Document/Exhibit Description Pages Size
1: 10-K Annual Report 66 486K
2: EX-10.50 Material Contract 95 324K
3: EX-10.51 Material Contract 2 10K
4: EX-10.52 Material Contract 9 28K
5: EX-10.53 Material Contract 7 20K
6: EX-10.54 Material Contract 23 75K
7: EX-10.55 Material Contract 5 15K
8: EX-10.56 Material Contract 5 15K
9: EX-10.57 Material Contract 4 13K
10: EX-10.58 Material Contract 5 13K
11: EX-10.59 Material Contract 5 13K
12: EX-12 Statement re: Computation of Ratios 1 9K
13: EX-21 Subsidiaries of the Registrant 1 7K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
OR
[ ] TRANSITION SECURITIES ON REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 33-79532
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LAROCHE INDUSTRIES INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3341472
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1100 JOHNSON FERRY ROAD
ATLANTA, GEORGIA 30342
(Address of principal executive offices)
(404) 851-0300
(Registrant's telephone number, including area code)
---------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes || No |_| (Not applicable to Registrant.)
Aggregate market value of voting stock held by non-affiliates of the
Registrant: None. (See Part II, Item 5.)
Number of shares of Common Stock outstanding as of February 28, 2001 was
428,935.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CERTAIN STATEMENTS IN THE "BUSINESS," "LEGAL PROCEEDINGS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K REGARDING, AMONG OTHER THINGS, (i)
COMPETITION IN THE MARKETS SERVED BY THE COMPANY, INCLUDING THE COMPETITIVE
FACTORS EXPECTED TO INFLUENCE SUCH MARKETS, RAW MATERIAL COSTS AND THE COMPANY'S
COMPETITIVE POSITIONING, (ii) THE COMPANY'S PLANS FOR FUNDING ITS FUTURE
OPERATIONS AND EMERGENCE FROM CHAPTER 11, AND (iii) THE EFFECT OF CERTAIN
ENVIRONMENTAL REGULATIONS ON THE COMPANY'S OPERATIONS AND THE COSTS OF
COMPLIANCE WITH SUCH REGULATIONS OR REMEDIATION OF EXISTING ENVIRONMENTAL
PROBLEMS ARE "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. AS FORWARD-LOOKING STATEMENTS, THEY ARE
NECESSARILY BASED UPON VARIOUS UNCERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO,
MANAGEMENT'S CURRENT KNOWLEDGE AND PERCEPTION OF THE COMPETITIVE CONDITIONS IN
THE MARKETS SERVED BY THE COMPANY, PROJECTIONS OF THE COMPANY'S FUTURE
PRODUCTION CAPACITY REQUIREMENTS AND ESTIMATES OF ENVIRONMENTAL COMPLIANCE AND
REMEDIATION COSTS. BECAUSE OF SUCH UNCERTAINTIES, THE ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
PART I
ITEM 1. BUSINESS
CHAPTER 11 FILING
On May 3, 2000 (the "Petition Date"), LaRoche Industries Inc. (the
"Company") and LaRoche Fortier Inc. ("Fortier") (collectively, the "Debtors")
filed voluntary petitions for protection under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States District Court
for the District of Delaware (the "Bankruptcy Court"). The bankruptcy cases are
being jointly administered under case number 00-1859(PJW) ("Bankruptcy Case"),
having been initially assigned case nos. 00-1859 (JJF) and 00-1860(JJF),
respectively. The Debtors have continued to manage and operate their assets
and businesses as debtors-in-possession subject to the supervision and orders
of the Bankruptcy Court. Accordingly, the existing directors and officers
continue to operate and manage the affairs of the Debtors subject to court
supervision. The Chapter 11 filing involves the domestic assets of the
Debtors only. The Debtors' European subsidiaries and operations are not
subject to the Chapter 11 filing, and are not subject to Bankruptcy Court
supervision.
The Debtors expect to reorganize under Chapter 11. On February 7, 2001, the
Debtors filed a joint plan of reorganization (the "Plan") that outlines, among
other things, the disposition of pre-petition claims against the bankruptcy
estate and the management and financial structure of the Company after emergence
from Chapter 11. In connection with the Plan, the Debtors also filed a
Disclosure Statement, which includes a liquidation analysis, feasibility study,
and other information about the Company and its Plan. A hearing is set for March
27, 2001 to determine the adequacy of the Plan and related disclosure statement,
after which, if the Bankruptcy Court issues a favorable ruling, the Plan and
disclosure statement will be submitted to interested parties for a vote. After
the distribution of the Plan, the Company will have 60 days (the "Exclusive
Period") to solicit enough affirmative votes to confirm the Plan. After
expiration of the Exclusive Period, parties in interest have the right to
propose reorganization plans absent an extension of the Exclusive Period.
Although management expects that the Plan will ultimately be confirmed by the
Bankruptcy Court, there can be no assurance of such confirmation.
At this time, it is not possible to predict the outcome of the Debtors'
Chapter 11 cases or their effect on the Debtors' business. See "ITEM 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition", footnote 1 to the audited consolidated financial statements, and the
Report of Independent Auditors included on page F-1 all of which indicate
substantial doubt about LaRoche Industries Inc.'s ability to continue as a going
concern.
CHAPTER 11 FINANCING AND OTHER MATTERS
On May 4, 2000, the Debtors received approval from the Bankruptcy Court to,
among other things, continue paying salaries, wages and benefits to all
employees, insurance and debts due to critical trade creditors and independent
contractors. In addition, on May 31, 2000 the Bankruptcy Court granted final
approval of a $25,000,000 debtor-in-possession financing facility (the "DIP
Loan"), which was provided by a syndicate of lenders, including the Chase
Manhattan Bank as agent bank (the "DIP Lenders"). The DIP Loan initially matured
on October 31, 2001. As discussed more fully under the heading "Recent
Developments and Subsequent Events" in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations", subsequent to the
Chapter 11 filing, the Company could not comply with certain terms of the DIP
Loan. A series of modifications have been made to the DIP Loan
1
in order to continue to provide the Company with adequate cash to fund its
operations during the Chapter 11 cases.
EVENTS LEADING UP TO THE CHAPTER 11 FILING AND RESTRUCTURING ACTIVITIES
Prior to filing the Bankruptcy Case, the Company had undergone almost two
years of highly depressed market prices for its domestic nitrogen and
chlor-alkali products, and as a consequence, insufficient cash was generated
from operations to fund its debt service and capital expenditures. Further an
explosion in July 1999 at an adjacent facility temporarily shut down operations
at the Company's Gramercy, Louisiana facility, and resulted in lost income and
damages in excess of $16 million. Over this same period, the Company was unable
on numerous occasions to comply with various financial covenants under its
senior secured credit facility and required waivers and amendments in order to
have continued access to this facility. In May 1999, the maximum amount
available for borrowing under this facility was reduced from $120 million to $90
million. In addition, the Company's continuing negative financial performance
led many of the Company's key suppliers to reduce trade credit available to the
Company. All of these factors severely reduced the Company's liquidity, and
ultimately the Company was compelled to file for protection under Chapter 11.
During the year immediately preceding the Petition Date, as well as
subsequent to that date, management of the Company and its financial and
legal advisors have conducted an extensive analysis of business operations
with the objective of making necessary changes to improve operating
performance, reduce costs, and improve the Company's capital structure.
Throughout this period, management has explored numerous strategies to
improve its liquidity and capital structure including disposing of distinct
business units and raising additional equity. Management, together with its
bankruptcy advisors, is continuing these efforts, with the ultimate goal of
emerging from Chapter 11 with a financially sound and economically viable
company.
COMPANY OVERVIEW
The Company is an international diversified producer and distributor of
inorganic and organic chemicals. During its fiscal year ended February 29, 2000
it operated seven production facilities, twenty-three customer service
distribution centers and two warehouses throughout the United States and in
Western Europe. As discussed in more detail under the headings "Recent
Developments and Subsequent Events" and "Discontinued Operations" in Item 7.
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations", the Company made decisions during 2000 to exit a number of these
businesses as part of its effort to restructure under Chapter 11.
The Company was formed in a 1986 management buyout of the nitrogen, mixed
fertilizers and retail business operations of United States Steel Corporation
("USX"), followed by a 1988 acquisition of certain chemical production
operations of Kaiser Aluminum and Chemical Corporation ("Kaiser"). In 1997, the
Company expanded into Western Europe by purchasing a 50% joint venture interest
in a Rhodia chlor-alkali operation in Pont-de-Claix, France ("ChlorAlp") and
acquiring a chlor-alkali plant near Frankfurt, Germany (the "Frankfurt
facility") from Hoechst Celanese. In June 1999, the Company sold its Alumina
chemicals business segment ("Aluminas") for approximately $39.5 million plus
working capital. Also in June 1999, the Company, through its wholly owned
subsidiary, LII Europe, purchased the remaining 50% interest in ChlorAlp from
Rhodia for approximately $27 million.
Prior to the asset dispositions referred to above, the Company's products
were divided into three business segments: Nitrogen Products ("Nitrogen"),
Electrochemical Products -- North America ("Electrochemicals -- N.A.") and
Electrochemical Products -- Europe ("Electrochemicals -- Europe").
The Nitrogen segment encompassed the production and distribution of three
primary nitrogen products: high-density ammonium nitrate ("HDAN"), a
nitrogen-based fertilizer essential for agricultural crops; low-density ammonium
nitrate ("LDAN"), a nitrogen-based blasting agent for industrial explosives; and
anhydrous and aqua ammonia for various industrial applications. Ammonia is the
common ingredient of these products and is produced from natural gas. On October
31, 2000, the Company disposed of the HDAN and LDAN production facilities for
aggregate proceeds of $39 million, net of approximately $4 million of purchase
proceeds withheld by the purchaser to cover certain contingencies as defined in
the agreement. As a result of this sale, the Company's Nitrogen business is
presently engaged only in the distribution of industrial ammonia and related
services.
In its Electrochemicals -- North America segment, the Company is a merchant
producer and marketer of chlor-alkali chemicals, including chlorine and caustic
soda. These chemical products are fundamental building blocks used in production
by the construction, pulp and paper, water treatment, detergent, pesticide and
pharmaceutical industries. In addition, until August 2000, the Company
manufactured fluorocarbon products used as blowing agents in production of
insulating foam materials. The Company is currently in negotiations with a third
party for the sale of substantially all of the assets comprising the
Electrochemicals -- N.A. business segment.
2
The Company hopes to complete this transaction before May 2001.
The Electrochemicals -- Europe segment produces chlorine, caustic soda and
chlor-alkali derivatives at two manufacturing plants located in Germany and
France. The Company markets these products throughout Western Europe.
INDUSTRY OVERVIEW
NITROGEN PRODUCTS
Anhydrous and aqua ammonia have a variety of industrial applications,
including the removal of nitrogen oxide pollutant gases from boiler and
incinerator emissions, refrigeration, fermentation, chemical processing, water
treatment, heat treating and waste acid neutralization. In response to
amendments (the "Clean Air Act Amendments") to the Federal Clean Air Act (the
"Clean Air Act"), which severely restrict the discharge of certain pollutants
into the environment, domestic demand for ammonia used in the treatment of
sulfur and nitrogen oxide gases has grown rapidly. The Clean Air Act Amendments
call for additional restrictions in the next several years. The Company believes
that it is a leading merchant distributor in the United States of premium
grade anhydrous and aqua ammonia used for water treatment, pollution control,
refrigeration, metal treating, and for use in other chemical production.
ELECTROCHEMICAL PRODUCTS
CHLOR-ALKALI
Chlorine and caustic soda are produced as co-products of salt brine
electrolysis in a fixed weight ratio of 1 to 1.12. In salt brine electrolysis,
an electric current is passed through a salt crystal dissolved in water between
immersed conductors, causing the brine solution to separate into chlorine,
caustic soda and hydrogen by-products.
Chlorine is a critical intermediate used in the production of several
thousand derivative commercial chemicals, including polyvinyl chloride ("PVC"),
polyurethane foams, titanium dioxide and pesticides. The primary
direct-application uses of chlorine are in municipal water treatment, in the
manufacture of household and industrial bleach and in the pulp and paper
industry. Caustic soda is a basic commodity chemical with even more diverse
end-market applications than chlorine. It is sold to manufacturers of aluminum,
alumina chemicals, soaps, detergents and petrochemicals, processors of pulp and
paper and for water treatment.
Historically, domestic chlorine production has fluctuated over the economic
cycles, but has experienced a long-term average growth rate of approximately
1.2% per annum during the period from 1973 to 2000. Chlorine is difficult and
dangerous to store in its elemental form, whereas caustic soda is comparatively
safe and stable and readily capable of being stored in large quantities. As a
result, demand for chlorine is the key driver for overall production volume of
chlorine and caustic soda. Generally, when demand for chlorine is high,
production levels and prices increase. This tends to be offset by over-supply of
caustic soda and weak caustic soda pricing. On the contrary, when chlorine
demand is weak, production levels and pricing decrease, causing caustic soda to
be in a tight supply position with attendant rising prices. The volatility in
the caustic soda market tends to be exacerbated by end-users building
inventories ahead of forecast shortages and price increases, or depleting
inventories ahead of forecast over-supply and price weakness. As a result, an
inverse, although not perfectly correlated, price relationship generally exists
between chlorine and caustic soda. The price of one ton of chlorine plus the
price of the accompanying 1.12 tons of caustic soda, known as an electrochemical
unit ("ECU"), therefore tends to be somewhat less volatile than the price of
either commodity individually. However, from June of 1998 through August of
1999, the traditional inverse price relationship between chlorine and caustic
soda shifted, and both products suffered severe price downturns at the same
time.
The Company believes that nearly one-third of the world's chlor-alkali
production capacity is located in North America, with approximately 70% of it
situated along the United States Gulf Coast. Chlor-alkali producers along the
United States Gulf Coast are among the lowest-cost industry producers, due to
excellent feedstock logistics and close proximity to downstream producers of
products that consume chlorine and caustic soda. According to industry
consultants, the three largest chlor-alkali producers in North America are Dow
Chemical Co., Occidental Chemical Corporation and PPG Industries Inc. with
capacity shares of approximately 25%, 21%, and 13%, respectively. Most of the
major United States Gulf Coast producers are fully downstream integrated into
products that involve the processing of chlorine. As a result, there are
relatively few merchant producers of chlorine. According to a market study
commissioned by the Company, of the approximate forty-five chlor-alkali
producers in Western Europe, the three biggest producers are Solvay S.A., Dow
Chemical Company and Imperial Chemical Industries PLC with 15%, 12% and 9%
market share, respectively. The Company believes its European operations
comprise approximately 4% of the Western European chlor-alkali market.
3
Technology used in the manufacture of chlorine and caustic soda is based on
either diaphragm, membrane or mercury cells. Of these, the diaphragm cell
process is predominant in the United States with the mercury cell process used
primarily in Europe. The Company's Gramercy, Louisiana and Pont-de-Claix, France
chlor-alkali plants utilize diaphragm cell technology, while its Frankfurt,
Germany plant utilizes mercury cell technology.
The profitability of the industry as a whole and relative profitability
between producers is significantly affected by energy efficiency and the cost of
energy, since energy represents by far the largest cost component in the
production of chlorine and caustic soda (the Company believes that energy
accounts for an average of 37% of manufacturing costs for a diaphragm cell based
producer). Historically, market fluctuations in natural gas prices have had a
significant impact on industry profitability. Other key components in relative
profitability between producers are brine costs and logistics and transport
costs, largely driven by proximity to customers.
BUSINESS PRODUCT SEGMENTS
NITROGEN PRODUCTS
After the divestiture of the Company's HDAN and LDAN production facilities,
its Nitrogen Products business segment consists of the distribution of
industrial anhydrous and aqua ammonia. The Company believes that it is currently
the largest merchant distributor in the United States of premium grade anhydrous
and aqua ammonia used for water treatment pollution control, refrigeration, and
for the manufacture of other chemical products.
The Company supplies the merchant market for anhydrous and aqua ammonia
through twenty-three customer service centers located throughout the country and
sells products and services nationally. Approximately 50% of the Company's
industrial ammonia sales are for chemical processing applications and
environmental processes, for which demand has been increasing. The Company is
experiencing an increasing demand for aqua ammonia as a result of new
environmental regulations that restrict sulfur and nitrogen oxide emissions. The
Company converts anhydrous ammonia into aqua ammonia at ten distribution
centers.
The Company's competitors include both ammonia manufacturers and merchant
distributors. The ammonia manufacturers serve primarily the large bulk commodity
users and the merchant distributors serve the smaller volume specialty users of
anhydrous and aqua ammonia, who are the focus of the Company's marketing
efforts. The Company has only one national competitor, Tanner Industries. Other
competitors in the industrial ammonia merchant market generally distribute only
in local market areas.
The Company has its own fleet of trucks and trailers for delivering these
products to customers' locations. Sales are made in cylinders, less than truck
load quantities, full truck load and railcar loads. The Company also sells
equipment, replacement parts, safety seminars and videos, ammonia clean-out and
other services and equipment rentals to support the primary sale of anhydrous
and aqua ammonia.
ELECTROCHEMICALS-- NORTH AMERICA
The Company's Electrochemicals -- N.A. products consist of chlorine and
caustic soda (together, chlor-alkali) and fluorocarbons that are produced at its
Gramercy facility. Chlorine is sold for a variety of uses, including the
manufacture of PVC, urethane foams, household and industrial bleach, water
treatment, titanium dioxide and various other end-uses. Caustic soda is sold to
manufacturers of aluminum, organic and inorganic chemicals, detergents and
petrochemicals, and to pulp and paper processors and water treatment facilities.
The Gramercy facility has chlorine production capacity of 200,000 tons p.a.
and caustic soda production capacity of 224,000 tons p.a. Domestically, the
Company primarily competes in the Gulf Coast chlor-alkali market. Industry
consultants estimate approximately 70% of Gulf Coast chlorine capacity is used
by integrated producers for captive consumption in the production of downstream
products. As a result, despite accounting for only approximately 2.0% of overall
Gulf Coast chlorine capacity, the Company has developed a niche position in the
Gulf Coast merchant chlorine market. The Company's production capacity
represents an approximate 7.5% share of that 2.7 million ton p.a. market. The
Company has achieved this position by focusing on chlorine sales to downstream
producers of PVC, rigid urethane foam and titanium dioxide that prefer not to
deal with chlorine suppliers that also produce competing downstream products.
The Company believes that it has developed strong customer relationships by
capitalizing upon its secure brine supply, low-cost on-site electric power and
close customer proximity to consistently deliver a competitively priced product.
Over 50% of the Company's chlorine and caustic soda sales are currently made to
customers located within a 100-mile radius of the Gramercy facility.
4
The Company employs the diaphragm cell technology at its Gramercy
manufacturing facility. The manufacturing processes consist of the electrolysis
of sodium chloride brine (salt water), which produces free hydrogen, chlorine
and caustic soda solution. For safety reasons, only small quantities of chlorine
are stored, and production tends to be limited to the amount of chlorine the
plant can sell in a relatively short period of time. Although salt is the basic
raw material used in the production of chlorine and caustic soda, electricity is
the largest production cost component.
At the Gramercy fluorocarbons facility, the Company has replaced its CFC
foam blowing agent (R-11) product line with the next generation foam blowing
agent, HCFC-141b, to comply with the federal government's mandated phaseout of
CFC. Likewise, HCFC-141b can be manufactured and sold through December 31, 2002,
at which time its manufacture and sale must be discontinued. No replacement
product is planned. The Company has reduced its reliance on fluorocarbon
products in general, with expanded offerings and more intensive development of
its products and facilities for its other markets. In the fiscal year ended
February 29, 2000, the Company recorded an impairment charge in recognition of
lower future profit expectations for its fluorocarbon business. See Item 7. "
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion.
As previously discussed, the Company is currently in negotiations to sell
the Gramercy facility to a third party. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion.
RAW MATERIALS. The primary raw material used in the production of chlorine
and caustic soda is salt. The Company has a long-term contract with Texaco Inc.,
which gives the Company the right to extract salt from a salt dome located 15
miles from the Gramercy facility. The contract expires on May 3, 2007, subject
to the Company's option to renew the contract until May 3, 2032. The Company
operates a pipeline through which the brine is transported from the Texaco salt
dome to the Gramercy facility.
Natural gas is the primary cost component in generating electricity for
chlorine and caustic soda production and is sold on the spot market, as well as
under long-term contracts. The Company purchases its gas requirements under
long-term supply agreements at market prices. The Company also periodically buys
natural gas contracts for future delivery at fixed prices and enters into
natural gas hedging arrangements with financial counterparties to hedge its
natural gas price exposure. However, as a result of the Chapter 11 filing, it
has been increasingly difficult for the Company to enter into these types of
hedging arrangements. Fluctuations in natural gas prices may affect the
operating results of the Electrochemicals -- N.A. business. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 7A. "Qualitative and Quantitative Disclosures About Market
Risk" for discussion of recent developments in natural gas pricing.
Hydrogen fluoride ("HF") and chlorinated organic products are the primary
raw materials needed for the production of fluorocarbons. HF and the required
chlorinated organic products are considered by management to be readily
available for purchase domestically.
ELECTRICAL POWER. At the Gramercy facility, Kaiser operates its alumina
plants adjacent to the Company's facility that produces electrochemical
products. Kaiser and the Company share a powerhouse complex, from which the
Company obtains electricity and steam for use in its domestic electrochemical
production, pursuant to certain lease and operating agreements that remain in
effect (if the Company exercises renewal options) until 2008. Kaiser owns and
operates the powerhouse complex that is located on Kaiser property. The costs of
operating the powerhouse and the utilization of electricity and steam generated
therefrom are shared in accordance with these agreements. During fiscal year
1996, the Company approved and began implementing certain capital improvements
at its powerhouse complex designed to reduce the electrical costs. These
improvements, which included the installation of a new back-up rectifier
assembly, refurbishment of generator turbine units and upgrading of the control
systems, were completed in early 1999.
On July 5, 1999, an explosion at the adjacent Kaiser facility caused
extensive damage, including the Kaiser powerhouse, thereby causing the shut down
of the Company's Gramercy chlor-alkali plant for five months. Extensive repairs
were conducted through the fall of 1999. The plant was able to resume
fluorocarbon production by mid-August 1999 and resumed full production of
chlor-alkali products by mid-December 1999. However, as a result of the
continued shutdown of the Kaiser facilities, power costs have increased.
Management believes that most of the increased costs will be covered by its
business interruption insurance. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion.
Kaiser and the Company have agreements relating to jointly operated or
administered environmental compliance matters at their Gramercy facilities,
other services such as water, sewage, dock and rail, chemical, telephone and
emergency response services, and other matters.
5
ELECTROCHEMICAL PRODUCTS -- EUROPE
The Electrochemicals -- Europe product base is comprised of chlorine,
chlorine derivative products and caustic soda produced at its Frankfurt and
ChlorAlp manufacturing facilities. The product markets for Electrochemical
Products -- Europe are similar to the chlorine and caustic markets for
Electrochemicals -- N.A. markets.
The Frankfurt facility is situated in an industrial park and has permitted
chlorine production capacity of 160,000 metric tons p.a. and permitted caustic
soda production capacity of 181,000 metric tons p.a. The Frankfurt operation
also includes a chlorinated methane manufacturing facility that produces methyl
chloride, methylene chloride/chloroform, sodium hypochloride, calcium chloride
and hydrochloric acid. Methyl chloride is used in the production of silicones
and methyl cellulosis. Methylene chloride acts as a solvent for synthesis of
pharmaceuticals, agrichemicals and the photo and film industry and as an
extraction medium in the food industry. Chloroform is used as feedstock in the
production of fluoropolymers and R-22 (an HCFC). This facility has a permitted
methyl chloride production capacity of 60,000 metric tons p.a. and permitted
methylene chloride/chloroform production capacity of 70,000 metric tons p.a.
All of the Frankfurt facility's chlorine output is consumed by the
facility's methane chlorination plant and other on-site chemical production
companies. The caustic soda and hydrochloric acid produced by the Frankfurt
facility are sold into an extensive customer base, located primarily within
Germany, and a wide variety of markets. The facility is the sole source of
caustic soda microprills that are primarily distributed throughout Western
Europe. The Frankfurt facility sells methylene chloride worldwide to numerous
customers for many different applications, while approximately 80% of the
chloroform output is sold to an on-site chemical company.
ChlorAlp has chlorine production capacity of 240,000 metric tons p.a.
and caustic soda production capacity of 269,000 metric tons p.a. Chlorine
produced by ChlorAlp is sold in both liquid and gaseous forms. Approximately
95,000 metric tons per year of chlorine is sold in the gaseous form and is
distributed to customers by pipeline. The balance of chlorine production is
sold in liquid form and is distributed in rail tank cars to customers
throughout France, Italy, Switzerland, Germany and the Benelux countries.
Caustic soda is distributed throughout France with deliveries by pipeline,
rail cars and tank trucks.
The Company employs the diaphragm cell technology at its ChlorAlp facility
and mercury cell technology at its Frankfurt facility. While the manufacturing
process is substantially similar to that described for Electrochemicals -- N.A.,
statutory bans on diaphragms containing asbestos in France by 2002 have spurred
the ChlorAlp facility to develop an asbestos free diaphragm technology ("new
technology") over the last five years. The new technology has been employed in
approximately 15% of the processes and will totally replace the restricted
process technology before the deadline. In addition to removing asbestos from
the process, the Company expects to benefit from some electrical power savings
from the new technology.
RAW MATERIALS. The primary raw material used in the production of chlorine
and caustic soda is salt. The Frankfurt facility obtains salt via river barge.
ChlorAlp receives salt via a pipeline from a Company- owned brine mine in
Hauterives, France.
ELECTRICAL POWER. The Frankfurt facility receives electric power from a
nearby plant. ChlorAlp receives its electric power from a powerhouse facility in
which it has a majority ownership interest and maintains management oversight
(GIE CEVco or "CEVco"). The Company feels this arrangement provides a strategic
advantage at the site.
RESEARCH AND DEVELOPMENT
The Company operated a research and development center at its Alumina
facility in Baton Rouge since 1989 to develop and test new products and
production methods. This facility was included in the sale of the Company's
Alumina Chemicals business segment in June 1999. The Company had research and
development expenditures of approximately $1.8 million and $4.0 million in
fiscal years 1999 and 1998, respectively. As virtually all of the research and
development projects were related to the Alumina Chemicals business segment and
HCFC replacement (which ended in fiscal 1998), the Company did not have research
and development related expenditures in fiscal year 2000.
6
PATENTS
The Company owns, has applied for, or has an interest in approximately 30
patents and is licensed under other patents covering certain of its products and
processes. The Company generally applies for patents whenever it develops new
products or processes considered being commercially viable and, in appropriate
circumstances, seeks licenses when others develop such products or processes.
Although in the aggregate the rights under such patents are important to the
Company's operations, no significant segment of the Company's business or its
business as a whole is dependent on any particular patent or license.
GOVERNMENTAL REGULATION
The Company is subject to various U.S. Federal, state and local
environmental laws and regulations, as well as various environmental laws and
regulations in Europe, governing the use, handling, transportation, discharge,
storage, and disposal of hazardous materials because the Company uses hazardous
substances and generates hazardous waste in the ordinary course of its
manufacturing processes. Environmental laws and regulations have evolved rapidly
over the last three decades typically becoming more restrictive of activities
that may impact the environment, such as emissions of pollutants to air and
water, generation and disposal of wastes and use and handling of chemical
substances. Consequently, the Company is required to obtain various permits for
the operation of its plants and related facilities, and these permits are
subject to revocation, modification and renewal. Governmental authorities
enforce compliance with these regulations and permits, impose excise taxes on
certain of the Company's products and implement environmental plans. Violators
of these regulations are subject to civil and criminal penalties, including
civil fines, injunctions or both. Accordingly, certain governmental regulation
compliance costs and potential liabilities are inherent in the Company's
operations and products. The Company cannot at this time assess with certainty
the degree of impact of future emissions standards and enforcement practices
upon its operations or capital expenditure requirements. The Company's
operations also are governed by laws and regulations relating to workplace
safety and worker health, principally the Occupational Safety and Health Act and
regulations thereunder which, among other things, regulate the use of hazardous
chemicals in the workplace. The Company uses asbestos in the manufacture of its
electrochemical products, and some of its operating facilities contain
structural asbestos that the Company believes is properly contained.
The Company is subject to the Clean Air Act and comparable state statutes
regulating air emissions. The Clean Air Act contains provisions that may result
in the imposition of certain pollution control requirements with respect to air
emissions from the Company's operations. Depending upon requirements that may be
imposed by state and local regulatory authorities in the implementation of those
provisions and related regulations, the Company may be required to incur capital
expenditures for air pollution control equipment in connection with maintaining
or obtaining operating permits and approvals. Until such time as the
requirements of the new Clean Air Act Amendments are fully implemented, the
Company is unable to estimate the effect on earnings or operations or the amount
and timing of such required capital expenditures. At present, the Company does
not believe that such regulations will have a material effect on its financial
condition or results of operations.
The Clean Air Act Amendments provided for the phase-out of the production
of CFCs (R-11 and R-12) as of January 1, 1996, followed by the phase-out of the
production of the HCFC-141b by December 31, 2002. The Clean Air Act also
regulates sulfur and nitrogen oxide removal from emissions and provides certain
incentives for the production of reformulated gasolines. These regulations may
increase the demand for certain of the Company's ammonia products.
Chlorine use has been affected and may be affected further by certain
environmental regulations, both final and pending, particularly those relating
to the discharge of dioxins by pulp and paper producers. When chlorine is used
in the pulp bleaching process, dioxins are a by-product. From time to time
legislation is introduced proposing the elimination of discharges of chlorine
compounds into navigable waters and requiring zero discharge limits for certain
toxic substances, including certain chlorinated compounds.
The Company voluntarily strives to adhere to the Guiding Principles of the
Responsible Care(R) initiative of the Chemical Manufacturers Association and its
six Codes of Management Practices. The Company believes that these codes
typically are more stringent than the legal requirements in the areas of process
safety, employee safety, pollution prevention and chemical distribution. The
Company has achieved "Practice in Place" status under this program.
EMPLOYEES
As of February 28, 2001, the Company had approximately 700 full-time
employees in continuing operations, approximately 25
7
who were represented by domestic labor unions under various collective
bargaining agreements, and approximately 360 represented by European labor
unions. Since 1986, the Company has had three domestic labor disputes, none
of which caused any material production delays. The Company considers its
relations with its existing union and non-union employees to be generally
good.
ITEM 2. PROPERTIES
As of February 28, 2001 the Company owned electrochemical manufacturing
facilities in or near Gramercy, Louisiana; Frankfurt, Germany; and
Pont-de-Claix, France. As more fully described under the heading "Discontinued
Operations" in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the Gramercy, Louisiana facility is being
sold under an asset purchase agreement, and is no longer a part of continuing
operations.
The Company believes that its primary facilities are in suitable condition
and adequate for its current operations. The following table presents certain
information relating to the principal facilities owned by the Company.
[Enlarge/Download Table]
LOCATION DESCRIPTION AND BUSINESS LINE STATUS
-------- ----------------------------- ------
Gramercy.......... Electrochemical products: hydrochlorofluorocarbons, Owned
caustic soda, and chlorine facility.
Frankfurt......... Electrochemical products: chlorine, caustic soda and Equipment -- Owned
chlorinated methane compounds facility. Building & Land -- Leased
Chlor-Alp......... Electrochemical products: chlorine and caustic soda Building & Equipment - Owned
facility, chlorine vaporization and distribution Land - Leased
operation, bleach production facility, and brine
extraction operation
In addition, the Company owns or leases twenty-three customer service
centers in nineteen states, where it stores and distributes anhydrous ammonia.
It produces and distributes aqua ammonia products at ten of these centers. The
Company also sells related storage systems and equipment and provides certain
customer services at those centers.
Substantially all of the Company's domestic properties and assets secure
its senior credit facilities, including the DIP Facility.
8
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company and its subsidiaries have been named as defendants in a number
of legal actions arising from normal business activities. Although the final
outcome of any legal action or dispute is subject to many variables and cannot
be predicted with any degree of certainty, management believes, based upon the
information currently available, that, except as otherwise described in this
section, such other legal actions are likely to be resolved without a material
adverse effect upon the financial condition and results of operations of the
Company.
CHAPTER 11 PROCEEDINGS
On May 3, 2000 (the "Petition Date"), LaRoche Industries Inc. and LaRoche
Fortier Inc. (collectively, the "Debtors") filed voluntary petitions for
protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States District Court for the District of
Delaware (the "Bankruptcy Court"). The bankruptcy cases are being jointly
administered under case number 00-1859(PJW), having been initially assigned
case nos. 00-1859 (JJF) and 00-1860(JJF), respectively. The Debtors have
continued to manage and operate their assets and businesses as
debtors-in-possession pending the confirmation of a reorganization plan and
subject to the supervision and orders of the Bankruptcy Court.
On May 4, 2000, the Debtors received approval from the Bankruptcy Court to,
among other things, continue paying salaries, wages and benefits to all
employees, insurance and debts due to critical trade creditors and independent
contractors. In addition, on May 31, 2000, the Bankruptcy Court granted final
approval of a $25,000,000 debtor-in-possession financing facility (the "DIP
Facility"), which was provided by a syndicate of lenders, including the Chase
Manhattan Bank as agent bank (the "DIP Lenders"). The DIP Facility initially
matured on October 31, 2001, but was subsequently modified as a result of the
continued deterioration of the Company's financial condition. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Recent Developments and Subsequent Events" for
further discussion.
Under section 362 of the Bankruptcy Code, during a Chapter 11 case,
creditors and other parties in interest may not without Bankruptcy Court
approval: (i) commence or continue judicial, administrative or other cases
against the Debtors that were or could have been commenced prior to commencement
of the Chapter 11 case, or recover a claim that arose prior to commencement of
the case; (ii) enforce any pre-petition judgments against the Debtors; (iii)
take any action to obtain possession of or exercise control over property of the
Debtors or their estates; (iv) create, perfect or enforce any lien against the
property of the Debtors; (v) collect, assess or recover claims against the
Debtors that arose before the commencement of the case; or (vi) set off any debt
owing to the Debtors that arose prior to the commencement of the case against a
claim of such creditor or party-in-interest against the Debtors that arose
before the commencement of the case.
Although the Debtors are authorized to operate their businesses and manage
their properties as debtors-in-possession, they may not engage in transactions
outside of the ordinary course of business without complying with applicable
notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy
Court approval. An official committee of unsecured creditors has been formed by
the United States Trustee. This committee and various other parties-in-interest,
including creditors holding claims, such as the pre-petition bank group and
secured bondholders, have the right to appear and be heard on applications of
the Debtors relating to certain business transactions. The Company is required
to pay certain expenses of the committee, including legal and accounting fees,
to the extent allowed by the Bankruptcy Court. In addition, the Company has an
agreement, approved by the Bankruptcy Court, with the pre-petition bank groups,
to make quarterly adequate protection payments of interest due on the
pre-petition secured debt aggregating approximately $3.5 to $4.0 million.
As debtors-in-possession, the Debtors have the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject executory,
pre-petition contracts and unexpired leases. In this context, "assumption"
requires the Debtors to perform their obligations and cure all existing defaults
under the assumed contract or lease and "rejection" means that the Debtors are
relieved from their obligations to perform further under the rejected contract
or lease, but are subject to a claim for damages for the breach thereof subject
to certain limitations contained in the Bankruptcy Code. Any damages resulting
from rejection are treated as general unsecured claims in the reorganization
cases.
Pre-petition claims that were contingent or unliquidated at the
commencement of the Chapter 11 cases are generally allowable against the Debtors
in amounts to be fixed by the Bankruptcy Court or otherwise agreed upon. These
claims, including, without
9
limitation, those that arise in connection with the rejection of executory
contracts and leases, are expected to be substantial. The Debtors have
established estimated accruals approximating what the Debtors believe will be
their liability under these claims. The ultimate amount of and settlement
terms for such liabilities are subject to an approved plan of reorganization
and, accordingly, are not presently determinable.
Inherent in a successful plan of reorganization is a capital structure
that permits the Debtors to generate sufficient cash flow after reorganization
to meet restructured obligations and fund the current obligations of the
Debtors. Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and stockholders may be substantially altered. At this time it is not
possible to predict the outcome of the Chapter 11 cases, in general, or the
effects of the Chapter 11 cases on the business of the Debtors or on the
interests of creditors.
Generally, after a plan has been filed with the Bankruptcy Court, it will
be sent, with a disclosure statement approved by the Bankruptcy Court following
a hearing, to members of all classes of impaired creditors and equity security
holders for acceptance or rejection. Following acceptance or rejection of any
such plan by impaired classes of creditors and equity security holders, the
Bankruptcy Court, after notice and a hearing, would consider whether to confirm
the plan. Among other things, to confirm a plan the Bankruptcy Court is required
to find that (i) each impaired class of creditors and equity security holders
will, pursuant to the plan, receive at least as much as the class would have
received in a liquidation of the debtor and (ii) confirmation of the plan is not
likely to be followed by the liquidation or need for further financial
reorganization of the debtor or any successor to the debtor, unless the plan
proposes such liquidation or reorganization.
To confirm a plan, the Bankruptcy Court generally is also required to find
that each impaired class of creditors and equity security holders has accepted
the plan by the requisite vote. If any impaired class of creditors or equity
security holders does not accept a plan, but all of the other requirements of
the Bankruptcy Code are met, the proponent of the plan may invoke the so-called
"cram down" provisions of the Bankruptcy Code. Under these provisions, the
Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the
plan by an impaired class of creditors or equity security holders if certain
requirements of the Bankruptcy Code are met, including that (i) at least one
impaired class of claims has accepted the plan, (ii) the plan "does not
discriminate unfairly" and (iii) the plan "is fair and equitable with respect to
each class of claims or interests that is impaired under, and has not accepted,
the plan." As used by the Bankruptcy Code, the phrases "discriminate unfairly"
and "fair and equitable" have narrow and specific meanings unique to bankruptcy
law.
On February 7, 2001, the Debtors filed a joint plan of reorganization (the
"Plan") that outlines, among other things, the disposition of pre-petition
claims against the bankruptcy estate and the management and financial structure
of the Company after emergence from Chapter 11. In connection with the Plan, the
Debtors also filed a Disclosure Statement, which includes a liquidation
analysis, feasibility study, and other information about the Company and its
Plan. A hearing is set for March 27, 2001 to determine the adequacy of the Plan
and related disclosure statement, after which, if the Bankruptcy Court issues a
favorable ruling, the Plan and disclosure statement will be submitted to
interested parties for a vote. After the distribution of the Plan, the Exclusive
period will extend for 60 days in order to allow the Company time to solicit
enough affirmative votes to confirm the Plan. After expiration of the Exclusive
Period, parties in interest have the right to propose reorganization plans
absent an extension of the Exclusive Period.
OTHER RECENT DEVELOPMENTS
On June 21, 1999, Elf Atochem North America ("Elf Atochem") filed an action
in U.S. District Court in Wilmington, Delaware against the Company alleging the
Company infringed an Elf Atochem patent in connection with the Company's
manufacture of HCFC 141b. The action sought to enjoin the Company from
continuing an alleged infringement of Elf Atochem's patent, treble damages for
lost profits, costs, prejudgment interest and attorneys fees. The Company
believes that it had a defensible position and valid counter-claims in this
matter. Pursuant to an order dated January 6, 2000, the United States District
Court for the District of Delaware denied the motion of Elf Atochem for
preliminary injunctive relief, finding that LaRoche raised substantial and
colorable issues relating to the validity of the patent suit. Notwithstanding
the Company's significant defenses, in June 2000, it determined that it was in
the Company's best interest to settle the dispute without further litigation,
and accordingly, entered into a settlement and license agreement with Elf
Atochem. Under the terms of the settlement, Elf Atochem granted the Company a
license to use certain patents in the manufacture of HCFC 141b. In consideration
for the license, the Company agreed to pay Elf Atochem a one-time lump sum fee
of $1.2 million and royalties in the amount of $.10 per pound of HCFC 141b
produced or sold subsequent to May 4, 2000. The Company's obligation to make
payments under this agreement will cease once the aggregate payments by the
Company, including the lump sum fee, reaches $4.5 million.
10
As previously reported, in December 1997, the Company was named as a
defendant in three civil antitrust actions (two of which are the same suit filed
in two separate jurisdictions, one of which was subsequently dismissed). These
actions were brought predominantly by various mining concerns, alleging that the
Company violated the federal antitrust laws, various state antitrust and unfair
trade practice statutes, and common law fraud in connection with the Company's
blasting grade ammonium nitrate business as conducted in the mid to late 1980's
and early 1990's. On May 5, 1998, the plaintiff dismissed the Company as a
defendant in one of such civil lawsuits. In May 1999, the Company reached an
agreement in principle with the plaintiff to settle all claims against the
Company. Under the terms of that settlement, the Company made an initial payment
of $.75 million and will make additional payments not to exceed $3.75 million,
based in part on the Company's net earnings, over the next four years. Minimum
payments of $.5 million are required on the first three anniversaries of
execution of the settlement and payments of $.3 million are required on the last
two anniversaries with an aggregate minimum, inclusive of the initial payment,
of $3 million. As a result of the Company's filing for Chapter 11 protection on
May 3, 2000, payments under this agreement have been suspended.
ENVIRONMENTAL PROCEEDINGS
GRAMERCY, LOUISIANA. On July 28, 1989, a 28,000 gallon mixture primarily
consisting of chloroform and carbon tetrachloride was spilled at the Company's
Gramercy plant during the off-loading of a barge. Although immediate corrective
action was initiated, the spill impacted the shallow soils and groundwater.
Expenditures for corrective action and to determine the extent of contamination
through February 29, 2000, have been approximately $4.5 million. The Company
estimates that the remaining cost to complete remediation could be up to an
additional $1.8 million over the next few years.
On June 27, 1996, Marathon Oil Company and Marathon Pipeline Company
(together "Marathon") filed a complaint against the Company and one other
company in the United States District Court for the Eastern District of
Louisiana alleging that the Company or its agents damaged a gasoline pipeline
causing it to rupture and release gasoline into the Blind River and
surrounding area near Gramercy. Marathon's preliminary claim statement for
damages incurred totaled $8.5 million. In connection with the gasoline
release, a class action petition was filed in the 23rd Judicial District
Court for the Parish of St. James, Louisiana against Marathon and the Company
on behalf of persons and entities allegedly sustaining direct and/or
consequential damage as a result of the gasoline release. On May 30, 1997,
two additional plaintiffs filed suit against Marathon, the Company and
certain unnamed defendants alleging damages suffered as a result of the
gasoline spill and clean-up operations. Marathon's lawsuit against the
Company was settled for $2 million in October 1998. The Company has met its
$1 million self-insured retention and its liability insurance carrier has
paid the balance. The Company has insurance coverage for, and continues to
defend itself against, the two remaining claims. In March 1999, plaintiffs
accepted an offer by all defendants to settle the class action for a lump sum
of $1.5 million. The Company's allocated portion of the settlement is
$375,000, although, as stated above, the Company has insurance coverage for
this amount. The third claim has remained dormant since filing, and the
Company, although it believes it has meritorious defenses to the claim,
believes that the case can be settled for a nominal amount.
In January 1997, the owner of the land over which the brine pipelines
serving the Company's Louisiana chlor-alkali facilities travel filed a lawsuit
seeking generally the removal of one of the pipelines and/or monetary damages,
based on its claims that the pipeline has suffered and continues to suffer
unpermitted leaks of brine. In connection with that lawsuit, the landowner
sought a preliminary injunction to stop the Company from using one of its brine
pipelines immediately. The court refused to grant such relief, and instead
required the Company to implement a written remediation policy and a continuous
leak monitoring program, and to agree to shut down the pipeline when and if
leaks are detected in the future until any necessary repairs are completed. The
Company complied with this order, and in January 1999, the Company completed
construction of a new pipeline which is now in service. The Company believes
that the landowner's lawsuit is without serious legal merit and is actively
defending it. The Company has developed appropriate strategies for ensuring a
continuous supply of brine to its Gramercy facility.
GREENSBORO, NORTH CAROLINA. The Company acquired a Greensboro, North
Carolina fertilizer plant and warehouse that was formerly used by Armour to
produce sulfuric acid as part of the 1986 purchase from USX. After a fire
destroyed the plant and most of the warehouse in 1989, the Company began an
effort to assess the effects of historical contamination at the site. The
original assessment addressed several areas, including a former wastewater
holding pond. USX has retained substantial liability with respect to assessment
and remediation of this site. Pursuant to the Asset Purchase Agreement dated
April 30, 1986 between USX and the Company, USX generally retains all
environmental liabilities relating to the acquired assets resulting from events
occurring prior to the closing date. The costs of any environmental liabilities
arising due to both parties' ownership or use of the purchased assets will be
allocated in accordance with each parties' contribution to the events or
circumstances which gave rise to the liabilities. The Company believes that its
portion of the remedial costs, including the cost of soil remediation and
off-site disposal of waste material and building debris, are adequately accrued.
11
OTHER. In addition to the matters described above, the Company is also
involved, to varying degrees, in litigation, as well as remedial
environmental activities at other facilities. Although management believes,
based upon information currently available, that such other litigation and
activities are likely to be resolved without a material adverse effect upon
the financial condition and results of operations of the Company, the
aggregate cost of such litigation and remedial activities cannot be precisely
predicted, and there can be no assurance that this will be the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders of the Company
during the fourth quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's common
stock, $.01 par value per share (the "Common Stock"). As of February 15, 2001
the Common Stock is held by 11 people, all of whom are affiliated with the
Company. No dividends were declared on the Common Stock until January 1996
when the Company's Board of Directors declared its first quarterly dividend
of $.50 per share. The Company also paid quarterly dividends of $.50 per
share during fiscal year 1997 and through the first quarter of fiscal year
1998, and $.75 per share for the second, third and fourth quarters of fiscal
year 1998. Dividends of $.75 per share were declared and paid in each of the
first two quarters and dividends of $1.00 per share were declared and paid in
the third quarter of fiscal 1999, respectively, with no dividends declared
for the fourth quarter. The payment of dividends is a decision made by the
Board of Directors from time to time based on the Company's earnings,
financial position and prospects, and such other considerations, as the Board
considers relevant. As a result of the Company's default under its credit
agreements and subsequent Chapter 11 filing, dividend payments have been
suspended indefinitely.
On September 23, 1997, the Company issued $175 million aggregate principal
amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes"), in an
unregistered private placement to Chase Securities Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation (the "Initial Purchasers"). The aggregate
offering price for the Notes was $174,216,000, or 99.552% of par value, and the
Initial Purchasers received an aggregate discount of $5,250,000, or 3%. The
Initial Purchasers subsequently placed the Notes with certain qualified
institutional buyers in reliance upon Rule 144A under the Securities Act of
1933, as amended (the "Securities Act").
Because the Notes were issued in a private transaction with only the two
Initial Underwriters, and not in connection with a public offering, the Company
relied upon an exemption from the registration requirements of the Securities
Act based upon Section 4(2) thereof.
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical financial
information of the Company's continuing operations. The following selected
historical consolidated financial information should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere
herein. Also see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In the opinion of management, all
adjustments (consisting of normally recurring accruals) considered necessary for
a fair presentation have been reflected therein.
[Enlarge/Download Table]
FISCAL YEAR ENDED(a)
-----------------------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2000 1999(b) 1998(c) 1997 1996
-------------- -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 204,515 $ 206,800 $ 133,359 $ 90,351 $ 84,900
Cost of sales............................ 168,501 176,841 101,848 68,215 59,480
---------- ---------- ---------- ---------- ----------
Gross profit............................. 36,014 29,959 31,511 22,136 25,420
Selling, general and administrative
expenses............................... 41,684 30,208 34,194 27,594 27,235
---------- ---------- ---------- ---------- ----------
Operating (loss) income from continuing
operations............................. (5,670) (249) (2,683) (5,458) (1,815)
Interest and amortization of debt
expense................................ (7,500) (5,741) (2,194) (1,457) (2,271)
Income (loss) from equity
investments............................ 1,627 2,614 (619) 31 1,101
Other (expense) income, net.............. (7,703) (1,070) (1,123) 2 (721)
(Provision) benefit for income taxes..... -- (1,488) 3,391 (1,072) 1,482
---------- ----------- ---------- ---------- ----------
Loss from continuing operations before
extraordinary charge................... $ (19,246) $ (5,934) $ (3,228) $ (7,954) $ (2,224)
========== ========== =========== =========== ===========
Net loss................................. $ (248,665) $ (40,518) $ (18,089) $ (9,300) $ (3,886)
========== ========== ========== =========== ===========
OTHER FINANCIAL DATA:
EBITDA(d)................................ $ 14,015 $ 20,661 $ 6,955 $ 9,684 $ 6,698
Cash flows provided by continuing
operations............................. 10,464 906 11,339 6,420 6,275
Capital expenditures(e).................. 34,321 15,553 19,870 6,537 2,482
Ratio of earnings to fixed
charges(f)............................. -- -- -- 1.1x 2.7x
Cash dividends........................... -- $ 1,198 $ 1,095 $ 912 $ 233
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents................ $ 2,311 $ 5,380 $ 12,884 $ 1,165 $ 3,265
Working capital.......................... (320,464) (27,039) 40,542 4,318 27,443
Total assets............................. 199,352 389,777 395,148 261,994 254,997
Total long-term debt..................... 0 202,221 207,418 104,441 112,940
Total debt(g)............................ 294,438 261,984 237,075 144,881 125,764
Common stock with redemption
features............................... 0 528 3,505 4,177 12,246
Stockholders' (deficit) equity........... (261,560) (10,605) 31,648 50,906 51,296
---------
(a) In August 2000, the Company made decisions to sell certain business
segments as part of its overall efforts to reorganize under Chapter 11.
On October 31, 2000, the Company sold four ammonium nitrate plants that
comprised a significant portion of its Nitrogen products business
segment. In addition, the Company is negotiating to sell its 50%
interest in Avondale Ammonia, also part of the Nitrogen products
business segment, to its joint venture partner, Cytec Industries. The
Company has also decided to sell its chlor-alkali and fluorocarbon
operations in Gramercy, Louisiana which comprise the Electochemicals -
N.A. business segment. The operating results attributable to these
businesses have been segregated and excluded from the results of
continuing operations in the schedule above. For additional information
regarding discontinued operations, see Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and
Notes to the Consolidated Financial Statements in Item 12.
(b) In June 1999, the Company sold its Alumina chemicals business.
Accordingly, the results of operations, financial position and cash
flows attributable to Aluminas have been segregated from that of
continuing operations. See the consolidated financial statements and
notes thereto for additional discussion.
(c) During 1998, the Company entered into the Credit Facility and repaid
the existing revolving credit facility, refinanced the
13
senior subordinated debt of the Company, invested in ChlorAlp and
acquired the Frankfurt facility.
(d) EBITDA represents income from operations plus net cash received from
equity investments plus depreciation, amortization and other non-cash
charges reflected in income from operations. EBITDA should not be
considered as an alternative measure of net income or cash flow
provided by operating activities (both as determined in accordance with
generally accepted accounting principles), but is presented to provide
additional information related to the Company's debt service
capability. EBITDA should not be considered in isolation or as a
substitute for other measures of financial performance or liquidity.
The primary difference between EBITDA and cash flows provided by
operating activities relates primarily to changes in working capital
requirements, and payments made for interest and income taxes.
(e) Capital expenditures exclude noncash additions through capital leases.
(f) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes, minority
interests and extraordinary charges plus fixed charges, adjusted to
exclude the undistributed earnings from equity investments and the
increase in redemption value of certain stock of a subsidiary held by
minority stockholders included in such fixed charges but not deducted
in the determination of income before minority interests. Fixed charges
consist of interest expense, amortization of debt expense, such portion
of rental expense deemed to be representative of the interest factor
and the pretax earnings required to cover the increase in redemption
value of certain stock of a subsidiary held by minority stockholders.
For the years ended February 29, 2000 and February 28, 1999 and 1998,
earnings were inadequate to cover fixed charges by approximately $73.6
million, $37.6 million, $8.5 million, respectively.
(g) Total debt includes the current and non-current portions of term debt
and revolving credit facilities.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in this 10-K Annual Report.
RECENT DEVELOPMENTS AND SUBSEQUENT EVENTS
The Company is an international producer of inorganic and organic
chemicals. During the periods included in the accompanying financial statements,
the Company operated in three principal business segments: Nitrogen Products
("Nitrogen"), Electrochemical Products -- North America ("Electrochemicals --
N.A.") and Electrochemical Products -- Europe ("Electrochemicals -- Europe").
Nitrogen products were manufactured in five plants located in the United States,
and sold into domestic fertilizer, blasting and industrial markets.
Electrochemicals -- N.A. products consist of chlorine and caustic soda
(chlor-alkali products) and fluorocarbons, which are manufactured in a single
plant in Louisiana. Electrochemicals -- Europe manufactures chlor-alkali
products and derivatives in two European facilities located in France and
Germany. For a more detailed description of the Company's business, see Item 1.
"Business". As described more fully below, during 2000 the Company made
decisions to dispose of certain business segments as part of a restructuring of
its business in Chapter 11 proceedings. These segments have been treated as
discontinued operations in the Company's financial statements.
During the year ended February 29, 2000, the Company continued to suffer
losses from operations as a result of depressed market conditions in its
domestic nitrogen and chlor-alkali businesses. In addition, during the second
half of the year, market prices for the Company's chlor-alkali and derivative
products produced in its European facilities declined. This extended period of
operating losses had a severe negative impact on the Company's liquidity. In
March 2000, the Company announced that it would not make scheduled interest
payments on its senior unsecured bonds, and that it was entering discussions
with its bondholders and senior secured lenders with the goal of restructuring
its existing debt agreements. On May 3, 2000 the Company filed a voluntary
petition with the U.S. District Court for the District of Delaware (the "Court")
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Chapter 11
filing involved only the Company's domestic assets. The Company's European
operations and subsidiaries are not part of the Chapter 11 cases. Management
believed that filing for Chapter 11 protection was a necessary step to provide
interim financing that would enable the Company to focus on running its
operations and serving its customers while in the process of restructuring its
debt. For further discussion of the Chapter 11 cases, see Item 1. "Business" and
Item 3. "Legal Proceedings".
In August 2000, the Company made decisions to dispose of substantially all
of its domestic manufacturing facilities in order to raise cash and to begin the
process of restructuring the Company for emergence from Chapter 11. The
facilities included all four of the Company's ammonium nitrate plants (the "AN
plants"), its joint venture interest in Avondale Ammonia, and its chlor-alkali
and fluorocarbon plant, located in Gramercy, Louisiana. The AN plants were sold
on October 31, 2000 to Orica Nitrogen LLC for approximately $39 million, net of
approximately $4 million placed in escrow to cover certain contingencies. Also
in August, the Company filed a motion with the Court to withdraw from Avondale
Ammonia, its joint venture with Cytec Industries. The Company has agreed to a
cash settlement under which it will receive approximately $800,000 in exchange
for its interest in the Avondale joint venture.
The Company is currently negotiating with a third party for the sale of its
Gramercy facility. Management is hopeful of completing this transaction prior to
May 2001, subject to Bankruptcy Court approval. For purposes of financial
reporting, and in accordance with generally accepted accounting principles, all
of these asset dispositions are considered disposals of business segments.
Accordingly, the loss on the disposal of each business, including estimated
operating losses through the anticipated date of disposition, have been accrued
as part of the net loss for the year ended February 29, 2000. These transactions
are discussed in more detail under the heading "DISCONTINUED OPERATIONS".
Early in the Chapter 11 cases, the Debtors received approval from the
Bankruptcy Court of a $25,000,000 debtor-in-possession financing facility (the
"DIP Facility"), which was provided by a syndicate of lenders, including the
Chase Manhattan Bank as agent bank (the "DIP Lenders"). The DIP Facility
initially matured on October 31, 2001, and management expected the facility to
meet its cash needs throughout the course of the bankruptcy proceedings.
However, as a result of higher than expected energy costs and slower than
expected price recovery for its chlor-alkali products, the Company was unable to
comply with certain terms of the DIP Facility in August 2000, and consequently
entered into a series of amendments to enable the Company to have continued
access to the facility. In August 2000, the DIP Facility was modified to, among
other things, eliminate certain borrowing base requirements, increase
availability up to $30,000,000, and provide for continuing availability through
the sale of the AN plants. The facility was further
15
modified in October 2000 to allow for continued availability subsequent to
the sale of the AN plants. Under its current terms, the DIP Facility matures
on April 18, 2001, and the Company may borrow up to $10,000,000. If a plan of
reorganization has not been confirmed prior to the termination of the DIP
Facility, an extension of that facility would be required in order to ensure
the Company has adequate cash available to meet its obligations and fund its
operations during the remainder of the Chapter 11 proceedings. While the
Company believes that its lenders will continue to support the Company and
will provide the liquidity necessary to sustain the Company until a plan of
reorganization is in place, there can be no assurances of this.
On February 7, 2001, the Debtors filed a joint plan of reorganization (the
"Plan") that outlines, among other things, the disposition of pre-petition
claims against the bankruptcy estate and the management and financial structure
of the Company after emergence from Chapter 11. In connection with the Plan, the
Debtors also filed a disclosure statement, which includes a liquidation
analysis, feasibility study, and other information about the Company and its
Plan. A hearing is set for March 27, 2001 to determine the adequacy of the Plan
and related disclosure statement, after which, if the Bankruptcy Court issues a
favorable ruling, the Plan and disclosure statement will be submitted to
interested parties for a vote. After the distribution of the Plan, the Company
will receive a 60-day extension of the Exclusive Period to solicit enough
affirmative votes to confirm the Plan. After expiration of the Exclusive Period,
parties in interest have the right to propose reorganization plans absent an
extension of the Exclusive Period.
Although management expects that the Plan will ultimately be confirmed by
the Bankruptcy Court, there can be no assurance of such confirmation. If the
Company is unable to obtain confirmation of a plan of reorganization, its
creditors or equity security holders may seek other alternatives for the
Company, which include soliciting bids for the Company or parts thereof through
an auction process or possible liquidation. There can be no assurance that upon
consummation of a plan of reorganization there will be improvement in the
Company's financial condition or results of operations. The Company has
incurred, and will continue to incur, professional fees and other cash demands
typically incurred in bankruptcy.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Chapter 11 filing, related circumstances, and the losses from
operations, raise substantial doubt about the Company's ability to continue as a
going concern. The appropriateness of reporting on the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, and the ability to generate sufficient cash from
operations and financing sources to meet obligations (see discussion in the next
paragraph explaining the impact of natural gas prices on cash and operations,
the section herein entitled "Liquidity and Capital Resources" and the Notes to
Consolidated Financial Statements for further discussion). As a result of the
filing and related circumstances, however, such realization of assets and
liquidation of liabilities are subject to significant uncertainty. While under
the protection of Chapter 11, the Debtors may sell or otherwise dispose of
assets and liquidate or settle liabilities for amounts other than those
reflected in the accompanying consolidated financial statements. Further, a plan
of reorganization could materially change the amounts reported in the Company's
consolidated financial statements. Except for losses recognized on the
disposition of discontinued operations, the consolidated financial statements do
not include any adjustments relating to the recoverability of the value of
recorded asset amounts or the amounts and classifications of liabilities that
might be necessary as a consequence of a plan of reorganization.
As discussed in Item 1. "Business", natural gas is a key raw material and
source of energy in both the nitrogen and electrochemical business lines.
Although the Company substantially reduced its exposure to natural gas prices
with the disposition of the AN plants and Avondale Ammonia as described above,
it will have continued exposure as long as it operates the Gramercy plant.
Subsequent to February 29, 2000, the daily cash price of natural gas in the
United States has risen from $2.60 per mmbtu in February 2000 to over $9.00 per
mmbtu in December 2000. Increasing natural gas prices were a primary contributor
to operating losses earlier in 2000 that necessitated the modifications to the
DIP Facility described above. Current futures markets and most industry
forecasts indicate that prices will stay above the $8.00 per mmbtu price level
through the winter months of 2001. Furthermore, as a result of the Company's
financial condition, it was unable to enter into hedge contracts earlier in the
year that may have mitigated the impact of changing market prices for natural
gas on the Company's operating results. At these levels, gas prices will
continue to have a significant negative impact on the Company's operating
results and cash flow until the Gramercy plant is sold.
16
FISCAL 2000 SUMMARY
Throughout the Company's fiscal year ended February 29, 2000, the
Company continued to pursue and build upon a series of strategic initiatives
begun in fiscal 1999 designed to strengthen the Company's financial condition
and to position the Company for future growth and profitability. The focus of
these initiatives has been threefold:
- Reduce costs;
- Concentrate resources on core businesses in which the Company has
competitive strengths; and
- Reduce the Company's total debt.
Cost reduction initiatives began in January 1999 with a restructuring of the
corporate headquarters and a 30% headcount reduction. During fiscal 2000,
management began an internal review of its operations with the goal of achieving
permanent cost reductions of 10% of all costs and expenses from its North
American and European operations over the next three years.
In June 1999, the Company completed the sale of its Alumina chemicals
business, and acquired the remaining 50% of ChlorAlp, its chlor-alkali facility
near Grenoble, France, which was previously owned in a joint venture with
Rhodia. These transactions allowed the Company to strengthen its position in the
European chlor-alkali market and to sell a specialty chemical business that had
not produced adequate returns, and did not have good long-term growth prospects.
On July 5, 1999, an explosion at an adjacent manufacturing site owned by
Kaiser Aluminum and Chemical Corp. caused a temporary suspension of production
at the Company's electrochemical manufacturing facility in Gramercy, Louisiana.
Fluorocarbon production was resumed in mid-August. Resumption of chlor-alkali
production, however, required restoration of services from a power plant shared
with Kaiser. The plant temporarily resumed operations in mid-November 1999 upon
the restoration of services from a shared power plant, but was unable to sustain
production due to mechanical failures that resulted from the effects of the
explosion. The plant began operating again in mid-December 1999, and until a
voluntary reduction in operating rates in November 2000 caused by high natural
gas prices, had sustained operations at approximately 90% capacity. Through
February 29, 2000 the Company estimates that it incurred approximately $8.7
million in lost profit margin from product sales and increased costs as a result
of the shut down, and will incur approximately $2.0 million of additional
losses, primarily as a result of increased power costs, prior to full resumption
of the adjacent Kaiser plant. In addition to lost profits, physical damages were
approximately $4.5 million to restore the plant facilities to their condition
before the explosion. In January 2001, the Company reached a settlement on most
of these losses and increased costs with its insurance carriers, net of
deductibles of approximately $1.6 million.
In September 1999, partially as a result of the temporary suspension of
fluorocarbon production caused by the Gramercy explosion and the Company's
deteriorating financial condition, the Company lost three major customers in its
fluorocarbon business. The Company has been unable to replace the resulting loss
of volume, and coupled with lower market prices in general, this business
produced cash losses in the second half of the fiscal year. The fluorocarbon
operation has continued to produce losses subsequent to the fiscal 2000 year
end, and is not projected to be profitable in fiscal 2001. The Company believes
that it is unlikely that this business will return to profitability before the
sale of HCFC is banned under government mandate on December 31, 2002.
Accordingly, as required by FAS 121, an impairment charge of $9.8 million was
recorded in the fourth quarter of fiscal 2000. This plant will be included in
the disposition of the entire Gramercy site as described herein under the
headings "Recent Developments and Subsequent Events" and "Discontinued
Operations".
In November 1999, the Company's board of directors elected current director
Robert L. Yohe to the position of chairman of the board. Victoria E. LaRoche was
re-elected vice chairman of the board, and W. Walter LaRoche III, who had served
as chairman of the board since 1994, was re-elected as a director. Two previous
board members, Johnnie Lou LaRoche and Louanne C. LaRoche, chose not to stand
for re-election. The Company's other board members remained unchanged.
Largely as a result of the negative impact of market pricing on its
financial performance, the Company was unable to comply with certain financial
covenants included in its senior credit facility during the year. The Company
entered into a series of amendments and waivers with its senior lenders over the
course of fiscal 2000 to allow continued access to the facility while the
Company pursued alternative sources of capital. Multiple efforts to obtain an
equity infusion or an alternative debt structure failed to produce any long-term
solution to the Company's capital needs, and as described in more detail above,
on May 3, 2000 the Company filed for protection under Chapter 11 of the
Bankruptcy Code.
17
RESULTS FROM CONTINUING OPERATIONS
The Company incurred operating losses from continuing operations of $5.7
million for the year ended February 29, 2000 ("fiscal 2000"), compared to losses
of $.2 million for the year ended February 28, 1999 ("fiscal 1999") and $2.7
million for the year ended February 28, 1998 ("fiscal 1998"). Lower prices in
domestic chlor-alkali and ammonium nitrate markets, as well as lower prices in
European markets for the second half of the year, resulted in the significant
increase in operating losses compared to the prior fiscal year. In addition, the
Company incurred fees and settlement costs of approximately $5.5 million in
connection with a lawsuit brought by Elf Atochem .
The decrease in fiscal 1999 losses from continuing operations was primarily
the result of income from the Company's European electrochemical operations,
acquired in the second half of fiscal 1998. Lower prices for the Company's
industrial ammonia products than in the prior year contributed to slightly lower
operating profits in the Nitrogen Products group.
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
----------------------- --------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ---------- ------ ---------- ------ ----------
NET SALES:
Nitrogen products............. $ 53,493 26.2% $ 74,508 36.0% $ 113,155 84.8%
Electrochemical products--
Europe...................... 151,022 73.8 132,292 64.0 20,204 15.2
--------- ------ ----------- ------- ---------- ------
Total................ $ 204,515 100.0% $ 206,800 100.0% $ 133,359 100.0%
========= ====== =========== ======= ========== ======
OPERATING INCOME (LOSS) FROM
CONTINUING OPERATIONS:
Nitrogen products............. $ 10,412 (183.6)% $ 4,201 (1,687.1)% $ 6,695 (249.5)%
Electrochemical products--
Europe...................... (6,596) 116.3 3,424 (1,375.1) (1,383) 51.5
Corporate..................... (9,486) 167.3 (7,874) 3,162.2 (7,995) 298.0
--------- ------ ----------- ------- ---------- ------
Total................ $ (5,670) 100.0% $ (249) 100.0% $ (2,683) 100.0%
========= ====== =========== ======= ========== ======
EBITDA:
Nitrogen products............. $ 12,782 91.2% $ 6,120 29.6% $ 10,323 148.4%
Electrochemical products--
Europe...................... 6,875 49.1 21,949 106.2 1,610 23.2
Corporate..................... (5,642) (40.3) (7,408) (35.8) (4,978) (71.6)
--------- ------ ----------- ------- ---------- ------
Total................ $ 14,015 100.0% $ 20,661 100.0% $ 6,955 100.0%
========= ====== =========== ======= ========== ======
NET SALES FROM CONTINUING OPERATIONS
The Company generated net sales from continuing operations of $204.5
million for the year ended February 29, 2000, compared with net sales of $206.8
and $133.3 million in 1999 and 1998, respectively. The change in net sales for
the year ended February 29, 2000 compared to the prior year was primarily due to
lower prices on principal North American products and German caustic and certain
chlorinated methane products, as well as a significant reduction of warehouse
sales in the Nitrogen products segment. These reductions were offset by the
inclusion of ChlorAlp sales in consolidated net sales since its purchase on
June 7, 1999.
The increase in net sales in fiscal 1999 compared to fiscal 1998 was
primarily due to the inclusion of a full year of sales from the Frankfurt
facility, acquired in the fourth quarter of fiscal 1998. This increase was
partially offset by lower pricing in industrial ammonia markets compared to
1998, as well as the disposition of certain nitrogen warehouse operations during
fiscal 1999.
Nitrogen products' net sales in fiscal 2000 decreased $21.0 million (28%)
compared to the prior year. Decreased volumes of agricultural resale product
related to the sale of the Company's Caruthersville warehouse facility in
September 1998 resulted in a $16.4 million decline in net sales compared to the
prior period. Continued declines in pricing of industrial grade products, due to
general market pressures, resulted in additional decreases in net sales over the
prior fiscal year.
Nitrogen sales for fiscal 1999 decreased $38.6 million (34.2%) compared to
fiscal 1998. Nitrogen net sales are sensitive to ammonia pricing, which impacts
direct ammonia sales and derivative products. Ammonia prices averaged $116 per
ton in 1999 compared to $156 per ton in 1998. Lower prices resulted in an $8.8
million reduction in net sales. In addition, the Company sold one
18
of its four warehouse operations, and contributed a second to a joint venture
during fiscal 1999, which resulted in lower volume and reduced net sales by
approximately $28 million.
Electrochemical Products-- Europe sales for the year ended February 29,
2000 increased $18.7 million (14.2%) compared to fiscal 1999. The consolidation
of the ChlorAlp facility purchased in June 1999 resulted in a $55.2 million
increase in net sales over the prior period. Offsetting this increase was a
decline in the net sales of the Company's German facility, as well as, a
stronger U.S. dollar in the current year which had a negative impact on sales.
Market prices for caustic declined 13% compared to the prior period and resulted
in a $5.1 million decline in sales. Market price reduction for some chlorinated
methane products, in particular methylene chloride, reduced sales by almost $5.1
million. Also, lost volume related to reduced purchases and resale of HCL
reduced sales by approximately $7.1 million. Sales for fiscal 1998 consist of
activity from the Company's Frankfurt facility, which was acquired in December
1997.
COSTS AND EXPENSES FROM CONTINUING OPERATIONS
The Company incurred costs and expenses of $210.2 million for the year
ended February 29, 2000 compared to $207.0 million in 1999 and $136.0 million in
1998. Operating expenses increased as a result of the inclusion of ChlorAlp's
costs and expenses in the Company's consolidated operating results since the
Company completed the acquisition on June 7, 1999. The addition of ChlorAlp's
expenses, however, was offset by the favorable impact of lower ammonia prices,
reduction of warehouse operations, and cost reduction initiatives on overall
operating costs.
The increase in fiscal 1999 operating costs and expenses as compared to
fiscal 1998 was mainly attributable to the acquisition of the Frankfurt facility
in December 1997, offset by a decrease in costs due to lower volumes in Nitrogen
and cost improvements across all business lines.
In Nitrogen, costs and expenses decreased from $70.3 million in 1999 to
$43.1 million in fiscal 2000. Cost reductions of $16.1 million were realized as
a result of decreased volumes in agricultural resale products related to the
sale of the Company's Caruthersville warehouse in September 1998. Fiscal 1999
costs and expenses for Nitrogen decreased from fiscal 1998 due to lower
volumes resulting from the divestiture of most of its warehouse business. In
addition, Nitrogen purchased approximately 30% of its ammonia requirements
from third parties, and lower ammonia prices compared to prior years also had
a favorable impact on costs.
Electrochemicals - Europe costs and expenses increased $28.7 million as
compared to fiscal 1999. The consolidation of operating results for the
Company's ChlorAlp facility purchased in June 1999 (see "Significant
Developments" section for further discussion) resulted in a $53.7 million
increase in costs over the prior period. Offsetting this increase was a
reduction in costs in the German facility due to overall cost savings
initiatives and the reduction in purchases and resale of HCL, as well as, the
impact of a strong U.S. Dollar on the translation of foreign currency expenses.
Selling, general, and administrative costs for fiscal 2000 were $41.7
million compared to $30.2 million and $34.2 million in 1999 and 1998,
respectively. The increase in fiscal 2000 expense was primarily the result of
the inclusion of $6.7 million of ChlorAlp selling, general and administrative
expenses in the consolidated operating results subsequent to its acquisition in
June 1999. Administrative expenses in the current year also included
approximately $3.8 million in legal expenses incurred in connection with the Elf
Atochem litigation (see Item 3. "Legal Proceedings" for further discussion). The
fiscal 2000 increases were somewhat offset by general cost reductions throughout
the Company. Cost savings initiatives in 1999 more than offset additional costs
incurred as a result of including the Frankfurt facility for the entire year,
which added approximately $9 million in selling, general and administrative
costs.
As discussed more fully under the heading "Fiscal 2000 Summary" and in Note
4 to the Consolidated Financial Statements, the Company recorded a $9.8 million
impairment charge in connection with its fluorocarbon operation in Gramercy,
Louisiana. In addition, uninsured losses of $3.6 million were recorded in
operating expenses in 2000 as a result of the Gramercy plant outage caused by an
explosion at an adjacent plant (see " Fiscal 2000 Summary" herein).
OTHER ITEMS AFFECTING NET LOSS
19
INTEREST AND AMORTIZATION OF DEBT EXPENSE. Interest and amortization of
debt expense allocated to continuing operations increased to $7.5 million in
fiscal 2000 from $5.7 million in 1999 and $2.2 million in 1998. The current year
increase was primarily due to increased debt levels resulting from continued
operating losses, as well as, increases in interest rates on the Company's
senior secured debt. The increase from fiscal 1998 to fiscal 1999 was due to
higher average debt balances incurred to fund acquisitions, capital investments
and operating losses.
INCOME (LOSS) FROM EQUITY INVESTMENTS. The Company had equity investments
in two nitrogen warehouses. In June 1999, the Company acquired the remaining 50%
interest in ChlorAlp, in which it had previously held a 50% joint venture
interest and had been accounted for as an equity investment. The Company had
income from equity investments of $1.6 million for the year ended February 29,
2000 compared to $2.6 million in fiscal 1999. The decrease was primarily the
result of having only one quarter of equity income from ChlorAlp versus an
entire year in fiscal 1999. The increase in equity income from fiscal 1998 to
fiscal 1999 was primarily due to operating income reported from ChlorAlp
compared to a loss in fiscal 1998 as a result of cost reduction programs and
improved market conditions.
OTHER (EXPENSE) INCOME, NET. The Company reported net other expense of $7.7
million for the year ended February 29, 2000 compared to net other expense of
$1.1 million and net other expense of $1.1 million for the years ended February
28, 1999 and 1998, respectively. The current year loss includes a number of
charges that were not included in the prior year. Approximately $4.9 million in
debt restructuring charges were taken in the fiscal 2000, including a $3.2
million write-off of previously capitalized debt issue costs. The Company also
accrued approximately $1.7 million in anticipation of settling a lawsuit brought
by Elf Atochem (see Item 3. "Legal Proceedings" and "Environmental and Legal
Matters" herein). In addition, exchange losses of approximately $5.5 million
were included in other expenses on foreign currency denominated intercompany
loans, compared to losses of just over $1.0 million in 1999. Offsetting these
losses in the current year were realized gains on the settlement of two cross
currency interest rate swaps and a gain on the sale of the Company's interest in
a nitrogen warehouse.
Other income, net in fiscal 1999 included gains on the sale of two Nitrogen
warehouses of $2.0 million, foreign exchange translation gains of $1.0 and
insurance recoveries of $.8 million. These gains were offset by unrealized
losses on cross currency interest rate swaps of $1.7 million and a write-off of
unamortized debt issuance costs of $1.0 million.
BENEFIT (PROVISION) FOR INCOME TAXES. The Company recorded no provision for
income taxes from continuing operations for the year ended February 29, 2000,
net of a charge of $6.2 million for increases to the valuation allowance for net
operating loss carryforwards. In fiscal 1999, the Company recorded a provision
for income taxes of $1.5 million, net of a $5.3 million valuation allowance,
compared to a benefit of $3.4 million in fiscal 1998. The valuation allowances
were established as a result of the uncertainty as to when benefits arising from
operating losses will be realized, and based on generally accepted accounting
principles for recognition of tax benefits associated with operating loss
carryforwards. At February 29, 2000, the Company had recorded valuation
allowances against the tax benefit from the domestic net operating loss
carryforwards and AMT credit carryforward of $64.9 and $5.1 million,
respectively. The effective tax rates related to continuing operations were 0 %,
(33.5%), and 51.2% for fiscal years 2000, 1999 and 1998, respectively.
OTHER CHARGES. For fiscal year 1998, net loss included an extraordinary
loss of $12.3 million (net of income tax benefit of $7.7 million) as a result of
the early extinguishment of the Company's senior indebtedness including certain
call and prepayment premiums.
DISCONTINUED OPERATIONS. As more fully described in the section entitled
"Strategic Transactions" below, the Company sold its entire Aluminas operations
in two transactions. In fiscal 1999, the Company accounted for the financial
results of this business segment as a discontinued operation, and recorded a
loss on the sale of $5.7 million, net of income taxes of $3.6 million. The
Company received net proceeds from the sale of $39.5 million when it was
completed in June 1999, and retained most of the working capital. Also in fiscal
2000, the Company received certain contingent payments under the sale agreement
and recorded other adjustments to the sale, which resulted in a $1.7 million
reduction of the previously reported loss.
Below is a summary of operating results for Aluminas for the period from
March 1, 1999 through its sale on June 3, 1999 and the years ended February 28,
1999 and 1998:
20
[Enlarge/Download Table]
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
------------ ------------ ------------
Net sales................................................................. $ 7,805 $ 30,365 $ 38,444
Operating income (loss)................................................... 753 (4,957) (115)
EBITDA.................................................................... 1,911 4,486 7,285
As described in the section entitled "Recent Developments and Subsequent
Events", the Company has sold, or is in the process of selling, all of its
domestic manufacturing operations as part of its efforts to reorganize under
Chapter 11 bankruptcy proceedings. These plants comprised a substantial portion
of the Nitrogen products business segment and all of the Electrochemicals - N.A.
business segment. The Company has accounted for these businesses as discontinued
operations for the year ended February 29, 2000, and accordingly, has recorded a
loss on the disposition of these businesses, including the estimated operating
losses through the disposal date.
The Company sold all four of its ammonium nitrate plants under a Court
approved asset purchase agreement to Orica Nitrogen LLC on October 31, 2000 for
approximately $39 million. An additional $4 million of proceeds are being held
in escrow to cover certain contingencies should they occur. In addition, the
Company negotiated a final settlement with Cytec, under which the Company would
transfer its 50% interest in the venture to Cytec for cash of approximately
$800. The Company recorded a loss on the disposition of these assets of $99,151
in fiscal 2000. The loss included operating losses for the period from March 1,
2000 through October 31, 2000 of $20,148.
Below is a summary of operating results for the AN plants and the Company's
share of Avondale Ammonia for the years ended February 29, 2000 and February 28,
1999 and 1998:
[Enlarge/Download Table]
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
------------ ------------ ------------
Net sales................................................................. $ 111,915 $ 114,267 $ 124,360
Operating income (loss)................................................... (9,916) (4,567) 4,602
EBITDA.................................................................... 971 10,955 16,460
Also as part of its restructuring in Chapter 11, the Company decided to
shut down and sell its fluorocarbon plant and to sell its chlor-alkali plant,
both located on the same site in Gramercy, Louisiana. These operations
comprise the entire Electrochemicals - N.A. business segment. The Company is
currently negotiating with a third party for the sale of these facilities,
and Management hopes to close the transaction prior to May 2001. The Company
recorded a loss on the disposition of these assets of $76,891 in fiscal 2000.
The loss included estimated operating losses of $22,836 for the period from
March 1, 2000 through the anticipated sale date.
Below is a summary of operating results for Electrochemicals - N.A. for the
years ended February 29, 2000 and February 28, 1999 and 1998:
[Enlarge/Download Table]
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
------------ ------------ ------------
Net sales................................................................. $ 50,518 $ 68,475 $ 84,852
Operating income (loss)................................................... (12,352) (8,823) 3,184
EBITDA.................................................................... (4,096) 1,454 7,125
EBITDA
EBITDA represents income (loss) from operations plus cash received from
equity investments, plus depreciation, amortization and other non-cash and
non-recurring transactions reflected in income from operations. In addition,
prior to its acquisition in June 1999, EBITDA also included the Company's equity
interest in the EBITDA of ChlorAlp. EBITDA should not be considered as an
alternative measure of net income or cash flow provided by operating activities
(both as determined in accordance with generally
21
accepted accounting principles), but is presented to provide additional
information related to the Company's debt service capability. EBITDA should
not be considered in isolation or as a substitute for other measures of
financial performance or liquidity. The primary difference between EBITDA and
cash flows provided by operating activities relates primarily to changes in
working capital requirements and payments made for interest and income taxes.
EBITDA from continuing operations for fiscal 2000, 1999, and 1998 was $14.0
million, $20.7 million and $7.0 million, respectively. The increase in EBITDA
for the Nitrogen products segment of $6.7 million was due primarily to improved
gross margins resulting from lower ammonia prices. EBITDA for the
Electrochemical Products -- Europe decreased in fiscal 2000 mainly due to price
decreases in the European chlor-alkali markets, as well as lower prices for
derivative products manufactured in the Company's German facility. EBITDA was
higher in 1999 than in 1998 due mainly to the inclusion of EBITDA from the
Company's German and French facilities, which were acquired late in fiscal 1998,
for an entire year. The increases in EBITDA in fiscal 1999 as a result of the
European investments were partially offset by lower domestic chlor-alkali,
ammonia and ammonium nitrate prices.
STRATEGIC TRANSACTIONS
The Company periodically implements strategic actions that it believes
affords it the opportunity to allocate resources to businesses that will enhance
profitability and growth. Significant strategic transactions during fiscal 1999
and fiscal 1998 are described below.
On December 31, 1997, the Company purchased certain chlor-alkali and
chlorinated methane manufacturing facilities located near Frankfurt, Germany for
a purchase price of $20.4 million. These facilities produce chlorine, caustic
soda, sodium hypochloride, calcium chloride, methyl chloride, methylene
chloride/chloroform and hydrochloric acid.
In October 1997, the Company purchased a 50% interest in ChlorAlp, a joint
venture with Rhodia. The joint venture manufactures chlorine and caustic soda
for sale to the plastics industry and merchant markets. The investment also
includes an interest in a power generation facility that provides electricity to
the manufacturing operation. On June 7, 1999, the Company, through its wholly
owned subsidiary, LII Europe, acquired all the remaining capital stock and
equity interest of ChlorAlp, which was held by Rhodia for approximately $27.0
million.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. For the year ended February 29, 2000 continuing
operations generated cash of $10.5 million compared with cash generated from
operations of $.9 million and $11.3 million for the years ended February 28,
1999 and 1998, respectively. The increase in net cash from operations in fiscal
2000 was primarily due to higher profits generated by the Company's industrial
ammonia operations. In fiscal 1999, the decrease in cash generated from
continuing operations as compared to the prior year was primarily the result of
lower operating profits in the industrial ammonia business and the Company's
German operations. In fiscal 1998, the increase in net cash provided by
operating activities compared with fiscal 1997, was primarily the result of net
decreases in working capital requirements, including a change in the timing of
interest payments on subordinated debt.
INVESTING ACTIVITIES. Cash used in investing activities related to
continuing operations was $7.2 million for fiscal 2000 compared to uses of
$9.9 million in 1999 and $54.0 million in 1998. Capital expenditures
decreased in 2000 as a result of the completion of several large capital
projects in 1999 and were consistent with the Company's capital expenditure
plan for this fiscal year. During 2000, the Company purchased the 50%
interest in ChlorAlp owned by Rhodia for approximately $27.0 million. The
acquisition was funded by the proceeds from the sale of the Company's
Aluminas chemical business for approximately $27.1 million. Capital
expenditures increased in 1999 compared to 1998, primarily due to the
inclusion of capital spending at the Company's German operation, which was
acquired late in fiscal 1998, for an entire year. As described above in
"Strategic Transactions", cash of approximately $20 million was invested in
ChlorAlp and $17.6 million was used to purchase the Frankfurt facility in
fiscal 1998.
FINANCING ACTIVITIES. During fiscal years 2000 and 1999, cash provided
by operations was not sufficient to fund capital investment and scheduled
repayments of long-term debt. Liquidity was provided by the Company's
revolving credit facilities, under which the Company borrowed $32.7 million
in 2000 and $33.4 million in 1999. During fiscal 1998, the Company raised
approximately $170.0 million in cash from a subordinated bond offering, net
of financing costs, and $35.0 million from a term loan under a bank credit
facility. Proceeds were used to refinance existing subordinated notes, repay
borrowings under an existing credit facility, and to fund the Company's
investments in ChlorAlp and the Frankfurt facility. The Company also made its
final payment on certain indebtedness to USX.
22
The Company paid cash dividends to its common stockholders of $1.2 and $1.1
million in the fiscal years ended February 28, 1999 and 1998, respectively.
As more fully described in Item 1. "Business" and under the heading "Recent
Developments" herein, the Company filed for Chapter 11 bankruptcy protection on
May 3, 2000. The Company is operating its business as a debtor-in-possession,
and is party to a post-petition credit facility dated May 4, 2000 (the "DIP
Facility"). The DIP Facility initially matured on October 31, 2001, and
management expected the facility to meet its cash needs throughout the course of
the bankruptcy proceedings. However, as a result of higher than expected energy
costs and slower than expected price recovery for its chlor-alkali products, the
Company was unable to comply with certain terms of the DIP Facility in August
2000, and consequently entered into a series of amendments to enable the Company
to have continued access to the facility. In August 2000, the DIP Facility was
modified to, among other things, eliminate certain borrowing base requirements,
increase availability up to $30 million, and provide for continuing availability
through the sale of the AN plants. The facility was further modified in October
2000 to allow for continued availability subsequent to the sale of the AN
plants. Under its current terms, the DIP Facility matures on April 18, 2001, and
the Company may borrow up to $10 million. If a plan of reorganization has not
been confirmed prior to the termination of the DIP Facility, an extension of
that facility would be required in order to ensure the Company has adequate cash
available to meet its obligations and fund its operations during the remainder
of the Chapter 11 proceedings. While the Company believes that its lenders will
continue to support the Company, and will provide the liquidity necessary to
sustain the Company until a plan of reorganization is in place, there can be no
assurances given in this regard. The Company expects to submit a reorganization
plan prior to the expiration of the DIP Facility, a component of which will be a
financing agreement to succeed the DIP Facility. As of February 28, 2001, the
Company had $6 million available under the DIP Agreement.
The DIP Facility is senior to all prior senior secured debt, and is secured
by all of the Company's domestic assets, as well as a pledge of its ownership
interests in and its intercompany receivables from its European subsidiaries. It
imposes restrictions on investments, acquisitions, repurchases of stock,
borrowing and sales of assets. It also imposes cumulative and annual limits on
capital spending, as well as a prohibition on the payment of dividends without
the consent of the lenders.
Prior to filing for Chapter 11 protection, the Company was in default of all
of its domestic long-term debt agreements. All amounts due under the senior
secured credit facility and the senior subordinated notes represent pre-petition
claims. The Company also has working capital facilities to support its
operations in both France and Germany. The European credit facilities are not
affected by the Company's bankruptcy filing.
The Company believes that cash on hand, amounts available under the DIP
Facility, its European credit facilities and funds from operations will enable
the Company to meet its current liquidity and capital expenditure requirements
during the Bankruptcy Cases, although no assurances can be given in this regard.
Until a plan of reorganization is approved, the Company's long-term liquidity
and the adequacy of its capital resources cannot be determined.
Inherent in a successful plan of reorganization is a capital structure that
permits the Company to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
Company. Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and stockholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Chapter 11 cases, in general, or the
effects of such cases on the business of the Company or on the interests of
creditors and stockholders.
RISK MANAGEMENT
The Company utilizes certain financial instruments in connection with its
risk management. See also Item 7A. "Quantitative and Qualitative Disclosures
About Market Risk" for further discussion.
Natural gas is the primary raw material used for the production of ammonia
in the Nitrogen Products segment and electricity in the Electrochemical Products
segments. The Company purchases its natural gas pursuant to market based
contracts with natural gas producers. The Company has a natural gas hedging
program designed to reduce the Company's exposure to natural gas price
volatility. To protect against the risk of increasing prices, the Company, at
its option, has periodically fixed its cost under these contracts in accordance
with the pricing mechanisms included in the contracts. Fixed price purchase
commitments pursuant to the contracts aggregated $3.0 million and $7.0 million,
respectively as of February 29, 2000 and February 28, 1999. The Company has also
at times utilized option spread agreements ("collars") to establish a range of
cost on a portion of its natural gas requirements. However, as a
23
result of its financial condition in fiscal 2000, the Company was unable to
obtain credit terms that would enable it to enter into the derivative
contracts that it has traditionally used to limit its exposure to higher
natural gas prices.
In connection with its acquisition of 50% of ChlorAlp in fiscal 1998, the
Company indirectly obtained a joint venture interest in a power generation
facility, which uses natural gas to generate power for the manufacturing
operation. Prices for natural gas used in the facility are based on European
fuel and gas oil prices. In fiscal 1999, the Company, through a wholly owned
European subsidiary, entered into a spread oil swap agreement ("SOS agreement")
for the purpose of reducing its exposure to fluctuations in its natural gas
prices. The contract covered three years for a notional amount of 2,430,000
barrels. A portion of the contract settled every six months in an amount
determined on a monthly basis, which was based on a defined spread between
certain forward fuel and gas oil prices multiplied by the notional quantity
settled. During the year ended February 29, 2000, the Company liquidated its
position in this instrument for an aggregate realized gain of approximately $2.0
million.
The Company also participated in two cross currency interest rate swaps,
one in French francs and the other in German marks. These swaps were entered in
order to take advantage of lower European interest rates, and to hedge the
Company's net investment in foreign currency assets. Under these contracts, the
Company remitted quarterly interest payments to its exchange partners in the
designated foreign currency and, in exchange, received quarterly interest
payments from its exchange partners in U.S. dollars at agreed upon rates. The
Company liquidated both of these instruments during the fiscal 2000 for a mark
to market gain aggregating approximately $2.0 million.
ENVIRONMENTAL AND LEGAL MATTERS
Due to the nature of the Company's business, it must continually monitor
compliance with all applicable environmental laws and regulations. As of
February 29, 2000, the Company had recorded $3.3 million in liabilities
associated with expected environmental obligations. A significant portion of the
recorded liabilities is attributable to a soil and groundwater contamination
incident at the Company's Gramercy facility in fiscal year 1990. Remediation at
such facility is being conducted in accordance with a work plan approved by the
Louisiana Department of Environmental Quality. Future expenditures for the
Gramercy facility are anticipated to be approximately $1.8 million and are
anticipated to be paid over the next several years. In addition, the Company has
recorded liabilities attributable to the Greensboro, North Carolina fertilizer
plant contamination for remedial costs, including the cost of soil redemption
and off-site disposal of waste material and building debris. See Item 3. "Legal
Proceedings."
Generally, under the asset purchase agreements for most of the Company's
operations, the former owners retained some liability under certain
circumstances for environmental matters that existed prior to the dates of the
respective transactions. In connection with the Company's sale of certain of the
businesses it originally bought from USX in 1986, the Company retains some
degree of liability for environmental matters that existed prior to the date of
sale. See "Environmental Proceedings" under Item 3. "Legal Proceedings".
Capital expenditures made to address environmental matters were
approximately $.2, $.9, and $3.9 million in fiscal years 2000, 1999, and 1998,
respectively.
On June 21, 1999, Elf Atochem North America ("Elf Atochem") filed an action
in U.S. District Court for the District of Delaware against the Company alleging
the Company infringed an Elf Atochem patent in connection with the Company's
manufacture of HCFC 141b. The action sought to enjoin the Company from
continuing an alleged infringement of Elf Atochem's patent, treble damages for
lost profits, costs, prejudgment interest and attorney fees. The Company
believes that it had a defensible position and valid counter-claims in this
matter. Pursuant to an order dated January 6, 2000, the United States District
Court for the District of Delaware denied the motion of Elf Atochem for
preliminary injunctive relief, finding that LaRoche raised substantial issues
relating to the validity of the patent suit. Notwithstanding the Company's
significant defenses, in June 2000, it determined that it was in the Company's
best interest to settle the dispute without further litigation, and accordingly,
entered into a settlement and license agreement with Elf Atochem. The settlement
is pending final approval by the Bankruptcy Court and is expected in July 2000.
Under the terms of the settlement, Elf Atochem granted the Company a license to
use certain patents in the manufacture of HCFC 141b. In consideration for the
license, the Company agreed to pay Elf Atochem a one-time lump sum fee of $1.2
million and royalties in the amount of $.10 per pound of HCFC 141b produced or
sold subsequent to May 4, 2000. The Company's obligation to make payments under
this agreement will cease once the aggregate payments by the Company, including
the lump sum fee, reaches $4.5 million.
On June 27, 1996, Marathon Oil Company and Marathon Pipe Line Company
(together, "Marathon") initiated litigation against the Company and another
defendant in connection with a 1996 petroleum release near the Company's
Gramercy facility, and in connection therewith a class action lawsuit and one
other lawsuit were filed against the Company and Marathon. Marathon's lawsuit
against the
24
Company was settled for $2 million in October 1998. The Company has met its
$1 million self-insured retention and its liability insurance carrier has
paid the balance. The Company has coverage for, and continues to defend
itself against, the two remaining claims. In March 1999, plaintiffs accepted
an offer by all defendants to settle the class action for a lump sum of $1.5
million. The Company's allocated portion of the settlement is $375,000,
although, as stated above, the Company has insurance coverage for this
amount. The third claim has remained dormant since filing, and the Company,
although it believes it has meritorious defenses to the claim, believes that
the case can be settled for a nominal amount. See "Environmental Proceedings."
In December 1997, the Company was named as a defendant in three civil
antitrust actions (two of which were the same suit filed in separate
jurisdictions, one of which was subsequently dismissed). These actions were
brought predominantly by various mining concerns, alleging that the Company
violated federal antitrust laws, various state antitrust and unfair trade
practice statutes, and common law fraud in connection with the Company's
blasting grade ammonium nitrate business as conducted in the mid to late 1980's
and early 1990's. In May 1999, the Company reached an agreement in principle
with the plaintiff to settle all claims against the Company. Under the terms of
that settlement, which will be reflected in a definitive settlement agreement,
the Company made an initial payment of $.75 million and will make additional
payments not to exceed $3.75 million, based in part on the Company's net
earnings, over the next five years. Minimum payments of $.5 million are required
on the first three anniversaries of execution of the settlement and payments of
$.3 million are required on the last two anniversaries with an aggregate
minimum, inclusive of the initial payment, of $3 million. As a result of the
Company's filing for Chapter 11 protection on May 3, 2000, payments under this
agreement have been suspended.
In January 1997, the owner of the land over which the brine pipelines
serving the Company's Gramercy, Louisiana chlor-alkali facilities travel filed a
lawsuit seeking generally the removal of one of the pipelines and/or monetary
damages, based on its claims that the pipeline has suffered and continues to
suffer unpermitted leaks of brine. In connection with that lawsuit, the
landowner sought a preliminary injunction to stop the Company from using one of
its brine pipelines. The court refused to grant such relief, and instead
required the Company to implement a written remediation policy and a continuous
leak monitoring program, and to agree to shut down the pipeline when and if
leaks are detected in the future until any necessary repairs are completed. In
January 1999, the Company completed construction of a new pipeline which is now
in service. The Company believes that the landowner's lawsuit is without serious
legal merit and is actively defending it. The Company has developed appropriate
strategies for ensuring a continuous supply of brine to its Gramercy facility.
See Item 3. "Legal Proceedings."
The Company is a participant in certain other legal actions, claims and
remedial activities. Management of the Company believes that, except as
described above, based upon the information currently available, such other
legal actions, claims and remedial activities are likely to be resolved without
a material adverse effect upon the Company's financial condition and results of
operations. However, the aggregate cost of such legal actions, claims and
remedial activities are inherently impossible to predict and there can therefore
be no assurance that this will be the case. See Item 3. "Legal Proceedings."
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("the Statement"). The Statement requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on the derivative designation. The effective date of the
Statement was deferred by FASB Statement No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133, and the Company will now be required to implement the
Statement in its fiscal year ended February 28, 2002. The Company has not yet
determined the impact that adoption of the Statement may have on its financial
position or the results of its operations.
YEAR 2000 COMPLIANCE
The Company's Year 2000 project, which began in mid-1998, is a
continuing review and evaluation of business systems and process controls for
the purpose of identifying ways in which these systems and the Company could be
adversely affected by incorrectly processing date information on and after
January 1, 2000 ("Year 2000"). The Company conducted its review and evaluation
in four main areas: Business Systems, Manufacturing Controllers and Processors,
Third Party Compliance, and Hardware. The process included assessing the impact
of the calendar change to Year 2000 on all systems used by the Company,
upgrading systems that were not Year 2000 ready, testing and monitoring systems
for Year 2000 readiness, and developing contingency plans for events beyond the
Company's control.
25
The Company completed all of the major components of its Year 2000
project prior to January 1, 2000, and did not experience any significant
disruptions or costs as a result of the calendar change. The Company will
continue to monitor business and manufacturing systems and hardware for
potential problems that could arise during calendar year 2000. However, based on
the Company's preparations prior to January 1, 2000 and the absence of any
problems subsequent to January 1, no significant disruptions or costs are
anticipated. In the fiscal years ended February 29, 2000 and February 28, 1999,
the Company incurred approximately $.8 million to make its systems Year 2000
compliant.
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING INFORMATION
Certain statements and information contained in this Annual Report on Form
10-K, including in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and under "Business" in Item 1. and under
"Legal Proceedings" in Item 3., are forward-looking statements regarding
Management's current plans, objectives, and expectations for the future, which
are based on prevailing circumstances and information available at this time.
Accordingly, such statements and information involve inherent risks and
uncertainties, and actual results may differ materially from those discussed
therein. Forward-looking statements contained herein include: (a) statements
made concerning strategic plans for growth, (b) statements made regarding future
cash flows, compliance with debt covenants, and the availability of funds to
meet obligations and fund investments, (c) statements made regarding price
expectations in the Company's principal markets, and (d) statements made
regarding the outcome and impact on the Company's business, financial condition,
or results of operation of the Year 2000 issue and pending litigation and other
claims, disputes and legal proceedings. Factors that could cause actual results
to differ from those discussed in the forward-looking statements include:
fluctuations in commodity prices (including chlor-alkali, ammonia, and natural
gas), changes in domestic and international market conditions, changes in
competitive positions, government regulation, changes in labor relations, the
outcome of pending litigation and other claims, changes in general economic
conditions and other factors not enumerated herein that are impossible to
predict at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest rates,
foreign currency exchange rates and commodity prices. To manage the volatility
relating to these exposures, the Company periodically enters into derivative
transactions. The Company does not hold or issue derivative financial
instruments for trading purposes.
The Company generally manages its risk associated with interest rate
movements through a combination of variable and fixed rate debt, as well as
utilization of derivative instruments when appropriate. The fair value of the
variable rate debt as of February 29, 2000 approximated its notional value of
$119,117, and the average interest rate for fiscal 2000 was 8.9%. The fixed rate
debt totaled $175,321 with a fair value of approximately $53,415 and a
weighted-average interest rate of 9.5%. See Note 8 to the Consolidated Financial
Statements on page F-12. There were no derivative contracts in place to manage
interest risk at February 29, 2000. During the year then ended, the Company
liquidated its positions in three cross currency interest rate swaps in place to
lower interest costs by taking advantage of European interest rates. The
interest benefit was recognized as a component of current interest expense. See
Note 14 to the Consolidated Financial Statements on page F-22.
Foreign currency exposures arising from transactions in foreign countries
include firm commitments and anticipated transactions denominated in a currency
other than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective functional
currencies. Therefore, foreign currency exposures arising from transactions are
not material to the Company. The Company's primary foreign currency exposure
arises from foreign denominated revenues and profits translated into U.S.
dollars. The primary currency to which the Company is exposed is the Euro.
The Company generally views its investments in foreign subsidiaries with a
functional currency other than the U.S. dollar as long-term. In the past the
Company has hedged its currency exposure on these investments with cross
currency interest rate swaps. However, as mentioned in the preceding paragraph,
the Company liquidated its positions in these instruments during the 2000 fiscal
year. The Company's net investment in foreign subsidiaries and affiliates
translated into dollars using the year-end exchange rates is approximately
$22,001 at February 29, 2000.
The Company relies upon the supply of natural gas in its production process
and historically has entered into fixed price purchase contracts, collars, swap
agreements and other contracts to manage the commodity based market risk
exposure. However, as a result of its financial condition in fiscal 2000, the
Company was unable to obtain credit terms that would enable it to enter into the
derivative
26
contracts that it has traditionally used to limit its exposure to higher
natural gas prices. All of the natural gas contracts below mature during
March and April 2000. Following is a summary of key contract terms of each
the natural gas contracts and derivative instruments (in thousands):
[Enlarge/Download Table]
CONTRACT VOLUME CONTRACT PRICE
--------------- --------------
(IN MMBTU'S) (PER MMBTU)
Fixed price purchase contracts.............................. 1,225,000 $2.30 - $2.54
See the Risk Management section of Management's Discussion and Analysis at
page 22 in this item and Note 14 to the Consolidated Financial Statements on
page F-20 for further discussion regarding these instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or a director on the Board of
Directors (a "Director") of the Company.
[Enlarge/Download Table]
NAME AGE POSITION
---- --- --------
Robert L. Yohe............................ 64 Chairman of the Board
Victoria E. LaRoche....................... 41 Vice Chairman of the Board
Harold W. Ingalls......................... 52 President and Chief Executive Officer
Gerald B. Curran.......................... 52 Vice President, Treasurer and Chief Financial Officer
Jay M. Lapine............................. 48 Vice President, General Counsel and Secretary
William G. Osborne, Ph.D.................. 59 Vice President and Assistant Secretary
W. Walter LaRoche, III.................... 48 Director
John R. Hall.............................. 67 Director
C. L. Wagner, Jr.......................... 56 Director
George R. Wislar.......................... 67 Director
ROBERT L. YOHE. Chairman of the Board. Mr. Yohe was elected Chairman of the
Board in November 1999 after serving as a Director of the Company since November
1996. Mr. Yohe retired as Vice Chairman of Olin Corporation in 1994, after 11
years of service. He served in many leadership capacities at Olin Corporation
including President of the Chemicals Group from 1985 to 1993 and Vice President
of Mergers and Acquisitions from 1983 to 1985. Prior to joining Olin
Corporation, Mr. Yohe worked in executive management for Uniroyal, and
Occidental Petroleum's Hooker Chemical Division. Mr. Yohe is a member of the
Board of Directors of Airgas, Inc., Calgon Carbon Corporation, Marsulex Inc. and
The Middleby Corporation. He is also a Trustee of Lafayette College.
VICTORIA E. LAROCHE. Vice Chairman of the Board. Ms. LaRoche was elected as
a Director of LaRoche Holdings Inc. ("LHI") in August 1993. She has been a
Director of the Company since the consolidation of LHI and LaRoche Chemicals
Inc. ("LCI") into the Company in 1994, serving as Vice Chairman of the Board
since October 1994. Ms. LaRoche began working for the Company in 1987 and held a
wide variety of positions within the Company in the Accounting, Environmental,
Financial Analysis and Market Research departments until March 1996.
HAROLD W. INGALLS. President and Chief Executive Officer. Mr. Ingalls
joined the Company as Vice President and Chief Financial Officer in July 1996
and was elected to President and Chief Executive Officer in October 1998. Prior
to joining the Company, Mr. Ingalls served for approximately one year as the
Vice President and Chief Financial Officer of OHM Corporation Atlanta, an
affiliate of WMX Technologies, Inc., an environmental remediation company
("WMX"). Prior to 1995, Mr. Ingalls served as the Chief Financial Officer,
Treasurer and Vice President of two subsidiaries of WMX and served other
subsidiaries of WMX for over thirteen years in various strategic and managerial
capacities.
GERALD B. CURRAN. Vice President, Treasurer and Chief Financial Officer.
Mr. Curran joined the Company as Vice President and Chief Financial Officer in
October 1998 after having served in a financial management consulting role for
the Company from July 1998 through October 1998. He was named to the position of
Treasurer in February 1999. Prior to joining the Company, Mr. Curran worked with
WMX where he held senior financial and management positions for over ten years.
JAY M. LAPINE. Vice President, General Counsel and Secretary. Mr. Lapine
joined the Company as Vice President, General Counsel and Secretary in July
1999. Prior to joining the Company, Mr. Lapine served as Senior Vice President,
General Counsel and Assistant Secretary of the information technology business
(formerly HBOC) of McKesson HBOC, Inc. for five years. Prior to 1994, he held
various executive and general counsel positions in the healthcare and technology
fields.
WILLIAM G. OSBORNE, PH.D. Vice President and Assistant Secretary. Dr.
Osborne is currently serving as Vice President of Sales for
Electrochemicals--North America. Dr. Osborne has held a number of positions
within the Company. He served as Managing Director of ChlorAlp from its
formation in October 1997 through October 1999. Dr. Osborne also led the
Company's merger and acquisition activity from May 1996 until October 1997,
including negotiation of the Company's European acquisitions. Prior to that, Dr.
Osborne oversaw the Company's purchasing and distribution functions for two
years. Dr. Osborne was Vice President of Corporate Operations and Vice President
and General Manager, Performance Materials for LCI from April 1992 through March
1994, and was Vice President and General Manager -- Specialty Alumina Chemicals
for LCI from July 1988 through April 1992. He also held a
28
number of positions with Kaiser from 1969 through LCI's acquisition of Kaiser
in 1988.
W. WALTER LAROCHE, III. Director. Mr. LaRoche came to the Company in 1988
from the Tennessee Valley Authority where he served as an attorney from 1976 to
1988. In August 1988 he joined LHI as Vice President of Planning and Business
Development. He was appointed Executive Vice President and Chief Operating
Officer of the Company in January 1989 and President and Chief Operating Officer
of the Company and Vice President of LCI in March 1991. Mr. LaRoche was
appointed Vice Chairman of LHI, LCI and the Company in May 1993. He served as a
member of the Board of Directors of LHI, LCI and the Company from July 1988
until 1994 and has continued to serve as a Director of the Company since 1994.
Mr. LaRoche served as Chairman of the Board of the Company from October 1994
until November 1999.
JOHN R. HALL. Director. Mr. Hall was elected to the Board of Directors of
the Company in September 1996. Most recently, Mr. Hall was employed by Ashland,
Inc. as Chairman of the Board and Chief Executive Officer from 1981 through
1997. He is a member of the Board of Directors of Banc One Corporation, the
Canada Life Assurance Company, CSX Corporation, Humana Inc., Reynolds Metals
Company and UCAR International Inc. He is a member of the American Petroleum
Institute Board of Directors and Public Policy Committee and the National
Petroleum Counsel. Mr. Hall is past Chairman of the National Petroleum Refiners
Association.
C.L. WAGNER, JR. Director. Mr. Wagner was elected as a Director of LCI in
1988 and has been a Director of the Company since the Consolidation. Mr. Wagner
has been a partner in the law firm of Hunton & Williams since 1988. Prior to
that time, Mr. Wagner was a partner with the law firm of Hansell & Post in
Atlanta, Georgia. Hunton & Williams has regularly acted as counsel to LHI, LCI
and the Company. Mr. Wagner is also a member of the Board of Directors of Lummus
Corporation, a textile equipment manufacturer, and Alimenta (United States),
Inc., an international food processor and distributor.
GEORGE R. WISLAR. Director. Mr. Wislar has been a Director of the Company
since the Consolidation. Mr. Wislar is the founder and retired Chairman of the
Board of Directors and Chief Executive Officer of Fountainhead Water Company,
Inc., Marietta, Georgia. Mr. Wislar's previous experience includes investment
banking at Alex Brown & Sons, Inc., The Robinson-Humphrey Company and Kidder,
Peabody & Co. Incorporated.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides the compensation earned for fiscal years 2000,
1999, and 1998 by the Company's Chief Executive Officer and its other executive
officers serving at fiscal year-end ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL COMPENSATION
--------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)(3)(4)
-------------------------------- ------ ----------------- ----------------- ------------------ -----------------------
Harold W. Ingalls............... 2000 $ 400,008 -- -- $ 10,250
Chief Executive Officer 1999 310,368 $ 15,736(6) -- 2,013
1998 200,353 -- -- --
Gerald B. Curran................ 2000 209,402 -- -- 7,797
Chief Financial Officer 1999 126,960(5) -- 42,845 667
1998 -- -- --
Jay M. Lapine................... 2000 120,464 -- -- 1,364
Secretary 1999 -- -- -- --
1998 -- -- -- --
William G. Osborne.............. 2000 150,000 60,060(7) -- 23,813
Assistant Secretary 1999 153,033 60,115(7) -- 16,638
1998 141,570 73,111(7) -- 51,192
----------
(1) Amounts shown reflect the tax gross-up amounts paid by the Company in
connection with the bonuses awarded to Mr. Curran pursuant to the
Company's Management Stock Purchase Plan. Also see footnotes (5) and
(6) below and "Management Stock Purchase Plan."
29
(2) Amounts shown for fiscal year 2000 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of
$10,250, $7,797, $1,364 and $6,313 on behalf of Mr. Ingalls, Mr.
Curran, Mr. Lapine and Mr. Osborne, respectively, and (ii) a taxable
relocation allowance of $17,500 paid to Mr. Osborne resulting from his
move back from France.
(3) Amounts shown for fiscal year 1999 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan of
$2,013, $1,613 and $667 on behalf of Mr. Ingalls, Mr. Osborne and Mr.
Curran, respectively, (ii) foreign service allowance of $15,000 paid to
Mr. Osborne and (iii) expatriate taxes of $7,984 paid to Mr. Osborne
resulting from his move to France.
(4) Amounts shown for fiscal year 1998 reflect (i) matching 401(k)
contributions made by the Company to the Company's savings plan to Mr.
Osborne of $416, (ii) relocation expense and resettlement allowance of
$50,776 paid to Mr. Osborne resulting from his move to France and (iii)
expatriate taxes of $7,984 paid to Mr. Osborne, also resulting from his
move to France.
(5) Amount shown reflects direct and consulting compensation for
approximately six months of Mr. Curran's employment in fiscal 1999.
(6) Amount shown reflects a special nonrecurring bonus granted by the
Company in fiscal 1999.
(7) Amount shown reflects a relocation bonus paid to Mr. Osborne resulting
from his move to France.
PENSION AND INCENTIVE PLANS
The Company maintains six 401(k) savings plans ("401(k) plans"), one of
which is for salaried employees not subject to a collective bargaining agreement
and five of which are for employees subject to collective bargaining agreements.
Under each 401(k) plan, participating employees can make pre-tax deferrals.
During fiscal 1999, the 401(k) plans with provisions for Company matching
contributions covering salaried employees were amended to provide for immediate
eligibility and vesting of the non-discretionary Company matching contribution.
Where the 401(k) plan has no matching feature, the Company does not contribute
any of its own funds to the plan. Under certain of the 401(k) plans,
participating employees are able to make after-tax contributions. All of the
401(k) plans are designed to be qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and exempt from tax under Code
Section 501(a).
The Company also maintains one qualified defined benefit Employee Pension
Benefits Plan, with separate rules for salaried employees (the "Salaried Pension
Plan Rules") and hourly employees (the "Hourly Pension Plan Rules"). Under the
pension plan normal retirement age is 65, though Participants may retire as
early as age 55 with 10 years of continuous service and receive a reduced
benefit. The benefit is reduced five percent for each year or fraction thereof
that retirement precedes age 65. Effective January 1, 1999, the Salaried Pension
Plan benefit calculation formula was amended to an average monthly earnings
basis multiplied by the years of service multiplied by a factor of 1.2%. Prior
to January 1, 1999, under the Salaried Pension Plan Rules, benefits were based
on the Final Earnings Benefit Formula and the Career Earnings Benefit Formula
(each defined therein). The Final Earnings Benefit Formula is the average of the
best five consecutive of the last 10 years of base monthly salary multiplied by
a factor obtained by multiplying the first 30 years of service by 1.1% and the
years of service over 30 by 1.2%. The monthly Career Earnings Benefit Formula is
1% of the total career compensation, including bonus, multiplied by 130% and
divided by 12. Under the Hourly Pension Plan Rules, the benefits are based on a
calculation of a specified hourly rate multiplied by years of credited service.
In addition, a non-qualified defined benefit Supplemental Employee Retirement
Plan is provided to recognize compensation in excess of the IRS limits under the
qualified plan. The estimated annual benefits payable upon retirement at normal
retirement age for each of the Named Executive Officers is as follows: Mr.
Ingalls -- $77,408; Mr. Curran -- $35,283; Mr. Lapine -- $40,803 and Mr. Osborne
-- $54,233.
The Company has instituted certain executive and other key employee benefit
plans intended to provide incentives to those employees most responsible for the
Company's success. The 1997 Stock Option Plan provides incentives in the form of
grants of stock options and is intended to recognize and reward outstanding
individual performance. The 1998 Management Stock-Based Incentive Plan enables
key management employees to acquire financial interests in the Company through
the award of phantom stock interests tracking the performance of the Company's
common stock but with the appreciation benefit payable in cash. The Annual
Incentive Plan is intended to provide a cash bonus incentive for key management
employees to achieve targeted operational results and individual goals. All such
plans are to be administrated by the Compensation Committee, which is empowered
to determine those employees eligible to participate, the type and amount of
awards to be made and the various restrictions applicable to such awards. In
April 1999, the Compensation Committee approved the implementation of a revised
Profit Sharing Plan ("Revised Plan"). The Revised Plan uses an established
EBITDA goal as a benchmark for Company performance coupled with individual
achievement.
30
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company receive no
additional compensation for serving on the Board of Directors. In November 1999,
as a result of the Company's poor financial condition, the Company's Board voted
to discontinue all fees paid to its Board members, except for reimbursement of
the Directors' out of pocket expenses. Prior to the suspension of payments, the
Company paid an annual fee to all non-employee Directors of $50,000, plus $1,000
for each board and committee meeting attended. The Company also paid an
additional annual fee to all outside Directors who serve as the Chairman of the
Board ($50,000), Vice-Chairman of the Board ($25,000) and Committee Chairman
($5,000).
Effective June 26, 1995, the Board of Directors approved the 1995 Board of
Directors Stock Purchase Plan (the "Directors Plan"). The Company has authorized
and reserved for issuance under the Directors Plan an aggregate of 5,000 shares
of the Company's common stock. The Directors Plan provides that outside
directors of the Company will be eligible to purchase shares of the Company's
common stock at fair market value (as determined by appraisal). In connection
with the Directors Plan, the Company may agree to guarantee loans used to
finance the purchase of such stock. Upon termination of directorship, the shares
must be sold to the Company at fair market value (based upon an appraisal). All
redemption provisions of the Company's shares expire upon a public offering of
the Company's common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 2000, the Company's compensation committee consisted of
C. L. Wagner, Jr. (Chairman), George R. Wislar, Robert L. Yohe and John R. Hall.
During fiscal year 2000, Hunton & Williams, of which C. L. Wagner is partner,
provided various types of legal services to the Company for which the Company
was billed approximately $.4 million.
RETENTION AGREEMENTS
Mr. Ingalls, Mr. Curran, Mr. Lapine and Mr. Osborne have all entered into
retention agreements with the Company. These agreements provide for three
scheduled retention payments, one of which is contingent, and for severance in
the event of involuntary termination, other than for cause. These contracts were
all entered prior to the Company's filing for Chapter 11 protection on May 3,
2000; therefore, the effectiveness of all of these contracts is subject to
Bankruptcy Court review and approval.
MANAGEMENT STOCK PURCHASE PLAN
In August 1994, the Company adopted a Management Stock Purchase Plan (the
"1994 Purchase Plan"), pursuant to which certain executive officers and
management employees of the Company (the "Eligible Employees") are, at the
discretion of the Board, eligible to purchase shares of the Company's common
stock at the then current fair market value of such shares as determined by
appraisal. Such Eligible Employees are also eligible to receive bonuses in the
form of cash, a portion of which must be applied to the purchase of shares of
the Company's common stock (the "Purchased Shares"). Certain bonuses were
granted to certain of the Eligible Employees at the time of the Consolidation to
purchase additional shares (the "Bonus Shares"). See Item 12. "Security
Ownership of Certain Beneficial Owners and Management" for information
concerning the aggregate share ownership of the Company's Named Executive
Officers and Directors. At the time of the Consolidation certain of the Eligible
Employees acquired shares of the Company's common stock with the proceeds from
the repurchase by LCI of their shares of LCI capital stock. See "Executive
Compensation -- Summary Compensation Table."
In August 1995, the Board adopted the 1995 Amended and Restated Stock
Purchase Plan (the "1995 Purchase Plan," and together with the 1994 Purchase
Plan, the "Management Stock Purchase Plan"). The 1995 Purchase Plan eliminated
the distinction between Bonus Shares, Purchased Shares and Conversion Shares and
provides that the repurchase value of all such shares will be the fair market
value. Participants are required to sell and the Company is required to purchase
the shares upon termination of employment. The 1995 Purchase Plan provides that
in the event that an Eligible Employee finances his purchase of shares with a
bank loan, the Company may guarantee the repayment of such loan, such guarantee
to be secured by the shares acquired by the Eligible Employee. The 1995 Purchase
Plan is administered by the Company's Board.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the Company's common
stock as of February 28, 2001 by directors, Named Executive Officers, persons
known by the Company to own more than 5% of the common stock and all
executive officers and directors of the Company as a group.
[Enlarge/Download Table]
AGGREGATE
NUMBER OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
Johnnie Lou LaRoche(1)................................... 106,250 24.8%
W. Walter LaRoche, III(1)................................ 106,250 24.8
Victoria E. LaRoche(1)................................... 106,250 24.8
Louanne C. LaRoche(1).................................... 106,250 24.8
Harold W. Ingalls........................................ 1,506 *
Paul L. M. Beckwith, Ph.D................................ 800 *
George R. Wislar......................................... 550 *
C. L. Wagner, Jr......................................... 400 *
Robert L. Yohe........................................... 300 *
John R. Hall............................................. 200 *
Wayne J. Breaux.......................................... 179 *
Directors and executive officers as a group (15) Persons. 428,935 100%
----------
* Indicates that the percentage beneficially owned was less than 1.0%.
(1) The LaRoche Family may be deemed to be a "group" for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), although such persons disclaim any such group
status, and there is no agreement among them with respect to the
acquisition, retention, disposition or voting of the Company's common
stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1997, the Company entered into a Consulting Agreement with
Johnnie Lou LaRoche, a Director of the Company, pursuant to which Mrs. LaRoche
will provide various consulting services to the Company in exchange for a
consultant fee of $438,612 per year. The Consulting Agreement had an initial
term of one year expiring June 30, 1998, and is automatically renewed for
successive one year periods, until terminated by either party upon 30 days
notice. During fiscal 1999, the payments under this contract were suspended
indefinitely pending improved financial performance of the Company.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
[Enlarge/Download Table]
PAGE
NUMBER
------
(1) Financial Statements
Report of Independent Auditors............................................................................ F-1
Consolidated Balance Sheets............................................................................... F-2
Consolidated Statements of Operations and Comprehensive (Loss) Income..................................... F-3
Consolidated Statements of Stockholders' (Deficit) Equity................................................. F-4
Consolidated Statements of Cash Flows..................................................................... F-5
Notes to Consolidated Financial Statements................................................................ F-6
(2) Financial Statement Schedules.............................................................................
Schedule II Valuation and Qualifying Accounts............................................................. S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instruction or are inapplicable and therefore have been omitted.
(3) Exhibits
The following exhibits are filed as part of this Report:
[Download Table]
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 -- Certificate of Incorporation of the Company, together
with amendments thereto(1).
3.2 -- Bylaws of the Company(1).
4.1 -- Indenture, dated as of August 17, 1994, between
NationsBank of Georgia, National Association, as
Trustee, and the Company(4).
4.2 -- Form of Note (included in Exhibit 4.1)(4).
4.3 -- Indenture, dated as of September 23, 1997, by and
between the Company and State Street Bank and Trust
Company, as Trustee(10).
4.4 -- Form of Note (included in Exhibit 4.3)(10).
10.4 -- Shareholders Agreement (and amendment thereto), dated
August 1, 1997, by and among the Company, LII Europe
S.A.R.L., Rhone-Poulenc Chimie S.A. and Rhone L
S.A.S.(10).
10.5 -- Put and Call Agreement (and amendment thereto), dated
August 1, 1997, by and among the Company, LII Europe
S.A.R.L., Rhone-Poulenc Chimie S.A. and Rhone L
S.A.S.(10).
10.6++ -- Agreement for Purchase and Supply of Electricity, Steam
and Other Products, dated October 17, 1997, by and among
ChlorAlp S.A.S., CEVCO G.I.E., and Rhone-Poulenc Chimie
S.A.(10).
10.7++ -- Supply and Purchase Agreement (Chlorine), dated October
17, 1997, by and between Rhone-Poulenc Chimie and
ChlorAlp S.A.S.(10).
33
10.8 -- Chlorine Side Letter, dated October 17, 1997, by and
among ChlorAlp S.A.S., Rhone-Poulenc Chimie and the
Company(10).
10.9++ -- Supply and Purchase Agreement (Caustic Soda), dated
October 17, 1997, by and between Rhone-Poulenc Chimie
and ChlorAlp S.A.S.(10).
10.10++ -- Supply and Purchase Agreement (Hydrochloric Acid), dated
October17, 1997, by and between Rhone-Poulenc Chimie and
ChlorAlp S.A.S.(10).
10.11++ -- Supply and Purchase Agreement (Hydrogene), dated October
17, 1997, by and between Rhone-Poulenc Chimie and
ChlorAlp S.A.S.(10).
10.12++ -- Supply and Purchase Agreement (Sulfuric Acid), dated
October 17, 1997, by and between Rhone-Poulenc Chimie
and ChlorAlp S.A.S.(10).
10.13++ -- Supply and Purchase Agreement (Sodium Hypochlorite),
dated October 17, 1997, by and between Rhone-Poulenc
Agro Chimie and ChlorAlp S.A.S.(10).
10.14++ -- Supply and Purchase Agreement (Gaseous Chlorine-Caustic
Soda), dated October 17, 1997, by and between
Rhone-Poulenc Agro Chimie and ChlorAlp S.A.S.(10).
10.21 -- Credit Agreement, dated as of August 26, 1997, among the
Company, the Lenders party hereto and the Chase
Manhattan Bank, as Administrative Agent(9).
10.22 -- First Amendment to Credit Agreement, dated as of August
26, 1997, among the Company, the Lenders party hereto
and the Chase Manhattan Bank, as Administrative
Agent(10).
10.24+ -- LaRoche Chemicals Inc. 1989 Key Management Stock
Appreciation Bonus Plan(1).
10.25+ -- LaRoche Holdings Inc. Supplemental Employee Retirement
Plan(1).
10.26+ -- LaRoche Executive Management Health Program(1).
10.27+ -- Management Stock Purchase Plan and forms of related
agreements with executive officers(3).
10.28+ -- LaRoche Industries Inc. 1995 Board of Directors Stock
Purchase Plan and form of agreement(5).
10.29 -- Hydrate Partnership Agreement, dated as of January 1,
1993, between Kaiser and LCI(1).
10.30 -- Amended and Restated Hydrate Sales Agreement, dated as
of May 27, 1997 and effective as of August 1, 1995,
between Kaiser and the Hydrate Partnership(8).
10.31 -- Powerhouse Operating Agreement, dated as of July 26,
1988, between Kaiser and LCI, as amended January 8,
1994(1).
10.32 -- Powerhouse Lease, dated as of July 26, 1988, between
Kaiser and LCI(1).
10.35 -- Salt Agreement, dated as of May 3, 1957, between Texaco
and Kaiser, as amended May 15, 1968(1).
10.36 -- Supply Agreement, dated as of April 1994, between Allied
Signal Inc. and LCI (portions redacted pursuant to a
confidentiality request)(1).
34
10.37 -- Joint Venture Agreement, dated as of July 26, 1994,
between Cytec Ammonia, Inc. and LaRoche Fortier Inc.(2).
10.38 -- Waiver and Amendment No. 2 to Credit Agreement, dated as
of August 26, 1997, among the Company, the Lenders party
thereto and the Chase Manhattan Bank, as Administrative
Agent(10).
10.39+ -- Form of 1997 Stock Option Plan(10).
10.40+ -- Form of Management Stock-Based Incentive Plan(10).
10.41+ -- Form of Annual Incentive Plan(10).
10.42 -- Amended and Restated Credit Agreement amending the
Credit Agreement, dated as of August 26, 1997, among the
Company, the Lenders party thereto and The Chase
Manhattan Bank, as administrative agent (10).
10.43 -- Amendment No. 2 dated as of September 14, 1999 to the
Amended and Restated Credit Agreement dated as of
February 28, 1999 and amended as of May 31, 1999 (11).
10.44 -- Amendment No. 3 dated as of November 15, 1999 to the
Amended and Restated Credit Agreement dated as of
February 28, 1999 and amended as of May 31, 1999 and
September 14, 1999 (12).
10.45 -- Amendment No. 4 dated as of December 10, 1999 to the
Amended and Restated Credit Agreement dated as of
February 28, 1999 and amended as of May 31, 1999,
September 14, 1999 and November 15, 1999 (12).
10.46 -- Amendment No. 5 dated as of January 10, 2000 to the
Amended and Restated Credit Agreement dated as of
February 28, 1999 and amended as of May 31, 1999,
September 14, 1999, November 15, 1999, and December 10,
1999 (13).
10.47 -- Amendment No. 6 dated as of January 20, 2000 to the
Amended and Restated Credit Agreement dated as of
February 28, 1999 and amended as of May 31, 1999,
September 14, 1999, November 15, 1999, December 10,
1999, and January 10, 2000 (14).
10.48 -- Amendment No. 7 to Credit Agreement and Forbearance
Agreement (15).
10.50* -- Revolving Credit and Guaranty Agreement dated as of May
4, 2000, among Laroche Industries Inc., a debtor and
debtor-in-possession under Chapter 11 of the Bankruptcy
Code, AS BORROWER, and The Lender Parties Hereto and The
Chase Manhattan Bank, as Agent, dated as of May 4, 2000.
10.51* -- Amendment No. 1, dated as of May 15, to the Credit
Agreement, dated as of May 4, 2000.
10.52* -- Amendment No. 2, dated as of June 1, 2000, to the Credit
Agreement, dated as of May 4, 2000.
10.53* -- Amendment No. 3, dated as of August 31, 2000, to the
Credit Agreement, dated as of May 4, 2000.
10.54* -- Amendment No. 4 and Waiver, dated as of August 31, 2000,
to the Credit Agreement, dated as of May 4, 2000.
10.55* -- Amendment No. 5 and Waiver, dated as of October 6, 2000,
to the Credit Agreement, dated as of May 4, 2000.
35
10.56* -- Amendment No. 6, dated as of October 30, 2000, to the
Credit Agreement, dated as of May 4, 2000.
10.57* -- Amendment No. 7, dated as of November 30, 2000, to the
Credit Agreement, dated as of May 4, 2000.
10.58* -- Amendment No. 8, dated as of December 29, 2000, to the
Credit Agreement, dated as of May 4, 2000.
10.59* -- Amendment No. 9, dated as of January 10, 2001, to the
Credit Agreement, dated as of May 4, 2000.
99.3 -- Press Release, issued March 10, 2000 (15).
99.4 -- Press Release, issued May 3, 2000 (16).
12* -- Statement regarding Computation of Ratios of Earnings to
Fixed Charges.
21* -- Subsidiaries of the Registrant.
----------
* Filed herewith.
+ Denotes a management contract or compensatory plan required to be
filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.
++ Portions of these documents have been omitted pursuant to a request
for confidential treatment under Rule 406 of the Securities Act of
1933, as amended.
(1) Previously filed as an exhibit to Registration Statement No. 33-79532
filed May 31, 1994 and incorporated herein by reference.
(2) Previously filed as an exhibit to Amendment No. 3 to Registration
Statement No. 33-79532 filed August 3, 1994 and incorporated herein by
reference.
(3) Previously filed as an exhibit to Amendment No. 4 to Registration
Statement No. 33-79532 filed August 9, 1994 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended August 31, 1994 and incorporated herein
by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended August 31, 1995 and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended November 30, 1996 and incorporated
herein by reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended February 28, 1997 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended May 31, 1997 and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended August 31, 1997 and incorporated herein
by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended February 28, 1998 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Company's Report on Form 8-K
dated September 15, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Report on Form 8-K
dated December 10, 1999 and incorporated herein by reference.
36
(13) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended November 31, 1999 and incorporated
herein by reference.
(14) Previously filed as an exhibit to the Company's Report on Form 8-K
dated January 21, 2000 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Company's Report on Form 8-K
dated March 10, 2000 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Report on Form 8-K
dated May 4, 2000 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on December 10, 1999 to provide
information about amendments to the Company's senior credit facility.
A Current Report on Form 8-K was filed on January 20, 2000 to provide
information about an amendment to the Company's senior credit facility.
A Current Report on Form 8-K was filed on February 14, 2000 to announce
that LaRoche Industries had retained the services of Chanin Capital Partners to
explore capital structure alternatives for the Company.
(c) REQUIRED EXHIBITS
The exhibits required to be filed with this Report are listed in Item
14(a)(3) and on the Exhibit Index page immediately following the signature page
hereto.
(d) REQUIRED FINANCIAL STATEMENT SCHEDULES
The financial statement schedule required to be filed with this Report is
listed in Item 14(a)(2) and appears on page S-1.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the undersigned Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
March 15, 2001.
LAROCHE INDUSTRIES INC.
By: /s/ Gerald B. Curran
--------------------------------------------
Gerald B. Curran
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 15, 2001.
[Enlarge/Download Table]
SIGNATURE TITLE
--------- -----
/s/ Harold W. Ingalls President, Chief Executive Officer and Director
---------------------------------------------------------------
Harold W. Ingalls
/s/ Gerald B. Curran Vice President and Chief Financial Officer
---------------------------------------------------------------
Gerald B. Curran
/s/ Robert L. Yohe Chairman of the Board
---------------------------------------------------------------
Robert L. Yohe
/s/ Victoria E. LaRoche Director
---------------------------------------------------------------
Victoria E. LaRoche
/s/ W. Walter LaRoche, III Director
---------------------------------------------------------------
W. Walter LaRoche, III
/s/ C.L. Wagner, Jr. Director
---------------------------------------------------------------
C. L. Wagner, Jr.
/s/ George R. Wislar Director
---------------------------------------------------------------
George R. Wislar
/s/ John R. Hall Director
---------------------------------------------------------------
John R. Hall
38
LAROCHE INDUSTRIES INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 29, 2000 and February 28,
1999 and 1998
CONTENTS
[Download Table]
PAGE
----
Report of Independent Auditors............................................. F-1
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations and Comprehensive Loss............... F-3
Consolidated Statements of Stockholders' (Deficit) Equity.................. F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
LaRoche Industries Inc.
We have audited the accompanying consolidated balance sheets of LaRoche
Industries Inc. (the "Company"), a debtor-in-possession as of May 3, 2000, as of
February 29, 2000 and February 28, 1999, and the related consolidated statements
of operations and comprehensive loss, stockholders' (deficit) equity, and cash
flows for each of the three years in the period ended February 29, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LaRoche
Industries Inc. at February 29, 2000 and February 28, 1999, and the consolidated
results of its operations and comprehensive loss and its cash flows for each of
the three years in the period ended February 29, 2000, in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the financial information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on May 3,
2000 the Company filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court (the
"Court"). Although the Company is currently continuing business operations as a
debtor-in-possession under the jurisdiction of the Court, the continuation of
its business as a going concern is contingent upon, among other things, the
ability to formulate a Plan of Reorganization which will be confirmed by the
Court, and the ability to generate sufficient cash from operations and financing
sources to meet obligations as they come due. The matters discussed above and
the recurring losses from operations and the substantial deficiency in
stockholders' equity raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern
and do not include any adjustments relating to the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst and Young LLP
Atlanta, Georgia
June 15, 2000, except for Note 10, which is as of December 12, 2000
F-1
LAROCHE INDUSTRIES INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 2,311 $ 5,380
Receivables (Notes 8 and 14):
Trade, net of allowances of $730 and $499 in 2000 and
1999, respectively................................................... 34,014 54,527
Refundable income taxes (Note 12)...................................... 2,257 5,037
Other.................................................................. 1,931 3,196
Inventories (Notes 2, 5 and 8)............................................ 8,032 22,105
Net assets of discontinued operations (Notes 3 and 10).................... 22,776 27,080
Other current assets...................................................... 6,877 3,468
------------ ------------
Total current assets.............................................. 78,198 120,793
Investments in and advances to affiliates (Note 6).......................... 7,764 48,082
Property, plant and equipment, at cost (Notes 2, 4, 7 and 8)................ 135,408 310,092
Less accumulated depreciation............................................. (43,417) (106,497)
------------ ------------
Net property, plant and equipment........................................... 91,991 203,595
Patents..................................................................... 7,004 98
Debt issue costs(Note 8).................................................... 6,717 9,256
Other assets................................................................ 7,678 7,953
------------ ------------
$ 199,352 $ 389,777
Total assets...................................................... ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit facility (Note 8)........................................ $ 92,138 $ 55,388
Accounts payable.......................................................... 65,467 48,166
Accrued compensation...................................................... 10,581 5,039
Accrued interest.......................................................... 11,245 8,202
Other accrued liabilities................................................. 16,931 26,662
Current portion of long-term debt (Note 8) ............................... -- 4,375
Long-term debt reclassified as current (Note 8)........................... 202,300 --
------------ ------------
Total current liabilities......................................... 398,662 147,832
Long-term debt (Note 8)..................................................... -- 202,221
Deferred income taxes (Note 12)............................................. 15,583 4,044
Pension and other post-retirement obligations (Note 9)...................... 32,775 33,625
Other noncurrent liabilities................................................ 13,892 12,132
Commitments and contingencies (Note 11).....................................
Redeemable common stock (Note 13)...........................................
-- 528
Stockholders' deficit:
10% cumulative, voting preferred stock, $.01 par value,
200 shares authorized, no shares outstanding........................... -- --
Common stock, $.01 par value, 1,200 shares authorized, 429
non-redeemable shares issued........................................... 4 4
Capital in excess of par value............................................ 630 630
Accumulated deficit....................................................... (259,156) (10,491)
Accumulated other comprehensive loss...................................... (3,038) (748)
------------ ------------
Total stockholders' deficit....................................... (261,560) (10,605)
------------ ------------
Total liabilities and stockholders' deficit....................... $ 199,352 $ 389,777
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
LAROCHE INDUSTRIES INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
[Enlarge/Download Table]
YEAR ENDED
--------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
------------ ------------ ------------
(IN THOUSANDS)
Net sales...................................................... $ 204,515 $ 206,800 $ 133,359
Cost of sales.................................................. 168,501 176,841 101,848
---------- ---------- -----------
Gross profit................................................... 36,014 29,959 31,511
Selling, general and administrative expenses................... 41,684 30,208 34,194
---------- ---------- -----------
Operating loss from continuing operations...................... (5,670) (249) (2,683)
Interest and amortization of debt expense...................... (7,500) (5,741) (2,194)
Income (loss) from equity investments (Note 6)................. 1,627 2,614 (619)
Other (expense) income, net.................................... (7,703) (1,070) (1,123)
----------- ----------- -----------
Loss from continuing operations before income taxes
and extraordinary charge..................................... (19,246) (4,446) (6,619)
(Provision) benefit for income taxes (Note 12)................. -- (1,488) 3,391
----------- ----------- -----------
(Loss) income from continuing operations before
extraordinary charge......................................... (19,246) (5,934) (3,228)
Discontinued operations (Notes 3, 4 and 10):
(Loss) from discontinued operations, net of tax benefit
(provision) of $ -0-, $(64) and $262 in 2000, 1999 and 1998,
respectively................................................ (53,377) (28,933) (2,571)
Loss on disposal of discontinued operations including
operating losses during the phase-out period of $42,984
in 2000, and loss on disposal of assets of $8,804,
including operating losses of $493, net of tax benefit
of $3,646 in 1999........................................... (176,042) (5,651) --
----------- ----------- -----------
Loss before extraordinary charge............................... (248,665) (40,518) (5,799)
Extraordinary charge from debt extinguishment, net of $7,740
tax benefit (Note 8)......................................... -- -- (12,290)
----------- ----------- -----------
Net loss....................................................... $ (248,665) $ (40,518) $ (18,089)
----------- ----------- -----------
Other comprehensive loss before tax:
Foreign currency translation adjustments..................... (4,407) (400) (150)
Minimum pension liability adjustments........................ 590 (496) 26
----------- ----------- -----------
Other comprehensive loss before tax.......................... (3,814) (896) (124)
Income tax benefit related to items of other comprehensive
loss......................................................... 1,527 359 50
----------- ----------- -----------
Other comprehensive loss..................................... (2,290) (537) (74)
----------- ----------- -----------
Comprehensive loss............................................. $ (250,955) $ (41,055) $ (18,163)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
LAROCHE INDUSTRIES INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
[Enlarge/Download Table]
ACCUMULATED
CAPITAL IN ACCUMULATED OTHER
COMMON EXCESS OF (DEFICIT) COMPREHENSIVE
STOCK PAR VALUE EARNINGS LOSS TOTAL
---------- ------------- ------------- ----------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Balance at February 28, 1997....... 4 $ 630 $ 50,409 $ (137) $ 50,906
Net loss......................... -- -- (18,089) (18,089)
Dividends paid, $2.50 per share.. -- -- (1,095) (1,095)
Foreign currency translation
adjustments................... -- -- -- (90) (90)
Pension adjustments.............. -- -- -- 16 16
-------- ------ ----------- -------- -----------
Balance at February 28, 1998....... 4 630 31,225 (211) 31,648
Net loss......................... -- -- (40,518) (40,518)
Dividends paid, $2.75 per share.. -- -- (1,198) (1,198)
Foreign currency translation
adjustments................... -- -- -- (240) (240)
Pension adjustments.............. -- -- -- (297) (297)
-------- ------ ----------- -------- -----------
Balance at February 28, 1999....... 4 630 (10,491) (748) (10,605)
NET LOSS......................... -- -- (248,665) (248,665)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS................... -- -- -- (2,644) (2,644)
PENSION ADJUSTMENTS.............. -- -- -- 354 354
-------- ------ ----------- -------- -----------
BALANCE AT FEBRUARY 29, 2000....... 4 $ 630 $ (259,156) $ (3,038) $ (261,560)
======== ====== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
LAROCHE INDUSTRIES INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED
----------------------------------
FEBRUARY 29, FEBRUARY 28,
------------ -------------
2000 1999 1998
------------ ------------ -----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss..................................................... $ (248,665) $ (40,518) $ (18,089)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 13,720 5,519 4,689
Deferred income taxes................................... 11,539 (5,981) (4,737)
Equity income (loss), net of distributions.............. (1,046) (2,637) 707
Net (gain) loss on disposal of assets................... -- (29) 1,573
Loss from discontinued operations and loss on disposal 229,419 34,584 2,571
Extraordinary charge from debt extinguishment........... -- -- 12,290
Changes in operating assets and liabilities
(excluding acquisitions):
Receivables........................................ 9,706 (8,014) (18,953)
Inventories........................................ 1,007 4,782 5,057
Other assets....................................... 9,875 272 (4,023)
Accounts payable................................... (466) (8,987) 22,358
Accrued liabilities................................ (10,811) 15,102 6,976
Noncurrent liabilities and other................... (3,814) 6,813 920
----------- ----------- -----------
Net cash provided by continuing operating activities......... 10,464 906 11,339
----------- ----------- -----------
Net cash (used in) provided by operating activities of
discontinued operations (12,206) 11,250 32,150
----------- ----------- -----------
INVESTING ACTIVITIES
Capital expenditures......................................... (7,808) (15,553) (2,248)
Acquisition of businesses.................................... (26,513) -- (17,622)
Investments in and advances to affiliates.................... -- 1,644 (34,138)
Proceeds from sale of facilities............................. 27,080 4,051 36
----------- ----------- -----------
Net cash used in investing activities of continuing
operations.................................................. (7,241) (9,858) (53,972)
----------- ----------- -----------
Net cash used in investing activities of
discontinued operations.................................... (21,505) (30,647) (37,713)
----------- ----------- -----------
FINANCING ACTIVITIES
Net proceeds (repayments) under revolving credit facility.... 32,716 33,378 (15,605)
Proceeds from issuance of long-term debt..................... -- -- 209,216
Repayments of long-term debt................................. (4,375) (8,558) (102,949)
Premium payments on the early extinguishment of debt and
costs of refinancing....................................... -- -- (29,489)
Sales of common stock with redemption features............... -- 128 326
Purchases of common stock with redemption features........... (79) (2,336) (750)
Dividends paid............................................... -- (1,198) (1,095)
----------- ----------- -----------
Net cash provided by financing activities.................... 28,262 21,414 59,654
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents. (843) (569) 261
Net (decrease) increase in cash and cash equivalents......... (3,069) (7,504) 11,719
Cash and cash equivalents at beginning of year............... 5,380 12,884 1,165
----------- ----------- -----------
Cash and cash equivalents at end of year..................... $ 2,311 $ 5,380 $ 12,884
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
LAROCHE INDUSTRIES INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION
LaRoche Industries Inc. ("LII" or the "Company") is engaged in the
manufacture, distribution and sale of electrochemical products in Europe and in
the distribution of anhydrous ammonia and ammonium nitrate in the United States.
These consolidated financial statements include the accounts of LaRoche
Industries Inc. and all majority-owned subsidiaries. Investments in 50%-or-less
owned entities are accounted for by the equity method (except CEVCO, see Equity
Investments - Note 6). All significant inter-company transactions and balances
have been eliminated in consolidation.
On May 3, 2000 (the "Petition Date"), LaRoche Industries Inc. and LaRoche
Fortier Inc. (collectively, the "Debtors") filed voluntary petitions for
protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States District Court for the District of
Delaware (the "Bankruptcy Court"). The bankruptcy cases are being jointly
administered under case number 00-1859 (JJF), having been assigned 00-1859 (JJF)
and 00-1860(JJF), respectively. The Debtors have continued to manage and operate
their assets and businesses as debtors-in-possession pending the confirmation of
a reorganization plan and subject to the supervision and orders of the
Bankruptcy Court. Accordingly, the existing directors and officers continue to
operate and manage the affairs of the Debtors subject to court supervision. The
Chapter 11 filing involves the domestic assets of the debtors only. The Debtors'
European subsidiaries and operations are not subject to the Chapter 11 filing,
and are not subject to Bankruptcy Court supervision. See Note 15 for condensed
financial information of the foreign entities included in the consolidated
financial statements but not included in the bankruptcy proceedings.
The consummation of a plan of reorganization is the principal objective of
the Company's Chapter 11 cases. A plan of reorganization sets forth the means
for satisfying claims and interests in the Company and its debtor subsidiaries,
including the liabilities subject to compromise. The consummation of a plan of
reorganization for the Company and its debtor subsidiary will require the
requisite vote of impaired creditors and stockholders under the Bankruptcy Code
and confirmation of the plan by the Bankruptcy Court.
On February 7, 2001 the Debtors filed a plan of reorganization with the
Bankruptcy Court. A hearing has been set for March 27, 2001 to determine the
adequacy of the plan of reorganization and related disclosure statement. If the
plan is deemed to be viable, the Debtors will have an additional 60 days to
solicit acceptances of the proposed plan. Although management believes that the
reorganization plan will ultimately be confirmed, there can be no assurance that
the Company will be successful in this effort.
The accompanying consolidated financial statements have been presented in
accordance with generally accepted accounting principles applicable to a going
concern, which principles assume that assets will be realized and liabilities
will be discharged in the ordinary course of business. As a result of the
Chapter 11 cases and circumstances relating thereto, default on all pre-petition
debt, negative cash flows, recurring losses, and current economic conditions,
such realization of assets and liquidation of liabilities are subject to
significant uncertainty. While under the protection of Chapter 11, the Company
may sell or otherwise dispose of assets, and liquidate or settle liabilities,
for amounts other than those reflected in the consolidated financial statements.
Additionally, the amounts reported on the consolidated balance sheet could
materially change because of changes in business strategies and the effects of
any proposed plan of reorganization.
The appropriateness of using the going concern basis is dependent upon,
among other things, confirmation of a plan of reorganization by the Bankruptcy
Court, future profitable operations, the ability to comply with the terms of the
debtor-in-possession financing facility and the ability to generate sufficient
cash from operations and financing arrangements to meet obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F-6
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, actual results inevitably will differ from those estimates and such
differences may be material to the financial statements.
REVENUE RECOGNITION AND TRADE RECEIVABLES
The Company recognizes revenue when title passes to customers, which is
generally upon shipment. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral. Terms
on trade receivables are granted in accordance with industry practice.
INVENTORIES
Inventories are valued at the lower of cost or market. At February 29, 2000
and February 28, 1999, the cost of approximately 17.8% and 15.6%, respectively,
of total inventories was determined using the last-in, first-out ("LIFO")
method. Costs for other inventories are determined on a first-in, first-out
("FIFO") or average cost basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including amounts under capital leases (Note
11), are recorded at cost and depreciated using the straight-line method for
financial reporting purposes and accelerated methods for tax purposes over their
estimated useful lives as follows:
Buildings and improvements............................. 20 to 35 years
Machinery and equipment................................ 5 to 15 years
Depreciation expense from continuing operations totaled approximately
$13,720, $5,519 and $4,689 for fiscal years 2000, 1999 and 1998, respectively.
Capitalized costs of certain long-term assets include capitalized interest that
is amortized over the estimated useful life of the related asset. The Company
had no capitalized interest costs in fiscal 2000 compared to capitalized
interest costs of $516 and $1,089 on eligible projects during fiscal 1999 and
1998, respectively.
OTHER ASSETS
The Company amortizes its deferred debt issuance costs, non-compete
agreements and other assets using the straight-line method over lives ranging
from two to twenty years. Accumulated amortization of other assets used in
continuing operations totaled $13,454 and $5,678 for the fiscal years ended
February 29, 2000 and February 28, 1999, respectively.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are generally
translated from the foreign currency at the rate of exchange in effect as of the
balance sheet date. Resulting translation adjustments are reflected in
accumulated comprehensive loss in stockholders' deficit. Revenues and expenses
are generally translated at average monthly exchange rates during the year, and
effect of exchange rate fluctuations on earnings is reflected in the results of
operations as they occur.
DERIVATIVES
The Company has periodically entered into financial instruments to reduce
its exposure to foreign currency risk from its net investments in and expected
cash flows from its foreign operations. The Company includes in income the gains
and losses related to the portion of these agreements which are not designated
as accounting hedges based upon the market values of the instrument. Gains and
losses related to the portion of these agreements designated as accounting
hedges of the Company's net foreign investment are included as a component of
the accumulated comprehensive loss in stockholders' deficit.
F-7
At times, the Company has bought call options and sold put options to
effectively establish a range (or collar) of natural gas prices to hedge natural
gas purchases against rising prices. The contracts are entered into with
financial counter-parties. The Company is exposed to risk of loss in the event
of nonperformance by the counter-parties; however, the Company does not
anticipate such nonperformance. See Note 14.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method of accounting. Accordingly, deferred tax liabilities and assets are
established based on the difference between the financial statement and income
tax bases of assets and liabilities using enacted tax rates. Deferred tax assets
are recognized to the extent that realization of the benefits therefrom are more
likely than not.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development of new
technologies are charged to expense as incurred. Included in the accompanying
consolidated statements of operations and comprehensive loss are
approximately $426 and $2,791 of research and development costs related to
continuing operations for the years ending February 28, 1999 and 1998,
respectively. The Company did not incur research and development costs for
the year ended February 29, 2000.
EARNINGS PER SHARE
Per share data has not been presented since such data provides no useful
information as the shares of the Company are closely held.
RECLASSIFICATIONS
Certain amounts for the 1999 and 1998 fiscal years have been reclassified
to conform to the 2000 presentation of discontinued operations. Other prior year
amounts have been reclassified to conform to current year presentation.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("the Statement"). The Statement requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on the derivative designation. The effective date of the
Statement was deferred by FASB Statement No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133, and further amended by FASB Statement No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING TRANSACTIONS. The Company
will now be required to implement the Statement in its fiscal year ended
February 28, 2002. The Company and has not yet determined the impact that
adoption of the Statement may have on its financial position or the results of
its operations.
STATEMENTS OF CASH FLOWS
The Company considers all liquid investments with initial maturities of
three months or less to be cash equivalents. Additional cash flow and non-cash
investing and financing information follows:
[Enlarge/Download Table]
2000 1999 1998
---------- ---------- ---------
F-8
Supplemental disclosures of cash flow information: Cash paid
(received) during the year for:
Interest.................................. $ 22,224 $ 21,920 $ 9,763
Income taxes, net of amounts refunded..... (585) (8,561) (1,827)
Non-cash investing and financing activities:
Capital leases for new equipment............... -- -- 313
Liabilities assumed in business acquisition.... 32,767 -- 2,677
3. STRATEGIC TRANSACTIONS
DISPOSITIONS. In November 1998, the Company adopted plans for the sale of
its Alumina Chemicals business ("Aluminas"). In anticipation of such sale, at
February 28, 1999, the Company accounted for the financial results, net assets
and cash flows of the business unit as a discontinued operation and recorded an
after-tax loss on disposal of assets, including operating losses during the
phase-out period, of $5,651. The sale was completed on June 3, 1999 for
approximately $39,500 plus working capital. See footnote 10 for additional
discussion of dispositions during bankruptcy proceedings.
ACQUISITIONS. On June 7, 1999, the Company, through its wholly owned
subsidiary, LII Europe, acquired the remaining 50% of the capital stock and
equity interest in ChlorAlp held by Rhodia Chimie, S.A. for approximately
$27,000 in cash. The Company previously held a 50% joint venture interest in
ChlorAlp, which it acquired on October 17, 1997. The total acquisition price,
net of equity distributions prior to June 7, 1999, was $53,378. The acquisition
was accounted for as a purchase; accordingly, the February 29, 2000 consolidated
statement of operations and comprehensive loss includes the results of
operations of ChlorAlp from the acquisition date through February 29, 2000. The
purchase price was allocated based on the estimated fair values of the assets
acquired at the acquisition date. The Company funded the purchase largely with
proceeds received from the disposition of its Aluminas production facilities
described in the preceding paragraph. The total cost of the acquisition was
allocated as follows:
[Enlarge/Download Table]
Receivables............................................................................................... $ 10,671
Inventory................................................................................................. 3,802
Other current assets...................................................................................... 3,841
Plant, equipment and other................................................................................ 50,282
Other long-term assets.................................................................................... 17,549
Accounts payable and other current liabilities............................................................ (24,457)
Revolving credit facilities............................................................................... (4,034)
Other liabilities assumed................................................................................. (4,276)
----------
$ 53,378
==========
Prior to its acquisition of Rhodia's interest in June 2000, the Company had
accounted for its investment in ChlorAlp using the equity method of accounting.
In addition, the Company has agreed to reimburse Rhodia for the Company's
proportionate share of any amounts that Rhodia may be ultimately required to pay
under its pre-existing guarantee of certain steam turbine lease obligations. The
Company's proportionate share under such arrangement is limited to a maximum of
172 million French Francs (approximately $25,500) over the original lease term,
of which approximately three years remain.
On December 31, 1997, the Company purchased chlor-alkali and chlorinated
methane compounds manufacturing facilities (the "Frankfurt Facilities") located
near Frankfurt, Germany from Celanese GmbH, a wholly-owned subsidiary of Hoechst
AG for a total cost of approximately $20,445, including assumption of certain
liabilities. The acquisition was accounted for as a purchase; accordingly, the
consolidated statements of operations and comprehensive loss include the results
of the operations of the Frankfurt Facilities since the acquisition date. The
Company funded the purchase with funds drawn from the Revolving Credit Facility.
The total cost of the acquisition was allocated as follows:
[Enlarge/Download Table]
Receivables............................................................................................... $ 2,677
Inventory................................................................................................. 2,878
Plant, equipment and other................................................................................ 20,444
Pension liability......................................................................................... (1,435)
Other liabilities assumed................................................................................. (4,119)
----------
$ 20,445
==========
F-9
RESTRUCTURING. During the fourth quarter of fiscal 1999, the Company
announced a restructuring of its corporate headquarters designed to
decentralize certain corporate functions and reduce the workforce. A total of
34 employees were terminated as a result of this action. The Company recorded
a restructuring charge of $2,054 for termination benefits, lease abandonment
commitments and related costs, offset by a $1,399 curtailment gain on
retirement benefits. The net amount of these charges are reflected in
selling, general, and administrative expenses in the accompanying statement
of operations for the year ended February 28, 1999. As of February 29, 2000,
$715 remained in the restructuring reserve primarily to cover lease
commitments.
4. ASSET IMPAIRMENT AND OTHER CHARGES
The Company manufactures and sells a hydrochlorofluorocarbon product
(HCFC 141b) at its plant in Gramercy, Louisiana. This product is being
phased-out under a government mandated ban on the manufacture and sale of
HCFCs in the United States after December 31, 2002. During 2000, the Company
lost several of its major HCFC 141b customers and market prices for the
product began to decline. In addition, a proposed settlement on a patent
infringement suit with Elf Atochem would add a $.10 per pound royalty onto
the product cost. As provided in SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
evaluated the expected cash flows from its HCFC business through its planned
phase out, and determined that, under current and anticipated market
conditions, it is unlikely that this business will return positive cash flows
prior to its phase out in 2002. In August 2000, the Company discontinued
production of HCFC 141b. The Company is planning to dispose of these
facilities in connection with its sale of the adjoining chlor-alkali plant in
Gramercy, Louisiana (see Note 10 "Discontinued Operations"). The plant and
equipment have little, if any, salvage value due to the phase out of these
products, and accordingly, the Company wrote off the entire carrying value of
these assets. The write off resulted in a non-cash impairment charge of
$9,800, which is included in the loss from discontinued operations for the
year ended February 29, 2000.
On July 5, 1999, an explosion at an adjacent manufacturing site owned by
Kaiser Aluminum and Chemical Corp. caused a temporary suspension of
production at the Company's electrochemical manufacturing facility in
Gramercy, Louisiana. Fluorocarbon production was resumed in mid-August.
Resumption of chlor-alkali production, however, required restoration of
services from a power plant shared with Kaiser. The plant temporarily resumed
operations in mid-November upon the restoration of services from a shared
power plant, but was unable to sustain production due to mechanical failures
that resulted from the effects of the explosion. The plant began operating
again in mid-December 1999. The Company incurred physical damages to its
facility, lost profit margins from product sales, and increased costs as a
result of the shut down. The Company has included uninsured lost profit
margin and increased costs of $3,565 in losses from discontinued operations
for the year ended February 29, 2000.
5. INVENTORIES
Components of inventory of continuing operations are as follows:
[Enlarge/Download Table]
2000 1999
--------- ---------
Finished goods and in-progress....................................... $ 4,753 $ 2,098
Inventory purchased for resale....................................... 1,217 2,458
Raw materials........................................................ 2,076 227
Supplies and catalysts............................................... 674 993
--------- ---------
8,720 5,776
Less LIFO reserve.................................................... (688) (540)
--------- ---------
$ 8,032 5,236
=========
Inventory now classified as discontinued operations 16,869
---------
$ 22,105
=========
F-10
6. EQUITY INVESTMENTS
The Company is an equity investor in several joint ventures for which it
uses the equity method of accounting. At February 29, 2000, the primary
investees include: CEVCO (a 60% owned investee of ChlorAlp), Avondale Ammonia
(50% owned, nitrogen products) and one nitrogen warehouse. At February 28,
1999 and 1998, the primary investees included ChlorAlp (50% owned,
electrochemical products), Avondale Ammonia (50% owned, nitrogen products)
and two nitrogen warehouses.
Although ChlorAlp has a majority ownership interest in CEVCO, (a
facility from which it receives electric power), it does not have majority
voting rights. Therefore, in accordance with EITF 96-16 "Investor's
Accounting for an Investee when the Investor has a Majority of the Voting
Interest but the Minority Shareholder Has Certain Approval or Veto Rights,"
the Company accounts for its interest under the equity method of accounting.
Excluding Avondale Ammonia, all income generated by the equity investees
is distributed to the partners relative to their respective partnership
interests. Avondale Ammonia generally does not generate income or loss
because all production is transferred to the partners at Avondale Ammonia's
cost. Each partner in Avondale provides their respective portions of natural
gas.
Summarized financial information since the date of investment by the
Company for unconsolidated entities (excluding Avondale Ammonia for fiscal
2000, 1999, and 1998 and ChlorAlp for subsequent to its acquisition in fiscal
2000) is as follows:
[Enlarge/Download Table]
2000 1999 1998
--------- --------- ---------
Summary of operations:
Net sales......................................... $ 29,299 $ 110,500 $ 37,209
Gross profit...................................... 8,244 23,085 4,301
Net income (loss)................................. 3,140 6,002 (1,238)
Company's equity in earnings (loss)............... 1,627 2,614 (619)
Summary of financial position:
Current assets.................................... $ 497 $ 32,752 $ 27,440
Noncurrent assets................................. 1,107 77,675 86,473
--------- --------- ---------
Total assets.................................. $ 1,604 $ 110,427 $ 113,913
========= ========= =========
Current liabilities................................. $ 123 $ 29,204 $ 26,210
========= ========= =========
Noncurrent liabilities.............................. $ 0 $ 25,824 $ 36,000
========= ========= =========
Purchases from Avondale Ammonia were approximately $3,700, $4,000, and
$8,400 for the years ended February 29, 2000 and February 28, 1999 and 1998,
respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Components of the Company's property, plant and equipment used in
continuing operations are as follows:
[Enlarge/Download Table]
2000 1999
---------- ----------
Land and land improvements................................... $ 1,393 $ 2,185
Buildings.................................................... 17,418 1,994
Machinery and equipment...................................... 103,043 59,415
Equipment under capital leases............................... 3,634 3,632
Construction in progress..................................... 9,920 2,100
---------- ----------
Property, plant and equipment, at cost....................... 135,408 69,326
Accumulated depreciation..................................... (43,417) (19,149)
---------- ----------
Property, plant and equipment, net........................... $ 91,991 50,177
==========
Property, plant and equipment, net now classified as
discontinued operations.................................... 153,418
----------
$ 203,595
==========
F-11
8. BORROWING ARRANGEMENTS
As of February 29, 2000 and February 28, 1999, the Company's borrowings
include the following:
[Enlarge/Download Table]
2000 1999
---------- ----------
Revolving credit facilities.................................. $ 92,138 $ 55,388
========== ==========
Term debt:
9-1/2% senior subordinated notes............................ $ 174,406 $ 174,327
13% senior subordinated notes............................... 915 915
Term loan................................................... 26,979 31,354
---------- ----------
Total............................................... 202,300 206,596
Less current portion......................................... -- (4,375)
---------- ----------
Long-term debt (classified as current in FY2000)............. $ 202,300 $ 202,221
========== ==========
In September 1997, the Company completed a refinancing of its principal
borrowings. In connection with this refinancing, the Company issued $175,000
principal amount of its 9 1/2% Senior Subordinated Notes due 2007 (the
"Notes"). A portion of the proceeds from the Notes was applied to repurchase
$99,100 of the Company's then outstanding 13% senior subordinated Notes due
2004 (the 13% Notes), and a portion was used to repay existing borrowings
under the Company's previous senior credit facility. In connection with
redeeming the 13% Notes, the Company paid prepayment premiums and incurred
other costs of $17,300 and expensed unamortized issuance costs associated
with the 13% Notes of $2,700. The total loss recognized as a result of this
early extinguishment of debt amounted to $12,290 (net of income tax benefit
of $7,740) and is reflected in the Company's consolidated statement of
operations and comprehensive loss as an extraordinary charge for the year
ended February 28, 1998.
The Notes require semi-annual interest only payments on March 15 and
September 15 each year. Debt issuance costs are being amortized over the life
of the Notes. The Notes are unsecured obligations of the Company and are
redeemable at the Company's option, in whole or in part, at any time on or
after September 15, 2002 at redemption prices set out in the Notes indenture
(the "Indenture"). The Indenture contains, among other things, limitations on
stock redemptions, dividends, borrowings and investments, and restricts the
Company from entering into certain transactions, all as set forth therein.
The Indenture also imposes additional restrictions on borrowing if the
Company does not maintain a minimum fixed charge coverage ratio for the
preceding twelve month period. As of February 29, 2000, the Company had not
achieved the minimum fixed charge coverage ratio, and accordingly, such
limitations were in effect. On March 10, 2000, the Company announced that it
would not make the $8,300 scheduled interest payment due March 15, 2000 on
the Notes, and commenced debt restructuring discussions with certain holders
of the Notes and their financial and legal advisors. As described in more
detail below, the Company filed for Chapter 11 protection on May 3, 2000, and
accordingly, all principal and interest due under the Notes has been
suspended and is subject to compromise.
In August 1997, the Company entered into a six year, $160,000 senior
secured credit facility ("Credit Facility"), which provided for a $35,000
term loan ("Term Loan") and a $125,000 revolving credit facility ("Revolving
Credit Facility"). The Credit Facility includes financial covenants that
require the Company to maintain certain debt to earnings and interest
coverage ratios. At February 28, 1999, the Company was not in compliance with
certain financial covenants, and the Credit Facility was amended and restated
effective as of that date to bring the Company into compliance. As part of
the amendment and restatement, availability under the revolving credit
facility (the "Revolving Credit Facility") was limited to the lesser of
$90,000 or a borrowing base (the "Borrowing Base"), which is determined
monthly based on a percentage of trade receivables, inventory, and property
plant and equipment, including approximately $11,000 of certain foreign
assets.
On October 17, 1997, the Company borrowed $35,000 under the Term Loan to
fund the ChlorAlp acquisition (see Note 3). Principal and interest payments
under the Term Loan are due quarterly in varying amounts until October 17,
2002, as defined in the agreement. The borrowing rates at February 29, 2000
and February 28, 1999 and 1998 were approximately 9.7%, 7.5%, and 7.6%,
respectively.
Between September 1999 and January 2000, the Credit Facility was amended
a number of times, primarily to delay scheduled reductions in the amount
available for borrowing under the Credit Facility and to waive the Company's
non-compliance with certain financial covenants. On March 10, 2000,
simultaneous with its announcement that the Company would miss a scheduled
interest payment on the Notes, the Company entered into an Amendment and
Forbearance Agreement ("Amendment No. 7") with its senior lenders to provide
continued access to the Credit Facility, while the Company sought a long-term
solution to its cash needs. Under
F-12
Amendment No. 7 the senior lenders agreed to forbear from default remedies
available to them under the Credit Facility as a result of the Company's
continued non-compliance with the Credit Facility's terms and conditions.
The Credit Facility is secured by substantially all of the domestic
assets of the Company. Prior to the February 28, 1999 amendment and
restatement, interest was based on either the prime rate plus up to .75% or
LIBOR plus up to 2.00%. Under the terms of the amended and restated Credit
Agreement, interest rates were increased to the prime rate plus 1.75%, or
LIBOR plus 3.00% through September 14, 1999. As a result of additional
amendments subsequent to September 14, 1999, interest rates were further
increased to the prime rate plus 2.25%, or LIBOR plus 3.50%. The Company also
paid commitment fees, on a quarterly basis, up to 1.0 % per annum of average
unused balances. Concurrent with the February 1999 amendment and restatement,
unamortized debt issuance costs of $1,010, proportionate to the effect of the
revised terms on the Revolving Credit Facility, were written off and included
in other income, net for the year ended February 28, 1999. Likewise, as a
result of defaults under the Credit Facility and the accelerated term of the
Credit Facility imposed by Amendment No. 7, as of February 29, 2000
unamortized debt costs of $3,300 were written off and included in other
expense, net for the year ended February 29, 2000. The weighted average
borrowing rates at February 29, 2000 and February 28, 1999 were approximately
8.9% and 8.2%, respectively.
The Company also has available for its German operations an unsecured
revolving credit line providing for up to 17,000 German marks (approximately
$8,500) at an average borrowing rate of approximately 5% (the "German Credit
Facility"). As of February 29, 2000, the German Credit Facility had
availability of approximately $500 with approximately $8,000 in outstanding
borrowings. In addition, the Company has a French franc credit facility (the
"French Credit Facility") of up to FRF 60,000 (approximately $8,900) for its
ChlorAlp operation in France. The French Credit Facility is secured by
ChlorAlp's receivables and inventory. As of February 29, 2000 approximately
$4,600 was outstanding under this facility, and $4,300 was available for
additional borrowings. Interest on the French Credit Facility is payable
monthly at an average rate of approximately 4.6%.
As more fully described in Note 1, "Organization and Basis of Financial
Statement Presentation", on May 3, 2000, the Company filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. As of that date all principal
payments due under the Term Loan have been suspended. All interest due under
the Credit Facility will continue to accrue and is being paid monthly as an
adequate protection payment under the Chapter 11 filing at the bank's prime
rate plus 3.00%. On May 4, 2000, the Company, as a debtor and
debtor-in-possession under U.S. Bankruptcy Code, entered into a new revolving
credit and guaranty agreement (the "DIP Facility") with its senior lenders.
The DIP Facility provided the Company with a $25 million revolving credit
facility, subject to a borrowing base calculation that was based on trade
accounts receivable and inventory.
The DIP Facility initially matured on October 31, 2001, and management
expected the facility to meet its cash needs throughout the course of the
bankruptcy proceedings. However, as a result of higher than expected energy
costs and slower than expected price recovery for its chlor-alkali products,
the Company was unable to comply with certain terms of the DIP Facility in
August 2000, and consequently entered into a series of amendments to enable
the Company to have continued access to the facility. In August 2000, the DIP
Facility was modified to, among other things, eliminate certain borrowing
base requirements, increase availability up to $30,000 and provide for
continuing availability through the sale of the AN plants. The facility was
further modified in October and December 2000 and in January 2001 to allow
for continued availability up to $10,000 subsequent to the sale of the AN
plants. Under its current terms, the DIP Facility matures on April 18, 2001
and the Company may borrow up to $10,000. If a plan of reorganization has not
been confirmed prior to the termination of the DIP Facility, an extension of
that facility would be required in order to ensure the Company has adequate
cash available to meet its obligations and fund its operations during the
remainder of the Chapter 11 proceedings. While the Company believes that its
lenders will continue to support the Company, and will provide the liquidity
necessary to sustain the Company until a plan of reorganization is in place,
there can be no assurances given in this regard.
Interest is payable monthly at the prime rate plus 2%, or an adjusted
LIBOR rate plus 3%, on all outstanding borrowings. In addition, the Company
pays a commitment fee of .5% of the unused amount of the facility. The DIP
Facility is senior to all prior senior secured debt, and is secured by all of
the Company's domestic assets, as well as a pledge of its ownership interests
in and its intercompany receivables from its European subsidiaries. It
imposes restrictions on investments, acquisitions, repurchases of stock,
borrowing and sales of assets. It also imposes cumulative and annual limits
on capital spending, as well as a prohibition on the payment of dividends
without the consent of the lenders.
As a result of its Chapter 11 filing, the Company is currently in
default of all of its existing credit agreements, except the amended DIP
Facility and the French and German credit facilities. As a result of the
default, all amounts due under long-term credit facilities have been
reclassified as current in the accompanying consolidated balance sheet as of
February 29, 2000. Scheduled maturities of
F-13
long-term debt in each fiscal year are as follows: $6,563 in 2001, $7,291 in
2002, $8,021 in 2003, $5,104 in 2004, $915 in 2005 and $174,406 thereafter.
9. EMPLOYEE BENEFITS
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligation and
fair value of assets over the two-year period ending February 29, 2000 and a
statement of the funded status as of February 29, 2000 and February 28, 1999.
[Enlarge/Download Table]
OTHER POSTRETIREMENT
PENSIONS BENEFITS
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of fiscal year...... $ 42,315 $ 43,497 $ 16,519 $ 23,207
Service cost...................................... 1,795 2,290 451 473
Interest cost..................................... 2,810 2,920 1,711 1,305
Amendments........................................ 172 (2,256) -- --
Net actuarial loss (gain)......................... (4,831) (2,903) 3,779 (3,403)
Curtailment gains................................. -- (1,019) -- (4,243)
Special termination benefit....................... 26 1,861 -- --
Benefits paid..................................... (3,163) (2,075) (925) (820)
---------- ---------- ---------- ----------
Benefit obligation at end of fiscal year............ $ 39,124 $ 42,315 $ 21,535 $ 16,519
========== ========== ========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of fiscal $ 33,064 $ 29,611 $ -- $ --
year..............................................
Actual return on plan assets...................... 2,001 2,067 -- --
Company contributions............................. 3,622 3,035 925 820
Participant contributions......................... -- 244 -- --
Settlements....................................... (332) (21) -- --
Benefits paid..................................... (3,163) (1,872) (925) (820)
---------- ---------- ---------- ----------
Fair value of plan assets at end of fiscal year..... $ 35,192 $ 33,064 $ -- $ --
========== ========== ========== ==========
RECONCILIATION OF FUNDED STATUS
Benefit obligation in excess of plan assets at end of
fiscal year....................................... $ 3,932 $ 9,279 $ 21,535 $ 16,519
Unrecognized actuarial gain/(loss)................ 2,853 (590) 3,764 7,544
Unrecognized prior service cost................... 691 873 -- --
---------- ---------- ---------- ----------
Accrued liability at end of fiscal year........... $ 7,476 $ 9,562 $ 25,299 $ 24,063
========== ========== ========== ==========
The following table provides the amounts recognized in the statement of
financial position as of February 29, 2000 and February 28, 1999:
[Enlarge/Download Table]
OTHER POSTRETIREMENT
PENSIONS BENEFITS
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Accrued benefit cost....................... $ (7,636) $ (10,095) $ (25,299) $ (24,063)
Intangible asset........................... 96 115 -- --
Accumulated other comprehensive income..... 64 418 -- --
---------- ---------- ---------- ----------
Net amount recognized...................... $ (7,476) $ (9,562) $ (25,299) $ (24,063)
========== ========== ========== ==========
F-14
The components of periodic costs for the pension and other
postretirement benefits were as follows:
[Enlarge/Download Table]
2000 1999 1998
---------- ---------- ----------
PENSIONS:
Service cost......................................... $ 1,795 $ 2,290 $ 2,326
Interest cost........................................ 2,810 2,920 2,648
Expected return on plan assets....................... (2,825) (2,546) (4,159)
Amortization of prior service cost................... (10) 172 2,271
Recognized net actuarial cost........................ 16 53 --
---------- ---------- ----------
Net periodic benefit cost............................ $ 1,786 $ 2,889 $ 3,086
Net curtailment and special termination benefit
costs.............................................. 26 842 --
---------- ---------- ----------
Total pension benefit cost................... $ 1,812 $ 3,731 $ 3,086
========== ========== ==========
OTHER POSTRETIREMENT BENEFITS:
Service cost......................................... $ 451 $ 473 $ 371
Interest cost........................................ 1,711 1,305 1,529
Expected return on plan assets....................... -- -- --
Amortization of prior service cost................... -- (196) (203)
Recognized net actuarial cost........................ -- (756) (351)
---------- ---------- ----------
Net periodic benefit cost............................ 2,162 826 1,346
Net curtailment and special termination benefit
costs.............................................. -- (4,243) --
---------- ---------- ----------
Total other postretirement benefit cost...... $ 2,162 $ (3,417) $ 1,346
========== ========== ==========
Periodically, the Company has offered early retirement programs to certain
of its salaried and hourly employees for which special termination benefits are
recognized.
The assumptions used in computing the preceding information are as follows:
[Download Table]
2000 1999
-------- --------
PENSION:
Discount rate at end of fiscal year...................... 8.0% 7.0%
Expected long-term rate of return on plan assets......... 8.5% 8.5%
Rates of increase in compensation levels................. 4.5% 4.5%
OTHER POSTRETIREMENT BENEFITS:
Discount rate at end of fiscal year...................... 8.0% 7.0%
The rate of increase in per capita costs of covered health care benefits
is assumed to be 7.31% in 2000, decreasing gradually to 5.0% by the year
2010. A one percentage point change in the assumed health care cost trend
rate would have the following effects:
[Download Table]
INCREASE DECREASE
-------- --------
Effect on accumulated postretirement benefit
obligation as of February 29, 2000........................ $ 2,373 $ (2,021)
Effect on net periodic postretirement benefit
cost in fiscal 2000....................................... $ 273 $ (226)
In addition to the pension and postretirement plans, the Company
maintains defined contribution savings plans in which substantially all
domestic employees are eligible to participate. The Company made
contributions to these plans of approximately $633, $211, and $85 during
fiscal 2000, 1999, and 1998, respectively.
10. DISCONTINUED OPERATIONS
During August and September 2000, the Company made decisions to sell or
close a number of its domestic manufacturing operations as part of its
efforts to reorganize under Chapter 11 bankruptcy proceedings. These plants
comprised a substantial portion of the Nitrogen products business segment and
all of the Electrochemicals - N.A. business segment. The Company has
accounted for
F-15
these businesses as discontinued operations for the year ended February 29,
2000, and accordingly, has recorded a loss on the disposition of these
businesses, including the estimated operating losses through the disposal
date. In addition, in the first quarter of fiscal 2000, the Company sold its
Aluminas Chemical business segment. The Aluminas Chemical segment has been
treated as a discontinued operation since fiscal 1999, when the plans to sell
the division were first announced. Following is a table that summarizes
operating losses and the loss on disposal of discontinued operations by
segment:
[Enlarge/Download Table]
2000 1999 1998
---------- ---------- ----------
NET LOSS FROM DISCONTINUED OPERATIONS:
Aluminas............................................. $ 1,017 $ (1,899) $ 163
AN Plants............................................ (22,559) (12,826) (2,928)
Electrochemicals - N.A............................... (31,835) (14,208) 194
---------- ---------- ----------
$ (53,377) $ (28,933) $ (2,571)
NET LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS:
Aluminas............................................. -- $ (5,651) --
AN Plants............................................ (99,151) -- --
Electrochemicals - N.A............................... (76,891) -- --
---------- ---------- ----------
$ (176,042) $ (5,651) $ --
The Company sold all four of its ammonium nitrate plants under a Court
approved asset purchase agreement on October 31, 2000 for approximately
$39,000 in cash proceeds. An additional $4,000 of proceeds are being held in
escrow to cover certain contingencies should they occur, and accordingly, are
not included in the determination of loss on disposal of these assets. In a
separate transaction, the Company has dissolved its Avondale Ammonia
("Avondale") joint venture with Cytec Industries, Inc. ("Cytec"). Under a
negotiated settlement agreement, the Company's interest in Avondale would be
assigned to Cytec in exchange for a cash payment to the Company of
approximately $800. The Company recognized a loss on disposition of these
assets in fiscal 2000 of $99,151. The loss on disposition includes operating
losses for the period from March 1, 2000 through October 31, 2000, of $20,148.
Net sales for the AN plants and Avondale were $111,915, $114,267 and
$124,360 for fiscal 2000, 1999 and 1998, respectively. Operating income
(losses) from discontinued operations for the same fiscal periods totaled
$(9,916), $(4,567) and $4,602, respectively. Net interest expense was
allocated to these discontinued businesses on the basis of sales and assets
in the amount of $12,613, $9,322 and $8,491 during fiscal 2000, 1999 and
1998, respectively, and $10,015 during the phase-out period. The net assets
of the discontinued nitrogen operations at February 29, 2000 were as follows:
[Download Table]
Accounts receivable, net..................................... $ 14,077
Inventory.................................................... 9,645
--------
Total current assets............................... 23,722
--------
Property, plant and equipment, net........................... 88,386
Investment in and advances to affiliates..................... 11,601
Other assets................................................. 2,563
--------
Net assets from discontinued nitrogen operations............. $126,272
========
Also as part of its restructuring in Chapter 11, the Company decided to
shut down and sell its fluorocarbon plant and to sell its chlor-alkali plant,
both located on the same site in Gramercy, Louisiana. These operations
comprise the entire Electrochemicals - N.A. business segment. The Company is
currently negotiating an asset purchase agreement with a third party for the
sale of these facilities, which management expects to close prior to May
2001. The Company recognized a loss on disposition of these assets in fiscal
2000 of $76,891. The loss on disposition includes estimated operating losses
for the period from March 1, 2000 through the anticipated disposal date of
$22,836
Net sales for the Electrochemicals - N.A. business segment were $50,518,
$68,475 and $84,852 for fiscal 2000, 1999 and 1998, respectively. Operating
income (losses) for the same fiscal periods totaled $(12,352), $(8,823) and
$3,184, respectively. Net interest expense was allocated to Electrochemicals
-N.A. on the basis of sales and assets in the amount of $6,491, $5,251 and
$3,854 during fiscal 2000, 1999 and 1998, respectively, and $6,567 during the
phase-out period. The net assets of the discontinued nitrogen operations at
February 29, 2000 were as follows:
F-16
[Download Table]
Accounts receivable, net....................................... $ 7,128
Inventory...................................................... 6,531
---------
Total current assets................................. 13,659
---------
Property, plant and equipment, net............................. 57,199
Investment in and advances to affiliates....................... 0
Other assets................................................... 1,688
---------
Net assets from discontinued electrochemical operations........ $ 72,546
=========
In November 1998, the Company adopted plans for the sale of Aluminas and
accounted for the financial results, net assets and cash flow of the business
unit as a discontinued operation. Accordingly, previously reported financial
results for all periods have been restated to reflect the business as a
discontinued operation.
In connection with the decision to discontinue this business, the
Company recognized a loss of $493 from operations during the phase-out period
(December 1, 1998, through June 3, 1999, the effective date of the sale) and
a loss on the disposal of assets of $8,804, which includes a curtailment gain
from employee pension and postretirement plans of $3,863 and gain on the sale
of one of the equity investments held by Aluminas of $6,500. At February 28,
1999, the Company had accrued approximately $19,167 for the expected loss on
the remaining assets and included the amount in net assets of discontinued
operations.
The sale was completed on June 3, 1999, at which time the Company
received approximately $25,000 for the remaining assets. In November
1999, the Company received certain contingent payments aggregating $1,907.
The contingent payments, net of certain additional costs associated with the
discontinued operation in excess of expected costs accrued at February 28,
1999, resulted in a reduction of the loss on disposal of $1,017, net of tax,
during the year ended February 29, 2000.
Net sales from Aluminas were $7,805, $30,365 and $38,444 for fiscal
2000, 1999 and 1998, respectively. Operating income (losses) from
discontinued operations for the same fiscal periods totaled $753, ($4,957)
and ($115), respectively. Net interest expense allocated to discontinued
operations on the basis of sales and assets was $2,126 and $2,971 during
fiscal 1999 and 1998, respectively. Net interest of $764 was allocated after
the measurement date and included in the determination of the loss from
discontinued operations. The net assets of the discontinued operation at
February 28, 1999 were as follows:
[Download Table]
1999
---------
Accounts receivable, net................................. $ 10,240
Inventory................................................ 7,983
---------
Total current assets........................... 18,223
---------
Property, plant and equipment, net....................... 32,003
Investment in and advances to affiliates................. 1,775
Other assets............................................. 356
---------
Total assets................................... $ 52,357
=========
Accounts payable......................................... $ 4,980
Accrued loss on sale..................................... 19,167
Deferred tax liability................................... 1,130
---------
Total liabilities.............................. $ 25,277
---------
Net assets from discontinued operation................... $ 27,080
=========
11. COMMITMENTS AND CONTINGENCIES
The Company is subject to numerous federal, state and local
environmental laws and regulations. The Company is currently involved in the
assessment, removal and/or mitigation of chemical substances at various
sites. Environmental expenditures which relate to an existing condition
caused by past operations and which have no significant future economic
benefit to the Company are expensed. Future environmental related
expenditures cannot be reliably determined in many circumstances due to the
early stages of investigations, the uncertainty of specific remediation
methods, changing environmental laws and interpretations and other matters.
F-17
Such environmental costs are accrued at the time the expenditure becomes
probable and the costs can be reasonably estimated. Costs are accrued based
upon estimates determined by management and in some cases with the assistance
of external consultants. At sites where a range of costs to be incurred is
determined and no amount within the range is more likely than another, the
lower amount of the range is recorded. As assessments and cleanups proceed,
these accruals are reviewed periodically and adjusted, if necessary, as
additional information becomes available. These accruals can change
substantially due to such factors as additional information on the nature or
extent of contamination, methods of remediation required and other actions by
governmental agencies or private parties.
The Company owns a variety of sites that may or will likely require
remediation. Under the provisions of the acquisition agreements for the
businesses, the former owners retained the obligations for any potential
liabilities arising from conditions or events occurring or attributable to
periods prior to the acquisition of properties acquired by the Company
pursuant to those agreements. At certain locations, such items were
identified and management believes that the former owners will fulfill their
obligations under the agreements.
In connection with all sites, the Company recorded accruals of
approximately $306 and $249 in fiscal years 2000 and 1999, respectively.
Other accrued liabilities include $1,529 and $1,411 for the current portion
of estimated clean-up expenditures and related accruals at February 29, 2000
and February 28, 1999, respectively. The balance of spending identifiable to
future years in other non-current liabilities totals $1,733 and $1,734 at
February 29, 2000 and February 28, 1999, respectively.
While the recorded amounts represent the Company's best estimate of the
costs of such matters, it is reasonably possible that additional costs may be
incurred. Based on currently available information and analysis, the Company
believes that it is reasonably possible that costs associated with these
sites may exceed current accruals by amounts that may prove insignificant or
that could range, in the aggregate, up to approximately $1,500. This estimate
of the range of reasonably possible additional costs is less certain than the
estimates upon which accruals are based, and in order to establish the upper
limit of such range, assumptions least favorable to the Company among the
range of reasonably possible outcomes were used. In estimating both its
current accruals for environmental remediation and the possible range of
additional costs, the Company has not assumed it will bear the entire cost of
remediation of every site to the exclusion of the former owners of such
sites. The ability of the former owners to participate has been taken into
account, based generally on their financial condition and probable
contribution on a per site basis. No amounts have been recorded for potential
recoveries from insurance carriers.
On June 21, 1999, Elf Atochem North America ("Elf Atochem") filed an
action in U.S. District Court in Wilmington, Delaware against the Company
alleging the Company infringed an Elf Atochem patent in connection with the
Company's manufacture of HCFC 141b. The action sought to enjoin the Company
from continuing an alleged infringement of Elf Atochem's patent, treble
damages for lost profits, costs, prejudgment interest and attorney fees.
Although the Company believed that it had a defensible position and valid
counter claim in this matter, in June 2000, it determined that it was in the
Company's best interest to settle the dispute without further litigation, and
accordingly, entered into a settlement and license agreement with Elf
Atochem. Under the terms of the settlement, Elf Atochem granted the Company a
license to use certain patents in the manufacture of HCFC 141b. In
consideration for the license, the Company agreed to pay Elf Atochem a
one-time lump sum fee of $1,200 and royalties in the amount of $.10 per pound
of HCFC 141b produced or sold subsequent to May 4, 2000. The Company's
obligation to make payments under this agreement will cease once the
aggregate payments by the Company, including the lump sum fee, reaches
$4,500. During the year ended February 29, 2000, the Company recorded
expenses aggregating $5,644, which represents the total legal and settlement
costs incurred and expected to be incurred in connection with this matter.
In December 1997, the Company was named as a defendant in three civil
antitrust actions, two of which were the same cases brought in separate
jurisdictions, one of which was subsequently dismissed. These actions were
brought predominantly by various mining concerns alleging the Company
violated the federal antitrust laws, various state antitrust and unfair trade
practice statutes and common law fraud in connection with the Company's
blasting grade ammonium nitrate business as conducted in the mid-to-late
1980's and early 1990's. During the year ended February 29, 2000, the Company
reached an agreement with the plaintiff to settle all claims against the
Company. Under the terms of that settlement, the Company made an initial
payment of $750 and will make additional payments not to exceed $3,750, based
in part on the Company's net earnings, over the next five years. Minimum
payments of $500 are required on the first three anniversaries of execution
of the settlement and payments of $300 are required on the last two
anniversaries with an aggregate minimum, inclusive of the initial payment, of
approximately $3,000. The Company included the net present value of the
minimum payments due under this settlement, $100, in its results of
operations for the year ended February 29, 2000. The present value of the
remaining minimum payments due under the settlement of $1,900 is included in
other non-current liabilities in the accompanying February 29, 2000
consolidated balance sheet.
F-18
On June 27, 1996, Marathon Oil Company and Marathon Pipe Line Company
(together, "Marathon") initiated litigation against the Company and another
defendant in connection with a 1996 petroleum release near the Company's
Gramercy facility, and in connection therewith a class action lawsuit and one
other lawsuit were filed against the Company and Marathon. Marathon's lawsuit
against the Company was settled for $2,000 in October 1998. The Company has
met its $1 million self-insured retention and its liability insurance carrier
has paid the balance. In March 1999, plaintiffs accepted an offer by all
defendants to settle the class action for a lump sum of $1,500. The Company's
allocated portion of the settlement is $375, which was paid by the Company's
insurance carriers. The third claim has remained dormant since filing, and
the Company, although it believes it has meritorious defenses to the claim,
and in any case has insurance coverage for possible losses, believes that the
case can be settled for a nominal amount.
In January 1997, the owner of the land over which the brine pipelines
serving the Company's Gramercy, Louisiana chlor-alkali facilities travel
filed a lawsuit seeking generally the removal of one of the pipelines and/or
monetary damages, based on its claims that the pipeline has suffered and
continues to suffer unpermitted leaks of brine. In connection with that
lawsuit, the landowner sought a preliminary injunction to stop the Company
from using one of its brine pipelines. The court refused to grant such
relief, and instead required the Company to implement a written remediation
policy and a continuous leak monitoring program, and to agree to shut down
the pipeline when and if leaks are detected in the future until any necessary
repairs are completed. The Company has complied with this order, and in
January 1999, the Company completed construction of a new pipeline which is
now in service. The Company believes that the landowner's lawsuit is without
serious legal merit and is actively defending it. The Company has developed
appropriate strategies for ensuring a continuous supply of brine to its
Gramercy facility.
In addition to the matters discussed above, the Company is involved in
certain other legal actions and claims arising in the ordinary course of
business. The amounts asserted in these matters are material to the Company's
consolidated financial statements, and certain claimants have not yet
asserted an amount. Although it is inherently impossible to predict with any
degree of certainty the outcome of such legal actions and claims, in the
opinion of management (based on advice of the Company's corporate and other
legal counsel) such litigation and claims are likely to be resolved without
material adverse effect on the Company's financial position and results of
operations. It is possible, however, that the resolution of certain matters
could be material to the results of operations of any single fiscal quarter.
The Company leases facilities and equipment consisting primarily of its
corporate office, electric power co-generation systems, transportation and
computer equipment. Some of the leases provide that the Company pay taxes,
maintenance, insurance and other occupancy expenses applicable to the leased
premises. Certain of the leases have renewal terms at the option of the
Company. Lease obligations for continuing operations with initial or
remaining non-cancelable terms in excess of one year as of February 29, 2000
are as follows:
[Enlarge/Download Table]
CAPITAL OPERATING
LEASES LEASES
------- ---------
Fiscal years ending February,
2001............................................................... $ 85 $ 1,285
2002............................................................... 5 1,172
2003............................................................... -- 1,026
2004............................................................... -- 424
2005............................................................... -- 241
Thereafter......................................................... -- 483
------ ---------
Total minimum lease payments............................... $ 90 $ 4,631
=========
Less estimated executory costs and imputed interest costs............ 31
------
Present value of minimum lease payments.............................. $ 59
======
Total rental expense under operating leases for continuing operations
totaled approximately $2,678, $2,265, and $3,396 during fiscal years 2000,
1999 and 1998, respectively.
Several of the Company's facilities and those of some of its joint
ventures are integrated with the operations of other companies. As a result,
the companies involved share certain common facilities and services,
including power generation. Generally, the Company maintains certain
long-term supply contracts with the appropriate parties.
As of February 29, 2000 and February 28, 1999, the Company had
approximately $5,476 and $1,851 committed for letters of credit, respectively.
F-19
12. INCOME TAXES
The (provision) benefit for income taxes includes income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities. The components of
the (provision) benefit for income taxes are as follows:
[Enlarge/Download Table]
2000 1999 1998
---------- ---------- -------
Current:
Federal............................................................ $ 1,010 $ 1,046 $ (1,953)
Foreign............................................................ -- (5,820) (201)
State.............................................................. -- -- 728
---------- --------- ---------
1,010 (4,774) (1,426)
---------- --------- ---------
Deferred:
Federal............................................................ $ 659 $ (1,669) $ 4,871
Foreign............................................................ (1,669) 4,570 --
State.............................................................. -- 385 (54)
--------- --------- ---------
(1,010) 3,286 4,817
--------- --------- ---------
(Provision) benefit for income taxes from continuing
operations before extraordinary charges............................ -- (1,488) 3,391
Tax (provision) benefit for discontinued operations.................. -- 3,582 262
Tax benefit for extraordinary charges................................ -- -- 7,740
--------- --------- ---------
Total (provision) benefit for income taxes................. $ -- $ 2,094 $ 11,393
========= ======== =========
The domestic and foreign components of (loss) earnings from continuing
operations before income taxes were as follows:
[Enlarge/Download Table]
2000 1999 1998
----------- ----------- --------
Domestic............................................................. $ (12,791) $ (8,681) $ (7,065)
Foreign.............................................................. (6,455) 4,235 446
------------ ---------- ----------
Total...................................................... $ (19,246) $ (4,446) $ (6,619)
========== ========== ==========
The Company has not provided for U.S. income taxes or international
withholding taxes on $2,249 of international subsidiaries' undistributed
earnings as of February 29, 2000, which are reinvested indefinitely.
Reconciliation of the differences between income taxes computed at the federal
statutory rate and the Company's consolidated income tax (provision) benefit
from continuing operations before extraordinary charges follows:
[Enlarge/Download Table]
2000 1999 1998
----------- ----------- --------
Tax benefit at federal statutory rate................................ $ 6,736 $ 1,561 $ 2,317
State income taxes, net of federal income tax benefit................ -- 1,449 1,155
Foreign tax provision in excess of federal statutory rate............ (534) 231 (45)
Increase in valuation allowance...................................... (6,202) (4,685) --
Percentage depletion................................................. -- -- 70
Other................................................................ -- (44) (106)
---------- ---------- --------
Total...................................................... $ -- $ (1,488) $ 3,391
=========== ========== ========
F-20
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
[Enlarge/Download Table]
2000 1999
----------- --------
Accrued expenses.......................................................... $ 6,326 $ 10,174
Other..................................................................... 2,906 3,175
---------- ---------
Current, net............................................................ 9,232 13,349
---------- ---------
Property, plant and equipment............................................. (36,909) (33,039)
Employee benefit obligations.............................................. 13,726 12,741
Loss carryforward......................................................... 6,821 1,238
AMT credit carryforward................................................... 5,139 6,150
Other..................................................................... (2,105) 802
---------- ---------
Noncurrent, net......................................................... (13,328) (12,108)
---------- ----------
Valuation allowance for deferred tax assets............................... (11,487) (5,285)
---------- ----------
Total attributable to continuing operations,
net........................................................... (15,583) (4,044)
Discontinued operations................................................... -- (1,130)
---------- ----------
Net deferred tax assets (liabilities)..................................... $ (15,583) $ (5,174)
========== ==========
At February 29, 2000, the Company had federal and state operating loss
carryforwards of approximately $64,899 that will begin to expire in 2019. The
Company also has approximately $5,139 in alternative minimum tax ("AMT")
carryforwards available to offset future taxes for an unlimited time period. For
financial reporting purposes, the valuation allowance has been increased at
February 29, 2000 and February 28, 1999 to reduce the net deferred tax assets.
The Company has not recognized any benefit from the future use of operating loss
carryforwards because management's evaluation of available evidence in assessing
the current realizability of the related tax benefits indicates that the
underlying assumptions of future profitability contain risks that do not provide
sufficient assurance (based on generally accepted accounting principles) to
recognize such tax benefits. The Company will continue to assess the valuation
allowance and make adjustments as appropriate in future periods.
13. REDEEMABLE COMMON STOCK AND OTHER STOCK PLANS
The Company allows certain of its executive officers, management employees
and directors to own common stock. At February 29, 2000 and February 28, 1999,
3,935 and 4,633 shares, respectively, were outstanding pursuant to its 1995
Stock Purchase Plan (the "1995 Plan,") and the Board of Directors Stock Purchase
Plan (the "Directors Plan"). Generally participants in the 1995 Plan must use
25% of any annual bonuses to purchase stock up to specified amounts. The 1995
Plan and the Directors Plan provide that certain executive officers, management
employees and directors of the Company will be, at the discretion of the Board
of Directors, eligible to purchase shares of the Company's common stock at fair
value (as determined by independent appraisal).
In connection with the 1995 Plan and the Directors Plan, the Company may
agree to guarantee loans used to finance the purchase of such stock. Upon
termination of employment or directorship, the shares must be sold to the
Company at fair value. Fair value was $0 and $114 per share at February 29, 2000
and February 28, 1999, respectively, and the aggregate value of such applicable
shares is reflected as redeemable common stock in the accompanying consolidated
balance sheets. As a result of the Company's Chapter 11 filing, it is doubtful
that the shares will have any value in the foreseeable future. All redemption
provisions of the Company's shares expire upon a public offering of the
Company's common stock. The Company has guaranteed indebtedness of certain
executive officers, management employees and directors pursuant to the 1995 Plan
and the Directors Plan aggregating $0 and $229 as of February 29, 2000 and
February 28, 1999, respectively.
The following table summarizes activity in the Company shares that have
redemption features:
[Download Table]
2000 1999
------------- ----------
REDEEMABLE REDEEMABLE
COMMON COMMON
STOCK STOCK
------------- ----------
Balance at beginning of year......................... $ 528 $ 3,505
Adjustment in value.................................. (449) (769)
Other shares issued.................................. 0 128
Repurchases.......................................... (79) (2,336)
--------- ---------
Balance at end of year............................... $ 0 $ 528
========= =========
F-21
The Company has instituted certain executive and other key employee benefit
plans intended to provide incentives to those employees. The 1997 Stock Option
Plan ("Option Plan") provides incentives in the form of grants of stock options
and is intended to recognize and reward outstanding individual performance. The
Management Stock-Based Incentive Plan ("Stock Plan") enables key management
employees to acquire financial interests in the Company through the award of
phantom stock interests tracking the performance of the Company's common stock
but with the benefit payable in cash. The Annual Incentive Plan is intended to
provide a cash bonus incentive for key management employees to achieve targeted
operational results and individual goals. All such plans are to be administered
by the Compensation Committee, which is empowered to determine those employees
eligible to participate, the type and amount of awards to be made and the
various restrictions applicable to such awards. Prior to fiscal 1999, no awards
under the Option Plan or the Stock Plan had been granted.
Effective March 1, 1998, phantom stock appreciation rights ("phantom
SAR's") were issued to certain key management employees pursuant to the stock
plan. The phantom SAR's vest on the third anniversary of the issuance date and
forfeit if the recipient terminates employment for any reason prior to the
vesting date. The value of the phantom SAR's is based on the appreciation of the
share value between the issuance and vesting dates. A total of 2,150 phantom
SAR's were issued based on a share value of $280 with 800 having been forfeited
during fiscal 1999. Based on the February 29, 2000 share value of $0, the 1,350
phantom SAR's outstanding at fiscal year-end had no value and, accordingly, no
cost associated with these awards was recognized.
14. FINANCIAL INSTRUMENTS
The Company is exposed to the impact of interest and foreign exchange rate
changes. With an objective of managing the impact of such changes on earnings
and cash flow, the Company previously had a French Franc (FRF) and two Deutsche
Mark (DEM) cross currency interest rate swaps which had a combined fair market
value of ($5,173) at February 28, 1999. The DEM contracts were liquidated in
July 1999 for a gain of approximately $1,100, and the FRF contract was
liquidated in November 1999 for a gain of approximately $900.
At February 29, 2000 the Company has commitments outstanding under their
natural gas fixed price purchase contracts to purchase approximately $3,003 of
natural gas during March and April 2000. If the Company settled these contracts
at February 29, 2000, a $116 gain would have been recognized.
The following sets forth the open positions and the fair value of the
Company's natural gas collar positions, which mature in the subsequent fiscal
year, as of February 29, 2000 and 1999:
[Enlarge/Download Table]
QUANTITY FAIR VALUE CARRYING VALUE
------------ ---------- --------------
(IN MMBTUS)
FEBRUARY 29, 2000
Purchased Call Options......................................... -- $ -- $ --
Written Put Options............................................ -- $ -- $ --
FEBRUARY 28, 1999
Purchased Call Options......................................... 5,002 $ 106 $ --
Written Put Options............................................ 5,002 $ (39) $ --
The fair values are based on quoted market prices.
In connection with its acquisition of ChlorAlp in fiscal 1998 (see Note 3),
the Company indirectly obtained a joint venture interest in a power generation
facility, which uses natural gas to generate power for the manufacturing
operation. Prices for natural gas used in the facility are based on European
fuel and gas oil prices. In fiscal 1999, the Company, through a wholly owned
European subsidiary, entered into a spread oil swap agreement ("SOS agreement")
to reduce its exposure to fluctuations in its natural gas prices. The contract
covered three years and was for a notional amount of 2,430,000 barrels. A
portion of the contract settled every six months in an amount determined on a
monthly basis, which is based on a defined spread between certain forward fuel
and gas oil prices multiplied by the notional quantity settled. During the year
ended February 29, 2000, the Company liquidated its position in this instrument
for an aggregate realized gain of $1,950.
The carrying amount of the Company's variable rate debt approximates its
fair value. At February 29, 2000 and February 28, 1999, the fair value of all
term debt approximated $80,000 and $135,000, respectively, based primarily on
market prices.
F-22
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and equivalents and trade accounts
receivable. The Company places its cash and equivalents with high quality
institutions; however, at times, such investments may be in excess of the
Federal Deposit Insurance Corporation insurance limit. The Company routinely
assesses the financial strength of its customers and does not believe the trade
account receivable credit risk exposure is significant. The fair value of these
financial instruments approximated book value at February 29, 2000 and February
28, 1999.
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's continuing operations in two principal business segments:
Nitrogen Products and Electrochemical Products -- Europe ("Electrochemicals --
Europe"). The Nitrogen Products segment consists of 23 facilities that
distribute anhydrous and aqua ammonia in North America. The Electrochemical --
Europe segment consists of caustic soda and chlorine production facilities
located in France and Germany (see Note 3). Operating profit includes all costs
and expenses directly related to the segment involved.
Following is a tabulation of business segment information for continuing
operations for each of the past three fiscal years:
[Enlarge/Download Table]
2000 1999 1998
----------- ----------- --------
Net sales:
Nitrogen products...................................... $ 53,493 $ 74,508 $ 113,155
Electrochemical products -- Europe..................... 151,022 132,292 20,204
----------- ----------- -----------
Total.......................................... $ 204,515 $ 206,800 $ 133,359
=========== =========== ===========
(Loss) income from continuing operations:
Nitrogen products...................................... $ 10,412 $ 4,201 $ 6,695
Electrochemical products -- Europe..................... (6,596) 3,424 (1,383)
Corporate expense...................................... (9,486) (7,874) (7,995)
------------ ----------- -----------
Loss from continuing operations.......................... (5,670) (249) (2,683)
Interest and amortization expense........................ (7,500) (5,741) (2,194)
Income (loss) from equity investments.................... 1,627 2,614 (619)
Other (expense) income, net.............................. (7,703) (1,070) (1,123)
------------ ------------ ------------
Loss from continuing operations before income
taxes and other items.................................. $ (19,246) $ (4,446) $ (6,619)
=========== =========== ===========
Depreciation:
Nitrogen products...................................... $ 1,236 $ 1,532 $ 2,923
Electrochemical products -- North America.............. -- -- --
Electrochemical products -- Europe..................... 12,269 2,968 801
Corporate.............................................. 215 1,019 965
----------- ----------- -----------
Total.......................................... $ 13,720 $ 5,519 $ 4,689
=========== =========== ===========
Capital expenditures (including acquisitions):
Nitrogen products...................................... $ 1,721 $ 2,269 $ 2,248
Electrochemical products -- Europe..................... 32,600 13,284 17,622
----------- ----------- -----------
Total.......................................... $ 34,321 $ 15,553 $ 19,870
=========== =========== ===========
Long lived assets by geographic area:
North America.......................................... $ 32,248 $ 34,440 $ 41,128
Europe................................................. 88,906 62,715 50,665
----------- ----------- -----------
Total.......................................... $ 121,154 $ 97,155 $ 91,793
=========== =========== ===========
Segment assets are not included in the above table because asset
information is not reported by segment in the information reviewed by the chief
operating decision maker for purposes of making decisions about allocating
resources to the segments and assessing their performance.
[Enlarge/Download Table]
2000 1999 1998
---------- ---------- -------
EBITDA:
Nitrogen products.......................................... $ 12,782 $ 6,120 $ 10,323
Electrochemical products -- Europe......................... 6,875 21,949 1,610
Corporate expense.......................................... (5,642) (7,408) (4,978)
--------- --------- ---------
Total.............................................. $ 14,015 $ 20,661 $ 6,955
========= ========= =========
EBITDA represents income from operations plus cash received from equity
investments, plus depreciation, amortization and other non-cash and
non-recurring transactions reflected in income from operations. In addition,
prior to its acquisition in June 1999, EBITDA also included the Company's equity
interest in the EBITDA of ChlorAlp. EBITDA should not be considered as an
F-23
alternative measure of net income or cash flow provided by operating activities
(both as determined in accordance with accounting principles generally accepted
in the United States), but is presented to provide additional information
related to the Company's debt service capability. EBITDA should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity. The primary difference between EBITDA and cash flows
provided by operating activities relates primarily to changes in working capital
requirements and payments made for interest and income taxes.
Below is Condensed Balance Sheet information for the Company's European
subsidiaries:
[Enlarge/Download Table]
2000 1999
---------- ----------
Current assets............................................................ $ 42,164 $ 32,717
Property and equipment, net............................................... 71,961 26,347
Other assets.............................................................. 16,944 50,354
---------- ----------
Total assets............................................................ 131,069 109,418
Current liabilities....................................................... 58,906 43,455
Intercompany payables to parent........................................... 42,221 26,951
Other liabilities......................................................... 15,081 1,411
---------- ----------
Total liabilities....................................................... 116,208 71,817
Equity.................................................................... 14,861 37,601
---------- ----------
Total liabilities and equity............................................ $ 131,069 $ 109,418
========== ==========
16. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited fiscal 2000, 1999 and 1998 pro forma financial
information gives effect to the investment in ChlorAlp (Note 5), the issuance of
the Notes (Note 7) and the acquisition of the German Facilities (Note 3), as if
each had occurred at the beginning of fiscal 1998. The unaudited pro forma
financial information is provided for informational purposes only. It is based
on historical information and does not necessarily reflect the actual results of
operations that would have occurred had such transactions actually occurred at
the beginning of such periods nor is it necessarily indicative of future results
of operations of the combined Company:
[Enlarge/Download Table]
2000 1999 1998
---------- --------- ---------
Net sales..................................................................... $ 228,878 $ 312,514 $ 337,991
(Loss) income from continuing operations before income taxes
and extraordinary charge.................................................... (15,193) 2,487 (3,965)
Net loss...................................................................... (246,302) (37,666) (16,698)
F-24
LAROCHE INDUSTRIES INC.
(DEBTOR IN POSSESSION)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ----------- ---------- ---------- ---------- -----------
YEAR ENDED FEBRUARY 29, 2000
Allowance for doubtful accounts.............. $ 499 571 -- 340(1) $ 730
Valuation allowance for deferred tax asset... 15,582 32,783 -- -- 48,365
YEAR ENDED FEBRUARY 28, 1999
Allowance for doubtful accounts.............. $ 527 53 -- 81(1) $ 499
Valuation allowance for deferred tax asset... 600 14,982 -- -- 15,582
YEAR ENDED FEBRUARY 28, 1998
Allowance for doubtful accounts.............. $ 776 36 -- 285(1) $ 527
Valuation allowance for deferred tax asset... 600 -- -- -- 600
----------
(1) Uncollectible accounts written off, net of recoveries.
S-1
[LAROCHE INDUSTRIES INC. LOGO]
Dates Referenced Herein and Documents Incorporated by Reference
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