UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended June 30, 2000
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 July 31, 2000 was 11,877,411 shares excluding
3,285,957 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 June 30, 2000, the condensed consolidated
statements of operations for the six-month and three-month
periods ended June 30, 2000 and 1999 and the condensed
consolidated statements of cash flows for the six-month periods
ended June 30, 2000 and 1999 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 first and second quarters of 2000 and
the second quarter of 1999 on the firm raw material purchase
commitments and the extraordinary gain recognized in the second
quarter of 2000 on the extinguishment of certain Senior Unsecured
Notes as discussed in Note 11 and Note 6, respectively of the
Notes to 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 six
months ended June 30, 2000, are not necessarily indicative of the
results to be expected for the full year. The condensed
consolidated balance sheet at December 31, 1999 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, 1999, for an expanded discussion of the Company's
financial disclosures and accounting policies.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 10)
(Information at June 30, 2000 is unaudited)
(Dollars in thousands)
June 30, December 31,
ASSETS 2000 1999
Current assets:
Cash and cash equivalents $ 3,941 $ 3,130
Trade accounts receivable, net 47,893 44,549
Inventories:
Finished goods 13,385 15,983
Work in process 6,339 5,503
Raw materials 10,367 8,994
_______________________
Total inventory 30,091 30,480
Supplies and prepaid items 4,531 4,617
_______________________
Total current assets 86,456 82,776
Property, plant and equipment,
net 82,981 83,814
Other assets, net 21,078 22,045
________________________
$ 190,515 $ 188,635
========================
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 10)
(Information at June 30, 2000 is unaudited)
(Dollars in thousands)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
Current liabilities:
Drafts payable $ 291 $ 360
Accounts payable 22,979 18,791
Brokerage account payable 4,863 -
Accrued liabilities 19,391 18,563
Current portion of long-term debt
(Note 6) 36,090 33,359
_______________________
Total current liabilities 83,614 71,073
Long-term debt (Note 6) 103,858 124,713
Accrued losses on firm purchase
commitments and other noncurrent
liabilities (Note 11) 6,255 6,883
Commitments and Contingencies (Note 5) - -
Redeemable, noncumulative convertible
preferred stock, $100 par value;
1,462 shares issued and outstanding 139 139
Stockholders' equity (Notes 2, 3, 5
and 10):
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; 907,325
shares issued in 2000 (920,000
in 1999) 45,366 46,000
Common stock, $.10 per value
75,000,000 shares authorized,
15,163,368 shares issued in 2000
(15,108,716 in 1999) 1,516 1,511
Capital in excess of par value 39,906 39,277
Accumulated deficit (75,858) (86,675)
_________________________
12,930 2,113
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 3,285,957 shares 16,081 16,086
________________________
Total stockholders' deficit (3,351) (14,173)
________________________
$ 190,515 $ 188,635
=========================
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 2000 and 1999
(Dollars in thousands, except per share amounts)
2000 1999
Businesses continuing at June 30,:
Revenues:
Net sales $ 146,184 $ 130,585
Other income 2,182 1,333
______________________
148,366 131,918
Costs and expenses:
Cost of sales 115,215 102,401
Selling, general and administrative 23,348 24,044
Interest 8,084 7,250
Provision for loss on firm purchase
commitments (Note 11) 2,485 7,500
Other expenses 1,661 1,439
______________________
150,793 142,634
______________________
Loss from continuing operations before
business disposed of, provision for
income taxes extraordinary gain (2,427) (10,716)
Business disposed of (Note 8):
Revenues - 6,374
Operating costs, expenses and interest - 8,105
______________________
- (1,731)
Loss on disposal of business - (1,971)
______________________
- (3,702)
Loss from continuing operations before
provision for income taxes and
extraordinary gain (2,427) (14,418)
Provision for income taxes - 50
______________________
Loss from continuing operations before
extraordinary gain (2,427) (14,468)
Net loss from discontinued operations
(Note 9) - (2,431)
Extraordinary gain, net of income taxes of
$225 (Note 6) 13,244 -
____________________
Net income (loss) $ 10,817 $ (16,899)
=======================
Net income (loss) applicable to common
stock (Note 2) $ 9,229 $ (18,521)
=======================
Weighted average common shares (Note 2):
Basic and Diluted 11,864,686 11,856,472
Income (loss) per common share (Note 2):
Basic and diluted:
Net loss from continuing operations $ (.34) $ (1.35)
Net loss from discontinued operations - (.21)
Extraordinary gain 1.12 -
________________________
Net income (loss) applicable to common
stock $ .78 $ (1.56)
========================
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 2000 and 1999
(Dollars in thousands, except per share amounts)
2000 1999
Businesses continuing at June 30,:
Revenues:
Net sales $ 76,563 $ 70,501
Other income 920 893
_____________________
77,483 71,394
Costs and expenses:
Cost of sales 61,524 56,335
Selling, general and administrative 11,699 12,135
Interest 4,002 3,661
Provision for loss on firm purchase
commitments (Note 11) 1,510 7,500
Other expenses 1,427 751
_____________________
80,162 80,382
_____________________
Loss from continuing operations
before business disposed of, provision
for income taxes and extraordinary gain (2,679) (8,988)
Business disposed of (Note 8):
Revenues - 3,506
Operating costs, expenses and interest - 4,267
_____________________
- (761)
Loss on disposal of business - (1,971)
_____________________
- (2,732)
_____________________
Loss from continuing operations before
provision for income taxes and
extraordinary gain (2,679) (11,720)
Provision for income taxes - -
______________________
Loss from continuing operations before
extraordinary gain (2,679) (11,720)
Net loss from discontinued operations
(Note 9) - (1,369)
Extraordinary gain, net of income taxes of
$225 (Note 6) 13,244 -
_____________________
Net income (loss) $ 10,565 $ (13,089)
=======================
Net income (loss) applicable to common
stock (Note 2) $ 9,772 $ (13,895)
=======================
Weighted average common shares (Note 2):
Basic and Diluted 11,877,389 11,835,020
Income (loss) per common share (Note 2):
Basic and diluted:
Net loss from continuing operations $ (.30) $ (1.05)
Net loss from discontinued operations - (.12)
Extraordinary gain 1.12 -
_________________________
Net income (loss) applicable to common
stock $ .82 $ (1.17)
=========================
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 2000 and 1999
(Dollars in thousands)
2000 1999
Cash flows from operating activities:
Net income (loss) $ 10,817 $ (16,899)
Adjustments to reconcile net income (loss) to
cash flows provided by continuing operations:
Net loss from discontinued operations - 2,431
Extraordinary gain on extinguishment of
debt (13,469) -
Depreciation, depletion and amortization:
Property, plant and equipment 4,209 5,110
Other 703 634
Provision for possible losses on
receivables and other assets 144 639
Loss on sale of assets - 23
Loss on business disposed of - 1,971
Inventory write-down and loss on
firm purchase commitments, net of
realization of $1,521 in 2000 964 9,100
Cash provided (used) by changes in assets
and liabilities, (net of effects of
discontinued operations):
Trade accounts receivable (3,319) (4,684)
Inventories 389 847
Supplies and prepaid items (803) (2,659)
Accounts payable 4,188 4,205
Accrued liabilities (688) (134)
______________________
Net cash provided by continuing operating
activities 3,135 674
Cash flows from investing activities:
Capital expenditures (3,721) (3,968)
Principal payments on loans receivable - 480
Proceeds from sale of equipment 76 3
Decrease (increase) in other assets 612 (81)
______________________
Net cash used in investing activities (3,033) (3,566)
Cash flows from financing activities:
Proceeds from long-term and other debt 2,447 -
Payments on long-term and other debt (3,023) (1,931)
Net change in revolving debt facilities 1,354 11,576
Net change in drafts payable (69) (338)
Dividends paid on Preferred Stocks (Note 3) - (1,622)
Purchases of treasury stock (Note 3) - (230)
______________________
Net cash provided by financing activities 709 7,455
Net cash used in discontinued operations - (3,060)
_______________________
Net increase in cash and cash equivalents 811 1,503
Cash and cash equivalents at beginning of
period 3,130 1,459
_______________________
Cash and cash equivalents at end of period $ 3,941 $ 2,962
=======================
(See accompanying notes)
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2000 and 1999
Note 1: Income Taxes At December 31, 1999, the Company had
regular tax net operating loss ("NOL") carry-forwards for tax
purposes of approximately $75.0 million (approximately $40.0
million alternative minimum tax NOLs). Certain amounts of
regular-tax NOL expire beginning in 2000.
For the three and six-month periods ended June 30, 2000, the
Company utilized approximately $10 million of regular and
alternative minimuum tax NOLs, against which the Company had
previously established a valuation allowance, to reduce its
income tax expense associated with the extraordinary gain.
Income taxes of $225,000 for such periods is comprised primarily
of Federal alternative minimum tax.
Note 2: Income (Loss) Per Share Net income (loss) applicable to
common stock is computed by adjusting net income or (loss) by the
amount of preferred stock dividends. Basic income (loss) per
common share is based upon net income (loss) applicable to common
stock and the weighted average number of common shares
outstanding during each period. All potentially dilutive
securities were antidilutive for all periods presented.
For the six months ended June 30, 2000, the Company's Board of
Directors did not declare and pay the regular quarterly dividend
of $.8125 on the Company's Series 2 $3.25 Convertible Class C
preferred stock. Dividends in arrears at June 30, 2000, amounted
to approximately $2.9 million. In addition, the Company's Board
of Directors did not declare and pay the January 1, 2000 regular
dividend on the Company's Series B 12% Convertible, Cumulative
Preferred Stock. Dividends in arrears at June 30, 2000, related
to the Company's Series B 12% Convertible, Cumulative Preferred
Stock, amounted to approximately $.2 million.
The following table sets forth the computation of basic and
diluted loss per share:
(Dollars in thousands, except per share amounts)
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
Net income (loss) $ 10,817 $(16,899) $ 10,565 $(13,089)
Preferred stock dividend
requirements (1,588) (1,622) (793) (806)
____________________ _____________________
Income (loss) available
to common stockholders $ 9,229 $(18,521) $ 9,772 $(13,895)
===================== =====================
Weighted - average
shares 11,864,686 11,856,472 11,877,389 11,835,020
______________________ ______________________
Basic and diluted income
(loss) per share $ .78 $ (1.56) $ .82 $ (1.17)
====================== =======================
Note 3: Stockholders' Equity
The table below provides detail of activity in the stockholders' equity
accounts for the six months ended June 30, 2000:
<TABLE>
Common Stock Non- Capital Accumulated Treasury Treasury Total
Shares Par redeemable in excess deficit Stock- Stock-
Value Preferred of par Common Preferred
Stock value
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1999 15,109 $ 1,511 $ 48,000 $ 39,277 $(86,675) $(16,086) $ (200) $(14,173)
Net Income - - - - 10,817 - - 10,817
Conversion of
12,675 shares
of non-redeemable
preferred stock
to common stock 54 5 (634) 629 - - - -
Exchange of 4,000
shares of common
stock held in
treasury for Board
of Director fees - - - - - 5 - 5
______________________________________________________________________________________
Balance at June
30, 2000 (1) 15,163 $ 1,516 $ 47,366 $ 39,906 $(75,858) $(16,081) $ (200) $ (3,351)
========================================================================================
</TABLE>
(1) Includes 3,286 shares of the Company's Common Stock held in treasury.
Excluding the 3,286 shares held in treasury, the outstanding shares of
the Company's Common Stock at June 30, 2000 were 11,877.
Note 4: Segment Information
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
(in thousands)
Net sales:
Businesses
continuing:
Chemical $ 76,308 $ 69,690 $ 41,241 $ 38,945
Climate Control 64,269 56,025 32,639 29,326
Industrial Products (4) 5,607 4,870 2,683 2,230
_____________________________________________
146,184 130,585 76,563 70,501
Business disposed of
- Chemical (1) - 6,374 - 3,506
_____________________________________________
$146,184 $ 136,959 $ 76,563 $ 74,007
=============================================
Gross profit: (2)
Businesses continuing:
Chemical $ 12,026 $ 9,624 $ 5,916 $ 4,667
Climate Control 17,356 17,313 8,397 8,992
Industrial Products 1,587 1,247 726 507
____________________________________________
$ 30,969 $ 28,184 $ 15,039 $ 14,166
=============================================
Operating profit
(loss): (3)
Businesses continuing:
Chemical $ 5,850 $ 2,525 $ 2,486 $ 1,078
Climate Control 5,713 5,715 3,027 3,008
Industrial Products 206 (913) (111) (501)
_____________________________________________
11,769 7,327 5,402 3,585
Business disposed of -
Chemical (1) - (1,488) - (643)
_____________________________________________
11,769 5,839 5,402 2,942
General corporate expenses
and other income or
expenses, net (3,627) (3,293) (2,569) (1,412)
Interest expense:
Business disposed of (1) - (243) - (118)
Businesses continuing (8,084) (7,250) (4,002) (3,661)
Loss on business
disposed of - (1,971) - (1,971)
Provision for loss on
firm purchase commitments
Chemical (2,485) (7,500) (1,510) (7,500)
_____________________________________________
Loss from continuing
operations before
provision for income
taxes and extraordinary
gain $ (2,427) $(14,418) $ (2,679) $(11,720)
==============================================
(1) In August 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary. See Note
8 of Notes to Condensed Consolidated Financial Statements
for further information. The operating results 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 and other expenses, interest expense, provision
for loss on firm purchase commitments and income taxes and
before extraordinary gain.
(4) Excludes intersegment sales to Climate Control of $97,000
and $591,000 for the three and six months ended June 30,
2000 ($105,000 and $254,000 in 1999), respectively.
Note 5: Commitments and Contingencies
Debt Guarantee
On October 17, 1997, Prime Financial Corporation ("Prime"), a
subsidiary of the Company, borrowed from SBL Corporation, a
corporation wholly owned by the spouse and children of Jack E.
Golsen, Chairman of the Board and President of the Company, the
principal amount of $3,000,000 (the "Loan") on an unsecured basis
and payable on demand, with interest payable monthly in arrears
at a variable interest rate equal to the Wall Street Journal
Prime Rate plus 2% per annum. The purpose of the loan was to
assist the Company by providing additional liquidity. The
Company has guaranteed the Prime Loan. As of June 30, 2000, the
unpaid principal balance on the Prime Loan was $1,950,000. In
April, 2000, at the request of Prime and the Company, SBL agreed
to modify the demand note to make such a term note with a
maturity date no earlier than April 1, 2001, unless the Company
receives cash proceeds in connection with either (i) the sale or
other disposition of KAC Acquisition Corp. and/or Kestrel
Aircraft, and/or (ii) the repayment of loans by Co-Energy Group
and affiliates, and/or the repayment of amounts in connection
with the stock option agreement with the shareholders of Co-
Energy Group, and/or (iii) some other source that is not in the
Company's projections for the year 2000. From April 1, 2000
until no sooner than April 1, 2001, any demand for repayment of
principal under the Prime Loan shall not exceed $1,000,000 from
proceeds realized on item (ii) and $950,000 from proceeds
realized on items (i) and (iii) discussed above.
In order to make the Loan to Prime, SBL and certain of its
affiliates borrowed the $3,000,000 from a bank (collectively "SBL
Borrowings"), and as part of the collateral pledged by SBL to the
bank in connection with such loan, SBL pledged, among other
things, its note from Prime. In order to obtain SBL's agreement
as provided above, and for other reasons, effective April 21,
2000, a subsidiary of the Company guaranteed on a limited basis
the obligations of SBL and its affiliates relating to the unpaid
principal amount due to the bank in connection with the SBL
Borrowings, and, in order to secure its obligations under the
guarantees pledged to the bank 1,973,461 shares of the Company's
Common Stock that it holds as treasury stock. Under the
guarantee, the Company's liability is limited to the value, from
time to time, of the Company's Common Stock pledged by the
Company. As of June 30, 2000, the outstanding principal balance
due to the bank from SBL as a result of such loan was $1,950,000.
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 cleanup of the site is
unknown due to continuing changes in the estimated total
cost of cleanup of the site and the percentage of the total
waste which was alleged to have been contributed to the site
by the Company. The Company had accrued an amount based on
a preliminary settlement proposal by the alleged potential
responsible parties; however, this liability was assumed as
of May 4, 2000, by the purchaser of the Automotive Business.
In connection with such assumption, certain of the Company's
subsidiaries received an indemnification by the purchaser of
the Automotive Business.
B. Arch Minerals Corporation, et al. v. ICI Explosives USA,
Inc., et al. On May 24, 1996, the plaintiffs filed this
civil cause of action against EDC and five 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. EDC does not believe that EDC
conspired with any party, including, but not limited to, the
five other defendants, to fix prices in connection with the
sale of commercial explosives. Based on the anticipated
future cost of defense and without admission of any kind,
EDC has agreed to settle this action in principle for an
amount which management does not consider material which was
accrued and charged to operations in the three-month period
ended June 30, 2000.
C. ASARCO v. ICI, et al. The U. S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and
consolidated with other lawsuits in Utah, leave to add EDC
as a defendant in that lawsuit. This lawsuit alleges a
national conspiracy, as well as a regional conspiracy,
directed against explosive customers in Missouri and seeks
unspecified damages. EDC 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 Arch case discussed above. Based on the
information presently available to EDC, EDC does not believe
that EDC conspired with any party, to fix prices in
connection with the sale of commercial explosives. EDC
intends to vigorously defend itself in this matter.
The Company, including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the
ordinary course of business. In the opinion of management after
consultation with counsel, all claims, legal actions (including
those described above) and complaints are not presently probable
of material loss, are adequately covered by insurance, or if not
so covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition 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.
Other
The Company has retained certain risks associated with its
operations, choosing to self-insure up to various specified
amounts under its automobile, workers' compensation, health and
general liability programs. The Company reviews such programs on
at least an annual basis to balance the cost-benefit between its
coverage and retained exposure.
Note 6: Long-Term Debt
As of June 30, 2000, the Company and certain of its subsidiaries,
including ClimaChem, are parties to a Revolving Credit Facility
evidenced by two separate loan agreements ("Agreements") with a
lender ("Lender") collateralized by receivables, inventories and
proprietary rights of the parties to the Agreements. The
Agreements have been amended from time to time since inception to
accommodate changes in business conditions and financial results.
The Agreements, as amended, requires the Company and ClimaChem to
maintain certain financial ratios and contain other financial
covenants, including capital expenditure limitations. The maximum
borrowing ability under the amended Agreements is the lesser of
$50.0 million or the borrowing availability calculated using
advance rates and eligible collateral less a Reserve of $5.0
million. The Agreements, as amended, provide for interest at the
Lender's prime rate plus 1.5% per annum or, at the Company's
option, at the Lender's LIBOR rate plus 3.875% per annum. The
term of the Agreements is through December 31, 2000, and is
renewable thereafter for successive thirteen-month terms if, by
October 1, 2000, the Company and Lender shall have determined new
financial covenants for the calendar year beginning in January
2001. The Company may terminate the Revolving Credit Facility
prior to maturity; however, should the Company do so, it would be
required to pay a termination fee of $500,000. While there is no
assurance that the Company will be successful in extending the
term of such credit facility, the Company believes it will be
successful in extending such facility or replacing such facility
from another Lender with substantially the same terms during
2000.
The outstanding borrowings under the Revolving Credit Facility of
$28.8 million at June 30, 2000 are classified as long-term debt
due within one year. As of June 30, 2000, the Borrowing Group,
excluding the " Reserve" had availability of $9.4 million. The
effective interest rate at June 30, 2000 was 11.0%.
In November 1997, the Company's wholly owned subsidiary,
ClimaChem, Inc. ("ClimaChem"), completed the sale of $105 million
principal amount of 10 3/4% Senior Notes due 2007, (the "Notes").
Interest on the Notes is payable semiannually in arrears on June
1 and December 1 of each year, and the principal is payable in
the year 2007. The Notes are senior unsecured obligations of
ClimaChem and rank pari passu in right of payment to all existing
senior unsecured indebtedness of ClimaChem and its subsidiaries.
The Notes are effectively subordinated to all existing and future
senior secured indebtedness of ClimaChem. As of June 30, 2000,
ClimaChem was current on the payment of all interest due the
holders of the Notes.
During the second quarter of 2000, a subsidiary of ClimaChem
repurchased approximately $19.2 million of the Notes and
recognized a gain of approximately $13.2 million, net of income
taxes of $.2 million. The outstanding principal balance of the
Notes is approximately $85.8 million at June 30, 2000. In July
2000, the Company repurchased approximately $6.0 million of
additional Notes on approximately the same basis as the second
quarter purchases.
ClimaChem owns substantially all of the companies comprising the
Company's Chemical and Climate Control Businesses. ClimaChem is
a holding company with no significant assets other than the notes
and accounts receivable from the Company or material 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 (the "Guarantors"),
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 June 30, 2000 and December
31, 1999 and the results of operations for the six-month and
three-month periods ended June 30, 2000 and 1999 are detailed
below.
ClimaChem, Inc. June 30, December 31,
2000 1999
(in thousands)
Balance sheet data:
Cash $ 3,401 $ 2,673
Trade accounts receivable, net 45,581 41,934
Inventories:
Finished goods 10,018 11,275
Work in process 6,339 5,503
Raw material 10,428 8,994
_________________________
Total inventory 26,785 25,772
Supplies and prepaid items 4,468 4,314
Due from LSB and affiliates, net (1) 1,840 1,758
_________________________
Total current assets 82,075 76,451
Property, plant and equipment, net 75,225 75,667
Notes and interest receivable from
LSB and affiliates (1) 14,046 13,948
Other assets, net 16,783 18,012
_________________________
Other assets, net
Total assets $ 188,129 $ 184,078
=========================
Accounts payable $ 21,017 $ 16,312
Brokerage account payable 4,863 -
Accrued liabilities 15,829 13,791
Current portion of long-term debt 31,139 29,644
__________________________
Total current liabilities 72,848 59,747
Long-term debt 94,395 112,544
Accrued losses on firm purchase
commitments 5,009 5,652
Stockholders' equity 15,877 6,135
_________________________
Total liabilities and stockholders'
equity $ 188,129 $ 184,078
=========================
Six Months Ended Three Months Ended
June 30, June 30,
ClimaChem, Inc. 2000 1999 2000 1999
(in thousands)
Operations data:
Revenues:
Net sales $ 140,577 $ 125,178 $ 73,880 $ 68,357
Other income 55 240 - 76
_____________________ _____________________
140,632 125,958 73,880 68,433
Costs and expenses:
Cost of sales 111,729 98,955 59,575 54,810
Selling, general and
administrative 21,938 20,336 11,024 10,319
Interest 7,307 7,131 3,616 3,637
Provision for loss on
firm purchase commitments 2,485 7,500 1,510 7,500
Other expense - - 687 -
_____________________ _____________________
143,459 133,922 76,412 76,266
_____________________ _____________________
Loss before business
disposed of, benefit
for income taxes and
extraordinary gain (2,827) (7,964) (2,532) (7,833)
Business disposed of
Revenues - 6,374 - 3,506
Operating costs,
expenses and
interest - 8,105 - 4,267
_____________________ _____________________
- (1,731) - (761)
Loss on disposal of
business - (1,971) - (1,971)
_____________________ ______________________
- (3,702) - (2,732)
_____________________ ______________________
Loss before benefit for
income taxes and
extraordinary gain (2,827) (11,666) (2,532) (10,565)
Benefit for income taxes - (3,074) - (3,124)
_____________________ ______________________
Loss before extraordinary
gain (2,827) (8,592) (2,532) (7,441)
Extraordinary gain, net
of income taxes of $900 12,569 - 12,569 -
_____________________ _______________________
Net income (loss) $ 9,742 $ (8,592) $ 10,037 $ (7,441)
===================== =======================
(1) Notes and other receivables from LSB and affiliates are
eliminated when consolidated with LSB.
Note 7: 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 six-month and three-month
periods ended June 30, 2000 and 1999 is detailed below.
Six Months Three Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
(in thousands)
Net income(loss) $10,817 $(16,899) $10,565 $(13,089)
Foreign currency
translation income - 1,599 - 1,337
________________________________________
Total comprehensive
income (loss) $10,817 $(15,340) $10,565 $(11,752)
=========================================
Note 8: Businesses Disposed of On August 2, 1999, the Company
sold substantially all the assets of its wholly owned Australian
subsidiary, Total Energy Systems Limited and its subsidiaries
("TES"), of the Chemical Business. The loss associated with the
disposition was $2.0 million and was comprised of disposition
costs of approximately $.3 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.
Note 9: Discontinued Operations On April 5, 2000, the Board of
Directors approved a plan of disposal of the Company's Automotive
Products Business to allow the Company to focus its efforts and
financial resources on its core businesses, Chemical and Climate
Control. Accordingly, the Automotive Business has been presented
in the accompanying consolidated financial statements as a
discontinued operation. The Company concluded the sale of the
substantially all of the assets of the Automotive Products
Business on May 4, 2000. As a result of the sale, the Company did
not receive any cash but did receive promissory notes totaling
$8.7 million, secured by a second lien on the buyer's assets, and
subordinated to the buyer's working capital lender. In addition,
the buyer assumed substantially all of the debts of the Company's
Automotive Products Business. The terms of the sale of the
Automotive Products Business calls for no payments of principal
on the notes to the Company for the first two years following
closing, and future receipts are entirely dependent upon the
buyers' ability to make the business profitable. Accordingly the
Company fully reserved its notes and related interest receivable
from the buyer and its investment in the net assets as of June
30, 2000 and December 31, 1999, respectively . The Company
remains a guarantor on certain equipment notes of the Automotive
Products Business which had outstanding indebtedness of
approximately $4.1 million as of June 30, 2000 and on its
revolving credit agreement in the amount of $1.0 million (for
which the Company has posted a letter of credit as of June 30,
2000). The loss on disposal does not include the loss, if any,
which may result if the Company is required to perform on its
guarantees described above. As of the date of this report, the
the Company believes that the buyer is current on its obligations
guaranteed by the Company; however, there are no assurances that
the Company will not be required to perform on its guarantees in
a future period. Net assets of the discontinued Automotive
operations were as follows as of December 31, 1999 (zero as of
June 30, 2000):
December 31,
1999
(in thousands)
Accounts receivable, net $ 4,852
Inventories 15,178
Other current assets 502
___________
Total current assets 20,532
Property and equipment, net 7,439
Other assets 2,138
___________
Total noncurrent assets 9,577
Accounts payable and accrued
liabilities (3,714)
Current portion of long-term debt (12,096)
Accrued loss through estimated
disposal date and other current
liabilities (2,289)
____________
Total current liabilities (18,099)
Long-term debt due after one year (4,115)
____________
7,895
Valuation allowance (7,895)
____________
Net assets of discontinued
operations $ -
============
Operating results of the discontinued Automotive operations for
the six-month and three-month periods ended June 30, 1999, are as
follows:
Six Months Three Months
Ended Ended
June 30, 1999 June 30, 1999
(in thousands)
Revenues $19,057 $ 8,915
Cost of sales 14,984 6,975
Selling, general 4,815 2,398
and administrative
Interest 1,584 806
Other expenses 105 105
_________________________
Loss from discontinued operations $(2,431) $(1,369)
=========================
Revenues of the Automotive Products Business of $10.3 million
through May 4, 2000 ($3.3 million for the period April 1, 2000
through May 4, 2000) have been excluded from revenues in the
accompanying Condensed Consolidated Statement of Operations of
LSB Industries, Inc. for the six-month and three-month periods
ended June 30, 2000.
Note: 10 Liquidity and Management's Plan 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") and its subsidiaries are dependent on credit
agreements with lenders and internally generated cash flow in
order to fund their operations and pay their debts and
obligations.
As of June 30, 2000, the Company and certain of its subsidiaries,
including ClimaChem, are parties to a working capital line of
credit evidenced by two separate loan agreements ("Agreements")
with a lender ("Lender") collateralized by receivables,
inventories and proprietary rights of the parties to the
Agreements. The Agreements have been amended from time to time
since inception to accommodate changes in business conditions and
financial results.
The term of the Agreements is through December 31, 2000, and is
renewable thereafter for successive thirteen-month terms if, by
October 1, 2000, the Company and Lender shall have determined new
financial covenants for the calendar year beginning in January
2001. The Company believes that it will be successful in
extending such facility or replacing such facility with another
lender with substantially the same terms during 2000.
As of June 30, 2000 the Company, exclusive of ClimaChem, and
ClimaChem have a borrowing availability under their existing
revolver of $.3 million, and $9.1 million, respectively, or $9.4
million in the aggregate and the effective interest rate was
11.0%. Borrowings under the Revolver outstanding at June 30,
2000, were $28.8 million. The annual interest on the outstanding
debt under the Revolver at June 30, 2000, at the rates then in
effect would approximate $3.2 million. The Agreements also
restrict the flow of funds, except under certain conditions, to
subsidiaries of the Company that are not parties to the
Agreement.
ClimaChem is restricted as to the funds that it may transfer to
the Company under the terms contained in an Indenture
("Indenture") covering the Senior Unsecured Notes issued by
ClimaChem. Under the terms of the Indenture, ClimaChem 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 (the "Tax Sharing Agreement"), (ii)
an amount not to exceed fifty percent (50%) of ClimaChem's
cumulative net income from January 1, 1998 through the end of the
period for which the calculation is made for the purpose of
proposing a dividend payment, 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. ClimaChem sustained a net loss of
$19.2 million in the calendar year 1999, and net income of
approximately $9.7 million for the six months ended June 30,
2000 including an extraordinary gain of $12.6 million, net
of income taxes, resulting from the repurchase of Senior
Unsecured Notes. No amounts were paid to the Company by
ClimaChem under the Tax Sharing Agreement, nor under the
Management Agreement during 1999. For the six months ended
June 30, 2000, ClimaChem was required to pay the Company
$900,000 under the Management Agreement inasmuch as earnings
before interest, income taxes, depreciation and amortization
("EBITDA") exceeded $13.0 million for the period. It is possible
that ClimaChem could pay up to $1.8 million of management fees to
the Company for fiscal 2000 should operating results be favorable
(if ClimaChem has EBITDA in excess of $26.0 million for fiscal 2000).
In addition, ClimaChem recorded a provision for income taxes relating
to the extraordinary gain on the repurchase of Senior Unsecured Notes
for the six months ended June 30, 2000 of $.9 million, $.8 million of
which is payable to the Company under the terms of the Tax Sharing
Agreement. There are no assurances that additional amounts will be
earned in future quarters or that the amount earned in the first half
of 2000 will not be required to be repaid in subsequent periods. Due
to these limitations, the Company and its non-ClimaChem subsidiaries
have limited resources to satisfy their obligations and may not be in a
position to satisfy its obligation to ClimaChem. The amount which
the Company owed ClimaChem at June 30, 2000 includes approximately
$.5 million for interest due June 1, 2000 on a $10 million note
payable by the Company to ClimaChem.
Due to the Company's and ClimaChem's net losses for the years of
1998 and 1999 and the limited borrowing ability under the
Revolver, the Company discontinued payment of cash dividends on
its common stock for periods subsequent to January 1, 1999, until
the Board of Directors determines otherwise, and the Company has
not paid the regular quarterly dividend of $.8125 on its
outstanding $3.25 Convertible Exchangeable Class C Preferred
Stock Series 2 ("Series 2 Preferred") since June 15, 1999,
totaling approximately $2.9 million. In July 2000, the Company
repurchased 172,500 shares of the Series 2 Preferred with a
stated value of approximately $8.6 million for approximately $.9
million. Also, the Company's Board of Directors has decided not
to pay the September 15, 2000 dividend payment on its outstanding
Series 2 Preferred. If the September 15 dividends on the Series
2 Preferred is not paid, the amount of the total arrearage of
unpaid dividend payment on the outstanding Series 2 Preferred
will be approximately $3.0 million. In addition, the Company did
not pay the January 1, 2000 regular dividend on the Series B
Preferred. The Company does not anticipate having funds
available to pay dividends on its stock for the foreseeable
future.
As of June 30, 2000, the Company had working capital of
approximately $2.8 million and long-term debt due after one year
of approximately $103.9 million on a consolidated basis.
However, the Company and its subsidiaries which are not
subsidiaries of ClimaChem had a working capital deficit of
approximately $4.2 million and long-term debt due after one year
of approximately $24.7 million including the amount owed to
ClimaChem.
The Company's plan for the remainder of 2000 identifies specific
non-core assets which the Company will attempt to realize to
provide additional working capital to the Company in 2000. As
part of the plan, the Company is presently evaluating
alternatives for realizing its net investment in the Industrial
Products Business. Further the Company's plan also calls for the
realization of the Company's investment in an option to acquire
an energy conservation company and advances made to such entity
(the "Optioned Company"). In April 2000, the Company received
written acknowledgment from the President of the Optioned Company
that it had executed a letter of intent to sell to a third party,
the proceeds from which would allow repayment of the advances and
options payments to the Company in the amount of approximately
$2.7 million. Upon receipt of these proceeds, the Company is
required to repay up to $1.0 million of outstanding indebtedness
to a related party, SBL Corporation, related to an advance made
to the Company in 1997. The remaining proceeds would be
available for corporate purposes.
During 1999 and into 2000, the Company has been restructuring its
operations and reducing its workforce as opportunities arise. The
Company also successfully renegotiated its primary raw material
purchase contracts in the Chemical Business in an effort to
improve the profitability of the Business and focused its
attention on the development of new, market-innovated products in
the Climate Control Business.
During the second quarter of 2000, a subsidiary of ClimaChem
repurchased approximately $19.2 million of the Senior Unsecured
Notes and recognized a gain of approximately $13.2 million, net
of income taxes. At June 30, 2000, the subsidiary had a liability
to the brokerage firms which reacquired the Senior Unsecured Notes
in the amount $4.9 million which was paid in July 2000 out of the
subsidiary's working capital. In July 2000, the Company repurchased
approximately $6.0 million of additional Senior Unsecured Notes on
approximately the same basis as the second quarter purchases.
For the remainder of 2000, the Company has planned capital
expenditures of approximately $2.5 million, primarily in the
Chemical and Climate Control Businesses, but such capital
expenditures are dependent upon obtaining acceptable financing.
The Company expects to delay these expenditures as necessary
based on the availability of adequate working capital and the
availability of financing. The Company believes, based upon
present circumstances, that it will receive relief from certain
of the compliance dates under its wastewater management project
and expects that this will ultimately result in the delay in the
implementation date of such project. Because the Company has not
completed its evaluation of engineering alternatives, the Company
has not yet provided to the state of Arkansas its final design
plans by the deadline of August 1, 2000 set forth in the
applicable consent order. The consent order provides that the
August 1, 2000 deadline for submission of final design plans will
be preceded by the agency's issuance of a revised permit. The
revised permit will include the discharge limits that will apply
to the wastewater treatment project. To date the state has
deferred issuance of the revised permit. The Company continues
to regularly advise the state of the projects engineering status
and financing status. Construction of the wastewater treatment
project is subject to the Company obtaining financing to fund
this project. There are no assurances that the Company will be
able to obtain the required financing. Failure to construct the
wastewater treatment project could have a material adverse effect
on the Company.
The Company's plan for the remainder of 2000 involves a number of
initiatives and assumptions which management believes to be
reasonable and achievable; however, should the Company not be
able to execute this plan described above, it may not have
resources available to meet its obligations as they come due.
Note 11: Loss on Firm Purchase Commitment The Chemical Business
is obligated to purchase anhydrous ammonia pursuant to the terms
of a firm uncancelable supply contract. At June 30, 2000, the
purchase price the Chemical Business was required to pay for
anhydrous ammonia to be purchased under the contract, which was
approximately ten percent of the Chemical Business' anhydrous
ammonia requirements in 2000 (15% in 2001 and 2002), exceeded and
was expected to continue to exceed the spot market prices
throughout the purchase period. Due to the estimated sales prices
and the cost to produce the nitrate products, including the cost
of the anhydrous ammonium to be purchased under the contract, the
costs of certain of the Company's nitrate based products are
expected to exceed the anticipated future sales prices. As a
result, an additional provision for loss on the firm purchase
commitment of $1.5 million was recorded in the second quarter of
2000 ($2.5 million for the six months ended June 30, 2000). At
June 30, 2000 and December 31, 1999, the accompanying balance
sheets include remaining accrued losses under the firm purchase
commitment of $8.4 and $7.4 million, respectively ($3.4 and $1.8
million of which is classified as current in accrued liabilities,
respectively). Due to the pricing mechanism in the contract, it
is reasonably possible that this loss provision estimate may
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 June 30, 2000 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 relating to its Chemical and Climate Control
Businesses. In addition, the Company is seeking to reduce its
outstanding indebtedness and improve its liquidity and operating
results through liquidation of selected assets. In this regard,
the Company previously concluded that its Industrial and
Automotive Products Businesses were non-core to the Company.
The Automotive Products Business was sold pursuant to a
definitive plan approved by the Board of Directors. Upon the
closing of the sale, the Company received notes in the
approximate amount of $8.7 million, such notes being secured by a
second lien on the assets of the Automotive Products Business.
These notes, and any payments of principal and interest, thereon,
are subordinated to the buyer's primary lender. The Company will
receive no principal payments under the notes for at least the
first two years following the sale of the Automotive Products
Business, and future receipts are entirely dependent upon the
buyers' ability to make the business profitable. Accordingly,
the Company has fully reserved its note and related interest
receivable from the buyer as of June 30, 2000. In addition, the
buyer assumed substantially all of the Automotive Products Business'
debts and obligations as of the date of the sale.
During the second quarter of 2000, a subsidiary of the
Company repurchased approximately $19.2 million of Senior
Unsecured Notes and recognized a gain of approximately $13.2
million, net of income taxes. At June 30, 2000, the subsidiary
had a liability to the brokerage firms which reacquired the Senior
Unsecured Notes in the amount of $4.9 million which was paid in
July 2000 out of the subsidiary's working capital. During July 2000,
a subsidiary of the Company repurchased approximately $6.0 million
of additional Senior Unsecured Notes on approximately the same
basis as the second quarter purchases. The purchases will serve
to reduce interest expense by approximately $2.7 million annually.
In addition, in July 2000, a subsidiary of the Company
purchased 172,500 shares of its $3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 ("$3.25 Preferred") for
approximately $.9 million. Each share of $3.25 Preferred has a
face value of $50.00 per share. The Company bought these shares
out of its working capital.
Chemical Business
The Company's Chemical Business manufactures three principal
product lines that are derived from anhydrous ammonia: (1)
fertilizer grade ammonium nitrate for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric
acid for commercial applications primarily in the paper industry.
As of June 30, 2000, the Chemical Business had commitments
to purchase 84,000 tons of anhydrous ammonia under a take or pay
contract at a minimum volume of 2,000 tons per month of anhydrous
ammonia during 2000 and 3,000 tons per month of anhydrous ammonia
during 2001 and 2002. In addition, under the contract the
Chemical Business is committed to purchase 50% of its remaining
requirements of anhydrous ammonia through 2002 from this third
party at prices which approximate market prices. Based on the
pricing index contained in this contract, prices paid during the
six months ended June 30, 2000 were higher than the current
market spot price. The purchase price(s) the Chemical Business
will be required to pay for the remaining 84,000 tons of
anhydrous ammonia under this contract currently exceeds and is
expected to continue to exceed the spot market prices throughout
the purchase period. As a result, in the first quarter of 2000
and in 1999 the Company recorded loss provisions for anhydrous
ammonia required to be purchased during the remainder of the
contract aggregating approximately $1.0 and $8.4 million,
respectively. At June 30, 2000, an additional loss provision of
approximately $1.5 million was recorded based on the forward
contract pricing existing at June 30, 2000 and estimated market
prices for certain products to be manufactured and sold during
the remainder of the contract. At June 30, 2000, the accrued
liability for future payments of the loss provision included in
the Condensed Consolidated Financial Statements was approximately
$8.4 million.
During 1999 and the six months ended June 30, 2000, the
Chemical Business has reported losses from operations after
interest and before income tax credit, if any. Management
expects the Chemical Business to continue to report losses until
natural gas and/or anhydrous ammonia prices come down or until
sales prices of the Business' nitrogen products increases to a
level that reflects the high price of such raw material. See
"Special Note Regarding Forward-Looking Statements".
The Chemical Business is a member of an organization of
domestic fertilizer grade ammonium nitrate producers which sought
relief from extremely low priced Russian ammonium nitrate. This
industry group filed a petition in July 1999 with the U.S.
International Trade Commission and the U.S. Department of
Commerce seeking an antidumping investigation and, if warranted,
relief from Russian dumping. The International Trade Commission
rendered a favorable preliminary determination that U.S.
producers of ammonium nitrate have been injured as a result of
Russian ammonium nitrate imports. In addition, the U.S.
Department of Commerce issued a preliminary affirmative
determination that the Russian imports were sold at prices that
were significantly below their fair market value. On May 19,
2000, the U.S. and Russian governments entered into an agreement
to limit volumes and set minimum prices for Russian ammonium
nitrate exported to the United States ("Suspension Agreement").
The U.S. industry , however, requested completion of the
investigation. On August 2, 2000, by unanimous vote, the U.S.
International Trade Commission found that imports by Russian
fertilizer grade ammonium nitrate have materially injured the
domestic ammonium nitrate industry ("Final Determination"). This
Final Determination will not abrogate the Suspension Agreement.
However, in the event that Russia withdraws from or violates the
Suspension Agreement, an antidumping order would be issued
subjecting Russian fertilizer grade ammonium nitrate to a dumping
duty of approximately 250%.
Net Sales in the Chemical Business (excluding the Australian
subsidiary in which substantially all of its assets were disposed
of in August, 1999) were $76.3 million for the six months ended
June 30, 2000 and $69.7 million for the six months ended June 30,
1999. The sales volume from the Chemical Business increased in
2000 from the 1999 level. This increase in sales is due largely
to increased sales volume of mining and industrial acid products
and improved sales prices of certain agricultural products. The
gross profit (excluding the Australian subsidiary) increased to
$12.0 million (or 15.8% of net sales) in 2000 from $9.6 million
(or 13.8% of net sales) in 1999. The increase in the gross profit
was primarily a result of improved sales prices and reductions in
costs relating to certain agricultural products and the
realization of approximately $1.5 million of the provision for
loss on firm purchase commitments and inventory write-down. This
increase was partially offset by lower sales prices and increased
costs relating to certain mining and industrial acid products.
The Australian subsidiary revenues for the six months ended
June 30, 1999 were $6.4 million and the loss was $3.7 million,
including a loss on disposal of $2.0 million. (See Note 8 of
Notes to Condensed Consolidated Financial Statements.) See Special
Note Regarding Forward-Looking Statements".
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.
Sales of $64.3 million for the six months ended June 30,
2000, in the Climate Control Business were approximately 14.7%
greater than sales of $56.0 million for the six months ended June
30, 1999. The gross profit was approximately $17.4 million and
$17.3 million in both periods. The gross profit percentage
decreased to 27.0% for 2000 from 30.9% for 1999. This decrease
is primarily due to (i) increased material costs relating to a
new product line and labor costs, (ii) decreased gross margins
caused by competitive pressures and (iii) increased sales of
products with lower margins.
Industrial Products Business
Net sales in the Industrial Products Business during the six
months ended June 30, 2000 and 1999 were $5.6 million and $4.9
million, respectively, resulting in an operating profit of $.2
million and operating loss of $.9 million, respectively. The net
investment in assets of this Business has continued to decrease
and the Company expects to realize further reductions in future
periods. The Company continues to eliminate certain categories of
machines from the product line by not replacing those machines
when sold.
RESULTS OF OPERATIONS
Six months ended June 30, 2000 vs. Six months ended June 30,
1999.
Revenues
Total revenues of Businesses continuing for the six months
ended June 30, 2000 and 1999 were $148.4 million and $131.9
million, respectively, an increase of $16.5 million. Sales and
other income increased $15.6 and $.9 million, respectively.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for the six months ended June 30, 2000, were
$146.2 million, compared to $130.6 million for the first six
months of 1999, an increase of $15.6 million. This increase in
sales resulted principally from: (i) increased sales in the
Chemical Business of $6.6 million due primarily from increased
sales volume of mining and industrial acid products and improved
sales prices of certain agricultural products, (ii) increased
sales in the Climate Control Business of $8.2 million due
primarily from an increase in export sales and an increase in
sales volume due to improved manufacturing processes , and (iii)
increased sales in the Industrial Products Business due to an
increase in sales of machine tools.
Gross Profit
Gross profit of Businesses continuing as a percent of sales
was 21.2% for the first six months of 2000, compared to 21.6% for
the first six months of 1999. The decrease in the gross profit
percentage was primarily the result of lower profit margins in
the Climate Control Business caused primarily from (i) increased
material costs relating to a new product line and labor costs,
(ii) decreased gross margins caused by competitive pressures,
and (iii) increased sales of products with lower margins. This
decrease was offset by higher profit margins in the Chemical
Business due to improved sales prices and reductions in costs
relating to certain agricultural products and the realization of
approximately $1.5 million of the provision for loss on firm
purchase commitments and inventory write-down in 2000. This
increase was offset by lower sales prices and increased costs
relating to certain mining and industrial acid products.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from Businesses continuing at June 30, 2000,
were 16.0% in the six month period ended June 30, 2000, compared
to 18.4% for the first six months of 1999. This decrease is
primarily the result of higher sales without a comparable
increase in expenses, however, SG&A expenses are lower due to
strategic efforts to reduce SG&A expenses relating to the
Industrial Products Business and a reduction in warranty expenses
due to quality control, improvements and improved management of
warranty claims in the Climate Control Business.
Interest Expense
Interest expense for continuing businesses of the Company
was $8.1 million in the first six months of 2000, compared to
$7.3 million for the first six months of 1999. The increase of
$.8 million primarily resulted from increased lenders' prime
rates.
Provision for Loss
The Company had a provision for loss on firm purchase
commitments of approximately $2.5 and $7.5 million for the six
months ended June 30, 2000 and 1999, respectively. See discussion
in Note 11 of Notes to Condensed Consolidated Financial
Statements.
Other Expense
Other expense for the six months ended June 30, 2000
included approximately $.6 million in costs incurred by the
Company in attempts to renegotiate the terms and conditions of
the Indenture related to the Senior Unsecured Notes of a
subsidiary of the Company as well as a provision for a
litigation settlement of $.6 million for the six months ended
June 30, 2000 (none in 1999).
Business Disposed of
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. See discussion in Note 8 of the Notes
to Condensed Consolidated Financial Statements.
Loss from Continuing Operations before Income Taxes and
Extraordinary Gain
The Company had a loss from continuing operations before
income taxes and extraordinary gain of $2.4 million in the first
six months of 2000 compared to $14.4 million in the six months
ended June 30, 1999. Approximately $5.0 million of the increased
profitability of $12.0 million was due to the difference in loss
provision on firm purchase commitments. The remainder of the
improvement was primarily due to improved profit margins of the
Chemical Business relating to certain agricultural products and
the realization of the loss provision on firm purchase
commitments in 2000 compare to the inventory write-down in 1999
offset by lower profit margins of the Climate Control Business
due to increased costs associated with new product lines and
labor and lower profit margins in the commercial and export heat
pump sales due to competitive pressures. The profit margins of
certain mining and industrial acid products of the Chemical
Business also decreased due to lower sales prices and higher
material costs. In addition, SG&A expenses decreased but were
partially offset by increased interest expense.
Provision for Income Taxes
As a result of the Company's net operating loss carry-
forward for income tax purposes as discussed elsewhere herein and
in Note 1 of Notes to Condensed Consolidated Financial
Statements, no provisions for income taxes were necessary for the
six months ended June 30, 2000. The Company's provisions for
income taxes were for current state income taxes and federal
alternative minimum taxes in 1999.
Discontinued Operations
On April 5, 2000 the Board of Directors approved a plan of
disposal of the Company's Automotive Products Business
("Automotive") which was completed on May 4, 2000. Automotive is
reflected as discontinued operations for the periods presented.
The net loss from discontinued operations of Automotive for the
phase-out period beginning January 1, 2000 through May 4, 2000
(closing date) was fully accrued for at December 31, 1999. For
the six months ended June 30, 1999, the net loss from
discontinued operations was $2.4 million. See discussion in Note
9 of the Notes to Consolidated Financial Statements.
Extraordinary Gain
During the second quarter of 2000, a subsidiary of the
Company repurchased approximately $19.2 million of the Senior
Unsecured Notes and recognized a gain of approximately $13.2
million, net of income taxes of $.2 million.
Three months ended June 30, 2000 vs. Three months ended June 30,
1999.
Revenues
Total revenues of Businesses continuing for the three months
ended June 30, 2000 and 1999 were $77.5 million and $71.4
million, respectively, an increase of $6.1 million relating to
net sales.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for the three months ended June 30, 2000, were
$76.6 million, compared to $70.5 million for the three months
ended June 30, 1999, an increase of $6.1 million. This increase
in sales resulted principally from: (i) increased sales in the
Chemical Business of $2.3 million due primarily from increased
sales volume of mining and industrial acid products offset by
decreased sales volume of agricultural products, (ii) increased
sales in the Climate Control Business of $3.3 million due
primarily from an increase in in sales volume due to improved
manufacturing processes, and (iii) increased sales in the
Industrial Products Business of $.5 million due to increased
sales of machine tools.
Gross Profit
Gross profit of Businesses continuing as a percent of sales
was 19.6% for the three months ended June 30, 2000, compared to
20.1% for the three months ended June 30, 1999. The decrease in
the gross profit percentage was primarily the result of lower
profit margins in the Climate Control Business due primarily from
(i) increased sales of products with lower margins, (ii)
decreased gross margins caused by competitive pressures, and
(iii) increased labor and certain overhead costs. These lower
margins were offset by higher profit margins in the Chemical
Business due to improved sales prices and reductions in costs
relating to certain agricultural products and the realization of
approximately $.6 million of the provision for loss on firm
purchase commitments in 2000 compared to the write-down of
inventory of $1.6 million in 1999. This increase was offset by
lower sales prices and increased costs relating to certain mining
and industrial acid products.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from Businesses continuing at June 30, 2000,
were 15.3% in the three-month period ended June 30, 2000,
compared to 17.2% for 1999. This decrease is primarily the
result of higher sales without a comparable increase in expenses,
however, SG&A expenses are lower due to strategic efforts to
reduce SG&A expenses relating to the Industrial Products
Business.
Interest Expense
Interest expense for continuing businesses of the Company
was $4.0 million in the three-month period ended June 30, 2000,
compared to $3.7 million for 1999. The increase of $.3 million
primarily resulted from increased lenders' prime rates.
Provision for Loss
The Company had a provision for loss on firm purchase
commitments of approximately $1.5 and $7.5 million for the three
months ended June 30, 2000 and 1999, respectively. See discussion
in Note 11 of Notes to Condensed Consolidated Financial
Statements.
Other Expense
Other expense for the three months ended June 30, 2000
included approximately $.6 million in costs incurred by the
Company in attempts to renegotiate the terms and conditions of
the Indenture related to the Senior Unsecured Notes of a
subsidiary of the Company as well as a provision for a
litigation settlement of $.6 million for the three months ended
June 30, 2000 (none in 1999).
Business Disposed of
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. See discussion in Note 8 of the Notes
to Condensed Consolidated Financial Statements.
Loss from Continuing Operations before Income Taxes and
Extraordinary Gain
The Company had a loss from continuing operations before
income taxes and extraordinary gain of $2.7 million in the three-
month period ended June 30, 2000 compared to a loss of $11.7
million in the three months ended June 30, 1999. The increased
profitability of $9.0 million was primarily due to the variance
in the amount of the loss on firm purchase commitments between
the two periods. Other profitability increases resulted from
improved profit margins of the Chemical Business relating to
certain agricultural products and the inventory write-down in
1999 offset by lower profit margins of the Climate Control
Business due to increased labor and overhead costs associated
with new product lines and lower profit margins in the commercial
and export heat pump sales. The profit margins of certain mining
and industrial acid products of the Chemical Business also
decreased due to lower sales prices and higher material costs.
In addition, decreased SG&A expenses were offset by increased
interest expense.
Provision for Income Taxes
As a result of the Company's net operating loss carry-
forward for income tax purposes as discussed elsewhere herein and
in Note 1 of Notes to Condensed Consolidated Financial
Statements, no provisions for income taxes were necessary for the
three months ended June 30, 2000 and 1999.
Discontinued Operations
On April 5, 2000 the Board of Directors approved a plan of
disposal of the Company's Automotive Products Business
("Automotive") which was completed on May 4, 2000. Automotive is
reflected as discontinued operations for the periods presented.
The net loss from discontinued operations of Automotive for phase-
out period from April 1, 2000 to May 4, 2000 was fully accrued
for at December 31, 1999. For the three-month period ended June
30, 1999, the net loss from discontinued operations was $1.4
million. See discussion in Note 9 of the Notes to Consolidated
Financial Statements.
Extraordinary Gain
During the second quarter of 2000, a subsidiary of the
Company repurchased approximately $19.2 million of the Senior
Unsecured Notes and recognized a gain of approximately $13.2
million, net of income taxes of $.2 million.
Liquidity and Capital Resources
Cash Flow From Operations
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures.
The Company has financed its cash requirements primarily through
internally generated cash flow, borrowings under its revolving
credit facilities and secured equipment financing, In November
1997, the Company issued $105 million of Senior Unsecured Notes
by its wholly owned subsidiary, ClimaChem, Inc. .
Net cash provided by continuing operating activities for the
six months ended June 30, 2000 was $3.1 million, after a noncash
extraordinary gain of $13.5 million, depreciation and
amortization of $4.9 million, loss on firm purchase commitments,
net of realization of $1.0 million and including an accounts
receivable increase of $3.3 million; an increase in accounts
payable of $4.2 million; and other items totaling $1.0 million.
The increase in receivables is primarily due to seasonal sales
of agricultural products in the Chemical Business and improved
sales in the Climate Control Business. The increase in accounts
payable is primarily due to increased purchases caused by an
increase in production and timing of payments in the Chemical and
Climate Control Businesses.
Cash Flow From Investing and Financing Activities
Net cash used in investing activities for the six months
ended June 30, 2000 included $3.7 million for 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 provided by financing activities included proceeds
from long- term debt and other debt of $2.4 million offset by
payments of $3.0 million. and a net increase in revolving debt of
$1.4 million.
Source of Funds
Continuing Businesses
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"), and its subsidiaries are dependent on credit
agreements with lenders and internally generated cash flow in
order to fund their operations and pay their debts and
obligations.
As of June 30, 2000, the Company and certain of its
subsidiaries, including ClimaChem, are parties to a working
capital line of credit evidenced by two separate loan agreements
("Agreements") with a lender ("Lender") collateralized by
receivables, inventories and proprietary rights of the parties to
the Agreements as described in Note 6 of Notes to Condensed
Consolidated Financial Statements. The term of the Agreements is
through December 31, 2000, and is renewable thereafter for
successive thirteen-month terms if, by October 1, 2000, the
Company and Lender shall have determined new financial covenants
for the calendar year beginning in January 2001. While there is
no assurance that the Company will be successful in extending the
term of such credit facility, the Company believes it will be
successful in extending such facility or replacing such facility
from another Lender with substantially the same terms during
2000.
As of June 30, 2000 the Company, exclusive of ClimaChem, and
ClimaChem had a borrowing availability under the revolver of $.3
million, and $9.1 million respectively, or $9.4 million in the
aggregate and the effective interest rate was 11.0%. Borrowings
under the Revolver outstanding at June 30, 2000, were $28.8
million. The annual interest on the outstanding debt under the
Revolver at June 30, 2000, at the rates then in effect would
approximate $3.2 million. The Agreements also restrict the flow
of funds, except under certain conditions, to subsidiaries of the
Company that are not parties to the Agreement.
In addition to the credit facilities discussed above, as of
June 30, 2000, ClimaChem's wholly owned subsidiary, DSN
Corporation ("DSN"), is a party to three loan agreements with a
financial company (the "Financing Company") for three projects.
At June 30, 2000, DSN had outstanding borrowings of $6.7 million
under these loans. The loans have monthly repayment schedules 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 June 30,
2000, at the agreed to interest rates would approximate $.6
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 August 2000, DSN obtained a waiver from the
Financing Company of the financial covenants through June 2001.
As discussed in Note 10 of Notes to Condensed Consolidated
Financial Statements, ClimaChem is restricted as to the funds
that it may transfer to the Company under the terms contained in
an Indenture ("Indenture") covering the Senior Unsecured Notes
issued by ClimaChem. No amounts were paid to the Company by
ClimaChem under the Tax Sharing Agreement, nor under the
Management Agreement during 1999. For the six months ended June
30, 2000, ClimaChem was required to pay the Company $900,000
under the Management Agreement inasmuch as earnings before
interest, income taxes, depreciation and amortization ("EBITDA")
exceeded $13.0 million for the period. It is possible that
ClimaChem could pay up to $1.8 million of management fees to the
Company should operating results be favorable (if ClimaChem has
EBITDA in excess of $26.0 million). In addition, ClimaChem
recorded a provision for income taxes relating to the
extraordinary gain on the repurchase of Senior Unsecured Notes
for the six months ended June 30, 2000 of $.9 million, $.8
million of which is payable to the Company under the terms of the
Tax Sharing Agreement. There are no assurances that additional
amounts will be earned in future quarters or that the amount
earned in the first half of 2000 will not be required to be
repaid in subsequent periods. Due to these limitations, the
Company and its non-ClimaChem subsidiaries have limited resources
to satisfy their obligations and may not be in a position to
satisfy its obligations to ClimaChem. The amount which the
Company owed ClimaChem at June 30, 2000 includes approximately
$.5 million for interest due June 1, 2000 on a $10 million note
payable by the Company to ClimaChem.
Due to the Company's and ClimaChem's net losses for the
years of 1998 and 1999 and the limited borrowing ability under
the Revolver, the Company discontinued payment of cash dividends
on its Common Stock for periods subsequent to January 1, 1999,
until the Board of Directors determines otherwise, and the
Company has not paid the regular quarterly dividend of $.8125 on
its outstanding $3.25 Convertible Exchangeable Class C Preferred
Stock Series 2 ("Series 2 Preferred") since June 15, 1999,
totaling approximately $2.9 million. In July 2000, the Company
repurchased 172,500 shares of the Series 2 Preferred for
approximately $.9 million. In addition, the Company did not pay
the January 1, 2000 regular dividend on the Series B Preferred.
The Company does not anticipate having funds available to pay
dividends on its stock for the foreseeable future.
As of June 30, 2000, the Company and its subsidiaries which
are not subsidiaries of ClimaChem had a working capital deficit
of approximately $4.2 million and long-term debt due after one
year of approximately $24.7 million including amounts owed to
ClimaChem.
Commencing in 1997, the Company created a long-term plan
which focused around the Company's core operations, the Chemical
and Climate Control Businesses. This plan commenced with the sale
of the 10 3/4% Senior Unsecured Notes by the Company's wholly
owned subsidiary, ClimaChem, in November 1997. This financing
allowed the core businesses to continue their growth through
expansion of business directly related to the Company's core
operations.
The plan for 2000 called for the Company to dispose of a
significant portion of its non-core assets. Therefore, on April
5, 2000, the Board of Directors approved a plan for the sale of
its Automotive Products Business, which was concluded on May 4,
2000. The Company's plan for the remainder of 2000 calls for the
Company to improve its liquidity and operating results through
the liquidation of non-core assets, realization of benefits from
its late 1999 and early 2000 realignment of its overhead (which
serves to minimize the cash flow requirements of the Company and
its subsidiaries which are not subsidiaries of ClimaChem) and
through various debt and equity alternatives. The Company's plan
for the remainder of 2000 also identifies specific other non-core
assets which the Company will attempt to realize to provide
additional working capital to the Company in 2000. See "Special
Note Regarding Forward Looking Statements." As part of the plan,
the Company is presently evaluating alternatives for realizing
its net investment in the Industrial Products Business. Further,
the Company's plan also calls for the realization of the
Company's investment in an option to acquire an energy
conservation company and advances made to such entity (the
"Optioned Company"). In April 2000, the Company received written
acknowledgment from the President of the Optioned Company that it
had executed a letter of intent to sell to a third party, the
proceeds from which would allow repayment of the advances and
options payments to the Company in the amount of approximately
$2.7 million. Upon receipt of these proceeds, the Company is
required to repay up to $1.0 million of outstanding indebtedness
to a related party, SBL Corporation, related to an advance made
to the Company in 1997. The remaining proceeds would be available
for corporate purposes.
During 1999 and into 2000, the Company has been
restructuring its operations and reduced its workforce as
opportunities arise. The Company also successfully renegotiated
its primary raw material purchase contracts in the Chemical
Business in an effort to improve the profitability of the
Business and focused its attention on the development of new,
market-innovative products in the Climate Control Business.
For the remainder of 2000, the Company has planned capital
expenditures of approximately $2.5 million, primarily in the
Chemical and Climate Control Businesses, but such capital
expenditures are dependent upon obtaining acceptable financing.
The Company expects to delay these expenditures as necessary
based on the availability of adequate working capital and the
availability of financing. The Company believes, based upon
present circumstances, that it will receive relief from certain
of the compliance dates under its wastewater management project
and expects that this will ultimately result in the delay in the
implementation date of such project. Because the Company has not
completed its evaluation of engineering alternatives, the Company
has not yet provided to the state of Arkansas its final design
plans by the deadline of August 1, 2000 set forth in the
applicable consent order. The consent order provides that the
August 1, 2000 deadline for submission of final design plans will
be preceded by the agency's issuance of a revised permit. The
revised permit will include the discharge limits that will apply
to the wastewater treatment project. To date the state has
deferred issuance of the revised permit. The Company continues
to regularly advise the state of the projects engineering status
and financing status. Construction of the wastewater treatment
project is subject to the Company obtaining financing to fund
this project. There are no assurances that the Company will be
able to obtain the required financing. Failure to construct the
wastewater treatment project could have a material adverse effect
on the Company.
The Company's plan for the remainder of 2000 involves a
number of initiatives and assumptions which management believes
to be reasonable and achievable; however, should the Company not
be able to execute this plan described above, it may not have
resources available to meet its obligations as they come due.
Discontinued Business
As discussed in Note 9 of Notes to Condensed Consolidated
Financial Statements, on April 5, 2000, the Board of Directors
approved a plan of disposal of the Company's Automotive Products
Business ("Automotive"). The sale of Automotive was concluded on
May 4, 2000. The Company received notes for its net investment
of approximately $8.7 million, and the buyer assumed
substantially all of the Automotive Products Business'
liabilities. The losses associated with the discontinuation of
this business segment are reflected in the net loss from
discontinued operations for the six months ended June 30, 1999 in
the Condensed Consolidated Statements of Operations.
The terms of the notes received in the sale call for no
payments of principal for the first two years following the
close. Interest will accrue at Wall Street Journal Prime plus
1.0% but will not be paid until and if Automotive's availability
reaches a level of $1.0 million. Accrued interest will not be
recognizable until received.
The Company remains a guarantor on certain equipment notes
of Automotive, which had outstanding indebtedness of
approximately $4.1 million at June 30, 2000, and on the
Automotive Revolver in the amount of $1.0 million for which the
Company has posted a letter of credit as of June 30, 2000. As of
the date of this report, the Company believes that the buyer is
current on its obligations guaranteed by the Company; however,
there are no assurances that the Company will not be required to
perform on its guarantee in a future period.
Debt Guarantee
As discussed in Note 5 of Notes to Condensed Consolidated
Financial Statements, on October 17, 1997, Prime Financial
Corporation ("Prime"), a subsidiary of the Company, borrowed from
SBL Corporation, a corporation wholly owned by the spouse and
children of Jack E. Golsen, Chairman of the Board and President
of the Company, the principal amount of $3,000,000 (the "Loan")
on an unsecured basis and payable on demand, with interest
payable monthly in arrears at a variable interest rate equal to
the Wall Street Journal Prime Rate plus 2% per annum. The
purpose of the loan was to assist the Company by providing
additional liquidity. The Company has guaranteed the Prime Loan.
As of June 30, 2000, the unpaid principal balance on the Prime
Loan was $1,950,000. In April, 2000, at the request of Prime and
the Company, SBL agreed to modify the demand note to make such a
term note with a maturity date no earlier than April 1, 2001,
unless the Company receives cash proceeds in connection with
either (i) the sale or other disposition of KAC Acquisition Corp.
and/or Kestrel Aircraft, and/or (ii) the repayment of loans by Co-
Energy Group and affiliates, and/or the repayment of amounts in
connection with the stock option agreement with the shareholders
of Co-Energy Group, and/or (iii) some other source that is not in
the Company's projections for the year 2000. From April 1, 2000
until no sooner than April 1, 2001, any demand for repayment of
principal under the Prime Loan shall not exceed $1,000,000 from
proceeds realized on item (ii) and $950,000 from proceeds
realized on items (i) and (iii) discussed above.
In order to make the Loan to Prime, SBL and certain of its
affiliates borrowed the $3,000,000 from a bank (collectively "SBL
Borrowings"), and as part of the collateral pledged by SBL to the
bank in connection with such loan, SBL pledged, among other things,
its note from Prime. In order to obtain SBL's agreement as provided
above, and for other reasons, effective April 21, 2000, a subsidiary
of the Company guaranteed on a limited basis the obligations of
SBL and its affiliates relating to the unpaid principal amount due
to the bank in connection with the SBL Borrowings, and, in order
to secure its obligations under the guarantees pledged to the bank
1,973,461 shares of the Company's Common Stock that it holds as
treasury stock. Under the guarantee, the Company's liability is
limited to the value, from time to time, of the Company's Common
Stock pledged by the Company. As of June 30, 2000, the outstanding
principal balance due to the bank from SBL as a result of such loan
was $1,950,000.
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 Disclosure 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, 1999, 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 June 30, 2000, the Company's variable rate and fixed
rate debt, which aggregated $139.9 million, exceeded the debt's
fair market value by approximately $58.4 million ($79.0 million
at December 31, 1999). The fair value of the Senior Notes of a
subsidiary of the Company was determined based on a market
quotation for such securities.
Raw Material Price Risk
The Company has a remaining commitment at June 30, 2000 to
purchase 84,000 tons of anhydrous ammonia under a contract. The
Company's purchase price can be higher or lower than the current
market spot price. As of June 30, 2000, based on the forward
contract pricing expected during the remaining contract term and
estimated market prices for certain products to be manufactured
and sold during the remainder of the contract, a provision for
losses during the remainder of the purchase period of
approximately $2.5 million was recorded in the six months ended
June 30, 2000. See Note 11 of Notes to Condensed Consolidated
Financial Statements.
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, (ii) establishing a position as a market
leader, (iii) the amount of the loss provision for anhydrous
ammonia required to be purchased may increase (iv) plan for 2000
to realize cash, reduce indebtedness and improve liquidity and
operating results, (v) collection of notes received on the sale
of the Automotive Products Business, (vi) ability to either
extend term of existing working capital agreement or replace
such, (vii) availability of net operating loss carryovers, (viii)
amount to be spent relating to capital expenditures, (ix) ability
to be able to continue to borrow under the Company's revolving
line of credit, (x) ability to complete the sale of the Optioned
Company, (xi) ability to obtain financing to fund its presently
anticipated capital requirements, (xii) ability to make required
capital improvements, (xiii) anticipated cost of certain amounts
of anhydrous ammonia exceed the market, (xiv) no improvements in
the sales price of certain nitrate based products of the Chemical
Business is expected in the near future due to increased cost of
anhydrous ammonia, and (xv) the Company's ability to receive or
repay management fees and amounts related to taxes from its
subsidiary. 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) changes in
federal, state and local laws and regulations, especially
environmental regulations, or in interpretation of such, pending
(vii) additional releases (particularly air emissions into the
environment), (viii) material increases in equipment,
maintenance, operating or labor costs not presently anticipated
by the Company, (ix) the requirement to use internally generated
funds for purposes not presently anticipated, (x) ability to
become profitable, or if unable to become profitable, the
inability to secure additional liquidity in the form of
additional equity or debt, (xi) the cost for the purchase of
anhydrous ammonia decreasing, (xii) changes in competition,
(xiii) the loss of any significant customer, (xiv) changes in
operating strategy or development plans, (xv) inability to fund
the working capital and expansion of the Company's businesses,
(xvi) adverse results in any of the Company's pending litigation,
(xvii) inability to obtain necessary raw materials, (xviii)
continuing decreases in the selling price for the Chemical
Business' nitrogen based end products, (xix) inability to
complete the sale of the Optioned Company, and (xx) 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 June 30,
2000, and the related condensed consolidated statements of
operations for the six-month and three-month periods ended June
30, 2000 and 1999 and the condensed consolidated statements of
cash flows for the six-month periods ended June 30, 2000 and
1999. 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 auditing standards generally
accepted in the United States, 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 accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance
sheet of LSB Industries, Inc. as of December 31, 1999, and the
related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented
herein); and in our report dated March 17, 2000, except for Note
4, as to which the date is April 6, 2000, 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, 1999, 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
August 3, 2000
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously
reported by the Company in Item 3 of its Form 10-K for the
fiscal period ended December 31, 1999, which Item 3 is
incorporated by reference herein.
Prior to the date of this report, the Chemical Business
entered into an agreement in principal to settle the
litigation styled Arch Minerals Corporation, et al. v. ICI
Explosives USA, Inc., pending in the United States District
Court, Eastern District of Missouri, for a sum which the
Company does not deem to be material. See Note 5 of Notes
to Condensed Consolidated Financial Statements.
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 June 15, 2000 dividends on the Company's
outstanding $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2 ("Series 2 Preferred).
Accrued and unpaid dividends on the Series 2 Preferred
are cumulative. The amount of the total arrearage of
unpaid dividends on the outstanding Series 2 Preferred
is approximately $2.4 million as of the date of this
report. In addition, the Company's Board of Directors
has decided not to pay the September 15, 2000 dividend
payment on its outstanding Series 2 Preferred. If the
September 15 dividends on the Series 2 Preferred is not
paid, the amount of the total arrearage of unpaid
dividend payment on the outstanding Series 2 Preferred
will be approximately $3.0 million. Also the Company's
Board of Directors did not declare and pay the January
1, 2000 regular dividend on the Company's Series B 12%
Convertible, Cumulative Preferred Stock ("Series B").
Dividends in arrears at June 30, 2000, related to the
Company's Series B amounted to approximately $.2
million.
Whenever dividends on the Series 2 Preferred shall be
in arrears and unpaid, whether or not declared, in
amount equal to at least six quarterly dividends
(whether or not consecutive), the holders of the Series
2 Preferred (voting separately as a class) will have
the exclusive right to vote for and elect two
additional directors of the Company's Board of
Directors during the period that dividends on the
Series 2 Preferred remain in arrears by six quarterly
dividends. The right of the holders of the Series 2
Preferred to vote for such two additional directors
shall terminate, subject to re-vesting in the event of
a subsequent similar arrearage, when all cumulative and
unpaid dividends on the Series 2 Preferred have been
declared and set apart for payment. The term of office
of all directors so elected by the holders of the
Series 2 Preferred shall terminate immediately upon the
termination of the right of the holders of the Series 2
Preferred to vote for such two additional directors,
subject to the requirements of Delaware law.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2000 Annual Meeting of Shareholders
held on July 20, 2000, the following nominees to the
Board of Directors were elected as directors of the
Company:
Name Number Number of Number
of Shares of
Shares "Against" and Abstentions
"For" to "Withhold and Broker
Authority" Non-Votes
Gerald G. Gagner 11,346,275 167,603 0
Barry H. Golsen 11,346,275 168,398 0
David R. Goss 11,340,480 167,398 0
Jerome D. 11,345,175 168,703 0
Shaffer, M.D.
Messrs. Golsen, Goss and Shaffer had been serving
on the Board of Directors at the time of the Annual
Meeting and were reelected for a term of three (3)
years. Mr. Gagner had been serving as director of the
Company at the time of the Annual Meeting and was
elected for a term of (1) year. The following are the
directors whose terms of office continued after such
Annual Meeting: Robert C. Brown, M.D., Charles H.
Burtch, Horace G. Rhodes, Raymond B. Ackerman, Bernard
G. Ille, Donald W. Munson, Tony M. Shelby and Jack E.
Golsen.
At the Annual Meeting, Ernst & Young, LLP,
Certified Public Accountants, was appointed as
independent auditors of the Company for 2000, as
follows:
Number of Number of Number of
Shares Shares Abstentions
"For" "Against" and and Broker
to "Withhold Non-Votes
Authority"
11,447,899 21,646 23,553
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:
2.1 Asset Purchase and Sale Agreement, dated May 4,
2000 by L&S Automotive Products Co., L&S Bearing Co., LSB
Extrusion Co., Rotex Corporation and DriveLine Technologies,
Inc., which is incorporated from Exhibit 2.1 to the
Company's Amendment No. 2 to the 1999 Form 10-K. This
agreement includes certain exhibits and schedules that are
not included with this exhibit, and will be provided upon
request by the Commission.
10.1 Covenant Waiver Letter, dated August 4, 2000,
between The CIT Group and DSN Corporation.
10.2 Letter, dated April 1, 2000, executed by SBL to
Prime amending the Promissory Note, which the Company incorporates
by reference from Exhibit 10.52 to the Company's Amendment
No. 2 to its 1999 Form 10-K.
10.3 Guaranty Agreement, dated as of April 21, 2000,
by Prime to Stillwater National Bank & Trust relating to
that portion of the SBL Borrowings borrowed by SBL, which
the Company incorporates by reference from Exhibit 10.50 to
the Company's Amendment No. 2 to its 1999 Form 10-K.
Substantial similar guarantees have been executed by Prime
in favor of Stillwater covering the amounts borrowed by the
following affiliates SBL relating to the SBL Borrowings (as
defined in " Relationships and Related Transactions") listed
in Exhibit A attached to the Guaranty Agreement with the
only material differences being the name of the debtor and
the amount owing by such debtor. Copies of which will
provided to the Commission upon request.
10.4 Security Agreement, dated effective April 21,
2000, executed by Prime in favor of Stillwater National Bank
and Trust, which the Company incorporates by reference from
Exhibit 10.54 to the Company's Amendment No. 2 to its 1999
Form 10-K.
10.5 Limited Guaranty, effective April 21, 2000,
executed by Prime to Stillwater National Bank and Trust,
which the Company incorporates by reference from Exhibit
10.55 to the Company's Amendment No. 2 to its 1999 Form 10-K.
10.6 Subordination Agreement, dated May 4, 2000, by
and among Congress Financial Corporation (Southwest), a
Texas corporation (Lender), LSB Industries Inc.
(Subordinated Creditor), DriveLine Technologies, Inc.,
(formerly known as Tribonetics Corporation),an Oklahoma
corporation and L&S Manufacturing Corp, which the Company
incorporated by reference from Exhibit 10.56 to the
Company's Amendment No. 2 to its 1999 Form 10-K.
15.1 Letter Re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(B) Reports of Form 8-K. The Company filed the following
reports on Form 8-K during the quarter ended June 30, 2000:
(i) Form 8-K, dated June 19, 2000 (date of event: May
4, 2000). The item reported was Item 2 "Acquisition or
Disposition of Assets" discussing the sale of substantially
all of the assets of LSB Industries, Inc.'s Automotive
Products Business to DriveLine Technologies, Inc.
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 11th day of
August 2000.
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)
