FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 1998
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
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Commission file number
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CLIMACHEM, INC.
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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
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Address of principal executive offices (Zip Code)
(405) 235-4546
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Registrant's telephone number, including area code
NONE
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
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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.
1
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. at March 31, 1998, the condensed consolidated
statements of operations and cash flows for the three month
periods ended March 31, 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 three months
ended March 31, 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.
2
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1998 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 1998 1997
- ---------------------------------------------- ------------ -----------
Current assets:
Cash and cash equivalents $ 4,402 $ 3,534
Trade accounts receivable, net of allowance 43,194 38,521
Inventories:
Finished goods 13,156 13,189
Work in process 8,305 7,803
Raw materials 15,033 17,768
------------ ---------
Total inventory 36,494 38,760
Supplies and prepaid items 6,228 6,282
Income tax receivable 2,172 2,142
Current deferred income taxes 1,345 1,345
Due from LSB and affiliates - 2,157
----------- ----------
Total current assets 93,835 92,741
Property, plant and equipment, net 83,169 84,329
Due from LSB and affiliates, net 13,443 13,443
Other assets, net 11,294 10,362
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$ 201,741 $ 200,875
============= ==========
(Continued on following page)
3
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1998 is unaudited)
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ---------------------------------------- ----------- -----------
Current liabilities:
Accounts payable $ 19,110 $ 19,091
Accrued liabilities 10,545 9,075
Current portion of long-term debt (Note 4) 9,795 9,838
Due to LSB and affiliates 245 -
----------- ----------
Total current liabilities 39,695 38,004
Long-term debt (Note 4) 125,446 126,346
Contingencies (Note 5)
Deferred income taxes 9,347 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 income (loss) (993) (1,003)
Retained earnings 15,593 15,639
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27,253 27,289
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Total stockholders' equity $ 201,741 200,875
=========== ==========
(See accompanying notes)
4
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
1998 1997
---------- ----------
Revenues:
Net sales $ 63,360 $ 62,219
Other income 68 76
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63,428 62,295
Costs and expenses:
Cost of sales 50,411 52,852
Selling, general and administrative 9,780 9,050
Interest 3,313 2,036
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63,504 63,938
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Loss before benefit for
income taxes (76) (1,643)
Benefit for income taxes (30) (710)
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Net loss $ (46) (933)
========== ==========
Retained earnings at beginning of period 15,639 19,913
Dividends to parent - (535)
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Retained earnings at end of period $ 15,593 $ 18,445
========== ==========
(See accompanying notes)
5
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
1998 1997
--------- ---------
Cash flows from operations:
Net loss $ (46) $ (933)
Adjustments to reconcile net loss
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 2,355 1,827
Other 189 180
Provision (recovery) for possible losses
on receivables and other assets 51 (33)
Benefit for deferred income taxes 111 358
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (4,671) (4,972)
Inventories 2,405 (811)
Supplies and prepaid items 57 288
Accounts payable (111) (7,507)
Accrued liabilities 1,433 (452)
Due to / from LSB and affiliates 2,373 -
---------- ----------
Net cash provided (used) by operations 4,146 (12,055)
Cash flows from investing activities:
Capital expenditures (1,109) (2,160)
Proceeds from sales of equipment 19 -
Decrease (increase) in other assets (1,121) 986
---------- ----------
Net cash used in investing activities (2,211) (1,174)
Cash flows from financing activities:
Payments on long-term debt (1,264) (20,298)
Long-term and other borrowings - 50,000
Net change in revolving debt 197 (8,956)
Net change in amounts due to / from
LSB and affiliates - (4,507)
Dividends paid to parent - (535)
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Net cash provided by financing activities (1,067) 15,704
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Net increase in cash 868 2,475
Cash and cash equivalents at beginning of period 3,534 1,109
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Cash and cash equivalents at end of period $ 4,402 $ 3,584
========== ==========
(See accompanying notes)
6
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
NOTE 1: BASIS OF PRESENTATION
- -----------------------------
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: CHANGE 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 costs capitalized
will be amortized over their estimated useful life. Prior to
1998, these costs were expensed as incurred. The effect of this
change on net loss for the first quarter of 1998 was not
material.
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
7
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
prior periods for comparative purposes. Other comprehensive
income for the quarterly periods ended March 31, 1998 and 1997,
related to foreign currency exchange and amounted to
approximately $10,000 and $43,000 respectively. After
consideration of the other comprehensive income item,
comprehensive loss for the quarterly periods ended March 31, 1998
and 1997 was approximately $36,000 and $890,000, respectively.
NOTE 4: LONG-TERM DEBT
- ----------------------
(A) On November 26, 1997, ("Issue Date"), the Company completed
the sale of $105 million principal amount of 10 3/4% Senior
Notes due 2007 (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 Notes are
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 Notes remain
outstanding following such redemption.
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
8
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
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 the
subsidiaries of the Company and three for LSB and its
subsidiaries which are not subsidiaries of the Company.
Under the Revolving Credit Facility, LSB and certain
subsidiaries of LSB that are not subsidiaries of the Company
have a right to borrow on a revolving basis up to $24
million under the Revolving Credit Facility ($7.4 million
outstanding at March 31, 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 by LSB and its subsidiaries that are not
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 1.5% per
annum or, at the Company's option, on the lender's LIBOR
rate plus 3.875% 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 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 the
company.
9
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(C) At March 31, 1998, the Company's wholly-owned Australian
subsidiary had an AUS$10.5 million (US$7.0 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 March 31, 1998 all
borrowings under the TES Revolver were under the commercial
bill option which had a weighted average interest rate of
6.5% per annum.
At March 31, 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 March 31, 1998, all borrowings
outstanding under the TES Revolver have been classified as
due within one year in the condensed consolidated balance
sheets.
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 will act 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
10
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
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 $60 million and will be completed by the end of
1998. Construction financing of the EDNC Baytown Plant is being
provided by an unaffiliated lender. Neither the Company 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
March 31, 1998, the fair value of such agreement represented a
liability of $4.1 million for which the Company has posted margin
and letters of credit totaling $4.1 million. Bayer has agreed to
reimburse the Company for 50% of the ultimate cost of the hedging
contract associated with the interest rate forward agreement.
LEGAL MATTERS
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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 reviewed by
the State of Arkansas.
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-
11
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
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
ditch near EDC's El Dorado, Arkansas, facility ("El Dorado
Facility"). ADPC&E has proposed a Consent Administrative
Agreement ("CAA") to resolve the event. The proposed CAA
will include a civil penalty in the amount of $201,700 which
includes $125,000 which was previously agreed to be paid in
the form of environmental improvements at the El Dorado
Plant. The Company believes the amount of the proposed civil
penalty in excess of such $125,000 is excessive and intends
to seek reduction of such amount. The draft of the proposed
Consent Administrative Agreement also requires EDC to
install and operate equipment to recover and treat
contaminated groundwater. EDC has proposed a long term
monitoring program as the groundwater remedy, and will
vigorously oppose the remedy proposed in this suggested
order. The draft of the proposed CAA also requires the
Chemical Business to undertake certain additional compliance
measures and equipment improvements related to the El Dorado
Plant's wastewater treatment system.
B. In 1996, a lawsuit was filed against the Company's Chemical
Business by a group of residents of El Dorado, Arkansas,
asserting a citizens' suit against the Chemical Business as
a result of certain alleged violations of the Clean Air Act,
the Clean Water Act, the Chemical Business' air and water
permits and certain other environmental laws, rules and
regulations. The citizens' suit requests the court to order
the Chemical Business to cure such alleged violations, if
any, plus penalties as provided under the applicable
statutes. During the first quarter of 1998 the Company's
Chemical Business has entered into a Consent Decree in
settlement of the citizen suit. The Consent Decree is
subject to approval by the court. Under the terms of the
Consent Decree, which is subject to court approval, the
Company's Chemical Business has agreed to, among other
things, (i) the granting of an injunctive relief requiring
its El Dorado Facility to (a) comply with certain
12
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
discharge, monitoring and reporting requirements of its
waste water discharge permit, the emission limitations of
its air permit and the notification requirements under
certain sections of certain environmental laws and the
statutory penalties for failure to comply with such
notification requirements, (b) perform air and water tests
to determine if the El Dorado Facility is meeting certain
compliance levels and, if the tests do not meet the required
compliance levels, to make the necessary corrections thereto
so that such compliance levels are met, and (c) limitations
relating to the El Dorado Facility's use of its older
concentrated nitric acid plant, (ii) to provide the
plaintiffs with copies of certain documents forwarded to, or
received by, appropriate environmental regulatory agencies
by the El Dorado Facility and summaries of certain test
results at the El Dorado Facility, (d) pay to the U.S.
Treasury $50,000 as a penalty, and (e) pay certain
stipulated penalties under certain conditions in the event
the El Dorado Facility fails to comply with the terms of the
Consent Decree. All actions to be performed by the
Company's Chemical Business under the Consent Decree and
payment of penalties required by the Consent Decree are to
be paid by the Company's Chemical Business.
In July 1996, several of the same individuals who are
plaintiffs in the citizens' suit referenced above filed a
toxic tort lawsuit against the Company's Chemical Business
alleging that they suffered certain injuries and damages as
a result of alleged releases of toxic substances from the
Chemical Business' El Dorado, Arkansas manufacturing
facility.
In October 1996, another toxic tort lawsuit was filed
against the Company's Chemical Business. This subsequent
action asserts similar damage theories as the previously
discussed lawsuit, except this action attempts to have a
class certified to represent substantially all allegedly
affected persons. The plaintiffs are suing for an
unspecified amount of actual and punitive damages.
The Company and the Chemical Business maintain an
Environmental Impairment Insurance Policy ("EIL Insurance")
that provides coverage to the Company and the Chemical
Business for certain discharges, dispersals, releases, or
escapes of certain contaminants and pollutants into or upon
land, the atmosphere or any water course or body of water
from the Site, which has caused bodily injury, property
damage or contamination to others or to other property not
on the Site. The EIL Insurance provides limits of liability
for each loss
13
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
up to $10.0 million and a similar $10.0 million limit for
all losses due to bodily injury or property damage, except
$5.0 million for all remediaton expenses, with the maximum
limit of liability for all claims under the EIL Insurance
not to exceed $10.0 million for each loss or remediaton
expense and $10.0 million for all losses and remediaton
expenses. The EIL Insurance also provides a retention of the
first $500,000 per loss or remediaton expense that is to be
paid by the Company. The Company's Chemical Business has
spent approximately $1.2 million in legal, expert and other
costs in connection with the toxic tort and citizen lawsuits
described above. The Company has been reimbursed under its
EIL Insurance approximately $405,000 of the $1.2 million.
The EIL Insurance carrier has assumed responsibility for all
subsequent legal, expert and other costs of defense and is
paying such legal, expert and other costs on an on-going
basis, subject to a reservation of rights relating to the
citizens' suit.
In 1998 the Company's Chemical Business entered into an
agreement to settle the class action toxic tort lawsuit and
completed a settlement of the other toxic tort lawsuit.
Settlement of the class action toxic tort lawsuit has been
preliminarily approved by the court, but such settlement is
subject to final approval by the court. Settlement of the
class action toxic tort lawsuit, if completed, will require,
and settlement of the other toxic tort lawsuit did require,
cash payments to the plaintiffs. Substantially all of such
cash settlement payments are to be or were funded directly
by the Company's EIL Insurance carrier.
The amount of the settlements of the toxic tort cases as
discussed above paid by the EIL Insurance and the amount
paid under the EIL Insurance for legal and other expenses
relating to the defense of the toxic tort cases and the
citizen suit case reduce the coverage amount available under
the EIL insurance.
C. 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
14
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
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.
For several years, certain members of the explosives
industry have been the focus of a grand jury investigation
being supervised by the U.S. Department of Justice ("DOJ")
in connection with criminal antitrust allegations involving
price fixing. Certain explosives companies, other than the
Company, including all the Company's major competitors, and
individuals employed by certain of those competitors, were
indicted and have pled guilty to antitrust violations. The
guilty pleas have resulted in nearly $40 million in criminal
fines.
In connection with the grand jury investigation, the Company's
Chemical Business received and has complied with two
document subpoenas, certain of the Company's Chemical
Business' employees have been interviewed by the DOJ under
grants of immunity from prosecution, and certain of the
Company's Chemical Business employees have testified under
subpoena before the grand jury under grants of immunity in
connection with the investigation. The Company believes that
it has cooperated fully with the government's investigation.
The Company has been informed by an official of the DOJ that
it is not currently a target of the above investigation or
of any grand jury investigating criminal antitrust activity
in the explosives or ammonium nitrate industries.
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
15
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
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.
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
16
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
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 $587,000 and $450,000 for
the quarterly periods ended March 31, 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 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. No amounts were paid to LSB by the
Company under the Management Agreement during the quarter ended
17
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
March 31, 1998, due to the Company's EBITDA being below the
specified level.
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 quarters ended March 31, 1998 and 1997
respectively, the Company did not pay LSB and is not obligated to
pay LSB any amount 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 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
18
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(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.
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
$118,750 during the first quarter of each 1998 and 1997.
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 March 31,
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 the 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 to LSB and
affiliates as of March 31, 1998, included in current liabilities
related to operations under the Services Agreement, which is non-
interest bearing.
NOTE 7: SUBSEQUENT EVENT
- ------------------------
On April 16, 1998, the Company's Exchange Offer Registration
Statement to exchange the Notes described in Note 4 for 10-3/4%
Series B Senior Notes due 2007 ("New Notes") was declared
effective by the Securities and Exchange Commission
("Commission"). During the exchange offer period, the holders of
all $105 million of the Notes elected to exchange the Notes for
New Notes. The form and terms of the New Notes are the same as
the form and terms of the Notes (which they replace), except the
New Notes will bear a Series B designation and will have been
registered under the Securities Act of 1933, as amended, will not
bear legends restricting their transfer and will not contain
provisions relating to liquidated damages which were included in
the terms of the Notes in certain circumstances relating to the
timing of the exchange offer. The New Notes will evidence the
same debt as the Notes and will be issued under and entitled to
the benefits of the Indenture.
19
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 March 31, 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
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 three months ended March
31, 1998 and 1997 is detailed below.
Three Months Ended March 31,
1998 1997
___________ __________
(In thousands)
(Unaudited)
Sales:
Chemical $ 33,424 $ 40,599
Climate Control 29,936 21,620
---------- ----------
$ 63,360 $ 62,219
========== ==========
Gross profit (1):
Chemical $ 4,596 $ 3,323
Climate Control 8,353 6,044
---------- ----------
$ 12,949 $ 9,367
========== ==========
Operating profit (loss) (2):
Chemical $ 838 $ (780)
Climate Control 2,399 1,173
---------- ----------
3,237 393
Interest expense (3,313) (2,036)
---------- ----------
Loss before benefit
for income taxes $ (76) $ (1,643)
========== ==========
(1)(1) Gross profit by industry segment represents net sales less
cost of sales.
20
(2) Operating profit (loss) by industry segment represents
revenues less operating expenses before deducting interest
expense and income taxes.
CHEMICAL BUSINESS
- -----------------
Beginning in 1994, the results of operations of the Chemical
Business have been adversely impacted by the high cost of
anhydrous ammonia. From its most recent cyclical low in 1986
through 1993, the average Gulf Coast price (the "Spot Price") of
anhydrous ammonia was approximately $100 per ton. During 1994
and in each of the years since, a tightness in supply developed
which resulted in an increase in the Spot Price of anhydrous
ammonia to an average of approximately $195 per ton. The Company
believes that the tightness in supply of anhydrous ammonia that
emerged in 1994 was a result of increased industrial usage as the
U.S. economy grew, a net consolidation of the domestic capacity
and a disruption in supply coming from the former Soviet Union.
Although prices for anhydrous ammonia vary considerably from
month to month, the annual average price has remained high for
each of the last three years. The Company currently 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 Spot Price of anhydrous
ammonia. The higher prices have been partially passed on to
customers; however, the Chemical Business has not been able to
offset the entire cost increase with price increases for its
products resulting in lower gross profit margins during each of
the periods since the increase. The Company believes there is
approximately 2 million tons of additional annual capacity being
constructed in the western hemisphere scheduled for completion in
1998 and 1999. The Company believes this additional capacity may
contribute to a decline in the future market price of anhydrous
ammonia.
During July 1997, a subsidiary of the Company entered into
an agreement with Bayer Corporation ("Bayer") whereby the
Company's subsidiaries would act 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 units 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 based on current market conditions, the plant
should generate approximately $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 $60 million and construction is scheduled to be
completed by the end of 1998. 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
21
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. If these adverse economic conditions in Asia
continue for an extended period of time, such could have an
adverse effect on the Company's consolidated results of
operations for 1998.
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.
As indicated in the above table, the Climate Control
Business reported improved sales (an increase of 38.5%) and
improved operating profit for the first three months of 1998 as
compared to the first three months of 1997.
22
RESULTS OF OPERATIONS
Three months ended March 31, 1998 vs. Three months ended March
31, 1997.
- -----------------------------------------------------------------
REVENUES
--------
Total revenues for the three months ended March 31, 1998 and
1997 were $63.4 million and $62.3 million, respectively (an
increase of $1.1 million). Sales increased $1.1 million and other
income remained consistent.
NET SALES
---------
Consolidated net sales included in total revenues for the
three months ended March 31, 1998 were $63.3 million, compared to
$62.2 million for the first three months of 1997, an increase of
$1.1 million. This increase in sales resulted from: (i)
increased sales in the Climate Control Business of $8.3 million
due to increased sales in this Business' Heat Pump and Fan Coil
product lines, offset by (ii) decreased sales in the Chemical
Business of $7.2 million primarily due to lower sales in the U.S.
of agricultural and blasting products and decreased business
volume of its Australian subsidiary.
GROSS PROFIT
------------
Gross profit was 20.4% for the first three months of 1998,
compared to 15.1% for the first three months of 1997. The
increase in the gross profit percentage was due primarily to
lower production costs in the Chemical Business, due to the
effect of lower prices of anhydrous ammonia in 1998, and lower
unabsorbed overhead costs caused by excessive downtime related to
problems associated with mechanical failures at the Chemical
Business' primary manufacturing plant in the first quarter of
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
-------------------------------------------
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 15.4% in the three month period ended
March 31, 1998, compared to 14.5% for the first three months of
1997. This increase is primarily the result of decreased sales
volume in the Chemical Business without a comparable decrease in
fixed costs , offset by increased sales volume in the Climate
Control Business without an equivalent corresponding increase in
SG&A.
INTEREST EXPENSE
----------------
Interest expense for the Company was $3.3 million during the
first quarter of 1998, compared to $2.7 million, before deducting
capitalized interest, during the first quarter of 1997. During
the
23
first quarter of 1997, $.7 million of interest expense was
capitalized in connection with construction of the DSN Plant.
The increase of $.6 million before the effect of capitalization
primarily resulted from increased borrowings
LOSS BEFORE TAXES
-----------------
The Company had a loss before income taxes of $.1 million in
the first quarter of 1998 compared to a loss before income taxes
of $1.6 million in the three months ended March 31, 1997. The
increased profitability of $1.5 million was primarily due to
increased sales and gross profits as previously discussed.
BENEFIT FOR INCOME TAXES
------------------------
The credit 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 $30,000 for the first
quarter of 1998 on a pre-tax loss of $76,000 (40%) compared to
$.7 million in the first quarter of 1997 on a pre-tax loss of
$1.6 million (43%).
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 issuance of senior
unsecured notes.
Net cash provided by operations for the quarter ended March
31, 1998 was $4.1 million, after $2.5 million for noncash
depreciation and amortization, $.1 million in provisions for
possible losses on accounts receivable, $.1 million in benefit
for deferred income taxes including the following changes in
assets and liabilities: (i) accounts receivable increases of $4.7
million; (ii) inventory decreases of $2.4 million; (iii)
decreases in supplies and prepaid items of $.1 million; (iv)
increases in accounts payable and accrued liabilities of $2.4
million and (v) a net change in due to / from LSB and affiliates
of $2.4 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) and seasonal
sales of agricultural products in the Chemical Business. The
decrease in inventory was due primarily to a decrease at the
Chemical Business due to seasonal sales of agricultural products.
The increase in accounts payable and accrued liabilities resulted
primarily from an increase in accrued interest expense related to
senior unsecured notes which is payable semi-annually.
24
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES
- -------------------------------------------------
Cash used by investing activities for the quarter ended
March 31, 1998 included $1.1 million in capital expenditures and
$1.1 million used to increase 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 included $.5 million
of deposits made in connection with an interest rate hedge
contract related to the agreement with Bayer.
Net cash used by financing activities included (i) payments
on long-term debt of $1.3 million, and (ii) net increases in
revolving debt of $.2 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.
In October 1997, the Company was organized as a new wholly
owned subsidiary of LSB. The Company owns substantially all of
LSB's Chemical and Climate Control Businesses. On November 26,
1997, the Company issued senior unsecured notes (the "Notes") in
the aggregate amount of $105 million pursuant to the terms of 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.
Certain subsidiaries of the Company are parties to a working
capital revolving line of credit evidenced by a loan agreement
("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 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, LSB and certain subsidiaries of LSB that are
not the Company or subsidiaries of the Company have the right to
borrow, on a revolving basis, up to $24 million of the $65
million. As of March
25
31, 1998, LSB and its subsidiaries other than the Company and its
subsidiaries have borrowed $7.4 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 1.5% per annum or, at the Company's
option, on the Lender's LIBOR rate plus 3.875% per annum (which
rates are subject to increase or reduction based upon achieving
specified availability and adjusted tangible net worth levels).
At March 31, 1998, the effective interest rate was 10.0%. The
term of the Revolving Credit Agreement is through December 31,
2000, and is renewable thereafter for successive thirteen month
terms. At March 31, 1998, the availability for additional
borrowings by the subsidiaries of the Company, based on eligible
collateral, approximated $33.6 million. Borrowings by
subsidiaries of the Company under the Revolver outstanding at
March 31, 1998, were $6.3 million. The Revolving Credit
Agreement requires the Company to maintain certain financial
ratios and contain other financial covenants, including tangible
net worth requirements and capital expenditure limitations. The
annual interest on the outstanding debt under the Revolver at
March 31, 1998 at the rates then in effect would approximate $.6
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 March 31, 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 March 31, 1998, DSN had outstanding
borrowings of $12.9 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 March 31, 1998, at the agreed to
interest rates would approximate $1.1 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.
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$6.9 million). The TES Revolving
Facility allows for borrowings based on specific percentages of
qualified eligible assets. At March 31, 1998,based on the
effective exchange rate, the availability under the TES Revolving
Facility was approximately US $6.2 million (AUS$9.3 million),
with approximately US$4.7 million (AUS$7.1 million approximately)
being borrowed at
26
March 31, 1998. 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 6.5% at March 31, 1998. TES is in
technical noncompliance with a certain financial covenant
contained in the loan agreement involving the TES Revolving
Facility. However, this covenant was not met 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 March 31, 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. The Company has planned
capital expenditures of approximately $8.4 million in the
Chemical and Climate Control Businesses for 1998.
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.
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.
27
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) the EDNC Baytown Plant will
cost approximately $60 million, will be completed by late 1998
and, when the EDNC Baytown Plant is fully operational, the annual
sales volume from such plant will be approximately $50.0 million,
(ii) future cash requirements (iii) ability to meet presently
anticipated capital expenditures, working capital, and debt
service requirements, (iv) ability to comply with the Company's
general working capital requirements, (v) ability to be able to
continue to borrow under the Company's revolving line of credit,
(vi) contingencies should not have a material adverse impact on
the Company's liquidity, and (vii) ability to complete certain
settlements. 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 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 to
finalize the settlements of the pending environmental litigation
or the Company's insurance does not cover a substantial portion
of such
28
settlements, 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.
29
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 March 31, 1998,
and the related condensed consolidated statements of operations
and cash flows for the three month periods ended March 31, 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, stockholders' equity 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.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 12, 1998
30
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 the following settlements or material developments
have occurred regarding certain of such litigation:
Roy Carr, et. al v. El Dorado Chemical Company ("Carr
Case"); Richard Detrez, et. al v. El Dorado Chemical Company
("Detrez Case"); Roy A. Carr, Sr., et. al v. El Dorado Chemical
Company ("Citizen Suit"), which are or were pending against El
Dorado Chemical Company ("EDC"), a subsidiary of the Company
within the Company's Chemical Business, in the United States
District Court, Western District of Arkansas. During the first
quarter of 1998, EDC (i) settled the Carr Case, (ii) entered into
a Consent Decree, subject to court approval, in settlement of the
Citizen Suit, and (iii) entered into an agreement to settle the
Detrez Case. The settlement of the Detrez Case has been
preliminarily approved by the court, but such settlement is
subject to final approval by the court.
Under the terms of the Consent Decree in settlement of the
Citizen Suit, which is subject to court approval, EDC has agreed
to, among other things, (i) the granting of injunctive relief
requiring its El Dorado, Arkansas facility("El Dorado Facility")
to (a) comply with certain discharge, monitoring and reporting
requirements of its waste water discharge permit, the emission
limitations of its air permit and the notification requirements
under certain sections of certain environmental laws and the
statutory penalties for failure to comply with such notification
requirements, (b) perform air and water tests to determine if the
El Dorado Facility is meeting certain compliance levels and, if
the tests do not meet the required compliance levels, to make the
necessary corrections so that such compliance levels can be met,
and (c) limitations relating to the El Dorado Facility's use of
its older concentrated nitric acid plant, (ii) provide the
plaintiffs with copies of certain documents forwarded to, or
received by, appropriate environmental regulatory agencies by the
El Dorado Facility and summaries of certain test results at the
El Dorado Facility, (iii) pay to the U.S. Treasury $50,000 as a
penalty, and (iv) pay certain stipulated penalties under certain
conditions in the event the El Dorado Facility fails to comply
with the terms of the Consent Decree. All Actions to be
performed by the Company's Chemical Business under the Consent
Decree and payment of penalties required by the Consent Decree
are to be paid by the Company's
31
Chemical Business.
Under the Carr Case settlement and the agreement to settle
the Detrez Case, certain cash payments will be or are to be made
to the plaintiffs as a result of such settlements. Substantially
all such cash settlement payments made in the Carr Case and to be
made in the Detrez Case, if the Detrez Case settlement is
completed pursuant to the terms of the agreement are to be funded
directly by the Company's EIL Insurance. See Note 1 to Notes to
Condensed Consolidated Financial Statements and "Special Note
Regarding Forward - Looking Statements."
Item 2. Changes in Securities
- ------- ---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
Item 5. Other Information
- ------- -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(A) Exhibits.
---------
The Company has included the following exhibits in this
report:
4.1 10-3/4% Series B Senior Notes due 2007.
27.1 Financial Data Schedule.
(B) Reports of Form 8-K.
--------------------
The Company did not file any reports on Form 8-K during
the quarter ended March 31, 1998.
32
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 29th day of
May 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)
33
CLIMACHEM, INC.
103/4% SERIES B SENIOR NOTES
DUE 2007
Unless and until it is exchanged in whole or in part for
Securities in definitive form, this Security may not be
transferred except as a whole by the Depository to a nominee of
the Depository or by a nominee of the Depository to the
Depository or another nominee of the Depository or by the
Depository or any such nominee to a successor Depository or a
nominee of such successor Depository. Unless this certificate is
presented by an authorized representative of The Depository Trust
Company (55 Water Street, New York, New York) ("DTC"), to the
Issuer or its agent for registration of transfer, exchange or
payment, and any certificate issued is registered in the name of
Cede & Co., or such other name as requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or
such other entity as is requested by an authorized representative
of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein.
CUSIP NO. 187168 AC 3
ISIN NO. US 187168AC33
No. 001 $105,000,000
ClimaChem, Inc., an Oklahoma corporation (the "Issuer"),
which term includes any successor corporation under the Indenture
hereinafter referred to) for value received, hereby promises to
pay to Cede & Co., or registered assigns, the principal sum of
One Hundred Five Million Dollars, on December 1, 2007.
Interest Payment Dates: June 1 and December 1.
Record Dates: May 15 and November 15.
Reference is made to the further provisions of this Security
on the reverse side, which will, for all purposes, have the same
effect as if set forth at this place.
2
IN WITNESS WHEREOF, the Issuer has caused this Instrument to
be duly executed under its corporate seal.
CLIMACHEM, INC.
By:_______________________________
Name: Tony M. Shelby
Title: Vice President - Chief
Financial Officer
Attest:
-----------------------------------
Barry H. Golsen, Vice President
3
ClimaChem, Inc.
Authentication Order
--------------------
May 28, 1998
Bank One, NA
100 E. Broad Street
Columbus, Ohio 43215
Attention: Corporate Trust Administration
Ladies and Gentlemen:
Pursuant to Section 2.2 of the Indenture, dated as of
November 26, 1997 (the "Indenture"), among ClimaChem, Inc., an
Oklahoma corporation (the "Company"), the Guarantors named
therein, and you, as Trustee, you are hereby requested to
authenticate, in the manner provided by the Indenture,
$105,000,000 aggregate principal amount of the Company's 103/4%
Series B Senior Notes due 2007 ("Series B Notes") duly executed
by the proper officers of the Company and enclosed herewith and
to deliver said authenticated notes to, or upon the order of, an
officer of the Company at 10:00 a.m. on May 29, 1998.
Very truly yours,
By:_________________________________
Name: Tony M. Shelby
Title: Vice President - Chief
Financial Officer
By:_________________________________
Name: Barry H. Golsen
Title: Vice President
4
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities described in the within-
mentioned Indenture.
Dated: May 29, 1998 Bank One, NA, as Trustee
By:___________________________
Authorized Signatory
5
CLIMACHEM, INC.
10 3/4% SERIES B SENIOR NOTES
DUE 2007
1. Interest.
--------
ClimaChem, Inc., an Oklahoma corporation (the "Issuer"),
promises to pay interest on the principal amount of this Security
at a rate of 10 3/4% per annum. To the extent it is lawful, the
Issuer promises to pay interest on any interest payment due but
unpaid on such principal amount at a rate of 10 3/4% per annum
compounded semi-annually.
The Issuer will pay interest semi-annually on December 1 and
June 1 of each year (each, an "Interest Payment Date"),
commencing June 1, 1998. Interest on the Securities will accrue
from the most recent date to which interest has been paid on the
Securities pursuant to the Indenture or, if no interest has been
paid, from November 26, 1997. Interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months.
2. Method of Payment.
------------------
The Issuer shall pay interest on the Securities (except
defaulted interest) to the persons who are the registered Holders
at the close of business on the Record Date immediately preceding
the Interest Payment Date. Holders must surrender Securities to
a Paying Agent to collect principal payments. Except as provided
below, the Issuer shall pay principal and interest in such coin
or currency of the United States of America as at the time of
payment shall be legal tender for payment of public and private
debts ("Cash"). The Securities will be payable as to principal,
premium and interest at the office or agency of the Issuer
maintained for such purpose within the City and State of New York
or, at the option of the Issuer, payment of principal, premium
and interest may be made by check mailed to the Holders at their
addresses set forth in the register of Holders, provided that
payment by wire transfer of immediately available funds will be
required with respect to principal of and interest and premium on
all Global Securities and all other Securities the Holders of
which shall have provided written wire transfer instructions to
the Issuer and the Paying Agent.
3. Paying Agent and Registrar.
---------------------------
Initially, Bank One, NA (the "Trustee") will act as Paying
Agent and Registrar. The Issuer may change any Paying Agent,
Registrar or Co-registrar without notice to the Holders. The
Issuer or any of its Subsidiaries may, subject to certain
exceptions, act as Paying Agent, Registrar or Co-registrar.
6
4. Indenture.
----------
The Issuer issued the Securities under an Indenture, dated
November 26, 1997 (the "Indenture"), among the Issuer, the
Guarantors named therein and the Trustee. Capitalized terms
herein are used as defined in the Indenture unless otherwise
defined herein. The terms of the Securities include those stated
in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The Securities are subject to all such terms, and
Holders of Securities are referred to the Indenture and said Act
for a statement of them. The Securities are senior obligations
of the Issuer limited in aggregate principal amount to
$105,000,000.
5. Redemption.
----------
Except as provided in this Paragraph 5, the Issuer shall not
have the right to redeem any Securities. The Securities are
redeemable in whole or from time to time in part at any time on
or after December 1, 2002, at the option of the Issuer, at the
Redemption Price (expressed as a percentage of principal amount)
set forth below, if redeemed during the 12-month period
commencing December 1 of each of the years indicated below, in
each case (subject to the right of Holders of record on the
Record Date to receive interest due on an Interest Payment Date
that is on or prior to such Redemption Date), plus any accrued
but unpaid interest to the Redemption Date.
Year Redemption Price
---- ----------------
2002 105.375%
2003 103.583%
2004 101.792%
2005 and thereafter 100.000%
Until December 1, 2000, upon a Public Equity Offering of
common stock of the Issuer for cash, up to $35 million aggregate
principal amount of the Notes may be redeemed at the option of
the Issuer within 120 days of such Public Equity Offering, on not
less than 30 days, but not more than 60 days, notice to each
Holder of the Notes to be redeemed, with cash from the Net Cash
Proceeds of such Public Equity Offering, at 110.75% of principal
(subject to the right of Holders of record on a Record Date to
receive interest due on an Interest Payment Date that is on or
prior to such Redemption Date) together with accrued and unpaid
interest to the date of redemption; provided, however, that
immediately following such redemption not less than $65 million
aggregate principal amount of the Notes are outstanding.
Any redemption of the Notes shall comply with Article III of
the Indenture.
7
6. Notice of Redemption.
---------------------
Notice of redemption will be mailed by first class mail at
least 30 days but not more than 60 days before the Redemption
Date to each Holder of Securities to be redeemed at his
registered address. Securities in denominations larger than
$1,000 may be redeemed in part.
Except as set forth in the Indenture, from and after any
Redemption Date, if monies for the redemption of the Securities
called for redemption shall have been deposited with the Paying
Agent on such Redemption Date, the Securities called for
redemption will cease to bear interest and the only right of the
Holders of such Securities will be to receive payment of the
Redemption Price, plus any accrued but unpaid interest to the
Redemption Date.
7. Denominations; Transfer; Exchange.
----------------------------------
The Securities are in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A
Holder may register the transfer of, or exchange Securities in
accordance with, the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for
redemption.
8. Persons Deemed Owners.
----------------------
The registered Holder of a Security may be treated as the
owner of it for all purposes.
9. Unclaimed Money.
----------------
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee and the Paying Agent(s) will
pay the money back to the Issuer at its written request. After
that, all liability of the Trustee and such Paying Agent(s) with
respect to such money shall cease.
10. Discharge Prior to Redemption or Maturity.
------------------------------------------
If the Issuer at any time deposits into an irrevocable trust
with the Trustee Cash or U.S. Government Obligations sufficient
to pay the principal of and interest on the Securities to
redemption or maturity and comply with the other provisions of
the Indenture relating thereto, the Issuer will be discharged
from certain provisions of the Indenture and the Securities
(including the financial covenants, but excluding its obligation
to pay the principal of and interest on the Securities).
11. Amendment; Supplement; Waiver.
------------------------------
Subject to certain exceptions, the Indenture or the
Securities may be amended or supplemented with the written
consent of the Holders of a majority in aggregate principal
8
amount of the Securities then outstanding, and any existing
Default or Event of Default or compliance with any provision may
be waived with the consent of the Holders of a majority in
aggregate principal amount of the Securities then outstanding.
Without notice to or consent of any Holder, the parties thereto
may amend or supplement the Indenture or the Securities to, among
other things, cure any ambiguity, defect or inconsistency, comply
with the TIA or make any other change that does not adversely
affect the rights of any Holder of a Security.
12. Restrictive Covenants.
---------------------
The Indenture imposes certain limitations on the ability of
the Issuer and its Subsidiaries to, among other things, incur
additional Indebtedness and Disqualified Capital Stock, make
payments in respect of its Capital Stock, enter into transactions
with Affiliates, incur Liens, merge or consolidate with any other
person and sell, lease, transfer or otherwise dispose of
substantially all of its properties or assets. The limitations
are subject to a number of important qualifications and
exceptions. The Issuer must annually report to the Trustee on
compliance with such limitations.
13. Change of Control.
-----------------
In the event there shall occur any Change of Control, each
Holder of Securities shall have the right, at such Holder's
option but subject to the limitations and conditions set forth in
the Indenture, to require the Issuer to purchase on the Change of
Control Purchase Date in the manner specified in the Indenture,
all or any part (in integral multiples of $1,000) of such
Holder's Securities at a cash price equal to 101% of the
principal amount thereof, together with accrued and unpaid
interest to and including the Change of Control Purchase Date.
14. Certain Asset Sales.
--------------------
The Indenture imposes certain limitations on the ability of
the Issuer to sell assets. In the event the proceeds from a
permitted Asset Sale exceed certain amounts, as specified in the
Indenture, the Issuer generally will be required either to
reinvest the proceeds of such Asset Sale in its business, use
such proceeds to retire debt, or to make an asset sale offer to
purchase a certain amount of each Holder's Securities at 100% of
the principal amount thereof, plus accrued and unpaid interest to
the purchase date, as more fully set forth in the Indenture.
15. Successors.
-----------
When a successor assumes all the obligations of its
predecessor under the Securities and the Indenture, the
predecessor will be released from those obligations.
16. Defaults and Remedies.
----------------------
If an Event of Default occurs and is continuing, the Trustee
or the Holders of at least 25% in aggregate principal amount of
Securities then outstanding may declare all the Securities to be
9
due and payable immediately in the manner and with the effect
provided in the Indenture. Holders of Securities may not enforce
the Indenture or the Securities except as provided in the
Indenture. The Trustee may require indemnity satisfactory to it
before it enforces the Indenture or the Securities. Subject to
certain limitations, Holders of a majority in aggregate principal
amount of the Securities then outstanding may direct the Trustee
in its exercise of any trust or power.
17. Trustee Dealings with Issuer.
-----------------------------
The Trustee under the Indenture, in its individual or any
other capacity, may make loans to, accept deposits from, and
perform services for the Issuer or its Affiliates, and may
otherwise deal with the Issuer or its Affiliates as if it were
not the Trustee.
18. No Recourse Against Others.
---------------------------
No direct or indirect stockholder, director, officer or
employee, as such, past, present or future of the Issuer, the
Guarantors or any successor entity shall have any personal
liability in respect of the obligations of the Issuer or the
Guarantors under the Securities or the Indenture by reason of his
status as such stockholder, director, officer or employee, except
to the extent such person is the Issuer or a Guarantor. Each
Holder of a Security by accepting a Security waives and releases
all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
19. Authentication.
---------------
This Security shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on
the other side of this Security.
20. Abbreviations and Defined Terms.
-------------------------------
Customary abbreviations may be used in the name of a Holder
of a Security or an assignee, such as: TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common),
CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
21. CUSIP Numbers.
--------------
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Issuer will cause
CUSIP numbers to be printed on the Securities as a convenience to
the Holders of the Securities. No representation is made as to
the accuracy of such numbers as printed on the Securities and
reliance may be placed only on the other identification numbers
printed hereon.
22 Governing Law.
--------------
The Indenture and the Securities shall be governed by and
construed in accordance with the internal laws of the State of
New York.
11
ASSIGNMENT
I or we assign this Security to
(Print or type name, address and zip code of assignee)
Please insert Social Security or other identifying number of
assignee
-------------------------------
and irrevocably appoint ___________ agent to transfer this
Security on the books of the Issuer. The agent may substitute
another to act for him.
Dated: Signed:
------------- -------------------------------------
(Sign exactly as your name appears on
the other side of this Security)
Signature guarantee:
12
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the
Issuer pursuant to Section 4.13 or Article X of the Indenture,
check the appropriate box:
- ------- Section 4.13
- ------- Article X
If you want to elect to have only part of this Security
purchased by the Issuer pursuant to the Indenture, state the
principal amount you want to have purchased: $------
Date: ----- Signature: ---------------------------------------
(Sign exactly as your name appears on
the other side of this Security)
Signature guarantee:-----------------------------------
13
<TABLE>
<CAPTION>
SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES(1)
The following exchanges of a part of this Global Security for definitive
Securities have been made:
Amount of Amount of Principal Amount of
decrease in Principal increase in Principal this Global Signature of
Amount of this Amount of this Security following authorized signatory
Date of Global Global Such decrease (or of Trustee or
Exchange Security Security increase) Securities Custodian
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------
1 This schedule should only be added if the Security is a Global Security.
</TABLE>
14
GUARANTEE
For value received, each of the undersigned corporations hereby irrevocably,
unconditionally guarantees on a senior basis to the Holder of the Security
upon which this Guarantee is endorsed the due and punctual payment, as set
forth in the Indenture pursuant to which such Security and this Guarantee were
issued, of the principal of, premium (if any) and interest on such Security
when and as the same shall become due and payable for any reason according to
the terms of such Security and Article XI of the Indenture. The Guarantee
of the Security upon which this Guarantee is endorsed will not become effective
until the Trustee signs the certificate of authentication on such Security.
International Environmental Corporation T.E.S. Mining Services Pty. Ltd.
Climate Master, Inc. Total Energy Systems (NZ) Ltd.
CHP Corporation
KOAX Corp.
APR Corporation By:
LSB Chemical Corp. --------------------------------
Slurry Explosive Corporation Name: David M. Shear
Universal Tech Corporation Title: Secretary
Total Energy Systems Limited
Northwest Financial Corporation
DSN Corporation
El Dorado Chemical Company Climate Mate, Inc.
By: By:
--------------------------------- --------------------------------
Name: Tony M. Shelby Name: Brian Haggart
Title: Vice President Title: Vice President
The Environmental Group The Environmental Group, Inc.
International Limited
By: By:
--------------------------------- --------------------------------
Name: Barry H. Golsen Name: Barry H. Golsen
Title: Director Title: Executive Vice President
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001053518
<NAME> CLIMACHEM, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,402
<SECURITIES> 0
<RECEIVABLES> 44,522
<ALLOWANCES> 1,328
<INVENTORY> 36,494
<CURRENT-ASSETS> 93,835
<PP&E> 137,598
<DEPRECIATION> 54,429
<TOTAL-ASSETS> 201,741
<CURRENT-LIABILITIES> 39,695
<BONDS> 125,446
0
0
<COMMON> 1
<OTHER-SE> 27,252
<TOTAL-LIABILITY-AND-EQUITY> 201,741
<SALES> 63,360
<TOTAL-REVENUES> 63,428
<CGS> 50,411
<TOTAL-COSTS> 60,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,313
<INCOME-PRETAX> (76)
<INCOME-TAX> (30)
<INCOME-CONTINUING> (46)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46)
<EPS-PRIMARY> (0)
<EPS-DILUTED> (0)
</TABLE>
