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, 1996
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
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Commission file number 1-7677
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LSB INDUSTRIES, INC.
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
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The number of shares outstanding of the Registrant's voting Common Stock, as
of May 1, 1996 is 12,908,487 shares excluding 1,849,469 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, 1996, the condensed consolidated statements of operations and
cash flows for the three month periods ended March 31, 1996 and 1995 have been
subjected to a review, in accordance with standards established by the
American Institute of Certified Public Accountants, by Ernst & Young LLP,
independent auditors, whose report with respect thereto appears elsewhere in
this Form 10-Q. The financial statements mentioned above are unaudited and
reflect all adjustments, consisting primarily of adjustments of a normal
recurring nature, which are, in the opinion of management, necessary for a
fair presentation of the interim periods. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated balance
sheet at December 31, 1995, was derived from audited financial statements as
of that date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1996 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 1996 1995
_________________________________________ ___________ __________
Current assets:
Cash and cash equivalents $ 539 $ 1,420
Trade accounts receivable, net of allowance 52,095 43,975
Inventories:
Finished goods 39,545 38,796
Work in process 12,150 12,247
Raw materials 15,186 15,222
__________ __________
Total inventory 66,881 66,265
Supplies and prepaid items 7,127 5,684
__________ __________
Total current assets 126,642 117,344
Property, plant and equipment, net 86,276 86,270
Investments and other assets:
Loans receivable, secured by real estate 15,613 15,657
Other assets, net of allowance 17,194 18,905
__________ __________
$ 245,725 $ 238,176
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at March 31, 1996 is unaudited)
(Dollars in thousands)
LIABILITIES March 31, December 31,
AND STOCKHOLDERS' EQUITY 1996 1995
________________________________________ ___________ __________
Current liabilities:
Drafts payable $ 216 $ 424
Accounts payable 34,133 28,508
Accrued liabilities 10,092 9,239
Current portion of long-term debt 14,086 14,925
__________ __________
Total current liabilities 58,527 53,096
Long-term debt 106,831 103,355
Contingencies (Note 4)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,552 shares
issued and outstanding (1,566 in 1995) 147 149
Stockholders' equity (Note 3):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,757,956 shares
issued (14,757,416 in 1995) 1,476 1,476
Capital in excess of par value 37,569 37,567
Retained Earnings 3,797 5,148
__________ __________
90,842 92,191
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 1,848,469 shares
(1,845,969 in 1995) 10,422 10,415
__________ __________
Total stockholders' equity 80,220 81,576
__________ __________
$ 245,725 $ 238,176
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
__________ __________
Revenues:
Net sales $ 69,495 $ 65,269
Other income 1,411 662
__________ __________
70,906 65,931
Costs and expenses:
Cost of sales 54,688 49,127
Selling, general and administrative 13,718 12,869
Interest 2,969 2,388
__________ __________
71,375 64,384
__________ __________
Income (loss) before provision for
income taxes (469) 1,547
Provision for income taxes 62 99
Net income (loss) $ (531) $ 1,448
========== ==========
Net income (loss) applicable to
common stock (Note 2) $ (1,350) $ 629
Average common shares outstanding (Note 2): ========== ==========
Primary 12,911,387 13,552,256
Fully diluted 12,911,387 13,573,199
Earnings per common share (Note 2):
Primary $ (.10) $ .05
========== ==========
Fully diluted $ (.10) $ .05
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1996 and 1995
(Dollars in thousands)
1996 1995
___________ __________
Cash flows from operations:
Net income (loss) $ (531) $ 1,448
Adjustments to reconcile net income (loss)
to cash flows used by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 2,307 1,667
Other 307 256
Provision for possible losses
on receivables and other assets 539 180
Gain on sale of assets (659) (105)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (7,958) (7,061)
Inventories (616) (8,625)
Supplies and prepaid items (1,444) (669)
Accounts payable 5,625 4,046
Accrued liabilities 853 878
__________ __________
Net cash used by operations (1,577) (7,985)
Cash flows from investing activities:
Capital expenditures (2,173) (4,563)
Principal payments on notes receivable 44 542
Proceeds from sales of equipment and
real estate properties 15 456
Proceeds from sale of investment securities 1,444 -
Increase in other assets (96) (1,472)
__________ __________
Net cash used in investing activities (766) (5,037)
Cash flows from financing activities:
Payments on long-term and other debt (2,290) (666)
Long-term and other borrowings - 3,662
Net change in revolving debt 4,787 13,779
Net change in drafts payable (208) (920)
Dividends paid on preferred stocks (Note 3) (820) (816)
Purchases of treasury stock (Note 3) (7) (93)
__________ __________
Net cash provided by financing activities 1,462 14,946
__________ __________
Net increase (decrease) in cash (881) 1,924
Cash and cash equivalents at beginning of period 1,420 2,610
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Cash and cash equivalents at end of period $ 539 $ 4,534
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1996 and 1995
Note 1: At March 31, 1996, the Company had net operating loss ("NOL")
carryforwards for tax purposes of approximately $43 million. Such amounts
expire beginning in 1999. The Company also has investment tax credit
carryforwards of approximately $568,000, which begin expiring in 1996.
The Company s provision for income taxes for the three months ended March 31,
1996 of $62,000 is for current state income taxes and federal alternative
minimum tax.
Note 2: 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 3: The table below provides detail of activity in the Stockholders'
equity accounts for the three months ended March 31, 1996:
<TABLE>
<CAPTION>
Common Stock Non- Capital Treasury
_______________ redeemable in excess Treasury Stock
Par Preferred of par Retained Stock- Prefer-
Shares Value Stock Value Earnings Common red Total
______ ______ _________ ________ ________ ________ _______ _______
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 14,757 $ 1,476 $ 48,000 $ 37,567 $ 5,148 $(10,415) $ (200) $81,576
Net loss (531) (531)
Conversion of 13.5 shares of
redeemable preferred stock
to common stock 1 2 2
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) (744) (744)
Purchase of treasury stock (7) (7)
______ ______ ________ _______ _______ ________ ______ ______
(1)
Balance at March 31, 1996 14,758 $1 ,476 $ 48,000 $ 37,569 $ 3,797 $(10,422) $ (200) $80,220
====== ====== ======== ======= ======= ======== ====== ======
</TABLE>
(1)
Includes 1,848,469 shares of the Company's Common Stock held in treasury.
Excluding the 1,848,469 shares held in treasury, the outstanding shares of
the Company's Common Stock at March 31, 1996 were 12,909,487.
Note 4: 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 and advised the
Company that there has occurred certain releases of contaminants at the
Company's Chemical Business' primary manufacturing facility located in
El Dorado, Arkansas. On July 18, 1994, the Company received a report
from the State of Arkansas which contained findings of violations of
certain environmental law 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 of May 2, 1995, the Company
completed its remediation and closure activities and had the "Closure
Certification Report" approved by the State of Arkansas. Post closure
activities associated with the landfill closures are being implemented
in accordance with the Agreement. The Company also submitted a
"Groundwater Monitoring Work Plan" to the State of Arkansas which has
been approved and the initial phase of field work has been completed. A
work plan for the second phase of the monitoring has also been submitted
and approved by the State of Arkansas.
On February 12, 1996, the Company entered into another Consent
Administrative Agreement ("Agreement") to resolve certain compliance
issues associated with nitric acid concentrations. The Company is
currently investigating the feasibility of several options for
installing additional pollution control equipment to reduce opacity and
constituent emissions which impact opacity. The Company has been
assessed a $50,000 civil penalty associated with the Agreement; however,
the Company is planning to undertake one or more supplemental
environmental projects in lieu of the penalty.
The Company recorded a provision for environmental costs of $450,000 in
1994 and, as of March 31, 1996, the Company continues to have
approximately $286,000 accrued for these environmental matters which the
Company believes approximates the remaining costs to be incurred related
thereto. Based on information presently available, the Company does not
believe that compliance with these agreements should have a material
adverse effect on the Company or the Company's financial condition.
C. The Company has been advised that one or more persons in the vicinity of
the primary manufacturing facility of the Company's chemical business
has retained legal counsel to bring a tort action against the chemical
business claiming that certain of their alleged health issues were
caused by air emissions from the manufacturing facility. The Company is
unaware of the exact nature of these claims or the amount of damages
that the claimants will allege as a result of such alleged injuries.
The Company's insurance carrier has been notified of this matter.
The Company, including its subsidiaries, is a party to various other claims,
legal actions and complaints arising in the ordinary course of business. In
the opinion of management after consultation with counsel, all claims, legal
actions (including those described above) and complaints are adequately
covered by insurance, or if not so covered, are without merit or are of such
kind, or involve such amounts, that unfavorable disposition would not have a
material effect on the financial position of the Company, but could have a
material impact to the net income of a particular quarter or year, if resolved
unfavorably.
DEBT GUARNATEE
The Company has guaranteed approximately $2.6 million of indebtedness of a
start-up aviation company in exchange for a minority ownership interest, to
which no value has been assigned as of March 31, 1996. The Company is,
however, accruing losses of the aviation company based on its ownership
percentage and, as a result, the Company has recorded losses of $225,000 in
1996 ($590,000 in the year ended December 31, 1995 subsequent to March 31,
1995) related to the debt guarantee. The debt guarantee relates to two note
instruments, both of which require interest only payments through September
1996. One note, on which a subsidiary of the Company has guaranteed up to
$600,000 of indebtedness, matures September 28, 1996. The other note, on
which the Company has guaranteed up to $2 million, requires monthly principal
payments of $11,111 plus interest beginning in October 1996 until it matures
on August 8, 1999, at which time all outstanding principal and unpaid interest
are due. In the event of default of this note, the Company is required to
assume payments on the note with the term extended until August 2004.
The aviation company expects to complete the Federal Aviation Authority
certification process by mid-1997, at which time commercial production
development may begin. It is expected that the aviation company will require
additional external funding during such period, the source of which has not
yet been determined. If the aviation company is not successful in completing
the certification process, obtaining additional external funding or selling a
significant interest in the business to third parties, the Company is likely
to become responsible for repayment of the $2.6 million indebtedness
guarantee.
OTHER
In 1995, in connection with the Company's purchase of fifty percent (50%)
equity interest in an energy conservation joint venture (the "Project"), the
Company guaranteed the bonding company's exposure under the payment and
performance bonds on the Project, which is approximately $17.9 million. As of
March 31, 1996, the Project was approximately 45% complete and the Company
expects it to be completed on schedule in 1996, Inasmuch as the Project is
presently performing (and is expected to perform in future periods), no demand
has been made on the Company's guarantee.
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, 1996 Condensed Consolidated Financial
Statements.
OVERVIEW
The Company is going through a transition from a highly diversified
company to a more focused company with the intent to focus on its two primary
business units, the Chemical Business and the Environmental Control Business.
In September 1995 the Company announced that it would reduce its
investment in, or take other actions regarding, the Automotive and Industrial
Products Businesses. The intent is to decrease the investment in these
Businesses and redeploy the cash into the Chemical and Environmental Control
Business which are perceived by management to have strategic advantages and
better historical returns on invested capital. The Company continues to
explore its alternatives to accomplish these goals, but as of now, no formal
plans have been adopted, however, the Company intends to reduce the Industrial
Products Business by liquidating its inventory in the ordinary course of
business to a size where the Company's investment in this business is not
significant, and thereafter, limiting this business to the purchase and sale
of a limited number of lines of machine tools which the Company believes are
profitable.
Information about the Company's continuing operations in different
industry segments for the three months ended March 31, 1996 and 1995 is
detailed below.
Three Months Ended March 31,
1996 1995
___________ __________
(In thousands)
(Unaudited)
Sales:
Chemical $ 36,520 $ 31,939
Environmental Control 18,995 21,622
Automotive Products 10,956 7,879
Industrial Products 3,024 3,829
__________ __________
$ 69,495 $ 65,269
Gross profit:
Chemical $ 6,800 $ 6,246
Environmental Control 4,699 6,685
Automotive Products 2,450 2,087
Industrial Products 858 1,124
__________ __________
$ 14,807 $ 16,142
Operating profit (loss):
Chemical $ 3,545 $ 2,927
Environmental Control 721 2,976
Automotive Products 139 48
Industrial Products (497) (350)
__________ __________
3,908 5,601
General corporate expenses (1,408) (1,666)
Interest expense (2,969) (2,388)
__________ __________
Income (loss) before
provision for income taxes $ (469) $ 1,547
========== ==========
Gross profit by industry segment represents net sales less cost of sales.
Operating profit by industry segment represents revenues less operating
expenses before deducting general corporate expenses, interest expense and
income taxes. As indicated in the above table the operating profit (as
defined) declined from $5.6 million in 1995 to $3.9 million in 1996, while
sales increased approximately 6%. The decline in operating profit, coupled
with an increase in interest expense, resulted in a loss from continuing
operations before income taxes for 1996 of $.5 million. This decline in
operating profit is primarily due to lower earnings in the Environmental
Control Business as a result of lower production volumes and cost absorption
in the Business' heat pump products operation in 1996 as compared to 1995
production volumes and cost absorption which were higher than normal due to a
certain governmental project.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 vs. Three months ended March 31, 1995.
REVENUES
Total revenues for the three months ended March 31, 1996 and 1995 were
$70.9 million and $65.9 million, respectively (an increase of $5.0 million).
Sales increased $4.2 million. Other income increased $.8 million due
primarily to a gain on the sale of securities that had been held as an
investment.
NET SALES
Consolidated net sales included in total revenues for the three months
ended March 31, 1996 were $69.5 million, compared to $65.3 million for the
first three months of 1995, an increase of $4.2 million. This increase in
sales resulted principally from: (i) increased sales in the Chemical Business
of $4.6 million, primarily due to higher sales of agricultural products and
increased business volume of Total Energy Systems, the Company's subsidiary
located in Australia ("TES"), (ii) increased sales in the Automotive Products
Business of $3.1 due primarily to the acquisition of New Alloy Company on June
1, 1995, a manufacturer and distributor of automotive U-joint products, offset
by (iii) decreased sales in the Environmental Control Business of $2.6 million
primarily due to heat pump sales in the first quarter of 1995 to a customer
which was retrofitting certain of the air-conditioning and heating systems on
a U.S. military base, and (iv) decreased machine tool sales in the Industrial
Products Business of $.8 million.
GROSS PROFIT
Gross profit was 21.3% for the first three months of 1996, compared to
24.7% for the first three months of 1995. The decrease in the gross profit
percentage was due primarily to (i) decreased absorption of costs due to lower
production volumes in the Environmental Control Business, and (ii) higher
production costs in the Chemical Business due to the effect of natural gas
curtailments by suppliers during unseasonably cold weather.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 19.7% in the three month periods ended March 31, 1996 and 1995.
As sales increased, SG&A expenses increased proportionately.
INTEREST EXPENSE
Interest expense was approximately $3.0 million during the three months
ended March 31, 1996 compared to approximately $2.7 million during the three
months ended March 31, 1995 before capitalization of approximately $.3 million
in connection with the construction of a concentrated nitric acid plant by the
Chemical Business. The increase primarily resulted from higher average
balances of borrowed funds.
INCOME (LOSS) BEFORE TAXES
The Company had a loss before income taxes of $.5 million in the first
quarter of 1996 compared to income before income taxes of $1.5 million in the
three months ended March 31, 1995. The decreased profitability of $2.0
million was primarily due to the decline in gross profit and increases in SG&A
and interest expense 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 1 of Notes to Condensed
Consolidated Financial Statements, the Company's provisions for income taxes
for the three months ended March 31, 1996 and the three months ended March 31,
1995 are for current state income taxes and federal alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
For the quarter ended March 31, 1996, the net loss of $.5 million
included (i) noncash charges for depreciation and amortization of $2.6
million, and (ii) noncash provisions for possible losses on accounts and notes
receivable and debt guarantee totalling $.5 million, resulting in positive
cash flow of $2.6 million. This positive cash flow was absorbed by increases
in accounts receivable, inventory, supplies, and prepaid items, which
increases were partially offset by increases in accounts payable and accrued
liabilities, resulting in a net cash usage of approximately $1.6 million from
operating activities.
The increase in accounts receivable from December 31, 1995 to March 31,
1996 was due primarily to seasonal sales increases in the Chemical Business
and increased sales in the Automotive and Industrial Products Businesses over
the fourth quarter of 1995. These increases were partially offset by accounts
receivable reductions in the Environmental Control Business due to timing of
collections. The increase in inventories was due to seasonality from December
31, 1995 to March 31, 1996 in the Chemical Business and increased inventories
of the Chemical Business's Australian subsidiary due to an expanded customer
base. These increases were partially offset by a reduction of excess
inventory in the Automotive Products Business. The increase in supplies and
prepaid items is primarily due to an increase in manufacturing supplies in the
Chemical Business. The increase in accounts payable and accrued liabilities
from December 31, 1995 to March 31, 1996 is due primarily to seasonality in
the Chemical Business and increased accounts payable of the Chemical
Business's Australian subsidiary due to increased business activity from
higher sales and increased inventories.
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES
For the quarter ended March 31, 1996, the cash flow from investing and
financing activities resulted in a positive cash flow of approximately $.7
million after increased borrowings against the Company's working capital
revolver of $4.8 million and collecting approximately $1.4 million in proceeds
from the sale of certain investment securities.
Those investment and financing activities requiring cash included:
capital expenditures, $2.2 million; payments on long-term debt, $2.3 million;
and, payment of preferred stock dividends, $.8 million. Capital expenditures
included expenditures of the Chemical Business for the completion of the
construction of a concentrated nitric acid plant in El Dorado, Arkansas which
was began in 1994. The balance of capital expenditures were for normal
additions in the Chemical, Environmental Control, and Automotive Products
Businesses.
During the first quarter of 1996, the Company declared and paid the
following aggregate dividends: (1) $12.00 per share on each of the outstanding
shares of its Series B 12% Cumulative Convertible Preferred Stock; (2) $.81
per share on each outstanding share of its $3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2; and (3) $10.00 per share on each
outstanding share of its Convertible Noncumulative Preferred Stock. The
Company expects to continue the payment of an annual cash dividend on its
common stock equal to $.06 per share, payable $.03 per share on January 1 and
July 1, in the future in accordance with the policy adopted by the Board of
Directors and the cash dividends on the Company's outstanding series of
preferred stock pursuant to the terms inherent to such 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.
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
provide for revolving credit facilities ("Revolver") for total direct
borrowings up to $65 million, including the issuance of letters of credit.
The Revolver provides for advances at varying percentages of eligible
inventory and trade receivables. During 1995, an amendment to the Agreements
was obtained whereby the Company's borrowing ability was temporarily increased
(the "overadvance") $5 million in excess of the amount calculated based on the
collateral, not to exceed $75 million. Starting on April 30, 1996, available
borrowings under the overadvance decrease by $750,000 per week until the
overadvance is eliminated. The line increase expires on June 30, 1996,
however the Company has requested that the line limit be permanently increased
to $75 million. The Agreements provide for interest at the reference rate as
defined (which approximates the national prime rate) plus 1%, or the
Eurodollar rate plus 3.375%. At March 31, 1996 the effective interest rate
was 9.25%. The initial term of the Agreements is through December 31, 1997,
and is renewable thereafter for successive thirteen month terms. The Lender
or the Company may terminate the Agreements at the end of the initial term or
at the end of any renewal term without penalty, except that the Company may
terminate the Agreements after the second anniversary of the Agreements
without penalty. At March 31, 1996, borrowings under the Revolver exceeded
the availability based on eligible collateral by $1.3 million, not including
the overadvance discussed above. Borrowings under the Revolver outstanding at
March 31, 1996, were $64 million. The Agreements require the Company to
maintain certain financial ratios and contain other financial covenants,
including tangible net worth requirements and capital expenditure limitations.
In November 1995 the Company renegotiated reductions in the tangible net worth
covenants for the period December 31, 1995 through December 31, 1997 and
simultaneous therewith agreed to an increase in the interest rate it pays the
Lender of one-half percent (.5%). The tangible net worth covenants were reset
to $78 million at December 31, 1995 escalating quarterly to $84 million at
December 31, 1997. At March 31, 1996, the Company is in compliance with all
financial covenents under the Agreements, except for the tangible net worth
covenant. A waiver of this covenant has been obtained from the lender. The
annual interest on the outstanding debt under the Revolver at March 31, 1996
at the rate then in effect would be approximately $5.9 million.
In addition to the Agreements discussed above, the Company has the
following term loans in place:
(1) The Company's wholly-owned subsidiaries, El Dorado Chemical Company and
Slurry Explosive Corporation (collectively "Chemical"), which
substantially comprise the Company's Chemical Business, are parties to a
loan agreement ("Loan Agreement") with two institutional lenders
("Lenders"). This Loan Agreement, as amended, provides for a seven year
term loan of $28.5 million ("Term Loan"). The balance of the Term Loan
at March 31, 1996 was $10.7 million. Annual principal payments on the
Term Loan are $5.1 million in 1996 and a final payment of $5.6 million
on March 31, 1997. The Loan Agreement also provides for a revolving
credit facility which provides for a maximum available credit line of
approximately $3.7 million at March 31, 1996. The availability under
this facility reduces by $1.8 million in 1996 with the remainder due in
March 1997. Annual interest at the agreed to interest rates, if
calculated on the aggregate $14.4 million outstanding balance at March
31, 1996, would be approximately $1.7 million. The Term Loan is secured
by substantially all of the assets of Chemical not otherwise pledged
under the credit facility previously discussed and capital stock of
Chemical. The Loan Agreement requires Chemical to maintain certain
financial ratios and contains other financial covenants, including
tangible net worth requirements and capital expenditures limitations.
As of the date of this report, Chemical is in compliance with all
financial covenants. Under the terms of the Loan Agreement, Chemical
cannot transfer funds to the Company in the form of cash dividends or
other advances, except for (i) the amount of taxes that Chemical would
be required to pay if it was not consolidated with the Company; and (ii)
an amount equal to fifty percent (50%) of Chemical's cumulative adjusted
net income as long as Chemical's Total Capitalization Ratio, as defined,
is .65:1 or below.
(2) The Company s wholly-owned subsidiary, DSN Corporation ("DSN") is a
party to several loan agreements with a financing company (the
"Financing Company") for three (3) projects which DSN substantially
completed during 1995. These loan agreements are for a $16.5 million
term loan (the "DSN Permanent Loan"), which was converted on June 1,
1995 from the original construction loan, and was used to construct,
equip, re-erect, and refurbish a concentrated nitric acid plant (the
"DSN Plant") 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 March 31, 1996, DSN had
outstanding borrowings of $15.3 million under the DSN Permanent Loan,
$1.0 million under the Mixed Acid Loan, and $1.1 million under the
Railcar Loan. The loans have repayment schedules of eighty-four (84)
consecutive monthly installments of principle and interest. The
interest rates on the loans range from 8.24% to 8.86% and are fixed
rates based on the United States Treasury Security rate at the time of
executing the note plus a specified percentage. Annual interest, for
the three notes as a whole, at the agreed to interest rates would
approximate $1.5 million. The loans are secured by the various DSN and
Mixed Acid Plants property and equipment, and all railcars purchased
under the railcar loan. The loan agreement requires the Company to
maintain certain financial ratios, including tangible net worth
requirements. As of the date of this report, the Company is in
compliance with all financial covenants or if not in compliance, has
obtained appropriate waivers from the Financing Company.
(3) A subsidiary of the Company ("Prime") entered into a loan agreement
("Agreement"), effective as of May 4, 1995, with Bank IV Oklahoma, N.A.
("Bank"). Pursuant to the Agreement, the Bank loaned $9 million to
Prime, evidenced by a Promissory Note ("Note"). The Note bears interest
per annum at a rate equal to one percent (1%) above the prime rate in
effect from day to day as published in the Wall Street Journal. The
outstanding principal balance of the Note is payable in sixty (60)
monthly payments of principal and interest commencing on May 31, 1995.
Payment of the Note is secured by a first and priority lien and security
interest in and to Prime's right, title, and interest in the loan
receivable relating to the real property and office building known as
the Bank IV Tower located in Oklahoma City, Oklahoma (the "Tower"), the
Management Agreement relating to the Tower, and the Option to Purchase
Agreement covering the real property on which the Tower is located.
Future cash requirements include working capital requirements for
anticipated sales increases in all Businesses, and funding for future capital
expenditures, primarily in the Chemical Business and the Environmental Control
Business. Funding for the higher accounts receivable resulting from
anticipated sales increases are expected to be provided by the revolving
credit facilities discussed elsewhere in this report. Inventory requirements
for the higher anticipated sales activity should be met by scheduled
reductions in the inventories of the Automotive Products Business, which
increased its inventories in 1995 beyond required levels. In 1996, the
Company has planned capital expenditures of approximately $6.0 million,
primarily in the Chemical and Environmental Control Businesses.
Management believes that cash flows from operations, the Company's
revolving credit facilities, and other sources will be adequate to meet its
presently anticipated capital expenditure, working capital, debt service and
dividend requirements. This is a forward-looking statement that involves a
number of risks and uncertainties that could cause actual results to differ
materially, such as, a material reduction in revenues, continuing to incur
losses, inability to collect a material amount of receivables, required
capital expenditures in excess of those presently anticipated, or other future
events, not presently predictable, which individually or in the aggregate
could impair the Company's ability to obtain funds to meet its requirements.
The Company currently has no material commitment for capital expenditures,
however, see discussion under "Recent Developments" of this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding negotiations to build two new plants; one to produce nitric acid and
another to produce high density ammonium nitrate.
FOREIGN SUBSIDIARY FINANCING
On March 7, 1995 the Company guaranteed a revolving credit working
capital facility (the "Facility") between its wholly-owned Australian
subsidiary Total Energy Systems, Ltd. ("TES") and Bank of New Zealand. The
Facility allows for borrowings up to an aggregate of approximately U.S. $3.7
million based on specific percentages of qualified eligible assets (U.S. $1.8
million borrowed at March 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
Base Lending Rate plus 0.5% (approximately 11.5% at March 31, 1996). The
Facility is subject to renewal at the discretion of Bank of New Zealand based
upon annual review. The next annual review is due on March 31, 1997. The
Facility requires TES to maintain certain financial covenants. As of the date
of this report, TES was in compliance with all required covenants. The
outstanding borrowing under the facility at March 31, 1996 has been classified
as due within one year in the accompanying condensed consolidated financial
statements.
JOINT VENTURES AND OPTIONS TO PURCHASE
During 1994 the Company, through a subsidiary, loaned $2.1 million to a
French manufacturer of HVAC equipment whose product line is compatible with
that of the Company's Environmental Control Business in the U.S.A. Under the
loan agreement, the Company has the option to exchange its rights under the
loan for 100% of the borrower's outstanding common stock. The Company
obtained a security interest in the stock of the french manufacturer to secure
its $2.1 million loan. During fiscal year 1995 and January, 1996 the Company
advanced an additional $800,000 to the French manufacturer bringing the total
of the loan to $2.9 million. At this time the decision has not been made to
exercise such option and the $2.9 million loan, less a $1.9 million valuation
reserve, is carried on the books as a note receivable in other assets.
During the second quarter of 1995, the Company executed a stock option
agreement to acquire eighty percent (80%) of the stock of a specialty sales
organization to enhance the marketing of the Company's air conditioning
products. The stock option has a four (4) year term, and a total option
granting price of $1.0 million payable in installments including an option fee
of $500,000 paid upon signing of the option agreement and annual $100,000
payments for yearly extensions of the stock option thereafter for up to three
(3) years. Upon exercise of the stock option by the Company, or upon the
occurrence of certain performance criteria which would give the grantors of
the stock option the right to accelerate the date on which the Company must
elect whether to exercise, the Company shall pay certain cash and issue
promissory notes for the balance of the exercise price of the subject shares.
The total exercise price of the subject shares is $4.0 million, less the
amounts paid for the granting and any extensions of the stock option. The
Company presently expects that it will eventually exercise the stock option.
A subsidiary of the Company invested approximately $2.8 million to
purchase a fifty percent (50%) limited partnership interest in an energy
conservation joint venture (the "Project"). As discussed above, the Company
has an option to acquire 80% of the general partner and the owner of the other
50% of the Project. The Project has been awarded a contract to retrofit
residential housing units at a U.S. Army base. The contract calls for
installation of energy-efficient equipment (including air conditioning and
heating equipment), which will reduce utility consumption. For the
installation and management, the Project will receive an average of seventy-
seven percent (77%) of all energy and maintenance savings during the twenty
(20) year contract term. The Project estimates that the cost to retrofit the
residential housing units at the U.S. Army base will be approximately $18.8
million. The Project has received a loan from a lender to finance up to
approximately $14 million of the cost of the Project. The Company is not
guaranteeing any of the lending obligations of the Project. The Company has
guaranteed the bonding company's exposure under the payment and performance
bonds on the Project, which is approximately $17.9 million.
DEBT GUARANTEE
As disclosed in Note 4 of the Notes to Condensed Consolidated Financial
Statements a subsidiary of the Company has guaranteed approximately $2.6
million of indebtedness of a start up aviation company in exchange for an
ownership interest. Both notes are current as to principal and interest.
The Company has advanced approximately $150,000 to the aviation company while
they seek additional capital. The Company has also purchased additional
shares of stock in the aviation company during the first quarter of 1996 for
approximately $165,000. This purchase increased the Company's ownership
interest in the aviation company to approximately 42%. At this time the
Company has not made a decision whether additional funds will be advanced.
Any additional advances will depend on the evaluation of the prospects of the
aviation company when it becomes evident that additional advances are
required.
The aviation company is working toward certification with the Federal
Aviation Authority by mid 1997. In the meantime the aviation Company has
limited cash and is seeking an equity investor to fund the completion of the
certification process and provide additional working capital of approximately
$7.0 million in exchange for an ownership interest of the company. If the
aviation company is unable to obtain such additional equity, then the Company
will probably be required to perform under its guarantee.
RECENT DEVELOPMENTS
The Chemical Business has entered into detailed negotiations with Bayer
Corporation ("Bayer") for the Chemical Business to build, own and operate a
nitric acid plant located on property owned by Bayer to supply nitric acid on
a long-term basis to a complex that Bayer is to construct in Baytown, Texas.
The transaction with Bayer is subject to finalization of a definitive
agreement. If the definitive agreement is finalized, the Company expects that
the plant can be constructed and become operational within 24-30 months from
the completion of such definitive agreement.
The Chemical Business has also entered into a letter of intent with
Farmland Industries, Inc. ("Farmland") to negotiate a long-term purchase and
sales agreement to supply a major portion of Farmland's annual requirements
for high density ammonium nitrate. If the negotiations are successful, the
Chemical Business will construct a new dedicated nitric acid plant at its El
Dorado, Arkansas complex, of sufficient size, to provide the additional nitric
acid needed to produce Farmland's requirements for ammonium nitrate. It is
presently anticipated that the new nitric acid plant should be ready for
production in 1998. The letter of intent with Farmland is subject to numerous
conditions, including the negotiation and execution of definitive agreements.
If the contracts with Bayer and/or Farmland are consummated, the Company
intends to obtain project financing to fund the construction of these
projects.
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, 1996, the Company had available NOL carryovers of
approximately $43 million, based on its federal income tax returns as filed
with the Internal Revenue Service for taxable years through 1994, and on the
Company's estimates for 1995 and 1996. These NOL carryovers will expire
beginning in the year 1999.
The first sentence in the preceding paragraph contains 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. Further, the
ability to utilize the NOL and affect the cash flow further defends on the
amount of taxes applicable to the income generated by the Company.
CONTINGENCIES
As discussed in Note 4 of Notes to 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. Management does not anticipate that these claims will result in
material adverse impacts on its liquidity. This is a forward-looking
statement that involves a number of risks and uncertainties that could cause
actual results to differ materially, such as, costs of remediation and
compliance exceeding those presently anticipated, additional sources of
contamination being discovered, the federal or state governmental agencies
having jurisdiction over these matters requiring substantially more equipment
to reduce air emissions than presently anticipated or ordering the Company's
Chemical Business to curtail or eliminate certain production activities at its
El Dorado, Arkansas site not anticipated, the Chemical Business' Environmental
Impairment Insurance policy ("EIL Policy") not providing coverage to the
Company and the Chemical Business for any material claims made by claimants
referred to in Note 4 or if a court finds the Company and/or the Chemical
Business liable for damages to claimants referenced in Note 4 for damages for
a material amount in excess of limits of coverage of the EIL Policy.
ERNST & YOUNG 2600 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, 1996, and the related
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 1996 and 1995. 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, 1995, and the related consolidated statements of operations ,
and stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 26, 1996, 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, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
April 19, 1996 /s/ ERNST & YOUNG LLP
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no additional material legal proceedings pending against the
Company and/or its subsidiaries not previously reported by the Company in Item
3 of its Form 10-K for the fiscal period ended December 31, 1995, which Item 3
is incorporated by reference herein.
During April, 1996, the Company was advised that the Chemical Business'
El Dorado, Arkansas, facility was no longer listed in the Environmental
Protection Agency's ("EPA") data-based tracking system as a CERCLIS site.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits. The Company has included the following exhibits in this
report:
11.1 Statement Re: Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule
(B) Reports of Form 8-K. The Company did not file any reports on Form
8-K during the quarter ended March 31, 1996.
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 14th day of May, 1996
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
--------------------------------
Tony M. Shelby,
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
--------------------------------
Jim D. Jones
Vice President, Controller and
Treasurer (Principal Accounting Officer)
LSB INDUSTRIES, INC. Exhibit 11.1
Page 1 of 2
PRIMARY EARNINGS PER SHARE COMPUTATION
Quarter ended March 31,
1996 1995
Shares for primary earnings per share: -------- ---------
Weighted average shares:
Common shares outstanding from beginning
of period 12,911,447 13,060,566
Common shares issued on conversion
of redeemable preferred stock;
calculated on weighted average
basis 270 180
Common shares issued upon exercise
of employee or director stock
options; calculated on weighted
average basis - -
Purchases of treasury stock;
calculated on weighted average
basis (330) (13,950)
___________ __________
12,911,387 13,046,796
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) - 823,140
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on average market price for
the period) - (317,680)
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above
on actual conversion - -
___________ __________
- 505,460
___________ __________
12,911,387 13,552,256
=========== ==========
Earnings for primary earnings per share:
Net earnings (loss) $ (531,218) $1,448,092
Dividends on cumulative preferred stocks (75,520) (75,880)
Dividends on convertible, exchangeable
Class C preferred stock (6.5% annually) (743,438) (743,437)
___________ __________
Earnings (loss) applicable to common stock $(1,350,176) $ 628,775
=========== ==========
Earnings (loss) per share $(.10) $.05
===== ====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 2 of 2
FULLY DILUTED EARNINGS PER SHARE COMPUTATION
Quarter ended March 31,
1996 1995
-------- --------
Shares for fully diluted earnings per
share:
Weighted average shares outstanding
for primary earnings per share 12,911,387 13,046,796
Shares issuable upon exercise of
options and warrants - 823,140
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on ending market price
for the quarter if greater than
the average) - (300,737)
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above on
actual conversion -
Common shares issuable upon conversion
of convertible note payable - 4,000
Common shares issuable upon conversion
of convertible preferred stock, if
dilutive, from date of issue:
Series B - -
___________ __________
12,911,387 13,573,199
Earnings for fully diluted earnings
per share:
Net earnings (loss) $ (531,218) $1,448,092
Dividends on cumulative convertible preferred
stocks:
Series B (75,520) (75,880)
Series 2 Class C (743,438) (743,437)
___________ __________
Earnings (loss) applicable to common stock $(1,350,176 $ 628,955
=========== ==========
Earnings (loss) per share $(.10) $.05
===== ====
Exhibit 15.1
ERNST & YOUNG LLP 100 North Broadway Phone: 405 278 6800
Oklahoma City, OK 73102 Fax: 405 278 6823
Fax: 405 278 6834
April 19, 1996
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) and the Registration Statement (Form S-3 No. 33-69800)
of LSB Industries, Inc. and in the related Prospectus of our report dated April
19, 1996 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, 1996.
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,
/s/ Ernst & Young LLP
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