UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2
FORM 10-K/A
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period 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 Over-the-Counter
Bulletin Board*
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 Over-the-Counter
Bulletin Board*
Securities Registered Pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights*
* Delisted from the New York Stock Exchange on July 6, 1999.
(Facing Sheet Continued)
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 ____ NO X .
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 May 31, 2000, the aggregate market value of the
7,656,337 shares of voting stock of the Registrant held by
non-affiliates of the Company equaled approximately $6,669,295
based on the closing sales price for the Company's common stock
as reported for that date on the Over-the-Counter Bulletin Board.
That amount does not include the 1,462 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 May 31, 2000, the Registrant had 11,877,411 shares of
common stock outstanding (excluding 3,285,957 shares of common
stock held as treasury stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 2
Chemical Business 3
Climate Control Business 8
Industrial Products Business 11
Employees 12
Research and Development 12
Environmental Matters 13
Item 2. Properties
Chemical Business 15
Climate Control Business 16
Industrial Products Business 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 4A. Executive Officers of the Company 19
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 20
Stockholders 20
Other Information 20
Dividends 20
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 26
Results of Operations 34
Liquidity and Capital Resources 38
Impact of Year 2000 48
Page
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
General 49
Interest Rate Risk 49
Raw Material Price Risk 51
Foreign Currency Risk 51
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 52
Special Note Regarding Forward-Looking Statements 53
PART III 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 56
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 purchase and sale of machine
tools (the "Industrial Products Business").
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 regard, the Company has come to the conclusion
that its Industrial and Automotive Products Businesses are non-
core to the Company. As discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Industrial Products Business", the Company is
currently evaluating opportunities to sell or realize its net
investment in the Business. On April 5, 2000, the Company's Board
of Directors approved a definitive plan to dispose of the
Automotive Products Business. This plan will allow the Company
to focus its efforts and financial resources on its core
businesses. In an effort to make the Automotive Products
Business viable so that it can be sold, on March 9, 2000, the
Automotive Products Business acquired certain assets of the
Zeller Corporation ("Zeller") representing Zeller's universal
joint business. In connection with the acquisition of these
assets, the Automotive Products Business assumed an aggregate of
approximately $7.5 million (unaudited) in Zeller's liabilities,
$4.7 million of which was funded by the Automotive Products
Business primary lender. (The balance of the assumed liabilities
is expected to be funded out of working capital of the Automotive
Products Business). For the year ended December 31, 1999, the
universal joint business of Zeller had unaudited sales of
approximately $11.7 and a net loss of $1.5 million.
In connection with the Automotive Products Business plan of
disposal, the Company's Board of Directors approved a sale of the
Automotive Products Business to an identified third party,
subject to completion of certain conditions (including approval
from the Automotive Products Business' primary lender). This sale was
completed by May 4, 2000. Upon completion of the sale of the
Automotive Products Business, the Company received notes
receivable in the approximate amount of $8.7 million, such notes being
secured by a second lien on substantially all of the assets of
the former Automotive Products Business. These notes, and any
payments of principal and interest, thereon, are subordinated
to the buyer's primary lender (which is the same lender that
was the primary lender to the Automotive Products Business). The
Company will receive no principal payments under the notes for the
first two years following the sale of the Automotive Products Business.
In addition, the buyer assumed substantially all of the Automotive
Products Business' debts and obligations, which at December 31, 1999,
prior to the Zeller acquisition, totaled $22.2 million.
The notes to be received by the Company will be secured by a
lien on all of the assets of the buyer and its subsidiaries, with
the notes to be received by the Company and liens securing
payment of all of the notes subordinated to the buyer's primary
lender and will be subject to any liens outstanding on the
assets. As of May 4, 2000, the Automotive Products Business
owed its primary lender approximately $14.1 million. After the
sale, the Company remained a guarantor on certain
equipment notes of the Automotive Products Business (which equipment
notes have an outstanding principal balance of $4.5 million
as of March 31, 2000) and continues to guaranty up to $1 million
of the revolving credit facility of the buyer, as it did for
its Automotive Products Business. There are no assurances
that the Company will be able to collect on the notes issued
to the Company as consideration for the purchase or that
the debts and obligations of the Automotive Products Business
assumed by the buyer will be paid.
The Company has classified its investment in the Automotive
Products Business as a discontinued operation, reserving its net
investment of approximately $7.9 million in 1999. This reserve
does not include the loss, if any, which may result if the
Company is required to perform on its guaranties described above.
For the twelve month period ended December 31, 1999, 1998
and 1997, the Automotive Products Business had revenues of $33.4,
$40.0 and $35.5 million, respectively and a net loss of $18.1,
$4.4 and $9.7 million respectively. See Note 4 of Notes to
Consolidated Financial Statements.
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 17
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.
All discussions below are that of the Businesses continuing
and accordingly exclude the Discontinued operations of the
Automotive Products Business and the Australian subsidiary's
operations sold in 1999. See discussion above and Notes 4 and 5
of the Notes to the Consolidated Financial Statements.
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 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 Baytown, Texas.
For each of the years 1999, 1998 and 1997, approximately
26%, 29% and 31% of the respective sales of the Chemical Business
consisted of sales of fertilizer and related chemical products
for agricultural purposes, which represented approximately 13%,
14% and 16% of the Company's consolidated sales for each
respective year. For each of the years 1999, 1998 and 1997,
approximately 34%, 47% and 53% of the respective sales of the
Chemical Business consisted of sales of ammonium nitrate and
other chemical-based blasting products for the mining industry,
which represented approximately 17%, 23% and 27% of the Company's
1999, 1998 and 1997 consolidated sales, respectively. For each
of the years 1999, 1998 and 1997, approximately 40%, 24% and 16%
of the respective sales of the Chemical Business consisted of the
Industrial Acids for sale in the food, paper, chemical and
electronics industries, which represented approximately 20%, 12%
and 9% of the Company's 1999, 1998 and 1997 consolidated sales,
respectively. Sales of the Chemical Business accounted for
approximately 50%, 49% and 52% of the Company's 1999, 1998 and
1997 consolidated sales, respectively.
Agricultural Products
The Chemical Business produces ammonium nitrate, a nitrogen-
based fertilizer, at the El Dorado Facility. In 1999, the
Company sold approximately 135,000 tons of ammonium nitrate
fertilizer to farmers, fertilizer dealers and distributors
located primarily in the south central United States (143,000 and
184,000 tons in 1998 and 1997, respectively).
Ammonium nitrate is one of several forms of nitrogen-based
fertilizers which includes anhydrous ammonia. 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 markets its ammonium nitrate 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 their 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 20 wholesale and retail
distribution centers.
In 1998 and 1999, the Chemical Business has been adversely
affected by the drought conditions in the mid-south market during
the primary fertilizer season, along with the importation of low
priced Russian ammonium nitrate, resulting in lower sales volume
and lower sales price for certain of its products sold in its
agricultural markets. The Chemical Business is a member of an
organization of domestic fertilizer grade ammonium nitrate
producers which is seeking relief from unfairly low priced
Russian ammonium nitrate. This industry group filed a petition
in July 1999 with the U.S. International Trade Commission and the
U.S. Department of Commerce seeking an antidumping investigation
and, if warranted, relief from Russian dumping. The
International Trade Commission has rendered a favorable
preliminary determination that U.S. producers of ammonium nitrate
have been injured as a result of Russian ammonium nitrate
imports. In addition, the U.S. Department of Commerce has issued
a preliminary affirmative determination that the Russian imports
were sold at prices that are 264.59% below their fair market
value. On May 19, 2000, the U.S. and Russian governments
entered into an agreement to limit volumes and set minimum prices for
Russian ammonium nitrate exported to the United States. As a result of
this agreement, the antidumping investigation has been suspended. The
U.S. industry or Russian exporters may, however, request
completion of the investigation. If the investigation is completed with
final affirmative findings by the Department of Commerce and the
International Trade Commission, an antidumping order will automatically be
put in place in the event of termination or violation of the agreement.
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 eight distribution centers, five
of which are located in close proximity to the customers' surface
mines in the coal producing states of Kentucky, Missouri,
Tennessee and West Virginia. 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 applications requiring controlled
explosive charges and typically command a premium price and
produce higher margins. The Company's Slurry packaged explosive
products are sold nationally and internationally to other
explosive companies and end-users.
In August, 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary, Total Energy
Systems Limited and its subsidiaries. See "Note 5 to Notes to
Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Industrial Acids
The Chemical Business manufactures and sells industrial
acids, primarily to the food, paper, chemical and electronics
industries. The Company is a 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
provides inventory management as part of the value-added services
it offers to its customers.
EDNC Baytown Plant
Subsidiaries within the Company's Chemical Business entered
into a series of agreements with Bayer Corporation
("Bayer")(collectively, the "Bayer Agreement"). Under the Bayer
Agreement, El Dorado Nitrogen Company ("EDNC") acted as an agent
to construct and, upon completion of construction, is operating a
nitric acid plant (the "EDNC Baytown Plant") at Bayer's Baytown,
Texas chemical facility.
Under the terms of the Bayer Agreement, EDNC leases 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 became fully operational (in May
1999). 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 following May 1999. 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 is entitled to sell to third parties the
amount of nitric acid manufactured at the EDNC Baytown Plant
which is in excess of Bayer's requirements. 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, as defined, plus a profit. The Company estimates that at
full production capacity based on terms of the Bayer Agreement
and subject to the price of anhydrous ammonia, the EDNC Baytown
Plant is anticipated to generate approximately $35 million in
annual gross revenues. See "Special Note Regarding Forward-
Looking Statements". Upon expiration of the initial ten-year
term from the date the EDNC Baytown Plant became 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.
EDNC and Bayer have an option to terminate the Bayer
Agreement upon the occurrence of certain events of default if not
cured. 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 demanded the
contractors bonding company to provide funds necessary for
subcontractors to complete construction. The Company, the
contractor, the bonding company and Bayer entered into an
agreement which provided that the bonding company pay $12.9
million for payments to subcontractors for work performed prior
to February 1, 1999. In addition, the contractor agreed to
provide, on a no cost basis, project management 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 to May 31,
1999, and fully operational by June 30, 1999. The construction
of the EDNC Baytown Plant was completed in May 1999, and EDNC
began producing and delivering nitric acid to Bayer at that time.
Sales by EDNC to Bayer out of the EDNC Baytown Plant production
during 1999, were approximately $17.2 million. Financing of the
EDNC Baytown Plant was provided by an unaffiliated lender.
Neither the Company nor EDC has guaranteed any of the repayment
obligations for the EDNC Baytown Plant. In connection with the
leveraged lease, the Company entered into an interest rate
forward agreement to fix the effective rate of interest implicit
in such lease. See "Special Note Regarding Forward-Looking
Statements" and Note 2 of Notes to Consolidated Financial
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 normally purchases
approximately 200,000 tons of anhydrous ammonia per year for use
in its manufacture of its products. Due to lower sales in 1999,
the Company purchases of anhydrous ammonia were approximately
151,000 tons.
During 1999, the Chemical Business purchased its raw
material requirements of anhydrous ammonia from three suppliers
at an average cost per ton of approximately $145 compared to
approximately $154 per ton in 1998 and approximately $184 per ton
in 1997. During the second half of 1999, the majority of the
Chemical Business' raw material purchases were made under one
contract as supply contracts with the other two suppliers were
terminated. In October, 1999, the Chemical Business renegotiated
its remaining contract, which provides the Chemical Business with
an extended term to purchase the anhydrous ammonia it was
required to purchase as of December 31, 1999 (96,000 tons).
Under the renegotiated contract, the Chemical Business is to
purchase the 96,000 tons at a minimum of 2,000 tons of anhydrous
ammonia per month during 2000 and 3,000 tons per month in 2001
and 2002, at prices which could exceed or be less than the then
current spot market price for anhydrous ammonia. In addition,
under the renegotiated requirements contract the Company is
committed to purchase 50% of its remaining requirements of
anhydrous ammonia through 2002 from this third party at prices
which will approximate the then current spot market price. In
January, 2000, the supplier under this requirement contract
agreed to supply the Chemical Business other requirements for
anhydrous ammonia for a one (1) year term at approximately the
then current spot market price, which one (1) year agreement is
terminable on 120 days notice.
During the second half of 1998 and during 1999, an excess
supply of nitrate based products, caused, in part, by the import
of Russian nitrate, has caused a significant decline in the sales
prices. This decline in sales price has resulted in the cost of
anhydrous ammonia purchased under the above contract when
combined with manufacturing and distribution costs, to exceed
anticipated future sales prices. See "Special Note Regarding
Forward-Looking Statements," and Note 16 of Notes to Consolidated
Financial Statements.
The Company believes that it could obtain anhydrous ammonia
from other sources in the event of a termination of the above-
referenced contract.
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. The agricultural markets serviced by the Chemical
Business have sustained a drought resulting in a lack of demand
for the Chemical Business' fertilizer products during the 1998
and 1999 fall and spring planting seasons and have had a material
adverse effect of the Company.
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 Chemical Business is also subject to
extensive federal, state and local environmental laws, rules and
regulations. See "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.
Developments in Asia
During 1999, the Chemical Business sold substantially all of
the assets of its Australian subsidiary. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 5 to Consolidated Financial Statements for a
discussion of the terms of the sale and the loss sustained by the
Company as a result of the disposition of the Chemical Business'
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 46%, 45% and 42% of the Company's 1999, 1998 and
1997 consolidated sales, respectively.
Hydronic Fan Coils
The Climate Control Business is a 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 breadth of the
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
the longer life, lower cost to operate, and relatively short
payback periods of geothermal systems, as compared with air-to-
air systems, will continue to increase demand for its geothermal
products. The Company is specifically targeting new residential
construction of homes exceeding $200,000 in value. 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 $325 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 is primarily a result of new
construction, the aging of the installed base of units, the
introduction of new energy efficient 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, schools, hospitals, apartment
buildings, office buildings and other commercial or residential
structures. As of December 31, 1999, the backlog of confirmed
orders for the Climate Control Business was approximately $22.1
million as compared to approximately $21.1 million at December
31, 1998. 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 February 29, 2000, the Climate
Control Business had released substantially all of the December
31, 1999 backlog to production. All of the December 31, 1999
backlog is expected to be filled by December 31, 2000. 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 manufacturers
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 27% of the sales of the
Climate Control Business in 1999 and approximately 12% of the
Company's 1999 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".
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 (the "Option") to acquire
80% of the issued and outstanding stock of an Entity (the
"Optioned Company") that performs energy savings contracts,
primarily on US government facilities. For the Option, the
Company has paid $1.3 million as of the date of this report. The
term of the Option expired May 4, 1999. The Company decided not
to exercise the Option. The grantors of the Option are obligated
to repay to the Company $1.0 million of the Option, which
obligation is secured by the stock of the Entity and other
affiliates of the Optioned Company. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for discussion of sale of this investment in 2000.
Through the date of this report, the Company has advanced the
Entity approximately $1.7 million, including accrued interest.
The Company has recorded reserves of approximately $1.5 million
against the loans, accrued interest and option payments. For its
year ended June 30, 1999, the Entity reported an audited net
income of approximately $.4 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 $1.6 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, management
of the Company's subsidiary which holds the option has not
decided whether it will exercise the option.
For 1999, 1998 and 1997, the French manufacturer had
revenues of $18.9, $17.2 and $14.3 million, respectively, and
reported net income of approximately $600,000, $100,000 and
$300,000, respectively. As a result of cumulative losses by the
French manufacturer prior to 1997, the Company established
reserves against the loans aggregating approximately $1.5 million
through December 31, 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
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 a percent of all energy and
maintenance savings during the twenty (20) year contract term.
The Project spent approximately $17.9 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. The
Company's equity interest in the results of the operations of the
Project were not material for the years ended December, 1999,
1998 and 1997.
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
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 4%, 6% and 6% of the Company's
consolidated sales in each of the years 1999, 1998 and 1997
respectively.
As discussed in "Item 1 - Business General", the Company has
concluded that its Industrial Products Business is non-core to
the Company and is pursuing various alternatives of realizing its
investments in these assets.
Distribution and Market
The Industrial Products Business distributes its machine
tools in the United States. The Industrial Products Business also
sells its machine tools through independent machine tool dealers
throughout the United States, 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, 1999, the Company employed 1,735 persons.
As of that date, (a) the Chemical Business employed 537 persons,
with 106 represented by unions under agreements expiring in
August, 2001 and February, 2002, (b) the Climate Control Business
employed 784 persons, none of whom are represented by a union,
(c) the Industrial Products Business employed 41 persons, none of
whom are represented by a union, and (d) the Automotive Products
Business, which the Board of Directors approved a plan to sell or
otherwise dispose of the operations, employed 311 persons, with
19 represented by unions under an agreement expiring in July,
2000 .
Research and Development
The Company incurred approximately $713,000 in 1999,
$377,000 in 1998, and $367,000 in 1997 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
obligations under the Environmental Laws and the Health Laws,
many of which provide for substantial fines and criminal
sanctions for violations. 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 will be required to make additional significant site or
operational modifications at the El Dorado Facility, involving
substantial expenditures. 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 administrative order ("CAO") entered into
with the Arkansas Department of Environmental Quality ("ADEQ"),
the Chemical Business has installed additional monitoring wells
at the El Dorado Facility in accordance with a workplan approved
by the ADEQ, and submitted the test results to ADEQ. 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 ADEQ 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 ADEQ in August,
1998 (the "Wastewater Consent Order"). 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 below, 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 1998 and 1999.
The Wastewater Consent Order also 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 ADEQ, or that further
work will not be required.
The Wastewater Consent Order also requires the Chemical
Business to undertake a facility wide wastewater evaluation and
pollutant source control program and facility wide 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 State of Arkansas by August 2000. The construction of the
additional water treatment components is required to be completed
by August, 2001 and the El Dorado plant has been mandated to be
in compliance with the final effluent limits on or before
February 2002. The aforementioned compliance deadlines, however,
are not scheduled to commence until after the State of Arkansas
has issued a renewal permit establishing new, more restrictive
effluent limits. Alternative methods for meeting these
requirements are continuing to be examined by the Chemical
Business. The Company believes, although there can be no
assurance, that any such new effluent limits would not have a
material adverse effect on the Company. See "Special Note
Regarding Forward-Looking Statements." The Wastewater Consent
Order provided that the State of Arkansas will make every effort
to issue the renewal permit by December 1, 1999; however, the
State of Arkansas has delayed issuance of the permit. Because
the Wastewater Consent Order provides that the compliance
deadlines may be extended for circumstances beyond the reasonable
control of the Company, and because the State of Arkansas has not
yet issued the renewal permit, the Company does not believe that
failure to meet the aforementioned compliance deadlines will
present a material adverse impact. The State of Arkansas has
been advised that the Company is seeking financing from Arkansas
authorities for the projects required to comply with the
Wastewater Consent Order and the Company has requested that the
permit be further delayed until financing arrangements can be
made, which requests have been met to date. The wastewater
program is currently expected to require future capital
expenditures of approximately $10.0 million. Negotiations for
securing financing are currently underway.
Due to certain start-up problems with the DSN Plant,
including excess emissions from various emission sources, the
Chemical Business and the ADEQ entered into certain agreements,
including an administrative consent order (the "Air Consent
Order") in 1995 to resolve certain of the Chemical Business' past
violations. 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. 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. 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." Effective May 1, 2000, the Chemical Business will
be operating under a new air permit. This air permit supercedes
all air-related consent administrative orders other than the Air
Consent Order discussed above.
During 1998 and 1999, the Chemical Business expended
approximately $.7 million and $.9 million, respectively, in
connection with compliance with federal, state and local
Environmental Laws at its El Dorado Facility, including, but not
limited to, compliance with the Wastewater Consent Order, as
amended. The Company anticipates that the Chemical Business may
spend up to $10.0 million for future capital expenditures
relating to environmental control facilities at its El Dorado
Facility to comply with Environmental Laws, including, but not
limited to, the Wastewater Consent Order, as amended, with $2.0
million being spent in 2000 and the balance being spent in 2001.
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 2000 and 2001 for capital expenditures
related to compliance with Environmental Laws is dependent upon a
variety of factors, including, but not limited to, obtaining
financing through Arkansas authorities, the occurrence of
additional releases or threatened releases 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." Additional orders from the ADEQ 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
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"), (iii) in a
mixed acid plant in Wilmington, North Carolina ("Wilmington
Plant"), and (iv) in a nitric acid plant in Baytown, Texas
("Baytown Plant"). The Chemical Business owns all of its
manufacturing facilities except the Baytown Plant. The Wilmington
Plant and the DSN Plant are subject to mortgages. The Baytown
Plant is being leased pursuant to a leveraged lease from an
unrelated third party.
As of December 31, 1999, the El Dorado Facility was utilized
at approximately 71% 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 28 agricultural and explosive distribution centers. The
Chemical Business currently operates 20 agricultural distribution
centers, with 16 of the centers located in Texas (13 of which the
Company owns and 3 of which it leases); 1 center located in
Missouri (leased); and 3 centers located in Tennessee (owned).
The Chemical Business currently operates 8 domestic explosives
distribution centers located in Hallowell, Kansas (owned); Bonne
Terre, Missouri (owned); Poca, West Virginia (leased); Owensboro,
Martin and Combs, Kentucky (leased); Pryor, Oklahoma (leased) and
Dunlap, Tennessee (owned).
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, 1999, the Climate Control Business was using the productive
capacity of the above referenced facility to the extent of
approximately 84%, 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 270,000 square foot facility in Oklahoma City,
Oklahoma, which it leases from an unrelated party. The lease
term began March 1, 1988 and expires February 28, 2003, with
options to renew for additional five-year periods. The lease
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,
1999, the productive capacity of this manufacturing operation was
being utilized to the extent of approximately 82%, based on two
nine-hour shifts per day and a five-day week in one department
and one eight-hour shift per day and a five-day week in all other
departments.
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.
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 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
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, 1999, the Company has accrued an amount based on
a 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 Minerals 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 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."
On August 26, 1999, LSB and EDC were served with a complaint
filed in the District Court of the Western District of Oklahoma
by National Union Fire Insurance Company, seeking recovery of
certain insurance premiums totaling $2,085,800 plus prejudgment
interest, costs and attorneys fees alleged to be due and owing by
LSB and EDC, related to National Union insurance policies for LSB
and subsidiaries dating from 1979 through 1988.
The parties entered into an agreement to settle this matter
in 1999, whereby LSB paid $200,000 in December 1999 and agreed to
pay an additional $300,000 to National Union. The $300,000 is
payable annually in installments of $100,000 plus interest. As a
part of the agreement to settle this matter, the parties have
agreed to adjudicate whether any additional amounts may be due to
National Union, but the parties have agreed that the Company's
liability for any additional amounts due National Union shall not
exceed $650,000. Amounts expected to be paid under this
settlement by EDC were fully accrued at December 31, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers
The following table identifies the executive officers of the
Company.
Position and Served as
Offices with an Officer
Name Age the Company from
Jack E. Golsen 71 Board Chairman December, 1968
and President
Barry H. Golsen 49 Board Vice Chairman August, 1981
and President of the
Climate Control
Business
David R. Goss 59 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 58 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 58 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 40 Vice President and March, 1990
General Counsel
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.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
Currently the Company's Common Stock trades on the Over-the-
Counter Bulletin Board ("OTC"). Prior to July 6, 1999, the
Company's Common Stock traded 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 through June 30, 1999 and from July 1,
1999 through December 31, 1999 the high and low bid information
for the Company's Common Stock.
Fiscal Year Ended
December 31,
1999 1998
Quarter High Low High Low
First 3 3/8 2 9/16 4 1/2 3 13/16
Second 2 3/4 1 1/4 4 9/16 3 13/16
Third 1 7/8 1 1/8 4 3/8 3 1/8
Fourth 1 3/4 9/16 3 9/16 2 15/16
Stockholders
As of May 31, 2000, the Company had 939 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 Over-the-
Counter Bulletin Board ("OTC"). Prior to July, 1999, the
Company's Common Stock traded on the New York Stock Exchange,
Inc. ("NYSE"). However, the Company 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. Therefore, the Company's Common Stock and
Series 2 Preferred were unable to continue to be listed on the
NYSE.
Dividends
Under the terms of loan agreements between the Company and
its lenders, 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.
The Company is a holding company and, accordingly, its
ability to pay cash 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 of Senior Unsecured Notes to which they are parties.
Under the terms of the Indenture of Senior Unsecured Notes,
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
1999, ClimaChem had a net loss of $19.2 million. See Note 8 of
Notes to Consolidated Financial Statements and Item 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Under the loan agreements discussed in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report, the Company and
its subsidiaries, exclusive of the Automotive Products Business
and ClimaChem and its subsidiaries, have the right to borrow on a
revolving basis up to $6 million, based on eligible collateral.
At December 31, 1999, the Company and its subsidiaries, except
ClimaChem and its subsidiaries, had availability for additional
borrowings of $.1 million. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
for a discussion of the financial covenants and amendments to
loan agreements during the first quarter of 2000.
Holders of the Company's Common Stock are entitled to
receive dividends only when, as, and if declared by the Board of
Directors. No cash 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, 1999, 915,000 shares of $3.25 Convertible Exchangeable Class
C Preferred Stock, Series 2 ("Series 2 Preferred"), 1,462 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 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.
Due to losses sustained by the Company and the Company's
subsidiaries (other than ClimaChem and its subsidiaries) limited
borrowing ability under the Company's revolving loan agreements,
the Company's Board of Directors discontinued payment of cash
dividends on its Common Stock for periods subsequent to January
1, 1999, until the Board of Directors determines otherwise. Also
due to the Company's losses and the Company's liquidity position,
the Company has not declared or paid the September 15, 1999,
December 15, 1999 and the March 15, 2000, regular quarterly
dividend of $.8125 (or $743,438 per quarter) on its outstanding
Series 2 Preferred. In addition, the Company did not declare or
pay the January 1, 2000 regular annual dividend of $12.00 (or
$240,000) on the Series B Preferred. The unpaid dividends in
arrears on the Company's outstanding Series 2 Preferred and
Series B Preferred are cumulative. No dividends or other
distributions, other than dividends payable in Common Stock,
shall be declared or paid, and no purchase, redemption or other
acquisition shall be made, by the Company of or in connection
with any shares of Common Stock until all cumulative and unpaid
dividends on the Series 2 Preferred and Series B Preferred shall
have been paid. As of March 31, 2000, the aggregate amount of
unpaid dividends in arrears on the Company's Series 2 Preferred
totaled approximately $2.2 million. The Company does not
anticipate having funds available to pay dividends on its stock
(Common or Preferred) for the foreseeable future. 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 3, 10, 11 and 12 of Notes to Consolidated
Financial Statements.
Whenever dividends on the Series 2 Preferred shall be in
arrears and unpaid, whether or not declared, in amount equal to
at least six quarterly dividends (whether or not consecutive) (i)
the number of members of the Company's Board of Directors (the
"Board") shall be increased by two, effective as of the time of
election of such directors as hereinafter provided, and (ii) the
holders of the Series 2 Preferred (voting separately as a class)
will have the exclusive right to vote for and elect the two
additional directors of the Company at any meeting of
stockholders of the Company at which directors are to be elected
held during the period that any dividends on the Series 2
Preferred remain in arrears. The right of the holders of the
Series 2 Preferred to vote for such two additional directors
shall terminate, subject to re-vesting in the event of a
subsequent similar arrearage, when all cumulative and unpaid
dividends on the Series 2 Preferred have been declared and set
apart for payment. The term of office of all directors so
elected by the holders of the Series 2 Preferred shall terminate
immediately upon the termination of the right of the holders of
the Series 2 Preferred to vote for such two additional directors,
subject to the requirements of Delaware law.
On January 5, 1999, the Company's Board of Directors
approved the renewal of the Company's then existing Preferred
Share Purchase Rights Plan (with certain exceptions), which
existing plan terminated effective as of February 27, 1999,
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
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%.
Item 6. SELECTED FINANCIAL DATA (1)
<TABLE>
Years ended December 31,
1999 1998 1997 1996 1995
(Dollars in Thousands,
except per share data)
<S> <C> <C> <C> <C> <C>
Selected Statement of Operations Data:
Net sales $261,697 $270,042 $278,430 $269,213 $234,121
Total revenues $262,733 $271,332 $283,597 $275,998 $240,861
Interest expense $ 15,441 $ 14,938 $ 12,155 $ 8,280 $ 8,929
Income (loss) from continuing
operations before extraordinary
charge $(31,646) $ 2,439 $ (8,755) $ 1,944 $ 1,144
Net loss $(49,767) $ (1,920) $(23,065) $(3,845) $ (3,732)
Net loss applicable
to common stock $(52,995) $ (5,149) $(26,294) $(7,074) $ (6,961)
Basic and diluted loss
per common share:
Loss from continuing
operations before extraordinary
charge $ (2.95) $ (.07) $ (.93) $ (.10) $ (.16)
Losses on discontinued
operations $ (1.53) $ (.35) $ (.75) $ (.45) $ (.38)
Net loss $ (4.48) $ (.42) $ (2.04) $ (.55) $ (.54)
</TABLE>
Item 6. SELECTED FINANCIAL DATA (Continued) (1)
<TABLE>
Years ended
December 31,
1999 1998 1997 1996 1995
(Dollars in Thousands,
except per share data)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $188,635 $223,250 $244,600 $233,703 $217,860
Long-term debt, including current
portion $158,072 $150,506 $160,903 $109,023 $102,472
Redeemable preferred stock $ 139 $ 139 $ 146 $ 146 $ 149
Stockholders' equity (deficit) $(14,173) $ 35,059 $ 44,496 $ 74,018 $ 81,576
Selected other data:
Cash dividends declared
per common share $ - $ .02 $ .06 $ .06 $ .06
</TABLE>
(1) On April 5, 2000, the Company's Board of Directors approved a
plan of disposal of the Company's Automotive Products Business.
Accordingly, all amounts have been restated to reflect the Automotive
Products Business as a discontinued operation for all periods presented.
See Note 4 of Notes to Consolidated Financial Statements.
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, 1999
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".
All discussions below are that of the Businesses
continuing and accordingly exclude the Discontinued operations of the
Automotive Products Business and the Australian subsidiary's operations sold
in 1999. See Notes 4 and 5 of the Notes to the Consolidated Financial
Statements.
Overview
General
For the year ended December 31, 1999, the Company had a
net loss applicable to common stock of approximately $53.0
million, as compared to a net loss applicable to common stock of
approximately $5.1 million for the year ended December 31, 1998. The loss
for the year ended December 31, 1999 from continuing operations was
approximately $31.6 million (income of $2.4 million in 1998). 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 regard,
the Company has come to the conclusion that its Industrial and Automotive
Products Businesses are non-core to the Company.
On April 5, 2000, the Board of Directors approved a definitive plan
to dispose of the Company's Automotive Products Business. The
plan allows the Company to focus its efforts and financial resources on its
core businesses. In an effort to make the Automotive Products
Business viable so that it can be sold, on March 9, 2000, the Automotive
Products Business acquired certain assets of the Zeller Corporation ("Zeller")
representing Zeller's universal joint business. In connection with the
acquisition of these assets, the Automotive Products Business assumed an
aggregate of approximately $7.5 million (unaudited) in Zeller's liabilities,
$4.7 million of which was funded by the Automotive Products Business primary
lender. (The balance of the assumed liabilities is expected to be funded out
of working capital of the Automotive Products Business). For year ended
December 31, 1999, the universal joint business of Zeller had unaudited sales
of approximately $11.7 million and a net loss of $1.5 million.
In connection with the Automotive Products Business plan of disposal,
the Company's Board of Directors approved a sale of the Business
to an identified third party, subject to completion of certain conditions
(including approval from the Automotive Products Business' primary lender).
This sale was completed by May 4, 2000. Upon completion of the sale of
the Automotive Products Business, the Company received notes receivable in
the approximate amount of $8.7 million, such notes being secured by a second
lien on substantially all of the assets of the Automotive
Products Business. These notes, and any payments of principal
and interest, thereon, are subordinated to the buyer's primary
lender (which is the same lender that was the primary lender to
the Automotive Products Business). The Company will receive no
principal payments under the notes for the first two years
following the sale of the Automotive Products Business. In
addition, the buyer will assume substantially all of the
Automotive Products Business' debts and obligations, which at
December 31, 1999, prior to the Zeller acquisition totaled $22.2
million.
The notes received by the Company will be secured by a
lien on all of the assets of the buyer and its subsidiaries, with
the notes to be received by the Company, and liens securing payment of all of
the notes subordinated to the buyer's primary lender and will be subject to
any liens outstanding on the assets. As of May 4, 2000, the
Automotive Products Business owed its primary lender approximately $14.1
million. After the sale, the Company remained a guarantor on certain equipment
notes of the Automotive Products Business (which equipment notes have
an outstanding principal balance of $4.5 million as of March 31, 2000)
and continued to guaranty up to $1 million of the revolving credit
facility of the buyer, as it did for its Automotive Products Business. There are
no assurances that the Company will be able to collect on the notes issued to
the Company as consideration for the purchase.
The Company has classified its investment in the Automotive Products
Business as a discontinued operation, reserving approximately $7.9 million in
1999. This reserve does not include the loss, if any, which may result if
the Company is required to perform on its guaranties described above.
For the twelve month period ended December 31, 1999, 1998 and 1997,
the Automotive Products Business had revenues of $33.4, $40.0 and $35.5
million, respective and a net loss of $18.1, $4.4 and $9.7 million
respectively. See Note 4 to Notes to Consolidated Financial Statements.
During August 1999, the Company's Chemical Business sold
substantially all of the assets of its Australian subsidiary. Revenues for
1999 to the date of the sale of the assets of the Australian subsidiary were
$7.5 million and the loss sustained by the Australian subsidiary was $2.0
million, excluding the loss of $2.0 million as a result of the sale.
Included in the Company's loss for 1999 is a loss provision of
$8.4 million as discussed in Note 16 of Notes to Consolidated Financial
Statements and elsewhere in the report. This loss provision was caused, in
part by the Chemical Business' requirements to buy a large percentage of its
anhydrous ammonia requirements (its primary raw material) at prices in excess of
the then market price and the oversupply of nitrate based products in 1999
caused, in part, by the importation of Russian anhydrous ammonia at prices
substantially below the then market price, resulting in the Chemical Business
costs to produce its nitrate based products exceeding the then anticipated
future sales prices.
During 1999, the Chemical Business had commitments to
purchase anhydrous ammonia under three contracts. The Company's purchase
price of anhydrous ammonia under one of these contracts could be higher or
lower than the current market spot price of anhydrous ammonia. Pricing is
subject to variations due to numerous factors contained in this contract.
Based on the pricing index contained in this contract, prices paid during
1998 and 1999 were substantially higher than the current market spot price.
As of December 31, 1999, the Chemical Business is to purchase 96,000 tons at
a minimum of 2,000 tons of anhydrous ammonia per month during 2000 and 3,000
tons per month in 2001 and 2002 under this contract. In addition, under the
contract the Company is committed to purchase 50% of its remaining
requirements of anhydrous ammonia through 2002 from this third party at
prices which approximate market prices. The purchase price(s) the Chemical
Business will be required to pay for the remaining 96,000 tons of anhydrous
ammonia under this contract currently exceeds and is expected to continue to
exceed the spot market prices throughout the purchase period. Additionally,
the excess supply of nitrate based products, caused, in part, by the import
of Russian nitrate, caused a significant decline in the sales prices;
although sales prices have improved in 2000 (improvement in sales margins is
expected in the near term due to increased cost of anhydrous ammonia). During
1999, this decline in sales price resulted in the cost of anhydrous ammonia
purchased under this contract when combined with manufacturing and
distribution costs, to exceed anticipated future sales prices. As a result,
the accompanying Consolidated Financial Statements included a loss provision
of approximately $8.4 million for anhydrous ammonia required to be purchased
during the remainder of the contract ($7.4 million remaining accrued
liability as of December 31, 1999). The provision for loss at December 31,
1999 was based on the forward contract pricing existing at June 30, 1999 and
September 30, 1999 (the date the provisions were recognized), and estimated
market prices for products to be manufactured and sold during the remainder
of the contract. There are no assurances that such estimates will prove
to be accurate. Differences, if any, in the estimated future cost of
anhydrous ammonia and the actual cost in effect at the time of purchase and
differences in the estimated sales prices and actual sales prices of products
manufactured could cause the Company's operating results to differ from that
estimate in arriving at the loss provision recorded during 1999. See Note
18 of Notes to Consolidated Financial Statements.
The Chemical Business is a member of an organization of domestic
fertilizer grade ammonium nitrate producers which sought relief from
unfairly low priced Russian ammonium nitrate. This industry group filed a
petition in July 1999 with the U.S. International Trade Commission and the
U.S. Department of Commerce seeking an antidumping investigation and, if
warranted, relief from Russian dumping. The International Trade Commission
has rendered a favorable preliminary determination that U.S. producers of
ammonium nitrate have been injured as a result of Russian ammonium nitrate
imports. In addition, the U.S. Department of Commerce has issued
a preliminary affirmative determination that the Russian imports were sold at
prices that are 264.59% below their fair market value. On May 19, 2000, the
U.S. and Russian governments entered into an agreement to limit volumes and
set minimum prices for Russian ammonium nitrate exported to the United States.
As a result of this agreement, the antidumping investigation has been suspended.
The U.S. industry or Russian exporters may, however, request completion of the
investigation. If the investigation is completed with final
affirmative findings by the Department of Commerce and the
International Trade Commission, an antidumping order will
automatically be put in place in the event of termination or
violation of the agreement.
The Company's financial statements have been restated to reflect
the Automotive Products Business as a discontinued operation for all periods
presented. As a result, the Automotive Products Business is no longer
presented as a reportable segment. Restated Automotive Products Business
results are presented as losses from discontinued operations, net of
applicable income taxes, and exclude general corporate overhead and certain
interest charges, previously allocated to that business. The discussions and
figures below are based on this restated presentation. Certain statements
contained in this Overview are forward-looking statements, and future results
could differ materially from such statements.
The following table contains certain of the information from
Note 17 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, 1999.
1999 1998 1997
(In thousands)
Net sales:
Businesses continuing:
Chemical $128,154 $125,757 $130,467
Climate Control 117,055 115,786 105,909
Industrial Products 9,027 14,315 15,572
_____________________________________
$254,236 $255,858 $251,948
Business disposed of - Chemical (1) 7,461 14,184 26,482
______________________________________
$261,697 $270,042 $278,430
======================================
Gross Profit: (2)
Businesses continuing:
Chemical $ 13,532 $ 18,570 $16,171
Climate Control 35,467 32,278 29,552
Industrial Products 1,757 3,731 3,776
_____________________________________
$ 50,756 $ 54,579 $49,499
=====================================
Operating Profit (loss): (3)
Businesses continuing:
Chemical $ 1,325 $ 6,592 $ 5,531
Climate Control 9,751 10,653 8,895
Industrial Products (2,507) (403) (993)
_______________________________________
8,569 16,842 13,433
Business disposed of -
Chemical (1) (1,632) (2,467) (52)
_________________________________________
6,937 14,375 13,381
General corporate and other
expenses, net (8,449) (9,891) (9,931)
Interest expense:
Business disposed of (1) (326) (434) (720)
Businesses continuing (15,115) (14,504) (11,435)
Gain (loss) on businesses
disposed of (1,971) 12,993 -
Provision for loss on firm purchase
commitments - Chemical (8,439) - -
Provision for impairment on long-lived
Assets - Chemical (4,126) - -
________________________________________
Income (loss) from continuing
operations before provision for
income taxes and extraordinary
charge $(31,489) $ 2,539 $ (8,705)
========================================
Total assets:
Businesses continuing:
Chemical $ 93,482 $107,780 $ 117,671
Climate Control 65,521 49,516 49,274
Industrial Products 8,203 11,662 9,929
Corporate assets and other 21,429 22,137 32,894
Business disposed of - Chemical - 16,797 19,899
Net assets of discontinued operations - 15,358 14,933
_______________________________________
Total assets $188,635 $223,250 $244,600
=======================================
(1) In August, 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary. See Note
5 of Notes to Consolidated Financial Statements for further
information. The operating results have been presented
separately in the above table.
(2) Gross profit by industry segment represents net sales less
cost of sales.
(3) Operating profit (loss) by industry segment represents
revenues less operating expenses before deducting general
corporate and other expenses, interest expense, income
taxes, loss on business disposed of and provision for loss
on firm purchase commitments and impairment on long-lived
assets in 1999 and gain on sale of an office building (the
"Tower") in 1998.
Chemical Business
Net Sales in the Chemical Business (excluding the Australian
subsidiary in which substantially all of its assets were disposed
of in August, 1999) were $128.2 million for the year ended
December 31, 1999 and $125.8 million for the year ended December
31, 1998. The sales volume from the Chemical Business' El Dorado
Plant was down substantially in 1999 (535,000 tons) from the 1998
level 615,000 tons. This decline in sales volume was offset by
sales from the EDNC Baytown Plant completed in May, 1999 (See
Item 1 "Business" included elsewhere in this report). The gross
profit (excluding the Australian subsidiary and the provision for
loss on firm purchase commitments) decreased to $13.5 million (or
10.6% of net sales) in 1999 from $18.6 million (or 14.8% of net
sales) in 1998. The decrease in the gross profit was primarily a
result of lower volumes and declining sales prices and unabsorbed
overhead resulting from the lower volumes and manufacturing
costs.
During the third and fourth quarters of 1999, two of the
plants were temporarily shut down due to the excessive supply of
ammonium nitrate at the Chemical Business and in the market
place. The plants that were shut down increased the Chemical
Business' losses due to overhead costs that continue even though
product was not being produced at the plants temporarily shut
down. These plants have resumed production in the first quarter
of 2000. There are no assurances that the Chemical Business will
not be required to record additional loss provisions in the
future. Based on the forward pricing and other factors existing
as of May 2000, the Chemical Business may be required to recognize an
additional loss on the anhydrous ammonia purchase contracts of
approximately $1.0 million. See "Special Note regarding Forward Looking
Statements".
In May, 1999, a subsidiary of the Company completed its
obligations, as an agent, pursuant to an agreement to construct a
nitric acid plant located within Bayer's Baytown, Texas chemical
plant complex. This plant is being operated by a subsidiary and
is supplying nitric acid to Bayer under a long-term supply
contract. Sales by this subsidiary to Bayer were approximately
$17.2 million during 1999. Management estimates that, at full
production capacity based on terms of the Agreement and, based on
the price of anhydrous ammonia as of the date of this report, the
plant should generate approximately $35 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. The Company's subsidiary is leasing the nitric acid
plant pursuant to a leverage lease from an unrelated third party
for an initial term of ten (10) years which, began on June 23,
1999. See "Special Note Regarding Forward Looking Statements".
The results of operation of the Chemical Business'
Australian subsidiary had been adversely affected due to adverse
economic developments in certain countries in Asia. As these
adverse economic conditions in Asia continued, they had an
adverse effect on the Company's consolidated results of
operations. As a result of the economic conditions in Australia
and the adverse effect of such conditions on the Company's
consolidated results of operations, the Company entered into an
agreement to dispose of this business. On August 2, 1999
substantially all the assets were sold and a loss of
approximately $2.0 million was recognized. See Note 5 of Notes
to Consolidated Financial Statements.
The Australian subsidiary had revenues for the calendar year
1999 up to the date of sale of $7.5 million and a loss of $2.0
million, excluding the loss on the sale. For the year ended
December 31, 1998, revenues were $14.2 million and the loss was
$2.9 million.
Climate Control
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, 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.
Sales of $117.1 million for the year ended December 31,
1999, in the Climate Control Business were approximately 1.1%
greater than sales of $115.8 million for the year ended December
31, 1998. The gross profit was approximately $35.5 million and
$32.3 million in 1999 and 1998, respectively. The gross profit
percentage increased to 30.3% for 1999 from 27.9% for 1998. This
increase is primarily due to an improved market and manufacturing
efficiency relating to the heat pump portion of the Climate
Control Business.
Industrial Products Business
As indicated in the above table, during the years ended
December 31, 1999 and 1998, respectively, the Industrial Products
Business recorded sales of $9.0 million and $14.3 million
respectively, and reported operating losses of $2.5 million and
$.4 million respectively. The net investment in assets of this
Business has continued to decrease and the Company expects to
realize further reductions in future periods.
The Company continues to eliminate certain categories of
machines from the product line by not replacing those machines
when sold. The Company previously announced that it is
evaluating opportunities to sell or realize its net investment in
its Industrial Products Business. The terms of sale, if any,
have not been finalized. The sale of the Industrial Products
Business is a forward looking statement and is subject to, among
other things, the Company and potential buyer agreeing to terms,
the buyer's and the Company's lending institutions agreeing to
the terms of the transaction, including the purchase price,
approval of the Company's Board of Directors and negotiation and
finalization of definitive agreements. There is no assurance
that the Company will sell or realize its net investment in the
Industrial Products Business in 2000.
Results of Operations
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Revenues
Total revenues of Businesses continuing for 1999 and 1998
were $255.3 million and $257.1 million, respectively (a decrease
of $1.8 million). Sales decreased $1.6 million and other income
decreased $.2 million.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for 1999 were $254.2 million, compared to $255.9
million for 1998, a decrease of $1.7 million. This decrease in
sales resulted principally from decreased sales in the Industrial
Products Business of $5.3 million due to decreased sales of
machine tools. This decrease was offset by: (i) increased sales
in the Climate Control Business of $1.3 million primarily due to
increased heat pump sales offset by production delays related to
mechanical problems with certain new equipment and (ii) lower
sales of $16.0 million from the Chemical Business other than the
EDNC Baytown Plant offset by sales by EDNC of $18.4 million from
the Baytown Plant which began operations in May 1999. Lower
volumes of the Company's nitrogen based products were sold at a
lower price in 1999 due primarily to the import of Russian
nitrate resulting in an over supply of nitrate based products in
the primary market areas for the Chemical Business' agricultural
products (see Note 16 of Notes to Consolidated Financial
Statement).
Gross Profit
Gross profit of Businesses continuing as a percent of net
sales was 20.0% for 1999, compared to 21.3% for 1998. The
decrease in the gross profit percentage was the result of
decreases in the Chemical and Industrial Products Businesses,
partially offset by the Climate Control Business. The decrease
in the Chemical Business was primarily the result of lower sales
volumes and reduced selling prices for the Company's nitrogen
based products. See "Overview General" elsewhere in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion of the Chemical
Business' decreased sales. The decrease in the Industrial
Products Business was primarily due to a lower gross profit
product mix of machine tools sold and a $490,000 charge taken to
write-down the net carrying cost of certain inventory in 1999.
The decrease in the gross profit percentage was offset by an
increase in the Climate Control Business due primarily to an
improved focus on sales of more profitable product lines.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from Businesses continuing for 1999 were
20.3% compared to 19.1% for 1998. This increase is primarily the
result of decreased sales volume in the Chemical Business and the
Industrial Products Business without equivalent corresponding
decreases in SG&A and increased cost of the Company sponsored
medical care programs for its employees due to increased health
care costs. Additionally, costs associated with new start-up
operations in 1999, by the Climate Control Business, having
minimal or no sales, contributed to the increase in dollars as
well as expense as a percent of sales.
Interest Expense
Interest expense for continuing businesses of the Company
was $15.1 million for 1999, compared to $14.5 million for 1998.
The increase of $.6 million primarily resulted from increased
borrowings and lenders' prime rates during the last half of 1999.
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.
Businesses Disposed of
The Company sold substantially all the assets of its wholly-
owned Australian subsidiary in 1999. The Company also sold
certain real estate in 1998. See discussion in Note 5 of the
Notes to Consolidated Financial Statements.
Provision for Loss on Firm Purchase Commitments
The Company had a provision for loss on firm purchase
commitments of $8.4 million for the year ended December 31, 1999
to provide for losses resulting from cost of remaining anhydrous
ammonia to be purchased pursuant to the firm purchase commitment
in the Chemical Business, which when combined with the manufacturing
and distribution costs exceeded the anticipated future sales price. See
discussion in Note 16 of the Notes to Consolidated Financial Statements.
Provision for Impairment on Long-lived Assets
The Company had a provision for impairment on long-lived
assets of $4.1 million for the year ended December 31, 1999 which
includes $3.9 million associated with two out of service chemical
plants which are to be sold or dismantled. See discussion in
Note 2 of the Notes to Consolidated Financial Statements.
Income (loss) from Continuing Operations before Income Taxes
The Company had a loss from continuing operations before
income taxes of $31.5 million for 1999 compared to income from
continuing operations before income taxes of $2.5 million for
1998. The decreased profitability of $34.0 million was primarily
due to the gain on the sale of the Tower in 1998 of $13.0
million, the lower gross profit margins from the Chemical
Business, the loss on disposition of the Australian subsidiary,
lower ammonium nitrate sales prices and volume, excluding EDNC,
from the Chemical Business, the provision for impairment on long-lived
assets and the provision for losses on purchase commitments, as previously
discussed.
Provision for Income Taxes
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
9 of Notes to Consolidated Financial Statements, the Company's
provisions for income taxes for 1999 are for current state income
taxes and 1998 are for current state income taxes and federal
alternative minimum taxes.
Discontinued Operations
On April 5, 2000 the Board of Directors approved a plan of
disposal of the Company's Automotive Products Business ("Automotive").
As a result, Automotive is reflected as a discontinued operations
for the periods presented. The net loss from discontinued operations
of Automotive is $18.1 million in 1999 and $4.4 million in 1998.
The increase in 1999 is due to lower sales volume and profits, and
the loss on disposal of $10.0 million comprised of an accrual of
approximately $2.1 million of anticipated operating losses through the
date of disposal and a reserve of $7.9 million to fully reserve the
Company's net investment in the net assets of Automotive due to
the recurring historical operating losses and uncertainty of realization
of the Company's net investment in the remaining net assets of Automotive.
The remaining loss in 1999 in excess of the loss in 1998 is primarily
due to reduced export sales and reduced sales to Automotive's major
customers while it reduced inventory levels following a merger in
late 1998. See discussion in Note 4 of the Notes to Consolidated
Financial Statements.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Revenues
Total revenues of Businesses continuing for 1998 were $256.5
million compared to $254.1 million in 1997. Sales increased $3.9
million and other income decreased $.8 million. The decrease in
other income was primarily due to certain valuation reserve adjustments
recorded against specifically identified investments in 1998.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for 1998 were $255.9 million, compared to $251.9
million for 1997, an increase of $4.0 million. This increase in
sales resulted principally from increased 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. This increase was offset by (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 $4.7 million primarily due to lower sales volume in the
U.S. of agricultural and blasting products. 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.
Gross Profit
Gross profit of Businesses continuing increased $5.1 million
and was 21.3% of net sales for 1998, compared to 19.6% of net
sales for 1997. The gross profit percentage improved in the
Chemical 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) lower production costs in the Chemical Business due to the
effect of lower prices of anhydrous ammonia in 1998, (ii) high
unabsorbed overhead costs in 1997 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 (iii)
higher gross profit product mix of machine tools sold in the Industrial
Products Business.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from Businesses continuing for 1998 were 19.1%
compared to 19.4% for 1997. This decrease is primarily the result of
increased sales in the Climate Control Business offset by increased
SG&A expenses relating to additional information technology personnel
to support management information system changes and higher variable
costs due to a change in sales mix toward greater domestic sales
which carry a higher SG&A percent. This decrease is offset by the
decrease in sales of the Chemical Business with an increase in SG&A
expenses relating to higher provisions for uncollectible accounts
receivable in 1998. Of the net change in SG&A in 1998 compared
to 1997, 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 continuing businesses of the Company, before
deducting capitalized interest, was $14.5 million during 1998, compared to
$12.5 million during 1997. During 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant. The increase
of $2.0 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.
Businesses Disposed of
The Company sold certain real estate in 1998 for a gain on
disposal of $13.0 million. See discussion in Note 5 of the Notes
to the Consolidated Financial Statements.
Income (loss) from Continuing Operations Before Income Taxes and
Extraordinary Charge
The Company had income from continuing operations before
income taxes and extraordinary charge of $2.5 million for 1998
compared to a loss of $8.7 million for 1997. The increased
profitability of $11.2 million was primarily due to the gain on
the sale of the Tower in 1998, the increased gross profit, and
the decreased SG&A offset by increased interest expense, as
previously discussed.
Provision for Income Taxes
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
9 of Notes to Consolidated Financial Statements, the Company's
provisions for income taxes for 1998 and 1997 are for current
state income taxes and federal alternative minimum taxes.
Discontinued Operations
The Company had losses from discontinued operations, net of
income taxes, of $4.4 million for 1998, compared to $9.7 million
for 1997. The decrease in losses is primarily due to higher
production volumes, improved experience with returns and
allowances and a decrease in SG&A expenses resulting from a
comprehensive cost reduction implemented by the Company offset by
an increase in interest expense resulting from increased
borrowings. See discussion in Note 4 of the Notes to Consolidated
Financial Statements.
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. See discussion in Note 8 of the
Notes to Consolidated Financial Statements.
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, borrowings under its revolving
credit facilities, the issuance of $105 million of Senior
Unsecured Notes by its wholly owned subsidiary, ClimaChem, Inc.,
in November 1997, and secured equipment financing.
Net cash used by continuing operations for the year ended
December 31, 1999 was $.4 million, after $18.1 million for net
loss from discontinued operations of the Automotive Products
Business, loss on the disposition of the Australian subsidiary of
$2.0 million, inventory write-down for $1.6 million and provision
for losses on purchase commitments of $8.4 million (net of amounts
realized in cost of sales of $1.8 million), provision for impairment
on long-lived assets primarily associated with two chemical plants
of $4.1 million, noncash depreciation and amortization of $11.4
million, net provision for losses of $1.5 million relating to accounts
receivable, inventory, notes receivable and other and including the
following changes in assets and liabilities: (i) accounts receivable
increases of $1.4 million; (ii) inventory decreases of $3.9 million;
(iii) increases in supplies and prepaid items of $.2 million; (iv)
decrease in accounts payable of $1.1 million; and (v) increase in
accrued liabilities of $2.8 million. The increase in accounts
receivable was primarily due to improved sales in the fourth quarter
in the Climate Control Business offset by declining fourth quarter
sales in the Industrial Products Business. The decrease in inventory
was primarily due to the reduction in the Chemical Business' inventory
partially offset by increases in the Climate Control Business due to a
build up of inventory in the plant due to an increase in confirmed orders
during the fourth quarter. The decrease in accounts payable is primarily
due to decreases in liabilities associated with purchases of raw materials
in the Chemical business partially offset by increases in liabilities
associated with purchases of raw materials and purchased goods in the
Climate Control Business and timing of payments in the Industrial Products
Business. The increase in accrued liabilities is primarily due to increases
in accrued warranty and sales incentives in the Climate Control Business and
deferred lease liability relating to the Baytown Plant in the Chemical Business.
Cash Flow From Investing and Financing Activities
Net cash provided by investing activities for the year ended
December 31, 1999 included $11.2 million from the proceeds of the
sale of the Australian subsidiary, certain railcars and other equipment
net of $7.6 million in capital expenditures. The capital expenditures
were primarily for the benefit of the Chemical and Climate Control
Businesses to enhance production and product delivery capabilities.
Principal payments of $1.1 million were received on loans receivable and
net expenditures of $.8 million were paid relating to other assets.
Net cash provided by financing activities included (i) payments on
long-term debt and other debt of $6.1 million, (ii) proceeds from long-term
and other borrowings, net of origination fees, of $2.9 million, (iii) net
increases in revolving debt of 6.6 million (iv) decreases in drafts payable
of $.3 million, (v) dividends of $1.7 million, and (vi) treasury stock
purchases of $.2 million.
During the first six months of 1999, the Company declared and paid the
following aggregate dividends: (i) $12.00 per share on each of the out-
standing shares of its Series B 12% Cumulative Convertible Preferred Stock;
(ii) $1.625 per share on each outstanding share of its $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2; and (iii) $10.00 per share
on each outstanding share of its Convertible Noncumulative Preferred Stock.
In order to conserve cash, no dividends were declared or paid subsequent to
June 30, 1999.
Source of Funds
Continuing Businesses
The Company is a diversified holding company and, as a result, it is
dependent on credit agreements and its ability to obtain funds from its
subsidiaries in order to pay its debts and obligations.
The Company's wholly-owned subsidiary, ClimaChem, Inc. ("ClimaChem"),
through its subsidiaries, owns substantially all of the Company's Chemical
and Climate Control Businesses. ClimaChem and its subsidiaries are dependent
on credit agreements with lenders and internally generated cash flow in
order to fund their operations and pay their debts and obligations.
As of December 31, 1999, the Company and certain of its subsidiaries,
including ClimaChem, are parties to a working capital line of credit
evidenced by two separate loan agreements ("Agreements") with a lender
("Lender") collateralized by receivables, inventories and proprietary rights
of the parties to the Agreements. The Agreements have been amended from time
to time since inception to accommodate changes in business conditions and
financial results. This working capital line of credit is a primary source
of liquidity for the Company and ClimaChem.
As of December 31, 1999, the Agreements provided for revolving credit
facilities ("Revolver") for total direct borrowing up to $65 million with
advances at varying percentages of eligible inventory and trade receivables.
At December 31, 1999, the effective interest rate was 9.0% and the
availability for additional borrowings, based on eligible collateral,
approximated $12.5 million. Borrowings under the Revolver outstanding at
December 31, 1999, were $27.5 million. The annual interest on the outstanding
debt under the Revolver at December 31, 1999, at the rates then in effect
would approximate $2.5 million. The Agreements also require the payment of
an annual facility fee of 0.5% of the unused Revolver and restrict the flow
of funds, except under certain conditions, to subsidiaries of the Company
that are not parties to the Agreements.
The Agreements, as amended, required the Company and ClimaChem to
maintain certain financial ratios and contain other financial covenants,
including tangible net worth requirements and capital expenditure
limitations. In 1999, the Company's financial covenants were not required
to be met so long as the Company and its subsidiaries, including ClimaChem,
that are parties to the Agreements, maintained a minimum aggregate
availability under the Revolving Credit Facility of $15.0 million. When
the availability dropped below $15.0 million for three consecutive business
days, the Company and ClimaChem were required to maintain the financial
ratios discussed above. Due to an interest payment of $5.6 million made by
ClimaChem on December 30, 1999, relating to the outstanding $105 million
Senior Unsecured Notes, the availability dropped below the minimum
aggregate availability level required on January 1, 2000. Because the
Company and ClimaChem could not meet the financial ratios required by the
Agreements, the Company and ClimaChem entered into a forbearance agreement
with the Lender effective January 1, 2000. The forbearance agreement waived
the financial covenant requirements for a period of sixty (60) days.
Prior to the expiration of the forbearance agreement, the Agreements
were amended, to provide for total direct borrowings of $50.0 million
including the issuance of letters of credit. The maximum borrowing ability
under the newly amended Agreements is the lesser of $50.0 million or the
borrowing availability calculated using advance rates and eligible collateral
less $5.0 million. The amendment provides for an increase in the interest
rate from the Lender's prime rate plus .5% per annum to the Lender's prime
rate plus 1.5% per annum, or the Company's and ClimaChem's LIBOR interest
rate option, increased to the Lender's LIBOR rate plus 3.875% per annum,
from 2.875%. The term of the Agreements is through December 31, 2000, and
is renewable thereafter for successive thirteen-month terms if, by October 1,
2000, the Company and Lender shall have determined new financial covenants
for the calendar year beginning in January 2001. The Agreements, as amended,
require the Company and ClimaChem to maintain certain financial ratios and
certain other financial covenants, including net worth and interest
coverage ratio requirements and capital expenditure limitations.
As of March 31, 2000 the Company, exclusive of ClimaChem, and ClimaChem
have a borrowing availability under the revolver of $.2 million, and $11.0
million respectively, or $11.2 million in the aggregate.
In addition to the credit facilities discussed above, as of December 31,
1999, ClimaChem's wholly-owned subsidiary, DSN Corporation ("DSN"), is a
party to three loan agreements with a financial company (the "Financing
Company") for three projects. At December 31, 1999, DSN had outstanding
borrowings of $8.2 million under these loans. The loans have monthly
repayment schedules 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, 1999, at the
agreed to interest rates would approximate $.7 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. In April 2000, DSN obtained a waiver from the
Financing Company of the financial covenants through April 2001.
During January 2000, a subsidiary of ClimaChem obtained financing up to
$3.5 million with the City of Oklahoma City ("Lender") to finance the working
capital requirements of Climate Control's new product line of large air
handlers. Currently, the financing agreement requires the Company to make
interest payments on a quarterly basis at the Lender's LIBOR rate plus two-
tenths of one percent (.2%) per annum. After the Lender obtains financing
through the U.S. Department of Housing and Urban Development ("HUD"), the
Company will be required to make principal payments on an annual basis over
a term of sixteen (16) years but based on a twenty (20) year amortization
period. Interest payments will be required on a semi-annual basis at the
rate charged to the Lender by HUD at the time of the funding. The loan is
secured by a mortgage on the manufacturing facility and a separate unrelated
parcel of land.
ClimaChem is restricted as to the funds that it may transfer to the
Company under the terms contained in an Indenture covering the $105 million
Senior Unsecured Notes issued by ClimaChem. Under the terms of the Indenture,
ClimaChem 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 (the "Tax Sharing Agreement"), (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 dividend
payment, 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. ClimaChem
sustained a net loss of $2.6 million in the calendar year 1998, and
a net loss of $19.2 million for the calendar year 1999. Accordingly,
no amounts were paid to the Company by ClimaChem under the Tax Sharing
Agreement, nor under the Management Agreement during 1999 and based on
ClimaChem's cumulative losses at December 31, 1999, and current estimates for
the results of operations for the year ended December 31, 2000, none are
expected during 2000. Due to these limitations, the Company and its
non-ClimaChem subsidiaries have limited resources to satisfy their obligations.
In April 2000, the Company repurchased $5.0 million of the
Senior Notes for $1.2 million. The Company funded the repurchase of these
Senior Notes out of its working capital.
Due to the Company's and ClimaChem's net losses for the years of 1998
and 1999 and the limited borrowing ability under the Revolver, the Company
discontinued payment of cash dividends on its Common Stock for periods
subsequent to January 1, 1999, until the Board of Directors determines
otherwise, and the Company has not paid the September 15, 1999, December 15,
1999 and March 15, 2000 regular quarterly dividend of $.8125 (or $743,438 per
quarter) on its outstanding $3.25 Convertible Exchangeable Class C Preferred
Stock Series 2, totaling approximately $2.2 million. In addition, the Company
did not pay the January 1, 2000 regular annual dividend of $12.00 (or
$240,000) on the Series B Preferred. The Company does not anticipate having
funds available to pay dividends on its stock for the foreseeable future.
As of December 31, 1999, the Company and its subsidiaries which are not
subsidiaries of ClimaChem and exclusive of the Automotive Products Business
had a working capital deficit of approximately $2.3 million, total assets of
$17.6 million, and long-term debt due after one year of approximately $13.5
million.
In 2000, the Company has planned capital expenditures of
approximately $10.0 million, primarily in the Chemical and Climate Control
Businesses. These capital expenditures include approximately $2.0 million,
which the Chemical Business is obligated to spend under consent orders with the
State of Arkansas related to environmental control facilities at its El Dorado
facility, as previously discussed in this report. The Company is currently
exploring alternatives to finance these capital expenditures. There are no
assurances that the Company will be able to arrange financing for its capital
expenditures or to make the necessary changes to its Indenture in order to
borrow the funds required to finance certain of these expenditures. Failure to
be able to make a substantial portion of these capital expenditures,
including those related to environmental matters, could have a material
adverse effect on the Company.
The Company's plan for 2000 calls for the Company to improve its
liquidity and operating results through the liquidation of non- core assets,
realization of benefits from its late 1999 and early 2000 realignment of its
overhead (which serves to minimize the cash flow requirements of the Company
and its subsidiaries which are not subsidiaries of ClimaChem) and through
various debt and equity alternatives.
Commencing in 1997, the Company created a long-term plan which focused
around the Company's core operations, the Chemical and Climate Control
Businesses. This plan commenced with the sale of the 10 3/4% Senior
Unsecured Notes by the Company's wholly-owned subsidiary, ClimaChem, in
November 1997. This financing allowed the core businesses to continue their
growth through expansion into new lines of business directly related to the
Company's core operations (i.e., completion of the DSN plant which produces
concentrated nitric acid, execution of the EDNC Baytown plant agreement with
Bayer to supply industrial acids, development and expansion into market-
innovative climate control products such as geothermal and high air quality
systems and large air handling units).
During 1999, the Chemical Business sustained significant losses,
primarily as a result of the reduction of selling prices for its nitrate-
based products (in large part due to the flood of the market with low-
priced Russian ammonium nitrate) while the Company's cost of raw materials
escalated under a contract with a pricing mechanism tied to the price of
natural gas which increased dramatically. During late 1999, the Company
renegotiated this supply contract, extending the cash requirements under its
take-or-pay provision to delay required takes to 2000, 2001 and 2002 and to
obtain future raw material requirements at spot market prices. The Company
was also active in bringing about a favorable preliminary determination from
the International Trade Commission and Commerce Department, which has had the
current impact of minimizing the dumping of Russian ammonium nitrate in the
U.S. market. This investigation has been suspended due to the agreement between
Russia and the United States to limit volumes and set minimum
prices for imported Russian ammonium nitrate. (The U.S. industry
or Russian exporters may, however, request completion of the
investigation). This, and other factors has
allowed the Chemical Business to see marginally improved market pricing for
its nitrate-based products in the first three months of 2000 compared to the
comparable period in 1999; however, there are no assurances that this
improvement will continue. The Company also successfully commenced operations
of its EDNC Baytown plant which is selling product to Bayer under a long-term
supply contract.
The Company's long-range plans also included the addition of expertise
related to the Company's core businesses to enhance its leadership team.
Beginning in 1998, the Company brought on several new members of its Board
of Directors with expertise in certain of the Company's Businesses, and
individuals with extensive knowledge in the banking industry and financial
matters. These individuals have brought business insight to the Company and
helped management to formulate the Company's immediate and long-range plans.
The plan for 2000 calls for the Company to dispose of a significant
portion of its non-core assets. As previously discussed, on April 5, 2000,
the Board of Directors approved the disposal of the Automotive Products
Business. The Automotive Products Business has experienced a rapidly
consolidating market and is not in an industry which the Company sees as able
to produce an adequate return on its investment. Additionally, the Company
is presently evaluating alternatives for realizing its net investment in the
Industrial Products Business. The Company has had discussions involving the
possible sale of the Industrial Products Business; however, no definitive
plans are currently in place and any which may arise will require Board of
Director approval prior to consummation. The Company is currently continuing
the operations of the Industrial Products Business; however, the Company may
sell or dispose of the operations in 2000. The Company's plan for 2000 also
calls for the realization of the Company's investment in an option to acquire
an energy conservation company and advances made to such entity
(the "Optioned Company"). In April 2000, the Company received
written acknowledgment from the President of the Optioned Company
that it had executed a letter of intent to sell to a third party, the
proceeds from which would allow repayment of the advances and options
payments to the Company in the amount of approximately $2.7
million. As of the date of this report, the Company has received
written confirmation from the buyer of the Optioned Company that
the transaction is on schedule to close in the month of June,
2000 with the amount due to the Company related to the advance
and option payments to be repaid in their entirety. Upon receipt
of these proceeds, the Company is required to repay up to $1
million of outstanding indebtedness to a related party, SBL
Corporation, related to an advance made to the Company in 1997.
The remaining proceeds would be available for corporate
purposes. The Company's plan for 2000 also identifies specific
other non- core assets which the Company will attempt to realize
to provide additional working capital to the Company in
2000. See "Special Note Regarding Forward Looking Statements."
During 1999 and into 2000, the Company has been restructuring its
operations, eliminating businesses which are non-core, reducing its
workforce as opportunities arise and disposing of non-core assets. As
discussed above, the Company has also successfully renegotiated its primary
raw material purchase contracts in the Chemical Business in an effort to make
that Business profitable again and focused its attention to the development
of new, market-innovative products in the Climate Control Business. Although
the Company has not planned to receive any dividends, tax payments or
management fees from ClimaChem in 2000, it is possible that ClimaChem could
pay up to $1.8 million of management fees to its ultimate parent should
operating results be favorable (ClimaChem having EBITDA in excess of $26
million annually, $6.5 million quarterly, is payable to LSB up to $1.8
million).
As previously mentioned, the Company and ClimaChem's primary credit
facility terminates on December 31, 2000, unless the parties to the
agreements agree to new financial covenants for 2001 prior to October 1,
2000. While there is no assurance that the Company will be successful in
extending the term of such credit facility, the Company believes it has a
good working relationship with the Lender and that it will be
successful in extending such facility or replacing such facility
from another lender with substantially the same terms during 2000.
In March 2000, the Company retained Chanin Capital Partners
as its financial advisor to assist in evaluating alternatives
relating to the Company's liquidity and determining its
alternatives for a financial restructuring. As part of the
Company's restructuring, the Company and its financial advisor
have begun discussions with a group of holders of the Senior
Notes to restructure the Senior Notes in order to reduce the
Company's leverage and increase its equity capitalization. The
Company did not make the June 1, 2000 interest payment of $5.4
million on the Senior Notes (excluding interest on the $5.0
million of Senior Notes repurchased by the Company). Under the
terms of the Indenture governing the Senior Notes, the Company
has a grace period of thirty (30) days, or until July 1, 2000, to
make the interest payment or enter into satisfactory agreements
with the holders of the Senior Notes before the Senior Notes are
in default. The Company currently anticipates achieving satisfactory
resoulution of this matter.
The Company has planned for up to $10 million of capital expenditures
for 2000, most of which is not presently committed. Further, a significant
portion of this is dependent upon obtaining acceptable financing. The
Company expects to delay these expenditures as necessary based on the
availability of adequate working capital and the availability of financing.
Recently, the Chemical Business has obtained relief from certain of the
compliance dates under its wastewater management project and expects that
this will ultimately result in the delay in the implementation date of such
project. Construction of the wastewater treatment project is subject to the
Company obtaining financing to fund this project. There are no assurances
that the Company will be able to obtain the required financing. Failure to
construct the wastewater treatment facility could have a material adverse
effect on the Company.
The Company's plan for 2000 involves a number of initiatives and
assumptions which management believes to be reasonable and achievable;
however, should the Company not be able to execute this plan described above,
it may not have resources available to meet its obligations as they come due.
During the period from January 1, 1999, through June 30, 1999, the
Company purchased a total of 87,267 shares of Common Stock for an aggregate
amount of $230,234. The Company has not purchased any of its stock since
prior to June 30, 1999.
Discontinued Business
In May of 1999, the Company's Automotive Products Business entered into
a Loan and Security Agreement (the "Automotive Loan Agreement") with an
unrelated lender (the "Automotive Lender") secured by substantially all
assets of the Automotive Products Business to refinance the Automotive Products
Business' working capital requirements that were previously financed under the
Revolver. The Company was required to provide the Automotive Lender a $1.0
million standby letter of credit to further secure the Automotive Loan
Agreement. The Automotive Loan Agreement provides a Revolving Loan Facility
(the "Automotive Revolver"), Letter of Credit Accommodations and a Term Loan
(the "Automotive Term Loan").
The Automotive Revolver provides for a total direct borrowings up to
$16.0 million, including the issuance of letters of credit. The
Automotive Revolver provides for advances at varying percentages of
eligible inventory and trade receivables. The Automotive Revolver
provides for interest at the rate from time to time publicly announced by
First Union National Bank as its prime rate plus one percent (1%) per
annum or, at the Company's option, on the Automotive Lender's LIBOR
rate plus two and three quarters percent (2.75%) per annum. The
Automotive Revolver also requires the payment of a monthly
servicing fee of $3,000 and a monthly unused line fee equal to
0.5% of the unused credit facility. At December 31, 1999, the
effective interest rate was 9.5% excluding the effect of the
service fee and unused line fee (10.19% considering such fees).
The term of the Automotive Revolver is through May 7, 2001, and
is renewable thereafter for successive twelve month terms. At
December 31, 1999, outstanding borrowing under the Automotive
Revolver were $8.8 million; in addition, the Automotive Products
Business had $.4 million, based on eligible collateral,
available for additional borrowing under the Automotive Revolver.
As a result of the Company's decision to sell or otherwise
dispose of the operations of the Automotive Products Business,
outstanding borrowings at December 31, 1999, are included in net
assets of discontinued operations (see Note 4 of Notes to
Consolidated Financial Statements).
The Automotive Loan Agreement restricts the flow of funds,
except under certain conditions, between the Automotive Products
Business and the Company and its subsidiaries.
The Automotive Term Loan is evidenced by a term promissory
note (the "Term Promissory Note") and is secured by all the same
collateral as the Automotive Revolver. The interest rate of the
Automotive Term Loan is the same as the Automotive Revolver
discussed above. The terms of the Term Promissory Note require
sixty (60) consecutive monthly principal installments (or earlier
as provided in the Term Promissory Note) of which the first
thirty-six (36) installments shall each be in the amount of
$48,611, the next twenty-two (22) installments shall each be in
the amount of $33,333, and the last installment shall be in the
amount of the entire unpaid principal balance. Interest payments
are also required monthly as calculated on the outstanding
principal balance. At December 31, 1999, the outstanding
borrowings under the Automotive Term Loan were approximately $2.2
million and are included in net assets of discontinued operations
(see Note 4 of Notes to Consolidated Financial Statements).
The annual interest on the outstanding debt under the
Automotive Revolver and Automotive Term Loan at December 31,
1999, at the rates then in effect would approximate $1.1 million.
On April 5, 2000, the Board of Directors approved a plan of
disposal of the Company's Automotive Products Business
("Automotive"). On May 4, 2000, the Company completed the disposal through
sale of the assets at book value for two notes receivable aggregating
$8.7 million . In addition the buyer assumed substantially all of the
Automotive Products Business' liabilities which, prior to the Zeller
acquisition, were approximately $22.2 million as of December 31, 1999.
As of March 31, 2000, the debts of the Automotive Products Business was
approximately $24.1 million. These notes are secured by a second
lien on substantially all of the assets of the buyer, but payment
of principal and interest and the Company's ability to foreclose
on the collateral securing the notes are subordinated to the
buyer's primary lender. The losses associated with the
discontinuation of this business segment are reflected
in the net loss from discontinued operations on the
Consolidated Statements of Operations.
The notes provide that no payments of principal will be made for at
least the first two years. Interest will accrue at Wall Street
Journal Prime + 1.0% but will not be paid until and if Automotive's
availability reaches a level of $1.0 million. As stated above, payment
of the notes by the buyer to the Company is subject to a subordination
agreement with the buyer's primary lender.
The Company will remain a guarantor on certain equipment
notes of Automotive, which had outstanding indebtedness of
approximately $4.5 million as of March 31, 2000, and on the
Automotive Revolver in the amount of $1.0 million for which the
Company has posted a letter of credit at December 31, 1999.
In an effort to assist the Automotive Products Business to
be in a position to complete the sell described above, on March
9, 2000, the Company closed the acquisition of certain assets of
the Zeller Corporation representing its universal joint business.
In connection with the acquisition of these assets, the
Automotive Products Business assumed an aggregate of
approximately $7.5 million (unaudited) in Zeller's liabilities,
$4.7 million of which was funded by the Automotive Products
Business primary lender. (The balance of the assumed liabilities
is expected to be funded out of working capital of the Automotive
Products Business). For year ended December 31, 1999, the
universal joint business of Zeller had unaudited sales of
approximately $11.7 and a net loss of $1.5 million.
Foreign Subsidiary
As previously discussed in this report, in August, 1999, the
Company sold substantially all of the assets of its wholly owned
Australian subsidiary, effectively disposing of this portion of
the Chemical Business. All of the proceeds received by the
Company have been applied to reduce the indebtedness of
ClimaChem, or have been reinvested in related businesses of
ClimaChem in accordance with the Indenture of Senior Unsecured
Notes.
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, which expires June 15, 2005, to exchange
its rights under the loan for 100% of the borrower's outstanding
common stock. The Company obtained a security interest in the
stock of the French manufacturer to secure its loan. Subsequent
to 1996, the Company advanced an additional $.9 million to the
French manufacturer bringing the total of the loan to $3.7
million. The $3.7 million loan, less a $1.5 million valuation
reserve for losses incurred by the French manufacturer prior to
1997, is carried on the books as a note receivable in other
assets. As of the date of this report, the decision has not been
made to exercise its option to acquire the stock of the French
manufacturer.
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 a percent of all energy and
maintenance savings during the twenty (20) year contract term.
The Project spent approximately $17.9 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. The
Company's equity interest in the results of the operations of the
Project were not material for the years ended December, 1999,
1998 and 1997.
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 Company has decided not to exercise the Option and has
allowed the term of the Option to lapse. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Source of Funds" for discussion of sale of this
investment in 2000. Through the date of this report, the Company
has made option payments aggregating $1.3 million ($1.0 million
of which is refundable) and has advanced the Optioned Company
approximately $1.7 million including accrued interest. The
Company has recorded reserves of $1.5 million against the loans,
accrued interest and option payments. The loans, accrued
interest and option payments are secured by the stock and other
collateral of the Optioned Company.
Debt and Performance 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 in the aviation company of
approximately 45%.
During the first quarter of 1999, the Company was called
upon to perform on its guarantees. The Company paid
approximately $500,000 to a lender and assumed an obligation for
a $2.0 million note, which is due in equal monthly principal
payments, plus interest, through August, 2004, in satisfaction of
the guarantees. In connection with the demand on the Company to
perform under its guarantee, the Company and the other guarantors
formed a new company ("KAC") which 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. Proceeds received by
the Company, if any, from the sale of KAC assets will be
recognized in the results of operations when and if realized.
As of December 31, 1999, LSB has agreed to guarantee a
performance bond of $2.1 million of a start-up operation
providing services to the Company's Climate Control Business.
Availability of Company's Loss Carry-Overs
The Company's cash flow in future years may 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 was approximately $40 million at December 31,
1999. As of December 31, 1999, the Company had available regular
tax NOL carry-overs of approximately $75 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 2000. 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
Condensed 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.
Impact of Year 2000
In 1999, the Company completed its project to enhance
certain of its Information Technology ("IT") systems and certain
other technologically advanced communication systems. Over the
life of the project, the Company capitalized approximately $1.3
million in costs to accomplish its enhancement program. The
capitalized costs included $.4 million in external programming
costs, with the remainder representing hardware and software
purchases. The time and expense of the project did not have a
material impact on the Company's financial condition. As a
result of these modifications, the Company did not incur any
significant problems relating to Year 2000 issues. There was no
interruption of business with key suppliers or downturn in
economic activity caused by problems with Year 2000 issues. As
of the date of this report, the Company has not been notified of
any warranty issues relating to Year 2000 for the products it has
sold and therefore, the Company believes it should have no
material exposure to contingencies related to the Year 2000 issue
for the products it has sold. The Company will continue to
monitor its computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Contingencies
The Company has several contingencies that could
impact its liquidity in the event that the Company is
unsuccessful in defending gainst 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: 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 13 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. All
information is presented in U.S. dollars.
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 of which prohibit
prepayment or require substantial prepayment penalties.
The Company is also a party to a series of agreements under
which it is leasing a nitric acid plant. The minimum lease
payments associated therewith, prior to execution in June 1999,
were 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 was the fixed rate payor on notional amounts aggregating
$25 million, net to its 50% interest, with a weighted average of
7.12%. The Company accounted for this forward under the deferral
method, so long as high correlation was maintained, whereby the
net gain or loss upon settlement adjusts the item being hedged,
the minimum lease rentals, in periods commencing with the lease
execution. As of December 31, 1999, the Company has deferred
costs of approximately $2.7 million associated with such
agreement, which is being amortized over the initial term of the
lease. The following table provides information about the
Company's interest rate sensitive financial instruments as
of December 31, 1999.
<TABLE>
Years Ending December 31,
2000 2001 2002 2003 2004
Thereafter Total
-----------------------------------------------------------------
--------------------------
<S> <C> <C> <C> <C>
<C> <C> <C>
Expected maturities of long-term debt:
Variable rate debt $27,639 $2,561 $ 121 $ 133
$ 145 $ 922 $31,521
Weighted average
interest rate (1) 9.00% 10.40% 9.00% 9.00%
9.00% 9.00% 9.00%
Fixed rate debt $ 5,720 $7,967 $1,637 $2,774
$1,460 $106,993 $126,551
Weighted average
interest rate (2) 10.52% 10.64% 10.65% 10.68%
10.70% 10.73% 10.66%
</TABLE>
___________________
(1)Interest rate is based on the aggregate rate of debt
outstanding as of December 31, 1999. Interest is at
floating rate based on the lender's prime rate plus
.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. During the first quarter of 2000, the
Revolving Credit
Agreements were amended which included an increase in the
floating rate
based on the Lender's prime rate plus 1.5% per annum, or at
the Company's
option, on the Lender's LIBOR rate plus 3.875% per annum.
The effect of
this change in interest rate based on the Lender's prime
rate at
December 31, 1999, increased the weighted average interest
rate to 9.95%
for 2000 and the total weighted average interest rate to
9.81%.
(2)Interest rate is based on the aggregate rate of debt
outstanding as of December 31, 1999.
December 31, 1999 December 31, 1998
Estimated Carrying Estimate Carrying
Fair Fair Fair Fair
Value Value Value Value
(in thousands)
Variable Rate:
Bank debt and
equipment
financing $ 31,521 $ 31,521 $ 26,196 $ 26,196
Fixed Rate:
Bank debt and
equipment
financing 21,269 21,551 19,590 19,310
Subordinated notes 26,250 105,000 105,000 105,000
_____________________________________________
$ 79,040 $158,072 $150,786 $150,506
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 has a commitment to purchase 96,000 tons of
anhydrous ammonia under a contract. The Company's purchase price
can be higher or lower than the current market spot price. Based
on the forward contract pricing existing during 1999, and
estimated market prices for products to be manufactured and sold
during the remainder of the contract, the accompanying
Consolidated Financial Statements included a loss provision of
approximately $8.4 million for anhydrous ammonia required to be
purchased during the remainder of the contract.
Foreign Currency Risk
During 1999, the Company sold its wholly owned subsidiary
located in Australia, for which the functional currency was the
local currency, the Australian dollar. Since the Australian
subsidiary accounts were converted into U.S. dollars upon
consolidation with the Company, declines in value of the
Australian dollar to the U.S. dollar resulted in translation loss
to the Company. As a result of the sale of the Australian
subsidiary, which was closed on August 2, 1999, the cumulative
foreign currency translation loss of approximately $1.1 million
has been included in the loss on disposal of the Australian
subsidiary at December 31, 1999.
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.
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, (ii) establishing a position as a market
leader, (iii) the amount of the loss provision for anhydrous
ammonia required to be purchased in that the cost to produce
Chemical Business products will improve, (iv) declines in the
price of anhydrous ammonia, (v) obtaining a final ruling as to
Russian dumping of anhydrous ammonia (vi) availability of net
operating loss carryovers, (vii) amount to be spent relating to
compliance with federal, state and local environmental laws at
the El Dorado Facility, (viii) liquidity and availability of
funds, (ix) profits through liquidation of assets or realignment
of assets or some other method, (x) anticipated financial
performance, (xi) ability to comply with general
working capital and debt service requirements, (xii) ability
to be able to continue to borrow under the Company's
revolving line of credit, (xiii) ability to collect on the promissory
notes issued to the Company in connection with the sale of the
Automotive Products Business, (xiv) adequate cash flows to meet
its presently anticipated capital requirements, (xv) ability
of the EDNC Baytown Plant to generate approximately $35 million
in annual gross revenues, or (xvi) ability to make required
capital improvements, and (xvii) ability to carry out its plans
for 2000. 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)
material increase in interest rates; (iv) inability to collect in
a timely manner a material amount of receivables, (v) increased
competitive pressures, (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)
material increases in equipment, maintenance, operating or labor
costs not presently anticipated by the Company, (ix) the
requirement to use internally generated funds for purposes not
presently anticipated, (x) ability to become profitable, or if
unable to become profitable, the inability to secure additional
liquidity in the form of additional equity or debt, (xi) the cost
for the purchase of anhydrous ammonia decreasing, (xii) changes
in competition, (xii) the loss of any significant customer, (xiv)
changes in operating strategy or development plans, (xv)
inability to fund the working capital and expansion of the
Company's businesses, (xvi) adverse results in any of the
Company's pending litigation, (xvii) inability to obtain
necessary raw materials, (xviii) ability to recover the Company's
investment in the aviation company, (x) Bayer's inability or
refusal to purchase all of the Company's production at the new
Baytown nitric acid plant; (xx) continuing decreases in the
selling price for the Chemical Business' nitrogen based end
products, (xxi) inability to negotiate amendments to the
Indenture (xxii) inability to collect the notes due from the
buyer of the Automotive Products Business under the terms the
subordination agreement or inability of the buyer to be able to pay
these notes due to various business conditions, and (xxiii) sale of
the Optioned Company not completed or, if completed, not consummated
on terms that the Company has been advised of, and (xxiv) other factors
described in "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.
PART III
Item 10. Directors and Executive Officers of the Company
Directors. Certificate of Incorporation and By-laws of the
Company provide for the division of the Board of Directors into
three (3) classes, each class consisting as nearly as possible of
one-third of the whole. The term of office of one class of
directors expires each year, with each class of directors elected
for a term of three (3) years and until the shareholders elect
their qualified successors.
The Company's By-laws provide that the Board of Directors,
by resolution from time to time, may fix the number of directors
that shall constitute the whole Board of Directors. The By-laws
presently provide that the number of directors may consist of not
less than three (3) nor more than twelve (12). The Board of
Directors currently has set the number of directors at twelve
(12).
The By-laws of the Company further provide that only persons
nominated by or at the direction of: (i) the Board of Directors
of the Company, or (ii) any stockholder of the Company entitled
to vote for the election of the directors that complies with
certain notice procedures, shall be eligible for election as a
director of the Company. Any stockholder desiring to nominate
any person as a director of the Company must give written notice
to the Secretary of the Company at the Company's principal
executive office not less than fifty (50) days prior to the date
of the meeting of stockholders to elect directors; except, if
less than sixty (60) days' notice or prior disclosure of the date
of such meeting is given to the stockholders, then written notice
by the stockholder must be received by the Secretary of the
Company not later than the close of business on the tenth (10th)
day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. In
addition, if the stockholder proposes to nominate any person, the
stockholder's written notice to the Company must provide all
information relating to such person that the stockholder desires
to nominate that is required to be disclosed in solicitation of
proxies pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.
The following table sets forth the name, principal
occupation, age, year in which the individual first became a
director, and year in which the director's term will expire for
each nominee for election as a director at the Annual Meeting and
all other directors whose term will continue after the Annual
Meeting. Certain information with respect to the executive
officers of the Company is set forth under Item 4A of Part I
hereof.
Name and First Became
Principal Occupation A Director Term Expires Age
Raymond B. Ackerman (1) 1993 2002 77
Chairman Emeritus of Ackerman
McQueen, Inc.
Gerald G. Gagner (2) 1997 2000 64
President of Dragerton
Investments
Bernard G. Ille (3) 1971 2002 73
Investments
Donald W. Munson (4) 1997 2002 67
Consultant
Tony M. Shelby (5) 1971 2002 58
Senior Vice President of
Finance and Chief
Financial Officer of the
Company
Barry H. Golsen (6) 1981 2000 49
Vice Chairman of the
Board of Directors of
the Company and President
of the Climate Control
Business of the Company
David R. Goss (7) 1971 2000 59
Senior Vice President of
Operations of the Company
Jerome D. Shaffer, M.D. (8) 1969 2000 83
Investments
Robert C. Brown, M.D. (9) 1969 2001 69
President of Northwest
Internal Medicine
Associates, Inc.
Jack E. Golsen (10) 1969 2001 71
President, Chief Executive
Officer and Chairman of
the Board of Directors of
the Company
Horace G. Rhodes (11) 1996 2001 72
President/Managing Partner,
Kerr, Irvine, Rhodes
and Ables
Charles A. Burtch (12) 1999 2001 65
Investments
(1) From 1972 until his retirement in 1992, Mr. Ackerman served
as Chairman of the Board and President of Ackerman, McQueen,
Inc., the largest public relations firm in Oklahoma. Mr.
Ackerman currently serves as Chairman Emeritus of Ackerman,
McQueen, Inc. Mr. Ackerman retired as a Rear Admiral from
the United States Naval Reserves. Mr. Ackerman is a
graduate of Oklahoma City University, and in 1996, he was
awarded an honorary doctorate from Oklahoma City,
University.
(2) Mr. Gagner, a resident of New Hope, Pennsylvania, served as
President, Chief Executive Officer and director of USPCI,
Inc., a New York Stock Exchange company involved in the
waste management industry, from 1984 until 1988, when USPCI
was acquired by Union Pacific Corporation. From 1988 to the
present, Mr. Gagner has been engaged as a private investor.
Mr. Gagner has served, and is presently serving, as
President and a director of Dragerton Investments, Inc.,
which developed and sold one of the world's largest
industrial waste landfills, and is presently general partner
of New West Investors, L.P., which has investments
principally in the financial service industry. Mr. Gagner
is also a director of Automation Robotics, A.G., a German
corporation. Mr. Gagner is also a director of the Ziegler
Companies, Inc. Mr. Gagner has an engineering degree from
the University of Utah.
(3) Mr. Ille served as President and Chief Executive Officer of
First Life Assurance Company from May, 1988, until it was
acquired by another company in March, 1994. For more than
five (5) years prior to joining First Life, Mr. Ille served
as President of United Founders Life Insurance Company. Mr.
Ille is a director of Landmark Land Company, Inc., which was
parent company of First Life. Mr. Ille is also a director
for Quail Creek Bank, N.A. Mr. Ille is currently a
private investor. He is a graduate of University of
Oklahoma.
(4) Mr. Munson is a resident of England. From January, 1988,
until his retirement in August, 1992, Mr. Munson served as
President and Chief Operating Officer of Lennox Industries.
Prior to his election as President and Chief Operating
Officer of Lennox Industries, Mr. Munson served as Executive
Vice President of Lennox Industries' Division Operations,
President of Lennox Canada and Managing Director of Lennox
Industries' European Operations. Prior to joining Lennox
Industries, Mr. Munson served in various capacities with the
Howden Group, a company located in England, and The Trane
Company, including serving as the managing director of
various companies within the Howden Group and Vice President
Europe for The Trane Company. Mr. Munson is currently a
consultant and international distributor for the Ducane
Company, a manufacturer of certain types of residential air
conditioning, air furnaces and other equipment, and is
serving as a member of the Board of Directors of Multi Clima
SA, a French manufacturer of air conditioning - heating
equipment, which the Company has an option to acquire. Mr.
Munson has degrees in mechanical engineering and business
administration from the University of Minnesota.
(5) Mr. Shelby, a certified public accountant, is Senior Vice
President and Chief Financial Officer of the Company, a
position he has held for a period in excess of five (5)
years. Prior to becoming Senior Vice President and Chief
Financial Officer of the Company, Mr. Shelby served as Chief
Financial Officer of a subsidiary of the Company and was
with the accounting firm of Arthur Young & Co., a
predecessor to Ernst & Young, L.L.P. Mr. Shelby is a
graduate of Oklahoma City University.
(6) Mr. Golsen, L.L.B., has served as Vice Chairman of the Board
of the Company since August, 1994, and for more than five
(5) years has been the President of the Company's
Environmental Control Business. Mr. Golsen has both his
undergraduate and law degrees from the University of
Oklahoma.
(7) Mr. Goss, a certified public accountant, is a Senior Vice
President - Operations of the Company and has served in
substantially the same capacity for a period in excess of
five (5) years. Mr. Goss is a graduate of Rutgers
University.
(8) Dr. Shaffer, a director of the Company since its inception,
is currently a private investor. He practiced medicine for
many years until his retirement in 1987. Dr. Shaffer is a
graduate of Penn State University and received his medical
degree from Jefferson Medical College.
(9) Dr. Brown has practiced medicine for many years and is Vice
President and Treasurer of Plaza Medical Group, P.C. Dr.
Brown is a graduate of Tufts University and received his
medical degree from Tufts University.
(10) Mr. Golsen, founder of the Company, is Chairman of the Board
and President of the Company and has served in that capacity
since the inception of the Company in 1969. During 1996,
Mr. Golsen was inducted into the Oklahoma Commerce and
Industry Hall of Honor as one of Oklahoma's leading
industrialists. Mr. Golsen has a degree from the University
of New Mexico in Biochemistry.
(11) Mr. Rhodes is the managing partner of the law firm of Kerr,
Irvine, Rhodes & Ables and has served in such capacity and
has practiced law for a period in excess of five (5) years.
Since 1972, Mr. Rhodes has served as Executive Vice
President and General Counsel for the Association of
Oklahoma Life Insurance Companies and since 1982 has served
as Executive Vice President and General Counsel for the
Oklahoma Life and Health Insurance Guaranty Association.
Mr. Rhodes received his undergraduate and law degrees from
the University of Oklahoma.
(12) Mr. Burtch was formerly Executive Vice-President and West
Division Manager of BankAmerica, where he managed
BankAmerica's asset-based lending division for the western
third of the United States. Mr. Burtch worked in the finance
field for more than thirty-five (35) years. He is a graduate of
Arizona State University.
Family Relationships. Jack E. Golsen is the father of Barry
H. Golsen and the brother-in-law of Robert C. Brown, M.D. Robert
C. Brown, M.D. is the uncle of Barry H. Golsen.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely on a review of copies of the Forms 3, 4 and 5 and
amendments thereto furnished to the Company with respect to 1999,
or written representations that no such reports were required to
be filed with the Securities and Exchange Commission, the Company
believes that during 1999 all directors and officers of the
Company and beneficial owners of more than ten percent (10%) of
any class of equity securities of the Company registered pursuant
to Section 12 of the Exchange Act filed their required Forms 3,
4, or 5, as required by Section 16(a) of the Securities Exchange
Act of 1934, as amended, on a timely basis, except Mr.
Ackerman filed one Form 4 inadvertently late to report one grant
of Company stock in lieu of director's fees.
Item 11. Executive Compensation.
The following table shows the aggregate cash compensation
which the Company and its subsidiaries paid or accrued to the
Chief Executive Officer and each of the other four (4) most
highly-paid executive officers of the Company (which includes the
Vice Chairman of the Board who also serves as President of the
Company's Climate Control Business). The table includes cash
distributed for services rendered during 1999, plus any cash
distributed during 1999 for services rendered in a prior year,
less any amount relating to those services previously included in
the cash compensation table for a prior year.
Summary Compensation Table
Long-term
Compen-
sation
Annual Compensation Awards
Other
All
Annual Securities
Other
Compen- Underlying
Compen-
Name and Salary Bonus sation Stock
sation
Position Year ($) ($)(1) ($)(2) Options
($)
Jack E. Golsen, 1999 477,400 - - 265,000
-
Chairman of 1998 477,400 - - -
-
the Board, 1997 470,450 - - -
-
President and
Chief Executive Officer
Barry H. Golsen,1999 226,600 - - 155,000
-
Vice Chairman 1998 226,600 - - -
-
of the Board of 1997 223,300 - - -
-
Directors and
President of the
Climate Control Business
David R. Goss, 1999 190,500 - - 100,000
-
Senior Vice 1998 190,500 - - -
-
President - 1997 187,750 - - -
-
Operations
Tony M. Shelby, 1999 190,500 - - 100,000
-
Senior Vice 1998 190,500 - - -
-
President/Chief 1997 187,750 - - -
-
Financial Officer
David M. Shear, 1999 165,000 - - 100,000
-
Vice President/ 1998 165,000 - - -
-
General Counsel 1997 162,500 - - -
-
(1) Bonuses are for services rendered for the prior fiscal
year. No bonuses were paid to the above-named executive officers
for 1997, 1998, or are to be paid to the above-named executive
officers for 1999 performance.
(2) Does not include perquisites and other personal
benefits, securities or property for the named executive officer
in any year if the aggregate amount of such compensation for such
year does not exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported for the named executive officer
for such year.
Option Grants in 1999. The following table sets forth information
relating to individual grants of stock options made to each of the named
executive officers in the above Summary Compensation Table during the last
fiscal year.
Individual Grants
Name Number of % of Exercise Expiration
Potential
Shares of Total Price Date
Realizable Value
Common Options ($/sh) at
Assumed
Stock Granted Annual
Rates of
underlying Employees Stock
Price
Options in
Appreciation for
Granted 1999
Option Term (2)
(#) (1) 5%
($) 10%
Jack E. 265,000 15.3 1.375 7-7-04 58,393
169,106
Golsen
Barry H. 155,000 9.0 1.375 7-7-04 34,155
98,911
Golsen
David R. 100,000 5.8 1.25 7-7-09 78,612
199,218
Goss
Tony M. 100,000 5.8 1.25 7-7-09 78,612
199,218
Shelby
David M. 100,000 5.8 1.25 7-7-09 78,612
199,218
Shear
(1) The Company has adopted a 1981 Incentive Stock Option Plan (the 1981
plan), a 1986 Incentive Stock Option Plan (the 1986 plan), a 1993
Incentive Stock Option Plan (the 1993 plan), and a 1998 Incentive
Stock Option Plan (the 1998 plan). The 1981 plan, the 1986 plan, the
1993 plan, and the 1998 plan are collectively designated as the Plans.
The Plans provide that the Company may grant options under the Plans
to key salaried employees of the Company. The option price for all
options granted under the Plans cannot equal less than 100% (or 110%
for persons possessing more than 10% of the voting stock of the
Company) of the market value of the Company's Common Stock on the date
of the grant. The Company could grant options under the 1981 Plan
until November 30, 1991, until April 10, 1996 under the 1986 Plan, and
can grant options until August 5, 2003 under the 1993 Plan, and until
August 13, 2008 under the 1998 Plan. The holder of an option granted
under the Plans may not exercise the option after ten (10) years from
the date of grant of the option (or five (5) years for persons
possessing more than 10% of the voting stock of the Company). The
options become exercisable approximately 20% after one year from the
date of the grant, an additional 20% after two years, an additional
30% after three years, and the remaining 30% after four years.
(2) The potential realizable value of each grant of options assumes that
the market price of the Company's Common Stock appreciates in value
from the date of grant to the end of the option term at the annualized
rates shown above each column. The actual value that an executive may
realize, if any, will depend on the amount by which the market price
of the Company's Common Stock at the time of exercise exceeds the
exercise price of the option. As of May 31, 2000, the closing price
of a share of the Company's Common Stock as quoted on the Over-the-
Counter Bulletin Board was $.875. There is no assurance that any
executive will receive the amounts estimated in this table.
Aggregated Option Exercises in 1999
and Fiscal Year End Option Values.
The following table sets forth information concerning each
exercise of stock options by each of the named executive officers
during the last fiscal year and the year-end value of unexercised
options:
Number of Value
Securities of
Unexercised
Underlying In-the-Money
Unexercised Options at
Options at Fiscal Year
End
FY End (#)(2) ($)
(2)(3)
Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#)(1) ($) Unexercisable
Unexercisable
Jack E. Golsen - - 70,000/ -/
295,000 (4) 8,215
Barry H. Golsen - - 73,500/ -/
185,000 (5) 4,805
David R. Goss - - 70,500/ 93/
124,000 (6) 15,600
Tony M. Shelby - - 70,500/ 93/
124,000 (6) 15,600
David M. Shear - - 67,800/ 93/
118,000 (6) 15,600
(1) The named executive officer did not
exercise any Company stock options in 1999.
(2) The incentive stock options granted under the Company's
stock option plans become exercisable 20% after one year from
date of grant, an additional 20% after two years, an additional
30% after three years, and the remaining 30% after four years.
(3) The values are based on the difference between the
price of the Company's Common Stock on the Over-the-Counter
Bulletin Board at the close of trading on December 31, 1999 of
$1.406 per share and the exercise price of such option. The
actual value realized by a named executive officer on the
exercise of these options depends on the market value of the
Company's Common Stock on the date of exercise.
(4) The amounts shown include a non-qualified stock option
covering 176,500 shares of Common Stock which is currently
unexercisable.
(5) The amounts shown include a non-qualified stock option
covering 55,000 shares of Common Stock which is currently
unexercisable.
(6) The amounts shown include a non-qualified stock option
covering 35,000 shares of Common Stock which is currently
unexercisable.
Other Plans. The Board of Directors has adopted an LSB
Industries, Inc., Employee Savings Plan (the "401(k) Plan") for
the employees (including executive officers) of the Company and
its subsidiaries, excluding certain (but not all)
employees covered under union agreements. The 401(k) Plan is an
employee contribution plan, and the Company and its subsidiaries
make no contributions to the 401(k) Plan. The amount that an
employee may contribute to the 401(k) Plan equals a certain
percentage of the employee's compensation, with the percentage based
on the employee's income and certain other criteria as
required under Section 401(k) of the Internal Revenue Code. The
Company or subsidiary deducts the amounts contributed to the
401(k) Plan from the employee's compensation each pay period, in
accordance with the employee's instructions, and pays the amount
into the 401(k) Plan for the employee's benefit. The Summary
Compensation Table set forth above includes any amount
contributed and deferred during the 1997, 1998, and 1999 fiscal years
pursuant to the 401(k) Plan by the named executive officers of the Company.
The Company has a death benefit plan for certain key
employees. Under the plan, the designated beneficiary of an
employee covered by the plan will receive a monthly benefit for a
period of ten (10) years if the employee dies while in the
employment of the Company or a wholly-owned subsidiary of the
Company. The agreement with each employee provides, in addition
to being subject to other terms and conditions set forth in the
agreement, that the Company may terminate the agreement as to any
employee at anytime prior to the employee's death. The Company
has purchased life insurance on the life of each employee covered
under the plan to provide, in large part, a source of funds for
the Company's obligations under the Plan. The Company also will
fund a portion of the benefits by investing the proceeds of such
insurance policy received by the Company upon the employee's
death. The Company is the owner and sole beneficiary of the
insurance policy, with the proceeds payable to the Company upon
the death of the employee. The following table sets forth the
amounts of annual benefits payable to the designated beneficiary
or beneficiaries of the executive officers named in the Summary
Compensation Table set forth above under the above- described
death benefits plan.
Amount of
Name of Individual Annual Payment
Jack E. Golsen $175,000
Barry H. Golsen $ 30,000
David R. Goss $ 35,000
Tony M. Shelby $ 35,000
David M. Shear $ N/A
In addition to the above-described plans, during 1991 the
Company entered into a non-qualified arrangement with certain key
employees of the Company and its subsidiaries to provide
compensation to such individuals in the event that they are
employed by the Company or a subsidiary of the Company at age 65.
Under the plan, the employee will be eligible to receive for the
life of such employee, a designated benefit as set forth in the
plan. In addition, if prior to attaining the age 65 the employee
dies while in the employment of the Company or a subsidiary of
the Company, the designated beneficiary of the employee will
receive a monthly benefit for a period of ten (10) years. The
agreement with each employee provides, in addition to being
subject to other terms and conditions set forth in the agreement,
that the Company may terminate the agreement as to any employee
at any time prior to the employee's death. The Company has
purchased insurance on the life of each employee covered under
the plan where the Company is the owner and sole beneficiary of
the insurance policy, with the proceeds payable to the Company to
provide a source of funds for the Company's obligations under the
plan. The Company may also fund a portion of the benefits by
investing the proceeds of such insurance policies. Under the
terms of the plan, if the employee becomes disabled while in the
employment of the Company or a wholly-owned subsidiary of the
Company, the employee may request the Company to cash-in any life
insurance on the life of such employee purchased to fund the
Company's obligations under the plan. Jack E. Golsen does not
participate in the plan. The following table sets forth the
amounts of annual benefits payable to the executive officers
named in the Summary Compensation Table set forth above under
such retirement plan.
Amount of
Name of Individual Annual Payment
Barry H. Golsen $17,480
David R. Goss $17,403
Tony M. Shelby $15,605
David M. Shear $17,822
Compensation of Directors. In 1999, the Company compensated
seven non-management directors in the amount of $4,500 each and
one non-management director in the amount of approximately $2,900
for their services. The non-management directors of the Company
also received $500 for every meeting of the Board of Directors
attended during 1999. The following members of the Audit
Committee, consisting of Messrs. Rhodes, Ille, Brown, and
Shaffer, received an additional $20,000 each for their services
in 1999. Each member of the Public Relations and Marketing
Committee, consisting of Messrs. Ille and Ackerman, received an
additional $20,000 and $15,000 and 4,000 shares of the Company's
common stock, respectively, for his services in 1999. During
1997, the Board of Directors established a special committee of
the Board of Directors for European business development (the
"European Operations Committee") and elected Mr. Munson as a
member of that committee. During 1999, Mr. Munson was paid
approximately $42,100 for his services on the European
Operations Committee.
In September, 1993, the Company adopted the 1993 Non-
Employee 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 shares for which options may be issued
under the Outside Director Plan will be 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 the Outside Director Plan shall be the fair market value of
the shares of Common Stock at the time the option is granted.
Each option granted under the Outside Director Plan, to the
extent not exercised, shall terminate upon the earlier of the
termination of the outside director as a member of the Company's
Board of Directors or the fifth anniversary of the date such
option was granted. The Company did not grant options under the
Outside Director Plan in April, 1997, 1998, and 1999.
During July, 1999, each of the outside directors of the
Company (Messrs. Ackerman, Brown, Burtch, Gagner, Ille, Munson,
Rhodes and Shaffer) was granted a non-qualified stock option for
the purchase of up to 15,000 shares of Common Stock at an
exercise price of $1.25 per share, which was the closing price
for the Company's Common Stock as quoted on the Over-the-Counter
Bulletin Board as of the date of grant. These non-qualified
options terminate at the earlier of (i) five years from the date
of grant or (ii) upon an optionee ceasing to be a director of the
Company and are exercisable, in whole or in part, at anytime
after six months from the date of grant prior to termination of
the options.
Employment Contracts and Termination of Employment and
Change in Control Arrangements.
a) Termination of Employment and Change in Control Agreements.
The Company has entered into severance agreements with Jack
E. Golsen, Barry H. Golsen, Tony M. Shelby, David R. Goss,
David M. Shear, and certain other officers of the Company
and subsidiaries of the Company.
Each severance agreement provides (among other things) that
if, within twenty-four (24) months after the occurrence of a
change in control (as defined) of the Company, the Company
terminates the officer's employment other than for cause (as
defined), or the officer terminates his employment for good
reason (as defined), the Company must pay the officer an
amount equal to 2.9 times the officer's base amount (as
defined). The phrase "base amount" means the average annual
gross compensation paid by the Company to the officer and
includable in the officer's gross income during the period
consisting of the most recent five (5) year period
immediately preceding the change in control. If the officer
has been employed by the Company for less than 5 years, the
base amount is calculated with respect to the most recent
number of taxable years ending before the change in control
that the officer worked for the Company.
The severance agreements provide that a "change in control"
means a change in control of the Company of a nature that
would require the filing of a Form 8-K with the Securities
and Exchange Commission and, in any event, would mean when:
(1) any individual, firm, corporation, entity, or group (as
defined in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) becomes the beneficial owner, directly
or indirectly, of thirty percent (30%) or more of the
combined voting power of the Company's outstanding voting
securities having the right to vote for the election of
directors, except acquisitions by: (a) any person, firm,
corporation, entity, or group which, as of the date of the
severance agreement, has that ownership, or (b) Jack E.
Golsen, his wife; his children and the spouses of his
children; his estate; executor or administrator of any
estate, guardian or custodian for Jack E. Golsen, his wife,
his children, or the spouses of his children, any
corporation, trust, partnership, or other entity of which
Jack E. Golsen, his wife, children, or the spouses of his
children own at least eighty percent (80%) of the
outstanding beneficial voting or equity interests, directly
or indirectly, either by any one or more of the above-
described persons, entities, or estates; and certain
affiliates and associates of any of the above- described
persons, entities, or estates; (2) individuals who, as of
the date of the severance agreement, constitute the Board of
Directors of the Company (the "Incumbent Board") and who
cease for any reason to constitute a majority of the Board
of Directors except that any person becoming a director
subsequent to the date of the severance agreement, whose
election or nomination for election is approved by a
majority of the Incumbent Board (with certain limited
exceptions), will constitute a member of the Incumbent
Board; or (3) the sale by the Company of all or
substantially all of its assets.
Except for the severance agreement with Jack E. Golsen, the
termination of an officer's employment with the Company "for
cause" means termination because of: (a) the mental or
physical disability from performing the officer's duties for
a period of one hundred twenty (120) consecutive days or one
hundred eighty days (even though not consecutive) within a
three hundred sixty (360) day period; (b) the conviction of
a felony; (c) the embezzlement by the officer of Company
assets resulting in substantial personal enrichment of the
officer at the expense of the Company; or (d) the willful
failure (when not mentally or physically disabled) to follow
a direct written order from the Company's Board of Directors
within the reasonable scope of the officer's duties
performed during the sixty (60) day period prior to the
change in control. The definition of "Cause" contained in
the severance agreement with Jack E. Golsen means
termination because of: (a) the conviction of Mr. Golsen of
a felony involving moral turpitude after all appeals have
been completed; or (b) if due to Mr. Golsen's serious,
willful, gross misconduct or willful, gross neglect of his
duties has resulted in material damages to the Company and
its subsidiaries, taken as a whole, provided that (i) no
action or failure to act by Mr. Golsen will constitute a
reason for termination if he believed, in good faith, that
such action or failure to act was in the Company's or its
subsidiaries' best interest, and (ii) failure of Mr. Golsen
to perform his duties hereunder due to disability shall not
be considered willful, gross misconduct or willful, gross
negligence of his duties for any purpose.
The termination of an officer's employment with the Company
for "good reason" means termination because of (a) the
assignment to the officer of duties inconsistent with the
officer's position, authority, duties, or responsibilities
during the sixty (60) day period immediately preceding the
change in control of the Company or any other action which
results in the diminishment of those duties, position,
authority, or responsibilities; (b) the relocation of the
officer; (c) any purported termination by the Company of the
officer's employment with the Company otherwise than as
permitted by the severance agreement; or (d) in the event of
a change in control of the Company, the failure of the
successor or parent company to agree, in form and substance
satisfactory to the officer, to assume (as to a successor)
or guarantee (as to a parent) the severance
agreement as if
no change in control had occurred.
Except for the severance agreement with Jack E.
Golsen, each
severance agreement runs until the earlier of: (a)
three
years after the date of the severance agreement, or
(b) the
officer's normal retirement date from the Company;
however,
beginning on the first anniversary of the
severance
agreement and on each annual anniversary
thereafter, the
term of the severance agreement automatically extends
for an
additional one-year period, unless the Company
gives notice
otherwise at least sixty (60) days prior to the
anniversary
date. The severance agreement with Jack E.
Golsen is
effective for a period of three (3) years from the
date of
the severance agreement; except that, commencing on
the date
one (1) year after the date of such severance
agreement and
on each annual anniversary thereafter, the term
of such
severance agreement shall be automatically extended so
as to
terminate three (3) years from such renewal date,
unless the
Company gives notices otherwise at least one (1)
year prior
to the renewal date.
(b) Employment Agreement. In March 1996, the Company
entered
into an employment agreement with Jack E.
Golsen. The
employment agreement requires the Company to employ
Jack E.
Golsen as an executive officer of the Company for
an initial
term of three (3) years and provides for two (2)
automatic
renewals of three (3) years each unless terminated
by either
party by the giving of written notice at least one
(1) year
prior to the end of the initial or first renewal
period,
whichever is applicable. Under the terms of such
employment
agreement, Mr. Golsen shall be paid (i) an
annual base
salary at his 1995 base rate, as adjusted from time
to time
by the Compensation Committee, but such shall
never be
adjusted to an amount less than Mr. Golsen's
1995 base
salary, (ii) an annual bonus in an amount as
determined by
the Compensation Committee, and (iii) receive
from the
Company certain other fringe benefits. The
employment
agreement provides that Mr. Golsen's employment may
not be
terminated, except (i) upon conviction of a felony
involving
moral turpitude after all appeals have been
exhausted, (ii)
Mr. Golsen's serious, willful, gross misconduct or
willful,
gross negligence of duties resulting in material
damage to
the Company and its subsidiaries, taken as a
whole, unless
Mr. Golsen believed, in good faith, that such
action or
failure to act was in the Company's or its
subsidiaries'
best interest, and (iii) Mr. Golsen's death;
provided,
however, no such termination under (i) or (ii)
above may
occur unless and until the Company has
delivered to
Mr. Golsen a resolution duly adopted by an
affirmative vote
of three-fourths of the entire membership of the
Board of
Directors at a meeting called for such
purpose after
reasonable notice given to Mr. Golsen finding,
in good
faith, that Mr. Golsen violated (i) or (ii)
above. If
Mr. Golsen's employment is terminated in breach
of this
Agreement, then he shall, in addition to his
other rights
and remedies, receive and the Company shall
pay to
Mr. Golsen (i) in a lump sum cash payment, on the
date of
termination, a sum equal to the amount of Mr.
Golsen's
annual base salary at the time of such termination
and the
amount of the last bonus paid to Mr. Golsen prior
to such
termination times (a) the number of years remaining
under
the employment agreement or (b) four (4) if such
termination
occurs during the last twelve (12) months of the
initial
period or the first renewal period, and (ii)
provide to
Mr. Golsen all of the fringe benefits that the
Company was
obligated to provide during his employment under
the
employment agreement for the remainder of the term
of the
employment agreement, or, if terminated at any
time during
the last twelve (12) months of the initial period
or first
renewal period, then during the remainder of the
term and
the next renewal period.
If there is a change in control (as defined in the
severance
agreement between Mr. Golsen and the Company) and within
twenty-
four (24) months after such change in control Mr.
Golsen is
terminated, other than for Cause (as defined in the
severance
agreement), then in such event, the severance agreement
between
Mr. Golsen and the Company shall be controlling.
In the event Mr. Golsen becomes disabled and is not
able to
perform his duties under the employment agreement as
a result
thereof for a period of twelve (12) consecutive months
within any
two (2) year period, the Company shall pay Mr. Golsen
his full
salary for the remainder of the term of the employment
agreement
and thereafter sixty percent (60%) of such salary
until Mr.
Golsen's death.
Compensation Committee Interlocks and Insider Participation.
The Company's Executive Salary Review Committee
has the
authority to set the compensation of all officers of the
Company.
This Committee generally considers and approves
the
recommendations of the President. The members of the
Executive
Salary Review Committee are the following non-
management
directors: Robert C. Brown, M.D., Jerome D. Shaffer,
M.D., and
Bernard G. Ille.
See "Compensation of Directors" for information
concerning
compensation paid and options granted to non-employee
directors
of the Company during 1999 for services as a director
to the
Company.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Security Ownership of Certain Beneficial Owners.
The
following table shows the total number and percentage
of the
outstanding shares of the Company's voting Common
Stock and
voting Preferred Stock beneficially owned as of the
close of
business on April 7, 2000, with respect to each person
(including
any "group" as used in Section 13(d)(3) of the
Securities Act of
1934, as amended) that the Company knows to have
beneficial
ownership of more than five percent (5%) of the
Company's voting
Common Stock and voting Preferred Stock. A person is
deemed to
be the beneficial owner of voting shares of Common
Stock of the
Company which he or she could acquire within sixty (60)
days of
April 29, 2000.
Because of the requirements of the Securities and
Exchange
Commission as to the method of determining the amount
of shares
an individual or entity may beneficially own, the
amounts shown
below for an individual or entity may include
shares also
considered beneficially owned by others.
Amounts
Name and Address Title of Shares
Percent
of of Beneficially
of
Beneficial Owner Class Owned(1)
Class
Jack E. Golsen and Common 4,243,668 (3)(5)(6)
33.2%
members of his family (2) Voting Preferred 20,000 (4)(6)
92.7%
Riverside Capital
Advisors, Inc. (7) Common 1,467,397 (7)
11.0%
Ryback Management
Corporation Common 1,835,063 (8)
13.4%
Dimensional Fund
Advisors, Inc. Common 686,000 (9)
5.8%
Jayhawk Capital
Management, LLC Common 1,016,300(10)
8.6%
______________________________________
(1) The Company based the information, with
respect to
beneficial ownership, on information furnished by the
above-named
individuals or entities or contained in filings made
with the
Securities and Exchange Commission or the Company's records.
(2) Includes Jack E. Golsen and the following
members of
his family: wife, Sylvia H. Golsen; son, Barry H.
Golsen (a
Director, Vice Chairman of the Board of Directors, and
President
of the Climate Control Business of the Company); son,
Steven J.
Golsen (Executive officer of several subsidiaries of
the
Company); and daughter, Linda F. Rappaport. The address
of Jack
E. Golsen, Sylvia H. Golsen, Barry H. Golsen, and
Linda F.
Rappaport is 16 South Pennsylvania Avenue,
Oklahoma City,
Oklahoma 73107; and Steven J. Golsen's address is 7300
SW 44th
Street, Oklahoma City, Oklahoma 73179.
(3) Includes (a) the following shares over which
Jack E.
Golsen ("J. Golsen") has the sole voting and
dispositive power:
(i) 109,028 shares that he owns of record, (ii) 4,000
shares that
he has the right to acquire upon conversion of a
promissory note,
(iii) 133,333 shares that he has the right to acquire
upon the
conversion of 4,000 shares of the Company's Series
B 12%
Cumulative Convertible Preferred Stock (the "Series B
Preferred")
owned of record by him, (iv) 10,000 shares owned of
record by the
MG Trust, of which he is the sole trustee, and (v)
70,000 shares
that he has the right to acquire within the next sixty
(60) days
under the Company's stock option plans; (b)
1,052,250 shares
owned of record by Sylvia H. Golsen, over which she
and her
husband, J. Golsen share voting and dispositive
power; (c)
246,616 shares over which Barry H. Golsen ("B. Golsen")
has the
sole voting and dispositive power, 533 shares owned of
record by
B. Golsen's wife, over which he shares the voting and
dispositive
power, and 75,000 shares that he has the right to
acquire within
the next sixty (60) days under the Company's stock
option plans;
(d) 206,987 shares over which Steven J. Golsen ("S.
Golsen") has
the sole voting and dispositive power and 61,000 shares
that he
has the right to acquire within the next sixty (60)
days under
the Company's stock option plans; (e) 222,460 shares
held in
trust for the grandchildren of J. Golsen and Sylvia H.
Golsen of
which B. Golsen, S. Golsen and Linda F. Rappaport
("L.
Rappaport") jointly or individually are trustees; (f)
82,552
shares owned of record by L. Rappaport, over which L.
Rappaport
has the sole voting and dispositive power; (g)
1,336,799 shares
owned of record by SBL Corporation ("SBL"), 39,177
shares that
SBL has the right to acquire upon conversion of 9,050
shares of
the Company's non-voting $3.25 Convertible Exchangeable
Class C
Preferred Stock, Series 2 (the "Series 2 Preferred"), and
400,000
shares that SBL has the right to acquire upon
conversion of
12,000 shares of Series B Preferred owned of record by
SBL, and
(h) 60,600 shares owned of record by Golsen Petroleum
Corporation
("GPC"), which is a wholly-owned subsidiary of SBL, and
133,333
shares that GPC has the right to acquire upon conversion
of 4,000
shares of Series B Preferred owned of record by GPC.
SBL is
wholly-owned by Sylvia H. Golsen (40% owner), B.
Golsen (20%
owner), S. Golsen (20% owner), and L. Rappaport (20%
owner) and,
as a result, SBL, J. Golsen, Sylvia H. Golsen, B.
Golsen, S.
Golsen, and L. Rappaport share the voting and
dispositive power
of the shares beneficially owned by SBL. SBL's address
is 16
South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107.
(4) Includes: (a) 4,000 shares of Series B
Preferred owned
of record by J. Golsen, over which he has the sole
voting and
dispositive power; (b) 12,000 shares of Series B
Preferred owned
of record by SBL; and (c) 4,000 shares owned of record
by SBL's
wholly-owned subsidiary, GPC, over which SBL, J.
Golsen, Sylvia
H. Golsen, B. Golsen, S. Golsen, and L. Rappaport
share the
voting and dispositive power.
(5) Does not include 124,350 shares of Common Stock
that L.
Rappaport's husband owns of record and 61,000 shares
which he has
the right to acquire within the next sixty (60) days
under the
Company's stock option plans, all of which L. Rappaport
disclaims
beneficial ownership. Does not include 234,520 shares
of Common
Stock owned of record by certain trusts for the benefit
of B.
Golsen, S. Golsen, and L. Rappaport over which B.
Golsen, S.
Golsen and L. Rappaport have no voting or
dispositive power.
Heidi Brown Shear, an officer of the Company and the
niece of J.
Golsen, is the Trustee of each of these trusts.
(6) J. Golsen disclaims beneficial ownership of
the shares
that B. Golsen, S. Golsen, and L. Rappaport each have
the sole
voting and investment power over as noted in footnote
(3) above.
B. Golsen, S. Golsen, and L. Rappaport disclaim
beneficial
ownership of the shares that J. Golsen has the sole
voting and
investment power over as noted in footnotes (3) and (4)
and the
shares owned of record by Sylvia H. Golsen. Sylvia
H. Golsen
disclaims beneficial ownership of the shares that J.
Golsen has
the sole voting and dispositive power over as noted in
footnotes
(3) and (4) above.
(7) Riverside Capital Advisors, Inc. ("Riverside")
advised
the Company that it owns 341,255 shares of Series 2
Preferred
that is convertible into 1,467,397 shares of
Common Stock.
Riverside further advised the Company that it has
voting and
dispositive power over such shares as a result of
Riverside
having full discretionary investment authority over
customers'
accounts to which it provides investment services. The
address
of Riverside is 1650 Southeast 17th Street Causeway,
Fort
Lauderdale, Florida 33316.
(8) Ryback Management Corporation ("Ryback") is
the
Investment Company Advisor for Lindner Dividend
Fund, a
registered investment company, which owns 423,900
shares of
Series 2 Preferred that is convertible into 1,835,063
shares of
Common Stock. Ryback has sole voting and dispositive
power over
these shares. The address of Ryback is 7711 Corondelet
Avenue,
Suite 700, St. Louis, Missouri 63105.
(9) Dimensional Fund Advisors, Inc.
("Dimensional"), a
registered investment advisor, is deemed to have
beneficial
ownership of 686,100 shares of the Company's Common
Stock, all of
which shares are held in portfolios of DFA Investment
Dimensions
Group Inc., a registered open-end investment company,
or in
series of the DFA Investment Trust Company, a Delaware
business
trust, or the DFA Group Trust and DFA Participation
Group Trust,
investment vehicles for qualified employee benefit plans,
all of
which Dimensional Fund Advisors Inc. serves as
investment
manager. Dimensional disclaims beneficial ownership of
all such
shares. The address of Dimensional is 1299 Ocean
Avenue, 11th
Floor, Santa Monica, California 90401.
(10) Jayhawk Capital Management, L.L.C.
("Jayhawk"), an
investment advisor, has sole voting and dispositive
power over
1,016,300 shares. The address of Jayhawk is 8201 Mission
Road,
Suite 110, Prairie Village, Kansas 66208.
Security Ownership of Management. The following
table sets
forth information obtained from the directors and
nominees to be
elected as a director of the Company and the directors,
nominees
and executive officers of the Company as a group as to
their
beneficial ownership of the Company's voting Common
Stock and
voting Preferred Stock as of April 7, 2000.
Because of the requirements of the Securities and
Exchange
Commission as to the method of determining the amount
of shares
an individual or entity may own beneficially, the amount
shown
below for an individual may include shares also
considered
beneficially owned by others. Any shares of stock which
a person
does not own, but which he or she has the right to
acquire within
sixty (60) days of April 29, 2000, are deemed to be
outstanding
for the purpose of computing the percentage of
outstanding stock
of the class owned by such person but are not deemed
to be
outstanding for the purpose of computing the percentage
of the
class owned by any other person.
Amounts of
Shares
Name of Title of Beneficially Percent of
Beneficial Owner Class Owned Class
Raymond B. Ackerman Common 46,000 (2) *
Robert C. Brown, M.D. Common 248,329 (3) 2.1%
Charles A. Burtch Common 15,000 (4) *
Gerald J. Gagner Common 33,000 (5) *
Barry H. Golsen Common 2,514,518 (6) 20.1%
Voting Preferred 16,000 (6) 74.2%
Jack E. Golsen Common 3,348,520 (7) 26.5%
Voting Preferred 20,000 (7) 92.7%
David R. Goss Common 253,625 (8) 2.1%
Bernard G. Ille Common 130,000 (9) 1.1%
Donald W. Munson Common 31,432 (10) *
Horace G. Rhodes Common 35,000 (11) *
Jerome D. Shaffer, M.D. Common 144,363 (12) 1.2%
Tony M. Shelby Common 264,879 (13) 2.2%
Directors and Common 5,321,934 (14) 40.1%
Executive Officers Voting Preferred 20,000 92.7%
as a group number
(14 persons)
* Less than 1%.
(1) The Company based the information, with
respect to
beneficial ownership, on information furnished by each
director
or officer, contained in filings made with the
Securities and
Exchange Commission, or contained in the Company's records.
(2) Mr. Ackerman has sole voting and dispositive
power over
these shares. 6,000 of these shares are held in a
trust for
which Mr. Ackerman is both the settlor and the trustee
and in
which he has the vested interest in both the corpus
and income.
The remaining 40,000 shares of Common Stock included
herein are
shares that Mr. Ackerman may acquire pursuant to
currently
exercisable non-qualified stock options granted to him
by the
Company.
(3) The amount shown includes 40,000 shares of
Common Stock
that Dr. Brown may acquire pursuant to currently
exercisable non-
qualified stock options granted to him by the
Company. The
shares, with respect to which Dr. Brown shares the
voting and
dispositive power, consists of 122,516 shares owned
by Dr.
Brown's wife, 15,000 shares held jointly by Dr. Brown
and his
wife, 50,727 shares owned by Robert C. Brown, M.D.,
Inc., a
corporation wholly-owned by Dr. Brown, and 20,086 shares
held by
the Robert C. Brown M.D., Inc. Employee Profit Sharing
Plan, of
which Dr. Brown serves as the trustee. The amount shown
does not
include 57,190 shares directly owned by the children
of Dr.
Brown, all of which Dr. Brown disclaims beneficial ownership.
(4) Mr. Burtch has sole voting and dispositive
power over
these shares, which may be acquired by Mr. Burtch
pursuant to
currently exercisable non-qualified stock options granted
to him
by the Company.
(5) Mr. Gagner has sole voting and dispositive
power over
these shares, which include 30,000 shares that may be
acquired by
Mr. Gagner pursuant to currently exercisable non-
qualified stock
options granted to him by the Company.
(6) See footnotes (3), (4), and (6) of the
table under
"Security Ownership of Certain Beneficial Owners" of
this item
for a description of the amount and nature of
the shares
beneficially owned by B. Golsen, including shares he
has the
right to acquire within sixty (60) days.
(7) See footnotes (3), (4), and (6) of the
table under
"Security Ownership of Certain Beneficial Owners" of
this item
for a description of the amount and nature of
the shares
beneficially owned by J. Golsen, including the shares he
has the
right to acquire within sixty (60) days.
(8) The amount shown includes 72,000 shares that
Mr. Goss
has the right to acquire within sixty (60) days
pursuant to
options granted under the Company's stock option plans.
Mr. Goss
has the sole voting and dispositive power over these shares.
(9) The amount includes (i) 40,000 shares that Mr.
Ille may
purchase pursuant to currently exercisable non-
qualified stock
options, over which Mr. Ille has the sole voting and
dispositive
power, and (ii) 90,000 shares owned of record by Mr. Ille's wife.
(10) This amount includes (i) 432 shares of
Common Stock
that Mr. Munson has the right to acquire upon conversion
of 100
shares of non-voting Series 2 Preferred that he
beneficially
owns, and (ii) 30,000 shares that Mr. Munson may
purchase
pursuant to currently exercisable non-qualified stock
options,
over which Mr. Munson has the sole voting and dispositive power.
(11) Mr. Rhodes has sole voting and dispositive
power over
these shares, which include 30,000 shares that may be
acquired by
Mr. Rhodes pursuant to currently exercisable non-
qualified stock
options granted to him by the Company.
(12) Dr. Shaffer has the sole voting and
dispositive power
over these shares, which include 40,000 shares that Dr.
Shaffer
may purchase pursuant to currently exercisable non-
qualified
stock options and 4,329 shares that Dr. Shaffer has the
right to
acquire upon conversion of 1,000 shares of Series 2
Preferred
owned by Dr. Shaffer. This amount also includes
10,000 shares
owned by Dr. Shaffer's wife.
(13) Mr. Shelby has the sole voting and
dispositive power
over these shares, which include 72,000 shares that
Mr. Shelby
has the right to acquire within sixty (60) days
pursuant to
options granted under the Company's ISOs and 15,151
shares that
Mr. Shelby has the right to acquire upon conversion of
3,500
shares of Series 2 Preferred owned by Mr. Shelby.
(14) The amount shown includes 677,000 shares
of Common
Stock that executive officers, directors, or entities
controlled
by executive officers and directors of the Company have
the right
to acquire within sixty (60) days.
Possible Change in Control
A subsidiary of the Company and the family of Jack E. Golsen
and entities controlled by them have pledged certain shares of
the Company's Common Stock to a lender as described under Item 13
"Certain Relationships and Related Transactions" contained in
this report. If the shares of Common Stock pledged to the lender
are foreclosed on and assuming the Company does not issue any
additional shares of Common Stock and none of the Company's
outstanding Preferred Stock are converted, the percentage of
outstanding shares of Common Stock held by the lender would be
approximately 25% of the then outstanding shares of Common Stock
and may, at a subsequent date, result in a change in control of
the Company.
Item 13. Certain Relationships and Related Transactions.
A subsidiary of the Company, Hercules Energy
Mfg.
Corporation ("Hercules"), leased land and a building in
Oklahoma
City, Oklahoma from Mac Venture, Ltd. ("Mac Venture"), a
limited
partnership. GPC (a wholly owned subsidiary of SBL)
serves as
the general partner of Mac Venture. The limited
partners of Mac
Venture include GPC and the three children of Jack E.
Golsen. See
"Security Ownership of Certain Beneficial Owners" and
"Security
Ownership of Management" above for a discussion of the
stock
ownership of SBL. The warehouse and shop space
leased by
Hercules from Mac Venture consists of a total of
30,000 square
feet. Hercules leased the property from Mac Venture
for $3,750
per month under a triple net lease extension which
began as of
January 1, 1999, and expired on December 31, 1999.
Northwest Internal Medicine Associates
("Northwest"), a
division of Plaza Medical Group., P.C., has an agreement
with the
Company to perform medical examinations of the
management and
supervisory personnel of the Company and its
subsidiaries. Under
such agreement, Northwest is paid $4,000 a month to
perform all
such examinations. Dr. Robert C. Brown (a director
of the
Company) is Vice President and Treasurer of Plaza Medical
Group., P.C.
In 1983, LSB Chemical Corp. ("LSB Chemical"), a
subsidiary
of the Company, acquired all of the outstanding stock
of El
Dorado Chemical Company ("EDC") from its then four
stockholders
("Ex-Stockholders"). A substantial portion of the purchase
price
consisted of an earnout based primarily on the annual
after-tax
earnings of EDC for a ten-year period. During 1989, two
of the
Ex-Stockholders received LSB Chemical promissory notes
for a
portion of their earnout, in lieu of cash, totaling
approximately
$896,000, payable $496,000 in January 1990, and $400,000
in May,
1994. LSB Chemical agreed to a buyout of the balance
of the
earnout from the four Ex-Stockholders for an aggregate
purchase
amount of $1,231,000. LSB Chemical purchased for
cash the
earnout from two of the Ex-Stockholders and issued
multi-year
promissory notes totaling $676,000 to the other two
Ex-
Stockholders. Jack E. Golsen guaranteed LSB Chemical's
payment
obligation under the promissory notes. The unpaid
balance of
these notes at March 31, 2000, was $400,000.
On October 17, 1997, Prime Financial Corporation
("Prime"),
a subsidiary of the Company, borrowed from SBL
Corporation, a
corporation wholly owned by the spouse and children of
Jack E.
Golsen, Chairman of the Board and President of the
Company, the
principal amount of $3,000,000 (the "Prime Loan") on an
unsecured
basis and payable on demand, with interest payable monthly
in
arrears at a variable interest rate equal to the Wall
Street
Journal Prime Rate plus 2% per annum. The purpose of
the loan
was to assist the Company by providing additional
liquidity. The
Company has guaranteed the Prime Loan. During 1999,
$150,000 in
principal and $280,000 in interest was paid on this
Prime Loan,
and as of March 31, 2000,the unpaid principal balance
on the
Prime Loan was $1,950,000. In February 2000, the
Company
borrowed approximately $500,000 under its key man life
insurance
policies, and used such proceeds to reduce the principal
amount due
SBL. In April, 2000, at the request of Prime and the
Company, SBL
agreed to modify the demand note to make such a term
note
with a maturity date no earlier than April 1, 2001,
unless the
Company receives cash proceeds in connection with either
(i) the
sale or other disposition of KAC Acquisition Corp.
and/or
Kestrel Aircraft, and/or (ii) the repayment of loans
by Co-
Energy Group and affiliates, and/or the repayment of
amounts
in connection with the stock option agreement with
the
shareholders of Co-Energy Group, and/or (iii) some other
source that is not in the Company's projections for the
year
2000. From April 1, 2000 until no sooner than April 1,
2001,
any demand for repayment of principal under the Prime
Loan shall
not exceed $1,000,000 from proceeds realized on item (ii)
and
$950,000 from proceeds realized on items (i) and
(iii)
discussed above.
In order to make the Prime Loan to Prime, SBL and certain of its
affiliates borrowed the $3,000,000 from a bank(collectively "SBL
Borrowings"), and as part of the collateral pledged by SBL to the
bank
in connection with such loan, SBL pledged, among other things,
its
note from Prime. In order to obtain SBL's agreement as provided
above,
and for other reasons, effective April 21, 2000, a subsidiary of
the
Company guaranteed on a limited basis the obligations of SBL and
its
affiliates relating to the unpaid principal amount due to the
bank
in connection with the SBL Borrowings, and, in order to secure
its
obligations under the guarantees pledged to the bank 1,973,461
shares
of the Company's Common Stock that it holds as treasury stock.
Under the
limited guaranty, the Company's subsidiary's liability is limited
to the
value, from time to time, of the Common Stock of the Company
pledged to
secure its obligations under its guarantees to the bank relating
to the SBL Borrowings. As of April 15, 2000, the outstanding
principal balance due to
the bank from SBL as a result of such loan was $1,950,000.
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, 1999
and 1998 F-2 to F-
3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1999 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1999 F-5 to F-
6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1999 F-7 to F-
8
Notes to Consolidated Financial Statements F-9 to F-
52
Quarterly Financial Data (Unaudited) F-53 to
F54
(a)(2) Financial Statement Schedule
The Company has included the following schedule in this
report:
II - Valuation and Qualifying Accounts F-55
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.
(a)(3) Exhibits
2.1. 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.
2.2. Asset Purchase and Sale Agreement, dated May 4,
2000
by L&S Automotive Products Co., L&S Bearing Co., LSB
Extrusion Co.
and Rotex Corporation and DriveLine Technologies, Inc. This
agreement
includes certain exhibits and schedules that are not included
with this
exhibit, and will be provided upon request by the Commission.
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.
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. 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. 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.
4.12. 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.
4.13. 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, which the Company
hereby incorporates by reference from Exhibit 4.16 to the
Company's Form 10-K for the year ended December 31, 1998.
4.14. First Supplemental Indenture, dated February 8,
1999, by and among ClimaChem, Inc., the Guarantors, and Bank
One N.A., which the Company hereby incorporates by reference
from Exhibit 4.19 to the Company's Form 10-K for the year
ended December 31, 1998.
4.15. Loan and Security Agreement, dated May 7, 1999,
by and between Congress Financial Corporation and L&S
Automotive Products Co., International Bearings, Inc., L&S
Bearing Co., LSB Extrusion Co., Rotex Corporation, and
Tribonetics Corporation, which the Company hereby
incorporates by reference from Exhibit 4.1 to the Company's
Form 10-Q for the fiscal quarter ended March 31, 1999.
4.16. Termination and Mutual General Release
Agreement,
dated as of May 10, 1999, by and among L&S Bearing Co., L&S
Automotive Products Co., LSB Extrusion Co., Rotex
Corporation, Tribonetics Corporation, International
Bearings, Inc., and Bank of America National Trust and
Savings Association (successor-in-interest to BankAmerica
Business Credit, Inc.), which the Company hereby
incorporates by reference from Exhibit 4.2 to the Company's
Form 10-Q for the fiscal quarter ended March 31, 1999.
4.17. Letter Agreement, dated April 30, 1999, by and
among Bank of America National Trust and Savings Association
(successor-in-trust to BankAmerica Business Credit, Inc.),
L&S Bearing Co., LSB Extrusion Co., Tribonetics Corporation,
Rotex Corporation, L&S Automotive Products Co.,
International Bearings, Inc., and Congress Financial
Corporation, which the Company hereby incorporates by
reference from Exhibit 4.3 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 1999.
4.18. Sixth Amendment, dated May 10, 1999, to Amended
and Restated Loan and Security Agreement 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 fiscal quarter ended June 30,
1999.
4.19. Second Amended and Restated Loan and Security
Agreement dated May 10, 1999, by and between Bank of America
National Trust and Savings Association and LSB Industries,
Inc., Summit Machine Tool Manufacturing Corp., and Morey
Machinery Manufacturing Corporation, which the Company
hereby incorporates by reference from Exhibit 4.2 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1999.
4.20. First Amendment to Loan and Security Agreement,
dated November 15, 1999 by and between Congress Financial
Corporation and L&S Automotive Products Co., Industrial
Bearings, Inc., L&S Bearing Co., LSB Extrusion Co., Rotex
Corporation, and Tribonetics Corporation.
4.21. Second Amendment to Loan and Security Agreement,
dated March 7, 2000 by and between Congress Financial
Corporation and L&S Automotive Products Co., International
Bearings, Inc., L&S Bearing Co., LSB Extrusion Co., Rotex
Corporation, and Tribonetics Corporation.
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.
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. 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.
10.9. 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.
10.10. 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.
10.11. 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.
10.12. 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.
10.13. 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.
10.14. 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.
10.15. 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.
10.16. 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.
10.17. 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.
10.18. 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.
10.19. 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.
10.20. 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. 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.
10.26. First Amendment to Baytown Nitric Acid
Project and Supply Agreement, dated February 1, 1999,
between El Dorado Nitrogen Company and Bayer Corporation,
which the Company hereby incorporates by reference from
Exhibit 10.30 to the Company's Form 10-K for the year ended
December 31, 1998. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #7927, DATED JUNE 9, 1999, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED.
10.27. 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.
10.28. 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.
10.29. 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.
10.30. 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.
10.31. 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.
10.32. 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.
10.33. 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.
10.34. Fifth Amendment to Lease Agreement, dated as
of December 31, 1998, between Mac Venture, Ltd. and Hercules
Energy Mfg. Corporation, which the Company hereby
incorporates by reference from Exhibit 10.38 to the
Company's Form 10-K for the year ended December 31, 1998.
10.35. Union Contract, dated August 1, 1998, between
EDC and the International Association of Machinists and
Aerospace Workers, which the Company hereby incorporates by
reference from Exhibit 10.42 to the Company's Form 10-K for
the year ended December 31, 1998.
10.36. 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.
10.37. The Company's 1998 Stock Option and Incentive
Plan, which the Company hereby incorporates by reference
from Exhibit 10.44 to the Company's Form 10-K for the year
ended December 31, 1998.
10.38. 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, which the Company hereby incorporates by reference
from Exhibit 10.45 to the Company's Form 10-K for the year
ended December 31, 1998.
10.39. LSB Industries, Inc. 1998 Stock Option and
Incentive Plan which the Company hereby incorporates by
reference from Exhibit "B" to the LSB Proxy Statement, dated
May 24, 1999, for Annual Meeting of Stockholders.
10.40. LSB Industries, Inc. Outside Directors Stock
Option Plan which the Company hereby incorporates by
reference from Exhibit "C" to the LSB Proxy Statement, dated
May 24, 1999, for Annual Meeting of Stockholders.
10.41. Seventh Amendment to Amended and Restated Loan
and Security Agreement, dated January 1, 2000, by and
between Bank of America, N.A. 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
Company's Form 8-K dated December 30, 1999.
10.42. First Amendment to Second Amended and Restated
Loan and Security Agreement, dated January 1, 2000, by and
between Bank of America, N.A. and LSB Industries, Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
Manufacturing Corporation, which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's
Form 8-K dated December 30, 1999.
10.43. Amendment to Anhydrous Ammonia Sales Agreement,
dated January 4, 2000, to be effective October 1, 1999,
between Koch Nitrogen Company 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.
10.44. Anhydrous Ammonia Sales Agreement, dated January
12, 2000, to be effective October 1, 1999, between Koch
Nitrogen Company 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.
10.45. Eighth Amendment to Amended and Restated Loan
and
Security Agreement, dated March 1, 2000, by and between Bank
of America, N.A. 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 Company's
Form 8-K dated March 1, 2000.
10.46. Second Amendment to Second Amended and Restated
Loan and Security Agreement, dated March 1, 2000 by and
between Bank of America, N.A. and LSB Industries Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
Manufacturing Corporation, which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's
Form 8-K dated March 1, 2000.
10.47. Third Amendment to Second Amended and Restated
Loan and Security Agreement, dated March 31, 2000 by and
between Bank of America, N.A. and LSB Industries Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
manufacturing Corporation.
10.48. Asset Purchase and Sale Agreement, dated as of
March 6, 2000, between L&S Automotive Products Co. and The
Zeller Corporation, which the Company hereby incorporates by
reference from Exhibit 2.1 to the Company's Form 8K dated
March 9, 2000.
10.49. Loan Agreement dated December 23, 1999 between
ClimateCraft, Inc. and the City of Oklahoma City.
10.50. Covenant Waiver Letter, dated April 10, 2000
between The CIT Group and DSN Corporation.
10.51. Promissory Note, dated March 5, 1998, in the
original principal amount of $3 million executed by Prime
Financial Corporation, in favor of SBL Corporation ("SBL").
10.52. Letter, dated April 1, 2000, executed by SBL to
Prime amending the Promissory Note referenced to in Exhibit
10.51.
10.53. Guaranty Agreement, dated as of April 21, 2000,
by
Prime to Stillwater National Bank and Trust Company of that
portion
relating to SBL Borrowings borrowed by SBL substantial
similar
guarantees have been executed by Prime in favor of
Stillwater
covering the amounts borrowed by the following affiliates of
SBL
relating to the SBL Borrowings (as defined in "
Relationships
and Related Transactions") listed in Exhibit A attached to
the
Guaranty Agreement, requests with the only material
differences
being the name of the debtor and the amount owing by such
debtor.
Copies of which will be provided to the Commission upon
request.
10.54. Security Agreement, dated effective April 21,
2000,
executed by Prime in favor of Stillwater National Bank and
Trust.
10.55. Limited Guaranty, effective April 21, 2000,
executed by Prime to Stillwater National Bank and Trust.
10.56. Subordination Agreement, dated May 4, 2000, by
and among Congress Financial Corporation (Southwest), a
Texas corporation (Lender), LSB Industries, Inc.
(Subordinated Creditor), DriveLine Technologies, Inc.,
(formerly known as Tribonetics Corporation), an Oklahoma
corporation and L&S Manufacturing Corp.
99.1. Non-Competition Agreement, dated as of March 6,
2000 between L&S Automotive Products Co. and Mark Zeller,
which
the Company hereby incorporates by reference from Exhibit
99.1 to the Company's Form 8-K dated March 9, 2000.
21.1. Subsidiaries of the Company.
23.1. Consent of Independent Auditors.
27.1. Financial Data Schedule.
27.2. Restated Financial Data Schedule
27.3. Restated Financial Data Schedule
(b) Reports on Form 8-K. The Company filed the following
report on Form 8-K during the fourth quarter of 1999.
(i) Form 8-K, dated December 30, 1999 (date of event:
December 30, 1999). The item reported was Item 5, "Other
Events", discussing the payment of interest on the Company's
subsidiary, ClimaChem's $105 million of outstanding 10 3/4%
Senior Notes due 2007 and related failure to meet certain
adjusted tangible net worth and debt ratio requirements under the
Company's revolving credit facility and obtaining a forbearance
agreement with the Company's Lender.
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 1 day of June, 2000.
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: June 1, 2000 By:
/s/ Jack E. Golsen
Jack E. Golsen, Director
Dated: June 1, 2000 By:
/s/ Tony M. Shelby
Tony M. Shelby, Director
Dated: June 1, 2000 By:
/s/ David R. Goss
David R. Goss, Director
Dated: June 1, 2000 By:
/s/ Barry H. Golsen
Barry H. Golsen, Director
Dated: June 1, 2000 By:
/s/
Robert C. Brown, Director
Dated: June 1, 2000 By:
/s/ Bernard G. Ille
Bernard G. Ille, Director
Dated: June 1, 2000 By:
/s/ Jerome D. Shaffer
Jerome D. Shaffer, Director
Dated: June 1, 2000 By:
/s/
Raymond B. Ackerman, Director
Dated: June 1, 2000 By:
/s/ Horace Rhodes
Horace Rhodes, Director.
Dated: June 1, 2000 By:
/s/
Gerald J. Gagner, Director
Dated: June 1, 2000 By:
/s/ Donald W. Munson
Donald W. Munson, Director
Dated: June 1, 2000 By:
/s/ Charles A. Burtch
Charles A. Burtch, Director
LSB Industries, Inc.
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, 1999 and 1998, and the
related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards
generally accepted in the United States. 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, 1999
and 1998, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 17, 2000,
except for Note 4, as to which the date is
April 6, 2000
LSB Industries, Inc.
Consolidated Balance Sheets
<TABLE>
December 31,
1999 1998
(In Thousands)
<S> <C> <C>
Assets
Current assets (Note 8):
Cash and cash equivalents (Note 2) $ 3,130 $ 1,459
Trade accounts receivable, net 44,549 43,646
Inventories (Note 6) 30,480 43,488
Supplies and prepaid items 4,617 7,333
__________________
Total current assets 82,776 95,926
Property, plant and equipment, net
(Notes 7 and 8) 83,814 90,855
Other assets, net 22,045 21,111
Net assets of discontinued operations
(Note 4) - 15,358
_________________
$188,635 $223,250
__________________
__________________
</TABLE>
(Continued on following page)
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
December 31,
1999 1998
(In Thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Drafts payable $ 360 $ 633
Accounts payable 18,791 19,626
Accrued liabilities (Note 16) 18,563 17,287
Current portion of long-term debt (Note 8) 33,359 11,526
____________________
Total current liabilities 71,073 49,072
Long-term debt (Note 8) 124,713 138,980
Accrued losses on firm purchase commitments
and other noncurrent liabilities (Note 16) 6,883 -
Commitments and contingencies (Note 13)
Redeemable, noncumulative, convertible preferred
stock, $100 par value; 1,462 shares issued and
outstanding in 1999 (1,463 in 1998) (Note 10) 139 139
Stockholders' equity (deficit)
(Notes 8, 11 and 12):
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, 15,108,716 shares issued
(15,108,676 in 1998) 1,511 1,511
Capital in excess of par value 39,277 38,329
Accumulated other comprehensive loss - (1,559)
Accumulated deficit (86,675) (35,166)
__________________
2,113 51,115
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares 200 200
Common stock, 3,285,957 shares
(3,202,690 in 1998) 16,086 15,856
__________________
Total stockholders' equity (deficit) (14,173) 35,059
__________________
$188,635 $223,250
===================
</TABLE>
See accompanying notes.
LSB Industries, Inc.
Consolidated Statements of Operations
<TABLE>
Year ended December31,
1999 1998 1997
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Businesses continuing at December 31:
Revenues:
Net sales $254,236 $255,858 $251,948
Other income 1,036 1,290 2,117
_________________________________
255,272 257,148 254,065
Costs and expenses:
Cost of sales (Note 16) 203,480 201,279 202,449
Selling, general and administrative 51,672 48,918 48,972
Interest 15,115 14,504 11,435
Provision for loss on firm purchase
commitments (Note 16) 8,439 - -
Provision for impairment on long-
lived assets (Note 2) 4,126 - -
_______________________________
282,832 264,701 262,856
________________________________
Loss from continuing operations
before businesses disposed of,
provision for income taxes and
extraordinary charge (27,560) (7,553) (8,791)
Businesses disposed of (Note 5):
Revenues 7,461 14,184 29,532
Operating costs, expenses and
interest 9,419 17,085 29,446
_______________________________
(1,958) (2,901) 86
Gain (loss) on disposal of
businesses (1,971) 12,993 -
________________________________
(3,929) 10,092 86
________________________________
Income (loss) from continuing
operations before provision for
income taxes and extraordinary
charge (31,489) 2,539 (8,705)
Provision for income taxes (Note 9) (157) (100) (50)
________________________________
Income (loss) from continuing
operations before extraordinary
charge (31,646) 2,439 (8,755)
Net loss from discontinued
operations (Note 4) (18,121) (4,359) (9,691)
Extraordinary charge (Note 8) - - (4,619)
________________________________
Net loss (49,767) (1,920) (23,065)
Preferred stock dividends 3,228 3,229 3,229
________________________________
Net loss applicable to common stock $(52,995) $(5,149) $(26,294)
==================================
Loss per common share - basic and
diluted:
Loss from continuing operations
before extraordinary charge $ (2.95) $ (.07) $ (.93)
Losses on discontinued operations (1.53) (.35) (.75)
Extraordinary charge - - (.36)
________________________________
Net loss $ (4.48) $ (.42) $ (2.04)
=================================
</TABLE>
See accompanying notes.
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
Non-
Accumulated Retained
Common Stock redeemable Capital in
Other Earnings Treasury Treasury
Par Preferred Excess of
Comprehensive (Accumulated Stock--- Stock---
Shares Value Stock Par Value
Income (loss) Deficit) Common Prefer Total
(In Thousands)
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
Balance at December 31,
1996 14,888 $ 1,489 $ 48,000 $ 37,843
$ 276 $ (2,706) $(10,684) $ (200) $ 74,018
Net loss - - - -
- (23,065) - - (23,065)
Foreign currency
translation
adjustment - - - -
(1,279) - - - (1,279)
________
Total comprehensive
loss
(24,344)
Exercise of stock
options:
Cash received 67 6 - 190
- - - - 196
Stock tendered and
added to treasury at
market value 87 9 - 224
- - (233) - -
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
- (240) - - (240)
Redeemable preferred
stock ($10.00 per
share) - - - -
- (16) - - (16)
Common stock ($.06 per
share) - - - -
- (773) - - (773)
Series 2 preferred
stock (3.25 per share) - - - -
- (2,973) - - (2,973)
Purchase of treasury
stock - - - -
- - (1,372) - (1,372)
_________________________________________________________________
_______________________________
Balance at December 31,
1997 15,042 1,504 48,000 38,257
(1,003) (29,773) (12,289) (200) 44,496
</TABLE>
(Continued on following page)
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity
(continued)
<TABLE>
Non-
Accumulated Retained
Common Stock redeemable Capital
in Other Earnings Treasury Treasury
Par Preferred Excess of
Comprehensive (Accumulated) Stock--- Stock---
Shares Value Stock Par Value
Income (Loss) Deficit) Common Preferr Total
(In Thousands)
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
Net loss - $ - $ - $ -
$ - $ (1,920) $ - $ - $ (1,920)
Foreign currency
translation adjustment - - - -
(556) - - - (556)
________
Total comprehensive loss
(2,476)
Conversion of 76.5 shares
of redeemable preferred
preferred stock to common
stock 3 - - 7
- - - - 7
Exercise of stock options:
Cash received 64 7 - 65
- - - - 72
Dividends declared:
Series B 12% preferred
stock ($12.00 per share) - - - -
- (240) - - (240)
Redeemable preferred stock
($10.00 per share) - - - -
- (16) - - (16)
Common stock ($.02 per share) - - - -
- (244) - - (244)
Series 2 preferred stock
($3.25 per share) - - - -
- (2,973) - - (2,973)
Purchase of treasury stock - - - -
- - (3,567) - (3,567)
_________________________________________________________________
____________________________
Balance at December 31,
1998 15,109 1,511 48,000 38,329
(1,559) (35,166) (15,856) (200) 35,059
Net loss - - - -
- (49,767) - - (49,767)
Foreign currency
translation adjustment - - - -
1,559 - - - 1,559
________
Total comprehensive loss
(48,208)
Expiration of variable
employee stock option
without exercise - - - 948
- - - - 948
Dividends declared:
Series B 12% preferred
stock ($12.00 per share) - - - -
- (240) - - (240)
Redeemable preferred stock
($10.00 per share) - - - -
- (16) - - (16)
Series 2 preferred stock
($1.63 per share) - - - -
- (1,486) - - (1,486)
Purchase of treasury stock - - - -
- - (230) - (230)
_________________________________________________________________
______________________________
Balance at December 31,
1999 15,109 $ 1,511 $48,000 $39,277
$ - $(86,675) $(16,086) $(200) $(14,173)
=================================================================
==============================
</TABLE>
See accompanying notes.
LSB Industries, Inc.
Consolidated Statements of Cash Flows
<TABLE>
Year ended
December 31,
1999 1998
1997
(In
Thousands)
<S> <C> <C>
<C>
Cash flows from operating activities
Net loss $(49,767) $ (1,920)
$(23,065)
Adjustments to reconcile net loss to
net cash used by continuing operating
activities:
Net loss from discontinued operations 18,121 4,359
9,691
Loss (gain) on businesses disposed of 1,971 (12,993)
-
Extraordinary charge related to
financing activities - -
4,619
Inventory write-down and provision for
loss on firm purchase commitments, net
of amount realized 8,175 -
-
Provision for impairment on long-lived
assets 4,126 -
-
Depreciation of property, plant and
equipment 9,749 10,419
9,653
Amortization 1,642 1,549
1,308
(Gain) loss on sales of assets 33 (879)
165
Provision for losses:
Trade accounts receivable 812 971
625
Inventory 695 212
-
Notes receivable 265 1,345
1,093
Loan guarantee - 1,662
1,093
Recapture of prior period provisions
for loss on loans receivable secured
by real estate (572) (1,081)
(1,383)
Other 288 -
150
Cash provided (used) by changes in
assets and liabilities (net of effects
of discontinued operations):
Trade accounts receivable (1,431) (899)
(2,685)
Inventories 3,934 1,331
(2,817)
Supplies and prepaid items (179) (829)
(473)
Accounts payable (1,056) (3,409)
(15,124)
Accrued liabilities 2,812 (294)
2,829
____________________________________
Net cash used by continuing operating
activities (382) (456)
(14,321)
</TABLE>
(Continued on following page)
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
Year ended
December 31,
1999 1998
1997
(In
Thousands)
<S> <C> <C>
<C>
Cash flows from investing activities
Capital expenditures $ (7,645) $ (9,032)
$(11,570)
Principal payments received on loans
receivable 1,052 427
283
Proceeds from the sales of equipment
and real estate properties 1,174 1,791
1,828
Proceeds from the sale of businesses
disposed of 9,981 29,266
-
Other assets (760) (2,088)
(5,556)
___________________________________
Net cash provided (used) by investing
activities 3,802 20,364
(15,015)
Cash flows from financing activities
Payments on long-term and other debt (6,144) (18,274)
(73,500)
Long-term and other borrowings, net of
origination fees 2,850 617
158,000
Debt prepayment charge - -
(4,619)
Net change in revolving debt facilities 6,554 6,586
(32,197)
Net change in drafts payable (273) 21
165
Dividends paid:
Preferred stocks (1,742) (3,229)
(3,229)
Common stock - (244)
(773)
Purchase of treasury stock (230) (3,567)
(1,372)
Net proceeds from issuance of common
stock - 72
196
__________________________________
Net cash provided (used) by financing
activities 1,015 (18,018)
42,671
Net cash used in discontinued
operations (2,764) (4,784)
(10,444)
__________________________________
Net increase (decrease) in cash and
equivalents 1,671 (2,894)
2,891
Cash and cash equivalents at beginning
of year 1,459 4,353
1,462
__________________________________
Cash and cash equivalents at end of year $3,130 $ 1,459
$ 4,353
==================================
</TABLE>
See accompanying notes.
<PAGE>
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"), and the purchase and sale of
machine tools (the "Industrial Products Business"). See Note 17 -
Segment Information. In April 2000, the Company adopted a plan of
disposal for its Automotive Products Division (See Note 4 -
Discontinued Operations). Accordingly, the Company's financial
statements and notes have been restated to reflect the Automotive
Products Division as a discontinued operation for all periods
presented.
All material intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made in the
consolidated financial statements for the years ended December
31, 1998 and 1997 to conform to the consolidated financial
statement presentation for the year ended December 31, 1999.
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 $8,351,000 at December 31, 1999 ($7,095,000 at
December 31, 1998), 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 $822,000 and $1,062,000 at December 31, 1999 and 1998,
respectively.
<PAGE>
2. Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment are carried at cost. For financial
reporting purposes, depreciation, depletion and amortization is
primarily computed using the straight-line method over the
estimated useful lives of the assets ranging from 3 to 30 years.
Property, plant and equipment leases which are deemed to be
installment purchase obligations have been capitalized and
included in property, plant and equipment. Maintenance, repairs
and minor renewals are charged to operations while major renewals
and improvements are capitalized.
Capitalization of Interest
Interest costs of $1,113,000 related to the construction of a
nitric acid plant were capitalized in 1997 (none in 1999 or
1998), and are amortized over the plant's estimated useful life.
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
$2,502,000 and $2,895,000, net of accumulated amortization, of
$4,424,000 and $4,033,000 at December 31, 1999 and 1998,
respectively, and is amortized by the straight-line method over
periods of 15 to 19 years.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
For the year ended December 31, 1999, the Company recognized
impairment totaling $4.1 million associated with two chemical
plants which are to be sold or dismantled. The 1999 provision for
impairment represents the difference between the net carrying
cost and the estimated salvage value for the nonoperating plant
to be dismantled and the difference between
<PAGE>
2. Accounting Policies (continued)
the net carrying cost and the estimated selling price less cost
to dispose for the plant to be sold. The Company has made
estimates of the future cash flows related to its Chemical
Business in order to determine recoverability of the Company's
remaining cost. Based on these estimates, no additional
impairment was indicated at December 31, 1999; however, it is
reasonably possible that the Company may recognize additional
impairments in this business in the near term if the Company
experiences continued or further deterioration of the chemical
business.
Debt Issuance Cost
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 $4,116,000 and $4,076,000, net of accumulated amortization,
of $1,770,000 and $1,135,000 as of December 31, 1999 and 1998,
respectively.
Revenue Recognition
The Company recognizes revenue at the time title of the goods
transfers to the buyer.
Research and Development Costs
Costs incurred in connection with product research and
development are expensed as incurred. Such costs amounted to
$713,000 in 1999, $377,000 in 1998 and $367,000 in 1997.
Advertising Costs
Costs incurred in connection with advertising and promotion of
the Company's products are expensed as incurred. Such costs
amounted to $2,097,000 in 1999, $1,575,000 in 1998 and $1,569,000
in 1997.
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 shareholders' equity.
Revenues and expenses are translated using average exchange rates
prevailing during the year.
<PAGE>
2. Accounting Policies (continued)
Hedging
In 1997, the Company entered into an interest rate forward
agreement to effectively fix the interest rate on a long-term
lease commitment (not for trading purposes). In 1999, the Company
executed the long-term lease agreement and terminated the forward
at a net cost of $2.8 million. The Company has accounted for this
hedge under the deferral method (as an adjustment of the initial
term lease rentals). At December 31, 1999, the remaining deferred
loss included in other assets approximated $2.7 million. The
deferred cost recognized in operations amounted to $169,000 in
1999 (none in 1998 or 1997). See Recently Issued Pronouncements
below and Note 13 - Commitments and Contingencies.
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 net loss applicable to common stock
and the weighted average number of common shares outstanding
during each period. Diluted income per share, if applicable, 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 adjustment for interest,
net of related income tax effects on convertible notes payable,
as applicable. All potentially dilutive securities were
antidilutive for all periods presented. See Note 10 - Redeemable
Preferred Stock, Note 11 - Stockholders' Equity, and Note 12 -
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:
<TABLE>
1999 1998
1997
<S> <C> <C>
<C>
Basic and diluted 11,838,271 12,372,770
12,876,064
</TABLE>
Recently Issued Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt
this new Statement January 1, 2001. The Statement will require
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that do not qualify or are
<PAGE>
2. Accounting Policies (continued)
not designated as hedges must be adjusted to fair value through
operations. 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 deferred hedge
loss 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 at the
date of adoption. 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.
Under the Company's Revolving Credit Facility (Note 8 - Long-Term
Debt) cash received by the Company on collection of trade
accounts receivable is deposited in cash collection accounts.
Cash in the collection accounts is applied against the
outstanding balance under the Company's revolving credit
agreement within 1-2 business days following receipt. The cash
balance held in the collection accounts at December 31, 1999 and
1998 aggregated $2.5 million and $2.0 million, respectively.
Supplemental cash flow information includes:
<TABLE>
1999 1998
1997
(In
Thousands)
<S> <C> <C>
<C>
Cash payments for:
Interest on long-term debt and other $16,114 $15,511
$12,170
Income taxes, net of refunds (36) 65
86
Noncash financing and investing
activities-
Long-term debt issued for property, plant
and equipment 3,327 523
547
Exchange of loans receivable for real
estate upon foreclosure - -
15,037
</TABLE>
<PAGE>
3. Liquidity and Management's Plan
The Company is a diversified holding company and, and as a
result,
it is dependent on credit agreements and its ability to obtain
funds from its subsidiaries in order to pay its debts and
obligations.
The Company's wholly-owned subsidiary, ClimaChem, Inc.
("ClimaChem"),
through its subsidiaries, owns substantially all of the Company's
Chemical and Climate Control Businesses. ClimaChem and its
subsidiaries
are dependent on credit agreements with lenders and internally
generated
cash flow in order to fund their operations and pay their debts
and
obligations.
As of December 31, 1999, the Company and certain of its
subsidiaries,
including ClimaChem, are parties to a working capital line of
credit
evidenced by two separate loan agreements ("Agreements") with a
lender
("Lender") collateralized by receivables, inventories and
proprietary
rights of the parties to the Agreements. The Agreements have
been
amended from time to time since inception to accommodate changes
in
business conditions and financial results. This working capital
line
of credit is a primary source of liquidity for the Company and
ClimaChem.
As of December 31, 1999, the Agreements provided for revolving
credit
facilities ("Revolver") for total direct borrowing up to $65
million
with advances at varying percentages of eligible inventory and
trade
receivables. At December 31, 1999, the effective interest rate
was
9.0% and the availability for additional borrowings, based on
eligible
collateral, approximated $12.5 million. Borrowings under the
Revolver
outstanding at December 31, 1999, were $27.5 million. The annual
interest on the outstanding debt under the Revolver at December
31, 1999,
at the rates then in effect would approximate $2.5 million. The
Agreements also restrict the flow of funds, except under certain
conditions,
to subsidiaries of the Company that are not parties to the
Agreements.
The Agreements, as amended, required the Company and ClimaChem to
maintain
certain financial ratios and contain other financial covenants,
including
tangible net worth requirements and capital expenditure
limitations. In
1999, the Company's financial covenants were not required to be
met so
long as the Company and its subsidiaries, including ClimaChem,
that are
parties to the Agreements, maintained a minimum aggregate
availability
under the Revolving Credit Facility of $15.0 million. When the
availability
dropped below $15.0 million for three consecutive business days,
the Company
and ClimaChem were required to maintain the financial ratios
discussed
above. Due to an interest payment of $5.6 million made by
ClimaChem on
December 30, 1999, relating to the outstanding $105 million
Senior Unsecured
Notes, the availability dropped below the minimum aggregate
availability
level required on January 1, 2000. Because the Company and
ClimaChem
could not meet the financial ratios required by the Agreements,
the Company
and ClimaChem entered into a forbearance agreement with the
Lender
effective, January 1, 2000. The forbearance agreement waived the
financial
covenant requirements for a period of sixty (60) days.
Prior to the expiration of the forbearance agreement, the
Agreements were
amended, to provide for total direct borrowings of $50.0 million
including
the issuance of letters of credit. The maximum borrowing ability
under the
newly amended Agreements is the lesser of $50.0 million or the
borrowing
availability calculated using advance rates and eligible
collateral less
$5.0 million. The amendment provides for an increase in the
interest rate
from the Lender's prime rate plus .5% per annum to the Lender's
prime rate
plus 1.5% per annum, or the Company's and ClimaChem's LIBOR
interest rate
option, increased to the Lender's LIBOR rate plus 3.875% per
annum, from
2.875%. The term of the Agreements is through December 31, 2000,
and is
renewable thereafter for successive thirteen-month terms if, by
October 1,
2000, the Company and Lender shall have determined new financial
covenants
for the calendar year beginning in January 2001. The Agreements,
as amended,
require the Company and ClimaChem to maintain certain financial
ratios and
certain other financial covenants, including net worth and
interest coverage
ratio requirements and capital expenditure limitations.
As of March 31, 2000 the Company, exclusive of ClimaChem, and
ClimaChem
have a borrowing availability under the revolver of $.2 million,
and $11.0
million, respectively, or $11.2 million in the aggregate.
In addition to the credit facilities discussed above, as of
December 31,
1999, ClimaChem's wholly-owned subsidiary, DSN Corporation
("DSN"), is
a party to three loan agreements with a financial company (the
"Financing
Company") for three projects. At December 31, 1999, DSN had
outstanding
borrowings of $8.2 million under these loans. The loans have
repayment
schedules 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, 1999,
at the
agreed to interest rates would approximate $.7 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. In April 2000, DSN obtained a
waiver
from the Financing Company of the financial covenants through
March 31,
2001.
ClimaChem is restricted as to the funds that it may transfer to
the
Company under the terms contained in an Indenture covering the
$105
million Senior Unsecured Notes issued by ClimaChem. Under the
terms
of the indenture, ClimaChem 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 (the "Tax Sharing
Agreement"),
(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 dividend
payment,
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. ClimaChem sustained a net
loss of
$2.6 million in the calendar year 1998, and a net loss of $19.2
million
for the calendar year 1999. Accordingly, no amounts were paid to
the
Company by ClimaChem under the Tax Sharing Agreement, nor under
the
Management Agreement during 1999 and based on ClimaChem's
cumulative
losses at December 31, 1999, and current estimates for results of
operations for the year ended December 31, 2000, none are
expected during
2000. Due to these limitations, the Company and its non-
ClimaChem
subsidiaries have limited resources to satisfy their obligations.
Due to the Company's and ClimaChem's net losses for the years of
1998 and
1999 and the limited borrowing ability under the Revolver, the
Company
discontinued payment of cash dividends on its common stock for
periods
subsequent to January 1, 1999, until the Board of Directors
determines
otherwise, and the Company has not paid the September 15, 1999,
December
15, 1999 and March 15, 2000 regular quarterly dividend of $.8125
(or $743,438 per quarter) on its outstanding $3.25 Convertible
Exchangeable
Class C Preferred Stock Series 2, totaling approximately $2.2
million.
In addition, the Company did not pay the January 1, 2000 regular
annual
dividend of $12.00 (or $240,000) on the Series B Preferred. The
Company
does not anticipate having funds available to pay dividends on
its stock
for the foreseeable future.
As of December 31, 1999, the Company and its subsidiaries which
are not
subsidiaries of ClimaChem and exclusive of the Automotive
Products Business
had a working capital deficit of approximately $2.3 million,
total assets
of $17.6 million, and long-term debt due after one year of
approximately
$13.5 million.
In 2000, the Company has planned capital expenditures of
approximately $10.0
million, primarily in the Chemical and Climate Control
Businesses. These
capital expenditures include approximately $2.0 million, which
the Chemical
Business is obligated to spend under consent orders with the
State of
Arkansas related to environmental control facilities at its El
Dorado
facility. The Company is currently exploring alternatives to
finance these
capital expenditures.
The Company's plan for 2000 calls for the Company to improve its
liquidity and
operating results through the liquidation of non-core assets,
realization of
benefits from its late 1999 and early 2000 realignment of its
overhead
(which serves to minimize the cash flow requirements of the
Company and its
subsidiaries which are not subsidiaries of ClimaChem) and through
various
debt and equity alternatives.
Commencing in 1997, the Company created a long-term plan which
focused around
the Company's core operations, the Chemical and Climate Control
Businesses.
This plan commenced with the sale of the 10 3/4% Senior Unsecured
Notes by
the Company's wholly-owned subsidiary, ClimaChem, in November
1997. This
financing allowed the core businesses to continue their growth
through
expansion into new lines of business directly related to the
Company's core
operations (i.e., completion of the DSN plant which produces
concentrated
nitric acid, execution of the EDNC Baytown plant agreement with
Bayer to
supply industrial acids, development and expansion into market-
innovative
climate control products such as geothermal and high air quality
systems and
large air handling units).
During 1999, the Chemical Business sustained significant losses,
primarily as
a result of the reduction of selling prices for its nitrate-based
products
(in large part due to the flood of the market with low-priced
Russian
ammonium nitrate) while the Company's cost of raw materials
escalated
under a contract with a pricing mechanism tied to the price of
natural gas
which increased dramatically. During late 1999, the Company
renegotiated
this supply contract, extending the cash requirements under its
take-or-pay
provision to delay required takes to 2000, 2001 and 2002 and to
obtain
future raw material requirements at spot market prices. The
Company was also
active in bringing about a favorable preliminary determination
from the
International Trade Commission and Commerce Department, which has
had the
current impact of minimizing the dumping of Russian ammonium
nitrate in the
U.S. market (although there are no assurances that the final
determination
will affirm the preliminary determination). This, and other
factors, has
allowed the Chemical Business to see marginally improved market
pricing
for its nitrate-based products in the first three months of 2000
compared
to the comparable period in 1999; however, there are no
assurances that
this improvement will continue. The Company also successfully
commenced
operations of its EDNC Baytown plant which is selling product to
Bayer under
a long-term supply contract.
The Company's long-range plans also included the addition of
expertise related
to the Company's core businesses to enhance its leadership team.
Beginning
in 1998, the Company brought on several new members of its Board
of
Directors with expertise in certain of the Company's businesses,
and individuals with extensive knowledge in the banking industry
and financial
matters. These individuals have brought business insight to the
Company and
helped management to formulate the Company's immediate and long-
range plans.
The plan for 2000 calls for the Company to dispose of a
significant portion
of its non-core assets. As previously discussed, on April 5,
2000, the
Board of Directors approved the disposal of the Automotive
Products
Business. The Automotive Products Business has experienced a
rapidly
consolidating market and is not in an industry which the Company
sees as
able to produce an adequate return on its investment.
Additionally, the
Company is presently evaluating alternatives for realizing its
net
investment in the Industrial Products Business. The Company has
had
discussions involving the possible sale of the Industrial
Products Business;
however, no definitive plans are currently in place and any which
may
arise will require Board of Director approval prior to
consummation. The
Company is currently continuing the operations of the Industrial
Products
Business; however, the Company may sell or dispose of the
operations in
2000. The Company's plan for 2000 also calls for the realization
of the
Company's investment in an option to acquire an energy
conservation company
and advances made to such entity (the "Option Company"). In
April 2000,
the Company received written acknowledgment from the President of
the
Option Company that it had executed a letter of intent to sell to
a third
party, the proceeds from which would allow repayment of the
advances and
options payments to the Company in the amount of approximately
$2.6 million.
Further, the Company has received written confirmation from the
buyer of the
Option Company that the transaction is on schedule to close on
April 28,
2000 with the amount due to the Company related to the advances
and option
payments to be repaid in their entirety. Upon receipt of these
proceeds, the Company is required to repay up to $1 million of
outstanding
indebtedness to a related party, SBL Corporation, related to an
advance
made to the Company in 1997. The remaining proceeds would be
available for
corporate purposes. The Company's plan for 2000 also identifies
specific
other non-core assets which the Company will attempt to realize
to provide
additional working capital to the Company in 2000. See "Special
Note
Regarding Forward-Looking Statements".
During 1999 and into 2000, the Company has been restructuring its
operations,
eliminating businesses which are non-core, reducing its workforce
as
opportunities arise and disposing of non-core assets. As
discussed above
the Company has also successfully renegotiated its primary raw
material
purchase contracts in the Chemical Business in an effort to make
that
Business profitable again and focused its attention to the
development of
new, market-innovated products in the Climate Control Business.
Although
the Company has not planned to receive any dividends, tax
payments or
management fees from ClimaChem in 2000, it is possible that
ClimaChem
could pay up to $1.8 million of management fees to its ultimate
parent
should operating results be favorable (ClimaChem having EBITDA in
excess of
$26 million annually, $6.5 million quarterly, is payable to LSB
up to
$1.8 million).
As previously mentioned, the Company and ClimaChem's primary
credit
facility terminates on December 31, 2000, unless the parties to
the
agreements agreed to new financial covenants for 2001 prior to
October 1,
2000. While there is no assurance that the Company will be
successful in
extending the term of such credit facility, the Company believes
it has
a good working relationship with the Lender and that it will be
successful in
extending such facility or replacing such facility from another
lender
with substantially the same terms during 2000.
In March 2000, the Company and ClimaChem retained Chanin Capital
Partners
as financial advisors to assist in evaluating all of the
alternatives
relating to the Company's and ClimaChem's liquidity, and to
assist the companies in determining their alternatives for
restructuring their
capitalization and improving their financial condition. The
Company has also
initiated discussions with third party lenders to explore the
possibility of
obtaining an additional credit facility or expanded credit
facility with which
to initiate discussions with ClimaChem's holders of the Senior
Notes, which, at
December 31, 1999, were trading at 25% of their face value.
There is no
assurance that the Company or ClimaChem will be successful in
obtaining the
additional credit facility or expanded credit facility.
The Company had planned for up to $10 million of capital
expenditures for
2000, most of which is not presently committed. Further, a
significant
portion of this is dependent upon obtaining acceptable financing.
The
Company expects to delay these expenditures as necessary based on
the
availability of adequate working capital and the availability of
financing.
Recently, the Chemical Business has obtained relief from certain
of the
compliance dates under its wastewater management project and
expects that
this will ultimately result in the delay in the implementation
date of such
project. Construction of the wastewater treatment project is
subject to
the Company obtaining financing to fund this project. There are
no
assurances that the Company will be able to obtain the required
financing.
Failure to construct the wastewater treatment facility could have
a material
adverse effect on the Company.
The Company's plan for 2000 involves a number of initiatives and
assumptions
which management believes to be reasonable and achievable;
however,
should the Company not be able to execute this plan described
above, it may
not have resources available to meet its obligations as they come
due.
<PAGE>
4. Discontinued Operations
On April 5, 2000, the Board of Directors approved a plan of
disposal of the Company's Automotive Products Business to allow
the Company to focus its efforts and financial resources on its
core businesses, Chemical and Climate Control. The plan calls for
management to make every effort to dispose of the Automotive
Business through sale. Accordingly, the Automotive Business has
been presented in the accompanying consolidated financial
statements as a discontinued operation.
In an effort to make the Automotive Products Business financially
viable and complete a pending sale of the Automotive Products
Business, on March 9, 2000, the Company closed the acquisition of
certain assets and assumption of certain liabilities of the
Zeller Corporation ("Zeller") representing its universal joint
business. The acquisition of Zeller will be accounted for using
the purchase method of accounting. The purchase price of the
assets acquired (primarily accounts receivable, inventory and
machinery and equipment) is represented by the liabilities of
Zeller assumed which aggregated approximately $7.5
million(unaudited).
In connection therewith, the Automotive Business' primary
lender
provided funding of approximately $4.7 million which was used to
repay the outstanding working capital and equipment notes related
to Zeller's universal joint business acquired. These new
borrowings of the Automotive Business provide for a $2 million,
24 month term loan on the equipment acquired (which is to be
resold in the near term) and incremental borrowings of $2.7
million under the Automotive Business' revolving credit facility
which matures in May 2001. For the year ended December 31, 1999,
Zeller reported unaudited net sales of $11.7 million related to
the universal joint business acquired by the Automotive
Business.
Zeller's historical operating results for 1999 are not meaningful
as during 1999, Zeller was in the process of liquidating its
various lines of business and the majority of its overhead will
not continue with the universal joint business acquired.
The Company expects to close the sale of the Automotive Products
Business by June 30, 2000 and has accrued anticipated operating
loss through the date of disposal of approximately $2.1 million.
Inasmuch as the preliminary terms of a pending sale of the
Automotive Products Business calls for no payments of principal
on the note to LSB of approximately $8.0 million for the first
two years following closing, and future receipts are entirely
dependent upon the buyers' ability to make the business
profitable, the Company has fully reserved its investment in the
net assets (i.e., note receivable from potential buyer) as of
December 31, 1999.
<PAGE>
The Company will remain a guarantor on certain
equipment notes of the Automotive Products Business which had
outstanding indebtedness of approximately $5.2 million as of
December 31, 1999 and on its revolving credit agreement in the
amount of $1 million (for which the Company has posted a letter
of credit at December 31, 1999). The loss on disposal does not
include the loss, if any, which may result if the Company is
required to perform on its guarantees described above.
Net assets of discontinued operations as of December 31, 1999
and
1998 are as follows:
<TABLE>
1999 1998
(In Thousands)
<S> <C> <C>
Accounts receivable, net $ 4,852 $ 9,084
Inventories 15,178 20,357
Other current assets 502 572
_________________
Total current assets 20,532 30,013
Property and equipment, net 7,439 8,373
Other assets 2,138 2,369
_________________
Total noncurrent assets 9,577 10,742
Accounts payable and accrued liabilities (3,714) (6,136)
Current portion of long-term debt (12,096) (2,428)
Accrued loss through estimated disposal date
and other current liabilities (2,289) (125)
__________________
Total current liabilities (18,099) (8,689)
Long-term debt due after one year (4,115) (16,708)
__________________
7,895 15,358
Valuation allowance (7,895) -
__________________
Net assets of discontinued operations $ - $15,358
==================
</TABLE>
<PAGE>
4. Discontinued Operations (continued)
Operating results of the discontinued operations for the year
ended December 31:
<TABLE>
December 31,
1999 1998
1997
(In Thousands)
<S> <C> <C>
<C>
Revenues $33,405 $39,995
$35,499
Cost of sales 28,915 31,379
31,697
Selling, general and
administrative 10,168 10,586
10,908
Interest 2,449 2,389
2,585
___________________________________
Loss from discontinued
operations before loss on
disposal (8,127) (4,359)
(9,691)
Loss on disposal (9,994) -
-
___________________________________
Loss from discontinued
operations $(18,121) $(4,359)
$(9,691)
5. Businesses Disposed Of
On August 2, 1999, the Company sold substantially all the assets
of its wholly owned subsidiary, Total Energy Systems Limited and
its subsidiaries ("TES"), of the Chemical Business. Pursuant to
the sale agreement, TES retained certain of its liabilities to be
liquidated from the proceeds of the sale and from the collection
of its accounts receivables which were retained. In connection
with the closing in August 1999, the Company received
approximately $3.6 million in net proceeds from the assets sold,
after paying off $6.4 million bank debt and the purchaser
assuming approximately $1.1 million of debt related to certain
capitalized lease obligations. The Company substantially
completed the liquidation of the assets and liabilities retained
during the fourth quarter of 1999.
The loss associated with the disposition included in the
accompanying consolidated statements of operations for the year
ended December 31, 1999 is $2.0 million and is comprised of
disposition costs of approximately $.3 million, the recognition
in earnings of the cumulative foreign currency loss of
approximately $1.1 million and approximately $.6 million related
to the resolution of certain environmental matters.
<PAGE>
5. Businesses Disposed Of (continued)
In February 1997, 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, a subsidiary of the Company 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. The Company
recognized a gain on the sale of the property of approximately
$13 million in 1998.
6. Inventories
Inventories at December 31, 1999 and 1998 consist of:
</TABLE>
<TABLE>
Finished
(or Work-In- Raw
Purchased)
Goods Process Materials
Total
(In Thousands)
<S> <C> <C> <C>
<C>
1999:
Chemical products $ 5,015 $ 2,362 $ 2,413
$ 9,790
Climate Control products 6,260 3,141 6,581
15,982
Machinery and
industrial supplies 4,708 - -
4,708
__________________________________________
Total $15,983 $ 5,503 $ 8,994
$30,480
==========================================
1998 total $20,244 $ 6,290 $16,954
$43,488
==========================================
</TABLE>
<PAGE>
7. Property, Plant and Equipment
Property, plant and equipment, at cost, consists of:
<TABLE>
December 31,
1999 1998
(In Thousands)
<S> <C> <C>
Land and improvements $ 2,981 $ 2,910
Buildings and improvements 18,665 18,333
Machinery, equipment and automotive 130,748 133,646
Furniture, fixtures and store equipment 7,819 7,035
Producing oil and gas properties 2,560 3,132
_________________
162,773 165,056
Less accumulated depreciation, depletion
and amortization 78,959 74,201
_________________
$ 83,814 $ 90,855
==================
</TABLE>
8. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
December 31,
1999 1998
(In Thousands)
<S> <C> <C>
Secured revolving credit facility with
interest at a base rate plus a specified
percentage (9.0% aggregate rate at
December 31, 1999) (A) $ 27,462 $ 14,663
10-3/4% Senior Notes due 2007 (B) 105,000 105,000
Secured loan with interest payable monthly
(C) 7,128 9,570
Secured revolving credit facility - 5,009
Other, with interest at rates of 6.28% to
12.5%, most of which is secured by machinery
and equipment (D) 18,482 16,254
___________________
158,072 150,496
Less current portion of long-term debt 33,359 11,526
___________________
Long-term debt due after one year $124,713 $138,970
===================
</TABLE>
<PAGE>
8. Long-Term Debt (continued)
(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. The agreement
has been amended at various dates since 1994 with the latest
being executed on March 1, 2000. The amended agreement
provides for a $50 million revolving credit facility (the
"Revolving Credit Facility") with separate loan
agreements (the "Loan Agreements"), for ClimaChem and its
subsidiaries and the Company and its subsidiaries excluding
ClimaChem 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 1.5% (prime rate plus .5% at
December 31, 1999) per annum or, at the Company's option, on
the lender's LIBOR rate plus 3.875% (LIBOR rate plus 2.875% at
December 31, 1999) per annum. The agreement will terminate on
December 31, 2000 unless the parties to the Revolving Credit
Facility agree on acceptable financial covenants for the
fiscal year beginning January 2001 on or before October 1,
2000. The Loan Agreements also require a "permanent reserve"
of $5 million which reduces the borrowing availability. The
Company may terminate the Revolving Credit Facility prior to
maturity; however, should the Company do so, it would be
required to pay a termination fee of $500,000.
Each of the Loan Agreements specify a number of events of
default and requires the Company to maintain certain
financial ratios (including net worth and an interest
coverage ratio), 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
agreement or instrument (other than an agreement or
instrument
<PAGE>
8. Long-Term Debt (continued)
evidencing the lending of money or Intercompany Accounts, as
defined) where the outstanding balance exceeds $500,000 and
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.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of the
Company.
(B) On November 26, 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
<PAGE>
8. Long-Term Debt (continued)
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.
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 significant 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 $3.3 million and $3.7 million
at December 31, 1999 and 1998, respectively) 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"). Separate financial statements and
other disclosures concerning the guarantors are not
presented herein because management has determined they are
not material to investors.
<PAGE>
8. Long-Term Debt (continued)
Summarized consolidated financial information of CCI and its
subsidiaries as of December 31, 1999 and 1998 and the
results of operations for each of the three years ended
December 31, 1999 is as follows:
<TABLE>
December 31,
1999 1998
<S> <C> <C>
(In Thousands)
Balance sheet data:
Trade accounts receivable, net $ 41,934 $ 38,817
Inventories 25,772 37,367
Other current assets (1) 9,250 14,107
___________________
Total current assets 76,956 90,291
Property, plant and equipment, net 75,667 82,389
Notes receivable from LSB and affiliates
(2) 13,443 13,443
Other assets, net 18,012 10,480
___________________
Total assets $184,078 $196,603
====================
Accounts payable and accrued
liabilities $ 30,103 $ 25,334
Current-portion of long-term debt 29,644 10,460
____________________
Total current liabilities 59,747 35,794
Long-term debt 112,544 127,471
Accrued losses on firm purchase
commitments 5,652 -
Deferred income taxes - 9,580
Stockholders' equity 6,135 23,758
____________________
Total liabilities and stockholders'
equity $184,078 $196,603
====================
</TABLE>
(1) Other current assets includes receivables from LSB of
$2.3 million and $5.0 million at December 31, 1999 and
1998, respectively.
(2) Notes receivable from LSB and affiliates is eliminated
when consolidated with the Company.
>PAGE>
8. Long-Term Debt (continued)
<TABLE>
December 31,
1999 1998
1997
(In Thousands)
<S> <C> <C> <C>
Operations data:
Total revenues $246,955 $243,014
$237,258
Costs and expenses:
Costs of sales 196,095 190,722
189,936
Selling, general and
administrative 45,618 38,105
35,183
Loss on sale and operations of
business disposed of 3,929 2,901
772
Provision for loss on firm
purchase commitments 8,439 -
-
Provision for impairment on
long-lived assets 3,913 -
-
Interest 14,260 13,463
9,041
___________________________________
272,254 245,191
234,932
___________________________________
Income (loss) before provision
(benefit) for income taxes
and extraordinary charge (25,299) (2,177)
2,326
Provision (benefit) for income
taxes (6,117) 392
1,429
___________________________________
Income (loss) before
extraordinary charge (19,182) (2,569)
897
Extraordinary charge, net of
income tax benefit of
$1,750,000 - -
2,869
____________________________________
Net loss $(19,182) $ (2,569) $
(1,972)
====================================
</TABLE>
In February 1997, certain subsidiaries 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, a subsidiary of the Company 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.
<PAGE>
8. Long-Term Debt (continued)
(C) This agreement, as amended, between a subsidiary of the
Company and an institutional lender provided 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
$27.1 million at December 31, 1999.
In November 1997, the Company amended this agreement to
restate the financial and restrictive covenants to be
applicable to the subsidiary of the Company. 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.
At December 31, 1999, the lender had waived compliance of
certain financial covenants through September 30, 2000. In
March 2000, the subsidiary of the Company obtained a waiver
of these covenants through April 2001.
(D) Includes a $2.5 million note payable in 1999 ($2.6 million
at December 31, 1998), to an unconsolidated related party.
The note is unsecured, bears interest at 10.75% per annum
payable monthly, and requires repayment of up to $1.5 million
in 2000 from the sale of non-core assets; remainder is due in
2001.
Maturities of long-term debt for each of the five years after
December 31, 1999 are: 2000-$33,359; 2001-$10,528; 2002-$1,758;
2003-$2,907; 2004-$1,605 and thereafter-$107,915.
9. Income Taxes
The provision for income taxes attributable to continuing
operations before extraordinary charge consists of the following
for the year ended December 31:
<TABLE>
1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ - $ 77 $ -
State 157 23 50
_________________________
$157 $100 $ 50
=========================
</TABLE>
<PAGE>
9. Income Taxes (continued)
The 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, 1999 and 1998 are as follows:
<TABLE>
1999 1998
(In Thousands)
<S> <C> <C>
Deferred tax assets
Amounts not deductible for tax purposes:
Allowance for doubtful accounts $ 3,996 $ 4,045
Asset impairment 1,609 -
Accrued liabilities 4,229 1,772
Other 2,787 2,197
Capitalization of certain costs as inventory
for tax purposes 2,136 2,546
Net operating loss carryforward 29,467 25,235
Investment tax and alternative minimum tax
credit carryforwards 1,424 1,424
_________________
Total deferred tax assets 45,648 37,219
Less valuation allowance on deferred tax
assets 36,129 25,534
_________________
Net deferred tax assets $ 9,519 $11,685
==================
Deferred tax liabilities
Accelerated depreciation used for tax
purposes $ 7,380 $ 9,546
Inventory basis difference resulting from a
business combination 2,139 2,139
___________________
Total deferred tax liabilities $ 9,519 $11,685
===================
</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 the loss carryforward period as the differences
are depreciated or amortized. Other differences will turn around
as the assets are disposed of in the normal course of business.
<PAGE>
9. Income Taxes (continued)
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 "Income (loss) from continuing
operations before provision for income taxes and extraordinary
charge" for each of the three years in the period ended December
31, 1999 are detailed below:
<TABLE>
1999 1998
1997
(In Thousands)
<S> <C> <C>
<C>
Provision (benefit) for income
taxes at federal statutory rate $(11,021) $ 889
$ (4,663)
Changes in the valuation allowance
related to deferred tax assets,
net of rate differential 9,336 (1,459)
3,971
State income taxes, net of federal
benefit 157 15
33
Permanent differences 310 (39)
484
Foreign subsidiary loss 1,375 617
191
Alternative minimum tax - 77
-
Other - -
34
___________________________________
Provision for income taxes $ 157 $ 100
$ 50
===================================
</TABLE>
At December 31, 1999, the Company has regular-tax net operating
loss ("NOL") carryforwards of approximately $75 million
(approximately $40 million alternative minimum tax NOLs). Certain
amounts of regular-tax NOL expire beginning in 2000.
10. 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.
<PAGE>
11. 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.
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 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 1999, 1998 and
1997, respectively: risk-free interest rates of 6.04%, 5.75% and
6.2%; a dividend yield of .0%, .5% and 1.43%; volatility factors
of the expected market price of the Company's common stock of
.48, .57 and .42; and a weighted average expected life of the
option of 6.9, 8.0 and 8.0 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.
<PAGE>
11. Stockholders' Equity (continued)
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:
<TABLE>
Year ended December 31,
1999 1998 1997
(In Thousands, Except Per
Share Data)
<S> <C> <C> <C>
Net loss applicable to
common stock $(53,608) $(5,943) $(26,715)
Loss per common share $(4.53) $(.48) $(2.07)
</TABLE>
Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect was not
fully reflected until 1998.
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),
in September 1993, the Company adopted the 1993 Stock Option and
Incentive Plan (850,000 shares) and in 1998 the Company's adopted
the 1998 Stock Option Plan (1,000,000 shares). Under these plans,
the Company is authorized to grant options to purchase up to
4,700,000 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, 1999, there are
148,000 options outstanding related to these two plans. At December
31, 1999, 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.
<PAGE>
11. Stockholders' Equity (continued)
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,
and have a life and vesting schedule based on the terminated
options.
Activity in the Company's qualified stock option plans during
each of the three years in the period ended December 31, 1999 is
as follows:
<TABLE>
1999 1998
1997
Weighted Weighted
Weighted
Average Average
Average
Exercise Exercise
Exercise
Shares Price Shares Price Shares
Price
<S> <C> <C> <C> <C> <C>
<C>
Outstanding at
beginning of year 987,500 $4.23 1,048,760 $4.25 1,176,640
$4.08
Granted 1,015,500 1.29 119,500 4.19 -
-
Exercised - - (63,260) 1.13
(118,880) 2.81
Canceled, forfeited
or expired (17,500) 3.38 (117,500) 6.07
(9,000) 6.05
__________ ___________
__________
Outstanding at end
of year 1,985,500 2.73 987,500 4.23 1,048,760
4.25
========== ===========
==========
Exercisable at end
of year 756,250 4.01 532,400 4.09 414,960
3.81
========== ===========
==========
Weighted average
fair value of
options granted
during year .71 2.16
-
</TABLE>
Outstanding options to acquire 1,956,500 shares of stock at
December 31, 1999 had exercise prices ranging from $1.13 to $4.88
per share (731,750 of which are exercisable at a weighted average
price of $4.07 per share) and had a weighted average exercise
price of $2.67 and remaining contractual life of 6.2 years. The
balance of options outstanding at December 31, 1999 had exercise
prices ranging from $5.36 to $9.00 per share (24,500 of which are
exercisable at a weighted average price of $7.44 per share) and
had a weighted average exercise price of $7.12 and remaining
contractual life of 2.3 years.
<PAGE>
11. Stockholders' Equity (continued)
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 is generally 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 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. 100% of these options expired unexercised
in 1999.
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 1999 and 1998, the Company
granted 120,000 and 105,000 options (none in 1996), respectively,
under the Outside Director Plan.
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 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 1999, the Board of Directors
granted 596,500 stock options that vest over 48 months and have
contractual lives of either five or ten years.
<PAGE>
11. Stockholders' Equity (continued)
Activity in the Company's non-qualified stock option plans during
each of the three years in the period ended December 31, 1999 is as follows:
<TABLE>
1999 1998
1997
Weighted Weighted
Weighted
Average Average
Average
Exercise Exercise
Exercise
Shares Price Shares Price Shares
Price
<S> <C> <C> <C> <C> <C>
<C>
Outstanding at
at beginning of
year 560,000 $3.82 280,000 $3.44 265,000
$3.31
Granted 716,500 1.30 280,000 4.19 50,000
4.19
Exercised - - - - (35,000)
3.13
Surrendered,
forfeited, or
expired (173,000) 2.70 - - -
-
___________ __________ __________
Outstanding at
end of year 1,103,500 2.36 560,000 3.82 280,000
3.44
=========== =========== ==========
Exercisable at end
of year 210,900 3.57 335,000 3.37 164,000
3.55
=========== =========== ==========
Weighted average
fair value of
options granted
during year .69 2.62
2.00
Outstanding options to acquire 1,063,500 shares of stock at
December 31, 1999 had exercise prices ranging from $1.25 to $4.25
per share (170,900 of which are exercisable at a weighted average
price of $3.78 per share) and had a weighted average exercise
price of $2.18 and remaining contractual life of 7.6 years. The
balance of options outstanding at December 31, 1999 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) and
had a weighted average exercise price of $7.19 and remaining
contractual life of 4.8 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.
<PAGE>
11. Stockholders' Equity (continued)
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.
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.
12. 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.
<PAGE>
12. Non-redeemable Preferred Stock (continued)
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.
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, 1999 was $51.30 per share. Dividends on the Series 2
Preferred are cumulative and are payable quarterly in arrears. At
December 31, 1999, $1.5 million of dividends ($1.62 per share) on
the Series 2 Preferred were in arrears.
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, 1999, the Company is authorized to issue an
additional 3,200 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.
<PAGE>
13. Commitments and Contingencies
Operating Leases
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, 1999 are as follows:
</TABLE>
<TABLE>
(In Thousands)
<S> <C>
2000 $9,995
2001 9,735
2002 9,405
2003 8,783
2004 13,964
After 2004 39,825
________
$91,707
========
</TABLE>
Rent expense under all operating lease agreements, including
month-to-month leases, was $8,247,000 in 1999, $3,637,000 in
1998 and $3,910,000 in 1997. Renewal options are available under
certain of the lease agreements for various periods at
approximately the existing annual rental amounts. Rent expense
paid to related parties was $45,000 in 1999 ($90,000 in each of
1998 and 1997).
Nitric Acid Project
The Company's wholly owned subsidiary, EDNC, operates a nitric
acid plant (the "Baytown Plant") at Bayer's Baytown, Texas
chemical facility in accordance with a series of agreements with
Bayer Corporation ("Bayer") (collectively, the "Bayer
Agreement"). Under the Bayer Agreement, EDNC converts ammonia
supplied by Bayer in nitric acid based on a cost plus
arrangement. Under the terms of the Bayer Agreement, EDNC is
leasing the Baytown Plant pursuant to a leveraged lease from an
unrelated third party with an initial lease term of ten years.
The schedule of future minimum payments on operating leases above
includes $7,664,000 in 2000, $7,665,000 in 2001, $7,665,000 in
2002, $7,666,000 in 2003, $13,001,000 in 2004, and $35,707,000
after 2004 related to lease payments on the EDNC Baytown Plant.
Upon expiration of the initial ten-year term, 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. A subsidiary of the Company
has guaranteed the performance of EDNC's obligations under the
Bayer Agreement.
<PAGE>
13. Commitments and Contingencies (continued)
Purchase Commitments
As of December 31, 1999, the Chemical Business has a long-term
commitment to purchase anhydrous ammonia. The commitment requires
the Company to take or pay for a minimum volume of 2,000 tons of
anhydrous ammonia during each month of 2000 and 3,000 tons per
month in 2001 and 2002. The Company's purchase price of anhydrous
ammonia under this contract can be higher or lower than the
current market spot price of anhydrous ammonia. The Company has
also committed to purchase 50% of its remaining quantities of
anhydrous ammonia through 2002 from this third party at prices
which approximate market. See Note 16 - Inventory Write-down and
Loss on Firm Purchase Commitment. During 1999, the Chemical
Business terminated two other anhydrous ammonia purchase
contracts at no cost which otherwise were not scheduled to end
until June 2000 and December 2000 by their terms. Purchases of
anhydrous ammonia under these contract terms aggregated $21.9
million in 1999 ($31.9 million and $40.1 million in 1998 and
1997, respectively). The Company also enters into agreements with
suppliers of raw materials which require the Company to provide
finished goods in exchange therefore. The Company did not have a
significant commitment to provide finished goods with its
suppliers under these exchange agreements at December 31, 1999.
At December 31, 1999, the Company has a standby letter of credit
outstanding related to its Chemical Business of approximately
$4 million.
A subsidiary of the Company leases certain precious metals for
use in the subsidiary's manufacturing process. The agreement at
December 31, 1999 requires rentals generally based on 25.25% of
the leased metals' market values, except for platinum, from
December 2, 1999 through December 1, 2000, contract expiration.
The agreements also requires rentals of $440 per ounce for the
usage of platinum.
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 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. Purchases under this agreement aggregated
$912,000, $938,000, and $938,000 in 1999, 1998, and 1997,
respectively.
<PAGE>
13. Commitments and Contingencies (continued)
Debt and Performance Guarantees
The Company guaranteed up to approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft
Company ("Kestrel"), in exchange for a 44.9% ownership interest.
At December 31, 1998, the Company had accrued the full amount of
its commitment under the debt guarantees and fully reserved its
investments and advances to Kestrel. In 1999, upon demand of the
Company's guarantee, the Company assumed the obligation for a
$2.0 million term note, due in equal monthly principal payments
of $11,111, plus interest, through August 2004 and funded
approximately $500,000 resulting from a subsidiary's partial
guarantee of Kestrel's obligation under a revolving credit
facility. In connection with the demand of the Company to perform
under its guarantees, the Company and the other guarantors formed
a new company ("KAC") which 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. Proceeds received by the Company, if any, from the
sale of KAC assets will be recognized in the results of
operations when and if realized.
In 1999, the Company agreed to guarantee a performance bond of
$2.1 million of a start-up operation providing services to the
Company's Climate Control Division.
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
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
<PAGE>
13. Commitments and Contingencies (continued)
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, 1999, the Company has
accrued an amount based on a 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
which was amended in January 1997. Pursuant to the
Administrative Agreement, as amended, the Chemical Business
installed additional pollution control equipment. 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.
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 records, resulted in a minor fish kill in a drainage
ditch near the El Dorado Plant. In 1998, the Chemical
Business entered into 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
was paid in 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
<PAGE>
13. Commitments and Contingencies (continued)
submitted to the State of Arkansas by August 2000. The
construction of the additional water treatment components
is required to 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 aforementioned
compliance deadlines, however, are not scheduled to commence
until after the State of Arkansas has issued a renewal permit
establishing new, more restrictive effluent limits. Alternative
methods for meeting these requirements are continuing to be
examined by the Chemical Business. The Company believes,
although there can be no assurance, that any such new effluent
limits would not have a material adverse effect on the Company.
The Wastewater Consent Order provides that the State of Arkansas
will make every effort to issue the renewal permit by December 1,
1999. The State of Arkansas has delayed issuance of the permit.
Because the Wastewater Consent Order provides that the compliance
deadlines may be extended for circumstances beyond the reasonable
control of the Company, and because the State of Arkansas has not
yet issued the renewal permit, the Company does not believe that
failure to meet the aforementioned compliance deadlines will present
a material adverse impact. The State of Arkansas has been advised
that the Company is seeking financing from Arkansas authorities for
projects required to comply with the Wastewater Consent Order and
the Company has requested that the permit be further delayed until
financing arrangements can be made, which requests have been met
to date. The wastewater program is currently expected to require
future capital expenditures of approximately $10 million.
Negotiations for securing financing are currently underway
(Note 3 Liquidity and Management Plan). The Company believes, although
there can be no assurance, that the renewal permit will continue to be
delayed, and that financing can be secured under terms that will not
have a material adverse effect on the Company.
C. 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. Discovery has only recently commenced
in this matter. 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.
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.
<PAGE>
13. Commitments and Contingencies (continued)
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 liability programs. The Company reviews such programs on
at least an annual basis to balance the cost/benefit between its
coverage and retained exposure.
14. 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
presently contribute to this plan.
15. 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. Carrying values for variable rate
borrowings approximate their fair value. As of
<PAGE>
15. Fair Value of Financial Instruments (continued)
December 31, 1999 and 1998, carrying values of variable rate
debt which aggregated $31.5 million and $26.2 million,
respectively, approximate their estimated fair value. As of
December 31, 1999 and 1998, carrying values of fixed rate
debt which aggregated $126.6 million and $124.3 million,
respectively, had estimated fair values of approximately
$47.5 million and $124.6 million, respectively.
As of December 31, 1999, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued
liabilities approximated their estimated fair value.
16. Inventory Write-down and Loss on Firm Purchase Commitment
During 1999, the Chemical Business had a firm uncancelable
commitment to purchase anhydrous ammonia pursuant to the terms of
a supply contract (Note 13 - Commitments and Contingencies,
Purchase Commitments). At June 30, 1999, the date the Company
recognized the provision for loss under the supply contract and
wrote down the inventory, the purchase price the Chemical
Business was required to pay for anhydrous ammonia under the
contract, which was for a significant percentage of the Chemical
Business' anhydrous ammonia requirements, exceeded and was
expected to continue to exceed the spot market prices throughout
the purchase period. Additionally, the market for nitrate based
products at that time was saturated with an excess supply of
products caused, in part, by the import of Russian ammonium
nitrate and significantly depressed selling prices for the
Company's products. Due to the decline in sales prices and the
cost to produce the nitrate products, including the cost of the
anhydrous ammonium to be purchased under the contract, the costs
of the Company's nitrate based products exceeded the anticipated
future sales prices. As a result, provisions for losses on the
firm purchase commitment aggregating $8.4 million were recorded
($7.5 million in second quarter of 1999 and $.9 million in
third quarter of 1999). At June 30, 1999, the Company's Chemical
Business also wrote down the carrying value of certain nitrate-
based inventories by approximately $1.6 million. At December 31,
1999, the accompanying balance sheet includes remaining accrued
losses under the firm purchase commitment of $7.4 million ($1.8
million of which is classified as current in accrued
liabilities). Substantially all of the inventory written down was
sold during 1999. Due to the pricing mechanism in the contract,
it is reasonably possible that this loss provision estimate may
change in the near term.
<PAGE>
17. 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 three continuing reportable segments:
the Chemical Business, Climate Control 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 operating profit or loss. 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, 1999 comprises approximately 72% 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.
In 1999, the Chemical Business sold its Australian
subsidiary and incurred a loss upon disposition of
$2.0 million. (See Note 5 - Business Disposed Of.)
<PAGE>
17. Segment Information (continued)
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. (See Note
16 - Inventory Write-down and Loss on Firm Purchase
Commitment.)
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.
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, 1999 and 1998, the Company's
accounts and notes receivable are shown net of allowance for
doubtful accounts of $10.2 million and $10.4 million,
respectively.
<PAGE>
17. Segment Information (continued)
Information about the Company's continuing operations in
different industry segments for each of the three years in the
period ended December 31, 1999 is detailed below.
<TABLE>
1999 1998
1997
(In Thousands)
<S> <C> <C>
<C>
Net sales:
Businesses continuing:
Chemical $128,154 $125,757
$130,467
Climate Control 117,055 115,786
105,909
Industrial Products 9,027 14,315
15,572
____________________________________
254,236 255,858
251,948
Business disposed of - Chemical 7,461 14,184
26,482
____________________________________
$261,697 $270,042
$278,430
====================================
Gross profit:
Businesses continuing:
Chemical $ 13,532 $ 18,570
$16,171
Climate Control 35,467 32,278
29,552
Industrial Products 1,757 3,731
3,776
____________________________________
$ 50,756 $ 54,579
$49,499
====================================
Operating profit (loss):
Businesses continuing:
Chemical $ 1,325 $ 6,592 $
5,531
Climate Control 9,751 10,653
8,895
Industrial Products (2,507) (403)
(993)
____________________________________
8,569 16,842
13,433
Business disposed of - Chemical (1,632) (2,467)
(52)
____________________________________
6,937 14,375
13,381
General corporate expenses
and other, net (8,449) (9,891)
(9,931)
Interest expense:
Business disposed of (326) (434)
(720)
Businesses continuing (15,115) (14,504)
(11,435)
Gain (loss) on businesses
disposed of (1,971) 12,993
-
Provision for loss on firm purchase
commitments - Chemical (8,439) -
-
Provision for impairment on
long-lived assets (4,126) -
-
____________________________________
Income (loss) from continuing
operations before provision for
income taxes and extraordinary
charge $(31,489) $ 2,539
$(8,705)
====================================
</TABLE>
<PAGE>
17. Segment Information (continued)
<TABLE>
1999 1998
1997
(In Thousands)
<S> <C> <C>
<C>
Depreciation of property, plant and
equipment:
Businesses continuing:
Chemical $ 7,102 $ 7,019 $
6,238
Climate Control 1,901 1,602
1,544
Industrial Products 64 102
190
Corporate assets and other 682 723
1,337
Business disposed of - Chemical - 973
344
_____________________________________
Total depreciation of property,
plant and equipment $ 9,749 $ 10,419 $
9,653
=====================================
Additions to property, plant and
equipment:
Businesses continuing:
Chemical $ 3,670 $ 5,264 $
8,390
Climate Control 7,147 3,868
1,127
Industrial Products 25 130
109
Corporate assets and other 130 293
17,528
_____________________________________
Total additions to property, plant
and equipment $ 10,972 $ 9,555 $
27,154
======================================
Total assets:
Businesses continuing:
Chemical $ 93,482 $107,780
$117,671
Climate Control 65,521 49,516
49,274
Industrial Products 8,203 11,662
9,929
Corporate assets and other 21,429 22,137
32,894
Business disposed of - Chemical - 16,797
19,899
Net assets of discontinued
operations - 15,358
14,933
______________________________________
Total assets $188,635 $223,250
$244,600
======================================
</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.
<PAGE>
17. Segment Information (continued)
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
from continuing operations, none of the following items have been
added or deducted: general corporate expenses, income taxes,
interest expense, provision for loss on firm purchase
commitments, provision for impairment on long-lived assets,
results from discontinued operations or businesses disposed of.
Identifiable 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 three identified industries.
Information about the Company's domestic and foreign operations
from continuing operations for each of the three years in the
period ended December 31, 1999 is detailed below:
<TABLE>
Geographic Region 1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Sales:
Businesses continuing:
Domestic $250,625 $252,745 $250,306
Foreign 3,611 3,113 1,642
____________________________
254,236 255,858 251,948
Foreign business disposed of 7,461 14,184 26,482
____________________________
$261,697 $270,042 $278,430
============================
Income (loss) from continuing
operations before provision for
income taxes and extraordinary
charge:
Businesses continuing:
Domestic $(27,113) $(8,223) $(7,579)
Foreign (447) 670 (354)
______________________________
(27,560) (7,553) (7,933)
Foreign business disposed of (1,958) (2,901) (772)
Gain (loss) on disposal of
businesses (1,971) 12,993 -
______________________________
(3,929) 10,092 (772)
______________________________
$(31,489) $ 2,539 $(8,705)
==============================
</TABLE>
<PAGE>
17. Segment Information (continued)
<TABLE>
Geographic Region 1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Long-lived assets:
Businesses continuing:
Domestic $83,811 $86,187 $102,160
Foreign 3 3 1,108
______________________________
83,814 86,190 103,268
Foreign business disposed of - 4,665 6,046
______________________________
$83,814 $90,855 $109,314
==============================
</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.
Revenues from unaffiliated customers include foreign export sales
as follows:
<TABLE>
Geographic Area 1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Mexico and Central and South
America $ 1,261 $ 864 $ 1,636
Canada 6,125 7,852 5,144
Middle East 4,431 5,114 6,163
Other 4,816 5,031 6,815
_____________________________
$16,633 $18,861 $19,758
=============================
</TABLE>
<PAGE>
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
Three months ended
March 31 June 30 September 30
December 31
<S> <C> <C> <C>
<C>
1999
Total revenues $59,837 $ 70,639 $62,382
$ 62,414
Gross profit on net sales $14,018 $ 14,166 $11,242
$ 11,330
Net loss from continuing
operations, including
businesses disposed of $(2,748) $(11,720) $(5,122)
$(12,056)
Net loss from discontinued
operations $(1,062) $ (1,369) $(1,969)
$(13,721)
Net loss $(3,810) $(13,089) $(7,091)
$(25,777)
Net loss applicable to common
stock $(4,626) $(13,895) $(7,894)
$(26,580)
Loss per common share:
Basic and diluted:
Net loss from continuing
operations $ (.30) $ (1.05) $ (.51)
$ (1.09)
Net loss from discontinued
operations $ (.09) $ (.12) $ (.16)
$ (1.16)
Net loss applicable to common
stock $ (.39) $ (1.17) $ (.67)
$ (2.25)
1998
Total revenues $ 63,694 $ 73,495 $ 65,655
$ 54,304
Gross profit on net sales $ 13,612 $ 17,561 $ 13,560
$ 9,846
Net income (loss) from
continuing operations,
including businesses disposed
of $ 10,741 $ 2,039 $ (1,671)
$ (8,677)
Net loss from discontinued
operations $ (1,463) $ (618) $ (1,525)
$ (746)
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:
Net income (loss) from
continuing operations $ .77 $ .10 $ (.20)
$ (.79)
Net loss from discontinued
operations $ (.11) $ (.05) $ (.13)
$ (.06)
Net income (loss) applicable
to common stock $ .66 $ .05 $ (.33)
$ (.85)
Diluted:
Net income (loss) from
continuing operations $ .61 $ .10 $ (.20)
$ (.79)
Net loss from discontinued
operations $ (.08) $ (.05) $ (.13)
$ (.06)
Net income (loss) applicable
to common stock $ .53 $ .05 $ (.33)
$ (.85)
</TABLE>
<PAGE>
In the second quarter of 1999, the Company incurred a loss of
$2.0 million on the disposal of its Australian subsidiary, TES.
The Company recorded provisions for losses on firm purchase
commitments of $7.5 million and $.9 million in the second quarter
and third quarter of 1999, respectively.
In the fourth quarter of 1999, the Company recorded a provision
for impairment on long-lived assets of $4.1 million and accrued a
loss provision on its investment in its Automotive Business of
$10 million which has been presented as discontinued operations.
As a result of the presentation of the Automotive Business as
discontinued operations, the Quarterly Financial Data in the
above table has been restated for all periods presented to
exclude the revenues and gross profit of the Automotive Business.
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.
<PAGE>
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
Additions
Deductions
Balance at Charged to Write-
offs/ Balance
Beginning Costs and Cost
at End
Description of Year Expenses Incurred
of Year
<S> <C> <C> <C>
<C>
Accounts
receivable-allowance for
doubtful accounts (1):
1999 $2,085 $ 812 $1,184
$1,713
1998 $1,643 $ 971 $ 529
$2,085
1997 $1,670 $ 625 $ 652
$1,643
Inventory-reserve for slow-
moving items (1):
1999 $ 814 $ 695 $ 59
$1,450
1998 $ 602 $ 212 $ -
$ 814
1997 $ 602 $ - $ -
$ 602
Notes receivable-allowance
for doubtful accounts (1):
1999 $6,502 $ 265 $ 19
$6,748
1998 $5,157 $1,345 $ -
$6,502
1997 $4,064 $1,093 $ -
$5,157
Accrual for plant
turnaround:
1999 $1,104 $1,421 $1,226
$1,299
1998 $1,263 $2,264 $2,423
$1,104
1997 $ 382 $2,647 $1,766
$1,263
</TABLE>
(1)Deducted in the balance sheet from the related assets to
which the reserve applies.
Other valuation and qualifying accounts are detailed in the
Company's notes to consolidated financial statements.
18. Subsequent Events (Unaudited)
In late April 2000, the Company was informed that the Optioned
Company discussed in Note 3 - Liquidity Management's Plan, had
agreed to a delay in the closing of its sale to a third party
(the "Acquirer"). This delay in closing is the result of the
Optioned Company's pending receipt of a notice to proceed on an
energy conservation installation project from a governmental
entity. Based on the information disclosed to the Company by
management of the Optioned Company, the notice to proceed is
expected to be issued by the governmental entity in June 2000, at
which time the Acquirer of the Optioned Company has indicated
closing will occur. The Acquirer of the Optioned Company has
confirmed to the Company its intent to proceed with the closing
of this transaction. The Company has further been informed that
the Board of Directors of the Acquirer has approved the
acquisition of the Optioned Company, pending receipt of the
notice to proceed. Accordingly, the Company's plan for 2000
continues to anticipate the collection of approximately $2.7
million upon the closing of the sale of the Optioned Company.
In April 2000, the Company repurchased Senior Notes with a face
amount of $5 million for approximately $1.2 million. In connection
with this
transaction, the Company will recognize a gain of approximately
$4.0 million in the second quarter of 2000. The Company is also in
discussions with the holders of its Senior Notes, in an effort to
restructure their terms and conditions. The Company does not
intend to make the June 1, 2000 interest payment when due. Under
the terms of the indenture governing the Senior Notes, the Company
has a grace period of thirty (30) days, or until July 1, 2000, to
make the interest payment or enter into satisfactory agreements
with the holders of the Senior Notes before the Senior Notes are in
default. The Company currently anticipates achieving satisfactory
resolution of this matter.
On May 4, 2000, a subsidiary of the Company completed the sale of
substantially all of the assets representing the Company's
Automotive Products Business to DriveLine Technologies, Inc.
("DriveLine") for $8.7 million. The Company received two notes
from DriveLine with principal amounts of $5.9 million and $2.8
million. The notes are secured by a second lien on all assets of
the purchaser and it's subsidiaries. The notes, and any payments
of principal and interest, are subordinated to DriveLine's
primary lender under a subordination agreement. Upon meeting
certain criteria of the subordination agreement, DriveLine is
able to make payment of principal and interest to the Company;
however, no principal payments are due under the terms of the
notes until April 2002. The collection of any amounts under
these notes is not presently determinable.
As discussed in Note 13 - Commitments and Contingencies and Note 16 -
Inventory Writedown on Firm Purchase Commitment, the Company has a firm
uncanceable commitment to purchase one of its raw materials, anhydrous
ammonia, under a long-term supply contract. Due to the increased cost
of the anhydrous ammonia under this contract and other factors,existing
as of May 2000, the Company may be required to recognize an additional
loss of approximately $1 million.
