<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
FOR QUARTERLY REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
------------- --------------
COMMISSION FILE NUMBER 33-79532
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3341472
(State (I.R.S. Employer
of Incorporation) Identification No.)
1100 JOHNSON FERRY ROAD N.E.
ATLANTA, GEORGIA 30342
(Address of principal executive offices)
(404) 851-0300
(Registrant's telephone number, including area code)
---------------
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 AT LEAST THE PAST 90 DAYS. YES. X NO .
INDICATE THE NUMBER OF SHARES OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK,
AS OF THE LATEST PRACTICABLE DATE:
CLASS OUTSTANDING AS OF OCTOBER 15, 1999
----- ----------------------------------
COMMON STOCK, $.01 PAR VALUE 429,214 SHARES
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<PAGE>
LAROCHE INDUSTRIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at August 31, 1999 and February 28, 1999 1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three
months and six months ended August 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the six months ended August 31, 1999
and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE>
LAROCHE INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
08/31/99 02/28/99
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,395 $ 5,380
Receivables:
Trade, net of allowances of $408 and $527 as of August 31,
1999 and February 28, 1999, respectively 63,088 54,527
Other 9,887 8,233
Inventories 23,868 22,105
Net assets of discontinued operations - 27,080
Other current assets 6,341 3,468
--------- ---------
Total current assets 104,579 120,793
Investments and advances to affliates 23,510 48,082
Property, plant and equipment, at cost 386,464 310,092
Less accumulated depreciation (132,525) (106,497)
--------- ---------
Net property, plant and equipment 253,939 203,595
Other assets 28,296 17,307
--------- ---------
Total assets $ 410,324 $ 389,777
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit facilities $ 83,843 $ 55,388
Accounts payable 50,662 48,166
Accrued compensation 1,699 5,039
Other accrued liabilities 35,485 34,864
Current portion of long-term debt 5,833 4,375
Long term debt reclassified as current 199,344 -
--------- ---------
Total current liabilities 376,866 147,832
Long-term debt - 202,221
Deferred income taxes 7,200 4,044
Other noncurrent liabilities 52,448 45,757
Commitments and contingencies - -
Redeemable common stock 480 528
Stockholders' deficit:
10% cumulative, voting preferred stock, $.01 par
value, 200 shares authorized, no shares outstanding - -
Common stock, $.01 par value, 1,200 shares
authorized, 425 non-redeemable shares issued 4 4
Capital in excess of par value 630 630
Retained deficit (25,524) (10,491)
Accumulated other comprehensive loss (1,780) (748)
--------- ---------
Total stockholders' deficit (26,670) (10,605)
--------- ---------
--------- ---------
Total liabilities and stockholders' deficit $ 410,324 $ 389,777
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
LAROCHE INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $92,135 $ 93,123 $ 182,750 $212,354
Cost of sales 87,872 80,656 169,105 180,488
--------- -------- --------- ---------
Gross profit 4,263 12,467 13,645 31,866
Selling, general and administrative expenses 8,392 8,711 16,223 16,966
--------- -------- --------- ---------
(Loss) income from continuing operations (4,129) 3,756 (2,578) 14,900
Interest and amortization of debt expense (6,730) (4,669) (12,300) (9,397)
(Loss) income from equity investments (9) (518) 1,552 (46)
Other (expense) income, net (1,575) (2,027) 318 (2,376)
--------- -------- --------- ---------
(Loss) income from continuing operations before
income taxes (12,443) (3,458) (13,008) 3,081
(Provision) benefit for income taxes (1,033) 253 (2,025) (2,952)
--------- -------- --------- ---------
(Loss) income from continuing operations (13,476) (3,205) (15,033) 129
Loss from operations of Alumina Chemicals
division, net of tax benefit 0 (1,087) 0 (1,177)
--------- -------- --------- ---------
Net loss (13,476) (4,292) (15,033) (1,048)
Other comprehensive loss:
Foreign currency translation adjustments, net of
tax benefits of $700, $114, $688 and $162, respectively (1,004) (171) (1,033) (243)
--------- -------- --------- ---------
Comprehensive loss $ (14,480) $ (4,463) $ (16,066) $ (1,291)
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
LAROCHE INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
-------------------------------------
1999 1998
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (15,033) $ (1,048)
Depreciation and amortization 16,025 11,925
Net change in operating assets and liabilities:
Receivables 455 7,054
Inventories 2,039 3,076
Other assets 3,606 (706)
Accounts payable and other liabilities (20,925) (14,220)
Noncurrent liabilities and other 3,053 3,883
Loss from discontinued operations and loss on disposal - 1,176
Net loss (gain) on disposal of assets 184
Deferred Income Taxes 3,156 -
Equity income, net of distributions (1,157) 46
--------- --------
Net cash (used for) provided by continuing operating activities (8,781) 11,370
--------- --------
Net cash provided by (used for) discontinued operating activities (149) 690
--------- --------
INVESTING ACTIVITIES
Capital expenditures (15,885) (17,597)
Investments in and advances to affliates (207) (2,960)
Investment in ChlorAlp, net of cash acquired (23,034) -
Plant turnarounds (2,693) -
Proceeds from the sale of facilities 27,590 794
--------- --------
Net cash used by investing activities of continuing operations (14,229) (19,763)
--------- --------
Net cash used by investing activities of discontinued operations (307) (781)
--------- --------
FINANCING ACTIVITIES
Net borrowings under revolving credit facility 20,378 8,419
Sales of common stock with redemption features - 128
Purchases of common stock with redemption features (48) (1,646)
Repayments of long-term debt (1,420) (5,618)
Dividends paid - (766)
--------- --------
Net cash provided by financing activities 18,910 517
--------- --------
Effect of exchange rate changes on cash 571 (972)
--------- --------
Net decrease in cash (3,985) (8,939)
Cash at beginning of period 5,380 12,884
--------- --------
Cash at end of period $ 1,395 $ 3,945
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. All significant intercompany transactions and balances have been
eliminated in consolidation. Operating results for the three months and six
months ended August 31, 1999 may not be indicative of the results that may be
expected for the full fiscal year. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended February 28, 1999.
2. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("the Statement"). The Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on the derivative designation. The
Company will be required to implement the Statement in its fiscal year ended
February 28, 2001, and it has not yet determined the impact that its adoption
may have on the Company's financial position or the results of operations.
3. ACQUISITIONS
On June 7, 1999, the Company, through its wholly-owned subsidiary, LII
Europe, acquired all the capital stock and equity interest in ChlorAlp held
by Rhodia Chimie, S.A. for approximately $27.3 million in cash. The Company
previously held a 50% joint venture interest in ChlorAlp, which it acquired
on October 17, 1997 for approximately $35.5 million. The acquisition was
accounted for as a purchase; accordingly, the August 31, 1999 consolidated
statement of operations includes the results of operations of ChlorAlp since
the June 7, 1999 acquisition date. The purchase price was allocated based on
the estimated fair values of the assets acquired at the acquisition date. The
Company funded the purchase largely with proceeds received from the
disposition of its Aluminas production facilities in Baton Rouge, Louisiana.
ChlorAlp is a chlor-alkali operation located in Pont de Claix, France.
Its facilities include a diaphragm chlorine and caustic soda plant, a
chlorine vaporization and distribution operation, a bleach production
facility, a brine extraction operation and a 60% interest in GIE CEVco, a
high efficiency 200MW power plant. The Company intends to continue the
operation of ChlorAlp substantially in the manner operated prior to the
acquisition.
The following unaudited pro forma information presents a summary of
the Company's consolidated results of operations for the three months and six
months ended August 31, 1999 and 1998, as if the acquisition of ChlorAlp had
occurred on March 1, 1998. These unaudited pro forma results have been
prepared for comparative purposes only, and do not purport to be indicative
of the results of operations which would have actually resulted had the
acquisition been in effect on March 1, 1998, or of the future results of
operations.
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
---------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ 92,135 $ 111,135 $ 207,133 $ 253,823
Net Income
(13,476) (5,114) (13,851) (1,343)
</TABLE>
4
<PAGE>
4. INVENTORIES
Components of inventory from continuing operations are as follows (in
thousands):
<TABLE>
<CAPTION>
AUGUST 31, February 28,
1999 1999
<S> <C> <C>
Finished goods and in-progress.. $ 10,019 $ 7,695
Inventory purchased for resale... 1,663 3,122
Raw materials.................... 2,379 1,358
Supplies and catalysts........... 10,347 10,470
--------- --------
24,408 22,645
Less LIFO reserve................ (540) (540)
--------- --------
$ 23,868 $ 22,105
--------- --------
--------- --------
</TABLE>
An actual valuation of inventory under the LIFO method can be made
only at the end of each year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs and
are subject to change based on the final year-end LIFO inventory valuation.
5. DISCONTINUED OPERATIONS
During November 1998, the Company adopted plans for the sale of its
Alumina Chemicals business ("Aluminas") and accounted for the financial
results, net assets and cash flow of the business unit as a discontinued
operation. Accordingly, previously reported financial results for all periods
have been restated to reflect the business as a discontinued operation. The
sale was completed on June 3, 1999 with no significant adjustments required
to the estimated loss recorded at February 28, 1999.
6. PROPERTY, PLANT AND EQUIPMENT
Components of the Company's property, plant and equipment used in
continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, February 28,
1999 1999
---------- ------------
<S> <C> <C>
Land and land improvements $ 9,984 $ 9,984
Buildings 20,090 16,651
Machinery and equipment 337,585 266,991
Equipment under capital leases 3,875 3,875
Construction in progress 14,930 12,591
-------- --------
Property, plant and equipment, at cost 386,464 310,092
Accumulated depreciation (132,525) (106,497)
-------- --------
Property, plant and equipment, net $253,939 $203,595
-------- --------
-------- --------
</TABLE>
5
<PAGE>
7. BORROWING ARRANGEMENTS
The Company's borrowings include the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, February 28,
1999 1999
----------- -----------
<S> <C> <C>
Revolving credit facilities $ 83,843 $ 55,388
----------- -----------
----------- -----------
Term debt:
9 1/2% senior subordinated notes $ 174,366 $ 174,327
13% senior subordinated notes 915 915
Term loan 29,896 31,354
----------- -----------
Total 205,177 206,596
Less current portion (5,833) (4,375)
Less long-term portion reclassified as current (199,344) -
----------- -----------
Long-term debt $ - $ 202,221
----------- -----------
</TABLE>
As of February 28, 1999, the Company's senior bank credit facility
(the "Credit Facility") was amended and restated to bring the Company into
compliance with certain financial covenants. As part of the amendment and
restatement, availability under the revolving credit facility (the "Revolving
Credit Facility") was limited to the lesser of $90 million or a borrowing
base (the "Borrowing Base"), which is determined monthly based on a
percentage of trade receivables, inventory, and property plant and equipment,
including approximately $14 million of certain foreign assets (the "Deemed
Foreign Assets").
On September 14, 1999, the Company further amended the Credit Facility
in order to increase borrowing availability under the Revolving Credit
Facility. The amendment was necessary as a result of lower than expected cash
flows and receivable and inventory balances caused principally by the
temporary suspension of operations of the Company's chlor-alkali and
fluorocarbons plants in Gramercy, Louisiana and continued depressed market
conditions for the Company's domestic nitrogen products.
The amendment, among other things, allows the Company to include
certain non-trade receivables in its Borrowing Base through December 10,
1999, which, based on current expectations, will allow the Company to borrow
up to $90 million under the Revolving Credit Facility. After December 10,
1999, these non-trade receivables together with the Deemed Foreign Assets
will not be included in the Borrowing Base. As a result of such reductions in
the Borrowing Base, based on current forecasts, approximately $70 to $73
million will be available under the Revolving Credit Facility after December
10, 1999, and therefore, amounts available thereunder will not likely be
adequate to meet the Company's cash needs. Accordingly, the Company has
reclassified all amounts due under the Credit Facility, as well as other
long-term debt subject to cross default provisions, to current liabilities in
the accompanying August 31, 1999 balance sheet. With assistance from its
financial and legal advisors, the Company is currently exploring a number of
alternatives and is working with its lender group to address the Company's
cash requirements at December 10, 1999 and thereafter.
As of August 31, 1999, the Company was in compliance with all
covenants included in the Credit Facility. The weighted average borrowing
rate as of August 31, 1999 was 8.6%. As of October 14, 1999, the Company had
approximately $86.4 million in outstanding borrowings and letters of credit
under the Revolving Credit Facility, and approximately $3.6 million available
without violating any of the covenants of the Credit Facility or the Bonds
Indenture. Approximately $14.5 million was outstanding under German and French
credit agreements, with approximately $4.5 million available for additional
borrowings.
The amended and restated Credit Facility imposes restrictions on
investments, acquisitions, repurchases of stock, borrowing and sales of
assets. It also imposes cumulative and annual limits on capital spending, as
well as a prohibition on the payment of dividends without the consent of the
lenders.
6
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
On June 21, 1999, Elf Atochem North America ("Elf Atochem") filed an
action in U.S. District Court against the Company alleging the Company
infringed an Elf Atochem patent in connection with the Company's manufacture
of HCFC products. The action seeks to enjoin the Company from its alleged
continuing infringement of Elf Atochem's rights, treble damages for lost
profits, costs, prejudgment interest and attorney fees. Prior to commencement
of the action, the Company informed Elf Atochem that it did not believe its
production process infringed valid patent rights of Elf Atochem. The Company
believes that, after having analyzed the claims in conjunction with counsel
engaged to assist in the defense of the matter, valid and enforceable
defenses and/or counter claims exist in favor of the Company and the Company
currently intends to defend the matter accordingly. Although management
believes the matter will be resolved without a material adverse effect, it is
inherently impossible to predict with any degree of certainty the outcome of
the type claim that the Elf Atochem matter represents. Accordingly, it is
possible that the resolution of the matter could be material to the Company's
financial position or the results of operations.
In addition to the matters discussed above, the Company is involved in
certain other legal actions and claims arising in the ordinary course of
business. The amounts in these matters are material to the Company's
financial statements, and certain claimants have not yet asserted an amount.
Although it is inherently impossible to predict with any degree of certainty
the outcome of such legal actions and claims, in the opinion of management
the resolution of these matters is not likely to have a material adverse
effect on the Company's financial position and results of operations. It is
possible, however, that the resolution of certain matters could be material
to the results of operations of any single fiscal quarter.
9. INCOME TAXES
Reconciliation of the differences between income taxes computed at the
federal statutory rate and the Company's consolidated income tax (provision)
benefit from continuing operations follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, SIX MONTHS ENDED AUGUST 31,
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Tax benefit (provision) at federal statutory rate $ 4,355 $ 1,210 $4,553 $ (1,078)
State income taxes, net of federal income tax benefit 392 576
125 (90)
Foreign tax provision in excess of federal statutory (402) (703)
rate (1,025) (1,768)
Increase valuation allowance (5,514) (6,621)
- -
Other 137
(57) 170 (16)
------------- ------------- ------------- --------------
Total $(1,032) $ 253 $(2,025) $ (2,952)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
The Company has not recognized any benefit from the future use of current
domestic operating loss carryforwards because management's evaluation of
available evidence in assessing the current realizability of the related tax
benefits indicates that the underlying assumptions of future domestic
profitability contains risks that do not provide sufficient assurance (based on
generally accepted accounting principles) to recognize such tax benefits. The
Company will continue to assess the valuation allowance and make adjustments as
appropriate in future periods.
7
<PAGE>
10. FINANCIAL INSTRUMENTS
The Company is exposed to the impact of interest and foreign exchange
rate changes. With an objective of managing the impact of such changes on
earnings and cash flow, the Company is a party to a French Franc (FRF)
cross-currency interest rate swap contract. At August 31, and February 28,
1999, the fair value of the FRF contract was approximately ($507) and
($2,871), respectively. The Company previously had two Deutsche Mark (DEM)
contracts which had a combined fair market value of ($2,302) at February 28,
1999. The DEM contracts were liquidated in July 1999 for a gain of
approximately $1.1 million.
At August 31, 1999 the Company has commitments outstanding under
natural gas fixed price purchase contracts to purchase approximately $2,306
of natural gas during fiscal 2000. If the Company settled these contracts at
August 31, 1999, a gain of $1,244 would have been recognized.
The following sets forth the open positions and the fair value of the
Company's natural gas collar positions, which mature in the current fiscal
year, as of August 31 and February 28, 1999.
<TABLE>
<CAPTION>
QUANTITY FAIR VALUE CARRYING VALUE
-------- ---------- --------------
AUGUST 31, 1999 (IN MMBTU'S)
<S> <C> <C> <C>
Purchased Call Options............... --- --- $ ---
Written Put Options.................. --- --- ---
QUANTITY FAIR VALUE CARRYING VALUE
-------- ---------- --------------
AUGUST 31, 1999 (IN MMBTU'S)
Purchased Call Options............... 5,002 $106 $ ---
Written Put Options.................. 5,002 (39) ---
</TABLE>
The fair values are based on quoted market prices. Approximately 12.3%
of the Company's estimated requirements for fiscal 2000 are subject to
forward or collar agreements.
During the quarter ended August 31, 1999, the Company recorded a
realized gain of $302 on positions maturing or liquidated during the quarter,
and had an unrealized gain of $159 on remaining contracts under the spread
oil swap agreement associated with natural gas purchases in France. The fair
market value of the remaining open positions under the spread oil swap
agreement is approximately $850 at August 31, 1999.
8
<PAGE>
11. SEGMENT INFORMATION
The Company's continuing operations are comprised of three principal
business segments: Nitrogen Products, Electrochemical Products - North
America ("Electrochemicals - NA") and Electrochemical Products - Europe
("Electrochemicals - Europe"). The Nitrogen Products segment consists of
facilities that manufacture and distribute agricultural and industrial
nitrogen products and distribute other agricultural fertilizers in North
America. The Electrochemicals - NA segment consists of caustic soda, chlorine
and fluorocarbons production facilities. The Electrochemicals - Europe
segment consists of caustic soda, chlorine and chlorinated methane compound
production facilities located in France and Germany. There is no overlap in
operational management reporting of or decision-making authority over
Electrochemicals - NA and Electrochemicals - Europe. Operating profit
includes all costs and expenses directly related to the segment involved.
Following is a tabulation of business segment information for continuing
operations for each of the quarters ended August 31, 1999 and 1998,
respectively (in thousands).
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
1999 1998 1999 1998
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Net Sales:
Nitrogen products $ 37,505 $ 43,022 $ 87,911 $ 109,811
Electrochemical products - North America 9,747 18,197 24,715 39,397
Electrochemical products - Europe 44,883 31,904 70,124 63,146
---------- --------- -------- ----------
Total $ 92,135 $ 93,123 $ 182,750 $ 212,354
---------- --------- -------- ----------
---------- --------- -------- ----------
Income (loss) from continuing operations:
Nitrogen products $ 361 $ 2,276 $ 4,490 $ 9,652
Electrochemical products - North America (4,446) 736 (8,416) 2,308
Electrochemical products - Europe 1,767 1,850 4,877 5,731
Corporate expense (1,811) (1,106) (3,529) (2,791)
---------- --------- -------- ----------
Income from continuing operations (4,129) 3,756 (2,578) 14,900
Interest and amortization expense (6,730) (4,669) (12,300) (9,397)
Income from equity investments (9) (518) 1,552 (46)
Other income, net (1,575) (2,027) 318 (2,376)
---------- --------- -------- ----------
(Loss) income from continuing operations
before income taxes and other items $(12,443) $ (3,458) $ (13,008) $ 3,081
---------- --------- -------- ----------
---------- --------- -------- ----------
EBITDA:
Nitrogen products $ 3,821 $ 5,361 $ 10,799 $ 15,967
Electrochemical products - North America (2,000) 2,195 (3,552) 5,472
Electrochemical products - Europe 4,381 3,003 9,979 9,207
Corporate expense (1,820) (174) (3,637) (2,449)
---------- --------- -------- ----------
Total $ 4,382 $ 10,385 $ 13,589 $ 28,197
---------- --------- -------- ----------
---------- --------- -------- ----------
</TABLE>
9
<PAGE>
EBITDA represents income from operations plus cash received from
equity investments, plus depreciation, amortization and other non-cash and
non-recurring transactions reflected in income from operations. In addition,
prior to its acquisition in June 1999, EBITDA also included the Company's
equity interest in the EBITDA of ChlorAlp. EBITDA should not be considered as
an alternative measure of net income or cash flow provided by operating
activities (both as determined in accordance with generally accepted
accounting principles), but is presented to provide additional information
related to the Company's debt service capability. EBITDA should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity. The primary difference between EBITDA and cash
flows provided by operating activities relates primarily to changes in
working capital requirements and payments made for interest and income taxes.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS.
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes
thereto included in this quarterly report on Form 10-Q and with the Company's
consolidated audited financial statements and notes thereto included in its
annual report on Form 10-K for the year ended February 28, 1999.
SIGNIFICANT DEVELOPMENTS
During the quarter ended August 31, 1999, the Company continued to
make progress on strategic initiatives outlined in the 1999 fiscal year-end
discussion in its annual report on Form 10-K, while addressing continued weak
domestic market conditions. For the quarter ended August 31, 1999, domestic
pricing for the Company's nitrogen and chlor-alkali products remained near
recent historic lows, which contributed to the operating losses during the
period.
On June 3, 1999, the Company completed the sale of the manufacturing
facilities, real estate and related assets comprising its Aluminas business
("Aluminas") for approximately $39.5 million in cash including specific
working capital. On June 7, 1999, the Company, through its wholly-owned
subsidiary, LII Europe, acquired all the capital stock and equity interest of
ChlorAlp, the chlor-alkali operation in Pont-de-Claix, France in which the
Company previously held a 50% joint venture interest. The purchase price for
the remaining 50% interest was approximately $27.5 million.
On July 5, 1999, an explosion at an adjacent manufacturing site owned
by Kaiser Aluminum and Chemical Corp. caused a temporary suspension of
production at the Company's electrochemical manufacturing facility in
Gramercy, Louisiana. Fluorocarbon production was resumed in mid-August.
Resumption of chlor-alkali production, however, is dependent upon restoration
of services from a power plant shared with Kaiser. The Company is working
with Kaiser and others to restore power in an expeditious and cost-effective
manner, and currently anticipates resumption of chlor-alkali production in
early November 1999. Through August 31, 1999, the Company estimates that it
has incurred approximately $3.5 million in lost margin from product sales and
increased costs as a result of the shut down, and will incur approximately
$2.8 million of additional losses between September 1, 1999 and the expected
resumption of chlor-alkali operations. In addition, physical damages are
expected to be approximately $2.0 million to restore the plant facilities to
their condition before the explosion. The Company expects to recover all of
these losses and increased costs from insurance proceeds, net of deductibles
of approximately $1.6 million. During the three months ended August 31, 1999,
the Company recorded approximately $1.9 million of receivables for business
interruption claims, which represent the amount of recovery the Company
expects to receive through that date.
On September 14, 1999, the Company amended its existing senior secured
credit facility in order to increase borrowing availability under its
revolving credit facility (the "Revolving Credit Facility"). The amendment
was necessary as a result of lower than expected cash flows and receivable
and inventory balances caused principally by the temporary suspension of
operations of the Company's chlor-alkali and fluorocarbons plants (discussed
in the preceding paragraph) and continued depressed market conditions for the
Company's domestic nitrogen products. The amendment, among other things,
allows the Company to include certain non-trade receivables in its Borrowing
Base through December 10, 1999, which, based on current expectations, will
allow the Company to borrow up to $90 million under the Revolving Credit
Facility. However, after December 10, 1999, these non-trade receivables
together with certain deemed foreign assets will not be eligible for
inclusion in the Borrowing Base. As a result of such reductions, based on
current forecasts, availability under the Revolving Credit Facility will be
reduced to approximately $70 to $73 million after December 10, 1999, and
accordingly, will not likely be adequate to meet the Company's cash needs. As
required by the amendment, the Company has engaged the services of
PricewaterhouseCoopers to review the Company's capital structure and business
strategy and to develop recommendations for strengthening the Company's
competitive and financial position. With this assistance from
PricewaterhouseCoopers and others, the Company is currently exploring a
number of alternatives and is working with its lender group to address the
Company's cash requirements at December 10, 1999 and thereafter.
11
<PAGE>
RESULTS OF OPERATIONS
SUMMARY
The Company incurred losses from continuing operations of $4.1 and
$2.6 million for the three months and six months ended August 31, 1999 as
compared to operating income of $3.8 and $14.9 million generated by the same
businesses for the three months and six months ended August 31, 1998. The
deterioration of results from the prior periods to the current periods is
primarily the result of continued weak prices for the Company's North
American derivative nitrogen and chlor-alkali products. Losses from North
American operations were partially offset by income from the Company's
European electrochemical operations, which include the operating results for
the ChlorAlp facility since its purchase on June 7, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------ -----------------------------------------------
(AMOUNTS IN THOUSANDS) AUGUST 31, 1999 AUGUST 31, 1998 AUGUST 31, 1999 AUGUST 31, 1998
--------------------- -------------------- --------------------- ------------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Nitrogen products $ 37,505 40.7% $43,022 46.2% $ 87,911 48.1% $109,811 51.7%
Electrochemical-N. A 9,747 10.6% 18,197 19.5% 24,715 13.5% 39,397 18.6%
Electrochemical-Europe 44,883 48.7% 31,904 34.3% 70,124 38.4% 63,146 29.7%
---------- --------- ---------- --------- ----------- --------- ----------- ---------
Total $ 92,135 100.0% $ 93,123 100.0% $182,750 100.0% $212,354 100.0%
---------- --------- ---------- --------- ----------- --------- ----------- ---------
---------- --------- ---------- --------- ----------- --------- ----------- ---------
INCOME (LOSS) FROM
OPERATIONS:
Nitrogen products $ 361 -8.7% $ 2,276 60.6% $ 4,490 -174.2% $ 9,652 64.8%
Electrochemical-N. A (4,446) 107.7% 736 19.6% (8,416) 326.5% 2,308 15.5%
Electrochemical-Europe 1,767 -42.8% 1,850 49.3% 4,877 -189.2% 5,731 38.5%
Corporate (1,811) 43.8% (1,106) -29.5% (3,529) 136.9% (2,791) -18.8%
---------- --------- ---------- --------- ----------- --------- ----------- ---------
Total $ (4,129) 100.0% $ 3,756 100.0% $ (2,578) 100.0% $ 14,900 100.0%
---------- --------- ---------- --------- ----------- --------- ----------- ---------
---------- --------- ---------- --------- ----------- --------- ----------- ---------
EBITDA:
Nitrogen products $ 3,821 87.2% $ 5,361 51.6% $ 10,799 79.5% $ 15,967 56.6%
Electrochemical-N. A (2,000) -45.6% 2,195 21.1% (3,552) -26.1% 5,472 19.4%
Electrochemical-Europe 4,381 100.0% 3,003 28.9% 9,979 73.4% 9,207 32.7%
Corporate (1,820) -41.6% (174) -1.6% (3,637) -26.8% (2,449) -8.7%
---------- --------- ---------- --------- ----------- --------- ----------- ---------
Total $ 4,382 100.0% $10,385 100.0% $ 13,589 100.0% $ 28,197 100.0%
---------- --------- ---------- --------- ----------- --------- ----------- ---------
---------- --------- ---------- --------- ----------- --------- ----------- ---------
</TABLE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998
NET SALES
Consolidated net sales of $92.1 million for the quarter ended August
31, 1999 ("current quarter") decreased $1.0 million or 1% from sales of $93.1
million for the quarter ended August 31, 1998 ("prior quarter"). The decline
was primarily due to a decrease in prices on principal North American
products and German caustic and CHC prices, offset by the inclusion of
ChlorAlp sales during the current quarter.
Nitrogen products' net sales in the current quarter decreased $5.5
million or 13% from the prior quarter activity. The market value of ammonia
declined approximately 20% from $132 per ton in the prior quarter to $106 per
ton in the current quarter, and accounted for $2.0 million of the decrease.
This decline in ammonia market prices was attributable to new capacity added
towards the end of calendar year 1998. Continued declines in nitrogen pricing
in both agricultural and industrial grade products resulted in a $2.8 million
reduction in sales as compared to the prior quarter. Agricultural prices are
lower primarily as the result of the availability of low-priced import
product from Russia. Industrial grade products have experienced a gradual
decline due to general market pressure toward
12
<PAGE>
lower prices. In addition, the absence of sales from our Caruthersville
facility, which was sold in September 1998, also contributed to lower
nitrogen product sales as compared to the prior quarter.
Electrochemicals - N.A.'s net sales for the current quarter decreased
$8.5 million or 46% compared to the prior quarter. Depressed prices for the
Company's chlor-alkali products, which averaged $173 per ECU ton for the
industry in the current quarter compared to $317 per ECU ton in the prior
quarter, caused $5.7 million of the decline. These depressed prices were
primarily due to decreased international demand for chlorine derivatives and
decreased demand for caustic in the pulp and paper industry. Industry reports
indicate that the chlor-alkali market has begun to turn around with a number
of announced price increases in October. Additional price increases are
forecasted in the next three to six months. In addition to lower ECU prices,
the Kaiser explosion, which occurred on July 5, 1999 (see "Significant
Developments" for further discussion) resulted in $3.3 million, net of
anticipated recoveries, in lost sales related to both chlor-alkali and
fluorocarbon product volumes.
Electrochemicals - Europe net sales in the current quarter increased
$13.0 million or 41% compared to the prior quarter. The consolidation of the
results of operations for the Company's ChlorAlp facility which had
previously been accounted for by the equity method (see "Significant Events"
section for further discussion), resulted in a $21.1 million increase in net
sales over the prior quarter. Offsetting this increase was a decline in the
net sales of the Company's German facility. Continued competitive market
conditions in caustic and CHC products resulted in reduced prices realized
for these products over the prior quarter. Also, loss of volume related to a
large resale customer contributed to the decline. Continued pressure is
anticipated in the European market for caustic and CHC products.
COSTS AND EXPENSES
The Company's costs and expenses increased $6.9 million or 8.0% over
the prior quarter. Increased costs are primarily the result of the
consolidation of the ChlorAlp facility offset by the favorable impact of
lower ammonia costs and reduced volumes across North American products, and
reduced SGA costs.
In Nitrogen products, costs and expenses decreased $3.6 million or
9.0% compared to the prior quarter to $37.2 million. Decreased costs of
resale ammonia resulted in a $3.8 million savings over the prior quarter,
which is impacted by the decline in ammonia values (see "Net Sales" section
for market changes over the prior period). Offsetting this reduction is $3.0
million of additional ammonia costs due to increased sales volumes over the
prior quarter. Additional savings were realized as a result of decreased
volumes in agricultural resale products related to the sale of the Company's
Caruthersville warehouse in September 1998 and reduced SG&A expenses due to
the Company's reorganization completed in January 1999.
Electrochemicals - N.A. costs and expenses decreased $3.3 million or
19% to $14.2 million from $17.5 million in the prior quarter. Decreased costs
related to the Kaiser explosion which occurred on July 5, 1999 (see
"Significant Developments" section for further discussion) resulted in lost
volumes of both chlor-alkali and fluorocarbon products and a $2.5 million
reduction in costs over the prior quarter. Reduction in SG&A expenses were
also realized over the prior quarter related to the Company's reorganization
completed in January 1999.
Electrochemicals - Europe total costs and expenses increased $13.1
million or 43% to $43.1 million during the current quarter from $30.0 million
during the prior quarter. The consolidation of operating results for the
Company's ChlorAlp facility purchased in June 1999 (see "Significant
Developments" section for further discussion) resulted in a $20.0 increase in
costs over the prior quarter. Offsetting this increase was a reduction in
costs related to the loss of a major resale customer of the German facility.
Relative to sales, costs remained relatively stable for the same time periods.
OTHER ITEMS AFFECTING NET LOSS
INTEREST AND AMORTIZATION OF DEBT EXPENSE. Interest and amortization
of debt expense increased $2.1 million over the prior quarter to $6.7
million. Higher average debt balances over the prior quarter to fund capital
investments and current year operating requirements coupled with a 1%
increase in interest rates on the Company's bank credit facility resulted in
the increased interest expense.
INCOME FROM EQUITY INVESTMENTS. Income from equity investments
increased $.5 million over the prior quarter primarily due to the
consolidation of the ChlorAlp production facility in the current quarter,
which was previously held as an equity investment, and had incurred a net
loss in the second quarter of the prior year.
13
<PAGE>
OTHER (EXPENSE) INCOME, NET. The Company reported net other expense
of $1.6 million for the current quarter compared to net other expense of $2.0
million in the prior quarter. The majority of the $.4 million decrease in
other expense is primarily the result of favorable foreign exchange rate
movements in the current quarter as compared to the prior quarter, which
impacts mark to market values of cross currency interest rate swap agreements.
BENEFIT (PROVISION) FOR INCOME TAXES. The net tax provision for the
current quarter is primarily comprised of the expected liability on income
generated in the Company's European operations. Due to uncertainty as to the
timing of realization of tax benefits derived from current domestic operating
losses, the Company recorded a valuation allowance offsetting the domestic
tax benefit
COMPARISON OF SIX MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998
NET SALES
Consolidated net sales of $182.8 million for the six months ended
August 31, 1999 ("current period") decreased $29.6 million or 14% from net
sales of $212.4 million for the six months ended August 31, 1998 ("prior
period"). The decline was primarily due to a decrease in prices on principal
North American products and German caustic and CHC prices, offset by the
addition of ChlorAlp sales since its purchase on June 7, 1999.
Nitrogen products' net sales in the current period decreased $21.9
million or 20% from the prior period activity. Decreased volumes of
agricultural resale product related to the sale of the Company's
Caruthersville warehouse facility in September, 1998 resulted in a $13.2
million decline in net sales over the prior period. A 16% decline in the
market value of ammonia to $110 per ton in the current period as compared to
the prior period value of $131 per ton, resulted in a $3.7 million reduction
in net sales. Continued declines in nitrogen pricing in both agricultural
products, as a result of Russian imports, and in industrial grade products,
due to general market pressures, resulted in an $8.3 million decrease in net
sales over the prior period. Offsetting these declines is an increase in net
revenues over the previous period related to additional sales volumes of
ammonia.
Electrochemicals - N.A.'s net sales for the current period decreased
$14.7 million or 37% compared to the prior period. Depressed prices for the
Company's chlor-alkali products, which averaged $172 per ECU ton for the
industry in the current period compared to $342 per ECU ton in the prior
period, resulted in a $12.7 million decline in net sales. Additionally, the
Kaiser explosion, which occurred on July 5, 1999 (see "Significant
Developments" for further discussion) resulted in a $3.3 million decline
related to both chlor-alkali and fluorocarbon product volumes.
Electrochemicals - Europe's net sales in the current period increased
$7.0 million or 11% compared to the prior period. The consolidation of the
ChlorAlp facility purchased in June 1999 (see "Significant Developments"
section for further discussion), resulted in a $21.1 million increase in net
sales over the prior period. Offsetting this increase was a decline in the
net sales of the Company's German facility. Continued competitive market
conditions in caustic and CHC products resulted in reduced prices realized
for these products over the prior period. Also, lost volume related to a
large resale customer contributed to the decline.
COSTS AND EXPENSES
The Company's costs and expenses decreased $12.1 million or 6.1% over
the prior period. Decreased costs represent the favorable impact of lower
ammonia costs and cost reduction initiatives realized across all other
business lines, offset by in the inclusion of ChlorAlp's costs and expenses
in the Company's consolidated operating results since its acquisition on June
7, 1999.
In Nitrogen, costs and expenses decreased $16.8 million or 16.8% to
$83.4 million from $100.2 million in the prior period. Decreased costs of
resale ammonia resulted in a $4.9 million savings over the prior period;
however, the decrease was more than offset by additional sales volumes, which
resulted in $5.5 million of incremental ammonia cost over the prior period.
Cost reductions of $12.5 million were realized as a result of decreased
volumes in agricultural resale products related to the sale of the Company's
Caruthersville warehouse in September 1998. SG&A expenses declined over the
prior period due to the Company's reorganization completed in January 1999.
14
<PAGE>
Electrochemicals - N.A.'s costs and expenses decreased $4.0 million
or 10.8% to $33.1 million from $37.1 million in the prior period. Decreased
costs related to the Kaiser explosion which occurred on July 5, 1999 (see
"Significant Developments" section for further discussion) resulted in lost
volumes of both chlor-alkali and fluorocarbon products and a $2.5 million
reduction in costs over the prior period. Reductions in SG&A expenses were
also realized over the prior period related to the Company's reorganization
completed in January 1999.
Electrochemicals - Europe's costs and expenses increased $7.8 million
or 13.6% to $65.3 million from $57.4 million in the prior period. The
consolidation of operating results for the Company's ChlorAlp facility
purchased in June 1999 (see "Significant Developments" section for further
discussion) resulted in a $20.0 increase in costs over the prior quarter.
Offsetting this increase was a reduction in costs related to the loss of a
major resale customer of the German facility, as well as cost reduction
initiatives which lowered certain production costs.
OTHER ITEMS AFFECTING NET LOSS
INTEREST AND AMORTIZATION OF DEBT EXPENSE. Interest and amortization
of debt expense increased $2.9 million over the prior period to $12.3
million. Higher average debt balances to fund capital investments, current
year operating requirements and a 1% increase in interest rates on the
Company's bank credit facility resulted in the increased interest expense.
INCOME FROM EQUITY INVESTMENTS. Income from equity investments has
increased $1.6 million over the prior period primarily due to improved
results of operations of ChlorAlp, in which the Company held a 50% joint
venture interest in the first quarter of the current fiscal year before
acquiring 100% ownership in June 1999.
OTHER INCOME, NET. The Company reported net other income of $.3
million for the current period compared to net other expense of $2.4 million
in the prior period. The majority of the $2.7 million increase is the
result of net gains on cross-currency interest swap contracts due to
favorable foreign exchange rate movements in the current period.
BENEFIT (PROVISION) FOR INCOME TAXES. The net tax provision for the
current quarter is primarily comprised of the expected liability on income
generated in the Company's European operations. Due to uncertainty as to the
timing of realization of tax benefits derived from current domestic operating
losses, the Company recorded a valuation allowance offsetting the domestic
tax benefit.
EBITDA
EBITDA represents income from operations plus cash received from
equity investments, plus depreciation, amortization and other non-cash and
non-recurring transactions reflected in income from operations. In addition,
prior to its acquisition in June 1999, EBITDA also included the Company's
equity interest in the EBITDA of ChlorAlp. EBITDA should not be considered as
an alternative measure of net income or cash flow provided by operating
activities (both as determined in accordance with generally accepted
accounting principles), but is presented to provide additional information
related to the Company's debt service capability. EBITDA should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity. The primary difference between EBITDA and cash
flows provided by operating activities relates primarily to changes in
working capital requirements and payments made for interest and income taxes.
EBITDA from continuing operations for the quarters ended August 31,
1999 and 1998 was $4.4 million and $10.4 million, respectively. The decrease
in EBITDA for the Nitrogen products segment of $1.5 million was due primarily
to lower realized nitrogen prices. EBITDA for Electrochemical Products - NA
decreased $4.2 million compared to the prior quarter as a result of sharply
lower ECU prices for chlor-alkali. EBITDA for Electrochemical Products -
Europe increased $1.4 in the current quarter due to the consolidation of the
ChlorAlp facility in the current quarter, which previously only included 50%
of the EBITDA impact of the results of operations, offset by the decline in
caustic and CHC product prices of the Company's German facility.
15
<PAGE>
EBITDA from continuing operations for the six months ended August 31,
1999 and 1998 was $13.6 million and $28.2 million, respectively. The decrease
in EBITDA for the Nitrogen products segment of $5.2 million was due primarily
to lower realized nitrogen prices. EBITDA for Electrochemical Products - NA
decreased $9.0 million compared to the prior period as a result of sharply
lower ECU prices for chlor-alkali. EBITDA for the Electrochemical Products
- -Europe increased $.7 million in the current period over the prior period
primarily due to the consolidation of the ChlorAlp facility in the current
quarter, which previously only included 50% of the EBITDA impact of the
results of operations, offset by the decline in caustic prices of the
Company's German facility.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. For the six months ended August 31, 1999,
continuing operations used cash of $8.8 million compared with $11.4 million
provided in the comparable period in the prior year. The decrease in net cash
from operations in fiscal 1999 was primarily the result of operating losses
incurred during the current quarter, the suspension of operations at the
Gramercy electrochemicals manufacturing plant, and the timing of working
capital requirements as compared to the prior quarter.
INVESTING ACTIVITIES. During the period, the Company used proceeds
from the sale of its Aluminas Chemical division to purchase the 50% interest
in ChlorAlp. Investing activities related to continuing operations absorbed
$14.2 million in the six month period ended August 31, 1999 compared to $19.8
million in the similar period ended August 31, 1998. The decrease is
primarily attributable to lower capital expenditures in the Company's
domestic operations, offset by higher expenditures from the European
operations, including capital expenditures of ChlorAlp. The decrease in
capital expenditure levels reflects the completion of several large projects
and is consistent with the Company's capital expenditure plan for this fiscal
year. The Company intends to use cash flows from operations and borrowings
under the Credit Facility as the source of funds for the future capital
projects.
FINANCING ACTIVITIES. During the six months ended August 31, 1999,
cash provided by operations was insufficient to fund capital investment and
scheduled repayments of long-term debt. Liquidity was provided by the
Company's revolving credit facilities, which had outstanding borrowings of
$83.8 million as of August 31, 1999 compared with $55.4 million at February
28, 1999. During the period, the Company made scheduled payments under
long-term debt agreements of $1.5 million. Borrowings under the revolving
credit facilities during the six months ended August 31, 1998 were $12.0
million lower than in the current year due to higher levels of cash provided
by operations during the earlier period. Payments of long-term debt totaling
$5.6 million during the six months ended August 31, 1998 were comprised
solely of scheduled reductions of debt.
As discussed in more detail in the Notes to the Condensed Consolidated
Financial Statements and under the heading "Significant Developments" herein,
the Company's principal bank credit facility was amended and restated
effective February 28, 1999. Under the amended and restated credit facility,
the amount available under the Revolving Credit Facility was reduced from
$125 million to $90 million, subject to a borrowing base calculation. As a
result of lower than expected cash flows during the first six months of
fiscal 2000, additional modifications to the facility were required in
September 1999. These modifications included a temporary increase in the
Borrowing Base by allowing the inclusion of certain non-trade receivables.
These temporary increases in the Borrowing Base, along with the inclusion of
certain deemed foreign assets, will expire on December 10, 1999. Based on
current projections, after such reduction in the Borrowing Base, the
Revolving Credit Facility will not likely be adequate to meet the Company's
cash needs. The Company has engaged the services of PricewaterhouseCoopers to
review the Company's capital structure and business strategy and to develop
recommendations for strengthening the Company's competitive and financial
position. With this assistance from PricewaterhouseCoopers and other
financial and legal advisors, the Company is currently exploring a number of
alternatives and working with its lender group to address the Company's cash
requirements at December 10, 1999 and thereafter.
RISK MANAGEMENT
The Company's exposure to and management of market risk from changes
in interest rates, exchange rates and commodity prices have not changed
significantly from the year ended February 28, 1999. For further information
regarding the Company's risk management see "Item 7A", Quantitative and
Qualitative Disclosures about Market Risk" set forth in the Company's Annual
Report on Form 10-K for the year ended February 28, 1999 and "Item 3.
Quantitative and Qualitative Disclosures about Market Risk" in this Form 10-Q.
16
<PAGE>
LEGAL MATTERS
On June 21, 1999, Elf Atochem North America ("Elf Atochem") filed an
action in U.S. District Court against the Company alleging the Company
infringed an Elf Atochem patent in connection with the Company's manufacture
of HCFC products. The action seeks to enjoin the Company from continuing to
infringe Elf Atochem's rights, treble damages for lost profits, costs,
prejudgment interest and attorney fees. Prior to commencement of the action,
the Company informed Elf Atochem that it did not believe its production
process infringed valid patent rights of Elf Atochem. The Company believes
that, after having analyzed the claims in conjunction with counsel engaged to
assist in the defense of the matter, that valid and enforceable defenses
and/or counter claims exist in favor of the Company and the Company currently
intends to defend the matter accordingly. Although management believes the
matter will be resolved without a material adverse effect, it is inherently
impossible to predict with any degree of certainty the outcome of the type
claim that the Elf Atochem matter represents. Accordingly, it is possible
that the resolution of the matter could be material to the Company's
financial position or the results of its operations.
The Company is a participant in certain other legal actions, claims
and remedial activities. Management of the Company believes that, except as
described above, based upon the information currently available, such other
legal actions, claims and remedial activities are likely to be resolved
without a material adverse effect upon the Company's financial condition and
results of operations. However, the aggregate cost of such legal actions,
claims and remedial activities are inherently impossible to predict and there
can therefore be no assurance that this will be the case. See "Legal
Proceedings."
YEAR 2000 COMPLIANCE
The Company's Year 2000 project, which began in mid-1998, is a
continuing review and evaluation of business systems and process controls for
the purpose of identifying ways in which these systems and the Company could
be adversely affected by incorrectly processing date information on and after
January 1, 2000 ("Year 2000"). The Company is conducting its review and
evaluation in four main areas: Business Systems, Manufacturing Controllers
and Processors, Third Party Compliance, and Hardware. The process includes
assessing the impact of the calendar change to Year 2000 on all systems used
by the Company and the associated upgrade costs, upgrading systems that are
not Year 2000 ready, and testing and monitoring systems for Year 2000
readiness. A summary of the Company's progress in each of these areas follows:
BUSINESS SYSTEMS. The implementation of a new enterprise-wide
financial and operational computer system during the past two years,
completed in November 1998, has effectively eliminated exposure to any
negative impact that Year 2000 may have had on the Company's ability to
produce reliable information needed to run its business. The software has
been certified Year 2000 compliant by the supplier, and critical components
of the business system have been tested. ChlorAlp has also installed the same
system and expects to have completed its implementation by the end of October
1999. These systems are critical for, among other things, purchasing
activities and payment, order processing and billing, production management
and inventory, payroll, and financial reporting.
MANUFACTURING CONTROLLERS AND PROCESSORS. Certain of the Company's
manufacturing processes are dependent upon microprocessors and controllers,
and related software, to regulate and monitor the production of its principal
products. The Company has completed its assessment of these items, and did
not discover any instances where noncompliance would result in a disruption
of operations. The majority of instances of noncompliance involved certain
monitoring and data gathering functions. Replacements and upgrades of
noncompliant hardware and software are approximately 80% complete and are
expected to be finalized by November 1999. Testing for critical components
has been conducted during regularly scheduled plant shutdowns and is expected
to be completed by November 1999.
THIRD PARTY. The Company has sent surveys to all significant vendors
inquiring about their Year 2000 readiness and has received responses from
approximately 90%. Supplemental procedures are in process with critical raw
material and utility suppliers to verify their compliance and to develop
contingency plans if necessary.
HARDWARE. Hardware includes the Company's computers, laptops,
terminals, and communications hardware such as routers and switches. In the
course of replacing its main business systems, the Company has upgraded much
of its hardware with systems that are Year 2000 compliant. The Company has
completed its assessment of the remaining hardware and has substantially
completed necessary upgrades, except for certain telecommunications hardware.
Testing and replacement of the remaining telecommunications hardware is
expected to be completed by November 1999.
17
<PAGE>
CONTINGENCY PLANNING. The Company is currently assessing
external sources of risk and developing contingency plans through
commercially reasonable efforts.
Through August 31, 1999, costs of approximately $.4 million have been
incurred in identifying and correcting Year 2000 problems. The Company
currently estimates that the total cost of making its systems Year 2000
compliant will not exceed $.8 million.
Based on the Company's efforts as described above, management believes
that it has identified and corrected all internal systems that could have had
a material adverse effect on the Company. Management also believes that it
has identified all significant external sources of risk, and is currently
preparing contingency plans to minimize any potential negative impact of such
risks. However, because certain of these risks are outside of the control of
the Company, there can be no assurance that the Company will be able to
successfully remedy problems that are discovered and, accordingly, there can
be no assurance that such noncompliance will not have a material adverse
effect on the Company's financial position and results of operation.
SEASONALITY
Demand for the Company's fertilizer products is seasonal. Such
seasonality of demand requires the Company to build its inventory in
anticipation of periods of peak demand and may adversely affect the Company's
cash flow. The Company typically realizes higher prices and margins for
fertilizer during the spring and, to a lesser extent, the fall planting
seasons. Demand for the Company's fertilizer is primarily dependent on United
States agricultural conditions, which can be volatile as a result of a number
of factors, the most important of which are weather patterns and conditions,
current and projected grain stocks and prices, and the governmental
agricultural policy. In addition, the Company periodically performs extended
major maintenance on its manufacturing facilities that results in periods of
reduced production at such facilities. Due to fertilizer seasonality, the
timing of major maintenance activities and other factors, interim results of
operations may not be indicative of the results expected for the full fiscal
year.
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING INFORMATION
Certain statements and information set forth in this report contain
forward-looking statements regarding Management's current plans, objectives,
and expectations for the future, which are based on prevailing circumstances
and information available at this time. Accordingly, such statements and
information involve inherent risks and uncertainties, and actual results may
differ materially from those discussed therein. Forward-looking statements
contained herein include: (a) statements made concerning strategic plans for
growth, (b) statements made regarding future cash flows, compliance with debt
covenants, and the availability of funds to meet obligations and fund
investments, (c) statements made regarding price expectations in the
Company's principal markets, and (d) statements made regarding the outcome
and impact on the Company's business, financial condition, or results of
operation of the Year 2000 issue and pending litigation and other claims,
disputes and legal proceedings. Factors that could cause actual results to
differ from those discussed in the forward-looking statements include:
fluctuations in commodity prices (including chlor-alkali, ammonia, and
natural gas), changes in domestic and international market conditions,
changes in competitive positions, government regulation, changes in labor
relations, the outcome of pending litigation and other claims, changes in
general economic conditions and other factors not enumerated herein that are
impossible to predict at this time.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest
rates, foreign currency exchange rates and commodity prices. To manage the
volatility relating to these exposures, the Company enters into derivative
transactions. The Company does not hold or issue derivative financial
instruments for trading purposes. At August 31, 1999, the Company's position
in derivative instruments intended to hedge market risk exposure to
fluctuations in interest rates was substantially the same as at February 28,
1999.
The Company has a French Franc (FRF) cross-currency interest rate swap
which provides a measure of protection against interest rate changes and
against the impact of fluctuations in the foreign currency exchange rates on
the Company's net investment in FRF denominated assets. The fair value of the
FRF contract was ($507) at August 31, 1999.
The Company relies upon the supply of natural gas in its production
process and has entered into fixed price purchase contracts and other
contracts to manage the commodity based market risk exposure. All of the
natural gas contracts mature during fiscal 2000. Following is a summary of
key contract terms of each the natural gas derivative positions at August 31,
1999 (in thousands, except per MMBTU amounts):
<TABLE>
<CAPTION>
CONTRACT VOLUME CONTRACT PRICE
--------------- --------------
(IN MMBTU'S) (PER MMBTU)
<S> <C> <C>
Fixed price purchase contracts.................. 1,220 $ 1.90
</TABLE>
Additionally, the Company participates in a spread oil swap agreement
to provide protection against other energy-based commodity price market
exposures. Gains or losses on the commodity based derivative contracts are
recognized as a component of the related transaction.
See Note 10 to the Condensed Consolidated Financial Statements on page
8 for further discussion regarding these instruments.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL. The Company and its subsidiaries have been named as
defendants in a number of legal actions arising from normal business
activities. Although Management believes, based upon the information
currently available, that, except as otherwise described in this section,
such other legal actions are likely to be resolved without a material adverse
effect upon the financial condition and results of operations of the Company.
Nonetheless, the resolution of certain matters could be material to the
results of operations of any single fiscal quarter and further, with the
aggregate cost of such legal actions being inherently impossible to predict,
there can therefore be no assurance that this will be the case.
RECENT DEVELOPMENTS. On June 21, 1999, Elf Atochem North America ("Elf
Atochem") filed an action in U.S. District Court against the Company alleging
the Company infringed an Elf Atochem patent in connection with the Company's
manufacture of HCFC products. The action seeks to enjoin the Company from the
alleged continuing infringement of Elf Atochem's rights, treble damages for
lost profits, costs, prejudgment interest and attorney fees. Prior to
commencement of the action, the Company informed Elf Atochem that it did not
believe its production process infringed valid patent rights of Elf Atochem.
The Company believes that, after having analyzed the claims in conjunction
with counsel engaged to assist in the defense of the matter, that valid and
enforceable defenses and/or counter claims exist in favor of the Company and
the Company currently intends to defend the matter accordingly. Although
management believes the matter will be resolved without a material adverse
effect, it is inherently impossible to predict with any degree of certainly
the outcome of the type claim that the Elf Atochem matter represents.
Accordingly, it is possible that the resolution of the matter could be
material to the Company's financial position or the results of is operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ---------------------------------------------
<S> <C>
21 Statement Regarding Computation of Ratio of
Earnings to Fixed Changes
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
(b) REPORTS OF FORM 8-K
A Current Report on Form 8-K was filed on June 3, 1999 to report the
sale of the Company's Aluminas Chemical division on June 3, 1999, and the
acquisition on June 7, 1999 of all of the outstanding shares of ChlorAlp, a
French joint venture in which the Company previously held a 50% interest.
A Current Report on Form 8-K/A was filed on August 4, 1999 amending
information provided about the ChlorAlp acquisition in the June 3, 1999 Form
8-K.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAROCHE INDUSTRIES INC.
(Registrant)
Date: OCTOBER 15, 1999 By: /s/ Harold W. Ingalls
-------------------------------------
Harold W. Ingalls
President and Chief Executive Officer
(Principal Executive Officer)
Date: OCTOBER 15, 1999 By: /s/ Gerald B. Curran
-------------------------------------
Gerald B. Curran
Vice President, Chief Financial Officer
(Principal Accounting Officer)
21
<PAGE>
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
For the years ended February 28,
except for 1996 which is February 29
Six months ended ---------------------------------------------------------
August 31, 1999 1999 1998 1997 1996
-------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before income taxes, minority interests
and extraordinary charge $ (12,711) $(42,612) $ (9,452) $ 1,076 $ 32,122
Less: Income from equity investments (1,853) (6,863) (2,698) (4,909) (2,647)
Distributions from equity investments -- 12,440 4,691 5,701 1,332
Fixed charges 13,616 26,584 21,346 17,992 17,853
Less: Capitalized Interest -- (516) (1,089) (860) --
--------- -------- -------- -------- --------
Earnings $ (948) $(10,967) $ 12,798 $ 19,000 $ 48,660
========= ======== ======== ======== ========
FIXED CHARGES
Interest expense $ 13,056 $ 23,204 $ 17,510 $ 14,881 $ 15,973
Capitalized interest -- 516 1,089 860 --
Interest portion of rental expense * 560 2,864 2,747 2,251 1,880
========= ======== ======== ======== ========
Fixed charges $ 13,616 $ 26,584 $ 21,346 $ 17,992 $ 17,853
========= ======== ======== ======== ========
========= ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES --- x --- x --- x 1.06 x 2.73 x
========= ======== ======== ======== ========
</TABLE>
(1) For the year ended February 28, 1998, earnings are inadequate to cover fixed
charges by approximately $8.5 million.
(2) For the year ended February 28, 1999, earnings are inadequate to cover fixed
charges by approximately $37.6 million.
(3) For the six months ended August 31, 1999, earnings are inadequate to cover
fixed charges by approximately $14.6 million.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS -- AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q 2ND QUARTER FISCAL 2000 -- LAROCHE INDUSTRIES INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,395
<SECURITIES> 0
<RECEIVABLES> 63,496
<ALLOWANCES> (408)
<INVENTORY> 23,868
<CURRENT-ASSETS> 104,579
<PP&E> 386,464
<DEPRECIATION> (132,525)
<TOTAL-ASSETS> 410,324
<CURRENT-LIABILITIES> 376,866
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> (26,670)
<TOTAL-LIABILITY-AND-EQUITY> 410,324
<SALES> 182,750
<TOTAL-REVENUES> 182,750
<CGS> 169,105
<TOTAL-COSTS> 169,105
<OTHER-EXPENSES> 16,223
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,300
<INCOME-PRETAX> (13,008)
<INCOME-TAX> (2,025)
<INCOME-CONTINUING> (15,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,033)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
