FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 1995
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
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Commission file number 1-7677
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LSB INDUSTRIES, INC.
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Exact name of Registrant as specified in its charter
DELAWARE 73-1015226
- ------------------------------ ---------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
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Address of principal executive offices (Zip Code)
(405) 235-4546
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Registrant's telephone number, including area code
None
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
--- ---
The number of shares outstanding of the Registrant's voting Common Stock, as
of May 10, 1995 is 12,938,097 shares excluding 1,810,419 shares held as
treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB Industries, Inc.
and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB Industries, Inc.
at March 31, 1995 and the condensed consolidated statements of income and cash
flows for the three month periods ended March 31, 1995 and 1994 have been
subjected to a review, in accordance with standards established by the
American Institute of Certified Public Accountants, by Ernst & Young LLP,
independent auditors, whose report with respect thereto appears elsewhere in
this Form 10-Q. The financial statements mentioned above are unaudited and
reflect all adjustments, consisting primarily of adjustments of a normal
recurring nature, which are, in the opinion of management, necessary for a
fair presentation of the interim periods. The results of operations for the
three months ended March 31, 1995 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated balance
sheet at December 31, 1994, was derived from audited financial statements as
of that date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1995 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 1995 1994
_________________________________________ __________ __________
Current assets:
Cash and cash equivalents $ 4,534 $ 2,610
Trade accounts receivable, net of allowance 48,459 42,720
Inventories:
Finished goods 38,873 33,926
Work in process 12,185 9,796
Raw materials 17,917 15,611
__________ __________
Total inventory 68,975 59,333
Supplies and prepaid items 7,077 6,386
__________ __________
Total current assets 129,045 111,049
Property, plant and equipment, net 76,614 73,684
Investments and other assets:
Loan receivable, secured by real estate 16,702 17,243
Other assets, net of allowance 20,072 19,305
__________ __________
$ 242,433 $ 221,281
========== ==========
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at March 31, 1995 is unaudited)
(Dollars in thousands)
LIABILITIES, PREFERRED AND COMMON STOCKS March 31, December 31,
AND OTHER STOCKHOLDERS' EQUITY 1995 1994
________________________________________ __________ __________
Current liabilities:
Drafts payable $ 371 $ 1,291
Accounts payable 33,455 29,496
Accrued liabilities 8,861 8,062
Current portion of long-term debt 11,809 9,716
__________ __________
Total current liabilities 54,496 48,565
Long-term debt 96,647 81,965
Contingencies (Note 7)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,588 shares
issued and outstanding (1,597 in 1994) 151 152
Non-redeemable preferred stock, common stock and
other stockholders' equity (Note 6):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued and outstanding 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,620,516 shares
issued (14,620,156 in 1994) 1,462 1,462
Capital in excess of par value 37,370 37,369
Retained Earnings 13,515 12,883
__________ __________
100,347 99,714
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 1,574,604 shares
(1,559,590 in 1994) 9,008 8,915
__________ __________
Total non-redeemable preferred stock, common
stock and other stockholders' equity 91,139 90,599
__________ __________
$ 242,433 $ 221,281
========== ==========
See accompanying notes
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, 1995 and 1994
(Dollars in thousands, except per share amounts)
1995 1994
__________ __________
Revenues:
Net sales $ 65,269 $ 63,851
Other income 662 501
__________ __________
65,931 64,352
Costs and expenses:
Cost of sales 49,127 49,493
Selling, general and administrative 12,869 11,168
Interest 2,388 1,681
__________ __________
64,384 62,342
__________ __________
Income from continuing operations
before provision for income taxes 1,547 2,010
Provision for income taxes 99 152
__________ __________
Income from continuing operations 1,448 1,858
Income from discontinued operations, net
of income taxes (Note 2) - 346
__________ __________
Net income $ 1,448 $ 2,204
========== ==========
Net income applicable to common stock (Note 4) $ 629 $ 1,380
========== ==========
Average common shares outstanding (Note 4):
Primary 13,552,256 14,413,581
Fully diluted 13,573,199 15,084,247
Earnings per common share (Note 4):
Primary:
Income from:
Continuing operations $ .05 $ .08
Discontinued operations - .02
__________ __________
Net income $ .05 $ .10
========== ==========
Fully diluted:
Income from:
Continuing operations $ .05 $ .08
Discontinued operations - .02
__________ __________
Net income $ .05 $ .10
========== ==========
See accompanying notes
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1995 and 1994
(Dollars in thousands)
1995 1994
__________ __________
Cash flows from continuing operations:
Income from continuing operations $ 1,448 $ 1,858
Adjustments to reconcile income from
continuing operations to cash flows
provided (used) by continuing operations:
Depreciation, depletion and amortization:
Property, plant and equipment 1,667 1,671
Other 256 237
Provision for bad debts 180 367
Gain on sale of assets (105) (161)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (7,061) (8,358)
Inventories (8,625) (717)
Supplies and prepaid items (669) 2,831
Accounts payable 4,046 12,687
Accrued liabilities 878 (897)
__________ __________
Net cash provided (used) by continuing operations (7,985) 9,518
Cash flows from investing activities of
continuing operations:
Capital expenditures (4,563) (3,975)
Principal payments on notes receivable 542 -
Proceeds from sales of equipment and
real estate properties 456 780
Increase in other assets (1,472) (577)
__________ __________
Net cash used by investing activities of
continuing operations (5,037) (3,772)
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Three Months Ended March 31, 1995 and 1994
(Dollars in thousands)
1995 1994
__________ __________
Cash flows from financing activities of
continuing operations:
Payments on long-term and other debt $ (666) $ (688)
Long-term and other borrowings 3,662 -
Net change in revolving debt facilities 13,779 23,910
Net change in drafts payable (920) (628)
Dividends paid on preferred stocks (Note 6) (816) (824)
Purchases of treasury stock (Note 6) (93) (343)
Net proceeds from issuance of
common stock (Note 6) - 46
Net decrease in receivables sold to
discontinued operations - (20,087)
__________ __________
Net cash provided by financing
activities of continuing operations 14,946 1,386
__________ __________
Net increase in cash and cash equivalents
from continuing operations 1,924 7,132
Net decrease in cash and cash equivalents
from discontinued operations - (2,222)
__________ __________
Net increase in cash and cash equivalents from
all activities 1,924 4,910
Cash and cash equivalents at beginning of period 2,610 2,781
__________ __________
Cash and cash equivalents at end of period $ 4,534 $ 7,691
========== ==========
See accompanying notes
Note 1:
- ------
The accompanying financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries. The Company's
financial services subsidiary, Equity Bank for Savings, F.A. ("Equity Bank")
was sold on May 25, 1994. The condensed consolidated statement of income for
the three months ended March 31, 1994 presents the operation of Equity Bank as
income from discontinued operations. The condensed consolidated statement of
cash flows for the three months ended March 31, 1994 has been restated for
changes in balance sheet classification adopted at December 31, 1994, as a
result of reclassification due to discontinued operations of the Company's
Financial Services Business.
Note 2:
- ------
On May 25, 1994, pursuant to a Stock Purchase Agreement, dated as of
February 9, 1994, (the "Acquisition Agreement"), the Company sold its wholly-
owned subsidiary, Equity Bank, which constituted the Financial Services
Business of the Company, to Fourth Financial Corporation (the "Purchaser") for
approximately $92 million. The Purchaser acquired all of the outstanding
shares of capital stock of Equity Bank.
Under the Acquisition Agreement and using the proceeds from 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 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.
Note 3:
- ------
At March 31, 1995, the Company had net operating loss ("NOL") carryforwards
for tax purposes of approximately $42 million. Such amounts expire beginning
in 1999. The Company also has investment tax credit carryforwards of
approximately $630,000, which expire beginning in 1995.
The Company's provision for income taxes for the three months ended March 31,
1995 of $.1 million is for current state income taxes and federal alternative
minimum tax.
Note 4:
- ------
Primary earnings per common share are based upon the weighted average number
of common shares and dilutive common equivalent shares outstanding during each
period, after giving appropriate effect to preferred stock dividends.
Fully diluted earnings per share are based on the weighted average number of
common shares and dilutive common equivalent shares outstanding and the
assumed conversion of dilutive convertible securities outstanding after
appropriate adjustment for interest and related income tax effects on
convertible notes payable.
Net income applicable to common stock is computed by adjusting net income by
the amount of preferred stock dividends, including undeclared or unpaid
dividends, if cumulative.
Note 5:
- ------
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, $17 million of which has been billed with $13.9 million
collected by the Company as of March 31, 1995. In addition, the subsidiary
agreed to use its best efforts to purchase approximately $6 million of bearing
products each year over the next five (5) years.
In May 1995, the subsidiary negotiated an amendment to the Agreement with the
foreign customer and an agreement with a syndication of foreign lenders
whereby the lenders acquired, without recourse to the Company or such
subsidiary, approximately $24 million of the unpaid contract amount billable
by the Company. Under the amendment with the foreign customer and the
agreement with the foreign lenders, the Company received approximately $5
million, net of fees, and a commitment from the foreign customer to provide
approximately $21 million of bearing products. The Company is to receive such
bearing products, without charge when and if the foreign customer repays the
debt of the foreign customer discussed above which the foreign lenders
acquired from the subsidiary. The commitment of the foreign customer to
provide the Company $21 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 the amendment with the foreign customer, the Company has
modified 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 predetermined 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 cash receipts and approximately $3.1 million originally
expected to have been received in 1993 through 1995 which $3.1 million is
included in other assets in the accompanying condensed consolidated balance
sheet at March 31, 1995.
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.
Note 6:
- ------
The table below provides detail of activity in the Stockholders' Equity
accounts for the three months ended March 31, 1995:
Common Stock Non- Capital Treasury
______________ redeemable in excess Treasury Stock
Par Preferred of par Retained Stock- Prefer-
Shares Value Stock Value Earnings Common red Total
______ ______ _________ ________ ________ _______ _______ _______
(In thousands)
Balance at December 31, 1994 14,620 $1,462 $48,000 $37,369 $12,883 $(8,915) $(200) $90,599
Net Income 1,448 1,448
Conversion of 9 shares of
redeemable preferred stock
to common stock 1 1 1
Dividends declared:
Series B 12% preferred
stock ($3.00 per share) (60) (60)
Redeemable preferred
stock ($10.00 per share) (16) (16)
Series 2 preferred
stock ($.81 per share) (743) (743)
Dividend received on Common
treasury stock 3 3
Purchase of treasury stock (93) (93)
______ ______ _________ ________ ________ _______ _______ _______
(1)
Balance at March 31, 1994 14,621 $1,462 $48,000 $37,370 $13,515 $(9,008) $(200) $91,139
====== ====== ========= ======== ======== ======= ====== =======
(1)
Includes 1,574,604 shares of the Company's Common Stock held in
treasury. Excluding the 1,574,604 shares held in treasury, the outstanding
shares of the Company's Common Stock at March 31, 1995 were 13,045,912.
Note 7:
- ------
The Company s Chemical Business is in the process of completing the
installation of an additional nitric acid plant in Arkansas. The Company
anticipates the total expenditures to complete the installation will be
approximately $17.8 million, of which $15.4 million had been incurred at March
31, 1995.
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 for the clean-up of
this site 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 (the "System").
Inclusion in the 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
alleged violations of certain environmental laws and requested the
Company to conduct further investigations to better determine the
compliance status of the Company and releases of contaminants at the
site. On May 2, 1995, the Company signed a Consent Administrative
Agreement ("Agreement") with the State of Arkansas. The Agreement
provides for the Company to remediate and close a certain landfill,
monitor groundwater for certain contaminants and depending on the
results of the monitoring program to submit a remediation plan, upgrade
certain equipment to reduce wastewater effluent, and pay a civil penalty
of $25,000. While the Company is at this time unable to determine the
ultimate cost of compliance with the Agreement, the Company has
determined the subsidiary s cost to be at least $450,000; therefore, the
Company 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 Agreement, or 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.
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 March 31, 1995. This debt requires interest only
payments until September 1996 at which time the outstanding principal and
interest are due in full.
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 March 31, 1995 Condensed Consolidated Financial
Statements.
OVERVIEW
The Company is a diversified holding company which is engaged, through
its subsidiaries, in the Chemical Business, the Environmental Control
Business, the Automotive Products Business and the Industrial Products
Business.
Information about the Company's continuing operations in different
industry segments for the three months ended March 31, 1995 and 1994 is
detailed below.
Three Months Ended March 31,
1995 1994
__________ __________
(In thousands)
(Unaudited)
Sales:
Chemical $ 31,939 $ 30,952
Environmental Control 21,622 20,252
Automotive Products 7,879 8,564
Industrial Products 3,829 4,083
__________ __________
$ 65,269 $ 63,851
========== ==========
Gross profit:
Chemical $ 6,246 $ 6,088
Environmental Control 6,685 5,387
Automotive Products 2,087 2,012
Industrial Products 1,124 871
__________ __________
$ 16,142 $ 14,358
========== ==========
Operating profit (loss):
Chemical $ 2,927 $ 2,889
Environmental Control 2,976 2,093
Automotive Products 48 (115)
Industrial Products (350) (217)
__________ __________
5,601 4,650
General corporate expenses (1,666) (959)
Interest expense (2,388) (1,681)
__________ __________
Income from continuing operations before
provision for income taxes $ 1,547 $ 2,010
========== ==========
RESULTS OF OPERATIONS
- ---------------------
Three months ended March 31, 1995 vs. Three months ended March 31, 1994.
- -----------------------------------------------------------------------
Revenues
--------
Total revenues for the three months ended March 31, 1995 and 1994 were
$65.9 million and $64.4 million, respectively (an increase of $1.5 million).
Sales increased $1.4 million.
Net Sales
---------
Consolidated net sales included in total revenues for the three months
ended March 31, 1995 were $65.3 million, compared to $63.9 million for the
first three months of 1994, an increase of $1.4 million. This increase in
sales resulted principally from: (i) increased sales in the Chemical Business
of $1 million, primarily due to the higher price of ammonia being partially
passed through to customers in the form of price increases, (ii) increased
sales in the Environmental Control Business of $1.4 primarily due to increased
heat pump sales to a customer which is retrofitting certain of the air
conditioning and heating systems on a US military base, offset by decreased
fan coil sales resulting from filling excess backlog orders in the first
quarter of 1994 which had been created by the effects of a strike in 1992,
(iii) decreased sales in the Automotive Products Business of $.7 million due
to a reduced customer base, and (iv) decreased sales in the Industrial
Products Business of $.3 million, primarily due to decreased sales to a
foreign customer offset by increases in sales of machine tools.
Gross Profit
------------
Gross profit was 24.7% for the first three months of 1995, compared to
22.5% for the first three months of 1994. The improvement in the gross profit
percentage was due primarily to (i) higher prices and improved absorption of
costs due to increased production volumes in the Environmental Control
Business, (ii) higher prices in the Industrial Products Business, and (iii)
discontinued sales to some low margin/high volume customers in the Automotive
Products Business.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 19.7% in the three months ended March 31, 1995 and 17.5% in the
first three months of 1994. 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 a less than equivalent corresponding reduction in SG&A
costs, (ii) costs incurred on abandoned acquisitions and certain long-term
projects, (iii) higher sales commissions expense in the Environmental Control
Business and (iv) increased insurance costs in 1995 versus 1994. These
factors were offset in part by 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 $2.4 million during
the three months ended March 31, 1995 compared to approximately $1.7 million
during the three months ended March 31, 1994. The increase primarily resulted
from higher interest rates and higher average balances of borrowed funds.
Income Before Taxes
-------------------
The Company had income from continuing operations before income taxes of
$1.5 million in the first quarter of 1995 compared to $2 million in the three
months ended March 31, 1994. The decreased profitability of $.5 million was
primarily due to higher SG&A costs and interest expense offset by improved
gross profit as previously discussed.
Provision For Income Taxes
--------------------------
As a result of the Company's net operating loss carryforward for income
tax purposes as discussed elsewhere herein and in Note 3 of Notes to Condensed
Consolidated Financial Statements, the Company's provisions for income taxes
for the three months ended March 31, 1995 and the three months ended March 31,
1994 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 sold in May 1994. Income from discontinued
operations, net of expenses, was $.3 million in the first quarter of 1994.
Liquidity and Capital Resources
- -------------------------------
The Company is a diversified holding company and its liquidity is
dependent, in large part, on the operations of its subsidiaries and credit
agreements with lenders.
Sources of Funds
----------------
In December 1994, the Company and certain of its subsidiaries finalized
a new working capital line of credit. This line of credit consolidated
substantially all of the Company's working capital lines of credit 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 (.5%). The rate in effect at March 31,
1995 was 9.5%. 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 March 31, 1995, the available borrowings,
based on eligible collateral, approximated $5.2 million. Borrowings under the
Revolver outstanding at March 31, 1995, were $57.8 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 March 31, 1995 at the rate then in effect would be
approximately $5.5 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 March 31, 1995
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 March 31, 1995, all of which was
borrowed at March 31, 1995. The availability under this revolving
credit facility decreases 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 March 31, 1995 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 discussed and capital stock of
Chemical. The Loan Agreement requires Chemical to maintain certain
financial ratios and contains other financial covenants, including
tangible net worth requirements and capital expenditures limitations.
As of the date of this report, Chemical is in compliance with all
financial covenants. Under the terms of the Loan Agreement, Chemical
cannot transfer funds to the Company in the form of cash dividends or
other advances, except for (i) the amount of taxes that Chemical would
be required to pay if it was not consolidated with the Company; (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 $16.5 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, a loan for approximately $1.2 million to
purchase additional railcars to support the DSN Plant (the "Railcar
Loan"), and a loan for approximately $1.1 million to finance the
construction of a mixed acid plant (the "Mixed Acid Plant") in North
Carolina (the "Mixed Acid Loan"). At March 31, 1995, DSN had
outstanding borrowings of $12.8 million under the Construction Loan and
no outstanding borrowings under the Railcar Loan or the Mixed Acid Loan.
The Construction Loan will be repaid upon the completion of construction
and acceptance of the DSN Plant as capable of production, with proceeds
of a permanent loan ("DSN Permanent Loan"). Completion of construction,
funding of the remaining $3.7 million and conversion to the DSN
Permanent Loan are expected to occur during late May or early June 1995.
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 May 1, 1995, the Treasury Rate was 6.87%, which would
result in an interest rate of 9.57%. The Railcar Loan and the Mixed
Acid Loan will be repaid under the same terms as the Construction Loan.
Upon the earlier of completion of construction of the 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%.
(3) A subsidiary of the Company ("Borrower") entered into a loan agreement
("Agreement"), effective as of May 4, 1995, with Bank IV Oklahoma, N.A.
("Bank"). Pursuant to the Agreement, the Bank loaned $9 million to the
Borrower, evidenced by a Promissory Note ("Note"). The Note bears
interest per annum at a rate equal to one percent (1%) above the prime
rate in effect from day to day as published in the Wall Street Journal.
The outstanding principal balance of the Note is payable in sixty (60)
monthly payments of principal and interest commencing on May 31, 1995.
Payment of the Note is secured by a first and priority lien and security
interest in and to the Borrower s right, title, and interest in the loan
documents relating to the real property and office building known as the
Bank IV Tower located in Oklahoma City, Oklahoma (the "Tower"), the
Management Agreement relating to the Tower, and the Option to Purchase
Agreement covering the real property on which the Tower is located.
Foreign Subsidiary Financing
----------------------------
On March 7, 1995 the Company guaranteed a revolving credit facility (the
"Facility") 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
from the Company. The interest rate on this debt is the Bank of New Zealand
Corporate Base Lending Rate plus .5% (11.5% at May 1, 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 used by operating activities of continuing operations in the
first three months of 1995, after adjustment for net non-cash expenses of $2
million, was $8 million. This cash usage included the following changes in
assets and liabilities: (i) increases in accounts receivable of $7.1 million,
(ii) inventory increases of $8.6 million, (iii) increases in supplies and
prepaid items of $.7 million, and (iv) increases in accounts payable and
accrued liabilities of $4.9 million. The increase in accounts receivable was
due primarily to increased sales by approximately $10 million over the fourth
quarter of 1994 in all businesses, including seasonal sales increases in the
Chemical Business. The increase in inventories was due primarily to higher
sales levels in all businesses, stocking up in the Chemical Business for the
spring fertilizer season and increases in the Automotive Products Business due
to purchases of new products in excess of the sales demand for those products.
The increase in supplies and prepaid items resulted primarily from increased
repair supplies in the Chemical Business. The increase in accounts payable
and accrued liabilities was due primarily to increased inventory purchases.
Investing activities during the first three months of 1995 included (i)
capital expenditures of $4.6 million, relating primarily to the construction
of a new nitric acid production facility in the Chemical Business, (ii)
principal payments received on certain loans receivable of $.5 million, (iii)
proceeds of $.5 million from the sale of assets, primarily real estate, and
(iv) an increase in other assets of $1.5 million due primarily to deferred
costs of certain long-term projects. Cash flows provided by financing
activities included net borrowings of $15.9 million, offset by dividends paid
of $.8 million and treasury stock purchases of $.1 million.
In summary, during the three months ended March 31, 1995, recurring cash
requirements for required debt service payments, dividends on Company stocks,
and purchases of treasury stock approximated $1.5 million. In addition, the
Company spent approximately $4.6 million for capital improvements, primarily
in connection with the DSN Plant being constructed by the Chemical Business.
The expenditures noted above, plus the cash used by operations of $8 million,
resulted in a borrowing requirement of approximately $14.1 million against the
Company s revolving credit facilities.
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 have increased their inventories beyond required levels. In the
first quarter of 1995, the Chemical Business incurred additional costs of $2.9
million to continue installation of the DSN Plant. The Company anticipates
incurring $2.4 million in the second quarter to complete this project, which
is expected to begin full production by June 1995. As previously noted, the
Company expects to borrow an additional $3.7 million during the second quarter
related to the DSN Plant. During the first quarter of 1995, the Chemical
Business spent $.4 million in connection with the Mixed Acid Plant. An
additional $1.1 million is expected to be incurred on the Mixed Acid Plant in
1995. The Company also has planned capital expenditures for the Environmental
Control Business to acquire certain machinery and equipment for approximately
$3 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 the Chemical Business
completion of an additional concentrated nitric acid plant and a mixed acid
plant as discussed above.
In May 1995, the Company purchased 226,926 shares of treasury stock for
an aggregate purchase price, including commissions, of approximately $1.2
million.
During the first quarter of 1995, 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, which is
the annual dividend on this series of preferred stock for 1995; (2) $.81 per
share on each outstanding share of its $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2; and (3) $10.00 per share on each outstanding share
of its Convertible Noncumulative Preferred Stock, which is the annual dividend
on this series of preferred stock for 1995. The Company expects to continue
the payment of an annual cash dividend on its common stock equal to $.06 per
share in the future in accordance with the policy adopted by the Board of
Directors and the cash dividends on the Company's outstanding series of
preferred stock pursuant to the terms of such preferred stock.
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, $17 million of which has been billed with
$13.9 million collected by the Company as of March 31, 1995. In addition, the
subsidiary agreed to use its best efforts to purchase approximately $6
million of bearing products each year over the next five (5) years.
In May 1995, the subsidiary negotiated an amendment to the Agreement
with the foreign customer and an agreement with a syndication of foreign
lenders whereby the lenders acquired, without recourse to the Company or such
subsidiary, approximately $24 million of the unpaid contract amount billable
by the Company. Under the amendment with the foreign customer and the
agreement with the foreign lenders, the Company received approximately $5
million, net of fees, and a commitment from the foreign customer to provide
approximately $21 million of bearing products, without charge. The Company is
to receive such bearing products when and if the foreign customer repays the
debt of the foreign customer discussed above which the foreign lenders
acquired from the subsidiary. The commitment of the foreign customer to
provide the Company $21 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 the amendment with the foreign customer, the Company has
modified 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 predetermined 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 cash receipts and approximately $3.1 million originally
expected to have been received in 1993 through 1995 which $3.1 million is
included in other assets in the accompanying condensed consolidated balance
sheet at March 31, 1995.
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.
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 million payable in installments during the first
year of the stock option, with an option fee of $.5 million payable upon
signing of the option and annual $.1 million payments for yearly extensions of
the stock option thereafter for up to three (3) years. Upon exercise of the
stock option by the Company, or upon the occurrence of certain performance
criteria which would give the grantors of the stock option the right to
accelerate the date on which the Company must elect whether to exercise, the
Company shall pay certain cash and issue promissory notes for the balance of
the exercise price of the subject shares. The total exercise price of the
subject shares is $4 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 invested approximately $2.8 million during
May 1995 to purchase a fifty percent (50%) equity interest in an energy
conservation joint venture (the "Project"). The Project has been awarded a
contract to retrofit residential housing units at a US 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 Project estimates that the cost to
retrofit the residential housing units at the US Army base will be
approximately $17.9 million. The Project has received a loan from a lender to
finance up to approximately $14 million of the cost of the Project. The
Company is not guaranteeing any of the obligations of the Project.
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 elects
to consummate the stock option agreement discussed above.
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.
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 March 31, 1995, the Company had available NOL carryovers of
approximately $42 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 NOL carryovers has not been audited or approved by
the Internal Revenue Service and, accordingly, no assurance can be given that
such NOL carryovers will not be reduced as a result of audits in the future.
In addition, the ability of the Company to utilize these NOL 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 Note 7 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.
ERNST & YOUNG LLP 1700 Liberty Tower
100 North Broadway
Oklahoma City, OK 73102
Phone: 405 278 6800
Fax: 405 278 6823
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of LSB
Industries, Inc. and subsidiaries as of March 31, 1995, and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended March 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of LSB Industries, Inc. as of
December 31, 1994, and the related consolidated statements of operations, non-
redeemable preferred stock, common stock and other stockholders' equity and
cash flows for the year then ended (not presented herein); and in our report
dated March 21, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1994, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
May 11, 1995 /s/ ERNST & YOUNG LLP
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- ------ -----------------
There are no additional material legal proceedings pending against the
Company and/or its subsidiaries not previously reported by the Company in Item
3 of its Form 10-K for the fiscal period ended December 31, 1994, which Item 3
is incorporated by reference herein.
Item 2. Changes in Securities
- ------ ---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
- ------ -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
Item 5. Other Information
- ------ -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(A) Exhibits.
--------
The Company has included the following exhibits in this report:
4.1 Loan Agreement dated as of May 4, 1995, by and among Prime
Financial Corporation, as borrower, LSB Industries, Inc, Summit
Machine Tool Manufacturing Corp., L&S Bearing Co., International
Environmental Corporation, El Dorado Chemical Company, Climate
Master, Inc., as the guarantors, and Bank IV Oklahoma, N.A. The
total amount of long-term debt represented by this loan agreement
does not exceed ten percent of the total assets of the registrant
and its subsidiaries on a consolidated basis; therefore, no copy
of such loan agreement has been filed herewith. Rather, the
Company agrees to furnish a copy of such loan agreement to the
Commission upon request.
4.2 First Amendment to Preferred Share Purchase Rights Plan,
dated as of May 24, 1994, between the Company and Liberty National
Bank and Trust Company of Oklahoma City.
10.1 First Amendment to Non-Qualified Stock Option Agreement,
dated March 2, 1994, and Second Amendment to Stock Option
Agreement, dated April 3, 1995, each between the Company and Jack
E. Golsen.
10.2 Pre-payment Agreement, dated April 20, 1995, and Supply
Agreement, dated May 8, 1995, each by and between L&S Automotive
Products Company, Inc. and ZVL-LSA A.S. and each pertaining to the
Technical License, Technology Assistance, Engineering and
Manufacturing Plant Sales Agreement, dated July 6, 1992, between
L&S Automotive Products Company, Inc. and ZVL-ZKL A.S., 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.
11.1 Statement Re: Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule
(B) Reports of Form 8-K.
-------------------
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1995.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has caused the undersigned, duly-authorized, to sign this
report on its behalf on this 19th day of May, 1995.
LSB INDUSTRIES, INC.
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)