2
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 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 November 15, 1999 was 11,818,719 shares
excluding 3,289,957 shares held as treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB
Industries, Inc. and all of its wholly owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB
Industries, Inc. at September 30, 1999, the condensed consolidated
statements of operations for the three month and nine month
periods ended September 30, 1999 and 1998 and the condensed
consolidated statement of cash flows for the nine month periods
ended September 30, 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, except for the loss
provision recognized in the second and third quarter on firm raw
material purchase commitments and a lower of cost or market
adjustment as discussed in Note 10 to the Condensed Consolidated
Financial Statements, which are, in the opinion of management,
necessary for a fair presentation of the interim periods. The
results of operations for the nine months ended September 30,
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 (Note 11)
(Information at September 30, 1999 is unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,772 $ 1,555
Trade accounts receivable, net 52,814 52,730
Inventories:
Finished goods 26,264 34,236
Work in process 7,088 7,178
Raw materials 14,790 22,431
______ ______
Total inventory 48,142 63,845
Supplies and prepaid items 9,939 7,809
______ ______
Total current assets 112,667 125,939
Property, plant and equipment,
net 94,691 99,228
Other assets, net 22,097 23,480
______ ______
$ 229,455 $ 248,647
========= =========
</TABLE>
(continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 11)
(Information at September 30, 1999 is unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
<S> <C>
<C>
Current liabilities:
Drafts payable $ 128 $ 758
Accounts payable 20,697 24,043
Accrued liabilities 22,183 19,006
Accrued losses on firm purchase
commitments (Note 10) 2,605 -
Current portion of long-term debt (Note 6) 19,060 13,954
_______ _______
Total current liabilities 64,673 57,761
Long-term debt (Note 6) 148,099 155,688
Accrued losses on firm purchase
commitments (Note 10) 4,879 -
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 (Note 2) 46,000 46,000
Common stock, $.10 per value 75,000,000 shares
authorized, 15,108,676 shares issued 1,511 1,511
Capital in excess of par value 39,277 38,329
Accumulated other comprehensive loss (1,559)
Accumulated deficit (60,837) (35,166)
________ ________
27,951 51,115
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, (3,289,957 shares in
1999, 3,202,690 in 1998) 16,086 15,856
______ _______
Total stockholders' equity 11,665 35,059
______ ______
$ 229,455 $ 248,647
========= =========
</TABLE>
(see accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
Businesses continuing at September 30,:
<S> <C> <C>
Revenues:
Net sales $218,533 $232,839
Other income 1,262 1,503
________ ________
219,795 234,342
Costs and expenses:
Cost of sales (Note 10) 174,004 181,121
Selling, general and administrative 44,051 43,941
Interest 13,259 12,722
Provision for loss on firm purchase commitments
(Note 10) 8,439 -
_______ _______
239,753 237,784
_______ _______
Loss before businesses disposed of and
provision for income taxes (19,958) (3,442)
Businesses disposed of (Note 9):
Revenues 7,461 11,402
Operating costs, expenses and interest 9,419 13,175
______ ______
(1,958) (1,773)
Gain (loss) on disposal of businesses (1,971) 12,993
______ ______
(3,929) 11,220
_______ ______
Income (loss) before provision for income taxes (23,887) 7,778
Provision for income taxes 102 275
________ _______
Net income (loss) $(23,989) $7,503
========= =======
Net income (loss) applicable to common stock
(Note 2) $(26,415) $5,077
========= =======
Weighted average common shares (Note 2):
Basic 11,843,887 12,502,320
Diluted 11,843,887 13,351,504
Income (loss) per common share (Note 2):
Basic $ (2.23) $ .41
========== ===========
Diluted $ (2.23) $ .39
========== ===========
</TABLE>
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
Businesses continuing at September 30:
<S> <C> <C>
Revenues:
Net Sales $ 68,955 $ 75,578
Other income 1,408 149
_______ _______
70,363 75,727
Costs and expenses:
Cost of sales (Note 10) 56,621 59,997
Selling, general and administrative 15,190 14,243
Interest 4,425 4,119
Provision for loss on firm purchase
commitments (Note 10) 939 -
_______ _______
77,175 78,359
_______ _______
Loss before business disposed of and
provision for income taxes (6,812) (2,632)
Business disposed of (Note 9):
Revenues 1,088 3,192
Operating costs, expenses and interest 1,315 3,741
_______ _______
(227) (549)
_______ _______
Loss before provision for income taxes (7,039) (3,181)
Provision for income taxes 52 15
_______ ________
Net loss $ (7,091) $(3,196)
========== ========
Net loss applicable to common stock (Note 2) $ (7,894) $(3,999)
========== ========
Weighted average common shares
(Note 2):
Basic and Diluted 11,818,719 12,184,598
Loss per common share (Note 2):
Basic and Diluted $ (.67) $ (.33)
=========== ==========
</TABLE>
(see accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months ended September 30, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
<S>
Cash flows from operations: <C> <C>
Net income (loss) $ (23,989) $ 7,503
Adjustments to reconcile net income
(loss) to cash flow provided(used)
by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 8,728 8,948
Other 954 1,226
Provision for possible losses on receivables
and other assets 994 1,588
Inventory write down and provision for loss
on firm purchase commitments, net
of amount realized 9,356 -
Gain on sale of assets - (591)
Loss (gain) on businesses disposed of 1,971 (12,993)
Cash provided (used) by changes in assets and
liabilities, exclusive of
businesses disposed of:
Trade accounts receivable (105) (7,863)
Inventories 5,720 1,105
Supplies and prepaid items (2,122) (2,115)
Accounts payable (3,547) (5,255)
Accrued liabilities 5,044 6,428
_______ _______
Net cash provided (used) by operations 3,004 (2,019)
Cash flows from investing activities:
Capital expenditures (5,781) (6,157)
Principal payments on loans receivable 480 308
Proceeds from sales of equipment and real
estate properties 1,248 1,742
Proceeds from sale of business disposed of 4,961 29,266
Increase in other assets (349) (3,096)
______ _______
Net cash provided by investing activities 559 22,063
Cash flows from financing activities:
Payments on long-term and other debt (7,274) (19,878)
Borrowings on term notes 3,539 150
Net change in revolving debt facilities 2,931 1,373
Net change in drafts payable (630) 358
Dividends paid (Note 3):
Preferred Stocks (1,682) (2,426)
Common Stocks - (124)
Purchases of treasury stock (Note 3) (230) (3,181)
Net proceeds from issuance of common stock - 72
_______ _______
Net cash used by financing activities (3,346) (23,656)
_______ ________
Net increase (decrease) in cash and cash
equivalents from all activities 217 (3,612)
Cash and cash equivalents at beginning of period 1,555 4,934
_______ _______
Cash and cash equivalents at end of period 1,772 1,322
======= =======
</TABLE>
(see accompanying notes)
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 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 nine months
ended September 30, 1999 of $102,000 is for current state income
taxes and federal alternative minimum tax.
Note 2: Earnings (Loss) Per Share Net income or loss applicable
to common stock is computed by adjusting net income or loss by
the amount of preferred stock dividend requirements. 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 dividend
requirements. 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 nine months of 1999 and the three month periods ended
in 1999 and 1998 and have thus, been excluded from the computation
of diluted loss per share.
For the three months ended September 30, 1999,
the Company's
Board of Directors did not declare dividends be
paid on the
Company's Series 2 $3.25 Convertible Class C
preferred stock.
Dividends in arrears at September 30, 1999, amounted
to $743,438
($.81 per share).
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 2: Earnings Per Share (continued)
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Nine Months Three Months
(Dollars inthousands, except per share amounts)
1999 1998 1999 1998
Numerator: <C> <C> <C> <C>
<S>
Numerator for 1998 diluted earnings per
share - net income (loss) $(23,989) $ 7,503 $ (7,091) $ (3,196)
Preferred stock dividend requirements (2,426) (2,426) (803) (803)
_________ ________ _________ _________
Numerator for 1999 and 1998 basic and 1999
diluted earnings per share - income
(loss) available to common stockholders $(26,415) $ 5,077 $ (7,894) $ (3,999)
Preferred stock dividends on preferred stock
assumed to be converted - 195 - -
Numerator for 1998 diluted earnings per share $(26,415) $ 5,272 $ (7,894) $ (3,999)
========== ======== ========= =========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 11,843,887 12,502,320 11,818,719 12,184,598
Effect of dilutive securities:
Employee stock options - 119,118 - -
Convertible preferred stock - 726,066 - -
Convertible note payable - 4,000 - -
_________ ________ __________ ___________
Dilutive potential common shares - 849,184 - -
_________ ________ __________ ___________
Denominator for diluted earnings
per share - adjusted weighted -average
shares and assumed 11,843,887 13,351,504 11,818,719 12,184,598
conversions
Basic earnings (loss) per share $ (2.23) $ .41 $ (.67) $ (.33)
========= ========== ========== =========
Diluted earnings (loss) per share $ (2.23) $ .39 $ (.67) $ (.33)
========= ========== ========== =========
</TABLE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 3: Stockholders' Equity
The table below provides detail of activity in the stockholders'
equity accounts for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Non- Capital Accumulated Accumulated Treasury Treasury Total
Common redeem- in comprehensive deficit stock stock
stock able excess loss Common Preferred
Shares Par value
<C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
15,109 $1,511 48,000 38,329 (1,559) (35,166) (15,856) (200) 35,059
Balance at December 31, 1998
<S>
Net Loss
Foreign Currency
translation (23,989) (23,989)
adjustment 1,559 1,559
Total comprehensive
income (Note 8) (22,430)
Expiration of employee
stock option and related
accrued compensation 948 948
Dividends declared:
Series B 12% preferred
stock ($9.00 per share)(180) (180)
Series 2 preferred stock(1,487) (1,487)
($1.624 per share)
Redeemable preferred stock
($10.00 per share) (15) (15)
Purchase of treasury stock (230) (230)
(1)
Balance at September 30,
1999 15,109 $ 1,511 $48,000 $39,277 $ $(60,837)$(16,086) $(200) $11,665
</TABLE>
(1) Includes 3,290 shares of the Company's Common Stock held in treasury.
Excluding the 3,290 shares held in treasury, the outstanding shares of the
Company's Common Stock at September 30, 1999 were 11,819
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 4: Segment Information
<TABLE>
<CAPTION>
Nine Months Three
Months
Ended September Ended
September
30, 30,
(in thousands)
1999 1998 1999 1998
Net sales:
<S> <C> <C> <C> <C>
Businesses continuing:
Chemical $ 98,429 $100,815 $ 28,739 $31,500
Climate Control 86,559 89,894 30,53430,637
Automotive Products 26,955 31,274 7,96210,076
Industrial Products 6,590 10,856 1,7203,365
Business disposed of - Chemical 7,462 11,403 1,088
3,195
$ 225,995 $224,242 $ 70,043 $
78,773
Operating profit (loss):
Businesses continuing:
Chemical:
Recurring operations $ 1,724 $ 7,135 $ (802) $
530
Loss on purchase commitments (8,439) (939)
(6,715) 7,135 (1,741)
530
Climate Control 8,144 10,395 2,429
4,083
Automotive Products (1,284) (337) (985)
(408)
Industrial Products (1,318) (780) (405)
(262)
Business to be disposed of -
Chemical (1,632) (1,433) (143)
(439)
(2,805) 14,980 (845)
3,504
General corporate expenses and
other (5,526) (7,133) (1,685)
(2,462)
Interest expense:
Business disposed of (326) (340) (84)
(104)
Recurring operations (13,259) (12,722) (4,425)
(4,119)
(13,585) (13,062) (4,509)
(4,223)
Gain (loss)on business disposed
of (1,971) 12,993
Income (loss) before provision for
income taxes $(23,887) $ 7,778 $(7,039) $
(3,181)
</TABLE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 5: Commitments and Contingencies
Nitric Acid Project
In June 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement").
Under the Bayer Agreement, EDNC agreed to act as an agent to
construct, and upon completion of construction, operate a nitric
acid plant (the "EDNC Baytown Plant") at Bayer's Baytown, Texas
chemical facility. The construction of the EDNC Baytown Plant
was completed in May 1999, and EDNC began producing and
delivering nitric acid to Bayer at that date. Sales by EDNC to
Bayer out of the EDNC Baytown Plant production during the quarter
ended September 30, 1999, were approximately $7.2 million. EDC
guaranteed the performance of EDNC's obligations under the Bayer
Agreement. Under the terms of the Bayer Agreement, EDNC is
leasing the EDNC Baytown plant pursuant to a leveraged lease from
an unrelated third party with an initial lease term of ten years.
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. Financing of the EDNC
Baytown Plant was 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 September 30, 1999, the Company has
deferred cost of approximately $2.8 million associated with such
agreement, which will be amortized over the initial term of the
lease. See Note 7, "Changes in Accounting," for the expected
accounting upon adoption of SFAS #133.
Debt and Performance Guarantee
The Company previously guaranteed up to 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 the obligation for a $2.0 million term note, due
in equal monthly principal payments of $11,111, plus interest,
through August 2004 and funded approximately $500,000
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
resulting from 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.
In the third quarter of 1999, LSB agreed to guarantee a
performance bond of $2.1 million of a start-up operation
providing services to the Company's Climate Control Division.
Purchase Commitments
As of September 30, 1999, the Chemical Business has commitments
to purchase anhydrous ammonia under two contracts. 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 pricing index
contained in one of these contracts, it is presently priced above
the current market spot price. As of September 30, 1999, the
Chemical Business has remaining purchase commitments of
approximately 104,000 tons under this contract. At this time, the
Company has reached an oral agreement in principle with the
supplier of anhydrous ammonia under this contract which will
allow the Company to defer quantities required to be purchased
under this take or pay contract through 2002. This agreement in
principle is subject to the parties evolving into a definitive
agreement, and there are no assurances that a definitive
agreement will be finalized. The Company will have deferred
approximately $9.0 million of product from the calendar year 1999
into future periods. Should the Company and the Supplier not
ultimately consummate the definitive agreement, the Company would
be required to pay for such deferred volumes in January 2000.
The Chemical Business is required to purchase a minimum of 7,000
tons monthly under the other contract expiring in June 2000;
however, for the fourth quarter of 1999, the Supplier will be
unable to deliver these required amounts.
Legal Matters
Following is a summary of certain legal actions involving the
Company:
A. In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with
numerous other companies, of potential responsibility for
clean up of a waste disposal site in Oklahoma. In 1990, the
EPA added the site to the National Priorities List.
Following the remedial investigation and feasibility study,
in 1992 the Regional Administrator of the EPA signed the
Record of Decision ("ROD") for the site. The ROD detailed
EPA's selected remedial action for the site and estimated
the cost of the remedy at $3.6 million. In 1992, the Company
made settlement proposals, which would have entailed a
collective payment by the subsidiaries of $47,000. The site
owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The
EPA rejected the Company's offer, allocating 60% of the
cleanup costs to the potentially responsible parties and 40%
to the site operator. The EPA estimated the total cleanup
costs at $10.1 million as of February 1993. The site owner
rejected all settlements with the EPA, after which the EPA
issued an order to the site owner to conduct the remedial
design/remedial action approved for the site. In August
1997, the site owner issued an "invitation to settle" to
various parties, alleging the total cleanup costs at the
site may exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the clean up of the site is
unknown due to continuing changes in the estimated total
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 September 30, 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.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
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,
which was amended in January, 1997. Pursuant to the
Administrative Agreement, as amended, the Chemical Business
has installed additional pollution control equipment.
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 penalties against the Chemical Business.
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 Chemical
Business entered into 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 State of Arkansas
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
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
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
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.
D. 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 asserted 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
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
actions taken by the subsidiary for which the subsidiary
failed to take, and Heartland alleged that the subsidiary
was 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. This
litigation has been settled with the subsidiary's payment of
approximately $81,000, which was accrued in the second
quarter of 1999.
E. On August 26, 1999, LSB and El Dorado were served with a
complaint filed in the District Court of the Western
District of Oklahoma by National Union Fire Insurance
Company, seeking recovery of certain insurance premiums
totaling $2,085,800 plus prejudgment interest, costs and
attorneys fees alleged to be due and owing by LSB and El
Dorado, related to National Union insurance policies for LSB
and subsidiaries dating from 1979 through 1988.
The parties
have entered into an agreement in principal to settle this
matter, whereby LSB will pay to National Union the amount of
$521,450, plus the expedited adjudication of an amount not
to exceed $650,000.The parties have entered into an
agreement in principal to settle this matter, whereby LSB
will pay to National Union the amount of $521,450. As a
part of that agreement in principal to settle this matter,
the parties have agreed in principal to adjudicate whether
any additional amounts may be due to National Union, but the
parties have agreed in principal that the Company's
liability for any additional amounts due National Union
shall not exceed $650,000. Amounts expected to be paid
under this settlement were fully accrued at September 30,
1999.
The Company, including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the
ordinary course of business. In the opinion of management after
consultation with counsel, all claims, legal actions (including
those described above) and complaints are not presently probable
of material loss, are adequately covered by insurance, or if not
so covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition 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
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
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 one subsidiary, El Dorado
Nitrogen Company ("EDNC"). 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 unaudited balance sheet information of
ClimaChem and its subsidiaries as of September 30, 1999 and
December 31, 1998 and the results of operations for the nine
month and three month periods ended September 30, 1999 and 1998
are detailed below.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30, December
31,
1999 1998
<C> <C>
(in thousands)
Balance sheet data:
<S>
Cash $ 74 $ 750
0
Trade accounts receivable, net 42,159 38,817
Inventories:
Finished goods 10,431 14,123
Work in process 6,431 6,290
Raw material 9,216 16,954
Total inventory 26,078 37,367
Supplies and prepaid items 8,682 7,023
Income tax receivable 2,050
Current deferred income taxes 4,837 1,338
Due from LSB and affiliates, net 2,926 1,047
Total current assets 85,422 88,392
Property, plant and equipment, net 77,612 82,389
Notes receivable from LSB and 13,443 13,443
affiliates, net
Other assets, net 15,779 10,480
Total assets $ 192,25 $ 194,704
6
Accounts payable $ 16,19 $ 17,416
Accrued liabilities 9 6,019
17,761
Current portion of long-term debt 4,017 10,460
Total current liabilities 37,977 33,895
Long-term debt 128,974 127,471
Accrued losses on firm 4,879
purchase commitments
Deferred income taxes 6,454 9,580
Stockholders' equity 13,972 23,758
Total liabilities and stockholders' $ 192,25 $ 194,704
equity 6
</TABLE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine Months Three
Months
Ended Ended
September
September 30, 30,
1999 1998 1999 1998
Operations data:
<S> <C> <C> <C> <C>
Total revenues $192,336 $202,71 $ 60,73 $65,390
8 1
Costs and expenses:
Cost of sales 154,675 160,099 49,117
52,660
Selling, general and 33,232 30,566 11,637
10,217
administrative
Loss on business disposed 1,971
of
Provision for loss on firm
purchase commitments 8,439 939
Interest 9,939 9,333 3,292
3,060
208,256 199,998
64,985
65,937
Income (loss) before provision
(credit) for income taxes (15,920) 2,720 (4,254)
(547)
Provision (credit) for income (4,575) 1,908 (1,501
208
taxes )
Net income (loss) $(11,345 $ 81 $(2,753 $
(755
) 2 )
)
</TABLE>
(1) Notes and other receivables from LSB and affiliates are
eliminated when consolidated with LSB.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
In May 1999, the Company's Automotive Products Business entered
into a term and revolving credit agreement with an asset based
lender. 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 September 30,
1999, was 8.31%. The term of this new facility is through May 7,
2001, and is renewable thereafter for successive twelve-month
terms unless either party gives sixty (60) days notice of intent
not to renew. As a result of the terms and conditions of this
facility, outstanding borrowings under the revolving credit
facility of $8.4 million at September 30, 1999 and $.6 million
under the term loan are classified as long term debt due within
one year (borrowings by the Automotive Products Business under
the Company's previous revolving credit agreements were
classified as long term debt due after one year in the
accompanying condensed consolidated balance sheets as of 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 the
lender with a $1.0 million standby letter of credit to further
secure such loan. As a result of this financing, the Company's
Revolving Credit Facility, that is not available to the
Automotive Products Business, now 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. As of September 30, 1999, the remaining
borrowing group had availability of $21.6 million.
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, 2000. 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
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
earnings and financial position of the Company; however, the
Company expects that the deferred charges associated with 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
nine-month and three-month periods ended September 30, 1999 and
1998 is detailed below.
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September Ended September
30, 30,
1999 1998 1999 1998
<C> <C> <C> <C>
(in thousands)
Net income(loss) $(23,98 $ 7,50 $ (7,09 $ (3,19
<S> 9) 3 1) 6)
Foreign currency
translation 1,55 (930) (324)
income(loss) 9
Total comprehensive
income $(22,43 $ 6,57 $ $ (3,52
(loss) 0) 3 (7,091) 0)
</TABLE>
Note 9: Businesses Disposed of On August 2, 1999 the Company
sold substantially all the assets of its wholly owned subsidiary,
Total Energy Systems Limited and its subsidiaries ("TES").
Pursuant to the sale agreement, TES retained certain of its
liabilities to be liquidated from the proceeds of the sale and
from the collection of its accounts receivables which were
retained.
At closing on August 2, 1999, the Company received approximately
$3.4 million, in net proceeds from the assets sold, exclusive of
approximately $.7 million retained by buyer related to the
final
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
reconciliation of the value of the inventory sold, after paying
off $6.4 million bank debt and the purchaser assuming
approximately $1.1 million of debt related to certain capitalized
lease obligations. The Company expects to complete the
liquidation of the assets and liabilities retained during the
fourth quarter of 1999.
The loss associated with this transaction included in the
accompanying Condensed Consolidated Statements of Operations for
the nine months ended September 30, 1999, is approximately
$1,971,000 and is comprised of disposition costs of approximately
$.4 million, the recognition in earnings of the cumulative
foreign currency loss of approximately $1.1 million and
approximately $.6 million related to the resolution of certain
environmental matters.
In March 1998, the Company closed the sale of real estate (the
Tower) and realized proceeds of $29.3 million, net of transaction
costs and a gain on the transaction of approximately $13 million.
Note 10: Inventory Write-down and Loss on Firm Purchase
Commitments Due to decreased selling prices for certain of the
Chemical Business' nitrogen-based products, the Chemical Business
wrote down the carrying value of certain inventories by
approximately $1.6 million at June 30, 1999, representing the
cost in excess of market.
The Chemical Business also has firm
uncancelable commitments to purchase anhydrous ammonia pursuant
to the terms of two contracts. The purchase price(s) the
Chemical Business will be required to pay for anhydrous ammonia
under one of these contracts, which is for a significant
percentage of the Chemical Business' anhydrous ammonia
requirements, currently exceeds and is expected to continue to
exceed the spot market prices throughout the purchase period.
Additionally, the current excess supply of nitrate based products
caused, in part, by the import of Russian nitrate, has caused a
significant decline in the sales prices, with no improvement in
sales prices expected in the near term. Due to the decline in
sales prices, the cost to produce the nitrate based products,
including the cost of the anhydrous ammonia to be purchased under
the contracts, exceeds the anticipated future sales prices of
such products. As a result, the accompanying Condensed
Consolidated Financial Statements for the nine months ended
September 30, 1999 include a provision for loss on
firm purchase commitments of anhydrous ammonia required to be
purchased during the remainder of the contracts of approximately
$8.4 million of which approximately $4.9 million is classified
as a long-term liability. The loss provision recorded for
the three months ended September 30, 1999 ($.9 million), is
based on the forward contract pricing existing
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
at September 30, 1999, which primarily represents an increase
from pricing at June 30, 1999. This pricing can move upward or
downward in future periods. Based on forward pricing existing as
of November 15, 1999, the Chemical Business would not be required
to recognize an additional loss. This loss provision estimate may
change in the near term.
Note: 11 Liquidity and Management's Plan For the nine months
ended September 30, 1999 and the year ended December 31, 1998,
the Company and its subsidiaries reported net losses of $24.0
million and $1.9 million, and provided (used) cash in
operating activities of $2.6 million and ($4.2) million,
respectively. Due to the restrictions under the indenture to the
10 3/4% Senior Notes, the Company and its subsidiaries (other
than ClimaChem and its subsidiaries) are dependent upon their
separate cash flows and the restricted funds which can be
distributed from ClimaChem and it subsidiaries. For the
nine
months ended
September 30, 1999, and for the year ended December 31, 1998,
ClimaChem and its subsidiaries reported a net loss of $11.3
million and $2.6 million, respectively. As a result of these
losses, the Company does not expect to receive any dividend
distributions or tax payments from ClimaChem until at least 2001.
As of September 30, 1999, the Company and its subsidiaries other
than ClimaChem and its subsidiaries, have working capital of
$.5 million (including $22.1 million of inventories and $10.7
million of accounts receivable), and long-term debt of $34.2
million ($15.0 million of which is classified as due within one
year including $8.4 million of Automotive Revolver borrowing
which terms provide for renewals each twelve months unless either
party gives sixty days notice of intent to not renew). For the
nine months ended September 30, 1999, the Company (excluding
ClimaChem and its subsidiaries) had a net loss of $12.6 million,
and used cash in operating activities of $.3 million. As
previously announced, the Company is focusing its efforts and
resources on its core businesses, Climate Control and Chemical
and is evaluating the most appropriate means of realizing its
investments in certain other non-core assets. These non-core
assets include the Company's Automotive and Industrial Products
Businesses.
As of November 15, 1999, the Company and ClimaChem, in the
aggregate, have borrowing availability under the revolver of
$20.5 million. ClimaChem has outstanding $105 million in Senior
Notes, which require that a semi-annual interest payment of
$5,643,000 be paid on each of December 1 and June 1. If
ClimaChem were to pay the December 1 interest payment on the $105
million Senior Note, such payment could
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
place the borrowing availability under the revolver at less than
the required $15 million, and without a waiver from the lender,
would require the Company and ClimaChem to meet certain financial
convenants. As of the date of this report, the Company does not
believe that, without further waivers from the lender, it and
ClimaChem would be in compliance with certain of those financial
convenants. If the Company does not pay the December 1, 1999
interest payment on December 1, it has thirty (30) days to cure
such before it becomes an event of default under the Indenture to
the 10 3/4% Senior Notes. An event of noncompliance, if not
waived or remedied within the cure period provided for in the
agreement, will cause an event of default. Under an event of
default, among other things, the lender may declare the debt
immediately due and payable. An event of default under the
Indenture could result in a default of the Revolver and certain
other indebtedness of the Company and its subsidiaries. As a
result, the Company and ClimaChem are evaluating whether it will
be in a position to make the December 1, 1999 interest payment.
Due to losses continuing to be sustained by Automotive, prior to
the end of the first quarter of 2000 Automotive may not have
sufficient borrowing availability under its credit facility to be
able to provide for all of its currently anticipated working
capital requirements. The Company is reviewing various
alternatives to supplement the liquidity requirements of
Automotive. The alternatives being considered include, but are
not limited to selling of Automotive through a leverage buy out
accompanied by additional financing to facilitate the acquisition
of another automotive parts company or selling all of
Automotive's finished goods inventory of one of its product lines
and then becoming an exclusive supplier to the buyer for that
product line. If Automotive
is unable to complete any of the above or to improve its
liquidity, the Company may be required to evaluate the
possibility of liquidating Automotive in whole or in part. The
loss if any, related to the possible alternatives being
considered is not presently determinable.
In November 1999, the Company and ClimaChem retained Banc of
America Securities LLC as its financial advisor, to provide
assistance to the Company and ClimaChem in evaluating liquidity
alternatives and providing advice concerning alternatives
available to the Company and ClimaChem. The Company and
ClimaChem are considering alternatives for restructuring their
balance sheets, such as raising new capital and reducing debt.
At this time, the Company is not able to predict whether it will
be successful in effecting the changes necessary to alleviate the
weak liquidity situation of the Company and its subsidiaries.
If the Company is not
successful in addressing this matter in the near future, the
recoverability and classification of assets and the amount and
classification of liabilities may be subject to change in the
near term.
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 September 30, 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 regard, the Company has come to the conclusion
that its Automotive and Industrial Products Businesses are non-
core to the Company and the Company is pursuing various
alternatives of realizing its investment in these and other non-
core assets. See "Liquidity and Capital Resources" of this
Management Discussion and Analysis.
Certain statements contained in this Overview are forward-
looking statements, and future results could differ materially
from such statements.
Information about the Company's operations in different industry
segments for the nine-month and three-month periods ended
September 30, 1999 and 1998 is detailed below.
<TABLE>
<CAPTION>
Nine Months Ended Three Months
September 30, Ended September 30,
1999 1998 1999 1998
<C> <C> <C> <C>
(in thousands)
(unaudited)
Sales:
<S>
Businesses continuing: Chemical
Chemical $ 98,429 $100,815 $ 28,739 $ 31,500
Climate Control
Automotive Products 86,559 89,894 30,534 30,637
Industrial Products 26,955 31,274 7,962 10,076
Business disposed of 6,590 10,856 1,720 3,365
Chemical(1)
7,462 11,403 1,088 3,195
$ 225,995 $ 244,242 $ 70,043 $ 78,773
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 11,306 $ 15,556 $ 1,6799 $ 3,406
Climate Control
Automotive Products 26,419 26,499 9,106 9,178
Industrial Products 5,103 6,985 1,095 2,019
Business disposed of 1,701 2,678 454 978
Chemical(1)
(118) 206 111 47
$ 44,411 $ 51,924 $ 12,445 $ 15,628
Operating profit (loss) (3):
Businesses continuing:
Chemical:
Recurring operations $ 1,724 $ 7,135 $ (802) $ 530
Loss on purchase commitments
(8,439) (939)
(6,715) 7,135 (1,741) 530
Climate Control 8,144 10,395 2,429 4,083
Automotive Products (1,284) (337) (985) (408)
Industrial Products (1,318) (780) (405) (262)
Business disposed of
Chemical(1) (1,632) (1,433) (143) (439)
(2,805) 14,980 (845) 3,504
General corporate expenses (5,526) (7,133) (1,685) (2,462)
Interest expense:
Business disposed of (326) (340) (84) (104)
Recurring operations (13,259) (12,722) (4,425) (4,119)
(13,585) (13,062) (4,509) (4,223)
Gain (loss) on businesses disposed (1,971) 12,993
of
Income (loss) before provision for
income taxes $ (23,887) $ 7,778 $(7,039) $ (3,181)
</TABLE>
(1) On August 2, 1999, the Company sold substantially all
the assets of its wholly owned Australian subsidiary, TES.
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.
(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
before loss on business disposed of in 1999 and gain on sale
of the Tower in 1998.
Chemical Business
Sales in the Chemical Business (excluding the Australian
subsidiary in which substantially all of its assets were disposed
of in August, 1999) have decreased from $100.8 million in the
nine months ended September 30, 1998 to $98.4 million in the nine
months ended September 30, 1999 and the gross profit (excluding
the Australian subsidiary and the provision for loss on firm
purchase commitments) has decreased from $15.6 million in 1998 to
$11.3 in 1999. The gross profit percentage (excluding the
Australian subsidiary and the provision for loss on firm purchase
commitments) has decreased from 15.4% in 1998 to 11.5% in 1999
primarily as a result of lower unit
sales prices and a $1.6million inventory writedown as discussed
below.
As of September 30, 1999, the Chemical Business has
commitments to purchase anhydrous ammonia under two contracts.
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
pricing index contained in one of these contracts, it is
presently priced above the current market spot price. As of
September 30, 1999, the Chemical Business has remaining purchase
commitments of approximately 104,000 tons under this contract. At
this time, the Company has reached an oral agreement in principle
with the supplier of anhydrous ammonia under this contract which
will allow the Company to defer quantities required to be
purchased under this take or pay contract through 2002. This
agreement in principle is subject to the parties evolving into a
definitive agreement, and there are no assurances that a
definitive agreement will be finalized. The Company will have
deferred approximately $9.0 million of product from the calendar
year 1999 into future periods. Should the Company and the
Supplier not ultimately consummate the definitive agreement, the
Company would be required to pay for such deferred volumes in
January 2000. The Chemical Business is required to purchase a
minimum of 7,000 tons monthly under the other contract expiring
in June 2000; however, for the fourth quarter of 1999, the
Supplier will be unable to deliver these required amounts.
As stated above, the Chemical Business has commitments to
purchase anhydrous ammonia pursuant to the terms of two
contracts. The purchase price(s) the Chemical Business will be
required to pay for anhydrous ammonia under one of these
contracts currently exceeds and is expected to continue to exceed
the spot market prices throughout the purchase period.
Additionally, the current excess supply of nitrate based
products, caused, in part, by the import of Russian nitrate, has
caused a significant decline in the sales prices; no improvement
in sales prices is expected in the near term. This decline in
sales price has resulted in the cost of anhydrous ammonia
purchased under these contracts when combined with manufacturing
and distribution costs, to exceed anticipated future sales
prices. As a result, the accompanying Condensed Consolidated
Financial Statements include a loss provision of approximately
$8.4 million for anhydrous ammonia required to be purchased
during the remainder of the contracts. The provision for loss
at September 30, 1999 is based
on the forward contract pricing existing at September 30, 1999,
and estimated market prices for products to be manufactured and
sold during the remainder of the contracts. There are no
assurances that such estimates will prove to be
accurate. Differences, if any, in the estimated future cost of
anhydrous ammonia and the actual cost in effect at the time of
purchase and differences in the estimated sales prices and actual
sales prices of products manufactured could cause the Company's
operating results to differ from that estimated in arriving at
the loss provision recorded at September 30, 1999. The Chemical
Business currently has an excess inventory of nitrogen based
products on hand. During the third quarter of 1999, two of the
Chemical Businesses nitric acid plants and one of its prill
plants were temporarily shut down due to the excessive supply of
ammonium nitrate at the Chemical Business and in the market
place. The plants that have been shut down have increased the
Chemical Business' losses in the third quarter due to overhead
costs that continue even though product is not being produced at
the plants temporarily shut down. Subject to market demand and
pricing for the Chemical Business products improving, it is
anticipated that these plants will resume production in the first
quarter of 2000. There are no assurances that the Chemical
Business will not be required to record additional loss
provisions in the future. Based on the forward pricing existing
as of November 15, 1999, the Chemical Business would not be
required to recognize an additional loss on the anhydrous ammonia
purchase contracts. See "Special Note Regarding Forward Looking
Statements."
Due to decreased selling prices for certain of the Chemical
Business' nitrogen-based products, the Chemical Business also
wrote down the carrying value of certain inventories by
approximately $1.6 million at June 30, 1999, representing the
cost in excess of market value.
The Chemical Business is a member of an organization of
domestic fertilizer grade ammonium nitrate producers which is
seeking protection from unfairly low priced Russian ammonium
nitrate. This industry group filed a Petition with the U.S.
Intentional Trade Commission and the U.S. Department of Commerce
to perform an antidumping investigation and, if warranted, impose
relief from Russian dumping. The International Trade Commission
has rendered a favorable preliminary determination as to the
presence of injury to U.S. producers of ammonium nitrate as a
result of Russian ammonium nitrate in the U.S. market. In
addition, the U.S. Department of Commerce has issued a
preliminary affirmative determination of "critical
circumstances", which means that if an antidumping duty order is
eventually imposed, it may apply retroactively to any shipments
of Russian ammonium nitrate entered into the United States as
early as October, 1999. It is not known whether the
antidumping Petition will be successful upon conclusion of the
U.S. Government's investigation.
In June 1999, a subsidiary of the Company completed its
obligations pursuant to an agreement to construct a nitric acid
plant located within Bayer's Baytown, Texas chemical plant
complex. This plant is being operated by a
subsidiary and is supplying nitric acid to Bayer under a long-
term supply contract. Sales from this plant were approximately
$7.2 million during the quarter ended September 30, 1999.
Management estimates that, at full production capacity based on
terms of the Agreement and, based on the price of anhydrous
ammonia as of the date of this report, the plant should generate
approximately $35 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. The Company's
subsidiary is leasing the nitric acid plant pursuant to a
leverage lease from an unrelated third party for an initial term
of ten (10) years which, began on June 23, 1999. See "Special
Note Regarding Forward Looking Statements."
The results of operation of the Chemical Business'
Australian subsidiary had been adversely affected due to adverse
economic developments in certain countries in Asia. As these
adverse economic conditions in Asia continued, they had an
adverse effect on the Company's consolidated results of
operations. As a result of the economic conditions in Australia
and the adverse effect of such conditions on the Company's
consolidated results of operations, the Company entered into an
agreement to dispose of this business. On August 2, 1999
substantially all the assets were sold and a loss of
approximately $2 million was recognized.
For the year ended December 31, 1998, the Australian
subsidiary had revenues of $14.2 million and a loss of $2.9
million. Revenues for the calendar year 1999 up to the date of
sale were $7.5 million and the loss was $2.0 million,
excluding the loss on the sale.
Climate Control
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source
heat pumps and has established a significant market share in
these specific markets.
Although sales of $86.6 million for the nine months ended
September 30, 1999, in the Climate Control Business were
approximately 3.7% less than sales of $89.9 million in the nine
months ended September 30, 1998, the gross profit was
approximately $26.4 million in both periods. The gross profit
percentage increased from 29.5% in the first nine months of 1998
to 30.5% in the first nine months of 1999.
Automotive and Industrial Products Businesses
As indicated in the above table, during the nine months
ended September 30, 1999 and 1998, respectively, the Automotive
and Industrial Products recorded combined sales of $33.5 million
and $42.1 million, respectively, and reported operating losses
(as defined above) of $2.6 million and $1.1 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. During the
second quarter of 1999, the Automotive Business converted its
investment in a wholly-owned subsidiary, International Bearings,
Inc. ("IBI") to a fifty percent (50%) non-controlling investment
in a joint venture ("the JV") continuing the industrial bearings
business formerly operated by IBI. Automotive sold its
inventory, having a book value of approximately $2.4 million to
the JV for approximately $1.5 million cash and $.9 million in
interest bearing notes. Automotive retains an equity interest in
the JV, which has not been assigned any value at September 30,
1999. IBI retained receivables of approximately $600,000, which
were fully collected as of the date of this report.
Due to losses continuing to be sustained by Automotive,
prior to the end of the first quarter of 2000, Automotive may not
have sufficient borrowing availability under its credit facility
to be able to provide for all of its currently anticipated
working capital requirements. The Company is reviewing various
alternatives to supplement the liquidity requirements of
Automotive. The alternatives being considered include, but are
not limited to selling of Automotive through a leverage buy out
accompanied by additional financing to facilitate the acquisition
of another automotive parts company or selling all of
Automotive's finished goods inventory of one of its product lines
and then becoming an exclusive supplier to the buyer for that
product line. If
Automotive is unable to complete any of the above or to improve
its liquidity, the Company may be required to evaluate the
possibility of liquidating Automotive in whole or in part. The
loss if any, related to the possible alternatives being
considered is not presently determinable.
The Company continues to eliminate certain categories of
machines from the Industrial Products product line by not
replacing those machines when sold. The Company previously
announced that it is negotiating to sell its Industrial Products
Business. The terms of such sale, if any, have not been
finalized. The sale of the Industrial Products Business is a
forward looking statement and is subject to, among other things,
the Company and potential buyer agreeing to terms, the buyer's
and the Company's lending institutions agreeing to the terms of
the transaction, including the purchase price, approval of the
Company's Board of Directors and negotiation and finalization of
definitive agreements.
RESULTS OF OPERATIONS
Nine months ended September 30, 1999 vs. Nine months ended
September 30, 1998.
Revenues
Total revenues of Businesses continuing, excluding the gain
on the disposition of a business in 1998, for the nine months
ended September 30, 1999 and 1998 were $219.8 million and $234.3
million, respectively, a decrease of $14.5 million.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for the nine months ended September 30, 1999, were
$218.5 million, compared to $232.8 million for the first nine
months of 1998, a decrease of $14.3 million. This decrease in
sales resulted principally from: (i) decreased sales in the
Climate Control Business of $3.3 million primarily due to
production delays related to mechanical problems with certain new
equipment, (ii) decreased sales in the Automotive Products
Business of $4.3 million, principally resulting from less bulk
sales in 1999 to industrial users and general customer demand,
and (iii) decreased sales in the Industrial Products Business of
$4.3 million due to decreased sales of machine tools, and (iv)
decreased sales in the Chemical Business of $2.4 million
primarily due to reduced selling prices. The Company's nitrogen
based products are selling at a lower price in 1999 due primarily
to the import of Russian nitrate resulting in an over supply of
nitrate based products (see Note 10 of Notes to Condensed
Consolidated Financial Statements).
Gross Profit
Gross profit of Businesses continuing as a percent of sales
was 20.4% for the first nine months of 1999, compared to 22.2%
for the first nine months of 1998. The decrease in the gross
profit percentage was primarily the result of decreases in the
Chemical and Automotive Businesses. The decrease in the Chemical
Business was primarily the result of reduced selling prices for
the Company's nitrogen based products. See "Overview Chemical
Business "elsewhere in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for further
discussion of the Chemical Business' decreased sales. The
decrease in the Automotive Business was primarily due to customer
mix.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from businesses continuing at September 30,
1999, were 20.2% in the nine-month period ended September 30,
1999, compared to 18.9% for the first nine months of 1998. This
increase is primarily the result of decreased sales volume in the
Climate Control Business, the Industrial Products Business and,
the Automotive Business without equivalent corresponding
decreases in SG&A and increased cost of the Company sponsored
medical care programs for its employees due to increased health
care costs. Additionally, costs associated with new start-up
operations in 1999, by the Climate Control Business, having
minimal or no sales, contributed to the increase in dollars as
well as expense as a percent of sales.
Interest Expense
Interest expense for continuing businesses of the Company
was $13.3 million in the first nine months of 1999, compared to
$12.7 million for the first nine months of 1998. The
increase of $.6 million primarily resulted from increased
borrowings.
Provision for Loss on Firm Purchase Commitments
The Company had a provision for loss on firm purchase
commitments of $8.4 million for the nine months ended September
30, 1999. See discussion in Note 10 of the Notes Condensed
Consolidated Financial Statements.
Businesses Disposed of
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. The Company also sold certain real
estate in 1998. See discussion in Note 9 of the Notes to
Condensed Consolidated Financial Statements.
Income (Loss) Before Taxes
The Company had a loss before income taxes of $23.9 million
in the first nine months of 1999 compared to income before income
taxes of $7.8 million in the nine months ended September 30,
1998. The decreased profitability of $31.7 million was
primarily due to the gain on the sale of the Tower in 1998, the
lower gross profit, the loss on disposition of the Australian
subsidiary, lower sales, the inventory write-down and the
provision for losses on purchase commitments, as previously
discussed.
Provision for Income Taxes
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
1 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the nine months ended
September 30, 1999 and the nine months ended September 30, 1998
are for current state income taxes and federal alternative
minimum taxes.
Three months ended September 30, 1999 vs. Three months
ended
September 30, 1998
Revenues
Total revenues of Businesses continuing for the three months
ended September 30, 1999 and 1998 were $70.4 million, and $75.7
million, respectively (a decrease of $5.3 million). Sales
decreased $6.6 million and other revenues increased $1.3 million.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenue for the three months ended September 30, 1999, were
$69.0 million, compared to $75.6 million for the three months
ended September 30, 1998. The decrease in sales resulted
principally from: (i) decreased sales in the Chemical Business
of approximately $2.8 million resulting from reduced selling
prices and lower demand for the Company's nitrogen based
products, (ii) decreased sales by the Automotive
Business due to customer mix in 1999 and certain bulk sales to an
industrial user and initial stocking order from a new retail
chain store customer in 1998, and (iii) decreased sales in the
Industrial Products Business resulting from the effects of the
Company limiting the product lines that it markets as well as
lower demand for the products of the Business. Sales in the
Climate Control Business was approximately the same in both
periods.
Gross Profit
Gross profit of Businesses continuing was 17.9% for the
third quarter of 1999, compared to 20.6% for the comparable
quarter of 1998. The decrease in the gross profit percentage was
primarily the result of decreases in the Chemical and Automotive
Businesses. The decrease in the Chemical Business was the result
of reduced selling prices for the Company's nitrogen based
products. The decrease in the Automotive Business was primarily
due to customer mix.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from businesses continuing at September 30,
1999 were 22.0% in the three months ended September 30, 1999,
compared to 18.8% for the three months ended September 30, 1998.
The increase in SG&A as a percent of sales principally resulted
from sales decreasing without a corresponding decrease in SG&A
expense, increased cost of the Company sponsored medical care
programs for its employees due to increased health care costs and
costs associated with new start-up operations having minimal or
no sales. SG&A expense increased approximately $.9 million while
sales decreased $6.6 million.
Interest Expense
Interest expense for continuing businesses of the Company
was $4.4 million in the three months ended September 30, 1999,
compared to $4.1 million for the three months ended September
30,1998. The increase of $.3 million primarily resulted from
increased borrowings.
Provision for Loss on Firm Purchase Commitments
The Company had a provision for loss on firm purchase
commitments of $.9 million for the three months ended September
30, 1999. See discussion in Note 10 of the Notes to Condensed
Consolidated Financial Statements.
Businesses Disposed of
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. See discussion in Note 9 of the Notes
Condensed Consolidated Financial Statements.
Loss Before Taxes
The Company had a loss before income taxes of $7.0 million
in the third quarter of 1999 compared to a loss before income
taxes of $3.2 million in the third quarter 1998. The decreased
profitability of $3.8 million was primarily due to the provision
for losses of $.9 million on firm uncancelable purchase
commitments, and decreased gross profit from sales in the
Chemical and Automotive Businesses, as previously discussed.
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, the issuance of senior
unsecured notes by its wholly owned subsidiary, ClimaChem, Inc.,
in November 1997 and secured equipment financing.
Net cash provided by operations for the nine months ended
September 30, 1999 was $3.0 million, after $9.7 million for
noncash depreciation and amortization, $1.0 million in provisions
for possible losses on accounts receivable, loss on the
disposition of the Australian subsidiary of $2.0 million,
inventory write down for $1.6 million and provision for losses on
purchase commitments of $8.4 million (net of amounts realized in
costs of sales of $.6 million), and including the following
changes in assets and
liabilities: (i) accounts receivable increases of $.1 million;
(ii) inventory decreases of $5.7 million excluding the effect
of the write down; (iii) increases in supplies and prepaid items
of $2.1 million; and (iv) net increases in accounts payable and
accrued liabilities of $1.5 million. The increase in accounts
receivable is primarily due to increased days of sales
outstanding in the Climate Control Business and the Chemical
Business. The decrease in inventory was due primarily to a
decrease at the Automotive Products Business and the Chemical
Business due to liquidation of excessive inventories partially
offset by temporary increases in the Climate Control Business due
to a build up of inventory in the plant due to temporary
production delays. Inventory in the Automotive and Industrial
Products Businesses decreased from $29.0 million at December 31,
1998, to $22.0 million at September 30, 1999.
Cash Flow From Investing And Financing Activities
Net cash provided by investing activities for the
nine months ended September 30, 1999 included $6.2 million from
the proceeds of the sale of the Australian subsidiary and other
equipment net of $5.8 million in capital expenditures. The
capital expenditures were primarily for the benefit of the
Chemical and Climate Control Businesses to enhance production and
product delivery capabilities.
Net cash used by financing activities included (i)
payments on long term debt of $7.3 million, (ii) net increases in
revolving debt of $2.9 million, (iii) the issuance of a
$3.5 million term notes, (iv)
decreases in drafts payable of $.6 million, (v) dividends of $1.7
million, and (vi) treasury stock purchases of $.2 million.
During the first six months of 1999, the Company declared
and paid the following aggregate dividends: (i)$12.00 per share
on each of the outstanding shares of its Series B 12% Cumulative
Convertible Preferred Stock; (ii) $1.625 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. In order to conserve cash, no dividends were declared
or paid subsequent to June 30, 1999.
Source of Funds
The Company is a diversified holding company, and as a
result, it is dependent on credit agreements and its ability to
obtain funds from its subsidiaries in order to pay its debts and
obligations. The Company's wholly-owned subsidiary, ClimaChem,
Inc. ("ClimaChem"), which owns substantially all of the Company's
subsidiaries constituting the Chemical Business and the Climate
Control Business, is restricted as to the funds that it may
transfer to the Company under the terms contained in an Indenture
covering the $105 million in Senior Notes issued by ClimaChem.
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. Due to this limitation, the Company and
its non-ClimaChem subsidiaries have limited resources to satisfy
their obligations. 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 either not realizing
an acceptable return and does not reasonably expect to do so or
on which the return is negative. In this regard, the Company has
come to the conclusion that its Automotive and Industrial
Products Businesses are non-core to the Company and Company is
exploring various alternatives of realizing its investment in
these and other non-core assets. There are no assurances that
the Company will be successful in improving its liquidity as a
result of its efforts to realize its investment in these assets.
ClimaChem sustained a net loss of $2.6 million in the
calendar year 1998 and a net loss of $11.3 million for the nine
months ended September 30, 1999. Accordingly, ClimaChem and its
subsidiaries were unable to transfer funds to the Company in 1998
and the first nine months of 1999, except for reimbursement of
costs and expenses incurred by the Company on their behalf or in
connection with certain agreements. The Company and
ClimaChem's
revolving credit facility provides that as long as the Company's
and ClimaChem's borrowing availability under the revolver is not
less than a minimum aggregate of $15 million for three
consecutive business days, the Company and ClimaChem will not
have to meet certain financial covenants, including tangible net
worth and capital expenditures. As of November 15, 1999, the
Company and ClimaChem, in the aggregate, have a borrowing
availability under the revolver of $20.5 million. ClimaChem has
outstanding $105 million in Senior Notes, which require that a
semi-annual interest payment of $5,643,000 be paid on each of
December 1 and June 1. If ClimaChem were to pay the December 1
interest payment on the $105 million Senior Note, such payment
could place the borrowing availability under the revolver at less
than the required $15 million, and without a waiver from the
lender, would require the Company and ClimaChem to meet certain
financial covenants. As of the date of this report, the Company
does not believe that, without further waivers from the lender,
it and ClimaChem would be in compliance with certain of those
financial covenants. If the Company does not pay the December 1,
1999 interest payment on December 1, it has thirty (30) days to
cure such before it becomes an event of default under the
Indenture to the 10 3/4% Senior Notes. An event of noncompliance,
if not waived or remedied within the cure period provided for in
the agreement, will cause an event of default. Under an event of
default, among other things, the lender may declare the debt
immediately due and payable. An event of default under the
Indenture could result in a default of the Revolver and certain
other indebtedness of the Company and its subsidiaries. As a
result, the Company and ClimaChem are evaluating whether it will
be in a position to make the December 1, 1999 interest payment.
The Company and ClimaChem have retained Banc of America
Securities LLC to provide assistance to them in considering
alternatives for restructuring their balance sheets, such as
raising new capital and reducing debt.
As of September 30, 1999, the Company and certain of its
subsidiaries, including ClimaChem and its subsidiaries were
parties to a working capital line of credit evidenced by two
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 during the second quarter of 1999, 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, at the Lender's LIBOR rate plus 2.875% per annum. At
September 30, 1999, the effective interest rate was 8.30%. The
term of the Revolving Credit Agreements is through December 31,
2000, and is renewable thereafter for successive thirteen-month
terms. At September 30, 1999, the availability for additional
borrowings, based on eligible collateral, approximated $22.1
million. Borrowings under the Revolver outstanding at September
30, 1999, were $18.7 million. The Revolving Credit Agreements,
as amended, requires the Company to maintain certain financial
ratios and contain other financial covenants, including tangible
net worth requirements and capital expenditure limitations. The
Company's financial covenants are not required to be met so long
as the Company and it subsidiaries that are parties to the
Revolving Credit Agreements maintain a minimum aggregate
availability under the Revolving Credit Facility of $15.0
million. Should the availability drop below $15 million for
three consecutive business days, the Company would be required to
maintain the financial ratios discussed above. The annual
interest on the outstanding debt under the Revolver at September
30, 1999 at the rates then in effect would approximate $1.6
million. The Revolving Credit Agreements also require the
payment of an annual facility fee of 0.5% of the unused revolver
and restrict 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
$6 million, based on eligible collateral. At November
15, 1999, the Company and its subsidiaries, except ClimaChem and
its subsidiaries, had additional borrowing availability, based on
eligible collateral, of $.6 million under the Revolver.
In May of 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. The Company was required to provide
the Automotive Lender a $1.0 million standby letter of credit to
further secure the Automotive Loan Agreement. 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 unused line fee equal to 0.5% of the unused credit
facility. At September 30, 1999, the effective interest rate was
8.31% excluding the effect of the source fee and unused line fee
(8.85% considering such fees).The term of the Automotive Revolver
is through May 7, 2001, and is renewable thereafter for
successive twelve month terms. At September 30, 1999,
outstanding borrowings under the Automotive Revolver were $8.4
million; in addition, the Automotive Products Business had $1.7
million, based on eligible collateral, available for additional
borrowing under the Automotive Revolver. As a result of the
terms and conditions of this facility, outstanding borrowings at
September 30, 1999, have been classified as long-term debt due
within one year.
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 original principal amount
of approximately $2.6 million. 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.
The annual interest on the outstanding debt under the
Automotive revolver and Automotive term loan at September 30,
1999, at the rates then in effect would approximate $.9 million.
In addition to the credit facilities discussed above, as of
September 30, 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 September 30, 1999, DSN had outstanding borrowings of $8.9
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 September 30, 1999, at the agreed to
interest rates would approximate $.8 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 October
1999, DSN obtained a waiver from the Financing Company of the
covenants through September 2000.
A subsidiary of the Company is currently negotiating $3.5
million loan with the City of Oklahoma City to finance the
working capital requirements of Climate Control's new product
line of large air handlers, which the lender has approved subject
to the development of definitive loan agreements. Consummation
of this loan is subject to agreement on various terms and
conditions, and there is no assurance that the loan will be
closed. The loan, if completed, will be secured by a mortgage on
the manufacturing facility and a separate unrelated parcel of
property.
Due to ClimaChem's net losses for the year 1998 and the
Company's (other than ClimaChem and its subsidiaries) limited
borrowing ability under the Revolver, management recommended to
the Board of Directors and such recommendation was approved, 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. The Company did not declare
or pay the September 15, 1999 regular quarterly dividend of
$.8125 (or $743,438) on its outstanding $3.25 Convertible
Exchangeable Class C Preferred Stock Series 2. In addition, as
of the date of this report, after consideration of the losses
reported in the accompanying Condensed Consolidated Statements of
Operations for the nine months ended September 30, 1999,
the Company has concluded that the Company does not
have adequate liquidity to pay the December 15, 1999 regular
quarterly dividend of $.8125 (or $743,438) on this
Preferred Stock and does not anticipate having funds available to
pay dividends on its stock for the foreseeable future.
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 and
higher inventory requirements 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 reductions in the Industrial Products and
Automotive Products Businesses should generate cash to supplement
those Businesses' availability under their respective revolving
credit facilities. In addition, the Company is also pursuing 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 ($8.5 million of which were incurred as of September 30,
1999), primarily in the Chemical and Climate Control Businesses,
a certain amount of which it anticipates will be financed by
either equipment finance contracts on a term basis or operating
leases and in a manner allowed under its various loan agreements.
Such capital expenditures include approximately $1.5 million ($.7
million in the nine months ended September 30, 1999), which the
Chemical Business anticipates spending related to environmental
control facilities at its El Dorado Facility, as previously
discussed in this report. The Company currently has no material
commitments for capital expenditures.
During the third quarter ended September 30, 1999, the
Company announced it had decided to discontinue the spin-off of
the Automotive Business to its shareholders. The decision was due
primarily to the Automotive Business' inability to raise
additional equity capital as a stand alone business. The Company
has decided to aggressively pursue consideration of a number of
alternative approaches to separate the Automotive Business from
LSB.
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.
During the period from January 1, 1999, through June 30, 1999,
the Company purchased a total of 87,267 shares of Common Stock
for an aggregate amount of $230,234. The Company has not
purchased any of its stock since prior to June 30, 1999.
Foreign Subsidiary
As previously discussed in this report, on August 2, 1999,
the Company substantially completed an agreement to sell
substantially all of the assets of TES, effectively disposing of
this portion of the Chemical Business. Under the terms of the
Indenture to which ClimaChem is bound, the net cash proceeds from
the sale of TES, are required (i) 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 (ii)
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. All of the proceeds received by the Company, through
the date of this report (approximately US$4.5 million), have been
applied to reduce the indebtedness of ClimaChem. The Company
expects that the remaining net proceeds from the disposition of
TES will be reinvested in related businesses of ClimaChem or used
to retire additional 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, which expires June 15, 2005, 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 to $3.8 million. The
$3.8 million loan, less a $1.5 million valuation reserve, is
carried on the books as a note receivable in other assets. As of
the date of this report, the decision has not been made to
exercise its option to acquire the stock of the French
manufacturer.
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. The Company's equity interest in the results of the
operations of the Project were not material for the nine month
periods ended September 30, 1999 and 1998.
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 Company has decided not to exercise the Option and has
allowed the term of the Option to lapse. 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.
Debt and Performance 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 $500,000 to a lender and assumed an obligation for
a $2.0 million note, which is due in equal monthly principal
payments, plus interest, through August 2004, in satisfaction of
the guarantees. 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.
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.
In the third quarter of 1999, LSB agreed to guarantee a
performance bond of $2.1 million of a start-up operation
providing services to the Company's Climate Control Division.
Availability of Company's Loss Carry-overs
The Company's cash flow in future years
may 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 was
approximately $31.4 million at December 31, 1998.
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 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 September 30, 1999, the Company has
capitalized approximately $1.3 million in costs to accomplish its
enhancement program. The capitalized costs include $.4 million
in external programming costs, with the remainder representing
hardware and software purchases. As of September 30, 1999, this
IT Systems enhancement project has been substantially completed.
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.
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 was completed in the third 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
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 has created contingency plans for certain
critical applications. These contingency plans will involve,
among other actions, manual workarounds,
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: 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.
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.
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 September 30, 1999, the Company's variable rate and
fixed rate debt which aggregated $167.2 million exceeded the
debt's fair market value by approximately $15.8 million. The
fair value of the Company's Senior Notes was determined based on
a market quotation for such securities.
Foreign Currency Risk
During 1999, the Company sold its wholly
owned subsidiary located in Australia, for which the functional
currency was the local currency, the Australian dollar. Since
the Australian subsidiary accounts were converted into U.S.
dollars upon consolidation with the Company, declines in value of
the Australian dollar to the U.S. dollar resulted in translation
loss to the Company. As a result of the sale of the Australian
subsidiary, which was closed on August 2, 1999, the cumulative
foreign currency translation loss of approximately $1.1 million
has been included in the loss on disposal of the Australian
subsidiary at September 30, 1999.
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) the amount of the loss
provision for anhydrous ammonia required to be purchased, (iv)
declines in the price of anhydrous ammonia, (v) availability of
net operating loss carryovers, (vi) amount to be spent in 1999
relating to compliance with federal, state and local
Environmental laws at the El Dorado Facility, (vii) Year 2000
issues, (viii) improving liquidity and profits through
liquidation of assets or realignment of assets or some other
method, (ix) ability to
pay December 1 interest payment on ClimaChem's $105 million in
Senior Notes, (x) anticipated financial performance, (xi)
ability to comply with the Company's general working capital and
debt service requirements, (xii) ability to be able to continue
to borrow under the Company's revolving line of credit, (xiii)
sale of the Industrial Products Business, (xiv) adequate cash
flows to meet its presently anticipated capital requirements and
(xv) ability of the EDNC Baytown Plant to generate
approximately $35 million in annual gross revenues once
operational,(xvi) nitric acid plants resuming production in the
first quarter of 2000, (xvii) consummation of an oral agreement
with one of the Chemical Business' suppliers of anhydrous
ammonia. 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) material
increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (x) the requirement to use
internally generated funds for purposes not presently
anticipated,(xi) ability to become profitable, or if unable to
become profitable, the inability to secure additional liquidity
in the form of additional equity or debt, (xii) the effect of
additional production capacity of anhydrous ammonia in the
western hemisphere, (xiii) 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, (xiv) changes in competition, (xv) the loss
of any significant customer, (xvi) changes in operating strategy
or development plans, (xvii) inability to fund the working
capital and expansion of the Company's businesses, (xviii)
adverse results in any of the Company's pending litigation, (xix)
inability to obtain necessary raw materials, (xx) inability to
recover the Company's investment in the aviation company, (xxi)
Bayer's inability or refusal to purchase all of the Company's
production at the new Baytown nitric acid plant; (xxii)
continuing decreases in the selling price for the Chemical
Business' nitrogen based end products, and (xxiii) other factors
described in "Management's Discussion and Analysis of Financial
Condition and Results of Operation" contained in this report.
Given these uncertainties, all parties are cautioned not to place
undue reliance on such Forward-Looking Statements. The Company
disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the
Forward Looking Statements contained herein to reflect future
events or developments.
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of LSB Industries, Inc. and subsidiaries as of September
30, 1999, and the related condensed consolidated statements of
operations for the nine-month and three-month periods ended
September 30, 1999 and 1998, and the condensed consolidated
statements of cash flows for the nine-month periods ended
September 30, 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.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 15, 1999
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 26, 1999, LSB and El Dorado were served with a
complaint filed in the District Court of the Western
District of Oklahoma by National Union Fire Insurance
Company, seeking recovery of certain insurance premiums
totaling $2,085,800 plus prejudgment interest, costs and
attorneys fees alleged to be due and owing by LSB and El
Dorado, related to National Union insurance policies for LSB
and subsidiaries dating from 1979 through 1988. The parties
have entered into an agreement in principal to settle this
matter, whereby LSB will pay to National Union the amount of
$521,450. As a part of that agreement in principal to
settle this matter, the parties have agreed in principal to
adjudicate whether any additional amounts may be due to
National Union, but the parties have agreed in principal
that the Company's liability for any additional amounts due
National Union shall not exceed $650,000.
The Eugene Lowe, et al v. Teresa Trucking, Inc. litigation
has been settled with the subsidiaries' payment of
approximately $81,000.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
(b) The Company's Board of Directors did not declare
and pay the September 15, 1999 dividends on the
Company's outstanding $3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 ("$3.25 Preferred).
Accrued and unpaid dividends on the $3.25 Preferred are
cumulative. The amount of the total arrearage of
unpaid dividends on the outstanding $3.25 Preferred is
$743,438 as of the date of this report. In
addition, the Company's Board of Directors has decided
not to pay the December 15, 1999 dividend payment on
its outstanding $3.25 Preferred. If the December 15
dividends on the $3.25 Preferred is not paid, the
amount of the total arrearage of unpaid dividend
payment on the outstanding $3.25 Preferred will be
$1,486,876.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A)Exhibits. The Company has included the following
exhibits in this report:
10.1Waiver of non-
compliance of certain covenants through September
30, 2000 included in a Loan Agreement dated
October 31, 1994, as amended between DSN
Corporation and the CIT Group/Equipment Financing,
Inc.
15.1Letter Re: Unaudited
Interim Financial Information
27.1Financial Data Schedule
(B) Reports of Form 8-K. The Company filed the following
reports on Form 8-K during the quarter ended September 30,
1999:
(i) Form 8-K, dated July 26, 1999 (date of event: July
6, 1999). The item reported was Item 5,
"Other Information", discussing the suspension
of trading on the New York Stock Exchange of the
Company's Common Stock and $3.25 Preferred.
(ii) Form 8-K, dated August 17, 1999 (date of event:
August 2, 1999). The item reported was
Item 2 "Acquisition on Disposition of
Assets" discussing the disposition of substantially all
of the assets of the Company's Australian
subsidiaries.
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 22nd day of
November 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)
The CIT Group/
Equipment Financing
650 CIT Drive
P.O. Box 490
Livingston, NJ 07039-0490
THE
CIT
GROUP
Mr. Jim Jones
Vice President and Treasurer
LSB Industries
16 South Pennsylvania Avenue
Oklahoma City, OK 73107
Dear Mr. Jones:
Reference is made to that certain Loan Agreement dated October 31,
1994, as amended (the "Agreement") between DSN Corporation,
("Debtor"), and the CIT Group/Equipment Financing, Inc. ("CIT").
Debtor has advised CIT that LSB Industries, Inc., a guarantor of
Debtor's obligations to CIT were not in compliance with certain
covenants as of September 30, 1999.
Debtor has requested, that notwithstanding anything to the
contrary
of the Agreement, that CIT waive the instances of non-compliance
through September 30, 2000.
All other terms, conditions and agreements under the Loan
Agreement, together with all schedules, attachments and amendments
thereto shall remain in full force and effect. Please note that
CIT's willingness to waive this particular covenant violation
should not be interpreted as CIT's agreement or willingness to
waive any further breach or violation of the Agreement.
Sincerely,
The CIT Group Equipment Financing, Inc.
By: /s/ Anthony Joseph
___________________________________
Title: Vice President
________________________________
Acknowledged and Agreed to
DSN Corporation
By: /s/ Jim D. Jones
_______________________
Title: VP
____________________
Exhibit 15.1
Letter of Acknowledgment RE: Unaudited Financial Information
The Board of Directors
LSB Industries, Inc.
We are aware of the incorporation by reference in the
Registration Statement (Form S-8 No. 33-8302) pertaining to
the 1981 and 1986 Incentive Stock Option Plans, the
Registration Statement (Form S-8 No. 333-58225) pertaining
to the 1993 Stock Option and Incentive Plan, the
Registration Statements (Forms S-8 No. 333-62831, No. 333-
62835, No. 333-62839, No. 333-62843, and No. 333-62841)
pertaining to the registration of an aggregate 225,000
shares of common stock pursuant to certain Non-Qualified
Stock Option Agreements for various employees and the
Registration Statement (Form S-3 No. 33-69800) of LSB
Industries, Inc. and in the related Prospectuses of our
report dated November 15, 1999, relating to the unaudited
condensed consolidated interim financial statements of LSB
Industries, Inc., which are included in its Form 10-Q for
the quarter ended September 30, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933, our
report is not a part of the registration statement prepared
or certified by accountants within the meaning of Section 7
or 11 of the Securities Act of 1933.
Ernst & Young LLP
Oklahoma City, Oklahoma
November 15, 1999
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