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 March 31, 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 NO X
The number of shares outstanding of the Registrant's voting
Common Stock, as of May 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 March 31, 2000, and the condensed
consolidated statements of operations and cash flows for the
three month periods ended March 31, 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 on
firm raw material purchase commitments as discussed in Note 12 to
the Condensed Consolidated Financial Statements, which are, in
the opinion of management, necessary for a fair presentation of
the interim periods. The results of operations for the three
months ended March 31, 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.
<PAGE>
LSB Industries, Inc.
Condensed Consolidated Balance Sheets (Note 11)
(Information at March 31, 2000 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 2000 1999
Current assets:
Cash and cash equivalents $ 3,242 $ 3,130
Trade accounts receivable, net 48,052 44,549
Inventories:
Finished goods 15,271 15,983
Work in process 6,782 5,503
Raw materials 10,859 8,994
----------------------
Total inventory 32,912 30,480
Supplies and prepaid items 5,537 4,617
-----------------------
Total current assets 89,743 82,776
Property, plant and equipment,
net 82,405 83,814
Other assets, net 21,366 22,045
-----------------------
$ 193,514 $ 188,635
=======================
(Continued on following page)
<PAGE>
LSB Industries, Inc.
Condensed Consolidated Balance Sheets (Note 11)
(Information at March 31, 2000 is unaudited)
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
Current liabilities:
Drafts payable $ 254 $ 360
Accounts payable 21,797 18,791
Accrued liabilities 21,811 18,563
Current portion of long-term debt
(Note 6) 33,132 33,359
------------------------
Total current liabilities 76,994 71,073
Long-term debt (Note 6) 123,810 124,713
Accrued losses on firm purchase
commitments and other noncurrent
liabilities (Note 12) 6,487 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 7):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible,
exchangeable Class C preferred
stock, $50 stated value; 907,525
shares issued in 2000 (920,000 in 1999) 45,376 46,000
Common stock, $.10 per value
75,000,000 shares authorized,
15,162,719 shares issued in 2000
(15,108,716 in 1999) 1,516 1,511
Capital in excess of par value 39,896 39,277
Accumulated deficit (86,423) (86,675)
------------------------
2,365 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 (13,916) (14,173)
------------------------
$ 193,514 $ 188,635
=======================
(See accompanying notes)
<PAGE>
LSB Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, 2000 and 1999
(Dollars in thousands, except per share amounts)
2000 1999
Businesses continuing at March 31,:
Revenues:
Net sales $ 69,621 $ 60,084
Other income 1,262 440
-----------------------
70,883 60,524
Costs and expenses:
Cost of sales 53,691 46,066
Selling, general and administrative 11,649 11,909
Interest 4,082 3,589
Provision for loss on firm purchase
commitments (Note 12) 975 -
Other expenses 234 688
-----------------------
70,631 62,252
-----------------------
Income (loss) from continuing operations
before business disposed of and
provision for income taxes 252 (1,728)
Business disposed of (Note 9):
Revenues - 2,868
Operating costs, expenses and interest - 3,838
------------------------
- (970)
Income (loss) from continuing operations
before provision for income taxes 252 (2,698)
Provision for income taxes - 50
------------------------
Income (loss) from continuing operations 252 (2,748)
Net loss from discontinued operations (Note 10) - (1,062)
-------------------------
Net income (loss) $ 252 $ (3,810)
=========================
Net loss applicable to common stock (Note 2) $ (543) $ (4,626)
=========================
Weighted average common shares (Note 2):
Basic and Diluted 11,851,983 11,880,625
Loss per common share (Note 2):
Basic and diluted:
Net loss from continuing operations $ (.05) $ (.30)
Net loss from discontinued operations - (.09)
------------------------
Net loss applicable to common stock $ (.05) $ (.39)
========================
(See accompanying notes)
<PAGE>
LSB Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 2000 and 1999
(Dollars in thousands)
2000 1999
Cash flows from operating activities:
Net income (loss) $ 252 $ (3,810)
Adjustments to reconcile net income (loss) to
cash flows provided(used) by continuing
operations:
Net loss from discontinued operations - 1,062
Depreciation, depletion and amortization:
Property, plant and equipment 1,974 2,512
Other 266 318
Provision for possible losses on
receivables and other assets 174 390
Loss on sale of assets - (22)
Realization of loss on firm purchase
commitments, net of provision of $975 in
2000 (396) -
Cash provided (used) by changes in assets
and liabilities, (net of effects of
discontinued operations):
Trade accounts receivable (3,508) (3,825)
Inventories (1,717) (1,244)
Supplies and prepaid items 533 (1,590)
Accounts payable 1,553 (1,441)
Accrued liabilities 2,558 2,481
---------------------
Net cash provided (used) by continuing
operating activities 1,689 (5,169)
Cash flows from investing activities:
Capital expenditures (1,798) (2,190)
Principal payments on loans receivable - 135
Proceeds from sale of equipment 76 -
Decrease in other assets 1,376 1,801
---------------------
Net cash used by investing activities (346) (254)
Cash flows from financing activities:
Proceeds from long-term and other debt 2,308 -
Payments on long-term and other debt (1,802) (730)
Net change in revolving debt facilities (1,631) 10,022
Net change in drafts payable (106) (134)
Dividends paid on Preferred Stocks
(Note 3) - (816)
Purchases of treasury stock (Note 3) - (206)
---------------------
Net cash provided (used) by financing
activities (1,231) 8,136
Net cash used in discontinued operations - (3,225)
-----------------------
Net increase (decrease) in cash and
cash equivalents 112 (512)
Cash and cash equivalents at beginning of
period 3,130 1,459
------------------------
Cash and cash equivalents at end of period $ 3,242 $ 947
========================
(See accompanying notes)
<PAGE>
LSB Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 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.
Note 2: Loss Per Share Net loss applicable to common stock is
computed by adjusting net income or (loss) by the amount of
preferred stock dividends. Basic loss per common share is based
upon net loss applicable to common stock and the weighted average
number of common shares outstanding during each period. Diluted
income per share, if applicable, is based on the weighted average
number of common shares and dilutive common equivalent shares
outstanding, if any, and the assumed conversion of dilutive
convertible securities outstanding, if any, after appropriate
adjustment for interest, net of related income tax effects on
convertible notes payable, as applicable. All potentially
dilutive securities were antidilutive for all periods presented.
For the three months ended March 31, 2000, the Company's Board of
Directors did not declare and pay the regular quarterly dividend
of $.8125 (or $735,170) on the Company's Series 2 $3.25
Convertible Class C preferred stock. Dividends in arrears at
March 31, 2000, amounted to approximately $2.2 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 March 31, 2000, related to the Company's Series B 12% Convertible,
Cumulative Preferred Stock, amounted to approximately $.1 million.
The following table sets forth the computation of basic and
diluted loss per share:
(Dollars in thousands, except per share amounts)
March 31,
2000 1999
Numerator:
Net income (loss) $ 252 $ (3,810)
Preferred stock dividend
requirements (795) (816)
----------------------
Numerator for basic and
diluted loss per share - loss
available to common
stockholders $ (543) $ (4,626)
======================
Denominator:
Denominator for basic and diluted
loss per share - weighted-
average share 11,851,983 11,880,625
=======================
Basic and diluted loss per
share $ (.05) $ (.39)
=======================
<PAGE>
LSB Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 3: Stockholders' Equity
The table below provides detail of activity in the stockholders' equity accounts
for the three months ended March 31, 2000:
<TABLE>
Common Stock Non- Capital in Accumulated Treasury Treasury Total
redeemable excess of deficit Stock- Stock
Par Preferred par value Common Preferred
Shares Value Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance at December 31, 15,109 $1,511 $48,000 $39,277 $(86,675) $(16,086) $ (200) $(14,173)
Net income - - - - 252 - - 252
Conversion of 12,475
shares of
non-redeemable
preferred stock
to common stock 54 5 (624) 619 - - - -
Exchange of 4,000
shares of
common stock held in
treasury for Board of
Director fees - - - - - 5 - 5
-----------------------------------------------------------------------------------
(1)
Balance at March 31, 15,163 $ 1,516 $47,376 $ 39,896 $(86,423) $(16,081) $ (200) $ (13,916)
2000 ====================================================================================
</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 March 31, 2000 were 11,877.
<PAGE>
LSB Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 4: Segment Information
Three Months Ended
March 31,
2000 1999
(in thousands)
Net sales:
Businesses continuing:
Chemical $ 35,067 $ 30,745
Climate Control 31,630 26,699
Industrial Products (1) 2,924 2,640
---------------------
69,621 60,084
Business disposed of - Chemical - 2,868
---------------------
$ 69,621 $ 62,952
=====================
Operating profit (loss):
Businesses continuing:
Chemical $ 3,364 $ 1,446
Climate Control 2,686 2,707
Industrial Products 317 (411)
---------------------
6,367 3,742
Business disposed of - Chemical - (845)
----------------------
6,367 2,897
General corporate expenses and other income
or expenses, net (1,058) (1,881)
Interest expense:
Business disposed of - (125)
Businesses continuing (4,082) (3,589)
Provision for loss on firm purchase
commitments - Chemical (975) -
----------------------
Income (loss) from continuing operations
before provision for income taxes $ 252 $ (2,698)
=======================
(1) Excludes intersegment sales to Climate Control of $494,000 in
2000 ($149,000 in 1999).
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 5: Commitments and Contingencies
Debt and Performance 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 "Prime 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. During 1999, $150,000 in
principal and $280,000 in interest was paid on this Prime Loan,
and as of March 31, 2000, the unpaid principal balance on the
Prime Loan was $1,950,000. In February 2000, the Company borrowed
approximately $500,000 under its key man life insurance policies,
and used such proceeds to reduce the principal amount due SBL. 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 Prime 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 limited guaranty, the Company's subsidiary's liability is
limited to the value, from time to time, of the Common Stock of the
Company pledged to secure obligations under its guarantees to the
bank relating to the SBL Borrowings. As of April 15, 2000, the
outstanding principal balance due to the bank from SBL as a result of
such loan was $1,950,000.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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. As of March 31, 2000, the Company has
accrued an amount based on a preliminary settlement proposal
by the alleged potential responsible parties; however, there
is no assurance such proposal will be accepted. Such amount
is not material to the Company's financial position or
results of operations. This estimate is subject to material
change in the near term as additional information is
obtained. The subsidiary's insurance carriers have been
notified of this matter; however, the amount of possible
coverage, if any, is not yet determinable.
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.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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. This cause of action is pending
in the United States District Court, Southern District of
Indiana. The plaintiffs are suing for an unspecified amount
of damages, which, pursuant to statute, plaintiffs are
seeking be trebled, together with costs. Plaintiffs are
also seeking a permanent injunction enjoining defendants
from further alleged anti-competitive activities. Based on
the information presently available to EDC, 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. This
action has been consolidated, for discovery purposes only,
with several other actions in a multi-district litigation
proceeding in Utah. Discovery in this litigation is in
process. EDC intends to vigorously defend itself in this
matter. See "Special Note Regarding Forward-Looking
Statements."
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. See
"Special Note Regarding Forward-Looking Statements."
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
LSB and, thus, 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. LSB reviews such programs
on at least an annual basis to balance the cost-benefit between
its coverage and retained exposure.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 6: Long-Term Debt In November 1997, the Company's wholly
owned subsidiary, ClimaChem, Inc. ("ClimaChem"), completed the
sale of $105 million principal amount of 10 3/4% Senior Notes due
2007, (the "Notes"). Interest on the Notes is payable
semiannually in arrears on June 1 and December 1 of each year,
and the principal is payable in the year 2007. The Notes are
senior unsecured obligations of ClimaChem and rank pari passu in
right of payment to all existing senior unsecured indebtedness of
ClimaChem and its subsidiaries. The Notes are effectively
subordinated to all existing and future senior secured
indebtedness of ClimaChem.
In April 2000, ClimaChem repurchased $5.0 million of the Notes for
approximately $1.2 million. In connection with this transaction,
the Company will recognize a gain of approximately $4.0 million
in the second quarter of 2000. The Company is also in discussions
with the holders of its Senior Notes, in an effort to restructure
their terms and conditions. The Company did not make the June 1,
2000 interest payment when due. Under the terms of the indenture
governing the Senior Notes, the Company has a grace period of thirty
(30) days to make the interest payment or enter into satisfactory
agreement with the holders of the Senior Notes before the Senior
Notes are in default. The Company currently anticipates achieving
satisfactory resolution of this matter.
ClimaChem owns substantially all of the companies comprising the
Company's Chemical and Climate Control Businesses. ClimaChem is
a holding company with no assets other than the notes and
accounts receivable from the Company and the Notes origination
fees which have a net book value of $3.2 million at March 31,
2000 ($3.3 million at December 31, 1999) 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 March 31, 2000 and December
31, 1999 and the results of operations for the three month
periods ended March 31, 2000 and 1999 are detailed below.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
March 31, December 31,
2000 1999
(in thousands)
Balance sheet data:
Cash $ 2,641 $ 2,673
Trade accounts receivable, net 44,679 41,934
Inventories:
Finished goods 10,792 11,275
Work in process 6,782 5,503
Raw material 11,373 8,994
--------------------------
Total inventory 28,947 25,772
Supplies and prepaid items 5,236 4,314
Due from LSB and affiliates, net (1) 2,382 1,758
--------------------------
Total current assets 83,885 76,451
Property, plant and equipment, net 74,800 75,667
Notes and interest receivable from
LSB and affiliates (1) 14,008 13,948
Other assets, net 17,809 18,012
-------------------------
Total assets $ 190,502 $ 184,078
=========================
Accounts payable $ 19,918 $ 16,312
Accrued liabilities 17,428 13,791
Current portion of long-term debt 27,749 29,644
-------------------------
Total current liabilities 65,095 59,747
Long-term debt 114,311 112,544
Accrued losses on firm purchase
commitments 5,256 5,652
Stockholders' equity 5,840 6,135
--------------------------
Total liabilities and stockholders'
equity $ 190,502 $ 184,078
==========================
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Three Months Ended
March 31,
2000 1999
(in thousands)
Operations data:
Total revenues $ 67,438 $ 60,291
Costs and expenses:
Cost of sales 52,154 47,171
Selling, general and
administrative 10,914 10,603
Interest 3,690 3,618
Provision for loss on firm
purchase commitments 975 -
-------------------------
67,733 61,392
-------------------------
Loss before provision for
income taxes (295) (1,101)
Provision for income taxes - 50
-----------------------
Net loss $ (295) $ (1,151)
========================
(1) Notes and other receivables from LSB and affiliates are
eliminated when consolidated with LSB.
In December 1994, the Company, certain subsidiaries of the
Company (the "Borrowing Group") and a bank entered into a series
of six asset-based revolving credit facilities which provided for
an initial term of three years. The agreement has been amended
at various dates since 1994 with the latest being executed on
March 1, 2000. In May 1999, the agreement was amended to exclude
the Automotive Products Business from the Borrowing Group. The
amended agreement provides for a $50.0 million revolving
credit facility (the "Revolving Credit Facility") with separate
loan agreements (the "Loan Agreement"), for ClimaChem and its
subsidiaries. Under the Revolving Credit Facility, certain
conditions exist which restrict intercompany transfers of amounts
borrowed between subsidiaries. Borrowings under the Revolving
Credit Facility bear an annual rate of interest at a floating
rate based on the lender's prime rate plus 1.5% per annum or, at
the Company's option, on the lender's LIBOR rate plus 3.875% per annum.
The outstanding borrowings under the Revolving Credit Facility of $25.8
million at March 31, 2000 are classified as long-term debt due within
one year. As of March 31, 2000, the Borrowing Group, excluding the
Automotive Products Business and the "Permanent Reserve" discussed
below, had availability of $13.9 million. The agreement will terminate on
December 31, 2000 unless the parties to the Revolving Credit
Facility agree on acceptable financial covenants for the fiscal
year beginning January 2001 on or before October 1, 2000. The
Loan Agreements also require a "permanent reserve" of $5.0
million which can reduce the borrowing availability. 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. The effective interest rate at
March 31, 2000 was 10.5%.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Change in Accounting In June, 1998, the Financial
Accounting Standards Board issued Statement No. 133 ("SFAS
#133"), Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning
after June 15, 2000. The Statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The
Company expects to adopt this statement on January 1, 2001. The
Statement will require the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that do not
qualify or are not designated as hedges must be adjusted to fair
value through operations. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet
determined what all of the effects of SFAS #133 will be on the
earnings and financial position of the Company; however, the
Company expects that the deferred charges associated with the
interest rate forward agreement discussed in Note 5, "Nitric Acid
Project," will be accounted for as a cash flow hedge upon
adoption of SFAS #133, with the effective portion of the hedge
being classified in equity in accumulated other comprehensive
income or loss. The amount included in accumulated other
comprehensive income or loss will be amortized to income over the
initial term of the leveraged lease.
Note 8: Comprehensive Income The Company presents comprehensive
income in accordance with Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130"). The provisions of
SFAS 130 require the Company to classify items of other
comprehensive income in the financial statements and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid in capital in the equity
section of the balance sheet. Other comprehensive income for the
three-month periods ended March 31, 2000 and 1999 is detailed
below.
Three Months
Ended March 31,
2000 1999
(in thousands)
Net income(loss) $ 252 $ (3,810)
Foreign currency
translation income - (222)
--------------------
Total comprehensive income
(loss) $ 252 $ (3,588)
=====================
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 9: Businesses Disposed of On August 2, 1999, the Company
sold substantially all the assets of its wholly owned subsidiary,
Total Energy Systems Limited and its subsidiaries ("TES"), 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 10: 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
Automotive Products Business on May 4, 2000. (As of March 31,
2000, the Company has accrued anticipated operating loss through
the date of disposal of approximately $.5 million.) The terms of
the sale of the Automotive Products Business calls for no
payments of principal on the notes to the Company of
approximately $8.7 million 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 has fully reserved its investment in the net assets
(i.e., note receivable from buyer) as of December 31, 1999 and
March 31, 2000. The Company remains a guarantor on certain
equipment notes of the Automotive Products Business which had
outstanding indebtedness of approximately $4.5 million as of
March 31, 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 March 31, 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. Net
assets of discontinued operations are as follows:
March 31, December 31,
2000 1999
(in thousands)
Accounts receivable, net $ 4,888 $ 4,852
Inventories 15,222 15,178
Other current assets 320 502
------------------------
Total current assets 20,430 20,532
Property and equipment, net 7,197 7,439
Other assets 4,616 2,138
------------------------
Total noncurrent assets 11,813 9,577
Accounts payable and accrued
liabilities (5,261) (3,714)
Current portion of long-term debt (11,592) (12,096)
Accrued loss through estimated
disposal date and other current
liabilities (545) (2,289)
------------------------
Total current liabilities (17,398) (18,099)
Long-term debt due after one year (6,950) (4,115)
------------------------
7,895 7,895
Valuation allowance (7,895) (7,895)
------------------------
Net assets of discontinued
operations $ - $ -
========================
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Operating results of the discontinued operations for the three
months ended March 31, 1999 are as follows:
1999
(in thousands)
Revenues $ 10,142
Cost of sales 8,009
Selling, general and
administrative 2,417
Interest 778
-------------
Loss from discontinued
operations $ (1,062)
=============
Revenues of the Automotive Products Business which have been
excluded from revenues in the accompanying Condensed Consolidated
Statement of Operations for the three months ended March 31, 2000
aggregated $7.0 million.
Note: 11 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"), through its subsidiaries, owns substantially all
of the Company's Chemical and Climate Control Businesses.
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 March 31, 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. This working capital line of
credit is a primary source of liquidity for the Company and
ClimaChem.
The Agreements, as amended, required the Company and ClimaChem to
maintain certain financial ratios and contain other financial
covenants, including capital expenditure limitations. In 1999,
the Company's financial covenants were not required to be met so
long as the Company and its subsidiaries, including ClimaChem,
that are parties to the Agreements, maintained a minimum
aggregate availability under the Revolving Credit Facility of
$15.0 million. When the availability dropped below $15.0 million
for three consecutive business days, the Company and ClimaChem
were required to maintain the financial ratios discussed above
and tangible net worth requirements. Due to an interest payment
of $5.6 million made by ClimaChem on December 30, 1999, relating
to ClimaChem's outstanding $105 million Senior Unsecured Notes,
the availability dropped below the minimum aggregate availability
level required on January 1, 2000. Because the Company and
ClimaChem could not meet the financial ratios required by the
Agreements, the Company and ClimaChem entered into a forbearance
agreement with the Lender effective January 1, 2000. The
forbearance agreement waived the financial covenant requirements
for a period of sixty (60) days.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Prior to the expiration of the forbearance agreement, the
Agreements were amended, to provide for total direct borrowings
of $50.0 million including the issuance of letters of credit.
The maximum borrowing ability under the newly amended Agreements
is the lesser of $50.0 million or the borrowing availability
calculated using advance rates and eligible collateral less $5.0
million. The amendment increased the interest rates on
outstanding borrowings from the Lender's prime rate plus .5% per
annum to the Lender's prime rate plus 1.5% per annum. Under the
Company's LIBOR interest rate option, the interest rate increased
to the Lender's LIBOR rate plus 3.875% per annum, from 2.875%.
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.
As of March 31, 2000 the Company, exclusive of ClimaChem, and
ClimaChem have a borrowing availability under their existing
revolver of $.3 million, and $13.6 million, respectively, or
$13.9 million in the aggregate and the effective interest rate
was 10.5%. Borrowings under the Revolver outstanding at March
31, 2000, were $25.8 million. The annual interest on the
outstanding debt under the Revolver at March 31, 2000, at the
rates then in effect would approximate $2.7 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 March
31, 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 March
31, 2000, DSN had outstanding borrowings of $7.5 million under
these loans. The loans have 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 March 31, 2000 at the agreed
to interest rates would approximate $.7 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 March
2000, DSN obtained a waiver from the Financing Company of the
financial covenants through April 1, 2001.
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
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
$.3 million for the three months ended March 31, 2000.
Accordingly, no amounts were paid to the Company by ClimaChem
under the Tax Sharing Agreement, nor under the Management
Agreement during 1999. For the three months ended March 31, 2000,
ClimaChem was required to pay the Company $450,000 under the
Management Agreement inasmuch as earnings before interest, income
taxes, depreciation and amortization (" EBITDA") exceeded $6.5
million for the period. There are no assurances that such amount
will be earned in future quarters or that this amount earned in the
first quarter 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.
In April 2000, a subsidiary of ClimaChem repurchased $5.0 million
of the Senior Unsecured Notes for approximately $1.2 million.
The subsidiary funded the repurchase of these Senior Unsecured
Notes out of the subsidiary's working capital.
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 September 15, 1999, December 15, 1999 and March 15,
2000 regular quarterly dividend of $.8125 on its outstanding
$3.25 Convertible Exchangeable Class C Preferred Stock Series 2,
totaling approximately $2.2 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 March 31, 2000, the Company and its subsidiaries which are
not subsidiaries of ClimaChem and exclusive of the Automotive
Products Business had a working capital deficit of approximately
$3.4 million, and long-term debt due after one year of
approximately $32.9 million including the amount owed to ClimaChem.
For the remainder of 2000, the Company has planned capital
expenditures of approximately $8.2 million, primarily in the
Chemical and Climate Control Businesses. These capital
expenditures include approximately $2.0 million, which the
Chemical Business plans to spend under consent orders with the
State of Arkansas related to environmental control facilities at
its El Dorado facility. The Company is currently exploring
alternatives to finance these capital expenditures.
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.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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
into new lines of business directly related to the Company's core
operations (i.e., completion of the DSN plant which produces
concentrated nitric acid, execution of the EDNC Baytown plant
agreement with Bayer to supply industrial acids, development and
expansion into market-innovative climate control products such as
geothermal and high air quality systems and large air handling units).
During 1999, the Chemical Business sustained significant losses,
primarily as a result of the reduction of selling prices for its
nitrate-based products (in large part due to the flood of the
market with low-priced Russian ammonium nitrate) while the
Company's cost of raw materials escalated under a contract with a
pricing mechanism tied to the price of natural gas which
increased dramatically. During late 1999, the Company
renegotiated this supply contract, extending the cash
requirements under its take-or-pay provision to delay required
takes to 2000, 2001 and 2002 and to obtain future raw material
requirements at spot market prices. The Company was also active
in bringing about a favorable preliminary determination from the
International Trade Commission and Commerce Department, which has
had the current impact of minimizing the dumping of Russian
ammonium nitrate in the U.S. market This investigation has been
suspended due to the agreement between Russia and the United
States to limit volumes and set minimum prices for imported
Russian ammonium nitrate. The U.S. industry or Russian exporters
may, however, request completion of the investigation. This, and
other factors, has allowed the Chemical Business to see
marginally improved market pricing for its nitrate-based products
in the first three months of 2000 compared to the comparable
period in 1999; however, there are no assurances that this
improvement will continue. The Company also successfully
commenced operations in May 1999 of its EDNC Baytown plant which
is selling product to Bayer under a long-term supply contract.
The Company's long-range plans also included the addition of
expertise related to the Company's core businesses to enhance its
leadership team. Beginning in 1998, the Company brought on
several new members of its Board of Directors with expertise in
certain of the Company's businesses, and individuals with extensive
knowledge in the banking industry and financial matters. These
individuals have brought business insight to the Company and
helped management to formulate the Company's immediate and
long-range plans.
The plan for the remainder of 2000 calls for the Company to
dispose of a significant portion of its non-core assets. As
previously discussed, 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. Additionally, the Company is
presently evaluating alternatives for realizing its net
investment in the Industrial Products Business. The Company has
had discussions involving the possible sale of the Industrial
Products Business; however, no definitive plans are currently in
place and any which may arise will require Board of Director
approval prior to consummation. The Company is currently
continuing the operations of the Industrial Products Business;
however, the Company may sell or dispose of the operations in
2000. The Company's plan for the remainder of 2000 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. As of the date of this report, the
Company has received written confirmation from the buyer of the
Optioned Company that the transaction is on schedule to
close in the month of June. 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. 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".
During 1999 and into 2000, the Company has been restructuring its
operations, eliminating businesses which are non-core, reducing
its workforce as opportunities arise and disposing of non-core
assets. As discussed above the Company has also successfully
renegotiated its primary raw material purchase contracts in the
Chemical Business in an effort to make that Business profitable
again and focused its attention to the development of new, market-
innovated products in the Climate Control Business. Although the
Company has not planned to receive any dividends, tax payments or
management fees from ClimaChem in 2000, it is possible that
ClimaChem could pay up to $1.8 million of management fees to its
ultimate parent should operating results be favorable (if
ClimaChem has EBITDA (as defined) in excess of $26.0
million annually, $6.5 million quarterly, is payable, up to $1.8,
million to LSB). For the three months ended March 31, 2000,
ClimaChem was required to pay the Company $450,000 under the
Management Agreement inasmuch as EBITDA exceeded $6.5 million for
the period. There are no assurances that such amount will be
earned in future quarters or that this amount earned in the first
quarter of 2000 will not be required to be repaid in subsequent
periods.
As previously mentioned, the Company and ClimaChem's primary
credit facility terminates on December 31, 2000, unless the
parties to the agreements agreed to new financial covenants for
2001 prior to October 1, 2000. While there is no assurance that
the Company will be successful in extending the term of such
credit facility, the Company believes it has a good working
relationship with the Lender and that it will be successful in
extending such facility or replacing such facility from another
lender with substantially the same terms during 2000.
In March 2000, ClimaChem retained Chanin Capital Partners as
its financial advisor to assist in evaluating alternatives
relating to ClimaChem's liquidity and determining its
alternatives for a financial restructuring. As part of
ClimaChem's restructuring, ClimaChem and its financial advisor
have begun discussions with a group of holders of the Senior
Unsecured Notes ("Senior Notes") to restructure the Senior Notes
in order to reduce ClimaChem's leverage and increase its equity
capitalization. ClimaChem did not make the June 1, 2000
interest payment of $5.4 million on the Senior Notes (excluding
interest on the $5.0 million of Senior Notes repurchased by
ClimaChem). Under the terms of the Indenture governing the Senior
Notes, ClimaChem has a grace period of thirty (30) days to make
the interest payment or enter into satisfactory agreements with
the holders of the Senior Notes before the Senior Notes are
in default. ClimaChem currently anticipates achieving satisfactory
resolution of this matter.
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
As discussed above, the Company had planned for up to $8.2
million of capital expenditures for the remainder of 2000, most
of which is not presently committed. Further, a significant
portion of this is 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. Recently, the Chemical Business has
obtained 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.
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: 12 Loss on Firm Purchase Commitment During 1999 and the
first three months of 2000, the Chemical Business has a firm
uncancelable commitment to purchase anhydrous ammonia pursuant to
the terms of a supply contract (Note 5 - Commitments and
Contingencies, Purchase Commitments). At March 31, 2000, the
purchase price the Chemical Business was required to pay for
anhydrous ammonia to be purchased under the contract, which was
for a significant percentage of the Chemical Business' anhydrous
ammonia requirements, exceeded and was expected to continue to
exceed the spot market prices throughout the purchase period.
Additionally, the market for nitrate based products, while
improved for the first quarter of 2000, is expected to decline
modestly in the summer and fall months of 2000. Due to the
expected 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 aggregating
approximately $1.0 million in excess of the accrued liability for
amounts recorded in 1999 was recorded in the first quarter of
2000. At March 31, 2000 and December 31, 1999, the accompanying
balance sheets include remaining accrued losses under the firm
purchase commitment of $7.8 and $7.4 million, respectively ($2.5
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. Based on the purchase
price of anhydrous ammonia under the firm purchase commitment and
other factors as of May 31, 2000, the Company may be required to
recognize an additional loss provision of approximately $.2
million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with the Company's March 31, 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".
All discussions below are that of the Businesses continuing
and accordingly exclude the Discontinued operations of the
Automotive Products Business and the Australian subsidiary's
operations sold in 1999. See Notes 9 and 10 of the Notes to
Condensed Consolidated Financial Statements.
Overview
General
For the three months ended March 31, 2000, the Company had
a net loss applicable to common stock of approximately $.5
million, as compared to a net loss applicable to common stock of
approximately $4.6 million for the three months ended March 31,
1999. The income for the three months ended March 31, 2000 from
continuing operations was approximately $.3 million (loss of $2.7
million in 1999). The Company is pursuing a strategy of focusing
on its core businesses and concentrating on product lines in
niche markets where the Company has established or believes it
can establish a position as a market leader. In addition, the
Company is seeking to improve its liquidity and profits through
liquidation of selected assets that are on its balance sheet and
on which it is not realizing an acceptable return and does not
reasonably expect to do so. In this regard, the Company concluded
that its Industrial and Automotive Products Businesses are non-
core to the Company.
On April 5, 2000, the Board of Directors approved a
definitive plan to dispose of the Company's Automotive Products
Business. On May 4, 2000, the sale of the Automotive Products
Business was concluded. 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 (which is the same lender that is the current
primary lender to the Automotive Products Business). 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. In addition, the buyer assumed substantially all of
the Automotive Products Business' debts and obligations, which at
March 31, 2000, totaled approximately $24.3 million.
As of March 31, 2000, the Automotive Products Business owes
its primary lender approximately $14.0 million. After the sale,
the Company remains a guarantor on certain equipment notes of the
Automotive Products Business (which equipment notes have an
outstanding principal balance of $4.5 million as of March 31,
2000) and continues to guaranty $1.0 million of the revolving
credit facility of the buyer, as it did for its Automotive Products
Business. There are no assurances that the Company will be able to
collect on the notes issued to the Company as consideration for the
purchase.
The Company has classified its investment in the Automotive
Products Business as a discontinued operation, reserving
approximately $7.9 million as of March 31, 2000. This reserve
does not include the loss, if any, which may result if the
Company is required to perform on its guaranties described above.
For the three month period ended March 31, 2000 and 1999,
the Automotive Products Business had revenues of $7.0 and $10.1
million, respectively and a net loss of $1.1 million for the
three month period ended March 31, 1999. See Note 10 to Notes to
Condensed Consolidated Financial Statements.
As of March 31, 2000, the Chemical Business had commitments
to purchase 90,000 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. The Company's purchase price of anhydrous
ammonia under this contract can be higher or lower than the
current market spot price of anhydrous ammonia. Pricing is
subject to variations due to numerous factors contained in this
contract. Based on the pricing index contained in this contract,
prices paid during the three months ended March 31, 2000 were
higher than the current market spot price. The purchase price(s)
the Chemical Business will be required to pay for the remaining
90,000 tons of anhydrous ammonia under this contract currently
exceeds and is expected to continue to exceed the spot market
prices throughout the purchase period. In addition, under the
contract the Company is committed to purchase 50% of its
remaining requirements of anhydrous ammonia through 2002 from
this third party at prices which approximate market prices.
Additionally, the excess supply of nitrate based products,
caused, in part, by the import of Russian nitrate, caused a
significant decline in the sales prices during 1999; although
sales prices have improved in 2000, no improvement in sales
margins is expected in the near term due to increased cost of
anhydrous ammonia. During the second and third quarters of 1999,
this decline in sales price resulted in the cost of anhydrous
ammonia purchased under this contract, when combined with
manufacturing and distribution costs, to exceed anticipated
future sales prices. As a result, in 1999 the Company recorded
loss provisions for anhydrous ammonia required to be purchased
during the remainder of the contract aggregating approximately
$8.4 million. At March 31, 2000, an additional loss provision of
approximately $1.0 million was recorded based on the forward
contract pricing existing at March 31, 2000 and estimated market
prices for certain products to be manufactured and sold during
the remainder of the contract. At March 31, 2000, the accrued
liability for future payments of the loss provision included in
the Condensed Consolidated Financial Statements was approximately
$7.8 million. It is reasonably possible that this loss provision
estimate may change in the near term. There are no assurances
that such estimates will prove to be accurate. Differences, if
any, in the estimated future cost of anhydrous ammonia and the
actual cost in effect at the time of purchase and differences in
the estimated sales prices and actual sales prices of products
manufactured could cause the Company's operating results to
differ from that estimate. Based on the purchase price of ammonia
under the firm purchase commitment as of May 31, 2000, the
Company may be required to recognize an additional loss provision
of approximately $.2 million in the second quarter of 2000.
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 264.59% 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. As a result of this agreement,
the antidumping investigation has been suspended. The U.S.
industry or Russian exporters may, however, request completion of
the investigation. If the investigation is completed with final
affirmative findings by the Department of Commerce and the
International Trade Commission, an antidumping order will
automatically be put in place in the event of termination or
violation of the agreement.
The Company's Condensed Consolidated Financial Statements
have been restated to reflect the Automotive Products Business as
a discontinued operation for all periods presented. As a result,
the Automotive Products Business is no longer presented as a
reportable segment. Restated Automotive Products Business
results are presented as losses from discontinued operations, net
of applicable income taxes, and exclude general corporate
overhead and certain interest charges, previously allocated to
that business. The discussions and figures below are based on
this restated presentation. Certain statements contained in this
Overview are forward-looking statements, and future results could
differ materially from such statements.
The following table contains certain of the information from
Note 4 of Notes to the Company's Condensed Consolidated Financial
Statements about the Company's operations in different industry
segments for the three-month periods ended March 31, 2000 and
1999.
2000 1999
(in thousands)
(unaudited)
Net sales:
Businesses continuing:
Chemical $ 35,067 $ 30,745
Climate Control 31,630 26,699
Industrial Products (4) 2,924 2,640
----------------------
69,621 60,084
Business disposed of - Chemical (1) - 2,868
----------------------
$ 69,621 $ 62,952
======================
Gross Profit: (2)
Businesses continuing:
Chemical $ 6,110 4,957
Climate Control 8,959 8,321
Industrial Products 861 740
----------------------
$ 15,930 $ 14,018
======================
Operating Profit (loss): (3)
Businesses continuing:
Chemical $ 3,364 $ 1,446
Climate Control 2,686 2,707
Industrial Products 317 (411)
----------------------
6,367 3,742
Business disposed of - Chemical (1) - (845)
-----------------------
6,367 2,897
General corporate expenses and other
income or expenses, net (1,058) (1,881)
Interest expense:
Business disposed of (1) - (125)
Businesses continuing (4,082) (3,589)
Provision for loss on firm purchase
commitments - Chemical (975) -
----------------------
Income (loss) from continuing operations
before provision for income taxes $ 252 $ (2,698)
=======================
(1) In August 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary. See Note
9 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.
(4) Excludes intersegment sales to Climate Control of $494,000 in
2000 ($149,000 in 1999).
Chemical Business
Net Sales in the Chemical Business (excluding the Australian
subsidiary in which substantially all of its assets were disposed
of in August, 1999) were $35.1 million for the three months ended
March 31, 2000 and $30.7 million for the three months ended March
31, 1999. The sales volume from the Chemical Business
increased in 2000 from the 1999 level. This increase in sales
volume is due largely to the sales from the EDNC Baytown Plant which
was completed in May 1999. The gross profit (excluding the Australian
subsidiary) increased to $6.1 million (or 17.4% of net sales) in
2000 from $5.0 million (or 16.1% of net sales) in 1999. The increase
in the gross profit was primarily a result of increased profit
margins for agricultural products due to higher sales prices caused,
in part, by an increase in demand due to improved climate conditions and a
decrease in imports of Russian nitrate. Sales of blasting
products which have higher profit margins also improved in 2000.
In May 1999, a subsidiary of the Company completed its
obligations, as an agent, pursuant to an agreement to construct a
nitric acid plant located within Bayer's Baytown, Texas chemical
plant complex. This plant is being operated by a subsidiary and
is supplying nitric acid to Bayer under a long-term supply
contract. Sales by this subsidiary to Bayer were approximately
$7.3 million during the three months ended March 31, 2000.
Management estimates that, at full production capacity based on
terms of the Agreement and, based on the price of anhydrous
ammonia as of the date of this report, the plant should generate
approximately $35 million in annual gross revenues. Unlike the
Chemical Business' regular sales volume, the market risk on this
additional volume is much less since the contract provides for
recovery of costs, as defined, plus a profit. The Company's
subsidiary is leasing the nitric acid plant pursuant to a
leverage lease from an unrelated third party for an initial term
of ten (10) years which, began on June 23, 1999. See "Special
Note Regarding Forward Looking Statements".
The Australian subsidiary revenues for the first quarter of
1999 were $2.9 million and the loss was $1.0 million. (See Note 9
of Notes to Condensed Consolidated Financial 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 $31.6 million for the three months ended March 31,
2000, in the Climate Control Business were approximately 18.5%
greater than sales of $26.7 million for the three months ended
March 31, 1999. The gross profit was approximately $9.0 million
and $8.3 million in 2000 and 1999, respectively. The gross profit
percentage decreased to 28.3% for 2000 from 31.2% for 1999. This
decrease is primarily due to lower profit margins in the
commercial and export heat pump portion of the Climate Control
Business due to increased competitive pricing and the costs
associated with new start-up product lines.
Industrial Products Business
As indicated in the above table, during the three months
ended March 31, 2000 and 1999, respectively, the Industrial
Products Business recorded sales of $2.9 million and $2.6 million
respectively, and reported operating profit of $.3 million and
operating loss of $.4 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. The Company previously announced that it is
evaluating opportunities to sell or realize its net investment in
its Industrial Products Business. The terms of sale, if any,
have not been finalized. The sale of the Industrial Products
Business is a forward looking statement and is subject to, among
other things, the Company and potential buyer agreeing to terms,
the buyer's and the Company's lending institutions agreeing to
the terms of the transaction, including the purchase price,
approval of the Company's Board of Directors and negotiation and
finalization of definitive agreements. There is no assurance
that the Company will sell or realize its net investment in the
Industrial Products Business in 2000.
RESULTS OF OPERATIONS
Three months ended March 31, 2000 vs. Three months ended March
31, 1999.
Revenues
Total revenues of Businesses continuing for the three months
ended March 31, 2000 and 1999 were $70.9 million and $60.5
million, respectively, an increase of $10.4 million. Sales and
other income increased $9.5 and $.9 million, respectively.
Net Sales
Consolidated net sales of Businesses continuing included in
total revenues for the three months ended March 31, 2000, were
$69.6 million, compared to $60.1 million for the first three
months of 1999, an increase of $9.5 million. This increase in
sales resulted principally from: (i) increased sales in the
Climate Control Business of $4.9 million primarily due to
increase in modular high rise sales, increased export sales and
sales contributed by new start-up companies, (ii) increased sales
in the Industrial Products Business of $.3 million due to
increased sales of machine tools, and (iii) increased sales in
the Chemical Business of $4.3 million primarily due to increased
industrial acid sales to third parties including Bayer. Also
ammonium nitrate sales increased for agricultural products due to
improved climate conditions, higher sales prices, and an
increased demand due to a decrease in imports of Russian nitrate.
Sales of blasting products also improved in 2000.
Gross Profit
Gross profit of Businesses continuing as a percent of sales
was 22.9% for the first three months of 2000, compared to 23.3%
for the first three months of 1999. The decrease in the gross
profit percentage was primarily the result of lower profit
margins in the commercial and export heat pump portion of the
Climate Control Business due to increased competitive pricing and
the costs associated with new start-up product lines. This
decrease was offset by increased profit margins for agricultural
products due to higher sales prices caused, in part, by an
increase in demand due to improved climate conditions and a
decrease in imports of Russian nitrate. Sales of blasting
products which have higher profit margins also improved in 2000.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from Businesses continuing at March 31,
2000, were 16.7% in the three-month period ended March 31, 2000,
compared to 19.8% for the first three months of 1999. This
decrease is primarily the result of higher sales, however, SG&A
expenses are lower due to a reduction of expenses caused, in
part, by the restructuring of its operations and reducing its
workforce as part of the Company's strategy of focusing on its
core businesses.
Interest Expense
Interest expense for continuing businesses of the Company
was $4.1 million in the first three months of 2000, compared to
$3.6 million for the first three months of 1999. The increase of
$.5 million primarily resulted from increased lenders' prime
rates.
Provision for Loss on Firm Purchase Commitments
The Company had a provision for loss on firm purchase
commitments of approximately $1.0 million for the three months
ended March 31, 2000. See discussion in Note 12 of Notes to
Condensed Consolidated Financial Statements.
Business Disposed of
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. See discussion in Note 9 of the Notes
to Condensed Consolidated Financial Statements.
Income (Loss) from Continuing Operations before Income Taxes
The Company had income from continuing operations before
income taxes of $.3 million in the first three months of 2000
compared to a loss from continuing operations before income taxes
of $2.7 million in the three months ended March 31, 1999. The
increased profitability of $3.0 million was primarily due to
improved profit margins of the Chemical Business offset by the
costs associated with new product lines and lower profit margins
in the commercial and export heat pump portion of the Climate
Control Business. Also the decrease in SG&A expenses offset by
increased interest expense and provision for loss on firm
purchase commitments as discussed above.
Provision for Income Taxes
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
1 of Notes to Condensed Consolidated Financial Statements, no
provisions for income taxes were necessary for the three months
ended March 31, 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 of $1.6
million for the three months ended March 31, 2000 was fully
accrued for at December 31, 1999. For the same period in 1999,
thenet loss from discontinued operations was $1.1 million See
discussion in Note 10 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Cash Flow From Operations
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures.
The Company has financed its cash requirements primarily through
internally generated cash flow, borrowings under its revolving
credit facilities, the issuance of $105 million of Senior
Unsecured Notes by its wholly owned subsidiary, ClimaChem, Inc.,
in November 1997, and secured equipment financing.
Net cash provided by continuing operations for the three
months ended March 31, 2000 was $1.7 million, after noncash
depreciation and amortization of $2.2 million, provision for
possible losses on receivables and other assets of $.2 million
and realization of loss on firm purchase commitments, net of
provision of $.4 million and including the following changes in
assets and liabilities: (i) accounts receivable increase of $3.5
million; (ii) inventory increase of $1.7 million; (iii) decrease
in supplies and prepaid items of $.5 million; (iv) increase in
accounts payable of $1.6 million; and (v) increase in accrued
liabilities of $2.6 million. The increase in accounts receivable
was primarily due to seasonal sales of agricultural products and
sales of industrial acids in the Chemical Business and improved
sales in the Industrial Products Businesses offset by decreased
days of sales outstanding in the Climate Control Business
due to improved collections. The increase in
inventory was primarily due to the increased production in the
Climate Control Business and an increase in inventory in the
Chemical Business due to anticipated demands relating to the
spring fertilizing season. This increase was offset by the
reduction in inventory in the Industrial Products Business. The
increase in accounts payable is primarily due to increases in
liabilities associated with purchases of raw materials and
purchased goods in the Climate Control Business and timing of
payments in the Chemical Business. The increase in accrued
liabilities is primarily due to the accrual of interest expense
related to the Senior Unsecured Notes which is payable semi-
annually.
Cash Flow From Investing and Financing Activities
Net cash used by investing activities for the three months
ended March 31, 2000 included $1.8 million for capital
expenditures net of $.1 million from the proceeds of the sale of
equipment . The capital expenditures were primarily for the
benefit of the Chemical and Climate Control Businesses to enhance
production and product delivery capabilities.
Net cash used by financing activities included (i) proceeds
from long- term debt and other debt of $2.3 million offset by
payments of $1.8 million, (ii) net decrease in revolving debt of
$1.6 million, and (iii) decrease in drafts payable of $.1
million. No dividends were declared or paid subsequent to June 30,
1999. See discussion in Note 2 of the Notes to Condensed Consolidated
Financial Statements.
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"), through its subsidiaries, owns substantially all
of the Company's Chemical and Climate Control Businesses.
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 March 31, 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. This working capital line of
credit is a primary source of liquidity for the Company and
ClimaChem.
The Agreements, as amended, required the Company and
ClimaChem to maintain certain financial ratios and contain other
financial covenants, including capital expenditure limitations.
In 1999, the Company's financial covenants were not required to
be met so long as the Company and its subsidiaries, including
ClimaChem, that are parties to the Agreements, maintained a
minimum aggregate availability under the Revolving Credit
Facility of $15.0 million. When the availability dropped below
$15.0 million for three consecutive business days, the Company
and ClimaChem were required to maintain the financial ratios
discussed above and tangible net worth requirements. Due to an
interest payment of $5.6 million made by ClimaChem on December
30, 1999, relating to the outstanding $105 million Senior
Unsecured Notes, the availability dropped below the minimum
aggregate availability level required on January 1, 2000. Because
the Company and ClimaChem could not meet the financial ratios
required by the Agreements, the Company and ClimaChem entered
into a forbearance agreement with the Lender effective January 1,
2000. The forbearance agreement waived the financial covenant
requirements for a period of sixty (60) days.
Prior to the expiration of the forbearance agreement, the
Agreements were amended, to provide for total direct borrowings
of $50.0 million including the issuance of letters of credit.
The maximum borrowing ability under the newly amended Agreements
is the lesser of $50.0 million or the borrowing availability
calculated using advance rates and eligible collateral less $5.0
million. The amendment increased the interest rates on
outstanding borrowings from the Lender's prime rate plus .5% per
annum to the Lender's prime rate plus 1.5% per annum. Under the
Company's LIBOR interest rate option, the interest rate increased
to the Lender's LIBOR rate plus 3.875% per annum, from 2.875%.
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.
As of March 31, 2000 the Company, exclusive of ClimaChem,
and ClimaChem has a borrowing availability under the revolver of
$.3 million, and $13.6 million respectively, or $13.9 million in
the aggregate and the effective interest rate was 10.5%.
Borrowings under the Revolver outstanding at March 31, 2000, were
$25.8 million. The annual interest on the outstanding debt under
the Revolver at March 31, 2000, at the rates then in effect would
approximate $2.7 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
March 31, 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 March 31, 2000, DSN had outstanding borrowings of $7.5 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 March 31,
2000, at the agreed to interest rates would approximate $.7
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 March 2000, DSN obtained a waiver from the
Financing Company of the financial covenants through April 1,
2001.
During January 2000, a subsidiary of the Company obtained
financing up to $3.5 million with the City of Oklahoma City
("Lender") to finance the working capital requirements of Climate
Control's new product line of large air handlers ("Interim
financing"). The Interim financing agreement does not require
principal payments and bears interest at the LIBOR rate plus two-
tenths of one percent (.2%) per annum. The Interim financing will
be replaced with permanent financing upon the Lender's completion
of a public offering at which time the outstanding borrowings
will bear interest at LIBOR plus two-tenths of one percent (.2%)
per annum, adjusted monthly due semi-annually. Principal
payments will be required annually based on a term of sixteen
(16) years but based on a twenty (20) year amortization period.
The balance of the principal and interest is due at the end of
the sixteen year term. The loan is secured by a mortgage on the
manufacturing facility and a separate unrelated parcel of land
owned by a subsidiary of LSB.
ClimaChem is restricted as to the funds that it may transfer
to the Company under the terms contained in an Indenture
("Indenture") covering the $105 million 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
$.3 million for the three months ended March 31, 2000.
Accordingly, no amounts were paid to the Company by ClimaChem
under the Tax Sharing Agreement, nor under the Management
Agreement during 1999. For the three months ended March 31, 2000,
ClimaChem was required to pay the Company $450,000 under the
Management Agreement inasmuch as EBITDA exceeded $6.5 million for
the period. There are no assurances that such amount will be
earned in future quarters or that this amount earned in the first
quarter 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.
In April 2000, a subsidiary of ClimaChem repurchased $5.0
million of the Senior Unsecured Notes for approximately $1.2
million. The subsidiary funded the repurchase of these Senior
Unsecured Notes out of its working capital.
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 September 15, 1999, December 15, 1999
and March 15, 2000 regular quarterly dividend of $.8125 on its
outstanding $3.25 Convertible Exchangeable Class C Preferred
Stock Series 2 ("Series 2 Preferred"), totaling approximately
$2.2 million. In addition, the Company's Board of Directors has
decided not to pay the June 15, 2000 dividend payment on its
outstanding Series 2 Preferred. If the June 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 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.
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) (i)
the number of members of the Company's Board of Directors (the
"Board") shall be increased by two, effective as of the time of
election of such directors as hereinafter provided, and (ii) the
holders of the Series 2 Preferred (voting separately as a class)
will have the exclusive right to vote for and elect the two
additional directors of the Company at any meeting of
stockholders of the Company at which directors are to be elected
held during the period that any dividends on the Series 2
Preferred remain in arrears. 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.
As of March 31, 2000, the Company and its subsidiaries which
are not subsidiaries of ClimaChem and exclusive of the Automotive
Products Business had a working capital deficit of approximately
$3.4 million and long-term debt due after one year of
approximately $32.9 million including amounts owed to ClimaChem.
For the remainder of 2000, the Company has planned capital
expenditures of approximately $8.2 million, primarily in the
Chemical and Climate Control Businesses. These capital
expenditures include approximately $2.0 million, which the
Chemical Business plans to spend under consent orders with the
State of Arkansas related to environmental control facilities at
its El Dorado facility, as previously discussed in this report.
The Company is currently exploring alternatives to finance these
capital expenditures. There are no assurances that the Company
will be able to arrange financing for its capital expenditures or
to make the necessary changes to its Indenture in order to borrow
the funds required to finance certain of these expenditures.
Failure to be able to make a substantial portion of these capital
expenditures, including those related to environmental matters,
could have a material adverse effect on the Company.
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.
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 into new lines of business directly related to the
Company's core operations (i.e., completion of the DSN plant
which produces concentrated nitric acid, execution of the EDNC
Baytown plant agreement with Bayer to supply industrial acids,
development and expansion into market-innovative climate control
products such as geothermal and high air quality systems and
large air handling units).
During 1999, the Chemical Business sustained significant
losses, primarily as a result of the reduction of selling prices
for its nitrate-based products (in large part due to the flood of
the market with low-priced Russian ammonium nitrate) while the
Company's cost of raw materials escalated under a contract with a
pricing mechanism tied to the price of natural gas which
increased dramatically. During late 1999, the Company
renegotiated this supply contract, extending the cash
requirements under its take-or-pay provision to delay required
takes to 2000, 2001 and 2002 and to obtain future raw material
requirements at spot market prices. The Company was also active
in bringing about a favorable preliminary determination from the
International Trade Commission and Commerce Department, which has
had the current impact of minimizing the dumping of Russian
ammonium nitrate in the U.S. market (This investigation has been
suspended due to the agreement between Russia and the United
States to limit volumes and set minimum prices for imported
Russian ammonium nitrate. The U.S. industry or Russian exporters
may, however, request completion of the investigation). This and
other factors has allowed the Chemical Business to see marginally
improved market pricing for its nitrate based products in the
first three months of 2000 compared to the comparable period in
1999; however, there are no assurances that this improvement
will continue. The Company also successfully commenced
operations in May 1999 of its EDNC Baytown plant which is selling
product to Bayer under a long-term supply contract.
The Company's long-range plans also included the addition of
expertise related to the Company's core businesses to enhance its
leadership team. Beginning in 1998, the Company brought on
several new members of its Board of Directors with expertise in
certain of the Company's Businesses, and individuals with
extensive knowledge in the banking industry and financial
matters. These individuals have brought business insight to the
Company and helped management to formulate the Company's
immediate and long-range plans.
The plan for the remainder of 2000 calls for the Company to
dispose of a significant portion of its non-core assets. As
previously discussed, 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. Additionally, the Company is
presently evaluating alternatives for realizing its net
investment in the Industrial Products Business. The Company has
had discussions involving the possible sale of the Industrial
Products Business; however, no definitive plans are currently in
place and any which may arise will require Board of Director
approval prior to consummation. The Company is currently
continuing the operations of the Industrial Products Business;
however, the Company may sell or dispose of the operations in
2000. The Company's plan for the remainder of 2000 also call 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. As of the date, the Company has
received written confirmation from the buyer of the Optioned
Company that the transaction is on schedule to close in the month
of June. 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. 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."
During 1999 and into 2000, the Company has been
restructuring its operations, eliminating businesses which are
non-core, reducing its workforce as opportunities arise and
disposing of non-core assets. As discussed above, the Company has
also successfully renegotiated its primary raw material purchase
contracts in the Chemical Business in an effort to make that
Business profitable again and focused its attention to the
development of new, market-innovative products in the Climate
Control Business. Although the Company has not planned to receive
any dividends, tax payments or management fees from ClimaChem in
2000, it is possible that ClimaChem could pay up to $1.8 million
of management fees to its ultimate parent should operating
results be favorable with the amount due to the Company related
to the advance and option payments and be repaid in the entirety.
(if ClimaChem has EBITDA in excess of $26.0 million annually,
$6.5 million quarterly, is, payable up to $1.8 million to LSB).
For the three months ended March 31, 2000, ClimaChem was required
to pay the Company $450,000 under the Managment Agreement inasmuch
as EBITDA exceeded $6.5 million for the period. There are no
assurances that such amount will be earned in future quarters or
that this amount earned in the first quarter of 2000 will not be
required to be repaid in subsequent periods.
As previously mentioned, the Company and ClimaChem's primary
credit facility terminates on December 31, 2000, unless the
parties to the agreements agree to new financial covenants for
2001 prior to October 1, 2000. While there is no assurance that
the Company will be successful in extending the term of such
credit facility, the Company believes it has a good working
relationship with the lender and that it will be successful in
extending such facility or replacing such facility from another
Lender with substantially the same terms during 2000.
In March 2000, ClimaChem retained Chanin Capital Partners
as its financial advisor to assist in evaluating alternatives
relating to ClimaChem's liquidity and determining its
alternatives for a financial restructuring. As part of
ClimaChem's restructuring, ClimaChem and its financial advisor
have begun discussions with a group of holders of the Senior
Unsecured Notes ("Senior Notes") to restructure the Senior Notes
in order to reduce ClimaChem's leverage and increase its equity
capitalization. ClimaChem did not make the June 1, 2000
interest payment of $5.4 million on the Senior Notes (excluding
interest on the $5.0 million of Senior Notes repurchased by
ClimaChem). Under the terms of the Indenture governing the Senior
Notes, ClimaChem has a grace period of thirty (30) days, or
until July 1, 2000, to make the interest payment or enter into
satisfactory agreements with the holders of the Senior Notes
before the Senior Notes are in default. ClimaChem currently
anticipates achieving satisfactory resolution of this matter.
As discussed above, the Company has planned for up to $8.2
million of capital expenditures for the remainder of 2000, most
of which is not presently committed. Further, a significant
portion of this is 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. Recently, the Chemical Business has
obtained relief from certain of the compliance dates under its
waste water management project and expects that this will
ultimately result in the delay in the implementation date of such
project. 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
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 which were
approximately $24.3 million as of March 31, 2000. These notes
are secured by a second lien on substantially all of the assets
of the buyer but payment of principal and interest are
subordinated to the buyer's primary lender. The losses
associated with the discontinuation of this business segment are
reflected in the net loss from discontinued operations for the
three months ended March 31, 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 + 1.0%
but will not be paid until and if Automotive's availability
reaches a level of $1.0 million.
The Company remains a guarantor on certain equipment notes
of Automotive, which had outstanding indebtedness of
approximately $4.5 million as of March 31, 2000, and on the
Automotive Revolver in the amount of $1.0 million for which the
Company has posted a letter of credit at March 31, 2000.
In an effort to assist the Automotive Products Business to
be in a position to complete the sale described above, on March
9, 2000, the Company closed the acquisition of certain assets of
the Zeller Corporation representing its universal joint business.
In connection with the acquisition of these assets, the
Automotive Products Business assumed an aggregate of
approximately $7.5 million (unaudited) in Zeller's liabilities,
$4.7 million of which was funded by the Automotive Products
Business primary lender. (The balance of the assumed liabilities
was funded out of working capital of the Automotive Products
Business). For the year ended December 31, 1999, the universal joint
business of Zeller had unaudited sales of approximately $11.7 and
a net loss of $1.5 million.
Joint Ventures and Options to Purchase
Prior to 1997, the Company, through a subsidiary, loaned
$2.8 million to a French manufacturer of HVAC equipment whose
product line is compatible with that of the Company's Climate
Control Business in the United States. Under the loan agreement,
the Company has the option, which expires June 15, 2005, to
exchange its rights under the loan for 100% of the borrower's
outstanding common stock. The Company obtained a security
interest in the stock of the French manufacturer to secure its
loan. Subsequent to 1996, the Company advanced an additional $.9
million to the French manufacturer bringing the total of the loan
to $3.7 million. The $3.7 million loan, less a $1.5 million
valuation reserve for losses incurred by the French manufacturer
prior to 1997, is carried on the books as a note receivable in
other assets. As of the date of this report, the decision has
not been made to exercise its option to acquire the stock of the
French manufacturer.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The
Project had been awarded a contract to retrofit residential
housing units at a US Army base, which it completed during 1996.
The completed contract was for installation of energy-efficient
equipment (including air conditioning and heating equipment)
which would reduce utility consumption. For the installation and
management, the Project will receive a percent of all energy and
maintenance savings during the twenty (20) year contract term.
The Project spent approximately $17.9 million to retrofit the
residential housing units at the US Army base. The project
received a loan from a lender to finance approximately $14.0
million of the cost of the Project. The Company is not
guaranteeing any of the lending obligations of the Project.
Since the date of acquisition through March 31, 2000, the
Company's equity interest in the results of the operations of the
Project was not material.
During 1995, the Company executed a stock option agreement
to acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company"), which owns the remaining fifty
percent (50%) equity interest in the Project discussed above, to
enhance the marketing of the Company's air conditioning products.
The Company has decided not to exercise the Option and has
allowed the term of the Option to lapse. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Source of Funds" for discussion of the pending sale of
this investment in 2000. Through the date of this report, the
Company has made option payments aggregating $1.3 million ($1.0
million of which is refundable) and has advanced the Optioned
Company approximately $1.4 million including accrued interest.
The Company has recorded reserves of $1.5 million against the
loans, accrued interest and option payments. The loans, accrued
interest and option payments are secured by the stock and other
collateral of the Optioned Company.
Debt and Performance Guarantee
At December 31, 1998, the Company and one of its subsidiaries
had outstanding guarantees of approximately $2.6 million of
indebtedness of a startup aviation company in exchange for an
ownership interest in the aviation company of approximately 45%.
During the first quarter of 1999, the Company was called
upon to perform on its guarantees. The Company paid
approximately $500,000 to a lender and assumed an obligation for
a $2.0 million note, which is due in equal monthly principal
payments, plus interest, through August, 2004, in satisfaction of
the guarantees. In connection with the demand on the Company to
perform under its guarantee, the Company and the other guarantors
formed a new company ("KAC") which acquired the assets of the
aviation company through foreclosure.
The Company and the other shareholders of KAC are attempting
to sell the assets acquired in foreclosure. Proceeds received by
the Company, if any, from the sale of KAC assets will be
recognized in the results of operations when and if realized.
As of March 31, 2000, LSB has agreed to guarantee a
performance bond of $2.1 million of a start-up operation
providing services to the Company's Climate Control Business.
On October 17, 1997, Prime Financial Corporation ("Prime"),
a subsidiary of the Company, borrowed from SBL Corporation,a
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 "Prime Loan") on an unsecured
basis 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. During 1999, $150,000 in principal and $280,000 in
interest was paid on this Prime Loan, and as of March 31, 2000, the
unpaid principal balance on the Prime Loan was $1,950,000. In
February 2000, the Company borrowed approximately $500,000 under its
key man life insurance policies, and used such proceeds to reduce the
principal amount due SBL. 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 Prim 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 Prime Loan, 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 limited guaranty, the Company's subsidiary's liability is limited
to the value, from time to time, of the Common Stock of the Company
pledged to secure obligations under its guarantees to the bank relating
to the SBL Borrowings. As of April 15, 2000, the outstanding principal
balance due to the bank from SBL as a result of such loan was $1,950,000.
Availability of Company's Loss Carry-Overs
The Company's cash flow in future years may benefit from its
ability to use net operating loss ("NOL") carry-overs from prior
periods to reduce the federal income tax payments which it would
otherwise be required to make with respect to income generated in
such future years. Such benefit, if any, is dependent on the
Company's ability to generate taxable income in future periods,
for which there is no assurance. Such benefit, if any, will be
limited by the Company's reduced NOL for alternative minimum tax
purposes, which was approximately $40 million at December 31,
1999. As of December 31, 1999, the Company had available regular
tax NOL carry-overs of approximately $75 million based on its
federal income tax returns as filed or to be filed with the
Internal Revenue Service for taxable years through 1999. These
NOL carry-overs will expire beginning in the year 2000. Due
to its recent history of reporting net losses, the Company has
established a valuation allowance on a portion of its NOLs and
thus has not recognized the full benefit of its NOLs in the
accompanying Condensed Consolidated Financial Statements.
The amount of these carry-overs has not been audited or
approved by the Internal Revenue Service and, accordingly, no
assurance can be given that such carry-overs will not be reduced
as a result of audits in the future. In addition, the ability of
the Company to utilize these carry-overs in the future will be
subject to a variety of limitations applicable to corporate
taxpayers generally under both the Internal Revenue Code of 1986,
as amended, and the Treasury Regulations. These include, in
particular, limitations imposed by Code Section 382 and the
consolidated return regulations.
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.
The Company is also a party to a series of agreements under
which it is leasing a nitric acid plant. The minimum lease
payments associated therewith, prior to execution in June 1999,
were directly impacted by the change in interest rates. To
mitigate a portion of the Company's exposure to adverse market
changes related to this leveraged lease, in 1997 the Company
entered into a interest rate forward agreement whereby the
Company was the fixed rate payor on notional amounts aggregating
$25 million, net to its 50% interest, with a weighted average of
7.12%. The Company accounted for this forward under the deferral
method. As of March 31, 2000, the Company has deferred costs
of approximately $2.7 million associated with such agreement,
which is being amortized over the initial term of the lease.
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 March 31, 2000, the Company's variable rate and fixed
rate debt, which aggregated $156.9 million, exceeded the debt's
fair market value by approximately $89.3 million ($79.0 million
at December 31, 1999). The fair value of the Company's Senior
Notes was determined based on a market quotation for such
securities.
Raw Material Price Risk
The Company has a remaining commitment at March 31, 2000 to
purchase 90,000 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 March 31, 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 $1.0 million was recorded in the three months ended
March 31, 2000. See Note 12 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 in that the cost to produce
Chemical Business products will improve, (iv) declines in the
price of anhydrous ammonia, (v) (obtaining a final ruling as to
Russian dumping of anhydrous ammonia) (vi) availability of net
operating loss carryovers, (vii) amount to be spent relating to
compliance with federal, state and local environmental laws at
the El Dorado Facility, (viii) liquidity and availability of
funds, (ix) profits through liquidation of assets or realignment
of assets or some other method, (x) anticipated financial
performance, (xi) ability to comply with general working capital
and debt service requirements, (xii) ability to be able to
continue to borrow under the Company's revolving line of credit,
(xiii) ability to complete the sale of the Optioned Company,
(xiv) adequate cash flows to meet its presently anticipated
capital requirements, (xv) ability of the EDNC Baytown Plant to
generate approximately $35 million in annual gross revenues,
(xvi) ability to make required capital improvements, (xvii)
ability to carry out its plans for 2000, (xviii) anticipated cost
of certain amounts of anhydrous ammonia exceed the market, (xix)
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 (xx) the Company
currently anticipates achieving satisfactory resolution of the
nonpayment of the June 1, 2000 interest payment on ClimaChem's
10 3/4% Senior Notes due 2007. 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, (xii) 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) ability to recover the Company's
investment in the aviation company, (x) Bayer's inability or
refusal to purchase all of the Company's production at the
Baytown nitric acid plant; (xx) continuing decreases in the
selling price for the Chemical Business' nitrogen based end
products, (xxi) inability to negotiate amendments to the
Indenture (xxii) inability to complete the sale of the Optioned
Company and (xxiii) other factors described in "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" contained in this report. Given these uncertainties,
all parties are cautioned not to place undue reliance on such
Forward-Looking Statements. The Company disclaims any obligation
to update any such factors or to publicly announce the result of
any revisions to any of the Forward-Looking Statements contained
herein to reflect future events or developments.
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.
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 March 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
$2,222,045 as of the date of this report. In addition,
the Company's Board of Directors has decided not to pay
the June 15, 2000 dividend payment on its outstanding
Series 2 Preferred. If the June 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 $2,955,184. 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").
Dividends in arrears at March 31, 2000, related to the
Company's Series B amounted to approximately $.1 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) (i) the number of members
of the Company's Board of Directors (the "Board") shall
be increased by two, effective as of the time of
election of such directors as hereinafter provided, and
(ii) the holders of the Series 2 Preferred (voting
separately as a class) will have the exclusive right to
vote for and elect the two additional directors of the
Company at any meeting of stockholders of the Company
at which directors are to be elected held during the
period that any dividends on the Series 2 Preferred
remain in arrears. 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
Not applicable.
Item 5. Other Information
In March 2000, ClimaChem retained Chanin Capital
Partners as its financial advisor to assist in
evaluating alternatives relating to ClimaChem's
liquidity and determining its alternatives for a
financial restructuring. As part of ClimaChem's
restructuring, ClimaChem and its financial advisor
have begun discussions with a group of holders of the
Senior Unsecured Notes ("Senior Notes") to restructure
the Senior Notes in order to reduce the ClimaChem's
leverage and increase its equity capitalization.
ClimaChem did not make the June 1, 2000 interest payment
of $5.4 million on the Senior Notes (excluding
interest on the $5.0 million of Senior Notes
repurchased by ClimaChem). Under the terms of the
Indenture governing the Senior Notes, ClimaChem has a
grace period of thirty (30) days to make the interest
payment or enter into satisfactory agreements with
the holders of the Senior Notes before the Senior
Notes are in default. ClimaChem currently anticipates
achieving satisfactory resolution of this matter.
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 "Prime 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. During 1999, $150,000 in
principal and $280,000 in interest was paid on this
Prime Loan, and as of March 31, 2000, the unpaid
principal balance on the Prime Loan was $1,950,000. In
February 2000, the Company borrowed approximately
$500,000 under its key man life insurance policies, and
used such proceeds to reduce the principal amount due
SBL. 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 Prime 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 limited
guaranty, the Company's subsidiary's liability is
limited to the volume, from time to time, of the Common
Stock of the Company pledged to secure obligations
under its guarantees to the bank relating to the SBL
Borrowings. As of April 15, 2000, the outstanding
principal balance due to the bank from SBL as a result
of such loan was $1,950,000.
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 Asset Purchase and Sale Agreement, dated as of
March 6, 2000, between L&S Automotive Products Co. and The
Zeller Corporation, which the Company hereby incorporates by
reference from Exhibit 2.1 to the Company's Form 8K dated
March 9, 2000.
10.2 Covenant Waiver Letter, dated April 10, 2000,
between The CIT Group and DSN Corporation, which the Company
incorporates by reference from Exhibit 10.50 to the
Company's Amendment No. 2 to its 1999 Form 10-K.
10.3. 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 Seventh Amendment to Amended and Restated Loan
and Security Agreement, dated January 1, 2000, by and
between Bank of America, N.A. and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company, and Slurry Explosive Corporation, which the Company
hereby incorporates by reference from Exhibit 10.2 to the
Company's Form 8-K dated December 30, 1999.
10.9 First Amendment to Second Amended and Restated
Loan and Security Agreement, dated January 1, 2000, by and
between Bank of America, N.A. and LSB Industries, Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
Manufacturing Corporation, which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's
Form 8-K dated December 30, 1999.
10.10 Amendment to Anhydrous Ammonia Sales Agreement,
dated January 4, 2000, to be effective October 1, 1999,
between Koch Nitrogen Company and El Dorado Chemical
Company, which is incorporated by reference from Exhibit
10.43 to the Company's Amendment No. 2 to its 1999 Form 10-
K. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE
OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE
SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR
PURPOSES OF SUCH REQUEST.
10.11 Anhydrous Ammonia Sales Agreement, dated January
12, 2000, to be effective October 1, 1999, between Koch
Nitrogen Company and El Dorado Chemical Company, which is
incorporated by reference from Exhibit 10.44 to the
Company's Amendment No. 2 to its 1999 Form 10-K. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER
THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION HAS
BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.12 Eighth Amendment to Amended and Restated Loan and
Security Agreement, dated March 1, 2000, with Bank of
America, N.A., which the Company hereby incorporates by
reference from Exhibit 10.2 to the Company's Form 8-K dated
March 1, 2000.
10.13 Second Amendment to Second Amended and Restated
Loan and Security Agreement, dated March 1, 2000 by and
between Bank of America, N.A. and LSB Industries Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
Manufacturing Corporation, which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's
Form 8-K dated March 1, 2000.
10.14 Third Amendment to Second Amended and Restated
Loan and Security Agreement, dated March 31, 2000 by and
between Bank of America, N.A. and LSB Industries Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
manufacturing Corporation.
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 March 31, 2000:
(i) Form 8-K, dated March 1, 2000 (date of event: Mach
1, 2000). The item reported was Item 5, "Other
Information", discussing the amendments to Amended and
Restated Loan and Security Agreements with Bank of
America, N.A.
(ii) Form 8-K, dated March 9, 2000 (date of event:
March 6, 2000). The item reported was Item 2
"Acquisition or Disposition of Assets" discussing the
acquisition of substantially all of the assets, except
for real estate, of the Zeller Corporation and a Non-
Competition Agreement with a shareholder and former
President of the Zeller Corporation.
(iii) Form 8-K/A, dated March 9, 2000 (date of event:
March 6, 2000). The item reported was Item 2
"Acquisition or Disposition of Assets" amending the
Form 8-K discussion of the acquisition of substantially
all of the assets, except for real estate, of the
Zeller Corporation and a Non-Competition Agreement with
a shareholder and former President of the Zeller
Corporation.
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 7 day of
June 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)
