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 June 30, 1994
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
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Commission file number 1-7677
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LSB INDUSTRIES, INC.
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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
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Address of principal executive offices (Zip Code)
(405) 235-4546
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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 August 8, 1994 is 13,543,901 shares excluding 1,074,235 shares held as
treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB Industries, Inc.
and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB Industries, Inc.
at June 30, 1994, the condensed consolidated statements of income for the six
month and three month periods ended June 30, 1994 and 1993 and the
consolidated statements of cash flows for the six month periods ended June 30,
1994 and 1993 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 six months and three months ended June 30, 1994 are not
necessarily indicative of the results to be expected for the full year. The
condensed consolidated balance sheet at December 31, 1993, was derived from
audited financial statements as of that date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1994 is unaudited)
(Dollars in thousands)
June 30, December 31,
ASSETS 1994 1993
_________________________________________ __________ __________
(Note 1)
Current assets:
Cash $ 5,588 $ 2,781
Trade accounts receivable, net of allowance 57,202 49,533
Inventories:
Finished goods 29,939 26,940
Work in process 7,145 9,643
Raw materials 10,039 11,801
__________ __________
Total inventory 47,123 48,384
Supplies and prepaid items 6,843 5,459
__________ __________
Total current assets 116,756 106,157
Property, plant and equipment, at cost 123,632 113,795
Accumulated depreciation (56,601) (53,269)
__________ __________
Property, plant and equipment, net 67,031 60,526
Loans receivable, secured by real estate 16,896 13,968
Other assets 14,277 15,387
__________ __________
$ 214,960 $ 196,038
========== ==========
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at June 30, 1994 is unaudited)
(Dollars in thousands)
LIABILITIES, PREFERRED AND COMMON STOCKS June 30, December 31,
AND OTHER STOCKHOLDERS' EQUITY 1994 1993
________________________________________ __________ __________
(Note 1)
Current liabilities:
Drafts payable $ 1,836 $ 1,220
Accounts payable 30,508 22,645
Accrued liabilities 7,361 6,752
Current portion of long-term debt 9,396 9,763
__________ __________
Total current liabilities 49,101 40,380
Long-term debt 64,871 20,508
Net liabilities of Financial Services
Business sold in 1994 (Notes 1 and 2) - 60,124
Contingencies (Note 7)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,619 shares
issued and outstanding (1,637 in 1993) 154 155
Non-redeemable preferred stock, common stock and
other stockholders' equity (Note 6):
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, 14,615,276 shares
issued (14,514,056 in 1993) 1,462 1,451
Capital in excess of par value 37,355 37,120
Retained earnings (deficit) 19,873 (7,541)
__________ __________
106,690 79,030
Less common treasury stock, 1,060,085 shares
(840,085 in 1993), at cost 5,856 4,159
__________ __________
Total non-redeemable preferred stock, common
stock and other stockholders' equity 100,834 74,871
__________ __________
$ 214,960 $ 196,038
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended June 30, 1994 and 1993
(Dollars in thousands, except per share amounts)
1994 1993
__________ __________
(Note 1)
Revenues:
Net sales $ 132,265 $ 120,466
Other income - net 1,831 2,343
__________ __________
134,096 122,809
Costs and expenses:
Cost of sales 102,677 89,113
Selling, general and administrative expense 22,596 19,353
Interest expense 3,393 4,170
Provision for environmental matter (Note 7) 400 -
Settlement of dispute - 1,767
__________ __________
129,066 114,403
__________ __________
Income from continuing operations
before provision for income taxes 5,030 8,406
Provision for income taxes 355 637
__________ __________
Income from continuing operations 4,675 7,769
Income from discontinued operations, net
of income taxes (Notes 1 and 2) 584 646
Gain on sale of discontinued
operations (Note 2) 24,200 -
__________ __________
Net income $ 29,459 $ 8,415
========== ==========
Net income applicable to common stock (Note 4) $ 27,827 $ 7,988
========== ==========
Average common shares outstanding (Note 4):
Primary 14,386,371 12,365,204
Fully diluted 17,035,037 15,685,412
Earnings per common share (Note 4):
Primary:
Income from continuing operations $ .21 $ .59
========== ==========
Net income $ 1.93 $ .65
========== ==========
Fully diluted:
Income from continuing operations $ .21 $ .50
========== ==========
Net income $ 1.69 $ .54
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, 1994 and 1993
(Dollars in thousands, except per share amounts)
1994 1993
__________ __________
(Note 1)
Revenues:
Net sales $ 68,414 $ 67,869
Other income - net 1,330 1,547
__________ __________
69,744 69,416
Costs and expenses:
Cost of sales 53,184 49,802
Selling, general and administrative expense 11,428 9,734
Interest expense 1,712 1,987
Provision for environmental matter (Note 7) 400 -
Settlement of dispute - 1,767
__________ __________
66,724 63,290
__________ __________
Income from continuing operations
before provision for income taxes 3,020 6,126
Provision for income taxes 203 512
__________ __________
Income from continuing operations 2,817 5,614
Income from discontinued operations, net
of income taxes (Notes 1 and 2) 238 144
Gain on sale of discontinued
operations (Note 2) 24,200 -
__________ __________
Net income $ 27,255 $ 5,758
========== ==========
Net income applicable to common stock (Note 4) $ 26,447 $ 5,408
========== ==========
Average common shares outstanding (Note 4):
Primary 14,359,161 14,381,918
Fully diluted 18,985,827 16,584,949
Earnings per common share (Note 4):
Primary:
Income from continuing operations $ .14 $ .37
========== ==========
Net income $ 1.84 $ .38
========== ==========
Fully diluted:
Income from continuing operations $ .14 $ .34
========== ==========
Net income $ 1.44 $ .35
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 1994 and 1993
(Dollars in thousands)
1994 1993
__________ __________
(Note 1)
Cash flows from continuing operations:
Income from continuing operations $ 4,675 $ 7,769
Adjustments to reconcile income from
continuing operations to net cash
provided by continuing operations:
Depreciation, depletion and amortization:
Property, plant and equipment 3,332 2,767
Other 489 432
Provision for possible losses:
Trade accounts receivable 519 (115)
Environmental matter 400 -
Settlement of dispute - 1,767
Gain of sales of assets (519) (1,381)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (8,188) (11,634)
Inventories 1,261 5,756
Supplies and prepaid items (1,384) (2,166)
Other assets (2,009) (548)
Accounts payable 7,862 7,202
Accrued liabilities 209 (4,594)
__________ __________
Net cash provided by
continuing operations 6,647 5,255
Cash flows from investing activities of
continuing operations:
Capital expenditures (7,993) (3,235)
Purchase of loans receivable (2,930) -
Sale of real estate properties 1,331 3,342
_________ _________
Net cash provided (used) by investing activities (9,592) 107
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Six Months Ended June 30, 1994 and 1993
(Dollars in thousands)
1994 1993
__________ __________
(Note 1)
Cash flows from financing activities of continuing
operations:
Payments on long-term and other debt $(6,012) $(7,240)
Long-term and other borrowings 2,700 -
Net change in revolving loans 45,465 (7,335)
Net decrease in receivables sold to
discontinued operations (31,844) (11,228)
Net change in drafts payable 616 (1,089)
Dividends paid (Note 6):
Preferred stocks (1,631) (302)
Common stock (414) (387)
Purchases of treasury stock (Note 6) (1,697) -
Net proceeds from issuance of stock (Note 6):
Common 244 2,230
Preferred - 44,071
________ ________
Net cash provided by financing
activities of continuing operations 7,427 18,720
________ ________
Net increase in cash from
continuing operations 4,482 24,082
Net decrease in cash from
discontinued operations (1,675) (5,761)
________ ________
Net increase in cash from all
activities 2,807 18,321
Cash at beginning of period 2,781 1,115
________ ________
Cash at end of period $ 5,588 $ 19,436
======== ========
(See accompanying notes)
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1994, and 1993
Note 1: The accompanying financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries at June 30, 1994. The
accounts of its financial services subsidiary, Equity Bank for Savings, F.A.
("Equity Bank") which was sold on May 25, 1994 (see Note 2 below), have been
reclassified as discontinued operations at December 31, 1993. Additionally,
the condensed consolidated statements of income for the six month and three
month periods ended June 30, 1993, have been restated to present the
operations of Equity Bank as income from discontinued operations. The assets
and liabilities of the Company's financial services subsidiary, classified as
discontinued at December 31, 1993, are as follows:
December 31,
1993
____________
Assets: (In thousands)
Cash and cash equivalents $ 8,906
Loans and mortgage backed
securities, net 359,303
Other securities 7,806
Property and equipment, net 5,144
Excess of purchase price over net
assets acquired, net 17,041
Other assets 3,273
_______
401,473
Liabilities:
Deposits 332,511
Securities sold under agreement
to repurchase 38,721
Federal Home Loan Bank advances 87,650
Accrued liabilities 2,715
_______
461,597
_______
Net liabilities $ 60,124
=======
Note 2: On May 25, 1994, pursuant to a Stock Purchase Agreement, dated as of
February 9, 1994, (the Acquisition Agreement) the Company sold its wholly-
owned subsidiary, Equity Bank , which constituted the Financial Services
Business of the Company, to Fourth Financial Corporation (the "Purchaser").
The Purchaser acquired all of the outstanding shares of capital stock of
Equity Bank. All regulatory and shareholder approvals necessary to complete
the sale of Equity Bank were obtained prior to the closing of this
transaction.
Under the Acquisition Agreement, the Company acquired from Equity Bank, prior
to closing, certain subsidiaries of Equity Bank (Retained Corporations) that
own the real and personal property and other assets contributed by the Company
to Equity Bank at the time of the acquisition of the predecessor of Equity
Bank by the Company for Equity Bank s carrying value of the assets contributed
of approximately $67.4 million. At the time of closing of the sale of Equity
Bank, the Company was required under the Acquisition Agreement to acquire: (A)
the loan and mortgage on and an option to purchase Equity Tower located in
Oklahoma City, Oklahoma (Equity Tower Loan), which Equity Bank previously
classified as an in-substance foreclosure on its books, for an amount equal to
Equity Bank's carrying value of approximately $13.9 million; (B) other real
estate owned by Equity Bank that was acquired by Equity Bank through
foreclosure for an amount equal to Equity Bank's carrying value of
approximately $3.6 million (the Equity Tower Loan and other real estate owned
are collectively called the Retained Assets ), and; (C) the outstanding
accounts receivable sold to Equity Bank by the Company and its subsidiaries
under various purchase agreements, dated March 8, 1988 (the Receivables ) of
$6.9 million. In addition, the Company acquired certain other loans for $2.7
million previously owned by Equity Bank.
The Company used the proceeds of the sale of Equity Bank, together with
borrowings under its credit facilities, to purchase the Retained Corporations
for approximately $67.4 million, the Retained Assets for approximately $17.5
million, certain other loans for approximately $2.7 million and to repurchase
its accounts receivable previously financed by Equity Bank for approximately
$6.9 million.
Under the Acquisition Agreement, the Company made certain representations and
warranties. The Company also agreed under the Stock Purchase Agreement to
indemnify the Purchaser and its wholly-owned subsidiary, Bank IV Oklahoma,
National Association ("Bank IV "), against, among other things, (i) losses
that may be sustained by them due to breach of any representations or
warranties made by the Company in the Stock Purchase Agreement or failure by
the Company to fulfill any agreement made by the Company in the Stock Purchase
Agreement, provided losses by Fourth and Bank IV exceed $1 million in the
aggregate, net of income tax effect, and such liability by the Company shall
not exceed $25 million. The Company has further agreed to indemnify the
Purchaser and Bank IV against certain liabilities which are not subject to the
$1 million deductible and the $25 million maximum liability, including, but
not limited to, environmental matters relating to the real estate contributed
to Equity Bank at the time that the Company acquired Equity Bank. The
representations and warranties made by the Company under the Agreement survive
the closing of the sale of Equity Bank for a period of two (2) years, except
certain tax-related representations and warranties which have a three (3) year
survival period. In addition, there are no time limits (other than as
provided by law) in connection with the indemnifications provided by the
Company relating to certain environmental matters, a certain pending lawsuit,
and a certain "frozen" 401-K Plan.
Note 3: At June 30, 1994, the Company has net operating loss ("NOL")
carryforwards for tax purposes of approximately $35 million. Such amounts
expire beginning in 1999. The Company also has investment tax credit
carryforwards of approximately $600,000, which expire beginning in 1994.
The Company's provision for income taxes for the six months ended June 30,
1994 of $.4 million are for current state income taxes and federal alternative
minimum tax.
Note 4: Primary earnings per common share are based on 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 after
appropriate adjustment for interest and related income tax effects on
convertible notes payable.
Net income applicable to common stock is computed by adjusting net income by
the amount of preferred stock dividends, including undeclared or unpaid
dividends, if cumulative.
Note 5: On July 6, 1992, a subsidiary of the Company signed an agreement to
supply a foreign customer with equipment, technology and technical assistance
to manufacture certain types of automotive products. The contract provided for
a total price of $56 million with $12 million to be retained by the customer,
as the subsidiary s equity participation, which represented a minority
interest in the customer. Of the balance of the contract price of $44 million,
$13.9 million has been billed and collected by the Company. The remaining
$30.1 million is to be collected in 38 equal quarterly installments beginning
December 31, 1994 of $791,000, plus interest at a rate of 7.5% per annum.
During the last quarter of 1993, the Company s subsidiary exchanged its rights
to the equity interest in the customer with a foreign nonaffiliated company
("Purchaser of the Interest") for $12 million in notes. The Company has been
advised that the customer has agreed to repurchase from the Purchaser of the
Interest up to $6 million of such equity interest over a six-year period, with
payment to the Purchaser of the Interest to be either in cash or bearing
products. The notes issued to the subsidiary for its rights to the equity
interest in the customer will only be payable when, as and if the Purchaser of
the Interest collects from the customer for such equity interest, and the
method of payment to the subsidiary will be either cash or bearing products,
in the same manner as received by the Purchaser of the Interest from the
customer. During the three months ended June 30, 1994, the Company received
approximately $250,000 in bearing products as partial payment on such notes.
Due to the Company s inability to determine what payments, if any, it will
receive on such notes, the Company will continue to carry such notes at a
nominal amount.
The Company s subsidiary has agreed to make its best effort to purchase
approximately $14.5 million of bearing products each year for ten years
commencing in the customer s first year of operations, which is anticipated to
be in 1994. However, the subsidiary is not required to purchase more product
from the customer in any one year than the quantity of tapered bearing
products the subsidiary is able to sell in its market. The customer has also
agreed to repurchase over six years, up to $6 million of the subsidiary s
former equity participation in the customer. In the event that the customer is
unable to repurchase such equity participation, and therefore the Company's
subsidiary is unable to collect such amount from the Purchaser of the Interest
the parties may renegotiate and modify the agreement for the Company s
subsidiary to purchase products from the customer.
Revenues, costs and profits related to the contract are being recognized in
two separate phases. The first phase involves the purchase, modification,
development and delivery of the machinery, tooling, designs and other
technical information and services. Sales to be recognized during this phase
are limited to the expected collections under the contract during this phase.
Sales and costs during the first phase are being recognized using the
percentage of completion method of accounting based on the ratio of total
costs incurred, excluding the cost of purchased machinery, to estimated total
costs, excluding the cost of purchased machinery. The cumulative effect of
future revisions in the contract terms or total cost estimates will be
reflected in the period in which changes become known.
The second phase of the contract includes payments by the customer under the
financing terms set forth above and purchases of bearing products by the
Company s subsidiary from the customer. Contract revenues will be recognized
as the Company performs its obligation to purchase products from the customer,
which timing generally coincides with the timing that amounts are to be
collected from the customer. Interest will be recognized as the amounts are
collected from the customer.
Note 6: The table below provides detail of activity in the Stockholders' Equity
accounts for the six months ended June 30, 1994:
Common Stock Non- Capital
_______________ redeemable in excess Retained
Par Preferred of par Earnings Treasury
Shares Value Stock Value (Deficit) Stock Total
____________ ________________________________________________
(In thousands)
Balance at December 31, 1993 14,514 $1,451 $48,000 $37,120 $(7,541) $(4,159) $74,871
Net Income - - - - 29,459 - 29,459
Conversion of 18 shares of
redeemable preferred stock
to common stock 1 - - 1 - - 1
Exercise of stock options
for cash 100 11 - 234 - - 245
Dividends declared:
Series B 12% preferred
stock ($6.00 per share) - - - - (120) - (120)
Redeemable preferred
stock ($10.00 per share) - - - - (16) - (16)
Common Stock ($.03 per share) - - - - (414) - (414)
Series 2 preferred
stock ($1.62 per share) - - - - (1,495) - (1,495)
Purchase of treasury stock - - - - - (1,697) (1,697)
______ _______ _______ _______ _______ _______ ________
(1)
Balance at June 30, 1994 14,615 $1,462 $48,000 $37,355 $ 19,873 $(5,856) $100,834
====== ====== ======= ======= ======== ======= ========
(1)
Includes 1,060,085 shares of the Company's Common Stock held in
treasury. Excluding the 1,060,085 shares held in treasury, the outstanding
shares of the Company's Common Stock at June 30, 1994 were 13,555,191.
Note 7: Following is a summary of certain legal actions 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-
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. In a settlement
offer that was rejected by the Company, the Environmental Protection
Agency ("EPA") did indicate that the Company was eligible for settlement
as a de minimis party. The subsidiary s insurance carriers have been
notified of this matter; however, the amount of possible coverage, if
any, is not yet determinable.
B. The primary manufacturing facility of the Company s Chemical Business,
located in El Dorado, Arkansas, (the "Site") has been placed in the
EPA's tracking system ("System") of sites which are known or suspected
to be a site of a release of contaminated waste. Inclusion in the EPA s
tracking system does not represent a determination of liability or a
finding that any response action is necessary. As a result of being
placed in the System, the State of Arkansas performed a preliminary
assessment. The Company has been advised that there have occurred
certain releases of contaminants at the Site. In addition, as a result
of certain releases of contaminants at the Site, the Company's
subsidiary will be subject to enforcement action, which will include
certain civil penalties. On July 18, 1994, the Company's subsidiary
received from the State of Arkansas a report of multimedia inspection of
the Site (the "Report"). The Report contains findings of violations of
certain environmental laws and requests the Company's subsidiary to
conduct further investigations to better determine the compliance status
of and releases at the Site. The Company's subsidiary has been advised
that the State of Arkansas is currently preparing an administrative
consent agreement to outline specific activities necessary to bring the
Site into compliance and to remediate identified releases. While the
Company is at this time unable to determine the ultimate cost of
compliance with the expected administrative consent agreement, the
Company has determined the subsidiary's cost to be at least $400,000,
therefore the Company has included a provision for environmental costs
of $400,000 in the results of operations for the six (6) month and three
(3) month periods ended June 30, 1994. Based on information presently
available, the Company does not believe, as of the date of this report,
that compliance with the administrative consent agreement, or the
assessment of penalties, or the facility being placed in the System,
should have a material adverse effect on the Company, the Company's
subsidiary or the Company's financial condition, however, there are no
assurances to that effect.
C. A subsidiary of the Company was named in April 1989 as a third party
defendant in a lawsuit alleging defects in fan coil units installed in a
commercial building. The amount of damages sought by the owner against
the general contractor and the subsidiary s customer are substantial.
The subsidiary s customer alleges that to the extent defects exist in
the fan coil units, it is entitled to recovery from the subsidiary. The
Company s subsidiary generally denies their customer s allegations and
that any failures in the fan coil units were a result of improper design
by the customer, improper installation or other causes beyond the
subsidiary s control. The subsidiary has in turn filed claims against
the suppliers of certain materials used to manufacture the fan coil
units to the extent any failures in the fan coil units were caused by
such materials. Discovery in these proceedings is continuing. The
Company believes it is probable that it will receive insurance proceeds
in the event of an unfavorable outcome.
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 effect on the financial position or results of operations of the
Company.
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 should be read in conjunction with a
review of the Company's June 30, 1994 Condensed Consolidated Financial
Statements. This discussion and analysis is intended to provide information
about the Company's continuing operations. Accordingly, it contains only
limited discussions of the Company's Financial Services Business, sold in
1994, which has been reported as a discontinued operation in the Company's
Condensed Consolidated Financial Statements at June 30, 1994. See "Liquidity
and Capital Resources" of this "Management's Discussion and Analysis", and
Note 2 of Notes to Condensed Consolidated Financial Statements for further
discussion of the sale of Equity Bank.
OVERVIEW
The Company is a diversified holding company which is engaged, through
its subsidiaries, in the Chemical Business, the Environmental Control
Business, the Automotive Products Business and the Industrial Products
Business.
Information about the Company's continuing operations in different
industry segments for the six months and three months ended June 30, 1994 and
1993 is detailed below.
Six Months Three Months
1994 1993 1994 1993
____ ____ ____ ____
(In thousands)
(Unaudited)
Sales:
Chemical $ 72,723 $ 63,003 $ 41,771 $ 38,563
Environmental Control 35,250 33,565 14,998 16,193
Automotive Products 17,600 14,706 9,036 8,555
Industrial Products 6,692 9,192 2,609 4,558
_______ _______ _______ _______
$132,265 $120,466 $ 68,414 $ 67,869
======= ======= ======= =======
Gross profit:
Chemical $ 15,175 $ 16,490 $ 9,087 $ 10,782
Environmental Control 8,781 7,426 3,394 3,277
Automotive Products 4,302 4,987 2,290 2,833
Industrial Products 1,330 2,450 459 1,175
_______ _______ _______ _______
$ 29,588 $ 31,353 $ 15,230 $ 18,067
======= ======= ======= =======
Operating profit (loss):
Chemical $ 8,566 $ 11,944 $ 5,677 $ 8,474
Environmental Control 2,329 2,117 236 787
Automotive Products (125) 1,777 (10) 960
Industrial Products (703) 665 (486) 435
Other 1,183 1,623 729 1,175
_______ _______ _______ _______
11,250 18,126 6,146 11,831
General corporate expenses (2,827) (5,550) (1,414) (3,718)
Interest expense (3,393) (4,170) (1,712) (1,987)
_______ _______ _______ _______
Income from continuing
operations before
provision for income taxes $ 5,030 $ 8,406 $ 3,020 $ 6,126
======= ======= ======= =======
RESULTS OF OPERATIONS
Six months ended June 30, 1994 vs. Six months ended June 30, 1993.
Revenues
Total revenues for the six months ended June 30, 1994 and 1993 were
$134.1 million and $122.8 million, respectively (an increase of $ 11.3
million). Interest and other income included in total revenues was $1.8
million in 1994, compared to $2.3 million for 1993. This decrease of $.5
million resulted primarily from insurance claim proceeds recorded in the first
quarter of 1993. Consolidated net sales included in total revenues for the
three months ended June 30, 1994 were $132.3 million, compared to $120.5
million for the first six months of 1993, an increase of $11.8 million. This
increase in sales resulted principally from; (i) increased sales in the
Chemical Business of $9.7 million, primarily due to favorable weather
conditions for seasonal fertilizer sales, higher price of ammonia being
partially passed through to customers, the acquisition of Total Energy Systems
Limited ("TES") in July, 1993, and higher sales of Universal Tech Corporation
("UTC"), offset by reduced sales by Slurry Explosives Corporation ("Slurry")
due to unfavorable weather conditions in some of their market areas; (ii)
increased sales in the Environmental Control Business of $1.7 million,
primarily due to an expanded customer base in 1994 and the continued recovery
from the effects of a strike that took place in 1992 at the fan coil
manufacturing plant of this business; (iii) increased sales in the Automotive
Products Business of $2.9 million due to an expanded customer base in 1994,
and (iv) decreased sales in the Industrial Products Business of $2.5 million,
primarily due to decreased sales to a foreign customer (see Note 5 to Notes to
Condensed Consolidated Financial Statements and discussion under the
"Liquidity and Capital Resources" section of this report).
Gross Profit
Gross profit was 22.4% for the first six months of 1994, compared to
26.0% for the first six months of 1993. The decline in the gross profit
percentage was due primarily to (i) revisions to the estimates to complete the
foreign sales contract which caused the percentage of completion calculation
to yield a lower gross profit percentage in the first six months of 1994 than
was calculated for the first six months of 1993; and (ii) higher cost of the
primary raw material (ammonia) in the Chemical Business. During the first six
months of 1994 the average cost of ammonia was approximately 31.6% higher than
the average cost of ammonia during the first six months of 1993. This higher
cost was not fully passed on to customers in the form of price increases.
These factors were offset in part by gross profit improvement after recovery
from the effects of a strike in 1992 at the fan coil manufacturing plant of
the Environmental Control Business that were still being experienced in the
first six months of 1993.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 17.1% in the six months ended June 30, 1994 and 16.1% in the
first six months of 1993. As sales increased, normal SG&A expenses increased
proportionally. Increases in SG&A which were not proportional to increases
in sales resulted from increased commissions of $400,000 by UTC as a result of
UTC's increased revenues in 1994 versus 1993 ($1.6 million increase); expenses
of companies acquired since June 30, 1993 of approximately $1.1 million (Total
Energy Systems - July 1993 - $600,000 and International Bearings, Inc. -
December, 1993 - $500,000); expenses of the heat pump segment of the
Environmental Control Business related to the acquisition of the O.E.M.
contract with a large multinational company; and, the low provision for bad
debt expenses in 1993 in the Environmental Control Business compared to the
provision in 1994 resulting in a variance between the periods of approximately
$750,000.
Interest Expense
Interest expense for the Company was approximately $3.4 million during
the six months ended June 30, 1994 compared to approximately $4.2 million
during the six months ended June 30, 1993. The decrease primarily resulted
from lower average balances of borrowed funds.
Income From Continuing Operations Before Taxes
The Company had income from continuing operations before income taxes of
$5.0 million in the first six months of 1994 compared to $8.4 million in the
six months ended June 30, 1993. The decreased profitability of $3.4 million
was primarily due to lower gross profit margins realized on sales in the
Chemical Division and on the foreign sales contract as previously discussed.
Also contributing to this decline is the $.4 million provision for
environmental matter discussed in Note 7 of Notes to Condensed Consolidated
Financial Statements.
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 3 of Notes to Condensed
Consolidated Financial Statements, the Company's provisions for income taxes
for the six months ended June 30, 1994 and the six months ended June 30, 1993
are for current state income taxes and federal alternative minimum taxes.
Income From Discontinued Operations
Income from discontinued operations reflects the results of operations
of the Financial Services Business excluding income and expenses of the
Retained Corporations and the Retained Assets as discussed in Note 2 of Notes
to Condensed Consolidated Financial Statements. Income from discontinued
operations, net of expenses, was $.6 million in the first six months of 1994
compared to $.6 million in the first six months of 1993.
Gain From Sale of Discontinued Operations
As more fully discussed in Note 2 of Notes to Condensed Consolidated
Financial Statements, the Company realized a gain of $24.2 million from the
sale on May 25, 1994 of its Wholly-owned subsidiary Equity Bank, which gain is
included in the company's results of operations for the six months ended June
30, 1994.
RESULTS OF OPERATIONS
Three months ended June 30, 1994 vs. Three months ended June 30, 1993.
- - ---------------------------------------------------------------------
Revenues
Total revenues for the three months ended June 30, 1994 and 1993 were
$69.7 million and $69.4 million, respectively (an increase of $.3 million).
Interest and other income included in total revenues was $1.3 million in 1994,
compared to $1.5 million for 1993. Consolidated net sales included in total
revenues for the three months ended June 30, 1994 were $68.4 million, compared
to $67.9 million for the three months ended June 30 1993, an increase of $.5
million. This increase in sales resulted principally from: (i) increased
sales in the Chemical Business of $3.2 million, primarily due to the higher
price of ammonia being partially passed through to customers, the acquisition
of Total Energy Systems Limited ("TES") in July, 1993, and higher sales of
Universal Tech Corporation ("UTC"); (ii) decreased sales in the Environmental
Control Business of $1.2 million, primarily due to soft market conditions in
1994 and production inefficiencies at the fan coil manufacturing plant; (iii)
increased sales in the Automotive Products Business of $ .5 million due to an
expanded customer base in 1994, and (iv) decreased sales in the Industrial
Products Business of $2.0 million, primarily due to decreased sales to a
foreign customer (see Note 5 to Notes to Condensed Consolidated Financial
Statements and discussion under the "Liquidity and Capital Resources" section
of this report).
Gross Profit
Gross profit was 22.3% for the second quarter of 1994, compared to 26.6%
for the second quarter of 1993. The decline in the gross profit percentage
was due primarily to (i) decreased sales in 1994 to a foreign customer in the
Industrial Products Business; and (ii) higher cost of the primary raw
material (ammonia) in the Chemical Business. During the second quarter of
1994 the average cost of ammonia was approximately 58.1% higher than the
average cost of ammonia during the second quarter of 1993. This higher cost
was not fully passed on to customers in the form of price increases. These
factors were offset in part by gross profit improvement after recovery from
the effects of a strike in 1992 at the fan coil manufacturing plant of the
Environmental Control Business that were still being experienced in the second
quarter of 1993.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 16.7% in the three months ended June 30, 1994 and 14.3% in the
three months ended June, 1993. As sales increased, normal SG&A expenses
increased proportionally. Other increases in SG&A for the three months ended
June 30, 1994 as compared to the three months ended June 30, 1993 which did
not change proportionately as discussed above in the comparison of variances
in SG&A expenses for the six months ended June 30, 1994 compared to the six
months ended June 30, 1993 were approximately the same.
Interest Expense
Interest expense for the Company was approximately $1.7 million during
the six months ended June 30, 1994 compared to approximately $2.0 million
during the six months ended June 30, 1993. The decrease primarily resulted
from lower average balances of borrowed funds.
Income From Continuing Operations Before Taxes
The Company had income from continuing operations before income taxes of
$3.0 million in the second quarter of 1994 compared to $6.1 million in the
second quarter of 1993. The decreased profitability of $3.1 million was
primarily due to lower gross profit margins realized on sales in the Chemical
Division and on the foreign sales contract as previously discussed. Also
contributing to this decline is the $.4 million provision for environmental
matter discussed in Note 7 of Notes to Condensed Consolidated Financial
Statements.
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 3 of Notes to Condensed
Consolidated Financial Statements, the Company's provisions for income taxes
for the six months ended June 30, 1994 and the six months ended June 30, 1993
are for current state income taxes and federal alternative minimum taxes.
Income From Discontinued Operations
Income from discontinued operations reflects the results of operations
of the Financial Services Business excluding income and expenses of the
Retained Corporations and the Retained Assets as discussed in Note 2 of Notes
to Condensed Consolidated Financial Statements. Income from discontinued
operations, net of expenses, was $.2 million in the second quarter of 1994
compared to $.1 million in the second quarter of 1993.
Gain From Sale of Discontinued Operations
As more fully discussed in Note 2 of Notes to Condensed Consolidated
Financial Statements, the Company realized a gain of $24.2 million from the
sale on May 25, 1994 of its Wholly-owned subsidiary Equity Bank, which gain is
included in the company's results of operations for the three months ended
June 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
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.
Sale of Equity Bank - As previously discussed, the Company and Fourth
Financial Corporation ("Fourth Financial") entered into the Acquisition
Agreement, whereby the Company agreed to sell Equity Bank, which constituted
the Financial Services Business of the Company, to Fourth Financial. Pursuant
to the Acquisition Agreement, Fourth Financial acquired all of the outstanding
shares of capital stock of Equity Bank on May 25, 1994. Under the Acquisition
Agreement, the Company acquired from Equity Bank prior to the completion of
the sale of Equity Bank certain subsidiaries of Equity Bank ("Retained
Corporations") that owned the assets contributed by the Company to Equity Bank
at the time of the acquisition of Equity Bank by the Company for Equity Bank's
carrying values of such Retained Corporations. At the time of the acquisition
of the Retained Corporations such carrying value was approximately $67.4
million. At the time of the closing of the sale of Equity Bank, a subsidiary
of the Company acquired the Equity Tower Loan and other real estate owned by
Equity Bank that were acquired by Equity Bank through foreclosure ("OREO"),
which have collectively been previously defined as the "Retained Assets". The
Retained Assets were acquired for an amount equal to Equity Bank's carrying
value of the Retained Assets at time of closing of the sale of Equity Bank,
which was approximately $17.5 million. In addition, the Company acquired (i)
certain loans owned by Equity Bank at book value or $1.00 in the case of loans
that had been charged off ("Other Loans")and (ii) certain other loans at
Equity Bank's carrying value of $4.6 million less a discount of $1.9 million.
The Purchase Price paid by Fourth Financial for Equity Bank was
approximately $91.3 million, and was subject to determination and adjustment
in accordance with the Acquisition Agreement. Of the approximately $91.3
million, the Company used approximately $67.4 million to repay certain
indebtedness the Company incurred to finance the purchase from Equity Bank of
the Retained Corporations. In addition, the Company used approximately $17.5
million to purchase the Retained Assets. The Company was further required
under the Acquisition Agreement to purchase from Equity Bank at the closing of
the proposed sale the outstanding amount of Receivables (approximately $7.0
million). The Company used approximately $3 million of borrowings from the
Bank IV Line of Credit discussed elsewhere in this Liquidity and Capital
resources section to purchase the balance of such Receivables and $2.7 million
of discounted loans (as discussed above) from Equity Bank. The Company has
subsequently obtained seven year term financing to replace the temporary
financing of the approximate $2.7 million in discounted loans it purchased
from Equity Bank.
The sale of Equity Bank pursuant to the Acquisition Agreement resulted
in a pre-tax gain for financial reporting purposes for the Company of
approximately $24.2 million, based upon the Purchase Price of approximately
$91.3 million. The Company's tax basis in Equity Bank was higher than its
basis for financial reporting purposes. Under current federal income tax
laws, the consummation of the Acquisition Agreement and the sale of Equity
Bank did not have any federal income tax consequences to either the Company or
to the shareholders of the Company.
Sources of funds - As a result of the sale of Equity Bank, the capitalization
of the Company improved considerably. Stockholders' equity is approximately
$100 million at June 30, 1994. The Company is also negotiating to restructure
its debt. The plan is to consolidate the current working capital requirements
of the Company and its subsidiaries into one loan agreement instead of the
three agreements that currently exist and are described below. At the present
time three banks and/or asset based lenders are making proposals for an asset
based working capital revolver ("New Revolver") in an amount of approximately
$75 million. The facility being proposed will include substantially all
accounts receivable and inventory of the Company and its subsidiaries except
foreign subsidiaries as collateral for loans.
Management expects to complete negotiations and have the New Revolver in place
by the end of the third quarter of 1994. Management is asking for advance
rates of 85% for receivables and 60% for inventories other than work in
process. If the New Revolver is agreed to, along the terms presently being
negotiated, the borrowing availability under the line should be adequate to
finance the current working capital requirements of the Company and its
subsidiaries.
Present lines of credit prior to the New Revolver being negotiated are:
(1) As a result of the sale of Equity Bank, the Company's accounts
receivable financing previously provided by Equity Bank had to be
replaced. Fourth Financial through its Oklahoma banking subsidiary has
provided a $35 million Line of Credit to finance such receivables "Line
of Credit". The Line of Credit provides for advance rates of 80% of
accounts receivable and is for a short term, allowing time for a more
comprehensive line of credit to be negotiated as discussed above. The
outstanding borrowings at June 30, 1994 were $25.6 million and the
availability for additional borrowings was $4.4 million.
(2) The Company and its subsidiaries (other than the Chemical Business) are
parties to a credit agreement ("Agreement"), with an unrelated lender
("Lender"), collateralized by certain inventory and certain other assets
of the Company and its subsidiaries (including the capital stock of
International Environmental Corporation) other than the assets and
capital stock of the Chemical Business. The Credit Agreement provides
for a revolving credit facility ("Revolver") for direct borrowing up to
$8 million, including the issuance of letters of credit. The Revolver
provides for advances at varying percentages of eligible inventory. This
Agreement expires on August 31, 1994, but the Company believes the
Agreement can be extended at that time. At June 30, 1994, the
availability based on eligible collateral approximated the credit line.
Borrowings (including letters of credit) under the Revolver outstanding
at June 30, 1994, were $7.4 million. The Revolver requires reductions
of principal equal to reductions as they occur in the underlying
inventory times the advance rate.
(3) The Company's wholly-owned subsidiaries, El Dorado Chemical Company and
Slurry Explosive Corp., which comprise the majority of the Company's
Chemical Business ("Chemical"), are parties to a loan agreement ("Loan
Agreement") with two institutional lenders ("Lenders"). This Loan
Agreement, as amended , provides for a seven year term loan of $28.5
million ("Term Loan"), and a $10 million asset based revolving credit
facility ("Revolving Facility"), The balance of the Term Loan at June
30, 1994 was $21.4 million. Annual principal payments on the Term Loan
are $7 million due in June, 1995; $7 million due in June 1996 and a
final payment of $7.4 million due in March 1997. Borrowings under the
Revolving Facility are available up to the lesser of $10 million or the
borrowing base. The borrowing base is determined by deducting 100% of
Chemical's accounts receivable financed by Fourth Financial from the
maximum borrowing availability as defined in the Revolving Facility. At
June 30, 1994 the borrowing base of $9.5 million was fully borrowed.
The accounts receivable and inventory securing the revolving facility
will be released when and if the revolving facility is paid off and the
Company and its subsidiaries enter into the New Revolver discussed
above. The Revolving Facility requires reductions of principal equal to
reductions as they occur in the underlying accounts receivable and
inventory times the applicable advance rate, assuming that the
outstanding balance under the Revolving Credit Facility is less than the
then maximum line availability based on eligible collateral. Borrowings
under the Revolving Facility are required to be reduced to zero for
forty-five (45) consecutive days annually. Annual interest at the
agreed to interest rates, if calculated on the $30.9 million outstanding
balance at June 30, 1994 would be approximately $3.3 million. The Term
Loan and Revolving Facility are secured by substantially all of the
assets and capital stock of Chemical. The Loan Agreement requires
Chemical 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,
Chemical is in compliance with all financial covenants. Under the terms
of the Loan Agreement, Chemical cannot transfer funds to the Company in
the form of cash dividends or other advances, except for (i) the amount
of taxes that Chemical would be required to pay if it was not
consolidated with the Company; and (ii) an amount equal to fifty percent
(50%) of Chemical's cumulative adjusted net income as long as Chemical's
Total Capitalization Ratio, as defined, remains .65:1 or below.
Cash Flows
-----------
Net cash provided by continuing operating activities in the first six
months of 1994, after adjustment for non-cash expenses of $4.2 million, was
$6.6 million. The net cash provided by continuing operating activities
included the following changes in assets and liabilities: (i) accounts
receivable increased $8.2 million; (ii) accounts payable and accrued
liabilities increased $8.1 million; (iii) inventory decreased $1.3 million;
and, (iv) supplies and prepaid items and other assets increased $3.4 million.
The increase in accounts receivable is due to higher sales in the Chemical,
and Automotive Products Businesses, and the higher cost of ammonia as
discussed elsewhere herein offset by decreased accounts receivable in the
Environmental Control Business due to lower sales in the second quarter of
1994. The increase in accounts payable and accrued liabilities was due
primarily to increased business activity in the Chemical, and Automotive
Products Businesses. The reduction in inventory was due to seasonality in the
Chemical Business and lower inventory levels being maintained in the
Environmental Control Business, offset by increased inventory in the
Automotive Products Business due to purchases made to take advantage of
favorable prices from certain vendors. The increase in supplies and prepaid
items and other assets is primarily due to prepayments for insurance premiums,
supplies, and other items in the Chemical Business, in addition to increased
investment securities and an increase in costs and earnings in excess of
billings on the foreign sales contract. Financing activities in the first
six months of 1994 included net borrowings of $42.8 million used to offset
reductions in accounts receivable sold of $31.8 million resulting from
termination of the accounts receivable financing arrangement with Equity Bank,
in addition to dividend payments of $2.0 million and treasury stock purchases
of $1.7 million. Cash flows from investing activities included capital
expenditures for property, plant and equipment in the Chemical Business of
$6.4 million related to relocation of an additional nitric acid plant acquired
in 1993 in addition to normal capital improvements, and capital expenditures
of $1.1 million in the Environmental Control Business primarily for
acquisition of certain equipment to support the manufacturing processes of
this business. Cash flows from investing activities also included the
purchase of certain loans receivable for $2.9 million and proceeds from the
sale of real estate properties of $1.3 million.
Future cash requirements include working capital requirements for
anticipated sales increases in the Environmental Control Business, the
Chemical Business and the Automotive Products Business, and funding for future
capital expenditures, primarily in the Chemical Business. Funding for the
higher accounts receivable resulting from anticipated sales increases will be
provided by the Line of Credit. Inventory requirements for the higher
anticipated sales activity should be met by scheduled reductions in the
inventories of the Environmental Control and Automotive Products Businesses.
During November 1993, the Company's Chemical Business acquired an
additional concentrated nitric acid plant and related assets from a location
in Illinois. The plant is being installed at the existing manufacturing
plant site located in El Dorado, Arkansas. The Company anticipates that the
total amount to be expended to acquire, move and install the plant and assets
will be approximately $15 million including $2 million for new nitric acid
railcars used to deliver the product to the customers. The Company expects to
obtain financing secured by such assets, however there are no assurances that
such financing will be obtained. At June 30, 1994, the Company had incurred
and paid approximately $5.6 million of the estimated $15.0 million. The
Company expects the plant and asset installation to be complete and
operational in early 1995.
Management believes that cash flows from operations and other sources,
including the New Revolver that the Company is presently negotiating will be
adequate to meet its presently anticipated capital expenditure, working
capital, debt service and dividend requirements. The Company currently has no
material commitment for capital expenditures, other than those related to
Chemical's acquisition of the additional concentrated nitric acid plant as
discussed above.
In 1993, the Company's Board of Directors adopted a policy as to the
payment of annual cash dividends of $.06 per share on its outstanding Common
Stock, subject to termination or change by the Board of Directors at any time.
The Board of Directors declared a cash dividend of $.03 per share on the
Company's outstanding shares of Common Stock, which was paid January 1, 1994,
to the stockholders of record as of the close of business on December 15,
1993. On May 23, 1994 the Company's Board of Directors declared a $.03 per
share cash dividend on the Company's outstanding shares of Common Stock, which
was paid July 1, 1994, to stockholders of record as of the close of business
on June 15, 1994.
On November 11, 1993 the Company's Board of Directors declared a $12.00
a share annual cash dividend on each outstanding share of its Series B 12%
Cumulative Convertible Preferred Stock, $100 par value, payable January 1,
1994 to stockholders of record on December 1, 1993, which is the annual
dividend on this series of preferred stock for 1994. This dividend is being
recognized in the Company's financial statements throughout the year as $3.00
a share in each fiscal quarter. On February 10, 1994 the Company's Board of
Directors declared a (i) $.81 a share quarterly cash dividend on each
outstanding share of its Series 2 $3.25 Convertible Exchangeable Class C
Preferred Stock, paid March 15, 1994 to shareholders of record on March 1,
1994, and (ii) $10.00 a share annual cash dividend on each outstanding share
of its Convertible Noncumulative Preferred Stock ($100 par), paid April 1,
1994 to stockholders of record on March 15, 1994. On May 23, 1994, the
Company's Board of Directors declared a $.81 per share quarterly cash
dividends on each outstanding share of its Series 2 $3.25 convertible
exchangeable Class C Preferred Stock, paid June 15, 1994 to shareholders of
record on June 1, 1994.
Foreign Sales Contract - A subsidiary of the Company entered into an
agreement with a foreign company ("Buyer") to supply the Buyer with equipment,
technology and technical services to manufacture certain types of automotive
bearing products. The agreement provided for a total contract amount of
approximately $56 million, with $12 million of the contract amount to be
retained by the Buyer as the Company's subsidiary's equity participation in
the Buyer, which represented a minority interest. During 1993 the Company's
subsidiary exchanged its equity interest in the Buyer to a foreign
nonaffiliated company for $12 million in notes. Through the date of this
report, the Company's subsidiary has received $13.9 million from the buyer
under the agreement. During 1993, the Company and the foreign customer agreed
to a revised payment schedule which deferred the beginning of payments under
the contract from June 30, 1993 to one $791,000 principal payment on November
1, 1993, one principal payment of $791,000 on March 31, 1994, one principal
payment of $791,000 on December 31, 1994 and quarterly, thereafter, until the
contract is paid in full
The customer made the March 31, 1994 payment on April 20, 1994 and the
Company expects that after the customer becomes operational, they will make
future payments as they become due. See Note 5 of Notes to Condensed
Consolidated Financial Statements.
Business Acquisitions - In March, 1994, a subsidiary of the Company
advanced to Deepwater Iodides, Inc. ("Deepwater"), a specialty chemical
company, $450,000 on a demand basis. In connection with the loan, Deepwater
and the Company entered into an agreement in principle for the Company to
purchase from Deepwater an amount of stock of Deepwater equal to eighty
percent of the outstanding shares of Deepwater for approximately $4 million.
Having performed due diligence, the Company has determined as of August 18,
1994 not to proceed with the acquisition of the stock of Deepwater on the
basis originally proposed.
On July 27, 1994 the Company through a subsidiary loaned $1.4 million
to a French manufacturer of HVAC equipment. The agreements provide, among
other things, that at the Company's option this loan can be converted from a
loan into 80% of the outstanding stock of the French company on or after
September 1, 1994. At this time the decision has not been made to exercise
such option and the $1.4 million is carried on the books as a note receivable.
Additionally, the Company is performing due diligence on some other
small companies that might result in acquisitions in 1994 or 1995. Any such
acquisitions consummated will require additional financing which the Company
believes can be obtained.
Settlement of Litigation - In 1994, the Company settled its litigation
with one of it's insurers for $3.6 million, which was paid to the Company on
March 11, 1994. Such amounts were accrued in the fourth quarter of 1993 to
the extent that costs and expenses had been previously incurred.
Letters of Intent with Foreign Customers - During the second and third
quarters of 1993, a subsidiary of the Company signed two separate letters of
intent to supply separate customers, one in the former Soviet Union and one
in Poland, with equipment to manufacture environmental control products. Upon
completion, the agreements are expected to include the sale of licenses,
designs, tooling, machinery, equipment, technical information, proprietary
know how, and technical services. The total sales price for the two contracts
is expected to be approximately $98 million. The agreements are also expected
to include a provision that, in lieu of cash, the Company will accept payment
in kind of anhydrous ammonia from the foreign customers at the foreign
customers' option. The projects are subject to completion of two separate
definitive agreements between each of the foreign customers and the Company's
subsidiary. There are no assurances that definitive contracts with either of
these two customers will be finalized.
Availability of Company's Loss Carryovers - The Company anticipates that
its cash flow in future years will benefit to some extent from its ability to
use net operating loss ("NOL") carryovers from prior periods to reduce the
federal income tax payments which it would otherwise be required to make with
respect to income generated in such future years. As of June 30, 1994, the
Company, had available NOL carryovers of approximately $35 million, based on
its federal income tax returns as filed with the Internal Revenue Service for
taxable years through 1992, and on the Company's estimates for 1993. These
NOL carryovers will expire beginning in the year 1999.
The amount of these carryovers has not been audited or approved by the
Internal Revenue Service and, accordingly, no assurance can be given that such
carryovers will not be reduced as a result of audits in the future. In
addition, the ability of the Company to utilize these carryovers in the future
will be subject to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations. These include, in particular, limitations imposed by
Code Section 382 and the consolidated return regulations.
ERNST & YOUNG LLP 1700 Liberty Tower
100 North Broadway
Oklahoma City, OK 73102
Phone: 405 278 6800
Fax: 405 278 6823
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of LSB
Industries, Inc. and subsidiaries as of June 30, 1994, the related condensed
consolidated statements of income for the six month and three month periods
ended June 30, 1994 and 1993 and the condensed consolidated statements of cash
flow for the six month periods ended June 30, 1994 and 1993. 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, 1993, and the related consolidated statements of income, non-
redeemable preferred stock, common stock and other stockholders' equity and
cash flows for the year then ended (not presented herein); and in our report
dated March 15, 1994, 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,
1993, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
August 10, 1994 /s/ ERNST & YOUNG LLP
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Since the 1940's, the the primary manufacturing facility of the
Company's Chemical Business, located in El Dorado, Arkansas, (the "Site") has
been a manufacturing facility for ammonium nitrate compounds, and until 1969,
was a manufacturing facility for ammonia. In 1955, the Site was acquired by
Monsanto Company ("Monsanto"), and in June, 1983, Monsanto sold the Site to El
Dorado Chemical Company ("EDC"). EDC was acquired by the Company in 1984.
Under the agreement with Monsanto, Monsanto agreed to indemnify EDC for any
claim which is suffered, incurred or arises due solely out of Monsanto's
disposal of chemical or chemical byproducts prior to acquisition of the Site
by EDC from Monsanto or the use by Monsanto of any substance prior to the date
EDC acquired the Site from Monsanto which is subsequently determined to be
deleterious or dangerous to the public's health, safety or welfare. Under the
agreement with Monsanto, the indemnification is not assignable to a party to
which EDC transfers the Site without the prior written consent of Monsanto,
except to any company 100% of the voting stock of which is owned or controlled
directly or indirectly by EDC. Although EDC has operated the Site since
acquisition from Monsanto in 1983, in 1988, EDC transferred ownership of the
Site to the Company, which in turn transferred title to a subsidiary of the
Company. All of the outstanding stock of EDC and such subsidiary are,
directly or indirectly, wholly owned by the Company. Although no consent was
obtained from Monsanto when EDC transferred ownership of the Site to its
affiliated company to assign the Monsanto indemnification, if such a consent
was required under the agreement with Monsanto, the Monsanto indemnification
remains applicable to EDC. Recently, the Company's Chemical Business was
advised that the Site had been placed in the Environmental Protection Agency's
("EPA") data based tracking system (the "System"). The System maintains an
inventory of sites in the United States where it is known or suspected that a
release of hazardous waste has occurred. Notwithstanding inclusion in the
System, EPA regulations recognize that such does not represent a determination
of liability or a finding that any response action will be necessary. Over
36,000 sites in the United States are presently listed in the System. If a
site is placed in the System, EPA regulations required that the government or
its agent perform a preliminary assessment of the site. If the preliminary
assessment determines that there has been a release, or that there is
suspected to have occurred a release, at the site of certain types of
contamination, the EPA will perform a site investigation. Pursuant to such
regulations, the State of Arkansas performed such preliminary assessment for
the EPA. The preliminary assessment report prepared by the State of Arkansas,
dated September 30, 1992, regarding the Site states, in part that a release of
certain types of contaminants is suspected to have occurred at the Site. It
is anticipated that the EPA will, at some future date, perform a site
inspection at the Site, which inspection will usually involve the gathering of
additional data including environmental sampling of the Site. After
conducting the site inspection, the regulations provide that the EPA may
determine that: (i) the Site does not warrant further involvement in the
evaluation process, or (ii) that further study of the Site is warranted to
determine what appropriate action is to be taken in response to a release, if
any, of contaminants at the Site or whether such release, if any, justifies
the Site being placed on the National Priorities List. Being placed in the
System will generally be the first step in the EPA's determination as to
whether a site will be placed on the National Priorities List. After the EPA
completes its site inspection and evaluates other information, the EPA will
then assess a site using the Hazard Ranking System to ascertain whether a site
poses a sufficient risk to human health or the environment to be proposed for
the National Priorities List. There are approximately 1,200 sites in the
United States presently listed on the National Priorities List. The Company
has been advised that there have occurred certain releases of contaminants at
the Site. However, the Company does not believe that such releases should
warrant the Site being placed on the National Priorities List, but there are
no assurances to that effect. As a result of certain releases of contaminants
at the Site, the Company's subsidiary will be subject to enforcement action,
which will include certain civil penalties. On July 18, 1994, the Company's
subsidiary received from the State of Arkansas a report of multimedia
inspection of the Site (the "Report"). The Report contains findings of
violations of certain environmental laws and requests the Company's subsidiary
to conduct further investigations to better determine the compliance status
and the extent of releases at the Site. The Company's subsidiary has been
advised that the State of Arkansas is currently preparing an administrative
consent agreement to outline specific activities necessary to bring the Site
into compliance and to remediate identified releases. While the Company is at
this time unable to determine the ultimate cost of compliance with the
expected administrative consent agreement, the Company has determined the
subsidiary's cost to be at least $400,000; therefore, the Company has included
a provision for environmental costs of $400,000 in the results of operations
for the six (6) month and three (3) month periods ended June 30, 1994. Based
on information presently available, the Company does not believe, as of the
date of this report, that compliance with the administrative consent
agreement, or the assessment of penalties, or having the facility placed in
the System should have a material adverse effect on the Company, the Company's
subsidiary or the Company's financial condition; however, there are no
assurances to that effect.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits. The Company has included the following
exhibits in this report:
4.01 Seventeenth Amendment to Loan Agreement, dated May 25, 1994,
among Congress, the Company, and certain subsidiaries of the
Company.
4.02 Eighteenth Amendment to Loan Agreement, dated May 20, 1994
among Congress, the Company, and certain subsidiaries of the
Company.
4.03 Nineteenth Amendment to Loan Agreement, dated June 29, 1994,
among Congress, the Company, and certain subsidiaries of the
Company.
4.04 Modification Agreement dated June 23, 1994 to agreement
between Prime Financial Corporation, the Company and Bank IV, N.A.
11.1 Statement Re: Computation of Earnings Per Share.
15.1 Letter Re: Unaudited Interim Financial Information.
(b) Reports on Form 8K. During the quarter ended June 30, 1994, the
Company filed one (1) report on Form 8-K, dated June 10, 1994,
reporting in Item 2 thereof in connection with the Company's sale
of Equity Bank for Savings, F.A., which comprised the Company's
Financial Services Business. As part of such form 8-K, the
Company filed a pro forma unaudited condensed consolidated balance
sheet at March 31, 1994, a proforma unaudited condensed
consolidated statement of income for the year ended December 31,
1993, a proforma unaudited condensed consolidated statement of
income for the three months ended March 31, 1994, and March 31,
1993, and (iv) notes to such pro forma unaudited condensed
consolidated financial statements, with such being presented to
give effect to the sale of Equity Bank.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has caused the undersigned, duly-authorized, to sign this
report on its behalf on this 18th day of August, 1994.
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
Tony M. Shelby, Sr. Vice President
(Chief Financial Officer)
By: /s/ Jimmie D. Jones
Jimmie D. Jones, Vice President
Controller (Chief Accounting Officer)
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