FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended June 30, 1997
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
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Commission file number 1-7677
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LSB INDUSTRIES, INC.
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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
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Address of principal executive offices (Zip Code)
(405) 235-4546
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Registrant's telephone number, including area code
None
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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 August 12, 1997 is 12,861,081 shares excluding 2,152,395
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 June 30, 1997, the condensed consolidated
statements of operations for the six month and three month
periods ended June 30, 1997 and 1996 and the consolidated
statements of cash flows for the six month periods ended June 30,
1997 and 1996 are unaudited and reflect all adjustments,
consisting primarily 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 six months and three months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full
year. The condensed consolidated balance sheet at December 31,
1996, was derived from audited financial statements as of that
date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1997 is unaudited)
(Dollars in thousands)
June 30, December 31,
ASSETS 1997 1996
_______________________________________ ___________ __________
Current assets:
Cash and cash equivalents $ 769 $ 1,620
Trade accounts receivable, net of allowance 56,578 50,791
Inventories:
Finished goods 37,720 36,304
Work in process 6,490 12,084
Raw materials 19,232 19,594
___________ __________
Total inventory 63,442 67,982
Supplies and prepaid items 7,978 7,217
___________ __________
Total current assets 128,767 127,610
Property, plant and equipment, net 119,547 103,143
Investments and other assets:
Loans receivable, secured by real estate 743 15,010
Other assets, net of allowance 17,163 15,521
___________ __________
$ 266,220 $ 261,284
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at June 30, 1997 is unaudited)
(Dollars in thousands)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
____________________________________ ___________ __________
Current liabilities:
Drafts payable $ 519 $ 536
Accounts payable 35,715 41,796
Accrued liabilities 12,385 12,780
Current portion of long-term debt (Note 1) 14,904 13,007
___________ __________
Total current liabilities 63,523 68,119
Long-term debt (Note 1) 135,135 119,277
Contingencies (Note 5)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,539 shares
issued and outstanding 146 146
Stockholders' equity (Note 4):
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, 15,013,476 shares
issued (14,888,476 in 1996) 1,501 1,489
Capital in excess of par value 38,227 37,843
Accumulated deficit (8,687) (2,706)
___________ __________
79,041 84,626
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 2,079,395 shares
(1,913,120 in 1996) 11,425 10,684
___________ __________
Total stockholders' equity 67,416 73,742
___________ __________
$ 266,220 $ 261,284
=========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts)
1997 1996
__________ __________
Revenues:
Net sales $ 162,502 $ 159,375
Other income 3,801 2,991
__________ __________
166,303 162,366
Costs and expenses:
Cost of sales 132,199 127,335
Selling, general and administrative 31,554 27,087
Interest 6,396 5,964
__________ __________
170,149 160,386
__________ __________
Income (loss) before provision for
income taxes (3,846) 1,980
Provision for income taxes 125 139
----------- ----------
Net income (loss) $ (3,971) $ 1,841
=========== ==========
Net income (loss) applicable to
common stock (Note 3) $ (5,594) $ 218
=========== ==========
Average common shares outstanding (Note 3):
Primary 13,066,250 13,129,970
Fully diluted 13,068,250 13,465,303
Earnings (loss) per common share (Note 3):
Primary $ (.43) $ .02
========== ==========
Fully diluted $ (.43) $ .02
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts)
1997 1996
__________ __________
Revenues:
Net sales $ 89,268 $ 89,880
Other income 2,171 1,580
__________ __________
91,439 91,460
Costs and expenses:
Cost of sales 69,887 72,647
Selling, general and administrative 16,682 13,369
Interest 3,340 2,995
__________ __________
89,909 89,011
__________ __________
Income before provision for
income taxes 1,530 2,449
Provision for income taxes 63 77
---------- ----------
Net income $ 1,467 $ 2,372
========== ==========
Net income applicable to
common stock (Note 3) $ 648 $ 1,568
========== ==========
Average common shares outstanding (Note 3):
Primary 13,157,676 13,348,553
Fully diluted 13,161,676 14,019,219
Earnings per common share (Note 3):
Primary $ .05 $ .12
========== ==========
Fully diluted $ .05 $ .12
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 1997 and 1996
(Dollars in thousands)
1997 1996
___________ __________
Cash flows from operations:
Net income (loss) $ (3,971) $ 1,841
Adjustments to reconcile net income (loss)
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 5,141 4,522
Other 567 617
Provision for possible losses
on receivables and other assets 1,066 677
Loss (gain) on sale of assets 9 (767)
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 ( 5,834) (17,959)
Inventories 4,540 1,169
Supplies and prepaid items ( 716) (1,880)
Accounts payable (6,081) 23,372
Accrued liabilities (853) 598
___________ _________
Net cash provided (used) by operations (7,515) 12,190
Cash flows from investing activities:
Capital expenditures (5,701) (7,381)
Principal payments on notes receivable 203 75
Proceeds from sales of equipment and
real estate properties 360 236
Proceeds from sale of investment securities - 1,444
Increase in other assets (2,994) (985)
---------- ---------
Net cash used in investing activities (8,132) (6,611)
Cash flows from financing activities:
Payments on long-term and other debt (23,041) (3,365)
Long-term and other borrowings 53,864 5,647
Net change in revolving debt (13,655) (3,465)
Net change in drafts payable (17) (424)
Dividends paid (Note 4):
Preferred stocks (1,621) (1,623)
Common Stock (389) (389)
Purchases of treasury stock (Note 4) (535) (12)
Net proceeds from issuance of common stock 190 -
_________ __________
Net cash provided (used) by financing activities 14,796 (3,631)
_________ __________
Net increase (decrease) in cash (851) 1,948
Cash and cash equivalents at beginning of period 1,620 1,420
--------- ----------
Cash and cash equivalents at end of period $ 769 $ 3,368
========= ==========
(See accompanying notes)
Note 1: The Company's working capital line of credit has a
scheduled termination date of April 1, 1998, and as of June 30,
1997, the Company was not in compliance with its financial
covenants relating to Tangible Net Worth and Debt-to-Worth. The
Company's working capital lender has waived such defaults as of
June 30, 1997. As of the date of this report, the lender has
verbally committed to an extension of the termination date so
that the termination date will be scheduled to occur more than
twelve months from June 30, 1997, and resetting the Company's
Tangible Net Worth and Debt-to-Worth financial covenants so that
such are consistent with the Company's current projections for
the next twelve months. Accordingly, the Company has classified
the $43.4 million due under the working capital line of credit at
June 30, 1997 as long-term debt due after one year in the
accompanying condensed consolidated financial statements. As of
the date of this report, there are no assurances that the lender
will extend the scheduled termination date and reset the Tangible
Net Worth and Debt-to-Worth financial covenants and, if such
financial covenants are reset, that the Company will be able to
comply with such reset covenants.
Note 2: At June 30, 1997, the Company had net operating loss
("NOL") carryforwards for tax purposes of approximately $45
million (approximately $10 million alternative minimum tax NOLs).
Such amounts of regular tax NOL expire beginning in 1999. The
Company also has investment tax credit carryforwards of
approximately $356,000 which begin expiring in 1997.
The Company s provision for income taxes for the six months ended
June 30, 1997 of $125,000 is for current state income taxes and
federal alternative minimum tax.
Note 3: Primary earnings per common share are based upon the
weighted average number of common shares and dilutive common
equivalent shares outstanding during each period, after giving
appropriate effect to preferred stock dividends.
Fully diluted earnings per share are based on the weighted
average number of common shares and dilutive common equivalent
shares outstanding and the assumed conversion of dilutive
convertible securities outstanding after appropriate adjustment
for interest and related income tax effects on convertible notes
payable.
Net income applicable to common stock is computed by adjusting
net income by the amount of preferred stock dividends, including
undeclared or unpaid dividends, if cumulative.
In February 1997, the Financial Accounting Standards Board issued
statement No. 128, Earnings per Share, which is required to be
adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. Based on the
Company's review of its earnings per share calculation, the
impact of Statement No. 128 on both primary and fully diluted
earnings per share for the periods presented herein are not
expected to be material.
Note 4: The table below provides detail of activity in the Stockholders'
equity accounts for the six months ended June 30, 1997:
Common Stock Non- Capital Treasury
_______________ redeemable in excess Treasury Stock
Par Preferred of par Accumulated Stock- Prefer-
Shares Value Stock Value Deficit Common red Total
______ ______ _________ ________ ________ ________ _______ _______
(In thousands)
Balance at December 31, 1996 14,888 $ 1,489 $ 48,000 $ 37,843 $(2,706) $(10,684) $ (200) $73,742
Net loss (3,971) (3,971)
Exercise of stock options:
Cash received 61 6 184 190
Stock tendered and added
to treasury at market value 64 6 200 (206)
Dividends declared:
Common Stock ($.03 per share) (389) (389)
Series B 12% preferred
stock ($6.00 per share) (120) (120)
Redeemable preferred
stock ($10.00 per share) (16) (16)
Series 2 preferred
stock ($1.62 per share) (1,485) (1,485)
Purchase of treasury stock (535) (535)
______ _______ ________ ________ _______ ________ ______ _______
(1)
Balance at June 30, 1997 15,013 $ 1,501 $ 48,000 $ 38,227 $(8,687) $(11,425) $ (200) $67,416
====== ======= ======== ======== ======= ======== ====== =======
(1)
Includes 2,079,395 shares of the Company's Common Stock held in treasury.
Excluding the 2,079,395 shares held in treasury, the outstanding
shares of the Company's Common Stock at June 30, 1997 were 12,934,081.
Note 5: Following is a summary of certain legal actions
involving the Company:
A. In 1987, the U.S. Government 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. No legal action has yet been filed. The
amount of the Company's cost associated with the clean-up of
the site is unknown. Accordingly, no provision for any
liability which may result has been made in the accompanying
financial statements.
B. 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 Company 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 Company 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 Company installed additional
pollution control equipment to address the compliance
issues. The Company was assessed $50,000 in civil penalties
associated with the Administrative Agreement. In the summer
of 1996 and then on January 28, 1997, the Company executed
amendments to the Administrative Agreement ("Amended
Agreements"). The Amended Agreements imposed a $150,000
civil penalty, which penalty has been paid.
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. The Company's Chemical Business will assert all
defenses available to it and will vigorously defend itself.
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's insurance carriers have been notified of these
matters. 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 an amount in excess of $500,000
in legal, expert and other costs in connection with the
toxic tort and citizen lawsuits described in this paragraph
C, which the Company expensed and has made a claim against
its EIL Insurance for reimbursement of the legal, expert and
other costs paid by the Chemical Business in excess of
$500,000 and to pay such legal, expert and other costs on an
on-going basis. The Company and the EIL Insurance Carrier
are presently negotiating this claim. There are no
assurances that the Company and its EIL Insurance Carrier
will be able to satisfactorily resolve this matter.
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 the explosive industry has been under an
investigation by the U.S. Department of Justice. Certain
explosive companies plead guilty to antitrust violations.
In connection with that investigation, the Chemical Business
received and has complied with certain document subpoenas,
and certain of the Chemical Business' employees have been
subpoenaed to testify in connection with such investigation.
As of the date of this report, the Chemical Business has not
been identified as a target of this investigation.
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 would
not have a material effect on the financial position of the
Company, but could have a material impact to the net income
(loss) of a particular quarter or year, if resolved unfavorably.
Debt Guarantee
The Company has guaranteed approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft
Company, in exchange for a 25.6% ownership interest, to which no
value has been assigned as of June 30, 1997. The Company has
advanced the aviation company $341,000 as of June 30, 1997 and is
accruing losses of the aviation company based on its ownership
percentage. As a result, the Company has recorded losses of
$1,591,000 ($375,000 in the first six months of 1997, and
$626,000 and $590,000 in the years ended December 31, 1996 and
1995, respectively) related to the debt guarantee. 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 a default of this note,
the Company would be 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, had a balance of
approximately $1.1 million as of June 30, 1997.
Nitric Acid Project
In June 1997, El Dorado Chemical Company ("El Dorado"), a wholly-
owned subsidiary of the Company, El Dorado Nitrogen Company
("EDNC"), a wholly-owned subsidiary of El Dorado, and Bayer
Corporation ("Bayer"), a corporation that is a non-affiliate of
the Company, entered into a series of agreements (collectively,
the "Agreement") whereby EDNC will act as agent to build and will
operate a nitric acid plant at Bayer's Baytown, Texas chemical
facility ("Nitric Acid Plant"). Under the terms of the
Agreement, Bayer has agreed to purchase from EDNC their required
amount of nitric acid used or to be used by Bayer at its Baytown,
Texas facility for ten years from the date on which the Nitric
Acid Plant becomes fully operational. The Agreement provides for
up to six renewal terms of five years each, however, prior to
each renewal period, either party to the Agreement may opt
against renewal. El Dorado has guaranteed the performance of
EDNC's obligations under the Agreement.
EDNC is to lease the Nitric Acid Plant pursuant to an operating
lease with an initial lease term of ten years from the date on
which the Nitric Acid Plant becomes fully operational. EDNC has
an option to purchase the Nitric Acid Plant at the end of the
initial 10 year term. It is anticipated that construction of the
Nitric Acid Plant will cost approximately $60 million and will be
completed by the end of 1998. If operations at the Nitric Acid
Plant are not commenced by February 1, 1999, Bayer has an option
to terminate the Agreement. Construction financing of the Nitric
Acid Plant is to be provided by an unaffiliated lender. Neither
the Company, nor El Dorado, has guaranteed any of the lending
obligations for the Nitric Acid Plant. The transaction with
Bayer is subject to EDNC as construction agent finalizing a long-
form contract with an unrelated third party to construct the
Nitric Acid Plant, which contract is presently being negotiated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with a review of the Company's June 30, 1997
Condensed Consolidated Financial 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 inventory that is 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 been concentrating on
reshaping the Automotive Products Business by the liquidation of
certain of their assets that don't have the potential to earn an
acceptable return and focusing on product lines that management
believes have strategic advantages within select niche markets.
The Company has also recruited new key management people in the
Automotive Products Business including marketing, materials
control, manufacturing, and financial. The Company continues to
explore its alternatives to accomplish these goals.
In addition, the Company has been liquidating certain slow
moving inventory in the Industrial Products Business in the
ordinary course of business. It is the present intention of the
Company to limit this Business to lines of machine tools which
should result in an acceptable return on capital employed.
Certain statements contained in this Overview are forward-
looking statements, and the results thereof could differ
materially from such statements if the Company is unable to
liquidate such assets in a reasonable period or on reasonable
terms, and if able to liquidate such assets, it may not be able
to improve profits in the Automotive Products Business or have an
acceptable return on capital employed in these Businesses if
general economic conditions deteriorate drastically from the
environment these Businesses currently operate in or these
Businesses are unable to meet competitive pressures in the market
place which restrict these Businesses from manufacturing or
purchasing and selling their products at acceptable prices.
Information about the Company's continuing operations in
different industry segments for the six months and three months
ended June 30, 1997 and 1996 is detailed below.
Six Months Three Months
1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
(Unaudited)
Sales:
Chemical $ 90,196 $ 90,118 $ 49,597 $ 53,598
Environmental Control 47,822 41,512 26,199 22,517
Automotive Products 17,037 20,738 9,045 9,782
Industrial Products 7,447 7,007 4,427 3,983
_______ _______ _______ _______
$162,502 $159,375 $ 89,268 $ 89,880
======= ======= ======= =======
Gross profit:
Chemical $ 12,783 $ 16,116 $ 9,399 $ 9,316
Environmental Control 13,683 10,255 7,675 5,556
Automotive Products 2,226 4,005 1,117 1,555
Industrial Products 1,611 1,664 1,190 806
_______ _______ _______ _______
$ 30,303 $ 32,040 $ 19,381 $ 17,233
======= ======= ======= =======
Operating profit (loss):
Chemical $ 4,734 $ 9,825 $ 5,379 $ 6,280
Environmental Control 4,391 2,301 2,840 1,580
Automotive Products (2,889) (690) (1,663) (829)
Industrial Products (710) (1,045) (45) (548)
_______ _______ _______ _______
5,526 10,391 6,511 6,483
General corporate expenses (2,976) (2,447) (1,641) (1,039)
Interest expense (6,396) (5,964) (3,340) (2,995)
_______ _______ _______ _______
Income (loss) before provision
for income taxes $ (3,846) $ 1,980 $ 1,530 $ 2,449
======= ======= ======= =======
Gross profit by industry segment represents net sales less cost
of sales. Operating profit by industry segment represents
revenues less operating expenses before deducting general
corporate expenses, interest expense and income taxes. As
indicated in the above table the operating profit for the first
six months (as defined) declined from $10.4 million in 1996 to
$5.5 million in 1997, while sales increased approximately 2.0%.
The decline in operating profit, coupled with increases in
general corporate expenses, primarily legal fees, and interest
expense, resulted in a loss before income taxes for the first six
months of 1997 of approximately $3.8 million.
Chemical Business
The operating profit in the Chemical Business is down from
$9.8 million in the first six months of 1996 to $4.7 million in
the first six months of 1997. During the first quarter of 1997,
the Chemical Business continued to incur significant amounts of
downtime at its El Dorado, Arkansas Plant site due to mechanical
problems being incurred at the plant. The downtime resulted in
increases in manufacturing overhead and lower absorption of such
costs. The unabsorbed overhead (partially offset by an insurance
settlement) combined with the continued high cost of the primary
raw material, ammonia, led to higher cost of sales as a percent
of sales and lower gross profit margins. During the first six
months of 1997, the Company believes that it substantially
completed repairs to resolve the mechanical problems resulting in
substantial downtime experienced during 1996 and the first six
months of 1997 at the El Dorado, Arkansas facility.
The Chemical Business purchases approximately 250,000 tons
per year of ammonia. The cost of ammonia consumed by the
Chemical Business in 1996 averaged $167 per ton, while in
November and December 1996, ammonia prices took an unexpected
increase to an average of approximately $200 per ton. During the
first quarter of 1997, ammonia prices continued to increase
through February (a high of $217 per ton) and then began to
decline during the second quarter so that the price for June,
1997 approximated $167 per ton. The continued volatility in
ammonia prices had a disruptive effect on the first six months
results of the Chemical Business' operations. The price of
ammonia averaged $32 more per ton in the first six months of 1997
than in the first six months of 1996. During the first half of
1997, the Chemical Business entered into agreements with
unrelated suppliers of ammonia to purchase its ammonia
requirements. Under these agreements the Company believes that
the prices the Chemical Business' will be required to pay for
ammonia will be favorable. However, there are no assurances that
the pricing pursuant to the above agreements will result in
reduced costs to the Chemical Business since such pricing is
subject to variations due to numerous factors.
As discussed in Note 5 of Notes to Condensed Consolidated
Financial Statements, the Chemical Business has finalized an
agreement with Bayer Corporation ("Bayer") for the Chemical
Business to act as construction agent to build and will operate a
nitric acid plant located on property owned by Bayer in Baytown,
Texas. When the transaction is completed, the Chemical Business
will provide nitric acid from such plant to Bayer's Baytown,
Texas plant. Such nitric acid plant will be leased to the
Chemical Business for a period expected to equal ten years under
an operating lease. The Chemical Business has an option to
purchase such nitric acid plant at the end of the initial 10 year
term. It is expected that the cost to construct the nitric acid
plant will be approximately $60 million and that it will be
completed by the end of 1998. The construction financing is to
be provided by an unrelated lender. See Note 5 of Notes to
Condensed Consolidated Financial Statements.
Environmental Control Business
As indicated in the above table, the Environmental Control
Business reported improved sales (an increase of 15.2%) and
improved operating profit for the first six months of 1997, over
that of the first six months of 1996, primarily as a result of
improved market conditions for the heat pump product lines.
Automotive and Industrial Products Businesses
As indicated in the above table, during the first six months
of 1997 these Businesses recorded combined sales of $24.5 million
and reported an operating loss (as defined above) of $3.6
million, as compared to combined sales of $27.7 million and an
operating loss of $1.7 million for the first six months of 1996,
as a result of lower sales and decreased absorption of
manufacturing costs due to lower production volume. As a result
of the inventory reduction program put into place in 1995,
inventories of these Businesses decreased approximately $1.0
million during the six months ended June 30, 1997.
RESULTS OF OPERATIONS
Six months ended June 30, 1997 vs. Six months ended June 30,
1996.
Revenues
Total revenues for the six months ended June 30, 1997 and
1996 were $166.3 million and $162.4 million, respectively (an
increase of $ 3.9 million). Sales increased $3.1 million. Other
income increased $.8 million. In February 1997, the Company
exercised its option to acquire an office building in Oklahoma
City, Oklahoma (the "Tower"), by foreclosing against the balance
owed the Company under a note receivable. As part of this
transaction, the Company recaptured $1.4 million of prior period
provisions for potential losses on loans receivable secured by
the Tower. This amount is included in other income in 1997.
Net Sales
Consolidated net sales included in total revenues for the
six months ended June 30, 1997 were $162.5 million, compared to
$159.4 million for the first six months of 1996, an increase of
$3.1 million. This increase in sales resulted principally from:
(i) increased sales in the Environmental Control Business of $6.3
million, primarily due to increased heat pump sales; and, (ii)
increased sales of machine tools in the Industrial Products
Business of $.4 million, offset by (iii) decreased sales in the
Automotive Products Business of $3.7 million primarily due to
less units being shipped and product mix.
Gross Profit
Gross profit was 18.6% for the first six months of 1997,
compared to 20.1% for the first six months of 1996. The decrease
in the gross profit percentage was due primarily to (i) higher
production costs in the Chemical Business due to the effect of
higher prices of ammonia and unabsorbed overhead costs caused by
excessive downtime related to modifications made to resolve
problems associated with mechanical failures at the Chemical
Business' primary manufacturing plant, offset by a reduction in
cost of sales of $1.3 million through recapture of manufacturing
variances of the Chemical Business in the form of a business
interruption insurance settlement, and (ii) decreased absorption
of costs due to lower production volumes in the Automotive
Products Business.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 19.4% and 17.0% in the six month
periods ended June 30, 1997 and 1996, respectively.
Approximately $840,000 of this increase is due to the operations
of the Tower in 1997 as discussed elsewhere in this report. The
remaining increase is primarily the result of increased bad debt
provisions, increased professional fees related to environmental
matters in the Chemical Business and decreased sales volume in
the Automotive Products Business without a corresponding decrease
in SG&A.
Interest Expense
Interest expense for the Company, before deducting
capitalized interest, was approximately $7.5 million during the
six months ended June 30, 1997 compared to approximately $6.0
million during the six months ended June 30, 1996. During the
first six months of 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant.
The 1997 increase of $1.5 million before the effect of
capitalization primarily resulted from increased borrowings.
Income Before Taxes
The Company had a loss before income taxes of $3.8 million
in the first six months of 1997 compared to income before income
taxes of $2.0 million in the six months ended June 30, 1996. The
decreased profitability of $5.8 million was primarily due to the
decline in gross profit, increase in SG&A and increase in
interest expense as previously discussed.
Provision For Income Taxes
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
2 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the six months ended
June 30, 1997 and the six months ended June 30, 1996 are for
current state income taxes and federal alternative minimum taxes.
Three months ended June 30, 1997 vs. Three months ended June 30,
1996.
Revenues
Total revenues for the three months ended June 30, 1997 and
1996 were approximately the same. Sales decreased $.6 million.
Other income increased $.6 million.
Net Sales
Consolidated net sales included in total revenues for the
three months ended June 30, 1997 were $89.3 million, compared to
$89.9 million for the second quarter of 1996, a decrease of $.6
million. This decrease in sales resulted principally from: (i)
increased sales in the Environmental Control Business of $3.7
million, primarily due to firming of market conditions for this
Business' Heat Pump Product lines, and (ii) increased machine
tool sales in the Industrial Products Business of $.4 million,
offset by (iii) decreased sales in the Chemical Business of $4.0
million primarily due to a delayed start of the agricultural
season in April due to wet weather conditions, and (iv) decreased
sales in the Automotive Products Business of $.7 million.
Gross Profit
Gross profit was 21.7% for the second quarter of 1997,
compared to 19.2% for the second quarter of 1996. The
improvement in the gross profit percentage was due primarily to
(i) higher prices and increased absorption of costs due to higher
production volumes in the Environmental Control Business, and
(ii) the settlement of a $1.3 million business interruption
insurance claim in the second quarter of 1997 which reduced cost
of sales in the Chemical Business.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 18.7% and 14.9% in the three month
periods ended June 30, 1997 and 1996, respectively.
Approximately $840,000 of this increase is due to the operations
of the Tower in 1997 as discussed elsewhere in this report. The
remaining increase is primarily the result of increased
professional fees related to litigation matters as discussed in
Note 5 of Notes to Condensed Consolidated Financial Statements
and increased bad debt provisions compounded by lower sales in
the Chemical and Automotive Products Businesses.
Interest Expense
Interest expense for the Company, before deducting
capitalized interest, was approximately $3.8 million during the
three months ended June 30, 1997 compared to approximately $3.0
million during the three months ended June 30, 1996. During the
second quarter of 1997, $.4 million of interest expense was
capitalized in connection with construction of the DSN plant.
The 1997 increase of $.8 million before the effect of
capitalization primarily resulted from higher average balances of
borrowed funds.
Income Before Taxes
The Company had income before income taxes of $1.5 million
in the second quarter of 1997 compared to income before income
taxes of $2.4 million in the three months ended June 30, 1996.
The decreased profitability of $.9 million was primarily due to
the increases in SG&A and interest expense, partially offset by
an insurance settlement 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
2 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the three months ended
June 30, 1997 and the three months ended June 30, 1996 are for
current state income taxes and federal alternative minimum taxes
("AMT").
Liquidity and Capital Resources
Cash Flow From Operations
Net cash used by operations for the six months ended June
30, 1997 was $7.5 million, including adjustments for noncash
depreciation and amortization of $5.7 million, provisions for
possible losses on accounts receivable and other assets of $1.1
million, and recapture of previous years provisions for possible
losses of $1.4 million. This net cash usage includes the
following changes in assets and liabilities: (i) accounts
receivable increases of $5.8 million, (ii) inventory decreases of
$4.5 million, (iii) increases in supplies and prepaid items of
$.7 million, and (iv) decreases in accounts payable and accrued
liabilities of $6.9 million. The increase in accounts receivable
is due mainly to seasonal sales increases in the Chemical
Business. The decrease in inventories is primarily due to spring
planting season sales of fertilizer inventory that is typically
built up by the Chemical Business in the fourth quarter of each
year, in addition to an inventory reduction in the Automotive
Products Business. The increase in supplies and prepaid items is
due primarily to increases in prepaid insurance costs and
manufacturing supplies. The decrease in accounts payable and
accrued liabilities is due primarily to use of proceeds from the
$50 million long-term financing discussed elsewhere in this
report.
Cash Flow From Investing And Financing Activities
Cash used by investing activities included $5.7 million in
capital expenditures (primarily in the Chemical Business) and
increased other assets of $3.0 million due primarily to (i) a
$1.0 million advance to a French manufacturer of HVAC equipment
as discussed further under "Joint Ventures and Options to
Purchase", and (ii) $1.4 million of deposits made in connection
with an interest rate hedge contract related to the 10 year
permanent financing of the nitric acid plant to be completed in
late 1998 pursuant to the agreement with Bayer. See Note 5 of
Notes to Condensed Consolidated Financial Statements. Net cash
provided by financing activities included (i) term borrowings of
$53.9 million, including proceeds from the new $50 million
financing discussed under "Sources of Funds", (ii) payments on
term debt of $23.0 million, including $19.1 million in
prepayments of debt with proceeds from the new $50 million
financing, (iii) decreases in revolving debt of $13.7 million,
(iv) dividends of $2.0 million, and (v) treasury stock purchases
of $.5 million.
During the first six months of 1997, the Company paid the
following aggregate dividends: (1) $6.00 per share on each of the
20,000 outstanding shares of its Series B 12% Cumulative
Convertible Preferred Stock; (2) $1.625 per share on each
outstanding share of its $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2; (3) $.03 per share on each outstanding
share of its Common Stock; and (4) $10.00 per share on each of
the 1,539 outstanding shares of its Redeemable 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.
On February 13, 1997 the Company's wholly-owned
subsidiaries, El Dorado Chemical Company, Slurry Explosive
Corporation, and Northwest Financial Corporation. (collectively
"Borrowers") completed a $50 million long-term financing
agreement ("Financing") with an institutional lender.
Approximately $19.1 million in proceeds from the Financing was
used to repay other outstanding term debt; $.2 million was used
to pay accrued interest; and, the remaining $30.7 million in
proceeds were used to pay down the Company's revolving credit
facilities and thereby create additional borrowing availability
for future working capital and other corporate needs. The
Financing is secured by a first mortgage lien on the Chemical
Business' property, plant, and equipment located in El Dorado,
Arkansas and owned by the Borrowers, except rolling stock and
excluding the DSN Plant which is security under a separate loan
agreement. The $50.0 million Financing consists of $25.0 million
of fixed rate notes bearing interest at 10.57% per annum and
$25.0 million of floating rate notes bearing interest at LIBOR
plus 4.2% (initially 9.76%). Repayment of the notes is due in
quarterly installments of $833,332 plus interest commencing on
July 1, 1997 through April 2004 at which time the balance is due.
The Financing requires the Borrowers to maintain certain
financial ratios and contains other financial covenants,
including the ratio of funded debt to total capitalization,
current ratio, and fixed charge coverage ratio, in addition to
net worth and working capital requirements. As of the date of
this report, the Borrowers are in compliance with all financial
covenants required by the loan agreement related to the
Financing. The Financing also contains certain restrictions on
transactions with affiliates. The Financing limits the amount of
dividends or distributions by the Borrowers to an amount equal to
payments for federal income taxes determined as if the Borrowers
filed returns on a separate company basis and dividends up to 50%
of the Borrowers' prior year net income. The annual interest on
the $50 million in outstanding debt under the Financing at June
30, 1997, at the rate then in effect, would approximate $5.1
million.
The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by six separate loan
agreements ("Agreements") with an unrelated lender ("Lender")
collateralized by receivables, inventory, and proprietary rights
of the Company and the subsidiaries that are parties to the
Agreements and the stock of certain of the subsidiaries that are
borrowers under the Agreements. The Agreements, as amended,
provide for revolving credit facilities ("Revolver") for total
direct borrowings up to $63.0 million, including the issuance of
letters of credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Agreements, as amended, provide for interest at the reference
rate as defined (which approximates the national prime rate) plus
1.5%, or the Eurodollar rate plus 3.875%. At June 30, 1997 the
effective interest rate was 10%. The annual interest on the
outstanding debt under the Revolver at June 30, 1997 at the rates
then in effect would approximate $4.3 million. At June 30, 1997,
additional amounts that the Company could have borrowed under the
Agreements, based on eligible collateral, were approximately
$14.2 million. Borrowings under the Revolver outstanding at June
30, 1997, were $43.4 million. The Revolver has a scheduled
termination date of April 1, 1998, and as of June 30, 1997, the
Company was not in compliance with its financial covenants
relating to Tangible Net Worth and Debt-to-Worth. The Company's
working capital lender has waived such defaults as of June 30,
1997. As of the date of this report, the lender has verbally
committed to an extension of the termination date so that the
termination date will be scheduled to occur more than twelve
months from June 30, 1997, and resetting the Company's Tangible
Net Worth and Debt-to-Worth financial covenants so that such are
consistent with the Company's current projections for the next
twelve months. Accordingly, the Company has classified the $43.4
million due under the Revolver at June 30, 1997 as long-term
debt due after one year in the accompanying condensed
consolidated financial statements. As of the date of this
report, there are no such assurances that the lender will extend
the scheduled termination date and reset the Tangible Net Worth
and Debt-to-Worth financial covenants and, if such financial
covenants are reset, that the Company will be able to comply with
such reset covenants. This paragraph contains certain forward-
looking statements, including but not limited to, the reference
to projections over the next twelve months and that the lender
will extend the termination date and reset certain financial
covenants and the result thereof could differ materially from
such statements if, among other reasons, the Company is unable to
meet such projections due to material reduction in revenues or
adverse changes to the Company's businesses or the lender decides
for whatever reason not to reset the scheduled termination date
or the financial covenants.
In addition to the Agreements discussed above, the Company
had the following term loans in place as of June 30, 1997:
(1) The Company s wholly-owned subsidiary, DSN Corporation
("DSN"), is a party to several loan agreements with a
financing company (the Financing Company ) for three (3)
projects. These loan agreements are for a $16.5 million
term loan (the DSN Permanent Loan"), which was used to
construct, equip, re-erect, and refurbish the DSN Plant
being placed into service by the Chemical Business at its El
Dorado, Arkansas facility; a loan for approximately $1.2
million to purchase additional railcars to support the DSN
Plant (the Railcar Loan ); and a loan for approximately
$1.1 million to finance the construction of a mixed acid
plant (the Mixed Acid Plant ) in North Carolina (the Mixed
Acid Loan ). At June 30, 1997, DSN had outstanding
borrowings of $12.9 million under the DSN Permanent Loan,
$.9 million under the Mixed Acid Loan, and $1.0 million
under the Railcar Loan. The loans have repayment schedules
of eighty-four (84) consecutive monthly installments of
principal and interest. The interest rate on each of the
loans is fixed and range from 8.24% to 8.86%. Annual
interest, for the three notes as a whole, at June 30, 1997
at the agreed to interest rates would approximate $1.3
million. The loans are secured by the various DSN and Mixed
Acid Plants property and equipment, and all railcars
purchased under the Railcar Loan. The loan agreements
require the Company to maintain certain financial ratios,
including tangible net worth requirements. As of the date
of this report, the Company is in compliance with all
financial covenants or if not in compliance, has obtained
appropriate waivers from the Financing Company.
(2) As of June 30, 1997, a subsidiary of the Company ("Prime")
was a party to an agreement ("Agreement") with a national
bank ("Bank"). The Agreement, as modified, requires
interest per annum at a rate equal to three quarters of one
percent (.75%) above the prime rate in effect from day to
day as published in the Wall Street Journal. The
outstanding principal balance of the note is payable in
sixty (60) monthly payments of principal and interest.
Payment of the note is secured by a first and priority lien
and security interest in and to Prime's right, title, and
interest in the loan receivable relating to the real
property and office building located in Oklahoma City,
Oklahoma (the "Tower"), and the Management Agreement
relating to the Tower. In February 1997, the Company
exercised its option to purchase the Tower by paying
approximately $140,000 for the exercise price under the
purchase option and related costs and accordingly $14.0
million of carrying value was transferred to property, plant
and equipment.
Future cash requirements include working capital
requirements for anticipated sales increases in all Businesses,
and funding for future capital expenditures, primarily in the
Chemical Business and the Environmental Control Business.
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 Automotive Products Business. In
the remaining six months of 1997, the Company has planned capital
expenditures of approximately $4.1 million, primarily in the
Chemical and Environmental Control Businesses.
SBL Corporation ("SBL"), a corporation wholly owned by the
spouse and children of Jack E. Golsen, Chairman of the Board and
President of the Company, including, but not limited to, Barry H.
Golsen, son of Jack E. Golsen and Vice Chairman of the Board of
the Company, has proposed to the Company that it is willing to
infuse into the Company $3 million of new equity. Under such
proposal, SBL proposes that the Company issue to SBL for such $3
million three million (3,000,000) shares of a newly created
series of preferred stock, with (i) each share of preferred stock
having one (1) vote and voting with the Common Stock of the
Company as a single class and bearing a dividend rate of 10% per
annum, with such dividends being cumulative, (ii) such preferred
stock is to be convertible into Common Stock of the Company held
by the Company as treasury shares at a conversion rate to be
negotiated , and (iii) the preferred stock containing such other
terms, rights and preferences as are standard in such series of
preferred stock.
At the meeting of the Board of Directors on August 14, 1997,
the Board of Directors established a special committee of the
Board ("Committee") consisting of four (4) outside and
independent directors. The Committee was given full power and
authority to evaluate the proposal for the Company, negotiate the
terms and provisions of such transaction, if any, retain legal,
financial and other advisors to assist the Committee in
performance of its duties, and, if such preferred is to be
issued, to fix and establish the terms thereof and authorize the
issuance of such preferred on terms approved by the Committee.
The Committee was established by the Board at its meeting held on
August 14, 1997, and has not yet begun to consider or evaluate
the proposal. There are no assurances that this transaction will
be completed, or, if completed, that the terms of such
transaction will be as set forth in the proposal by SBL.
Management believes that cash flows from operations, the
Company's revolving credit facilities, and other sources,
including the possible infusion of $3 million of new equity
proposed to be provided by SBL discussed above, will be adequate
to meet its presently anticipated capital expenditure, working
capital, debt service, and dividend requirements. The above
sentence and certain statements contained in the preceding
paragraph are forward-looking statements that involve a number of
risks and uncertainties that could cause actual results to differ
materially, such as, a material reduction in revenues, continuing
to incur losses, inability to collect a material amount of
receivables, required capital expenditures in excess of those
presently anticipated, or the Company is unable to finance such
capital expenditures on terms acceptable to the Company, the
Company and SBL do not complete the transaction discussed above
for any reason, or other future events, not presently
predictable, which individually or in the aggregate could impair
the Company's ability to obtain funds to meet its requirements.
Although the Company has planned capital expenditures, there are
no material irrevocable commitments to such at the date of this
report. The commitment to build the nitric acid plant discussed
in Note 5 to Notes to Condensed Financial Statements is to be
financed by an unaffiliated lender.
Foreign Subsidiary Financing
The Company has guaranteed a revolving credit working
capital facility (the "Facility") between TES and Bank of New
Zealand (the "Lender"). The Facility allows for borrowings based
on specific percentages of qualified eligible assets. Based on
the effective exchange rate at June 30, 1997, approximately
US$4.9 million (A$7 million approximately) was borrowed at June
30, 1997. Such debt is secured by substantially all the assets
of TES, plus an unlimited guarantee and indemnity from the
Company. The interest rate on this debt is the Bank of New
Zealand Corporate Lending Rate plus 0.5% (approximately 9.5% at
June 30, 1997). TES is in technical non-compliance with a
certain financial covenant contained in the loan agreement
involving the Facility. However, this covenant was not met at
the time of closing and the Lender agreed and continues to agree
as of the date of this report that the covenant is something to
work towards in the future and has continued to allow TES to
borrow under the Facility. The outstanding borrowing under the
Facility at June 30, 1997 has been classified as due within one
year in the accompanying Consolidated Financial Statements.
The Lender has verbally agreed to amend the Facility to
allow for borrowings up to an aggregate of A$11 million
Australian. This A$11 million will be broken down into three
parts: a A$6 million revolving working capital facility; a A$4.5
million long-term debt facility; and, a A$.5 million leasing
facility.
Joint Ventures and Options to Purchase
Prior to 1997, the Company, through a subsidiary, loaned
$2.9 million to a French manufacturer of HVAC equipment whose
product line is compatible with that of the Company's
Environmental 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 the first six
months of 1997 the Company advanced an additional $1 million to
the French manufacturer bringing the total of the loan at June
30, 1997 to $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, net of a $1.5 million valuation reserve, is carried
on the books as a note receivable in other assets.
During 1995, the Company executed a stock option agreement
to acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company") 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 June 30,
1997 the Company has made option payments aggregating $1.2
million and has loaned the Optioned Company approximately
$983,000. The Company has recorded reserves of $605,000 against
the loans and investments. 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.
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.
Debt Guarantee
As disclosed in Note 5 of the Notes to Condensed
Consolidated Financial Statements a subsidiary of the Company and
one of its subsidiaries have guaranteed approximately $2.6
million of indebtedness of a start up 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
$1,051,000 as of June 30, 1997. 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.
During 1996 and 1997, the aviation company received cash
infusions of $6.0 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 the date of this report, $1.0 million of
payments under this option have been received.
Availability of Company's Loss Carryovers
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carryovers 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; however, such
benefit will be limited by the Company's reduced NOL for
alternative minimum tax purposes which is approximately $10.0
million at December 31, 1996. As of December 31, 1996, the
Company had available NOL carryovers of approximately $45.0
million, based on its federal income tax returns as filed with
the Internal Revenue Service for taxable years through 1995, and
on the Company's estimates for 1996. These NOL carryovers will
expire beginning in the year 1999.
The above paragraph contains certain forward-looking
statements. The amount of these carryovers has not been audited
or approved by the Internal Revenue Service and, accordingly, no
assurance can be given that such carryovers will not be reduced
as a result of audits in the future. In addition, the ability of
the Company to utilize these carryovers 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
As discussed in Note 5 of Notes to Condensed Consolidated
Financial Statements, the Company has several contingencies that
could impact its liquidity in the event that the Company is
unsuccessful in defending against the claimants. Although
management does not anticipate that these claims will result in
substantial adverse impacts on its liquidity, it is not possible
to determine the outcome. The preceding sentence is a forward
looking statement that involves a number of risks and
uncertainties that could cause actual results to differ
materially, such as, among other factors, the following: the EIL
Insurance does not provide coverage to the Company and the
Chemical Business for any material claims made by the claimants,
the claimants alleged damages are not covered by the EIL Policy
which a court may find the Company and/or the Chemical Business
liable for, such as punitive damages or penalties, a court finds
the Company and/or the Chemical Business liable for damages to
such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company.
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, 1996, which Item 3 is incorporated by
reference herein.
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
At the Company's 1997 Annual Meeting of Shareholders held on
June 27, 1997, the following nominees to the Board of Directors
were elected as directors of the Company:
Number of
Shares Number of
"Against" and Abstentions
Number of to "Withhold and Broker
Name Shares "For" Authority" Non-Votes
- -------------------- ------------ ------------ -----------
Gerald J. Gagner 10,397,346 1,402,698 -
Barry H. Golsen 10,683,094 1,116,950 -
David R. Goss 10,690,093 1,109,951 -
Donald J. Munson 10,686,246 1,113,798 -
Jerome D. Shaffer, M.D. 10,542,127 1,257,917 -
Messrs Golsen, Goss and Shaffer had been serving on the
Board of Directors at the time of the Annual Meeting and were
reelected for a term of three (3) years. Mr. Gagner was not
serving as a director of the Company at the time of the Annual
Meeting and was elected for a term of one (1) year. Mr. Munson
was not serving as a director of the Company at the time of the
Annual Meeting and was elected for a term of two (2) years. The
following are the directors whose terms of office continued after
such Annual Meeting: Raymond B. Ackerman, Robert C. Brown, M.D.,
Jack E. Golsen, Bernard G. Ille, Horace G. Rhodes, Jerome D.
Shaffer, M.D. and Tony M. Shelby.
At the annual Meeting, Ernst & Young, LLP, Certified Public
Accountants, was appointed as independent auditors of the Company
for 1997, as follows:
Number of
Shares
"Against" Number of
and to Abstentions
Number of "Withhold and Broker
Shares "For" Authority" Non-Votes
----------- --------- ---------
11,156,349 624,316 19,379
At the Annual Meeting, a shareholder proposal to amend the
Corporation's by-laws to prohibit the election to the Board of
Directors of any person above the age of seventy (70) was
defeated, as follows:
Number of
Shares
"Against" Number of
and to Abstentions
Number of "Withhold and Broker
Shares "For" Authority" Non-Votes
----------- --------- ---------
1,990,579 6,795,013 3,014,452
At the Annual Meeting, a shareholder proposal recommending
that the Board of Directors consider amending the Company's
Certificate of Incorporation to adopt cumulative voting was
defeated, as follows:
Number of
Shares
"Against" Number of
and to Abstentions
Number of "Withhold and Broker
Shares "For" Authority" Non-Votes
----------- --------- ----------
2,988,725 5,785,237 3,026,082
At the Annual Meeting, a shareholder proposal recommending
that the Board of Directors consider amending the Company's
Certificate of Incorporation to eliminate the staggered terms of
the Board of Directors was defeated, as follows:
Number of
Shares
"Against" Number of
and to Abstentions
Number of "Withhold and Broker
Shares "For" Authority" Non-Votes
----------- --------- ---------
2,936,094 5,835,291 3,028,659
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:
4.1. Seventh Amendment to Loan and Security Agreement
between the Company and BankAmerica Business Credit,
Inc. Substantially identical Seventh Amendments were
entered into by each of L&S Bearing, International
Environmental Corporation, Climate Master, Inc., Summit
Machine Tool Manufacturing Corp., an El Dorado Chemical
Company and are omitted herefrom, and such will be
provided to the Commission upon request.
4.2. Eighth Amendment to Loan and Security Agreement
between the Company and BankAmerica Business Credit,
Inc. Substantially identical Seventh Amendments were
entered into by each of L&S Bearing, International
Environmental Corporation, Climate Master, Inc., Summit
Machine Tool Manufacturing Corp., an El Dorado Chemical
Company and are omitted herefrom, and such will be
provided to the Commission upon request.
10.1 Anhydrous Ammonia Sales Agreement dated May 28,
1997, to be effective January 1, 1997, between Koch
Nitrogen Company and El Dorado Chemical Company.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.2 Baytown Nitric Acid Project and Supply Agreement
dated June 27, 1997 by and among El Dorado Nitrogen
Company, El Dorado Chemical Company and Bayer
Corporation. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY
THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.3 Services Agreement dated June 27, 1997, between
Bayer Corporation and El Dorado Nitrogen Company.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
Additionally, the Exhibits and Schedules to the
Services Agreement have not been filed herewith, but
will be filed supplementally upon request of the
Commission, with the exception that SCHEDULE 6, WASTE,
IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
SCHEDULE 6 HAS NOT BEEN FILED AS A SCHEDULE TO THIS 10-
Q AS SUCH ENTIRE DOCUMENT IS THE SUBJECT OF A REQUEST
FOR CONFIDENTIAL TREATMENT, BUT SUCH DOCUMENT HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.4 Ground Lease dated June 27, 1997, between Bayer
Corporation and El Dorado Nitrogen Company.
10.5 Participation Agreement, dated as of June 27,
1997, among El Dorado Nitrogen Company, Boatmen's Trust
Company of Texas as Owner Trustee, Security Pacific
Leasing Corporation, as Owner Participant and a
Construction Lender, Wilmington Trust Company,
Bayerische Landesbank, New York Branch, as a
Construction Lender and the Note Purchaser, and Bank of
America National Trust and Savings Association, as
Construction Loan Agent. The Exhibits and Schedules to
the Participation Agreement have not been filed
herewith, but will be filed supplementally upon request
of the Commission, with the exception that Exhibit E,
the Lease, and Exhibit F-1, the Ground Lease have been
filed as separate exhibits to this Form 10-Q and
EXHIBIT D-1, THE BAYER SUPPORT AGREEMENT, EXHIBIT D-2,
THE BAYER AGREEMENT, EXHIBIT S-1, THE BAYTOWN NITRIC
ACID PROJECT AND SUPPLY AGREEMENT, EXHIBIT S-2, THE
SERVICES AGREEMENT, AND SCHEDULE 6, FIXED PRICE
PURCHASE OPTION AMOUNT ARE THE SUBJECTS OF A REQUEST BY
THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. EXHIBITS D-1 AND D-2 AND SCHEDULE 6
HAVE NOT BEEN FILED AS EXHIBITS OR SCHEDULES TO THIS
10-Q AS SUCH ENTIRE DOCUMENTS ARE THE SUBJECT OF A
REQUEST FOR CONFIDENTIAL TREATMENT, BUT SUCH DOCUMENTS
HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST. EXHIBITS S-1 AND S-2 HAVE BEEN FILED WITH
INFORMATION OMITTED WHICH HAS BEEN FILED SEPARATELY
WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE
COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.6 Lease Agreement dated as of June 27, 1997, between
Boatmen's Trust Company of Texas as Owner Trustee and
El Dorado Nitrogen Company.
10.7 Security Agreement and Collateral Assignment of
Construction Documents, dated as of June 27,1997, made
by El Dorado Nitrogen Company.
10.8 Security Agreement and Collateral Assignment of
Facility Documents, dated as of June 27, 1997, made by
El Dorado Nitrogen Company and consented to by Bayer
Corporation.
11.1 Statement Re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
(B) Reports on Form 8-K. The Company did not file any
reports on Form 8-K during the Quarter ended June 30, 1997.
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
August, 1997.
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)