FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1993
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1015226
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(State of Incorporation) (I.R.S. Employer
Identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(405) 235-4546
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, Par Value $.10 American Stock Exchange
(Facing Sheet Continued)
Securities Registered Pursuant to Section 12(g) of the Act:
$3.25 Series 2 Convertible Exchangeable Class C Preferred Stock.
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the Registrant has had
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days. YES X NO _____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 14, 1994, the aggregate market value of the 9,336,942
shares of voting stock of the Registrant held by non-affiliates of the Company
equaled approximately $82,865,360 based on the closing sales price for the
common stock as reported for that date. That amount does not include (1) the
1,619 shares of Convertible Non-Cumulative Preferred Stock (the "Non-
Cumulative Preferred Stock") held by non-affiliates of the Company, (2) the
20,000 shares of Series B 12% Convertible, Cumulative Preferred Stock (the
"Series B Preferred Stock"), and (3) the 920,000 shares of $3.25 Series 2
Convertible Exchangeable Class C Preferred Stock (the "Series 2 Preferred
Stock"). An active trading market does not exist for the shares of Non-
Cumulative Preferred Stock and the Series B Preferred Stock. The shares of
Series 2 Preferred Stock do not have voting rights except under limited
circumstances.
As of March 14, 1994, the Registrant had 13,634,691 shares of common
stock outstanding (excluding 880,085 shares of common stock held as treasury
stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
Page
Item 1. Business
General 1
Recent Development 1
Segment Information and Foreign
and Domestic Operations and Export Sales 3
Chemical Business 3
Environmental Control Business 5
Automotive Products Business 7
Industrial Products Business 8
Financial Services Business 10
General 10
Affliliated Transactions 10
Competition 12
Regulatory Matters 12
Recent Banking Legislation 12
Inherent Risk 18
Termination of Supervisory Agreement 19
Non-Accrual Policies 19
Loan Loss and Asset Valuation Reserve 19
Credit Risk Concentration 20
Investment Portfolio Policy 20
Financial Services Statistical Information 22
Employees 40
Research and Development 40
Environmental Compliance 40
Item 2. Properties
Chemical Business 41
Environmental Control Business 43
Automotive Products Business 44
Industrial Products Business 44
Financial Services Business 44
Item 3. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of
Security Holders 47
Item 4A. Executive Officers of the Company 47
iii
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters
Market Information 48
Stockholders 48
Issuance of Preferred Stock 48
Dividends 49
Item 6. Selected Financial Data 51
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview 53
Results of Operations 53
Liquidity and Capital Resources 56
Non-Financial Services Business 57
Financial Services Business 62
Item 8. Financial Statements and Supplementary Data 66
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 66
PART III
Item 10. Directors and Executive Officers of the Company 66
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial Owners and Management 73
Item 13. Certain Relationships and Related Transactions 76
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 78
iv
PART I
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Item 1. BUSINESS
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General
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LSB Industries, Inc. (the "Company") was formed in 1968 as an Oklahoma
corporation, and in 1977 became a Delaware corporation. The Company is a
diversified holding company which is engaged, through its subsidiaries, in (i)
the manufacture and sale of chemical products for the explosives, agricultural
and industrial acids markets (the "Chemical Business"), (ii) the manufacture
and sale of a broad range of air handling and heat pump products for use in
commercial and residential air conditioning systems (the "Environmental
Control Business"), (iii) the manufacture or purchase and sale of certain
automotive and industrial products, including automotive bearings and other
automotive replacement parts (the "Automotive Products Business") and the
purchase and sale of machine tools (the "Industrial Products Business") and
(iv) the financial services business (the "Financial Services Business").
Recent Development
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The Company and Fourth Financial Corporation ("Fourth Financial") have
entered into a Stock Purchase Agreement, dated as of February 9, 1994
("Acquisition Agreement"), in which the Company has agreed to sell, and Fourth
Financial has agreed to buy, the Company's wholly owned subsidiary, Equity
Bank for Savings, F.A. ("Equity Bank"), which constitutes the Financial
Services Business of the Company. Fourth Financial is to acquire all of the
outstanding shares of capital stock of Equity Bank. The closing of this
transaction is contingent upon several factors being met, including , but not
limited to, regulatory approvals, minimum tangible book value (as defined) of
Equity Bank and stockholder approval of the Company.
Under the Acquisition Agreement, the Company is to acquire from Equity
Bank, prior to closing, certain subsidiaries of Equity Bank ("Retained
Corporations") that own the real and personal property and other assets
contributed by the Company to Equity Bank at the time of the acquisition of
the predecessor of Equity Bank by the Company for Equity Bank's carrying value
of the assets contributed at the time of such purchase, which the Company
estimates will be approximately $65.4 million. At the time of closing of the
sale of Equity Bank, the Company is also required under the Acquisition
Agreement to acquire: (A) the loan and mortgage on and an option to purchase
Equity Tower located in Oklahoma City, Oklahoma, ("Equity Tower Loan"), which
Equity Bank previously classified as an in-substance foreclosure on its books,
(B) other real estate owned by Equity Bank that was acquired by Equity Bank
through foreclosure (the Equity Tower Loan and other real estate owned by
Equity Bank acquired through foreclosure are collectively call the "Retained
Assets"), and (C) the outstanding accounts receivable sold to Equity Bank by
the Company and its subsidiaries under various Receivables Purchase
Agreements, dated March 8, 1988 ("the Receivables"). The Retained Assets are
to be acquired for an amount equal to Equity Bank's carrying value of the
Retained Assets at time of closing of the sale of Equity Bank, which were
approximately $18.9 million at February 28, 1994. In addition, the Company
has the option, but not the obligation, to acquire any loan owned by Equity
Bank that has been charged off or written down for a price equal to the net
book value of such loan that has been written down and for a price of $1.00 in
the case of each loan that has been charged off ("Other Loans"). The purchase
price ("Purchase Price") to be paid by Fourth Financial for Equity Bank under
the Acquisition Agreement at the closing is estimated to be approximately $92
million. The exact amount of the Purchase Price is based on a formula, with
the exact amount of such formula to be determined at closing as the sum of the
following: (i) the tangible book value of Equity Bank (defined as the
aggregate consolidated stockholders' equity of Equity Bank, less the amounts
in the accounts relating to purchased mortgage servicing rights, goodwill, and
United BankCard goodwill) at the closing, plus a premium over Equity Bank's
tangible book value of the following determined at the closing: (a) $9.3
million for Equity Bank's credit card business, (b) 1% of the aggregate of the
unpaid principal balance at closing of Equity Bank's loans secured by fixed
rate mortgages having fully amortizing original terms of fifteen (15) years or
less, excluding loans originated after October 31, 1993, (c) 6% of the
aggregate unpaid principal balance at closing of Equity Bank's loans secured
by fixed rate mortgages having fully amortizing original terms in excess of
(15) years but not more than thirty (30) years, excluding loans originated
after October 31, 1993, and (d) 2% of the aggregate unpaid principal balance
at closing of Equity Bank's loans secured by variable rate mortgages,
excluding loans originated after October 31, 1993; (ii) an amount at the
closing equal to the unamortized discount on Equity Bank's mortgages included
in (i)(b), (c), and (d) above; (iii) an amount at the closing equal to (a)
0.65% of the aggregate unpaid principal balance of loans serviced by Equity
Bank prior to March 1, 1993, on which Equity Bank performs mortgage servicing
(other than loans serviced for the account of Equity Bank), (b) 1% of such
balance on such loans serviced by Equity Bank that were originated after March
31, 1993, secured by fixed or adjustable rate mortgages of fully amortizing
original terms of at least ten (10) but not more than fifteen (15) years, and
(c) 1.25% of such balance on such loans originated on or after March 1, 1993,
secured by fixed or adjustable rate mortgages having original fully amortized
terms of more than fifteen (15) but not more than thirty (30) years, (iv) an
amount obtained by subtracting the "required reserve" (as defined below) from
Equity Bank's actual loan loss reserve account at the closing, with the
"required reserve" meaning $2.7 million as adjusted by the amount by which
Equity Bank's loan loss account would have been adjusted at the closing under
normal and prudent banking practice to reflect aggregate changes of at least
$500,000 occurring subsequent to October 31, 1993, or originating since
October 31, 1993, and not reviewed in advance by Fourth Financial; provided,
that no such change in the quality of a loan is to be included in the
calculation to the extent such change has been reflected in the tangible book
value of Equity Bank at the closing or if such change is less that $25,000;
(v) to the extent not otherwise reflected in the tangible book value of Equity
Bank, an amount either positive or negative, by which the aggregate fair
market value of Equity Bank's securities portfolio at the closing differs from
Equity Bank's book value of such portfolio at the closing; (vi) the
difference, positive or negative, between the carrying value of Equity Bank's
time deposits and the aggregate value of such deposits after repricing them to
the Treasury yield curve at the closing; (vii) $10.5 million for Equity Bank's
net operating loss; (vii) $11.0 million for Equity Bank's deposit balance;
and, (ix) $1.4 million for certain of Equity Bank's branches.
The percentages specified in (i)(b) and (c) immediately above are
determined utilizing the spread between the bank's average portfolio yield and
FNMA required thirty (30) day yield as of August 31, 1993. If, at the time of
the closing, such spreads have fluctuated by more than 0.25%, the applicable
percentages in such subparagraphs (i)(b) and (c) will be adjusted up or down
by one-fourth of 1% for each full one-eighth of 1% change in the spread, in
the case of loans with an original term of fifteen (15) years or less, and by
three-eighths of 1% for each full one-eighth of 1% change in the spread, in
the case of loans with an original terms of more than fifteen (15) but not
more than thirty (30) years.
Based on the above, the Company estimates that at closing the Purchase
Price will be approximately $92 million, which amount is estimated based upon
estimates which cannot be definitively determined until the closing.
Management of the Company has made estimates with respect to the variables
which make up the Purchase Price. The Purchase Price will be affected by,
among other things, the results of operations of and the fluctuation of
interest rates between the date of this report and the closing. As a result,
2
the exact amount of the Purchase Price may be higher or lower depending on
factors of the formula that can only be determined at time of closing of the
sale of Equity Bank. Notwithstanding the foregoing, if the Purchase Price, as
finally determined at the closing, is less than $92 million, the Company may,
at its option, terminate the Acquisition Agreement.
The Company will use approximately $65.4 million, plus interest, of the
Purchase Price to repay certain indebtedness the Company intends to incur to
finance the purchase from Equity Bank of the Retained Corporations. In
addition, it is anticipated that the Company will use approximately $18.9
million of the Purchase Price to purchase from Equity Bank the Retained
Assets, which is the carrying value of the Retained Assets on the books of
Equity Bank as of February 28, 1994. As of this date, the Company has made no
decision if it will acquire any of the Other Loans. As of March 31, 1994,
Equity Bank owned approximately $13.5 million of the Receivables, which if the
closing occurs on or about June 30, 1994, the Company expects such to be less
than $10 million as of the closing. On March 30, 1994, the Company entered
into a $25 million accounts receivable financing line of credit with Bank IV
Oklahoma, N.A., a wholly owned subsidiary of Fourth Financial, and expects to
use borrowings under such line of credit to purchase the outstanding
Receivables from Equity Bank at the closing. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations"
The balance of the Purchase Price, if any, remaining after (i) repayment
of the indebtedness incurred by the Company to purchase the Retained
Corporations, (ii) purchase from Equity Bank of the Retained Assets, and (iii)
payment of the transactional costs relating to the sale of Equity Bank under
the Acquisition Agreement will be used by the Company for general working
capital. See "Business - Financial Services Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion as to matters affecting the proposed sale of Equity Bank.
Segment Information and Foreign and Domestic Operations and Export Sales
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Schedules of the amounts of revenues, operating profit and loss, and
identifiable assets attributable to each of the Company's lines of business
and of the amount of export sales of the Company in the aggregate and by major
geographic area for each of the Company's last three fiscal years appear in
Note 15 of the Notes to Consolidated Financial Statements included elsewhere
in this report.
A discussion of any risks attendant as a result of a foreign operation
or the importing of products from foreign countries appears below in the
discussion of each of the Company's business segments.
Chemical Business
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General:
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The Chemical Business manufactures and sells the following types of
chemical products to the mining, agricultural and other industries: sulfuric
acid, concentrated nitric acid, prilled ammonium nitrate fertilizer and
ammonium nitrate-based blasting products. In addition, the Chemical Business
markets emulsions that it purchases from others for resale to the mining
industry. In July 1993, the Chemical Business acquired Total Energy Systems
Limited ("TES"), an Australian explosives business, which sells blasting
agents and high explosives to the Australian mining industry.
3
For 1993, approximately 33% of the revenues of the Chemical Business
consisted of sales of fertilizer and related chemical products for
agricultural purposes, which represented approximately 12% of the Company's
1993 consolidated revenues, and 43% consisted of sales of ammonium nitrate and
other chemical-based blasting products for the mining industry, which
represented approximately 15% of the Company's 1993 consolidated revenues.
The Chemical Business accounted for approximately 42% and 43% of the Company's
1993 and 1992 consolidated revenues, respectively.
Seasonality:
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The Company believes that the only seasonal products of the Chemical
Business are fertilizer and related chemical products sold to the agricultural
industry. The selling seasons for those products generally occur during the
spring and fall planting seasons, i.e., from February through May and from
September through November. In addition, sales to the agricultural markets
depend upon weather conditions and other circumstances beyond the control of
the Company.
Raw Materials:
-------------
Ammonia represents an essential component in the production of most of
the products of the Chemical Business, and the price of those products
generally fluctuates with the price of ammonia. The Company has a contract
with a supplier of ammonia pursuant to which the supplier has agreed to supply
the ammonia requirements of the Chemical Business on terms the Company
considers favorable. The Company believes that it could obtain ammonia from
other sources in the event of a termination of that contract.
Marketing and Distribution:
--------------------------
The Chemical Business sells and markets its products directly through
its own sales force, 35 distribution centers and to wholesalers. See
"Properties". The Chemical Business sells low density prilled ammonium
nitrate-based explosives primarily to the surface coal mining industry through
nine company-owned distribution centers located in close proximity to the
customers' surface mines in the coal producing states of Kentucky, West
Virginia, Indiana and Illinois. In addition, sales of explosives are made on
a wholesale basis to independent wholesalers and other explosives companies.
The Chemical Business sells high density prilled ammonium nitrate for
use in agricultural markets in geographical areas within a freight-logical
distance from its El Dorado, Arkansas, manufacturing plant, primarily Texas,
Oklahoma, Arkansas and Louisiana. The products are sold through 20
distribution centers, with 15 centers located in Northern and Eastern Texas,
two centers located in Missouri and three centers located in Tennessee. The
Chemical Business also sells its agricultural products directly to wholesale
customers. The Company believes that it is a leader in the Texas ammonium
nitrate market.
The Chemical Business sells its industrial acids, consisting primarily
of high grade concentrated nitric acid and sulfuric acid, primarily to the
food, paper, chemical and electronics industries. Concentrated nitric acid is
a special grade of nitric acid used in the manufacture of pharmaceuticals,
explosives, and other chemical products. The Company believes that the
Chemical Business is one of the leading producers of concentrated nitric acid
in the United States for third party sales.
4
Patents:
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The Company believes that the Chemical Business does not depend upon any
patent or license; however, the Chemical Business does own certain patents
that it considers important in connection with the manufacture of certain
blasting agents and high explosives. These patents expire through 1997.
Regulatory Matters:
------------------
Each of the Chemical Business' blasting product distribution centers are
licensed by the Bureau of Alcohol, Tobacco and Firearms in order to
manufacture and distribute blasting products. The Chemical Business also must
comply with substantial governmental regulations dealing with environmental
matters. See "PROPERTIES - Chemical Business" for a discussion as to an
environmental issue regarding the Company's El Dorado, Arkansas, manufacturing
facility.
Competition:
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The Chemical Business competes with other chemical companies, in its
markets, many of whom have greater financial resources than the Company. The
Company believes that the Chemical Business is competitive as to price,
service, warranty and product performance.
Environmental Control Business
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General:
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The Company's Environmental Control Business manufactures and sells a
broad range of fan coil, air handling, air conditioning, heating, heat pumps
and dehumidification products targeted to both new building construction and
renovation, as well as industrial application. The fan coil products consist
of in-room terminal air distribution equipment utilizing air forced over a fin
tube heat exchanger which, when connected to centralized equipment
manufactured by other companies, creates a centralized air conditioning and
heating system that permits individual room temperature control. The heat
pump products manufactured by the Environmental Control Business consist of
heat-recovery, water-to-air heat pumps that include a self-contained
refrigeration circuit and blower, which allow the unit to heat or cool the
space it serves when supplied with water at mild temperatures. The
Environmental Control Business accounted for approximately 25% and 22% of the
Company's 1993 and 1992 consolidated revenues, respectively, with fan coil
products accounting for approximately 14% and heat pump products accounting
for approximately 11%, respectively, of the Company's 1993 consolidated
revenue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a discussion
relating to two letters of intent with foreign customers to supply such
customers with equipment and technology to manufacture certain types of air
handling products.
5
Production and Backlog:
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Most of the Environmental Control Business' production of the above-
described products occurs on a specific order basis. The Company manufactures
the units in many sizes, as required by the purchaser, to fit the space and
capacity requirements of hotels, motels, schools, hospitals, apartment
buildings, office buildings and other commercial or residential structures.
As of December 31, 1993, the backlog of confirmed orders for the Environmental
Control Business was approximately $17 million, as compared to approximately
$13 million as of December 31, 1992. A customer generally has the right to
cancel an order prior to the order being released to production. Past
experience indicates that customers generally do not cancel orders after the
Company receives them. As of December 31, 1993, the Company had released
approximately $14 million of backlog orders in the Environmental Control
Business to production, all of which are expected to be filled by December 31,
1994.
Distribution:
------------
The Environmental Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors. The Company's
sales to mechanical contractors primarily occur through independent
manufacturer's representatives, who also represent complimentary product lines
not manufactured by the Company. Original equipment manufacturers generally
consist of other air conditioning and heating equipment manufacturers who
resell under their own brand name the products purchased from the
Environmental Control Business as a separate item in competition with the
Company or as part of a package with other air conditioning-heating equipment
products to form a total air conditioning system which they then sell to
mechanical contractors or end-users for commercial application. Sales to
original equipment manufacturers accounted for approximately 36.4% of the
sales of the Environmental Control Business in 1993.
Construction Industry:
---------------------
The Environmental Control Business depends primarily on the commercial
construction industry, including new construction and the remodeling and
renovation of older buildings.
Raw Materials:
-------------
Numerous domestic and foreign sources exist for the materials used by
the Environmental Control Business, which materials include aluminum, copper,
steel, electric motors and compressors. The Company does not expect to have
any difficulties in obtaining any necessary materials for the Environmental
Control Business.
Competition:
-----------
The Environmental Control Business competes with approximately eight
companies, several of whom are also customers of the Company. Some of the
competitors have greater financial resources than the Company. The Company
believes that the Environmental Control Business manufactures a broader line
of fan coil and water source heat pump products than any other manufacturer in
the United States, and, that it is competitive as to price, service, warranty
and product performance.
6
Automotive Products Business
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General:
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The Automotive Products Business is primarily engaged in the manufacture
and sale of a line of anti-friction bearings, which includes straight-thrust
and radial-thrust ball bearings, angular contact ball bearings, and certain
other automotive replacement parts. These products are used in automobiles,
trucks, trailers, tractors, farm and industrial machinery, and other
equipment. In 1993, the Automotive Products Business manufactured
approximately 48.5% of the products it sold and approximately 61% in 1992, and
purchased the balance of its products from other sources, including foreign
sources.
Distribution and Market:
-----------------------
The automotive and truck replacement market serves as the principal
market for the Automotive Products Business. This business sells its products
domestically and for export, principally through independent manufacturers'
representatives who also sell other automotive products. Those manufacturers'
representatives sell to retailers (including major chain stores), wholesalers,
distributors and jobbers. The Automotive Products Business also sells its
products directly to original equipment manufacturers and certain major chain
stores.
Inventory:
---------
The Company generally produces or purchases the products sold by the
Automotive Products Business in quantities based on a general sales forecast,
rather than on specific orders from customers. The Company fills most orders
for the automotive replacement market from inventory. The Company generally
produces or purchases bearings for original equipment manufacturers after
receiving an order from the manufacturer.
Raw Materials:
-------------
The principal materials that the Automotive Products Business needs to
produce its products consist of high alloy steel tubing, steel bars, flat
strip coil steel and bearing components produced to specifications. The
Company acquires those materials from a variety of domestic and foreign
suppliers at competitive prices. The Company does not anticipate having any
difficulty in obtaining those materials in the near future.
Competition:
-----------
The Automotive Products Business engages in a highly competitive
business. Competitors include other domestic and foreign bearing
manufacturers, which sell in the original equipment and replacement markets.
Many of those manufacturers have greater financial resources than the Company.
7
Industrial Products Business
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General:
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The Industrial Products Business purchases and markets a proprietary
line of machine tools and also markets industrial supplies. The current line
of machine tools distributed by the Industrial Products Business includes
milling, drilling, turning, fabricating and grinding machines. The Industrial
Products Business purchases most of the machine tools marketed by it from
foreign companies, which manufacture the machine tools to the Company's
specifications.
Distribution and Market:
-----------------------
The Industrial Products Business distributes its machine tools in the
United States, Mexico, Canada and certain other foreign markets and
distributes its industrial supplies principally in Oklahoma. The Industrial
Products Business sells and distributes its products through its own sales
personnel, who call directly on end users. The Industrial Products Business
also sells its machine tools through independent machine tool dealers
throughout the United States and Canada, who purchase the machine tools for
resale to end users. The principal markets for machine tools, other than
independent machine tool dealers, consist of manufacturing and metal working
companies, maintenance facilities, utilities and schools.
Customer:
--------
The Industrial Products Business does not depend on any single customer,
or a few customers, the loss of any one or more of which would have a material
adverse effect on the Industrial Products Business. A significant increase in
the revenues of the Industrial Products Business occurred during 1992 and 1993
as a result of an agreement with a foreign company ("Buyer"), dated July 6,
1992, to supply the Buyer with equipment, technology and technical services to
manufacture certain types of automotive bearing products. The agreement
provides for a total contract amount of approximately $56.0 million, with
$12.0 million of the contract amount to be retained by the Buyer as the
Company's subsidiary's equity participation in the Buyer. The Company's
subsidiary has valued its equity participation in the Buyer at a nominal
amount. The balance of approximately $44.0 million has been or will be paid
to the Company's subsidiary as follows: (i) approximately $13.1 million was
paid through December 31, 1993, and (ii) the balance of approximately $30.9
million payable in equal quarterly installments over a ten (10) year period,
plus interest. Payment of the quarterly installments has been delayed from
time to time. However, during the fourth quarter of 1993, approximately
$791,000 of such balance was paid by the Buyer to the Industrial Products
Business under this agreement. The Company has shipped to the Buyer certain
machinery and equipment and expects to deliver the balance of such machinery
and equipment and the tooling and designs to the Buyer by the end of June,
1994. Circumstances could arise that could delay the delivery of the
machinery, equipment, designs and tooling to the Buyer. Under the agreement,
the Company's subsidiary will use its best efforts to purchase approximately
$14.5 million of bearing products from the Buyer each year over a period of
ten (10) years; provided, however, that the Company's subsidiary is not
required to purchase more product from the Buyer in any one (1) year than the
amount of tapered bearings the Company's subsidiary is able to sell in its
market. The Company presently manufactures and purchases from outside sources
tapered bearings. During 1993 and 1992, the Company sold approximately $10.0
million and $6.9 million, respectively, of tapered bearings. The Company
8
believes that the purchase price of these bearings will be favorable compared
to its present cost in purchasing these products from other sources or
manufacturing these products. Such prices are subject to increases or
decreases based upon price increases or decreases sustained in the United
States bearing industry. The Company will recognize revenues and profits on
the sale of equipment and technology over the term of the agreement as they
are realized. The revenue and profits realized during the delivery and
installation period are being recognized on a percentage of completion basis.
During the years ended December 31, 1993 and 1992, the Company recorded sales
of approximately $7.5 million and $6.2 million, respectively, in connection
with the agreement. The percentage of completion is determined by relating
the productive costs incurred to date to the total productive costs estimated
to complete the performance under the contract for delivery and installation.
The Company presently meets all of its obligations under the contract which
generally coincides with the payout term.
During the fourth quarter of 1993, the Industrial Products Business
exchanged its rights to the equity interest in the Buyer to a foreign non-
affiliated company ("Purchaser of the Interest") for $12.0 million in notes.
The Company has been advised that the Buyer has agreed to repurchase from the
Purchaser of the Interest up to $6 million of such equity interest over a six
(6) year period, with payment to be either in cash or bearing products. The
notes issued to the Industrial Products Business for its rights to the equity
interest in the Buyer will only be payable when, as and if the Purchaser of
the Interest collects from the Buyer for such equity interest, and the method
of payment to the Company will be either cash or bearing products in the same
manner as received by the Purchaser of the Interest from the Buyer. Due to
the Company's inability to determine what payments, if any, it will receive on
such notes, the Company will carry such notes at a nominal amount. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS" and Note 8 to Consolidated
Financial
Statements for further discussion of this agreement.
Foreign Risk:
------------
By purchasing a majority of the machine tools from foreign
manufacturers, the Industrial Products Business must bear certain import
duties and international economic risks, such as currency fluctuations and
exchange controls, and other risks from political upheavals and changes in
United States or other countries' trade policies. Most of the current
contracts for the purchase of foreign-made machine tools provide for payment
in United States dollars. Circumstances beyond the control of the Company
could eliminate or seriously curtail the supply of machine tools from any one
or all of the foreign countries involved.
Competition:
-----------
The Industrial Products Business competes with manufacturers and other
distributors of machine tools and industrial supplies, many of whom have
greater financial resources than the Company. The Company's machine tool
business generally is competitive as to price, warranty and service, and
maintains personnel to install and service machine tools.
9
Financial Services Business
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Recent Developments:
-------------------
See "Business - Recent Developments" under this section, "Management's
Discussion and Analysis of Financial Condition" and Note 1 to Notes to
Consolidated Financial Statements for discussion of the proposed sale of
Equity Bank, which comprises all of the Company's Financial Services Business.
General:
-------
The Company is engaged in the Financial Services Business through its
wholly owned subsidiary, Equity Bank and its subsidiaries. The Financial
Services Business offers retail banking services, mortgage, consumer and
commercial lending, and other related financial products and services through
15 branch offices located in the Oklahoma City metropolitan area and western
Oklahoma.
The Company's Financial Services Business operates an Oklahoma based
credit card division ("BankCard") which provides MasterCard and Visa credit
card services to member financial institutions and their customers and
merchants. As of December 31, 1993, BankCard had approximately $62.9 million
in credit card receivables outstanding, approximately 96,000 cardholders and
approximately 7,200 merchant accounts. At December 31, 1993, approximately
$23.6 million of credit card receivables are serviced for member financial
institutions without recourse to BankCard.
The Financial Services Business engages in, among other things, the
business of attracting deposits from commercial and retail customers and uses
those deposited funds and other borrowed funds to originate one to four family
residential loans and other loans. The loans, along with other investments,
serve as a major source of the assets utilized by the Financial Services
Business to generate its net interest income. Net interest income represents
a significant source of income for Equity Bank and results from the difference
between the amount of income earned on interest-earning assets and the expense
incurred on interest-bearing liabilities. Equity Bank earns other income and
fees principally in connection with credit card services, rental income, the
origination, sale and servicing of loans and checking servicing of accounts.
In 1993 and 1992, the Financial Services Business accounted for approximately
15% and 19% of the Company's consolidated revenues, respectively.
Affiliated Transactions:
-----------------------
In connection with the acquisition of Equity Bank in March, 1988, and
the approval of the appropriate regulatory authority at that time, the Company
and several of its subsidiaries transferred certain properties to Northwest
Financial Corporation ("Northwest Financial"), a wholly-owned service
corporation of Equity Bank. The properties included, but were not limited to,
the then manufacturing facilities and the then existing distribution
facilities of the Chemical Business, a portion of the real estate which the
Environmental Control, the Automotive Products and Industrial Products
Businesses conduct manufacturing and distribution operations and certain other
assets (collectively, the "Transferred Assets"). Based upon approvals by the
appropriate regulatory authority at that time, Equity Bank was allowed to
record, on a stand-alone basis, the Transferred Assets at their then current
fair market value based on MAI appraisals approved by the appropriate
regulatory agency at that time. The MAI appraisals relating to the
Transferred Assets were, in the aggregate, approximately $69.8 million. The
10
Transferred Assets were transferred to Northwest Financial subject to
approximately $21.5 million in debt. Equity Bank was allowed to reflect the
MAI appraised values of the Transferred Assets, less the associated debt, for
capital purposes. The Company continued to reflect the historical cost, less
depreciation to date, for such Transferred Assets on the Company's
consolidated financial statements. The Company's historical cost for all of
the Transferred Assets, less depreciation, equaled approximately $18.8 million
as of the time such were transferred to Northwest Financial. In order for the
Company and its subsidiaries to continue their operations on those properties,
Northwest Financial entered into agreements to lease or sublease certain of
the Transferred Assets back to their original users for an original term of
twelve (12) years expiring in the year 2000, with an option to renew for an
additional term of ten (10) years, at an aggregate annual rental for the
leased Transferred Assets of $3.2 million. Due to an agreement with its
regulators as hereafter discussed in this section, certain of the lease
agreements involving certain of the Transferred Assets were amended. Under
the amendments, the aggregate rentals relating to all of the Transferred
Assets were increased to $4.3 million and the lease terms as to certain of the
Transferred Assets were amended by eliminating the options to renew. Subject
to the terms of the leases between Northwest Financial and the Company's
subsidiary leasing such, Northwest Financial transferred beneficial ownership
of these properties to two general partnerships in which Northwest Financial
owns 99.0% of the partnership interest and the other 1.0% is owned by another
subsidiary of the Company. Northwest Financial continues to hold record title
to the real properties that constitute part of the Transferred Assets.
As part of the acquisition of Equity Bank and thereafter Arrowhead and
the approval of the appropriate regulatory authority at that time, the Company
and its subsidiaries were permitted to sell up to $60.0 million of eligible
accounts receivable at any one time to Equity Bank with recourse to the seller
("Receivable Financing"). Under such Receivable Financing, each of the
Receivables sold to Equity Bank was sold at 100% of face value. The OTS has
taken the position that the initial five (5) year approvals granted in 1988
allowing for the Receivable Financing between Equity Bank and the Company and
certain of its other subsidiaries expired, and because of an intervening
change in the law, beginning in September, 1993, the amount of the Receivable
Financing was to be reduced to amounts allowable under current regulations
relating to transactions with affiliated companies which is based on a
percentage of Equity Bank's capital. As part of the negotiations with the
OTS, the parties agreed to a phase-down period regarding the Receivable
Financing instead of having to reduce such to the applicable percentage of
Equity Bank's capital by September, 1993. It was agreed that: (i) at no one
time subsequent to September 28, 1993, but prior to September 1, 1994, would
the total amount of such Receivable Financing outstanding at any one time
exceed $33.6 million; (ii) beginning February 1, 1994, Equity Bank will not
purchase any new Receivables from the Company and/or its subsidiaries under
the Receivable Financing arrangement if such would result in Equity Bank
owning an amount that would exceed the amount allowed by current regulations,
and (iii) on and after September 1, 1994, the outstanding amount of such
Receivable Financing at any one time must be in compliance with current
regulations. Assuming that on December 31, 1993, Equity Bank has been
required to meet current regulations regarding such Receivable Financing, the
amount would have had to be reduced to approximately $9.2 million as of such
date.
During 1993 and 1992, the Financial Services Business earned a
significant portion of its income from two affiliated sources, which
transactions were previously approved by the appropriate federal regulatory
agency. These include rental income from payments made by the Company and
certain of its subsidiaries of approximately $4.3 million in 1993 and $4.2
million in 1992 for the use of certain of the Transferred Assets In addition,
11
the Financial Services Business earned fees of $2.7 million in 1993 and 2.7
million in 1992 in connection with the Receivable Financing. At March 31,
1994, Equity bank held approximately $13.5 million of such Receivables.
As provided in "Business - Recent Developments" The Company will, (a) if
the Acquisition Agreement is to be consummated, acquire from Equity Bank the
Retained Corporations that own the Transferred Assets one (1) day prior to
consummation of the proposed sale of Equity Bank to Fourth Financial, and (b)
upon consummation of the Acquisition Agreement, acquire from Equity Bank the
Retained Assets and the outstanding Receivables owned by Equity Bank on the
day of closing of the proposed sale of Equity Bank. See "Business - Recent
Developments", "Management's Discussion and Analysis of Financial Condition"
and Note 1 to Notes to Consolidated Financial Statements for further
discussion of the terms of the proposed sale of Equity Bank, the amounts that
the Company will pay for the Retained Corporations, the Transferred Assets and
the Receivables and the method that the Company intends to use to purchase
such assets from Equity Bank.
Competition:
-----------
The Financial Services Business experiences substantial competition in
attracting and retaining deposits and in making loans. The primary factors in
competing for deposits consist of the ability to offer attractive rates and
the availability of convenient office locations. Competition for financial
services historically comes from other savings institutions, commercial banks
and credit unions. However, securities firms and mortgage companies are also
competitors. Government and corporate securities also represent a source of
competition for savings and loan institutions, especially during periods of
declining interest rates when those securities may yield higher rates than
those offered by savings institutions.
Competition for loans comes principally from other savings institutions,
commercial banks, mortgage companies, insurance companies and other
institutional investors. In recent years, the Oklahoma market for financial
institutions like Equity Bank has changed as a result of large out-of-state
banks establishing operations in Oklahoma. The primary factors in competing
for loans consist of interest rates, loan origination fees and other terms and
services offered.
Currently, Oklahoma allows interstate banking only in limited cases
involving the acquisition of failing institutions.
Regulatory Matters:
------------------
(a) Capital Compliance
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which became effective in August, 1989, significantly affects the
business conducted by Equity Bank. The Office of Thrift Supervision ("OTS")
is Equity Bank's primary regulator. Deposits in Equity Bank are insured by,
the Savings Association Insurance Fund ("SAIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC") and backed by the full faith
and credit of the United States. The OTS has adopted regulations specifying
capital standards for all savings institutions that are no less stringent than
capital standards for national banks, and the standards under these
regulations exceed those required by FIRREA. If Equity Bank should fail to
meet any of its capital requirements, such failure could have a material
adverse effect on Equity Bank, its operations and the Company. In addition,
Equity Bank would be required to submit a capital plan to the OTS to
demonstrate the manner in which Equity Bank will come into capital compliance
12
and would also be subject to various operating restrictions on its business
activities which could have a substantial impact on Equity Bank's
profitability. See "Regulatory Matters" of this section discussing the
Financial Services Business for further discussion as to Equity Bank's capital
compliance.
FIRREA requires that Equity Bank meet progressively higher capital
requirements each year until they are "fully phased-in" through December 31,
1994, except for certain assets for which the "phase-in" period has been
extended through July, 1996. Equity Bank currently does and believes that it
will be able to meet all applicable requirements of law and federal regulation
relating to capital requirements as presently in effect and as the same become
effective during the phase-in period, although there are no assurances that
Equity Bank will be able to so comply. At December 31, 1993, Equity Bank
exceeded the current regulatory capital requirements and under the technical
definition and calculation of fully phased-in capital as prescribed by FIRREA,
Equity Bank believes that it meets future capital standards as presently
mandated by FIRREA. Equity Bank updated and submitted to the OTS a three (3)
year business plan that indicates all future capital requirements will be met,
See "Regulatory Matters" of this section discussing the Financial Services
Business, "Management's Discussion and Analysis of Financial Condition", and
Note 5 to Consolidated Financial Statements for further discussion as to the
status of regulatory matters.
The Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA"), resulted in extensive changes to the federal banking laws and will
result in extensive changes to banking regulations. The primary purpose of
the law is to authorize additional borrowings by the FDIC in order to provide
funds for the resolution of failing financial institutions. FDICIA institutes
certain changes to the supervisory process and contains various provisions
that may affect the operations of savings institutions like Equity Bank.
Certain of these changes are discussed below and in, "Management's Discussion
and Analysis - Financial Services Business, Savings Institution Regulation".
FDICIA made a number of significant changes to the statutory and
regulatory framework within which Equity Bank and the Company, as a savings
and loan holding company, must operate. Among the more significant
regulations is that FDICIA requires the federal banking regulators to take
prompt corrective action if an institution fails to satisfy certain minimum
capital requirements. Under FDICIA, capital requirements include a leverage
limit, a risk-based capital requirement, and any other measure of capital
deemed appropriate by the federal banking regulators for measuring the capital
adequacy of an insured depository institution. Depending on its capital
structure, an institution will be classified as "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized". A financial institution is considered "well
capitalized" if it is under no regulatory order or action and its leverage
ratio is at least 5% and its Tier 1 and Total Risk-Based Capital ratios are at
least 6% and 10% respectively. Equity Bank is deemed "well capitalized" under
these regulations.
FDICIA amended the Federal Deposit Insurance Act to prohibit insured
depository institutions that are not well-capitalized from accepting brokered
deposits unless a waiver has been obtained from the FDIC. FDICIA also
directed the FDIC to establish a risk-based assessment system for deposit
insurance. Pursuant to FDICIA, the federal bank regulatory agencies are
required to adopt uniform regulations for real estate mortgage and
construction loans. The federal bank regulatory agencies are required to
biannually review risk-based capital standards to ensure that they adequately
address interest rate risk, concentration of credit risk and risks from non-
traditional activities.
13
The FDIC, which insures the deposits of Equity Bank, has adopted a regulation
which provides that any insured depository institution with a ratio of Tier 1
capital to total assets of less than 2% will be deemed to be operating in an
unsafe or unsound condition, which would constitute grounds for the initiation
of termination of deposit insurance proceedings. The FDIC, however, will not
initiate termination of insurance proceedings if the depository institution
has entered into and is in compliance with a written agreement with its
primary regulator, and the FDIC is a party to the agreement, to increase its
Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is
defined as the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets other than eligible
purchased mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of
total assets may also be deemed to be operating in an unsafe or unsound
condition notwithstanding such capital level. The regulation further provides
that in considering applications that must be submitted to it by savings
institutions, the FDIC will take into account whether the savings institution
is meeting the Tier 1 capital requirement for state non-member banks of 4% of
total assets for all but the most highly rated state non-member banks. At
December 31, 1993, Equity Bank had Tier 1 capital of 7.71%.FIRREA required
that the value of certain assets be phased-out by 1994 in accordance with a
prescribed schedule. The Housing and Community Development Act of 1992
authorized the OTS to permit eligible institutions to defer this phase-out to
1996 with regard to certain assets. Equity Bank received approval from the
OTS to utilize this deferred phase-out schedule with regard to assets carried
at a capital value of approximately $11.5 million as of December 31, 1993.
(b) Borrowing Privileges:
So long as Equity Bank maintains an appropriate level of certain
investments ("Qualified Thrift Investments") and otherwise qualifies as a
"Qualified Thrift Lender," it will continue to enjoy full borrowing privileges
from the Federal Home Loan Bank. The required percentage of Qualified Thrift
Investment is 65% of portfolio assets, and such investments must continue to
equal or exceed that percentage on a monthly basis in nine out of every twelve
months. Qualified Thrift Investments include (i) loans that were made to
purchase, refinance, construct, improve or repair domestic residential or
manufactured housing; (ii) home equity loans; (iii) securities backed by or
representing an interest in mortgages on domestic residential or manufactured
housing; (iv) obligations issued by the federal deposit insurance agencies;
and (v) stock in Federal Home Loan Bank, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation. Subject to a 20%
of assets limitation, the amended definition of Qualified Thrift Investments
allows savings institutions to include consumer loans, investments in certain
subsidiaries, loans for the purchase or construction of schools, churches,
nursing homes and hospitals and 200% of investments in loans for low-to-
moderate income housing and certain other community-oriented investments.
The OTS amended the Qualified Thrift Lender ("QTL") regulations to
reflect the statutory changes to the definition of Qualified Thrift
Investments and to provide that a savings association that was not subject to
penalties for failure to maintain QTL status as of June 30, 1991 shall be
deemed a QTL as long as its percentage of Qualified Thrift Investments
continues to equal or exceed 65% in at least nine out of each 12 months.
Beginning January 1, 1993, a savings association will cease to be a QTL when
its percentage of Qualified Thrift Investments as measured by monthly averages
over the immediately preceding 12-month period falls below 65% for four or
more months.
14
At December 31, 1993, approximately 73% of Equity Bank's assets were invested
in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Association under the QTL test in effect at that time.
FDICIA liberalized the Qualified Thrift Lender test to require that
Qualified Thrift Investments equal or exceed 65% of portfolio assets on a
monthly basis in nine out of every 12 months, raised the amount of liquidity
investments excluded from portfolio assets to 20% of total assets and expanded
the range of assets constituting Qualified Thrift Investments.
(c) Internal Controls, Compensation, etc.:
FDICIA requires the federal bank regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation,
fees and benefits. These regulations became effective in July 1993. The
compensation standards prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. In addition, the federal banking
regulatory agencies are required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to
the extent feasible, a minimum ratio of market value to book value for
publicly traded shares of depository institutions and depository institution
holding companies.
All institutions, regardless of their capital levels, are restricted
from making any capital distribution or paying any management fees that would
cause the institution to fail to satisfy the minimum levels for any of its
capital requirements. An institution that failed to meet the minimum level
for any relevant capital measure (an "undercapitalized institution") will be:
(i) subject to increased monitoring by the appropriate federal banking
regulator; (ii) required to submit an acceptable capital restoration plan
within 45 days; (iii) subject to asset growth limits; and (iv) required to
obtain prior regulatory approval for acquisitions, branching and new lines of
businesses. The capital restoration plan must include a guarantee by the
institution's holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters. Under such guarantee the holding company would be liable up to the
lesser of 5% of the institution's total assets or the amount necessary to
bring the institution into capital compliance as of the date it failed to
comply with its capital restoration plan. A significantly undercapitalized
institution, as well as any undercapitalized institution that did not submit
an acceptable capital restoration plan, will be subject to regulatory demands
for recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution could also be
required to divest the institution. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or
increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated
debt. If an institution's ratio of tier 1 capital to total assets falls below
a level established by the appropriate federal banking regulator, which may
not be less than 2% nor more than 65% of the minimum tier 1 capital level
otherwise required (the "critical capital level"), the institution will be
subject to conservatorship or receivership within 90 days unless periodic
15
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate fundings and certifications
are made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized. Most of these new capital requirements and
applicable federal banking laws became effective in December , 1992, and the
OTS has adopted regulations implementing these provisions.
(d) Qualified Thrift Lender:
In connection with the acquisition of Equity Bank by the Company, the
predecessor of the OTS provided certain modifications to the Qualified Thrift
Lender requirements applicable to Equity Bank. Pursuant to these
modifications, Equity Bank was relieved of immediate compliance with the
statutory Qualified Thrift Lender test. At December 31, 1993, Equity Bank
maintained Qualified Thrift Investment of 73% of portfolio assets, meeting not
only the lower modified requirement but also the full statutory requirement.
If Equity Bank continues to meet the modified requirement as it phases in
toward the full statutory requirement and thereafter meets the full percentage
requirement provided by law, Equity Bank will continue to maintain its status
as a Qualified Thrift Lender. If Equity Bank should fail to maintain its
status as a Qualified Thrift Lender, the Company would be required within one
year thereof to qualify and register as a bank holding company. Under present
regulations, the Company is a savings and loan holding company, and, as a
result of it's present operations, is not qualified to be a bank holding
company. Thus, if the Company were to be required to become a bank holding
company, it would be necessary under present regulations for the Company to
either dispose of Equity Bank or dispose of its non-banking operations in
order to continue to own Equity Bank. A failure to maintain Qualified Thrift
Lender status will also result in the following restrictions on the operations
of a savings institution: (i) the savings institution may not engage in any
new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank,
(iii) the institution shall not be eligible to obtain any advances from the
appropriate governmental agency; (iv) payment of dividends by the institution
shall be subject to the rules regarding payment of dividends by a national
bank; and (v) change its method for accounting for bad debts to the direct
charge off method. No subsidiary savings institution of a savings and loan
holding company may declare or pay a dividend on its permanent or non-
withdrawable stock unless it first gives the Director of the OTS thirty (30)
days advance notice of such declaration and payment. Any dividend declared
during such period without the giving of such notice shall be invalid. "See
Market for Company's Common Equity and Related Stockholder Matters".
(e) Acquiring other savings institutions:
The Home Owners Loan Act ("HOLA"), generally prohibits the Company,
without prior approval of the Director of the OTS, from (i) acquiring control
of any other savings institution or savings and loan holding company or the
assets thereof or (ii) acquiring or retaining more than 5% of the voting
shares of a savings institution or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of the Company or person owning or controlling by proxy or
otherwise more than 25% of the Company's stock, may acquire control of any
savings institution, other than a subsidiary association, or any other savings
and loan holding company.
(f) Limitations in transactions with other savings institutions,
officers and others:
16
Transactions between savings institutions and any affiliate are governed by
the FRA and regulations of the OTS. An affiliate of a savings institution is
any company or entity which controls, is controlled by or is under common
control with the savings institution. In a holding company context, the
parent holding company of a savings institution (such as the Company) and any
company which is controlled by such parent holding company are affiliates of
the savings institution. Generally, the FRA (i) limits the extent to which
Equity Bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock
and surplus, and limit all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
Equity Bank or its subsidiary as those provided to a non-affiliate. The term
"Covered Transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar other types of transactions. In addition
to the restrictions imposed by the FRA, FIRREA has further provided that
Equity Bank may not, without the prior approval of the appropriate
governmental agency, (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are
permissible for bank holding companies, which would exclude the Company and
most of its industrial subsidiaries, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliate, except for
those which are subsidiaries of the savings institution. See discussions
elsewhere under this "BUSINESS - Financial Services Business" section for
transactions between Equity Bank and the Company, or subsidiaries of the
Company.
Further, FIRREA and FDICIA have extended to savings institutions the
restrictions contained in FRA on loans to directors, executive officers and
principal stockholders, wherein loans to an executive officer and to a greater
than 10% stockholder of a savings institution and certain affiliated entities
of either, may not exceed, together with all other outstanding loans to such
person and affiliated entities, the association's loan-to-one-borrower limit
as established by FIRREA. FRA also prohibits loans, above amounts prescribed
by the appropriate federal banking agency, to directors, executive officers
and greater than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance by a majority
of the board of directors of the association with any "interested" director
not participating in the voting. The Federal Reserve Board has prescribed the
loan amount (which includes all other outstanding loans to such person), as to
which such prior board of director approval, if required, as being the greater
of $25,000 or 5% of capital and surplus (up to $500,000). Further, the
Federal Reserve Board pursuant to FRA requires that loans to directors,
executive officers and principal stockholders be made on terms substantially
the same as offered in comparable transactions to other persons.
(g) Savings and Loan Holding Company:
The Board of Directors of the Company presently intends to continue to
operate the Company as a unitary savings and loan holding company until Equity
Bank is sold to Fourth Financial pursuant to the Acquisition Agreement. There
are generally no restrictions on the activities of a unitary savings and loan
holding company. However, if the Director of the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to
address such risk and limiting (i) payment of dividends by the savings
institution, (ii) transactions between the savings institution and its
affiliates, and (iii) any activities of the savings institution that might
17
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. See "Termination of
Supervisory Agreement" under this section.
As a diversified unitary savings and loan holding company engaged in a
variety of commercial and industrial businesses, the Company is restricted in
its ability to acquire other savings institutions. Acquisition of such a
second savings institution would result in the Company becoming a "multiple
savings and loan holding company" and the statutory restrictions on the types
of permissible business activities for such entities is wholly inconsistent
with the predominant nature of its current businesses. However, acquisitions
of other savings institutions which result in a merger or similar
consolidation with Equity Bank and retain the Company's status as a unitary
savings and loan holding company are permitted. Also, an acquisition of a
failing savings institution certified as such by the OTS would not result in
the Company's loss of status as a unitary holding company.
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of the Company unless the OTS receives sixty (60) days prior
written notice. The HOLA provides that no company may acquire "control" of
the Company without the prior approval of the OTS. Any company that acquires
control becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS. Applicable statutes and regulations
conclusively deem any person to have acquired "control" of the Company by,
among other things, the acquisition of more than 25% of any class of voting
stock of the Company or the ability to control the election of a majority of
the directors of the Company. In addition, applicable regulations presume a
person to have acquired control (subject to rebuttal), upon the acquisition of
more than 10% of any class of voting stock or of more than 25% of any class of
stock of the Company, when certain enumerated "control factors" also exist.
The OTS may prohibit an acquisition of control if it finds, among other
things, that (1) the acquisition would result in a monopoly or substantially
less competition, (2) the financial condition of the acquiring person might
jeopardize the financial stability of Equity Bank, or (3) the competence,
experience or integrity of the acquiring person indicates that it would not
serve the interest of the depositors or the public to permit the acquisition
of control by the person.
Inherent Risk:
-------------
During 1993, Equity Bank's Board of Directors and management continued
to place their priority on monitoring asset quality and maintaining
profitability.
Approximately 70% of non-performing loans were real estate related.
Adverse economic conditions experienced in the southwest and in the Oklahoma
economy which produced a general oversupply of developed real estate have
stabilized and in some areas improved during the year.
"Potential problem loans" are those loans which, although currently
performing, have credit weaknesses such that management has serious doubts as
to the borrowers' future ability to comply with present terms, and thus may
result in a change to non-performing status. Equity Bank has identified,
through internal credit ratings, certain performing loans which demonstrate
some deterioration in credit quality and, accordingly, are scrutinized more
carefully. At December 31, 1993 these loans totaled $3.7 million. Exposure
to loss of principal on such loans was estimated to be approximately $273,000,
all of which was considered in the reserve for possible loan losses at
December 31, 1993.
18
Under the Acquisition Agreement the Company has agreed to purchase from Equity
Bank at the closing of the Sale of Equity Bank the real estate owned by Equity
Bank that was acquired by Equity Bank through foreclosure for Equity Bank's
then carrying value for such real estate. In addition, the Company has the
option, but not the obligation to acquire any loan owned by Equity Bank that
has been charged off or written down for a price equal to the net book value
of such loan that has been written down and for a price of $1.00 in the case
of each loan that has been charged off. See "Business- Recent Developments".
Loans to executive officers and directors (or their associates) of
Equity Bank and its principal subsidiaries are made in the ordinary course of
business. These transactions are conducted on substantially the same terms as
those prevailing at the time for comparable transactions with other persons
and do not involve more than normal risk or present other unfavorable features
at the time they are made. No related party loans were identified by
management as potential problem loans at December 31, 1993.
Termination of Supervisory Agreement:
------------------------------------
During May 1991, as a result of a regulatory examination in 1990, Equity
Bank entered into a Supervisory Agreement with the OTS. This agreement
contained operating restrictions on Equity Bank, including limiting the
overall growth of Equity Bank's assets and liabilities to specified levels,
restricting investments, precluding the payment of cash and stock dividends
and increasing reporting requirements. The agreement also mandated certain
administrative actions to be taken, including the preparation and/or
modification of policies and procedures and the addition of Board members
considered not affiliated with its parent or other subsidiaries. In September
1993, Equity Bank was notified in writing by the OTS that such Supervisory
Agreement had been terminated.
Non-Accrual Policies:
--------------------
Interest income is not accrued on loans which are ninety (90) days or
more delinquent. The interest previously accrued on these delinquent loans is
reversed from income. Delinquent loans are reviewed on a monthly basis to
determine the propriety of non-accrual status for each loan. Management also
considers the financial strength of the borrower, collateral valuations,
business operations and current status of each borrower to determine non-
accrual status. Normally, loans are not reinstated to accrual status unless
all interest and principal payments have been brought current.
Loan Loss and Asset Valuation Reserve:
-------------------------------------
Equity Bank's loan portfolio is reviewed on a monthly basis by internal
management. The portfolio review normally includes large loans, delinquent
loans and previously classified loans. These loans are classified utilizing
general regulatory agency criteria. Specific losses identified by loan or
asset are charged against income as a loss provision expense. The loan or
asset balance is then written down upon approval by the Executive Committee of
the Board of Directors. In addition, a General Valuation Allowance ("GVA") is
computed as a percentage of the net book balance of the loan or asset. The
computed allowance is charged against income as a loss provision expense and a
general reserve is established to absorb potential future losses associated
with the asset.
19
A GVA is computed for all internally classified assets and all appropriate
unclassified loans and other assets. The GVA percentage utilized for these
calculations ranges between 1% and 7.5% of the net book balance of the asset.
Credit Risk Concentration:
-------------------------
Loan concentrations are another important factor in the assessment of
inherent risks of Equity Bank. The composition of the loan portfolio at year-
end for the past five years is presented elsewhere in this report. As
indicated therein, approximately 61% of Equity Bank's loan portfolio at
December 31, 1993 was in real estate. While real estate values have
stabilized and in some instances improved, Equity Bank has continuing exposure
to declining real estate values.
Included in foreclosed real estate as an in-substance foreclosure is a
$13.8 million first mortgage real estate loan collateralized by the building
in which Equity Bank's corporate office is located. As required by regulation
for this type of asset, a marketing plan for the disposal of the asset has
been prepared and submitted to the OTS. Equity Bank continues to work with
the borrower and building manager affiliate to maximize the asset's net
operating income while competing for optimum occupancy levels.
Investment Portfolio Policy:
---------------------------
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was issued by the FASB in May 1993. This Statement requires
investments to be classified in three categories and accounted for as follows:
* Debt securities that Equity Bank has the positive intent and
ability to hold to maturity are to be classified as held-to
maturity securities and reported at amortized cost.
* Debt and equity securities that are bought and held principally
for the purpose of selling in the near future are to be classified
as trading securities and reported at fair value, with unrealized
gains and losses included in current earnings.
* Debt and equity securities not classified as either held-to-
maturity securities or trading securities are to be classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses reported as a separate component of
stockholder's equity.
The Statement is effective for fiscal years beginning after December 15, 1993
and is to be initially applied as of the beginning of the fiscal year. Equity
Bank will adopt the provisions of this Statement as of January 1, 1994.
Management has determined that the effect of the adoption of this statement
will not be material to Equity Bank.
Termination of Assistance Agreement:
-----------------------------------
In connection with the acquisition of Arrowhead, Equity Bank and
FSLIC entered into an Assistance Agreement with an original term of ten years.
The Assistance Agreement provided for various forms of financial assistance
and indemnifications to Equity Bank during the term of the Agreement and
required payments to FSLIC for sharing of certain items including capital
losses, net income and tax benefits.
20
In March 1993, Equity Bank, the Company and the RTC (FDIC as manager of the
FSLIC Resolution Fund) finalized an agreement terminating the Assistance
Agreement (the "Termination Agreement"). Under the Termination Agreement, the
RTC paid Equity Bank approximately $14.2 million in cash and all of the
obligations of both parties under the Assistance Agreement were terminated.
As a result of the Termination Agreement, Equity Bank assumed all credit risk
with respect to existing "covered assets." Equity Bank allocated a
substantial portion of such $14.2 million to record the previously covered
loans and foreclosed real estate at estimated fair value. As a result, the
Company believes that there are adequate reserves relating to the assets to
reserve for the credit risk which was assumed. Also as a result of the
Termination Agreement, the Equity Bank is no longer indemnified for any
potential claim relating to any covered asset arising out of, or based upon,
any liability, action or failure to act of Equity Bank, or any of the Equity
Bank affiliates, officers or directors from and after December 30, 1988 that
are asserted against the FDIC. The effect of the accounting for the
Termination Agreement included reclassifying previously covered assets to
reflect their status at the date of termination of the Assistance Agreement
(on a fair value basis), all related receivables and payables were
extinguished, the cash payment from the FDIC Manager was recorded and goodwill
existing relating to the Arrowhead acquisition was adjusted for this
resolution of a contingent purchase price.
The Company has reserved a substantial portion of the $14.2 million,
and, as a result, the Company believes that there are adequate loss reserves
on these assets. Termination of the Assistance Agreement (including receipt
of the $14.2 million) did not result in a charge or credit to the Company's
income statement.
Recording of the Termination Agreement increased (decreased) the following
accounts (in millions):
Cash and cash equivalents $14.2
Receivables from FSLIC (18.9)
Assets covered by FSLIC Assistance (33.1)
Loans receivable, net 13.3
Foreclosed real estate, net 8.7
Excess of purchase price over fair value
of net assets acquired 6.7
Payable to FSLIC (9.1)
The Financial Services Business' earnings include the following
assistance income:
1992 1991
---- ----
(Dollars in Millions)
Yield Maintenance on Covered Assets $ .9 $2.8
Interest Income on the FSLIC Note
Receivable - .6
---- ----
FSLIC Assistance Income .9 3.4
Reimbursement of Capital Losses on
Covered Assets 3.1 3.8
---- ----
$ 4.0 $ 7.2
==== ====
21
Since the Assistance Agreement was terminated effective January 1, 1993, there
was no income under the Assistance Agreement for the year ended December 31,
1993.
FINANCIAL SERVICES STATISTICAL INFORMATION
-------------------------------------------
The following tables present statistical information regarding Equity
Bank's operations for the periods listed.
Average Balance Sheet - The following table sets forth certain information
relating to Equity Bank's average balance sheet on a stand-alone basis and
reflects the average yield on assets and average cost of liabilities for the
periods indicated and the average yields earned and rates paid at December 31,
1993, 1992 and 1991. The table includes assets transferred to Equity Bank by
the Company in connection with the acquisition at fair value of approximately
$69 million rather than at the depreciated book value of approximately $18.8
million at the date of acquisition. The yields and costs result from dividing
income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. The table uses month-end balances
in calculating average balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
difference in the information presented.
For presentation purposes, non-interest earning assets include plant,
property and equipment, foreclosed real estate, accounts receivable from
FSLIC, excess of purchase price over fair value of net assets acquired, loan
servicing rights and other assets. Non accrual loans have been included in
the category "Loan Receivable, net".
The tables also set forth the ratios of average interest-earning assets
to average interest-bearing liabilities, return on assets, return on equity
and equity to assets by Equity Bank for the fiscal years ended December 31,
1993, 1992 and 1991:
22
YEAR ENDED DECEMBER 31, 1993
-----------------------------------
AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE COST
-----------------------------------
(Dollars in Thousands)
Interest Earning Assets:
Loan and Securities:
Loans Receivable, net $151,446 $17,483 11.54%
Mortgage-Backed Securities 188,820 8,976 4.75%
Investment Securities 1,184 34 2.87%
------- ------
341,450 26,493 7.76%
Other interest earning assets:
Cash and cash equivalents-
principally overnight funds 16,519 579 3.51%
Federal Home Loan Bank Stock 6,417 449 7.00%
Accounts receivable purchased
from affiliates 29,775 2,659 8.93%
------- ------
52,711 3,687 6.99%
------- ------
Total Interest Earning Assets 394,161 30,180 7.66%
Non-Interest Earning Assets 119,306
-------
Total Assets $513,467
=======
Interest-Bearing Liabilities:
Deposits $334,447 12,505 3.74%
Borrowed Funds 120,217 4,668 3.88%
------- ------
Total Interest-Bearing
Liabilities 454,664 17,173 3.78%
------
Non-Interest Bearing
Liabilities 3,937
-------
Total Liabilities 458,601
Stockholder's Equity-average
(Actual at December 31, 1993
was $58,627,000) 54,866
-------
Total Liabilities and
Stockholder's Equity $513,467
=======
Net Interest Income $ 13,007
=======
Interest Rate Spread 3.88%
======
Net Yield on Interest Earning Assets 7.66%
======
Ratio of Average Interest-Earning Assets
To Average Interest-Bearing Liabilities 86.69%
======
Ratio of Return on Assets (Net Interest
Income/Average Total Assets) 2.53%
======
Ratio of Return on Equity (Net Interest
Income/Average Equity) 23.71%
======
Ratio of Equity to Assets (Average
Equity/average Total Assets) 10.69%
======
23
YEAR ENDED DECEMBER 31, 1992
--------------------------------------
AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE COST
--------------------------------------
(Dollars in Thousands)
Interest Earning Assets:
Loans and Securities
Loans Receivable, net $125,544 $18,006 14.34%
Mortgage-Backed Securities 185,132 10,710 5.79%
Investment Securities 1,385 64 4.62%
------- ------
312,061 28,780 9.22%
Other interest earning assets:
Cash and cash equivalents-
principally overnight funds 25,414 846 3.33%
Federal Home Loan Bank Stock 6,386 545 8.53%
Accounts receivable purchased
from affiliates 29,966 2,713 9.05%
Assets covered by FSLIC assistance 40,485 2,821 6.97%
------- -------
102,251 6,925 6.77%
------- -------
Total Interest Earning Assets 414,312 35,705 8.62%
Non-Interest Earning Assets 126,522
-------
Total Assets $540,834
=======
Interest-Bearing Liabilities:
Deposits $347,198 16,445 4.74%
Borrowed Funds 134,034 5,853 4.37%
Payable to FSLIC 9,034 829 9.18%
------- ------
Total Interest-Bearing
Liabilities 490,266 23,127 4.72%
------
Non-Interest Bearing
Liabilities 3,882
-------
Total Liabilities 494,148
Stockholder's Equity-average
(Actual at December 31, 1992
was $50,423,000) 46,686
-------
Total Liabilities and
Stockholder's Equity $540,834
=======
Net Interest Income $12,578
======
Interest Rate Spread 3.90%
======
Net Yield on Interest Earning Assets 8.62%
======
Ratio of Average Interest-Earning Assets
to Average Interest-Bearing Liabilities 84.51%
======
Ratio of Return on Assets (Net Interest
Income/Average Total Assets) 2.33%
======
Ratio of Return on Equity (Net Interest
Income/Average Equity) 26.94%
======
Ratio of Equity to Assets (Average
Equity/Average Total Assets) 8.63%
======
24
YEAR ENDED DECEMBER 31, 1991
--------------------------------------
AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE COST
--------------------------------------
(Dollars in Thousands)
Interest Earning Assets:
Loan and Securities:
Loans Receivable, net $142,481 $21,758 15.27%
Mortgage-Backed Securities 118,507 9,506 8.02%
Investment Securities 3,082 215 6.98%
------- ------
264,070 31,749 12.02%
Other interest earning assets:
Cash and Cash Equivalents-
Principally overnight funds 43,381 2,392 5.51%
Federal Home Loan Bank Stock 5,879 579 9.85%
Accounts receivable purchased
from affiliates 30,457 3,615 11.87%
Assets covered by FSLIC assistance 55,791 5,274 9.45%
Note receivable from FSLIC 6,732 589 8.75%
------- ------
142,240 12,449 8.75%
------- ------
Total Interest Earning Assets 406,310 43,928 10.81%
Non-Interest Earning Assets 133,761
-------
Total Assets $540,071
=======
Interest-Bearing Liabilities:
Deposits $356,993 23,144 6.48%
Borrowed Funds 129,137 8,234 6.38%
Payable to FSLIC 8,341 746 8.94%
------- ------
Total Interest-Bearing
Liabilities 494,471 32,124 6.50%
------
Non-Interest Bearing
Liabilities 5,609
-------
Total Liabilities 500,080
Stockholder's Equity - Average
(Actual at December 31, 1991
Was $43,405,000) 39,991
-------
Total Liabilities and
Stockholder's Equity $540,071
=======
Net Interest Income $11,804
======
Interest Rate Spread 4.31%
======
Net Yield on Interest Earning Assets 10.81%
======
Ratio of Average Interest-Earning Assets
To Average Interest-Bearing Liabilities 82.17%
======
Ratio of Return on Assets (Net Interest
Income/Average Total Assets 2.19%
======
Ratio of Return on Equity (Net Interest
Income/Average Equity) 29.52%
======
Ratio of Equity to Assets (Average
Equity/Average Total Assets) 7.40%
======
25
Changes in Interest Income and Expense
- --------------------------------------
REVENUE/ REVENUE/ CHANGE CHANGE CHANGE
EXPENSE EXPENSE INCREASE DUE TO DUETO VOLUME/
1993 1992 (DECREASE) VOLUME RATE RATE
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest earning
assets:
Loans, including
non-Accrual
loans $17,483 $18,006 $ (523) $ 3,715 $(3,513) $ (725)
Investment
securities 34 64 (30) (9) (24) 3
Mortgage-backed
securities 8,976 10,710 (1,734) 213 (1,911) (36)
Other interest earning
assets 3,687 6,925 (3,238) (3,355) 227 (110)
------ ------ ------- ------- ------- -------
TOTAL $30,180 $35,705 $(5,525) $ 564 $(5,221) $( 868)
====== ====== ====== ====== ====== ======
Interest bearing
liabilities:
Deposits $12,505 $16,445 $(3,940) $ (596) $(3,472) $ 128
Borrowed funds 4,668 5,853 (1,185) (603) (649) 67
Payable to FSLIC - 829 (829) (829) - -
------ ------ ------- ------ ----- ------
TOTAL $17,173 $23,127 $(5,954) $(2,028) $(4,121) $ 195
====== ====== ====== ====== ====== ======
26
Changes in Interest Income and Expense
- --------------------------------------
REVENUE/ REVENUE/ CHANGE CHANGE CHANGE
EXPENSE EXPENSE INCREASE DUE TO DUE TO VOLUME/
1992 1991 (DECREASE) VOLUME RATE RATE
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest earning
assets:
Loans, including
non-accrual
loans $18,006 $21,758 $(3,752) $(2,585) $(1,325) $ 158
Investment
securities 64 215 (151) (118) (73) 40
Mortgage-backed
securities 10,710 9,506 1,204 5,344 (2,650) (1,490)
Other interest earning
assets 6,925 12,449 (5,524) (3,499) (2,816) 791
------ ------ ------ ------ ------ -----
TOTAL $35,705 $43,928 $(8,223) $( 858) $(6,864) $( 501)
====== ====== ====== ====== ====== =====
Interest bearing
liabilities:
Deposits $16,445 $23,144 $(6,699) $ (635) $(6,235) $ 171
Borrowed funds 5,853 8,234 (2,381) 312 (2,595) (98)
Payable to FSLIC 829 746 83 62 19 2
------ ------ ------ ------ ------ -------
TOTAL $23,127 $32,124 $(8,997) $ ( 261) $(8,811) $ 75
======= ======= ====== ======= ======= ========
27
Composition of Loan Portfolio
- -----------------------------
The following indicates the loan distribution of Equity Bank as of
December 31, 1993, 1992, 1991, 1990 and 1989.
1993 1992 1991 1990 1989
-------- --------- -------- -------- ----------
(Dollars in Thousands)
Real estate -
mortgage - $89,613 $ 91,595 $106,731 $125,097 $153,546
Real estate -
construction 1,029 1,234 618 591 128
Undisbursed portion
of loans in process (819) (768) (236) (162) (79)
Net deferred loan
origination fees (63) (188) (125) (83) (54)
Unearned discounts (11,812) (13,372) (17,912) (24,442) (29,525)
------ ------ ------ ------- -------
Net real estate 77,948 78,501 89,076 101,001 124,016
Commercial 3,231 1,686 4,691 10,599 5,469
Consumer and other 45,893 41,546 37,151 32,009 25,802
Allowance for loan
losses (3,625) (3,142) (3,424) (3,712) (2,712)
-------- -------- -------- -------- --------
Loans, net $123,447 $118,591 $127,494 $139,897 $152,575
======== ======== ========= ======== ========
Loans held for sale $ 18,574 $ 6,358 $ 6,275 $ 4,491 -
======== ======== ======== ======== ========
Loans covered by FSLIC
assistance - $ 14,137 $ 21,231 $ 25,495 $ 33,352
======== ======== ======== ======== ========
Note: The amounts included above do not include accrued interest receivable.
28
Investment Portfolio
- --------------------
The following table sets forth the book value of the investment securities
portfolio, short-term investments, and mortgage-backed securities of Equity
Bank at the date indicated. At December 31, 1993, 1992 and 1991,
the market values of Equity Bank's investment securities portfolio
was $216.9 million and $174.5 million and $185.9 million, respectively.
December 31,
-------------------
1993 1992 1991
---- ---- ----
Investment securities (Dollars in Thousands)
U.S. Treasury securities $ 1,299 $ 406 $ 719
Corporate bonds - - 2,002
Other 90 187 241
_______ _______ _______
Total 1,389 593 2,962
Mortgage-backed securities
held for investment 201,623 174,241 181,358
Mortgage-backed securities
held for sale 13,947 - -
_______ _______ _______
Total investment
securities $216,959 $174,834 $184,320
======== ======== ========
Note: The above investment amounts do not include FHLB stock or accrued
interest receivable.
29
Investment Portfolio - December 31, 1993
- ----------------------------------------
The following table sets forth the scheduled maturities, book values,
market values, and weighted average yields for the investment securities of
Equity Bank at December 31, 1993 (excluding FHLB stock).
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
One Year One to Five Five to Ten More Than Total Investment
or Less Years Years Ten Years Securities
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Book Average Book Average Book Average Book Average Book Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government
and Agency
Obligations $1,193 3.16% $ 106 9.10% $ - -% $ - -% $1,299 $1,304 3.64%
Other 90 - - - - - - - 90 72 -
Mortgage-Backed
Securities held
for investment (1) - - 8,147 6.55% 9,638 4.88% 183,838 4.62% 201,623 201,609 4.71%
Mortgage-Backed
securities held
for sale (1) - - 13,947 4.68% - - - - 13,947 13,947 4.68%
______ ______ ______ _______ ______ ________
Total Investment
Securities $1,283 2.94% $22,200 5.39% $9,638 4.88% $183,838 4.62% $216,959 $216,932 4.70%
====== ===== ====== ===== ====== ===== ======= ===== ======= =======
(1) Mortgage-backed securities scheduled maturities are based on contractual
maturity dates. Payments on these securities are received monthly based
upon payments of the underlying mortgage loans.
30
Analysis of the Allowance for Loan Losses
- -----------------------------------------
This table summarizes the Equity Bank loan loss experience for each of the
years ended:
December 31,
1993 1992 1991 1990 1989
-----------------------------------------------------
(Dollars in Thousands)
Balance at beginning of period $3,142 $3,424 $3,712 $2,712 $3,497
Charge-offs:
Real estate-mortgage ( 106) ( 335) ( 543) (3,145) (179)
Commercial - - ( 200) ( 63) ( 11)
Consumer and other (1,045) (1,300) (1,158) (1,667) ( 703)
------ ------ ------ ------ ------
(1,151) (1,635) (1,901) (4,875) ( 893)
Recoveries:
Real estate-mortgage 20 12 90 - 73
Commercial 150 104 150 15 -
Consumer and other 82 13 38 8 -
------ ------ ------ ------ ------
252 129 278 23 73
------ ------ ------ ------ ------
Net Charge-offs (899) (1,506) (1,623) (4,852) ( 820)
Additions charged to operations 1,382 1,224 1,335 5,852 35
------ ------ ------ ------ ------
Balance at end of period $3,625 $3,142 $3,424 $3,712 $2,712
====== ====== ====== ====== ======
Ratio of net charge-offs
during the period to
average loans outstanding
during the period 0.60% 1.20% 1.14% 3.09% 0.55%
====== ====== ====== ====== ======
In connection with the termination of the Assistance Agreement, Equity Bank
assumed the credit risk of $13.3 million in loans whose credit risk had
previously been covered under the Assistance Agreement. At December 31, 1993,
approximately $1.4 million in unearned nonaccretable discounts exist
to provide as additional reserves on these loans. These amounts are included
as unearned discounts and are not included in the allowance for loan
losses above.
31
The following tables show an allocation of the allowance for loan losses as
of the end of each of the years ending:
Allocation of the Allowance for Loan Losses
(Dollars in Thousands)
December 31, 1993
-------------------------------
Percentage
of Loans
in each
Category
to Total
Amount Percent Loans
------ ------- ----------
Real estate $1,592 43.92% 61.34%
Commercial 142 3.92% 2.54%
Consumer and other 1,891 52.16% 36.12%
------ -------- --------
$3,625 100.00% 100.00%
======= ======== ========
December 31, 1992
-----------------------------
Percentage
of Loans
in each
Category
to Total
Amount Percent Loans
------ ------- ----------
Real estate $1,285 40.90% 64.49%
Commercial 116 3.69% 1.39%
Consumer and other 1,741 55.41% 34.12%
------- -------- --------
$3,142 100.00% 100.00%
======= ======== ========
32
Allocation of the Allowance for Loan Losses
(Dollars in Thousands)
December 31, 1991
----------------------------
Percentage
of Loans
in each
Category
to Total
Amount Percent Loans
------ ------- ----------
Real estate $1,441 42.09% 59.39%
Commercial 667 19.48% 11.49%
Consumer and other 1,316 38.43% 29.12%
------- -------- --------
$3,424 100.00% 100.00%
======= ======== ========
December 31, 1990
----------------------------
Percentage
of Loans
in each
Category
to Total
Amount Percent Loans
------- -------- ---------
Real estate $1,518 40.90% 61.94%
Commercial 813 21.90% 11.69%
Consumer and other 1,381 37.20% 26.37%
------- -------- --------
$3,712 100.00% 100.00%
======= ======== ========
33
Allocation of the Allowance for Loan Losses
(Dollars in Thousands)
December 31, 1989
----------------------------
Percentage
of Loans
in each
Category
to Total
Amount Percent Loans
------- -------- ---------
Real estate $1,091 40.23% 62.99%
Commercial 244 9.00% 20.45%
Consumer and other 1,377 50.77% 16.56%
------- -------- --------
$2,712 100.00% 100.00%
======= ======== ========
Note: For purposes of the above real estate mortgage and real estate
construction are combined due to the insignificance of real
estate construction loans and the related reserve.
34
Return on Equity and Assets
- ---------------------------
The table below sets forth certain performance ratios of Equity Bank for the
periods indicated.
Years Ended
December 31,
-------------------
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
- ----------------------------------------------------------------------------
Net Income $8,204 $ 7,017 $ 7,035
Return on assets (net income divided
by average total assets) 1.60% 1.30% 1.30%
Return on equity (net income divided
by average equity) 14.95% 15.03% 17.59%
Equity to assets (average equity
divided by average total asset) 10.69% 8.63% 7.40%
Dividend payout ratio (dividends
declared per share divided by net
income per share) 0.00% 0.00% 0.00%
35
Short-Term Borrowing
- --------------------
The following tables set forth certain information regarding short-term
borrowings by Equity Bank at the end of and during the periods indicated:
At December 31,
1993 1992 1991
---- ---- ----
(Dollars in Thousands)
----------------------
Summary of short-term borrowings:
Advances from the Federal
Home Loan Bank with thirty
day to one year maturities $31,000 $73,500 $ 72,500
Securities sold under
agreements to repurchase $38,721 $50,344 $ 66,744
Weighted average rate:
- ---------------------
FHLB advances 3.41% 4.13% 4.57%
Securities sold under
agreements to repurchase 3.38% 3.57% 4.44%
During the year-ended
December 31,
1993 1992 1990
---- ---- ----
(Dollars in Thousands)
----------------------
Maximum amount of short-term borrow-
ings outstanding at any month-end
- ----------------------------
FHLB advances $73,500 $73,500 $ 73,125
Securities sold under
agreements to repurchase $50,344 $66,744 $ 82,162
Approximate average short-term
borrowings outstanding with respect to:
- --------------------------------------
FHLB advances $53,250 $71,769 $ 53,708
Securities sold under
agreements to repurchase $44,473 $57,553 $ 74,549
Approximate weighted average rate
paid on:
- ---------------------------------
FHLB advances 4.03% 4.42% 6.13%
Securities sold under
agreements to repurchase 3.47% 4.12% 6.57%
36
Deposits
- --------
The following table sets forth the average consolidated deposits and average
rates paid for the years ended December 31, 1993, 1992 and 1991:
Weighted
Type Average Rate Paid Deposits
- -------------------------------------------------------------------------------
1993 1992 1991 1993 1992 1991
- -------------------------------------------------------------------------------
(Dollars in Thousands)
Demand 2.58% 3.28% 4.31% $ 86,283 $ 80,268 $ 58,151
Savings 3.02% 3.86% 5.47% 17,554 13,587 11,183
Time 4.26% 5.24% 6.92% 229,684 253,343 287,659
------- ------- -------
$333,521 $347,198 $356,993
======= ======= ========
Time certificates of deposits in amounts of $100,000 or more totaled
approximately $27.0 million at December 31, 1993.
The following table sets forth the maturities of time certificates of deposit
of $100,000 or more outstanding at December 31, 1993:
(Dollars in Thousands)
3 months or less $ 6,743
Over 3 through 6 months 9,167
Over 6 through 12 months 6,925
Over 12 months 4,122
-------
$26,957
=======
37
Analysis of Non-Accrual, Past Due and Restructured Loans
- --------------------------------------------------------
The following table Summarizes the non-accrual, past due, and restructured
loans: :
At December 31,
1993 1992 1991 1990 1989
-----------------------------------------------
(Dollars in Thousands)
Non Accrual Loans $1,964 $2,117 $1,316 $2,753 $2,550
Accruing Loans past
due 90 days or more - - - - -
Restructured Loans 1,019 641 500 1,300 -
------ ------ ------ ------ ------
$2,983 $2,758 $1,816 $4,053 $2,500
====== ====== ====== ====== ======
Interest income that would have been recorded under the original terms of
such loans and the interest income actually recognized for the year ended
December 31, 1993 are summarized below:
Interest income that would have been recorded $ 397
Interest income recognized (83)
------
Interest income foregone $ 314
======
38
Loan Maturity
The following table shows the maturity of loans (excluding real estate mortgage
loans and consumer loans) outstanding at December 31, 1993.
Maturing
------------------------------------------------
1 year 1 year to over
or less 5 years 5 years Total
------------------------------------------------
(Dollars in Thousands)
Commercial Loans $2,326 $ 809 $ 96 $3,231
Real estate -
Construction 1,029 - - 1,029
------ ----- ----- ------
$3,355 $ 809 $ 96 $4,260
====== ===== ===== ======
Loans maturing after
one year with:
Fixed interest rates $ 68 $ -
Variable interest rates 741 96
----- -----
$ 809 $ 96
===== =====
39
Employees
- ---------
As of December 31, 1993, the Company employed 1,671 persons. As of that date,
(a) the Environmental Control Business employed 595 persons, (none of which is
represented by a union)(b) the Automotive Products Business employed 236 persons
with 106 represented by unions under an agreement that expired in August, 1990,
(c) the Chemical Business employed 459 persons, with 110 represented by unions
under agreements expiring in August, 1995, and (d) the Financial Services
Businessemployed 204 persons, none of which are represented by unions.
The union contract within the Automotive Product Business expired on August 1,
1990, and the employees within that business have continued to work without a
contract. The employees did not strike in 1990 when their contract expired, and
as of the date of this report, there are no indications that the employees are
considering striking. There are no pending negotiations in connection with the
expired union contract. The Company does not believe such employees will strike
within the foreseeable future, but there are no assurances to that effect.
Research and Development
- ------------------------
The Company spent approximately $788,000 in 1993, $684,000 in 1992, and
$454,000 in 1991 on research and development relating to the development of new
products or the improvement of existing products. All expenditures for research
and development related to the development of new products and improvements are
sponsored by the Company.
Environmental Compliance
- ------------------------
The Company does not anticipate, based on facts presently known to the
Company, that it will be required during 1994 to incur any material capital
expenditures for environmental control facilities relating to its industrial
businesses. However, a subsidiary of the Company in its Automotive Products
Business has been notified that it is a potentially responsible party as a
result of having been a generator of waste disposed of at the Mosley site
(as defined in the first paragraph of Item 3 of this report). See
Item 3 "Legal Proceedings" for a discussion of the Mosley site. In addition,
a subsidiary of the Company in its Chemical Business has been notified that
its chemical manufacturing facility located in El Dorado, Arkansas, has
been placed into the Environmental Protection Agency's data based tracking
system and that there has occurred certain releases of contaminates at it's
El Dorado, Arkansas facility. See Item 2 "Properties - Chemical Business" for
a discussion of the environmental issues at the El Dorado, Arkansas facility.
While there are no assurances, based on the information presently available to
the Company, the Company does not believe that the Mosley Site or the El
Dorado, Arkansas facility being placed in the Environmental Protection Agency's
data based tracking system or any response to contamination at such facility
due to any release of contamination of such facility should have a
material adverse effect on the Company.
40
Item 2. PROPERTIES
- -------------------
In connection with the acquisition of Equity Bank, the Company and
several of its subsidiaries transferred certain properties to Northwest
Financial Corporation ("Northwest Financial"), a wholly-owned service
corporation of Equity Bank. The properties include, but are not limited to,
the then existing manufacturing facilities at the site (as defined below under
Chemical Business) and the then existing distribution facilities of the
Chemical Business, a portion of the manufacturing facilities of the
Environmental Control Business and certain other facilities. In order for the
Company (and its subsidiaries) to continue their operations on those
properties, Northwest Financial entered into several agreements to lease or
sublease the properties back to their original users. Subject to the terms of
the leases between Northwest Financial and the Chemical Business, Northwest
Financial transferred beneficial ownership of these properties to two general
partnerships in which Northwest Financial owns 99% of the partnership interest
and the other 1% is owned by another subsidiary of the Company. Northwest
Financial continues to hold record title to such real properties. See
"BUSINESS - Financial Services Business." The Company has agreed to purchase
these properties from Equity Bank in connection with the proposed sale of
Equity Bank in 1994 under the Acquisition Agreement. See "Business - Recent
Developments", "Business - Financial Service Business" , "Management's
Discussion and Analysis" and Note 1 to Notes to Consolidated Financial
Statements.
Chemical Business
- -----------------
The Chemical Business primarily conducts manufacturing operations (i) on
150 acres of a 1400 acre tract of land located in El Dorado, Arkansas (the
"Site") and (ii) on 10 acres of land in a facility of approximately 60,000
square feet located in Hallowell, Kansas ("Kansas facility") .
As of December 31, 1993, the manufacturing facility at the Site was being
utilized to the extent of approximately 85%, based on the continuous operation
of those facilities. As of December 31, 1993, manufacturing operations at the
Kansas facility were being utilized to the extent of approximately 80% based
on one 10 hour shift per day and a 5 day week.
In addition, the Chemical Business distributes its products through 35
agricultural and blasting distribution centers. The Chemical Business
currently operates 19 agricultural distribution centers, with 14 of the
centers located in Texas ( 11 of which the Company owns and 3 of which it
leases); 2 centers located in Missouri (1 of which the Company owns and 1 of
which it leases); and 3 centers located in Tennessee (all of which the Company
owns). The Chemical Business currently operates 16 blasting distribution
centers located in Bonne Terre, Missouri (owned); Central City, Combs, and
Pilgrim, Kentucky (leased); Midland, Indiana (leased); Rawlins, Wyoming
(leased); Logan and Cabin Creek, West Virginia (leased); Percy, Illinois
(leased); Carlsbad, New Mexico (leased); Homer, Georgia (leased); and Pryor,
Oklahoma (leased). The Chemical Business also has manufacturing facilities
in Australia located at: Peaks Down; Kalgoorlie; Karratha; and, Hunter Valley
(all leased).
The Chemical Business also operates its business from buildings located
on an approximate four acre site on the perimeter of the JayHawk Industrial
site in southeastern Kansas, and a research and testing facility comprising of
a one square mile tract of land including buildings and equipment thereon also
located in southeastern Kansas which it leases for an annual rental of $100
for a lease term of ten (10) years.
41
All facilities owned by the Chemical Business are subject to mortgages.
During November, 1993, the Company's Chemical Business acquired an
additional concentrated nitric acid plant and related assets ("Plant and
Assets") for approximately $1.9 million. The Chemical Business is in the
process of moving such Plant and Assets from Illinois to, and installing such
at, its manufacturing plant located in El Dorado, Arkansas. The Company
anticipates that the total amount that will be expended to acquire, move and
install the Plant and Assets will be approximately $12.0 million. As a result
of such expansion and the present utilization of the Chemical Business'
manufacturing facilities, the Company believes that it's present manufacturing
facilities are suitable for it's current operations.
Since the 1940's, the Site has been a manufacturing facility for ammonium
nitrate compounds, and until 1969, was a manufacturing facility for ammonia.
In 1955, the Site was acquired by Monsanto Company ("Monsanto"), and in June,
1983, Monsanto sold the Site to El Dorado Chemical Company ("EDC"). EDC was
acquired by the Company in 1984. Under the agreement with Monsanto, Monsanto
agreed to indemnify EDC for any claim which is suffered, incurred or arises
due solely out of Monsanto's disposal of chemical or chemical byproducts prior
to acquisition of the Site by EDC from Monsanto or the use by Monsanto of any
substance prior to the date EDC acquired the Site from Monsanto which is
subsequently determined to be deleterious or dangerous to the public's health,
safety or welfare. Under the agreement with Monsanto, the indemnification is
not assignable to a party to which EDC transfers the Site without the prior
written consent of Monsanto, except to any company 100% of the voting stock of
which is owned or controlled, directly or indirectly, by EDC. Although EDC
has operated the Site since its acquisition from Monsanto in 1983, in 1988,
EDC transferred ownership of the Site to the Company, which in turn
transferred title to its Financial Services subsidiary. All of the
outstanding stock of EDC and the Financial Services subsidiary are, directly
or indirectly, wholly owned by the Company. Although no consent was obtained
from Monsanto when EDC transferred ownership of the Site to its affiliated
company to assign the Monsanto indemnification, if such a consent was required
under the agreement with Monsanto, the Monsanto indemnification remains
applicable to EDC. Recently, the Company's Chemical Business was advised that
the Site had been placed in the Environmental Protection Agency's ("EPA") data
based tracking system (the "System"). The System maintains an inventory of
sites in the United States where it is known or suspected that a release of
hazardous waste has occurred. Notwithstanding inclusion in the System, EPA's
regulations recognize that such does not represent a determination of
liability or a finding that any response action will be necessary. Over
36,000 sites in the United States are presently listed in the System. If a
site is placed in the System, EPA regulations require that the government or
its agent perform a preliminary assessment of the site. If the preliminary
assessment determines that there has been a release, or that there is
suspected to have occurred a release, at the site of certain types of
contamination, the EPA will perform a site investigation. Pursuant to such
regulations, the State of Arkansas performed such preliminary assessment for
the EPA. The preliminary assessment report prepared by the State of Arkansas,
dated September 30, 1992, regarding the Site states, in part, that a release
of certain types of contaminants is suspected to have occurred at the Site.
It is anticipated that the EPA will, at some future date, perform a site
inspection at the Site, which inspection will usually involve the gathering of
additional data including environmental sampling of the Site. After
conducting the site inspection, the regulations provide that the EPA may
determine that: (i) the Site does not warrant further involvement in the
evaluation process, or (ii) that further study of the Site is warranted to
determine what appropriate action is to be taken in response to a release, if
any, of contaminants at the Site or whether such release, if any, justifies
the Site being placed on the National Priorities List. Being placed in the
System will generally be the first step in the EPA's determination as to
42
whether a site will be placed on the National Priorities List. After the EPA
completes its site inspection and evaluates other information, the EPA will
then assess the Site using the Hazard Ranking System to ascertain whether the
Site poses a sufficient risk to human health or the environment to be proposed
for the National Priorities List. There are approximately 1,200 sites in the
United States presently listed on the National Priorities List. The Company
has been advised that there have occurred certain releases of contaminants at
the Site. However, the Company does not believe that such releases should
warrant the Site being placed on the National Priorities List, but there are
no assurances to that effect. The Company is in the process of studying the
Site in an attempt to determine the extent of such releases at the Site and
when such releases may have occurred. In addition, as a result of certain
releases of contaminants at the Site, EDC may be subject to assessment of
certain civil penalties. The Company has not yet received from the
appropriate governmental agency of the State of Arkansas a determination as
to the appropriate plan of remediation of the Site and what contaminants, if
any, must be remediated. The Company is unable to estimate the cost of such
remediation until the Company receives an acceptable plan from such agency.
The Company believes that it will receive such plan from the State of
Arkansas in the near future, and at that time the Company will be able to
estimate the cost of such remediation at the Site. While there are no
assurances, based on information presently available to the Company, the
Company does not believe, as of the date of this report, that the Site being
placed in the System or the response to any contamination at the Site or the
assessment of penalties, if any, due to release of certain contaminants at the
Site should have any material adverse effect on the Company or the Company's
financial condition.
Environmental Control Business
- ------------------------------
The Environmental Control Business conducts its fan coil manufacturing
operations in various facilities, including two adjacent facilities located in
Oklahoma City, Oklahoma, consisting of approximately 240,000 square feet owned
by the Company. As of December 31, 1993, the Environmental Control Business
was using the productive capacity of the above-referenced facility to the
extent of approximately 92%, based on two, 8-hour shifts per day and a 5-day
week.
The Environmental Control Business manufactures most of its heat pump
products in a leased 230,000 square foot facility in Oklahoma City, Oklahoma.
The lease carries a five year term beginning March 1, 1988, with options to
renew for five additional five year periods, and currently provides for the
payment of rent in the amount of $52,389 per month. The Company also has an
option to acquire the facility at any time in return for the assumption of the
then outstanding balance of the lessor's mortgage. As of December 31, 1993,
the productive capacity of this manufacturing operation was being utilized to
the extent of approximately 59%, based on one, 8 hour shift per day and a 5-
day week.
The Environmental Control Business owns a 60,000 square foot facility in
Juarez, Mexico, which it leases to a third party tenant. The Environmental
Control Business also leases sales offices in Los Angeles and Chicago.
All of the properties utilized by the Environmental Control Business are
considered by Company management to be suitable and adequate to meet the
current needs of that business.
43
Automotive Products Business
- ----------------------------
The Automotive Products Business conducts its operations in plant
facilities principally located in Oklahoma City, Oklahoma which are considered
by Company management to be suitable and adequate to meet its needs. One of
the manufacturing facilities occupies a building owned by the Company, subject
to mortgages, totaling approximately 178,000 square feet. The Automotive
Products Business also uses additional manufacturing facilities located in
Oklahoma City, Oklahoma, owned and leased by the Company. During 1993, the
Automotive Products Business under-utilized the productive capacity of its
facilities.
In December 1993, International Bearings, Inc. ("IBI") of Memphis,
Tennessee, was acquired as a wholly owned subsidiary of the Company operating
as a separate entity within the Automotive Products Division. IBI is a
warehouse unit operating from a leased warehouse of approximately 45,000
square feet in an industrial park section of Memphis, TN.
Industrial Products Business
- ----------------------------
The Company owns several buildings, some of which are subject to
mortgages, totaling approximately 668,000 square feet located in Oklahoma City
and Tulsa, Oklahoma, which the Industrial Products Business uses for
showrooms, offices and warehouse facilities. The Company also owns real
property located near or adjacent to the above-referenced buildings, which the
Industrial Products Business uses for parking and storage.
The Industrial Products Business also leases a facility from an entity
owned by the immediate family of the Company's President, which facility
occupies approximately seven acres in Oklahoma City, Oklahoma, with buildings
having approximately 44,000 square feet. The Industrial Products Business
also has an office in Europe to coordinate its European activities.
All of the properties utilized by the Industrial Products Business are
considered by Company management to be suitable and adequate to meet the needs
of the Industrial Products Business.
Financial Services Business
- ---------------------------
The Financial Services Business' corporate headquarters is located in
approximately 26,700 square feet of leased office space in Oklahoma City,
Oklahoma. In addition to the corporate facility, the Financial Services
Business operates 14 branch offices. These facilities are considered by
Company management to be suitable and adequate to meet the needs of the
Financial Services Business.
On January 4, 1989, Northwest Financial Corporation ("Northwest
Financial"), a wholly-owned subsidiary of Equity Bank, acquired an option to
purchase a 22-story, 340,000 square foot office building in Oklahoma City,
Oklahoma, which contains the corporate headquarters of the Financial Services
Business. This property is known as "Equity Tower". Northwest Financial
acquired the option for $100,000 contemporaneously with Equity Bank's
acquisition of the note and mortgage relating to the property ("Equity Tower
Loan"). Northwest Financial may exercise its option at any time during the
six-month period beginning December 31, 1995. The option agreement provides
that the purchase price for the property upon exercise of the option will
equal the sum of (1) the then outstanding restated mortgage indebtedness
44
secured by the property and (2) the greater of (a) $100,000 or (b) 20% of the
difference between (i) the appraised fair market value of the property and
(ii) $15.1 million plus any additional advances under the loan plus any unpaid
"cumulative deficiency amounts," as defined, accrued under the loan. As
previously discussed, the Company has agreed under the Acquisition Agreement
to acquire the Equity Tower Loan and option to purchase the Equity Tower at
the time of closing of the sale of Equity Bank to Fourth Financial at Equity
Bank's then current carrying value of the Equity Tower Loan on the books of
Equity Bank. The carrying value of the Equity Tower Loan on the books of
Equity Bank as of February 28, 1994, was approximately $13.8 million.
45
Item 3. LEGAL PROCEEDINGS
- --------------------------
In December 1987, the United States Environmental Protection Agency
("EPA") notified L&S Bearing Company ("L&S") of potential responsibility for
releases of hazardous substances at the Mosley Road Landfill in Oklahoma ("the
Mosley Site"). The recipients of such notification were: a) generators of
industrial waste allegedly sent to the Mosley Site (including L&S), and b) the
current owner/operator of the Mosley Site, Waste Management of Oklahoma
("WMO") (collectively, "PRPs"). Between February 20, and August 24, 1976,
the Mosley Site was authorized to accept industrial hazardous waste. During
this time, a number of industrial waste shipments allegedly were transported
from L&S to the Mosley Site. In February 1990, EPA added the Mosley Site to
the National Priorities List. WMO and the U.S. Air Force conducted the
remedial investigation ("RI") and feasibility study ("FS"). It is too early
to evaluate the probability of a favorable or unfavorable outcome of the
matter for L&S. However, it is the PRP Group's position that WMO as the
Mosley Site owner and operator should be responsible for at least half of
total liability as the Mosley Site, and that 75% to 80% of the remaining
liability, if allocated on a volumetric basis, should be assignable to the
U.S. Air Force. The Company is unable at this time to estimate the amount of
liability, if any, since the estimated costs of clean-up of the Mosley Site
are continuing to change and the percentage of the total waste which were
alleged to have been contributed to the Mosley Site by L&S has not yet been
determined. If an action is brought against the Company in this matter, the
Company intends to vigorously defend itself and assert the above position.
Although there are no assurances to this effect, the Company is exploring
whether it has insurance coverage for this claim. Insurance coverage,
however, is not considered since it is not known whether insurance coverage
will be provided in connection with this matter. The Company does not believe
that the ultimate outcome of this matter will have a material adverse effect
on the Company's financial position or results of operations.
In April, 1989, a subsidiary, International Environmental Corporation
("IEC") was named as a third party defendant in a lawsuit brought by Economy
Mechanical Industries of Illinois, Inc. ("Economy"), in an action pending in
the Circuit Court of Cook County, Illinois, in connection with a project in
Chicago, Illinois. Economy had purchased fan coil units for the project from
IEC and the units were built in accordance with Economy's specifications.
This litigation initially resulted from disputes between the owner of the
project and the general contractor, and in connection therewith, the owner
withheld payment from the general contractor. The general contractor and a
number of subcontractors (including Economy) filed mechanics liens against the
property. The general contractor filed this action to foreclose on its lien
and the owner has asserted numerous claims against the general contractor and
certain subcontractors (including Economy) in the total amount of $20,610,599.
One of the counterclaims made by the owner relates to the fan coil system
manufactured by IEC. As a result Economy brought a third party action against
IEC alleging that if the fan coil system is defective, such was the
responsibility of IEC and in breach of IEC's implied and express warranties.
IEC has denied that the fan coils are defective and contends that any
failures, if any, were caused by improper installation or other causes beyond
IEC's control. IEC has filed fourth party complaints against certain of its
suppliers. Discovery in this proceeding is ongoing. The Company does not
believe this matter will have a material adverse effect on the financial
condition or results of operations of the Company due to the probable receipt
of insurance proceeds in the event of an adverse outcome.
46
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
- -------------------------------------------
Identification of Executive Officers. The following table identifies the
------------------------------------
executive officers of the Company.
Position and Served as
Offices With an Officer
Name Age the Company From
- ---- ---- ------------- -----------
Jack E. Golsen 65 Board Chairman December, 1968
and President
Barry H. Golsen 43 President of the August, 1981
Environmental
Control Businesses
and Director
David R. Goss 53 Senior Vice March, 1969
President of
Operations and
Director
Tony M. Shelby 52 Senior Vice March, 1969
President - Chief
Financial Officer,
and Director
Jim D. Jones 52 Vice President - April, 1977
Treasurer and
Corporate Controller
Michael Tepper 54 Senior Vice June, 1985
President -
International
Operations
David M. Shear 34 Vice President and March, 1990
General Counsel
Heidi L. Brown 35 Vice President and March, 1990
Managing Counsel
Michael Adams 44 Vice President- March, 1990
Internal Audit
- --------------------------------------------------------------
The Company's officers serve one-year terms, renewable on an annual basis
by the Board of Directors. With the exception of Messrs. Adams and Shear and
Ms. Brown, all of the individuals listed above have served in substantially
the same capacity with the Company and/or its subsidiaries for the last five
years. Prior to becoming an officer of the Company, Mr. Shear served as an
antitrust attorney for the Federal Trade Commission and was in private law
practice in Boston, Massachusetts. Ms. Brown was in private law practice in
Boston, Massachusetts prior to joining the Company. Mr. Adams has been
47
employed by the Company for the last five years, serving as Assistant Vice
President - Internal Audit since 1985 before being elected Vice President of
the Company.
Family Relationships. The only family relationships that exist among the
executive officers of the Company are the following: (i) Jack E. Golsen is the
father of Barry H. Golsen, (ii) Jack E. Golsen is the uncle of Heidi L. Brown
and (iii) David M. Shear and Heidi L. Brown are husband and wife.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. The Company's Common Stock trades on the American
Stock Exchange, Inc. ("AMEX") The following table shows, for the periods
indicated, the high and low closing sales prices for the Company's Common
Stock.
Fiscal Year Ended
December 31,
----------------------------
1993 1992
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First 11-1/8 6-3/4 2-7/8 1-1/4
Second 12 9 4-7/8 2-3/8
Third 12-3/8 10 6-1/2 3-3/4
Fourth 11-3/8 8-1/8 7-3/4 4-3/4
Stockholders. As of March 14, 1994, the Company had 1,539 record
holders of its Common Stock.
Issuance of Preferred Stock - On May 27, 1993, the Company completed a
public offering of $46 million of a new series of Class C Preferred Stock,
designated as $3.25 Convertible Exchangeable Class C Preferred Stock, Series
2, no par value ("Series 2 Preferred"). The Series 2 Preferred has a
liquidation preference of $50.00 per share plus accrued and unpaid dividends
and is convertible at the option of the holder at any time, unless previously
redeemed, into Common Stock, $0.10 par value, of the Company, at an initial
conversion price of $11.55 per share (equivalent to a conversion rate of
approximately 4.3 shares of Common Stock for each share of Series 2
Preferred), subject to adjustment under certain conditions. If under certain
conditions there occurs a Corporate Change or Ownership Change (as such terms
are defined in the underlying documents creating the Series 2 Preferred) with
respect to the Company, then, under certain conditions, each holder of Series
2 Preferred shall have the right, at the holder's option, for a period of 45
days after mailing of a notice by the Company that such change has occurred,
to convert all, but not less than all, of such holders Series 2 Preferred into
the Company's Common Stock or common stock of any corporation that is a
successor to the Company at a special conversion rate. The shares of Series 2
Preferred are not entitled to vote except under limited circumstances.
Each share of outstanding Series 2 Preferred is entitled to receive,
if,when and as declared by the Board of Directors, an annual dividend of $3.25
per share payable quarterly in the arrears. See "Dividends" of this Item 5
below.
The Series 2 Preferred is not redeemable prior to June 15, 1996. The
Series 2 Preferred will be redeemable at the option of the Company, in whole
48
or in part, at $52.28 per share if redeemed on or after June 15, 1996, and
thereafter at prices decreasing rateably annually to $50.00 per share on and
after June 15, 2003, plus accrued and unpaid dividends to the redemption date.
Dividends. Holders of the Company's Common Stock are entitled to
receive dividends only when, as and if declared by the Board of Directors. No
dividends may be paid on the Company's Common Stock until all required
dividends are paid on the outstanding shares of the Company's preferred stock,
or declared and amounts set apart for the current period, and, if cumulative,
prior periods. The Company has issued and outstanding as of December 31,
1993, 920,000 shares of Series 2 Preferred, 1,632.5 shares of a series of
Convertible Non Cumulative Preferred Stock ("Non Cumulative Preferred Stock")
and 20,000 shares of Series B 12% Convertible, Cumulative Preferred Stock
("Series B Preferred"). Each share of preferred stock is entitled to receive
an annual dividend, if, as and when declared by the Board of Directors,
payable as follows: (i) Series 2 Preferred at the rate of $3.25 a share
payable quarterly in arrears on June 15, September 15, December 15, and March
15, (ii) Non Cumulative Preferred Stock at the rate of $10 a share, and (iii)
Series B Preferred at the rate of $12.00 a share. The Company did not pay
cash dividends on its Common Stock for many years. During the first part of
1993, the Company's Board of Directors approved the adoption of a policy as to
the payment of cash dividends on its outstanding Common Stock pursuant to
which an annual cash dividend of $.06 per share will be declared by the Board
of Directors and paid on the Company's outstanding shares of Common Stock
payable at $.03 per share semiannually, subject to change or termination by
the Board of Directors at any time. The Company paid a cash dividend of $.03
a share on its outstanding Common Stock on July 1, 1993, and January 1, 1994;
however, there are no assurances that this policy will not be terminated or
changed by the Board of Directors. See Notes 9, 11, 12 and 13 to Notes to
Consolidated Financial Statements.
Under the terms of a loan agreement between El Dorado Chemical Company
("EDC") and its lenders, EDC cannot transfer funds to the Company in the form
of cash dividends or other advances, except (i) for the amount of taxes that
EDC would be required to pay if it was not consolidated with the Company and
(ii) an amount equal to twenty-five percent (25%) of EDC's cumulative adjusted
net income (as reduced by cumulative net losses), as defined, any time EDC has
a Total Capitalization Ratio, as defined, greater than .65:1 and after EDC has
a Total Capitalization Ratio of .65:1 or less, 50% of EDC's cumulative
adjusted net income (as reduced by cumulative net losses). See Note 9 of
Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis".
The Company is a holding company and, accordingly, its ability to pay
dividends on its preferred stock and its common stock is dependent in large
part on its ability to obtain funds from its subsidiaries. The ability of
EDC, International Environmental Corporation and Equity Bank to pay dividends
to the Company, to fund the payment of dividends by the Company or for other
purposes, is restricted by certain agreements to which they are parties and,
in the case of Equity Bank, subject to the restrictions promulgated by FIRREA.
See "Business - Financial Service Business".
On February 17, 1989, the Company's Board of Directors declared a
dividend to its stockholders of record on February 27, 1989, of one preferred
stock purchase right on each of the Company's outstanding shares of common
stock. The rights expire on February 27, 1999. The Company issued the
rights, among other reasons, in order to assure that all of the Company's
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company and to guard against partial tender abusive tactics to
gain control of the Company. The rights will become exercisable only if a
person or group acquires beneficial ownership of 30% or more of the Company's
common stock or announces a tender or exchange offer the consummation of which
49
would result in the ownership by a person or group of 30% or more of the
common stock, except any acquisition by Jack E. Golsen, Chairman of the Board
and President of the Company, and certain other related persons or entities.
Each right (other than the rights, owned by the acquiring person or
members of a group that causes the rights to become exercisable, which became
void) will entitle the stockholder to buy one-hundredth of a share of a new
series of participating preferred stock at an exercise price of $14.00 per
share. Each one one-hundredth of a share of the new preferred stock
purchasable upon the exercise of a right has economic terms designed to
approximate the value of one share of the Company's common stock. If another
person or group acquires the Company in a merger or other business combination
transaction, each right will entitle its holder (other than rights owned by
that person or group, which become void) to purchase at the right's then
current exercise price, a number of the acquiring company's common shares
which at the time of such transaction would have a market value two times the
exercise price of the right. In addition, if a person or group (with certain
exceptions) acquires 30% or more of the Company's outstanding common stock,
each right will entitle its holder, (other than the rights owned by the
acquiring person or members of the group that results in the rights becoming
exercisable, which become void), to purchase at the right's then current
exercise price, a number of shares of the Company's common stock having a
market value of twice the right's exercise price in lieu of the new preferred
stock.
Following the acquisition by a person or group of beneficial ownership
of 30% or more of the Company's outstanding common stock (with certain
exceptions) and prior to an acquisition of 50% or more of the Company's common
stock by the person or group, the Board of Directors may exchange the rights
(other than rights owned by the acquiring person or members of the group that
results in the rights becoming exercisable, which become void), in whole or in
part, for shares of the Company's common stock. That exchange would occur at
an exchange ratio of one share of common stock, or one one-hundredth of a
share of the new series of participating preferred stock, per right.
Prior to the acquisition by a person or group of beneficial ownership of
30% or more of the Company's common stock (with certain exceptions) the
Company may redeem the rights for one cent per right at the option of the
Company's Board of Directors. The Company's Board of Directors also has the
authority to reduce the 30% thresholds to not less than 10%.
50
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
Years ended December 31,
1993 1992 1991 1990 1989
-------- ------- ------- -------- --------
(Dollars in Thousands,
except per share data)
Selected Statement of Operations Data:
Net sales $232,616 $198,373 $177,035 $196,577 $212,748
======== ======== ======== ======== ========
Interest income on loans
and investments $ 27,761 $ 32,205 $ 40,548 $ 33,856 $28,746
======== ======== ======== ======== ========
FSLIC interest and yield
maintenance $ - $ 936 $ 3,441 $ 7,803 $ 10,089
======== ======== ======== ======== ========
Total Revenues $276,594 $246,783 $234,191 $248,226 $262,590
======== ======== ======== ======== ========
Interest expense:
Deposits $ 12,505 $ 16,445 $ 23,144 $ 27,940 $ 30,580
Long-term debt and other 9,517 13,194 16,142 16,100 13,996
-------- -------- -------- -------- --------
$ 22,022 $ 29,639 $ 39,286 $ 44,040 $ 44,576
======== ======== ======== ======== ========
Provision for loan losses $ 1,382 $ 1,224 $ 1,335 $ 5,852 $ 35
======== ======== ======== ======== ========
Income (loss) before extraordinary
items $ 12,399 $ 9,255 $ (1,147) $(10,654) $ 4,036
======== ======== ======== ======== ========
Net income (loss) $ 12,399 $ 9,255 $ (1,147) $ (9,121) $ 4,036
======== ======== ======== ======== ========
Net income (loss) applicable
to common stock $ 10,357 $ 7,428 $( 3,090) $(11,107) $ 1,987
======== ======== ======== ======== ========
Primary earnings (loss)
per common share:
Income (loss) before
extraordinary items $ .77 $ .94 $ (.48) $ (2.30) $ .32
======== ======== ======== ======= ========
Net income (loss) $ .71 $ .66 $ (.48) $ (2.02) $ .32
======== ======== ======== ======= ========
51
Item 6. SELECTED FINANCIAL DATA (Continued)
- ------- -----------------------------------
Years ended December 31,
----------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Selected Balance Sheet Data:
Total Assets $597,512 $582,248 $605,513 $649,730 $662,424
======== ======== ======== ======== ========
Deposits $332,511 $336,053 $359,228 $364,402 $386,493
======== ======== ======== ======== ========
Long-term debt $ 30,295 $ 50,321 $ 56,330 $ 57,092 $43,616
======== ======== ======== ======== ========
Redeemable preferred stock $ 155 $ 163 $ 179 $ 186 $ 196
======== ======== ======== ======== ========
Non-redeemable preferred
stock, common stock, and
other stockholders' equity $ 74,871 $ 18,339 $ 10,352 $ 13,481 $25,144
======== ======== ======== ======== ========
Selected other Data:
Cash dividends declared
per common share $ .06 $ - $ - $ - $ -
======== ======== ======== ======== ========
52
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with a
review of the Company's December 31, 1993 Consolidated Financial Statements,
Item 6 "SELECTED FINANCIAL DATA," and "BUSINESS" included elsewhere in this
report.
Overview
- --------
The Company is a diversified holding company which is engaged, through
its subsidiaries, in the Chemical Business, the Environmental Control
Business, the Automotive Products Business, the Industrial Products Business
and the Financial Services Business. The Chemical Business, the Environmental
Control Business and the Financial Services Business accounted for
approximately 12%, 4% and 77% respectively, of the Company's assets at
December 31, 1993, and approximately 42%, 25%, and 15% respectively, of the
Company's revenues for the year then ended. The operating income of the
Company increased from $16.5 million in 1991, to $25.9 million in 1992, to
$30.6 million in 1993. As a result of significantly higher operating income
and lower interest expense, the Company's net income was approximately $12.4
million in 1993, as compared to a net income of $9.3 million in 1992 and a net
loss of $1.1 million in 1991. As previously discussed in this report, the
Company has entered into an agreement to sell Equity Bank (which comprises the
Company's Financial Service Business) to Fourth Financial, which agreement has
been previously defined as the Acquisition Agreement. See "Liquidity and
Capital Resources" of this "Management Discussion and Analysis", "Business -
Recent Developments", "Business- Financial Service Business" and Note 1 to
Notes to Consolidated Financial Statements for further discussion of the
proposed sale of Equity Bank.
Results of Operations
- ---------------------
Comparison of 1993 with 1992
Revenues
Total revenues for the years ended December 31, 1993 and 1992 were
$276.6 million and $246.8 million, respectively (an increase of $29.8
million). Interest and other income attributable to the operations of the
Financial Services Business included in total revenues was $41.8 million in
1993, compared to $46.9 million for 1992. The decrease resulted primarily
from a net decrease in interest income of $5.5 million due to decreased
interest income from loans receivable and mortgage-backed securities of $5.4
million due to declining interest rates.
Net Sales
Consolidated net sales for the year 1993 were $232.6 million, compared
to $198.4 for the year 1992, an increase of $34.2 million or 17.2%. This
increase in sales resulted principally from: (i) increased sales in the
Chemical Business of $8.9 million, primarily due to the acquisition of Total
Energy Systems Limited ("TES") in July, 1993, sales by Slurry Explosive
Corporation ("Slurry") to an expanded customer base for twelve months in 1993
compared to only eleven months in 1992, and sales of Universal Tech
Corporation ("UTC"), which was acquired in September, 1992, offset by reduced
sales by El Dorado Chemical Company due to the effects of coal mine strikes in
53
the eastern United States; (ii) increased sales in the Environmental Control
Business of $14.6 million, primarily due to an expanded customer base in 1993
and the effects in 1992 of a strike at the fan coil manufacturing plant of
this business; (iii) increased sales in the Automotive Products Business of
$8.5 million due to an expanded customer base in 1993; and (iv) increase sales
in the Industrial Products Business of $2.2 million, primarily due to
increased sales to a foreign customer (see Note 8 to Notes to Consolidated
Financial Statements and discussion under the "Liquidity and Capital
Resources" section of this report).
Gross Profit
Gross profit was 25.0% for 1993, compared to 26.2% for 1992. The
decline in the gross profit percentage was due primarily to (i) lower
efficiency in the heat pump manufacturing plant of the Environmental Control
Business as a result of period costs associated with start up of production
requirements related to an agreement entered into with a major United States
air conditioning company; (ii) a shift in sales mix in the Industrial Products
Business to lower margin items; and (iii) higher cost of the primary raw
material (ammonia) in the Chemical Business. During 1993 the average cost of
ammonia was approximately 12.2% higher than the average cost of ammonia during
1992. This higher cost was not fully passed on to customers in the form of
price increases. These factors were offset in part by gross profits
recognized on the foreign sales contract (See Note 8 to Notes to Consolidated
Financial Statements) of $5.3 million in 1993, compared to only $3.6 million
in 1992, and the effects in 1992 of a strike at the fan coil manufacturing
plant of the Environmental Control Business.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the non-financial
services businesses as a percent of net sales was 18.9% in 1993 and 18.9% in
1992. The Financial Services Business recorded a decrease of $733,000 in SG&A
expenses in 1993 compared to 1992. The decrease included (i) a $0.2 million
reduction in data processing expenses associated with conversion costs due to
changing service bureaus in 1992, reduction in advertising expense, and
various fees and assessments associated with the credit card operations; (ii)
a $0.7 million reduction in other expenses primarily relating to the potential
income sharing provision of the assistance agreement; and (iii) a $2.5 million
increase in profitability related to real estate operations, offset by
increased goodwill amortization of $2.4 million. See "Termination of
Assistance Agreement" discussed elsewhere in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 3 of
Notes to Consolidated Financial Statements for further discussion of the
effects of the termination of the Assistance Agreement between Equity Bank and
the RTC.
Interest Expense
Interest expense for the Company was approximately $22.0 million during
1993 compared to approximately $29.6 million during 1992. The decrease
primarily resulted from lower interest rates and lower average balances of
deposits and borrowed funds.
Income Before Taxes
The Company had income before income taxes of $13.3 million in 1993,
compared to $9.8 million in 1992. The improved profitability of $3.5 million,
after the one time charge to expense of $1.8 million for settlement of a
dispute with Customs, was due to higher sales in the Chemical, Environmental
Control, and Automotive Products businesses, an increase of $1.7 million in
estimated earnings on the foreign sales contract, and increased net interest
54
margin in the financial service business resulting from declining interest
rates in 1993 as compared to 1992.
As a result of the Company's net operating loss carryforward for income
tax purposes as discussed elsewhere herein and in Note 10 of Notes to
Consolidated Financial Statements, the Company's provisions for income taxes
for 1993 and 1992 are for current state income taxes and federal alternative
minimum taxes.
Comparison of 1992 with 1991
Revenues
Total revenues for the years ended December 31, 1992 and 1991 were
$246.8 million and $234.2 million, respectively (an increase of $12.6
million). Interest and other income attributable to the operations of the
Financial Services Business included in total revenues was $46.9 million in
1992, compared to $55.0 million for 1991. The decrease resulted primarily
from a net decrease in interest income of $7.3 million due to (i) decreased
interest income from loans receivable of $4.3 million due to declining
interest rates and reduced outstanding principal balances; (ii) a decline in
yield maintenance assistance of $2.5 million due to a declining guaranteed
yield rate and a reduction in covered asset balances; (iii) lower income from
other interest earning assets (principally overnight deposits) of $1.5 million
due to declining rates offered for these types of assets in addition to
reduced amounts available to invest. These decreases were offset by an
increase in interest income from mortgage-backed securities of $1.2 million
resulting from additional investments of excess cash into mortgage-backed
securities to enhance interest rate spreads.
Net Sales
Consolidated net sales for the year 1992 were $198.4 million, compared
to $177.0 for the year 1991, an increase of $21.4 million or 12.1%. This
increase in sales resulted principally from an increase in sales of $17.1
million by the Chemical Business from increased demand in the blasting
products, fertilizer, and acid products markets ($6.9 million) and sales due
to the acquisition of Slurry in January 1992 ($10.2 million). Sales increases
and decreases by other businesses were: Environmental Control Business -
decrease $3.3 million; Automotive Products Business increase $2.9 million;
and Industrial Products Business - increase $4.7 million. The low order level
in the Environmental Control Business, which began in the second half of 1990
and continued into 1991 and 1992, is a result of a general decline in the
construction industry. Additionally, sales reductions in the Environmental
Control Business were due to a strike which began on May 20, 1992, at the fan
coil manufacturing plant of this business. The plant resumed operations in
July, 1992 with new employees that are not members of a union. Productivity
is continuing to improve at the plant and reached near normal levels by
December 31, 1992. The Sales increases in the Automotive Products Business
are due to stronger market conditions and an expanded customer base. Sales in
1992 for the Industrial Products Business include $6.2 million in earned
revenues related to the Foreign Sales Contract discussed in the Liquidity and
Capital Resources section and Note 8 of Notes to Consolidated Financial
Statements. Sales declines in the remaining sectors of the Industrial
Products Business were primarily the result of depressed market conditions.
Gross Profits
Gross profit was 26.2% for 1992, compared to 23.0% for 1991. This
increase in gross profit percentage is partially due to improved absorption of
manufacturing costs in the Chemical Business and Automotive Products Business
commensurate with their increased sales and manufacturing requirements. In
55
addition, the Chemical Business benefited from a lower cost of its primary raw
material (ammonia) in 1992 compared to 1991. Gross profit related to the
Foreign Sales Contract for 1992 amounted to $3.6 million. These gross profit
percentage improvements were partially offset by decreases in the
Environmental Control Business due to lower sales and inefficiencies in the
manufacturing process attributable to the effect of the strike discussed
above.
Selling, Gains and Administrative Expenses
Selling, general and administrative ("SGA") expenses for the non-
financial services businesses as a percent of net sales were 18.9% in 1992 and
20.7% in 1991. As sales increased, normal SGA costs did not increase
proportionately, thus resulting in a lower percentage. Additionally, the
Company experienced reductions in 1992 expense levels in the areas of bad
debts, insurance and other administrative expenses. The Financial Services
Business recorded an increase of $580,000 in SGA expenses for 1992 compared to
1991. This increase is due primarily to an increase in expenses related to
real estate operations.
Interest Expense
Interest expense of the Company in 1992 was approximately $29.6 million,
compared to approximately $39.3 million in 1991. The decrease resulted from:
(i) $6.7 million decrease in interest on deposits due principally to lower
rates, (ii) $2.3 million reduction in interest expense on borrowed funds of
the Financial Services Business due to lower rates on such borrowed funds, and
(iii) $650,000 decrease in interest on long-term debt of the Non-Financial
Services Businesses resulting from lower rates and lower average balances of
borrowed funds.
Income Before Taxes
The Company had a consolidated income before income taxes of $9,771,000
in 1992 compared to a loss of $950,000 for 1991. The increased profitability
of $10.7 million is primarily due to improved sales in the Chemical Business,
the acquisition of Slurry, improvement in the results of operations in the
Automotive Products Business, $3.6 million in estimated earnings related to
the Foreign Sales Contract and reduced interest rates.
As a result of the Company's net operating loss carryforward for income
tax purposes as discussed elsewhere herein and in Note 10 to Consolidated
Financial Statements, the Company's provisions for income taxes for 1992 and
1991 are for current state income taxes and federal alternative minimum taxes.
Liquidity and Capital Resources
- -------------------------------
The Company is a diversified holding Company and its liquidity is
dependent, in large part, on the operations of its subsidiaries and credit
agreements with lenders. As a regulated business, Equity Bank is limited in
the transactions which it can enter into with the Company, except as
specifically approved by the appropriate regulatory agencies. As a result,
the Company does not guarantee the obligations of Equity Bank nor does Equity
Bank guarantee the obligations of the Company. Accordingly, the Financial
Services and Non-Financial Services Businesses are discussed independently.
Existing financial arrangements between the Company's Financial and Non-
Financial Services Businesses are important elements of the liquidity and
capital resources of the Non-Financial Services Businesses.
56
Non-Financial Services Businesses (Company and its subsidiaries other than
- --------------------------------------------------------------------------
Equity Bank)
- ------------
Substantially all of the capital requirements, other than the equity
capital of the Company and its subsidiaries, are funded by three sources:
(1) Pursuant to approvals by the then appropriate governmental agency in
1988, the Company and its subsidiaries have been selling eligible
accounts receivable to Equity Bank with recourse to the particular
seller. Under such arrangement, an account receivables sold to Equity
Bank at 100% of the unpaid face value of such account receivable. Under
the prior approvals, the Company and its subsidiaries were allowed to
sell Equity Bank, at any one time, up to $60 million of eligible
accounts receivables. At December 31, 1993, $33.6 million of such
accounts receivable were owned by Equity Bank. The Office of Thrift
Supervision ("OTS"), the primary regulator of Equity Bank, has taken the
position that the approvals granted in 1988 allowing such accounts
receivable transactions between the Company, its subsidiaries and Equity
Bank have expired. As a result, Equity Bank and the OTS have agreed
that (i) at no one time subsequent to September 28, 1993, but prior to
September 1, 1994, shall the total amount of such accounts receivable
owned by Equity Bank exceed $33.6 million; (ii) beginning February 1,
1994, Equity Bank will not purchase any new accounts receivable from the
Company and/or its subsidiaries if such would result in Equity Bank
owning an amount that would exceed the amount allowed by current
regulations for transactions with affiliated companies, which amount is
based on a percentage of Equity Bank's capital, and (iii) on and after
September 1, 1994, the amount of such accounts receivable owned by
Equity Bank at any one time must be in compliance with current
regulations for transactions with affiliated companies. Assuming that
on December 31, 1993, Equity Bank had been required to meet current
regulations regarding the amount of such outstanding accounts receivable
owned by Equity Bank, the amount of such accounts receivable would have
had to be reduced to approximately $9.2 million as of such date. The
Company has temporarily replaced a substantial portion of the accounts
receivable financing previously provided by Equity Bank with Bank IV of
Oklahoma, N.A. ("Bank IV") a subsidiary of Fourth Financial which is
providing the Company with a $25 million accounts receivable financing
line of credit at 80% of the unpaid face value of such accounts
receivable ("Bank IV Line of Credit"). The Bank IV line of Credit is
temporary and will expire during 1994 unless extended. . The Company
intends to continue to use the accounts receivable financing arrangement
with Equity Bank to the extent described above and as allowed by
regulations until Equity Bank is sold as discussed elsewhere herein.
The Company has begun negotiations for a comprehensive line of credit.
Although the Company believes it will be successful in obtaining the
comprehensive line of credit to replace most, if not all, of its
present credit facilities, there are no assurances that it will be
successful in negotiating such.
(2) The Company and its subsidiaries (other than Equity Bank and the
Chemical Business) are parties to a credit agreement ("Agreement"), with
an unrelated lender ("Lender"), collateralized by certain inventory and
certain other assets of the Company and its subsidiaries (including the
capital stock of International Environmental Corporation) other than the
assets and capital stock of Equity Bank and the Chemical Business. The
Credit Agreement provides for a revolving credit facility ("Revolver")
for direct borrowing up to $8 million, including the issuance of letters
of credit. The Revolver provides for advances at varying percentages of
eligible inventory. This Agreement expires on June 30, 1994, but the
57
Company believes the Agreement can be extended at that time. At December
31, 1993, the availability based on eligible collateral approximated the
credit line. Borrowings (including letters of credit) under the
Revolver outstanding at December 31, 1993, were $.6 million. The
Revolver requires reductions of principal equal to reductions as they
occur in the underlying inventory times the advance rate. When the
offering of the Series 2 Preferred was completed, the Company repaid
$6.8 million of the Revolver with a portion of the net proceeds from the
offering of the Series 2 Preferred. The Company presently intends to
keep the Credit Agreement in effect if it can renegotiate certain of its
terms.
(3) The Company's wholly-owned subsidiaries, El Dorado Chemical Company and
Slurry Explosive Corp., which comprise the Company's Chemical Business ,
are parties to a loan agreement ("Loan Agreement") with two
institutional lenders ("Lenders"). This Loan Agreement, as amended in
conjunction with an unscheduled payment of $7.2 million in the third
quarter of 1993, provides for a seven year term loan of $28.5 million
("Term Loan"), a $10 million asset based revolving credit facility
("Revolving Facility"), and an additional revolving credit line of $7.2
million. Available borrowings under this additional revolving credit
line at December 31, 1993 was the full $7.2 million and decreases
annually until its termination in March, 1997. The balance of the Term
Loan at December 31, 1993 was $20.6 million. The annual principal
payment of the Term Loan for 1993, paid June 30, 1993, was $4.4 million.
Annual principal payments on the Term Loan escalate each year from $4.8
million in 1994 to a final payment of $5.5 million on March 31, 1997.
In addition to the $4.4 million principal payment on the Term Loan, a
$1.5 million principal payment was made on June 30, 1993 on a term loan
which was subsequently converted into the additional revolving credit
line of $7.2 million discussed above. Borrowings under the Revolving
Facility are available up to the lesser of $10 million or the borrowing
base. The borrowing base is determined by deducting 100% of Chemical's
accounts receivable sold to Equity Bank from the maximum borrowing
availability as defined in the Revolving Facility. The maximum line
availability based on eligible collateral under the Revolving Facility
at December 31, 1993 was approximately $8.7 million, net of
approximately $1.1 million reserved for the issuance of a standby letter
of credit. At December 31, 1993 there were outstanding borrowings
under the Revolving Facility of $2.1 million. The Revolving Facility
requires reductions of principal equal to reductions as they occur in
the underlying accounts receivable and inventory times the applicable
advance rate, assuming that the outstanding balance under the Revolving
Credit Facility is less than the then maximum line availability based on
eligible collateral. During 1993 and 1992, borrowings under the
Revolving Facility were reduced to zero for forty-five (45) consecutive
days as required by its terms. Annual interest at the agreed to
interest rates, if calculated on the $22.7 million outstanding balance
at December 31, 1993 would be approximately $2.7 million. The Term Loan
and Revolving Facility are secured by substantially all of the assets
and capital stock of Chemical. The Loan Agreement requires Chemical to
maintain certain financial ratios and contains other financial
covenants, including tangible net worth requirements and capital
expenditures limitations. As of the date of this report, Chemical is in
compliance with all financial covenants. Under the terms of the Loan
Agreement, Chemical cannot transfer funds to the Company in the form of
cash dividends or other advances, except for (i) the amount of taxes
that Chemical would be required to pay if it was not consolidated with
the Company; (ii) an amount equal to fifty percent (50%) of Chemical's
cumulative adjusted net income as long as Chemical's Total
Capitalization Ratio, as defined, is .65:1 or below and, (iii)
borrowings under the additional revolving credit line of $7.2 million.
58
Cash Flows - Non-Financial Services
-----------------------------------
Net cash used by operating activities in 1993, after adjustment for non-
cash expenses of $7.1 million, was $7.9 million. This cash used by operating
activities included the following changes in assets and liabilities: (i)
accounts receivable increased $12.3 million; (ii) accounts payable and accrued
liabilities decreased $1.6 million; (iii) increased costs and estimated
earnings in excess of billings on the foreign sales contract of $5.6 million;
(iv) inventory reduced $2.3 million; and (v) increased supplies, prepaid
items, and other assets of $2.0 million. The increase in accounts receivable
is due to higher sales in the Chemical, Environmental Control and Automotive
Products Businesses. The decrease in accounts payable and accrued liabilities
resulted from paydown of approximately $5 million with the net proceeds from
the offering of the Series 2 Preferred, partially offset by increases
resulting from higher business activity and expanded customer bases in the
Chemical, Environmental Control, and Automotive Products Business. The
decrease in inventories is due to reduced inventory levels in the
Environmental Control Business, which was increased beyond required levels in
1992. The increase in supplies, prepaid items and other assets is due to
increased business activity and prepayments for supplies, insurance, and
computer software and services. Financing activities in 1993 included $43.9
million of net proceeds from issuance of 920,000 shares of the Series 2
Preferred and proceeds of $3.2 million from issuance of Common Stock,
primarily in connection with the redemption of the Company's $2.20 Series 1
Convertible Exchangeable Class C Preferred Stock during the first quarter of
1993. Such increases have been offset by dividend payments of $2.7 million
and paydown of long term debt of $24.9 million. Cash flows used in investing
activities included capital expenditures for property, plant and equipment of
$5.5 million related to the Chemical Business, $1.5 million related to plant
improvements in the Environmental Control Business, and $1.7 million related
to improvements to the Automotive Products Business' warehouse facilities in
Oklahoma City, in addition to tooling and other upgrades made to machinery
used in the Automotive Products Business manufacturing facility.
Future cash requirements include working capital requirements for
anticipated sales increases in the Environmental Control Business, the
Chemical Business and the Automotive Products Business, and funding for future
capital expenditures, primarily in the Chemical Business and the Environmental
Control Business. Funding for the higher accounts receivable resulting from
anticipated sales increases will be provided by the Chemical Business'
revolving credit facilities previously discussed and the accounts receivable
financing provided by Bank IV. As previously discussed, the accounts
receivable financing is temporary and will be replaced with the comprehensive
line of credit that the Company is attempting to negotiate. Inventory
requirements for the higher anticipated sales activity should be met by
scheduled reductions in the inventories of the Environmental Control and
Automotive Products Businesses, both of which increased their inventories in
1992 beyond required levels. During November 1993, the Company's Chemical
Business acquired an additional concentrated nitric acid plant and related
assets for approximately $1.9 million. The Chemical Business is in the
process of moving such plant and assets from Illinois to, and installing such
at, its manufacturing plant located in El Dorado, Arkansas. The Company
anticipates that the total amount that will be expended to acquire, move and
install the plant and assets will be approximately $12.0 million for which the
Company expects to obtain financing secured by such assets. The Company
expects the plant and asset installation to be compete and operational by the
end of 1994. The Company also has planned capital expenditures for the
Environmental Control Business to acquire certain machinery and equipment for
approximately $4 million in 1994. Approximately $2 million of these
expenditures are expected to be financed by the sellers of said machinery and
59
equipment. The remaining $2 million is expected to be financed from
operations.
Management believes that cash flows from operations and other sources,
including the comprehensive line of credit that the Company is presently
negotiating will be adequate to meet its presently anticipated capital
expenditure, working capital, debt service and dividend requirements. The
Company currently has no material commitment for capital expenditures, other
than those related to Chemical's acquisition of an additional concentrated
nitric acid plant, the Environmental Control Business' acquisition of
machinery and equipment as discussed above, and a commitment of a subsidiary
of the Company to purchase from Equity Bank in the year 2000 for the then
carrying value for regulatory capital purposes certain of the Transferred
Assets presently being leased by Equity Bank to the subsidiary. Equity Bank's
carrying value for all of the Transferred Assets at December 31, 1993 was
approximately $65.4 million. The Company has agreed under the Acquisition
Agreement to repurchase all of the Transferred Assets by purchasing the
subsidiaries of Equity Bank that own the Transferred Assets at least one (1)
day prior to consummation of the Acquisition Agreement. However, if the sale
of Equity Bank does not occur, the Company believes that it will be able to
obtain satisfactory financing from non-affiliated parties to fulfill this
commitment on or prior to the date that the subsidiary of the Company is
required to purchase such assets.
The Company's Board of Directors has approved the adoption of a new
policy as to the payment of annual cash dividends of $.06 per share on its
outstanding Common Stock, subject to termination or change by the Board of
Directors at any time. The Board of Directors declared a cash dividend of
$.03 per share on the Company's outstanding shares of Common Stock, which was
paid July 1, 1993, to the stockholders of record as of the close of business
on June 15, 1993.
On November 11, 1993 the Company's Board of Directors declared a (i)
$.03 a share cash dividend on each outstanding share of its Common Stock,
payable January 1, 1994, to stockholders of record on December 15, 1993, (ii)
$3.00 a share quarterly cash dividend on each outstanding share of its Series
B 12% Cumulative Convertible Preferred Stock, $100 par value, payable January
1, 1994, to stockholders of record on December 1, 1993, (for the fourth
quarter of 1993), (iii) $12.00 a share annual cash dividend on each
outstanding share of its Series B 12% Cumulative Convertible Preferred Stock,
$100 par value, payable January 1, 1994 to stockholders of record on December
1, 1993, which is the annual dividend on this series of preferred stock for
1994, and (iv) $.81 a share quarterly cash dividend on each outstanding share
of its Series 2 Preferred, paid December 15, 1993 to shareholders of record on
December 1, 1993.
Foreign Sales Contract - A subsidiary of the Company entered into an
agreement with a foreign company ("Buyer") to supply the Buyer with equipment,
technology and technical services to manufacture certain types of automotive
bearing products. The agreement provides for a total contract amount of
approximately $56 million, with $12 million of the contract amount to be
retained by the Buyer as the Company's subsidiary's equity participation in
the Buyer, which will represent a minority interest. Through December 31,
1993, the Company's subsidiary has received $13.1 million from the buyer under
the agreement. During 1993, the Company and the foreign customer agreed to a
revised payment schedule which deferred the beginning of payments under the
contract from June 30, 1993 to one $791,000 principal payment on November 1,
1993 and then principal payments of $791,000 due March 31, 1994 and quarterly,
thereafter, until the contract is paid in full.
The customer made the November 1 payment as agreed and the Company
expects that the customer will make future payments as they become due,
60
starting with the payment due March 31, 1994. See "Business - Industrial
Products Business" and Note 8 to Notes to Consolidated Financial Statements.
Business Acquisitions - In July, 1993, the Company acquired an
Australian explosives business, Total Energy Systems Limited ("TES"). At
December 31, 1993 the Company has investments and advances of approximately
$3.4 million related to TES.
In December 1993,IBI, an automotive products distributor, was acquired
as a wholly owned subsidiary of the Company operating as a separate entity
within the Automotive Products Business, for a cash payment of $1.8 million
and a note payable of $0.2 million. At December 31, 1993, IBI had assets of
$2.2 million.
In March 1994, a subsidiary of the Company advanced to Deepwater
Iodides, Inc. ("Deepwater"), a specialty chemical company, $450,000 on a
demand basis. In connection with the loan, Deepwater and the Company agreed
to finalize an option allowing the Company to purchase from Deepwater an
amount of stock of Deepwater equal to fifty-one percent of the outstanding
shares of Deepwater for $1.95 million. The Company anticipates exercising
this option prior to the end of 1994, subject to the results of due diligence
presently being conducted.
See Note 2 to Notes to Consolidated Financial Statements for further
discussion of business acquisitions.
Settlement of U.S. Customs Matter - During the third quarter of 1993,
the Company paid $1.8 million to U.S.Customs in settlement of a long standing
dispute over a "notice of redelivery" served by U.S. Customs in a prior year.
Settlement of Litigation - In 1993 the Company filed suit against
certain transportation companies and certain of the Company's insurers over
damage sustained to certain of the Industrial Products Business' machine
inventory while in the transportation companies' possession. Subsequent to
December 31, 1993, the Company settled its litigation with one of it's
insurers for $2.8 million, net of related costs, which was paid to the Company
on March 11, 1994. The Company continues to pursue litigation against two
insurers that were not parties to said settlement and against the
transportation companies.
Letters of Intent with Foreign Customers - During the second and third
quarters of 1993, a subsidiary of the Company signed two separate letters of
intent to supply separate customers, one in the former Soviet Union and one
in Poland, with equipment to manufacture environmental control products. Upon
completion, the agreements are expected to include the sale of licenses,
designs, tooling, machinery, equipment, technical information, proprietary
know how, and technical services. The total sales price for the two contracts
is expected to be approximately $98 million. The agreements are also expected
to include a provision that, in lieu of cash, the Company will accept payment
in kind of anhydrous ammonia from the foreign customers at the foreign
customers' option. The projects are subject to completion of two separate
definitive agreements between each of the foreign customers and the Company's
subsidiary. There are no assurances that definitive contracts with either of
these two customers will be finalized. See "Business - Environmental Control
Business".
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
61
respect to income generated in such future years. As of December 31, 1993,
the Company, excluding amounts applicable to Equity Bank, had available NOL
carryovers of approximately $37 million, based on its federal income tax
returns as filed with the Internal Revenue Service for taxable years through
1992, and on the Company's estimates for 1993. These NOL carryovers will
expire beginning in the year 1999.
The amount of these carryovers has not been audited or approved by the
Internal Revenue Service and, accordingly, no assurance can be given that such
carryovers will not be reduced as a result of audits in the future. In
addition, the ability of the Company to utilize these carryovers in the future
will be subject to a variety of limitations applicable to corporate taxpayers
generally under both the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations. These include, in particular, limitations imposed by
Code Section 382 and the consolidated return regulations.
Contingencies - As discussed in Item 3 and in Note 14 of Notes to the
Consolidated Financial Statements, the Company has several contingencies that
could impact its liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not anticipate that
these claims will result in substantial adverse impacts on its liquidity it is
not possible to determine the outcome.
Financial Services Business
--------------------------
Termination of Assistance Agreement - During the first quarter of 1993,
Equity Bank finalized an agreement with the RTC terminating the Assistance
Agreement entered into between Equity Bank and the FSLIC in 1988 (the
"Assistance Agreement"), in connection with Equity Bank's acquisition of
Arrowhead. In connection with such termination, the RTC paid Equity Bank
approximately $14.2 million and all of the obligations of both parties under
the Assistance Agreement were terminated. As a result of the termination of
the Assistance Agreement, Equity Bank assumed the credit risk with respect to
approximately $30.8 million of assets (as of the date the Assistance Agreement
was terminated ) that had been acquired from Arrowhead in 1988, with respect
to which the FSLIC had previously borne the credit risk. Equity Bank reserved
a substantial portion of such $14.2 million to provide for potential future
losses relating to loans and real estate in which Equity Bank assumed the
credit risk as a result of the termination. As a result, the Company believes
that there are adequate loss reserves relating to the assets for which the
credit risk was assumed.
Regulatory Capital Compliance - At December 31, 1993 Equity Bank's
regulatory core capital was $38.6 million or 7.7% of assets compared to the 3%
minimum requirement. Tangible Capital was $34.8 million or 6.9% of assets
compared to the 1.5% minimum requirement, and Risk-Based Capital was $41.4
million or 15.1% compared to the 8% requirement. Management believes that
Equity Bank will be able to meet all applicable requirements of law and
federal regulation under FIRREA, although there are no assurances that they
will be able to do so.
Fully Phased-In Capital - FIRREA requires that Equity Bank meet
progressively higher capital requirements each year until they are "fully
phased-in" through December 31, 1994, except for certain assets for which the
"phase-in" period has been extended through July, 1996. Equity Bank currently
does and will, in the judgement of the Company, be able to meet applicable
requirements of law and regulations relating to capital requirements as
presently in effect and as the same become effective during the phase-in
period under current law and regulations, although there are no assurances
that Equity Bank will be able to so comply. At December 31, 1993, Equity Bank
exceeded the current regulatory capital requirements and under the technical
62
definition and calculation of fully phased-in capital as prescribed by FIRREA,
Equity Bank believes that it meets future capital standards as presently
mandated by FIRREA.
The OTS has issued a final rule adding an interest rate risk component
(IRR Component) to its risk-based capital rule. The final rule is effective
January 1, 1994. The IRR component is a dollar amount that will be deducted
from total capital for the purpose of calculating an institution's risk-based
capital requirements. The IRR component is equal to one-half the difference
between an institutions' "measured exposure" and a "normal" level of exposure.
An institution's interest rate risk exposure will be measured in terms
of the sensitivity of its net portfolio value (NPV) to changes in interest
rates. The OTS will calculate changes in an institution's NPV based on
financial data submitted by the institution in its quarterly reports.
An institution's "Measured Interest Rate Risk" (Measured IRR) will be
expressed as the change that occurs in its NPV as a result of a hypothetical
200 basis point increase or decrease in interest rates (whichever leads to the
lower NPV) divided by the estimated economic value (Present value) of its
assets. An institution with a "normal" level of interest rate risk is defined
as one whose Measured IRR is less than 2 percent, as estimated by the OTS
Model. Only institutions whose Measured IRR exceed 2 percent will be required
to maintain an IRR component. Based on Equity Bank's current levels of liquid
assets and regulatory capital, management does not expect Equity Bank's
interest rate risk component to have a material adverse effect on Equity
Bank's regulatory capital level or its compliance with regulatory capital
requirements, although there can be no assurance to this effect.
Liquidity - The liquidity of Equity Bank has consistently been
significantly in excess of regulatory liquidity requirements. Cash is
normally invested in Federal Home Loan Bank ("FHLB") overnight deposits that
earn a floating rate of interest. Equity Bank's cash and liquidity are
monitored on a daily basis. A comparison of the required liquidity and actual
liquidity is also performed on a daily basis.
Additionally, Equity Bank, as an insured institution, is required to
maintain cash and eligible liquid investments equal to at least 5% of net
withdrawable deposits accounts and short term borrowings. Equity Bank's
liquidity ratio, so calculated was 8.04% at December 31, 1993. For liquidity
purposes, Equity Bank's mortgage-backed securities portfolio and FHLB stock
are considered ineligible liquid investments. Based on a calculation
considering these types of investments as eligible, Equity Bank's liquidity
ratio would be approximately 49%. The primary liquid assets of Equity Bank
consist of overnight and demand deposits and short-term investment securities.
Funding Sources - Equity Bank has several significant sources of
funding. The primary sources of funding are: internal operating revenues,
including receipts of FSLIC assistance; loan repayments of interest and
principal; new and current depositor activity; maturities of investments and
sales of mortgage loans; FHLB advances based on the collateral value of Equity
Bank's assets; and reverse repurchase debt based on the collateral value of
new investments or mortgage-backed securities to be purchased.
At December 31, 1993, deposits totaled approximately $332.5 million and
had a weighted average interest rate of 3.50%; FHLB advances totaled
approximately $87.7 million, had a weighted average interest rate of 3.59% and
have maturities through 1998.
The primary uses of cash and liquidity include the funding of loans,
payments of interest on savings deposits, payments for savings withdrawals,
payment of operating expenses and investing activity.
63
During 1993, Equity Bank used approximately $14.6 million in operating
activities, used $0.9 million in investing activities and used $7.8 million in
financing activities, resulting in a net decrease in cash of $23.3 million.
Net cash used in operating activities included $24.4 million net increase in
loans and mortgage-backed securities held for sale offset by net income of
$8.2 million (on a stand-alone basis). The net cash used by investing
activities included purchases of mortgage-backed securities of $85.7 million
offset by principle payments on loans and mortgage-backed securities, net of
loan originations of $63.2 million and payment received for termination of the
FSLIC Assistance Agreement of $14.2 million. The net cash used by financing
activities included reductions in deposits of $3.5 million and a net reduction
in borrowings of $4.1 million.
At December 31, 1993, Equity Bank held $201.6 million of mortgage-
backed securities held for investment. These investments were primarily
financed with FHLB advances and reverse repurchase agreements.
Risk Management - Equity Bank's management is dedicated to operating
within prudent risk management policies and procedures. This includes the
extension of credit to borrowers, investment purchases and liability funding.
Equity Bank currently adheres to stringent loan underwriting procedures.
Loans are made primarily within Equity Bank's geographical presence. All
loans other than credit card loans currently generated for portfolio purposes
are adjustable rate loans. A significant number of fixed-rate mortgage loans
are made each month, but are sold to the secondary market normally within 90
to 120 days after origination. The total dollar amount of unsold fixed-rate
mortgage loans is dictated and monitored by the Board of Directors.
Investment purchases are approved by the Investment Committee of the
Board of Directors based on the recommendations of management. Management
utilizes an internal asset/liability modeling software system to analyze the
current condition and matching of the balance sheet and potential investment
purchases. The interest rate sensitivity of the balance sheet is monitored
monthly. An upward or downward movement of interest rates of 400 basis points
is projected each month to determine whether the sensitivity of assets and
liabilities and the market valuation of portfolio equity is within the
guidelines set forth by the Board of Directors. Equity Bank consistently
operates within the approved risk limitations.
Equity Bank's Asset/Liability Committee ("ALCO") is dedicated to
maintaining the deposit base at the lowest cost of funds without significantly
disturbing customer service. All sources and costs of funding are reviewed on
a weekly basis.
Proposed Sale of Equity Bank - As previously discussed, the Company and
Fourth Financial have entered into the Acquisition Agreement,whereby the
Company has agreed to the sale of Equity Bank , which constitutes the
Financial Services Business of the Company, to Fourth Financial. Fourth
Financial is to acquire all of the outstanding shares of capital stock of
Equity Bank. Under the Acquisition Agreement, the Company is to acquire from
Equity Bank (i) prior to the completion of the sale of Equity Bank under the
Acquisition Agreement certain subsidiaries of Equity Bank ("Retained
Corporations") that own the Transferred Assets contributed by the Company to
Equity Bank at the time of the acquisition of the predecessor of Equity Bank
by the Company for Equity Bank's carrying values of such Retained Corporations
at the time of the acquisition of the Retained Corporations from Equity Bank,
and (ii) at the time of the closing of the sale of Equity Bank under the
Acquisition Agreement, the Equity Tower Loan and other real estate owned by
Equity Bank that was acquired by Equity Bank through foreclosure ("OREO"),
64
which have collectively been previously defined as the "Retained Assets". The
Retained Assets are to be acquired for an amount equal to Equity Bank's
carrying value of the Retained Assets at time of closing of the sale of Equity
Bank. In addition, the Company has the option, but not the obligation, to
acquire any loan owned by Equity Bank at book value or $1.00 in the case of a
loan that has been charged off ("Other Loans").
The Company currently expects that the Purchase Price to be paid by
Fourth Financial for Equity Bank will be approximately $92 million, subject to
determination and adjustment in accordance with the Acquisition Agreement. .
The Purchase Price is based on a number of estimates, and the amount of the
Purchase Price will not be determined exactly until the closing of the sale of
Equity Bank. See "Business - Recent Developments " for a discussion of the
formula to determine the Purchase Price. Of the approximately $92 million, the
Company will use approximately $65.4 million, plus interest, to repay a
certain indebtedness the Company intends to incur to finance the purchase from
Equity Bank of the Retained Corporations. In addition, the Company will use
approximately $18.9 million (Equity Bank's carrying value at February 28,
1994) to purchase the Retained Assets. As of this date, the company has made
no decision if it will acquire any of the Other Loans. The Company is further
required under the Acquisition Agreement to purchase from Equity Bank at the
closing of the proposed sale the outstanding amount of Receivables. As of
March 31, 1994, Equity Bank owned $13.5 million of such Receivables. The
Company plans to use borrowings from the Bank IV Line of Credit to purchase
such Receivables from Equity Bank. Further, the Company will use the net
balance of the Purchase Price, if any (after repaying the indebtedness
incurred to purchase the Retained Corporations and paying for the Retained
Assets and transactional costs relating to the sale of Equity Bank) for
general working capital purposes.
The sale of Equity Bank pursuant to the Acquisition Agreement is
currently estimated to result in a pre-tax gain for financial reporting
purposes for the Company of approximately $25.0 million, based upon the
currently-expected Purchase Price of approximately $92 million. The exact
amount of the Purchase Price will depend on certain factors at the time of
closing, and, as a result, the pre-tax gain for financial reporting purposes
could be higher or lower depending upon the ultimate amount of the Purchase
Price. The Company's tax basis in Equity Bank is higher than its basis for
financial reporting purposes. Under current federal income tax laws, the
consummation of the Acquisition Agreement and the sale of Equity Bank will not
have any federal income tax consequences to either the Company or to the
shareholders of the Company. There are, however, certain proposed regulations
which, if adopted by the Internal Revenue Service ("IRS") before the
consummation of the sale of Equity Bank, could result in the Company having a
gain for federal income tax purposes in connection with the sale of Equity
Bank, but will not have any federal income tax effect on the shareholders of
the Company. If the proposed regulations become effective prior to completion
of the sale of Equity Bank, the Company has the right to terminate the
Acquisition Agreement.
As a federally chartered savings institution, the acquisition of Equity
Bank by Fourth Financial is subject to regulatory approvals. The proposed
sale of Equity Bank is also conditioned on, among other things, the
affirmative vote of the holders of a majority of the outstanding voting stock,
voting as a single class, of the Company. It is anticipated that the sale of
Equity Bank will occur on or before June 30, 1994. See "Business - Recent
Developments", "Business - Financial Service Business" and Note 1 to Notes to
Consolidated Financial Statements.
65
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The Company has included the financial statements and supplementary
financial information required by this item immediately following Part IV of
this report and hereby incorporates by reference the relevant portions of
those statements and information into this Item 8.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ -----------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements.
PART III
--------
Item 10. Directors and Executive Officers of the Company
- ------- -----------------------------------------------
Directors. The Company's Certificate of Incorporation and Bylaws
provide for the division of the Board of Directors into three classes, each
class consisting (as nearly as possible) of one-third of the whole. The terms
of office of one class of directors expires each year, with each class of
directors being elected for a term of three years and until the shareholders
or directors have elected or appointed their qualified successors. The
Company's bylaws presently provide that the number of directors may consist of
not less than three nor more than nine, and the Board of Directors presently
has set the number of directors at nine.
The following table sets forth the name, principal occupation, age, year
in which the individual first became director, and year in which the
director's term will expire.
Name and First Became Term
Principal Occupation a Director Expires Age
- -------------------- ------------- ------- ---
Raymond B. Ackerman (1) 1993 1996 71
Chairman Emeritus of Ackerman
McQueen, Inc.
Robert C. Brown, M.D. (2) 1969 1995 63
President of Northwest Internal
Medicine Associates, Inc.
Barry H. Golsen (3) 1981 1994 43
President of the Environmental
Control Business of the Company
Jack E. Golsen (4) 1969 1995 65
President and Chairman of the
Board of Directors of the Company
David R. Goss (5) 1971 1994 53
Senior Vice President -
Operations of the Company
Bernard G. Ille (6) 1971 1996 67
Investments
66
Jerome D. Shaffer, M.D. (7) 1969 1994 77
Investments
Tony M. Shelby (8) 1971 (8) 1996 52
Senior Vice President -
Finance of the Company
C.L. Thurman (9) 1969 1995 75
Investments
- ----------------------------------
(1) Mr. Ackerman is retired. Prior to his retirement, he served for
more than five years as President of Ackerman McQueen, Inc., which is a public
relations and advertising firm, located in Oklahoma.
(2) Dr. Brown has practiced medicine in Oklahoma City, Oklahoma for the
past five years.
(3) For the past five years, Barry H. Golsen has served as the
President of the Company's Environmental Control Business.
(4) Mr. Golsen has served in the same capacity with the Company for the
past five years.
(5) Mr. Goss, a certified public accountant, has served in
substantially the same capacity with the Company for the past five years.
(6) Mr. Ille has served as President and Chief Executive Officer of
First Life Assurance Company ("First Life") since May, 1988, and on March 31,
1994, he retired from that position. In 1991, First Life was placed in
conservatorship under the Oklahoma Department of Insurance and was sold on
March 31, 1994. For more than five (5) years prior to that time, Mr. Ille
also served as President of United Founders Life Insurance Company. Mr. Ille
also serves as a director of Landmark Land Company Inc. ("Landmark") and
served as a director of Landmark's wholly-owned savings and loan subsidiary.
Such savings and loan subsidiary was placed in receivership in 1991 by the
Federal Deposit Insurance Corporation while Mr. Ille served as a director.
First Life was a subsidiary of Landmark until such was placed in
conservatorship.
(7) Dr. Shaffer retired from the practice of medicine in 1987. Prior
to that time, Dr. Shaffer practiced medicine in Oklahoma City, Oklahoma, for
more than five years.
(8) Mr. Shelby, a certified public accountant, has served in
substantially the same capacity with the Company during the past five years.
(9) Prior to his retirement in September of 1987, Mr. Thurman served a
s President of the industrial supply operations of the Company's Industrial
Products Business for more than five years.
Family Relationships. Jack E. Golsen is the father of Barry H. Golsen;
Jack E. Golsen and Robert C. Brown, M.D., are brothers-in-law; and Robert C.
Brown, M.D. is the uncle of Barry H. Golsen.
Compliance with section 16(a) of the Exchange Act. Based solely on a
review of copies of the Forms 3, 4 and 5 and amendments thereto furnished to
the Company with respect to 1993, or written representations that no such
reports were required to be filed with the Securities and Exchange Commission,
the Company believes that during 1993 all directors and officers of the
Company and beneficial owners of more than ten percent (10%) of any class of
67
equity securities of the Company registered pursuant to Section 12 of the
Exchange Act filed their required Forms 3, 4, or 5, as required by Section
16(a) of the Exchange Act on a timely basis, except that each of Sylvia H.
Golsen and Raymond B. Ackerman filed late their respective Forms 3 relating to
when Mrs. Golsen became the beneficial owner of more than 10% of the Company's
common stock and when Mr. Ackerman was elected as a director of the Company;
C.L. Thurman timely filed one Form 5 representing one late Form 4 relating to
the exercise of three stock options; and, Michael D. Tepper timely filed one
Form 5 representing one late Form 4 relating to three different transactions
on the same day.
Item 11. Executive Compensation
- ------- ----------------------
The following table shows the aggregate cash compensation which the
Company and its subsidiaries paid or accrued to the Chief Executive Officer
and each of the other four (4) most highly-paid executive officers of the
Company (which includes the President of the Company's Environmental Control
Business, who also serves as a director of the Company and who performs key
policy making functions for the Company). The table includes cash distributed
for services rendered during 1993, plus any cash distributed during 1993 for
services rendered in a prior year, less any amount relating to those services
previously included in the cash compensation table for a prior year.
Summary Compensation Table
--------------------------
Long-term
Compen-
sation
Annual Compensation Awards
------------------- ------
Other All
Annual Securities Other
Compen- Underlying Compen-
Name and Salary Bonus sation Stock sation
Position Year ($) ($) ($)(2) Options ($)
- ---------- ---- ------ ------ -------- ---------- ------
[S] [C] [C] [C] [C] [C] [C]
Jack E. Golsen 1993 379,615 100,000 - - -
Chairman of the 1992 359,395 160,000(1) - 50,000 -
Board and Chief 1991 353,779 - - - -
Executive Officer
Barry H. Golsen 1993 165,000 60,000 - - -
President of the 1992 168,671 100,000(1) - 10,000 -
Environmental 1991 165,000 25,000 - - -
Control Business
David R. Goss 1993 142,000 60,000 - - -
Senior Vice 1992 145,099 100,000(1) - 10,000 -
President - 1991 142,000 25,000 - - 17,000(3)
Operations
Tony M. Shelby 1993 142,000 60,000 - - -
Senior Vice 1992 144,975 100,000(1) - 10,000 20,000(3)
President/Chief 1991 142,000 25,000 - - -
Financial Officer
David M. Shear 1993 111,846 30,000 - - -
Vice President/ 1992 98,032 20,000 - 25,000 -
General Council 1991 86,688 15,000 - - -
[/TABLE]
(1) Includes the following amounts paid in 1992 as bonuses for 1991:
Jack E. Golsen - $60,000; Barry H. Golsen - $40,000; David R. Goss - $40,000;
and Tony M. Shelby - $40,000.
68
(2) Does not include perquisites and other personal benefits,
securities or property for the named executive officer in any year if the
aggregate amount of such compensation for such year does not exceed the lesser
of either $50,000 or 10% of the total of annual salary and bonus reported for
the named executive officer for such year.
(3) In 1991, the Company paid to Messrs. Goss and Shelby an additional
bonus of $17,000 and $20,000, respectively, which they returned to the Company
in payment of a debt each owed to the Company.
Option Grants in 1993. No stock options were granted by the Company to any
named executive officer in 1993.
Aggregated Option Exercises in 1993
and Fiscal Year End Option Values
-------------------------------------
The following table sets forth information concerning each exercise of
stock options by each of the named executive officers during the last fiscal
year and the year-end value of unexercised options:
Number of Value
Securities of Unexercised
Underlying In-the-Money
Unexercised Options at
Options at FY End
FY End (#)(3) ($) (3) (4)
-------------- ------------
Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable
Name (#)(1) ($) (2) Unexercisable Unexercisable
- -------------- ----------- --------- ------------- ------------
Jack E. Golsen 35,800 $ 290,201 175,000/ (5) $1,238,750/
30,000 189,360
Barry H. Golsen 39,170 339,372 14,000/ 111,475/
6,000 37,872
David R. Goss 184,500 1,654,687 5,000/ 38,375/
6,000 39,750
Tony M. Shelby 196,650 1,777,706 5,000/ 38,375/
6,000 39,750
David M. Shear 8,000 75,250 8,000/ 58,250/
15,000 99,375
- --------------------------------
(1) Each number represents the number of shares received by the named
individual upon exercise.
(2) The values set forth in the columns below are between the market
value of the Company's common stock on the date the particular option was
exercised and the exercise price of such option.
(3) The options granted under the Company's Plans become exercisable
20% after one year from date of grant, an additional 20% after two years, an
additional 30% after three years, and the remaining 30% after four years.
(4) The values are based on the price of the Company's common stock on
the American Stock Exchange at the close of trading on December 31, 1993 of
69
$9.75 per share. The actual value realized by a named executive on the
exercise of these options depends on the market value of the Company's common
stock on the date of exercise.
(5) The amount shown includes 165,000 non-qualified stock options
which vest and are exercisable on the date of grant.
Other Plans. The Board of Directors has adopted an LSB Industries, Inc.
Employee Savings Plan (the "401(k) Plan") for the employees (including
executive officers) of the Company and its subsidiaries, excluding certain
(but not all) employees covered under union agreements. The 401(k) Plan is an
employee contribution plan, and the Company and its subsidiaries make no
contributions to the 401(k) Plan. The amount that an employee may contribute
to the 401(k) Plan equals a certain percentage of the employee's compensation,
with the percentage based on the employee's income and certain other criteria
as required under Section 401(k) of the Internal Revenue Code. The Company or
subsidiary deducts the amounts contributed to the 401(k) Plan from the
employee's compensation each pay period, in accordance with the employee's
instructions, and pays the amount into the 401(k) Plan for the employee's
benefit. The Summary Compensation Table set forth above includes any amount
contributed and deferred during the 1993 fiscal year pursuant to the 401(k)
Plan by the named executive officers of the Company.
The Company has a death benefit plan for certain key employees. Under
the plan, the designated beneficiary of an employee covered by the plan will
receive a monthly benefit for a period of ten (10) years if the employee dies
while in the employment of the Company or a wholly-owned subsidiary of the
Company. The agreement with each employee provides, in addition to being
subject to other terms and conditions set forth in the agreement, that the
Company may terminate the agreement as to any employee at anytime prior to the
employee's death. The Company has purchased life insurance on the life of
each employee covered under the plan to provide, in large part, a source of
funds for the Company's obligations under the Plan. The Company also will
fund a portion of the benefits by investing the proceeds of a policy received
by the Company upon the employee's death. The Company is the owner and sole
beneficiary of the insurance policy, with the proceeds payable to the Company
upon the death of the employee. The following table sets forth the amounts of
annual benefits payable to the designated beneficiary or beneficiaries of the
executive officers named in the Summary Compensation Table set forth above
under the above-described death benefits plan.
Amount of
Name of Individual Annual Payment
------------------ --------------
Jack E. Golsen $175,000
Barry H. Golsen $ 30,000
David R. Goss $ 35,000
Tony M. Shelby $ 35,000
David M. Shear $ 0
In addition to the above-described plans, during 1991 the Company
entered into a non-qualified arrangement with certain key employees of the
Company and its subsidiaries to provide compensation to such individuals in
the event that they are employed by the Company or a subsidiary of the Company
at age 65. Under the plan, the employee will be eligible to receive for the
life of such employee, a designated benefit as set forth in the plan. In
addition, if prior to attaining the age 65 the employee dies while in the
employment of the Company or a subsidiary of the Company, the designated
beneficiary of the employee will receive a monthly benefit for a period of ten
(10) years. The agreement with each employee provides, in addition to being
subject to other terms and conditions set forth in the agreement, that the
Company may terminate the agreement as to any employee at any time prior to
70
the employee's death. The Company has purchased insurance on the life of each
employee covered under the plan where the Company is the owner and sole
beneficiary of the insurance policy, with the proceeds payable to the Company
to provide a source of funds for the Company's obligations under the plan.
The Company may also fund a portion of the benefits by investing the proceeds
of such insurance policies. Under the terms of the plan, if the employee
becomes disabled while in the employment of the company or a wholly-owned
subsidiary of the Company, the employee may request the Company to cash-in any
life insurance on the life of such employee purchased to fund the Company's
obligations under the plan. Jack E. Golsen does not participate in the plan.
The following table sets forth the amounts of annual benefits payable to the
executive officers named in the Summary Compensation Table set forth above
under such retirement plan.
Amount of
Name of Individual Annual Payment
------------------ --------------
Barry H. Golsen $17,480
David R. Goss $17,403
Tony M. Shelby $15,605
David M. Shear $17,822
Compensation of Directors. In 1993, the Company compensated each non-
management director of the Company (with the exception of Raymond B. Ackerman)
for his services in the amount of $4,500. The non-management directors of
the Company also received $500 for every meeting of the Board of Directors
attended during 1993. Each member of the Audit Committee, consisting of
Messrs. Ille, Brown and Shaffer, also received an additional $20,000 for their
services in 1993. The Company did not compensate the directors that also
served as officers or employees of the Company or its subsidiaries for their
services as directors. In addition, the Company paid C.L. Thurman $20,000 as
compensation for his services as Chairperson of the Special Projects Committee
of the Board of Directors for 1993.
In September 1993, the company adopted the 1993 Non-Employee Director
Stock Option Plan (the "Outside Director Plan"). The Outside Director Plan
authorizes the grant of non-qualified stock options to each member of the
Company's Board of Directors who is not an officer or employee of the Company
or its subsidiaries. The maximum shares for which options may be issued under
the Outside Director Plan will be 150,000 shares (subject to adjustment as
provided in the Outside Director Plan). The Company shall automatically grant
to each outside director an option to acquire 5,000 shares of the Company's
common stock on April 30 following the end of each of the Company's fiscal
years in which the Company realizes net income of $9.2 million or more for
such fiscal year. The exercise price for an option granted under the Outside
Director Plan shall be the fair market value of the shares of common stock at
the time the option is granted. Each option granted under the Outside
Director Plan, to the extent not exercised, shall terminate upon the earlier
of the termination of the outside director as a member of the Company's Board
of Directors or the fifth anniversary of the date such option was granted. No
options are currently outstanding under the Outside Director Plan.
Termination of Employment and Change in Control Arrangements. In 1989
and 1991, the Company entered into severance agreements with Jack E. Golsen,
Barry H. Golsen, Tony M. Shelby, David R. Goss, David Shear and certain other
executive officers of the Company and subsidiaries of the Company.
Each severance agreement provides (among other things) that if, within
twenty-four (24) months after the occurrence of a change in control (as
defined) of the Company, the Company terminates the officer's employment other
than for cause (as defined) or the officer terminates his employment for good
reason (as defined) the Company must pay the officer an amount equal to 2.9
times the officer's base amount (as defined). The phrase "base amount" means
71
the average annual gross compensation paid by the Company to the officer and
includable in the officer's gross income during the period consisting of the
most recent five (5) year period immediately preceding the change in control.
If the officer has been employed by the Company for less than 5 years, the
base amount is calculated with respect to the most recent number of taxable
years ending before the change in control that the officer worked for the
Company.
The severance agreements provide that a "change in control" means a
change in control of the Company of a nature that would require the filing of
a Form 8-K with the Securities and Exchange Commission and, in any event,
would mean when: (1) any individual, firm, corporation, entity or group (as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) becomes the beneficial owner, directly or indirectly, of thirty
percent (30%) or more of the combined voting power of the Company's
outstanding voting securities having the right to vote for the election of
directors, except acquisitions by: (a) any person, firm, corporation, entity
or group which, as of the date of the severance agreement, has that ownership,
or (b) Jack E. Golsen, his wife; his children and the spouses of his children;
his estate; executor or administrator of any estate, guardian or custodian for
Jack E. Golsen, his wife, his children, or the spouses of his children, any
corporation, trust, partnership or other entity of which Jack E. Golsen, his
wife, children, or the spouses of his children own at least eighty percent
(80%) of the outstanding beneficial voting or equity interests, directly or
indirectly, either by any one or more of the above-described persons, entities
or estates; and certain affiliates and associates of any of the above-
described persons, entities or estates; (2) individuals who, as of the date of
the severance agreement, constitute the Board of Directors of the Company (the
"Incumbent Board") and who cease for any reason to constitute a majority of
the Board of Directors except that any person becoming a director subsequent
to the date of the severance agreement, whose election or nomination for
election is approved by a majority of the Incumbent Board (with certain
limited exceptions), will constitute a member of the Incumbent Board; or (3)
the sale by the Company of all or substantially all of its assets.
The termination of an officer's employment with the Company "for cause"
means termination because of: (a) the mental or physical disability from
performing the officer's duties for a period of one hundred twenty (120)
consecutive days or one hundred eighty days (even though not consecutive)
within a three hundred sixty (360) day period; (b) the conviction of a felony;
(c) the embezzlement by the officer of Company assets resulting in substantial
personal enrichment of the officer at the expense of the Company; or (d) the
willful failure (when not mentally or physically disabled) to follow a direct
written order from the Company's Board of Directors within the reasonable
scope of the officer's duties performed during the sixty (60) day period prior
to the change of control.
The termination of an officer's employment with the Company for "good
reason" means termination because of (a) the assignment to the officer of
duties inconsistent with the officer's position, authority, duties or
responsibilities during the sixty (60) day period immediately preceding the
change in control of the Company or any other action which results in the
diminishment of those duties, position, authority, or responsibilities; (b)
the relocation of the officer; (c) any purported termination by the Company of
the officer's employment with the Company otherwise than as permitted by the
severance agreement; or (d) in the event of a change in control of the
Company, the failure of the successor or parent company to agree, in form and
substance satisfactory to the officer, to assume (as to a successor) or
guarantee (as to a parent) the severance agreement as if no change in control
had occurred.
72
Each severance agreement runs until the earlier of: (a) three years
after the date of the severance agreement, or (b) the officer's normal
retirement date from the Company. However, beginning on the first anniversary
of the severance agreement and on each anniversary thereafter, the term of the
severance agreement automatically extends for an additional one-year period,
unless the Company gives notice otherwise at least sixty (60) days prior to
the anniversary date.
Compensation Committee Interlocks and Insider Participation. The
Company's Executive Salary Review Committee has the authority to set the
compensation of all officers of the Company, except the President, which the
Board of Directors sets. This Committee generally considers and approves the
recommendations of the President. The members of the Executive Salary Review
Committee are the following non-management directors: Robert C. Brown, M.D.,
Jerome D. Shaffer, M.D., and Bernard G. Ille. During 1993, the Executive
Salary Review Committee had one meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of certain Beneficial Owners. The following table
shows the total number and percentage of the outstanding shares of the
Company's voting common stock and voting preferred stock beneficially owned as
of April 15, 1994, with respect to each person (including any "group" as used
in Section 13(d)(3) of the Securities Act of 1934, as amended) that the
Company knows to have beneficial ownership of more than five percent (5%) of
the Company's voting common stock and voting preferred stock. A person is
deemed to be the beneficial owner of voting shares of Common Stock of the
Company which he or she could acquire within sixty (60) days of April 1, 1994,
such as upon the exercise of options.
Because of the requirements of the Securities and Exchange Commission as
to the method of determining the amount of shares an individual or entity may
beneficially own, the amounts shown below for an individual or entity may
include shares also considered beneficially owned by others.
Amounts
Name and Address Title of Shares Percent
of of Beneficially of
Beneficial Owner Class Owned(1) Class
- ----------------- ------ ------------ -------
Jack E. Golsen and Common 4,038,645 (3)(5)(6) 27.8%
members of his family(2) Voting Preferred 20,000 (4)(6)
92.3%
- --------------------------------
(1) The Company based the information with respect to beneficial
ownership on information furnished by the above-named individuals or entities
or contained in filings made with the Securities and Exchange Commission or
the Company's records.
(2) Includes Jack E. Golsen and the following members of his family:
wife, Sylvia H. Golsen; son, Barry H. Golsen (a director of the Company and
President of several subsidiaries of the Company); son, Steven J. Golsen
(Executive officer of several subsidiaries of the Company), and daughter,
Linda F. Rappaport. The address of Jack E. Golsen, Sylvia H. Golsen and Linda
F. Rappaport is 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107;
Barry H. Golsen's address is 5000 S.W. Seventh Street, Oklahoma City, Oklahoma
73125; and Steven J. Golsen's address is 518 North Indiana Avenue, Oklahoma
City, Oklahoma 73107.
73
(3) Includes (a) the following shares that Jack E. Golsen ("J.
Golsen") has the sole voting and investment power: (i) 89,028 shares that he
owns of record, (ii) 165,000 shares that he has the right to acquire under a
non-qualified stock option, (iii) 4,000 shares that he has the right to
acquire upon conversion of a promissory note, (iv) 133,333 shares that he has
the right to acquire upon the conversion of 4,000 shares of the Company's
Series B 12% Cumulative Convertible Preferred Stock (the "Series B Preferred")
owned of record by him, and (v) 10,000 shares that he has the right to acquire
within the next sixty (60) days under the Company's stock option plans; (b)
1,295,184 shares owned of record by Sylvia H. Golsen, in which she and her
husband, J. Golsen share voting and investment power; (c) 264,526 shares that
Barry H. Golsen ("B Golsen") has the sole voting and investment power, 533
shares that he shares the voting and investment power with his wife that are
owned of record by his wife, and 14,000 shares that he has the right to
acquire within the next sixty (60) days under the Company's stock option
plans; (d) 225,897 shares that Steven J. Golsen ("S. Golsen") has the sole
voting and investment power and 14,000 shares that he has the right to acquire
within the next sixty (60) days under the Company's stock option plans; (e)
145,460 shares held in trust for the grandchildren of Jack E. and Sylvia H.
Golsen of which B. Golsen, S. Golsen an Linda F. Rappaport jointly or
individually are trustees; (f) 82,552 shares owned of record by Linda F.
Rappaport, which Mrs. Rappaport has the sole voting an investment power, and
(g) 1,061,799 shares owned of record by Golsen Petroleum Corporation ("GPC)
and 533,333 shares that GPC has the right to acquire upon conversion of 16,000
shares of Series B Preferred owned of record by GPC. GPC is wholly-owned by
J. Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen and Linda F. Rappaport, with
each owning twenty percent (20%) of the outstanding stock of GPC, and as a
result, GPC, J. Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen, and Linda F.
Rappaport share the voting and investment power of the shares beneficially
owned by GPC. GPC's address is 16 South Pennsylvania Avenue, Oklahoma City,
Oklahoma 73107.
(4) Includes: (a) 4,000 shares of series B Preferred owned of record
by J. Golsen, which he has the sole voting and investment power; and (b)
16,000 shares of Series B Preferred owned of record by GPC, in which GPC, J.
Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen and Linda F. Rappaport share
the voting and investment power.
(5) Does not include 144,260 shares of Common stock that Linda F.
Rappaport's husband owns of record and 14,000 shares which he has the right to
acquire within the next sixty (60) days under the Company's stock option
plans, all of which Linda F. Rappaport disclaims beneficial ownership.
(6) J. Golsen disclaims beneficial ownership of the shares that B.
Golsen, S. Golsen and Linda F. Rappaport each have the sole voting and
investment power over as noted in footnote (3) above. B. Golsen, S. Golsen
and Linda F. Rappaport disclaim beneficial ownership of the shares that J.
Golsen has the sole voting and investment power over as noted in footnotes (3)
and (4) and the shares owned of record by Sylvia H. Golsen. Sylvia H. Golsen
disclaims beneficial ownership of the shares that J. Golsen has the sole
voting and investment power over as noted in footnotes (3) and (4) above.
Security Ownership of Management. The following table sets forth
information obtained from the directors of the Company and the directors and
executive officers of the Company as a group as to their beneficial ownership
of the Company's voting common stock and voting preferred stock as of April 1,
1994.
Because of the requirements of the Securities and Exchange Commission as
to the method of determining the amount of shares an individual or entity may
own beneficially, the amount shown below for an individual may include shares
also considered beneficially owned by others. Any shares of stock which a
74
person does not own, but which he or she has the right to acquire within sixty
(60) days of April 1, 1994 are deemed to be outstanding for the purpose of
computing the percentage of outstanding stock of the class owned by such
person but are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
Amounts of
Shares
Name of Title of Beneficially Percent of
Beneficial Owner Class Owned Class
- ---------------- ------- ------------ ----------
Raymond B. Ackerman Common 680 (2) *
Robert C. Brown, M.D. Common 253,329 (3) 1.8%
Barry H. Golsen Common 2,019,651 (4) 14.8%
Voting Preferred 16,000 (4) 74.0%
Jack E. Golsen Common 3,291,677 (5) 23.8%
Voting Preferred 20,000 (5) 92.5%
David R. Goss Common 266,477 (6) 1.9%
Bernard G. Ille Common 125,000 (7) *
Jerome D. Shaffer,M.D. Common 135,374 (8) 1.0%
Tony M. Shelby Common 262,882 (9) 1.9%
C.L. Thurman Common 66,833 (10) *
Directors and Common 5,075,499 (11) 36.8%
Executive Officers Voting Preferred 20,000 (11) 92.5%
as a group(12
persons)
- ------------------------------------------
* Less than 1%.
(1) The Company based the information with respect to beneficial
ownership on information furnished by each director or officer, contained in
filings made with the Securities and Exchange Commission, or contained in the
Company records.
(2) Mr. Ackerman has sole voting and investment power of these shares,
which shares are held in a trust in which Mr. Ackerman is both the settlor and
the trustee and in which he hasthe vested interest in both the corpus and
income.
(3) The amount shown includes 65,000 shares of common stock that Dr.
Brown may acquire pursuant to currently exercisable non-qualified stock
options granted to him by the Company. The shares with respect to which Dr.
Brown shares the voting and investment power consist of 117,516 shares owned
by Dr. Brown's wife, 50,727 shares owned by Robert C. Brown, M.D., Inc., a
corporation wholly-owned by Dr. Brown, and 20,086 shares held by the Robert C.
Brown M.D., Inc. Employee Profit Sharing Plan, of which Dr. Brown serves as
the trustee. The amount shown does not include 56,090 shares directly owned
by the children of Dr. Brown, all of which Dr. Brown disclaims beneficial
ownership.
75
(4) See footnotes (3), (4), and (6) of the table under "Security
Ownership of Certain Beneficial Owners and Management" of this Item for a
description of the amount and nature of the shares beneficially owned by B.
Golsen, including 14,000 shares B. Golsen has the right to acquire within
sixty (60) days.
(5) See footnotes (3), (4), and (6) of the table under "Security
Ownership of Certain Beneficial Owners and Management" of this Item for a
description of the amount and nature of the shares beneficially owned by J.
Golsen, including the 10,000 shares J. Golsen has the right to acquire within
sixty (60) days.
(6) The amount shown includes 5,000 shares that he has the right to
acquire within sixty (60) days pursuant to options granted under the Company's
Incentive Stock Option Plans ("ISOs"), all of Mr. Goss has the sole voting and
investment power. Mr. Goss shares voting and investment power over 2,429
shares owned by Mr. Goss's wife, individually and/or as custodian for Mr.
Goss's children and has sole voting and investment power over the balance of
the shares.
(7) The amount includes 65,000 shares that Mr. Ille may purchase
pursuant to currently exercisable non-qualified stock options, all of which
Mr. Ille has the sole voting and investment power. Mr. Ille disclaims
beneficial ownership of 60,000 shares owned by Mr. Ille's wife.
(8) Dr. Shaffer has the sole voting and investment power over these
shares, which includes 65,000 shares that Dr. Shaffer may purchase pursuant to
currently exercisable non-qualified stock options.
(9) Mr. Shelby has the sole voting and investment power over these
shares, which include 5,000 shares that he has the right to acquire within
sixty (60) days pursuant to options granted under the Company's ISOs.
(10) Mr. Thurman has the sole voting and investment power over these
shares.
(11) The amount shown includes 489,380 shares of common stock that
officers and directors, or entities controlled by officers and directors of
the Company, have the right to acquire within sixty (60) days.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
A subsidiary of the Company, Hercules Energy Mfg. Corporation
("Hercules"), leases land and a building in Oklahoma City, Oklahoma from Mac
Venture, Ltd. ("Mac Venture"), a limited partnership. GPC serves as the
general partner of Mac Venture. The limited partners of Mac Venture include
GPC and the three children of Jack E. Golsen. See "Security Ownership of
Certain Beneficial Owners and Management", above, for a discussion of the
stock ownership of GPC. The land leased by Hercules from Mac Venture consists
of a total of 341,000 square feet, with 44,000 square feet in the building.
Hercules leases the property from Mac Venture for $7,500 per month under a
triple net lease which began as of January 1, 1982, and expires on December
31, 1998. Also, at January 1, 1991, GPC owed Hercules approximately $62,000
for purchases of oilfield equipment in prior years. Beginning in 1991, the
balance of $62,000 was payable at the rate of $1,000 per month, and at March
31, 1994, $51,000 was owing by GPC to Hercules.
At January 1, 1992, there were outstanding loans and advances to Tony M.
Shelby of $105,000. $5,000 of such loans and advances were non-interest
bearing. $100,000 of such loans and advances bears an annual rate of interest
of 7.0%. During 1993, Mr. Shelby sold to the Company 9782 shares of the
76
Company's common stock at market value at that time and used the proceeds in
payment of such loan plus accrued interest. The market value of the shares
transferred on the date transferred was $11.25 per share (aggregate $110,000).
Prior to 1993 Equity made a loan to Douglas Barton which loan bears an
annual rate of interest equal to the Citibank, N.A.'s prime rate plus 1.5%.
As of June 30, 1993, Mr. Barton owed Equity the sum of $358,158 on this loan.
This loan was secured by Mr. Barton's home in Carmel, California and 155,000
shares of Landmark Land Company common stock. This loan was paid in full in
January 1994. The loan made by Equity to Mr. Barton was made in Equity's
ordinary course of business and made on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with other persons. Mr. Barton is the son of Gerald
G. Barton, who the Company believed owned more than five percent of the
Company's common stock from January 1, 1992 until March 1993, when he ceased,
to the Company's knowledge, being an owner of record of more than five percent
of any class of the Company's voting securities.
Northwest Internal Medicine Associates, ("Northwest") a division of
Plaza Medical Group., P.C., has an agreement with the Company to perform
medical examinations of the management and supervisory personnel of the
Company and its subsidiaries. Under such agreement, Northwest is paid $4,000
a month to perform all such examinations. Dr. Robert C. Brown (a director of
the Company) is a co-owner of Plaza Medical Group., P.C.
In 1983, LSB Chemical Corp. ("LSB Chemical"), a subsidiary of the
Company, acquired all of the outstanding stock of El Dorado Chemical Company
("EDC") from its then four stockholders ("Ex-Stockholders"). A substantial
portion of the purchase price consisted of an earnout based primarily on the
annual after-tax earnings of EDC for a ten-year period. During 1989, two of
the Ex-Stockholders received LSB Chemical promissory notes for a portion of
their earnout, in lieu of cash, totaling approximately $896,000, payable
$496,000 in January, 1990, and $400,000 in May, 1994. LSB Chemical agreed to
a buyout of the balance of the earnout from the four Ex-Stockholders for an
aggregate purchase amount of $1,231,000. LSB Chemical purchased for cash the
earnout from two of the Ex-Stockholders and issued multi-year promissory notes
totaling $676,000 to the other two Ex-Stockholders. Jack E. Golsen guaranteed
LSB Chemical's payment obligation under the promissory notes, which is
$400,000 at March 31, 1994.
At the request of a lender to the Company and several of its
subsidiaries, during the first half of 1992, Jack E. Golsen guaranteed the
repayment of a term loan in the original principal amount of $2,000,000 made
by such lender to several subsidiaries of the Company. This loan was repaid
by the Company in May, 1993.
77
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a) (1) Financial Statements. The following consolidated financial
statements of the Company appear immediately following this Part IV:
Pages
---------------
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1993
and 1992 F-2 to F-3
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1993 F-4
Consolidated Statements of Non-redeemable Preferred
Stock, Common Stock and Other Stockholders' Equity
for each of the three years in the period ended
December 31, 1993 F-5 to F-6
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1993 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-51
Quarterly Financial Data (Unaudited) F-52 to F-53
(a)(2) Financial Statement Schedules. The Company has included the
following schedules in this report:
Pages
----------------
II - Amounts Receivable from Employees F-54
III - Condensed Financial Information of Registrant F-55 to F-58
VIII - Valuation and Qualifying Accounts F-59
X - Supplementary Statement of Operations F-60
Information
The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information
appears in the Company's Consolidated Financial Statements, including the
notes to those statements.
(a)(3) Exhibits. The Company has filed the following exhibits with
this report:
2.1 Stock Purchase Agreement dated as of February 9, 1994,
between Fourth Financial Corporation, the Company and Prime Financial
Corporation ("Stock Purchase Agreement"), which the Company hereby
incorporates by reference from Exhibit A to the Company's Proxy
Statement, dated March 22, 1994 and filed with the Commission on March
23, 1994. A copy of the schedules and exhibits to the Stock Purchase
Agreement will be furnished supplementally to the Commission upon
request.
78
3.1. Restated Certificate of Incorporation, and the Certificate
of Designation dated February 17, 1989, which the Company hereby incorporates
by reference from Exhibit 3.01 to the Company's Form 10-K for fiscal year
ended December 31, 1989.
3.2. Bylaws, as amended, which the Company hereby
incorporates by reference from Exhibit 3.02 to the Company's form 10-K
for fiscal year ended December 31, 1990.
4.1. Loan Agreement and Accounts Receivable Security
Agreement, Security Agreement, General Security Agreement, Guarantee and
Waivers, Letter of Credit Purchase Guarantee Supplement, Pledge and
Security Agreement, Trademark and Patent Security Agreement and
Subordination Agreement, dated March 29, 1984, among the Company,
certain subsidiaries of the Company, and Congress Financial Corporation
("Congress"), which the Company hereby incorporates by reference from
Exhibits 10(e), 10(f), 10(h), 10(i), 10(j), 10(k) and 10(l) to the
Company's Form 10-K for the fiscal year ended December 31, 1983.
4.2. Amendment to Loan Agreement and Pledge and Security
Agreement, dated August 16, 1985, among the Company, Friedrich Climate
Master, Inc. ("FCM"), certain other subsidiaries of the Company, and
Congress, which the Company hereby incorporates by reference from
Exhibits 4.1 and 4.2 to the Company's Form 8-K, dated August 16, 1985.
4.3. Letter Agreement, Trademark and Patent Security
Agreement and Guarantee and Waiver, dated August 16, 1985, between FCM
and Congress, which the Company hereby incorporates by reference from
Exhibits 4.2, 4.3, 4.4 and 4.5 to the Company's Form 8-K, dated August
16, 1985.
4.4. Modification, dated March 14, 1986, to Loan Agreement
among Congress, the Company, and certain of the Company's subsidiaries,
which the Company hereby incorporates by reference from Exhibit 4.5 to
the Company's Form 10-K for the fiscal year ended December 31, 1985.
4.5. Second Amendment to Loan Agreement, dated April 3,
1986, among Congress, the Company, and certain subsidiaries of the
Company, which the Company hereby incorporates by reference from Exhibit
19.1 to the Company's Form 10-Q for the quarter ended March 31, 1986.
4.6. Third and Fourth Amendments to Loan Agreement, dated
October 26, 1986, and December 17, 1986, among Congress, the Company,
and certain subsidiaries of the Company, which the Company hereby
incorporates by reference from Exhibits 4.31 and 4.32 to the Company's
Registration Statement No. 33-9848.
4.7. Specimen Certificate for the Company's Non-cumulative
Preferred Stock, having a par value of $100 per share, which the Company
hereby incorporates by reference from Exhibit 4.1 to the Company's Form
10-Q for the quarter ended June 30, 1983.
4.8. Specimen Certificate for the Company's Series B
Preferred Stock, having a par value of $100 per share, which the Company
hereby incorporates by reference from Exhibit 4.27 to the Company's
Registration Statement No. 33-9848.
4.9 Specimen Certificate for the Company's Series 2
Preferred Stock, which the Company hereby incorporates by reference from
Exhibit 4.5 to the Company's Registration Statement No. 33-61640
79
4.10. Rights Agreement, dated as of February 17, 1989, between the
Company and The Liberty National Bank and Trust Company of Oklahoma City,
which the Company hereby incorporates by reference from Exhibit 2.1 to the
Company's Form 8-A Registration Statement dated February 22, 1989.
4.11. Fifth Amendment to Loan Agreement, dated May 7, 1988,
among Congress, the Company, and certain subsidiaries of the Company
which the Company hereby incorporates by reference from Exhibit 4.16 to
the Company's Form 10-K for the year ended December 31, 1987.
4.12. Sixth Amendment to Loan Agreement, dated March 31,
1989, among Congress, the Company, and certain subsidiaries of the
Company which the Company hereby incorporates by reference from Exhibit
4.17 to the Company's Form 10-K for the year ended December 31, 1988.
4.13. Amended and Restated Secured Credit Agreement, dated
as of January 21, 1992, between El Dorado Chemical Company ("EDC"),
Slurry Explosive Corporation ("Slurry"), Household Commercial Financial
Services, Inc. ("Household"), Connecticut Mutual Life Insurance Company
("CML") and CM Life Insurance Company which the Company hereby
incorporates by reference from Exhibit 4.15 to the Company's form 10K
for the year ended December 31,1991. The agreement contains a list of
schedules and exhibits omitted from the filed copy and the Company
agrees to furnish supplementally a copy of any of the omitted schedules
or exhibits to the Commission upon request.
4.14. Second Amended and Restated Working Capital Loan
Agreement, dated as of January 21, 1992, between EDC, Slurry and
Household which the Company hereby incorporates by reference from
Exhibit 4.16 to the Company's Form 10K for the year ended December 31,
1991. The agreement contains a list of schedules and exhibits omitted
from the filed copy and the Company agrees to furnish supplementally a
copy of any of the omitted schedules or exhibits to the Commission upon
request.
4.15. Seventh Amendment to Loan Agreement, dated May 18,
1990, between Congress Financial Corporation ("Congress"), LSB
Industries, Inc. ("LSB") and other subsidiaries of LSB, which the
Company hereby incorporates by reference from Exhibit 28.14 to the
Company's Form 10-Q for the quarter ended June 30, 1990.
4.16. Eighth and Ninth Amendments to Loan Agreement, dated
May 1, 1991, and February 25, 1992, respectively between Congress, LSB
and other subsidiaries of LSB which the Company hereby incorporates by
reference from Exhibit 4.18 to the Company's Form 10K for the year ended
December 31, 1991.
4.17 Tenth Amendment to Loan Agreement, dated March 31,
1992 and Eleventh Amendment to Loan Agreement, dated December 10, 1992
between Congress, the Company and certain subsidiaries of the Company
which the Company hereby incorporates by reference from Exhibit 4.18 to
the Company's Registration Statement No. 33-55608.
4.18 First Amendment to the Second Amended and Restated
Working Capital Loan Agreement, dated December 9, 1992, between El
Dorado Chemical Company and Household Commercial Financial Services,
Inc., which the Company hereby incorporates by reference from Exhibit
4.21 to the Company's Registration Statement No. 33-55608.
80
4.19 First Amendment to the Amended and Restated Secured
Credit Agreement, dated December 9, 1992, between El Dorado Chemical
Company, Slurry Explosive Corporation, Household Commercial Financial
Services Inc., Connecticut Mutual Insurance Company and C.M. Life
Insurance Company, which the Company hereby incorporates by reference
from Exhibit 4.22 to the Company's Registration Statement No. 33-55608.
4.20 Consent Agreement, dated December 9, 1992, between El
Dorado Chemical Company and Household Commercial Financial Services,
Inc., which the Company hereby incorporates by reference from Exhibit
4.23 to the Company's Registration Statement No. 33-55608.
4.21 First Amendment to Lease Agreements, made and entered
into effective December 10, 1992 between Chemical Plant Venture,
Chemical Plant Venture II and El Dorado Chemical Company, which the
Company hereby incorporates by reference from Exhibit 28.15 to the
Company's Registration Statement No. 33-55608.
4.22. Twelfth Amendment to Loan Agreement, dated April 23,
1993, Thirteenth Amendment to Loan Agreement, dated June 24, 1993;
Fourteenth Amendment to Loan Agreement, dated September 23, 1993;
Fifteenth Amendment to Loan Agreement, date November 29, 1993; Sixteenth
Amendment to Loan Agreement, dated January 25, 1994; and Seventeenth
Amendment to Loan Agreement dated March 30, 1994 between Congress, the
Company and certain subsidiaries of the Company.
4.23 Amendment Agreement, dated as of March 30, 1994, among
El Dorado Chemical Company, Slurry Explosive Corporation, Household
Commercial Financial Services, Inc., and Prime Financial Corporation.
10.1. Form of Death Benefit Plan Agreement between the
Company and the employees covered under the plan, which the Company
hereby incorporates by reference from Exhibit 10(c)(1) to the Company's
Form 10-K for the year ended December 31, 1980.
10.2. The Company's 1981 Incentive Stock Option Plan, as
amended, and 1986 Incentive Stock Option Plan, which the Company hereby
incorporates by reference from Exhibits 10.1 and 10.2 to the Company's
Registration Statement No. 33-8302.
10.3. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1981 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.10 to the Company's Form 10-K for the fiscal year ended December 31,
1984.
10.4. Form of Incentive Stock Option Agreement between the
Company and employees as to the Company's 1986 Incentive Stock Option
Plan, which the Company hereby incorporates by reference from Exhibit
10.6 to the Company's Registration Statement No. 33-9848.
10.5. The 1987 Amendments to the Company's 1981 Incentive
Stock Option Plan and 1986 Incentive Stock Option Plan, which the
Company hereby incorporates by reference from Exhibit 10.7 to the
Company's Form 10-K for the fiscal year ended December 31, 1986.
10.6 1993 Stock Option and Incentive Plan.
10.7 1993 Non-employee Director Stock Option Plan.
81
10.8. Union Contracts, dated August 1, 1992, between EDC and
the Oil, Chemical and Atomic Workers, United Steel Workers of America,
United Mine Workers and the International Association of Machinists and
Aerospace Workers.
10.9. Lease Agreement, dated March 26, 1982, between Mac
Venture, Ltd. and HEC, which the Company hereby incorporates by
reference from Exhibit 10.32 to the Company's Form 10-K for the fiscal
year ended December 31, 1981.
10.10. Agreement, dated March 1, 1991, between El Dorado
Chemical Company and Farmland Industries, Inc., which the Company hereby
incorporates by reference from Exhibit 10.09 to the Company's Form 10-K
for the fiscal year ended December 31, 1990.
10.11. Non-qualified Stock Option Agreement, dated April 26,
1990, between the Company and Robert C. Brown, M.D., which the Company
hereby incorporates by reference from Exhibit 10.10 to the Company's
Form 10-K for the fiscal year ended December 31, 1990. The Company
entered into substantially identical agreements with Bernard G. Ille,
Jerome Shaffer and C.L. Thurman, and the Company will provide copies
thereof to the Commission upon request.
10.12. Non-qualified Stock Option Agreement, dated November
19, 1987, between the Company and C.L. Thurman, which the Company hereby
incorporates by reference from Exhibit 10.25 to the Company's Form 10-K
for the fiscal year ended December 31, 1987. The Company entered into
substantially identical agreements with Jerome D. Shaffer, Bernard G.
Ille, and Robert C. Brown and the Company will provide copies thereof to
the Commission upon request.
10.13. Undertaking, dated March 7, 1988, executed by
Northwest Federal and Northwest Financial in favor of the Company,
Prime, and the Company's other subsidiaries and affiliates, which the
Company hereby incorporates by reference from Exhibit 28.01 to the
Company's Form 8-K, dated March 7, 1988.
10.14. Agreement, dated March 7, 1988, between the Company
and Northwest Federal, which the Company hereby incorporates by
reference from Exhibit 28.03 to the Company's Form 8-K, dated March 7,
1988.
10.15. Lease Agreement, dated March 7, 1988, between
Northwest Financial and the Company, which the Company hereby
incorporates by reference from Exhibit 28.04 to the Company's Form 8-K,
dated March 7, 1988. Rotex, Summit and Tribonetics entered into
substantially identical agreements, with the only differences being the
parties to the agreements, the property covered by the agreement, and
the amount of the annual rental set forth in the agreement and the
Company will provide copies thereof to the Commission upon request.
10.16. Lease Agreement, dated March 7, 1988, between
Northwest Financial and IEC, which the Company hereby incorporates by
reference from Exhibit 28.05 to the Company's Form 8-K, dated March 7,
1988. The filed copy omits Exhibit B to the Lease Agreement, which the
Company undertakes to furnish supplementally to the Commission upon
request.
10.17. Assignment of Lease, dated March 7, 1988, executed by
IEC in favor of Northwest Federal, which the Company hereby incorporates
by reference from Exhibit 28.06 to the Company's Form 8-K, dated March
7, 1988.
82
10.18. Lease Agreement, dated March 7, 1988, between
Northwest Financial and El Dorado Chemical Company, which the Company
hereby incorporates by reference from Exhibit 28.07 to the Company's
Form 8-K, dated March 7, 1988. Northwest Financial and EDC entered into
15 substantially identical lease agreements covering the real properties
discussed under Item 2 of this report, with the only differences being
the specific real property covered and the amount of the annual rental
specified in the agreement and the Company will provide copies thereof
to the Commission upon request.
10.19. Assignment and Agreement to Sublease, dated March 7,
1988, between EDC and Northwest Financial, which the Company hereby
incorporates by reference from Exhibit 28.08 to the Company's Form 8-K,
dated March 7, 1988.
10.20. Dividend Limitation Stipulation, dated January 6,
1989, executed by the Company, Northwest Federal Savings and Loan
Association, and Prime Financial Corporation, which the Company hereby
incorporates by reference from Exhibit 28.02 to the Company's Form 8-K,
dated December 30, 1988.
10.21. Lease Agreement dated November 12, 1987, between
Climate Master, Inc. and West Point Company and amendments thereto,
which the Company hereby incorporates by reference from Exhibits 10.32,
10.36, and 10.37, to the Company's Form 10-K for fiscal year ended
December 31, 1988.
10.22. Severance Agreement, dated January 17, 1989, between
the Company and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.48 from Form 10-K for fiscal year ended
December 31, 1988. The Company also entered into identical agreements
with Tony M. Shelby, David R. Goss, Michael Tepper, and Barr H. Golsen
and the Company will provide copies thereof to the Commission upon
request.
10.23. Third Amendment to Lease Agreement, dated as of
December 31, 1987, between Mac Venture, Ltd. and Hercules Energy Mfg.
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.49 to the Company's Form 10-K for fiscal year ended December
31, 1988.
10.24. Option to Purchase Real Estate, dated January 4, 1989,
between Northwest Financial Corporation and Northwest Tower Limited
Partnership, which the Company hereby incorporates by reference from
Exhibit 10.50 to the Company's Form 10-K for fiscal year ended December
31, 1988.
10.25. Agreement for Purchase of Receivables, dated March 31,
1989, between Equity Bank and Summit Machine Tool Manufacturing Corp,
which the Company hereby incorporates by reference from Exhibit 10.54 to
the Company's Form 10-K for fiscal year end December 31, 1988. The
following subsidiaries of the Company entered into identical agreements
with Northwest Federal: Climate Master, Inc.; El Dorado Chemical
Company; Hercules Energy Mfg. Corporation; International Environmental
Corporation; and L & S Bearing Co.and the Company will provide copies
thereof to the Commission upon request.
10.26. Chemical Plant Venture Agreement between Northwest
Financial Corporation and LSB Chemical Corp., dated April 1, 1989, which
the Company hereby incorporates by reference from Exhibit 10.26 to the
Company's Form 10-K for fiscal year ended December 31, 1990. This
Agreement contains a list of exhibits and schedules omitted from the
83
filed copy, and the Company undertakes to furnish supplementally a copy
of any of the omitted schedules or exhibits to the Commission upon
request.
10.27. Chemical Plant Venture II Agreement between Northwest
Capital Corporation and LSB Chemical Corp., dated as of December 31,
1991 which the Company hereby incorporates by reference from Exhibit
10.28 to the Company's Form 10K for fiscal year ended December 31, 1991.
This agreement contains a list of exhibits and schedules omitted from
the filed copy, and the Company undertakes to furnish supplementally a
copy of any of the omitted schedules or exhibits to the Commission upon
request.
10.28 Technical License, Technology Assistance, Engineering
and Manufacturing Plant sales Agreement between L&S Automotive Products
Company, Inc. and ZVL-ZKL A.S., dated July 6, 1992, as amended by
Addendums, which the Company hereby incorporates by reference from
Exhibit 28.1 to the Company's Form 10-Q for the quarter ended September
30, 1992.
10.29 Letter, dated November 9, 1992, amending the agreement
between L&S Automotive Products Co. and ZVL-ZKL A.S., which the Company
hereby incorporates by reference from Exhibit 28.2 to the Company's
Registration Statement No. 33-55608.
10.30 Supply Agreement, dated November 4, 1992, between
Climate Master, Inc. and Carrier Corporation,,which the Company hereby
incorporates by reference from Exhibit 28.3 to the Company's
Registration Statement No. 33-55608.
10.31 Right of First Refusal, dated November 4, 1992,
between the Company, Climate Master, Inc. and Carrier Corporation, which
the Company hereby incorporates by reference from Exhibit 28.4 to the
Company's Registration Statement No. 33-55608.
10.32 Fixed Assets Purchase Parts Purchase and Asset
Consignment Agreement, dated November 4, 1992, between Climate Master,
Inc. and Carrier Corporation, which the Company hereby incorporates by
reference from Exhibit 28.5 to the Company's Registration Statement No.
33-55608.
10.33 Amendment to Lease Agreements, made and entered into
effective December 10, 1992, between Chemical Plant Venture, Chemical
Plant Venture II and El Dorado Chemical Company, which the Company
hereby incorporates by reference from Exhibit 28.9 to the Company's
Registration Statement No. 33-55608.
10.34 Agreement for Purchase and Sale of Property, made and
entered into effective December 10, 1992, between Chemical Plant
Venture, Chemical Plant Venture II and El Dorado Chemical Company, which
the Company hereby incorporates by reference from Exhibit 28.10 to the
Company's Registration Statement No. 33-55608.
10.35 Letter, dated November 20, 1992, from the Office of
Thrift Supervision to Equity Bank for Savings, F.A., which the Company
hereby incorporates by reference from Exhibit 28.11 to the Company's
Registration Statement No. 33-55608.
10.36 Agreement between Monsanto Company and El Dorado
Chemical Company, which the Company hereby incorporates by reference
from Exhibit 28.12 to the Company's Registration Statement No. 33-55608.
84
10.37 Non-Qualified Stock Option Agreement, dated June 1,
1992, between the Company and Robert C. Brown, M.D. The Company entered
into substantially identical agreements with Bernard G. Ille, Jerome D.
Shaffer and C.L.Thurman, and the Company will provide copies thereof to
the Commission upon request.
10.38 Loan Agreement, dated as of March 30, 1994, by and
between Prime Financial Corporation, an Okklahoma corporation and Bank
IV Oklahoma, N.A., a national banking association.
10.38 Guaranty Agreement, dated as of March 30, 1994, by and
between LSB Industries, Inc. as Guarantor and Bank IV Oklahoma, N.A. as
Lender.
11.1. Statement re: Computation of Per Share Earnings.
22.1. Subsidiaries of the Company
24.1. Consent of Independent Auditors
(b) Reports on Form 8-K. The Company filed a report on Form 8-K
during the fourth quarter of 1993 concerning the proposed sale of Equity Bank.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused the undersigned,
duly-authorized, to sign this report on its behalf of this 13th day of April,
1994.
LSB INDUSTRIES, INC.
By:/s/ Jack E. Golsen
----------------------------------
Jack E. Golsen
Chairman of the Board and
President
(Principal Executive Officer)
By:/s/ Tony M. Shelby
----------------------------------
Tony M. Shelby
Senior Vice President of Finance
(Principal Financial Officer)
By:/s/ Jim D. Jones
---------------------------------
Jim D. Jones
Vice President, Controller and
Treasurer (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.
Dated: April 13, 1994 By:/s/ Jack E. Golsen
--------------------------------
Jack E. Golsen, Director
Dated: April 13, 1994 By:/s/ Tony M. Shelby
--------------------------------
Tony M. Shelby, Director
Dated: April 13, 1994 By:
--------------------------------
David R. Goss, Director
Dated: April 13, 1994 By:/s/ Barry H. Golsen
--------------------------------
Barry H. Golsen, Director
86
Dated: April 13, 1994 By:
--------------------------------
C. L. Thurman, Director
Dated: April 13, 1994 By:/s/ Robert C. Brown
--------------------------------
Robert C. Brown, Director
Dated: April 13, 1994 By:/s/ Bernard G. Ille
--------------------------------
Bernard G. Ille, Director
Dated: April 13, 1994 By:/s/ Jerome D. Shaffer
--------------------------------
Jerome D. Shaffer, Director
Dated: April 13, 1994 By:/s/ Raymond B. Ackerman
--------------------------------
Raymond B. Ackerman, Director
87
Report of Independent Auditors
The Board of Directors and Stockholders
LSB Industries, Inc.
We have audited the accompanying consolidated balance sheets of LSB
Industries, Inc. as of December 31, 1993 and 1992, and the related
consolidated statements of operations, non-redeemable preferred stock, common
stock and other stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. Our audits also included the
financial statement schedules listed in the Index at Item 14(a)(2). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of LSB Industries, Inc. at December 31, 1993 and 1992, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG
Oklahoma City, Oklahoma
March 15, 1994
F-1
LSB Industries, Inc.
Consolidated Balance Sheets
December 31,
1993 1992
------------------------------
(In Thousands)
Assets
Cash and cash equivalents $ 11,687 $ 33,271
Trade accounts receivable, less allowance for
doubtful accounts of $2,583,000 in 1993 and
$3,082,000 in 1992 49,533 36,050
Loans held for sale 18,574 6,358
Mortgage-backed securities held for sale 13,946
Loans receivable, including related accrued
interest receivable, net (Note 5)
124,060 119,278
Mortgage-backed securities held for investment,
including related accrued interest receivable
(Note 5) 202,723 175,427
Other securities held for investment 7,806 7,010
Inventories 48,384 48,373
FSLIC receivables and assets covered
by assistance (Note 4) 52,004
Supplies and prepaid items 5,459 4,134
Foreclosed real estate (Note 5) 19,262 15,151
Property, plant and equipment, net 65,670 58,049
Excess of purchase price over net assets
acquired, net of accumulated amortization
of $15,470,000 in 1993 and $10,777,000 in
1992 (Notes 3 and 4) 22,184 19,866
Other assets 8,224 7,277
-----------------------
$597,512 $582,248
=======================
F-2
December 31,
1993 1992
------------------------
(In Thousands)
Liabilities, preferred and common stocks and
other stockholders equity
Liabilities:
Deposits (Note 5) $332,511 $336,053
Accounts payable 22,645 18,906
Drafts payable 1,220 4,549
Securities sold under agreements to repurchase 38,721 50,344
Payable to FSLIC (Note 4) - 9,107
Billings in excess of costs and estimated earnings - 4,858
Accrued liabilities 9,444 9,458
Federal Home Loan Bank advances (Note 5) 87,650 80,150
Long-term debt (Note 9) 30,295 50,321
----------------------
Total liabilities 522,486 563,746
Commitments and contingencies (Note 14)
Redeemable, noncumulative, convertible preferred
stock, $100 par value; 1,660 shares issued and
outstanding (1,772 in 1992) (Note 12) 155 163
Non-redeemable preferred stock, common stock and
other stockholders equity (Notes 9, 11 and 12):
Series B 12% cumulative, convertible preferred stock,
$100 par value; 20,000 shares issued and
outstanding 2,000 2,000
Series 1 $2.20 convertible, exchangeable
Class C preferred stock, $20 stated value;
767,832 shares issued in 1992 - 15,357
Series 2 $3.25 convertible, exchangeable Class
C preferred stock, $50 stated value; 920,000
shares issued in 1993 46,000 -
Common stock, $.10 par value; 75,000,000 shares
authorized, 14,514,056 shares issued
(8,097,532 in 1992) 1,451 810
Capital in excess of par value 37,120 21,978
Accumulated deficit (7,541) (17,227)
----------------------
79,030 22,918
Less treasury stock, at cost:
Common stock, 840,085 shares (703,855 in 1992) 4,159 2,699
Series 1 $2.20 convertible, exchangeable Class
C preferred stock, 104,682 shares in 1992 - 1,880
---------------------
Total non-redeemable preferred stock, common
stock and other stockholders equity 74,871 18,339
---------------------
$597,512 $582,248
=====================
See accompanying notes.
F-3
LSB Industries, Inc.
Consolidated Statements of Operations
Year ended December 31,
1993 1992 1991
------------------------------
(In Thousands, Except Per Share Amounts)
Revenues:
Net sales $232,616 $198,373 $177,035
Interest on loans and investments 27,761 32,205 40,548
Credit card and other 16,217 15,269 13,167
FSLIC interest and yield maintenance - 936 3,441
------------------------------------
276,594 246,783 234,191
Costs and expenses:
Cost of sales 174,504 146,391 136,258
Selling, general and administrative:
Financial services 21,549 22,282 21,702
Nonfinancial services 43,864 37,476 36,560
Interest:
Deposits 12,505 16,445 23,144
Long-term debt and other 9,517 13,194 16,142
Provision for loan losses (Note 5) 1,382 1,224 1,335
-----------------------------------
263,321 237,012 235,141
Income (loss) before provision for -----------------------------------
income taxes 13,273 9,771 (950)
Provision for income taxes (Note 10) 874 516 197
----------------------------------
Net income (loss) $ 12,399 $ 9,255 $ (1,147)
==================================
Net income (loss) applicable to common
stock $ 10,357 $ 7,428 $ (3,090)
==================================
Net income (loss) per common share:
Primary $.77 $.94 $(.48)
==================================
Fully diluted $.71 $.66 $(.48)
==================================
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Non-redeemable Preferred Stock, Common Stock and
Other Stockholders' Equity
Non-
Common Stock redeemable Capital in Accu-
par Preferred Excess of mulated Treasury
Shares Value Stock Par Value Deficit Stock Total
-------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 1990 5,823 $ 582 $19,206 $17,847 $(21,565) $(2,589) $13,481
Net loss - - - - (1,147) - (1,147)
Conversion of 67.5 shares of
redeemable preferred stock to
common stock 2 1 - 6 - - 7
Dividends declared:
Series 1 Class C preferred
stock ($2.20 per share) - - - - (1,684) - (1,684)
Series B 12% preferred stock
($12.00 per share) - - - - (240) - (240)
Redeemable preferred stock
($10.00 per share) - - - - (19) - (19)
Purchase of treasury stock - - - - - (46) (46)
--------------------------------------------------------------------------
Balance at December 31, 1991 5,825 583 19,206 17,853 (24,655) (2,635) 10,352
Net income - - - - 9,255 - 9,255
Conversion of 158 shares of
redeemable preferred stock
to common stock 6 1 - 15 - - 16
Conversion of 92,468 shares of
Series 1 Class C preferred stock
to common stock 705 70 (1,849) 1,779 - - -
Exercise of stock options:
Cash 450 45 - 642 - - 687
Stock tendered and added to
treasury at market value 1,112 111 - 1,689 - (1,800) -
Dividends declared:
Series 1 Class C preferred
stock ($2.20 per share) - - - - (1,568) - (1,568)
(Continued on following page)
F-5
LSB Industries, Inc.
Consolidated Statements of Non-redeemable Preferred Stock, Common Stock and
other Stockholders' Equity (continued)
Non-
Common Stock redeemable Capital in Accu-
Par Preferred Excess of mulated Treasury
Shares Value Stock Par Value Deficit Stock Total
-------------------------------------------------------------------------
Series B 12% preferred stock
($12.00 per share) - - - - (240) - (240)
Redeemable preferred stock
($10.00 per share) - - - - (19) - (19)
Purchase of treasury stock - - - - - (144) (144)
----------------------------------------------------------------------------
Balance at December 31, 1992 8,098 810 17,357 21,978 (17,227) (4,579) 18,339
Net income - - - - 12,399 - 12,399
Conversion of 85 shares of redeemable
preferred stock to common stock 3 - - 5 - - 5
Conversion of 657,390 shares of
Series 1 preferred to common
stock 5,008 501 (13,148) 12,647 - - -
Redemption of Series 1 preferred - - (115) (8) - - (123)
Retirement of Series 1 preferred
held in treasury - - (2,094) 214 - 1,880 -
Sale of common stock 263 26 - 1,914 - - 1,940
Sale of Series 2 preferred - - 46,000 (2,129) - - 43,871
Exercise of stock options:
Cash received 640 64 - 1,501 - - 1,565
Stock tendered and added to
treasury at market value 502 50 - 998 - (1,048) -
Dividends declared:
Series B 12% preferred stock
($12.00 per share) - - - - (240) - (240)
Redeemable preferred stock
($10.00 per share) - - - - (16) - (16)
Common stock ($.06 per share) - - - - (797) - (797)
Series 2 preferred stock
($1.80 per share) - - - - (1,660) - (1,660)
Purchase of treasury stock - - - - - (412) (412)
-------------------------------------------------------------------------------
Balance at December 31, 1993 14,514 $1,451 $48,000 $37,120 $(7,541) $(4,159) $74,871
===============================================================================
See accompanying notes.
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
1993 1992 1991
--------------------------------
(In Thousands)
Cash flows from operations
Net income (loss) $12,399 $ 9,255 $ (1,147)
Adjustments to reconcile net income
(loss) to cash flows provided
(absorbed) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 6,549 6,588 6,284
Goodwill 4,693 2,318 2,355
Other, primarily premiums on loans and
mortgage-backed securities 2,895 2,971 890
Provisions for losses:
Trade accounts receivable 439 972 1,567
Loans and real estate 1,382 1,374 1,335
Accretion of interest expense on
payable to FSLIC - 829 745
Net decrease (increase) in loans and
mortgage-backed securities held for sale (24,547) 2,511 1,784
Net gain on sales of assets (3,574) (2,524) (3,295)
FHLB stock dividends - (263) (578)
Cash provided (used) by changes in assets
and liabilities, before acquisitions:
Trade accounts receivable (12,304) (3,980) 17,844
Inventories 2,348 (6,332) 3,329
FSLIC receivables - 5,510 8,039
Supplies and prepaid items (1,282) 414 (4,093)
Other assets (1,237) 927 1,032
Accounts payable (718) (277) 1,193
Billings in excess of costs and
estimated earnings (4,858) 4,858 -
Accrued liabilities (759) (785) (134)
Cash flows provided (absorbed) by ------------------------------------
operations (18,574) 24,366 37,150
Cash flows from investing activities
Net loan originations and principal
payments on loans 6,901 8,052 9,682
Principal payments on mortgage-backed
securities 56,556 61,984 23,049
Purchases of mortgage-backed securities (85,718) (56,909) (114,224)
Proceeds from covered asset reductions - 14,401 15,450
Proceeds from sales and maturities of
investment securities 325 2,647 1,295
Purchases of investment securities (1,168) (300) (668)
Capital expenditures (10,541) (5,345) (3,919)
Sales of properties, equipment and
real estate owned 6,656 1,176 1,975
Proceeds from termination of Assistance
Agreement 14,169 - -
Cash and cash equivalents acquired
in connection with acquisitions 1,228 55 -
Payments for acquisitions (1,747) (140) -
Cash flows provided by (used in) ------------------------------------
investing activities (13,339) 25,621 (67,360)
(Continued on following page) F-7
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
1993 1992 1991
------------------------------------
(In Thousands)
Cash flows from financing activities
Net decrease in deposits $ (3,542) $(23,175) $ (5,174)
Collection of FSLIC note receivable - - 40,390
Payments on long-term and other debt (60,352) (28,903) (86,526)
Payments for securities repurchased (11,623) - -
Long-term and other borrowings 50,000 13,501 57,894
Net change in revolving loans (4,950) (1,108) 145
Net change in drafts payable (3,329) 919 114
Dividends paid on common and
preferred stocks (2,713) (1,827) (1,943)
Purchases of treasury stock (302) (144) (46)
Net proceeds from issuance of common
and preferred stock 47,140 687 -
----------------------------------
Cash flows provided by (used in)
financing activities 10,329 (40,050) 4,854
----------------------------------
Net increase (decrease) in cash and
cash equivalents (21,584) 9,937 (25,356)
Cash and cash equivalents at beginning
of year 33,271 23,334 48,690
----------------------------------
Cash and cash equivalents at end of year $11,687 $ 33,271 $ 23,334
==================================
Noncash financing and investing activities
Exercise of stock options - stock
tendered and added to treasury
Shares at market value $ 1,048 $ 1,800 $ -
==================================
Patents purchased by reduction of note
receivable (Note 3) $ $ 2,344 $ -
==================================
Long-term debt issued for property,
plant and equipment $ 1,500 $ - $1,700
==================================
See Note 3 for noncash assets and liabilities related to acquisitions in 1993
and 1992. See Note 4 for noncash assets and liabilities related to the
terminated Assistance Agreement in 1993.
See accompanying notes.
F-8
LSB Industries, Inc.
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the Company ) and its subsidiaries, including its financial
services subsidiaries. Since the Company s financial services subsidiaries do
not typically distinguish between current and noncurrent assets and
liabilities, the accompanying balance sheets are presented on an unclassified
basis. Condensed classified balance sheet and other information is provided in
Note 15.
Proposed Disposition of Assets
On February 9, 1994, the Company signed a Stock Purchase Agreement (the
Acquisition Agreement ) for the sale of its wholly-owned subsidiary, Equity
Bank for Savings, F.A. ( Equity Bank ), which constitutes the Financial
Services Business of the Company. The Purchaser is to acquire all of the
outstanding shares of capital stock of Equity Bank. The closing of this
transaction is contingent upon several factors including regulatory approvals,
minimum tangible book value (as defined), acceptance by the Company of the
selling price determined under the terms of the Acquisition Agreement and
stockholders' approval. If the appropriate approvals are not received or an
acceptable selling price is not received, the Company can terminate the
Acquisition Agreement and, accordingly, the Financial Services Business has
not been reported as a discontinued operation.
Under the Acquisition Agreement, the Company is to acquire from Equity Bank,
prior to closing, certain subsidiaries of Equity Bank ( Retained
Corporations ) that own the real and personal property and other assets
contributed by the Company to Equity Bank at the time of the acquisition of
the predecessor of Equity Bank by the Company for Equity Bank s carrying value
of the assets contributed. At the time of closing of the sale of Equity Bank,
the Company is required under the Acquisition Agreement to acquire: (A) the
loan and mortgage on and an option to purchase Equity Tower located in
Oklahoma City, Oklahoma ( Equity Tower Loan ), which Equity Bank previously
classified as an in-substance foreclosure on its books, (B) other real estate
owned by Equity Bank that was acquired by Equity Bank through foreclosure (the
Equity Tower Loan and other real estate owned are collectively called the
Retained Assets ), and (C) the outstanding accounts receivable sold to Equity
Bank by the Company and its subsidiaries under various purchase agreements,
dated March 8, 1988 (the Receivables ). These assets are to be acquired for
an amount equal to Equity Bank s carrying value of the Retained Assets at time
of closing of the sale of Equity Bank. In addition, the Company has the
option, but not the obligation, to acquire any loan owned by Equity Bank that
has been charged off or written down for a price equal to the net book value
of such loan that has been written down and for a price of $1.00 in the case
of each loan that has been charged off ( Other Loans ).
The Company currently expects that the purchase price to be paid by the
Purchaser for Equity Bank will be approximately $92 million, subject to
determination and adjustment in accordance with the Acquisition Agreement (the
Purchase Price ). The Purchase Price is based on a number of estimates, and
the amount of the Purchase Price cannot be determined exactly until the
closing of the sale of Equity Bank. The Company will use approximately $65.4
million, plus interest, of the Purchase Price to repay certain indebtedness
the Company intends to incur to finance the purchase from Equity Bank of the
Retained Corporations. In addition, it is anticipated that the Company will
use approximately $19.2 million of the Purchase Price to purchase from Equity
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
Bank the Retained Assets, which is the carrying value of the Retained Assets
on the books of Equity Bank as of December 31, 1993. As of this date, the
Company has made no decision if it will acquire any of the Other Loans.
As of December 31, 1993, Equity Bank owned approximately $33.6 million of the
Receivables, which if the closing occurs on or about June 30, 1994, the
Company expects such to be less than $10 million as of the closing. On or
prior to the closing, the Company expects to have secured an accounts
receivable line of credit to replace, in whole or in part, the accounts
receivable financing provided by Equity Bank. The Company expects to use the
proceeds to be received from the new accounts receivable line of credit to
finance the repurchase of the Receivables from Equity Bank at the closing.
The balance of the Purchase Price, if any, remaining after (i) repayment of
the indebtedness incurred by the Company to purchase the Retained
Corporations, (ii) purchase from Equity Bank of the Retained Assets, and (iii)
payment of the transactional costs relating to the sale of Equity Bank under
the Acquisition Agreement will be used by the Company for general working
capital.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1993, and the Pro Forma Condensed Consolidated Statement of
Income for the fiscal year ended December 31, 1993, are presented to give
effect to the proposed sale of Equity Bank.
The pro forma adjustments reflected herein are based on available information
and certain assumptions that the Company s management believes are reasonable.
Pro forma adjustments made in the Pro Forma Condensed Consolidated Balance
Sheet assume that the sale of Equity Bank was consummated on December 31,
1993, and do not reflect the impact of Equity Bank s historical operating
results or changes in other balance sheet amounts subsequent to December 31,
1993. The pro forma adjustments related to the Pro Forma Condensed
Consolidated Statement of Income assume that the sale of Equity Bank was
consummated on January 1, 1993.
The Pro Forma Condensed Consolidated Balance Sheet and Pro Forma Condensed
Consolidated Statement of Income are based on assumptions and approximations
and, therefore, do not reflect in precise numerical terms the impact of the
transaction on the historical financial statements. In addition, such pro
forma financial statements should not be used as a basis for forecasting the
future operations of the Company.
F-10
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
1. Basis of Presentation (continued)
December 31, 1993
---------------------------------------------
Pro Forma Adjustments
As
Actual (Note A) (Note B) Adjusted
----------------------------------------------
(Amounts in Thousands)
Assets
Cash and cash equivalents $ 11,687 $65,416 $ (76,048) $ 1,055
Trade accounts receivable 49,533 49,533
Loans 142,634 (142,634)
Mortgage-backed and
investment securities 224,475 (224,475)
Inventories 48,384 48,384
Foreclosed real estate 19,262 (3,928) 15,334
Net property, plant and
equipment 65,670 (7,617) 58,053
Excess of purchase price
over net assets acquired 22,184 (17,041) 5,143
Other assets 13,683 (3,179) 10,504
-------------------------------------------
$597,512 $65,416 $ (474,922) $ 188,006
===========================================
Liabilities, preferred and
common stocks and other
stockholders equity
Liabilities:
Deposits $332,511 $(332,511) $ -
Notes payable - $65,416 (65,416) -
Securities sold under
agreements to
repurchase 38,721 (38,721) -
Other liabilities 33,309 (2,690) 30,619
Federal Home Loan
Bank advances 87,650 (87,650) -
Long-term debt 30,295 27,066 57,361
----------------------------------------------
522,486 65,416 (499,922) 87,980
Redeemable, noncumulative,
convertible preferred stock 155 155
Total non-redeemable preferred
stock, common stock and other
stockholders equity 74,871 25,000 99,871
---------------------------------------------
$597,512 $65,416 $(474,922) $188,006
=============================================
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
Note A
Pro forma adjustment to recognize the cash required by the Company to purchase
the Retained Corporations from Equity Bank prior to the sale of Equity Bank to
the Purchaser. The Company is negotiating with a lender to borrow the funds
with which to fund the purchase. The borrowed funds plus interest will be
repaid from the proceeds of the sale of Equity Bank. As the carrying value of
the Retained Assets and Retained Corporations on a consolidated basis will not
change as a result of the purchase, no adjustment to such carrying value is
necessary.
Note B
Pro forma adjustment to recognize the sale of Equity Bank as though
consummated on December 31, 1993. The adjustment is based on an estimated
selling price of $92 million resulting in an estimated financial gain of $25
million after consideration of costs of the transaction.
The reductions in the detail balance sheet amounts represent the historical
carrying values of such accounts that will remain assets and liabilities of
Equity Bank after the sale and after acquisition by the Company of the
Retained Assets and Retained Corporations.
F-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
Pro Forma Condensed Consolidated Statement of Income
(Unaudited)
Year ended December 31, 1993
------------------------------------------
Pro Forma As
Actual Adjustments Adjusted
------------------------------------------
(Amounts In Thousands Except Per Share Data)
Revenues:
Net sales $232,616 $232,616
Interest income on loans
and investments 27,761 $(27,521)(C) 240
Credit card and other 16,217 (14,315)(C)
213 (D) 2,115
------------------------------------------
Total revenues 276,594 (41,623) 234,971
Costs and expenses:
Cost of sales 174,504 174,504
Selling, general
and administrative:
Financial Services 21,549 (21,549)(C) -
Nonfinancial services 43,864 (750)(C)
133 (D) 43,247
Interest:
Deposits 12,505 (12,505)(C) -
Long-term debt and other 9,517 (2,010)(C)
(781)(D) 6,726
Provision for loan losses 1,382 (1,382)(C) -
-----------------------------------------
263,321 (38,844) 224,477
-----------------------------------------
Income from continuing
operations before provision
for income taxes 13,273 (2,779) 10,494
Provision for income taxes 874 (460)(C)
557 (D) 971
----------------------------------------
Income from continuing
operations $ 12,399 $(2,876) $ 9,523
========================================
Income from continuing
operations applicable
to common stock $ 10,357 $ 7,481
======= ======
Earnings from continuing
operations per common share:
Primary $.77 $.59
===== =====
Fully diluted $.71 $.55
===== =====
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
Note C
Reclassification of revenues and expenses of Equity Bank as a discontinued
operation of the Company for the period presented. Such amounts are reconciled
to reported segment data (Note 15) as follows:
Year ended
December 31, 1993
--------------------
(In Thousands)
Financial Services operating profit, as reported $ 4,390
Allocation of general corporate expenses (750)
Allocation of income taxes (460)
Losses on Retained Assets 46
------
Income from discontinued operations $ 3,226
======
Note D
Pro forma adjustments to reflect the estimated effect on earnings of acquiring
the Retained Assets is considered. These include reduced interest expense on
financing of the Company s accounts receivable with a new lender and the
earnings on real estate assets acquired as Retained Assets.
2. Accounting Policies
Statements of Cash Flows
As permitted by Statement of Financial Accounting Standards ( SFAS ) No. 104,
the Company reports in their statements of cash flows net cash receipts and
payments for (a) deposits placed with other financial institutions and
withdrawal of deposits, (b) time deposits accepted and repayment of deposits,
(c) loans made to customers and principal collections of loans, and (d) loans
originated for sale and proceeds from sales thereof.
For purposes of reporting cash flows, cash and cash equivalents include cash,
overnight funds and interest bearing deposits with original maturities when
purchased by the Company of 90 days or less.
Cash payments for interest and income taxes were as follows:
1993 1992 1991
---------------------------------------------
(In Thousands)
Interest:
Deposits $12,506 $16,553 $23,204
Long-term debt and other 8,841 12,959 15,638
Income taxes (1992 is net
refunds received) 928 (102) 257
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Securities Held for Investment
Securities held for investment are carried at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method
over the period to maturity. Management has the intent and ability to hold
these securities to maturity. Gains and losses on sales are determined using
the specific identification method.
Mortgage-Backed Securities Held for Investment
Mortgage-backed securities held for investment are stated at amortized cost,
adjusted for amortization of premiums and accretion of discounts using a
method that approximates level yield. Management has the intent and ability to
hold these assets to maturity. Should any be sold, gains and losses will be
recognized based on the specific identification method.
Mortgage-Backed Securities Held for Sale
Mortgage-backed securities which management may sell in response to market
conditions or for other reasons are classified as held for sale. These
securities are carried at the lower of cost or estimated market value in the
aggregate at the balance sheet date. Net unrealized losses on such securities
are recognized through a valuation allowance that is shown as a reduction in
the carrying value of the related securities and as a corresponding charge to
income. These securities are comprised of FHLMC collateralized mortgage
obligations. The cost at December 31, 1993 was $14,020,790 and the market
values of these securities were $13,946,511. Gross unrealized losses at
December 31, 1993 were $74,279 and there were no gross unrealized gains at
December 31, 1993. No sales of these securities have occurred in 1993;
however, gains and losses realized on sales of these securities would be
determined using the specific identification method.
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, requires investments to be classified in three categories and
accounted for as follows:
o Debt securities that the Company has the positive intent and ability to
hold to maturity are to be classified as held-to-maturity securities and
reported at amortized cost.
o Debt and equity securities that are bought and held principally for the
purpose of selling in the near future are to be classified as trading
securities and reported at fair value, with unrealized gains and losses
included in current earnings.
o Debt and equity securities not classified as either held-to-maturity
securities or trading securities are to be classified as available-for-
sale securities and reported at fair value, with unrealized gains and
losses reported as a separate component of stockholder s equity.
The Statement is effective for fiscal years beginning after December 15, 1993
and is to be initially applied as of the beginning of the fiscal year. The
Company will adopt the provisions of this Statement January 1, 1994.
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Management has determined that the effect of the adoption of this Statement
will not be material to the Company.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are collateralized by mortgage-
backed securities. These fixed-coupon agreements are carried at their
contractual amounts and are accounted for as financings.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, deferred loan origination fees and discounts. Discounts on
first mortgage loans are amortized to income using the interest method over
the remaining period to contractual maturity, adjusted for prepayments. The
allowance for loan losses is increased by charges to income and decreased by
chargeoffs (net of recoveries). Management s periodic evaluation of the
adequacy of the allowance is based on Equity Bank s past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower s ability to repay, the estimated value of the underlying
collateral, and current economic conditions. As discussed in Note 4, losses on
covered assets were reimbursable and, accordingly, no allowance for loss was
recorded on loans included in covered assets.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Gains
and losses on sales of these mortgage loans are determined using the specific
identification method.
Uncollectible interest on loans that are contractually past due (generally in
excess of 90 days) is charged against income, or an allowance is established
based on management s periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management s judgment, the borrower has demonstrated the ability to
make periodic interest and principal payments, in which case the loan is
returned to accrual status.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, amends SFAS
No. 5 to clarify that a creditor should evaluate both principal and interest
when assessing the need for a loss accrual. This Statement also requires
creditors to measure impairment of a loan based on the present value of
expected future cash flows discounted at the loan s effective interest rate or
based on the fair value of the collateral if the loan is collateral dependent.
The Statement does not apply to large groups of smaller-balance homogeneous
loans that are collectively valued for impairment (i.e., consumer installment
loans, residential mortgage loans, credit card loans, etc.). The Statement
also amends Practice Bulletin 7 ("PB7") guidance on accounting for in-
substance foreclosures ("ISFs"). PB7 requires creditors to account for the
operations of the collateral underlying ISFs, even though the creditor has not
taken possession of collateral, as if foreclosure had occurred. SFAS No. 114
recognizes the practical problems of accounting for the operation of an asset
the creditor does not possess and, therefore, states that a loan for which
foreclosure is probable should continue to be accounted for as a loan. The
effect of this provision will require all ISFs, which are currently classified
as foreclosed real estate for financial statement purposes (Note 9), to be
F-16
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
reclassified as loans for reporting purposes. SFAS No. 114 is effective for
financial statements for fiscal years beginning after December 15, 1994.
Inventories
Purchased machinery and equipment are carried at specific cost plus duty,
freight and other charges, not in excess of net realizable value. All other
inventory is priced at the lower of cost or market, with cost being determined
using the first-in, first-out (FIFO) basis, except for certain heat pump
products with a value of $7,191,000 at December 31, 1993 ($8,357,000 at
December 31, 1992), which are priced at the lower of cost or market, with cost
being determined using the last-in, first-out (LIFO) basis. The difference
between the LIFO basis and current cost is $571,000 at December 31, 1993
($625,000 at December 31, 1992).
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
recorded at the lower of cost or fair value, less estimated costs to sell the
underlying property. Costs relating to the improvement of property are
capitalized, whereas costs relating to the holding of the property are
expensed. Valuations are periodically performed by management, and chargeoffs
are reflected by a charge to operations if the carrying value of a property
exceeds its estimated fair value.
Depreciation
For financial reporting purposes, depreciation, depletion and amortization is
primarily computed using the straight-line method over the estimated useful
lives of the assets.
Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired is being amortized by
the interest or straight-line methods, as appropriate, primarily over periods
of 12 to 15 years. The carrying value of the excess of purchase price over net
assets acquired is reviewed if the facts and circumstances suggest that it may
be impaired.
Research and Development Costs
Costs incurred in connection with product research and development are
expensed as incurred. Such costs amounted to $788,000 in 1993, $684,000 in
1992 and $454,000 in 1991.
Net Income (Loss) Applicable to Common Stock
Net income (loss) applicable to common stock is computed by adjusting net
income or loss by the amount of preferred stock dividends, including unpaid
dividends, if cumulative.
Earnings Per Share
Primary earnings per common share are based upon the weighted average number
of common shares and dilutive common equivalent shares outstanding during each
year after giving appropriate effect to preferred stock dividends.
F-17
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
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.
Average common shares outstanding used in computing earnings per share are as
follows:
1993 1992 1991
--------------------------------------
Primary 13,401,194 8,188,492 6,105,222
Fully diluted 15,397,886 14,413,179 6,105,222
Fair Value of Financial Instruments
The following discussion of fair values is not indicative of the overall fair
value of the Company s balance sheet since the provisions of the SFAS No. 107,
Disclosures About Fair Value of Financial Instruments does not apply to all
assets, including intangibles.
The following methods and assumptions were used by the Company in estimating
its fair value of financial instruments:
Cash and Cash Equivalents: Carrying value approximates fair value.
Mortgage-Backed Securities and Other Securities Held for Investment: Fair
values for investment and mortgage-backed securities are based on quoted
market prices where available. Where quoted market prices are not
available, fair values are based upon dealer quotes or quoted market prices
of comparable instruments. The carrying value of FHLB stock approximates
estimated fair value since there is no active market for this stock and the
stock can be redeemed for par value which equals carrying value.
Loans: For variable-rate loans with no significant change in credit risk
since loan origination, fair values approximate carrying amounts. Fair
values for fixed-rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality and for the same
remaining maturities. Loans designated by the Company as problem or
potential problem loans are reduced by an estimated impairment allowance in
consideration of credit quality. Fair values for loans held for sale are
based upon quoted market prices.
Deposits: The fair values of demand deposits, interest-bearing demand
deposits and savings accounts are the amount payable on demand. The
carrying amount for variable rate certificates of deposit approximates
their fair value. Fair values for fixed rate certificates of deposit are
estimated using discounted cash flow analyses that apply interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on the time deposits.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Borrowed Funds: Fair values for fixed rate borrowings are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on borrowings of similar amounts and terms to those currently
outstanding. Carrying values for variable rate borrowings approximate their
fair value.
Securities Sold Under Agreements to Repurchase: Fair values for these
obligations are estimated using a discounted cash flow analysis that
applies interest rates currently being offered on borrowings of similar
amounts and terms to those currently outstanding.
3. Business Combinations
In July 1993, a subsidiary in the Company s Chemical Business acquired an
Australian explosives business, Total Energy Systems, Limited ( TES ). TES is
a distributor of blasting products and provides blasting services. In January
1992, subsidiaries in the Company s Chemical Business acquired all of the
outstanding stock of Slurry Explosive Corporation and certain patent rights
from Universal Tech Corporation ( UTC ). One of these subsidiaries acquired
the outstanding stock of UTC in September 1992. These acquisitions expand the
Company s Chemical Business to include the production and sale of certain
patented blasting products and related accessories and services and allow the
Company to sell license rights to other companies to manufacture the patented
blasting products.
In December 1993, the Company purchased International Bearings Incorporated
("IBI"). IBI is a distributor of agricultural and industrial bearings and is
included in the Automotive Products Business.
The results of operations of the acquired entities, recorded using the
purchase method of accounting, are included in the accompanying consolidated
financial statements from the date of acquisition. The pro forma effects of
the acquisitions on the Company s results of operations for 1993 and 1992 are
not significant. Following is a detail of the assets and liabilities acquired
in connection with the acquisitions discussed above:
TES and
IBI Slurry
----------------------------
1993 1992
----------------------------
(In Thousands)
Cash and cash equivalents $1,228 $ 55
Trade accounts receivable 1,618 1,186
Inventories 2,359 1,109
Supplies and prepaid items 43 130
Property, plant and equipment 2,143 861
Excess of purchase price over net
assets acquired 343 196
Patents and other assets 490 2,285
---------------------------
Total assets 8,224 5,822
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Business Combinations (continued)
TES and
IBI Slurry
----------------------------
1993 1992
----------------------------
(In Thousands)
Accounts payable $4,456 $ 1,458
Accrued liabilities 745 131
Long-term debt 1,276 1,749
-----------------------------
Total liabilities 6,477 3,338
-----------------------------
Total purchase price 1,747 2,484
Reduction of note receivable
from UTC - (2,344)
-----------------------------
Net cash payment $1,747 $ 140
============================
4. Assets Covered by FSLIC Assistance and FSLIC Receivables and Payable
On December 30, 1988, Equity Bank acquired Arrowhead Federal Savings and Loan
Association (Arrowhead), which had assets of approximately $317 million,
through a Federal Savings and Loan Insurance Corporation (FSLIC) assisted
acquisition. Arrowhead was merged into Equity Bank and its separate existence
was terminated.
In connection with the acquisition of Arrowhead, Equity Bank and FSLIC entered
into an Assistance Agreement with an original term of ten years. The
Assistance Agreement provided for various forms of financial assistance and
indemnifications to Equity Bank during the term of the Assistance Agreement
and required payments to FSLIC for sharing of certain items including capital
losses, net income and tax benefits.
From the date of the acquisition by Equity Bank of Arrowhead in December 1988
and continuing through 1992, Equity Bank had been subject to assistance
considerations by the FSLIC. The terms and effects of such assistance are set
forth in the following discussion as such assistance continued through 1992
and has been given effect in the consolidated financial position and results
of operations through December 31, 1992.
In March 1993, Equity Bank, the Company, the Federal Deposit Insurance
Corporation (FDIC - as manager of the FSLIC Resolution Fund) and the
Resolution Trust Corporation (RTC) finalized an agreement terminating the
Assistance Agreement. In connection with this Termination Agreement, the RTC
paid Equity Bank approximately $14.2 million in cash and all of the
obligations of both parties under the Assistance Agreement were terminated. As
a result of the Termination Agreement, Equity Bank assumed all credit risk
with respect to existing covered assets. Equity Bank allocated a
substantial portion of such $14.2 million to record the previously covered
loans and foreclosed real estate at estimated fair value. As a result, Equity
Bank believes that there are adequate discounts relating to the assets to
reserve for the credit risk which was assumed. Also as a result of the
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. Assets Covered by FSLIC Assistance and FSLIC Receivables and Payables
(continued)
Termination Agreement, Equity Bank is no longer indemnified for any potential
claim relating to any covered asset arising out of, or based upon, any
liability, action or failure to act of Equity Bank or any of Equity Bank s
affiliates, officers or directors from and after December 30, 1988 that are
asserted against the FDIC or Equity Bank related to covered assets. The effect
of the accounting for the Termination Agreement included reclassifying
previously covered assets to reflect their status at the termination date (on
a fair value basis), all related receivables and payables were extinguished,
the cash payment from the FDIC Manager was recorded and goodwill existing
relating to the Arrowhead acquisition was adjusted for this resolution of a
contingent purchase price.
Completion of the Termination Agreement had no effect on total stockholders
equity and did not result in a charge or credit to the Company s statement of
operations. The termination of the Assistance Agreement was recorded effective
as of January 1, 1993; therefore, no assistance income from the FSLIC has been
recognized in 1993.
Recording of the Termination Agreement increased (decreased) the following
accounts (in millions):
Cash and cash equivalents $14.2
FSLIC receivables (18.9)
Assets covered by FSLIC assistance (33.1)
Loans receivable, net 13.3
Foreclosed real estate, net 8.7
Excess of purchase price over fair
value of net assets acquired 6.7
Payable to FSLIC (9.1)
Covered Assets
Prior to the Termination Agreement, FSLIC had guaranteed the December 30, 1988
book value of covered assets, as defined, of Arrowhead, under the provisions
of the Assistance Agreement. Covered assets were defined to include all
Arrowhead assets acquired except cash and marketable securities, performing
one to four family residential first mortgage loans, certain fixed assets and
assets owned by subsidiaries.
An analysis of the changes in assets covered by FSLIC assistance for the year
ended December 31, 1992 is as follows (in thousands):
Carrying amount at December 31, 1991 $48,291
Additions 349
Sales, net of financings (9,097)
Chargeoffs (159)
Loan principal paid by borrowers (6,324)
-------
Carrying amount at December 31, 1992 $33,060
=======
Yield Maintenance
Prior to the Termination Agreement and under the provisions of the Assistance
Agreement, Equity Bank was provided yield maintenance guarantees on covered
assets. Yield maintenance assistance payments were based upon the difference
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. Assets Covered by FSLIC Assistance and FSLIC Receivables and Payable
(continued)
between the actual net yield on the covered assets and the guaranteed net
yield amount. The guaranteed yield maintenance rate is the FHLB District 10
cost of funds rate plus an additional amount as specified in the Assistance
Agreement. At December 31, 1992, the aggregate yield maintenance rate was
6.28% and the average aggregate rate for 1992 was 6.94%. Yield maintenance
assistance was $936,000 in 1992 and $2,851,000 in 1991.
Mark-to-Market Adjustment
Under the Assistance Agreement, Equity Bank was reimbursed for the acquisition
date mark-to-market adjustments associated with certain investment securities
and one to four family residential mortgage loans of Arrowhead that did not
qualify as covered assets. A receivable for this reimbursement of $36.3
million was recorded at December 30, 1988. The receivable did not bear
interest and was payable in annual installments over ten years or at the time
a loan was paid off. The receivable balance of $15.8 million at December 31,
1992 was settled under provisions of the Termination Agreement.
Other FSLIC Receivables
Equity Bank had various other amounts receivable and payable from FSLIC
pursuant to the Assistance Agreement. The following table summarizes the
components of other net amounts receivable at December 31, 1992 which were
settled under provisions of the Termination Agreement (in thousands):
Reimbursement for capital losses, net of recoveries $2,668
Yield maintenance receivable 612
Other (105)
------
$3,175
======
Payable to FSLIC
Pursuant to the provisions of the Assistance Agreement, Equity Bank was
required to pay FSLIC $435,000 quarterly for seven years beginning in March
1992 in lieu of tax benefits arising from the acquisition of Arrowhead. The
present value of amounts due under this provision of the Assistance Agreement
at December 31, 1992 was $9.1 million. Interest expense of $829,000 in 1992
and $745,000 in 1991 was added to the payable based on a rate of approximately
10%. This liability was settled by provisions of the Termination Agreement.
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank)
Credit Concentrations and Other Risk Factors
Equity Bank is active in originating, selling and servicing residential
mortgage loans, as well as originating commercial real estate loans and
originating and servicing credit card loans.
Equity Bank conducts its operations in Oklahoma, an area, like many other
parts of the country, in which real estate markets are considered depressed.
The collateral securing Equity Bank s residential and commercial real estate
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
loan portfolios is located in this geographical area, and the ultimate
recoverability of these portfolios may be dependent upon the economic and
market conditions in which Equity Bank conducts its operations. While
management uses current available information to provide for losses, future
additions to the allowances for losses may be necessary based on changes in
economic and market conditions.
In addition, Equity Bank is subject to competition, regulations of certain
federal agencies, and undergoes periodic examinations by those regulatory
agencies. These agencies may require Equity Bank to recognize additions to the
allowances for losses based on their judgments of information available to
them at the time of their examination.
Equity Bank is not committed to lend additional funds to debtors whose loans
have been modified.
Securities Held for Investment
The carrying values (amortized cost) and estimated market values of investment
securities and mortgage-backed securities at December 31, 1993 and 1992 are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1993 Cost Gains Losses Value
- ------------------------------------------------------------------------------
(In Thousands)
U.S. Treasury securities $ 1,299 $ 5 $ $ 1,304
Federal Home Loan Bank
stock 6,417 - - 6,417
Other 90 - (18) 72
----------------------------------------------
$ 7,806 $ 5 $ (18) $ 7,793
==============================================
Mortgage-backed securities
held for investment,
excluding accrued interest
receivable of $1,099,000 $201,623 $ 793 $ (807) $201,609
==============================================
1992
- -------------------------------------------------------------------------------
U.S. Treasury securities $ 406 $ 6 $ - $ 412
Federal Home Loan Bank stock 6,417 - - 6,417
Other 187 - - 187
---------------------------------------------
$ 7,010 $ 6 $ - $ 7,016
=============================================
Mortgage-backed securities
held for investment, excluding
accrued interest receivable
of $1,186,000 $174,241 $1,143 $(1,492) $173,892
====================================================
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
The amortized cost and estimated market value of securities held for
investment at December 31, 1993, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Market
Cost Value
----------------------
(In Thousands)
Due in one year or less $1,283 $1,264
Due after one year through five years106 112
Other 6,417 6,417
---------------------
Total investment securities $7,806 $7,793
======================
At December 31, 1993 and 1992, U.S. Treasury securities with an amortized cost
of approximately $1,299,000 and $400,000, respectively, were pledged to secure
customer deposits and FHLB advances.
Mortgage-Backed Securities Held for Investment
The carrying values and estimated market values of mortgage-backed securities
held for investment, excluding accrued interest receivable, at December 31,
1993 and 1992 are summarized as follows:
Estimated
Principal Unamortized Unearned Carrying Market
1993 Balance Premiums Discounts Value Value
- --------------------------------------------------------------------------
(In Thousands)
FHLMC certificates $ 44,705 $ 905 $ - $ 45,610 $ 45,396
FNMA certificates 58,983 1,567 - 60,550 60,399
GNMA certificates 44,384 379 (299) 44,464 45,013
FHLMC collateralized
mortgage obligations 5,014 27 - 5,041 5,047
FNMA collateralized
mortgage obligations 41,666 57 (2) 41,721 41,543
Private issue
collateralized
mortgage obligations 4,185 30 - 4,215 4,187
Other 22 - - 22 24
--------------------------------------------------
$198,959 $2,965 $(301) $201,623 $201,609
==================================================
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
Estimated
Principle Unamortized Unearned Carrying Market
1992 Balance Premiums Discounts Value Value
- ------------------------------------------------------------------------------
(In Thousands)
FHLMC certificates $ 50,569 $1,129 $ (79) $ 51,619 $ 52,242
FNMA certificates 56,611 1,516 58,127 58,076
GNMA certificates 39,454 386 (317) 39,523 39,327
FHLMC collateralized
mortgage obligations 12,330 484 12,814 12,471
REMICs 11,674 457 12,131 11,750
Other 27 27 26
------------------------------------------------------
$170,665 $3,972 $(396) $174,241 $173,892
======================================================
Mortgage-backed securities at December 31, 1993 had contractual maturities in
installments to 2030.
Mortgage-backed securities with a carrying value at December 31, 1993 of $39.1
million are pledged to secure outstanding repurchase agreements of
$38.7 million ($52.1 million were pledged to secure outstanding repurchase
agreements of $50.3 million in 1992). Mortgage-backed securities, with a
carrying value of $162.5 million at December 31, 1993, are pledged to secure
FHLB advances and certain deposits ($132.2 million in 1992).
Loans Receivable
A summary of loans receivable at December 31, 1993 and 1992 is as follows:
1993 1992
------------------------
(In Thousands)
Principal balances on first mortgage loans:
Secured by one to four family residences $ 63,757 $ 73,124
Secured by other properties 6,385 5,898
Commercial 18,955 12,495
Construction loans 1,029 1,234
Other 516 78
---------------------
90,642 92,829
Less:
Unearned discounts 11,812 13,372
Undisbursed portion of construction loans 819 768
Net deferred loan origination fees 63 188
--------------------
Total first mortgage loans 77,948 78,501
F-25
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
1993 1992
----------------------
(In Thousands)
Principal balances on consumer and other loans:
Commercial $ 3,231 $ 1,686
Loans on deposits 2,551 2,181
Credit cards 39,358 36,478
Other 3,984 2,887
--------------------
49,124 43,232
Accrued interest receivable
Less allowance for loan losses 3,625 3,142
--------------------
$124,060 $119,278
====================
Loans held for sale $ 18,574 $ 6,358
====================
The estimated fair values for loans receivable are approximately $134.7
million and $132.4 million at December 31, 1993 and 1992, respectively. The
estimated fair value for loans held for sale are approximately $18.6 million
and $6.4 million at December 31, 1993 and 1992, respectively.
Weighted average interest rates of loans receivable were 9.28% and 9.72% at
December 31, 1993 and 1992, respectively.
Commercial real estate, consumer and other loans with a carrying amount of
approximately $14 million at December 31, 1992, were not included above and
were included in Assets Covered by FSLIC Assistance in the balance sheet
(Note 4).
F-26
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1993 1992 1991
------------------------------
(In Thousands)
Balance at the beginning of the year $3,142 $3,424 $3,712
Provision charged to income 1,382 1,224 1,335
Chargeoffs (1,151) (1,635) (1,901)
Recoveries 252 129 278
------------------------------
Balance at the end of the year $3,625 $3,142 $3,424
==============================
In connection with the termination of the Assistance Agreement, Equity Bank
assumed the credit risk of $13.3 million in loans whose credit risk had
previously been covered under terms of the Assistance Agreement. At December
31, 1993, approximately $1.4 million in unearned nonaccretable discounts exist
to provide as additional reserves on these loans. These amounts are included
as unearned discounts and are not included in the allowance for loan losses
above.
Nonaccrual and renegotiated or restructured potentially problem loans
approximate $3.1 million and $2.8 million at December 31, 1993 and 1992,
respectively. Interest income that would have been recorded under the original
terms of such loans and the interest income actually recognized for the years
ended December 31 are summarized below:
1993 1992 1991
-----------------------------------
Interest income that would have
been recorded $397,000 $351,000 $156,000
Interest income recognized (84,000) (63,000) (58,000)
-----------------------------------
Interest income foregone $313,000 $288,000 $ 98,000
===================================
Loan Servicing
Mortgage loans and credit cards and other loans serviced for others are not
included in the consolidated financial statements. The unpaid principal
balances of these loans at December 31 are summarized as follows:
F-27
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
1993 1992
-----------------------
(In Thousands)
Mortgage loans underlying FNMA passthrough securities $ 38,273 $ 42,784
Mortgage loan portfolios serviced for:
FNMA 3,305 4,449
FHLMC 158,265 132,112
Other investors 8,865 11,939
Credit cards and other loans serviced for others 23,589 32,454
-----------------------
$232,297 $223,738
=======================
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,239,000 and $1,211,000 at December 31, 1993
and 1992, respectively.
Foreclosed Real Estate
A summary of changes in foreclosed real estate is as follows:
1993 1992 1991
------------------------------------
(In Thousands)
Balance at the beginning of the year $15,151 $16,165 $17,289
Additions:
Related to Termination Agreement 8,743
Other additions 423 614 320
Sales (4,941) (1,148) (814)
Chargeoffs and other (114) (480) (630)
---------------------------------
Balance at the end of the year $19,262 $15,151 $16,165
================================
Foreclosed real estate with a carrying value of $19 million at December 31,
1992 is not included above and is included in Assets Covered by FSLIC
Assistance (Note 4).
Foreclosed real estate includes loans considered in-substance foreclosures of
$13.9 million at December 31, 1993 and $14.2 million at December 31, 1992. The
majority of this balance is comprised of a commercial real estate property
which is the office building in which Equity Bank s corporate office is
located. This property was determined to be an in-substance foreclosure in
1990.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
Deposits
Deposits at December 31 are summarized as follows:
1993 1992
---------------------------- ------------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent
------------------------------------------------------
(Amounts in Thousands)
Demand, money market
and NOW accounts, including
non-interest bearing deposits
of approximately $19,887,000
in 1993 and $16,941,000
in 1992 2.24% $ 87,537 26.3% 2.96% $ 87,185 25.9%
Passbook savings 2.73% 17,260 5.2 3.50% 15,347 4.6
---------------- ----------------
104,797 31.5 102,532 30.5
Certificates of deposit:
0.99% to 2.99% 1,083 .3 - -
3.00% to 4.99% 191,852 57.7 182,230 54.2
5.00% to 6.99% 32,236 9.7 36,812 11.0
7.00% to 8.99% 2,196 .7 14,003 4.2
9.00% to 10.99% 245 .1 344 .1
11.00% to 12.99% - - 30 -
13.00% to 14.99% 102 - 102 -
------------------- ----------------
4.04% 227,714 68.5 4.54% 233,521 69.5
--------------------------------------------------------
3.50% $332,511 100.0% 4.08% $336,053 100.0%
===============================================
The fair values for deposits at December 31, 1993 and 1992 are approximately
$333.4 million and $337.4 million, respectively.
The aggregate amount of jumbo certificates of deposit and other accounts with
a minimum denomination of $100,000 was approximately $39.7 million and $31.2
million at December 31, 1993 and 1992, respectively.
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
At December 31, 1993, scheduled maturities of certificates of deposit are as
follows:
Year ending December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998 Total
-------------------------------------------------------
(In Thousands)
0.99% to 2.99% $ 1,083 $ - $ - $ - $ - $ 1,083
3.00% to 4.99% 166,670 19,723 5,099 - 360 191,852
5.00% to 6.99% 17,022 2,775 356 2,442 9,641 32,236
7.00% to 8.99% 2,073 124 - - - 2,197
9.00% to 10.99% 245 - - - - 245
13.00% to 14.99% 102 - - - - 102
-------------------------------------------------------
$187,195 $22,622 $5,455 $2,442 $10,001 $227,715
=======================================================
Interest expense on deposits is as follows:
Type 1993 1992 1991
- ----------------------------------------------------------------
(In Thousands)
Demand, money market and NOW $ 2,223 $ 2,634 $ 2,748
Savings 530 524 522
Time 9,752 13,287 19,874
------------------------
$12,505 $16,445 $23,144
========================
Federal Home Loan Bank Advances
Advances at December 31, 1993 and 1992 were $87.7 million and $80.1 million,
respectively. The advances have maturities ranging from 31 days to five years
and have interest rates ranging from 3.30% to 6.40% at December 31, 1993
(3.85% to 6.40% at December 31, 1992) and are secured by mortgage-backed
securities. The estimated fair values of FHLB advances at December 31, 1993
and 1992 are $87.7 million and $80.3 million, respectively. Interest expense
on FHLB advances was $3,122,000 in 1993, $3,343,000 in 1992 and $3,211,000 in
1991.
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase of $38.7 million at December
31, 1993 and $50.3 million at December 31, 1992 are treated as financings and
the underlying collateral is included in mortgage-backed securities. The
agreements outstanding at December 31, 1993 had interest rates of 3.38% (3.57%
on agreements outstanding at December 31, 1992) and mature in March 1994. The
underlying securities, which are held by a single counterparty (Prudential-
Bache Securities), were mortgage-backed certificates with a book value of
$39.1 million ($52.1 million at December 31, 1992) and a market value of
approximately $39.1 million ($52.6 million at December 31, 1992). Interest
expense on securities sold under agreements to repurchase was $1.5 million in
1993, $2.4 million in 1992 and $4.9 million in 1991. Estimated fair values for
securities sold under agreements to repurchase were $38.7 million and
$50.3 million at December 31, 1993 and 1992, respectively.
The maximum amount of repurchase agreements outstanding at any month end was
$50.3 million in 1993, $66.7 million in 1992 and $82.2 million in 1991. The
daily average amount outstanding was $44 million in 1993, $58 million in 1992
and $75 million in 1991.
Off-Balance-Sheet Risk
Equity Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers. At
December 31, 1993, these financial instruments include commitments of
undisbursed funds on loan commitments of $5.4 million, unfunded lines of
credit of $2.4 million, and unfunded credit card availability of approximately
$147 million. Equity Bank uses the same credit and collateral policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Equity Bank s exposure to credit loss in the event of nonperformance by the
other party to these financial instruments is generally represented by the
contractual notional amount of these instruments. Equity Bank uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments. Unless noted otherwise, Equity Bank does not
require collateral or other security to support financial instruments with
credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
F-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
necessarily represent future cash requirements. Equity Bank evaluates each
customer s credit worthiness on a case by case basis. The amount of collateral
obtained, if it is deemed necessary by Equity Bank upon extension of credit,
is based on management s credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property and
equipment and income producing commercial properties.
Regulatory and Other Matters
As discussed in Note 4, on August 9, 1989, the FIRREA legislation transferred
FSLIC s rights and obligations under the Assistance Agreement to the FSLIC
Resolution Fund, which is administered principally by the FDIC. Under FIRREA,
the Office of Thrift Supervision (OTS), which is a bureau of the U.S. Treasury
Department, became the primary regulator of thrift institutions and thrift
holding companies. Deposit insurance for all banks and thrifts is now the
responsibility of the FDIC through two agencies, the Savings Association
Insurance Fund and the Bank Insurance Fund.
In connection with the Company s acquisition of Equity Bank and Equity Bank s
acquisition of Arrowhead, Equity Bank received forbearances, approvals and
waivers related to certain regulatory requirements, which were for specified
periods of time in some instances. These included, among other things,
approval for the purchase and financing, with full recourse, of affiliates
accounts receivable and forbearances related to the Qualified Thrift Lender
regulatory requirements, among other things. The maximum amount of the
receivables purchased could not exceed $60 million. In March 1993, the five-
year waiver from regulatory limitations expired and the balance of purchased
receivables is now subject to transactions with affiliates limitations as set
forth in Sections 23A and 23B of the Federal Reserve Act (FRA). Equity Bank
was notified by regulatory authorities that it is expected to be in full
compliance with FRA 23A and 23B no later than September 1, 1994. The balance
of these purchased accounts receivable at December 31, 1993 and 1992 is
$33.6 million and $32.4 million, respectively. At December 31, 1993,
approximately $24.4 million of these receivables were in excess of the FRA 23A
and 23B limitations. The Company is presently in process of obtaining
alternative financing to meet its working capital needs.
Regulations for savings institutions minimum capital requirements went into
effect on December 7, 1989. In addition to the capital requirements, FIRREA
includes provisions for changes in the federal regulatory structure for
institutions, including a new deposit insurance system, increased deposit
insurance premiums, and restricted investment activities with respect to
noninvestment-grade corporate debt and certain other investments. FIRREA also
increases the required ratio of housing related assets needed to qualify as a
savings institution.
F-32
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
As a federally chartered institution and a member of the Federal Savings and
Loan System, Equity Bank is subject to restrictions on the payments of capital
distributions. At December 31, 1993, approximately $6 million of retained
earnings are available for future dividends.
Minimum capital standards for the thrift industry, which Equity Bank is
subject to, prescribe three separate measurements of capital adequacy. The
regulatory net worth requirements provide for tangible capital (1.5%), core
capital (3.0%) and risk-based capital (8.0%) requirements. A comparison of
Equity Bank s regulatory capital requirements at December 31, 1993 with actual
amounts and percentages is as follows (amounts in thousands):
Requirements Actual
---------------------------------------
Amount Percent Amount Percent
---------------------------------------
Tangible $ 7,554 1.5% $34,812 6.9%
Core 15,108 3.0 38,589 7.7
Risk-based 21,986 8.0 41,431 15.1
The following is a reconciliation of GAAP capital to regulatory capital:
Regulatory
-------------------------------
Tangible Core Risk-Based
Capital Capital Capital
-------------------------------
(In Thousands)
GAAP capital, as adjusted $58,627 $58,627 $58,627
Nonallowable assets:
Investments in nonincludable subsidiaries (6,774) (6,774) (6,774)
Goodwill and other intangible assets (17,041) (17,041) (17,041)
Qualifying supervisory goodwill - 3,777 3,777
Equity investments - - (598)
Additional capital items:
General valuation allowances - limited - - 3,440
------------------------------
Regulatory capital - computed 34,812 38,589 41,431
Minimum capital requirement 7,554 15,108 21,986
------------------------------
Regulatory capital - excess $27,258 $23,481 $19,445
==============================
Effective December 16, 1992, the banking regulations adopted final rules
regarding the FDIC Improvement Act of 1991 s establishment of five capital
levels, ranging from well capitalized to critically undercapitalized. If
an institution s capital level falls below well capitalized, it becomes
subject to increasing regulatory oversight and restrictions on banking
F-33
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Financial Services Subsidiaries (See Note 1 for Discussion of Proposed Sale
of Equity Bank) (continued)
activities for each lower capital level. In addition, FDIC insurance premiums
are now, in part, based upon the institution s capital level.
A financial institution is considered well capitalized if it is under no
regulatory order or action and its leverage ratio is at least 5% and its Tier
1 and Total Risk-Based Capital ratios are at least 6% and 10%, respectively.
Equity Bank is considered well capitalized as defined.
6. Inventories
Inventories at December 31, 1993 and 1992 consist of:
Finished
(or Purchased) Work-In- Raw
Goods Process Materials Total
--------------------------------------------
(In Thousands)
1993:
Air handling units $ 2,050 $ 2,281 $ 7,447 $11,778
Machinery and industrial supplies 10,287 - - 10,287
Automotive products 9,588 3,508 712 13,808
Chemical products 5,015 3,854 3,642 12,511
--------------------------------------
Total $26,940 $ 9,643 $11,801 $48,384
======================================
1992 total $27,877 $10,734 $ 9,762 $48,373
======================================
7. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of:
December 31,
1993 1992
-------------------
(In Thousands)
Land and improvements $ 5,534 $ 5,534
Buildings and improvements 23,116 20,822
Machinery, equipment and automotive 81,476 70,691
Furniture, fixtures and store equipment 8,385 7,481
Producing oil and gas properties 3,405 3,410
-------------------
121,916 107,938
Less accumulated depreciation,
depletion and amortization 56,246 49,889
------------------
$ 65,670 $ 58,049
==================
F-34
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. Foreign Sales Contract
On July 6, 1992, a subsidiary of the Company signed an agreement to supply a
foreign customer with equipment, technology and technical assistance to
manufacture certain types of automotive products. The total contract price is
$56 million with $12 million to be retained by the customer, as the
subsidiary s equity participation, which represents a minority interest in the
customer. The subsidiary values its equity participation in the customer at a
nominal amount. Of the balance of the contract price of $44 million, $13.1
million has been billed and collected by the Company. The remaining $30.9
million is to be collected in 39 equal quarterly installments of $791,000,
plus interest at a rate of 7.5% per annum.
The Company s subsidiary has agreed to make its best effort to purchase
approximately $14.5 million of bearing products each year for ten years
commencing in the customer s first year of operations, which is anticipated to
be in 1994. However, the subsidiary is not required to purchase more product
from the customer in any one year than the quantity of tapered bearing
products the subsidiary is able to sell in its market. The customer has also
agreed to repurchase within four years, $6 million of the subsidiary s equity
participation in the customer. In the event that the customer is unable to
repurchase such equity participation, the parties may renegotiate and modify
the agreement for purchase of the Company s subsidiary to purchase products
from the customer.
During the last quarter of 1993, the Company s subsidiary exchanged its rights
to the equity interest in the customer with a foreign nonaffiliated company
( Purchaser of the Interest ) for $12.0 million in notes. The Company has been
advised that the customer has agreed to repurchase from the Purchaser of the
Interest up to $6 million of such equity interest over a six-year period, with
payment to the Purchaser of the Interest to be either in cash or bearing
products. The notes issued to the subsidiary for its rights to the equity
interest in the customer will only be payable when, as and if the Purchaser of
the Interest collects from the customer for such equity interest, and the
method of payment to the subsidiary will be either cash or bearing products,
in the same manner as received by the Purchaser of the Interest from the
customer. Due to the Company s inability to determine what payments, if any,
it will receive on such notes, the Company will continue to carry such notes
at a nominal amount.
Revenues, costs and profits related to the contract are being recognized in
two separate phases. The first phase involves the purchase, modification,
development and delivery of the machinery, tooling, designs and other
technical information and services. Sales to be recognized during this phase
are limited to the expected collections under the contract during this phase.
Sales and costs during the first phase will be recognized using the percentage
of completion method of accounting based on the ratio of total costs incurred,
excluding the cost of purchased machinery, to estimated total costs, excluding
the cost of purchased machinery. Since the inception of the contract, the
Company has collected $13.1 million of the contract price and recognized sales
and cost of sales of $13.7 million and $4.8 million, respectively. For the
year ended December 31, 1993, the Company recognized sales and cost of sales
of $7.5 million and $2.2 million, respectively. The cumulative effect of
future revisions in the contract terms or total cost estimates will be
reflected in the period in which these changes become known.
F-35
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. Foreign Sales Contract (continued)
The second phase of the contract includes payments by the customer under the
financing terms set forth above and purchases of bearing products by the
Company s subsidiary from the customer. Contract revenues will be recognized
as the Company performs its obligation to purchase products from the customer,
which timing generally coincides with the timing that amounts are to be
collected from the customer. Interest will be recognized as the amounts are
collected from the customer.
9. Long-Term Debt
Long-term debt is detailed as follows:
December 31,
1993 1992
-----------------
(In Thousands)
Subordinated debt:
13-3/4% Subordinated Sinking Fund Debentures $ - $ 2,225
Other:
Secured loans of a subsidiary with interest
payable quarterly at rates indicated (A):
10.415% to 12.72% term loans 20,583 24,938
Revolving loans with interest at the
corporate base rate of a certain bank
plus a specified percentage (7.5% at
December 31, 1993) 2,100 -
Variable rate term loan - 8,750
Secured revolving loans with interest payable
monthly at the prime rate of a bank affiliated
with the lender plus a specified percentage (9.0%
aggregate rate at December 31, 1993) (B) 470 6,853
Other 7,142 7,555
----------------
$30,295 $50,321
================
(A) This agreement between a subsidiary of the Company and two institutional
lenders provides for two series of seven-year term loans aggregating
$28.5 million, a $10 million asset-based revolving credit facility, and
an additional revolving line of credit of $7.2 million. Available
borrowings under this additional revolving credit line at December 31,
1993 were $7.2 million and decreases annually until its termination in
March 1997. The asset-based revolving loans are available to the
subsidiary based on varying percentages of the carrying value of
eligible assets available for collateral, as specified in the agreement.
At December 31, 1993, there was $2.1 million in borrowings outstanding
against the revolving credit facility. At December 31, 1993, the
available asset-based revolving loans amounted to approximately $6.6
million, based on eligible assets after reduction by $1.1 million for an
outstanding letter of credit related to a leasing arrangement for
precious metals (Note 14). The subsidiary is required to pay a .5% fee
for the excess of available over outstanding revolving loans.
F-36
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Long-Term Debt (continued)
The agreement is secured by substantially all of the subsidiary s assets
and capital stock. It requires the subsidiary to maintain certain
financial ratios and contains other financial covenants, including
working capital, fixed charge coverage and tangible net worth
requirements and capital expenditure limitations. Payments to the parent
company are limited to (i) the amount of income taxes that the
subsidiary would pay if the subsidiary filed separate income tax
returns, (ii) management and other fees required for reimbursement of
reasonable costs and expenses, consistent with past practices and (iii)
other payments to the parent company up to 25% or 50% of the cumulative
net income of the subsidiary, depending on the capitalization ratio, as
defined, of the subsidiary. As a result of the various restrictions
under the agreement, net assets of the subsidiary of approximately $5.3
million cannot be transferred to the parent company.
Annual principal payments of the term loans began on June 30, 1992
starting at $4.8 million and escalate each year to a final payment of
$5.5 million on March 31, 1997.
(B) The revolving loans are generally available to the Company, up to a
maximum of $8 million, based on varying percentages of the carrying
value of eligible assets available for collateral, as specified in the
agreement. At December 31, 1993, the unused portion of available
revolving loans amounted to $7.4 million.
The loan agreement requires the Company to maintain consolidated net
worth, as defined, of not less than $6 million. The agreement also
requires the Company to maintain consolidated working capital (excluding
the assets and liabilities of Equity Bank and other subsidiaries not
parties to the agreement and excluding amounts owed under this
agreement) of not less than $9 million at the end of each fiscal
quarter. The agreement provides for certain other restrictions which,
among other things, (a) limit certain future liens, (b) prohibit
declaration and payment of cash dividends on common stock in excess of
$1,896,000 annually, and (c) limit cumulative treasury stock purchases.
Borrowings are collateralized by certain inventory and a security
interest in certain other assets of the Company and its subsidiaries.
This agreement continues to March 31, 1994. The Company has not
determined whether the agreement will be extended past March 31, 1994.
Maturities of long-term debt for each of the five years after December 31,
1993 are: 1994 - $10,651,000; 1995 - $5,568,000; 1996 - $5,667,000; 1997 -
$5,769,000 and 1998 and after - $2,640,000. All drafts payable mature in 1994.
The estimated fair value of the Company s long-term debt is $31.8
million and $52.2 million at December 31, 1993 and 1992, respectively.
10. Income Taxes
Prior to 1992, the Company computed income taxes in accordance with Accounting
Principles Board Opinion No. 11. Effective January 1, 1992, the Company
elected to adopt FASB Statement No. 109, Accounting for Income Taxes.
Pursuant to the provisions of Statement No. 109, the Company elected not to
restate prior years financial statements. The Company has determined that the
F-37
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
cumulative effect of the change in accounting for income taxes was not
significant.
Statement No. 109 provides that deferred income taxes will be determined using
the liability method. Specifically, Statement No. 109 requires companies to
recognize a deferred tax liability or asset for the estimated future tax
effects attributable to temporary differences and carryforwards. Measurement
of such liabilities and assets is based on provisions of enacted tax laws.
Deferred tax assets are reduced, if necessary, by the amount of tax benefits,
based on available evidence, that are not expected to be realized.
The provision for income taxes consists of the following:
Deferred
Liability Method Method
--------------------------
1993 1992 1991
---------------------------
(In Thousands)
Current:
Federal $440 $215 $ -
State 434 301 197
--------------------------
$874 $516 $197
==========================
The approximate tax effects of each type of temporary difference and
carryforward that are used in computing deferred tax assets and liabilities
and the valuation allowance related to deferred tax assets at December 31,
1993 and 1992 are as follows:
1993 1992
-------------------
Deferred tax asset (In Thousands)
Allowances for doubtful accounts and
loan losses not deductible for tax purposes $2,898 $ 2,869
Partnership losses not deductible for tax purposes 2,294 1,843
Capitalization of certain costs as inventory for
tax purposes 1,668 1,455
Foreclosed real estate basis differences 539 709
Net operating loss carryforward 38,493 43,661
Investment tax and alternative minimum tax
credit carryforwards 1,356 948
Other 262 990
--------------------
Total deferred tax assets 47,510 52,475
Less valuation allowance 34,865 39,915
--------------------
Net deferred tax assets $12,645 $12,560
====================
F-38
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
1993 1992
-------------------
Deferred tax liability (In Thousands)
Accelerated depreciation used for tax purposes $ 7,061 $ 6,083
Asset basis differences resulting from
business combinations:
Inventories 2,139 2,084
Investments 314 306
Loan servicing costs 194 280
Tax bad debt deduction over base year 2,234 3,179
FHLB stock dividends 598 583
Other 105 45
------------------
Total deferred tax liabilities $12,645 $12,560
==================
The Company is able to realize deferred tax assets up to an amount equal to
the future reversals of existing taxable temporary differences. The majority
of the taxable temporary differences will turn around in the loss carryforward
period as the differences are depreciated or amortized. Other differences
will turn around as the assets are disposed in the normal course of business
or by tax planning strategies which management considers prudent and feasible.
The differences between the amount of the provision for income taxes and the
amount which would result from the application of the federal statutory rate
to Income (loss) before provision for income taxes and extraordinary item
are detailed below:
Deferred
Liability Method Method
------------------ ---------
1993 1992 1991
------------------------------
(In Thousands)
Provision (credit) for income taxes at
federal statutory rate $4,646 $ 3,322 $ (323)
FSLIC interest and assistance - (1,095) (2,215)
Changes in the valuation allowance
related to deferred tax assets (5,050) (1,295) -
Net operating losses for which no
current benefit is available - - 4,754
Amortization of mark-to-market
adjustments (1,029) (1,493) (1,947)
State income taxes, net of
federal benefit 282 198 130
Amortization of excess of purchase
price over net assets acquired 1,643 788 800
Settlement of dispute with
governmental agency 618 - -
Recoveries of previously covered
foreclosed real estate (574) - -
Excess provision for losses on loans
and foreclosed real estate for
financial purposes less than tax
bad debt deduction - - (1,516)
Utilization of net operating
loss carryforward - (309) -
Alternative minimum tax 440 215 -
Other (102) 185 514
---------------------------------
Provision for income taxes $ 874 $ 516 $ 197
=================================
F-39
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
At December 31, 1993, the Company has net operating loss ( NOL ) carryforwards
for tax purposes of approximately $101 million including approximately $64
million allocable to Equity Bank (See Note 1 for discussion of proposed sale
of Equity Bank). Such amounts expire beginning in 1999. The Company also has
investment tax credit carryforwards of approximately $600,000, which expire
beginning in 1994.
Savings and loan associations which meet certain definitional tests and
operating requirements prescribed by the Internal Revenue Code are allowed a
special bad debt deduction. If a savings and loan does not continue to meet
the federal income tax requirements necessary to meet these definitions, the
association may lose the benefits of this deduction.
11. Stockholders Equity
Stock Options and Warrants
In November 1981, the Company adopted the 1981 Incentive Stock Option Plan, in
March 1986, the Company adopted the 1986 Incentive Stock Option Plan and in
September 1993, the Company adopted the 1993 Incentive Stock Plan. Under these
plans, the Company is authorized to grant options to purchase up to 3,700,000
shares of the Company s common stock to key employees of the Company and its
subsidiaries. These options become exercisable 20% after one year from date of
grant, 40% after two years, 70% after three years, 100% after four years and
lapse at the end of ten years. The exercise price of options to be granted
under this plan is equal to the fair market value of the Company s common
stock at the date of grant. For participants who own 10% or more of the
Company s common stock at the date of grant, the option price is 110% of the
fair market value at the date of grant and the options lapse after five years
from the date of grant.
Activity in the Company s stock option plans during each of the three years in
the period ended December 31, 1993 is as follows:
1993 1992 1991
-----------------------------------
Outstanding options at beginning of
year 1,340,300 2,501,700 2,719,700
Granted 14,000 280,000 -
Exercised (791,636) (1,411,400) -
Surrendered, forfeited or expired (6,000) (30,000) (218,000)
-----------------------------------
Outstanding options at end of year 556,664 1,340,300 2,501,700
===================================
F-40
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Stockholders' Equity (continued)
1993 1992 1991
------------------------------
At end of year:
Prices of outstanding options $1.13 $1.13 $1.13
to to to
$9.00 $3.44 $3.03
Average option price per share $2.44 $2.10 $1.73
Options exercisable 280,640 852,566 1,803,580
Options available for future grants 926,300 84,300 334,300
The Company s Board of Directors approved the grant of non-qualified stock
options to the Company s outside directors, President and a key employee of
one of the Company s subsidiaries, as detailed below. The option price was
based on the market value of the Company s common stock at the date of grant
and these options are exercisable at any time after the date of grant and
expire five years from such date. During 1993, one of the Company s directors
exercised options to purchase 65,000 shares of the Company s stock at an
average price of $2.26 per share. During 1992, three of the Company s
directors exercised options to purchase 150,000 shares of the Company s stock
at $1.25 per share and an option to purchase 50,000 shares at $1.25 per share
expired.
Number of Shares
Subject to Options
Option Price Outstanding at
Date Granted Per Share December 31, 1993
- --------------------------------------------------------------------------
June 1989 $2.625 243,000
April 1990 $1.375 100,000
June 1992 $3.125 45,000
In September 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "Outside Director Plan"). The Outside Director Plan
authorizes the grant of nonqualified stock options to each member of the
Company's Board of Directors who is not an officer or employee of the Company
or its subsidiaries. The maximum number of shares of common stock of the
Company that may be issued under the Outside Director Plan is 150,000 shares
(subject to adjustment as provided in the Outside Director Plan). The Company
shall automatically grant to each outside director an option to acquire 5,000
shares of the Company's common stock on April 30 following the end of each of
the Company's fiscal years in which the Company realizes net income of $9.2
million or more for such fiscal year. The exercise price for an option
granted under this plan shall be the fair market value of the shares of common
stock at the time the option is granted. Each option granted under this plan
to the extent not exercised shall terminate upon the earlier of the
termination as a member of the Company's Board of Directors or the fifth
anniversary of the date such option was granted. No options are outstanding
under this plan.
Preferred Share Purchase Rights
In February 1989, the Company s Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right (the Preferred Right ) for
each outstanding share of the Company s common stock. The Preferred Rights are
designed to ensure that all of the Company s stockholders receive fair and
equal treatment in the event of a proposed takeover or abusive tender offer.
F-41
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Stockholders' Equity (continued)
The Preferred Rights are generally exercisable when a person or group, other
than the Company s Chairman and his affiliates, acquire beneficial ownership
of 30% or more of the Company s common stock (such a person or group will be
referred to as the Acquirer ). Each Preferred Right (excluding Preferred
Rights owned by the Acquirer) entitles stockholders to buy one one-hundredth
(1/100) of a share of a new series of participating preferred stock at an
exercise price of $14. Following the acquisition by the Acquirer of beneficial
ownership of 30% or more of the Company s common stock, and prior to the
acquisition of 50% or more of the Company s common stock by the Acquirer, the
Company s Board of Directors may exchange all or a portion of the Preferred
Rights (other than Preferred Rights owned by the Acquirer) for the Company s
common stock at the rate of one share of common stock per Preferred Right.
Following acquisition by the Acquirer of 30% or more of the Company s common
stock, each Preferred Right (other than the Preferred Rights owned by the
Acquirer) will entitle its holder to purchase a number of the Company s common
shares having a market value of two times the Preferred Right s exercise
price.
If the Company is acquired, each Preferred Right (other than the Preferred
Rights owned by the Acquirer) will entitle its holder to purchase a number of
the Acquirer s common shares having a market value at the time of two times
the Preferred Right s exercise price.
Prior to the acquisition by the Acquirer of beneficial ownership of 30% or
more of the Company s stock, the Company s Board of Directors may redeem the
Preferred Rights for $.01 per Preferred Right.
12. Redeemable Preferred Stock
Each share of the noncumulative redeemable preferred stock, $100 par value, is
convertible into 40 shares of the Company s common stock at any time at the
option of the holder; entitles the holder to one vote and is redeemable at
par. The redeemable preferred stock provides for a noncumulative annual
dividend of 10%, payable when and as declared.
13. Non-redeemable Preferred Stock
The 20,000 shares of Series B cumulative, convertible preferred stock, $100
par value, are convertible, in whole or in part, into 666,666 shares of the
Company s common stock (33.3333 shares of common stock for each share of
preferred stock) at any time at the option of the holder and entitles the
holder to one vote per share. The Series B preferred stock provides for annual
cumulative dividends of 12% from date of issue, payable when and as declared.
Dividend payments are current at December 31, 1993.
On May 27, 1993, the Company completed a public offering of $46 million of a
new series of Class C preferred stock, designated as a $3.25 convertible
exchangeable Class C preferred stock, Series 2, no par value ( Series 2
Preferred ). The Series 2 Preferred has a liquidation preference of $50.00 per
share plus accrued and unpaid dividends and is convertible at the option of
the holder at any time, unless previously redeemed, into common stock of the
Company at an initial conversion price of $11.55 per share (equivalent to a
conversion rate of approximately 4.3 shares of common stock for each share of
Series 2 Preferred), subject to adjustment under certain conditions. Upon the
mailing of notice of certain corporate actions, holders will have special
conversion rights for a 45-day period.
F-42
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Non-redeemable Preferred Stock (continued)
The Series 2 Preferred is not redeemable prior to June 15, 1996. The Series 2
Preferred will be redeemable at the option of the Company, in whole or in
part, at $52.28 per share if redeemed on or after June 15, 1996, and
thereafter at prices decreasing ratably annually to $50.00 per share on or
after June 15, 2003, plus accrued and unpaid dividends to the redemption date.
Dividends on the Series 2 Preferred are cumulative and are payable quarterly
in arrears.
The Series 2 Preferred also is exchangeable in whole, but not in part, at the
option of the Company on any dividend payment date beginning June 15, 1996,
for the Company s 6.50% Convertible Subordinated Debentures due 2018 (the
Debentures ) at the rate of $50.00 principal amount of Debentures for each
share of Series 2 Preferred. Interest on the Debentures, if issued, will be
payable semiannually in arrears. The Debentures will, if issued, contain
conversion and optional redemption provisions similar to those of the Series 2
Preferred and will be subject to a mandatory annual sinking fund redemption of
five percent of the amount of Debentures initially issued, commencing June 15,
2003 (or the June 15 following their issuance, if later).
The 663,150 shares of Series 1 Convertible, Exchangeable Class C Preferred
Stock (Series 1 Preferred Stock) outstanding at December 31, 1992 were
converted into 5,008,558 shares of common stock. The remaining 5,760 shares of
Series 1 Preferred Stock not converted to common stock, were redeemed at
$20.88 per share plus accrued dividends by the Company.
At December 31, 1993, the Company is authorized to issue an additional 228,363
shares of $100 par value preferred stock and an additional 5,000,000 shares of
no par value preferred stock. Upon issuance, the Board of Directors of the
Company is to determine the specific terms and conditions of such preferred
stock.
14. Commitments and Contingencies
Operating Leases
The Company leases certain property, plant and equipment. Future minimum
payments on operating leases with initial or remaining terms of one year or
more at December 31, 1993 are as follows:
(In Thousands)
1994 $1,386
1995 980
1996 625
1997 234
1998 113
After 1998 36
--------
$3,374
=======
F-43
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Commitments and Contingencies (continued)
Rent expense under all operating lease agreements, including month-to-month
leases, was $2,073,000 in 1993, $2,934,000 in 1992 and $2,944,000 in 1991.
Renewal options are available under certain of the lease agreements for
various periods at approximately the existing annual rental amounts. Rent
expense paid to related parties was $120,000 in 1993, 1992 and 1991.
A subsidiary of the Company has an operating lease agreement for specified
quantities of precious metals used in the subsidiary s production process. The
lease, which expires in May 1994, requires, among other things, (i) rentals
generally based on a percentage (5.5%) of the leased metals market values,
(ii) the subsidiary to provide to the lessor a letter of credit equal to
approximately 80% of the leased metals market value (approximately $1.1
million at December 31, 1993) and (iii) the subsidiary to purchase the leased
metals at market value at the end of the lease term, if not renewed, or return
to the lessor the quantities of metals subject to the lease.
A substantial portion of Equity Bank s lease expense relates to the corporate
office space occupied by Equity Bank. In 1989, Equity Bank made a $15 million
first mortgage real estate loan collateralized by the building in which Equity
Bank s corporate office is located. In connection with the origination of this
loan, Equity Bank obtained an option to purchase the building. The option
period is from December 31, 1995 through June 30, 1996 at a price to be
determined at the time of exercise. This loan was determined to be an in-
substance foreclosure during 1990 and is included in foreclosed real estate at
December 31, 1993 and 1992 (Note 4).
During 1993, the Company s Chemical Business acquired an additional nitric
acid plant for approximately $1.9 million. The Chemical Business is in the
process of moving such plant from Illinois and installing the plant in
Arkansas. The Company anticipates the total expenditures to move and install
the plant will be approximately $12 million, of which $1.9 million had been
incurred at December 31, 1993.
Legal Matters
Following is a summary of certain legal actions involving the Company:
A. In 1987, the U.S. Government notified one of the Company s subsidiaries,
along with numerous other companies, of potential responsibility for
clean-up of a waste disposal site in Oklahoma. No legal action has yet
been filed. The amount of the Company s cost associated with the clean-
up of the site is unknown due to continuing changes in (i) the estimated
total cost of clean-up of the site and (ii) the percentage of the total
waste which was alleged to have been contributed to the site by the
Company, accordingly, no provision for any liability which may result
has been made in the accompanying financial statements. The subsidiary s
insurance carriers have been notified of this matter; however, the
amount of possible coverage, if any, is not yet determinable.
B. The primary manufacturing facility of the Company s Chemical Business
has been placed in the Environmental Protection Agency s ( EPA )
tracking system ("System") of sites which are known or suspected to be a
site of a release of contaminated waste. Inclusion in the EPA s tracking
system does not represent a determination of liability or a finding that
any response action is necessary, accordingly, no provision for any
liability that may result has been made in the consolidated financial
F-44
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Commitments and Contingencies (continued)
statements. As a result of being placed in the System, the State of
Arkansas performed a preliminary assessment. The Company has been
advised that there have occurred certain releases of contaminants at the
Site. In addition, as a result of certain releases of contaminants at
the Site, the Company s subsidiary may be subject to assessment of
certain civil penalties.
The Company s subsidiary has not yet received from the appropriate
governmental agency of the State of Arkansas a determination as to the
appropriate plan of remediation of the Site and what contaminants, if
any, must be remediated. The subsidiary is unable to estimate the cost
of such remediation until the subsidiary receives an acceptable plan
from such agency. The subsidiary believes that it will receive such a
plan from the appropriate Arkansas state agency in the near future and
at that time will be able to estimate the cost of such remediation at
the Site. The Company does not believe that the response to any
contamination at the Site or the assessment of penalties, if any, due to
the release of certain contaminants at the Site would have a material
adverse effect on the Company or its financial condition.
C. A subsidiary of the Company was named in April 1989 as a third party
defendant in a lawsuit alleging defects in fan coil units installed in a
commercial building. The amount of damages sought by the owner against
the general contractor and the subsidiary s customer are substantial.
The subsidiary s customer alleges that to the extent defects exist in
the fan coil units, it is entitled to recovery from the subsidiary. The
Company s subsidiary generally denies their customer s allegations and
that any failures in the fan coil units were a result of improper design
by the customer, improper installation or other causes beyond the
subsidiary s control. The subsidiary has in turn filed claims against
the suppliers of certain materials used to manufacture the fan coil
units to the extent any failures in the fan coil units were caused by
such materials. Discovery in these proceedings is continuing. The
Company believes it is probable that it will receive insurance proceeds
in the event of an unfavorable outcome.
The Company, including its subsidiaries, is a party to various other claims,
legal actions, and complaints arising in the ordinary course of business. In
the opinion of management after consultation with counsel, all claims, legal
actions (including those described above) and complaints are adequately
covered by insurance, or if not so covered, are without merit or are of such
kind, or involve such amounts that unfavorable disposition would not have a
material effect on the financial position or results of operations of the
Company.
During 1993 the Company settled an outstanding dispute with the U.S. Customs
Service. Pursuant to the terms of the settlement agreement, the Company made
a payment of $1.8 million. This settlement payment has been included in
nonfinancial services selling, general and administrative expenses in 1993.
In connection with its loan servicing activities, Equity Bank is contingently
liable for certain mortgage loans sold with recourse to investors. At December
31, 1993, the outstanding principal balance of such loans is approximately
$17.9 million.
F-45
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information
The Company and its subsidiaries operate principally in five industries.
Chemical
This segment manufactures and sells chemical products for mining,
agricultural, electronic, paper and other industries. Sales to customers
of this segment, which primarily include coal mining companies
throughout the United States and farmers in Texas, Missouri and
Tennessee, are generally unsecured.
Environmental Control
This business segment manufactures and sells a variety of air handling
and heat pump products for use in commercial and residential air
conditioning and heating systems. Sales to customers of this segment,
which primarily include original equipment manufacturers, contractors
and independent sales representatives located throughout the world, are
generally secured by a mechanic s lien, except for sales to original
equipment manufacturers, which are generally unsecured.
Financial Services (See Note 1 for Discussion of Proposed Sale of Equity
Bank)
This segment provides a wide variety of financial services to various
customers, located primarily in Oklahoma. See Notes 2, 4 and 5 for a
more complete discussion of the Financial Services Business, customers
and other matters.
Industrial Products
This segment purchases and sells machine tools and industrial supplies
to machine tool dealers and end users throughout the world. Sales of
industrial supplies are generally unsecured, whereas the Company
generally retains a security interest in machine tools sold until
payment is received.
Automotive Products
This segment manufactures and sells, generally on an unsecured basis,
anti-friction bearings and other products for automotive applications to
wholesalers, retailers and original equipment manufacturers located
throughout the world.
For all but the Financial Services Business for which credit granting is
discussed in Note 5, credit is extended to customers based on an evaluation of
the customer s financial condition and other factors. Credit losses are
provided for in the financial statements based on historical experience and
periodic assessment of outstanding accounts receivable, particularly those
accounts which are past due. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company s customer bases, and their dispersion across many different
industries and geographic areas.
F-46
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
Information about the Company s operations in different industry segments for
each of the three years in the period ended December 31, 1993 is detailed
below.
1993 1992 1991
--------------------------------------
(In Thousands)
Revenues:
Chemical $115,631 $107,219 $ 90,226
Environmental Control 69,644 55,019 57,861
Financial Services 41,835 46,909 55,029
Industrial Products 20,719 17,590 14,012
Automotive Products 28,765 20,046 17,063
--------------------------------------
$276,594 $246,783 $234,191
======================================
Gross profit:
Chemical $ 27,557 $ 26,572 $ 18,831
Environmental Control 15,651 13,839 15,532
Industrial Products 5,160 4,904 3,419
Automotive Products 9,744 6,667 2,995
--------------------------------------
$ 58,112 $ 51,982 $ 40,777
======================================
Operating profit (loss):
Chemical $ 17,632 $ 18,427 $ 12,278
Environmental Control 3,900 3,269 2,030
Financial Services 4,390 2,989 3,483
Industrial Products 2,120 257 558
Automotive Products 2,528 954 (1,809)
--------------------------------------
30,570 25,896 16,540
General corporate expenses (9,789) (6,900) (6,714)
Interest expense, excluding
Financial Services (7,508) (9,225) (10,776)
---------------------------------------
Income (loss) before
provision for income taxes $ 13,273 $ 9,771 $ (950)
=======================================
Depreciation, depletion and
amortization of property,
plant and equipment:
Chemical $ 3,696 $ 3,566 $ 3,274
======================================
Environmental Control $ 1,015 $ 965 $ 938
======================================
Financial Services $ 883 $ 821 $ 805
======================================
Industrial Products $ 118 $ 141 $ 92
======================================
Automotive Products $ 502 $ 620 $ 687
======================================
F-47
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
1993 1992 1991
--------------------------------------
(In Thousands)
Additions to property,
plant and equipment:
Chemical $ 9,036 $ 3,916 $ 2,224
======================================
Environmental Control $ 1,584 $ 400 $ 274
======================================
Financial Services $ 1,156 $ 719 $ 293
======================================
Industrial Products $ 560 $ 471 $ 1,830
======================================
Automotive Products $ 1,875 $ 769 $ 792
======================================
Identifiable assets:
Chemical $ 71,299 $ 57,138 $ 55,474
Environmental Control 24,394 22,517 21,430
Financial Services 457,330 466,065 492,101
Industrial Products 18,451 15,353 18,255
Automotive Products 22,957 18,682 14,911
--------------------------------------
594,431 579,755 602,171
Corporate assets 3,081 2,493 3,342
--------------------------------------
Total assets $ 597,512 $582,248 $605,513
======================================
Revenues by industry segment include revenues from unaffiliated customers, as
reported in the consolidated financial statements. Intersegment revenues,
which are accounted for at transfer prices ranging from the cost of producing
or acquiring the product or service to normal prices to unaffiliated
customers, are not significant.
Gross profit by industry segment represents net sales less cost of sales. In
1993 and 1992, gross profit of the Industrial Products and Automotive Products
segments has been increased for the profits recognized on the long-term
contract discussed in Note 8. The profits are divided equally between the two
segments.
Operating profit by industry segment represents revenues less operating
expenses. In computing operating profit, none of the following items have been
added or deducted: general corporate expenses, income taxes or interest
expense (except the interest expense of the Financial Services segment is
deducted in computing operating profit). The 1993 and 1992 operating profit of
the Industrial Products and the Automotive Products segments has been
increased for the profits recognized on the long-term contract discussed in
Note 8. The profits are divided equally between the two segments.
F-48
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
Identifiable assets by industry segment are those assets used in the
operations in each industry. Accounts receivable purchased by the Financial
Services segment from the other business segments are included in the
Financial Services identifiable assets since the financing income related
thereto is included in the Financial Services operating profit. Corporate
assets are those principally owned by the parent company.
Revenues from unaffiliated customers include direct foreign export sales as
follows:
Geographic Area 1993 1992 1991
- --------------------------------------------------------------------------
(In Thousands)
Mexico and Central and South America $ 6,419 $ 4,075 $4,075
Canada 11,850 8,123 4,571
Slovakia 9,231 6,203 -
Other 5,183 2,679 590
----------------------------------
$32,683 $21,080 $9,236
==================================
In addition, revenues from unaffiliated customers include sales in 1993, 1992
and 1991 amounting to $5,917,000, $2,088,000 and $7,491,000, respectively,
which the Company believes were ordered for export shipment.
As discussed in Note 1, the Company s consolidated balance sheet is prepared
on an unclassified basis due to the inclusion of the financial services
subsidiaries on a fully consolidated basis. The following detail presents the
financial services subsidiaries on the equity method and presents the other
assets and liabilities of the Company on the traditional classified basis:
1993 1992
----------------------
(In Thousands)
Current assets:
Cash $ 1,055 $ 279
Trade accounts receivable, net 17,689 4,535
Inventories 48,384 48,373
Advances and prepaid items 5,459 4,134
----------------------
Total current assets 72,587 57,321
Investment in, net of advances from,
Financial Services subsidiaries and
other noncurrent assets 21,484 12,160
Property, plant and equipment, net41,845 34,482
----------------------
$135,916 $103,963
=====================
F-49
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
1993 1992
----------------------
(In Thousands)
Current liabilities:
Drafts payable due within one year $ 1,220 $ 3,738
Accounts payable 22,645 18,906
Billings in excess of costs
and estimated earnings - 4,858
Accrued liabilities 6,755 6,877
Long-term debt due within one year 14,349 9,158
----------------------
Total current liabilities 44,969 43,537
Long-term debt and drafts payable
due after one year 15,921 41,924
Redeemable, noncumulative, convertible
preferred stock, $100 par value 155 163
Non-redeemable preferred stock, common
stock and other stockholders equity 74,871 18,339
----------------------
$135,916 $103,963
======================
The following detail presents summarized asset and liability amounts included
in the consolidated financial statements at December 31, 1993 and 1992 for the
Company s financial services subsidiaries. Real estate, office buildings and
equipment include the assets transferred to Equity Bank in connection with the
acquisition at the historical cost of $18.8 million rather than at the fair
value of $69 million at which they are recorded in Equity Bank s stand-alone
financial statements:
1993 1992
---------------------
(In Thousands)
Assets
Cash and securities $ 18,438 $ 40,002
Loans and mortgage-backed securities 359,303 301,063
Trade accounts receivable 31,844 31,515
Assets covered by FSLIC - 52,004
Real estate, office buildings
and equipment, net 43,086 38,718
Excess of purchase price over
net assets acquired 17,041 14,645
Other assets 3,179 3,677
----------------------
$472,891 $481,624
======================
F-50
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
1993 1992
---------------------
(In Thousands)
Liabilities:
Deposits $332,511 $336,053
FHLB advances 87,650 80,150
Long-term borrowings 25 50
Securities sold under
agreements to repurchase 38,721 50,344
Payable to FSLIC - 9,107
Other liabilities 2,689 2,581
Investment and advances 11,295 3,339
-----------------------
$472,891 $481,624
=======================
F-51
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
(Three months ended)
March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------
1993
Total revenues $63,419 $78,415 $68,773 $65,987
=======================================================
Gross profit on net
sales $13,286 $18,067 $13,454 $13,305
=======================================================
Net interest income
related to the
Financial Services
Business* $ 3,008 $ 3,232 $ 3,409 $ 3,358
=======================================================
Net income $ 2,657 $ 5,758 $ 2,424 $ 1,560
=======================================================
Net income
applicable to
common stock $ 2,580 $ 5,408 $ 1,616 $ 753
=======================================================
Primary earnings
per common share $.25 $.40 $.09 $.05
=======================================================
1992
Total revenues $56,796 $70,820 $60,622 $58,545
=======================================================
Gross profit on net
sales $11,520 $15,886 $11,553 $13,023
=======================================================
Net interest income
related to the
Financial Services
Business* $ 2,857 $ 3,150 $ 3,076 $ 3,496
=======================================================
Net income $ 1,108 $ 4,276 $ 2,097 $ 1,774
=======================================================
Net income
applicable to
common stock $ 614 $ 3,806 $ 1,659 $ 1,349
=======================================================
Primary earnings
per common
share $.10 $.49 $.19 $.16
=======================================================
*This amount includes interest income earned on accounts receivable purchased,
with recourse, from the Company's other subsidiaries. See Note 5 to the
Consolidated Financial Statements.
Net income in the fourth quarter of 1993 was increased approximately $3.5
million for additions to fixed assets resulting from capitalizable
expenditures previously being expensed and the collection of an insurance
settlement relating to the foreign project inventory (see Note 8 to the
Consolidated Financial Statements for further discussions relating to the
foreign sales contract).
F-52
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited) (continued)
Net income in the fourth quarter of 1992 was increased by approximately $3.5
million for adjustments to inventories resulting from book-to-physical
differences, adjustments to estimated accruals and deferrals of certain
operating expenses and profits recognized on a foreign sales contract (see
Note 8 to the Consolidated Financial Statements for further discussion related
to the foreign sales contract).
F-53
LSB Industries, Inc.
Schedule II - Amounts Receivable From Employees and Directors
Years ended December 31, 1993, 1992 and 1991
(Dollars in Thousands)
Balance at Balance
Beginning at End
Name of Debtor of Year Additions Payments of Year
- ----------------------------------------------------------------------------
Year ended December 31, 1993:
David Houston, former
President of the
Company's savings
and loan subsidiary
- Advances, bearing
interest at 10%
(resigned in January 1991) $299 $ - $ - $299
David R. Goss, Director
and Senior Vice President,
Operations - 100 - 100
Tony M. Shelby, Director
and Senior Vice President,
Finance 100 - 100 -
C.L. Thurman, Director - 147 - 147
----------------------------------------------
$399 $247 $100 $546
==============================================
Year ended December 31, 1992:
David Houston, former
President of the Company's
savings and loan subsidiary
- Advances, bearing
interest at 10% (resigned
in January 1991) $299 $ - $ - $299
Tony M. Shelby, Director
and Senior Vice
President, Finance 100 - - 100
----------------------------------------------
$399 $ - $ - $399
==============================================
Year ended December 31, 1991:
David Houston, former
President of the Company's
savings and loan subsidiary
- Advances, bearing
interest at 10% (resigned
in January 1991) $299 $ - $ - $299
Tony M. Shelby, Director
and Senior Vice
President, Finance 100 - - 100
----------------------------------------------
$399 $ - $ - $399
==============================================
F-54
LSB Industries, Inc.
Schedule III - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
1993 1992
-----------------
(In Thousands)
Assets
Current assets:
Cash $ 52 $ 702
Accounts receivable 381 90
Prepaid expenses 1,687 1,102
-------------------
Total current assets 2,120 1,894
Property, plant and equipment 4,555 4,399
Less allowance for depreciation (3,116) (2,734)
-------------------
1,439 1,665
Excess of purchase price over net assets acquired, net 319 397
Other assets (principally investments in and amounts
due from wholly-owned subsidiaries) (Notes A and B) 76,313 23,639
-------------------
$80,191 $27,595
===================
Liabilities and stockholders' equity
Current liabilities $ 4,196 $ 4,728
Long-term debt (Note B) 138 1,654
Commitments and contingencies (Notes C and D)
Redeemable preferred stock 155 163
Non-redeemable preferred stock, common stock and
other stockholders' equity:
Common stock 1,451 810
Preferred stock 48,000 17,357
Other stockholders' equity 26,251 2,883
------------------
75,702 21,050
------------------
$80,191 $27,595
==================
See accompanying notes.
F-55
LSB Industries, Inc.
Schedule III - Condensed Financial Information of Registrant (continued)
Condensed Statements of Operations
Year ended December 31,
1993 1992 1991
----------------------------------
(In Thousands)
Management fees from consolidated
subsidiaries $ 7,524 $ 7,459 $ 7,278
Interest income, primarily intercompany 3,078 1,807 7,073
Other income 808 800 1,250
----------------------------------
11,410 10,066 15,601
Costs and expenses:
General and administrative expenses 9,023 7,789 8,320
Interest expense, primarily
intercompany 1,666 1,930 4,901
Settlement of dispute 1,767 - -
---------------------------------
12,456 9,719 13,221
---------------------------------
Income (loss) before credit for income
taxes and equity in net income (loss)
of subsidiaries (1,046) 347 2,380
Credit for income taxes 4,347 3,348 2,311
---------------------------------
Income before equity in net income
(loss) of subsidiaries 3,301 3,695 4,691
Equity in net income (loss) of
subsidiaries 9,098 5,560 (5,838)
---------------------------------
Net income (loss) $12,399 $ 9,255 $(1,147)
=================================
See accompanying notes.
F-56
LSB Industries, Inc.
Schedule III - Condensed Financial Information of Registrant (continued)
Condensed Statements of Cash Flows
Year ended December 31,
1993 1992 1991
---------------------------------
(In Thousands)
Cash from operating activities $ 1,256 $4,658 $5,426
Investing activities
Capital expenditures (156) (206) (158)
Advances to, net of advances and
dividends from subsidiaries (43,613) (1,811) (3,166)
----------------------------------
(43,769) (2,017) (3,324)
Financing activities
Payment on long-term debt (2,262) (676) (636)
Dividends paid on common and
preferred stocks (2,713) (1,827) (1,943)
Proceeds from issuance of
preferred stock 43,871 - -
Proceeds from issuance of
common stock 3,269 687 -
Purchase of treasury stock (302) - -
---------------------------------
41,863 (1,816) (2,579)
---------------------------------
Increase (decrease) in cash $ (650) $ 825 $(477)
=================================
See accompanying notes.
F-57
LSB Industries, Inc.
Schedule III - Condensed Financial Information of Registrant (continued)
Notes to Condensed Financial Statements
Note A - Basis of Presentation
In the parent-company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings (losses)
of subsidiaries since date of acquisition. Parent-company-only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
Note B - Long-Term Debt
Redemption of Debentures - On June 1, 1993, the Company called for redemption
of all of its outstanding shares of 13-3/4% Subordinated Debentures due 1995
("Debentures"). The Debentures were redeemed on July 1, 1993. Each
outstanding Debenture was redeemed at $1,000, the principal amount of such
Debenture, plus accrued and unpaid interest on the Debentures to the
redemption date of July 1, 1993. There were approximately $2.2 million in
outstanding Debentures at the redemption date.
Note C - Guarantees
The Company has guaranteed the payment of principal and interest under the
terms of various debt agreements of the Company's subsidiaries. Subsidiaries'
long-term debt outstanding at December 31, 1992 which is guaranteed by the
parent is $1,697,000.
The Company has guaranteed a subsidiary's obligation to pay into affiliated
partnerships any deficit which exists in the subsidiary's partnership capital
accounts at the time of liquidation of the partnerships, reduced by the
difference between the net book value of the partnerships' assets and the fair
market value (or sales price in the case of liquidation) of assets. At
December 31, 1993, the deficit in the subsidiary's partnership capital
accounts was $10,994,000.
Note D - Commitments and Contingencies
See Note 14 to the Company's consolidated financial statements for discussion
of material contingencies. See Notes 12 and 13 for a discussion of matters
related to the Company's preferred stocks and other stockholders' equity
matters.
F-58
LSB Industries, Inc.
Schedule VIII - Valuation and Qualifying Accounts
Years ended December 31, 1993, 1992 and 1991
(Dollars in Thousands)
Additions Deductions
--------- ----------
Charged Write-
Balance at to Costs offs/ Balance
Beginning and Costs at End
Description of Year Expenses Incurredof Year
- -----------------------------------------------------------------------------
Allowance for doubtful accounts (1):
1993 $3,082 $ 439 $ 938 $2,583
======================================================
1992 $3,354 $ 972 $1,244 $3,082
======================================================
1991 $2,866 $1,873 $1,385 $3,354
======================================================
Product warranty liability:
1993 $ 613 $ 427 $ 387 $ 653
=====================================================
1992 $ 649 $ 547 $ 583 $ 613
=====================================================
1991 $ 579 $ 831 $ 761 $ 649
=====================================================
(1) Deducted in the balance sheet from the related assets to which the
reserve applies.
Other valuation and qualifying accounts are detailed in the Company's notes to
consolidated financial statements.
F-59
LSB Industries, Inc.
Schedule X - Supplementary Statement of Operations Information
Years ended December 31, 1993, 1992 and 1991
(Dollars in Thousands)
Charged to Costs and Expenses
1993 1992 1991
----------------------------------------
Maintenance and repairs $5,350 $4,569 $3,737
=======================================
Taxes, other than payroll and income taxes, royalties, amortization of
deferred costs and advertising costs did not exceed 1% of gross revenues
during any of the three years in the period ended December 31, 1993.
EXHIBIT 4.22
CONGRESS AMENDMENTS
-------------------
TWELFTH AMENDMENT TO LOAN AGREEMENT
-----------------------------------
April 23, 1993
Congress Financial Corporation and
Congress Financial Corporation (Central)
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Reference is made to the Loan Agreement dated March 29,
1984, as heretofore amended, modified or supplemented (including,
without limitation, pursuant to that certain Amendment to Loan
Agreement dated August 16, 1985, that certain Second Amendment to
Loan Agreement dated April 3, 1986, that certain Third Amendment
to Loan Agreement dated October 26, 1986, that certain Fourth
Amendment to Loan Agreement dated December 17, 1986, that certain
Fifth Amendment to Loan Agreement dated March 7, 1988, that
certain Sixth Amendment to Loan Agreement dated March 31, 1989,
that certain Seventh Amendment to Loan Agreement dated May 18,
1990, that certain Eighth Amendment to Loan Agreement dated May
1, 1991, that certain Ninth Amendment to Loan Agreement dated
February 25, 1992, that certain Tenth Amendment to Loan Agreement
dated March 31, 1992, and that certain Eleventh Amendment to Loan
Agreement, dated December 10, 1992; hereinafter, the "Loan
Agreement"), currently by and among Congress Financial
Corporation and Congress Financial Corporation (Central)
(collectively "Congress"), LSB Industries, Inc. (hereinafter
"LSB"), L&S Bearing Co., Rotex Corporation, Tribonetics
Corporation, LSB Extrusion Co., International Environmental
Corporation, CHP Corporation, Koax Corp., Summit Machine Tool
Manufacturing Corp., Hercules Energy Mfg. Corporation, Climate
Master, Inc., APR Corporation and Climatex, Inc. (collectively,
with LSB, the "Borrowers") and LSB Financial Corp., LSB Lease
Corp., LSB Import Corp., LSB Bearing Corp., Summit Machine Tool
Systems, Inc., LSB Europa Limited, Bowerdean Limited and LSB
International Limited (collectively herein, and pursuant to the
Loan Agreement, the "Guarantors").
1
Borrower and Guarantors have requested a sixty (60) day
extension of the Renewal Date of their existing financing
arrangements with Congress and Congress is willing, subject to
the terms and conditions set forth herein, to so extend the
Renewal Date of the existing financing arrangements with
Borrowers and Guarantors as provided below. Congress, Borrowers
and Guarantors agree as follows (capitalized terms used herein,
unless otherwise defined, shall have the meanings set forth in
the Loan Agreement):
I. Term. The date "April 30, 1993" in Section 9.1 of the
Accounts Agreements, as heretofore amended, is hereby deleted and
replaced with the date "June 30, 1993".
II. Effect of this Amendment. Except as modified pursuant
hereto, the Loan Agreement and the Financing Agreements are
hereby specifically ratified, restated and confirmed by the
parties hereto as of the date hereof. To the extent of conflict
between the terms of this Amendment and the Loan Agreement or
other Financing Agreements, the terms of this Amendment control.
III. Further Assurances. The parties hereto shall execute
and deliver such additional documents and take such additional
action as may be necessary to effectuate the provisions and
purposes of this Amendment.
2
By the signature hereto of each of their duly authorized
officers, all of the parties hereto mutually covenant and agree
as set forth herein (the covenants and agreements of the
Borrowers and Guarantors being joint and several).
Very truly yours,
LSB INDUSTRIES, INC.
L&S BEARING CO.
TRIBONETICS CORPORATION
LSB EXTRUSION CO.
ROTEX CORPORATION
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
HERCULES ENERGY MFG. CORPORATION
INTERNATIONAL ENVIRONMENTAL
CORPORATION
CHP CORPORATION
CLIMATE MASTER, INC.
KOAX CORP.
APR CORPORATION
CLIMATEX, INC.
LSB FINANCIAL CORP.
LSB LEASING CORP.
LSB IMPORT CORP.
LSB BEARING CORP.
SUMMIT MACHINE TOOL SYSTEMS, INC.
LSB EUROPA LIMITED
BOWERDEAN LIMITED
LSB INTERNATIONAL LIMITED
By:
--------------------------------
Title
-----------------------------
AGREED AND ACCEPTED:
CONGRESS FINANCIAL CORPORATION AND
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
-------------------------------------
Title:
----------------------------------
3
THIRTEENTH AMENDMENT TO LOAN AGREEMENT
--------------------------------------
June 24, 1993
Congress Financial Corporation and
Congress Financial Corporation (Central)
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Reference is made to the Loan Agreement dated March 29,
1984, as heretofore amended, modified or supplemented (including,
without limitation, pursuant to that certain Amendment to Loan
Agreement dated August 16, 1985, that certain Second Amendment to
Loan Agreement dated April 3, 1986, that certain Third Amendment
to Loan Agreement dated October 26, 1986, that certain Fourth
Amendment to Loan Agreement dated December 17, 1986, that certain
Fifth Amendment to Loan Agreement dated March 7, 1988, that
certain Sixth Amendment to Loan Agreement dated March 31, 1989,
that certain Seventh Amendment to Loan Agreement dated May 18,
1990, that certain Eighth Amendment to Loan Agreement dated May
1, 1991, that certain Ninth Amendment to Loan Agreement dated
February 25, 1992, that certain Tenth Amendment to Loan Agreement
dated March 31, 1992, that certain Eleventh Amendment to Loan
Agreement, dated December 10, 1992, and that certain Twelth
Amendment to Loan Agreement, dated April 23, 1993, hereinafter,
the "Loan Agreement"), currently by and among Congress Financial
Corporation and Congress Financial Corporation (Central)
(collectively "Congress"), LSB Industries, Inc. (hereinafter
"LSB"), L&S Bearing Co., Rotex Corporation, Tribonetics
Corporation, LSB Extrusion Co., International Environmental
Corporation, CHP Corporation, Koax Corp., Summit Machine Tool
Manufacturing Corp., Hercules Energy Mfg. Corporation, Climate
Master, Inc., APR Corporation and Climatex, Inc. (collectively,
with LSB, the "Borrowers") and LSB Financial Corp., LSB Lease
Corp., LSB Import Corp., LSB Bearing Corp., Summit Machine Tool
Systems, Inc., LSB Europa Limited, Bowerdean Limited and LSB
International Limited (collectively herein, and pursuant to the
Loan Agreement, the "Guarantors").
Borrower and Guarantors have requested a ninety (90) day
extension of the Renewal Date of their existing financing
arrangements with Congress and Congress is willing, subject to
the terms and conditions set forth herein, to so extend the
Renewal Date of the existing financing arrangements with
1
Borrowers and Guarantors as provided below. Congress, Borrowers
and Guarantors agree as follows (capitalized terms used herein,
unless otherwise defined, shall have the meanings set forth in
the Loan Agreement):
I. Term. The date "June 30, 1993" in Section 9.1 of the
Accounts Agreements, as heretofore amended, is hereby deleted and
replaced with the date "September 30, 1993".
II. Effect of this Amendment. Except as modified pursuant
hereto, the Loan Agreement and the Financing Agreements are
hereby specifically ratified, restated and confirmed by the
parties hereto as of the date hereof. To the extent of conflict
between the terms of this Amendment and the Loan Agreement or
other Financing Agreements, the terms of this Amendment control.
III. Further Assurances. The parties hereto shall execute
and deliver such additional documents and take such additional
action as may be necessary to effectuate the provisions and
purposes of this Amendment.
2
By the signature hereto of each of their duly authorized
officers, all of the parties hereto mutually covenant and agree
as set forth herein (the covenants and agreements of the
Borrowers and Guarantors being joint and several).
Very truly yours,
LSB INDUSTRIES, INC.
L&S BEARING CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
LSB EXTRUSION CO.
INTERNATIONAL ENVIRONMENTAL
CORPORATION
CHP CORPORATION
KOAX CORP.
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
HERCULES ENERGY MFG. CORPORATION
CLIMATE MASTER, INC.
APR CORPORATION
CLIMATEX, INC.
LSB FINANCIAL CORP.
LSB LEASING CORP.
LSB IMPORT CORP.
LSB BEARING CORP.
SUMMIT MACHINE TOOL SYSTEMS, INC.
LSB EUROPA LIMITED
BOWERDEAN LIMITED
LSB INTERNATIONAL LIMITED
By:
--------------------------------
Title
-----------------------------
AGREED AND ACCEPTED:
CONGRESS FINANCIAL CORPORATION AND
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
-------------------------------------
Title:
----------------------------------
3
FOURTEENTH AMENDMENT TO LOAN AGREEMENT
--------------------------------------
September 23, 1993
Congress Financial Corporation and
Congress Financial Corporation (Central)
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Reference is made to the Loan Agreement dated March 29,
1984, as heretofore amended, modified or supplemented (including,
without limitation, pursuant to that certain Amendment to Loan
Agreement dated August 16, 1985, that certain Second Amendment to
Loan Agreement dated April 3, 1986, that certain Third Amendment
to Loan Agreement dated October 26, 1986, that certain Fourth
Amendment to Loan Agreement dated December 17, 1986, that certain
Fifth Amendment to Loan Agreement dated March 7, 1988, that
certain Sixth Amendment to Loan Agreement dated March 31, 1989,
that certain Seventh Amendment to Loan Agreement dated May 18,
1990, that certain Eighth Amendment to Loan Agreement dated May
1, 1991, that certain Ninth Amendment to Loan Agreement dated
February 25, 1992, that certain Tenth Amendment to Loan Agreement
dated March 31, 1992, that certain Eleventh Amendment to Loan
Agreement, dated December 10, 1992, that certain Twelfth
Amendment to Loan Agreement, dated April 23, 1993, and that
certain Thirteenth Amendment to Loan Agreement, dated June 24,
1993, hereinafter, the "Loan Agreement"), currently by and among
Congress Financial Corporation and Congress Financial Corporation
(Central) (collectively "Congress"), LSB Industries, Inc.
(hereinafter "LSB"), L&S Bearing Co., Rotex Corporation,
Tribonetics Corporation, LSB Extrusion Co., International
Environmental Corporation, CHP Corporation, Koax Corp., Summit
Machine Tool Manufacturing Corp., Hercules Energy Mfg.
Corporation, Climate Master, Inc., APR Corporation and Climatex,
Inc. (collectively, with LSB, the "Borrowers") and LSB Financial
Corp., LSB Lease Corp., LSB Import Corp., LSB Bearing Corp.,
Summit Machine Tool Systems, Inc., LSB Europa Limited, Bowerdean
Limited and LSB International Limited (collectively herein, and
pursuant to the Loan Agreement, the "Guarantors").
Borrower and Guarantors have requested a sixty (60) day
extension of the Renewal Date of their existing arrangements with
Congress and Congress is willing, subject to the terms and
conditions set forth herein, to so extend the Renewal Date of the
existing financing arrangements with Borrowers and Guarantors as
provided below. Congress, Borrowers and Guarantors agree as
follows (capitalized terms used herein, unless otherwise defined,
shall have the meanings set forth in the Loan Agreement):
1
I. Term. The date "September 30, 1993" in Section 9.1 of
the Accounts Agreements, as heretofore amended, is hereby deleted
and replaced with the date "November 30, 1993".
II. Effect of this Amendment. Except as modified pursuant
hereto, the Loan Agreement and the Financing Agreements are
hereby specifically ratified, restated and confirmed by the
parties hereto as of the date hereof. To the extent of conflict
between the terms of this Amendment and the Loan Agreement or
other Financing Agreements, the terms of this Amendment control.
III. Further Assurances. The parties hereto shall execute
and deliver such additional documents and take such additional
action as may be necessary to effectuate the provisions and
purposes of this Amendment.
2
By the signature hereto of each of their duly authorized
officers, all of the parties hereto mutually covenant and agree
as set forth herein (the covenants and agreements of the
Borrowers and Guarantors being joint and several).
Very truly yours,
LSB INDUSTRIES, INC.
L&S BEARING CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
LSB EXTRUSION CO.
INTERNATIONAL ENVIRONMENTAL
CORPORATION
CHP CORPORATION
KOAX CORP.
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
HERCULES ENERGY MFG. CORPORATION
CLIMATE MASTER, INC.
APR CORPORATION
CLIMATEX, INC.
LSB FINANCIAL CORP.
LSB LEASING CORP.
LSB IMPORT CORP.
LSB BEARING CORP.
SUMMIT MACHINE TOOL SYSTEMS, INC.
LSB EUROPA LIMITED
BOWERDEAN LIMITED
LSB INTERNATIONAL LIMITED
By:
--------------------------------
Title
-----------------------------
AGREED AND ACCEPTED:
CONGRESS FINANCIAL CORPORATION AND
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
-------------------------------------
Title:
----------------------------------
3
FIFTEENTH AMENDMENT TO LOAN AGREEMENT
--------------------------------------
November 29, 1993
Congress Financial Corporation and
Congress Financial Corporation (Central)
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Reference is made to the Loan Agreement dated March 29,
1984, as heretofore amended, modified or supplemented (including,
without limitation, pursuant to that certain Amendment to Loan
Agreement dated August 16, 1985, that certain Second Amendment to
Loan Agreement dated April 3, 1986, that certain Third Amendment
to Loan Agreement dated October 26, 1986, that certain Fourth
Amendment to Loan Agreement dated December 17, 1986, that certain
Fifth Amendment to Loan Agreement dated March 7, 1988, that
certain Sixth Amendment to Loan Agreement dated March 31, 1989,
that certain Seventh Amendment to Loan Agreement dated May 18,
1990, that certain Eighth Amendment to Loan Agreement dated May
1, 1991, that certain Ninth Amendment to Loan Agreement dated
February 25, 1992, that certain Tenth Amendment to Loan Agreement
dated March 31, 1992, that certain Eleventh Amendment to Loan
Agreement, dated December 10, 1992, that certain Twelfth
Amendment to Loan Agreement, dated April 23, 1993, that certain
Thirteenth Amendment to Loan Agreement, dated June 24, 1993, and
that certain Fourteenth Amendment to Loan Agreement, dated
September 23, 1993, hereinafter, the "Loan Agreement"), currently
by and among Congress Financial Corporation and Congress
Financial Corporation (Central) (collectively "Congress"), LSB
Industries, Inc. (hereinafter "LSB"), L&S Bearing Co., Rotex
Corporation, Tribonetics Corporation, LSB Extrusion Co.,
International Environmental Corporation, CHP Corporation, Koax
Corp., Summit Machine Tool Manufacturing Corp., Hercules Energy
Mfg. Corporation, Climate Master, Inc., APR Corporation and
Climatex, Inc. (collectively, with LSB, the "Borrowers") and LSB
Financial Corp., LSB Lease Corp., LSB Import Corp., LSB Bearing
Corp., Summit Machine Tool Systems, Inc., LSB Europa Limited,
Bowerdean Limited and LSB International Limited (collectively
herein, and pursuant to the Loan Agreement, the "Guarantors").
Borrower and Guarantors have requested an extension of the
Renewal Date of their existing arrangements with Congress and
Congress is willing, subject to the terms and conditions set
forth herein, to so extend the Renewal Date of the existing
1
financing arrangements with Borrowers and Guarantors as provided
below. Congress, Borrowers and Guarantors agree as follows
(capitalized terms used herein, unless otherwise defined, shall
have the meanings set forth in the Loan Agreement):
I. Term. The date "November 30, 1993" in Section 9.1 of
the Accounts Agreements, as heretofore amended, is hereby deleted
and replaced with the date "January 31, 1994".
II. Delivery of Cash Collateral Upon Termination. In
addition to all of Congress' other rights and remedies available
to it upon the effective date of termination or non-renewal of
the Loan Agreement and the other Financing Agreements, upon the
effective date of such termination or non-renewal, Borrower shall
pay to Congress, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Congress in such amounts as
Congress determines are reasonably necessary to secure Congress
from loss, cost, damage or expense, including reasonable
attorneys' fees and legal expenses, in connection with any
contingent Obligations, including issued and outstanding letters
of credit, banker's acceptances, purchase guaranties, other
financial accommodations and checks or other payments
provisionally credited to the Obligations and/or as to which
Congress has not yet received the final and indefeasible payment.
Such amounts shall be remitted to Congress by wire transfer in
federal funds to such bank account of Congress, as Congress may,
in its discretion, designate in writing to Borrower for such
purpose.
III. Effect of this Amendment. Except as modified pursuant
hereto, the Loan Agreement and the Financing Agreements are
hereby specifically ratified, restated and confirmed by the
parties hereto as of the date hereof. To the extent of conflict
between the terms of this Amendment and the Loan Agreement or
other Financing Agreements, the terms of this Amendment control.
IV. Further Assurances. The parties hereto shall execute
and deliver such additional documents and take such additional
action as may be necessary to effectuate the provisions and
purposes of this Amendment.
2
By the signature hereto of each of their duly authorized
officers, all of the parties hereto mutually covenant and agree
as set forth herein (the covenants and agreements of the
Borrowers and Guarantors being joint and several).
Very truly yours,
LSB INDUSTRIES, INC.
L&S BEARING CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
LSB EXTRUSION CO.
INTERNATIONAL ENVIRONMENTAL
CORPORATION
CHP CORPORATION
KOAX CORP.
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
HERCULES ENERGY MFG. CORPORATION
CLIMATE MASTER, INC.
APR CORPORATION
CLIMATEX, INC.
LSB FINANCIAL CORP.
LSB LEASING CORP.
LSB IMPORT CORP.
LSB BEARING CORP.
SUMMIT MACHINE TOOL SYSTEMS, INC.
LSB EUROPA LIMITED
BOWERDEAN LIMITED
LSB INTERNATIONAL LIMITED
By:
--------------------------------
Title
-----------------------------
AGREED AND ACCEPTED:
CONGRESS FINANCIAL CORPORATION AND
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
-------------------------------------
Title:
----------------------------------
3
SIXTEENTH AMENDMENT TO LOAN AGREEMENT
-------------------------------------
January 25, 1994
Congress Financial Corporation and
Congress Financial Corporation (Central)
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Reference is made to the Loan Agreement dated March 29,
1984, as heretofore amended, modified or supplemented (including,
without limitation, pursuant to that certain Amendment to Loan
Agreement dated August 16, 1985, that certain Second Amendment to
Loan Agreement dated April 3, 1986, that certain Third Amendment
to Loan Agreement dated October 26, 1986, that certain Fourth
Amendment to Loan Agreement dated December 17, 1986, that certain
Fifth Amendment to Loan Agreement dated March 7, 1988, that
certain Sixth Amendment to Loan Agreement dated March 31, 1989,
that certain Seventh Amendment to Loan Agreement dated May 18,
1990, that certain Eighth Amendment to Loan Agreement dated May
1, 1991, that certain Ninth Amendment to Loan Agreement dated
February 25, 1992, that certain Tenth Amendment to Loan Agreement
dated March 31, 1992, that certain Eleventh Amendment to Loan
Agreement, dated December 10, 1992, that certain Twelfth
Amendment to Loan Agreement, dated April 23, 1993, that certain
Thirteenth Amendment to Loan Agreement, dated June 24, 1993, that
certain Fourteenth Amendment to Loan Agreement, dated September
23, 1993, and that certain Fifteenth Amendment to Loan Agreement,
dated November 29, 1993, hereinafter, the "Loan Agreement"),
currently by and among Congress Financial Corporation and
Congress Financial Corporation (Central) (collectively
"Congress"), LSB Industries, Inc. (hereinafter "LSB"), L&S
Bearing Co., Rotex Corporation, Tribonetics Corporation, LSB
Extrusion Co., International Environmental Corporation, CHP
Corporation, Koax Corp., Summit Machine Tool Manufacturing Corp.,
Hercules Energy Mfg. Corporation, Climate Master, Inc., APR
Corporation and Climatex, Inc. (collectively, with LSB, the
"Borrowers") and LSB Financial Corp., LSB Lease Corp., LSB Import
Corp., LSB Bearing Corp., Summit Machine Tool Systems, Inc., LSB
Europa Limited, Bowerdean Limited and LSB International Limited
(collectively herein, and pursuant to the Loan Agreement, the
"Guarantors").
1
Borrower and Guarantors have requested an extension of the
Renewal Date of their existing arrangements with Congress and
Congress is willing, subject to the terms and conditions set
forth herein, to so extend the Renewal Date of the existing
financing arrangements with Borrowers and Guarantors as provided
below. Congress, Borrowers and Guarantors agree as follows
(capitalized terms used herein, unless otherwise defined, shall
have the meanings set forth in the Loan Agreement):
I. Term. The date "January 31, 1994" in Section 9.1 of
the Accounts Agreements, as heretofore amended, is hereby deleted
and replaced with the date "March 31, 1994".
II. Delivery of Cash Collateral Upon Termination. In
addition to all of Congress' other rights and remedies available
to it upon the effective date of termination or non-renewal of
the Loan Agreement and the other Financing Agreements, upon the
effective date of such termination or non-renewal, Borrower shall
pay to Congress, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Congress in such amounts as
Congress determines are reasonably necessary to secure Congress
from loss, cost, damage or expense, including reasonable
attorneys' fees and legal expenses, in connection with any
contingent Obligations, including issued and outstanding letters
of credit, banker's acceptances, purchase guaranties, other
financial accommodations and checks or other payments
provisionally credited to the Obligations and/or as to which
Congress has not yet received the final and indefeasible payment.
Such amounts shall be remitted to Congress by wire transfer in
federal funds to such bank account of Congress, as Congress may,
in its discretion, designate in writing to Borrower for such
purpose.
III. Effect of this Amendment. Except as modified pursuant
hereto, the Loan Agreement and the Financing Agreements are
hereby specifically ratified, restated and confirmed by the
parties hereto as of the date hereof. To the extent of conflict
between the terms of this Amendment and the Loan Agreement or
other Financing Agreements, the terms of this Amendment control.
IV. Further Assurances. The parties hereto shall execute
and deliver such additional documents and take such additional
action as may be necessary to effectuate the provisions and
purposes of this Amendment.
2
By the signature hereto of each of their duly authorized
officers, all of the parties hereto mutually covenant and agree
as set forth herein (the covenants and agreements of the
Borrowers and Guarantors being joint and several).
Very truly yours,
LSB INDUSTRIES, INC.
L&S BEARING CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
LSB EXTRUSION CO.
INTERNATIONAL ENVIRONMENTAL
CORPORATION
CHP CORPORATION
KOAX CORP.
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
HERCULES ENERGY MFG. CORPORATION
CLIMATE MASTER, INC.
APR CORPORATION
CLIMATEX, INC.
LSB FINANCIAL CORP.
LSB LEASING CORP.
LSB IMPORT CORP.
LSB BEARING CORP.
SUMMIT MACHINE TOOL SYSTEMS, INC.
LSB EUROPA LIMITED
BOWERDEAN LIMITED
LSB INTERNATIONAL LIMITED
By:
--------------------------------
Title
-----------------------------
AGREED AND ACCEPTED:
CONGRESS FINANCIAL CORPORATION AND
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
-------------------------------------
Title:
----------------------------------
3
March 30, 1994
Congress Financial Corporation
and Congress Financial
Corporation (Central)
1133 Avenue of the Americas
New York, New York 10036
Re: Seventeenth Amendment to Loan
Agreement
Ladies and Gentleman:
LSB Industries, Inc. ("LSB") and those certain
subsidiaries of LSB identified on the execution page hereof (LSB
and such subsidiaries being hereinafter collectively referred to
as the "LSB Companies") have requested that Congress Financial
Corporation and Congress Financial Corporation (Central)
(collectively, "Congress") modify the Loan Documents (hereinafter
defined) in order to permit: (a) the sale to Prime Financial
Corp. ("Prime") of existing and future accounts receivable
(individually called an "Account" and collectively called the
"Accounts") of one or more of the LSB Companies; and (b) the
guaranty by LSB of the financing of Prime's purchase of such
Accounts by Bank IV Oklahoma, N.A. ("Bank IV"). Congress is
willing to agree to such request, subject to the following terms:
1. Loan Documents. As used herein, the term "Loan Documents"
will be deemed to refer to the following documents:
1.1 Loan Agreement dated March 29, 1984 (the "Loan
Agreement"), among Congress as the lender and those
LSB Companies named therein as the borrowers and
guarantors;
1.2 Sixteen Amendments to the Loan Agreement variously
dated (the "Amendments") among those LSB Companies
named therein, Congress and certain other parties;
1.3 The other "Financing Agreements", as defined in the
Loan Agreement;
1.4 Agreement dated March 31, 1989 (the "Equity Bank
Agreement") among Congress and Northwest Federal
Savings and Loan Association, now known as Equity
Bank for Savings, F.A. ("Equity Bank"), as amended;
and
1
1.5 Letter Agreement dated August 24, 1990 (the "Letter
Agreement") among Congress and Equity Bank; which
Letter Agreement was consented and agreed to by the
LSB Companies.
2. Loan Documents Modification. Notwithstanding anything
contained in the Loan Documents to the contrary, the LSB
Companies and Congress hereby agree as follows:
2.1 Congress acknowledges that Prime may from time to
time hereafter purchase Accounts from the LSB
Companies. Congress hereby consents, subject to the
terms hereof, to such purchases during the period
(the "Selling Period") from the date hereof to the
earlier of: (a) the occurrence of an Event of
Default under the Loan Documents; and (b) June 30,
1994;
2.2 The purchase price for an Account purchased by Prime
from the LSB Companies shall be 100% of the invoice
amount of an Account (the "Purchase Price"). The
Purchase Price shall be disbursed, without offset or
deduction, directly to Congress for the respective
accounts of the selling LSB Companies. If all
monetary obligations of the LSB Companies to Congress
under the Loan Documents are paid in full at the time
or as a result of any such disbursement to Congress
by Prime, Congress will within one (1) business day
of LSB's oral or written request, remit the full
amount received from Prime to LSB for the account of
the selling LSB Companies;
2.3 Upon receipt by Congress of the Purchase Price for
any Accounts purchased by Prime in accordance with
paragraph 2.2 hereof during the Selling Period,
Congress' security interest in such purchased
Accounts will terminate and be deemed released and
Congress will, at the request of Prime or Bank IV,
execute any partial releases or other documents as
Prime or Bank IV may reasonably request in order to
effectuate or evidence the termination and release of
Congress' security interest in such purchased
Accounts;
2.4 Congress hereby consents to LSB's unconditionally
guaranteeing to Bank IV the repayment of any loan or
loans (including associated fees and expenses) made
to Prime by Bank IV in connection with the financing
of Accounts purchased from the LSB Companies in
accordance herewith;
2
2.5 Notwithstanding anything contained in Sections 3.5
and 3.7 of the Loan Agreement (which was made a part
of the Loan Agreement pursuant to Section IV of the
Seventh Amendment to Loan Agreement), from and after
the date hereof and at any time LSB shall have the
right to prepay in full the unpaid principal balance
plus all accrued interest due and owing under that
certain Promissory Note dated December 31, 1989, made
by LSB in favor of LSB Chemical Corp.
2.6 Congress waives any default occasioned by any
advances, loans or investments made by one or more of
the LSB Companies in violation of said Sections 3.5
and 3.7 prior to the date hereof.
2.7 The Loan Documents are hereby deemed amended as
necessary to conform to the provisions set forth
herein and in the event of a conflict between the
terms of the Loan Documents and this agreement, this
agreement will control; and
2.8 Section 9.1 of each of the Accounts Agreements (as
defined in the Loan Agreement), as heretofore
amended, is hereby deleted and replaced with the
following:
"9.1 This Agreement shall become effective upon
acceptance by you and shall continue in full force
and effect for a term ending June 30, 1994, unless
sooner terminated as herein provided. You shall have
the right to terminate this Agreement immediately at
any time upon the occurrence of an Event of Default
(as defined in the Loan Agreement). No termination
of this Agreement, however, shall relieve or
discharge us of our duties, obligations and covenants
hereunder until all Obligations have been paid in
full, and your continuing security interest in the
Collateral shall remain in effect until such
Obligations have been fully discharged. No provision
hereof shall be modified or amended orally or by
course of conduct, but only by a written instrument
expressly referring hereto signed by both parties."
2.9 Congress will provide Bank IV with prior written or
telefacsimile notice to either Mr. Robert R. Gilbert
at (918) 749-4276 or Mr. Wade Edmundson at (918) 749-
4276, of the occurence of an Event of Default that
would result in the termination of the Selling Period
at least one (1) business day prior to ceasing to
release Accounts purchased by Prime in accordance
with Section 2.3 of this letter.
3
3. Modification Fee. Contemporaneously herewith, LSB shall
cause to be delivered to Congress, in immediately available
funds, the sum of TWENTY-FIVE THOUSAND DOLLARS ($25,000.00) (the
"Fee") in consideration of Congress' agreement to the terms
hereof; provided, if subsequent to the date hereof Congress and
LSB enter into a financing arrangement (the "Refinancing") in
substitution or replacement of the financing arrangement set
forth in the Loan Documents, then the full amount of the Fee will
be credited against any closing fee payable to Congress in
connection with the Refinancing.
4. Continued Validity. Except as expressly set forth herein,
the Loan Documents will continue in full force and effect and the
LSB Companies will continue to have the right, to the extent
permitted under applicable law and regulatory authorities, to
sell Accounts to Equity Bank pursuant and subject to the terms of
the Equity Bank Agreement and the Letter Agreement.
5. Reliance. Bank IV may rely on Sections 2.3 and 2.4 of this
letter.
3
6. Counterpart Execution. This Agreement may be executed in
counterparts, each of which will be deemed an original document,
but all of which will constitute a single document.
LSB INDUSTRIES, INC.
L & S BEARING CO.
TRIBONETICS CORPORATION
LSB EXTRUSION CO.
ROTEX CORPORATION
SUMMIT MACHINE TOOL
MANUFACTURING CORP.
HERCULES ENERGY MFG.
CORPORATION
LSB FINANCIAL CORP.
LSB LEASING CORP.
LSB IMPORT CORP.
LSB BEARING CORP.
SUMMIT MACHINE TOOL
SYSTEMS, INC.
LSB EUROPA LIMITED
BOWERDEAN LIMITED
LSB INTERNATIONAL LIMITED
INTERNATIONAL ENVIRONMENTAL
CORPORATION
CHP CORPORATION
CLIMATE MASTER, INC.
KOAX CORP.
APR CORPORATION
CLIMATEX, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
(the "LSB Companies")
CONSENTED AND AGREED TO:
PRIME FINANCIAL CORP.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
("Prime")
CONSENTED AND AGREED TO:
CONGRESS FINANCIAL CORPORATION
AND CONGRESS FINANCIAL
CORPORATION (CENTRAL)
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Date Executed:
-------------------
("Congress")
ACKNOWLEDGED:
BANK IV OKLAHOMA, N.A.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
("Bank IV")
EXHIBIT 4.23
AMENDMENT AGREEMENT
-------------------
THIS AMENDMENT AGREEMENT, dated as of March 30, 1994 (this
"Agreement"), is among EL DORADO CHEMICAL COMPANY ("EDC"), SLURRY
EXPLOSIVE CORPORATION ("Slurry"), HOUSEHOLD COMMERCIAL FINANCIAL
SERVICES, INC. ("HCFS"), and PRIME FINANCIAL CORPORATION
("Prime").
BACKGROUND
A. EDC, Slurry and HCFS are parties to the Second Amended and
Restated Working Capital Loan Agreement, dated as of January 21,
1992 (as heretofore and hereafter amended or supplemented, the
"Working Capital Loan Agreement").
B. EDC, Slurry, HCFS, Connecticut Mutual Life Insurance Life
Insurance Company and C.M. Life Insurance Company are parties to
the Amended and Restated Secured Credit Agreement, dated as of
January 21, 1992 (as heretofore or hereafter amended or
supplemented, the "Credit Agreement").
C. HCFS and Equity Bank for Savings, F.A. ("Equity Bank") are
parties to the Agreement Regarding Accounts Receivable, dated
May, 1990 (as heretofore or hereafter amended, the "Equity Bank
Agreement").
D. EDC and Prime are parties to an Agreement for Purchase of
Receivables, dated as of March 29, 1994 (as amended, supplemented
or otherwise modified with Lender's prior written consent, which
consent shall not be unreasonably withheld, the "Prime
Receivables Purchase Agreement").
E. The parties hereto hereby desire to amend the Working
Capital Loan Agreement, the Credit Agreement and the Equity Bank
Agreement in certain respects to reflect the entering into of the
Prime Receivables Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1
1. Definitions. Capitalized terms used in this Agreement and
not otherwise defined herein shall have the meanings assigned
thereto in the Working Capital Loan Agreement.
2. Receivables Purchase Agreement. The definition of
"Receivables Purchase Agreement" where it appears in the Working
Capital Loan Agreement, the Credit Agreement and the Equity
Agreement shall include the Prime Receivables Purchase Agreement.
3. Agreement of Prime. Prime hereby agrees that it shall have
no interest in any funds received from the Lockbox (as defined in
the Equity Bank Agreement) or otherwise to the extent that such
funds relate to accounts receivable other than Prime's
Receivables (hereafter defined) that have been purchased by Prime
pursuant to the terms of the Prime Receivables Purchase Agreement
(such accounts receivable other than Prime's Receivables,
including receivables repurchased by EDC, being hereafter
referred to as the "Lender's Receivables"). Prime acknowledges
that HCFS has a continuing lien upon, and security interest in,
the Lender's Receivables and all funds, cash, instruments,
securities and other things of value which are at any time paid,
deposited, credited or held or all other property of EDC or
Slurry from time to time in the possession or under the control
of, or in transit to the Lockbox or Equity Bank, except any of
the foregoing which relate to Prime's Receivables, and all
proceeds of the foregoing, to the extent they relate to Lender's
Receivables.
4. Prime's Receivables. HCFS acknowledges that Prime is from
time to time purchasing accounts receivable from EDC pursuant to
the terms of the Prime Receivables Purchase Agreement ("Prime's
Receivables") it being understood that Prime's Receivables shall
not include receivables repurchased by EDC from Prime.
Notwithstanding anything in the Working Capital Loan Agreement or
the Credit Agreement or other agreements related thereto to the
contrary, HCFS acknowledges and agrees that: (i) Prime is the
owner of and has a continuing lien upon, and security interest
in, all accounts receivable sold to Prime by EDC that are not
repurchased by EDC and all funds, cash, instruments, securities
and other things of value which are at any time paid, deposited,
credited or held, and all other property of EDC from time to time
in possession or under control of, and in transit to Prime, and
all proceeds of the foregoing, to the extent that they relate to
Prime's Receivables; (ii) it has no security interest or lien in
and to the Prime Receivables or the proceeds thereof; and (iii)
it has no interest in any funds, cash, installments, securities,
collections and other things of value which relate to Prime's
Receivables (including, but not limited to, funds in the Lockbox
that relate to Prime's Receivables).
2
5. Prime Receivables Purchase Agreement. EDC and Prime each
hereby agree that it shall not amend or modify the Prime
Receivables Purchase Agreement without the prior written consent
of HCFS and Bank IV.
6. Reliance. Bank IV may rely on Section 4 of this Agreement.
7. Cooperation. The parties hereto hereby agree that they
shall cooperate with each other, in good faith, to execute and
deliver such other documents as such other party may reasonably
request in order to further effect the terms of this Agreement.
8. Miscellaneous. EDC hereby agrees to pay, or reimburse HCFS
for, on demand, any and all reasonable costs and expenses,
including reasonable attorneys' fees and disbursements, incurred
in connection with this Agreement. This Agreement shall be
governed by, and interpreted in accordance with, the laws of the
State of Illinois. This Agreement may be executed in any number
of counterparts, and by the different parties on different
counterparts, each of which shall constitute an original, but all
of which shall constitute one and the same agreement. The Credit
Agreement, the Working Capital Loan Agreement and the Equity Bank
Agreement, as amended hereby, remain in full force and effect.
9. Termination. This Agreement shall terminate on August 31,
1994.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective duly authorized
officers as of the date above written.
EL DORADO CHEMICAL COMPANY
By
-------------------------------
Name
-----------------------------
Title
----------------------------
SLURRY EXPLOSIVE CORPORATION
By
-------------------------------
Name
-----------------------------
Title
----------------------------
3
HOUSEHOLD COMMERCIAL FINANCIAL
SERVICES, INC.
By
-------------------------------
Name
-----------------------------
Title
----------------------------
PRIME FINANCIAL CORPORATION
By
-------------------------------
Name
-----------------------------
Title
----------------------------
ACKNOWLEDGED:
BANK IV, OKLAHOMA, N.A.
By
-------------------------------
Name
-----------------------------
Title
----------------------------
EQUITY BANK FOR SAVINGS, F.A.
By
-------------------------------
Name
-----------------------------
Title
----------------------------
4
EXHIBIT 10.6
------------
LSB INDUSTRIES, INC.
1993 STOCK OPTION AND INCENTIVE PLAN
The Board of Directors of LSB Industries, Inc., a Delaware
corporation (the "Company"), has adopted this 1993 Stock Option
and Incentive Plan (the "Plan"), effective the ----- day of
- ----------, 1993, as follows:
1. Purpose. This Plan permits selected officers and key
employees, prospective employees, consultants and independent
contractors of the Company or any Subsidiary who bear a large
measure of responsibility for the success of the Company to
acquire and retain a proprietary interest in the Company and to
participate in the future of the Company as shareholders. The
purpose of this Plan is to advance the interests of the Company
and its shareholders by enabling the Company and the subsidiaries
to offer to its employee-directors, officers, key employees,
consultants and independent contractors, long-term performance
based stock and/or other equity interests in the Company, thereby
enhancing its ability to attract, retain and reward such
individuals, and by providing an incentive for employee-
directors, officers, key employees to render outstanding service
to the Company and to the Company's shareholders.
2. Definitions. For purposes of the Plan, the following terms
shall be defined as set forth herein:
2.1 "Act" means the Securities Act of 1933, as amended
from time to time, or any successor statute or
statutes thereto.
2.2 "Agreement" means the agreement between the Company
and the Holder setting forth the terms and conditions
of an award under the Plan.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change of Control" means a change of control of the
Company pursuant to Section hereof.
2.5 "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute
or statutes thereto.
1
2.6 "Committee" means the Stock Option Committee of the
Board or any other committee of the Board which the
Board may designate. In all events, the Committee
shall consist only of non-employee directors of the
Company.
2.7 "Common Stock" means the Common Stock of the Company,
par value $.10 per share.
2.8 "Disability" means disability as determined under the
procedures established by the Committee for purposes
of the Plan.
2.9 "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, or any successor
statute or statutes thereto.
2.10 "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations
issued thereunder, means, as of any given date:
2.10.1 the closing price of the Common Stock on the
last preceding day on which the Common Stock
was traded, as reported on a national
securities exchange; and,
2.10.2 if the fair market value of the Common Stock
cannot be determined pursuant to clause (i)
hereof, such price as the Committee shall
determine.
2.11 "Formula Price Per Share" means the highest gross
price (before brokerage commissions, soliciting
dealers' fees and similar charges) paid for any share
of Common Stock at any time during the ninety (90)
day period immediately prior to the Change of Control
(whether by way of exchange, conversion,
distribution, liquidation or otherwise) paid or to be
paid for any share of Common Stock in connection with
a Change of Control. If the consideration paid or to
be paid in any transaction that results in a Change
of Control consists, in whole or in part, of
consideration, other than cash, the Board shall take
such action, as in its judgment it deems appropriate,
to establish the cash value of such consideration,
but such valuation shall not be less than the value,
if any, attributed to such consideration by any other
party to such transaction that results in a Change of
Control.
2
2.12 "Holder" means an eligible employee-director,
officer, key employee, consultant or independent
contractor of the Company or a Subsidiary who has
received an award under the Plan.
2.13 "Incentive Stock Option" or "ISO" means any Stock
Option intended to be and designated as an "incentive
stock option" within the meaning of Section 422 of
the Code.
2.14 "Non-Qualified Stock Option" means any Stock Option
that is not an Incentive Stock Option.
2.15 "SAR Value" means the excess of the Fair Market Value
of one share of Common Stock over the exercise price
per share specified in a related Stock Option in the
case of a Stock Appreciation Right granted in tandem
with a Stock Option and the Stock Appreciation Right
price per share in the case of a Stock Appreciation
Right awarded on a free-standing basis multiplied by
the number of shares in respect of which the Stock
Appreciation Right shall be exercised, on the date of
exercise.
2.16 "Section 16(b) Holder" means such officer or director
or ten percent (10%) beneficial owner of Common Stock
subject to Section 16(b) of the Exchange Act.
2.17 "Stock Appreciation Right" means the right, pursuant
to an award granted under Section 7 hereof, to
recover an amount equal to the SAR Value.
2.18 "Stock Option" means any Incentive Stock Option or
Non-Qualified Stock Option to purchase shares of
Common Stock which is awarded pursuant to this Plan.
2.19 "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined
in Section 424(f) of the Code.
3. Administration.
3.1 Board; Committee. The Board shall create a committee
consisting of three members of the Board. The Board
may also appoint one member of the Board as an
alternate member of the Committee. Upon such
appointment, the Committee shall have all the powers,
privileges and duties set forth herein. The Board
may, from time to time, appoint members of any such
3
Committee in substitution for, or in addition to,
members previously appointed, may fill vacancies in
the Committee and may discharge the Committee. The
Committee shall select one of its members as its
Chairman and shall hold its meetings at such times
and places as it shall deem advisable. A majority of
its members shall constitute a quorum and all
determinations shall be made by a majority of such
quorum. Any determination reduced to writing and
signed by a majority of the members of the Committee,
shall be fully effective and a valid act of the
Committee as if it had been made by a majority vote
at a meeting duly called and held. The membership of
the Committee shall at all times be constituted so as
to not adversely affect the compliance of the Plan
with the requirements of Rule 16b-3 under the
Exchange Act, to the extent it is applicable, or with
the requirements of any other applicable law, rule or
regulation.
3.2 Power and Authority. The Committee shall have full
power and authority to do all things necessary or
appropriate to administer this Plan according to its
terms and provisions (excluding the power to appoint
members of the Committee and to terminate, modify, or
amend the Plan, except as otherwise authorized by the
Board), including, but not limited to the full power
and authority (subject to the express provisions of
this Plan):
3.2.1 to award Stock Options and Stock Appreciation
Rights, pursuant to the terms of this Plan,
to eligible individuals described under
Section 5 hereof;
3.2.2 to select the eligible individuals to whom
Stock Options or Stock Appreciation Rights,
or any combination thereof, if any, may from
time to time be awarded hereunder;
3.2.3 to determine the Incentive Stock Options,
Non-Qualified Stock Options, Stock
Appreciation Rights, or any combination
thereof, if any, to be awarded hereunder to
one or more eligible employees or persons;
3.2.4 to determine the number of shares to be
covered by each award granted hereunder;
4
3.2.5 to determine the terms and conditions not
inconsistent with the terms of the Plan, of
any award hereunder (including, but not
limited to, share price, any restrictions or
limitations, and any vesting, exchange,
surrender, cancellation, acceleration,
termination, exercise or forfeiture
provisions, as the Committee shall
determine);
3.2.6 to determine any specified performance goals
or such other factors or criteria which need
to be attained for the vesting of an award
granted hereunder;
3.2.7 to determine the terms and conditions under
which awards hereunder are to operate on a
tandem basis and/or in conjunction with or
apart from other equity awarded under this
Plan and cash awards made by the Company or
any Subsidiary outside of this Plan;
3.2.8 to determine the extent and circumstances
under which Common Stock and other amounts
payable with respect to an award hereunder
shall be deferred, which may be either
automatic or at the election of the Holder;
and
3.2.9 to substitute (i) new Stock Options for
previously granted Stock Options, which
previously granted Stock Options have higher
option exercise prices and/or contain other
less favorable terms, and (ii) new awards of
any other type for previously granted awards
of the same or other type, which previously
granted awards are upon less favorable terms.
3.3 Interpretation of Plan.
3.3.1 Subject to Sections 3.2 and 9 hereof, the
Committee shall have the authority at its
discretion to adopt, alter and repeal such
general and special administrative rules,
regulations, and practices governing the Plan
as it shall, from time to time, deem
advisable, to construe and interpret the
terms and provisions of this Plan and any
award issued under this Plan (and to
determine the form and substance of all
Agreements relating thereto), and to
otherwise supervise the administration of
this Plan.
5
3.3.2 Anything in this Plan to the contrary
notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall
any discretion or authority granted under
this Plan be so exercised, so as to
disqualify the Plan under Section 422 of the
Code, or, without the consent of the
Holder(s) affected, to disqualify any
Incentive Stock Option under Section 422 of
the Code.
3.3.3 Subject to Sections 3.2 and 9 hereof, all
decisions made by the Committee pursuant to
the provisions of this Plan shall be made in
the Committee's sole discretion and shall be
final and binding upon all persons granted
options pursuant to the Plan.
4. Shares Subject to Plan.
4.2 Number of Shares. The aggregate number of shares of
Common Stock reserved and available for distribution
under this Plan shall be 850,000 shares. If any
shares of Common Stock that are subject to a Stock
Option or Stock Appreciation Right cease to be
subject to such Stock Option or Stock Appreciation
Right, or any such award otherwise terminates without
a payment being made to the Holder in the form of
Common Stock, such shares shall again be available
for distribution in connection with future grants and
awards under this Plan. The number of shares
available for distribution under this Plan shall be
reduced by the number of shares of Common Stock
issued under this Plan upon the exercise of a Stock
Option.
4.3 Character of Shares. The Company may elect to
satisfy its obligations to a Holder exercising a
Stock Option entirely by issuing authorized and
unissued shares of Common Stock to such Holder,
entirely by transferring treasury shares to such
Holder, or in part by the issue of authorized and
unissued shares and the balance by the transfer of
treasury shares.
6
5. Eligibility.
5.1 General. Awards under this Plan may be made to: (i)
officers and other key employees of the Company or
any Subsidiary who are at the time of the grant of an
award under this Plan regularly employed by the
Company or any Subsidiary, including any full time
salaried officer or employee who is a member of the
Board (except as provided in the last sentence under
Section 3.1); and, (ii) consultants or independent
contractors whom the Board believes have contributed
or will contribute to the success of the Company.
5.2 Multiple Awards. The Committee shall from time to
time designate such employees, consultants or
independent contractors to whom options are to be
granted, and the number of shares to be subject to
each option. The Committee may at any time grant one
or more Stock Options or Stock Appreciation Rights or
a combination thereof to an individual to whom a
Stock Option or Stock Appreciation Right has
previously been granted under this or any other stock
option plan of the Company, whether or not such
previously granted Stock Option or Stock Appreciation
Right has been fully exercised.
5.3 Ineligibility for Awards. No person designated by
the Board to serve on the Committee, effective at
such future time so that he qualifies as a
"disinterested person" within the meaning of Rule
16b-3(c) of the Exchange Act, shall be eligible to
receive any awards under the Plan during the period
from the date such designation is made to the date
such designation becomes effective. Notwithstanding
Section 5.1 hereof, no member of the Committee, while
serving as such, shall be eligible to receive an
award under the Plan.
6. Stock Options.
6.1 Grant and Exercise. Stock Options granted under the
Plan may be of two types: (i) Incentive Stock Options
and (ii) Non-Qualified Stock Options. Only full-time
salaried officers or employees may be granted
Incentive Stock Options. Any individual eligible to
participate under this Plan may be granted Non-
Qualified Stock Options. Any Stock Option granted
under the Plan shall contain such terms, not
inconsistent with this Plan, as the Committee may
7
from time to time approve. The Committee shall have
the authority to grant to any eligible individual
Incentive Stock Options, Non-Qualified Stock Options,
or both types of Stock Options and, in each case, may
be granted alone, in tandem with, or without, or in
addition to Stock Appreciation Rights. To the extent
that any Stock Option (or portion thereof) does not
qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option.
Unless granted in substitution for another
outstanding award, Stock Options shall be granted for
no consideration other than services to the Company
or a Subsidiary.
6.2 Exercise Price.
6.2.1 Less Than 10% Shareholder. The exercise
price in any option granted under this Plan
to an individual who, at the time the Stock
Option is granted, does not own stock
possessing more than ten percent (10%) of the
total combined voting power of all classes of
stock of the Company or of any Subsidiary
(computed in accordance with the provisions
applicable to Section 422(b)(6) of the Code)
(a "less than 10% Shareholder") shall be not
less than the Fair Market Value of the shares
of Common Stock subject to the Stock Option
at the time the Stock Option is granted,
determined by the Committee in accordance
with the applicable regulations and rulings
of the Commissioner of the Internal Revenue
Service in effect at the time the Stock
Option is granted.
6.2.2 10% Shareholder. The exercise price in any
option granted under the Plan to an
individual who is not a less than ten percent
(10%) Shareholder (a "10% Shareholder") shall
be not less than one hundred ten percent
(110%) of the Fair Market Value of the shares
of Common Stock subject to the Stock Option
at the time the Stock Option is granted,
determined in accordance with the applicable
regulations and rulings of the Commissioner
of the Internal Revenue Service in effect at
the time the Stock Option is granted.
8
6.3 Option Term. The term of each Stock Option shall be
fixed by the Board, but no Stock Option shall be
exercisable more than ten (10) years (five (5) years,
in the case of an Incentive Stock Option granted to a
10% Shareholder) after the date on which the Stock
Option is granted.
6.4 Exercise of Non-Qualified Stock Options. Non-
Qualified Stock Options shall be exercisable at such
time or times and subject to such terms and
conditions as shall be determined by the Committee;
provided, however, that no Non-Qualified Stock Option
granted under this Plan may be exercised until after
the expiration of six (6) months from the date the
Stock Option is granted. If the Committee provides,
in its discretion, that any Stock Option is
exercisable only in installments, the Committee may
waive such installment exercise provisions at any
time at or after the time of grant in whole or in
part, based upon such factors as the Committee shall
determine; provided that the Committee cannot waive
the requirement that the Stock Option may not be
exercised until after the expiration of six (6)
months from the date the Stock Option is granted.
6.5 Exercise of Incentive Stock Options.
6.5.1 By an Employee. No Incentive Stock Option
granted under this Plan shall be exercisable
after the expiration of ten (10) years from
the date such ISO is granted, except that no
ISO granted to a person who is not a less
than 10% Shareholder shall be exercisable
after the expiration of five (5) years from
the date such option is granted. Employment
by a Subsidiary shall be employment by the
Company. Unless such requirements are waived
by the Committee, the employee, while still
in the employment of the Company, may
exercise the options as follows:
6.5.1.1 at any time after one (1) year of
continuous employment from the date
such ISO is granted, as to twenty
percent (20%) of the shares subject
to the option;
6.5.1.2 at any time after two (2) years of
such continuous employment from the
9
date such ISO is granted, as to an
additional twenty percent (20%) of
the shares subject to the option;
6.5.1.3 at any time after three (3) years
of such continuous employment from
the date such ISO is granted, as to
an additional thirty percent (30%)
of the shares subject to the
option; and
6.5.1.4 at any time after four (4) years of
such continuous employment from the
date such ISO is granted, as to all
of the shares remaining subject to
the option.
The Committee may decide in each case to what
extent leaves of absence for government or
military service, illness, temporary
disability, or other reasons, shall not
interrupt continuous employment.
6.5.2 Termination of Employment. Except as
otherwise expressly provided in Sections
6.5.3 and 6.5.4 of this Plan or in the
Agreement, no Stock Option may be exercised
at any time unless the Holder thereof is then
an employee of the Company or a Subsidiary.
6.5.3 By a Former Employee. No person may exercise
an ISO after he is no longer an employee of
the Company or any Subsidiary; except that if
an employee ceases to be an employee on
account of physical or mental disability as
defined in Section 22(e)(3) of the Code
("Former Employee"), he may exercise the ISO
within twelve (12) months after the date on
which he ceased to be an employee, for the
number of shares for which he could have
exercised at the time he ceased to be an
employee. No ISO granted under this Plan
shall in any event be exercised by such
Former Employee after the expiration of ten
(10) years from the date such ISO is granted,
except that no ISO granted to a person who is
a 10% Shareholder may be exercisable after
the expiration of five (5) years from the
date such ISO is granted.
10
6.5.4 In Case of Death. If any employee or Former
Employee who was granted an ISO dies prior to
the termination of such ISO, such ISO may be
exercised within twelve (12) months after the
death of the employee or Former Employee by
his estate, or by a person who acquired the
right to exercise such ISO by bequest or
inheritance, or by reason of the death of
such employee or Former Employee, provided
that:
6.5.4.1 such employee died while an
employee of the Company or a
Subsidiary; or
6.5.4.2 such Former Employee had ceased to
be an employee of the Company or a
Subsidiary on account of physical
or mental disability and died
within three (3) months after the
date on which he ceased to be such
employee.
Such ISO may be exercised only as to the
number of shares for which he could have
exercised at the time the employee or Former
Employee died. No ISO granted under this
Plan shall in any event be exercised in case
of death of an employee or Former Employee
after the expiration of ten (10) years from
the date such ISO is granted, except that no
ISO granted to a 10% Shareholder shall be
exercisable after the expiration of five (5)
years from the date such ISO is granted.
6.5.5 The Committee may, in its discretion, waive
the installment exercise provisions at any
time at or after the time of grant, in whole
or in part, based on such factors as the
Committee shall determine; provided that at
all times no ISO may be exercised until the
expiration of six (6) months from the date
that the Stock Option was granted.
6.6 Termination of Options. A Stock Option granted under
this Plan shall be considered terminated, in whole or
in part, to the extent that it can no longer be
exercised for shares originally subject to it,
provided that a Stock Option granted shall be
11
considered terminated at an earlier date upon
surrender for cancellation by the Holder to whom such
Stock Option was granted.
6.7 Notice of Exercise and Payment. Subject to any
installment, exercise and waiting period provisions
that are applicable in a particular case, Stock
Options granted under this Plan may be exercised, in
whole or in part, at any time during the term of the
Stock Option, by giving written notice of such
exercise to the Company identifying the Stock Option
being exercised and specifying the number of shares
then being purchased. Such notice shall be
accompanied by payment in full of the exercise price,
which shall be in cash or, unless otherwise provided
in the Agreement, in whole shares of Common Stock
which are already owned by the Holder of the Stock
Option or, unless otherwise provided in the
Agreement, partly in cash and partly in such Common
Stock. Cash payments shall be made by wire transfer,
certified check or bank check or personal check, in
each case payable to the order of the Company;
provided, however, that the Company shall not be
required to deliver certificates for shares of Common
Stock with respect to which a Stock Option is
exercised until the Company has confirmed the receipt
of good and valuable funds in payment of the purchase
price thereof. Payments in the form of Common Stock
(which shall be valued at the Fair Market Value of a
share of Common Stock on the date of exercise) shall
be made by delivery of stock certificates in
negotiable form which are effective to transfer good
and valid title thereto to the Company, free of any
liens or encumbrances, with signature guaranteed by a
bank or investment banking firm.
6.8 Issuance of Shares. As soon as practicable after its
receipt of such notice and payment, the Company shall
cause one or more certificates for the shares so
purchased to be delivered to the Holder or his or her
estate, as the case may be. No Holder or estate
shall have any of the rights of a shareholder with
reference to shares of Common Stock subject to a
Stock Option until after the Stock Option has been
exercised in accordance with Section 6.7 and
certificates representing the shares of Common Stock
so purchased by the Holder pursuant to the Stock
Option have been delivered to the Holder or estate.
12
6.9 Partial Exercise. A Stock Option granted under this
Plan may be exercised as to any part of the shares
for which it could be exercised. Such a partial
exercise of a Stock Option shall not affect the right
to exercise the Stock Option from time to time in
accordance with this Plan as to the remaining shares
of Common Stock subject to the Stock Option.
6.10 $100,000 Per Year Limitation. To the extent that the
aggregate Fair Market Value of Common Stock with
respect to which Incentive Stock Options are
exercisable for the first time by a Holder during any
calendar year (under all of the Company's plans)
exceeds $100,000, such excess Stock Options shall be
treated as Non-Qualified Stock Options for purposes
of Section 422 of the Code.
6.11 Buyout and Settlement Provisions. The Committee may
at any time offer to buy out for cash or otherwise
settle a Stock Option previously granted, based upon
such terms and conditions as the Committee shall
establish and communicate to the Holder at the time
that such offer is made, including a settlement for
exchange of a different award under the Plan for the
surrender of the Stock Option.
7. Stock Appreciation Rights.
7.1 Grant and Exercise. Stock Appreciation Rights may be
granted in tandem with ("Tandem Stock Appreciation
Right") or in conjunction with all or part of any
Stock Option granted under this Plan or may be
granted on a free-standing basis. In the case of a
Non-Qualified Stock Option, a Tandem Stock
Appreciation Right may be granted either at or after
the time of the grant of such Non-Qualified Stock
Option. In the case of an Incentive Stock Option, a
Tandem Stock Appreciation Right may be granted only
at the time of the grant of such Incentive Stock
Option. Unless granted in substitution for another
outstanding award, Stock Appreciation Rights shall be
granted for no consideration other than services to
the Company or a Subsidiary.
7.2 Termination. A Tandem Stock Appreciation Right shall
terminate and shall no longer be exercisable upon the
termination or exercise of the related Stock Option,
except that, unless otherwise determined by the
Board, a Tandem Stock Appreciation Right granted with
13
respect to less than the full number of shares
covered by a related Stock Option shall not be
reduced until after the number of shares remaining
under the related Stock Option equals the number of
shares covered by the Tandem Stock Appreciation
Right.
7.3 Method of Exercise. A Tandem Stock Appreciation
Right may be exercised by a Holder, in accordance
with Section 7.4 hereof, by surrendering the
applicable portion of the related Stock Option. Upon
such exercise and surrender, the Holder shall be
entitled to receive such amount in the form of
payment determined in the manner prescribed in
Section 7.5 hereof. Stock Options which have been so
surrendered, in whole or in part, shall no longer be
exercisable to the extent Tandem Stock Appreciation
Rights have been exercised.
7.4 Exercisability. Tandem Stock Appreciation Rights
shall be exercisable only at such time or times and
to the extent that the Stock Options to which they
relate shall be exercisable in accordance with the
provisions of Section 6 hereof and this Section 7,
and may be subject to such additional limitations on
exercisability as shall be determined by the
Committee and set forth in the Agreement. Other
Stock Appreciation Rights shall be exercisable at
such time or times and subject to such terms and
conditions as shall be determined by the Committee
and set forth in the Agreement. Notwithstanding
anything to the contrary contained herein (including
the provisions of Section 8.1 hereof), any Stock
Appreciation Right granted to a Section 16(b) Holder
to be settled wholly or partially in cash (i) shall
not be exercisable during the first six (6) months of
the term of such Stock Appreciation Right, except
that this special limitation shall not apply in the
event of death or disability of such Holder prior to
the expiration of the six (6) month period, and (ii)
shall only be exercisable during the period beginning
on the third business day following the date of
release for publication of the Company of quarterly
or annual summary statements of sales and earnings
and ending on the twelfth (12) business day following
such date.
14
7.5 Receipt of SAR Value. Upon the exercise of a Stock
Appreciation Right, a Holder shall be entitled to
receive up to, but not more than, an amount in cash
and/or shares of Common Stock equal to the SAR Value
with the Committee having the right to determine the
form of payment.
7.6 Shares Affected Under Plan. Upon the exercise of a
Tandem Stock Appreciation Right, the Stock Option or
part thereof to which such Tandem Stock Appreciation
Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth
in Section 4.1 hereof on the number of shares of
Common Stock to be issued under the Plan, but only to
the extent of the number of shares, if any, issued
under the Tandem Stock Appreciation Right at the time
of exercise based upon the SAR Value.
7.7 Limited Stock Appreciation Rights. The Committee may
grant "Limited Stock Appreciation Rights", i.e.,
Stock Appreciation Rights that become exercisable
upon the occurrence of one or more of the events
which trigger a Change of Control as defined in
Section 8.2 hereof, and shall be settled in an amount
equal to the Formula Price Per Share, subject to such
other terms and conditions as the Committee may
specify; provided, however, if any Limited Stock
Appreciation Right is granted to a Section 16(b)
Holder such Limited Stock Appreciation Right (i)
shall only be exercisable within sixty (60) days
after the event triggering the Change of Control; and
(ii) may not be exercised during the first six (6)
months after the date of grant of such Limited Stock
Appreciation Right (except in the event of death or
disability of such Holder prior to the expiration of
the six (6) month period); and (iii) shall only be
exercisable in the event that the date of the Change
of Control was outside the control of such Holder;
and (iv) shall only be settled in cash in an amount
equal to the Formula Price Per Share.
8. Acceleration.
8.1 Acceleration Upon Change of Control. Unless the
award Agreement provides otherwise or unless the
Holder waives the application of this Section 8.1
prior to a Change of Control (as hereinafter
defined), in the event of a Change of Control, each
15
outstanding Stock Option, Stock Appreciation Right
and Limited Stock Appreciation Right granted under
the Plan shall immediately become exercisable in full
notwithstanding the vesting or exercise provisions
contained in the Agreement.
8.2 Change of Control Defined. A "Change of control"
shall be deemed to have occurred upon any of the
following events:
8.2.1 The consummation of any of the following
transactions: any merger, reverse stock
split, recapitalization or other business
combination of the Company, with or into
another corporation, or an acquisition of
securities or assets by the Company, pursuant
to which the Company is not the continuing or
surviving corporation or pursuant to which
shares of Common Stock would be converted
into cash, securities or other property,
other than a transaction in which the
majority of the holders of Common Stock
immediately prior to such transaction will
own at least fifty percent (50%) of the total
voting power of the then-outstanding
securities of the surviving corporation
immediately after such transaction; or
8.2.2 A transaction in which any person (as such
term is defined in Sections 13(d)(3) and
14(d)(2) of the Exchange Act), corporation or
other entity (other than the Company, or any
profit-sharing, employee ownership or other
employee benefit plan sponsored by the
Company or any Subsidiary, or any trustee of
or fiduciary with respect to any such plan
when acting in such capacity, or any group
comprised solely of such entities): (i) shall
purchase any Common Stock (or securities
convertible into Common Stock) for cash,
securities or any other consideration
pursuant to a tender offer or exchange offer,
without the prior consent of the Board, or
(ii) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly (in one
transaction or a series of transactions), of
securities of the Company representing fifty
percent (50%) or more of the total voting
16
power of the then outstanding securities of
the Company ordinarily (and apart from the
rights accruing under special circumstances)
having the right to vote in the election of
directors (calculated as provided in Rule
13d-3(d) in the case of rights to acquire the
Company's securities); or
8.2.3 If, during any period of two consecutive
years, individuals who at the beginning of
such period constituted the entire Board and
any new director whose election by the Board,
or nomination for election by the Company's
stockholders was approved by a vote of at
least two-thirds of the directors then still
in office who either were directors at the
beginning of the period or whose election or
nomination for election by the stockholders
was previously so approved, cease for any
reason to constitute a majority thereof.
8.3 General Waiver by Board. The Committee may, after
grant of an award, accelerate the vesting of all or
any part of any Stock Option, and/or waive any
limitations or restrictions, if any, for all or any
part of an award.
8.4 Acceleration Upon Termination of Employment. In the
case of a Holder whose employment or affiliation with
the Company or a Subsidiary is involuntarily
terminated for any reason (other than for cause), the
Committee may, at its option and in its sole
discretion, accelerate the vesting of all or any part
of any award and/or waive, in whole or in part, any
or all of the remaining deferral limitations or
restrictions imposed hereunder or pursuant to the
Agreement.
9. Amendments and Termination.
9.1 Amendments to Plan; Termination. The Board may at
any time, and from time to time, amend any of the
provisions of the Plan, and may at any time suspend
or terminate the Plan; provided, however, that no
such amendment shall be effective unless and until it
has been duly approved by the stockholders of the
outstanding shares of Common Stock if (i) such
amendment materially increases the benefits accruing
17
to participants under this Plan; (ii) such amendment
materially increases the number of securities which
may be issued under this Plan; (iii) such amendment
materially modifies the requirements as to
eligibility for participation in this Plan; or, (iv)
the failure to obtain such approval would adversely
affect the compliance of the Plan with the
requirements of Rule 16b-3 under the Exchange Act, or
with the requirements of any other applicable law,
rule or regulation.
9.2 Amendments to Individual Awards. The Board may amend
the terms of any award granted under the Plan;
provided, however, that subject to Section 11 hereof,
no such amendment may be made by the Board which in
any material respect impairs the rights of the Holder
without the Holder's consent.
10. Term of Plan.
10.1 Effective Date. The Plan shall be effective as of
-----------------------, 1993 ("Effective Date"),
subject to the approval of the Plan by the
stockholders of the Company within one year after the
Effective Date. Any awards granted under the Plan
prior to such approval shall be effective when made
(unless otherwise specified by the Committee at the
time of grant) but shall be conditioned upon, and
subject to, such approval of the Plan by the
Company's stockholders and approval of the Company's
application to list the shares of the Company's
Common Stock covered by the Plan on the American
Stock Exchange (and no awards shall vest or otherwise
become free of restrictions prior to such approvals).
10.2 Termination Date. No award shall be granted pursuant
to the Plan on or after the tenth (10th) anniversary
of the Effective Date, but awards granted prior to
such tenth (10th) anniversary may extend beyond that
date. The Plan shall terminate at such time as no
further awards may be granted and all awards granted
under the Plan are no longer outstanding.
11. Adjustment Upon Change of Shares. Subject to any required
action by the stockholders of the Company, the number of shares
of Common Stock for which Stock Options may thereafter be
granted, and the number of shares of Common Stock then subject to
Stock Options previously granted, and the price per share payable
upon exercise of such Stock Option and the number of shares and
18
exercise price relating to Stock Appreciation Rights, shall be
proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock of the Company resulting
from a subdivision or consolidation of shares of Common Stock or
the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of shares of Common
Stock effected without receipt of consideration by the Company.
11.1 If the Company is reorganized or consolidated or
merged with another corporation, in which the Company
is the non-surviving corporation, a Holder of an
outstanding Stock Option and/or Stock Appreciation
Right granted under this Plan shall be entitled
(subject to the provisions of this Section 11) to
receive options and/or stock appreciation rights
covering shares of such reorganized, consolidated or
merged corporation in the same proportion as granted
to Holder prior to such reorganization, consolidation
or merger at an equivalent exercise price, and
subject to the same terms and conditions as this
Plan. For purposes of the preceding sentence, the
excess of the aggregate Fair Market Value of shares
subject to the option immediately after the
reorganization, consolidation or merger over the
aggregate exercise price of such shares shall not be
more than the excess of the aggregate Fair Market
Value of all shares of Common Stock subject to the
option or Stock Appreciation Right immediately before
such reorganization, consolidation or merger over the
aggregate exercise price of such shares of Common
Stock, and the new stock option or stock appreciation
right or assumption of the old Stock Option or old
Stock Appreciation Right by any surviving corporation
shall not give the Holder additional benefits which
he did not have under the old Stock Option or Stock
Appreciation Right.
11.2 To the extent that the foregoing adjustments relate
to the shares of Common Stock of the Company, such
adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding
and conclusive, provided that each Incentive Stock
Option granted pursuant to this Plan shall not be
adjusted in a manner that causes the Incentive Stock
Option to fail to continue to qualify as an incentive
stock option within the meaning of Section 422 of the
Code.
19
11.3 Except as expressly provided in this Section 11, the
Holder shall have no rights by reason of any
subdivision or consolidation of shares of stock of
any class or the payment of any stock dividend or any
other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution,
liquidation, merger, consolidation, reorganization or
spin-off of assets or stock of another corporation,
and any issue by the Company of shares of stock of
any class, or securities convertible into shares of
stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common
Stock subject to the Stock Option or the number or
price of Stock Appreciation Rights granted under this
Plan.
11.4 The grant of a Stock Option or Stock Appreciation
Right pursuant to this Plan shall not affect in any
way the right or power of the Company to make
adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to
merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or
assets.
12. General Provisions.
12.1 Investment Representations. The Committee may
require each person acquiring shares of Common Stock
pursuant to an award under this Plan to represent to
and agree with the Company in writing that the Holder
is acquiring the shares for investment without a view
to distribution thereof.
12.2 Additional Incentive Arrangements. Nothing contained
in this Plan shall prevent the Board from adopting
such other or additional incentive arrangements as it
may deem desirable, including, but not limited to,
the granting of Stock Options and the awarding of
stock and cash otherwise than under this Plan; and
such arrangements may be either generally applicable
or applicable only in specific cases.
12.3 No Right of Employment. Nothing contained in this
Plan or in any award hereunder shall be deemed to
confer upon any employee of the Company or any
Subsidiary any right to continued employment with the
20
Company or any Subsidiary, nor shall it interfere in
any way with the right of the Company or any
Subsidiary to terminate the employment of any of its
employees at any time.
12.4 Withholding Taxes. Not later than the date as of
which an amount first becomes includible in the gross
income of the Holder for federal income tax purposes
with respect to any award under the Plan, the Holder
shall pay to the Company, or make arrangements
satisfactory to the Company regarding the payment of,
any federal, state and local taxes of any kind
required by law to be withheld or paid with respect
to such amount. If permitted by the Board, tax
withholding or payment obligations may be settled
with Common Stock, including Common Stock that is
part of the award that gives rise to the withholding
requirement. The obligations of the Company under
this Plan shall be conditional upon such payment or
arrangements and the Company shall, to the extent
permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to
the Holder from the Company.
12.5 Governing Law. This Plan and all awards made and
actions taken thereunder shall be governed by and
construed in accordance with the laws of the State of
Delaware (without regard to choice of law
provisions).
12.6 Other Benefit Plans. Any award granted under this
Plan shall not be deemed compensation for purposes of
computing benefits under any retirement plan of the
Company or any Subsidiary and shall not affect any
benefits under any other benefit plan now or
subsequently in effect under which the availability
or amount of benefits is related to the level of
compensation (unless required by specific reference
in any such other plan to awards under this Plan).
12.7 Employee Status. A leave of absence, unless
otherwise determined by the Board prior to the
commencement thereof, shall not be considered a
termination of employment. Any awards granted under
this Plan shall not be affected by any change of
employment, so long as the Holder continues to be an
employee of the Company or any Subsidiary.
21
12.8 Non-Transferability. Other than the transfer of a
Stock Option or Stock Appreciation Right by will or
by the laws of descent and distribution, no award
under this Plan may be alienated, sold, assigned,
hypothecated, pledged, exchanged, transferred,
encumbered or charged, and any attempt to alienate,
sell, assign, hypothecate, pledge, exchange,
transfer, encumber or charge the same shall be void.
No right or benefit hereunder shall in any manner be
liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such
benefit. Unless otherwise provided in this Plan or
the Agreement, any Stock Option or Stock Appreciation
Right granted under this Plan is only exercisable
during the lifetime of the Holder by the Holder or by
his guardian or legal representative.
12.9 Applicable Laws. The obligations of the Company with
respect to all awards under this Plan shall be
subject to (i) all applicable laws, rules and
regulations, including, without limitation, the
requirements of all federal securities laws, rules
and regulations and state securities and blue sky
laws, rules and regulations, and such approvals by
any governmental agencies as may be required,
including, without limitation, the effectiveness of a
registration statement under the Act, and (ii) the
rules and regulations of any national securities
exchange on which the Common Stock may be listed or
the NASDAQ National Market System if the Common Stock
is designated for quotation thereon.
12.10 Conflicts. If any of the terms or provisions of the
Plan conflict with the requirements of Rule 16b-3
under the Exchange Act, or with the requirements of
any other applicable law, rule or regulation, and/or
with respect to Incentive Stock Options, Section 422
of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict
with the requirements of said Rule 16b-3, and/or with
respect to Incentive Stock Options, Section 422 of
the Code. With respect to Incentive Stock Options,
if this Plan does not contain any provision required
to be included herein under Section 422 of the Code,
such provision shall be deemed to be incorporated
herein with the same force and effect as if such
provision had been set out at length herein.
22
12.11 Written Agreements. Each award granted under this
Plan shall be confirmed by, and shall be subject to
the terms of the Agreement approved by the Committee
and executed by the Company and the Holder. The
Committee may terminate any award made under this
Plan if the Agreement relating thereto is not
executed and returned to the Company within sixty
(60) days after the Agreement has been delivered to
the Holder for his or her execution.
12.12 Indemnification of Committee. In addition to such
other rights of indemnification as they may have as
directors or as members of the Committee, the members
of the Committee shall be indemnified by the Company
against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection
with the defense of any action, suit or proceeding,
or in connection with any appeal therein, to which
they or any of them may be a party by reason of any
action taken or failure to act under or in connection
with the Plan or any award granted thereunder, and
against all amounts paid by them in settlement
thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation
to matters as to which it shall be adjudged in such
action, suit or proceeding that such Committee member
is liable for negligence or misconduct in the
performance of his duties; provided that within sixty
(60) days after institution of any such action, suit
or proceeding a Committee member shall in writing
offer the Company the opportunity, at its own
expense, to handle and defend the same.
12.13 Consideration for Common Stock. The Committee may
not grant any awards under this Plan pursuant to
which the Company will be required to issue any
shares of Common Stock unless the Company will
receive consideration for the shares of Common Stock
sufficient under the laws of the State of Delaware so
that such shares of Common Stock will be, when
issued, validly issued and fully paid and
nonassessable when issued.
12.14 Common Stock Certificates. All certificates for
shares of Common Stock delivered under this Plan
shall be subject to such stop-transfer orders and
other restrictions as the Committee may deem
23
advisable under the rules, regulations, and other
requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common
Stock is then listed, any applicable federal or state
securities law and any applicable corporate law, and
the Committee may cause a legend or legends to be put
on any such certificates to make appropriate
reference to such restrictions. Notwithstanding
anything to the contrary contained herein, whenever
certificates representing shares of Common Stock
subject to an award are required to be delivered
pursuant to the terms of this Plan, the Company may,
in lieu of such delivery requirement, comply with the
provisions of Section 158 of the Delaware General
Corporation Law.
12.15 Unfunded Status of Plan. This Plan is intended to
constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments
not yet made to a Holder by the Company, nothing
contained herein shall give any such Holder any
rights that are greater than those of a general
creditor of the Company.
EXHIBIT "10.37"
---------------
LSB INDUSTRIES, INC.
1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Board of Directors of LSB Industries, Inc., a Delaware
corporation (the "Company"), has adopted this 1993 Non-Employee
Director Stock Option Plan (the "Plan"), effective the ---- day
of -------------, 1993:
1. Purpose. This nondiscretionary Plan permits members of the
Board of Directors of the Company who are not officers or
employees of the Company and/or any Subsidiary to acquire and
retain a proprietary interest in the Company and to participate
in the future of the Company as shareholders. The purpose of
this Plan is to advance the interests of the Company and its
shareholders by enabling the Company to offer to its non-employee
directors long-term performance-based equity interests in the
Company, thereby enhancing its ability to attract, retain and
reward such individuals, as members of its Board of Directors,
and by providing an incentive for such individuals to render
outstanding service to the Company and to the Company's
shareholders.
2. Definitions. For purposes of the Plan, the following terms
shall be defined as set forth herein:
2.1 "Act" means the Securities Act of 1933, as amended
from time to time, or any successor statute or
statutes thereto.
2.2 "Agreement" means the agreement between the Company
and the Holder setting forth the terms and conditions
of an award under the Plan.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute
or statutes thereto.
2.5 "Committee" means the Stock Option Committee of the
Board or any other committee of the Board which the
Board may designate.
1
2.6 "Common Stock" means the Common Stock of the Company,
par value $.10 per share.
2.7 "Eligible Director" means each member of the Board
who is not an officer or employee of the Company or
any Subsidiary.
2.8 "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, or any successor
statute or statutes thereto.
2.9 "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations
issued thereunder, means, as of any given date:
2.9.1 the closing price of the Common Stock on the
last preceding day on which the Common Stock
was traded, as reported on a national
securities exchange; and,
2.9.2 if the fair market value of the Common Stock
cannot be determined pursuant to clause (i)
hereof, such price as the Committee shall
determine.
2.10 "Holder" means an Eligible Director of the Company
who has received an award under the Plan.
2.11 "Stock Option" means any option to purchase shares of
Common Stock which is awarded to an Eligible Director
pursuant to this Plan.
2.12 "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined
in Section 424(f) of the Code.
3. Administration.
3.1 Board; Committee. The Board shall create a committee
consisting of three members of the Board. The Board
may also appoint one member of the Board as an
alternate member of the Committee. Upon such
appointment, the Committee shall have all the powers,
privileges and duties set forth herein. The Board
may, from time to time, appoint members of any such
Committee in substitution for, or in addition to,
members previously appointed, may fill vacancies in
the Committee and may discharge the Committee. The
Committee shall select one of its members as its
2
Chairman and shall hold its meetings at such times
and places as it shall deem advisable. A majority of
its members shall constitute a quorum and all
determinations shall be made by a majority of such
quorum. Any determination reduced to writing and
signed by a majority of the members of the Committee,
shall be fully effective and a valid act of the
Committee as if it had been made by a majority vote
at a meeting duly called and held. The membership of
the Committee shall at all times be constituted so as
to not adversely affect the compliance of the Plan
with the requirements of Rule 16b-3 under the
Exchange Act, to the extent it is applicable, or with
the requirements of any other applicable law, rule or
regulation.
3.2 Power and Authority. The Committee shall have full
power and authority to do all things necessary or
appropriate to administer this Plan according to its
terms and provisions (excluding the power to appoint
members of the Committee and to terminate, modify, or
amend the Plan, except as otherwise authorized by the
Board); provided, however, that the Committee shall
have no authority or power to determine the Eligible
Directors who receive awards under this Plan or the
timing, amount or price of awards to Eligible
Directors under this Plan.
3.3 Interpretation of Plan. Subject to Sections 3.2 and
10 hereof, the Committee shall have the authority at
its discretion to adopt, alter and repeal such
general and special administrative rules,
regulations, and practices governing the Plan as it
shall, from time to time, deem advisable, to construe
and interpret the terms and provisions of this Plan
and any award issued under this Plan, and to
otherwise supervise the administration of this Plan.
Subject to Sections 3.2 and 10 hereof, all decisions
made by the Committee pursuant to the provisions of
this Plan shall be made in the Committee's sole
discretion and shall be final and binding upon all
persons granted options pursuant to the Plan.
4. Shares Subject to Plan.
4.1 Number of Shares. The aggregate number of shares of
Common Stock reserved and available for distribution
under this Plan shall be 150,000 shares. If any
shares of Common Stock that are subject to a Stock
3
Option cease to be subject to such Stock Option, or
any such award otherwise terminates without a payment
being made to the Holder in the form of Common Stock,
such shares shall again be available for distribution
in connection with future grants and awards under
this Plan. The number of shares available for
distribution under this Plan shall be reduced by the
number of shares of Common Stock issued under this
Plan upon the exercise of a Stock Option.
4.2 Character of Shares. The Company may elect to
satisfy its obligations to a Holder exercising a
Stock Option entirely by issuing authorized and
unissued shares of Common Stock to such Holder,
entirely by transferring treasury shares to such
Holder, or in part by the issue of authorized and
unissued shares and the balance by the transfer of
treasury shares.
5. Eligibility.
5.1 General. Awards under this Plan shall be made to
Eligible Directors only.
5.2 Multiple Awards. An Eligible Director to whom a
Stock Option has previously been granted under this
or any other stock option plan of the Company shall
receive an award under this Plan, whether or not such
previously granted Stock Option has been fully
exercised, if the terms of Section 6 hereof are met.
6. Grant of Option. Subject to the terms and conditions
hereof, on the 30th day of April following the end of each of the
Company's fiscal years in which the Company realizes net income
of $9.2 million or more for such fiscal year, as determined
solely by the audited financial statements of the Company for
such fiscal year, the Company shall automatically grant to each
Eligible Director an option to acquire 5,000 shares of Common
Stock under this Plan. Stock Options granted under this Plan are
intended to be options which do not satisfy the requirements to
be "incentive stock options" under Section 422 of the Code. Any
Stock Option granted under the Plan shall contain such terms, not
inconsistent with this Plan, as the Committee may from time to
time approve.
7. Exercise Price. The exercise price of any Stock Option
granted under this Plan to an Eligible Director shall be the Fair
Market Value of the shares of Common Stock subject to the Stock
Option at the time the Stock Option is granted.
4
8. Termination of Option. Each Stock Option granted under this
Plan, to the extent not theretofore exercised, shall terminate
forthwith upon the earlier of the following to occur: (i)
termination of Holder as a member of the Company's Board of
Directors or (ii) on the fifth anniversary of the date such Stock
Option was granted.
9. Exercise, Method of Exercise and Payment.
9.1 Notice of Exercise and Payment. No Stock Option
granted under this Plan may be exercised until after
the expiration of six (6) months from the date the
Stock Option is granted. At any time after the
expiration of six (6) months from the date the Stock
Option is granted, Stock Options granted under this
Plan may be exercised, in whole or in part, at any
time during the remaining term of the Stock Option,
by giving written notice of such exercise to the
Company identifying the Stock Option being exercised
and specifying the number of shares then being
purchased. Such notice shall be accompanied by
payment in full of the exercise price, which shall be
in cash or, unless otherwise provided in the
Agreement, in whole shares of Common Stock which are
already owned by the Holder of the Stock Option or,
unless otherwise provided in the Agreement, partly in
cash and partly in such Common Stock. Cash payments
shall be made by wire transfer, certified check or
bank check or personal check, in each case payable to
the order of the Company; provided, however, that the
Company shall not be required to deliver certificates
for shares of Common Stock with respect to which a
Stock Option is exercised until the Company has
confirmed the receipt of good and valuable funds in
payment of the purchase price thereof. Payments in
the form of Common Stock (which shall be valued at
the Fair Market Value of a share of Common Stock on
the date of exercise) shall be made by delivery of
stock certificates in negotiable form, with
signatures guaranteed by a bank or investing banking
firm, which are effective to transfer good and valid
title thereto to the Company, free of any liens or
encumbrances. No Stock Option may be exercised at
any time unless the Holder thereof is then a member
of the Board of the Company.
9.2 Issuance of Shares. As soon as practicable after its
receipt of such notice and payment, the Company shall
cause one or more certificates for the shares so
5
purchased to be delivered to the Holder or his or her
estate, as the case may be. No Holder or estate
shall have any of the rights of a shareholder with
reference to shares of Common Stock subject to a
Stock Option until after the Stock Option has been
exercised in accordance with this Section 9 and
certificates representing such shares so purchased by
the Holder pursuant to the Stock Option have been
delivered to the Holder or estate.
9.3 Partial Exercise. A Stock Option granted under this
Plan may be exercised as to any part of the shares
for which it could be exercised. Such a partial
exercise of a Stock Option shall not affect the right
to exercise the Stock Option from time to time in
accordance with this Plan as to the remaining shares
of Common Stock subject to the Stock Option.
9.4 Buyout and Settlement Provisions. The Committee may
at any time offer to buy out for cash or otherwise
settle a Stock Option previously granted, based upon
such terms and conditions as the Committee shall
establish and communicate to the Holder at the time
that such offer is made, including a settlement for
exchange of a different award under the Plan for the
surrender of the Stock Option.
10. Amendments and Termination.
10.1 Amendments to Plan; Termination. The Board may amend
any of the provisions of this Plan, and may at any
time suspend or terminate this Plan; provided,
however, that no such amendment shall be effective
unless and until it has been duly approved by the
stockholders of the outstanding shares of Common
Stock if (i) such amendment materially increases the
benefits accruing to participants under this Plan;
(ii) such amendment materially increases the number
of securities which may be issued under this Plan;
(iii) such amendment materially modifies the
requirements as to eligibility for participation in
this Plan; (iv) such amendment would disqualify an
Eligible Director a disinterested administrator under
16b-3 under any other stock option plan of the
Company; or, (v) the failure to obtain such approval
would adversely affect the compliance of the Plan
with the requirements of Rule 16b-3 under the
Exchange Act, or with the requirements of any other
applicable law, rule or regulation; and, further
6
provided, that this Plan may not be amended more than
once every six (6) months, other than to comport with
changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules
thereunder.
10.2 Amendments to Individual Awards. Subject to Section
12 hereof, no amendment may be made to this Plan
which in any material respect impairs the rights of a
Holder of a Stock Option without such Holder's
consent.
11. Term of Plan.
11.1 Effective Date. The Plan shall be effective as of
-------------------, 1993 ("Effective Date"), subject
to the approval of the Plan by the stockholders of
the Company within one year after the Effective Date.
Any awards granted under the Plan prior to such
approval shall be effective when made, but shall be
conditioned upon, and subject to, such approval of
the Plan by the Company's stockholders (and no awards
shall vest or otherwise become free of restrictions
prior to such approval).
11.2 Termination Date. No award shall be granted pursuant
to the Plan on or after the tenth (10th) anniversary
of the Effective Date, but awards granted prior to
such tenth (10th) anniversary may extend beyond that
date. The Plan shall terminate at such time as no
further awards may be granted and all awards granted
under the Plan are no longer outstanding.
12. Adjustment Upon Change of Shares. Subject to any required
action by the stockholders of the Company, the number of shares
of Common Stock for which options may thereafter be granted, and
the number of shares of Common Stock then subject to options
previously granted, and the price per share payable upon exercise
of such option, shall be proportionately adjusted for any
increase or decrease in the number of shares of Common Stock of
the Company issued under this Plan resulting from a subdivision
or consolidation of such shares or the payment of a stock
dividend (but only on the Common Stock) or any other increase or
decrease in the number of shares effected without receipt of
consideration by the Company.
12.1 If the Company is reorganized or consolidated or
merged with another corporation, in which the Company
is the non-surviving corporation, optionee shall be
7
entitled (subject to the provisions of this Section
12) to receive options covering shares of such
reorganized, consolidated or merged corporation in
the same proportion as optioned to optionee prior to
such reorganization, consolidation or merger at an
equivalent exercise price, and subject to the same
terms and conditions as this Plan. For purposes of
the preceding sentence the excess of the aggregate
fair market value of shares subject to the option
immediately after the reorganization, consolidation
or merger over the aggregate exercise price of such
shares shall not be more than the excess of the
aggregate fair market value of all shares issued
under this Plan subject to the option immediately
before such reorganization, consolidation or merger
over the aggregate exercise price of such shares
issued under this Plan, and the new option or
assumption of the old option by any surviving
corporation shall not give optionee additional
benefits which he did not have under the old option.
12.2 To the extent that the foregoing adjustments relate
to the shares of the Company issued under this Plan,
such adjustments shall be made by the Committee,
whose determination in that respect shall be final,
binding and conclusive.
12.3 Except as hereinbefore expressly provided in this
Section 12, the Holder shall have no rights by reason
of any subdivision or consolidation of shares of
stock of any class or the payment of any stock
dividend or any other increase or decrease in the
number of shares of stock of any class or by reason
of any dissolution, liquidation, merger,
consolidation, reorganization or spin-off of assets
or stock of another corporation, and any issue by the
Company of shares of stock of any class, or
securities convertible into shares of stock of any
class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or
price of Shares subject to the option.
12.4 The grant of an option pursuant to this Plan shall
not affect in any way the right or power of the
Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business
structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any
part of its business or assets.
8
13. Proration of Awards. In the event there is an insufficient
number of shares of Common Stock available under the Plan for any
automatic grant of a Stock Option pursuant to Section 6, the
shares of Common Stock available for awards under the Plan shall
be prorated among the Eligible Directors.
14. General Provisions.
14.1 Investment Representations. The Committee may
require each person acquiring shares of Common Stock
pursuant to an award under the Plan to represent to
and agree with the Company in writing that the Holder
is acquiring the shares for investment without a view
to distribution thereof.
14.2 Additional Incentive Arrangements. Nothing contained
in the Plan shall prevent the Board from adopting
such other or additional incentive arrangements as it
may deem desirable, including, but not limited to,
the granting of stock options and the awarding of
stock and cash otherwise than under the Plan; and
such arrangements may be either generally applicable
or applicable only in specific cases.
14.3 Withholding Taxes. Not later than the date as of
which an amount first becomes includible in the gross
income of the Holder for federal income tax purposes
with respect to any award under this Plan, the Holder
shall pay to the Company, or make arrangements
satisfactory to the Company regarding the payment of,
any federal, state and local taxes of any kind
required by law to be withheld or paid with respect
to such amount. If permitted by the Board, tax
withholding or payment obligations may be settled
with Common Stock, including Common Stock that is
part of the award that gives rise to the withholding
requirement. The obligations of the Company under
this Plan shall be conditional upon such payment or
arrangements and the Company shall, to the extent
permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to
the Holder from the Company.
14.4 Governing Law. The Plan and all awards made and
actions taken thereunder shall be governed by and
construed in accordance with the laws of the State of
Delaware (without regard to choice of law
provisions).
9
14.5 Director Status. A leave of absence, unless
otherwise determined by the Board prior to the
commencement thereof, shall not be considered a
termination of an individual's status as a director
of the Company.
14.6 Non-Transferability. Other than the transfer of a
Stock Option by will or by the laws of descent and
distribution, no award under the Plan may be
alienated, sold, assigned, hypothecated, pledged,
exchanged, transferred, encumbered or charged, and
any attempt to alienate, sell, assign, hypothecate,
pledge, exchange, transfer, encumber or charge the
same shall be void. No right or benefit hereunder
shall in any manner be liable for or subject to the
debts, contracts, liabilities or torts of the person
entitled to such benefit. Any Stock Option granted
under this Plan is only exercisable during the
lifetime of the Holder while such Holder is serving
as an Eligible Director.
14.7 Applicable Laws. The obligations of the Company with
respect to all awards under this Plan shall be
subject to (i) all applicable laws, rules and
regulations, including, without limitation, the
requirements of all federal securities laws, rules
and regulations and state securities and blue sky
laws, rules and regulations, and such approvals by
any governmental agencies as may be required,
including, without limitation, the effectiveness of a
registration statement under the Act, and (ii) the
rules and regulations of any national securities
exchange on which the Common Stock may be listed or
the NASDAQ National Market System if the Common Stock
is designated for quotation thereon.
14.7 Conflicts. If any of the terms or provisions of the
Plan conflict with the requirements of Rule 16b-3
under the Exchange Act, or with the requirements of
any other applicable law, rule or regulation, then
such terms or provisions shall be deemed inoperative
to the extent they so conflict with the requirements
of said Rule 16b-3.
14.8 Written Agreements. Each award granted under the
Plan shall be confirmed by, and shall be subject to
the terms of the Agreement approved by the Committee
and executed by the Company and the Holder. The
10
Committee may terminate any award made under the Plan
if the Agreement relating thereto is not executed and
returned to the Company within sixty (60) days after
the Agreement has been delivered to the Holder for
his or her execution.
14.9 Consideration for Common Stock. The Committee may
not grant any awards under the Plan pursuant to which
the Company will be required to issue any shares of
Common Stock unless the Company will receive
consideration for the shares of Common Stock
sufficient under the laws of the State of Delaware so
that such shares of Common Stock will be, when
issued, validly issued and fully paid and
nonassessable when issued.
14.10 Common Stock Certificates. All certificates for
shares of Common Stock delivered under the Plan shall
be subject to such stop-transfer orders and other
restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements
of the Securities and Exchange Commission, any stock
exchange upon which the Common Stock is then listed,
any applicable federal or state securities law and
any applicable corporate law, and the Committee may
cause a legend or legends to be put on any such
certificates to make appropriate reference to such
restrictions. Notwithstanding anything to the
contrary contained herein, whenever certificates
representing shares of Common Stock subject to an
award are required to be delivered pursuant to the
terms of the Plan, the Company may, in lieu of such
delivery requirement, comply with the provisions of
Section 158 of the Delaware General Corporation Law.
14.11 Unfunded Status of Plan. The Plan is intended to
constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments
not yet made to a Holder by the Company, nothing
contained herein shall give any such Holder any
rights that are greater than those of a general
creditor of the Company.
EXHIBIT "10.38"
LOAN AGREEMENT
PRIME FINANCIAL CORPORATION,
an Oklahoma corporation
"Borrower"
BANK IV OKLAHOMA, N.A.,
a national banking association
"Lender"
Dated: MARCH 30, 1994
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LIST OF EXHIBITS
A. Borrowing Base Certificate (Including Compliance
Certificate)
B. Note
C. Request for Advance - Revolving Credit Loan Request
D. Security Agreement
E. List of Account Sellers
F. Certificate of Officers (include proof of authority to sign
Request for advance)
G. Guaranty Agreement
H. Subsidiaries
I. Other Corporate, Fictitious or Trade Names; Mergers,
Consolidations, Asset Acquisitions
J. Insurance
K. Litigation
L. Tax Proceedings
2
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of the 30th
day of March, 1994, by and between PRIME FINANCIAL CORPORATION,
an Oklahoma corporation (the "Borrower") and BANK IV OKLAHOMA,
N.A., a national banking association (the "Lender").
R E C I T A L S
A. The Borrower has requested that the Lender enter into a
financing arrangement whereby the Lender shall extend credit to
Borrower in the form of a revolving loan up to the original
principal amount of $25,000,000.00 (the "Loan"); and
B. The Lender is willing to extend such credit on the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and other good and valuable
consideration, receipt of which is acknowledged, the parties
agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS
When used herein, the following terms shall have the
following meanings:
1.1 "Account Debtor" shall have the meaning assigned to
that term in Section 2.7 hereof.
1.2 "Account Sellers" shall mean those parties identified
in the attached Exhibit "E", which is made a part hereof, or any
other parties from whom Borrower may purchase accounts with
proceeds of the Loan after obtaining consent from the Lender.
1.3 "Affiliate" of any Person shall mean any Person
directly or indirectly controlling, controlled by, or under
common control with, such Person. For the purposes of this
definition, "control" (including, with correlative meanings, the
terms "controlled by" and "under common control with"), as used
with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of
the management and policies of such Person, whether through the
ownership of Voting Shares or by contract or otherwise.
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1.4 "Applicable Prime Rate" shall mean the annual rate of
interest announced by the Wall Street Journal, New York, New York
("WSJ") from time to time as average of corporate loan rates
quoted by a certain number of the nation's largest banks. The
Applicable Prime Rate shall be adjusted daily as announced,
calculated on the basis of a year of 360 days and a month of 30
days. Changes in the Applicable Prime Rate are effective,
without notice, on the same day as the change in the Applicable
Prime Rate as announced from time to time. The Applicable Prime
Rate shall not necessarily be the Lender's "best" or lowest rate.
Should WSJ fail to announce a prime rate, then the Applicable
Prime Rate shall be the rate announced by Chase Manhattan Bank,
New York, New York, from time to time as its prime rate.
1.5 "Borrowing Base" shall have the meaning assigned to
that term in Section 2.6 hereof.
1.6 "Borrowing Base Certificate" shall mean a Certificate
of Borrower in the form of Exhibit "A" annexed hereto and made a
part hereof.
1.7 "Business Day" shall mean a day other than a Saturday,
Sunday or a day upon which banks in the State of Oklahoma are
closed for business generally.
1.8 "Closing Date" shall mean March 30, 1994. .
1.9 "Collateral" shall have the meaning assigned to that
term in Article III of this Agreement.
1.10 "Commitment" shall mean the agreement of the Lender to
make the Loan on a revolving credit basis pursuant to this
Agreement.
1.11 "Congress" shall mean Congress Financial Corporation
and Congress Financial Corporation (Central).
1.12 "Congress Loan Agreement" shall mean that certain Loan
Agreement dated March 29, 1984, as amended, between Congress,
Guarantor and certain of Guarantor's Subsidiaries.
1.13 "Default Rate" shall mean the Applicable Prime Rate
plus five percent per annum.
1.14 "Default" shall mean any event, which together with any
lapse of time or giving of any notice, or both, would constitute
an Event of Default.
1.15 "Determination Date" shall mean any date not more than
five (5) days prior to the date on which the amount of the
Borrowing Base is determined.
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1.16 "Due Date" shall mean, in the case of an Invoice
calling for only one payment, the first day on which payment of
the full amount of the Invoice is due; and in the case of an
Invoice which contemplates more than one payment, the date on
which any particular payment is due.
1.17 "Eligible Accounts" shall have the meaning assigned to
that term in Section 2.7 of this Agreement.
1.18 "Event of Default" shall have the meaning specified in
Section 7.1 of this Agreement.
1.19 "GAAP" shall mean generally accepted accounting
principles applied on a consistent basis in all material respects
to those applied in the preceding period. Unless otherwise
indicated herein, all accounting terms will be defined according
to GAAP.
1.20 "Guarantor" shall mean LSB Industries, Inc., a Delaware
corporation.
1.21 "Guarantor Advances" shall mean indebtedness arising
from loans made by Guarantor or LSB Chemical Corp. to Borrower to
enable Borrower to purchase Accounts from Account Sellers.
1.22 "Guaranty" shall have the meaning as assigned to that
term in Section 4.1 of this Agreement.
1.23 "hereby", "herein", "hereof", "hereunder" and similar
such terms shall mean and refer to this Agreement as a whole and
not merely to the specific section, paragraph or clause in which
the respective word appears.
1.24 "Household" shall mean Household Commercial Financial
Services, Inc.
1.25 "Household Loan Agreement" shall mean that certain
Second Amended and Restated Working Capital Loan Agreement dated
January 21, 1992 between Guarantor, El Dorado Chemical Company,
Slurry Explosives Corporation and Household.
1.26 "Indebtedness" shall mean and include any and all: (i)
indebtedness, obligations and liabilities of the Borrower to the
Lender incurred or which may be incurred hereafter pursuant to
the terms of this Agreement or any of the other Loan Documents,
and any extensions, renewals, substitutions, amendments and
increases in amount thereof, including such amounts as may be
evidenced by the Note and all lawful interest, loan closing fees,
service fees, facility fees, commitment fees, fees in lieu of
5
balances and other charges, and all costs and expenses incurred
in connection with the preparation, filing and recording of the
Loan Documents, including reasonable attorneys' fees and legal
expenses; (ii) all other indebtedness, obligations (whether
direct or indirect, primary or secondary, fixed or contingent)
and liabilities of the Borrower to the Lender arising out of this
Agreement or the Loan Documents, including future advances and
loans made by the Lender to the Borrower and any extensions,
renewals, substitutions, amendments and increases in amount
thereof; (iii) all reasonable costs and expenses paid or incurred
by the Lender, including attorneys' fees, in enforcing or
attempting to enforce collection of any Indebtedness and in
enforcing or realizing upon or attempting to enforce or realize
upon any collateral or security for any Indebtedness, including
interest on all sums so expended by the Lender accruing from the
date upon which such expenditures are made until paid, at an
annual rate equal to the Default Rate; (iv) all sums expended by
the Lender in curing any Event of Default or Default of the
Borrower under the terms of this Agreement, the other Loan
Documents or any other writing evidencing or securing the payment
of the Note together with interest on all sums so expended by the
Lender accruing from the date upon which such expenditures are
made until paid, at an annual rate equal to the Default Rate; (v)
all reasonable costs and expenses paid or incurred by the Lender,
including attorneys' fees and legal expenses, in enforcing or
attempting to enforce any right, remedy or cause of action of the
Lender against the Guarantor under the Guaranty, including
interest on all sums so expended by the Lender accruing from the
date upon which such expenditures are made until paid, at an
annual rate equal to the Default Rate; and (vi) all
"Indebtedness" or "Secured Indebtedness" or "Obligations" as said
terms may be defined in any of the Loan Documents.
1.27 "Invoice" shall mean any form of demand for payment by
Borrower or any Account Seller to an Account Debtor for services
rendered or goods sold or leased, written or oral.
1.28 "Invoice Date" shall mean the date of the first
Invoice for the particular services rendered or the particular
goods sold or leased to an Account Debtor.
1.29 "Laws" shall mean all statutes, laws, ordinances,
regulations, orders, writs, injunctions, or decrees of the United
States, any state or commonwealth, any municipality, any foreign
country, any territory or possession, or any Tribunal.
1.30 "Lien" shall mean any mortgage, pledge, security
interest, tax lien, encumbrance, lien or charge of any kind
(including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in
6
the nature thereof, and the filing of or agreement to give any
financing statement or other similar form of public notice under
the Laws of any jurisdiction), whether arising by agreement or
under any statute or law.
1.31 "Loan Documents" shall mean this Agreement, the Note
(including any renewals or extensions thereof), the Guaranty, the
Security Instruments and all other documents, instruments and
certificates executed and delivered to the Lender by the Borrower
or any other party pursuant to the terms of this Agreement, and
any supplements thereto or modifications thereof.
1.32 "Note" shall mean that certain Promissory Note by
Borrower in favor of Lender in the form attached hereto as
Exhibit "B" annexed to this Agreement, together with any and all
extensions, renewals, modifications, substitutions and changes in
form thereof which may be from time to time and for any term or
terms effected.
1.33 "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a limited liability
company, a trust, an unincorporated organization, and a
government or any department, agency or political subdivision
thereof.
1.34 "Related Person" shall mean any Affiliate of Borrower,
any individual, corporation, organization or other entity who is
a stockholder, officer, director or employee of Borrower, or any
entity, fifty percent (50%) of the capital (or any class of
capital), or fifty percent (50%) of the partnership, limited
liability company membership, or other ownership interest in such
entity, of which Borrower is the owner. The term "Related
Person" shall also include any corporation, organization or other
entity, fifty percent (50%) of the capital (or fifty percent
(50%) of any class of capital) of which is owned by a Related
Person.
1.35 "Revolving Credit Loan Request" shall mean a Loan
Request in the form of Exhibit "C" annexed to this Agreement and
to be delivered to the Lender by the Borrower pursuant to Section
2.3 of this Agreement.
1.36 "Security Agreement" shall mean that certain Security
Agreement in the form of Exhibit "D" annexed to this Agreement,
to be made, executed and delivered by Borrower to the Lender
covering all accounts receivable and other personal property of
Borrower, as described therein.
7
1.37 "Security Instruments" shall mean the Security
Agreement and all other financing statements, assignments,
security agreements, documents or writings and any and all
amendments and supplements thereto, granting, conveying,
assigning, transferring, perfecting or in any manner providing
the Lender with a security interest in any property as security
for the repayment of all or any part of the Indebtedness.
1.38 "Subsidiary" shall mean any corporation in which the
Borrower or Guarantor, as the case may be, owns or controls
(directly or indirectly) fifty percent (50%) or more of the
outstanding capital stock.
1.39 "Taxes" shall mean all taxes, assessments, fees, or
other charges or levies from time to time or at any time imposed
by any Laws or by any Tribunal.
1.40 "Tribunal" shall mean any municipal, state,
commonwealth, federal, foreign, territorial or other sovereign,
governmental entity, governmental department, court, commission,
board, bureau, agency or instrumentality.
1.41 "UCC" shall mean the Uniform Commercial Code as adopted
in the State of Oklahoma, as it may be amended from time to time.
1.42 "Voting Shares" shall mean shares of any class or
classes (however designated) having ordinary voting power for the
election of at least a majority of the members of the Board of
Directors (or other governing bodies) of such corporation, other
than shares having such power only by reason of the happening of
a contingency.
ARTICLE II.
REVOLVING CREDIT LOAN
2.1 Loan. The Lender agrees, upon the terms and subject to
the conditions hereinafter set forth, to lend up to
$25,000,000.00 to Borrower on a revolving credit basis from the
Closing Date until October 1, 1994, unless its Commitment shall
be sooner terminated pursuant to the provisions of this
Agreement, for the purpose of purchasing Accounts from the
Account Sellers, and in such amounts as may from time to time be
requested by Borrower, provided however, the outstanding
principal amount due and payable under the Note shall not at any
one time exceed the Borrowing Base.
8
2.2 Note. On the Closing Date the Borrower shall execute
and deliver to the Lender the Borrower's Promissory Note in the
principal amount of $25,000,000.00, the form of which is annexed
hereto as Exhibit "B" and made a part hereof (referred to as the
"Note"), thereby evidencing Borrower's obligation to repay
advances under the Loan. The Note shall be dated as of the
Closing Date, and shall bear interest, payable monthly on the
first day of every month commencing May 1, 1994, on unpaid
balances of principal advanced to or on behalf of Borrower from
time to time outstanding at a variable annual rate equal from day
to day to the Applicable Prime Rate plus one-fourth of one
percent (1/4%). After maturity (whether by acceleration or
otherwise) the Note shall bear interest at the Default Rate.
Interest shall be calculated on the basis of a year of 360 days
but assessed for the actual number of days elapsed in each
accrual period.
2.3 Request for Advances. Each advance under the Loan
shall be requested by the Borrower from the Lender and shall (i)
be requested in writing on the form of Revolving Credit Loan
Request annexed hereto as Exhibit "C" and made a part hereof, and
shall be executed by the President of the Borrower or any other
authorized officer referred to in Section 4.1(c) hereof, on
behalf of the Borrower, which shall be delivered to the Lender no
later than three Business Days prior to the date upon which the
advance is to be made; (ii) be requested no more frequently than
one time per week (unless the last Borrowing Base Certificate
received by the Bank, taking into account any advances made by
the Bank after the receipt of such Borrowing Base Certificate,
indicates that additional funds may be advanced without exceeding
the Borrowing Base, in which case advances may be requested up to
one time per day); and (iii) be advanced by the Lender on the
applicable date, provided the Revolving Credit Loan Request is
timely received by the Lender and all other conditions of funding
are met. All advances made by the Lender under the Loan shall be
wired to the account(s) of Borrower designated by Borrower, for
the benefit of Borrower, which account(s) shall be acceptable to
Congress to the extent that such advance is used to purchase
Accounts subject to Congress's lien, and the Lender shall have no
responsibility to Borrower to monitor the distribution of such
advances in any other respect. All advances shall be paid
promptly upon receipt by Borrower to Congress, if Congress holds
the first priority lien and security interest in the Accounts to
be purchased with such advance, and in an amount necessary to
secure a release of such first priority lien and security
interest.
2.4 Payments and Voluntary Prepayments. Except as
otherwise prohibited hereby, the Borrower may from time to time
make prepayments of principal under the Note without premium or
penalty, provided that interest on the amount prepaid, accrued to
the prepayment date, shall be paid on such prepayment date. The
Borrower may reborrow subject to the limitations and conditions
for the Loan contained herein. All advances made by the Lender
on the Note and all payments or prepayments of principal and
interest thereon made by the Borrower shall be recorded by the
Lender in its records, and the aggregate unpaid principal amount
so recorded shall be rebuttable evidence of the principal amount
owing and unpaid on the Note. The failure to so record shall
not, however, limit or otherwise affect the obligations of the
Borrower hereunder or under the Note to repay the principal
amount of the Loan together with all interest accrued thereon.
If additional lines or blanks shall be needed for the purpose of
recording advances or payments on the schedule, one or more
additional schedules may be annexed to the Note and shall become
a part thereof. All payments and prepayments shall be made in
lawful money of the United States of America. Any payments or
prepayments on the Note received by the Lender after 2:00 o'clock
P.M. (applicable current time in Tulsa, Oklahoma) shall be deemed
to have been made on the next succeeding Business Day. All
outstanding principal of and accrued interest on the Note not
previously paid hereunder shall be due and payable at maturity on
October 1, 1994 unless such maturity shall be extended by the
Lender in writing or accelerated pursuant to the terms hereof.
2.5 Mandatory Prepayments. In the event the sum of the
Indebtedness exceeds the "Borrowing Base", as hereinafter
defined, the Borrower shall make a mandatory prepayment in an
amount equal to such excess. Each such mandatory prepayment
shall be paid prior to the earlier of (a) three Business Days
after the Borrower shall have knowledge of such excess, or (b)
three Business Days after the Lender shall have made demand that
the Borrower make such a mandatory prepayment. Notwithstanding
the above, Borrower hereby authorizes and directs the Lender to
withdraw the amount of such excess from any account or accounts
of Borrower maintained at the Lender, in any order and manner as
the Lender may determine in its sole discretion, without prior
notice or demand to Borrower, upon and at any time after receipt
by the Lender of a Borrowing Base Certificate reflecting such
excess, and apply said sums to the payment of such mandatory
prepayment.
2.6 Borrowing Base. The Borrower will not request, nor
will it accept, the proceeds of the Loan or an advance under the
Loan at any time when the amount thereof exceeds the "Borrowing
Base". As used in this Agreement, the term "Borrowing Base"
shall mean an amount equal to:
the lesser of:
eighty percent (80%) of the uncollected amount
of the aggregate Eligible Accounts of the
Borrower at book value, held by and due and
10
owing to the Borrower as shown by the books
and records of the Borrower as of the
Determination Date;
or
(b) $25,000,000.00.
2.7 Eligible Accounts. For the purposes of this Agreement,
an "Eligible Account" shall mean an Account (as defined in
Article 9 of the UCC) for which the Invoice Date has occurred and
which meets the following standards until the same is collected
in full:
(a) The Account is owned by and payable to the
Borrower and represents a sum of money (exclusive of
interest, late charges or carrying costs) unconditionally
due and owing to the Borrower from an account debtor
("Account Debtor") thereof for services rendered or goods
sold or leased or services performed by the Borrower, or the
Account Seller from whom Borrower may have purchased such
Account, to such Account Debtor in the ordinary course of
business and which services or goods have been accepted by
the Account Debtor;
(b) such sum of money does not remain unpaid for a
period in excess of sixty (60) days beyond the Due Date;
(c) such sum of money does not remain unpaid for a
period in excess of one-hundred fifty (150) days beyond the
Invoice Date, unless the Lender has pre-approved such
Account Debtor to receive more liberal terms, in the
Lender's sole discretion, which approval the Lender may
grant or withhold at any time;
(d) The Account is not a contra account and the
portion of the Account to be included as an Eligible Account
is not otherwise subject to any dispute, set-off,
recoupment, counterclaim or other claim or to any
rescission, cancellation or avoidance which would reduce or
eliminate the amount to be paid by the Account Debtor, and
the Account Debtor has not received or requested permission
to pay the same in installments at dates later than were
originally due and payable; it being further understood that
contract retainages will not constitute Eligible Accounts;
(e) The Account is not subject to any concession or
understanding with the Account Debtor of any kind which
11
varies from the terms of the Invoice that is not disclosed
to the Lender in writing and which does not cause the
Account to otherwise fall outside the definition of an
"Eligible Account";
(f) The Account does not result from the sale or lease
of any goods held on consignment;
(g) The Borrower has the full and unqualified right to
assign and grant a security interest in such Account as
security for the Indebtedness;
(h) The Account Debtor has not ceased business or made
an assignment for the benefit of creditors, and no trustee,
receiver, liquidator, conservator, custodian or like officer
has been appointed to take custody, possession or control of
the Account Debtor or any substantial portion of the assets
in general of such Account Debtor. The Account Debtor has
not become or been adjudged to be insolvent, requested or
consented to the appointment of any receiver, trustee,
custodian, liquidator or like officer or become subject to
the control or supervision of any court or other
governmental body or officer for the purpose of liquidating
its assets, winding up its affairs or for the purpose of any
financial reorganization, rehabilitation or other relief
under any law or statute now or hereafter in force affording
relief to debtors from their obligations or affecting the
rights of creditors generally;
(i) If twenty-five percent (25%) or more of any
Account or Accounts with any Account Debtor shall be unpaid
for a period in excess of sixty (60) days from the Due Date,
all accounts with such Account Debtor shall be ineligible
for inclusion in the Borrowing Base and none thereof shall
constitute an Eligible Account and, if the aggregate
accounts of any one Account Debtor constitute more than ten
percent (10%) of the total accounts of the Borrower at any
one time, the amount of all such accounts in excess of ten
percent (10%) shall be deemed ineligible for Borrowing Base
purposes; provided however, that upon prior application by
the Borrower to the Lender setting forth in writing the
extent of and reasons for the excess of the concentration
limits in this subparagraph, the Lender in its sole
discretion may allow certain Accounts in excess of the ten
percent (10%) concentration limit to be included in Eligible
Accounts;
(j) The Borrower or Account Seller who generated the
account has in its possession and under its control shipping
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tickets, bills of lading, invoices, delivery receipts and
other written business records and memoranda sufficient to
document and verify such Borrower's Accounts and the amount
thereof and to enforce collection thereof;
(k) The Account Debtor has neither attempted to return
the goods or services, the sale or delivery of which created
or gave rise to the portion of the Account to be included in
the "Eligible Accounts", nor refused to accept the goods or
services creating the portion of the Account to be included
in the "Eligible Accounts", nor attempted to revoke any
acceptance thereof or requested any allowance in adjustment
with respect to such goods or services creating the portion
of the Account to be included in the "Eligible Accounts",
nor made partial payment on a specific Invoice which is
being disputed;
(l) The Account is not evidenced by any promissory
note, trade acceptance, negotiable instrument or judgment
(unless the Lender pre-approves such Account Debtor and the
terms and documentation of such Account);
(m) All claims required to be filed in any public
office or with any public officer in connection with the
Account have been duly filed with and accepted by the
appropriate public office or officer;
(n) The Account Debtor is not a Related Person, or the
Guarantor;
(o) The Account Debtor is not a director, officer or
an employee of the Borrower, nor a member of the family of
any director, officer or employee of the Borrower, nor any
proprietorship or partnership owned in whole or in part by
any such director, officer or employee of the Borrower, or
by any member of the family of any such person;
(p) The Account is not subject to the federal statutes
requiring notice of the assignment of claims against the
United States of America, unless (i) the Borrower shall have
given the Lender advance notice of the officer, office and
filing address for notice, and telephone number for such
office (ii) the Borrower shall have executed all documents
which shall have been requested by the Lender in connection
with the notice of assignment of such claims, (iii) the
Lender shall have filed such notice in the appropriate
manner and shall have received confirmation thereof to its
satisfaction, and (iv) the Lender shall have received an
13
opinion of Borrower's counsel, acceptable to the Lender and
its counsel, to the effect that all requisite action has
been taken to properly perfect the Lender's security
interest in such Account and to properly provide notice of
such assignment of claims;
(q) The Account is not subject to the security
interest, Lien or claim of any party other than the Lender,
Prime, Household or Congress; and
(r) The Account was purchased from an Account Seller
for whom the Lender has received and approved (i) an
Agreement for Purchase of Receivables as contemplated by
Sections 3.1(b) and 4.1(h) hereof, (ii) an acknowledgment
contemplated by Section 4.1(i) hereof and (iii) verification
as contemplated by Section 4.1(j) hereof.
The above specifications with respect to the term "Eligible
Account" are specifications adopted for the purpose of
determining the Borrowing Base and the designation of such
specifications shall not be interpreted to limit in any respect
the security interest granted to the Lender to such Eligible
Accounts.
2.8 Variance from Borrowing Base. The Loan shall be
conclusively presumed to have been made to the Borrower by the
Lender under the terms and provisions hereof and shall be secured
by all of the Collateral and security described or referred to
herein or in the Security Instruments, whether or not such loan
conforms in all respects to the terms and provisions hereof. If
the Lender should (for the convenience of the Borrower or for any
other reason) make loans or advances which would cause the
Indebtedness to exceed the amount of the applicable Borrowing
Base, no such variance, change or departure shall prevent any
such loan or loans from being secured by the Collateral and
security created or intended to be created herein or in the
Security Instruments. The Borrowing Base shall not in any manner
limit the extent or scope of the Collateral and security granted
for the repayment of the Note (or any other Indebtedness) to the
proceeds of the Eligible Accounts or limit the amount of
indebtedness under the Note (or any other Indebtedness) to be
secured.
2.9 Commitment Fee. In addition to the fees described
elsewhere herein, Borrower agrees to pay to Lender a commitment
fee computed at a rate per annum, based on a year of 360 days,
equal to three-eighths of one percent (3/8%) on the average daily
unborrowed amount of the Loan payable quarterly in arrears on the
last day of each calendar quarter until such time as the
Commitment shall have expired, which shall be added to and
included within the Indebtedness.
14
ARTICLE III.
SECURITY
3.1 The Collateral. The repayment of the Indebtedness
shall be secured by a continuing security interest of first
priority in, and/or assignment, as security, of all the following
(the collateral described herein and in the Security Instruments
being referred to as the "Collateral"):
(a) all accounts, accounts receivable, reimbursements,
notes receivable, drafts, contracts, contract rights,
chattel paper and general intangibles of the Borrower and
all other obligations for the payment of money, whether now
owned or hereafter acquired, all instruments, documents,
installment sales contracts, sales contracts, chattel paper,
choses in action and other general intangibles relating
thereto, all cash, notes, checks and other forms of
remittance at any time received or to be received by
Borrower in payment thereof, all rights of Borrower in and
to all underlying goods the sale or lease of which gave rise
thereto, all rights of Borrower as an unpaid vendor,
conditional seller, lessor or mortgagee of goods, including
all rights of stoppage in transit, repossession,
reclamation, foreclosure or termination, all rights of
Borrower in and to any returned, rejected, repossessed or
reclaimed goods or merchandise, all guaranties and security
for any of the foregoing, and all rights to goods relating
thereto, except for proceeds of the sale of the Borrower's
stock in Equity Bank for Savings, F.A.;
(b) all rights of Borrower in, to and under those
certain Agreements for Purchase of Receivables dated March
29, 1994 by and between Borrower and the Account Sellers and
any similar agreements relating in whole or in part to the
rights of Borrower to buy accounts from the Account Sellers
and to require the Account Sellers or any of them under
certain conditions to repurchase accounts from Borrower;
(c) all cash, money, certificates of deposit, time
deposits and demand deposits of the Borrower, at any time in
the possession or control of the Lender, except for proceeds
of the sale of the Borrower's stock in Equity Bank for
Savings, F.A.;
(d) all documents, contracts, invoices and instruments
constituting or evidencing accounts, and all ledgers,
journals, books, records, vouchers, shipping tickets,
15
receipts, sales memoranda, contracts, correspondence and
other writings, data or papers evidencing or relating to the
items or types of collateral described above in subsections
(a) through (c), inclusive; and
(e) all products and proceeds of the items or types of
collateral described above in subsections (a) through (d),
inclusive, including without limitation insurance proceeds,
except for proceeds of the sale of the Borrower's stock in
Equity Bank for Savings, F.A.;
subject only to those prior encumbrances in favor of Congress or
Household as described in paragraph 3.4 below and only to the
specific collateral to which they relate. The foregoing security
interest is granted to the Lender pursuant to the Security
Agreement, and the Borrower shall execute such financing
statements, lien entry forms, assignments, notices and other
documents and instruments as shall be necessary or appropriate to
perfect the security interests thus created.
3.2 Continuation; Perfection. Borrower, at its expense,
shall promptly and diligently take all action necessary to
maintain and preserve the security interest herein granted in the
Collateral and either shall cause to be timely filed, together
with the payment of all necessary filing fees and taxes, such UCC
financing and continuation statements in such offices of public
record, or shall cause to be promptly delivered to the Lender,
such statements, instruments, assignments, documents or papers,
as may be necessary to keep the security interest herein granted
continuously perfected in the Collateral, and shall execute and
acknowledge and deliver or cause to be done, executed,
acknowledged and delivered, all and every such further act, deed,
conveyance, financing statement, continuation statement, transfer
and assurance the Lender may from time to time reasonably request
for the better assuring, conveying, transferring and confirming
unto the Lender the Collateral that is now and thereafter
constituted. Notwithstanding the above, the Lender is hereby
appointed Borrower's attorney-in-fact, coupled with an interest,
to do, at the Lender's option and at Borrower's expense, all acts
and things which the Lender may deem necessary to perfect and
continue perfecting the security interest referred to or created
by this Agreement and to protect the Collateral.
3.3 Lien Survives Until Full Repayment. The Borrower
hereby acknowledges that all of the Collateral is granted to the
Lender as security for the repayment of all of the Indebtedness.
Except as specifically limited herein, if a portion of the
Indebtedness is satisfied, but any portion of the Indebtedness
remains unsatisfied, the Lender may retain its security interest
16
in all of the Collateral until the remaining Indebtedness is paid
in full, even if the value of the Collateral far exceeds the
amount of Indebtedness outstanding.
3.4 Congress and Household. Congress and/or Household
currently may claim a first lien and security interest in
Borrower's Accounts. Notwithstanding anything to the contrary
contained in this Agreement, Borrower and Lender agree and
understand that the proceeds of all advances by Lender shall be
used to purchase Accounts of Account Sellers, and that such
proceeds shall be paid immediately upon receipt by Borrower to
Congress if being used to purchase Accounts subject to Congress's
lien,and that from the time of any advance by the Lender to the
Borrower until receipt of the proceeds of such advance by
Congress, Lender's security interest in the Account purchased
shall attach and be perfected but may not have priority over
Congress, but otherwise Lender's security interest in Accounts
purchased from Account Sellers shall be a first priority security
interest.
ARTICLE IV.
CONDITIONS PRECEDENT TO LOAN
4.1 Conditions Precedent. The obligation of the Lender to
make the Loan as contemplated herein is subject to the
satisfaction of all of the following conditions on or prior to
the Closing Date (in addition to the other terms and conditions
set forth herein):
(a) No Default. There shall exist no Event of Default
and no Default on the Closing Date.
(b) Representations and Warranties. The
representations, warranties and covenants set forth in
Article VI shall be true and correct on and as of the
Closing Date, with the same effect as though made on and as
of the Closing Date.
(c) Certificate. The Borrower shall have delivered to
the Lender a Certificate, dated as of the Closing Date, and
signed by the President or Vice President of Borrower,
substantially in the form as shown in Exhibit "F" annexed
hereto and made a part hereof. The Lender may conclusively
rely on such Certificate until it receives notice in writing
to the contrary.
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(d) Proceedings; Opinion of Borrower's Counsel. On or
before the Closing Date, all corporate proceedings of the
Borrower and the Guarantor shall be taken in connection with
the transactions contemplated by the Loan Documents and
shall be satisfactory in form and substance to the Lender
and its counsel; the Lender shall have received certified
copies, in form and substance satisfactory to the Lender and
its counsel, of the Articles or Certificate of Incorporation
and By-Laws of the Borrower and the Guarantor and the
resolutions of the Board of Directors of the Borrower and
the Guarantor, as adopted, authorizing the execution and
delivery of the Loan Documents, the borrowings under this
Agreement, and the granting of the security interests and
mortgage liens in, and assignment and pledge of, the
Collateral pursuant to the Security Instruments, to secure
the payment of the Indebtedness; and the Lender shall have
received an opinion of Borrower's counsel pertaining to
these matters and such other matters as shall be required by
the Lender, in a form acceptable to the Lender and Lender's
counsel.
(e) Certificate of Good Standing. The Borrower shall
have delivered to the Lender a Certificate of Good Standing
from the Secretary of State of the State of Oklahoma for
Borrower and from the Secretary of State of the State of
Delaware for Guarantor, all as of a recent date, along with
a Certificate from the Secretary of State of the State of
Oklahoma indicating that the Guarantor is qualified to do
business in the State of Oklahoma.
(f) Note. The Borrower shall have delivered the Note
to the Lender, appropriately executed.
(g) Guaranty. The Lender shall have received a
Guaranty in the form of Exhibit "G" annexed hereto and made
a part hereof duly executed by the Guarantor, whereby the
Guarantor shall unconditionally guarantee repayment of all
Indebtedness owed to the Lender by Borrower, including but
not limited to the indebtedness evidenced by the Note,
together with a financial statement of the Guarantor in a
form acceptable to Lender dated as of a date acceptable to
Lender and duly executed by the Guarantor.
(h) Account Sellers. The Borrower shall have
delivered to Lender an appropriately executed agreement by
all Account Sellers in a form acceptable to the Lender
pertaining to the Borrower's purchase of accounts from the
Account Sellers.
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(i) Acknowledgement. The Lender shall have received a
fully executed acknowledgement by each Account Seller
acknowledging the Lender's security interest in the
Collateral, in a form acceptable to Lender.
(j) Sale of Accounts. The Lender shall have received
verification in a form acceptable to Lender that all filings
required by the UCC or by other applicable law arising out
of the sale of accounts to the Borrower by the Account
Sellers are effective and in place.
(k) Litigation. The Lender shall have received a list
certified by an officer of the Borrower of all litigation
pending or threatened which could result in the entry of
judgment against Borrower and of any contingent claims,
asserted or unasserted, against Borrower in excess of
$50,000.
(l) Congress and Household. The Lender shall have
received fully-executed copies of agreements providing for
releases by Congress and Household of Accounts purchased by
the Borrower from Account Sellers, in a form acceptable to
the Lender.
(m) Other Loan Documents. The Lender shall have
received all Security Instruments and other Loan Documents
contemplated hereby.
(n) Other Information. The Lender shall have received
such other and assurances as shall be reasonably requested
by the Lender.
4.2 Continuing Conditions Precedent to Advances under Loan.
The Lender shall not be obligated to make any advances under the
Loan (i) if at such time any Event of Default shall have occurred
or any Default shall have occurred and be continuing; (ii) if any
of the representations, warranties and covenants contained in
Article VI of this Agreement shall be false or untrue in any
material respect on the date of such loan, as if made on such
date; or (iii) unless the Borrower shall have provided to the
Lender the appropriate Revolving Credit Loan Request duly
executed by authorized officers and in proper form and
establishing that the Borrowing Base will support the additional
Loan being requested and such other information as shall be
requested by the Lender in support thereof, all in conformity
with Section 2.3 hereof. Each request by the Borrower for an
advance shall constitute a representation by the Borrower that
there is not at the time of such request an Event of Default or a
Default, and that all representations, warranties and covenants
in Article V of this Agreement are true and correct on and as of
the date of each such request.
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ARTICLE V.
COVENANTS
The Borrower and Guarantor covenant and agree with the
Lender that from the date hereof and so long as this Agreement is
in effect (by extension, amendment or otherwise) and until
payment in full of all Indebtedness and the performance of all
other obligations of the Borrower under this Agreement, unless
the Lender shall otherwise consent in writing:
5.1 Payment of Taxes and Claims. The Borrower will pay and
discharge or cause to be paid and discharged all Taxes imposed
upon their income or profits or upon their property, real,
personal or mixed, or upon any part thereof, before the same
shall be in default, and all lawful claims for labor, rentals,
materials and supplies which, if unpaid, might become a Lien upon
their property or any part thereof; provided however, that the
Borrower shall not be required to pay and discharge or cause to
be paid or discharged any such Tax, assessment or claim so long
as the validity thereof shall be contested in good faith by
appropriate proceedings, and adequate book reserves shall be
established with respect thereto, and the Borrower shall pay such
Tax, charge or claim before any property subject thereto shall
become subject to execution.
5.2 Maintenance of Corporate Existence. The Borrower will
do or cause to be done all things necessary to preserve and keep
in full force and effect its corporate existence, rights and
franchises and will continue to conduct and operate its business
substantially as being conducted and operated presently. The
Borrower will become and remain qualified to conduct business in
each jurisdiction where the nature of the business or ownership
of property by the Borrower may require such qualification.
5.3 Preservation of Property. The Borrower will at all
times maintain, preserve and protect all franchises and trade
names and keep all the remainder of its properties which are used
or useful in the conduct of its business whether owned in fee or
otherwise, or leased, in good repair and operating condition;
from time to time make, or cause to be made, all needful and
proper repairs, renewals, replacements, betterments and
improvements thereto so that the business carried on in
connection therewith may be properly and advantageously conducted
at all times; and comply with all material leases to which it is
a party or under which it occupies property so as to prevent any
material loss or forfeiture thereunder.
20
5.4 Insurance. The Borrower will keep or cause to be kept
adequately insured by financially sound and reputable insurers
all property of a character usually insured by businesses engaged
in the same or similar businesses as Borrower. The Borrower
shall at all times maintain adequate insurance against damage to
persons or property, which insurance shall be by financially
sound and reputable insurers and shall include the coverage
listed on the attached Exhibit "J", which is made a part hereof.
5.5 Compliance with Applicable Laws. The Borrower will use
reasonable efforts to comply with the requirements of all
applicable Laws and orders of any Tribunal and obtain any
licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its properties or to
the conduct of its business.
5.6 Financial Statements and Reports.
(a) Monthly Report of Accounts Receivable, Sales and
Cash Receipts; Report of Accounts Payable. On or before the
twenty-fifth (25th) day of each calendar month, the Borrower
will deliver to the Lender schedules (certified to be true
and correct by the President or chief financial officer of
the Borrower) showing, as of the close of business on the
last day of the immediately preceding calendar month (i) the
name of the Borrower's Account Debtors and others with like
obligations payable to Borrower, (ii) the amounts due and
owing to the Borrower from each Account Debtor thereof,
(iii) "aging" of each Account dating from the Due Date and
shown by categories, as follows:
one day to and including 30 days,
31 days to and including 60 days,
61 days to and including 90 days, and
Over 90 days,
and (iv) any modification of the Due Date of any Account
granted after the Invoice Date. Upon request of the Lender,
but no more often than one time every thirty (30) days, the
Borrower shall report to Lender or cause to be reported to
Lender the amount of all accounts payable of the Borrower,
the Guarantor and all Account Sellers and to whom such
accounts payable are owed (excluding obligations to the
Lender).
(b) Weekly Borrowing Base and Compliance Certificate.
One time per week, the Borrower will deliver to the Lender a
Borrowing Base and Compliance Certificate, in the form as
shown in Exhibit "A" annexed hereto and made a part hereof,
certified by Borrower as being true and correct, along with
all information referenced therein.
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5.7 Notice of Default. Immediately upon the happening of
any condition or event which constitutes an Event of Default or
Default or any default or event of default under the Congress
Loan Agreement or the Household Loan Agreement, the Borrower will
give to or cause to be given to the Lender a written notice
thereof specifying the nature and period of existence thereof and
what actions, if any, the Borrower and/or any party thereto is
taking and proposes to take with respect thereto.
5.8 Notice of Litigation. Immediately upon becoming aware
of the existence of any action, suit or proceeding at law or in
equity before any Tribunal, an adverse outcome in which would (i)
materially impair the ability of the Borrower to carry on its
business substantially as now conducted, (ii) materially and
adversely affect the condition (financial or otherwise) of the
Borrower, or (iii) result in monetary damages in excess of
$50,000, the Borrower will give the Lender a written notice
specifying the nature thereof and what action, if any, is being
taken or is proposed to be taken with respect thereto.
5.9 Notice of Claimed Default. Immediately upon becoming
aware that the holder of any note or any evidence of indebtedness
or other security of the Borrower, or Congress or Household in
regard to the Congress Loan Agreement or the Household Loan
Agreement, has given notice or taken any action with respect to a
claimed default or event of default thereunder, the Borrower will
give the Lender a written notice specifying the notice given or
action taken by such holder and the nature of the claimed default
or event of default thereunder and what actions, if any, the
Borrower or any other Person is taking and proposes to take with
respect thereto.
5.10 Changes in or Creation of Subsidiaries. The Borrower
will give the Lender notice promptly upon the creation of any
Subsidiaries.
5.11 Notice of Change in Office. Within at least fifteen
(15) days prior to relocation of any office of Borrower,
including Borrower's chief executive office, the Borrower will
give the Lender a written notice of any such change of location
to be made (of a duration of more than five days), the effective
date of the change of location and the anticipated duration.
5.12 Notice of Change of Management. Within two (2) days
after any change in management of the Borrower or Guarantor
involving any officers holding an office of Secretary, Vice
President, President, Chairman or chief financial officer, the
Borrower shall give written notice thereof to the Lender,
together with a description of the reasons for the change.
22
5.13 Requested Information. With reasonable promptness, the
Borrower will give the Lender such other data and information
relating to the Borrower as from time to time may be reasonably
requested by the Lender.
5.14 Inspection. The Borrower or Account Sellers will keep
complete and accurate books and records with respect to the
Collateral and all its other properties, businesses and
operations and will permit employees and representatives of the
Lender to audit, inspect and examine the same and to make copies
thereof and extracts therefrom during normal business hours. All
such records shall be at all times kept and maintained at the
offices of the Borrower, Guarantor or Account Sellers. Upon any
Default or Event of Default, the Borrower will surrender all such
records relating to the Collateral to the Lender upon receipt of
any request therefor from the Lender.
5.15 Limitation on Other Indebtedness. The Borrower will
not create, incur, assume, become or be liable in any manner in
respect of, or suffer to exist, any indebtedness, whether
evidenced by a note, bond, debenture, agreement, letter of credit
or similar or other obligation, or accept any deposits or
advances of any kind, except (i) trade payables and current
indebtedness (other than for borrowed money) incurred in, and
deposits and advances accepted in, the ordinary course of
business, provided that such indebtedness shall be promptly paid
and discharged when due or in conformity with customary trade
terms; (ii) Guarantor Advances; and (iii) the Indebtedness.
5.16 Limitation on Liens. The Borrower will not create or
suffer to exist any Lien upon any of its inventory, property or
assets except (i) Liens currently in existence of which Lender is
aware; (ii) Liens in favor of the Lender securing the
Indebtedness; (iii) Liens arising in the ordinary course of
business for sums not due or sums being contested in good faith
and by appropriate proceedings and not involving any deposits,
advances, borrowed money or the deferred purchase price of
property or services; and (iv) Liens permitted to exist under the
terms of any of the Security Instruments.
5.17 Contingent Liabilities; Advances. The Borrower will
not, either directly or indirectly, (i) guarantee, become surety
for, discount, endorse, agree (contingently or otherwise) to
purchase, repurchase or otherwise acquire or supply or advance
funds in respect of, or otherwise become or be contingently
liable upon the indebtedness, obligation or liability of any
Person, (ii) guarantee the payment of any dividends or other
distributions upon the stock of any corporation, (iii) except to
Household and the Lender, discount or sell with recourse or for
23
less than the face value thereof, any of its notes receivable,
accounts receivable or chattel paper; (iv) lend, agree to lend,
or advance money to any Person; or (v) enter into any agreement
for the purchase or other acquisition of any goods, products,
materials or supplies, or for the making of any shipments or for
the payment of services, if in any such case payment therefor is
to be made regardless of the non-delivery of such goods,
products, materials or supplies or the non-furnishing of the
transportation of services; provided, however that the foregoing
shall not be applicable to endorsement of negotiable instruments
presented to or deposited with a bank for collection or deposit
in the ordinary course of business.
5.18 Limitation on Investments. The Borrower will not make
any investment in any Person, except for investments which
consist of:
(a) trade or customer accounts receivable for
inventory sold or services rendered in the ordinary course
of business or Accounts purchased by Borrower from the
Account Sellers in accordance with this Agreement;
(b) obligations issued or guaranteed as to principal
and interest by the United States of America and having a
maturity of not more than one year from the date of
acquisition;
(c) certificates of deposit issued by the Lender or
any other bank organized under the laws of the United States
of America or any state thereof and having total assets of
at least $400,000,000;
(d) commercial paper or finance company paper which is
rated not less than prime-one or A-1 or their equivalents by
Moody's Investors Service, Inc. or Standard & Poor's
Corporation or their successors; and
(e) repurchase agreements secured by any one or more
of the foregoing;
provided, however, that the foregoing shall not apply to proceeds
Borrower shall receive from the sale of its stock in Equity Bank
for Savings.
5.19 Disposition of Assets - Borrower. Except for the
Borrower's stock in Equity Bank For Savings, F.A. and the
proceeds of the sale of the Borrower's stock in Equity Bank for
Savings, F.A., the Borrower will not sell, lease, transfer, scrap
or otherwise dispose of any of its properties or assets, whether
24
for replacement or not, to the extent that the fair market value
of such assets exceeds $50,000.00 in the aggregate for all such
assets disposed of by the Borrower during any fiscal year unless
such sale or disposition shall be in the ordinary course of
business and for a full and fair consideration; provided,
however, that the Borrower shall not sell, assign or discount any
Accounts except as contemplated by Borrower's Agreements for
Purchase of Receivables with the Account Sellers.
5.20 Pledge of Chattel Paper. Neither the Borrower nor any
Account Seller will pledge and/or transfer possession of any
chattel paper which is included in the Collateral to any party
other than the Borrower or the Lender.
5.21 Merger, Consolidation, Acquisition, Etc. The Borrower
will not merge or consolidate with or into any other Person; or
permit any other Person to consolidate with or merge into the
Borrower; or acquire all or substantially all of the assets or
properties or capital stock of any other Person; or adopt or
effect any plan of reorganization, recapitalization, liquidation
or dissolution; or acquire any properties or assets, other than
in the ordinary course of business, to the extent that such
acquisitions exceed $50,000.00 in the aggregate during any
calendar year.
5.22 Dividends by Borrower, Etc. The Borrower will not
declare, pay or become obligated to declare or pay any dividend
on any class of its capital stock now or hereafter outstanding,
make any distribution of cash or property to holders of any
shares of such stock, or redeem, retire, purchase or otherwise
acquire, directly or indirectly, any shares of any class of its
capital stock now or hereafter outstanding; provided, however,
that this paragraph shall not apply to (i) any distribution by
Borrower of proceeds of the sale of Borrower's stock in Equity
Bank for Savings and (ii) any payment by Borrower to Guarantor to
repay Guarantor Advances.
5.23 Related Persons. The Borrower shall not engage in any
transaction or transactions with any Related Person, except upon
terms similar to those prevailing in like transactions with
Persons other than Related Persons, except for that
Administrative Services Agreement between Borrower and Guarantor
dated March 29, 1994.
5.24 Change of Fiscal Year. The Borrower will not change
its fiscal year from its present fiscal year.
5.25 Other Agreements. The Borrower will not enter into or
permit to exist any agreement (i) which would cause an Event of
Default or a Default hereunder; or (ii) which contains any
25
provision which would be violated or breached by the performance
of Borrower's obligations hereunder or under any of the other
Loan Documents.
5.26 Performance Bonds and Sureties. The Borrower will not
obtain, apply for, or enter into any undertaking relating to, any
performance bond or any other surety arrangement with respect to
the performance of any of the obligations of the Borrower to any
third party, over $50,000.00.
5.27 Payment of Indebtedness. The Borrower hereby agrees to
pay, when due and owing, all Indebtedness, whether or not
evidenced by the Note.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to
make the Loan to the Borrower under the provisions hereof, and in
consideration thereof, the Borrower represents, warrants and
covenants as follows:
6.1 Organization and Qualification - Borrower. The
Borrower is duly organized, validly existing, and in good
standing under the Laws of its jurisdiction of incorporation, and
is duly licensed and in good standing as a foreign corporation in
each jurisdiction in which the nature of the business transacted
or the property owned is such as to require licensing or
qualification as such.
6.2 Chief Executive Office. The Borrower's chief executive
office is located in the State of Oklahoma.
6.3 Litigation. There is no action, suit, investigation or
proceeding threatened or pending before any Tribunal against or
affecting the Borrower or any properties or rights of the
Borrower, which is not described on the attached Exhibit "K",
which is made a part hereof, or which has not otherwise been
reported to the Lender and which, if adversely determined, would
result in a liability of greater than $50,000.00.
6.4 Financial Statements. The Borrower's financial
statements which have been furnished to the Lender have been
prepared in conformity with GAAP, show all material liabilities,
direct and contingent, and fairly present the financial condition
of the Borrower as of such date and the results of its operations
for the period then ended, and since such date there has been no
material adverse change in the business, financial condition or
operations of the Borrower.
26
6.5 Title to Properties; Authority. The Borrower has full
power, authority and legal right to own and operate the
properties which it now owns and operates and to carry on the
lines of business in which it is now engaged, and the Borrower
has good and marketable title to the Collateral subject to no
Lien of any kind except Liens in favor of the Lender or otherwise
permitted by this Agreement. The Borrower has full power,
authority and legal right to execute and deliver and to perform
and observe the provisions of this Agreement and the other Loan
Documents to which it is a party.
6.6 Conflicting Agreements and Other Matters. The Borrower
is not in default in the performance of any obligation, covenant,
or condition in any agreement to which it is a party or by which
it is bound, which would materially and adversely affect its
business, property or assets, or its financial condition. The
Borrower is not a party to any contract or agreement or subject
to any charter or other corporate restriction which materially
and adversely affects its business, property or assets, or
financial condition. The Borrower is not a party to or otherwise
subject to any contract or agreement which restricts or otherwise
affects the right or ability of the Borrower to execute the Loan
Documents to which it is a party or the performance of any of
their respective terms. Neither the execution nor delivery of
any of the Loan Documents, nor fulfillment of nor compliance with
their respective terms and provisions will conflict with, or
result in a breach of, the terms, conditions or provisions of, or
constitute a default under, or result in any violation of, or
result in the creation of any Lien upon any of the properties or
assets of the Borrower pursuant to, or require any consent,
approval or other action by or any notice to or filing with any
Tribunal (other than routine filings after the Closing Date with
the Securities and Exchange Commission, any securities exchange
and/or state blue sky authorities) pursuant to, the charter or
By-Laws of the Borrower, any award of any arbitrator, or any
agreement, instrument or Law to which the Borrower is subject.
6.7 Corporate Authorization - Borrower. The Board of
Directors of the Borrower has duly authorized, and the Borrower
has the corporate power necessary for, the execution and delivery
of each of the Loan Documents and the performance of their
respective terms. No other consent of any other Person, except
for the Lender, is required as a prerequisite to the validity and
enforceability of the Loan Documents.
6.8 Purposes. The Borrower is not engaged principally, or
as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of
27
the Federal Reserve System) and no part of the proceeds of any
borrowing hereunder will be used to purchase or carry any margin
stock or to extend credit to others for the purpose of purchasing
or carrying any margin stock. If requested by the Lender, the
Borrower will furnish to the Lender a statement in conformity
with the requirements of Federal Reserve Form U-1 referred to in
Regulation U, to the foregoing effect. The Borrower has not
taken and will not take any action which might cause this
Agreement, the Note or the Guaranty to violate any regulation of
the Board of Governors of the Federal Reserve System (including
but not limited to Regulations G, T, U and X) or to violate any
securities laws, state or federal, in each case as in effect now
or as the same may hereafter be in effect.
6.9 Compliance with Applicable Laws - Borrower. To the
best of Borrower's knowledge, the Borrower is in compliance with
all Laws, ordinances, rules, regulations and other legal
requirements applicable to it and the business it conducts, the
violation of which could or would have a material adverse effect
on its business or condition, financial or otherwise. Neither
the ownership of any capital stock of the Borrower nor any
continued role of any Person in the management or other affairs
of the Borrower (i) to the best of Borrower's knowledge results
or could result in the Borrower's noncompliance with any Laws,
ordinances, rules, regulations and other legal requirements
applicable to the Borrower, or (ii) could or would have a
material adverse effect on the business or condition, financial
or otherwise, of the Borrower.
6.10 Possession of Franchises, Licenses, Etc. The Borrower
possesses all franchises, certificates, licenses, permits and
other authorizations from governmental, political subdivisions or
regulatory authorities, that are necessary in any material
respect for the ownership, maintenance and operation of its
properties and assets, and the Borrower is not in violation of
any thereof in any material respect.
6.11 Taxes. The Borrower has filed all Federal, state and
other income tax returns which are required to be filed and has
paid all Taxes, as shown on said returns, and has paid all Taxes
due or payable without returns and all assessments received to
the extent that such Taxes or assessments have become due, except
for Taxes being contested in good faith by appropriate
proceedings, a list of which is attached hereto, marked Exhibit
"L", and made a part hereof. All Tax liabilities of the Borrower
are adequately provided for on the books of the respective books
of the Borrower including interest and penalties. No income tax
liability of a material nature has been asserted by taxing
authorities for Taxes in excess of those already paid. There is
no proposed tax assessment against Borrower and there is no basis
for any such assessment except as disclosed on Exhibit "L".
28
6.12 Stock, Etc. The Guarantor owns 100% of the issued and
outstanding capital stock of the Borrower. All of the shares of
the capital stock of the Borrower have been duly issued and are
fully paid and non-assessable. All of the outstanding shares of
capital stock of the Borrower were issued under a valid exemption
to the registration provisions of the Securities Act of 1933, as
amended, and all applicable state securities Laws, and do not
require compliance with the Trust Indenture Act of 1939.
6.13 Subsidiaries. Borrower owns no Subsidiaries as of the
date hereof except as reflected on the annexed Exhibit "H", which
reflects the respective jurisdiction of incorporation and
qualifications of all Subsidiaries and the percentage of their
capital stock owned by the Borrower or other Subsidiaries. All
of the issued and outstanding shares of capital stock of such
Subsidiaries have been duly authorized and issued and are fully
paid and non-assessable.
6.14 Fiscal Year. The fiscal year of the Borrower and
Guarantor ends December 31.
6.15 Performance Bonds; Sureties. The Borrower has not
obtained, applied for, or entered into any undertakings relating
to, any performance bond or any other surety arrangement with
respect to the performance of any of the obligations of the
Borrower to any third party, greater than $50,000.00.
6.16 Corporate Name. Borrower has not during the preceding
five (5) years, been known as or used any other corporate,
fictitious or tradename except as disclosed on Exhibit "I".
Except as set forth on Exhibit "I", Borrower has not been the
surviving corporation of a merger or consolidation or acquired
all or substantially all of the assets of any Person.
6.17 Congress. Guarantor and certain of its Subsidiaries
are presently parties to the Congress Loan Agreement. No uncured
Events of Default have occurred thereunder, nor to the best of
Borrower's knowledge do any events or conditions exist which with
the passage of time or notice will constitute any Event of
Default thereunder. Congress claims no security interest or
other interest in any of the Collateral except to the extent
described in paragraph 3.4 above.
Household. Guarantor and certain of its Subsidiaries
are presently parties to the Household Loan Agreement. No
uncured Events of Default have occurred thereunder, nor to the
best of Guarantor's knowledge, do any events or conditions exist
which with the passage of time or notice will constitute any
Event of Default thereunder. Household claims no security
interest or other interest in any of the Collateral except to the
extent described in paragraph 3.4 above.
29
ARTICLE VII.
EVENTS OF DEFAULT
7.1 Events of Default. Any one or more of the following
events, once occurring and continuing for any reason whatsoever
(and whether such occurrence shall be voluntary or involuntary or
come about or be effected by operation of Law or otherwise),
shall be a "Default" hereunder, and if any such Default shall not
have been cured or remedied within the earlier of twenty (20)
Business Days after Borrower shall know (or should have known) of
its occurrence or ten (10) Business Days following the date
notice thereof from Lender is deemed to be received by Borrower
pursuant to paragraph 8.1 hereof, such Default shall be an "Event
of Default" hereunder:
(a) The Borrower shall fail to make any payment or
prepayment of principal or interest upon the Note, or fail
to pay any other Indebtedness after the same shall become
due and payable (whether by extension, renewal, acceleration
or otherwise); or
(b) Any representation or warranty of the Borrower or
the Guarantor made herein or in any writing furnished in
connection with or pursuant to any of the Loan Documents
shall have been false or misleading in any material respect
on the date when made; or
(c) The Borrower shall fail to duly observe, perform
or comply with any covenant, agreement or term contained in
this Agreement or any of the Loan Documents; or
(d) The Borrower or Guarantor shall default in the
payment of principal or of interest on any other material
obligation (which for purposes of this subparagraph shall
mean an obligation of over $50,000.00 for Borrower and over
$1,000,000.00 for Guarantor) for money borrowed or received
as an advance (or any obligation under any conditional sale
or other title retention agreement, or any obligation issued
or assumed as full or partial payment for property whether
or not secured by purchase money Lien, or any obligation
under notes payable or drafts accepted representing
extensions of credit) beyond any grace period provided with
respect thereto, or shall default in the performance of any
other agreement, term or condition contained in any
agreement under which such obligation is created (or if any
other default under any such agreement shall occur and be
continuing beyond any period of grace provided with respect
30
thereto) if the effect of such default is to cause, or to
permit the holder or holders of such obligation (or a
trustee on behalf of such holder or holders) to cause such
obligation to become due prior to its date of maturity; or
(e) Any of the following: (i) the Borrower or the
Guarantor shall become insolvent or unable to pay its debts
as they mature, make an assignment for the benefit of
creditors or admit in writing its inability to pay its debts
generally as they become due or fail generally to pay its
debts as they mature; or (ii) an order, judgment or decree
is entered adjudicating the Borrower or the Guarantor
bankrupt or insolvent; or (iii) the Borrower or the
Guarantor shall petition or apply to any Tribunal for the
appointment of a trustee, receiver, custodian or liquidator
of the Borrower or the Guarantor or of any substantial part
of the assets of Borrower or the Guarantor, or shall
commence any proceedings relating to the Borrower or the
Guarantor under any bankruptcy, reorganization, compromise,
arrangement, insolvency, readjustment of debts, dissolution,
or liquidation Law of any jurisdiction, whether now or
hereafter in effect; or (iv) any such petition or
application shall be filed, or any such proceedings shall be
commenced, of a type described in subsection (iii) above,
against the Borrower or the Guarantor and the Borrower or
the Guarantor by any act shall indicate its approval
thereof, consent thereto or acquiescence therein, or an
order, judgment or decree shall be entered appointing any
such trustee, receiver, custodian or liquidator, or
approving the petition in any such proceedings, and such
order, judgment or decree shall remain unstayed and in
effect, if being vigorously contested, for more than sixty
(60) days; or (v) any order, judgment or decree shall be
entered in any proceedings against the Borrower or the
Guarantor decreeing the dissolution of the Borrower or the
Guarantor and such order, judgment or decree shall remain
unstayed and in effect for more than thirty (30) days; or
(vi) any order, judgment or decree shall be entered in any
proceedings against the Borrower or the Guarantor decreeing
a split-up of the Borrower or the Guarantor which requires
the divestiture of a substantial part of the assets of the
Borrower or the Guarantor, and such order, judgment or
decree shall remain unstayed and in effect for more than
thirty (30) days; or (vii) the Borrower or Guarantor shall
fail to make timely payment or deposit of any amount of Tax
required to be withheld by the Borrower or Guarantor and
paid to or deposited to or to the credit of the United
States of America pursuant to the provisions of the Internal
Revenue Code of 1986, as amended, in respect of any and all
wages and salaries paid to employees of the Borrower or
Guarantor; or
31
(f) Any final judgment on the merits for the payment
of money in an amount in excess of $50,000 shall be
outstanding against the Borrower, or in excess of
$1,000,000.00 shall be outstanding against the Guarantor,
and such judgment shall remain unstayed and in effect and
unpaid for more than thirty (30) days; or
(g) A majority of the outstanding voting stock of the
Borrower or of the outstanding voting stock of the Guarantor
shall be acquired, directly or indirectly, by a Person or
group of Persons, acting in concert, who own on the date of
this Agreement less than fifty percent (50%) of the voting
stock of the Borrower or Guarantor; or
(h) The Guarantor shall give the Lender notice of
asserted discontinuance under the Guaranty; or
(i) Any of the Loan Documents shall cease to be legal,
valid and binding agreements enforceable against the Person
executing the same in accordance with the respective terms
thereof or shall in any way be terminated or become or be
declared ineffective or inoperative or shall in any way
whatsoever cease to give or provide the respective liens,
security interests, rights, titles, interests, remedies,
powers or privileges intended to be created thereby, and
Borrower or Guarantor shall fail or refuse to execute a
valid agreement or document reasonably acceptable to Lender
which will provide to Lender the same lien, security
interest, right, title, interest, remedy, power or privilege
originally contemplated; or
(j) The making of any levy against, seizure,
garnishment or attachment of any Collateral with a value of
over $50,000.00; or
(k) Any default or event of default under any of the
other Loan Documents which shall remain uncured beyond any
applicable cure period; or
(l) The occurrence of any Event of Default under the
Congress Loan Agreement or the Household Loan Agreement
which shall remain uncured beyond any applicable cure
period.
7.2 Remedies. Upon the occurrence of Default referred to
in Section 7.1(e) the Commitment shall immediately terminate and
the Note and all other Indebtedness shall be immediately due and
payable. Upon the occurrence of any other Event of Default, and
without prejudice to any right or remedy of the Lender under this
32
Agreement or the Loan Documents or under applicable Law of under
any other instrument or document delivered in connection
herewith, the Lender may (i) declare the Commitment terminated or
(ii) declare the Commitment terminated and declare the Note and
the other Indebtedness, or any part thereof, to be forthwith due
and payable, whereupon the Note and the other Indebtedness, or
such portion as is designated by the Lender shall forthwith
become due and payable, without presentment, demand, notice or
protest of any kind, all of which are hereby expressly waived by
the Borrower. No delay or omission on the part of the Lender in
exercising any power or right hereunder or under the Note, the
Loan Documents or under applicable law shall impair such right or
power or be construed to be a waiver of any default or any
acquiescence therein, nor shall any single or partial exercise by
the Lender of any such power or right preclude other or further
exercise thereof or the exercise of any other such power or right
by the Lender. In the event that all or part of the Indebtedness
becomes or is declared to be forthwith due and payable as herein
provided, the Lender shall have the right to set off the amount
of all the Indebtedness of the Borrower owing to the Lender
against, and shall have, and is hereby granted by the Borrower, a
lien upon and security interest in, all property of the Borrower
in the Lender's possession at or subsequent to such default,
regardless of the capacity in which the Lender possesses such
property, including but not limited to any balance or share of
any deposit, collection or agency account. After any Event of
Default all proceeds received by the Lender may be applied to the
Indebtedness in such order of application and such proportions as
the Lender, in its discretion, shall choose. At any time after
the occurrence of any Event of Default, the Lender may, at its
option, cause an audit of any and/or all of the books, records
and documents of the Borrower to be made by auditors satisfactory
to the Lender at the expense of the Borrower. The Lender also
shall have, and may exercise, each and every right and remedy
granted to it for default under the terms of the Security
Instruments and the other Loan Documents upon any Event of
Default.
ARTICLE VIII.
MISCELLANEOUS
8.1 Notices. Unless otherwise provided herein, all
notices, requests, consents and demands shall be in writing and
shall be mailed by certified mail, postage prepaid, to the
respective addresses specified below, or, as to any party, to
such other address as may be designated by it in written notice
in accordance herewith to the other parties:
If to the Borrower, to:
33
Prime Financial Corporation
16 South Pennsylvania
Oklahoma City, Ok. 73107
Attn: Jim Jones
with a copy to:
David Shear
LSB Industries, Inc.
16 S. Pennsylvania
Oklahoma City, OK 73107
If to the Lender, to:
BANK IV OKLAHOMA, N.A.
P. 0. Box 2360
Tulsa, Oklahoma 74101
Attention: Wade Edmundson
All notices, requests, consents and demands hereunder will be
effective when mailed by certified mail, postage prepaid,
addressed as aforesaid, and will be deemed received by the
addressee(s) thereof two (2) Business Days after so mailed.
8.2 Place of Payment. All sums payable hereunder shall be
paid in immediately available funds to the Lender, at its
principal banking offices in Tulsa, Oklahoma, or at such other
place as the Lender shall notify the Borrower in writing. If any
interest, principal or other payment falls due on a date other
than a Business Day, then (unless otherwise provided herein) such
due date shall be extended to the next succeeding Business Day,
and such extension of time will in such case be included in
computing interest, if any, in connection with such payment.
8.3 Marshalling. Borrower waives any right it may have to
require marshalling of assets or Collateral for repayment of the
Indebtedness in the event of the occurrence of any Default or
Event of Default hereunder or under any of the other Loan
Documents.
8.4 Survival of Agreements. All covenants, agreements,
representations and warranties made herein shall survive the
execution and the delivery of the Loan Documents. All statements
contained in any certificate or other instrument delivered by the
Borrower hereunder shall be deemed to constitute representations
and warranties by the Borrower.
34
8.5 Parties in Interest. All covenants, agreements and
obligations contained in this Agreement shall bind and inure to
the benefit of the respective successors and assigns of the
parties hereto, except that the Borrower may not assign its
rights or obligations hereunder without the prior written consent
of the Lender.
8.6 Governing Law and Jurisdiction; Venue. This Agreement
and the Note shall be deemed to have been made or incurred under
the Laws of the State of Oklahoma and shall be construed and
enforced in accordance with and governed by the Laws of Oklahoma.
For purposes of enforcing and/or interpreting the provisions of
this Agreement and all other Loan Documents, or resolving any
dispute arising out of the execution, delivery or performance of
this Agreement or any of the Loan Documents, the Borrower hereby
submits itself to the jurisdiction of the Courts of the State of
Oklahoma, the Borrower waives all objections to service of
process therefrom and the Borrower waives all objections to venue
of any state or federal court sitting in Tulsa County, Oklahoma.
8.7 Maximum Interest Rate. Regardless of any provision
herein, the Lender shall never be entitled to receive, collect or
apply, as interest on the Indebtedness, any amount in excess of
the maximum rate of interest permitted to be charged by the
Lender by applicable Law, and, in the event the Lender shall ever
receive, collect or apply, as interest, any such excess, such
amount which would be excessive interest shall be applied to
other Indebtedness and then to the reduction of principal; and,
if all other Indebtedness and principal are paid in full, then
any remaining excess shall forthwith be paid to the Borrower.
8.8 No Waiver; Cumulative Remedies. No failure to
exercise, and no delay in exercising on the part of the Lender,
any right, power or privilege hereunder or under any other Loan
Document or applicable Law shall preclude any other or further
exercise thereof or the exercise of any other right, power or
privilege of the Lender. The rights and remedies herein provided
are cumulative and not exclusive of any other rights or remedies
provided by any other instrument or by law. No amendment,
modification or waiver of any provision of this Agreement or any
other Loan Document shall be effective unless the same shall be
in writing and signed by the Lender. No notice to or demand on
the Borrower in any case shall entitle the Borrower to any other
or further notice or demand in similar or other circumstances.
8.9 Costs. The Borrower agrees to pay to the Lender on
demand all costs, fees and expenses (including without limitation
attorneys' fees and legal expenses) incurred or accrued by the
Lender in connection with the preparation, execution, delivery,
35
filing, recording and administration of this Agreement, the
Security Instruments and the other Loan Documents, or any
amendment, waiver, consent or modification thereto or thereof, or
any enforcement thereof, including without limitation the
Lender's attorneys' fees and expenses. The Borrower further
agrees that all such fees and expenses shall be paid regardless
of whether or not the transactions provided for in this Agreement
are eventually closed and regardless of whether or not any sums
are advanced to the Borrower by the Lender.
8.10 Participation. The Borrower recognizes and
acknowledges that the Lender may sell participating interests the
Note to one or more financial institutions (the "Participants").
Each Participant shall own an undivided interest in the
applicable Note. The Borrower hereby acknowledges that each
Participant shall be deemed a holder of the applicable Note to
the extent of its participation, and the Borrower hereby waives
its right, if any, to offset any amounts owing to the Borrower
from the Lender against any Participant's portion of the
applicable Note. Notwithstanding any sale to any Participant,
the Borrower shall not be required to send any notice or demand
required by this Agreement to any party not specifically required
by this Agreement.
8.11 Full Agreement. This Agreement and the other Loan
Documents contain the full agreement of the parties and supersede
all negotiations and agreements prior to the date hereof.
8.12 Headings. The article and section headings of this
Agreement are for convenience of reference only and shall not
constitute a part of the text hereof nor alter or otherwise
affect the meaning hereof.
8.13 Severability. The unenforceability or invalidity as
determined by a Tribunal of competent jurisdiction, of any
provision or provisions of this Agreement shall not render
unenforceable or invalid any other provision or provisions
hereof.
8.14 Exceptions to Covenants. The Borrower shall not be
deemed to be permitted to take any action or fail to take any
action which is permitted as an exception to any of the covenants
contained herein or which is within the permissible limits of any
of the covenants contained herein if such action or omission
would result in the breach of any other covenant contained
herein.
8.15 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall
constitute one and the same instrument.
36
8.16 Good Faith. The Lender and the Borrower agree with
each other that they will exercise good faith in their dealings
with each other under this Agreement and the transactions
provided for herein.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.
PRIME FINANCIAL CORPORATION,
an Oklahoma corporation
By:
--------------------------------
, President
"BORROWER"
BANK IV OKLAHOMA, N.A.
By:
-------------------------------
Robert R. Gilbert
Executive Vice President
"LENDER"
37
EXHIBIT "A"
BORROWING BASE AND COMPLIANCE CERTIFICATE
BANK IV Oklahoma, P. O. Box 2360, Tulsa, Oklahoma 74101
Pursuant to the terms and provisions of our Loan Agreement (the
"Loan Agreement") dated as of the ----- day of -----------------,
1994, by and between PRIME FINANCIAL CORPORATION, an Oklahoma
corporation (the "Borrower") and BANK IV OKLAHOMA, N.A., a
national banking association (the "Bank"), Borrower hereby
certifies as follows:
BORROWING BASE
1. Total Accounts Receivable $--------------
2. Less: Non-Eligible Accounts --------------
3. Total Eligible Accounts per Section 2.7
of the Loan Agreement (Line 1 minus Line 2) $--------------
4. Total Borrowing Base (The lesser of (i) Line 3 x 80%
or (ii) $25,000,000.00) --------------
5. Less outstanding principal due - NOTE --------------
6. Available for advance (Line 4, less Line 5) $--------------
COMPLIANCE CERTIFICATE (NOT COMPREHENSIVE)
REPORTING
Quarterly Operating Enclosed ----------------
Statements Last Furnished Dated ----------------
Next Due ----------------
Annual Audited Financial Enclosed ----------------
Statements Last Furnished Dated ----------------
Next Due ----------------
Monthly Report of
Accounts Enclosed ----------------
Last Furnished Dated ----------------
Next Due ----------------
38
CERTIFICATION
All terms used herein shall have the same meaning as set forth in
the Loan Agreement. Borrower hereby certifies (i) that the
information contained herein is true and correct as of the date
hereof; (ii) there has been no change in the financial condition
of Borrower which significantly impairs the security of the Bank;
(iii) that no Default has occurred or is occurring under the Loan
Agreement or any of the other Loan Documents; (iv) all Eligible
Accounts included within this Certificate as shown above comply
with all terms and conditions of Article II of the Loan
Agreement, in all respects; (v) attached hereto as Schedule "1"
is a schedule of all Accounts which, since the date of the last
Borrowing Base and Compliance Certificate submitted to the
Lender, have become "Chargedback Receivables" pursuant to any
Agreement for Purchase of Receivables between the Borrower and
any Account Seller; (vi) attached hereto as Schedule "2" is a
schedule of all cash receipts received since the last Borrowing
Base Certificate attributable to Accounts subject to Lender's
security interest, including customer number and name, date of
Invoice, amount of payment received and Invoice number.
PRIME FINANCIAL CORPORATION,
an Oklahoma corporation
By:
--------------------------------
Title:
-----------------------------
39
Exhibit "C"
REVOLVING CREDIT LOAN REQUEST
BANK IV Oklahoma, N.A. (the "Bank")
P.O. Box 2360
Tulsa, Oklahoma 74101
Pursuant to the terms and provisions of our Loan Agreement (the
"Loan Agreement") dated as of the ----- day of ----------, 199--,
by and between PRIME FINANCIAL CORPORATION (the "Borrower") and
BANK IV OKLAHOMA, N.A. (the "Bank"), Borrower hereby provides the
following Borrowing Base to be used to present the amount of
Borrower's requested advance under the Loan Agreement:
1. Total Accounts Receivable $--------------
2. Less: Non-Eligible Accounts --------------
3. Total Eligible Accounts per Section 2.7
of the Loan Agreement (Line 1
minus Line 2) $--------------
4. Total Borrowing Base with no further Account
Purchases (The lesser of (i) Line 3
x 80% or (ii) $25,000,000.00) $--------------
5. Less outstanding principal due - NOTE $--------------
6. Available for advance with no further Account
Purchases (Line 4, less Line 5) $--------------
7. Total Accounts to be Purchased from
Account Sellers with proceeds of
requested advance $--------------
8. AMOUNT REQUESTED HEREBY (must be less than
Line 6 plus Line 7) $--------------
All terms used herein shall have the same meaning as set
forth in the Loan Agreement.
The undersigned certifies (i) that the information contained
herein is true and correct as of the date hereof; (ii) that there
has been no change in the financial condition of Borrower which
significantly impairs the security of the Bank; and (iii) that no
Default has occurred under the Loan Agreement or any of the other
Loan Documents (as that term is defined in the Loan Agreement).
40
Attached hereto as Exhibit "A" is a schedule of all Eligible
Accounts which form the basis for this Request, which includes
for each such Eligible Account the name of the Account Debtor,
the Invoice Date, the Due Date, the Invoice Number, the amount of
the Account, and the name of the Account Seller from whom each
Eligible Account was or is to be purchased. The undersigned
certifies (i) that all such Eligible Accounts are now owned by
Borrower or will be purchased from one or more of the Account
Sellers, (ii) that the same schedule has been transmitted to
Congress and its liens or security interests on all such
Accounts, if any, will be released upon receipt of the proceeds
of the advance requested hereby, (iii) that all Eligible Accounts
contained in the attached schedule or included in the total
Eligible Accounts hereunder (except those Accounts to be
purchased with proceeds of the advance requested hereby, which
are subject to the first lien of Congress or Household) are free
and clear of any liens, claims or interests of any party except
for the Lender, (iv) that the Lender has a first and prior and
perfected lien and security interest in and to all such Accounts
except those to be purchased with proceeds hereof which may
currently be subject to first and prior liens in favor of
Congress, and (v) that the Lender's security interest will be
first and prior in and to such Accounts upon receipt by Congress
and/or Household of the proceeds of the requested advance.
To the extent that any Account on the attached listing of
Eligible Accounts was purchased from an Account Seller for whom
the Lender has not received (i) a fully executed Agreement for
Purchase of Receivables as contemplated by Sections 3.1(b) and
4.1(h) of the Loan Agreement, (ii) a fully executed
acknowledgment as contemplated by Section 4.1(i) of the Loan
Agreement and (iii) verification as contemplated by Section
4.1(j) of the Loan Agreement, such documents are attached hereto
and submitted for approval of the Lender.
DATED this _________ day of _________________________________,
1994.
PRIME FINANCIAL CORPORATION, an
Oklahoma corporation
By:
-----------------------------
Title:
--------------------------
41
Exhibit "E"
APR Corporation
Climate Master, Inc.
International Environmental Corporation
L&S Bearing Co.
Summit Machine Tool Manufacturing Corp.
El Dorado Chemical Company
Slurry Explosives Corporation
LSB Chemical Corp.
L&S Automotive Products Co.
Summit Machine Tool Inc. Corp.
Clipmate Corporation
Tribonetics Corporation
Rotex Corporation
International Bearings, Inc.
Hercules Energy Manufacturing Corporation
Koax Corp.
LSB Industries, Inc.
Universal Tech Corporation
CHP Corporation
42
Exhibit "F"
CERTIFICATE
STATE OF OKLAHOMA )
) ss.
COUNTY OF __________ )
The undersigned, -------------------------, on his oath,
does hereby depose and state as follows:
1. This Certificate is provided to BANK IV Oklahoma, N.A.
(the "Lender") pursuant to Section 4.1(c) of that certain Loan
Agreement (the "Loan Agreement") dated March 30, 1994 between the
Lender and Prime Financial Corporation, an Oklahoma corporation
(the "Borrower").
2. The undersigned, ---------------------, is the
currently acting and duly elected -------------------------
president of the Borrower.
3. The undersigned hereby certifies to the Lender that the
following persons are authorized to execute on behalf and in the
name of the Borrower all Borrowing Base Certificates (Exhibit "A"
to the Loan Agreement) and Requests for Advances (Exhibit "C" to
the Loan Agreement) contemplated or required by the Loan
Agreement (collectively the "Certifications"):
and the signature of any of the above-named individuals shall be
conclusive evidence, on which the Lender may rely at any time,
that the statements contained therein are true and correct.
4. The undersigned hereby certifies that he understands
and agrees that the Lender may rely upon the statements contained
herein and in the Certifications in acting under and pursuant to
the Loan Agreement.
------------------------------
43
STATE OF OKLAHOMA )
) ss.
COUNTY OF ----------)
Subscribed and sworn to before me this ----- day of March,
1994, by ----------------------------------.
----------------------------------
Notary Public
My Commission Expires:
- ----------------------
(SEAL)
44
EXHIBIT "G"
(Guaranty Agreement)
45
EXHIBIT "H"
Equity Bank for Savings, F.A. which in turn is the parent
company of:
United BankCard, Inc.
Northwest Financial Corporation
Northwest Capital Corporation
Credit Card Center, Inc.
Equity Financial Service Corp.
46
EXHIBIT "I"
NONE
47
EXHIBIT "K"
NONE
48
EXHIBIT "L"
NONE
EXHIBIT 10.39
-------------
GUARANTY AGREEMENT
LENDER: BANK IV OKLAHOMA, N.A.
515 SOUTH BOULDER
TULSA, OKLAHOMA 74103
GUARANTOR: LSB INDUSTRIES, INC.
16 S. PENNSYLVANIA
OKLAHOMA CITY, OK 73107
A. For value received, and for the purpose of inducing the
above named Lender to extend credit to PRIME FINANCIAL
CORPORATION, an Oklahoma corporation ("Debtor") or other
financial accommodations from the Lender named herein, the
undersigned as a primary obligor irrevocably and unconditionally:
(1) guarantees to the Lender that the undersigned Guarantor will
fully and promptly pay and discharge all indebtedness upon which
Debtor now is or may hereafter, from time to time, become
obligated to Lender under that Loan Agreement of even date
herewith between Lender and Debtor, specifically including, but
not limited to, that certain Promissory Note of even date
herewith in the principal amount of $25,000,000.00 by Debtor in
favor of Lender (the "Guaranteed Indebtedness"); (2) agrees,
without the Lender first having to proceed against Debtor or to
liquidate any security, to pay on demand all sums due to Lender
from Debtor under the Loan Agreement, and all losses, costs,
attorney fees or expenses which may be suffered or incurred by
Lender by reason of Debtor's default under the Loan Agreement;
(3) agrees to be bound by and on demand to pay any balance of any
Guaranteed Indebtedness subsequent to a sale of security held by
Lender, with or without notice to the undersigned; (4) further
agrees that liability hereunder will not be affected or impaired
by any failure, neglect or omission by Lender to protect in any
manner, the collection of the Guaranteed Indebtedness or the
security given therefor, including but not limited to any failure
or delay by Lender to perfect or keep perfected any lien or
security interest in any collateral, and regardless of whether
the Debtor has defenses or claims available under law or any
agreement with the Lender, including any failure or omission by
Lender to seek a deficiency judgment against Debtor; and (5)
represents and warrants to Lender that the undersigned owns 100%
of all capital stock of the Debtor and has received direct or
indirect benefit from the making of this Agreement and the
extension of credit or other financial accommodation from Lender
to Debtor.
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B. Lender may at any time without the consent of or notice
to the undersigned, without incurring responsibility to the
undersigned and without impairing or releasing the obligations of
the undersigned, and upon any terms and conditions the Lender may
elect: (1) change the manner, place for terms of payment or
extend the time of payment of any indebtedness of Debtor to
Lender; (2) extend, amend, modify, renew, replace, substitute
fork, change or alter any indebtedness of Debtor to Lender; (3)
raise or lower the interest rate or rates charged Debtor; (4)
sell, exchange, release surrender, realize upon or otherwise deal
with in any manner and in any order any property at any time
pledged to secure or securing the indebtedness of Debtor to
Lender or any liabilities incurred directly or indirectly
hereunder or any offsets against any such indebtedness or
liabilities; (5) exercise or refrain from exercising any rights
against debtor or others, or otherwise act or refrain from
acting; (6) settle or compromise any indebtedness hereby
guaranteed or hereby incurred with any one of the undersigned or
any other party for such sums as Lender may see fit in its sole
discretion, including any release of any one or more of the
undersigned or others in conjunction with a settlement or
compromise or otherwise; (7) subordinate the payment of all or
any part of any indebtedness of Debtor to Lender to the payment
of any liabilities which may be due Lender or others; (8) alter
in any respect the remedies or rights of Lender against the
Debtor; and/or (9) apply any sums paid to any indebtedness of
Debtor to Lender regardless of what indebtedness or liability of
Debtor to Lender remains unpaid.
C. This Agreement shall be an absolute, unconditional and
continuing guaranty of payment and not of collection and shall be
binding upon the undersigned, its successors and assigns. Any
one or more of the undersigned or any other party liable upon any
indebtedness or other obligation hereby guaranteed may be
released without affecting the liability hereunder of any of the
undersigned or any other party not so released. The undersigned
further agrees to the addition of guarantors without notice.
D. All rights of the Lender are cumulative and not
alternative to other rights. Suit may be brought against the
undersigned or any other parties liable, and against any one or
more of them, all or less than all, without impairing the right
of the Lender, its successors and assigns against the others of
the undersigned or such other parties. The Lender may assign
this Agreement or any of its rights and powers hereunder, with
all or any of the indebtedness hereby guaranteed and may assign
to any such assignee any of the security therefor and, in the
event of such assignment, the assignee hereof shall have the same
rights and remedies as if originally named herein in place of
2
Lender, and the Lender shall thereafter be fully discharged from
all responsibility with respect to any such indebtedness so
assigned.
E. This Agreement is understood to be unlimited in amount,
and shall extend to the full amount of any unpaid Guaranteed
Indebtedness owed by Debtor to Lender, regardless of any prior
payments on such Guaranteed Indebtedness.
F. Notwithstanding the provisions of any note or
obligation to which this Agreement applies, it is the intention
of the parties, and it is here provided, that Guarantor shall not
be liable for interest charges in excess of the maximum amount
permitted under the law applicable to this Agreement.
G. The undersigned expressly waives: (1) notice of
acceptance of this Agreement and of all extensions of credit to
Debtor; (2) notice of the creation of any indebtedness; (3)
presentment and demand for payment, notice of default or non-
payment of any of the debts of the Debtor; (4) protest and notice
of dishonor or of default to the undersigned or to any other
party with respect to any of the debts of the Debtor or with
respect to any security therefor; (5) acceptance of this
Agreement by Lender; (6) all other notices to which the
undersigned might otherwise be entitled; (7) demand for payment
under this guaranty; (8) any impairment of collateral, including,
but not limited to, the failure to perfect or maintain perfection
of a security interest in collateral; (9) any act or omission of
Lender (except acts or omissions in bad faith) which materially
increases the scope of the undersigned's risk, as guarantor; and
(10) any rights of setoff or any other credit against or
reduction in the indebtedness guaranteed hereby which may arise
under 12 O.S. Section 686, as may be amended from time to time,
or any other law. The undersigned further agrees that the
obligations hereunder are distinct and independent of the
obligations of the Debtor and shall not be limited by or
dependent upon the obtaining of any deficiency judgment in a
foreclosure action.
H. All amounts becoming payable by the undersigned to
Lender under this Guaranty shall be payable at Lender's offices
at 515 South Boulder (or P,.O. Box 2360, 74101) Tulsa, Oklahoma
74103 or such other place as Lender may from time to time
designate. The payment by the undersigned of any amount pursuant
to this Guaranty shall not in anywise entitle the undersigned to
any right, title or interest (whether by way of subrogation,
contribution or reimbursement or otherwise) in and to any of the
obligations or any of proceeds thereof, or any security or
collateral therefor.
3
I. In the event of a bankruptcy by the Debtor the
undersigned waives, as of the date of this Guaranty, any "claim"
(as that term is defined in the United States Bankruptcy Code)
which the undersigned might have or acquire against the Debtor
arising from the performance or existence of the undersigned's
obligations under this Guaranty Agreement, and to that extent
agrees that the undersigned is not a creditor of the Debtor.
J. Any deposits or other sums credited by or due from the
Lender to the undersigned, except for proceeds of the sale of
Debtor stock in Equity Bank for Savings, F.A., may be set off
against any and all liabilities of the undersigned to the Lender
arising under the terms of this Guaranty Agreement after an
"Event of Default" under the Loan Agreement. The rights granted
by this paragraph shall be in addition to the rights of Lender
under any statutory banker's lien or common law right of offset.
K. In the event that any payment from Debtor to Lender is
held to constitute a preference under the bankruptcy laws, such
payment by Debtor to Lender shall not constitute a release of the
undersigned from any liability hereunder and the undersigned
agrees to pay such amount to Lender as all other obligations of
the undersigned to Lender hereunder, and this Agreement shall
continue to be enforceable to its full extent and shall be
reinstated, as the case may be, to the extent of any such payment
or payments.
L. All capitalized terms in this Agreement shall have the
same meaning as in the Loan Agreement.
M. In order to induce the Lender to make the Loan
contemplated by the Loan Agreement, the Guarantor hereby
covenants as follows:
1. The Guarantor will do or cause to be done all
things necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises. The
Guarantor will become and remain qualified to conduct
business in each jurisdiction where the nature of the
business or ownership of property by the Guarantor may
require such qualification.
2. The Guarantor will pay and discharge or cause to
be paid and discharged all Taxes imposed upon its income or
profits or upon its property, real, personal or mixed, or
upon any part thereof, before the same shall be in default,
and all lawful claims for labor, rentals, materials and
supplies which, if unpaid, might become a Lien upon its
property or any part thereof; provided however, that the
4
Guarantor shall not be required to pay and discharge or
cause to be paid or discharged any such Tax, assessment or
claim so long as the validity thereof shall be contested in
good faith by appropriate proceedings, and adequate book
reserves shall be established with respect thereto, and the
Guarantor shall pay such Tax charge or claim before any
property subject thereto shall become subject to execution.
3. The Guarantor will reasonably comply with the
requirements of all applicable Laws and orders of any
Tribunal and obtain any licenses, permits, franchises or
other governmental authorizations necessary to the ownership
of its properties or to the conduct of its business, such
that the failure of Guarantor to comply herewith shall have
a material adverse effect on the Guarantor's and its
subsidiaries' (taken as a whole) business or financial
condition.
4. The Guarantor shall maintain a standard system of
accounting and shall furnish to the Lender as soon as
practicable after the end of each calendar quarter, and in
any event within fifty (50) days after the end of each said
calendar quarter, operating statements for the Guarantor on
a consolidated and consolidating basis, which shall be
certified, on the Guarantor's behalf, by the President or
the chief financial officer of the Guarantor to have been
prepared in accordance with GAAP and to fairly present the
financial condition of the Guarantor for such period, and
shall include at least a balance sheet as of the end of such
period, and a consolidated statement of income and a
consolidated statement of cash flow for such period, all in
reasonable detail, setting forth, in each case, the
comparative figures for the corresponding date or period
from the operating statements for the immediately preceding
fiscal year. In this Agreement, "GAAP" shall mean generally
accepted accounting principles applied on a consistent basis
in all material respects to those applied in the preceding
period.
5. As soon as practicable after the end of each
fiscal year of the Guarantor and in any event within 105
days thereafter, including for any fiscal year which may
have expired within six (6) months prior to the date of this
Agreement, the Guarantor shall furnish to the Lender the
following audited financial statements, together with a
report thereon, prepared in accordance with GAAP,
unqualified as to scope limitations imposed by the
Guarantor, of reputable independent certified public
accountants of recognized standing selected by the Guarantor
and acceptable to the Lender:
5
(a) A consolidated balance sheet of the Guarantor
at the end of such year,
(b) A consolidated statement of income of the
Guarantor for such year, and
(c) A consolidated statement of cash flow of the
Guarantor for such year setting forth in comparative
form the figures for the previous fiscal year, if
applicable, all in reasonable detail. In addition, the
certified public accountant shall prepare and submit to
Lender a report that contains a certification that in
the course of the audit necessary for the certification
of such financial statements, they have obtained no
knowledge of any Event of Default or Default as defined
in the Loan Agreement, or, if any such Event of Default
or Default existed or exists, specifying the nature and
period of existence thereof; provided, however, that
such accountants shall not be liable to the Lender by
reason of their failure to obtain knowledge of any such
Event of Default or Default which would not be
disclosed in the course of an audit conducted in
accordance with generally accepted auditing standards.
6. Promptly upon transmission thereof to the
Securities and Exchange Commission, the Guarantor shall
deliver to the Lender copies of all 10-K and 10-Q reports
and accompanying documents prepared and submitted on behalf
of the Guarantor.
7. Promptly upon receipt thereof, the Guarantor shall
deliver to the Lender a copy of each report submitted to the
Guarantor by independent accountants in connection with any
annual, interim or special audit made by them of the books
and records of the Guarantor, including, without limitation,
any comment letter submitted by such accountants to
management in connection with their audit.
8. Promptly upon completion thereof, and after any
request by Lender, the Guarantor shall deliver to the Lender
a copy of each operating budget and/or projection of
financial performance prepared for or by the Guarantor.
9. With reasonable promptness, the Guarantor will
give the Lender such other data and information relating to
the Guarantor as from time to time may be reasonably
requested by the Lender.
6
10. The Guarantor or its designee will keep complete
and accurate books and records with respect to the
Collateral and all its other properties, businesses and
operations and will permit employees and representatives of
the Lender to audit, inspect and examine the same to make
copies thereof and extracts therefrom during normal business
hours. All such records shall be at all times kept and
maintained at the offices of the Borrower, Guarantor or
Account Seller. Upon any Default or Event of Default, the
Guarantor will; surrender all such records relating to the
Collateral in its possession to the Lender upon receipt of
any request therefor from the Lender.
11. Immediately upon becoming aware of the existence
of any action, suit or proceeding at law or in equity before
any Tribunal, an adverse outcome in which would (i)
materially impair the ability of the Guarantor to carry on
its business substantially as now conducted, (ii) materially
and adversely affect the condition (financial or otherwise)
of the Borrower, or (iii) result in monetary damages in
excess of $500,000.00, the Guarantor will give the Lender a
written notice specifying the nature thereof and what
action, if any, is being taken or is proposed to be taken
with respect thereto.
N. To induce the Lender to enter into this Agreement and
to make the Loan to the Borrower under the provisions hereof, and
in consideration thereof, the Guarantor represents and warrants
as follows:
1. The Guarantor is duly organized, validly existing,
and in good standing under the Laws of its jurisdiction of
incorporation, and is duly licensed and in good standing as
a foreign corporation in each jurisdiction in which the
nature of the business transacted or the property owned is
such as to require licensing or qualification as such.
2. There is no action, suit, investigation or
proceeding threatened or pending before any Tribunal against
or affecting the Guarantor or any properties or rights of
the Guarantor which, if adversely determine,d would result
in a liability of greater than $500,000.00, and which is not
described on the attached Exhibit "A", which is made a part
hereof, or has not otherwise been reported to the Lender in
the Guarantor's audit letters from counsel for 1993.
3. The Guarantor's financial statements which have
been furnished to the Lender have been prepared in
conformity with GAAP, show all material liabilities, direct
7
and contingent, and fairly present the financial condition
of the Guarantor as of such date and the results of its
operations for the period then ended, and since such date
there has been no material adverse change in the business,
financial condition or operations of the Guarantor.
4. The Guarantor has full power, authority and legal
right to own and operate the properties which it now owns
and operates and to carry on the lines of business in which
it is now engaged, to the extent material to Guarantor's
operations. The Guarantor has full power, authority and
legal right to execute and deliver and to perform and
observe the provisions of this Agreement.
5. The Guarantor is not in default in the performance
of any material obligation, covenant, or condition in any
agreement to which it is a party or by which it is bound,
the default under which would have a material adverse effect
on its and its subsidiaries (taken as a whole) business or
condition, financial or otherwise. The Guarantor is not a
party to any contract or agreement or subject to any charter
or other corporate restriction which materially and
adversely affects its business, property or assets, or
financial condition. The Guarantor is not a party to or
otherwise subject to any contract or agreement which
restricts the right or ability of the Guarantor to execute
this Agreement or the performance of any of its terms.
Neither the execution nor delivery of this Agreement, nor
fulfillment of nor compliance with its terms and provisions
of, or constitute a default under, or result in any
violation of, or result in the creation of any Lien upon any
of the properties or assets of the Guarantor pursuant to, or
require any consent, approval or other action by or any
notice to or filing with any Tribunal (other than routine
filings after the Closing Date with the Securities and
Exchange Commission, any securities exchange and/or state
blue sky authorities) pursuant to, the charter or By-Laws of
the Guarantor, any award of any arbitrator, or any
agreement, instrument or Law to which the Guarantor is
subject.
6. The Board of Directors of the Guarantor has duly
authorized, and the Guarantor has the corporate power
necessary for, the execution and delivery of this Guaranty
Agreement and the performance of its terms. No other
consent of any other Person is required as a prerequisite to
the validity and enforceability of this Agreement.
8
7. To the best of Guarantor's knowledge, the
Guarantor is in reasonable compliance with all Laws,
ordinances, rules, regulations and other legal requirements
applicable to it and the business it conducts, the violation
of which could or would have a material adverse effect on
its business or condition, financial or otherwise. Neither
the ownership of any capital stock of the Guarantor nor any
continued role of any Person in the management or other
affairs of the Guarantor, (i) to the best of Guarantor's
knowledge results or could result in the Guarantor's
material noncompliance with any Laws, ordinances, rules,
regulations and other legal requirements applicable to the
Guarantor, or (ii) could or would have a material adverse
effect on the business or condition, financial or otherwise,
of the Guarantor.
8. The Guarantor has filed all Federal, state and
other income tax returns which are required to be filed and
has paid all Taxes, as shown on said returns, and has paid
all Taxes due or payable without returns and all assessments
received to the extent that such Taxes or assessments have
become due, except for filed extensions and Taxes being
contested in good faith by appropriate proceedings, a list
of which is attached hereto, marked Exhibit "B", and made a
part hereof. All Tax liabilities of the Guarantor are
adequately provided for on the books of the Guarantor
including interest and penalties. No income tax liability
of a material nature has been asserted by taxing authorities
for Taxes in excess of those already paid. There is no
proposed tax assessment against Guarantor and there is no
basis for any such assessment except as disclosed on Exhibit
"B".
O. A determination that any provision of this Guaranty is
unenforceable or invalid shall not affect the enforceability or
validity of any other provision.
P. The undersigned represents and warrants to the Lender
that it is aware of the financial condition of the Debtor and
acknowledges responsibility to monitor that financial condition
as long as this Guaranty Agreement is outstanding, and it is not
relying on Lender to provide information on the Debtor's
financial condition, now or in the future.
Q. Any and all other documents now or hereafter creating,
evidencing, securing and/or relating to Debtor's and/or
Guarantor's indebtedness and obligations to Lender, including,
but not limited to, this Agreement have been and/or will be
negotiated, consummated and performed in Tulsa, Tulsa County,
9
Oklahoma, and are intended to be a contract made under the laws
of the State of Oklahoma and to be construed in accordance with
the laws of such State, and Guarantor hereby waives all
objections to venue and jurisdiction of any state or federal
court sitting in Tulsa County, Oklahoma, in any action instituted
by the Lender by reason or arising out of the execution,
delivery, performance or enforcement of this Agreement or any
other documents relating to the indebtedness and obligations of
Debtor and/or Guarantor to Lender.
Dated this 30th day of March, 1994.
LSB INDUSTRIES, INC.,
a Delaware corporation
By:
--------------------------------
Name:
------------------------------
Title:
------------------- President
STATE OF OKLAHOMA )
) SS.
COUNTY OF )
This instrument was acnkowledged before me on the ----- day
of March, 1994 by -------------------- as -----------------
President of LSB Industries, Inc., a Delaware corporation.
----------------------------------
Notary Public
My Commission Expires:
- ----------------------
[ SEAL ]
10
EXHIBIT "A"
-----------
NONE
11
EXHIBIT "B"
-----------
Property Tax being contested by Koax Corp. and Climate
Master, Inc.
12
