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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, 1996
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 28, 1997, the aggregate market value of the 8,830,654
shares of voting stock of the Registrant held by non-affiliates of the Company
equaled approximately $44,153,270 based on the closing sales price for the
Company's common stock as reported for that date on the New York Stock
Exchange. That amount does not include (1) the 1,539 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 28, 1997, the Registrant had 12,949,356 shares of common
stock outstanding (excluding 1,939,120 shares of common stock held as treasury
stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
Page
____
Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 1
Chemical Business 1
Environmental Control Business 5
Automotive Products Business 8
Industrial Products Business 10
Employees 11
Research and Development 11
Environmental Compliance 11
Item 2. Properties
Chemical Business 13
Environmental Control Business 14
Automotive Products Business 14
Industrial Products Business 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 4A. Executive Officers of the Company 19
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 20
Stockholders 20
Dividends 20
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 26
Results of Operations 30
Liquidity and Capital Resources 34
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
PART III
Incorporated by reference from the Company's proxy
statement. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 42
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
purchase and sale of machine tools (the "Industrial Products Business").
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 its other manufacturing
facilities are located in Hallowell, Kansas, Wilmington, North Carolina, four
locations in Australia, and one location in New Zealand.
For 1996, approximately 26% 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
1996 consolidated sales, and 61% consisted of sales of ammonium nitrate and
other chemical-based blasting products for the mining industry, which
represented approximately 33% of the Company's 1996 consolidated sales. The
Chemical Business accounted for approximately 54% and 51% of the Company's
1996 and 1995 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 March through June and from
September through November, which causes the Company to increase its inventory
prior to the beginning of each season. Sales to this Business' 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 over time. The Company has
contracts with two suppliers of ammonia pursuant to which the suppliers have
agreed to supply the ammonia requirements of the Chemical Business on terms
the Company considers favorable. One contract is for a period of two (2)
years. One contract is for a period of 120 days, and the parties are in the
process of executing a long-term contract.
Substantial world-wide per ton price increases for ammonia were incurred
during 1995 and 1996 by most, if not all, users of ammonia that are not also
manufacturers of ammonia. Throughout 1995 and 1996, the Company's Chemical
Business has been able to increase its sales prices to cover a portion of the
price increases relating to the cost of ammonia that were incurred. However,
the Company's Chemical Business has not been able to recover all of these cost
increases by way of price increases during 1995 and 1996 on its products due
to market conditions. As a result, such inability to increase prices to cover
all price increases for ammonia for the Chemical Business' products had a
negative impact on the Company's 1995 and 1996 earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
a discussion of negative impact on the Chemical Business as a result of high
ammonia prices.
The Company believes that it could obtain ammonia from other sources in
the event of a termination of the above referenced contracts, but such may not
be obtainable on as favorable terms as presently available to the Chemical
Business under its present agreements.
MARKETING AND DISTRIBUTION:
__________________________
The Chemical Business sells and markets its products to wholesalers and
directly through its own sales force using 32 distribution centers operated by
the Chemical Business. See "Properties". The Chemical Business sells low
density prilled ammonium nitrate-based explosives primarily to the surface
coal mining industry through six (6) 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 pharmaceuticals,
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 from 1997 through
1999.
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' contracts with its suppliers of ammonia, which the Company
believes allows the Chemical Business to purchase ammonia at favorable prices
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 the leading producer of concentrated nitric acid in the
United States for third party sales.
RECENT CONSTRUCTION:
____________________
During 1994, 1995 and 1996 the Chemical Business spent approximately
$26.8 million to install an additional concentrated nitric acid plant ("DSN
Plant") at its manufacturing facility located at El Dorado, Arkansas. The
DSN Plant began limited operations in 1995 and such limited operations have
continued through March 1997 due to certain mechanical problems at the DSN
Plant. As of the date of this report, the DSN Plant is operating at
approximately 80% of its design capacity.
RECENT DEVELOPMENT:
__________________
The Chemical Business has substantially finalized negotiations with the
Bayer Corporation ("Bayer") for the Chemical Business to build and operate on
a long-term basis a nitric acid plant located on property owned by Bayer in
Baytown, Texas. If the transaction is completed, the Chemical Business would
provide nitric acid from such plant to Bayer's Baytown, Texas, plant.
Execution of the agreement between the Chemical Business and Bayer is subject
to the Company finalizing the financing to construct the nitric acid plant and
the final terms upon which the Chemical Business would lease such nitric acid
plant. The Company has an agreement in principle with a lender to provide
financing which is subject to a number of conditions. Such nitric acid plant
would be owned by a party that is not an affiliate of the Company and would be
leased to the Chemical Business for a period expected to equal ten years under
an operating lease. It is currently expected that the cost to construct the
nitric acid plant would be approximately $60.0 million. Under the terms of the
proposed agreement with Bayer, such nitric acid plant is to be constructed and
become operational within 18 months from execution of the definitive
agreement. See "Management's Discussion and Analysis of Financial Condition
and Results 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 29% and 31% of
the Company's 1996 and 1995 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, 1996, the backlog of confirmed orders for the Environmental
Control Business was approximately $14.9 million, as compared to approximately
$12.1 million as of December 31, 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 February 28, 1997, the Environmental Control
Business had released approximately $12.6 million of the December 31, 1996
backlog to production. All of the December 31, 1996 backlog is expected to be
filled by December 31, 1997.
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, distributors or end-
users. Sales to original equipment manufacturers accounted for approximately
28% of the sales of the Environmental Control Business in 1996 and
approximately 8% of the Company's 1996 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
geothermal products designed for residential markets for both new and
replacement 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:
______________________________________
The Company has obtained an option to acquire 80% of the issued and
outstanding stock of an Entity ("Entity") that performs energy savings
contracts, primarily on U.S. government facilities (the "Option"). For the
Option, the Company has paid $1.1 million as of the date of this report. The
term of the Option expires May 4, 1997, but the Company may extend such for
two (2) additional years until 1999 upon payment of $100,000 for each year the
Company desires to extend such Option. As of the date of this report, the
Company has not decided whether it will exercise the Option. If the Company
decides to exercise the Option, the Company has agreed to pay an exercise
price of $4.0 million, less the amount already paid toward the Option ("Option
Price"), 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 grantors 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 of the Option. 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 Entity reported an unaudited net loss of approximately $.5
million. The Company believes that the Entity sustained a loss from
operations for 1996, but as of the date of this report, the amount of such
loss for 1996 is undeterminable.
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 $2.1 million. Subsequent to the loan of $2.1 million, the
Company's subsidiary has loaned to the parent of the French manufacturer an
additional $1.8 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 1996 and 1995, the French manufacturer had revenues of $16.0 million
and $15.9 million, respectively, and reported an approximate breakeven level
of operations in 1996 and a net loss of $900,000 in 1995. As a result of
cumulative losses by the French manufacturer, the Company has established
reserves aggregating approximately $1.5 million through December 31, 1996.
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 (including universal joints, motor mounts,
and clutches). This Business also manufactures powertrain and drive line
parts for original equipment manufacturers. These products are used in
automobiles, trucks, trailers, tractors, farm and industrial machinery, and
other equipment. The Automotive Products Business accounted for approximately
12% of the Company's 1996 and 1995 sales. In 1996, the Automotive Products
Business manufactured approximately 44% of the products it sold and
approximately 37% in 1995, 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 products for original equipment manufacturers after receiving an
order from the manufacturer.
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. 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 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, and
fabricating 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 each of the years 1996, 1995, and 1994.
DISTRIBUTION AND MARKET:
__________________________
The Industrial Products Business distributes its machine tools in the
United States, Mexico, Canada and certain other foreign markets. 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 machine tool dealers, consist of manufacturing and metal
working companies, maintenance facilities, and utilities.
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. 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, importers,
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, 1996, the Company employed 1,563 persons. As of that
date, (a) the Chemical Business employed 569 persons, with 105 represented by
unions under agreements expiring in August, 1998,(b) the Environmental Control
Business employed 577 persons, none of whom are represented by a union, and
(c) the Automotive Products Business employed 261 persons, with 14 represented
by unions under an agreement that expired in August, 1990 which has not been
renewed.
RESEARCH AND DEVELOPMENT:
________________________
The Company incurred approximately $532,000 in 1996, $501,000 in 1995,
and $606,000 in 1994 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 to comply with such laws or to pay fines and
penalties. 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 or 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 was notified in 1987 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".
The Arkansas Department of Pollution Control & Ecology ("ADPC&E"), on
behalf of the EPA, performed a preliminary assessment at the Chemical
Business' El Dorado, Arkansas Plant site ("Site") in 1994. ADPC&E's
preliminary assessment report stated, in part, that a release of certain types
of contaminants is suspected to have occurred at the Site. In addition,
subsequent to the preliminary assessment, 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,
El Dorado Chemical Company ("EDC") and the ADPC&E entered into a Consent
Agreement to address certain groundwater contamination and other issues at the
Site. This Consent Agreement required EDC to undertake certain activities at
the Site, including action to reduce contaminants in the groundwater at the
Site. EDC submitted a groundwater monitoring work plan to the ADPC&E, which
the ADPC&E approved, and EDC initiated such plan. EDC has installed
additional monitoring wells at the Site to further test the groundwater. The
results of tests of water from the new monitoring wells indicated that a risk
assessment needed to be conducted on nitrates identified to be present in the
shallow groundwater. The ADPC&E has approved a work plan submitted by EDC for
the performance of such risk assessment. The risk assessment is currently
being performed.
During 1995 and the first half of 1996, EDC entered into two additional
Consent Administrative Agreements ("Agreements") with the ADPC&E to resolve
certain environmental compliance and certain other issues associated with
EDC's nitric acid concentrators. In the summer of 1996, EDC and the ADPC&E
entered into an amendment ("Amendment") to the Agreements to resolve various
compliance issues. In January 1997, EDC entered into a second amendment
("Second Amendment") to the Agreements, under which the ADPC&E acknowledged
EDC's completion of certain engineering activities and assessed a penalty of
$150,000 to resolve a number of permit issues relating to off-site emissions
and other air permit conditions. The Second Amendment also requires EDC to
modify its air permit to reflect the new pollution control and other equipment
installed. EDC is currently in compliance with the Agreements, as amended.
During 1996, the Chemical Business expended approximately $6.8 million
in connection with capital expenditures relating to compliance with federal,
state and local Environmental Laws at its El Dorado, Arkansas, facility,
including, but not limited to, compliance with the above- discussed consent
agreements with the ADPC&E. The Company estimates that the Chemical Business
is planning to spend approximately $1.2 million in 1997 for capital
expenditures relating to environmental control facilities at its El Dorado,
Arkansas, facility to comply with Environmental Laws, including, but not
limited to, such consent agreements. The amount to be spent in 1997 for
capital expenditures by the Chemical Business related to compliance with
Environmental Laws is a forward-looking statement and the results could
materially differ, if during 1997 there are additional releases or threatened
releases into the environment, changes in the Environmental Laws applicable to
the Chemical Business that require the Chemical Business to spend additional
amounts for capital expenditures not presently anticipated by the Company or
any federal or state environmental agencies or court of competent jurisdiction,
requires the Chemical Business to spend more for capital expenditures in order
to comply with Environmental Laws than presently contemplated by the Company.
The Chemical Business is also involved in various lawsuits pending in
federal court in El Dorado, Arkansas, relating to environmental issues at the
Chemical Business' El Dorado, Arkansas, facility. See Item 3. "Legal
Proceedings" for a discussion of such litigation and insurance coverage
relating thereto. The above discussion relating to the amount spent in 1996
and anticipated to be spent in 1997 for capital expenditures relating to
compliance with federal, state, and local Environmental Laws at the Chemical
Business' El Dorado, Arkansas, facility does not include fees and expenses
incurred, or to be incurred, in connection with such litigation or
expenditures, if any, that may be spent to comply with any order issued by the
court in connection with such lawsuits.
ITEM 2. PROPERTIES
___________________
CHEMICAL BUSINESS
_________________
The Chemical Business primarily conducts manufacturing operations (i) on
150 acres of a 1,400 acre tract of land located in El Dorado, Arkansas (the
"Site"), (ii) on 10 acres of land in a facility of approximately 60,000 square
feet located in Hallowell, Kansas ("Kansas facility") and (iii) a mixed acid
plant in Wilmington, North Carolina. In addition, the Chemical Business has
four manufacturing facilities in Australia and one in New Zealand that produce
blasting related products.
As of December 31, 1996, the manufacturing facility at the Site was
being utilized to the extent of approximately 76%, based on the continuous
operation of those facilities. As of December 31, 1996, 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 32
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 6 domestic explosives distribution
centers located in Bonne Terre, Missouri (owned); Owensboro, Combs, and
Pilgrim, Kentucky (leased); Midland, Indiana (leased); and Pryor, Oklahoma
(leased). The Chemical Business also has four (4) explosives distribution
centers in Australia, all of which are leased, and one (1) explosive
distribution center located in New Zealand, which is leased.
The Chemical Business operates its Kansas facility from buildings
located on an approximate ten acre 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.
The Chemical Business' El Dorado, Arkansas facility is subject to
mortgages.
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, 1996, 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 February 28, 1998 with options
to renew for 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, 1996,
the productive capacity of this manufacturing operation was being utilized to
the extent of approximately 64%, 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 158,000 square feet. During 1996, the Automotive Products
Business under-utilized the productive capacity of its facilities.
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 360,000 square feet located in Oklahoma
City, Oklahoma and Tulsa, Oklahoma, 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 in Oklahoma City, Oklahoma, which the Industrial Products
Business uses for parking and storage. The Company also leases facilities in
Middletown, New York containing approximately 25,000 square feet for
manufacturing operations.
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.
SUBSEQUENT EVENT
________________
In February 1997, Prime Financial Corporation, a wholly-owned subsidiary
of the Company, exercised its option to acquire a 22 story office building
containing approximately 293,000 square feet of office space (the "Tower") in
Oklahoma City, Oklahoma, by foreclosing against the balance owed the
subsidiary under a note receivable recorded on the subsidiary's records at a
carrying value of approximately $14.0 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for further
discussion of the acquisition of the Tower by the subsidiary.
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 US 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 US 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.
Roy Carr, et al. v. El Dorado Chemical Company ("Carr Case"); Richard
Detraz, et al. v. El Dorado Chemical Company ("Detraz Case"); Roy A. Carr,
Sr., et al. v. El Dorado Chemical Company ("Citizen Suit"). The Carr Case,
which was filed against El Dorado Chemical Company ("EDC") on June 26, 1996,
the Detraz Case, which was filed against EDC on October 14, 1996, and the
Citizen Suit, which was filed against EDC on October 17, 1996, are pending in
the United States District Court, Western District of Arkansas, El Dorado
Division. The plaintiffs in the Carr Case are comprised of eight (8) persons
who reside in the area surrounding EDC's El Dorado, Arkansas facility, while
the plaintiffs in the Detraz Case are comprised of sixteen (16) persons who
reside in various locations throughout the El Dorado, Arkansas, metropolitan
area. The plaintiffs in the Citizen Suit are substantially the same as the
plaintiffs in the Carr Case. The plaintiffs in both the Carr Case and the
Detraz Case allege that they have suffered an unspecified amount of damages
under various toxic tort theories for bodily injury and/or property damage as
a result of alleged releases of toxic substances into the environment from
EDC's El Dorado, Arkansas facility (the "Site"), plus punitive damages. In
addition, plaintiffs in the Detraz Case are seeking certification by the Court
as representatives of a class of persons who allegedly have been affected by
emissions from EDC's El Dorado, Arkansas facility, which certification EDC is
contesting. The plaintiffs in the Citizen Suit have brought a citizen's suit
alleging that EDC has violated the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended by the Emergency
Planning Community Right-To-Know Act ("EPCRA"), the Clean Air Act, and the
Clean Water Act and permits issued to EDC under certain of these acts, and, as
a result, under the terms of such acts the plaintiffs in the Citizen Suit are
seeking the Court to order EDC to pay penalties for each day in which EDC
violated such acts, if any, and injunctive relief requiring EDC to remediate
any such alleged violations. Recently, the Court in the Citizen Suit granted
EDC's motion to dismiss some of the plaintiffs' claims in the Citizen Suit,
but denied EDC's motion to dismiss other claims. It is expected that the
plaintiffs in the Citizen Suit will appeal the dismissal of certain of their
claims by the Court. EDC intends to vigorously defend the Carr Case, Detraz
Case, and the Citizen Suit.
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, dispersals, 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 $10.0 million and a similar $10.0 million limit for all losses
due to bodily injury or property damage, except $5 million for all remediation
expenses, with the maximum limit of liability for all claims under the EIL
Insurance not to exceed $10.0 million for each loss or remediation expense and
$10.0 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. The Company believes that the EIL
Insurance will provide coverage for actual damages, if any, sustained by the
plaintiffs, in the Carr Case and the Detraz Case, if any, up to the limits of
the policy in excess of the $500,000 retention, but will not provide coverage
for punitive damages or penalties. As of the date of this report, the Company
is unaware whether such claims in the Carr Case and/or the Detraz Case 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 these matters will
have a material adverse effect on the Company's financial position or results
of operation. Certain statements contained in this paragraph are forward-
looking statements that involve 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 are 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.
Arch Mineral Corporation, et al. v. ICI Explosives USA, Inc., et al. On
May 24, 1996, the plaintiffs filed this civil cause of action against EDC and
five (5) other unrelated commercial explosives manufacturers alleging that the
defendants allegedly violated certain federal and state antitrust laws in
connection with alleged price fixing of certain explosive products. This
cause of action is pending in the United States District Court, Southern
District of Indiana. The plaintiffs are suing for an unspecified amount of
damages, which, pursuant to statute, plaintiffs are requesting be trebled,
together with costs. Based on the information presently available to EDC, EDC
does not believe that EDC conspired with any party, including but not limited
to, the five (5) other defendants, to fix prices in connection with the sale
of commercial explosives. Discovery has only recently commenced in this
matter. EDC intends to vigorously defend itself in this matter.
ASARCO v. ICI, et al. The US District Court for the Eastern District
of Missouri has granted ASARCO and other plaintiffs in a lawsuit originally
brought against various commercial explosives manufacturers in Missouri, and
consolidated with other lawsuits in Utah, leave to add EDC as a defendant in
that lawsuit. An answer or other response is due in April 1997. This lawsuit
alleges a national conspiracy, as well as a regional conspiracy, directed
against explosive customers in Missouri and seeks unspecified damages. EDC
has been included in this lawsuit because it sold products to customers in
Missouri during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has been sued in the
Arch Case discussed above. Based on the information presently available to
EDC, EDC does not believe that EDC conspired with any party, to fix prices in
connection with the sale of commercial explosives. EDC intends to vigorously
defend itself in this matter.
Department of Justice Investigation of Explosives Industry. For several
years, the explosives industry has been under an investigation by the US
Department of Justice. Certain explosives companies plead guilty to antitrust
violations. In connection with that investigation, EDC received and has
complied with certain document subpoenas, and certain of EDC's employees have
been subpoenaed to testify in connection with such investigation. As of the
date of this report, EDC has not been identified as a target of this
investigation.
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 68 Board Chairman December 1968
and President
Barry H. Golsen 46 Board Vice Chairman August 1981
and President of the
Environmental
Control Business
David R. Goss 56 Senior Vice March 1969
President of
Operations and
Director
Tony M. Shelby 55 Senior Vice March 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 55 Vice President - April 1977
Treasurer and
Corporate Controller
David M. Shear 37 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. In March 1996, the Company executed an
employment agreement (the "Agreement") with Jack E. Golsen for an initial term
of three years followed by two additional three year terms. The Agreement
automatically renews for each successive three year term unless terminated by
either the Company or Jack E. Golsen giving written notice at least one year
prior to the expiration of the then three year term. 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"). 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,
___________________________
1996 1995
____ ____
Quarter High Low High Low
_______ ____ ___ ____ ___
First 6 3/8 3 1/2 6 1/4 5 5/8
Second 6 1/4 4 5/8 6 7/8 5 1/4
Third 5 1/8 3 1/2 6 7/8 4 7/8
Fourth 5 3 1/2 5 1/4 3 5/8
STOCKHOLDERS
____________
As of February 28, 1997, the Company had 1,155 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, 1996, 915,000 shares
of $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2 ("Series 2
Preferred"), 1,539 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 March 15, June
15, September 15, and December 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, 1996, and January 1, 1997;
however, there are no assurances that this policy will not be terminated or
changed by the Board of Directors. See Notes 7,9 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. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the financial covenants which the Company's failure to maintain could result
in an event of default. In addition, the loan agreement with the lender
includes as an event of default an ownership change if any Person (except Jack
E. Golsen or members of his Immediate Family [as defined below] and any entity
controlled by Jack E. Golsen or members of his Immediate Family together with
such Person's affiliates and associates), is or becomes the beneficial owner,
directly or indirectly, of more than fifty percent (50%) of the outstanding
Common Stock of LSB. The term "Immediate Family" of any Person means the
spouse, siblings, children, mothers and mothers-in-law, fathers and fathers-
in-law, sons and daughters-in-law, daughters and sons-in-law, nieces, nephews,
brothers and sisters-in-law, and sisters and brothers-in-law.
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, Slurry Explosive Corporation ("SEC"), Northwest Financial Corporation
("NFC"), and DSN Corporation ("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.
Under the terms of a term loan agreement between EDC, EDC's wholly-owned
subsidiary, SEC, both within the Company's Chemical Business, NFC, a wholly-
owned subsidiary of the Company, and certain lenders, and between 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
distributions or advances, except (a) for the amount of taxes that the
borrowers would be required to pay if they were not consolidated with the
Company and (ii) an amount not to exceed fifty percent (50%) of the borrowers'
net income for the immediately preceding fiscal year and (iii) 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".
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,
1996 1995 1994 1993 1992
(Dollars in Thousands, except per share data)
Selected Statement of Operations Data:
Net sales $307,160 $267,391 $245,025 $232,616 $198,373
======== ======== ======== ======== ========
Total Revenues $314,051 $274,115 $249,969 $237,529 $200,217
======== ======== ======== ======== ========
Interest expense $ 10,017 $ 10,131 $6,949 $ 7,507 $ 9,225
======== ======== ======== ======== ========
Income (loss) from continuing
operations $ (3,845) $ (3,732) $ 983 $ 11,235 $ 6,985
========= ========= ======= ======== ==========
Net income (loss) $ (3,845) $(3,732) $ 24,467 $ 12,399 $ 9,255
========= ======== ======== ======== =========
Net income (loss) applicable
to common stock $ (7,074) $ (6,961) $21,232 $ 10,357 $ 7,428
========= ========= ======== ======== =========
Primary earnings (loss)
per common share:
Income (loss) from continuing
operations $ (.54) $(.53) $ (.16) $ .69 $ (.66)
========= ========= ========= ========= =========
Net income (loss) $ (.54) $ (.53) $ 1.54 $ .77 $ .94
========= ========= ========= ========= =========
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
____________________________________________
Years ended December 31,
________________________________________
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
(Dollars in Thousands, except per share data)
Selected Balance Sheet Data:
Total Assets $261,284 $238,176 $221,281 $196,038 $166,999
======== ======== ======== ======== ========
Long-term debt, including current
portion $132,284 $118,280 $ 91,681 $ 90,395 $ 51,332
======== ======== ======== ======== ========
Redeemable preferred stock $ 146 $ 149 $ 152 $ 155 $ 163
======== ======== ======== ======== ========
Stockholders' Equity $ 73,742 $ 81,576 $90,599 $ 74,871 $ 18,339
======== ======== ======== ======== =========
Selected other Data:
Cash dividends declared
per common share $ .06 $ .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, 1996 Consolidated Financial Statements,
Item 6 "SELECTED FINANCIAL DATA" and Item 1 "BUSINESS" included elsewhere in
this report.
OVERVIEW
_________
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 has established or can establish a position as a market
leader. In addition, the Company is seeking to improve its liquidity and
profits through liquidation of selected assets that are on its balance sheet
and on which it is not realizing an acceptable return nor does it have the
potential to do so.
In this connection, the Company has been concentrating on reshaping the
Automotive Products Business by the liquidation of certain of their assets
that don't have the potential to earn an acceptable return and focusing on
product lines that management believes have strategic advantages within select
niche markets. The Company has also recruited new key management people in
the Automotive Products Business including marketing, materials control,
manufacturing, and financial. The Company continues to explore its
alternatives to accomplish these goals.
In addition, the Company has been liquidating certain slow moving
inventory in the Industrial Products Business in the ordinary course of
business. It is the present intention of the Company to limit this Business
to lines of machine tools which should result in an acceptable return on
capital employed.
Certain statements contained in this Overview are forward-looking
statements, and the results thereof could differ materially from such
statements if the Company is unable to liquidate such assets in a reasonable
period or on reasonable terms, and if able to liquidate such assets, it may
not be able to improve profits in the Automotive Products Business or have an
acceptable return on capital employed in these Businesses if general economic
conditions deteriorate drastically from the environment these Businesses
currently operate in or these Businesses are unable to meet competitive
pressures in the market place which restrict these Businesses from
manufacturing or purchasing and selling their products at acceptable prices.
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, 1996.
1996 1995 1994
_________ _________ _________
(In Thousands)
Sales:
Chemical $ 166,163 $ 136,903 $ 131,576
Environmental Control 89,275 83,843 69,914
Industrial Products 13,776 13,375 11,222
Automotive Products 37,946 33,270 32,313
_________ __________ _________
$ 307,160 $ 267,391 $ 245,025
========= ========== =========
Gross Profit: (1)
Chemical $ 25,885 $ 26,050 $ 25,700
Environmental Control 21,961 21,694 17,651
Industrial Products 3,058 2,953 1,316
Automotive Products 5,868 6,366 8,442
__________ __________ __________
$ 56,772 $ 57,063 $ 53,109
========== ========== ==========
1996 1995 1994
_________ ________ _________
(In Thousands)
Operating profit (loss): (2)
Chemical $ 10,971 $ 13,393 $ 12,809
Environmental Control 5,362 4,630 3,512
Industrial Products (2,685) (1,199) (4,155)
Automotive Products (4,134) (3,704) (1,462)
__________ __________ __________
9,514 13,120 10,704
General corporate expenses, net (3,192) (6,571) (3,472)
Interest Expense (10,017) (10,131) (6,949)
__________ __________ __________
Income (loss) from continuing
operations before provision
for income taxes $ (3,695) $ (3,582) $ 283
========== ========== ==========
Identifiable assets:
Chemical $ 132,442 $ 111,890 $ 94,972
Environmental Control 50,623 41,331 40,660
Industrial Products 13,614 17,328 18,423
Automotive Products 43,212 43,872 38,369
__________ __________ __________
239,891 214,421 192,424
Corporate assets 21,393 23,755 28,857
__________ __________ __________
Total assets $ 261,284 $ 238,176 $ 221,281
========== ========== ==========
(1) Gross profit by industry segment represents net sales less
cost of sales. (2) 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 $13.1 million in 1995 to $9.5 million in 1996,
while sales increased approximately 15% during the same period.
The decline in operating profit resulted in a loss from continuing
operations before income taxes for 1996 of $3.7 million. This
decline in operating profit is primarily due to lower earnings in
the Chemical Business as a result of increased ammonia costs and
underabsorbed overhead related to modifications at the Company's
El Dorado, Arkansas chemical plant complex and to the lower
margins in the Automotive Products Business and foreign sales
income recognized in 1995 and not repeated in 1996 in the
Industrial Products Business as discussed in Note 6 to Notes to
Consolidated Financial Statements.
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
1996, 1995, and 1994, capital expenditures in this Business were $19.1
million, $18.0 million, and $15.5 million, respectively. During the period
from December 1994 through December 1996 the net investment in assets of the
Chemical Business was increased from $95.0 million to $132.4 million primarily
due to the construction of additional capacity to benefit future periods.
The operating profit in the Chemical Business is down from $12.8 million
in 1994 and $13.4 million in 1995 to $11.0 million in 1996. During 1996, the
Chemical Business incurred significant amounts of unplanned downtime at the El
Dorado, Arkansas Plant site due to mechanical problems and planned downtime
for improvements being made to the plants. The downtime resulted in increases
in manufacturing overhead and lower absorption of such costs. The unabsorbed
overhead combined with unexpected increases in the cost of the primary raw
material, ammonia, led to higher cost of sales as a percent of sales and lower
gross profit margins.
The Chemical Business purchases approximately 250,000 tons per year of
anhydrous ammonia. The cost of ammonia consumed by the Chemical Business in
1996 was $167 per ton compared to $162 in 1995 and $157 in 1994. In November
and December 1996, ammonia prices took an unexpected increase to an average of
$200 per ton compared to an average of $152 in November and December 1995.
This spike had a disruptive effect on the fourth quarter results of
operations. The increased cost of purchased ammonia in 1996 was partially
passed on to customers in the form of higher prices, but the entire cost
increase could not be offset by higher sales prices resulting in lower gross
profit margins.
Ammonia prices continued to increase in 1997 averaging $217 per ton in
January and $212 in February. In March, the price of ammonia began to come
down, but not in time to significantly reduce the cost of sales percent in the
first quarter of 1997. The price for the Chemical Business' purchased ammonia
has declined to $165 per ton as of the date of this report.
The Chemical Business has substantially finalized negotiations with Bayer
for the Chemical Business to build and operate on a long-term basis a nitric
acid plant located on property owned by Bayer in Baytown, Texas. If the
transaction is completed, the Chemical Business would provide nitric acid
from such plant to Bayer's Baytown, Texas plant. Execution of the agreement
between the Chemical Business and Bayer is subject to the Company finalizing
the financing to construct the nitric acid plant and the final terms upon
which the Chemical Business would lease such nitric acid plant. The Company
has an agreement in principle with a lender to provide financing. Such nitric
acid plant would be owned by a party that is not an affiliate of the Company
and would be leased to the Chemical Business for a period expected to equal
ten years under an operating lease. It is expected that the cost to construct
the nitric acid plant would be approximately $60.0 million. Under the terms of
the proposed agreement, such nitric acid plant can be constructed and become
operational within 18 months from execution of the definitive agreement.
ENVIRONMENTAL CONTROL
The Environmental Control Business manufactures 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 6%) and improved operating profit for
1996 as compared to 1995. From December 1994 through December 1996 the net
investment in assets of the Environmental Control Business was increased from
$40.7 million to $50.6 million. During this two year period, additions to
property, plant, and equipment were $2.0 million and depreciation was
approximately $3.1 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 1994, 1995, and 1996, respectively, these Businesses
recorded combined sales of $43.5 million, $46.6 million and $51.7 million,
respectively, and reported operating losses (as defined above) of $5.6
million, $4.9 million, and $6.8 million in 1994 and 1995, and 1996
respectively. The net investment in assets of these Businesses was $56.8
million, $61.2 million and $56.8 million at year end 1994, 1995, and 1996,
respectively. The investment in these Businesses had become excessive due to
a build in inventory beyond current demand. However, the investment is
beginning to come back down due to a stringent inventory reduction program put
into place in 1995.
RESULTS OF OPERATIONS
_____________________
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Total revenues for 1996 and 1995 were $314.1 million and $274.1 million,
respectively (an increase of $40.0 million or 14.6%). Sales increased $39.8
million or 14.9%.
NET SALES
Consolidated net sales for 1996 were $307.2 million, compared to $267.4
million for 1995, an increase of $39.8 million or 14.9%. This sales increase
resulted principally from: (i) increased sales in the Environmental Control
Business of $5.4 million, primarily due to improved market conditions; (ii)
increased sales in the Chemical Business of $29.3 million which were primarily
attributable to increased sales of $16.0 million at Total Energy Systems
("TES"), the Company's subsidiary located in Australia and New Zealand, which
have resulted from an expanded customer base, to higher costs being passed
through to customers and higher sales of agricultural products; (iii)
increased sales of $.4 million in the Industrial Products Business; and (iv)
increased sales of $4.7 million in the Automotive Products Business due to the
addition of certain new product lines that the Company believes the Automotive
Products Business has a strategic advantage in.
GROSS PROFIT
Gross profit decreased $.3 million and was 18.5% of net sales for 1996,
compared to 21.3% of net sales for 1995. The gross profit percentage declined
in the Automotive Products, 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 and higher
production costs due to unabsorbed overhead costs resulting from excessive
downtime at the Chemical Business' El Dorado, Arkansas plant complex related
to modifications made to install air emissions abatement equipment and resolve
problems associated with mechanical failures at the DSN Plant. The
Environmental Control Business' gross profit percentage decreased due to
production inefficiencies and decreased absorption of costs due to lower
production volumes in certain product lines of this Business. The primary
reason for the decline in gross profit percentage in the Automotive Products
Business was a less favorable customer mix 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 expenses ("SG&A"), as a percent of
net sales, were 18.7% in 1996 and 21.4% in 1995. Consolidated SG&A expenses
were approximately the same in 1996 as 1995 and consolidated net sales
increased by 14.9% resulting in a lower percentage of SG&A to sales.
Increased SG&A of the Chemical Business consistent with sales increases were
offset by reductions in SG&A in the Environmental Control Business and general
corporate expenses.
INTEREST EXPENSE
Interest expense for the Company, excluding capitalized interest, was
$10.0 million during 1996, compared to $10.1 million during 1995. During
1996, $2.4 million of interest expense was capitalized in connection with
construction of the DSN Plant, compared to $1.4 million in 1995. The increase
of $.9 million before the effect of capitalization primarily resulted from
increased borrowings and higher interest rates. The increased borrowings were
necessary to support capital expenditures, 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 $3.8 million in 1996 compared to a net
loss of $3.7 million in 1995. Although 1996 consolidated net sales increased,
the consolidated gross profit did not increase and the net loss was
approximately the same in 1996 as 1995.
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 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
et 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, excluding capitalized interest, was
$10.1 million during 1995, compared to $6.9 million during 1994. During 1995,
$1.4 million interest expense was capitalized in connection with construction
of the DSN Plant compared to $.5 million in 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.
LIQUIDITY AND CAPITAL RESOURCES
______________________________
CASH FLOW FROM OPERATIONS
Net cash provided by operations for the year ended 1996 was $13.3
million, after $9.8 million for noncash depreciation and amortization, $3.7
million in provisions for possible losses on accounts and notes receivable,
and $1.6 million in gains from real estate and other assets and including the
following changes in assets and liabilities: (i) accounts receivable
increases of $8.3 million; (ii) inventory increases of $1.7 million; (iii)
increases in supplies and prepaid items of $1.5 million; and (iv) increases in
accounts payable and accrued liabilities of $16.7 million. The increase in
accounts receivable is due to increased sales in all businesses, especially in
the Environmental Control Business and the Chemical Business' Australian
subsidiary (see Results of Operations for discussion of increase in sales).
The increase in inventory was due primarily to an increase of $3.6 million at
the Chemical Business' Australian subsidiary resulting from growth of that
operation and increases in the Environmental Control Business to support sales
increases. These increases were offset by inventory reductions in the
Automotive and Industrial Products Businesses resulting from liquidation of
excess inventory. The increase in supplies and prepaid items resulted
primarily from an increase in manufacturing supplies in the Chemical Business.
The increase in accounts payable and accrued liabilities resulted primarily
from higher business volume and an increase in capital construction projects
in 1996.
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES
Cash used by investing activities for the year ended December 31, 1996
was $21.0 million primarily for capital expenditures in the Chemical Business
to complete construction of a strong nitric acid plant and for installation of
certain air emissions abatement equipment, and expenditures in the Automotive
Products Business related to the relocation of a u-joint manufacturing
facility moved from Indiana to Oklahoma. The balance of capital expenditures
were for normal additions in the Chemical, Environmental Control, and
Automotive Products Businesses. The increase in other assets is due primarily
to increased loans to potential acquisition candidates. Cash provided by
financing activities included long-term borrowings of $25.0 million reduced by
payments on long-term debt of $12.0 million, and (i) net paydown on revolving
credit facilities of $1.3 million, (ii) dividends of $4.0 million and (iii)
increases in other assets of $2.3 million.
During 1996, the Company declared and paid the following aggregate
dividends: (i) $12.00 per share on each of the outstanding shares of its
Series B 12% Cumulative Convertible Preferred Stock; (ii) $3.25 per share on
each outstanding share of its $3.25 Convertible Exchangeable Class C Preferred
Stock, Series 2; (iii) $10.00 per share on each outstanding share of its
Convertible Noncumulative Preferred Stock; and (iv) $.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.
On February 13, 1997 the Company's wholly-owned subsidiaries, EDC, SEC,
and NFC (collectively "Borrowers") completed a $50.0 million long-term
financing agreement ("Financing") with an institutional lender. Approximately
$19.3 million in proceeds from the Financing were used to repay other
outstanding term debt, and the remaining $30.7 million in proceeds was used
to pay down the Company's revolving credit facilities and thereby create
additional borrowing availability for future working capital and other
corporate needs. The Financing is secured by a first mortgage lien on the
Chemical Business' property, plant, and equipment located in El Dorado,
Arkansas and owned by the Borrowers, except rolling stock and excluding the
DSN Plant which is security under a separate loan agreement. The $50.0
million Financing consists of $25.0 million of fixed rate notes bearing
interest at 10.57% per annum and $25.0 million of floating rate notes
bearing interest at LIBOR plus 4.2% (initially 9.76%). Repayment of the
notes is due in quarterly installments of $833,332 plus interest commencing
on July 1,1997 through April 2004 at which time the balance is due. The
Financing requires the Borrowers to maintain certain financial ratios and
contains other financial covenants, including the ratio of funded debt to
total capitalization, current ratio, and fixed charge coverage ratio, in
addition to net worth and working capital requirements. The Financing also
contains certain restrictions on transactions with affiliates. The Financing
limits the amount of dividends or distributions on its shares to an amount
equal to payments for federal income taxes determined as if the Borrowers
filed returns on a separate company basis and dividends up to 50% of the
Borrowers' prior year net income. See Note 7 to Notes to Consolidated
Financial Statements.
The Company and certain of its subsidiaries are parties to a working
capital line of credit 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, as
amended, provide for revolving credit facilities ("Revolver") for total direct
borrowings up to $63.0 million, including the issuance of letters of credit.
The Revolver provides for advances at varying percentages of eligible
inventory and trade receivables. The Agreements, as amended, provide for
interest at the reference rate as defined (which approximates the national
prime rate) plus 2%, or the Eurodollar rate plus 4.375%. At December 31, 1996
the effective interest rate was 9.4%. The initial term of the Agreements is
through December 12, 1997, and is renewable thereafter for successive thirteen
month terms. The Lender has agreed to amend the initial term maturity date to
April 1, 1998. At December 31, 1996, the available borrowings, based on
eligible collateral approximated $3.3 million. Borrowings under the Revolver
outstanding at December 31, 1996, were $57.2 million. As discussed above, on
February 13, 1997, certain of the Company's subsidiaries completed a $50.0
million long-term Financing, from which $30.7 million in proceeds were used to
pay down the Revolver. Had this transaction taken place on December 31, 1996,
outstanding borrowing under the revolver would have been $26.5 million and
available borrowings would have approximated $34.0 million. The Agreements, as
amended, require the Company to maintain certain financial ratios and contain
other financial covenants, including tangible net worth requirements and
capital expenditure limitations. The annual interest on the outstanding debt
under the Revolver at December 31, 1996 at the rates then in effect would
approximate $5.4 million.
In addition to the Agreements discussed above, the Company had the
following term loans in place as of December 31, 1996:
(1) As of December 31, 1996, the Company's wholly-owned subsidiaries, El
Dorado Chemical Company and Slurry Explosive Corporation (collectively
"Chemical"), were parties to a loan agreement ("Loan Agreement") with
two institutional lenders ("Lenders"). This Loan Agreement provided for
a loan ("Term Loan") having a balance at December 31, 1996 of $7.4
million. The Term Loan was repaid in February 1997 with proceeds from
the $50.0 million Financing discussed above.
(2) As of December 31, 1996, Chemical was a party to a financing agreement
("Financing Agreement") with a leasing subsidiary of a national bank (the
"Bank"). The financing provided for a loan having a balance at December
31, 1996 of $12.0 million. On February 13, 1997, outstanding borrowings
under the Financing Agreement were repaid with proceeds from the $50.0
million Financing discussed above.
(3) The Company' s wholly-owned subsidiary, DSN, is a party to several loan
agreements with a financing company (the "Financing Company") for three
(3) projects. These loan agreements are for a $16.5 million term loan
(the "DSN Permanent Loan"), which was used to construct, equip, re-
erect, and refurbish 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,
1996, DSN had outstanding borrowings of $13.9 million under the DSN
Permanent Loan, $.9 million under the Mixed Acid Loan, and $1.0 million
under the Railcar Loan. The loans have repayment schedules of eighty-
four (84) consecutive monthly installments of principal and interest.
The interest rate on each of the loans is fixed and range from 8.24% to
8.86%. Annual interest, for the three notes as a whole, at December 31,
1996 at the agreed to interest rates would approximate $1.4 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 agreements require 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.
(4) As of December 31, 1996, a subsidiary of the Company ("Prime") was a
party to an agreement ("Agreement") with Boatmen's Bank, N.A. ("Bank").
The Agreement, as modified, requires interest per annum at a rate equal
to three quarters of one percent (.75%) 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 June 30, 1996.
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 located in
Oklahoma City, Oklahoma (the "Tower"), the Management Agreement relating
to the Tower. In February 1997, the Company exercised its option to
purchase the Tower by foreclosing against the loan receivable and paying
approximately $140,000 in related costs.
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 cash flow generated by the
Company and 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 Industrial
Products Business and in the inventories of the Automotive Products Business,
which increased its inventories in 1995 beyond required levels. In 1997, the
Company has planned capital expenditures of approximately $6.0 million,
primarily in the Chemical and Environmental Control Businesses.
As discussed elsewhere in this report in the "Results of Operations", as
a result of mechanical problems and planned downtime for improvements being
made to the plants at the facility, the Chemical Business has experienced
unabsorbed overhead costs at its El Dorado, Arkansas facility. The unabsorbed
overhead costs adversely impacted the Chemical Business' gross profit and the
Company's consolidated income before income taxes for the year ended December
31, 1996.
Management believes that cash flows from operations, the Company's
revolving credit facilities, and other sources, including the $50.0 million
Financing completed in February 1997, 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, except as
discussed 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
The Company has guaranteed a revolving credit working capital facility (the
"Facility") between TES and Bank of New Zealand. The Facility allows for
borrowings based on specific percentages of qualified eligible assets. The
Facility was amended on December 19, 1996 to allow for borrowings up to an
aggregate of $8.5 million Australian. This amendment also requires a
reduction of $.5 million to the amount of $8.0 million on or before February
28 1997, then a further reduction of $1.0 million to the amount of $7.0
million on or before March 31, 1997. Based on the effective exchange rate at
December 31, 1996, the amount of $6.7 million. (approximately US $4.6 million
borrowed at December 31, 1996). 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 Lending
Rate plus 0.5% (approximately 10.0% at December 31, 1996). The next annual
review is due on September 30, 1997. TES is in technical non-compliance with
a certain financial covenant contained in the loan agreement involving the
Facility. However, this covenant was not met at the time of closing and the
Bank of New Zealand agrees that the covenant is something to work towards in
the future and has continued to allow TES to borrow under the Facility. The
outstanding borrowing under the facility at December 31, 1996 has been
classified as due within one year in the accompanying 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 USA. 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 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
at December 31, 1996 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. Subsequent to December 31, 1996, the Company advanced an additional
$1.0 million to the French manufacturer for the purchase of additional plant
facilities.
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 ("Optioned Company") 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.
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 had been awarded a contract to retrofit
residential housing units at a US Army base. The completed contract was for
installation of energy-efficient equipment (including air conditioning and
heating equipment), which would 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 spent approximately $17.5 million to
retrofit the residential housing units at the US Army base. The Project has
received a loan from a lender to finance approximately $14.0 million of the
cost of the Project. The Company is not guaranteeing any of the lending
obligations of the Project.
DEBT GUARANTEE
As disclosed in Note 12 of the Notes to Consolidated Financial
Statements a subsidiary of the Company and one of its subsidiaries have
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 for which the subsidiary had guaranteed up to
$600,000 had a principal balance of $125,000 at December 31, 1996 and was paid
in full subsequent to December 31, 1996. The other note in the amount of $2.0
million requires monthly principal payments of $11,111 plus interest beginning
in October 1998 through August 8, 1999, at which time all outstanding
principal and accrued interest are due. In the event of default of the $2.0
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 1996, the aviation company received a cash infusion of $4.0 million
from an unrelated third party investor for a 41.6% ownership interest in the
aviation company. The investor also retained an option to purchase additional
stock of the aviation company in exchange for $4.0 million.
AVAILABILITY OF COMPANY'S LOSS CARRYOVERS
The Company anticipates that its cash flow in future years will benefit
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;
however, such benefit will be limited by the Company's reduced NOL for
alternative minimum tax purposes which is approximately $10.0 million at
December 31, 1996. As of December 31, 1996, the Company had available NOL
carryovers of approximately $45.0 million, based on its federal income tax
returns as filed with the Internal Revenue Service for taxable years through
1995, and on the Company's estimates for 1996. These NOL carryovers will
expire beginning in the year 1999.
The above paragraph contains certain forward-looking statements. 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 that the Company may file with the Securities and Exchange
Commission on or before April 30, 1997, in connection with the Company's 1997
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, 1996
and 1995 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1996 F-4
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1996 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1996 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-36
Quarterly Financial Data (Unaudited) F-37
(a)(2) FINANCIAL STATEMENT SCHEDULE. The Company has included the
____________________________
following schedule in this report:
II - Valuation and Qualifying Accounts F-38
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, which the Company incorporates by reference from Exhibit 2.1
to the Company's Form 10-K for fiscal year ended December 31, 1995.
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, the Certificate
of Designation dated February 17, 1989, and certificate of Elimination
dated April 30, 1993, which the Company hereby incorporates by reference
from Exhibit 4.1 to the Company's Registration Statement, No. 33-61640;
Certificate of Designation for the Company's $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, which is incorporated by
reference from Exhibit 4.6 to the Company's Registration Statement,
No. 33-61640.
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. 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.
4.7. 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.
4.8. 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.
4.9. 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 Explosive Corporation with BankAmerica Business Credit, Inc. and
are hereby omitted and such will be provided upon the Commission's
request.
4.10. 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.
4.11. 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., which the Company hereby incorporates by reference from
Exhibit 4.18 to the Company's Form 10-K for the fiscal year ended
December 31, 1995.
4.12. 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., which
the Company hereby incorporates by reference from Exhibit 4.19 to the
Company's Form 10-K for the fiscal year ended December 31, 1995.
4.13. Third Amendment to Loan and Security Agreement between the
Company and BankAmerica Business Credit, Inc. Substantially identical
Third Amendments 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 are hereby
omitted, and such will be provided to the Commission upon request.
4.14. Fourth Amendment to Loan and Security Agreement between the
Company and BankAmerica Business Credit, Inc. Substantially identical
Fourth Amendments 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 are
hereby omitted, and such will be provided to the Commission upon request.
4.15. Fifth Amendment to Loan and Security Agreement between the
Company and BankAmerica Business Credit, Inc. Substantially identical
Fifth Amendments 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 are hereby
omitted, and such will be provided to the Commission upon request.
4.16. Sixth Amendment to Loan and Security Agreement between the
Company and BankAmerica Business Credit, Inc. Substantially identical
Sixth Amendments 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 are hereby
omitted, and such will be provided to the Commission upon request.
4.17. 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, and 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.
4.18 Note Purchase Agreement, dated February 13, 1997
between El Dorado Chemical Company, Northwest Financial Corporation, and
Slurry Explosive Corporation as Borrowers, and John Hancock Mutual Life
Insurance Company.
4.19. Intercreditor Agreement dated February 13, 1997 by and
between BankAmerica Business Credit, Inc. and John Hancock Mutual Life
Insurance Company with respect to certain financing arrangements with El
Dorado Chemical Company, Slurry Explosive Corporation, and Northwest
Financial Corporation.
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 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, 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, 1997, between El Dorado Chemical Company and
Farmland Industries, Inc.
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 which the Company hereby incorporates by
reference from Exhibit 10.11 to the Company's Form 10-K for the fiscal
year ended December 31, 1995.
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, Barry H. Golsen, David M.
Shear, and Jim D. Jones 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 which the Company hereby incorporates by reference
from Exhibit 10.15 to the Company's Form 10-K for fiscal year ended
December 31, 1995.
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. 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.
10.18. 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.
10.19. 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.
10.20. 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.
10.21. 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.
10.22. 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.
10.23. 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.
10.24 Agreement for purchase and sale of ammonia dated December
31, 1996 between El Dorado Chemical Company and Koch Nitrogen Company.
11.1. Statement re: Computation of Per Share Earnings
21.1. 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 1996.
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 11th day of April,
1997.
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 11, 1997 By:
/s/ Jack E. Golsen
________________________________
Jack E. Golsen, Director
Dated: April 11, 1997 By:
/s/ Tony M. Shelby
________________________________
Tony M. Shelby, Director
Dated: April 11, 1997 By:
/s/ David R. Goss
_______________________________
David R. Goss, Director
Dated: April 11, 1997 By:
/s/ Barry H. Golsen
_______________________________
Barry H. Golsen, Director
Dated: April 11, 1997 By:
/s/ Robert C. Brown
_______________________________
Robert C. Brown, Director
Dated: April 11, 1997 By:
/s/ Bernard G. Ille
_______________________________
Bernard G. Ille, Director
Dated: April 11, 1997 By:
/s/ Jerome D. Shaffer
________________________________
Jerome D. Shaffer, Director
Dated: April 11, 1997 By:
/s/ Raymond B. Ackerman
______________________________
Raymond B. Ackerman, Director
Dated: April 11, 1997 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, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 7, 1997
LSB Industries, Inc.
Consolidated Balance Sheets
December 31,
1996 1995
-----------------------------
(In Thousands)
Assets
Current assets (Note 7):
Cash and cash equivalents $ 1,620 $ 1,420
Trade accounts receivable, less allowance for doubtful accounts
of $3,291,000 ($2,584,000 in 1995) 50,791 43,975
Inventories (Note 4) 67,982 66,265
Supplies and prepaid items 7,217 5,684
-----------------------------
Total current assets 127,610 117,344
Property, plant and equipment, at cost (Notes 5 and 7) 178,050 152,730
Accumulated depreciation (74,907) (66,460)
-----------------------------
Property, plant and equipment, net 103,143 86,270
Loans receivable, secured by real estate (Note 7) 15,010 15,657
Other assets, net of valuation allowances and allowance for doubtful accounts
of $5,281,000 in 1996 ($3,090,000 in 1995) and accumulated amortization of
$5,919,000 in 1996 ($4,795,000 in 1995)
15,521 18,905
-----------------------------
$261,284 $238,176
=============================
(Continued on following page)
F-2
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
December 31,
1996 1995
-----------------------------
(In Thousands)
Liabilities and stockholders' equity
Current liabilities:
Drafts payable $ 536 $ 424
Accounts payable 41,796 28,508
Accrued liabilities 12,780 9,239
Current portion of long-term debt (Note 7) 13,007 14,925
-----------------------------
Total current liabilities 68,119 53,096
Long-term debt (Note 7) 119,277 103,355
Commitments and contingencies (Notes 6 and 12)
Redeemable, noncumulative, convertible preferred stock, $100 par value; 1,539 shares
issued and outstanding (1,566 in 1995) (Note 10) 146 149
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, 14,888,476 shares
issued (14,757,416 in 1995) 1,489 1,476
Capital in excess of par value 37,843 37,567
Retained earnings (accumulated deficit) (2,706) 5,148
-----------------------------
84,626 92,191
Less treasury stock, at cost:
Series 2 preferred, 5,000 shares 200 200
Common stock, 1,913,120 shares (1,845,969 in 1995) 10,684 10,415
-----------------------------
Total stockholders' equity 73,742 81,576
-----------------------------
$261,284 $238,176
=============================
See accompanying notes.
F-3
LSB Industries, Inc.
Consolidated Statements of Operations
Year ended December 31,
1996 1995 1994
-----------------------------------------------------
(In Thousands, Except Per Share Amounts)
Revenues:
Net sales $307,160 $267,391 $245,025
Other income 6,891 6,724 4,944
-----------------------------------------------------
314,051 274,115 249,969
Costs and expenses:
Cost of sales 250,388 210,328 191,916
Selling, general and administrative 57,341 57,238 50,821
Interest 10,017 10,131 6,949
-----------------------------------------------------
317,746 277,697 249,686
-----------------------------------------------------
Income (loss) from continuing operations before provision
(benefit) for income taxes (3,695) (3,582) 283
Provision (benefit) for income taxes 150 150 (700)
-----------------------------------------------------
Income (loss) from continuing operations (3,845) (3,732) 983
Discontinued operations:
Income from discontinued operations - - 584
Gain on disposal of discontinued operations - - 24,200
Provision for income taxes related to discontinued
operations - - (1,300)
-----------------------------------------------------
- - 23,484
=====================================================
Net income (loss) $ (3,845) $ (3,732) $ 24,467
=====================================================
Net income (loss) applicable to common stock $ (7,074) $ (6,961) $ 21,232
=====================================================
Earnings (loss) per common share:
Primary:
Loss from continuing operations $(.54) $(.53) $(0.16)
=====================================================
Net income (loss) $(.54) $(.53) $ 1.54
=====================================================
Fully diluted:
Loss from continuing operations $(.54) $(.53) $(0.16)
=====================================================
Net income (loss) $(.54) $(.53) $ 1.46
=====================================================
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Non-
----------------------- redeemable Capital in
Par Preferred Excess of
Shares Value Stock Par Value
--------------------------------------------------
(In Thousands)
Balance at December 31, 1993 14,514 $1,451 $48,000 $37,120
Net income - - - -
Conversion of 40 shares of redeemable preferred stock to common stock 1 - - 1
Exercise of stock options for cash 105 11 - 248
Dividends declared:
Series B 12% preferred stock ($12.00 per share) - - - -
Redeemable preferred stock ($10.00 per share) - - - -
Common stock ($.06 per share) - - - -
Series 2 preferred stock ($3.25 per share) - - - -
Purchase of treasury stock - - - -
--------------------------------------------------
Balance at December 31, 1994 14,620 1,462 48,000 37,369
Net loss - - - -
Conversion of 31 shares of redeemable preferred stock to common stock 1 - - 2
Exercise of stock options:
Cash received 100 10 - 145
Stock tendered and added to treasury at market value 36 4 - 51
Dividends declared:
Series B 12% preferred stock ($12.00 per share) - - - -
Redeemable preferred stock ($10.00 per share) - - - -
Common stock ($.06 per share) - - - -
Series 2 preferred stock ($3.25 per share) - - - -
Purchase of treasury stock - - - -
--------------------------------------------------
Balance at December 31, 1995 14,757 1,476 48,000 37,567
Retained
Earnings Treasury Treasury
(Accumulated Stock-- Stock--
Deficit) Common Preferred Total
------------------------------------------------------
(In Thousands)
Balance at December 31, 1993 $ (7,541) $ (4,159) $ - $74,871
Net income 24,467 - - 24,467
Conversion of 40 shares of redeemable preferred stock to common stock - - - 1
Exercise of stock options for cash - - - 259
Dividends declared:
Series B 12% preferred stock ($12.00 per share) (240) - - (240)
Redeemable preferred stock ($10.00 per share) (16) - - (16)
Common stock ($.06 per share) (808) - - (808)
Series 2 preferred stock ($3.25 per share) (2,979) - - (2,979)
Purchase of treasury stock - (4,756) (200) (4,956)
------------------------------------------------------
Balance at December 31, 1994 12,883 (8,915) (200) 90,599
Net loss (3,732) - - (3,732)
Conversion of 31 shares of redeemable preferred stock to common stock - - - 2
Exercise of stock options:
Cash received - - - 155
Stock tendered and added to treasury at market value - (55) - -
Dividends declared:
Series B 12% preferred stock ($12.00 per share) (240) - - (240)
Redeemable preferred stock ($10.00 per share) (16) - - (16)
Common stock ($.06 per share) (774) - - (774)
Series 2 preferred stock ($3.25 per share) (2,973) - - (2,973)
Purchase of treasury stock - (1,445) - (1,445)
------------------------------------------------------
Balance at December 31, 1995 5,148 (10,415) (200) 81,576
(Continued on following page)
F-5
LSB Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Non-
Common Stock redeemable Capital in
-----------------------
Par Preferred Excess of
Shares Value Stock Par Value
--------------------------------------------------
(In Thousands)
Net loss - $ - $ - $ -
Conversion of 27 shares of redeemable preferred stock to common stock 1 - - 2
Exercise of stock options:
Cash received 85 8 - 185
Stock tendered and added to treasury at market value 45 5 - 89
Dividends declared:
Series B 12% preferred stock ($12.00 per share) - - - -
Redeemable preferred stock ($10.00 per share) - - - -
Common stock ($.06 per share) - - - -
Series 2 preferred stock ($3.25 per share) - - - -
Purchase of treasury stock - - - -
=====================================================
Balance at December 31, 1996 14,888 $1,489 $48,000 $37,843
=====================================================
Retained
Earnings Treasury Treasury
(Accumulated Stock-- Stock--
Deficit) Common Preferred Total
------------------------------------------------------
(In Thousands)
Net loss $ (3,845) $ - $ - $ (3,845)
Conversion of 27 shares of redeemable preferred stock to common stock - - - 2
Exercise of stock options:
Cash received - - - 193
Stock tendered and added to treasury at market value - (94) - -
Dividends declared:
Series B 12% preferred stock ($12.00 per share) (240) - - (240)
Redeemable preferred stock ($10.00 per share) (16) - - (16)
Common stock ($.06 per share) (780) - - (780)
Series 2 preferred stock ($3.25 per share) (2,973) - - (2,973)
Purchase of treasury stock - (175) - (175)
======================================================
Balance at December 31, 1996 $ (2,706) $(10,684) $(200) $73,742
======================================================
See accompanying notes.
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
1996 1995 1994
----------------------------------------------
(In Thousands)
Cash flows from continuing operations
Income (loss) from continuing operations $(3,845) $ (3,732) $ 983
Adjustments to reconcile income (loss) from continuing operations
to net cash provided (used) by continuing operations:
Depreciation, depletion and amortization:
Property, plant and equipment 8,655 7,909 6,998
Other 1,124 1,150 1,077
Provision for possible losses:
Trade accounts receivable 1,450 1,696 1,468
Notes receivable 1,565 1,350 650
Environmental matter 100 - 450
Loan guarantee 626 590 -
Gain on sales of assets (1,574) (203) (1,303)
Cash provided (used) by changes in assets and liabilities:
Trade accounts receivable (8,267) (4,092) 3,923
Inventories (1,717) (6,091) (13,692)
Supplies and prepaid items (1,533) 725 (927)
Accounts payable 13,288 (902) 6,209
Accrued liabilities 3,441 1,256 850
----------------------------------------------
Net cash provided (used) by continuing operations 13,313 (344) 6,686
Cash flows from investing activities of continuing operations
Capital expenditures (19,950) (17,810) (15,647)
Purchase of loans receivable - - (3,068)
Principal payments on loans receivable 742 1,586 388
Proceeds from sales of equipment and real estate properties
417 1,345 4,399
Proceeds from the sale of investment securities 1,524 - -
Other assets (3,745) (3,872) (5,566)
----------------------------------------------
Net cash used by investing activities (21,012) (18,751) (19,494)
(Continued on following page)
F-7
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
1996 1995 1994
----------------------------------------------
(In Thousands)
Cash flows from financing activities of continuing operations
Payments on long-term and other debt $(11,985) $ (9,476) $ (7,635)
Long-term and other borrowings 25,029 18,471 17,124
Net change in revolving debt facilities (1,266) 15,070 47,004
Net change in receivables previously financed by discontinued
operations - - (33,570)
Net change in drafts payable 112 (867) 71
Dividends paid:
Preferred stocks (3,229) (3,229) (3,235)
Common stock (780) (774) (808)
Purchase of treasury stock:
Preferred stock - - (200)
Common stock (175) (1,445) (4,756)
Net proceeds from issuance of common stock 193 155 259
----------------------------------------------
Net cash provided by financing activities of continuing operations 7,899 17,905 14,254
----------------------------------------------
Net increase (decrease) in cash from continuing operations 200 (1,190) 1,446
Net change in cash from discontinued operations - - (1,617)
----------------------------------------------
Net increase (decrease) in cash and cash equivalents from all
activities 200 (1,190) (171)
Cash and cash equivalents at beginning of year 1,420 2,610 2,781
----------------------------------------------
Cash and cash equivalents at end of year $ 1,620 $ 1,420 $ 2,610
==============================================
See accompanying notes.
F-8
LSB Industries, Inc.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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 statement of operations for 1994 presents
the operations of Equity Bank as discontinued operations.
2. ACCOUNTING POLICIES
USE OF ESTIMATES
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 maturities when purchased by
the Company of 90 days or less.
Supplemental cash flow information includes:
1996 1995 1994
----------------------------------------
(In Thousands)
Cash payments for interest and income taxes:
Interest on long-term debt and other $12,038 $10,613 $7,440
Income taxes 345 670 832
Noncash financing and investing activities--
Long-term debt issued for property, plant and equipment 2,226 2,534 4,884
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less any allowance
for loan losses (none in 1996, 1995 or 1994). Management's periodic evaluation
of the adequacy of the allowance is
F-9
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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.
In February 1997, the Company foreclosed on a loan receivable with a carrying
amount of $14.0 million and exercised its option to acquire the related office
building located in Oklahoma City, known as "The Tower." The estimated fair
value of The Tower at the date of acquisition exceeds the Company's carrying
amount at December 31, 1996 plus the exercise payment.
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 $8,595,000 at December 31, 1996 ($5,981,000 at
December 31, 1995), 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, 1996 or
1995.
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 $2,405,000, $1,357,000 and $491,000 related to the
construction of a new nitric acid plant were capitalized in 1996, 1995 and
1994, respectively, 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 $3,941,000 and
$4,361,000, net of accumulated amortization, of $3,400,000 and $2,980,000 at
December 31, 1996 and 1995, 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 indicate that it may be impaired. No
impairment provisions were required in 1996, 1995 or 1994.
F-10
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $532,000 in 1996, $501,000 in 1995 and
$606,000 in 1994.
ADVERTISING COSTS
Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $1,814,000 in 1996,
$1,658,000 in 1995 and $1,321,000 in 1994.
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 period 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, if
any, after appropriate adjustment for interest and related income tax effects
on convertible notes payable, as applicable.
Average common shares outstanding used in computing earnings per share are as
follows:
1996 1995 1994
-----------------------------------------------------
Primary 13,035,660 13,223,445 13,831,128
Fully diluted 13,035,660 13,233,022 15,155,461
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
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS--FINANCIAL SERVICES (CONTINUED)
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 were $16.5 million.
4. INVENTORIES
Inventories at December 31, 1996 and 1995 consist of:
Finished
(or Purchased) Work-In- Raw
Goods Process Materials Total
----------------------------------------------------------------------
(In Thousands)
1996:
Air handling units $ 2,739 $ 2,376 $ 8,125 $13,240
Machinery and industrial supplies 7,020 - - 7,020
Automotive products 17,766 3,456 2,383 23,605
Chemical products 8,779 6,252 9,086 24,117
----------------------------------------------------------------------
Total $36,304 $12,084 $19,594 $67,982
======================================================================
1995 total $38,796 $12,247 $15,222 $66,265
======================================================================
F-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of:
December 31,
1996 1995
------------------------------
(In Thousands)
Land and improvements $ 4,860 $ 4,405
Buildings and improvements 21,540 20,615
Machinery, equipment and automotive 141,972 118,567
Furniture, fixtures and store equipment 6,399 5,854
Producing oil and gas properties 3,279 3,289
------------------------------
178,050 152,730
Less accumulated depreciation, depletion and amortization 74,907 66,460
==============================
$103,143 $ 86,270
==============================
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
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 in
exchange for waiver of the foreign customer's commitment to provide bearing
products without charge to the subsidiary at a future date. Under this
amendment, the Company will not be required to purchase more bearing products
each year than it can sell in its normal course of business.
Accordingly, as a result of the elimination of the subsidiary's future bearing
product commitment, the Company 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.
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1996 1995
-----------------------------
(In Thousands)
Secured revolving credit facility with interest at a base rate of a
certain bank plus a specified percentage (9.42% aggregate rate
at December 31, 1996) (A) (E) $ 57,248 $ 59,175
Secured loans of a subsidiary with interest payable quarterly at
rates indicated (B) (E):
10.415% to 12.72% term loans 5,542 10,688
Revolving credit facility at a base rate of a certain bank plus
a specified percentage (10.5% at December 31, 1996) 1,944 3,750
Secured loan with interest payable monthly (C) 13,855 15,728
Note payable to bank, due in monthly installments of principal
and interest through May 2001, interest at a rate equal to the
Wall Street Journal prime rate plus .75% (aggregate rate of
9.0% at December 31, 1996) (D) 12,866 8,819
Secured loan due in monthly installments of principal and
interest through July 31, 2003, interest at a rate equal to the
"three-month adjusted LIBOR rate plus 4.25%" (9.75% at
December 31, 1996) (E) 11,819 -
Other, with interest at rates of 7.5% to 12.25%, most of which is
secured by machinery and equipment 29,010 20,120
-----------------------------
132,284 118,280
Less current portion of long-term debt 13,007 14,925
-----------------------------
Long-term debt due after one year $119,277 $103,355
=============================
(A) In December 1994, the Company, certain subsidiaries of the Company (the
"Borrowing Group") 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 by notice
from either party 60 days prior to maturity. Subsequent to December 31,
1996, the Company obtained a commitment from the bank to renew the credit
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
facilities through April 1, 1998. Accordingly, all amounts outstanding at
December 31, 1996 have been classified as long-term debt due after one
year in the accompanying 1996 consolidated balance sheet. 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 2%, or the Eurodollar rate
plus 4.375%, 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
$64.5 million in 1996 to $80.4 million in 1998), and debt ratios whereby
the Borrowing Groups' debt shall not exceed 2.39 times the Company's
adjusted tangible net worth. See (E) below.
(B) This agreement between a subsidiary of the Company and two institutional
lenders provided for two series of term loans and a revolving credit
facility. The balance outstanding at December 31, 1996 was paid in
February 1997. See Note (E).
(C) This agreement, as amended, between a subsidiary of the Company and an
institutional lender provided for a loan in the aggregate
amount of $16.5 million, the proceeds of which were used in the
construction of a nitric acid plant, requiring 84 equal monthly payments
of principal plus interest, with interest at a fixed rate of 8.86%.
This agreement is secured by the plant, equipment and machinery, and
proprietary rights associated with the plant which has an approximate
carrying value of $28.9 million.
This agreement contains various financial and restrictive covenants,
including a requirement to maintain tangible net worth, as defined, of $66
million, escalating to $76 million by December 31, 1997.
(D) In May 1995, a subsidiary of the Company entered into a term loan
agreement with a bank in the amount of $9 million. The agreement was
amended in May 1996 to increase the loan to $13 million. The loan, which
matures in May 2001, is payable in 60 monthly payments of principal and
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
interest, commencing on June 30, 1996. The monthly principal and
interest payment is based on a 240-month period ("Amortization Period")
at a rate of interest equal to .75% in excess of the prime rate of a
certain bank. On September 30, 1996, and on the last day of each
calendar quarter thereafter, the monthly principal and interest payment
is adjusted to an amount which will fully amortize the outstanding
principal balance over the remaining part of the Amortization Period.
When the loan matures in May 2001, all outstanding principal and all
unpaid interest on the loan shall become immediately due. The loan is
secured by The Tower, subsequent to its acquisition in February 1997 as
discussed in Note 2.
(E) On February 13, 1997, certain subsidiaries of the Company entered into a
$50 million financing arrangement with John Hancock Mutual Life Insurance
Company (the "New Note Agreement"). Approximately $19.3 million of the
proceeds from the New Note Agreement were used to retire the principal
balances outstanding on the term and revolving credit facility discussed
in (B) above and the secured loan due in monthly installments through
2003. The remaining proceeds of the New Note Agreement (approximately
$30.7 million) were used to pay down the revolving credit facility
described in (A). In connection with the new financing, $9.5 million of
debt previously due within one year has been classified as due after
one year reflecting the payment terms of the New Note Agreement.
The New Note Agreement consists of: (i) $25 million of fixed rate notes
bearing interest at 10.57% per annum and (ii) $25 million of floating rate
notes bearing interest at LIBOR plus 4.2%. Repayment of the notes is due
in quarterly installments of $833,332 plus interest through April 2004
commencing on July 1, 1997. The notes are secured by real and personal
property of the subsidiaries. The New Note Agreement contains several
financial covenants related to the borrowing subsidiaries. These financial
covenants, as defined, include the maintenance of a debt to capitalization
ratio, combined net worth, combined working capital, current ratio and
fixed charge coverage ratio. The New Note Agreement also restricts
payments that can be made by the borrowing subsidiaries to the Company or
its subsidiaries.
Maturities of long-term debt, after consideration of the New Note Agreement
discussed in (E) above, for each of the five years after December 31, 1996 are:
1997--$13,007; 1998--$36,745; 1999--$10,428; 2000--$10,456; 2001--$21,771 and
thereafter--$39,877.
F-16
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
The provision (benefit) for income taxes from continuing operations consists of
the following for the year indicated:
1996 1995 1994
-----------------------------------------------------
(In Thousands)
Current:
Federal $ 54 $ - $(1,150)
State 96 150 450
-----------------------------------------------------
$150 $150 $ (700)
=====================================================
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, 1996 and
1995 are as follows:
1996 1995
-----------------------------------
(In Thousands)
Deferred tax assets
Allowances for doubtful accounts and other asset impairments
not deductible for tax purposes $ 4,896 $ 3,508
Capitalization of certain costs as inventory for tax purposes 3,415 2,425
Net operating loss carryforward 17,642 16,745
Investment tax and alternative minimum tax credit carryforwards 1,397 1,300
Other 1,079 1,032
-----------------------------------
Total deferred tax assets 28,429 25,010
Less valuation allowance 17,363 15,492
-----------------------------------
Net deferred tax assets $11,066 $ 9,518
===================================
Deferred tax liabilities
Accelerated depreciation used for tax purposes $ 8,918 $ 7,256
Inventory basis difference resulting from a business combination 2,139 2,139
Other 9 123
-----------------------------------
Total deferred tax liabilities $11,066 $ 9,518
===================================
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.
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, 1996 are
detailed below:
1996 1995 1994
-----------------------------------------------------
(In Thousands)
Provision (benefit) for income taxes at federal statutory
rate $(1,293) $(1,254) $ 96
Changes in the valuation allowance related to deferred tax
assets 1,871 409 (1,591)
State income taxes, net of federal benefit 62 99 297
Amortization of excess of purchase price over net assets
acquired 143 143 139
Foreign subsidiary loss (income) (635) 615 (19)
Nondeductible life insurance premiums 99 142 98
Alternative minimum tax 54 - 150
Other (151) (4) 130
-----------------------------------------------------
Provision (benefit) for income taxes $ 150 $ 150 $ (700)
=====================================================
At December 31, 1996, the Company has regular-tax net operating loss ("NOL")
carryforwards of approximately $45 million (approximately $10 million
alternative minimum tax NOLs). Such amounts of regular-tax NOL expire beginning
in 1999. The Company also has investment tax credit carryforwards of
approximately $356,000 which begin expiring in 1997.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is generally recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.0% and 6.4%; an dividend
yield of 1.38% and 1.04%; volatility factors of the expected market price of
the Company's common stock of .41 and .41; and a weighted average expected
life of the option of 6.8 and 7.3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
qualified and non-qualified options is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
Year ended December 31,
1996 1995
------------------------------------
(In thousands,
except per share data)
Net loss applicable to common stock $(7,184) $(7,036)
Loss per common share (.55) (.53)
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
QUALIFIED STOCK OPTION PLANS
In November 1981, the Company adopted the 1981 Incentive Stock Option Plan
(1,350,000 shares), in March 1986, the Company adopted the 1986 Incentive Stock
Option Plan (1,500,000 shares) and, in September 1993, the Company adopted the
1993 Stock Option and Incentive Plan (850,000 shares). 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. The 1981 and 1986 Incentive Stock Option Plans have expired
and, accordingly, no additional options may be granted from these plans.
Options granted prior to the expiration of these plans continue to remain
valid thereafter in accordance with their terms. At December 31, 1996, there
are 331,140 of options outstanding related to these two plans. At December
31, 1996, there are 845,500 options outstanding related to the 1993 Incentive
Stock Option Plan which continues to be effective. 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.
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Activity in the Company's qualified stock option plans during each of the three
years in the period ended December 31, 1996 is as follows:
1996 1995 1994
------------------------ -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
Outstanding at beginning of year 611,140 $3.40 581,140 $2.84 556,640 $2.43
Granted 720,500 4.33 91,000 5.88 54,000 6.63
Exercised (120,000) 2.13 (61,000) 1.74 (29,500) 2.10
Surrendered, forfeited or expired (35,000) 4.21 - - - -
--------------- -------------- --------------
Outstanding at end of year 1,176,640 4.08 611,140 3.40 581,140 2.84
=============== ============== ==============
Exercisable at end of year 354,540 3.76 390,540 2.39 356,940 1.93
=============== ============== ==============
Weighted average fair value of
options granted during year 2.00 3.01 3.60
Outstanding options to acquire 1,026,640 shares of stock at December 31, 1996
had exercise prices ranging from $1.13 to $4.88 per share and had a weighted
average remaining contractual life of 8.1 years. The balance of options
outstanding at December 31, 1996 had exercise prices ranging from $5.36 to
$9.00 per share and a weighted average remaining contractual life of 8.1 years.
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 (except for the
1994 extension discussed below) 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. In June
1994, the Board of Directors extended the expiration date on the grant of
options for 165,000 shares to the Company's Chairman 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 Chairman agreed to a
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
revised vesting schedule for exercise of 20% of the option shares in each of
the years 1995, 1996 and 1997 and 40% of the option shares in 1998.
In September 1993, the Company adopted the 1993 Nonemployee Director Stock
Option Plan (the "Outside Director Plan"). The Outside Director Plan authorizes
the grant of non-qualified stock options to each member of the Company's Board
of Directors who is not an officer or employee of the Company or its
subsidiaries. The maximum 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 (40,000 options outstanding at
December 31, 1996).
Activity in the Company's non-qualified stock option plans during each of the
three years in the period ended December 31, 1996 is as follows:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
Outstanding at beginning of year 285,000 $3.44 335,000 $ 2.83 385,000 $2.36
Granted - - 25,000 5.38 25,000 9.00
Exercised (10,000) 3.13 (75,000) 1.38 (75,000) 2.63
Surrendered, forfeited, or expired (10,000) 7.19 - - - -
--------------- -------------- --------------
Outstanding at end of year 265,000 3.31 285,000 3.44 335,000 2.83
=============== ============== ==============
Exercisable at end of year 166,000 3.64 153,000 4.06 170,000 2.96
=============== ============== ==============
Weighted average fair value of
options granted during year - 2.14 3.85
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Outstanding options to acquire 225,000 shares of stock at December 31, 1996 had
exercise prices ranging from $1.38 to $3.13 per share and had a weighted
average remaining contractual life of 2.2 years. The balance of options
outstanding at December 31, 1996 had exercise prices ranging from $5.38 to
$9.00 per share and a weighted average remaining contractual life of 2.8 years.
PREFERRED SHARE PURCHASE RIGHTS
In February 1989, the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right (the "Preferred Right") for
each outstanding share of the Company's common stock. The Preferred Rights are
designed to ensure that all of the Company's stockholders receive fair and
equal treatment in the event of a proposed takeover or abusive tender offer.
The Preferred Rights are generally exercisable when a person or group, other
than the Company's Chairman and his affiliates, acquire beneficial ownership of
30% or more of the Company's common stock (such a person or group will be
referred to as the "Acquirer"). Each Preferred Right (excluding Preferred
Rights owned by the Acquirer) entitles stockholders to buy one one-hundredth
(1/100) of a share of a new series of participating preferred stock at an
exercise price of $14. Following the acquisition by the Acquirer of
beneficial ownership of 30% or more of the Company's common stock, and prior
to the acquisition of 50% or more of the Company's common stock by the
Acquirer, the Company's Board of Directors may exchange all or a portion of
the Preferred Rights (other than Preferred Rights owned by the Acquirer) for
the Company's common stock at the rate of one share of common stock per
Preferred Right. Following acquisition by the Acquirer of 30% or more of the
Company's common stock, each Preferred Right (other than the Preferred
Rights owned by the Acquirer) will entitle its holder to purchase a number
of the Company's common shares having a market value of two times the
Preferred Right's exercise price.
If the Company is acquired, each Preferred Right (other than the Preferred
Rights owned by the Acquirer) will entitle its holder to purchase a number of
the Acquirer's common shares having a market value at the time of two times the
Preferred Right's exercise price.
Prior to the acquisition by the Acquirer of beneficial ownership of 30% or more
of the Company's stock, the Company's Board of Directors may redeem the
Preferred Rights for $.01 per Preferred Right.
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. REDEEMABLE PREFERRED STOCK
Each share of the noncumulative redeemable preferred stock, $100 par value, is
convertible into 40 shares of the Company's common stock at any time at the
option of the holder; entitles the holder to one vote and is redeemable at par.
The redeemable preferred stock provides for a noncumulative annual dividend of
10%, payable when and as declared. Dividend payments were current at
December 31, 1996 and 1995.
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, 1996 and 1995.
The Class C preferred stock, designated as a $3.25 convertible exchangeable
Class C preferred stock, Series 2, has no par value ("Series 2 Preferred"). The
Series 2 Preferred has a liquidation preference of $50.00 per share plus
accrued and unpaid dividends and is convertible at the option of the holder at
any time, unless previously redeemed, into common stock of the Company at an
initial conversion price of $11.55 per share (equivalent to a conversion rate
of approximately 4.3 shares of common stock for each share of Series 2
Preferred), subject to adjustment under certain conditions. Upon the mailing
of notice of certain corporate actions, holders will have special conversion
rights for a 45-day period.
The Series 2 Preferred is redeemable subsequent 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, 1996 and 1995.
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
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. NON-REDEEMABLE PREFERRED STOCK (CONTINUED)
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, 1996, the Company is authorized to issue an additional 248,461
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, 1996 are as follows:
(In Thousands)
1997 $ 2,279
1998 1,685
1999 1,084
2000 982
2001 915
After 2001 7,340
-----------------
$14,285
=================
Rent expense under all operating lease agreements, including month-to-month
leases, was $4,337,000 in 1996, $3,400,000 in 1995 and $3,149,000 in 1994.
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 1996, 1995 and 1994.
F-25
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
DEBT GUARANTEE
The Company has guaranteed approximately $2.6 million of indebtedness of a
start-up aviation company, Kestrel Aircraft Company, in exchange for a 25.6%
ownership interest, to which no value has been assigned as of December 31,
1996. The Company has advanced the aviation company $241,000 as of December
31, 1996 (none in 1995) and is accruing losses of the aviation company based
on its ownership percentage. As a result, the Company has recorded losses of
$1,216,000 ($626,000 in 1996, $590,000 in 1995 and none in 1994) related to the
debt guarantee. The debt guarantee relates to a $2 million term note and a $2
million revolving credit facility. The $2 million term note requires interest
only payments through September 1998; thereafter, it requires monthly principal
payments of $11,111 plus interest beginning in October 1998 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. The $2 million
revolving credit facility, on which a subsidiary of the Company has guaranteed
up to $600,000 of indebtedness, had been paid down to $125,000 at December 31,
1996 and was paid in full subsequent to year end, although the full line of
credit remains available.
The aviation company expects to complete the Federal Aviation Authority
certification process by the end of 1997, at which time commercial
production may begin. The aviation company will require a significant amount
of additional funding in 1997 to complete the certification process and to
establish commercial production facilities.
In 1996, the aviation company received $5.0 million from an unrelated third
party investor for a 41.6% ownership interest in the aviation company. The
investor also retained an option to purchase additional stock of the aviation
company in exchange for $4 million. The Company believes these events reduce
its likelihood of performing under the debt guarantee; however, if the aviation
company is not successful in completing the certification process and obtaining
additional external funding, the Company is likely to become responsible for
the $2.6 million indebtedness guarantee and may not be able to recover amounts
advanced.
F-26
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. The State of Arkansas performed a preliminary assessment of the Chemical
Business' primary manufacturing facility (the "Site") 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. 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-27
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 ("Original Agreement") to resolve certain
compliance issues associated with nitric acid concentrations. The
Company has installed additional pollution control equipment to reduce
opacity and constituent emissions which impact opacity. The Company
was assessed $50,000 in civil penalties associated with the Original
Agreement. In the Summer of 1996 and then on January 28, 1997, the
Company executed amendments to the Original Agreement ("Amended
Agreement") which amended the Original Agreement. The January 28, 1997
Amended Agreement acknowledges compliance with the requirements of the
prior Amended Agreement and imposed a $150,000 civil penalty. As of
December 31, 1996, the Company has paid $13,000 of the above penalties
and, subsequent to 1996, the Company paid an additional $127,000 of
penalties. The Company is planning to undertake one or more
supplemental environmental projects in lieu of paying the remaining
penalty due. 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 or results of operations.
C. In 1996, a lawsuit was filed against the Company's Chemical Business by
a group of residents of El Dorado, Arkansas, asserting a citizens' suit
against the Chemical Business as a result of certain alleged violations
of the Clean Air Act, the Clean Water Act, the Chemical Business' air
and water permits and certain other environmental laws, rules and
regulations. The citizens' suit requests the court to order the Chemical
Business to cure such alleged violations, if any, plus penalties as
provided under the applicable statutes. The Company's Chemical Business
will assert all defenses available to it and will vigorously defend
itself.
In July 1996, several of the same individuals who are plaintiffs in the
citizens' suit referenced above filed a toxic tort lawsuit against the
Company's Chemical Business alleging that they suffered certain injuries
and damages as a result of alleged releases of toxic substances from the
Chemical Business' El Dorado, Arkansas manufacturing facility. In
October 1996, another toxic tort lawsuit was filed against the Company's
Chemical Business. This subsequent action asserts similar damage
theories as the previously discussed lawsuit, except this action
attempts to have a class certified to represent substantially all
allegedly affected persons.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In October 1996, individuals who reside in various locations throughout
the El Dorado, Arkansas metropolitan area filed a class action toxic
tort lawsuit against the Chemical Business alleging that, due to
releases of certain allegedly toxic substances by the Chemical Business'
El Dorado, Arkansas facility, certain property damage and bodily injury
resulted to residents of El Dorado, Arkansas. The plaintiffs are
attempting to have themselves certified by the court as
representatives of persons who allegedly have been affected by
emissions from the Chemical Business' El Dorado, Arkansas facility.
The plaintiffs are suing for an unspecified amount of actual and
punitive damages.
The Company's insurance carriers have been notified of these matters.
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 (loss) 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.
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.
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.
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
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 (interest rates range from 5.0% to 11.0%
at December 31, 1996). 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, 1996 and 1995, the net book value of loans receivable
was $15.0 million and $15.7 million and fair values of loans receivable
were approximately $18.9 million and $18.2 million, respectively (assuming
an estimated fair value of the underlying collateral for collateral
dependent loans of $18.0 million and $16.5 million in 1996 and 1995,
respectively).
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, 1996 and 1995, carrying
values of variable rate and fixed-rate long-term debt which aggregated
$132.3 million and $118.3 million, respectively, approximated their
estimated fair value.
As of December 31, 1996, 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
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. SEGMENT INFORMATION (CONTINUED)
manufacturing facility in El Dorado, Arkansas, comprises approximately
72% of the chemical segment's sales. Sales to customers of this
segment primarily include coal mining companies throughout the
United States and farmers in Texas, Missouri and Tennessee.
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.
The Chemical Business is currently constructing a concentrated nitric
acid plant (carrying value of $28.9 million at December 31, 1996)
which has a stated production capacity of 285 tons per day. The
Company has incurred significant delays and costs in attempting to
achieve the plant's stated capacity. The Company anticipates
maintaining an economically feasible rate of production. If such
rate of production is not maintained, the Company may sustain
significant future operating losses 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.
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 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.
F-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. SEGMENT INFORMATION (CONTINUED)
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 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 87% of the automotive products
segment sales.
At December 31, 1996, the automotive segment has $23.6 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 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.
F-32
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
Information about the Company's operations in different industry segments for
each of the three years in the period ended December 31, 1996 is detailed
below.
1996 1995 1994
-----------------------------------------------------
(In Thousands)
Sales:
Chemical $166,163 $136,903 $131,576
Environmental Control 89,275 83,843 69,914
Industrial Products 13,776 13,375 11,222
Automotive Products 37,946 33,270 32,313
-----------------------------------------------------
$307,160 $267,391 $245,025
=====================================================
Gross profit:
Chemical $ 25,885 $ 26,050 $ 25,700
Environmental Control 21,961 21,694 17,651
Industrial Products 3,058 2,953 1,316
Automotive Products 5,868 6,366 8,442
-----------------------------------------------------
$ 56,772 $ 57,063 $ 53,109
=====================================================
Operating profit (loss):
Chemical $ 10,971 $ 13,393 $ 12,809
Environmental Control 5,362 4,630 3,512
Industrial Products (2,685) (1,199) (4,155)
Automotive Products (4,134) (3,704) (1,462)
-----------------------------------------------------
9,514 13,120 10,704
General corporate expenses, net (3,192) (6,571) (3,472)
Interest expense (10,017) (10,131) (6,949)
-----------------------------------------------------
Income (loss) before provision
for income taxes $ (3,695) $ (3,582) $ 283
=====================================================
F-33
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
1996 1995 1994
-----------------------------------------------------
(In Thousands)
Depreciation, depletion and amortization of
property, plant and equipment:
Chemical $ 5,504 $ 4,532 $ 4,044
=====================================================
Environmental Control $ 1,552 $ 1,582 $ 1,427
=====================================================
Industrial Products $ 126 $ 124 $ 117
=====================================================
Automotive Products $ 1,050 $ 986 $ 785
=====================================================
Additions to property, plant and equipment:
Chemical $ 19,137 $ 17,979 $ 15,532
=====================================================
Environmental Control $ 1,551 $ 447 $ 3,722
=====================================================
Industrial Products $ 37 $ 265 $ 74
=====================================================
Automotive Products $ 1,306 $ 1,341 $ 1,203
=====================================================
Identifiable assets:
Chemical $132,442 $111,890 $ 94,972
Environmental Control 50,623 41,331 40,660
Industrial Products 13,614 17,328 18,423
Automotive Products 43,212 43,872 38,369
-----------------------------------------------------
239,891 214,421 192,424
Corporate assets and other 21,393 23,755 28,857
-----------------------------------------------------
Total assets $261,284 $238,176 $221,281
=====================================================
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-34
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.
Information about the Company's domestic and foreign operations for each of the
three years in the period ended December 31, 1996 is detailed below:
Geographic Region 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
(In Thousands)
Sales:
Domestic $270,675 $250,028 $230,434
Foreign:
Australia/New Zealand 32,917 16,884 14,371
Others 3,568 479 220
-----------------------------------------------------
$307,160 $267,391 $245,025
=====================================================
Income (loss) before provision for income taxes:
Domestic $ (5,174) $ (693) $ 949
Foreign:
Australia/New Zealand 1,705 (1,871) (22)
Others (226) (1,018) (644)
-----------------------------------------------------
$ (3,695) $ (3,582) $ 283
=====================================================
Identifiable assets:
Domestic $237,557 $221,656 $206,557
Foreign:
Australia/New Zealand 19,740 13,757 11,608
Others 3,987 2,763 3,116
-----------------------------------------------------
$261,284 $238,176 $221,281
=====================================================
F-35
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
Revenues from unaffiliated customers include foreign export sales as follows:
Geographic Region 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
(In Thousands)
Mexico and Central and South America $ 9,084 $ 5,955 $ 6,976
Canada 9,703 10,311 11,649
Slovakia - 2,147 1,783
Other 14,517 16,300 16,195
-----------------------------------------------------
$33,304 $34,713 $36,603
=====================================================
F-36
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
------------------------------------------------------------------------
1996
Total revenues $70,906 $91,460 $76,841 $74,844
========================================================================
Gross profit on net sales $14,807 $17,233 $13,529 $11,203 (A)
========================================================================
Net income (loss) $ (531) $ 2,372 $ (3,218) $ (2,468)
========================================================================
Net income (loss) applicable to
common stock $ (1,350) $ 1,568 $ (4,021) $ (3,271)
========================================================================
Primary earnings (loss) per
common share $(.10) $.12 $(.31) $(.25)
========================================================================
1995
Total revenues $65,931 $79,932 $65,525 $62,727
========================================================================
Gross profit on net sales $16,142 $16,888 $12,976 $11,057
========================================================================
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 $.05 $.05 $(.20) $(.43)
========================================================================
(A) In the fourth quarter of 1996, the Company recorded adjustments to the
cost of the DSN plant for depreciation, interest capitalization, excess
cost accruals and advances on an insurance settlement. These adjustments
increased gross profit on net sales by approximately $3.7 million for the
three months ended December 31, 1996.
In the fourth quarter of 1996, the Company also sustained a loss of $1.0
million related to writing-off a note receivable from a customer in the
Chemical Business.
F-37
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
(Dollars in Thousands)
Additions Deductions
-------------- --------------
Balance at Charged to Write- Balance
Beginning of Costs and offs/ at End
Description Year Expenses Costs Incurred of Year
- -------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts (1):
1996 $2,584 $1,451 $ 744 $3,291
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1995 $2,000 $1,696 $1,112 $2,584
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1994 $2,083 $1,468 $1,551 $2,000
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Other assets:
1996 $3,090 $2,191 $ - $5,281
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1995 $1,150 $1,940 $ - $3,090
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1994 $ 500 $ 650 $ - $1,150
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Product warranty liability:
1996 $ 699 $ 208 $ 230 $ 677
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1995 $ 689 $ 259 $ 249 $ 699
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1994 $ 653 $ 667 $ 631 $ 689
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(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-38
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-8302) pertaining to the 1981 and 1986 Incentive Stock Option
Plans of LSB Industries, Inc. and the Registration Statement (Form S-3,
No. 33-69800) and related Prospectus of LSB Industries, Inc. of our report
dated March 7, 1997, with respect to the consolidated financial statements and
schedule of LSB Industries, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1996.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 10, 1997