FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 1998
________________________________________
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from __________________ to _______________
Commission file number __________________________________________
ClimaChem, Inc.
____________________________________________________
Exact name of Registrant as specified in its charter
OKLAHOMA 73-1528549
______________________________ _______________
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
_______________________________________________________
Address of principal executive offices (Zip Code)
(405) 235-4546
__________________________________________________
Registrant's telephone number, including area code
None
______________________________________________________
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
_________ _________
The Registrant does not have any equity securities registered under
the Securities Act of 1933, as amended. All outstanding shares of
Common Stock of the registrant are held directly or indirectly by
the registrant's parent company, LSB Industries, Inc.
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PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed:
ClimaChem, Inc. and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of ClimaChem,
Inc. (the "Company") at September 30, 1998, the condensed
consolidated statements of operations for the nine month and three
month periods ended September 30, 1998 and 1997 and the
consolidated statements of cash flows for the nine month periods
ended September 30, 1998 and 1997 have been subjected to a review,
in accordance with standards established by the American Institute
of Certified Public Accountants, by Ernst & Young LLP, independent
auditors, whose report with respect thereto appears elsewhere in
this Form 10-Q. The financial statements mentioned above are
unaudited and reflect all adjustments, consisting only of
adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the interim
periods. The results of operations for the nine months and three
months ended September 30, 1998 are not necessarily indicative of
the results to be expected for the full year. The condensed
consolidated balance sheet at December 31, 1997, was derived from
audited financial statements as of that date. Reference is made to
the Company's registration statement on Form S-4 filed April 10,
1998 for an expanded discussion of the Company's financial
disclosures and accounting policies.
1
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 1998 is unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1998 1997
_________________________________________ ___________ ___________
S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,021 $ 3,534
Trade accounts receivable, net of allowance 43,084 38,521
Inventories:
Finished goods 9,722 13,189
Work in process 8,472 7,803
Raw materials 18,823 17,768
__________ __________
Total inventory 37,017 38,760
Supplies and prepaid items 7,760 6,282
Income tax receivable 234 2,142
Current deferred income taxes 1,345 1,345
Due from LSB and affiliates 164 2,157
__________ __________
Total current assets 90,625 92,741
Property, plant and equipment, net 81,057 84,329
Due from LSB and affiliates, net 13,443 13,443
Other assets, net 11,173 10,362
__________ __________
$ 196,298 $ 200,875
========== ==========
</TABLE>
(Continued on following page)
2
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 1998 is unaudited)
(Dollars in thousands)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
________________________________________ ___________ __________
<S> <C> <C>
Current liabilities:
Accounts payable $ 16,875 $ 19,091
Accrued liabilities 14,036 9,075
Current portion of long-term debt (Note 4) 7,198 9,838
__________ _________
Total current liabilities 38,109 38,004
Long-term debt (Note 4) 121,782 126,346
Contingencies (Note 5)
Deferred income taxes 9,236 9,236
Stockholders' equity:
Common stock, $.10 par value; 500,000
shares authorized, 10,000 shares
issued 1 1
Capital in excess of par value 12,652 12,652
Accumulated other comprehensive loss (1,933) (1,003)
Retained earnings 16,451 15,639
___________ __________
27,171 27,289
___________ __________
Total stockholders' equity $ 196,298 $ 200,875
=========== ==========
</TABLE>
(See accompanying notes)
3
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
1998 1997
__________ __________
<S> <C> <C>
Revenues:
Net sales $ 202,462 $ 200,367
Other income 256 510
__________ _________
202,718 200,877
Costs and expenses:
Cost of sales 160,099 161,684
Selling, general and administrative (Note 6) 30,566 28,005
Interest 9,333 6,587
__________ _________
199,998 196,276
__________ _________
Income before provision for
income taxes 2,720 4,601
Provision for income taxes 1,908 1,821
_________ _________
Net income $ 812 $ 2,780
========= =========
Retained earnings at beginning of period 15,639 19,913
Dividends to parent - (2,303)
Retained earnings at end of period $ 16,451 $ 20,390
========= =========
</TABLE>
(See accompanying notes)
4
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months ended September 30, 1998 and 1997
(Dollars in thousands)
1998 1997
__________ __________
<S> <C> <C>
Revenues:
Net sales $ 65,332 $ 62,362
Other income 58 179
__________ __________
65,390 62,541
Costs and expenses:
Cost of sales 52,660 50,021
Selling, general and administrative (Note 6) 10,217 9,287
Interest 3,060 2,332
__________ __________
65,937 61,640
__________ __________
Income (loss) before provision for
income taxes (547) 901
Provision for income taxes 208 320
__________ ________
Net income (loss) $ (755) $ 581
========== ========
Retained earnings at beginning of period 17,206 20,517
Dividends to parent - (708)
__________ ________
Retained earnings at end of period $ 16,451 $ 20,390
========== ========
</TABLE>
(See accompanying notes)
5
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
1998 1997
__________ _________
<S> <C> <C>
Cash flows from operations:
Net income $ 812 $ 2,780
Adjustments to reconcile net income
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 7,042 5,710
Other 1,065 559
Provision for possible losses
on receivables and other assets 206 148
Provision for deferred income taxes - 358
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (5,376) (4,316)
Inventories 859 16
Supplies and prepaid items (1,499) (580)
Accounts payable (2,075) (6,926)
Accrued liabilities 5,556 (708)
Due to / from LSB and affiliates 3,606 -
___________ _________
Net cash provided (used) by operations 10,196 (2,959)
Cash flows from investing activities:
Capital expenditures (4,229) (6,228)
Proceeds from sales of equipment 64 273
Increase in other assets (1,892) (527)
___________ __________
Net cash used in investing activities (6,057) (6,482)
Cash flows from financing activities:
Payments on long-term debt (4,939) (23,776)
Long-term and other borrowings 150 50,000
Net change in revolving debt (1,863) (2,483)
Net change in amounts due to / from
LSB and affiliates - (11,261)
Dividends paid to parent - (2,302)
___________ __________
Net cash provided (used) by financing activities (6,652) 10,178
___________ __________
Net increase (decrease) in cash (2,513) 737
Cash and cash equivalents at beginning of period 3,534 1,109
__________ __________
Cash and cash equivalents at end of period $ 1,021 $ 1,846
========= =========
</TABLE>
(See accompanying notes)
6
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Note 1: Basis of Presentation ClimaChem, Inc. ("the Company"), a
_____________________________
wholly-owned subsidiary of LSB Industries, Inc. ("LSB" or
"Parent"), was organized under the laws of the State of Oklahoma in
October 1997. The Company's Certificate of Incorporation
authorizes the issuance of 500,000 shares of $.10 par value common
stock. All of the issued and outstanding shares of common stock of
the Company are directly or indirectly owned by LSB. The Company
is a holding company which maintains operations through various
wholly-owned subsidiaries. The Company owns, through its
subsidiaries, a substantial portion, but not all, of the operations
comprising the Chemical Business and Climate Control Business as
previously owned by LSB. Prior to November 21, 1997, all of the
Company's subsidiaries were wholly-owned subsidiaries of LSB,
directly or through one or more intermediaries, and were
contributed to the Company, following its formation, by LSB or
other subsidiaries in exchange for all of the outstanding common
stock of the Company. These exchanges were accounted for as a
reorganization of entities under common control and, accordingly,
reflect LSB's and its subsidiaries' historical cost of such
subsidiaries and net assets. Accordingly, the condensed
consolidated financial statements of the Company and its
subsidiaries reflect this reorganization in a manner similar to a
pooling of interests.
The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in the
accompanying financial statements.
Note 2: Changes in Accounting Effective January 1, 1998, the
_____________________________
Company changed its method of accounting for the costs of computer
software developed for internal use to capitalize costs incurred
after the preliminary project stage as outlined in Statement of
Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). These
capitalized costs will be amortized over their estimated useful
life. Prior to 1998, these costs were expensed as incurred. The
effect of this change on net income for the nine month period ended
September 30, 1998 was not material.
In the second quarter of 1998, the Accounting Standards Executive
Committee of the Securities and Exchange Commission released
Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of
start-up activities, including organization costs, be expensed as
7
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
incurred. As of September 30, 1998, the start-up costs capitalized
on its balance sheet are immaterial. SOP 98-5 is effective for
fiscal years ending after December 15, 1998. The Company expects
to adopt SOP 98-5 no later than the first quarter of 1999.
In June, 1998, the Financial Accounting Standards Board issued
Statement No. 133 ("SFAS #133"), Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its
issuance. The Company has not yet determined when this new
Statement will be adopted. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
The Company has not yet determined what all of the effects of SFAS
#133 will be on the earnings and financial position of the Company;
however, the Company expects that the interest rate forward
agreement discussed in Note 5, "Nitric Acid Project", will be
accounted for as a cash flow hedge upon adoption of SFAS #133, with
the effective portion of the hedge being classified in equity in
accumulated other comprehensive income or loss. The amount
included in accumulated other comprehensive income or loss will be
amortized to income over the initial term of the leveraged lease.
Note 3: Comprehensive Income Effective January 1, 1998, the
____________________________
Company adopted Financial Accounting Standard No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). The provisions of SFAS 130
require the Company to classify items of other comprehensive income
in the financial statements and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance
sheet. The Company has also made similar reclassifications for all
prior periods for comparative purposes. Other comprehensive income
for the nine month and three month periods ended September 30, 1998
and 1997 is detailed below.
8
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
Nine Months Three Months
Ended Ended
____________________ ____________________
9/30/98 9/30/97 9/30/98 9/30/97
_________________________________________________
(In thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ 812 $2,780 $ (755) $ 581
Foreign currency
translation loss (930) (859) (324) (309)
_______ _______ ________ ______
Comprehensive income (loss) $ (118) $1,921 $(1,079) $ 272
======= ======= ======== ======
Note 4: Long-Term Debt
______________________
(A) In November, 1997, the Company completed the sale of $105
million principal amount of 10 3/4% Senior Notes due 2007,
which Senior Notes were exchanged by the Company with
registered senior notes of the same amount and substantially
the same terms in April, 1998 (the "Notes"). Interest on the
Notes is payable semiannually in arrears on June 1 and
December 1 of each year, and the principal is payable in the
year 2007. The Notes are senior unsecured obligations of the
Company and rank pari passu in right of payment to all
existing senior unsecured indebtedness of the Company and its
subsidiaries. The Notes are effectively subordinated to all
existing and future senior secured indebtedness of the
Company.
Except as described below, the Notes are not redeemable at the
Company's option prior to December 1, 2002. After December 1,
2002, the Notes will be subject to redemption at the option of
the Company, in whole or in part, at the redemption prices set
forth in the indenture relating to the Notes between the
Company, the guarantors and the trustee ("Indenture"), plus
accrued and unpaid interest thereon, plus liquidated damages,
if any, to the applicable redemption date. In addition, until
December 1, 2000, up to $35 million in aggregate principal
amount of the Notes is redeemable, at the option of the
Company, at a price of 110.75% of the principal amount of the
Notes, together with accrued and unpaid interest, if any,
thereon, plus liquidated damages; provided, however, that at
least $65 million in aggregate principal amount of the New
Notes remain outstanding following such redemption.
9
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
In the event of a change of control of the Company, holders of
the Notes will have the right to require the Company to
repurchase the Notes, in whole or in part, at a redemption
price of 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon, plus liquidated damages,
if any, to the date of repurchase.
The Company is a holding company with no assets or operations
other than its investments in its subsidiaries, and each of
its subsidiaries is wholly owned, directly or indirectly, by
the Company. The Company's payment obligations under the
Notes are fully, unconditionally and joint and severally
guaranteed by all of the direct and indirect existing
subsidiaries of the Company, except for El Dorado Nitrogen
Company ("EDNC"). The assets, equity, and earnings of EDNC
are currently inconsequential to the Company. Each of the
guarantors of the Notes are wholly-owned subsidiaries of the
Company. Separate financial statements and other disclosures
concerning the guarantors are not presented herein, because
management has determined they are not material to investors.
(B) LSB and the Company have an asset based credit agreement that
provides for a $65 million revolving credit facility (the
"Revolving Credit Facility") with four separate loan
agreements (the "Credit Facility Agreement"), one for certain
subsidiaries of the Company and three for LSB and its
subsidiaries which are not the Company or subsidiaries of the
Company. Under the Revolving Credit Facility, LSB and certain
subsidiaries of LSB that are not the Company or subsidiaries
of the Company have a right to borrow on a revolving basis up
to $24 million under the Revolving Credit Facility ($16.4
million outstanding at September 30, 1998). Subject to the
amount of eligible collateral, the Company has the right to
borrow up to $65 million under the Revolving Credit Agreement
less any amounts borrowed under the Revolving Credit Facility
by LSB and its subsidiaries that are not the Company or
subsidiaries of the Company. Borrowings under the Revolving
Credit Facility bear an annual rate of interest at a floating
rate based on the lender's prime rate plus .5% per annum or,
at the Company's option, on the lender's LIBOR rate plus
2.875% per annum (which rates are subject to increase or
reduction based upon specified availability and adjusted
tangible net worth levels). The agreement will terminate on
December 31, 2000, subject to automatic renewal for terms of
13 months each, unless terminated by either party. The Credit
Facility Agreement also requires the payment of an annual
facility fee equal to 0.5% of the unused Revolving Credit
10
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Facility. The Company may terminate the Revolving Credit
Facility prior to maturity; however, should the Company do so,
it would be required to pay a termination fee equal to 1% of
the average daily balance of loans and letters of credit
outstanding during the 180 day period immediately prior to
termination.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of
subsidiaries of the Company that are borrowers under the
Revolving Credit Agreement.
(C) At September 30, 1998, the Company's wholly-owned Australian
subsidiary had an AUS$10.5 million (US$6.1 million) revolving
credit facility with a bank (the "TES Revolver") which is
renewed by the bank on an annual basis. The TES Revolver
provides for borrowings based on specified percentages of
qualified eligible assets. The interest rate on the TES
Revolver is dependent upon the borrowing option elected by the
Company's Australian subsidiary. Borrowings under an
overdraft option, as defined, generally bear interest at the
bank's base lending rate (which approximates the U.S. prime
rate) plus .5% per annum. Borrowings under the commercial
bill option generally bear interest at the bank's yield rate,
as defined. At September 30, 1998 all borrowings under the
TES Revolver were under the commercial bill option which had
a weighted average interest rate of 7.23% per annum.
At September 30, 1998, the Company's Australian subsidiary was
in technical noncompliance with certain financial covenants
contained in the TES Revolver. At the time of closing of the
TES Revolver, the subsidiary was also in technical
noncompliance with certain financial covenants; however, the
bank has confirmed that it will not act on any default so long
as, in its opinion, such default will not impact the ability
of TES or LSB to continue operations or service and repay its
borrowings outstanding under the TES Revolver. At December
31, 1997 and September 30, 1998, all borrowings outstanding
under the TES Revolver have been classified as due within one
year in the accompanying condensed consolidated financial
statements.
At September 30, 1998, the Company was not in compliance with
certain financial covenants related to debt instruments other than
the Notes. In November, 1998, the Company obtained waivers for
such noncompliance and amendments to reset the covenants where
11
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
applicable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" - "Sources of Funds" for
further discussion of such waivers and debt instruments.
Note 5: Commitments and Contingencies
_____________________________________
Nitric Acid Project
___________________
In June, 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC is acting as an agent to construct, and
upon completion of construction, will operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC has guaranteed the performance of EDNC's obligations
under the Bayer Agreement. Under the terms of the Bayer Agreement,
EDNC is to lease the EDNC Baytown Plant pursuant to a leveraged
lease from an unrelated third party with an initial lease term of
ten years from the date on which the EDNC Baytown Plant becomes
fully operational. Upon expiration of the initial ten-year term
from the date the EDNC Baytown Plant becomes operational, the Bayer
Agreement may be renewed for up to six renewal terms of five years
each; however, prior to each renewal period, either party to the
Bayer Agreement may opt against renewal. It is anticipated that
construction of the EDNC Baytown Plant will cost approximately $65
million and will be completed by the first quarter of 1999.
Construction financing of the EDNC Baytown Plant is being provided
by an unaffiliated lender. Neither the Company, EDNC nor EDC has
guaranteed any of the lending obligations for the EDNC Baytown
Plant. In connection with the leveraged lease, the Company entered
into an interest rate forward agreement to fix the effective rate
of interest implicit in such lease. As of September 30, 1998, the
fair value of such agreement represented a liability of $7.3
million for which the Company has posted margin and letters of
credit totaling the same. Bayer has agreed to reimburse the
Company for 50% of the ultimate cost of the hedging contract
associated with the interest rate forward agreement. See Note 2,
"Changes in Accounting", for the expected accounting upon adoption
of SFAS #133.
EDNC has agreed in the Bayer Agreement that, prior to
completion of EDNC's Baytown Plant, EDNC will deliver to Bayer a
certain amount of Bayer's needs for nitric acid at Bayer's Baytown
plant. In 1998, EDNC began delivering nitric acid to Bayer that it
has purchased from EDC and unaffiliated third party vendors.
12
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Legal Matters
_____________
Following is a summary of certain legal actions involving the
Company:
A. A subsidiary of the Company submitted to the State of Arkansas
a "Groundwater Monitoring Work Plan" which was approved by the
State of Arkansas. Pursuant to the Groundwater Monitoring Work
Plan, the subsidiary has performed phase I and II groundwater
investigations, and submitted a risk assessment report to the
State of Arkansas. The risk assessment report is currently
being held in abeyance by the State of Arkansas. On August
10, 1998, the subsidiary entered into a Consent Administrative
Agreement ("CAA") with the State of Arkansas, which requires
the implementation of interim measures to reduce the
concentrations of nitrates in the shallow groundwater.
On February 12, 1996, the subsidiary entered into a Consent
Administrative Agreement ("Administrative Agreement") with the
State of Arkansas to resolve certain compliance issues
associated with nitric acid concentrators. Pursuant to the
Administrative Agreement, the subsidiary installed additional
pollution control equipment to address the compliance issues.
The subsidiary was assessed $50,000 in civil penalties
associated with the Administrative Agreement. In the summer of
1996 and then on January 28, 1997, the subsidiary executed
amendments to the Administrative Agreement ("Amended
Agreements"). The Amended Agreements imposed a $150,000 civil
penalty, which penalty has been paid. Since the 1997
amendment, the Chemical Business has been assessed stipulated
penalties of approximately $67,000 by the Arkansas Department
of Pollution Control and Ecology ("ADPC&E") for violations of
certain provisions of the 1997 Amendment. The Chemical
Business believes that the El Dorado Plant has made progress
in controlling certain off-site emissions; however, such off-
site emissions have occurred and continue to occur from time
to time, which could result in the assessment of additional
penalties against the Chemical Business by the ADPC&E for
violation of the 1997 Amendment.
During May, 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
13
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
ditch near EDC's El Dorado, Arkansas, facility ("El Dorado
Facility"). The referenced CAA resolves this spill by
requiring EDC to implement wastewater minimization
characterization, and enhanced treatment in order to meet more
stringent effluent limits by February 1, 2002. The CAA
includes a civil penalty in the amount of $183,700 which
includes $42,000 that has already been paid by funding an
environmental project in the community, and $125,000 which
will be paid in the form of environmental improvements at the
El Dorado Plant over a five year period. EDC paid stipulated
penalties in the amount of $5,000 relating to upset conditions
occurring in September, 1998.
B. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the defendants
allegedly violated certain federal and state antitrust laws in
connection with alleged price fixing of certain explosive
products. The plaintiffs are suing for an unspecified amount
of damages, which, pursuant to statute, plaintiffs are
requesting be trebled, together with costs. Based on the
information presently available to the Company, the Company
does not believe that the Chemical Business conspired with any
party, including but not limited to, the five (5) other
defendants, to fix prices in connection with the sale of
commercial explosives. Discovery has only recently commenced
in this matter. The Chemical Business intends to vigorously
defend itself in this matter.
The Company's Chemical Business has been added as a defendant
in a separate lawsuit pending in Missouri. This lawsuit
alleges a national conspiracy, as well as a regional
conspiracy, directed against explosive customers in Missouri
and seeks unspecified damages. The Company's Chemical Business
has been included in this lawsuit because it sold products to
customers in Missouri during a time in which other defendants
have admitted to participating in an antitrust conspiracy, and
because it has been sued in the preceding described lawsuit.
Based on the information presently available to the Company,
the Company does not believe that the Chemical Business
conspired with any party, to fix prices in connection with the
sale of commercial explosives. The Chemical Business intends
to vigorously defend itself in this matter.
14
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
During the third quarter of 1997, a subsidiary of the Company
was served with a lawsuit in which approximately 27 plaintiffs
have sued approximately 13 defendants, including a subsidiary
of the Company alleging personal injury and property damage
for undifferentiated compensatory and punitive damages of
approximately $7,000,000. Specifically, the plaintiffs assert
blast damage claims, nuisance (road dust from coal trucks) and
personal injury claims (exposure to toxic materials in
blasting materials) on behalf of residents living near the
Heartland Coal Company ("Heartland") strip mine in Lincoln
County, West Virginia. Heartland employed the subsidiary to
provide blasting materials and personnel to load and shoot
holes drilled by employees of Heartland. Down hole blasting
services were provided by the subsidiary at Heartland's
premises from approximately August 1991, until approximately
August 1994. Subsequent to August 1994, the subsidiary
supplied blasting materials to the reclamation contractor at
Heartland's mine. In connection with the subsidiary's
activities at Heartland, the subsidiary has entered into a
contractual indemnity to Heartland to indemnify Heartland
under certain conditions for acts or actions taken by the
subsidiary for which the subsidiary failed to take, and
Heartland is alleging that the subsidiary is liable thereunder
for Heartland's defense costs and any losses to or damages
sustained by, the plaintiffs in this lawsuit. Discovery has
only recently begun in this matter, and the Company intends to
vigorously defend itself in this matter. Based on limited
information available, the subsidiary's counsel believes that
the exposure, if any, to the subsidiary related to this
litigation is in the $100,000 range.
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 is not presently expected
to have a material effect on the financial position of the Company,
but could have a material impact to the net loss of a particular
quarter or year, if resolved unfavorably.
15
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Note 6: Transactions with Related Parties On November 21, 1997,
_________________________________________
the Company and LSB entered into a services agreement (the
"Services Agreement") pursuant to which LSB will provide to the
Company various services, including financial and accounting, order
entry, billing, credit, payable, insurance, legal, human resources,
advertising and marketing, and related administrative services,
that LSB has historically provided to the operations and businesses
of the Company. The Company will pay to, or reimburse, LSB for the
Company's payroll that is paid by LSB and the costs and expenses
incurred by LSB in the performance of the Services Agreement.
Under the terms of the Services Agreement, the Company will also
pay to, or reimburse, LSB for the value of the office facilities of
LSB, including LSB's principal offices and financial accounting
offices utilized in the performance of the Services Agreement. LSB
will determine the proportionate usage of such facilities by LSB
and the Company, and the Company will pay up to, or reimburse, LSB
for its proportionate share of such usage.
Charges for such services included in the accompanying condensed
consolidated financial statements were $1,704,000 and $1,350,000,
and $561,000 and $450,000 for the nine month and three month
periods ended September 30, 1998 and 1997, respectively.
Management of the Company believes these charges from LSB
reasonably approximate additional general and administrative costs
which would have been incurred if the Company had been an
independent entity during such periods. These amounts do not
include reimbursements for costs described in the next paragraph or
amounts paid by LSB relating to certain of the Company's payroll
that are directly charged to the Company by LSB.
The Services Agreement also provides that LSB will permit employees
of the Company and its subsidiaries to continue to participate in
the benefit plans and programs sponsored by LSB. The Company will
pay to, or reimburse, LSB for the costs associated with
participation by the employees of the Company in LSB's benefit
plans and programs.
On November 21, 1997, LSB and the Company entered into a management
agreement (the "Management Agreement"), which provides that LSB
will provide to the Company, managerial oversight and guidance
concerning the broad policies, strategic decisions and operations
of the Company and the subsidiaries and the rendering of such
further managerial assistance as deemed reasonably necessary by
16
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
LSB. Under the Management Agreement, the Company is to pay LSB a
fee for such services which will not exceed $1.8 million annually
based on a formula set forth in the Management Agreement, if the
Company's consolidated earnings before interest, income taxes,
depreciation and amortization ("EBITDA"), exceeds certain amounts
on a quarterly basis during a year and certain amounts at the end
of a year during the term of the Management Agreement. The maximum
management fee amount to be paid to LSB by the Company will be
increased annually commensurate with the percentage increase, if
any, in the Consumer Price Index during the preceding calendar
year, beginning January 1, 1998. In the third quarter of 1998,
$450,000 was accrued as a payable to LSB by the Company pursuant to
the Management Agreement, bringing the total to $1,350,000 for the
first nine months of the year. This amount is included in selling,
general and administrative expenses in the nine months ended
September 30, 1998 (none in 1997).
On November 21, 1997, the Company and LSB entered into a tax
sharing agreement (the "Tax Sharing Agreement") which provides for
(i) the allocation of payments of taxes for periods during which
the Company and its subsidiaries and LSB are included in the same
consolidated group for federal income tax purposes or the same
consolidated, combined or unitary returns for state, local or
foreign tax purposes, (ii) the allocation of responsibility for the
filing of tax returns, (iii) the conduct of tax audits and the
handling of tax controversies, and (iv) various related matters.
For tax periods beginning after December 1996 and ending ten years
thereafter, so long as the Company is included in LSB's
consolidated federal income tax returns or state consolidated
combined or unitary tax returns, the Company will be required to
pay to LSB an amount equal to the Company's consolidated federal
and state income tax liability calculated as if the Company and its
subsidiaries were a separate consolidated tax group and not part of
LSB's consolidated tax group. Such amount is payable in estimated
quarterly installments. If the sum of the estimated quarterly
installments is (a) greater than the tax liability of the Company,
on a consolidated basis, as determined by LSB, under the Tax
Sharing Agreement, then LSB will refund the amount of the excess to
the Company, or (b) less than the Company's tax liability, on a
consolidated basis, as determined by LSB, under the Tax Sharing
Agreement, then the Company will pay to LSB the amount of the
deficiency. For the nine months ended September 30, 1998 and 1997,
respectively, the Company paid or was obligated to pay LSB $1.9
million and $1.0 million under the Tax Sharing Agreement.
Under the terms of an Indenture between the Company, the guarantors
and the trustee relating to the Notes (as defined in Note 4), the
17
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Company is permitted to distribute or pay in the form of dividends
and other distributions to LSB in connection with the Company's
outstanding equity securities or loans, (a) advances or investments
to any person (including LSB), up to 50% of the Company's
consolidated net income for the period (taken as one accounting
period), commencing on the first day of the first full fiscal
quarter commencing after the Issue Date (as defined in Note 4) to
and including the last day of the fiscal quarter ended immediately
prior to the date of said calculation (or, in the event
consolidated net income for such period is a deficit, then minus
100% of such deficit), plus (b) the aggregate net cash proceeds
received by the Company from the sale of its capital stock. This
limitation will not prohibit (i) payment to LSB under the Services
Agreement, Management Agreement and the Tax Sharing Agreement, or
(ii) the payment of any dividend within 60 days after the date of
its declaration if such dividend could have been made on the date
of such declaration. Subsequent to September 30, 1998, based on
the terms stated above, the Company declared and paid to LSB a
dividend in the amount of $405,941 representing 50% of the
Company's consolidated net income for the nine month period ended
September 30, 1998.
The Company also leases the facilities of one of its Climate
Control manufacturing subsidiaries from a subsidiary of LSB that is
not the Company or a subsidiary of the Company under an operating
lease. Rental expense associated with the lease was $356,250 and
$335,490 during the first nine months of 1998 and 1997,
respectively.
The Company has, at various times, maintained certain unsecured
borrowings from LSB and its subsidiaries and made loans and
advances to LSB which generally bear interest. At September 30,
1998, the Company had loans and advances due from LSB of
approximately $13.4 million; $10.0 million of these loans were
loaned to LSB from the proceeds of the sale of the Notes and bears
interest at 10-3/4%, maturing November 2007. The remainder of
these loans to LSB and affiliates relate to cash advances from the
Company to LSB and affiliates prior to the sale of the Notes and
these loans are due November 2007 and bear interest at 7% per
annum. The Company has $.2 million due from LSB and affiliates as
of September 30, 1998, included in current assets related primarily
to accrued interest on the above-referenced loans and advances
offset by amounts owed to LSB under the Management Agreement, which
is non-interest bearing.
18
<PAGE>
<PAGE>
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 ("MD&A") should be
read in conjunction with a review of the Company's September 30,
1998 Condensed Consolidated Financial Statements.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
OVERVIEW
</TABLE>
<TABLE>
<CAPTION>
In October, 1997, the Company was organized as a new wholly
owned subsidiary of LSB Industries, Inc. ("LSB"). The Company owns
substantially all of LSB's Chemical and Climate Control Businesses.
See Note 1 of Notes to Condensed Consolidated Financial Statements.
Information about the Company's operations in different industry
segments for the nine months and three months ended September 30,
1998 and 1997 is detailed below.
Nine Months Three Months
1998 1997 1998 1997
________ ________ ________ ________
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Sales:
Chemical $112,217 $122,853 $ 34,695 $ 32,658
Climate Control 90,245 77,514 30,637 29,704
________ ________ ________ ________
202,462 200,367 65,332 62,362
======== ======== ======== ========
Gross profit (1):
Chemical $ 15,815 $ 16,096 $ 3,478 $ 3,516
Climate Control 26,548 22,587 9,194 8,825
________ ________ ________ ________
$ 42,363 $ 38,683 $ 12,672 $ 12,341
======== ======== ======== ========
Operating profit (2):
Chemical $ 3,809 $ 4,647 $ (494) $ 351
Climate Control 8,244 6,541 3,007 2,882
________ ________ ________ ________
12,053 11,188 2,513 3,233
Interest expense (9,333) (6,587) (3,060) (2,332)
________ ________ ________ ________
Income (loss) before provision
for income taxes $ 2,720 $ 4,601 $ (547) $ 901
======== ======== ======== ========
<FN>
(1) Gross profit by industry segment represents net sales less
cost of sales.
19
<PAGE>
(2) Operating profit by industry segment represents revenues less
operating expenses before deducting interest expense and
income taxes.
</FN>
</TABLE>
Chemical Business
_________________
Although sales in the Chemical Business have declined from
$122.9 million in the nine months ended September 30, 1997, to
$112.2 million in the nine months ended September 30, 1998 (a
decrease of 8.7%), exclusive of $997,000 of the fee to LSB under
the Management Agreement allocated to the Chemical Business in the
above table, the operating profit has increased approximately
$160,000 in 1998, compared to 1997.
During the first nine months of 1997, limitations on
production, as a result of certain mechanical and design problems
relating to the construction and start-up of a concentrated nitric
acid plant, resulted in significant fixed costs being expended as
period costs rather than being absorbed as cost of product being
produced and sold. In addition, significant amounts were expended
for engineering, consulting, and other costs to bring the nitric
acid plant up to its stated capacity.
Additionally, the cost of the Chemical Business' primary raw
material, anhydrous ammonia, averaged approximately $186 per ton in
the first nine months of 1997, compared to approximately $160 per
ton in the first nine months of 1998. The Chemical Business
purchases approximately 220,000 tons of anhydrous ammonia per year
under two contracts, both effective as of January 1, 1997. The
Company's purchase price of anhydrous ammonia under these contracts
can be higher or lower than the current market spot price of
anhydrous ammonia. Pricing is subject to variations due to
numerous factors contained in these contracts. Based on the price
calculations contained in the contracts, one contract is presently
priced above the current market spot price. The Chemical Business
is required to purchase approximately one half of its requirements
from each of the suppliers under the terms of the contracts.
The ammonia industry has added an additional one million tons
of capacity of anhydrous ammonia in the western hemisphere in 1998
and the Company believes there is approximately one million tons of
additional annual capacity of anhydrous ammonia being constructed
in the western hemisphere scheduled for completion in 1999. The
Company believes this additional capacity may contribute to a
decline in the future market price of anhydrous ammonia.
In 1998, the Chemical Business has been adversely affected by
the extreme drought conditions in the mid-south market during the
primary fertilizer season, followed by excess wet conditions and
20
<PAGE>
floods in the fall season, resulting in substantially lower volume
and lower sales prices for certain of its products sold in its
agricultural markets.
During July, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries is acting as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant, when constructed, will be operated by the
Company's subsidiary and will supply nitric acid for Bayer's
polyurethane business under a long-term supply contract.
Management estimates that, after the initial startup phase of
operations at the plant, at full production capacity based on terms
of the Bayer Agreement and dependent upon the price of anhydrous
ammonia, based on the price of anhydrous ammonia as of the date of
this report, the plant should generate approximately $35 million to
$50 million in annual gross revenues. It is anticipated that the
construction of the nitric acid plant at Bayer's facility in
Baytown, Texas, will cost approximately $65 million and
construction is scheduled to be completed in the first quarter of
1999. The Company's subsidiary is to lease the nitric acid plant
pursuant to a leverage lease from an unrelated third party for an
initial term of ten (10) years from the date that the plant becomes
fully operational, and the construction financing of this plant is
being provided by an unaffiliated lender.
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, such have had an adverse effect on the Company's
consolidated results of operations in 1998. The Company has
received an offer to sell its Australian subsidiary. There are no
assurances that the Company would sell the Australian subsidiary.
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
21
<PAGE>
As indicated in the above table, the Climate Control Business
reported improved sales (an increase of 16.4%) and improved
operating profit (an increase of 26.0%) for the first nine months
of 1998 as compared to the first nine months of 1997.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 vs. Nine Months Ended
September 30, 1997.
__________________________________________________________
Revenues
________
Total revenues for the nine months ended September 30, 1998
and 1997 were $202.7 million and $200.9 million, respectively (an
increase of $1.8 million). Sales increased $2.1 million and other
income decreased $.3 million.
Net Sales
_________
Consolidated net sales included in total revenues for the nine
months ended September 30, 1998 were $202.5 million, compared to
$200.4 million for the first nine months of 1997, an increase of
$2.1 million. This increase in sales resulted from: (i) increased
sales in the Climate Control Business of $12.7 million due to
increased sales volume and price increases in this Business' Heat
Pump and Fan Coil product lines, offset by (ii) decreased sales in
the Chemical Business of $10.6 million due to lower sales in the
U.S. of agricultural and blasting products and decreased business
volume of its Australian subsidiary. Sales were lower in the
Chemical Business during the first nine months of 1998, compared to
the first nine months of 1997, as a result of adverse weather
conditions in its agricultural markets during the spring and fall
planting seasons. Blasting sales in the Chemical Business declined
as a result of elimination of certain low profit margin sales and
decreased volume in the Australian subsidiary resulting from
adverse economic developments in Asia.
Gross Profit
____________
Gross profit was 20.9% for the first nine months of 1998,
compared to 19.3% for the first nine months of 1997. The increase
in the gross profit percentage was due primarily to: (i) lower
production costs in the Chemical Business, due to the effect of
lower prices of anhydrous ammonia in 1998, (ii) lower unabsorbed
overhead costs caused by excessive downtime related to problems
associated with mechanical failures at the Chemical Business'
primary manufacturing plant in 1997, and (iii) lower material costs
in the Climate Control Business as a result of improved unit cost
of certain raw materials.
22
<PAGE>
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 15.1% in the nine month period ended
September 30, 1998, compared to 14.0% for the first nine months of
1997. This increase is primarily the result of lower sales in the
Chemical Business without an equivalent decrease in fixed SG&A
expenses and a $1,350,000 charge recorded pursuant to the
Management Agreement with LSB as discussed in Note 6 of Notes to
Condensed Consolidated Financial Statements elsewhere in this
report.
Interest Expense
________________
Interest expense for the Company was $9.3 million during the
first nine months of 1998, compared to $7.7 million, before
deducting capitalized interest, during the first nine months of
1997. During the first nine months of 1997, $1.1 million of
interest expense was capitalized in connection with construction of
the DSN Plant. The increase of $1.6 million before the effect of
capitalization primarily resulted from increased borrowings.
Income Before Taxes
___________________
The Company had income before income taxes of $2.7 million in
the first nine months of 1998, compared to income before income
taxes of $4.6 million in the nine months ended September 30, 1997.
The decreased profitability of $1.9 million was primarily due to
increased gross profit, more than offset by increases in SG&A and
interest expenses as previously discussed.
Provision for Income Taxes
__________________________
The provision for income taxes pursuant to the terms of the
Tax Sharing Agreement as discussed in Note 6 of Notes to Condensed
Consolidated Financial Statements was $1.9 million for the first
nine months of 1998 on pre-tax income of $2.7 million (70.0%),
compared to $1.8 million in the first nine months of 1997 on pre-
tax income of $4.6 million (39.6%). The effective tax rate is
greater than the statutory rate due to losses associated with the
Company's Australian subsidiary, which provides no current benefit
due to its cumulative tax loss position.
Three Months Ended September 30, 1998 vs. Three Months Ended
September 30, 1997.
_____________________________________________________________
Revenues
________
Total revenues for the three months ended September 30, 1998
and 1997 were $65.4 million and $62.6 million, respectively (an
increase of $2.8 million). Sales increased $3.0 million and other
income decreased $.2 million.
23
<PAGE>
Net Sales
_________
Consolidated net sales included in total revenues for the
three months ended September 30, 1998 were $65.4 million, compared
to $62.4 million for the third quarter of 1997, an increase of $3.0
million. This increase in sales resulted from: (i) increased
sales in the Chemical Business of $2.0 million primarily due to
sales of nitric acid products pursuant to the Bayer Agreement (see
Note 5 of Notes to Condensed Consolidated Financial Statements),
offset by decreased business volume of its Australian subsidiary,
and (ii) increased sales in the Climate Control Business of $.8
million due to increased volume and prices in this Business' Heat
Pump product lines.
Gross Profit
____________
Gross profit was 19.4% for the third quarter of 1998, compared
to 19.8% for the third quarter of 1997. The decrease in the gross
profit percentage was due primarily to: (i) fixed costs of the
Company's Australian subsidiary with lower sales volume, and (ii)
non-recurring insurance claims and vendor rebates recorded in the
third quarter of 1997, offset by (iii) lower production costs in
the Chemical Business, due to the effect of lower prices of
anhydrous ammonia in 1998, and (iv) lower material costs caused by
improved unit cost of certain raw materials in the Climate Control
Business.
Selling, General and Administrative Expenses
____________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 15.6% in the three month period ended
September 30, 1998, compared to 14.9% for the third quarter of
1997. This increase is primarily the result of a $450,000 charge
incurred pursuant to the Management Agreement with LSB discussed in
Note 6 of Notes to Condensed Consolidated Financial Statements
elsewhere in this report.
Interest Expense
________________
Interest expense for the Company was $3.1 million during the
third quarter of 1998, compared to $2.3 million during the third
quarter of 1997. The increase of $.8 million primarily resulted
from increased borrowings.
Income (loss) Before Taxes
__________________________
The Company had a loss before income taxes of $.5 million in
the third quarter of 1998, compared to income before income taxes
of $.9 million in the three months ended September 30, 1997. The
decreased profitability of $1.4 million was primarily due to: (i)
24
<PAGE>
increased SG&A expense, and (ii) increased interest expense, as
previously discussed.
Provision for Income Taxes
__________________________
The provision for income taxes pursuant to the terms of the
Tax Sharing Agreement as discussed in Note 6 of Notes to Condensed
Consolidated Financial Statements was $.2 million for the third
quarter of 1998 on a pre-tax loss of $.5 million, compared to $.3
million in the third quarter of 1997 on pre-tax income of $.9
million (35.5%). A tax provision is incurred on a pre-tax loss in
the quarter ended September 30, 1998, and the effective tax rate is
greater than the statutory rate for the quarter ended September 30,
1997, due to losses associated with the Company's Australian
subsidiary, which provides no current benefit due to its cumulative
tax loss position.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow and borrowings under its revolving
credit facilities, and more recently, by the issuance of senior
unsecured notes.
Net cash provided by operations for the nine months ended
September 30, 1998 was $10.2 million, after adding back to income
$8.1 million for noncash depreciation and amortization, $.2 million
in provisions for possible losses on accounts receivable, and
includes the following changes in assets and liabilities: (i)
accounts receivable increases of $5.4 million; (ii) inventory
decreases of $.9 million; (iii) increases in supplies and prepaid
items of $1.5 million; (iv) increases in accounts payable and
accrued liabilities of $3.5 million; and (v) reductions of amounts
due from LSB and affiliates of $3.6 million. The increase in
accounts receivable is due to increased sales in the Climate
Control Business (see "Results of Operations" for discussion of
increase in sales), seasonal sales of agricultural products in the
Chemical Business, and sales of nitric acid products pursuant to
the Bayer Agreement. The decrease in inventory was due to seasonal
sales of agricultural products in the Chemical Business, offset by
increases to support higher business volumes in the Climate Control
Business. The increase in supplies and prepaid items was due
primarily to an increase in maintenance and manufacturing supplies
at the Chemical Business. The increase in accounts payable and
accrued liabilities is attributable to accrued interest expense
related to senior unsecured notes which is payable semi-annually.
25
<PAGE>
Cash Flow From Investing And Financing Activities
_________________________________________________
Cash used by investing activities for the nine months ended
September 30, 1998 included $4.2 million in capital expenditures
and $1.9 million increases in other assets. The capital
expenditures took place in the Chemical and Climate Control
Businesses to enhance production and product delivery capabilities.
The increase in other assets was primarily attributable to deposits
made in connection with an interest rate hedge contract related to
the agreement with Bayer and deferred loan costs associated with
the 10-3/4% Senior Notes discussed in Note 4 of Notes to Condensed
Consolidated Financial Statements.
Net cash used by financing activities included (i) payments on
long-term debt of $4.9 million; and (ii) net decreases in revolving
debt of $1.9 million.
Source of Funds
________________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
The Company owns substantially all of LSB's Chemical and
Climate Control Businesses. On November 26, 1997, the Company
issued senior unsecured notes which were exchanged with registered
senior notes of the same amount and substantially the same terms in
April, 1998 ("Notes") in the aggregate amount of $105 million
pursuant to the terms of an indenture (the "Indenture"). The Notes
are jointly and severally and fully and unconditionally guaranteed
on a senior basis by all, except for one inconsequential
subsidiary, of the existing and all of the future subsidiaries of
the Company.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year, commencing June 1, 1998. The Notes will
mature on December 1, 2007, unless earlier redeemed. The Notes are
redeemable at the option of the Company on December 1, 2002 at
105.375% of the principal amount declining to face amount at
December 1, 2005 and thereafter under the terms set forth in the
Indenture. The Notes are effectively subordinated to all secured
indebtedness of the Company and its subsidiaries.
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
a working capital revolving line of credit evidenced by four loan
agreements ("Revolving Credit Agreement") with an unrelated lender
("Lender") collateralized by receivables, inventory, proprietary
rights and proceeds thereof of the Company and the subsidiaries
that are parties to the Revolving Credit Agreement. The Revolving
26
<PAGE>
Credit Agreement, as amended, provides for revolving credit
facilities ("Revolver") for total direct borrowings up to $65.0
million, including the issuance of letters of credit. Under the
Revolver, the Company can borrow up to the full $65 million based
on certain percentages of eligible collateral, with LSB and certain
subsidiaries of LSB that are not the Company or subsidiaries of the
Company having the right to borrow, on a revolving basis, up to $24
million of the $65 million based on eligible collateral. As of
September 30, 1998, LSB and its subsidiaries other than the Company
and its subsidiaries have borrowed $16.4 million under the
Revolver. Any amounts borrowed by LSB and its subsidiaries that
are not subsidiaries of the Company will reduce the amount that the
subsidiaries of the Company may borrow at any one time under the
Revolver. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Revolving Credit Agreement, as amended, provides for interest at
the lender's prime rate plus .5% per annum or, at the Company's
option, on the Lender's LIBOR rate plus 2.875% per annum (which
rates are subject to increase or reduction based upon achieving
specified availability and adjusted tangible net worth levels). At
September 30, 1998, the effective interest rate was 8.75%. The
term of the Revolving Credit Agreement is through December 31,
2000, and is renewable thereafter for successive thirteen month
terms. At September 30, 1998, the availability for borrowings by
the subsidiaries of the Company, based on eligible collateral,
approximated $34.7 million. Borrowings by subsidiaries of the
Company under the Revolver outstanding at September 30, 1998, were
$4.3 million. Availability for additional borrowings under the
Revolver at September 30, 1998 approximated $30.4 million. The
Revolving Credit Agreement requires the Company to maintain certain
financial ratios and contains other financial covenants, including
tangible net worth requirements and capital expenditure
limitations. At September 30, 1998, the Company was not in
compliance with certain of these financial covenants. In November,
1998, the Company obtained waivers for such noncompliance and
amendments to reset the covenants to amounts the Company expects to
achieve in future periods. The annual interest on the outstanding
debt under the Revolver at September 30, 1998 at the rates then in
effect would approximate $.4 million. The Revolving Credit
Agreement also requires the payment of an annual facility fee of
0.5% of the unused revolver.
In addition to the Revolving Credit Agreement discussed above,
as of September 30, 1998, the Company's wholly-owned subsidiary,
DSN Corporation ("DSN"), is a party to several loan agreements with
a financial company (the "Financing Company") for three projects.
At September 30, 1998, DSN had outstanding borrowings of $11.6
million under these loans. The loans have repayment schedules of
84 consecutive monthly installments of principal and interest. The
interest rate on each of the loans is fixed and range from 8.2% to
8.9%. Annual interest, for the three notes as a whole, at
September 30, 1998, at the agreed to interest rates would
27
<PAGE>
approximate $1.0 million. The loans are secured by the various DSN
property and equipment. The loan agreements require the Company to
maintain certain financial ratios, including tangible net worth
requirements. At September 30, 1998, ClimaChem was not in
compliance with the tangible net worth covenant of these
agreements. In November, 1998, ClimaChem obtained a waiver for
such noncompliance and a waiver through September, 1999 for future
noncompliance, if appropriate. The Company expects to reset
covenants in the fourth quarter of 1998 as it relates to periods
ending on or after December 31, 1999.
The Company's Australian subsidiary has a revolving credit
working capital facility with a bank (the "TES Revolving
Facility"). The TES Revolving Facility is approximately AUS$10.5
million (approximately US$6.0 million). The TES Revolving Facility
allows for borrowings based on specific percentages of qualified
eligible assets. At September 30, 1998, based on the effective
exchange rate, the availability under the TES Revolving Facility
was approximately US$6.0 million (AUS$10.5 million), with
approximately US$3.2 million (AUS$5.6 million approximately) being
borrowed at September 30, 1998. Availability for additional
borrowings under the TES Revolving Facility at September 30, 1998
approximated US$2.8 million (AUS$4.9 million). Such debt is
secured by substantially all the assets of TES, plus an unlimited
guarantee and indemnity from LSB and certain subsidiaries of TES.
The interest rate on this debt is dependent upon the borrowing
option elected by TES and had a weighted average rate of 7.23% at
September 30, 1998. Technically, TES is not in compliance with a
certain financial covenant contained in the loan agreement
involving the TES Revolving Facility. However, this covenant was
waived at the time of closing of this loan and the bank has
continued to extend credit under this facility. The outstanding
borrowing under the TES Revolving Facility at September 30, 1998,
has been classified as due within one year in the accompanying
consolidated financial statements.
Future cash requirements include working capital requirements
for anticipated sales increases in all businesses and funding for
future capital expenditures. Funding for the higher accounts
receivable and inventory requirements resulting from anticipated
sales increases will be provided by cash flow generated by the
Company and the revolving credit facilities discussed elsewhere in
this report. Currently LSB and certain subsidiaries of LSB,
including the Company, are limited to capital expenditures of $10.0
million annually under the Revolving Credit Agreement discussed
above. The Company has expended approximately $6.0 million for
capital expenditures up to and including September, 1998. Planned
capital expenditures for the balance of 1998 are $3.0 million. The
Company's 1999 budget for capital expenditures has not been
finalized, but expenditures will probably equal or exceed those in
1998.
28
<PAGE>
Management believes that cash flows from operations, the
Company's revolving credit facilities, and other sources will be
adequate to meet its presently anticipated capital expenditure,
working capital, and debt service requirements. The Company
currently has no material commitment for capital expenditures. The
Company's subsidiary has, however, agreed to act as an agent to
construct a nitric acid plant for Bayer's Baytown, Texas facility.
See "Overview - Chemical Business" of this "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
regarding the fact that the Company's subsidiary has agreed to act
as agent to construct a nitric acid plant. Further, the Company's
Chemical Business may be required to incur additional capital
expenditures as discussed in Note 5 of Notes to Condensed
Consolidated Financial Statements regarding a "Groundwater
Monitoring Work Plan" and the draft of the proposed Consent
Administrative Agreement related to the Chemical Business'
wastewater treatment system. At the date of this report, the cost
of the expenditures for these environmental matters has not been
determined.
Year 2000 Issue
_______________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, LSB undertook a project to enhance certain
of its IT systems and install certain other technologically
advanced communication systems to provide extended functionality
for operational purposes. A major part of LSB's program was to
implement a standardized IT system purchased from a national
software distributor at all of the Company and subsidiary
operations, as well as other LSB subsidiaries, and to install a
Local Area Network ("LAN"). The IT system and the LAN necessitated
the purchase of additional hardware, as well as software. The
process implemented by LSB to advance its systems to be more
"state-of-the-art" systems had an added benefit in that the
software and hardware changes necessary to achieve LSB's goals are
Year 2000 compliant.
Starting in 1996 through September 30, 1998, LSB has
capitalized approximately $850,000 in costs to accomplish its
enhancement program. The capitalized costs include $422,000 in
29
<PAGE>
external programming costs with the remainder representing hardware
purchases. LSB anticipates that the remaining cost to complete
this IT systems enhancement project will be less than $100,000 and
such costs will be capitalized.
LSB's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing,
and implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing systems, the Company
is 100% complete on the assessment and remediation phases. As of
the date of this report, the Company has completed its testing and
has implemented its remediated systems for all of its businesses
except a portion of the Chemical Business. The uncompleted testing
and remediation procedures represent approximately 10% and 25%,
respectively, of the total Year 2000 Program testing and
remediation phase. Completion of the remaining testing and
implementation phase is expected by December 31, 1998. The
assessments also indicated that limited software and hardware
(embedded chips) used in production and manufacturing systems
("operating equipment") also are at limited risk. The Company has
completed its assessment and identified remedial action which will
take place in the second quarter 1999. In addition, the Company
has completed its assessment of its product line and determined
that the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant. Accordingly, based
on the Company's current assessment, the Company does not believe
that the Year 2000 presents a material exposure as it relates to
the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
30
<PAGE>
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company, however, management does not believe such potential impact
to be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company.
Contingencies
_____________
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.
31
<PAGE>
<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) additional capacity for anhydrous ammonia
coming on-line, and such additional capacity may contribute to a
decline in future market price for such ammonia, (ii) the EDNC
Baytown Plant will cost approximately $65 million, will be
completed by the first quarter of 1999 and, when the EDNC Baytown
Plant is fully operational, the annual sales volume from such plant
will be approximately $35 million to $50 million, (iii) future cash
requirements (iv) ability to meet presently anticipated capital
expenditures, working capital, and debt service requirements, (v)
ability to comply with the Company's general working capital
requirements, (vi) ability to be able to continue to borrow under
the Company's revolving line of credit, (vii) contingencies should
not have a material adverse impact on the Company's liquidity,
(viii) ability to be in compliance with certain financial covenants
contained in certain loan agreements, (ix) ability to complete
resolution of the Year 2000 Issues in a timely manner, (x) capital
expenditures for the balance of 1998 and for 1999, (xi) additional
capacity for the production of anhydrous ammonia constructed in
1998, and being constructed in 1999, may contribute to the decline
of its future market prices, and (xii) ability to comply with
revised financial covenants under the Revolver. While the Company
believes the expectations reflected in such Forward-Looking
Statements are reasonable, it can give no assurance such
expectations will prove to have been correct. There are a variety
of factors which could cause future outcomes to differ materially
from those described in this report, including, but not limited to,
(i) decline in general economic conditions, both domestic and
foreign, (ii) material reduction in revenues, (iii) inability to
collect in a timely manner a material amount of receivables, (iv)
increased competitive pressures, (v) contracts are not obtained or
projects are not finalized within a reasonable period of time or on
schedule, (vi) changes in federal, state and local laws and
regulations, especially environmental regulations, or in
interpretation of such, (vii) additional releases (particularly air
emissions into the environment), (viii) potential increases in
equipment, maintenance, operating or labor costs not presently
anticipated by the Company, (ix) inability to retain management or
32
<PAGE>
to develop new management, (x) the requirement to use internally
generated funds for purposes not presently anticipated, (xi) the
effect of additional production capacity of anhydrous ammonia in
the western hemisphere, (xii) the cost for the purchase of
anhydrous ammonia not reducing or continuing to increase or the
cost for natural gas increases, (xiii) changes in operating
strategy or development plans, (xiv) inability to fund the
expansion of the Company's businesses, (xv) adverse results in any
of the Company's pending litigation,(xvi) inability by others to
complete construction of additional capacity for the production of
anhydrous ammonia, and (xvii) other factors described in
"Management's Discussion and Analysis of Financial Condition and
Results of Operation" contained in this report. Given these
uncertainties, all parties are cautioned not to place undue
reliance on such Forward-Looking Statements. The Company disclaims
any obligation to update any such factors or to publicly announce
the result of any revisions to any of the Forward-Looking
Statements contained herein to reflect future events or
developments.
33
<PAGE>
<PAGE>
Independent Accountants' Review Report
Board of Directors
ClimaChem, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of ClimaChem, Inc. and subsidiaries as of September 30, 1998,
and the related condensed consolidated statements of operations for
the nine month and three month periods ended September 30, 1998 and
1997 and the condensed consolidated statements of cash flows for
the nine month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of ClimaChem,
Inc. as of December 31, 1997, and the related consolidated
statements of operations and retained earnings and cash flows for
the year then ended (not presented herein); and in our report dated
March 16, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 20, 1998
34
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
______ __________________
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously reported
by the Company in its S-4 Registration Statement No. 333-44905
("Registration Statement") under "Company - Legal Proceedings",
declared effective by the Commission on April 16, 1998, except as
described in Item 1 of Part II of the Company's Forms 10-Q for
the quarters ended March 31, 1998 and June 30, 1998.
Item 2. Changes in Securities and Use of Proceeds
______ _________________________________________
Not applicable.
Item 3. Defaults upon Senior Securities
______ _______________________________
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
______ ___________________________________________________
Not applicable.
Item 5. Other Information
______ _________________
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
______ ________________________________
(A) Exhibits. The Company has included the following
________
exhibits in this report:
4.1 Fourth Amendment to Amended and Restated Loan and
Security Agreement between BankAmerica Business Credit,
Inc. and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and
Slurry Explosive Corporation.
10.1 Waiver letter dated November 17, 1998, from The CIT
Group.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
(B) Reports of Form 8-K. The Company did not file any
___________________
reports on Form 8-K during the quarter ended September
30, 1998.
35
<PAGE>
SIGNATURES
___________
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this report on its behalf on this 23rd day of
November, 1998.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
______________________________
Tony M. Shelby
Vice President - Chief Financial
Officer, (Principal Financial
Officer)
By: /s/ Jim D. Jones
_________________________________
Jim D. Jones
Vice President - Treasurer
(Principal Accounting Officer)
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
_______ ___________ ___________
<S> <C> <C>
4.1 Fourth Amendment to Amended and Restated
Loan and Security Agreement between
BankAmerica Business Credit, Inc. and
Climate Master, Inc., International
Environmental Corporation, El Dorado
Chemical Company and Slurry Explosive
Corporation. 38
10.1 Waiver letter dated November 17, 1998,
from The CIT Group. 50
27.1 Financial Data Schedule. 51
27.2 Financial Data Schedule. 52
</TABLE>
37
S FOURTH AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (the "Amendment") is dated as of November 19,
1998, and entered into by and between BANKAMERICA BUSINESS CREDIT,
INC. ("Lender") and CLIMATE MASTER, INC. ("Climate Master"),
INTERNATIONAL ENVIRONMENTAL CORPORATION ("IEC"), EL DORADO CHEMICAL
COMPANY ("EDC") and SLURRY EXPLOSIVE CORPORATION ("Slurry")
(Climate, IEC, EDC, and Slurry being collectively referred to
herein as "Borrower").
WHEREAS, Lender and Borrower have entered into that certain
Amended and Restated Loan and Security Agreement dated as of
November 21, 1997 as amended by that certain First Amendment to
Amended and Restated Loan and Security Agreement dated as of March
12, 1998, that certain Second Amendment to Amended and Restated
Loan and Security Agreement dated as of June 30, 1998, and that
certain Third Amendment to Amended and Restated Loan and Security
Agreement dated as of August 14, 1998 (as so amended, the
"Agreement");
WHEREAS, two Events of Default have occurred under the
Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events
of Default and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default
and amend the Agreement subject to the terms and conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in the Agreement and this Amendment, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
ARTICLE I
_________
Definitions
___________
Section 1.01. Definitions. Capitalized terms used in this
___________
Amendment, to the extent not otherwise defined herein, shall have
the same meanings as in the Agreement, as amended hereby.
Section 1.02. New Definitions. The following new definitions
_______________
are hereby added to the Agreement and read as follows:
"Automotive Subsidiaries" means the following LSB
_______________________
Guarantor Subsidiaries: L&S Automotive Products Co., LSB Extrusion
Co., International Bearings, Inc., Rotex Corporation, and
Tribonetics Corporation.
<PAGE>
"Automotive Termination Date" means the date that LSB
___________________________
obtains alternative financing for the Automotive Subsidiaries in
accordance with the provisions of Section 6.16(b) of the Amended
and Restated Loan and Security Agreement, dated November 21, 1997,
as amended, between Lender and LSB and indefeasibly repays all
Obligations attributable to the Automotive Subsidiaries.
"Springing Covenant Event" means three consecutive
________________________
Business Days when the aggregate Availability of the LSB
Consolidated Borrowing Group under all of the LSB-Related Loan
Agreements is less than Fifteen Million Dollars ($15,000,000) on
each such Business Day."
ARTICLE II
__________
Amendments
__________
Section 2.01 Amendment to Section 9.16. Section 9.16 of the
_________________________ ____________
Agreement is hereby amended to read in its entirety as follows:
"9.16 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
<TABLE>
<CAPTION>
CCI Adjusted Tangible Net Worth. The CCI Adjusted
_______________________________
Tangible Net Worth will not be less than the following amounts at
the end of each of the Fiscal Quarters during the following Fiscal
Years:
Fiscal Quarters
in the Following
Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 $18,500,000
First Fiscal
Quarter during
Fiscal Year Ending
December 31, 1999 The CCI Adjusted Tangible Net Worth as of
December 31, 1998 less $1,500,000.
Second Fiscal
Quarter during
Fiscal Year Ending
December 31, 1999 The CCI Adjusted Tangible Net Worth as of
March 31, 1999.
-2-
<PAGE>
Third Fiscal Quarter
during Fiscal Year
Ending December 31,
1999 and each
Fiscal Quarter
during each Fiscal
Year ending there-
after: The CCI Adjusted Tangible Net Worth as of
March 31, 1999 plus fifty percent (50%) of
CCI's profits for the prior fiscal quarter
without taking into account any losses."
</TABLE>
-3-
<PAGE>
Section 2.02. Amendment to Section 9.17. Section 9.17 of the
________________________ ____________
Agreement is hereby amended to read in its entirety as follows:
"9.17 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
<TABLE>
<CAPTION>
Debt Ratio. The ratio of Debt of the CCI Consolidated
__________
Group to the CCI Adjusted Tangible Net Worth will not be greater
than the following ratios at the end of each of the Fiscal Quarters
during the following Fiscal Years:
Fiscal Quarters
in the Following
Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 7.75:1
Fiscal Year Ending
December 31, 1999
and 7.75:1 7.75:1 7.75:1 7.75:1
Each Fiscal Quarter during each
Fiscal Year ending thereafter: 7.75:1"
</TABLE>
ARTICLE III
___________
Waivers
_______
Section 3.01. Waiver of Events of Default.
___________________________
(a) The Lender hereby waives the following Events of
Default: (i) the CCI Adjusted Tangible Net Worth for the Fiscal
Quarter ending September 30, 1998 was less than $23,000,000, in
breach of Section 9.16 of the Loan Agreement; and (ii) the CCI
Consolidated Group's Debt Ratio for the Fiscal Quarter ending
September 30, 1998 was greater than 6.35 to 1.0, in breach of
Section 9.17 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and shall
only be effective to the extent described above. The waiver is
limited to the facts and circumstances referred to herein and shall
not operate as (i) a waiver of or consent to non-compliance with
any other section or provision of the Loan Agreement, (ii) a waiver
of any right, power, or remedy of the Lender under the Loan
Agreement (except as provided herein), or (iii) a waiver of any
other Event of Default or Event which may exist under the Loan
Agreement.
-4-
<PAGE>
ARTICLE IV
___________
Ratifications, Representations and Warranties
______________________________________________
Section 4.01. Ratifications. The terms and provisions set
_____________
forth in this Amendment shall modify and supersede all inconsistent
terms and provisions set forth in the Agreement and, except as
expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement, including, without limitation, all
financial covenants contained therein, are ratified and confirmed
and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower
_______________________________
hereby represents and warrants to Lender that the execution,
delivery and performance of this Amendment and all other loan,
amendment or security documents to which Borrower is or is to be a
party hereunder (hereinafter referred to collectively as the "Loan
Documents") executed and/or delivered in connection herewith, have
been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower.
ARTICLE V
__________
Conditions Precedent
_____________________
Section 5.01. Conditions. The effectiveness of this
__________
Amendment is subject to the satisfaction of the following
conditions precedent (unless specifically waived in writing by the
Lender):
(a) Lender shall have received all of the following,
each dated (unless otherwise indicated) as of the date of this
Amendment, in form and substance satisfactory to Lender in its
sole discretion:
(i) Company Certificate. A certificate executed by
___________________
the Secretary or Assistant Secretary of Borrower certifying (A)
that Borrower's Board of Directors has met and adopted, approved,
consented to and ratified the resolutions attached thereto which
authorize the execution, delivery and performance by Borrower of
the Amendment and the Loan Documents, (B) the names of the officers
of Borrower authorized to sign this Amendment and each of the Loan
Documents to which Borrower is to be a party hereunder, (C) the
specimen signatures of such officers, and (D) that neither the
Articles of Incorporation nor Bylaws of Borrower have been amended
since the date of the Agreement;
(ii) No Material Adverse Change. There shall have
___________________________
occurred no material adverse change in the business, operations,
financial condition, profits or prospects of Borrower, or in the
Collateral since September 30, 1998, and the Lender shall have
received a certificate of Borrower's chief executive officer to
such effect;
-5-
<PAGE>
(iii) Other Documents. Borrower shall have executed
________________
and delivered such other documents and instruments as well as
required record searches as Lender may require.
(b) All corporate proceedings taken in connection with
the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender and its legal counsel,
Jenkens & Gilchrist, a Professional Corporation.
ARTICLE VI
____________
Miscellaneous
_______________
Section 6.01. Survival of Representations and Warranties.
___________________________________________
All representations and warranties made in the Agreement or any
other document or documents relating thereto, including, without
limitation, any Loan Document furnished in connection with this
Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and
warranties or the right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of
______________________
the Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended
hereby.
Section 6.03. Severability. Any provision of this Amendment
____________
held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision
so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER
______________
LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF OKLAHOMA AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF OKLAHOMA.
Section 6.05. Successors and Assigns. This Amendment is
_______________________
binding upon and shall inure to the benefit of Lender and Borrower
and their respective successors and assigns; provided, however,
that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
Lender may assign any or all of its rights or obligations hereunder
without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed
_____________
in one or more counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
-6-
<PAGE>
Section 6.07. Effect of Waiver. No consent or waiver,
________________
express or implied, by Lender to or of any breach of or deviation
from any covenant or condition of the Agreement or duty shall be
deemed a consent or waiver to or of any other breach of or
deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in
exercising, and no course of dealing with respect to, any right,
power, or privilege under this Amendment, the Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or privilege
under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege. The rights and remedies
provided for in the Agreement and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by
law.
Section 6.08. Headings. The headings, captions and
________
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
Section 6.09. Releases. As a material inducement to Lender
________
to enter into this Amendment, Borrower hereby represents and
warrants that there are no claims or offsets against, or defenses
or counterclaims to, the terms and provisions of and the other
obligations created or evidenced by the Agreement or the other Loan
Documents. Borrower hereby releases, acquits, and forever
discharges Lender, and its successors, assigns, and predecessors in
interest, their parents, subsidiaries and affiliated organizations,
and the officers, employees, attorneys, and agents of each of the
foregoing (all of whom are herein jointly and severally referred to
as the "Released Parties") from any and all liability, damages,
losses, obligations, costs, expenses, suits, claims, demands,
causes of action for damages or any other relief, whether or not
now known or suspected, of any kind, nature, or character, at law
or in equity, which Borrower now has or may have ever had against
any of the Released Parties, including, but not limited to, those
relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the
Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of
commercial reasonableness or special relationships, such as
fiduciary, trust or confidential relationships, (d) allegations of
dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference
or negligence, (e) allegations of tortious interference with
present or prospective business relationships or of antitrust, or
(f) slander, libel or damage to reputation, (hereinafter being
collectively referred to as the "Claims"), all of which Claims are
hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on
__________________
demand (i) all costs and expenses reasonably incurred by Lender in
connection with the preparation, negotiation and execution of this
Amendment and the other Loan Documents executed pursuant hereto and
any and all subsequent amendments, modifications, and supplements
hereto or thereto, including, without limitation, the costs and
fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any
rights under the Agreement, this Amendment and/or other Loan
Documents, including, without limitation, the costs and fees of
Lender's legal counsel and the allocated cost of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER
__________________
WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL
-7-
<PAGE>
AGREEMENTS BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER":
CLIMATE MASTER, INC.
By: /s/ Tony M. Shelby
___________________________________
Tony M. Shelby
Vice President
INTERNATIONAL ENVIRONMENTAL CORPORATION
By: /s/ Tony M. Shelby
____________________________________
Tony M. Shelby
Vice President
EL DORADO CHEMICAL COMPANY
By: /s/ Tony M. Shelby
__________________________________
Tony M. Shelby
Vice President
-8-
<PAGE>
SLURRY EXPLOSIVE CORPORATION
By: /s/ Tony M. Shelby
____________________________________
Tony M. Shelby
Vice President
-9-
<PAGE>
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Tony M. Shelby
___________________________________
Michael J. Jasaitis, Vice President
-10-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
___________________________
The undersigned hereby acknowledges the execution of, and
consents to, the terms and conditions of that certain Fourth
Amendment to Amended and Restated Loan and Security Agreement dated
as of November 19, 1998, between Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Corporation, Slurry Explosive Corporation and BankAmerica Business
Credit, Inc. ("Creditor") and reaffirms its obligations under that
certain Continuing Guaranty (the "Guaranty") dated as of November
21, 1997, made by the undersigned in favor of the Creditor, and
acknowledges and agrees that the Guaranty remains in full force
and effect and the Guaranty is hereby ratified and confirmed.
Dated as of November 19, 1998.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
______________________________
Tony M. Shelby, Vice President
-11-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
_____________________________
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Fourth
Amendment to Amended and Restated Loan and Security Agreement dated
as of November 19, 1998, between Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Corporation, Slurry Explosive Corporation and BankAmerica Business
Credit, Inc. ("Creditor") and each reaffirms its obligations under
that certain Continuing Guaranty with Security Agreement (the
"Guaranty") dated as of November 21, 1997, and acknowledges and
agrees that such Guaranty remains in full force and effect and each
Guaranty is hereby ratified and confirmed.
Dated as of November 19, 1998.
LSB INDUSTRIES, INC.
LSB CHEMICAL CORP.
L&S AUTOMOTIVE PRODUCTS CO.
L&S BEARING CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
MOREY MACHINERY MANUFACTURING
CORPORATION
CHP CORPORATION
KOAX CORP.
APR CORPORATION
CLIMATE MATE, INC.
THE ENVIRONMENTAL GROUP, INC.
UNIVERSAL TECH CORPORATION
By: /s/ Tony M. Shelby
_______________________________
Tony M. Shelby, Vice President
acting on behalf of each of the
above
-12-
The CIT Group/
Equipment Financing
550 CIT Drive
P. O. Box 490
Livingston, NJ 07030-0480
November 17, 1998
THE
CIT
GROUP
Jim Jones
Vice President and Treasurer
LSB Industries
16 South Pennsylvania Avenue
Oklahoma City, OK 73107
Dear Mr. Jones:
Reference is made to that certain Loan and Security Agreement,
dated as of October 31, 1994, as amended, a Loan and Security
Agreement, dated as of April 5, 1995, as amended, and a Loan and
Security Agreement dated as of November 15, 1995, as amended, by
and between The CIT Group/Equipment Financing, Inc. ("Lender") and
DSN Corporation ("Borrower").
Borrower has informed Lender that ClimaChem was not in compliance
with the Tangible Net Worth covenant contained in Section 6.10, and
the Leverage Ratio covenant of the above referenced Agreement for
the period ended September 30, 1998, and will be unable to meet
these requirements through and including the quarter ending
September 30, 1999.
Borrower has requested, that notwithstanding anything to the
contrary in the Agreement, that Lender waive these instances of
non-compliance for these periods.
Lender hereby waives these instances of non-compliance for the
periods mentioned above, provided that such waiver is subject to
the following conditions:
(1) This waiver is strictly limited to the Tangible Net Worth and
Leverage Ratio Covenants of the Agreement.
(2) The waiver is strictly limited to the specific periods above.
Lender also agrees to consider resetting the covenants sixty (60)
days from the date of this waiver, along with a determination of
the fee. However, the reset of the covenants is subject to
approval by Lender's Credit Committee.
Sincerely,
THE CIT GROUP/Equipment Financing, Inc.
By /s/ Anthony Joseph
______________________________________
Anthony G. Joseph
Vice President
An affiliate of
The Dai-Ichi Kangyo Bank, Limited
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $ 1,021
<SECURITIES> 0
<RECEIVABLES> 44,532
<ALLOWANCES> 1,448
<INVENTORY> 37,017
<CURRENT-ASSETS> 90,625
<PP&E> 139,700
<DEPRECIATION> 58,643
<TOTAL-ASSETS> 196,298
<CURRENT-LIABILITIES> 38,109
<BONDS> 121,782
0
0
<COMMON> 1
<OTHER-SE> 27,170
<TOTAL-LIABILITY-AND-EQUITY> 196,298
<SALES> 202,462
<TOTAL-REVENUES> 202,718
<CGS> 160,099
<TOTAL-COSTS> 190,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,333
<INCOME-PRETAX> 2,720
<INCOME-TAX> 1,908
<INCOME-CONTINUING> 812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 812
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 1,845
<SECURITIES> 0
<RECEIVABLES> 42,836
<ALLOWANCES> 1,511
<INVENTORY> 36,533
<CURRENT-ASSETS> 87,810
<PP&E> 133,993
<DEPRECIATION> 50,493
<TOTAL-ASSETS> 182,825
<CURRENT-LIABILITIES> 47,104
<BONDS> 93,331
0
0
<COMMON> 1
<OTHER-SE> 33,042
<TOTAL-LIABILITY-AND-EQUITY> 182,825
<SALES> 200,367
<TOTAL-REVENUES> 200,877
<CGS> 161,684
<TOTAL-COSTS> 189,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,587
<INCOME-PRETAX> 4,601
<INCOME-TAX> 1,821
<INCOME-CONTINUING> 2,780
<DISCONTINUED> 0
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<EPS-PRIMARY> 0
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</TABLE>
