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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The transition period from _____________ to _____________
Commission file number 1-7677
_______________________________________
LSB INDUSTRIES, INC.
____________________________________________________
Exact name of Registrant as specified in its charter
DELAWARE 73-1015226
______________________________ ___________________
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
__________________________________________________________________
Address of principal executive offices (Zip Code)
(405) 235-4546
__________________________________________________
Registrant's telephone number, including area code
None
_____________________________________________________
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES x NO
______ ______
The number of shares outstanding of the Registrant's voting Common
Stock, as of April 30, 1999 was 11,835,386 shares excluding
3,273,290 shares held as treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB
Industries, Inc. and all of its wholly owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB
Industries, Inc. at March 31, 1999, the condensed consolidated
statements of operations and cash flows for the three month periods
ended March 31, 1999 and 1998 have been subjected to a review, in
accordance with standards established by the American Institute of
Certified Public Accountants, by Ernst & Young LLP, independent
auditors, whose report with respect thereto appears elsewhere in
this Form 10-Q. The financial statements mentioned above are
unaudited and reflect all adjustments, consisting only of
adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the interim
periods. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results to be
expected for the full year. The condensed consolidated balance
sheet at December 31, 1998, was derived from audited financial
statements as of that date. Reference is made to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998,
for an expanded discussion of the Company's financial disclosures
and accounting policies.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1999 is unaudited)
(dollars in thousands)
March 31, December 31,
ASSETS 1999 1998
_________________________________________ ___________ __________
Current assets:
Cash and cash equivalents $ 1,240 $ 1,555
Trade accounts receivable, net 57,113 52,730
Inventories:
Finished goods 33,322 34,236
Work in process 8,163 7,178
Raw materials 21,864 22,431
__________ __________
Total inventory 63,349 63,845
Supplies and prepaid items 9,503 7,809
__________ __________
Total current assets 131,205 125,939
Property, plant and equipment, net 99,102 99,228
Other assets, net 21,120 23,480
__________ __________
$ 251,427 $ 248,647
========== ==========
(Continued on following page)
3
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1999 is unaudited)
(dollars in thousands)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
________________________________________ ___________ __________
Current liabilities:
Drafts payable $ 499 $ 758
Accounts payable 20,534 24,043
Accrued liabilities 19,490 19,006
Current portion of long-term debt 14,559 13,954
___________ __________
Total current liabilities 55,082 57,761
Long-term debt (Note 6) 165,759 155,688
Commitments and Contingencies (Note 5)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,463 shares
issued and outstanding 139 139
Stockholders' equity (Notes 3 and 7):
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, 15,108,676 shares
issued 1,511 1,511
Capital in excess of par value 38,329 38,329
Accumulated other comprehensive loss (1,337) (1,559)
Accumulated deficit (39,794) (35,166)
___________ __________
46,709 51,115
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 3,273,290 shares
(3,202,690 in 1998) 16,062 15,856
___________ __________
Total stockholders' equity 30,447 35,059
___________ __________
$ 251,427 $ 248,647
=========== ==========
(See accompanying notes)
4
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(Amounts in thousands, except per share amounts)
1999 1998
__________ __________
Businesses continuing at March 31,:
Revenues:
Net sales $ 70,189 $ 73,290
Other income - 889
Gain on sale of the Tower 12,993
__________ __________
70,189 87,172
Costs and expenses:
Cost of sales 54,075 57,539
Selling, general and administrative 14,327 14,811
Interest 4,367 4,701
Other expenses 210 -
__________ __________
72,979 77,051
__________ __________
Income (loss) before subsidiary to be
disposed of during 1999 (2,790) 10,121
Subsidiary to be disposed of during 1999 (Note 9):
Revenues 2,868 4,779
Operating costs, expenses and interest 3,838 5,342
__________ __________
(970) (563)
Income (loss) before provision for
income taxes (3,760) 9,558
Provision for income taxes 50 280
Net income (loss) $ (3,810) $ 9,278
=========== ==========
Net income (loss) applicable to
common stock (Note 2) $ (4,626) $ 8,462
=========== ==========
Weighted average common shares
outstanding (Note 2):
Basic 11,881 12,746
Diluted 11,881 17,539
Income (loss) per common share (Note 2):
Basic $ (.39) $ .66
=========== ==========
Diluted $ (.39) $ .53
=========== ==========
(See accompanying notes)
5
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(dollars in thousands)
1999 1998
___________ ___________
Cash flows from operations:
Net income (loss) $ (3,810) $ 9,278
Adjustments to reconcile net income (loss)
to cash flows used by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 2,819 3,119
Other 318 262
Provision for possible losses
on receivables and other assets 427 399
Loss (gain) on sale of assets 23 (12,993)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (4,633) (5,968)
Inventories 645 3,798
Supplies and prepaid items (1,692) (335)
Accounts payable (3,564) (563)
Accrued liabilities 2,522 1,644
___________ _________
Net cash used by operations (6,945) (1,359)
Cash flows from investing activities:
Capital expenditures (2,328) (2,290)
Principal payments on loans receivable 135 23
Proceeds from sales of equipment and
real estate properties - 18
Proceeds from sale of the Tower - 29,266
Decrease (increase) in other assets 1,827 (2,511)
___________ _________
Net cash provided (used) by investing activities (366) 24,506
Cash flows from financing activities:
Payments on long-term and other debt (2,522) (14,649)
Net change in revolving debt facilities 10,799 (5,558)
Net change in drafts payable (259) (405)
Dividends paid on preferred stocks (Note 3) (816) (816)
Purchases of treasury stock (Note 3) (206) (819)
Net proceeds from issuance of common stock - 71
___________ _________
Net cash provided (used) by financing activities 6,996 (22,176)
___________ _________
Net increase (decrease) in cash and cash
equivalents from all activities (315) 971
Cash and cash equivalents at beginning of period 1,555 4,934
__________ _________
Cash and cash equivalents at end of period $ 1,240 $ 5,905
========== =========
(See accompanying notes)
6
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Note 1: Income Taxes At December 31, 1998, the Company had regular-tax net
operating loss ("NOL") carryforwards for tax purposes of approximately $63.8
million (approximately $31.4 million alternative minimum tax NOLs). Certain
amounts of regular-tax NOL expire beginning in 1999.
The Company's provision for income taxes for the three months ended March 31,
1999 of $50,000 is for current state income taxes and federal alternative
minimum tax.
Note 2: Earnings Per Share Net income or loss applicable to common stock is
computed by adjusting net income or loss by the amount of preferred stock
dividends. Basic income or loss per common share is based upon the weighted
average number of common shares outstanding during each period after giving
appropriate effect to preferred stock dividends. Diluted income or loss per
share is based on the weighted average number of common shares and dilutive
common equivalent shares outstanding and the assumed conversion of dilutive
convertible securities outstanding, if any, after appropriate adjustment for
interest, net of related income tax effects on convertible notes payable, as
applicable. The Company has stock options, convertible preferred stock, and a
convertible note payable, which are potentially dilutive. All of these
potentially dilutive securities were antidilutive for the first quarter of 1999
and have thus, been excluded from the computation of diluted loss per share for
that period.
7
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Note 2: Earnings Per Share (continued) The following table sets forth the
computation of basic and diluted earnings per share:
(dollars in thousands, except per share amounts)
March 31,
1999 1998
___________ _________
Numerator:
Numerator for 1998 diluted earnings
per share - net income (loss) $ (3,810) $ 9,278
Preferred stock dividends (816) (816)
__________ __________
Numerator for 1999 and 1998 basic
and 1999 diluted earnings per
share - income (loss) available
to common stockholders $ (4,626) $ 8,462
========== ==========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 11,880,625 12,746,178
Effect of dilutive securities:
Employee stock options - 126,290
Convertible preferred stock - 4,662,726
Convertible note payable - 4,000
__________ __________
Dilutive potential common shares - 4,793,016
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 11,880,625 17,539,194
========== ==========
Basic earnings (loss) per share (.39) $ .66
========== ==========
Diluted earnings (loss) per share (.39) $ .53
========== ==========
8
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months ended March 31, 1999 and 1998
Note 3: Stockholders' Equity The table below provides detail of activity in
the stockholders' equity accounts for the three months ended March 31, 1999:
Common Stock Non- Capital Accumulated
_______________ redeemable in excess Other Com-
Par Preferred of par prehensive
Shares Value Stock Value Loss
______ ______ _________ _______ __________
(in thousands)
Balance at December 31,
1998 15,109 $ 1,511 $ 48,000 $ 38,329 $(1,559)
Net loss
Foreign currency
translation adjustment 222
Total comprehensive
income (Note 8)
Dividends declared:
Series B 12% preferred
stock ($3.00 per share)
Series 2 preferred
stock ($.81 per share)
Redeemable preferred
stock ($10.00 per share)
Purchase of treasury stock
______ _______ _______ _______ _______
(1)
Balance at March 31, 1999 15,109 $ 1,511 $ 48,000 $ 38,329 $(1,337)
====== ======= ======== ======== =======
Treasury
Accumu Treasury Stock
lated Stock- Prefer-
deficit Common red Total
________ _________ ________ ________
$(35,166) $(15,856) $ (200) $35,059
(3,810) (3,810)
222
_______
(3,588)
(60) (60)
(741) (741)
(15) (15)
(206) (206)
_________ _________ _________ ________
$(38,794) $(16,062) $ (200) $30,447
========= ========= ========= ========
<FN>
(1) Includes 3,273 shares of the Company's Common Stock held in treasury.
Excluding the 3,273 shares held in treasury, the outstanding shares
of the Company's Common Stock at March 31, 1999 were 11,836.
</FN>
9
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Note 4: Segment Information
Three Months Ended March 31,
1999 1998
______ _______
(in thousands)
(unaudited)
Net sales:
Businesses continuing:
Chemical $ 30,745 $ 28,679
Climate Control 26,699 29,936
Automotive Products 10,105 10,490
Industrial Products 2,640 4,185
Subsidiary to be disposed of:
Chemical 2,868 4,746
___________ __________
$ 73,057 $ 78,036
=========== ==========
Operating profit (loss):
Businesses continuing:
Chemical $ 1,446 $ 1,557
Climate Control 2,707 2,812
Automotive Products 9 (407)
Industrial Products (411) (304)
Subsidiary to be disposed of:
Chemical (845) (406)
__________ _________
2,906 3,252
General corporate expenses and other (2,174) (1,829)
Interest expense (4,492) (4,858)
Gain on sale of the Tower - 12,993
__________ __________
Income (loss) before provision
for income taxes $ (3,760) $ 9,558
========== ==========
Note 5: Commitments and Contingencies
Nitric Acid Project
In June 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC agreed to act as an agent to construct,
and upon completion of construction, operate a nitric acid plant
10
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC guaranteed the performance of EDNC's obligations
under the Bayer Agreement. Under the terms of the Bayer Agreement,
EDNC is to lease the EDNC Baytown plant pursuant to a leveraged
lease from an unrelated third party with an initial lease term of
ten years from the date on which the EDNC Baytown Plant becomes
fully operational. Upon expiration of the initial ten-year term,
the Bayer Agreement may be renewed for up to six renewal terms of
five years each; however, prior to each renewal period, either
party to the Bayer agreement may opt against renewal. It is
anticipated that construction cost of the EDNC Baytown Plant will
approximate $69 million and will be completed in the second quarter
of 1999. Construction financing of the EDNC Baytown Plant is
provided by an unaffiliated lender. Neither the Company nor EDC
has guaranteed any of the repayment obligations for the EDNC
Baytown Plant. In connection with the leveraged lease, the Company
entered into an interest rate forward agreement to fix the
effective rate of interest implicit in such lease. As of March 31,
1999, the fair value of such agreement represented a liability of
$2.6 million for which the Company has issued a letter of credit
totaling the same. See Note 7, "Changes in Accounting," for the
expected accounting upon adoption of SFAS #133.
In January 1999, the contractor constructing the EDNC Baytown Plant
under a turnkey agreement, informed the Company that it could not
complete construction alleging a lack of financial resources. EDNC
at that time demanded that the contractor's bonding company provide
funds necessary for subcontractors to complete construction. A
substantial portion of the costs to complete the EDNC Baytown
Plant ($12.9 million), which were to be funded by the construction
contractor, have been funded by proceeds from the bonding company;
however, the cost to the Company through its leveraged lease is
expected to be impacted by these events. As a result of the delay
in completion of the EDNC Baytown Plant, the Company's
subsidiaries, EDNC and EDC, have entered into an interim supply
agreement with Bayer to provide product from the manufacturing
facility in El Dorado, Arkansas.
In connection with the EDNC Baytown Plant, EDNC had entered into a
long-term production and supply agreement with Bayer. This
agreement provided for a commencement date of no later than
February 1, 1999. As mentioned above, EDNC is providing product to
Bayer under an interim supply agreement until the EDNC Baytown
Plant becomes operational. In connection with these agreements,
EDNC and Bayer are to determine the financial impact of the delay
in completing the Baytown Plant as scheduled. Based on current
11
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
estimates, the loss associated with these agreements and contract
provisions is not expected to be material.
Debt Guarantee
The Company previously guaranteed approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft
Company ("Kestrel"), in exchange for a 44.9% ownership interest.
At December 31, 1998, the Company had accrued the full amount of
its commitment under the debt guarantees and fully reserved its
investments and advances to Kestrel. In the first quarter of 1999,
upon demand of the Company's guarantee, the Company assumed an
obligation for a $2.0 million term note, which is due in equal
monthly principal payments of $11,111, plus interest, through
August 2004 and funded its $600,000 obligation related to a
subsidiary's partial guarantee of Kestrel's obligation under a
revolving credit facility. In connection with the demand of the
Company to perform under its guarantees, the Company and the other
guarantors formed a new company ("KAC") which acquired the assets
of the aviation company through foreclosure.
The Company and the other shareholders of KAC are attempting to
sell the assets acquired in foreclosure. Proceeds received by the
Company, if any, from the sale of KAC assets will be recognized in
the results of operations when and if realized.
Legal Matters
Following is a summary of certain legal actions involving the
Company:
A. In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with
numerous other companies, of potential responsibility for
clean-up of a waste disposal site in Oklahoma. In 1990, the
EPA added the site to the National Priorities List. Following
the remedial investigation and feasibility study, in 1992 the
Regional Administrator of the EPA signed the Record of
Decision ("ROD") for the site. The ROD detailed EPA's selected
remedial action for the site and estimated the cost of the
remedy at $3.6 million. In 1992, the Company made settlement
proposals which would have entailed a collective payment by
the subsidiaries of $47,000. The site owner rejected this
offer and proposed a counteroffer of $245,000 plus a reopener
for costs over $12.5 million. The EPA rejected the Company's
offer, allocating 60% of the cleanup costs to the potentially
responsible parties and 40% to the site operator. The EPA
12
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
estimated the total cleanup costs at $10.1 million as of
February 1993. The site owner rejected all settlements with
the EPA, after which the EPA issued an order to the site owner
to conduct the remedial design/remedial action approved for
the site. In August 1997, the site owner issued an "invitation
to settle" to various parties, alleging the total cleanup
costs at the site may exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the clean-up of the site is
unknown due to continuing changes in the estimated total cost
of clean-up of the site and the percentage of the total waste
which was alleged to have been contributed to the site by the
Company. As of March 31, 1999, the Company has accrued an
amount based on a preliminary settlement proposal by the
alleged potential responsible parties; however, there is no
assurance such proposal will be accepted. Such amount is not
material to the Company's financial position or results of
operations. This estimate is subject to material change in the
near term as additional information is obtained. The
subsidiary's insurance carriers have been notified of this
matter; however, the amount of possible coverage, if any, is
not yet determinable.
B. On February 12, 1996, the Chemical Business 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 Chemical Business installed
additional pollution control equipment to address the
compliance issues. The Chemical Business was assessed $50,000
in civil penalties associated with the Administrative
Agreement. In the summer of 1996 and then on January 28, 1997,
the subsidiary executed amendments to the Administrative
Agreement ("Amended Agreements"). The Amended Agreements
imposed a $150,000 civil penalty, which penalty has been paid.
Since the 1997 amendment, the Chemical Business has been
assessed stipulated penalties of approximately $67,000 by the
Arkansas Department of Pollution Control and Ecology
("ADPC&E") for violations of certain provisions of the 1997
Amendment. The Chemical Business believes that the El Dorado
Plant has made progress in controlling certain off-site
emissions; however, such off-site emissions have occurred and
continue to occur from time to time, which could result in the
assessment of additional penalties against the Chemical
Business by the ADPC&E for violation of the 1997 Amendment.
13
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
ditch near the El Dorado Plant. In 1998, the ADPC&E issued a
Consent Administrative Order ("1998 CAO") to resolve the
event. The 1998 CAO includes a civil penalty in the amount of
$183,700 which includes $125,000 to be paid over five years in
the form of environmental improvements at the El Dorado Plant.
The remaining $58,700 was paid in 1998. The 1998 CAO also
requires the Chemical Business to undertake a facility-wide
wastewater evaluation and pollutant source control program and
wastewater facility-wide wastewater minimization program.
The program requires that the subsidiary complete rainwater
drain-off studies including engineering design plans for
additional water treatment components to be submitted to the
ADCP&E by August 2000. The construction of the additional
water treatment components shall be completed by August 2001
and the El Dorado plant has been mandated to be in compliance
with final effluent limits on or before February 2002. The
wastewater program is currently expected to require future
capital expenditures of approximately $5.0 million.
C. 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. This litigation has been consolidated,
for discovery purposes only, with several other actions in a
multi-district litigation proceeding in Utah. Discovery in
this litigation is in process. 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
14
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
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.
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
property damage to their residence and wells, annoyance and
inconvenience, and nuisance as a result of daily blasting and
round-the-clock mining activities. The plaintiffs are
residents living near the Heartland Coal Company ("Heartland")
strip mine in Lincoln County, West Virginia, and an unrelated
mining operation operated by Pen Coal Inc. During 1999, the
plaintiffs withdrew all personal injury claims previously
asserted in this litigation. 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 as a result of
the subsidiary's operations. Discovery in this litigation in
process. The Company intends to vigorously defend itself in
this matter. Based on the limited information available, the
subsidiary's counsel believes that the subsidiaries' possible
loss, if any, related to this litigation is not presently
expected to have a material adverse effect on the Company.
The Company, including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the ordinary
15
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
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 is not presently expected to have a
material effect on the financial position of the Company, but could
have a material impact to the net income (loss) of a particular
quarter or year, if resolved unfavorably.
Note 6: Long-Term Debt
In November, 1997, the Company's wholly owned subsidiary,
ClimaChem, Inc. ("ClimaChem"), completed the sale of $105 million
principal amount of 10 3/4% Senior Notes due 2007, (the "Notes").
Interest on the Notes is payable semiannually in arrears on June 1
and December 1 of each year, and the principal is payable in the
year 2007. The Notes are senior unsecured obligations of ClimaChem
and rank pari passu in right of payment to all existing senior
unsecured indebtedness of ClimaChem and its subsidiaries. The
Notes are effectively subordinated to all existing and future
senior secured indebtedness of ClimaChem.
ClimaChem owns substantially all of the companies comprising the
Company's Chemical and Climate Control Businesses. ClimaChem is a
holding company with no assets or operations other than its
investments in its subsidiaries, and each of its subsidiaries is
wholly owned, directly or indirectly, by ClimaChem. ClimaChem's
payment obligations under the Notes are fully, unconditionally and
joint and severally guaranteed by all of the existing subsidiaries
of ClimaChem, except for El Dorado Nitrogen Company ("EDNC"). The
assets, equity, and earnings of EDNC are currently inconsequential
to ClimaChem. Separate financial statements and other disclosures
concerning the guarantors are not presented herein because
management has determined they are not material to investors.
Summarized consolidated balance sheet information of ClimaChem and
its subsidiaries as of March 31, 1999 and December 31, 1998 and the
results of operations for the three month periods ended March 31,
1999 and 1998 are detailed below.
16
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
March 31, December 31,
1999 1998
__________________________
Balance sheet data:
Current assets (1) (2) $ 95,569 $ 90,291
Property, plant and equipment, net 84,338 82,389
Notes receivable from LSB and affiliates, net 13,443 13,443
Other assets, net 11,267 10,480
___________ __________
Total assets $ 205,617 $ 196,603
=========== ==========
Current liabilities $ 38,482 $ 35,794
Long-term debt 134,626 127,471
Other 9,680 9,580
Stockholders' equity 22,829 23,758
___________ __________
Total liabilities and stockholders' equity $ 205,617 $ 196,603
=========== ==========
Three Months Ended
March 31,
1999 1998
_________________________
Operations data:
Total revenues $ 59,951 $ 63,428
Costs and expenses:
Cost of sales 47,171 50,411
Selling, general and administrative 10,603 9,780
Interest 3,278 3,313
_________ __________
61,052 63,504
_________ __________
Loss before provision (benefit) for
income taxes (1,101) (76)
Provision (benefit) for income taxes 50 (30)
_________ __________
Net loss $ (1,151) $ (46)
========= ==========
17
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
<FN>
(1) Notes receivable from LSB and affiliates is eliminated when
consolidated with LSB.
(2) Current assets include income tax and other receivables due
from LSB which aggregate $4.3 million and $5.0 million at
March 31, 1999, and December 31, 1998.
</FN>
Note 7: Change in Accounting In June, 1998, the Financial
Accounting Standards Board issued Statement No. 133 ("SFAS #133"),
Accounting for Derivative Instruments and Hedging Activities, which
is required to be adopted in years beginning after June 15, 1999.
The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company has not yet
determined when this new Statement will be adopted. The Statement
will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must
be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what
all of the effects of SFAS #133 will be on the earnings and
financial position of the Company; however, the Company expects
that the interest rate forward agreement discussed in Note 5,
"Nitric Acid Project," will be accounted for as a cash flow hedge
upon adoption of SFAS #133, with the effective portion of the hedge
being classified in equity in accumulated other comprehensive
income or loss. The amount included in accumulated other
comprehensive income or loss will be amortized to income over the
initial term of the leveraged lease.
Note 8: Comprehensive Income The Company presents comprehensive
income in accordance with Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130"). The provisions of
SFAS 130 require the Company to classify items of other
comprehensive income in the financial statements and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of the balance sheet. Other comprehensive income for the
three month periods ended March 31, 1999 and 1998 is detailed
below.
18
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Three Months
Ended March 31,
_______________________
1999 1998
_______________________
(in thousands)
Net income (loss) $ (3,810) $ 9,278
Foreign currency
translation income 222 10
________ _________
Total comprehensive income
(loss) $ (3,588) $ 9,288
======== =========
Note 9: Subsequent Events. The Company finalized a term and
revolving line of credit of a total of $18.55 million with an
asset-based lender for its Automotive Products Business which was
funded on May 10, 1999. This facility replaces the Automotive
Products Business' previous loan agreement under the Company's
Revolver and provides for a $2.55 million term loan and a $16.0
million revolving credit facility (an increase of borrowing ability
calculated as of March 31, 1999 of $2.7 million compared to the
Automotive Products Business' availability under the replaced
facility) based on eligible amounts of accounts receivable and
inventory. This facility provides for interest at a bank's prime
rate plus one percent (1%) per annum, or at the Company's option,
the lender's LIBOR rate plus two and three-quarters percent (2.75%)
per annum. The effective interest rate at closing was 8.75%.
The term of this new facility is through May 7, 2001, and is renewable
thereafter for successive twelve-month terms. As a result, the terms
and conditions of this facility, outstanding borrowings under the
revolving credit facility of $9.3 million at closing and $.6 million
under the term loan will be classified as long-term debt due within
one year (borrowings by the Automotive Products Business under the
Company's revolving credit agreement were classified as long-term
debt due after one year in the accompanying condensed consolidated
balance sheets as of March 31, 1999 and December 31, 1998).
The Automotive Products Business was required to secure such loan
with substantially all of its assets. The loan agreement contains
various affirmative and negative covenants, including a requirement
to maintain tangible net worth of not less than $6.4 million. The
Company was required to provide such lender with a $1.0 million
standby letter of credit to further secure such loan. In
connection with this financing, the Company's Revolving Credit
Facility, that is not available to the Automotive Products
19
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Business, provides for the elimination of its financial covenants
so long as the remaining borrowing group maintains a minimum
aggregate availability under such facility of at least $15 million.
On May 7, 1999, the Company's wholly owned subsidiary, Total Energy
Systems Limited and its subsidiaries ("TES") entered into an
agreement (the "Asset Sale Agreement") to sell substantially all
the assets of TES ("Defined Assets"). Under the Asset Sale
Agreement, TES retains its liabilities and will liquidate such
liabilities from the proceeds of the sale and from the collection
of its accounts receivables which were retained by TES pursuant to
the Asset Sale Agreement.
The gain or loss on the closing of the Asset Sale Agreement is
subject to the fluctuation in the exchange rate between Australian
dollars and U. S. dollars prior to the close. At the date of this
report, the gain or loss associated with this transaction is
expected to be comprised primarily of disposition costs of
approximately $250,000, the recognition in earnings of the
cumulative foreign currency loss at such time ($1,337,000 at
March 31, 1999) and the amount, if any, related to the resolution
of certain environmental matters.
The Asset Sale Agreement is subject to certain conditions
precedent, including the purchaser receiving proper authorization
from specifically identified government and industry regulatory
agencies in Australia, and resolution of certain environmental
matters.
The Company expects to finalize the Asset Sale Agreement in the
second quarter of 1999, but there are no assurances that the
Company will be successful in doing so.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with the Company's March 31, 1999 Condensed
Consolidated Financial Statements.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
OVERVIEW
General
The Company is pursuing a strategy of focusing on its core
businesses and concentrating on product lines in niche markets
where the Company has established or believes it can establish a
position as a market leader. In addition, the Company is seeking
to improve its liquidity and profits through liquidation of
selected assets that are on its balance sheet and on which it is
not realizing an acceptable return and does not reasonably expect
to do so. In this connection, the Company has come to the
conclusion that its Automotive and Industrial Products Businesses
are non-core to the Company and the Company is exploring various
alternatives to maximize shareholder value from these assets. The
Company is also considering the sale of other assets that are non-
core to its Chemical and Climate Control Businesses.
The Company is continuing with its evaluation of the spin-off
of Automotive to its shareholders as a dividend. As part of its
evaluation, the Company has finalized a new credit facility for the
Automotive Products Business ("Automotive"). See "Liquidity &
Capital Resources" of this MD&A for a description of the credit
facility. In addition, the spin-off of Automotive will require,
among other things, commitment to a formal plan, receipt by the
Company of an opinion of counsel confirming tax-free treatment,
certain Securities and Exchange Commission filings, resolving
certain issues relating to a certain series of the Company's
outstanding preferred stock and LSB Board of Directors' approval.
Subject to completion and resolution of the above conditions,
management believes there is a strong likelihood that the spin-off
will be completed during 1999. However, there are no assurances
that the Company will spin-off Automotive.
Certain statements contained in this Overview are forward-
looking statements, and future results could differ materially from
such statements.
21
Information about the Company's operations in different
industry segments for the three months ended March 31, 1999 and
1998 is detailed below.
Three Months Ended March 31,
1999 1998
___________ ____________
(in thousands)
(Unaudited)
Sales:
Businesses continuing:
Chemical $ 30,745 $ 28,679
Climate Control 26,699 29,936
Automotive Products 10,105 10,490
Industrial Products 2,640 4,185
Subsidiary to be disposed of (1):
Chemical 2,868 4,746
_________ __________
$ 73,057 $ 78,036
========= ==========
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 4,957 $ 4,426
Climate Control 8,321 8,336
Automotive Products 2,096 2,139
Industrial Products 740 849
Subsidiary to be disposed of (1):
Chemical (158) 166
_________ __________
$ 15,956 $ 15,916
========= ==========
Operating profit (loss) (3):
Businesses continuing:
Chemical $ 1,446 $ 1,557
Climate Control 2,707 2,812
Automotive Products 9 (407)
Industrial Products (411) (304)
Subsidiary to be disposed of (1):
Chemical (845) (406)
_________ __________
2,906 3,252
General corporate expenses (2,174) (1,829)
Interest expense (4,492) (4,858)
Gain on sale of the Tower - 12,993
_________ __________
Income (loss) before provision
for income taxes $ (3,760) $ 9,558
======== ==========
<FN>
(1) On May 7, 1999, the Company's wholly owned Australian
subsidiary, TES, entered into an agreement to sell
substantially all of its assets, subject to certain conditions
precedent. See Note 9 of Notes to Condensed Consolidated
Financial Statements for further information. The operating
results for TES have been presented separately in the above
table.
22
(2) Gross profit by industry segment represents net sales less
cost of sales.
(3) Operating profit (loss) by industry segment represents
revenues less operating expenses before deducting general
corporate expenses, interest expense and income taxes and, in
1998, before gain on sale of the Tower.
</FN>
Chemical Business
Sales in the Chemical Business (excluding the subsidiary being
disposed of) have increased from $28.7 million in the three months
ended March 31, 1998 to $30.7 million in the three months ended
March 31, 1999 (an increase of 7.0%) and the gross profit
(excluding the Australian subsidiary being disposed of) has
increased from $4.4 million in 1998 to $5.0 in 1999, the gross
profit percentage (excluding the subsidiary being disposed of) has
increased from 15.4% in 1998 to 16.1% in 1999.
The cost of the Chemical Business' primary raw material,
anhydrous ammonia, averaged approximately $22 per ton less in the
first quarter of 1999, than in the first quarter of 1998. The
Chemical Business purchases approximately 220,000 tons of anhydrous
ammonia per year under three contracts expiring in April, 2000,
June, 2000, and December, 2000, respectively. The Company's
purchase price of anhydrous ammonia under these contracts can be
higher or lower than the current market spot price of anhydrous
ammonia. Pricing is subject to variations due to numerous factors
contained in these contracts. Based on the price calculations
contained in the contracts, the contract expiring in April, 2000 is
presently priced above the current market spot price. The Chemical
Business is required to purchase 120,000 tons of its requirements
under a contract expiring in April, 2000, at least 24,000 tons of
its requirements under a second contract expiring in June, 2000,
and 60,000 tons of its requirements under a third contract expiring
in December, 2000, with additional quantities of anhydrous ammonia
available under each contract. Anhydrous ammonia is not being
currently supplied under the contract expiring in December, 2000,
due to that supplier's declaration of an event of force majeure as
a result of a shut down of its plant due to mechanical problems.
The Company has been able to obtain anhydrous ammonia from other
sources on similar terms as provided in the contract expiring in
December, 2000.
The anhydrous ammonia industry added an additional one million
tons of capacity of anhydrous ammonia in the western hemisphere in
1998, and the Company believes there is approximately one million
tons of additional annual capacity of anhydrous ammonia being
constructed in the western hemisphere scheduled for completion in
1999. The Company believes this additional capacity may contribute
to a decline in the future market price of anhydrous ammonia. See
"Special Note Regarding Forward-Looking Statements".
23
In June, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries is acting as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant will be operated by the Company's subsidiary
and will supply nitric acid for Bayer's polyurethane business 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
dependent upon the price of anhydrous ammonia, based on the price
of anhydrous ammonia as of the date of this report, the plant
should generate approximately $35 million to $50 million in annual
gross revenues. Unlike the Chemical Business' regular sales
volume, the market risk on this additional volume is much less
since the contract provides for recovery of costs, as defined, plus
a profit. It is anticipated that the construction of the nitric
acid plant at Bayer's facility in Baytown, Texas, will cost
approximately $69 million and construction will be completed in the
second quarter of 1999. The Company's subsidiary is to lease the
nitric acid plant pursuant to a leverage lease from an unrelated
third party for an initial term of ten (10) years from the date
that the plant becomes fully operational, and the construction
financing of this plant is being provided by an unaffiliated
lender.
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, such have had an adverse effect on the Company's
consolidated results of operations. On May 7, 1999, the Company's
wholly owned Australian subsidiary entered into an agreement to
sell substantially all of its assets, subject to certain conditions
precedent. Revenues of the Australian subsidiary for the three
month periods ended March 31, 1999, and March 31, 1998, were $2.9
million and $4.8 million, respectively. For the year ended
December 31, 1998, the Australian subsidiary had a net loss of
US$2.9 million and revenues of US$14.2 million. See Note 9 of
Notes to Condensed Consolidated Financial Statements and Item 5
"Other Information" of Part II of this report for further
information concerning this transaction. There are no assurances
that this sale will be successfully completed.
Climate Control
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
24
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
Although sales in the Climate Control Business were 10.8%
lower in the three months ended March 31, 1999, than in the three
months ended March 31, 1998, the gross profit remained $8.3 million
in both periods. The gross profit percentage of the Climate
Control Business has improved from 27.8% in the first quarter of
1998 to 31.2% in the first quarter of 1999.
Automotive and Industrial Products Businesses
As indicated in the above table, during the three months ended
March 31, 1999 and 1998, respectively, the Automotive and
Industrial Products recorded combined sales of $12.7 million and
$14.7 million, respectively, and reported operating losses (as
defined above) of $.4 million and $.7 million, respectively. The
net investment in assets of these Businesses has decreased during
the last three years and the Company expects to realize further
reductions in future periods. See "Overview General" for a
discussion of the Company's intent to spin off the Automotive
Products Business, subject to numerous conditions precedent. The
Company continues to eliminate certain categories of machines from
the Industrial Products product line by not replacing machines when
sold.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 vs. Three months ended March 31,
1998.
Revenues
________
Total revenues, excluding the gain on the sale of the Tower,
for the three months ended March 31, 1999 and 1998 were $73.1
million and $79.0 million, respectively (a decrease of $5.9
million). Sales decreased $4.9 million and other income decreased
$1.0 million. The decrease in other income was primarily due to
nonrecurring operations of the Tower, sold in March 1998. The
Company recognized a pre-tax gain on the sale of approximately
$13.0 million in the first quarter of 1998.
Net Sales
_________
Consolidated net sales included in total revenues for the
three months ended March 31, 1999, were $73.1 million, compared to
$78.0 million for the first three months of 1998, a decrease of
$4.9 million. This decrease in sales resulted principally from:
(i) decreased sales in the Climate Control Business of $3.2 million
25
due to decreased sales volume in this Business' Heat Pump and Fan
Coil product lines, as well as production line changes and training
time for new employees which slowed production temporarily, (ii)
decreased sales in the Automotive Products Business of $.4 million
which is reasonably consistent with the prior year quarter, and
(iii) decreased sales in the Industrial Products Business of $1.5
million due to decreased sales of machine tools, offset by (iv)
increased sales in the Chemical Business of $4.2 million primarily
due to sales of nitric acid products pursuant to the Bayer
Agreement (see Note 5 of Notes to Condensed Consolidated Financial
Statements), offset by reduced sales of the Australian subsidiary
and reduced selling prices on the Company's nitrogen end product
due to reduced raw material cost and general supply and demand.
Gross Profit
____________
Gross profit was 21.8% for the first three months of 1999,
compared to 20.4% for the first three months of 1998. The increase
in the gross profit percentage was due primarily to ( ) improved
product mix and pricing, as well as reduced costs of component
parts, in the Company's heat pump product line, (ii) lower
production costs in the Chemical Business due to the effect of
lower prices of anhydrous ammonia in 1999, and (iii) improved
product mix of machine tools sold.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 20.4% in the three-month period ended
March 31, 1999, compared to 20.2% for the first three months of
1998. This increase is primarily the result of decreased sales
volume in the Climate Control Business, the Industrial Products
Business, and the Australian Subsidiary of the Chemical Business,
without an equivalent corresponding decrease in SG&A.
Interest Expense
________________
Interest expense for the Company was $4.4 million in the first
quarter of 1999, compared to $4.7 million for the first quarter of
1998. The decrease of $.3 million primarily resulted from
decreased borrowings.
Income (Loss) Before Taxes
__________________________
The Company had a loss before income taxes of $3.8 million in
the first quarter of 1999 compared to income before income taxes of
$9.6 million in the three months ended March 31, 1998. The
decreased profitability of $13.4 million was primarily due to the
gain on the sale of the Tower in 1998, and the reduction in other
income as previously discussed.
26
Provision for Income Taxes
__________________________
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
1 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the three months ended
March 31, 1999 and the three months ended March 31, 1998 are for
current state income taxes and federal alternative minimum taxes.
Liquidity and Capital Resources
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow, borrowings under its revolving
credit facilities, and the issuance of senior unsecured notes by
its wholly owned subsidiary, ClimaChem, Inc. in November 1997.
Net cash used by operations for the quarter ended March 31,
1999 was $6.9 million, after $3.1 million for noncash depreciation
and amortization, $.4 million in provisions for possible losses on
accounts receivable, and including the following changes in assets
and liabilities: (i) accounts receivable increases of $4.6 million;
(ii) inventory decreases of $.6 million; (iii) increases in
supplies and prepaid items of $1.7 million; and (iv) decreases in
accounts payable and accrued liabilities of $1.0 million. The
increase in accounts receivable is primarily due to increased sales
and increased days of sales outstanding in the Climate Control
Business and seasonal sales of agricultural products in the
Chemical Business, offset by decreased sales in the Industrial
Products Business. The decrease in inventory was due primarily to
a decrease at the Automotive Products Business due to liquidation
of excessive inventories, offset by increases in the Climate
Control Business in anticipation of higher sales volume in the heat
pump product lines and increases in the Chemical Business due to
reduced sales of the Australian subsidiary. Inventory in the
Automotive and Industrial Products Businesses decreased from $26.3
million at December 31, 1998 to $24.7 million at March 31, 1999.
The decrease in accounts payable and accrued liabilities resulted
primarily from a decrease in trade accounts payable balances offset
by an increase in accrued interest expense related to senior
unsecured notes which is payable semi-annually.
Cash Flow From Investing And Financing Activities
_________________________________________________
Cash used by investing activities for the quarter ended
March 31, 1999 included $2.3 million in capital expenditures offset
by decreases in other assets of $1.8 million. The capital
expenditures took place primarily in the Chemical and Climate
27
Control Businesses to enhance production and product delivery
capabilities. The decrease in other assets was primarily due to
the reduction of deposits made in connection with an interest rate
hedge contract related to the leveraged lease of the nitric acid
plant in Baytown, Texas.
Net cash provided by financing activities included (i)
payments on long-term debt of $2.5 million, (ii) net increases in
revolving debt of $10.8 million, (iii) decreases in drafts payable
of $.3 million, (iv) dividends of $.8 million, and (v) treasury
stock purchases of $.2 million.
During the first quarter of 1999, the Company declared and
paid the following aggregate dividends: (i) $3.00 per share on each
of the outstanding shares of its Series B 12% Cumulative
Convertible Preferred Stock; (ii) $.81 per share on each
outstanding share of its $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2; and (iii) $10.00 per share on each
outstanding share of its Convertible Noncumulative Preferred Stock.
Source of Funds
_______________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
As of March 31, 1999, the Company and certain of its
subsidiaries, including ClimaChem and its subsidiaries were parties
to a working capital line of credit evidenced by four separate loan
agreements ("Revolving Credit Agreements") with an unrelated lender
("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of certain
of the subsidiaries that are borrowers under the Revolving Credit
Agreements. The Revolving Credit Agreements, as amended, provide
for revolving credit facilities ("Revolver") for total direct
borrowings up to $65.0 million, including the issuance of letters
of credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Revolving Credit Agreements, as amended, provide for interest at
the lender's prime rate plus .5% per annum or, at the Company's
option, on the Lender's LIBOR rate plus 2.875% per annum. At
March 31, 1999, the effective interest rate was 8.3%. The term of
the Revolving Credit Agreements is through December 31, 2000, and
is renewable thereafter for successive thirteen month terms. At
March 31, 1999, the availability for additional borrowings, based
on eligible collateral, approximated $18.7 million. Borrowings
under the Revolver outstanding at March 31, 1999, were $34.9
million. The Revolving Credit Agreements, as amended, require the
Company to maintain certain financial ratios and contain other
financial covenants, including tangible net worth requirements and
28
capital expenditure limitations; however, with the refinancing of
the Automotive Products Business loan agreement as discussed below,
the Company's financial covenants are eliminated, so long as the
remaining borrowing group maintains a minimum aggregate
availability under the Revolving Credit Facility of $15.0 million.
If the Company is unable to maintain aggregate availability of
$15.0 million, the Company would be required to maintain certain
financial ratios, including tangible net worth requirements. In
April 1999, prior to finalization of the new Automotive financing,
the Company obtained waivers of noncompliance and amendments to
reset the financial covenants through maturity. The annual
interest on the outstanding debt under the Revolver at March 31,
1999 at the rates then in effect would approximate $2.9 million.
The Revolving Credit Agreements also require the payment of an
annual facility fee of 0.5% of the unused revolver and restricts
the flow of funds, except under certain conditions, to subsidiaries
of the Company that are not parties to the Revolving Credit
Agreements.
Under the Revolving Credit Agreements discussed above, the
Company and its subsidiaries, other than ClimaChem and its
subsidiaries, have the right to borrow on a revolving basis up to
$24 million, based on eligible collateral. At March 31, 1999, the
Company and its subsidiaries, except ClimaChem and its
subsidiaries, had borrowings under the Revolver approximately equal
to then eligible collateral ($16.1 million).
On May 7, 1999, the Company's Automotive Products Business
entered into a Loan and Security Agreement (the "Automotive Loan
Agreement") with an unrelated lender (the "Automotive Lender")
secured by substantially all assets of the Automotive Products
Business to refinance the Automotive Products Business' working
capital requirements that were previously financed under the
Revolver. In addition, the Company was required to provide the
Automotive Lender a $1.0 million standby letter of credit to
further secure the Automotive Loan Agreement. As of the funding
date, the Automotive Products Business' availability for additional
borrowing, based on eligible collateral, was $3.8 million. The
Automotive Loan Agreement provides a Revolving Loan Facility (the
"Automotive Revolver"), Letter of Credit Accommodations and a Term
Loan (the "Automotive Term Loan").
The Automotive Revolver provides for total direct borrowings
up to $16.0 million, including the issuance of letters of credit.
The Automotive Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Automotive Revolver provides for interest at the rate from time to
time publicly announced by First Union National Bank as its prime
rate plus one percent (1%) per annum or, at the Company's option,
on the Automotive Lender's LIBOR rate plus two and three-quarters
percent (2.75%) per annum. The Automotive Revolver also requires
the payment of a monthly servicing fee of $3,000 and a monthly
29
unused line fee equal to 0.5% of the unused credit facility. At
May 10, 1999, the funding date, the effective interest rate was
8.75%. The term of the Automotive Revolver is through May 7, 2001,
and is renewable thereafter for successive twelve-month terms.
The Automotive Loan Agreement restricts the flow of funds,
except under certain conditions, between the Automotive Products
Business and the Company and its subsidiaries.
The Automotive Term Loan is in the amount of $2,550,000. The
Automotive Term Loan is evidenced by a term promissory note (the
"Term Promissory Note") and is secured by all the same collateral
as the Automotive Revolver. The interest rate of the Automotive
Term Loan is the same as the Automotive Revolver discussed above.
The terms of the Term Promissory Note require sixty (60)
consecutive monthly principal installments (or earlier as provided
in the Term Promissory note) of which the first thirty-six (36)
installments shall each be in the amount of $48,611, the next
twenty-two (22) installments shall each be in the amount of
$33,333.33, and the last installment shall be in the amount of the
entire unpaid principal balance. Interest payments are also
required monthly as calculated on the outstanding principal
balance. On May 10, 1999, the Automotive Revolver funded
approximately $9.3 million, and the Automotive Term Loan funded
$2,550,000, the aggregate total of approximately $11.9 million was
simultaneously transferred to the lender in payment of the
Automotive Products Business' balance under the Revolver.
In addition to the credit facilities discussed above, as of
March 31, 1999, the Company's wholly owned subsidiary, DSN
Corporation ("DSN"), is a party to several loan agreements with a
financial company (the "Financing Company") for three projects. At
March 31, 1999, DSN had outstanding borrowings of $10.3 million
under these loans. The loans have repayment schedules of 84
consecutive monthly installments of principal and interest through
maturity in 2002. The interest rate on each of the loans is fixed
and range from 8.2% to 8.9%. Annual interest, for the three notes
as a whole, at March 31, 1999, at the agreed to interest rates
would approximate $.9 million. The loans are secured by the
various DSN property and equipment. The loan agreements require
the Company to maintain certain financial ratios, including
tangible net worth requirements. In April 1999, DSN obtained a
waiver of the covenants through June 2000.
As previously discussed, the Company is a holding company and,
accordingly, its ability to pay dividends on its outstanding Common
Stock and Preferred Stocks is dependent in large part on its
ability to obtain funds from its subsidiaries. The ability of the
Company's wholly owned subsidiary, ClimaChem (which owns all of the
stock of substantially all of the Company's subsidiaries comprising
the Chemical Business and the Climate Control Business) and its
subsidiaries to transfer funds to the Company is restricted by
30
certain covenants contained in the Indenture to which they are
parties. Under the terms of the Indenture, ClimaChem and its
subsidiaries cannot transfer funds to the Company, except for (i)
the amount of income taxes that they would be required to pay if
they were not consolidated with the Company, (ii) an amount not to
exceed fifty percent (50%) of ClimaChem's consolidated net income
for the year in question, and (iii) the amount of direct and
indirect costs and expenses incurred by the Company on behalf of
ClimaChem and ClimaChem's subsidiaries pursuant to a certain
services agreement and a certain management agreement to which the
companies are parties. During 1998 and the first quarter of 1999,
ClimaChem reported a consolidated net loss of approximately $2.6
million and $1.1 million, respectively. Accordingly, ClimaChem and
its subsidiaries were unable to transfer funds to the Company in
1998 and the first quarter of 1999, except for reimbursement of
costs and expenses incurred by the Company on their behalf or in
connection with certain agreements.
Due to ClimaChem's net loss for 1998 and the Company's (other
than ClimaChem and its subsidiaries) limited borrowing ability
under the Revolver, management is considering, but has not made its
final decision, recommending to the Board of Directors that the
Company discontinue payment of cash dividends on its Common Stock
for periods subsequent to January 1, 1999, until the Board of
Directors determines otherwise. In addition, as of the date of
this report, management has not determined whether the Company will
have adequate liquidity to declare and pay the quarterly dividends
on its outstanding Preferred Stock subsequent to the first quarter
dividends already declared and paid.
Future cash requirements (other than cash dividends) include
working capital requirements for anticipated sales increases in the
Company's core Businesses and funding for future capital
expenditures. Funding for the higher accounts receivable resulting
from anticipated sales increases will be provided by cash flow
generated by the Company and the revolving credit facilities
discussed elsewhere in this report. Inventory requirements for the
higher anticipated sales activity should be met by reductions in
the inventories of the Industrial Products Business and in the
inventories of the Automotive Products Business. In addition, the
Company is also considering the sale of certain assets which it
does not believe are critical to its Chemical and Climate Control
Businesses. In 1999, the Company has planned capital expenditures
of approximately $10 million, primarily in the Chemical and Climate
Control Businesses, a certain amount of which it anticipates will
be financed by equipment finance contracts on a term basis and in
a manner allowed under its various loan agreements. Such capital
expenditures include approximately $2.4 million ($443,000 in the
three months ended March 31, 1999), which the Chemical Business
anticipates spending related to environmental control facilities at
its El Dorado Facility, as previously discussed in this report.
31
The Company currently has no material commitments for capital
expenditures.
During the latter part of March 1999, the Company's management
began considering the realignment of certain of the Company's
overhead to better match its focus on its core businesses.
Consistent with this realignment, in April 1999, the Company's
Board of Directors approved the sale of certain assets to ClimaChem
in accordance with the terms of the Indenture to which ClimaChem
and its subsidiaries are parties to and the loan agreement that the
Company and subsidiaries of ClimaChem are borrowing under, which
assets are materially related to the lines of businesses of the
Chemical and Climate Control Businesses.
Management believes that, based upon the above described plans
and changes, the Company will have adequate cash flow from
operations, its revolving lines of credit and other sources to meet
its present anticipated working capital and debt service
requirements.
The spin-off being evaluated by the Company of the Automotive
Products Business would be accomplished in the form of a dividend
to the holders of the Company's Common Stock and the balance of the
amount the Automotive Products Business owes the Company would be
evidenced by a promissory note of approximately $6.0 million. In
order to declare and pay a dividend upon shares of capital stock,
the Delaware General Corporation Law ("Delaware Law") requires that
such either be declared and paid (1) out of "surplus", as defined
under the Delaware Law, or (2) in case there is no "surplus", out
of net profits of the Company for the fiscal year in which the
dividend is declared or the preceding fiscal year. The Company is
presently reviewing with its investment banker as to whether it has
sufficient "surplus" to accomplish the spin-off of the Automotive
Products Business to its holders of its Common Stock after the
capital contribution by the Company to the Automotive Products
Business as discussed above. The Company does not believe that it
will be able to pay such dividend out of net profits. If the
Company's investment banker is unable to opine that the Company has
sufficient "surplus" to accomplish the spin-off, under Delaware Law
the Company could reduce its "capital" (as defined under Delaware
Law) represented by issued shares of its capital stock without par
value and transfer the amount of such reduction to "surplus", as
long as the assets of the Company remaining after such reduction
shall be sufficient to pay the Company's debts for which payment
has not otherwise been provided. The terms of the Company's Series
B 12% Cumulative Convertible Preferred Stock ("Series B Preferred")
provides, in part, that "In the event of any voluntary or
involuntary liquidation, dissolution or winding up of LSB, or any
reduction in its capital resulting in any distribution of assets to
its stockholders, the holders of the Series B Preferred Stock shall
be entitled to receive in cash out of assets of LSB, whether from
capital or from earnings available for distribution to the
32
stockholders, before any amount shall be paid to the holder of
Common Stock of LSB the sum of One Hundred & No/100 Dollars ($100)
(the par value of the Series B Preferred Stock) per share, plus an
amount equal to all accumulated and unpaid cash dividends thereon
to the date fixed for payment of such distributive amount".
Counsel to the Company has advised the Company that a transfer from
"capital" to "surplus" to distribute the stock of the Automotive
Products Business to the holders of the Company's Common Stock
would trigger a payment of $100 per outstanding share of Series B
Preferred. There are currently outstanding 20,000 shares of Series
B Preferred, all of which are owned by Jack E. Golsen or members of
his immediate family and/or entities wholly owned by members of Mr.
Golsen's immediate family. Mr. Golsen has advised the Company that
if the Company is required to transfer from "capital" to "surplus"
an amount necessary to complete the spin-off and such triggers the
payment under the Series B Preferred, he would not require the
Company to pay such in cash but would be willing to receive such
amount in a form other than cash, with the form to be determined
based on negotiations with independent members of the Company's
Board of Directors. The Series B Preferred was issued by the
Company in 1987 in connection with a transaction approved by the
Board of Directors and the stockholders of the Company.
Accordingly, as of the date of this report, there are no assurances
that the Company will ultimately commit to a formal plan to spin-
off the Automotive Products Business.
During 1998 and pursuant to the Company's previously announced
repurchase plan, the Company purchased 909,300 shares of Common
Stock, for an aggregate purchase price of $3,567,026. From
January 1, 1999, through March 31, 1999, the Company has purchased
under its repurchase plan a total of 70,600 shares of Common Stock
for an aggregate amount of $205,234. As of the date of this
report, management and the Board of Directors are considering
whether to continue with its repurchase plan to purchase shares of
its Common Stock and if so, to what extent for the balance of 1999.
Foreign Subsidiary
__________________
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, in the amount of
AUS$10.5 million (approximately US$6.5 million). The TES Revolving
Facility allows for borrowings based on specific percentages of
qualified eligible assets. Based on the effective exchange rate at
March 31, 1999, approximately US$7.2 million (AUS$11.6 million
approximately) was borrowed at March 31, 1999. The borrowings
include approximately US$1.2 million of cash disbursements not
presented to the bank for payment prior to March 31, 1999. There
are no assurances that the bank would have cleared these checks if
they were presented for payment; however, TES received adequate
customer collection subsequent to March 31, 1999, to provide
33
availability under their line of credit as such checks were
presented for payment. Such debt is secured by substantially all
the assets of TES, plus an unlimited guarantee and indemnity from
LSB and certain subsidiaries of TES. The interest rate on this
debt is dependent upon the borrowing option elected by TES and had
a weighted average rate of 6.87% at March 31, 1999. TES is in
technical noncompliance with a certain financial covenant contained
in the loan agreement involving the TES Revolving Facility.
However, this covenant was not met at the time of closing of this
loan and the Bank of New Zealand, Australia has continued to extend
credit under the Facility. The outstanding borrowing under the TES
Revolving Facility at March 31, 1999 has been classified as due
within one year in the accompanying consolidated financial
statements. As previously noted in this report, the Company has
entered into an agreement to sell certain assets of TES,
effectively disposing of this portion of the Chemical Business. If
this transaction is finalized, the TES Revolving Facility will be
paid off with proceeds from the sale. This transaction is subject
to conditions precedent and is expected to be finalized in the
second quarter of 1999; however, there are no assurances that the
Company will finalize this transaction. Under the terms of the
Indenture to which ClimaChem is bound, the net cash proceeds from
the sale of TES, if completed, are required (1) within 270 days
from the date of the sale to be applied to the redemption of the
notes issued under the Indenture or to the repurchase of such
notes, or (2) within 240 days from the date of such sale, the
amount of the net cash proceeds be invested in a related business
of ClimaChem or the Australian subsidiary or used to reduce
indebtedness of ClimaChem. As of the date of this report, the
Company expects that net proceeds from the possible sale of TES
will be reinvested in related businesses of ClimaChem or be used to
retire the indebtedness of ClimaChem.
Joint Ventures and Options to Purchase
_______________________________________
Prior to 1997, the Company, through a subsidiary, loaned $2.8
million to a French manufacturer of HVAC equipment whose product
line is compatible with that of the Company's Climate Control
Business in the USA. Under the loan agreement, the Company has the
option to exchange its rights under the loan for 100% of the
borrower's outstanding common stock. The Company obtained a
security interest in the stock of the French manufacturer to secure
its loan. During 1997 the Company advanced an additional $1
million to the French manufacturer bringing the total of the loan
at December 31, 1997 to $3.8 million. Parties to the option have
agreed to extend the exercise date of the option to June 15, 2005.
As of the date of this report, the decision has not been made to
exercise such option and the $3.8 million loan, less a $1.5 million
valuation reserve, is carried on the books as a note receivable in
other assets.
34
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 the date of this report the Company has made
option payments aggregating $1.3 million ($1.0 million of which is
refundable) and has loaned the Optioned Company approximately $1.4
million. The Company has recorded reserves of $1.5 million against
the loans and option payments. The loans and option payments are
secured by the stock and other collateral of the Optioned Company.
The Company has determined to not exercise the Option and has
allowed the term of the Option to lapse.
Debt Guarantee
______________
At December 31, 1998, the Company and one of its subsidiaries
had outstanding guarantees of approximately $2.6 million of
indebtedness of a startup aviation company in exchange for an
ownership interest in the aviation company of approximately 45%.
During the first quarter of 1999, the Company was called upon
to perform on both guarantees. The Company paid approximately
$600,000 to the lender in satisfaction of the guarantee and assumed
the obligation for the $2.0 million note, which is due in equal
monthly principal payments, plus interest, through August, 2004.
In connection with the demand on the Company to perform under its
guarantee, the Company and the other guarantors formed a new
company ("KAC") which acquired the assets of the aviation company
through foreclosure.
35
The Company and the other shareholders of KAC are attempting
to sell the assets acquired in foreclosure. Proceeds received by
the Company, if any, from the sale of KAC assets will be recognized
in the results of operations when and if realized.
Availability of Company's Loss Carry-overs
__________________________________________
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carry-overs from prior periods to reduce the federal income tax
payments which it would otherwise be required to make with respect
to income generated in such future years. Such benefit, if any is
dependent on the Company's ability to generate taxable income in
future periods, for which there is no assurance. Such benefit if
any, will be limited by the Company's reduced NOL for alternative
minimum tax purposes which is approximately $31.4 million at
March 31, 1999. As of December 31, 1998, the Company had available
regular tax NOL carry-overs of approximately $63.8 million based on
its federal income tax returns as filed with the Internal Revenue
Service for taxable years through 1998. These NOL carry-overs will
expire beginning in the year 1999. Due to its recent history of
reporting net losses, the Company has established a valuation
allowance on a portion of its NOLs and thus has not recognized the
full benefit of its NOLs in the accompanying Condensed Consolidated
Financial Statements.
The amount of these carry-overs has not been audited or
approved by the Internal Revenue Service and, accordingly, no
assurance can be given that such carry-overs will not be reduced as
a result of audits in the future. In addition, the ability of the
Company to utilize these carry-overs in the future will be subject
to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations. These include, in particular,
limitations imposed by Code Section 382 and the consolidated return
regulations.
Year 2000 Issues
________________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, the Company undertook a project to enhance
certain of its Information Technology ("IT") systems and install
36
certain other technologically advanced communication systems to
provide extended functionality for operational purposes. A major
part of the Company's program was to implement a standardized IT
system purchased from a national software distributor at all of the
Company and subsidiary operations, and to install a Local Area
Network ("LAN"). The IT system and the LAN necessitated the
purchase of additional hardware, as well as software. The process
implemented by the Company to advance its systems to be more
"state-of-the-art" had an added benefit in that the software and
hardware changes necessary to achieve the Company's goals are Year
2000 compliant.
Starting in 1996 through March 31, 1999, the Company has
capitalized approximately $1.0 million in costs to accomplish its
enhancement program. The capitalized costs include $425,000 in
external programming costs, with the remainder representing
hardware and software purchases. The Company anticipates that the
remaining cost to complete this IT systems enhancement project will
be less than $100,000, and such costs will be capitalized.
The Company's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing,
and implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing scheduling systems,
the Company is 100% complete on the assessment and remediation
phases. As of the date of this report, the Company has completed
its testing and has implemented its remediated systems for all of
its businesses except a portion of the Industrial Products
Business. The uncompleted testing and remediation procedures
represent approximately 2% and 5%, respectively, of the total Year
2000 Program testing and remediation phase. Completion of the
remaining testing and implementation phase is expected by
August 31, 1999. The assessments also indicated that limited
software and hardware (embedded chips) used in production and
manufacturing systems ("operating equipment") also are at limited
risk. The Company has completed its assessment and identified
remedial action which will be completed in the second quarter 1999.
In addition, the Company has completed its assessment of its
product line and determined that the products it has sold and will
continue to sell do not require remediation to be Year 2000
compliant. Accordingly, based on the Company's current assessment,
the Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
37
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company; however, management does not believe that, under the most
reasonably likely worst case scenario, such potential impact would
be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company. See "Special Note Regarding Forward-
Looking Statements".
Contingencies
_____________
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome. 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. See Note 5 of Notes to
Condensed Consolidated Financial Statements.
38
Quantitative and Qualitative Disclosures about Market Risk
General
The Company's results of operations and operating cash flows
are impacted by changes in market interest rates and raw material
prices for products used in its manufacturing processes. The
Company also has a wholly owned subsidiary in Australia, for which
the Company has foreign currency translation exposure. The
derivative contracts used by the Company are entered into to hedge
these risks and exposures and are not for trading purposes. All
information is presented in U. S. dollars. See Note 9 of Notes to
Consolidated Financial Statements for a discussion of the
Australian subsidiary in 1999.
Interest Rate Risk
The Company's interest rate risk exposure results from its
debt portfolio which is impacted by short-term rates, primarily
prime rate-based borrowings from commercial banks, and long-term
rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, for an expanded analysis of
expected maturities of long-term debt and its weighted average
interest rates and discussion related to raw material price risk.
As of March 31, 1999, the Company's variable rate and fixed
rate debt which aggregated $180.3 million exceeded the debt's fair
market value by approximately $3.2 million. The fair value of the
Company's Senior Notes was determined based on a market quotation
for such securities.
The Company is also a party to a series of agreements under
which, upon completion of construction, it will lease a nitric acid
plant. The minimum lease payments associated therewith until
execution will be directly impacted by the change in interest
rates. To mitigate a portion of the Company's exposure to adverse
market changes related to this leveraged lease, in 1997 the Company
entered into an interest rate forward agreement whereby the Company
is the fixed rate payor on notional amounts aggregating $25
million, net to its 50% interest, with a weighted average interest
rate of 7.12%. The Company accounts for this forward under the
deferral method, so long as high correlation is maintained, whereby
the net gain or loss upon settlement will adjust the item being
hedged, the minimum lease rentals, in periods commencing with the
lease execution. As of March 31, 1999, the fair value of this
interest rate forward agreement represented a liability of
39
approximately $2.6 million ($3.3 million at December 31, 1998) net
to the Company's 50% interest.
Foreign Currency Risk
_____________________
The Company has a wholly owned subsidiary located in
Australia, for which the functional currency is the local currency,
the Australian dollar. Since the Australian subsidiary accounts
are converted into U.S. dollars upon consolidation using the end of
the period exchange rate, declines in value of the Australian
dollar to the U.S. dollar result in translation loss to the
Company. Additionally, any cumulative foreign currency translation
loss will impact operating results in the period the Company sells
or disposes of substantially all of its investment in the
subsidiary. As of March 31, 1999, the Company's net investment in
this Australian subsidiary was $5.7 million ($5.8 million at
December 31,1998) with the cumulative translation loss not
recognized in results of operations aggregating approximately $1.3
million ($1.6 million at December 31, 1998).
40
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) ability to improve operations and become
profitable on an annualized basis, (ii) establishing a position as
a market leader, (iii) construction costs of the EDNC Baytown Plant
will approximate $69 million and will be completed by the second
quarter of 1999, (iv) delay in completing the Baytown Plant as
scheduled will not result in material losses, (v) the sale of
substantially all of the assets of the Company's Australian
subsidiary, (vi) payment of dividends on Common Stock and Preferred
Stock, (vii) availability of net operating loss carryovers, (viii)
amount to be spent in 1999 relating to compliance with federal,
state and local Environmental laws at the El Dorado Facility, (ix)
Year 2000 issues, (x) improving liquidity and profits through
liquidation of assets or realignment of assets, (xi) the Company's
ability to develop or adopt new and existing technologies in the
conduct of its operations, (xii) anticipated financial performance,
(xiii) ability to comply with the Company's general working capital
and debt service requirements, (xiv) spin-off the Automotive
Products Business, (xv) ability to be able to continue to borrow
under the Company's revolving line of credit, and (xvi) ability of
the EDNC Baytown Plant to generate $35 to $50 million in gross
revenues once operational. While the Company believes the
expectations reflected in such Forward-Looking Statements are
reasonable, it can give no assurance such expectations will prove
to have been correct. There are a variety of factors which could
cause future outcomes to differ materially from those described in
this report, including, but not limited to, (i) decline in general
economic conditions, both domestic and foreign, (ii) material
reduction in revenues, (iii) material increase in interest rates;
(iv) inability to collect in a timely manner a material amount of
receivables, (v) increased competitive pressures, (vi) inability to
meet the "Year 2000" compliance of the computer system by the
Company, its key suppliers, customers, creditors, and financial
service organization, (vii) changes in federal, state and local
laws and regulations, especially environmental regulations, or in
interpretation of such, pending (viii) additional releases
(particularly air emissions into the environment), (ix) potential
increases in equipment, maintenance, operating or labor costs not
41
presently anticipated by the Company, (x) inability to retain
management or to develop new management, (xi) the requirement to
use internally generated funds for purposes not presently
anticipated, (xii) inability to become profitable, or if unable to
become profitable, the inability to secure additional liquidity in
the form of additional equity or debt, (xiii) the effect of
additional production capacity of anhydrous ammonia in the western
hemisphere, (xiv) the cost for the purchase of anhydrous ammonia
increasing or the Company's inability to purchase anhydrous ammonia
on favorable terms when a current supply contract terminates, (xv)
changes in competition, (xvi) the loss of any significant customer,
(xvii) changes in operating strategy or development plans, (xviii)
inability to fund the working capital and expansion of the
Company's businesses, (xix) adverse results in any of the Company's
pending litigation, (xx) inability to obtain necessary raw
materials, (xxi) inability to satisfy the NYSE continued listing
requirements, (xxii) inability to complete the spinoff due to
inability to obtain (a) required tax ruling or opinion,
(b) necessary approvals by the Securities and Exchange Commission
("SEC") as to certain documents required to be filed with the SEC
relating to the spin-off, (c) certain opinions from financial
advisors, (d) unqualified audit report from the Company's auditors
as to the Automotive Products Business, and (e) satisfactory
resolution of a possible distribution to an outstanding series of
preferred stock in connection with the spinoff; (xxiii) inability
to recover the Company's investment in the aviation company, (xxiv)
inability to finalize the sale of TES due to the Australian
government's failure to approve the sale or the potential buyer's
inability or refusal to complete the sale; (xxv) Bayer's inability
or refusal to purchase all of the Company's production at the new
Baytown nitric acid plant; (xvii) material increases in equipment,
maintenance, operating or labor costs not presently anticipated by
the Company; and (xxiii) other factors described "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" contained in this report. Given these uncertainties,
all parties are cautioned not to place undue reliance on such
Forward-Looking Statements. The Company disclaims any obligation
to update any such factors or to publicly announce the result of
any revisions to any of the Forward-Looking Statements contained
herein to reflect future events or developments.
42
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of LSB Industries, Inc. and subsidiaries as of March 31,
1999, and the related condensed consolidated statements of
operations and cash flows for the three month periods ended
March 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of LSB
Industries, Inc. as of December 31, 1998, 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 February 19, 1999, except for paragraphs (A) and
(C) of Note 5 and Note 14, as to which the date is April 14, 1999,
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, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 14, 1998
43
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, 1998, 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
______ ___________________________________________________
Not applicable.
Item 5. Other Information
______ __________________
(A) On May 7, 1999, the Company's wholly owned Australian
subsidiary entered into an agreement (the "Asset Sale
Agreement") to sell substantially all of its assets. The
Asset Sale Agreement is subject to certain conditions
precedent; however, the Company expects to finalize the
Asset Sale Agreement in the second quarter of 1999.
There are no assurances that the Company will finalize
the Asset Sale Agreement. See Note 9 of Notes to
Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations of this report for
further information concerning the Asset Sale Agreement.
(B) On May 7, 1999, the Company's Automotive Products
Business entered into a Loan and Security Agreement (the
"Automotive Loan Agreement") with an unrelated lender.
The Automotive Loan Agreement consists of a Revolving
Loan Facility (the "Automotive Revolver"), Letter of
Credit Accommodations and a Term Loan (the "Automotive
Term Loan"). The Automotive Revolver provides for total
direct borrowings up to $16.0 million consisting of
advances based on varying percentages of eligible
inventory and trade receivables. The Automotive Term
Loan is in the amount of $2,550,000 and requires
44
repayment in monthly installments of principal and
interest. The Automotive Products Business has secured
the Automotive Loan Agreement with substantially all of
its assets, and the Company has provided the lender with
a $1.0 million standby letter of credit to secure the
Automotive Loan Agreement. See Note 9 of Notes to
Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations of this report for
further discussion concerning the Automotive Loan
Agreement.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits. The Company has included the following
exhibits in this report:
4.1 Loan and Security Agreement, dated May 7, 1999, by
and between Congress Financial Corporation and L&S
Automotive Products Co., International Bearings,
Inc., L&S Bearing Co., LSB Extrusion Co., Rotex
Corporation, and Tribonetics Corporation.
4.2 Termination and Mutual General Release Agreement,
dated as of May 10, 1999, by and among L&S Bearing
Co., L&S Automotive Products Co., LSB Extrusion
Co., Rotex Corporation, Tribonetics Corporation,
International Bearings, Inc., and Bank of America
National Trust and Savings Association (successor-
in-interest to BankAmerica Business Credit, Inc.).
4.3 Letter Agreement, dated April 30, 1999, by and
among Bank of America National Trust and Savings
Association (successor-in-trust to BankAmerica
Business Credit, Inc.), L&S Bearing Co., LSB
Extrusion Co., Tribonetics Corporation, Rotex
Corporation, L&S Automotive Products Co.,
International Bearings, Inc., and Congress
Financial Corporation.
10.1 Asset Purchase Agreement, dated May 7, 1999,
between Quantum Explosives Pty. Limited and Total
Energy Systems Limited, Total Energy Systems
(International) Pty. Ltd. and Total Energy Systems
(NZ) Limited. 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.
45
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule
(B) Reports of Form 8-K. The Company did not file any
reports on Form 8-K during the quarter ended March 31,
1999.
46
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 21st day of
May 1999.
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)
47
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
_______ ____________ ___________
4.1 Loan and Security Agreement, dated May 7, 1993, 49
by and between Congress Financial Corporation
and L&S Automotive Products Co., International
Bearings, Inc., L&S Bearing Co., LSB Extrusion
Co., Rotex Corporation, and Tribonetics
Corporation.
4.2 Termination and Mutual General Release Agree- 111
ment, dated as of May 10, 1993, by and among
L&S Bearing Co., L&S Automotive Products Co.,
LSB Extrusion Co., Rotex Corporation, Tribonetics
Corporation, International Bearings, Inc., and
Bank of America National Trust and Savings
Association (successor-in-interest to BankAmerica
Business Credit, Inc.).
4.3 Letter Agreement, dated April 30, 1999, by and 116
among Bank of America National Trust and Savings
Association (successor-in-trust to BankAmerica
Business Credit, Inc.), L&S Bearing Co., LSB
Extrusion Co., Tribonetics Corporation, Rotex
Corporation, L&S Automotive Products Co.,
International Bearings, Inc., and Congress
Financial Corporation.
10.1 Asset Purchase Agreement, dated May 7, 1999, 120
between Quantum Explosives Pty. Limited and
Total Energy Systems Limited, Total Energy
Systems (Internation) Pty. Ltd. and Total
Energy Systems (NZ) Limited. CERTAIN INFOR-
MATION 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.
15.1 Letter Re: Unaudited Interim Financial Information. 193
27.1 Financial Data Schedule. 194