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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1015226
___________________________ ___________________
(State of Incorporation) (I.R.S. Employer
Identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
________________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(405) 235-4546
______________
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
___________________________________ _________________________
Common Stock, Par Value $.10 New York Stock Exchange
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
(Facing Sheet Continued)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for the
shorter period that the Registrant has had to file the reports),
and (2) has been subject to the filing requirements for the past 90
days. YES X NO
______ _____.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________.
As of February 28, 1999, the aggregate market value of the
7,650,412 shares of voting stock of the Registrant held by
non-affiliates of the Company equaled approximately $22,951,236
based on the closing sales price for the Company's common stock as
reported for that date on the New York Stock Exchange. That amount
does not include the 1,463 shares of voting Convertible Non-
Cumulative Preferred Stock (the "Non-Cumulative Preferred Stock")
held by non-affiliates of the Company. An active trading market
does not exist for the shares of Non-Cumulative Preferred Stock.
As of February 28, 1999, the Registrant had 11,866,486 shares
of common stock outstanding (excluding 3,242,190 shares of common
stock held as treasury stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
Page
____
Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 1
Chemical Business 1
Climate Control Business 7
Automotive Products Business 11
Industrial Products Business 12
Employees 13
Research and Development 13
Environmental Matters 13
Item 2. Properties
Chemical Business 16
Climate Control Business 17
Automotive Products Business 18
Industrial Products Business 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 4A. Executive Officers of the Company 21
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 22
Stockholders 22
Dividends 22
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 28
Results of Operations 32
Liquidity and Capital Resources 36
Year 2000 Issues 43
iii
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
General 45
Interest Rate Risk 46
Raw Material Price Risk 48
Foreign Currency Risk 48
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 48
Special Note Regarding Forward-Looking Statements 49
PART III 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 52
iv
PART I
______
Item 1. BUSINESS
________
General
_______
LSB Industries, Inc. (the "Company") was formed in 1968 as an
Oklahoma corporation, and in 1977 became a Delaware corporation.
The Company is a diversified holding company which is engaged,
through its subsidiaries, in (i) the manufacture and sale of
chemical products for the explosives, agricultural and industrial
acids markets (the "Chemical Business"), (ii) the manufacture and
sale of a broad range of hydronic fan coils and water source heat
pumps as well as other products used in commercial and residential
air conditioning systems (the "Climate Control Business"), and
(iii) the manufacture or purchase and sale of certain automotive
and industrial products, including automotive bearings and other
automotive replacement parts (the "Automotive Products Business")
and the purchase and sale of machine tools (the "Industrial
Products Business").
As previously announced, the Company is continuing with its
evaluation of the spin-off of the Automotive Products Business
("Automotive") to its shareholders as a dividend. The spin-off of
Automotive will require, among other things, commitment to a formal
plan, receipt by the Company from the Internal Revenue Service of
a favorable ruling or an opinion of counsel confirming tax-free
treatment, certain Securities and Exchange Commission filings,
arrangement for lines of credit for Automotive, and LSB Board of
Directors' approval. Subject to completion of the above
conditions, management believes there is a strong likelihood that
the spin-off will be completed during 1999. However, there are no
assurances that the Company will spin-off Automotive.
Segment Information and Foreign and Domestic Operations and Export
Sales
__________________________________________________________________
Schedules of the amounts of sales, operating profit and loss,
and identifiable assets attributable to each of the Company's lines
of business and of the amount of export sales of the Company in the
aggregate and by major geographic area for each of the Company's
last three fiscal years appear in Note 13 of the Notes to
Consolidated Financial Statements included elsewhere in this
report.
A discussion of any risks attendant as a result of a foreign
operation or the importing of products from foreign countries
appears below in the discussion of each of the Company's business
segments.
Chemical Business
_________________
General
_______
The Company's Chemical Business manufactures three principal
product lines that are derived from anhydrous ammonia: (1)
fertilizer grade ammonium nitrate for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric acid
for commercial applications primarily in the paper industry. The
Chemical Business' products are sold in niche markets where the
1
Company believes it can establish a position as a market leader.
See "Special Note Regarding Forward-Looking Statements".
The Chemical Business' principal manufacturing facility is
located in El Dorado, Arkansas ("El Dorado Facility"), and its
other manufacturing facilities are located in Hallowell, Kansas,
Wilmington, North Carolina, and four locations in Australia.
For each of the years 1998, 1997 and 1996, approximately 26%
of the sales of the Chemical Business consisted of sales of
fertilizer and related chemical products for agricultural purposes,
which represented approximately 12%, 13% and 14% of the Company's
consolidated sales for each respective year, and approximately 52%,
61% and 61% of the sales of the Chemical Business consisted of
sales of ammonium nitrate and other chemical-based blasting
products for the mining industry, which represented approximately
23%, 31% and 33% of the Company's 1998, 1997 and 1996 consolidated
sales, respectively. The Chemical Business accounted for
approximately 45%, 50% and 54% of the Company's 1998, 1997 and 1996
consolidated sales, respectively.
Agricultural Products
_____________________
The Chemical Business produces ammonium nitrate, a nitrogen-
based fertilizer, at the El Dorado Facility. In 1998, the Company
sold approximately 143,000 tons of ammonium nitrate fertilizer to
farmers, fertilizer dealers and distributors located primarily in
the south central United States.
Ammonium nitrate is one of several forms of nitrogen-based
fertilizers which include anhydrous ammonia and urea. Although, to
some extent, the various forms of nitrogen-based fertilizers are
interchangeable, each has its own characteristics which produce
agronomic preferences among end users. Farmers decide which type
of nitrogen-based fertilizer to apply based on the crop planted,
soil and weather conditions, regional farming practices and
relative nitrogen fertilizer prices.
The Chemical Business is a major manufacturer of fertilizer
grade ammonium nitrate, which it markets primarily in Texas,
Arkansas and the surrounding regions. This market, which is in
close proximity to its El Dorado Facility, includes a high
concentration of pasture land and row crops which favor ammonium
nitrate over other nitrogen-based fertilizers. The Company has
developed the leading market position in Texas by emphasizing high
quality products, customer service and technical advice. Using a
proprietary prilling process, the Company produces a high
performance ammonium nitrate fertilizer that, because of its
uniform size, is easier to apply than many competing nitrogen-based
fertilizer products. The Company believes that its "E-2" brand
ammonium nitrate fertilizer is recognized as a premium product
within its primary market. In addition, the Company has developed
long term relationships with end users through its network of 22
owned and operated wholesale and retail distribution centers.
In 1998, the Chemical Business has been adversely affected by
the extreme drought conditions in the mid-south market during the
primary fertilizer season, followed by excess wet conditions and
floods in the fall season, resulting in substantially lower volume
and lower sales prices for certain of its products sold in its
2
agricultural markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Special Note
Regarding Forward-Looking Statements".
Explosives
__________
The Chemical Business manufactures low density ammonium
nitrate-based explosives including bulk explosives used in surface
mining. In addition, the Company manufactures and sells a branded
line of packaged explosives used in construction, quarrying and
other applications, particularly where controlled explosive charges
are required. The Company's bulk explosives are marketed primarily
through five Company-owned distribution centers, three of which are
located in close proximity to the customers' surface mines in the
coal producing states of Kentucky, Missouri, and West Virginia.
Additionally, the Company, through its Australian subsidiary,
manufactures and distributes bulk and packaged explosives in
Australia. The Company emphasizes value-added customer services
and specialized product applications for its bulk explosives. Most
of the sales of bulk explosives are to customers who work closely
with the Company's technical representatives in meeting their
specific product needs. In addition, the Company sells bulk
explosives to independent wholesalers and to other explosives
companies. Packaged explosives are used for application requiring
controlled explosive charges and typically command a premium price
and produce higher margins. The Company believes its Slurry
packaged explosive products are among the most widely recognized in
the industry. Slurry packaged explosive products are sold
nationally and internationally to other explosive companies and
end-users.
The Company has received an offer in 1999, the terms of which
it is presently negotiating with the company that made the offer,
to sell the Australian subsidiary; however, there are no assurances
that the Company will sell the Australian subsidiary.
Industrial Acids
________________
The Chemical Business manufactures and sells industrial acids,
primarily to the food, paper, chemical and electronics industries.
The Company is the leading supplier to third parties of
concentrated nitric acid which is a special grade of nitric acid
used in the manufacture of plastics, pharmaceuticals, herbicides,
explosives, and other chemical products. In addition, the Company
produces and sells regular, blended and mixed nitric acid and a
variety of grades of sulfuric acid. The Company competes on the
basis of price and service, including on-time reliability and
distribution capabilities. The Company operates the largest fleet
of tankcars in the concentrated nitric acid industry which provides
it with a significant competitive advantage in terms of
distribution costs and capabilities. In addition, the Company
provides inventory management as part of the value-added services
it offers to its customers.
The Company has identified concentrated nitric acid as a
strategic product line for its Chemical Business due to attractive
levels of profitability, increased diversity of end markets and the
ability to compete on a value added service basis. To support
further growth in its nitric acid business, the Company constructed
the DSN Plant located at the El Dorado Facility. The DSN Plant
3
uses a newer and more efficient process to produce concentrated
nitric acid directly from anhydrous ammonia, in contrast to the
conventional process which requires the input of regular nitric
acid, an intermediate step to produce concentrated nitric acid.
DSN Plant
_________
During the four years commencing January 1, 1994, the Chemical
Business spent approximately $32.0 million to construct and install
the DSN Plant. The DSN Plant began limited operations in 1995, and
such limited operations continued due to certain mechanical and
design problems associated with the plant's construction and
installation. As a result of such problems, production at the DSN
Plant was limited to approximately 170 and 223 tons per day for the
years ended December 31, 1997 and 1998, respectively. These
production rates approximate 60% and 80%, respectively, of the
stated capacity of 285 tons per day assuming 338 days of annual
production. In October, 1998, management completed certain
corrective actions at the DSN Plant. As a result of these
corrective actions, the DSN Plant has since produced at rates equal
to or above the stated capacity of 285 tons per day. While the
Company will seek to market the additional capacity of concentrated
nitric acid output to commercial markets, there can be no assurance
that the Company will be able to sell all of the additional
capacity in this market. However, to the extent that there is
insufficient demand for concentrated nitric acid, the Company
believes it can profitably use the concentrated nitric acid in the
production of mixed and blended acids and ammonium nitrate based
fertilizer and explosives (although at lower margins than if the
production were sold as concentrated nitric acid). See "Special
Note Regarding Forward-Looking Statements".
EDNC Baytown Plant
__________________
In June, 1997, two wholly owned subsidiaries of the Company,
El Dorado Chemical Company ("EDC") and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer")(collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC will act as an agent to construct and,
upon completion of construction, will operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC has guaranteed the performance of EDNC's obligations
under the Bayer Agreement.
Under the terms of the Bayer Agreement, EDNC is to lease the
EDNC Baytown Plant pursuant to a leveraged lease from an unrelated
third party with an initial lease term of ten years from the date
on which the EDNC Baytown Plant becomes fully operational. Bayer
will purchase from EDNC all of its requirements for nitric acid to
be used by Bayer at its Baytown, Texas facility for ten years from
the date on which the EDNC Baytown Plant becomes fully operational.
EDNC will purchase from Bayer its requirements for anhydrous
ammonia for the manufacture of nitric acid as well as utilities and
other services. Subject to certain conditions, EDNC will be
entitled to sell the amount of nitric acid manufactured at the EDNC
Baytown Plant which is in excess of Bayer's requirements to third
parties. The Bayer Agreement provides that Bayer will make certain
net monthly payments to EDNC which will be sufficient for EDNC to
recover all of its costs plus a profit. The Company estimates
that, after the initial start-up phase of operations of the EDNC
Baytown Plant, at full production capacity based on terms of the
4
Bayer Agreement and subject to the price of anhydrous ammonia, the
EDNC Baytown Plant is anticipated to generate approximately $35
million to $50 million in annual gross revenues. Unlike the
Chemical Business' regular sales volume, the market risk on this
additional volume is much less since the contract provides for
recovery of costs, as defined, plus a profit. See "Special Note
Regarding Forward-Looking Statements". Upon expiration of the
initial ten-year term from the date the EDNC Baytown Plant becomes
operational, the Bayer Agreement may be renewed for up to six
renewal terms of five years each; however, prior to each renewal
period, either party to the Bayer Agreement may opt against
renewal.
Under the original Bayer Agreement, if operations at the EDNC
Baytown Plant were not commenced by February 1, 1999, or upon a
change in control of LSB, EDC or EDNC, Bayer had an option to
terminate the Bayer Agreement. EDNC has an option to terminate the
Bayer Agreement upon the occurrence of certain events of default
which remain uncured. Bayer retains the right of first refusal
with respect to any bona fide third-party offer to purchase any
voting stock of EDNC or any portion of the EDNC Baytown Plant.
In January, 1999, the contractor constructing the EDNC Baytown
Plant informed the Company that it could not complete construction
alleging a lack of financial resources. The Company and certain
other parties involved in this project have demanded the
contractor's bonding company to provide funds necessary for
subcontractors to complete construction. The Company, the
contractor, the bonding company and Bayer have entered into an
agreement which provides that the bonding company will pay $12.9
million for payments to subcontractors for work performed prior to
February 1, 1999. In addition, the contractor has agreed to
provide, on a no cost basis, labor and to incur certain other
additional costs through the completion of the contract. Because
of this delay, an amendment was entered into in connection with the
Bayer Agreement. The amendment extended the requirement date that
the plant be in production by May 31, 1999, and fully operational
by June 30, 1999. The amendment also requires the Company to
reimburse Bayer for certain increased costs incurred by Bayer due
to the failure to complete the construction of the EDNC Baytown
Plant by February 1, 1999. The anticipated construction cost of
the EDNC Baytown Plant, not including the $12.9 million paid to
subcontractors by the bonding company, is currently anticipated to
be approximately $69 million. The Company anticipates that
construction of the EDNC Baytown Plant will be mechanically
complete and making acid by April 15, 1999, and, after completion
of certain performance tests, be fully operational by June 1, 1999.
Construction financing of the EDNC Baytown Plant is being provided
by an unaffiliated lender up to $75 million. Neither the Company
nor EDC has guaranteed any of the lending obligations for the EDNC
Baytown Plant. See "Special Note Regarding Forward-Looking
Statements".
Raw Materials
-------------
Anhydrous ammonia represents the primary component in the
production of most of the products of the Chemical Business. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Chemical business currently purchases
approximately 220,000 tons of anhydrous ammonia per year for use in
its manufacture of its products. The Company has contracts with
three suppliers of anhydrous ammonia. One contract expires in
5
April, 2000, one expires in June, 2000, and the other expires in
December, 2000. The Chemical Business is required to buy at least
120,000 tons of its annual requirements of anhydrous ammonia under
the contract expiring in April, 2000, at least 24,000 tons of its
annual requirements of anhydrous ammonia under the contract
expiring in June, 2000, and at least 60,000 tons of its annual
requirements of anhydrous ammonia under the contract expiring in
December, 2000, with additional quantities of anhydrous ammonia
available under each contract. Anhydrous ammonia is not being
currently supplied under the contract expiring in December, 2000,
due to that supplier's declaration of an event of force majeure as
a result of a temporary shut down of its plant caused by mechanical
problems. The Company has been able to, on a temporary basis,
obtain anhydrous ammonia from other sources on similar terms as
provided in the contract expiring in December, 2000.
During 1995, 1996, 1997, and the first half of 1998, there
were substantial increases in the price for anhydrous ammonia.
During each of these periods, the Chemical Business was unable to
increase its sales prices to cover all of the higher anhydrous
ammonia costs incurred by the Company, and in the future the
Chemical Business may not be able to pass along to its customers
the full amount of increases in anhydrous ammonia costs.
Accordingly, the Company's results of operations and financial
condition have in the past been adversely affected by cost
increases of raw materials, including anhydrous ammonia. During
the second half of 1998, cost for anhydrous ammonia decreased. The
ammonia industry added an additional one million tons of capacity
of anhydrous ammonia in the western hemisphere in 1998, and the
Company believes there is approximately one million tons of
additional annual capacity of anhydrous ammonia being constructed
in the western hemisphere scheduled for completion in 1999. The
Company believes this additional capacity may contribute to a
decline in the future market price of anhydrous ammonia. See
"Special Note Regarding Forward-Looking Statements".
The Company believes that it could obtain anhydrous ammonia
from other sources in the event of a termination of the above-
referenced contracts, but such may not be obtainable on as
favorable terms.
Seasonality
___________
The Company believes that the only seasonal products of the
Chemical Business are fertilizer and related chemical products sold
to the agricultural industry. The selling seasons for those
products are primarily during the spring and fall planting seasons,
which typically extend from February through May and from September
through November in the geographical markets in which the majority
of the Company's agricultural products are distributed. As a
result, the Chemical Business increases its inventory of ammonium
nitrate prior to the beginning of each planting season. Sales to
the agricultural markets depend upon weather conditions and other
circumstances beyond the control of the Company.
Patents
_______
The Company believes that the Chemical Business does not
depend upon any patent or license; however, the Chemical Business
does own certain patents that it considers important in connection
with the manufacture of certain blasting agents and high
explosives. These patents will expire in 1999.
6
Regulatory Matters
__________________
Each of the Chemical Business' domestic blasting product
distribution centers are licensed by the Bureau of Alcohol, Tobacco
and Firearms in order to manufacture and distribute blasting
products. The Australian distribution centers are subject to
comparable licensing requirements imposed by their controlling
government authorities. The Chemical Business is also subject to
extensive federal, state and local environmental laws, rules and
regulations. See "Environmental Compliance", "Environmental
Matters" and "Legal Proceedings".
Competition
___________
The Chemical business competes with other chemical companies
in its markets, many of whom have greater financial and other
resources than the Company. The Company believes that competition
within the markets served by the Chemical Business is primarily
based upon price, service, warranty and product performance. The
Company believes that the Chemical Business is the leader in the
Texas ammonium nitrate market and is the leading producer of
concentrated nitric acid in the United States for third party
sales. See "Special Note Regarding Forward-Looking Statements".
Developments in Asia
____________________
The Chemical Business' Australian subsidiaries' results of
operations have been adversely affected during 1997 and 1998 due to
economic developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Chemical Business services. The
Company received in 1999 an offer for the purchase of the
Australian subsidiary, and, as of the date of this report, the
Company is negotiating with the company that made the offer. There
are no assurances that the Company will sell the Australian
subsidiary.
Climate Control Business
_________________________
General
_______
The Company's Climate Control Business manufactures and sells
a broad range of standard and custom designed hydronic fan coils
and water source heat pumps as well as other products for use in
commercial and residential heating ventilation and air conditioning
("HVAC") systems. Demand for the Climate Control Business'
products is driven by the construction of commercial, institutional
and residential buildings, the renovation of existing buildings and
the replacement of existing systems. The Climate Control Business'
commercial products are used in a wide variety of buildings, such
as: hotels, motels, office buildings, schools, universities,
apartments, condominiums, hospitals, nursing homes, extended care
facilities, supermarkets and superstores. Many of the Company's
products are targeted to meet increasingly stringent indoor air
quality and energy efficiency standards. The Climate Control
Business accounted for approximately 37%, 34% and 29% of the
Company's 1998, 1997 and 1996 consolidated sales, respectively.
7
Hydronic Fan Coils
__________________
The Climate Control Business is the leading provider of
hydronic fan coils targeted to the commercial and institutional
markets in the U.S. Hydronic fan coils use heated or chilled water,
provided by a centralized chiller or boiler through a water pipe
system, to condition the air and allow individual room control.
Hydronic fan coil systems are quieter and have longer lives and
lower maintenance costs than comparable systems used where
individual room control is required. The Company believes that its
product line of hydronic fan coils is the most extensive offered by
any domestic producer. The breadth of this product line coupled
with customization capability provided by a flexible manufacturing
process are important components of the Company's strategy for
competing in the commercial and institutional renovation and
replacement markets. See "Special Note Regarding Forward-Looking
Statements".
Water Source Heat Pumps
_______________________
The Company is a leading U.S. provider of water source heat
pumps to the commercial construction and renovation markets. These
are highly efficient heating and cooling units which enable
individual room climate control through the transfer of heat
through a water pipe system which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to
large sized buildings with many small, individually controlled
spaces. The Company believes the market for commercial water
source heat pumps will continue to grow due to the relative
efficiency and long life of such systems as compared to other air
conditioning and heating systems, as well as to the emergence of
the replacement market for those systems. See "Special Note
Regarding Forward-Looking Statements".
Geothermal Products
___________________
The Climate Control Business is a pioneer in the use of
geothermal water source heat pumps in residential and commercial
applications. Geothermal systems, which circulate water or
antifreeze through an underground heat exchanger, are among the
most energy efficient systems available. The Company believes that
an aging installed base of residential HVAC systems, coupled with
the longer life, lower cost to operate, and relatively short
payback periods of geothermal systems will continue to increase
demand for its geothermal products, particularly in the residential
replacement market. See "Special Note Regarding Forward-Looking
Statements".
Hydronic Fan Coil and Water Source Heat Pump Market
___________________________________________________
The Company has pursued a strategy of specializing in hydronic
fan coils and water source heat pump products. The annual U.S.
market for hydronic fan coils and water source heat pumps is
approximately $273 million. Demand in these markets is generally
driven by levels of repair, replacement, and new construction
activity. The U.S. market for fan coils and water source heat pump
products has grown on average 14% per year over the last 4 years.
This growth has been fueled by new construction, the aging of the
installed base of units, the introduction of new energy efficient
8
systems, upgrades to central air conditioning and increased
governmental regulations restricting the use of ozone depleting
refrigerants in HVAC systems.
Production and Backlog
______________________
Most of the Climate Control Business' production of the above-
described products occurs on a specific order basis. The Company
manufactures the units in many sizes and configurations, as
required by the purchaser, to fit the space and capacity
requirements of hotels, motels, school, hospitals, apartment
buildings, office buildings and other commercial or residential
structures. As of December 31, 1998, the backlog of confirmed
orders for the Climate Control Business was approximately $21.1
million as compared to approximately $28.8 million at December 31,
1997. A customer generally has the right to cancel an order prior
to the order being released to production. Past experience
indicates that customers generally do not cancel orders after the
Company receives them. As of March 31, 1999, the Climate Control
Business had released substantially all of the December 31, 1998
backlog to production. All of the December 31, 1998 backlog is
expected to be filled by December 31, 1999. See "Special Note
Regarding Forward-Looking Statements".
Marketing and Distribution
__________________________
Distribution
____________
The Climate Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors.
The Company's sales to mechanical contractors primarily occur
through independent manufacturer's representatives, who also
represent complementary product lines not manufactured by the
Company. Original equipment manufacturers generally consist of
other air conditioning and heating equipment manufacturers who
resell under their own brand name the products purchased from the
Climate Control Business in competition with the Company. Sales to
original equipment manufacturers accounted for approximately 25% of
the sales of the Climate Control Business in 1998 and approximately
9% of the Company's 1998 consolidated sales.
Market
______
The Climate Control Business depends primarily on the
commercial construction industry, including new construction and
the remodeling and renovation of older buildings. In recent years
this Business has introduced geothermal products designed for
residential markets for both new and replacement markets.
Raw Materials
_____________
Numerous domestic and foreign sources exist for the materials
used by the Climate Control Business, which materials include
aluminum, copper, steel, electric motors and compressors. The
Company does not expect to have any difficulties in obtaining any
necessary materials for the Climate Control Business. See "Special
Note Regarding Forward-Looking Statements".
9
Competition
___________
The Climate Control Business competes with approximately eight
companies, some of whom are also customers of the Company. Some of
the competitors have greater financial and other resources than the
Company. The Climate Control Business manufactures a broader line
of fan coil and water source heat pump products than any other
manufacturer in the United States, and the Company believes that it
is competitive as to price, service, warranty and product
performance.
Joint Ventures and Options to Purchase
______________________________________
The Company has obtained an option to acquire 80% of the
issued and outstanding stock of an Entity ("Entity") that performs
energy savings contracts, primarily on US government facilities
(the "Option"). For the Option, the Company has paid $1.3 million
as of the date of this report. The term of the Option expires May
4, 1999. The Company is currently negotiating to extend the
expiration date of its Option. As of the date of this report, the
Company has not decided whether it will exercise the Option. If
the Company is unsuccessful in negotiating an extension of the
Option exercise date, and, if the Company decides to exercise the
Option, the Company may pay an exercise price of $4.0 million, less
the amount already paid toward the Option ("Option Price"), with a
portion of the unpaid exercise price being payable in cash and the
balance over a certain period of time. The grantors of the Option
have entered into an employment agreement with the Entity. Under
the terms of the employment agreements, each of the three grantors
will receive, among other things, 12 1/2% of the net profits of the
Entity for a period of three to five years following the date of
exercise of the Option. If the Company is unsuccessful in
negotiating an extension of the Option exercise date, and, if the
Company decides not to exercise the Option, the grantors of the
Option have agreed to repay to the Company the amounts paid by the
Company in connection with the Option up to a total of $1.0
million, which obligation is secured by the stock of the Entity and
other affiliates of the Entity. There is no assurance that the
grantors of the Option will have funds necessary to repay to the
Company the amount paid for the Option in the event they are
required to pay such amounts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Through the date of this report, the Company has loaned the Entity
approximately $1.4 million. The Company has recorded reserves of
approximately $1.3 million against the loans and option payments.
For its year ended June 30, 1998, the Entity reported an audited
net income of approximately $.9 million.
During 1994, a subsidiary of the Company obtained an option to
acquire all of the stock of a French manufacturer of air
conditioning and heating equipment. The Company's subsidiary was
granted the option as a result of the subsidiary loaning to the
parent company of the French manufacturer approximately $2.1
million. Subsequent to the loan of $2.1 million, the Company's
subsidiary has loaned to the parent of the French manufacturer an
additional $1.7 million. The amount loaned is secured by the stock
and assets of the French manufacturer. The Company's subsidiary
may exercise its option to acquire the French manufacturer by
converting approximately $150,000 of the amount loaned into equity.
The option is currently exercisable and will expire June 15, 2005.
As of the date of this report, the Company has not decided whether
it will exercise the option.
10
For 1998 and 1997, the French manufacturer had revenues of
$17.2 million and $14.3 million, respectively, and reported net
income in 1998 and 1997 of approximately $100,000 and $300,000,
respectively. As a result of cumulative losses by the French
manufacturer, the Company established reserves against the loans
aggregating approximately $1.5 million through December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
Automotive Products Business
____________________________
General
_______
The Automotive Products Business is primarily engaged in the
manufacture and sale of a line of anti-friction bearings, which
includes straight-thrust and radial-thrust ball bearings, angular
contact ball bearings, and certain other automotive replacement
parts (including universal joints, motor mounts, and clutches).
This Business also manufactures power train and drive line parts
for original equipment manufacturers. These products are used in
automobiles, trucks, trailers, tractors, farm and industrial
machinery, and other equipment. The Automotive Products Business
accounted for approximately 13% and 11% of the Company's 1998 and
1997 sales, respectively. In 1998, the Automotive Products
Business manufactured approximately 44% of the products it sold,
and approximately 40% in 1997, and purchased the balance of its
products from other sources, including foreign sources.
As discussed in "Item 1 - Business - General", the Company is
continuing with its evaluation of the spin-off of Automotive to its
shareholders as a dividend. The spin-off of Automotive will
require, among other things, commitment to a formal plan, receipt
by the Company from the Internal Revenue Service of a favorable
ruling or an opinion of counsel confirming tax-free treatment,
certain Securities and Exchange Commission filings, arrangement for
lines of credit for Automotive, and LSB Board of Directors'
approval. Subject to completion of the above conditions,
management believes there is a strong likelihood that the spin-off
will be completed during 1999. However, there are no assurances
that the Company will spin-off Automotive.
Distribution and Market
_______________________
The automotive, truck and agricultural equipment replacement
markets serve as the principal markets for the Automotive Products
Business. This Business sells its products domestically and for
export, principally through independent manufacturers'
representatives who also sell other automotive products. Those
manufacturers' representatives sell to retailers (including major
chain stores), wholesalers, distributors and jobbers. The
Automotive Products Business also sells its products directly to
original equipment manufacturers and certain major chain stores.
Inventory
_________
The Company generally produces or purchases the products sold
by the Automotive Products Business in quantities based on a
general sales forecast, rather than on specific orders from
11
customers. The Company fills most orders for the automotive
replacement market from inventory. The Company generally produces
products for original equipment manufacturers after receiving an
order from the manufacturer.
Raw Materials
_____________
The principal materials that the Automotive Products Business
needs to produce its products consist of high alloy steel tubing,
steel bars, flat strip coil steel and bearing components produced
to specifications. The Company acquires those materials from a
variety of domestic and foreign suppliers at competitive prices.
The Company does not anticipate having any difficulty in obtaining
those materials in the near future. See "Special Note Regarding
Forward-Looking Information".
Foreign Risk
____________
By purchasing a significant portion of the bearings and other
automotive replacement parts that it sells from foreign
manufacturers, the Automotive Products Business must bear certain
import duties and international economic risks, such as currency
fluctuations and exchange controls, and other risks from political
upheavals and changes in United States or other countries' trade
policies. Contracts for the purchase of foreign-made bearings and
other automotive replacement parts provide for payment in United
States dollars. Circumstances beyond the control of the Company
could eliminate or seriously curtail the supply of bearings or
other automotive replacement parts from any one or all of the
foreign countries involved.
Competition
___________
The Automotive Products Business engages in a highly
competitive business. Competitors include other domestic and
foreign bearing manufacturers, which sell in the original equipment
and replacement markets. Many of those manufacturers have greater
financial and other resources than the Company.
Industrial Products Business
____________________________
General
_______
The Industrial Products Business purchases and markets a
proprietary line of machine tools. The current line of machine
tools distributed by the Industrial Products Business includes
milling, drilling, turning and fabricating machines. The
Industrial Products Business purchases most of the machine tools
marketed by it from foreign companies, which manufacture the
machine tools to the Company's specifications. This Business
manufactures CNC bed mills and electrical control panels for
machine tools. The Company has eliminated in the past, and
continues to eliminate, certain categories of machinery from its
product line by not replacing them when sold. The Industrial
Products Business accounted for approximately 5% of the Company's
consolidated sales in each of the years 1998 and 1997.
12
Distribution and Market
_______________________
The Industrial Products Business distributes its machine tools
in the United States, Mexico, Canada and certain other foreign
markets. The Industrial Products Business also sells its machine
tools through independent machine tool dealers throughout the
United States and Canada, who purchase the machine tools for resale
to end users. The principal markets for machine tools, other than
machine tool dealers, consist of manufacturing and metal working
companies, maintenance facilities, and utilities.
Foreign Risk
____________
By purchasing a majority of the machine tools from foreign
manufacturers, the Industrial Products Business must bear certain
import duties and international economic risks, such as currency
fluctuations and exchange controls, and other risks from political
upheavals and changes in United States or other countries' trade
policies. Contracts for the purchase of foreign-made machine tools
provide for payment in United States dollars. Circumstances beyond
the control of the Company could eliminate or seriously curtail the
supply of machine tools from any one or all of the foreign
countries involved.
Competition
___________
The Industrial Products Business competes with manufacturers,
importers, and other distributors of machine tools many of whom
have greater financial resources than the Company. The Company's
machine tool business generally is competitive as to price,
warranty and service, and maintains personnel to install and
service machine tools.
Employees
_________
As of December 31, 1998, the Company employed 1,723 persons.
As of that date, (a) the Chemical Business employed 578 persons,
with 133 represented by unions under agreements expiring in August,
2001 and February, 2002, (b) the Climate Control Business employed
686 persons, none of whom are represented by a union, and (c) the
Automotive Products Business employed 344 persons, with 21
represented by unions under an agreement expiring in July, 2000.
Research and Development
________________________
The Company incurred approximately $409,000 in 1998, $394,000
in 1997, and $532,000 in 1996 on research and development relating
to the development of new products or the improvement of existing
products. All expenditures for research and development related to
the development of new products and improvements are expensed by
the Company.
Environmental Matters
_____________________
The Company and its operations are subject to numerous
Environmental Laws and to other federal, state and local laws
regarding health and safety matters ("Health Laws"). In
particular, the manufacture and distribution of chemical products
are activities which entail environmental risks and impose
13
obligations under the Environmental Laws and the Health Laws, many
of which provide for substantial fines and criminal sanctions for
violations, and there can be no assurance that material costs or
liabilities will not be incurred by the Company in complying with
such laws or in paying fines or penalties for violation of such
laws. The Environmental Laws and Health Laws and enforcement
policies thereunder relating to the Chemical Business have in the
past resulted, and could in the future result, in penalties,
cleanup costs, or other liabilities relating to the handling,
manufacture, use, emission, discharge or disposal of pollutants or
other substances at or from the Company's facilities or the use or
disposal of certain of its chemical products. Significant
expenditures have been incurred by the Chemical Business at the El
Dorado Facility in order to comply with the Environmental Laws and
Health Laws. The Chemical Business may be required to make
additional significant site or operational modifications at the El
Dorado Facility, potentially involving substantial expenditures and
reduction, suspension or cessation of certain operations. See
"Special Note Regarding Forward-Looking Statements"; "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Chemical Business" and "Legal Proceedings."
Due to a consent order entered into with the Arkansas
Department of Pollution Control & Ecology ("ADPC&E"), the Chemical
Business has installed additional monitoring wells at the El Dorado
Facility in accordance with a workplan approved by the ADPC&E, and
submitted the test results to ADPC&E. The results indicated that a
risk assessment should be conducted on nitrates present in the
shallow groundwater. The Chemical Business' consultant has
completed this risk assessment, and has forwarded it to the ADPC&E
for approval. The risk assessment concludes that, although there
are contaminants at the El Dorado Facility and in the groundwater,
the levels of such contaminants at the El Dorado Facility and in
the groundwater do not present an unacceptable risk to human health
and the environment. Based on this conclusion, the Chemical
Business' consultant has recommended continued monitoring at the
site for five years.
A second consent order was entered into with ADPC&E in August,
1998 (the "Wastewater Consent Order"), which required installation
of an interim groundwater treatment system (which is now operating)
and certain improvements in the wastewater collection and treatment
system (discussed below). Twelve months after all improvements are
in place, the risk will be reevaluated, and a final decision will
be made on what additional groundwater remediation, if any, is
required. There can be no assurance that the risk assessment will
be approved by the ADPC&E, or that further work will not be
required.
In addition, in accordance with the consent order, the
Chemical Business currently plans to upgrade the El Dorado
Facility's wastewater treatment plant. Current estimates of the
cost of the planned upgrade are that approximately $4.6 million in
future capital expenditures will be incurred to complete this
project. Furthermore, the El Dorado Facility's new wastewater
permit currently is being reviewed for renewal by the ADPC&E. The
new permit may impose additional or more stringent limitations on
the plant's wastewater discharges. The Company believes, although
there can be no assurance, that any such new limitations would not
have a material adverse effect on the Company. See "Special Note
Regarding Forward-Looking Statements."
14
During May, 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel located at the El
Dorado Facility failed, resulting in a release of such material to
a stormwater drain, and according to ADPC&E records, a minor fish
kill in a creek near the El Dorado Facility. In 1998, the Chemical
Business entered into a Consent Administrative Order (the
"Wastewater Consent Order") with the ADPC&E to resolve this event,
as well as certain violations of the facility's NPDES permit for
wastewater discharge. The Wastewater Consent Order also resolved
several issues relating to a Consent Administrative Order that the
Chemical Business had entered into in May, 1995, which ordered
closure of a solid waste landfill. The Wastewater Consent Order
requires the Chemical Business to complete a waste minimization
plan and characterize the wastewater before obtaining a new NPDES
permit, which is expected to have more restrictive effluent limits,
to install additional treatment to meet the new effluent limits by
August 1, 2001, and achieve compliance with the new effluent limits
by February 1, 2002. The Chemical Business is currently
undertaking the waste minimization activities. The Wastewater
Consent Order recognizes the presence of nitrate contamination in
the groundwater and requires the Chemical Business to undertake on-
site bioremediation, which is currently underway. Upon completion
of the waste minimization activities referenced above, a final
remedy for groundwater contamination will be selected, based on an
evaluation of risk. There are no known users of groundwater in the
area, and preliminary risk assessments have not identified any risk
that would require additional remediation. The Wastewater Consent
Order included a $183,700 penalty assessment, of which $125,000
will be satisfied over five years at expenditures of $25,000 per
year for waste minimization activities. The Chemical Business has
documented in excess of $25,000 on expenditures for the first year,
1998. An additional $57,000 of the assessed penalty was satisfied
by funding approved supplemental environmental projects and the
$1,700 required monetary civil penalty has been paid.
The El Dorado Facility's air permit required it to cease
operation of certain older nitric acid concentrators (the "Older
Nitric Acid Concentrators") within a certain period of time after
the initiation of operations of the DSN Plant. Due to certain
start-up problems with the DSN Plant, including excess emissions
from various emission sources, the Chemical Business and the ADPC&E
entered into certain agreements, including an administrative
consent order (the "Air Consent Order") in 1995 to resolve certain
of the Chemical Business' past violations and to permit the
Chemical Business to operate the Older Nitric Acid Concentrators
until the ADPC&E has made a final decision regarding the El Dorado
Facility's air permit, including whether the Older Nitric Acid
Concentrators may continue to operate. Although the Company
expects that the Chemical Business will be able to continue to
operate the Older Nitric Acid Concentrators, there can be no
assurance that the ADPC&E will allow it to continue to do so. The
Air Consent Order also provides for payment of a civil penalty of
$50,000, which the Chemical Business has paid, and requires
installation of certain pollution control equipment and completion
of certain maintenance activities at the El Dorado Facility to
eliminate certain off-site hazing problems. The Air Consent Order
was amended in 1996 and 1997. The second amendment to the Air
Consent Order (the "1997 Amendment") provided for certain
stipulated penalties of $1,000 per hour to $10,000 per day for
continued off-site emission events and deferred enforcement for
other alleged air permit violations. The 1997 Amendment
acknowledges that the Chemical Business has completed the
15
installation of the pollution control equipment and maintenance
activities required under the Air Consent Order. Nonetheless, the
Chemical Business was assessed an additional penalty of $150,000,
as well as a payment of an additional $50,000 to fund certain
environmental projects, with respect to a number of alleged permit
violations relating to off-site emissions and other air permit
conditions. The Chemical Business has paid both the penalty and
the additional sums required by the 1997 Amendment. Since the 1997
Amendment and as of the date of this report, the Chemical Business
has been assessed stipulated penalties of approximately $67,000 by
the ADPC&E for violations of certain provisions of the 1997
Amendment. In 1998, a third amendment to the Air Consent Order
provided for the stipulated penalties to be reset at $1,000 per
hour after ninety (90) days without any confirmed events. The
Chemical Business believes that the El Dorado Facility has made
progress in controlling certain off-site emissions; however, such
off-site emissions have occurred, and may continue, from time to
time, which could result in the assessment of additional penalties
against the Chemical Business by the ADPC&E and could have a
material adverse effect on the Company. In addition, prior to
1998, the El Dorado Facility was identified as one of 33
significant violators of the federal Clean Air Act in a review of
Arkansas air programs by the EPA Office of Inspector General. The
Company is unable to predict the impact, if any, of such
designation. See "Special Note Regarding Forward-Looking
Statements."
During 1997 and 1998, the Chemical Business expended
approximately $1.1 million and $.7 million, respectively, in
connection with capital expenditures relating to compliance with
federal, state and local Environmental Laws at its El Dorado
Facility, including, but not limited to, compliance with the Air
Consent Order, as amended. The Company anticipates that the
Chemical Business will spend approximately $4.6 million for capital
expenditures relating to environmental control facilities at its El
Dorado Facility to comply with Environmental Laws, including, but
not limited to, the Air Consent Order, as amended, with $2.4
million being spent in 1999 and the balance being spent in 2000.
No assurance can be made that the actual expenditures of the
Chemical Business for such matters will not exceed the estimated
amounts by a substantial margin, which could have a material
adverse effect on the Company and its financial condition. The
amount to be spent during 1999 for capital expenditures related to
compliance with Environmental Laws is dependent upon a variety of
factors, including, but not limited to, the occurrence of
additional releases or threatened releases (particularly air
emissions) into the environment, or changes in the Environmental
Laws (or in the enforcement or interpretation by any federal or
state agency or court of competent jurisdiction). See "Special
Note Regarding Forward-Looking Statements." Failure to
satisfactorily resolve the pending noncompliance issues with the
ADPC&E, or additional orders from the ADPC&E imposing penalties, or
requiring the Chemical Business to spend more for environmental
improvements or curtail production activities at the El Dorado
Facility, could have a material adverse effect on the Company.
Item 2. PROPERTIES
___________________
Chemical Business
_________________
The Chemical Business primarily conducts manufacturing
operations (i) on 150 acres of a 1,400 acre tract of land located
16
in El Dorado, Arkansas (the "El Dorado Facility"), (ii) in a
facility of approximately 60,000 square feet located on ten acres
of land in Hallowell, Kansas ("Kansas Facility") and (iii) in a
mixed acid plant in Wilmington, North Carolina ("Wilmington
Plant"). The Chemical Business owns all of its manufacturing
facilities, with the El Dorado Facility and the Wilmington Plant
subject to mortgages. In addition, the Chemical Business has four
manufacturing facilities in Australia that produce bulk and
packaged explosives.
As of December 31, 1998, the El Dorado Facility was utilized
at approximately 74% of capacity, based on continuous operation.
The Chemical Business operates its Kansas Facility from
buildings located on an approximate ten acre site in southeastern
Kansas, and a research and testing facility comprising
approximately ten acres, including buildings and equipment thereon,
located in southeastern Kansas, which it owns.
In addition, the Chemical Business distributes its products
through 32 agricultural and explosive distribution centers. The
Chemical Business currently operates 22 agricultural distribution
centers, with 16 of the centers located in Texas (13 of which the
Company owns and three of which it leases); one center located in
Oklahoma which the Company owns; two centers located in Missouri
(one of which the Company owns and one of which it leases); and
three centers located in Tennessee (all of which the company owns).
The Chemical Business currently operates six domestic explosives
distribution centers located in Hallowell, Kansas (owned); Bonne
Terre, Missouri (owned); Poca, West Virginia (leased); Owensboro
and Combs, Kentucky (leased); and Pryor, Oklahoma (leased). The
Chemical Business also has four explosives distribution centers in
Australia, all of which are leased.
Climate Control Business
________________________
The Climate Control Business conducts its fan coil
manufacturing operations in a facility located in Oklahoma City,
Oklahoma, consisting of approximately 265,000 square feet. The
Company owns this facility subject to a mortgage. As of December
31, 1998, the Climate Control Business was using the productive
capacity of the above referenced facilities to the extent of
approximately 87%, based on three, eight-hour shifts per day and a
five-day week in one department and one and one half eight-hour
shifts per day and a five-day week in all other departments.
The Climate Control Business manufactures most of its heat
pump products in a leased 270,000 square foot facility in Oklahoma
City, Oklahoma, which it leases from an unrelated party. The lease
term began March 1, 1988, after renewal in October 1997, and
expires February 28, 2003, with options to renew for additional
five-year periods, and currently provides for the payment of rent
in the amount of $52,389 per month. The Company also has an option
to acquire the facility at any time in return for the assumption of
the then outstanding balance of the lessor's mortgage. As of
December 31, 1998, the productive capacity of this manufacturing
operation was being utilized to the extent of approximately 81%,
based on two twelve-hour shifts per day and a seven-day week in one
department and one eight-hour shift per day and a five-day week in
all other departments.
17
All of the properties utilized by the Climate Control Business
are considered by the Company management to be suitable and
adequate to meet the current needs of that Business.
Automotive Products Business
____________________________
The Automotive Products Business conducts its operations in
plant facilities principally located in Oklahoma City, Oklahoma
which are considered by Company management to be suitable and
adequate to meet its needs. One of the manufacturing facilities
occupies a building owned by the Company, subject to mortgages,
totaling approximately 178,000 square feet. The Automotive
Products Business also uses additional manufacturing facilities
located in Oklahoma City, Oklahoma, owned and leased by the Company
totaling approximately 158,000 square feet. During 1998, the
Automotive Products Business under utilized the productive capacity
of its facilities.
International Bearings, Inc. ("IBI"), a subsidiary of the
Company operating as a separate entity within the Automotive
Products Division, operates from a Company owned warehouse of
approximately 45,000 square feet in an industrial park section of
Memphis, Tennessee.
Industrial Products Business
____________________________
The Company owns several buildings, some of which are subject
to mortgages, totaling approximately 360,000 square feet located in
Oklahoma City and Tulsa, Oklahoma, which the Industrial Products
Business uses for showrooms, offices, warehouse and manufacturing
facilities. The Company also owns real property located near or
adjacent to the above-referenced buildings in Oklahoma City,
Oklahoma, which the Industrial Products Business uses for parking
and storage. The Company also leases facilities in Middletown, New
York containing approximately 25,000 square feet for manufacturing
operations.
The Industrial Products Business also leases a facility from
an entity owned by the immediate family of the Company's President,
which facility occupies approximately 30,000 square feet of
warehouse and shop space in Oklahoma City, Oklahoma. The
Industrial Products Business also leases an office in Europe to
coordinate its European activities.
All of the properties utilized by the Industrial Products
Business are considered by Company management to be suitable and
adequate to meet the needs of the Industrial Products Business.
Item 3. LEGAL PROCEEDINGS
__________________________
In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with numerous
other companies, of potential responsibility for clean-up of a
waste disposal site in Oklahoma. In 1990, the EPA added the site
to the National Priorities List. Following the remedial
investigation and feasibility study, in 1992 the Regional
Administrator of the EPA signed the Record of Decision ("ROD") for
the site. The ROD detailed EPA's selected remedial action for the
site and estimated the cost of the remedy at $3.6 million. In
1992, the Company made settlement proposals which would have
18
entailed a collective payment by the subsidiaries of $47,000. The
site owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The EPA
rejected the Company's offer, allocating 60% of the cleanup costs
to the potentially responsible parties and 40% to the site
operator. The EPA estimated the total cleanup costs at $10.1
million as of February 1993. The site owner rejected all
settlements with the EPA, after which the EPA issued an order to
the site owner to conduct the remedial design/remedial action
approved for the site. In August, 1997, the site owner issued an
"invitation to settle" to various parties, alleging the total
cleanup costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the cleanup of the site is unknown
due to continuing changes in the estimated total cost of cleanup of
the site and the percentage of the total waste which was alleged to
have been contributed to the site by the Company. As of December
31, 1998, the Company has accrued an amount based on a recent
preliminary settlement proposal by the alleged potential
responsible parties; however, there is no assurance such proposal
will be accepted. Such amount is not material to the Company's
financial position or results of operations. This estimate is
subject to material change in the near term as additional
information is obtained. The subsidiary's insurance carriers have
been notified of this matter; however, the amount of possible
coverage, if any, is not yet determinable.
Arch Mineral Corporation, et al. v. ICI Explosives USA, Inc.,
et al. On May 24, 1996, the plaintiffs filed this civil cause of
action against EDC and five other unrelated commercial explosives
manufacturers alleging that the defendants allegedly violated
certain federal and state antitrust laws in connection with alleged
price fixing of certain explosive products. This cause of action
is pending in the United States District Court, Southern District
of Indiana. The plaintiffs are suing for an unspecified amount of
damages, which, pursuant to statute, plaintiffs are seeking be
trebled, together with costs. Plaintiffs are also seeking a
permanent injunction enjoining defendants from further alleged
anti-competitive activities. Based on the information presently
available to EDC, EDC does not believe that EDC conspired with any
party, including, but not limited to, the five other defendants, to
fix prices in connection with the sale of commercial explosives.
This action has been consolidated, for discovery purposes only,
with several other actions in a multi-district litigation
proceeding in Utah. Discovery in this litigation is in process.
EDC intends to vigorously defend itself in this matter. See
"Special Note Regarding Forward-Looking Statements."
ASARCO v. ICI, et al. The U. S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and consolidated
with other lawsuits in Utah, leave to add EDC as a defendant in
that lawsuit. This lawsuit alleges a national conspiracy, as well
as a regional conspiracy, directed against explosive customers in
Missouri and seeks unspecified damages. EDC has been included in
this lawsuit because it sold products to customers in Missouri
during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has been
sued in the Arch case discussed above. Based on the information
19
presently available to EDC, EDC does not believe that EDC conspired
with any party, to fix prices in connection with the sale of
commercial explosives. EDC intends to vigorously defend itself in
this matter. See "Special Note Regarding Forward-Looking
Statements."
Eugene Lowe, et al. v. Teresa Trucking, Inc., pending in the
Circuit Court of Lincoln County, West Virginia. During the third
quarter of 1997, EDC was served with this lawsuit in which
approximately 27 plaintiffs have sued approximately 13 defendants,
including EDC, alleging personal injury and property damage for
undifferentiated compensatory and punitive damages of approximately
$7,000,000. Specifically, the plaintiffs assert property damage to
their residence and wells, annoyance and inconvenience, and
nuisance as a result of daily blasting and round-the-clock mining
activities. The plaintiffs are residents living near the Heartland
Coal Company ("Heartland") strip mine in Lincoln County, West
Virginia, and an unrelated mining operation operated by Pen Coal
Inc. During the first quarter of 1999, the plaintiffs withdrew all
personal injury claims previously asserted in this litigation.
Heartland employed EDC to provide blasting materials and personnel
to load and shoot holes drilled by employees of Heartland. Down
hole blasting services were provided by EDC at Heartland's premises
from approximately August 1991, until approximately August 1994.
Subsequent to August 1994, EDC supplied blasting materials to the
reclamation contractor at Heartland's mine. In connection with
EDC's activities at Heartland, EDC has entered into a contractual
indemnity to Heartland to indemnify Heartland under certain
conditions for acts or actions taken by EDC or for which EDC failed
to take, and Heartland is alleging that EDC is liable thereunder
for Heartland's defense costs and any losses to, or damages
sustained by, the plaintiffs in this lawsuit as a result of EDC's
operations.
Discovery in this litigation is in process. The Company
intends to vigorously defend itself in this matter. EDC has
provided notification of this lawsuit to its two insurance carriers
providing primary insurance coverage to EDC during the period
covered by the plaintiff's allegations. Based on information
provided to EDC by its counsel handling this matter, the Company
does not believe that this matter will have a material adverse
effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
____________________________________________________________
Not applicable.
20
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
___________________________________________
Identification of Executive Officers
The following table identifies the executive officers of the Company.
Position and Served as
Offices with an Officer
Name Age the Company from
_______________ ___ ______________ ______________
Jack E. Golsen 70 Board Chairman December, 1968
and President
Barry H. Golsen 48 Board Vice Chairman August, 1981
and President of the
Climate Control
Business
David R. Goss 58 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 57 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 57 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 39 Vice President and March, 1990
General Counsel
__________________________________________________________
The Company's officers serve one-year terms, renewable on an
annual basis by the Board of Directors. All of the individuals
listed above have served in substantially the same capacity with
the Company and/or its subsidiaries for the last five years. In
March 1996, the Company executed an employment agreement (the
"Agreement") with Jack E. Golsen for an initial term of three years
followed by two additional three year terms. The Agreement
automatically renews for each successive three year term unless
terminated by either the Company or Jack E. Golsen giving written
notice at least one year prior to the expiration of the then three
year term.
Family Relationships
____________________
The only family relationship that exists among the executive
officers of the Company is that Jack E. Golsen is the father of
Barry H. Golsen.
21
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_____ _________________________________________________
Market Information
__________________
The Company's Common Stock trades on the New York Stock
Exchange, Inc. ("NYSE"). The following table shows, for the
periods indicated, the high and low closing sales prices for the
Company's Common Stock.
Fiscal Year Ended
December 31,
________________________
1998 1997
____ ____
Quarter High Low High Low
_______ ____ ___ ____ ____
First 4 1/2 3 13/16 5 1/4 4 1/8
Second 4 9/16 3 13/16 5 4
Third 4 3/8 3 1/8 5 3 5/8
Fourth 3 9/16 2 15/16 5 13/16 3 5/8
Stockholders
____________
As of February 28, 1999, the Company had 981 record holders of
its Common Stock.
Other Information
_________________
The Company's Common Stock and its $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2 (the "Series 2
Preferred") are currently listed for trading on the New York Stock
Exchange ("NYSE"). The Company recently fell below the NYSE
continued listing criteria for net tangible assets available to the
holders of the Company's Common Stock and the three year average
net income. Based on a business plan submitted to the NYSE, the
NYSE has agreed to continue the listing of the Company's Common
Stock and Series 2 Preferred subject to certain quarterly reviews.
There are no assurances that the Company will be able to comply
with the business plan presented to the NYSE and that the Company's
Common Stock and Series 2 Preferred will continue to be listed on
the NYSE.
Dividends
_________
Under the terms of a loan agreement between the Company and
its lender, the Company may, so long as no event of default has
occurred and is continuing under the loan agreement, make currently
scheduled dividends and pay dividends on its outstanding Preferred
Stock and pay annual dividends on its Common Stock equal to $.06
per share. In addition, the loan agreement with the lender
includes as an event of default an ownership change if any Person
(except Jack E. Golsen or members of his Immediate Family, as
defined below, and any entity controlled by Jack E. Golsen or
members of his Immediate Family together with such Person's
22
affiliates and associates), is or becomes the beneficial owner,
directly or indirectly, of more than fifty percent (50%) of the
outstanding Common Stock of the Company. The term "Immediate
Family" of any Person means the spouse, siblings, children, mothers
and mothers-in-law, fathers and fathers-in-law, sons and daughters-
in-law, daughters and sons-in-law, nieces, nephews, brothers and
sisters-in-law, and sisters and brothers-in-law.
The Company is a holding company and, accordingly, its ability
to pay dividends on its Preferred Stock and its Common Stock is
dependent in large part on its ability to obtain funds from its
subsidiaries. The ability of the Company's wholly-owned subsidiary
ClimaChem, Inc. ("ClimaChem") (which owns substantially all of the
companies comprising the Chemical Business and the Climate Control
Business) and its wholly-owned subsidiaries to pay dividends and to
make distributions to the Company is restricted by certain
covenants contained in the Indenture to which they are parties.
Under the terms of the Indenture, ClimaChem cannot transfer
funds to the Company in the form of cash dividends or other
distributions or advances, except for (i) the amount of taxes that
ClimaChem would be required to pay if they were not consolidated
with the Company and (ii) an amount not to exceed fifty percent
(50%) of ClimaChem's cumulative net income from January 1, 1998,
through the end of the period for which the calculation is made for
the purpose of proposing a payment and (iii) the amount of direct
and indirect costs and expenses incurred by the Company on behalf
of ClimaChem pursuant to a certain services agreement and a certain
management agreement to which ClimaChem and the Company are
parties. For 1998, ClimaChem had a net loss of $2.6 million. See
Note 5 of Notes to Consolidated Financial Statements and Item 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Under the loan agreement, the Company and its subsidiaries,
other than ClimaChem and its subsidiaries, have the right to borrow
on a revolving basis up to $24 million, based on eligible
collateral. At December 31, 1998, the Company and its
subsidiaries, except ClimaChem and its subsidiaries, had
availability for additional borrowings of $2.7 million. See Item
7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the financial covenants
which the Company's failure to maintain could result in an event of
default.
Holders of the Company's Common Stock are entitled to receive
dividends only when, as, and if declared by the Board of Directors.
No dividends may be paid on the Company's Common Stock until all
required dividends are paid on the outstanding shares of the
Company's Preferred Stock, or declared and amounts set apart for
the current period, and, if cumulative, prior periods. The Company
has issued and outstanding as of December 31, 1998, 915,000 shares
of $3.25 Convertible Exchangeable Class C Preferred Stock, Series
2 ("Series 2 Preferred"), 1,463 shares of a series of Convertible
Non Cumulative Preferred Stock ("Non Cumulative Preferred Stock")
and 20,000 shares of Series B 12% Convertible, Cumulative Preferred
Stock ("Series B Preferred"). Each share of Preferred Stock is
entitled to receive an annual dividend, if, as and when declared by
the Board of Directors, payable as follows: (i) Series 2 Preferred
at the rate of $3.25 a share payable quarterly in arrears on March
15, June 15, September 15 and December 15, which dividend is
23
cumulative, (ii) Non Cumulative Preferred Stock at the rate of
$10.00 a share payable April 1, and (iii) Series B Preferred at the
rate of $12.00 a share payable January 1, which dividend is
cumulative. The Company has a policy as to the payment of annual
cash dividends on its outstanding Common Stock of an amount per
share to be determined by the Board of Directors from time to time.
The Company paid a cash dividend of $.01 a share on its outstanding
Common Stock on July 1, 1998, and January 1, 1999; however, there
are no assurances that this policy will not be terminated or
changed by the Board of Directors. As of the date of this report,
management is considering, but has not made its final decision,
recommending to the Board of Directors that the Company discontinue
payments of cash dividends on its Common Stock for periods
subsequent to January 1, 1999. Due to ClimaChem's net loss for
1998, the restrictions contained in the Indenture and certain
borrowing limitations upon the Company, other than ClimaChem and
its subsidiaries, under the Company's loan agreements, management
has not, as of the date of this report, determined whether the
Company will have adequate liquidity to declare and pay each of the
quarterly dividends on its outstanding Preferred Stock during 1999.
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources" for further discussion of the Company's payment of cash
dividends. Also see Notes 7, 8 and 9 of Notes to Consolidated
Financial Statements.
On February 17, 1989, the Company's Board of Directors
declared a dividend to its stockholders of record on February 27,
1989, of one Preferred Stock purchase right on each of the
Company's outstanding shares of Common Stock (the "Preferred Shares
Purchase Rights Plan"). The rights expire on February 27, 1999.
On January 5, 1999, the Company's Board of Directors approved the
renewal of the Company's existing Preferred Share Purchase Rights
Plan (with certain exceptions) through the execution and delivery
of a Renewed Rights Agreement, dated January 6, 1999, which expires
January 6, 2009 ("Renewed Rights Plan"). The Company issued the
rights, among other reasons, in order to assure that all of the
Company's stockholders receive fair and equal treatment in the
event of any proposed takeover of the Company and to guard against
partial tender abusive tactics to gain control of the Company. The
rights under the Renewed Rights Plan (the "Renewed Rights") will
become exercisable only if a person or group acquires beneficial
ownership of 20% or more of the Company's Common Stock or announces
a tender or exchange offer the consummation of which would result
in the ownership by a person or group of 20% or more of the Common
Stock, except pursuant to a tender or exchange offer which is for
all outstanding shares of Common Stock at a price and on terms
which a majority of outside directors of the Board of Directors
determines to be adequate and in the best interest of the Company
in which the Company, its stockholders and other relevant
constituencies, other than the party triggering the rights (a
"Permitted Offer"), except acquisitions by the following excluded
persons (collectively, the "Excluded Persons"): (i) the Company,
(ii) any subsidiary of the Company, (iii) any employee benefit plan
of the Company or its subsidiaries, (iv) any entity holding Common
Stock for or pursuant to the employee benefit plan of the Company
or its subsidiary, (v) Jack E. Golsen, Chairman of the Board and
President of the Company, his spouse and children and certain
related trusts and entities, (vi) any party who becomes the
beneficial owner of 20% or more of the Common Stock solely as a
result of the acquisition of Common Stock by the Company, unless
such party shall, after such share purchase by the Company, become
the beneficial owner of additional shares of Common Stock
24
constituting 1% or more of the then outstanding shares of Common
Stock, and (vii) any party whom the Board of Directors of the
Company determines in good faith acquired 20% or more of the Common
Stock inadvertently and such person divests within 10 business days
after such determination, a sufficient number of shares of Common
Stock and no longer beneficially own 20% of the Common Stock.
Each Renewal Rights, when triggered, (other than the Renewal
Rights, owned by the acquiring person or members of a group that
causes the Renewal Rights to become exercisable, which became void)
will entitle the stockholder to buy one one-hundredth of a share of
a new series of participating Preferred Stock at an exercise price
of $20.00 per share. Each one one-hundredth of a share of the new
Preferred Stock purchasable upon the exercise of a right has
economic terms designed to approximate the value of one share of
the Company's Common Stock. If another person or group acquires
the Company in a merger or other business combination transaction,
each Renewal Right will entitle its holder (other than Renewal
Rights owned by the person or group that causes the Renewal Rights
to become exercisable, which become void) to purchase at the
Renewal Right's then current exercise price, a number of the
acquiring company's common shares which at the time of such
transaction would have a market value two times the exercise price
of the Renewal Right. In addition, if a person or group (with
certain exceptions) acquires 20% or more of the Company's
outstanding Common Stock, each Renewal Right will entitle its
holder (other than the Renewal Rights owned by the acquiring person
or members of the group that results in the Renewal Rights becoming
exercisable, which become void) to purchase at the Renewal Right's
then current exercise price, a number of shares of the Company's
Common Stock having a market value of twice the Renewal Right's
exercise price in lieu of the new Preferred Stock.
Following the acquisition by a person or group of beneficial
ownership of 20% or more of the Company's outstanding Common Stock
(with certain exceptions) and prior to an acquisition of 50% or
more of the Company's Common Stock by the person or group, the
Board of Directors may exchange the Renewal Rights (other than
Renewal Rights owned by the acquiring person or members of the
group that results in the Renewal Rights becoming exercisable,
which become void), in whole or in part, for shares of the
Company's Common Stock. That exchange would occur at an exchange
ratio of one share of Common Stock, or one one-hundredth of a share
of the new series of participating Preferred Stock, per Renewal
Right.
Prior to the acquisition by a person or group of beneficial
ownership of 20% or more of the Company's Common Stock (with
certain exceptions) the Company may redeem the Renewal Rights for
one cent per Renewal Right at the option of the Company's Board of
Directors. The Company's Board of Directors also has the authority
to reduce the 20% thresholds to not less than 10%.
25
Item 6. SELECTED FINANCIAL DATA
_______________________
Years ended December 31,
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(Dollars in Thousands,
except per share data)
Selected Statement of Operations Data:
Net sales $310,037 $313,929 $307,160 $267,391 $245,025
======== ======== ======== ======== ========
Total revenues $324,320 $319,096 $313,425 $274,115 $249,969
======== ======== ======== ======== ========
Interest expense $ 17,327 $ 14,740 $ 10,017 $ 10,131 $ 6,949
======== ======== ======== ======== ========
Income (loss) from
continuing oper-
ations before
extraordinary
charge $ (1,920) $(18,446) $ (3,845) $ (3,732) $ 983
========= ========= ========= ========= ========
Net income (loss) $ (1,920) $(23,065) $ (3,845) $ (3,732) $ 24,467
========= ========= ========= ========= =========
Net income (loss)
applicable to
common stock $ (5,149) $(26,294) $ (7,074) $ (6,961) $ 21,232
========= ========= ========= ========= ========
Basic and diluted
earnings (loss)
per common share:
Loss from con-
tinuing oper-
ations before
extraordinary
charge $ (.42) $ (1.68) $ (.55) $ (.54) $ (.17)
======== ======== ========= ======== =========
Net income (loss) $ (.42) $ (2.04) $ (.55) $ (.54) $ 1.57
======== ======== ========= ======== =========
26
Item 6. SELECTED FINANCIAL DATA (Continued)
______ ___________________________________
Years ended December 31,
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(Dollars in Thousands,
except per share data)
Selected Balance Sheet Data:
Total assets $248,647 $270,653 $261,560 $238,176 $221,281
======== ======== ======== ======== ========
Long-term debt,
including current
portion $169,642 $180,941 $132,284 $118,280 $ 91,681
======== ======== ======== ======== ========
Redeemable preferred
stock $ 139 $ 146 $ 146 $ 149 $ 152
======== ======== ======== ======== ========
Stockholders' equity $ 35,059 $ 44,496 $ 74,018 $ 81,576 $ 90,599
======== ======== ======== ======== ========
Selected other data:
Cash dividends
declared per
common share $ .02 $ .06 $ .06 $ .06 $ .06
======== ======== ======== ======== ========
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
______ _________________________________________________
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with a review of the Company's December 31, 1998
Consolidated Financial Statements, Item 6 "SELECTED FINANCIAL DATA"
and Item 1 "BUSINESS" included elsewhere in this report.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
Overview
________
General
_______
The Company is pursuing a strategy of focusing on its core
businesses and concentrating on product lines in niche markets
where the Company has established or believes it can establish a
position as a market leader. In addition, the Company is seeking
to improve its liquidity and profits through liquidation of
selected assets that are on its balance sheet and on which it is
not realizing an acceptable return and does not reasonably expect
to do so. In this connection, the Company has come to the
conclusion that its Automotive and Industrial Products Businesses
are non-core to the Company and the Company is exploring various
alternatives to maximize shareholder value from these assets. The
Company is also considering the sale of other assets that are non-
core to its Chemical and Climate Control Businesses.
As discussed in "Item 1 - Business - General", the Company is
continuing with its evaluation of the spin-off of Automotive to its
shareholders as a dividend. The spin-off of Automotive will
require, among other things, commitment to a formal plan, receipt
by the Company from the Internal Revenue Service of a favorable
ruling or an opinion of counsel confirming tax-free treatment,
certain Securities and Exchange Commission filings, arrangement for
lines of credit for Automotive, and LSB Board of Directors'
approval. Subject to completion of the above conditions,
management believes there is a strong likelihood that the spin-off
will be completed during 1999. However, there are no assurances
that the Company will spin-off Automotive.
Certain statements contained in this Overview are forward-looking
statements, and future results could differ materially from such statements.
28
The following table contains certain of the information from Note 13 of
Notes to the Company's Consolidated Financial Statements about the Company's
operations in different industry segments for each of the three years in the
period ended December 31, 1998.
1998 1997 1996
________ _________ __________
(In Thousands)
Sales:
Chemical $139,942 $ 156,949 $ 166,163
Climate Control 115,786 105,909 89,275
Automotive Products 39,994 35,499 37,946
Industrial Products 14,315 15,572 13,776
________ _________ _________
$310,037 $ 313,929 $ 307,160
======== ========= =========
Gross profit: (1)
Chemical $ 18,274 $ 19,320 $ 25,885
Climate Control 32,278 29,552 21,961
Automotive Products 8,670 3,299 5,868
Industrial Products 3,731 3,776 3,058
________ _________ _________
$ 62,953 $ 55,947 $ 56,772
======== ========= =========
Operating profit (loss): (2)
Chemical $ 3,675 $ 5,479 $ 10,971
Climate Control 10,493 8,895 5,362
Automotive Products (1,827) (7,251) (4,134)
Industrial Products (403) (993) (2,685)
________ _________ _________
11,938 6,130 9,514
General corporate expenses, net (9,424) (9,786) (3,192)
Interest expense (17,327) (14,740) (10,017)
Gain on sale of the Tower 12,993 - -
_________ _________ _________
Loss from continuing
operations before provision
for income taxes and extra-
ordinary charge $ (1,820) $ (18,396) $ (3,695)
========= ========= =========
Total assets:
Chemical $124,577 $ 137,570 $ 132,718
Climate Control 49,516 49,274 50,623
Automotive Products 41,967 42,718 43,212
Industrial Products 11,662 9,929 13,614
________ _________ _________
227,722 239,491 240,167
Corporate assets and other 20,925 31,162 21,393
________ _________ _________
Total assets $248,647 $ 270,653 $ 261,560
======== ========= =========
(1) Gross profit by industry segment represents net sales less
cost of sales.
(2) Operating profit by industry segment represents revenues less
operating expenses before deducting general corporate
expenses, interest expense and income taxes and, in 1998,
before gain on sale of the Tower.
29
Chemical Business
_________________
Although sales in the Chemical Business have declined from
$156.9 million in the twelve months ended December 31, 1997, to
$139.9 million in the twelve months ended December 31, 1998 (a
decrease of 10.8%) and the gross profit has decreased from $19.3
million in 1997 to $18.3 million in 1998, the gross profit
percentage has increased from 12.3% in 1997 to 13.1% in 1998.
In 1998, the Chemical Business was adversely affected by the
extreme drought conditions in the mid-south market during the
primary fertilizer season, followed by excess wet conditions and
floods in the fall season, resulting in substantially lower volume
and lower sales prices for certain of its products sold in its
agricultural markets. The operating profit of the Chemical
Business decreased from $5.5 million in 1997 to $3.7 million in
1998 (a decrease of 32.9%). The decline in sales volume explains
approximately $1.0 million of this decrease. The remaining
$800,000 decrease is primarily attributable to a provision for
possible loss on a note receivable recorded in the fourth quarter
of 1998.
During 1997, limitations on production, as a result of certain
mechanical and design problems relating to the construction and
start-up of a concentrated nitric acid plant, resulted in
significant fixed costs being expended as period costs rather than
being absorbed as cost of product being produced and sold. In
addition, significant amounts were expended for engineering,
consulting, and other costs to bring the nitric acid plant up to
its stated capacity.
Additionally, the cost of the Chemical Business' primary raw
material, anhydrous ammonia, averaged approximately $184 per ton in
1997, compared to approximately $154 per ton in 1998. The Chemical
Business purchases approximately 220,000 tons of anhydrous ammonia
per year under three contracts expiring in April, 2000, June, 2000,
and December, 2000, respectively. The Company's purchase price of
anhydrous ammonia under these contracts can be higher or lower than
the current market spot price of anhydrous ammonia. Pricing is
subject to variations due to numerous factors contained in these
contracts. Based on the price calculations contained in the
contracts, one contract is presently priced above the current
market spot price. The Chemical Business is required to purchase
120,000 tons of its requirements under the contract expiring in
April, 2000, at least 24,000 tons of its requirements under the
contract expiring in June, 2000, and 60,000 tons of its
requirements under the contract expiring in December, 2000, with
additional quantities of anhydrous ammonia available under each
contract. Anhydrous ammonia is not being currently supplied under
the contract expiring in December, 2000, due to that supplier's
declaration of an event of force majeure as a result of a temporary
shut down of its plant due to mechanical problems. The Company has
been able to, on a temporary basis, obtain anhydrous ammonia from
other sources on similar terms as provided in the contract expiring
in December, 2000.
The anhydrous ammonia industry added an additional one million
tons of capacity of anhydrous ammonia in the western hemisphere in
1998, and the Company believes there is approximately one million
tons of additional annual capacity of anhydrous ammonia being
constructed in the western hemisphere scheduled for completion in
1999. The Company believes this additional capacity may contribute
30
to a decline in the future market price of anhydrous ammonia. See
"Special Note Regarding Forward-Looking Statements".
In June, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries is acting as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant, when constructed, will be operated by the
Company's subsidiary and will supply nitric acid for Bayer's
polyurethane business under a long-term supply contract.
Management estimates that, after the initial startup phase of
operations at the plant, at full production capacity based on terms
of the Bayer Agreement and dependent upon the price of anhydrous
ammonia, based on the price of anhydrous ammonia as of the date of
this report, the plant should generate approximately $35 million to
$50 million in annual gross revenues. Unlike the Chemical
Business' regular sales volume, the market risk on this additional
volume is much less since the contract provides for recovery of
costs, as defined, plus a profit. It is anticipated that the
construction of the nitric acid plant at Bayer's facility in
Baytown, Texas, will cost approximately $69 million and
construction is scheduled to be completed in the second quarter of
1999. The Company's subsidiary is to lease the nitric acid plant
pursuant to a leverage lease from an unrelated third party for an
initial term of ten (10) years from the date that the plant becomes
fully operational, and the construction financing of this plant is
being provided by an unaffiliated lender. (See Item 1 - "Business
- - - Chemical Business" for a further discussion of the Baytown, Texas
nitric acid plant facility.)
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, such have had an adverse effect on the Company's
consolidated results of operations in 1998. The Company received
an offer in 1999 to purchase its Australian subsidiary. As of the
date of this report, the Company is negotiating with the company
that offered to buy the Australian subsidiary. During 1998, TES
had net sales of $14.2 million, and reported a net loss of $2.9
million. There are no assurances that the Company will sell the
Australian subsidiary.
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pump, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
As indicated in the above table, the Climate Control Business
reported improved sales (an increase of 9.3%) and improved
operating profit (an increase of 18.0%) for 1998, as compared to
1997.
31
Automotive and Industrial Products Businesses
_____________________________________________
As indicated in the above table, during 1998, 1997, and 1996,
the Automotive and Industrial Products Businesses recorded combined
sales of $54.3 million, $51.1 million, and $51.7 million,
respectively, and reported operating losses (as defined above) of
$2.2 million, $8.2 million, and $6.8 million in 1998, 1997, and
1996, respectively. The net investment in assets of these
Businesses was $53.6 million, $52.6 million, and $56.8 million at
year end 1998, 1997, and 1996, respectively. While the Company's
investment in the assets of these businesses has declined from
$56.8 million in 1996 to $53.6 million in 1998, the Company expects
to realize further reductions in future periods as it implements
its proposed plan to dispose of non-core and non-earning assets.
See "Overview - General" for a discussion of the Company's intent
to spin-off the Automotive Business, subject to numerous conditions
precedent. During 1998, the Automotive Business had net sales of
$40.0 million, and an operating loss (as defined) of approximately
$1.8 million. The Company continues to eliminate certain
categories of machinery from the Industrial Products' product line
by not replacing machines when sold.
Results of Operations
_____________________
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
_____________________________________________________________________
Revenues
________
Total revenues for 1998 and 1997 were $324.3 million and
$319.1 million, respectively (an increase of $5.2 million). Sales
decreased $3.9 million and other income decreased $3.9 million.
Additionally, in March, 1998, a subsidiary of the Company closed
the sale of an Oklahoma City office building (the "Tower"). The
Company recognized a pre-tax gain on the sale of the Tower of
approximately $13.0 million in the first quarter of 1998. The
decrease in other income of $3.9 million was primarily due to non-
recurring operations of the Tower, which was sold in March, 1998,
and certain valuation reserve adjustments recorded against
specifically identified investments in the fourth quarter of 1998.
Net Sales
_________
Consolidated net sales included in total revenues for 1998
were $310.0 million, compared to $313.9 million for 1997, a
decrease of $3.9 million. This decrease in sales resulted
principally from: (i) decreased sales in the Industrial Products
Business of $1.3 million due to decreased sales of machine tools,
and (ii) decreased sales in the Chemical Business of $17.0 million
primarily due to lower sales volume in the U.S. of agricultural and
blasting products and decreased business volume of its Australian
subsidiary. Sales were lower in the Chemical Business during 1998,
compared to 1997, as a result of adverse weather conditions in its
agricultural markets during the spring and fall planting seasons.
Blasting sales in the Chemical Business declined as a result of
elimination of certain low profit margin sales and decreased volume
in the Australian subsidiary resulting from adverse economic
developments in Asia. These decreases were offset by (i) increased
32
sales in the Climate Control Business of $9.9 million, primarily
due to increased volume and price increases in both the heat pump
and fan coil product lines, and (ii) increased sales in the
Automotive Products Business of $4.5 million primarily due to
increased volume of units being shipped to original equipment
manufacturers and new customers.
Gross Profit
____________
Gross profit increased $7.0 million and was 20.3% of net sales
for 1998, compared to 17.8% of net sales for 1997. The gross
profit percentage improved in the Chemical, Automotive Products and
Industrial Products Businesses. It was consistent from 1997 to
1998 in the Climate Control Business.
The increase in the gross profit percentage was due primarily
to (i) increased absorption of costs due to higher production
volumes and improved experience with returns and allowances in the
Automotive Products Business, (ii) lower production costs in the
Chemical Business due to the effect of lower prices of anhydrous
ammonia in 1998, (iii) lower unabsorbed overhead costs caused by
excessive downtime related to problems associated with mechanical
failures at the Chemical Business' primary manufacturing plant in
the first half of 1997, and (iv) higher gross profit product mix of
machine tools sold in the Industrial Products Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative expenses ("SG&A"), as a
percent of net sales, were 19.9% in 1998, and 20.6% in 1997. SG&A,
as a percent of sales, was approximately 11.5% in 1998, compared to
9.8% in 1997 for the Chemical Business; 20.3% in 1998, compared to
21.0% in 1997 for the Climate Control Business; 26.5% in 1998,
compared to 32.1% in 1997 for the Automotive Products Business; and
33.3% in 1998, compared to 33.4% in 1997 for the Industrial
Products Business.
The increase in the Chemical Business was the result of lower
sales in 1998 with relatively constant SG&A expenses. Within SG&A
of the Chemical Business, higher provisions for uncollectible
accounts receivable in 1998 were offset by decreased expenses at
the Company's Australian subsidiary in anticipation of sustaining
a lower level of business activity. The decrease in the Climate
Control Business' SG&A as a percentage of sales was the result of
increases in sales. The Climate Control Business' amount of SG&A
increased in 1998 due to additional information technology
personnel to support management information systems changes and
higher variable costs due to a change in sales mix toward greater
domestic sales which carry a higher SG&A percent. The decrease in
the Automotive Products Business was due to higher sales and
decreased expenses pursuant to a comprehensive cost reduction
program implemented by the Company.
In addition to the variances described above, approximately
$1.7 million of the total SG&A decrease of $3.0 million is due to
the reduction of costs associated with the Tower which was sold in
March of 1998 compared to a full year in 1997 and approximately
$1.0 million is due to legal fees in 1997 over 1998 to assert the
Company's position in various legal proceedings.
Interest Expense
________________
Interest expense for the Company, before deducting capitalized
interest, was $17.3 million during 1998, compared to $15.9 million
33
during 1997. During 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant. The
increase of $1.4 million before the effect of capitalization
primarily resulted from increased borrowings. The increased
borrowings were necessary to support capital expenditures, higher
accounts receivable balances and to meet the operational
requirements of the Company. See "Liquidity and Capital Resources"
of this Management's Discussion and Analysis.
Extraordinary Charge
____________________
In 1997, in connection with the issuance of the 10 3/4%
unsecured senior notes due 2007 by a subsidiary of the Company, a
subsidiary of the Company retired the outstanding principal
associated with a certain financing arrangement and incurred a
prepayment fee. The prepayment fee and loan origination costs
expensed in 1997 related to the financing arrangement aggregated
approximately $4.6 million.
Net Loss
________
The Company had a net loss of $1.9 million in 1998, compared
to a net loss of $23.1 million in 1997. The decreased loss of
$21.2 million was primarily due to the gain on the sale of the
Tower in 1998, increased gross profit in 1998, decreased SG&A in
1998, and the extraordinary charge in 1997 offset by increased
interest expense in 1998, as discussed above.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
_____________________________________________________________________
Revenues
________
Total revenues for 1997 and 1996 were $319.1 million and
$313.4 million, respectively (an increase of $5.7 million or 1.8%).
Sales increased $6.8 million or 2.2%.
Net Sales
_________
Consolidated net sales for 1997 were $313.9 million, compared
to $307.2 million for 1996, an increase of $6.8 million or 2.2%.
This sales increase resulted principally from: (i) increased sales
in the Climate Control Business of $16.6 million, primarily due to
increased sales of heat pumps; and (ii) increased sales of $1.8
million in the Industrial Products Business due to increased
machine tool sales; partially offset by (iii) decreased sales of
$2.4 million in the Automotive Products Business due to less units
being shipped and product mix; and (iv) decreased sales in the
Chemical Business of $9.2 million primarily due to reduced sales of
the Company's wholly-owned Australian subsidiary, because of the
expiration of certain customer contracts and recent economic
developments in Asia.
Gross Profit
____________
Gross profit decreased $.8 million and was 17.8% of net sales
for 1997, compared to 18.5% of net sales for 1996. The gross
profit percentage declined in the Automotive Products and Chemical
Businesses, but improved in the Climate Control and Industrial
Products Businesses.
34
The gross profit of the Chemical Business was adversely
affected by higher production costs due to (i) the higher cost of
anhydrous ammonia which was only partially passed on in the form of
higher selling prices, (ii) unabsorbed overhead costs caused by
down time related to modifications made to resolve problems
associated with mechanical failures, and (iii) environmental
matters at the Chemical Business' primary manufacturing plant.
These increased costs in 1997 were partially offset by a reduction
in cost of sales of $2.1 million through recapture of manufacturing
variances of the Chemical Business in the form of business
interruption insurance settlements.
The primary reasons for the decline in gross profit percentage
in the Automotive Products Business were (i) less favorable
customer mix (i.e., decreased sales to higher margin retail
customers, and increased sales to Original Equipment Manufacturer
(OEM) customers which are lower margin customers), and (ii)
increases in manufacturing expenses in excess of increases in
production cost absorption attributable to new product lines that
have been developed.
These gross profit declines have been partially offset by
gross profit percentage increases due to sales of machine tools
carrying a higher gross profit percentage in the Industrial
Products Business and increased absorption of costs due to higher
production volumes and focus on sales of more profitable product
lines in the Climate Control Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative expenses ("SG&A"), as a
percent of net sales, were 20.6% in 1997 and 18.5% in 1996. SG&A,
as a percent of sales, was approximately 9.8% in 1997 compared to
9.3% in 1996 for the Chemical Business; 21.0% in 1997 compared to
19.8% in 1996 for the Climate Control Business; 32.1% in 1997
compared to 29.5% in 1996 for the Automotive Products Business; and
33.4% in 1997 compared to 44.4% in 1996 for the Industrial
Products Business.
The increase in the Chemical Business was the result of lower
sales in 1997 with relatively constant SG&A expenses. Within SG&A
of the Chemical Business, lower provisions for uncollectible
accounts receivable in 1997 were offset by increased expenses at
the Company's Australian subsidiary in anticipation of sustaining
a higher level of business activity. The increase in the Climate
Control Business' SG&A was the result of increases in sales
personnel costs to support higher sales in future periods,
additional information technology personnel to support management
information systems changes and higher freight costs due to a
change in sales mix toward greater domestic sales which carry a
higher SG&A percent. The increase in the Automotive Products
Business was due to lower sales and increased advertising expenses
expected to benefit future periods. The decrease in the Industrial
Products Business resulted from lower bad debt expenses and lower
advertising expenses compounded by higher sales.
In addition to the variances described above, approximately
$2.2 million of the total SG&A increase of $8.1 million is due to
the operations of the Tower in 1997 as discussed elsewhere in this
report and approximately $2.4 million is due to increased legal
fees, settlement accruals and loss reserves in 1997 over 1996 to
35
assert the Company's position in various legal proceedings and
joint ventures.
Interest Expense
________________
Interest expense for the Company, before deducting capitalized
interest, was $15.9 million during 1997, compared to $12.4 million
during 1996. During 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant,
compared to $2.4 million in 1996. The increase of $3.5 million
before the effect of capitalization primarily resulted from
increased borrowings and higher interest rates. The increased
borrowings were necessary to support capital expenditures, higher
accounts receivable balances and to meet the operational
requirements of the Company.
Extraordinary Charge
____________________
In 1997, in connection with the issuance of the 10 3/4%
unsecured senior notes due 2007 by a subsidiary of the Company, a
subsidiary of the Company retired the outstanding principal
associated with a certain financing arrangement and incurred a
prepayment fee. The prepayment fee and loan origination costs
expensed in 1997 related to the financing arrangement aggregated
approximately $4.6 million.
Net Loss
________
The Company had a net loss of $23.1 million in 1997 compared
to a net loss of $3.8 million in 1996. The increased loss of $19.3
million was primarily due to decreased gross profit, increased
SG&A, increased interest expense and the extraordinary charge as
discussed above.
Liquidity and Capital Resources
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow and borrowings under its revolving
credit facilities, and more recently, by issuance of senior
unsecured notes by a wholly owned subsidiary.
Net cash used by operations for the year ended December 31,
1998 was $4.2 million, after $13.2 million for noncash depreciation
and amortization, $4.9 million in provisions for possible losses on
accounts receivable, inventory, notes receivable and a loan
guarantee, $1.1 million of increase in cash surrender value on
certain life insurance policies and $13.9 million in gains from the
sales of real estate and other assets and including the following
changes in assets and liabilities: (i) accounts receivable
increases of $2.3 million; (ii) inventory decreases of $1.3
million; (iii) increases in supplies and prepaid items of $1.0
million; and (iv) decreases in accounts payable and accrued
liabilities of $3.5 million. The increase in accounts receivable
is due to increased sales and extended credit terms to new
customers in the Automotive Products Business and initial sales
36
under the Bayer Agreement in the Chemical Business. The decrease
in inventory was due primarily to measures taken in all of the
Company's Businesses to decrease their inventory levels. The
increase in supplies and prepaid items resulted primarily from an
increase in maintenance and manufacturing supplies in the Chemical
Business. The decrease in accounts payable and accrued liabilities
was primarily due to timing of payments for inventory purchases in
the Chemical Business.
Cash Flow from Investing and Financing Activities
_________________________________________________
Cash provided by investing activities for the year ended
December 31, 1998 included cash proceeds of $29.3 million received
on the sale of the Tower (see Note 2 of Notes to the Company's
Consolidated Financial Statements) and proceeds from sales of other
property of $1.8 million offset by $9.6 million in capital
expenditures and $2.1 million used to increase other assets. The
capital expenditures took place primarily in the Chemical and
Climate Control Businesses to enhance production and product
delivery capabilities. The increase in other assets includes
approximately $.9 million of cash advances to a start-up aviation
company as discussed later in this report under "Debt Guarantee"
and approximately $.7 million of deposits made in connection with
an interest rate hedge contract related to the agreement with
Bayer.
Net cash used by financing activities included: (i) payments
on long-term debt of $20.3 million, including the $12.6 million
payoff of the mortgage on the Tower, (ii) long-term and other
borrowings, net of origination fees, of $.6 million, (iii) net
increases in revolving debt of $7.7 million, after application of
net proceeds of $16.5 million from the sale of the Tower, (iv)
dividends of $3.5 million, and (v) treasury stock purchases of $3.6
million.
Source of Funds
_______________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by four separate loan
agreements ("Revolving Credit Agreements") with an unrelated lender
("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of certain
of the subsidiaries that are borrowers under the Revolving Credit
Agreements. The Revolving Credit Agreements, as amended, provide
for revolving credit facilities ("Revolver") for total direct
borrowings up to $65.0 million, including the issuance of letters
of credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Revolving Credit Agreements, as amended, provide for interest at
the lender's prime rate plus .5% per annum or, at the Company's
option, on the Lender's LIBOR rate plus 2.875% per annum (which
rates are subject to increase or reduction based upon achieving
specified availability and adjusted tangible net worth levels). At
December 31, 1998, the effective interest rate was 8.11%. The term
of the Revolving Credit Agreements is through December 31, 2000,
and is renewable thereafter for successive thirteen month terms.
At December 31, 1998, the availability for additional borrowings,
37
based on eligible collateral approximated $22 million. Borrowings
under the Revolver outstanding at December 31, 1998, were $26.3
million. The Revolving Credit Agreements, as amended, require the
Company to maintain certain financial ratios and contain other
financial covenants, including tangible net worth requirements and
capital expenditure limitations. At December 31, 1998, the Company
was not in compliance with certain of these financial covenants.
Subsequent to December 31, 1998, the Company obtained waivers of
such noncompliance and amendments to reset the financial covenants
through maturity. The annual interest on the outstanding debt
under the Revolver at December 31, 1998 at the rates then in effect
would approximate $2.1 million. The Revolving Credit Agreements
also require the payment of an annual facility fee of 0.5% of the
unused revolver.
In addition to the Revolving Credit Agreements discussed
above, as of December 31, 1998, the Company's wholly-owned
subsidiary, DSN Corporation ("DSN"), is a party to several loan
agreements with a financial company (the "Financing Company") for
three projects. At December 31, 1998, DSN had outstanding
borrowings of $11.0 million under these loans. The loans have
repayment schedules of 84 consecutive monthly installments of
principal and interest through maturity in 2002. The interest rate
on each of the loans is fixed and range from 8.2% to 8.9%. Annual
interest, for the three notes as a whole, at December 31, 1998, at
the agreed to interest rates would approximate $1.0 million. The
loans are secured by the various DSN property and equipment. The
loan agreements require the Company to maintain certain financial
ratios, including tangible net worth requirements.
As previously discussed, the Company is a holding company and,
accordingly, its ability to pay dividends on its outstanding Common
Stock and Preferred Stocks is dependent in large part on its
ability to obtain funds from its subsidiaries. The ability of the
Company's wholly owned subsidiary, ClimaChem (which owns all of the
stock of substantially all of the Company's subsidiaries comprising
the Chemical Business and the Climate Control Business) and its
subsidiaries to transfer funds to the Company is restricted by
certain covenants contained in the Indenture to which they are
parties. Under the terms of the Indenture, ClimaChem and its
subsidiaries cannot transfer funds to the Company, except for (i)
the amount of income taxes that they would be required to pay if
they were not consolidated with the Company, (ii) an amount not to
exceed fifty percent (50%) of ClimaChem's consolidated net income
for the year in question, and (iii) the amount of direct and
indirect costs and expenses incurred by the Company on behalf of
ClimaChem and ClimaChem's subsidiaries pursuant to a certain
services agreement and a certain management agreement to which the
companies are parties. During 1998, ClimaChem reported a
consolidated net loss of approximately $2.6 million. Accordingly,
ClimaChem and its subsidiaries were unable to transfer funds to the
Company in 1998 except for reimbursement of costs and expenses
incurred by the Company on their behalf or in connection with
certain agreements.
Under the Revolving Credit Agreements discussed above, the
Company and its subsidiaries, other than ClimaChem and its
subsidiaries, have the right to borrow on a revolving basis up to
$24 million, based on eligible collateral. At December 31, 1998,
the Company and its subsidiaries, except ClimaChem and its
subsidiaries, had availability for additional borrowings based on
eligible collateral of approximately $2.7 million (borrowings
under the Revolver outstanding at December 31, 1998, were $14.5
million).
38
Due to ClimaChem's net loss for 1998 and the Company's (other
than ClimaChem and its subsidiaries) limited borrowing ability
under the Revolver, management is considering, but has not made its
final decision, recommending to the Board of Directors that the
Company discontinue payment of cash dividends on its Common Stock
for periods subsequent to January 1, 1999, until the Board of
Directors determines otherwise. In addition, as of the date of
this report, management has not determined whether the Company will
have adequate liquidity to declare and pay each of the quarterly
dividends on its outstanding Preferred Stock during 1999.
Future cash requirements (other than cash dividends) include
working capital requirements for anticipated sales increases in all
Businesses and funding for future capital expenditures. Funding
for the higher accounts receivable resulting from anticipated sales
increases will be provided by cash flow generated by the Company
and the revolving credit facilities discussed elsewhere in this
report. Inventory requirements for the higher anticipated sales
activity should be met by scheduled reductions in the inventories
of the Industrial Products Business and in the inventories of the
Automotive Products Business. In addition, the Company is also
considering the sale of certain assets which it does not believe
are critical to its Chemical and Climate Control Businesses. In
1999, the Company has planned capital expenditures of approximately
$10 million, primarily in the Chemical and Climate Control
Businesses, a certain amount of which it anticipates will be
financed by equipment finance contracts on a term basis and in a
manner allowed under its various loan agreements. Such capital
expenditures include approximately $2.4 million, which the Chemical
Business anticipates spending related to environmental control
facilities at its El Dorado Facility, as previously discussed in
this report. The Company currently has no material commitments for
capital expenditures.
During the latter part of March 1999, the Company's management
is considering the realignment of certain of the Company's overhead
to better match its focus on its core businesses. Consistent with
this realignment, in April 1999, the Company's Board of Directors
approved the sale of certain assets to ClimaChem in accordance with
the terms of the Indenture to which ClimaChem and its subsidiaries
are parties to and the loan agreement that the Company and
subsidiaries of ClimaChem are borrowing under, which assets are
materially related to the lines of businesses of the Chemical and
Climate Control Businesses. In addition, the Company is negotiating
with an asset based lender to provide the Automotive Business with
a new credit facility of up to $20.0 million, with a term loan of
$2.0 million and a revolving line of credit of up to $18.0 million.
If this new credit facility is finalized as currently structured, it
would have provided the Automotive Business borrowing ability of
approximately $14.3 million as of March 31, 1999, as compared to borrowing
ability of $12.7 million under the Automotive Business' current
credit facility as of March 31, 1999. Borrowings outstanding under
the current credit facility at March 31, 1999, approximated $12.5
million. Such borrowings will be repaid from proceeds of this new
credit facility if it is finalized. Further, the Company's
Revolver provides for the elimination of its financial covenants
upon the sale, disposal or spin-off of the Automotive Business by
the Company as long as the Company maintains a minimum aggregate
availability under the Revolver of at least $15 million.
39
Management believes that the Company will have adequate cash
flow from operations, its revolving line of credit and other
sources to meet its present anticipated working capital and debt
service requirements.
If the spin-off of the Automotive Business is to be completed,
the Company anticipates that the Company will be required to make
a capital contribution to the Automotive Business prior to the
spin-off in the form of a reduction of the amount the Automotive
Business owes the Company so as to enable the Automotive Business
after the spin-off to have a positive stockholders' equity. The
balance of the amount the Automotive Business owes the Company is
expected to be evidenced by a promissory note.
The spin-off being evaluated by the Company of the Automotive
Business would be accomplished in the form of a dividend to the
holders of the Company's Common Stock. In order to declare and pay
a dividend upon shares of capital stock, the Delaware General
Corporation Law ("Delaware Law") requires that such either be
declared and paid (1) out of "surplus", as defined under the
Delaware Law, or (2) in case there is no "surplus", out of net
profits of the Company for the fiscal year in which the dividend is
declared or the preceding fiscal year. The Company is presently
reviewing with its investment banker as to whether it has
sufficient "surplus" to accomplish the spin-off of the Automotive
Business to its holders of its Common Stock after the capital
contribution by the Company to the Automotive Business as discussed
above. The Company does not believe that it will be able to pay
such dividend out of net profits. If the Company's investment
banker is unable to opine that the Company has sufficient "surplus"
to accomplish the spin-off, under Delaware Law the Company could
reduce its "capital" (as defined under Delaware Law) represented by
issued shares of its capital stock without par value and transfer
the amount of such reduction to "surplus", as long as the assets of
the Company remaining after such reduction shall be sufficient to
pay the Company's debts for which payment has not otherwise been
provided. The terms of the Company's Series B 12% Cumulative
Convertible Preferred Stock ("Series B Preferred") provides, in
part, that "In the event of any voluntary or involuntary
liquidation, dissolution or winding up of LSB, or any reduction in
its capital resulting in any distribution of assets to its
stockholders, the holders of the Series B Preferred Stock shall be
entitled to receive in cash out of assets of LSB, whether from
capital or from earnings available for distribution to the
stockholders, before any amount shall be paid to the holder of
Common Stock of LSB the sum of One Hundred & No/100 Dollars ($100)
(the par value of the Series B Preferred Stock) per share, plus an
amount equal to all accumulated and unpaid cash dividends thereon
to the date fixed for payment of such distributive amount".
Counsel to the Company has advised the Company that a transfer from
"capital" to "surplus" to distribute the stock of the Automotive
Business to the holders of the Company's Common Stock would trigger
a payment of $100 per outstanding share of Series B Preferred.
There are currently outstanding 20,000 shares of Series B
Preferred, all of which are owned by Jack E. Golsen or members of
his immediate family and/or entities wholly owned by members of Mr.
Golsen's immediate family. Mr. Golsen has advised the Company that
if the Company is required to transfer from "capital" to "surplus"
an amount necessary to complete the spin-off and such triggers the
payment under the Series B Preferred, he would not require the
Company to pay such in cash but would be willing to receive such
amount in a form other than cash, with the form to be determined
based on negotiations with independent members of the Company's
40
Board of Directors. The Series B Preferred was issued by the
Company in 1987 in connection with a transaction approved by the
Board of Directors and the stockholders of the Company.
Accordingly, as of the date of this report, there are no assurances
that the Company will ultimately commit to a formal plan to spin-
off the Automotive Business.
Pursuant to the Company's previously announced repurchase
plan, the Company purchased during 1998, 909,300 shares of Common
Stock, for an aggregate purchase price of $3,567,026. From
January 1, 1999, through March 31, 1999, the Company has purchased
under its repurchase plan a total of 80,400 shares of Common Stock
for an aggregate amount of $232,555. As of the date of this
report, management and the Board of Directors are considering
whether to continue with its repurchase plan to purchase shares of
its Common Stock and if so, to what extent for the balance of 1999.
Foreign Subsidiary
__________________
The Company's wholly-owned Australian subsidiary, TES, has a
revolving credit working capital facility (the "TES Revolving
Facility") with Bank of New Zealand, Australia, in the amount of
AUS$10.5 million (approximately US$6.5 million). The TES Revolving
Facility allows for borrowings based on specific percentages of
qualified eligible assets. Based on the effective exchange rate at
December 31, 1998, approximately US$5.0 million (AUS$8.1 million
approximately) was borrowed at December 31, 1998. Such debt is
secured by substantially all the assets of TES, plus an unlimited
guarantee and indemnity from LSB and certain subsidiaries of TES.
The interest rate on this debt is dependent upon the borrowing
option elected by TES and had a weighted average rate of 7.01% at
December 31, 1998. TES is in technical noncompliance with a
certain financial covenant contained in the loan agreement
involving the TES Revolving Facility. However, this covenant was
not met at the time of closing of this loan and the Bank of New
Zealand, Australia has continued to extend credit under the
Facility. The outstanding borrowing under the TES Revolving
Facility at December 31, 1998 has been classified as due within one
year in the accompanying consolidated financial statements. As
previously noted in this report, the Company has received an offer
in 1999, the terms of which it is presently negotiating with the
company that made the offer, to purchase TES; however, there are no
assurances that the Company will sell TES. Under the terms of
the Indenture to which ClimaChem is bound by, the net cash proceeds
from the sale of TES, if completed, are required (1) within 270
days from the date of the sale to be applied to the redemption of
the notes issued under the Indenture or to the repurchase of such
notes, or (2) within 240 days from the date of such sale, the
amount of the net cash proceeds be invested in a related business
of ClimaChem or the Australian subsidiary or used to reduce
indebtedness of ClimaChem.
Joint Ventures and Options to Purchase
______________________________________
Prior to 1997, the Company, through a subsidiary, loaned $2.8
million to a French manufacturer of HVAC equipment whose product
line is compatible with that of the Company's Climate Control
Business in the USA. Under the loan agreement, the Company has the
option to exchange its rights under the loan for 100% of the
borrower's outstanding common stock. The Company obtained a
41
security interest in the stock of the French manufacturer to secure
its loan. During 1997 the Company advanced an additional $1
million to the French manufacturer bringing the total of the loan
at December 31, 1997 to $3.8 million. Parties to the option have
agreed to extend the exercise date of the option to June 15, 2005.
As of the date of this report, the decision has not been made to
exercise such option and the $3.8 million loan, less a $1.5 million
valuation reserve, is carried on the books as a note receivable in
other assets.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The Project
had been awarded a contract to retrofit residential housing units
at a US Army base which it completed during 1996. The completed
contract was for installation of energy-efficient equipment
(including air conditioning and heating equipment), which would
reduce utility consumption. For the installation and management,
the Project will receive an average of seventy-seven percent (77%)
of all energy and maintenance savings during the twenty (20) year
contract term. The Project spent approximately $17.5 million to
retrofit the residential housing units at the US Army base. The
Project received a loan from a lender to finance approximately
$14.0 million of the cost of the Project. The Company is not
guaranteeing any of the lending obligations of the Project.
During 1995, the Company executed a stock option agreement to
acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company"), which owns the remaining fifty
percent (50%) equity interest in the Project discussed above, to
enhance the marketing of the Company's air conditioning products.
The stock option has a four (4) year term, and a total option
granting price of $1.0 million and annual $100,000 payments for
yearly extensions of the stock option thereafter for up to three
(3) years. The Company is currently negotiating to extend the
Option expiration date. Through the date of this report the
Company has made option payments aggregating $1.3 million and has
loaned the Optioned Company approximately $1.4 million. The
Company has recorded reserves of $1.3 million against the loans and
option payments. Upon exercise of the stock option by the Company,
or upon the occurrence of certain performance criteria which would
give the grantors of the stock option the right to accelerate the
date on which the Company must elect whether to exercise, the
Company shall pay certain cash and issue promissory notes for the
balance of the exercise price of the subject shares. The total
exercise price of the subject shares is $4.0 million, less the
amounts paid for the granting and any extensions of the stock
option. As of the date of this report, no decision to exercise
this option has been reached by the Company.
Debt Guarantee
______________
At December 31, 1998, the Company and one of its subsidiaries
had outstanding guarantees of approximately $2.6 million of
indebtedness of a startup aviation company in exchange for an
ownership interest. The debt guarantee relates to two note
instruments. The subsidiary has guaranteed up to $600,000 on one
of the note instruments. The other note in the amount of $2.0
million requires monthly principal payments.
42
In 1998 and during the first quarter of 1999, the aviation
company made capital calls on its shareholders. In 1998 and 1999,
in contemplation of a sale of the aviation company and pursuant to
such capital calls, the Company invested an additional $1,046,000
in the aviation company. This additional investment increased the
Company's ownership interest to approximately 45%. The Company has
reserves for losses equal to its direct investment and contingent
liabilities under the guarantees.
Subsequent to December 31, 1998, the Company was called upon
to perform on both guarantees. The Company paid approximately
$600,000 to the lender in satisfaction of the guarantee and assumed
the obligation for the $2.0 million note, which is due in equal
monthly principal payments, plus interest, through August, 2004.
In connection with the demand on the Company to perform under its
guarantee, the Company and the other guarantors formed a new
company ("KAC") and acquired the assets of the aviation company
through foreclosure.
The Company and the other shareholders of KAC are attempting
to sell the assets acquired in foreclosure. If they are successful
in selling these assets, it is expected that the Company will
recover a portion of its investment in and advances to the aviation
company which have been previously fully reserved.
Availability of Company's Loss Carry-overs
__________________________________________
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carry-overs from prior periods to reduce the federal income tax
payments which it would otherwise be required to make with respect
to income generated in such future years. Such benefit, if any is
dependent on the Company's ability to generate taxable income in
future periods, for which there is no assurance. Such benefit if
any, will be limited by the Company's reduced NOL for alternative
minimum tax purposes which is approximately $31.4 million at
December 31, 1998. As of December 31, 1998, the Company had
available regular tax NOL carry-overs of approximately $63.8
million based on its federal income tax returns as filed with the
Internal Revenue Service for taxable years through 1998. These NOL
carry-overs will expire beginning in the year 1999. As of December
31, 1998 and 1997, due to its recent history of reporting net
losses, the Company has established a valuation allowance on a
portion of its NOLs and thus has not recognized the full benefit of
its NOLs in the accompanying Consolidated Financial Statements.
The amount of these carry-overs has not been audited or
approved by the Internal Revenue Service and, accordingly, no
assurance can be given that such carry-overs will not be reduced as
a result of audits in the future. In addition, the ability of the
Company to utilize these carry-overs in the future will be subject
to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations. These include, in particular,
limitations imposed by Code Section 382 and the consolidated return
regulations.
Year 2000 Issues
________________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
43
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, the Company undertook a project to enhance
certain of its Information Technology ("IT") systems and install
certain other technologically advanced communication systems to
provide extended functionality for operational purposes. A major
part of the Company's program was to implement a standardized IT
system purchased from a national software distributor at all of the
Company and subsidiary operations, and to install a Local Area
Network ("LAN"). The IT system and the LAN necessitated the
purchase of additional hardware, as well as software. The process
implemented by the Company to advance its systems to be more
"state-of-the-art" had an added benefit in that the software and
hardware changes necessary to achieve the Company's goals are Year
2000 compliant.
Starting in 1996 through December 31, 1998, the Company has
capitalized approximately $1.0 million in costs to accomplish its
enhancement program. The capitalized costs include $425,000 in
external programming costs, with the remainder representing
hardware and software purchases. The Company anticipates that the
remaining cost to complete this IT systems enhancement project will
be less than $100,000, and such costs will be capitalized.
The Company's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing,
and implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing scheduling systems,
the Company is 100% complete on the assessment and remediation
phases. As of the date of this report, the Company has completed
its testing and has implemented its remediated systems for all of
its businesses except a portion of the Industrial Products
Business. The uncompleted testing and remediation procedures
represent approximately 2% and 5%, respectively, of the total Year
2000 Program testing and remediation phase. Completion of the
remaining testing and implementation phase is expected by August
31, 1999. The assessments also indicated that limited software and
hardware (embedded chips) used in production and manufacturing
systems ("operating equipment") also are at limited risk. The
Company has completed its assessment and identified remedial action
which will be completed in the second quarter 1999. In addition,
the Company has completed its assessment of its product line and
determined that the products it has sold and will continue to sell
do not require remediation to be Year 2000 compliant. Accordingly,
based on the Company's current assessment, the Company does not
believe that the Year 2000 presents a material exposure as it
relates to the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
44
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company; however, management does not believe that, under the most
reasonably likely worst case scenario, such potential impact would
be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company. See "Special Note Regarding Forward-
Looking Statements".
Contingencies
_____________
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome. The preceding sentence is a forward-looking statement
that involves a number of risks and uncertainties that could cause
actual results to differ materially, such as, among other factors,
the following: the EIL Insurance does not provide coverage to the
Company and the Chemical Business for any material claims made by
the claimants, the claimants alleged damages are not covered by the
EIL Policy which a court may find the Company and/or the Chemical
Business liable for, such as punitive damages or penalties, a court
finds the Company and/or the Chemical Business liable for damages
to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company. See "Business", "Legal
Proceedings" and Note 10 of Notes to Consolidated Financial
Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
_______ __________________________________________________________
General
_______
The Company's results of operations and operating cash flows
are impacted by changes in market interest rates and raw material
prices for products used in its manufacturing processes. The
Company also has a wholly-owned subsidiary in Australia, for which
the Company has foreign currency translation exposure. The
derivative contracts used by the Company are entered into to hedge
these risks and exposures and not for trading purposes. All
45
information is presented in U.S. dollars. See Item 1. - "Business
- - - Chemical" for a discussion of an offer to purchase the Australian
subsidiary which the Company received in 1999.
Interest Rate Risk
__________________
The Company's interest rate risk exposure results from its
debt portfolio which is impacted by short-term rates, primarily
prime rate-based borrowings from commercial banks, and long-term
rates, primarily fixed-rate notes, some if which prohibit
prepayment or require substantial prepayment penalties.
The Company is also a party to a series of agreements under
which, upon completion of construction, it will lease a nitric acid
plant. The minimum lease payments associated therewith until
execution will be directly impacted by the change in interest
rates. To mitigate a portion of the Company's exposure to adverse
market changes related to this leveraged lease, in 1997 the Company
entered into a interest rate forward agreement whereby the Company
is the fixed rate payor on notional amounts aggregating $25
million, net to its 50% interest, with a weighted average of 7.12%.
The Company accounts for this forward under the deferral method, so
long as high correlation is maintained, whereby the net gain or
loss upon settlement will adjust the item being hedged, the minimum
lease rentals, in periods commencing with the lease execution. As
of December 31, 1998, the fair value of this interest rate forward
agreement represented a liability of approximately $3.3 million,
net to the Company's 50% interest. The following table provides
information about the Company's interest rate sensitive financial
instruments as of December 31, 1998.
46
Years Ending December 31,
1999 2000 2001 2002 2003 Thereafter Total
through
2007
______________________________________________________________
Expected maturities of long-term debt:
Variable rate
debt $ 5,725 $26,969 $ 272 $ 116 $ 126 $ 1,009 $ 34,217
Weighted
averages
interest
rate(1) 8.05% 8.13% 8.28% 8.25% 8.25% 8.25% 8.10%
Fixed rate
debt $ 8,229 $ 9,852 $7,641 $2,813 $ 550 $106,340 $135,425
Weighted
average
interest
rate(2) 10.44% 10.51% 10.61% 10.69% 10.72% 10.74% 10.65%
(1) Interest rate is based on the aggregate rate of debt
outstanding as of December 31, 1998. Interest is at floating
rate based on the lender's prime rate plus percentages ranging
from .5% to 1.5% per annum, or at the Company's option, on its
Revolving Credit Agreements on the lender's LIBOR rate plus
2.875% per annum (rates under its Revolving Credit Agreements
are subject to change based upon specified availability and
adjusted tangible net worth levels).
(2) Interest rate is based on the aggregate rate of debt
outstanding as of December 31, 1998.
47
As of December 31, 1998, the Company's variable rate and fixed
rate debt which aggregated $169.6 million approximated their fair
value. The fair value of the Company's Senior Notes was determined
based on a market quotation for such securities.
Raw Material Price Risk
_______________________
The Company enters into long-term supply agreements with
certain third parties to insure availability of certain raw
materials used in its manufacturing processes. To mitigate a
portion of its price risk, the Company has entered into swap
agreements whereby it receives a floating price and pays a fixed
price. As of December 31, 1998, the Company had outstanding natural
gas contracts requiring settlement in January and February 1999
involving notional amounts of 590,000 MMBtu for which the fair
value represented a liability of approximately $255,000. The
Company follows the deferral method of accounting for these swap
agreements.
Foreign Currency Risk
_____________________
The Company has a wholly-owned subsidiary located in
Australia, for which the functional currency is the local currency,
the Australian dollar. Since the Australian subsidiary accounts are
converted into U.S. dollars upon consolidation using the end of the
period exchange rate, declines in value of the Australian dollar to
the U.S. dollar result in translation loss to the Company.
Additionally, any cumulative foreign currency translation loss will
impact operating results in the period the Company sells or
disposes of substantially all of its investment in the subsidiary.
As of December 31, 1998, the Company's net investment in this
Australian subsidiary was $5.8 million with the cumulative
translation loss not recognized in results of operations
aggregating approximately $1.6 million.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
_______ ___________________________________________
The Company has included the financial statements and
supplementary financial information required by this item
immediately following Part IV of this report and hereby
incorporates by reference the relevant portions of those statements
and information into this Item 8.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
_______ _________________________________________________
No disagreements between the Company and its accountants have
occurred within the 24-month period prior to the date of the
Company's most recent financial statements.
48
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) ability to improve operations and become
profitable on an annualized basis, (ii) establishing a position as
a market leader, (iii) construction costs of the EDNC Baytown Plant
will approximate $69 million (excluding the $12.9 million paid to
subcontractors by the bonding company) and will be completed by the
second quarter of 1999, (iv) ability to continue to operate the DSN
Plant at the rate of approximately 285 tons per day, (v) increase
demand for, and growth relating to, the Company's products, (vi)
certain of the Company's product lines possibly being the most
extensive offered, (vii) production of backlog, (viii) amount to be
spent in 1999 relating to compliance with federal, state and local
Environmental laws at the El Dorado Facility, (ix) Year 2000
issues, (x) improving liquidity and profits through liquidation of
assets or realignment of assets, (xi) the Company's ability to
develop or adopt new and existing technologies in the conduct of
its operations, (xii) anticipated financial performance, (xiii)
ability to comply with the Company's general working capital
requirements, (xiv) spin-off the Automotive Products Business, (xv)
ability to be able to continue to borrow under the Company's
revolving line of credit, (xvi) ability to enter into a new line of
credit for the Automotive Business, and (xvii) ability of the EDNC
Baytown Plant to guarantee $35 to $50 million in gross revenues
once operational. While the Company believes the expectations
reflected in such Forward-Looking Statements are reasonable, it can
give no assurance such expectations will prove to have been
correct. There are a variety of factors which could cause future
outcomes to differ materially from those described in this report,
including, but not limited to, (i) decline in general economic
conditions, both domestic and foreign, (ii) material reduction in
revenues, (iii) inability to collect in a timely manner a material
amount of receivables, (iv) increased competitive pressures, (v)
inability to meet the "Year 2000" compliance of the computer system
by the Company, its key suppliers, customers, creditors, and
financial service organization, (vi) changes in federal, state and
local laws and regulations, especially environmental regulations,
or in interpretation of such, pending (vii) additional releases
(particularly air emissions into the environment), (viii) potential
increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (ix) inability to retain
management or to develop new management, (x) the requirement to use
internally generated funds for purposes not presently anticipated,
(xi) inability to become profitable, or if unable to become
profitable, the inability to secure additional liquidity in the
form of additional equity or debt, (xii) the effect of additional
production capacity of anhydrous ammonia in the western hemisphere,
49
(xiii) the cost for the purchase of anhydrous ammonia not reducing
or continuing to increase, (xiv) changes in competition, (xv) the
loss of any significant customer, (xvi) changes in operating
strategy or development plans, (xvii) inability to implement on a
permanent basis the corrective actions necessary for the DSN Plant
to operate at its stated capacity or inability to produce at the
DSN Plant in an efficient manner, (xviii) inability to fund the
working capital and expansion of the Company's businesses, (xix)
adverse results in any of the Company's pending litigation, on
claims described under "Legal Proceedings", (xx) inability to
finalize the settlements of the environmental litigation in terms
described in "Legal Proceedings", (xxi) inability to obtain
necessary raw materials, (xxii) inability to satisfy the NYSE
continued listing requirements, (xxiii) the requirement to pay a
dividend on the Series B Preferred as a result of the spin-off of
the Automotive Products Business, (xxiv) inability to recover the
Company's investment in the aviation company, and (xxiv) other
factors described in "Business", "Legal Proceedings" or
"Management's Discussion and Analysis of Financial Condition and
Results of Operation" contained in this report. Given these
uncertainties, all parties are cautioned not to place undue
reliance on such Forward-Looking Statements. The Company disclaims
any obligation to update any such factors or to publicly announce
the result of any revisions to any of the Forward-Looking
Statements contained herein to reflect future events or
developments.
50
PART III
The Company hereby incorporates by reference the information
required by Part III of this report except for the information on
the Company's executive officers included under Part 4A of Part I
of this report, from the definitive proxy statement which the
Company intends to file with the Securities and Exchange
Commission on or before April 30, 1999, in connection with the
Company's 1999 annual meeting of stockholders.
51
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
_______ _________________________________________________________
(a)(1) Financial Statements
The following consolidated financial statements of the
Company appear immediately following this Part IV:
Pages
_________
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998
and 1997 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1998 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1998 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1998 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-46
Quarterly Financial Data (Unaudited) F-47
(a)(2) Financial Statement Schedule
The Company has included the following schedule in this
report:
II - Valuation and Qualifying Accounts F-48
The Company has omitted all other schedules because the
conditions requiring their filing do not exist or because the
required information appears in the Company's Consolidated
Financial Statements, including the notes to those statements.
52
(a)(3) Exhibits
2.1. Stock Option Agreement dated as of May 4, 1995,
between optionee, LSB Holdings, Inc., an Oklahoma
Corporation and the shareholders of a specialty sales
organization, an option which the Company hereby
incorporates hereby by reference from Exhibit 2.1 to the
Company's Form 10-K for fiscal year ended December 31, 1995.
2.2. Stock Purchase Agreement and Stock Pledge
Agreement between Dr. Hauri AG, a Swiss Corporation, and LSB
Chemical Corp., which the Company hereby incorporates by
reference from Exhibit 2.2 to the Company's Form 10-K for
fiscal year ended December 31, 1994.
3.1. Restated Certificate of Incorporation, the
Certificate of Designation dated February 17, 1989, and
certificate of Elimination dated April 30, 1993, which the
Company hereby incorporates by reference from Exhibit 4.1 to
the Company's Registration Statement, No. 33-61640;
Certificate of Designation for the Company's $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2,
which the Company hereby incorporates by reference from
Exhibit 4.6 to the Company's Registration Statement, No. 33-
61640.
3.2. Bylaws, as amended, which the Company hereby
incorporates by reference from Exhibit 3(ii) to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.1. Specimen Certificate for the Company's Non-
cumulative Preferred Stock, having a par value of $100 per
share, which the Company hereby incorporates by reference
from Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended June 30, 1983.
4.2. Specimen Certificate for the Company's Series B
Preferred Stock, having a par value of $100 per share, which
the Company hereby incorporates by reference from Exhibit
4.27 to the Company's Registration Statement No. 33-9848.
4.3. Specimen Certificate for the Company's Series 2
Preferred, which the Company hereby incorporates by
reference from Exhibit 4.5 to the Company's Registration
Statement No. 33-61640.
4.4. Specimen Certificate for the Company's Common
Stock, which the Company incorporates by reference from
Exhibit 4.4 to the Company's Registration Statement No. 33-
61640.
4.5. Renewed Rights Agreement, dated January 6, 1999,
between the Company and Bank One, N.A., which the Company
hereby incorporates by reference from Exhibit No. 1 to the
Company's Form 8-A Registration Statement, dated January 27,
1999.
4.6. Indenture, dated as of November 26, 1997, by and
among ClimaChem, Inc., the Subsidiary Guarantors and Bank
One, NA, as trustee, which the Company hereby incorporates
by reference from Exhibit 4.1 to the Company's Form 8-K,
dated November 26, 1997.
53
4.7. Form 10 3/4% Series B Senior Notes due 2007 which
the Company hereby incorporates by reference from Exhibit
4.3 to the ClimaChem Registration Statement, No. 333-44905.
4.8. Amended and Restated Loan and Security Agreement,
dated November 21, 1997, by and between BankAmerica Business
Credit, Inc., and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and
Slurry Explosive Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the ClimaChem
Form S-4 Registration Statement, No. 333-44905.
4.9. Amended and Restated Loan and Security Agreement,
dated November 21, 1997, by and between BankAmerica Business
Credit, Inc., and the Company, which the Company hereby
incorporates by reference from Exhibit 4.11 to the Company's
Form 10-K for the fiscal year ended December 31, 1997.
Substantially identical Amended and Restated Loan and
Security Agreements dated November 21, 1997, were entered
into by each of L&S Bearing Co., and Summit Machine Tool
Manufacturing Corp., with BankAmerica Business Credit, Inc.,
and are hereby omitted and such will be provided upon the
Commission's request.
4.10. First Amendment to Amended and Restated Loan and
Security Agreement, dated March 12, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation which the Company
hereby incorporates by reference from Exhibit 10.53 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.11. First Amendment to Amended and Restated Loan and
Security Agreement, dated March 12, 1998, between
BankAmerica Business Credit, Inc., and the Company, which
the Company hereby incorporates by reference from Exhibit
4.13 to the Company's Form 10-K for the fiscal year ended
December 31, 1997. Substantially identical First Amendments
to Amended and Restated Loan and Security Agreements, dated
March 12, 1998, were entered into by each of L&S Bearing Co.
and Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
4.12. Third Amendment to Amended and Restated Loan and
Security Agreement, dated August 14, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.13. Third Amendment to Amended and Restated Loan and
Security Agreement, dated August 14, 1998, between
BankAmerica Business Credit, Inc., and the Company, which
the Company hereby incorporates by reference from Exhibit
4.2 to the Company's Form 10-Q for the quarter ended June
30, 1998. Substantially identical Third Amendments to
Amended and Restated Loan and Security Agreements, dated
August 14, 1998, were entered into by each of L&S Bearing
Co. and Summit Machine Tool Manufacturing Corp. with
BankAmerica Business Credit, Inc., and are hereby omitted
and such will be provided upon the Commission's request.
54
4.14. Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental Corporation,
El Dorado Chemical Company and Slurry Explosive Corporation, which the
Company hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30, 1998.
4.15. Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica Business Credit,
Inc., and the Company, which the Company hereby incorporates by
reference from Exhibit 4.2 to the Company's Form 10-Q for the quarter
ended September 30, 1998. Substantially identical Fourth Amendments to
Amended and Restated Loan and Security Agreements, dated November 19,
1998, were entered into by each of L&S Bearing Co. and Summit Machine
Tool Manufacturing Corp. with BankAmerica Business Credit, Inc., and are
hereby omitted and such will be provided upon the Commission's request.
4.16. Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental Corporation,
El Dorado Chemical Company and Slurry Explosive Corporation.
4.17. Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica Business Credit,
Inc., and the Company. Substantially identical Fifth Amendments to
Amended and Restated Loan and Security Agreements, dated April 8, 1999,
were entered into by each of L&S Bearing Co. and Summit Machine Tool
Manufacturing Corp. with BankAmerica Business Credit, Inc., and are
hereby omitted and such will be provided upon the Commission's request.
4.18. Waiver Letter, dated March 16, 1998, from BankAmerica
Business Credit, Inc. which the Company hereby incorporates by reference
from Exhibit 10.55 to the ClimaChem Form S-4 Registration Statement, No.
333-44905.
4.19. First Supplemental Indenture, dated February 8, 1999, by
and between ClimaChem, Inc., the Guarantors, and Bank One, N.A.
10.1. Form of Death Benefit Plan Agreement between the Company
and the employees covered under the plan, which the Company hereby
incorporates by reference from Exhibit 10(c)(1) to the Company's Form
10-K for the year ended December 31, 1980.
10.2. The Company's 1981 Incentive Stock Option Plan, as
amended, and 1986 Incentive Stock Option Plan, which the Company hereby
incorporates by reference from Exhibits 10.1 and 10.2 to the Company's
Registration Statement No. 33-8302.
55
10.3. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1981 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.10 to the Company's Form 10-K for the fiscal year ended December 31,
1984.
10.4. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1986 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Registration Statement No. 33-9848.
10.5. The 1987 Amendments to the Company's 1981 Incentive Stock
Option Plan and 1986 Incentive Stock Option Plan, which the Company
hereby incorporates by reference from Exhibit 10.7 to the Company's Form
10-K for the fiscal year ended December 31, 1986.
10.6. The Company's 1993 Stock Option and Incentive Plan which
the Company hereby incorporates by reference from Exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1993.
10.7. The Company's 1993 Non-employee Director Stock Option Plan
which the Company hereby incorporates by reference from Exhibit 10.7 to
the Company's Form 10-K for the fiscal year ended December 31, 1993.
10.8. Union Contracts, dated August 5, 1995, between EDC and the
Oil, Chemical and Atomic Workers, and the United Steel Workers of
America, dated November 1, 1995 which the Company hereby incorporates by
reference from Exhibit 10.7 to the Company's Form 10-K for the fiscal
year ended December 31, 1995.
10.9. Lease Agreement, dated March 26, 1982, between Mac
Venture, Ltd. and Hercules Energy Mfg. Corporation, which the Company
hereby incorporates by reference from Exhibit 10.32 to the Company's
Form 10-K for the fiscal year ended December 31, 1981.
10.10. Limited Partnership Agreement dated as of May 4, 1995,
between the general partner, and LSB Holdings, Inc., an Oklahoma
Corporation, as limited partner which the Company hereby incorporates by
reference from Exhibit 10.11 to the Company's Form 10-K for the fiscal
year ended December 31, 1995.
10.11. Lease Agreement dated November 12, 1987, between Climate
Master, Inc. and West Point Company and amendments thereto, which the
Company hereby incorporates by reference from Exhibits 10.32, 10.36, and
10.37, to the Company's Form 10-K for fiscal year ended December 31,
1988.
10.12. Severance Agreement, dated January 17, 1989, between the
Company and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.48 to the Company's Form 10-K for fiscal year
ended December 31, 1988. The Company also entered into identical
agreements with Tony M. Shelby, David R. Goss, Barry H. Golsen, David M.
Shear, and Jim D. Jones and the Company will provide copies thereof to
the Commission upon request.
56
10.13. Third Amendment to Lease Agreement, dated as of December
31, 1987, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.49 to the Company's Form 10-K for fiscal year ended December
31, 1988.
10.14. Employment Agreement and Amendment to Severance Agreement
dated January 12, 1989 between the Company and Jack E. Golsen, dated
March 21, 1996 which the Company hereby incorporates by reference from
Exhibit 10.15 to the Company's Form 10-K for fiscal year ended December
31, 1995.
10.15. Non-Qualified Stock Option Agreement, dated June 1, 1992,
between the Company and Robert C. Brown, M.D. which the Company hereby
incorporates by reference from Exhibit 10.38 to the Company's Form 10-K
for fiscal year ended December 31, 1992. The Company entered into
substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer and C.L.Thurman, and the Company will provide copies thereof to
the Commission upon request.
10.16. Loan and Security Agreement (DSN Plant) dated October 31,
1994 between DSN Corporation and The CIT Group which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Form 10-Q
for the fiscal quarter ended September 30, 1994.
10.17. Loan and Security Agreement (Mixed Acid Plant) dated April
5, 1995 between DSN Corporation and The CIT Group, which the Company
hereby incorporates by reference from Exhibit 10.25 to the Company's
Form 10-K for the fiscal year ended December 31, 1994.
10.18. First Amendment to Loan and Security Agreement (DSN
Plant), dated June 1, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.13 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.19. First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.15 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.20 Loan and Security Agreement (Rail Tank Cars), dated
November 15, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc. which the Company hereby incorporates by reference from
Exhibit 10.16 to the ClimaChem Form S-4 Registration Statement, No. 333-
44905.
57
10.21. First Amendment to Loan and Security Agreement (Rail Tank
Cars), dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.17 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.22. Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment Financing,
Inc. which the Company hereby incorporates by reference from Exhibit
10.1 to the Company's Form 10-Q for the fiscal quarter ended March 31,
1997.
10.23. Amendment to Loan and Security Agreement, dated November
21, 1997, between DSN Corporation and The CIT Group/Equipment Financing,
Inc. which the Company hereby incorporates by reference from Exhibit
10.19 to the ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.24. First Amendment to Non-Qualified Stock Option Agreement,
dated March 2, 1994, and Second Amendment to Stock Option Agreement,
dated April 3, 1995, each between the Company and Jack E. Golsen, which
the Company hereby incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended March 31, 1995.
10.25. Facility Letter, dated August 20, 1997, between Bank of
New Zealand, Australia, and Total Energy Systems Limited which the
Company hereby incorporates by reference from Exhibit 10.38 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.26. Variation Letter, dated February 10, 1998, between Bank of
New Zealand, Australia, and Total Energy Systems Limited which the
Company hereby incorporates by reference from Exhibit 10.39 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.27. Debenture Charge, dated March 7, 1995, between Total
Energy Systems Limited and Bank of New Zealand which the Company hereby
incorporates by reference from Exhibit 10.40 to the ClimaChem Form S-4
Registration Statement, No. 333-44905. T.E.S. Mining Services Pty. Ltd.
and Total Energy Systems (NZ) Limited are each parties to substantially
identical Debentures, copies of which will be provided to the Commission
upon request.
10.28. Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to
be effective January 1, 1997, between Koch Nitrogen Company and El
Dorado Chemical Company which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT
UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED.
58
10.29. Baytown Nitric Acid Project and Supply Agreement dated
June 27, 1997, by and among El Dorado Nitrogen Company, El Dorado
Chemical Company and Bayer Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10.30. First Amendment to Baytown Nitric Acid Project and Supply
Agreement, dated February 1, 1999, between El Dorado Nitrogen Company,
El Dorado Chemical Company, and Bayer Corporation. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION
HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE
COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.31. Service Agreement, dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10.32. Ground Lease dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.4 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER
CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10.33. Participation Agreement, dated as of June 27, 1997, among
El Dorado Nitrogen Company, Boatmen's Trust Company of Texas as Owner
Trustee, Security Pacific Leasing corporation, as Owner Participant and
a Construction Lender, Wilmington Trust Company, Bayerische Landesbank,
New York Branch, as a Construction Lender and the Note Purchaser, and
Bank of America National Trust and Savings Association, as Construction
Loan Agent which the Company hereby incorporates by reference from
Exhibit 10.5 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25,
1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.34. Lease Agreement, dated as of June 27, 1997, between
Boatmen's Trust Company of Texas as Owner Trustee and El Dorado Nitrogen
59
Company which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1997.
10.35. Security Agreement and Collateral Assignment of
Construction Documents, dated as of June 27, 1997, made by El Dorado
Nitrogen Company which the Company hereby incorporates by reference from
Exhibit 10.7 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997.
10.36. Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company
and consented to by Bayer Corporation which the Company hereby
incorporates by reference from Exhibit 10.8 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1997.
10.37. Amendment to Loan and Security Agreement, dated March 16,
1998, between The CIT Group/Equipment Financing, Inc., and DSN
Corporation which the Company hereby incorporates by reference from
Exhibit 10.54 to the ClimaChem Form S-4 Registration Statement, No. 333-
44905.
10.38. Fifth Amendment to Lease Agreement, dated as of December
31, 1998, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation.
10.39. Sales Contract, dated December 7, 1998, between Solutia,
Inc. and El Dorado Chemical Company. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.40. Agreement for Purchase and Sale of Anhydrous Ammonia,
dated January 1, 1999, between El Dorado Chemical Company and Farmland
Industries, Inc. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER
THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN FILED
SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION
FOR PURPOSES OF SUCH REQUEST.
10.41. Agreement, dated March 23, 1999, among El Dorado Chemical
Company, El Dorado Nitrogen Company, Bayer Corporation, ICF Kaiser
Engineers, Inc., ICF Kaiser International, Inc., and Acstar Insurance
Company.
10.42. Union Contract, dated August 1, 1998, between El Dorado
Chemical Company and the International Association of Machinists and
Aerospace Workers.
60
10.43. Non-Qualified Stock Option Agreement, dated April 22,
1998, between the Company and Robert C. Brown, M.D. The Company entered
into substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer, Raymond B. Ackerman, Horace G. Rhodes, Gerald J. Gagner, and
Donald W. Munson. The Company will provide copies of these agreements
to the Commission upon request.
10.44. The Company's 1998 Stock Option and Incentive Plan.
10.45. Letter Agreement, dated March 12, 1999, between Kestrel
Aircraft Company and LSB Industries, Inc., Prime Financial Corporation,
Herman Meinders, Carlan K. Yates, Larry H. Lemon, Co-Trustee Larry H.
Lemon Living Trust.
10.46. Covenant Waiver Letter, dated April 13, 1999, between The
CIT Group and DSN Corporation.
21.1. Subsidiaries of the Company
23.1. Consent of Independent Auditors
27.1. Financial Data Schedule
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the fourth quarter of 1998.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Company has
caused the undersigned, duly-authorized, to sign this report on
its behalf of this 15th day of April, 1999.
LSB INDUSTRIES, INC.
By: /s/ Jack E. Golsen
______________________________
Jack E. Golsen
Chairman of the Board and
President
(Principal Executive Officer)
By: /s/ Tony M. Shelby
________________________________
Tony M. Shelby
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
_________________________________
Jim D. Jones
Vice President, Controller and
Treasurer (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the undersigned have signed this report on
behalf of the Company, in the capacities and on the dates
indicated.
Dated: April 15, 1999 By: /s/ Jack E. Golsen
__________________________________
Jack E. Golsen, Director
Dated: April 15, 1999 By: /s/ Tony M. Shelby
__________________________________
Tony M. Shelby, Director
Dated: April 15, 1999 By: /s/ David R. Goss
__________________________________
David R. Goss, Director
Dated: April 15, 1999 By: /s/ Barry H. Golsen
__________________________________
Barry H. Golsen, Director
62
Dated: April 15, 1999 By: /s/ Robert C. Brown
___________________________________
Robert C. Brown, Director
Dated: April 15, 1999 By: /s/ Bernard G. Ille
____________________________________
Bernard G. Ille, Director
Dated: April 15, 1999 By: /s/ Jerome D. Shaffer
____________________________________
Jerome D. Shaffer, Director
Dated: April 15, 1999 By: /s/ Raymond B. Ackerman
_____________________________________
Raymond B. Ackerman, Director
Dated: April 15, 1999 By: /s/ Horace Rhodes
______________________________________
Horace Rhodes, Director.
Dated: April 15, 1999 By: /s/ Gerald J. Gagner
______________________________________
Gerald J. Gagner, Director
Dated: April 15, 1999 By: /s/ Donald W. Munson
______________________________________
Donald W. Munson, Director
LSB INDUSTRIES, INC.
Consolidated Financial Statements
Years ended December 31, 1998, 1997, and 1996
Contents
Report of Independent Auditors . . . . . . . . . . . . . . . .F-1
Consolidated Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations. . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity. . . . . . . .F-5
Consolidated Statements of Cash Flows. . . . . . . . . . . . .F-7
Notes to Consolidated Financial Statements . . . . . . . . . .F-9
Report of Independent Auditors
The Board of Directors and Stockholders
LSB Industries, Inc.
We have audited the accompanying consolidated balance sheets of LSB
Industries, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements
and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of LSB Industries, Inc. at December 31, 1998 and
1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
February 19, 1999,
except for paragraphs (A) and (C) of Note 5 and Note 14, as to
which the date is
April 14, 1999
F-1
LSB INDUSTRIES, INC.
Consolidated Balance Sheets
December 31
1998 1997
____________________
(In Thousands)
Assets
Current assets (Note 5):
Cash and cash equivalents $ 1,555 $ 4,934
Trade accounts receivable, net 52,730 52,191
Inventories (Note 3) 63,845 66,374
Supplies and prepaid items 7,809 7,595
___________________
Total current assets 125,939 131,094
Property, plant and equipment, net
(Notes 4 and 5) 99,228 119,331
Other assets, net 23,480 21,228
_____________________
$248,647 $270,653
=====================
(Continued on following page)
F-2
LSB INDUSTRIES, INC.
Consolidated Balance Sheets (continued)
December 31
1998 1997
____________________
(In Thousands)
Liabilities and stockholders' equity
Current liabilities:
Drafts payable $ 758 $ 737
Accounts payable 24,043 28,137
Accrued liabilities 19,006 16,196
Current portion of long-term debt
(Note 5) 13,954 15,874
___________________
Total current liabilities 57,761 60,944
Long-term debt (Note 5) 155,688 165,067
Commitments and contingencies (Note 10)
Redeemable, noncumulative, convertible
preferred stock, $100 par value; 1,463
shares issued and outstanding (1,539
in 1997) (Note 8) 139 146
Stockholders' equity (Notes 5, 7 and 9):
Series B 12% cumulative, convertible,
preferred stock, $100 par value; 20,000
shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 15,108,676 shares
issued (15,042,356 in 1997) 1,511 1,504
Capital in excess of par value 38,329 38,257
Accumulated other comprehensive loss (1,559) (1,003)
Accumulated deficit (35,166) (29,773)
____________________
51,115 56,985
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares 200 200
Common stock, 3,202,690 shares
(2,293,390 in 1997) 15,856 12,289
____________________
Total stockholders' equity 35,059 44,496
____________________
$248,647 $270,653
====================
See accompanying notes.
F-3
LSB Industries, Inc.
Consolidated Statements of Operations
Year ended December 31,
1998 1997 1996
__________________________________
(In Thousands, Except Per Share
Amounts)
Revenues:
Net sales $310,037 $313,929 $307,160
Other income 1,290 5,167 6,265
Gain on sale of The Tower
(Note 2) 12,993 - -
__________________________________
324,320 319,096 313,425
Costs and expenses:
Cost of sales 247,084 257,982 250,388
Selling, general and
administrative 61,729 64,770 56,715
Interest 17,327 14,740 10,017
__________________________________
326,140 337,492 317,120
__________________________________
Loss before provision for
income taxes and extra-
ordinary charge (1,820) (18,396) (3,695)
Provision for income taxes
(Note 6) 100 50 150
__________________________________
Loss before extraordinary
charge (1,920) (18,446) (3,845)
Extraordinary charge - 4,619 -
__________________________________
Net loss (1,920) (23,065) (3,845)
Preferred stock dividends 3,229 3,229 3,229
__________________________________
Net loss applicable to
common stock $ (5,149) $(26,294) $ (7,074)
==================================
Loss per common share--basic
and diluted:
Loss before extraordinary
charge $(.42) $(1.68) $(.55)
Extraordinary charge - (.36) -
__________________________________
Net loss $(.42) $(2.04) $(.55)
==================================
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Non-
_________________ redeemable Capital in
Par Preferred Excess of
Shares Value Stock Par Value
______________________________________________
Balance at December 31, 1995 14,757 $1,476 $48,000 $37,567
Net loss - - - -
Foreign currency translation
adjustment - - - -
Total comprehensive loss
Conversion of 27 shares of
redeemable preferred stock
to common stock 1 - - 2
Exercise of stock options:
Cash received 85 8 - 185
Stock tendered and added
to treasury at market
value 45 5 - 89
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
Redeemable preferred stock
($10.00 per share) - - - -
Common stock ($.06 per
share) - - - -
Series 2 preferred stock
($3.25 per share) - - - -
Purchase of treasury stock - - - -
_____________________________________________
Balance at December 31, 1996 14,888 1,489 48,000 37,843
(Continued on following page)
Accumulated Retained
Other Earnings Treasury Treasury
Comprehensive (Accumulated) Stock-- Stock--
Income (Loss) Deficit) Common Preferred Total
_______________________________________________________________________
(In Thousands)
$ 278 $ 5,148 $(10,415) $ (200) $ 81,854
- (3,845) - - (3,845)
(2) - - - (2)
_________
(3,847)
- - - - 2
- - - - 193
- - (94) - -
- (240) - - (240)
- (16) - - (16)
- (780) - - (780)
- (2,973) - - (2,973)
- - (175) - (175)
_______________________________________________________________________
276 (2,706) (10,684) (200) 74,018
F-5
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock Non-
____________________ redeemable Capital in
Par Preferred Excess of
Shares Value Stock Par Value
________________________________________________
Net loss - $ - $ - $ -
Foreign currency translation
adjustment - - - -
Total comprehensive loss
Exercise of stock options:
Cash received 67 6 - 190
Stock tendered and added
to treasury at market
value 87 9 - 224
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
Redeemable preferred stock
($10.00 per share) - - - -
Common stock ($.06 per
share) - - - -
Series 2 preferred stock
($3.25 per share) - - - -
Purchase of treasury stock - - - -
_______________________________________________
Balance at December 31, 1997 15,042 1,504 48,000 38,257
Net loss - - - -
Foreign currency translation
adjustment - - - -
Total comprehensive loss
Conversion of 76.5 shares of
redeemable preferred stock
to common stock 3 - - 7
Exercise of stock options:
Cash received 64 7 - 65
Dividends declared:
Series B 12% preferred
stock ($12.00 per
share) - - - -
Redeemable preferred stock
($10.00 per share) - - - -
Common stock ($.02 per
share) - - - -
Series 2 preferred stock
($3.25 per share) - - - -
Purchase of treasury stock - - - -
________________________________________________
Balance at December 31, 1998 15,109 1,511 48,000 38,329
================================================
(See accompanying notes)
Accumulated Retained
Other Earnings Treasury Treasury
Comprehensive (Accumulated) Stock-- Stock--
Income (Loss) Deficit) Common Preferred Total
_______________________________________________________________________
(In Thousands)
$ - $(23,065) $ - $ - $(23,065)
(1,279) - - - (1,279)
________
(24,344)
- - - - 196
- - (233) - -
- (240) - - (240)
- (16) - - (16)
- (773) - - (773)
- (2,973) - - (2,973)
- - (1,372) - (1,372)
_________________________________________________________________________
(1,003) (29,773) (12,289) (200) 44,496
- (1,920) - - (1,920)
(556) - - - (556)
_________
(2,476)
- - - - 7
- - - - 72
- (240) - - (240)
- (16) - - (16)
- (244) - - (244)
- (2,973) - - (2,973)
- - (3,567) - (3,567)
______________________________________________________________________
$(1,559) $(35,166) $(15,856) $(200) $35,059
======================================================================
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
1998 1997 1996
________________________________
(In Thousands)
Cash flows from operating activities
Net loss $(1,920) $(23,065) $ (3,845)
Adjustments to reconcile net loss to
net cash provided (used) by operations:
Extraordinary charge related to
financing activities - 4,619 -
Depreciation of property, plant and
equipment 11,651 11,142 8,655
Amortization 1,549 1,308 1,124
Provision for possible losses:
Accounts receivable 1,544 1,544 1,450
Inventory 173 68 578
Notes receivable 1,480 1,093 1,565
Environmental matters - 300 100
Loan guarantee 1,662 1,093 626
Recapture of prior period provisions
for loss on loans receivable
secured by real estate and other (1,081) (1,383) -
Loss (gain) on sale of assets (13,872) 57 (1,574)
Cash provided (used) by changes
in assets and liabilities:
Trade accounts receivable (2,301) (3,805) (8,267)
Inventories 1,341 (1,960) (2,295)
Supplies and prepaid items (1,010) (476) (1,533)
Accounts payable (4,016) (13,549) 13,288
Accrued liabilities 559 2,530 3,441
__________________________________
Net cash provided (used) by operating
activities (4,241) (20,484) 13,313
Cash flows from investing activities
Capital expenditures (9,620) (12,633) (19,950)
Principal payments on loans receivable 427 283 742
Proceeds from sale of The Tower, sales
of equipment and real estate
properties 31,057 1,957 417
Proceeds from the sale of investment
securities - - 1,524
Other assets (2,082) (5,293) (3,745)
_________________________________
Net cash provided (used) by investing
activities 19,782 (15,686) (21,012)
(Continued on following page)
F-7
LSB INDUSTRIES, INC.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
1998 1997 1996
__________________________________
(In Thousands)
Cash flows from financing activities
Payments on long-term and other debt $(20,338) $(75,846) $(11,985)
Long-term and other borrowings, net
of origination fees 617 162,451 25,029
Debt prepayment charge - (4,619) -
Net change in revolving debt
facilities 7,748 (37,525) (1,266)
Net change in drafts payable 21 201 112
Dividends paid:
Preferred stocks (3,229) (3,229) (3,229)
Common stock (244) (773) (780)
Purchase of treasury stock (3,567) (1,372) (175)
Net proceeds from issuance of
common stock 72 196 193
_________________________________
Net cash provided (used) by financing
activities (18,920) 39,484 7,899
_________________________________
Net increase (decrease) in cash and
cash equivalents from all activities (3,379) 3,314 200
Cash and cash equivalents at beginning
of year 4,934 1,620 1,420
___________________________________
Cash and cash equivalents at end of year $ 1,555 $ 4,934 $ 1,620
===================================
See accompanying notes.
F-8
LSB INDUSTRIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries. The Company is a
diversified holding company which is engaged, through its subsidiaries, in the
manufacture and sale of chemical products (the "Chemical Business"), the
manufacture and sale of a broad range of air handling and heat pump products
(the "Climate Control Business"), the manufacture or purchase and sale of
certain automotive products (the "Automotive Business") and the purchase and
sale of machine tools (the "Industrial Products Business"). See Note 13
Segment Information.
All material intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to the financial statements for the
years ended December 31, 1997 and 1996 to conform to the consolidated
financial statement presentation for the year ended December 31, 1998.
2. Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories
Purchased machinery and equipment are carried at specific cost plus duty,
freight and other charges, not in excess of net realizable value. All other
inventory is priced at the lower of cost or market, with cost being determined
using the first-in, first-out (FIFO) basis, except for certain heat pump
products with a value of $7,095,000 at December 31, 1998 ($8,151,000 at
December 31, 1997), which are priced at the lower of cost or market, with cost
being determined using the last-in, first-out (LIFO) basis. The difference
between the LIFO basis and current cost was $1,062,000 and $1,223,000 at
December 31, 1998 and 1997, respectively.
Depreciation
For financial reporting purposes, depreciation is primarily computed using the
straight-line method over the estimated useful lives of the assets.
F-9
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Capitalization of Interest
Interest costs of $1,113,000 and $2,405,000 related to the construction of a
nitric acid plant were capitalized in 1997 and 1996, respectively (none in
1998), and are amortized over the plant's estimated useful life.
Loans Receivable
In February 1997, a subsidiary of the Company foreclosed on a loan receivable
with a carrying amount of $14.0 million and exercised its option to acquire the
related office building located in Oklahoma City, known as "The Tower."
In March 1998, the subsidiary closed the sale of The Tower and realized
proceeds of approximately $29.3 million from the sale, net of transaction costs.
Proceeds from the sale were used to retire the outstanding indebtedness of
approximately $13 million in March 1998, for which this property served as
collateral. Approximately $15 million of the remaining proceeds were used to
reduce indebtedness outstanding under the Company's Revolving Credit Facility.
The Company recognized a gain on the sale of the property of approximately $13
million in the first quarter of 1998.
Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired, which is included in
other assets in the accompanying balance sheets, were $2,895,000 and $3,287,000,
net of accumulated amortization, of $4,033,000 and $3,641,000 at December 31,
1998 and 1997, respectively, and is amortized by the straight-line method over
periods of 10 to 22 years. The carrying value of the excess of purchase price
over net assets acquired is reviewed (using estimated future net cash flows,
including proceeds from disposal) if the facts and circumstances indicate that
it may be impaired. No significant impairment provisions were required in 1998,
1997 or 1996.
Debt Issuance Costs
Debt issuance costs are amortized over the term of the associated debt
instrument using the straight-line method. Such costs, which are included in
other assets in the accompanying balance sheets, were $4,084,000 and $4,272,000
net of accumulated amortization of $1,141,000 and $683,000 as of December 31,
1998 and 1997, respectively.
F-10
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Research and Development Costs
Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $409,000 in 1998, $394,000 in 1997 and
$532,000 in 1996.
Advertising Costs
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $2,123,000 in 1998,
$2,430,000 in 1997 and $1,814,000 in 1996.
Translation of Foreign Currency
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are recorded as cumulative
translation adjustments, a separate component of stockholders' equity. Revenues
and expenses are translated using average exchange rates prevailing during the
year.
Hedging
In 1997, the Company entered into interest rate forward contracts to effectively
fix the interest rate on a long-term lease commitment to become effective in
1999 (not for trading purposes). The Company accounts for these contracts under
the deferral method, whereby the net gain or loss upon settlement will adjust
the item being hedged, the minimum lease rentals, in periods commencing with
the lease execution. If the necessary correlation (generally a correlation
coefficient of between 80% and 125%) ceases, the differential between the market
value and the carrying value will be recognized in operations as a gain or loss.
Under the interest rate forward agreement, the Company is the fixed rate payor
on notional amounts aggregating $50 million with a weighted average interest
rate of 7.12%. The agreement requires a net settlement on maturity in 1999, of
which an unrelated third party is contractually obligated for 50%. The
Company is required to post margin in the form of bank letters of credit or
treasury bills under this interest rate hedge agreement equal to the loss in
market value of the contracts since inception. See Note 10 -- Commitments and
Contingencies and Note 12 -- Fair Value of Financial Instruments.
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
In August 1998, the Company entered into a three month natural gas swap
agreement at a price of $2.56 per MMBtu for the months of December 1998 through
February 1999 to hedge the price volatility of ammonia (not for trading
purposes). Under these swap agreements, the Company is the fixed-price payor.
Monthly payments are made or received based on the differential between the
fixed price and the specified index price of natural gas on the settlement date.
Gains or losses resulting from the settlement of the swap transactions are
recognized in cost of sales when the inventory is sold. At December 31, 1998,
the Company had outstanding commodity contracts involving notional amounts of
590,000 MMBtu that are not reflected in the accompanying balance sheet. These
notional amounts do not represent amounts exchanged by the parties; rather,
they are used as the basis to calculate the amounts due under the agreements.
Loss Per Share
Net loss applicable to common stock is computed by adjusting net loss by the
amount of preferred stock dividends. Basic loss per common share is based upon
the weighted average number of common shares outstanding during each period
after giving appropriate effect to preferred stock dividends. Diluted loss per
share is based on the weighted average number of common shares and dilutive
common equivalent shares outstanding, if any, and the assumed conversion of
dilutive convertible securities outstanding, if any, after appropriate adjust-
ment for interest, net of related income tax effects on convertible notes
payable, as applicable. All potentially dilutive securities were antidilutive
for all periods presented and have thus, been excluded from diluted loss per
share. See Note 7 -- Stockholders' Equity, Note 8 -- Redeemable Preferred Stock,
and Note 9 -- Non-redeemable Preferred Stock for a full description of
securities which may have a dilutive effect in future periods.
Average common shares outstanding used in computing loss per share are as
follows:
1998 1997 1996
___________________________________
Basic and diluted 12,372,770 12,876,064 12,925,649
Changes in Accounting
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The provisions
of SFAS 130 require the Company to classify items of other comprehensive income
in the financial statements
F-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
and display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. The Company has also made similar reclassifications for all
prior periods for comparative purposes.
Effective January 1, 1998, the Company changed its method of accounting for the
costs of computer software developed for internal use to capitalize costs
incurred after the preliminary project stage as outlined in Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). These capitalized costs will be
amortized over their estimated useful life. Prior to 1998, these costs were
expensed as incurred. The effect of this change on net income for the year
ended December 31, 1998 was not material.
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(Statement 131). Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of Statement 131 did not affect results of operations
or financial position, but did affect the disclosure of segment information
(Note 13).
Recently Issued Pronouncements
In the second quarter of 1998, the Accounting Standards Executive Committee of
the Securities and Exchange Commission released Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires
that the costs of start-up activities, including organization costs, be expensed
as incurred. As of December 31, 1998, the start-up costs capitalized on the
balance sheet are immaterial. SOP 98-5 is effective for fiscal years ending
after December 15, 1998 and, accordingly, will be adopted January 1, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt this new Statement January 1, 2000.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what all of the effects of SFAS 133 will be on the earnings and
financial position of the Company; however, the Company expects that the
interest rate forward contracts, discussed under Accounting Policies Hedging,
will be accounted for as a cash flow hedge upon adoption of SFAS 133, with the
effective portion of the hedge being classified in equity in accumulated other
comprehensive income or loss. The amount included in accumulated other
comprehensive income or loss will be amortized to operations over the initial
term of the leveraged lease.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash,
overnight funds and interest bearing deposits with maturities when purchased by
the Company of 90 days or less.
Supplemental cash flow information includes:
1998 1997 1996
___________________________
(In Thousands)
Cash payments for:
Interest on long-term debt and other $17,333 $14,804 $12,038
Income taxes, net of refunds 65 86 345
Noncash financing and investing
activities-
Long-term debt issued for property,
plant and equipment 523 1,108 2,226
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Inventories
Inventories at December 31, 1998 and 1997 consist of:
Finished
(or
Purchased) Work-In- Raw
Goods Process Materials Total
___________________________________________
(In Thousands)
1998:
Chemical products $10,934 $3,848 $10,281 $25,063
Climate Control products 3,233 2,442 6,673 12,348
Automotive products 13,992 888 5,477 20,357
Machinery and industrial
supplies 6,077 - - 6,077
___________________________________________
Total $34,236 $7,178 $22,431 $63,845
===========================================
1997 total $36,429 $8,582 $21,363 $66,374
===========================================
4. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of:
December 31
1998 1997
____________________
(In Thousands)
Land and improvements $ 2,910 $ 5,425
Buildings and improvements(A) 20,130 34,648
Machinery, equipment and automotive 161,337 154,727
Furniture, fixtures and store equipment 8,098 7,159
Other 3,132 3,246
_____________________
195,607 205,205
Less accumulated depreciation, depletion,
and amortization 96,379 86,874
_____________________
$ 99,228 $118,331
=====================
(A) Includes The Tower in 1997 acquired through foreclosure in
February 1997 and sold in March 1998 as discussed in Note 2 --
Accounting Policies, Loans Receivable.
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
1998 1997
____________________
(In Thousands)
Secured revolving credit facility with interest
at a base rate plus a specified percentage
(8.1% aggregate rate at December 31, 1998)(A) $ 26,333 $ 19,275
10-3/4% Senior Notes due 2007(B) 105,000 105,000
Secured loan with interest payable monthly(C) 9,570 11,806
Secured revolving credit facility (weighted
average interest rate of 7.1% at December 31,
1998)(D) 5,009 4,592
Note payable to bank, due in monthly installments
of principal and interest through May 2001 - 12,622
Other, with interest at rates of 7.5% to 10.9%,
most of which is secured by machinery and
equipment(E) 23,730 27,646
________________________
169,642 180,941
Less current portion of long-term debt 13,954 15,874
________________________
Long-term debt due after one year $155,688 $165,067
========================
(A) In December 1994, the Company, certain subsidiaries of the
Company (the "Borrowing Group") and a bank entered into a
series of six asset-based revolving credit facilities which
provided for an initial term of three years. In November 1997,
the Company amended the agreement. The amended agreement
provides for a $65 million revolving credit facility (the
"Revolving Credit Facility") with four separate loan
agreements (the "Credit Facility Agreements"), for the
Company and its subsidiaries. Under the Revolving Credit
Facility, certain conditions exist which restrict intercompany
transfers of amounts borrowed between subsidiaries. Borrowings
under the Revolving Credit Facility bear an annual rate of
interest at a floating rate based on the lender's prime rate
plus .5% per annum or, at the Company's option, on the
lender's LIBOR rate plus 2.875% per annum (which rates are
subject to increase or reduction based upon specified
availability and adjusted tangible net worth levels). The
Revolving Credit Facility will terminate on December 31, 2000,
subject to automatic renewal for terms of 13 months each,
unless terminated by either party. The Credit Facility
Agreements also require the payment of an annual facility fee
equal to 0.5% of the unused Revolving Credit Facility. The
Company may terminate the Revolving Credit Facility prior to
F-16
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
maturity; however, should the Company do so, it would be required
to pay a termination fee of $500,000.
Each of the Credit Facility Agreements specify a number of
events of default and require the Company to maintain certain
financial ratios (including adjusted tangible net worth and
debt ratios), limits the amount of capital expenditures, and
contains other covenants which restrict, among other things,
(i) the incurrence of additional debt; (ii) the payment of
dividends and other distributions; (iii) the making of certain
investments; (iv) certain mergers, acquisitions and
dispositions; (v) the issuance of secured guarantees; and (vi)
the granting of certain liens.
Events of default under the Revolving Credit Facility include,
among other things, (i) the failure to make payments of
principal, interest, and fees, when due; (ii) the failure to
perform covenants contained therein; (iii) the occurrence of
a change in control if any party is or becomes the beneficial
owner of more than 50% of the total voting securities of the
Company, except for Jack E. Golsen or members of his immediate
family; (iv) default under any material agreement or
instrument (other than an agreement or instrument evidencing
the lending of money) which would have a material adverse
effect on the Company and its subsidiaries which are borrowers
under the Revolving Credit Facility, taken as a whole, and
which is not cured within the grace period; (v) a default
under any other agreement relating to borrowed money exceeding
certain limits; and (vi) customary bankruptcy or insolvency
defaults. In November 1998, the Company and its subsidiaries
amended the financial covenants of the Revolving Credit
Facility (the "Amended Covenants"). The Amended Covenants
provide for elimination of financial covenants upon the sale,
disposal or spin-off of LSB's Automotive subsidiaries so long
as the remaining borrowing group maintains a minimum aggregate
availability under the Revolving Credit Facility of $15
million.
At December 31, 1998, the Company and its subsidiaries were
not in compliance with certain of the financial covenants of
the Revolving Credit Facility. In April 1999, the Company
obtained waivers of noncompliance and amendments to reset the
financial covenants through maturity.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of the
Company.
F-17
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
(B) In 1997, a subsidiary of the Company (ClimaChem, Inc., "CCI")
completed the sale of $105 million principal amount of 10 3/4%
Senior Notes due 2007 (the "Notes"). The Notes bear interest
at an annual rate of 10 3/4% payable semiannually in arrears
on June 1 and December 1 of each year. The Notes are senior
unsecured obligations of CCI and rank pari passu in right of
payment to all existing senior unsecured indebtedness of CCI
and its subsidiaries. The Notes are effectively subordinated
to all existing and future senior secured indebtedness of CCI.
The Notes were issued pursuant to an Indenture, which contains
certain covenants that, among other things, limit the ability
of CCI and its subsidiaries to: (i) incur additional
indebtedness; (ii) incur certain liens; (iii) engage in
certain transactions with affiliates; (iv) make certain
restricted payments; (v) agree to payment restrictions
affecting subsidiaries; (vi) engage in unrelated lines of
business; or (vii) engage in mergers, consolidations or the
transfer of all or substantially all of the assets of CCI to
another person. In addition, in the event of certain asset
sales, CCI will be required to use the proceeds to reinvest in
the Company's business, to repay certain debt or to offer to
purchase Notes at 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon, plus liquidated
damages, if any, to the date of purchase.
Under the terms of the Indenture, CCI cannot transfer funds to
the Company in the form of cash dividends or other
distributions or advances, except for (i) the amount of taxes
that CCI would be required to pay if they were not
consolidated with the Company and (ii) an amount not to exceed
fifty percent (50%) of CCI's cumulative net income from
January 1, 1998 through the end of the period for which the
calculation is made for the purpose of proposing a payment and
(iii) the amount of direct and indirect costs and expenses
incurred by the Company on behalf of CCI pursuant to a certain
services agreement and a certain management agreement to which
CCI and the Company are parties.
Except as described below, the Notes are not redeemable at
CCI's option prior to December 1, 2002. After December 1,
2002, the Notes will be subject to redemption at the option of
CCI, in whole or in part, at the redemption prices set forth
in the Indenture, plus accrued and unpaid interest thereon,
plus liquidated damages, if any, to the applicable redemption
date. In addition, until December 1, 2000, up to $35 million
in aggregate principal amount of Notes are redeemable, at the
option of CCI, at a price of 110.75% of the principal amount
of the Notes, together with accrued and unpaid interest, if
any, thereon, plus liquidated damages, if any, to the date of
the redemption, with the net cash proceeds of a public equity
offering; provided, however, that at least $65 million in
aggregate principal amount of the Notes remain outstanding
following such redemption.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
In the event of a change of control of the Company or CCI,
holders of the Notes will have the right to require CCI to
repurchase the Notes, in whole or in part, at a redemption
price of 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon, plus liquidated damages,
if any, to the date of repurchase.
CCI is a holding company with no assets (other than that
related to the notes receivable from LSB and affiliates,
specified below, and the Notes origination fees which have a
net book value of $3.7 million as of December 31, 1998) or
operations other than its investments in its subsidiaries, and
each of its subsidiaries is wholly owned, directly or
indirectly. CCI's payment obligations under the Notes are
fully, unconditionally and joint and severally guaranteed by
all of the existing subsidiaries of CCI, except for El Dorado
Nitrogen Company ("EDNC"). The assets, equity, and earnings of
EDNC are inconsequential for all periods presented. Separate
financial statements and other disclosures concerning the
guarantors are not presented herein because management has
determined they are not material to investors. Summarized
financial information of CCI and its subsidiaries as of
December 31, 1998 and 1997 and the results of operations for
each of the three years ended December 31, 1998 is as follows:
December 31
1998 1997
____________________
(In Thousands)
Balance sheet data:
Current assets(1)(2) $ 88,695 $ 88,442
Property, plant and equipment 82,389 84,329
Notes receivable from LSB and
affiliates(1) 13,140 13,443
Other assets 10,480 14,661
___________________
Total assets $194,704 $200,875
===================
Current liabilities $ 33,895 $ 38,004
Long-term debt 127,471 126,346
Other 9,580 9,236
Stockholders' equity 23,758 27,289
___________________
Total liabilities and stockholders'
equity $194,704 $200,875
==================
(1) Notes receivable from LSB and affiliates is eliminated when
consolidated with the Company.
(2) Current assets include income tax and other receivables due
from LSB which aggregate $3.4 million and $4.3 million at
December 31, 1998 and 1997, respectively.
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
December 31,
1998 1997 1996
________________________________
(In Thousands)
Operations data:
Total revenues $257,198 $263,740 $255,618
Costs and expenses:
Costs of sales 205,148 213,772 207,828
Selling, general and administrative 40,283 37,854 33,122
Interest 13,944 9,788 6,247
________________________________
259,375 261,414 247,197
________________________________
Income (loss) before provision for
income taxes and extraordinary
charge (2,177) 2,326 8,421
Provision for income taxes 392 1,429 2,668
________________________________
Income (loss) before extraordinary
charge (2,569) 897 5,753
Extraordinary charge, net of income tax
benefit of $1,750,000 - 2,869 -
________________________________
Net income (loss) $ (2,569) $ (1,972) $ 5,753
================================
In February 1997, certain subsidiaries of the Chemical
Business of the Company entered into a $50 million financing
arrangement with John Hancock. The financing arrangement
consisted of $25 million of fixed rate notes and $25 million
of floating rate notes. In November 1997, in connection with
the issuance of the Notes described above, the subsidiaries
retired the outstanding principal associated with the John
Hancock financing arrangement and incurred a prepayment fee.
The prepayment fee paid and loan origination costs expensed in
1997 related to the John Hancock financing arrangement
aggregated approximately $4.6 million.
(C) This agreement, as amended, between a subsidiary of the
Company and an institutional lender provides for a loan, the
proceeds of which were used in the construction of a nitric
acid plant, in the aggregate amount of $16.5 million requiring
84 equal monthly payments of principal plus interest, with
interest at a fixed rate of 8.86% through maturity in 2002.
This agreement is secured by the plant, equipment and
machinery, and proprietary rights associated with the plant
which has an approximate carrying value of $28.7 million at
December 31, 1998.
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
This agreement, as amended, contains covenants (i) requiring
maintenance of an escalating tangible net worth, (ii)
restricting distributions and dividends, (iii) restricting a
change of control of the subsidiary and the Company and (iv)
requiring maintenance of a reducing debt to tangible net worth
ratio. In November 1998, the subsidiary of the Company
received a waiver for noncompliance of the tangible net worth
and debt to tangible net worth ratio through the period ended
September 30, 1999. In April 1999, the subsidiary of the
Company obtained a waiver of the covenants through June 2000.
(D) At December 31, 1998, the Company's wholly-owned Australian
subsidiary, TES, had an AUS $10.5 million (U.S. $6.5 million)
revolving credit facility with a bank (the "Amended TES
Revolver") which is renewed by the bank on an annual basis.
The Amended TES Revolver provides for borrowings based on
specified percentages of qualified eligible assets. The
interest rate on the Amended TES Revolver is dependent upon
the borrowing option elected by TES. Borrowings under an
overdraft option, as defined, generally bear interest at the
bank's base lending rate (which approximates the U.S. prime
rate) plus .5% per annum. Borrowings under the commercial bill
option generally bear interest at the bank's yield rate, as
defined, plus 1.5% per annum.
The Amended TES Revolver contains certain financial covenants
with which the subsidiary must comply. At December 31, 1998,
the Company was in technical noncompliance with certain
financial covenants contained in the Amended TES Revolver;
however, the bank has confirmed that it will not act on any
default so long as, in its opinion, such default will not
impact the ability of TES or the Company to continue
operations or service and repay its borrowings outstanding
under the Amended TES Revolver. At December 31, 1998 and 1997,
all borrowings outstanding under the Amended TES Revolver have been
classified as due within one year in the consolidated balance
sheets.
The Amended TES Revolver is secured by substantially all of
the assets of TES, plus an unlimited guarantee and indemnity
from the Company and certain subsidiaries.
(E) Includes a $2.6 million note payable in 1998 ($3.0 million at
December 31, 1997), to an unconsolidated related party. The
note is unsecured, bears interest at 10.75% per annum payable
monthly, and requires principal payments of $300,000 in 1999
and $2.3 million in 2000.
Maturities of long-term debt for each of the five years after
December 31, 1998 are: 1999 $13,954; 2000 $36,821; 2001 $7,913;
2002 $2,929; 2003 $676 and thereafter $107,349.
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
The provision for income taxes before extraordinary charge consists
of the following for the year ended December 31:
1998 1997 1996
______________________________
(In Thousands)
Current:
Federal $ 77 $ - $ 54
State 23 50 96
_______________________________
$100 $50 $150
===============================
The approximate tax effects of each type of temporary difference
and carryforward that are used in computing deferred tax assets and
liabilities and the valuation allowance related to deferred tax
assets at December 31, 1998 and 1997 are as follows:
1998 1997
_________________
(In Thousands)
Deferred tax assets
Allowance for doubtful accounts and
other asset impairments not
deductible for tax purposes $ 6,864 $ 5,361
Capitalization of certain costs as
inventory for tax purposes 2,546 2,836
Net operating loss carryforward 25,235 25,390
Investment tax and alternative
minimum tax credit carryforwards 1,424 1,397
Other 1,150 956
__________________
Total deferred tax assets 37,219 35,940
Less valuation allowance on deferred
tax assets 25,534 25,511
__________________
Net deferred tax assets $11,685 $10,429
==================
Deferred tax liabilities
Accelerated depreciation used for tax
purposes $ 9,546 $ 8,288
Inventory basis difference resulting
from a business combination 2,139 2,139
Other - 2
__________________
Total deferred tax liabilities $11,685 $10,429
==================
The Company is able to realize deferred tax assets up to an amount
equal to the future reversals of existing taxable temporary
differences. The taxable temporary differences will turn around in
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
the loss carryforward period as the differences are
depreciated or amortized. Other differences will turn around
as the assets are disposed in the normal course of business.
The differences between the amount of the provision for income
taxes and the amount which would result from the application
of the federal statutory rate to "Loss before provision for
income taxes and extraordinary charge" for each of the three
years in the period ended December 31, 1998 are detailed
below:
1998 1997 1996
_________________________
(In Thousands)
Benefit for income taxes at
federal statutory rate $(637) $(8,055) $(1,293)
Changes in the valuation allow-
ance related to deferred
tax assets, net of rate
differential 23 7,313 1,591
State income taxes, net of
federal benefit 15 33 62
Permanent differences 30 534 364
Foreign subsidiary loss
(income) 617 191 (635)
Alternative minimum tax 77 - 54
Other (25) 34 7
_________________________
Provision for income taxes $ 100 $ 50 $ 150
=========================
At December 31, 1998, the Company has regular-tax net
operating loss ("NOL") carryforwards of approximately
$63.8 million (approximately $31.4 million alternative minimum
tax NOLs). Certain amounts of regular-tax NOL expire beginning
in 1999.
7. Stockholders' Equity
Stock Options
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
generally recognized.
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Pro forma information regarding net income and earnings per
share is required by Statement 123, which also requires that
the information be determined as if the Company has accounted
for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for 1998, 1997
and 1996, respectively: risk-free interest rates of 5.75%,
6.2% and 6.0%; a dividend yield of .5%, 1.43% and 1.38%;
volatility factors of the expected market price of the
Company's common stock of .57, .42 and .41; and a weighted
average expected life of the option of 8.0, 8.0 and 6.8 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the qualified and non-qualified stock options is
amortized to expense over the options' vesting period. The
Company's pro forma information follows:
Year ended December 31,
1998 1997 1996
___________________________
(In Thousands, Except Per
Share Data)
Net loss applicable to
common stock $(5,943) $(26,715) $(7,184)
Loss per common share (.48) (2.07) (.56)
Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect was not fully
reflected until 1998.
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Qualified Stock Option Plans
In November 1981, the Company adopted the 1981 Incentive Stock
Option Plan (1,350,000 shares), in March 1986, the Company adopted
the 1986 Incentive Stock Option Plan (1,500,000 shares) and, in
September 1993, the Company adopted the 1993 Stock Option and
Incentive Plan (850,000 shares). Under these plans, the Company is
authorized to grant options to purchase up to 3,700,000 shares of
the Company's common stock to key employees of the Company and its
subsidiaries. The 1981 and 1986 Incentive Stock Option Plans have
expired and, accordingly, no additional options may be granted from
these plans. Options granted prior to the expiration of these plans
continue to remain valid thereafter in accordance with their terms.
At December 31, 1998, there are 149,000 of options outstanding
related to these two plans. At December 31, 1998, there are 838,500
options outstanding related to the 1993 Stock Option and Incentive
Plan which continues to be effective. These options become
exercisable 20% after one year from date of grant, 40% after two
years, 70% after three years, 100% after four years and lapse at
the end of ten years. The exercise price of options to be granted
under this plan is equal to the fair market value of the Company's
common stock at the date of grant. For participants who own 10% or
more of the Company's common stock at the date of grant, the option
price is 110% of the fair market value at the date of grant and the
options lapse after five years from the date of grant.
In August 1998, the Company adopted the 1998 Incentive Stock Option
Plan (1,000,000 shares) subjective to shareholder approval. If
approved, the 1998 Plan would have the same terms as described
above under the 1993 Stock Option and Incentive Plan.
On April 22, 1998, the Company terminated 116,000 qualified stock
options (the "terminated options"), previously granted under the
1993 Plan and replaced the terminated options with newly granted
options under and pursuant to the terms of the 1993 Plan (the
"replacement options"). The replacement options were granted at the
fair market value of the Company's stock on April 22, 1998, have a
life and vesting schedule based on the terminated options.
F-25
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Activity in the Company's qualified stock option plans during each
of the three years in the period ended December 31, 1998 is as
follows:
1998 1997
______________________ ____________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
_____________________________________________
Outstanding at beginning of year 1,048,760 $4.25 1,176,640 $4.08
Granted 119,500 4.19 - -
Exercised (63,260) 1.13 (118,880) 2.81
Canceled, forfeited or expired (117,500) 6.07 (9,000) 6.05
____________ __________
Outstanding at end of year 987,500 4.23 1,048,760 4.25
============ ==========
Exercisable at end of year 532,400 4.09 414,960 3.81
============ =========
Weighted average fair value
of options granted during
year 2.16 -
1996
____________________
Weighted
Average
Exercise
Shares Price
______________________
611,140 $3.40
720,500 4.33
(120,000) 2.13
(35,000) 4.21
__________
1,176,640 4.08
==========
354,540 3.76
==========
2.00
Outstanding options to acquire 954,500 shares of stock at
December 31, 1998 had exercise prices ranging from $1.13 to $4.88
per share (507,500 of which are exercisable at a weighted average
price of $3.93 per share), had a weighted average exercise price of
$4.13 and a remaining contractual life of 5.9 years. The balance of
options outstanding at December 31, 1998 had exercise prices
ranging from $5.36 to $9.00 per share (24,900 of which are
exercisable at a weighted average price of $7.54 per share), had a
weighted average exercise price of $7.01 and a remaining
contractual life of 4.7 years.
Non-qualified Stock Option Plans
The Company's Board of Directors approved the grant of non-
qualified stock options to the Company's outside directors,
President and certain key employees, as detailed below. The option
price was based on the market value of the Company's common stock
at the date of grant. These options have vesting terms and lives
specific to each grant but generally vest over 48 months and expire
five or ten years from the grant date (except for the 1994
extension and 1998 grants discussed below). In June 1994, the Board
of Directors extended the expiration date on the grant of options
for 165,000 shares to the Company's Chairman for an additional five
years. The option price and terms of the option were unchanged
except that, in consideration of the extension of time to exercise,
the Chairman agreed to a revised vesting schedule for exercise of
20% of the option shares in each of the years 1995, 1996 and 1997
and 40% of the option shares in 1998.
F-26
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
In 1998, the Board of Directors granted 175,000 stock options, at
the price equivalent to the Company's stock price at the date of
grant. Options to two key employees for 100,000 shares have a nine-
year vesting schedule while the remaining 75,000 vest over 48
months. These options expire ten years from the date of grant. In
1997, the Board of Directors granted 50,000 options to two key
employees that vest over 60 months and expire ten years from the
date of grant.
In September 1993, the Company adopted the 1993 Nonemployee
Director Stock Option Plan (the "Outside Director Plan"). The
Outside Director Plan authorizes the grant of non-qualified stock
options to each member of the Company's Board of Directors who is
not an officer or employee of the Company or its subsidiaries. The
maximum number of shares of common stock of the Company that may be
issued under the Outside Director Plan is 150,000 shares (subject
to adjustment as provided in the Outside Director Plan).
The Company shall automatically grant to each outside director an
option to acquire 5,000 shares of the Company's common stock on
April 30 following the end of each of the Company's fiscal years in
which the Company realizes net income of $9.2 million or more for
such fiscal year. The exercise price for an option granted under
this plan shall be the fair market value of the shares of common
stock at the time the option is granted. Each option granted under
this plan to the extent not exercised shall terminate upon the
earlier of the termination as a member of the Company's Board of
Directors or the fifth anniversary of the date such option was
granted. During 1998, the Company granted 105,000 options (none in
1997 or 1996), respectively, under the Outside Director Plan.
Activity in the Company's non-qualified stock option plans during
each of the three years in the period ended December 31, 1998 is as
follows:
1998 1997
______________________ ____________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
_____________________________________________
Outstanding at beginning of year 280,000 $3.44 265,000 $3.31
Granted 280,000 4.19 50,000 4.19
Exercised - - (35,000) 3.13
Surrendered, forfeited or expired - - - -
____________ __________
Outstanding at end of year 560,000 3.82 280,000 3.44
============ ==========
Exercisable at end of year 335,000 3.37 164,000 3.55
============ ==========
Weighted average fair value
of options granted during
year 2.62 2.00
1996
____________________
Weighted
Average
Exercise
Shares Price
______________________
285,000 $3.44
- -
(10,000) 3.13
(10,000) 7.19
__________
265,000 3.31
==========
166,000 3.64
==========
-
F-27
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Outstanding options to acquire 520,000 shares of stock at
December 31, 1998 had exercise prices ranging from $1.38 to $4.25 per
share (295,000 of which are exercisable at a weighted average price
of $3.08 per share), had a weighted average exercise price of $3.56
and a remaining contractual life of 7.7 years. The balance of options
outstanding at December 31, 1998 had exercise prices ranging from
$5.38 to $9.00 per share (40,000 of which are exercisable at a
weighted average price of $7.19 per share), had a weighted average
exercise price of $7.19 and a remaining contractual life of 5.8
years.
Preferred Share Purchase Rights
In January 1999, the Company's Board of Directors approved the
renewal (the "Renewed Rights Plan") of the Company's existing
Preferred Share Purchase Rights Plan ("Existing Rights Plan") and
declared a dividend distribution of one Renewed Preferred Share
Purchase Right (the "Renewed Preferred Right") for each outstanding
share of the Company's common stock outstanding upon the Existing
Rights Plan's expiration date. The Renewed Preferred Rights are
designed to ensure that all of the Company's stockholders receive
fair and equal treatment in the event of a proposed takeover or
abusive tender offer.
The Renewed Preferred Rights are generally exercisable when a person
or group, other than the Company's Chairman and his affiliates,
acquire beneficial ownership of 20% or more of the Company's common
stock (such a person or group will be referred to as the "Acquirer").
Each Renewed Preferred Right (excluding Renewed Preferred Rights
owned by the Acquirer) entitles stockholders to buy one one-hundredth
(1/100) of a share of a new series of participating preferred stock
at an exercise price of $20. Following the acquisition by the
Acquirer of beneficial ownership of 20% or more of the Company's
common stock, and prior to the acquisition of 50% or more of the
Company's common stock by the Acquirer, the Company's Board of
Directors may exchange all or a portion of the Renewed Preferred
Rights (other than Renewed Preferred Rights owned by the Acquirer)
for the Company's common stock at the rate of one share of common
stock per Renewed Preferred Right. Following acquisition by the
Acquirer of 20% or more of the Company's common stock, each Renewed
Preferred Right (other than the Renewed Preferred Rights owned by the
Acquirer) will entitle its holder to purchase a number of the
Company's common shares having a market value of two times the
Renewed Preferred Right's exercise price in lieu of the new preferred
stock.
If the Company is acquired, each Renewed Preferred Right (other than
the Renewed Preferred Rights owned by the Acquirer) will entitle its
holder to purchase a number of the Acquirer's common shares having a
market value at the time of two times the Renewed Preferred Right's
exercise price.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Prior to the acquisition by the Acquirer of beneficial ownership of
20% or more of the Company's stock, the Company's Board of Directors
may redeem the Renewed Preferred Rights for $.01 per Renewed
Preferred Right.
8. Redeemable Preferred Stock
Each share of the noncumulative redeemable preferred stock, $100 par
value, is convertible into 40 shares of the Company's common stock at
any time at the option of the holder; entitles the holder to one vote
and is redeemable at par. The redeemable preferred stock provides for
a noncumulative annual dividend of 10%, payable when and as declared.
Dividend payments were current at December 31, 1998 and 1997.
9. Non-redeemable Preferred Stock
The 20,000 shares of Series B cumulative, convertible preferred
stock, $100 par value, are convertible, in whole or in part, into
666,666 shares of the Company's common stock (33.3333 shares of
common stock for each share of preferred stock) at any time at the
option of the holder and entitles the holder to one vote per share.
The Series B preferred stock provides for annual cumulative dividends
of 12% from date of issue, payable when and as declared. Dividend
payments were current at December 31, 1998 and 1997. The terms of the
Company's Series B Preferred Stock provides, in part, that in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, or any reduction in its capital resulting
in any distribution of assets to its stockholders, the holders of the
Series B Preferred Stock shall be entitled to receive in cash out of
assets of the Company, whether from capital or from earnings
available for distribution to the stockholders, before any amount
shall be paid to the holder of Common Stock of the Company the sum of
One Hundred & No/100 Dollars ($100) per share, plus an amount equal
to all accumulated and unpaid cash dividends thereon to the date
fixed for payment of such distributive amount.
The Class C preferred stock, designated as a $3.25 convertible
exchangeable Class C preferred stock, Series 2, has no par value
("Series 2 Preferred"). The Series 2 Preferred has a liquidation
preference of $50.00 per share plus accrued and unpaid dividends and
is convertible at the option of the holder at any time, unless
previously redeemed, into common stock of the Company at an initial
conversion price of $11.55 per share (equivalent to a conversion rate
of approximately 4.3 shares of common stock for each share of Series
2 Preferred), subject to adjustment under certain conditions. Upon
the mailing of notice of certain corporate actions, holders will have
special conversion rights for a 45-day period.
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Non-redeemable Preferred Stock (continued)
The Series 2 Preferred is redeemable at the option of the Company, in
whole or in part, at prices decreasing annually to $50.00 per share
on or after June 15, 2003, plus accrued and unpaid dividends to the
redemption date. The redemption price at December 31, 1998 was $51.63
per share. Dividends on the Series 2 Preferred are cumulative and are
payable quarterly in arrears. Dividend payments were current at
December 31, 1998 and 1997.
The Series 2 Preferred also is exchangeable in whole, but not in
part, at the option of the Company on any dividend payment date
beginning June 15, 1996, for the Company's 6.50% Convertible
Subordinated Debentures due 2018 (the "Debentures") at the rate of
$50.00 principal amount of Debentures for each share of Series 2
Preferred. Interest on the Debentures, if issued, will be payable
semiannually in arrears. The Debentures will, if issued, contain
conversion and optional redemption provisions similar to those of the
Series 2 Preferred and will be subject to a mandatory annual sinking
fund redemption of five percent of the amount of Debentures initially
issued, commencing June 15, 2003 (or the June 15 following their
issuance, if later).
At December 31, 1998, the Company is authorized to issue an
additional 248,538 shares of $100 par value preferred stock and an
additional 5,000,000 shares of no par value preferred stock. Upon
issuance, the Board of Directors of the Company will determine the
specific terms and conditions of such preferred stock.
10. Commitments and Contingencies
Operating Leases
The Company leases certain property, plant and equipment under
noncancelable operating leases. Future minimum payments on operating
leases with initial or remaining terms of one year or more at
December 31, 1998 are as follows:
(In Thousands)
1999 $ 2,718
2000 2,394
2001 2,139
2002 1,887
2003 1,236
After 2003 4,774
_______
$15,148
=======
Rent expense under all operating lease agreements, including month-
to-month leases, was $3,866,000 in 1998, $4,085,000 in 1997 and
$4,337,000 in 1996. Renewal options are available
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
under certain of the lease agreements for various periods at
approximately the existing annual rental amounts. Rent expense paid
to related parties was $90,000 in each of 1998, 1997 and 1996.
In June 1997, two wholly owned subsidiaries of the Company, El Dorado
Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement").
Under the Bayer Agreement, EDNC will act as an agent to construct,
and upon completion of construction, will operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC has guaranteed the performance of EDNC's obligations
under the Bayer Agreement. Under the terms of the Bayer Agreement,
EDNC is to lease the EDNC Baytown Plant pursuant to a leveraged lease
from an unrelated third party with an initial lease term of ten years
from the date on which the EDNC Baytown Plant becomes fully
operational. Upon expiration of the initial ten-year term from the
date the EDNC Baytown Plant becomes operational, the Bayer Agreement
may be renewed for up to six renewal terms of five years each;
however, prior to each renewal period, either party to the Bayer
Agreement may opt against renewal. It is anticipated that
construction cost of the EDNC Baytown Plant will approximate $69
million and will be completed in the second quarter of 1999.
Construction financing of the EDNC Baytown Plant is to be provided by
an unaffiliated lender. Neither the Company nor EDC has guaranteed
any of the lending obligations for the EDNC Baytown Plant.
In January 1999, the contractor constructing the EDNC Baytown Plant
under a turnkey agreement, informed the Company that it could not
complete construction alleging a lack of financial resources. The
parties to this agreement have demanded the contractor's bonding
company to provide funds necessary for subcontractors to complete
construction. The Company believes that a substantial portion of the
costs to complete the EDNC Baytown Plant, which were to be funded by
the construction contractor, will ultimately be funded by proceeds
from the bonding company; however, the cost to the Company through
its leveraged lease is expected to be impacted by these events. As a
result of the delay in completion of the EDNC Baytown Plant, the
Company, through EDNC and EDC, has entered into an interim supply
agreement with Bayer to provide product from its manufacturing
facility in El Dorado, Arkansas. Performance by the Company under
this supply agreement will cause the Company to realign its
production mix at its El Dorado manufacturing facility. While there
are no assurances, the realignment of production mix is not presently
anticipated to adversely impact the Company's existing chemical
business or the results of operations related thereto.
In connection with the EDNC Baytown Plant, EDNC had entered into a
long-term production and supply agreement with Bayer. This agreement
provided for a commencement date of February 1, 1999. As mentioned
above, EDNC is to provide product under an interim supply
F-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
agreement until the EDNC Baytown Plant becomes operational; however,
EDNC will be responsible to Bayer for certain lost operating profits
during this time period as reasonably agreed-upon by the parties. The
possible loss, if any, associated with these agreements and contract
provisions is not presently determinable; however, they may be
material.
Purchase Commitments
A subsidiary of the Company purchases substantial quantities of
anhydrous ammonia for use in manufacturing its products. The
subsidiary has contracts with three suppliers of ammonia. One
contract requires a subsidiary of the Company to purchase not less
than 24,000 tons nor more than 72,000 tons of anhydrous ammonia
during the contract term which expires on June 30, 2000. A second
contract requires a subsidiary of the Company to purchase not less
than 5,000 tons of anhydrous ammonia each contract month and is for
a term expiring in December 2000. The third contract requires a
subsidiary of the Company to take or pay for an average of 10,000
tons of anhydrous ammonia per month and expires April 2000. These
contracts are at floating prices. Purchases of anhydrous ammonia
under two contracts with similar terms aggregated $31.9 million in
1998 ($40.1 million and $30.4 million in 1997 and 1996, respectively,
under similar arrangements). At December 31, 1998, the subsidiary was
required to make a deficiency payment of $1.3 million for quantities
not taken as deliveries in 1998. The Company is allowed two years to
take delivery of product. The subsidiary believes that their demand
for ammonia will exceed current purchase requirements and thus the
subsidiary will take delivery of the 1998 deficiency prior to
expiration of the recovery period. The pricing volatility of such raw
material directly affects the operating profitability of a subsidiary
of the Company. A subsidiary of the Company also enters into
agreements with suppliers of raw materials which require a subsidiary
of the Company to provide finished goods in exchange therefore. The
subsidiary did not have a significant commitment to provide finished
goods with its suppliers under these exchange agreements at
December 31, 1998. At December 31, 1998, the Company has a standby
letter of credit outstanding related to its Chemical Business of $3.5
million.
A subsidiary of the Company leases certain precious metals for use in
the subsidiary's manufacturing process. The agreement at December 31,
1998 requires rentals generally based on 7.5% of the leased metals'
market values from January 1999 through July 1999, contract
expiration.
In July 1995, a subsidiary of the Company entered into a product
supply agreement with a third party whereby the subsidiary is
required to make monthly facility fee and other payments which
aggregate $71,965. In return for this payment, the subsidiary is
entitled to certain quantities of compressed oxygen produced by the
third party. Except in circumstances as defined by the agreement, the
monthly payment is payable regardless of the quantity of compressed
F-32
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
oxygen used by the subsidiary. The term of this agreement, which has been
included in the above minimum operating lease commitments, is for a
term of 15 years; however, after the agreement has been in effect for
60 months, the subsidiary can terminate the agreement without cause
at a cost of approximately $4.5 million. Based on the subsidiary's
estimate of compressed oxygen demands of the plant, the cost of the
oxygen under this agreement is expected to be favorable compared to
floating market prices.
Debt Guarantee
The Company has guaranteed approximately $2.6 million of indebtedness
of a start-up aviation company, Kestrel Aircraft Company ("Kestrel"),
in exchange for a 44.9% ownership interest. The Company's advances
and investment in the aviation company amount to $1,371,000 at
December 31, 1998 ($341,000 at December 31, 1997). At December 31,
1998, the Company has accrued the full amount of its commitment under
the debt guarantees and fully impaired its investment and advances to
Kestrel. The Company recorded losses of $1,662,000 in 1998,
$1,093,000 in 1997 and $626,000 in 1996 related to its investment and
the debt guarantee. The debt guarantee relates to a $2 million term
note and a $2 million revolving credit facility. The $2 million
revolving credit facility, on which a subsidiary of the Company has
guaranteed $600,000 of indebtedness is expected to be funded by the
Company in the first quarter of 1999. Upon demand of the Company's
guarantee, the $2 million note guarantee agreement requires monthly
principal payments of $11,111 plus interest through maturity in
August 2004. At December 31, 1998, Kestrel was in default of the
covenants of this term note.
Should demand be made on the Company to perform under its guarantee,
the Company expects to foreclose on the assets of Kestrel, along with
the other guarantors to enable the Company and the other guarantors
to negotiate with potential buyers of Kestrel's stock and/or
technology. Proceeds received by the Company, if any, from the sale
of its ownership interest in Kestrel will be recognized in the
results of operations when realized.
Legal Matters
Following is a summary of certain legal actions involving the
Company:
A. In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with numerous
other companies, of potential responsibility for clean-up of a
waste disposal site in Oklahoma. In 1990, the EPA added the site
to the National Priorities List. Following the remedial
investigation and feasibility study, in 1992 the Regional
Administrator of the EPA signed the Record of Decision ("ROD")
for the site. The ROD detailed EPA's selected remedial action
for the site and estimated the cost of the remedy at $3.6
million. In 1992, the Company made settlement proposals which
would have entailed a collective payment by the subsidiaries of
$47,000. The site
F-33
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The EPA
rejected the Company's offer, allocating 60% of the cleanup
costs to the potentially responsible parties and 40% to the site
operator. The EPA estimated the total cleanup costs at $10.1
million as of February 1993. The site owner rejected all
settlements with the EPA, after which the EPA issued an order to
the site owner to conduct the remedial design/remedial action
approved for the site. In August 1997, the site owner issued an
"invitation to settle" to various parties, alleging the total
cleanup costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the Company's
cost associated with the clean-up of the site is unknown due to
continuing changes in the estimated total cost of clean-up of
the site and the percentage of the total waste which was alleged
to have been contributed to the site by the Company. As of
December 31, 1998, the Company has accrued an amount based on a
recent preliminary settlement proposal by the alleged potential
responsible parties; however, there is no assurance such
proposal will be accepted. Such amount is not material to the
Company's financial position or results of operations. This
estimate is subject to material change in the near term as
additional information is obtained. The subsidiary's insurance
carriers have been notified of this matter; however, the amount
of possible coverage, if any, is not yet determinable.
B. On February 12, 1996, the Chemical Business entered into a
Consent Administrative Agreement ("Administrative Agreement")
with the state of Arkansas to resolve certain compliance issues
associated with nitric acid concentrators. Pursuant to the
Administrative Agreement, the Chemical Business installed
additional pollution control equipment to address the compliance
issues. The Chemical Business was assessed $50,000 in civil
penalties associated with the Administrative Agreement. In the
summer of 1996 and then on January 28, 1997, the subsidiary
executed amendments to the Administrative Agreement ("Amended
Agreements"). The Amended Agreements imposed a $150,000 civil
penalty, which penalty has been paid. Since the 1997 amendment,
the Chemical Business has been assessed stipulated penalties of
approximately $67,000 by the Arkansas Department of Pollution
Control and Ecology ("ADPC&E") for violations of certain
provisions of the 1997 Amendment. The Chemical Business believes
that the El Dorado Plant has made progress in controlling
certain off-site emissions; however, such off-site emissions
have occurred and may continue from time to time, which could
result in the assessment of additional penalties against the
Chemical Business by the ADPC&E for violation of the 1997
Amendment.
During May 1997, approximately 2,300 gallons of caustic material
spilled when a valve in a storage vessel failed, which was
released to a stormwater drain, and according to ADPC&E
F-34
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
records, resulted in a minor fish kill in a drainage ditch near
the El Dorado Plant. In 1998, the ADPC&E issued a Consent
Administrative Order ("1998 CAO") to resolve the event. The 1998
CAO includes a civil penalty in the amount of $183,700 which
includes $125,000 to be paid over five years in the form of
environmental improvements at the El Dorado Plant. The remaining
$58,700 has been paid prior to December 31, 1998. The 1998 CAO
also requires the Chemical Business to undertake a facility-wide
wastewater evaluation and pollutant source control program and
wastewater minimization program. The program requires that the
subsidiary complete rainwater drain-off studies including
engineering design plans for additional water treatment
components to be submitted to the ADCP&E by August 2000. The
construction of the additional water treatment components shall
be completed by August 2001 and the El Dorado Plant has been
mandated to be in compliance with final effluent limits on or
before February 2002. The wastewater program is currently
expected to require future capital expenditures of approximately
$4.6 million.
C. In 1996, three lawsuits were filed against the Company's
Chemical Business by certain groups of residents of El Dorado,
Arkansas, asserting a citizens' suit and two toxic tort lawsuits
against the Chemical Business. The citizens' suit alleged
violations of the Clean Air Act, the Clean Water Act, the
Chemical Business' air and water permits and certain other
environmental laws, rules and regulations. The toxic tort
lawsuits alleged that the plaintiffs suffered certain injuries
and damages as a result of alleged releases of toxic substances
from the Chemical Business' El Dorado, Arkansas, manufacturing
facility.
The Company and the Chemical Business maintain an Environmental
Impairment Insurance Policy ("EIL Insurance") that provides
coverage through June 30, 2001 to the Company and the Chemical
Business for certain discharges, dispersals, releases, or
escapes of certain contaminants and pollutants into or upon
land, the atmosphere or any water course or body of water from
the Site, which has caused bodily injury, property damage or
contamination to others or to other property not on the Site.
The EIL Insurance provides limits of liability for each loss up
to $20.0 million, except $5.0 million for all remediation
expenses, with the maximum limit of liability for all claims
under the EIL Insurance not to exceed $20.0 million for each
loss or remediation expense and $40.0 million for all losses and
remediation expenses. The EIL Insurance also provides a
retention of the first $500,000 per loss or remediation expense
that is to be paid by the Company. Previous to 1998, the
Company's Chemical Business incurred and expensed $500,000 in
legal, expert and other costs in connection with the toxic tort
and citizen lawsuits described above.
F-35
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
During 1998, the Company's Chemical Business settled all claims
asserted in the citizens' and toxic tort lawsuits. The
settlements required cash payments to the plaintiffs.
Substantially all of such payments were funded directly by the
Company's EIL Insurance carrier.
The amount of the settlements of the toxic tort cases as
discussed above paid by the EIL Insurance and the amount paid
under the EIL Insurance for legal and other expenses relating to
the defense of the toxic tort cases and the citizen suit case
reduce the coverage amount available under the policy then in
effect.
D. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the defendants allegedly
violated certain federal and state antitrust laws in connection
with alleged price fixing of certain explosive products. The
plaintiffs are suing for an unspecified amount of damages,
which, pursuant to statute, plaintiffs are requesting be
trebled, together with costs. Based on the information presently
available to the Company, the Company does not believe that the
Chemical Business conspired with any party, including but not
limited to, the five (5) other defendants, to fix prices in
connection with the sale of commercial explosives. This
litigation has been consolidated, for discovery purposes only,
with several other actions in a multi-district litigation
proceeding in Utah. Discovery in this litigation is in process.
The Chemical Business intends to vigorously defend itself in
this matter.
The Company's Chemical Business has been added as a defendant in
a separate lawsuit pending in Missouri. This lawsuit alleges a
national conspiracy, as well as a regional conspiracy, directed
against explosive customers in Missouri and seeks unspecified
damages. The Company's Chemical Business has been included in
this lawsuit because it sold products to customers in Missouri
during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has
been sued in the preceding described lawsuit. Based on the
information presently available to the Company, the Company does
not believe that the Chemical Business conspired with any party,
to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously defend
itself in this matter.
During the third quarter of 1997, a subsidiary of the Company
was served with a lawsuit in which approximately 27 plaintiffs
have sued approximately 13 defendants, including a subsidiary of
the Company alleging personal injury and property damage for
undifferentiated compensatory and punitive damages of
approximately $7,000,000. Specifically, the plaintiffs assert
property damage to their residence and wells, annoyance
F-36
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
and inconvenience, and nuisance as a result of daily blasting
and round-the-clock mining activities. The plaintiffs are
residents living near the Heartland Coal Company ("Heartland")
strip mine in Lincoln County, West Virginia, and an unrelated
mining operation operated by Pen Coal Inc. During 1999, the
plaintiffs withdrew all personal injury claims previously
asserted in this litigation. Heartland employed the subsidiary
to provide blasting materials and personnel to load and shoot
holes drilled by employees of Heartland. Down hole blasting
services were provided by the subsidiary at Heartland's premises
from approximately August 1991, until approximately August 1994.
Subsequent to August 1994, the subsidiary supplied blasting
materials to the reclamation contractor at Heartland's mine. In
connection with the subsidiary's activities at Heartland, the
subsidiary has entered into a contractual indemnity to Heartland
to indemnify Heartland under certain conditions for acts or
actions taken by the subsidiary for which the subsidiary failed
to take, and Heartland is alleging that the subsidiary is liable
thereunder for Heartland's defense costs and any losses to or
damages sustained by, the plaintiffs in this lawsuit as a result
of the subsidiary's operations. Discovery in this litigation is
in process. The Company intends to vigorously defend itself in
this matter. Based on limited information available, the
subsidiary's counsel believes that the subsidiary's possible
loss, if any, related to this litigation is not presently
expected to have a material adverse effect on the Company.
The Company, including its subsidiaries, is a party to various other
claims, legal actions, and complaints arising in the ordinary course
of business. In the opinion of management after consultation with
counsel, all claims, legal actions (including those described above)
and complaints are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such
amounts that unfavorable disposition is not presently expected to
have a material effect on the financial position of the Company, but
could have a material impact to the net loss of a particular quarter
or year, if resolved unfavorably.
Other
In 1989 and 1991, the Company entered into severance agreements with
certain of its executive officers that become effective after the
occurrence of a change in control, as defined, if the Company
terminates the officer's employment or if the officer terminates
employment with the Company for good reason, as defined. These
agreements require the Company to pay the executive officers an
amount equal to 2.9 times their average annual base compensation, as
defined, upon such termination.
The Company has retained certain risks associated with its
operations, choosing to self-insure up to various specified amounts
under its automobile, workers' compensation, health and general
F-37
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
liability programs. The Company reviews such programs on at least an
annual basis to balance the cost-benefit between its coverage and
retained exposure.
11. Employee Benefit Plan
The Company sponsors a retirement plan under Section 401(k) of the
Internal Revenue Code under which participation is available to
substantially all full-time employees. The Company does not
contribute any significant amounts to this plan.
12. Fair Value of Financial Instruments
The following discussion of fair values is not indicative of the
overall fair value of the Company's balance sheet since the
provisions of the SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," do not apply to all assets, including
intangibles.
The following methods and assumptions were used by the Company in
estimating its fair value of financial instruments:
Borrowed Funds: Fair values for fixed rate borrowings, other
than the Notes, are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on
borrowings of similar amounts and terms to those currently
outstanding. The fair value of the Notes was determined based on
a market quotation for such securities. As of December 31, 1998
and 1997, carrying values of variable rate and fixed-rate long-
term debt which aggregated $169.6 million and $180.9 million,
respectively, approximate their fair value.
Hedging Agreements: The fair value of the interest rate forward
agreement is estimated based on quoted market prices of
instruments with similar terms. As of December 31, 1998, the
financial instruments' fair value (which is not reflected on the
accompanying balance sheet), net to the Company's 50% interest,
represented a liability of approximately $3.3 million ($1.8
million at December 31, 1997). The fair value of the natural gas
swap agreements was estimated based on market prices of natural
gas for the periods covered by the agreements. At December 31,
1998 and 1997, the fair values of such agreements represented a
liability of approximately $255,000 and $165,000, respectively.
As of December 31, 1998, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued
liabilities approximated their estimated fair value.
F-38
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information
Factors Used By Management to Identify the Enterprise's Reportable
Segments and Measurement of Segment Profit or Loss and Segment Assets
LSB Industries, Inc. has four reportable segments: the Chemical
Business, Climate Control Business, Automotive Business, and
Industrial Products Business. The Company's reportable segments are
based on business units that offer similar products and services. The
reportable segments are each managed separately because they
manufacture and distribute distinct products with different
production processes.
The Company evaluates performance and allocates resources based on
profit or loss from operations before allocation of corporate
overhead, interest expense and income taxes. The accounting policies
of the reportable segments are the same as those described in the
summary of significant accounting policies.
Description of Each Reportable Segment
Chemical
This segment manufactures and sells fertilizer grade ammonium
nitrate for the agriculture industry, explosive grade ammonium
nitrate for the mining industry and concentrated, blended and
mixed nitric acid for industrial applications. Production from
the Company's primary manufacturing facility in El Dorado,
Arkansas, for the year ended December 31, 1998 comprises
approximately 86% of the chemical segment's sales. Sales to
customers of this segment primarily include farmers in Texas and
Arkansas, coal mining companies in Kentucky, Missouri and West
Virginia and industrial users of acids in the South and East
regions of the United States.
The Chemical Business is subject to various federal, state and
local environmental regulations. Although the Company has
designed policies and procedures to help reduce or minimize the
likelihood of significant chemical accidents and/or
environmental contamination, there can be no assurances that the
Company will not sustain a significant future operating loss
related thereto.
The Chemical Business' Australian subsidiary's results of
operations have been adversely affected due to the recent
economic developments in certain countries in Asia. These
economic developments in Asia have had a negative impact on the
mining industry in Australia, which this subsidiary services. In
February 1999, the Company received a nonbinding offer to
acquire the stock of the Australian subsidiary. At the present
F-39
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
time the parties are in negotiation; however, there are no assurances
that the transaction will ultimately be consummated. If the
Company does not ultimately consummate this sale and the
operating results of the Australian subsidiary do not reflect
markedly improved conditions, in the near term, it is reasonably
possible that the Company will recognize an impairment charge
related to the recovery of such net assets.
Further, the Company purchases substantial quantities of
anhydrous ammonia for use in manufacturing its products. The
pricing volatility of such raw material directly affects the
operating profitability of the chemical segment.
Climate Control
This business segment manufactures and sells, primarily from its
various facilities in Oklahoma City, a variety of hydronic fan
coil, water source heat pump products and other HVAC products
for use in commercial and residential air conditioning and
heating systems. The Company's various facilities in Oklahoma
City comprise substantially all of the Climate Control segment's
operations. Sales to customers of this segment primarily include
original equipment manufacturers, contractors and independent
sales representatives located throughout the world which are
generally secured by a mechanic's lien, except for sales to
original equipment manufacturers.
Automotive Products
This segment manufactures and sells anti-friction bearings,
clutch sets, universal joints and other products for automotive
applications to wholesalers, retailers and original equipment
manufacturers located throughout the world. Net sales from the
Company's primary facility in Oklahoma City comprises
approximately 90% of the automotive products segment sales.
At December 31, 1998, the automotive segment has $22.7 million
of inventory, a portion of which is in excess of current
requirements based on recent sales levels and has been
classified with other assets. Management has developed a program
to reduce this inventory to desired levels over the near term
and believes no significant loss will be incurred on
disposition.
In 1998, one customer accounted for 21.1% of Automotive Products
net sales. In 1997, two customers accounted for an aggregate of
24.1% of net sales, 12.8% and 11.3% individually and in 1996 one
customer accounted for 12.1% of net sales.
F-40
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Industrial Products
This segment manufactures and purchases machine tools and
purchases industrial supplies for sale to machine tool dealers
and end users throughout the world. Sales of industrial supplies
are generally unsecured, whereas the Company generally retains
a security interest in machine tools sold until payment is
received.
The industrial products segment attempts to maintain a full line
of certain product lines, which necessitates maintaining certain
products in excess of management's successive year expected
sales levels. Inasmuch as these products are not susceptible to
rapid technological changes, management believes no loss will be
incurred on disposition.
Credit, which is generally unsecured, is extended to customers based
on an evaluation of the customer's financial condition and other
factors. Credit losses are provided for in the financial statements
based on historical experience and periodic assessment of outstanding
accounts receivable, particularly those accounts which are past due.
The Company's periodic assessment of accounts and credit loss
provisions are based on the Company's best estimate of amounts which
are not recoverable. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers
comprising the Company's customer bases, and their dispersion across
many different industries and geographic areas. As of December 31,
1998 and 1997, the Company's accounts and notes receivable are shown
net of allowance for doubtful accounts of $10.2 million and $9.2
million, respectively.
Information about the Company's operations in different industry
segments for each of the three years in the period ended December 31,
1998 is detailed below.
1998 1997 1996
_______________________________
(In Thousands)
Sales:
Chemical $139,942 $156,949 $166,163
Climate Control 115,786 105,909 89,275
Automotive Products 39,994 35,499 37,946
Industrial Products 14,315 15,572 13,776
_____________________________
$310,037 $313,929 $307,160
=============================
F-41
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
:
1998 1997 1996
_______________________________
(In Thousands)
Gross profit:
Chemical $ 18,274 $ 19,320 $ 25,885
Climate Control 32,278 29,552 21,961
Automotive Products 8,670 3,299 5,868
Industrial Products 3,731 3,776 3,058
_____________________________
$ 62,953 $ 55,947 $ 56,772
=============================
Operating profit (loss):
Chemical $ 3,675 $ 5,479 $ 10,971
Climate Control 10,493 8,895 5,362
Automotive Products (1,827) (7,251) (4,134)
Industrial Products (403) (993) (2,685)
_____________________________
11,938 6,130 9,514
General corporate expenses and
other, net (9,424) (9,786) (3,192)
Interest expense (17,327) (14,740) (10,017)
Gain on sale of Tower 12,993 - -
_____________________________
Loss before provision for income
taxes and extraordinary charge $ (1,820) $(18,396) $ (3,695)
=============================
Depreciation of property, plant
and equipment:
Chemical $ 7,992 $ 6,581 $ 5,504
Climate Control 1,602 1,544 1,552
Automotive Products 1,230 1,637 994
Industrial Products 102 190 126
Corporate assets and other 725 1,190 479
Total depreciation of property, _____________________________
plant and equipment $ 11,651 $ 11,142 $ 8,655
=============================
F-42
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
1998 1997 1996
_______________________________
(In Thousands)
Additions to property, plant
and equipment:
Chemical $ 5,233 $ 8,390 $ 19,137
Climate Control 3,868 1,127 1,551
Automotive Products 619 936 1,306
Industrial Products 130 109 37
Corporate assets and other 293 17,528 145
_____________________________
Total additions to property,
plant and equipment $ 10,143 $ 28,090 $ 22,176
=============================
Total assets:
Chemical $124,577 $137,570 $132,718
Climate Control 49,516 49,274 50,623
Automotive Products 41,967 42,718 43,212
Industrial Products 11,662 9,929 13,614
Corporate assets and other 20,925 31,162 21,393
_____________________________
Total assets $248,647 $270,653 $261,560
============================
Revenues by industry segment include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Intersegment revenues, which are accounted for at transfer prices
ranging from the cost of producing or acquiring the product or
service to normal prices to unaffiliated customers, are not
significant.
Gross profit by industry segment represents net sales less cost of
sales. Operating profit by industry segment represents revenues
less operating expenses. In computing operating profit, none of the
following items have been added or deducted: general corporate
expenses, income taxes or interest expense and, in 1998, before the
gain on the sale of The Tower.
Total assets by industry segment are those assets used in the
operations of each industry. Corporate assets are those principally
owned by the parent company or by subsidiaries not involved in the
four identified industries. All corporate assets leased by the
Company's subsidiaries have been included in the identified
segments' assets.
F-43
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Information about the Company's domestic and foreign operations for
each of the three years in the period ended December 31, 1998 is
detailed below:
Geographic Region 1998 1997 1996
_______________________________________________________________
(In Thousands)
Sales:
Domestic $292,740 $285,805 $270,675
Foreign:
Australia/New Zealand 14,184 26,482 32,917
Others 3,113 1,642 3,568
____________________________
$310,037 $313,929 $307,160
============================
Income (loss) before provision
for income taxes and extra-
ordinary charge:
Domestic $ 408 $(17,270) $ (5,174)
Foreign:
Australia/New Zealand (2,898) (772) 1,705
Others 670 (354) (226)
____________________________
$ (1,820) $(18,396) $ (3,695)
============================
Long-lived assets:
Domestic $ 94,560 $111,177 $ 94,752
Foreign:
Australia/New Zealand 4,665 6,046 6,398
Others 3 1,108 1,993
____________________________
$ 99,228 $118,331 $103,143
============================
Revenues by geographic region include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Revenues earned from sales or transfers between affiliates in
different geographic regions are shown as revenues of the
transferring region and are eliminated in consolidation.
F-44
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Revenues from unaffiliated customers include foreign export sales
as follows:
Geographic Area 1998 1997 1996
_______________________________________________________________
(In Thousands)
Mexico and Central and South
America $ 8,126 $ 8,604 $ 9,084
Canada 8,400 5,609 9,703
Middle East 5,135 6,167 6,019
Other 5,774 7,359 8,498
____________________________
$27,435 $27,739 $33,304
============================
14. Liquidity and Management's Plan
As discussed in Note 5(B), the Company and its subsidiaries (other
than CCI and subsidiaries of CCI) (the "Non-CCI Entities") are
dependent upon their separate cash flows and the restricted funds
which can be distributed by CCI to the Company under various
agreements CCI and its subsidiaries are parties to. As of December
31, 1998, the Non-CCI Entities had working capital of $13.7 million
(including $26.5 million of inventories and $13.9 million of
accounts receivable), stockholders' equity of $11.3 million
(exclusive of their equity in CCI) and long-term debt of $31.7
million ($3.5 million of which is due within one year). For the
year ended December 31, 1998, the Non-CCI Entities had net income
of $.6 million, inclusive of a gain on the sale of The Tower of
$13.0 million, and used cash in operating activities approximating
$8.1 million. As previously announced, the Company is focusing its
efforts and resources on its core businesses, Climate Control and
Chemical, and is evaluating the possible spin-off of its Automotive
Business and the most appropriate means of realizing its
investments in certain other non-core assets. These non-core assets
include the Company's Automotive and Industrial Products
Businesses.
Management is also realigning the Company's overhead to better
match its focus on the core businesses. This realignment will
include the sale of certain Non-CCI Entity assets to CCI, which
assets are materially related to the lines of businesses of the
Chemical and Climate Control Businesses and create opportunities
for CCI and its subsidiaries to expand upon their strengths. The
Company is currently negotiating with an asset-based lender, for a
$20 million credit facility for the Automotive Business. This
facility, if completed as currently structured, would provide for
a $2 million term loan and an $18 million revolving credit facility
(an increase of availability calculated as of March 31, 1999 of
$1.6 million compared to the Automotive Business' current
facility). Further, as discussed in Note 5(A), the Company's
Revolving Credit Facility provides for the elimination of its
financial covenants upon the sale, disposal or spin-off of the
F-45
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Liquidity and Management's Plan (continued)
Automotive Business so long as the remaining borrowing group
maintains a minimum aggregate availability under such facility of
at least $15 million.
Based on these plans, management believes the Non-CCI Entities will
have sufficient operating capital to meet their obligations as they
come due. If management is not successful in executing this plan
including realignment of overhead to reduce its operating costs or
realizing certain excess and non-core assets, it is reasonably
possible that this evaluation could change in the near term.
F-46
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
Three months ended
March 31 June 30 September 30 December 31
______________________________________________________
Total revenues $92,139 $87,646 $78,919 $ 65,616
======================================================
Gross profit on net
sales $15,917 $20,379 $15,628 $ 11,029
======================================================
Net income (loss) $ 9,278 $ 1,421 $(3,196) $ (9,423)
======================================================
Net income (loss)
applicable to
common stock $ 8,462 $ 618 $(3,999) $(10,230)
======================================================
Earnings (loss) per
common share:
Basic $.66 $.05 $(.33) $(.85)
======================================================
Diluted $.53 $.05 $(.33) $(.85)
======================================================
1997
Total revenues $74,864 $91,437 $77,927 $ 75,961
======================================================
Gross profit on net
sales $10,922 $19,380 $14,541 $ 11,104
======================================================
Income (loss) before
extraordinary
charge $(5,438) $ 1,467 $(4,779) $ (9,696)
======================================================
Net income (loss) $(5,438) $ 1,467 $(4,779) $(14,315)
======================================================
Net income (loss)
applicable to common
stock $(6,241) $ 648 $(5,582) $(15,119)
======================================================
Basic and diluted
earnings (loss) per
common share:
Earnings (loss)
before extra-
ordinary charge $(0.48) $0.05 $(0.43) $(0.82)
Extraordinary
charge - - - (0.36)
______________________________________________________
Net income (loss) $(0.48) $0.05 $(0.43) $(1.18)
======================================================
In the first quarter of 1998, a subsidiary of the Company closed the
sale of an office building located in Oklahoma City, known as "The
Tower." The subsidiary realized proceeds from the sale of
approximately $29 million, net of transaction costs.
In the fourth quarter of 1998, the Company's Climate Control group
recorded an adjustment to inventory which reduced gross profit by
$1.5 million and the Company's Chemical group recorded a provision
for loss of approximately $.8 million for a note receivable which
increased the Company's net loss.
In the fourth quarter of 1997, in connection with the issuance of
$105 million, 10 3/4% Senior Notes due in 2007, a subsidiary of the
Company retired the outstanding principal associated with a $50
million financing arrangement and incurred a prepayment fee. The
prepayment fee paid and loan origination costs expensed in 1997
relating to the financing arrangement aggregated approximately $4.6
million.
F-47
LSB Industries, Inc.
Schedule II -- Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Additions Deductions
__________ ____________
Balance at Charged to Write-offs/ Balance
Beginning Costs and Costs at End
Description of Year Expenses Incurred of Year
___________________________________________________________________________
Accounts receivable --
allowance for doubtful
accounts:(1)
1998 $4,007 $1,544 $1,998 $3,553
================================================
1997 $3,291 $1,544 $ 828 $4,007
================================================
1996 $2,584 $1,451 $ 744 $3,291
================================================
Inventory -- reserve for
slow-moving items:
1998 $1,531 $ 173 $ - $1,704
================================================
1997 $1,709 $ 68 $ 246 $1,531
================================================
1996 $1,318 $ 578 $ 187 $1,709
================================================
Notes receivable -- allowance
for doubtful accounts:
1998 $5,158 $1,480 $ - $6,638
================================================
1997 $4,065 $1,093 $ - $5,158
================================================
1996 $2,500 $1,565 $ - $4,065
================================================
(1) Deducted in the balance sheet from the related assets to which
the reserve applies.
Other valuation and qualifying accounts are detailed in the Company's
notes to consolidated financial statements.
F-48
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
______ ___________ __________
2.1 Stock Option Agreement dated as of May 4, 1995, between
optionee, LSB Holdings, Inc., an Oklahoma Corporation and
the shareholders of a specialty sales organization, an
option which the Company hereby incorporates hereby by
reference from Exhibit 2.1 to the Company's Form 10-K for
fiscal year ended December 31, 1995.
2.2 Stock Purchase Agreement and Stock Pledge Agreement between
Dr. Hauri AG, a Swiss Corporation, and LSB Chemical Corp.,
which the Company hereby incorporates by reference from
Exhibit 2.2 to the Company's Form 10-K for fiscal year
ended December 31, 1994.
3.1 Restated Certificate of Incorporation, the Certificate of
Designation dated February 17, 1989, and certificate of
Elimination dated April 30, 1993, which the Company hereby
incorporates by reference from Exhibit 4.1 to the Company's
Registration Statement, No. 33-61640; Certificate of
Designation for the Company's $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, which the
Company hereby incorporates by reference from Exhibit 4.6
to the Company's Registration Statement, No. 33-61640.
3.2 Bylaws, as amended, which the Company hereby incorporates
by reference from Exhibit 3(ii) to the Company's Form 10-Q
for the quarter ended June 30, 1998.
4.1 Specimen Certificate for the Company's Non-cumulative
Preferred Stock, having a par value of $100 per share,
which the Company hereby incorporates by reference from
Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended June 30, 1983.
4.2 Specimen Certificate for the Company's Series B Preferred
Stock, having a par value of $100 per share, which the
Company hereby incorporates by reference from Exhibit 4.27
to the Company's Registration Statement No. 33-9848.
4.3 Specimen Certificate for the Company's Series 2 Preferred,
which the Company hereby incorporates by reference from
Exhibit 4.5 to the Company's Registration Statement No. 33-
61640.
4.4 Specimen Certificate for the Company's Common Stock, which
the Company incorporates by reference from Exhibit 4.4 to
the Company's Registration Statement No. 33-61640.
4.5 Renewed Rights Agreement, dated January 6, 1999, between
the Company and Bank One, N.A., which the Company hereby
incorporates by reference from Exhibit No. 1 to the
Company's Form 8-A Registration Statement, dated
January 27, 1999.
4.6 Indenture, dated as of November 26, 1997, by and among
ClimaChem, Inc., the Subsidiary Guarantors and Bank One,
NA, as trustee, which the Company hereby incorporates by
reference from Exhibit 4.1 to the Company's Form 8-K,
dated November 26, 1997.
64
4.7 Form 10 3/4% Series B Senior Notes due 2007 which the
Company hereby incorporates by reference from Exhibit 4.3
to the ClimaChem Registration Statement, No. 333-44905.
4.8 Amended and Restated Loan and Security Agreement, dated
November 21, 1997, by and between BankAmerica Business
Credit, Inc., and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and
Slurry Explosive Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.9 Amended and Restated Loan and Security Agreement, dated
November 21, 1997, by and between BankAmerica Business
Credit, Inc., and the Company, which the Company hereby
incorporates by reference from Exhibit 4.11 to the
Company's Form 10-K for the fiscal year ended December 31,
1997. Substantially identical Amended and Restated Loan
and Security Agreements dated November 21, 1997, were
entered into by each of L&S Bearing Co., and Summit Machine
Tool Manufacturing Corp., with BankAmerica Business Credit,
Inc., and are hereby omitted and such will be provided upon
the Commission's request.
4.10 First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation which the Company
hereby incorporates by reference from Exhibit 10.53 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.11 First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica
Business Credit, Inc., and the Company, which the Company
hereby incorporates by reference from Exhibit 4.13 to the
Company's Form 10-K for the fiscal year ended December 31,
1997. Substantially identical First Amendments to Amended
and Restated Loan and Security Agreements, dated March 12,
1998, were entered into by each of L&S Bearing Co. and
Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
4.12 Third Amendment to Amended and Restated Loan and Security
Agreement, dated August 14, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.13 Third Amendment to Amended and Restated Loan and Security
Agreement, dated August 14, 1998, between BankAmerica
Business Credit, Inc., and the Company, which the Company
hereby incorporates by reference from Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
Substantially identical Third Amendments to Amended and
Restated Loan and Security Agreements, dated August 14,
1998, were entered into by each of L&S Bearing Co. and
Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
65
4.14 Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30,
1998.
4.15 Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated November 19, 1998, between BankAmerica
Business Credit, Inc., and the Company, which the Company
hereby incorporates by reference from Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30,
1998. Substantially identical Fourth Amendments to Amended
and Restated Loan and Security Agreements, dated November
19, 1998, were entered into by each of L&S Bearing Co. and
Summit Machine Tool Manufacturing Corp. with BankAmerica
Business Credit, Inc., and are hereby omitted and such will
be provided upon the Commission's request.
4.16 Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation.
4.17 Fifth Amendment to Amended and Restated Loan and Security Agreement,
dated April 8, 1999, between BankAmerica Business Credit, Inc., and
the Company. Substantially identical Fifth Amendments to Amended and
Restated Loan and Security Agreements, dated April 8, 1999, were
entered into by each of L&S Bearing Co. and Summit Machine Tool
Manufacturing Corp. with BankAmerica Business Credit, Inc., and are
hereby omitted and such will be provided upon the Commission's
request.
4.18 Waiver Letter, dated March 16, 1998, from BankAmerica
Business Credit, Inc. which the Company hereby incorporates
by reference from Exhibit 10.55 to the ClimaChem Form S-4
Registration Statement, No. 333-44905.
4.19 First Supplemental Indenture, dated February 8, 1999, by and
among ClimaChem, Inc., the Guarantors, and Bank One, N.A.
10.1 Form of Death Benefit Plan Agreement between the Company
and the employees covered under the plan, which the Company
hereby incorporates by reference from Exhibit 10(c)(1) to
the Company's Form 10-K for the year ended December 31,
1980.
10.2 The Company's 1981 Incentive Stock Option Plan, as amended,
and 1986 Incentive Stock Option Plan, which the Company
hereby incorporates by reference from Exhibits 10.1 and
10.2 to the Company's Registration Statement No. 33-8302.
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10.3 Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1981 Incentive
Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.10 to the Company's Form 10-K for
the fiscal year ended December 31, 1984.
10.4 Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1986 Incentive
Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.6 to the Company's Registration
Statement No. 33-9848.
10.5 The 1987 Amendments to the Company's 1981 Incentive Stock
Option Plan and 1986 Incentive Stock Option Plan, which the
Company hereby incorporates by reference from Exhibit 10.7
to the Company's Form 10-K for the fiscal year ended
December 31, 1986.
10.6 The Company's 1993 Stock Option and Incentive Plan which
the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Form 10-K for the fiscal year ended
December 31, 1993.
10.7 The Company's 1993 Non-employee Director Stock Option Plan
which the Company hereby incorporates by reference from
Exhibit 10.7 to the Company's Form 10-K for the fiscal year
ended December 31, 1993.
10.8 Union Contracts, dated August 5, 1995, between EDC and the
Oil, Chemical and Atomic Workers, and the United Steel
Workers of America, dated November 1, 1995 which the
Company hereby incorporates by reference from Exhibit 10.7
to the Company's Form 10-K for the fiscal year ended
December 31, 1995.
10.9 Lease Agreement, dated March 26, 1982, between Mac Venture,
Ltd. and Hercules Energy Mfg. Corporation, which the
Company hereby incorporates by reference from Exhibit 10.32
to the Company's Form 10-K for the fiscal year ended
December 31, 1981.
10.10 Limited Partnership Agreement dated as of May 4, 1995,
between the general partner, and LSB Holdings, Inc., an
Oklahoma Corporation, as limited partner which the Company
hereby incorporates by reference from Exhibit 10.11 to the
Company's Form 10-K for the fiscal year ended December 31,
1995.
10.11 Lease Agreement dated November 12, 1987, between Climate
Master, Inc. and West Point Company and amendments thereto,
which the Company hereby incorporates by reference from
Exhibits 10.32, 10.36, and 10.37, to the Company's Form 10-
K for fiscal year ended December 31, 1988.
10.12 Severance Agreement, dated January 17, 1989, between the
Company and Jack E. Golsen, which the Company hereby
incorporates by reference from Exhibit 10.48 to the
Company's Form 10-K for fiscal year ended December 31,
1988. The Company also entered into identical agreements
with Tony M. Shelby, David R. Goss, Barry H. Golsen, David
M. Shear, and Jim D. Jones and the Company will provide
copies thereof to the Commission upon request.
67
10.13 Third Amendment to Lease Agreement, dated as of December
31, 1987, between Mac Venture, Ltd. and Hercules Energy
Mfg. Corporation, which the Company hereby incorporates by
reference from Exhibit 10.49 to the Company's Form 10-K for
fiscal year ended December 31, 1988.
10.14 Employment Agreement and Amendment to Severance Agreement
dated January 12, 1989 between the Company and Jack E.
Golsen, dated March 21, 1996 which the Company hereby
incorporates by reference from Exhibit 10.15 to the
Company's Form 10-K for fiscal year ended December 31,
1995.
10.15 Non-Qualified Stock Option Agreement, dated June 1, 1992,
between the Company and Robert C. Brown, M.D. which the
Company hereby incorporates by reference from Exhibit 10.38
to the Company's Form 10-K for fiscal year ended December
31, 1992. The Company entered into substantially identical
agreements with Bernard G. Ille, Jerome D. Shaffer and
C.L.Thurman, and the Company will provide copies thereof to
the Commission upon request.
10.16 Loan and Security Agreement (DSN Plant) dated October 31,
1994 between DSN Corporation and The CIT Group which the
Company hereby incorporates by reference from Exhibit 10.1
to the Company's Form 10-Q for the fiscal quarter ended
September 30, 1994.
10.17 Loan and Security Agreement (Mixed Acid Plant) dated April
5, 1995 between DSN Corporation and The CIT Group, which
the Company hereby incorporates by reference from Exhibit
10.25 to the Company's Form 10-K for the fiscal year ended
December 31, 1994.
10.18 First Amendment to Loan and Security Agreement (DSN Plant),
dated June 1, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.13 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.19 First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation
and The CIT Group/Equipment Financing, Inc. which the
Company hereby incorporates by reference from Exhibit 10.15
to the ClimaChem Form S-4 Registration Statement, No. 333-
44905.
10.20 Loan and Security Agreement (Rail Tank Cars), dated
November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.16 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
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10.21 First Amendment to Loan and Security Agreement (Rail Tank
Cars), dated November 15, 1995, between DSN Corporation and
The CIT Group/Equipment Financing, Inc. which the Company
hereby incorporates by reference from Exhibit 10.17 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.22 Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1997.
10.23 Amendment to Loan and Security Agreement, dated
November 21, 1997, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.19 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.24 First Amendment to Non-Qualified Stock Option Agreement,
dated March 2, 1994, and Second Amendment to Stock Option
Agreement, dated April 3, 1995, each between the Company
and Jack E. Golsen, which the Company hereby incorporates
by reference from Exhibit 10.1 to the Company's Form 10-Q
for the fiscal quarter ended March 31, 1995.
10.25 Facility Letter, dated August 20, 1997, between Bank of New
Zealand, Australia, and Total Energy Systems Limited which
the Company hereby incorporates by reference from Exhibit
10.38 to the ClimaChem Form S-4 Registration Statement, No.
333-44905.
10.26 Variation Letter, dated February 10, 1998, between Bank of
New Zealand, Australia, and Total Energy Systems Limited
which the Company hereby incorporates by reference from
Exhibit 10.39 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.27 Debenture Charge, dated March 7, 1995, between Total Energy
Systems Limited and Bank of New Zealand which the Company
hereby incorporates by reference from Exhibit 10.40 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
T.E.S. Mining Services Pty. Ltd. and Total Energy Systems
(NZ) Limited are each parties to substantially identical
Debentures, copies of which will be provided to the
Commission upon request.
10.28 Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to
be effective January 1, 1997, between Koch Nitrogen Company
and El Dorado Chemical Company which the Company hereby
incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
69
10.29 Baytown Nitric Acid Project and Supply Agreement dated
June 27, 1997, by and among El Dorado Nitrogen Company, El
Dorado Chemical Company and Bayer Corporation which the
Company hereby incorporates by reference from Exhibit 10.2
to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF
#5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.30 First Amendment to Baytown Nitric Acid Project and Supply
Agreement, dated February 1, 1999, between El Dorado
Nitrogen Company, El Dorado Chemical Company, and Bayer
Corporation. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION
FOR PURPOSES OF SUCH REQUEST.
10.31 Service Agreement, dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the
Company hereby incorporates by reference from Exhibit 10.3
to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF
#5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.32 Ground Lease dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.4 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.33 Participation Agreement, dated as of June 27, 1997, among
El Dorado Nitrogen Company, Boatmen's Trust Company of
Texas as Owner Trustee, Security Pacific Leasing
corporation, as Owner Participant and a Construction
Lender, Wilmington Trust Company, Bayerische Landesbank,
New York Branch, as a Construction Lender and the Note
Purchaser, and Bank of America National Trust and Savings
Association, as Construction Loan Agent which the Company
hereby incorporates by reference from Exhibit 10.5 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.34 Lease Agreement, dated as of June 27, 1997, between
Boatmen's Trust Company of Texas as Owner Trustee and El
Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.6 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997.
70
10.35 Security Agreement and Collateral Assignment of
Construction Documents, dated as of June 27, 1997, made by
El Dorado Nitrogen Company which the Company hereby
incorporates by reference from Exhibit 10.7 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1997.
10.36 Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado
Nitrogen Company and consented to by Bayer Corporation
which the Company hereby incorporates by reference from
Exhibit 10.8 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997.
10.37 Amendment to Loan and Security Agreement, dated March 16,
1998, between The CIT Group/Equipment Financing, Inc., and
DSN Corporation which the Company hereby incorporates by
reference from Exhibit 10.54 to the ClimaChem Form S-4
Registration Statement, No. 333-44905.
10.38 Fifth Amendment to Lease Agreement, dated as of
December 31, 1998, between Mac Venture, Ltd. and Hercules
Energy Mfg. Corporation.
10.39 Sales Contract, dated December 7, 1998, between Solutia,
Inc. and El Dorado Chemical Company. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT
OF A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN FILED
SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND
EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.40 Agreement for Purchase and Sale of Anhydrous Ammonia, dated
January 1, 1999, between El Dorado Chemical Company and
Farmland Industries, Inc. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION
ACT. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY
WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE
COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.41 Agreement, dated March 23, 1999, among El Dorado Chemical
Company, El Dorado Nitrogen Company, Bayer Corporation, ICF
Kaiser Engineers, Inc., ICF Kaiser International, Inc., and
Acstar Insurance Company.
10.42 Union Contract, dated August 1, 1998, between El Dorado
Chemical Company and the International Association of
Machinists and Aerospace Workers.
71
10.43 Non-Qualified Stock Option Agreement, dated April 22, 1998,
between the Company and Robert C. Brown, M.D. The Company
entered into substantially identical agreements with
Bernard G. Ille, Jerome D. Shaffer, Raymond B. Ackerman,
Horace G. Rhodes, Gerald J. Gagner, and Donald W. Munson.
The Company will provide copies of these agreements to the
Commission upon request.
10.44 The Company's 1998 Stock Option and Incentive Plan.
10.45 Letter Agreement, dated March 12, 1999, between Kestrel
Aircraft Company and LSB Industries, Inc., Prime Financial
Corporation, Herman Meinders, Carlan K. Yates, Larry H.
Lemon, Co-Trustee Larry H. Lemon Living Trust.
10.46 Covenant Waiver Letter, dated April 13, 1999, between The
CIT Group and DSN Corporation.
21.1. Subsidiaries of the Company
23.1. Consent of Independent Auditors
27.1. Financial Data Schedule