FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 1998
-------------------
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
------------- -------------
Commission file number 1-7677
-------------------
LSB INDUSTRIES, INC.
-----------------------------------------------------
Exact name of Registrant as specified in its charter
DELAWARE 73-1015226
- ----------------------------- ------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 SOUTH PENNSYLVANIA, OKLAHOMA CITY, OKLAHOMA 73107
-------------------------------------------------------
Address of principal executive offices (Zip Code)
(405) 235-4546
-------------------------------------------------------
Registrant's telephone number, including area code
NONE
-------------------------------------------------------
Former name, former address and former fiscal year, if
changed since last report.
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 the past 90 days.
YES x NO
----- -----
The number of shares outstanding of the Registrant's voting
Common Stock, as of April 30, 1998 was 12,596,826 shares
excluding 2,508,790 shares held as treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB
Industries, Inc. and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB
Industries, Inc. at March 31, 1998, the condensed consolidated
statements of operations and cash flows for the three month
periods ended March 31, 1998 and 1997 have been subjected to a
review, in accordance with standards established by the American
Institute of Certified Public Accountants, by Ernst & Young LLP,
independent auditors, whose report with respect thereto appears
elsewhere in this Form 10-Q. The financial statements mentioned
above are unaudited and reflect all adjustments, consisting only
of adjustments of a normal recurring nature, which are, in the
opinion of management, necessary for a fair presentation of the
interim periods. The results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year. The condensed
consolidated balance sheet at December 31, 1997, was derived from
audited financial statements as of that date.
2
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1998 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 1998 1997
- --------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 5,905 $ 4,934
Trade accounts receivable, net of allowance 58,164 52,191
Inventories:
Finished goods 34,877 36,429
Work in process 9,049 8,582
Raw materials 20,616 23,189
----------- ----------
Total inventory 64,542 68,200
Supplies and prepaid items 7,546 7,595
----------- ----------
Total current assets 136,157 132,920
Property, plant and equipment, net (Note 4) 101,552 118,331
Investments and other assets, net of allowance 21,276 19,402
----------- ----------
$ 258,985 $ 270,653
=========== ==========
(Continued on following page)
3
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1998 is unaudited)
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------- -------------- ------------
Current liabilities:
Drafts payable $ 332 $ 737
Accounts payable 27,704 28,137
Accrued liabilities 17,725 16,196
Current portion of long-term debt 15,412 15,874
----------- ----------
Total current liabilities 61,173 60,944
Long-term debt (Notes 4 and 6) 145,446 165,067
Contingencies (Note 5)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,539 shares
issued and outstanding (1,539 in 1997) 146 146
Stockholders' equity (Notes 3 and 8):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 15,105,616 shares
issued (14,914,476 in 1997) 1,511 1,504
Capital in excess of par value 38,322 38,257
Accumulated other comprehensive income (loss) (993) (1,003)
Accumulated deficit (21,311) (29,773)
----------- ----------
65,529 56,985
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 2,482,590 shares
(1,982,620 in 1997) 13,107 12,289
----------- ----------
Total stockholders' equity 52,222 44,496
----------- ----------
$ 258,985 $ 270,653
=========== ==========
(See accompanying notes)
4
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
1998 1997
---------- ----------
Revenues:
Net sales $ 78,036 $ 73,234
Other income 1,110 1,630
Gain on sale of the Tower (Note 4) 12,993 -
----------- ----------
92,139 74,864
Costs and expenses:
Cost of sales 62,119 62,312
Selling, general and administrative 15,604 14,872
Interest 4,858 3,056
----------- ----------
82,581 80,240
----------- ----------
Income (loss) before provision for
income taxes 9,558 (5,376)
Provision for income taxes 280 62
----------- ----------
Net income (loss) $ 9,278 $ (5,438)
=========== ==========
Net income (loss) applicable to
common stock (Note 2) $ 8,462 $ (6,241)
========== ==========
Weighted average common shares
outstanding (Note 2):
Basic 12,746,178 12,974,824
Diluted 17,539,194 12,974,824
Income (loss) per common share (Note 2):
Basic $ .66 $ (.48)
========== ==========
Diluted $ .53 $ (.48)
========== ==========
(See accompanying notes)
5
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
1998 1997
----------- ----------
Cash flows from operations:
Net income (loss) $ 9,278 $ (5,438)
Adjustments to reconcile net loss
to cash flows used by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 3,119 2,439
Other 262 283
Provision for possible losses
on receivables and other assets 399 152
Gain on sale of assets (12,993) (65)
Recapture of prior period provisions for
loss on loans receivable secured by real estate - (1,383)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (5,968) (4,841)
Inventories 3,798 678
Supplies and prepaid items (335) (791)
Accounts payable (563) (4,947)
Accrued liabilities 1,644 169
----------- ----------
Net cash used by operations (1,359) (13,744)
Cash flows from investing activities:
Capital expenditures (2,290) (2,819)
Principal payments on notes receivable 23 183
Proceeds from sales of equipment and
real estate properties 18 160
Proceeds from sale of the Tower (Note 4) 29,266
Increase in other assets (2,511) (721)
----------- ----------
Net cash provided (used) in investing activities 24,506 (3,197)
Cash flows from financing activities:
Payments on long-term debt (14,649) (21,172)
Long-term and other borrowings - 54,451
Net change in revolving debt (5,558) (12,408)
Net change in drafts payable (405) (96)
Dividends paid on preferred stocks (Note 3) (816) (803)
Purchases of treasury stock (Note 3) (819) (327)
Net proceeds from issuance of common stock 71 81
----------- ----------
Net cash provided (used) by financing activities (22,176) 19,918
- --------- ----------
Net increase in cash 971 2,977
Cash and cash equivalents at beginning of period 4,934 1,620
----------- ----------
Cash and cash equivalents at end of period $ 5,905 $ 4,597
=========== ==========
(See accompanying notes)
6
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Note 1: Income Taxes
- ---------------------
At December 31, 1997, the Company had regular-tax net
operating loss ("NOL") carryforwards for tax purposes of
approximately $65 million (approximately $18 million alternative
minimum tax NOLs). Certain amounts of regular-tax NOL expire
beginning in 1999.
The Company's provision for income taxes for the three months
ended March 31, 1998 of $280,000 is for current state income
taxes and federal alternative minimum tax.
Note 2: Earnings Per Share
- ---------------------------
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share. Statement 128 replaced
the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128
requirements.
Net income or loss applicable to common stock is computed by
adjusting net income or loss by the amount of preferred stock
dividends. Basic income or loss per common share is based upon
the weighted average number of common shares outstanding during
each period after giving appropriate effect to preferred stock
dividends. Diluted income or loss per share is based on the
weighted average number of common shares and dilutive common
equivalent shares outstanding and the assumed conversion of
dilutive convertible securities outstanding, if any, after
appropriate adjustment for interest, net of related income tax
effects on convertible notes payable, as applicable. All
potentially dilutive securities were antidilutive for the first
quarter of 1997 and have thus, been excluded from the computation
of diluted loss per share for that period.
7
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Note 2: Earnings Per Share (continued)
- --------------------------------------
The following table sets forth the computation of basic and
diluted earnings per share: (dollars in thousands, except per
share amounts)
March 31,
Numerator: 1998 1997
--------- ----------
Numerator for 1998 diluted earnings
per share - net income (loss) $ 9,278 $ (5,438)
Preferred stock dividends (816) (803)
--------- ----------
Numerator for 1998 and 1997 basic
and 1997 diluted earnings per
share - income (loss) available
to common stockholders $ 8,462 $ (6,241)
========= ==========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 12,746,178 12,974,824
Effect of dilutive securities:
Employee stock options 126,290 -
Convertible preferred stock 4,662,726 -
Convertible note payable 4,000 -
---------- ----------
Dilutive potential common shares 4,793,016 -
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 17,539,194 12,974,824
========== ==========
Basic earnings per share $ .66 $ (.48)
========== ==========
Diluted earnings per share $ .53 $ (.48)
========== ==========
8
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Note 3: Stockholders' Equity
- ----------------------------
The table below provides detail of activity in the stockholders' equity
accounts for the three months
ended March 31, 1998:
Accumulated Retained
Common Stock Non- Capital Other Com- Earnings Treasury
--------------- redeemable in excess prehensive (Accumu- Treasury Stock
Par Preferred of par Income lated Stock- Prefer-
Shares Value Stock Value (Loss) deficit) Common red Total
------ ----- --------- --------- ---------- -------- ------- ------- ------
(In thousands)
Balance at December 31,
1997 15,042 $ 1,504 $ 48,000 $ 38,257 $(1,003) $(29,773) $(12,289) $ (200) $44,496
Net income 9,278 9,278
Foreign currency
translation adjustment 10 10
------
Comprehensive income (Note 8) 9,288
Exercise of
stock options 64 7 65 72
Dividends declared:
Series B 12% preferred
stock ($3.00 per share) (60) (60)
Series 2 preferred
stock ($.81 per share) (741) (741)
Redeemable preferred
stock ($10.00 per share) (15) (15)
Purchase of
treasury stock (818) (818)
------ ------ -------- -------- ------- -------- -------- ------ ------
(1)
Balance at March 31,
1998 15,106 $ 1,511 $ 48,000 $ 38,322 $ (993) $(21,311) $(13,107) $ (200) $52,222
====== ======= ======== ======== ======= ======== ======== ====== =======
(1) Includes 2,482,590 shares of the Company's Common Stock held in
treasury. Excluding the 2,482,590 shares held in treasury, the
outstanding shares of the Company's Common Stock at March 31, 1998
were 12,623,026.
9
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Note 4: Sale of the Tower
- -------------------------
In March 1998, a subsidiary of the Company closed the sale
of the Tower office building. The Company realized net proceeds
of approximately $29.3 million from the sale ($1.0 million of
which is held in escrow until September 1998, pending expiration
of representations and warranties associated with the sale).
Proceeds from the sale were used to retire the outstanding
indebtedness of approximately $12.6 million in March 1998, for
which this property served as collateral. Approximately $15.5
million of the remaining proceeds were used to reduce
indebtedness outstanding under the Company's Revolving Credit
Facility. The Company recognized a gain on the sale of the
property of approximately $13 million in the first quarter of
1998.
Note 5: Commitments and Contingencies
- -------------------------------------
Nitric Acid Project
- -------------------
In June 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement").
Under the Bayer Agreement, EDNC will act as an agent to
construct, and upon completion of construction, will operate a
nitric acid plant (the "EDNC Baytown Plant") at Bayer's Baytown,
Texas chemical facility. EDC has guaranteed the performance of
EDNC's obligations under the Bayer Agreement. Under the terms of
the Bayer Agreement, EDNC is to lease the EDNC Baytown Plant
pursuant to a leveraged lease from an unrelated third party with
an initial lease term of ten years from the date on which the
EDNC Baytown Plant becomes fully operational. Upon expiration of
the initial ten-year term from the date the EDNC Baytown Plant
becomes operational, the Bayer Agreement may be renewed for up to
six renewal terms of five years each; however, prior to each
renewal period, either party to the Bayer Agreement may opt
against renewal. It is anticipated that construction of the EDNC
Baytown Plant will cost approximately $60 million and will be
completed by the end of 1998. Construction financing of the EDNC
Baytown Plant is being provided by an unaffiliated lender.
Neither the Company nor EDC has guaranteed any of the lending
obligations for the EDNC Baytown Plant. In connection with the
leveraged lease, the Company entered into an interest rate
forward agreement to fix the effective rate of interest implicit
in such lease. As of March 31, 1998, the fair value of such
agreement represented a liability of $4.1 million for which the
Company has posted margin and letters of credit totaling $4.1
million. Bayer has agreed to reimburse the Company for 50% of
the ultimate cost of the hedging contract associated with the
interest rate forward agreement.
Debt Guarantee
- --------------
The Company has guaranteed approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft
10
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Company, in exchange for an ownership interest, to which no value
has been assigned as of March 31, 1998. The Company has made
investments in and advances to the aviation company totaling
$628,000 as of March 31, 1998 and is accruing losses of the
aviation company based on its ownership percentage (35.9% as of
March 31, 1998). The Company has recorded losses of $2,496,500
($187,500 during the first quarter of 1998) related to the debt
guarantee and advances. The debt guarantee relates to a $2
million term note and up to $600,000 of a $2 million revolving
credit facility. The $2 million term note requires interest only
payments through September 1998; thereafter, it requires monthly
principal payments of $11,111 plus interest beginning in October
1998 until it matures on August 8, 1999, at which time all
outstanding principal and unpaid interest are due. In the event
of default of this note, the Company is required to assume
payments on the note with the term extended until August 2004.
The $2 million revolving credit facility, on which a subsidiary
of the Company has guaranteed up to $600,000 of indebtedness, has
an outstanding balance of $2.0 million at March 31, 1998. At
March 31, 1998 principal and interest payments on such notes were
current.
Legal Matters
- -------------
Following is a summary of certain legal actions involving the
Company:
A. In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with
numerous other companies, of potential responsibility for
clean-up of a waste disposal site in Oklahoma. In 1990, the
EPA added the site to the National Priorities List.
Following the remedial investigation and feasibility study,
in 1992 the Regional Administrator of the EPA signed the
Record of Decision ("ROD") for the site. The ROD detailed
EPA's selected remedial action for the site and estimated
the cost of the remedy at $3.6 million. In 1992, the Company
made settlement proposals which would have entailed a
collective payment by the subsidiaries of $47,000. The site
owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The
EPA rejected the Company's offer, allocating 60% of the
cleanup costs to the potentially responsible parties and 40%
to the site operator. The EPA estimated the total cleanup
costs at $10.1 million as of February 1993. The site owner
rejected all settlements with the EPA, after which the EPA
issued an order to the site owner to conduct the remedial
design/remedial action approved for the site. In August
1997, the site owner issued an "invitation to settle" to
various parties, alleging the total cleanup costs at the
site may exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the clean-up of the site is
unknown due to continuing changes in the estimated total
11
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
cost of clean-up of the site and the percentage of the total
waste which was alleged to have been contributed to the site
by the Company. As of March 31,1998, the Company has accrued
an amount based on a preliminary settlement proposal by the
alleged potential responsible parties; however, there is no
assurance such proposal will be accepted. The amount
accrued is not material to the Company's financial position
or results of operations. This estimate is subject to
material change in the near term as additional information
is obtained.
B. A subsidiary of the Company submitted to the State of
Arkansas a "Groundwater Monitoring Work Plan" which was
approved by the State of Arkansas. Pursuant to the
Groundwater Monitoring Work Plan, the subsidiary has
performed phase I and II groundwater investigations, and
submitted a risk assessment report to the State of Arkansas.
The risk assessment report is currently being reviewed by
the State of Arkansas.
On February 12, 1996, the subsidiary entered into a Consent
Administrative Agreement ("Administrative Agreement") with
the state of Arkansas to resolve certain compliance issues
associated with nitric acid concentrators. Pursuant to the
Administrative Agreement, the subsidiary installed
additional pollution control equipment to address the
compliance issues. The subsidiary was assessed $50,000 in
civil penalties associated with the Administrative
Agreement. In the summer of 1996 and then on January 28,
1997, the subsidiary executed amendments to the
Administrative Agreement ("Amended Agreements"). The Amended
Agreements imposed a $150,000 civil penalty, which penalty
has been paid. Since the 1997 amendment, the Chemical
Business has been assessed stipulated penalties of
approximately $67,000 by the Arkansas Department of
Pollution Control and Ecology ("ADPC&E") for violations of
certain provisions of the 1997 Amendment. The Chemical
Business believes that the El Dorado Plant has made progress
in controlling certain off-site emissions; however, such
off-site emissions have occurred and continue to occur from
time to time, which could result in the assessment of
additional penalties against the Chemical Business by the
ADPC&E for violation of the 1997 Amendment.
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
ditch near EDC's El Dorado, Arkansas, facility ("El Dorado
Facility"). ADPC&E has proposed a Consent Administrative
Agreement ("CAA") to resolve the event. The proposed CAA is
currently being drafted by ADPC&E, and EDC has been advised
that it will include a civil penalty in the amount of
$201,700 which includes $125,000 which was previously agreed
to be paid in the form of environmental improvements at the
El Dorado Plant. EDC has proposed to the ADPC&E that it be
12
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
allowed to pay the $125,000 in the form of environmental
improvements at the El Dorado Facility. The Company
believes the remainder of the proposed civil penalty is
excessive and intends to seek reduction of such amount. The
draft of the proposed Consent Administrative Agreement also
requires EDC to install and operate equipment to recover and
treat contaminated groundwater. EDC has proposed a long
term monitoring program as the groundwater remedy, and will
vigorously oppose the remedy proposed in this suggested
order. The draft of the proposed CAA also requires the
Chemical Business to undertake certain additional compliance
measures and equipment improvements related to the El Dorado
Plant's wastewater treatment system.
C. In 1996, a lawsuit was filed against the Company's Chemical
Business by a group of residents of El Dorado, Arkansas,
asserting a citizens' suit against the Chemical Business as
a result of certain alleged violations of the Clean Air Act,
the Clean Water Act, the Chemical Business' air and water
permits and certain other environmental laws, rules and
regulations. The citizens' suit requests the court to order
the Chemical Business to cure such alleged violations, if
any, plus penalties as provided under the applicable
statutes. During the first quarter of 1998 the Company's
Chemical Business has entered into a Consent Decree in
settlement of the citizen suit. The Consent Decree is
subject to approval by the court. Under the terms of the
Consent Decree, which is subject to court approval, the
Company's Chemical Business has agreed to, among other
things, (i) the granting of an injunctive relief requiring
its El Dorado Facility to (a) comply with certain discharge,
monitoring and reporting requirements of its waste water
discharge permit, the emission limitations of its air permit
and the notification requirements under certain sections of
certain environmental laws and the statutory penalties for
failure to comply with such notification requirements, (b)
perform air and water tests to determine if the El Dorado
Facility is meeting certain compliance levels and, if the
tests do not meet the required compliance levels, to make
the necessary corrections thereto so that such compliance
levels are met, and (c) limitations relating to the El
Dorado Facility's use of its older concentrated nitric acid
plant, (ii) to provide the plaintiffs with copies of certain
documents forwarded to, or received by, appropriate
environmental regulatory agencies by the El Dorado Facility
and summaries of certain test results at the El Dorado
Facility, (d) pay to the U.S. Treasury $50,000 as a penalty,
and (e) pay certain stipulated penalties under certain
conditions in the event the El Dorado Facility fails to
comply with the terms of the Consent Decree. All actions to
be performed by the Company's Chemical Business under the
Consent Decree and payment of penalties required by the
Consent Decree are to be paid by the Company's Chemical
Business.
13
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
In July 1996, several of the same individuals who are
plaintiffs in the citizens' suit referenced above filed a
toxic tort lawsuit against the Company's Chemical Business
alleging that they suffered certain injuries and damages as
a result of alleged releases of toxic substances from the
Chemical Business' El Dorado, Arkansas manufacturing
facility. In October 1996, another toxic tort lawsuit was
filed against the Company's Chemical Business. This
subsequent action asserts similar damage theories as the
previously discussed lawsuit, except this action attempts to
have a class certified to represent substantially all
allegedly affected persons. The plaintiffs are suing for an
unspecified amount of actual and punitive damages.
The Company and the Chemical Business maintain an
Environmental Impairment Insurance Policy ("EIL Insurance")
that provides coverage to the Company and the Chemical
Business for certain discharges, dispersals, releases, or
escapes of certain contaminants and pollutants into or upon
land, the atmosphere or any water course or body of water
from the Site, which has caused bodily injury, property
damage or contamination to others or to other property not
on the Site. The EIL Insurance provides limits of liability
for each loss up to $10.0 million and a similar $10.0
million limit for all losses due to bodily injury or
property damage, except $5.0 million for all remediation
expenses, with the maximum limit of liability for all claims
under the EIL Insurance not to exceed $10.0 million for each
loss or remediation expense and $10.0 million for all losses
and remediation expenses. The EIL Insurance also provides a
retention of the first $500,000 per loss or remediation
expense that is to be paid by the Company. The Company's
Chemical Business has spent approximately $1.2 million in
legal, expert and other costs in connection with the toxic
tort and citizen lawsuits described above. The Company has
been reimbursed under its EIL Insurance approximately
$405,000 of the $1.2 million. The EIL Insurance carrier has
assumed responsibility for all subsequent legal, expert and
other costs of defense and is paying such legal, expert and
other costs on an on-going basis, subject to a reservation
of rights relating to the citizens' suit.
During the first quarter of 1998, the Company's Chemical
Business entered into an agreement to settle the class
action toxic tort lawsuit and completed a settlement of the
other toxic tort lawsuit. Settlement of the class action
toxic tort lawsuit has been preliminarily approved by the court,
but such settlement is subject to final approval by the court.
Settlement of the class action toxic tort lawsuit, if completed,
will require, and settlement of the other toxic tort lawsuit did
require, cash payments to the plaintiffs. Substantially all
of such cash settlement payments are to be or were funded
directly by the Company's EIL Insurance carrier.
The amount of the settlements of the toxic tort cases as
discussed above paid by the EIL Insurance and the amount
paid under the EIL Insurance for legal and other expenses
relating to the defense of the toxic tort cases and the
citizen suit case reduce the coverage amount available under
the EIL insurance.
14
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
D. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the defendants
allegedly violated certain federal and state antitrust laws
in connection with alleged price fixing of certain explosive
products. The plaintiffs are suing for an unspecified amount
of damages, which, pursuant to statute, plaintiffs are
requesting be trebled, together with costs. Based on the
information presently available to the Company, the Company
does not believe that the Chemical Business conspired with
any party, including but not limited to, the five (5) other
defendants, to fix prices in connection with the sale of
commercial explosives. Discovery has only recently commenced
in this matter. The Chemical Business intends to vigorously
defend itself in this matter.
The Company's Chemical Business has been added as a
defendant in a separate lawsuit pending in Missouri. This
lawsuit alleges a national conspiracy, as well as a regional
conspiracy, directed against explosive customers in Missouri
and seeks unspecified damages. The Company's Chemical
Business has been included in this lawsuit because it sold
products to customers in Missouri during a time in which
other defendants have admitted to participating in an
antitrust conspiracy, and because it has been sued in the
preceding described lawsuit. Based on the information
presently available to the Company, the Company does not
believe that the Chemical Business conspired with any party,
to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously
defend itself in this matter.
For several years, certain members of the explosives
industry have been the focus of a grand jury investigation
being supervised by the U.S. Department of Justice ("DOJ")
in connection with criminal antitrust allegations involving
price fixing. Certain explosives companies, other than the
Company, including all the Company's major competitors, and
individuals employed by certain of those competitors, were
indicted and have pled guilty to antitrust violations. The
guilty pleas have resulted in nearly $40 million in criminal
fines. In connection with the grand jury investigation, the
Company's Chemical Business received and has complied with
two document subpoenas, certain of the Company's Chemical
Business' employees have been interviewed by the DOJ under
grants of immunity from prosecution, and certain of the
Company's Chemical Business employees have testified under
15
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
subpoena before the grand jury under grants of immunity in
connection with the investigation. The Company believes that
it has cooperated fully with the government's investigation.
The Company has been informed by an official of the DOJ that
it is not currently a target of the above investigation or
of any grand jury investigating criminal antitrust activity
in the explosives or ammonium nitrate industries.
During the third quarter of 1997, a subsidiary of the
Company was served with a lawsuit in which approximately 27
plaintiffs have sued approximately 13 defendants, including
a subsidiary of the Company alleging personal injury and
property damage for undifferentiated compensatory and
punitive damages of approximately $7,000,000. Specifically,
the plaintiffs assert blast damage claims, nuisance (road
dust from coal trucks) and personal injury claims (exposure
to toxic materials in blasting materials) on behalf of
residents living near the Heartland Coal Company
("Heartland") strip mine in Lincoln County, West Virginia.
Heartland employed the subsidiary to provide blasting
materials and personnel to load and shoot holes drilled by
employees of Heartland. Down hole blasting services were
provided by the subsidiary at Heartland's premises from
approximately August 1991, until approximately August 1994.
Subsequent to August 1994, the subsidiary supplied blasting
materials to the reclamation contractor at Heartland's mine.
In connection with the subsidiary's activities at Heartland,
the subsidiary has entered into a contractual indemnity to
Heartland to indemnify Heartland under certain conditions
for acts or actions taken by the subsidiary for which the
subsidiary failed to take, and Heartland is alleging that
the subsidiary is liable thereunder for Heartland's defense
costs and any losses to or damages sustained by, the
plaintiffs in this lawsuit. Discovery has only recently
begun in this matter, and the Company intends to vigorously
defend itself in this matter. Based on limited information
available, the subsidiary's counsel believes that the
exposure, if any, to the subsidiary related to this
litigation is in the $100,000 range.
The Company, including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the
ordinary course of business. In the opinion of management after
consultation with counsel, all claims, legal actions (including
those described above) and complaints are adequately covered by
insurance, or if not so covered, are without merit or are of such
kind, or involve such amounts that unfavorable disposition is not
presently expected to have a material effect on the financial
position of the Company, but could have a material impact to the
net loss of a particular quarter or year, if resolved
unfavorably.
Note 6: Long-Term Debt
- ---------------------
In November 1997, the Company's wholly owned subsidiary,
ClimaChem, Inc. ("CCI") completed the sale of $105 million
principal amount of 10 3/4% Senior Notes due 2007 (the "Notes").
16
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Interest on the Notes is payable semiannually in arrears on June
1 and December 1 of each year, and the principal is payable in
the year 2007. The Notes are senior unsecured obligations of CCI
and rank pari passu in right of payment to all existing senior
unsecured indebtedness of CCI and its subsidiaries. The Notes
are effectively subordinated to all existing and future senior
secured indebtedness of CCI.
Except as described below, the Notes are not redeemable at CCI's
option prior to December 1, 2002. After December 1, 2002, the
Notes will be subject to redemption at the option of CCI, in
whole or in part, at the redemption prices set forth in the
Indenture, plus accrued and unpaid interest thereon, plus
liquidated damages, if any, to the applicable redemption date.
In addition, until December 1, 2000, up to $35 million in
aggregate principal amount of Notes are redeemable, at the option
of CCI, at a price of 110.75% of the principal amount of the
Notes, together with accrued and unpaid interest, if any,
thereon, plus liquidated damages; provided, however, that at
least $65 million in aggregate principal amount of the Notes
remain outstanding following such redemption.
In the event of a change of control of the Company or CCI,
holders of the Notes will have the right to require CCI to
repurchase the Notes, in whole or in part, at a redemption price
of 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon, plus liquidated damages, if any, to
the date of repurchase.
CCI owns substantially all of the companies comprising the
Company's Chemical and Climate Control Businesses. CCI is a
holding company with no assets or operations other than its
investments in its subsidiaries, and each of its subsidiaries is
wholly owned, directly or indirectly, by CCI. CCI's payment
obligations under the Notes are fully, unconditionally and joint
and severally guaranteed by all of the existing subsidiaries of
CCI, except for El Dorado Nitrogen Company ("EDNC"). The assets,
equity, and earnings of EDNC are currently inconsequential to
CCI. Separate financial statements and other disclosures
concerning the guarantors are not presented herein because
management has determined they are not material to investors.
Summarized consolidated balance sheet information of CCI and its
subsidiaries as of December 31, 1997 and March 31, 1998 and the
results of operations for the three month periods ended March 31,
1998 and March 31, 1997, is as follows: (In thousands)
17
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Note 6: (continued)
- -------------------
March 31, December 31,
1998 1997
---------- -----------
(unaudited)
Balance sheet data:
Current assets $ 93,805 $ 88,442
Property, plant and equipment 83,964 84,329
Notes receivable from LSB and affiliates 12,432 13,443
Other assets 11,294 14,661
---------- ----------
Total assets $ 201,495 $ 200,875
========== ==========
Current liabilities $ 39,449 $ 38,004
Long-term debt 125,445 126,346
Other 9,347 9,236
Stockholder's equity 27,254 27,289
---------- ----------
Total liabilities and stockholder's equity $ 201,495 $ 200,875
========== ==========
Three Months Ended
March 31,
1998 1997
---------- -----------
(unaudited)
Operations data:
Total revenues $ 63,428 $ 62,295
Costs and expenses:
Costs of sales 50,411 52,852
Selling, general and administrative 9,780 9,050
Interest 3,313 2,036
---------- ----------
63,504 63,938
Loss before benefit for income taxes (76) (1,643)
Income tax (benefit) (30) (710)
---------- ----------
Net loss $ (46) $ (933)
========== ==========
18
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
Note 7: Change in Accounting
- ----------------------------
Effective January 1, 1998, the Company changed its method of
accounting for the costs of computer software developed for
internal use to capitalize costs incurred after the preliminary
project stage as outlined in Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). These costs capitalized
will be amortized over their estimated useful life. Prior to
1998, these costs were expensed as incurred. The effect of this
change on net income for the first quarter of 1998 was not
material.
Note 8: Comprehensive Income
- ----------------------------
Effective January 1, 1998, the Company adopted Financial
Accounting Standard No. 130 "Reporting Comprehensive Income"
("SFAS 130"). The provisions of SFAS 130 require the Company to
classify items of other comprehensive income in the financial
statements and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance
sheet. The Company has also made similar reclassifications for
all prior periods for comparative purposes. Other comprehensive
income for the quarterly period ended March 31, 1997, was
approximately $43,000. After consideration of the $43,000 other
comprehensive income item, the comprehensive loss for the
quarterly period ended March 31, 1997 was approximately
$5,395,000.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with a review of the Company's March 31, 1998
Condensed Consolidated Financial Statements.
Certain statements contained in this "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" may be deemed forward-looking statements. See
"Special Note Regarding Forward-Looking Statements".
OVERVIEW
The Company is pursuing a strategy of focusing on its more
profitable businesses and concentrating on businesses and product
lines in niche markets where the Company has established or can
establish a position as a market leader. In addition, the
Company is seeking to improve its liquidity and profits through
liquidation of selected assets that are on its balance sheet and
on which it is not realizing an acceptable return nor does it
have the potential to do so. In this connection, the Company has
come to the conclusion that its Automotive and Industrial
Products Businesses are non-core to the Company and the Company
is exploring various alternatives to maximize shareholder value
from these assets. This evaluation includes the possibility of
spinning-off the Automotive and Industrial Products Businesses to
its shareholders to form a new entity with a separate focus.
Any action to be taken in this regard will require approval of
the Company's Board of Directors.
Information about the Company's operations in different
industry segments for the three months ended March 31, 1998 and
1997 is detailed below.
20
Three Months Ended March 31,
1998 1997
___________ __________
(In thousands)
(Unaudited)
Sales:
Chemical $ 33,425 $ 40,599
Climate Control 29,936 21,623
Automotive Products 10,490 7,992
Industrial Products 4,185 3,020
---------- ----------
$ 78,036 $ 73,234
========== ==========
Gross profit (1):
Chemical $ 4,592 $ 3,384
Climate Control 8,336 6,008
Automotive Products 2,139 1,109
Industrial Products 849 421
---------- ----------
$ 15,916 $ 10,922
========== ==========
Operating profit (loss) (2):
Chemical $ 1,151 $ (645)
Climate Control 2,812 1,551
Automotive Products (407) (1,226)
Industrial Products (304) (665)
---------- ----------
3,252 (985)
General corporate expenses (1,829) (1,335)
Interest expense (4,858) (3,056)
Gain on sale of the Tower 12,993 -
---------- ----------
Income (loss) before provision
for income taxes $ 9,558 $ (5,376)
========== ==========
(1) Gross profit by industry segment represents net sales less
cost of sales.
(2) Operating profit (loss) by industry segment represents
revenues less operating expenses before deducting general
corporate expenses, interest expense and income taxes and,
in 1998, before gain on sale of the Tower.
Chemical Business
- -----------------
Beginning in 1994, the results of operations of the Chemical
Business have been adversely impacted by the high cost of
anhydrous ammonia. From its most recent cyclical low in 1986
through 1993, the average Gulf Coast price (the "Spot Price") of
anhydrous ammonia was approximately $100 per ton. During 1994
and in each of the years since, a tightness in supply developed
which resulted in an increase in the Spot Price of anhydrous
21
ammonia to an average of approximately $195 per ton. The Company
believes that the tightness in supply of anhydrous ammonia that
emerged in 1994 was a result of increased industrial usage as the
U.S. economy grew, a net consolidation of the domestic capacity
and a disruption in supply coming from the former Soviet Union.
Although prices for anhydrous ammonia vary considerably from
month to month, the annual average price has remained high for
each of the last three years. The Company currently purchases
approximately 220,000 tons of anhydrous ammonia per year under
two contracts, both effective as of January 1, 1997. The
Company's purchase price of anhydrous ammonia under these
contracts can be higher or lower than the Spot Price of anhydrous
ammonia. The higher prices have been partially passed on to
customers; however, the Chemical Business has not been able to
offset the entire cost increase with price increases for its
products resulting in lower gross profit margins during each of
the periods since the increase. The Company believes there is
approximately 2 million tons of additional annual capacity being
constructed in the western hemisphere scheduled for completion in
1998 and 1999. The Company believes this additional capacity may
contribute to a decline in the future market price of anhydrous
ammonia.
During July 1997, a subsidiary of the Company entered into
an agreement with Bayer Corporation ("Bayer") whereby the
Company's subsidiaries would act as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant, when constructed, will be operated by the
Company's subsidiary and will supply nitric acid for Bayer's
polyurethane units under a long-term supply contract. Management
estimates that, after the initial startup phase of operations at
the plant, at full production capacity based on terms of the
Bayer Agreement and based on current market conditions, the plant
should generate approximately $50 million in annual gross
revenues. It is anticipated that the construction of the nitric
acid plant at Bayer's facility in Baytown, Texas, will cost
approximately $60 million and construction is scheduled to be
completed by the end of 1998. The Company's subsidiary is to
lease the nitric acid plant pursuant to a leverage lease from an
unrelated third party for an initial term of ten (10) years from
the date that the plant becomes fully operational, and the
construction financing of this plant is being provided by an
unaffiliated lender.
In addition, in May 1998, the Company entered into a letter
of intent with Bayer to purchase Bayer's concentrated nitric acid
production unit (the "Unit") located at Bayer's plant in West
Virginia. Under the terms of the letter of intent, the Company
would, if the purchase is completed, pay to Bayer $2.0 million at
closing and the balance payable over six years. If the purchase is
completed, the Company would grant to Bayer a purchase money mortgage
on the Unit and would lease from Bayer the land on which the Unit is
located for a nominal amount. The purchase is subject to, among
other things; completion by the Company of its due diligence,
22
completion of a final purchase agreement and approval by the
Board of Directors of both parties. Completion of this
transaction, if completed, is to occur on or before December 31,
1999.
The results of operation of the Chemical Business'
Australian subsidiary have been adversely affected due to the
recent economic developments in certain countries in Asia. These
economic developments in Asia have had a negative impact on the
mining industry in Australia which the Company's Chemical
Business services. If these adverse economic conditions in Asia
continue for an extended period of time, such could have an
adverse effect on the Company's consolidated results of
operations for 1998.
Climate Control
- ---------------
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source
heat pumps and has established a significant market share in
these specific markets.
As indicated in the above table, the Climate Control
Business reported improved sales (an increase of 38.4%) and
improved operating profit for the first three months of 1998 as
compared to the first three months of 1997.
Automotive and Industrial Products Businesses
- ---------------------------------------------
As indicated in the above table, during the three months
ended March 31, 1998 and 1997, respectively, the Automotive and
Industrial Products Businesses recorded combined sales of $14.7
million and $11.0 million, respectively, and reported operating
losses (as defined above) of $.7 million and $1.9 million
respectively. The net investment in assets of these Businesses
has decreased consistently during the last three years and the
Company expects to realize further reductions in future periods.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 vs. Three months ended March 31, 1997.
- ------------------------------------------------------------------------
Revenues
--------
Total revenues for the three months ended March 31, 1998 and
1997 were $92.1 million and $74.9 million, respectively (an
increase of $17.2 million). Sales increased $4.8 million and
other income decreased $.5 million. Additionally, in March 1998,
23
a subsidiary of the Company closed the sale of an Oklahoma City
office building, ("the Tower"). The Company recognized a pre-tax
gain on the sale of the Tower of approximately $13.0 million in
the first quarter of 1998.
Net Sales
---------
Consolidated net sales included in total revenues for the
three months ended March 31, 1998 were $78.0 million, compared to
$73.2 million for the first three months of 1997, an increase of
$4.8 million. This increase in sales resulted principally from:
(i) increased sales in the Climate Control Business of $8.3
million due to increased sales in this Business' Heat Pump and
Fan Coil product lines, (ii) increased sales in the Automotive
Products Business of $2.5 million due to increased sales to
original equipment manufacturers and new customers, and (iii)
increased sales in the Industrial Products Business of $1.2
million due to increased sales of machine tools, offset by (iv)
decreased sales in the Chemical Business of $7.2 million
primarily due to lower sales in the U.S. of agricultural and
blasting products and decreased business volume of its Australian
subsidiary.
Gross Profit
------------
Gross profit was 20.4% for the first three months of 1998,
compared to 14.9% for the first three months of 1997. The
increase in the gross profit percentage was due primarily to (i)
increased absorption of costs due to higher production volumes in
the Automotive Products Business, and (ii) lower production costs
in the Chemical Business due to the effect of lower prices of
anhydrous ammonia in 1998, and (iii) lower unabsorbed overhead
costs caused by excessive downtime related to problems associated
with mechanical failures at the Chemical Business' primary
manufacturing plant in the first quarter of 1997.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 20.0% in the three month period ended
March 31, 1998, compared to 20.3% for the first three months of
1997. This decrease is primarily the result of decreased
professional fees related to environmental matters in the
Chemical Business and increased sales volume in the Climate
Control and Automotive Products Businesses without an equivalent
corresponding increase in SG&A, offset by increased SG&A of $.4
million on the operations of the Tower prior to the Tower being
sold in March 1998.
Interest Expense
----------------
Interest expense for the Company was $4.9 million during the
first quarter of 1998, compared to $3.8 million, before deducting
24
capitalized interest, during the first quarter of 1997. During
the first quarter of 1997, $.7 million of interest expense was
capitalized in connection with construction of the DSN Plant.
The increase of $1.1 million before the effect of capitalization
primarily resulted from increased borrowings.
Income (Loss) Before Taxes
--------------------------
The Company had income before income taxes of $9.6 million
in the first quarter of 1998 compared to a loss before income
taxes of $5.4 million in the three months ended March 31, 1997.
The increased profitability of $15.0 million was primarily due to
the gain on the sale of the Tower and increased sales and gross
profits as previously discussed.
Provision for Income Taxes
--------------------------
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
1 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the three months ended
March 31, 1998 and the three months ended March 31, 1997 are for
current state income taxes and federal alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flow From Operations
- -------------------------
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures.
The Company has financed its cash requirements primarily through
internally generated cash flow and borrowings under its revolving
credit facilities, and more recently, by issuance of senior
unsecured notes by a wholly owned subsidiary and the sale of the
Tower.
Net cash used by operations for the quarter ended March 31,
1998 was $1.4 million, after $3.4 million for noncash
depreciation and amortization, $.4 million in provisions for
possible losses on accounts receivable, notes receivable and a
loan guarantee and the $13.0 million gain from the sale of the
Tower and including the following changes in assets and
liabilities: (i) accounts receivable increases of $6.0 million;
(ii) inventory decreases of $3.8 million; (iii) increases in
supplies and prepaid items of $.3 million; and (iv) increases in
accounts payable and accrued liabilities of $1.1 million. The
increase in accounts receivable is due to increased sales
primarily in the Climate Control and Automotive Products
Businesses (see "Results of Operations" for discussion of
increase in sales) and seasonal sales of agricultural products in
the Chemical Business. The decrease in inventory was due
primarily to a decrease at the Chemical Business due to seasonal
sales of agricultural products and inventory reductions in the
25
Automotive and Industrial Products Businesses resulting from
liquidation of excessive inventories. Inventory in the
Automotive and Industrial Products Businesses decreased from
$29.4 million at December 31, 1997 to $27.9 million at March 31,
1998. The increase in accounts payable and accrued liabilities
resulted primarily from an increase in accrued interest expense
related to senior unsecured notes which is payable semi-annually.
Cash Flow From Investing And Financing Activities
- -------------------------------------------------
Cash provided by investing activities for the quarter ended
March 31, 1998 included cash proceeds of $29.3 million received
on the sale of the Tower (see Note 4 of Notes to Condensed
Consolidated Financial Statements) offset by $2.3 million in
capital expenditures and $2.5 million used to increase other
assets. The capital expenditures took place primarily in the
Chemical and Climate Control Businesses to enhance production and
product delivery capabilities. The increase in other assets
included (i) a $1.0 million escrow account relating to the sale
of the Tower, (ii) $.5 million of deposits made in connection
with an interest rate hedge contract related to the agreement
with Bayer.
Net cash used by financing activities included (i) payments
on long-term debt of $14.6 million, including the $12.6 million
payoff of the mortgage on the Tower, (ii) net decreases in
revolving debt of $5.6 million, after application of net proceeds
of $15.5 million from the sale of the Tower, (iii) decreases in
drafts payable of $.4 million (iv) dividends of $.8 million, and
(v) treasury stock purchases of $.8 million.
During the first quarter of 1998, the Company declared and
paid the following aggregate dividends: (i) $3.00 per share on
each of the outstanding shares of its Series B 12% Cumulative
Convertible Preferred Stock; (ii) $.81 per share on each
outstanding share of its $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2; and (iii) $10.00 per share on each
outstanding share of its Convertible Noncumulative Preferred
Stock.
Source of Funds
- ---------------
The Company is a diversified holding Company and its
liquidity is dependent, in large part, on the operations of its
subsidiaries and credit agreements with lenders.
In October 1997, the Company organized a new wholly owned
subsidiary, ClimaChem, Inc. ("ClimaChem"). ClimaChem owns
substantially all of the Company's Chemical and Climate Control
Businesses. On November 26, 1997, ClimaChem issued senior
unsecured notes (the "Notes") in the aggregate amount of $105
million pursuant to the terms of an indenture (the "Indenture").
The Notes are jointly and severally and fully and unconditionally
guaranteed on a senior basis by all, except for one
26
inconsequential subsidiary, of the existing and all of the future
subsidiaries of ClimaChem. One current subsidiary of ClimaChem,
which is currently inconsequential to ClimaChem, is not a
guarantor of the Notes. The Company is neither an issuer of, nor
a guarantor under, the Notes.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year, commencing June 1, 1998. The Notes will
mature on December 1, 2007, unless earlier redeemed. The Notes
are redeemable at the option of the Company on December 1, 2002
at 105.375% of the principal amount declining to face amount at
December 1, 2005 and thereafter under the terms set forth in the
Indenture. The Notes are effectively subordinated to all secured
indebtedness of ClimaChem and its subsidiaries.
Under the terms of the Indenture, ClimaChem and its
subsidiaries cannot transfer funds to the Company in the form of
cash dividends or other distributions or advances, except for (i)
the amount of taxes that ClimaChem would be required to pay if
they were not consolidated with the Company and (ii) an amount
not to exceed fifty percent (50%) of ClimaChem's net income for
the year in question and (iii) the amount of direct and indirect
costs and expenses incurred by the Company on behalf of ClimaChem
pursuant to a certain services agreement and a certain management
agreement to which ClimaChem and the Company are parties.
The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by four separate loan
agreements ("Revolving Credit Agreements") with an unrelated
lender ("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of
certain of the subsidiaries that are borrowers under the
Revolving Credit Agreements. The Revolving Credit Agreements, as
amended, provide for revolving credit facilities ("Revolver") for
total direct borrowings up to $65.0 million, including the
issuance of letters of credit. The Revolver provides for
advances at varying percentages of eligible inventory and trade
receivables. The Revolving Credit Agreements, as amended,
provide for interest at the lender's prime rate plus 1.5% per
annum or, at the Company's option, on the Lender's LIBOR rate
plus 3.875% per annum (which rates are subject to increase or
reduction based upon achieving specified availability and
adjusted tangible net worth levels). At March 31, 1998 the
effective interest rate was 10.0%. The term of the Revolving
Credit Agreements is through December 31, 2000, and is renewable
thereafter for successive thirteen month terms. At March 31,
1998, the availability for additional borrowings, based on
eligible collateral, approximated $42.9 million. Borrowings
under the Revolver outstanding at March 31, 1998, were $13.6
million. The Revolving Credit Agreements, as amended, require
the Company to maintain certain financial ratios and contain
other financial covenants, including tangible net worth
27
requirements and capital expenditure limitations. The annual
interest on the outstanding debt under the Revolver at March 31,
1998 at the rates then in effect would approximate $1.4 million.
The Revolving Credit Agreements also require the payment of an
annual facility fee of 0.5% of the unused revolver.
In addition to the Revolving Credit Agreements discussed
above, as of March 31, 1998, the Company's wholly-owned
subsidiary, DSN Corporation ("DSN"), is a party to several loan
agreements with a financial company (the "Financing Company") for
three projects. At March 31, 1998, DSN had outstanding
borrowings of $12.9 million under these loans. The loans have
repayment schedules of 84 consecutive monthly installments of
principal and interest. The interest rate on each of the loans
is fixed and range from 8.2% to 8.9%. Annual interest, for the
three notes as a whole, at March 31, 1998, at the agreed to
interest rates would approximate $1.1 million. The loans are
secured by the various DSN property and equipment. The loan
agreements require the Company to maintain certain financial
ratios, including tangible net worth requirements.
The Company's Australian subsidiary has a revolving credit
working capital facility (the "TES Revolving Facility"). The TES
Revolving Facility is approximately AUS$10.5 million
(approximately US$6.9 million). The TES Revolving Facility
allows for borrowings based on specific percentages of qualified
eligible assets. At March 31, 1998,based on the effective
exchange rate, the availability under the TES Revolving Facility
was approximately US $6.2 million (AUS$9.3 million, with
approximately US$4.7 million (AUS$7.1 million approximately)
being borrowed at March 31, 1998. Such debt is secured by
substantially all the assets of TES, plus an unlimited guarantee
and indemnity from LSB and certain subsidiaries of TES. The
interest rate on this debt is dependent upon the borrowing option
elected by TES and had a weighted average rate of 6.5% at March
31, 1998. TES is in technical noncompliance with a certain
financial covenant contained in the loan agreement involving the
TES Revolving Facility. However, this covenant was not met at
the time of closing of this loan and the Bank of New Zealand,
Australia has continued to extend credit under this facility.
The outstanding borrowing under the TES Revolving Facility at
March 31, 1998, has been classified as due within one year in the
accompanying consolidated financial statements.
Future cash requirements include working capital
requirements for anticipated sales increases in all Businesses
and funding for future capital expenditures. Funding for the
higher accounts receivable resulting from anticipated sales
increases will be provided by cash flow generated by the Company
and the revolving credit facilities discussed elsewhere in this
report. Inventory requirements for the higher anticipated sales
activity should be met by scheduled reductions in the inventories
of the Industrial Products Business and in the inventories of the
28
Automotive Products Business. In 1998, the Company has planned
capital expenditures of approximately $9.0 million, primarily in
the Chemical and Climate Control Businesses.
Management believes that cash flows from operations, the
Company's revolving credit facilities, and other sources,
including proceeds from the sale of the Tower in March 1998, will
be adequate to meet its presently anticipated capital
expenditure, working capital, debt service, and dividend
requirements. The Company currently has no material commitment
for capital expenditures, except as discussed under "Overview -
Chemical Business" of this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" regarding the
letter of intent with Bayer Corporation to purchase a nitric acid
unit. In addition, the Company's subsidiary has agreed to act as
agent to construct a nitric acid plant as discussed under
"Overview - Chemical Business" of this "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Joint Ventures and Options to Purchase
- --------------------------------------
Prior to 1997, the Company, through a subsidiary, loaned
$2.8 million to a French manufacturer of HVAC equipment whose
product line is compatible with that of the Company's Climate
Control Business in the USA. Under the loan agreement, the
Company has the option to exchange its rights under the loan for
100% of the borrower's outstanding common stock. The Company
obtained a security interest in the stock of the French
manufacturer to secure its loan. During 1997 the Company
advanced an additional $1 million to the French manufacturer
bringing the total of the loan at December 31, 1997 to $3.8
million. As of March 31, 1998 the balance of the loan remained
$3.8 million. As of the date of this report, the decision has
not been made to exercise such option and the $3.8 million loan,
less a $1.5 million valuation reserve, is carried on the books as
a note receivable in other assets.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The
Project had been awarded a contract to retrofit residential
housing units at a US Army base which it completed during 1996.
The completed contract was for installation of energy-efficient
equipment (including air conditioning and heating equipment),
which would reduce utility consumption. For the installation and
management, the Project will receive an average of seventy-seven
percent (77%) of all energy and maintenance savings during the
twenty (20) year contract term. The Project spent approximately
$17.5 million to retrofit the residential housing units at the US
Army base. The Project received a loan from a lender to finance
approximately $14.0 million of the cost of the Project. The
Company is not guaranteeing any of the lending obligations of the
Project.
29
During 1995, the Company executed a stock option agreement
to acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company"), which owns the remaining fifty
percent (50%) equity interest in the Project discussed above, to
enhance the marketing of the Company's air conditioning products.
The stock option has a four (4) year term, and a total option
granting price of $1.0 million and annual $100,000 payments for
yearly extensions of the stock option thereafter for up to three
(3) years. Through the date of this report the Company has made
option payments aggregating $1.2 million and has loaned the
Optioned Company approximately $1.4 million. The Company has
recorded reserves of $1.0 million against the loans and option
payments. Upon exercise of the stock option by the Company, or
upon the occurrence of certain performance criteria which would
give the grantors of the stock option the right to accelerate the
date on which the Company must elect whether to exercise, the
Company shall pay certain cash and issue promissory notes for the
balance of the exercise price of the subject shares. The total
exercise price of the subject shares is $4.0 million, less the
amounts paid for the granting and any extensions of the stock
option. As of the date of this report, no decision to exercise
this option has been reached by the Company
Debt Guarantee
- --------------
The Company and one of its subsidiaries have guaranteed
approximately $2.6 million of indebtedness of a startup aviation
company in exchange for an ownership interest. The debt
guarantee relates to two note instruments. One note for which
the subsidiary had guaranteed up to $600,000 had a balance of
approximately $2.0 million as of March 31, 1998. The other note
in the amount of $2.0 million requires monthly principal payments
of $11,111 plus interest beginning in October 1998 through August
8, 1999, at which time all outstanding principal and accrued
interest are due. In the event of default of the $2.0 million
note, the Company is required to assume payments on the note with
the term extended until August 2004. Both notes are current as
to principal and interest as of March 31, 1998.
During 1996 and 1997, the aviation company received cash
infusions of $5.0 million from an unrelated third party investor
for a 41.6% ownership interest in the aviation company. During
1997, the investor exercised an option to purchase additional
stock of the aviation company in exchange for $4.0 million in
scheduled payments. At December 31, 1997, $2.5 million of
payments under this option had been received. Accordingly,
additional shares of stock were issued pursuant to the option
exercise increasing the investor's ownership interest to 46.3%.
In February 1998, the aviation company made a capital call on its
shareholders. In contemplation of a sale of the aviation company
to an additional investor and pursuant to such capital call, the
Company invested an additional $241,545 which increased the
30
Company's ownership interest to 35.9%. The unrelated third
party investor did not participate in such capital call and their
investment was diluted to 23.1%. On March 20, 1998 the Company
loaned an additional net amount of $32,000 to the aviation
company in exchange for additional stock. This transaction
increased the Company's ownership interest to approximately 37.2%
Availability of Company's Loss Carry-overs
- ------------------------------------------
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carry-overs from prior periods to reduce the federal income tax
payments which it would otherwise be required to make with
respect to income generated in such future years. Such benefit,
if any is dependent on the Company's ability to generate taxable
income in future periods, for which there is no assurance. Such
benefit if any, will be limited by the Company's reduced NOL for
alternative minimum tax purposes which is approximately $18
million at March 31, 1998. As of December 31, 1997, the Company
had available NOL carry-overs of approximately $65 million.
These NOL carry-overs will expire beginning in the year 1999.
Due to its recent history of reporting net losses, the Company
has established a valuation allowance on a portion of its NOLs
and thus has not recognized the full benefit of its NOLs in the
accompanying Condensed Consolidated Financial Statements.
The amount of these carry-overs has not been audited or
approved by the Internal Revenue Service ("IRS")and, accordingly,
no assurance can be given that such carry-overs will not be
reduced as a result of audits in the future. In addition, the
ability of the Company to utilize these carry-overs in the future
will be subject to a variety of limitations applicable to
corporate taxpayers generally under both the Internal Revenue
Code of 1986, as amended, and the Treasury Regulations. These
include, in particular, limitations imposed by Code Section 382
and the consolidated return regulations.
Contingencies
- -------------
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome.
31
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be
deemed "Forward-Looking Statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements
in this report other than statements of historical fact are
Forward-Looking Statements that are subject to known and unknown
risks, uncertainties and other factors which could cause actual
results and performance of the Company to differ materially from
such statements. The words "believe", "expect", "anticipate",
"intend", "will", and similar expressions identify Forward-
Looking Statements. Forward-Looking Statements contained herein
relate to, among other things, (i) ability to improve operations
and become profitable on an annualized basis (ii) establish a
plan to dispose of non-core assets, including the possible spin-
off of such non-core assets (iii) the EDNC Baytown Plant will
cost approximately $60 million, will be completed by late 1998
and, when the EDNC Baytown Plant is fully operational, the annual
sales volume from such plant will be approximately $50.0 million,
(iv) ability to meet presently anticipated capital expenditures,
working capital, debt service and dividend requirements,(v)
amount to be spent in 1998 relating to compliance with federal,
state and local Environmental laws at the El Dorado Facility,
(vi) improve liquidity and profits through liquidation of assets,
(vii) anticipated financial performance, (viii) ability to comply
with the Company's general working capital requirements, (ix)
ability to be able to continue to borrow under the Company's
revolving line of credit, (x) ability to use NOL carry-overs from
prior years, (xi) contingencies should not have a material
adverse impact on the Company's liquidity, and (xii) ability to
complete certain settlements. While the Company believes the
expectations reflected in such Forward-Looking Statements are
reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors which could
cause future outcomes to differ materially from those described
in this report, including, but not limited to, (i) decline in
general economic conditions, both domestic and foreign, (ii)
material reduction in revenues, (iii) inability to collect in a
timely manner a material amount of receivables, (iv) increased
competitive pressures, (v) costs cannot be reduced or cost
reduction projects are not completed on schedule, (vi) contracts
are not obtained or projects are not finalized within a
reasonable period of time or on schedule, (vii) inability to
dispose of or spin-off non-core businesses or assets in a
reasonable manner or on reasonable terms due to the inability to
dispose of such on prices or terms satisfactory to the Company or
inability to spin-off such businesses due to legal impediments,
(viii) changes in federal, state and local laws and regulations,
especially environmental regulations, or in interpretation of
such, (ix) additional releases (particularly air emissions into
the environment), (x) potential increases in equipment,
32
maintenance, operating or labor costs not presently anticipated
by the Company, (xi) inability to retain management or to develop
new management, (xii) the requirement to use internally generated
funds for purposes not presently anticipated, (xiii) inability
to become profitable, or if unable to become profitable, the
inability to secure additional liquidity in the form of
additional equity or debt, (xiv) the effect of additional
production capacity of anhydrous ammonia in the western
hemisphere, (xv) the cost for the purchase of anhydrous ammonia
not reducing or continuing to increase or the cost for natural
gas increases, (xvi) changes in operating strategy or development
plans, (xvii) inability to fund the expansion of the Company's
businesses, (xviii) adverse results in any of the Company's
pending litigation,(xix) inability to finalize the settlements of
the pending environmental litigation or the Company's insurance
does not cover a substantial portion of such settlements, (xx)
NOL carry-overs are limited or reduced as a result of future
audits by the IRS or being limited or reduced by limitations
applicable to corporate taxpayers, including, without limitation,
limitations imposed by code Section 382 and the consolidated
return limitations, and (xxi) other factors described in
"Management's Discussion and Analysis of Financial Condition and
Results of Operation" contained in this report. Given these
uncertainties, all parties are cautioned not to place undue
reliance on such Forward-Looking Statements. The Company
disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the
Forward-Looking Statements contained herein to reflect future
events or developments.
33
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of LSB Industries, Inc. and subsidiaries as of March 31,
1998, and the related condensed consolidated statements of
operations and cash flows for the three month periods ended March
31, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the
objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of LSB
Industries, Inc. as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated March 16, 1998, except for the fourth paragraph
of Note 5(A), as to which the date is April 8, 1998, we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 12, 1998
34
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously
reported by the Company in Item 3 of its Form 10-K for the fiscal
period ended December 31, 1997, which Item 3 is incorporated by
reference herein. During the quarter ended March 31, 1998, the
following settlements or material developments did occur
regarding certain litigation reported in Item 3 of the Company's
Form 10-K for the year ended December 31, 1997:
Roy Carr, et. al v. El Dorado Chemical Company ("Carr Case");
Richard Detrez, et. al v. El Dorado Chemical Company ("Detrez
Case"); Roy A. Carr, Sr., et. al v. El Dorado Chemical Company
("Citizen Suit"), which are or were pending against El Dorado
Chemical Company ("EDC"), a subsidiary of the Company within the
Company's Chemical Business, in the United States District Court,
Western District of Arkansas. During the first quarter of 1998,
EDC (i) settled the Carr Case, (ii) entered into a Consent
Decree, subject to court approval, in settlement of the Citizen
Suit, and (iii) entered into an agreement to settle the Detrez
Case. The settlement of the Detrez Case has been preliminarily
approved by the court, but such settlement is subject to final
approval by the court.
Under the terms of the Consent Decree in settlement of the
Citizen Suit, which is subject to court approval, EDC has agreed
to, among other things, (i) the granting of injunctive relief
requiring its El Dorado, Arkansas facility("El Dorado Facility")
to (a) comply with certain discharge, monitoring and reporting
requirements of its waste water discharge permit, the emission
limitations of its air permit and the notification requirements
under certain sections of certain environmental laws and the
statutory penalties for failure to comply with such notification
requirements, (b) perform air and water tests to determine if the
El Dorado Facility is meeting certain compliance levels and, if
the tests do not meet the required compliance levels, to make the
necessary corrections so that such compliance levels can be met,
and (c) limitations relating to the El Dorado Facility's use of
its older concentrated nitric acid plant, (ii) provide the
plaintiffs with copies of certain documents forwarded to, or
received by, appropriate environmental regulatory agencies by the
El Dorado Facility and summaries of certain test results at the
El Dorado Facility, (iii) pay to the U.S. Treasury $50,000 as a
penalty, and (iv) pay certain stipulated penalties under certain
conditions in the event the El Dorado Facility fails to comply
with the terms of the Consent Decree. All Actions to be
performed by the Company's Chemical Business under the Consent
Decree and payment of penalties required by the Consent Decree
are to be paid by the Company's Chemical Business.
35
Under the Carr Case settlement and the agreement to settle
the Detrez Case, certain cash payments will be or are to be made
to the plaintiffs as a result of such settlements. Substantially
all such cash settlement payments made in the Carr Case and to be
made in the Detrez Case, if the Detrez Case settlement is
completed pursuant to the terms of the agreement are to be funded
directly by the Company's EIL Insurance. See Note 5 to Notes to
Condensed Consolidated Financial Statements and "Special Note
Regarding Forward - Looking Statements."
Item 2. Changes in Securities
- ------- ---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
Item 5. Other Information
- ------- -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(A) Exhibits.
---------
The Company has included the following exhibits in this
report:
15.1 Letter Re: Unaudited Interim Financial
Information.*
27.1 Financial Data Schedule.*
(B) Reports of Form 8-K.
--------------------
The Company did not file any reports on Form 8-K during
the quarter ended March 31, 1998.
- ---------------------
* Filed with original Form 10-Q
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this report on its behalf on this 19th day of
May 1998.
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
Tony M. Shelby,
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
Jim D. Jones
Vice President, Controller and
Treasurer(Principal Accounting
Officer)
Exhibit 15.1
Letter of Acknowledgment Re: Unaudited Financial Information
The Board of Directors
LSB Industries, Inc.
We are aware of the incorporation by reference in the
Registration Statement (Form S-8 No. 33-8302) and the
Registration Statement (Form S-3 No. 33-69800) of LSB Industries,
Inc. and in the related Prospectus of our report dated May 12,
1998 relating to the unaudited condensed consolidated interim
financial statements of LSB Industries, Inc. which are included
in its Form 10-Q for the quarter ended March 31, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report
is not a part of the registration statement prepared or certified
by accountants within the meaning of Section 7 or 11 of the
Securities Act of 1933.
Ernst & Young LLP
Oklahoma City, Oklahoma
May 12, 1998
[S] [C]
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] MAR-31-1998
[CASH] 5,905
[SECURITIES] 0
[RECEIVABLES] 61,324
[ALLOWANCES] 3,160
[INVENTORY] 64,542
[CURRENT-ASSETS] 136,157
[PP&E] 190,615
[DEPRECIATION] 89,063
[TOTAL-ASSETS] 258,985
[CURRENT-LIABILITIES] 61,172
[BONDS] 145,446
[PREFERRED-MANDATORY] 146
[PREFERRED] 48,000
[COMMON] 1,511
[OTHER-SE] 2,710
[TOTAL-LIABILITY-AND-EQUITY] 258,985
[SALES] 78,035
[TOTAL-REVENUES] 92,139
[CGS] 62,119
[TOTAL-COSTS] 77,724
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 4,858
[INCOME-PRETAX] 9,558
[INCOME-TAX] 280
[INCOME-CONTINUING] 9,278
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 9,278
[EPS-PRIMARY] .66
[EPS-DILUTED] .53
