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 June 30, 1998
______________________________
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from ________________ to ______________
Commission file number __________________________________________
ClimaChem, Inc.
____________________________________________________
Exact name of Registrant as specified in its charter
OKLAHOMA 73-1528549
______________________________ __________________
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
______________________________________________________
Address of principal executive offices (Zip Code)
(405) 235-4546
__________________________________________________
Registrant's telephone number, including area code
None
___________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
____ _____
The Registrant does not have any equity securities registered under
the securities act of 1933, as amended. All outstanding shares of
Common Stock of the registrant are held directly or indirectly by
the registrant's parent company, LSB Industries, Inc.
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PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: ClimaChem,
Inc. and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of ClimaChem,
Inc. at June 30, 1998, the condensed consolidated statements of
operations for the six month and three month periods ended June 30,
1998 and 1997 and the consolidated statements of cash flows for the
six month periods ended June 30, 1998 and 1997 have been subjected
to a review, in accordance with standards established by the
American Institute of Certified Public Accountants, by Ernst &
Young LLP, independent auditors, whose report with respect thereto
appears elsewhere in this Form 10-Q. The financial statements
mentioned above are unaudited and reflect all adjustments,
consisting only of adjustments of a normal recurring nature, which
are, in the opinion of management, necessary for a fair
presentation of the interim periods. The results of operations for
the six months and three months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full
year. The condensed consolidated balance sheet at December 31,
1997, was derived from audited financial statements as of that
date. Reference is made to the Company's registration statement on
Form S-4 filed April 10, 1998 for an expanded discussion of the
Company's financial disclosures and accounting policies.
1
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<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1998 is unaudited)
(Dollars in thousands)
June 30, December 31,
ASSETS 1998 1997
_________________________________________ ___________ ___________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,883 $ 3,534
Trade accounts receivable, net of allowance 41,316 38,521
Inventories:
Finished goods 10,856 13,189
Work in process 7,486 7,803
Raw materials 18,074 17,768
__________ __________
Total inventory 36,416 38,760
Supplies and prepaid items 7,502 6,282
Income tax receivable 442 2,142
Current deferred income taxes 1,345 1,345
Due from LSB and affiliates - 2,157
__________ __________
Total current assets 90,904 92,741
Property, plant and equipment, net 81,974 84,329
Due from LSB and affiliates, net 13,443 13,443
Other assets, net 9,058 10,362
__________ __________
$ 195,379 $ 200,875
========== ==========
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(Continued on following page)
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<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1998 is unaudited)
(Dollars in thousands)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
________________________________________ ___________ __________
<S> <C> <C>
Current liabilities:
Accounts payable $ 18,313 $ 19,091
Accrued liabilities 9,525 9,075
Current portion of long-term debt (Note 4) 7,295 9,838
Due to LSB and affiliates 668 -
__________ _________
Total current liabilities 35,801 38,004
Long-term debt (Note 4) 122,092 126,346
Contingencies (Note 5)
Deferred income taxes 9,236 9,236
Stockholders' equity:
Common stock, $.10 par value; 500,000
shares authorized, 10,000 shares
issued 1 1
Capital in excess of par value 12,652 12,652
Accumulated other comprehensive loss (1,609) (1,003)
Retained earnings 17,206 15,639
___________ __________
28,250 27,289
___________ __________
Total stockholders' equity $ 195,379 200,875
=========== ===========
</TABLE>
(See accompanying notes)
3
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<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
(Dollars in thousands, except per share amounts)
1998 1997
__________ __________
<S> <C> <C>
Revenues:
Net sales $ 137,130 $ 138,006
Other income 197 330
__________ _________
137,327 138,336
Costs and expenses:
Cost of sales 107,439 111,663
Selling, general and administrative (Note 6) 20,348 18,718
Interest 6,273 4,255
__________ _________
134,060 134,636
__________ _________
Income before provision for
income taxes 3,267 3,700
Provision for income taxes 1,700 1,501
________ _________
Net income $ 1,567 $ 2,199
========== =========
Retained earnings at beginning of period 15,639 19,913
Dividends to parent - (1,595)
__________ _________
Retained earnings at end of period $ 17,206 $ 20,517
========== =========
</TABLE>
(See accompanying notes)
4
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<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months ended June 30, 1998 and 1997
(Dollars in thousands, except per share amounts)
1998 1997
__________ __________
<S> <C> <C>
Revenues:
Net sales $ 73,771 $ 75,787
Other income 129 254
__________ __________
73,900 76,041
Costs and expenses:
Cost of sales 57,028 58,811
Selling, general and administrative (Note 6) 10,569 9,668
Interest 2,960 2,218
__________ __________
70,557 70,697
__________ __________
Income before provision for
income taxes 3,343 5,344
Provision for income taxes 1,730 2,212
__________ ________
Net income $ 1,613 $ 3,132
========== ========
Retained earnings at beginning of period 15,593 18,445
Dividends to parent - (1,060)
__________ ________
Retained earnings at end of period $ 17,206 $ 20,517
========== ==========
</TABLE>
(See accompanying notes)
5
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<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
(Dollars in thousands)
1998 1997
__________ _________
<S> <C> <C>
Cash flows from operations:
Net income $ 1,567 $ 2,199
Adjustments to reconcile net income
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 4,707 3,651
Other 579 360
Provision for possible losses
on receivables and other assets 176 138
Provision for deferred income taxes - 358
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (3,275) (5,635)
Inventories 1,791 3,119
Supplies and prepaid items (1,233) (1,105)
Accounts payable (690) (7,329)
Accrued liabilities 594 (339)
Due to / from LSB and affiliates 4,525 -
___________ _________
Net cash provided (used) by operations 8,741 (4,583)
Cash flows from investing activities:
Capital expenditures (2,562) (4,613)
Proceeds from sales of equipment 29 273
Decrease in other assets 682 857
___________ __________
Net cash used in investing activities (1,851) (3,483)
Cash flows from financing activities:
Payments on long-term debt (4,236) (21,679)
Long-term and other borrowings - 50,000
Net change in revolving debt (2,305) (11,888)
Net change in amounts due to / from
LSB and affiliates - (7,818)
Dividends paid to parent - (1,595)
_________ __________
Net cash provided (used) by financing activities (6,541) 7,020
_________ __________
Net increase (decrease) in cash 349 (1,046)
Cash and cash equivalents at beginning of period 3,534 1,109
__________ __________
Cash and cash equivalents at end of period $ 3,883 $ 63
========== ==========
</TABLE>
(See accompanying notes)
6
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 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: Changes in Accounting Effective January 1, 1998, the
Company changed its method of accounting for the costs of computer
software developed for internal use to capitalize costs incurred
after the preliminary project stage as outlined in Statement of
Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). These 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 income for the first and second quarters of
1998 was not material.
In the second quarter of 1998, the Accounting Standards Executive
Committee of the Securities and Exchange Commission released
Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of
start-up activities, including organization costs, be expensed as
7
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CLIMACHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
incurred. As of June 30, 1998, the Company has approximately
$328,000 of capitalized costs on its balance sheet classified as
other assets that will have to be written-off as a cumulative
effect of change in accounting pursuant to SOP 98-5 upon adoption.
SOP 98-5 is effective for fiscal years ending after December 15,
1998. The Company expects to adopt SOP 98-5 no later than the
first quarter of 1999.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter after its
issuance. The Company has not yet determined when this new
Statement will be adopted. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133
will be on the earnings and financial position of the Company.
Note 3: Comprehensive Income Effective January 1, 1998, the
Company adopted Financial Accounting Standard No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). The provisions of SFAS 130
require the Company to classify items of other comprehensive income
in the financial statements and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance
sheet. The Company has also made similar reclassifications for all
prior periods for comparative purposes. Other comprehensive losses
for the six month and three month periods ended June 30, 1998 and
1997, related to foreign currency exchange, amounted to
approximately $606,000 and $550,000 for the six month periods and
ended and $616,000 and $593,000 for the three month periods,
respectively. After consideration of the other comprehensive loss
items, comprehensive income for the six month and three month
periods ended June 30, 1998 and 1997 was approximately $961,000 and
8
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CLIMACHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
$1,649,000 for the six month periods and $997,000 and $2,539,000
for the three month periods, 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 ("Old Notes"). In April 1998, the Company
exchanged all of the outstanding Old Notes for registered 10
3/4% Series B Senior Notes due 2007 ("New Notes"). The form
and terms of the New Notes are the same as the Old Notes
(which they replaced), except for certain limited exceptions.
The New Notes evidence the same debt as the Old Notes (which
they replaced). Interest on the Old Notes until replaced by
the New Notes and interest on the New Notes are payable
semiannually in arrears on June 1 and December 1 of each year,
and the principal is payable in the year 2007. The New 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 New
Notes are effectively subordinated to all existing and future
senior secured indebtedness of the Company.
Except as described below, the New Notes are not redeemable at
the Company's option prior to December 1, 2002. After
December 1, 2002, the New 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
New Notes between the Company, the guarantors and the trustee
("Indenture"), plus accrued and unpaid interest thereon, plus
liquidated damages, if any, to the applicable redemption date.
In addition, until December 1, 2000, up to $35 million in
aggregate principal amount of the New Notes is redeemable, at
the option of the Company, at a price of 110.75% of the
principal amount of the Notes, together with accrued and
unpaid interest, if any, thereon, plus liquidated damages;
provided, however, that at least $65 million in aggregate
principal amount of the New Notes remain outstanding following
such redemption.
In the event of a change of control of the Company, holders of
the New Notes will have the right to require the Company to
repurchase the New Notes, in whole or in part, at a redemption
price of 101% of the principal amount thereof, plus accrued
9
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
and unpaid interest, if any, thereon, plus liquidated damages,
if any, to the date of repurchase.
The Company is a holding company with no assets or operations
other than its investments in its subsidiaries, and each of
its subsidiaries is wholly owned, directly or indirectly, by
the Company. The Company's payment obligations under the New
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 New 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 the Company or subsidiaries of
the Company. Under the Revolving Credit Facility, LSB and
certain subsidiaries of LSB that are not the Company or
subsidiaries of the Company have a right to borrow on a
revolving basis up to $24 million under the Revolving Credit
Facility ($12.2 million outstanding at June 30, 1998). Subject
to the amount of eligible collateral, the Company has the right
to borrow up to $65 million under the Revolving Credit Agreement
less any amounts borrowed by LSB and its subsidiaries that are
not the Company or subsidiaries of the Company. Borrowings under
the Revolving Credit Facility bear an annual rate of interest
at a floating rate based on the lender's prime rate plus 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
10
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997
Credit Facility prior to maturity; however, should the Company
do so, it would be required to pay a termination fee equal to
1% of the average daily balance of loans and letters of credit
outstanding during the 180 day period immediately prior to
termination.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of
subsidiaries of the Company that are borrowers under the
Revolving Credit Agreement.
(C) At June 30, 1998, the Company's wholly-owned Australian
subsidiary had an AUS$10.5 million (US$6.4 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 June 30, 1998 all borrowings under the TES
Revolver were under the commercial bill option which had a
weighted average interest rate of 7.2% per annum.
At June 30, 1998, the Company's Australian subsidiary was in
technical noncompliance with certain financial covenants
contained in the TES Revolver. At the time of closing of the
TES Revolver, the subsidiary was also in technical
noncompliance with certain financial covenants; however, the
bank has confirmed that it will not act on any default so long
as, in its opinion, such default will not impact the ability
of TES or LSB to continue operations or service and repay its
borrowings outstanding under the TES Revolver. At December
31, 1997 and June 30, 1998, all borrowings outstanding under
the TES Revolver have been classified as due within one year
in the accompanying condensed consolidated financial
statements.
11
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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
Agreement may be renewed for up to six renewal terms of five years
each; however, prior to each renewal period, either party to the
Bayer Agreement may opt against renewal. It is anticipated that
construction of the EDNC Baytown Plant will cost approximately $65
million and will be completed by the first quarter of 1999. Construction
financing of the EDNC Baytown Plant is being provided by an
unaffiliated lender. Neither the Company 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 June 30, 1998, the fair
value of such agreement represented a liability of $5.0 million for
which the Company has posted margin and letters of credit totaling
$5.0 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.
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
Legal Matters
_____________
Following is a summary of certain legal actions involving the
Company:
A. A subsidiary of the Company submitted to the State of Arkansas
a "Groundwater Monitoring Work Plan" which was approved by the
State of Arkansas. Pursuant to the Groundwater Monitoring Work
Plan, the subsidiary has performed phase I and II groundwater
investigations, and submitted a risk assessment report to the
State of Arkansas. The risk assessment report is currently
being reviewed by the State of Arkansas. The State of
Arkansas has indicated that additional groundwater monitoring
may be required to better define the extent of groundwater
contamination before a decision is made on a risk based
remedy.
On February 12, 1996, the subsidiary entered into a Consent
Administrative Agreement ("Administrative Agreement") with the
state of Arkansas to resolve certain compliance issues
associated with nitric acid concentrators. Pursuant to the
Administrative Agreement, the subsidiary installed additional
pollution control equipment to address the compliance issues.
The subsidiary was assessed $50,000 in civil penalties
associated with the Administrative Agreement. In the summer of
1996 and then on January 28, 1997, the subsidiary executed
amendments to the Administrative Agreement ("Amended
Agreements"). The Amended Agreements imposed a $150,000 civil
penalty, which penalty has been paid. Since the 1997
amendment, the Chemical Business has been assessed stipulated
penalties of approximately $67,000 by the Arkansas Department
of Pollution Control and Ecology ("ADPC&E") for violations of
certain provisions of the 1997 Amendment. The Chemical
Business believes that the El Dorado Plant has made progress
in controlling certain off-site emissions; however, such off-
site emissions have occurred and continue to occur from time
to time, which could result in the assessment of additional
penalties against the Chemical Business by the ADPC&E for
violation of the 1997 Amendment.
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
13
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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 is
currently being drafted by ADPC&E, and EDC has been advised
that it will include a civil penalty in the amount of $183,700
which includes $42,000 that has already been paid by funding
an environmental project in the community, and $125,000 which
will be paid in the form of environmental improvements at the
El Dorado Plant. EDC has also been advised that the draft of
the proposed CAA will, in addition, require 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 requested 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
entered into a Consent Decree in settlement of the citizen
suit. The Consent Decree was approved by the court during the
second quarter of 1998. Under the terms of the Consent
Decree, 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
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, and (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, (ii) limitations relating to the El
Dorado Facility's use of its older concentrated nitric acid
plant, (iii) to provide the plaintiffs with copies of certain
documents forwarded to, or received by, appropriate
environmental regulatory agencies by the El Dorado Facility
14
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
and summaries of certain test results at the El Dorado
Facility, (iv) pay to the U.S. Treasury $50,000 as a penalty,
and (v) pay certain stipulated penalties under certain
conditions in the event the El Dorado Facility fails to comply
with the terms of the Consent Decree. The $50,000 penalty has
been paid by the Company's Chemical Business to the U.S.
Treasury.
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
asserted similar damage theories as the previously discussed
toxic tort lawsuit, except this action attempted to have a
class certified to represent substantially all allegedly
affected persons. The plaintiffs sued 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
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
15
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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.
During the second quarter of 1998, the Company's Chemical
Business settled the property damage claims, and proceeded
with an agreement to settle the personal injury claims,
asserted in the class action toxic tort lawsuit. The Company
also completed a settlement of the other toxic tort lawsuit.
The court approved the settlement of the class action claims
relating to alleged property damage. Settlement of the
personal injury claims by the individual claimants that were
asserted in the class action lawsuit does not require court
approval and is in the process of being completed. Settlement
of the class action toxic tort lawsuit and settlement of the
other toxic tort lawsuit 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
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.
16
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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.
During the third quarter of 1997, a subsidiary of the Company
was served with a lawsuit in which approximately 27 plaintiffs
have sued approximately 13 defendants, including a subsidiary
of the Company alleging personal injury and property damage
for undifferentiated compensatory and punitive damages of
approximately $7,000,000. Specifically, the plaintiffs assert
blast damage claims, nuisance (road dust from coal trucks) and
personal injury claims (exposure to toxic materials in
blasting materials) on behalf of residents living near the
Heartland Coal Company ("Heartland") strip mine in Lincoln
County, West Virginia. Heartland employed the subsidiary to
provide blasting materials and personnel to load and shoot
holes drilled by employees of Heartland. Down hole blasting
services were provided by the subsidiary at Heartland's
premises from approximately August 1991, until approximately
August 1994. Subsequent to August 1994, the subsidiary
supplied blasting materials to the reclamation contractor at
Heartland's mine. In connection with the subsidiary's
activities at Heartland, the subsidiary has entered into a
contractual indemnity to Heartland to indemnify Heartland
under certain conditions for acts or actions taken by the
subsidiary for which the subsidiary failed to take, and
Heartland is alleging that the subsidiary is liable thereunder
for Heartland's defense costs and any losses to or damages
sustained by, the plaintiffs in this lawsuit. Discovery has
only recently begun in this matter, and the Company intends to
vigorously defend itself in this matter. Based on limited
information available, the subsidiary's counsel believes that
the exposure, if any, to the subsidiary related to this
litigation is in the $100,000 range.
17
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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
Company's payroll that is paid by LSB and the costs and expenses
incurred by LSB in the performance of the Services Agreement.
Under the terms of the Services Agreement, the Company will also
pay to, or reimburse, LSB for the value of the office facilities of
LSB, including LSB's principal offices and financial accounting
offices utilized in the performance of the Services Agreement. LSB
will determine the proportionate usage of such facilities by LSB
and the Company, and the Company will pay up to, or reimburse, LSB
for its proportionate share of such usage.
Charges for such services included in the accompanying condensed
consolidated financial statements were $1,143,000 and $900,000, and
$556,000 and $450,000 for the six month and three month periods
ended June 30, 1998 and 1997, respectively. Management of the
Company believes these charges from LSB reasonably approximate
additional general and administrative costs which would have been
incurred if the Company had been an independent entity during such
periods. These amounts do not include reimbursements for costs
described in the next paragraph or amounts paid by LSB relating to
certain of the Company's payroll that are directly charged to the
Company by LSB.
18
<PAGE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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. In the second quarter of 1998,
$900,000 was accrued as a payable to LSB by the Company pursuant to
the Management Agreement, which amount is included in selling, general
and administrative expenses in the second quarter of 1998 (none in 1997).
On November 21, 1997, the Company and LSB entered into a tax
sharing agreement (the "Tax Sharing Agreement") which provides for
(i) the allocation of payments of taxes for periods during which
the Company and its subsidiaries and LSB are included in the same
consolidated group for federal income tax purposes or the same
consolidated, combined or unitary returns for state, local or
foreign tax purposes, (ii) the allocation of responsibility for the
filing of tax returns, (iii) the conduct of tax audits and the
handling of tax controversies, and (iv) various related matters.
For tax periods beginning after December 1996 and ending ten years
thereafter, so long as the Company is included in LSB's
consolidated federal income tax returns or state consolidated
combined or unitary tax returns, the Company will be required to
pay to LSB an amount equal to the Company's consolidated federal
and state income tax liability calculated as if the Company and its
19
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
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 six months ended June 30, 1998 and 1997,
respectively, the Company paid or was obligated to pay LSB $1.7
million and $1.1 million under the Tax Sharing Agreement.
Under the terms of an Indenture between the Company, the guarantors
and the trustee relating to the Notes (as defined in Note 4), the
Company is permitted to distribute or pay in the form of dividends
and other distributions to LSB in connection with the Company's
outstanding equity securities or loans, (a) advances or investments
to any person (including LSB), up to 50% of the Company's
consolidated net income for the period (taken as one accounting
period), commencing on the first day of the first full fiscal
quarter commencing after the Issue Date (as defined in Note 4) to
and including the last day of the fiscal quarter ended immediately
prior to the date of said calculation (or, in the event
consolidated net income for such period is a deficit, then minus
100% of such deficit), plus (b) the aggregate net cash proceeds
received by the Company from the sale of its capital stock. This
limitation will not prohibit (i) payment to LSB under the Services
Agreement, Management Agreement and the Tax Sharing Agreement, or
(ii) the payment of any dividend within 60 days after the date of
its declaration if such dividend could have been made on the date
of such declaration.
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 $237,500 and
$223,700 during the first six months of 1998 and 1997,
respectively.
The Company has, at various times, maintained certain unsecured
borrowings from LSB and its subsidiaries and made loans and
advances to LSB which generally bear interest. At June 30, 1998,
20
<PAGE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1998 and 1997
the Company had loans and advances due from LSB of approximately
$13.4 million, $10.0 million of these loans were loaned to LSB from
the proceeds of the sale of the Notes and bears interest at 10-3/4%,
maturing November 2007. The remainder of these loans to
LSB and affiliates relate to cash advances from the Company to LSB
and affiliates prior to the sale of the Notes and these loans are
due November 2007 and bear interest at 7% per annum. The Company
has $.7 million due to LSB and affiliates as of June 30, 1998,
included in current liabilities related primarily to amounts owed
under the Management Agreement, which is non-interest bearing.
21
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with a review of the Company's June 30, 1998
Condensed Consolidated Financial Statements.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
OVERVIEW
<TABLE>
<CAPTION>
In October 1997, the Company was organized as a new wholly
owned subsidiary of LSB Industries, Inc. ("LSB"). The Company owns
substantially all of LSB's Chemical and Climate Control Businesses.
See Note 1 of Notes to Condensed Consolidated Financial Statements.
Information about the Company's operations in different industry
segments for the six months and three months ended June 30, 1998
and 1997 is detailed below.
Six Months Three Months
1998 1997 1998 1997
________ ________ ________ ________
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Sales:
Chemical $ 77,522 $ 90,194 $ 44,099 $ 49,595
Climate Control 59,608 47,812 29,672 26,192
________ ________ ________ ________
137,130 138,006 73,771 75,787
======== ======== ======== ========
Gross profit (1):
Chemical $ 12,337 $ 12,580 $ 7,742 $ 9,257
Climate Control 17,354 13,763 9,001 7,719
________ ________ ________ ________
$ 29,691 $ 26,343 $ 16,743 $ 16,976
======== ======== ======== ========
Operating profit (2):
Chemical $ 4,303 $ 4,296 $ 3,466 $ 5,076
Climate Control 5,237 3,659 2,837 2,486
________ ________ ________ ________
9,540 7,955 6,303 7,562
Interest expense (6,273) (4,255) (2,960) (2,218)
________ ________ ________ ________
Income before provision
for income taxes $ 3,267 $ 3,700 $ 3,343 $ 5,344
======== ======== ======== ========
<FN>
(1) Gross profit by industry segment represents net sales less
cost of sales.
22
(2) Operating profit by industry segment represents revenues less
operating expenses before deducting interest expense and
income taxes.
</FN>
</TABLE>
Chemical Business
_________________
Beginning in 1994, the results of operations of the Chemical
Business have been adversely impacted by the high cost of anhydrous
ammonia, the Chemical Business' principal raw material. 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 $65
million and construction is scheduled to be completed by the first
quarter of 1999. The Company's subsidiary is to lease the nitric acid
23
<PAGE>
plant pursuant to a leverage lease from an unrelated third party
for an initial term of ten (10) years from the date that the plant
becomes fully operational, and the construction financing of this
plant is being provided by an unaffiliated lender.
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. 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.
During the first six months of 1998, the Chemical Business'
revenues were adversely affected by an unusual heat wave and lack
of rain in its principal markets in eastern Texas, resulting in
part in a substantial decrease in the Chemical Business' revenues
during the first six months of 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 24.7%) and improved
operating profit for the first six months of 1998 as compared to
the first six months of 1997.
RESULTS OF OPERATIONS
Six months ended June 30, 1998 vs. Six months ended June 30, 1997.
_________________________________________________________________
Revenues
________
Total revenues for the six months ended June 30, 1998 and 1997
were $137.3 million and $138.3 million, respectively (a decrease of
$1.0 million). Sales decreased $.9 million and other income
decreased $.1 million.
24
<PAGE>
Net Sales
_________
Consolidated net sales included in total revenues for the six
months ended June 30, 1998 were $137.1 million, compared to $138.0
million for the first six months of 1997, a decrease of $.9
million. This decrease in sales resulted from: (i) decreased
sales in the Chemical Business of $12.7 million due to lower sales
in the U.S. of agricultural and blasting products and decreased
business volume of its Australian subsidiary, offset by (ii)
increased sales in the Climate Control Business of $11.8 million
due to increased sales in this Business' Heat Pump and Fan Coil
product lines.
Gross Profit
____________
Gross profit was 21.7% for the first six months of 1998,
compared to 19.1% for the first six 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 1997.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 14.8% in the six month period ended June
30, 1998, compared to 13.6% for the first six months of 1997. This
increase is primarily the result of expenses incurred to enhance
production capabilities in the Climate Control Business and a
$900,000 charge recorded pursuant to the Management Agreement with
LSB as discussed in Note 6 of Notes to Condensed Consolidated
Financial Statements elsewhere in this report.
Interest Expense
________________
Interest expense for the Company was $6.3 million during the
first six months of 1998, compared to $5.4 million, before
deducting capitalized interest, during the first six months of
1997. During the first six months of 1997, $1.1 million of
interest expense was capitalized in connection with construction of
the DSN Plant. The increase of $.9 million before the effect of
capitalization primarily resulted from increased borrowings.
Income Before Taxes
___________________
The Company had income before income taxes of $3.3 million in
the first six months of 1998 compared to income before income taxes
of $3.7 million in the six months ended June 30, 1997. The
decreased profitability of $.4 million was primarily due to
increased gross profit, more than offset by increases in SG&A and
interest expenses as previously discussed.
25
<PAGE>
Benefit for Income Taxes
________________________
The provision for income taxes pursuant to the terms of the
Tax Sharing Agreement as discussed in Note 6 of Notes to Condensed
Consolidated Financial Statements was $1.7 million for the first
six months of 1998 on pre-tax income of $3.3 million (51.5%)
compared to $1.5 million in the first six months of 1997 on pre-tax
income of $3.7 million (40.6%). The effective tax rate is greater than
the statutory rate due to losses associated with the Company's
Australian subsidiary, which provides no current benefit due to its
cumulative tax loss position.
Three months ended June 30, 1998 vs. Three months ended June 30, 1997.
_____________________________________________________________________
Revenues
________
Total revenues for the three months ended June 30, 1998 and
1997 were $73.9 million and $76.0 million, respectively (a
decrease of $2.1 million). Sales decreased $2.0 million and other
income decreased $.1 million.
Net Sales
_________
Consolidated net sales included in total revenues for the
three months ended June 30, 1998 were $73.8 million, compared to
$75.8 million for the second quarter of 1997, a decrease of $2.0
million. This decrease in sales resulted from: (i) decreased
sales in the Chemical Business of $5.5 million primarily due to
lower sales in the U.S. of agricultural and blasting products and
decreased business volume of its Australian subsidiary, offset by
(ii) increased sales in the Climate Control Business of $3.5
million due to increased sales in the Business' Heat Pump and Fan
Coil product lines.
Gross Profit
____________
Gross profit was 22.7% for the second quarter of 1998,
compared to 22.4% for the second quarter 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 second quarter of 1997.
- 26 -
<PAGE>
Selling, General and Administrative Expenses
____________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 14.3% in the three month period ended
June 30, 1998, compared to 12.8% for the second quarter of 1997.
This increase is primarily the result of expenses incurred to
enhance production capabilities in the Climate Control Business and
a $900,000 charge incurred pursuant to the Management Agreement
with LSB discussed in Note 6 of Notes to Condensed Consolidated
Financial Statements elsewhere in this report.
Interest Expense
________________
Interest expense for the Company was $3.0 million during the
second quarter of 1998, compared to $2.6 million, before deducting
capitalized interest, during the second quarter of 1997. During
the second quarter of 1997, $.4 million of interest expense was
capitalized in connection with construction of the DSN Plant. The
increase of $.4 million before the effect of capitalization
primarily resulted from increased borrowings.
Loss Before Taxes
_________________
The Company had income before income taxes of $3.3 million in
the second quarter of 1998 compared to income before income taxes
of $5.3 million in the three months ended June 30, 1997. The
decreased profitability of $2.0 million was primarily due to (i)
decreased sales, (ii) increased SG&A expense, and (iii) increased
interest expense, as previously discussed.
Benefit for Income Taxes
________________________
The provision for income taxes pursuant to the terms of the
Tax Sharing Agreement as discussed in Note 6 of Notes to Condensed
Consolidated Financial Statements was $1.7 million for the second
quarter of 1998 on pre-tax income of $3.3 million (51.7%) compared
to $2.2 million in the second quarter of 1997 on pre-tax income of
$5.3 million (41.4%). The effective tax rate is greater than the
statutory rate due to losses associated with the Company's
Australian subsidiary, which provides no current benefit due to
its cumulative tax loss position.
27
<PAGE>
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.
Net cash provided by operations for the six months ended June
30, 1998 was $8.7 million, after $5.3 million for noncash
depreciation and amortization, $.2 million in provisions for
possible losses on accounts receivable, including the following
changes in assets and liabilities: (i) accounts receivable
increases of $3.3 million; (ii) inventory decreases of $1.8
million; (iii) increases in supplies and prepaid items of $1.2
million; (iv) decreases in accounts payable and accrued
liabilities of $.1 million; and (v) reductions of amounts
due from LSB and affiliates of $4.5 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.
Cash Flow From Investing And Financing Activities
_________________________________________________
Cash used by investing activities for the six months ended
June 30, 1998 included $2.6 million in capital expenditures and $.7
million provided by decreases in other assets. The capital
expenditures took place in the Chemical and Climate Control
Businesses to enhance production and product delivery capabilities.
The decrease in other assets was primarily attributable to refunds
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 $4.2 million, and (ii) net decreases in revolving
debt of $2.3 million.
28
<PAGE>
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 ("Old Notes") in
- 28 -
<PAGE>
the aggregate amount of $105 million pursuant to the terms of the
Indenture, which Old Notes were exchanged for new registered notes
in April 1998 ("New Notes"). The terms of the New Notes were the
same as the Old Notes, except for certain limited exceptions. The
New Notes evidence the same debt as the Old Notes (which they
replaced). The New Notes are, and the Old Noteswere, 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. See
Note 4(A) to Notes to Condensed Consolidated Financial Statements.
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 June
30, 1998, LSB and its subsidiaries other than the Company and its
subsidiaries have borrowed $12.2 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
29
<PAGE>
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
June 30, 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 June
30, 1998, the availability for additional borrowings by the
subsidiaries of the Company, based on eligible collateral,
approximated $32.0 million. Borrowings by subsidiaries of the
Company under the Revolver outstanding at June 30, 1998, were $3.8
million. The Revolving Credit Agreement requires the Company to
maintain certain financial ratios and contains other financial
covenants, including tangible net worth requirements and capital
expenditure limitations. At June 30, 1998, the Company was not in
compliance with certain of these financial covenants. In August
1998, the Company obtained waivers for such noncompliance and
amendments to reset the covenants to amounts the Company expects to
achieve in future periods. The annual interest on the outstanding
debt under the Revolver at June 30, 1998 at the rates then in
effect would approximate $.4 million. The Revolving Credit
Agreement also requires the payment of an annual facility fee of
0.5% of the unused revolver.
In addition to the Revolving Credit Agreement discussed above,
as of June 30, 1998, the Company's wholly-owned subsidiary, DSN
Corporation ("DSN"), is a party to several loan agreements with a
financial company (the "Financing Company") for three projects. At
June 30, 1998, DSN had outstanding borrowings of $12.3 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 June 30,
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. At June 30, 1998, ClimaChem was not in compliance
with the tangible net worth covenant of these agreements. In
August 1998, ClimaChem obtained a waiver for such noncompliance and
a waiver through June 1999 to the extent that noncompliance is
caused by the Management Fee Agreement between LSB and the Company.
The Company expects to be in compliance with these agreements,
after consideration of the waiver, in future periods.
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$6.4 million). The TES Revolving Facility
allows for borrowings based on specific percentages of qualified
eligible assets. At June 30, 1998, based on the effective exchange
rate, the availability under the TES Revolving Facility was
approximately US$6.4 million (AUS$10.5 million), with approximately
US$2.5 million (AUS$4.1 million approximately) being borrowed at
June 30, 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
- 30 -
<PAGE>
dependent upon the borrowing option elected by TES and had a
weighted average rate of 7.2% at June 30, 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 June 30, 1998, has been classified as due within one
year in the accompanying consolidated financial statements.
Future cash requirements include working capital requirements
for anticipated sales increases in all businesses and funding for
future capital expenditures. Funding for the higher accounts
receivable and inventory requirements resulting from anticipated
sales increases will be provided by cash flow generated by the
Company and the revolving credit facilities discussed elsewhere in
this report. Currently LSB and certain subsidiaries of LSB,
including the Company, are limited to capital expenditures of $6
million annually under the Revolving Credit Agreement discussed
above. LSB has requested an amendment to increase permitted annual
capital expenditures to $10.0 million. If this amendment is
approved, the Company has planned capital expenditures of
approximately $9.0 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. The Company
currently has no material commitment for capital expenditures,
except as discussed under "Overview - Chemical Business" of this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the fact that the Company's
subsidiary has agreed to act as agent to construct a nitric acid
plant. Further, the Company's Chemical Business may be required to
incur additional capital expenditures as discussed in Note 5 of
Notes to Condensed Consolidated Financial Statements regarding a
"Groundwater Monitoring Work Plan" and the draft of the proposed
Consent Administrative Agreement related to the Chemical Business'
wastewater treatment system. At the date of this report, the cost
of the expenditures for these environmental matters has not been
determined.
- 31 -
<PAGE>
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.
- 32 -
<PAGE>
<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) additional capacity for anhydrous ammonia
coming on-line, and such additional capacity may contribute to a
decline in future market price for such ammonia, (ii) the EDNC
Baytown Plant will cost approximately $65 million, will be completed
by the first quarter of 1999 and, when the EDNC Baytown Plant is
fully operational, the annual sales volume from such plant will be
approximately $50.0 million, (iii) future cash requirements (iv)
ability to meet presently anticipated capital expenditures, working
capital, and debt service requirements, (v) ability to comply with the
Company's general working capital requirements, (vi) ability to be
able to continue to borrow under the Company's revolving line of
credit, (vii) contingencies should not have a material adverse
impact on the Company's liquidity, (viii) ability to be in
compliance with certain financial covenants contained in certain
loan agreements, and (ix) 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
33
<PAGE>
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
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.
34
<PAGE>
<PAGE>
Independent Accountants' Review Report
Board of Directors
ClimaChem, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of ClimaChem, Inc. and subsidiaries as of June 30, 1998, and
the related condensed consolidated statements of operations for the
six month and three month periods ended June 30, 1998 and 1997 and
the condensed consolidated statements of cash flows for the six
month periods ended June 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of ClimaChem,
Inc. as of December 31, 1997, and the related consolidated
statements of operations and retained earnings and cash flows for
the year then ended (not presented herein); and in our report dated
March 16, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
August 14, 1998
35
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
______ _________________
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously reported
by the Company in its S-4 Registration Statement No. 333-44905
("Registration Statement") under "Company - Legal Proceedings",
declared effective by the Commission on April 16, 1998, except 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 Detraz, et. al v. El Dorado Chemical Company ("Detraz
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 second quarter of 1998,
EDC (i) settled the Carr Case, (ii) obtained court approval of a
Consent Decree in settlement of the Citizen Suit, and (iii) settled
the Detraz Case.
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. The $50,000 payment to the U.S. Treasury has
been made by the Company's Chemical Business.
36
<PAGE>
Under the Carr Case and Detraz Case settlements, 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 Detraz Case have been
funded or are to be funded directly by the Company's EIL Insurance.
See Note 5 to Notes to Condensed Consolidated Financial Statements
and "Special Note Regarding Forward - Looking Statements."
Item 2. Changes in Securities and Use of Proceeds
______ _________________________________________
(a) In April 1998, the Company exchanged its $105 million in
10 3/4% Senior Notes Due 2007 ("Old Notes") for $105 million of 10
3/4% Series B Senior Notes Due 2007 ("New Notes") that were
registered under the Securities Act of 1933, as amended (the
"Act"). The Old Notes were sold by the Company to Wasserstein
Perella Securities, Inc., who subsequently resold the Old Notes to
qualified institutional buyers pursuant to Rule 144A under the Act.
The form and terms of the New Notes are the same as the form and
terms of the Old Notes (which they replaced), except the New Notes
bear a Series B designation, have been registered under the Act
and, therefore, do not bear legends restricting their transfer and
do not contain certain provisions relating to liquidated damages
which were included in the Old Notes in certain circumstances
relating to the timing of the exchange offer of the New Notes for
the Old Notes. The New Notes evidence the same debt as the Old
Notes (which they replaced) and were issued and entitled to the
benefits of an Indenture, dated November 26, 1997, between the
Company, the Guarantors (as defined in the Indenture) and BankOne,
N.A., as trustee governing the Old Notes and the New Notes. See
Note 4 of Notes to Condensed Consolidated Financial Statements and
"Management Discussion and Analysis of Financial Condition and
Results of Operations".
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.
37
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits. The Company has included the following
exhibits in this report:
4.1 Third Amendment to Amended and Restated Loan and
Security Agreement between BankAmerica Business
Credit, Inc. and Climate Master, Inc.,
International Environmental Corporation,
El Dorado Chemical Company, and Slurry Explosives
Corporation.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
(B) Reports of Form 8-K. The Company did not file any
reports on Form 8-K during the quarter ended June 30,
1998.
38
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this report on its behalf on this 15th day of
August 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)
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
_______ ___________ ___________
<S> <C> <C>
4.1 Third Amendment to Amended and Restated
Loan and Security Agreement between
BankAmerica Business Credit, Inc.
and Climate Master, Inc., International
Environmental Corporation, El Dorado
Chemical Company, and Slurry Explosive
Corporation. 41
27.1 Financial Data Schedule 52
27.2 Financial Data Schedule 53
- 39 -
</TABLE>
THIRD AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (the "Amendment") is dated as of August 14,
1998, and entered into by and between BANKAMERICA BUSINESS
CREDIT, INC. ("Lender") and CLIMATE MASTER, INC. ("Climate
Master"), INTERNATIONAL ENVIRONMENTAL CORPORATION ("IEC"), EL
DORADO CHEMICAL COMPANY ("EDC") and SLURRY EXPLOSIVE CORPORATION
("Slurry") (Climate, IEC, EDC, and Slurry being collectively
referred to herein as "Borrower").
WHEREAS, Lender and Borrower have entered into that certain
Amended and Restated Loan and Security Agreement dated as of
November 21, 1997 as amended by that certain First Amendment to
Amended and Restated Loan and Security Agreement dated as of
March 12, 1998, and that certain Second Amendment to Amended and
Restated Loan and Security Agreement dated as of June 30, 1998
(as so amended, the "Agreement");
WHEREAS, two Events of Default have occurred under the
Agreement;
WHEREAS, the Borrower desires that the Lender waive the
Events of Default and amend the Agreement in certain respects;
and
WHEREAS, the Lender is willing to waive the Events of
Default and amend the Agreement subject to the terms and
conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions
and agreements set forth in the Agreement and this Amendment, and
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties,
intending to be legally bound, hereby agree as follows:
ARTICLE I
__________
Definitions
___________
Section 1.01. Definitions. Capitalized terms used in this
Amendment, to the extent not otherwise defined herein, shall have
the same meanings as in the Agreement, as amended hereby.
ARTICLE II
__________
Amendments
__________
Section 2.01 Amendment to Section 3.1 (a) Interest Rates.
Section 3.1 (a) of the Agreement is hereby amended in its
entirety to read as follows:
<PAGE>
"3.1 Interest.
________
(a) Interest Rates. All amounts charged as Revolving
Loans shall bear interest on the unpaid principal amount thereof
from the date made until paid in full in cash at the Applicable
Interest Rate as described in Sections 3.1(a)(i) and (ii) but not
to exceed the maximum rate permitted by applicable law. Subject
to the provisions of Section 3.2, any of the Revolving Loans may
be converted into, or continued as, Reference Rate Loans or
Eurodollar Rate Loans in the manner provided in Section 3.2. If
at any time Revolving Loans are outstanding with respect to which
notice has not been delivered to Lender in accordance with the
terms of this Agreement specifying the basis for determining the
interest rate applicable thereto, then those Revolving Loans
shall be Reference Rate Loans and shall bear interest at a rate
determined by reference to the Reference Rate until notice to the
contrary has been given to the Lender and such notice has become
effective. Except as otherwise provided herein, the amounts
charged as Revolving Loans shall bear interest at the following
rates (the "Applicable Interest Rate"):
(i) For all amounts charged as Revolving Loans
other than Eurodollar Rate Loans, including all Revolving
Loans which are Reference Rate Loans, then at a fluctuating
per annum rate equal to one-half percent (.50%) per annum
(the "Reference Rate Margin") plus the Reference Rate; and
(ii) If the Revolving Loans are Eurodollar Rate
Loans, then at a per annum rate equal to: two and seven-
eighths percent (2.875%) per annum (the "Eurodollar Margin")
plus the Eurodollar Rate determined for the applicable
Interest Period.
Each change in the Reference Rate shall be reflected in the
interest rate described in (i) above as of the effective date of
such change. All interest charges shall be computed on the basis
of a year of three hundred sixty (360) days and actual days
elapsed. Except as otherwise provided herein, (1) interest
accrued on each Eurodollar Rate Loan shall be payable in arrears
on each Eurodollar Interest Payment Date applicable to such
Eurodollar Rate Loan, and (2) interest accrued on the Reference
Rate Loans will be payable in arrears on the first day of each
month hereafter."
Section 2.02. Amendment to Section 9.16. Section 9.16 of
the Agreement is hereby amended to read in its entirety as
follows:
-2-
<PAGE>
<TABLE>
<CAPTION>
"9.16 CCI Adjusted Tangible Net Worth. The CCI
Adjusted Tangible Net Worth will not be less than the
following amounts at the end of each of the Fiscal Quarters
during the following Fiscal Years:
Fiscal Quarters in the
Following Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
______________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 $23,000,000 $24,700,000
First Fiscal Quarter
during Fiscal Year
Ending December 31,
1999 The CCI Adjusted Tangible Net Worth as of
December 31, 1998 less $1,500,000.
Second Fiscal Quarter
during Fiscal Year
Ending December 31,
1999 The CCI Adjusted Tangible Net Worth as of
March 31, 1999.
Third Fiscal Quarter
during Fiscal Year Ending
December 31, 1999 and
each Fiscal Quarter
during each Fiscal Year
ending thereafter: The CCI Adjusted Tangible Net Worth
as of March 31, 1999 plus fifty percent
(50%) of CCI's profits for the prior
fiscal quarter without taking into account
any losses."
</TABLE>
Section 2.03. Amendment to Section 9.17. Section 9.17 of
the Agreement is hereby amended to read in its entirety as
follows:
<TABLE>
<CAPTION>
"9.17 Debt Ratio. The ratio of Debt of the CCI
Consolidated Group to the CCI Adjusted Tangible Net Worth
will not be greater than the following ratios at the end of
each of the Fiscal Quarters during the following Fiscal
Years:
Fiscal Quarters in the
Following Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
______________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 6.35:1 5.95:1
Fiscal Year Ending
December 31, 1999 and 5.95:1 5.95:1 5.95:1 5.95:1
Each Fiscal Quarter during each Fiscal Year ending thereafter: 5.95:1"
</TABLE>
-3-
<PAGE>
ARTICLE III
___________
Waivers
_______
Section 3.01. Waiver of Events of Default.
(a) The Lender hereby waives the following Events of
Default: (i) the CCI Adjusted Tangible Net Worth for the Fiscal
Quarter ending June 30, 1998 was less than $21,500,000, in breach
of Section 9.16 of the Loan Agreement; and (ii) the CCI
Consolidated Group's Debt Ratio for the Fiscal Quarter ending
June 30, 1998 was greater than 7.10 to 1.0, in breach of Section
9.17 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and
shall only be effective to the extent described above. The
waiver is limited to the facts and circumstances referred to
herein and shall not operate as (i) a waiver of or consent to
non-compliance with any other section or provision of the Loan
Agreement, (ii) a waiver of any right, power, or remedy of the
Lender under the Loan Agreement (except as provided herein), or
(iii) a waiver of any other Event of Default or Event which may
exist under the Loan Agreement.
ARTICLE IV
__________
Ratifications, Representations and Warranties
_____________________________________________
Section 4.01. Ratifications. The terms and provisions set
forth in this Amendment shall modify and supersede all inconsistent
terms and provisions set forth in the Agreement and, except as
expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement, including, without limitation, all
financial covenants contained therein, are ratified and confirmed
and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower
hereby represents and warrants to Lender that the execution,
delivery and performance of this Amendment and all other loan,
amendment or security documents to which Borrower is or is to be a
party hereunder (hereinafter referred to collectively as the "Loan
Documents") executed and/or delivered in connection herewith, have
been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower.
-4-
<PAGE>
ARTICLE V
_________
Conditions Precedent
____________________
Section 5.01. Conditions. The effectiveness of this
Amendment is subject to the satisfaction of the following
conditions precedent (unless specifically waived in writing by the
Lender):
(a) Lender shall have received all of the following,
each dated (unless otherwise indicated) as of the date of this
Amendment, in form and substance satisfactory to Lender in its
sole discretion:
(i) Company Certificate. A certificate executed by
the Secretary or Assistant Secretary of Borrower
certifying (A) that Borrower's Board of Directors has met
and adopted, approved, consented to and ratified the
resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the
Amendment and the Loan Documents, (B) the names of the
officers of Borrower authorized to sign this Amendment
and each of the Loan Documents to which Borrower is to be
a party hereunder, (C) the specimen signatures of such
officers, and (D) that neither the Articles of
Incorporation nor Bylaws of Borrower have been amended
since the date of the Agreement;
(ii) No Material Adverse Change. There shall have
occurred no material adverse change in the business,
operations, financial condition, profits or prospects of
Borrower, or in the Collateral since May 31, 1998, and
the Lender shall have received a certificate of
Borrower's chief executive officer to such effect;
(iii) Other Documents. Borrower shall have executed
and delivered such other documents and instruments as
well as required record searches as Lender may require.
(b) All corporate proceedings taken in connection with
the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender and its legal counsel,
Jenkens & Gilchrist, a Professional Corporation.
-5-
<PAGE>
ARTICLE VI
__________
Miscellaneous
_____________
Section 6.01. Survival of Representations and Warranties.
All representations and warranties made in the Agreement or any
other document or documents relating thereto, including, without
limitation, any Loan Document furnished in connection with this
Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and
warranties or the right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of
the Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended
hereby.
Section 6.03. Severability. Any provision of this Amendment
held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision
so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER
LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF OKLAHOMA AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF OKLAHOMA.
-6-
<PAGE>
Section 6.05. Successors and Assigns. This Amendment is
binding upon and shall inure to the benefit of Lender and Borrower
and their respective successors and assigns; provided, however,
that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
Lender may assign any or all of its rights or obligations hereunder
without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed
in one or more counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
Section 6.07. Effect of Waiver. No consent or waiver,
express or implied, by Lender to or of any breach of or deviation
from any covenant or condition of the Agreement or duty shall be
deemed a consent or waiver to or of any other breach of or
deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in
exercising, and no course of dealing with respect to, any right,
power, or privilege under this Amendment, the Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or privilege
under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege. The rights and remedies
provided for in the Agreement and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by
law.
Section 6.08. Headings. The headings, captions and
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
Section 6.09. Releases. As a material inducement to Lender
to enter into this Amendment, Borrower hereby represents and
warrants that there are no claims or offsets against, or defenses
or counterclaims to, the terms and provisions of and the other
obligations created or evidenced by the Agreement or the other Loan
Documents. Borrower hereby releases, acquits, and forever
discharges Lender, and its successors, assigns, and predecessors in
interest, their parents, subsidiaries and affiliated organizations,
and the officers, employees, attorneys, and agents of each of the
foregoing (all of whom are herein jointly and severally referred to
as the "Released Parties") from any and all liability, damages,
losses, obligations, costs, expenses, suits, claims, demands,
causes of action for damages or any other relief, whether or not
now known or suspected, of any kind, nature, or character, at law
or in equity, which Borrower now has or may have ever had against
any of the Released Parties, including, but not limited to, those
relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the
Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of
commercial reasonableness or special relationships, such as
fiduciary, trust or confidential relationships, (d) allegations of
dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference
or negligence, (e) allegations of tortious interference with
present or prospective business relationships or of antitrust, or
-7-
<PAGE>
(f) slander, libel or damage to reputation, (hereinafter being
collectively referred to as the "Claims"), all of which Claims are
hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on
demand (i) all costs and expenses reasonably incurred by Lender in
connection with the preparation, negotiation and execution of this
Amendment and the other Loan Documents executed pursuant hereto and
any and all subsequent amendments, modifications, and supplements
hereto or thereto, including, without limitation, the costs and
fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any
rights under the Agreement, this Amendment and/or other Loan
Documents, including, without limitation, the costs and fees of
Lender's legal counsel and the allocated cost of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER
WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL
AGREEMENTS BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER":
CLIMATE MASTER, INC.
By: /s/ Tony M. Shelby
__________________________
Tony M. Shelby
Vice President
INTERNATIONAL ENVIRONMENTAL CORPORATION
By: /s/ Tony M. Shelby
__________________________
Tony M. Shelby
Vice President
-8-
<PAGE>
EL DORADO CHEMICAL COMPANY
By: /s/ Tony M. Shelby
___________________________
Tony M. Shelby
Vice President
SLURRY EXPLOSIVE CORPORATION
By: /s/ Tony M. Shelby
___________________________
Tony M. Shelby
Vice President
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Michael J. Jasaitis
___________________________________
Michael J. Jasaitis, Vice President
-9-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
The undersigned hereby acknowledges the execution of, and
consents to, the terms and conditions of that certain Third
Amendment to Amended and Restated Loan and Security Agreement dated
as of August 14, 1998, between Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Corporation, Slurry
Explosive Corporation and BankAmerica Business Credit, Inc.
("Creditor") and reaffirms its obligations under that certain
Continuing Guaranty (the "Guaranty") dated as of November 21,
1997, made by the undersigned in favor of the Creditor, and
acknowledges and agrees that the Guaranty remains in full force
and effect and the Guaranty is hereby ratified and confirmed.
Dated as of August 14, 1998.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
________________________________
Tony M. Shelby, Vice President
-10-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Third
Amendment to Amended and Restated Loan and Security Agreement dated
as of August 14, 1998, between Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Corporation, Slurry
Explosive Corporation and BankAmerica Business Credit, Inc.
("Creditor") and each reaffirms its obligations under that certain
Continuing Guaranty with Security Agreement (the "Guaranty") dated
as of November 21, 1997, and acknowledges and agrees that such
Guaranty remains in full force and effect and each Guaranty is
hereby ratified and confirmed.
Dated as of August 14, 1998.
LSB INDUSTRIES, INC.
LSB CHEMICAL CORP.
L&S AUTOMOTIVE PRODUCTS CO.
L&S BEARING CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
SUMMIT MACHINE TOOL MANUFACTURING
CORP
MOREY MACHINERY MANUFACTURING
CORPORATION
CHP CORPORATION
KOAX CORP.
APR CORPORATION
CLIMATE MATE, INC.
THE ENVIRONMENTAL GROUP, INC.
UNIVERSAL TECH CORPORATION
By: /s/ Tony M. Shelby
_______________________________
Tony M. Shelby, Vice President
acting on behalf of each of the
above
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