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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
COMMISSION FILE NUMBER 33-79532
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LAROCHE INDUSTRIES INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3341472
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 JOHNSON FERRY ROAD
ATLANTA, GEORGIA 30342
(Address of principal executive offices)
(404) 851-0300
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes. X No. .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes. X No. (Not applicable to Registrant.)
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Aggregate market value of voting stock held by non-affiliates of the
Registrant: None. (See Part II, Item 5.)
Number of shares of Common Stock outstanding as of May 27, 1998 was
437,697.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in the "Business," "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections of this Annual Report on Form 10-K regarding, among other
things, (i) competition in the markets served by the Company, including the
competitive factors expected to influence such markets, raw material costs and
the Company's competitive positioning, (ii) the Company's facility and
production expansion plans and (iii) the effect of certain environmental
regulations on the Company's operations and the costs of compliance with such
regulations or remediation of existing environmental problems are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. As forward-looking statements, they are necessarily based
upon various uncertain factors, including, but not limited to, management's
current knowledge and perception of the competitive conditions in the markets
served by the Company, projections of the Company's future production capacity
requirements and estimates of environmental compliance and remediation costs.
Because of such uncertainties, the actual results may differ significantly from
the forward-looking statements contained herein.
PART I
ITEM 1. BUSINESS
THE COMPANY
LaRoche Industries Inc., a Delaware corporation (the "Company"), is a
major international diversified producer and distributor of inorganic chemicals.
The Company's products are divided into three business segments: Nitrogen
Products, Electrochemical Products and Alumina Chemicals. The Company produces
and distributes various Nitrogen Products, including nitrogen-based fertilizers
essential for crop growth and nitrogen-based blasting agents for industrial
explosives. In its Electrochemical Products segment, the Company is a merchant
producer and marketer of chlor-alkali chemicals, including chlorine and caustic
soda, which are fundamental building blocks for products used in the
construction, pulp and paper, water treatment, detergent, pesticide and
pharmaceutical industries. In addition, the Company produces fluorocarbon
blowing agents used in production of insulating foam materials. The Company also
produces Alumina Chemicals, which are used in a variety of catalyst and
adsorbent applications, including environmental protection and abatement
processes.
The Company was formed in a 1986 management buyout of the nitrogen,
mixed fertilizers and retail business operations of United States Steel
Corporation ("USX"), followed by a 1988 acquisition of certain chemical
production operations of Kaiser. The Company has assembled and is continuing to
develop a platform of three core businesses upon which it believes that it can
realize long term growth and improved profitability. The Company intends to
achieve these objectives primarily through capital expenditures to improve and
expand existing facilities, new product development and strategic acquisitions
of attractively priced assets in the Company's core business segments.
Management believes that the Company benefits from the sale of diversified
products with relatively independent business cycles and distinct markets. For
the fiscal year ended February 28, 1998, the Company had consolidated net sales
of $381.0 million and EBITDA (as defined herein) of $37.8 million.
INDUSTRY OVERVIEW
NITROGEN PRODUCTS
Ammonia is produced from natural gas and is used primarily as a direct
application fertilizer, as an ingredient in a number of industrial chemicals and
as the basic building block to produce a variety of
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nitrogen-based products. Ammonia is upgraded into a number of products including
urea, ammonium nitrate, UAN solution and nitric acid. These upgraded products
are used in a variety of applications including fertilizers and as a key
ingredient in industrial explosives.
In the production of ammonium nitrate, ammonia gas and air are burned
in the presence of a catalyst to form nitric acid. Additional ammonia is then
used to neutralize the nitric acid, forming ammonium nitrate liquor. This liquor
is either solidified and converted into granular pellets (or prilled) to produce
high density ammonium nitrate ("HDAN"), a solid fertilizer, or low density
ammonium nitrate ("LDAN"), a blasting grade ammonium nitrate, or combined with
urea liquor to produce urea-ammonium solution ("UAN") solution, a liquid
fertilizer product.
The Company believes that the market for ammonium nitrate in the United
States is characterized as mature with industry experts forecasting relatively
minimal but steady demand growth of 1% per annum ("p.a.") through 2000, driven
by increasing demand for ammonium nitrate for the fertilizer markets and stable
demand for ammonium nitrate from the coal mining industry. Management believes
that the increased demand for ammonium nitrate, driven by the factors discussed
below, will keep pace with expected capacity increases, which may help to keep
ammonium nitrate prices relatively stable.
Fertilizer
Nitrogen fertilizer demand in the United States depends on a number of
factors, including total planted acreage of corn and wheat, the primary crops
which utilize nitrogen fertilizer, crop mix and fertilizer application rates.
Planted acreage and fertilizer application rates are determined primarily by the
planting decisions of farmers who are influenced by, among other things, the
profit that they expect to make on the investment to plant, grow and harvest
their crops. These profit expectations are in turn influenced by current and
projected grain stocks and prices, United States government agricultural
policies (including subsidy and acreage set-aside programs) and weather.
Nitrogen fertilizer application rates are also affected by the type of crops
planted and local soil conditions.
According to an industry consultant, the Company believes that
Mississippi Chemical Corporation is the leading North American producer of HDAN
with an approximate 28% share of installed capacity followed by the Company
(11%), Unocal Corporation (9%), and El Dorado Chemical Company (9%). Because the
main competitive factor affecting price is cost of transportation, the
geographic area which a production facility can competitively supply tends to be
restricted.
Blasting Grade Ammonium Nitrate
The Company believes that approximately 70% of ammonium nitrate-based
blasting agents and explosive tonnage are used in the mining of coal, the volume
of which is largely determined by electric power demand. Metals mining, quarry
and road construction activity also affect demand for these blasting products.
According to an industry consultant, the Company believes that ICI Explosives
USA Inc. is the leading North American producer of LDAN with an approximate 21%
share of industry capacity, followed by Potash Corporation of Saskatchewan Inc.
(17%), Dyno Nobel Inc. (16%), and the Company (16%). Overall demand tends to be
cyclical reflecting the economic sensitivity of industries consuming explosives.
Freight charges typically account for a significant percentage of the
selling price of blasting grade ammonium nitrate, which limits the geography to
which manufacturers can deliver on a competitive basis. Competition is generally
divided between the eastern and western regions of the United States and is
based on price and product quality.
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Industrial Ammonia
Anhydrous and aqua ammonia have a variety of industrial applications,
including the removal of nitrogen oxide pollutant gases from boiler and
incinerator emissions, refrigeration, fermentation, chemical processing, water
treatment, heat treating and waste acid neutralization. In response to the
amendments (the "Clean Air Act Amendments") to the federal Clean Air Act (the
"Clean Air Act"), which severely restrict the discharge of certain pollutants
into the environment, domestic demand for ammonia used in the treatment of
sulfur and nitrogen oxide gases has grown rapidly. These provisions call for
additional restrictions in the next several years. Because the market for
industrial ammonia is highly fragmented and regional in nature, the share of
industry capacity and other market data is not readily available.
ELECTROCHEMICAL PRODUCTS
Chlor-alkali
Chlorine and caustic soda are produced as co-products of salt brine
electrolysis in a fixed weight ratio of 1 to 1.12. In salt brine electrolysis,
an electric current is passed through a salt crystal dissolved in water between
immersed conductors, causing the brine solution to break down into chlorine,
caustic soda and hydrogen by-product.
Chlorine is a critical intermediate used in the production of several
thousand derivative commercial chemicals, including polyvinyl chloride ("PVC"),
polyurethane foams, titanium dioxide and pesticides. The primary
direct-application uses of chlorine are in municipal water treatment, in the
manufacture of household and industrial bleach, and in the pulp and paper
industry. Caustic soda is a basic commodity chemical with even more diverse
end-market applications than chlorine. It is sold to manufacturers of aluminum,
alumina chemicals, soaps, detergents and petrochemicals, processors of pulp and
paper, and for water treatment.
Historically, chlorine production has fluctuated over the economic
cycles, but has experienced a long-term average growth rate of approximately
1.2% per annum during the period from 1973 to 1998. Chlorine is difficult and
dangerous to store in its elemental form, whereas caustic soda is comparatively
safe and stable and readily capable of being stored in large quantities. As a
result, demand for chlorine, generally dictated by the construction industry, is
the key driver for overall production volume of chlorine and caustic soda.
Generally, when demand for chlorine is high, production levels and prices
increase. This tends to be offset by over-supply of caustic soda and weak
caustic soda pricing. On the contrary, when chlorine demand is weak, production
levels and pricing decrease, causing caustic soda to be in a tight supply
position with attendant rising prices. The volatility in the caustic soda market
tends to be exacerbated by end-users building inventories ahead of forecast
shortages and price increases, and running down inventories ahead of forecast
over-supply and price weakness. As a result, an inverse, although not perfectly
correlated price relationship exists between chlorine and caustic soda. The
price of one ton of chlorine plus the price of the accompanying 1.12 tons of
caustic soda, known as an electrochemical unit ("ECU"), therefore tends to be
somewhat less volatile than the price of either commodity individually.
The Company believes that nearly one-third of the world's chlor-alkali
production capacity is located in North America, with approximately 70% situated
along the United States Gulf Coast. Chlor-alkali producers along the United
States Gulf Coast are among the lowest-cost industry producers, due to excellent
feedstock logistics and close proximity to downstream producers of products that
consume chlorine and caustic soda. According to industry consultants, the three
largest chlor-alkali producers in North America are Dow Chemical Co., Occidental
Chemical Corporation and PPG Industries Inc. with capacity shares of
approximately 25%, 21%, and 13% respectively. Most of the major United States
Gulf Coast producers are fully downstream integrated into products which involve
the processing of chlorine.
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As a result, there are relatively few merchant producers of chlorine.
Technology used in the manufacture of chlorine and caustic soda is
based on either diaphragm, membrane or mercury cells. Of these, the diaphragm
cell process is predominant in the United States.
The profitability of the industry as a whole and relative profitability
between producers is significantly affected by energy efficiency and the cost of
energy, since energy represents by far the largest cost component in the
production of chlorine and caustic soda (the Company believes that energy
accounts for an average of 37% of manufacturing costs for a diaphragm cell based
producer). Historically, market fluctuations in natural gas prices have had a
significant impact on industry profitability. Other key components in relative
profitability between producers are brine costs and logistics and transport
costs, largely driven by proximity to customers.
Fluorocarbons
Fluorocarbons are used as refrigerants, blowing agents, raw materials
for fluoropolymers, elastomers, and aerosol propellants in a wide variety of
end-use applications. In 1987, the United States signed the Montreal Protocols
(international environmental treaties) which, for environmental reasons related
to ozone depletion, mandated the total phase-out of chlorofluorocarbons
("CFCs"), their temporary replacement by hydrochlorofluorocarbons ("HCFCs"), and
their ultimate replacement by hydrofluorocarbons ("HFCs"), or other products.
ALUMINA CHEMICALS
Alumina chemicals are used in a variety of catalyst and absorbant
applications, including environmental protection and abatement processes.
Industry consultants forecast demand growth of specialty alumina products of
5%-6% per annum over the next five years. Activated and Versal(R) aluminas have
diverse end-use applications and customer groups. Much of the increased demand
for specialty alumina products is driven by environmental regulation and the
declining quality of crude petroleum feedstocks.
Major specialty aluminas producers include the Company, the Aluminum
Company of America, Societe Francaise de Produits par Catalyse S.A. (a 50%-50%
French joint venture between Rhone-Poulenc and Institute de Services Industriels
et Scientifiques), Condea Chemie, GmbH., a large German chemical company, and
the Aluminum Company of Canada.
Activated Alumina Chemicals
The term active or activated alumina refers to several synthetic,
high-surface area alumina products formulated in proprietary activation
processes. Activation is a process or series of processes in which optimum
chemical or surface reactivity is developed in a solid material by using
rehydration and heat to change the physical structure and characteristics of the
material. These activated aluminas are available in various forms and
modifications such as powders, granules or spheres.
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Uses of activated alumina include utilization as a specialty adsorbent
in a wide variety of processes within the petroleum and petrochemical
industries. Applications include dehydration of various gases and liquids,
hydrofluoric acid alkylation, catalyst support, chloride removal, Claus
catalysts, and as adsorbent materials used in the manufacture of polyethylene,
hydrogen peroxide, petrochemicals and gasoline additives.
Versal(R)
The Versal(R) name refers to a family of high performance gel aluminas.
Versal(R) fills a market niche as a raw material in the production of catalyst
supports. The Versal(R) product line provides the breadth required to satisfy a
wide range of properties required by a catalyst manufacturer, such as pore
volume, pore volume distribution, dispersibility and density. Versal(R) products
are used as catalyst supports for a number of applications, including fluid
cracking, desulfurization (removal of sulfurs and metals from sour crude oil),
petrochemical reactions, production of additives used in reformulated gasoline
products and treatment of automotive emissions. The passage of the Clean Air Act
Amendments has resulted in increased demand for Versal(R) products especially
those used as support for desulfurization and oxygenate catalysts.
Hydrate
Hydrate, the key raw material in the production of specialty alumina,
is a constituent of bauxite and is produced in the Bayer process, the nearly
universal process for producing aluminas from bauxite. The three largest markets
for hydrate are flame retardants, alum and detergent zeolites. Hydrate is a
widely used chemical that retards flame and suppresses smoke. Hydrate, along
with sulfuric acid, is used in the production of alum, which is primarily used
in water treatment systems. Hydrate is also used as a coagulant and softener in
water and sanitation systems. Management believes that overall growth in demand
for hydrate to be modest, averaging approximately 1.5% to 2.0% annually over the
next several years.
BUSINESS PRODUCT SEGMENTS
NITROGEN PRODUCTS
The Company's Nitrogen Products consist of three product lines: (i)
ammonium nitrate and nitrogen solution fertilizers; (ii) blasting-grade ammonium
nitrate; and (iii) industrial anhydrous and aqua ammonia. The Company's two
primary nitrogen-based fertilizers are HDAN and UAN solution. The Company has
total HDAN production capacity of 285,000 tons p.a. at its Cherokee and Crystal
City facilities, and UAN solution capacity of 250,000 tons p.a. at its Cherokee
facility. The Company believes that it is the second largest North American
supplier of HDAN with approximately 11% of industry capacity. The Company
manufactures blasting-grade LDAN and 83% ammonium nitrate solution ("83%
Solution") used by the coal mining, metal mining and quarry industries. The
Company has total LDAN capacity of 440,000 tons p.a. at its Crystal City, Seneca
and Geneva facilities. The Company believes that it is the fourth largest North
American supplier of LDAN to the blasting products market, representing
approximately 16% of industry capacity. The Company also believes that it is
currently the largest merchant distributor in the United States of premium grade
anhydrous and aqua ammonia used for water treatment and for the manufacture of
other chemical products. For fiscal year 1998, Nitrogen Products accounted for
$234.9 million of net sales (61.6% of Company total) and $26.8 million of EBITDA
before unallocated corporate expenses (62.6% of Company total).
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<TABLE>
<CAPTION>
NAMEPLATE CAPACITY (TONS P.A.)*
--------------------------------------------------------------
TYPICAL CRYSTAL
COMPANY PRODUCT APPLICATIONS CHEROKEE CITY SENECA GENEVA FORTIER
- --------------- --------------------- -------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
FERTILIZER
HDAN................... Fertilizers 145,000 140,000 -- -- --
UAN solution........... Fertilizers 250,000 -- -- -- --
EXPLOSIVES
LDAN................... Explosives -- 110,000 230,000 100,000 --
83% solution........... Explosives 175,000 -- -- -- --
AMMONIA
Anhydrous &
aqua ammonia........... Fertilizer, Feedstock 175,000 -- -- -- 440,000(1)
& Water Treatment
</TABLE>
- ----------
* total production capacity output from the facility
(1) The Fortier, Louisiana facility is owned by Avondale Ammonia. The
Company is obligated to purchase at least 220,000 tons p.a. produced at
such facility, and may be required to purchase any excess production
not purchased by Cytec.
The Company has developed an extensive system of production and
distribution facilities which are located close to their target markets, often
in areas where competitors do not have local operations. Accordingly, due to the
high costs associated with the transportation of certain nitrogen products, the
Company believes that it has located its facilities where it enjoys a freight
advantage over many other competitors. The Company has maintained
competitiveness through back- integration into ammonia, efficient management of
natural gas feedstock costs and capacity expansions.
Fertilizer Grade Ammonium Nitrate. The Company primarily markets
fertilizer grade HDAN and UAN solution to distributors, dealers, national farm
retail chains, regional farm cooperatives and other fertilizer producers located
near its plants or distribution warehouses for ultimate sale and delivery to
farmers.
The Company believes that its fertilizer customers are concentrated
mainly in the midsouth and midwest regions of the United States, where their
location allows the Company to supply its customers with lower freight costs and
more reliable delivery rates than certain of its competitors. The Company
historically has sold more fertilizer grade ammonium nitrate and UAN solution
than it had the capacity to produce, thus allowing it to operate its fertilizer
plants at or near capacity year-round. Due to the high fixed costs associated
with fertilizer production, the Company believes that this strategy provides it
with a delivered cost advantage over certain competitors. The Company sells its
UAN solution in markets that can be advantageously supplied by its Cherokee
facility.
Blasting Grade Ammonium Nitrate. As in its fertilizer business, the
Company is committed to selling a greater volume of blasting grade LDAN than it
produces. Unlike other ammonium nitrate producers that tend to de-emphasize the
blasting market during periods of high fertilizer demand, the Company seeks to
maintain product quality and availability irrespective of conditions in the
fertilizer market.
In December 1995, the Company acquired the Seneca facility, a 230,000
tons p.a. blasting grade LDAN manufacturing facility and related assets for an
aggregate purchase price of approximately $38 million. The facility manufactures
and sells LDAN only in the blasting market. Blasting grade LDAN is also
manufactured at the Company's 110,000 ton p.a. Geneva facility. The Company also
purchases blasting grade LDAN on a contract basis from third parties. Sales to
manufacturers, distributors and end users are made through contracts and open
market sales.
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In May 1995, as a result of the Oklahoma City bombing and the Company's
commitment to the community as a Responsible Care(R) company, the Company
adopted a new policy severely limiting the sale of blasting grade LDAN to any
entity outside the explosives industry. The Company announced in May 1996 that
it had suspended production of LDAN at the Crystal City facility due to the lack
of demand for explosives from the surrounding coal mining industry. As a result
of improved market conditions, the Company has entered into a multi-year sales
contract for the LDAN capacity of the Crystal City facility and thus the
facility was returned to operation in October 1997.
Freight charges typically account for a significant percentage of the
selling price of blasting grade LDAN, which somewhat limits the geographic areas
in which manufacturers can compete. Competition generally is divided between the
eastern and western regions of the United States and is based on price and
product quality. Because of the location of its three plants and two
distribution centers, the Company is able to compete in both regions. The
Company believes that no competitor maintains a significant technological or
quality advantage over the others.
Industrial Ammonia. The Company supplies the merchant market for
anhydrous and aqua ammonia through 22 customer service centers located
throughout the country and sells products and services nationally. Approximately
50% of the Company's industrial ammonia sales are for chemical processing
applications and environmental processes, for which demand has been increasing.
The Company is experiencing an increasing demand for aqua ammonia as a result of
new environmental regulations that restrict sulfur and nitrogen oxide emissions.
The Company converts anhydrous ammonia into aqua ammonia at ten distribution
centers.
The Company's competitors include both ammonia manufacturers and
merchant distributors. The ammonia manufacturers serve primarily the large bulk
commodity users, and the merchant distributors serve the smaller volume
specialty users of anhydrous and aqua ammonia, who are the focus of the
Company's marketing efforts. The Company has only one major competitor, Tanner
Industries, which distributes industrial ammonia products nationally. Other
competitors in the industrial ammonia merchant market distribute only in local
market areas.
The Company has its own fleet of trucks and trailers for delivering
these products to customers' locations. Sales are made in cylinders, less than
truck load quantities, full truck load and railcar loads. The Company also sells
equipment, replacement parts, safety seminars and videos, ammonia clean-out
services and other services and equipment rentals, that support the primary sale
of anhydrous and aqua ammonia.
Raw Materials. At the Cherokee facility, anhydrous ammonia is produced
and then upgraded into ammonium nitrate and UAN solutions. The Company purchases
anhydrous ammonia to produce ammonium nitrate at the Seneca, Crystal City and
Geneva facilities. The Company's investment in Avondale Ammonia reflects the
Company's strategy to vertically integrate. The Company obtains approximately
220,000 tons p.a. of ammonia feedstock from Avondale Ammonia, either directly or
through swapping arrangements, for its various Nitrogen Products facilities.
Ammonia produced by Avondale Ammonia is transferred at cost to the joint venture
partners relative to their respective ownership interests. In the aggregate, the
Company purchases approximately one-third of its ammonia feedstock requirements
from external ammonia manufacturers. Substantially all of its purchased ammonia
requirements are supplied pursuant to contracts at prices that permit the
Company to produce Nitrogen Products at a competitive cost. The primary material
purchased by the Company in connection with the production of ammonia at its
Cherokee and Avondale Ammonia facilities is natural gas. Natural gas is supplied
throughout the United States by large pipeline companies and local distributors.
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ELECTROCHEMICAL PRODUCTS
The Company's Electrochemical Products consist primarily of chlorine
and caustic soda (together, chlor-alkali) that are produced at its Gramercy
facility, and the recently purchased Hochst, Germany facilities and ChlorAlp's
PCL Facility (as defined herein). Chlorine is sold for a variety of uses,
including the manufacture of PVC, household and industrial bleach, water
treatment, titanium dioxide, and various other end-uses. Caustic soda is sold to
manufacturers of aluminum, organic and inorganic chemicals, detergents and
petrochemicals, and to pulp and paper processors, and water treatment
facilities. For fiscal year 1998, Electrochemical Products accounted for $107.7
million of net sales (28.3% of Company total) and $9.1 million of EBITDA before
unallocated corporate expenses (21.3% of Company total).
The Gramercy facility has chlorine production capacity of 200,000 tons
p.a. and caustic soda production capacity of 224,000 tons p.a. Domestically, the
Company primarily competes in the Gulf Coast chlor-alkali market. Industry
consultants estimate approximately 70% of Gulf Coast chlorine capacity is used
by integrated producers for captive consumption in the production of downstream
products. As a result, despite accounting for only approximately 2.0% of overall
Gulf Coast chlorine capacity, the Company has developed a niche position in the
Gulf Coast merchant chlorine market. The Company's production capacity
represents an approximate 7.5% share of the 2.7 million ton p.a. market. The
Company has achieved this position by focusing on chlorine sales to downstream
producers of PVC, rigid urethane foam and titanium dioxide that prefer not to
deal with chlorine suppliers that also produce competing downstream products.
The Company believes that it has developed strong customer relationships by
capitalizing upon its secure brine supply, low-cost on-site electric power and
close customer proximity to consistently deliver a competitively priced product.
Over 50% of the Company's chlorine and caustic soda sales are currently made to
customers located within a 100-mile radius of the Gramercy facility.
The Hochst facility is situated in an industrial park, and has
permitted chlorine production capacity of 144,000 metric tons p.a. and permitted
caustic soda production capacity of 163,000 metric tons p.a. The Hochst facility
also operates a chlorinated methane manufacturing facility which produces methyl
chloride, methylene chloride/chloroform, sodium hypochloride, calcium chloride
and hydrochloric acid. Methyl chloride is used in the production of silicones
and methyl cellulosis. Methylene chloride acts as a solvent for synthesis of
pharmaceuticals, agrichemicals, and photo and film industry and as an extraction
medium in the food industry. Chloroform is used as feedstock in the production
of fluoropolymers. This facility has a permitted methyl chloride production
capacity of 60,000 metric tons p.a. and permitted methylene chloride/chloroform
production capacity of 70,000 metric tons p.a.
All of the Hochst facility's chlorine output is consumed by the
facility's methane chlorination plant as well as other nearby chemical
production companies. The caustic soda produced by the Hochst facility is sold
to a wide range of customers, primarily in Germany. Approximately 30% of the
caustic soda output is produced in the form of microprills, which is the only
source of caustic soda microprills in Germany, and is sold approximately 1/3 in
Germany, 1/3 in Europe and 1/3 overseas. The Hochst facility sells methylene
chloride worldwide to numerous customers for many different applications, while
approximately 80% of the chloroform output is sold to a nearby chemical company.
ChlorAlp's facility has chlorine production capacity of 240,000 metric
tons p.a. and caustic soda production capacity of 269,000 metric tons p.a. See
"--Chlor-Alkali Joint Venture" for further information about this facility.
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The Company employs the diaphragm cell technology at its Gramercy
facility and the PCL Facility, and mercury cell technology at its Hochst
facility. These manufacturing processes consist of the electrolysis of sodium
chloride brine (salt water), which produces free hydrogen, chlorine and caustic
soda solution. For safety reasons, only small quantities of chlorine are stored,
and production tends to be limited to the amount of chlorine the plant can sell
in a relatively short period of time. Although salt is the basic raw material
used in the production of chlorine and caustic soda, electricity is the largest
production cost component.
The Gramercy facility is adjacent to a Kaiser bauxite processing
facility and the two companies share a powerhouse complex and have certain
operating agreements relating to this and other jointly operated or administered
assets. During fiscal year 1996, the Company approved and began implementing
certain capital improvements designed to reduce the electrical costs at its
chlorine and caustic soda plant at Gramercy. These improvements, which included
the installation of a new back-up rectifier assembly, refurbishment of generator
turbine units and upgrading of the control systems, are expected to be
substantially complete during fiscal year 1999. The Company intends to make
approximately $10.0 million of capital improvements to the plant and equipment
at its Hochst facility during fiscal year 1999, approximately $9.0 million of
which was offset by a reduction of the facility's purchase price.
The Company also operates a fluorocarbon business at its Gramercy
facility. Due to the federal government's mandated phaseout of CFC production by
1996, the Company has replaced its CFC foam blowing agent product line with the
next generation foam blowing agent, HCFC-141b, over the last three fiscal years.
The Company has reduced its reliance on its CFC business and on fluorocarbon
products in general, with expanded offerings and more intensive development of
markets and facilities for the production of chlorine and caustic soda as well
as products in its Nitrogen Products and Alumina Chemicals segments. As a
result, CFCs contributed $33.4 million, $12.4 million, $8.1 million and $2.5
million, respectively, to the Company's income from operations for fiscal years
1994, 1995, 1996 and 1997 and immaterial amounts for fiscal year 1998.
Raw Materials. The primary raw material used in the production of
chlorine and caustic soda is salt. The Company has a long-term contract with
Texaco Inc. ("Texaco"), which gives the Company the right to extract salt from a
salt dome located 15 miles from the Gramercy facility. The contract expires on
May 3, 2007, subject to the Company's option to renew the contract until May 3,
2032. The Company is currently negotiating a new agreement with Texaco that
would give Texaco the right to open additional wells in exchange for a contract
extension and certain other amendments. The Company operates a pipeline through
which the brine is transported from the Texaco salt dome to the Gramercy
facility.
Natural gas is the primary cost component in generating electricity for
chlorine and caustic soda production and is sold on the spot market, as well as
under long-term contracts. The Company makes spot purchases and has contracts
for up to one year; however, the Company also buys natural gas contracts for
future delivery and enters into natural gas hedging arrangements with financial
counterparties to hedge its natural gas price exposure. Fluctuations in natural
gas prices may affect the operating results of the Electrochemical Products
business.
The Hochst facility receives electric power from a nearby plant and
salt from various sources via river barge. The facility owns the pipeline
network in the industrial park utilized for chlorine, caustic soda and certain
other chemicals.
Hydrogen Fluoride ("HF") and chlorinated organic products are the
primary raw materials needed for the production of fluorocarbons. HF and the
required chlorinated organic products are considered by management to be readily
available for purchase domestically.
Kaiser Powerhouse Complex. Kaiser and the Company share the powerhouse
complex at the Gramercy facility, from which the Company obtains electricity and
steam for use in Electrochemical Products,
9
<PAGE> 11
pursuant to certain lease and operating agreements that remain in effect (if the
Company exercises renewal options) until 2008. Kaiser owns and operates the
powerhouse complex which is located on Kaiser property. The costs of operating
the powerhouse and the utilization of electricity and steam generated therefrom
are shared in accordance with these agreements. At the Gramercy facility, Kaiser
operates its alumina plants adjacent to the Company's facility that produces
Electrochemical Products. The Company currently is engaged in upgrading the
powerhouse facility to increase its reliability and efficiency which the Company
expects will lower power costs. These lower costs will benefit the Company as it
shares in the facility's output.
Kaiser and the Company also have agreements relating to jointly
operated or administered environmental compliance matters at their Gramercy and
Baton Rouge facilities, other services, such as water, sewage, dock and rail,
chemical, telephone and emergency response services and other matters.
Chlor-alkali Joint Venture
In October 1997, the Company purchased a 50% interest in the French
chlor-alkali business of Rhone-Poulenc Chimie, S.A. (now known as Rhodia Chimie,
"RPC"), a subsidiary of Rhone-Poulenc, and entered into certain related
arrangements with RPC (the "Chlor-alkali Joint Venture"). The Company purchased,
through LII Europe, its wholly owned subsidiary, a 50% stock interest in
ChlorAlp S.A.S. ("ChlorAlp"). The purchase price for such interest was 42.5% of
the agreed value of ChlorAlp (the "Initial Purchase"), which was approximately
equal to FRF 447 million ($76.3 million) which resulted in an initial investment
by the Company of FRF 190 million including an advance of FRF 66.3 million for
an aggregate initial investment of approximately $35.5 million, including
acquisition costs. The Company funded the Initial Purchase by drawing under the
Term Loan (as defined herein) portion of its Credit Facility (as defined
herein). Three members of the Company's executive management serve on the Board
of Directors of ChlorAlp.
Prior to the Closing, RPC contributed to ChlorAlp a 265,000 metric ton
p.a. chlor-alkali production facility (the "PCL Facility"), as well as certain
other related assets and liabilities. The Company believes that the Chlor-alkali
Joint Venture will: (i) increase its international market share in chlorine and
caustic soda; (ii) provide a significant entry point to the European chemical
markets at an attractive initial investment cost; and (iii) produce operating
efficiencies which may be derived from the operating similarities between the
PCL Facility and the Company's Gramercy facility. In connection with the
Chlor-alkali Joint Venture, ChlorAlp entered into market-priced long term
contracts to sell to Rhone-Poulenc (or its affiliates) chlorine and caustic
soda, the amounts of which historically have been approximately 65% of the PCL
Facility's production output. Based on audited financial information provided by
Rhone-Poulenc, in 1996, the PCL Facility generated net sales of approximately
FRF 547.6 million, and based on unaudited financial information, it generated
EBITDA of approximately FRF 100 million. According to this financial
information, for the year ended December 31, 1996, chlorine and caustic soda
represented approximately 32% and 55%, respectively, while bleach and salt
accounted for approximately 4% and 9%, respectively, of net sales from the PCL
Facility to be contributed to ChlorAlp.
Pursuant to its agreement with RPC, RPC has the right at its option to
sell to the Company the remaining 50% of the stock of ChlorAlp for approximately
FRF 167 million (approximately $28 million), subject to certain adjustments
("the RPC Put"). The RPC Put may be exercised at any time from April 1998
through April 2002, pursuant to a put and call agreement among RPC, ChlorAlp,
LII Europe and the Company (the "Put and Call Agreement"). If RPC does not
exercise the RPC Put during such period, the Company may "put" its ownership
interest back to RPC (the "Company Put") at a price ranging from approximately
FRF 95 million to FRF 142 million (approximately $16 million to $24 million),
subject to other adjustments and subject to RPC's further rights to exercise the
RPC Put within the six-month period following notice of the Company's exercise
of the Company Put. If the Company cannot or does not purchase RPC's stock
pursuant to the RPC Put, RPC has the right to require the Company to sell its
50% interest to RPC one year after notice of the RPC Put.
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<PAGE> 12
paid by the Company for the Initial Purchase, subject to certain adjustments.
Consequently, there can be no assurance that the Company will own 100% of
ChlorAlp in the future, and the Company may be required to sell its 50%
interest.
The Company has agreed to reimburse, on a "stand-by" basis, RPC for the
Company's proportionate share of any amounts that RPC is ultimately required to
pay under its pre-existing guarantee of the obligations of CEVCO, the provider
of electric energy to ChlorAlp, in respect of steam turbines leased by CEVCO
under a certain operating lease (the "Turbine Lease"). The Company's
proportionate share under such arrangement is limited to a maximum of FRF 172
million. The remaining term of the Turbine Lease is SIX years. The Company's
proportionate share of such lease payments, based on current and expected
ownership percentages, will not exceed $2.0 million per year prior to the
exercise of the RPC Put, and will not exceed $4.0 million per year after
exercise of the RPC Put, each based on current currency exchange rates.
The Company and RPC have also entered into a shareholders agreement
(the "Shareholders' Agreement") effective as of the same date as the Put and
Call Agreement, which provides for, among other things, governance of ChlorAlp.
The Put and Call Agreement also contains restrictions upon the ability of the
shareholders of ChlorAlp to compete with ChlorAlp during the term of the
Shareholders' Agreement and, with respect to an exiting shareholder, for three
years thereafter. In the event of a change of control of the Company, RPC would
be able to invoke the RPC Put.
As part of the Chlor-alkali Joint Venture, ChlorAlp entered into
agreements with RPC and its affiliates and other third parties: (i) to own and
operate jointly a powerhouse complex (the "Powerhouse Complex") located at the
PCL Facility for the generation of electricity, steam and demineralized water
for the PCL Facility's operations; (ii) to own a brine mine, and the extraction
rights thereto, at Hauterives, France (the "Hauterives Facility"), and to
operate a brine pipeline to transport sodium chloride from the Hauterives
Facility to the PCL Facility; (iii) for the supply of certain products and
services by RPC to ChlorAlp; and (iv) to sell to Rhone-Poulenc (or its
affiliates) chlorine and caustic soda, the amounts of which historically have
been approximately 65% of the PCL Facility's production output. In addition,
ChlorAlp entered into long-term arrangements with Elf Atochem S.A., France's
second largest chemical company and a wholly owned subsidiary of Elf Acquitaine
S.A., which operated the Saint Fons bleach facility that was transferred to
ChlorAlp.
Pursuant to the Chlor-alkali Joint Venture, ChlorAlp intends to
distribute by dividend to its shareholders, 100% of its net income annually.
Under the terms of the Shareholders' Agreement, capital expenditures will be
funded from excess cash provided by operating income of ChlorAlp. There will be
no obligation on the Company or RPC to fund any capital expenditures. It is
anticipated that any debt facilities required by ChlorAlp will be borrowed
locally by ChlorAlp without support from either RPC or the Company.
ALUMINA CHEMICALS
The Company's Alumina Chemicals business, located at its Baton Rouge
facility, includes specialty activated aluminas and Versal(R) gel aluminas.
These specialty products are used as desiccants, adsorbents, catalysts and
catalyst support systems. The Company believes that it is the world's second
largest producer of activated aluminas, with an estimated annual production
capacity of 50 million pounds, and the world's second largest merchant producer
of gel aluminas, with an estimated annual production capacity of 20 million
pounds. The Company is also an equity investor in two joint ventures, (CRILAR
and the Kaiser LaRoche Hydrate Partnership, a partnership with Kaiser in which
the Company acquired a 45% interest (the "Hydrate Partnership")), related to its
specialty aluminas business. For fiscal year 1998, Alumina Chemicals accounted
for $38.4 million of net sales (10.1% of Company total) and $7.3 million of
EBITDA
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<PAGE> 13
before unallocated corporate expenses (17.0% of Company total).
<TABLE>
<CAPTION>
INTERMEDIATE TYPICAL
COMPANY PRODUCT PRODUCTS APPLICATIONS NAMEPLATE CAPACITY
- -------------------------------- --------------- ---------------------------------- -----------------------
<S> <C> <C> <C>
Activated alumina chemicals..... Adsorbent Polyethylene, hydrogen 50 million lbs. p.a.
materials, peroxide, petrochemicals,
catalysts, and gasoline additives and air
desiccants purification
Versal(R)alumina chemicals...... Catalysts Oil refining, gasoline additives 20 million lbs. p.a.(1)
and automobile emission control
Hydrate......................... None Detergents, plastics, flame NA(2)
retardant materials, and specialty
aluminas
</TABLE>
- ----------
(1) The Company also owns, through CRILAR, an interest in a second
Versal(R) facility with annual production capacity of 20 million lbs.
p.a.
(2) Hydrate marketed by the Hydrate Partnership is produced at Kaiser's
Gramercy facility. The Company has no direct hydrate capacity.
In specialty aluminas, product performance is the basis for commanding
a pricing premium. The Company believes that it has successfully developed
superior and technically advanced custom products for its customers, especially
in its Versal(R) product line. The Company has developed strong relationships
due to the customer-specific nature of its products.
Activated Alumina Chemicals. The Company manufactures activated alumina
chemicals, which are used as catalysts for a variety of industrial applications,
and are all available in different size fractions. Activated alumina chemicals
are marketed to several different industry segments. The Company's major
customers include major polyethylene manufacturers, hydrogen peroxide producers,
petrochemical manufacturers, natural gas processors and gasoline additive
manufacturers.
Versal(R) Alumina Chemicals. The Versal(R) line of alumina chemicals
includes several types of products made using the Company's proprietary
Versal(R) process. The Company's Versal(R) products are produced by the Company
at its owned facility at Baton Rouge and at the CRILAR facility (as described
below).
Versal(R) products are supplied to a wide variety of catalyst
producers, including oil refineries and automobile catalyst manufacturers. As
evolving environmental regulations alter the catalyst requirements of automobile
manufacturers, crude oil refiners and other catalyst users, the Company believes
that the key to increasing market share will be the ability to meet unique
customer demands for product characteristics. The Company believes that the
Versal(R) process allows it to produce a full line of Versal(R) powders to
satisfy the changing needs of its customers. Most of the Company's competitors
produce only one type of alumina powder.
CRILAR. In September 1995, the Company and Criterion formed CRILAR for
the production of Versal(R) aluminas. The Company sold a 50% interest in certain
Versal(R) alumina production equipment for $5.5 million as part of the joint
venture arrangement. CRILAR obtained title to the Company's Versal(R) II plant.
The Company continues to operate the facility under an operating agreement.
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<PAGE> 14
Hydrate; Hydrate Partnership. Historically, the Company was a
significant distributor of hydrate, which it purchased from Kaiser. In January
1993, the Company ceased its distribution of hydrate and entered into the
Hydrate Partnership for the development, operation and management of a marketing
operation for the sale of hydrate. The Company markets hydrate through the
Hydrate Partnership. This partnership was formed in January 1993 for the
development, operation and management of a marketing operation for the sale of
hydrate. The Company jointly manages and has a 45% ownership interest in the
partnership. The Hydrate Partnership purchases hydrate from Kaiser at
competitive prices pursuant to a 20 year contract. All of the hydrate purchased
by the Hydrate Partnership is sold to third parties, except for certain sales to
CRILAR. In addition, the Company typically purchases all of its hydrate
requirements from Kaiser under a long-term contract.
Raw Materials. Hydrate, which is the primary raw material in the
production of alumina chemicals, is generally supplied by aluminum
manufacturers. The Company purchases all of its hydrate raw material
requirements from Kaiser under a long-term contract and, on occasion, from other
third party suppliers. Collectively, the Company and the Hydrate Partnership
purchase a significant portion of Kaiser's hydrate production from its Gramercy
facility. However, the Company does not directly purchase any hydrate from the
Hydrate Partnership, with the exception of certain hydrate purchased by the
CRILAR joint venture.
RESEARCH AND DEVELOPMENT
The Company has operated a research and development center at its Baton
Rouge facility since 1989 to develop and test new products and production
methods. The Company had research and development expenditures of approximately
$4.0 million, $3.8 million and $3.4 million in fiscal years 1998, 1997 and 1996,
respectively. The research and development center focuses on both process and
product development. Many of the Company's innovations involve improvements to
processes that allow existing products to be used in new applications. The
research and development center also provides technical support for the
Company's various product lines and is involved in the Company's plant upgrade
projects. Through its research and development center, the Company also conducts
research on a contract basis for third parties, including customers. Particular
areas of emphasis for the research and development effort have been CFC and HCFC
replacement processes and products and the development of new alumina chemical
products to meet the needs of the Company's customers.
PATENTS
The Company owns or has applied for approximately 30 patents and is
licensed under other patents covering certain of its products and processes. The
Company generally applies for patents whenever it develops new products or
processes considered to be commercially viable and, in appropriate
circumstances, seeks licenses when such products or processes are developed by
others. Although in the aggregate the rights under such patents are important to
the Company's operations, no significant segment of the Company's business or
its business as a whole is dependent on any particular patent or license.
SEASONALITY
A portion of the Company's nitrogen business serves the agricultural
fertilizer market, which is seasonal with greater sales of such products
occurring in the spring and, to a lesser extent, in the fall planting seasons.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
GOVERNMENTAL REGULATION
The Company is subject to various U.S. federal, state and local
environmental laws and regulations, as
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<PAGE> 15
well as various environmental laws and regulations in Europe, governing the use,
handling, transportation, discharge, storage, and disposal of hazardous
materials because the Company uses hazardous substances and generates hazardous
waste in the ordinary course of its manufacturing processes. Environmental laws
and regulations have evolved rapidly over the last three decades typically
becoming more restrictive of activities that may impact the environment, such as
emissions of pollutants to air and water, generation and disposal of wastes and
use and handling of chemical substances. Consequently, the Company is required
to obtain various permits for the operation of its plants and related
facilities, and these permits are subject to revocation, modification and
renewal. Governmental authorities enforce compliance with these regulations and
permits, impose excise taxes on certain of the Company's products and implement
environmental plans. Violators of these regulations are subject to civil and
criminal penalties, including civil fines, injunctions or both. Accordingly,
certain governmental regulation compliance costs and potential liabilities are
inherent in the Company's operations and products. The Company cannot at this
time assess with certainty the degree of impact of future emissions standards
and enforcement practices upon its operations or capital expenditure
requirements. The Company's operations also are governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and regulations thereunder which, among other things,
regulate the use of hazardous chemicals in the workplace. The Company uses
asbestos in the manufacture of its electrochemical products, and some of its
operating facilities contain structural asbestos that the Company believes is
properly contained.
The Company is subject to the Clean Air Act and comparable state
statutes regulating air emissions. The Clean Air Act contain provisions that may
result in the imposition of certain pollution control requirements with respect
to air emissions from the Company's operations. Depending upon requirements that
may be imposed by state and local regulatory authorities in the implementation
of those provisions and related regulations, the Company may be required to
incur capital expenditures for air pollution control equipment in connection
with maintaining or obtaining operating permits and approvals. Until such time
as the requirements of the new Clean Air Act Amendments are fully implemented,
the Company is unable to estimate the effect on earnings or operations or the
amount and timing of such required capital expenditures. At present, the Company
does not believe that such regulations will have a material effect on its
financial condition or results of operations.
The Clean Air Act Amendments provided for the phase-out of the
production of CFCs (R-11 and R-12) as of January 1, 1996, followed by the
phase-out of the production of the HCFC-141b by January 1, 2003. The Clean Air
Act also regulates sulfur and nitrogen oxide removal from emissions and provides
certain incentives for the production of reformulated gasolines. These
regulations may increase the demand for certain of the Company's alumina
chemicals and ammonia products.
Chlorine use has been affected and may be affected further by certain
environmental regulations, both final and pending, particularly those relating
to the discharge of dioxins by pulp and paper producers. When chlorine is used
in the pulp bleaching process, dioxins are a by-product. From time to time
legislation is introduced proposing the elimination of discharges of chlorine
compounds into navigable waters and requiring zero discharge limits for certain
toxic substances, including certain chlorinated compounds.
The Company voluntarily strives to adhere to the Guiding Principles of
the Responsible Care(R) initiative of the Chemical Manufacturers Association and
its six Codes of Management Practices. The Company believes that these codes
typically are more stringent than the legal requirements in the areas of process
safety, employee safety, pollution prevention and chemical distribution.
EMPLOYEES
As of April 30, 1998, the Company had approximately 1,120 full-time
employees, approximately 730
14
<PAGE> 16
of whom were represented by labor unions under various collective bargaining
agreements. Since 1986, the Company has had three labor disputes, none of which
caused any material production delays. The Company considers its relations with
its existing union and non-union employees to be satisfactory.
ITEM 2. PROPERTIES
The Company has seven facilities where its products are manufactured,
22 customer service centers from which it distributes anhydrous and aqua ammonia
and four warehouses that it uses for delivery and storage of fertilizer. The
Company's manufacturing facilities include one facility located in Baton Rouge
which manufactures alumina chemicals, two facilities located in Gramercy and
Hochst which manufacture electrochemical products and four facilities located in
Cherokee, Crystal City, Geneva and Seneca which manufacture nitrogen products.
The Company believes that its primary facilities are in suitable
condition and adequate for its current operations. The following table presents
certain information relating to the principal facilities owned by the Company.
<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND BUSINESS LINE STATUS
- ----------------- ------------------------------------------------------------ ------------------------
<S> <C> <C>
Baton Rouge...... Alumina chemicals: activated and Versal(R) alumina Owned
chemicals facility.
Gramercy......... Electrochemical products: hydrochlorofluorocarbons, caustic Owned
soda and chlorine facility.
Hochst........... Electrochemical products: chlorine, caustic soda and Equipment - Owned
chlorinated methane compounds facility. Building & Land - Leased
Cherokee......... Nitrogen products: fertilizer and blasting grade ammonium Owned
nitrate facility and distribution center.
Crystal City..... Nitrogen products: fertilizer and blasting grade ammonium Owned
nitrate facility.
Geneva........... Nitrogen products: blasting grade ammonium nitrate facility. Owned
Seneca........... Nitrogen products: blasting grade ammonium nitrate facility. Owned
</TABLE>
The Company is an equity investor in four manufacturing joint ventures.
The CRILAR joint venture is located within the Baton Rouge facility, and the
Hydrate Partnership's operations are located in Gramercy. The PCL Facility is
located near Grenoble in Pont-de-Claix, France, the facility and the land
interests of which are owned by the Chlor-alkali Joint Venture. The Avondale
Ammonia facility is located in Westwego, LA and is owned by Avondale Ammonia,
and is situated on land leased from Cytec.
In addition, the Company owns or leases 22 customer service centers in
18 states, where it stores and distributes anhydrous ammonia. It produces and
distributes aqua ammonia products at nine of these centers. The Company also
sells related storage systems and equipment and provides certain customer
services at those centers. The Company owns the four agricultural warehouses
located in Missouri, Illinois and Indiana, where the Company stores and
distributes phosphate fertilizer (DAP and TSP), solid urea, potash, nitrate, UAN
solutions and ammonium sulfate. The Company also owns several sites that were
once used in the production or distribution of Company products, which currently
are surplus to its needs.
The Credit Facility is secured by a security interest in substantially
all of the Company's domestic properties and assets granted to the lenders
thereunder.
ITEM 3. LEGAL PROCEEDINGS
General. The Company and its subsidiaries have been named as defendants
in a number of legal
15
<PAGE> 17
actions arising from normal business activities. Although management believes,
based upon the information currently available, that, except as otherwise
described in this section, such other legal actions are likely to be resolved
without a material adverse effect upon the financial condition and results of
operations of the Company, resolution of certain matters could be material to
the results of operations of any single fiscal quarter. However, the aggregate
cost of such legal actions are inherently impossible to predict and there can
therefore be no assurance that this will be the case. Additionally, the Company
is involved, to the extent and with the Company's assessment of the effect
noted, in the proceedings set forth below and in the Environmental Proceedings
section which follows.
Recent Developments. As previously reported, in December 1997, the
Company was named as a defendant in three civil antitrust actions (two of which
are the same suit filed in two separate jurisdictions), brought predominantly by
various mining concerns, alleging that the Company is guilty of violations of
federal antitrust laws, various state antitrust and unfair trade practice
statutes, and common law fraud in connection with the Company's blasting grade
ammonium nitrate business as conducted in the mid to late 1980's and early
1990's. The Company believes that the plaintiffs in these cases have targeted
the Company because of the Company's previously disclosed plea agreement with
the United States Department of Justice in which the Company agreed to plead
guilty to a one-count information charging the Company with participating in a
conspiracy to restrain competition in the pricing of ammonium nitrate during May
1992. In that agreement, the Company did not admit, and the Department of
Justice did not contend, that the Company ever implemented any such conspiracy.
Accordingly, the Company has filed answers denying liability in such civil
actions and intends vigorously to defend them.
On or about May 5, 1998, the Company was dismissed as a defendant by
the plaintiff in one of such civil lawsuits. However, the Company does not
expect that the plaintiffs in the remaining two cases will dismiss their claims
against the Company. Also, there can be no assurances that the Company will not
be added as a defendant in other existing civil antitrust lawsuits pending
against parties other than the Company, one of which existing lawsuits being a
class action suit. If the Company were to be found liable in any of such
existing or potential antitrust lawsuits, the monetary damages for which the
Company might be responsible could be materially adverse to the financial
condition of the Company.
ENVIRONMENTAL PROCEEDINGS
Gramercy, Louisiana. On July 28, 1989, a 28,000 gallon mixture
primarily consisting of chloroform and carbon tetrachloride was spilled at the
Company's Gramercy plant during the off-loading of a barge. Although immediate
corrective action was initiated, the spill impacted the shallow soils and
groundwater. Expenditures for corrective action and to determine the extent of
contamination through February 28, 1998, have been approximately $3.8 million.
The Company estimates that the remaining cost to complete remediation could be
up to an additional $1.9 million over the next few years.
On June 27, 1996, Marathon filed a complaint against the Company and
one other company in the United States District Court for the Eastern District
of Louisiana alleging that the Company or its agents damaged a gasoline pipeline
causing it to rupture and release gasoline into the Blind River and surrounding
area near Gramercy. Marathon's preliminary claim statement for damages incurred
totals $8.5 million. In connection with the gasoline release, a class action
petition was filed in the 23rd Judicial District Court for the Parish of St.
James, Louisiana against Marathon and the Company on behalf of persons and
entities allegedly sustaining direct and/or consequential damage as a result of
the gasoline release. On May 30, 1997, two additional plaintiffs filed suit
against Marathon, the Company and certain unnamed defendants alleging damages
suffered as a result of the gasoline spill and clean-up operations. The Company
is continuing a diligent investigation of the situation in order to evaluate the
allegations and the relative responsibility of the parties involved. Management
believes that the Company has meritorious defenses to these claims and is
vigorously defending itself against all claims. Because the matter is in a
preliminary stage, it is not yet possible to predict whether the Company will
incur any liability for the rupture and
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<PAGE> 18
release or to reasonably estimate the cost of any possible liability.
In January 1997, the owner of the land over which the brine pipelines
serving the Company's Louisiana chlor-alkali facilities travel filed a lawsuit
seeking generally the removal of one of the pipelines and/or monetary damages,
based on its claims that the pipeline has suffered and continues to suffer
unpermitted leaks of brine. In connection with that lawsuit, the landowner
sought a preliminary injunction to stop the Company from using one of its brine
pipelines immediately. The court refused to grant such relief, and instead
required the Company to implement a written remediation policy and a continuous
leak monitoring program, and to agree to shut down the pipeline when and if
leaks are detected in the future until any necessary repairs are completed. The
Company intends to replace such pipeline as soon as practicable after such
replacement is authorized by the authorities having jurisdiction over the
pipeline. The Company believes that the landowner's lawsuit is without serious
legal merit and is actively defending it. The Company has developed appropriate
strategies for ensuring a continuous supply of brine to its Gramercy facility.
Greensboro, North Carolina. The Company acquired a Greensboro, North
Carolina fertilizer plant and warehouse that was formerly used by Armour to
produce sulfuric acid as part of the 1986 purchase from USX. After a fire
destroyed the plant and most of the warehouse in 1989, the Company began an
effort to assess the effects of historical contamination at the site. The
original assessment addressed several areas, including a former wastewater
holding pond. USX has retained substantial liability with respect to assessment
and remediation of this site. The Company believes that its portion of the
remedial costs, including the cost of soil remediation and off-site disposal of
waste material and building debris, are adequately accrued.
Pursuant to the Asset Purchase Agreement dated April 30, 1986 between
USX and the Company, USX generally retains all environmental liabilities
relating to the acquired assets resulting from events occurring prior to the
closing date. The costs of any environmental liabilities arising due to both
parties' ownership or use of the purchased assets will be allocated in
accordance with each parties' contribution to the events or circumstances which
gave rise to the liabilities.
Other. In addition to the matters described above, the Company is also
involved, to varying degrees, in litigation, as well as remedial activities at
other facilities. Although management believes, based upon information currently
available, that such other litigation and activities are likely to be resolved
without a material adverse effect upon the financial condition and results of
operations of the Company, the aggregate cost of such litigation and remedial
activities cannot be precisely predicted, and there can be no assurance that
this will be the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders of the Company
during the fourth quarter of fiscal year 1998.
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<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock, $.01 par value per share (the "Common Stock"). As of May 27, 1998, the
Common Stock is held by 15 persons, all of whom are affiliated with the Company.
No dividends were declared on the Common Stock until January 1996 when the
Company's Board of Directors declared its first quarterly dividend of $.50 per
share. The Company also paid quarterly dividends of $.50 per share during fiscal
year 1997 and through the first quarter of fiscal year 1998, and $.75 per share
for the second, third and fourth quarters of fiscal year 1998. The payment of
dividends is a decision made by the Board of Directors from time to time based
on the Company's earnings, financial position and prospects, and such other
considerations as the Board considers relevant. Accordingly, the Company's
dividend policy may change at any time. In addition, the Company's debt
instruments include restrictions that may limit future dividends.
On September 23, 1997, the Company issued $175 million aggregate
principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes"), in
an unregistered private placement to Chase Securities Inc. and Donaldson, Lufkin
& Jenrette Securities Corporation (the "Initial Purchasers"). The aggregate
offering price for the Notes was $174,216,000, or 99.552% of par value, and the
Initial Purchasers received an aggregate discount of $5,250,000, or 3%. The
Initial Purchasers subsequently placed the Notes with certain qualified
institutional buyers in reliance upon Rule 144A under the Securities Act of
1933, as amended (the "Securities Act").
Because the Notes were issued in a private transaction with only the
two Initial Underwriters, and not in connection with a public offering, the
Company relied upon an exemption from the registration requirements of the
Securities Act based upon Section 4(2) thereof.
18
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical financial information
of the Company. The following selected historical consolidated financial
information should be read in conjunction with the consolidated financial
statements and notes thereto are included elsewhere herein. Also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In the opinion of management, all adjustments (consisting of
normally recurring accruals) considered necessary for a fair presentation have
been reflected therein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1994 1995 1996(a) 1997(b) 1998(c)
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .................... $ 375,511 $ 420,723 $ 448,982 $ 379,285 $ 381,014
Cost of sales ................ 302,075 329,383 350,066 313,871 319,242
------------ ------------ ------------ ------------ ------------
Gross profit ................. 73,436 91,340 98,916 65,414 61,772
Selling, general and
administrative expenses ... 50,048 54,135 54,631 54,777 56,594
------------ ------------ ------------ ------------ ------------
Income from operations ....... 23,388 37,205 44,285 10,637 5,178
Interest and amortization of
debt expense .............. (7,118) (13,083) (15,973) (14,881) (17,510)
Income from equity investments 3,257 2,540 2,647 4,909 2,698
Other income, net ........... 128 1,581 1,163 411 182
(Provision) benefit for income
taxes ..................... (8,499) (12,297) (13,170) (417) 3,653
------------ ------------ ------------ ------------ ------------
Income (loss) before minority
interests and extraordinary
charges ................... $ 11,156 $ 15,946 $ 18,952 $ 659 $ (5,799)
============ ============ ============ ============ ============
Net income (loss) ............ $ 6,853 $ 13,023 $ 18,952 $ 659 $ (18,089)
============ ============ ============ ============ ============
OTHER FINANCIAL DATA:
EBITDA(d) .................... $ 42,525 $ 56,538 $ 67,430 $ 39,099 $ 37,825
Cash flows from operations ... 29,071 5,495 60,751 25,332 46,366
Capital expenditures(e) ...... 27,897 17,651 16,894 35,784 37,898
Ratio of earnings to fixed
charges(f) ................ 1.9x 2.4x 2.7x 1.1x --
Cash dividends ............... $ -- $ -- $ 233 $ 912 $ 1,095
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1994 1995 1996(a) 1997(b) 1998(c)
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents .... $ 4,096 $ 5,900 $ 3,265 $ 1,165 $ 12,884
Working capital .............. 5,521 58,307 29,269 6,832 12,985
Total assets ................. 241,721 300,421 305,932 312,365 405,414
Total long-term debt(g) ...... 50,639 120,686 113,691 105,036 208,260
Total debt(h) ................ 79,067 130,500 125,089 145,901 237,924
Common stock with redemption
features .................. 16,538 15,392 12,246 4,177 3,505
Stockholders' equity ......... 23,404 34,478 51,296 50,906 31,648
</TABLE>
- ---------
(a) In September 1995, the Company entered into the CRILAR joint venture.
Since that time, sales related to the assets contributed to such joint
venture have been excluded from the Company's sales, and results of the
Company's interest in the CRILAR joint venture have been accounted for
as income from equity investments. Fiscal year 1996 also reflects the
results of operations of the Company's Seneca facility since December
1995, the date the Company acquired substantially all of the assets of
such facility.
(b) In April 1996, the Company sold substantially all of the property,
plant and equipment and certain other assets used in its calcined and
tabular alumina chemical businesses.
(c) During 1998, the Company entered into the Credit Facility and
repaid the existing revolving credit facility, refinanced the senior
subordinated debt of the Company, invested in ChlorAlp and acquired the
Hochst facility.
(d) EBITDA represents income from operations plus cash received from equity
investments plus depreciation, amortization and non-cash long-term
asset writedowns reflected in income from operations. EBITDA should not
be considered as an alternative measure of net income or cash flow
provided by operating activities (both as determined in accordance
with generally accepted accounting principles), but is presented to
provide additional information related to the Company's debt service
capability. EBITDA should not be considered in isolation or as a
substitute for other measures of financial performance or liquidity.
The primary difference between EBITDA and cash flows provided by
operating activities relates primarily to changes in working capital
requirements, and payments made for interest and income taxes.
(e) Capital expenditures exclude noncash additions through capital leases.
(f) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes, minority
interests and extraordinary charges plus fixed charges, adjusted to
exclude the undistributed earnings from equity investments and the
increase in redemption value of certain stock of a subsidiary held by
minority stockholders included in such fixed charges but not deducted
in the determination of income before minority interests. Fixed charges
consist of interest expense, amortization of debt expense, such portion
of rental expense deemed to be representative of the interest factor
and the pretax earnings required to cover the
20
<PAGE> 22
increase in redemption value of certain stock of a subsidiary held by
minority stockholders. For the year ended February 28, 1998, earnings
are inadequate to cover fixed charges by approximately $8.5 million.
(g) Total long-term debt includes term debt and capital leases, excluding
any current portion.
(h) Total debt includes the current and non-current portions of term debt,
capital leases, revolving credit facilities.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated audited financial statements and notes thereto
included in this 10-K Annual Report.
SIGNIFICANT DEVELOPMENTS
The Company historically has expanded its business through acquisitions
of other related businesses and investments in joint venture arrangements, and
the Company continues to evaluate acquisition and joint venture opportunities.
Accordingly, on December 31, 1997, the Company (through a wholly-owned
subsidiary) purchased certain chlor-alkali and chlorinated methane manufacturing
facilities located near Frankfurt in Hochst, Germany from Celanese GmbH,
Frankfurt, a subsidiary of Hoechst AG. These facilities produce chlorine,
caustic soda, sodium hypochloride, calcium chloride, methyl chloride, methylene
chloride/chloroform and hydrochloric acid. The Company funded the purchase with
funds drawn from its Revolving Credit Facility portion of its Credit Facility.
The purchase price was net of certain planned capital expenditures by Celanese
GmbH. The Company expects to complete certain of these planned projects in
addition to other projects related to environmental upgrades and to increase
the capacity and efficiency of the facility.
In October 1997, the Company purchased a 50% interest in ChlorAlp in
connection with the Chlor-alkali Joint Venture, as discussed elsewhere herein.
The Company's initial investment in ChlorAlp was approximately $35.5 million.
In connection with the Chlor-alkali Joint Venture acquisition, the Company
entered into a cross-currency interest rate swap agreement to hedge the
Company's investment. The Company includes in income the gains and losses
related to the portion of this agreement which is not designated as an
accounting hedge based upon the market values of the instrument. Gains and
losses related to the portion of this agreement designated as an accounting
hedge of the Company's equity investment are accounted for as an offset to the
translation adjustment. See "Business -- Electrochemical Products --
Chlor-alkali Joint Venture."
In September 1997, the Company refinanced its outstanding indebtedness
under its then-outstanding $100 million aggregate principal amount of 13% Senior
Subordinated Notes due 2004 (the "13% Notes") and then-existing bank credit
facility (the "Old Facility") (collectively, the "Refinancing). The Refinancing
was funded through the issuance of $175 million aggregate principal amount of
(9 1/2% Senior Subordinated Notes due 2007 (the Notes) and the Credit Facility,
the net proceeds from which were used to repurchase approximately 99% of the 13%
Notes and repay certain borrowings under the Revolving Credit Facility. The
Company also amended the Indenture governing the remaining 13% Notes to
eliminate substantially all its restrictive covenants. The Notes are unsecured
obligations of the Company and the Indenture contains, among other things,
limitations on stock redemptions, dividends, borrowings and investments, and
restricts the Company from entering into certain transactions, all as set forth
therein. In connection with issuing the Notes and redeeming the 13% Notes, the
Company paid call and prepayment premiums and incurred other costs. The total
loss recognized as a result of this early extinguishment of debt amounted to
$12.3 million (net of income tax benefit of $7.7 million) and is reflected in
the Company's consolidated statement of income as an extraordinary charge. In
August 1997, the Company entered into a six year, $160.0 million senior secured
credit facility (the "Credit Facility"), which currently provides for a $125.0
million revolving credit facility (the "Revolving Credit Facility") and a $35.0
million term loan (the "Term Loan"). The Company used a portion of the Revolving
Credit Facility to retire the Old Facility. All of the Term Loan was drawn in
October 1997 for purposes of closing the Chlor-alkali Joint Venture.
During December 1997, the Company entered into a multi-year tolling
contract for the production of
22
<PAGE> 24
LDAN at its Crystal City facility. The contract allowed the Company to start up
production of its LDAN plant at its Crystal City facility for the first time
since it was idled in the spring of 1996. During January 1998, the
Company experienced a fire at its Crystal City facility that caused damage to
its equipment, requiring the plant (including the recently operating LDAN plant)
to shut down production completely. As of April 1998, the Crystal City facility
is operational and no additional shutdowns are planned by Management in the near
future. Also, during fiscal year 1998, the Company's Geneva facility experienced
mechanical failure of a turbine that caused the facility to shutdown production
from October 1997 to December 1997. Management believes that the property damage
and business interruption are covered by insurance and that there will be no
significant adverse impact on the Company's operations as a result of such
events.
The Company has a natural gas hedging program designed to reduce the
Company's exposure to natural gas price volatility. Natural gas is the primary
raw material used for the production of ammonia in the Nitrogen Products segment
and electricity in the Electrochemical Products segment. The Company purchases
its natural gas pursuant to market based contracts with natural gas producers.
To protect against the risk of increasing prices, the Company, at its option,
periodically fixes its cost under these contracts in accordance with the pricing
mechanisms included in the contracts. Fixed price purchase commitments pursuant
to the contracts aggregated $6.8 million as of February 28, 1998. The Company
also at times utilizes option spread agreements ("collars") to establish a range
of cost on a portion of its natural gas requirements. A significant portion of
the Company's requirements are hedged for the next twelve months. The Company is
currently considering various alternatives to hedging its natural gas price
volatility in its European operations.
The Company also participates in two cross currency interest rate swaps
in order to reduce its exposure to currency exchange risk. Under these current
contracts, the Company remits quarterly interest payments to its exchange
partners in an designated foreign currency and, in exchange, receives quarterly
interest payments from its exchange partners in U.S. dollars at agreed upon
rates. As of February 28, 1998, the Company was a party to one of the contracts;
a 5 year, $60.0 million (FRF 372.4 million) cross currency interest rate swap
designed to hedge its exchange risk in its investment in ChlorAlp. Subsequent to
February 28, 1998, the Company entered into a 5 year, $50.0 million (DM 90.0
million) cross currency interest rate swap designed to hedge the exchange risk
related to the assets of its German facilities.
During fiscal year 1998, the Company experienced decreased income from
operation in both its Electrochemical Products business and its Nitrogen
Products business as a result of certain external factors including decreased
ECU prices and decreased ammonia prices, respectively. The decline in ECU prices
was primarily the result of increased competitive market conditions. The decline
in ammonia prices was primarily the result of increased worldwide production
capacity.
As of February 28, 1998, the Company was not in compliance with certain
financial and nonfinancial covenants contained in its Credit Facility. The
Company has received the appropriate amendments and waivers with respect to
these violations. While management expects to remain in compliance with the
covenants contained in the Credit Facility and the Indenture, it is possible
that the Company may not comply with such covenants in the future.
23
<PAGE> 25
SEGMENT INFORMATION
The following table presents business segment information for the
fiscal years ended February 29, 1996 and February 28, 1997 and 1998,
respectively:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
------------------ ------------------- --------------------
PERCENT PERCENT PERCENT OF
AMOUNT OF TOTAL AMOUNT OF TOTAL TOTAL AMOUNT
-------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
Nitrogen Products................ $248,438 55.3% $242,408 63.9% $234,884 61.6%
Electrochemical Products......... 138,775 30.9 96,738 25.5 107,686 28.3
Alumina Chemicals................ 61,769 13.8 40,139 10.6 38,444 10.1
-------- ----- -------- ----- -------- -----
Total....................... $448,982 100.0% $379,285 100.0% $381,014 100.0%
======== ===== ======== ===== ======== =====
INCOME (LOSS) FROM OPERATIONS:
Nitrogen Products................ $ 20,468 46.2% $ 11,710 110.1% $ 11,303 218.3%
Electrochemical Products......... 29,624 66.9 8,562 80.4 (1,181) (22.9)
Alumina Chemicals................ (448) (1.0) (3,897) (36.6) 34 0.7
Corporate........................ (5,359) (12.1) (5,738) (53.9) (4,978) (96.1)
-------- ----- -------- ----- -------- -----
Total....................... $ 44,285 100.0% $ 10,637 100.0% $ 5,178 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
RESULTS OF OPERATIONS
Comparison of Years Ended February 28, 1998 and February 28, 1997
Net Sales. Net sales for the fiscal year 1998 increased to $381.0
million from $379.3 million in fiscal year 1997, an increase of $1.7 million
(0.5%).
The Nitrogen Products segment's net sales decreased $7.5 million (3.1%)
due primarily to decreased sales volumes from its plants of $11.1 million
primarily as a result of unexpected outages at its Geneva and Crystal City
facilities and a delay in the start up of the Phase II expansion at its Cherokee
facility. The Phase II project is expected to improve ammonium nitrate prill
production and has increased the ammonium nitrate production capacity of the
facility. In addition, the Crystal City and Geneva facilities (including the
LDAN plant at Crystal City) are currently running and are expected to increase
production capacity during fiscal year 1999. In addition, the Company
experienced decreased sales prices in agricultural markets of $9.2 million due
to increases in the worldwide ammonia production capacity, as discussed above.
Such decreases were partially offset by increased sales volumes at its nitrogen
warehouses of $7.4 million primarily as a result of regional weather and
planting conditions and increased selling prices in blasting grade ammonium
nitrate of $5.4 million due to stronger market conditions.
The Electrochemical Products segment's net sales increased $10.9
million (11.3%) primarily due to the acquisition of the Hochst facility from
Celanese GmbH on December 31, 1997 (the "German Acquisition") which contributed
sales of $20.2 million. Such increase was partially offset by: (i) decreased ECU
prices during the year of $4.5 million, (ii) a $3.6 million decrease in sales
volume of fluorocarbon products primarily as a result of the federally-mandated
withdrawal from production of CFCs R-ll and R-12 and the Company's exit from
packaged refrigerant products and (iii) decreased sales prices of R-141b of $2.0
million primarily due to poor market conditions. In accordance with the
federally-mandated phase-out, the Company continued to sell its remaining bulk
CFCs during fiscal year 1997, no significant sales were made during fiscal year
1998.
24
<PAGE> 26
The Alumina Chemicals segment's net sales decreased $1.7 million (4.2%)
which consisted primarily of: (i) decreased activated alumina sales volumes of
$2.2 million and (ii) $3.0 million from the sale of the Company's calcined and
tabular alumina production facilities to C-E Baton Rouge, Inc. ("C-E") on April
1, 1996. Such decreases were partially offset by increased Versal(R) sales
volumes of $2.0 million and increased sales prices of alumina products of $1.5
million.
Income from Operations. Income from operations for fiscal year 1998
decreased to $5.2 million from $10.6 million in fiscal year 1997, a decrease of
$5.4 million (51.3%).
The Nitrogen Products segment's income from operations decreased by
$0.4 million (3.5%) during fiscal year 1998 as compared to the preceding year.
This decrease consisted of several offsetting factors including (i) decreased
sales prices in agricultural markets of $9.5 million due to increases in
worldwide ammonia production capacity, (ii) decreased margins of $1.7 million in
part as a result of unexpected outages at its Geneva and Crystal City
facilities, (iii) decreased raw materials costs at its warehouses and
distribution facilities of $5.3 million and decreased natural gas costs at its
manufacturing facilities of $1.6 million, (iv) decreased labor, maintenance and
other costs of $3.7 million as compared to fiscal year 1997 and (v) increased
profits in blasting grade ammonium nitrate primarily as a result of price
increases as discussed above.
The Electrochemical Products segment's loss from operations decreased
by $9.7 million (113.8%) during fiscal year 1998 as compared to the preceding
year. This decrease consisted primarily of lower income from operations in
chlorine and caustic soda of $3.5 million and fluorocarbons of $6.2 million. The
decline in profitability of chlorine and caustic soda resulted primarily from
lower ECU prices. In addition, the Company recorded a $2.1 million loss on a
french franc foreign currency hedge related to its ChlorAlp joint venture
investment in France. The Company experienced a $5.2 million decrease in
fluorocarbons income from operations, resulting primarily from the
federally-mandated withdrawal from production of certain fluorocarbons and
refrigerant products, and decreased sales prices of HCFC R-141b products. In
addition, a loss on the disposal of LaRoche Air Systems Inc. resulted in
decreasing fluorocarbons income from operations by $1.0 million.
The Alumina Chemicals segment's income from operations improved by $3.9
million (100.9%) during fiscal year 1998 as compared to the preceding year. The
increase was primarily the result of increased margins on Versal(R) alumina
products of $2.6 million due to increased sales volumes and improved operational
performance. Income from operations for the Alumina Chemicals segment in fiscal
1997 included losses of $0.4 million associated with the calcined and tabular
businesses which was sold to C-E during fiscal year 1997.
Corporate Expenses. Corporate expenses for fiscal year 1998 decreased
$760,000 to $5.0 million from $5.7 million for fiscal year 1997. For fiscal
years ended 1998 and 1997, as a percentage of net sales, these corporate
expenses were 1.3% and 1.5%, respectively.
Interest and Amortization of Debt Expense. Interest expense for fiscal
year 1998 increased to $17.5 million from $14.9 million in fiscal year 1997, an
increase of $2.6 million (17.7%). The increase was primarily due to the
Company's refinancing of its senior indebtedness and the purchases of its
European facilities as discussed above.
Income from Equity Investments. Income from equity investments
decreased to $2.7 million in fiscal year 1998 from $4.9 million in fiscal year
1997, a decrease of $2.2 million (45.0%). The decrease in equity income was
primarily due to a decline in income earned from the Hydrate Partnership as a
result of
25
<PAGE> 27
increased costs incurred by the partnership and a net loss incurred from the
ChlorAlp joint venture which primarily resulted from certain start up costs as a
result of the Company's investment in October 1997.
Other Income, Net. Other income, net, for fiscal year 1998 decreased to
$182,000 from $411,000 for fiscal year 1997, a decrease of $229,000.
Benefit (Provision) For Income Taxes. Benefit (provision) for income
taxes for fiscal year 1998 decreased to $3.7 million from ($417,000) for fiscal
year 1997, a decrease of $4.1 million (976.0%). The decrease reflects the
decrease in income before income taxes as compared to fiscal year 1997. The
effective tax rates were 38.6% and 38.8% for fiscal years 1998 and 1997,
respectively.
Extraordinary charge. For fiscal year 1998, net loss included an
extraordinary loss of $12.3 million (net of income tax benefit of $7.7 million)
as a result of the early extinguishment of the Company's senior indebtedness as
discussed above which included certain call and prepayment premiums.
Net Income (Loss). As a result of the factors described above, net
income (loss) for fiscal year 1998 was ($18.1) million. Net income decreased
$18.7 million from the preceding year.
Comparison of Years Ended February 28, 1997 and February 29, 1996
Net Sales. Net sales for the fiscal years 1997 decreased to $379.3
million from $449.0 million in fiscal year 1996, a decrease of $69.7 million
(15.5%).
The Nitrogen Products segment's net sales decreased $6.0 million (2.4%)
due primarily to increased internal consumption of ammonia produced by Avondale
Ammonia ("Avondale Ammonia"), an equally-held joint venture between the Company
and Cytec Industries Inc. ("Cytec"), as well as production problems experienced
at the Avondale Ammonia facility, resulting in reduced net sales of $14.4
million. In connection with the formation of Avondale Ammonia in July 1994, the
Company agreed to fulfill certain market-based sales commitments expiring within
approximately one year of the formation of Avondale Ammonia. Approximately
one-half of the sales commitments were renewed on an annual basis. Accordingly,
the Company's ammonia sales declined during 1997 as such sales commitments
expired and the ammonia became available for internal consumption. In addition,
the Company experienced decreased sales volumes at its nitrogen warehouses and
industrial ammonia locations of $13.1 million primarily as a result of poor
regional weather and planting conditions. Such decreases were partially offset
by increased net sales of $26.2 million resulting from the purchase of the
Seneca blasting grade ammonium nitrate facility during December 1995.
The Electrochemical Products segment's net sales decreased $42.0
million (30.3%) primarily due to a $33.1 million decrease in sales volume of
fluorocarbon products as a result of the federally-mandated withdrawal from
production of CFCs R-ll and R-12 and the Company's exit from packaged
refrigerant products. Also contributing to the decline in net sales were
decreased ECU prices of $6.1 million experienced during fiscal year 1997.
The Alumina Chemicals segment's net sales decreased $21.6 million
(35.0%) which consisted primarily of: (i) $11.9 million from the formation of
CRILAR and the resulting exclusion of certain sales from net sales and
production problems experienced at the remaining Versal(R) facility and (ii)
$14.5 million from the sale of the calcined and tabular alumina production
facilities to C-E on April 1, 1996. Such decreases were partially offset by
increased activated alumina net sales of $4.9 million.
Income from Operations. Income from operations for fiscal year 1997
decreased to $10.6 million from $44.3 million in fiscal year 1996, a decrease of
$33.6 million (76.0%).
26
<PAGE> 28
The Nitrogen Products segment's income from operations decreased by
$8.8 million (42.8%) during fiscal year 1997 as compared to the preceding year.
This decrease was primarily due to increased natural gas costs of $5.8 million
(as discussed above) and increased environmental remediation costs of $1.1
million as compared to fiscal year 1996. The Nitrogen Products segment's income
from operations for fiscal year 1997 also includes a $1.5 million charge to
selling, general and administrative expense as a result of a plea agreement with
the United States Department of Justice. See "Legal Proceedings."
The Electrochemical Products segment's income from operations decreased
by $21.1 million (71.1%) during fiscal year 1997 as compared to the preceding
year. This decrease consisted primarily of lower income from operations in
chlorine and caustic soda of $14.5 million and fluorocarbons of $5.5 million.
The decline in chlorine and caustic soda profitability resulted from (i) reduced
income from operations of $12.5 million because of lower ECU prices and
production problems and (ii) the $4.5 million effect of increased natural gas
prices, which were partially offset by $2.6 million of lower maintenance and
other costs. A $6.3 million decrease in fluorocarbons income from operations,
resulting from the federally-mandated withdrawal from production of certain
fluorocarbons and refrigerant products was partially offset by reduced cost of
$800,000 in the Company's HCFC R-141b operations.
The Alumina Chemicals segment's loss from operations increased by $3.4
million during fiscal year 1997 as compared to the preceding year. The increase
was primarily the result of the formation of CRILAR and the resulting exclusion
of certain gross profits from the segment's income from operations. Income from
operations for the Alumina Chemicals segment was also negatively affected by the
operating agreement entered into with C-E upon the disposition of the calcined
and tabular businesses as the Company incurred costs associated with the
transition of operations to C-E during fiscal year 1997.
Corporate Expenses. Corporate expenses for fiscal year 1997 increased
$379,000 to $5.7 million from $5.3 million for fiscal year 1996. For fiscal
years ended 1997 and 1996, as a percentage of net sales, these corporate
expenses were 1.5% and 1.2%, respectively.
Interest and Amortization of Debt Expense. Interest expense for fiscal
year 1997 decreased to $14.9 million from $16.0 million in fiscal year 1996, a
decrease of $1.1 million (6.8%). The decrease resulted from repayments on higher
rate debt obligations of $11.7 million and interest capitalized on major capital
projects of $860,000. The Company capitalized no interest on major capital
projects in fiscal year 1996.
Income from Equity Investments. Income from equity investments
increased to $4.9 million in fiscal year 1997 from $2.6 million in fiscal year
1996, an increase of $2.3 million (85.5%). Equity income attributable to CRILAR
and increases in income from the Hydrate Partnership, due primarily to increased
sales by the partnership, accounted for the increase.
Other Income, Net. Other income, net, for fiscal year 1997 decreased to
$411,000 from $1.2 million for fiscal year 1996, a decrease of $752,000 (64.7%).
The decrease is primarily attributable to the decrease in interest income earned
in fiscal year 1997.
Provision For Income Taxes. Provision for income taxes for fiscal year
1997 decreased to $417,000 from $13.2 million for fiscal year 1996, a decrease
of $12.8 million (96.8%). The effective tax rates were 38.8% and 41.0% for
fiscal years 1997 and 1996, respectively. The Company's effective tax rate in
fiscal year 1997 was adversely affected by the non-deductible charge relating to
the United States Department of Justice fine, which was offset by certain
one-time benefits from the resolution of federal tax audits and amendments to
prior tax returns.
Net Income. As a result of the factors described above, net income for
fiscal year 1997 was $659,000.
27
<PAGE> 29
Net income decreased $18.3 million from the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash provided by operating activities for
fiscal years 1998, 1997 and 1996 was $43.5 million, $25.3 million and $60.8
million, respectively. In fiscal year 1998, the increase in cash provided by
operating activities was primarily the result of net decreases in the Company's
working capital requirements from the prior year. Specifically, the Company
experienced significant increases in its accounts payable and other accrued
liabilities resulting from the purchase of the German facility as well as the
timing of the interest payments under the 13% Notes. Such increases in cash
provided by operating activities were partially offset by the Company's decrease
in net income before extraordinary charges in fiscal year 1998. In fiscal year
1997, the decrease in net income and changes in working capital requirements
contributed primarily to the decrease in net cash provided by operating
activities. The Company experienced a less significant increase in working
capital requirements during fiscal year 1997 compared to a substantial decline
in working capital requirements experienced in fiscal year 1996.
Investing and Financing Activities. Net cash used in investing
activities for fiscal years 1998, 1997 and 1996 were $91.7 million, $39.7
million and $52.0 million, respectively. The primary uses of cash for investing
activities during fiscal year 1998 were (i) capital expenditures of $37.9
million, (ii) the investment in the Chlor-alkali Joint Venture and (iii) the
purchase of the German facility for $17.6 million. Major capital expenditures
included $1.8 million for Phase II of the Cherokee facility expansion (as
discussed above), $6.0 million for projects to improve the electrical systems at
the Gramercy powerhouse and $6.2 million for the Company's ongoing software
implementation project. The powerhouse projects are expected to increase the
reliability and efficiency of the powerhouse operations at the Gramercy chlorine
and caustic soda facility and are expected to be substantially completed during
fiscal year 1998.
In addition, the Company has spent approximately $2.3 million during
fiscal year 1998 on certain debottlenecking projects at its Alumina Chemicals
facility and $2.4 million to improve and upgrade the equipment at certain of its
Nitrogen facilities. The primary use of cash for investing activities during
fiscal year 1997 was for capital expenditure projects. Significant fiscal year
1997 capital expenditures related to the Company's strategic growth plan. Major
projects which were in process during fiscal year 1997 included Phases I and II
of the Cherokee facility expansion and the Gramercy powerhouse improvement
projects. The Company also incurred costs of approximately $1.5 million for its
ongoing software implementation project. Net cash used in investing activities
for fiscal year 1996 included $38 million for the purchase of the Seneca
facility in December 1995. Phases I and II of the Cherokee facility projects
have been completed and are expected to improve ammonium nitrate prill
production and reduce emissions. The Company intends to use cash flows from
operations and borrowings under the Credit Facility as the source of funds for
the projects mentioned above.
During fiscal year 1997, proceeds of $3.1 million from the sale of the
Company's calcined and tabular operations and $600,000 from the sale of other
properties contributed cash of $3.7 million. In addition, proceeds from the sale
to CRILAR of the 50% interest in the Versal II plant and $1.0 million from the
sale of other properties contributed to cash of $6.5 million in fiscal year
1996.
Net cash (used)/provided by financing activities for fiscal years 1998,
1997 and 1996 was $59.7 million, $12.3 million and ($11.3) million,
respectively. Cash provided by financing activities of
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<PAGE> 30
$59.7 million for fiscal year 1998 included net additions of $76.8 million to
long-term debt partially offset by net repayments of $15.6 million of
outstanding indebtedness under the Company's Revolving Credit Facility.
Borrowings of long-term debt were used to complete the Refinancing and invest in
the ChlorAlp joint venture. During fiscal year 1998, the Company made its final
payment on certain indebtedness to USX (the "USX Notes"). Cash provided in 1997
was primarily due to borrowings of $32.9 million under the then-existing credit
facility. Such amounts were primarily used to fund the Company's capital
expenditures during 1997, as discussed above. In addition, the Company repaid
$11.7 million of long-term debt, including pre-payments of $5.2 million and
scheduled payments of $5.0 million on the USX Notes. Fiscal year 1997 activity
also included payments of $7.5 million to repurchase common stock of the Company
pursuant to rights of a former officer. Cash used by financing activities in
1996 was primarily due to the repayment of debt, specifically a pre-payment of
$7.4 million and scheduled payments of $4.0 million on the USX Notes.
Dividend payments of an aggregate of $1.1 million and $912,000 were
paid during fiscal year 1998 and 1997, respectively. On April 17, 1998, the
Company's Board approved dividend payments of $328,000 to all shareholders of
record as of April 15, 1998. The Board may or may not declare additional
dividends in the future depending upon the financial condition of the Company
and restrictions pursuant to the Company's debt instruments.
The Company has formed an internal task force to evaluate the
potential impact of the situation commonly referred to as the "Year 2000 issue."
The Year 2000 issue, which is common to most businesses, concerns the inability
of computer systems and devices to properly recognize and process date-sensitive
information when the year changes to 2000. The software implementation project
(as discussed above) is designed as Year 2000 compliant. Currently, several
modules of the software project (including, but not limited to, payroll, job
costing and the general ledger) have been implemented by the Company. The
Company expects to complete the implementation of the software project during
fiscal year 1999. In addition, the Company is addressing the Year 2000 issue as
it relates to its operations and its outside business partners and has not
determined the effect on the Company. Further, while it is not possible at
present to give an accurate estimate of the cost of this work, the Company
expects that such costs will not be material to the Company's results of
operations, liquidity or financial position of the Company.
Management anticipates that the Company's existing capital resources,
cash flow generated from future operations and drawings under the Revolving
Credit Facility will enable it to maintain its planned operations, capital
expenditures, acquisitions and debt service for the foreseeable future.
See "Business -- Chlor-alkali Joint Venture" for a description of the
RPC Put, pursuant to which RPC has certain rights to require the Company to
purchase RPC's 50% interest in ChlorAlp.
ENVIRONMENTAL AND LEGAL MATTERS
Due to the nature of the Company's business, it must continually
monitor compliance with all applicable environmental laws and regulations. As of
February 28, 1998, the Company had recorded $1.7 million of current liabilities
and $1.5 million of non-current liabilities to reflect the estimated future
costs associated with environmental matters. A significant portion of the
recorded liabilities is attributable to a soil and groundwater contamination
incident at the Company's Gramercy facility in fiscal year 1990. Remediation at
such facility is being conducted in accordance with a work plan approved by the
Louisiana Department of Environmental Quality. Future expenditures for the
Gramercy facility are anticipated to be approximately $2.2 million and are
anticipated to be paid over the next few years. In addition, the Company has
recorded liabilities attributable to the Greensboro, North Carolina fertilizer
plant contamination for remedial costs, including the cost of soil redemption
and off-site disposal of waste material and building debris. See "Legal
Proceedings."
Generally, under the asset purchase agreements for most of the
Company's operations the former owners retained some liability under certain
circumstances for environmental matters that existed prior to the dates of the
respective transactions. In connection with the Company's sale of certain of the
businesses it originally bought from USX in 1986, the Company retains some
degree of liability for environmental matters that existed prior to the date of
sale. See "Legal Proceedings -- Environmental Proceedings."
Capital expenditures made to address environmental matters were
approximately $3.9 million, $7.8 million and $1.5 million in fiscal years 1998,
1997 and 1996, respectively. Included in fiscal year 1997 expenditures is
approximately $5.9 million related to certain emissions abatement equipment at
the Cherokee facility that allows the Company to operate a nitric acid plant at
a substantially higher capacity than in recent years without exceeding
limitations on certain emissions.
On June 27, 1996, Marathon Oil Company and Marathon Pipe Line Company
(together, "Marathon") initiated litigation against the Company and another
defendant in connection with a 1996 petroleum release near the Company's
Gramercy facility, and in connection therewith a class action lawsuit and one
other
29
<PAGE> 31
lawsuit were filed against the Company and Marathon. At this stage, it is not
yet possible to predict whether the Company will incur any liability for the
rupture and release or to reasonably estimate the cost of any possible
liability. The Company believes that insurance proceeds will be available to
defray a significant portion of any liability the Company may incur. See --
Environmental Proceedings.
As previously reported, in December 1997, the Company was named as a
defendant in three civil antitrust actions (two of which were the same suit
filed in separate jurisdictions), brought predominantly by various mining
concerns, alleging that the Company is guilty of violations of federal antitrust
laws, various state antitrust and unfair trade practice statutes, and common law
fraud in connection with the Company's blasting grade ammonium nitrate business
as conducted in the mid to late 1980's and early 1990's. The Company believes
that the plaintiffs in these cases have targeted the Company because of the
Company's previously disclosed plea agreement with the United States Department
of Justice in which the Company agreed to plead guilty to a one-count
information charging the Company with participating in a conspiracy to restrain
competition in the pricing of ammonium nitrate during May 1992. In that
agreement, the Company did not admit, and the Department of Justice did not
contend, that the Company ever implemented any such conspiracy. Accordingly, the
Company has filed answers denying liability in such civil actions and intends
vigorously to defend them.
On or about May 5, 1998, the Company was dismissed as a defendant by
the plaintiff in one of such civil lawsuits. However, the Company does not
expect that the plaintiffs in the remaining two cases will dismiss their claims
against the Company. Also, there can be no assurances that the Company will not
be added as a defendant in other existing civil antitrust lawsuits pending
against parties other than the Company, one of which existing lawsuits being a
class action suit. If the Company were to be found liable in any of such
existing or potential antitrust lawsuits, the monetary damages for which the
Company might be responsible could be materially adverse to the financial
condition of the Company.
In January 1997, the owner of the land over which the brine pipelines
serving the Company's Gramercy, Louisiana chlor-alkali facilities travel filed a
lawsuit seeking generally the removal of one of the pipelines and/or monetary
damages, based on its claims that the pipeline has suffered and continues to
suffer unpermitted leaks of brine. In connection with that lawsuit, the
landowner sought a preliminary injunction to stop the Company from using one of
its brine pipelines. The court refused to grant such relief, and instead
required the Company to implement a written remediation policy and a continuous
leak monitoring program, and to agree to shut down the pipeline when and if
leaks are detected in the future until any necessary repairs are completed. The
Company intends to replace such pipeline as soon as practicable after such
replacement is authorized by the authorities having jurisdiction over the
pipeline. The Company believes that the landowner's lawsuit is without serious
legal merit and is actively defending it. The Company has developed appropriate
strategies for ensuring a continuous supply of brine to its Gramercy facility.
See "Legal Proceedings."
The Company is a participant in certain other legal actions, claims and
remedial activities. Management of the Company believes that, except as
described above, based upon the information currently available, such other
legal actions, claims and remedial activities are likely to be resolved without
a material adverse effect upon the Company's financial condition and results of
operations. However, the aggregate cost of such legal actions, claims and
remedial activities are inherently impossible to predict and there can therefore
be no assurance that this will be the case. See "Legal Proceedings."
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective March 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of
30
<PAGE> 32
("SFAS 121"). SFAS 121 requires that long-lived assets to be held and used by an
entity, certain identifiable intangibles and goodwill be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The adoption of this accounting standard did
not have a material effect on the Company's operating results or financial
condition.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"). SOP 96-1 provides guidance with respect to the recognition, measurement
and disclosure of environmental remediation liabilities. The Company adopted SOP
96-1 effective March 1, 1997. Adoption of SOP 96-1 did not have a material
effect on the Company's operating results or financial condition.
In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") and Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 131
establishes standards for disclosures of segment information about products and
services, geographic areas, major customers and certain interim disclosures of
segment information which are not required by accounting standards currently
used by the Company. These statements are required to be adopted in fiscal year
1999. The Company does not anticipate that SFAS 130 will have a material impact
on the Company's consolidated financial statements. The Company is currently
evaluating SFAS 131 and has not yet determined its impact on the Company's
consolidated financial statements.
In February 1998, the FASB issued Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). The
Statement supersedes the disclosure requirements in Statements No. 87,
Employers' Accounting for Pensions, No. 88, Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
The overall objective is to improve and standardize disclosures about pensions
and other postretirement benefits and to make the required information easier to
prepare and more understandable. SFAS 132 eliminates certain existing disclosure
requirements, but at the same time adds new disclosures. The Statement is
required to be adopted in fiscal year 1999.
SEASONALITY
Demand for the Company's fertilizer products is seasonal. Such
seasonality of demand requires the Company to build its inventory in
anticipation of periods of peak demand and may adversely affect the Company's
cash flow. The Company typically realizes higher prices and margins for
fertilizer during the spring and, to a lesser extent, the fall planting seasons.
Demand for the Company's fertilizer is primarily dependent on United States
agricultural conditions, which can be volatile as a result of a number of
factors, the most important of which are weather patterns and conditions,
current and projected grain stocks and prices, and the United States
government's agricultural policy. Due to fertilizer seasonality, interim results
of operations may not be indicative of the results expected for the full fiscal
year. In addition, the Company periodically performs extended major maintenance
on its manufacturing facilities that results in periods of reduced production at
such facilities. Due to the timing of these activities and other factors,
interim results of operations may not be indicative of the results expected for
the full fiscal year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the
Company of each person who is an executive officer or a director on the Board of
Directors (a "Director") of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ ------- -----------------------------------------------
<S> <C> <C>
W. Walter LaRoche, III.............. 46 Chairman of the Board
Victoria E. LaRoche................. 39 Vice Chairman of the Board
Grant O. Reed....................... 51 President, Chief Executive Officer and Director
Harold W. Ingalls................... 50 Vice President and Chief Financial Officer
Richard H. Watts.................... 51 Vice President and Secretary
Vincent R. Gurzo.................... 49 Vice President
William G. Osborne, Ph.D............ 57 Vice President
David A. Lillback................... 50 Vice President
Paul L. M. Beckwith, Ph.D........... 40 Director
John R. Hall........................ 65 Director
Johnnie Lou LaRoche................. 69 Director
Louanne C. LaRoche.................. 42 Director
C. L. Wagner, Jr.................... 53 Director
George R. Wislar.................... 65 Director
Robert L. Yohe...................... 62 Director
</TABLE>
W. Walter LaRoche, III. Chairman of the Board. Mr. LaRoche joined the
Tennessee Valley Authority in 1976 as an attorney and served in that capacity
until 1988. In August 1988 he joined LaRoche Holdings Inc. ("LHI") as Vice
President of Planning and Business Development. He was appointed Executive Vice
President and Chief Operating Officer of the Company in January 1989 and
President and Chief Operating Officer of the Company and Vice President of
LaRoche Chemicals Inc. ("LCI") in March 1991. Mr. LaRoche was appointed Vice
Chairman of LHI, LCI and the Company in May 1993. He served as a member of the
Board of Directors of LHI, LCI and the Company from July 1988 until the
consolidation of LHI and LCI into the Company (the "Consolidation") and he has
continued to serve as a Director of the Company since the Consolidation. In
October 1994, Mr. LaRoche was appointed Chairman of the Board of the Company.
Mr. LaRoche's mother, Johnnie Lou LaRoche, and his sisters, Victoria E. LaRoche
and Louanne C. LaRoche also serve as directors of the Company.
Victoria E. LaRoche. Vice Chairman of the Board. Ms. LaRoche was
elected as a Director of LHI in August 1993 and has been a Director of the
Company since the Consolidation and Vice Chairman of the Board since October
1994. Ms. LaRoche began working for the Company in 1987 and held many positions
within the Company in the Accounting, Environmental, Financial Analysis and
Market Research departments until March 1996.
Grant O. Reed. President, Chief Executive Officer and Director. Mr.
Reed joined Monsanto Company in 1969 as a Chemical Engineer and later performed
in various sales, product management and planning positions. He joined Ashland
Chemical Company in 1980 and became Vice President and General Manager of the
Carbon Black Division in 1984. In 1988 the Carbon Black Division of Ashland was
sold to Degussa A.G. of Germany, and Mr. Reed became President of the Degussa
Carbon Black Corporation. In 1990 he was appointed Executive Vice President of
the Pigment Group of Degussa Corporation. Mr. Reed was appointed President and
Chief Operating Officer of LHI and the Company in July 1993 and of LCI in August
1993. He became Chief Executive Officer of LHI, LCI and the Company in April
1994. Mr. Reed remained in those positions and has continued to serve as
President, Chief Executive Officer and Director
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<PAGE> 35
of the Company since the Consolidation.
Harold W. Ingalls. Vice President and Chief Financial Officer. Mr.
Ingalls joined the Company as Vice President and Chief Financial Officer in July
1996. Prior to joining the Company, Mr. Ingalls served for approximately a year
as the Vice President and Chief Financial Officer of OHM Corporation Atlanta, an
affiliate of WMX Technologies, Inc., an environmental remediation company
("WMX"). Prior to 1995, Mr. Ingalls served as the Chief Financial Officer,
Treasurer and Vice President of two subsidiaries of WMX and served other
subsidiaries of WMX for over thirteen years in various strategic and managerial
capacities.
Richard H. Watts. Vice President. Mr. Watts has been responsible for
Nitrogen Products since April 1995. Prior to that time Mr. Watts was the Vice
President and General Manager of Alumina Chemicals from April 1992 until April
1995. Mr. Watts was Vice President and General Manager -- Gramercy Products for
LCI from 1989 through April 1992. Between 1968 and 1988 Mr. Watts held a number
of supervisory and management positions with Kaiser.
Vincent R. Gurzo. Vice President. Mr. Gurzo joined the Company as Vice
President of Specialty Chemicals in August 1996. Prior to joining the Company,
Mr. Gurzo worked for a year with The Mercer Hoyt Group, a group specializing in
training and sales development in the chemical industry and in publishing in the
health care industry. From 1989 to 1995, Mr. Gurzo served as Vice President --
Business Unit General Manager Industrial Business and in other sales and
marketing positions for International Specialty Products (GAF).
William G. Osborne, Ph.D. Vice President. Dr. Osborne has been the
managing director of ChlorAlp since its formation in October 1997. Prior to
that, Dr. Osborne has been responsible for the Company's merger and acquisition
activity from May 1996 until October 1997 including negotiation of the
Chlor-alkali Joint Venture and the German Acquisition. Prior to that, Dr.
Osborne was responsible for the Company's purchasing and distribution functions
from March 1994 until May 1996. Dr. Osborne was Vice President of Corporate
Operations and Vice President and General Manager, Performance Materials for LCI
from April 1992 through March 1994, and was Vice President and General Manager
- -- Specialty Alumina Chemicals for LCI from July 1988 through April 1992. He
also held a number of positions with Kaiser from 1969 through LCI's acquisition
of Kaiser in 1988. From 1966 to 1969, Dr. Osborne was a Research Engineer with
E.I. du Pont de Nemours and Co.
David A. Lillback. Vice President. Mr. Lillback was appointed to Vice
President in charge of the Company's U.S. chlor-alkali business on March 1,
1998, and has been employed with the Company and LCI in various capacities since
1988. From January to March 19998, Mr. Lillback was the Managing Director of the
Company's German operations, and from May 1996 through January 1998 he served as
Plant Manager at the Company's Baton Rouge facility. From November 1994 through
May 1996, Mr. Lillback was Director of Strategic Organizational Planning, and
from March 1993 through November 1994 he served as Director of Human Resources.
Prior to his employment with the Company, Mr. Lillback served in various
capacities with Kaiser Aluminum & Chemical Corporation from 1980 though 1988.
Paul L. M. Beckwith, Ph.D. Director. Dr. Beckwith was elected as a
Director of LCI in 1988 and has been a Director of the Company since the
Consolidation. Dr. Beckwith became a Managing Director of Chase Securities Inc.
in May 1997, where he is the Group Executive of the Global Chemicals Group.
Prior to May 1997, Dr. Beckwith was a Managing Director of The Chase Manhattan
Bank, where he had been employed since 1982.
John R. Hall. Director. Mr. Hall was elected to the Board of Directors
of the Company in September, 1996. Most recently, Mr. Hall was employed by
Ashland, Inc. as Chairman of the Board and Chief
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<PAGE> 36
Executive Officer. Mr. Hall served as Ashland Inc.'s Chairman of the Board and
Chief Executive Officer since 1981. Mr. Hall stepped down from his position as
Chief Executive Officer of Ashland, Inc. in October 1996 and retired as Chairman
in February 1997. He is a member of the Board of Directors of Banc One
Corporation, the Canada Life Assurance Company, CSX Corporation, Humana Inc.,
Reynolds Metals Company and UCAR International Inc. He is a member of the
American Petroleum Institute Board of Directors and Public Policy Committee and
the National Petroleum Counsel. Mr. Hall is past Chairman of the National
Petroleum Refiners Association.
Johnnie Lou LaRoche. Director. Mrs. LaRoche was elected as a Director
of LHI in August 1993 and of LCI in August 1989. She has been a Director of the
Company since the Consolidation. Mrs. LaRoche is the widow of the deceased
founder (and principal) of the Company, William W. LaRoche, Jr. W. Walter
LaRoche, III, Victoria E. LaRoche and Louanne C. LaRoche are siblings and are
the children of Johnnie Lou LaRoche and William W. LaRoche, Jr.
Louanne C. LaRoche. Director. Ms. LaRoche was elected as a Director of
LHI in August 1993 and has been a Director of the Company since the
Consolidation. As well as being an artist, she was owner and director of the Red
Piano Art Gallery in Hilton Head, South Carolina from 1979 to 1995.
C. L. Wagner, Jr. Director. Mr. Wagner was elected as a Director of LCI
in 1988 and has been a Director of the Company since the Consolidation. Mr.
Wagner has been a partner in the law firm of Hunton & Williams since 1988. Prior
to that time, Mr. Wagner was a partner with the law firm of Hansell & Post in
Atlanta, Georgia. Hunton & Williams has regularly acted as counsel to LHI, LCI
and the Company. Mr. Wagner is also a member of the Board of Directors of Lummus
Corporation, a textile equipment manufacturer, and Alimenta (United States),
Inc., an international food processor and distributor.
George R. Wislar. Director. Mr. Wislar has been a Director of the
Company since the Consolidation. Mr. Wislar is the founder, and retired Chairman
of the Board of Directors and Chief Executive Officer of Fountainhead Water
Company, Inc., Marietta, Georgia. Mr. Wislar's previous experience includes
investment banking at Alex Brown & Sons, Inc., The Robinson-Humphrey Company and
Kidder, Peabody & Co. Incorporated.
Robert L. Yohe. Director. Mr. Yohe has been a Director of the Company
since November 1996. Mr. Yohe retired as Vice Chairman of Olin Corporation in
1994, after 11 years of service. He served in many leadership capacities at Olin
Corporation including President of the Chemicals Group from 1985 to 1993 and
Vice President of Mergers and Acquisitions from 1983 to 1985. Prior to joining
Olin Corporation, Mr. Yohe worked in executive management for Uniroyal, and
Occidental Petroleum's Hooker Chemical Division. Mr. Yohe is a member of the
Board of Directors of Airgas, Inc., BetzDearborn, Inc., Calgon Carbon
Corporation, Marsulex Inc. and Middleddy Corporation. He is also a Trustee of
Lafayette College.
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<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended February 28,
1998, February 28, 1997 and February 29, 1996, respectively, the compensation
paid to or earned by the Company's Chief Executive Officer and its four other
most highly compensated executive officers who were serving at the end of fiscal
year 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)(3)(4)
- --------------------------- ---- ----------- ----------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Grant O. Reed................ 1998 $341,131 -- -- $ 496
President and Chief 1997 331,683 $241,704(5) $101,550 --
Executive Officer 1996 267,963 708,504(6) 372,721 --
W. Walter LaRoche, III....... 1998 252,247 -- -- 950
Chairman of the Board 1997 244,270 59,968 -- 1,055
1996 200,572 278,736 43,055 45,634
Harold W. Ingalls............ 1998 200,353 -- -- --
Vice President and 1997 126,089(8) 376,456(7) 274,104 --
Chief Financial Officer
Neil A. Stephansson.......... 1998 153,676 50,000(9) -- 571
Vice President (12) 1997 150,966 11,219 -- 746
1996 129,940 118,449 16,403 711
William G. Osborne........... 1998 141,570 73,111(10) -- 51,192
Vice President 1997 128,071 5,836 -- 64,691
1996 97,491 88,335 -- 288
Vincent R. Gurzo............. 1998 136,247 50,000 48,951 420
Vice President 1997 68,687(11) 76,015(13) 50,442 95,886
</TABLE>
- ----------
(1) Amounts shown reflect (i) the tax gross-up amounts paid by the Company
in connection with the bonuses awarded to Mr. Reed, Mr. Ingalls, Mr.
Stephansson and Mr. Gurzo pursuant to the Company's Management Stock
Purchase Plan, (ii) the tax gross-up amount paid by the Company in
connection with the life insurance policy for Mr. LaRoche and (iii) the
tax gross-up amount paid by the Company in connection with a club
membership fee for Mr. LaRoche. See footnotes (5), (6), (7), (10) and
(13) below and "Management Stock Purchase Plan."
(2) Amounts shown for fiscal year 1998 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of
$496, $950, $571, $416 and $420 on behalf of Mr. Reed, Mr. LaRoche, Mr.
Stephansson, Mr. Osborne, and Mr. Gurzo, respectively (ii) a
resettlement allowance of $17,500 paid to Mr. Osborne resulting from
his move to France and (iii) relocation expenses of $33,276 paid to Mr.
Osborne resulting from his move to France and (iv) expatriate taxes of
$7,984 paid to Mr. Osborne, also resulting from his move to France.
(3) Amounts shown for fiscal year 1997 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of
$1,055, $746 and $377 on behalf of Mr. LaRoche, Mr. Stephansson and Mr.
Osborne, respectively and (ii) relocation expenses of $64,314 and
$80,710 paid to Mr. Osborne and Mr. Gurzo, respectively, related to
their move to Atlanta and (iii) a resettlement allowance of $15,176
paid to Mr. Gurzo.
(4) Amounts shown for fiscal year 1996 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of
$602, $711 and $288 on behalf of Mr. LaRoche, Mr. Stephansson and Mr.
Osborne, respectively, (ii) a life insurance premium of $18,392 paid on
behalf of Mr. LaRoche, for the life insurance policy on his mother,
Johnnie Lou LaRoche, and (iii) a one-time club membership fee of
$26,640 paid on behalf of Mr. LaRoche. The club is utilized for
business meetings as well as for personal use.
(5) Amount shown reflects (i) a profit sharing bonus of $59,968 and (ii) a
$181,736 bonus granted by
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<PAGE> 38
the Company in fiscal year 1997 in accordance with the Company's
Management Stock Purchase Plan (as defined).
(6) Amount shown reflects (i) a profit sharing bonus of $307,238, (ii) a
$301,266 bonus granted by the Compensation Committee pursuant to the
Management Stock Purchase Plan as a result of the Company achieving a
fixed ratio coverage exceeding certain annual performance goals in
fiscal year 1996, and (iii) a $100,000 bonus constituting matching
funds for the purchase of the Company's common stock.
(7) Amount shown reflects (i) a profit sharing bonus of $75,000 and (ii) a
$301,456 signing bonus to purchase shares in accordance with the
Company's Management Stock Purchase Plan (as defined).
(8) Amount shown reflects compensation for the approximately seven months
of Mr. Ingalls' employment in fiscal year 1997.
(9) Amount shown reflects a bonus granted by the Company for achieving
certain performance goals in fiscal year 1998.
(10) Amount shown reflects a relocation bonus paid to Mr. Osborne resulting
from his move to France.
(11) Amount shown reflects compensation for the approximately seven months
of Mr. Gurzo's employment in fiscal year 1997.
(12) Mr. Stephansson was not serving as an executive officer at the end of
fiscal year 1998.
(13) Amount shown reflects (i) a profit sharing bonus of $25,000 and (ii) a
$51,015 signing bonus to purchase shares in accordance with the
Company's Management Stock Purchase Plan (as defined).
PENSION AND INCENTIVE PLANS
The Company maintains seven 401(k) savings plans ("401(k) plans"), one
of which is for salaried employees not subject to a collective bargaining
agreement and six of which are for employees subject to collective bargaining
agreements. Under each 401(k) plan, participating employees can make pre-tax
deferrals. Where the 401(k) plan has a matching feature, the Company may make a
discretionary contribution from its own funds to match some or all of a
participating employee's pre-tax contributions. Where the 401(k) plan has no
matching feature, the Company does not contribute any of its own funds to the
plan. Under certain of the 401(k) plans, participating employees are able to
make after-tax contributions. All of the 401(k) plans are designed to be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") and exempt from tax under Code Section 501(a).
The Company also maintains two qualified defined benefit Employee
Pension Benefits Plan, one of which is for salaried employees (the "Salaried
Pension Plan") and one of which is for hourly employees (the "Hourly Pension
Plan"). Under the these pension plans normal retirement age is 65, though
Participants may retire as early as age 55 with 10 years of continuous service
and receive a reduced benefit. The benefit is reduced five percent for each year
or fraction thereof that retirement precedes age 65. In addition, a
non-qualified defined benefit Supplemental Employee Retirement Plan is provided
to recognize compensation in excess of the IRS limits under the qualified plan.
Under the Salaried Pension Plan, benefits are based on the Final Earnings
Benefit Formula and the Career Earnings Benefit Formula (each defined therein).
The Final Earnings Benefit Formula is the average of the best five consecutive
of the last 10 years of base monthly salary multiplied by a factor obtained by
multiplying the first 30 years of service by 1.1% and the years of service over
30 by 1.2%. The monthly Career Earnings Benefit Formula is 1% of the total
career compensation, including bonus, multiplied by 130% and divided by 12. In
addition, in lieu of receiving the first three months of the Final Earnings
Benefit, a lump sum special retirement payment equal to nine weeks of the
participant's weekly vacation rate is paid during the first month of retirement.
The special payment may be reduced by the amount of any comparable pension under
a retirement plan of USX or any subsidiary of a plan sponsor. Under the Hourly
Pension Plan, the benefits are based on a calculation of a specified hourly rate
multiplied by years of credited service.
The estimated annual benefits payable upon retirement at normal
retirement age for each of the Named Executive Officers is as follows: Mr.
LaRoche -- $303,912; Mr. Reed -- $263,784; Mr. Ingalls -- $127,308; Mr.
Stephansson -- $0; and Mr. Osborne-- $62,628.
The Company has recently instituted certain executive and other key
employee benefit plans intended to
37
<PAGE> 39
provide incentives to those employees most responsible for the Company's
success. The 1997 Stock Option Plan provides incentives in the form of grants of
stock options and is intended to recognize and reward outstanding individual
performance. The Management Stock-Based Incentive Plan enables key management
employees to acquire financial interests in the Company through the award of
phantom stock interests tracking the performance of the Company's common stock
but with the benefit payable in cash. The Annual Incentive Plan is intended to
provide a cash bonus incentive for key management employees to achieve targeted
operational results and individual goals. All such plans are to be administrated
by the Compensation Committee, which is empowered to determine those employees
eligible to participate, the type and amount of awards to the made and the
various restrictions applicable to such awards.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company receive no
additional compensation for serving on the Board of Directors. The Company pays
an annual fee to all non-employee Directors of $50,000, plus $1,000 for each
board and committee meeting attended. The Company pays an additional annual fee
to all outside Directors who serve as the Chairman of the Board ($50,000),
Vice-Chairman of the Board ($25,000) and Committee Chairman ($5,000).
Effective June 26, 1995, the Board of Directors approved the 1995 Board
of Directors Stock Purchase Plan (the "Directors Plan"). The Company has
authorized and reserved for issuance under the Directors Plan an aggregate of
5,000 shares of the Company's common stock. The Directors Plan provides that
outside directors of the Company will be eligible to purchase shares of the
Company's common stock at fair market value (as determined by appraisal). In
connection with the Directors Plan, the Company may agree to guarantee loans
used to finance the purchase of such stock. Upon termination of directorship,
the shares must be sold to the Company at fair market value (based upon an
appraisal). All redemption provisions of the Company's shares expire upon a
public offering of the Company's common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1998, the Company's compensation committee consisted
of C. L. Wagner, Jr. (Chairman), Paul L.M. Beckwith, Ph.D., George R. Wislar,
Robert L. Yohe and John R. Hall. During fiscal year 1998, Hunton & Williams, of
which C. L. Wagner is partner, provided various types of legal services to the
Company for which the Company was billed approximately $1.6 million. Mr.
Beckwith is the Managing Director of Chase Securities Inc.
EMPLOYMENT CONTRACTS
In June 1993, LHI entered into an employment and non-competition
agreement (the "Employment Agreement") with Mr. Reed who, at that time, was the
President and Chief Operating Officer of LHI. Although the term of the
Employment Agreement expired on July 18, 1996, Mr. Reed's employment continued
on substantially the same terms and is expected to continue on substantially
such terms unless the Employment Agreement is renegotiated. The Employment
Agreement provided that the term of the agreement may be extended only by the
prior written agreement of the Company and Mr. Reed. The Employment Agreement
provided that Mr. Reed was eligible to participate in certain variable and other
compensation programs. The Employment Agreement provided that Mr. Reed would
receive 25% of his variable compensation plan and stock appreciation plan
earnings in the form of LHI equity. However, pursuant to the terms of the
Employment Agreement, Mr. Reed's equity ownership in the Company may not exceed
five percent of the shares of Company common stock outstanding from time to
time. At the time of the Consolidation, the Employment Agreement was assumed by
the Company. Concurrent with bonuses paid to Mr. Reed over the past three fiscal
years, Mr. Reed has purchased a total of 3,344 shares of the Company's common
stock valued at approximately $936,320.
38
<PAGE> 40
MANAGEMENT STOCK PURCHASE PLAN
In August 1994, the Company adopted a Management Stock Purchase Plan
(the "1994 Purchase Plan"), pursuant to which certain executive officers and
management employees of the Company (the "Eligible Employees") are, at the
discretion of the Board, eligible to purchase shares of the Company's common
stock at the then current fair market value of such shares as determined by
appraisal. Such Eligible Employees are also eligible to receive bonuses in the
form of cash, a portion of which must be applied to the purchase of shares of
the Company's common stock (the "Purchased Shares"). Certain bonuses were
granted to certain of the Eligible Employees, including Mr. Stephansson, at the
time of the Consolidation to purchase additional shares (the "Bonus Shares").
See "Security Ownership of Certain Beneficial Owners and Management" for
information concerning the aggregate share ownership of the Company's Named
Executive Officers and directors. At the time of the Consolidation certain of
the Eligible Employees acquired shares of the Company's common stock with the
proceeds from the repurchase by LCI of their shares of LCI capital stock. See
"Executive Compensation -- Summary Compensation Table."
The terms of the 1994 Purchase Plan give Mr. Reed the opportunity to
purchase, through bonuses and/or the use of his own funds, up to five percent of
the outstanding shares of the Company's common stock. The Company awarded Mr.
Reed a cash bonus of $150,000 at the time of the Consolidation that was applied
to the purchase of shares. The Company has paid and intends to continue to pay
an annual cash bonus of $150,000 to Mr. Reed for each of the four years
following the Consolidation, contingent upon the Company's achieving a certain
fixed charge coverage ratio for each of such years. Each such bonus will include
an additional amount which represents Mr. Reed's income tax liability for such
bonus. Each such bonus was and shall be applied to the repayment of the loan
used to finance the purchase of his shares of the Company's common stock. See
"Executive Compensation -- Summary Compensation Table."
In August 1995, the Board adopted the 1995 Amended and Restated Stock
Purchase Plan (the "1995 Purchase Plan," and together with the 1994 Purchase
Plan, the "Management Stock Purchase Plan"). The 1995 Purchase Plan eliminated
the distinction between Bonus Shares, Purchased Shares and Conversion Shares and
provides that the repurchase value of all such shares will be the fair market
value. Participants are required to sell and the Company is required to purchase
the shares upon termination of employment. The 1995 Purchase Plan provides that
in the event that an Eligible Employee finances his purchase of shares with a
bank loan, the Company may guarantee the repayment of such loan, such guarantee
to be secured by the shares acquired by the Eligible Employee. The 1995 Purchase
Plan is administered by the Company's Board.
39
<PAGE> 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the Company's common
stock as of May 27, 1998 by directors, Named Executive Officers, persons known
by the Company to own more than 5% of the common stock and all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
- ---------------------------------------------------------------------- ------------------ ----------
<S> <C> <C>
Johnnie Lou LaRoche(1)................................................ 297,500 68.0%
W. Walter LaRoche, III(1)............................................. 42,500 9.7
Victoria E. LaRoche(1)................................................ 42,500 9.7
Louanne C. LaRoche(1)................................................. 42,500 9.7
Grant O. Reed......................................................... 3,344 *
Richard H. Watts...................................................... 2,500 *
William G. Osborne, Ph.D.............................................. 2,500 *
Harold W. Ingalls..................................................... 1,506 *
Paul L. M. Beckwith, Ph.D............................................. 800 *
George R. Wislar...................................................... 550 *
Vincent R. Gurzo...................................................... 419 *
C. L. Wagner, Jr...................................................... 400 *
Robert L. Yohe........................................................ 300 *
John R. Hall.......................................................... 200 *
David A. Lillback..................................................... 178 *
Directors and executive officers as a group (15) Persons.............. 437,697 100%
</TABLE>
- ----------
* Indicates that the percentage beneficially owned was less than 1.0%.
(1) The LaRoche Family may be deemed to be a "group" for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), although there is no agreement among them with
respect to the acquisition, retention, disposition or voting of the
Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Salary Continuation Agreement entered into by the Company
and her late husband beginning in 1989, Johnnie Lou LaRoche received death
benefit payments of $438,612 per year through June 1997. A portion of these
payments was funded by the proceeds of an insurance policy on the life of Mr.
LaRoche of which the Company was a beneficiary.
On June 30, 1997, the Company entered into a Consulting Agreement with
Johnnie Lou LaRoche, a Director of the Company, pursuant to which Mrs. LaRoche
will provide various consulting services to the Company in exchange for a
consultant fee of $438,612 per year. The Consulting Agreement has an initial
term of one year expiring June 30, 1998, and is automatically renewed for
successive one year periods, until terminated by either party upon 30 days
notice after May 31, 1998.
40
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
<TABLE>
<CAPTION>
(a) DOCUMENTS FILED AS PART OF THIS REPORT: PAGE
NUMBER
------
<S> <C> <C>
(1) Financial Statements
Report of Independent Auditors F1
Consolidated Balanced Sheets F2
Consolidated Statements of Income F4
Consolidated Statements of Stockholders' Equity F5
Consolidated Statements of Cash Flows F6
Notes to Consolidated Financial Statements F7
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts S1
</TABLE>
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instruction or are inapplicable and therefore have been
omitted
(3) Exhibits
The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Company, together with amendments thereto(1).
3.2 Bylaws of the Company(1).
4.1 Indenture, dated as of August 17, 1994, between NationsBank of Georgia, National
Association, as Trustee, and the Company(4).
4.2 Form of Note (included in Exhibit 4.1)(4).
4.3 Indenture, dated as of September 23, 1997, by and between the Company and State Street Bank
and Trust Company, as Trustee(10).
4.4 Form of Note (included in Exhibit 4.3)(10).
10.1 Stock Purchase Agreement (and amendments thereto), dated August 1, 1997, by and among the
Company, LII Europe S.A.R.L., Rhone-Poulenc Chimie S.A. and Rhone L S.A.S.(10).
10.2 Exchange and Registration Rights Agreement, dated September 23, 1997, by and among the
Company, Chase Securities Inc. and Donaldson, Lufkin & Jenrette(10).
10.3 Purchase Agreement, dated September 18, 1997, by and among the Company and Chase Securities
Inc. and Donaldson, Lufkin & Jenrette(10).
10.4 Shareholders Agreement (and amendment thereto), dated August 1, 1997, by and among the
Company, LII Europe S.A.R.L., Rhone-Poulenc Chimie S.A. and Rhone L S.A.S.(10).
10.5 Put and Call Agreement (and amendment thereto), dated August 1, 1997, by and among the
Company, LII Europe S.A.R.L., Rhone-Poulenc Chimie S.A. and Rhone L S.A.S.(10).
10.6++ Agreement for Purchase and Supply of Electricity, Steam and Other Products, dated October
17, 1997, by and among ChlorAlp S.A.S., CEVCO G. I.E., and Rhone-Poulenc Chimie S.A.(10).
10.7++ Supply and Purchase Agreement (Chlorine), dated October 17, 1997, by and between
Rhone-Poulenc Chimie and ChlorAlp S.A.S.(10).
10.8 Chlorine Side Letter, dated October 17, 1997, by and among ChlorAlp S.A.S., Rhone-Poulenc
Chimie and the Company(10).
10.9++ Supply and Purchase Agreement (Caustic Soda), dated October 17, 1997, by and between
Rhone-Poulenc Chimie and ChlorAlp S.A.S.(10).
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
10.10++ Supply and Purchase Agreement (Hydrochloric Acid), dated October 17, 1997, by and between
Rhone-Poulenc Chimie and ChlorAlp S.A.S.(10).
10.11++ Supply and Purchase Agreement (Hydrogene), dated October 17, 1997, by and between
Rhone-Poulenc Chimie and ChlorAlp S.A.S.(10).
10.12++ Supply and Purchase Agreement (Sulfuric Acid), dated October 17, 1997, by and between
Rhone-Poulenc Chimie and ChlorAlp S.A.S.(10).
10.13++ Supply and Purchase Agreement (Sodium Hypochlorite), dated October 17, 1997, by and between
Rhone-Poulenc Agro Chimie and ChlorAlp S.A.S.(10).
10.14++ Supply and Purchase Agreement (Gazeous Chlorine-Caustic Soda), dated October 17, 1997, by
and between Rhone-Poulenc Agro Chimie and ChlorAlp S.A.S.(10).
10.15+ Employment Agreement, dated as of June 1993, between LHI and Grant O. Reed(1).
10.16 Credit Agreement, dated as of August 17, 1994, among the Company, Bank South, N.A. (now
known as NationsBank, N.A. South), as Agent, and the Lenders listed therein(4).
10.17 First Amendment to Credit Agreement dated as of May 17, 1995 and effective as of March 1,
1995 among the Company, Bank South, N.A. (now known as NationsBank, N.A. South), as Agent,
and the lenders listed therein(7).
10.18 Letter Agreement dated as of July 17, 1995 extending the Credit Agreement dated as of August
17, 1994 among the Company, Bank South (formerly known as Bank South, N.A.), as Agent, and
the lenders listed therein(7).
10.19 Letter Agreement dated as of December 16, 1996 amending the Credit Agreement dated as of
August 17, 1994 among the Company, NationsBank N.A., South (successor to Bank South), as
Agent, and the lenders listed therein(6).
10.20 Second Amendment to Credit Agreement and Waiver dated March 14, 1997 among the Company,
NationsBank, N.A. (South), as Agent, and the lenders listed therein(8).
10.21 Credit Agreement, dated as of August 26, 1997, among the Company, the Lenders party hereto
and the Chase Manhattan Bank, as Administrative Agent(9).
10.22 First Amendment to Credit Agreement, dated as of August 26, 1997, among the Company, the
Lenders party hereto and the Chase Manhattan Bank, as Administrative Agent(10).
10.23+ Consulting Agreement, dated as of June 30, 1997, between the Company and Johnnie Lou
LaRoche(9).
10.24+ LaRoche Chemicals Inc. 1989 Key Management Stock Appreciation Bonus Plan(1).
10.25+ LaRoche Holdings Inc. Supplemental Employee Retirement Plan(1).
10.26+ LaRoche Executive Management Health Program(1).
10.27+ Management Stock Purchase Plan and forms of related agreements with executive officers(3).
10.28+ LaRoche Industries Inc. 1995 Board of Directors Stock Purchase Plan and form of
agreement(5).
10.29 Hydrate Partnership Agreement, dated as of January 1, 1993, between Kaiser and LCI(1).
10.30 Amended and Restated Hydrate Sales Agreement, dated as of May 27, 1997 and effective as of
August 1, 1995, between Kaiser and the Hydrate Partnership(8).
10.31 Powerhouse Operating Agreement, dated as of July 26, 1988, between Kaiser and LCI, as
amended January 8, 1994(1).
10.32 Powerhouse Lease, dated as of July 26, 1988, between Kaiser and LCI(1).
10.33 Specialty Aluminas Sales Agreement, dated as of July 26, 1988, between Kaiser and LCI(1).
10.34 Amendment No. 1 to Specialty Aluminas Sales Agreement, dated as of February 1, 1993, between
Kaiser and LCI(1).
10.35 Salt Agreement, dated as of May 3, 1957, between Texaco and Kaiser, as amended May 15,
1968(1).
10.36 Supply Agreement, dated as of April 1994, between AlliedSignal Inc. and LCI (portions
redacted pursuant to a confidentiality request)(1).
10.37 Joint Venture Agreement, dated as of July 26, 1994, between Cytec Ammonia, Inc. and LaRoche
Fortier Inc.(2).
10.38* Waiver and Amendment No. 2 to Credit Agreement, dated as of August 26, 1997, among
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
the Company, the Lenders party thereto and the Chase Manhattan Bank, as Administrative Agent.
10.39*+ Form of 1997 Stock Option Plan.
10.40*+ Form of Management Stock-Based Incentive Plan.
10.41*+ Form of Annual Incentive Plan.
12* Statement regarding Computation of Ratios of Earnings to Fixed Charges.
21* Subsidiaries of the Registrant.
27* Financial Data Schedule.
</TABLE>
- ----------
* Filed herewith.
+ Denotes a management contract or compensatory plan required to be filed
pursuant to Item 601(b)(10)(iii) of Regulation S-K.
++ Portions of these documents have been omitted pursuant to a request for
confidential treatment under Rule 406 of the Securities Act of 1933, as
amended.
(1) Previously filed as an exhibit to Registration Statement No. 33-79532
filed May 31, 1994 and incorporated herein by reference.
(2) Previously filed as an exhibit to Amendment No. 3 to Registration
Statement No. 33-79532 filed August 3, 1994 and incorporated herein by
reference.
(3) Previously filed as an exhibit to Amendment No. 4 to Registration
Statement No. 33-79532 filed August 9, 1994 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended August 31, 1994 and incorporated herein
by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended August 31, 1995 and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended November 30, 1996 and incorporated
herein by reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended February 28, 1997 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended May 31, 1997 and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended August 31, 1997 and incorporated herein
by reference.
(b) REPORTS ON FORM 8-K
(1) Current Report on Form 8-K (dated of report: October 17, 1997),
filed November 3, 1997.
(2) Amendment No. 1 to Current Report on Form 8-K/A (date of report:
October 17, 1997), filed December 31, 1997.
(c) REQUIRED EXHIBITS
The exhibits required to be filed with this Report are listed in Item
14(a)(3) and on the Exhibit Index page immediately following the signature page
hereto.
(d) REQUIRED FINANCIAL STATEMENT SCHEDULES
The financial statement schedule required to be filed with this Report is
listed in Item 14(a)(2) and appears on page S-1.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the undersigned Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on May 29,
1998.
LaRoche Industries Inc.
By: /s/ Harold W. Ingalls
-----------------------------------
Harold W. Ingalls
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated on May 29, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
------------------------------ --------------------------------------------------
<S> <C>
/s/ Grant O. Reed President, Chief Executive Officer and Director
------------------------------
Grant O. Reed
/s/ Harold W. Ingalls Vice President and Chief Financial Officer
------------------------------
Harold W. Ingalls
/s/ W. Walter LaRoche, III Chairman of the Board
------------------------------
W. Walter LaRoche, III
/s/ Victoria E. LaRoche Vice Chairman of the Board
------------------------------
Victoria E. LaRoche
Director
------------------------------
Paul L. M. Beckwith
Director
------------------------------
John R. Hall
/s/ Johnnie Lou LaRoche Director
------------------------------
Johnnie Lou LaRoche
/s/ Louanne C. LaRoche Director
------------------------------
Louanne C. LaRoche
/s/ C. L. Wagner, Jr. Director
------------------------------
C. L. Wagner, Jr.
/s/ George R. Wislar Director
------------------------------
George R. Wislar
/s/ Robert L. Yohe Director
------------------------------
Robert L. Yohe
</TABLE>
44
<PAGE> 46
LaRoche Industries Inc.
Consolidated Financial Statements
Years ended February 28, 1998, 1997, and February 29, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.........................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets............................................................................F-2
Consolidated Statements of Operations..................................................................F-4
Consolidated Statements of Stockholders' Equity........................................................F-5
Consolidated Statements of Cash Flows..................................................................F-6
Notes to Consolidated Financial Statements.............................................................F-7
</TABLE>
<PAGE> 47
Report of Independent Auditors
The Board of Directors
LaRoche Industries Inc.
We have audited the accompanying consolidated balance sheets of LaRoche
Industries Inc. as of February 28, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended February 28, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LaRoche Industries
Inc. at February 28, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
February 28, 1998, in conformity with generally accepted accounting principles.
Also in our opinion, based on our audits, 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 financial information set
forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
May 8, 1998
F-1
<PAGE> 48
LaRoche Industries Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,884 $ 1,165
Receivables (Note 6):
Trade, net of allowances of $527 and $776 in
1998 and 1997, respectively 52,709 43,393
Refundable income taxes 11,495 6,649
Other 5,384 7,159
Inventories (Notes 4 and 6) 36,399 39,924
Other current assets 1,162 2,513
-------------------------
Total current assets 120,033 100,803
Investments in and advances to affiliates (Note 5) 50,428 17,886
Property, plant and equipment, at cost (Note 6):
Land and land improvements 13,001 12,234
Buildings 22,735 19,547
Machinery and equipment 250,249 220,613
Equipment under capital leases 4,673 4,902
Construction in progress 31,027 14,208
-------------------------
321,685 271,504
Less accumulated depreciation (105,561) (90,417)
-------------------------
Net property, plant and equipment 216,124 181,087
Other assets 18,829 12,589
-------------------------
Total assets $ 405,414 $ 312,365
=========================
</TABLE>
F-2
<PAGE> 49
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
-------------------------
(In thousands, except share data)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 6) $ 22,000 $ 37,605
Accounts payable 53,431 35,992
Accrued compensation 8,503 8,595
Other accrued liabilities 15,457 8,944
Current portion of long-term debt (Note 6) 7,657 2,835
-------------------------
Total current liabilities 107,048 93,971
Long-term debt (Note 6) 207,418 104,441
Deferred income taxes (Note 9) 17,518 22,335
Other noncurrent liabilities (Notes 7 and 8) 38,277 36,535
Commitments and contingencies (Note 8)
Redeemable common stock (Note 10) 3,505 4,177
Stockholders' equity:
10% cumulative, voting preferred stock, $.01 par
value, 200,000 shares authorized, no shares
outstanding
-- --
Common stock, $.01 par value, 1,200,000 shares
authorized, 425,000 non-redeemable shares
issued 4 4
Capital in excess of par value 630 630
Retained earnings 31,225 50,409
Foreign currency translation adjustments (90) --
Minimum pension liability (121) (137)
-------------------------
Total stockholders' equity 31,648 50,906
=========================
$ 405,414 $ 312,365
=========================
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
LaRoche Industries Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
-----------------------------------------
(In thousands)
<S> <C> <C> <C>
Net sales $ 381,014 $ 379,285 $ 448,982
Cost of sales 319,242 313,871 350,066
-----------------------------------------
Gross profit 61,772 65,414 98,916
Selling, general and administrative
expenses 56,594 54,777 54,631
-----------------------------------------
Income from operations 5,178 10,637 44,285
Interest and amortization of debt expense (17,510) (14,881) (15,973)
Income from equity investments (Note 5) 2,698 4,909 2,647
Other income, net 182 411 1,163
-----------------------------------------
(Loss) income before income taxes and
extraordinary charge (9,452) 1,076 32,122
Benefit (provision) for income taxes
(Note 9) 3,653 (417) (13,170)
-----------------------------------------
(Loss) income before extraordinary
charge (5,799) 659 18,952
Extraordinary charge from debt
extinguishment, net of $7,740 tax
benefit (12,290) -- --
-----------------------------------------
Net (loss) income (18,089) 659 18,952
Adjustment to estimated fair value of
common stock with put rights (Note 10) -- -- (1,901)
-----------------------------------------
(Loss) income attributable to non-
redeemable common stockholders $ (18,089) $ 659 $ 17,051
=========================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
LaRoche Industries Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
FOREIGN
CAPITAL IN CURRENCY MINIMUM
COMMON EXCESS OF RETAINED TRANSLATION PENSION
STOCK PAR VALUE EARNINGS ADJUSTMENTS LIABILITY TOTAL
----- ---------- -------- ------------ ---------- --------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1995 $ 4 $ 630 $ 33,844 $ -- $ -- $ 34,478
Net income -- -- 18,952 -- -- 18,952
Dividends paid, $.50 per share -- -- (233) -- -- (233)
Adjustment to estimated fair value
of common stock with put rights -- -- (1,901) -- -- (1,901)
----- ---------- -------- ------------ ---------- --------
Balance at February 29, 1996 4 630 50,662 -- -- 51,296
Net income -- -- 659 -- -- 659
Dividends paid, $2.50 per share -- -- (912) -- -- (912)
Pension adjustments -- -- -- -- (137) (137)
----- ---------- -------- ------------ ---------- --------
Balance at February 28, 1997 4 630 50,409 -- (137) 50,906
Net loss -- -- (18,089) -- -- (18,089)
Dividends paid, $2.50 per share -- -- (1,095) -- -- (1,095)
Foreign currency translation
adjustments -- -- -- (90) -- (90)
Pension adjustments -- -- -- -- 16 16
----- ---------- -------- ------------ ---------- --------
Balance at February 28, 1998 $ 4 $ 630 $ 31,225 $ (90) $ (121) $ 31,648
===== ========== ======== ============ ========== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
LaRoche Industries Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (18,089) $ 659 $ 18,952
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 22,629 23,061 18,996
Deferred income taxes (4,737) 6,667 (495)
Equity income, net of distributions 1,993 792 (1,315)
Net loss (gain) on disposal of assets 1,573 (349) 3,021
Extraordinary charge from debt extinguishment 12,290 -- --
Changes in operating assets and liabilities (excluding
acquisitions):
Receivables (8,284) 4,800 4,749
Inventories 6,403 5,946 17,129
Other assets 348 (2,880) 1,874
Accounts payable 17,866 (1,778) (2,231)
Accrued liabilities 10,029 (13,420) (57)
Noncurrent liabilities and other 1,468 1,834 128
-----------------------------------------
Net cash provided by operating activities 43,489 25,332 60,751
INVESTING ACTIVITIES
Capital expenditures (37,898) (35,784) (16,894)
Acquisition of businesses (17,622) -- (37,504)
Investments in and advances to affiliates (35,433) (2,631) (1,451)
Plant turnarounds (768) (5,038) (2,672)
Proceeds from sale of facilities 36 3,708 6,484
-----------------------------------------
Net cash used by investing activities (91,685) (39,745) (52,037)
FINANCING ACTIVITIES
Net (repayments) borrowings under revolving credit facility (15,605) 32,850 (1,350)
Additions to long-term debt 209,216 -- --
Repayments of long-term debt (102,949) (11,654) (11,352)
Premium payments on the early extinguishment of debt and
costs of refinancing (29,489) -- --
Sales of common stock with redemption features 326 3,187 1,918
Purchases of common stock with redemption features (750) (11,158) (332)
Dividends paid (1,095) (912) (233)
-----------------------------------------
Net cash provided (used) by financing activities 59,654 12,313 (11,349)
-----------------------------------------
Effect of exchange rate changes on cash 261 -- --
Net increase (decrease) in cash 11,719 (2,100) (2,635)
Cash at beginning of year 1,165 3,265 5,900
-----------------------------------------
Cash at end of year $ 12,884 $ 1,165 $ 3,265
=========================================
</TABLE>
See accompanying notes
F-6
<PAGE> 53
LaRoche Industries Inc.
Notes to Consolidated Financial Statements
February 28, 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
LaRoche Industries Inc. ("LII") is engaged in the manufacture, distribution, and
sale of agricultural and industrial nitrogen products and bulk fertilizer
materials, certain specialty aluminas, and electrochemical products in the
United States and Europe. These consolidated financial statements include the
accounts of LaRoche Industries Inc. and all majority-owned subsidiaries.
Investments in 50%-or-less owned entities are accounted for by the equity
method. All significant intercompany transactions and balances have been
eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
REVENUE RECOGNITION AND TRADE RECEIVABLES
The Company generally recognizes revenue upon shipment to customers. The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Terms on trade receivables are granted in
accordance with industry practice. The Company serves a variety of customers,
and therefore, the Company believes that it has limited exposure to credit loss.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of approximately
23% and 20% of total inventories was determined using the last in, first out
(LIFO) method at February 28, 1998 and 1997, respectively. Cost for all other
inventories are determined on a first-in, first-out (FIFO) or average cost
basis.
F-7
<PAGE> 54
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TURNAROUND COSTS
Costs related to the periodic, scheduled major maintenance of continuous process
production facilities ("turnaround costs") are capitalized when incurred and are
amortized on a straight-line basis over the period until the next scheduled
plant turnaround, generally ranging from one to three years.
Expenditures for routine repair and maintenance are charged to current operating
expenses.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment, including amounts under capital leases (Note 8),
are depreciated using the straight-line method for financial reporting purposes
and accelerated methods for tax purposes over their estimated useful lives as
follows:
Buildings and improvements 20 to 35 years
Machinery and equipment 5 to 15 years
Depreciation expense aggregated approximately $17,760,000, $16,076,000 and
$14,421,000 for fiscal years ended February 28, 1998 and 1997, and February 29,
1996, respectively. Costs of construction of certain long-term assets include
capitalized interest which is amortized over the estimated useful life of the
related asset. The Company capitalized interest costs of $1,089,000 and $860,000
on eligible projects during fiscal 1998 and 1997, respectively. No amount of
interest was capitalized in fiscal year 1996.
OTHER ASSETS
The Company amortizes its deferred debt issuance costs, goodwill, non-compete
agreements and other assets using the straight-line method over lives ranging
from one to twenty years. Accumulated amortization of other assets aggregated
$4,108,000 and $4,276,000 at February 28, 1998 and 1997, respectively.
F-8
<PAGE> 55
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are generally
translated from the foreign currency at the rate of exchange in effect as of the
balance sheet date. Revenues and expenses are generally translated at average
monthly exchange rates prevailing during the year. Resulting translation
adjustments are reflected in stockholders' equity.
DERIVATIVES
The Company enters into financial instruments to reduce its exposure to foreign
currency risk from its net investments in and expected cash flows from its
foreign operations. The Company includes in income the gains and losses related
to the portion of these agreements which are not designated as accounting hedges
based upon the market values of the instrument. Gains and losses related to the
portion of these agreements designated as accounting hedges of the Company's net
foreign investment are included as a component of the foreign currency
translation adjustment account in stockholders' equity or as an offset to
changes in values of advances denominated in foreign currencies.
In addition, the Company buys call options and sells put options to effectively
establish a range (or collar) of natural gas prices to hedge natural gas
purchases against rising prices. The contracts are entered into with a financial
counter-party. The Company is exposed to loss in the event of nonperformance by
the counter-party to the contracts. However, the Company does not anticipate
nonperformance by the counter party. See Note 8.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability method of
accounting. Accordingly, deferred tax liabilities and assets are established
based on the difference between the financial statement and income tax bases of
assets and liabilities using enacted tax rates. Deferred tax assets are
recognized to the extent that realization of the benefits therefrom are more
likely than not.
F-9
<PAGE> 56
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development of new technologies
are charged to expense as incurred. Included in the accompanying consolidated
statements of income are approximately $4,001,000, $3,762,000 and $3,388,000 of
such costs for the years ending February 28, 1998, 1997 and February 29, 1996,
respectively.
EARNINGS PER SHARE
Earnings per share have not been presented since such data provides no useful
information as the shares of the Company are closely held.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
presentation.
NEW ACCOUNTING STANDARDS
Effective March 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The statement standardizes the accounting
for impairment of long-lived assets, certain identifiable intangibles and
goodwill. The adoption of this accounting standard did not have a material
effect on the Company's operating results or financial condition.
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, Environmental Remediation Liabilities ("SOP 96-1").
SOP 96-1 provides guidance with respect to the recognition, measurement and
disclosure of environmental remediation liabilities. The Company adopted SOP
96-1 effective March 1, 1997. The adoption of SOP 96-1 did not have a material
effect on the Company's operating results or financial condition.
F-10
<PAGE> 57
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS (CONTINUED)
In 1997, the FASB issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 131 establishes standards for
disclosures of segment information about products and services, geographic
areas, major customers and certain interim disclosures of segment information
which are not required by accounting standards currently used by the Company.
These statements are required to be adopted in fiscal 1999. The Company does not
anticipate that SFAS 130 will have a material impact on the Company's
consolidated financial statements. The Company is currently evaluating SFAS 131
and has not yet determined its impact on the Company's consolidated financial
statements.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits ("SFAS 132") . The Statement
supersedes the disclosure requirements in Statements No. 87, Employers'
Accounting for Pensions, No. 88, Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. The
overall objective is to improve and standardize disclosures about pensions and
other postretirement benefits and to make the required information easier to
prepare and more understandable. SFAS 132 eliminates certain existing disclosure
requirements, but at the same time adds new disclosures. The Statement is
required to be adopted in fiscal 1999.
F-11
<PAGE> 58
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
The Company considers all liquid investments with initial maturities of three
months or less to be cash equivalents. Additional cash flow and non-cash
investing and financing information follows:
<TABLE>
YEARS ENDED
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information (in thousands):
Cash paid (received) during the year for:
Interest, net of amounts capitalized $ 9,763 $ 15,192 $16,469
Income taxes, net of payments (1,827) (809) 18,155
Non-cash investing and financing activities (in
thousands):
Capital leases for new equipment 313 90 545
Contribution of assets to a joint venture -
at cost -- -- 1,243
Note issued to purchase Company stock
(Note 10) -- -- 7,401
Liabilities assumed in business acquisition 2,677 -- --
</TABLE>
3. DISPOSITIONS, ACQUISITION AND OTHER MATTERS
In October 1997, the Company purchased a 50% interest in ChlorAlp, see Note 5.
On December 31, 1997, the Company, through a subsidiary, purchased chlor-alkali
and chlorinated methane compounds manufacturing facilities (the "German
Facilities") located in Hochst near Frankfurt, Germany from Celanese GmbH, a
wholly-owned subsidiary of Hoechst AG for a total cost of approximately $17.6
million. The acquisition was accounted for as a purchase; accordingly, the
consolidated statement of income includes
F-12
<PAGE> 59
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
3. DISPOSITIONS, ACQUISITION AND OTHER MATTERS (CONTINUED)
the results of the operations of the German Facilities since the acquisition
date. The Company funded the purchase with funds drawn from the Revolving Credit
Facility. The total cost of the acquisition has preliminarily been allocated as
follows (in thousands):
<TABLE>
<S> <C>
Receivables $ 2,677
Inventory 2,878
Plant, equipment and other 17,621
Pension liability (1,435)
Other liabilities assumed (4,119)
--------
$ 17,622
========
</TABLE>
During fiscal 1996, the Company re-evaluated portions of its alumina chemicals
segment. In connection with the re-evaluation of its alumina chemicals business,
effective April 1, 1996, the Company sold substantially all property, plant and
equipment and certain other assets used exclusively in its calcined and tabular
alumina production businesses to C-E Baton Rouge, Inc., an unrelated third
party. The sale price of the assets was $3 million, plus $300,000 for raw
material inventory. Net sales and operating (losses) of the calcined and tabular
alumina business aggregated $3,659,000 and ($389,000) in fiscal 1997 and
$18,801,000 and ($4,670,000) in fiscal 1996, respectively. Fiscal 1998 net sales
and operating losses are immaterial. In fiscal 1996, the Company recorded
equipment writedowns of approximately $3.8 million in connection with the
determination to sell or otherwise dispose of its calcined and tabular aluminas
business.
Effective September 1, 1995, the Company sold a 50% interest in certain Versal
alumina production equipment to CRILAR Alumina Company ("CRILAR") for $5.5
million, consisting of $2.2 million in cash and $3.3 million in a note which has
been collected. The remaining 50% interest in such equipment (with a net
carrying value of approximately $1,243,000) was contributed by the Company to
CRILAR. CRILAR is equally owned by the Company and by Criterion Catalyst Company
LP, an unaffiliated entity. In connection with the sale of the 50% interest to
CRILAR, the Company recognized a gain of approximately $3.4 million. The Company
operates the facility under an agreement with CRILAR, and the owners of CRILAR
purchase substantially all of the production of the
F-13
<PAGE> 60
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
3. DISPOSITIONS, ACQUISITION AND OTHER MATTERS (CONTINUED)
facility. Fiscal 1996 net sales and operating profits prior to the formation of
CRILAR from the assets associated with the CRILAR transaction were not material
to the Company's consolidated net sales or operating profits.
On December 13, 1995, the Company acquired an ammonium nitrate manufacturing
facility located near Seneca, Illinois and related assets for an initial
purchase price of approximately $38 million (the "Seneca Acquisition"). The
transaction was accounted for under the purchase method of accounting;
accordingly, the 1996 consolidated statement of income includes the results of
operations of the Seneca plant since the acquisition date. The Company used
available cash to fund the acquisition. The total cost of the acquisition was
allocated as follows (in thousands):
<TABLE>
<S> <C>
Property, plant and equipment $31,014
Inventory 2,259
Non-compete agreement, goodwill and other 4,736
-------
$38,009
=======
</TABLE>
Certain of the Company's fluorocarbon products (CFC R-11 and R-12) previously
manufactured by the electrochemical products segment are subject to federal
regulations which provided for the phase out of production by January 1, 1996.
These products accounted for 1% and 4% of net sales and 23% and 18% of income
from operations for the fiscal years ended February 28, 1997 and February 29,
1996, respectively. Sales and income from operations of these products were
immaterial for the year ended February 28, 1998. The Company is also required to
phase out the production of their hydrochloroflourocarbon (HCFC-141b) by January
1, 2003. In fiscal years 1998, 1997 and 1996, this product accounted for
approximately 8%, 8.4% and 7.8% of net sales and 18.8%, 17.8% and 2.5% of income
from operations, respectively.
F-14
<PAGE> 61
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
3. DISPOSITIONS, ACQUISITION AND OTHER MATTERS (CONTINUED)
During fiscal 1998, the Company's nitric acid facilities at the Geneva and
Crystal City plants experienced equipment failure. Upon determining the probable
amount recoverable in the fourth quarter of fiscal 1998, the Company recorded a
$1.7 million receivable from an insurance carrier. Of this, the Company recorded
$1.1 million related to business interruption as a reduction of cost of sales.
The remainder was recorded as a gain of approximately $.6 million related to the
involuntary conversion of the equipment and is recorded in other income, net.
4. INVENTORIES
Components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
------------------------
<S> <C> <C>
Finished goods and in-progress $ 20,143 $ 21,019
Inventory purchased for resale 6,689 11,931
Raw materials 1,277 637
Supplies and catalysts 8,905 7,483
------------------------
37,014 41,070
Less LIFO reserve (615) (1,146)
------------------------
$ 36,399 $ 39,924
========================
</TABLE>
During fiscal 1997, inventory quantities were reduced resulting in the
liquidation of certain inventory quantities valued under the LIFO method. The
effect of this liquidation was to increase operating income during the year
ended February 28, 1997 by approximately $1,086,000.
F-15
<PAGE> 62
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
5. EQUITY INVESTMENTS
The Company is an equity investor in several joint ventures which it accounts
for under the equity method of accounting. The primary investees include
ChlorAlp (50% owned, electrochemical products), CRILAR (50% owned, alumina
chemicals), Kaiser LaRoche Hydrate Partnership ("KLHP", 45% owned, alumina
chemicals), and Avondale Ammonia (50% owned, nitrogen products).
In October 1997, the Company, through a subsidiary, acquired a 50% interest in
ChlorAlp S.A.S. ("ChlorAlp"), a joint venture company with Rhone-Poulenc Chimie
S.A. ("RPC"), a subsidiary of Rhone-Poulenc, S.A. ChlorAlp is a joint venture
that owns and operates, among other things, a chlorine, caustic soda and bleach
manufacturing and distribution facility in Pont-de-Claix, France. The
acquisition was accounted for as a purchase; accordingly, the consolidated
statement of income includes the Company's share of the results of operations of
ChlorAlp since the effective date of the acquisition using the equity method of
accounting. The total investment cost was approximately $35.5 million, including
a French Franc loan to ChlorAlp equal to approximately $10.9 million. The
Company's loan to ChlorAlp is a 5 year loan at an interest rate of 6%, with a
varying principal repayment structure.
RPC has the right to require the Company to purchase the remaining 50% ownership
interest in ChlorAlp (the "RPC Put") at any time with six months prior notice,
during the four-year period beginning April 1998, for approximately 167 million
French Francs (approximately $28 million), subject to certain adjustments. The
Company cannot require RPC to sell its ownership interest to the Company, except
under very limited circumstances such as a change of control at RPC and is
subject to a variety of conditions upon purchase or sale as outlined in the
investment agreements. If RPC does not exercise (or is not able to execute under
certain circumstances) the RPC Put during the four year period, the Company may
put its ownership interest back to RPC at a price ranging from approximately 95
million French Francs to approximately 142 million French Francs (approximately
$16 million to $24 million) depending on the circumstances, subject to certain
adjustments as defined. If RPC then chooses to exercise their put, it takes
precedence over the Company's put with the effect that the Company would be
required to purchase RPC's interest.
F-16
<PAGE> 63
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
5. EQUITY INVESTMENTS (CONTINUED)
If the Company cannot or does not purchase RPC's interest, pursuant to the RPC
put, RPC would have the right to require the Company to sell its 50% interest to
RPC one year after notice of the RPC Put for approximately 95 million French
Francs (approximately $16 million), subject to certain adjustments.
As a condition of their investment in ChlorAlp, the Company has agreed to
reimburse RPC for the Company's proportionate share of any amounts that RPC
may be ultimately required to pay under its pre-existing guarantee of certain
obligations of CEVCO, a 60% owned subsidiary of ChlorAlp, and the provider of
electric energy to the joint venture, in respect of steam turbines leased by
CEVCO. The Company's proportionate share under such arrangement is limited to a
maximum of FRF 172 million (approximately $29 million) over the remaining lease
term. The remaining term of the Turbine Lease is approximately six years.
Prior to its initial investment in ChlorAlp, the Company entered into certain
foreign currency forward contracts in order to secure the foreign currency
exchange rate for their initial investment in ChlorAlp. As a result of an
unfavorable change in the exchange rates, the Company charged approximately $2
million to expense for the year ended February 28, 1998.
In connection with this investment, in order to reduce its exposure to currency
exchange risk, in July 1997, the Company entered into a 5 year, $60,000,000 (FRF
372,377,500) cross currency interest rate swap contract with a bank. The Company
remits quarterly interest payments in French Francs at a rate equal to the
French Franc LIBOR and receives quarterly interest payments in US dollars at a
rate equal to LIBOR. At the termination date the Company pays the 372,377,500
French Francs and receives $60,000,000. At February 28, 1998, the fair value of
the contract was approximately $191,000.
All income generated by the equity investees, except Avondale Ammonia, is
distributed to the partners relative to their respective partnership interests.
Avondale Ammonia generally does not generate income or loss because all
production is transferred to the partners at Avondale Ammonia's cost. Each
partner in Avondale provides their respective portions of natural gas.
F-17
<PAGE> 64
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
5. EQUITY INVESTMENTS (CONTINUED)
Summarized financial information since the date of investment by the Company for
unconsolidated entities (excluding Avondale Ammonia) is as follows (in
thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
FEBRUARY 2 FEBRUARY 29,
1998 1997 1996
------------------------------------
Summary of operations:
<S> <C> <C> <C>
Net sales $ 88,509 $52,136 $35,674
Gross profit 12,783 11,353 5,799
Net income 7,553 10,280 4,871
Company's equity in earnings 2,698 4,909 2,647
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
-------- -------
Summary of financial position:
<S> <C> <C>
Current assets $ 36,746 $13,854
Noncurrent assets 100,794 16,532
-------- -------
Total $137,540 $30,386
======== =======
Current liabilities $ 32,594 $ 8,948
======== =======
Noncurrent liabilities $ 36,525 $ --
======== =======
</TABLE>
Purchases from Avondale Ammonia aggregated approximately $8.4 million, $8.8
million and $6.9 million for the years ended February 28, 1998, 1997 and
February 29, 1996, respectively. Purchases from CRILAR aggregated approximately
$3.6 million and $2.3 million for the years ended February 28, 1998 and 1997,
respectively. Amounts due from CRILAR amounted to approximately $2,285,000 and
$4,338,000 at February 28, 1998 and 1997, respectively.
F-18
<PAGE> 65
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
6. BORROWING ARRANGEMENTS
The Company's borrowings include the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
--------- ---------
<S> <C> <C>
Revolving credit facilities $ 22,000 $ 37,605
========= =========
Term debt:
9 1/2% senior subordinated notes $ 174,248 $ --
13% senior subordinated notes 915 100,000
Term Loan 34,271 --
Other notes payable 5,641 7,276
--------- ---------
Total 215,075 107,276
Less current portion (7,657) (2,835)
--------- ---------
Long-term debt $ 207,418 $ 104,441
========= =========
</TABLE>
In September 1997, the Company completed a refinancing of its principal
borrowings. In connection with this refinancing in September 1997, the Company
issued $175.0 million principal amount of its 9 1/2% Senior Subordinated Notes
due 2007 (the "Notes"). A portion of the proceeds from the Notes were applied to
repurchase $99.1 million of the Company's 13% senior subordinated Notes due 2004
(the 13% Notes) and a portion was used to repay existing borrowings under the
Company's previous credit facility. In connection with redeeming the 13% Notes,
the Company paid prepayment premiums and incurred other costs of $17.3 million
and expensed unamortized issuance costs associated with the 13% Notes of $2.7
million. The total loss recognized as a result of this early extinguishment of
debt amounted to $12.3 million (net of income tax benefit of $7.7 million) and
is reflected in the Company's consolidated statement of income as an
extraordinary charge.
F-19
<PAGE> 66
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
6. BORROWING ARRANGEMENTS (CONTINUED)
The Notes require semi-annual interest only payments on March 15 and September
15 each year. The Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after September 15, 2002 at redemption prices set out
in the Notes Indenture (the "Indenture"). The Notes are unsecured obligations of
the Company and the Indenture contains, among other things, limitations on stock
redemptions, dividends, borrowings and investments, and restricts the Company
from entering into certain transactions, all as set forth therein. Debt issuance
costs are being amortized over the life of the Notes.
In August 1997, the Company entered into a six year, $160.0 million senior
secured credit facility ("Credit Facility"), which now provides for a $125
million revolving credit facility ("Revolving Credit Facility") and $35 million
term loan ("Term Loan"). The Credit Facility is secured by substantially all of
the domestic assets of the Company and each of its domestic subsidiaries. Debt
issuance costs are being amortized over the life of the Credit Facility.
Interest is based on either the prime rate or LIBOR, plus up to 2.00%.
Availability under the Revolving Credit Facility is subject to limitations as
outlined in the agreement. At February 28, 1998, $22,000,000 was outstanding
under the Revolving Credit Facility and $13.0 million was available without
violating any covenants. The weighted average borrowing rate was approximately
7.97%. On October 17, 1997, the Company borrowed $35.0 million under the Term
Loan to fund the ChlorAlp acquisition. Principal and interest payments under the
Term Loan are due quarterly in varying amounts until October 17, 2002, as
defined in the agreement. The borrowing rate was approximately 7.62% at February
28, 1998. Under the terms of the Credit Agreement, the Company pays commitment
fees, on a quarterly basis, ranging from 0.25% to 0.50% per annum of average
unused balances. The Company is required, among other things, to maintain
certain working capital, debt to equity, and net worth levels under the
agreement.
At February 28, 1998, the Company was not in compliance with certain covenants
contained in the Credit Facility. The Company has received amendments and
waivers with respect to such violations. While the Company expects to remain in
compliance with the covenants contained in the debt agreements, it is possible
that the Company may not comply with such covenants in the future.
F-20
<PAGE> 67
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
6. BORROWING ARRANGEMENTS (CONTINUED)
At February 28, 1997, $37,605,000 was outstanding under the previously existing
$40.0 million credit facility and the weighted average borrowing rate was 7.63%.
At February 28, 1998, no amounts of retained earnings were available to the
Company to make restricted payments (as defined) under the most restrictive
provisions of the above agreements, however, the Company generally is allowed to
annually pay up to approximately $2,000,000 of dividends.
As of February 28, 1998, the Company has approximately $2,100,000 committed for
letters of credit.
Annual maturities of long-term debt are as follows: $7,657,000 in 1999;
$4,674,000 in 2000; $6,862,000 in 2001; $7,592,000 in 2002; $8,022,000 in 2003
and $180,268,000 thereafter.
The carrying amount of the Company's variable rate debt approximates its fair
value. At February 28, 1998 and 1997, the fair value of all term debt
approximated $212,241,000 and $113,354,000, respectively, based primarily on
market prices.
7. EMPLOYEE BENEFITS
The Company has a defined benefit pension plan covering substantially all of its
domestic employees. Salaried participant benefits are based on years of service
and the average of the highest five years of compensation earned during a ten
year consecutive period of employment. Hourly participant benefits are based on
years of service. Pension costs are funded in amounts determined by management,
but not less than the minimum funding required by the Employee Retirement Income
Security Act of 1974 (ERISA). Salaried employees are required to contribute 1%
of their annual salaries to the plan. The assets of the plan primarily consist
of investments in insurance company General Investment accounts and pooled
separate accounts invested in marketable equity securities and government and
corporate debt securities.
F-21
<PAGE> 68
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the funded status of the plan and amounts
recognized in the Company's consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
---------------------
<S> <C> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested $30,472 $25,326
Nonvested 2,165 1,807
---------------------
32,637 27,133
Additional amounts related to projected compensation
levels 7,986 6,861
---------------------
Total projected benefit obligation 40,623 33,994
Plan assets at fair value 29,611 24,188
---------------------
Projected benefit obligation in excess of plan assets 11,012 9,806
Unrecognized net loss 3,417 2,723
Unrecognized prior service cost 1,057 851
---------------------
Pension liability recognized in balance sheets $ 6,538 $ 6,232
=====================
</TABLE>
Net pension costs for the plan include the following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Service cost $ 2,254 $ 2,229 $ 1,814
Interest on projected benefit obligation 2,538 2,240 1,987
Actual return on plan assets (4,159) (2,575) (2,921)
Net amortization and deferral 2,232 1,007 1,713
-------------------------------------
Net periodic pension cost $ 2,865 $ 2,901 $ 2,593
=====================================
</TABLE>
F-22
<PAGE> 69
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFITS (CONTINUED)
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.0% and 7.5% as of February 28, 1998 and 1997,
respectively. The expected increase in compensation levels used in determining
the actuarial present value of the projected benefit obligation was 5.5% as of
February 28, 1998 and 1997. The expected long-term rate of return on assets was
8.5% for each of the three years in the period ended February 28, 1998.
The Company also provides unfunded supplemental retirement benefits to certain
domestic executives which provides for incremental pension payments so that
total pension payments equal amounts that would have been payable from the
Company's principal pension plan if it were not for limitations imposed by
federal tax regulations. The accrued liability for this plan totals $1,453,141
and $1,338,000 at February 28, 1998 and 1997, respectively. The accrued
liability at February 28, 1998 and 1997 includes an additional minimum liability
of $341,000 and $303,000, respectively, of which $121,000 and $137,000,
respectively, has been charged to a separate component of stockholders' equity.
Pension expense related to the arrangement was $223,000 in 1998, $178,000 in
1997 and $187,000 in 1996.
Substantially all of the current and former employees of the Company's German
Facilities are covered by a fully funded defined contribution pension plan (The
"General Plan"). The General Plan has a vesting period of five years and
participation is mandatory for all employees. Employees are required to
contribute a fixed percentage of their gross salary up to certain qualifying
amounts, as defined in the plan documents. The employee contribution is fully
matched by the Company. The assets of the General Plan consist primarily of an
insurance fund. For employees whose contributions would exceed the qualifying
amounts for the General Plan, the Company also provides an unfunded
supplementary pension plan ("Supplementary Plan"). The liabilities of the
Supplementary Plan were acquired by the Company in the Hoechst acquisition and
are valued assuming a discount rate of 6%. The accrued liability for the
Supplementary Plan totals $1,435,000 at February 28, 1998.
F-23
<PAGE> 70
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFITS (CONTINUED)
The Company has recently instituted certain executive and other key employee
benefit plans intended to provide incentives to those employees. The 1997 Stock
Option Plan provides incentives in the form of grants of stock options and is
intended to recognize and reward outstanding individual performance. The
Management Stock-Based Incentive Plan enables key management employees to
acquire financial interests in the Company through the award of phantom stock
interests tracking the performance of the Company's common stock but with the
benefit payable in cash. The Annual Incentive Plan is intended to provide a cash
bonus incentive for key management employees to achieve targeted operational
results and individual goals. All such plans are to be administrated by the
Compensation Committee, which is empowered to determine those employees eligible
to participate, the type and amount of awards to be made and the various
restrictions applicable to such awards. As of February 28, 1998, no awards had
been granted.
In addition, the Company maintains defined contribution savings plans in which
substantially all domestic salaried and hourly employees are eligible to
participate. Employee contributions to the plans are on a voluntary basis and
may range from 1/2% to 16% of the employee's compensation, as defined in the
plans. Under the plan for salaried employees, the Company matches 10% of the
employees' qualified contributions up to a defined amount, and at the discretion
of the Board of Directors, contributions may be made to the account of employees
who are employed on the last valuation date in each year in an amount which
cannot exceed 15% of the annual salaries of the employees who are eligible to
receive contributions. The Company made contributions to these plans of
approximately $85,000, $79,000 and $68,000 during fiscal 1998, 1997 and 1996,
respectively.
The Company funds healthcare and life insurance benefits for retired domestic
employees on a pay-as-you-go basis with the retiree paying a portion of the
costs, except that individuals who were not employed by the prior owners of
certain acquired businesses pay 100% of their allocated premium. The Company's
plans cover substantially all employees of the Company and provide for life and
health coverage upon retirement.
F-24
<PAGE> 71
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFITS (CONTINUED)
Summary information on the Company's postretirement health and life insurance
plans follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
---------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
(APBO):
Retirees $ 9,780 $ 7,728
Fully eligible active plan participants 5,414 5,657
Other active plan participants 8,011 7,466
---------------------
Total accumulated postretirement benefit obligation 23,205 20,851
Unrecognized net actuarial gain 4,890 6,121
Unrecognized prior service cost asset 203 406
---------------------
Accrued postretirement benefit cost $28,298 $27,378
=====================
</TABLE>
The components of net periodic postretirement benefit costs follow (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Service cost $ 371 $ 426 $ 426
Interest on accumulated postretirement
benefit obligation 1,529 1,707 1,758
Net amortization and deferral (554) (241) (221)
-------------------------------------
Net periodic postretirement benefit cost $ 1,346 $ 1,892 $ 1,963
=====================================
</TABLE>
F-25
<PAGE> 72
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE BENEFITS (CONTINUED)
The discount rate used in determining the APBO was 7.0% and 7.5% as of February
28, 1998 and 1997, respectively. The assumed healthcare cost trend rates range
from 7.4% to 7.8% in fiscal 1999, declining gradually to 5% after 12 years and
remaining at that level thereafter. The Company amortizes significant actuarial
gains and losses over the estimated average remaining service periods.
If the healthcare cost trend rate assumptions were increased by 1%, the APBO at
February 28, 1998 would be increased by approximately $2,900,000. The effect of
this change on the aggregate of the service and interest components of net
periodic postretirement benefit cost for 1998 would be an increase of
approximately $269,000.
8. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to numerous federal, state and local environmental laws
and regulations. The Company is currently involved in the assessment, removal
and/or mitigation of chemical substances at various sites. Environmental
expenditures which relate to an existing condition caused by past operations and
which have no significant future economic benefit to the Company are expensed.
Future environmental related expenditures cannot be reliably determined in many
circumstances due to the early stages of investigations, the uncertainty of
specific remediation methods, changing environmental laws and interpretations
and other matters. Such environmental costs are accrued at the time the
expenditure becomes probable and the costs can be reasonably estimated. Costs
are accrued based upon estimates determined by management and in some cases with
the assistance of external consultants. At sites where a range of costs to be
incurred is determined and no amount within the range is more likely than
another, the lower amount of the range is recorded. As assessments and cleanups
proceed, these accruals are reviewed periodically and adjusted, if necessary, as
additional information becomes available. These accruals can change
substantially due to such factors as additional information on the nature or
extent of contamination, methods of remediation required, and other actions by
governmental agencies or private parties.
F-26
<PAGE> 73
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL AND LEGAL MATTERS (CONTINUED)
The Company owns a variety of sites which may or will likely require
remediation. Under the provisions of the acquisition agreements for the
businesses, the former owners retained the obligations for any potential
liabilities arising from conditions or events occurring or attributable to
periods prior to the acquisition of properties acquired by the Company pursuant
to those agreements. At certain locations, such items must be identified by July
26, 1998 for the former owner to remain obligated. Management believes that it
is probable the former owners will fulfill their obligations under the
agreements.
In connection with all sites, the Company reduced accruals and related expense
by approximately $.8 million and increased accruals and related expense by
approximately $1.1 million during fiscal year 1998 and 1997, respectively, and
an immaterial amount was charged to expense in 1996 in connection with
remediation and related activities. Other accrued liabilities include $1.7
million and $1.9 million for the current portion of estimated clean-up
expenditures and related accruals at February 28, 1998 and 1997, respectively.
The balance of spending identifiable to future years is included in other
non-current liabilities at February 28, 1998 and 1997 and amounts to $1.5
million and $2.6 million, respectively, for each year then ended.
While the Company believes that the recorded amounts represent the Company's
best estimate of the costs of such matters, it is reasonably possible that
additional costs may be incurred. Based on currently available information and
analysis, the Company believes that it is reasonably possible that costs
associated with these sites may exceed current accruals by amounts that may
prove insignificant or that could range, in the aggregate, up to approximately
$1.3 million. This estimate of the range of reasonably possible additional costs
is less certain than the estimates upon which accruals are based, and in order
to establish the upper limit of such range, assumptions least favorable to the
Company among the range of reasonably possible outcomes were used. In estimating
both its current accruals for environmental remediation and the possible range
of additional costs, the Company has not assumed it will bear the entire cost of
remediation of every site to the exclusion of the former owners of such sites.
The ability of the former owners to participate has been taken into account,
based generally on their financial condition and probable contribution on a per
site basis. No amounts have been recorded for potential recoveries from
insurance carriers.
F-27
<PAGE> 74
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL AND LEGAL MATTERS (CONTINUED)
In May 1997, the Company reached a plea agreement with the U.S. Department of
Justice, along with other U.S. ammonium nitrate producers, in a government
investigation relating to a price fixing conspiracy among U.S. ammonium nitrate
producers during May 1992. On May 9, 1997, the Company and the federal
government reached an agreement to settle the matter for $1.5 million, plus
interest from May 1997, to be paid during the succeeding four year period. Such
amount was accrued in the Company's financial statements as of February 28,
1997.
In December 1997, the Company was named as a defendant in certain civil
antitrust actions and could be added as a defendant in other existing cases,
brought predominantly by various mining concerns, alleging that the Company is
guilty of violations of federal antitrust laws, various state antitrust and
unfair trade practice statutes, and common law fraud in connection with the
Company's blasting grade ammonium nitrate business as conducted in the mid to
late 1980's and early 1990's. No amounts have been stated in such claims. The
Company believes that the plaintiffs in these cases have targeted the Company
because of the Company's above disclosed plea agreement with the U.S. Department
of Justice in which the Company agreed to plead guilty to a one-count
information charging the Company with participating in a conspiracy to restrain
competition in the pricing of ammonium nitrate during May 1992. In that
agreement, the Company did not admit, and the Department of Justice did not
contend, that the Company ever implemented any such conspiracy. Accordingly, the
Company has filed answers denying liability in such civil actions and intends
vigorously to defend them. Because the matter is in a preliminary stage, it is
not yet possible to predict whether the Company will incur any liability with
respect to this matter. Accordingly, the Company has not recorded any accruals
related to such claims. However, if found liable the amount could be material.
The Company is named as a defendant in a suit alleging the Company's contractor
struck and damaged a gasoline pipeline owned by the plaintiff while the
contractor was performing work on an adjacent Company-owned facility. The
plaintiff seeks recovery of damages of approximately $8.5 million. The pipeline
later ruptured, resulting in the release of gasoline into the Blind River and
surrounding area near Gramercy, Louisiana. In addition, the Company has been
named in a class-action petition and in one other individual suit filed on
behalf of persons allegedly harmed by the rupture
F-28
<PAGE> 75
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL AND LEGAL MATTERS (CONTINUED)
of the pipeline. The Company is continuing a diligent investigation of the
situation in order to evaluate the allegations and the relative responsibility
of the parties involved. The Company is also responding to inquiries from
regulatory authorities of the State of Louisiana related to the gasoline
release. Management believes the Company has meritorious defenses to these
claims and is vigorously defending itself against them. Because the matter is in
a preliminary stage, it is not yet possible to predict whether the Company will
incur any liability for the rupture and release or to reasonably estimate the
cost of any possible liability. Accordingly, the Company has not recorded any
accruals related to such claims.
The Company owns and operates two pipelines to transport brine, a key raw
material in the production of chlor-alkali products, to its Gramercy facility.
The pipelines transverse land upon which the Company has been granted the right
to transport brine to its Gramercy facility. The Company has been evaluating the
possibility of replacing one of the pipelines due to operating difficulties and
to provide additional raw material for capacity expansion. A landowner recently
filed petitions alleging among other items that the Company's rights to
transport brine through one of these pipelines should be prohibited and that its
right to replace this same pipeline has expired. In connection with this
lawsuit, the landowner sought a preliminary injunction to immediately forbid the
Company from using this pipeline. The Court refused to grant such action but has
required the Company to implement certain programs including monitoring for
potential leaks. With respect to the remaining issues, management believes the
Company has meritorious defenses to these allegations and is vigorously
defending itself against them. Because the matter is in a preliminary stage, it
is not possible to determine whether this landowner will prevail. If this
landowner prevails, the Company's ability to supply the Gramercy plant with
brine may be adversely effected.
In addition to the matters discussed above, the Company is involved in certain
other legal actions and claims arising in the ordinary course of business. The
amounts asserted in these matters are material to the Company's financial
statements, and certain claimants have not yet asserted an amount. Although it
is inherently impossible to predict with any degree of certainty the outcome of
such legal actions and claims, in the opinion of
F-29
<PAGE> 76
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL AND LEGAL MATTERS (CONTINUED)
management (based on advice of the Company's corporate and other legal counsel)
such litigation and claims are likely to be resolved without material adverse
effect on the Company's financial position and results of operations. It is
possible, however, that the resolution of certain matters could be material to
the results of operations of any single fiscal quarter.
LEASES AND OTHER
The Company leases facilities and equipment consisting primarily of its
corporate office, electric power co-generation systems, transportation and
computer equipment. Some of the leases provide that the Company pay taxes,
maintenance, insurance and other occupancy expenses applicable to the leased
premises. Certain of the leases have renewal terms at the option of the Company.
Minimum future obligations on leases that have initial or remaining
non-cancelable lease terms in excess of one year as of February 28, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------------------------------
<S> <C> <C>
Fiscal years ending February,
1999 $ 526 $ 6,734
2000 248 6,293
2001 69 5,523
2002 12 4,206
2003 11 3,491
Thereafter -- 21,125
-------------------------------
Total minimum lease payments 866 $47,372
=======
Less estimated executory costs and imputed interest costs 97
----------
Present value of minimum lease payments $ 769
==========
</TABLE>
F-30
<PAGE> 77
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES AND OTHER (CONTINUED)
Total rental expense under operating leases aggregated approximately $8,897,000,
$7,504,000 and $7,519,000 during fiscal years 1998, 1997 and 1996, respectively.
At February 28, 1998 the Company has commitments outstanding under their natural
gas fixed price purchase contracts to purchase approximately $6.8 million of
natural gas during the subsequent year. The following sets forth the open
positions and the fair value of its natural gas collar positions as of February
28, 1998 and 1997:
<TABLE>
<CAPTION>
QUANTITY FAIR VALUE CARRYING VALUE
----------------------------------------------------------
(in MMBTUs)
<S> <C> <C> <C>
FEBRUARY 28, 1998
Purchased Call Options 5,118,000 $ 953,000 $ --
Written Put Options 5,118,000 (412,000) --
FEBRUARY 28, 1997
Purchased Call Options 4,575,000 $ 366,000 $ --
Written Put Options 4,575,000 (154,000) --
</TABLE>
The fair values are based on quoted market prices.
As of February 28, 1998, of the Company's estimated requirements, approximately
95% beginning in March 1998 and declining to 10% in March 1999 are subject to
collar arrangements.
Several of the Company's facilities and those of some of its joint ventures are
integrated with the operations of other companies. As a result, the companies
involved share certain common facilities and services, including power
generation. Generally, the Company maintains certain long-term supply contracts
with the appropriate parties.
9. INCOME TAXES
The provision for income taxes includes income taxes currently payable and those
deferred because of temporary differences between the financial statement and
tax bases of assets and liabilities.
F-31
<PAGE> 78
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets are
as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28
1998 1997
------------------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 36,168 $ 32,819
Other 9,003 8,846
------------------------
Total deferred tax liabilities 45,171 41,665
Deferred tax assets:
Employee benefit obligations 13,087 15,005
AMT credit carryforward 6,150 875
Other 9,016 4,050
------------------------
Total deferred tax assets 28,253 19,930
------------------------
Valuation allowance for deferred tax assets (600) (600)
------------------------
Net deferred tax liabilities $ 17,518 $ 22,335
========================
</TABLE>
F-32
<PAGE> 79
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 1,691 $ (5,456) $ 11,317
Deferred (4,871) 5,432 (317)
----------------------------------------
(3,180) (24) 11,000
State:
Current (728) (794) 2,348
Deferred 54 1,235 (178)
----------------------------------------
(674) 441 2,170
----------------------------------------
Foreign 201 -- --
Provision (benefit) for income taxes before
extraordinary charges (3,653) 417 13,170
Tax benefit for extraordinary charges (7,740) -- --
----------------------------------------
Total provision (benefit) for income taxes $(11,393) $ 417 $ 13,170
========================================
</TABLE>
F-33
<PAGE> 80
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
A reconciliation between income taxes provided and the amount computed by
applying the federal income tax rate (35%) to income before income taxes follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Computed amount based on federal
statutory rate $(10,319) $ 377 $11,243
State income taxes, net of federal
income tax benefit (1,155) 45 1,357
Increase in valuation allowance -- 277 --
Percentage depletion (70) (886) --
Other 151 604 570
---------------------------------------
$(11,393) $ 417 $13,170
=======================================
</TABLE>
At February 28, 1998, the company had state operating loss carryforwards of
approximately $6.3 million which begin to expire in 2011. The Company has
provided a valuation allowance for these State net operating losses. The Company
has approximately $6,150,000 in alternative minimum tax ("AMT") carryforwards
available to offset future taxes for an unlimited time period.
10. REDEEMABLE COMMON STOCK AND COMMON STOCK WITH PUT RIGHTS
The Company allows certain of its executive officers, management employees and
directors to own common stock. At February 28, 1998 and 1997, 12,519 and 13,934
shares, respectively, were outstanding pursuant to its 1995 Stock Purchase Plan
(the "1995 Plan,") and the Board of Directors Stock Purchase Plan (the
"Directors Plan"). Generally participants in the 1995 Plan must use 25% of any
annual bonuses to purchase stock up to specified amounts. The 1995 Plan and the
Directors Plan provide that certain executive officers, management employees and
directors of the Company will be, at the discretion of the Board of Directors,
eligible to purchase shares of the Company's common stock at fair value (as
determined by independent appraisal).
F-34
<PAGE> 81
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
10. REDEEMABLE COMMON STOCK AND COMMON STOCK WITH PUT RIGHTS (CONTINUED)
In connection with the 1995 Plan and the Directors Plan, the Company may agree
to guarantee loans used to finance the purchase of such stock. Upon termination
of employment or directorship, the shares must be sold to the Company at fair
value. Fair value, based upon an independent appraisal, was $280 and $300 per
share at February 28, 1998 and 1997, respectively, and the aggregate value of
such applicable shares is reflected as redeemable common stock in the
accompanying consolidated balance sheets. The final settlement prices for any
shares may differ from the estimated amounts. All redemption provisions of the
Company's shares expire upon a public offering of the Company's common stock.
The Company has guaranteed indebtedness of certain executive officers,
management employees and directors pursuant to the 1995 Plan and the Directors
Plan aggregating $191,000 and $455,000 as of February 28, 1998 and 1997,
respectively.
The Company originally had shareholder agreements with two of the Company's
founding stockholders who were executive officers. Such holders originally held
15% (75,000 shares) of the Company's outstanding common stock. As of February
28, 1998 and 1997, none of these shares were outstanding. Such agreements
provided the holders the option to sell their stock at any time to the Company
for at least fair market value and required the Company to repurchase such stock
upon the occurrence of certain conditions. Changes in the value of these shares
were charged directly to retained earnings as "Adjustment to estimated fair
value of common stock with put rights." During fiscal 1995, the Company's former
chairman put 25,000 of his shares to the Company for $5,512,500. During fiscal
1996, the Company and its former chairman mutually agreed to a repurchase of his
remaining 25,000 shares in exchange for a $7,401,250 promissory note. Finally,
during fiscal 1997, the holder of the remaining 25,000 shares put his shares to
the Company for $7,475,000 in cash.
F-35
<PAGE> 82
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
10. REDEEMABLE COMMON STOCK AND COMMON STOCK WITH PUT RIGHTS (CONTINUED)
The following table summarizes activity in the Company shares that have
redemption features (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------------------------------
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
-------------------------------------------------------------------------------
REDEEMABLE REDEEMABLE COMMON STOCK REDEEMABLE COMMON
COMMON COMMON WITH PUT COMMON STOCK WITH PUT
STOCK STOCK RIGHTS STOCK RIGHTS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning
of year $4,177 $ 4,771 $ 7,475 $2,417 $12,975
Adjustment in value (248) (98) -- 768 1,901
Other shares issued 326 3,187 1,918 --
Repurchases (750) (3,683) (7,475) (332) (7,401)
-------------------------------------------------------------------------------
Balance at end of year $3,505 $ 4,177 $ -- $4,771 $ 7,475
===============================================================================
</TABLE>
11. SEGMENT INFORMATION
The Company operates principally in three business segments. The electrochemical
products segment consists of caustic soda, chlorine, chlorinated methane
compounds and fluorocarbons (see Note 3). The nitrogen products segment consists
of facilities which manufacture and distribute agricultural and industrial
nitrogen products and distribute non-nitrogenous agricultural fertilizers. The
alumina chemicals segment consists of specialty aluminas and related products.
Beginning in fiscal 1998, certain operations included in the electrochemical
products segment were located in Europe and had income from operations of
approximately $821,000 and a loss from equity investments of approximately
($725,000) for the fiscal year ended February 28, 1998. For fiscal 1998, foreign
operations represented approximately 5.3% and 17.3% of total net sales to
unaffiliated customers and total identifiable assets, respectively. Net income
from foreign operations and intersegment sales are not material. Net assets for
European operations totaled approximately $52 million.
F-36
<PAGE> 83
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
Operating profit includes all costs and expenses directly related to the segment
involved. The corporate portion of operating profit includes corporate general
and administrative expenses.
Assets are assigned to segments based on use. Corporate assets primarily consist
of cash and other assets.
Following is a tabulation of business segment information for each of the past
three fiscal years (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------------------
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Nitrogen products $234,884 $242,408 $248,438
Electrochemical products 107,686 96,738 138,775
Alumina chemicals 38,444 40,139 61,769
--------------------------------------------------------
Total $381,014 $379,285 $448,982
========================================================
Income (loss) from operations:
Nitrogen products $ 11,303 $ 11,710 $ 20,468
Electrochemical products (1,181) 8,562 29,624
Alumina chemicals 34 (3,897) (448)
Corporate expense (4,978) (5,738) (5,359)
--------------------------------------------------------
Income from operations 5,178 10,637 44,285
Interest expense (17,510) (14,881) (15,973)
Income from equity investments 2,698 4,909 2,647
Other income, net 182 411 1,163
--------------------------------------------------------
(Loss) income before income
taxes and other items $ (9,452) $ 1,076 $ 32,122
========================================================
</TABLE>
F-37
<PAGE> 84
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
FEBRUARY 28 FEBRUARY 29,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Identifiable assets:
Nitrogen products $170,403 178,179 160,346
Electrochemical products 148,809 68,956 $ 79,794
Alumina chemicals 56,825 47,627 52,291
Corporate 29,378 17,603 13,501
--------------------------------------
Total $405,414 $312,365 $305,932
======================================
Depreciation and amortization:
Nitrogen products $ 13,036 $ 14,693 $ 10,425
Electrochemical products 5,787 5,665 4,493
Alumina chemicals 3,035 2,276 3,662
Corporate 771 427 416
--------------------------------------
Total $ 22,629 $ 23,061 $ 18,996
======================================
Capital expenditures (including
acquisitions and plant turnarounds):
Nitrogen products $ 19,123 $ 26,922 $ 40,866
Electrochemical products 30,682 10,773 6,062
Alumina chemicals 6,483 3,127 3,652
--------------------------------------
Total $ 56,288 $ 40,822 $ 50,580
======================================
</TABLE>
The fiscal 1998 electrochemical products segment and fiscal 1996 nitrogen
products segment capital expenditures summarized in the above table include
business acquisition expenditures of $17.6 million and $38 million related to
the purchase of the German facilities and Seneca facilities, respectively.
F-38
<PAGE> 85
LaRoche Industries Inc.
Notes to Consolidated Financial Statements (continued)
12. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited fiscal 1998 and 1997 pro forma financial information
gives effect to the investment in ChlorAlp (Note 6), the issuance of the Notes
(Note 7) and the acquisition of the German Facilities (Note 3), as if each had
occurred at the beginning of fiscal 1997. The fiscal 1996 unaudited pro forma
information gives effect to the Seneca Acquisition (Note 3) at the beginning of
such fiscal year. The unaudited pro forma financial information is provided for
informational purposes only. It is based on historical information and does not
necessarily reflect the actual results of operations that would have occurred
had such transactions actually occurred at the beginning of such periods nor is
it necessarily indicate of future results of operations of the combined company
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
FEBRUARY 28 FEBRUARY 29,
1998 1997 1996
--------------------------------------
(Unaudited)
<S> <C> <C> <C>
Net sales $ 480,191 $487,637 $473,774
(Loss) income before extraordinary
charge (5,305) 640 16,827
Net (loss) income (17,595) 640 16,827
</TABLE>
F-39
<PAGE> 86
LaRoche Industries Inc.
SCHEDULE II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------ ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 29, 1996
Allowance for doubtful accounts 807 102 -- 60 (1) 849
Valuation allowance for deferred tax asset 969 -- -- 646 (2) 323
YEAR ENDED FEBRUARY 28, 1997
Allowance for doubtful accounts 849 68 -- 141 (1) 776
Valuation allowance for deferred tax asset 323 277 -- -- 600
YEAR ENDED FEBRUARY 28, 1998
Allowance for doubtful accounts 776 36 -- 285 (1) 527
Valuation allowance for deferred tax asset 600 -- -- -- 600
</TABLE>
- -----------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Write off of deferred tax assets.
S-1
<PAGE> 1
EXHIBIT 10.38
WAIVER AND AMENDMENT NO. 2 TO CREDIT AGREEMENT
WAIVER AND AMENDMENT dated as of May 12, 1998 (the "Amendment") to the
Credit Agreement dated as of August 26, 1997, as amended by Amendment No. 1
dated as of September 30, 1997 (the CREDIT AGREEMENT"), among LAROCHE INDUSTRIES
INC. (the "BORROWER"), the LENDERS party thereto (the "LENDERS") and THE CHASE
MANHATTAN BANK, as Administrative Agent (the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the Credit Agreement to
permit certain investments in foreign subsidiaries in the form of debt as well
as equity in an aggregate amount not to exceed $85,000,000, to modify the
leverage ratio and minimum consolidated net worth requirements and to make
certain other changes, primarily relating to foreign subsidiaries;
WHEREAS, the Borrower has requested that compliance and the effects of
non-compliance by the Borrower with certain provisions of the Credit Agreement
be waived;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
SECTION 2. Section 1.01. Section 1.01 of the Credit Agreement is
amended by
(a) amending the definitions of
(i) "Asset Sale" by amending clause (iii) thereof to read as
follows:
<PAGE> 2
(iii) disposition to the Borrower or a Subsidiary
Guarantor or by a Foreign Subsidiary (that is not a Direct
Foreign Subsidiary) to another Foreign Subsidiary.
(ii) "Borrower Consolidated EBITDA" by amending clause (1)
thereof in its entirety to read as follows:
(1) consolidated net income of the Borrower and its
Consolidated Subsidiaries for such period (exclusive of (x)
the portion of net income allocable to minority interests in
unconsolidated Persons to the extent that cash distributions
have not actually been received from such Persons (provided
that cash distributions of prior period earnings may be added
to net income for such period to the extent not previously
reflected), (y) the effect of any extraordinary or non
recurring gain or loss and (z) the effect of "marking to
market" any notional amount under any Hedging Agreement that
exceeds the amount of the Borrower's net investment in the
related assets, to the extent such "marking to market" does
not reflect a current cash payment to or from the Borrower
upon the termination or unwind of such Hedging Agreement),
plus
(iii) "Consolidated Net Worth" in its entirety to read as
follows:
"Consolidated Net Worth" means, at any date, the
consolidated stockholders' equity of the Borrower and its
Consolidated Subsidiaries determined as of such date, provided
there shall be excluded from any computation of such equity
the effect of "marking to market" any notional amount under
any Hedging Agreement that exceeds the amount of the
Borrower's net investment in the related assets, to the extent
such "marking to market" does not reflect a current cash
payment to or from the Borrower upon the termination or unwind
of such Hedging Agreement.
(b) inserting therein, in proper alphabetical order, the following
defined term:
"Direct Foreign Subsidiary" means any Foreign Subsidiary more
than 50% of the equity, ordinary voting power or general partnership
interests of which are owned directly by the Borrower.
2
<PAGE> 3
SECTION 3. Section 3.16. Article III of the Credit Agreement is
amended to add the following section at the end thereof:
SECTION 3.16. Year 2000. Any reprogramming required to permit
the proper functioning, in and following the year 2000, of (i) the
computer systems of the Borrower and its Subsidiaries and (ii)
equipment containing embedded microchips (including systems and
equipment supplied by others or with which the systems of the Borrower
and its Subsidiaries interface) and the testing of all such systems and
equipment, as so reprogrammed, will be completed by July 1, 1999. The
cost to the Borrower and its Subsidiaries of such reprogramming and
testing and of the reasonably foreseeable consequences of year 2000 to
the Borrower and its Subsidiaries (including, without limitation,
reprogramming errors and the failure of others' systems or equipment)
will not result in a Default or a Material Adverse Effect. Except for
such of the reprogramming referred to in the preceding sentence as may
be necessary, the computer and management information systems of the
Borrower and its Subsidiaries are and, with ordinary course upgrading
and maintenance, will continue to be, sufficient to permit the Borrower
and its Subsidiaries to conduct their business without a Material
Adverse Effect.
SECTION 4. Section 5.01. (a) Section 5.01(d) of the Credit Agreement is
amended by deleting the words "95 days" and replacing them with the words "five
months".
(b) Section 5.01(e) of the Credit Agreement is amended by deleting the
number "50" and replacing it with the number "60".
SECTION 5. Section 5.09(b)(ii). Section 5.09(b)(ii) of the Credit
Agreement is amended by deleting the word "and" preceding the designation "(y)";
inserting before the term "Foreign Subsidiary" in subclause (y) thereof the word
"Direct" and immediately after the figure "66%" in subclause (y) thereof the
parenthetical phrase "(or, if less, 100% of the Borrower's holdings)"; and
inserting before the period at the end of clause (ii) the following:
, and (z) any promissory notes issued to the Borrower or any Subsidiary
other than a Foreign Subsidiary to evidence Indebtedness incurred
pursuant to Section 6.01(a)(iv)
SECTION 6. Section 6.01(a). (a) Section 6.01(a)(iv) of the Credit
Agreement is amended by deleting the parenthetical phrase "(other than a Foreign
Subsidiary)" and substituting therefor the parenthetical phrase "(other than a
Foreign Subsidiary, unless such Foreign Subsidiary is a wholly owned
Subsidiary)"; inserting after the words "provided that" the designation "(i)";
and
3
<PAGE> 4
inserting after the words "Administrative Agent" the following:
and (ii) the aggregate principal amount of Indebtedness of all such
Foreign Subsidiaries to the Borrower or other Subsidiaries which are
not Foreign Subsidiaries shall not exceed $85,000,000 (including all
such Indebtedness permitted by any other provision of this Section
6.01(a) (other than any such Indebtedness incurred to finance purchases
of capital stock of JVC permitted pursuant to Section 6.04(i)), and
computed on a consolidated basis as to all Foreign Subsidiaries) at any
time outstanding
(b) Section 6.01(a)(v) of the Credit Agreement is amended by deleting
the parenthetical phrase "(other than a Foreign Subsidiary)" both times it
appears, and substituting therefor the parenthetical phrase "(other than a
Foreign Subsidiary, unless such Foreign Subsidiary is a wholly owned
Subsidiary)"; and
(c) Section 6.01(a)(xi) of the Credit Agreement is amended by
inserting after the designation "(x)" the word "either" and by inserting before
the word "and" at the end of subclause (x) of the proviso the following:
or such Indebtedness is of a Foreign Subsidiary to a local bank and is
denominated in a currency other than Dollars
SECTION 7. Section 6.02(a). Section 6.02(a) of the Credit Agreement is
amended by deleting the word "and" at the end of clause (iii); replacing the
period at the end of clause (iv) with a semi-colon, followed by the word "and";
and adding the following new clause (v):
(v) Liens on inventory or accounts receivable of a Foreign
Subsidiary securing Indebtedness of such Subsidiary permitted pursuant
to subclause (x) of the proviso to Section 6.01(a)(xi) or Section
6.01(a)(xii).
SECTION 8. Section 6.04. (a) Section 6.04(c) of the Credit Agreement is
amended in its entirety to read as follows:
(c) subject to Section 5.09, Investments by the Borrower or
any of its wholly owned Subsidiaries in capital stock and, if such
Investments are in connection with a Permitted Acquisition, promissory
notes of wholly owned Subsidiaries; provided that the aggregate amount
(including all such Investments permitted by any other provision of
this Section 6.04 (other than Section 6.04(i)), and computed on a
consolidated basis as to all Foreign Subsidiaries) of such Investments
in Foreign Subsidiaries will not exceed $85,000,000;
4
<PAGE> 5
(b) Section 6.04(i) of the Credit Agreement is amended in its entirety
to read in its entirety as follows:
(i) purchases of capital stock of JVC by LII Europe pursuant
to the Put/Call Arrangements or pursuant to other arrangements, and
loans or advances by the Borrower to LII Europe to finance such
purchases; provided that any such purchase made by LII Europe pursuant
to any such other arrangements is on substantially the same material
terms (including without limitation price) as the terms set forth in
the Put/Call Arrangements;
(c) Section 6.04(k) of the Credit Agreement is amended by inserting
after the words "subject to" the words "Section 6.04(c) and",
(d) Section 6.04 is further amended by deleting from the final proviso
thereto the words "on or" (appearing after the phrase "made at any time")
therein, and by adding the following additional sentence at the end thereof:
For purposes of this Section 6.04, the amount of any Investment in a
Foreign Subsidiary denominated in a currency other than Dollars shall
be the amount thereof converted to Dollars at the spot rate on the date
such Investment is made (without adjustment for subsequent currency
fluctuations).
SECTION 9. Section 6.12. Section 6.12 of the Credit Agreement is
amended in its entirety to read as follows:
SECTION 6.12. Leverage Ratio. At the last day of any fiscal
quarter of the Borrower in any period (both dates inclusive) set forth
below, the Leverage Ratio will not exceed the ratio set forth below
opposite such period.
<TABLE>
<CAPTION>
Period Ratio
<S> <C>
3/01/98-5/31/98 5.20:1
6/01/98-11/29/98 5:00:1
11/30/98-2/27/99 4.90:1
2/28/99-5/30/00 4.50:1
5/31/00-5/30/01 4.00:1
5/31/01-5/30/02 3.50:1
Thereafter 3.25:1
</TABLE>
5
<PAGE> 6
SECTION 10. Section 6.13. Section 6.13 of the Credit Agreement is
amended in its entirety to read as follows:
SECTION 6.13. Minimum Consolidated Net Worth. At the last day
of any fiscal quarter of the Borrower ending on or after May 31, 1998,
Consolidated Net Worth will not be less than an amount equal to the sum
of (i) $31,000,000 and (ii) an amount equal to 50% of consolidated net
income for each successive period of two consecutive fiscal quarters
ended after May 31, 1998 and on or before such day, in each case, for
which consolidated net income is positive (but with no deduction on
account of negative consolidated net income for any such period of two
consecutive fiscal quarters) plus (iii) 100% of the aggregate net
proceeds, including the fair market value of property other than cash
(as determined in good faith by the Borrower's board of directors),
received by the Borrower from the issuance and sale after the date
hereof of any capital stock of the Borrower (other than the proceeds of
any issuance and sale of any capital stock (x) to a Subsidiary or (y)
which is required to be redeemed, or is redeemable at the option of the
holder, if certain events or conditions occur or exist or otherwise) or
in connection with the conversion or exchange of any Indebtedness of
the Borrower into capital stock of the Borrower after February 28,
1997.
SECTION 11. Waivers. The Administrative Agent and the Required Lenders
hereby waive compliance and the effects of non-compliance by the Borrower with
the following provisions of the Credit Agreement: (a) Section 5.01(c) with
respect to the financial statements of the Borrower referred to therein for the
calendar month ended March 31, 1998, to the extent that such statements are
delivered not later than May 31, 1998, and are otherwise as provided therein,
(b) Section 5.11 with respect to the title insurance policy delivered as to the
Borrower's Gramercy, Louisiana property, to the extent that exception 3 of
Schedule B, Section 11 thereof is unchanged from the original title commitment
therefor, (c) Section 6.01(a)(iv) to the extent that upon the effectiveness of
Section 6 of this Amendment no breach thereof will be continuing, (d) Section
6.12 with respect to the Leverage Ratio as of November 30, 1997, to the extent
that the Leverage Ratio as of such date did not exceed 5.50:1, and (e) Section
6.13 with respect to Consolidated Net Worth as of February 28, 1998, to the
extent that Consolidated Net Worth as of such date was not less than
$31,000,000.
SECTION 12. Representations of Borrower. The Borrower represents and
warrants that after giving effect to the foregoing provisions of this Amendment
(i) the representations and warranties of the Borrower set forth in Article 3 of
the Credit Agreement will be true and correct on and as of the Amendment
Effective Date (as hereinafter defined) to the same extent as they would be
required to be under Section 4.03(b) on the occasion of any Borrowing and (ii)
no Default will have occurred and be continuing on such date.
6
<PAGE> 7
SECTION 13. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 14. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 15. Effectiveness. This Amendment shall become effective as of
the date hereof on the date (the "AMENDMENT EFFECTIVE DATE") when the
Administrative Agent shall have received from each of the Borrower and the
Required Lenders a counterpart hereof signed by such party or facsimile or other
written confirmation (in form satisfactory to the Administrative Agent) that
such party has signed a counterpart hereof.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
LAROCHE INDUSTRIES INC.
By: /s/ Harold W. Ingalls
-----------------------------
Name: Harold W. Ingalls
Title: Chief Financial Officer
& Vice President
THE CHASE MANHATTAN BANK
By: /s/ Robert T. Sacks
-----------------------------
Name: Robert T. Sacks
Title: Managing Director
HIBERNIA NATIONAL BANK
By: /s/ Trudy W. Nelson
-----------------------------
Name: Trudy W. Nelson
Title: Vice President
WACHOVIA BANK, N.A.
By: /s/ W. Tompkins Rison, Jr.
-----------------------------
Name: W. Tompkins Rison, Jr.
Title: Vice President
8
<PAGE> 9
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
--------------------------------------
Name: F. C. H. Ashby
Title: Senior Manager Loan Operations
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Rose M. Crump
--------------------------------------
Name: Rose M. Crump
Title: Vice-President
AMSOUTH BANK
By:
--------------------------------------
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ Linda Pace
--------------------------------------
Name: Linda Pace
Title: Vice President
By: /s/ Anthony Heyman
--------------------------------------
Name: Anthony Heyman
Title: Assistant Vice President
9
<PAGE> 10
COMERICA BANK
By: /s/ Kristine L. Andersen
--------------------------------------
Name: Kristine L. Andersen
Title: Account Officer
NATIONAL BANK OF CANADA
By: /s/ Susan K. Gadrix
--------------------------------------
Name: Susan K. Gadrix
Title: Assistant Vice President
By: /s/ J. F. Hannon
--------------------------------------
Name: J.F. Hannon
Title: Vice President
BANQUE PARIBAS
By: /s/ Duane Helkowski
--------------------------------------
Name: Duane Helkowski
Title: Vice President
By: /s/ David Canavan
--------------------------------------
Name: David Canavan
Title: Director
10
<PAGE> 1
EXHIBIT 10.39
LAROCHE INDUSTRIES INC.
1997 STOCK OPTION PLAN
1. PURPOSE. The purpose of this LaRoche Industries Inc. 1997 Stock
Option Plan (the "Plan") is to further the interests of LaRoche Industries Inc.
(the "Company"), organized under the laws of Delaware, and any entity that
hereafter becomes a subsidiary of the Company, by providing incentives in the
form of grants of stock options to key employees and other persons who
contribute materially to the success and profitability of the Company. The
grants will recognize and reward outstanding individual performances and
contributions and will give such persons a proprietary interest in the Company,
thus enhancing their personal interest in the Company's continued success and
progress. This program will also assist the Company in attracting and retaining
key persons.
2. DEFINITIONS. The following definitions shall apply to this Plan:
(A) "BOARD" means the board of directors of the Company.
(B) "CAUSE" means termination of a Participant's employment on
the basis of (i) the willful and continued failure to perform his duties with
the Company (other than failure resulting from an incapacity due to physical or
mental illness) after a written demand for performance by the Board or designee
of the Board is delivered to the individual which specifically identifies the
manner in which it is determined that he has not substantially performed his
duties, or (ii) the willful engagement in gross conduct materially and
demonstrably injurious to the Company. No act or failure to act shall be
considered "willful" unless determined by the Committee to have been done or
omitted to be done, not in good faith and without reasonable belief that the
action or omission was in the best interest of the Company. No termination for
Cause shall occur unless and until there shall have been delivered to the
individual a written notice from the Committee of its determination that the
individual is guilty of the conduct set forth in clauses (i) or (ii) above.
(C) "CHANGE OF CONTROL" means (i) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation, or pursuant to which shares of the Company's common stock are
converted into cash, securities or other property, other than a consolidation or
merger of the Company in which the holders of the Company's common stock
immediately prior to the merger have substantially the same proportionate
ownership of common stock of the surviving corporation immediately after the
consolidation or merger, or (ii) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially all
the assets of the Company, or (iii) the approval by the shareholders of the
Company of any plan or proposal for the liquidation or dissolution of the
Company, or (iv) any transaction or series of related transactions (whether as a
result of privately negotiated purchases or otherwise) in which any person or
persons not currently a shareholder shall become the beneficial owner(s) of
securities of the Company representing 51% or more of the combined voting power
of the Company's securities having a right to vote in the election of Board
members.
(D) "CODE" means the Internal Revenue Code of 1986, as
amended.
(E) "COMMITTEE" means the Compensation Committee consisting of
two or more directors appointed by the Board.
(F) "COMPANY" means LaRoche Industries Inc.
<PAGE> 2
(G) "DATE OF GRANT" means the date on which the Option is
granted.
(H) "DISABILITY" means a total mental or physical illness,
injury or disease that renders a Recipient unable to perform work similar to
that which he was performing for the Company at the time of such disability and
which is expected to be permanent in nature. A Recipient must have been absent
from his duties with the Company on a full-time basis for a continuous period of
six months and shall not have returned to the full-time performance of his
duties following written notice, given not less than thirty (30) days prior to
the intended date of termination, of the Company's intention to terminate
employment.
(I) "ELIGIBLE PERSON" means any person who performs or has in
the past performed services for the Company or any direct or indirect partially
or wholly owned subsidiary thereof, whether as a director, officer, employee,
consultant or other independent contractor, and any person who performs services
relating to the Company in his or her capacity as an employee or independent
contractor of a corporation or other entity that provides services for the
Company; provided, that only an Employee can receive an incentive stock option
grant.
(J) "EMPLOYEE" means any person employed on an hourly or
salaried basis by the Company or any subsidiary of the Company that now exists
or hereafter is organized or acquired by the Company.
(K) "FAIR MARKET VALUE" means the fair market value of the
Share. If the Share is not publicly traded on the date as of which fair market
value is being determined, the Board shall determine the fair market value of
the Shares, using such factors as the Board considers relevant, such as the
price at which recent sales have been made, the book value of the Share, and the
Company's current and projected earnings. If the Share is publicly traded on the
date as of which fair market value is being determined, the fair market value is
the average of the high bid and ask price of the Common Stock as quoted on that
date. If a price quotation does not occur on the date as of which fair market
value is being determined, the next preceding date on which a price was quoted
will determine the fair market value.
(L) "INCENTIVE STOCK OPTION" means a stock option granted
pursuant to either this Plan or any other plan of the Company that satisfies the
requirements of Section 422 of the Code and that entitles the key employee to
purchase stock of the Company or in a corporation that at the time of grant of
the option was a parent or subsidiary of the Company or a predecessor
corporation of any such corporation.
(M) "NONQUALIFIED STOCK OPTION" means a stock option granted
pursuant to the Plan that is not an Incentive Stock Option and that entitles the
Recipient to purchase stock of the Company or in a corporation that at the time
of grant of the option was a parent or subsidiary of the Company or a
predecessor corporation of any such corporation.
(N) "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option granted pursuant to the Plan.
(O) "OPTION AGREEMENT" means a written agreement entered into
between the Company and a Recipient which sets out the terms and restrictions of
an Option granted to the
2
<PAGE> 3
Recipient.
(P) "OPTION SHAREHOLDER" shall mean an Employee who has
exercised his or her Option.
(Q) "OPTION SHARES" means Shares issued upon exercise of an
Option.
(R) "PLAN" means this LaRoche Industries Inc. 1997 Stock
Option Plan.
(S) "RECIPIENT" means an individual who receives an Option.
(T) "SHARE" means the common stock, par value $1.00 per share
of the Company, as adjusted in accordance with Section 8 of the Plan, or such
other class of shares or securities as to which the Plan may be applicable.
3. ADMINISTRATION. This Plan will be administered by the Committee. The
Committee has the exclusive power to select the Recipients of Options pursuant
to this Plan, to establish the terms of the Options granted to each Recipient,
and to make all other determinations necessary or advisable under the Plan. The
Committee has the sole and absolute discretion to determine whether the
performance of an Eligible Person warrants an Option under this Plan, and to
determine the size and type of the Option. The Committee shall have the
authority to grant in its discretion to the holder of an outstanding Option, in
exchange for the surrender and cancellation of such Option, a new Option having
an exercise price other than that provided in the Option so surrendered and
cancelled and containing such other terms and conditions as the Committee may
deem appropriate. The Committee has full and exclusive power to construe and
interpret this Plan, to prescribe, amend, and rescind rules and regulations
relating to this Plan, and to take all actions necessary or advisable for the
Plan's administration. The Committee, in the exercise of its powers, may correct
any defect or supply any omission, or reconcile any inconsistency in the Plan,
or in any Agreement, in the manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective. In exercising this power, the
Committee may retain counsel at the expense of the Company. The Committee shall
also have the power to determine the duration and purposes of leaves of absence
which may be granted to a Recipient without constituting a termination of the
Recipient's employment for purposes of the Plan. Any determinations made by the
Committee will be final and binding on all persons. Each member of the Committee
shall be indemnified and held harmless by the Company against any cost or
expense reasonably incurred by him, or any liability (including any sum paid in
settlement of a claim with the approval of the Company) arising out of any act
or omission to act in connection with the Plan unless arising out of such
member's own fraud or bad faith, to the extent permitted by applicable law.
4. SHARES SUBJECT TO PLAN. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares that may be subject to Options
under the Plan shall be 50,000. If an Option should expire or become
unexercisable for any reason (including cancellation) without having been
exercised, the unpurchased Shares that were subject to such Option shall, unless
the Plan has then terminated, be available for other Options under the Plan.
3
<PAGE> 4
5. ELIGIBILITY. Any Eligible Person that the Committee in its sole
discretion designates is eligible to receive an Option under this Plan. The
Committee's grant of an Option to a Recipient in any year does not require the
Committee to grant an Option such Recipient in any other year. Furthermore, the
Committee may grant different Options to different Recipients and has full
discretion to choose whether to grant Options to any Eligible Person. The
Committee may consider such factors as it deems pertinent in selecting
Recipients and in determining the types and sizes of their Options, including,
without limitation, (i) the financial condition of the Company or its
subsidiaries; (ii) expected profits for the current or future years; (iii) the
contributions of a prospective Recipient to the profitability and success of the
Company or its subsidiaries; and (iv) the adequacy of the prospective
Recipient's other compensation. Recipients may include persons to whom stock,
stock options or other benefits previously were granted under this or another
plan of the Company or any subsidiary, whether or not the previously granted
benefits have been fully exercised or vested. A Recipient's right, if any, to
continue to serve the Company and its subsidiaries as an officer, Employee, or
otherwise will not be enlarged or otherwise affected by his designation as a
Recipient under this Plan, and such designation will not in any way restrict the
right of the Company or any parent, as the case may be, to terminate at any time
the employment or affiliation of any participant.
6. OPTIONS. Each Option granted to a Recipient under the Plan shall
contain such provisions as the Committee at the Date of Grant shall deem
appropriate. Each Option granted to a Recipient will satisfy the following
requirements:
(a) WRITTEN AGREEMENT. Each Option granted to a Recipient will
be evidenced by an Option Agreement. The terms of the Option Agreement need not
be identical for different Recipients. The Option Agreement shall include a
description of the substance of each of the requirements in this Section 6 with
respect to that particular Option.
(b) NUMBER OF SHARES. Each Option Agreement shall specify the
number of Shares that may be purchased by exercise of the Option.
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(c) EXERCISE PRICE. The exercise price of each Share subject
to an Incentive Stock Option shall equal the exercise price designated by the
Committee on the Date of Grant, but shall not be less than the Fair Market Value
of the Share on the Incentive Stock Option's Date of Grant. The exercise price
of each Share subject to a Nonqualified Stock Option shall equal the exercise
price designated by the Committee on the Date of Grant.
(d) DURATION OF OPTION. Except as otherwise provided in this
Section 6, an Incentive Stock Option granted to an Employee shall expire on the
tenth anniversary of its Date of Grant or, at such earlier date as is set by the
Committee in establishing the terms of the Incentive Stock Option at grant.
Except as otherwise provided in this Section 6, a Nonqualified Stock Option
granted to an Employee shall expire on the tenth anniversary of its Date of
Grant or, at such earlier or later date as is set by the Committee in
establishing the terms of the Nonqualified Stock Option at grant.
(e) VESTING OF OPTION. Each Option Agreement shall specify the
vesting schedule applicable to the Option. The Committee, in its sole and
absolute discretion, may accelerate the vesting of any Option at any time.
(f) DEATH. In the case of the death of a Recipient, an Option
granted the Recipient shall expire no later than the one year anniversary of the
Recipient's death, or if earlier, the date specified in subsection (d) above.
The Committee shall set the expiration date in establishing the terms of the
Option at grant or a later expiration date subsequent to the Date of Grant but
prior to the one year anniversary of the Recipient's death. During the period
beginning on the date of the Recipient's death and ending on the date the Option
expires, the Option may be exercised to the extent it could have been exercised
at the time the Recipient died, subject to any adjustment under Section 8
herein.
(g) DISABILITY. In the case of the Disability of a Recipient
and a resulting termination of employment or affiliation with the Company or
subsidiary, an Option granted to the Recipient shall expire no later than the
one year anniversary of the Recipient's last day of employment, or, if earlier,
the date specified in subsection (d) above. The Committee shall set the
expiration date in establishing the terms of the Option at grant or a later
expiration date subsequent to the Date of Grant but prior to the one year
anniversary of the Recipient's last day of employment or affiliation with the
Company or subsidiary. During the period beginning on the date of the
Recipient's termination of employment or affiliation by reason of Disability and
ending on the date the Option expires, the Option may be exercised as to the
number of Shares for which it could have been exercised at the time the
Recipient became disabled, subject to any adjustments under Section 8 herein.
(h) RETIREMENT. If the Recipient's employment with the Company
or subsidiary terminates by reason of normal retirement under the Company's
normal retirement policies, an Option granted the Recipient shall expire no
later than 90 days after the last day of employment, or, if earlier, on the date
specified in subsection (d) above. The Committee shall set the expiration date
in establishing the terms of the Option at grant or a later expiration date
subsequent to the Date of Grant but prior to the end of the 90-day period
following the Recipient's normal retirement. During the period beginning on the
date of the Recipient's normal retirement and ending on the date the Option
expires, the Option may be exercised as to the number of Shares for which it
could have been exercised on the retirement date, subject to any adjustment
under Section 8 herein.
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(i) TERMINATION OF SERVICE. If the Recipient ceases employment
or affiliation with the Company or subsidiary, for any reason other than death,
disability, retirement (as described above), or Cause, an Option granted to the
Recipient shall lapse immediately following the last day that the Recipient is
employed by or affiliated with the Company or subsidiary. However, the Committee
may, in its sole discretion, either at grant of the Option or at the time the
Recipient terminates employment, delay the expiration date of the Option to a
date after termination of employment; provided, however, that the expiration
date of an Incentive Stock Option may not be delayed more than 90 days following
the termination of the Recipient's employment or affiliation with the Company.
During any such delay of the expiration date, the Option may be exercised only
for the number of Shares for which it could have been exercised on such
termination date, subject to any adjustment under Section 8 herein.
(j) CHANGE OF CONTROL. If a Change of Control occurs, all
Options shall become immediately vested and exercisable by the Recipient.
(k) CONDITIONS REQUIRED FOR EXERCISE. Options granted to
Recipients under the Plan shall be exercisable only to the extent they are
vested according to the terms of the Option Agreement. Furthermore, Options
granted to Employees under the Plan shall be exercisable only if the issuance of
Shares pursuant to the exercise would be in compliance with applicable
securities laws, as contemplated by Section 7 of the Plan. Each Agreement shall
specify any additional conditions required for the exercise of the Option.
(l) TEN PERCENT SHAREHOLDERS. An Incentive Stock Option
granted to an Employee who, on the Date of Grant, owns stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
either the Company or any subsidiary, shall be granted at an exercise price of
110 percent of Fair Market Value on the Date of Grant and shall be exercisable
only during the five-year period immediately following the Date of Grant. In
calculating stock ownership of any person, the attribution rules of Section
424(d) of the Code will apply. Furthermore, in calculating stock ownership, any
stock that the Employee may purchase under outstanding options will not be
considered.
(m) MAXIMUM OPTION GRANTS. The aggregate Fair Market Value,
determined on the Date of Grant, of stock in the Company with respect to which
any Incentive Stock Options under the Plan and all other plans of the Company or
its subsidiary (within the meaning of Section 422(b) of the Code) may become
exercisable by any individual for the first time in any calendar year shall not
exceed $100,000.
(n) METHOD OF EXERCISE. An Option granted under this Plan
shall be deemed exercised when the person entitled to exercise the Option (i)
delivers written notice to the President of the Company (or his delegate, in his
absence) of the decision to exercise accompanied by a voting proxy for the
Shares to be received on exercise, (ii) concurrently tenders to the Company full
payment for the Shares to be purchased pursuant to the exercise, and (iii)
complies with such other reasonable requirements as the Committee establishes
pursuant to Section 7 of the Plan. Payment for Shares with respect to which an
Option is exercised may be made in cash, or by certified check, or wholly or
partially in the form of Common Stock having a Fair Market Value equal to the
exercise price (subject to any rules established by the Committee with respect
to required holding period or portion of exercise price that can be paid in such
shares), or by cashless exercise using a registered broker-dealer in which
irrevocable instructions are delivered to a broker to promptly deliver to the
Company the amount of sale or loan proceeds necessary to pay the exercise price,
all subject to the rules that the Committee establishes. No
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<PAGE> 7
person will have the rights of a shareholder with respect to Shares subject to
an Option granted under this Plan until a certificate or certificates for the
Shares have been delivered to him. A partial exercise of an Option will not
affect the holder's right to exercise the Option from time to time in accordance
with this Plan as to the remaining Shares subject to the Option.
(o) DESIGNATION OF BENEFICIARY. Each Recipient shall
designate, in the Option Agreement he executes, a beneficiary to receive Options
awarded hereunder in the event of his death prior to full exercise of such
Options; provided, that if no such beneficiary is designated or if the
beneficiary so designated does not survive the Recipient, the estate of such
Recipient shall be deemed to be his beneficiary. Recipients may, by written
notice to the Committee, change the beneficiary designated in any outstanding
Option Agreements.
(p) TRANSFERABILITY. An Option granted under this Plan is not
transferable except by will or the laws of descent and distribution. During the
lifetime of the Recipient, all rights of the Option are exercisable only by the
Recipient.
7. TAXES; COMPLIANCE WITH LAW; APPROVAL OF REGULATORY BODIES; LEGENDS.
The Company shall have the right to withhold from payments (including shares
otherwise to be received on exercise) otherwise due and owing to the Recipient
(or his beneficiary) or to require the Recipient (or his beneficiary) to remit
to the Company in cash upon demand an amount sufficient to satisfy any federal
(including FICA and FUTA amounts), state, and/or local withholding tax
requirements at the time the Recipient (or his beneficiary) recognizes income
for federal, state, and/or local tax purposes with respect to any Option under
this Plan.
Options can be granted, and Shares can be delivered under this Plan,
only in compliance with all applicable federal and state laws and regulations
and the rules of all stock exchanges on which the Company's stock is listed at
any time. An Option is exercisable only if either (a) a registration statement
pertaining to the Shares to be issued upon exercise of the Option has been filed
with and declared effective by the Securities and Exchange Commission and
remains effective on the date of exercise, or (b) an exemption from the
registration requirements of applicable securities laws is available. This Plan
does not require the Company, however, to file such a registration statement or
to assure the availability of such exemptions. Any certificate issued to
evidence Shares issued under the Plan may bear such legends and statements, and
shall be subject to such transfer restrictions, as the Committee deems advisable
to assure compliance with federal and state laws and regulations and with the
requirements of this Section. No Option may be exercised, and Shares may not be
issued under this Plan, until the Company has obtained the consent or approval
of every regulatory body, federal or state, having jurisdiction over such
matters as the Committee deems advisable.
Each person who acquires the right to exercise an Option may be
required by the Committee to furnish reasonable evidence of ownership of the
Option as a condition to his exercise of the Option. In addition, the Committee
may require such consents and releases of taxing authorities as the Committee
deems advisable.
8. ADJUSTMENT UPON CHANGE OF SHARES. If a reorganization, merger,
consolidation, reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering, or other expansion or
contraction of the Stock of the Company occurs, the number and class of Shares
for which Options are authorized to be granted under this Plan, the number and
class of Shares then subject to Options previously granted to Employees under
this Plan, and the price per Share payable upon exercise of each Option
outstanding under this Plan
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shall be equitably adjusted by the Committee to reflect such changes. To the
extent deemed equitable and appropriate by the Board, subject to any required
action by shareholders, in any merger, consolidation, reorganization,
liquidation or dissolution, any Option granted under the Plan shall pertain to
the securities and other property to which a holder of the number of Shares of
stock covered by the Option would have been entitled to receive in connection
with such event.
9. INITIAL PUBLIC OFFERING SALE RESTRICTIONS. Each Recipient, by
acceptance of an Option hereunder, agrees that in the event of an initial public
offering of Stock made by the Company under the Securities Act of 1933, as
amended (the "Securities Act"), the Recipient shall not offer, sell, contract to
sell, pledge, hypothecate, grant any option to purchase or make any short sale
of, or otherwise dispose of any shares of Stock of the Company or any rights to
acquire Stock of the Company for such period of time as may be established by
the underwriter for such initial for such public offering; provided, however,
that such period of time shall not exceed one hundred eighty (180) days from the
effective date of the registration statement to be filed in connection with such
initial public offering. The foregoing limitations shall not apply to any shares
of Stock registered under the Securities Act.
10. LIABILITY OF THE COMPANY. The Company and its subsidiaries shall
not be liable to any person for any tax consequences incurred by a Recipient or
other person with respect to an Option.
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11. OPTION SHAREHOLDER ACTION. If prior to completion of a public
offering of Shares of the Company, all or substantially all of the Shares of the
Company are to be sold, or upon a merger or reorganization or similar
transaction, the Shares of the Company or any class thereof, are to be exchanged
for securities of another company then in such event, each Recipient shall be
obliged to sell or exchange, as the case may be, the Shares such Optionee
acquired under the Plan in accordance with instructions provided by the Board.
12. AMENDMENT AND TERMINATION OF PLAN. The Board may alter, amend, or
terminate this Plan from time to time without approval of the shareholders of
the Company, except that no amendment shall be made which, without the approval
of the shareholders of the Company would (i) increase the number of shares
reserved for purposes of the Plan, (ii) change the class of persons eligible to
participate in the Plan, or (iii) extend the option period as set forth in
Section 6. The Board may condition any amendment on the approval of the
shareholders of the Company if such approval is necessary or advisable with
respect to tax, securities or other applicable laws to which the Company, the
Plan, Recipients or Eligible Persons are subject. Any amendment, whether with or
without the approval of shareholders of the Company, that alters the terms or
provisions of an Option granted before the amendment (unless the alteration is
expressly permitted under this Plan) will be effective only with the consent of
the Recipient to whom the Option was granted or the holder currently entitled to
exercise it.
13. EXPENSES OF PLAN. The Company shall bear the expenses of
administering the Plan.
14. DURATION OF PLAN. Options may be granted under this Plan only
during the 10 years immediately following the effective date of this Plan.
15. APPLICABLE LAW. This Plan and options issued hereunder shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia applicable to contracts made and to be performed therein without
giving effect to the principles of conflict of laws.
16. EFFECTIVE DATE. The effective date of this Plan shall be the
earlier of (i) the date on which the Board adopts the Plan or (ii) the date on
which the Shareholders approve the Plan.
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EXHIBIT 10.40
LAROCHE INDUSTRIES INC.
MANAGEMENT STOCK-BASED INCENTIVE PLAN
<PAGE> 2
LAROCHE INDUSTRIES INC.
MANAGEMENT STOCK-BASED INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I NAME, PURPOSE AND DEFINITIONS...................................................1
Section 1.1 Purpose..............................................................1
Section 1.2 Definitions..........................................................1
ARTICLE II ELIGIBILITY....................................................................3
ARTICLE III AWARDS........................................................................3
Section 3.1 General..............................................................3
Section 3.2 Phantom Shares.......................................................3
Section 3.3 Other Awards.........................................................3
ARTICLE IV AWARD AGREEMENTS...............................................................4
Section 4.1 General .............................................................4
Section 4.2 Required Terms ......................................................4
ARTICLE V PAYMENT OF BENEFITS.............................................................5
Section 5.1 Entitlement to Benefits .............................................5
Section 5.2 Time of Payment .....................................................5
Section 5.3 Form of Payment .....................................................5
ARTICLE VI ADMINISTRATION.................................................................5
Section 6.1 General .............................................................5
Section 6.2 Duties ..............................................................5
Section 6.3 Powers ..............................................................5
Section 6.4 Claim for Benefits...................................................6
ARTICLE VII ADJUSTMENTS UPON CHANGES IN CAPITALIZATION....................................6
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VIII CHANGES OF CONTROL..........................................................6
Section 8.1 General .............................................................6
Section 8.2 Definition of Change of Control .....................................7
ARTICLE XI AMENDMENT AND TERMINATION......................................................7
Section 9.1 Amendment of Plan ...................................................7
Section 9.2 Termination of Plan .................................................8
Section 9.3 Procedure for Amendment or Termination .............................8
ARTICLE X MISCELLANEOUS...................................................................8
Section 10.1 Rights of Employees ................................................8
Section 10.2 Unfunded Status ....................................................8
Section 10.3 Limits on Liability ................................................8
Section 10.4 No Illegal Transactions ............................................9
Section 10.5 Governing Law ......................................................9
Section 10.6 Section References .................................................9
</TABLE>
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LAROCHE INDUSTRIES INC.
MANAGEMENT STOCK-BASED INCENTIVE PLAN
ARTICLE I
NAME, PURPOSE AND DEFINITIONS
LaRoche Industries Inc. (the "Company"), a Delaware corporation, hereby
establishes the LaRoche Industries Inc. Management Stock-Based Incentive Plan as
set forth herein and as may from time to time be amended (the "Plan"), effective
March 1, 1998.
Section 1.1 Purpose. The purpose of the Plan is to benefit the Company
and stockholders by enabling key management employees of the Company to acquire
a financial interest in the Company. The Plan is intended to aid the Company in
attracting and retaining key management employees, to stimulate the efforts of
those individuals and strengthen their desire to remain in the employ of the
Company.
Section 1.2 Definitions. Whenever used in the Plan, unless the context
clearly indicates otherwise, the following terms shall have the following
meanings:
(a) "Award" or "Awards" means an award granted pursuant to Article III.
(b) "Award Agreement" means an agreement described in Article IV hereof
entered into between the Company and a Participant, setting forth the terms,
conditions and limitations applicable to the Award granted to the Participant.
(c) "Beneficiary" means the Participant's spouse or, if the Participant
is not married at the date of the Participant's death, the Participant's estate.
(d) "Board" means the Board of Directors of the Company as it may be
comprised from time to time.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute and applicable regulations.
(f) "Committee" means the Compensation Committee of the Board.
(g) "Company" means LaRoche Industries Inc., a Delaware corporation,
and any subsidiary or successor corporation.
(h) "Fair Market Value" in reference to the Stock of the Company means
as of a given date, the fair market value determined by the Committee on the
basis of available prices for the Stock or in such manner as the Committee shall
agree. The Committee shall determine the fair market value of any security that
is not publicly traded, using such criteria as it shall determine, in its sole
discretion, to be appropriate for such valuation.
(i) "Management" means any individual who is a salaried employee of the
Company.
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(j) "Maturity Value" means the increase in Fair Market Value of a
Phantom Stock unit from the grant date specified in the Participant's Award
Agreement to the Payment Date, as determined by the Committee.
(k) "Participant" means management personnel designated by the
Committee to be eligible and who have received an Award pursuant to this Plan.
(l) "Payment Date" means the third anniversary of the effective date of
an Award Agreement.
(m) "Phantom Stock" means a unit equivalent to a share of Stock as of
the date of the Award. The award of Phantom Stock units shall not entitle the
employee to any dividend, voting or other rights of a shareholder with respect
to such Phantom Stock units.
(n) "Stock" means the common stock, par value $1.00 per share, of the
Company.
ARTICLE II
ELIGIBILITY
Awards may be granted to any employee who is or class of employees who
are designated as Participants by the Committee. The Committee shall determine
which employees shall be Participants, the types of Awards to be made to
Participants, and the terms, conditions, and limitations applicable to the
Awards.
ARTICLE III
AWARDS
Section 3.1 General. The Committee may, in its sole discretion, grant
Awards singly, in tandem, or in combination with other Awards under this Plan or
any other benefit plan of the Company. Subject to the other provisions of this
Plan, Awards also may be granted in combination or in tandem with, in
replacement of, or as alternatives to, grants or rights under this Plan and any
other benefit plan of the Company.
Section 3.2 Phantom Shares. Phantom Stock units may be awarded under
this Plan from time to time based on such terms and conditions as the Committee
deems appropriate provided that such Awards shall not be inconsistent with the
terms and purposes of this Plan. The Committee shall determine the performance
measurements, if any, vesting and other conditions applicable to such Phantom
Stock units and may prescribe different provisions for different employees or
classes of employees.
Section 3.3 Other Awards. The Committee may from time to time grant
other Stock and Stock-based Awards under the Plan, including without limitation,
Awards pursuant to which shares of Stock are or may in the future be acquired,
Awards denominated in Stock units and securities convertible into shares of
Stock. The Committee shall determine the terms and conditions of such other
Stock and Stock-based Awards provided that such Awards shall not be inconsistent
with the terms and purpose of this Plan.
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ARTICLE IV
AWARD AGREEMENTS
Section 4.1 General. Each Award under this Plan shall be evidenced by
an Award Agreement setting forth the number of units subject to the Award and
such other terms and conditions applicable to the Award as are determined by the
Committee.
Section 4.2 Required Terms. In any event, Award Agreements shall
include, at a minimum, explicitly or by reference, the following terms:
(a) Nonassignability. The Awards under the Plan and the benefit
attributable thereto shall not be assigned, pledged, or otherwise transferred
except by will or by the laws of descent.
(b) Termination of Employment. In the event of the termination of a
Participant's employment with the Company for any reason prior to vesting, a
Participant shall forfeit all nonvested Phantom Stock units.
(c) Rights of Stockholder. A Participant shall have no rights as a
stockholder with respect to any interests covered by an Award. Except as
provided in Article VII hereof, no adjustment shall be made for dividends or
other rights, unless the Award Agreement specifically requires such adjustment,
in which case grants of dividend equivalents or similar rights shall not be
considered to be a grant of any stockholder right.
(d) Withholding. Withholding of applicable taxes required by law from
all amounts paid in satisfaction of an Award shall be satisfied by withholding
the applicable amount from any benefit due a Participant under the Plan and
paying the net amount of such benefit in cash to the Participant.
(e) Other Terms. The Committee shall determine such other terms as are
necessary and appropriate to effect an Award to the Participant including but
not limited to the term of the Award, vesting provisions, deferrals, any
requirements for continued employment with the Company or a subsidiary, any
other restrictions or conditions (including performance requirements) on the
Award and the method by which restrictions or conditions lapse, the effect on
the Award of a Change of Control as defined in Article VIII, or the price,
amount, or value of Awards.
ARTICLE V
PAYMENT OF BENEFITS
5.1 Entitlement to Benefits. The Award Agreement shall specify the
conditions that must be satisfied in order for a Participant to become vested in
Phantom Stock units. These conditions may include financial and other
performance requirements, continued employment and other measurements deemed
appropriate by the Committee.
5.2 Time of Payment. A Participant shall be entitled to distribution of
the Maturity Value of vested Phantom Stock within 90 days following the Payment
Date.
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5.3 Form of Payment. Payment of a Participant's vested Phantom Stock
units shall be made in a lump sum cash payment.
ARTICLE VI
ADMINISTRATION
Section 6.1 General. The Plan and all Awards pursuant thereto shall be
administered by the Committee. A majority of the members of the Committee shall
constitute a quorum. The vote of a majority of a quorum shall constitute action
by the Committee.
Section 6.2 Duties. The Committee shall have the duty to administer the
Plan, and to determine periodically the Participants in the Plan and the nature,
amount, pricing, timing, and other terms of Awards to be made to such
individuals.
Section 6.3 Powers. The Committee shall have all powers necessary to
enable it to carry out its duties under the Plan properly, including without
limitation the power to interpret and administer the Plan. All questions of
interpretation with respect to the Plan, the number of units granted, and the
terms of any Award Agreements shall be determined by the Committee, and its
determination shall be final and conclusive upon all parties in interest. In the
event of any conflict between an Award Agreement and the Plan, the terms of the
Plan shall govern. In addition, the Committee may delegate to the officers or
employees of the Company the authority to execute and deliver such instruments
and documents, to do such acts and things, and to take all such other steps
deemed necessary, advisable or convenient for the effective administration of
the Plan in accordance with its terms and purpose. The Committee may, in its
discretion and consistent with the terms of the Plan, the requirements of other
applicable law, and the terms of an Award Agreement, amend, modify, or waive the
provisions of an Award Agreement or grant a new Award with respect to or in
replacement of an existing Award; provided, however, that no such amendment,
modification, or waiver shall, without the Participant's consent, alter or
impair any rights or obligations under an Award Agreement unless specifically
permitted by the Award Agreement.
Section 6.4 Claim for Benefits. If any claim for benefits, which must
initially be submitted in writing to the Compensation Committee, is denied (in
whole or in part), the claimant must receive notice of such denial in writing,
written in a manner calculated to be understood by the claimant, setting forth
the reasons for such denial. A claimant may request that the Compensation
Committee review any such denial by submitting, in writing, a written request
within 30 days of such initial denial, setting forth the specific basis upon
which the Participant bases his or her claim for benefits. In the event a claim
for benefits is denied at the last stage of the Plan's administrative review
proceedings, and in the event the claimant continues to contest such denial, the
claim shall be settled by binding arbitration and the decision of the arbitrator
shall be final and binding on the parties.
ARTICLE VII
ADJUSTMENTS UPON CHANGES
IN CAPITALIZATION
In the event of a reorganization, recapitalization, Stock split, Stock
dividend, exchange of
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Stock, combination of Stock, merger, consolidation or any other change in
corporate structure of the Company affecting the Stock, or in the event of a
sale by the Company of an or a significant part of its assets, or any
distribution to its stockholders other than a normal cash dividend, the
Committee shall make appropriate adjustment in the number, kind, price and value
of outstanding Awards as it determines appropriate so as to prevent dilution or
enlargement of rights, unless the Award provides otherwise.
ARTICLE VIII
CHANGE OF CONTROL
Section 8.1 General. In the event of a Change of Control of the
Company, in addition to any action required or authorized by the terms of an
Award Agreement, the Committee may, in its discretion, recommend that the Board
of Directors take any of the following actions as a result of, or in
anticipation of, any such event to assure fair and equitable treatment of the
Plan Participants:
(a) accelerate time periods for purposes of vesting in, or realizing
gain from, any outstanding Award made pursuant to the Plan;
(b) offer to purchase any outstanding Award made pursuant to this Plan
from the holder for its equivalent cash value, as determined by the Committee,
as of the date of the Change of Control; or
(c) make adjustments or modifications to outstanding Awards as the
Committee deems appropriate to maintain and protect the rights and interests of
Plan Participants following such Change of Control.
Any such action approved by the Board of Directors shall be conclusive and
binding on the Company and Plan Participants.
Section 8.2 Definition of Change of Control. For the purposes of this
Section, a "Change of Control" shall mean the earliest date on which one of the
following events shall occur:
(a) any consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation, or pursuant to which shares of the
Company's common stock are converted into cash, securities or other property,
other than a consolidation or merger of the Company in which the holders of the
Company's common stock immediately prior to the merger have substantially the
same proportionate ownership of common stock of the surviving corporation
immediately after the consolidation or merger, or
(b) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all the assets of the
Company, or
(c) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, or
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(d) any transaction or series of related transactions (whether as a
result of privately negotiated purchases or otherwise) in which any person or
persons not currently a shareholder shall become the beneficial owner(s) of
securities of the Company representing 51% or more of the combined voting power
of the Company's securities having a right to vote in the election of Board
members.
ARTICLE IX
AMENDMENT AND TERMINATION
Section 9.1 Amendment of Plan. The Company expressly reserves the
right, at any time and from time to time, to amend in whole or in part any of
the terms and provisions of the Plan and any or all Award Agreements under the
Plan for whatever reason(s) the Company may deem appropriate; provided, that no
such amendment shall reduce the accrued value of vested Phantom Stock units as
of the date of such amendment.
Section 9.2 Termination of Plan. The Company expressly reserves the
right, at any time, to terminate the Plan and any or all Award Agreements under
the Plan for whatever reason(s) the Company may deem appropriate, including,
without limitation, termination as to any participating subsidiary, employee, or
class of employees; provided, that vested Phantom Stock units shall be
surrendered for their equivalent cash value as of the termination date.
Section 9.3 Procedure for Amendment or Termination. Any amendment to
the Plan or termination of the Plan shall be made by the Company by resolution
of the Board and shall not require the approval or consent of any subsidiary,
Participant, or Beneficiary in order to be effective.
ARTICLE X
MISCELLANEOUS
Section 10.1 Rights of Employees. Status as an eligible employee shall
not be construed as a commitment that any Award will be made under the Plan to
such eligible employee or to eligible employees generally. Nothing contained in
the Plan (or in any other documents related to this Plan or to any Award) shall
confer upon any employee personnel or Participant any right to continue in the
employ or other service of the Company or constitute any contract or limit in
any way the right of the Company to change such person's compensation or other
benefits or to terminate the employment of such person with or without cause.
Section 10.2 Unfunded Status. The Plan shall be unfunded. Neither the
Company nor the Board of Directors shall be required to segregate any assets
that may at any time be represented by Awards made pursuant to the Plan. Neither
the Company, the Committee, nor the Board of Directors shall be deemed to be a
trustee of any amounts to be paid under the Plan.
-6-
<PAGE> 10
Section 10.3 Limits on Liability. Any liability of the Company to any
Participant with respect to an Award shall be based solely upon contractual
obligations created by the Plan and the Award Agreement. Neither the Company nor
any member of the Board of Directors or the Committee, nor any other person
participating in any determination of any question under the Plan, or in the
interpretation, administration or application of the Plan, shall have any
liability to any party for any action taken or not taken, in good faith under
the Plan and that do not constitute willful misconduct. To the extent permitted
by applicable law, the Company shall indemnify and hold harmless each member of
the Board of Directors and the Committee from and against any and all liability,
claims, demands, costs, an expenses (including the costs and expenses of
attorneys incurred in connection with the investigation or defense of claims) in
any manner connected with or arising out of any actions or inactions in
connection with the administration of the Plan except for such actions or
inactions which are not in good faith or which constitute willful misconduct.
Section 10.4 No Illegal Transactions. The Plan and all Awards granted
pursuant to it are subject to all laws and regulations of any governmental
authority which may be applicable thereto. Any provision of the Plan or any
Award notwithstanding, Participants shall not be entitled to exercise Awards or
receive the benefits thereof and the Company shall not be obligated to pay any
benefits to a Participant if such exercise, delivery, receipt or payment of
benefits would constitute a violation by the Participant or the Company or any
provision of any such law or regulation.
Section 10.5 Governing Law. The laws of the State of Georgia shall be
controlling in all matters relating to the Plan.
Section 10.6 Section References. All references in this Plan to
sections or articles shall refer to sections and articles of this Plan unless
specifically noted otherwise.
LaRoche Industries Inc.
By:
----------------------------------
Its:
---------------------------------
-7-
<PAGE> 1
EXHIBIT 10.41
LAROCHE INDUSTRIES INC.
ANNUAL INCENTIVE PROGRAM
PURPOSE:
The purpose of this program is to provide an incentive for key
management employees to achieve targeted operational results and individual
goals on an annual basis. By achieving these goals, participants will advance
the interests of the Company and make it a leader in its industry.
ELIGIBILITY:
Participation in the program is limited to individuals nominated by the
Chief Executive Officer and approved by the Board of Directors. Participation is
limited to those employees upon whose judgment and efforts the company is
largely dependent for its success. You have been selected to participate in this
program.
ANNUAL BONUS OPPORTUNITY:
Attachment "A" sets forth your financial and individual goals.
Attachment "A" indicates that financial performance goals established by the
Administrator and the Threshold, Target and Maximum levels with corresponding
bonus amounts as percentages of base salary. Performance between the threshold
and target levels and target and maximum levels will be adjusted on a straight
line basis. The individual performance goals established by the Administrator
are also included on Attachment "A." The determination of whether your
performance satisfied the Threshold, Target or Maximum level will be made by the
Administrator after year-end. For each participant in the program, financial
goals are weighted between corporate and division.
PAYMENT OF BONUS:
The Board will determine the extent to which individual performance
goals have been achieved. All performance bonus payments will be made in a
single cash payment within 90 days after the end of the program year (i.e.,
February 28), subject to applicable tax withholding. A participant who
terminates employment for any reason during the year will not be entitled to a
bonus. Should a participant die after the end of a year for which he or she has
earned a performance bonus, payment of such bonus will be made to the
participant's surviving spouse (if any). Should there be no surviving spouse,
payment will be made to the participant's estate.
ADMINISTRATION:
The Board, or persons designated by the Board, will interpret and
administer the program. The Administrator is empowered with complete discretion
to determine all questions relating to eligibility and participation. The
Administrator also has the authority to make all determinations concerning a
participant's entitlement to a bonus, including computing and certifying the
extent to which operational and individual goals have been achieved. Decisions
or interpretations of any provision of the program by the Administrator shall be
final and conclusive.
<PAGE> 2
AMENDMENT AND/OR TERMINATION OF PLAN:
The Company reserves the right to amend the program at any time
(including Appendix "A") and to terminate the program in whole or in part at any
time.
-2-
<PAGE> 3
ATTACHMENT "A"
Financial and Individual Performance Goals
For
--------------------------------------
(Name of Participant)
--------------------------------------
Percentage of Base Salary Payable
Upon Achieving Performance Levels
<TABLE>
<CAPTION>
Threshold Performance Level Target Performance Level Maximum Performance Level
and and and
% of Base Salary Payable % of Base Salary Payable % of Base Salary Payable
------------------------ ------------------------ ------------------------
<S> <C> <C>
</TABLE>
-3-
<PAGE> 1
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
February 28, February 29, February 28,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before income taxes, minority interests
and extraordinary charge $ 19,655 $ 28,243 $ 32,122 $ 1,076 $ (9,452)
Less: Income from equity investments (3,257) (2,905) (2,647) (4,909) (2,698)
Distributions from equity investments 2,455 2,933 1,332 5,701 4,691
Fixed charges 14,021 17,751 17,853 17,992 21,346
Less: Accretion related to LCI stock (5,729) (3,654) -- -- --
Less: Capitalized Interest (89) -- -- (860) (1,089)
------------------------------------------------------------------
Earnings $ 27,056 $ 42,368 $ 48,660 $ 19,000 $ 12,798
==================================================================
FIXED CHARGES
Interest expense $ 7,118 $ 13,083 $ 15,973 $ 14,881 $ 17,510
Capitalized interest 89 -- -- 860 1,089
Interest portion of rental expense 1,085 1,014 1,880 2,251 2,747
Accretion related to LCI stock 5,729 3,654 -- -- --
------------------------------------------------------------------
Fixed charges $ 14,021 $ 17,751 $ 17,853 $ 17,992 $ 21,346
==================================================================
==================================================================
RATIO OF EARNINGS TO FIXED CHARGES 1.93 x 2.39 x 2.73 x 1.06 x (1)
==================================================================
</TABLE>
(1) For the year ended February 28, 1998, earnings are inadequate to cover
fixed charges by approximately $8.5 million.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
LaRoche International Inc., a Delaware corporation
LaRoche Overseas, Inc., a Delaware corporation
LaRoche Fortier Inc., a Delaware corporation
LaRoche Air Systems Inc., a Delaware corporation
LaRoche Chemicals FSC Inc., a Delaware corporation
LCI Stone Inc., a Delaware corporation
LII Europe S.A.R.L.
LII Management S.A.R.L.
LII Europe GmbH
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS - FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K - FISCAL YEAR 1998 - LAROCHE INDUSTRIES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 12,884
<SECURITIES> 0
<RECEIVABLES> 53,236
<ALLOWANCES> 527
<INVENTORY> 36,399
<CURRENT-ASSETS> 120,033
<PP&E> 321,685
<DEPRECIATION> 105,561
<TOTAL-ASSETS> 405,414
<CURRENT-LIABILITIES> 107,048
<BONDS> 207,418
3,505
0
<COMMON> 4
<OTHER-SE> 31,648
<TOTAL-LIABILITY-AND-EQUITY> 405,414
<SALES> 381,014
<TOTAL-REVENUES> 381,014
<CGS> 319,242
<TOTAL-COSTS> 319,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,510
<INCOME-PRETAX> (9,452)
<INCOME-TAX> (3,653)
<INCOME-CONTINUING> (5,799)
<DISCONTINUED> 0
<EXTRAORDINARY> (12,290)
<CHANGES> 0
<NET-INCOME> (18,089)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
