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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2000
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
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(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: None
Securities Registered Pursuant to Section 12(g) of the Act: Preferred Share
Purchase Rights and
Name of Each Exchange
Title of Each Class On Which Registered
---------------------------- -------------------------------
Common Stock, Par Value $.10 Over-the-Counter Bulletin Board
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 Over-the-Counter Bulletin Board
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 March 31, 2001, the aggregate market value of the 7,486,938 shares
of voting stock of the Registrant held by non-affiliates of the Company equaled
approximately $28,547,695 based on the closing sales price for the Company's
common stock as reported for that date on the Over-the-Counter Bulletin Board.
That amount does not include the 1,462 shares of voting Convertible
Non-Cumulative Preferred Stock (the "Non-Cumulative Preferred Stock") held by
non-affiliates of the Company. An active trading market does not exist for the
shares of Non-Cumulative Preferred Stock.
As of March 31, 2001, the Registrant had 11,894,619 shares of common
stock outstanding (excluding 3,269,290 shares of common stock held as treasury
stock).
The information required by Part III of this Form 10-K is incorporated
by reference from the registrant's proxy statement to be filed pursuant to
regulation 14A which involves the election of directors no later than 120 days
after the end of the fiscal year covered by this Form 10-K.
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FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
PART I Page
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Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 2
Chemical Business 2
Climate Control Business 5
Industrial Products Business 8
Employees 9
Research and Development 9
Environmental Matters 9
Item 2. Properties
Chemical Business 11
Climate Control Business 12
Industrial Products Business 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 4A. Executive Officers of the Company 14
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 15
Stockholders 15
Dividends 15
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 21
Results of Operations 26
Liquidity and Capital Resources 31
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Page
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General 38
Interest Rate Risk 38
Raw Material Price Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
Special Note Regarding Forward-Looking Statements 41
PART III 43
The information required by Part III of this Form 10-K is
incorporated by reference from the registrant's proxy statement
to be filed pursuant to regulation 14A which involves the
election of directors no later than 120 days after the end of
the fiscal year covered by this Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 44
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PART I
ITEM 1. BUSINESS
GENERAL
LSB Industries, Inc. (the "Company") was formed in 1968 as an Oklahoma
corporation, and in 1977 became a Delaware corporation. The Company is a
diversified holding company which is engaged, through its subsidiaries, in (i)
the manufacture and sale of chemical products for the explosives, agricultural
and industrial acids markets (the "Chemical Business"), (ii) the manufacture and
sale of a broad range of hydronic fan coils and water source heat pumps as well
as other products used in commercial and residential air conditioning systems
(the "Climate Control Business"), and (iii) the purchase and sale of machine
tools (the "Industrial Products Business").
The Company is focusing on its core businesses relating to its Chemical
and Climate Control Businesses. In addition, the Company is seeking to reduce
its outstanding indebtedness and improve its liquidity and operating results
through liquidation and/or sale of selected assets.
In conjunction with the Company's strategy, subsidiaries of the Company
completed the acquisition of two chemical plants during the fourth quarter of
2000. One plant is located in Cherokee, Alabama ("Cherokee Facility"), and the
other is located in Crystal City, Missouri ("Crystal City Facility"). The
Cherokee Facility produces anhydrous ammonia, nitric acid, aqua ammonia,
agricultural grade ammonium nitrate fertilizer, urea ammonium nitrate fertilizer
and ammonium nitrate solution as a blasting product ingredient. The Crystal City
Facility is currently held for sale and will not be operated by the Company or
any of its subsidiaries. See discussion in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
For the year ended December 31, 2000, subsidiaries of the Company
repurchased approximately $29.7 million of Senior Unsecured Notes and recognized
a gain of approximately $20.1 million. The purchases will serve to reduce
interest expense by approximately $2.0 million annually. In addition, during
2000, a subsidiary of the Company purchased 278,700 shares of its $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2 ("$3.25 Preferred")
for approximately $1.6 million. Each share of $3.25 Preferred has a stated value
of $50.00 per share.
As part of the Company's plan to liquidate selected assets, the Company
sold the Automotive Products Business pursuant to a definitive plan approved by
the Board of Directors during 2000 for approximately $8.7 million in notes
secured by certain assets of the buyer, and received proceeds equal to its
advances to and investments in an option to acquire an energy conservation
company. Due to the terms of the notes received by the Company in connection
with the sale of its Automotive Products Business and the possibility of
non-collectibility of those notes, the Company has fully reserved the total
amount of these notes and has placed no value for these notes on its financial
statements. Further, the Company is required to pay those obligations that it
guaranteed prior to the sale relating to certain assets of the Automotive
Products Business. See discussion in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Discontinued
Operations".
As of December 31, 2000, the Company and certain of its subsidiaries,
including ClimaChem, Inc. ("ClimaChem") were parties to a Revolving Credit
Facility evidenced by two separate loan agreements ("Agreements") with a lender.
The Agreements have been amended from time to time since inception to
accommodate changes in business conditions and financial results. The term of
the Agreements, as amended, was through December 31, 2000, and was automatically
being renewed thereafter for successive terms of one month each.
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In April 2001, the Company replaced its existing Revolving Credit
Facility with a new lender. See Note 8 of Notes to Consolidated Financial
Statements.
SEGMENT INFORMATION AND FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Schedules of the amounts of sales, operating profit and loss, and
identifiable assets attributable to each of the Company's lines of business and
of the amount of export sales of the Company in the aggregate and by major
geographic area for each of the Company's last three fiscal years appear in Note
17 of the Notes to Consolidated Financial Statements included elsewhere in this
report.
A discussion of risks associated with the importing of products from
foreign countries appears below in the discussion of the Industrial Products
Business.
All discussions below are that of the Businesses continuing and
accordingly exclude the discontinued operations of the Automotive Products
Business and the Australian subsidiary's operations sold in 2000 and 1999,
respectively. See discussion above and Notes 4 and 5 of the Notes to the
Consolidated Financial Statements.
CHEMICAL BUSINESS
GENERAL
The Company's Chemical Business manufactures three principal product
lines that are derived from anhydrous ammonia: (1) fertilizer grade ammonium
nitrate and urea ammonia nitrate ("UAN") for the agricultural industry, (2)
explosive grade ammonium nitrate for the mining industry and (3) concentrated,
blended and mixed nitric acid and sulfuric acid for industrial applications. The
Chemical Business' principal manufacturing facilities are located in El Dorado,
Arkansas ("El Dorado Facility") and Cherokee, Alabama, ("Cherokee Facility").
The other manufacturing operations are located in Hallowell, Kansas, Wilmington,
North Carolina, and Baytown, Texas. The following discussion is that of the
Businesses continuing and accordingly exclude the business disposed of in 1999.
For each of the years 2000, 1999 and 1998, approximately 27%, 26% and
30% of the respective sales of the Chemical Business consisted of sales of
fertilizer and related chemical products for agricultural purposes, which
represented approximately 14%, 13% and 15% of the Company's consolidated sales
for each respective year. For each of the years 2000, 1999 and 1998,
approximately 35%, 40% and 46% of the respective sales of the Chemical Business
consisted of sales of ammonium nitrate and other chemical-based blasting
products for the mining industry, which represented approximately 18%, 20% and
22% of the Company's 2000, 1999 and 1998 consolidated sales, respectively. For
each of the years 2000, 1999 and 1998, approximately 38%, 34% and 24% of the
respective sales of the Chemical Business consisted of the industrial acids for
sale in the food, paper, chemical and electronics industries, which represented
approximately 19%, 17% and 12% of the Company's 2000, 1999 and 1998 consolidated
sales, respectively. Sales of the Chemical Business accounted for approximately
51%, 50% and 49% of the Company's 2000, 1999 and 1998 consolidated sales,
respectively.
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AGRICULTURAL PRODUCTS
The Chemical Business produces ammonium nitrate, a nitrogen-based
fertilizer, at the El Dorado Facility and the Cherokee Facility and in addition
produces UAN at the Cherokee Facility. Ammonium nitrate and UAN are two of
several forms of nitrogen-based fertilizers which include anhydrous ammonia.
Although, to some extent, the various forms of nitrogen-based fertilizers are
interchangeable, each has its own characteristics which produce agronomic
preferences among end users. Farmers decide which type of nitrogen-based
fertilizer to apply based on the crop planted, soil and weather conditions,
regional farming practices and relative nitrogen fertilizer prices. These
agricultural products are sold to farmers, fertilizer dealers and distributors
located primarily in the South Central and Southeastern United States.
The Chemical Business' markets are in close proximity to its El Dorado,
Arkansas and Cherokee, Alabama facilities and include a high concentration of
pasture land and row crops which favor the Company's products. The Company has
developed its market position in these areas by emphasizing high quality
products, customer service and technical advice. Using a proprietary prilling
process, the El Dorado Facility 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. See "Special Note Regarding Forward - Looking
Statements". In addition, the El Dorado Facility has developed long-term
relationships with end users through its network of 20 wholesale and retail
distribution centers and the Cherokee Facility sells directly to agricultural
cooperative customers.
EXPLOSIVES
The Chemical Business manufactures low density ammonium nitrate-based
explosives including bulk explosives used in surface mining. In addition, the
Company manufactures and sells a branded line of packaged explosives used in
construction, quarrying and other applications, particularly where controlled
explosive charges are required. The Company's bulk explosives are marketed
primarily through eight distribution centers, five of which are located in close
proximity to the customers' surface mines in the coal producing states of
Kentucky, Missouri, Tennessee and West Virginia. The Company emphasizes
value-added customer services and specialized product applications for its bulk
explosives. Most of the sales of bulk explosives are to customers who work
closely with the Company's technical representatives in meeting their specific
product needs. In addition, the Company sells bulk explosives to independent
wholesalers and to other explosives companies. Packaged explosives are used for
applications requiring controlled explosive charges and typically command a
premium price and produce higher margins. The Company's Slurry packaged
explosive products are sold nationally and internationally to other explosive
companies and end-users.
The Chemical Business has a letter of intent with a third party to sell
its explosive distribution outlets and enter into a long-term supply agreement,
which the Company currently expects to close in May 2001. Under the terms of the
letter of intent, the Chemical Business would sell its wholesale and retail
explosive distribution business (excluding accounts receivable) for $3.5 million
plus any additional amount for inventories and enter into an ammonium nitrate
tolling agreement with the third party. The buyer has prepaid to the Chemical
Business $2 million of the $3.5 million, which amount has been received by the
Chemical Business. If the transaction does not close by May 31, 2001, the $2
million prepayment will be applied towards the purchase of ammonium nitrate
products by the third party from the Chemical Business. However if the
transaction has not closed by May 31, 2001 and the third party reasonably,
determines that the Chemical Business is unable to make deliveries of the
ammonium nitrate products beginning June 2001 and thereafter, the Chemical
Business shall return the prepayment. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operation" for a discussion of
the expected impact upon the operations and financial position of the Chemical
Business as a result of these anticipated transactions. See "Special Note
Regarding Forward-Looking Statement."
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INDUSTRIAL ACIDS
The Chemical Business manufactures and sells industrial acids, primarily
to the food, paper, chemical and electronics industries. The Company is a major
supplier to third parties of concentrated nitric acid, which is a special grade
of nitric acid used in the manufacture of plastics, pharmaceuticals, herbicides,
explosives, and other chemical products. In addition, the Company produces and
sells regular, blended and mixed nitric acid and a variety of grades of sulfuric
acid. The Company competes on the basis of price and service, including on-time
reliability and distribution capabilities. The Company provides inventory
management as part of the value-added services it offers to its customers.
Subsidiaries within the Company's Chemical Business entered into a
series of agreements with Bayer Corporation ("Bayer")(collectively, the "Bayer
Agreement"). Under the Bayer Agreement, El Dorado Nitrogen Company ("EDNC") is
operating a nitric acid plant (the "EDNC Baytown Plant") at Bayer's Baytown,
Texas chemical facility. Under the terms of the Bayer Agreement, Bayer will
purchase from EDNC all of its requirements for nitric acid to be used by Bayer
at its Baytown, Texas facility for an initial ten-year term ending May 2009.
EDNC will purchase from Bayer its requirements for anhydrous ammonia for the
manufacture of nitric acid as well as utilities and other services. Upon
expiration of the initial ten-year term, the Bayer Agreement may be renewed for
up to six renewal terms of five years each; however, prior to each renewal
period, either party to the Bayer Agreement may opt against renewal.
EDNC and Bayer may terminate the Bayer Agreement upon the occurrence of
certain events of default if not cured. Bayer retains the right of first refusal
with respect to any bona fide third-party offer to purchase any voting stock of
EDNC or any portion of the EDNC Baytown Plant.
In October 2000, the EDNC Baytown Plant experienced a mechanical failure
resulting in an interruption of production. To supply nitric acid to Bayer
during the interruption, EDNC purchased nitric acid produced by a subsidiary of
the Company, El Dorado Chemical Company, as well as from third party producers.
The repairs to the nitric plant were completed in January 2001. The Company
believes that the losses arising from this mechanical failure and interruption
of production will be fully covered by insurance and payments by Bayer. See
"Special Note Regarding Forward-Looking Statements".
MAJOR CUSTOMER
Revenues from sales to one customer, Bayer, of the Company's Chemical
Business segment represented approximately $38.4 million (13.0% of consolidated
revenues) and $17.2 million (6.6% of consolidated revenues) for the years ended
2000 and 1999, respectively (none in 1998). As discussed above, under the terms
of the Bayer Agreement, Bayer will purchase from a subsidiary of the Company all
of its requirements for nitric acid to be used at its Baytown, Texas facility
for an initial ten-year term ending May 2009.
RAW MATERIALS
Anhydrous ammonia represents the primary component in the production of
most of the products of the Chemical Business. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Chemical Business purchased approximately 180,000 tons of anhydrous ammonia in
2000 (151,000 in 1999 and 220,000 in 1998). As a result of the acquisition of
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the Cherokee Facility, the Chemical Business became a purchaser of natural gas.
At full production the Cherokee Facility will purchase approximately 500,000
MMBtu of natural gas per month.
During 2000, the Chemical Business purchased its raw material
requirements of anhydrous ammonia from one supplier. As of December 31, 2000,
the Chemical Business had commitments to purchase 72,000 tons of anhydrous
ammonia under a take or pay contract at an average minimum volume of 3,000 tons
per month during 2001 and 2002. In addition, under the contract the Chemical
Business is committed to purchase 100% of its anhydrous ammonia requirements in
2001 and 50% of its remaining quantities in excess of the take or pay volumes of
its anhydrous ammonia requirements through 2002 from this third party at prices
which approximate market prices. The Company believes that it could obtain
anhydrous ammonia from other sources in the event of a termination of the
above-referenced contract. See "Special Note Regarding Forward-Looking
Statements," and Note 13 of Notes to Consolidated Financial Statements.
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 March through June 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 and UAN prior
to the beginning of each planting season. Sales to the agricultural markets
depend upon weather conditions and other circumstances beyond the control of the
Company. The agricultural markets serviced by the Chemical Business have
sustained a drought resulting in a lack of demand for the Chemical Business'
fertilizer products during the 1998, 1999 and 2000 fall and spring planting
seasons and have had a material adverse effect on the Company.
REGULATORY MATTERS
Each of the Chemical Business' domestic blasting product distribution
centers are licensed by the Bureau of Alcohol, Tobacco and Firearms in order to
manufacture and distribute blasting products. The Chemical Business is also
subject to extensive federal, state and local environmental laws, rules and
regulations. See "Environmental Matters" and "Legal Proceedings".
COMPETITION
The Chemical Business competes with other chemical companies in its
markets, many of whom have greater financial and other resources than the
Company. In 2000, there were plant closures due to the high cost of natural gas
and other economic factors in the nitrogen business. The Company believes that
competition within the markets served by the Chemical Business is primarily
based upon price, service, warranty and product performance.
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
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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 45%, 46% and 45% of the Company's
2000, 1999 and 1998 consolidated sales, respectively.
HYDRONIC FAN COILS
The Climate Control Business is a leading provider of hydronic fan coils
targeted to the commercial and institutional markets in the United States
Hydronic fan coils use heated or chilled water, provided by a centralized
chiller or boiler through a water pipe system, to condition the air and allow
individual room control. Hydronic fan coil systems are quieter and have longer
lives and lower maintenance costs than comparable systems used where individual
room control is required. The breadth of the product line coupled with
customization capability provided by a flexible manufacturing process are
important components of the Company's strategy for competing in the commercial
and institutional renovation and replacement markets. During 2000, the Company
completed a facility to manufacture large air handlers. See "Special Note
Regarding Forward-Looking Statements".
WATER SOURCE HEAT PUMPS
The Company is a leading United States provider of water source heat
pumps to the commercial construction and renovation markets. These are highly
efficient heating and cooling units which enable individual room climate control
through the transfer of heat through a water pipe system which is connected to a
centralized cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to large sized
buildings with many small, individually controlled spaces. The Company believes
the market for commercial water source heat pumps will continue to grow due to
the relative efficiency and long life of such systems as compared to other air
conditioning and heating systems, as well as to the emergence of the replacement
market for those systems. See "Special Note Regarding Forward-Looking
Statements".
GEOTHERMAL PRODUCTS
The Climate Control Business is a pioneer in the use of geothermal water
source heat pumps in residential and commercial applications. Geothermal
systems, which circulate water or antifreeze through an underground heat
exchanger, are among the most energy efficient systems available. The Company
believes the longer life, lower cost to operate, and relatively short payback
periods of geothermal systems, as compared with air-to-air systems, will
continue to increase demand for its geothermal products. The Company is
specifically targeting new residential construction of homes exceeding $200,000
in value. See "Special Note Regarding Forward-Looking Statements."
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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 United States market for
hydronic fan coils and water source heat pumps is approximately $310 million.
Demand in these markets is generally driven by levels of repair, replacement,
and new construction activity. The United States market for fan coils and water
source heat pump products has grown on average 8% per year over the last 5
years. This growth is primarily a result of new construction, the aging of the
installed base of units, the introduction of new energy efficient systems,
upgrades to central air conditioning and increased governmental regulations
restricting the use of ozone depleting refrigerants in HVAC systems.
PRODUCTION AND BACKLOG
Most of the Climate Control Business production of the above-described
products occurs on a specific order basis. The Company manufactures the units in
many sizes and configurations, as required by the purchaser, to fit the space
and capacity requirements of hotels, motels, schools, hospitals, apartment
buildings, office buildings and other commercial or residential structures. As
of December 31, 2000, the backlog of confirmed orders for the Climate Control
Business was approximately $26.7 million as compared to approximately $22.1
million at December 31, 1999. See discussion in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations". 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 the date of this report, the
Climate Control Business had released substantially all of the December 31, 2000
backlog to production. All of the December 31, 2000 backlog is expected to be
filled by December 31, 2001. See "Special Note Regarding Forward-Looking
Statements."
MARKETING AND DISTRIBUTION
DISTRIBUTION
The Climate Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors. The Company's
sales to mechanical contractors primarily occur through independent
manufacturers representatives, who also represent complementary product lines
not manufactured by the Company. Original equipment manufacturers generally
consist of other air conditioning and heating equipment manufacturers who resell
under their own brand name the products purchased from the Climate Control
Business in competition with the Company. Sales to original equipment
manufacturers accounted for approximately 22% of the sales of the Climate
Control Business in 2000 and approximately 10% of the Company's 2000
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. This Business also depends primarily on the
residential construction industry for both new and replacement markets relating
to their geothermal products.
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RAW MATERIALS
Numerous domestic and foreign sources exist for the materials used by
the Climate Control Business, which materials include aluminum, copper, steel,
electric motors and compressors. The Company does not expect to have any
difficulties in obtaining any necessary materials for the Climate Control
Business. See "Special Note Regarding Forward-Looking Statements."
COMPETITION
The Climate Control Business competes with approximately fourteen
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 VENTURE AND OPTION TO PURCHASE
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 has loaned to the parent of the French
manufacturer $3.7 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, management of the Company's
subsidiary which holds the option has not decided whether it will exercise the
option. For 2000, 1999 and 1998, the French manufacturer had revenues of $16.7,
$18.9 and $17.2 million, respectively, and reported net income of approximately
$200,000, $600,000 and $100,000, respectively. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
In 1995, a subsidiary of the Company invested approximately $2.8 million
to purchase a fifty percent (50%) equity interest in an energy conservation
joint venture (the "Project"). The Project was awarded a contract to retrofit
residential housing units at a US Army base, which it completed during 1996. For
the installation and management of energy-efficient equipment (including air
conditioning and heating equipment), the Project will receive a percent of all
energy and maintenance savings during the twenty (20) year contract term. The
Company's equity interest in the results of the operations of the Project were
not material for the years ended December, 2000, 1999 and 1998.
INDUSTRIAL PRODUCTS BUSINESS
GENERAL
The Industrial Products Business purchases and markets a proprietary
line of machine tools. The current line of machine tools distributed by the
Industrial Products Business includes milling, drilling, turning and fabricating
machines. The Industrial Products Business purchases most of the machine tools
from foreign companies, which manufacture the machine tools to the Company's
specifications. 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
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for approximately 4%, 4% and 6% of the Company's consolidated sales in each of
the years 2000, 1999 and 1998 respectively.
DISTRIBUTION AND MARKET
The Industrial Products Business distributes its machine tools through
independent machine tool dealers 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, 2000, the Company employed 1,506 persons. As of that
date, (i) the Chemical Business employed 566 persons, with 91 represented by
unions under agreements expiring in August, 2001 and February, 2002, (ii) the
Climate Control Business employed 862 persons, none of whom are represented by a
union, and (iii) the Industrial Products Business employed 36 persons, none of
whom are represented by a union.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $391,000 in 2000, $713,000 in 1999,
and $377,000 in 1998 on research and development relating to the development of
new products or the improvement of existing products. All expenditures for
research and development related to the development of new products and
improvements are expensed by the Company.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to numerous Environmental
Laws and to other federal, state and local laws regarding health and safety
matters ("Health Laws"). In particular, the manufacture and distribution of
chemical products are activities which entail environmental risks and impose
obligations under the Environmental Laws and the Health Laws, many of which
provide for substantial fines and criminal sanctions for violations. There can
be no assurance that material costs or liabilities will not be incurred by the
Company in complying with such laws or in paying fines or penalties for
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violation of such laws. The Environmental Laws and Health Laws and enforcement
policies thereunder relating to the Chemical Business have in the past resulted,
and could in the future result, in penalties, cleanup costs, or other
liabilities relating to the handling, manufacture, use, emission, discharge or
disposal of pollutants or other substances at or from the Company's facilities
or the use or disposal of certain of its chemical products. Significant
expenditures have been incurred by the Chemical Business at the El Dorado
Facility in order to comply with the Environmental Laws and Health Laws. The
Chemical Business will be required to make additional significant site or
operational modifications at the El Dorado Facility, involving substantial
expenditures. See "Special Note Regarding Forward-Looking Statements";
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Chemical Business" and "Legal Proceedings."
The Chemical Business entered into a consent administrative order with
the Arkansas Department of Environmental Quality ("ADEQ") in August, 1998 (the
"Wastewater Consent Order"). The Wastewater Consent Order recognized the
presence of nitrate contamination in the groundwater and required the Chemical
Business to undertake on-site bioremediation. The bioremediation was not
successful in achieving denitrification. The Chemical Business is preparing a
report to the ADEQ regarding field testing of the shallow groundwater. Upon
completion of the waste minimization activities referenced below, a final remedy
for groundwater contamination will be selected, based on an evaluation of risk.
There are no known users of groundwater in the area, and preliminary risk
assessments have not identified any risk that would require additional
remediation. The Wastewater Consent Order included a $183,700 penalty
assessment, of which $125,000 will be satisfied over five years at expenditures
of $25,000 per year for waste minimization activities. The Chemical Business has
documented in excess of $25,000 on expenditures for each of the years 1998, 1999
and 2000.
The Wastewater Consent Order also required installation of an interim
groundwater treatment system (which is now operating) and certain improvements
in the wastewater collection and treatment system (discussed below). Twelve
months after all improvements are in place, the risk will be reevaluated, and a
final decision will be made on what additional groundwater remediation, if any,
is required. There can be no assurance that the risk assessment will be approved
by the ADEQ, or that further work will not be required.
The Wastewater Consent Order also requires the Chemical Business to
undertake a facility wide wastewater evaluation and pollutant source control
program and facility wide wastewater minimization program. The program requires
that the subsidiary complete rainwater drain off studies including engineering
design plans for additional water treatment components to be submitted to the
State of Arkansas, by the revised date of October 1, 2001. The construction of
the additional water treatment components is required to be completed by the
revised date of October 1, 2002 and the El Dorado plant has been mandated to be
in compliance with the final effluent limits on or before the revised date of
April 2003. The aforementioned compliance deadlines, however, are not scheduled
to commence until after the State of Arkansas has issued a renewal permit
establishing new, more restrictive effluent limits. Alternative methods for
meeting these requirements are continuing to be examined by the Chemical
Business. The Company believes, although there can be no assurance, that any
such new effluent limits would not have a material adverse effect on the
Company. See "Special Note Regarding Forward-Looking Statements." The Wastewater
Consent Order provided that the State of Arkansas will make every effort to
issue the renewal permit by December 1, 1999;
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however, the State of Arkansas has delayed issuance of the permit. Because the
Wastewater Consent Order provides that the compliance deadlines may be extended
for circumstances beyond the reasonable control of the Company, and because the
State of Arkansas has not yet issued the renewal permit, the Company does not
believe that failure to meet the aforementioned compliance deadlines will
present a material adverse impact. The State of Arkansas has been advised that
the Company is seeking financing from Arkansas authorities for the projects
required to comply with the Wastewater Consent Order and the Company has
requested that the permit be further delayed until financing arrangements can be
made, which requests have been met to date. The Chemical Business and the ADEQ
entered into certain agreements, including an administrative consent order (the
"Air Consent Order") in 1995 to resolve certain of the Chemical Business' past
violations. The Air Consent Order was amended in 1996, 1997 and 1998. The Air
Consent Order was unilaterally withdrawn by the ADEQ as of July 31, 2000. In
addition, prior to 1998, the El Dorado Facility was identified as one of 33
significant violators of the federal Clean Air Act in a review of Arkansas air
programs by the EPA Office of Inspector General. The Company is unable to
predict the impact, if any, of such designation. See "Special Note Regarding
Forward-Looking Statements." Effective May 1, 2000, the Chemical Business is
operating under a new air permit. This air permit supercedes all air-related
consent administrative orders other than the Air Consent Order discussed above.
During 2000, the Chemical Business expended approximately $.1 million in
connection with compliance with federal, state and local Environmental Laws at
its El Dorado Facility, including, but not limited to, compliance with the
Wastewater Consent Order, as amended. The Company anticipates that the Chemical
Business may spend up to $2 to $3 million for future capital expenditures
relating to environmental control facilities at its El Dorado Facility to comply
with Environmental Laws, including, but not limited to, the Wastewater Consent
Order, as amended, with $.3 million being spent in 2001 and the balance being
spent in 2002. 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 for capital expenditures
related to compliance with Environmental Laws is dependent upon a variety of
factors, including, but not limited to, obtaining financing through Arkansas
authorities, the occurrence of additional releases or threatened releases into
the environment, or changes in the Environmental Laws (or in the enforcement or
interpretation by any federal or state agency or court of competent
jurisdiction). See "Special Note Regarding Forward-Looking Statements."
Additional orders from the ADEQ imposing penalties, or requiring the Chemical
Business to spend more for environmental improvements or curtail production
activities at the El Dorado Facility, could have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
CHEMICAL BUSINESS
The Chemical Business primarily conducts manufacturing operations (i) on
150 acres of a 1,400 acre tract of land located in El Dorado, Arkansas (the "El
Dorado Facility"), (ii) on 120 acres of a 1,300 acre tract of land located in
Cherokee, Alabama ("Cherokee Facility"), (iii) in a facility of approximately
60,000 square feet located on ten acres of land in Hallowell, Kansas ("Kansas
Facility"), (iv) in a mixed acid plant in Wilmington, North Carolina
("Wilmington Plant"), and (v) in a nitric acid plant in Baytown, Texas ("Baytown
Plant"). The Chemical Business owns all of its manufacturing
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facilities except the Baytown Plant. The Wilmington Plant and the DSN Plant
(located at the El Dorado Facility) are subject to mortgages. The Baytown Plant
is being leased pursuant to a leveraged lease from an unrelated third party. As
discussed in Item 1, "Business-General", the Company acquired the Cherokee
Facility during the fourth quarter of 2000.
As of December 31, 2000, the El Dorado Facility was utilized at
approximately 77% of capacity, based on continuous operation.
The Chemical Business operates its Kansas Facility from buildings
located on an approximate ten acre site in southeastern Kansas, and a research
and testing facility comprising approximately ten acres, including buildings and
equipment thereon, located in southeastern Kansas, which it owns.
In addition, the Chemical Business distributes its products through 28
agricultural and explosive distribution centers. The Chemical Business currently
operates 20 agricultural distribution centers, with 16 of the centers located in
Texas (10 of which the Company owns and 6 of which it leases); 2 centers located
in Missouri including the Crystal City Facility which was acquired during the
fourth quarter of 2000 as discussed in Item 1, "Business - General", (1 of which
the Company owns and 1 of which it leases); and 2 centers located in Tennessee
(owned). The Chemical Business currently operates 8 domestic explosives
distribution centers located in Hallowell, Kansas (owned); Bonne Terre, Missouri
(owned); Poca, West Virginia (leased); Owensboro, Martin and Combs, Kentucky
(leased); Pryor, Oklahoma (leased) and Dunlap, Tennessee (leased). The Chemical
Business has entered into a letter of intent with a third party to sell its
explosives distribution outlets and enter into a long-term supply agreement,
which the Company currently expects to close in May 2001. Under the terms of the
letter of intent, the Chemical Business would sell its wholesale and retail
explosive distribution business (excluding accounts receivable) for $3.5 million
plus any additional amount for inventories and enter into an ammonium nitrate
tolling agreement with the third party. The buyer has prepaid to the Chemical
Business $2 million of the $3.5 million, which amount has been received by the
Chemical Business. If the transaction does not close by May 31, 2001, the $2
million prepayment will be applied towards the purchase of ammonium nitrate
products by the third party from the Chemical Business. However if the
transaction has not closed by May 31, 2001 and the third party reasonably,
determines that the Chemical Business is unable to make deliveries of the
ammonium nitrate products beginning June 2001 and thereafter, the Chemical
Business shall return the prepayment. See "Business -- Chemical Business --
Explosives" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the expected impact upon the
operations and financial position of the Chemical Business as a result of these
anticipated transactions. See "Special Note Regarding Forward-Looking
Statements".
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, 2000, the Climate Control Business was using the
productive capacity of the above referenced facility to the extent of
approximately 78%, based on three, eight-hour shifts per day and a five-day week
in one department and one and one half eight-hour shifts per day and a five-day
week in all other departments.
The Climate Control Business manufactures most of its heat pump products
in a 270,000 square foot facility in Oklahoma City, Oklahoma, which it leases
from an unrelated party. The lease term began March 1, 1988 and expires February
28, 2003, with options to renew for additional five-year periods. The lease
currently provides for the payment of rent in the amount of $52,389 per month.
The Company also has an option to acquire the facility at any time in return for
the assumption of the then outstanding balance of the lessor's mortgage. As of
December 31, 2000, the productive capacity of this manufacturing operation was
being utilized to the extent of approximately 81%, based on two nine-hour shifts
per day and a five-day week in one department and one eight-hour shift per day
and a five-day week in all other departments.
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All of the properties utilized by the Climate Control Business are
considered by the Company management to be suitable and adequate to meet the
current needs of that Business.
INDUSTRIAL PRODUCTS BUSINESS
The Company owns several buildings, some of which are subject to
mortgages, totaling approximately 360,000 square feet located in Oklahoma City
and Tulsa, Oklahoma, which the Industrial Products Business uses for showrooms,
offices, warehouse and manufacturing facilities. The Company also leases
facilities in Middletown, New York for distribution operations.
The Industrial Products Business also rents on a month-to-month basis a
facility from an entity owned by the immediate family of the Company's
President, which facility occupies approximately 30,000 square feet of warehouse
and shop space in Oklahoma City, Oklahoma. The Industrial Products Business also
leases an office in Europe to coordinate its European activities.
All of the properties utilized by the Industrial Products Business are
considered by Company management to be suitable and adequate to meet the needs
of the Industrial Products Business.
ITEM 3. LEGAL PROCEEDINGS
In 1987, the U.S. Environmental Protection Agency ("EPA") notified one
of the Company's subsidiaries, along with numerous other companies, of potential
responsibility for clean up of a waste disposal site in Oklahoma. In 1990, the
EPA added the site to the National Priorities List. Following the remedial
investigation and feasibility study, in 1992 the Regional Administrator of the
EPA signed the Record of Decision ("ROD") for the site. The ROD detailed EPA's
selected remedial action for the site and estimated the cost of the remedy at
$3.6 million. In 1992, the Company made settlement proposals which would have
entailed a collective payment by the subsidiaries of $47,000. The site owner
rejected this offer and proposed a counteroffer of $245,000 plus a reopener for
costs over $12.5 million. The EPA rejected the Company's offer, allocating 60%
of the cleanup costs to the potentially responsible parties and 40% to the site
operator. The EPA estimated the total cleanup costs at $10.1 million as of
February 1993. The site owner rejected all settlements with the EPA, after which
the EPA issued an order to the site owner to conduct the remedial
design/remedial action approved for the site. In August 1997, the site owner
issued an "invitation to settle" to various parties, alleging the total cleanup
costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the Company's cost
associated with the cleanup of the site is unknown due to continuing changes in
the estimated total cost of cleanup of the site and the percentage of the total
waste which was alleged to have been contributed to the site by the Company. The
Company had accrued an amount based on a preliminary settlement proposal by the
alleged potential responsible parties; however, this liability was assumed as of
May 4, 2000, by the purchaser of the Automotive Business. In connection with
such assumption, certain of the Company's subsidiaries received an
indemnification by the purchaser of the Automotive Business.
The Company was dismissed from the previously reported case of ASARCO v.
ICI, et. al. pending in the U.S. District Court for the Eastern District of
Missouri.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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 72 Board Chairman December, 1968
and President
Barry H. Golsen 50 Board Vice Chairman August, 1981
and President of the
Climate Control
Business
David R. Goss 60 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 59 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 59 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 41 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.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Currently the Company's Common Stock trades on the Over-the-Counter
Bulletin Board ("OTC"). Prior to July 6, 1999, the Company's Common Stock traded
on the New York Stock Exchange, Inc. ("NYSE"). The following table shows, for
the periods indicated, the high and low closing sales prices for the Company's
Common Stock through June 30, 1999 and from July 1, 1999 through December 31,
2000 the high and low bid information for the Company's Common Stock which
reflect inter-dealer prices, without retail markup, markdown or commission, and
may not represent actual transactions.
Fiscal Year Ended
December 31,
------------------------------------------------
2000 1999
------------------- -------------------
Quarter High Low High Low
------- ---- --- ---- ---
First 1.500 .750 3.375 2.562
Second 1.000 .625 2.750 1.250
Third 1.437 .812 1.875 1.125
Fourth 2.437 .687 1.750 .562
STOCKHOLDERS
As of February 28, 2001, the Company had 916 record holders of its
Common Stock.
DIVIDENDS
The Company is a holding company and, accordingly, its ability to pay
cash dividends on its Preferred Stock and its Common Stock is dependent in large
part on its ability to obtain funds from its subsidiaries. The ability of the
Company's wholly-owned subsidiary ClimaChem, Inc. ("ClimaChem") (which owns
substantially all of the companies comprising the Chemical Business and the
Climate Control Business) and its wholly-owned subsidiaries to pay dividends and
to make distributions to the Company is restricted by certain covenants
contained in the Indenture of Senior Unsecured Notes to which they are parties.
Under the terms of the Indenture of Senior Unsecured Notes, and a loan
agreement to which ClimaChem and its subsidiaries are party to, 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
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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. See Note 3 of Notes to
Consolidated Financial Statements and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Holders of the Company's Common Stock are entitled to receive dividends
only when, as, and if declared by the Board of Directors. No cash dividends may
be paid on the Company's Common Stock until all required dividends are paid on
the outstanding shares of the Company's Preferred Stock, or declared and amounts
set apart for the current period, and, if cumulative, prior periods. As of
December 31, 2000, the Company has issued and outstanding, 623,550 shares of
$3.25 Convertible Exchangeable Class C Preferred Stock, Series 2 ("Series 2
Preferred"), 1,462 shares of a series of Convertible Non Cumulative Preferred
Stock ("Non Cumulative Preferred Stock") and 20,000 shares of Series B 12%
Convertible, Cumulative Preferred Stock ("Series B Preferred"). Each share of
Preferred Stock is entitled to receive an annual dividend, if, as and when
declared by the Board of Directors, payable as follows: (i) Series 2 Preferred
at the annual rate of $3.25 a share payable quarterly in arrears on March 15,
June 15, September 15 and December 15, which dividend is cumulative, (ii) Non
Cumulative Preferred Stock at the rate of $10.00 a share payable April 1, and
(iii) Series B Preferred at the rate of $12.00 a share payable January 1, which
dividend is cumulative. Due to losses sustained by the Company in 1998 and 1999
and the Company's subsidiaries (other than ClimaChem and its subsidiaries)
limited borrowing ability under the Company's revolving loan agreements, the
Company's Board of Directors discontinued payment of cash dividends on its
Common Stock for periods subsequent to January 1, 1999, until the Board of
Directors determines otherwise. Also due to the Company's losses in 1998 and
1999 and the Company's liquidity position, the Company has not declared or paid
regular quarterly dividend of $.8125 on its outstanding Series 2 Preferred since
June 15, 1999. In addition, the Company did not declare or pay the January 1,
2000 and 2001 regular annual dividend of $12.00 on the Series B Preferred
totaling $480,000. The unpaid dividends in arrears on the Company's outstanding
Series 2 Preferred and Series B Preferred are cumulative. No dividends or other
distributions, other than dividends payable in Common Stock, shall be declared
or paid, and no purchase, redemption or other acquisition shall be made, by the
Company of or in connection with any shares of Common Stock until all cumulative
and unpaid dividends on the Series 2 Preferred and Series B Preferred shall have
been paid. As of the date of this report, the aggregate amount of unpaid
dividends in arrears on the Company's Series 2 Preferred totaled approximately
$3.5 million. The Company does not anticipate having funds available to pay
dividends on its stock (Common or Preferred) for the foreseeable future. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" for further discussion of the
Company's payment of cash dividends. Also see Notes 3, 11 and 12 of Notes to
Consolidated Financial Statements.
Since the December 15, 2000 dividends on the Series 2 Preferred were not
paid, the Company has gone six quarters without paying the quarterly dividends
on its Series 2 Preferred. Whenever dividends on the Series 2 Preferred shall be
in arrears and unpaid, whether or not declared, in amount equal to at least six
quarterly dividends (whether or not consecutive), the holders of the Series 2
Preferred (voting separately as a class) have the exclusive right to vote for
and elect two additional directors to the Company's Board of Directors during
the period that dividends on the Series 2 Preferred remain in arrears by six
quarterly dividends. The right of the holders of the Series 2 Preferred to
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vote for such two additional directors shall terminate, subject to revesting in
the event of a subsequent similar arrearage, when all cumulative and unpaid
dividends on the Series 2 Preferred have been declared and set apart for
payment. The term of office of all directors so elected by the holders of the
Series 2 Preferred shall terminate immediately upon the termination of the right
of the holders of the Series 2 Preferred to vote for such two additional
directors, subject to the requirements of Delaware law. As of the date of this
report, the Company has not received a slate of proposed parties to fill these
director positions from the holders of the Series 2 Preferred.
On January 5, 1999, the Company's Board of Directors approved the
renewal of the Company's then existing Preferred Share Purchase Rights Plan
(with certain exceptions) through the execution and delivery of a Renewed Rights
Agreement, dated January 6, 1999, which expires January 6, 2009 ("Renewed Rights
Plan"). The Company issued the rights, among other reasons, in order to assure
that all of the Company's stockholders receive fair and equal treatment in the
event of any proposed takeover of the Company and to guard against partial
tender abusive tactics to gain control of the Company. The rights under the
Renewed Rights Plan (the "Renewed Rights") will become exercisable only if a
person or group acquires beneficial ownership of 20% or more of the Company's
Common Stock or announces a tender or exchange offer the consummation of which
would result in the ownership by a person or group of 20% or more of the Common
Stock, except pursuant to a tender or exchange offer which is for all
outstanding shares of Common Stock at a price and on terms which a majority of
outside directors of the Board of Directors determines to be adequate and in the
best interest of the Company in which the Company, its stockholders and other
relevant constituencies, other than the party triggering the rights (a
"Permitted Offer"), except acquisitions by the following excluded persons
(collectively, the "Excluded Persons"): (i) the Company, (ii) any subsidiary of
the Company, (iii) any employee benefit plan of the Company or its subsidiaries,
(iv) any entity holding Common Stock for or pursuant to the employee benefit
plan of the Company or its subsidiary, (v) Jack E. Golsen, Chairman of the Board
and President of the Company, his spouse and children and certain related trusts
and entities, (vi) any party who becomes the beneficial owner of 20% or more of
the Common Stock solely as a result of the acquisition of Common Stock by the
Company, unless such party shall, after such share purchase by the Company,
become the beneficial owner of additional shares of Common Stock constituting 1%
or more of the then outstanding shares of Common Stock, and (vii) any party whom
the Board of Directors of the Company determines in good faith acquired 20% or
more of the Common Stock inadvertently and such person divests within 10
business days after such determination, a sufficient number of shares of Common
Stock and no longer beneficially own 20% of the Common Stock.
Each Renewal Rights, when triggered, (other than the Renewal Rights,
owned by the acquiring person or members of a group that causes the Renewal
Rights to become exercisable, which became void) will entitle the stockholder to
buy one one-hundredth of a share of a new series of participating Preferred
Stock at an exercise price of $20.00 per share. Each one one-hundredth of a
share of the new Preferred Stock purchasable upon the exercise of a right has
economic terms designed to approximate the value of one share of the Company's
Common Stock. If another person or group acquires the Company in a merger or
other business combination transaction, each Renewal Right will entitle its
holder (other than Renewal Rights owned by the person or group that causes the
Renewal Rights to become exercisable, which become void) to purchase at the
Renewal Right's then current exercise price, a number of the acquiring company's
common shares which at the time of such transaction would have a
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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%.
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ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Statement of Operations Data:
Net sales(1) $290,620 $254,236 $255,858 $251,948 $269,213
======== ======== ======== ======== ========
Total revenues(1) $296,250 $259,655 $261,756 $254,699 $276,420
======== ======== ======== ======== ========
Interest expense(1) $ 15,377 $ 15,115 $ 14,504 $ 11,435 $ 8,280
======== ======== ======== ======== ========
Income (loss) from continuing
operations before extraordinary
gain (charge) $(10,790) $(31,646) $ 2,439 $ (8,755) $ 1,944
======== ======== ======== ======== ========
Net income (loss) $ 6,195 $(49,767) $ (1,920) $(23,065) $ (3,845)
======== ======== ======== ======== ========
Net income (loss) applicable
to common stock $ 3,424 $(52,995) $ (5,149) $(26,294) $ (7,074)
======== ======== ======== ======== ========
Basic and diluted income (loss)
per common share:
Loss from continuing
operations before extraordinary
gain (charge) $ (1.14) $ (2.95) $ (.07) $ (.93) $ (.10)
======== ======== ======== ======== ========
Net loss from discontinued
operations $ (.26) $ (1.53) $ (.35) $ (.75) $ (.45)
======== ======== ======== ======== ========
Net income (loss) $ .29 $ (4.48) $ (.42) $ (2.04) $ (.55)
======== ======== ======== ======== ========
(1) Amounts are shown excluding balances related to Businesses disposed of and
discontinued operations.
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)(1)
Years ended December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Balance Sheet Data:
Total assets $192,895 $188,635 $223,250 $244,600 $233,703
======== ======== ======== ======== ========
Long-term debt, including current
portion $136,005 $158,072 $150,506 $160,903 $109,023
======== ======== ======== ======== ========
Redeemable preferred stock $ 139 $ 139 $ 139 $ 146 $ 146
======== ======== ======== ======== ========
Stockholders' equity (deficit) $ (9,442) $(14,173) $ 35,059 $ 44,496 $ 74,018
======== ======== ======== ======== ========
Selected other data:
Cash dividends declared
per common share $ - $ - $ .02 $ .06 $ .06
======== ======== ======== ======== ========
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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, 2000 Consolidated Financial Statements, Item 6
"SELECTED FINANCIAL DATA" and Item 1 "BUSINESS" included elsewhere in this
report.
Certain statements contained in this "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" may be deemed
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements".
All discussions below are that of the Businesses continuing and
accordingly exclude the Discontinued operations of the Automotive Products
Business sold in 2000 and the Australian subsidiary's operations sold in 1999.
See Notes 4 and 5 of the Notes to the Consolidated Financial Statements.
OVERVIEW
GENERAL
The Company is focusing on its core businesses relating to its Chemical
and Climate Control Businesses. In addition, the Company is seeking to reduce
its outstanding indebtedness and improve its liquidity and operating results
through the liquidation and/or sale of selected assets.
As part of the Company's plan to liquidate and/or sell selected assets,
the Automotive Products Business ("Automotive") was sold on May 4, 2000 pursuant
to a definitive plan approved by the Board of Directors. Upon the closing of the
sale, the Company received notes in the approximate amount of $8.7 million, such
notes being secured by a second lien on the assets of the buyer. These notes,
and any payments of principal and interest, thereon, are subordinated to the
buyer's primary lender. The Company will receive no principal payments under the
notes for at least the first two years following the sale of Automotive and
future receipts are entirely dependent upon the buyers' ability to make the
business profitable. Accordingly, the Company has fully reserved its notes and
related interest receivable from the buyer. In addition, the buyer assumed
substantially all of Automotive's debts and obligations as of the date of the
sale. However following the sale, the Company remained a guarantor on certain of
the Automotive's equipment notes and was the guarantor of $1 million of
Automotive's revolving credit agreement. In the fourth quarter 2000 and 2001,
the Company was required to perform on the equipment loan notes and the $1
million guarantee of the revolving credit agreement. See discussion in Source of
Funds - Discontinued Business.
For the year ended December 31, 2000, subsidiaries of the Company
repurchased approximately $29.7 million of Senior Unsecured Notes and recognized
a gain of approximately $20.1 million. The purchases, which were paid out of its
working capital, will serve to reduce interest expense by approximately $2.0
million annually. In addition, a subsidiary of the Company purchased 278,700
shares of its $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2
("$3.25 Preferred") for approximately $1.6 million. Each share of $3.25
Preferred has a stated value of $50.00 per share. The Company bought these
shares out of its working capital.
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In October 2000, the nitric acid plant in Baytown, Texas, operated by El
Dorado Nitrogen Company ("EDNC") experienced a mechanical failure resulting in
an interruption of production. To supply nitric acid to Bayer Corporation
("Bayer") during the interruption, EDNC purchased nitric acid produced by an
affiliated company, El Dorado Chemical Company, as well as from third party
producers. The repairs to the nitric plant were completed in January 2001. The
Company believes that the losses arising from this mechanical failure and
interruption of production will be fully covered by insurance and payments by
Bayer. See "Special Note Regarding Forward-Looking Statements".
In conjunction with the Company's strategy, subsidiaries of the Company,
which are not subsidiaries of ClimaChem, completed the acquisition of two
chemical plants from LaRoche Industries, Inc. ("LaRoche") during the fourth
quarter of 2000. One plant is located in Cherokee, Alabama ("Cherokee Plant")
and the other is located in Crystal City, Missouri ("Crystal City Plant"). The
purchase price of the two plants was approximately $3.0 million. The acquisition
was pursuant to an agreement ("Orica Agreement") between subsidiaries of the
Company and Orica USA, Inc. ("Orica"). Orica was the successful bidder in a
bankruptcy court managed auction of the nitrogen products business of LaRoche,
which consisted of four nitrogen products chemical plants. The Bankruptcy Court
order approved the sale of LaRoche's nitrogen business including a release of
the purchasers of any pre-existing environmental liabilities.
Under the Orica Agreement, Orica assigned to subsidiaries of the
Company, which are not subsidiaries of ClimaChem, the rights to purchase the
assets, including inventory, machinery and equipment, and real property,
associated with the two chemical plants. The subsidiaries of the Company took
title to the Cherokee Plant and the Crystal City Plant directly from LaRoche.
The purchase of the plants was funded by the working capital of the Company.
The Cherokee Plant produces anhydrous ammonia, nitric acid, aqua
ammonia, agricultural grade ammonium nitrate fertilizer, urea ammonium nitrate
fertilizer and ammonium nitrate solution as a blasting product ingredient.
Because natural gas is a significant element in the production of anhydrous
ammonia and the natural gas costs rose significantly during the fourth quarter
of 2000, the Cherokee Plant was shut down in mid-December 2000 and restarted in
mid-February 2001. Due to the current fluctuations in natural gas costs, future
production shut-downs may occur. The funding of the future operations will be
obtained from working capital and financing arrangements. For the year ended
February 28, 2000, this plant (under operatorship of the previous owners) sold
398,000 tons of product and had net sales of approximately $32 million.
In connection with the Crystal City Plant acquisition, the Company
granted to Orica an option to purchase the nitric acid plant at the Crystal City
Plant. Orica has advised the Company's subsidiary that it intends to exercise
the option to purchase the nitric acid plant, the exercise price of which
amounts to $150,000. The Crystal City Plant cannot produce nitrogen products
without a nitric acid plant. The Company has a contract to sell this plant and
surrounding land, subject to the performance of due diligence. There are no
assurances that this contract will close. See Note 3-Liquidity and Management's
Plan for a further discussion of this anticipated transaction.
THE COMPANY'S FINANCIAL STATEMENTS REFLECT THE AUTOMOTIVE PRODUCTS
BUSINESS AS A DISCONTINUED OPERATION FOR ALL PERIODS PRESENTED. AS A RESULT, THE
AUTOMOTIVE PRODUCTS BUSINESS IS NOT PRESENTED AS A REPORTABLE SEGMENT. CERTAIN
STATEMENTS CONTAINED IN THIS OVERVIEW ARE FORWARD-LOOKING STATEMENTS, AND FUTURE
RESULTS COULD DIFFER
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MATERIALLY FROM SUCH STATEMENTS. The following table contains certain of the
information from Note 17 of Notes to the Company's Consolidated Financial
Statements about the Company's operations in different industry segments for
each of the three years in the period ended December 31, 2000.
2000 1999 1998
---- ---- ----
(In thousands)
Net sales:
Businesses continuing:
Chemical $149,639 $128,154 $125,757
Climate Control 130,574 117,055 115,786
Industrial Products 10,407 9,027 14,315
-------- -------- --------
290,620 254,236 255,858
Business disposed of - Chemical(1) - 7,461 14,184
-------- -------- --------
$290,620 $261,697 $270,042
======== ======== ========
Gross Profit:(2)
Businesses continuing:
Chemical $ 15,240 $ 13,532 $ 18,570
Climate Control 34,475 35,467 32,278
Industrial Products 2,839 1,757 3,731
-------- -------- --------
$ 52,554 $ 50,756 $ 54,579
======== ======== ========
Operating Profit (loss):(3)
Businesses continuing:
Chemical $ 1,877 $ 1,325 $ 6,592
Climate Control 10,961 9,751 10,653
Industrial Products 77 (2,507) (403)
-------- -------- --------
12,915 8,569 16,842
Business disposed of - Chemical(1) - (1,632) (2,467)
-------- -------- --------
12,915 6,937 14,375
General corporate expense, net (4,798) (8,449) (9,891)
Interest expense:
Business disposed of(1) - (326) (434)
Businesses continuing (15,377) (15,115) (14,504)
Gain (loss) on businesses disposed of - (1,971) 12,993
Provision for loss on firm sales and
purchase commitments - Chemical (3,395) (8,439) -
Provision for impairment on long-lived
assets - Chemical - (4,126) -
-------- -------- --------
Income (loss) from continuing
operations before provision for
income taxes and extraordinary gain $(10,655) $(31,489) $ 2,539
======== ======== ========
Total assets:
Businesses continuing:
Chemical $109,672 $ 93,482 $107,780
Climate Control 65,516 65,521 49,516
Industrial Products 7,228 8,203 11,662
Corporate assets and other 10,479 21,429 22,137
Business disposed of - Chemical - - 16,797
Net assets of discontinued operations - - 15,358
-------- -------- --------
Total assets $192,895 $188,635 $223,250
======== ======== ========
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(1) In August, 1999, the Company sold substantially all the assets of its wholly
owned Australian subsidiary. The operating results have been presented
separately in the above table.
(2) Gross profit by industry segment represents net sales less cost of sales.
(3) Operating profit (loss) by industry segment represents revenues less
operating expenses before deducting general corporate expense, interest
expense, income taxes, loss on business disposed of, provision for loss on
firm sales and purchase commitments, impairment on long-lived assets in 1999
and before extraordinary gain on extinguishment of debt in 2000 and gain on
sale of an office building in 1998.
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CHEMICAL BUSINESS
Net Sales in the Chemical Business (excluding the Australian subsidiary
in which substantially all of its assets were disposed of in August, 1999) were
$149.6 million for the year ended December 31, 2000 and $128.2 million for the
year ended December 31, 1999. The gross profit (excluding the Australian
subsidiary and the provision for loss on firm purchase commitments) increased to
$15.2 million (or 10.2% of net sales) in 2000 from $13.5 million (or 10.6% of
net sales) in 1999.
The Company's Chemical Business manufactures three principal product
lines that are derived from anhydrous ammonia: (1) fertilizer grade ammonium
nitrate and urea ammonia nitrate (UAN) for the agricultural industry, (2)
explosive grade ammonium nitrate for the mining industry and (3) concentrated,
blended and regular nitric acid for industrial applications. In addition, the
Company also produces sulfuric acid for commercial applications primarily in the
paper industry.
As of December 31, 2000, the Chemical Business had commitments to
purchase 72,000 tons of anhydrous ammonia under a take or pay contract at an
average minimum volume of 3,000 tons per month during 2001 and 2002. In
addition, under the contract the Chemical Business is committed to purchase 100%
of its anhydrous ammonia requirements in 2001 and 50% of its remaining
quantities in excess of the take or pay volumes of its anhydrous ammonia
requirements through 2002 from this third party at prices which approximate
market prices. Based on the pricing index contained in this contract, prices
paid during 2000 and 1999 were higher than the current market spot price. As a
result, in 2000 and 1999 the Company recorded loss provisions for anhydrous
ammonia required to be purchased during the remainder of the contract
aggregating approximately $2.5 and $8.4 million, respectively. At December 31,
2000, the accrued liability for future payments of the loss provision included
in the Consolidated Balance Sheet was approximately $6.9 million ($3.5 million
of which is included in current accrued liabilities).
During the fourth quarter of 2000, subsidiaries of the Company acquired
two chemical plants. See discussion in Overview-General.
The Chemical Business has entered into a letter of intent with a third
party to sell its explosives distribution outlets and enter into a long-term
supply agreement, which the Company currently expects to close in May 2001.
Under the terms of the letter of intent, the Chemical Business would sell its
wholesale and retail explosive distribution business (excluding accounts
receivable) for $3.5 million plus any additional amount for inventories and
enter into an ammonium nitrate tolling agreement with the third party. The buyer
has prepaid to the Chemical Business $2 million of the $3.5 million, which
amount has been received by the Chemical Business. If the transaction does not
close by May 31, 2001, the $2 million prepayment will be applied towards the
purchase of ammonium nitrate products by the third party from the Chemical
Business. However if the transaction has not closed by May 31, 2001 and the
third party reasonably, determines that the Chemical Business is unable to make
deliveries of the ammonium nitrate products beginning June 2001 and thereafter,
the Chemical Business shall return the prepayment. If these transactions are
executed, they are expected to have the effect of providing working capital from
the proceeds of the sale of assets of approximately $3.5 million, reduce
outstanding accounts receivable and inventory balances and provide a more
constant and predictable operating margin on explosives sales in the Chemical
Business. See "Special Note Regarding Forward-Looking Statements".
CLIMATE CONTROL
The Climate Control Business manufactures and sells a broad range of
hydronic fan coil, air handling, air conditioning, heating, water source heat
pumps, and dehumidification products targeted to both commercial and residential
new building construction and renovation.
The Climate Control Business focuses on product lines in the specific
niche markets of hydronic fan coils and water source heat pumps and has
established a significant market share in these specific markets.
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As of December 31, 2000, the backlog of confirmed orders for the Climate
Control Business increased to approximately $26.7 million from approximately
$22.1 million at December 31, 1999. This increase in backlog is primarily due
from continued growth and an influx of orders late in the third quarter of 2000.
These orders represented a combination of models including engineered-to-order
products which require an increased lead-time for production.
Sales of $130.6 million for the year ended December 31, 2000, in the
Climate Control Business were approximately 11.5% greater than sales of $117.1
million for the year ended December 31, 1999. The gross profit was approximately
$34.5 million and $35.5 million in 2000 and 1999, respectively. The gross profit
percentage decreased to 26.4% for 2000 from 30.3% for 1999.
INDUSTRIAL PRODUCTS BUSINESS
Net sales in the Industrial Products Business during 2000 and 1999 were
$10.4 million and $9.0 million, respectively, resulting in an operating profit
of $.1 million and operating loss of $2.5 million, respectively. The net
investment in assets of this Business has continued to decrease and the Company
expects to realize further reductions in future periods. The Company continues
to eliminate certain categories of machines from the product line by not
replacing those machines when sold.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES
Total revenues of Businesses continuing for 2000 and 1999 were $296.3
million and $259.7 million, respectively (an increase of $36.6 million). Sales
increased $36.4 million and other income decreased $.2 million. Other income for
2000 includes the recapture of prior period provision for loss on advances of
$1.6 million, the Company's equity interest in an unconsolidated joint venture
of $.7 million, $.6 million of interest income, gain on sale of equity
securities of an unrelated entity of $.4 million, $.3 million of income from oil
and gas properties and rental income of $.3 million.
NET SALES
Consolidated net sales of Businesses continuing included in total
revenues for 2000 were $290.6 million, compared to $254.2 million for 1999, an
increase of $36.4 million. This increase in sales resulted principally from: (i)
increased sales in the Chemical Business of $21.5 million from increased sales
volumes of agricultural, explosive, and industrial acid products due in part to
the completion of the nitric acid plant in Baytown, Texas in May 1999 and the
acquisition of the Cherokee Plant and improved sales prices of certain
agricultural products, (ii) increased sales in the Climate Control Business of
$13.5 million due primarily from an increase in foreign sales, variation in
product sales mix, increased customer demand and the expansion of new products
and services, and (iii) increased sales in the Industrial Products Business due
to an increase in sales of machine tools.
GROSS PROFIT
Gross profit of Businesses continuing as a percent of net sales was
18.1% for 2000, compared to 20.0% for 1999. The decrease in the gross profit
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percentage was the result of lower profit margins in the Chemical and Climate
Control Business caused primarily from (i) increased raw material costs relating
to certain explosive and industrial acid products and increased sales volume of
explosive products with lower margins relating to the Chemical Business, and
(ii) increased material and labor costs relating to a new heat pump product
line, start up costs of the new large air handler business, lower gross margins
caused by competitive pressures and variation in product sales mix relating to
the Climate Control Business. This decrease was partially offset by (i) improved
gross margins relating to certain agricultural products relating to the Chemical
Business, and (ii) improved profit margins of machine tools relating to the
Industrial Products Business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses as a percent of
net sales from Businesses continuing for 2000 were 16.4% compared to 20.3% for
1999. This decrease is primarily the result of higher sales without a comparable
increase in expenses; however, SG&A expenses are lower due to strategic efforts
to reduce SG&A expenses relating to the Industrial Products Business, a decrease
in depreciation and amortization expenses, a reduction in advertising and
research and development expenditures, and legal expenses incurred in 1999
relating to a project in Mexico not recurring in 2000. The decrease was
partially offset by an increase in SG&A expenses relating to new start-up
operations during 1999 and 2000.
INTEREST EXPENSE
Interest expense for continuing businesses of the Company was $15.4
million for 2000, compared to $15.1 million for 1999. The increase of $.3
million primarily resulted from increased lenders' prime rates and the rate
being charged by the Company's working capital lender which was partially offset
by reduced debt outstanding resulting from the repurchase of the Senior
Unsecured Notes.
OTHER EXPENSE
Other expense of Businesses continuing for 2000 and 1999 were $2.3
million and $4.4 million, respectively. Other expense for 2000 includes (i)
approximately $.6 million in costs incurred by the Company in attempts to
renegotiate the terms and conditions of the Indenture related to the Senior
Unsecured Notes of a subsidiary of the Company, (ii) a provision for a
litigation settlement of $.6 million, and (iii) start up costs of approximately
$.2 million associated with a new subsidiary in the Climate Control Business.
PROVISION FOR LOSS ON FIRM SALES AND PURCHASE COMMITMENTS
The Company had a provision for loss on firm sales and purchase
commitments of $3.4 million and $8.4 million for the years ended December 31,
2000 and 1999, respectively. See discussion in Note 16 of the Notes to
Consolidated Financial Statements.
PROVISION FOR IMPAIRMENT ON LONG-LIVED ASSETS
The Company had a provision for impairment on long-lived assets of $4.1
million for the year ended December 31, 1999 which includes $3.9 million
associated with two out of service chemical plants which are to be sold or
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31
dismantled. See discussion in Note 2 of the Notes to Consolidated financial
Statements.
BUSINESSES DISPOSED OF
The Company sold substantially all the assets of its wholly-owned
Australian subsidiary in 1999.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY GAIN
The Company had a loss from continuing operations before income taxes
and extraordinary gain of $10.7 million for 2000 compared to a loss of $31.5
million for 1999. Approximately $5.0 million of the reduced loss of $20.8
million was due to the difference in loss provision on firm sales and purchase
commitments, approximately $4.1 million was due to the provision for impairment
on long-lived assets in 1999, and approximately $3.9 million was due to losses
relating to the business disposed of in 1999. The remainder of the improvement
was primarily due to increased gross profit of the Chemical and Industrial
Products Businesses which was partially offset by decreased gross profit of the
Climate Control Business and the decrease in other expenses as described above.
Also SG&A expenses decreased but were partially offset by increased interest
expense and decreased other income as described above.
PROVISION FOR INCOME TAXES
As a result of the Company's net operating loss carry-forward for income
tax purposes as discussed elsewhere herein and in Note 9 of Notes to
Consolidated financial Statements, the provisions for income taxes associated
with continuing operations in 2000 and 1999 were related to current state income
taxes.
DISCONTINUED OPERATIONS
On April 5, 2000 the Board of Directors approved a plan of disposal of
the Company's Automotive Products Business ("Automotive") which was completed on
May 4, 2000. Automotive is reflected as discontinued operations for all periods
presented. An estimate of the net loss from discontinued operations of
Automotive for the phase-out period beginning January 1, 2000 through May 4,
2000 (closing date) was accrued for at December 31, 1999. For the year ended
December 31, 1999, the net loss from discontinued operations was $18.1 million.
The 2000 net loss from discontinued operations relates to the expected
performance by the Company on certain debt guarantee of Automotive and the
ultimate operating loss of Automotive through May 2000. See discussion in Note 4
of the Notes to Consolidated Financial Statements for further information.
Following the Sale of Automotive, the Company remained a guarantor on
certain of Automotive's indebtedness. In the fourth quarter of 2000, the Company
was required to perform on certain of the equipment note guarantees and in 2001,
has been required to fund its $1.0 million guaranty on DLT's revolving credit
agreement. The Company has acquired certain of this debt from the original
lender and in other situations, negotiated revised terms. The Company has
recognized its obligations under the guaranties as of December 31, 2000 in the
amount of $4.3 million in the accompanying consolidated balance sheet ($3.2
million of which is due within one year and
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$1.1 million of which is due after one year). The Company has also recognized a
loss in the 2000 statement of operations in the amount of $2.6 million which
represents the Company's estimate of ultimate loss, net of the collateral value
of approximately $1.7 million, associated with guaranteed indebtedness of
Automotive. This loss, and that associated with the final adjustment for 2000
operations from the amount accrued as of December 31, 1999, has been included in
the 2000 net loss from discontinued operations. See discussion in Note 13 of the
Notes to Consolidated Financial Statements for further information.
EXTRAORDINARY GAIN
During the year ended December 31, 2000, subsidiaries of the Company
repurchased approximately $29.7 million of the Senior Unsecured Notes and
recognized a gain of approximately $20.1 million.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues of Businesses continuing for 1999 and 1998 were $259.7
million and $261.8 million, respectively (a decrease of $2.1 million). Sales
decreased $1.6 million and other income decreased $.5 million.
NET SALES
Consolidated net sales of Businesses continuing included in total
revenues for 1999 were $254.2 million, compared to $255.9 million for 1998, a
decrease of $1.7 million. This decrease in sales resulted principally from
decreased sales in the Industrial Products Business of $5.3 million due to
decreased sales of machine tools. This decrease was offset by: (i) increased
sales in the Climate Control Business of $1.3 million primarily due to increased
heat pump sales offset by production delays related to mechanical problems with
certain new equipment and (ii) lower sales of $16.0 million from the Chemical
Business other than the EDNC Baytown Plant offset by sales by EDNC of $18.4
million from the Baytown Plant which began operations in May 1999. Lower volumes
of the Company's nitrogen based products were sold at a lower price in 1999 due
primarily to the import of Russian nitrate resulting in an over supply of
nitrate based products in the primary market areas for the Chemical Business'
agricultural products.
GROSS PROFIT
Gross profit of Businesses continuing as a percent of net sales was
20.0% for 1999, compared to 21.3% for 1998. The decrease in the gross profit
percentage was the result of decreases in the Chemical and Industrial Products
Businesses, partially offset by the Climate Control Business. The decrease in
the Chemical Business was primarily the result of lower sales volumes and
reduced selling prices for the Company's nitrogen based products. The decrease
in sales volume was due to the temporarily shutdown of two plants in 1999 caused
by the excessive supply of ammonium nitrate at the Chemical Business and in the
market place. Also this excessive supply, caused, in part, by the import of
Russian nitrate during 1999 reduced selling prices. The decrease in the
Industrial Products Business was primarily due to a lower gross profit product
mix of machine tools sold and a $490,000 charge taken to write-down the net
carrying cost of certain inventory in 1999. The decrease in the gross
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profit percentage was offset by an increase in the Climate Control Business due
primarily to an improved focus on sales of more profitable product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses as a percent of
net sales from Businesses continuing for 1999 were 20.3% compared to 19.1% for
1998. This increase is primarily the result of decreased sales volume in the
Chemical Business and the Industrial Products Business without equivalent
corresponding decreases in SG&A and increased cost of the Company sponsored
medical care programs for its employees due to increased health care costs.
Additionally, costs associated with new start-up operations in 1999, by the
Climate Control Business, having minimal or no sales, contributed to the
increase in dollars as well as expense as a percent of sales.
INTEREST EXPENSE
Interest expense for continuing businesses of the Company was $15.1
million for 1999, compared to $14.5 million for 1998. The increase of $.6
million primarily resulted from increased borrowings and lenders' prime rates
during the last half of 1999. The increased borrowings were necessary to support
capital expenditures, higher accounts receivable balances and to meet the
operational requirements of the Company.
OTHER EXPENSES
Other expense of Businesses continuing for 1999 and 1998 were $4.4
million and $4.6 million, respectively (a decrease of $.2 million).
PROVISION FOR LOSS ON FIRM PURCHASE COMMITMENTS
The Company had a provision for loss on firm purchase commitments of
$8.4 million for the year ended December 31, 1999 to provide for losses
resulting from cost of remaining anhydrous ammonia to be purchased pursuant to
the firm purchase commitment in the Chemical Business, which when combined with
the manufacturing and distribution costs exceeded the anticipated future sales
price. See discussion in Note 16 of the Notes to Consolidated Financial
Statements.
PROVISION FOR IMPAIRMENT ON LONG-LIVED ASSETS
The Company had a provision for impairment on long-lived assets of $4.1
million for the year ended December 31, 1999 which includes $3.9 million
associated with two out of service chemical plants which are to be sold or
dismantled. See discussion in Note 2 of the Notes to Consolidated Financial
Statements.
BUSINESSES DISPOSED OF
The Company sold substantially all the assets of its wholly-owned
Australian subsidiary in 1999. The Company also sold certain real estate in
1998. See discussion in Note 5 of the Notes to Consolidated Financial
Statements.
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
The Company had a loss from continuing operations before income taxes of
$31.5 million for 1999 compared to income from continuing operations before
income taxes of $2.5 million for 1998. The decreased profitability of $34.0
million was primarily due to the gain on the sale of an office building in 1998
of $13.0 million, the lower gross profit margins from the Chemical Business, the
loss on disposition of the Australian subsidiary, lower ammonium nitrate sales
prices and volume, excluding EDNC, from the Chemical Business, the provision for
impairment on long-lived assets and the provision for losses on purchase
commitments, as previously discussed.
PROVISION FOR INCOME TAXES
As a result of the Company's net operating loss carry forward for income
tax purposes as discussed elsewhere herein and in Note 9 of Notes to
Consolidated Financial Statements, the Company's provisions for income taxes for
1999 are for current state income taxes and 1998 are for current state income
taxes and federal alternative minimum taxes.
DISCONTINUED OPERATIONS
On April 5, 2000 the Board of Directors approved a plan of disposal of
the Company's Automotive Products Business ("Automotive") which was completed on
May 4, 2000. Automotive is reflected as a discontinued operations for all
periods presented. The net loss from discontinued operations of Automotive is
$18.1 million in 1999 and $4.4 million in 1998. The increase in 1999 is due to
lower sales volume and profits, and the loss on disposal of $10.0 million
comprised of an accrual of approximately $2.1 million of anticipated operating
losses through the date of disposal and a reserve of $7.9 million to fully
reserve the Company's net investment in the net assets of Automotive due to the
recurring historical operating losses and uncertainty of realization of the
Company's net investment in the remaining net assets of Automotive. The
remaining loss in 1999 in excess of the loss in 1998 is primarily due to reduced
export sales and reduced sales to Automotive's major customers while it reduced
inventory levels following a merger in late 1998. See discussion in Note 4 of
the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Historically, the Company's primary cash needs have been for operating
expenses, working capital and capital expenditures. The Company has financed its
cash requirements primarily through internally generated cash flow, borrowings
under its revolving credit facilities, and secured equipment financing. In
November 1997, the Company issued $105 million of Senior Unsecured Notes by its
wholly owned subsidiary, ClimaChem, Inc.
Net cash provided by continuing operating activities for the year ended
December 31, 2000 was $8.0 million, after adjustments for a net loss from
discontinued operations of $3.1 million, a noncash extraordinary gain of $20.1
million, net provision for loss on firm sales and purchase commitments of $.4,
depreciation and amortization of $10.6 million, recapture of prior period
provision for loss on advances net of provision for possible losses on
receivables of $1.6 million and including an increase in accounts receivable of
$5.8 million; an increase in inventories of $2.2 million; an increase in
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35
supplies and prepaid items of $2.4 million; an increase in accounts payable of
$8.2 million; an increase in accrued liabilities of $7.9 million and an increase
in other noncurrent liabilities of $1.4 million. The increase in receivables is
primarily due to improved sales prices and increased sales due, in part, to the
acquisition of the Cherokee Facility in 2000 in the Chemical Business and
increased sales due, in part, to new start-up operations during 1999 and 2000 in
the Climate Control Business. This increase was partially offset by successful
efforts to reduce the number of days outstanding relating to the Climate Control
Business. The increase in inventories is primarily due to the acquisition of the
Cherokee Facility in 2000, increased costs of raw materials in the Chemical
Business, an increase in certain raw materials relating to hydronic fan coil
products and a new start-up operation during 1999 in the Climate Control
Business. This increase was partially offset by a reduction in industrial
machines and supplies in the Industrial Products Business and a reduction in
certain raw materials relating to heat pump products in the Climate Control
Business. The increase in supplies and prepaid items is primarily due to the
acquisition of two plants in 2000 and the purchase of precious metals to be used
in the manufacturing process in the Chemical Business. The increase in accounts
payable is primarily due to the increase in the number of days outstanding,
increase in production, the acquisition of the Cherokee Facility in 2000, the
new start-up operations during 2000 and timing of payments in the Chemical and
Climate Control Businesses. The increase in accrued liabilities is primarily due
to cash deposits received from customers for agricultural products to be
delivered during 2001 in the Chemical Business, loss on firm purchase commitment
and accrued property taxes.
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES
Net cash used in investing activities for the year ended December 31,
2000 included $7.7 million for capital expenditures and a decrease in other
assets of $3.1 million. The capital expenditures were primarily for the benefit
of the Chemical and Climate Control Businesses to enhance production and product
delivery capabilities. The decrease in other assets relates primarily from the
Company's realization of its investment in an option to acquire an energy
conservation company and related payment received for advances and accrued
interest.
Net cash used in financing activities included payments and note
acquisitions of $13.9 million and the repurchase of preferred stock of $1.6
million offset by proceeds from the long-term debt and other debt of $5.7
million and a net increase of revolving debt of $7.0 million.
SOURCE OF FUNDS
CONTINUING BUSINESSES
The Company is a diversified holding company and, as a result, it is
dependent on credit agreements and its ability to obtain funds from its
subsidiaries in order to pay its debts and obligations.
The Company's wholly-owned subsidiary, ClimaChem, Inc. ("ClimaChem"),
through its subsidiaries, owns substantially all of the Company's Chemical and
Climate Control Businesses. ClimaChem and its subsidiaries are dependent on
credit agreements with lenders and internally generated cash flow in order to
fund their operations and pay their debts and obligations.
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As of December 31, 2000 the Company, exclusive of ClimaChem, had no
borrowing availability under their existing revolver and ClimaChem had $3.7
million. The effective interest rate was 11.0%.
As of December 31, 2000, the Company and certain of its subsidiaries,
including ClimaChem, were parties to a working capital line of credit evidenced
by two separate loan agreements ("Agreements") with a lender. The term of the
Agreements, as amended, was through December 31, 2000, and was automatically
being renewed thereafter for successive terms of one month each. Borrowings
under the Agreements outstanding at December 31, 2000 were $34.5 million. In
April, 2001, the Company replaced its existing Revolving Credit Facility
("Revolver") for ClimaChem and its subsidiaries with a new lender. ClimaChem
and its subsidiaries, ("the borrowers"), entered into a new $50 million credit
facility with Foothill Capital Corporation (the "Foothill Facility"). The
Foothill Facility provides for advances based on specified percentages of
eligible accounts receivable and inventory of ClimaChem and its subsidiaries and
accrues interest at a base rate (generally equivalent to the prime rate) plus 2%
or the LIBOR rate plus 4.5%. Interest is due monthly. The facility provides for
up to $8.5 million of letters of credit; All letters of credit outstanding
reduce availability under the facility. Under the Foothill Facility, the lender
also requires the borrowers to pay a letter of credit fee equal to 2.75% per
annum of the undrawn amount of all outstanding letters of credit, and unused
line fee equal to .5% per annum for the excess amount available under the
facility not drawn and various other audit, appraisal and valuation charges. The
Foothill Facility matures in April 2005 and is secured by receivables, inventory
and intangibles of ClimaChem and its subsidiaries and certain assets of
non-ClimaChem entities. LSB, each of ClimaChem's subsidiaries and the two LSB
subsidiaries which acquired Chemical Plants during 2000 (Note 17) are guarantors
of the indebtedness. LSB and one of its wholly-owned subsidiaries which is not a
subsidiary of ClimaChem has also pledged the capital stock of ClimaChem as
additional collateral on the Foothill Facility. A prepayment penalty equal to 4%
of the facility is due to the lender should the borrowers elect to prepay the
facility prior to the first anniversary date. This penalty is reduced 1% per
year through maturity. The Foothill Facility requires ClimaChem to meet certain
financial covenants on a monthly, quarterly and/or annual basis, including a
fixed charge coverage ratio, minimum EBITDA (earnings before interest, taxes,
depreciation and amortization) of ClimaChem and ClimaChem's Climate Control
Business and limits capital expenditures. The foothill Facility requires that
ClimaChem's excess availability, as defined, equal an amount not less than $3.8
million, on each interest payment date, after making the interest payment due
pursuant to ClimaChem's 10 3/4% Senior Notes. The Foothill Facility requires the
borrowers to have various minimum amounts of availability under the revolver
which amounts generally increase prior to interest payment due dates of the
Senior Notes discussed in (B) below. The Foothill Facility also contains
covenants that, among other things, limit the borrowers ability to: (i) incur
additional indebtedness, (ii) incur liens, (iii) make restricted payments or
loans to affiliates who are not borrowers, or (iv) engage in mergers,
consolidations or other forms of recapitalization, (v) dispose of assets, and
(vi) repurchase ClimaChem's 10 3/4% Senior Notes. It also requires all
collections on accounts be made through an account in the name of the lender or
their agent and gives the lender the sole discretion to determine whether there
has been any material adverse change; as defined, in the financial condition of
the borrowers or LSB Industries, Inc., as guarantor, prior to granting
additional advances. The Foothill Facility requires the borrowers to use their
best efforts to assist Foothill Capital Corporation with the syndication of no
less than 40% and no more than 50% of the total facility commitment. In
connection therewith, the borrowers have agreed that Foothill Capital
Corporation or agent shall have the right after consultation with the borrowers'
agent to alter certain terms and conditions as may be necessary, to insure a
successful syndication of the total facility commitment. The lender may, upon an
event of default as defined, terminate the Foothill Facility and make the
balance outstanding due and payable in full. See Note 8: Long-term Debt. For
LSB's subsidiaries which are not subsidiaries of ClimaChem, the Company executed
the third amended and restated revolving credit agreement with Bank America
Business Credit (the "BABC Agreement") in April 2001. The BABC Agreement
provides a revolving line of credit of up to $2.5 million through April 2002,
and is secured by the receivables, inventory and intangibles of the LSB
subsidiaries which are not subsidiaries of ClimaChem. The BABC Agreement
requires monthly payments of interest which accrue based on the BABC's prime
rate plus the applicable margin (2.5% in April 2000). Effective July 1, 2001,
the applicable margin increases .50% and increases .50% monthly thereafter until
the agreement is terminated. The agreement may be terminated by the Company with
proper notice without premium or penalty.
As of December 31, 2000, the Company had a working capital deficit of
approximately $9.4 million and long-term debt due after one year of
approximately $93.9 million on a consolidated basis. The Company and its
subsidiaries which are not subsidiaries of ClimaChem had a working capital
deficit of approximately $6.0 million and long-term debt due after one year of
approximately $27.9 million including the amount owed to ClimaChem.
As of April 16, 2001, the Company, exclusive of ClimaChem, and ClimaChem
had a borrowing availability under the BABC Facility of $.1 million and
ClimaChem had borrowing availability under the Foothill Facility of $4.5
million. The effective interest rates under the BABC Facility and the Foothill
Facility were 10.5% and 10%, respectively. Borrowings under the Foothill
Facility outstanding at April 16, 2001, were $41.5 million. The annual interest
on the outstanding debt under the Foothill and BABC Facilities at April 16,
2001, at the rates then in effect would approximate $4.4 million annually.
In addition to the credit facilities discussed above, as of December 31,
2000, ClimaChem's wholly owned subsidiary, DSN Corporation ("DSN"), is a party
to three loan agreements with a financial company (the "Financing Company") for
three projects. At December 31, 2000, DSN had outstanding borrowings of $5.2
million under these loans. The loans have monthly repayment schedules of
principal and interest through maturity in 2002. The interest rate on each of
the loans is fixed and range from 8.2% to 8.9%. Annual interest, for the three
notes as a whole, at December 31, 2000, would approximate $.5 million. The loans
are secured by the various DSN property and equipment. The loan agreements
require the Company to maintain certain financial ratios, including tangible net
worth requirements. In October 2000, DSN obtained a waiver from the Financing
Company of the financial covenants through December 2001.
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As discussed in Note 8 of Notes to Consolidated Financial Statements,
ClimaChem is restricted as to the funds that it may transfer to the Company
under the terms contained in an Indenture ("Indenture") covering the Senior
Unsecured Notes issued by ClimaChem and the Foothill Facility. No amounts were
paid to the Company by ClimaChem under the Tax Sharing Agreement, nor under the
Management Agreement during 1999. For the year ended December 31, 2000,
ClimaChem was required to pay the Company $1.8 million under the Management
Agreement inasmuch as earnings before interest, income taxes, depreciation and
amortization ("EBITDA") exceeded $26 million for the period ($1.4 million has
been paid as of December 31, 2000). In addition, ClimaChem recorded a provision
for income taxes relating to the extraordinary gain on the repurchase of Senior
Unsecured Notes for the year ended December 31, 2000 of $.3 million, $.1 million
of which is payable to the Company under the terms of the Tax Sharing Agreement.
As of December 31, 2000 $.8 million had been paid to the Company, $.7 million of
which will be repaid to ClimaChem in 2001. The Company believes its EBITDA and
pre-tax income will be sufficient in 2001 for the management fee and income
taxes to be paid by ClimaChem to the Company, however, there are no assurances
that amounts will be earned during 2001. Due to these limitations, the Company
and its non-ClimaChem subsidiaries have limited resources to satisfy their
obligations.
Due to the Company's and ClimaChem operating losses for the years of
1998, 1999 and 2000, and the limited borrowing ability under the Agreements, the
Company discontinued payment of cash dividends on its Common Stock for periods
subsequent of January 1, 1999, until the Board of Directors determines
otherwise. As of the date of this report the Company has not paid the regular
quarterly dividend of $.8125 on its outstanding $3.25 Convertible Exchangeable
Class C Preferred Stock Series 2 ("Series 2 Preferred") since June 15, 1999,
totaling approximately $3.5 million. During 2000, the Company purchased 278,700
shares of the Series 2 Preferred for approximately $1.6 million. In addition,
the Company did not pay the January 1, 2000 and 2001 regular dividend on the
Series B Preferred totaling $480,000. The Company does not anticipate having
funds available to pay dividends on its stock for the foreseeable future. See
discussion in Note 12 of Notes to Consolidated Financial Statements.
During the year ended December 31, 2000, the Company repurchased
approximately $29.7 million of the Senior Unsecured Notes and recognized a gain
of approximately $20.1 million. The Company used its working capital and
borrowing under its then existing credit facilities in order to fund these
purchases. This reduction in outstanding indebtedness will reduce interest
expense by $2.0 million annually.
The Company has planned capital expenditures of approximately $5
million, primarily in the Chemical and Climate Control Businesses, but such
capital expenditures are dependent upon obtaining acceptable financing. The
Company expects to delay these expenditures as necessary based on the
availability of adequate working capital and the availability of financing. The
Company obtained a fourteen (14) month extension of the compliance dates under
its wastewater management project and in the implementation dates of such
project. Because the Company has not completed its evaluation of engineering
alternatives, the Company has not yet provided to the state of Arkansas its
final design plans under the new extended deadlines. The consent order provides
for an October 1, 2001 deadline for submission of final design plans and will be
preceded by the agency's issuance of a revised permit. The revised permit will
include the discharge limits that will apply to the wastewater treatment
project. To date, the state has deferred issuance of the revised permit. The
Company continues to regularly advise
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the state of the projects engineering status and financing status. Construction
of the wastewater treatment project. There are no assurances that the Company
will be able to obtain the required financing. Failure to construct the
wastewater treatment project could have a material adverse long-term effect on
the Company.
Effective January 1, 2001, a subsidiary of the Company purchased the
real estate and personal property associated with an ammonia and fertilizer
plant located in Pryor, Oklahoma ("Pryor Plant"). The purchase price of the
Pryor Plant was immaterial. The Pryor Plant has not been in operation for two
(2) years. The Company has not determined whether the Pryor Plant will be put in
operation in the future, be held for sale or dismantled and used for spare
parts.
The Company's plan for 2001 identifies specific non-core assets (real
estate, oil and gas properties, spare parts, etc.) which the Company is working
to realize to provide additional working capital to the Company. The Company
also continues to evaluate alternatives for realizing its net investment in the
Industrial Products Business.
If the letter of intent to sell the Chemical Business' explosive
business distribution outlets and a long-term supply agreement with a third
party closes, they are expected to have the effect of providing working capital
from the proceeds of the sale of the assets of $3.5 million, reduce outstanding
accounts receivable and inventory, as well as provide a more constant and
predictable operating margin in the Company's explosives business.
In April 2001, the Company entered into a contract with a third party to
sell land adjacent to the Crystal City Plant for $4.5 million, before selling
and closing expenses. The buyer has 65 days to complete due diligence. Should
this transaction close, up to $2 million of the proceeds will be available to
LSB and its subsidiaries which are not subsidiaries of ClimaChem with the
remainder to be applied against the outstanding balance on the Foothill Facility
revolver.
The Company is negotiating to sell the building in which one of its
subsidiaries builds water-source heat pumps for approximately $8.1 million, of
which the Company is to receive approximately $2.2 million in cash, an unsecured
promissory note ("Note") for $1.6 million, plus $4.3 million, to be used to pay
off the currently existing mortgage on the building. As part of this
transaction, the lease held by the Company's subsidiary on the building is to be
extended from February 2003 to November 2007 and the Company's subsidiary's
option to buy the building is to be similarly extended. The option price to
purchase the building, when exercised, is to be based on the amount of the
mortgage on the building outstanding at the time the option is exercised plus an
amount up to $200,000 less the then outstanding amount due on the Note. The
closing of this transaction is subject to certain conditions.
During 2001, the Company's Chemical Business has experienced a
significant increase in the sales prices of its nitrogen-based products compared
to 2000, due primarily to reduced competition in the market including a
reduction in foreign imports. The Company has also seen a reduction in its raw
material costs of its Chemical Business from the later part of 2000 and early
2001, which are expected to result in improved margins in that business. The
Company's Climate Control Business has continued to experience strong demand and
steady increases in margins, contributing to a return to profitability for the
Company in March 2001.
Assuming all of the events discussed above are completed, the completion
of the Foothill Facility in April 2001, and the lack of other unforeseen adverse
events, management of the Company believes that the Company's operating results
will improve in 2001 over that of 2000 and believes the Company will have
adequate resources to meet its obligations as they come due; however, this
expectation may change in the near term. See "Special Note Regarding
Forward-Looking Statements".
The Company's plan for 2001 involves a number of initiatives and
assumptions which management believes to be reasonable and achievable;
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however, should the Company not be able to execute this plan described above, it
may not have resources available to meet its obligations as they come due.
DISCONTINUED BUSINESS
As discussed in Note 4 of Notes to Consolidated Financial Statements, on
April 5, 2000, the Board of Directors approved a plan of disposal of the
Company's Automotive Products Business ("Automotive"). The sale of Automotive
was concluded on May 4, 2000, to DriveLine Technologies ("DLT"). The Company
received notes for its net investment of approximately $8.7 million, and the
buyer assumed substantially all of Automotive's liabilities. The operating
losses associated with the discontinuation of this business segment are
reflected in the net loss from discontinued operations for the years ended
December 31, 1999 and 1998 in the Consolidated Statements of Operations.
The terms of the notes received in the sale call for no payments of
principal for the first two years following the close. Interest will accrue at
Wall Street Journal Prime plus 1.0% but will not be paid until DLT's
availability under its credit agreement reaches a level of $1.0 million. Accrued
interest will not be recognized until received.
Following the sale of Automotive, the Company remained a guarantor on
certain of Automotive's indebtedness. In the fourth quarter of 2000, the Company
was required to perform on certain of the equipment note guarantees and in 2001,
has been required to fund its $1.0 million guaranty on DLT's revolving credit
agreement. The Company has acquired certain of this debt from the original
lender and in other situations, negotiated revised terms. The Company has
recognized its obligations under the guaranties as of December 31, 2000 in the
amount of $4.3 million in the accompanying consolidated balance sheet ($3.2
million of which is due within one year and $1.1 million of which is due after
one year). The Company has also recognized a loss from discontinued operations
in the 2000 statement of operations in the amount of $3.1 million which
represents the Company's estimate of ultimate loss, net of collateral value and
that associated with the final adjustment for 2000 operations from the amount
accrued as of December 31, 1999.
JOINT VENTURE AND OPTION 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 United States. Under the
loan agreement, the Company has the option, which expires June 15, 2005, to
exchange its rights under the loan for 100% of the borrower's outstanding common
stock. The Company obtained a security interest in the stock of the French
manufacturer to secure its loan. Subsequent to 1996, the Company advanced an
additional $.9 million to the French manufacturer bringing the total of the loan
to $3.7 million. The $3.7 million loan, less a $1.5 million valuation reserve
for losses incurred by the French manufacturer prior to 1997, is carried on the
books as a note receivable in other assets. As of the date of this report, the
decision has not been made to exercise its option to acquire the stock of the
French manufacturer. The results of the operations of the French manufacturer
were not material for the years ended December 31, 2000 and 1999 and 1998.
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
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retrofit residential housing units at a United States Army base, which it
completed during 1996. The completed contract was for installation of
energy-efficient equipment (including air conditioning and heating equipment)
which would reduce utility consumption. For the installation and management, the
Project will receive a percent of all energy and maintenance savings during the
twenty (20) year contract term. The Project spent approximately $17.9 million to
retrofit the residential housing units at the United States Army base. The
project received a loan from a lender to finance approximately $14.0 million of
the cost of the Project. The Company is not guaranteeing any of the lending
obligations of the Project. The Company's equity interest in the results of the
operations of the Project were not material for the years ended December 31,
2000, 1999 and 1998.
DEBT GUARANTEE
On October 17, 1997, Prime Financial Corporation ("Prime"), a subsidiary
of the Company, borrowed from SBL Corporation, a corporation wholly owned by the
spouse and children of Jack E. Golsen, Chairman of the Board and President of
the Company, the principal amount of $3,000,000 (the "Loan") on an unsecured
basis and payable on demand, with interest payable monthly in arrears at a
variable interest rate equal to the Wall Street Journal Prime Rate plus 2% per
annum. The purpose of the loan was to assist the Company by providing additional
liquidity. The Company has guaranteed the Loan. As of December 31, 2000, the
unpaid principal balance on the Loan was $1,750,000. In April, 2000, at the
request of Prime and the Company, SBL agreed to modify the demand note to make
such a term note with a maturity date no earlier than April, 2001, except under
limited circumstances. In April 2001, this term note was amended to require
repayment of $300,000 in 2001 and $1,450,000 in 2002.
In order to make the Loan to Prime, SBL and certain of its affiliates
borrowed the $3,000,000 from a bank (collectively "SBL Borrowing"), and as part
of the collateral pledged by SBL to the bank in connection with such loan, SBL
pledged among other things, its note from Prime. In order to obtain SBL's
agreement as provided above, and for other reasons, effective April 21, 2000, a
subsidiary of the Company guaranteed on a limited basis the obligations of SBL
and its affiliates relating to the unpaid principal amount due to the bank in
connection with the SBL Borrowings, and, in order to secure its obligations
under the guarantees pledged to the bank 1,973,461 shares of the Company's
Common Stock that it holds as treasury stock. Under the guarantee, the Company's
liability is limited to the value, from time to time, of the Company's Common
Stock pledged by the Company. As of December 31, 2000, the outstanding principal
balance due to the bank from SBL as a result of such loan was $1,750,000.
AVAILABILITY OF COMPANY'S LOSS CARRY-OVERS
The Company's cash flow in future years may benefit from its ability to
use net operating loss ("NOL") carry-overs from prior periods to reduce the
federal income tax payments which it would otherwise be required to make with
respect to income generated in such future years. Such benefit, if any, is
dependent on the Company's ability to generate taxable income in future periods,
for which there is no assurance. Such benefit, if any, will be limited by the
Company's reduced NOL for alternative minimum tax purposes, which was
approximately $42.5 million at December 31, 2000 (exclusive of the NOL carry
forwards attributable to the Automotive entities sold in March 2001). As of
December 31, 2000, the Company had available regular tax NOL carry-overs of
approximately $69.8 million based on its federal income tax returns as filed
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with the Internal Revenue Service for taxable years through 1999 and its
estimated Federal taxable income for the year 2000 (exclusive of the NOL carry
forwards attributable to the Automotive entities sold in March 2001).
Approximately $1.5 million of regular tax NOL expires in 2001. Due to its recent
history of reporting net losses, the Company has established a valuation
allowance on a portion of its NOLs and thus has not recognized the full benefit
of its NOLs in the accompanying Condensed Consolidated Financial Statements.
The amount of these carry-overs has not been audited or approved by the
Internal Revenue Service and, accordingly, no assurance can be given that such
carry-overs will not be reduced as a result of audits in the future. In
addition, the ability of the Company to utilize these carry-overs in the future
will be subject to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations. These include, in particular, limitations imposed by Code
Section 382 and the consolidated return regulations.
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, 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 or the Company is required to fund any of the unsecured liabilities of
its former subsidiaries of the Automotive Business not presently anticipated by
the Company. See "Business", "Legal Proceedings" and Note 13 of Notes to
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
The Company's results of operations and operating cash flows are
impacted by changes in market interest rates and raw material prices for
products used in its manufacturing processes. All information is presented in
U.S. dollars.
INTEREST RATE RISK
The Company's interest rate risk exposure results from its debt
portfolio which is impacted by short-term rates, primarily prime rate-based
borrowings from commercial banks, and long-term rates, primarily fixed-rate
notes, some of which prohibit prepayment or require substantial prepayment
penalties.
The following table provides information about the Company's interest
rate sensitive financial instruments as of December 31, 2000.
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YEARS ENDING DECEMBER 31,
------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Expected maturities of long-term debt:
Variable rate debt $35,169 $1,623 $ 189 $ 205 $ 724 $ 5,609 $43,519
Weighted average
interest rate(1) 10.98% 7.37% 7.30% 7.21% 6.80% 6.80% 10.29%
Fixed rate debt $ 6,932 $3,576 $3,156 $1,482 $ 284 $77,056 $92,486
Weighted average
interest rate(2) 10.55% 10.61% 10.68% 10.68% 10.69% 10.69% 10.65%
- -------------------
(1) Interest rate is based on the aggregate rate of debt outstanding as of
December 31, 2000. Interest is at floating rate based on the lender's prime
rate plus 1.5% per annum, or at the Company's option, on its Revolving
Credit Agreements on the lender's LIBOR rate plus 3.875% per annum. In
April, 2001, the Revolving Credit Agreements were replaced which caused an
increase in the floating rate by .5%.
(2) Interest rate is based on the aggregate rate of debt outstanding as of
December 31, 2000.
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December 31, 2000 December 31, 1999
--------------------------- ----------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- -------- ---------- --------
(in thousands)
Variable Rate:
Bank debt and
equipment financing $43,519 $ 43,519 $31,521 $ 31,521
Fixed Rate:
Bank debt and
equipment financing 16,749 17,151 21,269 21,551
Senior Notes 26,367 75,335 26,250 105,000
------ ------ ------ -------
$86,635 $136,005 $79,040 $158,072
======= ======== ======= ========
The fair value of the Company's Senior Notes was determined based on a market
quotation for such securities.
RAW MATERIAL PRICE RISK
The Company has a commitment to purchase 72,000 tons of anhydrous
ammonia under a contract. The Company's purchase price can be higher or lower
than the current market spot price. Based on the pricing index contained in this
contract, prices paid during 2000 and 1999 were higher than the current market
spot price. As a result, in 2000 and 1999 the accompanying Consolidated
Financial Statements include loss provisions for anhydrous ammonia required to
be purchased during the remainder of the contract aggregating approximately $2.5
and $8.4 million, respectively.
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.
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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
from operations on an annualized basis, (ii) establishing a position as a market
leader, (iii) the amount of the loss provision for anhydrous ammonia required to
be purchased on that the cost to produce Chemical Business products will
improve, (iv) the market for certain of the Climate Control Business products
will continue to grow, (v) losses arising from the mechanical failure and
interruption of production will be fully paid by insurance (vi) availability of
net operating loss carryovers, (vii) amount to be spent relating to compliance
with federal, state and local environmental laws at the El Dorado Facility,
(viii) liquidity and availability of funds, (ix)profits through liquidation of
assets or realignment of assets or some other method, (x) anticipated financial
performance, (xi) ability to comply with general working capital and debt
service requirements, (xii) ability to be able to continue to borrow under the
Company's revolving line of credit, (xiii) the ability to obtain necessary
materials for the manufacturing of products, (xiv) adequate cash flows to meet
its presently anticipated capital requirements, (xv) fertilizer and related
chemical products sold to the agricultural industry are the only seasonal
products, (xvi) the sale of the Company's explosive business distribution
outlets and related long-term supply agreement will close, (xvii) the sale of
land adjacent to the Crystal City Plant will close, (xviii) the Company's EBITDA
and pre-tax income will be sufficient in 2001 for the management fee and income
taxes to be paid by ClimaChem, (xix) ability to obtain anhydrous ammonia from
other sources in the event of a termination of its existing contract, (xx)
Climate Control Business' backlog is expected to be completed by December 31,
2001, (xxi) management expects to see significant improvements in operating
results from the Company in 2001 and believes that the Company has adequate
resources to meet its obligations as they come due, and (xxii) ability to carry
out its plans for 2001. While the Company believes the expectations reflected in
such Forward-Looking Statements are reasonable, it can give no assurance such
expectations will prove to have been correct. There are a variety of factors
which could cause future outcomes to differ materially from those described in
this report, including, but not limited to, (i) decline in general economic
conditions, both domestic and foreign, (ii) material reduction in revenues,
(iii) material increase in interest rates; (iv) inability to collect in a timely
manner a material amount of receivables, (v) increased competitive pressures,
(vi) changes in federal, state and local laws and regulations, especially
environmental regulations, or in interpretation of such, pending (vii)
additional releases (particularly air emissions into the environment), (viii)
material increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (ix) the requirement to use internally
generated funds for purposes not presently anticipated, (x) ability to become
profitable from operations, or if unable to become profitable from operations,
the inability to secure additional liquidity in the form of additional equity or
debt, (xi) the cost for the purchase of anhydrous ammonia and natural gas, (xii)
changes in competition, (xiii) the loss of any significant customer, (xiv)
changes in
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operating strategy or development plans, (xv) inability to fund the working
capital and expansion of the Company's businesses, (xvi) adverse results in any
of the Company's pending litigation, (xvii) inability to obtain necessary raw
materials, (xviii) ability to recover the Company's investment in the aviation
company, (xix) Bayer's inability or refusal to purchase all of the Company's
production at the Baytown nitric acid plant, (xx) the sale of the land adjacent
to the Crystal City Plant does not close, (xxi) insurance does not cover all of
the Company's losses due to mechanical failure and interruption, (xxii) sale of
the Chemical Business' explosive distribution centers does not close by a
certain date, and in such event, the buyer does not believe that the Chemical
Business can deliver product to it, and (xxiii) other factors described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" contained in this report. Given these uncertainties, all parties are
cautioned not to place undue reliance on such Forward-Looking Statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the Forward-Looking Statements
contained herein to reflect future events or developments.
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46
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, 2001, in connection with the
Company's 2001 annual meeting of stockholders.
43
47
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, 2000
and 1999 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
2000 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 2000 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 2000 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-46
Quarterly Financial Data (Unaudited) F-47 to F-48
(a)(2) FINANCIAL STATEMENT SCHEDULE
The Company has included the following schedule in this report:
II - Valuation and Qualifying Accounts F-49 to F-50
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.
44
48
(a)(3) EXHIBITS
2.1. Stock Purchase Agreement and Stock Pledge Agreement between Dr.
Hauri AG, a Swiss Corporation, and LSB Chemical Corp., which the Company
hereby incorporates by reference from Exhibit 2.2 to the Company's Form
10-K for fiscal year ended December 31, 1994.
2.2. Asset Purchase and Sale Agreement, dated May 4, 2000 L&S Automotive
Products Co., L&S Bearing So., LSB Extrusion Co., Rotex Corporation and
DriveLine Technologies, Inc., which is incorporated from Exhibit 2.2 to
the Company's Amendment No. 2 to the 1999 Form 10-K. This agreement
includes certain exhibits and schedules that are not included with this
exhibit, and will be provided upon request by the Commission.
3.1. Restated Certificate of Incorporation, the Certificate of
Designation dated February 17, 1989, and certificate of Elimination dated
April 30, 1993, which the Company hereby incorporates by reference from
Exhibit 4.1 to the Company's Registration Statement, No. 33-61640;
Certificate of Designation for the Company's $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, which the Company hereby
incorporates by reference from Exhibit 4.6 to the Company's Registration
Statement, No. 33-61640.
3.2. Bylaws, as amended, which the Company hereby incorporates by
reference from Exhibit 3(ii) to the Company's Form 10-Q for the quarter
ended June 30, 1998.
4.1. Specimen Certificate for the Company's Non-cumulative Preferred
Stock, having a par value of $100 per share, which the Company hereby
incorporates by reference from Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1983.
4.2. Specimen Certificate for the Company's Series B Preferred Stock,
having a par value of $100 per share, which the Company hereby
incorporates by reference from Exhibit 4.27 to the Company's Registration
Statement No. 33-9848.
4.3. Specimen Certificate for the Company's Series 2 Preferred, which
the Company hereby incorporates by reference from Exhibit 4.5 to the
Company's Registration Statement No. 33-61640.
4.4. Specimen Certificate for the Company's Common Stock, which the
Company incorporates by reference from Exhibit 4.4 to the Company's
Registration Statement No. 33-61640.
4.5. Renewed Rights Agreement, dated January 6, 1999, between the
Company and Bank One, N.A., which the Company hereby incorporates by
reference from Exhibit No. 1 to the Company's Form 8-A Registration
Statement, dated January 27, 1999.
4.6. Indenture, dated as of November 26, 1997, by and among ClimaChem,
Inc., the Subsidiary Guarantors and Bank One, NA, as trustee, which the
Company hereby incorporates by reference from Exhibit 4.1 to the Company's
Form 8-K, dated November 26, 1997.
45
49
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. First Supplemental Indenture, dated February 8, 1999, by and among
ClimaChem, Inc., the Guarantors, and Bank One N.A., which the Company
hereby incorporates by reference from Exhibit 4.19 to the Company's Form
10-K for the year ended December 31, 1998.
4.9. Second Amended and Restated Loan and Security Agreement dated May
10, 1999, by and between Bank of America National Trust and Savings
Association and LSB Industries, Inc., Summit Machine Tool Manufacturing
Corp., and Morey Machinery Manufacturing Corporation, which the Company
hereby incorporates by reference from Exhibit 4.2 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1999.
10.1. Form of Death Benefit Plan Agreement between the Company and the
employees covered under the plan, which the Company hereby incorporates by
reference from Exhibit 10(c)(1) to the Company's Form 10-K for the year
ended December 31, 1980.
10.2. The Company's 1981 Incentive Stock Option Plan, as amended, and
1986 Incentive Stock Option Plan, which the Company hereby incorporates by
reference from Exhibits 10.1 and 10.2 to the Company's Registration
Statement No. 33-8302.
10.3. Form of Incentive Stock Option Agreement between the Company and
employees as to the Company's 1981 Incentive Stock Option Plan, which the
Company hereby incorporates by reference from Exhibit 10.10 to the
Company's Form 10-K for the fiscal year ended December 31, 1984.
10.4. Form of Incentive Stock Option Agreement between the Company and
employees as to the Company's 1986 Incentive Stock Option Plan, which the
Company hereby incorporates by reference from Exhibit 10.6 to the
Company's Registration Statement No. 33-9848.
10.5. The 1987 Amendments to the Company's 1981 Incentive Stock Option
Plan and 1986 Incentive Stock Option Plan, which the Company hereby
incorporates by reference from Exhibit 10.7 to the Company's Form 10-K for
the fiscal year ended December 31, 1986.
10.6. The Company's 1993 Stock Option and Incentive Plan which the
Company hereby incorporates by reference from Exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1993.
10.7. The Company's 1993 Non-employee Director Stock Option Plan which
the Company hereby incorporates by reference from Exhibit 10.7 to the
Company's Form 10-K for the fiscal year ended December 31, 1993.
10.8. Lease Agreement, dated March 26, 1982, between Mac Venture, Ltd.
and Hercules Energy Mfg. Corporation, which the Company hereby
incorporates by reference from Exhibit 10.32 to the Company's Form 10-K
for the fiscal year ended December 31, 1981.
46
50
10.9. Limited Partnership Agreement dated as of May 4, 1995, between the
general partner, and LSB Holdings, Inc., an Oklahoma Corporation, as
limited partner which the Company hereby incorporates by reference from
Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended
December 31, 1995.
10.10. Lease Agreement dated November 12, 1987, between Climate Master,
Inc. and West Point Company and amendments thereto, which the Company
hereby incorporates by reference from Exhibits 10.32, 10.36, and 10.37, to
the Company's Form 10-K for fiscal year ended December 31, 1988.
10.11. Severance Agreement, dated January 17, 1989, between the Company
and Jack E. Golsen, which the Company hereby incorporates by reference
from Exhibit 10.48 to the Company's Form 10-K for fiscal year ended
December 31, 1988. The Company also entered into identical agreements with
Tony M. Shelby, David R. Goss, Barry H. Golsen, David M. Shear, and Jim D.
Jones and the Company will provide copies thereof to the Commission upon
request.
10.12. Third Amendment to Lease Agreement, dated as of December 31,
1987, between Mac Venture, Ltd. and Hercules Energy Mfg. Corporation,
which the Company hereby incorporates by reference from Exhibit 10.49 to
the Company's Form 10-K for fiscal year ended December 31, 1988.
10.13. Employment Agreement and Amendment to Severance Agreement dated
January 12, 1989 between the Company and Jack E. Golsen, dated March 21,
1996 which the Company hereby incorporates by reference from Exhibit 10.15
to the Company's Form 10-K for fiscal year ended December 31, 1995.
10.14. Non-Qualified Stock Option Agreement, dated June 1, 1992, between
the Company and Robert C. Brown, M.D. which the Company hereby
incorporates by reference from Exhibit 10.38 to the Company's Form 10-K
for fiscal year ended December 31, 1992. The Company entered into
substantially identical agreements with Bernard G. Ille, Jerome D. Shaffer
and C.L. Thurman, and the Company will provide copies thereof to the
Commission upon request.
10.15. Loan and Security Agreement (DSN Plant) dated October 31, 1994
between DSN Corporation and The CIT Group which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Form 10-Q for
the fiscal quarter ended September 30, 1994.
10.16. Loan and Security Agreement (Mixed Acid Plant) dated April 5,
1995 between DSN Corporation and The CIT Group, which the Company hereby
incorporates by reference from Exhibit 10.25 to the Company's Form 10-K
for the fiscal year ended December 31, 1994.
10.17. First Amendment to Loan and Security Agreement (DSN Plant), dated
June 1, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc. which the Company hereby incorporates by reference from
Exhibit 10.13 to the ClimaChem Form S-4 Registration Statement, No.
333-44905.
47
51
10.18. First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.15 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.19. Loan and Security Agreement (Rail Tank Cars), dated November 15,
1995, between DSN Corporation and The CIT Group/Equipment Financing, Inc.
which the Company hereby incorporates by reference from Exhibit 10.16 to
the ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.20. First Amendment to Loan and Security Agreement (Rail Tank Cars),
dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.17 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.22. Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment Financing,
Inc. which the Company hereby incorporates by reference from Exhibit 10.1
to the Company's Form 10-Q for the fiscal quarter ended March 31, 1997.
10.23. Amendment to Loan and Security Agreement, dated November 21,
1997, between DSN Corporation and The CIT Group/Equipment Financing, Inc.
which the Company hereby incorporates by reference from Exhibit 10.19 to
the ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.24. First Amendment to Non-Qualified Stock Option Agreement, dated
March 2, 1994, and Second Amendment to Stock Option Agreement, dated April
3, 1995, each between the Company and Jack E. Golsen, which the Company
hereby incorporates by reference from Exhibit 10.1 to the Company's Form
10-Q for the fiscal quarter ended March 31, 1995.
10.25. Baytown Nitric Acid Project and Supply Agreement dated June 27,
1997, by and among El Dorado Nitrogen Company, El Dorado Chemical Company
and Bayer Corporation which the Company hereby incorporates by reference
from Exhibit 10.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS
IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.26. First Amendment to Baytown Nitric Acid Project and Supply
Agreement, dated February 1, 1999, between El Dorado Nitrogen Company and
Bayer Corporation, which the Company hereby incorporates by reference from
Exhibit 10.30 to the Company's Form 10-K for the year ended December 31,
1998. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF COMMISSION ORDER CF #7927, DATED JUNE 9, 1999, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.27. Service Agreement, dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company which the Company hereby incorporates by
reference from Exhibit 10.3 to the Company's Form 10-Q
48
52
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF
#5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED.
10.28. Ground Lease dated June 27, 1997, between Bayer Corporation and
El Dorado Nitrogen Company which the Company hereby incorporates by
reference from Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED
SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
10.29. Participation Agreement, dated as of June 27, 1997, among El
Dorado Nitrogen Company, Boatmen's Trust Company of Texas as Owner
Trustee, Security Pacific Leasing corporation, as Owner Participant and a
Construction Lender, Wilmington Trust Company, Bayerische Landes Bank, New
York Branch, as a Construction Lender and the Note Purchaser, and Bank of
America National Trust and Savings Association, as Construction Loan Agent
which the Company hereby incorporates by reference from Exhibit 10.5 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1997.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.30. Lease Agreement, dated as of June 27, 1997, between Boatmen's
Trust Company of Texas as Owner Trustee and El Dorado Nitrogen Company
which the Company hereby incorporates by reference from Exhibit 10.6 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1997.
10.31. Security Agreement and Collateral Assignment of Construction
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company
which the Company hereby incorporates by reference from Exhibit 10.7 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1997.
10.32. Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company
and consented to by Bayer Corporation which the Company hereby
incorporates by reference from Exhibit 10.8 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1997.
10.33. Amendment to Loan and Security Agreement, dated March 16, 1998,
between The CIT Group/Equipment Financing, Inc., and DSN Corporation which
the Company hereby incorporates by reference from Exhibit 10.54 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
10.34. Fifth Amendment to Lease Agreement, dated as of December 31,
1998, between Mac Venture, Ltd. and Hercules Energy Mfg. Corporation,
which the Company hereby incorporates by reference from Exhibit 10.38 to
the Company's Form 10-K for the year ended December 31, 1998.
49
53
10.35. Union Contract, dated August 1, 1998, between EDC and the
International Association of Machinists and Aerospace Workers, which the
Company hereby incorporates by reference from Exhibit 10.42 to the
Company's Form 10-K for the year ended December 31, 1998.
10.36. Non-Qualified Stock Option Agreement, dated April 22, 1998,
between the Company and Robert C. Brown, M.D. The Company entered into
substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer, Raymond B. Ackerman, Horace G. Rhodes, Gerald J. Gagner, and
Donald W. Munson. The Company will provide copies of these agreements to
the Commission upon request.
10.37. The Company's 1998 Stock Option and Incentive Plan, which the
Company hereby incorporates by reference from Exhibit 10.44 to the
Company's Form 10-K for the year ended December 31, 1998.
10.38. Letter Agreement, dated March 12, 1999, between Kestrel Aircraft
Company and LSB Industries, Inc., Prime Financial Corporation, Herman
Meinders, Carlan K. Yates, Larry H. Lemon, Co-Trustee Larry H. Lemon
Living Trust, which the Company hereby incorporates by reference from
Exhibit 10.45 to the Company's Form 10-K for the year ended December 31,
1998.
10.39. LSB Industries, Inc. 1998 Stock Option and Incentive Plan which
the Company hereby incorporates by reference from Exhibit "B" to the LSB
Proxy Statement, dated May 24, 1999, for Annual Meeting of Stockholders.
10.40 LSB Industries, Inc. Outside Directors Stock Option Plan which the
Company hereby incorporates by reference from Exhibit "C" to the LSB Proxy
Statement, dated May 24, 1999, for Annual Meeting of Stockholders.
10.41. First Amendment to Second Amended and Restated Loan and Security
Agreement, dated January 1, 2000, by and between Bank of America, N.A. and
LSB Industries, Inc., Summit Machine Tool Manufacturing Corp., and Morey
Machinery Manufacturing Corporation, which the Company hereby incorporates
by reference from Exhibit 10.3 to the Company's Form 8-K dated December
30, 1999.
10.42 Amendment to Anhydrous Ammonia Sales Agreement, dated January 4,
2000, to be effective October 1, 1999, between Koch Nitrogen Company and
El Dorado Chemical Company, which is incorporated by reference from
Exhibit 10.43 to the Company's Amendment No. 2 to its 1999 Form 10-K.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF#9650, DATED JULY 2000, GRANTING A REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
10.43 Anhydrous Ammonia Sales Agreement, dated January 2000, to be
effective October 1, 1999, between Koch Nitrogen Company and El Dorado
Chemical Company which is incorporated by reference from Exhibit 10.44 to
the Company's Amendment No. 2 to its 1999 Form 10-K. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION
ORDER CF#9650, DATED JULY 2000, GRANTING A REQUEST BY THE
50
54
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
10.44 Second Amendment to Second Amended and Restated Loan and Security
Agreement, dated March 1, 2000 by and between Bank of America, N.A. and
LSB Industries Inc., Summit Machine Tool Manufacturing Corp., and Morey
Machinery Manufacturing Corporation, which the Company hereby incorporates
by reference from Exhibit 10.3 to the Company's Form 8-K dated March 1,
2000.
10.45 Third Amendment to Second Amended and Restated Loan and Security
Agreement, dated March 31, 2000 by and between Bank of America, N.A. and
LSB Industries Inc., Summit Machine Tool Manufacturing Corp., and Morey
Machinery manufacturing Corporation, which the Company hereby incorporates
by reference from Exhibit 10.14 to the Company's Form 10-Q for the fiscal
quarter ended March 31, 2000.
10.46 Loan Agreement dated December 23, 1999 between Climate Craft, Inc.
and the City of Oklahoma City, which the Company hereby incorporates by
reference from Exhibit 10.49 to the Company's Amendment No. 2 to its 1999
Form 10-K.
10.47 Letter, dated April 1, 2000, executed by SBL to Prime amending the
Promissory Note, which the Company incorporates by reference from Exhibit
10.52 to the Company's Amendment No. 2 to its 1999 Form 10-K.
10.48 Guaranty Agreement, dated as of April 21, 2000, by Prime to
Stillwater National Bank & Trust relating to that portion of the SBL
Borrowings borrowed by SBL, which the Company incorporates by reference
from Exhibit 10.50 to the Company's Amendment No. 2 to its 1999 Form 10-K.
Substantial similar guarantees have been executed by Prime in favor of
Stillwater covering the amounts borrowed by the following affiliates SBL
relating to the SBL Borrowing s (as \defined in "Relationships and Related
Transactions:") listed in Exhibit A attached to the Guaranty Agreement
with the only material differences being the name of the debtor and the
amount owing by such debtor. Copies of which will provided to the
Commission upon request.
10.49 Security Agreement, dated effective April 21, 2000, executed by
Prime in favor of Stillwater National Bank and Trust, which the Company
incorporates by reference from Exhibit 10.54 to the Company's Amendment
No. 2 to its 1999 Form 10-K.
10.50 Limited Guaranty, effective April 21, 2000, executed by Prime to
Stillwater National Bank and Trust, which the Company incorporates by
reference from Exhibit 10.55 to the Company's Amendment No. 2 to its 1999
Form 10-K.
10.51 Covenant Waiver Letter, dated October 19, 2000, between The CIT
Group and DSN Corporation, 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, 2000.
10.52 Fourth Amendment to Second Amended and Restated Loan and Security
Agreement dated October 10, 2000 by and between Bank of
51
55
America, N.A. and LSB Industries, Inc., Summit Machine Tool Manufacturing
corp., and Morey Machinery Manufacturing Corporation, which the Company
hereby incorporates by reference from Exhibit 10.2 to the Company's Form
10-Q for the fiscal quarter ended September 30, 2000.
10.53 Letter Agreement, dated August 23, 2000, between LSB Chemical
Corp. and Orica USA, Inc., which the Company hereby incorporates by
reference from Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended September 30, 2000. 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.
10.54 Agreement, dated October 31, 2000, between Orica Nitrogen, L.L.C.,
Orica USA, Inc., and LSB Chemical Corp., which the Company hereby
incorporates by reference from Exhibit 10.5 to the company's Form 10-Q for
the fiscal quarter ended September 20, 2000. 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.
10.55. Letter, dated April 1, 2001, executed by SBL to Prime amending
the Promissory Note.
10.56. Letter of Intent, dated December 22, 2000, between El Dorado
Chemical Company and ORICA USA Inc.
10.57. Agreement, dated April 2, 2001, between Crystal City Nitrogen
Company and River Cement Company.
21.1. Subsidiaries of the Company.
23.1. Consent of Independent Auditors.
(b) REPORTS ON FORM 8-K. The Company filed the following report on Form
8-K during the fourth quarter of 2000.
(i) Form 8-K, dated November 15, 2000. (date of event: October 31,
2000). The item reported was Item 2, "Acquisition or Disposition of Assets",
discussing the letter agreement between LSB Chemical Corp. and Orica USA Inc.
and the agreement between Orica Nitrogen, L.L.C., Orica USA, Inc. and LSB
Chemical Corp. relating to the acquisition of certain assets located in
Cherokee, Alabama and Crystal City, Missouri.
52
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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 17th day
of April, 2001.
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 17, 2001 By: /s/ JACK E. GOLSEN
-------------------------------------
Jack E. Golsen, Director
Dated: April 17, 2001 By: /s/ TONY M. SHELBY
-------------------------------------
Tony M. Shelby, Director
Dated: April 17, 2001 By: /s/ DAVID R. GOSS
-------------------------------------
David R. Goss, Director
Dated: April 17, 2001 By: /s/ BARRY H. GOLSEN
-------------------------------------
Barry H. Golsen, Director
Dated: April 17, 2001 By: /s/ ROBERT C. BROWN
-------------------------------------
Robert C. Brown, Director
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57
Dated: April 17, 2001 By: /s/ BERNARD G. ILLE
-------------------------------------
Bernard G. Ille, Director
Dated: April 17, 2001 By: /s/ JEROME D. SHAFFER
-------------------------------------
Jerome D. Shaffer, Director
Dated: April 17, 2001 By: /s/ RAYMOND B. ACKERMAN
-------------------------------------
Raymond B. Ackerman, Director
Dated: April 17, 2001 By: /s/ HORACE RHODES
-------------------------------------
Horace Rhodes, Director.
Dated: April 17, 2001 By: /s/ GERALD J. GAGNER
-------------------------------------
Gerald J. Gagner, Director
Dated: April 17, 2001 By: /s/ DONALD W. MUNSON
-------------------------------------
Donald W. Munson, Director
Dated: April 17, 2001 By: /s/ CHARLES A. BURTCH
-------------------------------------
Charles A. Burtch, Director
54
58
LSB
Financial
Statements
59
LSB Industries, Inc.
Consolidated Financial Statements
for Inclusion of Form 10-K
Years ended December 31, 2000, 1999 and 1998
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
60
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, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14 (2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LSB
Industries, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young, LLP
Oklahoma City, Oklahoma
April 16, 2001
F-1
61
LSB Industries, Inc.
Consolidated Balance Sheets
DECEMBER 31,
---------------------------
2000 1999
--------- ---------
(In Thousands)
ASSETS
Current assets :
Cash and cash equivalents $ 3,063 $ 3,130
Trade accounts receivable, net 48,333 44,549
Inventories 31,639 30,480
Supplies and prepaid items 5,977 4,617
--------- ---------
Total current assets 89,012 82,776
Property, plant and equipment, net 80,884 83,814
Other assets, net 22,999 22,045
--------- ---------
$ 192,895 $ 188,635
========= =========
(Continued on following page)
F-2
62
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
DECEMBER 31,
---------------------------
2000 1999
--------- ---------
(In Thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Drafts payable $ 224 $ 360
Accounts payable 26,765 18,791
Accrued liabilities 29,312 18,563
Current portion of long-term debt 42,101 33,359
--------- ---------
Total current liabilities 98,402 71,073
Long-term debt 93,904 124,713
Accrued losses on firm purchase commitments and other
noncurrent liabilities 9,892 6,883
Commitments and contingencies (Note 13)
Redeemable, noncumulative, convertible preferred stock, $100
par value; 1,462 shares issued and outstanding 139 139
Stockholders' deficit:
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; 628,550 shares issued (920,000
in 1999) 31,427 46,000
Common stock, $.10 par value; 75,000,000 shares authorized,
15,163,909 shares issued (15,108,716 in 1999) 1,516 1,511
Capital in excess of par value 52,376 39,277
Accumulated deficit (80,480) (86,675)
--------- ---------
6,839 2,113
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares 200 200
Common stock, 3,285,957 shares 16,081 16,086
--------- ---------
Total stockholders' deficit (9,442) (14,173)
--------- ---------
$ 192,895 $ 188,635
========= =========
See accompanying notes.
F-3
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LSB Industries, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands, Except Per Share Amounts)
BUSINESSES CONTINUING AT DECEMBER 31:
Revenues:
Net sales $ 290,620 $ 254,236 $ 255,858
Other 5,630 5,419 5,898
--------- --------- ---------
296,250 259,655 261,756
Costs and expenses:
Cost of sales 238,066 203,480 201,279
Selling, general and administrative 47,787 51,672 48,918
Interest 15,377 15,115 14,504
Other 2,280 4,383 4,608
Provision for loss on firm sales and purchase commitments 3,395 8,439 --
Provision for impairment on long-lived assets -- 4,126 --
--------- --------- ---------
306,905 287,215 269,309
--------- --------- ---------
Loss from continuing operations before businesses disposed of,
provision for income taxes and extraordinary gain
(10,655) (27,560) (7,553)
Businesses disposed of:
Revenues -- 7,461 14,184
Operating costs, expenses and interest -- 9,419 17,085
--------- --------- ---------
-- (1,958) (2,901)
Gain (loss) on disposal of businesses -- (1,971) 12,993
--------- --------- ---------
-- (3,929) 10,092
--------- --------- ---------
Income (loss) from continuing operations before provision
for income taxes and extraordinary gain (10,655) (31,489) 2,539
Provision for income taxes (135) (157) (100)
--------- --------- ---------
Income (loss) from continuing operations before
extraordinary gain (10,790) (31,646) 2,439
Net loss from discontinued operations (Note 4) (3,101) (18,121) (4,359)
Extraordinary gain (Note 8 (B)) 20,086 -- --
--------- --------- ---------
Net income (loss) 6,195 (49,767) (1,920)
Preferred stock dividend requirements 2,771 3,228 3,229
--------- --------- ---------
Net income (loss) applicable to common stock $ 3,424 $ (52,995) $ (5,149)
========= ========= =========
Income (loss) per common share -- basic and diluted:
Loss from continuing operations before extraordinary
gain $ (1.14) $ (2.95) $ (.07)
Net loss from discontinued operations (.26) (1.53) (.35)
Extraordinary gain 1.69 -- --
--------- --------- ---------
Net income (loss) $ .29 $ (4.48) $ (.42)
========= ========= =========
See accompanying notes.
F-4
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LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
COMMON STOCK NON- ACCUMULATED
--------------- REDEEMABLE CAPITAL IN OTHER TREASURY TREASURY
PAR PREFERRED EXCESS OF COMPREHENSIVE ACCUMULATED STOCK-- STOCK--
SHARES VALUE STOCK PAR VALUE LOSS DEFICIT COMMON PREFERRED TOTAL
------ ----- ---------- --------- ------------- ----------- -------- --------- -----
(In Thousands)
Balance at December 31, 1997 15,042 $ 1,504 $ 48,000 $ 38,257 $ (1,003) $(29,773) $(12,289) $(200) $ 44,496
Net loss -- -- -- -- -- (1,920) -- -- (1,920)
Foreign currency translation
adjustment -- -- -- -- (556) -- -- -- (556)
--------
Total comprehensive loss (2,476)
Conversion of 76.5 shares of
redeemable preferred stock to 3 -- -- 7 -- -- -- -- 7
common stock
Exercise of stock options:
Cash received 64 7 -- 65 -- -- -- -- 72
Dividends declared:
Series B 12% preferred stock
($12.00 per share) -- -- -- -- -- (240) -- -- (240)
Redeemable preferred stock
($10.00 per share) -- -- -- -- -- (16) -- -- (16)
Common stock ($.02 per share) -- -- -- -- -- (244) -- -- (244)
Series 2 preferred stock -- -- -- -- -- (2,973) -- -- (2,973)
($3.25 per share)
Purchase of treasury stock -- -- -- -- -- -- (3,567) -- (3,567)
------ -------- -------- -------- -------- -------- -------- ----- --------
Balance at December 31, 1998 15,109 1,511 48,000 38,329 (1,559) (35,166) (15,856) (200) 35,059
Net loss -- -- -- -- -- (49,767) -- -- (49,767)
Foreign currency translation
adjustment -- -- -- -- 1,559 -- -- -- 1,559
--------
Total comprehensive loss (48,208)
Expiration of variable employee
stock option without exercise -- -- -- 948 -- -- -- -- 948
Dividends declared:
Series B 12% preferred stock
($12.00 per share) -- -- -- -- -- (240) -- -- (240)
Redeemable preferred stock
($10.00 per share) -- -- -- -- -- (16) -- -- (16)
Series 2 preferred stock -- -- -- -- -- (1,486) -- -- (1,486)
($1.63 per share)
Purchase of treasury stock -- -- -- -- -- -- (230) -- (230)
------ -------- -------- -------- -------- -------- -------- ----- --------
Balance at December 31, 1999 15,109 1,511 48,000 39,277 -- (86,675) (16,086) (200) (14,173)
(Continued on following page)
F-5
65
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
COMMON STOCK NON- ACCUMULATED
--------------- REDEEMABLE CAPITAL IN OTHER TREASURY TREASURY
PAR PREFERRED EXCESS OF COMPREHENSIVE ACCUMULATED STOCK-- STOCK--
SHARES VALUE STOCK PAR VALUE LOSS DEFICIT COMMON PREFERRED TOTAL
------ ----- ---------- --------- ------------- ----------- -------- --------- -----
(In Thousands)
Net income -- -- -- -- -- 6,195 -- -- 6,195
Repurchase of 278,700 shares of
non-redeemable preferred stock -- (13,935) 12,290 -- -- -- -- (1,645)
Conversion of 12,750 shares of
non-redeemable preferred
stock to common stock 55 5 (638) 633 -- -- -- -- --
Grant of 185,000 stock options
to a former employee -- -- -- 137 -- -- -- -- 137
Remeasurement of 30,000 stock
options with employer loan -- -- -- 39 -- -- -- -- 39
feature
Exchange of 4,000 shares of
common stock held in treasury
for Board of Directors fee -- -- -- -- -- -- 5 -- 5
------ -------- -------- ------- ------ -------- -------- ------- --------
Balance at December 31, 2000 15,164 $ 1,516 $ 33,427 $52,376 $ -- $(80,480) $(16,081) $ (200) $ (9,442)
====== ======== ======== ======= ====== ======== ======== ======= ========
See accompanying notes.
F-6
66
LSB Industries, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 6,195 $(49,767) $ (1,920)
Adjustments to reconcile net income (loss) to net cash
provided (used) by continuing operating activities:
Net loss from discontinued operations 3,101 18,121 4,359
Loss (gain) on businesses disposed of -- 1,971 (12,993)
Extraordinary gain on extinguishment of debt (20,086) -- -
Inventory write-down and provision for loss on firm
sales and purchase commitments, net of amount
realized 389 8,175 -
Provision for impairment on long-lived assets -- 4,126 -
Depreciation of property, plant and equipment 9,213 9,749 10,419
Amortization 1,341 1,642 1,549
Provision for losses:
Trade accounts receivable 1,974 812 971
Inventory -- 695 212
Notes receivable -- 265 1,345
Loan guarantee -- -- 1,662
Recapture of prior period provisions for loss on
advances and loans receivable secured by real
estate (1,576) (572) (1,081)
Other 176 321 (879)
Cash provided (used) by changes in assets and liabilities
(net of effects of discontinued operations):
Trade accounts receivable (5,758) (1,431) (899)
Inventories (2,172) 3,934 1,331
Supplies and prepaid items (2,415) (179) (829)
Accounts payable 8,249 (1,056) (3,409)
Accrued liabilities 7,919 2,812 (294)
Other noncurrent liabilities 1,407 -- -
-------- -------- --------
Net cash provided (used) by continuing operating
activities 7,957 (382) (456)
(Continued on following page)
F-7
67
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures $ (7,736) $ (7,645) $ (9,032)
Principal payments received on loans receivable -- 1,052 427
Proceeds from the sales of equipment and real estate
properties 76 1,174 1,791
Proceeds from the sale of businesses disposed of -- 9,981 29,266
Other assets 3,137 (760) (2,088)
-------- -------- --------
Net cash provided (used) by investing activities (4,523) 3,802 20,364
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term and other debt (5,152) (6,144) (18,274)
Long-term and other borrowings, net of origination fees 5,666 2,850 617
Acquisition of 10 3/4% Senior Notes (8,712) -- -
Net change in revolving debt facilities 7,003 6,554 6,586
Net change in drafts payable (136) (273) 21
Dividends paid:
Preferred stocks -- (1,742) (3,229)
Common stock -- -- (244)
Purchases of preferred and treasury stock (1,645) (230) (3,567)
Net proceeds from issuance of common stock -- -- 72
-------- -------- --------
Net cash provided (used) by financing activities (2,976) 1,015 (18,018)
Net cash used in discontinued operations (525) (2,764) (4,784)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (67) 1,671 (2,894)
Cash and cash equivalents at beginning of year 3,130 1,459 4,353
-------- -------- --------
Cash and cash equivalents at end of year $ 3,063 $ 3,130 $ 1,459
======== ======== ========
See accompanying notes.
F-8
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LSB Industries, Inc.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries. The Company is a
diversified holding company which is engaged, through its subsidiaries, in the
manufacture and sale of chemical products (the "Chemical Business"), the
manufacture and sale of a broad range of air handling and heat pump products
(the "Climate Control Business"), and the purchase and sale of machine tools
(the "Industrial Products Business"). See Note 17 -- Segment Information. In May
2000, the Company sold its Automotive Products Division (See Note 4 --
Discontinued Operations). The Company's consolidated financial statements and
notes reflect the Automotive Products Division as a discontinued operation for
all periods presented.
All material intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made in the consolidated financial
statements for the years ended December 31, 1999 and 1998 to conform to the
consolidated financial statement presentation for the year ended December 31,
2000.
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 $7,798,000 at December 31, 2000 ($8,351,000 at December
31, 1999), 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 $682,000 and $822,000 at December 31, 2000 and
1999, respectively.
F-9
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. For financial reporting
purposes, depreciation, depletion and amortization are primarily computed using
the straight-line method over the estimated useful lives of the assets ranging
from 3 to 30 years. Property, plant and equipment leases which are deemed to be
installment purchase obligations have been capitalized and included in property,
plant and equipment. Maintenance, repairs and minor renewals are charged to
operations while major renewals and improvements are capitalized.
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, was $2,111,000 and $2,502,000,
net of accumulated amortization, of $ 4,816,000 and $4,424,000 at December 31,
2000 and 1999, respectively, and is amortized by the straight-line method over
periods of 15 to 19 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
For the year ended December 31, 1999, the Company recognized impairment totaling
$4.1 million (none in 2000) associated with two chemical plants which are to be
sold or dismantled. The 1999 provision for impairment represented the difference
between the net carrying cost and the estimated salvage value for the
non-operating plant to be dismantled and the difference between the net carrying
cost and the estimated selling price less cost to dispose for the plant to be
sold. The Company has made estimates of the future cash flows related to its
Chemical Business in order to determine recoverability of the Company's
remaining cost. Based on these estimates, no additional impairment was indicated
at December 31, 2000; however, it is reasonably possible that the Company may
recognize additional impairments in this business in the near term if the
Company experiences continued or further deterioration of the chemical business.
F-10
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
DEBT ISSUANCE COST
Debt issuance costs are amortized over the term of the associated debt
instrument using the straight-line method. Such costs, which are included in
other assets in the accompanying balance sheets, were $2,173,000 and $3,481,000,
net of accumulated amortization, of $1,104,000 and $1,770,000 as of December 31,
2000 and 1999, respectively.
REVENUE RECOGNITION
The Company recognizes revenue at the time title of the goods transfers to the
buyer and there remains no significant future performance obligations by the
Company.
SHIPPING AND HANDLING COSTS
The Company records its shipping and handling costs in the Chemical Business in
net sales, the Industrial Products Business records shipping and handling costs
in cost of goods sold and the Climate Control Business records shipping and
handling costs in selling, general and administrative expense. For the years
ended December 31, 2000, 1999 and 1998 the shipping and handling costs of the
Chemical Business amounted to $9,689,000, $6,042,000 and $6,213,000,
respectively while the costs in the Climate Control Business amounted to
$5,135,000, $4,960,000 and $4,748,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $391,000 in 2000, $713,000 in 1999 and
$377,000 in 1998.
ADVERTISING COSTS
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $1,543,000 in 2000,
$2,097,000 in 1999 and $1,575,000 in 1998.
HEDGING
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
The Company will adopt this new Statement effective January 1, 2001. The
Statement requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that do not qualify or are not designated as hedges
must be adjusted to fair value through operations. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either
F-11
71
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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.
In 1997, the Company entered into an interest rate forward agreement to
effectively fix the interest rate on a long-term lease commitment (not for
trading purposes). In 1999, the Company executed the long-term lease agreement
and terminated the forward at a net cost of $2.8 million. The Company has
historically accounted for this hedge under the deferral method (as an
adjustment of the initial term lease rentals). At December 31, 2000 and 1999,
the remaining deferred loss included in other assets approximated $2.4 million
and $2.7 million, respectively. The deferred cost recognized in operations
amounted to $290,000 in 2000 ($169,000 in 1999 and none in 1998). Upon adoption
of SFAS 133 on January 1, 2001, the deferred loss will be reclassified into
accumulated other comprehensive income and be amortized to operations over the
term of the lease arrangement. The Company also periodically enters into
exchange-traded futures contracts for copper and aluminum (as such products are
used in the Company's Climate Control Business), which contracts presently are
and will continue to be accounted for on a mark to market basis. As of December
31, 2000, the Company had 20 such contracts outstanding (which expire December
2001), whose fair value was not material. The adoption of SFAS 133 is not
expected to have any other material impact as of January 1, 2001, on the
Company's consolidated financial statements.
INCOME (LOSS) PER SHARE
Net income (loss) applicable to common stock is computed by adjusting net income
(loss) by the amount of preferred stock dividends. Basic income (loss) per
common share is based upon net income (loss) applicable to common stock and the
weighted average number of common shares outstanding during each period. Diluted
income per share, if applicable, is based on the weighted average number of
common shares and dilutive common equivalent shares outstanding, if any, and the
assumed conversion of dilutive convertible securities outstanding, if any. All
potentially dilutive securities were antidilutive for all periods presented. See
Note 10 -- Redeemable Preferred Stock, Note 11 -- Stockholders' Equity, and Note
12 -- Non-redeemable Preferred Stock for a full description of securities which
may have a dilutive effect in future periods.
Average common shares outstanding used in computing loss per share are as
follows:
2000 1999 1998
---------- ---------- ----------
Basic and diluted 11,871,211 11,838,271 12,372,770
F-12
72
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash,
overnight funds and interest bearing deposits with maturities when purchased by
the Company of 90 days or less.
Under the Company's Revolving Credit Facility (Note 8 -- Long-Term Debt) cash
received by the Company on collection of trade accounts receivable is deposited
in cash collection accounts. Cash in the collection accounts is applied against
the outstanding balance under the Company's revolving credit agreement within
1-2 business days following receipt. The cash balance held in the collection
accounts at December 31, 2000 and 1999 aggregated $2.7 million and $2.5 million,
respectively.
Supplemental cash flow information includes:
2000 1999 1998
-------- -------- --------
(In Thousands)
Cash payments for:
Interest on long-term debt and other $ 15,435 $ 16,114 $ 15,511
Income taxes, net of refunds 136 (36) 65
Noncash financing and investing activities--
Long-term debt issued for property, plant and equipment 81 3,327 523
3. LIQUIDITY AND MANAGEMENT'S PLAN
The Company is a diversified holding company and, as a result, it is dependent
on credit agreements and its ability to obtain funds from its subsidiaries in
order to pay its debts and obligations.
The Company's wholly-owned subsidiary, ClimaChem, Inc. ("ClimaChem"), through
its subsidiaries, owns substantially all of the Company's Chemical and Climate
Control Businesses. ClimaChem and its subsidiaries are dependent on credit
agreements with lenders and internally generated cash flow in order to fund
their operations and pay their debts and obligations.
As of December 31, 2000 the Company, exclusive of ClimaChem, had no borrowing
availability under their existing revolver and ClimaChem had $3.7 million. The
effective interest rate was 11.0%.
F-13
73
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. LIQUIDITY AND MANAGEMENT'S PLAN (CONTINUED)
As of December 31, 2000, the Company and certain of its subsidiaries, including
ClimaChem, were parties to a working capital line of credit evidenced by two
separate loan agreements ("Agreements") with a lender. The term of the
Agreements, as amended, was through December 31, 2000, and was automatically
being renewed thereafter for successive terms of one month each. Borrowings
under the Agreements outstanding at December 31, 2000 were $34.5 million. In
April, 2001, the Company replaced its existing Revolving Credit Facility
("Revolver") for ClimaChem and its subsidiaries with a new lender. See Note 8:
Long-term Debt. For LSB's subsidiaries which are not subsidiaries of ClimaChem,
in April 2001, the Company executed the third amended and restated revolving
credit agreement with Bank America Business Credit (the "BABC Agreement") to
provide financing for LSB and its subsidiaries which are not subsidiaries of
ClimaChem. The BABC Agreement provides a revolving line of credit of up to $2.5
million through April 2002. The BABC Agreement is secured by the receivables
inventory and intangibles of the LSB subsidiaries which are not subsidiaries of
ClimaChem.
As of December 31, 2000, the Company had a working capital deficit of
approximately $9.4 million and long-term debt due after one year of
approximately $93.9 million on a consolidated basis. The Company and its
subsidiaries which are not subsidiaries of ClimaChem had a working capital
deficit of approximately $6.0 million and long-term debt due after one year of
approximately $27.9 million including the amount owed to ClimaChem.
As of April 16, 2001 the Company, exclusive of ClimaChem, and ClimaChem had a
borrowing availability under the BABC Facility of $.1 million and ClimaChem had
borrowing availability under the Foothill Facility of $4.5 million. The
effective interest rates under the BABC Facility and the Foothill Facility were
10.5% and 10%, respectively. Borrowings under the Foothill Facility outstanding
at April 16, 2001, were $41.5 million. The annual interest on the outstanding
debt under the Foothill and BABC Facilities at April 16, 2001, at the rates then
in effect would approximate $4.4 million annually.
In addition to the credit facilities discussed above, as of December 31, 2000,
ClimaChem's wholly owned subsidiary, DSN Corporation ("DSN"), is a party to
three loan agreements with a financial company (the "Financing Company") for
three projects. At December 31, 2000, DSN had outstanding borrowings of $5.2
million under these loans. The loans have monthly repayment schedules of
principal and interest through maturity in 2002. The interest rate on each of
the loans is fixed and range from 8.2% to 8.9%. Annual interest, for the three
notes as a whole, at December 31, 2000, would approximate $.5 million. The loans
are secured by the various DSN property and equipment. The loan agreements
require the Company to maintain certain financial ratios, including tangible net
worth requirements. In October 2000, DSN obtained a waiver from the Financing
Company of the financial covenants through December 2001.
F-14
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. LIQUIDITY AND MANAGEMENT'S PLAN (CONTINUED)
As discussed in Note 8 of Notes to Consolidated Financial Statements, ClimaChem
is restricted as to the funds that it may transfer to the Company under the
terms contained in an Indenture ("Indenture") covering the Senior Unsecured
Notes issued by ClimaChem and the Foothill Facility. No amounts were paid to the
Company by ClimaChem under the Tax Sharing Agreement, nor under the Management
Agreement during 1999. For the year ended December 31, 2000, ClimaChem was
required to pay the Company $1.8 million under the Management Agreement inasmuch
as earnings before interest, income taxes, depreciation and amortization
("EBITDA") exceeded $26 million for the period ($1.4 million has been paid as of
December 31, 2000). In addition, ClimaChem recorded a provision for income taxes
relating to the extraordinary gain on the repurchase of Senior Unsecured Notes
for the year ended December 31, 2000 of $.3 million, $.1 million of which is
payable to the Company under the terms of the Tax Sharing Agreement. As of
December 31, 2000 $.8 million had been paid to the Company, $.7 million of which
will be repaid to ClimaChem in 2001. The Company believes its EBITDA and pre-tax
income will be sufficient in 2001 for the management fee and income taxes to be
paid by ClimaChem to the Company, however, there are no assurances that amounts
will be earned during 2001. Due to these limitations, the Company and its
non-ClimaChem subsidiaries have limited resources to satisfy their obligations.
Due to the Company's and ClimaChem operating losses for the years of 1998, 1999
and 2000, and the limited borrowing ability under the Agreements, the Company
discontinued payment of cash dividends on its Common Stock for periods
subsequent of January 1, 1999, until the Board of Directors determines
otherwise. As of the date of this report the Company has not paid the regular
quarterly dividend of $.8125 on its outstanding $3.25 Convertible Exchangeable
Class C Preferred Stock Series 2 ("Series 2 Preferred") since June 15, 1999,
totaling approximately $3.5 million. During 2000, the Company purchased 278,700
shares of the Series 2 Preferred for approximately $1.6 million. In addition,
the Company did not pay the January 1, 2000 and 2001 regular dividend on the
Series B Preferred totaling $480,000. The Company does not anticipate having
funds available to pay dividends on its stock for the foreseeable future. See
discussion in Note 12 of Notes to Consolidated Financial Statements.
During the year ended December 31, 2000, the Company repurchased approximately
$29.7 million of the Senior Unsecured Notes and recognized a gain of
approximately $20.1 million. This reduction in outstanding indebtedness will
reduce interest expense by $2.0 million annually.
The Company has planned capital expenditures of approximately $5 million,
primarily in the Chemical and Climate Control Businesses, but such capital
expenditures are dependent upon obtaining acceptable financing. The Company
expects to delay these expenditures as necessary based on the availability of
adequate working capital and the availability of financing. The Company obtained
a fourteen (14) month extension of the compliance dates under its wastewater
F-15
75
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. LIQUIDITY AND MANAGEMENT'S PLAN (CONTINUED)
management project and in the implementation dates of such project. Because the
Company has not completed its evaluation of engineering alternatives, the
Company has not yet provided to the state of Arkansas its final design plans
under the new extended deadlines. The consent order provides for an October 1,
2001 deadline for submission of final design plans and will be preceded by the
agency's issuance of a revised permit. The revised permit will include the
discharge limits that will apply to the wastewater treatment project. To date,
the state has deferred issuance of the revised permit. The Company continues to
regularly advise the state of the projects engineering status and financing
status. Construction of the wastewater treatment project. There are no
assurances that the Company will be able to obtain the required financing.
Failure to construct the wastewater treatment project could have a material
adverse long-term effect on the Company.
Effective January 1, 2001, a subsidiary of the Company purchased the real estate
and personal property associated with an ammonia and fertilizer plant located in
Pryor, Oklahoma ("Pryor Plant"). The purchase price of the Pryor Plant was
immaterial. The Pryor Plant has not been in operation for two (2) years. The
Company has not determined whether the Pryor Plant will be put in operation in
the future, be held for sale or dismantled and used for spare parts.
The Company's plan for 2001 identifies specific non-core assets (real estate,
oil and gas properties, spare parts, etc.) which the Company is working to
realize to provide additional working capital to the Company. The Company also
continues to evaluate alternatives for realizing its net investment in the
Industrial Products Business.
The Company has a letter of intent to sell its explosive business distribution
outlets and a long-term supply agreement with a third party which the Company
currently expects to close in May 2001. Under the terms of the letter of intent,
the Chemical Business would sell its wholesale and retail explosive distribution
business (excluding accounts receivable) for $3.5 million plus any additional
amount for inventories and enter into an ammonium nitrate tolling agreement with
the third party. The buyer has prepaid to the Chemical Business $2 million of
the $3.5 million, which amount has been received by the Chemical Business. If
the transaction does not close by May 31, 2001, the $2 million prepayment will
be applied towards the purchase of ammonium nitrate products by the third party
from the Chemical Business. However if the transaction has not closed by May 31,
2001 and the third party reasonably, determines that the Chemical Business is
unable to make deliveries of the ammonium nitrate products beginning June 2001
and thereafter, the Chemical Business shall return the prepayment. If these
transactions are executed, they are expected to have the effect of providing
working capital from the proceeds of the sale of approximately $3.5 million,
reduce outstanding accounts receivable and inventory, as well as provide a more
constant and predictable operating margin in the Company's explosives business.
In April 2001, the Company entered into a contract with a third party to sell
land adjacent to the Crystal City Plant for $4.5 million, before selling and
closing expenses. The buyer has 65 days to complete due diligence. Should this
transaction close, up to $2 million of the proceeds will be available to LSB and
its subsidiaries which are not subsidiaries of ClimaChem with the remainder to
be applied against the outstanding balance on the Foothill Facility revolver.
The Company is negotiating to sell the building in which one of its subsidiaries
builds water-source heat pumps for approximately $8.1 million, of which the
Company is to receive approximately $2.2 million in cash, an unsecured
promissory note ("Note") for $1.6 million, plus $4.3 million, to be used to pay
off the currently existing mortgage on the building. As part of this
transaction, the lease held by the Company's subsidiary on the building is to be
extended from February 2003 to November 2007 and the Company's subsidiary's
option to buy the building is to be similarly extended. The option price to
purchase the building, when exercised, is to be based on the amount of the
mortgage on the building outstanding at the time the option is exercised plus an
amount up to $200,000 less the then outstanding amount due on the Note. The
closing of this transaction is subject to certain conditions.
During 2001, the Company's Chemical Business has experienced a significant
increase in the sales prices of its nitrogen-based products compared to 2000,
due primarily to reduced competition in the market including a reduction in
foreign imports. The Company has also seen
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. LIQUIDITY AND MANAGEMENT'S PLAN (CONTINUED)
a reduction in its raw material costs of its Chemical Business from the later
part of 2000 and early 2001, which are expected to result in improved margins in
that business. The Company's Climate Control Business has continued to
experience strong demand and steady increases in margins, contributing to a
return to profitability for the Company in March 2001.
With these improved business economics, the completion of the Foothill
Facility in April 2001, and the lack of other unforeseen adverse events,
management of the Company expects to see significant improvements in operating
results for the Company in 2001 from 2000 and believes the Company will have
adequate resources to meet its obligations as they come due; however, this
expectation may change in the near term.
The Company's plan for 2001 involves a number of initiatives and assumptions
which management believes to be reasonable and achievable; however, should the
Company not be able to execute this plan described above, it may not have
resources available to meet its obligations as they come due.
4. DISCONTINUED OPERATIONS
On April 5, 2000, the Board of Directors approved a plan of disposal of the
Company's Automotive Products Business ("Automotive"). The sale of Automotive
was concluded on May 4, 2000, to Drive Line Technologies ("DLT"). The Company
received notes for its net investment of approximately $8.7 million, and the
buyer assumed substantially all of Automotive's liabilities. The operating
losses associated with the discontinuation of this business segment are
reflected in the net loss from discontinued operations for the years ended
December 31, 1999 and 1998 in the Consolidated Statements of Operations.
The terms of the notes received in the sale call for no payments of principal
for the first two years following the close. Interest will accrue at Wall Street
Journal Prime plus 1.0% but will not be paid until DLT's availability under its
credit agreement reaches a level of $1.0 million. Accrued interest will not be
recognized until received. Due to the terms of the notes received by the
Company in connection with the sale of Automotive and the possibility of
non-collectibility of those notes, the Company has fully reserved the total
amount of these notes.
Following the sale of Automotive, the Company remained a guarantor on certain of
Automotive's indebtedness. In the fourth quarter of 2000, the Company was
required to perform on certain of the equipment note guarantees and in 2001, has
been required to fund its $1.0 million guaranty on DLT's revolving credit
agreement. The Company has acquired certain of this debt from the original
lender and in other situations, negotiated revised terms. The Company has
recognized its obligations under the guaranties as of December 31, 2000 in the
amount of $4.3 million in the accompanying consolidated balance sheet ($3.2
million of which is due within one year and $1.1 million of which is due after
one year). The Company has also recognized a loss in the 2000 statement of
operations in the amount of $2.6 million which represents the Company's estimate
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. DISCONTINUED OPERATIONS (CONTINUED)
of ultimate loss, net of the collateral value of approximately $1.7 million,
associated with guaranteed indebtedness of Automotive. This loss, and that
associated with the final adjustment for 2000 operations from the amount accrued
as of December 31, 1999, has been included in the 2000 net loss from
discontinued operations (see Note 13 - Commitments and Contingencies).
Operating results of the discontinued operations for the year ended December 31:
1999 1998
--------- --------
(In Thousands)
Revenues $ 33,405 $ 39,995
Cost of sales 28,915 31,379
Selling, general and administrative 10,168 10,586
Interest 2,449 2,389
-------- --------
Loss from discontinued operations before
loss on disposal (8,127) (4,359)
Loss on disposal (9,994) -
-------- --------
Loss from discontinued operations $(18,121) $ (4,359)
======== ========
Revenues of Automotive of $10.3 million through May 4, 2000 have been excluded
from revenues in the accompanying consolidated statement of operations for the
year ended December 31, 2000.
5. BUSINESSES DISPOSED OF
On August 2, 1999, the Company sold substantially all the assets of its wholly
owned subsidiary, Total Energy Systems Limited and its subsidiaries ("TES"), of
the Chemical Business. Pursuant to the sale agreement, TES retained certain of
its liabilities which were liquidated from the proceeds of the sale and the
collection of its accounts receivables which were retained. In connection with
the closing in August 1999, the Company received approximately $3.6 million in
net proceeds from the assets sold, after paying off $6.4 million bank debt and
the purchaser assuming approximately $1.1 million of debt related to certain
capitalized lease obligations. The loss associated with the disposition included
in the accompanying consolidated statements of operations for the year ended
December 31, 1999 was $2.0 million.
In March 1998, a subsidiary of the Company closed the sale of an office building
and realized proceeds of approximately $29.3 million from the sale, net of
transaction costs. Proceeds from
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
the sale were used to retire the outstanding indebtedness. The Company
recognized a gain on the sale of this property of approximately $13 million in
1998.
6. INVENTORIES
Inventories at December 31, 2000 and 1999 consist of:
FINISHED
(OR PURCHASED) WORK-IN- RAW
GOODS PROCESS MATERIALS TOTAL
-------------- -------- --------- -----
(In Thousands)
2000:
Chemical products $10,680 $ -- $ 2,667 $13,347
Climate Control products 5,691 2,962 7,020 15,673
Machinery and industrial supplies 4,228 -- -- 4,228
------- ------- ------- -------
20,599 2,962 9,687 33,248
Less amount not expected to be
realized within one year 1,609 -- -- 1,609
------- ------- ------- -------
$18,989 $ 2,962 $ 9,687 $31,639
======= ======= ======= =======
1999 Total $16,579 $ 5,503 $ 8,994 $31,076
Less amount not expected to be
realized within one year 596 -- -- 596
------- ------- ------- -------
$15,983 $ 5,503 $ 8,994 $30,480
======= ======= ======= =======
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consists of:
DECEMBER 31,
2000 1999
-------- --------
(In Thousands)
Land and improvements $ 3,546 $ 2,981
Buildings and improvements 19,295 18,665
Machinery, equipment and automotive 132,592 130,748
Furniture, fixtures and store equipment 8,632 7,819
Producing oil and gas properties 2,391 2,560
-------- --------
166,456 162,773
Less accumulated depreciation, depletion and amortization 85,572 78,959
-------- --------
$ 80,884 $ 83,814
======== ========
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79
8. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
2000 1999
-------- --------
(In Thousands)
Secured revolving credit facility with interest
at a base rate plus a specified percentage
(11% aggregate rate at December 31, 2000)(A) $ 34,466 $ 27,462
10-3/4% Senior Notes due 2007(B) 75,335 105,000
Secured loan with interest payable monthly(C) 4,463 7,128
Other, with interest at rates of 6% to 12.76%,
most of which is secured by machinery, equipment
and real estate(D) 21,741 18,482
-------- --------
136,005 158,072
Less current portion of long-term debt 42,101 33,359
-------- --------
Long-term debt due after one year $ 93,904 $124,713
======== ========
(A) In December 1994, the Company, certain subsidiaries of the Company and a
bank entered into a series of six asset-based revolving credit
facilities which provided for an initial term of three years. The
agreement has been amended at various dates since 1994 with the latest
being executed on October 10, 2000. The amended agreement provided for a
$50 million revolving credit facility (the "Revolving Credit Facility")
with separate loan agreements, for ClimaChem and its subsidiaries and
the Company and its subsidiaries excluding ClimaChem and its
subsidiaries. In April 2001, the Company replaced the Revolving Credit
Facility for ClimaChem and its subsidiaries with a new facility
described below. For LSB and its subsidiaries, which are not
subsidiaries of ClimaChem, the Company executed the third and restated
revolving credit agreement with Bank America Business Credit (the "BABC
Agreement") in April 2001. The BABC Agreement provides a revolving line
of credit of up to $2.5 million through April 1, 2002 and is secured by
the receivables, inventory and intangibles of the LSB subsidiaries which
are not subsidiaries of ClimaChem. The BABC Agreement requires monthly
payments of interest which accrue based on the BABC's prime rate plus
the applicable margin (2.5% in April 2000) for an effective rate of
10.5% as of the date of closing. Effective July 1, 2001, the applicable
margin increases .50% and increases .50% monthly thereafter until the
agreement is terminated. The agreement may be terminated by the Company
with proper notice without premium or penalty.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
In April 2001, ClimaChem and its subsidiaries, ("the borrowers"),
entered into a new $50 million credit facility with Foothill Capital
Corporation (the "Foothill Facility"). The Foothill Facility provides
for advances based on specified percentages of eligible
8. LONG-TERM DEBT (CONTINUED)
accounts receivable and inventory of ClimaChem and its subsidiaries and
accrues interest at a base rate (generally equivalent to the prime rate)
plus 2% or the LIBOR rate plus 4.5%. Interest is due monthly. The
facility provides for up to $8.5 million of letters of credit; All
letters of credit outstanding reduce availability under the facility.
Under the Foothill Facility, the lender also requires the borrowers to
pay a letter of credit fee equal to 2.75% per annum of the undrawn
amount of all outstanding letters of credit, an unused line fee equal to
.5% per annum for the excess amount available under the facility not
drawn and various other audit, appraisal and valuation charges. The
Foothill Facility matures in April 2005 and is secured by receivables,
inventory and intangibles of ClimaChem and its subsidiaries and certain
assets of non-ClimaChem entities. LSB, each of ClimaChem's subsidiaries
and the two LSB subsidiaries which acquired Chemical Plants during 2000
(Note 17) are guarantors of the indebtedness. LSB and one of its
wholly-owned subsidiaries which is not a subsidiary of ClimaChem has
also pledged the capital stock of ClimaChem as additional collateral on
the Foothill Facility. A prepayment penalty equal to 4% of the facility
is due to the lender should the borrowers elect to prepay the facility
prior to the first anniversary date. This penalty is reduced 1% per year
through maturity. The Foothill Facility requires ClimaChem to meet
certain financial covenants on a monthly, quarterly, and/or annual
basis, including a fixed charge coverage ratio, minimum EBITDA (earnings
before interest, taxes, depreciation and amortization) of ClimaChem and
ClimaChem's Climate Control Business and limits capital expenditures.
The Foothill Facility requires the borrowers to have varying minimum
amounts of availability under the revolver, which amounts generally
increase prior to interest payment due dates of the Senior Notes
discussed in (B) below. The Foothill Facility also contains covenants
that, among other things, limit the borrowers ability to: (i) incur
additional indebtedness, (ii) incur liens, (iii) make restricted
payments or loans to affiliates who are not borrowers, or (iv) engage in
mergers, consolidations or other forms of recapitalization, (v) dispose
of assets, and (vi) repurchase ClimaChem's 10-3/4% Senior Notes. It also
requires all collections on accounts be made through an account in the
name of the lender or their agent and gives the lender the sole
discretion to determine whether there has been any material adverse
change; as defined, in the financial condition of the borrowers or LSB
Industries, Inc., as guarantor, prior to granting additional advances.
The Foothill Facility requires the borrowers to use their best efforts
to assist Foothill Capital Corporation with the syndication of no less
than 40% and no more than 50% of the total facility commitment. In
connection therewith, the borrowers have agreed that Foothill Capital
Corporation or agent shall have the right after consultation with the
borrowers' agent to alter certain terms and conditions as may be
necessary, to insure a successful syndication of the total facility
commitment. The lender may, upon an event of default as defined,
terminate the Foothill Facility and make the balance outstanding due and
payable in full.
(B) On November 26, 1997, ClimaChem 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 ClimaChem and rank pari passu in right of
payment to all existing senior unsecured indebtedness of ClimaChem and
its subsidiaries. The Notes are effectively subordinated to all existing
and future senior secured indebtedness of ClimaChem.
F-21
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The Notes were issued pursuant to an Indenture, which contains certain
covenants that, among other things, limit the ability of ClimaChem and
its subsidiaries to: (i) incur additional indebtedness; (ii) incur
certain liens; (iii) engage in certain transactions with
8. LONG-TERM DEBT (CONTINUED)
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 ClimaChem to another person.
In addition, in the event of certain asset sales, ClimaChem 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, 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, (ii) an
amount not to exceed fifty percent (50%) of ClimaChem's cumulative net
income from January 1, 1998 through the end of the period for which the
calculation is made for the purpose of proposing a dividend payment, and
(iii) the amount of direct and indirect costs and expenses incurred by
the Company on behalf of ClimaChem pursuant to a certain services
agreement and a certain management agreement to which ClimaChem and the
Company are parties.
Except as described below, the Notes are not redeemable at ClimaChem's
option prior to December 1, 2002. After December 1, 2002, the Notes will
be subject to redemption at the option of ClimaChem, 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 the event of a change of control of the Company or ClimaChem, holders
of the Notes will have the right to require ClimaChem 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.
During 2000, subsidiaries of the Company repurchased approximately $29.7
million of the Notes on the open market for approximately $8.7 million
and recognized a gain, after writing off approximately $.9 million of
loan origination costs, of approximately $20.1 million before income
taxes.
ClimaChem is a holding company with no significant assets (other than
that related to the notes receivable from LSB and affiliates, specified
below, and the Note's origination fees
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
which have a net book value of $2.1 million and $3.3 million at December
31, 2000 and 1999, respectively) or operations other than its
investments in its subsidiaries, and each of
8. LONG-TERM DEBT (CONTINUED)
its subsidiaries is wholly owned, directly or indirectly. ClimaChem's
payment obligations under the Notes are fully, unconditionally and joint
and severally guaranteed by all of the existing subsidiaries of
ClimaChem, except for El Dorado Nitrogen Company ("EDNC"). See
ClimaChem's Form 10-K for ClimaChem's consolidating financial
information.
Summarized consolidated financial information of ClimaChem and its
subsidiaries as of December 31, 2000 and 1999 and the results of
operations for each of the three years ended December 31, 2000 is as
follows:
DECEMBER 31,
2000 1999
--------- ---------
(In Thousands)
BALANCE SHEET DATA:
Trade accounts receivable, net $ 45,981 $ 41,934
Inventories 29,020 25,772
Other current assets(1) 9,930 9,250
--------- ---------
Total current assets 84,931 76,956
Property, plant and equipment, net 72,825 75,667
Notes and interest receivable from LSB and affiliates(2) 14,166 13,443
Other assets, net 17,245 18,012
--------- ---------
Total assets $ 189,167 $ 184,078
========= =========
Accounts payable and accrued liabilities $ 47,512 $ 30,103
Current-portion of long-term debt 37,092 29,644
--------- ---------
Total current liabilities 84,604 59,747
Long-term debt 89,064 112,544
Accrued losses on firm purchase commitments and other
non current liabilities 6,116 5,652
Stockholders' equity 9,383 6,135
--------- ---------
Total liabilities and stockholders' equity $ 189,167 $ 184,078
========= =========
(1) Other current assets includes receivables from LSB of $1.1
million and $2.3 million at December 31, 2000 and 1999,
respectively.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
(2) Notes receivable from LSB and affiliates is eliminated when
consolidated with the Company.
8. LONG-TERM DEBT (CONTINUED)
DECEMBER 31,
2000 1999 1998
--------- --------- ---------
(In Thousands)
OPERATIONS DATA:
Total revenues $ 281,866 $ 246,955 $ 243,014
Costs and expenses:
Costs of sales 232,495 196,095 190,722
Selling, general and administrative 45,932 45,618 38,105
Interest 13,882 14,260 13,463
Loss on sale and operations of
business disposed of -- 3,929 2,901
Provision for loss on firm sales and
purchase commitments 3,395 8,439 --
Provision for impairment on long-lived assets -- 3,913 --
--------- --------- ---------
295,704 272,254 245,191
--------- --------- ---------
Loss before provision (benefit) for
income taxes and extraordinary gain
(13,838) (25,299) (2,177)
Provision (benefit) for income taxes 235 (6,117) 392
--------- --------- ---------
Loss before extraordinary gain (14,073) (19,182) (2,569)
Extraordinary gain, net of income taxes
of $100 17,321 -- --
--------- --------- ---------
Net income (loss) $ 3,248 $ (19,182) $ (2,569)
========= ========= =========
During 2000, certain subsidiaries of ClimaChem repurchased approximately
$25.2 million of the Senior Unsecured Notes and recognized a gain of
approximately $17.3 million, net of income taxes.
(C) This agreement, as amended, between a subsidiary of the Company and an
institutional lender provided for a loan, the proceeds of which were
used in the construction of a nitric acid plant, in the aggregate amount
of $16.5 million requiring 84 equal monthly payments of principal plus
interest, with interest at a fixed rate of 8.86% through maturity in
2002. This agreement is secured by the plant, equipment and machinery,
and proprietary rights associated with the plant which has an
approximate carrying value of $25.3 million at December 31, 2000.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. LONG-TERM DEBT (CONTINUED)
In November 1997, the Company amended this agreement to restate the
financial and restrictive covenants to be applicable to the subsidiary
of the Company. This agreement, as amended, contains covenants (i)
requiring maintenance of an escalating tangible net worth, (ii)
restricting distributions and dividends, (iii) restricting a change of
control of the subsidiary and the Company and (iv) requiring maintenance
of a reducing debt to tangible net worth ratio. In October 2000, the
lender waived compliance of financial covenants through December 31,
2002.
(D) Includes a $1.8 million note payable ($2.5 million at December 31,
1999), to an unconsolidated related party. The note is unsecured, bears
interest at 10.75% per annum payable monthly, and requires repayment of
$.3 million in 2001 and $1.5 million in 2002.
Maturities of long-term debt for each of the five years after December 31, 2000
are: 2001--$42,101; 2002--$5,199; 2003--$3,345; 2004--$1,687; 2005--$1,008 and
thereafter--$82,665.
9. INCOME TAXES
The provision for income taxes attributable to continuing operations before
extraordinary gain consists of the following for the year ended December 31:
2000 1999 1998
-- -- ----
(In Thousands)
Current:
Federal $ -- $ -- $ 77
State 135 157 23
---- ---- ----
$135 $157 $100
==== ==== ====
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The tax effects of each type of temporary difference and carry forward that are
used in computing deferred tax assets and liabilities and the valuation
allowance related to deferred tax assets at December 31, 2000 and 1999 are as
follows:
2000 1999
------- -------
(In Thousands)
DEFERRED TAX ASSETS
Amounts not deductible for tax purposes:
Allowance for doubtful accounts $ 1,802 $ 3,996
Asset impairment 6,363 5,507
Accrued liabilities 3,789 4,229
Other 1,071 2,787
Capitalization of certain costs as inventory for tax purposes 1,396 2,136
Net operating loss carry forward 25,508 31,466
Investment tax and alternative minimum tax credit carry forwards 793 1,424
------- -------
Total deferred tax assets 40,722 51,545
Less valuation allowance on deferred tax assets 29,977 42,026
------- -------
Net deferred tax assets $10,745 $ 9,519
======= =======
DEFERRED TAX LIABILITIES
Accelerated depreciation used for tax purposes $ 8,606 $ 7,380
Inventory basis difference resulting from a business combination 2,139 2,139
------- -------
Total deferred tax liabilities $10,745 $ 9,519
======= =======
The Company is able to realize deferred tax assets up to an amount equal to the
future reversals of existing taxable temporary differences. The taxable
temporary differences will turn around in the loss carry forward period as the
differences are depreciated or amortized. Other differences will turn around as
the assets are disposed of in the normal course of business.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The differences between the amount of the provision for income taxes and the
amount which would result from the application of the federal statutory rate to
"Income (loss) from continuing operations before provision for income taxes and
extraordinary gain" for each of the three years in the period ended December 31,
2000 are detailed below:
2000 1999 1998
-------- -------- --------
(In Thousands)
Provision (benefit) for income taxes at federal
statutory rate $ (3,379) $(11,021) $ 889
Changes in the valuation allowance related to
deferred tax assets, net of rate differential (12,049) 16,492 (1,459)
Effect of discontinued operations, extraordinary
gain, NOL expirations and other on valuation
allowance 15,238 (7,156) --
State income taxes, net of federal benefit 135 157 15
Permanent differences 190 310 (39)
Foreign subsidiary loss -- 1,375 617
Alternative minimum tax -- -- 77
-------- -------- --------
Provision for income taxes $ 135 $ 157 $ 100
======== ======== ========
At December 31, 2000, the Company has regular-tax net operating loss ("NOL")
carry forwards of approximately $69.8 million (approximately $42.5 million
alternative minimum tax NOLs), exclusive of NOL carry forwards attributable to
Automotive entities sold in March 2001 (Note 13). Approximately $1.5 million of
regular-tax NOL carryforward expires in 2001.
10. REDEEMABLE PREFERRED STOCK
Each share of the noncumulative redeemable preferred stock, $100 par value, is
convertible into 40 shares of the Company's common stock at any time at the
option of the holder; entitles the holder to one vote; and is redeemable at par.
The redeemable preferred stock provides for a noncumulative annual dividend of
10%, payable when and as declared.
11. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its
F-27
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
employee stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
generally recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for 2000, 1999 and 1998, respectively:
risk-free interest rates of 6.13%, 6.04% and 5.75%; a dividend yield of 0%, .0%
and .5%; volatility factors of the expected market price of the Company's common
stock of .55, .48 and .57; and a weighted average expected life of the option of
8.1, 6.9 and 8.0 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
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,
2000 1999 1998
---------- ---------- ----------
(In Thousands, Except Per Share Data)
Net income (loss) applicable to common stock $ 2,838 $ (53,608) $ (5,943)
Income (loss) per common share $ .24 $ (4.53) $ (.48)
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. 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), in September 1993, the Company adopted the 1993
Stock Option and Incentive Plan (850,000 shares) and in 1998 the Company's
adopted the 1998 Stock Option Plan (1,000,000 shares). Under these plans, the
Company is authorized to grant options to purchase up to 4,700,000 shares of the
Company's common stock to key employees of the Company and its subsidiaries. The
1981 and 1986 Incentive Stock Option Plans have expired and, accordingly, no
additional options may be granted from these plans. Options granted prior to the
expiration of these plans continue to remain valid thereafter in accordance with
their terms. At December 31, 2000, there are 118,000 options outstanding related
to these two plans. At December 31, 2000, there are 724,000 options outstanding
related to the 1993 Stock Option and Incentive Plan and 898,500 options
outstanding relating to the 1998 stock Option and Incentive Plan which continue
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 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 market value at the date of
grant and the options lapse after five years from the date of grant.
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 market value of the Company's stock on April 22, 1998, and have a life
and vesting schedule based on the terminated options.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
Activity in the Company's qualified stock option plans during each of the three
years in the period ended December 31, 2000 is as follows:
2000 1999 1998
------------------------ ------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- ---------- --------- ----------
Outstanding at beginning of year 1,985,500 2.73 987,500 $ 4.23 1,048,760 $ 4.25
Granted -- -- 1,015,500 1.29 119,500 4.19
Exercised -- -- -- -- (63,260) 1.13
Canceled, forfeited or expired 245,000 3.02 (17,500) 3.38 (117,500) 6.07
---------- ---------- ----------
Outstanding at end of year 1,740,500 2.69 1,985,500 2.73 987,500 4.23
========== ========== ==========
Exercisable at end of year 1,010,100 3.71 756,250 4.01 532,400 4.09
========== ========== ==========
Weighted average fair value of
options granted during year N/A .71 2.16
Outstanding options to acquire 1,716,500 shares of stock at December 31, 2000
had exercise prices ranging from $1.13 to $4.88 per share (986,100 of which are
exercisable at a weighted average price of $3.61 per share) and had a weighted
average exercise price of $2.62 and remaining contractual life of 5.5 years. The
balance of options outstanding at December 31, 2000 had exercise prices ranging
from $5.36 to $9.00 per share (all of which are exercisable at a weighted
average exercise price of $7.48 per share) and had a remaining contractual life
of 1.5 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 is generally based on the market value of
the Company's common stock at the date of grant.
These options have vesting terms and lives specific to each grant but generally
vest over 48 months and expire five or ten years from the grant date. In
September 1993, the Company adopted the 1993 non-employee Director Stock Option
Plan (the "Outside Director Plan"). The Outside Director Plan authorizes the
grant of non-qualified stock options to each member of the Company's Board of
Directors who is not an officer or employee of the Company or its subsidiaries.
The maximum number of shares of common stock of the Company that may be
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
issued under the Outside Director Plan is 150,000 shares (subject to adjustment
as provided in the Outside Director Plan).
11. STOCKHOLDERS' EQUITY (CONTINUED)
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 2000 there were no options granted under
this plan. During 1999 and 1998, the Company granted 120,000 and 105,000
options, respectively, under the Outside Director Plan.
In 1998, the Board of Directors granted 175,000 stock options, at the market
price of the Company's stock price at the date of grant. Options to two key
employees for 100,000 shares have a nine-year vesting schedule while the
remaining 75,000 vest over 48 months. These options expire ten years from the
date of grant. In 1999, the Board of Directors granted 596,500 stock options
that vest over 48 months and have contractual lives of either five or ten years.
In 2000, the Board of Directors granted 185,000 to a former employee of the
Company to replace the options this individual held prior to leaving the
Company. These options were fully vested at the date of grant. One hundred
thousand of these options expire nine years from the date of grant and 85,000
expire seven years from the date of grant. The Company recognized compensation
expense amounting to $137,000 in 2000 related to the grant of these shares.
Activity in the Company's non-qualified stock option plans during each of the
three years in the period ended December 31, 2000 is as follows:
2000 1999 1998
------------------------ ------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- ---------- --------- ----------
Outstanding at beginning of year 1,103,500 2.36 560,000 $ 3.82 280,000 $ 3.44
Granted 185,000 2.82 716,500 1.30 280,000 4.19
Surrendered, forfeited, or expired (113,000) 2.06 (173,000) 2.70 -- --
--------- --------- ---------
Outstanding at end of year 1,175,500 2.46 1,103,500 2.36 560,000 3.82
--------- --------- ---------
Exercisable at end of year 617,900 2.90 210,900 3.57 335,000 3.37
========= ========= =========
Weighted average fair value of
options granted during year .64 .69 2.62
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
Outstanding options to acquire 1,130,500 shares of stock at December 31, 2000
had exercise prices ranging from $1.25 to $4.54 per share (572,900 of which are
exercisable at a weighted average price of $2.58 per share) and had a weighted
average exercise price of $2.28 and remaining contractual life of 6.7 years. The
balance of options outstanding at December 31, 2000 had exercise prices ranging
from $5.36 to $9.00 per share (all of which are exercisable) at a weighted
average exercise price of $6.98 per share, and had a remaining contractual life
of 5.0 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.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. 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.
12. NON-REDEEMABLE PREFERRED STOCK
The 20,000 shares of Series B cumulative, convertible preferred stock, $100 par
value, are convertible, in whole or in part, into 666,666 shares of the
Company's common stock (33.3333 shares of common stock for each share of
preferred stock) at any time at the option of the holder and entitles the holder
to one vote per share. The Series B preferred stock provides for annual
cumulative dividends of 12% from date of issue, payable when and as declared. At
December 31, 2000, $.2 million of dividends ($12 per share) on the Series B
preferred stock were in arrears.
The Class C preferred stock, designated as a $3.25 convertible exchangeable
Class C preferred stock, Series 2, has no par value ("Series 2 Preferred"). The
Series 2 Preferred has a liquidation preference of $50.00 per share plus accrued
and unpaid dividends and is convertible at the option of the holder at any time,
unless previously redeemed, into common stock of the Company at an initial
conversion price of $11.55 per share (equivalent to a conversion rate of
approximately 4.3 shares of common stock for each share of Series 2 Preferred),
subject to adjustment under certain conditions. Upon the mailing of notice of
certain corporate actions, holders will have special conversion rights for a
45-day period.
The Series 2 Preferred is redeemable at the option of the Company, in whole or
in part, at prices decreasing annually to $50.00 per share on or after June 15,
2003, plus accrued and unpaid dividends to the redemption date. The redemption
price at December 31, 2000 was $50.98 per share. Dividends on the Series 2
Preferred are cumulative and are payable quarterly in arrears. At December 31,
2000, $3.0 million of dividends ($4.88 per share) on the Series 2 Preferred were
in arrears.
The Series 2 Preferred also is exchangeable in whole, but not in part, at the
option of the Company on any dividend payment date beginning June 15, 1996, for
the Company's 6.50% Convertible Subordinated Debentures due 2018 (the
"Debentures") at the rate of $50.00 principal amount of Debentures for each
share of Series 2 Preferred. Interest on the Debentures, if issued, will be
payable semiannually in arrears. The Debentures will, if issued, contain
conversion and optional redemption provisions similar to those of the Series 2
Preferred and will be subject to a mandatory annual sinking fund redemption of
five percent of the amount of Debentures initially issued, commencing June 15,
2003 (or the June 15 following their issuance, if later).
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. NON-REDEEMABLE PREFERRED STOCK (CONTINUED)
At December 31, 2000, the Company is authorized to issue an additional 3,200
shares of $100 par value preferred stock and an additional 5,000,000 shares of
no par value preferred stock. Upon issuance, the Board of Directors of the
Company will determine the specific terms and conditions of such preferred
stock.
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain property, plant and equipment under non-cancelable
operating leases. Future minimum payments on operating leases with initial or
remaining terms of one year or more at December 31, 2000 are as follows:
(In Thousands)
2001 $10,413
2002 10,070
2003 9,405
2004 14,441
2005 3,450
After 2005 36,791
-------
$84,570
=======
Rent expense under all operating lease agreements, including month-to-month
leases, was $12,436,000 in 2000, $8,247,000 in 1999 and $3,637,000 in 1998.
Renewal options are available under certain of the lease agreements for various
periods at approximately the existing annual rental amounts. Rent expense paid
to related parties was $45,000 in 2000 and 1999 and $90,000 in 1998.
NITRIC ACID PROJECT
The Company's wholly owned subsidiary, EDNC, operates a nitric acid plant (the
"Baytown Plant") at Bayer's Baytown, Texas chemical facility in accordance with
a series of agreements with Bayer Corporation ("Bayer") (collectively, the
"Bayer Agreement"). Under the Bayer Agreement, EDNC converts ammonia supplied by
Bayer into nitric acid based on a cost plus arrangement. Under the terms of the
Bayer Agreement, EDNC is leasing the Baytown Plant pursuant to a leveraged lease
from an unrelated third party with an initial lease term of ten years. The
schedule of future minimum payments on operating leases above includes
$7,665,000 in 2001, $7,665,000 in 2002, $7,666,000 in 2003, $13,001,000 in 2004,
$2,250,000 in 2005, and $33,457,000 after 2005 related to lease payments on the
EDNC Baytown Plant. Upon expiration of the initial ten-year term, the Bayer
Agreement may be renewed for up to six renewal terms of five years each;
however, prior to each renewal period, either party to the Bayer Agreement may
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
opt against renewal. A subsidiary of the Company has guaranteed the performance
of EDNC's obligations under the Bayer Agreement.
PURCHASE COMMITMENTS
As of December 31, 2000, the Chemical Business has a long-term commitment to
purchase anhydrous ammonia. The commitment requires the Company to take or pay
for an average minimum volume of 3,000 tons of anhydrous ammonia during each
month of 2001 and 2002. The Company's purchase price of anhydrous ammonia under
this contract can be higher or lower than the current market spot price of
anhydrous ammonia. The Company has also committed to purchase 100% of its
anhydrous ammonia requirements in 2001 and 50% of its remaining quantities in
excess of the take or pay volumes of its anhydrous ammonia requirements in 2002
from this third party at prices which approximate market. See Note 16 --
Inventory Write-down and Loss on Firm Sales and Purchase Commitments. The
Company also enters into agreements with suppliers of raw materials which
require the Company to provide finished goods in exchange therefore. The Company
did not have a significant commitment to provide finished goods with its
suppliers under these exchange agreements at December 31, 2000. At December 31,
2000, the Company has a standby letter of credit outstanding related to its
Chemical Business of approximately $4.3 million.
In July 1995, a subsidiary of the Company entered into a product supply
agreement with a third party whereby the subsidiary is required to make monthly
facility fee and other payments which aggregate $71,965. In return for this
payment, the subsidiary is entitled to certain quantities of compressed oxygen
produced by the third party. Except in circumstances as defined by the
agreement, the monthly payment is payable regardless of the quantity of
compressed oxygen used by the subsidiary. The term of this agreement, which has
been included in the above minimum operating lease commitments, is for a term of
15 years; however, after the agreement has been in effect for 60 months, the
subsidiary can terminate the agreement without cause at a cost of approximately
$4.5 million. Based on the subsidiary's estimate of compressed oxygen demands of
the plant, the cost of the oxygen under this agreement is expected to be
favorable compared to floating market prices. Purchases under this agreement
aggregated $933,000, $912,000, and $938,000 in 2000, 1999, and 1998,
respectively.
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
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
("ROD") for the site. The ROD detailed EPA's selected remedial action
for the site and estimated the cost of the remedy at $3.6 million. In
1992, the Company made settlement proposals which would have entailed a
collective payment by the subsidiaries of $47,000. The site owner
rejected this offer and proposed a counteroffer of $245,000 plus a
reopener for costs over $12.5 million. The EPA rejected the Company's
offer, allocating 60% of the cleanup costs to the potentially
responsible parties and 40% to the site operator. The EPA estimated the
total cleanup costs at $10.1 million as of February 1993. The site owner
rejected all settlements with the EPA, after which the EPA issued an
order to the site owner to conduct the remedial design/remedial action
approved for the site. In August 1997, the site owner issued an
"invitation to settle" to various parties, alleging the total cleanup
costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the Company's cost
associated with the 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. The Company had accrued an amount based on a
preliminary settlement proposal by the alleged potential responsible
parties; however, this liability was assumed as of May 4, 2000, by the
purchaser of the Automotive Business. In connection with such
assumption, certain of the Company's subsidiaries received an
indemnification by the purchaser of the Automotive Business.
B. The Company and its operations are subject to numerous Environmental
Laws and to other federal, state and local laws regarding health and
safety matters ("Health Laws"). In particular, the manufacture and
distribution of chemical products are activities which entail
environmental risks and impose obligations under the Environmental Laws
and the Health Laws, many of which provide for substantial fines and
criminal sanctions for violations. There can be no assurance that
material costs or liabilities will not be incurred by the Company in
complying with such laws or in paying fines or penalties for violation
of such laws. The Environmental Laws and Health Laws and enforcement
policies thereunder relating to the Chemical Business have in the past
resulted, and could in the future result, in penalties, cleanup costs,
or other liabilities relating to the handling, manufacture, use,
emission, discharge or disposal of pollutants or other substances at or
from the Company's facilities or the use or disposal of certain of its
chemical products. Significant expenditures have been incurred by the
Chemical Business at the El Dorado Facility in order to comply with the
Environmental Laws and Health Laws. The Chemical Business will be
required to make additional significant site or operational
modifications at the El Dorado Facility, involving substantial
expenditures.
The Chemical Business entered into consent administrative order with the
Arkansas Department of Environmental Quality ("ADEQ") in August, 1998
(the "Wastewater
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consent Order"). The Wastewater Consent Order recognized the presence of
nitrate contamination in the shallow groundwater and required the
Chemical Business to undertake on-site bioremediation. The
bioremediation was not successful in achieving denitrification. The
Chemical Business is preparing a report to the ADEQ regarding field
testing of the shallow groundwater. Upon completion of the waste
minimization activities referenced below, a final remedy for groundwater
contamination will be selected, based on an evaluation of risk. There
are no known users of groundwater in the area, and preliminary risk
assessments have not identified any risk that would require additional
remediation. The Wastewater Consent Order included a $183,700 penalty
assessment, of which $125,000 will be satisfied over five years at
expenditures of $25,000 per year for waste minimization activities. The
Chemical Business has documented in excess of $25,000 on expenditures
for each of the years 1998, 1999 and 2000.
The Wastewater Consent Order also required installation of an interim
groundwater treatment system (which is now operating) and certain
improvements in the wastewater collection and treatment system
(discussed below). Twelve months after all improvements are in place,
the risk will be reevaluated, and a final decision will be made on what
additional groundwater remediation, if any, is required. There can be no
assurance that the risk assessment will be approved by the ADEQ, or that
further work The Wastewater Consent Order also requires the Chemical
Business to undertake a facility wide wastewater evaluation and
pollutant source control program and facility wide wastewater
minimization program. The program requires that the subsidiary complete
rainwater drain off studies including engineering design plans for
additional water treatment components to be submitted to the State of
Arkansas, by the revised date of October 1, 2001. The construction of
the additional water treatment components is required to be completed by
the revised date of October 1, 2002 and the El Dorado plant has been
mandated to be in compliance with the final effluent limits on or before
the revised date of April, 2003. The aforementioned compliance
deadlines, however, are not scheduled to commence until after the State
of Arkansas has issued a renewal permit establishing new, more
restrictive effluent limits. Alternative methods for meeting these
requirements are continuing to be examined by the Chemical Business. The
Company believes, although there can be no assurance, that any such new
effluent limits would not have a material adverse effect on the Company.
The Wastewater Consent Order provided that the State of Arkansas will
make every effort to issue the renewal permit by December 1, 1999;
however, the State of Arkansas has delayed issuance of the permit.
Because the Wastewater Consent Order provides that the compliance
deadlines may be extended for circumstances beyond the reasonable
control of the Company, and because the State of Arkansas has not yet
issued the renewal permit, the Company does not believe that failure to
meet the aforementioned compliance deadlines will present a material
adverse impact.
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The State of Arkansas has been advised that the Company is seeking
financing from Arkansas authorities for the projects required to comply
with the Wastewater Consent Order and the Company has requested that the
permit be further delayed until financing arrangements can be made,
which requests have been met to date. The wastewater program is
currently expected to require future capital expenditures of
approximately $2 to $3 million. Negotiations for securing financing are
currently underway.
C. In connection with the sale of the Automotive Business in May 2000, the
buyer assumed over $5 million of vendor liabilities. The Company has
learned that as of December 31, 2000, a majority of these liabilities
existing prior to the sale have not yet been paid. As of December 31,
2000, a relatively minor amount of the vendor payables have been
demanded for payment from the Company. In March 2001, the Company
completed a transaction with the buyer whereby the Company sold the
stock of its Automotive Business previously retained, the primary assets
of which were represented by a note receivable and net operating loss
carry forwards (all of which were fully reserved at December 31, 1999).
As a result of this transaction, the Company presently believes, after
consultation with counsel, that the nonperformance by the buyer of the
Automotive Business relative to these payables which originated prior to
the sale of the Automotive Business, will not ultimately result in cash
payments by the Company for these Automotive payables nor will it have a
material effect on the financial position or results of operations of
the Company; however, the ultimate outcome of this matter is not
presently known.
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. It is however, reasonably possible that this assessment could
change in the near term.
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. As of December 31, 2000, severance payments required would
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
amount to $4.2 million.
The Company has retained certain risks associated with its operations, choosing
to self-insure up to various specified amounts under its health program and
maintain loss sensitive (retrospective) policies on its automotive, workers
compensation and general liability programs. The Company reviews such programs
on at least an annual basis to balance the cost/benefit between its coverage and
retained exposure.
14. EMPLOYEE BENEFIT PLAN
The Company sponsors a retirement plan under Section 401(k) of the Internal
Revenue Code under which participation is available to substantially all
full-time employees. The Company does not presently contribute to this plan.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion of fair values is not indicative of the overall fair
value of the Company's balance sheet since the provisions of the SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," do not apply to all
assets, including intangibles.
The following methods and assumptions were used by the Company in estimating its
fair value of financial instruments:
BORROWED FUNDS: Fair values for fixed rate borrowings, other than the
Notes, are estimated using a discounted cash flow analysis that applies
interest rates currently being offered on borrowings of similar amounts
and terms to those currently outstanding. Carrying values for variable
rate borrowings approximate their fair value. As of December 31, 2000
and 1999, carrying values of variable rate debt which aggregated $43.5
million and $31.5 million, respectively, approximate their estimated
fair value. As of December 31, 2000 and 1999, carrying values of fixed
rate debt which aggregated $92.5 million and $126.6 million,
respectively, had estimated fair values of approximately $43.1 million
and $47.5 million, respectively.
As of December 31, 2000 and 1999, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximated their estimated fair value.
16. INVENTORY WRITE-DOWN AND LOSS ON FIRM SALES AND PURCHASE COMMITMENTS
The Chemical Business has a firm uncancelable commitment to purchase anhydrous
ammonia pursuant to the terms of a supply contract (Note 13-- Commitments and
Contingencies, Purchase Commitments). Based on the pricing index contained in
this contract, prices paid
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. INVENTORY WRITE-DOWN AND LOSS ON FIRM SALES AND PURCHASE COMMITMENTS
(CONTINUED)
during 2000 and 1999, were higher than the current market spot price. As a
result, in 2000 and 1999, a subsidiary of the Company recorded loss provisions
for anhydrous ammonia required to be purchased during the remainder of the
contract aggregating approximately $2.5 and $8.4 million, respectively. At
December 31, 2000 and 1999, the accrued liability for future payments of the
loss provision included in the Consolidated Balance Sheet was approximately $
6.9 and $7.4 million, respectively ($3.5 and $1.8 million of which is included
in accrued liabilities due within one year as of December 31, 2000 and 1999
respectively). During 1999, the Company's Chemical Business also wrote down the
carrying value of certain nitrate-based inventories by approximately $1.6
million. Substantially all of the inventory written down was sold during 1999.
Due to the pricing mechanism in the contract, it is reasonably possible that
this loss provision estimate may change in the near term.
Also during November and December 2000, the Company entered into a forward sales
commitment with a customer for deliveries in 2001 which ultimately were at
prices below the Company's anticipated costs as of December 31, 2000. In
connection therewith, the Company recognized a loss on this sales commitment in
2000 of $.9 million.
17. SEGMENT INFORMATION
FACTORS USED BY MANAGEMENT TO IDENTIFY THE ENTERPRISE'S REPORTABLE SEGMENTS AND
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
LSB Industries, Inc. has three continuing reportable segments: the Chemical
Business, Climate Control Business, and Industrial Products Business. The
Company's reportable segments are based on business units that offer similar
products and services. The reportable segments are each managed separately
because they manufacture and distribute distinct products with different
production processes.
The Company evaluates performance and allocates resources based on operating
profit or loss. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies.
DESCRIPTION OF EACH REPORTABLE SEGMENT
CHEMICAL
This segment manufactures and sells fertilizer grade ammonium nitrate
and urea ammonia nitrate for the agriculture industry, explosive grade
ammonium nitrate for the mining industry and concentrated, blended and
mixed nitric acid for industrial applications. The Company's primary
manufacturing facilities are located in El Dorado,
F-40
100
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. SEGMENT INFORMATION (CONTINUED)
Arkansas, Baytown, Texas and Cherokee, Alabama. Sales to customers of
this segment primarily include farmers in the South Central and
Southeast regions of the United States, 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.
On October 31, 2000, the Company acquired two plants previously owned
and operated by LaRoche Industries, Inc. ("LaRoche") through an asset
purchase agreement involving Orica, USA who acquired other operating
assets of LaRoche for approximately $3.0 million. The purchase
allocation associated with this acquisition as of December 31, 2000 is
preliminary. The acquisition by LSB subsidiaries, which are not
subsidiaries of ClimaChem, included inventory, spare parts, precious
metals and an operating nitrogen-based products plant in Cherokee,
Alabama (the "Cherokee Plant") and a plant in Crystal City, Missouri
(the "Crystal City Plant") which is in the process of being shut-down.
The Cherokee Plant, which produces primarily solid and liquid fertilizer
products and anhydrous ammonia, had unaudited sales for the nine months
ended September 30, 2000, and the year ended December 31, 1999, of $30.0
million and $32.3 million, respectively. The Cherokee Plant also had an
unaudited operating loss before selling, general and administrative
expense for the nine months ended September 30, 2000 and for the year
ended December 31, 1999, of $.1 million and $2.4 million, respectively.
On a proforma basis, giving effect to this acquisition as if it occurred
on January 1, 1999 the Company would have reported the following
operating results for the years ended December 31, 2000 and 1999:
2000 1999
--------- ---------
(in millions, except
per share amounts)
Revenues from businesses continuing $ 329.9 $ 287.5
Loss - from continuing operations
before extraordinary item $ (10.9) $ (33.9)
Earnings per share from continuing operations
before extraordinary item applicable to common
stock $ (1.14) $ (3.15)
F-41
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. SEGMENT INFORMATION (CONTINUED)
In 1999, the Chemical Business sold its Australian subsidiary and incurred a
loss upon disposition of $2.0 million. (See Note 5--Business Disposed Of.)
Further, the Company Company purchases substantial quantities of anhydrous
ammonia and natural gas for use in manufacturing its products. The pricing
volatility of such raw materials directly affects the operating profitability of
the Chemical segment. (See Note 16 -- Inventory Write-down and Loss on Firm
Sales and Purchase Commitments.)
CLIMATE CONTROL
This business segment manufactures and sells, primarily from its various
facilities in Oklahoma City, a variety of hydronic fan coil, water
source heat pump products and other HVAC products for use in commercial
and residential air conditioning and heating systems. The Company's
various facilities in Oklahoma City comprise substantially all of the
Climate Control segment's operations. Sales to customers of this segment
primarily include original equipment manufacturers, contractors and
independent sales representatives located throughout the world which are
generally secured by a mechanic's lien, except for sales to original
equipment manufacturers.
INDUSTRIAL PRODUCTS
This segment manufactures and purchases machine tools for sale to
machine tool dealers and end users throughout the world. 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, 2000 and
1999, the Company's accounts and notes receivable are shown net of allowance for
doubtful accounts of $14.3 million and $17.1 million, respectively.
F-42
102
17. SEGMENT INFORMATION (CONTINUED)
Information about the Company's continuing operations in different industry
segments for each of the three years in the period ended December 31, 2000 is
detailed below.
2000 1999 1998
--------- --------- ---------
(In Thousands)
Net sales:
Businesses continuing:
Chemical:
Agricultural Products $ 40,671 $ 33,398 $ 37,203
Explosives 51,679 50,712 57,423
Industrial Acids 57,289 44,044 31,131
--------- --------- ---------
Total Chemical 149,639 128,154 125,757
Climate Control:
Water Source heat pumps 54,242 51,292 55,046
Hydronic fan coils 61,111 57,133 58,239
Other HVAC products 15,221 8,630 2,501
--------- --------- ---------
Total Climate Control 130,574 117,055 115,786
Industrial Products 10,407 9,027 14,315
Business disposed of - Chemical -- 7,461 14,184
========= ========= =========
$ 290,620 $ 261,697 $ 270,042
========= ========= =========
Gross profit:
Businesses continuing:
Chemical $ 15,240 $ 13,532 $ 18,570
Climate Control 34,475 35,467 32,278
Industrial Products 2,839 1,757 3,731
========= ========= =========
$ 52,554 $ 50,756 $ 54,579
========= ========= =========
Operating profit (loss):
Businesses continuing:
Chemical $ 1,877 $ 1,325 $ 6,592
Climate Control 10,961 9,751 10,653
Industrial Products 77 (2,507) (403)
--------- --------- ---------
12,915 8,569 16,842
Business disposed of-- Chemical -- (1,632) (2,467)
--------- --------- ---------
12,915 6,937 14,375
General corporate expenses and other, net (4,798) (8,449) (9,891)
Interest expense:
Business disposed of -- (326) (434)
Businesses continuing (15,377) (15,115) (14,504)
Gain (loss) on businesses disposed of -- (1,971) 12,993
Provision for impairment on long-lived assets -- (4,126) --
========= ========= =========
Income (loss) from continuing operations
before provision for income taxes and extraordinary gain $ (10,655) $ (31,489) $ 2,539
========= ========= =========
F-43
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LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. SEGMENT INFORMATION (CONTINUED)
2000 1999 1998
--------- --------- ---------
(In Thousands)
Depreciation of property, plant and equipment:
Businesses continuing:
Chemical $ 6,576 $ 7,102 $ 7,019
Climate Control 2,174 1,901 1,602
Industrial Products 63 64 102
Corporate assets and other 400 682 723
Business disposed of-- Chemical -- -- 973
--------- --------- ---------
Total depreciation of property, plant and equipment $ 9,213 $ 9,749 $ 10,419
========= ========= =========
Additions to property, plant and equipment:
Businesses continuing:
Chemical $ 4,191 $ 3,670 $ 5,264
Climate Control 3,180 7,147 3,868
Industrial Products 253 25 130
Corporate assets and other 112 130 293
--------- --------- ---------
Total additions to property, plant and equipment $ 7,736 $ 10,972 $ 9,555
========= ========= =========
Total assets:
Businesses continuing:
Chemical $ 109,672 $ 93,482 $ 107,780
Climate Control 65,516 65,521 49,516
Industrial Products 7,228 8,203 11,662
Corporate assets and other 10,479 21,429 22,137
Business disposed of-- Chemical -- -- 16,797
Net assets of discontinued operations -- -- 15,358
--------- --------- ---------
Total assets $ 192,895 $ 188,635 $ 223,250
========= ========= =========
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.
F-44
104
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. SEGMENT INFORMATION (CONTINUED)
Gross profit by industry segment represents net sales less cost of sales.
Operating profit by industry segment represents revenues less operating
expenses. In computing operating profit from continuing operations, none of the
following items have been added or deducted: general corporate expenses, income
taxes, interest expense, provision for loss on firm sales and purchase
commitments, provision for impairment on long-lived assets, results from
discontinued operations or businesses disposed of.
Identifiable assets by industry segment are those assets used in the operations
of each industry. Corporate assets are those principally owned by the parent
company or by subsidiaries not involved in the three identified industries.
Information about the Company's domestic and foreign operations from continuing
operations for each of the three years in the period ended December 31, 2000 is
detailed below:
GEOGRAPHIC REGION 2000 1999 1998
- ----------------- --------- --------- ---------
(In Thousands)
Sales:
Businesses continuing:
Domestic $ 283,916 $ 250,625 $ 252,745
Foreign 6,704 3,611 3,113
--------- --------- ---------
290,620 254,236 255,858
Foreign business disposed of -- 7,461 14,184
========= ========= =========
$ 290,620 $ 261,697 $ 270,042
========= ========= =========
Income (loss) from continuing operations before
provision for income taxes and extraordinary gain:
Businesses continuing:
Domestic $ (10,323) $ (27,113) $ (8,223)
Foreign (332) (447) 670
--------- --------- ---------
(10,655) (27,560) (7,553)
Foreign business disposed of -- (1,958) (2,901)
Gain (loss) on disposal of businesses -- (1,971) 12,993
--------- --------- ---------
-- (3,929) 10,092
--------- --------- ---------
$ (10,655) $ (31,489) $ 2,539
========= ========= =========
F-45
105
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. SEGMENT INFORMATION (CONTINUED)
GEOGRAPHIC REGION 2000 1999 1998
- ----------------- --------- --------- ---------
(In Thousands)
Long-lived assets:
Businesses continuing:
Domestic $ 80,882 $ 83,811 $ 86,187
Foreign 2 3 3
--------- --------- ---------
80,884 83,814 86,190
Foreign business disposed of -- -- 4,665
========= ========= =========
$ 80,884 $ 83,814 $ 90,855
========= ========= =========
Revenues by geographic region include revenues from unaffiliated customers, as
reported in the consolidated financial statements. Revenues earned from sales or
transfers between affiliates in different geographic regions are shown as
revenues of the transferring region and are eliminated in consolidation.
Revenues from unaffiliated customers include foreign export sales as follows:
GEOGRAPHIC AREA 2000 1999 1998
- --------------- --------- --------- ---------
(In Thousands)
Mexico and Central and South America $ 862 $ 1,261 $ 864
Canada $ 5,953 6,125 7,852
Middle East $ 3,697 4,431 5,114
Other $ 3,592 4,816 5,031
--------- --------- ---------
$ 14,104 $ 16,633 $ 18,861
========= ========= =========
MAJOR CUSTOMER
Revenues from sales to one customer, Bayer Corporation ("Bayer") of the
Company's Chemical Business segment represented approximately $38.4 million and
$17.2 million for the year ended 2000 and 1999 respectively (none in 1998). As
discussed in Note 13 - Commitments and Contingencies, under the terms of the
Bayer Agreement, Bayer will purchase from a subsidiary of the Company all of its
requirements for nitric acid to be used at its Baytown, Texas facility for an
initial ten-year term ending May 2009.
F-46
106
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
-------- -------- -------- --------
2000
Total revenues $ 70,883 $ 77,483 $ 69,951 $ 77,933
======== ======== ======== ========
Gross profit on net sales $ 15,930 $ 15,039 $ 11,246 $ 10,339
======== ======== ======== ========
Net income (loss) from continuing operations,
including businesses disposed of but before
extraordinary gain $ 252 $ (2,679) $ (2,952) $ (5,411)
======== ======== ======== ========
Net loss from discontinued operations $ -- $ -- $ (579) $ (2,522)
======== ======== ======== ========
Extraordinary gain $ -- $ 13,244 $ 3,952 $ 2,890
======== ======== ======== ========
Net income (loss) $ 252 $ 10,565 $ 421 $ (5,043)
======== ======== ======== ========
Net income (loss) applicable to
common stock $ (543) $ 9,772 $ (195) $ (5,610)
======== ======== ======== ========
Earnings (loss) per common share:
Basic and diluted:
Net loss from continuing operations
before extraordinary gain $ (.05) $ (.30) $ (.32) $ (.47)
======== ======== ======== ========
Net loss from discontinued operations $ -- $ -- $ (.05) $ (.21)
======== ======== ======== ========
Extraordinary gain $ -- $ 1.12 $ .35 $ .22
======== ======== ======== ========
Net income (loss) applicable to common
stock $ (.05) $ .82 $ (.02) $ (.46)
======== ======== ======== ========
1999
Total revenues $ 60,524 $ 71,394 $ 61,904 $ 65,833
======== ======== ======== ========
Gross profit on net sales $ 14,018 $ 14,166 $ 11,242 $ 11,330
======== ======== ======== ========
Net loss from continuing operations, including
businesses disposed of $ (2,748) $(11,720) $ (5,122) $(12,056)
======== ======== ======== ========
Net loss from discontinued operations $ (1,062) $ (1,369) $ (1,969) $(13,721)
======== ======== ======== ========
Net loss $ (3,810) $(13,089) $ (7,091) $(25,777)
======== ======== ======== ========
Net loss applicable to common stock $ (4,626) $(13,895) $ (7,894) $(26,580)
======== ======== ======== ========
Loss per common share:
Basic and diluted:
Net loss from continuing operations $ (.30) $ (1.05) $ (.51) $ (1.09)
======== ======== ======== ========
Net loss from discontinued operations $ (.09) $ (.012) $ (.16) $ (1.16)
======== ======== ======== ========
Net loss applicable to common stock $ (.39) $ (1.17) $ (.67) $ (2.25)
======== ======== ======== ========
F-47
107
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited) (continued)
The Company recorded provisions for losses on firm sales and purchase
commitments of $1.5 million, $1.0 million and $.9 million in the first, second
and fourth quarters of 2000, respectively and $7.5 million and $.9 million in
the second quarter and third quarter of 1999, respectively.
In the third and fourth quarters of 2000, the Company recognized a loss from
discontinued operations of approximately $.6 million and $2.5 million,
respectively. These losses relate to the recognition of the Company's obligation
to perform on certain note guarantees and a letter of credit, net of the
collateral value and the final adjustment for 2000 from the amount accrued as of
December 31, 1999.
The Company repurchased approximately $19.2 million, $6.0 million and $4.5
million of Senior Notes in the second, third and fourth quarters of 2000,
respectively. Therefore the Company recognized a gain of approximately $13.2
million, $4.0 million and $2.9 million, respectively.
In the second quarter of 1999, the Company incurred a loss of $2.0 million on
the disposal of its Australian subsidiary, TES.
In the fourth quarter of 1999, the Company recorded a provision for impairment
on long-lived assets of $4.1 million and accrued a loss provision on its
investment in its Automotive Business of $10 million which has been presented as
discontinued operations. As a result of the presentation of the Automotive
Business as discontinued operations. the Quarterly Financial Data in the above
table has been restated for all periods presented to exclude the revenues and
gross profit of the Automotive Business.
F-48
108
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
Additions
Charges Deductions
Balance at (Recoveries) Write-offs/ Balance
Beginning to Costs and Costs at End
Description of Year Expenses Incurred of Year
----------- ---------- ------------ ----------- ---------
Accounts receivable - allowance
for doubtful accounts (1):
2000 $ 1,713 $ 1,974 $ 610 $ 3,077
======= ======= ======== =======
1999 $ 2,085 $ 812 $ 1,184 $ 1,713
======= ======= ======== =======
1998 $ 1,643 $ 971 $ 529 $ 2,085
======= ======= ======== =======
Inventory-reserve for
slow-moving items (1):
2000 $ 1,450 $ -- $ 159 $ 1,291
======= ======= ======== =======
1999 $ 814 $ 695 $ 59 $ 1,450
======= ======= ======== =======
1998 $ 602 $ 212 $ -- $ 814
======= ======= ======== =======
Notes receivable-allowance
for doubtful accounts (1):
2000 $15,414 $(1,576) $ 2,628 $11,210
======= ======= ======== =======
1999 $ 6,502 $ 8,931 $ 19 $15,414
======= ======= ======== =======
1998 $ 5,157 $ 1,345 $ -- $ 6,502
======= ======= ======== =======
F-49
109
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts (continued)
Years ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
Additions
Charged to Deductions
Balance at (Recoveries) Write-offs/ Balance
Beginning to Costs and Costs at End
Description of Year Expenses Incurred of Year
----------- ---------- ------------ ----------- ---------
Accrual for plant turnaround:
2000 $ 1,299 $ 1,922 $ 1,373 $ 1,848
======== ======== ======== ========
1999 $ 1,104 $ 1,421 $ 1,226 $ 1,299
======== ======== ======== ========
1998 $ 1,263 $ 2,264 $ 2,423 $ 1,104
======== ======== ======== ========
(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-50
110
EXHIBIT INDEX
EXHIBITS
2.1. Stock Purchase Agreement and Stock Pledge Agreement between Dr.
Hauri AG, a Swiss Corporation, and LSB Chemical Corp., which the
Company hereby incorporates by reference from Exhibit 2.2 to the
Company's Form 10-K for fiscal year ended December 31, 1994.
2.2. Asset Purchase and Sale Agreement, dated May 4, 2000 L&S
Automotive Products Co., L&S Bearing So., LSB Extrusion Co.,
Rotex Corporation and DriveLine Technologies, Inc., which is
incorporated from Exhibit 2.2 to the Company's Amendment No. 2
to the 1999 Form 10-K. This agreement includes certain exhibits
and schedules that are not included with this exhibit, and will
be provided upon request by the Commission.
3.1. Restated Certificate of Incorporation, the Certificate of
Designation dated February 17, 1989, and certificate of
Elimination dated April 30, 1993, which the Company hereby
incorporates by reference from Exhibit 4.1 to the Company's
Registration Statement, No. 33-61640; Certificate of Designation
for the Company's $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2, which the Company hereby incorporates
by reference from Exhibit 4.6 to the Company's Registration
Statement, No. 33-61640.
3.2. Bylaws, as amended, which the Company hereby incorporates by
reference from Exhibit 3(ii) to the Company's Form 10-Q for the
quarter ended June 30, 1998.
4.1. Specimen Certificate for the Company's Non-cumulative Preferred
Stock, having a par value of $100 per share, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30, 1983.
4.2. Specimen Certificate for the Company's Series B Preferred Stock,
having a par value of $100 per share, which the Company hereby
incorporates by reference from Exhibit 4.27 to the Company's
Registration Statement No. 33-9848.
4.3. Specimen Certificate for the Company's Series 2 Preferred, which
the Company hereby incorporates by reference from Exhibit 4.5 to
the Company's Registration Statement No. 33-61640.
4.4. Specimen Certificate for the Company's Common Stock, which the
Company incorporates by reference from Exhibit 4.4 to the
Company's Registration Statement No. 33-61640.
4.5. Renewed Rights Agreement, dated January 6, 1999, between the
Company and Bank One, N.A., which the Company hereby
incorporates by reference from Exhibit No. 1 to the Company's
Form 8-A Registration Statement, dated January 27, 1999.
4.6. Indenture, dated as of November 26, 1997, by and among
ClimaChem, Inc., the Subsidiary Guarantors and Bank One, NA, as
trustee, which the Company hereby incorporates by reference from
Exhibit 4.1 to the Company's Form 8-K, dated November 26, 1997.
111
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. First Supplemental Indenture, dated February 8, 1999, by and
among ClimaChem, Inc., the Guarantors, and Bank One N.A., which
the Company hereby incorporates by reference from Exhibit 4.19
to the Company's Form 10-K for the year ended December 31, 1998.
4.9. Second Amended and Restated Loan and Security Agreement dated
May 10, 1999, by and between Bank of America National Trust and
Savings Association and LSB Industries, Inc., Summit Machine
Tool Manufacturing Corp., and Morey Machinery Manufacturing
Corporation, which the Company hereby incorporates by reference
from Exhibit 4.2 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1999.
10.1. Form of Death Benefit Plan Agreement between the Company and the
employees covered under the plan, which the Company hereby
incorporates by reference from Exhibit 10(c)(1) to the Company's
Form 10-K for the year ended December 31, 1980.
10.2. The Company's 1981 Incentive Stock Option Plan, as amended, and
1986 Incentive Stock Option Plan, which the Company hereby
incorporates by reference from Exhibits 10.1 and 10.2 to the
Company's Registration Statement No. 33-8302.
10.3. Form of Incentive Stock Option Agreement between the Company and
employees as to the Company's 1981 Incentive Stock Option Plan,
which the Company hereby incorporates by reference from Exhibit
10.10 to the Company's Form 10-K for the fiscal year ended
December 31, 1984.
10.4. Form of Incentive Stock Option Agreement between the Company and
employees as to the Company's 1986 Incentive Stock Option Plan,
which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Registration Statement No. 33-9848.
10.5. The 1987 Amendments to the Company's 1981 Incentive Stock Option
Plan and 1986 Incentive Stock Option Plan, which the Company
hereby incorporates by reference from Exhibit 10.7 to the
Company's Form 10-K for the fiscal year ended December 31, 1986.
10.6. The Company's 1993 Stock Option and Incentive Plan which the
Company hereby incorporates by reference from Exhibit 10.6 to
the Company's Form 10-K for the fiscal year ended December 31,
1993.
10.7. The Company's 1993 Non-employee Director Stock Option Plan which
the Company hereby incorporates by reference from Exhibit 10.7
to the Company's Form 10-K for the fiscal year ended December
31, 1993.
10.8. Lease Agreement, dated March 26, 1982, between Mac Venture, Ltd.
and Hercules Energy Mfg. Corporation, which the Company hereby
incorporates by reference from Exhibit 10.32 to the Company's
Form 10-K for the fiscal year ended December 31, 1981.
112
10.9. Limited Partnership Agreement dated as of May 4, 1995, between
the general partner, and LSB Holdings, Inc., an Oklahoma
Corporation, as limited partner which the Company hereby
incorporates by reference from Exhibit 10.11 to the Company's
Form 10-K for the fiscal year ended December 31, 1995.
10.10. Lease Agreement dated November 12, 1987, between Climate Master,
Inc. and West Point Company and amendments thereto, which the
Company hereby incorporates by reference from Exhibits 10.32,
10.36, and 10.37, to the Company's Form 10-K for fiscal year
ended December 31, 1988.
10.11. Severance Agreement, dated January 17, 1989, between the Company
and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.48 to the Company's Form 10-K for
fiscal year ended December 31, 1988. The Company also entered
into identical agreements with Tony M. Shelby, David R. Goss,
Barry H. Golsen, David M. Shear, and Jim D. Jones and the
Company will provide copies thereof to the Commission upon
request.
10.12. Third Amendment to Lease Agreement, dated as of December 31,
1987, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation, which the Company hereby incorporates by reference
from Exhibit 10.49 to the Company's Form 10-K for fiscal year
ended December 31, 1988.
10.13. Employment Agreement and Amendment to Severance Agreement dated
January 12, 1989 between the Company and Jack E. Golsen, dated
March 21, 1996 which the Company hereby incorporates by
reference from Exhibit 10.15 to the Company's Form 10-K for
fiscal year ended December 31, 1995.
10.14. Non-Qualified Stock Option Agreement, dated June 1, 1992,
between the Company and Robert C. Brown, M.D. which the Company
hereby incorporates by reference from Exhibit 10.38 to the
Company's Form 10-K for fiscal year ended December 31, 1992. The
Company entered into substantially identical agreements with
Bernard G. Ille, Jerome D. Shaffer and C.L. Thurman, and the
Company will provide copies thereof to the Commission upon
request.
10.15. Loan and Security Agreement (DSN Plant) dated October 31, 1994
between DSN Corporation and The CIT Group which the Company
hereby incorporates by reference from Exhibit 10.1 to the
Company's Form 10-Q for the fiscal quarter ended September 30,
1994.
10.16. Loan and Security Agreement (Mixed Acid Plant) dated April 5,
1995 between DSN Corporation and The CIT Group, which the
Company hereby incorporates by reference from Exhibit 10.25 to
the Company's Form 10-K for the fiscal year ended December 31,
1994.
10.17. First Amendment to Loan and Security Agreement (DSN Plant),
dated June 1, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.13 to the ClimaChem
Form S-4 Registration Statement, No. 333-44905.
113
10.18. First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation and The
CIT Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.15 to the ClimaChem
Form S-4 Registration Statement, No. 333-44905.
10.19. Loan and Security Agreement (Rail Tank Cars), dated November 15,
1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.16 to the ClimaChem Form S-4
Registration Statement, No. 333-44905.
10.20. First Amendment to Loan and Security Agreement (Rail Tank Cars),
dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc. which the Company hereby
incorporates by reference from Exhibit 10.17 to the ClimaChem
Form S-4 Registration Statement, No. 333-44905.
10.22. Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment
Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company's Form 10-Q for the
fiscal quarter ended March 31, 1997.
10.23. Amendment to Loan and Security Agreement, dated November 21,
1997, between DSN Corporation and The CIT Group/Equipment
Financing, Inc. which the Company hereby incorporates by
reference from Exhibit 10.19 to the ClimaChem Form S-4
Registration Statement, No. 333-44905.
10.24. First Amendment to Non-Qualified Stock Option Agreement, dated
March 2, 1994, and Second Amendment to Stock Option Agreement,
dated April 3, 1995, each between the Company and Jack E.
Golsen, which the Company hereby incorporates by reference from
Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1995.
10.25. Baytown Nitric Acid Project and Supply Agreement dated June 27,
1997, by and among El Dorado Nitrogen Company, El Dorado
Chemical Company and Bayer Corporation which the Company hereby
incorporates by reference from Exhibit 10.2 to the Company's
Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM
OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
10.26. First Amendment to Baytown Nitric Acid Project and Supply
Agreement, dated February 1, 1999, between El Dorado Nitrogen
Company and Bayer Corporation, which the Company hereby
incorporates by reference from Exhibit 10.30 to the Company's
Form 10-K for the year ended December 31, 1998. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #7927, DATED JUNE 9, 1999,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM
OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
10.27. Service Agreement, dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company which the Company
hereby incorporates by reference from Exhibit 10.3 to the
Company's Form 10-Q
114
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
10.28. Ground Lease dated June 27, 1997, between Bayer Corporation and
El Dorado Nitrogen Company which the Company hereby incorporates
by reference from Exhibit 10.4 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
10.29. Participation Agreement, dated as of June 27, 1997, among El
Dorado Nitrogen Company, Boatmen's Trust Company of Texas as
Owner Trustee, Security Pacific Leasing corporation, as Owner
Participant and a Construction Lender, Wilmington Trust Company,
Bayerische Landes Bank, New York Branch, as a Construction
Lender and the Note Purchaser, and Bank of America National
Trust and Savings Association, as Construction Loan Agent which
the Company hereby incorporates by reference from Exhibit 10.5
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED
SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.30. Lease Agreement, dated as of June 27, 1997, between Boatmen's
Trust Company of Texas as Owner Trustee and El Dorado Nitrogen
Company which the Company hereby incorporates by reference from
Exhibit 10.6 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1997.
10.31. Security Agreement and Collateral Assignment of Construction
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen
Company which the Company hereby incorporates by reference from
Exhibit 10.7 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1997.
10.32. Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen
Company and consented to by Bayer Corporation which the Company
hereby incorporates by reference from Exhibit 10.8 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1997.
10.33. Amendment to Loan and Security Agreement, dated March 16, 1998,
between The CIT Group/Equipment Financing, Inc., and DSN
Corporation which the Company hereby incorporates by reference
from Exhibit 10.54 to the ClimaChem Form S-4 Registration
Statement, No. 333-44905.
10.34. Fifth Amendment to Lease Agreement, dated as of December 31,
1998, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation, which the Company hereby incorporates by reference
from Exhibit 10.38 to the Company's Form 10-K for the year ended
December 31, 1998.
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10.35. Union Contract, dated August 1, 1998, between EDC and the
International Association of Machinists and Aerospace Workers,
which the Company hereby incorporates by reference from Exhibit
10.42 to the Company's Form 10-K for the year ended December 31,
1998.
10.36. Non-Qualified Stock Option Agreement, dated April 22, 1998,
between the Company and Robert C. Brown, M.D. The Company
entered into substantially identical agreements with Bernard G.
Ille, Jerome D. Shaffer, Raymond B. Ackerman, Horace G. Rhodes,
Gerald J. Gagner, and Donald W. Munson. The Company will provide
copies of these agreements to the Commission upon request.
10.37. The Company's 1998 Stock Option and Incentive Plan, which the
Company hereby incorporates by reference from Exhibit 10.44 to
the Company's Form 10-K for the year ended December 31, 1998.
10.38. Letter Agreement, dated March 12, 1999, between Kestrel Aircraft
Company and LSB Industries, Inc., Prime Financial Corporation,
Herman Meinders, Carlan K. Yates, Larry H. Lemon, Co-Trustee
Larry H. Lemon Living Trust, which the Company hereby
incorporates by reference from Exhibit 10.45 to the Company's
Form 10-K for the year ended December 31, 1998.
10.39. LSB Industries, Inc. 1998 Stock Option and Incentive Plan which
the Company hereby incorporates by reference from Exhibit "B" to
the LSB Proxy Statement, dated May 24, 1999, for Annual Meeting
of Stockholders.
10.40 LSB Industries, Inc. Outside Directors Stock Option Plan which
the Company hereby incorporates by reference from Exhibit "C" to
the LSB Proxy Statement, dated May 24, 1999, for Annual Meeting
of Stockholders.
10.41. First Amendment to Second Amended and Restated Loan and Security
Agreement, dated January 1, 2000, by and between Bank of
America, N.A. and LSB Industries, Inc., Summit Machine Tool
Manufacturing Corp., and Morey Machinery Manufacturing
Corporation, which the Company hereby incorporates by reference
from Exhibit 10.3 to the Company's Form 8-K dated December 30,
1999.
10.42 Amendment to Anhydrous Ammonia Sales Agreement, dated January 4,
2000, to be effective October 1, 1999, between Koch Nitrogen
Company and El Dorado Chemical Company, which is incorporated by
reference from Exhibit 10.43 to the Company's Amendment No. 2 to
its 1999 Form 10-K. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF#9650,
DATED JULY 2000, GRANTING A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION ACT.
10.43 Anhydrous Ammonia Sales Agreement, dated January 2000, to be
effective October 1, 1999, between Koch Nitrogen Company and El
Dorado Chemical Company which is incorporated by reference from
Exhibit 10.44 to the Company's Amendment No. 2 to its 1999 Form
10-K. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF COMMISSION ORDER CF#9650, DATED JULY
2000, GRANTING A REQUEST BY THE
116
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
10.44 Second Amendment to Second Amended and Restated Loan and
Security Agreement, dated March 1, 2000 by and between Bank of
America, N.A. and LSB Industries Inc., Summit Machine Tool
Manufacturing Corp., and Morey Machinery Manufacturing
Corporation, which the Company hereby incorporates by reference
from Exhibit 10.3 to the Company's Form 8-K dated March 1, 2000.
10.45 Third Amendment to Second Amended and Restated Loan and Security
Agreement, dated March 31, 2000 by and between Bank of America,
N.A. and LSB Industries Inc., Summit Machine Tool Manufacturing
Corp., and Morey Machinery manufacturing Corporation, which the
Company hereby incorporates by reference from Exhibit 10.14 to
the Company's Form 10-Q for the fiscal quarter ended March 31,
2000.
10.46 Loan Agreement dated December 23, 1999 between Climate Craft,
Inc. and the City of Oklahoma City, which the Company hereby
incorporates by reference from Exhibit 10.49 to the Company's
Amendment No. 2 to its 1999 Form 10-K.
10.47 Letter, dated April 1, 2000, executed by SBL to Prime amending
the Promissory Note, which the Company incorporates by reference
from Exhibit 10.52 to the Company's Amendment No. 2 to its 1999
Form 10-K.
10.48 Guaranty Agreement, dated as of April 21, 2000, by Prime to
Stillwater National Bank & Trust relating to that portion of the
SBL Borrowings borrowed by SBL, which the Company incorporates
by reference from Exhibit 10.50 to the Company's Amendment No. 2
to its 1999 Form 10-K. Substantial similar guarantees have been
executed by Prime in favor of Stillwater covering the amounts
borrowed by the following affiliates SBL relating to the SBL
Borrowing s (as \defined in "Relationships and Related
Transactions:") listed in Exhibit A attached to the Guaranty
Agreement with the only material differences being the name of
the debtor and the amount owing by such debtor. Copies of which
will provided to the Commission upon request.
10.49 Security Agreement, dated effective April 21, 2000, executed by
Prime in favor of Stillwater National Bank and Trust, which the
Company incorporates by reference from Exhibit 10.54 to the
Company's Amendment No. 2 to its 1999 Form 10-K.
10.50 Limited Guaranty, effective April 21, 2000, executed by Prime to
Stillwater National Bank and Trust, which the Company
incorporates by reference from Exhibit 10.55 to the Company's
Amendment No. 2 to its 1999 Form 10-K.
10.51 Covenant Waiver Letter, dated October 19, 2000, between The CIT
Group and DSN Corporation, 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, 2000.
10.52 Fourth Amendment to Second Amended and Restated Loan and
Security Agreement dated October 10, 2000 by and between Bank of
117
America, N.A. and LSB Industries, Inc., Summit Machine Tool
Manufacturing corp., and Morey Machinery Manufacturing
Corporation, which the Company hereby incorporates by reference
from Exhibit 10.2 to the Company's Form 10-Q for the fiscal
quarter ended September 30, 2000.
10.53 Letter Agreement, dated August 23, 2000, between LSB Chemical
Corp. and Orica USA, Inc., which the Company hereby incorporates
by reference from Exhibit 10.4 to the Company's Form 10-Q for
the fiscal quarter ended September 30, 2000. 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.
10.54 Agreement, dated October 31, 2000, between Orica Nitrogen,
L.L.C., Orica USA, Inc., and LSB Chemical Corp., which the
Company hereby incorporates by reference from Exhibit 10.5 to
the company's Form 10-Q for the fiscal quarter ended September
20, 2000. 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.
10.55. Letter, dated April 1, 2001, executed by SBL to Prime amending
the Promissory Note.
10.56 Letter of Intent, dated December 22, 2000, between El Dorado
Chemical Company and ORICA USA Inc.
10.57 Agreement, dated April 2, 2001, between Crystal City Nitrogen
Company and River Cement Company
21.1. Subsidiaries of the Company.
23.1. Consent of Independent Auditors.