FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 1996
----------------------------March 31, 1997
------------------------------------
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
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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
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES x NO
------ ------
The number of shares outstanding of the Registrant's voting Common
Stock, as of November 8, 1996 is 12,971,356May 1, 1997 was 12,882,656 shares excluding 1,907,1202,031,820
shares held as treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB
Industries, Inc. and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB
Industries, Inc. at September 30, 1996,March 31, 1997, the condensed consolidated
statements of operations and cash flows for the nine month and three month
periods ended September 30,March 31, 1997 and 1996 and 1995 and
the consolidated statements of cash flows for the nine month periods ended
September 30, 1996 and 1995 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
primarily of adjustments of a normal recurring nature, which are,
in the opinion of management, necessary for a fair presentation
of the interim periods. The results of operations for the nine months and three
months ended September 30, 1996March 31, 1997 are not necessarily indicative of the
results to be expected for the full year. The condensed
consolidated balance sheet at December 31, 1995,1996, was derived from
audited financial statements as of that date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 1996March 31, 1997 is unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1996 1995
------------- ------------
Current assets:
Cash and cash equivalents $ 4,071 $ 1,420
Trade accounts receivable, net of allowance 57,388 43,975
Inventories:
Finished goods 35,882 38,796
Work in process 7,868 12,247
Raw materials 19,695 15,222
-------- --------
Total inventory 63,445 66,265
Supplies and prepaid items 7,130 5,684
-------- --------
Total current assets 132,034 117,344
Property, plant and equipment, net 94,110 86,270
Investments and other assets:
Loans receivable, secured by real estate 15,247 15,657
Other assets, net of allowance 17,604 18,905
-------- --------
$ 258,995 $ 238,176
======== ========
March 31, December 31,
ASSETS 1997 1996
_________________________________________ ___________ __________
Current assets:
Cash and cash equivalents $ 4,597 $ 1,620
Trade accounts receivable, net of allowance 55,819 50,791
Inventories:
Finished goods 39,402 36,304
Work in process 8,709 12,084
Raw materials 19,193 19,594
___________ __________
Total inventory 67,304 67,982
Supplies and prepaid items 8,007 7,217
___________ __________
Total current assets 135,727 127,610
Property, plant and equipment, net 118,983 103,143
Investments and other assets:
Loans receivable, secured by real estate 764 15,010
Other assets, net of allowance 15,511 15,521
___________ __________
$ 270,985 $ 261,284
=========== ==========
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at September 30, 1996March 31, 1997 is unaudited)
(Dollars in thousands)
LIABILITIES, PREFERRED AND COMMON STOCKS September 30, December 31,
AND OTHER STOCKHOLDERS' EQUITY 1996 1995
------------ -----------
Current liabilities:
Drafts payable $ 752 $ 424
Accounts payable 41,067 28,508
Accrued liabilities 10,295 9,239
Current portion of long-term debt 17,442 14,925
-------- --------
Total current liabilities 69,556 53,096
Long-term debt 111,906 103,355
Contingencies (Note 4)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,539 shares
issued and outstanding (1,566 in 1995) 146 149
Non-redeemable preferred stock, common stock and
other stockholders' equity (Note 3):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued and outstanding 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,868,476 shares
issued (14,757,416 in 1995) 1,487 1,476
Capital in excess of par value 37,802 37,567
Retained earnings 956 5,148
-------- --------
88,245 92,191
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 1,907,120 shares
(1,845,969 in 1995) 10,658 10,415
-------- --------
Total non-redeemable preferred stock, common
stock and other stockholders' equity 77,387 81,576
-------- --------
$ 258,995 $ 238,176
======== ========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
-------- --------
Revenues:
Net sales $ 235,298 $ 208,038
Other income 3,909 3,350
-------- -------
239,207 211,388
Costs and expenses:
Cost of sales 189,729 162,032
Selling, general and administrative 41,587 40,554
Interest 9,081 7,540
-------- --------
240,397 210,126
-------- --------
Income (loss) before provision for income taxes (1,190) 1,262
Provision for income taxes 187 112
-------- --------
Net income (loss) $ (1,377) $ 1,150
======== ========
Net loss applicable to
common stock (Note 2) $ (3,803) $ (1,276)
Average common shares outstanding (Note 2): ======== ========
Primary 13,056,160 13,325,587
Fully diluted 13,279,716 13,338,356
Loss per common share (Note 2):
Primary $ (.29) $ (.10)
======== ========
Fully diluted $ (.29) $ (.10)
======== ========
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
________________________________________ ___________ __________
Current liabilities:
Drafts payable $ 632 $ 536
Accounts payable 36,849 41,796
Accrued liabilities 12,947 12,780
Current portion of long-term debt 16,197 13,007
__________ __________
Total current liabilities 66,625 68,119
Long-term debt 136,959 119,277
Contingencies (Note 4)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,539 shares
issued and outstanding (1,539 in 1996) 146 146
Stockholders' equity (Note 3):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,914,476 shares
issued (14,888,476 in 1996) 1,491 1,489
Capital in excess of par value 37,922 37,843
Accumulated deficit (8,947) (2,706)
__________ __________
78,466 84,626
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 1,982,620 shares
(1,913,120 in 1996) 11,011 10,684
__________ __________
Total stockholders' equity 67,255 73,742
__________ __________
$ 270,985 $ 261,284
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,March 31, 1997 and 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
-------- ----------
Revenues:
Net sales $ 75,923 $ 63,878
Other income 918 1,647
--------- ---------
76,841 65,525
Costs and expenses:
Cost of sales 62,394 50,902
Selling, general and administrative 14,500 14,003
Interest 3,117 2,520
--------- ---------
80,011 67,425
Loss before provision (credit)
for income taxes (3,170) (1,900)
Provision (credit) for income taxes 48 (99)
--------- ---------
Net loss $ (3,218) $ (1,801)
========= =========
Net loss applicable to
common stock (Note 2) $ (4,021) $ (2,604)
========= =========
Average common shares outstanding (Note 2):
Primary 12,908,541 12,940,607
Fully diluted 12,908,541 12,940,607
Loss per common share (Note 2):
Primary $ (.31) $ (.20)
========= =========
Fully diluted $ (.31) $ (.20)
========= =========1997 1996
__________ __________
Revenues:
Net sales $ 73,234 $ 69,495
Other income 1,630 1,411
__________ __________
74,864 70,906
Costs and expenses:
Cost of sales 62,312 54,688
Selling, general and administrative 14,872 13,718
Interest 3,056 2,969
__________ __________
80,240 71,375
__________ __________
Loss before provision for
income taxes (5,376) (469)
Provision for income taxes 62 62
---------- ----------
Net loss $ (5,438) $ (531)
========== ==========
Net loss applicable to
common stock (Note 2) $ (6,241) $ (1,350)
Average common shares outstanding (Note 2): ========== ==========
Primary 12,974,824 12,911,387
Fully diluted 12,974,824 12,911,387
Loss per common share (Note 2):
Primary $ (.48) $ (.10)
========== ==========
Fully diluted $ (.48) $ (.10)
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NineThree Months Ended September 30,March 31, 1997 and 1996 and 1995
(Dollars in thousands)
1996 1995
___________ ___________
Cash flows from operations:
Net income (loss) $ (1,377) $ 1,150
Adjustments to reconcile net income
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 6,908 5,534
Other 930 751
Provision for possible losses:
Trade accounts receivable 107 687
Other 1,270
Gain on sale of assets (846) (165)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (13,519) (11,137)
Inventories 2,820 (3,610)
Supplies and prepaid items (1,446) 73
Accounts payable 12,559 345
Accrued liabilities 955 1,740
--------- ---------
Net cash provided (used) by
continuing operations 8,361 (4,632)
Cash flows from investing activities:
Capital expenditures (14,411) (15,081)
Proceeds from sale of investment securities 1,444 -
Principal payments on notes receivable 410 1,482
Proceeds from sales of equipment and
real estate properties 445 1,006
Increase in other assets (1,842) (696)
--------- ---------
Net cash used by investing activities (13,954) (13,289)
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Nine Months Ended September 30,1997 1996
___________ __________
Cash flows from operations:
Net loss $ (5,438) $ (531)
Adjustments to reconcile net loss
to cash flows used by operations:
Depreciation, depletion and 1995
(Dollarsamortization:
Property, plant and equipment 2,439 2,307
Other 283 307
Provision for possible losses
on receivables and other assets 152 539
Gain on sale of assets (65) (659)
Recapture of prior period provisions for
loss on loans receivable secured by real estate (1,383) -
Cash provided (used) by changes in thousands)
1996 1995
_________ _________
Cash flows from financing activities:
Payments on long-term and other debt $ (11,818) $ (9,966)
Long-term and other borrowings 19,647 18,435
Net change in revolving debt 2,901 12,874
Net change in drafts payable 328 (618)
Dividends paid (Note 3):
Preferred stocks (2,426) (2,425)
Common stock (389) (386)
Purchases of treasury stock (Note 3) (148) (1,384)
Net proceeds from issuance of
common stock (Note 3) 149 210
__________ _________
Net cash provided by financing
activities 8,244 16,740
__________ _________
Net increase (decrease) in cash and cash
equivalents 2,651 (1,181)
Cash and cash equivalents at beginning of
period 1,420 2,610
--------- ---------
Cash and cash equivalents at end of period $ 4,071 $ 1,429
========= =========
assets
and liabilities:
Trade accounts receivable (4,841) (7,958)
Inventories 678 (616)
Supplies and prepaid items (791) (1,444)
Accounts payable (4,947) 5,625
Accrued liabilities 169 853
___________ __________
Net cash used by operations (13,744) (1,577)
Cash flows from investing activities:
Capital expenditures (2,819) (2,173)
Principal payments on notes receivable 183 44
Proceeds from sales of equipment and
real estate properties 160 15
Proceeds from sale of investment securities - 1,444
Increase in other assets (721) (96)
___________ __________
Net cash used in investing activities (3,197) (766)
Cash flows from financing activities:
Payments on long-term and other debt (21,172) (2,290)
Long-term and other borrowings 54,451 -
Net change in revolving debt (12,408) 4,787
Net change in drafts payable 96 (208)
Dividends paid on preferred stocks (Note 3) (803) (820)
Purchases of treasury stock (Note 3) (327) (7)
Net proceeds from issuance of common stock 81 -
___________ __________
Net cash provided by financing activities 19,918 1,462
___________ __________
Net increase (decrease) in cash 2,977 (881)
Cash and cash equivalents at beginning of period 1,620 1,420
----------- ----------
Cash and cash equivalents at end of period $ 4,597 $ 539
(See accompanying notes)
Note 1: At September 30,December 31, 1996, the Company had regular-tax net
operating loss ( NOL ) carryforwards for tax purposes of
approximately $43 million.$45 million (approximately $10 million alternative
minimum tax NOLs). Such amounts of regular-tax NOL expire
beginning in 2000.1999. The Company also has investment tax credit
carryforwards of approximately $568,000,$356,000, which expire beginningbegin expiring in
1996.1997.
The Company s provision for income taxes for the ninethree months
ended September
30, 1996March 31, 1997 of $187,000$62,000 is for current state income taxes.taxes
and federal alternative minimum tax.
Note 2: Primary earnings per common share are based upon the
weighted average number of common shares and dilutive common
equivalent shares outstanding during each period, after giving
appropriate effect to preferred stock dividends.
Fully diluted earnings per share are based on the weighted
average number of common shares and dilutive common equivalent
shares outstanding and the assumed conversion of dilutive
convertible securities outstanding, if any, after appropriate
adjustment for interest and related income tax effects on
convertible notes payable.
Net income (loss) applicable to common stock is computed by adjusting
net income by the amount of preferred stock dividends, including
past due undeclared or unpaid dividends, if cumulative.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be
adopted on December 31, 1997. At that time, the Company will he
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. Due to losses
incurred during the fiscal quarters ended March 31, 1997 and
March 31, 1996, the impact of Statement No. 128 on the
calculation of both primary and fully diluted earnings per share
for these quarters is not expected to be material.
Note 3: The table below provides detail of activity in the Stockholders'
Equityequity accounts for the ninethree months ended September 30, 1996:March 31, 1997:
Retained
Common Stock Non- Capital Earnings Treasury
_______________ redeemable in excess (Accumu- Treasury Stock
Par Preferred of par Retained Stocklated Stock- Prefer-
Shares Value Stock Value Earningsdeficit) Common red Total
------ ----- --------- -------- -------- -------- ------- -----______ ______ _________ ________ ______ _______ _______ ______
(In thousands)
Balance at December 31, 1995 14,757 $1,476 $48,000 $37,5671996 14,888 $ 5,148 $(10,415) $(200) $81,5761,489 $ 48,000 $ 37,843 $(2,706) $(10,684) $ (200) 73,742
Net loss (1,377) (1,377)
Conversion of 26.5 shares of
redeemable preferred stock
to common stock 1 2 2(5,438) (5,438)
Exercise of stock options 110 11 233 (95) 14926 2 79 81
Dividends declared:
Common Stock ($.03 per share) (389) (389)
Series B 12% preferred
stock ($9.003.00 per share) (180) (180)
Redeemable preferred
stock ($10.00 per share) (16) (16)(60) (60)
Series 2 preferred
stock ($2.44.81 per share) (2,230) (2,230)
Purchases(743) (743)
Purchase of treasury stock (148) (148)(327) (327)
______ ______ ________ _______ _______ _______ ______ ______
(1)------ ------ ------- ------- ------ -------- ----- -------
Balance at September 30, 1996 14,868 $1,487 $48,000 $37,802March 31, 1997 14,914 $ 956 $(10,658) $(200) $77,3871,491 $ 48,000 $ 37,922 $(8,947) $(11,011) $ (200) $67,255
====== ====== ======== ======= ======= ======= ====== ======== ===== =============
(1)
Includes 1,907,1201,982,620 shares of the Company's Common Stock held in treasury.
Excluding the 1,907,1201,982,620 shares held in treasury, the outstanding
shares of the Company's Common Stock at September 30, 1996March 31, 1997 were 12,961,356.12,931,856.
Note 4: Following is a summary of certain legal actions and/or claims
involving the Company:
A. In 1987, the U.S. Government 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. No legal action has yet been filed. The
amount of the Company's cost associated with the clean-
upclean-up of
the site is unknown due to continuing changes in (i) the
estimated total cost of clean-up of the site and (ii) the
percentage of the total waste which was alleged to have been
contributed to the site by the Company, accordingly, no
provision for any liability which may result has been made
in the accompanying financial statements. The subsidiary's
insurance carriers have been notified of this matter;
however, the amount of possible coverage, if any, is not yet
determinable.
B. DuringThe State of Arkansas performed a preliminary assessment of
the Chemical Business' primary manufacturing facility (the
"Site") and advised the Company that the Site has had
certain releases of contaminants. On July 18, 1994, the
Company received a report from the State of Arkansas which
contained findings of violations of certain environmental
laws and requested the Company to conduct further
investigations to better determine the compliance status of
the Company and releases of contaminants at the Site. On
May 2, 1995, and the first half of 1996, the Company's Chemical Business
entered into twoCompany signed a Consent Administrative
AgreementsAgreement ("Agreements"Agreement") with the State of Arkansas. The
Agreement provides for the Company to remediate and close a
certain landfill, monitor groundwater for certain
contaminants and depending on the results of the monitoring
program to submit a remediaton plan, upgrade certain
equipment to reduce wastewater effluent, and pay a civil
penalty of $25,000.
Subsequent to the signing of the Agreement on May 2, 1995,
the Company completed its remediation and closure activities
and had the "Closure Certification Report" approved by the
State of Arkansas. The Company also submitted a
"Groundwater Monitoring Work Plan" to the State of Arkansas
(the "State"which has been approved and the initial phase of field work
has been completed. A work plan for the second phase of the
monitoring has also been submitted and approved by the state
of Arkansas.
On February 12, 1996, the Company entered into another
Consent Administrative Agreement ("Additional Agreement")
with the state of Arkansas to resolve certain environmental
compliance and certain other
issues associated with the Chemical
Business' nitric acid concentrators at its El Dorado, Arkansas facility
("Facility").concentrations. The
Company's Chemical Business has completed its
obligations under these Agreements andCompany has installed additional pollution control equipment
to reduce opacity and constituent emissions which impact
opacity. On June 10,The Company was assessed $50,000 in civil
penalties associated with the Original Agreement. In the
summer of 1996 and then on January 28, 1997, the Company
executed amendments to the Additional Agreement ("Amended
Agreements"). The Amended Agreements acknowledged
compliance with the requirements of the prior Agreement and
imposed a $150,000 civil penalty. As of March 31, 1997, the
Company has paid $144,000 of the above penalties. The
Company is planning to undertake one or more supplemental
environmental projects in lieu of paying the remaining
penalty due. Based on information presently available, the
Company does not believe that compliance with these
agreements should have a material adverse effect on the
Company or the Company's financial condition or results of
operation.
C. In 1996, a lawsuit was filed against the Company's Chemical
Business by a group of residents of El Dorado, Arkansas,
asserting a citizens' suit against the Chemical Business as
a result of certain alleged violations of the Clean Air Act,
the Clean Water Act, the Chemical Business' air and water
permits and certain other environmental laws, rules and
regulations. The citizens' suit requests the court to order
the Chemical Business to cure such alleged violations, if
any, plus penalties as provided under the applicable
statutes. The Company's Chemical Business will assert all
defenses available to it and will vigorously defend itself.
In July 1996, several of the same individuals who are
plaintiffs in the citizens' suit referenced above filed a
toxic tort lawsuit against the Company's Chemical Business
alleging that they suffered certain injuries and damages as
a result of alleged releases of toxic substances from the
Chemical Business' El Dorado, Arkansas manufacturing
facility. In October 1996, another toxic tort lawsuit was
filed against the Company's Chemical Business. This
subsequent action asserts similar damage theories as the
previously discussed lawsuit, except this action attempts to
have a class certified to represent substantially all
allegedly affected persons. The plaintiffs are suing for an
unspecified amount of actual and punitive damages.
The Company's insurance carriers have been notified of these
matters. The Company and the Chemical Business maintain an
Environmental Impairment Insurance Policy ("EIL Insurance")
that provides coverage to the Company and the Chemical
Business for certain discharges, dispersals, releases, or
escapes of certain contaminants and pollutants into or upon
land, the atmosphere or any water course or body of water
from the Site, which has caused bodily injury, property
damage or contamination to others or to other property not
on the Site. The EIL Insurance provides limits of liability
for each loss up to $10.0 million and a similar $10.0
million limit for all losses due to bodily injury or
property damage, except $5.0 million for all remediation
expenses, with the maximum limit of liability for all claims
under the EIL Insurance not to exceed $10.0 million for each
loss or remediation expense and $10.0 million for all losses
and remediation expenses. The EIL Insurance also provides a
retention of the first $500,000 per loss or remediation
expense that is to be paid by the Company.
D. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the State further
agreeddefendants
allegedly violated certain federal and state antitrust laws
in connection with alleged price fixing of certain explosive
products. The plaintiffs are suing for an unspecified
amount of damages, which, pursuant to an amendment ("Amendment")statute, plaintiffs
are requesting be trebled, together with costs. Based on
the information presently available to one of the AgreementsCompany, the
Company does not believe that the Chemical Business
conspired with any party, including but not limited to, resolve
certain compliance issues associatedthe
five (5) other defendants, to fix prices in connection with
the older concentrated nitric
acid units and various related compliance issues at the Facility. As
drafted, the Amendment provides for more detailed reporting to the Statesale of environmental activities of the Company'scommercial explosives. Discovery has only
recently commenced in this matter. The Chemical Business
specific
engineering activitiesintends to be undertaken at the Facility, and
continuation of operation of the older concentrated nitric acid units at
the Facility. Stipulated penalties are also set forthvigorously defend itself in the Amendment.
By report dated October 16, 1996, the State of Arkansas determined that
the Company's Chemical Business fulfilled all activities required under
the Amendment.
C.this matter.
The Company's Chemical Business is involvedhas been added as a
defendant in certain litigation
involving certain environmentala separate lawsuit pending in Missouri. This
lawsuit alleges a national conspiracy, as well as a regional
conspiracy, directed against explosive customers in Missouri
and anti-trust matters. See Part II,
Item 1, of this report for a discussion as to such litigation and as to
certain environmental impairment insurance coverage that theseeks unspecified damages. The Company's Chemical
Business has been included in this lawsuit because it sold
products to customers in Missouri during a time in which
may relateother defendants have admitted to participating in an
antitrust conspiracy, and because it has been sued in the
preceding described lawsuit. Based on the information
presently available to the Company, the Company does not
believe that the Chemical Business conspired with any party,
to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously
defend itself in this matter.
For several years the explosive industry has been under an
investigation by the U.S. Department of Justice. Certain
explosive companies plead guilty to antitrust violations.
In connection with that investigation, the Chemical Business
received and has complied with certain document subpoenas,
and certain of these itemsthe Chemical Business' employees have been
subpoenaed to testify in connection with such investigation.
As of litigation.the date of this report, the Chemical Business has not
been identified as a target of this investigation.
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 adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition would not have a
material adverse 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.
Debt Guarantee
The Company has guaranteed approximately $2.6 million of
indebtedness of ana start-up aviation company, in development stageKestrel Aircraft
Company, in exchange for a minority25.6% ownership interest, to which no
value has been assigned as of September 30, 1996.March 31, 1997. The Company has
advanced the aviation company $241,000 as of March 31, 1997 and
is however, accruing losses of the aviation company based on its ownership
percentage and, aspercentage. As a result, the Company has recorded losses of
$400,000 in 1996$1,403,000 ($590,000187,000 in the yearfirst quarter of 1997, and $626,000
and $590,000 in the years ended December 31, 1995; $375,000 of
which was recorded subsequent to September 30, 1995)1996 and 1995,
respectively) related to the debt guarantee. SeeThe debt guarantee
relates to a $2 million term note and up to $600,000 of a $2
million revolving credit facility. The $2 million term note
requires interest only payments through September 1998;
thereafter, it requires monthly principal payments of $11,111
plus interest beginning in October 1998 until it matures on
August 8, 1999, at which time all outstanding principal and
unpaid interest are due. In the "Debt Guarantee" discussion in "Management's Discussion
and Analysisevent of Financial Condition and Results of Operations"default of this report
for further discussion concerningnote,
the guarantee.
Other
In 1995, in connectionCompany is required to assume payments on the note with the
Company's purchaseterm extended until August 2004. The $2 million revolving credit
facility, on which a subsidiary of fifty percent (50%)
equity interest in an energy conservation joint venture (the "Project"), the Company has guaranteed the bonding company's exposure under the payment and
performance bonds on the Project, which isup
to $600,000 of indebtedness, had a balance of approximately
$17.9 million. The
Company is not guaranteeing any$400,000 as of the lending obligations of the Project, but
has pledged to the lender of the Project, on a non-recourse basis, its equity
interest in the Project. As of September 30, 1996, the Project was complete.March 31, 1997.
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 a review of the Company's September 30, 1996March 31, 1997
Condensed Consolidated Financial Statements.
OVERVIEW
The Company is going throughpursuing a transition from a highly diversified
company to a more focused company with the intent to focusstrategy of focusing on its primary
business units, the Chemical Businessmore
profitable businesses and the Environmental Control Businessconcentrating on businesses and the profitable portions of the Company's Automotive and Industrial
Products Businesses.
In September 1995product
lines in niche markets where the Company announcedhas established or 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 would reduce its
investment in, or take other actions regarding,is not realizing an acceptable return nor does it
have the potential to do so.
In this connection, the Company has been concentrating on
reshaping the Automotive Products Business by the liquidation of
certain of their assets that don't have the potential to earn an
acceptable return and Industrial
Products Businesses. The intent is to decrease the investment in these
Businesses and redeploy the cash into the Chemical and Environmental Control
Businesses which are perceived byfocusing on product lines that management
tobelieves have strategic advantages within select niche markets.
The Company has also recruited new key management people in the
Automotive Products Business including marketing, materials
control, manufacturing, and better historical returns on invested capital.financial. The Company continues to
work
towardexplore its alternatives to accomplish these goals, but as of the date of this report, no formal plans have
been adopted regarding the Automotive Products Business, exceptgoals.
In addition, the Company has installed a new management team with the assignment of reducing the
investmentbeen liquidating certain slow
moving inventory in the inventories of the Automotive Products Business. The
Company has adopted a strategy of reducing the Industrial Products Business by
liquidating its inventory in the
ordinary course of businessbusiness. It is the present intention of the
Company to a size where
the Company's investment inlimit this business is not significant, and thereafter,
limiting this businessBusiness to the purchase and sale of a limited number of lines of machine tools which
should result in an acceptable return on capital employed.
Certain statements contained in this Overview are forward-
looking statements, and the results thereof could differ
materially from such statements if the Company believesis unable to
liquidate such assets in a reasonable period or on reasonable
terms, and if able to liquidate such assets, it may not be able
to improve profits in the Automotive Products Business or have an
acceptable return on capital employed in these Businesses if
general economic conditions deteriorate drastically from the
environment these Businesses currently operate in or these
Businesses are profitable.unable to meet competitive pressures in the market
place which restrict these Businesses from manufacturing or
purchasing and selling their products at acceptable prices.
Information about the Company's continuing operations in
different industry segments for the nine months and three months ended September 30,March 31,
1997 and 1996 and 1995 is detailed below.
Nine Months Three Months Ended March 31,
1997 1996
1995 1996 1995___________ __________
(In thousands)
(Unaudited)
Sales:
Chemical $129,132 $106,569 $ 39,01440,599 $ 32,63136,520
Environmental Control 66,368 64,696 24,856 19,49921,623 18,995
Automotive Products 28,849 25,167 8,111 8,7267,992 10,956
Industrial Products 10,949 11,606 3,942 3,022
_______ _______ _______ _______
$235,298 $208,0383,020 3,024
___________ __________
$ 75,92373,234 $ 63,87869,495
=========== ==========
Gross profit:
Chemical $ 21,3183,384 $ 20,571 $ 5,202 $ 6,3926,800
Environmental Control 16,809 17,670 6,554 4,5566,008 4,699
Automotive Products 5,029 5,018 1,024 1,3521,109 2,450
Industrial Products 2,413 2,747 749 676
_______ _______ _______ _______421 858
___________ __________
$ 45,56910,922 $ 46,006 $ 13,529 $ 12,97614,807
=========== ==========
Operating profit (loss):
Chemical $ 11,421(645) $ 10,869 $ 1,596 $ 3,2513,545
Environmental Control 4,259 6,046 1,958 6501,551 721
Automotive Products (1,998) (1,960) (1,308) (1,142)(1,226) 139
Industrial Products (1,668) (2,015) (623) (953)
_______ _______ _______ _______
12,014 12,940 1,623 1,806(665) (497)
___________ __________
(985) 3,908
General corporate expenses (4,123) (4,138) (1,676) (1,186)(1,335) (1,408)
Interest expense (9,081) (7,540) (3,117) (2,520)
_______ _______ _______ _______
Income (loss)(3,056) (2,969)
___________ __________
Loss before provision
for income taxes $ (1,190)(5,376) $ 1,262 $ (3,170) $ (1,900)(469)
=========== ==========
Gross profit by industry segment represents net sales less
cost of sales. Operating profit by industry segment represents
revenues less operating expenses before deducting general
corporate expenses, interest expense and income taxes. As
indicated in the above table, the operating profit for the first nine months (as defined)
declined from $12.9$3.9 million in 1995the first quarter of 1996 to $12.0 millionan
operating loss of $985,000 in 1996,the first quarter of 1997, while
sales increased approximately 13%.$3.7 million or 5.4% in the first
quarter of 1997 over the first quarter of 1996. The decline in
operating profit, coupled with an increase in interest expense,
resulted in decreased incomea loss before provision for income taxes for 1997 of
$5.4 million.
Chemical Business
The operating profit in the Chemical Business is down from
$3.5 million profit in the first quarter of 1996 to an operating
loss of $2.5 million. This$.6 million in the first quarter of 1997. During the
first quarter of 1997, the Chemical Business continued to incur
significant amounts of downtime at its El Dorado, Arkansas Plant
site due to mechanical problems being incurred at the plant. The
downtime resulted in increases in manufacturing overhead and
lower absorption of such costs. The unabsorbed overhead combined
with the continued high cost of the primary raw material,
ammonia, led to higher cost of sales as a percent of sales and
lower gross profit margins.
The Chemical Business purchases approximately 250,000 tons
per year of anhydrous ammonia. The cost of ammonia consumed by
the Chemical Business in 1996 averaged $167 per ton, while in
November and December 1996, ammonia prices took an unexpected
increase to an average of approximately $200 per ton. During the
first quarter of 1997, ammonia prices continued to increase
through February (a high of $217 per ton) and then began to
decline during March so that the price for March, 1997
approximated the average price incurred during the months of
November and December 1996. The continued increase in ammonia
prices had a disruptive effect on the first quarter results of
the Chemical Business' operations. The decline in prices in
March, 1997 did not significantly reduce the Chemical Business'
cost of sales in the first quarter of 1997. The price of ammonia
averaged $45 more per ton in the first quarter of 1997 than in
the first quarter of 1996.
The Chemical Business has substantially finalized
negotiations with Bayer for the Chemical Business to build and
operate on a long-term basis a nitric acid plant located on
property owned by Bayer in Baytown, Texas. If the transaction is
completed, the Chemical Business would provide nitric acid from
such plant to Bayer's Baytown, Texas plant. Execution of the
agreement between the Chemical Business and Bayer is subject to
the Company finalizing the financing to construct the nitric acid
plant and the final terms upon which the Chemical Business would
lease such nitric acid plant. The Company has an agreement in
principle with a lender to provide financing. Such nitric acid
plant would be owned by a party that is not an affiliate of the
Company and would be leased to the Chemical Business for a period
expected to equal ten years under an operating profitlease. It is
primarily dueexpected that the cost to lower earningsconstruct the nitric acid plant would
be approximately $60.0 million. Under the terms of the proposed
agreement, such nitric acid plant is to be constructed and become
operational within 18 months from execution of the definitive
agreement.
Environmental Control Business
As indicated in the above table, the Environmental Control
Business reported improved sales (an increase of 13.8%) and
improved operating profit for the first quarter of 1997, over
that of the first quarter of 1996, primarily as a result of
improved market conditions for the heat pump product lines.
Automotive and Industrial Products Businesses
As indicated in the above table, during the first quarter of
1997 these Businesses recorded combined sales of $11.0 million
and reported an operating loss (as defined above) of $1.9
million, as compared to combined sales of $14.0 million and an
operating loss of $.4 million for the first quarter of 1996, as a
result of lower sales and decreased absorption of manufacturing
costs due to lower production volumes and cost absorptionvolume. The net investment in
assets of these Businesses decreased from $56.8 million at year
end 1996 to $56.3 million at March 31, 1997. As a result of the
Business' heat pump products
operationstringent inventory reduction program put into place in 1996 as compared to 1995,
production volumes and cost absorption.inventories of these Businesses decreased approximately $.9
million during the three months ended March 31, 1997.
RESULTS OF OPERATIONS
NineThree months ended September 30, 1996March 31, 1997 vs. NineThree months ended September 30, 1995.March
31, 1996.
Revenues
--------
Total revenues for the ninethree months ended September 30,March 31, 1997 and
1996 and 1995
were $239.2$74.9 million and $211.4$70.9 million, respectively (an
increase of $27.8$4.0 million). Sales increased $27.3$3.7 million. Other
income increased $.2 million.
Net Sales
---------
Consolidated net sales included in total revenues for the
ninethree months ended September 30, 1996March 31, 1997 were $235.3$73.2 million, compared to
$208.0$69.5 million for the first ninethree months of 1995,1996, an increase of
$27.3$3.7 million. This increase in sales resulted principally from:
(i) increased sales in the Chemical Business of $22.6$4.1 million,
primarily due to higher sales in the U.S. of agricultural
products and increased business volume of $11.4 million atthe Company's
subsidiary located in Australia , Total Energy Systems ("TES")
the Company's Australian subsidiary,,
(ii) increased sales in the Automotive
Products Business of $3.7 million due primarily to new product sales
associated with the acquisition on June 1, 1995 of New Alloy Company, a
manufacturer and distributor of automotive U-joint products, and (iii) increased sales in the Environmental Control Business of
$1.7$2.6 million primarily due to increased fan coil sales, firming of market conditions for
this Business' Heat Pump product lines,offset by (iv)(iii) decreased machine
tool
sales in the IndustrialAutomotive Products Business of $.7 million.$3.0 due primarily
to a reduced customer base.
Gross Profit
------------
Gross profit was 19.4%14.9% for the first ninethree months of 1996,1997,
compared to 22.1%21.3% for the first ninethree months of 1995.1996. The
decrease in the gross profit percentage was due primarily to (i)
decreased absorption of costs due to lower production volumes in
the Heat Pump Division of the Environmental ControlAutomotive Products Business, and (ii) higher production
costs in the Chemical Business due to the effect of higher prices
of ammonia and unabsorbed overhead costs resulting fromcaused by excessive
downtime at the Chemical
Business' El Dorado, Arkansas plant complex related to modifications made to
install air emissions abatement equipment and resolve problems
associated with mechanical failures at the new direct strong nitric acid plant, and (iii)
less favorable product mix in the Automotive Products Business.Chemical Business'
primary manufacturing plant.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 17.7%20.3% in the ninethree month period ended
March 31, 1997 compared to 19.7% for the first three months ended September 30, 1996 and 19.5%of
1996. This increase is primarily the result of increased
professional fees related to environmental matters in the
first nine months of 1995. AsChemical Business and decreased sales increased,volume in the Automotive
Products Business without a corresponding decrease in SG&A expenses also
increased, but not proportionately.&A.
Interest Expense
----------------
Interest expense for the Company, excluding capitalized
interest, was approximately $9.1$3.1 million during the nine months
ended September 30, 1996first quarter of 1997,
compared to approximately $8.4$3.0 million during the nine months ended September 30, 1995 before capitalizationfirst quarter of approximately
$.91996.
During the first quarter of 1997, $.7 million in 1995of interest expense
was capitalized in connection with the construction of a concentrated
nitric acid plant by the Chemical Business.DSN Plant.
The increase of $.8 million before the effect of capitalization
primarily resulted from increased borrowings and higher average balances of borrowed funds.
Incomeinterest
rates.
Loss Before Taxes
-------------------
The Company had a loss before income taxes of $1.2$5.4 million
in the first nine monthsquarter of 19961997 compared toa loss before income taxes
of $1.3$.5 million in the ninethree months ended September 30, 1995.March 31, 1996. The
decreased profitability of $2.5$4.9 million was primarily due to the
decline in gross profit and the increase in interest expenseSG&A as previously
discussed.
Provision Forfor Income Taxes
--------------------------
As a result of the Company's current operating loss and net
operating loss carryforward for income tax purposes as discussed
elsewhere herein and in Note 1 of Notes to Condensed Consolidated
Financial Statements, the Company's provisionprovisions for income taxes
for the ninethree months ended September 30, 1996 is for current state income taxesMarch 31, 1997 and the Company's provision for income taxes for the ninethree months
ended September 30, 1995 isMarch 31, 1996 are for current state income taxes and
federal alternative minimum taxes.
Three months ended September 30, 1996 vs. Three months ended September 30,
1995.
Revenues
--------
Total revenues for the three months ended September 30, 1996
Liquidity and 1995
were $76.8 million and $65.5 million, respectively (an increase of $11.3
million). Sales increased $12.0 million.
Net Sales
---------
Consolidated net sales included in total revenues for the three months
ended September 30, 1996 were $75.9 million, compared to $63.9 million for the
third quarter of 1995, an increase of $12.0 million. This increase in sales
resulted principally from: (i) increased sales in the Chemical Business of
$6.4 million due to improved demand for the products of this Business and
increased business volume of $3.5 million at TES, (ii) increased sales in the
Environmental Control Business of $5.3 million primarily due to increased
product lines and improved market conditions for these products, and (iii)
increased sales in the Industrial Products Business of $.9 million primarily
due to increased sales of machine tools, offset by (iv) decreased sales in the
Automotive Products Business of $.6 million due to lower sales of U-joint
products.
Gross Profit
------------
Gross profit was 17.8% for the three months ended September 30, 1996,
compared to 20.3% for the three months ended September 30, 1995. The decline
in the gross profit percentage was due primarily to (i) higher production
costs in the Chemical Business due to unabsorbed overhead costs resulting from
excessive downtime at the Business' El Dorado, Arkansas plant related to
modifications made to install air emissions abatement equipment and resolve
problems associated with mechanical failures at the new direct strong nitric
acid plant, and (ii) less favorable product mix in the Automotive and
Industrial Products Businesses, offset by (iii) improved absorption of costs
in the Environmental Control Business due to higher production volumes.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 19.1% in the three months ended September 30, 1996 and 21.9% in
the third quarter of 1995. As sales increased, SG&A expenses also increased,
but not proportionately.
Interest Expense
----------------
Interest expense was approximately $3.1 million during the three months
ended September 30, 1996 compared to approximately $2.8 million during the
three months ended September 30, 1995, before capitalization of approximately
$.3 million in 1995 in connection with the construction of a concentrated
nitric acid plant by the Chemical Business. The increase primarily resulted
from higher average balances of borrowed funds.
Income before Taxes
-------------------
The Company had a loss before income taxes of $3.2 million in the third
quarter of 1996 compared to a loss of $1.9 million in the three months ended
September 30, 1995. The increased loss of $1.3 million was primarily due to
higher gross profit that was more than offset by increases in SG&A and
interest expense as previously discussed. The remaining difference is due to
a decrease in other income.
Provision For Income Taxes
--------------------------
As a result of the Company's net operating loss carryforward for income
tax purposes as discussed elsewhere herein and in Note 1 of Notes to
Condensed Consolidated Financial Statements, the Company's provision for
income taxes for the three months ended September 30, 1996 is for current
state income taxes and the Company's credit for income taxes for the three
months ended September 30, 1995 relates to current state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------Capital Resources
Cash Flow From Operations
Net cash providedused by operating activitiesoperations for the quarter ended March 31,
1997 was $13.7 million, after adjustments for noncash
depreciation and amortization of $2.7 million and recapture of
previous years provisions for possible losses of $1.4 million.
This net cash usage includes the following changes in the first nine monthsassets and
liabilities: (i) accounts receivable increases of 1996, after adjustment for net non-cash expenses$4.8 million,
(ii) inventory decreases of $9.8$0.7 million, was $8.4(iii) increases in
supplies and prepaid items of $0.8 million, and (iv) decreases in
accounts payable and accrued liabilities of $4.8 million. AccountsThe
increase in accounts receivable increased $13.5 million from December 31, 1995
to September 30, 1996 primarilyis due mainly to seasonal sales
increases in the Chemical Business. The decrease in inventories
is primarily due to the inventory reduction plan being executed
in the Automotive Products Business, partially offset by
increased inventories at the Chemical Business' Australian
subsidiary due to anticipated sales increases. The increase in
supplies and increased sales by TES, in additionprepaid items is due primarily to sales increases in
the Environmental Control and Industrial Products Businesses over the
fourth quarter of 1995. Accountsprepaid insurance costs. The decrease in accounts payable and
accrued liabilities increased
$13.6 millionis due primarily to higher business volumesa decrease in the Chemical and
Environmental Control Businesses, as compared to the fourth quarter of 1995.
Other factors contributing to the increase in accounts payable include
amounts associated with modifications made at the Chemical Business' El
Dorado, Arkansas plant and timing of payments for inventory purchases in the
Chemical Business and increased accounts payable of TES due to increased
business activity from higher sales and increased inventories, in addition to
increases in the Environmental Control Business due to increased inventories.
Supplies and prepaid items increased by $1.4 million, primarily due to higher
prepaid insurance costs and increased manufacturing supplies.capital
construction projects.
Cash Flow From Investing And Financing Activities
ForCash used by investing activities included $2.8 million in
capital expenditures (primarily in the nine months ended September 30, 1996,Chemical Business) and
increased other assets of $0.7 million due primarily to advances
made to a potential acquisition candidate. Net cash flow from investing
andprovided by
financing activities used approximately $5.7included (i) term borrowings of $54.5
million, cash. Those
investment and financing activities providing cash included approximately $1.4
million inincluding proceeds from the salenew $50 million financing
discussed under "Sources of certain investment securities,Funds", (ii) payments on term debt of
$21.2 million, including $19.1 million in unscheduled payoff of
debt with proceeds from long term borrowingsthe new $50 million financing, (iii)
decreases in revolving debt of $20$12.4 million, (iv) dividends of
$0.8 million, and $2.9 million in net borrowings
against the Company's working capital revolver.
Those investment and financing activities requiring cash included:
capital expenditures, $14.4 million; payments on long-term debt, $11.8
million; and, payment(v) treasury stock purchases of preferred and common stock dividends, $2.8$0.3 million.
Capital expenditures included expenditures of the Chemical Business related to
the construction of a concentrated nitric acid plant in El Dorado, Arkansas
which began in 1994, and installation of certain air emissions abatement
equipment on other plants at the Chemical Business' El Dorado, Arkansas
facility. The balance of capital expenditures were for normal additions in
the Chemical, Environmental Control, and Automotive Products Businesses.
During the first nine monthsquarter of 1996,1997, the Company declared and paid the
following aggregate dividends: (1) $9.00$3.00 per share on each of the
outstanding shares of its Series B 12% Cumulative Convertible
Preferred Stock; (2) $2.44$.81 per share on each outstanding share of
its $3.25 Convertible Exchangeable Class C Preferred Stock,
Series 2; and (3) $.03 per share on each outstanding share of its
Common Stock. During the second quarter of 1997, the Company has
paid a dividend of $10.00 per share on each outstanding share of
its Redeemable Preferred Stock and has declared but not paid
dividends of $.81 per share on each outstanding share of its
$3.25 Convertible NoncumulativeExchangeable Class C Preferred Stock;Stock, Series 2,
$3.00 per share on each of the outstanding shares of its Series B
12% Cumulative Convertible Preferred Stock and (4) $.03 per share on
each share of its outstanding shares of Common Stock. A total of $2.8 million have been
paid in dividends during the first nine months of 1996, with $2.4 million paid
on its outstanding preferred stock and $.4 million paid on its outstanding
common stock. Continuation of payment of dividends on the Company's common
stocks is subject to the discretion of the Board of Directors. The Company
expects to continue payment of cash dividends on the Company's outstanding
series of preferred stock pursuant to the terms inherent to such preferred
stocks.
Source of Funds
The Company is a diversified holding Company and its
liquidity is dependent, in large part, on the operations of its
subsidiaries and credit agreements with lenders.
On February 13, 1997 the Company's wholly-owned
subsidiaries, El Dorado Chemical Company, Slurry Explosive
Corporation, and Northwest Financial Corporation. (collectively
"Borrowers") completed a $50.0 million long-term financing
agreement ("Financing") with an institutional lender.
Approximately $19.3 million in proceeds from the Financing were
used to repay other outstanding term debt and accrued interest,
and the remaining $30.7 million in proceeds were used to pay down
the Company's revolving credit facilities and thereby create
additional borrowing availability for future working capital and
other corporate needs. The Financing is secured by a first
mortgage lien on the Chemical Business' property, plant, and
equipment located in El Dorado, Arkansas and owned by the
Borrowers, except rolling stock and excluding the DSN Plant which
is security under a separate loan agreement. The $50.0 million
Financing consists of $25.0 million of fixed rate notes bearing
interest at 10.57% per annum and $25.0 million of floating rate
notes bearing interest at LIBOR plus 4.2% (initially 9.76%).
Repayment of the notes is due in quarterly installments of
$833,332 plus interest commencing on July 1,1997 through April
2004 at which time the balance is due. The Financing requires
the Borrowers to maintain certain financial ratios and contains
other financial covenants, including the ratio of funded debt to
total capitalization, current ratio, and fixed charge coverage
ratio, in addition to net worth and working capital requirements.
As of the date of this report, the Borrowers are in compliance
with all financial covenants required by the loan agreement
related to the financing. The Financing also contains certain
restrictions on transactions with affiliates. The Financing
limits the amount of dividends or distributions by the Borrowers
to an amount equal to payments for federal income taxes
determined as if the Borrowers filed returns on a separate
company basis and dividends up to 50% of the Borrowers' prior
year net income. The annual interest on the $50 million in
outstanding debt under the Financing at March 31, 1997, at the
rate then in effect, would approximate $5.1 million.
The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by six separate loan
agreements ("Agreements") with an unrelated lender ("Lender")
collateralized by receivables, inventory, and proprietary rights
of the Company and the subsidiaries that are parties to the
Agreements and the stock of certain of the subsidiaries that are
borrowers under the Agreements. The Agreements, as amended,
provide for revolving credit facilities ("Revolver") for total
direct borrowings up to $65$63.0 million, including the issuance of
letters of credit (As
discussed below, in August 1996 the maximum permitted borrowing under the
Revolver was reduced to $63 million).credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Agreements, as amended, provide for interest at the reference
rate as defined (which approximates the national prime rate) plus
1%1.5%, or the Eurodollar rate plus 2.875%3.875%. At September 30, 1996March 31, 1997 the
effective interest rate was 8.85%10%. The initial term of the
Agreements is through December 31,12, 1997, and is renewable
thereafter for successive thirteen month terms. The Lender or the Company may
terminate the Agreements at the end ofhas
agreed to amend the initial term or at the end of any
renewal term without penalty, exceptmaturity date to April 1, 1998.
At March 31, 1997, additional amounts that the Company may terminatecould have
borrowed under the Agreements, after the second anniversary of the Agreements without penalty.based on eligible collateral, were
approximately $18.2 million. Borrowings under the Revolver
outstanding at September 30, 1996,March 31, 1997, were $60.3
million. At September 30, 1996, additional borrowings available under the
Revolver based on eligible collateral (as limited by the maximum permitted
borrowing of $63 million) was $2.6$43.9 million. The
Agreements, as amended, require the Company to maintain certain
financial ratios and contain other financial covenants, including
tangible net worth requirements and capital expenditure
limitations. In October 1996 the Company renegotiated reductions in the
tangible net worth and debt ratio covenants for the period September 30, 1996
through December 31, 1997. The tangible net worth covenants were reset to
$66.0 million at September 30, 1996 escalating to $68.3 million at December
31, 1997. As of the date of this report, the Company is in
compliance with all financial covenants, underor if not in compliance,
has obtained appropriate waivers from the Agreements as amended subsequent to
September 30, 1996.Lender. The annual
interest on the outstanding debt under the Revolver at September 30, 1996March 31,
1997 at the raterates then in effect would be
approximately $5.3 million. In July 1996, the Company also negotiated an
additional term borrowing of $10 million with the same lender ("Bridge Loan"),
which bore interest at the reference rate as defined plus 3%. In August 1996
the Company repaid the Bridge Loan with the proceeds from the "initial
advance" of $12 million pursuant to a secured chemical plant asset financing
(the "Financing Agreement").
On August 9, 1996, the Company's wholly-owned subsidiaries, El Dorado
Chemical Company and Slurry Explosive Corporation (collectively "Chemical
Business"), which substantially comprise the Company's Chemical Business,
entered into the Financing Agreement with a leasing subsidiary of a national
bank (the "Bank"), whereby the Bank loaned $12 million to the Chemical
Business and agreed to use its best efforts to arrange other participants to
loan an additional $33 million to the Chemical Business on a long-term basis.
The Financing Agreement requires the Chemical Business to maintain certain
financial ratios and contains other financial covenants including tangible net
worth requirements. Funds borrowed pursuant to the Financing Agreement bear
interest at the three month LIBOR Rate plus 425 basis points adjusted
quarterly (approximately 10% at September 30, 1996). This Financing
Agreement is secured by certain real property and equipment located at the
Business' El Dorado, Arkansas facility not previously secured by other
borrowing agreements. The funding under the Financing Agreement included an
initial advance of $12 million, which the Chemical Business received on August
9, 1996, and a final advance of the remaining $33 million as soon as the Bank
has obtained certain additional participants. Should the Bank be unable to
obtain additional participants, the Chemical Business will have until June 30,
1997 to repay the initial advance without penalty or convert such advance to a
36 month term loan with amortization based on a 57 month schedule. As of the
date of this report, the Company has no assurances that the Bank will be
successful in finding the required additional participants. Proceeds from
funding the remaining $33 million under the Financing Agreement are to be used
to paydown outstanding borrowings under the Revolver discussed above and pay
other obligations. The Company has had discussions with other interested
parties to replace the Financing Agreement in the event the Lender is unable
to obtain additional participants to fund the remaining $33approximate $4.5 million.
In addition to the Agreements discussed above, the Company
hashad the following term loans in place:place as of March 31, 1997:
(1) The Chemical Business is a party to a loan agreement ("Credit Facility")
with two institutional lenders ("Lenders"). This Credit Facility, as
amended, provides for a seven year term loan of $28.5 million. The
balance of the Credit Facility at September 30, 1996 was $7.5 million,
which is due on March 31, 1997. Annual interest at the agreed to
interest rates, if calculated on the $7.5 million outstanding balance at
September 30, 1996, would be approximately $.9 million. The Credit
Facility is secured by certain of the assets of the Chemical Business
not otherwise pledged under the working capital line of credit and the
Financing Agreement previously discussed and capital stock of the
Chemical Business. The Credit Facility requires the Chemical Business
to maintain certain financial ratios and contains other financial
covenants, including tangible net worth requirements and capital
expenditures limitations. As of the date of this report, the Chemical
Business is in compliance with all financial covenants. Under the terms
of the loan agreements between the Chemical Business and its lenders,
the Chemical Business cannot transfer funds to the Company in the form
of cash dividends or other advances, except for (i) the amount of taxes
that the Chemical Business would be required to pay if it was not
consolidated with the Company; and (ii) an amount equal to fifty percent
(50%) of the Chemical Business' cumulative adjusted net income as long
as the Chemical Business meets certain financial ratios.
(2) The Company'ss wholly-owned subsidiary, DSN Corporation
("DSN"), is a party to several loan agreements with a
financing company (the "Financing Company"Financing Company ) for three (3)
projects which DSN substantially
completed during 1995.projects. These loan agreements are for a $16.5 million
term loan (the "DSNDSN Permanent Loan"), which was used to
construct, equip, re-erect, and refurbish a concentrated nitric acid plant (the
"DSN Plant")the DSN Plant
being placed into service by the Chemical Business at its El
Dorado, Arkansas facility; a loan for approximately $1.2
million to purchase additional railcars to support the DSN
Plant (the "Railcar Loan");Railcar Loan ); and a loan for approximately
$1.1 million to finance the construction of a mixed acid
plant (the "MixedMixed Acid Plant"Plant ) in North Carolina (the "MixedMixed
Acid Loan").Loan ). At September 30, 1996,March 31, 1997, DSN had outstanding
borrowings of $14.3$13.4 million under the DSN Permanent Loan,
$1.0$.9 million under the Mixed Acid Loan, and $1.1$1.0 million
under the Railcar Loan. The loans have repayment schedules
of eighty-four (84) consecutive monthly installments of
principle and interest. The interest rates arerate on each of the
loans is fixed and range from 8.24% to 8.86%. Annual
interest, for the three notes as a whole, at March 31, 1997
at the agreed to interest rates would approximate $1.4$1.3
million. The loans are secured by the various DSN and Mixed
Acid Plants property and equipment, and all railcars
purchased under the railcar loan.Railcar Loan. The loan agreement
requiresagreements
require the Company to maintain certain financial ratios,
including tangible net worth requirements. As of the date
of this report, the Company is in compliance with all
financial covenants or if not in compliance, has obtained
appropriate waivers from the Financing Company.
(3) A(2) As of March 31, 1997, a subsidiary of the Company ("Prime")
entered intowas a loanparty to an agreement ("Agreement"), effective as of May 4, 1995, with Boatmen's
Bank, IV Oklahoma, N.A. ("Bank"). Pursuant to the Agreement, the Bank loaned $9 million to
Prime, evidenced by a Promissory Note ("Note"). The Agreement, and Note
wereas modified, in June of 1996 in consideration for the Bank loaning an
additional $4.2 million to Prime. The Note bearsrequires
interest per annum at a rate equal to three quarters of one
percent .75%(.75%) above the prime rate in effect from day to
day as published in the Wall Street Journal. The
outstanding principal balance of the Notenote is payable in
sixty (60) monthly payments of principal and interest
commencing on June 30, 1996. Payment of the Notenote is secured
by a first and priority lien and security interest in and to
Prime's right, title, and interest in the loan receivable
relating to the real property and office building located
in Oklahoma City, Oklahoma (the "Tower"), the Management
Agreement relating to the Tower, andTower. In February 1997, the
OptionCompany exercised its option to Purchase Agreement covering the real
property on whichpurchase the Tower is located.
(4) The Company has guaranteed a revolving credit working capital facility
(the "Facility") between TES and Bank of New Zealand. The Facility
allowsby
paying approximately $140,000 for borrowings based on specific percentages of qualified
eligible assets. The Facility was amended on June 25, 1996 to allow for
borrowings up to an aggregate of $7.0 million Australian. This
amendment also requires a reduction of $1.0 million to the amount of
$6.0 million on or before December 31, 1996; then a further reduction of
$1.0 million to the amount of $5.0 million on or before June 30, 1997.
Based on the effective exchange rate at September 30, 1996, the amount
of allowed borrowingsexercise price under
the Facility is approximately U.S. $5.5
million. (approximately U.S. $3.9 million borrowed at September 30,
1996). Such debt is secured by substantially all the assets of TES,
plus an unlimited guaranteepurchase option and indemnity from the Company. The
interest rate on this debt is the Bank of New Zealand Corporate Base
Lending Rate plus 0.5% (approximately 9.3% at September 30, 1996). The
Facility is subject to renewal at the discretion of Bank of New Zealand
based upon annual review. The next annual review is due on September
30, 1997. The Facility requires TES to maintain certain financial
covenants. As of the date of this report, TES was in compliance with
all required covenants. The outstanding borrowing under the facility at
September 30, 1996 has been classified as due within one year in the
accompanying condensed consolidated financial statements.
As of the date of this report, futurerelated costs.
Future cash requirements include working capital
requirements for anticipated sales increases in all Businesses,
and funding for future capital expenditures, primarily in the
Chemical Business and the Environmental Control Business.
Funding for the higher accounts receivable resulting from
anticipated sales increases are expected towill be provided by cash flow
generated by the Company and the revolving credit facilities
discussed elsewhere in this report. Inventory requirements for
the higher anticipated sales activity should be met by scheduled
reductions in the inventories of the Industrial Products Business
and in the inventories of the Automotive Products Business, which
increased its inventories in 1995 beyond required levels. In
1996,1997, the Company anticipateshas planned capital expenditures of
approximately $15.5$6.0 million, (of which approximately $14.4 million had been
expended by September 30, 1996), primarily in the Chemical and
Environmental Control Businesses.
As discussed elsewhere in this report in the "Results of Operations",
the Chemical Business has experienced substantial downtime resulting in
unabsorbed overhead costs at its El Dorado, Arkansas facility as a result of
mechanical failures at its new direct strong nitric acid plant. The
unabsorbed overhead costs adversely impacted the Chemical Business' gross
profit and the Company's consolidated income before income taxes for the nine
and three months periods ended September 30, 1996. In addition, cash
expenditures for repairs of the physical damage to the Chemical Business'
equipment were approximately $1.8 million as of the date of this report. The
Company has filed preliminary claims with its insurance carrier under both its
business interruption and property policies aggregating approximately $5.7
million (before considering the Company's aggregate deductible of $500,000 per
occurrence of an insurable loss). The insurance company has confirmed
coverage but, as of this date, has not confirmed the amount that the insurance
company would be willing to pay under this claim. The Company believes that
this claim is one occurrence, while the insurance company has advised the
Company that they believe such may involve more than one occurrence. As of
the date of this report, the insurance company has advanced the Chemical
Business $1.0 million against its claim. Management believes that it will
reach an agreement with the insurance company and settle its claim regarding
this matter by December 31, 1996. This is a forward looking statement, and
the Company may not be able to settle such claims by December 31, 1996 or be
able to ultimately collect any monies in addition to the $1.0 million already
advanced.
Management believes that in addition to cash flows from operations, and the
Company's revolving credit facilities, itand other sources, will
be necessary for the Company
to complete, by the end of the first quarter of 1997, a substantial portion of
the remaining amounts to be funded under the Financing Agreement discussed
above, or a similar financing,adequate to meet its presently anticipated capital
expenditure, working capital, debt service, and dividend
requirements. This is
aThe above sentence and certain statements
contained in the preceding paragraph are forward-looking
statementstatements that involvesinvolve a number of risks and uncertainties that
could cause actual results to differ materially, such as, a
material reduction in revenues, the incurrance ofcontinuing to incur losses,
inability to collect a material amount of receivables, required
capital expenditures in excess of those presently anticipated, or
other future events, including the Bank's, or a
replacement lender's, ability to fund the $33 million discussed earlier in the
"Source of Funds" section of this report, not presently predictable, which
individually or in the aggregate could impair the Company's
ability to obtain funds to meet its requirements. See discussionThe Company
currently has no material commitment for capital expenditures,
except as discussed under "Recent Developments""Overview", "Chemical Business" of this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the negotiations to build twoa new plants; one to produce
nitric acid plant.
Foreign Subsidiary Financing
The Company has guaranteed a revolving credit working
capital facility (the "Facility") between TES and anotherBank of New
Zealand. The Facility allows for borrowings based on specific
percentages of qualified eligible assets. The Facility was
amended on December 19, 1996 to produce high density ammonium nitrate.allow for borrowings up to an
aggregate of A$8.5 million Australian. This amendment also
required a reduction of A$.5 million to the amount of A$8.0
million on or before February 28, 1997, then a further reduction
of A$1.0 million to the amount of A$7.0 million (approximately US
$5.6 million) on or before March 31, 1997. Based on the
effective exchange rate at March 31, 1997,approximately US $4.6
million was borrowed at March 31, 1997. Such debt is secured by
substantially all the assets of TES, plus an unlimited guarantee
and indemnity from the Company. The interest rate on this debt
is the Bank of New Zealand Corporate Lending Rate plus 0.5%
(approximately 10.0% at March 31, 1997). The next annual review
is due on September 30, 1997. TES is in technical non-compliance
with a certain financial covenant contained in the loan agreement
involving the Facility. However, this covenant was not met at
the time of closing and the Bank of New Zealand agreed and
continues to agree as of the date of this report that the
covenant is something to work towards in the
future and has continued to allow TES to borrow under the
Facility. The outstanding borrowing under the facility at March
31, 1997 has been classified as due within one year in the
accompanying Consolidated Financial Statements.
Joint Ventures and Options to Purchase
During 1994Prior to 1997, the Company, through a subsidiary, loaned
$2.1$2.9 million to a French manufacturer of HVAC equipment whose
product line is compatible with that of the Company's
Environmental Control Business in the U.S.A.USA. Under the loan
agreement, the Company has the option to exchange its rights
under the loan for 100% of the borrower's outstanding common
stock. The Company obtained a security interest in the stock of
the French manufacturer to secure its $2.1 million loan. During fiscal year 1995 and January 1996,the first
quarter of 1997 the Company advanced an additional $800,000$1 million to
the French manufacturer bringing the total of the loan at March
31, 1997 to $2.9$3.9 million. AtAs of the date of this timereport, the
decision has not been made to exercise such option and the $2.9$3.9
million loan, lessnet of a $1.9$1.5 million valuation reserve, is carried
on the books as a note receivable in other assets.
During the second quarter of 1995, the Company executed a stock option agreement
to acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company") to enhance the marketing of the
Company's air conditioning products. The stock option has a four
(4) year term, and a total option granting price of $1.0 million
payable in installments including an option fee of $500,000 paid
upon signing of the option agreement and annual $100,000
payments for yearly extensions of the stock option thereafter for
up to three (3) years. Upon exercise of the stock option by the
Company, or upon the occurrence of certain performance criteria
which would give the grantors of the stock option the right to
accelerate the date on which the Company must elect whether to
exercise, the Company shall pay certain cash and issue promissory
notes for the balance of the exercise price of the subject
shares. The total exercise price of the subject shares is $4.0
million, less the amounts paid for the granting and any
extensions of the stock option.
The
Company presently expects that it will eventually exercise the stock option.
AIn 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) limited partnershipequity interest in
an energy conservation joint venture (the "Project"). As discussed above, the Company
has an option to acquire 80% of the general partner and the owner of the other
50% of the Project. The
Project washad been awarded a contract to retrofit residential
housing units at a U.S.US Army base. The completed contract requiredwas for
installation of energy-efficient equipment (including air
conditioning and heating equipment), which willwould reduce utility
consumption. For the installation and management, the Project
will receive an average of seventy-
sevenseventy-seven percent (77%) of all
energy and maintenance savings during the twenty (20) year
contract term. The Project has expendedspent approximately $19.4$17.5 million to
retrofit the residential housing units at the U.S.US Army base. The
Project has received a loan from a lender to finance
up to approximately $14$14.0 million of the cost of the Project. The
Company is not guaranteeing any of the lending obligations of the
Project, but has pledged to the lender of the Project, on a
non-recourse basis, its equity interest in the Project.
Debt guaranteeGuarantee
As disclosed in Note 4 of the Notes to Condensed
Consolidated Financial Statements a subsidiary of the Company hasand
one of its subsidiaries have guaranteed approximately $2.6
million of indebtedness of a development stagestart up aviation company in
exchange for an ownership interest. The debt guarantee relates
to two instruments, both
of which require interest only payments through September 1998.note instruments. One note for which the subsidiary had
guaranteed up to $600,000 matures September 28, 1998.had a balance of approximately $400,000
as of March 31, 1997. The other note in the amount of $2.0
million requires monthly principal payments of approximately $11,000$11,111 plus
interest beginning in October 1998 untilthrough August 8, 2001,1999, at
which time all outstanding principal and unpaidaccrued interest are
due. In the event of default of thisthe $2.0 million note, the
Company is required to assume payments on the note with the term
extended until August 2006.2004. Both notes are current as to
principal and interest.
The Company has advanced approximately $150,000 toIn 1996, the aviation company while they sought additional capital. The Company has also purchased
additional sharesreceived a cash infusion of
stock in the aviation company during the first nine
months of 1996$4.0 million from an unrelated third party investor for approximately $165,000. As of September 30, 1996, the
Company'sa 41.6%
ownership interest in the aviation company is approximately 26%.company. The aviation company has advised the Company that it expects to complete the
Federal Aviation Authority certification process by the end of 1997, at which
time commercial production development may begin. On August 23, 1996, the
aviation company entered into a stock purchase agreement with a third party
whereby the third party purchased a 41.62% ownership interest, or 385 shares
of common stock for $5 million. The third partyinvestor also
obtainedretained an option to purchase an additional 224 sharesstock of common stock for $4 million. With the
completion of this stock purchase agreement, the Company is currently advised
by the aviation
company in exchange for $4.0 million.
Availability of Company's Loss Carryovers
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carryovers from prior periods to reduce the aviation companyfederal income tax
payments which it would otherwise be required to make with
respect to income generated in such future years; however, such
benefit will be limited by the Company's reduced NOL for
alternative minimum tax purposes which is expected to have adequate
funding sources to meet capital needs prior to completionapproximately $10.0
million at December 31, 1996. As of commercial
production development, including debt servicingDecember 31, 1996, the
Company had available NOL carryovers of approximately $45.0
million, based on its federal income tax returns as filed with
the Internal Revenue Service for taxable years through 1995, and
on the two note instruments
previously discussed.
Recent developments
As previously reported,Company's estimates for 1996. These NOL carryovers will
expire beginning in the Chemical Businessyear 1999.
The above paragraph contains certain forward-looking
statements. The amount of these carryovers has entered into detailed
negotiations with Bayer Corporation ("Bayer") fornot been audited
or approved by the constructionInternal Revenue Service and, operationaccordingly, no
assurance can be given that such carryovers will not be reduced
as a result of a nitric acid plant located on property owned by Bayeraudits in the future. In addition, the ability of
the Company to supply
nitric acid on a long-term basis to Bayer's Baytown, Texas facility. All
contracts relating to this transaction with Bayer areutilize these carryovers in the future will be
subject to finalizationa variety of limitations applicable to corporate
taxpayers generally under both the Internal Revenue Code of 1986,
as amended, and completion. If the contracts are finalized,Treasury Regulations. These include, in
particular, limitations imposed by Code Section 382 and the
Company expects that the
plant will be constructed and become operational by August 1998.
The Chemical Business has also entered into a letter of intent with
Farmland Industries, Inc. ("Farmland") to negotiate a long-term purchase and
sales agreement to supply a major portion of Farmland's annual requirements
for high density ammonium nitrate. If the negotiations are successful, the
Chemical Business may construct a new dedicated nitric acid plant at its El
Dorado, Arkansas complex, of sufficient size, to provide the additional nitric
acid needed to produce Farmland's requirements for ammonium nitrate, if
necessary to meet the Business' commitment. The letter of intent with
Farmland is subject to numerous conditions, including the negotiation and
execution of definitive agreements. If the contract with Farmland is
consummated, the Company intends to obtain project financing to fund the
construction of the project or enter into long-term loan arrangements for the
facilities required.consolidated return regulations.
Contingencies
As discussed in Note 4 of Notes to Condensed Consolidated
Financial Statements, and Part II, Item 1 "Legal Proceedings", of this report, the Company has several contingencies that
could impact its liquidity in the event that the Company is
unsuccessful in defending against the claimants. ManagementAlthough
management does not anticipate that these claims will result in
materialsubstantial adverse impacts on its liquidity. Thisliquidity, it is not possible
to determine the outcome. The preceding sentence is a forward-lookingforward
looking statement that involves a number of risks and
uncertainties that could cause actual results to differ
materially, such as, costs of compliance exceeding those presently
anticipated, additional sources of contamination being discovered, oramong other factors, the Chemical Business' Environmental Impairmentfollowing: the EIL
Insurance Policy ("EIL Policy")does not providingprovide coverage to the Company and the
Chemical Business for any material toxic tort claims made by the claimants,
referred to in Note 4 of Notes to
Condensed Consolidated Financial Statementsthe claimants alleged damages are not covered by the EIL Policy
which a court may find the Company and/or Part II, Item 1 "Legal
Proceedings" of this report, ifthe Chemical Business
liable for, such as punitive damages or penalties, a court finds
the Company and/or the Chemical Business liable for damages to
such claimants in connection with certain toxic tort
claims referenced in Note 4 of Notes to Condensed Consolidated Financial
Statements and/or Part II, Item 1 "Legal Proceedings" of this report, for
damages for a material amount in excess of the limits of
coverage of the EIL Policy,Insurance or a court finds the Company and/or the Chemical
Business liable for a material amount of damages in connection with those claims and/orthe antitrust
lawsuits pending litigation
involving matters other thanagainst the toxic tort lawsuit discussedChemical Business in Note 4 of
Notes to Condensed Consolidated Financial Statements and/or Part II, Item 1
"Legal Proceedings" of this report.
ERNST & YOUNG LLP 2600 Liberty Tower
100 North Broadway
Oklahoma City, OK 73102
Phone: 405 278 6800
Fax: 405 278 6823a manner not
presently anticipated by the Company.
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of LSB Industries, Inc. and subsidiaries as of September 30, 1996,March 31,
1997, and the related condensed consolidated statements of
operations for the nine-month and three-
month periods ended September 30, 1996 and 1995 and the condensed consolidated
statements of cash flows for the nine-monththree month periods ended September 30, 1996March
31, 1997 and 1995.1996. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the
objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of LSB
Industries, Inc. as of December 31, 1995,1996, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated February 26, 1996,March 7, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995,1996, is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
November 19, 1996 /s/Oklahoma City, Oklahoma
May 20, 1997 ERNST & YOUNG LLP
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, 1995, and1996, which Item 1
"Legal Proceedings" of Part II of the Company's Form 10-Q for the quarter
ended June 30, 1996, discussing (i) a toxic tort lawsuit filed against the
Company's Chemical Business in June 1996, styled Roy Carr, et al. v. El Dorado
Chemical Company, pending in the United States District Court, Western
District of Arkansas, El Dorado Division, and (ii) an anti-trust lawsuit filed
against the Company's Chemical Business, styled Arch Mineral Company, et al.
v. ICI Explosives USA, Inc. et al., pending in the United States District
Court, Southern District of Indiana which are3 is incorporated by
reference herein, except as discussed below.
Richard Detraz, et al. v. El Dorado Chemical Company. This lawsuit was
filed by the plaintiffs against El Dorado Chemical Company ("El Dorado"), a
wholly owned subsidiary of the Company, in the United States District Court,
Western Division of Arkansas, El Dorado Division, Case No. 96-1112, on October
16, 1996. The plaintiffs are comprised of sixteen (16) persons who reside in
various locations throughout the El Dorado, Arkansas metropolitan area. The
plaintiffs seek certification by the court as representatives of a class of
persons who allegedly have been affected by emissions from El Dorado's
Chemical Facility. The named plaintiffs assert that they suffered an
unspecified amount of damages due to bodily injuries and property damages as a
result of various toxic tort theories, including negligence, nuisance,
trespass and strict liability, as a result of releases of toxic substances
from El Dorado's manufacturing facility. In addition, the plaintiffs are
seeking punitive damages. The Company has been advised by its technical
experts that any air emissions from El Dorado's Chemical Facility were not
toxic in the quantity so emitted. Discovery has not yet begun in this matter,
and El Dorado intends to vigorously defend itself against these claims.
The Company and the Chemical Business maintain an Environmental
Impairment insurance policy ("EIL Insurance") that provides coverage to the
Company and the Chemical Business for certain discharges, dispersal, releases,
or escapes of certain contaminants and pollutants into or upon land, the
atmosphere or any water course or body of water from El Dorado's manufacturing
facility which has caused bodily injury, property damage or contamination to
others or to other property not on El Dorado's manufacturing facility. The
EIL Insurance provides limits of liability for each loss up to $10 million and
a similar $10 million limit for all losses due to bodily injury or property
damage, except $5 million limits for each remediation expense and $5 million
for all remediation expenses, with the maximum limit of liability for all
claims under the EIL Insurance not to exceed $10 million for each loss or
remediation expense and $10 million for all losses and remediation expenses.
The EIL Insurance also provides a retention of the first $500,000 per loss or
remediation expense that is to be paid by the Company. The Company has given
notice to its insurance carrier of the above claims. Although there are no
assurances, the Company believes that the EIL Insurance will provide coverage
for the toxic tort lawsuits presently pending against El Dorado as discussed
above and in the Company's Form 10-Q for the quarter ended June 30, 1996, up
to the limits of the policy in excess of the Company's $500,000 deductible.
As of the date of this report, the Company believes that, if any award is
ultimately received by the Plaintiffs in the toxic tort lawsuits, such award
would not exceed the limits of the coverage of the EIL Insurance. Although
there can be no assurances, the Company does not believe the outcome of the
pending toxic tort lawsuits will have a material adverse effect on the
Company's financial position or results of operation. The statements
contained in the two penultimate sentences of this paragraph are forward-
looking statements that involve a number of risks and uncertainties that could
cause actual results to differ materially, such as, among other factors, the
following: the EIL Insurance does not provide coverage to the Company and the
Chemical Business for any material claims made by the plaintiffs, the
plaintiffs alleged damages not covered by the EIL Policy which a court may
find the Company and/or the Chemical Business liable for, such as punitive
damages, or a court finds the Company and/or the Chemical Business liable for
damages to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance.
In October, 1996, a group of individuals who reside in various locations
throughout the El Dorado, Arkansas metropolitan area filed a citizens lawsuit
against El Dorado in a case styled Roy A. Carr, et al. v. El Dorado Chemical
Company, Case No. 96-1113, in the United States District Court, Western
District of Arkansas, El Dorado Division. The plaintiffs in this lawsuit are
substantially the same as the plaintiffs in the toxic tort lawsuit styled Roy
Carr, et al. v. El Dorado Chemical Company discussed in the Company's Form 10-
Q for the quarter ended June 30, 1996. In this case, plaintiffs are bringing
a citizens' suit against El Dorado alleging that El Dorado violated certain
air, water and other environmental laws, rules or regulations and certain
permits issued to El Dorado, and, requesting the court to order El Dorado to
cure any such alleged violations and to access civil penalties against El
Dorado of up to $25,000 per day for each violation, if any, and award costs
and attorneys' fees. Discovery has not begun in this case, and El Dorado will
vigorously defend itself.
Arch Mineral Corporation, et al. v. ICI Explosives USA, Inc., et al. On
May 24, 1996, the plaintiffs filed this cause of action against El Dorado and
five (5) other unrelated commercial explosives manufacturers alleging that the
defendants allegedly violated certain federal and state antitrust laws in
connection with alleged price fixing of certain explosive products. This
cause of action is pending in the United States District Court, Southern
District of Indiana. The principal plaintiffs in this cause of action are
Arch Mineral Corporation, Ohio Power Company, Consol, Inc., Cyprus Amax
Minerals Company, Kennecott Corporation, Mapco Coal, Inc., Solar Sources,
Inc., Triton Coal Company and certain subsidiaries of the above. The other
defendants are ICI Explosives USA, Inc., Dyno Nobel, Inc., Mine Equipment &
Mill Supply Company, Austin Powder Co., and ETI Explosives Technologies
International, Inc., none of which are affiliates of the Company or El Dorado.
The plaintiffs are suing for an unspecified amount of damages, which, pursuant
to statute, plaintiffs are requesting be trebled, together with costs. Based
on the information presently available to the Company, the Company does not
believe that El Dorado conspired with any party, including, but not limited
to, the five (5) other defendants, to fix prices in connection with the sale
of commercial explosives. Discovery has just begun in this matter, and El
Dorado will vigorously defend itself in this litigation.herein.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits. The Company has included the following
exhibits in this report:
3.0(ii) The Bylaws of the Company, as amended.
4.1 Seventh Amendment dated April 11, 1997 to the Loan
and Security Agreement dated December 12, 1994, between
the Company and BankAmerica Business Credit, Inc.
Substantially identical First Amendments dated April
11, 1997 to the Loan and Security Agreements dated
December 12, 1994, were entered into by each of L&S
Bearing, International Environmental Corporation,
Climate Master, Inc., Summit Machine Tool
Manufacturing, Corp., and El Dorado Chemical Company
and Slurry Explosive Corporation with BankAmerica
Business Credit, Inc. and are hereby omitted and such
will be provided upon the Commission's request.
10.1 Letter Amendment dated May 14, 1997 to Loan and
Security Agreement between DSN Corporation and The CIT
Group/Equipment Financing, Inc.
11.1 Statement Re: Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial
Information.
27.1 Financial Data Schedule
(B) Reports of Form 8-K. The Company did not file any
reports on Form 8-K during the quarter ended September 30, 1996.March 31,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly-authorized,duly-
authorized, to sign this report on its behalf on this 19th20th day of
November 1996.May, 1997.
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
-----------------------------------------------------------------
Tony M. Shelby,
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
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Jim D. Jones
Vice President, Controller and
Treasurer
(PrincipalTreasurer(Principal Accounting
Officer)
SEC\10Q-s96.WPceerer