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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
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<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
</TABLE>
COMMISSION FILE NUMBER: 33-79532
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(LAROCHE INDUSTRIES INC. LOGO)
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 13-3341472
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
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.)
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, 1999 was
429,633.
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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 an
international diversified producer and distributor of inorganic and organic
chemicals and operates six production facilities, 22 customer service
distribution centers and three warehouses throughout the United States and in
Western Europe. The Company's products are divided into three business segments:
Nitrogen Products ("Nitrogen"), Electrochemical Products -- North America
("Electrochemicals -- N.A.") and Electrochemical Products -- Europe
("Electrochemicals -- Europe"). 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 -- North America 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 and derivatives used in production of insulating foam materials.
The Electrochemical Products -- Europe segment produces and markets chlor-alkali
chemicals throughout Western Europe.
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 Aluminum and Chemical Corporation ("Kaiser"). The Company
has focused on reconfiguring its asset base by disposing of various businesses
and assets which were not integral to the Company's long-term business
activities and reinvesting the proceeds derived from such dispositions into
businesses in which it believes it has strong competitive positions. In fiscal
1998, the Company expanded into Western Europe by purchasing a 50% joint venture
interest in a chlor-alkali operation in Pont-de-Claix, France ("ChlorAlp") and
another chlor-alkali plant near Frankfurt, Germany (the "Frankfurt facility")
from Hoechst Celanese. In November 1998, the Company announced a plan to sell
its Alumina chemicals business segment ("Aluminas"). The sale was completed in
June 1999 for approximately $39.5 million plus working. Negotiations are
currently underway to purchase the remaining 50% interest in ChlorAlp and the
Company expects to complete the transaction in the second quarter of fiscal
2000.
INDUSTRY OVERVIEW
NITROGEN PRODUCTS
Ammonia is produced from natural gas and is used primarily as a direct
application fertilizer, an ingredient in a number of industrial chemicals and
the basic building block to produce a variety of nitrogen-based products.
Ammonia is upgraded into a number of products including ammonium nitrate and
nitric acid.
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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.
The Company believes that the market for ammonium nitrate in the United
States is characterized as mature with industry experts forecasting relatively
stable demand growth of 1% per annum ("p.a.") through 2000, driven by demand for
ammonium nitrate for the fertilizer markets and slightly increasing demand for
ammonium nitrate primarily from the coal mining industry. Management believes
that, in general, 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 over time. However,
temporary over or under supply conditions are likely to occur, which may
significantly impact pricing. In fiscal 1999, prices were negatively impacted by
capacity increases in the global ammonia market.
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. The
type of crops planted and local soil conditions also affects nitrogen fertilizer
application rates.
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.
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
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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 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, domestic 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 1999. 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, 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 that involve
the processing of chlorine. As a result, there are relatively few merchant
producers of chlorine. According to a market study commissioned by the Company,
of the approximate 45 chlor-alkali producers in Western Europe, the three
biggest producers are Solvay S.A., Dow Chemical Company and Imperial Chemical
Industries PLC with 15%, 12% and 9% market share, respectively. The Company
believes its European operations comprise approximately 4% of the Western
European chlor-alkali market.
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 with the mercury cell process used
primarily in Europe.
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
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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.
Demand for HCFC's is declining as users begin to convert to alternative
products.
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 primary
nitrogen-based fertilizers are HDAN with total production capacity of 290,000
tons p.a. at its Cherokee, Alabama and Crystal City, Missouri facilities. 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, Illinois and Geneva,
Utah 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 pollution control,
refrigeration, and for the manufacture of other chemical products. For fiscal
year 1999, Nitrogen Products accounted for $188.8 million of net sales from
continuing operations (48.5% of Company total) and $17.1 million of EBITDA from
continuing operations before unallocated corporate expenses (51.6% of Company
total).
<TABLE>
<CAPTION>
NAMEPLATE CAPACITY (TONS P.A.)*
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TYPICAL CRYSTAL
COMPANY PRODUCT APPLICATIONS CHEROKEE CITY SENECA GENEVA FORTIER
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<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
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* total production capacity output from the facility
(1) The Fortier, Louisiana facility is owned by Avondale Ammonia, a joint
venture with Cytec in which the Company has a 50% interest. The Company
receives one half of the plant's production, approximately 220,000 tons
p.a., and may be required to purchase any excess production not consumed by
Cytec.
The Company has developed an extensive system of production and
distribution facilities located close to their target markets and 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
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maintained competitiveness through back-integration into ammonia, efficient
management of natural gas feedstock costs and some capacity expansions.
Fertilizer Grade Ammonium Nitrate. The Company primarily markets
fertilizer grade HDAN 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's 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 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 in its favored markets.
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 strategy
is 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.
In May 1995, as a result of the Oklahoma City bombing and the Company's
commitment to the community under Responsible Care(R), 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 resumed LDAN production at
this facility 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 national competitor, Tanner Industries. Other
competitors in the industrial ammonia merchant market generally 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
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also sells equipment, replacement parts, safety seminars and videos, ammonia
clean-out and other services and equipment rentals to 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 where practical. 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.
ELECTROCHEMICAL PRODUCTS -- NORTH AMERICA
The Company's Electrochemicals -- N.A. products consist of chlorine and
caustic soda (together, chlor-alkali) and fluorocarbons that are produced at its
Gramercy facility. 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. The predominant
fluorocarbon production is of HCFCs, the interim CFC replacement product. For
fiscal year 1999, Electrochemical Products -- N.A. accounted for $68.5 million
of net sales from continuing operations (17.6% of Company total sales) and $1.5
million of EBITDA from continuing operations (4.4% 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 that 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 Company employs the diaphragm cell technology at its manufacturing
facility. The 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.
At the Gramercy fluorocarbons facility, the Company has replaced its CFC
foam blowing agent (R-11) product line with the next generation foam blowing
agent, HCFC-141b, to comply with the federal government's mandated phaseout of
CFC. The Company has reduced its reliance on fluorocarbon products in general,
with expanded offerings and more intensive development of markets and facilities
for its other markets.
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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 generally has
contracts for up to twelve months; 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
Electrochemicals -- N.A. business.
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.
Electrical Power. At the Gramercy facility, Kaiser operates its alumina
plants adjacent to the Company's facility that produces electrochemical
products. Kaiser and the Company share a powerhouse complex, from which the
Company obtains electricity and steam for use in its domestic electrochemical
production, 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 that 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. During fiscal year
1996, the Company approved and began implementing certain capital improvements
at its powerhouse complex designed to reduce the electrical costs. These
improvements, which included the installation of a new back-up rectifier
assembly, refurbishment of generator turbine units and upgrading of the control
systems, were recently completed. The 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.
ELECTROCHEMICAL PRODUCTS -- EUROPE
The Electrochemicals -- Europe product base is comprised of chlorine,
chlorine derivative products and caustic soda produced at its Frankfurt and
ChlorAlp manufacturing facilities. The product markets for Electrochemical
Products -- Europe are similar to the chlorine and caustic markets for
Electrochemicals -- N.A. markets. For fiscal 1999, Electrochemical
Products -- Europe comprised $132.3 million of net sales from continuing
operations (34% of total sales) and $21.9 million of EBITDA from continuing
operations (66.4% of Company total) which includes the Company's interest in
ChlorAlp's EBITDA.
The Frankfurt facility is situated in an industrial park and has permitted
chlorine production capacity of 160,000 metric tons p.a. and permitted caustic
soda production capacity of 181,000 metric tons p.a. The Frankfurt operation
also includes a chlorinated methane manufacturing facility that 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 and R-22 (an HCFC). 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 Frankfurt facility's chlorine output is consumed by the
facility's methane chlorination plant and other on-site chemical production
companies. The caustic soda and hydrochloric acid produced by the
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Frankfurt facility are sold into an extensive customer base, located primarily
within Germany, and a wide variety of markets. The facility is the sole source
of caustic soda microprills that are primarily distributed throughout Western
Europe. The Frankfurt facility sells methylene chloride worldwide to numerous
customers for many different applications, while approximately 80% of the
chloroform output is sold to an on-site chemical company.
ChlorAlp (see ChlorAlp joint venture discussion below) has chlorine
production capacity of 240,000 metric tons p.a. and caustic soda production
capacity of 269,000 metric tons p.a. Chlorine produced by ChlorAlp is sold in
both liquid and gaseous forms. Approximately 95,000 metric tons per year of
chlorine is sold in the gaseous form and is distributed to customers by
pipeline. The balance of chlorine production is sold in liquid form and is
distributed in rail tank cars to customers throughout France, Italy,
Switzerland, Germany and the Benelux countries. Caustic soda is distributed
throughout France with deliveries by pipeline, rail cars and tank trucks.
The Company employs the diaphragm cell technology at its ChlorAlp facility
and mercury cell technology at its Frankfurt facility. While the manufacturing
process is substantially similar to that described for Electrochemicals -- N.A.,
statutory bans on diaphragms containing asbestos in France by 2002 have spurred
the ChlorAlp facility to develop an asbestos free diaphragm technology ("new
technology") over the last five years. The new technology has been employed in
approximately 15% of the processes and will totally replace the restricted
process technology before the deadline. In addition to removing asbestos from
the process, the Company expects to benefit from some electrical power savings
from the new technology.
Raw Materials. The primary raw material used in the production of chlorine
and caustic soda is salt. The Frankfurt facility obtains salt via river barge.
ChlorAlp receives salt from via a pipeline from a brine mine in Hauterives,
France, in which the Company, through ChlorAlp, has an ownership interest.
Electrical Power. The Frankfurt facility receives electric power from a
nearby plant. ChlorAlp receives its electric power from a powerhouse facility in
which it has an ownership interest and maintains management oversight (GIE CEVco
or "CEVco"). The Company feels this arrangement provides a strategic advantage
at the site.
ChlorAlp Joint Venture
In October 1997, the Company purchased a 50% interest in the French
chlor-alkali business ("the initial purchase arrangement") of Rhone-Poulenc
Chimie, S.A. (now known as Rhodia Chimie, "Rhodia"), a subsidiary of
Rhone-Poulenc, and entered into certain related arrangements with Rhodia (the
"Chlor-alkali Joint Venture"). The Company purchased, through LII Europe, its
wholly owned subsidiary, a 50% stock interest in ChlorAlp. The purchase price
for such interest was 42.5% of the agreed value of ChlorAlp (the "Initial
Purchase"), which was approximately equal to 447 million French francs ($76.3
million) which resulted in an initial investment by the Company of 190 million
French francs ("FRF") including a loan 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, Rhodia contributed a 265,000 metric ton p.a.
chlor-alkali production facility to ChlorAlp (the "PCL Facility"), as well as
certain other related assets and liabilities. In connection with the joint
venture, ChlorAlp entered into market-priced long term contracts to sell to
Rhodia (or its affiliates) chlorine and caustic soda, the amounts of which
historically have been approximately 65% of the PCL Facility's production
output.
In April, 1999, the Company announced its intention to purchase the
remaining 50% of the stock of ChlorAlp for approximately FRF 170 million
(approximately $28 million), subject to certain adjustments. Subject to terms
reached in the initial purchase arrangement, if the Company cannot or does not
purchase the remaining 50% of stock in ChlorAlp, Rhodia has the right to require
the Company to sell its 50% interest to
8
<PAGE> 10
Rhodia in one year for approximately FRF 95 million (approximately $16 million),
subject to certain adjustments.
The Company has agreed to reimburse, on a "stand-by" basis, Rhodia for the
Company's proportionate share of any amounts that Rhodia is ultimately required
to pay under its pre-existing guarantee of the obligations of CEVco, in respect
of steam turbines leased by CEVco under a certain operating lease (the "Turbine
Lease"). The Company's proportionate share under such arrangement was limited to
a term maximum of FRF 172 million. The remaining term of the Turbine Lease is
approximately four years. The Company's proportionate share of such lease
payments, based on current and expected ownership percentages, will not exceed
$2 million per year based upon current ownership percentages, increasing to $4
million per year should the Company purchase the remaining stock in ChlorAlp.
The Company and Rhodia have also entered into a shareholders agreement (the
"Shareholders' Agreement") which provides for, among other things, governance of
ChlorAlp. The initial purchase arrangement 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,
Rhodia would be able to initiate discussions with the Company to purchase the
remaining stock in ChlorAlp.
As part of the Chlor-alkali Joint Venture, ChlorAlp entered into agreements
with Rhodia 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 Rhodia 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 operates the Saint Fons chlorine vaporization, distribution and
bleach production facility that was transferred to ChlorAlp.
Pursuant to the Chlor-alkali Joint Venture, ChlorAlp intends to declare
dividends to its shareholders of 100% of its distributable 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 Rhodia to fund any capital expenditures. It is
anticipated that any debt facilities required by ChlorAlp will be borrowed
locally without support from either Rhodia or the Company.
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. This facility is being sold as part of the sale of the Alumina
Chemicals business segment. The Company had research and development
expenditures of approximately $1.8 million, $4.0 million and $3.8 million in
fiscal years 1999, 1998 and 1997, respectively. As the majority of the research
and development projects were related to the Alumina Chemicals business segment
and HCFC replacement (which ended in fiscal 1998), the Company does not
anticipate related expenditures will continue at this level.
PATENTS
The Company owns, has applied for, or has an interest in 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 being commercially viable and, in appropriate
circumstances, seeks licenses when others develop such products or processes.
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.
9
<PAGE> 11
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 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 contains 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 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,
10
<PAGE> 12
employee safety, pollution prevention and chemical distribution. The Company has
achieved "Practice in Place" status under this program.
EMPLOYEES
As of May 27, 1999, the Company had approximately 915 full-time employees
in continuing operations, approximately 335 who were represented by domestic
labor unions under various collective bargaining agreements and 360 represented
by European labor unions. Since 1986, the Company has had three domestic labor
disputes, none of which caused any material production delays. As of February
28, 1999, there were five labor union contracts expiring during fiscal 2000
covering 130 employees. Subsequent to that date, the Company reached agreement
with one of the unions representing 8 employees. The Company plans to seek
continued cooperation with the unions to set and achieve business objectives
while maintaining focus on both Company and union interests. The Company
considers its relations with its existing union and non-union employees to be
generally satisfactory.
ITEM 2. PROPERTIES
The Company has six facilities where its products are manufactured, 22
customer service centers from which it distributes anhydrous and aqua ammonia
and three warehouses that it uses for delivery and storage of fertilizer. The
Company owns electrochemical manufacturing facilities in or near Gramercy,
Louisiana and Frankfurt, Germany. The Company's four nitrogen manufacturing
facilities are located in Cherokee, Alabama; Crystal City, Missouri; Geneva,
Utah and Seneca, Illinois.
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>
Gramercy............. Electrochemical products: Owned
hydrochlorofluorocarbons, caustic soda
and chlorine facility.
Frankfurt............ Electrochemical products: chlorine, Equipment -- Owned
caustic soda and chlorinated methane Building & Land -- Leased
compounds facility.
Cherokee............. Nitrogen products: fertilizer and Owned
blasting grade ammonium nitrate facility
and distribution center.
Crystal City......... Nitrogen products: fertilizer and Owned
blasting grade ammonium nitrate
facility.
Geneva............... Nitrogen products: blasting grade Owned
ammonium nitrate facility.
Seneca............... Nitrogen products: blasting grade Owned
ammonium nitrate facility.
</TABLE>
The Company is an equity investor in two manufacturing joint ventures,
ChlorAlp and Avondale Ammonia. ChlorAlp 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, 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 ten of these centers. The Company also
sells related storage systems and equipment and provides certain customer
services at those centers. The Company owns or has joint venture interests in,
three agricultural warehouses located in Missouri, Illinois and Indiana, where
the Company stores and distributes phosphate fertilizer (DAP and
11
<PAGE> 13
TSP), solid urea, potash, nitrate and UAN solutions. The Company also owns
several sites that were once used in the production or distribution of
agricultural products, which currently are surplus to its needs.
The Credit Facility (as defined herein) is secured by an 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 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, one of which was subsequently
dismissed). These actions were brought predominantly by various mining concerns,
alleging that the Company violated the 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. On or about May 5, 1998, the plaintiff
dismissed the Company as a defendant in one of such civil lawsuits. The Company
has reached an agreement in principle with the plaintiff to settle all claims
against the Company. Under the terms of that settlement, which will be reflected
in a definitive settlement agreement, the Company will make an initial payment
of $.75 million and will make additional payments not to exceed $3.75 million,
based in part on the Company's net earnings, over the next five years. Minimum
payments of $.5 million are required on the first three anniversaries of
execution of the settlement and payments of $.3 million are required on the last
two anniversaries with an aggregate minimum, inclusive of the initial payment,
of $3 million.
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, 1999, have been approximately $4.4 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 Oil Company and Marathon Pipeline Company
(together "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
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<PAGE> 14
against Marathon, the Company and certain unnamed defendants alleging damages
suffered as a result of the gasoline spill and clean-up operations. Marathon's
lawsuit against the company was settled for $2 million in October 1998. The
Company has met its $1 million self-insured retention and its liability
insurance carrier has paid the balance. The Company has coverage for, and
continues to defend itself against, the two remaining claims. In March 1999,
plaintiffs accepted an offer by all defendants to settle the class action for a
lump sum of $1.5 million. The Company's allocated portion of the settlement is
$375,000, although, as stated above, the Company has insurance coverage for this
amount. The third claim has remained dormant since filing, and the Company,
although it believes it has meritorious defenses to the claim, believes that the
case can be settled for a nominal amount.
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 complied with this order, and in January 1999, the Company completed
construction on a new pipeline which is now in service. 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 1999.
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<PAGE> 15
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, 1999, the
Common Stock is held by 13 people, 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. Dividends of $.75
per share were declared and paid in each of the first two quarters and dividends
of $1.00 per share were declared and paid in the third quarter of fiscal 1999,
respectively, with no dividends declared for the fourth quarter. 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.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical financial
information of the Company's continuing operations. The following selected
historical consolidated financial information should be read in conjunction with
the consolidated financial statements and notes thereto 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(A)
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 1998(B) 1997 1996(C) 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $389,542 $342,570 $339,044 $387,079 $361,323
Cost of sales.......................... 357,750 287,535 276,134 295,876 279,974
-------- -------- -------- -------- --------
Gross profit........................... 31,792 55,035 62,910 91,203 81,349
Selling, general and administrative
expenses............................. 45,431 49,742 48,376 46,470 46,340
-------- -------- -------- -------- --------
(Loss) income from continuing
operations........................... (13,639) 5,293 14,534 44,733 35,009
Interest and amortization of debt
expense.............................. (20,314) (14,539) (12,249) (12,169) (10,339)
Income (loss) from equity
investments.......................... 2,614 (619) 31 798 (362)
Other income (loss) net................ 1,150 141 397 (243) 1,486
(Provision) benefit for income taxes... (2,779) 3,762 (1,072) (13,349) (11,419)
-------- -------- -------- -------- --------
(Loss) income from continuing
operations before
extraordinary charges...... $(32,968) $ (5,962) $ 1,641 $ 19,770 $ 14,375
======== ======== ======== ======== ========
Net (loss) income............ $(40,518) $(18,089) $ 659 $ 19,770 $ 11,452
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(d).............................. $ 33,070 $ 30,540 $ 34,977 $ 61,754 $ 49,097
Cash flows from continuing
operations........................... 7,503 36,441 23,187 57,857 225
Capital expenditures(e)................ 44,191 33,362 32,657 9,663 12,255
Ratio of earnings to fixed
charges(f)........................... -- -- 1.1x 2.7x 2.4x
Cash dividends......................... $ 1,198 $ 1,095 $ 912 $ 233 $ --
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.............. $ 5,380 $ 12,884 $ 1,165 $ 3,265 $ 5,900
Working capital........................ (27,039) 40,542 4,318 27,443 51,215
Total assets........................... 389,777 395,148 261,994 254,997 248,775
Total long-term debt(g)................ 202,221 207,418 104,441 112,940 119,659
Total debt(h).......................... 261,984 237,075 144,881 125,764 117,695
Common stock with redemption
features............................. 528 3,505 4,177 12,246 15,392
Stockholders' equity (deficit)......... (10,605) 31,648 50,906 51,296 34,478
</TABLE>
- ---------------
(a) In November 1998, the Company announced a plan to sell its Alumina chemicals
business. Accordingly the results of operations, financial position and cash
flows attributable to Aluminas have been segregated from that of continuing
operations. See the consolidated financial statements and notes thereto for
additional discussion.
(b) 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 Frankfurt facility.
(c) Fiscal year 1996 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.
(d) EBITDA represents income from operations plus net cash received from equity
investments plus depreciation, amortization and other non-cash charges
reflected in income from operations. EBITDA
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<PAGE> 17
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 increase in redemption value of certain stock
of a subsidiary held by minority stockholders. For the year ended February
28, 1999 and 1998, earnings were inadequate to cover fixed charges by
approximately $37.6 million and $8.5 million, respectively.
(g) Total long-term debt includes term debt, excluding any current portion.
(h) Total debt includes the current and non-current portions of term debt and
revolving credit facilities.
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<PAGE> 18
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.
INTRODUCTION
The Company is an international producer of inorganic and organic chemicals
operating in three principal business segments: Nitrogen Products ("Nitrogen"),
Electrochemical Products -- North America ("Electrochemicals -- N.A.") and
Electrochemical Products -- Europe ("Electrochemicals -- Europe"). Nitrogen
products are manufactured in five plants located in the United States, and are
sold into domestic fertilizer, blasting and industrial markets.
Electrochemicals -- N.A. products consist of chlorine and caustic soda
(chlor-alkali products) and fluorocarbons, which are manufactured in a single
plant in Louisiana. Electrochemicals -- Europe manufactures chlor-alkali
products and derivatives in two European facilities located in France and
Germany. For a more detailed description of the Company's business, see Item 1,
"Business".
The year ended February 28, 1999 was a challenging year for the Company.
The Company benefited from the strong performance of its European
electrochemical operations, acquired in the second half of fiscal 1998. However,
domestic prices for the Company's nitrogen and chlor-alkali products were at
trough levels for most of the year, resulting in a loss from continuing
operations of $13.6 million compared to income from operations of $5.3 million
in fiscal 1998.
In the second half of fiscal 1999, the Company began a series of strategic
initiatives designed to strengthen the Company's financial condition, focus
resources on core businesses, and position the Company for future growth and
profitability. In November, the Company announced a plan to sell its Aluminas
chemical business. The sale was completed in two stages -- the first was the
sale of a joint venture that markets alumina hydrate for $9.5 million, which was
completed on February 26, 1999. The remaining assets, including the principal
manufacturing facility in Baton Rouge, Louisiana, were sold on June 3, 1999 for
approximately $30 million plus working capital.
In January 1999, the Company announced a corporate restructuring that
involved decentralizing certain corporate functions and reducing the workforce
in the Atlanta corporate office by approximately 33%. Management expects the
restructuring to result in a more cost effective and responsive organization.
Largely as a result of the negative impact of market pricing on its
financial performance, the Company was not in compliance with certain covenants
included in its senior credit facility at November 30, 1998 and February 28,
1999. In April 1999, the Company's bank group approved an amendment that
modified certain financial covenant ratios and established a borrowing base for
the availability of funds. Management believes that the modified credit facility
will provide the liquidity and support it needs to meet its obligations and to
execute its strategic plan.
The fiscal year ended February 29, 2000 will continue to present challenges
to the Company. Domestic market prices are expected to remain at depressed
levels for most of the year. Consequently, the Company expects continuing
domestic operating losses during fiscal 2000. The electrochemical market in
Europe is forecasted to remain relatively stable in the coming year. In April
1999, the Company announced plans to acquire the remaining 50% of ChlorAlp,
which will strengthen the Company's European market position. The Company will
continue to focus internally on cost controls and efficient operations in order
to take full advantage of price recoveries when they do occur.
RESULTS FROM CONTINUING OPERATIONS
The Company incurred losses from continuing operations before extraordinary
charges of $33.0 million for the year ended February 28, 1999, compared to
losses of $6.0 million for the year ended February 28, 1998 and income of $1.6
million for the year ended February 28, 1997. The increase in 1999 losses was
primarily the result of near historic low prices for the Company's principal
North American products; unrealized losses on
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<PAGE> 19
certain gas contracts of $4.3; accrual of expected settlement costs associated
with two lawsuits of $3.5 million; increased pension costs from early retirement
programs of $1.9 million; and net corporate restructuring costs of $.5 million.
Operating losses from North American operations were partially offset by income
from the Company's European electrochemical operations, acquired in the second
half of fiscal 1998.
The loss from continuing operations before extraordinary charges for the
fiscal year ended February 28, 1998 was primarily the result of lower prices in
U.S. chlor-alkali and ammonia markets compared to fiscal 1997. The Company also
incurred additional interest expense as a result of additional debt incurred for
acquisitions and capital investments.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ---------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
Nitrogen products................. $188,775 48.5% $234,884 68.6% $242,408 71.5%
Electrochemical products -- North
America......................... 68,475 17.6 87,482 25.5 96,636 28.5
Electrochemical
products -- Europe.............. 132,292 33.9 20,204 5.9 -- --
-------- ----- -------- ----- -------- -----
Total.................... $389,542 100.0% $342,570 100.0% $339,044 100.0%
======== ===== ======== ===== ======== =====
(LOSS) INCOME FROM OPERATIONS:
Nitrogen products................. $ (366) (2.6)% $ 11,303 213.5% $ 11,710 80.6%
Electrochemical products -- North
America......................... (8,981) (65.8) 202 3.8 8,562 58.9
Electrochemical
products -- Europe.............. 3,424 25.1 (1,383) (26.1) -- --
Corporate......................... (7,716) (56.7) (4,829) (91.2) (5,738) (39.5)
-------- ----- -------- ----- -------- -----
Total.................... $(13,639) 100.0% $ 5,293 100.0% $ 14,534 100.0%
======== ===== ======== ===== ======== =====
EBITDA:
Nitrogen products................. $ 17,075 51.7% $ 26,783 87.7% $ 26,446 75.6%
Electrochemical products -- North
America......................... 1,454 4.3 7,125 23.3 14,269 40.8
Electrochemical
products -- Europe.............. 21,949 66.4 1,610 5.3 -- --
Corporate......................... (7,408) (22.4) (4,978) (16.3) (5,738) (16.4)
-------- ----- -------- ----- -------- -----
Total.................... $ 33,070 100.0% $ 30,540 100.0% $ 34,977 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
NET SALES
The Company generated net sales of $389.5 million for the year ended
February 28, 1999, compared with net sales of $342.6 and $339.0 million in 1998
and 1997, respectively. The increase during the current year was primarily due
to the inclusion of a full year of sales from the Frankfurt facility, acquired
in the fourth quarter of fiscal 1998. This increase was partially offset by
lower pricing in domestic chlor-alkali and ammonia markets compared to 1998 and
1997, as well as the disposition of certain nitrogen warehouse operations during
fiscal 1999.
Nitrogen products' net sales in fiscal 1999 decreased $46.1 million (19.6%)
compared to the prior year. Nitrogen net sales are sensitive to ammonia pricing,
which impacts direct ammonia sales and derivative products. Ammonia prices
averaged $116 per ton in 1999 compared to $156 per ton in 1998 and $194 per ton
in 1997. Lower prices resulted in a $23.1 million reduction in net sales. In
addition, the Company sold one of its four warehouse operations, and contributed
a second to a joint venture during fiscal 1999, which resulted in lower volume
and reduced net sales by $19.9 million.
Nitrogen sales for the year ended February 28, 1998 decreased 3.1% from the
preceding year as a result of lower ammonia prices and lower volumes caused by
unexpected outages at the Crystal City and Geneva facilities. These declines
were partially offset by higher sales volumes in the Company's warehouse
operations and higher prices for blasting grade ammonium nitrate.
18
<PAGE> 20
Electrochemicals -- N.A.'s net sales for the year ended February 28, 1999
decreased $19.0 million (21.7%) compared to fiscal 1998. The decrease was
primarily due to lower ECU pricing, which averaged $276 per ECU ton in fiscal
1999 compared to $318 and $343 per ECU ton in fiscal 1998 and 1997,
respectively. ECU prices dropped from approximately $365 per ton at the
beginning of fiscal 1999 to approximately $195 per ton in February 1999.
Industry forecasts indicate that prices will remain at depressed levels through
most of fiscal 2000, with some improvement near year end.
In fiscal 1998, Electrochemicals -- N.A.'s sales decreased 9.5% compared to
fiscal 1997 mainly as a result of lower ECU pricing and lower fluorocarbon
pricing and volume as a result of the federally mandated phase out of certain
CFC products.
Electrochemical products -- Europe sales consist of activity from the
Company's Frankfurt facility, which was acquired in December 1997. This facility
produces chlorine, most of which the Company further processes into chlorinated
methane and related derivative products. Caustic soda produced during the
production of chlorine is sold to the merchant market at prevailing market
prices.
COSTS AND EXPENSES
The Company's costs and expenses increased to $403.2 million for the year
ended February 28, 1999 compared to $337.2 million in 1998 and $324.5 million in
1997. The increase was mainly attributable to the acquisition of the Frankfurt
facility in December 1997, offset by a decrease in costs due to lower volumes in
Nitrogen and cost improvements across all business lines.
In Nitrogen, costs and expenses decreased from $223.6 million in 1998 to
$189.1 million in fiscal 1999 due to lower volumes resulting from the
divestiture of most of its warehouse business. In addition, Nitrogen purchases
approximately 30% of its ammonia requirements from third parties, and lower
ammonia prices compared to prior years also had a favorable impact on costs.
Selling, general and administrative expenses included a $2.5 million charge
related to the settlement of an ongoing civil suit (see discussion in the
section entitled "Environmental and Legal Actions" below). Fiscal 1998 costs and
expenses for Nitrogen decreased from fiscal 1997 as a result of lower ammonia
and natural gas prices, as well as labor and maintenance cost reductions
associated with cost saving initiatives.
Fiscal 1999 Electrochemicals -- N.A. costs and expenses decreased due to
lower volumes as a result of scheduled plant maintenance and lower energy costs
from fiscal 1998. Cost and expenses of Electrochemicals-N.A. in fiscal 1998 did
not change significantly from fiscal 1997. Decreased profitability was primarily
a result of lower prices.
Selling, general, and administrative costs for fiscal 1999 were $45.4
compared to $49.7 and 48.4 million in 1998 and 1997, respectively. Cost savings
initiatives in 1999 more than offset additional costs incurred as a result of
including the Frankfurt facility for the entire year, which added approximately
$9 million in selling, general and administrative costs.
OTHER ITEMS AFFECTING NET LOSS
Interest and amortization of debt expense. Interest and amortization of
debt expense increased to $20.3 million in fiscal 1999 from $14.5 million in
1998 and $12.2 million in 1997. The current year increase was due to higher
average debt balances incurred to fund acquisitions, capital investments and
current year operating losses. Amortization of debt issue costs associated with
the 1998 bond offering and bank credit facility also increased interest costs.
The increase from 1997 to 1998 was primarily due to debt incurred to fund
acquisitions in the fourth quarter of fiscal 1998.
Income (loss) from equity investments. The Company has equity investments
in ChlorAlp, an ammonia plant in Louisiana, and two nitrogen warehouses. The
Company had income from equity investments of $2.6 million for the year ended
February 28, 1999 compared to a loss in fiscal 1998 of $.6 million. The increase
was primarily due to operating income reported from ChlorAlp compared to a loss
in fiscal 1998 as a result of cost reduction programs and improved market
conditions. Joint venture activity was minimal for the year ended February 28,
1997.
19
<PAGE> 21
Other income, net. The Company reported net other income of $1.2 million
for the year ended February 28, 1999 compared to net other income of $.1 million
and $.4 million for the years ended February 28, 1998 and 1997, respectively.
Other income, net in fiscal 1999 included gains on the sale of two Nitrogen
warehouses of $2.0 million, foreign exchange translation gains of $1.0 and
insurance recoveries of $.8 million. These gains were offset by unrealized
losses on cross currency interest rate swaps of $1.7 million and a write-off of
unamortized debt issuance costs of $1.0 million.
Benefit (provision) for income taxes. Increased losses from continuing
operations before income taxes resulted in a benefit (provision) for income
taxes for fiscal year 1999 of $(2.8) million, including a charge for a $15.0
million valuation allowance, compared to a benefit of $3.8 million in fiscal
1998 and a provision for income taxes of $1.1 million in fiscal 1997. As a
result of the uncertainty as to when benefits arising from the fiscal 1999 loss
will be realized, and based on generally accepted accounting principles for
recognition of tax benefits associated with operating loss carryforwards, at
February 28, 1999, the Company recorded valuation allowances against the tax
benefit from the domestic net operating loss carryforwards and AMT credit
carryforward of $8.3 and $6.1, respectively. The effective tax rates related to
continuing operations were (9.2%), 38.7% and 39.5% for fiscal years 1999, 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
including certain call and prepayment premiums.
Discontinued operations. As more fully described in the section entitled
strategic transactions below, the Company sold its entire Aluminas operations in
two transactions. The Company has accounted for the financial results of this
business segment as a discontinued operation, and accordingly, has recorded a
loss on the sale of $5.7 million, net of income taxes of $3.6 million as of
February 28, 1999. The Company received net proceeds from the sale of $39.5
million and retained most of the working capital. As of February 28, 1999, the
net book value of assets sold was $52.3 million.
Below is a summary of operating results for Aluminas for the years ended
February 28, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................. $30,365 $38,444 $40,241
Operating loss............................................ (4,957) (115) (3,897)
EBITDA.................................................... 4,486 7,285 4,122
</TABLE>
EBITDA
EBITDA represents income from operations plus cash received from equity
investments, plus depreciation, amortization and other non-cash and
non-recurring transactions reflected in income from operations. In addition,
EBITDA includes the Company's 50% share of ChlorAlp's EBITDA. 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.
EBITDA from continuing operations for the years ended February 28, 1999,
1998 and 1997 was $33.1 million, $30.5 million and $35.0 million, respectively.
The decrease in EBITDA for the Nitrogen products segment of $9.7 million was due
primarily to lower agricultural prices caused by global increases in ammonia
production capacity. These decreases were somewhat offset partially by improved
margins primarily due to decreased ammonia raw material and natural gas costs.
EBITDA for Electrochemical Products -- North America decreased $5.7 million
(79.6%) primarily as a result of lower ECU prices for chlor-alkali products.
EBITDA for the Electrochemical Products -- Europe increased in fiscal 1999
mainly because of the inclusion
20
<PAGE> 22
of both the Frankfurt facility's and ChlorAlp's operating results for the entire
year in fiscal 1999. The European chlor-alkali markets have not seen the price
erosion that has been prevalent in the U.S. during fiscal 1999, and as a result,
operating profits remain strong in this segment. EBITDA was lower in 1998 than
in 1997 due mainly to lower ECU pricing in the U.S. chlor-alkali markets.
STRATEGIC TRANSACTIONS
The Company periodically implements strategic actions that it believes
affords it the opportunity to allocate resources to businesses that will enhance
profitability and growth. Significant strategic transactions during fiscal 1999
and fiscal 1998 are described below.
Dispositions. In November 1998, the Company announced a plan to sell its
Alumina Chemicals business segment as part of a strategic realignment aimed to
focus the Company's resources on its core commodity chemicals businesses, rather
than on specialty chemicals such as aluminas. On February 26, 1999 the Company
sold its 50% interest in a joint venture that manufactures alumina hydrate for
$9.5 million. The remaining assets were sold on June 3, 1999 for $30 million
plus working capital. The Company recorded a net loss after tax of $5.7 million
related to these sales for the year ended February 28, 1999.
Acquisitions. On December 31, 1997, the Company purchased certain
chlor-alkali and chlorinated methane manufacturing facilities located near
Frankfurt, Germany for a purchase price of $20.4 million. These facilities
produce chlorine, caustic soda, sodium hypochloride, calcium chloride, methyl
chloride, methylene chloride/chloroform and hydrochloric acid.
In October 1997, the Company purchased a 50% interest in ChlorAlp, a joint
venture with Rhodia, for approximately $35.5 million. The joint venture
manufactures chlorine and caustic soda for sale to the plastics industry and
merchant markets. The investment also includes an interest in a power generation
facility that provides electricity to the manufacturing operation. In April
1999, the Company announced that it would commence with the acquisition of the
remaining 50% interest in accordance with the terms of the original joint
venture agreement. The Company expects this transaction to be completed in the
second quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. For the year ended February 28, 1999, continuing
operations provided cash of $7.5 million compared with $36.4 million and $23.2
million for the years ended February 28, 1998 and 1997, respectively. The
decrease in net cash from operations in fiscal 1999 was primarily the result of
operating losses incurred in the current year and the timing of working capital
requirements as compared to the prior year. In fiscal 1998, the increase in net
cash provided by operating activities compared with fiscal 1997, was primarily
the result of net decreases in working capital requirements, including a change
in the timing of interest payments on subordinated debt. For the year ended
February 28, 1997, net cash provided by operations decreased as a result of
lower net income caused by a reduction in ECU prices and higher natural gas
costs as compared to the prior year.
Investing Activities. Cash used by investing activities related to
continuing operations was $44.0 million for fiscal 1999 compared to $84.8
million in 1998 and $36.6 million in 1997. Capital expenditures increased to
$44.2 million in 1999 compared to $33.4 million and $32.6 million in 1998 and
1997, respectively. As described above in "Strategic Transactions", cash of
$35.5 million was invested in ChlorAlp and $17.6 million was used to purchase
the Frankfurt facility in fiscal 1998. Other asset sales provided cash of $4.0
million in fiscal 1999 compared to a minimal amount in fiscal 1998 and $3.7
million in fiscal 1997.
Major capital expenditures during fiscal 1999 included a powerhouse project
and new brine supply line at the Gramercy facility, plant upgrades at the
Nitrogen division's Cherokee plant, and additional expenditures for the
Company's ongoing software implementation project. The Company intends to use
cash flows from operations and borrowings under the Credit Facility as the
source of funds for the future completion of projects mentioned above.
Cash provided by disposition transactions and used for other investing
activities of discontinued operations of $3.5 million includes proceeds of $9.5
million on the sale of a joint venture interest held by
21
<PAGE> 23
Aluminas (see section entitled "Strategic Transactions" above), net of capital
expenditures and plant turnarounds of approximately $6.0 million.
Financing Activities. During fiscal 1999, cash provided by operations was
not sufficient to fund capital investment and scheduled repayments of long-term
debt. Liquidity was provided by the Company's revolving credit facilities, which
had outstanding borrowings of $55.4 million as of February 28, 1999 compared
with $22.0 million as of February 28, 1998. During the year the Company made
payments under long-term debt agreements of $8.6 million, including an
accelerated fine payment of $1.2 million to the Department of Justice. The
Company also repurchased 8,344 shares of redeemable common stock for $2.3
million.
During fiscal 1998, the Company raised approximately $170.0 million in cash
from a subordinated bond offering, net of financing costs, and $35.0 million
from a term loan under a bank credit facility. Proceeds were used to refinance
existing subordinated notes, repay borrowings under an existing credit facility,
and to fund the Company's investments in ChlorAlp and the Frankfurt facility.
The Company also made its final payment on certain indebtedness to USX (the "USX
Notes").
In fiscal 1997, the Company had net borrowings of $32.9 million under a
bank credit facility. 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. Activity for the year also included payments of $11.2 million to
repurchase common stock of the Company.
The Company paid cash dividends to its common stockholders of $1.2, $1.1,
and $.9 million in the fiscal years ended February 28, 1999, 1998 and 1997,
respectively. However, there are presently no plans to pay dividends until the
Company returns to an appropriate level of profitability.
On February 28, 1999 the Company was not in compliance with certain
financial covenants contained in its bank credit facility. As a result, the
Company sought and was granted a modification of the credit facility, effective
February 28, 1999. Under the terms of the amended and restated agreement,
certain financial ratios were modified and the amount of funds that may be
borrowed under the facility was reduced from $125 million to $110 million, not
to exceed an amount based on trade receivables, inventory, and certain plant and
equipment. The modification also places restrictions on payments of dividends,
repurchases of common stock, capital expenditures, and acquisitions and
divestitures. In addition, because earnings during the period were not
sufficient to meet certain fixed charge ratios, limitations on borrowings and
investments are also in effect under the Company's senior subordinated notes.
Management has evaluated the Company's cash needs for the year ended
February 29, 2000, giving consideration to operating losses sustained in the
past two years and restrictions on the use of its credit facilities as described
above. Based on that evaluation, management believes that funds available under
its revolving credit facility, together with funds expected to be generated from
operations and sales of discontinued operations will be sufficient to fund
planned capital expenditures, strategic transactions, and otherwise meet its
cash obligations in the upcoming fiscal year. In addition, management believes
that the Company's operating results will be adequate to allow the Company to
comply with the modified terms of its credit agreement. However, there is no
guarantee that the Company will be able to achieve expected results if market
conditions are worse than expected. In such case, the Company may be required to
secure additional sources of capital, though there can be no assurances that the
Company will be able to secure additional capital on acceptable terms.
RISK MANAGEMENT
The Company utilizes certain financial instruments in connection with its
risk management.
Natural gas is the primary raw material used for the production of ammonia
in the Nitrogen Products segment and electricity in the Electrochemical Products
segments. The Company purchases its natural gas pursuant to market based
contracts with natural gas producers. The Company has a natural gas hedging
program designed to reduce the Company's exposure to natural gas price
volatility. 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. The Company also at times
utilizes option spread
22
<PAGE> 24
agreements ("collars") to establish a range of cost on a portion of its natural
gas requirements. Fixed price purchase commitments pursuant to the contracts
aggregated $7.0 million and $6.8 million as of February 28, 1999 and 1998.
In connection with its acquisition of ChlorAlp in fiscal 1998, the Company
indirectly obtained a joint venture interest in a power generation facility,
which uses natural gas to generate power for the manufacturing operation. Prices
for natural gas used in the facility are based on European fuel and gas oil
prices. In fiscal 1999, the Company, through a wholly owned European subsidiary,
entered into a spread oil swap agreement ("SOS agreement") for the purpose of
reducing its exposure to fluctuations in its natural gas prices. The contract
covers three years and is for a notional amount of 2,430,000 barrels. A portion
of the contract settles every six months in an amount determined on a monthly
basis, which is based on a defined spread between certain forward fuel and gas
oil prices multiplied by the notional quantity settled. As of February 28, 1999,
the market value of the SOS agreement was a $2.3 million unrealized loss as
determined by prevailing market prices.
The Company also participates in two cross currency interest rate swaps,
one in French francs and the other in German marks. These swaps were entered in
order to take advantage of lower European interest rates, and to hedge the
Company's net investment in foreign currency assets. Under these contracts, the
Company remits quarterly interest payments to its exchange partners in the
designated foreign currency and, in exchange, receives quarterly interest
payments from its exchange partners in U.S. dollars at agreed upon rates.
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, 1999, the Company had recorded $3.1 million in liabilities
associated with expected environmental obligations. 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 $1.9 million and are
anticipated to be paid over the next several 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 "Environmental Proceedings" under Item 3. Legal Proceedings.
Capital expenditures made to address environmental matters were
approximately $.9, $3.9 million and $7.8 million in fiscal years 1999, 1998 and
1997, 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 lawsuit were filed against the Company and Marathon. Marathon's lawsuit
against the company was settled for $2 million in October 1998. The Company has
met its $1 million self-insured retention and its liability insurance carrier
has paid the balance. The Company has coverage for, and continues to defend
itself against, the two remaining claims. In March 1999, plaintiffs accepted an
offer by all defendants to settle the class action for a lump sum of $1.5
million. The Company's allocated portion of the settlement is $375,000,
although, as stated above, the Company has insurance coverage for this amount.
The third claim has remained
23
<PAGE> 25
dormant since filing, and the Company, although it believes it has meritorious
defenses to the claim, believes that the case can be settled for a nominal
amount. See "-- Environmental Proceedings."
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, one of which was subsequently dismissed). These actions were
brought predominantly by various mining concerns, alleging that the Company
violated 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 filed answers denying liability in
such civil actions. The Company has reached an agreement in principle with the
plaintiff to settle all claims against the Company. Under the terms of that
settlement, which will be reflected in a definitive settlement agreement, the
Company will make an initial payment of $.75 million and will make additional
payments not to exceed $3.75 million, based in part on the Company's net
earnings, over the next five years. Minimum payments of $.5 million are required
on the first three anniversaries of execution of the settlement and payments of
$.3 million are required on the last two anniversaries with an aggregate
minimum, inclusive of the initial payment, of $3 million.
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. In
January 1999, the Company completed construction of a new pipeline which is now
in service. 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
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, Accounting for Derivative Financial Instruments and Hedging Activities
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. The statement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at their fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the instrument and the resulting designation. SFAS 133 must adopted for
all fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company has not yet determined the impact on the financial position or results
of operation from adoption of this standard.
24
<PAGE> 26
YEAR 2000 COMPLIANCE
The Company's Year 2000 project, which began in mid-1998, is a continuing
review and evaluation of business systems and process controls for the purpose
of identifying ways in which these systems and the Company could be adversely
affected by incorrectly processing date information on and after January 1, 2000
("Year 2000"). The Company is conducting its review and evaluation in four main
areas: Business Systems, Manufacturing Controllers and Processors, Third Party
Compliance, and Hardware. The process includes assessing the impact of the
calendar change to Year 2000 on all systems used by the Company and the
associated upgrade costs, upgrading systems that are not Year 2000 ready, and
testing and monitoring systems for Year 2000 readiness. A summary of the
Company's progress in each of these areas follows.
Business Systems. The implementation of a new enterprise-wide financial
and operational computer system during the past two years, completed in November
1998, has effectively eliminated exposure to any negative impact that Year 2000
may have had on the Company's ability to produce reliable information needed to
run its business. The software has been certified Year 2000 compliant by the
supplier, and critical components of the business system have been tested.
ChlorAlp, is also installing the same system, and expects to have completed its
implementation by July 1, 1999. These systems are critical for, among other
things, purchasing activities and payment, order processing and billing,
production management and inventory, payroll, and financial reporting.
Manufacturing Controllers and Processors. Certain of the Company's
manufacturing processes are dependent upon microprocessors and controllers, and
related software, to regulate and monitor the production of its principal
products. The Company has completed its assessment of these items, and did not
discover any instances where non-compliance would result in a disruption of
operations. The majority of instances of noncompliance involved certain
monitoring and data gathering functions. Replacements and upgrades of non-
compliant hardware and software are approximately 50% complete and are expected
to be finalized by July 1999. Testing for critical components will be conducted
during regularly scheduled plant shutdowns, and is expected to be completed by
September 1999.
Third Party. The Company has sent surveys to all significant vendors
inquiring about their Year 2000 readiness, and has received responses from
approximately 78%. Additional follow up procedures are planned for the first
half of 1999 to follow up on critical raw material and utility suppliers to
verify their compliance and to develop contingency plans if necessary. The
Company has not yet surveyed its key customers, but plans to begin this
assessment in mid 1999.
Hardware. Hardware includes the Company's computers, laptops, terminals,
and communications hardware such as routers and switches. In the course of
replacing its main business systems, the Company has upgraded much of its
hardware with systems that are Year 2000 compliant. The Company has completed
its assessment of the remaining hardware and has substantially completed
necessary upgrades. Testing and replacement of any remaining non-compliant
hardware are expected to be completed by June 1999.
Contingency Planning. The Company is currently assessing external sources
of risk and developing contingency plans through commercially reasonable
efforts.
Through February 28, 1999, costs of approximately $.3 million have been
incurred in identifying and correcting Year 2000 problems. The Company currently
estimates that the total cost of making its systems Year 2000 compliant will not
exceed $.6 million.
Based on the Company's efforts as described above, management believes that
it has identified and corrected all internal systems that could have had a
material adverse effect on the Company. Management also believes that it has
identified all significant external sources of risk, and is currently preparing
contingency plans to minimize any potential negative impact of such risks.
However, because certain of these risks are outside of the control of the
Company, there can be no assurance that the Company will be able to successfully
remedy problems that are discovered, and accordingly, there can be no assurance
that such non-compliance will not have a material adverse effect on the
Company's financial position and results of operation.
25
<PAGE> 27
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 governmental agricultural policy. 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
fertilizer seasonality, the timing of major maintenance activities and other
factors, interim results of operations may not be indicative of the results
expected for the full fiscal year.
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING INFORMATION
Certain statements and information contained in this Annual Report on Form
10-K, including in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and under "Business" in Item 1 and under
"Legal Proceedings" in Item 3, are forward-looking statements regarding
Management's current plans, objectives, and expectations for the future, which
are based on prevailing circumstances and information available at this time.
Accordingly, such statements and information involve inherent risks and
uncertainties, and actual results may differ materially from those discussed
therein. Forward-looking statements contained herein include: (a) statements
made concerning strategic plans for growth, (b) statements made regarding future
cash flows, compliance with debt covenants, and the availability of funds to
meet obligations and fund investments, (c) statements made regarding price
expectations in the Company's principal markets, and (d) statements made
regarding the outcome and impact on the Company's business, financial condition,
or results of operation of the Year 2000 issue and pending litigation and other
claims, disputes and legal proceedings. Factors that could cause actual results
to differ from those discussed in the forward-looking statements include:
fluctuations in commodity prices (including chlor-alkali, ammonia, and natural
gas), changes in domestic and international market conditions, changes in
competitive positions, government regulation, changes in labor relations, the
outcome of pending litigation and other claims, changes in general economic
conditions and other factors not enumerated herein that are impossible to
predict at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest rates,
foreign currency exchange rates and commodity prices. To manage the volatility
relating to these exposures, the Company enters into derivative transactions.
The Company does not hold or issue derivative financial instruments for trading
purposes. At February 28, 1999, the Company held derivative instruments intended
to hedge market risk exposure in each of the areas noted.
The Company generally manages its risk associated with interest rate
movements through a combination of variable and fixed rate debt and three
cross-currency interest rate swap agreements. The fair value of the variable
rate debt approximated the notional value, and the average interest rate for
fiscal 1999 was 7.5%. The fixed rate debt totaled $175,242 with a fair value of
approximately $104,165 and a weighted-average interest rate of 9.5%. See Note 7
to the Consolidated Financial Statements on page F-11. One of the cross-currency
interest rate swap contracts is a French franc ("FRF") agreement ("FRF
contract") maturing in fiscal 2003 which has a notional amount of $60,000 (FRF
372.4 million). The interest rate swap is based on the Company paying PIBOR plus
an agreed-upon spread (total rate of 3.81% at February 28, 1999) and receiving
LIBOR (5.25% at February 28, 1999). The two remaining cross-currency interest
rate swap agreements are German mark ("DEM") contracts ("DEM Contracts") each
maturing through 2004 and with original notional amounts of $25,000 (DEM 45
million). Principal notional value exchanges of $2,500 (DEM 4.5 million) are due
each fiscal year through the fiscal 2003 with the balance of $13,125 (DEM 23.6
million) due in fiscal 2004. The DEM interest swap is based on the Company
paying a fixed interest rate of 4.68% and receiving
26
<PAGE> 28
LIBOR (5.25% at February 28, 1999). The interest benefit or expense is
recognized as a component of current interest expense. See Note 13 to the
Consolidated Financial Statements on page F-21.
The cross-currency interest rate swaps also provide a measure of protection
against the impact of fluctuations in the foreign currency exchange rates on the
Company's net investment in foreign currency denominated assets. The implicit
contract rate of currency exchange in the FRF contract is 6.2 and in the DEM
contract is 1.8. The fair value of the FRF contract was ($2,871) and of the
combined DEM contacts was ($2,302) at fiscal 1999 year-end. Gains or losses
related to the portion of these agreements designated as hedges of the Company's
net foreign investment in accordance with generally accepted accounting
principles are included as a component of the accumulated comprehensive loss in
stockholder's (deficit) equity or as an offset to changes in values of advances
denominated in foreign currencies.
The Company relies upon the supply of natural gas in its production process
and has entered into fixed price purchase contracts, collars, swap agreements
and other contracts to manage the commodity based market risk exposure. All of
the natural gas contacts mature during fiscal 2000. Following is a summary of
key contract terms of each the natural gas derivative instruments (in
thousands):
<TABLE>
<CAPTION>
CONTRACT VOLUME CONTRACT PRICE
--------------- --------------
(in MMBTU's) (per MMBTU)
<S> <C> <C>
Fixed price purchase contracts............................ 24,255 $ 1.95
Collars................................................... 5,002 $1.76/$2.01
Put options............................................... 44,940 $ 2.10
</TABLE>
Additionally, the Company participates in a spread oil swap agreement to
provide protection against other energy-based commodity price market exposures.
Gains or losses on the commodity based derivative contracts are recognized as a
component of the related transaction.
See the Risk Management section of Management's Discussion and Analysis at
page 22 in this item and Note 13 to the Consolidated Financial Statements on
page F-21 for further discussion regarding these instruments.
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.
27
<PAGE> 29
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..................... 47 Chairman of the Board
Victoria E. LaRoche........................ 40 Vice Chairman of the Board
Harold W. Ingalls.......................... 51 Chief Executive Officer
Gerald B. Curran........................... 51 Vice President and Chief Financial Officer
Vice President, General Counsel and
Robert P. Wolf............................. 55 Secretary
Vincent R. Gurzo........................... 50 Vice President
William G. Osborne, Ph.D................... 58 Vice President
David A. Lillback.......................... 51 Vice President
Paul L. M. Beckwith, Ph.D. ................ 41 Director (resigned effective May 4, 1999)
John R. Hall............................... 66 Director
Johnnie Lou LaRoche........................ 70 Director
Louanne C. LaRoche......................... 43 Director
C. L. Wagner, Jr........................... 54 Director
George R. Wislar........................... 66 Director
Robert L. Yohe............................. 63 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.
Harold W. Ingalls. Chief Executive Officer. Mr. Ingalls joined the Company
as Vice President and Chief Financial Officer in July 1996 and was elected to
Chief Executive Officer in October 1998. Prior to joining the Company, Mr.
Ingalls served for approximately one 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.
Gerald B. Curran. Vice President and Chief Financial Officer. Mr. Curran
joined the Company as Vice President and Chief Financial Officer in October 1998
after having served in a financial management consulting role from July 1998
through October 1998. Prior to joining the Company, Mr. Curran worked with Waste
Management Inc. where he held senior financial and management positions for over
ten years.
28
<PAGE> 30
Robert P. Wolf. Vice President, General Counsel and Secretary. Mr. Wolf
joined the Company as Vice President, General Counsel and Secretary in November
1998. Prior to joining the Company, Mr. Wolf served as Senior Vice President and
General Counsel with Alumax Inc. from March 1997 through July 1998 and Vice
President and General Counsel from October 1989.
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 had been responsible for the Company's merger and acquisition
activity from May 1996 until October 1997 including negotiation of the Company's
European acquisitions. 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 named Vice President
in charge of the Company's chlor-alkali business in March 1998 and Vice
President of the Company's North American operations in January 1999. Prior to
these appointments, Mr. Lillback has been employed with the Company in various
management capacities since 1988, including Plant Manager at the Company's Baton
Rouge facility, Director of Strategic Organizational Planning and 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. Effective May 4, 1999, Dr. Beckwith
tendered his resignation from the Board of Directors.
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 Executive Officer. Mr. Hall served as
Ashland Inc.'s Chairman of the Board and Chief Executive Officer from 1981
through 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 since 1979.
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 &
29
<PAGE> 31
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., Calgon Carbon Corporation, Marsulex Inc. and
The Middleby Corporation. He is also a Trustee of Lafayette College.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides the compensation earned for fiscal years 1999,
1998 and 1997 by the Company's Chief Executive Officer and its four other most
highly compensated executive officers serving at fiscal year-end ("Named
Executive Officers") as well as compensation earned by one other individual for
whom disclosure would have been provided except that he was not serving as an
executive officer at February 28, 1999.
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>
Harold W. Ingalls........ 1999 $ 310,368 $ 15,736(7) -- $ 2,013
Chief Executive Officer 1998 200,353 -- -- --
1997 126,089(5) 376,456(8) $274,104 --
W. Walter LaRoche, III 1999 264,952 -- -- 2,542
Chairman of the 1998 252,247 -- -- 950
Board 1997 244,270 59,968 -- 1,055
William G. Osborne....... 1999 153,033 60,115(9) -- 16,638
Vice President 1998 141,570 73,111(9) -- 51,192
1997 128,071 5,836 -- 64,691
David W. Lillback........ 1999 136,680 78,678(7) 25,203 69,235
Vice President
Gerald B. Curran......... 1999 126,960(6) -- 42,845 667
Chief Financial Officer
Grant O. Reed (11)....... 1999 167,368 -- -- 417
President and Chief 1998 341,131 -- -- 496
Executive Officer 1997 331,683 241,704(10) 101,550 --
</TABLE>
- ---------------
(1) Amounts shown reflect the tax gross-up amounts paid by the Company in
connection with the bonuses awarded to Mr. Ingalls and Mr. Reed pursuant to
the Company's Management Stock Purchase Plan. Also see footnotes (7), (8),
(9), and (10) below and "Management Stock Purchase Plan."
(2) Amounts shown for fiscal year 1999 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of $2,013,
$2,542, $1,638, $1,613, $667 and $417 on behalf of Mr. Ingalls,
30
<PAGE> 32
Mr. LaRoche, Mr. Osborne, Mr. Lillback, Mr. Curran and Mr. Reed,
respectively, (ii) a relocation expense and resettlement allowance of
$67,621 paid to Mr. Lillback resulting from his move between the United
States and Germany, (iii) foreign service allowance of $15,000 paid to Mr.
Osborne and (iv) expatriate taxes of $7,984 paid to Mr. Osborne, also
resulting from his move to France.
(3) Amounts shown for fiscal year 1998 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of $416,
$950 and $496 on behalf of Mr. Osborne, Mr. LaRoche and Mr. Reed,
respectively (ii) relocation expense and resettlement allowance of $50,776
paid to Mr. Osborne resulting from his move to France and (iii) expatriate
taxes of $7,984 paid to Mr. Osborne, also resulting from his move to
France.
(4) 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
and $377 on behalf of Mr. LaRoche and Mr. Osborne, respectively and (ii)
relocation expenses of $64,314 paid to Mr. Osborne related to his move to
Atlanta.
(5) Amount shown reflects compensation for the approximately seven months of
Mr. Ingalls' employment in fiscal year 1997.
(6) Amount shown reflects direct and consulting compensation for approximately
six months of Mr. Curran's employment in fiscal 1999.
(7) Amount shown reflects a special nonrecurring bonus granted by the Company
in fiscal 1999.
(8) Amount shown reflects a profit sharing bonus of $75,000 and a $301,456
signing bonus to purchase shares in accordance with the Company's
Management Stock Purchase Plan.
(9) Amount shown reflects a relocation bonus paid to Mr. Osborne resulting from
his move to France.
(10) Amount shown reflects (i) a profit sharing bonus of $59,968 and (ii) a
$181,736 bonus granted by the Company in fiscal year 1997 in accordance
with the Company's Management Stock Purchase Plan (as defined).
(11) Mr. Reed was not serving as an executive officer at February 28, 1999.
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.
During fiscal 1999, the 401(k) plans with provisions for Company matching
contributions covering salaried employees were amended to provide for immediate
eligibility and vesting of the non-discretionary Company matching contribution.
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 one qualified defined benefit Employee Pension
Benefits Plan, with separate rules for salaried employees (the "Salaried Pension
Plan Rules") and hourly employees (the "Hourly Pension Plan Rules"). Under the
pension plan 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. Effective January 1, 1999, the Salaried Pension
Plan benefit calculation formula was amended to an average monthly earnings
basis multiplied by the years of service multiplied by a factor of 1.2%. Prior
to January 1, 1999, under the Salaried Pension Plan Rules, benefits were 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. Under the Hourly Pension Plan Rules, the benefits are based on a
calculation of a specified hourly rate multiplied by years of credited service.
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.
31
<PAGE> 33
The estimated annual benefits payable upon retirement at normal retirement
age for each of the Named Executive Officers is as follows: Mr.
LaRoche -- $60,289; Mr. Ingalls -- $0; Mr. Osborne -- $36,942; Mr.
Lillback -- $26,761; Mr. Curran -- $0 and Mr. Reed -- $61,411.
The Company has recently instituted certain executive and other key
employee benefit plans intended to 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 1998 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 appreciation 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. In April 1999, the Compensation
Committee approved the implementation of a revised Profit Sharing Plan ("Revised
Plan"). The Revised Plan uses an established EBITDA goal as a benchmark for
Company performance coupled with individual achievement.
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 1999, 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 1999, 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 $.3 million. Dr. 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 through August 1998, at which time Mr. Reed
tendered his resignation. Following that date, Mr. Reed continued to receive his
salary and benefits pursuant to his severance agreement with the Company. At
February 28, 1999, the Company had accrued approximately $233,000 for additional
payments and benefits due under that agreement.
32
<PAGE> 34
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 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."
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.
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, 1999 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 69.2%
W. Walter LaRoche, III(1)................................... 42,500 9.9
Victoria E. LaRoche(1)...................................... 42,500 9.9
Louanne C. LaRoche(1)....................................... 42,500 9.9
Harold W. Ingalls........................................... 1,506 *
Paul L. M. Beckwith, Ph.D................................... 800 *
George R. Wislar............................................ 550 *
C. L. Wagner, Jr............................................ 400 *
Robert L. Yohe.............................................. 300 *
John R. Hall................................................ 200 *
David A. Lillback........................................... 279 *
Directors and executive officers as a group (15) Persons.... 429,633 100%
</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.
33
<PAGE> 35
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. During fiscal 1999, the payments under this contract
were suspended indefinitely pending improved financial performance of the
Company.
34
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
(1) Financial Statements
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations and Comprehensive
(Loss) Income............................................... F-3
Consolidated Statements of Stockholders' (Deficit) Equity... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts............... S-1
</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
- ------- ----------------------
<C> <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).
10.4 -- 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).
10.10++ -- Supply and Purchase Agreement (Hydrochloric Acid), dated
October 17, 1997, by and between Rhone-Poulenc Chimie and
ChlorAlp S.A.S.(10).
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
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 (Gaseous Chlorine-Caustic
Soda), dated October 17, 1997, by and between Rhone-Poulenc
Agro Chimie and ChlorAlp S.A.S.(10).
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).
10.35 -- 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 the Company, the Lenders party
thereto and the Chase Manhattan Bank, as Administrative
Agent(10).
10.39+ -- Form of 1997 Stock Option Plan(10).
10.40+ -- Form of Management Stock-Based Incentive Plan(10).
10.41+ -- Form of Annual Incentive Plan(10).
10.42* -- Amended and Restated Credit Agreement amending the Credit
Agreement, dated as of August 26, 1997, among the Company,
the Lenders party thereto and The Chase Manhattan Bank, as
administrative agent.
12* -- Statement regarding Computation of Ratios of Earnings to
Fixed Charges.
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
21* -- Subsidiaries of the Registrant.
27* -- Financial Data Schedule (for SEC use only).
</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.
(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the period ended February 28, 1998 and incorporated herein by
reference.
(B) REPORTS ON FORM 8-K
(1) Current Report on Form 8-K. None filed in the fourth quarter of fiscal
1999.
(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.
37
<PAGE> 39
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/ GERALD B. CURRAN
------------------------------------
Gerald B. Curran
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, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ HAROLD W. INGALLS President, Chief Executive Officer and
- ----------------------------------------------------- Director
Harold W. Ingalls
/s/ GERALD B. CURRAN Vice President and Chief Financial Officer
- -----------------------------------------------------
Gerald B. Curran
/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
/s/ JOHN R. HALL 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>
38
<PAGE> 40
LAROCHE INDUSTRIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28, 1999, 1998 and 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations and Comprehensive
(Loss) Income............................................. F-3
Consolidated Statements of Stockholders' (Deficit) Equity... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
<PAGE> 41
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, 1999 and 1998, and the related consolidated
statements of operations and comprehensive (loss) income, stockholders'
(deficit) equity, and cash flows for each of the three years in the period ended
February 28, 1999. 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, 1999 and 1998, and the consolidated results of
its operations and comprehensive (loss) income and its cash flows for each of
the three years in the period ended February 28, 1999, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
financial information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
May 18, 1999
Except for Note 9, which is as of June 3, 1999
F-1
<PAGE> 42
LAROCHE INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1999 1998
--------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,380 $ 12,884
Receivables (Notes 7 and 13):
Trade, net of allowances of $499 and $527 in 1999 and
1998, respectively.................................... 54,527 46,386
Refundable income taxes................................ 5,037 11,495
Other.................................................. 3,196 2,961
Inventories (Notes 2, 4 and 7)............................ 22,105 27,613
Net assets of discontinued operations (Notes 3 and 9)..... 27,080 42,758
Other current assets...................................... 3,468 1,162
--------- --------
Total current assets.............................. 120,793 145,259
Investments in and advances to affiliates (Note 5).......... 48,082 46,577
Property, plant and equipment, at cost (Notes 2 and 6)...... 310,092 274,900
Less accumulated depreciation............................. (106,497) (89,521)
--------- --------
Net property, plant and equipment........................... 203,595 185,379
Other assets................................................ 17,307 17,933
--------- --------
Total assets...................................... $ 389,777 $395,148
========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Revolving credit facility (Note 7)........................ $ 55,388 $ 22,000
Accounts payable.......................................... 48,166 51,101
Accrued compensation...................................... 5,039 8,503
Other accrued liabilities................................. 34,864 15,457
Current portion of long-term debt (Note 7)................ 4,375 7,657
--------- --------
Total current liabilities......................... 147,832 104,718
Long-term debt (Note 7)..................................... 202,221 207,418
Deferred income taxes (Note 11)............................. 4,044 10,025
Other noncurrent liabilities (Note 8)....................... 45,757 37,834
Commitments and contingencies (Note 10).....................
Redeemable common stock (Note 12)........................... 528 3,505
Stockholders' (deficit) equity:
10% cumulative, voting preferred stock, $.01 par value,
200 shares authorized, no shares outstanding........... -- --
Common stock, $.01 par value, 1,200 shares authorized, 425
non-redeemable shares issued........................... 4 4
Capital in excess of par value............................ 630 630
Retained (deficit) earnings............................... (10,491) 31,225
Accumulated other comprehensive loss...................... (748) (211)
--------- --------
Total stockholders' (deficit) equity.............. (10,605) 31,648
--------- --------
Total liabilities and stockholders' (deficit)
equity........................................... $ 389,777 $395,148
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 43
LAROCHE INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $389,542 $342,570 $339,044
Cost of sales............................................... 357,750 287,535 276,134
-------- -------- --------
Gross profit................................................ 31,792 55,035 62,910
Selling, general and administrative expenses................ 45,431 49,742 48,376
-------- -------- --------
(Loss) income from continuing operations.................... (13,639) 5,293 14,534
Interest and amortization of debt expense................... (20,314) (14,539) (12,249)
Income (loss) from equity investments (Note 5).............. 2,614 (619) 31
Other income, net........................................... 1,150 141 397
-------- -------- --------
(Loss) income from continuing operations before income taxes
and extraordinary charge.................................. (30,189) (9,724) 2,713
(Provision) benefit for income taxes (Note 11).............. (2,779) 3,762 (1,072)
-------- -------- --------
(Loss) income from continuing operations before
extraordinary charge...................................... (32,968) (5,962) 1,641
Discontinued operations (Notes 3 and 9):
(Loss) income from operations of Alumina Chemical
Division, net of tax benefit (provision) of $1,227,
($109) and $655, respectively.......................... (1,899) 163 (982)
(Loss) on disposal of Alumina Chemical Division including
operating losses during phase-out period of $493 and
loss on disposal of assets of $8,804, net of taxes of
$3,646................................................. (5,651) -- --
-------- -------- --------
(Loss) income before extraordinary charge................... (40,518) (5,799) 659
Extraordinary charge from debt extinguishment in 1998, net
of $7,740 tax benefit..................................... -- (12,290) --
-------- -------- --------
Net (loss) income........................................... $(40,518) $(18,089) $ 659
-------- -------- --------
Other comprehensive (loss), before tax:
Foreign currency translation adjustments.................. (400) (150) --
Minimum pension liability adjustments..................... (496) 26 (211)
-------- -------- --------
Other comprehensive (loss) before tax....................... (896) (124) (211)
Income tax benefit related to items of other comprehensive
loss...................................................... 359 50 74
-------- -------- --------
Other comprehensive loss.................................... (537) (74) (137)
-------- -------- --------
Comprehensive (loss) income................................. $(41,055) $(18,163) $ 522
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 44
LAROCHE INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL IN RETAINED OTHER
COMMON EXCESS OF (DEFICIT) COMPREHENSIVE
STOCK PAR VALUE EARNINGS LOSS TOTAL
------ ---------- --------- ------------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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 (211) 31,648
Net loss................................. -- -- (40,518) (40,518)
Dividends paid, $2.75 per share.......... -- -- (1,198) (1,198)
Foreign currency translation
adjustments........................... -- -- -- (240) (240)
Pension adjustments...................... -- -- -- (297) (297)
-- ---- -------- ----- --------
Balance at February 28, 1999............... $4 $630 $(10,491) $(748) $(10,605)
== ==== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 45
LAROCHE INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................................... $(40,518) $(18,089) $ 659
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization.......................... 27,796 19,594 20,785
Deferred income taxes.................................. (5,981) (4,737) 6,667
Equity income, net of distributions.................... (2,637) 707 792
Net (gain) loss on disposal of assets.................. (29) 1,573 (349)
Loss (income) from discontinued operations and loss on
disposal............................................. 7,550 (163) 982
Extraordinary charge from debt extinguishment.......... -- 12,290 --
Changes in operating assets and liabilities (excluding
acquisitions):
Receivables....................................... (1,918) (10,670) 2,187
Inventories....................................... 5,508 9,511 (399)
Other assets...................................... (2,414) (285) (2,880)
Accounts payable.................................. (2,935) 18,408 (1,778)
Accrued liabilities............................... 15,927 7,323 (5,313)
Noncurrent liabilities and other.................. 7,154 979 1,834
-------- -------- --------
Net cash provided by continuing operating activities........ 7,503 36,441 23,187
-------- -------- --------
Net cash provided by operating activities of discontinued
operations................................................ 4,653 7,048 2,145
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures........................................ (44,191) (33,362) (32,657)
Acquisition of businesses................................... -- (17,622) --
Investments in and advances to affiliates................... (127) (35,031) (2,631)
Plant turnarounds........................................... (3,723) (1,179) (5,038)
Proceeds from sale of facilities............................ 4,051 36 3,708
-------- -------- --------
Net cash used by investing activities of continuing
operations................................................ (43,990) (84,800) (36,618)
-------- -------- --------
Net cash provided by disposition and (used for) other
investing activities of discontinued operation............ 3,485 (6,885) (3,127)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds (repayments) under revolving credit facility... 33,378 (15,605) 32,850
Proceeds from issuance of long-term debt.................... -- 209,216 --
Repayments of long-term debt................................ (8,558) (102,949) (11,654)
Premium payments on the early extinguishment of debt and
costs of refinancing...................................... -- (29,489) --
Sales of common stock with redemption features.............. 128 326 3,187
Purchases of common stock with redemption features.......... (2,336) (750) (11,158)
Dividends paid.............................................. (1,198) (1,095) (912)
-------- -------- --------
Net cash provided by financing activities................... 21,414 59,654 12,313
-------- -------- --------
Effect of exchange rate changes on cash..................... (569) 261 --
Net (decrease) increase in cash............................. (7,504) 11,719 (2,100)
Cash at beginning of year................................... 12,884 1,165 3,265
-------- -------- --------
Cash at end of year......................................... $ 5,380 $ 12,884 $ 1,165
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 46
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
LaRoche Industries Inc. ("LII") is engaged in the manufacture, distribution
and sale of agricultural and industrial nitrogen products, bulk fertilizer
materials 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 inter-company
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.
INVENTORIES
Inventories are valued at the lower of cost or market. At February 28, 1999
and 1998, the cost of approximately 15.6% and 8.5%, respectively, of total
inventories was determined using the last-in, first-out ("LIFO") method. Costs
for other inventories are determined on a first-in, first-out ("FIFO") or
average cost basis.
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.
Amortization of turnaround expenditures used in continuing operations totaled
$2,832, $3,240 and $3,530 for the fiscal years 1999, 1998 and 1997,
respectively. 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 10), are depreciated using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over their estimated
useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements................................. 20 to 35 years
Machinery and equipment.................................... 5 to 15 years
</TABLE>
Depreciation expense from continuing operations totaled approximately
$22,772, $14,814 and $13,758 for fiscal years ended February 28, 1999, 1998 and
1997, respectively. Capitalized costs of certain long-term assets include
capitalized interest that is amortized over the estimated useful life of the
related asset. The Company
F-6
<PAGE> 47
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized interest costs of $516, $1,089 and $860 on eligible projects during
fiscal 1999, 1998 and 1997, respectively.
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 two to twenty years. Accumulated amortization of other assets
used in continuing operations totaled $5,678 and $4,108 for the fiscal years
ended February 28, 1999 and 1998, respectively.
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 during the year. Resulting translation adjustments are
reflected in accumulated comprehensive loss in stockholders' (deficit) 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 accumulated comprehensive loss in stockholders' (deficit) equity.
The Company also 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. In addition, the Company has entered into a
spread oil swap agreement designed to hedge the Company's exposure to energy
costs associated with its investment in a French chlor-alkali joint venture.
Gains or losses on these contracts are recognized as a component of the related
transaction. The contracts are entered into with financial counter-parties. The
Company is exposed to risk of loss in the event of nonperformance by the
counter-parties; however, the Company does not anticipate such nonperformance.
See Note 13.
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.
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 operations are approximately $426, $2,791 and $2,856
of research and development costs for the years ending February 28, 1999, 1998
and 1997, respectively.
EARNINGS PER SHARE
Per share data has not been presented since such data provides no useful
information as the shares of the Company are closely held.
F-7
<PAGE> 48
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain amounts for the 1998 and 1997 fiscal years have been reclassified
to conform to the 1999 presentation of discontinued operations. Other prior year
amounts have been reclassified to conform to current year presentation.
NEW ACCOUNTING STANDARDS
Effective March 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130 -- Reporting Comprehensive Income, SFAS No.
131 -- Disclosures about Segments of an Enterprise and Related Information and
SFAS No. 132 -- Employers' Disclosure about Pensions and Other Postretirement
Benefits. These standards increased the financial reporting disclosures, but had
no impact on the Company's financial position or results of operations.
Reclassifications have been made to the previously reported financial statements
to conform with these financial reporting requirements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("the Statement" or "SFAS 133"). The Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on the derivative designation. The Statement is
required to be adopted in fiscal 2000. The Company has not yet determined the
impact on the financial position or results of operation from adoption of this
standard. In February 1998, Statement of Position ("SOP") 98-1 (Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use) was issued
and is effective for fiscal years beginning after December 15, 1998. The Company
adopted this statement in fiscal 1999 and the impact on the financial position
and results of operations was insignificant.
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>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest........................................ $21,920 $ 9,763 $15,192
Income taxes, net of amounts refunded........... (8,561) (1,827) (809)
Non-cash investing and financing activities:
Capital leases for new equipment..................... -- 313 90
Liabilities assumed in business acquisition.......... -- 2,677 --
</TABLE>
3. STRATEGIC TRANSACTIONS
Dispositions. In June 1999, the Company reached an agreement to sell
operating assets of the Alumina Chemicals business segment ("Aluminas") for
approximately $39,500 plus working capital. In anticipation of such sale, at
February 28, 1999, the Company recorded an after-tax loss on disposal of assets,
including operating losses during the phase-out period, of $5,651. See footnote
9 for additional discussion of the discontinued operations reporting.
Acquisitions. In October 1997, the Company acquired a 50% interest in
ChlorAlp S.A.S. ("ChlorAlp"), a joint venture company with Rhodia S.A.
("Rhodia"). ChlorAlp 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 operations
F-8
<PAGE> 49
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $35,500, including a French Franc loan
to ChlorAlp of approximately $10,900. The Company's loan to ChlorAlp is a
five-year loan at an interest rate of 6%, with a varying principal repayment
structure. The Company is currently in negotiations to purchase the remaining
50% interest in ChlorAlp. The purchase price is approximately 170 million French
Francs (approximately $28,000), subject to certain adjustments. Subject to terms
of an agreement reached upon the Company's purchase of the initial investment in
ChlorAlp, if the Company cannot or does not purchase the remaining 50% in
ChlorAlp, Rhodia would have the right to require the Company to sell its 50%
interest to Rhodia in one year for approximately 95 million French Francs
(approximately $16,000), subject to certain adjustments. As a condition of their
investment in ChlorAlp, the Company has agreed to reimburse Rhodia for the
Company's proportionate share of any amounts that Rhodia may be ultimately
required to pay under its pre-existing guarantee of certain steam turbine lease
obligations. The Company's proportionate share under such arrangement is limited
to a maximum of 172 million French Francs (approximately $29,000) over the
original lease term, of which approximately four years remain.
On December 31, 1997, the Company, purchased chlor-alkali and chlorinated
methane compounds manufacturing facilities (the "Frankfurt Facilities") located
near Frankfurt, Germany from Celanese GmbH, a wholly-owned subsidiary of Hoechst
AG for a total cost of approximately $20,445, including assumption of certain
liabilities. The acquisition was accounted for as a purchase; accordingly, the
consolidated statement of operations includes the results of the operations of
the Frankfurt Facilities since the acquisition date. The Company funded the
purchase with funds drawn from the Revolving Credit Facility. The total cost of
the acquisition was allocated as follows:
<TABLE>
<S> <C>
Receivables................................................. $ 2,677
Inventory................................................... 2,878
Plant, equipment and other.................................. 20,444
Pension liability........................................... (1,435)
Other liabilities assumed................................... (4,119)
-------
$20,445
=======
</TABLE>
Restructuring. During the fourth quarter of fiscal 1999, the Company
announced a restructuring of its corporate headquarters designed to decentralize
certain corporate functions and reduce the workforce. A total of 34 employees
were terminated as a result of this action. The Company recorded a restructuring
charge of $2,054 for termination benefits, lease abandonment commitments and
related costs, offset by a $1,399 curtailment gain on retirement benefits. As of
February 28, 1999, 25 of the terminated employees had left the Company and $244
had been charged to the restructuring reserve. The remaining employees will
leave the Company during fiscal 2000 and the associated costs will be
substantially paid by September 1999.
4. INVENTORIES
Components of inventory of continuing operations are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Finished goods and in-progress.............................. $ 7,695 $12,602
Inventory purchased for resale.............................. 3,122 6,689
Raw materials............................................... 1,358 932
Supplies and catalysts...................................... 10,470 7,796
------- -------
22,645 28,019
Less LIFO reserve........................................... (540) (406)
------- -------
$22,105 $27,613
======= =======
</TABLE>
F-9
<PAGE> 50
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EQUITY INVESTMENTS
The Company is an equity investor in several joint ventures that it
accounts for under the equity method of accounting. At February 28, 1999, the
primary investees include ChlorAlp (50% owned, electrochemical products),
Avondale Ammonia (50% owned, nitrogen products) and two nitrogen warehouses. At
February 28, 1998, the investees included ChlorAlp, Avondale Ammonia and two
interests held by Aluminas, Kaiser LaRoche Hydrate Partnership (45%) and CRILAR
(50%), as well as smaller holdings.
Excluding Avondale Ammonia, all income generated by the equity investees 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.
Summarized financial information since the date of investment by the
Company for unconsolidated entities (excluding Avondale Ammonia) is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ----
<S> <C> <C> <C>
Summary of operations:
Net sales................................................ $110,500 $ 37,209 $768
Gross profit............................................. 23,085 4,301 87
Net income (loss)........................................ 6,002 (1,238) 62
Company's equity in earnings (loss)...................... 2,614 (619) 31
Summary of financial position:
Current assets........................................... $ 32,752 $ 27,440
Noncurrent assets........................................ 77,675 86,473
-------- --------
Total............................................ $110,427 $113,913
======== ========
Current liabilities........................................ $ 29,204 $ 26,210
======== ========
Noncurrent liabilities..................................... $ 25,824 $ 36,000
======== ========
</TABLE>
Purchases from Avondale Ammonia were approximately $4,000, $8,400 and
$8,800 for the years ended February 28, 1999, 1998 and 1997, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Components of the Company's property, plant and equipment used in
continuing operations are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Land and land improvements.................................. $ 9,984 $ 13,001
Buildings................................................... 16,651 22,735
Machinery and equipment..................................... 266,991 205,088
Equipment under capital leases.............................. 3,875 4,673
Construction in progress.................................... 12,591 29,403
--------- --------
Property, plant and equipment, at cost...................... 310,092 274,900
Accumulated depreciation.................................... (106,497) (89,521)
--------- --------
Property, plant and equipment, net.......................... $ 203,595 $185,379
========= ========
</TABLE>
F-10
<PAGE> 51
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWING ARRANGEMENTS
The Company's borrowings include the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revolving credit facilities................................. $ 55,388 $ 22,000
======== ========
Term debt:
9 1/2% senior subordinated notes.......................... $174,327 $174,248
13% senior subordinated notes............................. 915 915
Term loan................................................. 31,354 34,271
Other notes payable....................................... -- 5,641
-------- --------
Total............................................. 206,596 215,075
Less current portion........................................ (4,375) (7,657)
-------- --------
Long-term debt.............................................. $202,221 $207,418
======== ========
</TABLE>
In September 1997, the Company completed a refinancing of its principal
borrowings. In connection with this refinancing, 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 was 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 operations and
comprehensive (loss) income as an extraordinary charge in the fiscal 1998
results.
The Notes require semi-annual interest only payments on March 15 and
September 15 each year. Debt issuance costs are being amortized over the life of
the Notes. The Notes are unsecured obligations of the Company and are redeemable
at the Company's option, 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 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. The Indenture also imposes
additional restrictions on borrowing if the Company does not maintain a minimum
fixed charge coverage ratio for the preceding twelve month period. As of
February 28, 1999, the Company had not achieved the minimum fixed charge
coverage ratio, and accordingly, such limitations were in effect.
In August 1997, the Company entered into a six year, $160.0 million senior
secured credit facility ("Credit Facility"), which provided for a $35 million
term loan ("Term Loan") and a $125 million revolving credit facility ("Revolving
Credit Facility"). The Credit Facility includes financial covenants that require
the Company to maintain certain debt to earnings and interest coverage ratios.
At February 28, 1998, the Company was not in compliance with certain of these
covenants, and received amendments and waivers with respect to such
noncompliance. At February 28, 1999, the Company again was not in compliance
with certain financial covenants, and the Credit Facility was amended and
restated effective as of that date to bring the Company into compliance.
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. Prior to the February 28,
1999 amendment and restatement, interest was based on either the prime rate plus
up to .75% or LIBOR plus up to 2.00%. Under the terms of the amended and
restated Credit Agreement, interest rates were increased to the prime rate plus
1.75%, or LIBOR plus 3.00%. The Company also pays commitment fees, on a
quarterly basis, up to 0.75% per annum of average unused balances. Concurrent
with the February 1999
F-11
<PAGE> 52
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amendment, unamortized debt issuance costs of $1,010, proportionate to the
effect of the revised terms on the Revolving Credit Facility, were written off.
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 rates at February 28, 1999 and 1998 were
approximately 7.5% and 7.6%, respectively.
Availability under the amended and restated Revolving Credit Facility is
limited to $80 million until the earlier of (a) July 15, 1999, or (b) the
Company's purchase of the remaining 50% of ChlorAlp (see Note 3). After that
date, the amount available will be based on a percentage of domestic trade
receivables, inventory and certain property plant and equipment, as defined not
to exceed $90,000. At February 28, 1999, $48,500 was outstanding and an
additional $31,500 was available without violating any covenants under the
Revolving Credit Facility or the Notes Indenture. The weighted average borrowing
rates at February 28, 1999 and 1998 were approximately 8.2% and 8.0%,
respectively.
The amended and restated Credit Facility imposes restrictions on
investments, acquisitions, repurchases of stock, borrowing and sales of assets.
It also imposes cumulative and annual limits on capital spending, as well as a
prohibition on the payment of dividends without the consent of the lenders. The
Company is also required to maintain certain leverage and interest coverage
ratios. 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.
The Company also has available for its German operations an unsecured
revolving credit line providing for up to 17 million German marks (approximately
$9,597) at an average borrowing rate of approximately 4% ("German Credit
Facility"). As of February 28, 1999, the German Credit Facility had availability
of approximately $2,709 with approximately $6,888 outstanding at fiscal 1999
year-end.
Maturities of long-term debt in each fiscal year are as follows: $4,375 in
2000, $6,562 in 2001, $7,292 in 2002, $8,021 in 2003, $5,104 in 2004 and
$175,915 thereafter.
F-12
<PAGE> 53
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFITS
The Company sponsors several qualified and nonqualified pension plans and
other postretirement benefit plans for employees. The following tables provide a
reconciliation of the changes in the plans' benefit obligation and fair value of
assets over the two-year period ending February 28, 1999 and a statement of the
funded status as of February 28 for both years.
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSIONS BENEFITS
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of fiscal year........ $ 43,497 $ 38,096 $ 23,207 $ 20,865
Service cost........................................ 2,290 2,326 473 371
Interest cost....................................... 2,920 2,648 1,305 1,529
Amendments.......................................... (2,256) -- -- --
Net actuarial loss (gain)........................... (2,903) 663 (3,403) 1,112
Acquisitions........................................ -- 1,205 -- --
Curtailment (gains)................................. (1,019) -- (4,243) --
Special termination benefit......................... 1,861 -- -- --
Participant contributions........................... -- 224 -- --
Benefits paid....................................... (2,075) (1,665) (820) (670)
-------- -------- -------- --------
Benefit obligation at end of fiscal year.............. $ 42,315 $ 43,497 $ 16,519 $ 23,207
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of fiscal
year................................................ $ 29,611 $ 24,188 $ -- $ --
Actual return on plan assets........................ 2,067 4,159 -- --
Company contributions............................... 3,035 2,558 820 668
Participant contributions........................... 244 224 -- --
Settlements......................................... (21) -- -- --
Benefits paid....................................... (1,872) (1,518) (820) (668)
-------- -------- -------- --------
Fair value of plan assets at end of fiscal year....... $ 33,064 $ 29,611 $ -- $ --
======== ======== ======== ========
RECONCILIATION OF FUNDED STATUS
Benefit obligation in excess of plan assets at end of
fiscal year......................................... $ 9,279 $ 12,681 $ 16,519 $ 23,207
Unrecognized actuarial gain/(loss).................. (590) (3,692) 7,544 4,890
Unrecognized prior service cost..................... 873 (1,198) -- 203
-------- -------- -------- --------
Accrued benefit liability at end of fiscal year..... $ 9,562 $ 7,791 $ 24,063 $ 28,300
======== ======== ======== ========
</TABLE>
The following table provides the amounts recognized in the statement of
financial position as of February 28, 1999 and 1998:
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSIONS BENEFITS
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Accrued benefit cost.................................. $(10,095) $ (8,055) $(24,063) $(28,300)
Intangible asset...................................... 115 143 -- --
Accumulated other comprehensive income................ 418 121 -- --
-------- -------- -------- --------
Net amount recognized................................. $ (9,562) $ (7,791) $(24,063) $(28,300)
======== ======== ======== ========
</TABLE>
F-13
<PAGE> 54
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of periodic costs for the pension and other postretirement
benefits were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
PENSIONS:
Service cost............................................ $ 2,290 $ 2,326 $ 2,229
Interest cost........................................... 2,920 2,648 2,240
Expected return on plan assets.......................... (2,546) (4,159) (2,575)
Amortization of prior service cost...................... 172 2,271 1,007
Recognized net actuarial cost........................... 53 -- --
------- ------- -------
Net periodic benefit cost............................... $ 2,889 $ 3,086 $ 2,901
Net curtailment and special termination benefit costs... 842 -- --
------- ------- -------
Total pension benefit cost...................... $ 3,731 $ 3,086 $ 2,901
======= ======= =======
OTHER POSTRETIREMENT BENEFITS:
Service cost............................................ $ 473 $ 371 $ 426
Interest cost........................................... 1,305 1,529 1,707
Expected return on plan assets.......................... -- -- --
Amortization of prior service cost...................... (196) (203) (203)
Recognized net actuarial cost........................... (756) (351) (38)
------- ------- -------
Net periodic benefit cost............................... 826 1,346 1,892
Net curtailment and special termination benefit costs... (4,243) -- --
------- ------- -------
Total other postretirement benefit cost......... $(3,417) $ 1,346 $ 1,892
======= ======= =======
</TABLE>
Periodically, the Company has offered early retirement programs to certain
of its salaried and hourly employees for which special termination benefits are
recognized.
The assumptions used in computing the preceding information are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
PENSION:
Discount rate at end of fiscal year......................... 7.0% 7.0% 7.5%
Expected long-term rate of return on plan assets............ 8.5% 8.5% 8.5%
Rates of increase in compensation levels.................... 4.5% 5.5% 5.5%
OTHER POSTRETIREMENT BENEFITS:
Discount rate at end of fiscal year......................... 7.0% 7.0% 7.5%
</TABLE>
The rate of increase in per capita costs of covered health care benefits is
assumed to be 7.4% in 1999, decreasing gradually to 5.0% by the year 2010. A one
percentage point change in the assumed health care cost trend rate would have
the following effects:
<TABLE>
<CAPTION>
INCREASE DECREASE
-------- --------
<S> <C> <C>
Effect on accumulated postretirement benefit obligation as
of February 28, 1999........................................ $2,068 $(2,147)
Effect on net periodic postretirement benefit cost in fiscal
1999...................................................... $ 251 $ (259)
</TABLE>
In addition to the pension and postretirement plans, the Company maintains
defined contribution savings plans in which substantially all domestic employees
are eligible to participate. The Company made contributions to these plans of
approximately $211, $85 and $79 during fiscal 1999, 1998 and 1997, respectively.
F-14
<PAGE> 55
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DISCONTINUED OPERATIONS
During November 1998, the Company adopted plans for the sale of Aluminas
and accounted for the financial results, net assets and cash flow of the
business unit as a discontinued operation. Accordingly, previously reported
financial results for all periods have been restated to reflect the business as
a discontinued operation.
In connection with the decision to discontinue this business, the Company
recognized a loss of $493 from operations during the phase-out period (December
1, 1998, through the effective date of the sale) and a loss on the disposal of
assets of $8,804, which includes a curtailment gain from employee pension and
postretirement plans of $3,863 and gain on the sale of one of the equity
investments held by Aluminas of $6,500. At February 28, 1999, the Company had
accrued approximately $19,167 for the expected loss on the remaining assets and
included the amount in net assets of discontinued operation.
Net sales from Aluminas were $30,365, $38,444 and $40,241 for fiscal 1999,
1998 and 1997, respectively. Operating losses from discontinued operations for
the same fiscal periods totaled ($4,957), ($115) and ($3,897). Net interest
expense allocated to discontinued operations on the basis of sales and assets
was $2,126, $2,971 and $2,632 during fiscal 1999, 1998 and 1997, respectively.
Net interest of $764 was allocated after measurement date. The net assets of the
discontinued operation at February 28, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accounts receivable, net.................................... $10,240 $ 8,747
Inventory................................................... 7,983 8,786
------- -------
Total current assets.............................. 18,223 17,533
------- -------
Property, plant and equipment, net.......................... 32,003 30,744
Investment in and advances to affiliates.................... 1,775 3,851
Other assets................................................ 356 896
------- -------
Total assets...................................... $52,357 $53,024
======= =======
Accounts payable............................................ $ 4,980 $ 2,773
Accrued loss on sale........................................ 19,167 --
Deferred tax liability...................................... 1,130 7,493
------- -------
Total liabilities................................. $25,277 $10,266
------- -------
Net assets from discontinued operation...................... $27,080 $42,758
======= =======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
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
F-15
<PAGE> 56
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional information on the nature or extent of contamination, methods of
remediation required and other actions by governmental agencies or private
parties.
The Company owns a variety of sites that 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 were identified and
management believes that the former owners will fulfill their obligations under
the agreements.
In connection with all sites, the Company recorded accruals of
approximately $249 and $1,100 in fiscal 1999 and 1997, respectively, and reduced
the accrual by approximately $.8 million during fiscal 1998. Other accrued
liabilities include $1,411 and $1,722 for the current portion of estimated
clean-up expenditures and related accruals at February 28, 1999 and 1998,
respectively. The balance of spending identifiable to future years in other
non-current liabilities totals $1,734 and $1,448 at February 28, 1999 and 1998,
respectively.
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
$1.5 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.
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. The
penalty was paid in full during fiscal 1999.
In December 1997, the Company was named as a defendant in three civil
antitrust actions, two of which were the same cases brought in separate
jurisdictions, one of which was subsequently dismissed. These actions were
brought predominately by various mining concerns alleging the Company violated
the 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 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 filed answers denying liability in such civil actions. On or about May
5, 1999, the Company was dismissed as a defendant by the plaintiff in one of
such civil lawsuits. The Company has reached an agreement in principle with the
plaintiff to settle all claims against the Company. Under the terms of that
settlement, which will be reflected in a definitive settlement agreement, the
Company will make an initial payment of $.75 million and will make additional
payments not to exceed $3.75 million, based in part on the Company's net
earnings, over the next five years. Minimum payments of $.5 million are required
on the first three anniversaries of execution of the settlement and payments of
$.3 million are required on the last two
F-16
<PAGE> 57
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anniversaries with an aggregate minimum, inclusive of the initial payment, of $3
million. The Company has accrued the net present value of this settlement,
$2,504, at February 28, 1999.
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 lawsuit were filed against the Company and Marathon. Marathon's lawsuit
against the company was settled for $2 million in October 1998. The Company has
met its $1 million self-insured retention and its liability insurance carrier
has paid the balance. The Company has coverage for, and continues to defend
itself against, the two remaining claims. In March 1999, plaintiffs accepted an
offer by all defendants to settle the class action for a lump sum of $1.5
million. The Company's allocated portion of the settlement is $375,000,
although, as stated above, the Company has insurance coverage for this amount.
The third claim has remained dormant since filing, and the Company, although it
believes it has meritorious defenses to the claim, believes that the case can be
settled for a nominal amount.
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 has complied with this order, and in January 1999, the Company completed
construction of a new pipeline which is now in service. 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.
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 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.
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. Sales and income from operations of these products were immaterial for the
years ended February 28, 1999 and 1998. These products accounted for 23% of
income from operations for the fiscal year ended February 28, 1997. The Company
is also required to phase out the production of their hydrochloroflourocarbon
(HCFC-141b) by January 1, 2003. In fiscal years 1999, 1998 and 1997, this
product accounted for approximately 6%, 8% and 8% of net sales from continuing
operations and 2%, 19% and 18% of income from continuing operations,
respectively.
F-17
<PAGE> 58
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Lease obligations for continuing operations with initial or remaining
non-cancelable terms in excess of one year as of February 28, 1999 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Fiscal years ending February,
2000...................................................... $265 $ 5,592
2001...................................................... 85 4,783
2002...................................................... 5 3,970
2003...................................................... -- 3,468
2004...................................................... -- 2,830
Thereafter................................................ -- 36,374
---- -------
Total minimum lease payments...................... $355 $57,017
=======
Less estimated executory costs and imputed interest costs... 30
----
Present value of minimum lease payments..................... $325
====
</TABLE>
Total rental expense under operating leases for continuing operations
totaled approximately $7,972, $7,247 and $5,798 during fiscal years 1999, 1998
and 1997, respectively.
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.
As of February 28, 1999 and 1998, the Company had approximately $1,851 and
$2,100 committed for letters of credit, respectively.
11. INCOME TAXES
The (provision) benefit 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. The components of
the (provision) benefit for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 1,046 $(1,582) $ 4,883
Foreign................................................. (5,820) (201) --
State................................................... -- 728 712
------- ------- -------
(4,774) (1,055) 5,595
------- ------- -------
Deferred:
Federal................................................. $(2,960) $ 4,871 $(5,432)
Foreign................................................. 4,570 -- --
State................................................... 385 (54) (1,235)
------- ------- -------
1,995 4,817 (6,667)
------- ------- -------
</TABLE>
F-18
<PAGE> 59
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(Provision) benefit for income taxes from continuing
operations before extraordinary charges................. (2,779) 3,762 (1,072)
Tax (provision) benefit for discontinued operations....... 4,873 (109) 655
Tax benefit for extraordinary charges..................... -- 7,740 --
------- ------- -------
Total (provision) benefit for income taxes...... $ 2,094 $11,393 $ (417)
======= ======= =======
</TABLE>
The domestic and foreign components of (loss) earnings from continuing
operations before income taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Domestic................................................. $(34,424) $(10,170) $2,713
Foreign.................................................. 4,235 446 --
-------- -------- ------
Total.......................................... $(30,189) $ (9,724) $2,713
======== ======== ======
</TABLE>
The Company has not provided for U.S. income taxes or international
withholding taxes on $4,681 of international subsidiaries' undistributed
earnings as of February 28, 1999, which are reinvested indefinitely.
Reconciliation of the differences between income taxes computed at the
federal statutory rate and the Company's consolidated income tax (provision)
benefit from continuing operations before extraordinary charges follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Tax at federal statutory rate.............................. $10,567 $2,688 $(1,032)
State income taxes, net of federal income tax Benefit...... 1,449 1,155 (45)
Foreign tax provision in excess of federal statutory
rate..................................................... 231 (45) --
Increase in valuation allowance............................ (14,982) -- (277)
Percentage depletion....................................... -- 70 886
Other...................................................... (44) (106) (604)
------- ------ -------
Total............................................ $(2,779) $3,762 $(1,072)
======= ====== =======
</TABLE>
Significant components of the Company's deferred tax assets/(liabilities)
are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued expenses............................................ $ 10,174 $ 2,617
Other....................................................... 3,175 512
-------- --------
Current, net.............................................. 13,349 3,129
-------- --------
Property, plant and equipment............................... (33,039) (28,675)
Employee benefit obligations................................ 12,741 13,087
Loss carryforward........................................... 11,535 --
AMT credit carryforward..................................... 6,150 6,150
Other....................................................... 802 (3,116)
-------- --------
Noncurrent, net........................................... (1,811) (12,554)
-------- --------
Valuation allowance for deferred tax assets................. (15,582) (600)
-------- --------
Total attributable to continuing operations,
net............................................. (4,044) (10,025)
Discontinued operations..................................... (1,130) (7,493)
-------- --------
Net deferred tax assets/(liabilities)....................... $ (5,174) $(17,518)
======== ========
</TABLE>
F-19
<PAGE> 60
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At February 28, 1999, the company had federal and state operating loss
carryforwards of approximately $25,183 that expire in 2019. The Company also has
approximately $6,150 in alternative minimum tax ("AMT") carryforwards available
to offset future taxes for an unlimited time period. For financial reporting
purposes, the valuation allowance has been increased at February 28, 1999 to
reduce the net deferred tax assets. The Company has not recognized any benefit
from the future use of domestic operating loss carryforwards because
management's evaluation of available evidence in assessing the current
realizability of the related tax benefits indicates that the underlying
assumptions of future domestic profitability contain risks that do not provide
sufficient assurance (based on generally accepted accounting principles) to
recognize such tax benefits. The Company will continue to assess the valuation
allowance and make adjustments as appropriate in future periods.
12. REDEEMABLE COMMON STOCK AND OTHER STOCK PLANS
The Company allows certain of its executive officers, management employees
and directors to own common stock. At February 28, 1999 and 1998, 4,633 and
12,519 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).
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 $114
and $280 per share at February 28, 1999 and 1998, 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 $229 and $191 as of February 28, 1999 and
1998, respectively.
The following table summarizes activity in the Company shares that have
redemption features:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -------------------------
REDEEMABLE REDEEMABLE REDEEMABLE COMMON STOCK
COMMON COMMON COMMON WITH PUT
STOCK STOCK STOCK RIGHTS
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of Year............ $3,505 $4,177 $4,771 $7,475
Adjustment in value..................... (769) (248) (98) --
Other shares issued..................... 128 326 3,187
Repurchases............................. (2,336) (750) (3,683) (7,475)
------ ------ ------ ------
Balance at end of year.................. $ 528 $3,505 $4,177 $ --
====== ====== ====== ======
</TABLE>
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 ("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 ("Stock 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
F-20
<PAGE> 61
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operational results and individual goals. All such plans are to be administered
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.
Prior to fiscal 1999, no awards under the Option Plan or the Stock Plan had
been granted. Effective March 1, 1998, phantom stock appreciation rights
("phantom SAR's") were issued to certain key management employees pursuant to
the stock plan. The phantom SAR's vest on the third anniversary of the issuance
date and forfeit if the recipient terminates employment for any reason prior to
the vesting date. The value of the phantom SAR's is based on the appreciation of
the share value between the issuance and vesting dates. A total of 2,150 phantom
SAR's was issued based on a share value of $280 with 800 having been forfeited
during fiscal 1999. Based on the February 28, 1999 share value of $114, the
1,350 phantom SAR's outstanding at fiscal year-end had no value and,
accordingly, no cost associated with these awards was recognized.
13. FINANCIAL INSTRUMENTS
The Company is exposed to the impact of interest and foreign exchange rate
changes. With an objective of managing the impact of such changes on earnings
and cash flow, the Company is a party to three cross-currency interest rate swap
contracts. In connection with the ChlorAlp investment in fiscal 1998, the
Company entered into a five-year, $60,000 (372.4 million French francs) cross
currency interest rate swap contract with a bank. The Company remits quarterly
French franc interest payments at PIBOR plus an agreed-upon spread and receives
quarterly interest payments in US dollars at a rate equal to LIBOR. At the
termination date, the Company will pay 372.4 million French francs and receive
$60,000. In fiscal 1999, the Company entered into two five-year, $25,000 (45
million German marks) cross currency interest rate swap contracts with banks.
The Company remits quarterly German mark principal and interest payments at a
rate equal to LIBOR and receives quarterly US dollar principal and interest
payments at a fixed rate. At February 28, 1999 and 1998, the fair value of the
French franc contract was approximately ($2,871) and $191, respectively. The
combined fair value of the two German mark contracts at February 28, 1999 was
($2,302).
At February 28, 1999 the Company has commitments outstanding under their
natural gas fixed price purchase contracts to purchase approximately $7,042 of
natural gas during the subsequent year. If the Company settled these contracts
at February 28, 1999, a $575 loss would have been recognized. The Company also
sold natural gas put options with a notional amount of $13,482 maturing in the
first half of fiscal 2000. At fiscal 1999 year-end, an unrealized loss of $2,247
was recorded on these contracts. Subsequent to February 28, 1999, the contracts
were settled for a loss of $863.
The following sets forth the open positions and the fair value of its
natural gas collar positions, which mature in the subsequent fiscal year, as of
February 28, 1999 and 1998:
<TABLE>
<CAPTION>
QUANTITY FAIR VALUE CARRYING VALUE
----------- ---------- --------------
(IN MMBTUS)
<S> <C> <C> <C>
FEBRUARY 28, 1999
Purchased Call Options........................... 5,002 $ 106 $ --
Written Put Options.............................. 5,002 (39) --
FEBRUARY 28, 1998
Purchased Call Options........................... 5,118 $ 953 $ --
Written Put Options.............................. 5,118 (412) --
</TABLE>
The fair values are based on quoted market prices. Approximately 20% of the
Company's estimated requirements for fiscal 2000 are subject to forward or
collar agreements.
In connection with its acquisition of ChlorAlp in fiscal 1998 (see Note 3),
the Company indirectly obtained a joint venture interest in a power generation
facility, which uses natural gas to generate power for the manufacturing
operation. Prices for natural gas used in the facility are based on European
fuel and gas oil
F-21
<PAGE> 62
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prices. In fiscal 1999, the Company, through a wholly-owned European subsidiary,
entered into a spread oil swap agreement ("SOS agreement") to reduce its
exposure to fluctuations in its natural gas prices. The contract covers three
years and is for a notional amount of 2,430,000 barrels. A portion of the
contract settles every six months in an amount determined on a monthly basis,
which is based on a defined spread between certain forward fuel and gas oil
prices multiplied by the notional quantity settled. As of February 28, 1999, the
Company had recorded an unrealized loss of $2,303 on the SOS agreement.
The carrying amount of the Company's variable rate debt approximates its
fair value. At February 28, 1999 and 1998, the fair value of all term debt
approximated $135,519 and $212,241, respectively, based primarily on market
prices.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and equivalents and trade accounts
receivable. The Company places its cash and equivalents with high quality
institutions; however, at times, such investments may be in excess of the
Federal Deposit Insurance Corporation insurance limit. The Company routinely
assesses the financial strength of its customers and does not believe the trade
account receivable credit risk exposure is significant. The fair value of these
financial instruments approximated book value at February 28, 1999 and 1998,
respectively.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's continuing operations are situated principally in three
business segments: Nitrogen Products, Electrochemical Products -- North America
("Electrochemicals -- NA") and Electrochemical Products -- Europe
("Electrochemicals -- Europe"). The Nitrogen Products segment consists of
facilities that manufacture and distribute agricultural and industrial nitrogen
products and distribute non-nitrogenous agricultural fertilizers in North
America. The Electrochemical -- NA segment consists of caustic soda, chlorine,
chlorinated methane compounds and fluorocarbons production facilities. The
Electrochemical -- Europe segment consists of caustic soda and chlorine
production facilities located in France and Germany (see Note 3). There is no
overlap in operational management reporting of or decision-making authority over
Electrochemicals -- NA and Electrochemicals -- Europe. Operating profit includes
all costs and expenses directly related to the segment involved.
F-22
<PAGE> 63
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a tabulation of business segment information for continuing
operations for each of the past three fiscal years:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Nitrogen products.................................... $188,775 $234,884 $242,408
Electrochemical products -- North America............ 68,475 87,482 96,636
Electrochemical products -- Europe................... 132,292 20,204 --
-------- -------- --------
Total........................................ $389,542 $342,570 $339,044
======== ======== ========
(Loss) income from continuing operations:
Nitrogen products.................................... $ (366) $ 11,303 $ 11,710
Electrochemical products -- North America............ (8,981) 202 8,562
Electrochemical products -- Europe................... 3,424 (1,383) --
Corporate expense.................................... (7,716) (4,829) (5,738)
-------- -------- --------
(Loss) income from continuing operations............... (13,639) 5,293 14,534
Interest and amortization expense...................... (20,314) (14,539) (12,249)
Income (loss) from equity investments.................. 2,614 (619) 31
Other income, net...................................... 1,150 141 397
-------- -------- --------
(Loss) income from continuing operations before income
taxes and other items................................ $(30,189) $ (9,724) $ 2,713
======== ======== ========
Depreciation and amortization:
Nitrogen products.................................... $ 13,747 $ 13,036 $ 14,693
Electrochemical products -- North America............ 9,600 4,986 5,665
Electrochemical products -- Europe................... 2,968 801 --
Corporate............................................ 1,481 771 427
-------- -------- --------
Total........................................ $ 27,796 $ 19,594 $ 20,785
======== ======== ========
Capital expenditures (including acquisitions and plant
turnarounds):
Nitrogen products.................................... $ 12,645 $ 19,123 $ 26,922
Electrochemical products -- North America............ 21,985 13,060 10,773
Electrochemical products -- Europe................... 13,284 17,622 --
-------- -------- --------
Total........................................ $ 47,914 $ 49,805 $ 37,695
======== ======== ========
Long lived assets by geographic area:
North America........................................ $192,283 $215,926 $211,529
Europe............................................... 76,701 33,963 --
-------- -------- --------
Total........................................ $268,984 $249,889 $211,529
======== ======== ========
</TABLE>
Segment assets are not included in the above table because asset
information is not reported by segment in the information reviewed by the chief
operating decision maker for purposes of making decisions about allocating
resources to the segments and assessing their performance.
F-23
<PAGE> 64
LAROCHE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
EBITDA:
Nitrogen products.................................... $ 17,075 $ 26,783 $ 26,446
Electrochemical products -- North America............ 1,454 7,125 14,269
Electrochemical products -- Europe................... 21,949 1,610 --
Corporate expense.................................... (7,408) (4,978) (5,738)
-------- -------- --------
Total........................................ $ 33,070 $ 30,540 $ 34,977
======== ======== ========
</TABLE>
EBITDA represents income from operations plus cash received from equity
investments, plus depreciation, amortization and other non-cash and
non-recurring transactions reflected in income from operations. In addition,
EBITDA includes the Company's 50% share of ChlorAlp's EBITDA. 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.
15. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited fiscal 1998 and 1997 pro forma financial
information gives effect to the investment in ChlorAlp (Note 5), 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 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 indicative of future results
of operations of the combined company:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales................................................... $480,191 $487,637
(Loss) income from continuing operations before income taxes
and extraordinary charge.................................. (5,305) 640
Net (loss) income from continuing operations before
extraordinary charge...................................... (17,595) 640
</TABLE>
F-24
<PAGE> 65
LAROCHE INDUSTRIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 28, 1999
Allowance for doubtful accounts.......... $527 53 -- 81(1) $ 499
Valuation allowance for deferred tax
asset.................................. 600 14,982 -- -- 15,582
YEAR ENDED FEBRUARY 28, 1998
Allowance for doubtful accounts.......... 776 36 -- 285(1) 527
Valuation allowance for deferred tax
asset.................................. 600 -- -- -- 600
YEAR ENDED FEBRUARY 28, 1997
Allowance for doubtful accounts.......... 849 68 -- 141(1) 776
Valuation allowance for deferred tax
asset.................................. 323 277 -- -- 600
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 66
(LAROCHE INDUSTRIES INC. LOGO)
<PAGE> 1
EXHIBIT 10.42
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT dated as of February 28, 1999,
amending the Credit Agreement dated as of August 26, 1997, as amended by
Amendment No. 1 dated as of September 30, 1997, Waiver and Amendment No. 2
dated as of May 12, 1998 and Consent and Amendment No. 3 dated as of
October 23, 1998 (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
increase pricing, permit the sale of certain assets, prohibit the payment of
any cash dividends, decrease the level of permitted capital expenditures,
eliminate the net worth and modify the leverage and interest coverage financial
covenants, and make certain related changes, all as more fully set forth below,
and to restate the Credit Agreement in its entirety to read as set forth in the
Credit Agreement with the amendments specified below;
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, from and after the date
hereof, refer to the Credit Agreement as amended and restated hereby.
SECTION 2. Section 1.01. Section 1.01 of the Credit Agreement is amended by
(a) amending the definitions of
(i) "ADJUSTED BORROWER EBITDA" in its entirety to read as
follows:
<PAGE> 2
"ADJUSTED BORROWER EBITDA" means, (i) for any period ended on or prior
to the Term Drawdown Date or after the date on which JVC becomes a Subsidiary,
Borrower Consolidated EBITDA for such period (as restated to include, without
duplication. JVC Consolidated EBITDA for such period) and (ii) for any period
ended after the Term Drawdown Date and prior to the date on which JVC becomes a
Subsidiary, the sum of (1) Borrower Consolidated EBITDA for such period plus
(2) Adjusted JVC EBITDA for such period.
(ii) "APPLICABLE RATE" by replacing, in the last line of the chart
set forth therein, ".75%" with "1.75%", "2.00%" with "3.00%" and "1.75%" with
"2.75%".
(iii) "LEVERAGE RATIO" so that the last sentence thereof reads in its
entirety as follows:
For purposes of determining Borrower Consolidated EBITDA for purpose of
determining Adjusted Borrower EBITDA at any time during the fiscal quarter in
which a Permitted Acquisition or a disposition which has a material effect on
future Borrower Consolidated EBITDA has been made and the three fiscal quarters
immediately succeeding such fiscal quarter, Borrower Consolidated EBITDA shall
be increased or decreased, as appropriate, for any fiscal quarter which began
prior to such Permitted Acquisition or disposition by the amount of Borrower
Consolidated EBITDA which the Borrower shall determine would have been
attributable to the acquired or disposed of assets for the fiscal quarter most
recently ended on or prior to the date of such Permitted Acquisition or
disposition, provided that (i) the Administrative Agent shall have consented to
the calculation on the basis of which the Borrower determined such amount to be
so attributed and (ii) for the fiscal quarter in which the Permitted
Acquisition or disposition has occurred, such increase or decrease shall be
prorated to reflect only the days during such fiscal quarter prior to the
consummation of the Permitted Acquisition or disposition.
(iv) "PERMITTED ACQUISITION" by inserting after the words "provided
that" and before clause (w) the following new clause (v):
(iv) if, after giving effect to such acquisition, the amount of
Indebtedness of the Borrower and its Subsidiaries shall have increased, the
Required Lenders shall have consented to such acquisition in their sole
discretion;
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<PAGE> 3
(b) inserting therein, in proper alphabetical order, the following defined
terms:
"AMENDMENT 4 EFFECTIVE DATE" means the date on which the Amended and
Restated Credit Agreement dated as of February 28, 1999, amending this
Agreement, became effective.
"AVAILABLE AMOUNT" means, (i) prior to the earlier of July 15, 1999 or
the date on which the purchase of the capital stock of JVC pursuant to the
Put/Call Arrangements is consummated, $80,000,000 (the earlier of such
dates, the "TRIGGER DATE"), and (ii) on or after the Trigger Date, the
Borrowing Base.
"BORROWING BASE" means, at any date, the amount of the Borrowing Base
as of the date of the Borrowing Base Certificate then most recently
delivered by the Borrower pursuant to Section 5.01(1) (the "BORROWING BASE
DATE"), determined by calculating the sum of (i) 85% of the aggregate
amount of Eligible Receivables at the Borrowing Base Date plus (ii) 50% of
the aggregate amount of Eligible Inventory at the Borrowing Base Date plus
(iii) the Facilities Domestic Amount at the Borrowing Base Date plus (iv)
the Facilities Foreign Amount at the Borrowing Base Date.
"BORROWING BASE CERTIFICATE" means a certificate, duly executed by a
Financial Officer, appropriately completed and in substantially the form of
Exhibit J hereto.
"ELIGIBLE INVENTORY" means, at any date, the value (determined at the
lower of cost or market on a first-in, first-out basis) of all Inventory
owned by (and in the possession or under the control of) the Borrower or
any Subsidiary Guarantor and located in a jurisdiction in the United Stated
of America, as to which appropriate Uniform Commercial Code file search
reports have been received and appropriate Uniform Commercial Code
financing statements have been filed naming the Borrower or such Subsidiary
Guarantor as "DEBTOR" and the Administrative Agent as "SECURED PARTY" and
in which the Administrative Agent has a first priority perfected security
interest and as to which all representations and warranties in the
applicable Security Agreement are true and correct (excluding, however, any
such Inventory which is covered by a negotiable document of title or is in
transit or has been shipped to a customer, even if on a consignment or
"SALE OR RETURN" basis, unless the Required Lenders (in their reasonable
judgment) notify the Borrower in writing that any such Inventory may be
included in Eligible Inventory); provided that the
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<PAGE> 4
Required Lenders (through the Administrative Agent) may at any time exclude from
Eligible Inventory any type of Inventory which the Required Lenders (in their
reasonable judgment) determine to be unmarketable.
"ELIGIBLE RECEIVABLES" means, at any date, the aggregate of all Receivables
at said date due to the Borrower and the Subsidiary Guarantors other than the
following (determined without duplication):
(a) all Receivables which, at the date of issuance of the respective
invoice therefor, were payable more than sixty days after such invoice,
(b) any Receivable due from an account debtor whose principal place of
business is located outside of the United States of America unless (i) such
Receivable is backed by U.S. Government insurance (in form and substance
satisfactory to the Administrative Agent) or a letter of credit (in form and
substance satisfactory to the Administrative Agent) issued or confirmed by a
bank organized under the laws of the United States of America or a State thereof
and having capital and surplus in excess of $500,000,000 (so long as such
insurance or such letter of credit has been delivered to the Administrative
Agent as additional collateral under the Security Documents) or (ii) such
account debtor has previously been approved in writing by the Required Lenders
as an eligible foreign account debtor for purposes of this Agreement,
(c) any Receivable due from an account debtor which the Required Lenders
(through the Administrative Agent) have notified the Borrower does not have a
satisfactory credit standing (as determined in the reasonable judgment of the
Required Lenders),
(d) any Receivable which remains unpaid for more than ninety days measured
from the date of the original issuance of the invoice therefor,
(e) any Receivables which arise from the delivery of Inventory on a
bill-and-hold, sale-or-return or guaranteed sale terms basis,
(f) all Receivables due from any account debtor if more than 15% of the
aggregate amount of the Receivables of such account debtor (exclusive of
Receivables described in clause (f) below) have at the time remained unpaid for
more than ninety days (measured from the date of the original issuance of the
invoice therefor),
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<PAGE> 5
(g) any Receivable as to which there is any unresolved dispute with or
offset or counterclaim by the respective account debtor (but only to the extent
of such dispute, offset or counterclaim),
(h) any Receivable evidenced by an instrument or chattel paper (as defined
in Article 9 of the Uniform Commercial Code) not in the possession of the
Administrative Agent, or which has been reduced to a judgment,
(i) if the Receivables due from any account debtor exceed an amount equal
to 20% of the aggregate of all Receivables at said date, an amount of such
Receivables equal to such excess, and
(j) any Receivable with respect to which the Administrative Agent does not
have a first priority perfected security interest or any of the representations
or warranties in the applicable Security Agreement is untrue or incorrect.
"FACILITIES DOMESTIC AMOUNT" means, at any date, an amount equal to (i) 80%
of the sum of the Facility Amounts at such date with respect to the Facilities
located in a jurisdiction in the United States of America minus (ii) the
aggregate principal amount of Term Loans outstanding on the Amendment 4
Effective Date; provided that the "Facilities Domestic Amount" shall not exceed
$60,000,000. It is understood that the Facilities Domestic Amount" shall not be
reduced by any exposure of the Borrower or any Subsidiary under Hedging
Agreements.
"FACILITIES FOREIGN AMOUNT" means, at any date, an amount equal to (i) 80%
of the sum of the Facility Amounts at such date with respect to the Facilities
located in a jurisdiction outside the United States of America, to the extent
such Facilities are subject to the Lien of the Collateral Documents (unless the
Required Lenders otherwise agree), minus (ii) the aggregate principal or face
amount of Indebtedness outstanding on such date of each Foreign Subsidiary that
owns any Facility the Facility Amount with respect to which is included in
clause (i) of this definition (other than Indebtedness permitted by Section
6.01(iv)); provided that the "Facilities Foreign Amount" shall not exceed
$15,000,000. It is understood that the Facilities Foreign Amount shall not be
reduced by any exposure of the Borrower or any Subsidiary under Hedging
Agreements.
5
<PAGE> 6
"FACILITY" means (i) any real property owned and used by the Borrower
or any of its Subsidiaries at Cherokee, Alabama, Seneca, Illinois, Crystal
City, Missouri, Geneva, Utah (and, to the extent such real property is owned
and used by the IPG Distribution Group, elsewhere in the United States of
America), Hoechst, Germany and (from and after the date JVC becomes a
Subsidiary) Pont-de-Claix, France (ii) all buildings, fixtures, machinery and
equipment owned by such Person and located thereon and (iii) all machinery and
equipment owned by the IPG Distribution Group which is located on real property
in the United States of America leased to the IPG Distribution Group.
"FACILITY AMOUNT" means at any date, with respect to any Facility,
the orderly liquidation value thereof, as set forth in the appraisal with
respect to such Facility delivered by the Borrower pursuant to Section 5.01(m)
and approved by the Required Lenders in their sole judgment. The Lenders shall
use their good faith efforts to review any such appraisal, and to advise the
Borrower whether such appraisal has been approved by them, within five Business
Days of receipt thereof.
"INVENTORY" means inventory (as defined in Article 9 of the Uniform
Commercial Code) to the extent comprised of readily marketable materials,
products or goods of a type manufactured or consumed by the Borrower or any
Subsidiary Guarantor in the ordinary course of business as presently conducted
(but excluding work-in-process which is not readily marketable in its current
form).
"RECEIVABLES" means, as at any date, the unpaid portion of the
obligation, payable in U.S. Dollars as stated on the respective invoice, of a
customer (other than an Affiliate of the Borrower or the U.S. government or any
political subdivision or any agency thereof) of the Borrower or any Subsidiary
Guarantor in respect of Inventory purchased and shipped, net of any credits,
rebates or offsets owed to the respective customer and also, if the Required
Lenders (in their reasonable judgment) shall so specify by notice to the
Borrower (through the Administrative Agent), net of any commissions payable to
third parties.
"SENIOR LEVERAGE RATIO" means, at the last day of any fiscal quarter,
the ratio of (i) Consolidated Senior Indebtedness on such day (other than such
Indebtedness consisting of contingent obligations with respect to letters of
credit and letters of guarantee) to (ii) Adjusted Borrower EBITDA for the
period of our consecutive fiscal quarters ended on such day. For purposes of
this definition, "CONSOLIDATED SENIOR INDEBTEDNESS" means Consolidated
Indebtedness other than the Senior
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<PAGE> 7
Subordinated Notes and any other Indebtedness which by its terms is
subordinated in right of payment to Indebtedness created under this
Agreement on written terms acceptable to the Administrative Agent. For
purposes of determining Borrower Consolidated EBITDA for purposes of
determining Adjusted Borrower EBITDA at any time during the fiscal
quarter in which a Permitted Acquisition has been made and the three
fiscal quarters immediately succeeding such fiscal quarter, Borrower
Consolidated EBITDA shall be increased for any fiscal quarter which
began prior to such Permitted Acquisition by the amount of Borrower
Consolidated EBITDA which the Borrower shall determine would have been
attributable to the acquired assets for the fiscal quarter most
recently ended on or prior to the date of such Permitted Acquisition;
provided that (i) the Administrative Agent shall have consented to the
calculation on the basis of which the Borrower determined such amount
to be so attributed and (ii) for the fiscal quarter in which the
Permitted Acquisition has occurred, such increase shall be prorated to
reflect only the days during such fiscal quarter prior to the
consummation of the Permitted Acquisition.
(c) deleting the definition of "CONSOLIDATED NET WORTH".
Section 3. Section 2.01(b). The first sentence of Section 2.01(b) of
the Credit Agreement is amended in its entirety to read as follows:
Subject to the terms and conditions set forth herein, each Lender
agrees to make loans to the Borrower from time to time during the
Availability Period in an aggregate Dollar Amount that will not result
in (i) such Lender's Revolving Credit Exposure exceeding such Lender's
Revolving Commitment or (ii) the aggregate Revolving Credit Exposures
exceeding the Available Amount.
Section 4. Section 2.04(b). The numbered clauses at the end of the
last sentence of Section 2.04(b) of the Credit Agreement are amended in their
entirety to read as follows:
(i) the LC Exposure shall not exceed the least of (x) $30,000,000, (y) the
total Revolving Commitments at such time and (z) the Available Amount at such
time, and (ii) no more than twenty Letters of Credit shall be outstanding.
Section 5. Section 2.09(b). (a) Section 2.09(b)(i) of the Credit
Agreement is amended to add after the words "Schedule 2.09" in the second
proviso to subclause (x) the words "and Asset Sales specified in clause (iv) of
Section 6.03(c), other than the first $15,000,000 of Net Cash Proceeds from the
sale of the Alumina Chemicals business unit,"
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<PAGE> 8
(b) Section 2.09(b)(ii) of the Credit Agreement is amended to add before
the period at the end of the second paragraph thereof the following proviso:
; and provided further that the first $15,000,000 of Net Cash Proceeds from
the sale of the Alumina Chemicals business unit shall be applied to reduce
Revolving Commitments.
(c) The first sentence of Section 2.09(b)(iii) of the Credit Agreement is
amended in its entirety to read as follows:
(iii) If on the date of any reduction of the Revolving Commitments
pursuant to clauses (i) or (ii) of this paragraph the aggregate Revolving
Credit Exposure on such date exceeds the aggregate Revolving Commitments on
such date as then reduced or the Available Amount (or if the Revolving
Commitments have terminated but there is still Revolving Credit Exposure),
the Borrower shall apply an amount equal to such excess to prepay the
Revolving Loans and cash collateralize Letters of Credit so that after
giving effect thereto the Revolving Credit Exposure of each Lender does not
exceed its Revolving Commitment as then reduced or its pro rata share of
the Available Amount (or until there is no Revolving Credit Exposure).
SECTION 6. Section 4.03. Section 4.03 of the Credit Agreement is amended to
add the following new clause (e) at the end thereof:
(e) Immediately after giving effect to such Borrowing or such issuance,
amendment, renewal or extension, as the case may be, the aggregate Revolving
Credit Exposures do not exceed the Available Amount at such date.
SECTION 7. Section 5.01. Section 5.01 of the Credit Agreement is amended to
delete the word "and" at the end of clause (k), reletter clause (l) as clause
(n), and insert in the proper alphabetical order the following clauses (l) and
(m):
(l)(x) on the date the Available Amount first equals the Borrowing
Base, and (y) as soon as available and in any event within (i) ten Business
Days after the last day of each calendar month, and (ii) five Business Days
after receipt of a request therefor (which may be given from time to time
after the occurrence and during the continuation of a Default) from the
Required Lenders, a Borrowing Base Certificate as at such day or the date
of such request, as the case may be; provided that, in the case of any
Borrowing Base Certificate to be delivered pursuant to the foregoing clause
(ii), Eligible Inventory shall be calculated based on the amount of
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<PAGE> 9
Eligible Inventory as of the date of the Borrowing Base Certificate most
recently delivered pursuant to clause (i), adjusted to reflect the
Company's best estimate of changes in Eligible Inventory since the date of
such Borrowing Base Certificate;
(m) on or prior to May 31, 1999, an appraisal of the orderly
liquidation value of the fixed assets of the Borrower and its Subsidiaries
conducted by Valuation Research Corporation; and
SECTION 8. Section 5.09. Section 5.09 of the Credit Agreement is amended to
add the following clause (d) at the end thereof:
(d) The Borrower will deliver to the Lenders, (i) in the case of JVC,
on or before the date which is 90 days after JVC becomes a Subsidiary, and
(ii) in the case of all other Foreign Subsidiaries, on or before June 30,
1999, a memorandum (a "FOREIGN COLLATERAL MEMORANDUM"), prepared after
consultation with the Administrative Agent, setting forth the stock and
assets of Foreign Subsidiaries in which the Borrower proposes to cause to
be granted to the Administrative Agent a security interest, taking into
account legal issues, tax and other cost considerations and the desire of
the Borrower and the Lenders that Foreign Subsidiaries have available to
them Indebtedness permitted by clauses (xi) and (xii) of Section 6.01(a).
If the Required Lenders consent in writing (and in their sole discretion)
to the proposal set forth in a Foreign Collateral Memorandum or consent to
an alternative proposal with respect to the relevant Foreign Subsidiaries
(any such consent, a "CONSENT"), the Borrower shall cause the security
interest described therein to be granted as promptly as practicable and in
any event no later than the date which is 45 days after the effective date
of such Consent. If the Required Lenders (in their sole discretion) have
not given a Consent within 60 days after receipt by the Administrative
Agent of the related Foreign Collateral Memorandum, the Required Lenders
may by written notice to the Borrower deem the Borrower to have failed to
perform the covenant set forth in this paragraph (d), which deemed failure
shall constitute an Event of Default.
SECTION 9. Section 6.01(a). Section 6.01(a)(xi) of the Credit Agreement is
amended to replace the number "$10,000,000" with the number "$15,000,000".
SECTION 10. Section 6.03(c). Section 6.03(c) of the Credit Agreement is
amended by replacing the words "and" preceding the designation "(iii)" with a
comma and inserting before the period at the end of clause (iii) the following:
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<PAGE> 10
, and (iv) the sale of Borrower's interest in Kaiser LaRoche Hydrate
Partnership and the Alumina Chemicals business unit, provided that the
sale of the Alumina Chemicals business unit is consummated on or prior
to the date, and for the consideration, specified by the Borrower to the
Lenders in writing on March 17, 1999.
SECTION 11. Section 6.06(a)(ii). (a) Section 6.06(a)(ii) of the Credit
Agreement is amended by adding prior to the comma at the end thereof the
following:
; provided that the Required Lenders shall have consented to such
declaration and payment in their sole discretion
(b) Section 6.06(a)(v) of the Credit Agreement is amended to replace the
words "during the term of this Agreement does not exceed $3,500,000" with the
following:
after February 28, 1999 does not exceed $500,000
SECTION 12. Section 6.11. The chart set forth in Section 6.11 of the
Credit Agreement is amended in its entirety to read as follows:
Fiscal Year Amount
----------- ------
1998 $75,000,000
1999 55,000,000
2000 25,000,000
2001 25,000,000
2002 25,000,000
2003 25,000,000
Thereafter 25,000,000;
provided that for any fiscal year during which JVC is a subsidiary, the amount
set forth opposite such year shall be $30,000,000 instead of $25,000,000.
SECTION 13. Section 6.12. The chart set forth in Section 6.12 of the
Credit Agreement is amended in its entirety to read as follows:
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<PAGE> 11
Period Ratio
------ -----
3/01/99 - 5/31/99 12.50:1
6/01/99 - 8/31/99 9.50:1
9/01/99 - 11/30/99 9.25:1
12/01/99 - 2/28/00 3.00:1
3/01/00 - 5/31/01 4.00:1
6/01/01 - 5/31/02 3.50:1
Thereafter 3.25:1
SECTION 14. Section 6.13. Section 6.13 of the Credit Agreement is amended
in its entirety to read as follows:
SECTION 6.13. Senior Leverage Ratio. At the last day of any fiscal
quarter of the Borrower in any period (both dates inclusive) set forth
below, the Senior Leverage Ratio will not exceed the ratio set forth below
opposite such period.
Period Ratio
------ -----
3/01/99 - 5/31/99 4.00:1
6/01/99 - 11/30/99 3.75:1
12/01/99 - 2/28/00 3.50:1
Thereafter 3.00:1
SECTION 15. Section 6.14. Section 6.14 of the Credit Agreement is amended
in its entirety to read as follows:
SECTION 6.14. Interest Coverage Ratio. At the last day of any fiscal
quarter of the Borrower in any period (both dates inclusive) set forth
below, the Interest Coverage Ratio will not be less than the ratio set
forth below opposite such period.
Period Ratio
------ -----
3/01/99 - 5/31/99 0.40:1
6/01/99 - 8/31/99 0.20:1
9/01/99 - 11/30/99 0.55:1
12/01/99 - 2/28/00 1.00:1
3/01/00 - 5/31/01 2.50:1
Thereafter 2.75:1
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<PAGE> 12
SECTION 16. Article VII. Clause (d) of Article VII is amended to
replace the expression "or 5.08" with the expression ",5.08 or 5.09(d)".
SECTION 17. Exhibit J. A new Exhibit J is added to the Credit
Agreement, to read in its entirety as set forth on Exhibit J hereto.
SECTION 18. Representations of Borrower. The Borrower represents and
warrants that after giving effect to the foregoing provisions of this Amended
and Restated Credit Agreement (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 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.
SECTION 19. Governing Law. This Amended and Restated Credit Agreement
shall be governed by and construed in accordance with the laws of the State of
New York.
SECTION 20. Counterparts. This Amended and Restated Credit Agreement
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 21. Effectiveness. This Amended and Restated Credit Agreement
shall become effective, and the Credit Agreement shall have been restated to
read as set forth in the Credit Agreement with the amendments specified herein,
as of the date hereof on the date (the "EFFECTIVE DATE") when the
Administrative Agent shall have received (i) from the Borrower, for the account
of each Lender which has signed a counterpart hereof on or prior to April 16,
1999, an amendment fee equal to 0.25% of such Lender's aggregate Revolving
Credit Exposure and Term Loans on such date, and (ii) 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.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Credit Agreement to be duly executed as of the date first above
written.
LAROCHE INDUSTRIES INC.
By: _________________________________________
Name:
Title:
THE CHASE MANHATTAN BANK
By: _________________________________________
Name:
Title:
HIBERNIA NATIONAL BANK
By: _________________________________________
Name:
Title:
WACHOVIA BANK, N.A.
By: _________________________________________
Name:
Title:
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<PAGE> 14
THE BANK OF NOVA SCOTIA
By: _________________________________________
Name:
Title:
By: _________________________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By: _________________________________________
Name:
Title:
AMSOUTH BANK
By: _________________________________________
Name:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By: _________________________________________
Name:
Title:
By: _________________________________________
Name:
Title:
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<PAGE> 15
COMERICA BANK
By: _________________________________________
Name:
Title:
NATIONAL BANK OF CANADA
By: _________________________________________
Name:
Title:
By: _________________________________________
Name:
Title:
PARIBAS
By: _________________________________________
Name:
Title:
By: _________________________________________
Name:
Title:
15
<PAGE> 16
EXHIBIT J
[Form of Borrowing Base Certificate]
BORROWING BASE CERTIFICATE
Reference is made to the Amended and Restated Credit Agreement dated
as of February 28, 1999, amending the Credit Agreement dated as of August 26,
1997, as amended by Amendment No. 1 dated as of September 30, 1997, Waiver and
Amendment No. 2 dated as of May 12, 1998 and Consent and Amendment No. 3 dated
as of October 23, 1998 (as modified and supplemented and in effect from time to
time, the "CREDIT AGREEMENT") among LaRoche Industries Inc. (the "COMPANY"),
the lenders party thereto named therein, and The Chase Manhattan Bank, as
administrative agent for said lenders. Terms defined in the Credit Agreement
are used herein as defined therein.
Pursuant to Section 5.01(1) of the Credit Agreement, the undersigned,
a Financial Officer of the Company, hereby certifies that, to the best of
[his/her] knowledge, attached hereto as Annex 1 is a true and accurate
calculation of the Borrowing Base as at the [monthly/weekly] accounting period
ended __________________, ____ determined in accordance with the requirements
of the Credit Agreement.
IN WITNESS WHEREOF, the undersigned has caused this certificate to be
duly executed as of the ___ day of _________, ____.
----------------------------------
Name:
Title:
<PAGE> 17
ANNEX 1
Borrowing Base Certificate
LaRoche Industries Inc.
Borrowing Base Certificate
Omitted (000's)
********************************************************************************
Gross Receivables - beginning balance
period ended ______________, __________ _____________
Rebates, credits and offsets _____________
Receivables from Affiliates _____________
Governmental Receivables _____________
Net Receivables - beginning balance
period ended ______________, __________ _____________
Plus: total sales for period _____________
Less: total cash receipts for period _____________
total credits for period (returns and
allowances) _____________
total increase (decrease) in offsets for
period _____________
total other adjustments for period (+/-)
(details attached) including rebates
and credits _____________
Net Receivables - ending balance
period ended ______________, ___________ _____________
Less: ineligible Receivables at period end
(determined pursuant to definition of
Eligible Receivables in Credit
Agreement, without duplication):
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Receivables over 60 days original
terms __________
Export Receivables without acceptable
letters of credit or US Govt insurance
delivered to the Administrative Agent as
collateral and not otherwise approved by
Required Lenders __________
Receivables from debtors with
unsatisfactory credit standing (as
determined by Required Lenders) __________
Receivables remaining unpaid over 90
days from invoice date __________
Receivables arising from delivery of
Inventory on bill-and-hold, sale-or-return or
guaranteed sale basis __________
Receivables from debtors with excess of
15% of balances past 90 days from invoice
date (exclusive of Receivables subject to
dispute) __________
Receivables subject to dispute, offset or
counterclaim __________
Receivables evidenced by instruments
or chattel paper not in the possession of
Administrative Agent or which has been
reduced to a judgment __________
Receivables from any debtor to extent they
exceed 20% of aggregate of all Receivables __________
Receivables as to which Administrative
Agent does not have first priority perfected
security interest or representations and
warranties are untrue or incorrect __________
Total ineligible Receivables __________
Total Eligible Receivables __________
****************************************************************
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Inventory at lower of cost or market (using
first-in-first-out-basis) owned by the
Company, located in United States, and
covered by appropriate filings (from
attached schedule):
Beginning period Inventory balance
____________, ______ _____________
Ending period Inventory balance
____________, ______ _____________
Less: ineligible Inventory at period end
(determined pursuant to definition
of Eligible Inventory in Credit
Agreement):
Inventory not located in U.S. _____________
Inventory as to which Administrative Agent
does not have first priority perfected
security interest or representation and
warranties are untrue _____________
Inventory covered by negotiable document
of title _____________
Inventory in transit or shipped to customers _____________
Inventory determined to be unmarketable _____________
Total Eligible Inventory _____________
*******************************************************************************
Facilities in U.S.:
Cherokee, Alabama _____________
Seneca, Illinois _____________
Crystal City, Missouri _____________
Geneva, Utah _____________
other IPG sites _____________
80% of sum of Facility Amounts _____________
4
<PAGE> 20
Less: Ending period Term Loans Balance ________
Subtotal
Facilities Domestic Amount:
Lesser of Subtotal and $60 million ________
*******************************************************************************
Facilities outside U.S.:
Hoechst, Germany ________
Pont-de-Claix, France (if JVC is a
Subsidiary) ________
80% of sum of Facility Amounts ________
Less: Ending period Indebtedness of
relevant Foreign Subsidiaries ________
Subtotal ________
Facilities Foreign Amount: ________
Lesser of Subtotal and $20 million ________
*******************************************************************************
Borrowing Base:
85% of Eligible Receivables ________
Plus: 50% of Eligible Inventory
Plus: Facilities Domestic Amount ________
Plus: Facilities Foreign Amount ________
Borrowing Base: ________
*******************************************************************************
Revolving Loans Balance
Period begin ___________, ____ ________
advances for period ________
reductions for period ________
other adjustments (+/-) ________
5
<PAGE> 21
Revolving Loans Balance
Period end __________, ____ __________
Total outstandings __________
Availability (overadvance) __________
********************************************************************************
6
<PAGE> 22
Inventory Schedule
********************************************************************************
Unit
Cost
Quantity Cents/ Value Eligible
M Units Unit M$ M$
-------- ------ ----- --------
Finished Product
Inventory
- ----------------
Location/product/unit
Total fin. prod. inv
Raw Material Inventory
- ----------------------
Location/product/unit
Total raw materials inv.
Inventory Value - M$
- --------------------
Finished product inventory
Raw materials inventory
All inventory set forth above was produced in compliance with the requirements
of the Fair Labor Standards Act, as amended.
********************************************************************************
7
<PAGE> 1
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
For the years ended February 28, except for 1996 which is February 29
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before income taxes, minority interests
and extraordinary charge $(42,612) $ (9,452) $ 1,076 $32,122 $28,243
Less: Income from equity investments (6,863) (2,698) (4,909) (2,647) (2,905)
Distributions from equity investments 12,440 4,691 5,701 1,332 2,933
Fixed charges 26,584 21,346 17,992 17,853 17,751
Less: Accretion related to LCI stock -- -- -- -- (3,654)
Less: Capitalized Interest (516) (1,089) (860) -- --
-------- -------- -------- ------- -------
Earnings $(10,967) $ 12,798 $ 19,000 $48,660 $42,368
======== ======== ======== ======= =======
FIXED CHARGES
Interest expense $ 23,204 $ 17,510 $ 14,881 $15,973 $13,083
Capitalized interest 516 1,089 860 -- --
Interest portion of rental expense 2,864 2,747 2,251 1,880 1,014
Accretion related to LCI stock -- -- -- -- 3,654
-------- -------- -------- ------- -------
Fixed charges $ 26,584 $ 21,346 $ 17,992 $17,853 $17,751
======== ======== ======== ======= =======
======== ======== ======== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES ---x ---x 1.06x 2.73x 2.39x
======== ======== ======== ======= =======
</TABLE>
(1) For the year ended February 28, 1999, earnings are inadequate to cover fixed
charges by approximately $37.6 million.
(2) 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
(as of February 28, 1999)
Name State or Country of Organization
LaRoche International Inc. Delaware
LaRoche Overseas Inc. Delaware
LaRoche Europe Holdings, Inc. Delaware
LCI Stone Inc. Delaware
LII Europe S.A.R.L. France
ChlorAlp S.A.S. (50% owned) France
LII Management S.A.R.L. France
LII Europe GmbH Germany
The names of certain subsidiaries and equity entities which, considered in the
aggregate, would not constitute a significant subsidiary, have been omitted
from the above list.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS - FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K FOR FISCAL YEAR 1999 - LAROCHE INDUSTRIES INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 5,380
<SECURITIES> 0
<RECEIVABLES> 55,026
<ALLOWANCES> (499)
<INVENTORY> 22,105
<CURRENT-ASSETS> 120,793
<PP&E> 310,092
<DEPRECIATION> (106,497)
<TOTAL-ASSETS> 389,777
<CURRENT-LIABILITIES> 147,832
<BONDS> 202,221
0
0
<COMMON> 4
<OTHER-SE> (10,609)
<TOTAL-LIABILITY-AND-EQUITY> 389,777
<SALES> 389,542
<TOTAL-REVENUES> 389,542
<CGS> 357,750
<TOTAL-COSTS> 357,750
<OTHER-EXPENSES> 45,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,314
<INCOME-PRETAX> (30,189)
<INCOME-TAX> 2,779
<INCOME-CONTINUING> (32,968)
<DISCONTINUED> (7,550)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,518)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
