FORM 10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
to
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period_________to__________
Commission file number 1-7677
LSB INDUSTRIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 73-1015226
________________________ ___________________
(State of Incorporation) (I.R.S. Employer
identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
_______________________________________ ___________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(405) 235-4546
_______________
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
___________________ _______________________
Common Stock, Par Value $.10 New York Stock Exchange
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
1
(Facing Sheet Continued)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the Registrant has had
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days. YES 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, 1999, the aggregate market value of the 7,649,412 shares
of voting stock of the Registrant held by non-affiliates of the Company equaled
approximately $22,948,236 based on the closing sales price for the Company's
common stock as reported for that date on the New York Stock Exchange. That
amount does not include (1) the 1,463 shares of Convertible Non-Cumulative
Preferred Stock (the "Non-Cumulative Preferred Stock") held by non-affiliates of
the Company, (2) the 20,000 shares of Series B 12% Convertible, Cumulative
Preferred Stock (the "Series B Preferred Stock"), and (3) the 915,000 shares of
$3.25 Convertible Exchangeable Class C Preferred Stock, Series 2, excluding
5,000 shares held in treasury (the "Series 2 Preferred Stock"). An active
trading market does not exist for the shares of Non-Cumulative Preferred Stock
or the Series B Preferred Stock. The shares of Series 2 Preferred Stock do
not have voting rights except under limited circumstances.
As of March 31, 1999, the Registrant had 11,825,586 shares of common
stock outstanding (excluding 3,283,090 shares of common stock held as treasury
stock).
2
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 Amendment No. 1 to the report on its behalf of this
28th day of April, 1999.
LSB INDUSTRIES, INC.
By: /s/ Jack E. Golsen
_____________________________
Jack E. Golsen
Chairman of the Board and
President
(Principal Executive Officer)
By: /s/ Tony M. Shelby
_____________________________
Tony M. Shelby
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
______________________________
Jim D. Jones
Vice President, Controller and
Treasurer (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.
Dated: April 28, 1999 By: /s/ Jack E. Golsen
_________________________
Jack E. Golsen, Director
Dated: April 28, 1999 By: /s/ Tony M. Shelby
__________________________
Tony M. Shelby, Director
Dated: April 28, 1999 By: /s/ David R. Goss
__________________________
David R. Goss, Director
Dated: April 28, 1999 By: /s/ Barry H. Golsen
__________________________
Barry H. Golsen, Director
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Dated: April 28, 1999 By: /s/ Robert C. Brown
__________________________
Robert C. Brown, Director
Dated: April 28, 1999 By: /s/ Bernard G. Ille
___________________________
Bernard G. Ille, Director
Dated: April 28, 1999 By: /s/ Jerome D. Shaffer
___________________________
Jerome D. Shaffer, Director
Dated: April 28, 1999 By: /s/ Raymond B. Ackerman
___________________________
Raymond B. Ackerman, Director
Dated: April 28, 1999 By:
_____________________________
Horace Rhodes, Director.
Dated: April 28, 1999 By:
_____________________________
Gerald J. Gagner, Director
Dated: April 28, 1999 By: /s/ Donald W. Munson
______________________________
Donald W. Munson, Director
4
PART III
Item 10. Directors and Executive Officers of the Company
_______ _______________________________________________
Directors. Certificate of Incorporation and By-laws of the
Company provide for the division of the Board of Directors into
three (3) classes, each class consisting as nearly as possible of
one-third of the whole. The term of office of one class of
directors expires each year, with each class of directors elected
for a term of three (3) years and until the shareholders elect
their qualified successors.
The Company's By-laws provide that the Board of Directors, by
resolution from time to time, may fix the number of directors that
shall constitute the whole Board of Directors. The By-laws
presently provide that the number of directors may consist of not
less than three (3) nor more than eleven (11). The Board of
Directors currently has set the number of directors at eleven (11).
The By-laws of the Company further provide that only persons
nominated by or at the direction of: (i) the Board of Directors of
the Company, or (ii) any stockholder of the Company entitled to
vote for the election of the directors that complies with certain
notice procedures, shall be eligible for election as a director of
the Company. Any stockholder desiring to nominate any person as a
director of the Company must give written notice to the Secretary
of the Company at the Company's principal executive office not less
than fifty (50) days prior to the date of the meeting of
stockholders to elect directors; except, if less than sixty (60)
days' notice or prior disclosure of the date of such meeting is
given to the stockholders, then written notice by the stockholder
must be received by the Secretary of the Company not later than the
close of business on the tenth (10th) day following the day on
which such notice of the date of the meeting was mailed or such
public disclosure was made. In addition, if the stockholder
proposes to nominate any person, the stockholder's written notice
to the Company must provide all information relating to such person
that the stockholder desires to nominate that is required to be
disclosed in solicitation of proxies pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
The following table sets forth the name, principal occupation,
age, year in which the individual first became a director, and year
in which the director's term will expire for each nominee for
election as a director at the Annual Meeting and all other
directors whose term will continue after the Annual Meeting.
Certain information with respect to the executive officers of the
Company is set forth under Item 4A of Part I hereof.
5
Name and First Became
Principal Occupation A Director Term Expires Age
_____________________ ___________ ____________ ____
Raymond B. Ackerman (1) 1993 1999 76
Chairman Emeritus of Ackerman
McQueen, Inc.
Gerald G. Gagner (2) 1997 1999 63
President of Dragerton
Investments
Bernard G. Ille (3) 1971 1999 72
Investments
Donald W. Munson (4) 1997 1999 66
Consultant
Tony M. Shelby (5) 1971 1999 57
Senior Vice President of
Finance and Chief
Financial Officer of the
Company
Barry H. Golsen (6) 1981 2000 48
Vice Chairman of the
Board of Directors of
the Company and President
of the Climate Control
Business of the Company
David R. Goss (7) 1971 2000 58
Senior Vice President of
Operations of the Company
Jerome D. Shaffer, M.D. (8) 1969 2000 82
Investments
Robert C. Brown, M.D. (9) 1969 2001 68
President of Northwest
Internal Medicine
Associates, Inc.
Jack E. Golsen (10) 1969 2001 70
President, Chief Executive
Officer and Chairman of
the Board of Directors of
the Company
Horace G. Rhodes (11) 1996 2001 71
President/Managing Partner,
Kerr, Irvine, Rhodes
and Ables
_______________________
(1) From 1972 until his retirement in 1992, Mr. Ackerman served as
Chairman of the Board and President of Ackerman, McQueen,
Inc., the largest public relations firm in Oklahoma. Mr.
Ackerman currently serves as Chairman Emeritus of Ackerman,
6
McQueen, Inc. Mr. Ackerman retired as a Rear Admiral from the
United States Naval Reserves. Mr. Ackerman is a graduate of
Oklahoma City University, and in 1996, he was awarded an
honorary doctorate from Oklahoma City, University.
(2) Mr. Gagner, a resident of Key West, Florida, served as
President, Chief Executive Officer and director of USPCI,
Inc., a New York Stock Exchange company involved in the waste
management industry, from 1984 until 1988, when USPCI was
acquired by Union Pacific Corporation. From 1988 to the
present, Mr. Gagner has been engaged as a private investor.
Mr. Gagner has served, and is presently serving, as President
and a director of Dragerton Investments, Inc., which developed
and sold one of the world's largest industrial waste
landfills, and is presently general partner of New West
Investors, L.P., which has investments principally in the
financial service industry. Mr. Gagner is also a director of
Automation Robotics, A.G., a German corporation. Mr. Gagner
has an engineering degree from the University of Utah.
(3) Mr. Ille served as President and Chief Executive Officer of
First Life Assurance Company from May, 1988, until it was
acquired by another company in March, 1994. For more than
five (5) years prior to joining First Life, Mr. Ille served as
President of United Founders Life Insurance Company. Mr. Ille
is a director of Landmark Land Company, Inc., which was parent
company of First Life. Mr. Ille is currently a private
investor. He is a graduate of University of Oklahoma.
(4) Mr. Munson is a resident of England. From January, 1988,
until his retirement in August, 1992, Mr. Munson served as
President and Chief Operating Officer of Lennox Industries.
Prior to his election as President and Chief Operating Officer
of Lennox Industries, Mr. Munson served as Executive Vice
President of Lennox Industries' Division Operations, President
of Lennox Canada and Managing Director of Lennox Industries'
European Operations. Prior to joining Lennox Industries, Mr.
Munson served in various capacities with the Howden Group, a
company located in England, and The Trane Company, including
serving as the managing director of various companies within
the Howden Group and Vice President Europe for The Trane
Company. Mr. Munson is currently a consultant and
international distributor for the Ducane Company, a
manufacturer of certain types of residential air conditioning,
air furnaces and other equipment, and is serving as a member
of the Board of Directors of Multi Clima SA, a French
manufacturer of air conditioning - heating equipment, which
the Company has an option to acquire. Mr. Munson has degrees
in mechanical engineering and business administration from the
University of Minnesota.
(5) Mr. Shelby, a certified public accountant, is Senior Vice
President and Chief Financial Officer of the Company, a
7
position he has held for a period in excess of five (5) years.
Prior to becoming Senior Vice President and Chief Financial
Officer of the Company, Mr. Shelby served as Chief Financial
Officer of a subsidiary of the Company and was with the
accounting firm of Arthur Young & Co., a predecessor to Ernst
& Young LLP. Mr. Shelby is a graduate of Oklahoma City
University.
(6) Mr. Golsen, L.L.B., has served as Vice Chairman of the Board
of the Company since August, 1994, and for more than five (5)
years has been the President of the Company's Environmental
Control Business. Mr. Golsen has both his undergraduate and
law degrees from the University of Oklahoma.
(7) Mr. Goss, a certified public accountant, is a Senior Vice
President - Operations of the Company and has served in
substantially the same capacity for the past five (5) years.
Mr. Goss is a graduate of Rutgers University.
(8) Dr. Shaffer, a director of the Company since its inception, is
currently a private investor. He practiced medicine for many
years until his retirement in 1987. Dr. Shaffer is a graduate
of Penn State University and received his medical degree from
Jefferson Medical College.
(9) Dr. Brown has practiced medicine for many years and is Vice
President and Treasurer of Plaza Medical Group, P.C. Dr. Brown
is a graduate of Tufts University and received his medical
degree from Tufts University.
(10) Mr. Golsen, founder of the Company, is Chairman of the Board
and President of the Company and has served in that capacity
since the inception of the Company in 1969. During 1996, Mr.
Golsen was inducted into the Oklahoma Commerce and Industry
Hall of Honor as one of Oklahoma's leading industrialists.
Mr. Golsen has a degree from the University of New Mexico in
Biochemistry.
(11) Mr. Rhodes is the managing partner of the law firm of Kerr,
Irvine, Rhodes & Ables and has served in such capacity and has
practiced law for a period in excess of five (5) years. Since
1972, Mr. Rhodes has served as Executive Vice President and
General Counsel for the Association of Oklahoma Life Insurance
Companies and since 1982 has served as Executive Vice
President and General Counsel for the Oklahoma Life and Health
Insurance Guaranty Association. Mr. Rhodes received his
undergraduate and law degrees from the University of Oklahoma.
8
Family Relationships. Jack E. Golsen is the father of Barry
H. Golsen and the brother-in-law of Robert C. Brown, M.D. Robert C.
Brown, M.D. is the uncle of Barry H. Golsen.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely on a review of copies of the Forms 3, 4 and 5 and
amendments thereto furnished to the Company with respect to 1998,
or written representations that no such reports were required to be
filed with the Securities and Exchange Commission, the Company
believes that during 1998 all directors and officers of the Company
and beneficial owners of more than ten percent (10%) of any class
of equity securities of the Company registered pursuant to Section
12 of the Exchange Act filed their required Forms 3, 4, or 5, as
required by Section 16(a) of the Securities Exchange Act of 1934,
as amended, on a timely basis, except Messrs. Ackerman, Ille,
Munson, Shaffer, Brown and Rhodes each filed one Form 5
inadvertently late to report one grant by the Company of certain
non-qualified stock options to each individual.
Item 11. Executive Compensation.
_______ _______________________
The following table shows the aggregate cash compensation
which the Company and its subsidiaries paid or accrued to the Chief
Executive Officer and each of the other four (4) most highly-paid
executive officers of the Company (which includes the Vice Chairman
of the Board who also serves as President of the Company's Climate
Control Business). The table includes cash distributed for
services rendered during 1998, plus any cash distributed during
1998 for services rendered in a prior year, less any amount
relating to those services previously included in the cash
compensation table for a prior year.
9
Summary Compensation Table
___________________________
Long-term
Compen-
sation
Annual Compensation Awards
___________________________ ______
Other All
Annual Securities Other
Compen- Underlying Compen-
Name and Salary Bonus sation Stock sation
Position Year ($) ($)(1) ($)(2) Options ($)
_______________ ____ ______ ______ ______ ________ ______
Jack E. Golsen, 1998 477,400 - - - -
Chairman of the 1997 470,450 - - - -
Board, President 1996 469,125 - - 100,000 -
and Chief
Executive Officer
Barry H. Golsen, 1998 226,600 - - - -
Vice Chairman of 1997 223,300 - - - -
the Board of 1996 209,125 - - 105,000 -
Directors and
President of the
Climate Control Business
David R. Goss, 1998 190,500 - - - -
Senior Vice 1997 187,750 - - - -
President - 1996 173,300 - - 85,000 -
Operations
Tony M. Shelby, 1998 190,500 - - - -
Senior Vice 1997 187,750 - - - -
President/Chief 1996 173,425 - - 85,000 -
Financial Officer
David M. Shear, 1998 165,000 - - - -
Vice President/ 1997 162,500 - - - -
General Counsel 1996 151,300 - - 64,000 -
_________________________
(1) Bonuses are for services rendered for the prior fiscal
year. No bonuses were paid to the above-named executive officers
for 1996 or 1997, and no bonuses for 1998 performance are to be
paid to the above-named executive officers.
(2) Does not include perquisites and other personal benefits,
securities or property for the named executive officer in any year
if the aggregate amount of such compensation for such year does not
exceed the lesser of either $50,000 or 10% of the total of annual
salary and bonus reported for the named executive officer for such
year.
Option Grants in 1998. There were no grants of stock options made
to the named executive officers in 1998.
10
Aggregated Option Exercises in 1998
and Fiscal Year End Option Values.
_________________________________
The following table sets forth information concerning each
exercise of stock options by each of the named executive officers
during the last fiscal year and the year-end value of unexercised
options:
Number of Value
Securities of Unexercised
Underlying In-the-Money
Unexercised Options at
Options at Fiscal Year End
FY End (#)(2) ($) (2) (3)
_____________ ________________
Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#)(1) ($) Unexercisable Unexercisable
______________ ____________ ________ ______________ _______________
Jack E. Golsen - - 205,000/(4) 113,438/
60,000 -
Barry H. Golsen - - 42,000/ - /
63,000 -
David R. Goss - - 45,000/ 7,313/
51,000 -
Tony M. Shelby - - 45,000/ 7,313/
51,000 -
David M. Shear - - 48,600/ 9,563/
38,400 -
_______________________________________
(1) The named executive officer did not exercise any Company
stock options in 1998.
(2) The incentive stock options granted under the Company's
stock option plans become exercisable 20% after one year from date
of grant, an additional 20% after two years, an additional 30%
after three years, and the remaining 30% after four years.
(3) The values are based on the difference between the price
of the Company's Common Stock on the New York Stock Exchange at the
close of trading on December 31, 1998 of $3.3125 per share and the
exercise price of such option. The actual value realized by a
named executive officer on the exercise of these options depends on
the market value of the Company's Common Stock on the date of
exercise.
(4) The amounts shown include a non-qualified stock option
covering 165,000 shares of Common Stock which is currently
exercisable.
Other Plans. The Board of Directors has adopted an LSB
Industries, Inc., Employee Savings Plan (the "401(k) Plan") for the
employees (including executive officers) of the Company and its
11
subsidiaries, excluding certain (but not all) employees covered
under union agreements. The 401(k) Plan is an employee
contribution plan, and the Company and its subsidiaries make no
contributions to the 401(k) Plan. The amount that an employee may
contribute to the 401(k) Plan equals a certain percentage of the
employee's compensation, with the percentage based on the
employee's income and certain other criteria as required under
Section 401(k) of the Internal Revenue Code. The Company or
subsidiary deducts the amounts contributed to the 401(k) Plan from
the employee's compensation each pay period, in accordance with the
employee's instructions, and pays the amount into the 401(k) Plan
for the employee's benefit. The Summary Compensation Table set
forth above includes any amount contributed and deferred during the
1996, 1997, and 1998 fiscal years pursuant to the 401(k) Plan by
the named executive officers of the Company.
The Company has a death benefit plan for certain key
employees. Under the plan, the designated beneficiary of an
employee covered by the plan will receive a monthly benefit for a
period of ten (10) years if the employee dies while in the
employment of the Company or a wholly-owned subsidiary of the
Company. The agreement with each employee provides, in addition to
being subject to other terms and conditions set forth in the
agreement, that the Company may terminate the agreement as to any
employee at anytime prior to the employee's death. The Company has
purchased life insurance on the life of each employee covered under
the plan to provide, in large part, a source of funds for the
Company's obligations under the Plan. The Company also will fund
a portion of the benefits by investing the proceeds of such
insurance policy received by the Company upon the employee's death.
The Company is the owner and sole beneficiary of the insurance
policy, with the proceeds payable to the Company upon the death of
the employee. The following table sets forth the amounts of annual
benefits payable to the designated beneficiary or beneficiaries of
the executive officers named in the Summary Compensation Table set
forth above under the above-described death benefits plan.
Amount of
Name of Individual Annual Payment
__________________ ______________
Jack E. Golsen $175,000
Barry H. Golsen $ 30,000
David R. Goss $ 35,000
Tony M. Shelby $ 35,000
David M. Shear $ N/A
In addition to the above-described plans, during 1991 the
Company entered into a non-qualified arrangement with certain key
employees of the Company and its subsidiaries to provide
compensation to such individuals in the event that they are
employed by the Company or a subsidiary of the Company at age 65.
Under the plan, the employee will be eligible to receive for the
life of such employee, a designated benefit as set forth in the
plan. In addition, if prior to attaining the age 65 the employee
12
dies while in the employment of the Company or a subsidiary of the
Company, the designated beneficiary of the employee will receive a
monthly benefit for a period of ten (10) years. The agreement with
each employee provides, in addition to being subject to other terms
and conditions set forth in the agreement, that the Company may
terminate the agreement as to any employee at any time prior to the
employee's death. The Company has purchased insurance on the life
of each employee covered under the plan where the Company is the
owner and sole beneficiary of the insurance policy, with the
proceeds payable to the Company to provide a source of funds for
the Company's obligations under the plan. The Company may also
fund a portion of the benefits by investing the proceeds of such
insurance policies. Under the terms of the plan, if the employee
becomes disabled while in the employment of the Company or a
wholly-owned subsidiary of the Company, the employee may request
the Company to cash-in any life insurance on the life of such
employee purchased to fund the Company's obligations under the
plan. Jack E. Golsen does not participate in the plan. The
following table sets forth the amounts of annual benefits payable
to the executive officers named in the Summary Compensation Table
set forth above under such retirement plan.
Amount of
Name of Individual Annual Payment
__________________ ______________
Barry H. Golsen $17,480
David R. Goss $17,403
Tony M. Shelby $15,605
David M. Shear $17,822
Compensation of Directors. In 1998, the Company compensated
each non-management director of the Company for his services in the
amount of $4,500. The non-management directors of the Company also
received $500 for every meeting of the Board of Directors attended
during 1998. Each member of the Audit Committee, consisting of
Messrs. Rhodes, Ille, Brown, and Shaffer, received an additional
$20,000 for his services in 1998. Each member of the Public
Relations and Marketing Committee, consisting of Messrs. Ackerman
and Ille, received an additional $20,000 for his services in 1998.
During 1997, the Board of Directors established a special committee
of the Board of Directors for European business development (the
"European Operations Committee") and elected Mr. Munson as a member
of that committee. During 1998, Mr. Munson was paid approximately
$42,600 for his services on the European Operations Committee.
In September, 1993, the Company adopted the 1993 Non-Employee
Director Stock Option Plan (the "Outside Director Plan"). The
Outside Director Plan authorizes the grant of non-qualified stock
options to each member of the Company's Board of Directors who is
not an officer or employee of the Company or its subsidiaries. The
maximum shares for which options may be issued under the Outside
Director Plan will be 150,000 shares (subject to adjustment as
provided in the Outside Director Plan). The Company shall
automatically grant to each outside director an option to acquire
5,000 shares of the Company's Common Stock on April 30 following
13
the end of each of the Company's fiscal years in which the Company
realizes net income of $9.2 million or more for such fiscal year.
The exercise price for an option granted under the Outside Director
Plan shall be the fair market value of the shares of Common Stock
at the time the option is granted. Each option granted under the
Outside Director Plan, to the extent not exercised, shall terminate
upon the earlier of the termination of the outside director as a
member of the Company's Board of Directors or the fifth anniversary
of the date such option was granted. On April 30, 1995, options to
acquire 5,000 shares of Common Stock were granted under this plan
to each of Messrs. Ille, Brown, Shaffer, and Ackerman, at a per
share exercise price of $5.375. The Company did not grant options
under the Outside Director Plan in April, 1996, 1997, and 1998.
During April, 1998, each of the outside directors of the
Company (Messrs. Ackerman, Brown, Gagner, Ille, Munson, Rhodes and
Shaffer) was granted a non-qualified stock option for the purchase
of up to 15,000 shares of Common Stock at an exercise price of
$4.1875 per share, which was the closing price for the Company's
Common Stock as quoted on the New York Stock Exchange as of the
date of grant. These non-qualified options terminate at the
earlier of (i) five years from the date of grant or (ii) upon an
optionee ceasing to be a director of the Company and are
exercisable, in whole or in part, at anytime after six months from
the date of grant prior to termination of the options.
Employment Contracts and Termination of Employment and Change
in Control Arrangements.
(a) Termination of Employment and Change in Control Agreements.
The Company has entered into severance agreements with Jack E.
Golsen, Barry H. Golsen, Tony M. Shelby, David R. Goss, David
M. Shear, and certain other officers of the Company and
subsidiaries of the Company.
Each severance agreement provides (among other things) that
if, within twenty-four (24) months after the occurrence of a
change in control (as defined) of the Company, the Company
terminates the officer's employment other than for cause (as
defined), or the officer terminates his employment for good
reason (as defined), the Company must pay the officer an
amount equal to 2.9 times the officer's base amount (as
defined). The phrase "base amount" means the average annual
gross compensation paid by the Company to the officer and
includable in the officer's gross income during the period
consisting of the most recent five (5) year period immediately
preceding the change in control. If the officer has been
employed by the Company for less than 5 years, the base amount
is calculated with respect to the most recent number of
taxable years ending before the change in control that the
officer worked for the Company.
The severance agreements provide that a "change in control"
means a change in control of the Company of a nature that
14
would require the filing of a Form 8-K with the Securities and
Exchange Commission and, in any event, would mean when: (1)
any individual, firm, corporation, entity, or group (as
defined in Section 13(d)(3) of the Securities Exchange Act of
1934, as amended) becomes the beneficial owner, directly or
indirectly, of thirty percent (30%) or more of the combined
voting power of the Company's outstanding voting securities
having the right to vote for the election of directors, except
acquisitions by: (a) any person, firm, corporation, entity,
or group which, as of the date of the severance agreement, has
that ownership, or (b) Jack E. Golsen, his wife; his children
and the spouses of his children; his estate; executor or
administrator of any estate, guardian or custodian for Jack E.
Golsen, his wife, his children, or the spouses of his
children, any corporation, trust, partnership, or other entity
of which Jack E. Golsen, his wife, children, or the spouses of
his children own at least eighty percent (80%) of the
outstanding beneficial voting or equity interests, directly or
indirectly, either by any one or more of the above-described
persons, entities, or estates; and certain affiliates and
associates of any of the above-described persons, entities, or
estates; (2) individuals who, as of the date of the severance
agreement, constitute the Board of Directors of the Company
(the "Incumbent Board") and who cease for any reason to
constitute a majority of the Board of Directors except that
any person becoming a director subsequent to the date of the
severance agreement, whose election or nomination for election
is approved by a majority of the Incumbent Board (with certain
limited exceptions), will constitute a member of the Incumbent
Board; or (3) the sale by the Company of all or substantially
all of its assets.
Except for the severance agreement with Jack E. Golsen, the
termination of an officer's employment with the Company "for
cause" means termination because of: (a) the mental or
physical disability from performing the officer's duties for
a period of one hundred twenty (120) consecutive days or one
hundred eighty days (even though not consecutive) within a
three hundred sixty (360) day period; (b) the conviction of a
felony; (c) the embezzlement by the officer of Company assets
resulting in substantial personal enrichment of the officer at
the expense of the Company; or (d) the willful failure (when
not mentally or physically disabled) to follow a direct
written order from the Company's Board of Directors within the
reasonable scope of the officer's duties performed during the
sixty (60) day period prior to the change in control. The
definition of "Cause" contained in the severance agreement
with Jack E. Golsen means termination because of: (a) the
conviction of Mr. Golsen of a felony involving moral turpitude
after all appeals have been completed; or (b) if due to Mr.
Golsen's serious, willful, gross misconduct or willful, gross
neglect of his duties has resulted in material damages to the
Company and its subsidiaries, taken as a whole, provided that
(i) no action or failure to act by Mr. Golsen will constitute
15
a reason for termination if he believed, in good faith, that
such action or failure to act was in the Company's or its
subsidiaries' best interest, and (ii) failure of Mr. Golsen to
perform his duties hereunder due to disability shall not be
considered willful, gross misconduct or willful, gross
negligence of his duties for any purpose.
The termination of an officer's employment with the Company
for "good reason" means termination because of (a) the
assignment to the officer of duties inconsistent with the
officer's position, authority, duties, or responsibilities
during the sixty (60) day period immediately preceding the
change in control of the Company or any other action which
results in the diminishment of those duties, position,
authority, or responsibilities; (b) the relocation of the
officer; (c) any purported termination by the Company of the
officer's employment with the Company otherwise than as
permitted by the severance agreement; or (d) in the event of
a change in control of the Company, the failure of the
successor or parent company to agree, in form and substance
satisfactory to the officer, to assume (as to a successor) or
guarantee (as to a parent) the severance agreement as if no
change in control had occurred.
Except for the severance agreement with Jack E. Golsen, each
severance agreement runs until the earlier of: (a) three
years after the date of the severance agreement, or (b) the
officer's normal retirement date from the Company; however,
beginning on the first anniversary of the severance agreement
and on each annual anniversary thereafter, the term of the
severance agreement automatically extends for an additional
one-year period, unless the Company gives notice otherwise at
least sixty (60) days prior to the anniversary date. The
severance agreement with Jack E. Golsen is effective for a
period of three (3) years from the date of the severance
agreement; except that, commencing on the date one (1) year
after the date of such severance agreement and on each annual
anniversary thereafter, the term of such severance agreement
shall be automatically extended so as to terminate three (3)
years from such renewal date, unless the Company gives notices
otherwise at least one (1) year prior to the renewal date.
(b) Employment Agreement. In March 1996, the Company entered into
an employment agreement with Jack E. Golsen. The employment
agreement requires the Company to employ Jack E. Golsen as an
executive officer of the Company for an initial term of three
(3) years and provides for two (2) automatic renewals of three
(3) years each unless terminated by either party by the giving
of written notice at least one (1) year prior to the end of
the initial or first renewal period, whichever is applicable.
Under the terms of such employment agreement, Mr. Golsen shall
be paid (i) an annual base salary at his 1995 base rate, as
adjusted from time to time by the Compensation Committee, but
such shall never be adjusted to an amount less than Mr.
16
Golsen's 1995 base salary, (ii) an annual bonus in an amount
as determined by the Compensation Committee, and (iii) receive
from the Company certain other fringe benefits. The
employment agreement provides that Mr. Golsen's employment may
not be terminated, except (i) upon conviction of a felony
involving moral turpitude after all appeals have been
exhausted, (ii) Mr. Golsen's serious, willful, gross
misconduct or willful, gross negligence of duties resulting in
material damage to the Company and its subsidiaries, taken as
a whole, unless Mr. Golsen believed, in good faith, that such
action or failure to act was in the Company's or its
subsidiaries' best interest, and (iii) Mr. Golsen's death;
provided, however, no such termination under (i) or (ii) above
may occur unless and until the Company has delivered to
Mr. Golsen a resolution duly adopted by an affirmative vote of
three-fourths of the entire membership of the Board of
Directors at a meeting called for such purpose after
reasonable notice given to Mr. Golsen finding, in good faith,
that Mr. Golsen violated (i) or (ii) above. If Mr. Golsen's
employment is terminated in breach of this Agreement, then he
shall, in addition to his other rights and remedies, receive
and the Company shall pay to Mr. Golsen (i) in a lump sum cash
payment, on the date of termination, a sum equal to the amount
of Mr. Golsen's annual base salary at the time of such
termination and the amount of the last bonus paid to Mr.
Golsen prior to such termination times (a) the number of years
remaining under the employment agreement or (b) four (4) if
such termination occurs during the last twelve (12) months of
the initial period or the first renewal period, and (ii)
provide to Mr. Golsen all of the fringe benefits that the
Company was obligated to provide during his employment under
the employment agreement for the remainder of the term of the
employment agreement, or, if terminated at any time during the
last twelve (12) months of the initial period or first renewal
period, then during the remainder of the term and the next
renewal period.
If there is a change in control (as defined in the severance
agreement between Mr. Golsen and the Company) and within twenty-
four (24) months after such change in control Mr. Golsen is
terminated, other than for Cause (as defined in the severance
agreement), then in such event, the severance agreement between Mr.
Golsen and the Company shall be controlling.
In the event Mr. Golsen becomes disabled and is not able to
perform his duties under the employment agreement as a result
thereof for a period of twelve (12) consecutive months within any
two (2) year period, the Company shall pay Mr. Golsen his full
salary for the remainder of the term of the employment agreement
and thereafter sixty percent (60%) of such salary until Mr.
Golsen's death.
17
Compensation Committee Interlocks and Insider Participation.
The Company's Executive Salary Review Committee has the
authority to set the compensation of all officers of the Company.
This Committee generally considers and approves the recommendations
of the President. The members of the Executive Salary Review
Committee are the following non-management directors: Robert C.
Brown, M.D., Jerome D. Shaffer, M.D., and Bernard G. Ille. During
1998, the Executive Salary Review Committee had one meeting.
See "Compensation of Directors" for information concerning
compensation paid and options granted to non-employee directors of
the Company during 1998 for services as a director to the Company.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
_______ ____________________________________________________
Security Ownership of Certain Beneficial Owners. The following
table shows the total number and percentage of the outstanding
shares of the Company's voting Common Stock and voting Preferred
Stock beneficially owned as of the close of business on March 31,
1999, with respect to each person (including any "group" as
used in Section 13(d)(3) of the Securities Act of 1934, as amended)
that the Company knows to have beneficial ownership of more than
five percent (5%) of the Company's voting Common Stock and voting
Preferred Stock. A person is deemed to be the beneficial owner of
voting shares of Common Stock of the Company which he or she could
acquire within sixty (60) days of March 31, 1999.
Because of the requirements of the Securities and Exchange
Commission as to the method of determining the amount of shares an
individual or entity may beneficially own, the amounts shown below
for an individual or entity may include shares also considered
beneficially owned by others.
Amounts
Name and Address Title of Shares Percent
of of Beneficially of
Beneficial Owner Class Owned(1) Class
_________________ _______ ____________ _______
Jack E. Golsen and Common 4,024,568 (3)(5)(6) 31.4%
members of his family (2) Voting Preferred 20,000 (4)(6) 92.7%
Riverside Capital
Advisors, Inc. (7) Common 1,467,397 (7) 11.0%
Ryback Management
Corporation Common 1,835,063 (8) 13.4%
Dimensional Fund
Advisors, Inc. Common 717,100 (9) 6.0%
Wynnefield Partners Small
Cap Value, L.P. and
Nelson Obus(10) Common 975,000 (10) 8.2%
______________________________________
18
(1) The Company based the information, with respect to
beneficial ownership, on information furnished by the above-named
individuals or entities or contained in filings made with the
Securities and Exchange Commission or the Company's records.
(2) Includes Jack E. Golsen and the following members of his
family: wife, Sylvia H. Golsen; son, Barry H. Golsen (a Director,
Vice Chairman of the Board of Directors, and President of the
Climate Control Business of the Company); son, Steven J. Golsen
(Executive officer of several subsidiaries of the Company); and
daughter, Linda F. Rappaport. The address of Jack E. Golsen,
Sylvia H. Golsen, Barry H. Golsen, and Linda F. Rappaport is 16
South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107; and
Steven J. Golsen's address is 7300 SW 44th Street, Oklahoma City,
Oklahoma 73179.
(3) Includes (a) the following shares over which Jack E.
Golsen ("J. Golsen") has the sole voting and dispositive power:
(i) 109,028 shares that he owns of record, (ii) 165,000 shares that
he has the right to acquire within sixty (60) days under a non-
qualified stock option, (iii) 4,000 shares that he has the right to
acquire upon conversion of a promissory note, (iv) 133,333 shares
that he has the right to acquire upon the conversion of 4,000
shares of the Company's Series B 12% Cumulative Convertible
Preferred Stock (the "Series B Preferred") owned of record by him,
(v) 10,000 shares owned of record by the MG Trust, of which he is
the sole trustee, and (vi) 40,000 shares that he has the right to
acquire within the next sixty (60) days under the Company's stock
option plans; (b) 1,052,250 shares owned of record by Sylvia H.
Golsen, over which she and her husband, J. Golsen share voting and
dispositive power; (c) 246,616 shares over which Barry H. Golsen
("B. Golsen") has the sole voting and dispositive power, 533 shares
owned of record by B. Golsen's wife, over which he shares the
voting and dispositive power, and 112,000 shares that he has the
right to acquire within the next sixty (60) days under the
Company's stock option plans; (d) 206,987 shares over which Steven
J. Golsen ("S. Golsen") has the sole voting and dispositive power
and 34,000 shares that he has the right to acquire within the next
sixty (60) days under the Company's stock option plans; (e) 222,460
shares held in trust for the grandchildren of J. Golsen and Sylvia
H. Golsen of which B. Golsen, S. Golsen and Linda F. Rappaport ("L.
Rappaport") jointly or individually are trustees; (f) 82,552 shares
owned of record by L. Rappaport, over which L. Rappaport has the
sole voting and dispositive power; (g) 1,042,699 shares owned of
record by SBL Corporation ("SBL"), 39,177 shares that SBL has the
right to acquire upon conversion of 9,050 shares of the Company's
non-voting $3.25 Convertible Exchangeable Class C Preferred Stock,
Series 2 (the "Series 2 Preferred"), and 400,000 shares that SBL
has the right to acquire upon conversion of 12,000 shares of
Series B Preferred owned of record by SBL, and (h) 60,600 shares
owned of record by Golsen Petroleum Corporation ("GPC"), which is
a wholly-owned subsidiary of SBL, and 133,333 shares that GPC has
the right to acquire upon conversion of 4,000 shares of Series B
Preferred owned of record by GPC. SBL is wholly-owned by Sylvia H.
19
Golsen (40% owner), B. Golsen (20% owner), S. Golsen (20% owner),
and L. Rappaport (20% owner) and, as a result, SBL, J. Golsen,
Sylvia H. Golsen, B. Golsen, S. Golsen, and L. Rappaport share the
voting and dispositive power of the shares beneficially owned by
SBL. SBL's address is 16 South Pennsylvania Avenue, Oklahoma City,
Oklahoma 73107.
(4) Includes: (a) 4,000 shares of Series B Preferred owned
of record by J. Golsen, over which he has the sole voting and
dispositive power; (b) 12,000 shares of Series B Preferred owned of
record by SBL; and (c) 4,000 shares owned of record by SBL's
wholly-owned subsidiary, GPC, over which SBL, J. Golsen, Sylvia H.
Golsen, B. Golsen, S. Golsen, and L. Rappaport share the voting and
dispositive power.
(5) Does not include 124,350 shares of Common Stock that L.
Rappaport's husband owns of record and 34,000 shares which he has
the right to acquire within the next sixty (60) days under the
Company's stock option plans, all of which L. Rappaport disclaims
beneficial ownership. Does not include 219,520 shares of Common
Stock owned of record by certain trusts for the benefit of B.
Golsen, S. Golsen, and L. Rappaport over which B. Golsen, S. Golsen
and L. Rappaport have no voting or dispositive power. Heidi Brown
Shear, an officer of the Company and the niece of J. Golsen, is the
Trustee of each of these trusts.
(6) J. Golsen disclaims beneficial ownership of the shares
that B. Golsen, S. Golsen, and L. Rappaport each have the sole
voting and investment power over as noted in footnote (3) above. B.
Golsen, S. Golsen, and L. Rappaport disclaim beneficial ownership
of the shares that J. Golsen has the sole voting and investment
power over as noted in footnotes (3) and (4) and the shares owned
of record by Sylvia H. Golsen. Sylvia H. Golsen disclaims
beneficial ownership of the shares that J. Golsen has the sole
voting and dispositive power over as noted in footnotes (3) and (4)
above.
(7) Riverside Capital Advisors, Inc. ("Riverside") advised
the Company that it owns 341,255 shares of Series 2 Preferred that
is convertible into 1,467,397 shares of Common Stock. Riverside
further advised the Company that it has voting and dispositive
power over such shares as a result of Riverside having full
discretionary investment authority over customers' accounts to
which it provides investment services. The address of Riverside is
1650 Southeast 17th Street Causeway, Fort Lauderdale, Florida 33316.
(8) Ryback Management Corporation ("Ryback") is the
Investment Company Advisor for Lindner Dividend Fund, a registered
investment company, which owns 423,900 shares of Series 2 Preferred
that is convertible into 1,835,063 shares of Common Stock. Ryback
has sole voting and dispositive power over these shares. The
address of Ryback is 7711 Corondelet Avenue, Suite 700, St. Louis,
Missouri 63105.
20
(9) Dimensional Fund Advisors, Inc. ("Dimensional"), a
registered investment advisor, is deemed to have beneficial
ownership of 717,100 shares of the Company's Common Stock, all of
which shares are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company, or in series
of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Participation Group Trust, investment
vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares. The
address of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa
Monica, California 90401.
(10) Wynnefield Partners Small Cap Value, L.P.
("Wynnefield"), together with Wynnefield Partners Small Cap Value,
L.P. I ("Wynnefield I"), Channel Partnership II, L.P.("Channel"),
Wynnefield Value Offshore Fund, Ltd. ("Wynnefield Offshore"), and
Nelson Obus, an individual ("Obus") (collectively, the Wynnefield
Group"), filed a joint group Schedule 13D. The Schedule 13D states
that Wynnefield has sole voting and dispositive power over 458,720
shares; Wynnefiled I has sole voting and dispositive power over
308,180 shares; Channel has sole voting and dispositive power over
24,000 shares; Wynnefield Offshore has sole voting and dispositive
power over 164,100 shares, and Obus has sole voting and dispositive
power over 20,000 shares. However, Obus has advised the Company
that he possesses voting control over the 975,000 shares officially
owned by the Wynnefield Group. The address of Wynnefield and Obus
is One Penn Plaza, Suite 4720, New York, New York 10119.
Security Ownership of Management. The following table sets
forth information obtained from the directors and nominees to be
elected as a director of the Company and the directors, nominees
and executive officers of the Company as a group as to their
beneficial ownership of the Company's voting Common Stock and
voting Preferred Stock as of March 31, 1999.
Because of the requirements of the Securities and Exchange
Commission as to the method of determining the amount of shares an
individual or entity may own beneficially, the amount shown below
for an individual may include shares also considered beneficially
owned by others. Any shares of stock which a person does not own,
but which he or she has the right to acquire within sixty (60) days
of March 31, 1999, are deemed to be outstanding for the purpose of
computing the percentage of outstanding stock of the class owned by
such person but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.
21
Amounts of
Shares
Name of Title of Beneficially Percent of
Beneficial Owner Class Owned Class
________________ ________ _____________ __________
Raymond B. Ackerman Common 27,000 (2) *
Robert C. Brown, M.D. Common 233,329 (3) 2.0%
Gerald J. Gagner Common 16,000 (4) *
Barry H. Golsen Common 2,188,918 (5) 17.6%
Voting Preferred 16,000 (5) 74.2%
Jack E. Golsen Common 3,189,420 (6) 25.0%
Voting Preferred 20,000 (6) 92.7%
David R. Goss Common 233,585 (7) 2.0%
Bernard G. Ille Common 115,000 (8) 1.0%
Donald W. Munson Common 16,432 (9) *
Horace G. Rhodes Common 20,000 (10) *
Jerome D. Shaffer, M.D. Common 154,363 (11) 1.3%
Tony M. Shelby Common 237,879 (12) 2.0%
Directors and Common 4,940,994 (13) 37.7%
Executive Officers Voting Preferred 20,000 92.7%
as a group number
(13 persons)
_____________________________
* Less than 1%.
(1) The Company based the information, with respect to
beneficial ownership, on information furnished by each director or
officer, contained in filings made with the Securities and Exchange
Commission, or contained in the Company's records.
(2) Mr. Ackerman has sole voting and dispositive power over
these shares. 2,000 of these shares are held in a trust for which
Mr. Ackerman is both the settlor and the trustee and in which he
has the vested interest in both the corpus and income. The
remaining 25,000 shares of Common Stock included herein are shares
that Mr. Ackerman may acquire pursuant to currently exercisable
non-qualified stock options granted to him by the Company.
(3) The amount shown includes 25,000 shares of Common Stock
that Dr. Brown may acquire pursuant to currently exercisable non-
qualified stock options granted to him by the Company. The shares,
with respect to which Dr. Brown shares the voting and dispositive
power, consists of 122,516 shares owned by Dr. Brown's wife, 15,000
shares held jointly by Dr. Brown and his wife, 50,727 shares owned
22
by Robert C. Brown, M.D., Inc., a corporation wholly-owned by Dr.
Brown, and 20,086 shares held by the Robert C. Brown M.D., Inc.
Employee Profit Sharing Plan, of which Dr. Brown serves as the
trustee. The amount shown does not include 57,190 shares directly
owned by the children of Dr. Brown, all of which Dr. Brown
disclaims beneficial ownership.
(4) Mr. Gagner has sole voting and dispositive power over
these shares, which include 15,000 shares that may be acquired by
Mr. Gagner pursuant to currently exercisable non-qualified stock
options granted to him by the Company.
(5) See footnotes (3), (4), and (6) of the table under
"Security Ownership of Certain Beneficial Owners" of this item for
a description of the amount and nature of the shares beneficially
owned by B. Golsen, including shares he has the right to acquire
within sixty (60) days.
(6) See footnotes (3), (4), and (6) of the table under
"Security Ownership of Certain Beneficial Owners" of this item for
a description of the amount and nature of the shares beneficially
owned by J. Golsen, including the shares he has the right to
acquire within sixty (60) days.
(7) The amount shown includes 45,000 shares that Mr. Goss has
the right to acquire within sixty (60) days pursuant to options
granted under the Company's stock option plans. Mr. Goss has the
sole voting and dispositive power over these shares.
(8) The amount includes (i) 25,000 shares that Mr. Ille may
purchase pursuant to currently exercisable non-qualified stock
options, over which Mr. Ille has the sole voting and dispositive
power, and (ii) 75,000 shares owned of record by Mr. Ille's wife.
Mr. Ille disclaims beneficial ownership of the 75,000 shares owned
by Mr. Ille's wife.
(9) This amount includes (i) 432 shares of Common Stock that
Mr. Munson has the right to acquire upon conversion of 100 shares
of non-voting Series 2 Preferred that he beneficially owns, and
(ii) 15,000 shares that Mr. Munson may purchase pursuant to
currently exercisable non-qualified stock options, over which Mr.
Munson has the sole voting and dispositive power.
(10) Mr. Rhodes has sole voting and dispositive power over
these shares, which include 15,000 shares that may be acquired by
Mr. Rhodes pursuant to currently exercisable non-qualified stock
options granted to him by the Company.
(11) Dr. Shaffer has the sole voting and dispositive power
over these shares, which include 25,000 shares that Dr. Shaffer may
purchase pursuant to currently exercisable non-qualified stock
options and 4,329 shares that Dr. Shaffer has the right to acquire
upon conversion of 1,000 shares of Series 2 Preferred owned by Dr.
23
Shaffer. This amount also includes 10,000 shares owned by Dr.
Shaffer's wife.
(12) Mr. Shelby has the sole voting and dispositive power
over these shares, which include 45,000 shares that Mr. Shelby has
the right to acquire within sixty (60) days pursuant to options
granted under the Company's ISOs and 15,151 shares that Mr. Shelby
has the right to acquire upon conversion of 3,500 shares of Series
2 Preferred owned by Mr. Shelby.
(13) The amount shown includes 564,200 shares of Common Stock
that executive officers, directors, or entities controlled by
executive officers and directors of the Company have the right to
acquire within sixty (60) days.
Item 13. Certain Relationships and Related Transactions.
_______ ______________________________________________
A subsidiary of the Company, Hercules Energy Mfg. Corporation
("Hercules"), leases land and a building in Oklahoma City, Oklahoma
from Mac Venture, Ltd. ("Mac Venture"), a limited partnership. GPC
(a wholly owned subsidiary of SBL) serves as the general partner of
Mac Venture. The limited partners of Mac Venture include GPC and
the three children of Jack E. Golsen. See "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management"
above for a discussion of the stock ownership of SBL. The
warehouse and shop space leased by Hercules from Mac Venture
consists of a total of 30,000 square feet. Hercules leases the
property from Mac Venture for $3,750 per month under a triple net
lease extension which began as of January 1, 1999, and expires on
December 31, 1999.
Northwest Internal Medicine Associates ("Northwest"), a
division of Plaza Medical Group., P.C., has an agreement with the
Company to perform medical examinations of the management and
supervisory personnel of the Company and its subsidiaries. Under
such agreement, Northwest is paid $4,000 a month to perform all
such examinations. Dr. Robert C. Brown (a director of the Company)
is Vice President and Treasurer of Plaza Medical Group., P.C.
In 1983, LSB Chemical Corp. ("LSB Chemical"), a subsidiary of
the Company, acquired all of the outstanding stock of El Dorado
Chemical Company ("EDC") from its then four stockholders ("Ex-
Stockholders"). A substantial portion of the purchase price
consisted of an earnout based primarily on the annual after-tax
earnings of EDC for a ten-year period. During 1989, two of the Ex-
Stockholders received LSB Chemical promissory notes for a portion
of their earnout, in lieu of cash, totaling approximately $896,000,
payable $496,000 in January 1990, and $400,000 in May, 1994. LSB
Chemical agreed to a buyout of the balance of the earnout from the
four Ex-Stockholders for an aggregate purchase amount of
$1,231,000. LSB Chemical purchased for cash the earnout from two
of the Ex-Stockholders and issued multi-year promissory notes
totaling $676,000 to the other two Ex-Stockholders. Jack E. Golsen
guaranteed LSB Chemical's payment obligation under the promissory
24
notes. The unpaid balance of these notes at March 31, 1999, was
$400,000.
On October 17, 1997, Prime Financial Corporation ("Prime"), a
subsidiary of the Company, borrowed from SBL, a corporation wholly
owned by the spouse and children of Jack E. Golsen, Chairman of the
Board and President of the Company, the principal amount of
$3,000,000 (the "Prime Loan") on an unsecured basis and payable on
demand, with interest payable monthly in arrears at a variable
interest rate equal to the Wall Street Journal Prime Rate plus 2%
per annum. The purpose of the loan was to assist the Company by
providing additional liquidity. The Company has guaranteed the
Prime Loan. SBL had initially proposed purchasing three (3)
million shares of a new series of the Company's voting convertible
preferred stock for $3,000,000. During the period that such
proposal was being considered by a special committee of the Board
of Directors of the Company, SBL entered into the Prime Loan to
assist the Company's liquidity. The proposal to purchase a new
series of preferred stock has been withdrawn by SBL, and SBL and
the Company agreed that SBL would continue the Prime Loan on an
unsecured basis, payable on demand and at an annual rate of
interest of 10 3/4%. During 1998, $400,000 in principal and
$278,000 in interest was paid on this Prime Loan, and as of April
15, 1999, the unpaid principal balance on the Prime Loan was
$2,600,000. In April, 1999, 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 16, 2000. This
modification would involve a principal reduction of $300,000 and
possibly the provision of security for the remaining balance.
The Company is evaluating the possible spin-off of its
Automotive Business. If the spin-off is to be accomplished, it
must take the form of a dividend to the holders of the Company's
Common Stock. In order to declare and pay a dividend upon shares
of capital stock, the Delaware General Corporation Law ("Delaware
Law") requires that such either be declared and paid (1) out of
"surplus", as defined under the Delaware Law, or (2) in case there
is no "surplus", out of net profits of the Company for the fiscal
year in which the dividend is declared or the preceding fiscal
year. The Company is presently reviewing with its investment
banker as to whether it has sufficient "surplus" to accomplish the
spin-off of the Automotive Business to its holders of its Common
Stock after the capital contribution by the Company to the
Automotive Business as discussed above. The Company does not
believe that it will be able to pay such dividend out of net
profits. If the Company's investment banker is unable to opine
that the Company has sufficient "surplus" to accomplish the spin-
off, under Delaware Law the Company could reduce its "capital" (as
defined under Delaware Law) represented by issued shares of its
capital stock without par value and transfer the amount of such
reduction to "surplus", as long as the assets of the Company
remaining after such reduction shall be sufficient to pay the
Company's debts for which payment has not otherwise been provided.
The terms of the Company's Series B 12% Cumulative Convertible
25
Preferred Stock ("Series B Preferred") provides, in part, that "In
the event of any voluntary or involuntary liquidation, dissolution
or winding up of LSB, or any reduction in its capital resulting in
any distribution of assets to its stockholders, the holders of the
Series B Preferred Stock shall be entitled to receive in cash out
of assets of LSB, whether from capital or from earnings available
for distribution to the stockholders, before any amount shall be
paid to the holder of Common Stock of LSB the sum of One Hundred &
No/100 Dollars ($100) (the par value of the Series B Preferred
Stock) per share, plus an amount equal to all accumulated and
unpaid cash dividends thereon to the date fixed for payment of such
distributive amount". Counsel to the Company has advised the
Company that a transfer from "capital" to "surplus" to distribute
the stock of the Automotive Business to the holders of the
Company's Common Stock would trigger a payment of $100 per
outstanding share of Series B Preferred. There are currently
outstanding 20,000 shares of Series B Preferred, all of which are
owned by Jack E. Golsen or members of his immediate family and/or
entities wholly owned by members of Mr. Golsen's immediate family.
Mr. Golsen has advised the Company that if the Company is required
to transfer from "capital" to "surplus" an amount necessary to
complete the spin-off and such triggers the payment under the
Series B Preferred, he would not require the Company to pay such in
cash but would be willing to receive such amount in a form other
than cash, with the form to be determined based on negotiations
with independent members of the Company's Board of Directors.
During 1998, a total of $240,000 in dividends were paid on the
Series B Preferred.
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