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, 1994
------------------------------
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
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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 November 8, 1994 is 13,060,046 shares excluding 1,558,590 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, 1994, the condensed consolidated statements of operations for
the nine month and three month periods ended September 30, 1994 and 1993 and
the consolidated statements of cash flows for the nine month periods ended
September 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 nine months and three months ended
September 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 September 30, 1994 is unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1994 1993
(Note 1)
Current assets:
Cash $ 6,286 $ 2,781
Trade accounts receivable, net of allowance 49,396 49,533
Inventories:
Finished goods 33,285 26,940
Work in process 8,136 9,643
Raw materials 11,479 11,801
-------- --------
Total inventory 52,900 48,384
Supplies and prepaid items 6,522 5,459
-------- -------
Total current assets 115,104 106,157
Property, plant and equipment, at cost 127,730 113,795
Accumulated depreciation (58,520) (53,269)
-------- -------
Property, plant and equipment, net 69,210 60,526
Loan receivable, secured by real estate 13,968 13,968
Other assets 19,321 15,387
-------- -------
$ 217,603 $ 196,038
======== =======
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at September 30, 1994 is unaudited)
(Dollars in thousands)
LIABILITIES, PREFERRED AND COMMON STOCKS September 30, December 31,
AND OTHER STOCKHOLDERS' EQUITY 1994 1993
(Note 1)
Current liabilities:
Drafts payable $ 1,451 $ 1,220
Accounts payable 37,707 22,645
Accrued liabilities 5,910 6,752
Current portion of long-term debt 8,907 9,763
-------- -------
Total current liabilities 53,975 40,380
Long-term debt 66,714 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; 1,610 shares
issued and outstanding (1,637 in 1993) 153 155
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 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,618,636 shares
issued (14,514,056 in 1993) 1,462 1,451
Capital in excess of par value 37,365 37,120
Retained earnings (deficit) 18,158 (7,541)
------- ------
104,985 79,030
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares
(none in 1993) 200 -
Common Stock, 1,403,935 shares
(840,085 in 1993) 8,024 4,159
Total non-redeemable preferred stock, common
stock and other stockholders' equity 96,761 74,871
$ 217,603 $ 196,038
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1994 and 1993
(Dollars in thousands, except per share amounts)
1994 1993
(Note 1)
Revenues:
Net sales $ 190,954 $ 177,798
Other income - net 3,281 3,685
194,235 181,483
Costs and expenses:
Cost of sales 149,131 132,991
Selling, general and administrative expense 35,584 30,489
Interest expense 5,081 5,778
Provision for environmental matter (Note 7) 400 -
Settlement of dispute - 1,767
------- -------
190,196 171,025
Income from continuing operations ------- -------
before provision for income taxes 4,039 10,458
Provision for income taxes 277 820
------- -------
Income from continuing operations 3,762 9,638
Income from discontinued operations, net
of income taxes (Notes 1 and 2) 584 1,201
Gain on sale of discontinued
operations (Note 2) 24,200 -
-------- --------
Net income $ 28,546 $ 10,839
======== =======
Net income applicable to common stock (Note 4) $ 26,110 $ 9,604
======== =======
Average common shares outstanding (Note 4):
Primary 14,275,885 13,058,718
Fully diluted 16,041,622 15,497,418
Earnings per common share (Note 4):
Primary:
Income from continuing operations $ 0.09 $ 0.64
======== ========
Net income $ 1.83 $ 0.74
======== ========
Fully diluted:
Income from continuing operations $ 0.09 $ 0.57
======== ========
Net income $ 1.68 $ 0.64
======== ========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1994 and 1993
(Dollars in thousands, except per share amounts)
1994 1993
(Note 1)
Revenues:
Net sales $ 58,689 $ 57,332
Other income - net 1,450 1,342
-------- ---------
60,139 58,674
Costs and expenses:
Cost of sales 46,454 43,878
Selling, general and administrative expense 12,988 11,136
Interest expense 1,688 1,608
-------- ---------
61,130 56,622
Income (loss) from continuing operations -------- ---------
before provision (credit) for income taxes (991) 2,052
Provision (credit) for income taxes (78) 183
-------- ---------
Income (loss) from continuing operations (913) 1,869
======== =========
Income from discontinued operations, net
of income taxes (Notes 1 and 2) - 555
-------- ---------
Net income (loss) $ (913) $ 2,424
======== =========
Net income (loss) applicable to common
stock (Note 4) $ (1,718) $ 1,616
======== =========
Average common shares outstanding (Note 4):
Primary 14,054,914 14,445,747
Fully diluted 14,054,914 15,121,431
Earnings per common share (Note 4):
Primary:
Income (loss) from continuing operations $ (0.12) $ 0.07
========= =========
Net income (loss) $ (0.12) $ 0.11
========= =========
Fully diluted:
Income (loss) from continuing operations $ (0.12) $ 0.07
========= =========
Net income (loss) $ (0.12) $ 0.11
========= =========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1994 and 1993
(Dollars in thousands)
1994 1993
--------- -------
(Note 1)
Cash flows from continuing operations:
Income from continuing operations $ 3,762 $ 9,638
Adjustments to reconcile income from
continuing operations to net cash
provided (used) by continuing operations:
Depreciation, depletion and amortization:
Property, plant and equipment 5,250 4,061
Other 715 633
Provision for possible losses:
Trade accounts receivable 391 172
Environmental matter 400 -
Gain of sales of assets (1,117) (1,710)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (253) (12,021)
Inventories (4,516) 4,605
Supplies and prepaid items (1,063) (2,482)
Other assets (5,584) (7,972)
Accounts payable 14,099 (374)
Accrued liabilities (1,241) (1,133)
-------- -------
Net cash provided (used) by
continuing operations 10,843 (6,583)
Cash flows from investing activities of
continuing operations:
Capital expenditures (12,090) (5,134)
Purchase of loans receivable (2,877) -
Proceeds from sales of real estate properties 4,071 5,687
Cash acquired in connection with acquisitions - 1,232
-------- -------
Net cash provided (used) by investing activities (10,896) 1,785
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Nine Months Ended September 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 $ (6,275) $(17,629)
Long-term and other borrowings 2,676 -
Net change in revolving loans 47,101 (6,231)
Net change in receivables previously
financed by discontinued operations (31,844) 956
Net change in drafts payable 231 (1,427)
Dividends paid (Note 6):
Preferred stocks (2,433) (1,110)
Common stock (414) (387)
Purchases of treasury stock (Note 6):
Preferred stock (200) -
Common Stock (3,865) -
Net proceeds from issuance of stock (Note 6):
Common 256 2,251
Preferred - 44,019
--------- ---------
Net cash provided by financing
activities of continuing operations 5,233 20,442
---------- ---------
Net increase in cash from
continuing operations 5,180 15,644
Net decrease in cash from
discontinued operations (1,675) (9,058)
--------- ---------
Net increase in cash from all
activities 3,505 6,586
Cash at beginning of period 2,781 1,115
-------- --------
Cash at end of period $ 6,286 $ 7,701
======== ========
(See accompanying notes)
Note 1: The accompanying financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries at September 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 operations for the nine
month and three month periods ended September 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 Acquisition 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 Acquisition Agreement or failure by the
Company to fulfill any agreement made by the Company in the Acquisition
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 September 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 nine months ended September
30, 1994 of $.3 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, as
applicable, 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 second quarter of 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 nine months ended September 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 - - - - 28,546 - 28,546
Conversion of 18 shares of
redeemable preferred stock
to common stock 2 - - 2 - - 2
Exercise of stock options
for cash 103 11 - 243 - - 254
Dividends declared:
Series B 12% preferred
stock ($9.00 per share) - - - - (180) - (180)
Redeemable preferred
stock ($10.00 per share) - - - - (16) - (16)
Common stock ($.03 per share) - - - - (414) - (414)
Series 2 preferred
stock ($2.44 per share) - - - - (2,237) - (2,237)
Purchases of treasury stock:
Common stock - - - - - (3,865) (3,865)
Series 2 preferred stock - - - - - (200) (200)
(1)
Balance at September 30, 1994 14,619 $1,462 $48,000 $37,365 $18,158 $(8,224) $ 96,761
====== ====== ======= ======= ======= ======= ========
(1)
Includes 1,403,935 shares of the Company's Common Stock held in
treasury. Excluding the 1,403,935 shares held in treasury, the outstanding
shares of the Company's Common Stock at September 30, 1994 were 13,214,701.
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 nine (9) month period
ended September 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
contends 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.
Note 8: Subsequent Events
A. On November 3, 1994, the Company received a commitment letter (the
"Commitment") from an asset based lending institution for an asset based
working capital revolver ("New Revolver") in an amount of approximately
$75 million for an initial term of three (3) years with multiple
thirteen (13) month renewal periods under certain conditions. The
facility being proposed, if completed, will be secured principally by
the Company's accounts receivables, inventory, general intangibles,
chattel paper and the capital stock of certain of the Company's
subsidiaries. The Commitment is subject to the negotiation of a
definitive agreement which will incorporate in more specific details the
general terms and conditions of the commitment. Management expects to
complete negotiations and have the New Revolver in place by the end of
the fourth quarter of 1994; however, there are no assurances that such
will happen. The Commitment proposes advance rates of 85% for eligible
receivables and 60% for eligible inventories other than work-in-process.
If the New Revolver is agreed to, along the terms presently being
negotiated, it is anticipated that the borrowing availability under the
line should be adequate to finance the current working capital
requirements of the Company and its subsidiaries.
B. On November 4, 1994 the Company entered into an agreement to purchase
eighty percent (80%) of the outstanding stock of a specialty sales
organization to enhance the marketing of the Company's air conditioning
products. The total purchase price to be paid by the Company is $4
million, payable $1.5 Million at closing and $500,000, plus interest at
7% on the unpaid purchase price, annually for five (5) years. The
Company expects to close this transaction in January, 1995 however,
there are no assurances that such closing will be completed on such
schedule.
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 September 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 September 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 nine months and three months ended September 30,
1994 and 1993 is detailed below.
Nine Months Three Months
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
(Unaudited)
Sales:
Chemical $103,859 $ 90,515 $ 31,136 $ 27,512
Environmental Control 52,977 51,465 17,727 17,900
Automotive Products 25,420 21,956 7,820 7,250
Industrial Products 8,698 13,862 2,006 4,670
------- ------- ------- -------
$190,954 $177,798 $ 58,689 $ 57,332
======= ======= ======= =======
Gross profit:
Chemical $ 20,479 $ 22,401 $ 5,304 $ 5,911
Environmental Control 13,439 11,209 4,658 3,783
Automotive Products 6,188 7,488 1,886 2,501
Industrial Products 1,717 3,709 387 1,259
------- ------- ------- -------
$ 41,823 $ 44,807 $ 12,235 $ 13,454
======= ======= ======= =======
Operating profit (loss):
Chemical $ 11,130 $ 15,549 $ 2,564 $ 3,605
Environmental Control 3,527 2,701 1,198 584
Automotive Products (678) 2,306 (553) 529
Industrial Products (2,103) 1,423 (1,400) 758
Other 2,181 2,037 998 414
------- ------- ------- -------
14,057 24,016 2,807 5,890
General corporate expenses (4,937) (7,780) (2,110) (2,230)
Interest expense (5,081) (5,778) (1,688) (1,608)
Income (loss) from continuing ------- ------- ------- -------
operations before
provision (credit) for
income taxes $ 4,039 $ 10,458 $ (991) $ 2,052
======= ======= ======= =======
RESULTS OF OPERATIONS
Nine months ended September 30, 1994 vs. Nine months ended September 30, 1993.
Revenues
Total revenues for the nine months ended September 30, 1994 and 1993
were $194.2 million and $181.5 million, respectively (an increase of $12.7
million). Interest and other income included in total revenues was $3.3
million in 1994, compared to $3.7 million for 1993. This decrease of $.4
million resulted primarily from insurance claim proceeds recorded in the first
quarter of 1993. Consolidated net sales included in total revenues for the
nine months ended September 30, 1994 were $191.0 million, compared to $177.8
million for the first nine months of 1993, an increase of $13.2 million. This
increase in sales resulted principally from; (i) increased sales in the
Chemical Business of $13.3 million, primarily due to favorable weather
conditions for seasonal fertilizer sales and the higher price of ammonia being
partially passed through to customers; (ii) increased sales in the
Environmental Control Business of $1.5 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 $3.6 million due
to an expanded customer base in 1994, and (iv) decreased sales in the
Industrial Products Business of $5.2 million, of which $4.3 million relates
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 as a percent of net sales was 21.9% for the first nine
months of 1994, compared to 25.2% for the first nine months of 1993. The
decline in the gross profit percentage was due primarily to higher cost of the
primary raw material (ammonia) in the Chemical Business. During the first
nine months of 1994 the average cost of ammonia was approximately 35.3% higher
than the average cost of ammonia during the first nine months of 1993. This
higher cost was not fully passed on to customers in the form of price
increases. Other factors which affected the gross profit percentage were
improved gross profit 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 nine months of 1993; and, decreased
sales to a foreign customer in the Industrial Products Business which carried
a high gross profit percentage.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 18.6% in the nine months ended September 30, 1994 and 17.1% in
the first nine months of 1993. This increase in SG&A as a percent of sales
was primarily due to: (i) decreased sales to a foreign customer in the
Industrial Products Business with no corresponding reduction in SG&A costs;
(ii) increased insurance costs in the Industrial Products Business resulting
from settlement of certain claims; (iii) costs incurred in the heat pump
segment of the Environmental Control Business related to acquisition of an OEM
contract with a large customer; and (iv) low provision for bad debt expenses
in 1993 in the Environmental Control Business compared to the provision in
1994. These factors were offset in part by a decrease in legal costs
resulting from settlement of the customs matter in the second quarter of 1993
and settlement of a dispute with one of the Company's insurors in the first
quarter of 1994, in addition to sales increases due to higher ammonia prices
in the Chemical Business with no corresponding increase in SG&A costs.
Interest Expense
Interest expense for the Company was approximately $5.1 million during
the nine months ended September 30, 1994 compared to approximately $5.8
million during the nine months ended September 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
$4.0 million in the first nine months of 1994 compared to $10.5 million in the
nine months ended September 30, 1993. The decreased profitability of $6.5
million was primarily due to lower gross profit realized on sales in the
Chemical Division due to unrecovered ammonia price increases in 1994 and
decreased profit of $1.3 million from 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 and $.4 million in increased insurance costs in 1994 in
the Industrial Products Business.
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 nine months ended September 30, 1994 and the nine months ended
September 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 nine months of 1994
compared to $1.2 million in the first nine 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 nine months ended
September 30, 1994.
Three months ended September 30, 1994 vs. Three months ended September 30,
1993.
Revenues
Total revenues for the three months ended September 30, 1994 and 1993
were $60.1 million and $58.7 million, respectively (an increase of $1.4
million). Interest and other income included in total revenues was
approximately $1.4 million in both periods. Consolidated net sales included
in total revenues for the three months ended September 30, 1994 were $58.7
million, compared to $57.3 million for the three months ended September 30,
1993, an increase of $1.4 million. This increase in sales resulted
principally from: (i) increased sales in the Chemical Business of $3.6
million, primarily due to the higher price of ammonia being partially passed
through to customers; and, improved sales of Total Energy Systems Limited
("TES") which was acquired in July, 1993; (ii) increased sales in the
Automotive Products Business of $.7 million due to an expanded customer base
in 1994, and (iii) decreased sales in the Industrial Products Business of $2.7
million, of which $1.9 million relates 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 as a percent of net sales was 20.8% for the third quarter
of 1994, compared to 23.5% for the third quarter of 1993. The decline in the
gross profit percentage was due primarily to higher cost of the primary raw
material (ammonia) in the Chemical Business. During the third quarter of 1994
the average cost of ammonia was approximately 65.1% higher than the average
cost of ammonia during the third quarter of 1993. This higher cost was not
fully passed on to customers in the form of price increases. Other factors
which affected the gross profit percentage were improved gross profit after
recovery from the effects of a strike in 1992 at the fan coil manufacturing
plant of the Environmental Control Business that was still being experienced
in the third quarter of 1993; and, decreased sales in 1994 to a foreign
customer which affected both the Industrial Products Business and the
Automotive Products Business.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 22.1% in the three months ended September 30, 1994 and 19.4% in
the three months ended September, 1993. This increase in SG&A as a percentage
of net sales was attributable to: (i) decreased sales to a foreign customer in
the Industrial Products Business with no corresponding reduction in
administrative costs; (ii) increased insurance costs in the Industrial
Products Business resulting from settlement of certain claims; and (iii)
start-up costs related to a new subsidiary in the Industrial Products
Business. These factors were offset in part by sales increases in the
Chemical Business due to partial recovery of higher ammonia prices with no
corresponding increase in SG&A.
Interest Expense
Interest expense for the Company was approximately $1.7 million during
the three months ended September 30, 1994 compared to approximately $1.6
million during the three months ended September 30, 1993. The increase
primarily resulted from higher average interest rates.
Income From Continuing Operations Before Taxes
The Company had a loss from continuing operations before income taxes of
$1.0 million in the third quarter of 1994 compared to income of $2.1 million
in the third quarter of 1993. The decreased profitability of $3.1 million was
primarily due to lower gross profit realized on sales in the Chemical
Division, decreased profit of $.5 million from the foreign sales contract and
increased insurance cost of the Industrial Products Business of approximately
$.4 million.
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 or credits for
income taxes for the three months ended September 30, 1994 and the three
months ended September 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 third quarter of 1993.
There was no income from discontinued operations in the third quarter of 1994
due to the sale of Equity Bank in the second quarter of 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 sold to Fourth
Financial Corporation ("Fourth Financial") Equity Bank for Savings, F.A.
("Equity Bank") pursuant to the Acquisition Agreement, whereby the Company
agreed to sell Equity Bank, which constituted the Financial Services Business
of the Company. 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 $91.1 million, and was subject to determination and adjustment
in accordance with the Acquisition Agreement. Of the approximately $91.1
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
$91.1 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
$97 million at September 30, 1994. The Company is also in the process of
finalizing a comprehensive new debt capitalization program. 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. On November 3, 1994, the Company
received a commitment letter (the "Commitment") from an asset based lending
institution for an asset based working capital revolver ("New Revolver") in an
amount of approximately $75 million for an initial term of three (3) years
with multiple thirteen (13) month renewal periods under certain conditions.
The facility being proposed, if completed, will be secured principally by the
Company's accounts receivables, inventory, general intangibles, chattel paper
and the capital stock of certain of the Company's subsidiaries. The
Commitment is subject to the negotiation of a definitive agreement which will
incorporate in more specific details the general terms and conditions of the
Commitment. Management expects to complete negotiations and have the New
Revolver in place by the end of the fourth quarter of 1994; however, there are
no assurances that such will happen. The Commitment proposes advance rates of
85% for eligible receivables and 60% for eligible inventories other than work-
in-process. If the New Revolver is agreed to, along the terms presently being
negotiated, it is anticipated that 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 proposed 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 September 30, 1994 were $27.5 million and the
availability for additional borrowings was $2.3 million. This line of
credit terminates as of December 31, 1994. The outstanding borrowings
at September 30, 1994 are classified as long-term debt based upon the
application of the proceeds from the New Revolver as discussed above.
(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 November 30, 1994, but the Company believes the
Agreement can be extended at that time to December 31, 1994 if the New
Revolver has not been completed, although there are no assurances to
that effect. At September 30, 1994, the availability based on eligible
collateral exceeded the credit line. Borrowings (including letters of
credit) under the Revolver outstanding at September 30, 1994, were $7.2
million which is classified as long-term debt based upon the application
of the proceeds from the New Revolver as discussed above. 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
September 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.
This revolving facility terminates as of November 30, 1994. The Company
believes that if it has not been able to complete the New Revolver by
December 31, 1994, it will be able to continue borrowing under the
revolver until December 31, 1994, although there are no assurances to
that effect. At September 30, 1994 the borrowing base was fully
borrowed and was classified as long-term debt based upon the application
of the proceeds from the New Revolver as discussed above. The accounts
receivable and inventory securing the revolving facility will be
released when 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 September 30, 1994 would be approximately $3.4 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 nine
months of 1994, after a net adjustment for non-cash income and expenses of
$5.6 million, was $10.8 million. The net cash provided by continuing
operating activities included the following changes in assets and liabilities:
(i) accounts receivable increased $0.3 million; (ii) accounts payable and
accrued liabilities increased $12.9 million; (iii) inventory increased $4.5
million; and, (iv) supplies and prepaid items and other assets increased $6.6
million. The increase in accounts receivable is due to higher sales in the
Chemical and Automotive Products businesses, offset by decreased accounts
receivable in the Environmental Control and Industrial Products businesses due
to improved collections. The increase in accounts payable and accrued
liabilities was due primarily to increased business activity in the Chemical
and Automotive Products businesses, in addition to increases in the Chemical
Business due to the higher cost of ammonia. The increase in inventory was due
to purchases made in the Automotive Products Business to take advantage of
favorable prices from certain vendors, increased ammonia cost in the Chemical
Business, and increases in inventory at the businesses acquired in 1993 (TES
Australia - July, 1993 and International Bearings, Inc. - December, 1993).
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, loans made
in connection with certain acquisition candidates, and an increase in costs
and earnings in excess of billings on the foreign sales contract. Financing
activities in the first nine months of 1994 included net borrowings of $43.7
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 $2.8 million and
treasury stock purchases of $4.1 million. Cash flows from investing
activities included capital expenditures for property, plant and equipment in
the Chemical Business of $9.9 million related to construction of an additional
nitric acid plant which began in 1993 in addition to normal capital
improvements, and capital expenditures of $1.3 million in the Environmental
Control Business primarily for acquisition of certain equipment to improve
productivity and enhance the manufacturing processes of this business. Cash
flows from investing activities also included the purchase of certain loans
receivable for $2.9 million in connection with the sale of Equity Bank and
proceeds from the sale of real estate properties acquired in connection with
the sale of Equity Bank of $4.1 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 and/or the New Revolver. 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 $16 million including $1.6 million for new nitric acid
railcars used to deliver the product to the customers. As previously
discussed in the "cash Flows" section of this report, as of September 30,
1994, the Company had incurred approximately $8.8 million of the estimated $16
million. The Company expects the plant and asset installation to be complete
and operational in early 1995.
On October 31, 1994, a subsidiary of the Company entered into a Loan and
Security Agreement with a lender whereby the lender agreed to provide
construction financing of approximately $14 million for the installation of
the Chemical Business' concentrated nitric acid plant and assets, discussed
above, to be secured by such plant and assets. Subject to certain conditions
being met, such construction financing may be converted to an eighty-four (84)
month term loan at the end of the construction period. The lender has also
agreed to provide approximately $1.6 million of financing for the purchase of
the nitric acid railcars discussed above and approximately $1.5 million
financing for a mixed acid facility which the Chemical Business plans to
construct and begin operations during the second half of 1995. The subsidiary
received the initial funding of $5 million in construction funds on November
7, 1994. The receipt by the subsidiary of the remaining construction funds is
dependent on, among other things, the Company completing negotiations and
funding of the New Revolver discussed above. As previously noted, the Company
believes that it will be successful in funding the New Revolver prior to
December 31, 1994, although there are no assurances that the Company will be
able to do so.
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 of the 2,000 outstanding shares 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 of $240,000 on this series of preferred stock for 1994. 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 of the approximate 1600 outstanding shares 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 dividend 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.
On August 19, 1994 the Company's Board of Directors declared a $.81 per share
quarterly cash dividend on each outstanding share of its Series 2 $3.25
convertible exchangeable class C Preferred Stock, paid September 15, 1994 to
stockholders of record on September 1, 1994. The Company expects to continue
the payment of such dividends on the dates that such are required to be paid
in the future.
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 - 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.
On November 4, 1994 the Company entered into an agreement to purchase
eighty percent (80%) of the outstanding stock of a specialty sales
organization to enhance the marketing of the Company's air conditioning
products. The total purchase price to be paid by the Company is $4 million,
payable $1.5 Million at closing and $500,000, plus interest at 7% on the
unpaid purchase price, annually for five (5) years. The Company expects to
close this transaction in January, 1995 however, there are no assurances that
such closing will be completed on such schedule.
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.
Subsequently, the Company has decided to discontinue negotiations relating to
the prospective customer located in the former Soviet Union. The Company
continues negotiations regarding the customer in Poland. The Company expects
to complete agreements which will include the sale of licenses, designs,
tooling, machinery, equipment, technical information, proprietary expertise ,
and technical services. The total sales price for the contract is expected to
be approximately $25 million. The project is subject to completion of a
definitive agreement between the foreign customer and the Company's
subsidiary. There are no assurances that a definitive contract with the
customer 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 September 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 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 September 30, 1994, the related
condensed consolidated statements of operations for the nine-month and three-
month periods ended September 30, 1994 and 1993, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 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 operations, 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.
November 9, 1994 /s/ 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 1 of
its Form 10-Q for the fiscal period ended June 30, 1994, which Item 1 is
incorporated by reference herein.
Item 4. Submission of Matters to a Vote of Security Holders
On August 18, 1994, the Company held its Annual Meeting of Stockholders
(the "Meeting"). At the Meeting, the following shares were entitled to vote
as a single class 13,580,191 shares of the Company's Common Stock, 20,000
shares of the Company's Series B Cumulative Convertible Preferred Stock, par
value $100, and 1,614.5 shares of the Company's Redeemable convertible
Preferred Stock, par value $100. At the Meeting, the stockholders elected or
approved the following:
1. The following three (3) directors were reelected as members of the Board
of Directors: Barry H. Golsen, David R. Goss and Jerome D. Shaffer M.D.
At the Meeting, (i) Mr. Golsen was reelected, with 12,562,298 shares
voting "For", 71,540 shares voting "Against" or to "withhold authority"
and zero shares abstaining and broker non-votes, (ii) Mr. Goss was
reelected, with 12,563,125 shares voting "For", 70,713 shares voting
"Against" or to "withhold authority", and zero shares abstaining and
broker non-votes, and (iii) Dr. Shaffer was reelected with 12,560,608
shares voting "For", 73,230 shares voting "Against" or to "withhold
authority" and zero shares abstaining and broker non-votes.
2. Reappointment of Ernst & Young as the Company's independent auditors for
1994. Such reappointment was approved, with 12,571,348 shares voting
"For", 52,713 shares voting "Against" or to "withhold authority" and
9,777 abstaining and broker non-votes.
Item 6. Exhibits and Reports on Form 8K
(a)
Exhibits. The Company has included the following exhibits in this
report:
4. Instruments defining the rights of security holders, including
indentures
4.01 Twentieth Amendment to Loan Agreement, dated August 23, 1994, among
Congress, the Company, and certain subsidiaries of the Company.
4.02 Twenty-first Amendment to Loan Agreement, dated September 16, 1994,
among Congress, the Company, and certain subsidiaries of the Company.
4.03 Twenty-second Amendment to Loan Agreement, dated October 13, 1994,
among Congress, the Company, and certain subsidiaries of the Company.
4.04 Twenty-third Amendment to Loan Agreement, dated October 24, 1994,
among Congress, the Company, and certain subsidiaries of the Company.
4.05 Amendment dated September 29, 1994 to the Amended and Restated
Secured Credit Agreement and the Second Amended and Restated Working
Capital Agreement, both dated as of January 21, 1992 among El Dorado
Chemical Company, Slurry Explosive Corporation, Connecticut Mutual Life
Insurance Company, C.M. Life Insurance Company Mutual and Household
Commercial Financial Services, Inc.
4.06 Second Amendment Agreement dated as of October 31, 1994 among El
Dorado Chemical Company, Slurry Explosive Corporation Household
Commercial Financial Services, Inc., Connecticut Mutual Life Insurance
Company Mutual and C.M. Life Insurance Company Mutual
10. Material Contracts
10.1 Loan and Security Agreement dated October 31, 1994 between DSN
Corporation and the CIT Group.
10.2 Commitment Letter dated November 3, 1994 between the Company and
certain subsidiaries of the Company and Bank America Business Credit,
Inc.
10.3 Stock Purchase Agreement dated November 4, 1994 between the
Company and the shareholders of a specialty sales organization.
11.1 Statement Re: Computation of Earnings Per Share.
15.1 Letter Re: Unaudited Interim Financial Information.
27 Financial Data Schedule
(b) Reports on Form 8K. During the quarter ended September 30, 1994, the
Company did not file any reports on Form 8-K.
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 14th day of November, 1994.
LSB INDUSTRIES, INC.
By:
Tony M. Shelby, Sr. Vice President
(Chief Financial Officer)
By:
Jimmie D. Jones, Vice President
Controller (Chief Accounting Officer)
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