantity for the applicable time period under
this contract divided by the number of months in such time period).
Any quantity not shipped as a result of any such limitation shall
be deducted from the total quantity of this contract. Seller shall
not be bound to tender delivery of any quantities for which Buyer
has not given shipping instructions.
5. LIMITED WARRANTY. Subject to Section 6 and unless
otherwise expressly provided herein, Seller warrants title and that
the goods shall conform to Seller's standard specifications or to
the attached specifications, if any. Subject to the preceding
sentence and except as otherwise expressly provided herein, SELLER
MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED, AS TO MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE, OR
ANY OTHER MATTER WITH RESPECT TO THE GOODS, whether used alone or
in combination with any other material.
6. LIMITATION OF LIABILITY. (a) Within thirty (30) days
after receipt of each shipment of the goods, Buyer shall examine
such goods for any damage, defect or shortage. All claims for any
cause whatsoever (whether such cause be based on contract,
negligence, strict liability, other tort or otherwise) shall be
deemed waived unless made in writing and received by Seller within
sixty (60) days after Buyer's receipt of the goods, in respect to
which such claim is made, or, if such claim is for non-delivery of
such goods, within sixty (60) days after the date upon which such
goods were to be delivered, provided that as to any such cause not
reasonably discoverable within such sixty (60) day period
(including that discoverable only in processing, further
manufacture, other use or resale) any claim shall be made in
writing and received by Seller within one hundred eighty (180) days
after Buyer's receipt of the goods, in respect to which such claim
is made, or within thirty (30) days after Buyer learns of the facts
giving rise to such claim, whichever shall first occur. Failure of
Seller to receive written notice of any such claim within the
applicable time period shall be deemed an absolute and
unconditional waiver by Buyer of such claim irrespective of whether
the facts giving rise to such claim shall have then been discovered
or of whether processing, further manufacture, other use or resale
of the goods shall have then taken place.
(b) BUYER'S EXCLUSIVE REMEDY SHALL BE FOR DAMAGES, AND
SELLER'S TOTAL LIABILITY FOR ANY AND ALL LOSSES AND DAMAGES ARISING
OUT OF ANY CAUSE WHATSOEVER (WHETHER SUCH CAUSE BE BASED IN
CONTRACT, NEGLIGENCE, STRICT LIABILITY, OTHER TORT OR OTHERWISE)
SHALL IN NO EVENT EXCEED THE PURCHASE PRICE OF THE GOODS IN RESPECT
TO WHICH SUCH CAUSE ARISES OR, AT SELLER'S OPTION, THE REPAIR OR
REPLACEMENT OF SUCH GOODS, AND IN NO EVENT SHALL SELLER BE LIABLE
FOR INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES RESULTING FROM
ANY SUCH CAUSE. Seller shall not be liable for, and Buyer assumes
liability for, all personal injury and property damage connected
with the handling, transportation, possession, processing, further
manufacture, other use or resale of the goods, whether the goods
are used alone or in combination with any other material.
Transportation charges for the return of the goods shall not be
paid unless authorized in advance by Seller.
(c) If Seller furnishes technical or other advice to Buyer,
whether or not at Buyer's request, with respect to processing,
further manufacture, other use or resale of the goods, Seller shall
not be liable for, and Buyer assumes all risk of, such advice and
the results thereof.
7. PATENTS. Subject to Section 6 and unless otherwise
expressly provided herein, Seller warrants that the goods sold
pursuant to this contract, except for those made for Buyer
according to Buyer's specifications, do not infringe any valid U.S.
patent. This warranty is given upon condition that Buyer promptly
notify Seller of any claim or suit involving Buyer in which such
infringement is alleged and that, if Seller is affected, Buyer
permit Seller to control completely the defense or compromise of
any such allegation of infringement. Seller does not warrant that
the use of the goods or any material made therefrom, whether the
goods are used alone or in combination with any other material,
will not infringe a patent. Seller reserves the right to terminate
Seller's warranty under this Section 7 at any time with respect to
any undelivered goods, it being agreed that in the event of such
termination Buyer may, without penalty, thereafter refuse
acceptance of such undelivered goods.
8. FREIGHT AND TAXES. Any increase in freight rates paid by
Seller on shipments covered by this contract and hereafter becoming
effective and any tax or governmental charge or increase in same
(excluding any franchise or income tax or other tax or charge based
on income) (a) increasing the cost to Seller of producing, selling
or delivering the goods or of procuring materials used therein or
(b) payable by Seller because of the production, sale or delivery
of the goods, such as Sales Tax, Use Tax, Retailer's Occupational
Tax, Gross Receipts Tax, Value Added Tax, may, at Seller's option,
be added to the price herein specified.
9. PRICE REVISION.
10. Price Protection.
11. COMPLIANCE WITH CERTAIN LAWS. Subject to Section 6 and
unless otherwise expressly provided herein, the goods shall be
produced in compliance with the requirements of the Fair Labor
Standards Act of 1938, as amended, and Executive Order 11246.
12. ASSIGNMENT. Buyer shall not (by operation of law or
otherwise) assign its rights or delegate its performance hereunder
without the prior written consent of Seller, and any attempted
assignment or delegation without such consent shall be void.
13. MISCELLANEOUS. THE VALIDITY, INTERPRETATION AND
PERFORMANCE OF THIS CONTRACT AND ANY DISPUTE CONNECTED HEREWITH
SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF MISSOURI. This contract constitutes the full
understanding of the parties, a complete allocation of risks
between them and a complete and exclusive statement of the terms
and condition of their agreement. Except as provided in Sections 9
and 10 hereof, no conditions, usage of trade, course of dealing or
performance, understanding or agreement purporting to modify, vary,
explain or supplement the terms or conditions of this contract
shall be binding unless hereafter made in writing and signed by the
party to be bound, and no modification shall be effected by the
acknowledgment or acceptance of purchase order or shipping
instruction forms containing terms or conditions at variance with
or in addition to those set forth herein. No waiver by either
Seller or Buyer with respect to any breach or default or of any
right or remedy and no course of dealing, shall be deemed to
constitute a continuing waiver of any other breach or default or of
any other right or remedy, unless such waiver be expressed in
writing signed by the party to be bound.
AGREEMENT FOR PURCHASE AND SALE
OF ANHYDROUS AMMONIA*
THIS AGREEMENT ("Agreement") is made this 1st day of January,
1999, by and between Farmland Industries, Inc. (hereinafter
"Seller"), a Kansas Corporation, with its principal place of
business in Kansas City, Missouri, and El Dorado Chemical Company
(hereinafter "Buyer"), an Oklahoma corporation, with its principal
place of business in El Dorado, Arkansas.
WITNESSETH
WHEREAS, Seller represents that it has the right to sell
certain quantities of anhydrous ammonia as hereinafter defined
("Product"); and
WHEREAS, Seller desires to sell and Buyer wishes to purchase
the quantities of Product herein stipulated upon the conditions,
covenants, and agreements contained herein;
NOW, THEREFORE, in consideration of the mutual covenants,
promises and agreements contained herein, Seller and Buyer agree as
follows:
1. Quantity: Seller shall deliver to Buyer at El Dorado,
Arkansas a volume of Product of not less than twenty four thousand
(24,000) tons and not more than seventy two thousand (72,000) tons,
during the contract term, commencing January 1, 1999.
2. Minimum/Maximum Monthly and Quarterly Quantities: Seller
shall not be required to deliver more than six thousand (6,000)
tons and not less than two thousand (2,000) ton of Product in any
one month. Seller shall not be required to deliver more than
eighteen thousand (18,000) tons and not less than six thousand
(6,000) tons of Product in any one quarter.
3. Forecast of Buyer's Purchases: During the term of this
Agreement, Buyer shall provide a written forecast quarterly by
month for purchases for each quarter of the contract year. Buyer
shall make this quarterly forecast and deliver it to Seller on or
before the 15th day of the month preceding the quarter.
4. Term: This Agreement shall commence at 12:01 a.m.,
Central Standard Time, January 1, 1999, and shall continue until
11:59 p.m. Central Standard Time, June 30, 2000, unless terminated
earlier in accordance with the provisions hereof.
5. Price:
(a) The parties to this Agreement have intentionally
left the purchase price to be paid by Buyer open for periodic
determination, pursuant to the contract pricing formula
contained herein. It is the intention of the parties that
there be a binding agreement from the date of the signing of
this Agreement, even if the price is not determined at the
time since a contract pricing formula is contained herein.
(b) "Base Price" hereunder shall be calculated as
follows, for each calendar month during the term of this
Agreement:
*INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED FROM THIS PUBLIC
FILING PURSUANT TO A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
1
<PAGE>
(1) On or before the first day of each calendar
month during the term of this Agreement, Seller shall
calculate on a million British Thermal Unit basis
(hereinafter MMBTU), *** cost of natural gas, for such
calendar month; plus a nominal fee of *** per MMBTU for
procurement and expense incurred in gas negotiation and
purchase. Such cost shall exclude gains or losses
pursuant to Paragraph 5(h) herein;
(2) The natural gas price per MMBTU, as calculated
in 5(b)(1) above, shall be multiplied by ***;
(3) To the results of 5(b)(2) shall be added an
amount of ***;
(4) The results in 5(b)(3) shall be multiplied by
***.
The total amount in 5(b)(4) shall be defined as the "Base
Price".
(c) The "*** Ammonia Price" shall be defined as the ***.
(d) If at any time during the term of this Agreement the
"*** Ammonia Price" exceeds the "Base Price", the
sale/purchase price per ton of Product hereunder shall be
calculated as follows:
(1) The "Base Price" shall be noted;
(2) The "*** Ammonia Price" shall be noted;
(3) ***;
(4) ***;
(5) The f.o.b. sale/purchase price at any time
during the term of this Agreement when the "*** Ammonia
Price" exceeds the "Base Price" shall be an amount equal
to ***.
(e) If at any time during the term of this Agreement the
"*** Ammonia Price" is below the "Base Price", the
sale/purchase price per ton of Product hereunder, shall be the
"*** Ammonia Price".
(f) Volume discounts may be earned quarterly for Product
priced monthly by either 5(d) or 5(e). Credit will be issued
on total volume per quarter and calculated as follows:
***
(g) All Product for shipments to Buyer's El Dorado,
Arkansas location shall be delivered to Buyer via Koch
Pipeline unless such pipeline becomes unavailable due to
mechanical failure of the pipeline. In the event the Koch
Pipeline is unavailable for that reason, Product shall be
shipped by rail cars and each party hereto shall use its best
efforts to minimize the cost of shipment by rail car. In the
event Product is shipped by rail car, the purchase price for
Product shall be adjusted to reflect the actual cost of such
transportation.
***INDICATES INFORMATION IN THIS DOCUMENT WHICH HAS BEEN OMITTED
FROM THIS PUBLIC FILING PURSUANT TO A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION.
THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE
SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES
OF SUCH REQUEST.
2
<PAGE>
(h) Gains or losses resulting from Seller's activities
in the natural gas Futures market shall not be incorporated
into the gas cost calculations irrespective of whether
delivery is taken by Farmland in any Futures transaction.
6. Verification of *** Natural Gas Prices: Buyer shall have
the right, at any time during the term of this Agreement, to
request Seller to provide documentation to a mutually acceptable
audit firm to verify that excess charges for natural gas have not
been made.
7. Delivery/Freight:
(a) Pipeline - As shipper of record Seller shall invoice
Buyer for all actual Koch Pipeline tariff charges plus a ***
per short ton meter fee for tons transported by pipeline to
Buyer's El Dorado, Arkansas facility. Seller will credit
Buyer for all shrink refunds allowed Seller by the Koch
Pipeline on tons transported to El Dorado during the term of
the Agreement.
(b) Rail - Freight charges on rail shipments shall be
invoiced to Buyer at either (i) the then current railroad
tariff rate, or (ii) a negotiated contract freight rate as
agreed by the parties. Seller may invoice Buyer and Buyer
shall pay Seller tank car demurrage at a daily rate of *** per
car per day for each day commencing with the eighth day after
constructive placement of the car at Buyer's destination.
Such rail shipments shall be priced at the time of the order
by Seller.
8. Invoices and Payment: Seller shall deliver invoices to
Buyer as soon after the end of each calendar month as is reasonably
possible. Buyer shall make payments to Seller for each month's
purchases, on or before the fifteenth (15th) day of the following
month. Payment shall be made by wire transfer to such bank or
banks as Seller shall designate. If at any time during the term of
this Agreement, Buyer becomes delinquent in payment or in Seller's
reasonable judgment there has occurred a material adverse change in
the financial condition of Buyer which could reasonably be expected
to impair Buyer's ability to carry out its financial obligations to
Seller, Seller shall have the sole and exclusive right to require
the Buyer to open an irrevocable letter of credit for the benefit
of Farmland Industries, Inc., at a bank or banks, acceptable to
Farmland Industries, Inc. for an amount not to exceed the result of
multiplying *** by the contract price per ton of Product in the most
recently completed calendar month.
9. Default and Nonpayment: Default in payment, or failure
to perform any of the terms and conditions of this Agreement, shall
constitute a default by either party to this Agreement. In the
event that either party (i) defaults in making payment provided for
herein when due or (ii) defaults in the performance of any other
material obligation provided for herein and, if such default is
susceptible of cure, fails to cure any such default of a material
obligation within 30 days of receipt of written notice form the
non-defaulting party thereof, the non-defaulting party shall have
the right, by giving written notice to the defaulting party, to
immediately terminate this Agreement.
On the occurrence of a default by either party, the non-
defaulting party shall have the option to terminate this Agreement
without liability of any kind as to future shipments; to alter
credit terms provided to Buyer; to stop any Product in transit; to
treat any default as substantially impairing the value of the whole
***INDICATES INFORMATION IN THIS DOCUMENT WHICH HAS BEEN OMITTED
FROM THIS PUBLIC FILING PURSUANT TO A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BYTHE SECURITIES AND EXCHANGE COMMISSION.
THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY
OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
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Agreement, and hence a breach thereof. If Buyer does not pay any
invoice on its due date, then all outstanding invoices of Seller to
Buyer under this or any other agreement shall become immediately
due and payable, and Seller may assess a finance charge of *** per
month, or the maximum legal rate if less, on remittances not
received by their due date. On the occurrence of a default by
either party, the defaulting party shall be liable to the
non-defaulting part for all costs, losses, and expenses incurred by
such non-defaulting party by reason thereof, including reasonable
attorneys' fees.
10. Product Specifications: "Product", where used in this
Agreement, means Product solution of commercial grade, having
ammonia (NH3) content of not less than ***, having water content of
not more than ***, and having oil content of not more than ***.
Product tendered to any pipeline shall meet or exceed such
pipeline's Product quality specifications for Product shipped
therein. Seller shall be nominated as shipper of record on those
volumes of Product sold pursuant to this Agreement and shipped via
Koch Pipeline.
11. Determination of Weights: "Ton", where used in this
Agreement, means two thousand pounds (2,000 lbs.) avoirdupois, as
measured by Koch Pipeline meter tickets if delivery is made by
pipeline, by bills of lading if delivery is made by rail or truck.
12. Manufacture and Delivery: Seller specifically reserves
the right to manufacture at, or exchange to, and to deliver from,
any origin, all of the Product transferred to the location
scheduled and agreed to quarterly pursuant to this Agreement.
13. Disclaimer of Warranties: There are no warranties which
extend beyond the description on the face hereof, and SELLER MAKES
NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WHETHER OF
MERCHANTABILITY OR FITNESS FOR ANY PURPOSE OR AGAINST INFRINGEMENT
OR OTHERWISE. Buyer assumes all risk and liability for the use of
the Product purchased, whether used singly or in combination with
other substances and for loss, damage, or injury to persons, or
property of Buyer or others arising out of the use or possession of
the Product; Buyer agrees to indemnify Seller from loss (including
costs of defense) in connection with claims arising from use or
possession of the Product.
14. Claims by Buyer or Seller: Notices by Seller or Buyer of
claims as to Product delivered, or for the nondelivery thereof,
shall be made within thirty (30) days after delivery, or the date
fixed for delivery, as the case may be, and failure to give such
notice shall constitute a waiver by Seller or Buyer of all claims
in respect thereto. Buyer's sole claim for loss or damage arising
from nondelivery of Product hereunder shall be the difference
between the price for the Product specified in this Agreement, and
the average price of such Product then charged by major suppliers
of Product at the point of shipment specified in this Agreement,
duly adjusted for freight charges. In no event shall any claims of
any kind be greater than, nor shall Seller in any event be liable
for, any amount in excess of the purchase price of the Product in
respect of which claim is made. SELLER SHALL NOT BE LIABLE FOR ANY
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING
FROM SELLER'S PERFORMANCE OR BREACH OF THIS AGREEMENT AND/OR USE OR
POSSESSION OF THE PRODUCT, OR FOR LOSS OF PROFIT FROM RESALE OF
PRODUCT. No suit or legal proceeding arising upon this Agreement
shall be maintainable against Seller or Buyer unless commenced or
made within one (1) year after passing of title to Product, or
delivery of or failure to deliver Product hereunder.
***INDICATES INFORMATION IN THIS DOCUMENT WHICH HAS BEEN OMITTED
FROM THIS PUBLIC FILING PURSUANT TO A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION.
THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY
OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
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15. Conflicting Terms: Notwithstanding any provision herein
to the contrary, no term in Seller's or Buyer's purchase order,
acknowledgment form or other document which conflicts with the
terms hereof or increases Seller's or Buyer's obligations
hereunder, shall be binding on either party unless accepted in
writing by both parties hereunder.
16. Waiver: Any waiver by Seller or Buyer of any term,
provision, or condition of this Agreement, or of any default
hereunder in any one or more instances shall not be deemed to be a
further or continuing waiver of such term, provision or condition,
or of any subsequent default hereunder.
17. Force Majeure: Neither party will be liable for failure
to perform or for delay in performing this Agreement where such
failure or delay is occasioned by acts of any government,
compliance with law or government regulations, acts of God, war,
riots, insurrections, civil commotion or disturbances, fire, flood,
or accident or by any other cause or circumstances whether of like
or different character, beyond the control of the party affected
thereby, herein referred to as "Events of Force Majeure". Failure
to obtain a supply of Product by Seller from a third party supplier
shall not be an Event of Force Majeure that can be exercised by
Seller. The party asserting that an Event of Force Majeure has
occurred shall send the other party notice thereof by cable or
telex no later than three (3) days after the beginning of such
claimed event setting forth a description of the Event of Force
Majeure, an estimate of its effect upon the party's ability to
perform its obligations under this Agreement and the duration
thereof. The notice shall be supplemented by such other
information or documentation as the party receiving the notice may
reasonably request. As soon as possible after the cessation of any
Event of Force Majeure, the party which asserted such event shall
give the other party written notice of such cessation. Whenever
possible, each party shall give the other party notice of any
threatened or impending Event of Force Majeure. If an Event of
Force Majeure affecting Seller's or Buyer's performance by the
party affected (the "affected party") shall be excused during the
continuation of the Event of Force Majeure and the other party
shall send written notice to the affected party whether the
notifying party elects to (a) reduce the quantity of Product
specified in this Agreement by the amount which cannot be delivered
or received and/or (b) reschedule deliveries on a commercially
reasonable basis for delivery during the remainder of the
applicable Contract Year.
"In the Event of Force Majeure affecting Seller, Seller shall
allocate its available Product to Buyer in the same proportion as
the quantity delivered to Buyer's El Dorado, Arkansas facility
hereunder during the twelve (12) months preceding the Event of
Force Majeure is to the total quantity of all Product sold or used
by Seller during such twelve (12) month period". (Provided,
however, the total Product Buyer received shall not exceed the
quantities in Article 2.) In the event Seller has not given
written notice of cessation of force majeure, and such Event of
Force Majeure prevents deliveries of Product for more than thirty
(30) consecutive days, Buyer shall have the right to terminate this
Agreement.
18. Acquisition of Plant: In the event that El Dorado
Chemical Company or affiliated company having a common parent
acquires more than fifty percent (50%) interest in and to a plant
or company that produces or has the capacity to produce Product,
Buyer may upon twelve (12) months' written notice to Seller,
terminate this Contract and thereafter have no further
responsibility to accept or pay for any quantity of Product
hereunder.
19. Commission/Broker Fees: Seller and Buyer represent that
they are dealing with each other, that neither is the agent of the
other, and that no broker or agent has been involved, either
directly or indirectly, in consummating this Agreement and the sale
of Product hereunder. SELLER AGREES TO INDEMNIFY, PROTECT AND SAVE
BUYER HARMLESS from the claims of any person or entity for
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commissions or finder's fees or similar fees in connection with the
transaction set forth herein where the claimant alleges that his or
its contact with this transaction is traceable to Seller. BUYER
AGREES TO INDEMNIFY, PROTECT, AND SAVE SELLER HARMLESS from the
claims of any person or entity for commissions or finder's fees or
similar fees in connection with the transaction set forth herein
where the claimant alleges that his or its contact with this
transaction is traceable to Buyer.
20. Taxes: Any and all taxes of any type whatsoever levied,
prior to passage of title, against Product transferred pursuant to
this Agreement shall be paid by Seller promptly as required by law.
Any and all taxes of any type whatsoever levied against the Product
at or upon, or subsequent to, passage of title shall be paid by
Buyer promptly as required by law. Title to and risk of loss of
the Product shall pass to the Buyer as the Product progressively
passes into tank cars, and/or pipeline. Notwithstanding any
provision to the contrary in this Agreement, with regard to
sales/purchases of Product pursuant to this Agreement, Buyer shall
pay any and all taxes or charges that are due and owing under the
federal Superfund (Comprehensive Environmental Response,
Compensation and Liability Act of 1986) statutes, or regulations
promulgated thereunder, as amended. Notwithstanding any provision
to the contrary in this Agreement with regard to sales/purchases of
Product pursuant to this Agreement, Buyer shall pay any and all
taxes and charges that may become in the future due and owing
because of the future enactment of any state law or regulation
establishing a state tax or fee of any kind whatsoever on the
manufacturing and/or sale of Product or any constituent part
thereof. All taxes hereunder are in addition to those prices
described herein.
21. Notices: No notice, actual or constructive, shall be
effective against any party unless it is (a) in writing; (b) signed
by the party giving the notice; and (c) sent by registered mail,
postage prepaid, or personally served on the party intended to
receive said notice.
The address to be used on a mailed notice for each party shall
be as follows:
To Seller: Farmland Industries, Inc.
3315 N. Oak Trafficway
P. O. Box 7305, Dept. 314
Kansas City, Missouri 64116
Facsimile: 816-459-5913
To Buyer: El Dorado Chemical Company
P. O. Box 231
El Dorado, Arkansas 71731
Facsimile: 501-863-1426
Attn.: Warren Jones
El Dorado Chemical Co.
16 S. Pennsylvania
Oklahoma City, OK 73007
Facsimile: 405-235-5067
Attn.: James Wewers
David Shear
22. Alternate Dispute Resolution: In the event of any
controversy arising out of or relating to this Contract, or any
breach thereof, the parties agree to submit the dispute for
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<PAGE>
resolution to a senior executive of both parties. Such executives
shall meet within thirty (30) days of written request of either
party.
In the event the parties are unable to resolve the controversy
through such meeting, the dispute shall be submitted to binding
arbitration in accordance with the rules of the Missouri
Arbitration Act. V.A.M.S. 435 et. Seq. (or Uniform Arbitration
Act). Such arbitration shall be initiated by either party by
notifying the other party in writing and requesting a panel of five
(5) arbitrators from the American Arbitration Association.
Alternate strikes shall be made to the panel commencing with the
party requesting the arbitration until one name remains. Such
individual shall be the arbitrator for the controversy. The party
requesting the arbitration shall notify the arbitrator who shall
hold a hearing(s) within sixty (60) days of the notice. The
arbitrator shall render a decision within twenty (20) days after
the conclusion of the hearing(s). Judgment upon the award rendered
by the Arbitrator may be entered in any court having jurisdiction
thereof.
23. Confidentiality: The parties agree to maintain as
confidential the terms of this Agreement and not to divulge such
terms to any third party without the written consent of the other.
24. Miscellaneous: This Agreement expresses the whole
agreement of the parties. There are no promises, condition, or
obligations, other than those enumerated herein. This Agreement
shall supersede all previous or contemporaneous communications,
representations, or agreement, verbal or written, between or among
the parties. No usage of trade or prior course of dealing or
performance between Buyer and Seller shall be deemed to modify the
terms of this Agreement. This Agreement shall not be modified
except in writing signed by the party to be charged. Headings are
for reference only, and do not affect the meaning of any paragraph.
This Agreement shall not be assigned by either party without
the prior written consent of the other party except that either
party may assign its interest under this Agreement to a successor
to all or any substantial portion (more than 50%) of its business
or assets, or to any parent, subsidiary, or affiliated company
having a common parent. Any purported assignment of this Agreement
or any part thereof, except as set forth above, shall be void.
Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction. To the extent permitted by
applicable law, the parties hereby waive any provision of law which
renders any provision hereof prohibited or unenforceable in any
respect.
[The remainder of this page intentionally left blank.]
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This Agreement shall be governed in all respects, including,
but not limited to, interpretation and performance by the laws of
the State of Kansas. Remedies herein reserved are cumulative and
in addition to any other or further remedies Seller or Buyer may
have at law or in equity.
No termination of this Agreement shall affect the rights or
obligations theretofore accrued.
IN WITNESS WHEREOF, the parties have executed this Agreement
the day and year first above written.
FARMLAND INDUSTRIES, INC. EL DORADO CHEMICAL COMPANY
(Seller) (Buyer)
By:______________________________ By:____________________________
Title:___________________________ Title:_________________________
Date:____________________________ Date:__________________________
- 8 -
AGREEMENT
This Agreement ("Agreement"), dated as of March 23, 1999, is
made among El Dorado Nitrogen Company, an Oklahoma corporation
with an office and principal place of business in Oklahoma City,
Oklahoma ("El Dorado Nitrogen"), El Dorado Chemical Company, an
Oklahoma corporation with an office and principal place of
business in Oklahoma City, Oklahoma ("El Dorado Chemical"), Bayer
Corporation, an Indiana corporation with an office and principal
place of business in Pittsburgh, Pennsylvania ("Bayer"), ICF
Kaiser Engineers, Inc., an Ohio corporation with an office and
principal place of business in Fairfax, Virginia ("Kaiser"), ICF
Kaiser International, Inc., a Delaware corporation with an office
and principal place of business in Fairfax, Virginia ("Kaiser
International"), and Acstar Insurance Company, a Connecticut
corporation with an office and principal place of business in New
Britain, Connecticut ("Acstar").
WITNESSETH:
WHEREAS, on August 26, 1997, El Dorado Nitrogen, Kaiser, and
Kaiser International, as guarantor of the performance of Kaiser,
entered into a contract, as amended, amended and restated,
supplemented or otherwise modified (the "Contract"), for the
design and construction of a certain nitric acid plant with a
production capacity of 1,265 short tons per day and all necessary
ancillary work and connections, located in Baytown, Texas, all as
more particularly described in said Contract (the "Project");
WHEREAS, El Dorado Nitrogen, as set out in the Contract,
acts as the duly authorized construction agent of the Project's
owner, First Security Bank, National Association, as trustee;
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<PAGE>
WHEREAS, on September 10, 1997, Acstar, as surety, issued
for said Project a certain performance and payment bond (No.
7362) with Kaiser as the principal, and El Dorado Nitrogen and
Bayer as the dual obligees (the "Bond");
WHEREAS, in connection with the issuance of the Bond Kaiser
executed and delivered to Acstar an indemnification agreement
(the "Indemnification Agreement");
WHEREAS, Kaiser failed to complete the Project in the time
specified in the Contract;
WHEREAS, Kaiser, during the course of performance, failed to
make certain payments due certain subcontractors for labor and
materials provided to the Project;
WHEREAS, certain subcontractors or suppliers to Kaiser on
said Project have made claims, or have threatened to make claims,
or may in the future make claims, against the Bond for alleged
non-payment of labor and materials provided on the Project, which
claims (so far as they relate to the time period prior to
February 1, 1999) are set forth and described in Schedules A, B
and C attached hereto (the "Subcontractor Claims") and
subcontractors or suppliers making such claims are herein
referred to as the "Subcontractors";
WHEREAS, on or about January 29, 1999, El Dorado Nitrogen
issued a Notice of Default (the "Notice of Default") to Kaiser,
demanding that Kaiser cure certain Events of Default alleged
therein within ten (10) days or suffer a default termination;
WHEREAS, the Notice of Default was sent by El Dorado
Nitrogen to Acstar;
WHEREAS, Kaiser disputed certain allegations made by El
Dorado Nitrogen in the Notice of Default; and
WHEREAS, since January 29, 1999, the parties hereto have
been engaged in continuous discussions and other efforts to
resolve their disputes and disagreements;
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NOW, THEREFORE, for good and valuable consideration and in
consideration of the mutual covenants contained herein, and
intending to be legally bound, the parties agree and covenant as
follows:
1. Acstar hereby waives and releases any and all rights it
has to conduct an investigation to determine what defenses it has
under the Bond and to assert any such defenses.
2. Acstar, Kaiser and Kaiser International hereby waive
and release any and all rights or claims they have to any unpaid
Contract funds , whether deemed unearned Contract balance or
earned retainage (the "Contract Funds"). Said Contract Funds
shall be expended by El Dorado Nitrogen for the completion of the
Project.
3. Kaiser represents and warrants to El Dorado Nitrogen,
El Dorado Chemical and Bayer that Schedules A, B and C comprise a
complete listing of Subcontractors and Subcontractor Claims and
cumulatively represent a complete listing of all amounts due and
owing through January 31, 1999 on the Project. Schedules A, B
and C are in all respects true and accurate to the best of
Kaiser's knowledge, after due inquiry, and represent invoices
(other than a claim of Shaw in the amount of $1,335,997 million
(the "Disputed Amount"), which amount is being deposited in an
escrow account pursuant to paragraph 5 hereof) that are due and
owing through January 31, 1999 to the indicated Subcontractor.
4. On a date no more than ten (10) business days after the
date hereof, Acstar agrees to pay to the Subcontractors listed in
Schedule B an amount equal to $11,564,003. The actual date of
such $11,564,003 payment and the deposit by Acstar of the
$1,335,997 into the escrow account pursuant to paragraph 5 hereof
is herein referred to as the "Effective Date." Prior to or
contemporaneously with the payments set forth on Schedule B,
Kaiser, Acstar, Bayer and El Dorado Nitrogen shall receive from
each such Subcontractor, as a condition of the payments set forth
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<PAGE>
on Schedule B, a full release of claims and liens for all work
performed prior to February 1, 1999, and a written
acknowledgement and waiver that such payment constitutes payment
of all amounts due to such Subcontractors for work performed or
materials provided prior to February 1, 1999. Acstar shall
receive from each Subcontractor listed on Schedule B a complete
and full release of any and all claims or rights such
Subcontractor may have against Acstar under the Bond, with the
exception of Shaw Constructors in the amount of $1.0 million, and
with the exception of Insulations Inc., which will provide the
same release upon receipt of the payment in paragraph 6.
5. Also on a date no more than 10 business days after the
date hereof, Acstar shall pay the Disputed Amount of $1,335,997
to Wilmington Trust Company, as Escrow Agent (the "Escrow Agent")
for El Dorado Nitrogen, El Dorado Chemical and Bayer, to be held
by it and distributed under and in accordance with the Escrow
Agreement, in the form attached hereto as Exhibit A (the "Escrow
Agreement"). Such payment to the Escrow Agent shall be final
and, except as specifically provided below, neither Kaiser nor
Acstar shall have any right or claim to recovery of any portion
thereof, whether or not paid to Shaw under the terms of the
Escrow Agreement. Kaiser and El Dorado Nitrogen shall cooperate
in the performance by Kaiser of the third party audit of the
invoices from Shaw Constructors. In the event that any portion of
the Disputed Amount is not paid to Shaw Constructors (the
"Recovery"), then Kaiser shall first receive reimbursement from
the Recovery of the out of pocket audit fees actually incurred by
Kaiser. After reimbursement of such audit fees, then the
Recovery, up to the amount of $600,000, shall be used by El
Dorado Nitrogen first for payment and satisfaction of its
obligation under paragraph 7 to make the El Dorado Payment. In
the event any funds remain in said Escrow Account after the full
disbursement of the amounts set forth in the preceding sentence,
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then provided Kaiser has made the payments under paragraph 6,
Kaiser may use any such remaining funds to pay for costs it
incurred at the Project other than the $500,000 amount pursuant
to paragraph 6 hereof.
6. With respect to Subcontractor Claims, Kaiser and Kaiser
International jointly and severally shall pay an amount equal to
$500,000 (the "$500,000 Amount") in two (2) installments of
$250,000 each. The first $250,000 installment shall be paid by
Kaiser no later than April 1, 1999. The second $250,000
installment shall be paid by Kaiser no later than May 1, 1999.
The payments of the $500,000 Amount shall be disbursed in
accordance with Schedule C attached hereto. All parties shall
receive, as a condition of the payments set forth on Schedule C,
a full release of liens for all work performed prior to February
1, 1999, and a written acknowledgement and waiver that such
payment constitutes full and final payment of all amounts due to
such Subcontractors for work performed or materials provided
prior to February 1, 1999. Acstar shall receive from each
Subcontractor listed on Schedule C a complete and full release of
any and all claims or rights such Subcontractor may have against
Acstar under the Bond.
7. Also, with respect to Subcontractor Claims, El Dorado
Nitrogen shall pay to Subcontractors, for Subcontractor Claims
only and in connection with this Agreement only, up to a maximum
total amount of $600,000 (the "El Dorado Payment"), towards
Subcontractor Claims set forth in Schedule A. Kaiser and Kaiser
International jointly and severally shall pay all additional or
other amounts necessary to make full payment and satisfy all
amounts owed to any Subcontractors, material providers,
consultants or other costs associated with the Project incurred
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<PAGE>
prior to February 1, 1999. As a condition of such payments,
Acstar, Kaiser, Bayer and El Dorado Nitrogen shall receive a
release of claims and liens for all work performed prior to
February 1, 1999 and a written acknowledgement and waiver that
such payment constitutes full and final payment of all amounts
due to such Subcontractors for work performed, or services
provided, or materials provided prior to February 1, 1999. The
party paying such Subcontractor listed on Schedule A shall use
best efforts to obtain from such Subcontractor a complete and
full release of any and all claims or rights such Subcontractor
may have against Acstar under the Bond.
8. If Kaiser and Kaiser International shall fail to pay
the $500,000 Amount described in paragraph 6 above on the due
date of each installment, on a date five (5) Business Days
following the date on which the conditions set forth below have
been satisfied, Acstar shall pay such amount to the
Subcontractors in accordance with Schedule C. Acstar's
obligations under this paragraph 8 shall be subject to (i) its
prior full recovery of an amount equal to $12.9 million under the
Indemnification Agreement, (ii) its determination, as evidenced
by an opinion of its counsel, that it has a present and
enforceable right to recover such $500,000 and its ability to
obtain full satisfaction of said right, under the Indemnification
Agreement. Amounts paid by Acstar under this paragraph 8 shall
be distributed as though paid by Kaiser under paragraph 6.
9. El Dorado Nitrogen and El Dorado Chemical, jointly and
severally, hereby agree to indemnify Acstar and hold it harmless
from and against any and all Subcontractor Claims and any and
all claims for labor or material provided by a Subcontractor or
supplier to the Project, including all reasonable attorneys' fees
and other costs of litigation incurred by Acstar in defending any
such claims, except such fees and costs incurred prior to the
Effective Date. The indemnification obligation hereunder is
conditioned on Acstar providing written notice of any claim to El
Dorado Nitrogen and El Dorado Chemical, within 15 business days
for claims and within seven (7) business days for lawsuits, of
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<PAGE>
Acstar's receipt thereof. Upon receipt thereof, El Dorado
Nitrogen and El Dorado Chemical shall provide a defense for
Acstar against any such conforming claim.
10. On the Effective Date, the Notice of Default issued by
El Dorado Nitrogen against Kaiser shall be withdrawn without
prejudice.
11. Kaiser shall continue performance of the Contract as
EPC Contractor in accordance with the terms and conditions of the
Contract (except as expressly and specifically modified herein)
and provide, at no cost to El Dorado Nitrogen or El Dorado
Chemical, all the proper and appropriate supervisory personnel,
including, without limitation, all technical and engineering
personnel, all start-up and commissioning personnel, and such
other personnel necessary to manage and direct its Subcontractors
and perform all other necessary services to complete the Project,
as provided in the Contract, except as modified with respect to
Completion Dates by paragraph 13 hereof (the "Completion
Effort").
12. During said Completion Effort, El Dorado Nitrogen will
be represented by its consultant, Benham Constructors, Inc.
("Benham"), and Kaiser shall cooperate with Benham in its
participation in the Completion Effort. El Dorado Nitrogen shall
pay and be solely responsible for any and all compensation and
fees due Benham.
13. On the Effective Date, (i) a new deadline of April 15,
1999 will apply to the Project for initial production of Nitric
Acid, (ii) the Completion Date of the Project, as set forth in
Section 3 of the Contract, will be deemed to have been extended
to May 1, 1999 (the "Extended Completion Dates"),and Final
Completion and Final Acceptance, as set forth in Secion 4.7 of
the Contract, shall occur no later than June 1, 1999. Except for
initial production run testing and the performance test (as
required in the Contract), El Dorado Nitrogen shall determine the
operating rates and hours of operation of the Project. Kaiser
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<PAGE>
shall conduct the performance test (as required in the Contract)
at the earliest possible time after April 15, 1999, but no later
than May 15, 1999, but subject to El Dorado Nitrogen making the
Project reasonably available to Kaiser to perform the performance
tests and reasonably cooperating with Kaiser to facilitate the
performance tests. Expressly contingent on Kaiser's satisfaction
of those obligations set forth in paragraphs 6, 7, and 11 hereof,
on the Effective Date, El Dorado Nitrogen hereby releases and
waives any right it has to liquidated damages for accrued delays
prior to April 15, 1999. If, however, either of the Extended
Completion Dates is not achieved by Kaiser, as aforedescribed,
then Kaiser and Kaiser International, jointly and severally,
shall be liable to El Dorado Nitrogen for liquidated damages in
the amount of Forty-Four Thousand Dollars ($44,000) per day for
each day of the delay after April 15, 1999 or May 1, 1999, as the
case may be, until the requirement for that date is met, but in
no event shall the aggregate total of such liquidated damages
exceed $44,000 per day.
14. On the Effective Date, El Dorado Nitrogen and El Dorado
Chemical, on the one hand, and Kaiser and Kaiser International on
the other, hereby release each other from any and all claims,
causes of action, debts, damages, and demands whatsoever, each
ever had or now has against the other, or the other's parents,
subsidiaries or affiliates, arising out of or relating to the
liquidated damages under the Contract prior to April 15, 1999 or
the failure of Kaiser or Kaiser International to complete the
Contract or the Project prior to March 23, 1999, provided,
however, that this release in no manner affects any obligation
set forth in the Contract including, without limitation, all
warranty obligations, design obligations and Project performance
guarantees of Kaiser, Kaiser International or Kaiser's
Subcontractors under the Contract (unless and solely to the
extent such obligation is specifically and expressly modified by
this Agreement) or any of the obligations set forth in this
Agreement. The effectiveness of this release is subject to the
8
<PAGE>
performance by El Dorado Nitrogen and El Dorado Chemical, on the
one hand, and Kaiser and Kaiser International, on the other hand,
of their respective obligations in this Agreement and in the
Contract.
15. Except as specifically and expressly modified in this
Agreement, all obligations and responsibilities of the parties
under the Contract remain unchanged and in full force and effect.
16. Upon satisfaction of Acstar's obligations in paragraph
4 and paragraph 8 (if any shall arise), El Dorado Nitrogen and
Bayer, as obligees under the Bond, and Kaiser as principal under
the Bond, hereby release Acstar as surety under the Bond from any
and all claims, causes of action, debts, damages and demands
whatsoever any ever had, now has or may have against Acstar, its
parents, subsidiaries or affiliates, arising out of or relating
to the Bond on the Project in any way whatsoever from the
beginning of the world to the date hereof.
17. Kaiser shall provide to El Dorado Nitrogen on behalf of
itself and its Subcontractors a complete set of documentation as
required by the Contractincluding, but not limited to, all
inspection reports, test reports, approvals and certifications of
the work, in accordance with Exhibit B.
18. This Agreement represents and contains the entire
understanding of the parties and may not be amended except by a
writing executed by all parties.
19. Subject to paragraph 3 hereof, the parties acknowledge
that Schedules A, B, and C may require adjustment in the event it
is determined that the exact amounts due to Subcontractors
differs from that set out in those schedules.
20. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same Agreement.
9
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have made and executed this
Agreement on the date as first set forth above.
ATTEST: EL DORADO NITROGEN COMPANY
_________________________ By: _________________________
Its
_________________________ Duly Authorized
ATTEST: EL DORADO CHEMICAL COMPANY
__________________________ By: _________________________
Its
___________________________ Duly Authorized
ATTEST: BAYER CORPORATION
__________________________ By: _________________________
Its
__________________________ Duly Authorized
ATTEST: ICF KAISER ENGINEERS, INC.
_________________________ By: _________________________
Its
___________________________ Duly Authorized
10
<PAGE>
ATTEST: ACSTAR INSURANCE COMPANY
__________________________ By: _________________________
Its
__________________________ Duly Authorized
ATTEST: ICF KAISER INTERNATIONAL ,
INC.
__________________________ By: _________________________
Its
________________________ Duly Authorized
11
<PAGE>
<PAGE>
SCHEDULE "A"
____________
Contract/PO Number Payor Value
___________ ______ _____ ______
Adrian 3003 EDNC $20,708.48
Cajun 3004 EDNC 41,657.00
Cooper Heat 3019 EDNC 17,616.0
Epcon 3103 EDNC 145,930.50
Grinnel 3015 EDNC 17,488.00
Tracer 3016 EDNC 103,518.81
Pace EDNC 100,000.00
Pipe Tech 3018 EDNC 114,671.74
Marley 3005 EDNC 18,736.00
Phillips 3007 EDNC 18,501.22
League City 3011 KAISER 6,843.00
Plant Maint. Service 3105 KAISER 1,568.00
Misc. Equip. KAISER 7,061.00
Heat Exchangers KAISER 1,872.00
Filters KAISER 7,588.00
Pumps KAISER 7,157.00
Electrical Equip. KAISER 17,684.00
Structural KAISER 3,487.00
Expansion Joints KAISER 14,865.00
Pipe/Fittings/Etc. KAISER 26,323.00
Pipe Supports KAISER 5,747.00
Start-Up Vendor PO's KAISER 102,092.00
___________
TOTAL $801,114.80
===========
12
<PAGE>
<PAGE>
SCHEDULE "B"
____________
Contract/PO Number Value
___________ ______ _______
Shaw 3009 $11,624,600.93
ISC 3013 896,920.33
Insulation Inc. 3017 378,478.74
______________
TOTAL $12,900,000.00
==============
13
<PAGE>
<PAGE>
SCHEDULE "C"
____________
Contract/PO Number Value
___________ ______ _____
April
_____
Insulation Inc. 3017 $212,812.19
Adrian 37,187.81
___________
SUBTOTAL - APRIL $250,000.00
May
___
Adrian 3003 $250,000.00
SUBTOTAL - MAY $250,000.00
___________
TOTAL -- APRIL & MAY $500,000.00
===========
14
<PAGE>
<PAGE>
EXHIBIT "A"
ESCROW AGREEMENT
Escrow Agreement, dated as of March 23, 1999 (the "Escrow
Agreement"), by and among El Dorado Nitrogen Company, an
Oklahoma corporation ("EDNC"), as construction agent; El Dorado
Chemical Company, an Oklahoma corporation ("EDCC"); and Bayer
Corporation, an Indiana corporation ("Bayer"); and Wilmington
Trust Company, as escrow agent (the "Escrow Agent").
PRELIMINARY STATEMENT
WHEREAS, EDNC, EDCC, Bayer, ICF Kaiser Engineers, Inc., an
Ohio corporation ("Kaiser"), ICF Kaiser International, Inc., a
Delaware corporation ("Kaiser International"), and Acstar
Insurance Company, a Connecticut corporation ("Acstar"), are
parties to a certain Agreement dated as of March 23, 1999 (the
"Global Agreement"), pursuant to which certain funds are to be
held in escrow and disbursed in conformity with the terms hereof;
and
WHEREAS, the Escrow Agent is willing to act as escrow agent
hereunder;
NOW, THEREFORE, in consideration of the foregoing premises
and the respective agreements of the parties hereinafter set
forth, and intending to be legally bound, the parties hereto
agree as follows:
ARTICLE I
APPOINTMENT OF ESCROW AGENT;
DEPOSIT OF ESCROW AMOUNT
Section 1.1 Escrow Agent. The parties hereto hereby
appoint Wilmington Trust Company, as escrow agent hereunder and
Wilmington Trust Company hereby accepts such appointment and
agrees to serve as escrow agent, establish the Escrow Account (as
defined below) and to hold and dispose of the Escrow Amount (as
defined below) exclusively in accordance with the terms of this
Escrow Agreement.
Section 1.2 Deposit of Escrow Amount.
(a) Acstar shall deliver to the Escrow Agent
immediately available funds in the amount of One Million
Three Hundred Seventy-Four Thousand Six Hundred and 93/100
Dollars ($1,374,600.93) ("Escrow Amount") for deposit in
trust account #48183-0 (the "Escrow Account") at Wilmington
Trust Company, to be held in escrow and in trust by the
Escrow Agent; and
(b) The Escrow Agent will act as custodian of the
Escrow Amount. The Escrow Agent will receive, hold, invest
and release the Escrow Amount in accordance with the terms
of this Escrow Agreement.
<PAGE>
Section 1.3 Investment of Escrow Amount.
(a) Until such time as the entire Escrow Amount has
been released pursuant to the terms hereof, the Escrow Agent
shall invest the Escrow Amount in the Money Market Portfolio
of the Rodney Square Fund, a mutual fund managed by Rodney
Square Management Corporation, a subsidiary of Escrow Agent.
The parties acknowledge that shares in this mutual fund are
not obligations of Wilmington Trust Company, are not
deposits and are not insured by the FDIC. Escrow Agent or
its affiliate is compensated by the mutual fund for services
rendered in its capacity as investment advisor, custodian
and/or transfer agent, and such compensation is both
described in detail in the prospectus for the fund under the
heading "Management of the Fund", and is in addition to the
compensation, if any, paid to Wilmington Trust Company in
its capacity as Escrow Agent hereunder. The Escrow Agent
shall have the power to sell or liquidate the foregoing
investments whenever the Escrow Agent shall be required to
distribute all or any portion of the Escrow Amount pursuant
to Section 2.1 hereof.
(b) Interest earned and credited on the Escrow Amount,
less escrow fees payable under Section 3.7 hereof, shall be
added to the principal deposited in the Escrow Account with
the Escrow Agent hereunder and distributed in conformity
with the provisions of Article II hereof. EDNC shall be
liable for and pay all taxes due and payable on any interest
earned and credited on the Escrow Amount. In connection
with any investment of the Escrow Amount, EDNC shall provide
the Escrow Agent with its taxpayer identification number.
(c) The Escrow Agent shall not have any liability for
any loss sustained as a result of any investment made in
accordance with this Section 1.3 (including as a result of
any liquidation of any such investment prior to its
maturity), except as a result of the Escrow Agent's bad
faith, gross negligence or willful misconduct.
Section 1.4 Manner of Payment. The Escrow Agent shall
release the Escrow Amount and any interest earned thereon in
accordance with the provisions of this Section 1.4 and Article II
hereof. Whenever the Escrow Agent shall be required by this
Escrow Agreement to deliver any Escrow Amount in conformity with
any disbursement request delivered by EDNC, EDCC and Bayer, the
Escrow Agent shall make such payment as provided in Article II
from any available Escrow Amount. All cash payments required to
be made hereunder by the Escrow Agent from the Escrow Amount
shall be made in United States Dollars by wire transfer or other
immediately available funds to the account and payee designated
by EDNC, EDCC and Bayer in the relevant Disbursement Request
(defined below).
2
<PAGE>
ARTICLE II
RELEASE OF ESCROW AMOUNT
Subject to Section 3.1 hereof, the Escrow Agent shall
release the Escrow Amount and any interest earned thereon only as
follows:
Section 2.1 Release of Escrow Amount.
(a) Within seven (7) business days of the date hereof,
Kaiser is required pursuant to the terms of that certain
Agreement (the "Kaiser Agreement") of even date herewith between
Kaiser and Shaw Constructors (a/k/a United Crafts, Inc., a Shaw
Group Company) ("Shaw"), to commence an audit of certain
outstanding invoices of Shaw related to the performance of work
at the El Dorado Nitrogen nitric acid plant site in Baytown,
Texas (the "Project') prior to January 30, 1999 (the "Audit").
Subject to Sections 2.1(b) and (c), following completion of the
Audit, Kaiser is required pursuant to the Kaiser Agreement to
notify EDNC in writing (a "Kaiser Disbursement Notice") that
certain funds in the Escrow Account are to be released and paid
to Shaw, if the results of the Audit indicate that amounts are
undisputed and are due and payable to Shaw. Upon EDNC's receipt
of a Kaiser Disbursement Notice indicating that any portion of
the Escrow Funds is to be paid to Shaw, EDNC, EDCC and Bayer
shall in writing promptly advise the Escrow Agent ("Escrow
Release Notice") that the amount set forth in such Kaiser
Disbursement Notice shall be paid to Shaw by the Escrow Agent by
the second business day following receipt by the Escrow Agent of
such Escrow Release Notice.
(b) The Kaiser Agreement provides that in the event that
amounts payable to Shaw remain in dispute after completion of the
Audit, Kaiser and Shaw shall have thirty days to attempt to
resolve such dispute, and if the dispute is resolved within such
thirty day period, then the procedures described in clause (a)
above following completion of the Audit shall apply.
(c) The Kaiser Agreement provides that in the event that
Kaiser and Shaw are unable to resolve their dispute within the
thirty-day period described in clause (b) above, the dispute
shall be submitted to binding arbitration, and upon receipt of a
certified copy of the decision of the arbitrator(s), EDNC, EDCC
and Bayer shall promptly provide the Escrow Agent with an Escrow
Release Notice, directing the Escrow Agent to pay to Shaw on the
second business day following receipt by the Escrow Agent of such
Escrow Release Notice, the amount that the arbitrator(s) have
awarded to Shaw, to the extent not in excess of the Escrow
Amount.
(d) Following resolution of the amounts in dispute between
Kaiser and Shaw and payment to Shaw by the Escrow Agent pursuant
to clause (a), (b) or (c) above, as applicable, the Escrow Agent
shall distribute the remainder of the funds constituting the
Escrow Amount to EDNC, and EDNC shall pay such funds to itself or
Kaiser, as required pursuant to Section 5 of the Global
Agreement. In addition, such distributions may be made to EDNC
3
<PAGE>
at any time prior to the resolution of the dispute between Kaiser
and Shaw if EDNC directs the Escrow Agent to make such
distributions pursuant to an Escrow Release Notice and certifies
to the Escrow Agent in writing that Shaw has provided written
consent to such release of funds to EDNC and that the results of
the Audit provide that such distributions should be made to EDNC
or Kaiser. EDNC shall immediately pay to Kaiser any portion of
such distributions to which it is entitled in accordance with the
results of the Audit.
ARTICLE III
ESCROW AGENT; RIGHTS AND OBLIGATIONS
Section 3.1 Resignation. Except as otherwise expressly
provided in this Section 3.1, the Escrow Agent may resign and be
discharged from its duties hereunder at any time by giving notice
of such resignation to the parties hereto specifying a date (not
less than thirty (30) days after the date of receipt by the
parties of such notice) when such resignation shall take effect.
Upon such notice, a successor escrow agent shall be appointed
with the mutual consent of the remaining parties, such successor
escrow agent to become Escrow Agent hereunder upon the
resignation date specified in such notice. If the parties are
unable to agree upon a successor Escrow Agent within thirty (30)
days after delivery of such notice, then anything to the contrary
in Article II hereof notwithstanding, the Escrow Agent may
deposit the Escrow Amount with a court of competent jurisdiction
in the State of Delaware. In such event, the Escrow Agent shall
have no further liability under this Escrow Agreement. The
Escrow Agent shall continue to serve until its successor accepts
the escrow and receives the Escrow Amount or the Escrow Amount is
deposited in a court of competent jurisdiction in the State of
Delaware. The parties (excluding the Escrow Agent) shall have
the right at any time upon their unanimous consent to appoint a
new escrow agent by giving notice thereof to the then-acting
Escrow Agent.
Section 3.2 Limitation of Duties. The duties and
obligations of the Escrow Agent shall be determined solely by the
express provisions of this Escrow Agreement. Except as otherwise
expressly set forth herein, the Escrow Agent shall not be bound
in any way by any other agreement or contract among any of the
parties.
Section 3.3 Reliance. The Escrow Agent may act in reliance
upon any writing, instrument or signature which it in good faith
believes to be genuine, may assume the validity and accuracy of
any statement or assertion contained in such writing or
instrument and may assume that any person purporting to give any
writing, notice, advice or instructions in connection with the
provisions hereof has been duly authorized to do so. The Escrow
Agent shall not be liable in any manner for the sufficiency or
correctness as to form, manner of execution, content or validity
of any instrument deposited in escrow, nor as to the identity,
authority or right of any person executing the same; and its
duties hereunder shall be limited to the safekeeping of such
certificates, moneys, instruments or other documents received by
4
<PAGE>
it as such escrow holder, and for the disposition of the same in
accordance with the terms of this Escrow Agreement.
Section 3.4 Indemnification. Each party hereto jointly and
severally agrees to indemnify and hold harmless the Escrow Agent
from and against all claims, liabilities, losses, actions, suits
or proceedings at law or in equity, or any other expenses, fees
or charges of any character or nature, which the Escrow Agent may
incur or with which the Escrow Agent may be threatened by reason
of its acting as Escrow Agent under this Escrow Agreement and in
connection therewith to indemnify the Escrow Agent against any
and all expenses, including reasonable attorneys' fees of one
firm and the cost of defending any action, suit or proceedings or
resisting any claim under this Escrow Agreement. Notwithstanding
the foregoing, it is specifically understood and agreed that in
the event the Escrow Agent is determined to have acted in bad
faith, gross negligence or willful misconduct in the exercise of
its responsibilities hereunder or negligence in the handling of
funds, the indemnification provisions of this Escrow Agreement
shall to that extent not apply. Escrow Agent shall have a first
lien against the Escrow Account to secure the obligations of the
parties hereunder. The terms of this paragraph shall survive
termination of this Escrow Agreement.
Section 3.5 Parties Proceeding. If any two parties
(considering EDNC and EDCC as a single party) shall be in
disagreement about the interpretation of this Escrow Agreement,
or rights or obligations hereunder, or the propriety of any
action taken by the Escrow Agent hereunder, any one of the
parties (including the Escrow Agent) may, in its discretion,
commence a proceeding pursuant to Section 4.2 below to resolve
said disagreement. The Escrow Agent shall be indemnified for all
costs, including reasonable attorneys' fees, in connection with
such proceeding, and shall be fully protected in suspending all
or a part of its activities under this Escrow Agreement until an
order or judgment is received.
Section 3.6 Counsel. The Escrow Agent may consult with
independent counsel of its own choosing and shall have full and
complete authorization and protection for any action taken or
suffered by it hereunder in good faith in accordance with the
opinion of such counsel. The Escrow Agent shall otherwise not be
liable for any mistakes of fact or error of judgment or for any
acts or omissions of any kind unless caused by its gross
negligence or willful misconduct.
Section 3.7 Fees. The Escrow Agent shall be paid a fee of
U.S. $2,000.00, which shall be paid 50% by EDNC and 50% by
Kaiser. In addition, the Escrow Agent shall be reimbursed by the
parties for all reasonable expenses, disbursements and advances
incurred or made by the Escrow Agent in performance of its duties
hereunder. Expenses, disbursements and advances shall be paid
solely out of the Escrow Amount, on a quarterly basis. Escrow
Agent shall have a first lien against the Escrow Account to
secure the obligations of the parties hereunder. The terms of
5
<PAGE>
this paragraph shall survive termination of this Escrow
Agreement.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. This Escrow Agreement shall
terminate upon the disbursement of all of the Escrow Amount
pursuant to the terms hereof.
Section 4.2 Governing Law and Dispute Resolution.
(a) The construction and interpretation of this
Agreement shall be governed by the internal laws of the State
of Delaware, without regard to its conflicts of laws
provisions.
(b) The parties hereto hereby irrevocably submit to the
jurisdiction of the United States District Court for the
District of Delaware (or, if subject matter jurisdiction in
that court is not available, in any state court located within
the City of Wilmington, Delaware) over any dispute arising out
of or relating to this Agreement or any of the transactions
contemplated hereby and each party hereby irrevocably agrees
that all claims in respect of such dispute or proceeding shall
be heard and determined in such court. The parties hereby
irrevocably waive, to the fullest extent permitted by
applicable Law, any objection which they may now or hereafter
have to the laying of venue of any such dispute brought in
such court or any defense of inconvenient forum.
(c) Each of the parties hereto hereby consents to
process being served by any party to this Escrow Agreement in
any suit, action or proceeding of the nature specified in
subsection (b) above by mailing of a copy thereof in
accordance with the provisions of Section 4.3 of this Escrow
Agreement.
Section 4.3 Notices. All notices, requests, demands and
other communications made hereunder shall be in writing and shall
be deemed duly given when delivered by overnight delivery or
personally against receipt or on the third day after deposit with
the post office by registered or certified mail, postage prepaid
and return receipt requested, as follows, or to such other address
or person as a party may hereafter designate by notice to the other
party:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Department
If to El Dorado Nitrogen and/or El Dorado Chemical:
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
Attention: President
6
<PAGE>
<PAGE>
With copies to:
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
Attention: General Counsel
If to Bayer:
Bayer Corporation
100 Bayer Road
Pittsburgh, Pennsylvania 15205-9741
Attention: Barry Phillips, Ph.D.
Paul Berry, Esq.
With copies to:
Christopher B. Carson, Esq.
Cohen & Grigsby, P.C.
11 Stanwix Street
Pittsburgh, Pennsylvania 15222
Section 4.4 Amendments. This Escrow Agreement and the
provisions hereof, may be amended or modified only by a written
document specifically referring to this Escrow Agreement and signed
by the parties hereto.
Section 4.5 Entire Agreement. This Escrow Agreement
constitutes the entire agreement among the parties with respect to
the subject matter hereof and supersedes all prior agreements and
understandings, oral and written, among the parties hereto with
respect to the subject matter hereof, except for the Global
Agreement.
Section 4.6 Counterparts. This Escrow Agreement may be
executed in two or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute but one and
the same instrument. Facsimile copies of the signed original of
this Agreement with originals to follow shall constitute execution
of this Escrow Agreement.
7
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed and delivered on the date first-above
written,
EL DORADO CHEMICAL COMPANY
By:________________________________
Its:________________________________
EL DORADO NITROGEN COMPANY,
Construction Agent
By:________________________________
Its:________________________________
WILMINGTON TRUST COMPANY
As Escrow Agent:
By:________________________________
Its:________________________________
BAYER CORPORATION
By:________________________________
Its:________________________________
8
<PAGE>
<PAGE>
EXHIBIT "B"
I. DOCUMENTATION REQUIRED FOR TURNOVER TO EDNC BEFORE "INITIAL
PRODUCTION OF ACID" DATE:
1. Piping and Instrument (P&I) Diagrams Fully updated, hand-
corrected version.
2. Hydrostatic Test Records
3. Pneumatic Test Records
4. Radiograph Reeder Sheets
5. Welder Certifications
6. Authorized Inspector (AI) Report of Boiler Code Facilities
(required before inspection by EDNC's insurer, see attached
information from Arkwright on insurer's documentation
requirements which also must be provided by ICF Kaiser)
7. Grounding Test Records
8. Loop Check Sheets (Certain non-critical loops may be waived by EDNC
to category II)
9. Relief Valve Certifications
10. List of Spare Parts Provided by ICF Kaiser
11. Electrical Breaker Settings
12. Preliminary Alarm and Trip Settings
13. Logic Diagrams
14. Instrument Locations and Tag Numbers (Acceptable as part of P&I
diagrams)
15. Letter from ICF Kaiser Attesting that all Required Certified
Drawings are Available.
16. Y2K Compliance Letters
17. Operating Manuals
18. Complete Set of Maintenance Manuals
19. Completed Process Hazards Review Documentation as Required by OSHA
20. Completed Pre-Start-Up Safety Review Documentation as Required by
OSHA.
* Records must be submitted in a timely fashion to allow review by
EDNC prior to "Initial Production of Acid" date.
II. Documentation Required for Turnover to EDNC by the later of "Final
Acceptance" Date, or if such is impractical and not necessary
for "Final Acceptance", by no later than June 1, 1999.
21. "As Built" Drawings and Final P&I Diagrams (Paper and CAD versions)
22. Three Dimensional Model of Phase 2 Facilities (current version)
23. Piping Isometrics (all existing drawings)
24. All Radiograph Records Records must be complete (actual
radiographs may be retained at ICF Kaiser or the
Subcontractor)
25. Weld Maps
26. All Other Applicable Non-Destructive Examination (NDE)
Documentation (to be determined)
15
<PAGE>
<PAGE>
EXHIBT "B" CONTINUED
27. Instrument Calibration Records (or within 48 hours of subsequent
tests)
28. Punchlist (Final Status)
29. Records of Initial Equipment Preparation (e.g. Alignment,
30. Lubrication, Rotation, Test Records)
Equipment Maintenance Procedures (if not included in maintenance
manuals)
31. Mil Test Reports (may be retained by Subcontractor)
32. Final Alarm and Trip Settings
33. Certified Equipment Drawings as required by Code
Available Mil Thickness Reports on Protective Coatings (as
available)
34. Concrete and Masonry Compaction Reports (as available)
35. "As-Built" Drawings for Field-Constructed Vessels such as Storage
36. Tanks (including API certificates)
37. PLC Final Documentation
16
AGREEMENT
between
EL DORADO CHEMICAL COMPANY
and
INTERNATIONAL ASSOCIATION OF
MACHINISTS AND AEROSPACE WORKERS,
AFL-CIO
LOCAL NO. 224
Effective: August 1, 1998
EL DORADO CHEMICAL COMPANY
El Dorado, Arkansas
<PAGE>
<PAGE>
TABLE OF CONTENTS
PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I APPLICATION OF AGREEMENT. . . . . . . . . . . . 1
ARTICLE II PERIOD OF AGREEMENT . . . . . . . . . . . . . . 1
ARTICLE III MANAGEMENT RIGHTS CLAUSE. . . . . . . . . . . . 1
ARTICLE IV CHECK-OFF OF UNION DUES . . . . . . . . . . . . 2
ARTICLE V SENIORITY . . . . . . . . . . . . . . . . . . . 2
Section 1. Length of Service. . . . . . . . 2
Section 2. Order of Seniority . . . . . . . 2
Section 3. Eligibility for Seniority. . . . 2
Section 4. Filling Vacancies. . . . . . . . 3
Section 5. Qualifications for Job . . . . . 4
Section 6. Seniority List . . . . . . . . . 4
Section 7. Seniority Accrued. . . . . . . . 4
Section 8. Seniority - Outside Assignments. 4
Section 9. Discharges and Reemployment. . . 4
Section 10. Status of Employees Laid Off . . 5
Section 11. Loss of Seniority. . . . . . . . 5
ARTICLE VI HOURS OF WORK AND OVERTIME. . . . . . . . . . . 6
Section 1. Hours of Work. . . . . . . . . . 6
Section 2. Overtime and Call-Out Pay Rates. 7
Section 3. Shift Change Notice. . . . . . . 7
Section 4. Meal Time. . . . . . . . . . . . 8
Section 5. No Reduction of Work Week as Result
of Overtime. . . . . . . . . . . 8
Section 6. Computation of Overtime. . . . . 8
Section 7. Distribution of Overtime and Call-
Out Time . . . . . . . . . . . . 8
Section 8. Call-Out . . . . . . . . . . . . 9
Section 8A. Advance Scheduling of Overtime . 9
Section 8B. Right to Assign Qualified Personnel
. . . . . . . . . . . . . . . . 9
Section 9. Holiday Pay. . . . . . . . . . . 10
Section 10. Reporting for Work and Not Used. 10
ARTICLE VII WAGE RATES AND CLASSIFICATIONS. . . . . . . . . 11
(i)
<PAGE>
Section 1. Wages and Pay Period . . . . . . 11
Section 2. Changes in Classification of Work 11
ARTICLE VIII HANDLING OF GRIEVANCES. . . . . . . . . . . . . 11
Section 1. Routine Submission . . . . . . . 11
Section 2. Arbitration. . . . . . . . . . . 12
ARTICLE IX SHOP COMMITTEE AND STEWARDS . . . . . . . . . . 14
Section 1. Shop Committee . . . . . . . . . 14
Section 2. Stewards . . . . . . . . . . . . 14
ARTICLE X LEAVE OF ABSENCE. . . . . . . . . . . . . . . . 14
Article 1. Personal Business. . . . . . . . 14
Article 2. Union Business . . . . . . . . . 14
Article 3. Sickness or Accident . . . . . . 15
Article 4. Notice to the Company. . . . . . 15
Article 5. Military Reserve Training. . . . 15
ARTICLE XI VACATIONS . . . . . . . . . . . . . . . . . . . 16
Section 1. . . . . . . . . . . . . . . . . 16
Section 2. . . . . . . . . . . . . . . . . 16
Section 3. . . . . . . . . . . . . . . . . 16
Section 4. . . . . . . . . . . . . . . . . 17
ARTICLE XII MILITARY LEAVE. . . . . . . . . . . . . . . . . 18
Section 1. Military Selective Service Act . 18
Section 2. Pay in Lieu of Vacation. . . . . 18
ARTICLE XIII PHYSICAL EXAMINATIONS . . . . . . . . . . . . . 18
Section 1. Periodical Examinations. . . . . 18
Section 2. Certificate of Physical Fitness. 18
Section 3. Dispute Resolution . . . . . . . 18
ARTICLE XIV MISCELLANEOUS AND GENERAL . . . . . . . . . . . 19
Section 1. Tool Check-In Time . . . . . . . 19
Section 2. Bulletin Board . . . . . . . . . 19
(ii)
<PAGE>
Section 3. Discrimination . . . . . . . . . 19
Section 4. Wage Rate Changes. . . . . . . . 19
Section 5. Safety Provisions. . . . . . . . 19
Section 6. Discharges . . . . . . . . . . . 20
Section 7. Recess Period (Smoking). . . . . 20
Section 8. Jury Duty. . . . . . . . . . . . 20
Section 9. Termination Pay. . . . . . . . . 20
Section 10. Contract Work. . . . . . . . . . 21
Section 11. Technical and Supervisory Employees
. . . . . . . . . . . . . . . . 21
Section 12. Minor Maintenance. . . . . . . . 21
Section 13. Minor Operating Functions. . . . 21
<PAGE>
ARTICLE XV VALIDITY OF CONTRACT . . . . . . . . . . . . . 21
ARTICLE XVI NOTICE. . . . . . . . . . . . . . . . . . . . . 22
ARTICLE XVII FUNERAL LEAVE . . . . . . . . . . . . . . . . . 22
ARTICLE XVIII GROUP INSURANCE . . . . . . . . . . . . . . . . 23
Section 1. Group Insurance and Retirement . 23
ARTICLE XIX NO STRIKE OR LOCKOUT. . . . . . . . . . . . . . 24
ARTICLE XX SERVICE WITH COMPANY. . . . . . . . . . . . . . 24
ARTICLE XXI RETIREMENT AGE. . . . . . . . . . . . . . . . . 24
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT "A" BASIC HOURLY WAGE RATE. . . . . . . . . . . . . 26
EXHIBIT "B" CLOTHING ALLOWANCE. . . . . . . . . . . . . . . 26
EXHIBIT "C" PART 1
RECOGNIZED MAINTENANCE WORK GROUPS. . . . . . . 27
EXHIBIT "D" EMPLOYEE DUES AUTHORIZATION LETTER. . . . . . . 28
AMERICANS WITH DISABILITIES ACT LETTER OF UNDERSTANDING. . . . 29
SHIFT DIFFERENTIAL LETTER OF UNDERSTANDING . . . . . . . . . . 30
(iii)
<PAGE>
<PAGE>
PREAMBLE
This Agreement is made and entered into by and between EL
DORADO CHEMICAL COMPANY (hereinafter referred to as the "Company"),
and the INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE
WORKERS, AFL-CIO, LOCAL NO. 224 (hereinafter referred to as the
"Union"), which the Company recognizes as the sole bargaining
agency for the Maintenance employees of the Company at its chemical
plant located north of El Dorado, Arkansas, who are eligible for
membership in the Union in accordance with the Labor Management
Relations Act of 1947.
ARTICLE I
APPLICATION OF AGREEMENT
The Company hereby recognizes the Union as the exclusive
bargaining agency for the employees of the Company at said plant
who work in the capacities hereinafter stated in this Article I.
(a) All Maintenance employees, as described in Exhibit "A",
engaged in the installation, maintenance and repair of machinery
and equipment, but excluding all production, chemical and operating
employees, shipping attendants, office and clerical employees,
managers, supervisors and guards.
ARTICLE II
PERIOD OF AGREEMENT
This Agreement shall remain in full force and effect for a 3-
year contract term
commencing August 1, 1998, at 12:01 a.m., and ending 12:00
Midnight, August 3, 2001. At reasonable times after June 1, 2001,
the parties will meet to attempt to negotiate a new contract to be
effective for a period beginning after 12:01 a.m., August 4, 2001.
ARTICLE III
MANAGEMENT RIGHTS CLAUSE
The Union expressly recognizes that the Company has the
exclusive responsibility for and authority over (whether or not the
same was exercised heretofore) the management, operation and
maintenance of its facilities and, in furtherance thereof, has,
subject to the terms of this Agreement, the right to determine
policy affecting the selection, hiring, and training of employees;
to direct the work force and to schedule work; to institute and
enforce reasonable rules of conduct; to assure discipline and
efficient operations; to determine what work is to be done, what is
to be produced and by what means; to determine the quality and
quantity of workmanship; to determine the size and composition of
the work force; to determine the allocation and assignment of work
to employees; to determine the location of the business, including
the establishment of new locations or departments, divisions, or
subdivisions thereof; to arrange for work to be done by other
(1)
<PAGE>
companies or other divisions of the Company; to alter, combine, or
eliminate any job, operation, service, or department; to sell,
merge or discontinue the business or any phase thereof; provided,
however, in the exercise of these prerogatives, none of the
specific provisions of the Agreement shall be abridged. The
Company will not use the vehicle of subcontracting for the sole
purpose of laying off employees or reducing the number of hours
available to them.
ARTICLE IV
CHECK-OFF OF UNION DUES
Upon receipt of a signed authorization by an employee
requesting deductions from his wages for his monthly union dues,
the Company agrees to honor such authorization according to its
terms during the life of this Agreement. The form of such
individual authorization shall be as set forth in Exhibit "D"
hereto.
The Financial Secretary of Local 224, IAM-AW, shall, from time
to time, notify the Company in writing of the amount of the monthly
deduction to be made, from time to time, under this authorization.
All money so deducted by the Company shall be paid to the Union on
or before the end of the month during which deductions are made.
Upon receipt of written request by an employee, the Company shall,
after thirty (30) days' notice, discontinue dues deduction.
ARTICLE V
SENIORITY
Section 1. Length of Service.
Length of service in the bargaining unit and with the El
Dorado Plant shall, in that order, govern the promotion, demotion,
and transfer of employees.
Section 2. Order of Seniority.
An employee's seniority shall be determined as follows:
Order of Importance Seniority
___________________ __________
1st Bargaining Unit
2nd Plant
Section 3. Eligibility for Seniority.
An employee shall be first entitled to seniority in the
bargaining unit when he has been continuously employed in that unit
for 180 days; his seniority dating from the date of the beginning
of such employment.
(2)
<PAGE>
However, an employee who has been employed in the bargaining
unit, who has been laid off prior to his having been employed
therein for 180 days continuously, and who is reemployed in the
bargaining unit within 180 days from the date upon which he is laid
off, shall, upon such reemployment, be entitled to have the number
of days which he has worked in the bargaining unit, during the
period of his most recent previous employment herein, included in
any subsequent computation of his seniority in the bargaining unit
and shall be entitled to seniority when he has accrued 180 days on
that basis.
The Company shall have the right to layoff or discharge,
without cause, any employee who has not worked in the bargaining
unit a sufficient length of time to gain seniority, and such action
on the part of the Company shall not be the subject of a grievance
on the part of the Union under any provision of this Agreement.
Section 4. Filling Vacancies.
(a) Temporary and permanent vacancies will be filled only
when the Company sees a need to fill the vacancy. In the event the
Company sees a need to fill a vacancy, it will be filled by the
employee having the most bargaining unit seniority, who desires the
job, and who possesses a skill of the group in which the vacancy
occurs. Any person so promoted must accept the duties and
responsibilities of the job.
(b) When there is a permanent vacancy in a group and the
Company sees a need to fill that vacancy, the Company shall post
promptly, and keep posted for fifteen (15) days, notice on its
bulletin board of the job vacancy. It shall be the duty of an
employee who feels himself entitled to such job on account of his
seniority to file his sealed bid for such job with the Plant
Manager or his representative, and send a copy thereof to the
Chairman of the Shop Committee within said 15-day period. In order
to be considered valid, a bid must be signed, dated, and deposited
in a locked box marked "I.A. of M. and A.W. Bids" located at the
plant entrance gate.
Immediately upon expiration of the posting period of fifteen
(15) days, the names of all bidders will be posted on the bulletin
board, and the bidder having the most seniority and who desires the
job shall be assigned to the group and receive the "C" Mechanic
rate of pay if he possesses the necessary skill. In the event no
qualified bidder possessing the necessary skill bids on the
vacancy, the Company may hire a qualified employee from the
outside.
If he does not possess the skill, he will be reduced to the
rate that compares to his previous experience beginning not later
than the beginning of the work week following the week in which the
successful bidder is determined, provided the successful bidder is
available to report for work on that day.
If the group vacancy is not filled by the procedure set forth
above and the Company sees the need to fill the vacancy, a first-
year "E" Mechanic job will be posted for filling outside the
bargaining unit.
(3)
Notwithstanding any other provisions of this subsection (b),
it is agreed that the Company shall have the right at any time
during said 15-day posting period to withdraw the posting of a new
job in the event the Company decides that such job need not be
filled.
(c) Should an employee within a group who is entitled to a
promotion desire to waive his opportunity for that promotion, he
shall do so by signing a waiver.
(d) In the event that it becomes necessary to establish a
permanent rotating shift the Company will notify the Shop Committee
to discuss the procedure and shift to be implemented at least
thirty (30) calendar days before establishing such shift.
Section 5. Qualifications for Job.
(a) It is not the intention of the parties to this Agreement
that any employee shall be permitted to work on a job when he is
not qualified to perform the work which that job requires.
However, if, in the opinion of the Company, an employee is not
qualified for a particular job to which he would otherwise be
entitled by virtue of his seniority, and the Company determines
that an employee's application for the job shall be denied on the
basis of his lack of qualifications, the Company shall notify the
Chairman of the Shop Committee and the employee involved of their
decision, at least five (5) days prior to the date upon which any
other employee is permanently assigned to the job.
Section 6. Seniority List.
Seniority lists will be compiled on April 1 and October 1 and
will be available to all employees. One copy of each seniority
list will be furnished to the Shop Committee.
Section 7. Seniority Accrued.
Each employee shall retain the seniority accrued to him based
upon actual service at the El Dorado Plant.
Section 8. Seniority - Outside Assignments.
Any employee, after having established seniority under the
provisions of this Agreement, who is temporarily assigned to
another job by the Company (outside the bargaining unit) shall
continue, for not more than ninety (90) days per calendar year, on
a cumulative basis, to accrue seniority on his regular classifica
tion during such period of temporary assignment. If such employee
works more than ninety (90) days per calendar year on a cumulative
basis, he shall forfeit one (1) day of bargaining unit seniority
for each day in excess of ninety (90) days worked outside of the
bargaining unit during that calendar year.
(4)
<PAGE>
Section 9. Discharges and Reemployment.
When there is a reduction in the number of employees in the
bargaining unit, the employee last employed in the bargaining unit
shall be the first employee laid off. The employee laid off
through no fault of his own, who has the greatest bargaining unit
seniority, shall (subject to the following provisions of this
Article) be the person first reemployed in the event additional
employees are employed, provided that the person is qualified to
perform the duties of the job to which he would be assigned on
reemployment.
A person who has worked in the bargaining unit sufficiently
long to be entitled to seniority in that unit, and who is laid off
through no fault of his own, who has kept his current address on
file with the Company, and who continues to be entitled to
seniority under the terms of this Agreement shall (subject to the
following provisions of this Article) be given first consideration
for reemployment.
If reemployment is available for any such person, the Company
shall so notify him by letter (with a copy of such letter to the
Chairman of the Shop Committee), addressed to him at his address
then on file with the Company, and he shall be allowed fifteen (15)
days from the date upon which said letter was mailed, or until he
no longer retains his accrued seniority as provided in Section 10
of this Article V (whichever is the shorter period), in which to
notify the Company in writing of his desire to return to work. In
the event he delivers such notice, he shall be allowed seven (7)
days from the date of the delivery thereof to report for work;
provided, however, if the employee involved is, on the date which
he would otherwise be required to report for work totally disabled
to work, he shall, on or before that date, deliver to the Company
a statement in writing from a licensed physician stating that he is
so disabled, in which event the period within which he shall be
permitted to return to work shall be extended ninety (90) days.
Section 10. Status of Employees Laid Off.
The accrued seniority of an employee who has been laid off
through no fault of his own shall continue to exist from the date
of his layoff for the following periods:
Years of Service Period Seniority to Exist
________________ __________________________
0-180 days -0-
181 days to 2 years Length of previously accrued
seniority
2 years or more 2 years
Section 11. Loss of Seniority.
Seniority shall be lost and employment terminated for any of
the following reasons:
(a) Quitting.
(5)
<PAGE>
(b) Absence from work for three (3) consecutive days without
having notified the Company, unless physically impossible
to do so.
(c) Discharge for just cause.
(d) Failure to return at the expiration of a leave of absence
or vacation.
(e) If an employee misrepresents the reason for requesting a
leave of absence.
(f) If an employee fails to file for reinstatement within
ninety (90) days following discharge from the U.S.
Military Service.
(g) Failure to return to work from layoff within the time
specified in Section 9 of this Article.
(h) At the end of the period specified in Section 10 of this
Article, or upon earlier rejection after layoff of an
offer of reemployment in a classification equal to the
classification from which laid off.
ARTICLE VI
HOURS OF WORK AND OVERTIME
Section 1. Hours of Work.
(a) Regular base hours of work shall be eight (8) hours per
day and forty (40) hours per week.
(b) The work week shall begin at 12:01 a.m. each Monday and
end at 12:00 midnight the following Sunday. The work day shall
begin at 12:01 a.m. and end at 12:00 midnight.
(c) The work week shall normally be five (5) consecutive 8-
hour days, Monday through Friday, and will normally begin work at
7:00 a.m. and end at 3:30 p.m. with a 30-minute lunch period from
12:00 noon to 12:30 p.m.
(d) No employee shall be required to work more than twelve
(12) hours during any normal work day except in case of an
emergency.
(e) All employees shall be expected to report to work
promptly at the scheduled time. No employee shall be permitted to
work if such employee reports for work more than one and one-half
(1-1/2) hours after his regular scheduled reporting time, unless
such delay has been previously excused by the Company.
(6)
<PAGE>
(f) No employee shall be allowed to work more than sixteen
(16) continuous hours nor more than sixteen (16) hours in any one
day except in the case of an emergency. However, an employee will
be allowed to complete his regularly scheduled hours of work as
provided in Sections 5, 8 and 10 of this Article VI.
(g) Maintenance overhauls may be staffed on 8-hour, 10-hour,
or 12-hour shifts as may be necessitated by the needs of the
operation.
The Company will specify and select the number and classifica-
tions of personnel on each shift by work group classification for
each particular overhaul on a shift basis. Preference to shifts
will be governed by the employee's bargaining unit seniority.
Shift change notice will be handled as outlined in Article VI,
Section 3. In the event there are insufficient qualified personnel
on each shift, the Company shall have the right to assign qualified
personnel as needed.
Section 2. Overtime and Call-Out Pay Rates.
(a) Overtime and call-out rates shall be one and one-half
(1-1/2) times the regular rate and shall be paid for all work
performed in excess of forty (40) hours per week, continuous actual
work in excess of eight (8) hours, and for all work performed as a
result of call-out and for hours worked outside an employee's
regularly scheduled hours.
(b) Any employee who works over, beyond his regular scheduled
work day, shall be paid a minimum of three (3) hours at straight
time. If the employee is required to stay over beyond his regular
scheduled work day to attend meetings or to receive training, and
no production work is involved, he will receive pay for actual time
spent at one and one-half (1-1/2) times his regular rate of pay,
providing he has received a minimum of twenty-four (24) hours'
notice in advance.
(c) No employee shall work overtime without the approval of
his Foreman.
Section 3. Shift Change Notice.
(a) The Company shall pay each employee one and one-half
(1-1/2) times his regular rate of pay for the first shift of a
rearranged work schedule if the employee whose shift is changed
shall not have been notified of the change at least twenty-four
(24) hours prior to the beginning of said first shift. If notice
of employee's shift change shall be posted on his regular day off,
notice of the change shall be posted at least seventy-two (72)
hours prior to the beginning of said first shift. Any notice
required to be given to an employee under the provisions of this
Section 3 may be given by written notice posted on the general
bulletin board of the Company and the bulletin board of the Union,
and each employee named in any notice shall be deemed to have
received the notice at the time copies of said notices are posted
on said boards.
(b) The changing of an employee's shift, incident to the
return of an employee from sickness or accident, shall not be
(7)
<PAGE>
considered a change in shift within the meaning of this Section 3,
unless the absent employee has given the Company at least seventy-
two (72) hours' notice of his intention to return to work and the
time at which he will return to work by notifying his supervisor.
(c) The changing of an employee's shift from 7:00-3:30 to
7:00-3:00, or from 7:00-3:00 to 7:00-3:30 will not constitute a
shift change.
(d) A change in shift at the request of an employee shall not
be considered a change in shift for the purpose of this Section 3.
(e) No employee shall lose any time from his normally
scheduled 40-hour week occasioned by any shift change.
Section 4. Meal Time.
(a) If a "Day Man" is instructed to and continues to work
overtime past 6:00 p.m., he shall be allowed a 30-minute period
beginning at 6:00 p.m. for supper on Company time; and if said "Day
Man" then continues to work additional overtime, he shall be
allowed a 30-minute lunch period on Company time; each such period
to begin at the end of four (4) hours of additional continuous
overtime worked after 6:30 p.m.
(b) Any employee called for work outside of his regular
working hours, who is required to work more than four (4) consecu-
tive hours outside his regular hours, shall be allowed a 30-minute
period for a meal on Company time at the end of the fourth
consecutive hour and at the end of each consecutive 4-hour period
thereafter that said employee continues to work outside his regular
hours.
Section 5. No Reduction of Work Week as Result of Overtime.
No employee will be required to take any time off from his
regular work week because of overtime worked in that or any other
week. If an employee is required to work on his day off, he shall
not be forced to take another day off in lieu thereof.
Section 6. Computation of Overtime.
For the purpose of computing overtime under this Article, the
exact time worked, rounded to the nearest quarter hour, shall be
accounted for, which shall be paid for at the overtime rate.
There shall be no duplicate payment for daily overtime and
weekly overtime. If daily overtime is greater in any one work
week, only daily overtime shall be paid, or if weekly overtime is
greater in any one work week, only weekly overtime shall be paid.
There shall be no pyramiding of overtime.
(8)
<PAGE>
Section 7. Distribution of Overtime and Call-Out Time.
Overtime work opportunities shall initially be distributed, as
equitably as practicable, within each work group where the overtime
is required in accord with the Company's distribution policy. The
Company may then offer such work to employees in other work groups
who are qualified.
For the purpose of distributing overtime, the Company will
submit a list, biweekly, to the work group steward showing the
overtime worked, refused and overtime standing of each employee
covered within the group.
Each employee who is requested to report for overtime duty
shall report at the required time unless he shall first obtain
permission from his supervisor to be relieved of such duty.
Section 8. Call-Out.
An employee who is called out and reports for work outside his
regular working hours shall work until excused by the person then
supervising his work; provided that no one shall be required to
work longer than is provided in Section 1(d) of this Article. An
employee who is called out and reports for work shall be paid a
minimum for four (4) hours at time and one-half (1-1/2), even
though the full four (4) hours may not be worked because no work is
available, or he does not work at all because no work is available.
An employee called for such work, who works continuously until the
beginning of his regular hours of work and continues to work during
the regular hours of his scheduled work, shall not be considered to
have had a change in shift within the meaning of Section 3 of this
Article VI.
A description of the work or jobs to be done, or the problem
necessitating the call-out, is provided as accurately as possible
by the supervisor in order that the person being called may judge:
(a) whether or not he has the ability to do the work, and (b) about
how long he may have to work. It is not intended to have a person
come out on one job, then surprise him with a list of additional
jobs to be done. However, due to emergencies, it cannot be
guaranteed that he will only be required to do what he was called
for.
Notwithstanding the fact that an employee has been called out
for work, such employee shall perform his regular work schedule
during the remainder of the work week in which such call-out occurs
unless excused from such work.
If an employee is called out for work and works until the
beginning of his regular work schedule, the call-out will be
considered as ending at the beginning of his regular schedule.
(9)
<PAGE>
Section 8A. Advance Scheduling of Overtime.
Overtime may be scheduled up to three (3) weeks in advance of
the actual time required. In the event the scheduled overtime is
cancelled, eight (8) hours' notice will be given or a call-out will
be paid.
Section 8B. Right to Assign Qualified Personnel.
In the event overtime distribution and call-out procedures do
not provide the Company with sufficient, qualified personnel to
perform the overtime work, the Company shall have the right to
assign such work to qualified personnel. The performance of such
work is mandatory.
Section 9. Holiday Pay.
The following days shall be considered holidays and normally
no work will be performed on the designated holidays except in
cases of emergency, around-the-clock shift work, and in those
crafts where work is necessary for continued operations:
1. New Year's Day
2. Good Friday
3. Memorial Day
4. July Fourth
5. Labor Day
6. Columbus Day
7. Thanksgiving Day
8. Day after Thanksgiving
9. Last work day before Christmas holiday
10. Christmas Day
When any of these holidays fall on Sunday, the following
Monday will be observed as the holiday.
When any of these holidays fall on Saturday, the preceding
Friday will be observed as the holiday.
Each employee who is not required to work and who does not
work on a holiday shall be paid a bonus equivalent to eight (8)
hours at his regular rate at straight time pay, providing he has
worked his last scheduled work day immediately preceding the
holiday and his first scheduled work day following the holiday
unless the failure to work these days is because of confirmed
illness or accident no more than five (5) work days before or after
the holiday, unless the employee was excused in advance by the
Company.
Each employee who works on a holiday will be paid, in addition
to the 8-hour bonus mentioned above, one and one-half (1-1/2) times
his regular rate of pay.
(10)
<PAGE>
Section 10. Reporting for Work and Not Used.
Except when no work is available due to Act of God, such as
fire, flood, explosion, or tornado, an employee who reports for
duty on his regular schedule shall be given the opportunity of
working a full 8-hour shift.
ARTICLE VII
WAGE RATES AND CLASSIFICATIONS
Section 1. Wages and Pay Period.
The regular pay periods for employees subject to this
Agreement will cover every two (2) scheduled work weeks, and checks
will be available to the men on their regular shifts on the Friday
following completion of the 2-week period.
Each employee who works during the period beginning 12:01
a.m., August 1, 1998, and ending 12:00 Midnight, August 3, 2001,
shall be paid for his work in that classification on the basis of
the basic hourly wage rate for that classification shown on Exhibit
"A" to this Agreement. Each employee will be paid the applicable
clothing allowances provided on Exhibit "B" to this Agreement.
Section 2. Changes in Classification of Work.
(a) Each employee covered by any classification is expected
to perform any duties to which he may be assigned within his
classification or lower classification.
(b) It is understood and agreed by the parties hereto that
two (2) work groups shall be recognized under this Agreement. A
tabulation of the groups with explanatory notes is made in Exhibit
"C", Part 1, which is a part of this Agreement.
(c) All Maintenance personnel may be assigned to do any jobs
that they have the ability to perform subject to the provisions of
Article V, Section 5, and Article XIV, Section 5, of the current
contract.
(d) The Company reserves the right to increase or reduce, at
any time and from time to time, the number of men employed in any
group mentioned in Exhibit "C", Part 1, to that number of men
which, in the opinion of the Company, are required to perform work
in that group for maintaining the plant. Any such increase or
reduction of force in any group shall be made on the basis of
bargaining unit seniority in that group. The Company shall advise
the employee(s) affected seventy-two (72) hours in advance of any
permanent change in the number of persons who shall work in any
classification.
(11)
<PAGE>
ARTICLE VIII
HANDLING OF GRIEVANCES
Section 1. Routine Submission.
(a) For the purpose of adjusting a grievance arising out of
the application or interpretation of a written provision of the
Agreement, it is agreed that an employee, and/or with his Steward,
shall first seek adjustment of the matter with his Foreman; and, if
not resolved, the employee, and/or with his Steward, may submit the
grievance in writing to his Foreman. No grievance will be
considered unless it has been submitted to his Foreman within five
(5) working days after the employee knew or should have known that
the grievance occurred.
The Foreman shall advise the employee and/or the Steward, in
writing, within five (5) days (Saturdays, Sundays and holidays
excluded) of his decision on the grievance, if submitted. The
grievance must be filed, in writing, on grievance forms provided by
the Company and signed by the individual grievant.
If the grievance is not satisfactorily adjusted with the
Foreman, the employee and the Steward may submit the grievance to
the Shop Committee for handling with the Department Head.
(b) If the Shop Committee elects to process the grievance, it
shall submit the grievance to the Department Head, along with a
factual statement of the reasons that the Foreman's answer was not
satisfactory. The grievance must be submitted to the Department
Head within five (5) days (excluding Saturdays, Sundays and
holidays) after the date the Foreman advised the Steward and/or
employee of his decision. The Department Head shall, within seven
(7) calendar days following receipt of the grievance, meet with the
designated members of the Shop Committee at a time to be mutually
agreed upon. The Department Head shall advise the Shop Committee,
in writing, within five (5) days following this meeting (excluding
Saturdays, Sundays and holidays) of his decision regarding the
grievance.
(c) If the response of the Department Head is not satisfac-
tory, the Shop Committee may submit the matter, in writing, to the
Plant Manager within ten (10) days (excluding Saturdays, Sundays
and holidays) after the date the Department Head furnishes his
grievance response to the Committee. The Plant Manager shall,
within ten (10) calendar days following receipt of such grievance
(and documentation) meet with the designated members of the Shop
Committee, at a time to be mutually agreed upon. The Plant
Manager, or his authorized representative, shall render a decision
on the grievance, in writing, within ten (10) days (Saturdays,
Sundays and holidays excluded) following this meeting.
Section 2. Arbitration.
If the grievance is not adjusted satisfactorily through the
procedure hereinbefore mentioned, the issue may be referred to an
arbitrator. If the Union desires to submit such grievance to an
(12)
<PAGE>
impartial arbitrator (providing the grievance is one which does not
involve matters in which arbitration is specifically prohibited
under the terms of this Agreement, and which the Company and Union
have mutually agreed to submit to arbitration) it must notify the
Company of that fact, in writing, within thirty (30) days after the
date the Plant Manager, or other duly authorized representative,
advised the Workmen's Committee of his decision.
The Union and the Company shall make written application to
the Federal Mediation & Conciliation Service requesting a seven-
name arbitrator panel from which the parties shall select one (1)
arbitrator. The parties shall alternately each strike one name
until only one (1) name remains who shall act as Arbitrator. It is
understood that, starting with the first arbitration case following
the date of the execution of this Agreement, the Union shall strike
the first name. In the next case, the first name shall be stricken
by the Company, and alternately the Union and the Company thereafter.
Both the Company and the Union shall have the right to reject
two (2) panels submitted by the Federal Mediation & Conciliation
Service.
When the Arbitrator has been selected, he shall meet for the
consideration of the grievance as soon thereafter as is practical.
Any such procedure shall be held in El Dorado, Arkansas, unless the
parties unanimously decide otherwise.
The expense of the Arbitrator shall be shared equally by the
Company and the Union.
The Arbitrator shall decide only the grievance submitted to
him upon testimony presented to him by the Union and the Company,
and shall render his decision in writing.
Except as otherwise specifically provided in this Agreement,
the Arbitrator shall have no power to change the wages, hours, or
conditions of employment set forth in this Agreement; he shall have
no power to add to, subtract from or modify any of the terms of
this Agreement; he shall deal only with the grievance which
occasioned his appointment. He will require that the Union has the
burden of establishing its position on behalf of the employee,
except in a discipline and/or discharge case when the burden will
be on management.
The parties hereto shall comply fully with the award or
decision made by any such Arbitrator, and the decision of the
Arbitrator will be final and binding on both parties.
No provisions of this Article, or of any other Article of this
Agreement, shall deprive any employee covered by the terms of this
Agreement of any rights to which he may be entitled under Section
9(a) of the Labor Management Relations Act of 1947, or any other
Statute of the United States.
The Union has the authority to process, abandon, or settle
grievances on behalf of employees. It is provided, however, that
no grievance as to wage scales that shall be paid to all or any
group of the employees in the bargaining unit shall be submitted to
an arbiter, in any event.
(13)
<PAGE>
The question as to whether a person has been paid the rate to
which he is entitled, in accordance with the wage rates set forth
in Exhibit "A" to this Agreement, for work which he has performed
shall be a subject for arbitration.
The grievance and arbitration provisions provided for herein,
in addition to any other right or obligation under the Agreement,
are limited to grievances or clams arising and actually filed in
writing during the term of this Agreement.
In the event a grievance arises over a discharge or layoff,
the first and second steps of the grievance procedure may be
bypassed.
ARTICLE IX
SHOP COMMITTEE AND STEWARDS
Section 1. Shop Committee.
The Shop Committee, composed of four (4) members from the
employee work force, and management representatives, shall hold
regular meetings on a bimonthly basis. It shall be the responsi-
bility of the Shop Committee to submit a written agenda of each
subject it wishes to discuss with the Company no less than forty-
eight (48) hours before the day of any such meeting. Only three
(3) employees in any one group at any one time shall be a member of
the Committee.
Section 2. Stewards.
(a) A Steward and an assistant Steward may be elected in each
work group by the employees of that group, and the Union shall
submit to the Company, in writing, the names of each person so
designated. The Company shall consider the person so designated as
Steward and assistant Steward of each work group until notified, in
writing, to the contrary.
(b) Duly-elected Stewards or Committeemen shall be deemed to
possess top ranking seniority for purposes of layoff and recall
rights within his respective work group or classification while
acting as such.
ARTICLE X
LEAVE OF ABSENCE
Section 1. Personal Business.
If an employee desires to be off on personal business (not
emergencies), he may do so with the consent of the Company so long
as he does not desire to be off over two (2) work weeks and
provided that he gives the Company forty-eight (48) hours' notice
of his desire to be absent and the length of time he desires to be
off. Upon completion of such leave, he will resume employment on
the basis of uninterrupted service.
(14)
<PAGE>
Section 2. Union Business.
(a) The Company shall, upon a minimum of thirty (30) days'
prior written request from an employee and the President of Local
No. 224 of International Association of Machinists and Aerospace
Workers, grant a leave of absence, extending not longer than
fourteen (14) days, to the employee applying for such leave in
order that he may, during that leave, engage in work pertaining to
the business of Local No. 224 of International Association of
Machinists and Aerospace Workers.
Such a leave shall not be granted to more than one (1)
employee at any one time. Such employee shall not be granted such
a leave for more than an aggregate of thirty(30) days in any one
(1) calendar year.
(b) The Company shall grant (upon a minimum of sixty (60)
days advance prior written request of an employee and the President
or Vice President of International Association of Machinists and
Aerospace Workers) a leave of absence for a period not to exceed
one (1) year in order that the employee requesting such leave may,
during the period of such leave, work as any employee of Interna-
tional Association of Machinists and Aerospace Workers. Not more
than one (1) employee shall be permitted to be absent from work at
any one time on any such leave.
Section 3. Sickness or Accident.
If an employee who has established seniority is out of service
due to occupational injury or occupational disease suffered or
contracted while he is in the employment of the Company, he shall
retain his seniority accrued at the date of his disability and
continue to accrue seniority for a period of twenty-four (24)
months or length of previously-accrued seniority, whichever is
less, during the period of his disability as a result thereof. If
an employee who has established seniority is out of service due to
nonoccupational injury or disease suffered while he was in the
employment of the Company, he shall retain his accrued seniority
for a period of twenty-four (24) months and will accrue seniority
in the classification in which he was last regularly employed for
a period of one (1) year.
Under either of the above conditions, if an employee should
accept an equal or better job elsewhere, his seniority shall be
cancelled.
Section 4. Notice to the Company.
When an employee becomes aware of the fact that he is going to
be absent from work due to sickness, accident, or other emergency,
he must notify his supervisor as far in advance of his scheduled
shift as he/she has knowledge of such intended absence, but no less
than one (1) hour before the time he is due to report to work. In
the event the employee cannot contact his Supervisor, it is
permissible to contact any member of Management.
(15)
<PAGE>
Section 5. Military Reserve Training.
(a) Any regular employee (not probationary) may be granted a
special leave of absence for a period not to exceed fourteen (14)
days, plus a reasonable period to cover travel time, when required
for the purpose of engaging in a training program for Enlisted
Reserve, Reserve Officers, or National Guard Encampment, provided:
1. He furnishes the Company with a copy of orders from
the military authorities calling him for duty; and
2. He gives advance notice to his immediate supervisor
so that arrangements may be made for his replace-
ment during the period of his leave.
(b) Only one (1) leave of absence for Military Reserve
Training shall be granted to any employee during a calendar year.
ARTICLE XI
VACATIONS
Section 1.
Normal vacation accruals will be computed in accordance with
the following provisions:
(a) Two weeks (80 hours) - after having accrued one (1)
year's Company seniority;
(b) Three weeks (120 hours) - during the calendar year in
which an employee accrues six (6) year's plant seniority;
In computing length of service for vacations, time spent
working at the El Dorado Plant will be used.
Section 2.
Those employees who had previously accrued or who will accrue,
during the term of this Agreement, twelve (12) years or more
Company seniority shall be entitled to a vacation accrual of four
weeks (160 hours). Thereafter, and for all other employees, the
maximum vacation accrual shall be as provided in Section 1.
Section 3.
(a) Normally, all vacations will begin with the first work
day of the work week schedule.
(b) Vacation pay shall be based upon the straight time rate
of an employee's regular classification at the beginning of the
vacation and will be taken in accordance with his established work
(16)
<PAGE>
schedule. If a holiday, as defined in Article VI, occurs during an
employee's vacation period, the employee will receive pay for said
holiday as defined in Article VI.
(c) Each employee must take his vacation during the vacation
year (January 1-December 31) in which it falls due, subject to
subsections (d) and (i) below.
(d) If an employee is not permitted to take his vacation in
any calendar year in which it is due because the Company finds it
not convenient to excuse him from work, he shall be paid a sum
equal to the sum to which he would have been entitled for working
at his regular job based on straight-time pay at normal working
schedule during the last part of that year equal to the number of
weeks' vacation to which he is entitled.
(e) Except with special permission of the Company, no
employee shall be permitted to begin a vacation in any year within
three (3) months of the date of the end of the vacation taken by
him during the preceding calendar year, and any employee who has
received pay in lieu of vacation for one (1) calendar year shall be
entitled to his next annual vacation before March 1 of the
following year, if it is practical for the Company to give him a
vacation.
(f) An employee who (a) resigns, (b) retires, (c) is laid off
as part of a reduction in forces, or (d) is granted a military
leave under the provisions of Article XII, at a time when he has
earned vacation to that date but has not taken, nor previously
received pay in lieu of, shall be paid in lieu of any vacation he
has earned to that date but has not taken, nor previously received
pay in lieu of.
Computation of vacation under this section will be earned at
the rate of one-twelfth (1/12th) for each month from employee's
anniversary date. Sixteen (16) or more calendar days of employment
in any calendar month will be considered a full month in computing
vacation accruals.
(g) An employee will not be eligible for overtime or call-out
during the period beginning with the first day of his vacation and
until his first scheduled work day following completion of his
vacation.
(h) In the event of the death of any employee who was then
otherwise eligible for a vacation but who had not taken it, a sum
of money equal to pay in lieu of such vacation shall be paid to the
person(s) who shall be entitled to the personal property of such
decedent.
(i) No employee shall receive pay in lieu of vacation except
as provided in Article XI, Section 2(d). However, when an employee
is absent from work due to authorized occupational injury or
illness, or personal sick leave, and has not returned to work by
December 31, he may, at the Company's option, be permitted to take
his vacation or receive vacation pay between January 1, and April
1 of the following year.
(17)
<PAGE>
Section 4.
The vacation schedule will be initiated January 2nd of each
year for those eligible for vacation in that year. Employees shall
choose their vacation periods in order of their bargaining unit
seniority. The Company will, insofar as operations permit, arrange
by choice and by seniority the employee's request in the vacation
schedule. An employee not submitting his vacation preference
within a reasonable time after being contacted will have his
vacation scheduled during the year at a time convenient to the
plant operations.
Normally, subject to operational requirements, the Company
will permit from each Maintenance Work Group, a maximum of twenty
(20%) percent of the active available employees to be on vacation
at the same time.
ARTICLE XII
MILITARY LEAVE
Section 1. Military Selective Service Act.
The rights of employees of the Company who enter Military
Service during the term of this Agreement will be governed in all
respects by the Military Selection Service Act including amend-
ments.
Section 2. Pay in Lieu of Vacation.
Each such employee who is entitled to a vacation under the
vacation policy of the Company at the time he leaves to enter the
Armed Forces, who elects not to take the vacation but to receive
pay in lieu thereof, shall, upon furnishing to the Company a
certificate from his commanding officer establishing the fact that
he had been inducted into the military service, be paid the amount
of money he would have received had he taken his vacation just
prior to the beginning of his military leave.
ARTICLE XIII
PHYSICAL EXAMINATIONS
Section 1. Periodical Examinations.
The Company may, from time to time, require all employees to
have periodical physical examinations by a doctor selected by the
Company. However, such examinations shall not be used for the
purpose of discriminating against an employee. Each employee shall
receive his regular rate of pay for all time required to be
examined as provided in this Section 1.
Section 2. Certificate of Physical Fitness.
In the case of an employee being absent from work due to
illness or physical impairment, he may be required to present a
certificate of physical fitness, signed by a licensed physician,
before being readmitted to work. This rule, however, shall not
(18)
<PAGE>
limit the right of the Company to require physical examination by
a physician in the Company's service in exceptional cases of
constantly recurring absence from duty.
Section 3. Dispute Resolution.
Notwithstanding any of the provisions of Article VIII of this
Agreement, in case a dispute arises over the physical fitness of an
employee to return to work or continue to work, a board of three
(3) physicians shall be selected; one by the Company, one by the
employee, and one selected by the two so named. The decisions of
the majority of this board shall be final and binding.
ARTICLE XIV
MISCELLANEOUS AND GENERAL
Section 1. Tool Check-in Time.
Employees will be allowed fifteen (15) minutes time to clean
and check in their tools before quitting time, if such action is
required by them.
Section 2. Bulletin Board.
The Company shall maintain at the plant entrance gate at the
Chemical Plant a bulletin board which shall be designated as "Local
No. 224 Bulletin Board" and shall be for the use of the Union for
posting -- subject to the approval of the Company -- of any matters
of interest to or affecting the business of the Union. It is
understood and agreed that the posting of notices by the Union
within the plant area will be on this bulletin board only and will
be posted by the Chairman of the Shop Committee or his recognized
representative. This bulletin board will be locked with a key,
released to the Chairman of the Shop Committee and to the Company.
Section 3. Discrimination.
There shall be no discrimination by the Company against any
employee with respect to any conditions of employment on account of
his membership in this labor union, or on account of any activity
undertaken in good faith in his capacity as a representative of
other employees. The Union shall not discriminate against any
employee who is not a member of the Union.
Where the male gender is used in this contract, it is intended
to refer to both male and female. It is a continuing policy of the
Company and the Union that the provisions of this Agreement shall
be applied to all employees without regard to race, color,
religion, sex, physical disability, national origin, or age.
(19)
<PAGE>
Section 4. Wage Rate Changes.
There shall be no change in the basic hourly wage rates set
forth in Exhibit "A" to this Agreement, or in the clothing
allowance set forth in Exhibit "B" to this Agreement, during the
term of this Agreement.
Section 5. Safety Provisions.
The Company shall continue to make reasonable provisions for
the safety and the health of its employees at the plant during
hours of their employment. Protective devices from injury shall be
provided by the Company. Employees, subject to this Agreement,
will abide by safe practice rules and regulations of the Company,
and failure to do so may be considered grounds for dismissal.
No employee shall be required to perform services which, in
the considered judgment of the Company and the Union, seriously
endanger his physical safety; his refusal to do such work shall not
warrant or justify discharge. If any employee refused to perform
such work, representatives of the Company and the Union shall
immediately attempt to decide the safety factor. Should they be
unable to agree, the decision of a representative of the Safety
Department of the Company shall be obtained. If the employee still
feels an unsafe condition exists, he will not be required to
perform that given job, and the Company will have the work done by
any means it elects.
Section 6. Discharges.
It is agreed by and between the Company and the Union that the
Company may, without limitation upon its right to discharge an
employee for any other valid reason, discharge any employee,
subject to this Agreement, for the violation of any of the
Company's rules or regulations, which said rules and regulations
heretofore have been approved by both the Company and the Union.
Section 7. Recess Period (Smoking).
Where men are required to work continuously in restricted and
confined areas where smoking is not permitted, the Foreman is
authorized to grant a recess of not longer than ten (10) minutes to
employees upon request, providing in his judgment, work conditions
permit; however, no employee shall be granted more than two (2)
such recesses in any one (1) normal work day.
Section 8. Jury Duty.
Each employee of the Company who is called for service upon
any grand jury, petit jury or coroner jury shall, after furnishing
to his Foreman, a certificate in evidence of his jury service, be
paid by the Company for each day which he serves upon said jury a
sum equal to the difference between the amount he would have earned
if he had been required to work for the Company on that day for the
number of hours of his regular work schedule and the jury pay he
received, with the provision that no such payment shall be made to
an employee for jury service on any day during which, in accordance
with his regular work schedule, he would not have worked for the
Company.
(20)
<PAGE>
Section 9. Termination Pay.
An hourly employee whose work comes within the scope of the
Fair Labor Standards Act, and who has been continuously employed by
the Company for one (1) year, shall, if discharged through no fault
of his own, receive a sum equivalent to forty (40) hours' straight
time pay at his regular rate, based upon his normal schedule of
work, and twice that amount if he has been employed by the Company
for a period of five (5) years. No employee shall receive such
termination pay more than once in any one (1) calendar year.
Section 10. Contract Work.
It is agreed that any classified work covering maintenance and
repair of equipment and machinery now being done by employees of
the Company shall not be contracted out as long as the Company has
the necessary equipment and as long as there are qualified men
available to do the work.
Section 11. Technical and Supervisory Employees.
The Company may use technical and supervisory employees to
install temporary test equipment to be used in evaluating condi-
tions and/or performance of plant facilities.
Section 12. Minor Maintenance.
It is agreed that Operating Department personnel will perform
minor maintenance functions. Minor maintenance functions shall be
similar in scope but not limited to the following examples:
1. Tightening loose mechanical connections.
2. Tightening leaking packing.
3. Changing instrument charts.
4. Tightening piping fittings to stop minor leaks.
5. Changing light bulbs.
6. Hooking up loading and unloading lines.
Section 13. Minor Operating Functions.
Maintenance personnel may perform minor operating functions
when requested by production supervision, but only when accompanied
(21)
<PAGE>
by a qualified member of the operations group. Typical example:
Assisting in closing or opening large block valves that are
difficult for one person to handle.
ARTICLE XV
VALIDITY OF CONTRACT
If any court shall hold any provision of this contract
invalid, such decision shall not invalidate the other provisions.
ARTICLE XVI
NOTICE
Any notice to the Company provided herein may be given by
depositing same in the U.S. Mail in a sealed envelope, registered,
postage prepaid, and addressed to:
El Dorado Chemical Company
P.O. Box 231
El Dorado, Arkansas 71731
Attention: Plant Manager
Any notice to be given to the Union may be given by depositing
same in the U.S. Mail in a seal envelope, registered, postage
prepaid, and addressed to:
Recording Secretary
International Association of Machinists
and Aerospace Workers, AFL-CIO,
Local No. 224
Box 1332
El Dorado, Arkansas
A copy of notices should be likewise mailed to:
President, International Association of
Machinists and Aerospace Workers
AFL-CIO Machinists Building
9000 Machinist Place
Upper Marlboro, Maryland 20772-2687
ARTICLE XVII
FUNERAL LEAVE
Any employee in the bargaining unit shall be allowed to be
absent from work to arrange for or attend the funeral of any one of
the relatives of the employee hereinafter stated:
(22)
<PAGE>
(a) If the deceased relative was the husband, wife, child,
father, mother, brother, sister, grandfather, grandmother, or
grandchild of the employee, the employee shall be permitted to be
absent from work for a period not to exceed two (2) continuous
days. One of these days shall be the day of the funeral. The
other day may be the day before the funeral or the day after the
funeral. If either or both of these days are scheduled working
days, he shall be allowed pay for the day(s) off during his regular
working schedule.
(b) If the deceased relative was the father-in-law, mother-
in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-
law of the employee, the employee shall be permitted to be absent
from work with pay for the purposes stated for one (1) scheduled
working day if the funeral is held on a scheduled working day.
Brother-in-law and sister-in-law will be interpreted as (i) the
spouse of an employee's brother or sister; (ii) the brother or
sister of an employee's spouse; or (iii) the spouse of an
employee's spouse's brother or sister.
(c) If, to attend the funeral for the deceased relative, the
employee travels to a point more than 100 miles from El Dorado,
Arkansas, he shall be allowed such leave for an additional day with
pay.
The pay for each day's leave which the employee receives under
the provisions of this Article shall be a sum equal to straight
time for his regular schedule of work on the day involved. There
shall be no duplication of payment under provisions of this Article
for any other employee benefits such as vacation pay, holiday pay,
or sickness benefits payments.
Any request for such time off with pay based on false
statements will subject the employee making the request to
immediate disciplinary action or discharge.
ARTICLE XVIII
GROUP INSURANCE
The Company agrees to provide group insurance benefits.
Employees participating in these plans will be furnished a booklet
explaining the provisions of the agreements.
Section 1. Group Insurance and Retirement.
Effective with the date of this Agreement the Company and
employees will share the cost of employee and employee dependent
group insurance coverage on the following basis:
Company 75%
Employee 25%
Effective with the date of this Agreement the Company agrees
to pay the cost of employee long-term disability insurance and
basic life insurance.
(23)
<PAGE>
Dental insurance coverage will be made available as an option.
The employee may elect to purchase the insurance by paying the
premium each month, or by increasing the deductible amounts of the
current group medical plan.
The Savings Incentive Plan for Employees, adopted effective
December 1, 1985, shall be continued during the term of this
Agreement.
ARTICLE XIX
NO STRIKE OR LOCKOUT
There shall be no strike, sympathy strike, or lockout during
the term of this Agreement for any reason.
ARTICLE XX
SERVICE WITH COMPANY
The Company shall honor previous service at the El Dorado
Chemical Company for purposes of seniority and vacation eligibility
only. Previous service at the plant, or any predecessor of the
Company, shall not be credited for purposes of pension benefits.
ARTICLE XXI
RETIREMENT AGE
The mandatory retirement age for employees shall be in accord
with federal law.
The seniority of each employee whose services are terminated
under the provisions of this Article shall cease as of the date of
such retirement.
IN WITNESS HEREOF, this instrument is executed on the 1st day
of August, 1998, to be effective as of August 1, 1998, at 12:00
a.m.
EL DORADO CHEMICAL COMPANY
By:
________________________________
R.L. Milliken
Senior Vice President,
Manufacturing
(24)
<PAGE>
INTERNATIONAL ASSOCIATION OF MACHIN-
ISTS AND AEROSPACE WORKERS AFL-CIO,
LOCAL NO. 224
By:
________________________________
Randolph Jiles
Directing Business Representative
Members of the Shop Committee:
____________________________________
Jim McKnight
_____________________________________
Todd Lambert
_____________________________________
Edward Johnson
_____________________________________
Wayne Husbands
______________________________________
Larry Cannon
(25)
<PAGE>
<PAGE>
EXHIBIT "A"
BASIC HOURLY WAGE RATE
Classification 08/01/98 08/01/99 08/01/00
*"A" Mechanic $16.71 $17.13 $17.47
*"B" Mechanic $15.97 $16.13 $16.45
*"C" Mechanic $15.59 $15.75 $16.07
*"D" Mechanic $11.70 $11.82 $12.06
*"E" Mechanic-New Hire ** ** **
*(First 180 Days)
** Rate of pay determined by Company on basis of employees
qualifications.
The Company shall have the right to select and appoint
employee(s) as Lead. In addition to the regular work of their
classification, a Lead may be assigned to train, assist, assign
employees, carry out the instructions of supervision, and to
perform any other duties pertaining to the maintenance department,
which may be assigned by management. The selection of Lead
personnel and the duration of their appointment is within the sole
discretion of management. While so assigned, Lead(s) shall receive
a premium of one dollar ($1.00) above their regular hourly rate.
(26)
<PAGE>
EXHIBIT "B"
CLOTHING ALLOWANCE
In addition to the hourly rates set forth in Exhibit "A",
there shall be paid a clothing allowance of each hour worked, as
indicated below:
Clothing Allowance
Per Hour
$.16
(27)
<PAGE>
<PAGE>
EXHIBIT "C"
Part 1
RECOGNIZED MAINTENANCE WORK GROUPS
Group I - Mechanical
Includes work ordinarily done by:
Pipefitter, Plumber
Welder, Lead Burner
Heavy Duty Operator
Rigger
Machinist
General Mechanic
Tank Car Repairman
Carpenter
Painter
Mason, Insulator, Concrete Finisher
Group II - Electrical/Instrumentation
Includes work ordinarily done by:
Electrician
Instrument Repairman
(28)
<PAGE>
<PAGE>
EXHIBIT "D"
EMPLOYEE DUES AUTHORIZATION LETTER
DATE:__________________________
TO: EL DORADO CHEMICAL COMPANY
El Dorado, Arkansas
Until further notice, you are hereby requested and authorized
to deduct from wages due me, and payable on the first regular pay
day of each month, the sum equal to my monthly dues as set by Local
224, IAM & AW, AFL-CIO, for my account on or before the end of the
month during which deductions are made.
"Contributions or gifts to Local Lodge 224, International
Association of Machinists and Aerospace Workers are not deductible
as charitable contributions for federal income tax purposes.
However, they may be tax deductible under other provisions of the
Internal Revenue Code."
(29)
<PAGE>
___________________________________________________________________
Employee
AMERICANS WITH DISABILITIES ACT
LETTER OF UNDERSTANDING
The Company and Union recognize the provisions of the American's
with Disabilities Act may impact the terms of this Agreement, and
thus agree to discuss each instance individually in order to reach
a mutual understanding.
Dated this 1st day of August, 1998.
EL DORADO CHEMICAL COMPANY
By:_________________________________
R.L. Milliken
Senior Vice President, Manufacturing
INTERNATIONAL ASSOCIATION OF MACHINISTS AND
AEROSPACE WORKERS AFL-CIO, LOCAL NO. 224
By:_________________________________
Randolph Jiles
Directing Business Representative
Members of the Shop Committee:
____________________________________
Jim McKnight
____________________________________
Todd Lambert
____________________________________
Edward Johnson
____________________________________
Wayne Husbands
____________________________________
Larry Cannon
(30)
<PAGE>
SHIFT DIFFERENTIAL
LETTER OF UNDERSTANDING
Effective August 1, 1998, in addition to the foregoing hourly
rates, employees who are regularly assigned to a specific shift
shall be paid a shift differential of forty cents ($.40) for each
hour worked on the evening shift and eighty cents ($.80) for each
hour worked on the graveyard shift. For payroll purposes,
employees who are regularly assigned to a three shift rotating
schedule shall receive shift pay averaged over all three shifts
(forty cents ($.40) per hour).
NOTE: Maintenance personnel who are not regularly assigned on a
rotating shift basis or to the evening or graveyard shift will
receive shift differential in accordance with the August 3, 1989,
Letter of Understanding (regarding turnarounds and major mainte-
nance projects).
EL DORADO CHEMICAL COMPANY
By:_________________________________
R.L. Milliken
Senior Vice President, Manufacturing
INTERNATIONAL ASSOCIATION OF MACHINISTS AND
AEROSPACE WORKERS AFL-CIO, LOCAL NO. 224
By:_________________________________
Randolph Jiles
Directing Business Representative
Members of the Shop Committee:
____________________________________
Jim McKnight
____________________________________
Todd Lambert
____________________________________
Edward Johnson
____________________________________
Wayne Husbands
____________________________________
Larry Cannon
(31)
NON-QUALIFIED STOCK OPTION AGREEMENT
(Non-Employee Directors - 1998)
THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement")
is made this 22nd day of April, 1998, between LSB Industries, Inc.,
a Delaware corporation (the "Company"), and Robert C. Brown (the
"Optionee");
W I T N E S S E T H:
In consideration of the mutual covenants and conditions
herein set forth and for good and valuable consideration, the
Company and the Optionee agree as follows:
1. Recitations. The closing price of the Company's common
stock, par value $0.10 per share (the "Common Stock") on April 22,
1998 was $4.1875. The "Date of Grant" of this Option is April 22,
1998. This option is not an "incentive stock option" as such term
is defined under Section 422 of the Internal Revenue code of 1986, as
amended. This option has been approved by the Board of Directors
of the Company.
2. Grant of Option. The Company hereby grants to Optionee,
as of the 22nd day of April, 1998, the right, privilege and option
to purchase an aggregate of Fifteen Thousand (15,000) shares of its
Common Stock at $4.1875 per share, under and subject to the terms
and conditions of this Agreement.
3. Time and Exercise Option.
3.1 Vesting of Exercise Rights. If this option has not
been terminated pursuant to Section 6 hereof, the option
herein granted may be exercised by Optionee as hereinafter
provided. The option granted hereunder may not be exercised
prior to the expiration of six (6) months from the date this
option is granted. At any time after the expiration of six
(6) months from the date this option is granted, the option
may be exercised, in whole or in part, at any time during the
remaining term of the option. No option may be exercised at
any time unless the Optionee is then a member of the Board of
Directors of the Company, except as provided for in paragraph
5.4 hereof.
4. Methods of Exercise and Payment of Exercise Price.
4.1 Notice and Payment. Subject to the terms hereof,
this option shall be exercised by the Optionee giving to the
Company written notice at the Company's principal place of
business setting forth the exact number of shares under this
option that the Optionee is purchasing, which may not exceed
the number of shares that Optionee is eligible to purchase
under this option. Such written notice shall be accompanied
by the payment to the Company of the full option price for
such number of shares Optionee desires to purchase as
specified in such written notice. Further, Optionee shall
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comply with such other reasonable requirements as the
Committee may establish.
4.2 Method of Payment. Subject to the terms and
conditions of this Agreement, payment by the Optionee of the
option price may be made in cash or by wire transfer or
certified check or bank check or personal check, in each case
payable to the order of the Company.
4.3 Withholding. The Optionee understands that, on the
exercise of this option, the excess of the fair market value
of the Common Stock over its option price is taxable
remuneration to him subject to federal income tax withholding
by the Company. Not later than the date as of which an amount
first becomes includible in the gross income of the Optionee
for federal income tax purposes with respect to any award
under this Agreement, the Optionee shall pay to the Company,
or make arrangements satisfactory to the Company, regarding
the payment of any federal, state and local taxes of any kind
required by law to be withheld or paid with respect to such
amount. The obligations of the Company under this Agreement
shall be conditional upon such payment or arrangements and the
Company shall, to the extent permitted by law, have the right
to deduct any such taxes from any payment of any kind
otherwise due to the Optionee from the Company.
4.4 Issuance of Shares. As soon as practicable after
its receipt of the notice and payment pursuant to this Section
4, the Company shall cause one or more certificates for the
shares so purchased to be delivered to the Optionee or his or
her estate, as the case may be; provided that if any law or
regulation requires the Company to take any action with
respect to the shares specified in such written notice before
the issuance thereof, then the date of issuance of such shares
shall be extended for a period necessary to take such action.
5. Termination of Option. This Agreement and option granted
hereunder, to the extent not theretofore exercised, shall terminate
as follows:
5.1 Cessation as Director. Except as otherwise provided
in Section 5.4 hereof, upon the cessation of Optionee as a
member of the Board of Directors of the Company; or
5.2 Surrender of Options. Upon the Optionee's surrender
to the Company for cancellation of this Agreement and the
option granted hereunder; or
5.3 Five-Year Term. Upon the fifth (5th) anniversary of
the date this option was granted, notwithstanding any
provision of this Agreement to the contrary, including, but
not limited to, Sections 5.1, 5.2 and 5.4 of this Agreement.
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5.4 In Case of Death. If the Optionee dies prior to the
termination of this Option, the Option may be exercised within
one (1) year after the death of the Optionee by the personal
representative of the Optionee's estate, or by a person who
acquired the right to exercise the Option by bequest,
inheritance, or by reason of the death of the Optionee,
provided that the Optionee died while a Director of the
Company. The Option may be exercised only as to the number of
shares for which the Optionee could have exercised at the time
the Optionee died. In no event may the Option be exercised
after the expiration of five (5) years from the Date of Grant.
6. Non-Transferability.
6.1 The option will not be transferrable otherwise than
by will or the laws of descent and distribution, and the
Option may be exercised, during the lifetime of the Optionee,
only by Optionee and upon the death of Optionee, as set forth
in Section 5.4 hereof. More particularly (but without
limiting the generality of the foregoing), the Option may not
be assigned, transferred (except as provided above), pledged,
or hypothecated in any way, will not be assignable by
operation of law and will not be subject to execution,
attachment, or similar process. Any attempted assignment,
transfer, pledge, hypothecation, or other disposition of the
Option contrary to the provisions hereof, and the levy of any
execution, attachment or similar process upon the Option, will
be null and void and without effect.
6.2 Optionee shall have no right as a stockholder with
respect to any shares covered by this Agreement until the date
of issuance of a stock certificate to him for such shares. No
adjustment shall be made for dividends or other rights for
which the record date is prior to the date such stock
certificate is issued.
7. Adjustments In the event of a subdivision or
consolidation of shares of Common Stock of the Company, the payment
of a stock dividend (but only on the Common Stock), a
reorganization, consolidation, merger or any other increase or
decrease in the number of shares affected without receipt of
consideration by the Company, the number of shares of Common Stock
then subject to this option and the price per share payable upon
exercise of this option shall be proportionately adjusted by the
Board of Directors of the Company, whose determination of such
adjustment shall be final, binding and conclusive.
8. Rights as a Shareholder. Optionee shall have no rights
as a shareholder with respect to any shares covered by this
Agreement or the option granted under this Agreement until the date
of issuance of a stock certificate to him for such shares. No
adjustment shall be made for dividends or other rights for which
the record date is prior to the date such stock certificate is
issued.
9. Investment Representations. The Optionee hereby
represents, warrants, covenants, agrees and acknowledges as
follows:
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9.1 Restricted Shares. The Optionee represents and
warrants that if he acquires any of the shares under this
Agreement he will acquire such shares for his own account and
for the purpose of investment and not with a view to the sale
or distribution thereof, except for sales pursuant to an
effective registration statement under the Securities Act of
1933 (the "Act") or pursuant to an exemption from registration
under the Act. The Optionee understands that these shares
have not and will not have been registered under the Act (the
Company being under no obligation to effect such registration)
and that such shares must be held indefinitely unless a
subsequent disposition thereof is registered under the Act or
is exempt from registration. The Optionee further understands
that the exemption from registration afforded by Rule 144
under the Act depends upon the satisfaction of various
conditions and that, if applicable, Rule 144 affords the basis
for sale of such shares only in limited amounts.
9.2 Disposition of Restricted Shares. The Optionee
represents, covenants, and agrees that it will not sell or
otherwise dispose of the shares acquired under this Agreement
in the absence of (a) an effective registration statement
under the Act, (b) an opinion acceptable in form and substance
to the Company from Optionee's counsel satisfactory to the
Company, or an option of counsel to the Company, to the effect
that no registration is required for such disposition or (c)
a "no-action" letter from the staff of the Securities and
Exchange Commission ("SEC") to the effect that such staff will
not recommend any action to the SEC if such a disposition
takes place without registration.
9.3 Legend. The certificates representing shares
covered by this Agreement shall upon issuance thereof have
stamped or imprinted thereon or affixed thereto a legend to
the following effect:
The registered holder hereof has acquired the
shares represented by this certificate for
investment and not for resale in connection with a
distribution thereof. Accordingly, such shares
have not been registered under the Securities Act
of 1933 and may not be sold, transferred or
otherwise disposed of except pursuant to a
currently effective registration statement under
said Act or otherwise in a transaction exempt from
the provisions of Section 5 of said Act.
10. Binding Effect. This Agreement shall be binding upon the
heirs, executors, administrators and successors of the parties
hereto.
11. Subsidiary. The term "Subsidiary" means any present or
future subsidiary corporation of the Company, as such term is
defined in Section 424(f) of the Code.
12. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware
(without regard to choice of law provisions).
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13. Amendments. Subject to the terms of this Agreement, the
Board of Directors of the Company may amend any of the provisions
of this Agreement, and may at any time terminate this Agreement.
However, no amendment may be made to this Agreement which in any
material respect impairs the rights of the Optionee under this
Agreement without the Optionee's consent.
14. Interpretation. The Board of Directors shall construe
and interpret the terms and provisions of this Agreement and shall,
at its discretion, make general and special rules and regulations
for administering this Agreement, which construction,
interpretation, rules and regulations shall be binding and
conclusive upon all persons granted option pursuant to this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the day and year first above written.
LSB INDUSTRIES, INC.
ATTEST:
______________________________ By:_________________________________
Assistant Secretary Jack E. Golsen, President
[S E A L]
"Optionee"
__________________________________
Robert C. Brown
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LSB INDUSTRIES, INC.
1998 STOCK OPTION AND INCENTIVE PLAN
The Board of Directors of LSB Industries, Inc., a Delaware
corporation (the "Company"), has adopted this 1998 Stock Option
and Incentive Plan (the "Plan"), effective the 13th day of
August, 1998, as follows:
1. Purpose. This Plan permits selected officers and employees,
prospective employees, consultants and independent contractors of
the Company or any Subsidiary who bear a large measure of respon-
sibility for the success of the Company to acquire and retain a
proprietary interest in the Company and to participate in the
future of the Company as shareholders. The purpose of this Plan
is to advance the interests of the Company and its shareholders
by enabling the Company and the subsidiaries to offer to its
employee-directors, officers, employees, consultants and
independent contractors, long-term performance-based stock and/or
other equity interests in the Company, thereby enhancing its
ability to attract, retain and reward such individuals, and by
providing an incentive for employee-directors, officers,
employees to render outstanding service to the Company and to the
Company's shareholders.
2. Definitions. For purposes of the Plan, the following terms
shall be defined as set forth herein:
2.1 "Act" means the Securities Act of 1933, as amended
from time to time, or any successor statute or
statutes thereto.
2.2 "Agreement" means the agreement between the Company
and the Holder setting forth the terms and conditions
of an award under the Plan.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change of Control" means a change of control of the
Company pursuant to Section 8.2 hereof.
2.5 "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute
or statutes thereto.
2.6 "Committee" means the Stock Option Committee of the
Board or any other committee of the Board which the
Board may designate. In all events, the Committee
shall consist only of non-employee directors of the
Company.
2.7 "Common Stock" means the Common Stock of the Company,
par value $.10 per share.
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2.8 "Disability" means disability as determined under the
procedures established by the Committee for purposes
of the Plan.
2.9 "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, or any successor
statute or statutes thereto.
2.10 "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations
issued thereunder, means, as of any given date:
2.10.1 the closing price of the Common Stock on the
last preceding day on which the Common Stock
was traded, as reported on a national
securities exchange; and,
2.10.2 if the fair market value of the Common Stock
cannot be determined pursuant to clause (i)
hereof, such price as the Committee shall
determine.
2.11 "Formula Price Per Share" means the highest gross
price (before brokerage commissions, soliciting
dealers' fees and similar charges) paid for any share
of Common Stock at any time during the ninety (90)
day period immediately prior to the Change of Control
(whether by way of exchange, conversion,
distribution, liquidation or otherwise) paid or to be
paid for any share of Common Stock in connection with
a Change of Control. If the consideration paid or to
be paid in any transaction that results in a Change
of Control consists, in whole or in part, of
consideration, other than cash, the Board shall take
such action, as in its judgment it deems appropriate,
to establish the cash value of such consideration,
but such valuation shall not be less than the value,
if any, attributed to such consideration by any other
party to such transaction that results in a Change of
Control.
2.12 "Holder" means an eligible employee-director,
officer, employee, consultant or independent
contractor of the Company or a Subsidiary who has
received an award under the Plan.
2.13 "Incentive Stock Option" or "ISO" means any Stock
Option intended to be and designated as an "incentive
stock option" within the meaning of Section 422 of
the Code.
2.14 "Non-Qualified Stock Option" means any Stock Option
that is not an Incentive Stock Option.
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2.15 "SAR Value" means the excess of the Fair Market Value
of one share of Common Stock over the exercise price
per share specified in a related Stock Option in the
case of a Stock Appreciation Right granted in tandem
with a Stock Option and the Stock Appreciation Right
price per share in the case of a Stock Appreciation
Right awarded on a free-standing basis multiplied by
the number of shares in respect of which the Stock
Appreciation Right shall be exercised, on the date of
exercise.
2.16 "Section 16(b) Holder" means such officer or director
or ten percent (10%) beneficial owner of Common Stock
subject to Section 16(b) of the Exchange Act.
2.17 "Stock Appreciation Right" means the right, pursuant
to an award granted under Section 7 hereof, to
recover an amount equal to the SAR Value.
2.18 "Stock Option" means any Incentive Stock Option or
Non-Qualified Stock Option to purchase shares of
Common Stock which is awarded pursuant to this Plan.
2.19 "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined
in Section 424(f) of the Code.
3. Administration.
3.1 Board; Committee. The Board shall create a committee
consisting of three members of the Board. The Board
may also appoint one member of the Board as an
alternate member of the Committee. Upon such
appointment, the Committee shall have all the powers,
privileges and duties set forth herein. The Board
may, from time to time, appoint members of any such
Committee in substitution for, or in addition to,
members previously appointed, may fill vacancies in
the Committee and may discharge the Committee. The
Committee shall select one of its members as its
Chairman and shall hold its meetings at such times
and places as it shall deem advisable. A majority of
its members shall constitute a quorum and all
determinations shall be made by a majority of such
quorum. Any determination reduced to writing and
signed by a majority of the members of the Committee,
shall be fully effective and a valid act of the
Committee as if it had been made by a majority vote
at a meeting duly called and held. The membership of
the Committee shall at all times be constituted so as
to not adversely affect the compliance of the Plan
with the requirements of Rule 16b-3 under the
Exchange Act, to the extent it is applicable, or with
the requirements of any other applicable law, rule or
regulation.
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3.2 Power and Authority. The Committee shall have full
power and authority to do all things necessary or
appropriate to administer this Plan according to its
terms and provisions (excluding the power to appoint
members of the Committee and to terminate, modify, or
amend the Plan, except as otherwise authorized by the
Board), including, but not limited to the full power
and authority (subject to the express provisions of
this Plan):
3.2.1 to award Stock Options and Stock Appreciation
Rights, pursuant to the terms of this Plan,
to eligible individuals described under
Section 5 hereof;
3.2.2 to select the eligible individuals to whom
Stock Options or Stock Appreciation Rights,
or any combination thereof, if any, may from
time to time be awarded hereunder;
3.2.3 to determine the Incentive Stock Options,
Non-Qualified Stock Options, Stock
Appreciation Rights, or any combination
thereof, if any, to be awarded hereunder to
one or more eligible employees or persons;
3.2.4 to determine the number of shares to be
covered by each award granted hereunder;
3.2.5 to determine the terms and conditions not
inconsistent with the terms of the Plan, of
any award hereunder (including, but not
limited to, share price, any restrictions or
limitations, and any vesting, exchange, sur-
render, cancellation, acceleration, termin-
ation, exercise or forfeiture provisions, as
the Committee shall determine);
3.2.6 to determine any specified performance goals
or such other factors or criteria which need
to be attained for the vesting of an award
granted hereunder;
3.2.7 to determine the terms and conditions under
which awards hereunder are to operate on a
tandem basis and/or in conjunction with or
apart from other equity awarded under this
Plan and cash awards made by the Company or
any Subsidiary outside of this Plan;
3.2.8 to determine the extent and circumstances
under which Common Stock and other amounts
payable with respect to an award hereunder
shall be deferred, which may be either
automatic or at the election of the Holder;
and
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3.2.9 to substitute (i) new Stock Options for pre-
viously granted Stock Options, which previ-
ously granted Stock Options have higher
option exercise prices and/or contain other
less favorable terms, and (ii) new awards of
any other type for previously granted awards
of the same or other type, which previously
granted awards are upon less favorable terms.
3.3 Interpretation of Plan.
3.3.1 Subject to Sections 3.2 and 9 hereof, the
Committee shall have the authority at its
discretion to adopt, alter and repeal such
general and special administrative rules,
regulations, and practices governing the Plan
as it shall, from time to time, deem advis-
able, to construe and interpret the terms and
provisions of this Plan and any award issued
under this Plan (and to determine the form
and substance of all Agreements relating
thereto), and to otherwise supervise the
administration of this Plan.
3.3.2 Anything in this Plan to the contrary
notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall
any discretion or authority granted under
this Plan be so exercised, so as to
disqualify the Plan under Section 422 of the
Code, or, without the consent of the
Holder(s) affected, to disqualify any
Incentive Stock Option under Section 422 of
the Code.
3.3.3 Subject to Sections 3.2 and 9 hereof, all
decisions made by the Committee pursuant to
the provisions of this Plan shall be made in
the Committee's sole discretion and shall be
final and binding upon all persons granted
options pursuant to the Plan.
4. Shares Subject to Plan.
4.1 Number of Shares. The aggregate number of shares of
Common Stock reserved and available for distribution
under this Plan shall be 850,000 shares. If any
shares of Common Stock that are subject to a Stock
Option or Stock Appreciation Right cease to be
subject to such Stock Option or Stock Appreciation
Right, or any such award otherwise terminates without
a payment being made to the Holder in the form of
Common Stock, such shares shall again be available
for distribution in connection with future grants and
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awards under this Plan. The number of shares
available for distribution under this Plan shall be
reduced by the number of shares of Common Stock
issued under this Plan upon the exercise of a Stock
Option.
4.2 Character of Shares. The Company may elect to
satisfy its obligations to a Holder exercising a
Stock Option entirely by issuing authorized and
unissued shares of Common Stock to such Holder,
entirely by transferring treasury shares to such
Holder, or in part by the issue of authorized and
unissued shares and the balance by the transfer of
treasury shares.
5. Eligibility.
5.1 General. Awards under this Plan may be made to: (i)
officers and other employees of the Company or any
Subsidiary who are at the time of the grant of an
award under this Plan regularly employed by the
Company or any Subsidiary, including any full time
salaried officer or employee who is a member of the
Board (except as provided in the last sentence under
Section 3.1); and, (ii) consultants or independent
contractors whom the Board believes have contributed
or will contribute to the success of the Company.
5.2 Multiple Awards. The Committee shall from time to
time designate such employees, consultants or
independent contractors to whom options are to be
granted, and the number of shares to be subject to
each option. The Committee may at any time grant one
or more Stock Options or Stock Appreciation Rights or
a combination thereof to an individual to whom a
Stock Option or Stock Appreciation Right has
previously been granted under this or any other stock
option plan of the Company, whether or not such
previously granted Stock Option or Stock Appreciation
Right has been fully exercised.
5.3 Ineligibility for Awards. No person designated by
the Board to serve on the Committee, effective at
such future time so that he qualifies as a
"disinterested person" within the meaning of Rule
16b-3(c) of the Exchange Act, shall be eligible to
receive any awards under the Plan during the period
from the date such designation is made to the date
such designation becomes effective. Notwithstanding
Section 5.1 hereof, no member of the Committee, while
serving as such, shall be eligible to receive an
award under the Plan.
6. Stock Options.
6.1 Grant and Exercise. Stock Options granted under the
Plan may be of two types: (i) Incentive Stock Options
and (ii) Non-Qualified Stock Options. Only full-time
salaried officers or employees may be granted
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Incentive Stock Options. Any individual eligible to
participate under this Plan may be granted Non-
Qualified Stock Options. Any Stock Option granted
under the Plan shall contain such terms, not
inconsistent with this Plan, as the Committee may
from time to time approve. The Committee shall have
the authority to grant to any eligible individual
Incentive Stock Options, Non-Qualified Stock Options,
or both types of Stock Options and, in each case, may
be granted alone, in tandem with, or without, or in
addition to Stock Appreciation Rights. To the extent
that any Stock Option (or portion thereof) does not
qualify as an Incentive Stock Option, it shall con-
stitute a separate Non-Qualified Stock Option.
Unless granted in substitution for another
outstanding award, Stock Options shall be granted for
no consideration other than services to the Company
or a Subsidiary.
6.2 Exercise Price.
6.2.1 Less Than 10% Shareholder. The exercise
price in any option granted under this Plan
to an individual who, at the time the Stock
Option is granted, does not own stock
possessing more than ten percent (10%) of the
total combined voting power of all classes of
stock of the Company or of any Subsidiary
(computed in accordance with the provisions
applicable to Section 422(b)(6) of the Code)
(a "less than 10% Shareholder") shall be not
less than the Fair Market Value of the shares
of Common Stock subject to the Stock Option
at the time the Stock Option is granted,
determined by the Committee in accordance
with the applicable regulations and rulings
of the Commissioner of the Internal Revenue
Service in effect at the time the Stock
Option is granted.
6.2.2 10% Shareholder. The exercise price in any
option granted under the Plan to an indi-
vidual who is not a less than ten percent
(10%) Shareholder (a "10% Shareholder") shall
be not less than one hundred ten percent
(110%) of the Fair Market Value of the shares
of Common Stock subject to the Stock Option
at the time the Stock Option is granted,
determined in accordance with the applicable
regulations and rulings of the Commissioner
of the Internal Revenue Service in effect at
the time the Stock Option is granted.
6.3 Option Term. The term of each Stock Option shall be
fixed by the Board, but no Stock Option shall be
exercisable more than ten (10) years (five (5) years,
in the case of an Incentive Stock Option granted to a
10% Shareholder) after the date on which the Stock
Option is granted.
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6.4 Exercise of Non-Qualified Stock Options. Non-
Qualified Stock Options shall be exercisable at such
time or times and subject to such terms and
conditions as shall be determined by the Committee;
provided, however, that no Non-Qualified Stock Option
granted under this Plan may be exercised until after
the expiration of six (6) months from the date the
Stock Option is granted. If the Committee provides,
in its discretion, that any Stock Option is
exercisable only in installments, the Committee may
waive such installment exercise provisions at any
time at or after the time of grant in whole or in
part, based upon such factors as the Committee shall
determine; provided that the Committee cannot waive
the requirement that the Stock Option may not be
exercised until after the expiration of six (6)
months from the date the Stock Option is granted.
6.5 Exercise of Incentive Stock Options.
6.5.1 By an Employee. No Incentive Stock Option
granted under this Plan shall be exercisable
after the expiration of ten (10) years from
the date such ISO is granted, except that no
ISO granted to a person who is not a less
than 10% Shareholder shall be exercisable
after the expiration of five (5) years from
the date such option is granted. Employment
by a Subsidiary shall be employment by the
Company. Unless such requirements are waived
by the Committee, the employee, while still
in the employment of the Company, may
exercise the options as follows:
6.5.1.1 at any time after one (1) year of
continuous employment from the date
such ISO is granted, as to twenty
percent (20%) of the shares subject
to the option;
6.5.1.2 at any time after two (2) years of
such continuous employment from the
date such ISO is granted, as to an
additional twenty percent (20%) of
the shares subject to the option;
6.5.1.3 at any time after three (3) years
of such continuous employment from
the date such ISO is granted, as to
an additional thirty percent (30%)
of the shares subject to the
option; and
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6.5.1.4 at any time after four (4) years of
such continuous employment from the
date such ISO is granted, as to all
of the shares remaining subject to
the option.
The Committee may decide in each case to what
extent leaves of absence for government or
military service, illness, temporary dis-
ability, or other reasons, shall not inter-
rupt continuous employment.
6.5.2 Termination of Employment. Except as other-
wise expressly provided in Sections 6.5.3 and
6.5.4 of this Plan or in the Agreement, no
Stock Option may be exercised at any time
unless the Holder thereof is then an employee
of the Company or a Subsidiary.
6.5.3 By a Former Employee. No person may exercise
an ISO after he is no longer an employee of
the Company or any Subsidiary; except that if
an employee ceases to be an employee on
account of physical or mental disability as
defined in Section 22(e)(3) of the Code
("Former Employee"), he may exercise the ISO
within twelve (12) months after the date on
which he ceased to be an employee, for the
number of shares for which he could have
exercised at the time he ceased to be an
employee. No ISO granted under this Plan
shall in any event be exercised by such
Former Employee after the expiration of ten
(10) years from the date such ISO is granted,
except that no ISO granted to a person who is
a 10% Shareholder may be exercisable after
the expiration of five (5) years from the
date such ISO is granted.
6.5.4 In Case of Death. If any employee or Former
Employee who was granted an ISO dies prior to
the termination of such ISO, such ISO may be
exercised within twelve (12) months after the
death of the employee or Former Employee by
his estate, or by a person who acquired the
right to exercise such ISO by bequest or
inheritance, or by reason of the death of
such employee or Former Employee, provided
that:
6.5.4.1 such employee died while an
employee of the Company or a
Subsidiary; or
6.5.4.2 such Former Employee had ceased to
be an employee of the Company or a
Subsidiary on account of physical
or mental disability and died
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within three (3) months after the
date on which he ceased to be such
employee.
Such ISO may be exercised only as to the
number of shares for which he could have
exercised at the time the employee or Former
Employee died. No ISO granted under this
Plan shall in any event be exercised in case
of death of an employee or Former Employee
after the expiration of ten (10) years from
the date such ISO is granted, except that no
ISO granted to a 10% Shareholder shall be
exercisable after the expiration of five (5)
years from the date such ISO is granted.
6.5.5 The Committee may, in its discretion, waive
the installment exercise provisions at any
time at or after the time of grant, in whole
or in part, based on such factors as the
Committee shall determine; provided that at
all times no ISO may be exercised until the
expiration of six (6) months from the date
that the Stock Option was granted.
6.6 Termination of Options. A Stock Option granted under
this Plan shall be considered terminated, in whole or
in part, to the extent that it can no longer be exer-
cised for shares originally subject to it, provided
that a Stock Option granted shall be considered
terminated at an earlier date upon surrender for
cancellation by the Holder to whom such Stock Option
was granted.
6.7 Notice of Exercise and Payment. Subject to any
installment, exercise and waiting period provisions
that are applicable in a particular case, Stock
Options granted under this Plan may be exercised, in
whole or in part, at any time during the term of the
Stock Option, by giving written notice of such
exercise to the Company identifying the Stock Option
being exercised and specifying the number of shares
then being purchased. Such notice shall be
accompanied by payment in full of the exercise price,
which shall be in cash or, unless otherwise provided
in the Agreement, in whole shares of Common Stock
which are already owned by the Holder of the Stock
Option or, unless otherwise provided in the
Agreement, partly in cash and partly in such Common
Stock. Cash payments shall be made by wire transfer,
certified check or bank check or personal check, in
each case payable to the order of the Company; pro-
vided, however, that the Company shall not be
required to deliver certificates for shares of Common
Stock with respect to which a Stock Option is
exercised until the Company has confirmed the receipt
of good and valuable funds in payment of the purchase
price thereof. Payments in the form of Common Stock
(which shall be valued at the Fair Market Value of a
share of Common Stock on the date of exercise) shall
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<PAGE>
be made by delivery of stock certificates in
negotiable form which are effective to transfer good
and valid title thereto to the Company, free of any
liens or encumbrances, with signature guaranteed by a
bank or investment banking firm.
6.8 Issuance of Shares. As soon as practicable after its
receipt of such notice and payment, the Company shall
cause one or more certificates for the shares so pur-
chased to be delivered to the Holder or his or her
estate, as the case may be. No Holder or estate
shall have any of the rights of a shareholder with
reference to shares of Common Stock subject to a
Stock Option until after the Stock Option has been
exercised in accordance with Section 6.7 and certifi-
cates representing the shares of Common Stock so pur-
chased by the Holder pursuant to the Stock Option
have been delivered to the Holder or estate.
6.9 Partial Exercise. A Stock Option granted under this
Plan may be exercised as to any part of the shares
for which it could be exercised. Such a partial
exercise of a Stock Option shall not affect the right
to exercise the Stock Option from time to time in
accordance with this Plan as to the remaining shares
of Common Stock subject to the Stock Option.
6.10 $100,000 Per Year Limitation. To the extent that the
aggregate Fair Market Value of Common Stock with
respect to which Incentive Stock Options are exer-
cisable for the first time by a Holder during any
calendar year (under all of the Company's plans)
exceeds $100,000, such excess Stock Options shall be
treated as Non-Qualified Stock Options for purposes
of Section 422 of the Code.
6.11 Buyout and Settlement Provisions. The Committee may
at any time offer to buy out for cash or otherwise
settle a Stock Option previously granted, based upon
such terms and conditions as the Committee shall
establish and communicate to the Holder at the time
that such offer is made, including a settlement for
exchange of a different award under the Plan for the
surrender of the Stock Option.
7. Stock Appreciation Rights.
7.1 Grant and Exercise. Stock Appreciation Rights may be
granted in tandem with ("Tandem Stock Appreciation
Right") or in conjunction with all or part of any
Stock Option granted under this Plan or may be
granted on a free-standing basis. In the case of a
Non-Qualified Stock Option, a Tandem Stock
Appreciation Right may be granted either at or after
the time of the grant of such Non-Qualified Stock
Option. In the case of an Incentive Stock Option, a
Tandem Stock Appreciation Right may be granted only
at the time of the grant of such Incentive Stock
-11-
<PAGE>
Option. Unless granted in substitution for another
outstanding award, Stock Appreciation Rights shall be
granted for no consideration other than services to
the Company or a Subsidiary.
7.2 Termination. A Tandem Stock Appreciation Right shall
terminate and shall no longer be exercisable upon the
termination or exercise of the related Stock Option,
except that, unless otherwise determined by the
Board, a Tandem Stock Appreciation Right granted with
respect to less than the full number of shares
covered by a related Stock Option shall not be
reduced until after the number of shares remaining
under the related Stock Option equals the number of
shares covered by the Tandem Stock Appreciation
Right.
7.3 Method of Exercise. A Tandem Stock Appreciation
Right may be exercised by a Holder, in accordance
with Section 7.4 hereof, by surrendering the
applicable portion of the related Stock Option. Upon
such exercise and surrender, the Holder shall be
entitled to receive such amount in the form of
payment determined in the manner prescribed in
Section 7.5 hereof. Stock Options which have been so
surrendered, in whole or in part, shall no longer be
exercisable to the extent Tandem Stock Appreciation
Rights have been exercised.
7.4 Exercisability. Tandem Stock Appreciation Rights
shall be exercisable only at such time or times and
to the extent that the Stock Options to which they
relate shall be exercisable in accordance with the
provisions of Section 6 hereof and this Section 7,
and may be subject to such additional limitations on
exercisability as shall be determined by the
Committee and set forth in the Agreement. Other
Stock Appreciation Rights shall be exercisable at
such time or times and subject to such terms and
conditions as shall be determined by the Committee
and set forth in the Agreement. Notwithstanding
anything to the contrary contained herein (including
the provisions of Section 8.1 hereof), any Stock
Appreciation Right granted to a Section 16(b) Holder
to be settled wholly or partially in cash (i) shall
not be exercisable during the first six (6) months of
the term of such Stock Appreciation Right, except
that this special limitation shall not apply in the
event of death or disability of such Holder prior to
the expiration of the six (6) month period, and (ii)
shall only be exercisable during the period beginning
on the third business day following the date of
release for publication of the Company of quarterly
or annual summary statements of sales and earnings
and ending on the twelfth (12) business day following
such date.
7.5 Receipt of SAR Value. Upon the exercise of a Stock
Appreciation Right, a Holder shall be entitled to
receive up to, but not more than, an amount in cash
and/or shares of Common Stock equal to the SAR Value
with the Committee having the right to determine the
form of payment.
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<PAGE>
7.6 Shares Affected Under Plan. Upon the exercise of a
Tandem Stock Appreciation Right, the Stock Option or
part thereof to which such Tandem Stock Appreciation
Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth
in Section 4.1 hereof on the number of shares of
Common Stock to be issued under the Plan, but only to
the extent of the number of shares, if any, issued
under the Tandem Stock Appreciation Right at the time
of exercise based upon the SAR Value.
7.7 Limited Stock Appreciation Rights. The Committee may
grant "Limited Stock Appreciation Rights", i.e.,
Stock Appreciation Rights that become exercisable
upon the occurrence of one or more of the events
which trigger a Change of Control as defined in
Section 8.2 hereof, and shall be settled in an amount
equal to the Formula Price Per Share, subject to such
other terms and conditions as the Committee may
specify; provided, however, if any Limited Stock
Appreciation Right is granted to a Section 16(b)
Holder such Limited Stock Appreciation Right (i)
shall only be exercisable within sixty (60) days
after the event triggering the Change of Control; and
(ii) may not be exercised during the first six (6)
months after the date of grant of such Limited Stock
Appreciation Right (except in the event of death or
disability of such Holder prior to the expiration of
the six (6) month period); and (iii) shall only be
exercisable in the event that the date of the Change
of Control was outside the control of such Holder;
and (iv) shall only be settled in cash in an amount
equal to the Formula Price Per Share.
8. Acceleration.
8.1 Acceleration Upon Change of Control. Unless the
award Agreement provides otherwise or unless the
Holder waives the application of this Section 8.1
prior to a Change of Control (as hereinafter
defined), in the event of a Change of Control, each
outstanding Stock Option, Stock Appreciation Right
and Limited Stock Appreciation Right granted under
the Plan shall immediately become exercisable in full
notwithstanding the vesting or exercise provisions
contained in the Agreement.
8.2 Change of Control Defined. A "Change of control"
shall be deemed to have occurred upon any of the
following events:
8.2.1 The consummation of any of the following
transactions: any merger, reverse stock
split, recapitalization or other business
combination of the Company, with or into
another corporation, or an acquisition of
securities or assets by the Company, pursuant
to which the Company is not the continuing or
surviving corporation or pursuant to which
shares of Common Stock would be converted
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<PAGE>
into cash, securities or other property,
other than a transaction in which the
majority of the holders of Common Stock
immediately prior to such transaction will
own at least fifty percent (50%) of the total
voting power of the then-outstanding
securities of the surviving corporation
immediately after such transaction; or
8.2.2 A transaction in which any person (as such
term is defined in Sections 13(d)(3) and
14(d)(2) of the Exchange Act), corporation or
other entity (other than the Company, or any
profit-sharing, employee ownership or other
employee benefit plan sponsored by the
Company or any Subsidiary, or any trustee of
or fiduciary with respect to any such plan
when acting in such capacity, or any group
comprised solely of such entities): (i) shall
purchase any Common Stock (or securities con-
vertible into Common Stock) for cash, secur-
ities or any other consideration pursuant to
a tender offer or exchange offer, without the
prior consent of the Board, or (ii) shall
become the "beneficial owner" (as such term
is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly (in one
transaction or a series of transactions), of
securities of the Company representing fifty
percent (50%) or more of the total voting
power of the then-outstanding securities of
the Company ordinarily (and apart from the
rights accruing under special circumstances)
having the right to vote in the election of
directors (calculated as provided in Rule
13d-3(d) in the case of rights to acquire the
Company's securities); or
8.2.3 If, during any period of two consecutive
years, individuals who at the beginning of
such period constituted the entire Board and
any new director whose election by the Board,
or nomination for election by the Company's
stockholders was approved by a vote of at
least two-thirds of the directors then still
in office who either were directors at the
beginning of the period or whose election or
nomination for election by the stockholders
was previously so approved, cease for any
reason to constitute a majority thereof.
8.3 General Waiver by Board. The Committee may, after
grant of an award, accelerate the vesting of all or
any part of any Stock Option, and/or waive any
limitations or restrictions, if any, for all or any
part of an award.
8.4 Acceleration Upon Termination of Employment. In the
case of a Holder whose employment or affiliation with
the Company or a Subsidiary is involuntarily
terminated for any reason (other than for cause), the
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<PAGE>
Committee may, at its option and in its sole
discretion, accelerate the vesting of all or any part
of any award and/or waive, in whole or in part, any
or all of the remaining deferral limitations or
restrictions imposed hereunder or pursuant to the
Agreement.
9. Amendments and Termination.
9.1 Amendments to Plan; Termination. The Board may at
any time, and from time to time, amend any of the
provisions of the Plan, and may at any time suspend
or terminate the Plan; provided, however, that no
such amendment shall be effective unless and until it
has been duly approved by the stockholders of the
outstanding shares of Common Stock if (i) such amend-
ment materially increases the benefits accruing to
participants under this Plan; (ii) such amendment
materially increases the number of securities which
may be issued under this Plan; (iii) such amendment
materially modifies the requirements as to
eligibility for participation in this Plan; or, (iv)
the failure to obtain such approval would adversely
affect the compliance of the Plan with the
requirements of Rule 16b-3 under the Exchange Act, or
with the requirements of any other applicable law,
rule or regulation.
9.2 Amendments to Individual Awards. The Board may amend
the terms of any award granted under the Plan; pro-
vided, however, that subject to Section 11 hereof, no
such amendment may be made by the Board which in any
material respect impairs the rights of the Holder
without the Holder's consent.
10. Term of Plan.
10.1 Effective Date. The Plan shall be effective as of
August 13, 1998 ("Effective Date"), subject to the
approval of the Plan by the stockholders of the
Company within one year after the Effective Date.
Any awards granted under the Plan prior to such
approval shall be effective when made (unless other-
wise specified by the Committee at the time of grant)
but shall be conditioned upon, and subject to, such
approval of the Plan by the Company's stockholders
and approval of the Company's application to list the
shares of the Company's Common Stock covered by the
Plan on the New York Stock Exchange (and no awards
shall vest or otherwise become free of restrictions
prior to such approvals).
10.2 Termination Date. No award shall be granted pursuant
to the Plan on or after the tenth (10th) anniversary
of the Effective Date, but awards granted prior to
such tenth (10th) anniversary may extend beyond that
date. The Plan shall terminate at such time as no
further awards may be granted and all awards granted
under the Plan are no longer outstanding.
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<PAGE>
11. Adjustment Upon Change of Shares. Subject to any required
action by the stockholders of the Company, the number of
shares of Common Stock for which Stock Options may
thereafter be granted, and the number of shares of Common
Stock then subject to Stock Options previously granted, and
the price per share payable upon exercise of such Stock
Option and the number of shares and exercise price relating
to Stock Appreciation Rights, shall be proportionately
adjusted for any increase or decrease in the number of
issued shares of Common Stock of the Company resulting from
a subdivision or consolidation of shares of Common Stock or
the payment of a stock dividend (but only on the Common
Stock) or any other increase or decrease in the number of
shares of Common Stock effected without receipt of
consideration by the Company.
11.1 If the Company is reorganized or consolidated or
merged with another corporation, in which the Company
is the non-surviving corporation, a Holder of an out-
standing Stock Option and/or Stock Appreciation Right
granted under this Plan shall be entitled (subject to
the provisions of this Section 11) to receive options
and/or stock appreciation rights covering shares of
such reorganized, consolidated or merged corporation
in the same proportion as granted to Holder prior to
such reorganization, consolidation or merger at an
equivalent exercise price, and subject to the same
terms and conditions as this Plan. For purposes of
the preceding sentence, the excess of the aggregate
Fair Market Value of shares subject to the option
immediately after the reorganization, consolidation
or merger over the aggregate exercise price of such
shares shall not be more than the excess of the
aggregate Fair Market Value of all shares of Common
Stock subject to the option or Stock Appreciation
Right immediately before such reorganization, con-
solidation or merger over the aggregate exercise
price of such shares of Common Stock, and the new
stock option or stock appreciation right or assump-
tion of the old Stock Option or old Stock
Appreciation Right by any surviving corporation shall
not give the Holder additional benefits which he did
not have under the old Stock Option or Stock
Appreciation Right.
11.2 To the extent that the foregoing adjustments relate
to the shares of Common Stock of the Company, such
adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding
and conclusive, provided that each Incentive Stock
Option granted pursuant to this Plan shall not be
adjusted in a manner that causes the Incentive Stock
Option to fail to continue to qualify as an incentive
stock option within the meaning of Section 422 of the
Code.
11.3 Except as expressly provided in this Section 11, the
Holder shall have no rights by reason of any sub-
division or consolidation of shares of stock of any
class or the payment of any stock dividend or any
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<PAGE>
other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution,
liquidation, merger, consolidation, reorganization or
spin-off of assets or stock of another corporation,
and any issue by the Company of shares of stock of
any class, or securities convertible into shares of
stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common
Stock subject to the Stock Option or the number or
price of Stock Appreciation Rights granted under this
Plan.
11.4 The grant of a Stock Option or Stock Appreciation
Right pursuant to this Plan shall not affect in any
way the right or power of the Company to make
adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to
merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or
assets.
12. General Provisions.
12.1 Investment Representations. The Committee may
require each person acquiring shares of Common Stock
pursuant to an award under this Plan to represent to
and agree with the Company in writing that the Holder
is acquiring the shares for investment without a view
to distribution thereof.
12.2 Additional Incentive Arrangements. Nothing contained
in this Plan shall prevent the Board from adopting
such other or additional incentive arrangements as it
may deem desirable, including, but not limited to,
the granting of Stock Options and the awarding of
stock and cash otherwise than under this Plan; and
such arrangements may be either generally applicable
or applicable only in specific cases.
12.3 No Right of Employment. Nothing contained in this
Plan or in any award hereunder shall be deemed to
confer upon any employee of the Company or any
Subsidiary any right to continued employment with the
Company or any Subsidiary, nor shall it interfere in
any way with the right of the Company or any
Subsidiary to terminate the employment of any of its
employees at any time.
12.4 Withholding Taxes. Not later than the date as of
which an amount first becomes includible in the gross
income of the Holder for federal income tax purposes
with respect to any award under the Plan, the Holder
shall pay to the Company, or make arrangements
satisfactory to the Company regarding the payment of,
any federal, state and local taxes of any kind
required by law to be withheld or paid with respect
to such amount. If permitted by the Board, tax
withholding or payment obligations may be settled
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<PAGE>
with Common Stock, including Common Stock that is
part of the award that gives rise to the withholding
requirement. The obligations of the Company under
this Plan shall be conditional upon such payment or
arrangements and the Company shall, to the extent
permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to
the Holder from the Company.
12.5 Governing Law. This Plan and all awards made and
actions taken thereunder shall be governed by and
construed in accordance with the laws of the State of
Delaware (without regard to choice of law
provisions).
12.6 Other Benefit Plans. Any award granted under this
Plan shall not be deemed compensation for purposes of
computing benefits under any retirement plan of the
Company or any Subsidiary and shall not affect any
benefits under any other benefit plan now or subse-
quently in effect under which the availability or
amount of benefits is related to the level of
compensation (unless required by specific reference
in any such other plan to awards under this Plan).
12.7 Employee Status. A leave of absence, unless
otherwise determined by the Board prior to the
commencement thereof, shall not be considered a
termination of employment. Any awards granted under
this Plan shall not be affected by any change of
employment, so long as the Holder continues to be an
employee of the Company or any Subsidiary.
12.8 Non-Transferability. Other than the transfer of a
Stock Option or Stock Appreciation Right by will or
by the laws of descent and distribution, no award
under this Plan may be alienated, sold, assigned,
hypothecated, pledged, exchanged, transferred,
encumbered or charged, and any attempt to alienate,
sell, assign, hypothecate, pledge, exchange,
transfer, encumber or charge the same shall be void.
No right or benefit hereunder shall in any manner be
liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such
benefit. Unless otherwise provided in this Plan or
the Agreement, any Stock Option or Stock Appreciation
Right granted under this Plan is only exercisable
during the lifetime of the Holder by the Holder or by
his guardian or legal representative.
12.9 Applicable Laws. The obligations of the Company with
respect to all awards under this Plan shall be
subject to (i) all applicable laws, rules and
regulations, including, without limitation, the
requirements of all federal securities laws, rules
and regulations and state securities and blue sky
laws, rules and regulations, and such approvals by
any governmental agencies as may be required,
including, without limitation, the effectiveness of a
registration statement under the Act, and (ii) the
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<PAGE>
rules and regulations of any national securities
exchange on which the Common Stock may be listed or
the NASDAQ National Market System if the Common Stock
is designated for quotation thereon.
12.10 Conflicts. If any of the terms or provisions of the
Plan conflict with the requirements of Rule 16b-3
under the Exchange Act, or with the requirements of
any other applicable law, rule or regulation, and/or
with respect to Incentive Stock Options, Section 422
of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict
with the requirements of said Rule 16b-3, and/or with
respect to Incentive Stock Options, Section 422 of
the Code. With respect to Incentive Stock Options,
if this Plan does not contain any provision required
to be included herein under Section 422 of the Code,
such provision shall be deemed to be incorporated
herein with the same force and effect as if such
provision had been set out at length herein.
12.11 Written Agreements. Each award granted under this
Plan shall be confirmed by, and shall be subject to
the terms of the Agreement approved by the Committee
and executed by the Company and the Holder. The
Committee may terminate any award made under this
Plan if the Agreement relating thereto is not
executed and returned to the Company within sixty
(60) days after the Agreement has been delivered to
the Holder for his or her execution.
12.12 Indemnification of Committee. In addition to such
other rights of indemnification as they may have as
directors or as members of the Committee, the members
of the Committee shall be indemnified by the Company
against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection
with the defense of any action, suit or proceeding,
or in connection with any appeal therein, to which
they or any of them may be a party by reason of any
action taken or failure to act under or in connection
with the Plan or any award granted thereunder, and
against all amounts paid by them in settlement
thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation
to matters as to which it shall be adjudged in such
action, suit or proceeding that such Committee member
is liable for negligence or misconduct in the
performance of his duties; provided that within sixty
(60) days after institution of any such action, suit
or proceeding a Committee member shall in writing
offer the Company the opportunity, at its own
expense, to handle and defend the same.
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<PAGE>
12.13 Consideration for Common Stock. The Committee may
not grant any awards under this Plan pursuant to
which the Company will be required to issue any
shares of Common Stock unless the Company will
receive consideration for the shares of Common Stock
sufficient under the laws of the State of Delaware so
that such shares of Common Stock will be, when
issued, validly issued and fully paid and
nonassessable when issued.
12.14 Common Stock Certificates. All certificates for
shares of Common Stock delivered under this Plan
shall be subject to such stop-transfer orders and
other restrictions as the Committee may deem
advisable under the rules, regulations, and other
requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common
Stock is then listed, any applicable federal or state
securities law and any applicable corporate law, and
the Committee may cause a legend or legends to be put
on any such certificates to make appropriate refer-
ence to such restrictions. Notwithstanding anything
to the contrary contained herein, whenever
certificates representing shares of Common Stock
subject to an award are required to be delivered
pursuant to the terms of this Plan, the Company may,
in lieu of such delivery requirement, comply with the
provisions of Section 158 of the Delaware General
Corporation Law.
12.15 Unfunded Status of Plan. This Plan is intended to
constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments
not yet made to a Holder by the Company, nothing
contained herein shall give any such Holder any
rights that are greater than those of a general
creditor of the Company.
-20-
March 12, 1999
Herman Meinders Carlan K. Yates
3030 Northwest Expressway, 14701 Coles Road
Suite 1407 Edmond, OK 73013
Oklahoma City, OK 73112
Larry H. Lemon, Co-Trustee Prime Financial Corporation
Larry H. Lemon Living Trust 16 South Pennsylvania
3840 Northwest 44th Oklahoma City, OK 73107
Oklahoma City, OK 73112
LSB Industries, Inc.
16 South Pennsylvania
Oklahoma City, OK 73107
Gentlemen:
This letter will confirm that on Friday, March 12, 1999,
Kestrel Aircraft Company ("Kestrel") voluntarily and peacefully
surrendered possession of its assets, both tangible and intangible,
more particularly described in the schedule attached hereto as
Exhibit "A" (the "Collateral") to you as secured creditors.
Secondly, Kestrel hereby acknowledges and agrees that it is
indebted to:
(1) Herman Meinders, for the sum of One Million Three
Thousand Six Hundred Forty-Five and 83/100's Dollars
($1,003,645.83), the payment and performance of which is
secured by a first priority security interest in an
undivided 50% interest in the Collateral;
(2) Carlan K. Yates, for the sum of Two Hundred Fifty
Thousand Nine Hundred Eleven and 46/100's Dollars
($250,911.46), the payment and performance of which is
secured by a first priority security interest in an
undivided 12.5% interest in the Collateral;
(3) Larry H. Lemon Living Trust, for the sum of Two Hundred
Fifty Thousand Nine Hundred Eleven and 46/100's Dollars
($250,911.46), the payment and performance of which is
secured by a first priority security interest in an
undivided 12.5% interest in the Collateral;
(4) Prime Financial Corporation, for the sum of Five Hundred
One Thousand Eighty Hundred Twenty-Two and 91/100's
Dollars ($501,822.91), the payment and performance of
which is secured by a first priority security interest in
an undivided 25% interest in the Collateral; and
<PAGE>
(5) LSB Industries, Inc. for the sum of Two Million Two
Hundred Twenty-Five Thousand Nine Hundred Seventy-Two and
21/100's Dollars ($2,225,972.21), the payment and
performance of which is secured by a junior, second
priority security interest in the Collateral.
Kestrel hereby offers to renounce its rights in the Collateral
pursuant to 12A O.S. Section 9-505(2) of Oklahoma's Uniform Commercial
Code, and thereupon absolutely and unconditionally grant, bargain,
sell, convey, transfer and set over to a nominee to be designated
by you, all of its right, title and interest in and to the
Collateral, subject only to certain purchase security interests
granted to those secured parties with respect to specific items of
equipment whose claims are identified on Exhibit "B" attached
hereto, in full settlement and satisfaction of your respective
claims as secured creditors.
Should you have any questions concerning any aspect of this
proposal, please call.
KESTREL AIRCRAFT COMPANY, an
Oklahoma corporation
By: ____________________________________
Michael Humphreys, President
<PAGE>
<PAGE>
EXHIBIT "A"
(a) All cash, cash equivalents, accounts and accounts
receivable of Kestrel and all other rights to payment of money held
by Kestrel, now existing or hereafter arising;
(b) All inventory of Kestrel, now owned or hereafter
acquired, and all additions, accessions and substitutions thereto
and therefor, and all accessories, parts and equipment now or
hereafter attached thereto or used in connection therewith,
including (without limitation) any such inventory which is
completed or is in the process of being completed;
(c) All goods, machinery, equipment, apparatus, work in
progress, motor vehicles and airplanes of Kestrel and all other
tangible personal property or every kind and description which is
used in Kestrel's business operations or is owned by Kestrel;
(d) All contract rights of Kestrel;
(e) All general intangibles, chattel paper, securities,
instruments, choses in action and causes of action of Kestrel and
all other intangible personal property of Kestrel of every kind and
nature, now existing or hereafter arising;
(f) All patents, trademarks, copyrights and other
intellectual property rights (and all pending applications for any
of the foregoing) now owned or hereafter acquired by Kestrel; and
(g) All other assets of Kestrel of any kind or nature.
<PAGE>
<PAGE>
EXHIBIT "B"
Schedule of Permitted Liens
___________________________
Creditor Equipment Acquired With Purchase Money Financing
________ _______________________________________________
1) Orix Credit Alliance, Inc. Power MacIntosh Computer, Model
#M2284LL-B; Apple Multi-Scan
Monitor, Model #M2611-LL-A;
Apple Tranceiver, Model
#M04372-B; Insignia Software
Package, Model #01705-1.0
2) Advanta Leasing Corp. Encad Cadjet Plotter 36"
3) AT&T Capital Leasing Computer equipment and software described
Services, Inc. in Financing Statement No. 00208
filed on January 20, 1995 with the
Oklahoma County Clerk, Oklahoma
4) Clark Credit Corporation 1 used Clark Model C-500-30 LPG lift
truck, S/N 235-161-5850
5) Clark Credit Corporation 1 1995 Komatsu Model FG-15C, LPG
powered, pneumatic tire lift truck,
S/N 313075A
6) AT&T Capital Leasing Gateway P5-90 Best Buy Computers
Services, Inc. 2565839 through 2565842
7) Community Bank & Trust Computer equipment, copier and
Company software described in Financing Statement
No. 065314 filed on December 15, 1995
with the Oklahoma County Clerk,
Oklahoma
8) LSB Industries, Inc. Office work station partitions
for 14 work stations
9) MIS Systems Corporation Equipment, computers and software
described in Financing Statement No.
006059 filed on February 7, 1997
with the Oklahoma County Clerk,
Oklahoma
10) AT&T Capital Leasing OCE 7065 Copier SN 705509204
Services, Inc.
The CIT Group/
Equipment Financing
650 CIT Drive
P. O. Box 490
Livingston, NJ 07038-0480
April 13, 1999
THE
CIT
GROUP
Mr. Jim Jones
Vice President
LSB Industries
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
Dear Mr. Jones
Reference is made to (a) that certain Loan Agreement dated
October 31, 1994, as amended, (the "Agreement") between DSN
Corporation, an Oklahoma corporation ("Debtor"), and THE CIT
GROUP/EQUIPMENT FINANCING, INC., a New York corporation ("CIT"),
and (b) the defined terms within. Debtor has advised CIT that LSB
Industries (LSB), a guarantor of Debtor's obligations to CIT was
not in compliance with:
Section 6.10 to the Agreement, in that as of December 31,
1998, LSB did not maintain a tangible net worth of
$32,674,000.00. Further, LSB did not maintain a leverage
requirement of 4.90x.
Debtor has requested that notwithstanding anything to the contrary
in the Agreement, that CIT waive the above instances of non-
compliance through June 30, 2000.
CIT hereby waives, as of this date, the above instances of
noncompliance, provided that such waiver is subject to the
following conditions:
(1) that this waiver is strictly limited to the specific
covenants under section 6.10 of the Agreement, as
amended, set forth above and is strictly limited only to
such instances of noncompliance through and including
June 30, 2000
(2) that Debtor pay a fee in the amount of $40,000.00 within
5 business days of the above date to cover the waiver
(3) CIT agrees to reset the covenants within 30 days of the
date of this waiver.
Sincerely,
The CIT Group Equipment
Financing, Inc.
By: /s/ Anthony Joseph
___________________________
Title: Vice President
_________________________
Acknowledged and Agreed:
DSN Corporation
By: /s/ Tony M. Shelby
________________________
Title: V.P.
_____________________
LSB Industries
By: /s/ Tony M. Shelby
________________________
Title: S.V.P.
______________________
An affiliate of
The Dai-ichi Kagyo Bank, Limited
LSB INDUSTRIES, INC.
SUBSIDIARY LISTING
Revised February 26, 1999
LSB INDUSTRIES, INC. (Direct subsidiaries in bold italics)
Prime Financial Corporation
Tower IV Corporation (f/k/a LSB Leasing Corp.)
Northwest Capital Corporation
Northwest Energy Enterprises, Inc.
Tower Land Development Corp.
ClimaChem, Inc. (5% stock ownership)
LSB Holdings, Inc.
LSB-Europa Limited
Equipos Climatec S.A. de C.V. (97% stock ownership)
LSB Indonesia Corporation (f/k/a LSB Corporation)
Summit Machine Tool Inc. Corp.
Saffron Corporation
Explosives Equipment Corp.
Clipmate Corporation (20% held by Waldock and
Starrett)
Equipos Climatec S.A. de C.V. (1% stock ownership)
LSB International Corp.
Equipos Climatec S.A. de C.V. (1% stock ownership)
L&S Automotive Technologies, Inc. (f/k/a L&S Automotive Products Co.)
Climatex, Inc.
LSB Financial Corp.
Equipos Climatec S.A. de C.V. (1% stock ownership)
Aerobit Industries, Limited (7.98% held by Horovitz and Landsome)
Climate Master International Limited
ROL-BIT Ltd. (5% held by Horovitz)
ClimateCraft Technologies, Inc.
INDUSTRIAL PRODUCTS BUSINESS
Summit Machine Tool Manufacturing Corp.
Hercules Energy Mfg. Corporation
Morey Machinery Manufacturing Corporation (f/k/a Fertilizer
Equipment Corp.) (10% held by Jonathon Morey)
<PAGE>
<PAGE>
ENVIRONMENTAL/CHEMICAL BUSINESS
ClimaChem, Inc. (95% stock ownership)
Northwest Financial Corporation
Climate Mate, Inc.
The Environmental Group International Limited
LSB Chemical Corp.
Total Energy Systems Limited
Total Energy Systems (NZ) Limited
T.E.S. Mining Services Pty. Ltd.
Total Energy Systems (International) Pty Ltd
El Dorado Chemical Company
Slurry Explosive Corporation
El Dorado Nitrogen Company (f/k/a LSB Nitrogen Corporation,
f/k/a LSB Import Corp.)
DSN Corporation
Universal Tech Corporation
The Environmental Group, Inc.
International Environmental Corporation
Climate Master, Inc.
CHP Corporation
Koax Corp.
APR Corporation
ClimateCraft, Inc. (f/k/a Summit Machine Tool Systems, Inc.)
ACP International Limited (f/k/a ACP Manufacturing Corp.)
ThermalClime, Inc. (f/k/a LSB South America Corporation)
AUTOMOTIVE PRODUCTS BUSINESS
LSA Technologies Inc.
L&S Automotive Products Co. [DE]
L&S Bearing Co. (f/k/a L&S Automotive Products Co., f/k/a
LSB Bearing Corp.)
International Bearings, Inc.
LSB Extrusion Co.
Rotex Corporation
Tribonetics Corporation
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8, No. 33-8302) pertaining to the 1981 and 1986
Incentive Stock Option Plans, the Registration Statement (Form S-8
No. 333-58225) pertaining to the 1993 Stock Option and Incentive
Plan, the Registration Statements (Forms S-8 No. 333-62831, No.
333-62835, No. 333-62839, No. 333-62843, and No. 333-62841)
pertaining to the registration of an aggregate of 225,000 shares of
common stock pursuant to certain Non-qualified Stock Option
Agreements for various employees, and the Registration Statement
(Form S-3, No. 33-69800) and the related Prospectuses of LSB
Industries, Inc. of our report dated February 19, 1999, except for
paragraphs (A) and (C) of Note 5 and Note 14, as to which the date
is April 14, 1999 with respect to the consolidated financial
statements and schedule of LSB Industries, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000060714
<NAME> LSB INDUSTRIES, INC.
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> $1,555
<SECURITIES> 0
<RECEIVABLES> 55,053
<ALLOWANCES> 2,323
<INVENTORY> 63,845
<CURRENT-ASSETS> 125,939
<PP&E> 195,607
<DEPRECIATION> 96,379
<TOTAL-ASSETS> 248,647
<CURRENT-LIABILITIES> 57,761
<BONDS> 155,688
139
48,000
<COMMON> 1,511
<OTHER-SE> (14,452)
<TOTAL-LIABILITY-AND-EQUITY> 248,647
<SALES> 310,037
<TOTAL-REVENUES> 324,320
<CGS> 247,084
<TOTAL-COSTS> 308,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,327
<INCOME-PRETAX> (1,820)
<INCOME-TAX> 100
<INCOME-CONTINUING> (1,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,920)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
