FORM 10-Q/A
Amendment No. 1
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 September 30, 1996
----------------------------
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
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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
-------------------------------------------------------
Address of principal executive offices (Zip Code)
(405) 235-4546
--------------------------------------------------
Registrant's telephone number, including area code
None
-----------------------------------------------------
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 November 8, 1996 is 12,971,356 shares excluding 1,907,120 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 September 30, 1996, the condensed consolidated statements of operations for
the nine month and three month periods ended September 30, 1996 and 1995 and
the consolidated statements of cash flows for the nine month periods ended
September 30, 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 nine months and three months ended
September 30, 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 September 30, 1996 is unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1996 1995
------------- ------------
Current assets:
Cash and cash equivalents $ 4,071 $ 1,420
Trade accounts receivable, net of allowance 57,388 43,975
Inventories:
Finished goods 35,882 38,796
Work in process 7,868 12,247
Raw materials 19,695 15,222
-------- --------
Total inventory 63,445 66,265
Supplies and prepaid items 7,130 5,684
-------- --------
Total current assets 132,034 117,344
Property, plant and equipment, net 94,110 86,270
Investments and other assets:
Loans receivable, secured by real estate 15,247 15,657
Other assets, net of allowance 17,604 18,905
-------- --------
$ 258,995 $ 238,176
======== ========
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at September 30, 1996 is unaudited)
(Dollars in thousands)
LIABILITIES, PREFERRED AND COMMON STOCKS September 30, December 31,
AND OTHER STOCKHOLDERS' EQUITY 1996 1995
------------ -----------
Current liabilities:
Drafts payable $ 752 $ 424
Accounts payable 41,067 28,508
Accrued liabilities 10,295 9,239
Current portion of long-term debt 17,442 14,925
-------- --------
Total current liabilities 69,556 53,096
Long-term debt 111,906 103,355
Contingencies (Note 4)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,539 shares
issued and outstanding (1,566 in 1995) 146 149
Non-redeemable preferred stock, common stock and
other 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 and outstanding 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,868,476 shares
issued (14,757,416 in 1995) 1,487 1,476
Capital in excess of par value 37,802 37,567
Retained earnings 956 5,148
-------- --------
88,245 92,191
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 1,907,120 shares
(1,845,969 in 1995) 10,658 10,415
-------- --------
Total non-redeemable preferred stock, common
stock and other stockholders' equity 77,387 81,576
-------- --------
$ 258,995 $ 238,176
======== ========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
-------- --------
Revenues:
Net sales $ 235,298 $ 208,038
Other income 3,909 3,350
-------- -------
239,207 211,388
Costs and expenses:
Cost of sales 189,729 162,032
Selling, general and administrative 41,587 40,554
Interest 9,081 7,540
-------- --------
240,397 210,126
-------- --------
Income (loss) before provision for income taxes (1,190) 1,262
Provision for income taxes 187 112
-------- --------
Net income (loss) $ (1,377) $ 1,150
======== ========
Net loss applicable to
common stock (Note 2) $ (3,803) $ (1,276)
Average common shares outstanding (Note 2): ======== ========
Primary 13,056,160 13,325,587
Fully diluted 13,279,716 13,338,356
Loss per common share (Note 2):
Primary $ (.29) $ (.10)
======== ========
Fully diluted $ (.29) $ (.10)
======== ========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
-------- ----------
Revenues:
Net sales $ 75,923 $ 63,878
Other income 918 1,647
--------- ---------
76,841 65,525
Costs and expenses:
Cost of sales 62,394 50,902
Selling, general and administrative 14,500 14,003
Interest 3,117 2,520
--------- ---------
80,011 67,425
Loss before provision (credit)
for income taxes (3,170) (1,900)
Provision (credit) for income taxes 48 (99)
--------- ---------
Net loss $ (3,218) $ (1,801)
========= =========
Net loss applicable to
common stock (Note 2) $ (4,021) $ (2,604)
========= =========
Average common shares outstanding (Note 2):
Primary 12,908,541 12,940,607
Fully diluted 12,908,541 12,940,607
Loss per common share (Note 2):
Primary $ (.31) $ (.20)
========= =========
Fully diluted $ (.31) $ (.20)
========= =========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1996 and 1995
(Dollars in thousands)
1996 1995
___________ ___________
Cash flows from operations:
Net income (loss) $ (1,377) $ 1,150
Adjustments to reconcile net income
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 6,908 5,534
Other 930 751
Provision for possible losses:
Trade accounts receivable 107 687
Other 1,270
Gain on sale of assets (846) (165)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (13,519) (11,137)
Inventories 2,820 (3,610)
Supplies and prepaid items (1,446) 73
Accounts payable 12,559 345
Accrued liabilities 955 1,740
--------- ---------
Net cash provided (used) by
continuing operations 8,361 (4,632)
Cash flows from investing activities:
Capital expenditures (14,411) (15,081)
Proceeds from sale of investment securities 1,444 -
Principal payments on notes receivable 410 1,482
Proceeds from sales of equipment and
real estate properties 445 1,006
Increase in other assets (1,842) (696)
--------- ---------
Net cash used by investing activities (13,954) (13,289)
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
Nine Months Ended September 30, 1996 and 1995
(Dollars in thousands)
1996 1995
_________ _________
Cash flows from financing activities:
Payments on long-term and other debt $ (11,818) $ (9,966)
Long-term and other borrowings 19,647 18,435
Net change in revolving debt 2,901 12,874
Net change in drafts payable 328 (618)
Dividends paid (Note 3):
Preferred stocks (2,426) (2,425)
Common stock (389) (386)
Purchases of treasury stock (Note 3) (148) (1,384)
Net proceeds from issuance of
common stock (Note 3) 149 210
__________ _________
Net cash provided by financing
activities 8,244 16,740
__________ _________
Net increase (decrease) in cash and cash
equivalents 2,651 (1,181)
Cash and cash equivalents at beginning of
period 1,420 2,610
--------- ---------
Cash and cash equivalents at end of period $ 4,071 $ 1,429
========= =========
(See accompanying notes)
Note 1: At September 30, 1996, the Company had net operating loss
carryforwards for tax purposes of approximately $43 million. Such amounts
expire beginning in 2000. The Company also has investment tax credit
carryforwards of approximately $568,000, which expire beginning in 1996.
The Company s provision for income taxes for the nine months ended September
30, 1996 of $187,000 is for current state income taxes.
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 (loss) 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 nine months ended September 30, 1996:
Common Stock Non- Capital Treasury
_______________ redeemable in excess Treasury Stock
Par Preferred of par Retained Stock Prefer-
Shares Value Stock Value Earnings Common red Total
------ ----- --------- -------- -------- -------- ------- -----
(In thousands)
Balance at December 31, 1995 14,757 $1,476 $48,000 $37,567 $ 5,148 $(10,415) $(200) $81,576
Net loss (1,377) (1,377)
Conversion of 26.5 shares of
redeemable preferred stock
to common stock 1 2 2
Exercise of stock options 110 11 233 (95) 149
Dividends declared:
Common Stock ($.03 per share) (389) (389)
Series B 12% preferred
stock ($9.00 per share) (180) (180)
Redeemable preferred
stock ($10.00 per share) (16) (16)
Series 2 preferred
stock ($2.44 per share) (2,230) (2,230)
Purchases of treasury stock (148) (148)
(1)------ ------ ------- ------- ------ -------- ----- -------
Balance at September 30, 1996 14,868 $1,487 $48,000 $37,802 $ 956 $(10,658) $(200) $77,387
====== ====== ======= ======= ====== ======== ===== =======
(1)
Includes 1,907,120 shares of the Company's Common Stock held in treasury.
Excluding the 1,907,120 shares held in treasury, the outstanding shares
of the Company's Common Stock at September 30, 1996 were 12,961,356.
Note 4: Following is a summary of certain legal actions and/or claims
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.
B. During 1995 and the first half of 1996, the Company's Chemical Business
entered into two Consent Administrative Agreements ("Agreements") with
the State of Arkansas (the "State") to resolve certain environmental
compliance and certain other issues associated with the Chemical
Business' nitric acid concentrators at its El Dorado, Arkansas facility
("Facility"). The Company's Chemical Business has completed its
obligations under these Agreements and has installed additional
pollution control equipment to reduce opacity and constituent emissions
which impact opacity.
On June 10, 1996, the Company's Chemical Business and the State further
agreed to an amendment ("Amendment") to one of the Agreements to resolve
certain compliance issues associated with the older concentrated nitric
acid units and various related compliance issues at the Facility. As
drafted, the Amendment provides for more detailed reporting to the State
of environmental activities of the Company's Chemical Business, specific
engineering activities to be undertaken at the Facility, and
continuation of operation of the older concentrated nitric acid units at
the Facility. Stipulated penalties are also set forth in the Amendment.
By report dated October 16, 1996, the State of Arkansas determined that
the Company's Chemical Business fulfilled all activities required under
the Amendment.
C. The Company's Chemical Business is involved in certain litigation
involving certain environmental and anti-trust matters. See Part II,
Item 1, of this report for a discussion as to such litigation and as to
certain environmental impairment insurance coverage that the Company's
Chemical Business has which may relate to certain of these items of
litigation.
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 adverse 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 Guarantee
The Company has guaranteed approximately $2.6 million of indebtedness of an
aviation company in development stage in exchange for a minority ownership
interest, to which no value has been assigned as of September 30, 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
$400,000 in 1996 ($590,000 in the year ended December 31, 1995; $375,000 of
which was recorded subsequent to September 30, 1995) related to the debt
guarantee. See the "Debt Guarantee" discussion in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of this report
for further discussion concerning the 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. The
Company is not guaranteeing any of the lending obligations of the Project, but
has pledged to the lender of the Project, on a non-recourse basis, its equity
interest in the Project. As of September 30, 1996, the Project was complete.
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 September 30, 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 primary
business units, the Chemical Business and the Environmental Control Business
and the profitable portions of the Company's Automotive and Industrial
Products Businesses.
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
Businesses which are perceived by management to have strategic advantages and
better historical returns on invested capital. The Company continues to work
toward these goals, but as of the date of this report, no formal plans have
been adopted regarding the Automotive Products Business, except the Company
has installed a new management team with the assignment of reducing the
investment in the inventories of the Automotive Products Business. The
Company has adopted a strategy of reducing 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 operations in different industry segments
for the nine months and three months ended September 30, 1996 and 1995 is
detailed below.
Nine Months Three Months
1996 1995 1996 1995
(In thousands)
(Unaudited)
Sales:
Chemical $129,132 $106,569 $ 39,014 $ 32,631
Environmental Control 66,368 64,696 24,856 19,499
Automotive Products 28,849 25,167 8,111 8,726
Industrial Products 10,949 11,606 3,942 3,022
_______ _______ _______ _______
$235,298 $208,038 $ 75,923 $ 63,878
Gross profit:
Chemical $ 21,318 $ 20,571 $ 5,202 $ 6,392
Environmental Control 16,809 17,670 6,554 4,556
Automotive Products 5,029 5,018 1,024 1,352
Industrial Products 2,413 2,747 749 676
_______ _______ _______ _______
$ 45,569 $ 46,006 $ 13,529 $ 12,976
Operating profit (loss):
Chemical $ 11,421 $ 10,869 $ 1,596 $ 3,251
Environmental Control 4,259 6,046 1,958 650
Automotive Products (1,998) (1,960) (1,308) (1,142)
Industrial Products (1,668) (2,015) (623) (953)
_______ _______ _______ _______
12,014 12,940 1,623 1,806
General corporate expenses (4,123) (4,138) (1,676) (1,186)
Interest expense (9,081) (7,540) (3,117) (2,520)
_______ _______ _______ _______
Income (loss)
before provision for
income taxes $ (1,190) $ 1,262 $ (3,170) $ (1,900)
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 for the first nine months (as defined) declined from $12.9 million in
1995 to $12.0 million in 1996, while sales increased approximately
13%. The decline in operating profit, coupled with an increase in interest
expense, resulted in decreased income before income taxes for 1996 of
$2.5 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.
RESULTS OF OPERATIONS
Nine months ended September 30, 1996 vs. Nine months ended September 30, 1995.
Revenues
--------
Total revenues for the nine months ended September 30, 1996 and 1995
were $239.2 million and $211.4 million, respectively (an increase of $27.8
million). Sales increased $27.3 million.
Net Sales
---------
Consolidated net sales included in total revenues for the nine months
ended September 30, 1996 were $235.3 million, compared to $208.0 million for
the first nine months of 1995, an increase of $27.3 million. This increase in
sales resulted principally from: (i) increased sales in the Chemical Business
of $22.6 million, primarily due to higher sales of agricultural products and
increased business volume of $11.4 million at Total Energy Systems, ("TES")
the Company's Australian subsidiary, (ii) increased sales in the Automotive
Products Business of $3.7 million due primarily to new product sales
associated with the acquisition on June 1, 1995 of New Alloy Company, a
manufacturer and distributor of automotive U-joint products, and (iii)
increased sales in the Environmental Control Business of $1.7 million
primarily due to increased fan coil sales, offset by (iv) decreased machine
tool sales in the Industrial Products Business of $.7 million.
Gross Profit
------------
Gross profit was 19.4% for the first nine months of 1996, compared to
22.1% for the first nine 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 Heat Pump Division of the Environmental Control
Business, (ii) higher production costs in the Chemical Business due to
unabsorbed overhead costs resulting from excessive downtime at the Chemical
Business' El Dorado, Arkansas plant complex related to modifications made to
install air emissions abatement equipment and resolve problems associated with
mechanical failures at the new direct strong nitric acid plant, and (iii)
less favorable product mix in the Automotive Products Business.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 17.7% in the nine months ended September 30, 1996 and 19.5% in
the first nine months of 1995. As sales increased, SG&A expenses also
increased, but not proportionately.
Interest Expense
----------------
Interest expense was approximately $9.1 million during the nine months
ended September 30, 1996 compared to approximately $8.4 million during the
nine months ended September 30, 1995 before capitalization of approximately
$.9 million in 1995 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 Before Taxes
-------------------
The Company had a loss before income taxes of $1.2 million in the first
nine months of 1996 compared to income of $1.3 million in the nine months
ended September 30, 1995. The decreased profitability of $2.5 million was
primarily due to the decline in gross profit and increase in 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 provision for income taxes
for the nine months ended September 30, 1996 is for current state income taxes
and the Company's provision for income taxes for the nine months ended
September 30, 1995 is for current state income taxes and federal alternative
minimum taxes.
Three months ended September 30, 1996 vs. Three months ended September 30,
1995.
Revenues
--------
Total revenues for the three months ended September 30, 1996 and 1995
were $76.8 million and $65.5 million, respectively (an increase of $11.3
million). Sales increased $12.0 million.
Net Sales
---------
Consolidated net sales included in total revenues for the three months
ended September 30, 1996 were $75.9 million, compared to $63.9 million for the
third quarter of 1995, an increase of $12.0 million. This increase in sales
resulted principally from: (i) increased sales in the Chemical Business of
$6.4 million due to improved demand for the products of this Business and
increased business volume of $3.5 million at TES, (ii) increased sales in the
Environmental Control Business of $5.3 million primarily due to increased
product lines and improved market conditions for these products, and (iii)
increased sales in the Industrial Products Business of $.9 million primarily
due to increased sales of machine tools, offset by (iv) decreased sales in the
Automotive Products Business of $.6 million due to lower sales of U-joint
products.
Gross Profit
------------
Gross profit was 17.8% for the three months ended September 30, 1996,
compared to 20.3% for the three months ended September 30, 1995. The decline
in the gross profit percentage was due primarily to (i) higher production
costs in the Chemical Business due to unabsorbed overhead costs resulting from
excessive downtime at the Business' El Dorado, Arkansas plant related to
modifications made to install air emissions abatement equipment and resolve
problems associated with mechanical failures at the new direct strong nitric
acid plant, and (ii) less favorable product mix in the Automotive and
Industrial Products Businesses, offset by (iii) improved absorption of costs
in the Environmental Control Business due to higher production volumes.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a percent of
net sales were 19.1% in the three months ended September 30, 1996 and 21.9% in
the third quarter of 1995. As sales increased, SG&A expenses also increased,
but not proportionately.
Interest Expense
----------------
Interest expense was approximately $3.1 million during the three months
ended September 30, 1996 compared to approximately $2.8 million during the
three months ended September 30, 1995, before capitalization of approximately
$.3 million in 1995 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 before Taxes
-------------------
The Company had a loss before income taxes of $3.2 million in the third
quarter of 1996 compared to a loss of $1.9 million in the three months ended
September 30, 1995. The increased loss of $1.3 million was primarily due to
higher gross profit that was more than offset by increases in SG&A and
interest expense as previously discussed. The remaining difference is due to
a decrease in other income.
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 provision for
income taxes for the three months ended September 30, 1996 is for current
state income taxes and the Company's credit for income taxes for the three
months ended September 30, 1995 relates to current state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flow From Operations
Net cash provided by operating activities in the first nine months of
1996, after adjustment for net non-cash expenses of $9.8 million, was $8.4
million. Accounts receivable increased $13.5 million from December 31, 1995
to September 30, 1996 primarily due to seasonal sales increases in the
Chemical Business and increased sales by TES, in addition to sales increases
in the Environmental Control and Industrial Products Businesses over the
fourth quarter of 1995. Accounts payable and accrued liabilities increased
$13.6 million due primarily to higher business volumes in the Chemical and
Environmental Control Businesses, as compared to the fourth quarter of 1995.
Other factors contributing to the increase in accounts payable include
amounts associated with modifications made at the Chemical Business' El
Dorado, Arkansas plant and timing of payments for inventory purchases in the
Chemical Business and increased accounts payable of TES due to increased
business activity from higher sales and increased inventories, in addition to
increases in the Environmental Control Business due to increased inventories.
Supplies and prepaid items increased by $1.4 million, primarily due to higher
prepaid insurance costs and increased manufacturing supplies.
Cash Flow From Investing And Financing Activities
For the nine months ended September 30, 1996, cash flow from investing
and financing activities used approximately $5.7 million cash. Those
investment and financing activities providing cash included approximately $1.4
million in proceeds from the sale of certain investment securities, proceeds
from long term borrowings of $20 million, and $2.9 million in net borrowings
against the Company's working capital revolver.
Those investment and financing activities requiring cash included:
capital expenditures, $14.4 million; payments on long-term debt, $11.8
million; and, payment of preferred and common stock dividends, $2.8 million.
Capital expenditures included expenditures of the Chemical Business related to
the construction of a concentrated nitric acid plant in El Dorado, Arkansas
which began in 1994, and installation of certain air emissions abatement
equipment on other plants at the Chemical Business' El Dorado, Arkansas
facility. The balance of capital expenditures were for normal additions in
the Chemical, Environmental Control, and Automotive Products Businesses.
During the first nine months of 1996, the Company declared and paid the
following aggregate dividends: (1) $9.00 per share on each of the outstanding
shares of its Series B 12% Cumulative Convertible Preferred Stock; (2) $2.44
per share on each outstanding share of its $3.25 Convertible Exchangeable
Class C Preferred Stock, Series 2; (3) $10.00 per share on each outstanding
share of its Convertible Noncumulative Preferred Stock; and (4) $.03 per share
on its outstanding shares of Common Stock. A total of $2.8 million have been
paid in dividends during the first nine months of 1996, with $2.4 million paid
on its outstanding preferred stock and $.4 million paid on its outstanding
common stock. Continuation of payment of dividends on the Company's common
stocks is subject to the discretion of the Board of Directors. The Company
expects to continue payment of 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 (As
discussed below, in August 1996 the maximum permitted borrowing under the
Revolver was reduced to $63 million). The Revolver provides for advances at
varying percentages of eligible inventory and trade receivables. The
Agreements provide for interest at the reference rate as defined (which
approximates the national prime rate) plus 1%, or the Eurodollar rate plus
2.875%. At September 30, 1996 the effective interest rate was 8.85%. 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.
Borrowings under the Revolver outstanding at September 30, 1996, were $60.3
million. At September 30, 1996, additional borrowings available under the
Revolver based on eligible collateral (as limited by the maximum permitted
borrowing of $63 million) was $2.6 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 October 1996 the Company renegotiated reductions in the
tangible net worth and debt ratio covenants for the period September 30, 1996
through December 31, 1997. The tangible net worth covenants were reset to
$66.0 million at September 30, 1996 escalating to $68.3 million at December
31, 1997. As of the date of this report, the Company is in compliance with
all financial covenants under the Agreements as amended subsequent to
September 30, 1996. The annual interest on the outstanding debt under the
Revolver at September 30, 1996 at the rate then in effect would be
approximately $5.3 million. In July 1996, the Company also negotiated an
additional term borrowing of $10 million with the same lender ("Bridge Loan"),
which bore interest at the reference rate as defined plus 3%. In August 1996
the Company repaid the Bridge Loan with the proceeds from the "initial
advance" of $12 million pursuant to a secured chemical plant asset financing
(the "Financing Agreement").
On August 9, 1996, the Company's wholly-owned subsidiaries, El Dorado
Chemical Company and Slurry Explosive Corporation (collectively "Chemical
Business"), which substantially comprise the Company's Chemical Business,
entered into the Financing Agreement with a leasing subsidiary of a national
bank (the "Bank"), whereby the Bank loaned $12 million to the Chemical
Business and agreed to use its best efforts to arrange other participants to
loan an additional $33 million to the Chemical Business on a long-term basis.
The Financing Agreement requires the Chemical Business to maintain certain
financial ratios and contains other financial covenants including tangible net
worth requirements. Funds borrowed pursuant to the Financing Agreement bear
interest at the three month LIBOR Rate plus 425 basis points adjusted
quarterly (approximately 10% at September 30, 1996). This Financing
Agreement is secured by certain real property and equipment located at the
Business' El Dorado, Arkansas facility not previously secured by other
borrowing agreements. The funding under the Financing Agreement included an
initial advance of $12 million, which the Chemical Business received on August
9, 1996, and a final advance of the remaining $33 million as soon as the Bank
has obtained certain additional participants. Should the Bank be unable to
obtain additional participants, the Chemical Business will have until June 30,
1997 to repay the initial advance without penalty or convert such advance to a
36 month term loan with amortization based on a 57 month schedule. As of the
date of this report, the Company has no assurances that the Bank will be
successful in finding the required additional participants. Proceeds from
funding the remaining $33 million under the Financing Agreement are to be used
to paydown outstanding borrowings under the Revolver discussed above and pay
other obligations. The Company has had discussions with other interested
parties to replace the Financing Agreement in the event the Lender is unable
to obtain additional participants to fund the remaining $33 million.
In addition to the Agreements discussed above, the Company has the
following term loans in place:
(1) The Chemical Business is a party to a loan agreement ("Credit Facility")
with two institutional lenders ("Lenders"). This Credit Facility, as
amended, provides for a seven year term loan of $28.5 million. The
balance of the Credit Facility at September 30, 1996 was $7.5 million,
which is due on March 31, 1997. Annual interest at the agreed to
interest rates, if calculated on the $7.5 million outstanding balance at
September 30, 1996, would be approximately $.9 million. The Credit
Facility is secured by certain of the assets of the Chemical Business
not otherwise pledged under the working capital line of credit and the
Financing Agreement previously discussed and capital stock of the
Chemical Business. The Credit Facility requires the Chemical Business
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, the Chemical
Business is in compliance with all financial covenants. Under the terms
of the loan agreements between the Chemical Business and its lenders,
the Chemical Business cannot transfer funds to the Company in the form
of cash dividends or other advances, except for (i) the amount of taxes
that the Chemical Business would be required to pay if it was not
consolidated with the Company; and (ii) an amount equal to fifty percent
(50%) of the Chemical Business' cumulative adjusted net income as long
as the Chemical Business meets certain financial ratios.
(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 used to construct,
equip, re-erect, and refurbish a concentrated nitric acid plant (the
"DSN Plant") 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 September 30, 1996, DSN had outstanding borrowings of $14.3
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 are fixed and range from
8.24% to 8.86%. Annual interest, for the three notes as a whole, at the
agreed to interest rates would approximate $1.4 million. The loans are
secured by the various DSN and Mixed Acid Plants property and equipment,
and all railcars purchased under the railcar loan. The loan 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 Agreement and Note
were modified in June of 1996 in consideration for the Bank loaning an
additional $4.2 million to Prime. The Note bears interest per annum at
a rate equal to three quarters of one percent .75% above the prime rate
in effect from day to day as published in the Wall Street Journal. The
outstanding principal balance of the Note is payable in sixty (60)
monthly payments of principal and interest commencing on June 30, 1996.
Payment of the Note is secured by a first and priority lien and security
interest in and to Prime's right, title, and interest in the loan
receivable relating to the real property and office building located in
Oklahoma City, Oklahoma (the "Tower"), the Management Agreement relating
to the Tower, and the Option to Purchase Agreement covering the real
property on which the Tower is located.
(4) The Company has guaranteed a revolving credit working capital facility
(the "Facility") between TES and Bank of New Zealand. The Facility
allows for borrowings based on specific percentages of qualified
eligible assets. The Facility was amended on June 25, 1996 to allow for
borrowings up to an aggregate of $7.0 million Australian. This
amendment also requires a reduction of $1.0 million to the amount of
$6.0 million on or before December 31, 1996; then a further reduction of
$1.0 million to the amount of $5.0 million on or before June 30, 1997.
Based on the effective exchange rate at September 30, 1996, the amount
of allowed borrowings under the Facility is approximately U.S. $5.5
million. (approximately U.S. $3.9 million borrowed at September 30,
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 9.3% at September 30, 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 September
30, 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
September 30, 1996 has been classified as due within one year in the
accompanying condensed consolidated financial statements.
As of the date of this report, 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 anticipates capital expenditures of
approximately $15.5 million (of which approximately $14.4 million had been
expended by September 30, 1996), primarily in the Chemical and Environmental
Control Businesses.
As discussed elsewhere in this report in the "Results of Operations",
the Chemical Business has experienced substantial downtime resulting in
unabsorbed overhead costs at its El Dorado, Arkansas facility as a result of
mechanical failures at its new direct strong nitric acid plant. The
unabsorbed overhead costs adversely impacted the Chemical Business' gross
profit and the Company's consolidated income before income taxes for the nine
and three months periods ended September 30, 1996. In addition, cash
expenditures for repairs of the physical damage to the Chemical Business'
equipment were approximately $1.8 million as of the date of this report. The
Company has filed preliminary claims with its insurance carrier under both its
business interruption and property policies aggregating approximately $5.7
million (before considering the Company's aggregate deductible of $500,000 per
occurrence of an insurable loss). The insurance company has confirmed
coverage but, as of this date, has not confirmed the amount that the insurance
company would be willing to pay under this claim. The Company believes that
this claim is one occurrence, while the insurance company has advised the
Company that they believe such may involve more than one occurrence. As of
the date of this report, the insurance company has advanced the Chemical
Business $1.0 million against its claim. Management believes that it will
reach an agreement with the insurance company and settle its claim regarding
this matter by December 31, 1996. This is a forward looking statement, and
the Company may not be able to settle such claims by December 31, 1996 or be
able to ultimately collect any monies in addition to the $1.0 million already
advanced.
Management believes that in addition to cash flows from operations and
the Company's revolving credit facilities it will be necessary for the Company
to complete, by the end of the first quarter of 1997, a substantial portion of
the remaining amounts to be funded under the Financing Agreement discussed
above, or a similar financing, 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, the incurrance of losses, inability to collect a
material amount of receivables, required capital expenditures in excess of
those presently anticipated, or other future events including the Bank's, or a
replacement lender's, ability to fund the $33 million discussed earlier in the
"Source of Funds" section of this report, not presently predictable, which
individually or in the aggregate could impair the Company's ability to obtain
funds to meet its requirements. 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.
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 was awarded a contract to retrofit
residential housing units at a U.S. Army base. The contract required
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 has expended approximately $19.4 million
to retrofit the residential housing units at the U.S. Army base. The Project
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, but has pledged to the lender of the Project, on a
non-recourse basis, its equity interest in the Project.
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 development stage aviation company in exchange
for an ownership interest. The debt guarantee relates to two instruments, both
of which require interest only payments through September 1998. One note for
$600,000 matures September 28, 1998. The other note requires monthly
principal payments of approximately $11,000 plus interest beginning in October
1998 until August 8, 2001, 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
2006. Both notes are current as to principal and interest.
The Company has advanced approximately $150,000 to the aviation company
while they sought additional capital. The Company has also purchased
additional shares of stock in the aviation company during the first nine
months of 1996 for approximately $165,000. As of September 30, 1996, the
Company's ownership interest in the aviation company is approximately 26%.
The aviation company has advised the Company that it expects to complete the
Federal Aviation Authority certification process by the end of 1997, at which
time commercial production development may begin. On August 23, 1996, the
aviation company entered into a stock purchase agreement with a third party
whereby the third party purchased a 41.62% ownership interest, or 385 shares
of common stock for $5 million. The third party also obtained an option to
purchase an additional 224 shares of common stock for $4 million. With the
completion of this stock purchase agreement, the Company is currently advised
by the aviation company that the aviation company is expected to have adequate
funding sources to meet capital needs prior to completion of commercial
production development, including debt servicing on the two note instruments
previously discussed.
Recent developments
As previously reported, the Chemical Business has entered into detailed
negotiations with Bayer Corporation ("Bayer") for the construction and
operation of a nitric acid plant located on property owned by Bayer to supply
nitric acid on a long-term basis to Bayer's Baytown, Texas facility. All
contracts relating to this transaction with Bayer are subject to finalization
and completion. If the contracts are finalized, the Company expects that the
plant will be constructed and become operational by August 1998.
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 may 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, if
necessary to meet the Business' commitment. The letter of intent with
Farmland is subject to numerous conditions, including the negotiation and
execution of definitive agreements. If the contract with Farmland is
consummated, the Company intends to obtain project financing to fund the
construction of the project or enter into long-term loan arrangements for the
facilities required.
Contingencies
As discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements and Part II, Item 1 "Legal Proceedings", of this report, 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 compliance exceeding those presently
anticipated, additional sources of contamination being discovered, or the
Chemical Business' Environmental Impairment Insurance Policy ("EIL Policy")
not providing coverage to the Company and the Chemical Business for any
material toxic tort claims made by claimants referred to in Note 4 of Notes to
Condensed Consolidated Financial Statements and/or Part II, Item 1 "Legal
Proceedings" of this report, if a court finds the Company and/or the Chemical
Business liable for damages to claimants in connection with certain toxic tort
claims referenced in Note 4 of Notes to Condensed Consolidated Financial
Statements and/or Part II, Item 1 "Legal Proceedings" of this report, for
damages for a material amount in excess of limits of coverage of the EIL
Policy, or a court finds the Company and/or the Chemical Business liable for a
material amount in connection with those claims and/or pending litigation
involving matters other than the toxic tort lawsuit discussed in Note 4 of
Notes to Condensed Consolidated Financial Statements and/or Part II, Item 1
"Legal Proceedings" of this report.
ERNST & YOUNG LLP 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 September 30, 1996, and the related
condensed consolidated statements of operations for the nine-month and three-
month periods ended September 30, 1996 and 1995 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 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,
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.
November 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, and Item 1
"Legal Proceedings" of Part II of the Company's Form 10-Q for the quarter
ended June 30, 1996, discussing (i) a toxic tort lawsuit filed against the
Company's Chemical Business in June 1996, styled Roy Carr, et al. v. El Dorado
Chemical Company, pending in the United States District Court, Western
District of Arkansas, El Dorado Division, and (ii) an anti-trust lawsuit filed
against the Company's Chemical Business, styled Arch Mineral Company, et al.
v. ICI Explosives USA, Inc. et al., pending in the United States District
Court, Southern District of Indiana which are incorporated by reference
herein, except as discussed below.
Richard Detraz, et al. v. El Dorado Chemical Company. This lawsuit was
filed by the plaintiffs against El Dorado Chemical Company ("El Dorado"), a
wholly owned subsidiary of the Company, in the United States District Court,
Western Division of Arkansas, El Dorado Division, Case No. 96-1112, on October
16, 1996. The plaintiffs are comprised of sixteen (16) persons who reside in
various locations throughout the El Dorado, Arkansas metropolitan area. The
plaintiffs seek certification by the court as representatives of a class of
persons who allegedly have been affected by emissions from El Dorado's
Chemical Facility. The named plaintiffs assert that they suffered an
unspecified amount of damages due to bodily injuries and property damages as a
result of various toxic tort theories, including negligence, nuisance,
trespass and strict liability, as a result of releases of toxic substances
from El Dorado's manufacturing facility. In addition, the plaintiffs are
seeking punitive damages. The Company has been advised by its technical
experts that any air emissions from El Dorado's Chemical Facility were not
toxic at the levels of exposure. Discovery has not yet begun in this matter,
and El Dorado intends to vigorously defend itself against these claims.
The Company and the Chemical Business maintain an Environmental
Impairment insurance policy ("EIL Insurance") that provides coverage to the
Company and the Chemical Business for certain discharges, dispersal, releases,
or escapes of certain contaminants and pollutants into or upon land, the
atmosphere or any water course or body of water from El Dorado's manufacturing
facility which has caused bodily injury, property damage or contamination to
others or to other property not on El Dorado's manufacturing facility. The
EIL Insurance provides limits of liability for each loss up to $10 million and
a similar $10 million limit for all losses due to bodily injury or property
damage, except $5 million limits for each remediation expense and $5 million
for all remediation expenses, with the maximum limit of liability for all
claims under the EIL Insurance not to exceed $10 million for each loss or
remediation expense and $10 million for all losses and remediation expenses.
The EIL Insurance also provides a retention of the first $500,000 per loss or
remediation expense that is to be paid by the Company. The Company has given
notice to its insurance carrier of the above claims. Although there are no
assurances, the Company believes that the EIL Insurance will provide coverage
for the toxic tort lawsuits presently pending against El Dorado as discussed
above and in the Company's Form 10-Q for the quarter ended June 30, 1996, up
to the limits of the policy in excess of the Company's $500,000 deductible.
As of the date of this report, the Company believes that, if any award is
ultimately received by the Plaintiffs in the toxic tort lawsuits, such award
would not exceed the limits of the coverage of the EIL Insurance. Although
there can be no assurances, the Company does not believe the outcome of the
pending toxic tort lawsuits will have a material adverse effect on the
Company's financial position or results of operation. The statements
contained in the two penultimate sentences of this paragraph are forward-
looking statements that involve a number of risks and uncertainties that could
cause actual results to differ materially, such as, among other factors, the
following: the EIL Insurance does not provide coverage to the Company and the
Chemical Business for any material claims made by the plaintiffs, the
plaintiffs alleged damages not covered by the EIL Policy which a court may
find the Company and/or the Chemical Business liable for, such as punitive
damages, or a court finds the Company and/or the Chemical Business liable for
damages to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance.
In October, 1996, a group of individuals who reside in various locations
throughout the El Dorado, Arkansas metropolitan area filed a citizens lawsuit
against El Dorado in a case styled Roy A. Carr, et al. v. El Dorado Chemical
Company, Case No. 96-1113, in the United States District Court, Western
District of Arkansas, El Dorado Division. The plaintiffs in this lawsuit are
substantially the same as the plaintiffs in the toxic tort lawsuit styled Roy
Carr, et al. v. El Dorado Chemical Company discussed in the Company's Form 10-
Q for the quarter ended June 30, 1996. In this case, plaintiffs are bringing
a citizens' suit against El Dorado alleging that El Dorado violated certain
air, water and other environmental laws, rules or regulations and certain
permits issued to El Dorado, and, requesting the court to order El Dorado to
cure any such alleged violations and to access civil penalties against El
Dorado of up to $25,000 per day for each violation, if any, and award costs
and attorneys' fees. Discovery has not begun in this case, and El Dorado will
vigorously defend itself.
Arch Mineral Corporation, et al. v. ICI Explosives USA, Inc., et al. On
May 24, 1996, the plaintiffs filed this cause of action against El Dorado and
five (5) other unrelated commercial explosives manufacturers alleging that the
defendants allegedly violated certain federal and state antitrust laws in
connection with alleged price fixing of certain explosive products. This
cause of action is pending in the United States District Court, Southern
District of Indiana. The principal plaintiffs in this cause of action are
Arch Mineral Corporation, Ohio Power Company, Consol, Inc., Cyprus Amax
Minerals Company, Kennecott Corporation, Mapco Coal, Inc., Solar Sources,
Inc., Triton Coal Company and certain subsidiaries of the above. The other
defendants are ICI Explosives USA, Inc., Dyno Nobel, Inc., Mine Equipment &
Mill Supply Company, Austin Powder Co., and ETI Explosives Technologies
International, Inc., none of which are affiliates of the Company or El Dorado.
The plaintiffs are suing for an unspecified amount of damages, which, pursuant
to statute, plaintiffs are requesting be trebled, together with costs. Based
on the information presently available to the Company, the Company does not
believe that El Dorado conspired with any party, including, but not limited
to, the five (5) other defendants, to fix prices in connection with the sale
of commercial explosives. Discovery has just begun in this matter, and El
Dorado will vigorously defend itself in this litigation.
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 September 30, 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 21th day of November 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)
SEC\10Q-s96.WPceerer
LSB INDUSTRIES, INC. Exhibit 11.1
Page 1 of 6
PRIMARY EARNINGS PER SHARE COMPUTATION
1996 quarter ended
March 31 June 30 Sept. 30
-------- ------- --------
Shares for primary earnings per share:
Weighted average shares:
Common shares outstanding from
beginning of period 12,911,447 12,909,487 12,908,487
Common shares issued on conversion
of redeemable preferred stock;
calculated on weighted average
basis 270 - 260
Common shares issued upon exercise
of employee or director stock
options; calculated on weighted
average basis - - 12,527
Purchase of treasury stock;
calculated on weighted
average basis (330) (978) ( 12,734)
---------- ---------- ----------
12,911,387 12,908,509 12,908,540
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) - 737,640 -
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on average market price for
the period) - (359,676) -
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above
on actual conversion - 62,080 -
---------- ---------- ----------
- 440,044 -
---------- ---------- ----------
12,911,387 13,348,553 12,908,540
========== ========== ==========
Earnings for primary earnings per share:
Net earnings (loss) $ (531,218) $ 2,371,797 $(3,217,649)
Dividends on cumulative preferred stocks (75,520) (60,000) (60,000)
Dividends on convertible, exchangeable
Class C preferred stock (6.5% annually) (743,438) (743,438) (743,438)
---------- --------- ---------
Earnings (loss) applicable to common
stock $(1,350,176) $ 1,568,359 $(4,021,087)
========== ========= =========
Earnings (loss) per share $(.10) $ .12 $(.31)
===== ===== =====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 2 of 6
PRIMARY EARNINGS PER SHARE COMPUTATION
Nine months
ended
Sept. 30, 1996
Net loss applicable to common stock $(3,802,904)
==========
Weighted average number of common and common
equivalent shares (average of three quarters
above) 13,056,160
==========
Loss per share $(.29)
=====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 3 of 6
PRIMARY EARNINGS PER SHARE COMPUTATION
1995 quarter ended
March 31 June 30 Sept. 30
-------- ------- --------
Shares for primary earnings per share:
Weighted average shares:
Common shares outstanding from
beginning of period 13,060,566 13,045,912 12,941,097
Common shares issued on conversion
of redeemable preferred stock;
calculated on weighted average
basis 180 - 10
Common shares issued upon exercise
of employee or director stock
options; calculated on weighted
average basis - 96,692 3,326
Purchases of treasury stock;
calculated on weighted average
basis (13,950) (146,176) (3,826)
---------- ---------- ----------
13,046,796 12,996,428 12,940,607
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) 823,140 817,448 -
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on average market price for
the period) (317,680) (393,498) -
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above
on actual conversion - 63,520 -
---------- ---------- ----------
505,460 487,470 -
---------- ---------- ----------
13,552,256 13,483,898 12,940,607
========== ========== ==========
Earnings for primary earnings per share:
Net earnings (loss) $ 1,448,092 $ 1,502,431 $(1,800,736)
Dividends on cumulative preferred
stocks (75,880) (60,000) (60,000)
Dividends on convertible, exchangeable
Class C preferred stock (6.5%
annually) (743,437) (743,437) (743,437)
---------- ----------- ----------
Earnings (loss) applicable to common
stock $ 628,775 $ 698,994 $(2,604,173)
========== =========== ==========
Earnings (loss) per share $ .05 $ .05 $(.20)
===== ===== =====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 4 of 6
PRIMARY EARNINGS PER SHARE COMPUTATION
Nine months
ended
Sept. 30, 1995
--------------
Net loss applicable to common stock $(1,276,404)
===========
Weighted average number of common and common
equivalent shares (average of three quarters
above) 13,325,587
===========
Loss per share $(.10)
=====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 5 of 6
FULLY DILUTED EARNINGS PER SHARE COMPUTATION
1996 quarter ended
____________________________________
March 31 June 30 Sept. 30
---------- ----------- ---------
Shares for fully diluted earnings
per share:
Weighted average shares outstanding
for primary earnings per share 12,911,387 12,908,509 12,908,540
Shares issuable upon exercise of
options and warrants - 737,640 -
Assumed repurchase of outstanding
shares up to the 20% limitation
(based on ending market price for
the quarter if greater than the
average) - (359,676) -
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above
on actual conversion - 62,080 -
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 - 666,666 -
Series 2 - - -
---------- ---------- ----------
12,911,387 14,019,219 12,908,540
========== ========== ==========
Earnings for fully diluted
earnings per share:
Net earnings (loss) $ (531,218) $ 2,371,797 $(3,217,649)
Dividends on cumulative convertible
preferred stocks:
Series B (75,520) - (60,000)
Series 2 class C (743,438) (743,438) (743,438)
---------- ---------- ---------
Earnings (loss) applicable to
common stock $(1,350,176) $ 1,628,359 $(4,021,087)
========== ========== ==========
Earnings (loss) per share $(.10) $ .12 $( .31)
===== ===== ======
Nine months
ended
Sept. 30, 1996
Net loss applicable to common stock $(3,742,904)
==========
Weighted average number of common and common
equivalent shares (average of three quarters
above) 13,279,715
==========
Loss per share $(.29)
=====
LSB INDUSTRIES, INC. Exhibit 11.1
Page 6 of 6
FULLY DILUTED EARNINGS PER SHARE COMPUTATION
1995 quarter ended
March 31 June 30 Sept. 30
---------- ------- ----------
Shares for fully diluted earnings per
share:
Weighted average shares outstanding
for primary earnings per share 13,046,796 12,996,428 12,940,607
Shares issuable upon exercise of
options and warrants 823,140 817,448 -
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) (380,135) -
Common shares issuable on conversion
of redeemable preferred stock,
excluding shares included above on
actual conversion - 63,520 -
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 - - -
Series 2 - - -
---------- ---------- ----------
13,573,199 13,501,261 12,940,607
========== ========== ==========
Earnings for fully diluted
earnings per share:
Net earnings (loss) $ 1,448,092 $ 1,502,431 $(1,800,736)
Interest on convertible note 180 180 -
Dividends on cumulative convertible
preferred stocks:
Series B (75,880) (60,000) (60,000)
Series 2 Class C (743,437) (743,437) (743,437)
---------- ---------- ----------
Earnings (loss) applicable to
common stock $ 628,955 $ 699,174 $(2,604,173)
========== ========== ==========
Earnings (loss) per share $ .05 $ .05 $(.20)
===== ===== =====
Nine months
ended
Sept. 30, 1995
--------------
Net loss applicable to common stock $(1,276,044)
===========
Weighted average number of common and common
equivalent shares (average of three quarters
above) 13,338,356
==========
Loss per share $ (.10)
======
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
November 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
November 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 September 30, 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
5
9-MOS
DEC-31-1996
SEP-30-1996
4,071
0
57,388
2,433
63,445
132,034
167,478
73,368
258,995
69,556
111,906
146
48,000
1,487
27,900
258,995
235,298
239,207
189,729
189,729
0
0
9,081
(1,190)
187
(1,377)
0
0
0
(1,377)
(.29)
(.29)
