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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, 1995
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
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(405) 235-4546
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------------------ -----------------------
Common Stock, Par Value $.10 New York Stock Exchange
$3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2 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 February 29, 1996, the aggregate market value of the 8,769,203
shares of voting stock of the Registrant held by non-affiliates of the Company
equaled approximately $33,980,662 based on the closing sales price for the
Company's common stock as reported for that date. That amount does not
include (1) the 1,566 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 February 29, 1996, the Registrant had 12,911,447 shares of common
stock outstanding (excluding 1,845,969 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
Business Strategy 1
Segment Information and Foreign
and Domestic Operations and Export Sales 1
Chemical Business 1
Environmental Control Business 4
Automotive Products Business 7
Industrial Products Business 8
Employees 9
Research and Development 9
Environmental Compliance 9
Item 2. Properties
Chemical Business 11
Environmental Control Business 12
Automotive Products Business 13
Industrial Products Business 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 4A. Executive Officers of the Company 14
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 15
Stockholders 15
Dividends 15
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 20
Results of Operations 23
Liquidity and Capital Resources 26
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
PART III
Incorporated by reference from the Company's proxy statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 31
PART I
Item 1. BUSINESS
General
- -------
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").
Business Strategy
- -----------------
The Company is pursuing a strategy of focusing on its more profitable
businesses and concentrating on businesses and product lines in niche markets
where the Company can establish a position as a market leader. In addition,
the Company is seeking to further build value for its stockholders through
realization of the value of selected assets reflected on its balance sheet.
In this connection, the Company is considering alternatives with respect to
the Automotive Business, including its possible disposition. Any disposition
of the Automotive Business is, however, subject, among other things, to the
Company obtaining an acceptable price. In addition, the Company intends to
reduce the Industrial Products Business by liquidating its inventory in the
ordinary course of business to a size where the Company's investment in this
business is not significant, and thereafter, limiting this business to the
purchase and sale of a limited number of lines of machine tools which the
Company believes are profitable. For 1995, approximately 82% of the Company's
consolidated sales were attributable to its businesses other than the
Automotive Products Business and the Industrial Products Business. The
Automotive Products and the Industrial Products Businesses incurred a combined
operating loss of approximately $4.9 million compared to the Company's
consolidated operating profit of approximately $13.1 million after deducting
the $4.9 million operating loss.
Segment Information and Foreign and Domestic Operations and Export Sales
- ------------------------------------------------------------------------
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
- -----------------
General:
-------
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.
The Chemical Business' principal manufacturing facility is located in
El Dorado, Arkansas ("El Dorado Facility") and it's other manufacturing
facilities are located in Hallowell, Kansas, and in Australia. The Chemical
Business has placed into operation a blending facility in Wilmington, North
Carolina to allow the Company to produce a mixed acid product for sale. This
facility became operational during the fourth quarter of 1995.
For 1995, approximately 27% of the sales of the Chemical Business
consisted of sales of fertilizer and related chemical products for
agricultural purposes, which represented approximately 14% of the Company's
1995 consolidated sales, and 57% consisted of sales of ammonium nitrate and
other chemical-based blasting products for the mining industry, which
represented approximately 30% of the Company's 1995 consolidated sales. The
Chemical Business accounted for approximately 51% and 54% of the Company's
1995 and 1994 consolidated sales, respectively.
Seasonality:
-----------
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 increase its inventory
prior to the beginning of each season. 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 selling 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 and 1995 by most, if not all, users of ammonia that are not also
manufacturers of ammonia. During 1994 and 1995, the Company's Chemical
Business was not able to recover all 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
negative impact on the Company's 1994 and 1995 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 throughout 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. However, the Company is
not able to predict, at this time, what the effect of continuing ammonia price
increases during 1996, 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 34 distribution centers. See
"Properties". The Chemical Business sells low density prilled ammonium
nitrate-based explosives primarily to the surface coal mining industry through
eight (8) 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, and Missouri, and through four (4) company-owned
distribution centers in Australia and one (1) location in New Zealand 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 21
distribution centers, with 15 centers located in Northern and Eastern Texas,
one center located in Oklahoma, 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.
Customers:
---------
The Chemical Business does not depend on any single customer or a few
customers. However, the Company does have a multi-year contract expiring in
December, 1998, to supply a customer with nitric acid from ammonia provided
by such customer. The loss of that contract could have a material adverse
effect on the Chemical Business.
Patents:
-------
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' domestic blasting product distribution
centers are licensed by the Bureau of Alcohol, Tobacco and Firearms in order
to manufacture and distribute blasting products and is subject to comparable
requirements in its Australian operations. The Chemical Business also must
comply with substantial governmental regulations dealing with environmental
matters. See "Business - Environmental Compliance" for a discussion as to an
environmental issue regarding the Company's El Dorado, Arkansas, manufacturing
facility.
Competition:
-----------
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.
Recent Development:
------------------
The Chemical Business has entered into detailed negotiations with Bayer
Corporation ("Bayer") for the Chemical Business to build, own and operate a
nitric acid plant located on property owned by Bayer to supply nitric acid on
a long-term basis to a complex that Bayer is to construct in Baytown, Texas.
The transaction with Bayer is subject to finalization of a definitive
agreement. If the definitive agreement is finalized, the Company expects that
the plant can be constructed and become operational within 24-30 months from
the completion of such definitive agreement. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations".
Environmental Control Business
- ------------------------------
General:
-------
The Company's Environmental Control Business manufactures and sells a
broad range of fan coil, air handling, air conditioning, heating, water source
heat pump, geothermal water source heat pump and dehumidification products
targeted to both commercial and residential new building construction and
renovation, as well as industrial applications. 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 31% and 29% of
the Company's 1995 and 1994 consolidated sales, respectively.
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, 1995, the backlog of confirmed orders for the Environmental
Control Business was approximately $12.1 million, as compared to approximately
$24.2 million as of December 31, 1994. This decrease in backlog of confirmed
orders took place because (a) at December 31, 1994, the back log contained one
unusually large order for approximately $5.0 million which was shipped during
the first half of 1995, and (b) because of efficiencies realized in the
manufacturing processes of the Environmental Control Business resulting in
lead times being reduced from ten (10) weeks in 1994 to seven (7) weeks in
1995. 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, 1995, the Company had released approximately $9.8 million of
backlog orders in the Environmental Control Business to production, all of
which are expected to be filled by December 31, 1996.
Distribution:
------------
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. The Environmental Control Business' sales to
residential mechanical contractors are through distributors or sold directly
by the Environmental Control Business to the contractors. 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 31% of the sales of the Environmental Control Business in
1995 and approximately 10% of the Company's 1995 consolidated sales.
Market:
------
The Environmental Control Business depends primarily on the commercial
construction industry, including new construction and the remodeling and
renovation of older buildings. In recent years this Business has introduced
products designed for residential markets.
Raw Materials:
-------------
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:
-----------
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.
Joint Ventures and Options to Purchase:
--------------------------------------
In January, 1994, an entity (the "Entity"), through a limited
partnership formed by the Entity, obtained a $17.9 million contract
("Contract") to replace air conditioning equipment and other energy savings
devices in residential housing located at a federal governmental facility (the
"Project"). The Environmental Control Business received a purchase order from
the partnership to provide the air conditioning equipment for the Project
under the energy savings contract. The amount of such purchase order was
approximately $5 million. Substantially all of the products ordered pursuant
to the purchase order were delivered by the Environmental Control Business to
the partnership in 1995. After the partnership received the contract from the
government and after the partnership issued the purchase order to the
Environmental Control Business, the partnership borrowed approximately $14
million from an unaffiliated lender and a subsidiary of the Company invested
approximately $2.8 million as equity in the limited partnership that obtained
the contract for the Project. As a result, the Company's subsidiary is a
limited partner in the limited partnership owning 50% of the limited
partnership. The partnership's revenue under this Contract is based on an
average of 77% of all energy and maintenance savings during the twenty (20)
year term of the Contract. The Company did not guarantee the repayment to the
lender, however, the Company's subsidiary pledged its investment in the joint
venture, on a non-recourse basis, to the lender to secure the loan. The
Company also agreed to indemnify the bonding company that provided the $17.9
million performance bond which the partnership had to provide under the terms
of the Contract.
The Company has obtained a stock option to acquire 80% of the issued and
outstanding stock of the Entity (the "Option"). For the Option, the Company
has paid $900,000 as of the date of this report and has agreed to pay an
additional $100,000 on or before May 31, 1996. The term of the Option is
originally for a period of one year, but the Company may extend such for three
(3) additional years until 1999 upon payment of $100,000 for each year the
Company desires to extend such option. If the Company decides to exercise the
option, the Company has agreed to pay an exercise price of $4 million, less
the amount already paid toward the Option ("Option Price") and less any other
amounts paid by the Company for the Option ("Prepayments"), with a portion of
the unpaid exercise price being payable in cash and the balance over a certain
period of time. The grantors of the Option have entered into an employment
agreement with the Entity. Under the terms of the employment agreements, each
of the three guarantors will receive, among other things, 12 1/2% of the net
profits of the Entity for a period of three to five years following the date
of exercise. If the Company decides not to exercise the Option, the grantors
of the Option have agreed to repay to the Company the amounts paid by the
Company in connection with the Option (less $100,000), which obligation is
secured by the stock of the Entity and other affiliates of the Entity. If the
Company decides not to exercise the Option, there is no assurance that the
grantors of the Option will have funds necessary to repay to the Company the
amount paid for the Option. The grantors of the option may, under certain
conditions, require the Company to accelerate its decision as to when it
exercises the option. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". For 1995 the unaudited revenues of the
Entity were approximately $2.7 million with a net loss of approximately $.5
million.
During 1994, a subsidiary of the Company obtained an option to acquire
all of the stock of a French manufacturer of air conditioning and heating
equipment. The Company's subsidiary was granted the option as a result of the
subsidiary loaning to the parent company of the French manufacturer
approximately U.S. $2.1 million. Subsequent to the loan of U.S. $2.1 million,
the Company's subsidiary has loaned to the parent of the French manufacturer
an additional U.S $.8 million. The amount loaned is secured by the stock and
assets of the French manufacturer. The Company's subsidiary may exercise its
option to acquire the French manufacturer by converting approximately $150,000
of the amount loaned into equity. The option is currently exercisable and
will expire June 15, 1999. As of the date of this report, the Company has not
decided whether it will exercise the option.
For 1995 and 1994, the French manufacturer had revenues of U.S. $15.9
million and U.S. $10.9 million, respectively, with adjusted net losses of U.S.
$.9 million and U.S. $1.4 million in 1995 and 1994, respectively. As a result
of these losses by the French manufacturer in 1994 and 1995, the Company has
taken certain write-offs against the amount of the loans aggregating
approximately $1.5 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Automotive Products Business
- ----------------------------
General:
-------
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 12%
and 13% of the Company's 1995 and 1994 sales, respectively. In 1995, the
Automotive Products Business manufactured approximately 37% of the products it
sold and approximately 47% in 1994, 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.
In connection with a contract entered into in 1992 with a foreign
customer ("Buyer") to supply the Buyer with equipment, technology and
technical services to manufacture certain types of automotive bearing
products, a subsidiary of the Company agreed to buy from the Buyer
approximately $6 million of bearing products over each of the next five (5)
years, at predetermined prices, not in excess of market prices, subject to the
Buyer's ability to deliver products meeting quality standards. In January,
1996, the Company's subsidiary and the Buyer entered into letter agreements
that provided that the Company's subsidiary would not be required by past or
present agreements to purchase quantities of bearings each year in excess of
bearings that it can sell in the ordinary course of business.
Raw Materials:
-------------
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.
Foreign Risk:
------------
By purchasing a significant portion of the bearings and other automotive
replacement parts that it sells from foreign manufacturers, the Automotive
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 bearings and other automotive replacement parts provide for payment in
United States dollars. Circumstances beyond the control of the Company could
eliminate or seriously curtail the supply of bearings or other automotive
replacement parts from any one or all of the foreign countries involved.
Competition:
-----------
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
- ----------------------------
General:
-------
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. The Industrial Products Business accounted for approximately 5% of the
Company's consolidated sales in 1995.
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.
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
- ---------
As of December 31, 1995, the Company employed 1,420 persons. As of that
date, (a) the Chemical Business employed 442 persons, with 118 represented by
unions under agreements expiring in August, 1998,(b) the Environmental Control
Business employed 575 persons, none of whom are represented by a union, and
(c) the Automotive Products Business employed 243 persons, with 16 represented
by unions under an agreement that expired in August, 1990.
Research and Development
- ------------------------
The Company incurred approximately $ 501,000 in 1995, $606,000 in 1994,
and $788,000 in 1993 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
- ------------------------
The Chemical Business and its operations are subject to extensive
federal, state and local environmental laws, rules, regulations and ordinances
relating to pollution, the protection of the environment or the release or
disposal of materials ("Environmental Laws") and is also subject to other
federal, state and local laws regarding health and safety matters ("Health
Laws"). The operation of any chemical manufacturing plant and the
distribution of chemical products entail risks under the Environmental Laws
and Health Laws, many of which provide for substantial fines and criminal
sanctions for violations, and there can be no assurance that material costs or
liabilities will not be incurred. In addition, the Environmental Laws and
Health Laws, and enforcement policies thereunder relating to the Chemical
Business could bring into question the handling, manufacture, use, emission or
disposal of substances of pollutants at the facilities of the Chemical
Business or the manufacture, use, or disposal or certain of its chemical
products. Potentially significant expenditures could be required in order to
comply with the Environmental Laws and Health Laws. The Company may be
required to make additional significant site or operational modifications,
potentially involving substantial expenditures and reduction or suspension of
certain operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources". A
subsidiary of the Company in the 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 a site in Oklahoma City, Oklahoma. See
"Legal Proceedings".
In 1993, the Chemical Business was advised that its El Dorado, Arkansas
facility (the "Site") had been placed in the Environmental Protection Agency's
("EPA") data-based tracking system (the "System"). The Company has been
orally advised that the EPA has cancelled the scheduled inspection for the
Site and the Site will be removed from the System; however, until the EPA
formally advises the Company in writing that the Site has been removed from
the System, there are no assurances that such will occur. 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, the 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. 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. If a site is placed in the System, the 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 Arkansas Department of Pollution Control & Ecology ("ADPC&E),
on behalf of the EPA, performed such preliminary assessment. The preliminary
assessment report prepared by the ADPC&E stated, in part, that a release of
certain types of contaminants is suspected to have occurred at the Site. The
Company has been advised that there have occurred certain releases of
contaminants at the Site. In addition, subsequent to the preliminary
assessment by the State of Arkansas, the ADPC&E conducted additional
inspections at the Site, which revealed certain instances of noncompliance
with applicable hazardous waste management activities at the Site. In 1995,
the Company and the ADPC&E entered into a consent agreement to address (i)
closure of a solid waste landfill ("Landfill") at the Site, which had been
used for disposal of certain wastes (including sulphur waste), and (ii)
certain groundwater contamination and other issues at the Site. This
agreement required the Chemical Business to undertake certain activities at
the Site, including closure of the Landfill, certain groundwater monitoring
and other action to reduce contaminants in the groundwater at the Site. The
closure of the Landfill has been completed. The Chemical Business has
submitted a Groundwater Monitoring Work Plan ("Plan") to the ADPC&E which the
ADPC&E has approved, and the Chemical Business is proceeding under the Plan.
Monitoring data obtained by the Chemical Business has indicated certain
contaminants in the groundwater at the Site. The Chemical Business has
installed additional monitoring wells at the Site to further test the
groundwater. While the Company is, as of the date of this report, unable to
determine the ultimate cost of compliance with the agreement and monitoring,
testing and remediating any contaminants in the groundwater at the Site, in
1994 the Company included a provision for such environmental cost of $450,000
in its results of operations. As of the date of this report, the Chemical
Business has incurred approximately $400,000 in closing the Landfill and
monitoring, testing and remediating the groundwater at the Site and performing
its obligations under the agreement with the ADPC&E. See Note 12 to Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". As part of the agreement with
the ADPC&E, the Chemical Business paid a $25,000 penalty, and it was agreed
that an additional penalty of $125,000 will be forgiven through expenditures
in excess of $125,000 that reduce the sulfates in the manufacturing processes
at the Site through an upgrade to a certain system. The upgrade has been
installed at a cost in excess of $125,000, but there are no assurances that
the upgrade will achieve the sulfate reduction required to forgive the
additional penalty.
In December, 1995, the Chemical Business and the ADPC&E entered into a
consent agreement to resolve certain issues raised by the ADPC&E relating to
start up of certain equipment at the Site and air emissions at the Site.
Under this consent agreement, the Chemical Business agreed, among other
things, to take certain actions to: (i) implement a corrective measures plan
submitted to the ADPC&E in October, 1995; (ii) submit an application to the
ADPC&E to modify its air permit within a certain period which includes all
unpermitted sources of emissions, which application is subject to approval by
the ADPC&E; (iii) address the air emissions from its older concentrated nitric
acid concentrator at the Site; and, (iv) pending decision by the ADPC&E as to
the permit modification, the Chemical Business may continue to operate its
older concentrated nitric acid concentrator at the Site until July 1, 1996;
provided that the Chemical Business shall maintain a running total of certain
emissions from its concentrated nitric acid concentrators and shall
discontinue use of such older concentrated nitric acid concentrator before the
combined total of emissions reaches a certain level. In addition, under the
terms of the agreement, the Chemical Business agreed to pay a $50,000 penalty,
except that the Chemical Business has received permission from the ADPC&E to
erect an air emission monitoring station in lieu of paying the $50,000. In
February, 1996, the Chemical Business voluntarily temporarily removed from
operation at the Site one-half of the older concentrated nitric acid
concentrator, which nitric acid concentrator is scheduled to be removed from
operation on July 1, 1996, and has voluntarily taken certain other actions to
reduce air emissions at the Site. The Chemical Business has instituted an
opacity reduction program, and is investigating, as of the date of this
report, additional opacity reduction activities and the feasibility of
installing additional pollution control equipment to further reduce opacity at
the Site. The Company believes that the cost will not exceed $3 million in
acquiring and installing the additional pollution control equipment to reduce
air emissions at the Site. Failure to satisfactorily resolve the alleged
emission issues with the ADPC&E could have a material adverse effect on the
Company, including, but not limited to, the ADPC&E ordering the Chemical
Business to curtail certain production activities at the Site under certain
conditions.
The Company has been advised that certain persons in the vicinity of the
Site have retained counsel to bring a toxic tort action against the Chemical
Business claiming that certain of their alleged health issues were caused by
air emissions from the Site. To the knowledge of the Company, as of the date
of this report, no lawsuit or legal proceedings have been filed or instituted
in connection with this matter, and the Company is unaware of the exact nature
of these claims or the amount of damages that the claimants are alleging as a
result of such alleged injuries. The Company and the Chemical Business
maintain an Environmental Impairment insurance policy ("EIL Insurance") that
provides coverage to the Company and the Chemical Business for certain
discharges, dispersal, releases, or escapes of certain contaminants and
pollutants into or upon land, the atmosphere or any water course or body of
water from the Site which has caused bodily injury, property damage or
contamination to others or to other property not on the Site. The EIL
Insurance provides limits of liability for each loss up to $10 million and a
similar $10 million limit for all losses due to bodily injury or property
damage, except $5 million limits for each remediation expense and $5 million
for all remediation expenses, with the maximum limit of liability for all
claims under the EIL Insurance not to exceed $10 million for each loss or
remediation expense and $10 million for all losses and remediation expenses.
The EIL Insurance also provides a retention of the first $500,000 per loss or
remediation expense that is to be paid by the Company. The Company has given
notice to its insurance carrier of the above claims. Although there are no
assurances, the Company believes that the EIL Insurance will provide coverage
for these claims up to the limits of the policy in excess of the $500,000
retention. As of the date of this report, the Company is unaware whether such
claims will exceed the limits of the coverage of the EIL Insurance. Although
there can be no assurances, the Company does not believe the outcome of this
matter will have a material adverse effect on the Company's financial position
or results of operation. The statement contained in the penultimate sentence
of this paragraph is a forward looking statement that involves a number of
risks and uncertainties that could cause actual results to differ materially,
such as, among other factors, the following: the EIL Insurance does not
provide coverage to the Company and the Chemical Business for any material
claims made by the claimants, the claimants alleged damages not covered by the
EIL Policy which a court may find the Company and/or the Chemical Business
liable for, such as punitive damages, or a court finds the Company and/or the
Chemical Business liable for damages to such claimants for a material amount
in excess of the limits of coverage of the EIL Insurance.
Item 2. PROPERTIES
- -------------------
Chemical Business
- -----------------
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"). In addition, the
Chemical Business has two manufacturing facilities in Australia that produce
blasting related products.
As of December 31, 1995, the manufacturing facility at the Site was
being utilized to the extent of approximately 90%, based on the continuous
operation of those facilities. As of December 31, 1995, 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 34
agricultural and blasting distribution centers. The Chemical Business
currently operates 21 agricultural distribution centers, with 15 of the
centers located in Texas (12 of which the Company owns and 3 of which it
leases); 1 center located in Oklahoma which the Company owns; 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 8 domestic explosives distribution
centers located in Bonne Terre, Missouri (owned); Central City, Owensboro,
Combs, and Pilgrim, Kentucky (leased); Midland, Indiana (leased); Carlsbad,
New Mexico (leased); and Pryor, Oklahoma (leased). The Chemical Business also
has explosives distribution centers in Australia located at: Peak Downs;
Kalgoorlie; Karratha; and, Hunter Valley (all leased) and one located in New
Zealand.
The Chemical Business operates its Kansas facility 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 1994 and 1995 the Chemical Business spent approximately $22.3
million to install an additional concentrated nitric acid concentrator ("new
concentrator") at its manufacturing plant facility at the Site. The new
concentrator began limited operations in 1995 and is expected to become fully
operational by March 31, 1996. 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.
The Company has constructed a facility in Wilmington, North Carolina to
allow the Company to blend a mixed acid product for sale. This facility
became operational during the fourth quarter of 1995.
Environmental Control Business
- ------------------------------
The Environmental Control Business conducts its fan coil manufacturing
operations in two adjacent facilities located in Oklahoma City, Oklahoma,
consisting of approximately 265,000 square feet owned by the Company subject
to mortgage. As of December 31, 1995, the Environmental Control Business was
using the productive capacity of the above-referenced facilities to the extent
of approximately 55%, based on two, eight-hour shifts per day and a five-day
week.
The Environmental Control Business manufactures most of its heat pump
products in a leased 270,000 square foot facility in Oklahoma City, Oklahoma.
The lease term began March 1, 1988 and expires June 30, 1996, 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, 1995,
the productive capacity of this manufacturing operation was being utilized to
the extent of approximately 60%, based on one eight-hour shift per day and a
five-day week.
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 1995, the Automotive Products
Business under-utilized the productive capacity of its facilities.
In May 1995, New Alloy Co. was acquired as a wholly owned subsidiary of
the Automotive Products Business to manufacture and distribute U-joints and
related products. The leased manufacturing facility for this operation is
located in Michigan City, Indiana.
International Bearings, Inc. ("IBI"), a subsidiary of the Company
operating as a separate entity within the Automotive Products Division,
operates from a Company owned warehouse of approximately 45,000 square feet
in an industrial park section of Memphis, Tennessee.
Industrial Products Business
- ----------------------------
The Company owns several buildings, some of which are subject to
mortgages, totaling approximately 385,000 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.
In addition to the Chemical Business' El Dorado, Arkansas facility (the
"Site") being placed in the System (see "Business - Environmental
Compliance"), investigations have identified certain groundwater and other
contamination issues at this facility, including the Landfill. The Company
has been orally advised that the EPA has cancelled the scheduled inspection
for the Site and the Site will be removed from the System; however, until the
EPA formally advises the Company in writing that the Site has been removed
from the System, there are no assurances that such will occur. On June 9,
1995, the Chemical Business and the ADPC&E entered into a consent agreement
addressing the Landfill and the groundwater and certain other contamination
issues at the Site. See "Business - Environmental Compliance" for a
discussion of the system and such consent agreement with the ADPC&E.
The Company's Chemical Business also signed a consent agreement
("Agreement") with the ADPC&E, effective February 12, 1996, to resolve certain
compliance issues associated with the start-up of the a new concentrated
nitric acid concentrator, the decommissioning of the older concentrated nitric
acid units and certain other air emissions issues. See "Business -
Environmental Compliance" for a discussion of the Agreement.
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 67 Board Chairman December, 1968
and President
Barry H. Golsen 45 Board Vice Chairman August, 1981
and President of the
Environmental
Control Business
David R. Goss 55 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 54 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 54 Vice President - April, 1977
Treasurer and
Corporate Controller
David M. Shear 36 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,
-------------------------
1995 1994
Quarter High Low High Low
------- ---- --- ---- ---
First 6 1/4 5 5/8 10 8 1/4
Second 6 7/8 5 1/4 9 1/4 7
Third 6 7/8 4 7/8 7 3/4 5 1/4
Fourth 5 1/4 3 5/8 7 3/4 5 3/8
Stockholders
- ------------
As of February 29, 1996, the Company had 1173 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, 1995, 915,000 shares
of $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2 ("Series 2
Preferred"), 1,566 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 has a policy as to the payment of
annual cash dividends on its outstanding Common Stock of $.06 per share,
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, 1995, and January 1, 1996;
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"), both within the Company's Chemical Business, and certain lenders, and
between DSN Corporation ("DSN"), another subsidiary of the Company within the
Chemical Business, and a lender, (i) 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), and (ii) DSN is prohibited from paying any dividends or making any
distributions to the Company. See Note 7 of Notes to Consolidated Financial
Statements and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
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, SEC, and DSN 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,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Statement of Operations Data:
Net sales $267,391 $245,025 $232,616 $198,373 $177,035
======== ======== ======== ======== ========
Total Revenues $274,115 $249,969 $237,529 $200,217 $180,238
======== ======== ======== ======== ========
Interest expense $ 10,131 $ 6,949 $ 7,507 $ 9,225 $ 10,776
======== ======== ======== ======== ========
Income (loss) from continuing
operations
$ (3,732) $ 983 $ 11,235 $ 6,985 $ (3,190)
======== ======== ======== ======== ========
Net income (loss) $ (3,732) $ 24,467 $ 12,399 $ 9,255 $ (1,147)
======== ======== ======== ======== ========
Net income (loss) applicable
to common stock $ (6,961) $ 21,232 $ 10,357 $ 7,428 $ (3,090)
======== ======== ======== ======== ========
Primary earnings (loss)
per common share:
Income (loss) from continuing
operations
$ (.53) $ (.16) $ .69 $ .66 $ (.81)
======== ======== ======== ======== ========
Net income (loss) $ (.53) $ 1.54 $ .77 $ .94 $ (.48)
======== ======== ======== ======== ========
Item 6. SELECTED FINANCIAL DATA (Continued)
Years ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Balance Sheet Data:
Total Assets $238,176 $221,281 $196,038 $166,999 $158,383
======== ======== ======== ======== ========
Long-term debt, including current $118,280 $ 91,681 $ 90,395 $ 51,332 $ 56,807
portion ======== ======== ======== ========
Redeemable preferred stock $ 149 $ 152 $ 155 $ 163 $ 179
======== ======== ======== ======== ========
Stockholders' Equity $ 81,576 $ 90,599 $ 74,871 $ 18,339 $ 10,352
======== ======== ======== ======== ========
Selected other Data:
Cash dividends declared
per common share $ .06 $ .06 $ .06 $ - $ -
======== ======== ======== ======== ========
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, 1995 Consolidated Financial Statements,
Item 6 "SELECTED FINANCIAL DATA" and Item 1 "BUSINESS" included elsewhere in
this report.
Overview
- --------
The Company is going through a transition from a highly diversified company to
a more focused company with the intent to focus on its two primary business
units, the Chemical Business and the Environmental Control Business.
In May 1994, the Company sold its Financial Services Business, Equity Bank for
Savings F.A. and as a result exited the financial services business.
In September 1995 the Company announced that it would reduce its investment
in, or take other actions regarding, the Automotive and Industrial Products
Businesses. The intent is to decrease the investment in these Businesses and
redeploy the cash into the Chemical and Environmental Control Business which
are perceived by management to have strategic advantages and better historical
returns on invested capital. The Company continues to explore its
alternatives to accomplish these goals, but as of now, no formal plans have
been adopted.
The following table contains certain of the information from note 15 of Notes
to the Company's Consolidated Financial Statements about the Company's
operations in different industry segments for each of the three years in the
period ended December 31, 1995.
1995 1994 1993
--------- --------- --------
(In Thousands)
Sales:
Chemical $ 136,903 $ 131,576 $ 114,952
Environmental Control 83,843 69,914 69,437
Industrial Products 13,375 11,222 19,714
Automotive Products 33,270 32,313 28,513
--------- --------- ---------
$ 267,371 $ 245,025 $ 232,616
========= ========= =========
Gross Profit: (1)
Chemical $ 26,050 $ 25,700 $ 27,557
Environmental Control 21,694 17,651 15,651
Industrial Products 2,953 1,316 5,160
Automotive Products 6,366 8,442 9,744
--------- --------- ---------
$ 57,063 $ 53,109 $ 58,112
========= ========= =========
Operating profit (loss): (2)
Chemical $ 13,393 $ 12,809 $ 17,632
Environmental Control 4,630 3,512 3,900
Industrial Products (1,199) (4,155) 2,120
Automotive Products (3,704) (1,462) 2,528
--------- --------- ---------
13,120 10,704 26,180
General corporate expenses, net (6,571) (3,472) (6,629)
Interest Expense (10,131) (6,949) (7,507)
--------- -------- --------
Income (loss) from continuing
operations before provision
for income taxes $ (3,582) $ 283 $ 12,044
========= ========= =========
1995 1994 1993
------ ------ ------
(In Thousands)
Depreciation, depletion and
amortization of property,
plant and equipment:
Chemical $ 4,532 $ 4,044 $ 3,696
========= ========= =========
Environmental Control $ 1,582 $ 1,427 $ 1,015
========= ========= =========
Industrial Products $ 124 $ 117 $ 118
========= ========= =========
Automotive Products $ 986 $ 785 $ 502
========= ========= =========
Additions to property,
plant and equipment:
Chemical $ 17,979 $ 15,532 $ 9,036
========= ========= =========
Environmental Control $ 447 $ 3,722 $ 1,584
========= ========= =========
Industrial Products $ 265 $ 74 $ 560
========= ========= =========
Automotive Products $ 1,341 $ 1,203 $ 1,875
========= ========= =========
Identifiable assets:
Chemical $ 111,890 $ 94,972 $ 77,943
Environmental Control 41,331 40,660 38,389
Industrial Products 17,328 18,423 22,688
Automotive Products 43,872 38,369 31,650
--------- --------- ---------
214,421 192,424 170,670
Corporate assets 23,755 28,857 25,368
--------- --------- ---------
Total assets $ 238,176 $ 221,281 $ 196,038
========= ========= =========
____________________________
Gross profit by industry segment represents net sales less cost of sales.
Operating profit by industry segment represents revenues less operating
expenses before deducting general corporate expenses, interest expense and
income taxes. As indicated in the above table the operating profit
(as defined) declined from $26.1 million in 1993 to $10.7 million in
1994 and $13.1 million in 1995, while sales increased approximately 15%
during the same period. The decline in operating profit, coupled with an
increase in interest expense, resulted in a loss from continuing
operations before income taxes for 1995 of $3.6 million. This decline in
operating profit is primarily due to lower earnings in the Chemical
Business as a result of much higher costs for anhydrous ammonia (NH3),
which is the basic raw material for the Chemical Business' nitrate based
products, and to the lower margins in the Automotive and Industrial
Products Businesses.
Chemical Business
- -----------------
The Chemical Business manufacturers and sells prilled ammonium nitrate
products and high grade specialty acids to the explosives, agricultural, and
industrial acids markets, and markets and licenses a number of proprietary
explosives products. The Company has grown this Business through the
expansion of its principal manufacturing facility in El Dorado, Arkansas, the
construction of a mixed acid plant in Wilmington, North Carolina, and the
acquisition of new agricultural distribution centers in key geographical
markets which are freight logical to its principal plant. During the years
1995, 1994, and 1993, capital expenditures in this Business were $18.0
million, $15.5 million, and $9.0 million, respectively. During the period
from December 1993 through December 1995 the net investment in assets of the
Chemical Business was increased from $78 million to $112 million primarily due
to the construction of additional capacity to benefit future periods.
The operating profit in the Chemical Business is down from $17.6 million in
1993 to $12.8 million and $13.4 million in 1994 and 1995, respectively.
During 1994 and 1995 the cost of the Chemical Business' primary raw material
Anhydrous Ammonia increased from a 1993 average of $107.12 per ton to $156.71
in 1994 and $161.84 per ton in 1995. The Chemical Business purchases
approximately 220,000 tons per year of anhydrous ammonia. The increased cost
was partially passed on to customers in the form of higher prices but the
entire cost could not be offset by higher sales prices resulting in lower
gross profit margins in 1994 and 1995.
The Chemical Business has entered into detailed negotiations with Bayer
Corporation ("Bayer") to build, own, and operate a nitric acid plant as a part
of a complex to be built by Bayer in Baytown Texas to provide Bayer's
requirements for nitric acid on a long-term basis, subject to completion of
a definitive agreement relating to this project. The Company intends
to obtain project financing to fund the construction of the plant, which
will be constructed by an independent construction firm to be selected by
the Company. If the definitive agreement is finalized, the Company
expects that the plant can be constructed and become operational within 24-30
months from the completion of such definitive agreement.
Environmental Control
- ---------------------
The Environmental Control Business manufacturers and sells a broad range of
fan coil, air handling, air conditioning, heating, water source heat pumps,
and dehumidification products targeted to both commercial and residential new
building construction and renovation.
The Environmental Business focuses on product lines in the specific niche
markets of fan coils and water source heat pumps and has established a
significant market share in these specific markets.
As indicated in the above table, the Environmental Control Business reported
improved sales (an increase of 20%) and improved operating profit for 1995 as
compared to 1994. From December 1993 through December 1995 the net investment
in assets of the Environmental Control Business was increased from $38 million
to $41 million. During this two year period inventories were reduced $2.3
million, capital expenditures were $4.2 million and depreciation was
approximately $3.0 million.
Automotive and Industrial Products Businesses
- ---------------------------------------------
The Automotive Products Business sells its products into the automotive, truck
and agricultural equipment replacement markets. Certain of the products are
sold directly to original equipment manufacturers and certain major chain
stores. The Industrial Products Business markets a proprietary line of
machine tools most of which are purchased from foreign companies, which
manufacture the machine tools to Company specifications. As indicated in the
above table, during 1993, 1994 and 1995, respectively, these Business recorded
combined sales of $48.2 million $43.5 million and $46.6 million, respectively,
and reported an operating profit (as defined above) of $4.6 million in 1993
and operating losses (as defined above) of $5.6 million and $4.9 million in
1994 and 1995, respectively. The net investment in assets of these Businesses
was $54.3 million, $56.8 million and $61.2 million at year end 1993, 1994 and
1995, respectively. The increase in the investment was primarily due to a
build up in inventory in the Automotive Products Business, which resulted from
purchases from foreign suppliers with long lead times, in quantities in excess
of current demand. A stringent inventory reduction plan was put into place
that should bring the inventories back into line over time.
Results of Operations
- ---------------------
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Revenues
Total revenues for 1995 and 1994 were $274.1 million and $250.0 million,
respectively (an increase of $24.1 million or 9.7%). Sales increased $22.4
million or 9.1%. Other income included in total revenues was $6.7 million, an
increase of $1.8 million from 1994, which resulted primarily from proceeds
received on the settlement of loans which were acquired in connection with the
sale of Equity Bank. See "Liquidity and Capital Resources" of this
Management's Discussion and Analysis.
Net Sales
Consolidated net sales for 1995 were $267.4 million, compared to $245.0
million for 1994, an increase of $22.4 million or 9.1%. This sales increase
resulted principally from: (i) increased sales in the Environmental Control
Business of $13.9 million, primarily due to improved market conditions and
increased production in the fan coil segment of this business and to
increased sales in geothermal water source heat pumps related to certain
governmental projects; (ii) increased sales in the Chemical Business of $5.3
million which were primarily attributable to higher ammonia costs being passed
through to customers, and increased sales of $2.5 million at Total Energy
Systems ("TES"), the Company's subsidiary located in Australia, which have
resulted from an expanded customer base; (iii) increased sales of $2.2 million
in the Industrial Products Business primarily due to finalization of a sale
to a foreign customer and increases in sales of machine tools; and (iv)
increased sales of $1.0 million in the Automotive Products Business due to the
addition of new product lines.
Gross Profit
Gross profit increased $4.0 million and was 21.3% of net sales for 1995,
compared to 21.7% of net sales for 1994. The gross profit percentage remained
consistent, with only slight changes, in the Chemical and Environmental
Control Businesses. The gross profit of the Chemical Business was adversely
affected due to the continued high cost of anhyrdrous ammonia as discussed
above. The Industrial Products Business gross profit percentage increased due
to higher prices. The primary reason for the consolidated decline in gross
profit percentage was due to customer mix in the Automotive Products Business,
i.e. decreased sales to higher margin retail customers, and increased sales to
Original Equipment Manufacturers (OEM) customers which are lower margin
customers.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses, as a percent of
net sales, were 21.4% in 1995 and 20.7% in 1994. SG&A remained consistent from
1994 to 1995 as a percentage of sales in the Chemical, Environmental Control
and Automotive Products Businesses. The increase in SG&A, as a percent of
sales on a consolidated basis, was primarily attributable to: (1) an increase
in the Company's cost of providing employee healthcare benefits of $.7
million; and, (2) increased legal expenses of $.6 million primarily
attributable to litigation in connection with an insurance claim for damages
to machine tools during transport in a prior year.
Interest Expense
Interest expense for the Company was $10.1 million during 1995, compared
to $6.9 million during 1994. The increase primarily resulted from increased
borrowings. The increased borrowings were necessary to support capital
expenditures, higher inventory levels, higher accounts receivable balances and
to meet the operational requirements of the Company. See "Liquidity and
Capital Resources" of this Management's Discussion and Analysis.
Net Income (Loss)
The Company had a net loss of $3.7 million in 1995 compared to net
income of $24.5 million in 1994. The 1994 net income includes approximately
$23.5 million relating to a gain on the sale of a certain business and income
from discontinued operations. Excluding this non-recurring activity, the 1994
net income was $1.0 million. The decreased profitability in 1995 of $4.7
million was primarily attributable to increased SG&A, as discussed above, and
increased interest expense of $3.2 million due to higher average balances of
outstanding debt. These increased expenses were offset in part by increased
income of $1.0 million from collection of loans receivables in excess of net
carrying values. Such loans were purchased at a discount in connection with
the Equity Bank transaction.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Revenues
Total revenues for 1994 and 1993 were $250.0 million and $237.5 million,
respectively (an increase of $12.5 million or 5.2%). Sales increased $12.4
million or 5.3%.
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 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 decreased $5.0 million and was 21.7% of net sales for 1994,
compared to 25.0% of net 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 20.7% 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; (iv) approximately $1.2 million in costs
expended in pursuit of acquisition prospects which the Company chose to
abandon; and (v) lower 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".
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 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.
Liquidity and Capital Resources
- -------------------------------
Cash Flow From Operations
For the year ended December 31, 1995, the loss from continuing
operations of $3.7 million included (i) noncash charges for depreciation and
amortization of $9.1 million, and (ii) noncash provisions for possible losses
on accounts and notes receivable of $3.6 million, resulting in positive cash
flow of $9 million. This positive cash flow was absorbed primarily by
increases in accounts receivable and inventories, resulting in an approximate
break-even cash flow from operating activities.
The increase in accounts receivable was due primarily to increased sales
in the Environmental Control Business. The increase in inventory was due, in
large part, to an $8 million build up in the Automotive Products Business'
inventory as a result of purchases from foreign supplies, with long lead
times, of quantities in excess of current demand and the addition of new
product lines within the Automotive Products Business. The Company has
announced its intention to reduce its investment in the Automotive Products
Business, and a stringent inventory reduction plan has been put into place in
1996 for this Business.
Cash Flow From Investing And Financing Activities
For the year ended December 31, 1995, the cash flow from investing and
financing activities resulted in a negative cash flow of approximately $1
million after long-term borrowings of $18.5 million and increased borrowings
against the Company's working capital revolver of $15.1 million.
Those investment and financing activities requiring cash included:
capital expenditures, $17.8 million; payments on long-term debt, $9.5 million;
payment of common and preferred stock dividends, $4.0 million; and, purchases
of treasury stock, $1.5 million. Capital expenditures included expenditures
of the Chemical Business for (a) the completion of the construction of a
concentrated nitric acid plant in El Dorado, Arkansas which was began in 1994
and, (b) a mixed acid plant in Wilmington, North Carolina. The balance of
capital expenditures were for normal additions in the Chemical, Environmental
Control, and Automotive Products Business.
During 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; (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.
Source of Funds
The Company is a diversified holding Company and its liquidity is
dependent, in large part, on the operations of its subsidiaries and credit
agreements with lenders.
In December 1994, the Company and certain of its subsidiaries finalized
a working capital line of credit. 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
and the stock of certain of the subsidiaries that are borrowers under 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. During 1996, an
amendment to the Agreements was obtained whereby the Company's borrowing
ability was temporarily increased (the "overadvance")$5 million in excess of
the amount calculated based on the collateral, not to exceed $75 million. The
temporary overadvance ability expires on June 30, 1996; the line limit reverts
back to $65 million on September 30, 1996. The Agreements provide for
interest at the reference rate as defined (which approximates the
national prime rate) plus 1%, or the Eurodollar rate plus 3.375%.
At December 31, 1995 the effective interest rate was 9.4%. 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, 1995, the available borrowings, based on eligible collateral,
not including the overadvance discussed above approximated $60.1 million.
Borrowings under the Revolver outstanding at December 31, 1995, were $59.2
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. In November 1995 the
Company renegotiated reductions in the tangible net worth covenants for the
period December 31, 1995 through December 31, 1997 and simultaneous therewith
agreed to an increase in the interest rate it pays the Lender by one-half
percent (.5%). The tangible net worth covenants were reset to $78 million at
December 31, 1995 escalating quarterly to $84 million at December 31, 1997.
The annual interest on the outstanding debt under the Revolver at December 31,
1995 at the rate then in effect would be approximately $5.6 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 (collectively "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, 1995 was $10.7 million. Annual principal payments on
the Term Loan are $5.1 million in 1996 and a final payment of $5.6
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 $3.7 million at December 31, 1995. The
availability under this facility reduces by $1.8 million in 1996 with
the remainder due in March 1997. Annual interest at the agreed to
interest rates, if calculated on the aggregate $14.4 million outstanding
balance at December 31, 1995, would be approximately $1.7 million. The
Term Loan is secured by the capital stock of Chemical and substantially
all of the assets of Chemical not otherwise pledged under the credit
facility previously discussed. The Loan Agreement requires Chemical to
maintain certain financial ratios and contains other financial
covenants, including tangible net worth requirements and capital
expenditures limitations. As of the date of this report, Chemical is in
compliance with all financial covenants. Under the terms of the Loan
Agreement, Chemical cannot transfer funds to the Company in the form of
cash dividends or other advances, except for (i) the amount of taxes
that Chemical would be required to pay if it was not consolidated with
the Company; and (ii) an amount equal to fifty percent (50%) of
Chemical's cumulative adjusted net income as long as Chemical's Total
Capitalization Ratio, as defined, 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 three (3) projects which DSN substantially
completed during 1995. These loan agreements are for a $16.5 million
term loan (the DSN Permanent Loan"), which was converted on June 1,
1995 from the original construction loan, and was used to construct,
equip, re-erect, and refurbish a concentrated nitric acid plant (the
DSN Plant ) being placed into service by the Chemical Business at its
El Dorado, Arkansas facility; a loan for approximately $1.2 million to
purchase additional railcars to support the DSN Plant (the Railcar
Loan ); 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 December 31, 1995, DSN had
outstanding borrowings of $15.7 million under the DSN Permanent Loan,
$1.1 million under the Mixed Acid Loan, and $1.2 million under the
Railcar Loan. The loans have repayment schedules of eighty-four (84)
consecutive monthly installments of principle and interest. The
interest rate on each of the loans range from 8.24% to 8.86% and are
fixed rates based on the United States Treasury Security rate at the
time of executing the note plus a specified percentage. Annual
interest, for the three notes as a whole, at the agreed to interest
rates would approximate $1.5 million. The loans are secured by the
various DSN and Mixed Acid Plants property and equipment, and all
railcars purchased under the railcar loan. The loan agreement requires
the Company to maintain certain financial ratios, including tangible net
worth requirements. As of the date of this report, the Company is in
compliance with all financial covenants or if not in compliance, has
obtained appropriate waivers from the Financing Company.
(3) A subsidiary of the Company ("Prime") 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
Prime, 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 Prime's right, title, and interest in the loan
receivable 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.
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 discussed elsewhere in this report. Inventory requirements for the
higher anticipated sales activity should be met by scheduled reductions in the
inventories of the Automotive Products Business, which increased its
inventories in 1995 beyond required levels. In 1996, the Company has planned
capital expenditures of approximately $6.0 million, primarily in the Chemical
and Environmental Control Businesses.
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. This is a forward-looking statement that involves a
number of risks and uncertainties that could cause actual results to differ
materially, such as, a material reduction in revenues, continuing to incur
losses, inability to collect a material amount of receivables, required
capital expenditures in excess of those presently anticipated, or other future
events, not presently predictable, which individually or in the aggregate
could impair the Company's ability to obtain funds to meet its requirements.
The Company currently has no material commitment for capital expenditures,
however, see discussion under "overview", "Chemical Business" of this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the negotiations to build a new nitric acid plant.
Foreign Subsidiary Financing
On March 7, 1995 the Company guaranteed a revolving credit working
capital facility (the "Facility") between its wholly-owned Australian
subsidiary Total Energy Systems, Ltd. ("TES") and Bank of New Zealand. The
Facility allows for borrowings up to an aggregate of approximately U.S. $3.7
million based on specific percentages of qualified eligible assets (U.S. $1.9
million borrowed at December 31, 1995). 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% (approximately 11.5% at December 31, 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. TES is
in technical non-compliance with a certain financial covenant contained in the
loan agreement involving the Facility. However, Bank of New Zealand has not
taken any action against TES or the Company as a result of such non-compliance
and has continued to allow TES to borrow under the Facility. The outstanding
borrowing under the facility at December 31, 1995 has been classified as due
within one year in the accompanying condensed consolidated financial
statements.
Joint Ventures and Options to Purchase
During 1994 the Company, through a subsidiary, loaned $2.1 million to a
French manufacturer of HVAC equipment whose product line is compatible with
that of the Company's Environmental Control Business in the U.S.A. Under the
loan agreement, the Company has the option to exchange its rights under the
loan for 100% of the borrower's outstanding common stock. The Company obtained
a security interest in the stock of the french manufacturer to secure its $2.1
million loan. During fiscal year 1995 and January, 1996 the Company advanced
an additional $800,000 to the French manufacturer bringing the total of the
loan to $2.9 million. At this time the decision has not been made to exercise
such option and the $2.9 million loan net of a $1.5 million valuation reserve
is carried on the books as a note receivable in other assets.
During the second quarter of 1995, the Company executed a stock option
agreement to acquire eighty percent (80%) of the stock of a specialty sales
organization to enhance the marketing of the Company's air conditioning
products. The stock option has a four (4) year term, and a total option
granting price of $1.0 million payable in installments including an option fee
of $500,000 paid upon signing of the option agreement and annual $100,000
payments for yearly extensions of the stock option thereafter for up to three
(3) years. Upon exercise of the stock option by the Company, or upon the
occurrence of certain performance criteria which would give the grantors of
the stock option the right to accelerate the date on which the Company must
elect whether to exercise, the Company shall pay certain cash and issue
promissory notes for the balance of the exercise price of the subject shares.
The total exercise price of the subject shares is $4.0 million, less the
amounts paid for the granting and any extensions of the stock option. The
Company expects that it will eventually exercise the stock option, however,
there are no assurances that such stock option will ultimately be exercised.
A subsidiary of the Company invested approximately $2.8 million 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 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 Project estimates that the cost to retrofit the
residential housing units at the U.S. Army base will be approximately $18.8
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 lending obligations of the Project. The Company has
guaranteed the bonding company's exposure under the payment and performance
bonds on the Project, which is approximately $17.9 million.
Debt guarantee
As disclosed in note 12 of the Notes to Consolidated Financial
Statements a subsidiary of the Company has guaranteed approximately $2.6
million of indebtedness of a start up aviation company in exchange for an
ownership interest. The debt guarantee relates to two note instruments. One
note in the amount of $600,000 requires monthly interest payments and matures
September 28, 1996. The other note in the amount of $2 million requires
monthly principal payments of $11,111 plus interest beginning in October 1996
through August 8, 1999, at which time all outstanding principal and accrued
interest are due. In the event of default of the $2 million note, the Company
is required to assume payments on the note with the term extended until August
2004. Both notes are current as to principal and interest.
In November 1995, the aviation company completed and test flew its first
operational model. The aviation company is working toward certification with
the Federal Aviation Authority by mid 1997. In the meantime the aviation
Company has limited cash and is seeking an equity investor to fund the
completion of the certification process and provide additional working capital
in exchange for an ownership interest of the company. If the aviation
company is unable to obtain such additional equity, then the Company may be
required to perform under its guaranty. Management of the aviation company
believes that it is possible that an additional $7 million may be needed
to complete the certification process at which time they believe they
will be able to obtain additional capital to manufacture and market the
airplane.
The Company has advanced approximately $150,000 to the aviation company
while they seek additional capital. At this time the Company has not made a
decision whether additional funds will be advanced. Any additional advances
will depend on the evaluation of the prospects of the aviation company when it
becomes evident that additional advances are required.
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, 1995, the Company had available NOL carryovers of
approximately $43 million, based on its federal income tax returns as filed
with the Internal Revenue Service for taxable years through 1994, and on the
Company's estimates for 1995. 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
--------
The Company hereby incorporates by reference the information required by
Part III of this report except for the information of the Company's executive
officers included under Part 4A of Part I of this report, from the definitive
proxy statement which the Company intends to file with the Securities and
Exchange Commission on or before April 30, 1996, in connection with the
Company's 1996 annual meeting of stockholders.
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, 1995
and 1994 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1995 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1995 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1995 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-32
Quarterly Financial Data (Unaudited) F-33
(a)(2) Financial Statement Schedule. The Company has included the
following schedule in this report:
II - Valuation and Qualifying Accounts F-34
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 Option Agreement dated as of May 4, 1995,
optionee, LSB Holdings, Inc., an Oklahoma Corporation, an option to
purchase.
2.2. Stock Purchase Agreement and Stock Pledge Agreement
between Dr. Hauri AG, a Swiss Corporation, and LSB Chemical Corp., which
the Company hereby incorporates by reference from Exhibit 2.2 to the
Company's Form 10-K for fiscal year ended December 31, 1994.
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 , Slurry
Explosive Corporation , Household Commercial Financial Services, Inc. ,
Connecticut Mutual Life Insurance Company and C.M. 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., which the
Company hereby incorporates by reference from Exhibit 4.12 to the
Company's Form 10-K for the fiscal year ended December 31, 1994. 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.
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, which the
Company hereby incorporates by reference from Exhibit 4.13 to the
Company's Form 10-K for the fiscal year ended December 31, 1994. 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.
4.14. 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., which the Company
hereby incorporates by reference from Exhibit 4.1 to the Company's Form
10-Q for the fiscal quarter ended March 31, 1995.
4.15. 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, which the Company hereby
incorporates by reference from Exhibit 4.2 to the Company's Form 10-Q
for the fiscal quarter ended March 31, 1995.
4.16. First Amendment dated August 17, 1995, to the Loan and
Security Agreement dated December 12, 1994, between the Company and
BankAmerica Business Credit, Inc. Substantially identical First
Amendments dated August 17, 1995, to the Loan and Security Agreements
dated December 12, 1994, were entered into by each of L&S Bearing,
International Environmental Corporation, Climate Master, Inc., Summit
Machine Tool Manufacturing, Corp., and El Dorado Chemical Company and
Slurry Explosives Corporation with BankAmerica Business Credit, Inc. and
are hereby omitted and such will be provided upon the Commission s
request.
4.17. Second Amendment dated December 1, 1995, to the Loan
and Security Agreement dated December 12, 1994, between the Company and
BankAmerica Business Credit, Inc. Substantially identical Second
Amendments dated December 1, 1995, to the Loan and Security Agreements
dated December 12, 1994, were entered into by each of L&S Bearing,
Climate Master, Inc., and Summit Machine Tool Manufacturing, Corp. with
BankAmerica Business Credit, Inc. and are hereby omitted and such will
be provided upon the Commission s request.
4.18. Second Amendment dated December 1, 1995, to the Loan
and Security Agreement dated December 12, 1994, between El Dorado
Chemical Company and Slurry Explosives Corporation, and BankAmerica
Business Credit, Inc.
4.19. Second Amendment dated December 1, 1995, to the Loan
and Security Agreement dated December 12, 1994, between International
Environmental Corporation, and BankAmerica Business Credit, Inc.
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 5, 1995, between EDC and
the Oil, Chemical and Atomic Workers, the International Association of
Machinists and Aerospace Workers and the United Steel Workers of
America, dated November 1, 1995.
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., 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, 1994.
10.11. Limited Partnership Agreement dated as of May 4, 1995,
between the general partner, and LSB Holdings, Inc., an Oklahoma
Corporation, as limited partner.
10.12. 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.
10.13. 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, and Barry H. Golsen and
the Company will provide copies thereof to the Commission upon request.
10.14. 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.
10.15. Employment Agreement and Amendment to Severance
Agreement dated January 17, 1989 between the Company and Jack E. Golsen,
dated March 21, 1996.
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, which the Company
hereby incorporates by reference from Exhibit 10.22 to the Company's
Form 10-K for the fiscal year ended December 31, 1994.
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, 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, 1994.
10.26. 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, which the Company hereby incorporates by reference from Exhibit
10.1 to the Company's Form 10-Q for the fiscal quarter ended March 31,
1995.
10.27. 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., which the company hereby
incorporates by reference from Exhibit 10.2 to the Company's Form 10-Q
for the fiscal quarter ended March 31, 1995. Each of these Agreements
is 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.
10.28. Letters, dated January 12, 1996 amending the agreement
between L&S Automotive Products Co. and ZVL-LSA A.S.
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 1995.
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 9th day of April,
1996.
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 9, 1996 By:
/s/ Jack E. Golsen
------------------------------
Jack E. Golsen, Director
Dated: April 9, 1996 By:
/s/ Tony M. Shelby
------------------------------
Tony M. Shelby, Director
Dated: April 9, 1996 By:
/s/ David R. Goss
------------------------------
David R. Goss, Director
Dated: April 9, 1996 By:
/s/ Barry H. Golsen
------------------------------
Barry H. Golsen, Director
Dated: April 9, 1996 By:
/s/ Robert C. Brown
------------------------------
Robert C. Brown, Director
Dated: April 9, 1996 By:
/s/ Bernard G. Ille
------------------------------
Bernard G. Ille, Director
Dated: April 9, 1996 By:
/s/ Jerome D. Shaffer
------------------------------
Jerome D. Shaffer, Director
Dated: April 9, 1996 By:
/s/ Raymond B. Ackerman
------------------------------
Raymond B. Ackerman, Director
Dated: April 9, 1996 By:
/s/ Horace Rhodes
------------------------------
Horace Rhodes, 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, 1995 and 1994, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and 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, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, 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
February 26, 1996
F-1
LSB Industries, Inc.
Consolidated Balance Sheets
DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
ASSETS
Current assets (Note 7):
Cash and cash equivalents $ 1,420 $ 2,610
Trade accounts receivable, less allowance for
doubtful accounts of $2,584,000 ($2,000,000
in 1994) 43,975 42,720
Inventories (Note 4) 66,265 59,333
Supplies and prepaid items 5,684 6,386
-----------------------
Total current assets 117,344 111,049
Property, plant and equipment, at cost (Notes
5 and 7) 152,730 133,359
Accumulated depreciation (66,460) (59,675)
-----------------------
Property, plant and equipment, net 86,270 73,684
Loans receivable, secured by real estate 15,657 17,243
Other assets, net of valuation allowances and
allowance for doubtful accounts of $3,090,000
in 1995 ($1,150,000 in 1994) and accumulated
amortization of $4,795,000 in 1995 ($4,031,000
in 1994) 18,905 19,305
-----------------------
$238,176 $221,281
=======================
(Continued on following page)
F-2
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
DECEMBER 31,
1995 1994
------------------
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Drafts payable $ 424 $ 1,291
Accounts payable 28,508 29,496
Accrued liabilities 9,239 8,062
Current portion of long-term debt (Note 7) 14,925 9,716
------------------
Total current liabilities 53,096 48,565
Long-term debt (Note 7) 103,355 81,965
Commitments and contingencies (Notes 3, 6
and 12)
Redeemable, noncumulative, convertible preferred
stock, $100 par value; 1,566 shares issued and
outstanding (1,597 in 1994) (Note 10) 149 152
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, 14,757,416 shares issued (14,620,156
in 1994) 1,476 1,462
Capital in excess of par value 37,567 37,369
Retained earnings 5,148 12,883
------------------
92,191 99,714
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares 200 200
Common stock, 1,845,969 shares (1,559,590 in
1994) 10,415 8,915
------------------
Total stockholders' equity 81,576 90,599
------------------
$238,176 $221,281
==================
See accompanying notes.
F-3
LSB Industries, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------
(In Thousands, Except Per Share Amounts)
Revenues:
Net sales $267,391 $245,025 $232,616
Other income 6,724 4,944 4,913
--------------------------------------
274,115 249,969 237,529
Costs and expenses:
Cost of sales 210,328 191,916 174,504
Selling, general and 57,238 50,821 43,474
administrative
Interest 10,131 6,949 7,507
--------------------------------------
277,697 249,686 225,485
--------------------------------------
Income (loss) from continuing
operations before provision (3,582) 283 12,044
(benefit) for income taxes
Provision (benefit) for
income taxes 150 (700) 809
--------------------------------------
Income (loss) from continuing
operations (3,732) 983 11,235
Discontinued operations:
Income from discontinued
operations - 584 1,228
Gain on disposal of
discontinued operations - 24,200 -
Provision for income taxes
related to discontinued
operations - (1,300) (64)
--------------------------------------
- 23,484 1,164
--------------------------------------
Net income (loss) $ (3,732) $ 24,467 $ 12,399
======================================
Net income (loss) applicable
to common stock $ (6,961) $ 21,232 $ 10,357
======================================
Earnings (loss) per common share:
Primary:
Income (loss) from continuing
operations $ (.53) $ (0.16) $ 0.69
======================================
Net income (loss) $ (.53) $ 1.54 $ 0.77
======================================
Fully diluted:
Income (loss) from continuing
operations $ (.53) $ (0.16) $ 0.63
======================================
Net income (loss) $ (.53) $ 1.46 $ 0.71
======================================
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity
RETAINED
COMMON STOCK NON- EARNINGS
-------------- REDEEMABLE CAPITAL IN (ACCUMU- TREASURY TREASURY
PAR PREFERRED EXCESS OF LATED STOCK-- STOCK--
SHARES VALUE STOCK PAR VALUE DEFICIT) COMMON PREFERRED TOTAL
----------------------------------------------------------------------------------------
(In Thousands)
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 3 - - 5 - - - 5
redeemable preferred stock to
common stock
Conversion of 657,390 shares of Series 5,008 501 (13,148) 12,647 - - - -
1 preferred to common stock
Redemption of Series 1 preferred - - (115) (8) - - - (123)
Retirement of Series 1 preferred - - (2,094) 214 - 1,880 - -
held in treasury
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 502 50 - 998 - (1,048) - -
treasury at market value
Dividends declared:
Series B 12% preferred stock - - - - (240) - - (240)
($12.00 per share)
Redeemable preferred stock - - - - (16) - - (16)
($10.00 per share)
Common stock ($.06 per share) - - - - (797) - - (797)
Series 2 preferred stock - - - - (1,660) - - (1,660)
($1.80 per share)
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
(Continued on following page)
F-5
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
RETAINED
COMMON STOCK NON- EARNINGS
-------------- REDEEMABLE CAPITAL IN (ACCUMU- TREASURY TREASURY
PAR PREFERRED EXCESS OF LATED STOCK-- STOCK--
SHARES VALUE STOCK PAR VALUE DEFICIT) COMMON PREFERRED TOTAL
----------------------------------------------------------------------------------------
(In Thousands)
Net income - $ - $ - $ - $24,467 $ - $ - $24,467
Conversion of 40 shares of 1 - - 1 - - - 1
redeemable preferred stock to
common stock
Exercise of stock options for cash 105 11 - 248 - - - 259
Dividends declared:
Series B 12% preferred stock - - - - (240) - - (240)
($12.00 per share)
Redeemable preferred stock - - - - (16) - - (16)
($10.00 per share)
Common stock ($.06 per share) - - - - (808) - - (808)
Series 2 preferred stock - - - - (2,979) - - (2,979)
($3.25 per share)
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
Net loss - - - - (3,732) - - (3,732)
Conversion of 31 shares of 1 - - 2 - - - 2
redeemable preferred stock to
common stock
Exercise of stock options:
Cash received 100 10 - 145 - - - 155
Stock tendered and added to 36 4 - 51 - (55) - -
treasury at market value
Dividends declared:
Series B 12% preferred stock - - - - (240) - - (240)
($12.00 per share)
Redeemable preferred stock - - - - (16) - - (16)
($10.00 per share)
Common stock ($.06 per share) - - - - (774) - - (774)
Series 2 preferred stock - - - - (2,973) - - (2,973)
($3.25 per share)
Purchase of treasury stock - - - - - (1,445) - (1,445)
----------------------------------------------------------------------------------------------
Balance at December 31, 1995 14,757 $1,476 $48,000 $37,567 $ 5,148 $(10,415) $(200) $81,576
==============================================================================================
See accompanying notes.
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------
(In Thousands)
CASH FLOWS FROM CONTINUING
OPERATIONS
Income (loss) from continuing $ (3,732) $ 983 $ 11,235
operations
Adjustments to reconcile
income (loss) from
continuing operations to net
cash provided (used) by
continuing operations:
Depreciation, depletion and
amortization:
Property, plant and 7,909 6,998 5,870
equipment
Other 1,150 1,077 959
Provision for possible
losses:
Trade accounts receivable 1,696 1,468 439
Notes receivable 1,350 650 -
Environmental matter - 450 -
Loan guarantee 590 - -
Gain of sales of assets (203) (1,303) (1,587)
Cash provided (used) by
changes in assets and
liabilities:
Trade accounts receivable (4,092) 3,923 (13,523)
Inventories (6,091) (13,692) 2,737
Supplies and prepaid 725 (927) (1,282)
items
Accounts payable (902) 6,209 (718)
Accrued liabilities 1,256 850 (867)
Billings in excess of - - (4,858)
costs and estimated
earnings
--------------------------------
Net cash provided (used) by (344) 6,686 (1,595)
continuing operations
CASH FLOWS FROM INVESTING
ACTIVITIES OF CONTINUING
OPERATIONS
Capital expenditures (17,810) (15,647) (9,397)
Purchase of loans receivable - (3,068) -
Principal payments on loans 1,586 388 -
receivable
Proceeds from sales of
equipment and real estate 1,345 4,399 6,735
properties
Other assets (3,872) (5,566) (1,882)
Cash acquired in connection - - 1,228
with acquisitions
Payments for acquisitions - - (1,747)
--------------------------------
Net cash used by investing (18,751) (19,494) (5,063)
activities
(Continued on following page)
F-7
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------
(In Thousands)
CASH FLOWS FROM FINANCING
ACTIVITIES OF CONTINUING
OPERATIONS
Payments on long-term and $(9,476) $ (7,635) $(17,828)
other debt
Long-term and other borrowings 18,471 17,124 -
Net change in revolving debt 15,070 47,004 (4,950)
facilities
Net change in receivables
previously financed by - (33,570) 1,218
discontinued operations
Net change in drafts payable (867) 71 (3,329)
Dividends paid:
Preferred stocks (3,229) (3,235) (1,916)
Common stock (774) (808) (797)
Purchase of treasury stock:
Preferred stock - (200) -
Common stock (1,445) (4,756) (302)
Net proceeds from issuance of
common and preferred stock 155 259 47,141
--------------------------------
Net cash provided by
financing activities of 17,905 14,254 19,237
continuing operations
--------------------------------
Net increase (decrease) in
cash from continuing (1,190) 1,446 12,579
operations
Net change in cash from - (1,617) (10,913)
discontinued operations
-------------------------------
Net increase (decrease) in
cash and cash equivalents (1,190) (171) 1,666
from all activities
Cash and cash equivalents at 2,610 2,781 1,115
beginning of year
--------------------------------
Cash and cash equivalents at $ 1,420 $ 2,610 $ 2,781
end of year
================================
See accompanying notes.
F-8
LSB Industries, Inc.
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries. On May 25, 1994, the
financial services subsidiary, Equity Bank for Savings, F.A. ("Equity Bank"),
was sold and, thus, the consolidated statements of operations for 1994 and 1993
present the operations of Equity Bank as discontinued operations.
2. ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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:
1995 1994 1993
-------------------------
(In Thousands)
Cash payments for interest
and income taxes:
Interest on long-term debt $10,613 $7,440 $7,159
and other
Income taxes 670 832 861
Noncash financing and
investing activities--
Long-term debt issued for 2,534 4,884 1,500
property, plant and
equipment
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 1995, 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 $5,981,000 at December 31, 1995 ($9,007,000 at December
31, 1994), 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 not material at December 31, 1995 or 1994.
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 of $1,357,000 and $491,000 related to the construction of a new
nitric acid plant were capitalized in 1995 and 1994, respectively (none in 1993)
and 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 $4,361,000 and
$4,776,000, net of accumulated amortization, of $2,980,000 and $2,565,000 at
December 31, 1995 and 1994, respectively, 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 (using estimated future net cash flows, including proceeds from
disposal) if the facts and circumstances suggest that it may be impaired. No
impairment provisions were required in 1995, 1994 or 1993.
F-10
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. The Company will adopt Statement 121 in the first quarter of 1996. Based
on presently available estimates, the new impairment rules are not expected to
have a material impact on the Company.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $501,000 in 1995, $606,000 in 1994 and
$788,000 in 1993.
ADVERTISING COSTS
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $1,658,000 in 1995,
$1,321,000 in 1994 and $1,310,000 in 1993.
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.
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) 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 (loss) 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.
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
Average common shares outstanding used in computing earnings per share are as
follows:
1995 1994 1993
----------------------------------
Primary 13,223,445 13,831,128 13,401,194
Fully diluted 13,233,022 15,155,461 15,397,886
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. Equity Bank's revenues for the period from January 1, 1994 to May 25, 1994
and the year ended December 31, 1993 were $16.5 million and $41.8 million,
respectively.
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-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVENTORIES
Inventories at December 31, 1995 and 1994 consist of:
FINISHED
(OR PURCHASED) WORK-IN- RAW
GOODS PROCESS MATERIALS TOTAL
----------------------------------------------
(In Thousands)
Air handling units $ 2,477 $ 1,153 $ 5,835 $ 9,465
Machinery and industrial 7,908 - - 7,908
supplies
Automotive products 21,494 4,307 2,033 27,834
Chemical products 6,917 6,787 7,354 21,058
----------------------------------------------
Total $38,796 $12,247 $15,222 $66,265
==============================================
1994 total $33,926 $ 9,796 $15,611 $59,333
==============================================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of:
DECEMBER 31,
1995 1994
--------------------
(In Thousands)
Land and improvements $ 4,405 $ 4,405
Buildings and improvements 20,615 20,346
Machinery, equipment and automotive 118,567 99,507
Furniture, fixtures and store equipment 5,854 5,760
Producing oil and gas properties 3,289 3,341
--------------------
152,730 133,359
Less accumulated depreciation, 66,460 59,675
depletion and amortization --------------------
$ 86,270 $ 73,684
====================
6. FOREIGN SALES CONTRACT
In connection with a 1992 equipment sales contract with a foreign customer, a
subsidiary of the Company agreed to a contract amendment in May 1995 that
enabled collection of outstanding billings on the contract and required the
customer deliver bearing products to the subsidiary, at a future date, without
charge to the subsidiary. The amendment also included a purchase commitment by
the subsidiary to purchase $30 million of bearing products from the customer
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. FOREIGN SALES CONTRACT (CONTINUED)
over a five-year period. During 1995, the subsidiary purchased approximately
$3.1 million of product in connection with such requirement.
In January 1996, the subsidiary negotiated another amendment to the agreement
with the foreign customer, modifying the subsidiary's firm commitment to
purchase $30 million of bearing products over the five-year period to a best
efforts arrangement in exchange for waiver of the foreign customer's commitment
to provide bearing products without charge to the subsidiary at a future date.
Accordingly, as a result of the elimination of the subsidiary's future bearing
product commitment, the Company has recognized the remaining $1.8 million of
contract revenue in the fourth quarter of 1995 which had been previously
deferred pending completion of the subsidiary's firm purchase commitment.
7. LONG-TERM DEBT
Long-term debt is detailed as follows:
DECEMBER 31,
1995 1994
-----------------
(In Thousands)
Secured revolving credit
facility with interest at a
base rate of a certain bank
plus a specified percentage
(9.39% aggregate rate at
December 31, 1995) (A) $ 59,175 $44,379
Secured loans of a subsidiary
with interest payable
quarterly at rates indicated
(B):
10.415% to 12.72% term loans 10,688 15,833
Revolving credit facility
at a base rate of a
certain bank plus a
specified percentage
(10.75% at December 31,
1995) 3,750 5,556
Secured loan with interest
payable monthly (C) 15,728 12,750
Note payable to bank, due in
monthly installments of
principal and interest
through May 2000, interest
at a rate equal to the Wall
Street Journal prime rate
plus 1% (aggregate rate of
9.5% at December 31, 1995)
(D) 8,819 -
Other, with interest at rates
of 7.5% to 12.25% 20,120 13,163
-----------------
118,280 91,681
Less current portion of
long-term debt 14,925 9,716
-----------------
Long-term debt due after one
year $103,355 $81,965
=================
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
(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 up to $65 million based upon defined eligible assets. 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 and also
provide for the issuance of letters of credit of up to $11 million, subject
to certain restrictions. The agreement provides for loans at the reference
rate as defined (which approximates the national prime rate) plus 1%, or the
Eurodollar rate plus 3.375%, with interest due monthly. The agreement is
secured by substantially all of the Company's receivables, inventory,
proprietary rights, and proceeds thereof and the stock of certain
participating subsidiaries. The agreement contains financial covenants,
including limitations on dividends, investments and capital expenditures,
and requires maintenance of tangible net worth, as defined (escalating
from $78 million in 1995 to $84 million in 1997), 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.
(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
$3.75 million as of December 31, 1995. The availability under the revolving
credit facility reduces by $1.8 million in 1996 with the remainder due in
March 1997. Annual principal payments of the term loans are $5.1 million and
$5.6 million in March 1996 and 1997, respectively.
The agreement is secured by substantially all of the subsidiaries' assets,
not otherwise pledged and the stock of certain participating subsidiaries.
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.
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,
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
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 $1.5 million of net assets to the parent
company as of December 31, 1995.
(C) This agreement, as amended, between a subsidiary of the Company and an
institutional lender provided for a construction loan in the aggregate
amount of $16.5 million, the proceeds of which were used in the construction
of a nitric acid plant. Interest during the construction period accrued at a
rate equal to the LIBOR rate plus 3.10%. In November 1995, the loan
converted to a term loan requiring 84 equal monthly payments of principal
plus interest, with interest at a fixed rate equal to the five-year U.S.
Treasury Security rate plus 2.7% (an aggregate rate of 8.86% at December 31,
1995). This agreement is secured by the plant, equipment and machinery, and
proprietary rights associated with the plant which has an approximate
carrying value of $24.2 million.
This agreement contains various financial and restrictive covenants,
including a requirement to maintain tangible net worth, as defined, of $75
million, escalating to $82.5 million after December 31, 1996. Subsequent to
December 31, 1995, the Company obtained a waiver from the lender reducing
the minimum tangible net worth through March 31, 1996 and accepting a
certain existing lien by a third party on the assets of the plant. The
Company expects to be able to comply with this revised covenant subsequent
to such date.
(D) In May 1995, a subsidiary of the Company entered into a term loan agreement
in the amount of $9 million. During the term of the loan, which matures in
May 2000, the outstanding principal balance is payable in 60 monthly
payments of principal and interest, commencing on May 31, 1995. The amount
of the monthly principal and interest payment is the amount necessary to
fully amortize the principal balance over a 180-month period ("Amortization
Period") at a rate of interest equal to 1% in excess of the prime rate of a
certain bank. On June 30, 1995, and on the last day of each calendar quarter
thereafter, the monthly principal and interest payment will be adjusted to
an amount which would fully amortize the outstanding principal balance on
the last day of each calendar quarter over the remaining part of the
Amortization Period. When the loan matures in May 2000, all outstanding and
unpaid principal and all accrued and unpaid interest on the loan shall
become immediately due. The loan is secured by a loan receivable which has a
book value of $13,967,500 as of December 31, 1995 as well as the commercial
management agreement between the subsidiary and a certain property
management company and the subsidiary's option to purchase the building
which secures the loan receivable.
F-16
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, 1995
are: 1996--$14,925,000; 1997--$72,475,000; 1998--$5,342,000; 1999--$4,483,000;
2000--$12,214,000 and thereafter--$8,841,000.
8. INCOME TAXES
The provision (benefit) for income taxes from continuing operations consists of
the following for the year indicated:
1995 1994 1993
-----------------------
(In Thousands)
Current:
Federal $ - $(1,150) $ 142
State 150 450 667
----------------------
$ 150 $ (700) $ 809
======================
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, 1995 and
1994 are as follows:
1995 1994
------------------
(In Thousands)
DEFERRED TAX ASSETS
Allowances for doubtful
accounts and other asset $ 3,508 $ 2,399
impairments not deductible
for tax purposes
Capitalization of certain 2,425 2,102
costs as inventory for tax
purposes
Net operating loss 16,745 18,227
carryforward
Investment tax and 1,300 1,212
alternative minimum tax
credit carryforwards
Other 1,032 864
------------------
Total deferred tax assets 25,010 24,804
Less valuation allowance 15,492 14,717
------------------
Net deferred tax assets $ 9,518 $10,087
==================
DEFERRED TAX LIABILITIES
Accelerated depreciation used $ 7,256 $ 7,751
for tax purposes
Inventory basis difference 2,139 2,139
resulting from a business
combination
Other 123 197
------------------
Total deferred tax liabilities $ 9,518 $10,087
==================
F-17
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
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 (loss) from continuing operations before provision (benefit) for income
taxes" for each of the three years in the period ended December 31, 1995 are
detailed below:
1995 1994 1993
-----------------------------
(In Thousands)
Provision (benefit) for
income taxes at federal $(1,254) $ 96 $ 4,215
statutory rate
Changes in the valuation
allowance related to 1,735 (291) (4,770)
deferred tax assets
State income taxes, net of 99 297 259
federal benefit
Amortization of excess of
purchase price over net 143 139 191
assets acquired
Foreign subsidiary loss 615 (19) -
(income)
Nondeductible life insurance 142 98 77
premiums
Settlement of dispute with - - 618
governmental agency
Utilization of regular and/or
alternative minimum tax net (1,326) (1,300) -
operating loss carryforward
Alternative minimum tax - 150 142
Other (4) 130 77
-----------------------------
Provision (benefit) for $ 150 $ (700) $ 809
income taxes
=============================
At December 31, 1995, the Company has net operating loss ("NOL") carryforwards
for tax purposes of approximately $43 million. Such amounts expire beginning in
1999. The Company also has investment tax credit carryforwards of approximately
$568,000 which begin expiring in 1996.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-based employee compensation plans. Effective for fiscal years
beginning after December 15, 1995, the statement provides the option to continue
under the accounting provisions of APB Opinion 25, while requiring pro forma
footnote disclosures of the effects on net income and earnings per share,
calculated as if the new method had been implemented. The Company will adopt the
financial reporting provisions of SFAS 123 for 1996, but expects to elect to
continue under the accounting provisions of APB Opinion 25.
QUALIFIED STOCK OPTION PLANS
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, 1995 is as follows:
1995 1994 1993
----------------------------------
Outstanding options at 581,140 556,640 1,340,276
beginning of year
Granted 91,000 54,000 14,000
Exercised (61,000) (29,500) (791,636)
Surrendered, forfeited or - - (6,000)
expired
----------------------------------
Outstanding options at end of 611,140 581,140 556,640
year
==================================
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
1995 1994 1993
----------------------------------
At end of year:
Prices of outstanding options $ 1.13 $ 1.13 $ 1.13
TO to to
$ 9.00 $ 9.00 $ 9.00
Average option price per $ 3.41 $ 2.84 $ 2.44
share
Options exercisable 390,540 356,940 280,640
Options available for future 781,300 872,300 926,300
grants
NON-QUALIFIED STOCK OPTION PLANS
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; however, the options granted to the key employee have a
vesting schedule which has been completed and do not expire until ten years from
the date of grant. During 1995, three of the Company's directors exercised
options to purchase 75,000 shares of the Company's stock at $1.38 per share.
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.
NUMBER OF SHARES
SUBJECT TO OPTIONS OUTSTANDING AT
DATE GRANTED OPTION PRICE DECEMBER 31, 1995
OR EXTENDED PER SHARE
- ---------------------------------------------------------------------------
September 1990 $1.375 25,000
June 1992 $3.125 45,000
April 1994 $ 9.00 25,000
June 1994 (A) $2.625 165,000
April 1995 $5.375 25,000
(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.
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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).
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 each 1995 and 1994, there were 25,000
options granted at $5.375 and $9.00 per share, respectively, 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
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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, 1995 and 1994.
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, 1995 and 1994.
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.
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. NON-REDEEMABLE PREFERRED STOCK (CONTINUED)
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, 1995 and 1994.
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 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, 1995, the Company is authorized to issue an additional 248,435
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 under noncancelable
operating leases. Future minimum payments on operating leases with initial or
remaining terms of one year or more at December 31, 1995 are as follows:
(In Thousands)
1996 $ 2,192
1997 1,443
1998 1,191
1999 900
2000 872
After 2000 8,204
-------
$14,802
=======
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense under all operating lease agreements, including month-to-month
leases, was $3,400,000 in 1995, $3,149,000 in 1994 and $2,595,000 in 1993.
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 each 1995 and 1994 and $120,000 in 1993.
DEBT GUARANTEE
The Company has guaranteed approximately $2.6 million of indebtedness of a
start-up aviation company in exchange for a 24% ownership interest, to which no
value has been assigned as of December 31, 1995. The Company is, however,
accruing losses of the aviation company based on its ownership percentage and,
as a result, the Company has recorded losses of $590,000 in 1995 (none in 1994
or 1993) related to the debt guarantee. The debt guarantee relates to two note
instruments, both of which require interest only payments through September
1996. One note, on which a subsidiary of the Company has guaranteed up to
$600,000 of indebtedness, matures September 28, 1996. The other note, on which
the Company has guaranteed up to $2 million, requires monthly principal payments
of $11,111 plus interest beginning in October 1996 until it matures on August 8,
1999, at which time all outstanding principal and unpaid interest are due. In
the event of default of this note, the Company is required to assume payments on
the note with the term extended until August 2004.
In November 1995, the start-up aviation company completed and test flew its
first operational model. The aviation company expects to complete the Federal
Aviation Authority certification process by mid-1997, at which time commercial
production development may begin. It is expected that the aviation company will
require additional external funding during such period, the source of which has
not yet been determined (the Company has advanced $150,000 to the aviation
company subsequent to December 31, 1995 and may provide additional amounts in
future periods).
If the aviation company is not successful in completing the certification
process, obtaining additional external funding or selling a significant interest
in the business to third parties, the Company is likely to become responsible
for repayment of the $2.6 million indebtedness guarantee and may not be able to
recover amounts advanced.
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 (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
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.
Subsequent to the signing of the Agreement on May 2, 1995, the Company
completed its remediation and closure activities and had the "Closure
Certification Report" approved by the State of Arkansas. Post closure
activities associated with the landfill closure are being implemented in
accordance with the Agreement. The Company also submitted a "Groundwater
Monitoring Work Plan" to the State of Arkansas which has been approved and
the initial phase of field work has been completed. A work plan for the
second phase of the monitoring has also been submitted and approved by the
State of Arkansas.
F-25
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 12, 1996, the Company entered into another Consent
Administrative Agreement ("Agreement") to resolve certain compliance issues
associated with nitric acid concentrations. The Company is currently
investigating the feasibility of several options for installing additional
pollution control equipment to reduce opacity and constituent emissions which
impact opacity. The Company has been assessed a $50,000 civil penalty
associated with the Agreement; however, the Company is planning to undertake
one or more supplemental environmental projects in lieu of the penalty.
The Company recorded a provision for environmental costs of $450,000 in
1994 and, as of December 31, 1995, the Company continues to have
approximately $290,000 accrued for these environmental matters which the
Company believes approximates the remaining costs to be incurred related
thereto. Based on information presently available, the Company does not
believe that compliance with these agreements should have a material adverse
effect on the Company or the Company's financial condition.
C. Subsequent to December 31, 1995, the Company was advised that one or more
persons in the vicinity of the primary manufacturing facility of the
Company's chemical business had retained legal counsel to bring a tort action
against the chemical business claiming that certain of their alleged health
issues were caused by air emissions from the manufacturing facility. The
Company is unaware of the exact nature of these claims or the amount of
damages that the claimants will allege as a result of such alleged injuries.
The Company's insurance carrier has been notified of this matter.
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 of the Company, but could have a material
impact to the net income of a particular quarter or year, if resolved
unfavorably.
OTHER
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.
F-26
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has retained certain risks associated with its operations, choosing
to self-insure up to various specified amounts under its automobile, workers'
compensation, health and general liability programs. The Company reviews such
programs on at least an annual basis to balance the cost/benefit between its
coverage and retained exposure.
In 1995, in connection with the Company's purchase of a fifty percent (50%)
equity interest in an energy conservation joint venture (the "Project"), the
Company guaranteed the bonding company's exposure under the payment and
performance bonds on the Project, which is approximately $17.9 million. As of
December 31, 1995, the Project was approximately 30% complete and the Company
expects it to be completed on schedule in 1996. Inasmuch as the Project is
presently performing (and is expected to perform in future periods), no demand
has been made on the Company's guarantee.
13. EMPLOYEE BENEFIT PLANS
The Company sponsors a retirement plan under Section 401(k) of the Internal
Revenue Code under 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:
LOANS RECEIVABLE: 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. The fair values of loans which are collateral
dependent for realization are estimated using the fair value of the
underlying collateral.
As of December 31, 1995 and 1994, fair values of loans receivable were
approximately $18.2 million and $18.6 million, respectively.
F-27
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INVESTMENT IN EQUITY SECURITIES: Fair values of investments in equity
securities of closely-held companies have not been determined as estimation
of such values is not practicable (carrying cost of $802,000 in 1995 and
1994).
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. As of December 31, 1995 and 1994, carrying values of long-term
debt also approximated their estimated fair value.
As of December 31, 1995, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities approximated
their estimated fair value.
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. Production from the
Company's primary manufacturing facility in El Dorado, Arkansas, comprises
approximately 80% of the chemical segment's sales. 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.
The chemical business is subject to various federal, state and local
environmental regulations. Although the Company has designed policies and
procedures to help reduce or minimize the likelihood of significant
chemical accidents and/or environmental contamination, there can be no
assurances that the Company will not sustain a significant future operating
loss related thereto.
Further, the Company purchases substantial quantities of anhydrous ammonia
for use in manufacturing its products. The pricing volatility of such raw
material directly affects the operating profitability of the chemical
segment.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. SEGMENT INFORMATION (CONTINUED)
ENVIRONMENTAL CONTROL
This business segment manufactures and sells, primarily from its various
facilities in Oklahoma City, a variety of air handling and water source
heat pump products for use in commercial and residential air conditioning
and heating systems. The Company's various facilities in Oklahoma City
comprise substantially all of the environment control operations. 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.
The industrial products segment attempts to maintain a full line of certain
product lines, which necessitates maintaining certain products in excess of
management's successive year expected sales levels. Inasmuch as these
products are not susceptible to rapid technological changes, management
believes no loss will be incurred on disposition.
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. Net sales from the Company's primary facility in
Oklahoma City comprises approximately 75% of the automotive products
segment sales.
At December 31, 1995, the automotive segment has $27.8 million of
inventory, a portion of which is in excess of current requirements based on
recent sales levels. Management has developed a program to reduce this
inventory to desired levels over the near term and believes no significant
loss will be incurred on disposition.
Credit, which is generally unsecured, 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
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. SEGMENT INFORMATION (CONTINUED)
receivable, particularly those accounts which are past due. The Company's
periodic assessment of accounts and credit loss provisions are based on the
Company's best estimate of amounts which are not recoverable. 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.
Information about the Company's operations in different industry segments for
each of the three years in the period ended December 31, 1995 is detailed below.
1995 1994 1993
--------------------------------
(In Thousands)
Sales:
Chemical $136,903 $131,576 $114,952
Environmental Control 83,843 69,914 69,437
Industrial Products 13,375 11,222 19,714
Automotive Products 33,270 32,313 28,513
--------------------------------
$267,391 $245,025 $232,616
================================
Gross profit:
Chemical $ 26,050 $ 25,700 $ 27,557
Environmental Control 21,694 17,651 15,651
Industrial Products 2,953 1,316 5,160
Automotive Products 6,366 8,442 9,744
--------------------------------
$ 57,063 $ 53,109 $ 58,112
================================
Operating profit (loss):
Chemical $ 13,393 $ 12,809 $ 17,632
Environmental Control 4,630 3,512 3,900
Industrial Products (1,199) (4,155) 2,120
Automotive Products (3,704) (1,462) 2,528
--------------------------------
13,120 10,704 26,180
General corporate expenses, (6,571) (3,472) (6,629)
net
Interest expense (10,131) (6,949) (7,507)
--------------------------------
Income (loss) before $ (3,582) $ 283 $ 12,044
provision for income taxes
================================
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. SEGMENT INFORMATION (CONTINUED)
1995 1994 1993
--------------------------------
(In Thousands)
Depreciation, depletion and
amortization of property,
plant and equipment:
Chemical $ 4,532 $ 4,044 $ 3,696
================================
Environmental Control $ 1,582 $ 1,427 $ 1,015
================================
Industrial Products $ 124 $ 117 $ 118
================================
Automotive Products $ 986 $ 785 $ 502
================================
Additions to property, plant
and equipment:
Chemical $ 17,979 $ 15,532 $ 9,036
================================
Environmental Control $ 447 $ 3,722 $ 1,584
================================
Industrial Products $ 265 $ 74 $ 560
================================
Automotive Products $ 1,341 $ 1,203 $ 1,875
================================
Identifiable assets:
Chemical $111,890 $ 94,972 $ 77,943
Environmental Control 41,331 40,660 38,389
Industrial Products 17,328 18,423 22,688
Automotive Products 43,872 38,369 31,650
--------------------------------
214,421 192,424 170,670
Corporate assets 23,755 28,857 25,368
--------------------------------
Total assets $238,176 $221,281 $196,038
================================
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.
F-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. SEGMENT INFORMATION (CONTINUED)
Gross profit by industry segment represents net sales less cost of sales.
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.
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 foreign export sales as follows:
GEOGRAPHIC AREA 1995 1994 1993
- -------------------------------------------------------------------
(In Thousands)
Mexico and Central and South $ 5,955 $ 6,976 $ 6,419
America
Canada 10,311 11,649 11,850
Slovakia 2,147 1,783 7,488
Other 16,300 16,195 11,100
---------------------------
$34,713 $36,603 $36,857
===========================
F-32
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
-----------------------------------------------
1995
Total revenues $65,931 $79,932 $65,525 $62,727
===============================================
Gross profit on net sales $16,142 $16,888 $12,976 $11,057
===============================================
Income (loss) from continuing
operations $ 1,448 $ 1,503 $(1,801) $(4,882)
===============================================
Net income (loss) $ 1,448 $ 1,503 $(1,801) $(4,882)
===============================================
Net income (loss) applicable
to common stock $ 629 $ 699 $(2,604) $(5,685)
===============================================
Primary earnings (loss) per
common share:
Continuing operations $ .05 $ .05 $ (.20) $ (.43)
===============================================
Net income (loss) $ .05 $ .05 $ (.20) $ (.43)
===============================================
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)
===============================================
F-33
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
(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):
1995 $2,000 $1,696 $1,112 $2,584
======================================================
1994 $2,083 $1,468 $1,551 $2,000
======================================================
1993 $2,582 $ 439 $ 938 $2,083
======================================================
Other assets:
1995 $1,150 $1,940 $ - $3,090
======================================================
1994 $ 500 $ 650 $ - $1,150
======================================================
1993 $ 500 $ - $ - $ 500
======================================================
Product warranty liability:
1995 $ 689 $ 259 $ 249 $ 699
======================================================
1994 $ 653 $ 667 $ 631 $ 689
======================================================
1993 $ 613 $ 427 $ 387 $ 653
======================================================
(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-34