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 September 30, 1997
------------------
[ ] 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 Identification
incorporation or organization No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
----------------------------------------------------
Address of principal executive offices (Zip Code)
(405) 235-4546
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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 November 11, 1997 is 12,791,086 shares excluding 2,222,390
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 September 30, 1997, the condensed consolidated statements of operations for
the nine month and three month periods ended September 30, 1997 and 1996 and
the consolidated statements of cash flows for the nine month periods ended
September 30, 1997 and 1996 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 the Form 10-Q. The financial statements
mentioned above are unaudited and reflect all 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 nine
months and three months ended September 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 September 30, 1997 is unaudited)
(Dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,482 $ 1,620
Trade accounts receivable,
net of allowance 55,915 50,791
Inventories:
Finished goods 33,048 36,304
Work in process 8,582 12,084
Raw materials 23,812 19,594
--------- ---------
Total inventories 65,442 67,982
Supplies and prepaid items 7,933 7,217
-------- --------
Total current assets 131,772 127,610
Property, plant and equipment, net 118,319 103,143
Investments and other assets:
Loans receivable, secured by real estate 684 15,010
Other assets, net of allowance 17,372 15,521
-------- -------
18,056 30,531
-------- -------
$ 268,147 $ 261,284
======== =======
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at September 30, 1997 is unaudited)
(Dollars in thousands)
September 30, December 31,
1997 1996
____________________________________ ------------ -----------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Drafts payable $ 409 $ 536
Accounts payable 35,180 41,796
Accrued liabilities 12,952 12,780
Current portion of long-term debt 16,321 13,007
------- -------
Total current liabilities 64,862 68,119
Long-term debt 141,881 119,277
Contingencies (Note 4)
Redeemable, noncumulative convertible
preferred stock, $100 par value;
1,539 shares issued and outstanding 146 146
Stockholders equity (Note 3):
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 (14,868,476 in 1996) 1,501 1,489
Capital in excess of par value 38,228 37,843
Accumulated deficit (14,269) (2,706)
-------- -------
73,460 84,626
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 2,222,390 shares
(1,907,120 in 1996) 12,002 10,684
---------- ---------
Total stockholders equity 61,258 73,742
---------- ---------
$ 268,147 $ 261,284
========== =========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
(Dollars in thousands, except per share amounts)
1997 1996
------- --------
Revenues:
Net sales $ 239,037 $ 235,298
Other income 5,192 3,909
------- -------
244,229 239,207
Costs and expenses:
Cost of sales 194,195 189,729
Selling, general and administrative 48,215 41,587
Interest 10,382 9,081
------- --------
252,792 240,397
Loss before provision for income taxes (8,562) (1,190)
Provision for income taxes 188 187
------- -------
Net loss $ (8,750) $ (1,377)
======= =======
Net loss applicable to common
stock (Note 3) $ (11,176) $ (3,803)
======= =======
Average common shares outstanding
(Note 3):
Primary 12,988,040 13,056,160
Fully diluted 12,989,373 13,279,716
Loss per common share (Note 3):
Primary $ (.86) $ (.29)
========= =======
Fully diluted $ (.86) $ (.29)
========= =======
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1997 and 1996
(Dollars in thousands, except per share amounts)
1997 1996
------ ------
Revenues:
Net sales $ 76,536 $ 75,923
Other income 1,391 918
-------- -------
77,927 76,841
Costs and expenses:
Cost of sales 61,995 62,394
Selling, general and administrative 16,662 14,500
Interest 3,986 3,117
-------- -------
82,643 80,011
-------- -------
Loss before provision for income taxes (4,716) (3,170)
Provision for income taxes 63 48
-------- -------
Net loss $ (4,779) $ (3,218)
======== =======
Net loss applicable to common
stock (Note 3) $ (5,582) $ (4,021)
======== =======
Average common shares outstanding
(Note 3):
Primary 12,831,620 12,908,541
Fully diluted 12,831,620 12,908,541
Loss per common share (Note 3):
Primary $ (.44) $ (.31)
========= ========
Fully diluted $ (.44) $ (.31)
========= ========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
(Dollars in thousands)
1997 1996
__________ _________
Cash flows from operations:
Net loss $(8,750) $ (1,377)
Adjustments to reconcile net loss
to cash flows provided (used)
by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 7,809 6,908
Other 888 930
Provision for possible losses on receivables and
other assets 1,394 1,377
Loss (gain) on sale of assets 282 (846)
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 (6,254) (13,519)
Inventories 2,540 2,820
Supplies and prepaid items (672) (1,446)
Accounts payable (6,616) 12,559
Accrued liabilities (166) 955
Net cash provided (used) by operations (10,928) 8,361
Cash flows from investing activities:
Capital expenditures (7,141) (14,411)
Principal payments on notes receivable 263 410
Proceeds from sales of equipment and real
estate properties 87 445
Proceeds from sale of investment securities - 1,444
Increase in other assets (3,101) (1,842)
Net cash used in investing activities (9,892) (13,954)
Cash flows from financing activities:
Payments on long-term and other debt (26,290) (11,818)
Long-term and other borrowings 54,451 19,647
Net change in revolving debt (2,618) 2,901
Net change in drafts payable (127) 328
Dividends paid (Note 3):
Preferred stocks (2,424) (2,426)
Common stock (389) (389)
Purchases of treasury stock (Note 3) (1,112) (148)
Net proceeds from issuance of common stock 191 149
_________ ________
Net cash provided by financing activities 21,682 8,244
_________ ________
Net increase in cash 862 2,651
Cash and cash equivalents at beginning of period 1,620 1,420
_________ _________
Cash and cash equivalents at end of period $ 2,482 $ 4,071
========= =========
(See accompanying notes)
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
Note 1: At December 31, 1996, the Company had net operating loss ( NOL )
carry forwards for tax purposes of approximately $40 million (approximately $7
million alternative minimum tax NOLs). Such amounts of regular tax NOLs
expire beginning in 1999. The Company also has investment tax credit carry
forwards of approximately $356,000 which begin expiring in 1997.
The Company s provision for income taxes for the nine months ended September
30, 1997 of $188,000 is for current state income taxes and federal alternative
minimum tax.
Note 2: Primary earnings per common share are based upon the weighted average
number of common shares and dilutive common equivalent shares outstanding, if
any, 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, if any, and
the assumed conversion of dilutive convertible securities outstanding, if any,
after appropriate adjustment for interest and related income tax effects on
convertible notes payable.
Net income (loss) applicable to common stock is computed by adjusting net
income (loss) 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 earnings per share, the Company s
review of its earnings per share calculation indicates that the impact of
Statement No. 128 on both primary and fully diluted earnings per share for the
periods presented herein is not material.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1997, and 1996
Note 3: The table below provides detail of activity in the Stockholders equity
accounts for the nine months ended September 30, 1997:
Common Stock Non- Capital Accumulated Treasury Treasury
Par redeemable in excess Deficit Stock- Stock-
Shares Value Preferred of par Value Common Preferred Total
------ ----- ---------- ------------ ----------- -------- --------- -----
(In thousands)
Balance at December 31, 1996 14,888 $1,489 $48,000 $37,843 $(2,706) $(10,684) $(200) $73,742
Net loss (8,750) (8,750)
Exercise of stock options:
Cash received 61 6 185 191
Stock tendered and added
to treasury at market value 64 6 200 (206)
Dividends declared:
Common Stock ($.03 per share) (389) (389)
Series B 12% preferred
stock ($9.00 per share) (180) (180)
Redeemable preferred
stock ($10.00 per share) (16) (16)
Series 2 preferred
stock ($2.44 per share) (2,228) (2,228)
Purchase of treasury stock (1,112) (1,112)
------ ------- -------- -------- -------- -------- ------ --------
(1)
Balance at September 30, 1997 15,013 $ 1,501 $ 48,000 $ 38,228 $(14,269) $(12,002) $ (200) $ 61,258
====== ======= ======== ======== ========= ======== ====== ========
(1)
Includes 2,222,390 shares of the Company s Common Stock held in treasury.
Excluding the 2,222,390 shares held in treasury, the outstanding shares of
the Company s Common Stock at September 30, 1997 were 12,791,086.
Note 4: Commitments and Contingencies
Following is a summary of certain administrative and legal actions involving
the Company:
A. Administrative\Proceedings
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, if any, is unknown. No provision for any liability which
may result has been made in the accompanying financial statements.
The Company submitted to the State of Arkansas a Groundwater Monitoring
Work Plan for its El Dorado, Arkansas plant (the El Dorado Facility ),
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 at the El Dorado Facility. Pursuant to the Administrative
Agreement the Company installed additional pollution control equipment to
address the compliance issues. The Company was assessed and paid $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 as well as a payment
of $50,000 to fund certain environmental projects, which penalty and
additional sum have been paid. Since the 1997 amendment, the Company s
Chemical Business has been assessed stipulated penalties of approximately
$55,000 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.
B. Legal Proceedings
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 provide 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 the
following paragraph 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. In
September 1997, the Company and the EIL Insurance Carrier agreed that the
EIL Insurance Carrier will reimburse the Chemical Business for certain
expenses in excess of retention, and pay such future fees and expenses,
subject to a reservation of rights relating to the citizens' suit.
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 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. Recently, 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.
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 not presently
probable of material loss, 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 September 30,
1997. The Company has advanced the aviation company $341,000 as of September
30, 1997 and is accruing losses of the aviation company based on its ownership
percentage. As a result, the Company has recorded losses of $1,778,500
($562,500 in the first nine months of 1997, and $525,000 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 $1.3 million as of September 30,
1997.
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 an operating lease from an unrelated third party
with an initial ease 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. Under the terms of the Bayer 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 EDNC Baytown
Plant becomes fully operational. The Bayer Agreement provides that Bayer will
make certain net monthly payments to EDNC which will be sufficient for EDNC to
recover all of its costs plus a profit. It is anticipated that construction
of the EDNC Baytown Plant will cost approximately $60 million and will be
completed by late 1998. Construction financing of the EDNC Baytown Plant is
to be provided by an unaffiliated lender. Neither the Company nor EDC has
guaranteed any of the lending obligations for the EDNC Baytown
Plant.
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 September 30, 1997 Condensed Consolidated Financial Statements.
OVERVIEW
The Company is pursuing a strategy of concentrating on businesses and product
lines in niche markets where the Company can establish a position as a market
leader. In addition, the Company is seeking to improve its liquidity and
profits through liquidation of inventory on which it is not realizing an
acceptable return nor does it have the potential to do so.
In this connection, the Company is concentrating on reshaping the Automotive
Products Business by liquidating certain assets that do not 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
personnel. The Company continues to explore alternatives to accomplish these
goals.
In addition, the Company is liquidating certain slow moving inventory in the
Industrial Products Business in the ordinary course of business. The Company
presently intends to limit the Industrial Products Business to lines of
machine tools which the Company believes will 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. If able to liquidate such assets, the Company may not be
able to improve profits in the Automotive Products Business and Industrial
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 if 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
aceptable prices.
Information about the Company s continuing operations in different industry
segments for the nine months and three month ended September 30, 1997 and 1996
is detailed below.
Nine Months Three Months
1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
(Unaudited)
Net Sales:
Chemical $ 122,853 $ 129,132 $32,658 $39,014
Climate Control 77,526 66,368 29,704 24,856
Automotive Products 27,245 28,849 10,208 8,111
Industrial Products 11,413 10,949 3,966 3,942
$ 239,037 $ 235,298 $ 76,536 $ 75,923
======== ======== ======= =======
Gross profit:
Chemical $ 16,388 $ 21,318 $ 3,605 $ 5,202
Climate Control 22,469 16,809 8,786 6,554
Automotive Products 3,311 5,029 1,085 1,024
Industrial Products 2,674 2,413 1,064 749
$ 44,842 $ 45,569 $ 14,540 $ 13,529
======= ======= ======= =======
Operating profit (loss):
Chemical $ 5,288 $ 11,421 $ 554 $ 1,596
Climate Control 7,721 4,259 3,330 1,958
Automotive Products (4,447) (1,998) (1,559) (1,308)
Industrial Products (880) (1,668) (170) (623)
------ ------- ----- -------
7,682 12,014 2,155 1,623
General corporate expenses (5,862) (4,123) (2,886) (1,676)
Interest expense (10,382) (9,081) (3,986) (3,117)
-------- -------- ------- --------
Loss before provision for
income taxes $ (8,562) $ (1,190) $(4,717) $ (3,170)
======== ======== ======= ========
Gross profit by industry segment represents net sales less cost of sales.
Operating profit (loss) by industry segment represents revenues less operating
expenses before deducting general corporate expenses, interest expense and
income taxes. As indicted in the above table the operating profit (as
defined) for the first nine months declined from $12.0 million in 1996 to $7.7
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 nine months of 1997 of approximately $8.6 million.
Chemical Business
Beginning in 1994, the results of operation of the Chemical Business have been
adversely impacted by the high costs 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 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 entire cost increase
could not be offset 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 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 market price of
anhydrous ammonia.
During 1994, the Company undertook construction of a concentrated nitric acid
plant at its El Dorado Facility (the "DSN" Plant). The DSN Plant began
operations in 1995, but due to certain mechanical and design problems,
production of concentrated nitric acid since start-up has been limited. The
limitations on production resulted in significant fixed costs being expended
as period costs during the fourth quarter of 1996, and the first nine months
of 1997, rather than being absorbed as cost of product being produced and
sold. In addition, significant amounts were expended for engineering,
consulting, and other costs to bring the DSN Plant up to the stated capacity.
During the annual maintenance turnaround in September 1997, management
implemented corrective actions which it believes will now allow the DSN Plant
to operate at its stated capacity and to fully absorb the costs and produce a
quality product. In early October 1997, the DSN Plant was restarted and is
currently operating at its stated capacity of 285 tons per day (assuming 338
days of annual production).
After the initial start up of the DSN Plant, certain residents of El Dorado,
Arkansas and the ADPC&E (as defined) alleged that the El Dorado Facility s air
emissions were in violation of its existing permit requirements. As a result,
the Chemical Business entered into certain agreements with the ADPC&E,
including, in 1995, an administrative order which has since been amended, and
which imposed certain requirements on, and assessed penalties against, the
Company. See Note 4 of Notes to Condensed Consolidated Financial Statements.
In addition, certain lawsuits were filed by plaintiffs living in the El
Dorado, Arkansas, community. See Note 4 of Notes to Condensed Consolidated
Financial Statement. In order to address the ADPC&E s concerns, and to defend
itself in these lawsuits, significant expenditures were made for consultants,
lawyers, and other related fees and expenses, as well as for significant
capital improvements to the air emission control equipment at the El Dorado
Facility. A substantial portion of the litigation-related costs are not
expected to reoccur. Furthermore, although these expenses were absorbed by
the Company as they were incurred, the Company s EIL Insurance (as defined)
has agreed to reimburse the Company for the majority of its past legal fees
and expenses relating to the pending litigation, less the amount of the
retention under the EIL Insurance, and to pay such future fees and expenses
which may be incurred, subject to a reservation of rights regarding one of the
lawsuits. See Note 4 of Notes to Condensed Consolidated Financial Statements.
A subsidiary of the Company entered into an agreement with Bayer Corporation
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 on current market conditions, the plant should generate
approximately $50 million in annual revenues. Construction is scheduled to be
completed by the end of 1998. See Note 4 of Notes to Condensed Consolidated
Financial Statements.
Climate Control
The Climate Control Business two principal product lines are manufactured and
sold through two operating subsidiaries: International Environmental
Corporation ( IEC ), which manufactures and markets hydronic fan coil units,
and Climate Master, Inc., ( CM ), which manufactures and markets water source
heat pumps, geothermal water source heat pumps, and packaged terminal air
conditioners.
Due to significant changes in the market for its products, CM implemented a
strategy of diversification. Several new markets were targeted, and new
products were introduced. CM entered the original equipment manufacturer
( OEM ) business, introduced a new line of packaged terminal air conditioners
and new rooftop water source heat pumps, entered the shared energy savings
market (which primarily sells highly efficient water source heat pumps to
retrofit large government installations), and emphasized and expanded the
residential geothermal water source heat pump business. In addition, a new
management team was recruited, and CM s operations were reorganized.
These actions were implemented over the last two years and have begun to
improve operating performance for 1997. As indicated in the above table, the
Climate Control Business reported improved sales (an increase of 16.8%) and
improved operating profit for the first nine months of 1997 over that of the
first nine months of 1996, primarily as a result of CM's increased sales of
its heat pump products.
Automotive and Industrial Products Businesses
During the first nine months of 1997 the Automotive and Industrial Products
Businesses recorded combined sales of $38.7 million and reported an operating
loss (as defined above) of $5.3 million, as compared to combined sales of
$39.8 million and an operating loss of $3.7 million for the first nine months
of 1996, as a result of (i) lower sales, (ii) decreased absorption of
manufacturing costs due to lower production volume, and (iii) increased
selling, general and administrative expenses related to new advertising
programs and employment of new key management personnel in the Automotive
Products Business. As a result of the inventory reduction program implemented
in 1995, inventories of these businesses decreased approximately $1.8 million
during the nine months ended September 30, 1997.
RESULTS OF OPERATIONS
Nine months ended September 30, 1997 vs. Nine months ended September 30, 1996
Revenues
Total revenues for the nine months ended September 30, 1997 and 1996 were
$244.2 million and $239.2 million, respectively (an increase of $5.0
million). Sales increased $3.7 million. Other income increased $1.3 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. Additionally,
in 1997, the Company has recognized $2.2 million of rental income from the
Tower as compared to $1.6 million of net rental receipts in 1996. These
amounts are included in other income in 1997.
Net Sales
Consolidated net sales included in total revenues for the nine months ended
September 30, 1997 were $239.0 million, compared to $235.3 million for the
first nine months of 1996, an increase of $3.7 million. This increase in
sales resulted principally from increased sales in the Climate Control
Business of $11.2 million, primarily due to increased sales of CM's heat pump
products, partially offset by decreased sales in the Chemical Business of
$6.3 million primarily due to reduced sales of the Company s wholly-owned
Australian subsidiary, Total Energy Systems, Ltd. ("TES") due to expiration of
certain customer contracts.
Gross Profit
Gross profit decreased $.7 million and was 18.8% as a percent of net sales for
the first nine months of 1997, compared to 19.4% for the first nine months of
1996. The decrease in the gross profit as a percentage of net sales was due
primarily to (i) higher production costs in the Chemical Business due to the
effect of higher prices of anhydrous ammonia and unabsorbed overhead costs
caused by excessive downtime related to modifications made to resolve problems
associated with mechanical failures and the cost of environmental matters at
the Chemical Business' primary manufacturing plant, partially offset by a
reduction in cost of sales of $2.1 million through recapture of manufacturing
variances of the Chemical Business in the form of business interruption
insurance settlements, and (ii) decreased absorption of costs due to lower
production volumes in the Automotive Products Business; partially offset by
(iii) increased absorption of costs due to higher production volumes and focus
on sales of more profitable product lines in the Climate Control Business.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of net
sales were 20.2% and 17.7% in the nine month periods ended September 30, 1997
and 1996, respectively. Approximately $1.5 million of the $6.6 million
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 without a
corresponding decrease in SG&A in the Automotive Products Business and TES.
Interest Expense
Interest expense for the Company, before deducting capitalized interest, was
approximately $11.5 million during the nine months ended September 30, 1997
compared to approximately $9.1 million during the nine months ended September
30, 1996. The 1997 increase of $2.4 million before the effect of
capitalization primarily resulted from increased borrowings to fund capital
expenditures in the Chemical Business. During the first nine months of 1997
the Company capitalized approximately $1.1 million of interest expense in
connection with the construction of a concentrated nitric acid plant.
Income Before Taxes
The Company had a loss before income taxes of $8.6 million in the first nine
months of 1997 compared to a loss before income taxes of $1.2 million in the
nine months ended September 30, 1996. The decreased profitability was
primarily due to the factors discussed above.
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 nine month periods ended September 30, 1997 and September 30, 1996 are for
current state income taxes and federal alternative minimum taxes.
Three months ended September 30, 1997 vs. Three months ended September 30,
1996.
Revenues
Total revenues for the three months ended September 30, 1997 and 1996 were $77.9
million and $76.8 million, respectively (an increase of $1.1 million). Sales
increased $.6 million. Other income increased $.5 million primarily due to
rental income from the Tower of $.8 million in 1997 as compared to $.4 million
of net rental receipts in 1996.
Net Sales
Consolidated net sales included in total revenues for the three months ended
September 30, 1997 were $76.5 million, compared to $75.9 million for the third
quarter of 1996, an increase of $.6 million. This increase in sales resulted
principally from (i) increased sales in the Climate Control Business of $4.8
million, primarily due to increased sales of CM's heat pump products, and (ii)
increased sales in the Automotive Products Business of $2.1 million, offset by
(iii) decreased sales in the Chemical Business of $6.4 million primarily due
to unfavorable weather and market conditions in 1997 for agricultural products
in the Chemical Business market area and lower sales of $3.3 million at TES
due to expiration of certain customer contracts.
Gross Profit
Gross profit increased $1.0 million and was 19.0% as a percent of net sales
for the third quarter of 1997, compared to 17.8% as a percent of net sales for
the third 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 Climate Control Business, and (ii) improved
profit margins on sales of machine tools in the Industrial Products Business;
offset by (iii) lower margins due to product mix in the Automotive Products
Business, and (iv) higher production costs in the Chemical Business due to the
effect of higher cost of anhydrous ammonia which the Chemical Business could
not fully pass along to customers and downtime experienced at the El Dorado
Facility due to mechanical problems, partially offset by an $800,000 insurance
settlement.
Selling, General and Administrative Expense
SG&A expenses as a percent of net sales were 21.8% and 19.1% in the three
month periods ended September 30, 1997 and 1996, respectively. Approximately
$.7 million 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 4 of Notes to Condensed Consolidated Financial Statements
compounded by lower sales in the Chemical Business.
Interest Expense
Interest expense for the Company was approximately $4.0 million during the
three months ended September 30, 1997 compared to approximately $3.1 million
during the three months ended September 30, 1996. This increase resulted
primarily from higher average balances of borrowed funds to fund capital
expenditures in the Chemical Business.
Income Before Taxes
The Company had a loss before income taxes of $4.7 million in the third
quarter of 1997 compared to a loss before income taxes of $3.2 million in the
three months ended September 30, 1996. The decreased profitability of $1.5
million was primarily due to the increases in SG&A and 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 1 of Notes to Condensed
Consolidated Financial Statements, the Company's provisions for income taxes
for the three month periods ended September 30, 1997 and September 30, 1996
are for current state income taxes and federal alternative minimum taxes.
Liquidity and Capital Resources
Cash Flow From Operations
The Company's primary cash needs historically 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 debt facilities.
Cash flows from operations before changes in working capital items were $.2
million and $7.0 million for the nine months ended September 30, 1997 and
1996, respectively. During the nine months ended September 30, 1997, net cash
flows used in operating activities were $10.9 million while the nine months
ended September 30, 1996 provided net cash flows of $8.4 million. This
reduction in cash flows provided from operations of $19.3 million resulted
primarily from lower earnings of $7.4 million and an increase in working
capital of $12.5 million. The increase in working capital is due primarily to
a net decrease in account payable primarily due 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 $7.1 million in capital
expenditures (primarily in the Chemical Business) and increased other assets
of $3.1 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) $.8 million of deposits made in connection with
an interest rate hedge contract related to the agreement with Bayer. See Note
4 of Notes to Condensed Consolidated Financial Statements. Net cash provided
by financing activities included (i) term borrowings of $54.5 million,
including proceeds from the new $50 million financing discussed under "Sources
of Funds", (ii) payments on term debt of $26.3 million, including $19.1
million in prepayments of debt with proceeds from the new $50 million
financing, (iii) decreases in revolving debt of $2.6 million, (iv) dividends
of $2.8 million, and (v) treasury stock purchases of $1.1 million.
During the first nine months of 1997, the Company paid the following
aggregate dividends: (1) $9.00 per share on each of the 20,000 outstanding
shares of its Series B 12% Cumulative Convertible Preferred Stock; (2) $2.44
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.
Sources 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. 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 $49.2
million in outstanding debt under the Financing at September 30, 1997, at the
rates 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"), as
amended 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 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 Agreements 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 September 30, 1997 the effective interest
rate was 10%. The annual interest on the outstanding debt under the Revolver
at September 30, 1997 at the rates then in effect would approximate $5.3
million. At September 30, 1997, additional amounts that the Company could
have borrowed under the Agreements, based on eligible collateral, were
approximately $5.0 million. Borrowings under the Revolver outstanding at
September 30, 1997, were $52.7 million. The Revolver has a scheduled
termination date of October 1, 1998, and as of September 30, 1997, the Company
was not in compliance with its financial covenants relating to tangible net
worth and debt-to-worth. The Lender has waived such defaults as of September
30, 1997 and has reset the Company's tangible net worth and debt-to worth
financial covenants through the termination date.
In addition to the Agreements discussed above, the Company had the following
term loans in place as of September 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 September 30, 1997, DSN had outstanding borrowings of $12.3
million under the DSN Permanent Loan, $.8 million under the Mixed Acid
Loan, and $.9 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 8.15% to 8.86%. Annual interest, for the three notes as
a whole, at September 30, 1997 at the agreed to interest rates would
approximate $1.2 million. The loans are secured by the various DSN and
Mixed Acid Plant 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. At September 30, 1997, the Company was not in compliance
with its financial covenant related to tangible net worth. The
Financing Company has waived such default as of September 30, 1997 and
has reset the Company's financial covenants through December 31, 1998.
(2) As of September 30, 1997, a subsidiary of the Company, Prime Financial
Corporation ("Prime"), was a party to a loan agreement ("Loan
Agreement") with a national bank ("Bank") relating to real property and
an office building located in Oklahoma City, Oklahoma (the Tower ).
The Loan 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 Loan Agreement was $12.7 million at
September 30, 1997 and is payable in sixty (60) monthly payments of
principal and interest.
In February 1997, the Company exercised its option to purchase the
Tower, which option was granted to the Company in connection with the
Loan Agreement, by paying approximately $140,000 for the exercise price
under the purchase option and related costs and foreclosing against the
balance owed the Company under a note receivable. Accordingly $14.0
million of carrying value was transferred to property, plant and
equipment.
Prime currently has a commitment from a bank to refinance the Loan
Agreement. The commitment provides for a loan to Prime of $19.5
million payable over sixty months at an interest rate equal to LIBOR
plus 1.75%. Such loan would be secured by a first mortgage on the
Tower, and Prime's obligations under the loan and mortgage would be
guaranteed by the Company. Completion of the proposed refinancing is
subject to, among other things, the negotiation of a definitive loan
agreement. There are no assurances that Prime will be able to complete
the proposed refinancing.
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 Climate 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 satisfied by scheduled reductions in the inventories of the
Automotive Products Business. In the remaining three months of 1997, the
Company has planned capital expenditures of approximately $1.5 million,
primarily in the Chemical Business.
As previously disclosed, 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, proposed to
the Company that SBL is willing to infuse into the Company $3 million of new
equity. Under such proposal, SBL proposed 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 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.
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 is currently in the process of
evaluating the proposal; however, as of the date of this report, the committee
has not made any recommendations to the Board of Directors. 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.
On October 17, 1997, Prime borrowed from SBL the principal amount of $3
million (the "Prime Loan") payable on demand, with interest payable monthly in
arrears at a variable interest rate equal to the Wall Street Journal Prime
Rate plus 2% per annum. The purpose of the loan is to assist the Company by
providing additional liquidity. The Company has guaranteed the Prime Loan.
It is anticipated that the Prime Loan will be repaid before the proposal by
SBL is completed, if completed.
Management believes that its presently anticipated cash flows from operations,
the Company's revolving credit facilities, and other sources, 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 paragraphs under Sources of
Funds 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
reduce inventories, 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, 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 act a agent for an unrelated third
party to build the nitric acid plant discussed in Note 4 to Notes to Condensed
Financial Statements is to be financed by an unaffiliated lender.
Foreign Subsidiary Financing
The Company s wholly-owned Australian subsidiary, TES, has a revolving credit
working capital facility (the TES Revolving Facility ) with Bank of New
Zealand, Australia of approximately AUS$8.5 million (approximately US$6.1
million). The TES Revolving Facility allows for borrowings based on specific
percentages of qualified eligible assets. Based on the effective exchange
rate at September 30, 1997, approximately US$5.5 million (AUS$7.7 million
approximately) was borrowed at September 30, 1997. 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 8.1% at September 30, 1997. TES is in technical non-compliance 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 has continued to extend credit under
the Facility. The outstanding borrowing under the TES Revolving Facility at
September 30, 1997 has been classified as due within one year in the
accompanying Condensed Consolidated Financial Statements.
The Company is in negotiations with Bank of New Zealand to amend the TES
Revolving Facility to allow for borrowings up to an aggregate of AUS$11
million (approximately US$7.9 million). This AUS$11 million will be broken
down into three parts: (a) AUS$6 million revolving working capital facility;
(b) AUS$4.5 million long-term debt facility; and (c) AUS$0.5 million leasing
facility. There are no assurances that such increase will be implemented.
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 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 the first nine months of 1997 the Company advanced an additional $1
million to the French manufacturer bringing the total of the loan at September
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.
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.
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
September 30, 1997 the Company has made option payments aggregating $1.2
million and has loaned the Optioned Company approximately $1,241,000. The
Company has recorded reserves of $710,000 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.
Debt Guarantee
As disclosed in Note 4 of the Notes to Condensed Consolidated Financial
Statements 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 $1.3 million as of September 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 $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 the date of this report, $2.2 million of payments
under this option have been received. As yet, no additional shares of stock
have been issued pursuant to the option exercise.
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 $7.0 million at December 31, 1996. As of
December 31, 1996, the Company had available NOL carryovers of approximately
$40.0 million based on its federal income tax returns as filed with the
Internal Revenue Service for taxable years through 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 4 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.
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 September 30, 1997, and the related
condensed consolidated statements of operations for the nine-month and three-
month periods ended September 30, 1997 and 1996 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1997
and 1996. 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 review, 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, 1996 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 7, 1997, 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, 1996, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Oklahoma City, Oklahoma
November 18, 1997
/s/ERNST & YOUNG LLP
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 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 Ninth Amendment to Loan and Security Agreement between the Company
and BankAmerica Business Credit, Inc. Substantially identical
Ninth 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 here from, and such will be provided to the
Commission upon request.
4.2 Tenth Amendment to Loan and Security Agreement between the Company
and BankAmerica Business Credit, Inc. Substantially identical
Tenth 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 here from, and such will be provided to
the Commission upon request.
4.3 Eleventh Amendment to Loan and Security Agreement between the
Company and BankAmerica Business Credit, Inc. Substantially
identical Eleventh 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 here from, and such will be
provided to the Commission upon request.
11.1 Statement Re: Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule.
(B) Reports on Form 8-K. The Company has filed reports on Form 8-K
since July 31, 1997, as follows:
(i) A current report on Form 8-K (Item 5. Other Events ), Date of
Report (Date of earliest event reported): October 17, 1997, reporting a
$3 million loan made by SBL Corporation, a corporation owned by the wife
and children of the Chairman and President of the Company, to a
subsidiary of the Company;
(ii) A current report on Form 8-K (Item 5. Other Events ), Date of
Report (Date of earliest event reported): November 4, 1997, reporting a
press release pursuant to Rule 135c promulgated under the Securities Act
of 1933, as amended, in connection with a private placement debt
offering by a subsidiary of the Company.
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 November, 1997.
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
------------------
Tony M. Shelby,
Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
------------------
Jim D. Jones,
Vice President, Controller and
Treasurer(Principal Accounting Officer)