FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1994
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1015226
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(State of Incorporation) (I.R.S. Employer
Identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(405) 235-4546
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, Par Value $.10 New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
(Facing Sheet Continued)
Securities Registered Pursuant to Section 12(g) of the Act:
$3.25 Convertible Exchangeable Class C Preferred Stock, Series 2.
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the Registrant has had
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days. YES X NO _____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 31, 1995, the aggregate market value of the 9,423,861 shares
of voting stock of the Registrant held by non-affiliates of the Company
equaled approximately $57,721,149 based on the closing sales price for the
Company's common stock as reported for that date. That amount does not
include (1) the 1,588 shares of Convertible Non-Cumulative Preferred Stock
(the "Non-Cumulative Preferred Stock") held by non-affiliates of the Company,
(2) the 20,000 shares of Series B 12% Convertible, Cumulative Preferred Stock
(the "Series B Preferred Stock"), and (3) the 915,000 shares of $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2, excluding 5,000
shares held in treasury (the "Series 2 Preferred Stock"). An active trading
market does not exist for the shares of Non-Cumulative Preferred Stock or the
Series B Preferred Stock . The shares of Series 2 Preferred Stock do not have
voting rights except under limited circumstances.
As of March 31, 1995, the Registrant had 13,044,922 shares of common
stock outstanding (excluding 1,575,594 shares of common stock held as
treasury stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
Page
Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 1
Chemical Business 1
Environmental Control Business 3
Automotive Products Business 5
Industrial Products Business 6
Employees 8
Research and Development 8
Environmental Compliance 8
Item 2. Properties
Chemical Business 9
Environmental Control Business 11
Automotive Products Business 11
Industrial Products Business 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 4A. Executive Officers of the Company 13
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 14
Stockholders 15
Dividends 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 19
Results of Operations 19
Liquidity and Capital Resources 22
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
PART III
Item 10. Directors and Executive Officers of the Company 28
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management37
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 43
PART I
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Item 1. BUSINESS
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General
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LSB Industries, Inc. (the "Company") was formed in 1968 as an Oklahoma
corporation, and in 1977 became a Delaware corporation. The Company is a
diversified holding company which is engaged, through its subsidiaries, in (i)
the manufacture and sale of chemical products for the explosives, agricultural
and industrial acids markets (the "Chemical Business"), (ii) the manufacture
and sale of a broad range of air handling and heat pump products for use in
commercial and residential air conditioning systems (the "Environmental
Control Business"), and (iii) the manufacture or purchase and sale of certain
automotive and industrial products, including automotive bearings and other
automotive replacement parts (the "Automotive Products Business") and the
manufacture, purchase and sale of machine tools (the "Industrial Products
Business"). In May, 1994, the Company sold its Financial Services Business,
which was comprised of Equity Bank for Savings F.A. ("Equity Bank") and
subsidiaries of Equity Bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 of Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K for a
brief discussion as to the terms of sale by the Company of its Financial
Services Business.
Segment Information and Foreign and Domestic Operations and Export Sales
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Schedules of the amounts of sales, operating profit and loss, and
identifiable assets attributable to each of the Company's lines of business
and of the amount of export sales of the Company in the aggregate and by major
geographic area for each of the Company's last three fiscal years appear in
Note 15 of the Notes to Consolidated Financial Statements included elsewhere
in this report.
A discussion of any risks attendant as a result of a foreign operation
or the importing of products from foreign countries appears below in the
discussion of each of the Company's business segments.
Chemical Business
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General:
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The Chemical Business manufactures and sells the following types of
chemical products to the mining, agricultural and other industries: sulfuric
acid, concentrated nitric acid, prilled ammonium nitrate fertilizer and
ammonium nitrate-based blasting products. In addition, the Chemical Business
markets emulsions that it purchases from others for resale to the mining
industry.
In addition to its existing facilities, the Company is in the process of
constructing a plant in Wilmington, N.C. to allow the Company to produce a
mixed acid product for sale. The Company expects this plant to become
operational during the third quarter of 1995.
For 1994, approximately 30% of the sales of the Chemical Business
consisted of sales of fertilizer and related chemical products for
agricultural purposes, which represented approximately 16% of the Company's
1994 consolidated sales, and 49% consisted of sales of ammonium nitrate and
other chemical-based blasting products for the mining industry, which
represented approximately 26% of the Company's 1994 consolidated sales. The
Chemical Business accounted for approximately 54% and 49% of the Company's
1994 and 1993 consolidated sales, respectively.
Seasonality:
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The Company believes that the only seasonal products of the Chemical
Business are fertilizer and related chemical products sold to the agricultural
industry. The selling seasons for those products generally occur during the
spring and fall planting seasons, i.e., from February through May and from
September through November, which causes the Company to build up inventory
prior thereto. In addition, sales to the agricultural markets depend upon
weather conditions and other circumstances beyond the control of the Company.
Raw Materials:
-------------
Ammonia represents an essential component in the production of most of
the products of the Chemical Business, and the price of those products
generally fluctuates with the price of ammonia. The Company has a contract
with a supplier of ammonia pursuant to which the supplier has agreed to supply
the ammonia requirements of the Chemical Business on terms the Company
considers favorable.
Substantial world-wide per ton price increases for ammonia were incurred
during 1994 by most, if not all, users of ammonia that are not also
manufacturers of ammonia. During 1994, the Company's Chemical Business was
not able to recover a substantial portion of these cost increases by way of
price increases on its products due to market conditions. As a result, such
inability to increase prices for the Chemical Business' products had a
substantial negative impact on the Company's 1994 earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
a discussion of such negative impact. Beginning in the latter part of 1994
and through the first few months of 1995, the Company's Chemical Business has
been able to increase its sales prices to cover a substantial portion of the
price increases relating to the cost of ammonia that were incurred during
1994. However, the Company is not able to predict, at this time, what the
effect of continuing ammonia price increases during 1995, if any, will have on
the Company and the Company's earnings.
The Company believes that it could obtain ammonia from other sources in
the event of a termination of the above referenced contract, but such may not
be obtainable on as favorable terms as presently available to the Chemical
Business under its present agreement.
Marketing and Distribution:
--------------------------
The Chemical Business sells and markets its products to wholesalers and
directly through its own sales force using thirty-three distribution centers.
See "Properties". The Chemical Business sells low density prilled ammonium
nitrate-based explosives primarily to the surface coal mining industry through
nine company-owned distribution centers most of which are located in close
proximity to the customers' surface mines in the coal producing states of
Kentucky, Indiana, Missouri and Illinois, and through four company-owned
distribution centers in Australia located in the proximity of the mines. In
addition, sales of explosives are made on a wholesale basis to independent
wholesalers and other explosives companies.
The Chemical Business sells high density prilled ammonium nitrate for
use in agricultural markets in geographical areas within a freight-logical
distance from its El Dorado, Arkansas, manufacturing plant, primarily Texas,
Oklahoma, Arkansas and Louisiana. The products are sold through 20
distribution centers, with 15 centers located in Northern and Eastern Texas,
two centers located in Missouri and three centers located in Tennessee. The
Chemical Business also sells its agricultural products directly to wholesale
customers.
The Chemical Business sells its industrial acids, consisting primarily
of high grade concentrated nitric acid and sulfuric acid, primarily to the
food, paper, chemical and electronics industries. Concentrated nitric acid is
a special grade of nitric acid used in the manufacture of pharmaceutical,
explosives, and other chemical products.
Patents:
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The Company believes that the Chemical Business does not depend upon any
patent or license; however, the Chemical Business does own certain patents
that it considers important in connection with the manufacture of certain
blasting agents and high explosives. These patents expire through 1997.
Regulatory Matters:
------------------
Each of the Chemical Business' blasting product distribution centers are
licensed by the Bureau of Alcohol, Tobacco and Firearms in order to
manufacture and distribute blasting products. The Chemical Business also must
comply with substantial governmental regulations dealing with environmental
matters. See "PROPERTIES - Chemical Business" for a discussion as to an
environmental issue regarding the Company's El Dorado, Arkansas, manufacturing
facility.
Competition:
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The Chemical Business competes with other chemical companies, in its
markets, many of whom have greater financial resources than the Company. The
Company believes that the Chemical Business is competitive as to price,
service, warranty and product performance. The Company believes that the
Chemical Business' contract with its supplier of ammonia, which the Company
believes allows the Chemical Business to purchase ammonia at a favorable price
compared to the world market price of ammonia, allows the Chemical Business
the ability to favorably compete with its competitors as to price. The
Company believes that the Chemical Business is a leader in the Texas ammonium
nitrate market and one of the leading producers of concentrated nitric acid in
the United States for third party sales.
Environmental Control Business
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General:
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The Company's Environmental Control Business manufactures and sells a
broad range of fan coil, air handling, air conditioning, heating, heat pump
and dehumidification products targeted to both new building construction and
renovation, as well as industrial application. The fan coil products consist
of in-room terminal air distribution equipment utilizing air forced over a fin
tube heat exchanger which, when connected to centralized equipment
manufactured by other companies, creates a centralized air conditioning and
heating system that permits individual room temperature control. The heat
pump products manufactured by the Environmental Control Business consist of
heat-recovery, water-to-air heat pumps that include a self-contained
refrigeration circuit and blower, which allow the unit to heat or cool the
space it serves when supplied with recirculating water at mild temperatures.
The Environmental Control Business accounted for approximately 29% and 30% of
the Company's 1994 and 1993 consolidated sales, respectively, with fan coil
products accounting for approximately 16% and heat pump products accounting
for approximately 13%, respectively, of the Company's 1994 consolidated sales.
Production and Backlog:
----------------------
Most of the Environmental Control Business' production of the above-
described products occurs on a specific order basis. The Company manufactures
the units in many sizes, as required by the purchaser, to fit the space and
capacity requirements of hotels, motels, schools, hospitals, apartment
buildings, office buildings and other commercial or residential structures.
As of December 31, 1994, the backlog of confirmed orders for the Environmental
Control Business was approximately $24.2 million, as compared to approximately
$17 million as of December 31, 1993. A customer generally has the right to
cancel an order prior to the order being released to production. Past
experience indicates that customers generally do not cancel orders after the
Company receives them. As of December 31, 1994, the Company had released
approximately $21.4 million of backlog orders in the Environmental Control
Business to production, all of which are expected to be filled by December 31,
1995.
Distribution:
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The Environmental Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors. The Company's
sales to mechanical contractors primarily occur through independent
manufacturer's representatives, who also represent complimentary product lines
not manufactured by the Company. Original equipment manufacturers generally
consist of other air conditioning and heating equipment manufacturers who
resell under their own brand name the products purchased from the
Environmental Control Business as a separate item in competition with the
Company or as part of a package with other air conditioning-heating equipment
products to form a total air conditioning system which they then sell to
mechanical contractors or end-users for commercial application. Sales to
original equipment manufacturers accounted for approximately 36% of the sales
of the Environmental Control Business in 1994 and approximately 10% of the
Company's 1994 consolidated sales.
Construction Industry:
---------------------
Historically, the Environmental Control Business has depended primarily
on the commercial construction industry, including new construction and the
remodeling and renovation of older buildings, however, this Business' recent
growth has been in the residential area.
Raw Materials:
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Numerous domestic and foreign sources exist for the materials used by
the Environmental Control Business, which materials include aluminum, copper,
steel, electric motors and compressors. The Company does not expect to have
any difficulties in obtaining any necessary materials for the Environmental
Control Business.
Competition:
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The Environmental Control Business competes with approximately eight
companies, several of whom are also customers of the Company. Some of the
competitors have greater financial resources than the Company. The Company
believes that the Environmental Control Business manufactures a broader line
of fan coil and water source heat pump products than any other manufacturer in
the United States, and, that it is competitive as to price, service, warranty
and product performance.
Automotive Products Business
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General:
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The Automotive Products Business is primarily engaged in the manufacture
and sale of a line of anti-friction bearings, which includes straight-thrust
and radial-thrust ball bearings, angular contact ball bearings, and certain
other automotive replacement parts. These products are used in automobiles,
trucks, trailers, tractors, farm and industrial machinery, and other
equipment. The Automotive Products Business accounted for approximately 13%
and 12% of the Company's 1994 and 1993 sales, respectively. In 1994, the
Automotive Products Business manufactured approximately 47% of the products it
sold and approximately 49% in 1993, and purchased the balance of its products
from other sources, including foreign sources.
Distribution and Market:
-----------------------
The automotive, truck and agricultural equipment replacement markets
serve as the principal markets for the Automotive Products Business. This
business sells its products domestically and for export, principally through
independent manufacturers' representatives who also sell other automotive
products. Those manufacturers' representatives sell to retailers (including
major chain stores), wholesalers, distributors and jobbers. The Automotive
Products Business also sells its products directly to original equipment
manufacturers and certain major chain stores.
Inventory:
---------
The Company generally produces or purchases the products sold by the
Automotive Products Business in quantities based on a general sales forecast,
rather than on specific orders from customers. The Company fills most orders
for the automotive replacement market from inventory. The Company generally
produces or purchases bearings for original equipment manufacturers after
receiving an order from the manufacturer.
Raw Materials:
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The principal materials that the Automotive Products Business needs to
produce its products consist of high alloy steel tubing, steel bars, flat
strip coil steel and bearing components produced to specifications. The
Company acquires those materials from a variety of domestic and foreign
suppliers at competitive prices. The Company does not anticipate having any
difficulty in obtaining those materials in the near future.
Competition:
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The Automotive Products Business engages in a highly competitive
business. Competitors include other domestic and foreign bearing
manufacturers, which sell in the original equipment and replacement markets.
Many of those manufacturers have greater financial resources than the Company.
Industrial Products Business
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General:
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The Industrial Products Business manufactures, purchases and markets a
proprietary line of machine tools. The current line of machine tools
distributed by the Industrial Products Business includes milling, drilling,
turning, fabricating and grinding machines. The Industrial Products Business
purchases most of the machine tools marketed by it from foreign companies,
which manufacture the machine tools to the Company's specifications. This
Business manufactures CNC bed mills and electrical control panels for machine
tools.
Distribution and Market:
-----------------------
The Industrial Products Business distributes its machine tools in the
United States, Mexico, Canada and certain other foreign markets and
distributes its industrial supplies principally in Oklahoma. The Industrial
Products Business sells and distributes its products through its own sales
personnel, who call directly on end users. The Industrial Products Business
also sells its machine tools through independent machine tool dealers
throughout the United States and Canada, who purchase the machine tools for
resale to end users. The principal markets for machine tools, other than
independent machine tool dealers, consist of manufacturing and metal working
companies, maintenance facilities, utilities and schools.
Customer:
--------
The Industrial Products Business does not depend on any single customer,
or a few customers, the loss of any one or more of which would have a material
adverse effect on the Industrial Products Business. A significant increase in
the revenues of the Industrial Products Business occurred during 1992 and 1993
as a result of an agreement with a foreign company ("Buyer"), dated July 6,
1992, to supply the Buyer with equipment, technology and technical services to
manufacture certain types of automotive bearing products. The Company has
shipped to the Buyer all machinery and equipment and the tooling and designs
required under the agreement. The agreement provides for a total contract
amount of approximately $56.0 million, with $12.0 million of the contract
amount to be retained by the Buyer as the Company's subsidiary's equity
participation in the Buyer. The Company's subsidiary exchanged its rights to
the equity interest in the Buyer with a foreign nonaffiliated company
("Purchaser of the Interest") for $12 million in notes. The Company has been
advised that the Buyer 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 Buyer will only be payable when, as and if the Purchaser of
the Interest collects from the Buyer 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 Buyer. 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 balance of approximately $44.0 million has been or will be paid to
the Company's subsidiary as follows: (i) approximately $13.9 million was paid
through December 31, 1994, and (ii) the balance of approximately $30.1 million
payable in equal quarterly installments over a ten (10) year period, plus
interest. Under the agreement, the Company's subsidiary will use its best
efforts to purchase approximately $14.5 million of bearing products from the
Buyer each year over a period of ten (10) years; provided, however, that the
Company's subsidiary is not required to purchase more product from the Buyer
in any one (1) year than the amount of tapered bearings the Company's
subsidiary is able to sell in its market. However, the Company's subsidiary
has negotiated a preliminary oral agreement in principle which, if completed,
would change the method of payment of the balance due and the subsidiary's
obligation to buy products from the Buyer as discussed below. The Company
will recognize revenues and profits on the sale of equipment and technology
over the term of the agreement as they are realized. The revenue and profits
realized during the delivery and installation period have been recognized on a
percentage of completion basis. During the years ended December 31, 1994 and
1993, the Company recorded sales of approximately $1.8 million and $7.5
million, respectively, in connection with the agreement. The percentage of
completion is determined by relating the productive costs incurred to date to
the total productive costs estimated to complete the performance under the
contract for delivery and installation. The Company presently meets all of
its obligations under the contract which generally coincides with the payout
term.
In March 1995, the subsidiary negotiated a preliminary oral agreement in
principle with a syndication of foreign lenders whereby the lenders will
acquire, without recourse to the Company, as such subsidiary, approximately
$24.0 million of the unpaid contract amount billable by the Company. Under
the oral agreement, the Company expects to receive approximately $4.0 million
at closing, net of fees, and a commitment from the Buyer to provide
approximately $16.0 million of bearing products. Upon completion of the oral
agreement with the foreign lenders, the Company and the Buyer will amend their
agreement to exchange the then remaining unpaid contract amount from the Buyer
(approximately $5.0 million) for an amendment to the Buyer's commitment to
provide additional bearing products approximating $5.0 million, thereby making
the Buyer's commitment to provide bearing products to the Company
approximately $21.0 million. The Company is to receive such bearing products
when and if the Buyer repays the debt discussed above which the foreign
lenders will acquire. The commitment of the Buyer to provide the Company
$21.0 million in bearing products, at no additional cost, is to be further
increased to include interest at 7 1/2% per annum until such commitment has
been fulfilled by the delivery of bearing products to the Company, which
delivery is not expected to begin prior to the year 2000. In connection with
this agreement, the Company would also amend its purchase commitment from a
best efforts arrangement to a firm commitment to purchase approximately $6.0
million of bearing products over each of the next five years, at predetermined
prices, not in excess of market prices, subject to the Buyer's ability to
deliver product to the Company and the product meeting quality standards. The
agreement in principle is subject to, among other things, finalization of
definitive agreements. There is no assurnace that the agreement in principle
will be finalized. See "MANAGEMENT'S DISCUSSION AND ANALYSIS" and Note 6 of
Notes to Consolidated Financial Statements for further discussion of this
agreement.
Foreign Risk:
------------
By purchasing a majority of the machine tools from foreign
manufacturers, the Industrial Products Business must bear certain import
duties and international economic risks, such as currency fluctuations and
exchange controls, and other risks from political upheavals and changes in
United States or other countries' trade policies. Most of the current
contracts for the purchase of foreign-made machine tools provide for payment
in United States dollars. Circumstances beyond the control of the Company
could eliminate or seriously curtail the supply of machine tools from any one
or all of the foreign countries involved.
Competition:
-----------
The Industrial Products Business competes with manufacturers and other
distributors of machine tools many of whom have greater financial resources
than the Company. The Company's machine tool business generally is
competitive as to price, warranty and service, and maintains personnel to
install and service machine tools.
Employees
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As of December 31, 1994, the Company employed 1,446 persons. As of that
date, (a) the Environmental Control Business employed 550 persons, (none of
which is represented by a union),(b) the Automotive Products Business employed
255 persons, with 91 represented by unions under an agreement that expired in
August, 1990, and, (c) the Chemical Business employed 447 persons, with 113
represented by unions under agreements expiring in August, 1995.
The union contract within the Automotive Product Business expired on
August 1, 1990, and the employees within that business have continued to work
without a contract. The employees did not strike in 1990 when their contract
expired, and, as of the date of this report, there are no indications that the
employees are considering striking. There are no pending negotiations in
connection with the expired union contract. The Company does not believe such
employees will strike within the foreseeable future, but there are no
assurances to that effect.
Research and Development
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The Company incurred approximately $606,000 in 1994, $788,000 in 1993,
and $684,000 in 1992 on research and development relating to the development
of new products or the improvement of existing products. All expenditures for
research and development related to the development of new products and
improvements are sponsored by the Company.
Environmental Compliance
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The Company does not anticipate, based on facts presently known to the
Company, that it will be required during 1995 to incur any material capital
expenditures for environmental control facilities relating to its industrial
businesses. However, a subsidiary of the Company in its Automotive Products
Business has been notified that it is a potentially responsible party as a
result of having been a generator of waste disposed of at the Mosley site (as
defined in the first paragraph of Item 3 of this report). In addition, a
subsidiary of the Company in its Chemical Business has been notified that its
chemical manufacturing facility located in El Dorado, Arkansas, has been
placed into the Environmental Protection Agency's data based tracking system
and that there has occurred certain releases of contaminates at it's El
Dorado, Arkansas facility, and, as a result of such releases, the Chemical
Business will be required to perform certain activities to remediate the
contamination at the facility. See Item 2 "PROPERTIES - Chemical Business"
and Item 3 "LEGAL PROCEEDINGS" for a discussion of the environmental issues at
the El Dorado, Arkansas facility. While the Company is, at this time, unable
to determine the ultimate cost of remediation as a result of contamination of
the site in El Dorado, Arkansas, the Company has included a provision for
environmental costs of $450,000 in its results of operations for 1994. While
there are no assurances, based on the information presently available to the
Company, the Company does not believe that the Mosley Site, as discussed in
Item 3 "LEGAL PROCEEDINGS", or the El Dorado, Arkansas facility being placed
in the Environmental Protection Agency's data based tracking system or any
response to contamination at such El Dorado, Arkansas facility due to any
release of contamination of such facility or the assessment of any penalty as
a result thereof, should have a material adverse effect on the Company.
Item 2. PROPERTIES
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Chemical Business
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The Chemical Business primarily conducts manufacturing operations (i) on
150 acres of a 1400 acre tract of land located in El Dorado, Arkansas (the
"Site") and (ii) on 10 acres of land in a facility of approximately 60,000
square feet located in Hallowell, Kansas ("Kansas facility").
As of December 31, 1994, the manufacturing facility at the Site was
being utilized to the extent of approximately 88%, based on the continuous
operation of those facilities. As of December 31, 1994, manufacturing
operations at the Kansas facility were being utilized to the extent of
approximately 80% based on two 8 hour shifts per day and a 5 day week.
In addition, the Chemical Business distributes its products through 33
agricultural and blasting distribution centers. The Chemical Business
currently operates 20 agricultural distribution centers, with 15 of the
centers located in Texas ( 12 of which the Company owns and 3 of which it
leases); 2 centers located in Missouri (1 of which the Company owns and 1 of
which it leases); and 3 centers located in Tennessee (all of which the Company
owns). The Chemical Business currently operates 9 domestic explosives
distribution centers located in Bonne Terre, Missouri (owned); Central City,
Owensboro, Combs, and Pilgrim, Kentucky (leased); Midland, Indiana (leased);
Rawlins, Wyoming (leased); Carlsbad, New Mexico (leased); and Pryor, Oklahoma
(leased). The Chemical Business also has explosives distribution centers in
Australia located at: Peaks Down; Kalgoorlie; Karratha; and, Hunter Valley
(all leased).
The Chemical Business also operates its business from buildings located
on an approximate four acre site on the perimeter of the JayHawk Industrial
site in southeastern Kansas, and a research and testing facility comprising of
a one square mile tract of land including buildings and equipment thereon also
located in southeastern Kansas which it owns.
All facilities owned by the Chemical Business are subject to mortgages.
During November, 1993, the Company's Chemical Business acquired assets
for an additional concentrated nitric acid plant and related assets ("Plant
and Assets") for approximately $1.9 million. During 1994 and early 1995 the
Chemical Business spent approximately $15.1 million to install such Plant and
Assets at its manufacturing plant facility located in El Dorado, Arkansas.
The plant is scheduled to be operational in May, 1995. As a result of such
expansion and the present utilization of the Chemical Business' manufacturing
facilities, the Company believes that it's present manufacturing facilities
are suitable for it's current operations.
Since the 1940's, 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 chemicals 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 of
which 100% of the voting stock is owned or controlled, directly or indirectly,
by EDC. Although EDC has operated the Site since its acquisition from
Monsanto in 1983, in 1988, EDC transferred ownership of the Site to the
Company, which in turn transferred title to another subsidiary. All of the
outstanding stock of EDC is directly and wholly owned by the Company.
Although no consent was obtained from Monsanto to assign the Monsanto
indemnification when EDC transferred ownership of the Site to its affiliated
company, if such a consent was required under the agreement with Monsanto, the
Company believes that the Monsanto indemnification remains applicable to EDC.
In 1993, 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's
regulations recognize that such does not represent a determination of
liability or a finding that any response action will be necessary. Over
12,000 sites in the United States are presently listed in the System. If a
site is placed in the System, EPA regulations require 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, on behalf of the EPA, performed such
preliminary assessment. The preliminary assessment report prepared by the
State of Arkansas, dated September 30, 1992, stated 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. Such inspections 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 the Site using the Hazard Ranking System to ascertain whether the
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. See Item 1 "BUSINESS - Environmental
Compliance" and Item 3 "LEGAL PROCEEDINGS".
Environmental Control Business
- ------------------------------
The Environmental Control Business conducts its fan coil manufacturing
operations in various facilities, including two adjacent facilities located in
Oklahoma City, Oklahoma, consisting of approximately 240,000 square feet owned
by the Company. As of December 31, 1994, the Environmental Control Business
was using the productive capacity of the above-referenced facilities to the
extent of approximately 93%, based on one, eight-hour shift per day and a
five-day week.
The Environmental Control Business manufactures most of its heat pump
products in a leased 230,000 square foot facility in Oklahoma City, Oklahoma.
The lease carries a five year term beginning March 1, 1988, with options to
renew for five additional five year periods, and currently provides for the
payment of rent in the amount of $52,389 per month. The Company also has an
option to acquire the facility at any time in return for the assumption of the
then outstanding balance of the lessor's mortgage. As of December 31, 1994,
the productive capacity of this manufacturing operation was being utilized to
the extent of approximately 71%, based on one, eight-hour shift per day and a
five-day week.
The Environmental Control Business owns a 60,000 square foot facility in
Juarez, Mexico, which it leases to a third party tenant. The Environmental
Control Business also leases sales offices in Los Angeles and Chicago.
All of the properties utilized by the Environmental Control Business are
considered by Company management to be suitable and adequate to meet the
current needs of that business.
Automotive Products Business
- ----------------------------
The Automotive Products Business conducts its operations in plant
facilities principally located in Oklahoma City, Oklahoma which are considered
by Company management to be suitable and adequate to meet its needs. One of
the manufacturing facilities occupies a building owned by the Company, subject
to mortgages, totaling approximately 178,000 square feet. The Automotive
Products Business also uses additional manufacturing facilities located in
Oklahoma City, Oklahoma, owned and leased by the Company totalling
approximately 102,000 square feet. During 1994, the Automotive Products
Business under-utilized the productive capacity of its facilities.
In December 1993, International Bearings, Inc. ("IBI") of Memphis,
Tennessee, was acquired as a wholly owned subsidiary of the Company operating
as a separate entity within the Automotive Products Division. IBI is a
warehouse unit operating from a Company owned warehouse of approximately
45,000 square feet in an industrial park section of Memphis, TN.
Industrial Products Business
- ----------------------------
The Company owns several buildings, some of which are subject to
mortgages, totaling approximately 691,000 square feet located in Oklahoma
City, Oklahoma, Tulsa, Oklahoma, and Middletown, New York, which the
Industrial Products Business uses for showrooms, offices, warehouse and
manufacturing facilities. The Company also owns real property located near or
adjacent to the above-referenced buildings, which the Industrial Products
Business uses for parking and storage.
The Industrial Products Business also leases a facility from an entity
owned by the immediate family of the Company's President, which facility
occupies approximately seven acres in Oklahoma City, Oklahoma, with buildings
having approximately 44,000 square feet. The Industrial Products Business
also leases an office in Europe to coordinate its European activities.
All of the properties utilized by the Industrial Products Business are
considered by Company management to be suitable and adequate to meet the needs
of the Industrial Products Business.
Item 3. LEGAL PROCEEDINGS
- --------------------------
In December 1987, the United States Environmental Protection Agency
("EPA") notified L&S Bearing Company ("L&S") of potential responsibility for
releases of hazardous substances at the Mosley Road Landfill in Oklahoma ("the
Mosley Site"). The recipients of such notification were: a) generators of
industrial waste allegedly sent to the Mosley Site (including L&S), and b) the
current owner/operator of the Mosley Site, Waste Management of Oklahoma
("WMO") (collectively, "PRPs"). Between February 20, and August 24, 1976, the
Mosley Site was authorized to accept industrial hazardous waste. During this
time, a number of industrial waste shipments allegedly were transported from
L&S to the Mosley Site. In February 1990, EPA added the Mosley Site to the
National Priorities List. WMO and the U.S. Air Force conducted the remedial
investigation ("RI") and feasibility study ("FS"). It is too early to
evaluate the probability of a favorable or unfavorable outcome of the matter
for L&S. However, it is the PRP Group's position that WMO as the Mosley Site
owner and operator should be responsible for at least half of total liability
at the Mosley Site, and that 75% to 80% of the remaining liability, if
allocated on a volumetric basis, should be assignable to the U.S. Air Force.
The Company is unable at this time to estimate the amount of liability, if
any, since the estimated costs of clean-up of the Mosley Site are continuing
to change and the percentage of the total waste which were alleged to have
been contributed to the Mosley Site by L&S has not yet been determined. If an
action is brought against the Company in this matter, the Company intends to
vigorously defend itself and assert the above position. Although there are no
assurances to this effect, the Company is exploring whether it has insurance
coverage for this claim. Insurance coverage, however, is not considered since
it is not known whether insurance coverage will be provided in connection with
this matter. The Company does not believe that the ultimate outcome of this
matter will have a material adverse effect on the Company's financial position
or results of operations.
In April, 1989, a subsidiary of the Company, International Environmental
Corporation ("IEC"), was named as a third party defendant in a lawsuit brought
by Economy Mechanical Industries of Illinois, Inc. ("Economy"), in an action
pending in the Circuit Court of Cook County, Illinois, in connection with a
project in Chicago, Illinois. Economy had purchased fan coil units for the
project from IEC and the units were built in accordance with Economy's
specifications. This litigation initially resulted from disputes between the
owner of the project and the general contractor, and in connection therewith,
the owner withheld payment from the general contractor. The general
contractor and a number of subcontractors (including Economy) filed mechanics
liens against the property. The general contractor filed this action to
foreclose on its lien and the owner has asserted numerous claims against the
general contractor and certain subcontractors (including Economy) in the total
amount of $20,610,599. One of the counterclaims made by the owner relates to
the fan coil system manufactured by IEC. As a result Economy brought a third
party action against IEC alleging that if the fan coil system is defective,
such was the responsibility of IEC and in breach of IEC's implied and express
warranties. IEC has denied that the fan coils are defective and contends that
any failures, if any, were caused by improper installation or other causes
beyond IEC's control. IEC has filed fourth party complaints against certain
of its suppliers. A settlement in principle has recently been reached subject
to documentation. This settlement in principle would require two of IEC's
insurance carriers to fund IEC's portion of the settlement in the sum of
$868,000 and reimburse IEC approximately $330,000 for previously paid attorney
fees and expenses. One of these policies has a $250,000 loss limitation on
IEC's retro-premium calculations under the policy. The retro-premiums under
this policy will total less than the $330,000 reimbursement payment IEC is
expecting to receive under the other policy. This settlement in principle is
subject to documentation and will require payments to the building owners by
other parties to the suit; therefore, no assurances can currently be made
concerning the final resolution of this litigation. Notwithstanding the
settlement in principle, the Company does not believe this matter will have a
material adverse effect on the financial condition or results of operations of
the Company.
In addition to the Chemical Business' El Dorado, Arkansas facility being
placed in the System (see Item 2 "PROPERTIES" for a discussion thereof),
recent investigations have identified possible contamination associated with
the on-site solid waste landfill at such facility in El Dorado, Arkansas. The
contamination includes possible landfilling of sludges containing chromium and
lead, and possible groundwater contamination. An investigation of the
chromium sludge generation and landfilling was completed, as well as
confirmation of the groundwater sampling data. Preliminary results indicated
the presence of hazardous quantities of lead and chromium in the landfill,
which were reported to EPA through the National Response Center and to the
Arkansas Department of Pollution Control and Ecology ("ADPC&E"). A
preliminary remedial plan was also submitted by the Chemical Business to
ADPC&E. ADPC&E conducted a multi-media inspection of the facility, including
the landfill, and collected groundwater samples. An inspection report
identified a few deficiencies in recordkeeping which have been corrected, and
allegations of improper management of the chromium sludge and another waste
stream which had been managed in the wastewater treatment system. On March
29, 1995, ADPC&E forwarded to the Chemical Business a proposed Consent
Administrative Order ("CAO") to resolve all compliance issues identified in
the multi-media inspection. The significant items in the CAO are that the CAO
provides for closure of the landfill as a solid waste unit, performance of
ground water monitoring for the entire site, and payment of a civil penalty of
$25,000. While the Company is at this time unable to determine the ultimate
cost of compliance with the CAO, the Company has determined the subsidiary's
cost to be at least $450,000; therefore, the Company has included a provision
for environmental costs of $450,000 in the results of operations. Based on
information presently available, the Company does not believe, as of the date
of this report, that compliance with the CAO, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
- -------------------------------------------
Identification of Executive Officers. The following table identifies
the executive officers of the Company.
Position and Served as
Offices With an Officer
Name Age the Company From
- ---- ---- ------------- -----------
Jack E. Golsen 66 Board Chairman December, 1968
and President
Barry H. Golsen 44 Board Vice Chairman August, 1981
and President of the
Environmental
Control Business
David R. Goss 54 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 53 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 53 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 35 Vice President and March, 1990
General Counsel
- --------------------------------------------------------------
The Company's officers serve one-year terms, renewable on an annual
basis by the Board of Directors. All of the individuals listed above have
served in substantially the same capacity with the Company and/or its
subsidiaries for the last five years.
Family Relationships. The only family relationship that exists among
the executive officers of the Company is that Jack E. Golsen is the father of
Barry H. Golsen.
PART II
---------
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ --------------------------------------------------------------
MATTERS
-------
Market Information
- ------------------
The Company's Common Stock trades on the New York Stock Exchange, Inc.
("NYSE"). Prior to August, 1994, the Company's Common Stock traded on the
American Stock Exchange, Inc. ("AMEX"). The following table shows, for the
periods indicated, the high and low closing sales prices for the Company's
Common Stock.
Fiscal Year Ended
December 31,
----------------------------
1994 1993
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First 10 8 1/4 11 1/8 6 3/4
Second 9 1/4 7 12 9
Third 7 3/4 5 1/4 12 3/8 10
Fourth 7 3/4 5 3/8 11 3/8 8 1/8
Stockholders
- ------------
As of March 31, 1995, the Company had 1463 record holders of its Common
Stock.
Dividends
- ---------
Holders of the Company's Common Stock are entitled to receive dividends
only when, as and if declared by the Board of Directors. No dividends may be
paid on the Company's Common Stock until all required dividends are paid on
the outstanding shares of the Company's preferred stock, or declared and
amounts set apart for the current period, and, if cumulative, prior periods.
The Company has issued and outstanding as of December 31, 1994, 915,000 shares
of $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2 ("Series 2
Preferred"), 1,597 shares of a series of Convertible Non Cumulative Preferred
Stock ("Non Cumulative Preferred Stock") and 20,000 shares of Series B 12%
Convertible, Cumulative Preferred Stock ("Series B Preferred"). Each share of
preferred stock is entitled to receive an annual dividend, if, as and when
declared by the Board of Directors, payable as follows: (i) Series 2 Preferred
at the rate of $3.25 a share payable quarterly in arrears on June 15,
September 15, December 15, and March 15, which dividend is cumulative, (ii)
Non Cumulative Preferred Stock at the rate of $10 a share payable April 1, and
(iii) Series B Preferred at the rate of $12.00 a share payable January 1,
which dividend is cumulative. The Company did not pay cash dividends on its
Common Stock for many years. During the first part of 1993, the Company's
Board of Directors approved the adoption of a policy as to the payment of cash
dividends on its outstanding Common Stock pursuant to which an annual cash
dividend of $.06 per share will be declared by the Board of Directors and paid
on the Company's outstanding shares of Common Stock payable at $.03 per share
semiannually, subject to change or termination by the Board of Directors at
any time. The Company paid a cash dividend of $.03 a share on its outstanding
Common Stock on July 1, 1994, and January 1, 1995; however, there are no
assurances that this policy will not be terminated or changed by the Board of
Directors. See Notes 9,10 and 11 of Notes to Consolidated Financial
Statements.
Under the terms of a loan agreement between the Company and its lender,
the Company may, so long as no event of default has occurred and is continuing
under the loan agreement, make currently scheduled dividends and pay dividends
on its outstanding preferred stock and pay annual dividends on its Common
Stock equal to $.06 per share.
Under the terms of a term loan agreement between El Dorado Chemical
Company ("EDC"), EDC's wholly owned subsidiary, Slurry Explosive Corporation
("SEC") and certain lenders, EDC cannot transfer funds to the Company in the
form of cash dividends or other advances, except (i) for the amount of taxes
that EDC would be required to pay if it was not consolidated with the Company
and (ii) an amount equal to twenty-five percent (25%) of EDC's cumulative
adjusted net income (as reduced by cumulative net losses), as defined, any
time EDC has a Total Capitalization Ratio, as defined, greater than .65:1 and
after EDC has a Total Capitalization Ratio of .65:1 or less, 50% of EDC's
cumulative adjusted net income (as reduced by cumulative net losses). See
Note 7 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis".
The Company is a holding company and, accordingly, its ability to pay
dividends on its preferred stock and its common stock is dependent in large
part on its ability to obtain funds from its subsidiaries. The ability of EDC
and SEC to pay dividends to the Company, to fund the payment of dividends by
the Company or for other purposes, is restricted by certain agreements to
which they are parties.
On February 17, 1989, the Company's Board of Directors declared a
dividend to its stockholders of record on February 27, 1989, of one preferred
stock purchase right on each of the Company's outstanding shares of common
stock. The rights expire on February 27, 1999. The Company issued the
rights, among other reasons, in order to assure that all of the Company's
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company and to guard against partial tender abusive tactics to
gain control of the Company. The rights will become exercisable only if a
person or group acquires beneficial ownership of 30% or more of the Company's
common stock or announces a tender or exchange offer the consummation of which
would result in the ownership by a person or group of 30% or more of the
common stock, except any acquisition by Jack E. Golsen, Chairman of the Board
and President of the Company, and certain other related persons or entities.
Each right (other than the rights, owned by the acquiring person or
members of a group that causes the rights to become exercisable, which became
void) will entitle the stockholder to buy one one-hundredth of a share of a
new series of participating preferred stock at an exercise price of $14.00 per
share. Each one one-hundredth of a share of the new preferred stock
purchasable upon the exercise of a right has economic terms designed to
approximate the value of one share of the Company's common stock. If another
person or group acquires the Company in a merger or other business combination
transaction, each right will entitle its holder (other than rights owned by
that person or group, which become void) to purchase at the right's then
current exercise price, a number of the acquiring company's common shares
which at the time of such transaction would have a market value two times the
exercise price of the right. In addition, if a person or group (with certain
exceptions) acquires 30% or more of the Company's outstanding common stock,
each right will entitle its holder, (other than the rights owned by the
acquiring person or members of the group that results in the rights becoming
exercisable, which become void), to purchase at the right's then current
exercise price, a number of shares of the Company's common stock having a
market value of twice the right's exercise price in lieu of the new preferred
stock.
Following the acquisition by a person or group of beneficial ownership
of 30% or more of the Company's outstanding common stock (with certain
exceptions) and prior to an acquisition of 50% or more of the Company's common
stock by the person or group, the Board of Directors may exchange the rights
(other than rights owned by the acquiring person or members of the group that
results in the rights becoming exercisable, which become void), in whole or in
part, for shares of the Company's common stock. That exchange would occur at
an exchange ratio of one share of common stock, or one one-hundredth of a
share of the new series of participating preferred stock, per right.
Prior to the acquisition by a person or group of beneficial ownership of
30% or more of the Company's common stock (with certain exceptions) the
Company may redeem the rights for one cent per right at the option of the
Company's Board of Directors. The Company's Board of Directors also has the
authority to reduce the 30% thresholds to not less than 10%.
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
Years ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Statement of Operations Data:
Net sales $245,025 $232,616 $198,373 $177,035 $196,577
======== ======== ======== ======== ========
Total Revenues $249,969 $237,529 $200,217 $180,238 $198,931
======== ======== ======== ======== ========
Interest expense $ 6,949 $ 7,507 $ 9,225 $ 10,776 $ 11,126
======== ======== ======== ======== ========
Income (loss) from continuing
operations before extraordinary
items $ 983 $ 11,235 $ 6,985 $ (3,190) $ 2,919
======== ======== ======== ======== ========
Net income (loss) $ 24,467 $ 12,399 $ 9,255 $ (1,147) $ (9,121)
======== ======== ======== ======== ========
Net income (loss) applicable
to common stock $ 21,232 $ 10,357 $ 7,428 $ (3,090) $(11,107)
======== ======== ======== ======== ========
Primary earnings (loss)
per common share:
Income (loss) from continuing
operations before
extraordinary items $ (.16) $ .69 $ .66 $ (.81) $ .17
======== ======== ======== ======== ========
Net income (loss) $ 1.54 $ .77 $ .94 $ (.48) $ (2.02)
======== ======== ======== ======== ========
Item 6. SELECTED FINANCIAL DATA (Continued)
- ------- -----------------------------------
Years ended December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Balance Sheet Data:
Total Assets $221,281 $196,038 $166,999 $158,383 $192,754
======== ======== ======== ======== ========
Long-term debt, including current portion $ 91,681 $ 90,395 $ 51,332 $ 56,807 $ 57,796
======== ======== ======== ======== ========
Redeemable preferred stock $ 152 $ 155 $ 163 $ 179 $ 186
======== ======== ======== ======== ========
Non-redeemable preferred
stock, common stock, and
other stockholders' equity, net $ 90,599 $ 74,871 $ 18,339 $ 10,352 $ 13,481
======== ======== ======== ======== ========
Selected other Data:
Cash dividends declared
per common share $ .06 $ .06 $ - $ - $ -
======== ======== ======== ======== ========
Information for years 1993 and prior has been restated to reflect the results
and sale of Equity Bank in 1994 as a discontinued operation - See Note 3 of
Notes to Consolidated Financial Statements.
Item 7. 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 December 31, 1994 Consolidated Financial Statements,
Item 6 "SELECTED FINANCIAL DATA" and Item 1 "BUSINESS" included elsewhere in
this report.
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 . The Chemical Business accounted for approximately 43% of the
Company's assets at December 31, 1994. The Chemical Businessand the
Environmental Control Business accounted for approximately 54% and 29%,
respectively, of the Company's sales for the year ended December 31, 1994.
Operating profit of the Company increased from $22.9 million in 1992, to $26.2
million in 1993, then decreased to $10.7 million in 1994. As a result of
significantly lower operating profit, the Company's net income from continuing
operations was approximately $1.0 million in 1994, as compared to $11.2
million in 1993 and $7.0 million in 1992. As previously discussed in this
report, in 1994 the Company sold Equity Bank for Savings F.A. ("Equity Bank"),
which comprised the Company's Financial Services Business. See "Liquidity and
Capital Resources" of this Management's Discussion and Analysis,and Note 3 of
Notes to Consolidated Financial Statements for further discussion of the sale
of Equity Bank.
Results of Operations
- ---------------------
Comparison of 1994 with 1993
Revenues
Total revenues for the years ended December 31, 1994 and 1993 were
$250.0 million and $237.5 million, respectively (an increase of $12.5
million). Sales increased $12.4 million.
Net Sales
Consolidated net sales for 1994 were $245.0 million, compared to $232.6
million for 1993, an increase of $12.4 million or 5.3%. This increase in
sales resulted principally from: (i) increased sales in the Chemical Business
of $16.6 million, primarily due to favorable weather conditions for seasonal
fertilizer sales, the higher price of ammonia being partially passed through
to customers and inclusion of Total Energy Systems, Limited ("TES") for a full
year in 1994 compared to only five months in 1993; (ii) increased sales in the
Automotive Products Business of $3.8 million due to an expanded customer base
in 1994 and the acquisition of International Bearings, Inc., in December 1993;
and (iii) decreased sales in the Industrial Products Business of $8.5 million,
primarily due to decreased sales to a foreign customer (see Note 6 of Notes to
Consolidated Financial Statements and discussion under the "Liquidity and
Capital Resources" section of this report).
Gross Profit
Gross profit was 21.7% of sales for 1994, compared to 25.0% of sales for
1993. The decline in gross profit percentage was due primarily to higher cost
of the primary raw material (ammonia) in the Chemical Business. During 1994
the average cost of ammonia was approximately 46.4% higher than the average
cost of ammonia during 1993. The Chemical Business was not able to pass on to
its customers a substantial amount of the higher ammonia cost in the form of
price increases in 1994. Additionally, gross profit was reduced in 1994 by
$1.3 million due to cost overruns associated with a sale to a foreign customer
in the Industrial Products Business being accounted for on the percentage of
completion method. 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 1993; and, decreased sales to the foreign
customer mentioned above which carried a high gross profit percentage in 1993.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 20.1% in 1994 and 18.7% in 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) loss reserves
placed on loans to potential acquisition candidates in the Automotive Products
and Environmental Control Businesses; 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 insurers 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 $6.9 million during
1994, compared to approximately $7.5 million during 1993. The decrease
primarily resulted from the capitalization of approximately $.5 million in
1994 related to the purchase and construction of the Nitric Acid Plant in El
Dorado, Arkansas as discussed in Item 2 "PROPERTIES - Chemical Business".
Write-off of Costs Associated with Abandoned Acquisition Prospects
Results of operation for 1994 include approximately $1.2 million in
costs expended in pursuit of acquisition prospects which the Company chose to
abandon. Subsequent to year end, a decision was made to discontinue the
evaluation to manufacture fertilizer in Indonesia and to charge-off a loan
made in connection with a potential acquisition of 80% of a specialty chemical
manufacturer of iodine derivatives.
Income From Continuing Operations Before Taxes
The Company had income from continuing operations before income taxes of
$.3 million in 1994 compared to $12.0 million in 1993. The decreased
profitability of $11.7 million was primarily due to lower gross profit of
approximately $6.5 million realized on sales in the Chemical Business due to
unrecovered ammonia price increases in 1994 that the Chemical Business was
unable to pass on as price increases during 1994 and decreased profit of $6.2
million from the foreign sales contract as discussed in Note 6 of Notes to
Consolidated Financial Statements. Also contributing to this decline is the
$.5 million provision for the environmental matter discussed in Note 12 of
Notes to Consolidated Financial Statements and $1.2 million in costs
associated with abandoned acquisition prospects, as discussed above.
Provision For Income Taxes
As a result of the Company's net operating loss carryforward for income
tax purposes as discussed elsewhere herein and in Note 8 of Notes to
Consolidated Financial Statements, the Company's provisions for income taxes
for 1994 and 1993 are for current state income taxes and federal alternative
minimum taxes. In 1994, the Company recognized a provision for alternative
minimum taxes associated with its discontinued Financial Services Business of
$1.3 million with an offsetting benefit to continuing operations as a result
of utilization of the Company's alternative minimum tax net operating loss
carryforward not otherwise available to the Financial Services Business.
Income From Discontinued Operations
Income from discontinued operations reflects the results of operations
of the Financial Services Business as discussed in Note 3 of Notes to
Consolidated Financial Statements. Income from discontinued operations, net
of expenses, was $.6 million in 1994 compared to $1.2 million in 1993.
Gain From Disposal of Discontinued Operations
As more fully discussed in "Liquidity and Capital Resources - Sale of
Equity Bank" of this Management's Discussion and Analysis and in Note 3 of
Notes to Consolidated Financial Statements, the Company realized a gain of
$24.2 million before income taxes 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 1994.
Comparison of 1993 with 1992
Revenues
Total revenues for the years ended December 31, 1993 and 1992 were
$237.5 millon and $200.2 million, respectively (an increase of $37.3 million).
Other income included in total revenues was $4.9 million in 1993, compared to
$1.8 million for 1992. This increase resulted primarily from higher proceeds
on real estate sold in 1993 than in 1992.
Net Sales
Consolidated net sales for the year 1993 were $232.6 million, compared
to $198.4 for the year 1992, an increase of $34.2 million or 17.2%. This
increase in sales resulted principally from: (i) increased sales in the
Chemical Business of $8.9 million, primarily due to the acquisition ofTES in
July, 1993, sales by Slurry Explosive Corporation ("Slurry") to an expanded
customer base for twelve months in 1993 compared to only eleven months in
1992, and sales of Universal Tech Corporation ("UTC"), which was acquired in
September, 1992, offset by reduced sales by El Dorado Chemical Company due to
the effects of coal mine strikes in the eastern United States; (ii) increased
sales in the Environmental Control Business of $14.6 million, primarily due to
an expanded customer base in 1993 and the effects in 1992 of a strike at the
fan coil manufacturing plant of this business; (iii) increased sales in the
Automotive Products Business of $8.5 million due to an expanded customer base
in 1993; and (iv) increased sales in the Industrial Products Business of $2.2
million, primarily due to increased sales to a foreign customer (see Note 6 of
Notes to Consolidated Financial Statements and discussion under the "Liquidity
and Capital Resources" section of this Management's Discussion and Analysis).
Gross Profit
Gross profit was 25.0% of sales for 1993, compared to 26.2% of sales for
1992. The decline in the gross profit percentage was due primarily to (i)
lower efficiency in the heat pump manufacturing plant of the Environmental
Control Business as a result of period costs associated with start up of
production requirements related to an agreement entered into with a major
United States air conditioning company; (ii) a shift in sales mix in the
Industrial Products Business to lower margin items; and (iii) higher cost of
the primary raw material (ammonia) in the Chemical Business. During 1993 the
average cost of ammonia was approximately 12.2% higher than the average cost
of ammonia during 1992. This higher cost was not fully passed on to customers
in the form of price increases. These factors were offset in part by gross
profits recognized on the foreign sales contract (See Note 6 of Notes to
Consolidated Financial Statements) of $5.3 million in 1993, compared to only
$3.6 million in 1992, and the effects in 1992 of a strike at the fan coil
manufacturing plant of the Environmental Control Business.
Selling, General and Administrative Expense
Selling, general and administrative expense as a percent of net sales
was 18.7% in both 1993 and 1992.
Interest Expense
Interest expense for the Company was approximately $7.5 million during
1993 compared to approximately $9.2 million during 1992. The decrease
primarily resulted from lower interest rates and lower average balances of
borrowed funds.
Income From Continuing Operations Before Taxes
The Company had income from continuing operations before income taxes of
$12.0 million in 1993, compared to $7.4 million in 1992. The improved
profitability of $4.6 million, after the one time charge to expense of $1.8
million for settlement of a dispute with Customs, was due to higher sales in
the Chemical, Environmental Control, and Automotive Products businesses, and
an increase of $1.7 million in estimated earnings on the foreign sales
contract.
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 8 of Notes to
Consolidated Financial Statements, the Company's provisions for income taxes
for 1993 and 1992 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 as discussed in Note 3 of Notes to
Consolidated Financial Statements. Income from discontinued operations, net
of expenses, was $1.2 million in 1993 compared to $2.3 million in 1992.
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 - On May 25, 1994, pursuant to a Stock Purchase
Agreement dated as of February 9, 1994 (the "Acquisition Agreement") , the
Company sold to Fourth Financial Corporation ("Fourth Financial") Equity Bank
for Savings, F.A., ("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. 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, Equity Bank's
carrying value of the Retained Corporations 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 had been acquired by Equity Bank through foreclosure ("OREO"), which
are collectively referred to 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 net carrying value of $3.1 million.
The Purchase Price paid by Fourth Financial for Equity Bank was
approximately $91.1 million. 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 the Company's trade receivables
previously sold by the Company and certain of its subsidiaries to Equity Bank
(the "Receivables") (approximately $6.9 million). The Company used cash and
approximately $3.0 million of borrowings from a line of credit provided by
Fourth Financial through its Bank IV subsidiary which line of credit was
replaced by the $65 million line of credit facility discussed elsewhere in
this Liquidity and Capital Resources section, to purchase the balance of such
Receivables and $3.1 million of net loans (as discussed above) from Equity
Bank. The Company has subsequently obtained seven year term financing to
replace the temporary financing of approximately $2.7 million of the 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. Consequently, the income tax effect
of the sale of Equity Bank is limited to a charge for alternative minimum tax.
Sources of funds - As a result of the sale of Equity Bank, the
capitalization of the Company improved considerably. Stockholders' equity is
approximately $91 million at December 31, 1994. In December 1994, the Company
and certain of its subsidiaries finalized a new working capital line of
credit. This line of credit consolidates substantially all of the Company's
working capital requirements into one comprehensive funding source. This
working capital line of credit is evidenced by six separate loan agreements
("Agreements") with an unrelated lender ("Lender") collateralized by
receivables, inventory and proprietary rights of the Company and the
subsidiaries that are parties to the Agreements. The Agreements provide for
revolving credit facilities ("Revolver") for total direct borrowings up to $65
million, including the issuance of letters of credit. The Revolver provides
for advances at varying percentages of eligible inventory and trade
receivables and bears interest at the Lender's prime lending rate plus one-
half percent (.50%). The rate in effect at December 31, 1994 was 9.00%. The
initial term of the Agreements is through December 31, 1997, and is renewable
thereafter for successive thirteen month terms. The Lender or the Company may
terminate the Agreements at the end of the initial term or at the end of any
renewal term without penalty, except that the Company may terminate the
Agreements after the second anniversary of the Agreements without penalty. At
December 31, 1994, the available borrowings, based on eligible collateral,
approximated $9.2 million. Borrowings under the Revolver outstanding at
December 31, 1994, were $44.4 million. The Agreements require the Company to
maintain certain financial ratios and contain other financial covenants,
including tangible net worth requirements and capital expenditure limitations.
The annual interest on the outstanding debt under the Revolver at December 31,
1994 at the rate then in effect would be approximately $4 million.
In addition to the Agreements discussed above, the Company has the
following term loans in place:
(1) The Company's wholly-owned subsidiaries, El Dorado Chemical Company and
Slurry Explosive Corporation ("Chemical"), which substantially comprise
the Company's Chemical Business, 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"). The balance of the Term Loan at December 31,
1994 was $15.8 million. Annual principal payments on the Term Loan are
$5.1 million in 1995, $5.2 million in 1996 and a final payment of $5.5
million on March 31, 1997. The Loan Agreement also provides for a
revolving credit facility which provides for a maximum available credit
line of approximately $5.6 million at December 31, 1994. The
availability under this facility reduces by $1.8 million annually in
1995 and 1996 with the remainder due in March 1997. Annual interest at
the agreed to interest rates, if calculated on the aggregate $21.4
million outstanding balance at December 31, 1994 would be approximately
$2.6 million. The Term Loan is secured by substantially all of the
assets not otherwise pledged under the credit facility previously
discussedand 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; (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, is .65:1 or below.
(2) The Company's wholly-owned subsidiary, DSN Corporation ("DSN") is a
party to several loan agreements with a financing company (the
"Financing Company") for two (2) projects which DSN will complete during
1995. These loan agreements are for a construction loan (the
"Construction Loan") which provides for $12.5 million to be used to
construct, equip, reerect and refurbish a nitric acid plant (the "DSN
Plant") being placed into service by the Chemical Business at it's El
Dorado Arkansas facility and a loan for approximately $1.1 million to
finance the construction of a mixed acid plant in North Carolina (the
"Mixed Acid Loan"). The Construction Loan will be repaid upon the
earlier of completion of construction and acceptance of the DSN Plant as
capable of production or March 31, 1995, with proceeds of a permanent
loan ("DSN Permanent Loan"). The DSN Permanent Loan will have a
repayment schedule of eighty-four (84) equal consecutive monthly
installments of principal and interest, payable in arrears. The
interest rate per annum will fix for the entire loan term at the rate
per annum for a five year United States Treasury Security ("Treasury
Rate") as determined at the close of business on the third business day
prior to the making of the DSN Permanent Loan plus 2.70%. As of March
24, 1995, the Treasury Rate was 6.91%, resulting in an interest rate of
9.61%. The Mixed Acid Loan will be repaid under the same terms as the
Construction Loan. Upon the earlier of completion of construction of
the referenced mixed acid plant or August 1, 1995, the Mixed Acid Loan
will have a repayment schedule of eighty-four (84) equal consecutive
monthly installments of principal and interest, payable in arrears. The
rate of interest on the Mixed Acid Loan will be the Treasury Rate, as
defined above, plus 2.70%.
Foreign Subsidiary Financing - On March 7, 1995 the Company guaranteed a
revolving credit facility (the "Facility") entered into between its wholly-
owned Australian subsidiary Total Energy Systems Ltd. ("TES") and Bank of New
Zealand. The Facility is intended to assist TES in meeting its working
capital and trade finance requirements. The Facility allows for borrowings up
to an aggregate of approximately $3.7 million based on specific percentages of
qualified eligible assets. Such debt is secured by substantially all the
assets of TES, plus an unlimited guarantee and indemnity from the Company.
The interest rate on this debt is the Bank of New Zealand Corporate Base
Lending Rate plus 0.5% (11.5% at March 7, 1995). The Facility is subject to
renewal at the discretion of Bank of New Zealand based upon annual review.
The next annual review is due on March 31, 1996.
Cash Flows - Net cash provided by operating activities of continuing
operations in 1994, after adjustment for net non-cash expenses of $9.3
million, was $6.7 million. This cash increase consisted of the following
changes in assets and liabilities: (i) decreases in accounts receivable of
$3.9 million, (ii) inventory increases of $13.7 million, (iii) increases in
supplies and prepaid items of $0.9 million, and (iv) increases in accounts
payable and accrued liabilities of $7.1 million. The decrease in accounts
receivable was due primarily to the collection of a 1993 receivable in 1994
for a large insurance settlement in the Industrial Products Business, in
addition to collections on certain long outstanding accounts in the Industrial
Products Business. The increase in inventory was due primarily to (i)
increases in the Automotive Products Business for the build-up of inventory
levels at a new subsidiary acquired in December 1993, (ii) higher than normal
purchases from certain foreign vendors by the Automotive Products Business in
advance of anticipated cost increases (iii) build up of heat pump inventory in
the Environmental Control Business in anticipation of sales increases in 1995,
(iv) increases in raw material (ammonia) costs in the Chemical Business and
(v) build up in inventory at the Chemical Business' Australian subsidiary,
which was acquired in 1993, due to expansion of that operation. The increase
in supplies and prepaid items resulted primarily from increases in supplies,
security deposits, and prepaid costs in the Chemical Business. The increase
in accounts payable and accrued liabilities was due primarily to the increases
in inventory levels as described above. Investing activities during 1994
included (i) capital expenditures of $15.6 million, due primarily to the
Chemical Business' construction of a new nitric acid production facility, in
addition to normal expenditures in the Chemical Business and expenditures in
the Environmental Control Business to improve the manufacturing processes of
that business; (ii) sales of real estate and equipment which generated
proceeds of $4.4 million; (iii) a purchase in connection with the sale of
Equity Bank of certain loans for $3.1 million; (iv) principal payments on
notes receivable; and (v) an increase in other assets of $5.6 million, due
primarily to loans made in connection with certain pending acquisitions,
investment in equity securities, and deferred costs of certain long term
projects. Cash flows provided by financing activities included net borrowings
of $56.5 million, offset by repurchases of accounts receivable from Equity
Bank of $33.6 million, dividends paid of $4.0 million, and treasury stock
purchases of $5.0 million.
In summary, during 1994, recurring cash requirements for required debt
service payments, dividends on Company stocks and purchases of treasury stock
exceeded cash provided from operations by approximately $11.0 million. In
addition, the Company spent approximately $3.0 million for capital
improvements, primarily in the Environmental Control Business and Chemical
Business, to improve manufacturing capabilities and $11.0 million in
connection with the DSN Plant being constructed by the Chemical Business. The
Company also spent approximately $3.6 million for prospective acquisition
related activities. The expenditures noted above exceeded cash provided from
operations by approximately $28.6 million. Of this excess, $13.4 million was
funded by borrowings against the Company's revolving credit facilities, $12.8
million was borrowed from DSN's lender and the balance of $2.4 million was
funded through other financings, principally real estate financing.
Future cash requirements include working capital requirements for
anticipated sales increases in all Businesses, and funding for future capital
expenditures, primarily in the Chemical Business and the Environmental Control
Business. Funding for the higher accounts receivable resulting from
anticipated sales increases will be provided by the revolving credit
facilities previously discussed. 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,
both of which increased their inventories in 1994 beyond required levels.
In 1995, the Company has incurred another $4.0 million to complete
installation of the new plant, which is expected to begin full production by
May, 1995. The Company also has planned capital expenditures for the
Environmental Control Business to acquire certain machinery and equipment for
approximately $3.0 million in 1995.
Management believes that cash flows from operations, the Company's
revolving credit facilities, and other sources 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 completion of an
additional concentrated nitric acid plant and a mixed acid plant as discussed
above.
During 1994, the Company declared and paid the following aggregate
dividends: (1) $12.00 per share on each of the outstanding shares of its
Series B 12% Cumulative Convertible Preferred Stock; (2) $3.25 per share on
each outstanding share of its $3.25 Convertible Exchangeable Class C Preferred
Stock, Series 2; (3) $10.00 per share on each outstanding share of its
Convertible Noncumulative Preferred Stock; and (4) $.06 per share on its
outstanding shares of Common Stock. The Company expects to continue the
payment of such dividends in the future in accordance with the policy adopted
by the Board of Directors and the terms inherent to the Company's various
preferred stocks.
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 provides for a total contract amount of
approximately $56.0 million, with $12.0 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 participation in the Buyer for $12.0 million
in notes. Through December 31, 1994, 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 and then principal payments of
$791,000 due March 31, 1994 and quarterly, thereafter, until the contract is
paid in full.
The customer made the quarterly payments due November 1, 1993 and March
31, 1994. The quarterly payments due subsequent to March 31, 1994 have not
been received. See Item 1 "BUSINESS - Industrial Products Business" and Note
6 of Notes to Consolidated Financial Statements.
Potential Business Acquisitions - During 1994 the Company, through a
subsidiary, loaned $2.1 million to a French manufacturer of HVAC equipment.
Under the loan agreement, the Company has the option to exchange its rights
under the loan for 80% of the borrower's outstanding common stock. The
Company obtained a security interest in the stock of the french manufacturer
to secure its $2.1 million loan. At this time the decision has not been made
to exercise such option and the $2.1 million loan net of a $650,000 reserve is
carried on the books as a note receivable in other assets.
The Company is presently negotiating a stock option agreement to acquire
eighty percent (80%) of the stock of a specialty sales organization to enhance
the marketing of the Company's air conditioning products. The Company
anticipates that the stock option will have a four (4) year term, and a total
option granting price of $1.0 million payable in installments during the first
year of the stock option, with annual $100,000 payments for yearly extensions
of the stock option thereafter for up to three (3) years. Upon exercise of
the stock option by the Company, or upon the occurrence of certain performance
criteria which would give the grantors of the stock option the right to
accelerate the date on which the Company must elect whether to exercise, the
Company shall issue promissory notes for the exercise price of the subject
shares. The total exercise price of the subject shares is $4.0 million, less
the amounts paid for the granting and any extensions of the stock option. The
Company expects to obtain the stock option in 1995, however, there are no
assurances that such stock option will be obtained or that it will ultimately
be exercised.
A subsidiary of the Company has indicated a willingness to invest
approximately $2.8 million to purchase a fifty percent (50%) equity interest
in an energy conservation joint venture (the "Project"). The purchase is
contingent on, among other things, the developer closing financing for the
Project. The Project was awarded a $17.9 million performance contract to
retrofit residential housing units at a U.S. Army base. The contract calls
for installation of energy-efficient equipment (including air conditioning and
heating equipment), which will reduce utility consumption. For the
installation and management, the Project will receive an average of seventy-
seven percent(77%) of all energy and maintenance savings during the twenty
(20) year contract term. The Company anticipates that the developer will
obtain financing and the Company will invest in the Project, however, there
are no assurances that such will happen.
The Company believes it will be able to finance the cash requirements
associated with the stock option agreement and the Project from existing cash
reserves and cashflow from Company operations in the event the Company
consumates either of the two prospects discussed in the two preceeding
paragraphs.
Additionally, the Company is performing due diligence on some other
small companies that might result in acquisitions in 1995 or later. 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.
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 December 31, 1994,
the Company had available NOL carryovers of approximately $42.9 million, based
on its federal income tax returns as filed with the Internal Revenue Service
for taxable years through 1993, and on the Company's estimates for 1994.
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.
Contingencies - As discussed in Item 3 and in Note 12 of Notes to
Consolidated Financial Statements, the Company has several contingencies that
could impact its liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not anticipate that
these claims will result in substantial adverse impacts on its liquidity, it
is not possible to determine the outcome.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The Company has included the financial statements and supplementary
financial information required by this item immediately following Part IV of
this report and hereby incorporates by reference the relevant portions of
those statements and information into this Item 8.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ -----------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements.
PART III
---------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ------- -----------------------------------------------
Directors. The Company's Certificate of Incorporation and Bylaws
provide for the division of the Board of Directors into three classes, each
class consisting (as nearly as possible) of one-third of the whole. The terms
of office of one class of directors expires each year, with each class of
directors being elected for a term of three years and until the shareholders
or directors have elected or appointed their qualified successors. The
Company's bylaws presently provide that the number of directors may consist of
not less than three nor more than nine, and the Board of Directors presently
has set the number of directors at nine.
The following table sets forth the name, principal occupation, age, year
in which the individual first became director, and year in which the
director's term will expire.
Name and First Became Term
Principal Occupation a Director Expires Age
- -------------------- ------------- ------- ---
Raymond B. Ackerman (1) 1993 1996 72
Chairman Emeritus of Ackerman
McQueen, Inc.
Robert C. Brown, M.D. (2) 1969 1995 64
President of Northwest Internal
Medicine Associates, Inc.
Barry H. Golsen (3) 1981 1997 44
Vice Chairman of the Board of
Directors of the Company and
President of the Environmental
Control Business of the Company
Jack E. Golsen (4) 1969 1995 66
President and Chairman of the
Board of Directors of the Company
David R. Goss (5) 1971 1997 54
Senior Vice President -
Operations of the Company
Bernard G. Ille (6) 1971 1996 68
Investments
Jerome D. Shaffer, M.D. (7) 1969 1997 78
Investments
Tony M. Shelby (8) 1971 1996 53
Senior Vice President -
Finance of the Company
C.L. Thurman (9) 1969 1995 76
Investments
- ----------------------------------
(1) Mr. Ackerman retired in 1992 from Ackerman McQueen, Inc.. Prior to
his retirement, he served for more than five years as President of Ackerman
McQueen, Inc., which is a public relations and advertising firm, located in
Oklahoma.
(2) Dr. Brown has practiced medicine in Oklahoma City, Oklahoma for the
past five years.
(3) For the past five years, Barry H. Golsen has served as the
President of the Company's Environmental Control Business. Mr. Golsen was
elected Vice Chairman of the Board of Directors on August 18, 1994.
(4) Mr. Golsen has served in the same capacity with the Company for the
past five years.
(5) Mr. Goss, a certified public accountant, has served in
substantially the same capacity with the Company for the past five years.
(6) Mr. Ille served as President and Chief Executive Officer of First
Life Assurance Company ("First Life") from May, 1988, to March 31, 1994, when
he retired from that position. In 1991, First Life was placed in
conservatorship under the Oklahoma Department of Insurance and was sold on
March 31, 1994. For more than five (5) years prior to that time, Mr. Ille
also served as President of United Founders Life Insurance Company. Mr. Ille
also serves as a director of Landmark Land Company Inc. ("Landmark") and
served as a director of Landmark's wholly-owned savings and loan subsidiary.
Such savings and loan subsidiary was placed in receivership in 1991 by the
Federal Deposit Insurance Corporation while Mr. Ille served as a director.
First Life was a subsidiary of Landmark until such was placed in
conservatorship.
(7) Dr. Shaffer retired from the practice of medicine in 1987. Prior
to that time, Dr. Shaffer practiced medicine in Oklahoma City, Oklahoma, for
more than five years.
(8) Mr. Shelby, a certified public accountant, has served in
substantially the same capacity with the Company during the past five years.
(9) Prior to his retirement in September of 1987, from the Company, Mr.
Thurman served as President of the industrial supply operations of the
Company's Industrial Products Business for more than five years.
Family Relationships. Jack E. Golsen is the father of Barry H. Golsen;
Jack E. Golsen and Robert C. Brown, M.D., are brothers-in-law; and Robert C.
Brown, M.D. is the uncle of Barry H. Golsen.
Compliance with section 16(a) of the Exchange Act. Based solely on a
review of copies of the Forms 3, 4 and 5 and amendments thereto furnished to
the Company with respect to 1994, or written representations that no such
reports were required to be filed with the Securities and Exchange Commission,
the Company believes that during 1994 all directors and officers of the
Company and beneficial owners of more than ten percent (10%) of any class of
equity securities of the Company registered pursuant to Section 12 of the
Exchange Act filed their required Forms 3, 4, or 5, as required by Section
16(a) of the Exchange Act on a timely basis, except that Clifford L. Thurman
filed two late Forms 4 relating to four transactions and Bernard G. Ille filed
one late Form 4 relating to one transaction.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The following table shows the aggregate cash compensation which the
Company and its subsidiaries paid or accrued to the Chief Executive Officer
and each of the other four (4) most highly-paid executive officers of the
Company (which includes the President of the Company's Environmental Control
Business, who also serves as Vice Chairman of the Board of Directors of the
Company and who performs key policy making functions for the Company). The
table includes cash distributed for services rendered during 1994, plus any
cash distributed during 1994 for services rendered in a prior year, less any
amount relating to those services previously included in the cash compensation
table for a prior year.
Summary Compensation Table
---------------------------
Long-term
Compen-
sation
Annual Compensation Awards
---------------------------- -------
Other All
Annual Securities Other
Compen- Underlying Compen-
Name and Salary Bonus sation Stock sation
Position Year ($) ($) ($)(2) Options ($)(3)
- ------------ ---- ------ ----- ------ ------- ------
Jack E. Golsen 1994 429,423 150,000 - 165,000(4) 100,000
Chairman of the 1993 379,615 100,000 - - -
Board, President 1992 359,395 160,000(1) - 50,000 -
and Chief
Executive Officer
Barry H. Golsen 1994 176,769 90,000 - - 100,000
Vice Chairman of 1993 165,000 60,000 - - -
the Board of 1992 168,671 100,000(1) - 10,000 -
Directors and
President of the
Environmental
Control Business
David R. Goss 1994 146,708 90,000 - - 100,000
Senior Vice 1993 142,000 60,000 - - -
President - 1992 145,099 100,000(1) - 10,000 -
Operations
Tony M. Shelby 1994 146,708 90,000 - - 100,000
Senior Vice 1993 142,000 60,000 - - -
President/Chief 1992 144,975 100,000(1) - 10,000 -
Financial Officer
David M. Shear 1994 128,827 40,000 - - -
Vice President/ 1993 111,846 30,000 - - -
General Counsel 1992 98,032 20,000 - 25,000 -
- -----------------------------
(1) Includes the following amounts paid in 1992 as bonuses for 1991:
Jack E. Golsen - $60,000; Barry H. Golsen - $40,000; David R. Goss - $40,000;
and Tony M. Shelby - $40,000.
(2) Does not include perquisites and other personal benefits,
securities or property for the named executive officer in any year if the
aggregate amount of such compensation for such year does not exceed the lesser
of either $50,000 or 10% of the total of annual salary and bonus reported for
the named executive officer for such year.
(3) In 1994, the Company paid to Messrs. J. Golsen, B. Golsen, Goss
and Shelby an additional bonus of $100,000 each for their services as members
of the Board of Directors of Equity Bank during the six years that the Company
owned that financial business.
(4) On June 1, 1989, the Company originally granted a nonqualified
stock option to purchase 165,000 shares of the Company's Common Stock at an
exercise price of $2.625 per share (the "NQSO"), which on the date of grant
was the fair market value of the Company's Common Stock. Prior to the NQSO's
expiration date of June 1, 1994, the Company granted an extension of the
option period of the NQSO for an additional five (5) year period, beginning on
June 1, 1994, and terminating on June 1, 1999 (the "Extended NQSO"). The
Extended NQSO vests and becomes exercisable at twenty percent (20%) per year
on June 1, 1995, 1996, and 1997, and the remaining forty percent (40%) becomes
exercisable June 1, 1998. The exercise price of the Extended NQSO is $2.625
per share, the same as the original NQSO. The Extended NQSO shall become
immediately exercisable in full upon the death of the optionee or a change in
control of the Company, and the Board of Directors of the Company may, at its
option, accelerate such vesting at any time.
Option Grants in 1994
---------------------
The following table sets forth information relating to individual grants
of stock options made to each of the named executive officers in the above
Summary Compensation Table during the last fiscal year:
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term(2)
--------------------------------- -----------------------------
% of
Total
Options
Granted Exer-
Options Emp- cise Expir-
Granted loyees Price ration
Name (#)(1) in 1994 ($/sh) Date 0%($) 5%($) 10%($)
- -------------- ------ ------- ------ -------- ------- --------- ---------
Jack E. Golsen 165,000 67.6% 2.625 6/01/99 948,651 1,210,743 1,527,812
- --------------------------
(1) On June 1, 1989, the Company originally granted a nonqualified stock
option to purchase 165,000 shares of the Company's Common Stock at an exercise
price of $2.625 per share (the "NQSO"), which on the date of grant was the
fair market value of the Company's Common Stock. Prior to the NQSO's
expiration date of June 1, 1994, the Company granted an extension of the
option period of the NQSO for an additional five (5) year period, beginning on
June 1, 1994, and terminating on June 1, 1999 (the "Extended NQSO"). The
Extended NQSO vests and becomes exercisable at twenty percent (20%) per year
on June 1, 1995, 1996, and 1997, and the remaining forty percent (40%) becomes
exercisable June 1, 1998. The exercise price of the Extended NQSO is $2.625
per share, the same as the original NQSO. The Extended NQSO shall become
immediately exercisable in full upon the death of the optionee or a change in
control of the Company, and the Board of Directors of the Company may, at its
option, accelerate such vesting at any time.
(2) The potential realizable value of each grant of options assumes that the
market price of the Company's Common Stock appreciates in value from the date
of grant to the end of the option term at the annualized rates shown above
each column. The actual value that the optionee may realize, if any, will
depend on the amount by which the market price of the Company's Common Stock
at the time of exercise exceeds the exercise price of the option. There is no
assurance that the optionee will receive the amounts estimated in this table.
The fair market value of a share of the Company's Common Stock was $8.375 on
the date that the NQSO was extended as discussed in footnote (1) above, and
$6.125 on March 31, 1995. Thus, the realizable value of the Extended NQSO on
March 31, 1995, was $577,401, which is the difference between the exercise
price of the Extended NQSO and the market value of the Company's Common Stock
on March 31, 1995.
Aggregated Option Exercises in 1994
and Fiscal Year End Option Values
---------------------------------
The following table sets forth information concerning each exercise of
stock options by each of the named executive officers during the last fiscal
year and the year-end value of unexercised options:
Number of Value
Securities of Unexercised
Underlying In-the-Money
Unexercised Options at
Options at FY End
FY End (#)(3) ($) (3) (4)
-------------- ------------
Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable
Name (#)(1) ($) (2) Unexercisable Unexercisable
- -------------- ----------- --------- ------------- ------------
Jack E. Golsen - $ - 10,000/ $ 28,120/
195,000 (5) 682,485
Barry H. Golsen - - 14,000/ 62,468/
6,000 16,872
David R. Goss - - 5,000/ 20,875/
6,000 18,750
Tony M. Shelby - - 5,000/ 20,875/
6,000 18,750
David M. Shear - - 8,000/ 30,250/
15,000 46,875
- --------------------------------
(1) Each number represents the number of shares received by the named
individual upon exercise.
(2) The values set forth in the columns below are between the market
value of the Company's common stock on the date the particular option was
exercised and the exercise price of such option.
(3) The options granted under the Company's Plans become exercisable
20% after one year from date of grant, an additional 20% after two years, an
additional 30% after three years, and the remaining 30% after four years.
(4) The values are based on the difference between the price of the
Company's common stock on the New York Exchange at the close of trading on
December 31, 1994 of $6.25 per share and the exercise price of such option.
The actual value realized by a named executive on the exercise of these
options depends on the market value of the Company's common stock on the date
of exercise.
(5) The amount shown includes 165,000 non-qualified stock options
which vest and are exercisable 20% on June 1, 1995, June 1, 1996 and June 1,
1997 with the remaining 40% exercisable June 1, 1988.
Other Plans. The Board of Directors has adopted an LSB Industries, Inc.
Employee Savings Plan (the "401(k) Plan") for the employees (including
executive officers) of the Company and its subsidiaries, excluding certain
(but not all) employees covered under union agreements. The 401(k) Plan is an
employee contribution plan, and the Company and its subsidiaries make no
contributions to the 401(k) Plan. The amount that an employee may contribute
to the 401(k) Plan equals a certain percentage of the employee's compensation,
with the percentage based on the employee's income and certain other criteria
as required under Section 401(k) of the Internal Revenue Code. The Company or
subsidiary deducts the amounts contributed to the 401(k) Plan from the
employee's compensation each pay period, in accordance with the employee's
instructions, and pays the amount into the 401(k) Plan for the employee's
benefit. The Summary Compensation Table set forth above includes any amount
contributed and deferred during the 1994 fiscal year pursuant to the 401(k)
Plan by the named executive officers of the Company.
The Company has a death benefit plan for certain key employees. Under
the plan, the designated beneficiary of an employee covered by the plan will
receive a monthly benefit for a period of ten (10) years if the employee dies
while in the employment of the Company or a wholly-owned subsidiary of the
Company. The agreement with each employee provides, in addition to being
subject to other terms and conditions set forth in the agreement, that the
Company may terminate the agreement as to any employee at anytime prior to the
employee's death. The Company has purchased life insurance on the life of
each employee covered under the plan to provide, in large part, a source of
funds for the Company's obligations under the Plan. The Company also will
fund a portion of the benefits by investing the proceeds of a policy received
by the Company upon the employee's death. The Company is the owner and sole
beneficiary of the insurance policy, with the proceeds payable to the Company
upon the death of the employee. The following table sets forth the amounts of
annual benefits payable to the designated beneficiary or beneficiaries of the
executive officers named in the Summary Compensation Table set forth above
under the above-described death benefits plan.
Amount of
Name of Individual Annual Payment
------------------ --------------
Jack E. Golsen $175,000
Barry H. Golsen $ 30,000
David R. Goss $ 35,000
Tony M. Shelby $ 35,000
David M. Shear $ 0
In addition to the above-described plans, during 1991 the Company
entered into a non-qualified arrangement with certain key employees of the
Company and its subsidiaries to provide compensation to such individuals in
the event that they are employed by the Company or a subsidiary of the Company
at age 65. Under the plan, the employee will be eligible to receive for the
life of such employee, a designated benefit as set forth in the plan. In
addition, if prior to attaining the age 65 the employee dies while in the
employment of the Company or a subsidiary of the Company, the designated
beneficiary of the employee will receive a monthly benefit for a period of ten
(10) years. The agreement with each employee provides, in addition to being
subject to other terms and conditions set forth in the agreement, that the
Company may terminate the agreement as to any employee at any time prior to
the employee's death. The Company has purchased insurance on the life of each
employee covered under the plan where the Company is the owner and sole
beneficiary of the insurance policy, with the proceeds payable to the Company
to provide a source of funds for the Company's obligations under the plan.
The Company may also fund a portion of the benefits by investing the proceeds
of such insurance policies. Under the terms of the plan, if the employee
becomes disabled while in the employment of the company or a wholly-owned
subsidiary of the Company, the employee may request the Company to cash-in any
life insurance on the life of such employee purchased to fund the Company's
obligations under the plan. Jack E. Golsen does not participate in the plan.
The following table sets forth the amounts of annual benefits payable to the
executive officers named in the Summary Compensation Table set forth above
under such retirement plan.
Amount of
Name of Individual Annual Payment
----------------- --------------
Barry H. Golsen $17,480
David R. Goss $17,403
Tony M. Shelby $15,605
David M. Shear $17,822
Compensation of Directors. In 1994, the Company compensated each non-
management director of the Company for his services in the amount of $4,500.
The non-management directors of the Company also received $500 for every
meeting of the Board of Directors attended during 1994. Each member of the
Audit Committee, consisting of Messrs. Ille, Brown and Shaffer, also received
an additional $20,000 for their services in 1994. In addition, the Company
paid C.L. Thurman $20,000 as compensation for his services as Chairperson of
the Special Projects Committee of the Board of Directors for 1994. Also, as
further discussed in Item 11 "EXECUTIVE COMPENSATION - Summary Compensation
Table", the Company paid to Messrs. J. Golsen, B. Golsen, Goss and Shelby an
additional one-time bonus of $100,000 for their services as members of the
Board of Directors of Equity Bank during the six years that the Company owned
that financial business. Messrs. J. Golsen, B. Golsen, Goss and Shelby are
members of the Company's Board of Directors, as well as, employees of the
Company.
In September 1993, the Company adopted the 1993 Non-Employee Director
Stock Option Plan (the "Outside Director Plan"). The Outside Director Plan
authorizes the grant of non-qualified stock options to each member of the
Company's Board of Directors who is not an officer or employee of the Company
or its subsidiaries. The maximum shares for which options may be issued under
the Outside Director Plan will be 150,000 shares (subject to adjustment as
provided in the Outside Director Plan). The Company shall automatically grant
to each outside director an option to acquire 5,000 shares of the Company's
common stock on April 30 following the end of each of the Company's fiscal
years in which the Company realizes net income of $9.2 million or more for
such fiscal year. The exercise price for an option granted under the Outside
Director Plan shall be the fair market value of the shares of common stock at
the time the option is granted. Each option granted under the Outside
Director Plan, to the extent not exercised, shall terminate upon the earlier
of the termination of the outside director as a member of the Company's Board
of Directors or the fifth anniversary of the date such option was granted. On
April 30, 1994, options to acquire 5000 shares of Common Stock were granted
under this plan to Messrs. Ille, Brown, Shaffer, Thurman and Ackerman, at a
per share exercise price of $9.00. As a result of the Company's financial
performance for 1994, the Company will be granting options under the Outside
Director Plan for the purchase of 5,000 shares of Common Stock to each of
Messrs. Ille, Brown, Shaffer, Thurman, and Ackerman.
Termination of Employment and Change in Control Arrangements. In 1989
and 1991, the Company entered into severance agreements with Jack E. Golsen,
Barry H. Golsen, Tony M. Shelby, David R. Goss, David M. Shear and certain
other officers of the Company and subsidiaries of the Company.
Each severance agreement provides (among other things) that if, within
twenty-four (24) months after the occurrence of a change in control (as
defined) of the Company, the Company terminates the officer's employment other
than for cause (as defined) or the officer terminates his employment for good
reason (as defined) the Company must pay the officer an amount equal to 2.9
times the officer's base amount (as defined). The phrase "base amount" means
the average annual gross compensation paid by the Company to the officer and
includable in the officer's gross income during the period consisting of the
most recent five (5) year period immediately preceding the change in control.
If the officer has been employed by the Company for less than 5 years, the
base amount is calculated with respect to the most recent number of taxable
years ending before the change in control that the officer worked for the
Company.
The severance agreements provide that a "change in control" means a
change in control of the Company of a nature that would require the filing of
a Form 8-K with the Securities and Exchange Commission and, in any event,
would mean when: (1) any individual, firm, corporation, entity or group (as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) becomes the beneficial owner, directly or indirectly, of thirty
percent (30%) or more of the combined voting power of the Company's
outstanding voting securities having the right to vote for the election of
directors, except acquisitions by: (a) any person, firm, corporation, entity
or group which, as of the date of the severance agreement, has that ownership,
or (b) Jack E. Golsen, his wife; his children and the spouses of his children;
his estate; executor or administrator of any estate, guardian or custodian for
Jack E. Golsen, his wife, his children, or the spouses of his children, any
corporation, trust, partnership or other entity of which Jack E. Golsen, his
wife, children, or the spouses of his children own at least eighty percent
(80%) of the outstanding beneficial voting or equity interests, directly or
indirectly, either by any one or more of the above-described persons, entities
or estates; and certain affiliates and associates of any of the above-
described persons, entities or estates; (2) individuals who, as of the date of
the severance agreement, constitute the Board of Directors of the Company (the
"Incumbent Board") and who cease for any reason to constitute a majority of
the Board of Directors except that any person becoming a director subsequent
to the date of the severance agreement, whose election or nomination for
election is approved by a majority of the Incumbent Board (with certain
limited exceptions), will constitute a member of the Incumbent Board; or (3)
the sale by the Company of all or substantially all of its assets.
The termination of an officer's employment with the Company "for cause"
means termination because of: (a) the mental or physical disability from
performing the officer's duties for a period of one hundred twenty (120)
consecutive days or one hundred eighty days (even though not consecutive)
within a three hundred sixty (360) day period; (b) the conviction of a felony;
(c) the embezzlement by the officer of Company assets resulting in substantial
personal enrichment of the officer at the expense of the Company; or (d) the
willful failure (when not mentally or physically disabled) to follow a direct
written order from the Company's Board of Directors within the reasonable
scope of the officer's duties performed during the sixty (60) day period prior
to the change of control.
The termination of an officer's employment with the Company for "good
reason" means termination because of (a) the assignment to the officer of
duties inconsistent with the officer's position, authority, duties or
responsibilities during the sixty (60) day period immediately preceding the
change in control of the Company or any other action which results in the
diminishment of those duties, position, authority, or responsibilities; (b)
the relocation of the officer; (c) any purported termination by the Company of
the officer's employment with the Company otherwise than as permitted by the
severance agreement; or (d) in the event of a change in control of the
Company, the failure of the successor or parent company to agree, in form and
substance satisfactory to the officer, to assume (as to a successor) or
guarantee (as to a parent) the severance agreement as if no change in control
had occurred.
Each severance agreement runs until the earlier of: (a) three years
after the date of the severance agreement, or (b) the officer's normal
retirement date from the Company. However, beginning on the first anniversary
of the severance agreement and on each anniversary thereafter, the term of the
severance agreement automatically extends for an additional one-year period,
unless the Company gives notice otherwise at least sixty (60) days prior to
the anniversary date.
Effective June 1, 1994, the Company extended until June 1, 1999, the
option period of a nonqualified stock option previously granted to Jack E.
Golsen for the purchase of 165,000 shares of the Company's Common Stock at an
exercise price of $2.625 per share (the "Extended NQSO"). The Extended NQSO
vests and becomes exercisable at twenty percent (20%) per year on June 1,
1995, 1996, and 1997, and the remaining forty percent (40%) becomes
exercisable on June 1, 1998. The terms of the Extended NQSO provide, in part,
that the Extended NQSO shall become immediately exercisable upon a change in
control of the Company. A "change in control" for purposes of the Extended
NQSO, shall be deemed to have occurred upon any of the following events: (i)
consummation of any of the following transactions: any merger,
recapitalization, or other business combination of the Company pursuant to
which the Company is the non-surviving corporation, unless the majority of the
holders of Common Stock immediately prior to such transaction will own at
least fifty percent (50%) of the total voting power of the then outstanding
securities of the surviving corporation immediately after such transaction;
(ii) a transaction in which any person, corporation, or other entity (A) shall
purchase any Common Stock pursuant to a tender offer or exchange offer,
without the prior consent of the Board of Directors or (B) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of securities of the Company representing
fifty percent (50%) or more of the total voting power of the then outstanding
securities of the Company; or (iii) if, during any period of two (2)
consecutive years, individuals who, at the beginning of such period,
constituted the entire Board of Directors and any new director whose election
by the Board of Directors, or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of the period
or whose election or nomination for election by the stockholders was
previously approved, cease for any reason to constitute a majority thereof.
Compensation Committee Interlocks and Insider Participation. The
Company's Executive Salary Review Committee has the authority to set the
compensation of all officers of the Company, except the President, which the
Board of Directors sets. This Committee generally considers and approves the
recommendations of the President. The members of the Executive Salary Review
Committee are the following non-management directors: Robert C. Brown, M.D.,
Jerome D. Shaffer, M.D., and Bernard G. Ille. During 1994, the Executive
Salary Review Committee had one meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------- --------------------------------------------------------------
Security Ownership of Certain Beneficial Owners. The following table
shows the total number and percentage of the outstanding shares of the
Company's voting common stock and voting preferred stock beneficially owned as
of March 31, 1995, with respect to each person (including any "group" as used
in Section 13(d)(3) of the Securities Act of 1934, as amended) that the
Company knows to have beneficial ownership of more than five percent (5%) of
the Company's voting common stock and voting preferred stock. A person is
deemed to be the beneficial owner of voting shares of Common Stock of the
Company which he or she could acquire within sixty (60) days of April 1, 1995
such as upon the exercise of options.
Because of the requirements of the Securities and Exchange Commission as
to the method of determining the amount of shares an individual or entity may
beneficially own, the amounts shown below for an individual or entity may
include shares also considered beneficially owned by others.
Amounts
Name and Address Title of Shares Percent
of of Beneficially of
Beneficial Owner Class Owned(1) Class
- ---------------- ------- ------------ -------
Jack E. Golsen and Common 3,783,735 (3)(5)(6) 27.2%
members of his family(2) Voting Preferred 20,000 (4)(6) 92.3%
Riverside Capital
Advisors, Inc. Common 901,373 (7) 6.7%
- ------------------------------
(1) The Company based the information with respect to beneficial
ownership on information furnished by the above-named individuals or entities
or contained in filings made with the Securities and Exchange Commission or
the Company's records.
(2) Includes Jack E. Golsen and the following members of his family:
wife, Sylvia H. Golsen; son, Barry H. Golsen (a Director, Vice Chairman of the
Board of Directors and President of the Environmental Control Business of the
Company); son, Steven J. Golsen (Executive officer of several subsidiaries of
the Company), and daughter, Linda F. Rappaport. The address of Jack E.
Golsen, Sylvia H. Golsen and Linda F. Rappaport is 16 South Pennsylvania
Avenue, Oklahoma City, Oklahoma 73107; Barry H. Golsen's address is 5000 S.W.
Seventh Street, Oklahoma City, Oklahoma 73125; and Steven J. Golsen's address
is 7300 S.W. 44th Street, Oklahoma City, Oklahoma 73179.
(3) Includes (a) the following shares that Jack E. Golsen ("J.
Golsen") has the sole voting and investment power: (i) 89,028 shares that he
owns of record, (ii) 33,000 shares that he has the right to acquire within
sixty (60) days under a non-qualified stock option, (iii) 4,000 shares that he
has the right to acquire upon conversion of a promissory note, (iv) 133,333
shares that he has the right to acquire upon the conversion of 4,000 shares of
the Company's Series B 12% Cumulative Convertible Preferred Stock (the "Series
B Preferred") owned of record by him, and (v) 25,000 shares that he has the
right to acquire within the next sixty (60) days under the Company's stock
option plans; (b) 1,168,984 shares owned of record by Sylvia H. Golsen, in
which she and her husband, J. Golsen share voting and investment power; (c)
235,526 shares that Barry H. Golsen ("B Golsen") has the sole voting and
investment power, 533 shares that he shares the voting and investment power
with his wife that are owned of record by his wife, and 17,000 shares that he
has the right to acquire within the next sixty (60) days under the Company's
stock option plans; (d) 195,897 shares that Steven J. Golsen ("S. Golsen") has
the sole voting and investment power and 17,000 shares that he has the right
to acquire within the next sixty (60) days under the Company's stock option
plans; (e) 163,460 shares held in trust for the grandchildren of Jack E. and
Sylvia H. Golsen of which B. Golsen, S. Golsen and Linda F. Rappaport jointly
or individually are trustees; (f) 82,552 shares owned of record by Linda F.
Rappaport, which Mrs. Rappaport has the sole voting an investment power, and
(g) 1,041,799 shares owned of record by Golsen Petroleum Corporation ("GPC")
and 533,333 shares that GPC has the right to acquire upon conversion of 16,000
shares of Series B Preferred owned of record by GPC. GPC is wholly-owned by
J. Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen and Linda F. Rappaport, with
each owning twenty percent (20%) of the outstanding stock of GPC, and as a
result, GPC, J. Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen, and Linda F.
Rappaport share the voting and investment power of the shares beneficially
owned by GPC. GPC's address is 16 South Pennsylvania Avenue, Oklahoma City,
Oklahoma 73107.
(4) Includes: (a) 4,000 shares of Series B Preferred owned of record
by J. Golsen, which he has the sole voting and investment power; and (b)
16,000 shares of Series B Preferred owned of record by GPC, in which GPC, J.
Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen and Linda F. Rappaport share
the voting and investment power.
(5) Does not include 112,360 shares of Common stock that Linda F.
Rappaport's husband owns of record and 17,000 shares which he has the right to
acquire within the next sixty (60) days under the Company's stock option
plans, all of which Linda F. Rappaport disclaims beneficial ownership.
(6) J. Golsen disclaims beneficial ownership of the shares that B.
Golsen, S. Golsen and Linda F. Rappaport each have the sole voting and
investment power over as noted in footnote (3) above. B. Golsen, S. Golsen
and Linda F. Rappaport disclaim beneficial ownership of the shares that J.
Golsen has the sole voting and investment power over as noted in footnotes (3)
and (4) and the shares owned of record by Sylvia H. Golsen. Sylvia H. Golsen
disclaims beneficial ownership of the shares that J. Golsen has the sole
voting and investment power over as noted in footnotes (3) and (4) above.
(7) Riverside Capital Advisors was deemed to beneficially own these
shares as a result of having full discretionary investment authority over 13
customers accounts to which it provides investment services. This amount
includes 90,850 shares of Common Stock that may be acquired upon conversion of
the Company's $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2
("Series 2 Preferred") and 103,422 shares of Common Stock held by affiliates
of Riverside Capital Advisors who share control of investment decisions made
by Riverside Capital Advisors.
Security Ownership of Management. The following table sets forth
information obtained from the directors of the Company and the directors and
executive officers of the Company as a group as to their beneficial ownership
of the Company's voting common stock and voting preferred stock as of March
31, 1995.
Because of the requirements of the Securities and Exchange Commission as
to the method of determining the amount of shares an individual or entity may
own beneficially, the amount shown below for an individual may include shares
also considered beneficially owned by others. Any shares of stock which a
person does not own, but which he or she has the right to acquire within sixty
(60) days of April 1, 1995 are deemed to be outstanding for the purpose of
computing the percentage of outstanding stock of the class owned by such
person but are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
Amounts of
Shares
Name of Title of Beneficially Percent of
Beneficial Owner Class Owned Class
- ---------------- ------- ------------ ----------
Raymond B. Ackerman Common 5,680 (2) *
Robert C. Brown, M.D. Common 233,329 (3) 1.8%
Barry H. Golsen Common 1,909,921 (4) 14.6%
Voting Preferred 16,000 (4) 74.0%
Jack E. Golsen Common 3,071,767 (5) 23.4%
Voting Preferred 20,000 (5) 92.5%
David R. Goss Common 196,585 (6) 1.5%
Bernard G. Ille Common 115,000 (7) *
Jerome D. Shaffer,M.D. Common 140,374 (8) 1.1%
Tony M. Shelby Common 204,728 (9) 1.6%
C.L. Thurman Common 20,333 (10) *
Directors and Common 4,487,750 (11) 34.2%
Executive Officers Voting Preferred 20,000 (11) 92.5%
as a group(11
persons)
- ----------------------------
* Less than 1%.
(1) The Company based the information with respect to beneficial
ownership on information furnished by each director or officer, contained in
filings made with the Securities and Exchange Commission, or contained in the
Company records.
(2) Mr. Ackerman has sole voting and investment power of 680 of these
shares, which shares are held in a trust in which Mr. Ackerman is both the
settlor and the trustee and in which he has the vested interest in both the
corpus and income. The remaining 5000 shares of common stock listed here are
shares that Mr. Ackerman may acquire pursuant to currently exercisable non-
qualified stock options granted to him by the Company.
(3) The amount shown includes 45,000 shares of common stock that Dr.
Brown may acquire pursuant to currently exercisable non-qualified stock
options granted to him by the Company. The shares with respect to which Dr.
Brown shares the voting and investment power consist of 117,516 shares owned
by Dr. Brown's wife, 50,727 shares owned by Robert C. Brown, M.D., Inc., a
corporation wholly-owned by Dr. Brown, and 20,086 shares held by the Robert C.
Brown M.D., Inc. Employee Profit Sharing Plan, of which Dr. Brown serves as
the trustee. The amount shown does not include 57,190 shares directly owned
by the children of Dr. Brown, all of which Dr. Brown disclaims beneficial
ownership.
(4) See footnotes (3), (4), and (6) of the table under "Security
Ownership of Certain Beneficial Owners and Management" of this Item for a
description of the amount and nature of the shares beneficially owned by B.
Golsen, including 17,000 shares B. Golsen has the right to acquire within
sixty (60) days.
(5) See footnotes (3), (4), and (6) of the table under "Security
Ownership of Certain Beneficial Owners and Management" of this Item for a
description of the amount and nature of the shares beneficially owned by J.
Golsen, including the 33,000 shares J. Golsen has the right to acquire within
sixty (60) days pursuant to non-qualified stock options and 25,000 shares J.
Golsen has the right to acquire within sixty (60) days pursuant to options
granted under the Company's Incentive Stock Option Plans ("ISOs").
(6) The amount shown includes 8,000 shares that Mr. Goss has the right
to acquire within sixty (60) days pursuant to options granted under the
Company's ISOs, over which Mr. Goss has the sole voting and investment power.
Mr. Goss shares voting and investment power over 2,429 shares owned by Mr.
Goss's wife, individually and/or as custodian for Mr. Goss's children and has
sole voting and investment power over the balance of the shares.
(7) The amount includes 45,000 shares that Mr. Ille may purchase
pursuant to currently exercisable non-qualified stock options, over which Mr.
Ille has the sole voting and investment power. Mr. Ille disclaims beneficial
ownership of 70,000 shares owned by Mr. Ille's wife.
(8) Dr. Shaffer has the sole voting and investment power over these
shares, which include 45,000 shares that Dr. Shaffer may purchase pursuant to
currently exercisable non-qualified stock options.
(9) Mr. Shelby has the sole voting and investment power over these
shares, which include 8,000 shares that Mr. Shelby has the right to acquire
within sixty (60) days pursuant to options granted under the Company's ISOs.
(10) Mr. Thurman has the sole voting and investment power over these
shares, which include 5000 shares that Mr. Thurman may purchase pursuant to
currently exercisable non-qualified stock options..
(11) The amount shown includes 256,500 shares of common stock that
officers and directors, or entities controlled by officers and directors of
the Company, have the right to acquire within sixty (60) days.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------
A subsidiary of the Company, Hercules Energy Mfg. Corporation
("Hercules"), leases land and a building in Oklahoma City, Oklahoma from Mac
Venture, Ltd. ("Mac Venture"), a limited partnership. GPC serves as the
general partner of Mac Venture. The limited partners of Mac Venture include
GPC and the three children of Jack E. Golsen. See "Security Ownership of
Certain Beneficial Owners and Management", above, for a discussion of the
stock ownership of GPC. The land leased by Hercules from Mac Venture consists
of a total of 341,000 square feet, with 44,000 square feet in the building.
Hercules leases the property from Mac Venture for $7,500 per month under a
triple net lease which began as of January 1, 1982, and expires on December
31, 1998. Also, at January 1, 1991, GPC owed Hercules approximately $62,000
for purchases of oilfield equipment in prior years. Beginning in 1991, the
balance of $62,000 was payable at the rate of $1,000 per month, and in
September 1994, GPC paid this debt in full.
Northwest Internal Medicine Associates, ("Northwest") a division of
Plaza Medical Group., P.C., has an agreement with the Company to perform
medical examinations of the management and supervisory personnel of the
Company and its subsidiaries. Under such agreement, Northwest is paid $4,000
a month to perform all such examinations. Dr. Robert C. Brown (a director of
the Company) is a co-owner of Plaza Medical Group., P.C.
In 1983, LSB Chemical Corp. ("LSB Chemical"), a subsidiary of the
Company, acquired all of the outstanding stock of El Dorado Chemical Company
("EDC") from its then four stockholders ("Ex-Stockholders"). A substantial
portion of the purchase price consisted of an earnout based primarily on the
annual after-tax earnings of EDC for a ten-year period. During 1989, two of
the Ex-Stockholders received LSB Chemical promissory notes for a portion of
their earnout, in lieu of cash, totaling approximately $896,000, payable
$496,000 in January, 1990, and $400,000 in May, 1994. LSB Chemical agreed to
a buyout of the balance of the earnout from the four Ex-Stockholders for an
aggregate purchase amount of $1,231,000. LSB Chemical purchased for cash the
earnout from two of the Ex-Stockholders and issued multi-year promissory notes
totaling $676,000 to the other two Ex-Stockholders. Jack E. Golsen guaranteed
LSB Chemical's payment obligation under the promissory notes, which is
$400,000 at March 31, 1995.
In December 1993, the Company's Board of Directors authorized the
Company to loan funds to certain executive officers of the Company and certain
subsidiaries who incurred unanticipated alternative minimum tax liability as a
result of the exercise of the Company's incentive stock options during 1993.
Pursuant to such authorization, the Company made loans to the following
executive officers of the Company in the following amounts for the purpose of
assisting in the payment of alternative minimum tax liability arising from the
exercise of the Company's incentive stock options: Jack E. Golsen - $290,000;
Barry H Golsen - $270,000; David R. Goss - $461,000; Tony M. Shelby -
$400,000; David M. Shear - $56,500; Jim D. Jones - $185,000; and Michael
Tepper - $66,427. Each loan was payable on demand at an annual interest rate
equal to New York Prime plus 1% and was secured by shares of the Company's
Common Stock acquired by the respective executive officers upon the exercise
of such options. The Company also made loans for the same purposes and on the
same terms as described above to Steven J. Golsen, President of one of the
Company's subsidiaries, in the amount of $270,000 and Claude L. Rappaport,
President of one of the Company's subsidiaries, in the amount of $270,000.
Steven J. Golsen and Claude L. Rappaport are also the son and son-in-law,
respectively, of Jack E. Golsen, the President and Chairman of the Board of
the Company.
On or before September 26, 1994, Jack E. Golsen, Barry H. Golsen, David
M. Shear, and Michael D. Tepper each paid their respective loans in full by
tendering cash payment to the Company in an amount equal to the outstanding
principal and accrued interest owing under their respective loans. The funds
used to satisfy such loans were acquired by Jack E. Golsen, Barry H. Golsen,
David M. Shear and Michael D. Tepper uopon the sale in open market
transactions to Lazard Freres & Company ("Lazard") of the following number of
shares of the Company's Common Stock owned by them at the following sales
prices: Sylvia H. Golsen, wife of Jack E. Golsen, - 92,000 shares at $6.25
per share; Barry H. Golsen - 29,000 shares at $6.25 per share; David M. Shear
and Heidi Brown, his wife, - 9,900 shares at $6.125 per share, and Michael D.
Tepper - 11,000 shares at $6.125 per share. Steven J. Golsen, son of Jack E.
Golsen, and Claude L. Rappaport, Son-in-law of Jack E. Golsen, also paid their
respective loans in full by tendering cash payment to the Company in the
amount equal to the outstanding principal and accrued interest owing under
their respective loans. The funds used to satisfy such loans were acquired by
Steven J. Golsen and Claude L. Rappaport upon the sale in open market
transactions to Lazard of the following number of shares of the Company's
Common Stock owned by them at the follwoing sales prices: Steven J. Golsen -
30,000 shares at $6.25 per share, and Claude L. Rappaport - 31,000 shares at
$6.25 per share.
Pursuant to an understanding between the Company and Lazard, immediately
following the open market sales of (i) an aggregate 202,900 shares by Sylvia
H. Golsen, Michael D. Tepper, Barry H. Golsen, David M. Shear, Heidi Brown,
Steven J. Golsen, and Claude L. Rappaport, described above; (ii) 20,000 shares
by Golsen Petroleum Corporation ("GPC") at a sales price of $6.25 per share,
and (iii) 25,000 shares by Robert C. Brown, M. D. at a sales price of $6.25
per share, the Company purchased such shares of its Common Stock from Lazard
Freres & Company at purchase prices of $6.25 per share as to 227,000 shares
and $6.125 as to 20,900 shares, which purchase prices equaled the fair market
value of the Common Stock on the dates of such purchases. The shares acquired
by the Company upon such purchase constitute treasury shares of the Company.
GPC is wholly owned by Sylvia H. Golsen, Steven J. Golsen, Barry H. Golsen,
and the daughter of Jack E. Golsen.
On or before October 4, 1994, Messrs. Shelby, Jones, and Goss paid their
respective loans in full by (i) tendering cash payment to the Company as
payment of a portion of such loans, and (ii) transferring to the Company the
number of shares of Common Stock owned by each of them equal to the remaining
outstanding principal and accrued interest owing under such loans, based on
the fair market value of $5.75 per share of Common Stock on the date of
transfer. The number of shares of Common Stock transferred to the Company by
Messrs. Shelby, Jones, and Goss, as described above, was 60,654, 21,458 and
72,892, respectively.
In 1994, during the period that the Company was negotiating a new
working capital line of credit, GPC advanced the Company $175,000 and the MG
Revocable Trust advanced the Company $247,000. Each advance was made on a
unsecured basis at a rate of interest equal to the base rate of a local bank
approximating prime plus 1-3/4% per annum. The Settlor of the MG Revocable
Trust is the mother of Jack E. Golsen. These advances and all accrued
interest were repaid in full prior to the closing of the new working capital
line of credit in December, 1994.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a)(1) Financial Statements. The following consolidated financial
statements of the Company appear immediately following this Part IV:
Pages
---------------
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1994
and 1993 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1994 F-4
Consolidated Statements of Non-redeemable Preferred
Stock, Common Stock and Other Stockholders' Equity
for each of the three years in the period ended
December 31, 1994 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1994 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-31
Quarterly Financial Data (Unaudited) F-32
(a)(2) Financial Statement Schedule. The Company has included the
following schedule in this report:
Pages
----------------
II - Valuation and Qualifying Accounts F-33
The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information
appears in the Company's Consolidated Financial Statements, including the
notes to those statements.
(a)(3) Exhibits. The Company has filed the following exhibits with
this report:
2.1. Stock Purchase Agreement dated as of February 9, 1994,
between Fourth Financial Corporation, the Company and Prime Financial
Corporation ("Stock Purchase Agreement"), which the Company hereby
incorporates by reference from Exhibit A to the Company's Proxy
Statement, dated March 22, 1994 and filed with the Commission on March
23, 1994. Schedules and exhibits to the Stock Purchase Agreement are
listed in the Stock Purchase Agreement and copies of such documents so
listed will be furnished supplementally to the Commission upon request.
2.2. Stock Purchase Agreement and Stock Pledge Agreement
between Dr. Hauri AG, a Swiss Corpoation, and LSB Chemical Corp.
3.1. Restated Certificate of Incorporation, and the
Certificate of Designation dated February 17, 1989, which the Company
hereby incorporates by reference from Exhibit 3.01 to the Company's Form
10-K for fiscal year ended December 31, 1989.
3.2. Bylaws, as amended, which the Company hereby
incorporates by reference from Exhibit 3.02 to the Company's form 10-K
for fiscal year ended December 31, 1990.
4.1. Specimen Certificate for the Company's Non-cumulative
Preferred Stock, having a par value of $100 per share, which the Company
hereby incorporates by reference from Exhibit 4.1 to the Company's Form
10-Q for the quarter ended June 30, 1983.
4.2. Specimen Certificate for the Company's Series B
Preferred Stock, having a par value of $100 per share, which the Company
hereby incorporates by reference from Exhibit 4.27 to the Company's
Registration Statement No. 33-9848.
4.3. Specimen Certificate for the Company's Series 2
Preferred, which the Company hereby incorporates by reference from
Exhibit 4.5 to the Company's Registration Statement No. 33-61640.
4.4. Specimen Certificate for the Company's Common Stock,
which the Company incorporates by reference from Exhibit 4.4 to the
Company's Registration Statement No. 33-61640.
4.5. Rights Agreement, dated as of February 17, 1989,
between the Company and The Liberty National Bank and Trust Company of
Oklahoma City, which the Company hereby incorporates by reference from
Exhibit 2.1 to the Company's Form 8-A Registration Statement dated
February 22, 1989.
4.6. Amended and Restated Secured Credit Agreement, dated
as of January 21, 1992, between El Dorado Chemical Company ("EDC"),
Slurry Explosive Corporation ("Slurry"), Household Commercial Financial
Services, Inc. ("Household"), Connecticut Mutual Life Insurance Company
("CML") and CM Life Insurance Company which the Company hereby
incorporates by reference from Exhibit 4.15 to the Company's Form 10K
for the year ended December 31,1991. The agreement contains a list of
schedules and exhibits omitted from the filed copy and the Company
agrees to furnish supplementally a copy of any of the omitted schedules
or exhibits to the Commission upon request.
4.7. First Amendment to the Amended and Restated Secured
Credit Agreement, dated December 9, 1992, between El Dorado Chemical
Company, Slurry Explosive Corporation, Household Commercial Financial
Services Inc., Connecticut Mutual Insurance Company and C.M. Life
Insurance Company, which the Company hereby incorporates by reference
from Exhibit 4.22 to the Company's Registration Statement No. 33-55608.
4.8. Consent Agreement, dated December 9, 1992, between El
Dorado Chemical Company and Household Commercial Financial Services,
Inc., which the Company hereby incorporates by reference from Exhibit
4.23 to the Company's Registration Statement No. 33-55608.
4.9. Amendment Agreement, dated as of March 30, 1994, among
El Dorado Chemical Company, Slurry Explosive Corporation, Household
Commercial Financial Services, Inc., and Prime Financial Corporation,
which the Company hereby incorporates by reference from Exhibit 4.23 to
the Company's Form 10-K for the fiscal year ended December 31, 1993.
4.10. 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., which the Company hereby
incorporates by reference from Exhibit 4.05 to the Company's Form 10-Q
for the fiscal quarter ended September 30, 1994.
4.11. 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, which
the Company hereby incorporates by reference from Exhibit 4.06 to the
Company's Form 10-Q for the fiscal quarter ended September 30, 1994.
4.12. Loan and Security Agreement, dated December 12, 1994,
between the Company and BankAmerica Business Credit, Inc.. The Loan and
Security Agreement contains a list of schedules and exhibits omitted
from the filed exhibit and the Compnay agrees to furnish supplementally
a copy of any of the omitted schedules and exhibits to the Commission
upon request.
4.13. Loan and Security Agreement dated December 12, 1994,
between El Dorado Chemical Company and Slurry Explosive Corporation, as
borrowers, and BankAmerica Business Credit, Inc., as lender. The Loan
and Security Agreement contains a list of schedules and exhibits omitted
from the filed exhibit and the Company agrees to furnish supplementally
a copy of any of the omitted schedules and exhibits to the Commission
upon request. Substantially identical Loan and Security Agreements,
dated December 12, 1994, have been entered into by each of L&S Bearing
Co., International Environmental Corporation, Climate Master, Inc., and
Summit Machine Tool Manufacturing, Corp. with BankAmerica Business
Credit, Inc. and are hereby omitted and such will be provided to the
Commission upon the Commission's request.
10.1. Form of Death Benefit Plan Agreement between the
Company and the employees covered under the plan, which the Company
hereby incorporates by reference from Exhibit 10(c)(1) to the Company's
Form 10-K for the year ended December 31, 1980.
10.2. The Company's 1981 Incentive Stock Option Plan, as
amended, and 1986 Incentive Stock Option Plan, which the Company hereby
incorporates by reference from Exhibits 10.1 and 10.2 to the Company's
Registration Statement No. 33-8302.
10.3. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1981 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.10 to the Company's Form 10-K for the fiscal year ended December 31,
1984.
10.4. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1986 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Registration Statement No. 33-9848.
10.5. The 1987 Amendments to the Company's 1981 Incentive
Stock Option Plan and 1986 Incentive Stock Option Plan, which the
Company hereby incorporates by reference from Exhibit 10.7 to the
Company's Form 10-K for the fiscal year ended December 31, 1986.
10.6. The Company's 1993 Stock Option and Incentive Plan
which the Company hereby incorporates by reference from Exhibit 10.6 to
the Company's Form 10-K for the fiscal year ended December 31, 1993.
10.7. The Company's 1993 Non-employee Director Stock Option
Plan which the Company hereby incorporates by reference from Exhibit
10.7 to the Company's Form 10-K for the fiscal year ended December 31,
1993.
10.8. Union Contracts, dated August 1, 1992, between EDC and
the Oil, Chemical and Atomic Workers, United Steel Workers of America,
United Mine Workers and the International Association of Machinists and
Aerospace Workers, which the Company hereby incorporates by reference
from Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended
December 31, 1992.
10.9. Lease Agreement, dated March 26, 1982, between Mac
Venture, Ltd. and Hercules Energy Mfg. Corporation, which the Company
hereby incorporates by reference from Exhibit 10.32 to the Company's
Form 10-K for the fiscal year ended December 31, 1981.
10.10. Agreement for Purchase and Sale of Anhydrous Ammonia,
dated as of January 1, 1994, between El Dorado Chemical Company and
Farmland Industries, Inc.
10.11. Non-qualified Stock Option Agreement, dated April 26,
1990, between the Company and Robert C. Brown, M.D., which the Company
hereby incorporates by reference from Exhibit 10.10 to the Company's
Form 10-K for the fiscal year ended December 31, 1990. The Company
entered into substantially identical agreements with Bernard G. Ille,
Jerome Shaffer and C.L. Thurman, and the Company will provide copies
thereof to the Commission upon request.
10.12. Non-qualified Stock Option Agreement, dated November
19, 1987, between the Company and C.L. Thurman, which the Company hereby
incorporates by reference from Exhibit 10.25 to the Company's Form 10-K
for the fiscal year ended December 31, 1987. The Company entered into
substantially identical agreements with Jerome D. Shaffer, Bernard G.
Ille, and Robert C. Brown and the Company will provide copies thereof to
the Commission upon request.
10.13. Lease Agreement dated November 12, 1987, between
Climate Master, Inc. and West Point Company and amendments thereto,
which the Company hereby incorporates by reference from Exhibits 10.32,
10.36, and 10.37, to the Company's Form 10-K for fiscal year ended
December 31, 1988.
10.14. Severance Agreement, dated January 17, 1989, between
the Company and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.48 to the Company's Form 10-K for fiscal year
ended December 31, 1988. The Company also entered into identical
agreements with Tony M. Shelby, David R. Goss, Michael Tepper, and Barry
H. Golsen and the Company will provide copies thereof to the Commission
upon request.
10.15. Third Amendment to Lease Agreement, dated as of
December 31, 1987, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.49 to the Company's Form 10-K for fiscal year ended December
31, 1988.
10.16. Option to Purchase Real Estate, dated January 4, 1989,
between Northwest Financial Corporation and Northwest Tower Limited
Partnership, which the Company hereby incorporates by reference from
Exhibit 10.50 to the Company's Form 10-K for fiscal year ended December
31, 1988.
10.17. Technical License, Technology Assistance, Engineering
and Manufacturing Plant sales Agreement between L&S Automotive Products
Company, Inc. and ZVL-ZKL A.S., dated July 6, 1992, as amended by
Addendums, which the Company hereby incorporates by reference from
Exhibit 28.1 to the Company's Form 10-Q for the quarter ended September
30, 1992.
10.18. Letter, dated November 9, 1992, amending the agreement
between L&S Automotive Products Co. and ZVL-ZKL A.S., which the Company
hereby incorporates by reference from Exhibit 28.2 to the Company's
Registration Statement No. 33-55608.
10.19. Supply Agreement, dated November 4, 1992, between
Climate Master, Inc. and Carrier Corporation, which the Company hereby
incorporates by reference from Exhibit 28.3 to the Company's
Registration Statement No. 33-55608.
10.20. Right of First Refusal, dated November 4, 1992,
between the Company, Climate Master, Inc. and Carrier Corporation, which
the Company hereby incorporates by reference from Exhibit 28.4 to the
Company's Registration Statement No. 33-55608.
10.21. Fixed Assets Purchase Parts Purchase and Asset
Consignment Agreement, dated November 4, 1992, between Climate Master,
Inc. and Carrier Corporation, which the Company hereby incorporates by
reference from Exhibit 28.5 to the Company's Registration Statement No.
33-55608.
10.22. Processing Agreement, dated January 1, 1994, between
Monsanto Company and El Dorado Chemical Company.
10.23. Non-Qualified Stock Option Agreement, dated June 1,
1992, between the Company and Robert C. Brown, M.D. which the Company
hereby incorporates by reference from Exhibit 10.38 to the Company's
Form 10-K for fiscal year ended December 31, 1992. The Company entered
into substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer and C.L.Thurman, and the Company will provide copies thereof to
the Commission upon request.
10.24. Loan and Security Agreement dated October 31, 1994
between DSN Corporation and the CIT Group which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Form 10-Q
for the fiscal quarter ended September 30, 1994.
10.25. Loan and Security Agreement dated April 5, 1995
between DSN Corporation and the CIT Group.
11.1. Statement re: Computation of Per Share Earnings
22.1. Subsidiaries of the Company
23.1. Consent of Independent Auditors
27.1. Financial Data Schedule
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the fourth quarter of 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused the undersigned,
duly-authorized, to sign this report on its behalf of this 13th day of April,
1995.
LSB INDUSTRIES, INC.
By: /S/ Jack E. Golsen
----------------------------------
Jack E. Golsen
Chairman of the Board and
President
(Principal Executive Officer)
By: /s/ Tony M. Shelby
----------------------------------
Tony M. Shelby
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/Jim D. Jones
---------------------------------
Jim D. Jones
Vice President, Controller and
Treasurer (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.
Dated: April 13, 1995 By: /s/Jack E. Golsen
--------------------------------
Jack E. Golsen, Director
Dated: April 13, 1995 By:/s/ Tony M. Shelby
--------------------------------
Tony M. Shelby, Director
Dated: April 13, 1995 By:/s/ David R. Goss
--------------------------------
David R. Goss, Director
Dated: April 13, 1995 By:/s/Barry H. Golsen
--------------------------------
Barry H. Golsen, Director
Dated: April 13, 1995 By:/s/ C.L. Thurman
--------------------------------
C. L. Thurman, Director
Dated: April 13, 1995 By:/s/Robert C. Brown
--------------------------------
Robert C. Brown, Director
Dated: April 13, 1995 By:/s/Bernard G. Ille
--------------------------------
Bernard G. Ille, Director
Dated: April 13, 1995 By:/s/Jerome D. Shaffer
--------------------------------
Jerome D. Shaffer, Director
Dated: April 13, 1995 By:/s/Raymond B. Ackerman
--------------------------------
Raymond B. Ackerman, Director
Report of Independent Auditors
The Board of Directors and Stockholders
LSB Industries, Inc.
We have audited the accompanying consolidated balance sheets of LSB Industries,
Inc. as of December 31, 1994 and 1993, and the related consolidated statements
of operations, non-redeemable preferred stock, common stock and other
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. Our audits also included the financial statement
schedule listed in the Index at Item 14(a)(2). These financial statements and
the schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LSB
Industries, Inc. at December 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 21, 1995
F-1
LSB Industries, Inc.
Consolidated Balance Sheets (Note 1)
DECEMBER 31,
1994 1993
--------------------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,610 $ 2,781
Trade accounts receivable, less
allowance for doubtful accounts of
$2,000,000 ($2,583,000 in 1993) 42,720 49,533
Inventories (Notes 4 and 7):
Finished goods 33,926 24,197
Work in process 9,796 9,643
Raw materials 15,611 11,801
--------------------
Total inventory 59,333 45,641
Supplies and prepaid items 6,386 5,459
--------------------
Total current assets 111,049 103,414
Property, plant and equipment, at cost
(Notes 5 and 7) 133,359 113,795
Accumulated depreciation (59,675) (53,269)
--------------------
Property, plant and equipment, net 73,684 60,526
Loans receivable, secured by real
estate (Note 3) 17,243 13,968
Other assets, net of allowance for
doubtful accounts of $1,150,000 in
1994 (none in 1993) 19,305 18,130
--------------------
$221,281 $196,038
====================
F-2
DECEMBER 31,
1994 1993
-------------------
(In Thousands)
LIABILITIES, PREFERRED AND COMMON
STOCKS AND OTHER STOCKHOLDERS' EQUITY
Current liabilities:
Drafts payable $ 1,291 $ 1,220
Accounts payable 29,496 22,645
Accrued liabilities 8,062 6,752
Current portion of long-term debt (Note 7) 9,716 9,763
-------------------
Total current liabilities 48,565 40,380
Long-term debt (Note 7) 81,965 20,508
Net liabilities of Financial Services
Business sold in 1994 (Note 3) -- 60,124
Commitments and contingencies (Notes 3, 6 and 12)
Redeemable, noncumulative, convertible preferred
stock, $100 par value; 1,597 shares issued and
outstanding (1,637 in 1993) (Note 10) 152 155
Non-redeemable preferred stock, common
stock and other stockholders' equity
(Notes 7, 9 and 11):
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, 14,620,156 shares issued
(14,514,056 in 1993) 1,462 1,451
Capital in excess of par value 37,369 37,120
Retained earnings (deficit) 12,883 (7,541)
-------------------
99,714 79,030
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares (none in 1993) 200 --
Common stock, 1,559,590 shares (840,085 in 1993) 8,915 4,159
-------------------
Total non-redeemable preferred stock, common
stock and other stockholders' equity 90,599 74,871
-------------------
$221,281 $196,038
===================
See accompanying notes.
F-3
LSB Industries, Inc.
Consolidated Statements of Operations (Note 1)
YEAR ENDED DECEMBER 31,
1994 1993 1992
-----------------------------------------
(In Thousands, Except Per Share Amounts)
Revenues:
Net sales $245,025 $232,616 $198,373
Other income 4,944 4,913 1,844
---------------------------------------
249,969 237,529 200,217
Costs and expenses:
Cost of sales 191,916 174,504 146,391
Selling, general and administrative 49,221 43,474 37,153
Interest 6,949 7,507 9,225
Provision for environmental matter 450 -- --
Costs of abandoned acquisitions 1,150 -- --
---------------------------------------
249,686 225,485 192,769
---------------------------------------
Income from continuing operations before provision
(benefit) for income taxes 283 12,044 7,448
Provision (benefit) for income taxes (700) 809 463
---------------------------------------
Income from continuing operations 983 11,235 6,985
Discontinued operations:
Income from discontinued operations 584 1,228 2,323
Gain on disposal of discontinued operations 24,200 -- --
Provision for income taxes related to
discontinued operations (1,300) (64) (53)
---------------------------------------
23,484 1,164 2,270
---------------------------------------
Net income $ 24,467 $ 12,399 $ 9,255
=======================================
Net income applicable to common stock $ 21,232 $ 10,357 $ 7,428
=======================================
Earnings per common share:
Primary:
Income (loss) from continuing operations $ (0.16) $ 0.69 $ 0.66
=======================================
Net income $ 1.54 $ 0.77 $ 0.94
=======================================
Fully diluted:
Income (loss) from continuing operations $ (0.16) $ 0.63 $ 0.50
=======================================
Net income $ 1.46 $ 0.71 $ 0.66
=======================================
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Non-redeemable Preferred Stock, Common Stock and
Other Stockholders' Equity
COMMON STOCK NON- RETAINED
-------------------- REDEEMABLE CAPITAL IN EARNINGS TREASURY TREASURY
PAR PREFERRED EXCESS OF (ACCUMULATED STOCK -- STOCK --
SHARES VALUE STOCK PAR VALUE DEFICIT) COMMON PREFERRED TOTAL
--------------------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 1991 5,825 $583 $ 19,206 $17,853 $(24,655) $(2,635) $ -- $10,352
Net income -- -- -- -- 9,255 -- -- 9,255
Conversion of 158 shares of
redeemable preferred stock
to common stock 6 1 -- 15 -- -- -- 16
Conversion of 92,468 shares
of Series 1 Class C
preferred stock to common
stock 705 70 (1,849) 1,779 -- -- -- --
Exercise of stock options:
Cash 450 45 -- 642 -- -- -- 687
Stock tendered and added to
treasury at market value 1,112 111 -- 1,689 -- (1,800) -- --
Dividends declared:
Series 1 Class C preferred
stock ($2.20 per share) -- -- -- -- (1,568) -- -- (1,568)
Series B 12% preferred stock
($12.00 per share) -- -- -- -- (240) -- -- (240)
Redeemable preferred stock
($10.00 per share) -- -- -- -- (19) -- -- (19)
Purchase of treasury stock -- -- -- -- -- (144) -- (144)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1992 8,098 810 17,357 21,978 (17,227) (4,579) -- 18,339
Net income -- -- -- -- 12,399 -- -- 12,399
Conversion of 85 shares of
redeemable preferred stock
to common stock 3 -- -- 5 -- -- -- 5
Conversion of 657,390 shares
of Series 1 preferred to
common stock 5,008 501 (13,148) 12,647 -- -- -- --
Redemption of Series 1
preferred -- -- (115) (8) -- -- -- (123)
Retirement of Series 1
preferred held in treasury -- -- (2,094) 214 -- 1,880 -- --
Sale of common stock 263 26 -- 1,914 -- -- -- 1,940
Sale of Series 2 preferred -- -- 46,000 (2,129) -- -- -- 43,871
Exercise of stock options:
Cash received 640 64 -- 1,501 -- -- -- 1,565
Stock tendered and added to
treasury at market value 502 50 -- 998 -- (1,048) -- --
(Continued on following page)
F-5
LSB Industries, Inc.
Consolidated Statements of Non-redeemable Preferred Stock, Common Stock and
Other Stockholders' Equity (continued)
COMMON STOCK NON- RETAINED
----------------- REDEEMABLE CAPITAL IN EARNINGS TREASURY TREASURY
PAR PREFERRED EXCESS OF (ACCUMULATED STOCK -- STOCK --
SHARES VALUE STOCK PAR VALUE DEFICIT) COMMON PREFERRED TOTAL
-------------------------------------------------------------------------------------------------
(In Thousands)
Dividends declared:
Series B 12% preferred
stock ($12.00 per share) -- $ -- $ -- $ -- $ (240) $ -- $ -- $ (240)
Redeemable preferred
stock ($10.00 per share) -- -- -- -- (16) -- -- (16)
Common stock ($.06 per
share) -- -- -- -- (797) -- -- (797)
Series 2 preferred stock
($1.80 per share) -- -- -- -- (1,660) -- -- (1,660)
Purchase of treasury
stock -- -- -- -- -- (412) -- (412)
------------------------------------------------------------------------------------------------
Balance at December 31, 1993 14,514 1,451 48,000 37,120 (7,541) (4,159) -- 74,871
Net income -- -- -- -- 24,467 -- -- 24,467
Conversion of 40 shares of
redeemable preferred stock
to common stock 1 -- -- 1 -- -- -- 1
Exercise of stock options:
Cash received 105 11 -- 248 -- -- -- 259
Dividends declared:
Series B 12% preferred stock
($12.00 per share) -- -- -- -- (240) -- -- (240)
Redeemable preferred stock
($10.00 per share) -- -- -- -- (16) -- -- (16)
Common stock ($.06 per share) -- -- -- -- (808) -- -- (808)
Series 2 preferred stock
($3.25 per share) -- -- -- -- (2,979) -- -- (2,979)
Purchase of treasury stock -- -- -- -- -- (4,756) (200) (4,956)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1994 14,620 $1,462 $48,000 $37,369 $12,883 $(8,915) $(200) $90,599
=================================================================================================
See accompanying notes.
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows (Note 1)
YEAR ENDED DECEMBER 31,
1994 1993 1992
----------------------------------
(In Thousands)
CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations $ 983 $ 11,235 $ 6,985
Adjustments to reconcile income from continuing operations
to net cash provided (used) by continuing operations:
Depreciation, depletion and amortization:
Property, plant and equipment 6,998 5,870 5,971
Other 1,077 959 1,071
Provision for possible losses:
Trade accounts receivable 1,468 439 972
Notes receivable 650 -- --
Environmental matter 450 -- --
Gain of sales of assets (1,303) (1,587) (61)
Cash provided (used) by changes in assets and liabilities:
Trade accounts receivable 3,923 (13,523) 3,084
Inventories (13,692) 2,737 (7,130)
Supplies and prepaid items (927) (1,282) 415
Accounts payable 6,209 (718) (277)
Accrued liabilities 850 (867) 1,439
Billings in excess of costs and estimated earnings -- (4,858) 4,858
----------------------------------
Net cash provided (used) by continuing operations 6,686 (1,595) 17,327
CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Capital expenditures (15,647) (9,397) (4,628)
Purchase of loans receivable (3,068) -- --
Principal payments on notes receivable 388 -- --
Proceeds from sales of equipment and real estate properties 4,399 6,735 1,164
Other assets (5,566) (1,882) (968)
Cash acquired in connection with acquisitions -- 1,228 55
Payments for acquisitions -- (1,747) (140)
----------------------------------
Net cash used by investing activities (19,494) (5,063) (4,517)
(Continued on following page)
F-7
LSB Industries, Inc.
Consolidated Statements of Cash Flows (Note 1) (continued)
YEAR ENDED DECEMBER 31,
1994 1993 1992
--------------------------------
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES OF
CONTINUING OPERATIONS
Payments on long-term and other debt $ (7,635) $(17,828) $ (6,948)
Long-term and other borrowings 17,124 -- 851
Net change in revolving debt facilities 47,004 (4,950) (1,108)
Net change in receivables previously financed by
discontinued operations (33,570) 1,218 (7,065)
Net change in drafts payable 71 (3,329) 918
Dividends paid:
Preferred stocks (3,235) (1,916) (1,827)
Common stock (808) (797) --
Purchase of treasury stock:
Preferred stock (200) -- --
Common stock (4,756) (302) (144)
Net proceeds from issuance of common and preferred stock 259 47,141 687
--------------------------------
Net cash provided (used) by financing activities of
continuing operations 14,254 19,237 (14,636)
--------------------------------
Net increase (decrease) in cash from continuing operations 1,446 12,579 (1,826)
Net change in cash from discontinued operations (1,617) (10,913) 1,723
--------------------------------
Net increase (decrease) in cash and cash equivalents from
all activities (171) 1,666 (103)
Cash and cash equivalents at beginning of year 2,781 1,115 1,218
--------------------------------
Cash and cash equivalents at end of year $ 2,610 $ 2,781 $ 1,115
================================
See accompanying notes.
F-8
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries. The accounts of its
financial services subsidiary, Equity Bank for Savings, F.A. ("Equity Bank"),
which was sold on May 25, 1994 have been reclassified as discontinued operations
at December 31, 1993. Additionally, the consolidated statements of operations
for the years ended December 31, 1993 and 1992 have been restated to present the
operation of Equity Bank as income from discontinued operations. See Note 3 for
the assets and liabilities of the Company's financial services subsidiary
classified as discontinued at December 31, 1993.
2. ACCOUNTING POLICIES
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash,
overnight funds and interest bearing deposits with original maturities when
purchased by the Company of 90 days or less.
Supplemental cash flow information includes:
1994 1993 1992
---------------------------
(In Thousands)
Cash payments for interest and income taxes:
Interest on long-term debt and other $7,440 $7,159 $8,911
Income taxes (1992 is net refunds received) 832 861 (155)
Noncash financing and investing activities:
Exercise of stock options-stock tendered and
added to treasury shares at market value -- 1,048 1,800
Long-term debt issued for property, plant and
equipment 4,884 1,500 --
Patents purchased by reduction of note receivable -- -- 2,344
F-9
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Accounting Policies (continued)
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less any allowance for
loan losses (none in 1994 or 1993). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of the underlying collateral,
and current economic conditions.
INVENTORIES
Purchased machinery and equipment are carried at specific cost plus duty,
freight and other charges, not in excess of net realizable value. All other
inventory is priced at the lower of cost or market, with cost being determined
using the first-in, first-out (FIFO) basis, except for certain heat pump
products with a value of $9,007,000 at December 31, 1994 ($7,191,000 at December
31, 1993), which are priced at the lower of cost or market, with cost being
determined using the last-in, first-out (LIFO) basis. The difference between the
LIFO basis and current cost is $681,000 at December 31, 1994 ($571,000 at
December 31, 1993).
DEPRECIATION
For financial reporting purposes, depreciation, depletion and amortization is
primarily computed using the straight-line method over the estimated useful
lives of the assets.
CAPITALIZATION OF INTEREST
Interest costs aggregating $491,000 related to the construction of a new nitric
acid plant were capitalized in 1994 (none in 1993 or 1992). At such time as the
assets are placed in service, capitalized costs will be amortized over the
related plant's estimated useful life.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
The excess of purchase price over net assets acquired totals $4,776,000 at
December 31, 1994, is included in other assets and is being amortized by the
straight-line method over periods of 10 to 22 years. The carrying value of the
excess of purchase price over net assets acquired is reviewed if the facts and
circumstances suggest that it may be impaired.
F-10
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Accounting Policies (continued)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $606,000 in 1994, $788,000 in 1993 and
$684,000 in 1992.
ADVERTISING COSTS
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $1,321,000 in 1994,
$1,310,000 in 1993 and $898,000 in 1992.
INCOME TAXES
The Company provides income taxes for the difference in the tax and financial
reporting bases of assets and liabilities in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
Net income (loss) applicable to common stock is computed by adjusting net income
or loss by the amount of preferred stock dividends, including unpaid dividends,
if cumulative.
EARNINGS PER SHARE
Primary earnings per common share are based upon the weighted average number of
common shares and dilutive common equivalent shares outstanding during each year
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, as applicable.
Average common shares outstanding used in computing earnings per share are as
follows:
1994 1993 1992
------------------------------------
Primary 13,831,128 13,401,194 8,188,492
Fully diluted 15,155,461 15,397,886 14,413,179
F-11
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS--FINANCIAL SERVICES
On May 25, 1994, pursuant to a Stock Purchase Agreement, dated as of February 9,
1994 (the "Acquisition Agreement"), the Company sold for $91.1 million 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. Equity
Bank's revenues for the period from January 1, 1994 to May 25, 1994 and the
years ended December 31, 1993 and 1992 were $16.5 million, $41.8 million and
$46.9 million, respectively.
The assets and liabilities of the Company's Financial Services subsidiary,
classified as discontinued at December 31, 1993, are as follows:
DECEMBER 31, 1993
-----------------
(In Thousands)
ASSETS
Cash and cash equivalents $ 8,906
Loans and mortgage-backed securities, 359,303
net
Other securities 7,806
Property and equipment, net 5,144
Excess of purchase price over net 17,041
assets acquired, net
Other assets 3,273
--------
401,473
LIABILITIES
Deposits 332,511
Securities sold under agreement to 38,721
repurchase
Federal Home Loan Bank advances 87,650
Accrued liabilities 2,715
--------
461,597
--------
Net liabilities $ 60,124
========
Under the Acquisition Agreement and using the proceeds from the sale of Equity
Bank, 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
F-12
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Discontinued Operations--Financial Services (continued)
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, which approximated fair value. The
carrying value of the assets in the consolidated financial statements of the
Company continues to be historical cost. At the time of closing of the sale of
Equity Bank, the Company also acquired: (A) the loan and mortgage on and an
option to purchase Equity Tower located in Oklahoma City, Oklahoma ("Equity
Tower Loan"), 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)
certain other loans for $3.1 million previously owned by Equity Bank. In
addition, the Company acquired the outstanding accounts receivable sold to
Equity Bank by the Company and its subsidiaries under various purchase
agreements, dated March 8, 1988 (the "Receivables") for $6.9 million, which
approximated fair value.
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.
F-13
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories at December 31, 1994 and 1993 consist of:
FINISHED
(OR PURCHASED) WORK-IN- RAW
GOODS PROCESS MATERIALS TOTAL
-----------------------------------------------
(In Thousands)
1994:
Air handling units $ 2,461 $2,004 $ 8,737 $ 13,202
Machinery and industrial supplies 7,603 -- -- 7,603
Automotive products 15,029 3,814 1,148 19,991
Chemical products 8,833 3,978 5,726 18,537
-----------------------------------------------
Total $33,926 $9,796 $ 15,611 $ 59,333
===============================================
1993 total $24,197 $9,643 $ 11,801 $ 45,641
===============================================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of:
DECEMBER 31,
1994 1993
-------------------
(In Thousands)
Land and improvements $ 4,409 $ 4,387
Buildings and improvements 20,342 19,576
Machinery, equipment and automotive 99,507 81,476
Furniture, fixtures and store equipment 5,760 4,951
Producing oil and gas properties 3,341 3,405
-------------------
133,359 113,795
Less accumulated depreciation, depletion and amortization 59,675 53,269
-------------------
$ 73,684 $ 60,526
===================
F-14
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FOREIGN SALES CONTRACT
In 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. Payments scheduled under the contract
totaled $44 million, $15.5 million of which has been billed (in accordance with
the payment schedule) with $13.9 million collected by the Company as of December
31, 1994.
In March 1995, the subsidiary has negotiated a preliminary oral agreement in
principle with the customer to revise the contract payment terms and the
commitment by the subsidiary to purchase bearing products from the customer.
Under the proposed revision, the subsidiary expects to receive approximately $4
million cash upon completion of the revision and $21 million in bearing
products, after the subsidiary satisfies its revised purchase commitment and
after the customer repays it debt associated with the contract and its revision,
which receipt is not expected prior to the year 2000. In connection with this
revision, the Company would amend its purchase commitment from a best efforts
arrangement to a firm commitment to purchase approximately $6 million of bearing
products over each of the next five years, at pre-determined prices, not in
excess of market prices, subject to the customer's ability to deliver product to
the Company meeting defined quality standards.
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 recognized during this phase have been limited
to actual cash collections and approximately $1.6 million originally expected to
have been received in 1994 which is included in other assets in the accompanying
consolidated balance sheet at December 31, 1994.
Contract revenues related to bearing products to be received under the $21
million delivery commitment discussed above, will be deferred until such
products are received.
F-15
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Long-term debt is detailed as follows:
December 31,
1994 1993
-----------------
(In Thousands)
Secured revolving credit facility with interest at
a base rate of a certain bank plus a specified
percentage (9.0% aggregate rate at December 31,
1994) (A) $44,379 $ --
Secured loans of a subsidiary with interest payable
quarterly at rates indicated (B):
10.415% to 12.72% term loans 15,833 20,583
Revolving credit facility at a base rate of a
certain bank plus a specified percentage
(10.75% at December 31, 1994) 5,556 2,100
Secured construction loan with interest payable
monthly at the "LIBOR rate" plus 3.1% (9.225% at
December 31, 1994) (C) 12,750 --
Secured revolving loans with interest payable
monthly at the prime rate of a bank affiliated
with the lender plus a specified percentage -- 470
Other with interest at a rate of 7.5% to 13.0% 13,163 7,118
-----------------
91,681 30,271
Less current portion of long-term debt 9,716 9,763
-----------------
Long-term debt due after one year $81,965 $20,508
=================
(A) In December 1994, the Company, certain subsidiaries of the Company and a
bank entered into a series of six asset-based revolving credit facilities
aggregating $65 million. The agreement provides for an initial term of three
years; however, the agreement will automatically renew for successive 13-
month terms, unless terminated by either party. The revolving loans are
available based on varying percentages of eligible accounts receivable and
inventory. At December 31, 1994, available borrowings aggregated $9.2
million on which the Company pays a commitment fee of .5%. The agreement
provides for loans at the reference rate as defined (which approximates the
national prime rate) plus .5%, or the Eurodollar rate plus 2.875%, with
interest due monthly. The agreement also provides for the issuance of
letters of credit of up to $11 million, subject to certain restrictions.
The agreement is secured by substantially all of the Company's receivables,
inventory, proprietary rights, and proceeds thereof. The agreement contains
financial covenants, including limitations on dividends, investments and
capital expenditures, and requires
F-16
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Long-Term Debt (continued)
maintenance of tangible net worth (escalating from $86 million in 1994 to
$98 million in 1996), and debt ratios whereby the "borrowing groups'" debt
(excluding the borrowings under this agreement) shall not exceed 85% of the
Company's adjusted tangible net worth (as defined).
(B) This agreement between a subsidiary of the Company and two institutional
lenders provides for two series of term loans and a revolving credit
facility which provides a maximum available credit line of approximately
$5.6 million as of December 31, 1994. The availability under the revolving
credit facility reduces by $1.8 million in each 1995 and 1996 with the
remainder due in March 1997. Annual principal payments of the term loans are
$5.1 million in 1995 and escalate each year to a final payment of $5.5
million on March 31, 1997.
The agreement is secured by substantially all of the subsidiaries' assets,
not otherwise pledged. It requires the Company to maintain certain financial
ratios and contains other financial covenants, including working capital,
fixed charge coverage and tangible net worth requirements and capital
expenditure limitations. During 1994, the subsidiary obtained a waiver from
the lender as it relates to the fixed charge coverage ratio, reducing the
required minimum through November 1995. The subsidiary expects to be able to
comply with the original covenant by such date. Payments to the parent
company are limited to (i) the amount of income taxes that the subsidiary
would pay if the subsidiary filed separate income tax returns, (ii)
management and other fees required for reimbursement of reasonable costs and
expenses, consistent with past practices and (iii) other payments to the
parent company up to 25% or 50% of the cumulative net income of the
subsidiary, depending on the total capitalization ratio, as defined, of the
Company. As a result of the various restrictions under the agreement, the
subsidiary is permitted to transfer approximately $272,000 of net assets to
the parent company as of December 31, 1994.
(C) This agreement between a subsidiary of the Company and an institutional
lender provides for a construction loan in the aggregate amount of $12.75
million of which the proceeds are to be used in the construction of a nitric
acid plant. Interest during the construction period accrues at a rate equal
to the LIBOR rate plus 3.10%. Upon completion of the plant, the loan
converts to a term loan requiring 84 equal monthly payments of principal
bearing interest, with interest equal to a fixed rate of the treasury rate
plus 2.7%. This agreement is secured by the plant, equipment and machinery,
and proprietary rights associated with the plant.
F-17
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Long-Term Debt (continued)
Maturities of long-term debt for each of the five years after December 31, 1994
are: 1995-$9,716,000; 1996-$10,184,000; 1997-$54,938,000; 1998-$3,409,000; 1999-
$3,581,000 and thereafter-$9,853,000.
Subsequent to December 31, 1994, the Company obtained waivers from two lenders
relating to certain debt covenants. Although there can be no assurances, the
Company expects to meet such covenants in future periods.
8. INCOME TAXES
The provision (benefit) for income taxes from continuing operations consists of
the following for the year indicated:
1994 1993 1992
-----------------------
(In Thousands)
Current:
Federal $(1,150) $142 $ 51
State 450 667 412
------------------------
$ (700) $809 $463
========================
The approximate tax effects of each type of temporary difference and
carryforward that are used in computing deferred tax assets and liabilities and
the valuation allowance related to deferred tax assets at December 31, 1994 and
1993 are as follows:
1994 1993
-----------------
(In Thousands)
DEFERRED TAX ASSETS
Allowances for doubtful accounts not deductible for tax purposes $ 982 $ 1,027
Partnership losses not deductible for tax purposes 2,294 2,294
Capitalization of certain costs as inventory for tax purposes 2,102 1,667
Net operating loss carryforward 16,734 15,409
Investment tax and alternative minimum tax credit carryforwards 1,466 1,292
Other 1,226 1,090
-----------------
Total deferred tax assets 24,804 22,779
Less valuation allowance 14,717 13,559
-----------------
Net deferred tax assets $10,087 $ 9,220
=================
F-18
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Income Taxes (continued)
1994 1993
-----------------
(In Thousands)
DEFERRED TAX LIABILITIES
Accelerated depreciation used for tax
purposes $ 7,751 $ 6,977
Inventory basis difference resulting
from a business combination 2,139 2,139
Other 197 104
-----------------
Total deferred tax liabilities $10,087 $ 9,220
=================
The Company is able to realize deferred tax assets up to an amount equal to the
future reversals of existing taxable temporary differences. The majority of the
taxable temporary differences will turn around in the loss carryforward period
as the differences are depreciated or amortized. Other differences will turn
around as the assets are disposed in the normal course of business or by tax
planning strategies which management considers prudent and feasible.
The differences between the amount of the provision for income taxes and the
amount which would result from the application of the federal statutory rate to
"Income from continuing operations before provision (benefit) for income taxes"
for each of the three years in the period ended December 31, 1994 are detailed
below:
1994 1993 1992
-----------------------------
(In Thousands)
Provision for income taxes at federal
statutory rate $ 96 $ 4,215 $ 2,532
Changes in the valuation allowance
related to deferred tax assets (291) (4,770) (2,458)
State income taxes, net of federal
benefit 297 259 92
Amortization of excess of purchase
price over net assets acquired 139 191 153
Settlement of dispute with governmental
agency -- 618 --
Utilization of regular and/or
alternative minimum tax net operating
loss carryforward (1,300) -- (309)
Alternative minimum tax 150 142 51
Other 209 154 402
-----------------------------
Provision (benefit) for income taxes $ (700) $ 809 $ 463
=============================
At December 31, 1994, the Company has net operating loss ("NOL") carryforwards
for tax purposes of approximately $42.9 million. Such amounts expire beginning
in 1999. The Company also has investment tax credit carryforwards of
approximately $630,000 which expire beginning in 1995.
F-19
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In November 1981, the Company adopted the 1981 Incentive Stock Option Plan, in
March 1986, the Company adopted the 1986 Incentive Stock Option Plan and, in
September 1993, the Company adopted the 1993 Stock Option and Incentive Plan.
Under these plans, the Company is authorized to grant options to purchase up to
3,700,000 shares of the Company's common stock to key employees of the Company
and its subsidiaries. These options become exercisable 20% after one year from
date of grant, 40% after two years, 70% after three years, 100% after four years
and lapse at the end of ten years. The exercise price of options to be granted
under this plan is equal to the fair market value of the Company's common stock
at the date of grant. For participants who own 10% or more of the Company's
common stock at the date of grant, the option price is 110% of the fair market
value at the date of grant and the options lapse after five years from the date
of grant.
Activity in the Company's stock option plans during each of the three years in
the period ended December 31, 1994 is as follows:
1994 1993 1992
------------------------------------
Outstanding options at beginning of year 556,664 1,340,300 2,501,700
Granted 54,000 14,000 280,000
Exercised (29,500) (791,636) (1,411,400)
Surrendered, forfeited or expired -- (6,000) (30,000)
------------------------------------
Outstanding options at end of year 581,164 556,664 1,340,300
====================================
At end of year:
Prices of outstanding options $ 1.13 $ 1.13 $ 1.13
to to to
$ 9.00 $ 9.00 $ 3.44
Average option price per share $ 2.84 $ 2.44 $ 2.10
Options exercisable 356,940 280,640 852,566
Options available for future grants 872,300 926,300 84,300
F-20
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Stockholders' Equity (continued)
The Company's Board of Directors approved the grant of non-qualified stock
options to the Company's outside directors, President and a key employee of one
of the Company's subsidiaries, as detailed below. The option price was based on
the market value of the Company's common stock at the date of grant and these
options are exercisable at any time after the date of grant and expire five
years from such date. During 1994, three of the Company's Directors exercised
options to purchase 75,000 shares of the Company's stock at $2.63 per share.
During 1993, one of the Company's directors exercised options to purchase 65,000
shares of the Company's stock at an average price of $2.26 per share. During
1992, three of the Company's directors exercised options to purchase 150,000
shares of the Company's stock at $1.25 per share and an option to purchase
50,000 shares at $1.25 per share expired.
NUMBER OF SHARES
SUBJECT TO OPTIONS
DATE GRANTED OPTION PRICE OUTSTANDING AT
OR EXTENDED PER SHARE DECEMBER 31, 1994
- ----------------------------------------------------
April 1990 $1.375 100,000
June 1992 $3.125 45,000
June 1994 (A) $2.625 165,000
(A) In June 1994, the Board of Directors extended the expiration date on the
grant of options for 165,000 shares to the Company's President for an
additional five years. The option price and terms of the option were
unchanged except that, in consideration of the extension of time to
exercise, the President agreed to a revised vesting schedule for exercise
of 20% of the option shares in each of the years 1995, 1996 and 1997 and
40% of the option shares in 1998.
In September 1993, the Company adopted the 1993 Nonemployee Director Stock
Option Plan (the "Outside Director Plan"). The Outside Director Plan authorizes
the grant of nonqualified stock options to each member of the Company's Board of
Directors who is not an officer or employee of the Company or its subsidiaries.
The maximum number of shares of common stock of the Company that may be issued
under the Outside Director Plan is 150,000 shares (subject to adjustment as
provided in the Outside Director Plan).
F-21
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Stockholders' Equity (continued)
The Company shall automatically grant to each outside director an option to
acquire 5,000 shares of the Company's common stock on April 30 following the end
of each of the Company's fiscal years in which the Company realizes net income
of $9.2 million or more for such fiscal year. The exercise price for an option
granted under this plan shall be the fair market value of the shares of common
stock at the time the option is granted. Each option granted under this plan to
the extent not exercised shall terminate upon the earlier of the termination as
a member of the Company's Board of Directors or the fifth anniversary of the
date such option was granted. During 1994, there were 25,000 options granted at
$9.00 per share under the Outside Director Plan.
PREFERRED SHARE PURCHASE RIGHTS
In February 1989, the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right (the "Preferred Right") for
each outstanding share of the Company's common stock. The Preferred Rights are
designed to ensure that all of the Company's stockholders receive fair and equal
treatment in the event of a proposed takeover or abusive tender offer.
The Preferred Rights are generally exercisable when a person or group, other
than the Company's Chairman and his affiliates, acquire beneficial ownership of
30% or more of the Company's common stock (such a person or group will be
referred to as the "Acquirer"). Each Preferred Right (excluding Preferred Rights
owned by the Acquirer) entitles stockholders to buy one one-hundredth (1/100) of
a share of a new series of participating preferred stock at an exercise price of
$14. Following the acquisition by the Acquirer of beneficial ownership of 30% or
more of the Company's common stock, and prior to the acquisition of 50% or more
of the Company's common stock by the Acquirer, the Company's Board of Directors
may exchange all or a portion of the Preferred Rights (other than Preferred
Rights owned by the Acquirer) for the Company's common stock at the rate of one
share of common stock per Preferred Right. Following acquisition by the Acquirer
of 30% or more of the Company's common stock, each Preferred Right (other than
the Preferred Rights owned by the Acquirer) will entitle its holder to purchase
a number of the Company's common shares having a market value of two times the
Preferred Right's exercise price.
If the Company is acquired, each Preferred Right (other than the Preferred
Rights owned by the Acquirer) will entitle its holder to purchase a number of
the Acquirer's common shares having a market value at the time of two times the
Preferred Right's exercise price.
Prior to the acquisition by the Acquirer of beneficial ownership of 30% or more
of the Company's stock, the Company's Board of Directors may redeem the
Preferred Rights for $.01 per Preferred Right.
F-22
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE PREFERRED STOCK
Each share of the noncumulative redeemable preferred stock, $100 par value, is
convertible into 40 shares of the Company's common stock at any time at the
option of the holder; entitles the holder to one vote and is redeemable at par.
The redeemable preferred stock provides for a noncumulative annual dividend of
10%, payable when and as declared. Dividend payments were current at December
31, 1994 and 1993.
11. NON-REDEEMABLE PREFERRED STOCK
The 20,000 shares of Series B cumulative, convertible preferred stock, $100 par
value, are convertible, in whole or in part, into 666,666 shares of the
Company's common stock (33.3333 shares of common stock for each share of
preferred stock) at any time at the option of the holder and entitles the holder
to one vote per share. The Series B preferred stock provides for annual
cumulative dividends of 12% from date of issue, payable when and as declared.
Dividend payments were current at December 31, 1994 and 1993.
On May 27, 1993, the Company completed a public offering of $46 million of a new
series of Class C preferred stock, designated as a $3.25 convertible
exchangeable Class C preferred stock, Series 2, no par value ("Series 2
Preferred"). The Series 2 Preferred has a liquidation preference of $50.00 per
share plus accrued and unpaid dividends and is convertible at the option of the
holder at any time, unless previously redeemed, into common stock of the Company
at an initial conversion price of $11.55 per share (equivalent to a conversion
rate of approximately 4.3 shares of common stock for each share of Series 2
Preferred), subject to adjustment under certain conditions. Upon the mailing of
notice of certain corporate actions, holders will have special conversion rights
for a 45-day period.
The Series 2 Preferred is not redeemable prior to June 15, 1996. The Series 2
Preferred will be redeemable at the option of the Company, in whole or in part,
at $52.28 per share if redeemed on or after June 15, 1996, and thereafter at
prices decreasing ratably annually to $50.00 per share on or after June 15,
2003, plus accrued and unpaid dividends to the redemption date. Dividends on the
Series 2 Preferred are cumulative and are payable quarterly in arrears. Dividend
payments were current at December 31, 1994 and 1993.
The Series 2 Preferred also is exchangeable in whole, but not in part, at the
option of the Company on any dividend payment date beginning June 15, 1996, for
the Company's 6.50% Convertible Subordinated Debentures due 2018 (the
"Debentures") at the rate of $50.00 principal amount of Debentures for each
share of Series 2 Preferred. Interest on the Debentures, if issued, will be
payable semiannually in arrears. The Debentures will, if issued, contain
conversion and optional redemption provisions similar to those of the Series 2
Preferred and will be subject to a
F-23
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Non-redeemable Preferred Stock (continued)
mandatory annual sinking fund redemption of five percent of the amount of
Debentures initially issued, commencing June 15, 2003 (or the June 15 following
their issuance, if later).
At December 31, 1994, the Company is authorized to issue an additional 248,403
shares of $100 par value preferred stock and an additional 5,000,000 shares of
no par value preferred stock. Upon issuance, the Board of Directors of the
Company is to determine the specific terms and conditions of such preferred
stock.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain property, plant and equipment. Future minimum
payments on operating leases with initial or remaining terms of one year or more
at December 31, 1994 are as follows:
(In Thousands)
1995 $1,143
1996 763
1997 373
1998 253
1999 23
After 1999 35
------
$2,590
======
Rent expense under all operating lease agreements, including month-to-month
leases, was $3,149,000 in 1994, $2,595,000 in 1993 and $2,934,000 in 1992.
Renewal options are available under certain of the lease agreements for various
periods at approximately the existing annual rental amounts. Rent expense paid
to related parties was $90,000 in 1994 and $120,000 in 1993 and 1992.
A subsidiary of the Company has an operating lease agreement for specified
quantities of precious metals used in the subsidiary's production process. The
lease, which expires in March 1995, requires, among other things, (i) rentals
generally based on a percentage (5.75%) of the leased metals' market values,
(ii) the subsidiary to provide to the lessor a letter of credit equal to at
least 35% of the leased metals' market value (approximately $500,000 at December
31, 1994) and (iii) the subsidiary to purchase the leased metals at market value
at the end of the lease term, if not renewed, or return to the lessor the
quantities of metals subject to the lease.
F-24
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Commitments and Contingencies (continued)
During 1993, the Company's Chemical Business acquired an additional nitric acid
plant for approximately $1.9 million. The Chemical Business is in the process of
moving such plant from Illinois and installing the plant in Arkansas. The
Company anticipates the total expenditures to move and install the plant will be
approximately $16.5 million, of which $12.5 million had been incurred at
December 31, 1994.
LEGAL MATTERS
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. The subsidiary's insurance carriers have been notified
of this matter; however, the amount of possible coverage, if any, is not yet
determinable.
B. As a result of a preliminary environmental assessment report prepared by the
State of Arkansas, the primary manufacturing facility of the Company's
Chemical Business has been placed in the Environmental Protection Agency's
("EPA") tracking system of sites which are known or suspected to be a site of
a release of hazardous 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 and advised the Company that the
site has had certain releases of contaminants. On July 18, 1994, the Company
received a report from the State of Arkansas which contained findings of
violations of certain environmental laws and requested the Company to conduct
further investigations to better determine the compliance status of and
releases of contaminants at the Company. The Company 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 $450,000; therefore, the Company has included a provision
for environmental costs of $450,000 in the 1994 results of operations. Based
on information presently available, the Company does not believe that
compliance with the administrative consent agreement, or the assessment of
penalties, or
F-25
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Commitments and Contingencies (continued)
the facility being placed in the System, should have a material adverse
effect on the Company or the Company's financial condition.
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 and settlement discussions are continuing. The Company does
not believe resolution of the matter will have a material adverse effect on
the Company or the Company's financial condition.
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.
OTHER
During 1993 the Company settled an outstanding dispute with the U.S. Customs
Service. Pursuant to the terms of the settlement agreement, the Company made a
payment of $1.8 million.
In 1989 and 1991, the Company entered into severance agreements with certain of
its executive officers that become effective after the occurrence of a change in
control, as defined, if the Company terminates the officer's employment or if
the officer terminates employment with the Company for good reason, as defined.
These agreements require the Company to pay the executive officers an amount
equal to 2.9 times their average annual base compensation, as defined, upon such
termination.
In 1994, the Company guaranteed approximately $2 million of debt of a start-up
aviation company in exchange for a 20% ownership interest, to which no value has
been assigned as of December 31, 1994. This debt requires interest only payments
until September 1996 at which time the outstanding principal and interest are
due in full.
F-26
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution pension plan of which participation
is available to substantially all full-time employees. The Company does not
contribute to this plan, although it does pay for all costs associated with
administering the plan, none of which are significant.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion of fair values is not indicative of the overall fair
value of the Company's balance sheet since the provisions of the SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," do not apply to all
assets, including intangibles.
The following methods and assumptions were used by the Company in estimating its
fair value of financial instruments:
CASH AND CASH EQUIVALENTS: Carrying value approximates fair value.
LOANS: For variable-rate loans with no significant change in credit risk since
loan origination, fair values approximate carrying amounts. Fair values for
fixed-rate loans are estimated using discounted cash flow analyses, using
interest rates which would currently be offered for loans with similar terms
to borrowers of similar credit quality and for the same remaining maturities.
As of December 31, 1994 and 1993, carrying values of loans receivable
approximated their estimated fair value.
INVESTMENT IN EQUITY SECURITIES: Fair values of investments in equity
securities of closely-held companies have not been determined as estimation of
such values are not practicable (carrying cost of $802,190).
BORROWED FUNDS: Fair values for fixed rate borrowings are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on borrowings of similar amounts and terms to those currently
outstanding. Carrying values for variable rate borrowings approximate their
fair value.
The estimated fair value of the Company's long-term debt is $92.6 million and
$31.8 million compared to the Company's carrying value of $91.7 million and
$30.3 million at December 31, 1994 and 1993, respectively.
As of December 31, 1994, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities approximated
their estimated fair value.
F-27
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company and its subsidiaries operate principally in four industries.
CHEMICAL
This segment manufactures and sells chemical products for mining,
agricultural, electronic, paper and other industries. Sales to customers of
this segment, which primarily include coal mining companies throughout the
United States and farmers in Texas, Missouri and Tennessee, are generally
unsecured.
ENVIRONMENTAL CONTROL
This business segment manufactures and sells a variety of air handling and
heat pump products for use in commercial and residential air conditioning
and heating systems. Sales to customers of this segment, which primarily
include original equipment manufacturers, contractors and independent sales
representatives located throughout the world, are generally secured by a
mechanic's lien, except for sales to original equipment manufacturers,
which are generally unsecured.
INDUSTRIAL PRODUCTS
This segment manufactures and purchases machine tools and purchases
industrial supplies for sale to machine tool dealers and end users
throughout the world. Sales of industrial supplies are generally unsecured,
whereas the Company generally retains a security interest in machine tools
sold until payment is received.
AUTOMOTIVE PRODUCTS
This segment manufactures and sells, generally on an unsecured basis, anti-
friction bearings and other products for automotive applications to
wholesalers, retailers and original equipment manufacturers located
throughout the world.
Credit is extended to customers based on an evaluation of the customer's
financial condition and other factors. Credit losses are provided for in the
financial statements based on historical experience and periodic assessment of
outstanding accounts receivable, particularly those accounts which are past due.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer bases, and
their dispersion across many different industries and geographic areas.
F-28
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Segment Information (continued)
Information about the Company's operations in different industry segments for
each of the three years in the period ended December 31, 1994 is detailed below.
1994 1993 1992
---------------------------------
(In Thousands)
Sales:
Chemical $131,576 $114,952 $106,031
Environmental Control 69,914 69,437 54,812
Industrial Products 11,222 19,714 17,539
Automotive Products 32,313 28,513 19,991
---------------------------------
$245,025 $232,616 $198,373
=================================
Gross profit:
Chemical $ 25,700 $ 27,557 $ 26,572
Environmental Control 17,651 15,651 13,839
Industrial Products 1,316 5,160 4,904
Automotive Products 8,442 9,744 6,667
---------------------------------
$ 53,109 $ 58,112 $ 51,982
=================================
Operating profit (loss):
Chemical $ 12,809 $ 17,632 $ 18,427
Environmental Control 3,512 3,900 3,269
Industrial Products (4,155) 2,120 257
Automotive Products (1,462) 2,528 954
---------------------------------
10,704 26,180 22,907
General corporate expenses, net (3,472) (6,629) (6,234)
Interest expense (6,949) (7,507) (9,225)
---------------------------------
Income before provision for income taxes $ 283 $ 12,044 $ 7,448
=================================
F-29
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Segment Information (continued)
1994 1993 1992
---------------------------------
(In Thousands)
Depreciation, depletion and
amortization of property, plant and
equipment:
Chemical $ 4,044 $ 3,696 $ 3,566
=================================
Environmental Control $ 1,427 $ 1,015 $ 965
=================================
Industrial Products $ 117 $ 118 $ 141
=================================
Automotive Products $ 785 $ 502 $ 620
=================================
Additions to property, plant and
equipment:
Chemical $ 15,532 $ 9,036 $ 3,916
=================================
Environmental Control $ 3,722 $ 1,584 $ 400
=================================
Industrial Products $ 74 $ 560 $ 471
=================================
Automotive Products $ 1,203 $ 1,875 $ 769
=================================
Identifiable assets:
Chemical $ 94,972 $ 77,943 $ 67,175
Environmental Control 40,660 38,389 33,708
Industrial Products 18,423 22,688 20,902
Automotive Products 38,369 31,650 24,257
---------------------------------
192,424 170,670 146,042
Corporate assets 28,857 25,368 20,957
---------------------------------
Total assets $221,281 $196,038 $166,999
=================================
F-30
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Segment Information (continued)
Revenues by industry segment include revenues from unaffiliated customers, as
reported in the consolidated financial statements. Intersegment revenues, which
are accounted for at transfer prices ranging from the cost of producing or
acquiring the product or service to normal prices to unaffiliated customers, are
not significant.
Gross profit by industry segment represents net sales less cost of sales. Gross
profit of the Industrial Products and the Automotive Products segments reflects
the results recognized on the long-term contract discussed in Note 6. Such
results are divided equally between the two segments.
Operating profit by industry segment represents revenues less operating
expenses. In computing operating profit, none of the following items have been
added or deducted: general corporate expenses, income taxes or interest expense.
Operating profit of the Industrial Products and the Automotive Products segments
reflects the results recognized on the long-term contract discussed in Note 6.
Such results are divided equally between the two segments.
Identifiable assets by industry segment are those assets used in the operations
in each industry. Corporate assets are those principally owned by the parent
company or by subsidiaries not involved in the four identified industries.
Revenues from unaffiliated customers include direct foreign export sales as
follows:
GEOGRAPHIC AREA 1994 1993 1992
--------------- ---------------------------
(In Thousands)
Mexico and Central and South America $ 6,976 $ 6,419 $ 4,075
Canada 11,649 11,850 8,123
Slovakia 1,783 7,488 6,203
Other 16,195 11,100 4,767
---------------------------
$36,603 $36,857 $23,168
===========================
F-31
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------
(Restated)
1994
Total revenues $64,352 $69,744 $60,139 $55,734
==================================================
Gross profit on net sales $14,358 $15,230 $12,235 $11,286
==================================================
Income (loss) from continuing operations $ 1,858 $ 2,817 $ (913) $(2,773)
==================================================
Net income (loss) $ 2,204 $27,255 $ (913) $(4,079)
==================================================
Net income (loss) applicable to common stock $ 1,380 $26,447 $(1,718) $(4,877)
==================================================
Primary earnings (loss) per common share:
Continuing operations $ .07 $ .14 $ (.13) $ (.27)
==================================================
Net income $ .10 $ 1.84 $ (.13) $ (.37)
==================================================
1993
Total revenues $53,393 $69,416 $58,674 $56,046
==================================================
Gross profit on net sales $13,286 $18,067 $13,454 $13,305
==================================================
Income (loss) from continuing operations $ 2,155 $ 5,614 $ 1,869 $ 1,597
==================================================
Net income $ 2,657 $ 5,758 $ 2,424 $ 1,560
==================================================
Net income applicable to common stock $ 2,580 $ 5,408 $ 1,616 $ 753
==================================================
Primary earnings per common share:
Continuing operations $ .20 $ .37 $ .07 $ .05
==================================================
Net income $ .25 $ .38 $ .11 $ .05
==================================================
Net income in the fourth quarter of 1993 was increased approximately $3.5
million for additions to fixed assets resulting from capitalizable expenditures
previously being expensed and the collection of an insurance settlement relating
to the foreign project inventory.
F-32
LSB Industries, Inc.
Schedule II -- Valuation and Qualifying Accounts
Years ended December 31, 1994, 1993 and 1992
(Dollars in Thousands)
ADDITIONS DEDUCTIONS
CHARGED WRITE-
BALANCE AT TO COSTS OFFS/ BALANCE
BEGINNING AND COSTS AT END
DESCRIPTION OF YEAR EXPENSES INCURRED OF YEAR
- ------------------------------------------------------------------------------------------
Allowance for doubtful accounts (1):
1994 $2,583 $2,118 $1,551 $3,150
===================================================
1993 $3,082 $ 439 $ 938 $2,583
===================================================
1992 $3,354 $ 972 $1,244 $3,082
===================================================
Product warranty liability:
1994 $ 653 $ 667 $ 631 $ 689
===================================================
1993 $ 613 $ 427 $ 387 $ 653
===================================================
1992 $ 649 $ 547 $ 583 $ 613
===================================================
(1) Deducted in the balance sheet from the related assets to which the reserve
applies.
Other valuation and qualifying accounts are detailed in the Company's notes to
consolidated financial statements.
F-33