FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 1994
------------------------
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from_______________ to _________________
Commission file number 1-7677
---------------
LSB INDUSTRIES, INC.
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Exact name of Registrant as specified in its charter
DELAWARE 73-1015226
- - ----------------------------- -------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
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Address of principal executive offices (Zip Code)
(405) 235-4546
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Registrant's telephone number, including area code
None
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
------ ------
The number of shares outstanding of the Registrant's voting Common Stock, as
of May 10, 1994 is 13,639,691 shares excluding 900,085 shares held as treasury
stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB Industries, Inc.
and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB Industries, Inc.
at March 31, 1994, the condensed consolidated statements of income and cash
flows for the three month periods ended March 31, 1994 and 1993 have been
subjected to a review, in accordance with standards established by the
American Institute of Certified Public Accountants, by Ernst & Young,
independent auditors, whose report with respect thereto appears elsewhere in
this Form 10-Q. The financial statements mentioned above are unaudited and
reflect all adjustments, consisting primarily of adjustments of a normal
recurring nature, which are, in the opinion of management, necessary for a
fair presentation of the interim periods. The results of operations for the
three months ended March 31, 1994 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated balance
sheet at December 31, 1993, was derived from audited financial statements as
of that date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1994 is unaudited)
(Dollars in thousands)
<TABLE>
March 31, December 31,
ASSETS 1994 1993
_________________________________________ __________ __________
<S> <C> <C>
(Note 1)
Current assets:
Cash $ 7,691 $ 2,781
Trade accounts receivable, net of allowance 57,524 49,533
Inventories:
Finished goods 30,930 26,940
Work in process 7,638 9,643
Raw materials 9,380 11,801
__________ __________
Total inventory 47,948 48,384
Supplies and prepaid items 2,628 5,459
__________ __________
Total current assets 115,791 106,157
Operating property, plant and equipment, net 62,830 60,526
Investments and other assets:
Loan receivable, secured by real estate 13,968 13,968
Other real estate properties 4,581 5,200
Other assets 11,681 10,187
__________ _________
Total investments and other assets 30,230 29,355
__________ __________
$ 208,851 $ 196,038
</TABLE>
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at March 31, 1994 is unaudited)
(Dollars in thousands)
<TABLE>
LIABILITIES, PREFERRED AND COMMON STOCKS March 31, December 31,
AND OTHER STOCKHOLDERS' EQUITY 1994 1993
________________________________________ __________ __________
(Note 1)
<S> <C> <C>
Current liabilities:
Drafts payable $ 592 $ 1,220
Accounts payable 35,332 22,645
Accrued liabilities 5,855 6,752
Current portion of long-term debt 15,967 9,763
__________ __________
Total current liabilities 57,746 40,380
Long-term debt 37,526 20,508
Net liabilities of Financial Services
Business to be sold in 1994 (Note 2) 37,470 60,124
Contingencies (Note 7)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,619 shares
issued and outstanding (1,637 in 1993) 154 155
Non-redeemable preferred stock, common stock and
other stockholders' equity (Notes 6):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued and outstanding 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,539,776 shares
issued (14,514,056 in 1993) 1,454 1,451
Capital in excess of par value 37,164 37,120
Accumulated deficit (6,161) (7,541)
__________ __________
80,447 79,030
Less common treasury stock, 880,085 shares
(840,085 in 1993), at cost 4,502 4,159
__________ __________
Total non-redeemable preferred stock, common
stock and other stockholders' equity 75,945 74,871
__________ __________
$ 208,851 $ 196,038
</TABLE>
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, 1994 and 1993
(Dollars in thousands, except per share amounts)
<TABLE>
1994 1993
__________ __________
(Note 1)
<S> <C> <C>
Revenues:
Net sales $ 63,851 $ 52,597
Other income - net 501 796
__________ __________
64,352 53,393
Costs and expenses:
Cost of sales 49,493 39,311
Selling, general and administrative expense 11,168 9,619
Interest expense 1,681 2,183
__________ __________
62,342 51,113
__________ __________
Income from continuing operations
before provision for income taxes 2,010 2,280
Provision for income taxes 152 125
__________ __________
Income from continuing operations 1,858 2,155
Income from discontinued operations, net
of income taxes (Note 2) 346 502
__________ __________
Net income $ 2,204 $ 2,657
Net income applicable to common stock (Note 4) $ 1,380 $ 2,580
Average common shares outstanding (Note 4):
Primary 14,413,581 10,348,489
Fully diluted 15,084,247 14,785,875
Earnings per common share (Note 4):
Primary:
Income from:
Continuing operations $ .08 $ .20
Discontinued operations .02 .05
__________ __________
Net income $ .10 $ .25
Fully diluted:
Income from:
Continuing operations $ .08 $ .15
Discontinued operations .02 .03
__________ __________
Net income $ .10 $ .18
</TABLE>
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1994 and 1993
(Dollars in thousands)
<TABLE>
1994 1993
__________ __________
(Note 1)
<S> <C> <C>
Cash flows from continuing operations:
Income from continuing operations $ 1,858 $ 2,155
Adjustments to reconcile income from
continuing operations to cash flows
provided (used) by continuing operations:
Depreciation, depletion and amortization:
Property, plant and equipment 1,671 1,423
Other 237 217
Provision for bad debts 367 82
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (8,358) (6,143)
Inventories 436 283
Supplies and prepaid items 2,831 (1,114)
Other assets (1,730) (268)
Accounts payable 12,687 6,157
Accrued liabilities (819) (2,031)
__________ __________
Net cash provided by
continuing operations 9,100 761
Cash flows from investing activities of
continuing operations:
Capital expenditures (3,975) (1,428)
</TABLE>
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Three Months Ended March 31, 1994 and 1993
(Dollars in thousands)
1994 1993
__________ __________
(Note 1)
Cash flows from financing activities of continuing
operations:
Payments on long-term and other debt $ (688) $ (487)
Net change in revolving loan 23,910 460
Net change in drafts payable (628) 130
Dividends paid on preferred stocks (Note 6) (824) (76)
Purchases of treasury stock (Note 6) (343) -
Net proceeds from issuance of
common stock (Note 6) 46 1,884
Net decrease in receivables sold to
discontinued operations (21,688) (291)
________ ________
Net cash provided (used) by financing activities
from continuing operations (215) 1,620
________ ________
Net increase in cash from
continuing operations 4,910 953
Cash flows from discontinued operations:
Cash provided (used) by discontinued operations 10,634 (11,864)
Cash provided by investing activities 18,050 7,633
Cash used in financing activities (24,266) (4,022)
________ ________
Net increase (decrease) in cash from
discontinued operations 4,418 (8,253)
Net increase (decrease) in cash from all
activities 9,328 (7,300)
Cash and cash equivalents at beginning of period 11,687 33,271
________ ________
Cash and cash equivalents at end of period 21,015 25,971
Less cash and cash equivalents
of discontinued operations
at end of period 13,324 23,190
________ ________
Cash - continuing operations at end of period $ 7,691 $ 2,781
(See accompanying notes)
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months Ended March 31, 1994 and 1993
Note 1: The accompanying financial statements include the accounts of LSB
Industries, Inc. (the "Company") and its subsidiaries, with the accounts of
its financial services subsidiary, anticipated to be sold in 1994 (see Note 2
below), classified as discontinued operations. Accordingly, classification of
certain comparative information from 1993 has been reclassified to conform
with the current presentation. The assets and liabilities of the Company's
financial services subsidiary, anticipated to be sold in 1994, are as follows:
March 31, December 31,
1994 1993
______ ______
Assets: (In thousands)
Cash and cash equivalents $ 13,324 $ 8,906
Loans and mortgage backed
securities, net 331,117 359,303
Other securities 7,967 7,806
Property and equipment, net 5,382 5,144
Excess of purchase price over net
assets acquired, net 16,257 17,041
Other assets 2,903 3,273
_______ _______
376,950 401,473
Liabilities:
Deposits 326,052 332,511
Securities sold under agreement
to repurchase 24,233 38,721
Federal Home Loan Bank advances 62,650 87,650
Accrued liabilities 1,485 2,715
_______ _______
414,420 461,597
_______ _______
Net liabilities to be sold $ 37,470 $ 60,124
======= =======
Note 2: Under a stock purchase agreement, dated as of February 9, 1994, (the
Acquisition Agreement ) the Company agreed to sell its wholly-owned
subsidiary, Equity Bank for Savings, F.A. ( Equity Bank ), which constitutes
the Financial Services Business of the Company, to Fourth Financial
Corporation (the "Purchaser"). The Purchaser is to acquire all of the
outstanding shares of capital stock of Equity Bank. The closing of this
transaction is contingent upon several factors including regulatory approvals,
minimum tangible book value (as defined), and acceptance by the Company of the
selling price determined under the terms of the Acquisition Agreement. All
regulatory and shareholder approvals necessary to complete the sale of Equity
Bank have been obtained with the exception of approval by the Office of Thrift
Supervision ("OTS"), which approval the Company anticipates will be obtained
prior to the closing of this transaction.
Under the Acquisition Agreement, the Company is to acquire from Equity Bank,
prior to closing, certain subsidiaries of Equity Bank ( Retained
Corporations ) that own the real and personal property and other assets
contributed by the Company to Equity Bank at the time of the acquisition of
the predecessor of Equity Bank by the Company for Equity Bank s carrying value
of the assets contributed. At the time of closing of the sale of Equity Bank,
the Company is required under the Acquisition Agreement to acquire: (A) the
loan and mortgage on and an option to purchase Equity Tower located in
Oklahoma City, Oklahoma ( Equity Tower Loan ), which Equity Bank previously
classified as an in-substance foreclosure on its books, (B) other real estate
owned by Equity Bank that was acquired by Equity Bank through foreclosure (the
Equity Tower Loan and other real estate owned are collectively called the
Retained Assets ), and (C) the outstanding accounts receivable sold to Equity
Bank by the Company and its subsidiaries under various purchase agreements,
dated March 8, 1988 (the Receivables ). The Retained Assets and the
Receivables are to be acquired for an amount equal to Equity Bank s carrying
value at time of closing of the sale of Equity Bank. In addition, the Company
has the option, but not the obligation, to acquire any loan owned by Equity
Bank that has been charged off or written down for a price equal to the net
book value of such loan that has been written down and for a price of $1.00 in
the case of each loan that has been charged off ( Other Loans ).
The Company currently expects that the purchase price to be paid by the
Purchaser for Equity Bank will be approximately $92 million, subject to
determination and adjustment in accordance with the Acquisition Agreement (the
Purchase Price ). The Purchase Price is based on a number of estimates, and
the amount of the Purchase Price cannot be determined exactly until the
closing of the sale of Equity Bank. The Company will use approximately $65.3
million, plus interest, of the Purchase Price to repay certain indebtedness
the Company intends to incur to finance the purchase from Equity Bank of the
Retained Corporations. In addition, it is anticipated that the Company will
use approximately $18.5 million of the Purchase Price to purchase from Equity
Bank the Retained Assets, which is the carrying value of the Retained Assets
on the books of Equity Bank as of March 31, 1994. As of this date, the Company
has made no decision if it will acquire any of the Other Loans.
As of March 31, 1994, Equity Bank owned approximately $13.5 million of the
Receivables, which if the closing occurs on or about June 1, 1994, the Company
expects such to be less than $10 million as of the closing. The Company has
secured a temporary accounts receivable line of credit of $25 million to
replace, in whole or in part, the accounts receivable financing provided by
Equity Bank. The Company expects to secure a long-term comprehensive line of
credit at or near the closing of the sale of Equity Bank to provide financing
for the Company's needs. The Company expects to use the proceeds from the new
accounts receivable line of credit to finance the repurchase of the
Receivables from Equity Bank at the closing.
The balance of the Purchase Price, if any, remaining after (i) repayment of
the indebtedness incurred by the Company to purchase the Retained
Corporations, (ii) purchase from Equity Bank of the Retained Assets, and (iii)
payment of the transactional costs relating to the sale of Equity Bank under
the Acquisition Agreement will be used by the Company for general working
capital. However, the following unaudited Pro Forma Condensed Consolidated
Balance Sheet as of March 31, 1994, does not assume that any balance of the
Purchase Price remains after the sale transaction takes place.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1994 is presented to give effect to the proposed sale of Equity
Bank.
The pro forma adjustments reflected herein are based on available information
and certain assumptions that the Company s management believes are reasonable.
Pro forma adjustments made in the Pro Forma Condensed Consolidated Balance
Sheet assume that the sale of Equity Bank was consummated on March 31, 1994,
and do not reflect the impact of Equity Bank s historical operating results or
changes in other balance sheet amounts subsequent to March 31, 1994.
The Pro Forma Condensed Consolidated Balance Sheet is based on assumptions and
approximations and, therefore, does not reflect in precise numerical terms the
impact of the transaction on the historical financial statements. In addition,
such pro forma financial statements should not be used as a basis for
forecasting the future operations of the Company.
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
March 31, 1994
___________________________________________
Pro Forma Adjustments
As
Actual (Note A) (Note B) Adjusted
___________________________________________
(Amounts in thousands)
Assets
Current Assets:
Cash $ 7,691 $ 65,320 $(65,320) $ 7,691
Trade accounts receivable,
net 57,524 57,524
Inventories 47,948 47,948
Supplies and prepaid items 2,628 2,628
___________________________________________
115,791 65,320 (65,320) 115,791
Operating property, plant and
equipment, net 62,830 (2,472) 60,358
Investments and other assets:
Loan receivable, secured by
real estate 13,968 (3,860) 10,108
Other real estate properties 4,581 4,581
Other assets 11,681 11,681
___________________________________________
30,230 (3,860) 26,370
___________________________________________
$208,851 $65,320 $(71,652) $ 202,519
===========================================
Liabilities, preferred and
common stocks and other
stockholders equity
Current Liabilities:
Drafts payable $ 592 $ - $ - $ 592
Accounts payable 35,332 35,332
Accrued Liabilities 5,855 5,855
Current portion of long-
term debt 15,967 15,967
___________________________________________
57,746 57,746
Long-term debt 37,526 6,138 43,664
Notes payable 65,320 (65,320)
Net liabilities of Financial
Service Business to be sold
in 1994 37,470 (37,470)
Redeemable, noncumulative,
convertible preferred stock 154 154
Non-redeemable preferred
stock, common stock and other
stockholders equity 75,955 25,000 100,955
___________________________________________
$208,851 $65,320 $(71,652) $202,519
===========================================
Note A
Pro forma adjustment to recognize the cash required by the Company to purchase
the Retained Corporations from Equity Bank prior to the sale of Equity Bank to
the Purchaser. The Company is negotiating with a lender to borrow the funds
with which to fund the purchase. The borrowed funds plus interest will be
repaid from the proceeds of the sale of Equity Bank. As the carrying value of
the Retained Assets and Retained Corporations on a consolidated basis will not
change as a result of the purchase, no adjustment to such carrying value is
necessary.
Note B
Pro forma adjustment to recognize the sale of Equity Bank as though
consummated on March 31, 1994. The adjustment is based on an estimated selling
price of $92 million resulting in an estimated financial gain of $25 million
after consideration of costs of the transaction.
Note 3: At March 31, 1994, the Company has net operating loss ("NOL")
carryforwards for tax purposes of approximately $101 million including
approximately $64 million allocable to Equity Bank. (See Note 2 for
discussion of proposed sale of Equity Bank.) Such amounts expire beginning in
1999. The Company also has investment tax credit carryforwards of
approximately $600,000, which expire beginning in 1994.
The Company's provision for income taxes for the three months ended March 31,
1994 of $.2 million are for current state income taxes and federal alternative
minimum tax.
Note 4: Primary earnings per common share are based upon the weighted average
number of common shares and dilutive common equivalent shares outstanding
during each period, after giving appropriate effect to preferred stock
dividends.
Fully diluted earnings per share are based on the weighted average number of
common shares and dilutive common equivalent shares outstanding and the
assumed conversion of dilutive convertible securities outstanding after
appropriate adjustment for interest and related income tax effects on
convertible notes payable.
Net income applicable to common stock is computed by adjusting net income by
the amount of preferred stock dividends, including undeclared or unpaid
dividends, if cumulative.
Note 5: On July 6, 1992, a subsidiary of the Company signed an agreement to
supply a foreign customer with equipment, technology and technical assistance
to manufacture certain types of automotive products. The contract provided for
a total price of $56 million with $12 million to be retained by the customer,
as the subsidiary s equity participation, which represented a minority
interest in the customer. Of the balance of the contract price of $44 million,
$13.9 million has been billed and collected by the Company. The remaining
$30.1 million is to be collected in 38 equal quarterly installments of
$791,000, plus interest at a rate of 7.5% per annum.
During the last quarter of 1993, the Company s subsidiary exchanged its rights
to the equity interest in the customer with a foreign nonaffiliated company
( Purchaser of the Interest) for $12.0 million in notes. The Company has been
advised that the customer has agreed to repurchase from the Purchaser of the
Interest up to $6 million of such equity interest over a six-year period, with
payment to the Purchaser of the Interest to be either in cash or bearing
products. The notes issued to the subsidiary for its rights to the equity
interest in the customer will only be payable when, as and if the Purchaser of
the Interest collects from the customer for such equity interest, and the
method of payment to the subsidiary will be either cash or bearing products,
in the same manner as received by the Purchaser of the Interest from the
customer. Due to the Company s inability to determine what payments, if any,
it will receive on such notes, the Company will carry such notes at a nominal
amount.
The Company's subsidiary has agreed to make its best effort to purchase
approximately $14.5 million of bearing products each year for ten years
commencing in the customer s first year of operations, which is anticipated to
be in 1994. However, the subsidiary is not required to purchase more product
from the customer in any one year than the quantity of tapered bearing
products the subsidiary is able to sell in its market. The customer has also
agreed to repurchase over six years, up to $6 million of the subsidiary s
former equity participation in the customer. In the event that the customer is
unable to repurchase such equity participation, and therefore the Company's
subsidiary is unable to collect such amount from the Purchaser of the Interest,
the parties may renegotiate and modify the agreement for the Company's
subsidiary to purchase products from the customer.
Revenues, costs and profits related to the contract are being recognized in
two separate phases. The first phase involves the purchase, modification,
development and delivery of the machinery, tooling, designs and other
technical information and services. Sales to be recognized during this phase
are limited to the expected collections under the contract during this phase.
Sales and costs during the first phase are being recognized using the
percentage of completion method of accounting based on the ratio of total
costs incurred, excluding the cost of purchased machinery, to estimated total
costs, excluding the cost of purchased machinery. Since the inception of the
contract, the Company has collected $13.9 million of the contract price and
recognized sales and cost of sales of $14.8 million and $5.5 million,
respectively. For the three months ended March 31, 1994, the Company
recognized sales and cost of sales of $1.1 million and $.7 million,
respectively. The cumulative effect of future revisions in the contract terms
or total cost estimates will be reflected in the period in which these changes
become known.
The second phase of the contract includes payments by the customer under the
financing terms set forth above and purchases of bearing products by the
Company s subsidiary from the customer. Contract revenues will be recognized
as the Company performs its obligation to purchase products from the customer,
which timing generally coincides with the timing that amounts are to be
collected from the customer. Interest will be recognized as the amounts are
collected from the customer.
Note 6: The table below provides detail of activity in the Stockholders' Equity
accounts for the three months ended March 31, 1994:
<TABLE>
Common Stock Non- Capital
_______________ redeemable in excess
Par Preferred of par Accumulated Treasury
Shares Value Stock Value Deficit Stock Total
____________ __________________________________________________________
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 14,514 $1,451 $48,000 $37,120 $(7,541) $(4,159) $74,871
Net Income - - - - 2,204 - 2,204
Conversion of 18 shares of
redeemable preferred stock
to common stock 1 - - 1 - - 1
Exercise of stock options
for cash 25 3 - 43 - - 46
Dividends declared:
Series B 12% preferred
stock ($3.00 per share) - - - - (60) - (60)
Redeemable preferred
stock ($10.00 per share) - - - - (16) - (16)
Series 2 preferred
stock ($.81 per share) - - - - (748) - (748)
Purchase of treasury stock - - - - - (343) (343)
______ ______ _______ _______ _______ _______ _______
(1) (2)
Balance at March 31, 1994 14,540 $1,454 $48,000 $37,164 $(6,161) $(4,502) $75,955
</TABLE>
(1)
Includes 880,085 shares of the Company's Common Stock held in treasury.
Excluding the 880,085 shares held in treasury, the outstanding shares of the
Company's Common Stock at March 31, 1994 were 13,659,691.
(2)
See Pro Forma Condensed Consolidated Balance Sheet presented in Note 2
for the anticipated effect on the Company's Stockholders' Equity of the
proposed sale of Equity Bank.
Note 7: Following is a summary of certain legal actions involving the Company:
A. In 1987, the U.S. Government notified one of the Company s subsidiaries,
along with numerous other companies, of potential responsibility for
clean-up of a waste disposal site in Oklahoma. No legal action has yet
been filed. The amount of the Company s cost associated with the clean-
up of the site is unknown due to continuing changes in (i) the estimated
total cost of clean-up of the site and (ii) the percentage of the total
waste which was alleged to have been contributed to the site by the
Company, accordingly, no provision for any liability which may result
has been made in the accompanying financial statements. The subsidiary s
insurance carriers have been notified of this matter; however, the
amount of possible coverage, if any, is not yet determinable.
B. The primary manufacturing facility of the Company s Chemical Business
has been placed in the Environmental Protection Agency s ( EPA )
tracking system ("System") of sites which are known or suspected to be a
site of a release of contaminated waste. Inclusion in the EPA s tracking
system does not represent a determination of liability or a finding that
any response action is necessary, accordingly, no provision for any
liability that may result has been made in the consolidated financial
statements. As a result of being placed in the System, the State of
Arkansas performed a preliminary assessment. The Company has been
advised that there have occurred certain releases of contaminants at the
Site. In addition, as a result of certain releases of contaminants at
the Site, the Company s subsidiary may be subject to assessment of
certain civil penalties.
The Company s subsidiary has not yet received from the appropriate
governmental agency of the State of Arkansas a determination as to the
appropriate plan of remediation of the Site and what contaminants, if
any, must be remediated. The subsidiary is unable to estimate the cost
of such remediation until the subsidiary receives an acceptable plan
from such agency. The subsidiary believes that it will receive such a
plan from the appropriate Arkansas state agency in the near future and
at that time will be able to estimate the cost of such remediation at
the Site. The Company does not believe that the response to any
contamination at the Site or the assessment of penalties, if any, due to
the release of certain contaminants at the Site would have a material
adverse effect on the Company or its financial condition.
C. A subsidiary of the Company was named in April 1989 as a third party
defendant in a lawsuit alleging defects in fan coil units installed in a
commercial building. The amount of damages sought by the owner against
the general contractor and the subsidiary s customer are substantial.
The subsidiary s customer alleges that to the extent defects exist in
the fan coil units, it is entitled to recovery from the subsidiary. The
Company s subsidiary generally denies their customer s allegations and
that any failures in the fan coil units were a result of improper design
by the customer, improper installation or other causes beyond the
subsidiary s control. The subsidiary has in turn filed claims against
the suppliers of certain materials used to manufacture the fan coil
units to the extent any failures in the fan coil units were caused by
such materials. Discovery in these proceedings is continuing. The
Company believes it is probable that it will receive insurance proceeds
in the event of an unfavorable outcome.
The Company, including its subsidiaries, is a party to various other claims,
legal actions, and complaints arising in the ordinary course of business. In
the opinion of management after consultation with counsel, all claims, legal
actions (including those described above) and complaints are adequately
covered by insurance, or if not so covered, are without merit or are of such
kind, or involve such amounts that unfavorable disposition would not have a
material effect on the financial position or results of operations of the
Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with a
review of the Company's March 31, 1994 Condensed Consolidated Financial
Statements. This discussion and analysis is intended to provide information
about the Company's continuing operations. Accordingly, it contains only
limited discussions of the Company's Financial Services Business to be sold in
1994, which has been reported as a discontinued operation in the Company's
Condensed Consolidated Financial Statements at March 31, 1994. See "Liquidity
and Capital Resources" of this "Management's Discussion and Analysis", and
Note 2 of Notes to Condensed Consolidated Financial Statements for further
discussion of the proposed sale of Equity Bank.
OVERVIEW
The Company is a diversified holding company which is engaged, through
its subsidiaries, in the Chemical Business, the Environmental Control
Business, the Automotive Products Business and the Industrial Products
Business.
Information about the Company's continuing operations in different
industry segments for the three months ended March 31, 1994 and 1993 is
detailed below.
Three Months Ended March 31,
1994 1993
____ ____
(In thousands)
(Unaudited)
Sales:
Chemical $30,952 $24,440
Environmental Control 20,252 17,372
Automotive Products 8,564 6,151
Industrial Products 4,083 4,634
_______ _______
$63,851 $52,597
======= =======
Gross profit:
Chemical $ 6,088 $ 5,710
Environmental Control 5,387 4,149
Automotive Products 2,012 2,155
Industrial Products 871 1,272
_______ _______
$14,358 $13,286
======= =======
Operating profit (loss):
Chemical $ 2,889 $ 3,470
Environmental Control 2,093 1,330
Automotive Products (115) 817
Industrial Products (217) 230
_______ _______
4,650 5,847
General corporate expenses (959) (1,384)
Interest expense (1,681) (2,183)
_______ _______
Income from continuing operations before
provision for income taxes $ 2,010 $ 2,280
======= =======
RESULTS OF OPERATIONS
Three months ended March 31, 1994 vs. Three months ended March 31, 1993.
Revenues
Total revenues for the three months ended March 31, 1994 and 1993 were
$64.4 million and $53.4 million, respectively (an increase of $11.0 million).
Interest and other income included in total revenues was $.5 million in 1994,
compared to $.8 million for 1993. This decrease of $.3 million resulted
primarily from one-time insurance claim proceeds recorded in the first quarter
of 1993. Consolidated net sales included in total revenues for the three
months ended March 31, 1994 were $63.9 million, compared to $52.6 million for
the first three months of 1993, an increase of $11.3 million. This increase
in sales resulted principally from: (i) increased sales in the Chemical
Business of $6.5 million, primarily due to favorable weather conditions for
seasonal fertilizer sales, higher price of ammonia being partially passed
through to customers, the acquisition of Total Energy Systems Limited ("TES")
in July, 1993, and higher sales of Universal Tech Corporation ("UTC"), offset
by reduced sales by Slurry Explosives Corporation ("Slurry") due to
unfavorable weather conditions in some of their market areas; (ii) increased
sales in the Environmental Control Business of $2.9 million, primarily due to
an expanded customer base in 1994 and the continued recovery from the effects
of a strike that took place in 1992 at the fan coil manufacturing plant of
this business; (iii) increased sales in the Automotive Products Business of
$2.4 million due to an expanded customer base in 1994, and (iv) decreased
sales in the Industrial Products Business of $.5 million, primarily due to
decreased sales to a foreign customer (see Note 5 to Notes to Condensed
Consolidated Financial Statements and discussion under the "Liquidity and
Capital Resources" section of this report).
Gross Profit
Gross profit was 22.5% for the first three months of 1994, compared to
25.3% for the first three months of 1993. The decline in the gross profit
percentage was due primarily to (i) revisions to the estimates to complete the
foreign sales contract which caused the percentage of completion calculation
to yield a lower gross profit percentage in the first three months of 1994
than was calculated for the first three months of 1993; and (ii) higher cost
of the primary raw material (ammonia) in the Chemical Business. During the
first three months of 1994 the average cost of ammonia was approximately 14.4%
higher than the average cost of ammonia during the first three months of 1993.
This higher cost was not fully passed on to customers in the form of price
increases. These factors were offset in part by gross profit improvement
after recovery from the effects of a strike in 1992 at the fan coil
manufacturing plant of the Environmental Control Business that were still
being experienced in the first quarter of 1993.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 17.6% in the three months ended March 31, 1994 and 18.3% in the
first three months of 1993. As sales increased, normal SG&A expenses did not
increase proportionally, thus resulting in a lower percentage.
Interest Expense
Interest expense for the Company was approximately $1.7 million during
the three months ended March 31, 1994 compared to approximately $2.2 million
during the three months ended March 31, 1993. The decrease primarily resulted
from lower average balances of borrowed funds.
Income Before Taxes
The Company had income from continuing operations before income taxes of
$2.0 million in the first quarter of 1994 compared to $2.3 million in the
three months ended March 31, 1993. The decreased profitability of $.3
million was primarily due to lower gross profit margins realized on sales in
the Chemical Division and on the foreign sales contract as previously
discussed.
Provision For Income Taxes
As a result of the Company's net operating loss carryforward for income
tax purposes as discussed elsewhere herein and in Note 3 of Notes to Condensed
Consolidated Financial Statements, the Company's provisions for income taxes
for the three months ended March 31, 1994 and the three months ended March 31,
1993 are for current state income taxes and federal alternative minimum taxes.
Income From Discontinued Operations
Income from discontinued operations reflects the results of operations
of the Financial Services Business excluding income and expenses of the
Retained Corporations and the Retained Assets as discussed in Note 2 of Notes
to Condensed Consolidated Financial Statements. Income from discontinued
operations, net of expenses, was $.4 million in the first quarter of 1994
compared to $.5 million in the first quarter of 1993. This decreased
profitability is primarily due to the effects of higher interest rates on the
operations of that business in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a diversified holding Company and its liquidity is
dependent, in large part, on the operations of its subsidiaries and credit
agreements with lenders. As a regulated business, Equity Bank is limited in
the transactions which it can enter into with the Company, except as
specifically approved by the appropriate regulatory agencies. As a result,
the Company does not guarantee the obligations of Equity Bank nor does Equity
Bank guarantee the obligations of the Company.
Proposed Sale of Equity Bank - As previously discussed, the Company and Fourth
Financial Corporation ("Fourth Financial") have entered into the Acquisition
Agreement, whereby the Company has agreed to the sale of Equity Bank, which
constitutes the Financial Services Business of the Company, to Fourth
Financial. Fourth Financial is to acquire all of the outstanding shares of
capital stock of Equity Bank. Under the Acquisition Agreement, the Company is
to acquire from Equity Bank (i) prior to the completion of the sale of Equity
Bank under the Acquisition Agreement certain subsidiaries of Equity Bank
("Retained Corporations") that own the assets contributed by the Company to
Equity Bank at the time of the acquisition of the predecessor of Equity Bank
by the Company for Equity Bank's carrying values of such Retained Corporations
at the time of the acquisition of the Retained Corporations from Equity Bank,
which is anticipated to be approximately $65.3 million, and (ii) at the time
of the closing of the sale of Equity Bank under the Acquisition Agreement, the
Equity Tower Loan and other real estate owned by Equity Bank that was acquired
by Equity Bank through foreclosure ("OREO"), which have collectively been
previously defined as the "Retained Assets". The Retained Assets are to be
acquired for an amount equal to Equity Bank's carrying value of the Retained
Assets at time of closing of the sale of Equity Bank, which is anticipated to
be approximately $18.5 million. In addition, the Company has the option, but
not the obligation, to acquire any loan owned by Equity Bank at book value or
$1.00 in the case of a loan that has been charged off ("Other Loans").
The Company currently expects that the Purchase Price to be paid by
Fourth Financial for Equity Bank will be approximately $92 million, subject to
determination and adjustment in accordance with the Acquisition Agreement.
The Purchase Price is based on a number of estimates, and the amount of the
Purchase Price will not be determined exactly until the closing of the sale of
Equity Bank. Of the approximately $92 million, the Company will use
approximately $65.3 million, plus interest, to repay a certain indebtedness
the Company intends to incur to finance the purchase from Equity Bank of the
Retained Corporations. In addition, the Company will use approximately $18.5
million (Equity Bank's carrying value at March 31, 1994) to purchase the
Retained Assets. As of this date, the Company has made no decision if it will
acquire any of the Other Loans. The Company is further required under the
Acquisition Agreement to purchase from Equity Bank at the closing of the
proposed sale the outstanding amount of Receivables. As of March 31, 1994,
Equity Bank owned $13.5 million of such Receivables. The Company plans to use
borrowings from the Bank IV Line of Credit discussed elsewhere in this
Liquidity and Capital resources section to purchase such Receivables from
Equity Bank. Further, the Company will use the net balance of the Purchase
Price, if any (after repaying the indebtedness incurred to purchase the
Retained Corporations and paying for the Retained Assets and transactional
costs relating to the sale of Equity Bank) for general working capital
purposes.
The sale of Equity Bank pursuant to the Acquisition Agreement is
currently estimated to result in a pre-tax gain for financial reporting
purposes for the Company of approximately $25.0 million, based upon the
currently-expected Purchase Price of approximately $92 million. The exact
amount of the Purchase Price will depend on certain factors at the time of
closing, and, as a result, the pre-tax gain for financial reporting purposes
could be higher or lower depending upon the ultimate amount of the Purchase
Price. The Company's tax basis in Equity Bank is higher than its basis for
financial reporting purposes. Under current federal income tax laws, the
consummation of the Acquisition Agreement and the sale of Equity Bank will not
have any federal income tax consequences to either the Company or to the
shareholders of the Company. There are, however, certain proposed regulations
which, if adopted by the Internal Revenue Service ("IRS") before the
consummation of the sale of Equity Bank, could result in the Company having a
gain for federal income tax purposes in connection with the sale of Equity
Bank, but will not have any federal income tax effect on the shareholders of
the Company. If the proposed regulations become effective prior to completion
of the sale of Equity Bank, the Company has the right to terminate the
Acquisition Agreement.
As a federally chartered savings institution, the acquisition of Equity
Bank by Fourth Financial is subject to regulatory approvals. The proposed
sale of Equity Bank is conditioned on, among other things, the price to be
paid by Fourth Financial is to be no less than $92 million. The Company has
the right to cancel the transaction if the price is less than $92 million. As
of the date of this report, both shareholder and regulatory approvals have
been received. It is anticipated that the sale of Equity Bank will occur on
or before June 1, 1994. See Note 2 of Notes to Condensed Consolidated
Financial Statements.
Sources of funds - Substantially all of the capital requirements, other than
the equity capital of the Company and its subsidiaries, are funded by three
sources:
(1) Pursuant to approvals by the then appropriate governmental agency in
1988, the Company and its subsidiaries have been selling eligible
accounts receivable to Equity Bank with recourse to the particular
seller. Under such arrangement, accounts receivable were sold to Equity
Bank at 100% of the unpaid face value of such account receivable. Under
the prior approvals, the Company and its subsidiaries were allowed to
sell Equity Bank, at any one time, up to $60 million of eligible
accounts receivable. The Office of Thrift Supervision ("OTS"), the
primary regulator of Equity Bank, has taken the position that the
approvals granted in 1988 allowing such accounts receivable transactions
between the Company, its subsidiaries and Equity Bank have expired. As
a result, Equity Bank and the OTS have agreed that (i) at no one time
subsequent to September 28, 1993, but prior to September 1, 1994, shall
the total amount of such accounts receivable owned by Equity Bank exceed
$33.6 million; (ii) beginning February 1, 1994, Equity Bank will not
purchase any new accounts receivable from the Company and/or its
subsidiaries if such would result in Equity Bank owning an amount that
would exceed the amount allowed by current regulations for transactions
with affiliated companies, which amount is based on a percentage of
Equity Bank's capital, and (iii) on and after September 1, 1994, the
amount of such accounts receivable owned by Equity Bank at any one time
must be in compliance with current regulations for transactions with
affiliated companies. At March 31, 1994, $13.5 million of such accounts
receivable were owned by Equity Bank. Assuming that on March 31, 1994,
Equity Bank had been required to meet current regulations regarding the
amount of such outstanding accounts receivable owned by Equity Bank, the
amount of such accounts receivable would have had to be reduced to
approximately $9.6 million as of such date. The Company has temporarily
replaced a substantial portion of the accounts receivable financing
previously provided by Equity Bank with Bank IV of Oklahoma, N.A. ("Bank
IV") a subsidiary of Fourth Financial which is providing Prime Financial
Corporation ("Prime"), a wholly-owned subsidiary of the Company, with a
$25 million accounts receivable financing line of credit at 80% of the
unpaid face value of such accounts receivable which Prime has purchased
from the Company and its subsidiaries ("Bank IV Line of Credit"). The
outstanding balance borrowed on the Bank IV Line of Credit at March 31,
1994 was $10 million. The Bank IV Line of Credit is temporary and will
expire during 1994 unless extended. The Company intends to continue to
use the accounts receivable financing arrangement with Equity Bank to
the extent described above and as allowed by regulations until Equity
Bank is sold as discussed elsewhere herein. The Company has begun
negotiations for a comprehensive line of credit. Although the Company
believes it will be successful in obtaining the comprehensive line of
credit to replace most, if not all, of its present credit facilities,
there are no assurances that it will be successful in negotiating such.
(2) The Company and its subsidiaries (other than Equity Bank and the
Chemical Business) are parties to a credit agreement ("Agreement"), with
an unrelated lender ("Lender"), collateralized by certain inventory and
certain other assets of the Company and its subsidiaries (including the
capital stock of International Environmental Corporation) other than the
assets and capital stock of Equity Bank and the Chemical Business. The
Credit Agreement provides for a revolving credit facility ("Revolver")
for direct borrowing up to $8 million, including the issuance of letters
of credit. The Revolver provides for advances at varying percentages of
eligible inventory. This Agreement expires on June 30, 1994, but the
Company believes the Agreement can be extended at that time. At March
31, 1994, the availability based on eligible collateral approximated the
credit line. Borrowings (including letters of credit) under the
Revolver outstanding at March 31, 1994, were $.4 million. The Revolver
requires reductions of principal equal to reductions as they occur in
the underlying inventory times the advance rate. The Company presently
intends to keep the Agreement in effect if it can renegotiate certain of
its terms.
(3) The Company's wholly-owned subsidiaries, El Dorado Chemical Company and
Slurry Explosive Corp., which comprise the majority of the Company's
Chemical Business ("Chemical"), are parties to a loan agreement ("Loan
Agreement") with two institutional lenders ("Lenders"). This Loan
Agreement, as amended in conjunction with an unscheduled payment of $7.2
million in the third quarter of 1993, provides for a seven year term
loan of $28.5 million ("Term Loan"), a $10 million asset based revolving
credit facility ("Revolving Facility"), and an additional revolving
credit line of $7.2 million. The amount borrowed under this additional
revolving credit line at March 31, 1994 was the full $7.2 million.
Available borrowings under the additional revolving credit line
decreases annually until its termination in March, 1997. The balance of
the Term Loan at March 31, 1994 was $20.6 million. Annual principal
payments on the Term Loan escalate each year from $4.8 million in 1994
to a final payment of $5.5 million on March 31, 1997. Borrowings under
the Revolving Facility are available up to the lesser of $10 million or
the borrowing base. The borrowing base is determined by deducting 100%
of Chemical's accounts receivable sold to Equity Bank and Prime from the
maximum borrowing availability as defined in the Revolving Facility.
The maximum line availability based on eligible collateral under the
Revolving Facility at March 31, 1994 was approximately $8.9 million, net
of approximately $1.1 million reserved for the issuance of a standby
letter of credit. At March 31, 1994 there were outstanding borrowings
under the Revolving Facility of $8.9 million. The Revolving Facility
requires reductions of principal equal to reductions as they occur in
the underlying accounts receivable and inventory times the applicable
advance rate, assuming that the outstanding balance under the Revolving
Credit Facility is less than the then maximum line availability based on
eligible collateral. Borrowings under the Revolving Facility are
required to be reduced to zero for forty-five (45) consecutive days
annually. Such requirement has not yet been met for 1994. Annual
interest at the agreed to interest rates, if calculated on the $36.7
million outstanding balance at March 31, 1994 would be approximately
$3.9 million. The Term Loan and Revolving Facility are secured by
substantially all of the assets and capital stock of Chemical. The Loan
Agreement requires Chemical to maintain certain financial ratios and
contains other financial covenants, including tangible net worth
requirements and capital expenditures limitations. As of the date of
this report, Chemical is in compliance with all financial covenants.
Under the terms of the Loan Agreement, Chemical cannot transfer funds to
the Company in the form of cash dividends or other advances, except for
(i) the amount of taxes that Chemical would be required to pay if it was
not consolidated with the Company; (ii) an amount equal to fifty percent
(50%) of Chemical's cumulative adjusted net income as long as Chemical's
Total Capitalization Ratio, as defined, remains .65:1 or below and,
(iii) borrowings under the additional revolving credit line of $7.2
million.
Cash Flows
-----------
Net cash provided by operating activities in the first three months of
1994, after adjustment for non-cash expenses of $2.3 million, was $9.1
million. The net cash provided by operating activities included the following
changes in assets and liabilities: (i) accounts receivable increased $8.4
million; (ii) accounts payable and accrued liabilities increased $11.8
million; (iii) inventory decreased $0.4 million; and, (iv) supplies and
prepaid items and other assets decreased $1.1 million. The increase in
accounts receivable is due to higher sales in the Chemical, Environmental
Control and Automotive Products Businesses. The increase in accounts payable
and accrued liabilities was due primarily to increased business activity in
the Chemical, Environmental Control and Automotive Products Businesses, net of
a decrease in the amount of drafts issued to purchase inventory in the
Automotive Products Business. The reduction in inventory was due to increased
sales in the Environmental Control and Automotive Products Businesses, offset
by increased inventory in the Chemical Business in anticipation of sales
increases resulting from the spring fertilizer season. The decrease in
supplies and prepaid items and other assets is primarily due to amortization
of certain prepaid insurance premiums, in addition to decreased prepayments in
the Chemical Business due to timing of payments to certain vendors for
inventory purchases. Financing activities in the first three months of 1994
included net borrowings of $22.6 million used to offset reductions in accounts
receivable sold of $21.7 million resulting from termination of the accounts
receivable financing arrangement with Equity Bank, in addition to dividend
payments of $0.8 million and treasury stock purchases of $0.3 million. Cash
flows from investing activities included capital expenditures for property,
plant and equipment in the Chemical Business of $2.8 million related to
relocation of an additional nitric acid plant acquired in 1993 in addition to
normal capital improvements, and capital expenditures of $0.8 million in the
Environmental Control Business primarily for acquisition of certain equipment
to support the manufacturing processes of this business.
Future cash requirements include working capital requirements for
anticipated sales increases in the Environmental Control Business, the
Chemical Business and the Automotive Products Business, and funding for future
capital expenditures, primarily in the Chemical Business and the Environmental
Control Business. Funding for the higher accounts receivable resulting from
anticipated sales increases will be provided by the Chemical Business'
revolving credit facilities previously discussed and the accounts receivable
financing provided by Bank IV. As previously discussed, the Bank IV Line of
Credit is temporary and will be replaced with the comprehensive line of credit
that the Company is attempting to negotiate. Inventory requirements for the
higher anticipated sales activity should be met by scheduled reductions in the
inventories of the Environmental Control and Automotive Products Businesses.
During November 1993, the Company's Chemical Business acquired an additional
concentrated nitric acid plant and related assets for approximately $1.9
million. The Chemical Business is in the process of moving such plant and
assets from Illinois to, and installing such at, its manufacturing plant
located in El Dorado, Arkansas. The Company anticipates that the total amount
that will be expended to acquire, move and install the plant and assets will
be approximately $12.0 million for which the Company expects to obtain
financing secured by such assets. At March 31, 1994, the Company had incurred
and paid approximately $3.8 million of the estimated $12.0 million. The
Company expects the plant and asset installation to be complete and
operational by the end of 1994. The Company also has planned capital
expenditures for the Environmental Control Business to acquire certain
machinery and equipment for approximately $4 million in 1994. Approximately
$2 million of these expenditures are expected to be financed by the sellers of
said machinery and equipment. The remaining $2 million is expected to be
financed from operations.
Management believes that cash flows from operations and other sources,
including the comprehensive line of credit that the Company is presently
negotiating will be adequate to meet its presently anticipated capital
expenditure, working capital, debt service and dividend requirements. The
Company currently has no material commitment for capital expenditures, other
than those related to Chemical's acquisition of an additional concentrated
nitric acid plant, the Environmental Control Business' acquisition of
machinery and equipment as discussed above, and a commitment of a subsidiary
of the Company to purchase from Equity Bank in the year 2000 for the then
carrying value for regulatory capital purposes certain of the assets
previously contributed by the Company to Equity Bank, all of which are now
owned or controlled by the Retained Corporations, presently being leased by
Equity Bank to the subsidiary. Equity Bank's carrying value for all of such
assets at March 31, 1994 was approximately $65.3 million. The Company has
agreed under the Acquisition Agreement to repurchase all of such assets by
purchasing the subsidiaries of Equity Bank that own these assets at least one
(1) day prior to consummation of the Acquisition Agreement. However, if the
sale of Equity Bank does not occur, the Company believes that it will be able
to obtain satisfactory financing from non-affiliated parties to fulfill this
commitment on or prior to the date that the subsidiary of the Company is
required to purchase such assets.
In 1993, the Company's Board of Directors adopted a policy as to the
payment of annual cash dividends of $.06 per share on its outstanding Common
Stock, subject to termination or change by the Board of Directors at any time.
The Board of Directors declared a cash dividend of $.03 per share on the
Company's outstanding shares of Common Stock, which was paid January 1, 1994,
to the stockholders of record as of the close of business on December 15,
1993.
On November 11, 1993 the Company's Board of Directors declared a $12.00
a share annual cash dividend on each outstanding share of its Series B 12%
Cumulative Convertible Preferred Stock, $100 par value, payable January 1,
1994 to stockholders of record on December 1, 1993, which is the annual
dividend on this series of preferred stock for 1994. This dividend is being
recognized in the Company's financial statements throughout the year as $3.00
a share in each fiscal quarter. On February 10, 1994 the Company's Board of
Directors declared a (i) $.81 a share quarterly cash dividend on each
outstanding share of its Series 2 $3.25 Convertible Exchangeable Class C
Preferred Stock, paid March 15, 1994 to shareholders of record on March 1,
1994, and (ii) $10.00 a share annual cash dividend on each outstanding share
of its Convertible Noncumulative Preferred Stock ($100 par), paid April 1,
1994 to stockholders of record on March 15, 1994.
Foreign Sales Contract - A subsidiary of the Company entered into an
agreement with a foreign company ("Buyer") to supply the Buyer with equipment,
technology and technical services to manufacture certain types of automotive
bearing products. The agreement provided for a total contract amount of
approximately $56 million, with $12 million of the contract amount to be
retained by the Buyer as the Company's subsidiary's equity participation in
the Buyer, which represented a minority interest. During 1993 the Company's
subsidiary exchanged its equity interest in the Buyer to a foreign
nonaffiliated company for $12 million in notes. Through the date of this
report, the Company's subsidiary has received $13.9 million from the buyer
under the agreement. During 1993, the Company and the foreign customer agreed
to a revised payment schedule which deferred the beginning of payments under
the contract from June 30, 1993 to one $791,000 principal payment on November
1, 1993, one principal payment of $791,000 on March 31, 1994, one principal
payment of $791,000 on December 31, 1994 and quarterly, thereafter, until
the contract is paid in full.
The customer made the March 31, 1994 payment on April 20, 1994 and the
Company expects that after the customer becomes operational, they will make
future payments as they become due. See Note 5 of Notes to Condensed
Consolidated Financial Statements.
Business Acquisitions - In March, 1994, a subsidiary of the Company
advanced to Deepwater Iodides, Inc. ("Deepwater"), a specialty chemical
company, $450,000 on a demand basis. In connection with the loan, Deepwater
and the Company entered into an agreement in principle for the Company to
purchase from Deepwater an amount of stock of Deepwater equal to eighty
percent of the outstanding shares of Deepwater for approximately $4 million.
The Company anticipates exercising this option prior to the end of 1994,
subject to the results of due diligence presently being conducted. This
transaction is subject to the parties entering into a definitive agreement.
Settlement of Litigation - In 1993 the Company filed suit against
certain transportation companies and certain of the Company's insurers over
damage sustained to certain of the Industrial Products Business' machine
inventory while in the transportation companies' possession. The Company
settled its litigation with one of it's insurers for $3.6 million, which was
paid to the Company on March 11, 1994. Such amounts were accrued in 1993 to
the extent that costs and expenses had been previously incurred. The Company
continues to pursue litigation against two insurers that were not parties to
said settlement and against the transportation companies.
Letters of Intent with Foreign Customers - During the second and third
quarters of 1993, a subsidiary of the Company signed two separate letters of
intent to supply separate customers, one in the former Soviet Union and one
in Poland, with equipment to manufacture environmental control products. Upon
completion, the agreements are expected to include the sale of licenses,
designs, tooling, machinery, equipment, technical information, proprietary
know how, and technical services. The total sales price for the two contracts
is expected to be approximately $98 million. The agreements are also expected
to include a provision that, in lieu of cash, the Company will accept payment
in kind of anhydrous ammonia from the foreign customers at the foreign
customers' option. The projects are subject to completion of two separate
definitive agreements between each of the foreign customers and the Company's
subsidiary. There are no assurances that definitive contracts with either of
these two customers will be finalized.
Availability of Company's Loss Carryovers - The Company anticipates that
its cash flow in future years will benefit to some extent from its ability to
use net operating loss ("NOL") carryovers from prior periods to reduce the
federal income tax payments which it would otherwise be required to make with
respect to income generated in such future years. As of March 31, 1994, the
Company, excluding amounts applicable to Equity Bank, had available NOL
carryovers of approximately $37 million, based on its federal income tax
returns as filed with the Internal Revenue Service for taxable years through
1992, and on the Company's estimates for 1993. These NOL carryovers will
expire beginning in the year 1999.
The amount of these carryovers has not been audited or approved by the
Internal Revenue Service and, accordingly, no assurance can be given that such
carryovers will not be reduced as a result of audits in the future. In
addition, the ability of the Company to utilize these carryovers in the future
will be subject to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations. These include, in particular, limitations imposed by
Code Section 382 and the consolidated return regulations.
Contingencies - As discussed in Note 7 of Notes to the Condensed
Consolidated Financial Statements, the Company has several contingencies that
could impact its liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not anticipate that
these claims will result in substantial adverse impacts on its liquidity it is
not possible to determine the outcome.
ERNST & YOUNG 1700 Liberty Tower
100 North Broadway
Oklahoma City, OK 73102
Phone: 405 278 6800
Fax: 405 278 6823
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of LSB
Industries, Inc. and subsidiaries as of March 31, 1994, and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended March 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of LSB Industries, Inc. as of
December 31, 1993, and the related consolidated statements of income, non-
redeemable preferred stock, common stock and other stockholders' equity and
cash flows for the year then ended (not presented herein); and in our report
dated March 15, 1994, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1993, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
May 9, 1994 /s/ ERNST & YOUNG
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May,2 1994, the company held a Special Meeting of Stockholders
(the "Meeting"). At the Meeting, the Stockholders approved the sale of Equity
Bank for Savings, F.A., a wholly owned subsidiary of the Company which
comprises the Company's Financial Services Business, to Fourth Financial
Corporation pursuant to a Stock Purchase Agreement, dated as of February 9,
1994 (the "Sale"). The Sale was approved with 11,256,493 shares voting "For",
47,229 shares voting "Against", 24,902.5 shares abstaining and broker non-
votes. The following shares were entitled to vote at the Meeting as a single
class: 13,639,691 shares of the Company's Common Stock, 20,000 shares of the
Company's Series B Cumulative Convertible Preferred Stock, and 1,614.5 shares
of the Company's Redeemable Convertible Preferred Stock.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits. The Company has included the following
exhibits in this report:
11.1 Statement Re: Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
(b) Reports on Form 8K. During the quarter ended March 31, 1994, the
Company filed one (1) Form 8K. This filing, dated February 9,
1994, reported the Stock Purchase Agreement entered into by the
Company and Fourth Financial Corporation, pursuant to which, at
the closing, the Company agreed to sell, and Fourth Financial
Corporation agreed to purchase, all of the issued and outstanding
shares of capital stock of Equity Bank for Savings, F.A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has caused the undersigned, duly-authorized, to sign this
report on its behalf on this 12th day of May, 1994.
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
----------------------------------
Tony M. Shelby, Sr. Vice President
(Chief Financial Officer)
By: /s/ Jimmie D. Jones
----------------------------------
Jimmie D. Jones, Vice President
Controller (Chief Accounting Officer)
LSB INDUSTRIES, INC. Exhibit 11.1
Page 1 of 2
PRIMARY EARNINGS PER SHARE COMPUTATION
Quarter ended March 31,
_____________________________
1994 1993
____________ ___________
Shares for primary earnings per share:
Weighted average shares:
Common shares outstanding from
beginning of period 13,673,971 7,393,674
Common shares issued on conversion
of redeemable preferred stock;
calculated on weighted average
basis 360 1,070
Common shares issued on conversion
of convertible preferred stock;
calculated on weighted average
basis - 1,304,070
Common shares issued upon exercise
of employee or director stock
options; calculated on weighted
average basis 6,833 19,500
Purchases of treasury stock;
calculated on weighted average
basis (20,000) -
Sale of stock; calculated on
weighted average basis - 5,843
__________ _________
13,661,164 8,724,157
Common Stock equivalents:
Shares issuable upon exercise of
options and warrants (including
the weighted average for shares
subject to options and warrants
granted during the period) 934,807 2,069,776
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on average market price for
the period) (247,510) (513,253)
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above
on actual conversion 66,560 67,810
__________ __________
753,857 1,624,333
__________ __________
14,415,021 10,348,490
========== ==========
Earnings for primary earnings per share:
Net earnings $ 2,203,665 $ 2,657,133
Dividends on cumulative preferred stocks (76,145) ( 77,220)
Dividends on convertible, exchangeable
Class C preferred stock (6.5% annually) (747,500) -
__________ __________
Earnings applicable to common stock $ 1,380,020 $ 2,579,913
========== ==========
Earnings per share $.10 $.25
==== ====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 2 of 2
FULLY DILUTED EARNINGS PER SHARE COMPUTATION
Quarter ended March 31,
____________________________
1994 1993
__________ __________
Shares for fully diluted earnings per
share:
Weighted average shares outstanding
for primary earnings per share 13,661,164 8,724,157
Shares issuable upon exercise of
options and warrants 934,807 2,069,776
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on ending market price
for the quarter if greater than
the average) (247,510) (495,004)
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above on
actual conversion 66,560 67,810
Common shares issuable upon conversion
of convertible note payable 4,000 4,000
Common shares issuable upon conversion
of convertible preferred stock, if
dilutive, from date of issue:
Series B 666,666 666,666
Series 1, net of shares
held in treasury - 3,748,470
__________ __________
15,085,687 14,785,875
========== ==========
Earnings for fully diluted earnings
per share:
Net earnings $ 2,203,665 $ 2,657,133
Interest on convertible note 180 180
Dividends on cumulative preferred
stocks (747,500) -
__________ __________
Earnings applicable to common stock $ 1,456,345 $ 2,657,313
========== ==========
Earnings per share $.10 $.18
==== ====
ERNST & YOUNG EXHIBIT 15.1
1700 Liberty Tower
100 North Broadway
Oklahoma City, OK 73102
Phone: 405 278 6800
Fax: 405 278 6823
May 9, 1994
The Board of Directors
LSB Industries, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-8302) of LSB Industries, Inc. for the registration of
2,850,000 shares of its common stock of our report dated May 9, 1994 relating
to the unaudited condensed consolidated interim financial statements of LSB
Industries, Inc. which are included in its Form 10-Q for the quarter ended
March 31, 1994.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
Ernst & Young
