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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, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
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 Over-the-Counter
Bulletin Board*
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 Over-the-Counter
Bulletin Board*
Securities Registered Pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights*
* Delisted from the New York Stock Exchange on July 6, 1999.
(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 April 7, 2000, the aggregate market value of the
7,656,337 shares of voting stock of the Registrant held by
non-affiliates of the Company equaled approximately $5,497,250
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 April 7, 2000, the Registrant had 11,877,411 shares of
common stock outstanding (excluding 3,285,957 shares of common
stock held as treasury stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 2
Chemical Business 3
Climate Control Business 8
Industrial Products Business 11
Employees 12
Research and Development 12
Environmental Matters 13
Item 2. Properties
Chemical Business 15
Climate Control Business 16
Industrial Products Business 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 4A. Executive Officers of the Company 19
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 20
Stockholders 20
Other Information 20
Dividends 20
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 26
Results of Operations 34
Liquidity and Capital Resources 38
Impact of Year 2000 48
Page
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
General 49
Interest Rate Risk 49
Raw Material Price Risk 51
Foreign Currency Risk 51
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 52
Special Note Regarding Forward-Looking Statements 53
PART III 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 56
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 pursuing a strategy of focusing on its core
businesses and concentrating on product lines in niche markets
where the Company has established or believes it can establish a
position as a market leader. In addition, the Company is seeking
to improve its liquidity and profits through liquidation of
selected assets that are on its balance sheet and on which it is
not realizing an acceptable return and does not reasonably expect
to do so. In this regard, the Company has come to the conclusion
that its Industrial and Automotive Products Businesses are non-
core to the Company. As discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Industrial Products Business", the Company is
currently evaluating opportunities to sell or realize its net
investment in the Business. On April 5, 2000, the Company's Board
of Directors approved a definitive plan to dispose of the
Automotive Products Business. This plan will allow the Company
to focus its efforts and financial resources on its core
businesses. In an effort to make the Automotive Products
Business viable so that it can be sold, on March 9, 2000, the
Automotive Products Business acquired certain assets of the
Zeller Corporation ("Zeller") representing Zeller's universal
joint business. In connection with the acquisition of these
assets, the Automotive Products Business assumed an aggregate of
approximately $7.5 million (unaudited) in Zeller's liabilities,
$4.7 million of which was funded by the Automotive Products
Business primary lender. (The balance of the assumed liabilities
is expected to be funded out of working capital of the Automotive
Products Business). For the year ended December 31, 1999, the
universal joint business of Zeller had unaudited sales of
approximately $11.7 and a net loss of $1.5 million.
In connection with the Automotive Products Business plan of
disposal, the Company's Board of Directors approved a sale of the
Business to an identified third party, subject to completion of
certain conditions (including approval from the Automotive
Products Business' primary lender). It is anticipated that this
sale will be completed by June 30, 2000. Upon completion of the
sale of the Automotive Products Business, the Company expects to
receive notes receivable in the approximate amount of $8.0
million, such notes being secured by a second lien on the assets
of the Automotive Products Business. These notes, and any
payments of principal and interest, thereon, will be subordinated
to the buyer's primary lender (which is the same lender that is
the current primary lender to the Automotive Products Business).
LSB will receive no principal payments under the notes for the
first two years following the sale of the Automotive Products
Business. In addition, the buyer will assume substantially all
of the Automotive Products Business' debts and obligations, which
at December 31, 1999, prior to the Zeller acquisition, totaled
$22.2 million.
The notes to be received by the Company will be secured by a
lien on all of the assets of the buyer and its subsidiaries, with
the notes to be received by the Company and liens securing
payment of all of the notes subordinated to the buyer's primary
lender and will be subject to any liens outstanding on the
assets. As of March 31, 2000, the Automotive Products Business
owes its primary lender approximately $14.0 million. After the
sale, the Company will also remain a guarantor on certain
equipment notes of the Automotive Products Business (which
equipment notes have an outstanding principal balance of $4.5
million as of March 31, 2000) and will continue to guaranty up to
$1 million of the revolving credit facility of the buyer, as it
did for its Automotive Products Business. If the sale of the
Automotive Products Business is completed, there are no
assurances that the Company will be able to collect on the notes
issued to the Company as consideration for the purchase or that
the debts and obligations of the Automotive Products Business
assumed by the buyer will be paid.
The Company has classified its investment in the Automotive
Products Business as a discontinued operation, reserving its net
investment of approximately $7.9 million in 1999. This reserve
does not include the loss, if any, which may result if the
Company is required to perform on its guaranties described above.
For the twelve month period ended December 31, 1999, 1998
and 1997, the Automotive Products Business had revenues of $33.4,
$40.0 and $35.5 million, respectively and a net loss of $18.1,
$4.4 and $9.7 million respectively. See Note 4 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 any risks attendant as a result of a foreign
operation or the importing of products from foreign countries
appears below in the discussion of each of the Company's business
segments.
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 1999. 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 for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric
acid for commercial applications primarily in the paper industry.
The Chemical Business products are sold in niche markets where
the Company believes it can establish a position as a market
leader. See "Special Note Regarding Forward-Looking Statements".
The Chemical Business' principal manufacturing facility is
located in El Dorado, Arkansas ("El Dorado Facility"), and its
other manufacturing facilities are located in Hallowell, Kansas,
Wilmington, North Carolina, and Baytown, Texas.
For each of the years 1999, 1998 and 1997, approximately
26%, 29% and 31% of the respective sales of the Chemical Business
consisted of sales of fertilizer and related chemical products
for agricultural purposes, which represented approximately 13%,
14% and 16% of the Company's consolidated sales for each
respective year. For each of the years 1999, 1998 and 1997,
approximately 34%, 47% and 53% 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 17%, 23% and 27% of the Company's
1999, 1998 and 1997 consolidated sales, respectively. For each
of the years 1999, 1998 and 1997, approximately 40%, 24% and 16%
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 20%, 12%
and 9% of the Company's 1999, 1998 and 1997 consolidated sales,
respectively. Sales of the Chemical Business accounted for
approximately 50%, 49% and 52% of the Company's 1999, 1998 and
1997 consolidated sales, respectively.
Agricultural Products
The Chemical Business produces ammonium nitrate, a nitrogen-
based fertilizer, at the El Dorado Facility. In 1999, the
Company sold approximately 135,000 tons of ammonium nitrate
fertilizer to farmers, fertilizer dealers and distributors
located primarily in the south central United States (143,000 and
184,000 tons in 1998 and 1997, respectively).
Ammonium nitrate is one of several forms of nitrogen-based
fertilizers which includes 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.
The Chemical Business markets its ammonium nitrate primarily
in Texas, Arkansas and the surrounding regions. This market,
which is in close proximity to its El Dorado Facility, includes a
high concentration of pasture land and row crops which favor
ammonium nitrate over other nitrogen-based fertilizers. The
Company has developed their market position in Texas by
emphasizing high quality products, customer service and technical
advice. Using a proprietary prilling process, the Company
produces a high performance ammonium nitrate fertilizer that,
because of its uniform size, is easier to apply than many
competing nitrogen-based fertilizer products. The Company
believes that its "E-2" brand ammonium nitrate fertilizer is
recognized as a premium product within its primary market. In
addition, the Company has developed long term relationships with
end users through its network of 20 wholesale and retail
distribution centers.
In 1998 and 1999, the Chemical Business has been adversely
affected by the drought conditions in the mid-south market during
the primary fertilizer season, along with the importation of low
priced Russian ammonium nitrate, resulting in lower sales volume
and lower sales price for certain of its products sold in its
agricultural markets. The Chemical Business is a member of an
organization of domestic fertilizer grade ammonium nitrate
producers which is seeking relief from unfairly low priced
Russian ammonium nitrate. This industry group filed a petition
in July 1999 with the U.S. International Trade Commission and the
U.S. Department of Commerce seeking an antidumping investigation
and, if warranted, relief from Russian dumping. The
International Trade Commission has rendered a favorable
preliminary determination that U.S. producers of ammonium nitrate
have been injured as a result of Russian ammonium nitrate
imports. In addition, the U.S. Department of Commerce has issued
a preliminary affirmative determination that the Russian imports
were sold at prices that are 264.59% below their fair market
value. As a result of the Commerce Department's preliminary
ruling, all imports of Russian ammonium nitrate are currently
subject to potential antidumping duty liability. The Department
of Commerce is due to issue a final determination by May 22, 2000
and the International Trade Commission by July 5, 2000. The
relief currently in place will remain only if both agencies make
final affirmative determinations. It is not known, therefore,
whether the antidumping action will be successful upon conclusion
of the U.S. Government's investigation. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Special Note Regarding Forward-Looking
Statements".
Explosives
The Chemical Business manufactures low density ammonium
nitrate-based explosives including bulk explosives used in
surface mining. In addition, the Company manufactures and sells
a branded line of packaged explosives used in construction,
quarrying and other applications, particularly where controlled
explosive charges are required. The Company's bulk explosives
are marketed primarily through 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.
In August, 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary, Total Energy
Systems Limited and its subsidiaries. See "Note 5 to Notes to
Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Industrial Acids
The Chemical Business manufactures and sells industrial
acids, primarily to the food, paper, chemical and electronics
industries. The Company is a leading supplier to third parties
of concentrated nitric acid, which is a special grade of nitric
acid used in the manufacture of plastics, pharmaceuticals,
herbicides, explosives, and other chemical products. In
addition, the Company produces and sells regular, blended and
mixed nitric acid and a variety of grades of sulfuric acid. The
Company competes on the basis of price and service, including on-
time reliability and distribution capabilities. The Company
provides inventory management as part of the value-added services
it offers to its customers.
EDNC Baytown Plant
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") acted as an agent
to construct and, upon completion of construction, is operating a
nitric acid plant (the "EDNC Baytown Plant") at Bayer's Baytown,
Texas chemical facility.
Under the terms of the Bayer Agreement, EDNC leases the EDNC
Baytown Plant pursuant to a leveraged lease from an unrelated
third party with an initial lease term of ten years from the date
on which the EDNC Baytown Plant became fully operational (in May
1999). Bayer will purchase from EDNC all of its requirements for
nitric acid to be used by Bayer at its Baytown, Texas facility
for ten years following May 1999. EDNC will purchase from Bayer
its requirements for anhydrous ammonia for the manufacture of
nitric acid as well as utilities and other services. Subject to
certain conditions, EDNC is entitled to sell to third parties the
amount of nitric acid manufactured at the EDNC Baytown Plant
which is in excess of Bayer's requirements. The Bayer Agreement
provides that Bayer will make certain net monthly payments to
EDNC which will be sufficient for EDNC to recover all of its
costs, as defined, plus a profit. The Company estimates that at
full production capacity based on terms of the Bayer Agreement
and subject to the price of anhydrous ammonia, the EDNC Baytown
Plant is anticipated to generate approximately $35 million in
annual gross revenues. See "Special Note Regarding Forward-
Looking Statements". Upon expiration of the initial ten-year
term from the date the EDNC Baytown Plant became operational, the
Bayer Agreement may be renewed for up to six renewal terms of
five years each; however, prior to each renewal period, either
party to the Bayer Agreement may opt against renewal.
EDNC and Bayer have an option to 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 January, 1999, the contractor constructing the EDNC
Baytown Plant informed the Company that it could not complete
construction alleging a lack of financial resources. The Company
and certain other parties involved in this project demanded the
contractors bonding company to provide funds necessary for
subcontractors to complete construction. The Company, the
contractor, the bonding company and Bayer entered into an
agreement which provided that the bonding company pay $12.9
million for payments to subcontractors for work performed prior
to February 1, 1999. In addition, the contractor agreed to
provide, on a no cost basis, project management and to incur
certain other additional costs through the completion of the
contract. Because of this delay, an amendment was entered into
in connection with the Bayer Agreement. The amendment extended
the requirement date that the plant be in production to May 31,
1999, and fully operational by June 30, 1999. The construction
of the EDNC Baytown Plant was completed in May 1999, and EDNC
began producing and delivering nitric acid to Bayer at that time.
Sales by EDNC to Bayer out of the EDNC Baytown Plant production
during 1999, were approximately $17.2 million. Financing of the
EDNC Baytown Plant was provided by an unaffiliated lender.
Neither the Company nor EDC has guaranteed any of the repayment
obligations for the EDNC Baytown Plant. In connection with the
leveraged lease, the Company entered into an interest rate
forward agreement to fix the effective rate of interest implicit
in such lease. See "Special Note Regarding Forward-Looking
Statements" and Note 2 of Notes to Consolidated Financial
Statements.
Raw Materials
Anhydrous ammonia represents the primary component in the
production of most of the products of the Chemical Business. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Chemical Business normally purchases
approximately 200,000 tons of anhydrous ammonia per year for use
in its manufacture of its products. Due to lower sales in 1999,
the Company purchases of anhydrous ammonia were approximately
151,000 tons.
During 1999, the Chemical Business purchased its raw
material requirements of anhydrous ammonia from three suppliers
at an average cost per ton of approximately $145 compared to
approximately $154 per ton in 1998 and approximately $184 per ton
in 1997. During the second half of 1999, the majority of the
Chemical Business' raw material purchases were made under one
contract as supply contracts with the other two suppliers were
terminated. In October, 1999, the Chemical Business renegotiated
its remaining contract, which provides the Chemical Business with
an extended term to purchase the anhydrous ammonia it was
required to purchase as of December 31, 1999 (96,000 tons).
Under the renegotiated contract, the Chemical Business is to
purchase the 96,000 tons at a minimum of 2,000 tons of anhydrous
ammonia per month during 2000 and 3,000 tons per month in 2001
and 2002, at prices which could exceed or be less than the then
current spot market price for anhydrous ammonia. In addition,
under the renegotiated requirements contract the Company is
committed to purchase 50% of its remaining requirements of
anhydrous ammonia through 2002 from this third party at prices
which will approximate the then current spot market price. In
January, 2000, the supplier under this requirement contract
agreed to supply the Chemical Business other requirements for
anhydrous ammonia for a one (1) year term at approximately the
then current spot market price, which one (1) year agreement is
terminable on 120 days notice.
During the second half of 1998 and during 1999, an excess
supply of nitrate based products, caused, in part, by the import
of Russian nitrate, has caused a significant decline in the sales
prices. This decline in sales price has resulted in the cost of
anhydrous ammonia purchased under the above contract when
combined with manufacturing and distribution costs, to exceed
anticipated future sales prices. See "Special Note Regarding
Forward-Looking Statements," and Note 16 of Notes to Consolidated
Financial Statements.
The Company believes that it could obtain anhydrous ammonia
from other sources in the event of a termination of the above-
referenced contract.
Seasonality
The Company believes that the only seasonal products of the
Chemical Business are fertilizer and related chemical products
sold to the agricultural industry. The selling seasons for those
products are primarily during the spring and fall planting
seasons, which typically extend from February through May and
from September through November in the geographical markets in
which the majority of the Company's agricultural products are
distributed. As a result, the Chemical Business increases its
inventory of ammonium nitrate prior to the beginning of each
planting season. Sales to the agricultural markets depend upon
weather conditions and other circumstances beyond the control of
the Company. 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
and 1999 fall and spring planting seasons and have had a material
adverse effect of 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. The Company believes that
competition within the markets served by the Chemical Business is
primarily based upon price, service, warranty and product
performance.
Developments in Asia
During 1999, the Chemical Business sold substantially all of
the assets of its Australian subsidiary. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 5 to Consolidated Financial Statements for a
discussion of the terms of the sale and the loss sustained by the
Company as a result of the disposition of the Chemical Business'
Australian subsidiary.
Climate Control Business
General
The Company's Climate Control Business manufactures and
sells a broad range of standard and custom designed hydronic fan
coils and water source heat pumps as well as other products for
use in commercial and residential heating ventilation and air
conditioning ("HVAC") systems. Demand for the Climate Control
Business' products is driven by the construction of commercial,
institutional and residential buildings, the renovation of
existing buildings and the replacement of existing systems. The
Climate Control Business' commercial products are used in a wide
variety of buildings, such as: hotels, motels, office buildings,
schools, universities, apartments, condominiums, hospitals,
nursing homes, extended care facilities, supermarkets and
superstores. Many of the Company's products are targeted to meet
increasingly stringent indoor air quality and energy efficiency
standards. The Climate Control Business accounted for
approximately 46%, 45% and 42% of the Company's 1999, 1998 and
1997 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 U.S. Hydronic fan coils use heated or chilled
water, provided by a centralized chiller or boiler through a
water pipe system, to condition the air and allow individual room
control. Hydronic fan coil systems are quieter and have longer
lives and lower maintenance costs than comparable systems used
where individual room control is required. The 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. See "Special
Note Regarding Forward-Looking Statements".
Water Source Heat Pumps
The Company is a leading U.S. provider of water source heat
pumps to the commercial construction and renovation markets.
These are highly efficient heating and cooling units which enable
individual room climate control through the transfer of heat
through a water pipe system which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to
large sized buildings with many small, individually controlled
spaces. The Company believes the market for commercial water
source heat pumps will continue to grow due to the relative
efficiency and long life of such systems as compared to other air
conditioning and heating systems, as well as to the emergence of
the replacement market for those systems. See "Special Note
Regarding Forward-Looking Statements".
Geothermal Products
The Climate Control Business is a pioneer in the use of
geothermal water source heat pumps in residential and commercial
applications. Geothermal systems, which circulate water or
antifreeze through an underground heat exchanger, are among the
most energy efficient systems available. The Company believes
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".
Hydronic Fan Coil and Water Source Heat Pump Market
The Company has pursued a strategy of specializing in
hydronic fan coils and water source heat pump products. The
annual U.S. market for hydronic fan coils and water source heat
pumps is approximately $325 million. Demand in these markets is
generally driven by levels of repair, replacement, and new
construction activity. The U.S. market for fan coils and water
source heat pump products has grown on average 14% per year over
the last 4 years. This growth 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, 1999, the backlog of confirmed
orders for the Climate Control Business was approximately $22.1
million as compared to approximately $21.1 million at December
31, 1998. 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 February 29, 2000, the Climate
Control Business had released substantially all of the December
31, 1999 backlog to production. All of the December 31, 1999
backlog is expected to be filled by December 31, 2000. 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 27% of the sales of the
Climate Control Business in 1999 and approximately 12% of the
Company's 1999 consolidated sales.
Market
The Climate Control Business depends primarily on the
commercial construction industry, including new construction and
the remodeling and renovation of older buildings. In recent
years this Business has introduced geothermal products designed
for residential markets for both new and replacement markets.
Raw Materials
Numerous domestic and foreign sources exist for the
materials used by the Climate Control Business, which materials
include aluminum, copper, steel, electric motors and compressors.
The Company does not expect to have any difficulties in obtaining
any necessary materials for the Climate Control Business. See
"Special Note Regarding Forward-Looking Statements".
Competition
The Climate Control Business competes with approximately
eight companies, some of whom are also customers of the Company.
Some of the competitors have greater financial and other
resources than the Company. The Climate Control Business
manufactures a broader line of fan coil and water source heat
pump products than any other manufacturer in the United States,
and the Company believes that it is competitive as to price,
service, warranty and product performance.
Joint Ventures and Options to Purchase
The Company has obtained an option (the "Option") to acquire
80% of the issued and outstanding stock of an Entity (the
"Optioned Company") that performs energy savings contracts,
primarily on US government facilities. For the Option, the
Company has paid $1.3 million as of the date of this report. The
term of the Option expired May 4, 1999. The Company decided not
to exercise the Option. The grantors of the Option are obligated
to repay to the Company $1.0 million of the Option, which
obligation is secured by the stock of the Entity and other
affiliates of the Optioned Company. There is no assurance that
the grantors of the Option will have funds necessary to repay to
the Company the amount paid for the Option. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for discussion of sale of this investment in 2000.
Through the date of this report, the Company has advanced the
Entity approximately $1.7 million, including accrued interest.
The Company has recorded reserves of approximately $1.5 million
against the loans, accrued interest and option payments. For its
year ended June 30, 1999, the Entity reported an audited net
income of approximately $.4 million.
During 1994, a subsidiary of the Company obtained an option
to acquire all of the stock of a French manufacturer of air
conditioning and heating equipment. The Company's subsidiary was
granted the option as a result of the subsidiary loaning to the
parent company of the French manufacturer approximately $2.1
million. Subsequent to the loan of $2.1 million, the Company's
subsidiary has loaned to the parent of the French manufacturer an
additional $1.6 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 1999, 1998 and 1997, the French manufacturer had
revenues of $18.9, $17.2 and $14.3 million, respectively, and
reported net income of approximately $600,000, $100,000 and
$300,000, respectively. As a result of cumulative losses by the
French manufacturer prior to 1997, the Company established
reserves against the loans aggregating approximately $1.5 million
through December 31, 1999. See "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 had been awarded a contract to retrofit residential
housing units at a US Army base, which it completed during 1996.
The completed contract was for installation of energy-efficient
equipment (including air conditioning and heating equipment)
which would reduce utility consumption. For the installation and
management, the Project will receive 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 US Army base. The project
received a loan from a lender to finance approximately $14.0
million of the cost of the Project. The Company is not
guaranteeing any of the lending obligations of the Project. The
Company's equity interest in the results of the operations of the
Project were not material for the years ended December, 1999,
1998 and 1997.
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. This Business manufactures CNC bed
mills and electrical control panels for machine tools. The
Company has eliminated in the past, and continues to eliminate,
certain categories of machinery from its product line by not
replacing them when sold. The Industrial Products Business
accounted for approximately 4%, 6% and 6% of the Company's
consolidated sales in each of the years 1999, 1998 and 1997
respectively.
As discussed in "Item 1 - Business General", the Company has
concluded that its Industrial Products Business is non-core to
the Company and is pursuing various alternatives of realizing its
investments in these assets.
Distribution and Market
The Industrial Products Business distributes its machine
tools in the United States. The Industrial Products Business also
sells its machine tools through independent machine tool dealers
throughout the United States, 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, 1999, the Company employed 1,735 persons.
As of that date, (a) the Chemical Business employed 537 persons,
with 106 represented by unions under agreements expiring in
August, 2001 and February, 2002, (b) the Climate Control Business
employed 784 persons, none of whom are represented by a union,
(c) the Industrial Products Business employed 41 persons, none of
whom are represented by a union, and (d) the Automotive Products
Business, which the Board of Directors approved a plan to sell or
otherwise dispose of the operations, employed 311 persons, with
19 represented by unions under an agreement expiring in July,
2000 .
Research and Development
The Company incurred approximately $713,000 in 1999,
$377,000 in 1998, and $367,000 in 1997 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
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."
Due to a consent administrative order ("CAO") entered into
with the Arkansas Department of Environmental Quality ("ADEQ"),
the Chemical Business has installed additional monitoring wells
at the El Dorado Facility in accordance with a workplan approved
by the ADEQ, and submitted the test results to ADEQ. The results
indicated that a risk assessment should be conducted on nitrates
present in the shallow groundwater. The Chemical Business'
consultant has completed this risk assessment, and has forwarded
it to the ADEQ for approval. The risk assessment concludes that,
although there are contaminants at the El Dorado Facility and in
the groundwater, the levels of such contaminants at the El Dorado
Facility and in the groundwater do not present an unacceptable
risk to human health and the environment. Based on this
conclusion, the Chemical Business' consultant has recommended
continued monitoring at the site for five years.
A second consent order was entered into with ADEQ in August,
1998 (the "Wastewater Consent Order"). The Wastewater Consent
Order recognizes the presence of nitrate contamination in the
groundwater and requires the Chemical Business to undertake on-
site bioremediation, which is currently underway. Upon completion
of the waste minimization activities referenced 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 1998 and 1999.
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 August 2000. The construction of the
additional water treatment components is required to be completed
by August, 2001 and the El Dorado plant has been mandated to be
in compliance with the final effluent limits on or before
February 2002. 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; 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 wastewater
program is currently expected to require future capital
expenditures of approximately $10.0 million. Negotiations for
securing financing are currently underway.
Due to certain start-up problems with the DSN Plant,
including excess emissions from various emission sources, 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 and 1997.
The second amendment to the Air Consent Order (the "1997
Amendment") provided for certain stipulated penalties of $1,000
per hour to $10,000 per day for continued off-site emission
events and deferred enforcement for other alleged air permit
violations. In 1998, a third amendment to the Air Consent Order
provided for the stipulated penalties to be reset at $1,000 per
hour after ninety (90) days without any confirmed events. 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 will
be 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 1998 and 1999, the Chemical Business expended
approximately $.7 million and $.9 million, respectively, 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 $10.0 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 $2.0
million being spent in 2000 and the balance being spent in 2001.
No assurance can be made that the actual expenditures of the
Chemical Business for such matters will not exceed the estimated
amounts by a substantial margin, which could have a material
adverse effect on the Company and its financial condition. The
amount to be spent during 2000 and 2001 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) in a
facility of approximately 60,000 square feet located on ten acres
of land in Hallowell, Kansas ("Kansas Facility"), (iii) in a
mixed acid plant in Wilmington, North Carolina ("Wilmington
Plant"), and (iv) in a nitric acid plant in Baytown, Texas
("Baytown Plant"). The Chemical Business owns all of its
manufacturing facilities except the Baytown Plant. The Wilmington
Plant and the DSN Plant are subject to mortgages. The Baytown
Plant is being leased pursuant to a leveraged lease from an
unrelated third party.
As of December 31, 1999, the El Dorado Facility was utilized
at approximately 71% 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 (13 of which the
Company owns and 3 of which it leases); 1 center located in
Missouri (leased); and 3 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 (owned).
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, 1999, the Climate Control Business was using the productive
capacity of the above referenced facility to the extent of
approximately 84%, 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,
1999, the productive capacity of this manufacturing operation was
being utilized to the extent of approximately 82%, 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.
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 containing approximately
25,000 square feet for manufacturing operations.
The Industrial Products Business also leases a facility from
an entity owned by the immediate family of the Company's
President, which facility occupies approximately 30,000 square
feet of warehouse and shop space in Oklahoma City, Oklahoma. The
Industrial Products Business also leases an office in Europe to
coordinate its European activities.
All of the properties utilized by the Industrial Products
Business are considered by Company management to be suitable and
adequate to meet the needs of the Industrial Products Business.
Item 3. LEGAL PROCEEDINGS
In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with numerous
other companies, of potential responsibility for clean-up of a
waste disposal site in Oklahoma. In 1990, the EPA added the site
to the National Priorities List. Following the remedial
investigation and feasibility study, in 1992 the Regional
Administrator of the EPA signed the Record of Decision ("ROD")
for the site. The ROD detailed EPA's selected remedial action for
the site and estimated the cost of the remedy at $3.6 million.
In 1992, the Company made settlement proposals which would have
entailed a collective payment by the subsidiaries of $47,000.
The site owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The EPA
rejected the Company's offer, allocating 60% of the cleanup costs
to the potentially responsible parties and 40% to the site
operator. The EPA estimated the total cleanup costs at $10.1
million as of February 1993. The site owner rejected all
settlements with the EPA, after which the EPA issued an order to
the site owner to conduct the remedial design/remedial action
approved for the site. In August, 1997, the site owner issued an
"invitation to settle" to various parties, alleging the total
cleanup costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the cleanup of the site is unknown
due to continuing changes in the estimated total cost of cleanup
of the site and the percentage of the total waste which was
alleged to have been contributed to the site by the Company. As
of December 31, 1999, the Company has accrued an amount based on
a preliminary settlement proposal by the alleged potential
responsible parties; however, there is no assurance such proposal
will be accepted. Such amount is not material to the Company's
financial position or results of operations. This estimate is
subject to material change in the near term as additional
information is obtained. The subsidiary's insurance carriers
have been notified of this matter; however, the amount of
possible coverage, if any, is not yet determinable.
Arch Minerals Corporation, et al. v. ICI Explosives USA,
Inc., et al. On May 24, 1996, the plaintiffs filed this civil
cause of action against EDC and five other unrelated commercial
explosives manufacturers alleging that the defendants allegedly
violated certain federal and state antitrust laws in connection
with alleged price fixing of certain explosive products. This
cause of action is pending in the United States District Court,
Southern District of Indiana. The plaintiffs are suing for an
unspecified amount of damages, which, pursuant to statute,
plaintiffs are seeking be trebled, together with costs.
Plaintiffs are also seeking a permanent injunction enjoining
defendants from further alleged anti-competitive activities.
Based on the information presently available to EDC, EDC does not
believe that EDC conspired with any party, including, but not
limited to, the five other defendants, to fix prices in
connection with the sale of commercial explosives. This action
has been consolidated, for discovery purposes only, with several
other actions in a multi-district litigation proceeding in Utah.
Discovery in this litigation is in process. EDC intends to
vigorously defend itself in this matter. See "Special Note
Regarding Forward-Looking Statements."
ASARCO v. ICI, et al. The U. S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and consolidated
with other lawsuits in Utah, leave to add EDC as a defendant in
that lawsuit. This lawsuit alleges a national conspiracy, as
well as a regional conspiracy, directed against explosive
customers in Missouri and seeks unspecified damages. EDC has
been included in this lawsuit because it sold products to
customers in Missouri during a time in which other defendants
have admitted to participating in an antitrust conspiracy, and
because it has been sued in the Arch case discussed above. Based
on the information presently available to EDC, EDC does not
believe that EDC conspired with any party, to fix prices in
connection with the sale of commercial explosives. EDC intends
to vigorously defend itself in this matter. See "Special Note
Regarding Forward-Looking Statements."
On August 26, 1999, LSB and EDC were served with a complaint
filed in the District Court of the Western District of Oklahoma
by National Union Fire Insurance Company, seeking recovery of
certain insurance premiums totaling $2,085,800 plus prejudgment
interest, costs and attorneys fees alleged to be due and owing by
LSB and EDC, related to National Union insurance policies for LSB
and subsidiaries dating from 1979 through 1988.
The parties entered into an agreement to settle this matter
in 1999, whereby LSB paid $200,000 in December 1999 and agreed to
pay an additional $300,000 to National Union. The $300,000 is
payable annually in installments of $100,000 plus interest. As a
part of the agreement to settle this matter, the parties have
agreed to adjudicate whether any additional amounts may be due to
National Union, but the parties have agreed that the Company's
liability for any additional amounts due National Union shall not
exceed $650,000. Amounts expected to be paid under this
settlement by EDC were fully accrued at December 31, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 71 Board Chairman December, 1968
and President
Barry H. Golsen 49 Board Vice Chairman August, 1981
and President of the
Climate Control
Business
David R. Goss 59 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 58 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 58 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 40 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.
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, 1999 the high and low bid information
for the Company's Common Stock.
Fiscal Year Ended
December 31,
1999 1998
Quarter High Low High Low
First 3 3/8 2 9/16 4 1/2 3 13/16
Second 2 3/4 1 1/4 4 9/16 3 13/16
Third 1 7/8 1 1/8 4 3/8 3 1/8
Fourth 1 3/4 9/16 3 9/16 2 15/16
Stockholders
As of April 7, 2000, the Company had 945 record holders of
its Common Stock.
Other Information
The Company's Common Stock and its $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2 (the "Series 2
Preferred") are currently listed for trading on the Over-the-
Counter Bulletin Board ("OTC"). Prior to July, 1999, the
Company's Common Stock traded on the New York Stock Exchange,
Inc. ("NYSE"). However, the Company fell below the NYSE
continued listing criteria for net tangible assets available to
the holders of the Company's Common Stock and the three year
average net income. Therefore, the Company's Common Stock and
Series 2 Preferred were unable to continue to be listed on the
NYSE.
Dividends
Under the terms of loan agreements between the Company and
its lenders, the Company may, so long as no event of default has
occurred and is continuing under the loan agreement, make
currently scheduled dividends and pay dividends on its
outstanding Preferred Stock and pay annual dividends on its
Common Stock equal to $.06 per share.
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,
ClimaChem cannot transfer funds to the Company in the form of
cash dividends or other distributions or advances, except for (i)
the amount of taxes that ClimaChem would be required to pay if
they were not consolidated with the Company and (ii) an amount
not to exceed fifty percent (50%) of ClimaChem's cumulative net
income from January 1, 1998 through the end of the period for
which the calculation is made for the purpose of proposing a
payment, and(iii) the amount of direct and indirect costs and
expenses incurred by the Company on behalf of ClimaChem pursuant
to a certain services agreement and a certain management
agreement to which ClimaChem and the Company are parties. For
1999, ClimaChem had a net loss of $19.2 million. See Note 8 of
Notes to Consolidated Financial Statements and Item 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Under the loan agreements discussed in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report, the Company and
its subsidiaries, exclusive of the Automotive Products Business
and ClimaChem and its subsidiaries, have the right to borrow on a
revolving basis up to $6 million, based on eligible collateral.
At December 31, 1999, the Company and its subsidiaries, except
ClimaChem and its subsidiaries, had availability for additional
borrowings of $.1 million. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
for a discussion of the financial covenants and amendments to
loan agreements during the first quarter of 2000.
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. The Company has issued and outstanding as of December
31, 1999, 915,000 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 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 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 and the Company's liquidity position,
the Company has not declared or paid the September 15, 1999,
December 15, 1999 and the March 15, 2000, regular quarterly
dividend of $.8125 (or $743,438 per quarter) on its outstanding
Series 2 Preferred. In addition, the Company did not declare or
pay the January 1, 2000 regular annual dividend of $12.00 (or
$240,000) on the Series B Preferred. 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 March 31, 2000, the aggregate amount of
unpaid dividends in arrears on the Company's Series 2 Preferred
totaled approximately $2.2 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, 10, 11 and 12 of Notes to Consolidated
Financial Statements.
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) (i)
the number of members of the Company's Board of Directors (the
"Board") shall be increased by two, effective as of the time of
election of such directors as hereinafter provided, and (ii) the
holders of the Series 2 Preferred (voting separately as a class)
will have the exclusive right to vote for and elect the two
additional directors of the Company at any meeting of
stockholders of the Company at which directors are to be elected
held during the period that any dividends on the Series 2
Preferred remain in arrears. The right of the holders of the
Series 2 Preferred to vote for such two additional directors
shall terminate, subject to re-vesting 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.
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), which
existing plan terminated effective as of February 27, 1999,
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 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%.
Item 6. SELECTED FINANCIAL DATA (1)
Years ended December 31,
1999 1998 1997 1996 1995
(Dollars in Thousands,
except per share data)
Selected Statement of Operations Data:
Net sales $261,697 $270,042 $278,430 $269,213 $234,121
Total revenues $262,733 $271,332 $283,597 $275,998 $240,861
Interest expense $ 15,441 $ 14,938 $ 12,155 $ 8,280 $ 8,929
Income (loss) from continuing
operations before extraordinary
charge $(31,646) $ 2,439 $ (8,755) $ 1,944 $ 1,144
Net loss $(49,767) $ (1,920) $(23,065) $ (3,845) $ (3,732)
Net loss applicable
to common stock $(52,995) $ (5,149) $(26,294) $ (7,074) $ (6,961)
Basic and diluted loss
per common share:
Loss from continuing
operations before extraordinary
charge $ (2.95) $ (.07) $ (.93) $ (.10) $ (.16)
Losses on discontinued
operations $ (1.53) $ (.35) $ (.75) $ (.45) $ (.38)
Net loss $ (4.48) $ (.42) $ (2.04) $ (.55) $ (.54)
Item 6. SELECTED FINANCIAL DATA (Continued) (1)
Years ended December 31,
1999 1998 1997 1996 1995
(Dollars in Thousands,
except per share data)
Selected Balance Sheet Data:
Total assets $188,635 $223,250 $244,600 $233,703 $217,860
Long-term debt, including current
portion $158,072 $150,506 $160,903 $109,023 $102,472
Redeemable preferred stock $ 139 $ 139 $ 146 $ 146 $ 149
Stockholders' equity (deficit) $(14,173) $ 35,059 $ 44,496 $ 74,018 $ 81,576
Selected other data:
Cash dividends declared
per common share $ - $ .02 $ .06 $ .06 $ .06
(1) On April 5, 2000, the Company's Board of Directors approved a plan of
disposal of the Company's Automotive Products Business. Accordingly, all
amounts have been restated to reflect the Automotive Products Business as
a discontinued operation for all periods presented. See Note 4 of Notes to
Consolidated Financial Statements.
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, 1999
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 and the Australian subsidiary's
operations sold in 1999. See Notes 4 and 5 of the Notes to the
Consolidated Financial Statements.
Overview
General
For the year ended December 31, 1999, the Company had a
net loss applicable to common stock of approximately $53.0
million, as compared to a net loss applicable to common stock of
approximately $5.1 million for the year ended December 31, 1998.
The loss for the year ended December 31, 1999 from continuing
operations was approximately $31.6 million (income of $2.4
million in 1998). The Company is pursuing a strategy of focusing
on its core businesses and concentrating on product lines in
niche markets where the Company has established or believes it
can establish a position as a market leader. In addition, the
Company is seeking to improve its liquidity and profits through
liquidation of selected assets that are on its balance sheet and
on which it is not realizing an acceptable return and does not
reasonably expect to do so. In this regard, the Company has come
to the conclusion that its Industrial and Automotive Products
Businesses are non-core to the Company.
On April 5, 2000, the Board of Directors approved a
definitive plan to dispose of the Company's Automotive Products
Business. The plan allows the Company to focus its efforts and
financial resources on its core businesses. In an effort to make
the Automotive Products Business viable so that it can be sold,
on March 9, 2000, the Automotive Products Business acquired
certain assets of the Zeller Corporation ("Zeller") representing
Zeller's universal joint business. In connection with the
acquisition of these assets, the Automotive Products Business
assumed an aggregate of approximately $7.5 million (unaudited) in
Zeller's liabilities, $4.7 million of which was funded by the
Automotive Products Business primary lender. (The balance of the
assumed liabilities is expected to be funded out of working
capital of the Automotive Products Business). For year ended
December 31, 1999, the universal joint business of Zeller had
unaudited sales of approximately $11.7 million and a net loss of
$1.5 million.
In connection with the Automotive Products Business plan of
disposal, the Company's Board of Directors approved a sale of the
Business to an identified third party, subject to completion of
certain conditions (including approval from the Automotive
Products Business' primary lender). It is anticipated that this
sale will be completed by June 30, 2000. Upon completion of the
sale of the Automotive Products Business, the Company expects to
receive notes receivable in the approximate amount of $8.0
million, such notes being secured by a second lien on the assets
of the Automotive Products Business. These notes, and any
payments of principal and interest, thereon, will be subordinated
to the buyer's primary lender (which is the same lender that is
the current primary lender to the Automotive Products Business).
LSB will receive no principal payments under the notes for the
first two years following the sale of the Automotive Products
Business. In addition, the buyer will assume substantially all
of the Automotive Products Business' debts and obligations, which
at December 31, 1999, prior to the Zeller acquisition totaled
$22.2 million.
The notes to be received by the Company will be secured by a
lien on all of the assets of the buyer and its subsidiaries, with
the notes to be received by the Company and liens securing
payment of all of the notes subordinated to the buyer's primary
lender and will be subject to any liens outstanding on the
assets. As of March 31, 2000, the Automotive Products Business
owes its primary lender approximately $14.0 million. After the
sale, the Company will also remain a guarantor on certain
equipment notes of the Automotive Products Business (which
equipment notes have an outstanding principal balance of $4.5
million as of March 31, 2000) and will continue to guaranty up to
$1 million of the revolving credit facility of the buyer, as it
did for its Automotive Products Business. If the sale of the
Automotive Products Business is completed, there are no
assurances that the Company will be able to collect on the notes
issued to the Company as consideration for the purchase.
The Company has classified its investment in the Automotive
Products Business as a discontinued operation, reserving
approximately $7.9 million in 1999. This reserve does not
include the loss, if any, which may result if the Company is
required to perform on its guaranties described above.
For the twelve month period ended December 31, 1999, 1998
and 1997, the Automotive Products Business had revenues of $33.4,
$40.0 and $35.5 million, respective and a net loss of $18.1, $4.4
and $9.7 million respectively. See Note 4 to Notes to
Consolidated Financial Statements.
During August 1999, the Company's Chemical Business sold
substantially all of the assets of its Australian subsidiary.
Revenues for 1999 to the date of the sale of the assets of the
Australian subsidiary were $7.5 million and the loss sustained by
the Australian subsidiary was $2.0 million, excluding the loss of
$2.0 million as a result of the sale.
Included in the Company's loss for 1999 is a loss
provision of $8.4 million as discussed in Note 16 of Notes to
Consolidated Financial Statements and elsewhere in the report.
This loss provision was caused, in part by the Chemical Business'
requirements to buy a large percentage of its anhydrous ammonia
requirements (its primary raw material) at prices in excess of
the then market price and the oversupply of nitrate based
products in 1999 caused, in part, by the importation of Russian
anhydrous ammonia at prices substantially below the then market
price, resulting in the Chemical Business costs to produce its
nitrate based products exceeding the then anticipated future
sales prices.
During 1999, the Chemical Business had commitments to
purchase anhydrous ammonia under three contracts. The Company's
purchase price of anhydrous ammonia under one of these contracts
could be higher or lower than the current market spot price of
anhydrous ammonia. Pricing is subject to variations due to
numerous factors contained in this contract. Based on the pricing
index contained in this contract, prices paid during 1998 and
1999 were substantially higher than the current market spot
price. As of December 31, 1999, the Chemical Business is to
purchase 96,000 tons at a minimum of 2,000 tons of anhydrous
ammonia per month during 2000 and 3,000 tons per month in 2001
and 2002 under this contract. In addition, under the contract
the Company is committed to purchase 50% of its remaining
requirements of anhydrous ammonia through 2002 from this third
party at prices which approximate market prices. The purchase
price(s) the Chemical Business will be required to pay for the
remaining 96,000 tons of anhydrous ammonia under this contract
currently exceeds and is expected to continue to exceed the spot
market prices throughout the purchase period. Additionally, the
excess supply of nitrate based products, caused, in part, by the
import of Russian nitrate, caused a significant decline in the
sales prices; although sales prices have improved in 2000 (no
improvement in sales margins is expected in the near term due to
increased cost of anhydrous ammonia). During 1999, this decline
in sales price resulted in the cost of anhydrous ammonia
purchased under this contract when combined with manufacturing
and distribution costs, to exceed anticipated future sales
prices. As a result, the accompanying Consolidated Financial
Statements included a loss provision of approximately $8.4
million for anhydrous ammonia required to be purchased during the
remainder of the contract ($7.4 million remaining accrued
liability as of December 31, 1999). The provision for loss at
December 31, 1999 was based on the forward contract pricing
existing at June 30, 1999 and September 30, 1999 (the date the
provisions were recognized), and estimated market prices for
products to be manufactured and sold during the remainder of the
contract. There are no assurances that such estimates will prove
to be accurate. Differences, if any, in the estimated future
cost of anhydrous ammonia and the actual cost in effect at the
time of purchase and differences in the estimated sales prices
and actual sales prices of products manufactured could cause the
Company's operating results to differ from that estimate in
arriving at the loss provision recorded during 1999.
The Chemical Business is a member of an organization of
domestic fertilizer grade ammonium nitrate producers which is
seeking relief from unfairly low priced Russian ammonium nitrate.
This industry group filed a petition in July 1999 with the U.S.
International Trade Commission and the U.S. Department of
Commerce seeking an antidumping investigation and, if warranted,
relief from Russian dumping. The International Trade Commission
has rendered a favorable preliminary determination that U.S.
producers of ammonium nitrate have been injured as a result of
Russian ammonium nitrate imports. In addition, the U.S.
Department of Commerce has issued a preliminary affirmative
determination that the Russian imports were sold at prices that
are 264.59% below their fair market value. As a result of the
Commerce Department's preliminary ruling, all imports of Russian
ammonium nitrate are currently subject to potential antidumping
duty liability. The Department of Commerce is due to issue a
final determination by May 22, 2000 and the International Trade
Commission by July 5, 2000. The relief currently in place will
remain only if both agencies make final affirmative
determinations. It is not known, therefore, whether the
antidumping action will be successful upon conclusion of the U.S.
Government's Investigation.
The Company's financial statements have been restated to
reflect the Automotive Products Business as a discontinued
operation for all periods presented. As a result, the Automotive
Products Business is no longer presented as a reportable segment.
Restated Automotive Products Business results are presented as
losses from discontinued operations, net of applicable income
taxes, and exclude general corporate overhead and certain
interest charges, previously allocated to that business. The
discussions and figures below are based on this restated
presentation. Certain statements contained in this Overview are
forward-looking statements, and future results could differ
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, 1999.
1999 1998 1997
(In thousands)
Net sales:
Businesses continuing:
Chemical $128,154 $125,757 $130,467
Climate Control 117,055 115,786 105,909
Industrial Products 9,027 14,315 15,572
____________________________________
$254,236 $255,858 $251,948
Business disposed of - Chemical (1) 7,461 14,184 26,482
______________________________________
$261,697 $270,042 $278,430
______________________________________
______________________________________
Gross Profit: (2)
Businesses continuing:
Chemical $ 13,532 $ 18,570 $ 16,171
Climate Control 35,467 32,278 29,552
Industrial Products 1,757 3,731 3,776
_____________________________________
$ 50,756 $ 54,579 $ 49,499
_____________________________________
_____________________________________
Operating Profit (loss): (3)
Businesses continuing:
Chemical $ 1,325 $ 6,592 $ 5,531
Climate Control 9,751 10,653 8,895
Industrial Products (2,507) (403) (993)
_______________________________________
8,569 16,842 13,433
Business disposed of -
Chemical (1) (1,632) (2,467) (52)
_________________________________________
6,937 14,375 13,381
General corporate and other
expenses, net (8,449) (9,891) (9,931)
Interest expense:
Business disposed of (1) (326) (434) (720)
Businesses continuing (15,115) (14,504) (11,435)
Gain (loss) on businesses
disposed of (1,971) 12,993 -
Provision for loss on firm purchase
commitments - Chemical (8,439) - -
Provision for impairment on long-lived
Assets - Chemical (4,126) - -
________________________________________
Income (loss) from continuing
operations before provision for
income taxes and extraordinary
charge $(31,489) $ 2,539 $ (8,705)
________________________________________
________________________________________
Total assets:
Businesses continuing:
Chemical $ 93,482 $107,780 $117,671
Climate Control 65,521 49,516 49,274
Industrial Products 8,203 11,662 9,929
Corporate assets and other 21,429 22,137 32,894
Business disposed of - Chemical - 16,797 19,899
Net assets of discontinued operations - 15,358 14,933
_______________________________________
Total assets $188,635 $223,250 $244,600
________________________________________
________________________________________
(1) In August, 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary. See Note
5 of Notes to Consolidated Financial Statements for further
information. 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 and other expenses, interest expense, income
taxes, loss on business disposed of and provision for loss
on firm purchase commitments and impairment on long-lived
assets in 1999 and gain on sale of an office building (the
"Tower") in 1998.
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 $128.2 million for the year ended
December 31, 1999 and $125.8 million for the year ended December
31, 1998. The sales volume from the Chemical Business' El Dorado
Plant was down substantially in 1999 (535,000 tons) from the 1998
level 615,000 tons. This decline in sales volume was offset by
sales from the EDNC Baytown Plant completed in May, 1999 (See
Item 1 "Business" included elsewhere in this report). The gross
profit (excluding the Australian subsidiary and the provision for
loss on firm purchase commitments) decreased to $13.5 million (or
10.6% of net sales) in 1999 from $18.6 million (or 14.8% of net
sales) in 1998. The decrease in the gross profit was primarily a
result of lower volumes and declining sales prices and unabsorbed
overhead resulting from the lower volumes and manufacturing
costs.
During the third and fourth quarters of 1999, two of the
plants were temporarily shut down due to the excessive supply of
ammonium nitrate at the Chemical Business and in the market
place. The plants that were shut down increased the Chemical
Business' losses due to overhead costs that continue even though
product was not being produced at the plants temporarily shut
down. These plants have resumed production in the first quarter
of 2000. There are no assurances that the Chemical Business will
not be required to record additional loss provisions in the
future. Based on the forward pricing existing as of March 31,
2000, the Chemical Business would not be required to recognize an
additional loss on the anhydrous ammonia purchase contracts. See
"Special Note regarding Forward Looking Statements".
In May, 1999, a subsidiary of the Company completed its
obligations, as an agent, pursuant to an agreement to construct a
nitric acid plant located within Bayer's Baytown, Texas chemical
plant complex. This plant is being operated by a subsidiary and
is supplying nitric acid to Bayer under a long-term supply
contract. Sales by this subsidiary to Bayer were approximately
$17.2 million during 1999. Management estimates that, at full
production capacity based on terms of the Agreement and, based on
the price of anhydrous ammonia as of the date of this report, the
plant should generate approximately $35 million in annual gross
revenues. Unlike the Chemical Business' regular sales volume,
the market risk on this additional volume is much less since the
contract provides for recovery of costs, as defined, plus a
profit. The Company's subsidiary is leasing the nitric acid
plant pursuant to a leverage lease from an unrelated third party
for an initial term of ten (10) years which, began on June 23,
1999. See "Special Note Regarding Forward Looking Statements".
The results of operation of the Chemical Business'
Australian subsidiary had been adversely affected due to adverse
economic developments in certain countries in Asia. As these
adverse economic conditions in Asia continued, they had an
adverse effect on the Company's consolidated results of
operations. As a result of the economic conditions in Australia
and the adverse effect of such conditions on the Company's
consolidated results of operations, the Company entered into an
agreement to dispose of this business. On August 2, 1999
substantially all the assets were sold and a loss of
approximately $2.0 million was recognized. See Note 5 of Notes
to Consolidated Financial Statements.
The Australian subsidiary had revenues for the calendar year
1999 up to the date of sale of $7.5 million and a loss of $2.0
million, excluding the loss on the sale. For the year ended
December 31, 1998, revenues were $14.2 million and the loss was
$2.9 million.
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.
Sales of $117.1 million for the year ended December 31,
1999, in the Climate Control Business were approximately 1.1%
greater than sales of $115.8 million for the year ended December
31, 1998. The gross profit was approximately $35.5 million and
$32.3 million in 1999 and 1998, respectively. The gross profit
percentage increased to 30.3% for 1999 from 27.9% for 1998. This
increase is primarily due to an improved market and manufacturing
efficiency relating to the heat pump portion of the Climate
Control Business.
Industrial Products Business
As indicated in the above table, during the years ended
December 31, 1999 and 1998, respectively, the Industrial Products
Business recorded sales of $9.0 million and $14.3 million
respectively, and reported operating losses of $2.5 million and
$.4 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. The Company previously announced that it is
evaluating opportunities to sell or realize its net investment in
its Industrial Products Business. The terms of sale, if any,
have not been finalized. The sale of the Industrial Products
Business is a forward looking statement and is subject to, among
other things, the Company and potential buyer agreeing to terms,
the buyer's and the Company's lending institutions agreeing to
the terms of the transaction, including the purchase price,
approval of the Company's Board of Directors and negotiation and
finalization of definitive agreements. There is no assurance
that the Company will sell or realize its net investment in the
Industrial Products Business in 2000.
Results of Operations
Year Ended December 31, 1999 compared to Year Ended December 31,
1998
Revenues
Total revenues of Businesses continuing for 1999 and 1998
were $255.3 million and $257.1 million, respectively (a decrease
of $1.8 million). Sales decreased $1.6 million and other income
decreased $.2 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 (see Note 16 of Notes to Consolidated Financial
Statement).
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. See "Overview General" elsewhere in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion of the Chemical
Business' decreased sales. 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 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. See "Liquidity and
Capital Resources" of this Management's Discussion and Analysis.
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.
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.
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 the Tower 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 carryforward
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"). As a result, Automotive is reflected as a
discontinued operations for the 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.
Year Ended December 31, 1998 compared to Year Ended December 31,
1997
Revenues
Total revenues of Businesses continuing for 1998 were $256.5
million compared to $254.1 million in 1997. Sales increased $3.9
million and other income decreased $.8 million. The decrease in
other income was primarily due to certain valuation reserve
adjustments recorded against specifically identified investments
in 1998.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for 1998 were $255.9 million, compared to $251.9
million for 1997, an increase of $4.0 million. This increase in
sales resulted principally from increased sales in the Climate
Control Business of $9.9 million, primarily due to increased
volume and price increases in both the heat pump and fan coil
product lines. This increase was offset by (i) decreased sales
in the Industrial Products Business of $1.3 million due to
decreased sales of machine tools, and (ii) decreased sales in the
Chemical Business of $4.7 million primarily due to lower sales
volume in the U.S. of agricultural and blasting products. Sales
were lower in the Chemical Business during 1998, compared to
1997, as a result of adverse weather conditions in its
agricultural markets during the spring and fall planting seasons.
Blasting sales in the Chemical Business declined as a result of
elimination of certain low profit margin sales.
Gross Profit
Gross profit of Businesses continuing increased $5.1 million
and was 21.3% of net sales for 1998, compared to 19.6% of net
sales for 1997. The gross profit percentage improved in the
Chemical and Industrial Products Businesses. It was consistent
from 1997 to 1998 in the Climate Control Business.
The increase in the gross profit percentage was due
primarily to (i) lower production costs in the Chemical Business
due to the effect of lower prices of anhydrous ammonia in 1998,
(ii) high unabsorbed overhead costs in 1997 caused by excessive
downtime related to problems associated with mechanical failures
at the Chemical Business' primary manufacturing plant in the
first half of 1997, and (iii) higher gross profit product mix of
machine tools sold in 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 1998 were
19.1% compared to 19.4% for 1997. This decrease is primarily the
result of increased sales in the Climate Control Business offset
by increased SG&A expenses relating to additional information
technology personnel to support management information system
changes and higher variable costs due to a change in sales mix
toward greater domestic sales which carry a higher SG&A percent.
This decrease is offset by the decrease in sales of the Chemical
Business with an increase in SG&A expenses relating to higher
provisions for uncollectible accounts receivable in 1998. Of the
net change in SG&A in 1998 compared to 1997, approximately $1.0
million is due to legal fees in 1997 over 1998 to assert the
Company's position in various legal proceedings.
Interest Expense
Interest expense for continuing businesses of the Company,
before deducting capitalized interest, was $14.5 million during
1998, compared to $12.5 million during 1997. During 1997, $1.1
million of interest expense was capitalized in connection with
construction of the DSN Plant. The increase of $2.0 million
before the effect of capitalization primarily resulted from
increased borrowings. The increased borrowings were necessary to
support capital expenditures, higher accounts receivable balances
and to meet the operational requirements of the Company. See
"Liquidity and Capital Resources" of this Management's Discussion
and Analysis.
Businesses Disposed of
The Company sold certain real estate in 1998 for a gain on
disposal of $13.0 million. See discussion in Note 5 of the Notes
to the Consolidated Financial Statements.
Income (loss) from Continuing Operations Before Income Taxes and
Extraordinary Charge
The Company had income from continuing operations before
income taxes and extraordinary charge of $2.5 million for 1998
compared to a loss of $8.7 million for 1997. The increased
profitability of $11.2 million was primarily due to the gain on
the sale of the Tower in 1998, the increased gross profit, and
the decreased SG&A offset by increased interest expense, as
previously discussed.
Provision for Income Taxes
As a result of the Company's net operating loss carryforward
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 1998 and 1997 are for current
state income taxes and federal alternative minimum taxes.
Discontinued Operations
The Company had losses from discontinued operations, net of
income taxes, of $4.4 million for 1998, compared to $9.7 million
for 1997. The decrease in losses is primarily due to higher
production volumes, improved experience with returns and
allowances and a decrease in SG&A expenses resulting from a
comprehensive cost reduction implemented by the Company offset by
an increase in interest expense resulting from increased
borrowings. See discussion in Note 4 of the Notes to Consolidated
Financial Statements.
Extraordinary Charge
In 1997, in connection with the issuance of the 10 3/4%
unsecured senior notes due 2007 by a subsidiary of the Company, a
subsidiary of the Company retired the outstanding principal
associated with a certain financing arrangement and incurred a
prepayment fee. The prepayment fee and loan origination costs
expensed in 1997 related to the financing arrangement aggregated
approximately $4.6 million. See discussion in Note 8 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, the issuance of $105 million of Senior
Unsecured Notes by its wholly owned subsidiary, ClimaChem, Inc.,
in November 1997, and secured equipment financing.
Net cash used by continuing operations for the year ended
December 31, 1999 was $.4 million, after $18.1 million for net
loss from discontinued operations of the Automotive Products
Business, loss on the disposition of the Australian subsidiary of
$2.0 million, inventory write-down for $1.6 million and provision
for losses on purchase commitments of $8.4 million (net of
amounts realized in cost of sales of $1.8 million), provision for
impairment on long-lived assets primarily associated with two
chemical plants of $4.1 million, noncash depreciation and
amortization of $11.4 million, net provision for losses of $1.5
million relating to accounts receivable, inventory, notes
receivable and other and including the following changes in
assets and liabilities: (i) accounts receivable increases of
$1.4 million; (ii) inventory decreases of $3.9 million; (iii)
increases in supplies and prepaid items of $.2 million; (iv)
decrease in accounts payable of $1.1 million; and (v) increase in
accrued liabilities of $2.8 million. The increase in accounts
receivable was primarily due to improved sales in the fourth
quarter in the Climate Control Business offset by declining
fourth quarter sales in the Industrial Products Business. The
decrease in inventory was primarily due to the reduction in the
Chemical Business' inventory partially offset by increases in the
Climate Control Business due to a build up of inventory in the
plant due to an increase in confirmed orders during the fourth
quarter. The decrease in accounts payable is primarily due to
decreases in liabilities associated with purchases of raw
materials in the Chemical business partially offset by increases
in liabilities associated with purchases of raw materials and
purchased goods in the Climate Control Business and timing of
payments in the Industrial Products Business. The increase in
accrued liabilities is primarily due to increases in accrued
warranty and sales incentives in the Climate Control Business and
deferred lease liability relating to the Baytown Plant in the
Chemical Business.
Cash Flow From Investing and Financing Activities
Net cash provided by investing activities for the year ended
December 31, 1999 included $11.2 million from the proceeds of the
sale of the Australian subsidiary, certain railcars and other
equipment net of $7.6 million in capital expenditures. The
capital expenditures were primarily for the benefit of the
Chemical and Climate Control Businesses to enhance production and
product delivery capabilities. Principal payments of $1.1
million were received on loans receivable and net expenditures of
$.8 million were paid relating to other assets.
Net cash provided by financing activities included (i)
payments on long- term debt and other debt of $6.1 million, (ii)
proceeds from long-term and other borrowings, net of origination
fees, of $2.9 million, (iii) net increases in revolving debt of
6.6 million (iv) decreases in drafts payable of $.3 million, (v)
dividends of $1.7 million, and (vi) treasury stock purchases of
$.2 million.
During the first six months of 1999, the Company declared
and paid the following aggregate dividends: (i) $12.00 per share
on each of the outstanding shares of its Series B 12% Cumulative
Convertible Preferred Stock; (ii) $1.625 per share on each
outstanding share of its $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2; and (iii) $10.00 per share on each
outstanding share of its Convertible Noncumulative Preferred
Stock. In order to conserve cash, no dividends were declared or
paid subsequent to June 30, 1999.
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.
As of December 31, 1999, the Company and certain of its
subsidiaries, including ClimaChem, are parties to a working
capital line of credit evidenced by two separate loan agreements
("Agreements") with a lender ("Lender") collateralized by
receivables, inventories and proprietary rights of the parties to
the Agreements. The Agreements have been amended from time to
time since inception to accommodate changes in business
conditions and financial results. This working capital line of
credit is a primary source of liquidity for the Company and
ClimaChem.
As of December 31, 1999, the Agreements provided for
revolving credit facilities ("Revolver") for total direct
borrowing up to $65 million with advances at varying percentages
of eligible inventory and trade receivables. At December 31,
1999, the effective interest rate was 9.0% and the availability
for additional borrowings, based on eligible collateral,
approximated $12.5 million. Borrowings under the Revolver
outstanding at December 31, 1999, were $27.5 million. The annual
interest on the outstanding debt under the Revolver at December
31, 1999, at the rates then in effect would approximate $2.5
million. The Agreements also require the payment of an annual
facility fee of 0.5% of the unused Revolver and restrict the flow
of funds, except under certain conditions, to subsidiaries of the
Company that are not parties to the Agreements.
The Agreements, as amended, required the Company and
ClimaChem to maintain certain financial ratios and contain other
financial covenants, including tangible net worth requirements
and capital expenditure limitations. In 1999, the Company's
financial covenants were not required to be met so long as the
Company and its subsidiaries, including ClimaChem, that are
parties to the Agreements, maintained a minimum aggregate
availability under the Revolving Credit Facility of $15.0
million. When the availability dropped below $15.0 million for
three consecutive business days, the Company and ClimaChem were
required to maintain the financial ratios discussed above. Due to
an interest payment of $5.6 million made by ClimaChem on December
30, 1999, relating to the outstanding $105 million Senior
Unsecured Notes, the availability dropped below the minimum
aggregate availability level required on January 1, 2000. Because
the Company and ClimaChem could not meet the financial ratios
required by the Agreements, the Company and ClimaChem entered
into a forbearance agreement with the Lender effective January 1,
2000. The forbearance agreement waived the financial covenant
requirements for a period of sixty (60) days.
Prior to the expiration of the forbearance agreement, the
Agreements were amended, to provide for total direct borrowings
of $50.0 million including the issuance of letters of credit.
The maximum borrowing ability under the newly amended Agreements
is the lesser of $50.0 million or the borrowing availability
calculated using advance rates and eligible collateral less $5.0
million. The amendment provides for an increase in the interest
rate from the Lender's prime rate plus .5% per annum to the
Lender's prime rate plus 1.5% per annum, or the Company's and
ClimaChem's LIBOR interest rate option, increased to the Lender's
LIBOR rate plus 3.875% per annum, from 2.875%. The term of the
Agreements is through December 31, 2000, and is renewable
thereafter for successive thirteen-month terms if, by October 1,
2000, the Company and Lender shall have determined new financial
covenants for the calendar year beginning in January 2001. The
Agreements, as amended, require the Company and ClimaChem to
maintain certain financial ratios and certain other financial
covenants, including net worth and interest coverage ratio
requirements and capital expenditure limitations.
As of March 31, 2000 the Company, exclusive of ClimaChem,
and ClimaChem have a borrowing availability under the revolver of
$.2 million, and $11.0 million respectively, or $11.2 million in
the aggregate.
In addition to the credit facilities discussed above, as of
December 31, 1999, 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, 1999, DSN had outstanding borrowings of $8.2
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, 1999, at the agreed to interest rates would
approximate $.7 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 April 2000, DSN obtained a waiver
from the Financing Company of the financial covenants through
April 2001.
During January 2000, a subsidiary of ClimaChem obtained
financing up to $3.5 million with the City of Oklahoma City
("Lender") to finance the working capital requirements of Climate
Control's new product line of large air handlers. Currently, the
financing agreement requires the Company to make interest
payments on a quarterly basis at the Lender's LIBOR rate plus two-
tenths of one percent (.2%) per annum. After the Lender obtains
financing through the U.S. Department of Housing and Urban
Development ("HUD"), the Company will be required to make
principal payments on an annual basis over a term of sixteen (16)
years but based on a twenty (20) year amortization period.
Interest payments will be required on a semi-annual basis at the
rate charged to the Lender by HUD at the time of the funding.
The loan is secured by a mortgage on the manufacturing facility
and a separate unrelated parcel of land.
ClimaChem is restricted as to the funds that it may transfer
to the Company under the terms contained in an Indenture covering
the $105 million Senior Unsecured Notes issued by ClimaChem.
Under the terms of the Indenture, ClimaChem cannot transfer funds
to the Company, except for (i) the amount of income taxes that
they would be required to pay if they were not consolidated with
the Company (the "Tax Sharing Agreement"), (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 and
ClimaChem's subsidiaries pursuant to a certain services agreement
and a certain management agreement to which the companies are
parties. ClimaChem sustained a net loss of $2.6 million in the
calendar year 1998, and a net loss of $19.2 million for the
calendar year 1999. Accordingly, no amounts were paid to the
Company by ClimaChem under the Tax Sharing Agreement, nor under
the Management Agreement during 1999 and based on ClimaChem's
cumulative losses at December 31, 1999, and current estimates for
the results of operations for the year ended December 31, 2000,
none are expected during 2000. 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's net losses for the
years of 1998 and 1999 and the limited borrowing ability under
the Revolver, the Company discontinued payment of cash dividends
on its Common Stock for periods subsequent to January 1, 1999,
until the Board of Directors determines otherwise, and the
Company has not paid the September 15, 1999, December 15, 1999
and March 15, 2000 regular quarterly dividend of $.8125 (or
$743,438 per quarter) on its outstanding $3.25 Convertible
Exchangeable Class C Preferred Stock Series 2, totaling
approximately $2.2 million. In addition, the Company did not pay
the January 1, 2000 regular annual dividend of $12.00 (or
$240,000) on the Series B Preferred. The Company does not
anticipate having funds available to pay dividends on its stock
for the foreseeable future.
As of December 31, 1999, the Company and its subsidiaries
which are not subsidiaries of ClimaChem and exclusive of the
Automotive Products Business had a working capital deficit of
approximately $2.3 million, total assets of $17.6 million, and
long-term debt due after one year of approximately $13.5 million.
In 2000, the Company has planned capital expenditures of
approximately $10.0 million, primarily in the Chemical and
Climate Control Businesses. These capital expenditures include
approximately $2.0 million, which the Chemical Business is
obligated to spend under consent orders with the State of
Arkansas related to environmental control facilities at its El
Dorado facility, as previously discussed in this report. The
Company is currently exploring alternatives to finance these
capital expenditures. There are no assurances that the Company
will be able to arrange financing for its capital expenditures
or to make the necessary changes to its Indenture in order to borrow the funds
required to finance certain of these expenditures. Failure to be able to
make a substantial portion of these capital expenditures, including
those related to environmental matters, could have a material
adverse effect on the Company.
The Company's plan for 2000 calls for the Company to improve
its liquidity and operating results through the liquidation of
non-core assets, realization of benefits from its late 1999 and
early 2000 realignment of its overhead (which serves to minimize
the cash flow requirements of the Company and its subsidiaries
which are not subsidiaries of ClimaChem) and through various debt
and equity alternatives.
Commencing in 1997, the Company created a long-term plan
which focused around the Company's core operations, the Chemical
and Climate Control Businesses. This plan commenced with the sale
of the 10 3/4% Senior Unsecured Notes by the Company's wholly-owned
subsidiary, ClimaChem, in November 1997. This financing allowed
the core businesses to continue their growth through expansion
into new lines of business directly related to the Company's core
operations (i.e., completion of the DSN plant which produces
concentrated nitric acid, execution of the EDNC Baytown plant
agreement with Bayer to supply industrial acids, development and
expansion into market-innovative climate control products such as
geothermal and high air quality systems and large air handling
units).
During 1999, the Chemical Business sustained significant
losses, primarily as a result of the reduction of selling prices
for its nitrate-based products (in large part due to the flood of
the market with low-priced Russian ammonium nitrate) while the
Company's cost of raw materials escalated under a contract with a
pricing mechanism tied to the price of natural gas which
increased dramatically. During late 1999, the Company
renegotiated this supply contract, extending the cash
requirements under its take-or-pay provision to delay required
takes to 2000, 2001 and 2002 and to obtain future raw material
requirements at spot market prices. The Company was also active
in bringing about a favorable preliminary determination from the
International Trade Commission and Commerce Department, which has
had the current impact of minimizing the dumping of Russian
ammonium nitrate in the U.S. market (although there are no
assurances that the final determination will affirm the
preliminary determination). This, and other factors has allowed the
Chemical Business to see marginally improved market pricing for its
nitrate-based products in the first three months of 2000 compared to the
comparable period in 1999; however, there are no assurances that this
improvement will continue. The Company also successfully
commenced operations of its EDNC Baytown plant which is selling
product to Bayer under a long-term supply contract.
The Company's long-range plans also included the addition of
expertise related to the Company's core businesses to enhance
its leadership team. Beginning in 1998, the Company brought on
several new members of its Board of Directors with expertise in
certain of the Company's Businesses, and individuals with extensive
knowledge in the banking industry and financial matters.
These individuals have brought business insight to the
Company and helped management to formulate the
Company's immediate and long-range plans.
The plan for 2000 calls for the Company to dispose of a
significant portion of its non-core assets. As previously
discussed, on April 5, 2000, the Board of Directors approved the
disposal of the Automotive Products Business. The Automotive
Products Business has experienced a rapidly consolidating market
and is not in an industry which the Company sees as able to
produce an adequate return on its investment. Additionally, the
Company is presently evaluating alternatives for realizing its
net investment in the Industrial Products Business. The Company
has had discussions involving the possible sale of the Industrial
Products Business; however, no definitive plans are currently in
place and any which may arise will require Board of Director
approval prior to consummation. The Company is currently
continuing the operations of the Industrial Products Business;
however, the Company may sell or dispose of the operations in
2000. The Company's plan for 2000 also calls for the realization
of the Company's investment in an option to acquire an energy
conservation company and advances made to such entity (the
"Optioned Company"). In April 2000, the Company received written
acknowledgment from the President of the Optioned Company that it
had executed a letter of intent to sell to a third party, the
proceeds from which would allow repayment of the advances and
options payments to the Company in the amount of approximately
$2.6 million. Further, the Company has received written
confirmation from the buyer of the Optioned Company that the
transaction is on schedule to close on April 28, 2000 with the
amount due to the Company related to the advance and option
payments to be repaid in their entirety. Upon receipt of these
proceeds, the Company is required to repay up to $1 million of
outstanding indebtedness to a related party, SBL Corporation,
related to an advance made to the Company in 1997. The remaining
proceeds would be available for corporate purposes. The Company's
plan for 2000 also identifies specific other non-core assets
which the Company will attempt to realize to provide additional
working capital to the Company in 2000. See "Special Note
Regarding Forward Looking Statements."
During 1999 and into 2000, the Company has been
restructuring its operations, eliminating businesses which are
non-core, reducing its workforce as opportunities arise and
disposing of non-core assets. As discussed above, the Company has
also successfully renegotiated its primary raw material purchase
contracts in the Chemical Business in an effort to make that
Business profitable again and focused its attention to the
development of new, market-innovative products in the Climate
Control Business. Although the Company has not planned to receive
any dividends, tax payments or management fees from ClimaChem in
2000, it is possible that ClimaChem could pay up to $1.8 million
of management fees to its ultimate parent should operating
results be favorable (ClimaChem having EBITDA in excess of $26
million annually, $6.5 million quarterly, is payable to LSB up to $1.8
million).
As previously mentioned, the Company and ClimaChem's primary
credit facility terminates on December 31, 2000, unless the
parties to the agreements agree to new financial covenants for
2001 prior to October 1, 2000. While there is no assurance that
the Company will be successful in extending the term of such
credit facility, the Company believes it has a good working
relationship with the Lender and that it will be successful in
extending such facility or replacing such facility from another
lender with substantially the same terms during 2000.
In March 2000, the Company and ClimaChem retained Chanin
Capital Partners as financial advisors to assist in evaluating
all of the alternatives relating to the Company's and CliamaChem's liquidity,
and to assist the companies in determining their alternatives
for restructuring their capitalization and improving
their financial condition. The Company has also
initiated discussions with third party lenders to explore the
possibility of obtaining an additional credit facility or
expanded credit facility with which to initiate discussions with
ClimaChem's holders of the Senior Notes, which, at December 31,
1999, were trading at 25% of their face value. There is no
assurance that the Company or ClimaChem will be successful in
obtaining the additional credit facility or expanded credit
facility.
The Company has planned for up to $10 million of capital
expenditures for 2000, most of which is not presently committed.
Further, a significant portion of this is 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.
Recently, the Chemical Business has obtained relief from certain
of the compliance dates under its wastewater management project
and expects that this will ultimately result in the delay in the
implementation date of such project. Construction of the wastewater
treatment project is subject to the Company obtaining financing to fund this
project. There are no assurances that the Company will be able to obtain the
required financing. Failure to construct the wastewater treatment facility
could have a material adverse effect on the Company.
The Company's plan for 2000 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.
During the period from January 1, 1999, through June 30,
1999, the Company purchased a total of 87,267 shares of Common
Stock for an aggregate amount of $230,234. The Company has not
purchased any of its stock since prior to June 30, 1999.
Discontinued Business
In May of 1999, the Company's Automotive Products Business
entered into a Loan and Security Agreement (the "Automotive Loan
Agreement") with an unrelated lender (the "Automotive Lender")
secured by substantially all assets of the Automotive Products
Business to refinance the Automotive Products Business' working
capital requirements that were previously financed under the
Revolver. The Company was required to provide the Automotive
Lender a $1.0 million standby letter of credit to further secure
the Automotive Loan Agreement. The Automotive Loan Agreement
provides a Revolving Loan Facility (the "Automotive Revolver"),
Letter of Credit Accommodations and a Term Loan (the "Automotive
Term Loan").
The Automotive Revolver provides for a total direct
borrowings up to $16.0 million, including the issuance of letters
of credit. The Automotive Revolver provides for advances at
varying percentages of eligible inventory and trade receivables.
The Automotive Revolver provides for interest at the rate from
time to time publicly announced by First Union National Bank as
its prime rate plus one percent (1%) per annum or, at the
Company's option, on the Automotive Lender's LIBOR rate plus two
and three quarters percent (2.75%) per annum. The Automotive
Revolver also requires the payment of a monthly servicing fee of
$3,000 and a monthly unused line fee equal to 0.5% of the unused
credit facility. At December 31, 1999, the effective interest
rate was 9.5% excluding the effect of the service fee and unused
line fee (10.19% considering such fees). The term of the
Automotive Revolver is through May 7, 2001, and is renewable
thereafter for successive twelve month terms. At December 31,
1999, outstanding borrowing under the Automotive Revolver were
$8.8 million; in addition, the Automotive Products Business had
$.4 million, based on eligible collateral, available for
additional borrowing under the Automotive Revolver. As a result
of the Company's decision to sell or otherwise dispose of the
operations of the Automotive Products Business, outstanding
borrowings at December 31, 1999, are included in net assets of
discontinued operations (see Note 4 of Notes to Consolidated
Financial Statements).
The Automotive Loan Agreement restricts the flow of funds,
except under certain conditions, between the Automotive Products
Business and the Company and its subsidiaries.
The Automotive Term Loan is evidenced by a term promissory
note (the "Term Promissory Note") and is secured by all the same
collateral as the Automotive Revolver. The interest rate of the
Automotive Term Loan is the same as the Automotive Revolver
discussed above. The terms of the Term Promissory Note require
sixty (60) consecutive monthly principal installments (or earlier
as provided in the Term Promissory Note) of which the first
thirty-six (36) installments shall each be in the amount of
$48,611, the next twenty-two (22) installments shall each be in
the amount of $33,333, and the last installment shall be in the
amount of the entire unpaid principal balance. Interest payments
are also required monthly as calculated on the outstanding
principal balance. At December 31, 1999, the outstanding
borrowings under the Automotive Term Loan were approximately $2.2
million and are included in net assets of discontinued operations
(see Note 4 of Notes to Consolidated Financial Statements).
The annual interest on the outstanding debt under the
Automotive Revolver and Automotive Term Loan at December 31,
1999, at the rates then in effect would approximate $1.1 million.
On April 5, 2000, the Board of Directors approved a plan of
disposal of the Company's Automotive Products Business
("Automotive"). The plan is to sell the assets for book value.
At closing, the Company is to receive notes receivable for its
net investment expected to approximate $8.0 million, and the
buyer is to assume substantially all of the Automotive Products
Business' liabilities which, prior to the Zeller acquisition,
were approximately $22.2 million as of December 31, 1999.
These notes will be secured by a second lien on substantially all of the assets
of the buyer but payment of principal and interest will be subordinated to the
buyer's primary lender. The losses associated with the
discontinuation of this business segment are reflected in
the net loss from discontinued operations on the Consolidated
Statements of Operations.
The closing of the sale of Automotive Products Business is
subject to satisfaction of certain conditions. The Company
expects to close the sale of Automotive by June 30, 2000. The
preliminary terms of the pending sale of Automotive calls for no
payments of principal on the approximately $8.0 million note to
the Company for the first two years following the close.
Interest will accrue at Wall Street Journal Prime + 1.0% but will
not be paid until and if Automotive's availability reaches a
level of $1.0 million.
The Company will remain a guarantor on certain equipment
notes of Automotive, which had outstanding indebtedness of
approximately $4.5 million as of March 31, 2000, and on the
Automotive Revolver in the amount of $1.0 million for which the
Company has posted a letter of credit at December 31, 1999.
In an effort to assist the Automotive Products Business to
be in a position to complete the sell described above, on March
9, 2000, the Company closed the acquisition of certain assets of
the Zeller Corporation representing its universal joint business.
In connection with the acquisition of these assets, the
Automotive Products Business assumed an aggregate of
approximately $7.5 million (unaudited) in Zeller's liabilities,
$4.7 million of which was funded by the Automotive Products
Business primary lender. (The balance of the assumed liabilities
is expected to be funded out of working capital of the Automotive
Products Business). For year ended December 31, 1999, the
universal joint business of Zeller had unaudited sales of
approximately $11.7 and a net loss of $1.5 million.
Foreign Subsidiary
As previously discussed in this report, in August, 1999, the
Company sold substantially all of the assets of its wholly owned
Australian subsidiary, effectively disposing of this portion of
the Chemical Business. All of the proceeds received by the
Company have been applied to reduce the indebtedness of
ClimaChem, or have been reinvested in related businesses of
ClimaChem in accordance with the Indenture of Senior Unsecured
Notes.
Joint Ventures and Options to Purchase
Prior to 1997, the Company, through a subsidiary, loaned
$2.8 million to a French manufacturer of HVAC equipment whose
product line is compatible with that of the Company's Climate
Control Business in the USA. Under the loan agreement, the
Company has the option, 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.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The
Project had been awarded a contract to retrofit residential
housing units at a US Army base, which it completed during 1996.
The completed contract was for installation of energy-efficient
equipment (including air conditioning and heating equipment)
which would reduce utility consumption. For the installation and
management, the Project will receive 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 US Army base. The project
received a loan from a lender to finance approximately $14.0
million of the cost of the Project. The Company is not
guaranteeing any of the lending obligations of the Project. The
Company's equity interest in the results of the operations of the
Project were not material for the years ended December, 1999,
1998 and 1997.
During 1995, the Company executed a stock option agreement
to acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company"), which owns the remaining fifty
percent (50%) equity interest in the Project discussed above, to
enhance the marketing of the Company's air conditioning products.
The Company has decided not to exercise the Option and has
allowed the term of the Option to lapse. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Source of Funds" for discussion of sale of this
investment in 2000. Through the date of this report, the Company
has made option payments aggregating $1.3 million ($1.0 million
of which is refundable) and has advanced the Optioned Company
approximately $1.7 million including accrued interest. The
Company has recorded reserves of $1.5 million against the loans,
accrued interest and option payments. The loans, accrued
interest and option payments are secured by the stock and other
collateral of the Optioned Company.
Debt and Performance Guarantee
At December 31, 1998, the Company and one of its
subsidiaries had outstanding guarantees of approximately $2.6
million of indebtedness of a startup aviation company in exchange
for an ownership interest in the aviation company of
approximately 45%.
During the first quarter of 1999, the Company was called
upon to perform on its guarantees. The Company paid
approximately $500,000 to a lender and assumed an obligation for
a $2.0 million note, which is due in equal monthly principal
payments, plus interest, through August, 2004, in satisfaction of
the guarantees. In connection with the demand on the Company to
perform under its guarantee, the Company and the other guarantors
formed a new company ("KAC") which acquired the assets of the
aviation company through foreclosure.
The Company and the other shareholders of KAC are attempting
to sell the assets acquired in foreclosure. Proceeds received by
the Company, if any, from the sale of KAC assets will be
recognized in the results of operations when and if realized.
As of December 31, 1999, LSB has agreed to guarantee a
performance bond of $2.1 million of a start-up operation
providing services to the Company's Climate Control Business.
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 $40 million at December 31,
1999. As of December 31, 1999, the Company had available regular
tax NOL carry-overs of approximately $75 million based on its
federal income tax returns as filed with the Internal Revenue
Service for taxable years through 1998. These NOL carry-overs
will expire beginning in the year 2000. 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.
Impact of Year 2000
In 1999, the Company completed its project to enhance
certain of its Information Technology ("IT") systems and certain
other technologically advanced communication systems. Over the
life of the project, the Company capitalized approximately $1.3
million in costs to accomplish its enhancement program. The
capitalized costs included $.4 million in external programming
costs, with the remainder representing hardware and software
purchases. The time and expense of the project did not have a
material impact on the Company's financial condition. As a
result of these modifications, the Company did not incur any
significant problems relating to Year 2000 issues. There was no
interruption of business with key suppliers or downturn in
economic activity caused by problems with Year 2000 issues. As
of the date of this report, the Company has not been notified of
any warranty issues relating to Year 2000 for the products it has
sold and therefore, the Company believes it should have no
material exposure to contingencies related to the Year 2000 issue
for the products it has sold. The Company will continue to
monitor its computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Contingencies
The Company has several contingencies that could impact its liq
uidity in the event that the Company is unsuccessful in defending
against the claimants. Although management does not anticipate
that these claims will result in substantial adverse impacts on
its liquidity, it is not possible to determine the outcome. The
preceding sentence is a forward looking statement that involves a
number of risks and uncertainties that could cause actual results
to differ materially, such as, among other factors, the
following: a court finds the Chemical Business liable for a
material amount of damages in the antitrust lawsuits pending
against the Chemical Business in a manner not presently
anticipated by the Company. See "Business", "Legal Proceedings"
and Note 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 Company is also a party to a series of agreements under
which it is leasing a nitric acid plant. The minimum lease
payments associated therewith, prior to execution in June 1999,
were directly impacted by the change in interest rates. To
mitigate a portion of the Company's exposure to adverse market
changes related to this leveraged lease, in 1997 the Company
entered into a interest rate forward agreement whereby the
Company was the fixed rate payor on notional amounts aggregating
$25 million, net to its 50% interest, with a weighted average of
7.12%. The Company accounted for this forward under the deferral
method, so long as high correlation was maintained, whereby the
net gain or loss upon settlement adjusts the item being hedged,
the minimum lease rentals, in periods commencing with the lease
execution. As of December 31, 1999, the Company has deferred
costs of approximately $2.7 million associated with such
agreement, which is being amortized over the initial term of the
lease. The following table provides information about the
Company's interest rate sensitive financial instruments as of
December 31, 1999.
Years Ending December 31,
2000 2001 2002 2003 2004 Thereafter Total
- -------------------------------------------------------------------------------------------
Expected maturities of long-term debt:
Variable rate debt $27,639 $2,561 $ 121 $ 133 $ 145 $ 922 $31,521
Weighted average
interest rate (1) 9.00% 10.40% 9.00% 9.00% 9.00% 9.00% 9.00%
Fixed rate debt $ 5,720 $7,967 $1,637 $2,774 $1,460 $106,993 $126,551
Weighted average
interest rate (2) 10.52% 10.64% 10.65% 10.68% 10.70% 10.73% 10.66%
___________________
(1)Interest rate is based on the aggregate rate of debt outstanding as of
December 31, 1999. Interest is at floating rate based on the lender's prime
rate plus .5% per annum, or at the Company's option, on its Revolving Credit
Agreements on the lender's LIBOR rate plus 2.875% per annum. During the first
quarter of 2000, the Revolving Credit Agreements were amended which included
an increase in the floating rate based on the Lender's prime rate plus 1.5%
per annum, or at the Company's option, on the Lender's LIBOR rate plus 3.875%
per annum. The effect of this change in interest rate based on the Lender's
prime rate at December 31, 1999, increased the weighted average interest rate
to 9.95% for 2000 and the total weighted average interest rate to 9.81%.
(2)Interest rate is based on the aggregate rate of debt outstanding as of
December 31, 1999.
December 31, 1999 December 31, 1998
Estimated Carrying Estimate Carrying
Fair Fair Fair Fair
Value Value Value Value
(in thousands)
Variable Rate:
Bank debt and
equipment
financing $ 31,521 $ 31,521 $ 26,196 $ 26,196
Fixed Rate:
Bank debt and
equipment
financing 21,269 21,551 19,590 19,310
Subordinated notes 26,250 105,000 105,000 105,000
_____________________________________________
$ 79,040 $158,072 $150,786 $150,506
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 96,000 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 forward contract pricing existing during 1999, and
estimated market prices for products to be manufactured and sold
during the remainder of the contract, the accompanying
Consolidated Financial Statements included a loss provision of
approximately $8.4 million for anhydrous ammonia required to be
purchased during the remainder of the contract.
Foreign Currency Risk
During 1999, the Company sold its wholly owned subsidiary
located in Australia, for which the functional currency was the
local currency, the Australian dollar. Since the Australian
subsidiary accounts were converted into U.S. dollars upon
consolidation with the Company, declines in value of the
Australian dollar to the U.S. dollar resulted in translation loss
to the Company. As a result of the sale of the Australian
subsidiary, which was closed on August 2, 1999, the cumulative
foreign currency translation loss of approximately $1.1 million
has been included in the loss on disposal of the Australian
subsidiary at December 31, 1999.
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.
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, (ii) establishing a position as a market
leader, (iii) the amount of the loss provision for anhydrous
ammonia required to be purchased in that the cost to produce
Chemical Business products will improve, (iv) declines in the
price of anhydrous ammonia, (v) obtaining a final ruling as to
Russian dumping of anhydrous ammonia (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) ability to complete the sale of the
Automotive Products Business, (xiv) adequate cash flows to meet
its presently anticipated capital requirements, (xv) ability
of the EDNC Baytown Plant to generate approximately $35 million
in annual gross revenues, or (xvi) ability to make required
capital improvements, and (xvii) ability to carry out its plans for
2000. 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, or if
unable to become profitable, the inability to secure additional
liquidity in the form of additional equity or debt, (xi) the cost
for the purchase of anhydrous ammonia decreasing, (xii) changes
in competition, (xii) the loss of any significant customer, (xiv)
changes in 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, (x) Bayer's inability or
refusal to purchase all of the Company's production at the new
Baytown nitric acid plant; (xx) continuing decreases in the
selling price for the Chemical Business' nitrogen based end
products, (xxi) inability to negotiate amendments to the
Indenture (xxii) inability to complete the sale of the Automotive
Products Business, (xxiii) sale of the Optioned Company not completed
or, if completed, not consummated on terms that the Company has been
advised of, and (xxiv) 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.
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 29, 2000, in connection with the
Company's 2000 annual meeting of stockholders.
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, 1999
and 1998 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1999 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1999 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1999 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-52
Quarterly Financial Data (Unaudited) F-53 to F 54
(a)(2) Financial Statement Schedule
The Company has included the following schedule in this
report:
II - Valuation and Qualifying Accounts F-55
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.
(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.
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.
4.7. Form 10 3/4% Series B Senior Notes due 2007 which
the Company hereby incorporates by reference from Exhibit
4.3 to the ClimaChem Registration Statement, No. 333-44905.
4.8. Amended and Restated Loan and Security Agreement,
dated November 21, 1997, by and between BankAmerica Business
Credit, Inc., and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and
Slurry Explosive Corporation which the Company
hereby incorporates by reference from Exhibit 10.2 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.9. First Amendment to Amended and Restated Loan and
Security Agreement, dated March 12, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation which the Company
hereby incorporates by reference from Exhibit 10.53 to the
ClimaChem Form S-4 Registration Statement, No. 333-44905.
4.11. Third Amendment to Amended and Restated Loan and
Security Agreement, dated August 14, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998.
4.12. Fourth Amendment to Amended and Restated Loan and
Security Agreement, dated November 19, 1998, between
BankAmerica Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30,
1998.
4.13. Fifth Amendment to Amended and Restated Loan and
Security Agreement, dated April 8, 1999, between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.16 to the
Company's Form 10-K for the year ended December 31, 1998.
4.14. 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.
4.15. Loan and Security Agreement, dated May 7, 1999,
by and between Congress Financial Corporation and L&S
Automotive Products Co., International Bearings, Inc., L&S
Bearing Co., LSB Extrusion Co., Rotex Corporation, and
Tribonetics Corporation, which the Company hereby
incorporates by reference from Exhibit 4.1 to the Company's
Form 10-Q for the fiscal quarter ended March 31, 1999.
4.16. Termination and Mutual General Release Agreement,
dated as of May 10, 1999, by and among L&S Bearing Co., L&S
Automotive Products Co., LSB Extrusion Co., Rotex
Corporation, Tribonetics Corporation, International
Bearings, Inc., and Bank of America National Trust and
Savings Association (successor-in-interest to BankAmerica
Business Credit, Inc.), which the Company hereby
incorporates by reference from Exhibit 4.2 to the Company's
Form 10-Q for the fiscal quarter ended March 31, 1999.
4.17. Letter Agreement, dated April 30, 1999, by and
among Bank of America National Trust and Savings Association
(successor-in-trust to BankAmerica Business Credit, Inc.),
L&S Bearing Co., LSB Extrusion Co., Tribonetics Corporation,
Rotex Corporation, L&S Automotive Products Co.,
International Bearings, Inc., and Congress Financial
Corporation, which the Company hereby incorporates by
reference from Exhibit 4.3 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 1999.
4.18. Sixth Amendment, dated May 10, 1999, to Amended
and Restated Loan and Security Agreement between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1999.
4.19. 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.
4.20 First Amendment to Loan and Security Agreement,
dated November 15, 1999 by and between Congress Financial
Corporation and L&S Automotive Products Co., Industrial
Bearings, Inc., L&S Bearing Co., LSB Extrusion Co., Rotex
Corporation, and Tribonetics Corporation.
4.21 Second Amendment to Loan and Security Agreement,
dated March 7, 2000 by and between Congress Financial
Corporation and L&S Automotive Products Co., International
Bearings, Inc., L&S Bearing Co., LSB Extrusion Co., Rotex
Corporation, and Tribonetics Corporation.
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.
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.
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 AND 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 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 Landesbank, New York
Branch, as a Construction Lender and the Note Purchaser, and
Bank of America National Trust and Savings Association, as
Construction Loan Agent which the Company hereby
incorporates by reference from Exhibit 10.5 to the Company's
Form 10-Q for the fiscal quarter ended June 30, 1997.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS
IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED
SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.30. 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.
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. Seventh Amendment to Amended and Restated Loan
and Security Agreement, dated January 1, 2000, by and
between Bank of America, N.A. and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company, and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 10.2 to the
Company's Form 8-K dated December 30, 1999.
10.42. 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.
10.43 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. 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.
10.44 Anhydrous Ammonia Sales Agreement, dated January
12, 2000, to be effective October 1, 1999, between Koch
Nitrogen Company and El Dorado Chemical Company. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER
THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION HAS
BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.45 Eighth Amendment to Amended and Restated Loan and
Security Agreement, dated March 1, 2000, by and between Bank
of America, N.A. and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company, and
Slurry Explosive Corporation, which the Company hereby
incorporates by reference from Exhibit 10.2 to the Company's
Form 8-K dated March 1, 2000.
10.46 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.
10.47 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.
10.48 Asset Purchase and Sale Agreement, dated as of
March 6, 2000, between L&S Automotive Products Co. and The
Zeller Corporation, which the Company hereby incorporates by
reference from Exhibit 2.1 to the Company's Form 8K dated
March 9, 2000.
10.49 Loan Agreement dated December 23, 1999 between
ClimateCraft, Inc. and the City of Oklahoma City.
10.50 Covenant Waiver Letter, dated April 10, 2000 between
The CIT Group and DSN Corporation.
99.1 Non-Competition Agreement, dated as of March 6, 2000
between L&S Automotive Products Co. and Mark Zeller, which
the Company hereby incorporates by reference from Exhibit
99.1 to the Company's Form 8-K dated March 9, 2000.
21.1. Subsidiaries of the Company.
23.1. Consent of Independent Auditors.
27.1. Financial Data Schedule.
27.2. Restated Financial Data Schedule
27.3. Restated Financial Data Schedule
(b) Reports on Form 8-K. The Company filed the following
report on Form 8-K during the fourth quarter of 1999.
(i) Form 8-K, dated December 30, 1999 (date of event:
December 30, 1999). The item reported was Item 5, "Other
Events", discussing the payment of interest on the Company's
subsidiary, ClimaChem's $105 million of outstanding 10 3/4%
Senior Notes due 2007 and related failure to meet certain
adjusted tangible net worth and debt ratio requirements under the
Company's revolving credit facility and obtaining a forbearance
agreement with the Company's Lender.
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 14 day of April, 2000.
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 14, 2000 By:
/s/ Jack E. Golsen
Jack E. Golsen, Director
Dated: April 14, 2000 By:
/s/ Tony M. Shelby
Tony M. Shelby, Director
Dated: April 14, 2000 By:
/s/ David R. Goss
David R. Goss, Director
Dated: April 14, 2000 By:
/s/ Barry H. Golsen
Barry H. Golsen, Director
Dated: April 14, 2000 By:
/s/ Robert C. Brown
Robert C. Brown, Director
Dated: April 14, 2000 By:
/s/ Bernard G. Ille
Bernard G. Ille, Director
Dated: April 14, 2000 By:
/s/ Jerome D. Shaffer
Jerome D. Shaffer, Director
Dated: April 14, 2000 By:
/s/ Raymond B. Ackerman
Raymond B. Ackerman, Director
Dated: April 14, 2000 By:
/s/ Horace Rhodes
Horace Rhodes, Director.
Dated: April 14, 2000 By:
/s/ Gerald J. Gagner
Gerald J. Gagner, Director
Dated: April 14, 2000 By:
/s/ Donald W. Munson
Donald W. Munson, Director
Dated: April 14, 2000 By:
/s/ Charles A. Burtch
Charles A. Burtch, Director