FILED PURSUANT TO RULE 424(b)(3)
RELATING TO REGISTRATION STATEMENT
FILE NO. 333-44905
PROSPECTUS
APRIL 16, 1998
CLIMACHEM, INC.
OFFER TO EXCHANGE ITS 10 3/4% SERIES B SENIOR NOTES DUE 2007
FOR ANY AND ALL OF ITS
OUTSTANDING 10 3/4% SENIOR NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON
MAY 16, 1998, WHICH IS 30 DAYS AFTER THE EFFECTIVE DATE
OF THE REGISTRATION STATEMENT, UNLESS EXTENDED
ClimaChem, Inc., an Oklahoma corporation (the "Company"), a
wholly owned subsidiary of LSB Industries, Inc., a Delaware
corporation ("LSB"), is engaged, through its subsidiaries, in the
manufacture and sale of (i) chemical products for the explosives,
agricultural and industrial acids markets and (ii) a broad range of
hydronic fan coils and water source heat pumps as well as other
products in commercial and residential heating, ventilation and air
conditioning ("HVAC Systems"). See "The Company." The Company
hereby offers (the "Exchange Offer"), upon the terms and conditions
set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"),
to exchange $1,000 principal amount of its 10 3/4% Series B Senior
Notes due 2007 (the "New Notes") registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each
$1,000 principal amount of its outstanding 10 3/4% Senior Notes due
2007 (the "Old Notes"), of which $105 million principal amount is
outstanding. The Old Notes were sold by the Company on November
26, 1997, to Wasserstein Perella Securities, Inc., who subsequently
resold the Old Notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act ("Initial Offering"). See
"Initial Offering." The form and terms of the New Notes are the
same as the form and terms of the Old Notes (which they replace),
except the New Notes will bear a Series B designation and will have
been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer and will not contain
certain provisions relating to liquidated damages which were
included in the terms of the Old Notes in certain circumstances
relating to the timing of the Exchange Offer. The New Notes will
evidence the same debt as the Old Notes (which they replace) and
will be issued under and be entitled to the benefits of an
Indenture, dated November 26, 1997 (the "Indenture"), between the
Company , the Guarantors (as defined) and Bank One, NA, as trustee
(the "Trustee") governing the Old Notes and the New Notes. The Old
Notes and the New Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and
"Description of Securities Notes."
(COVER PAGE CONTINUED ON FOLLOWING PAGES)
SEE "RISK FACTORS," BEGINNING ON PAGE 18, FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER
THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS,
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR
TO THE TIME THE REGISTRATION STATEMENT BECOME EFFECTIVE. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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(COVER PAGE CONTINUED)
The Notes bear interest at a rate of 10 3/4% per annum,
payable semiannually on June 1 and December 1 of each year,
commencing June 1, 1998. The Notes will mature on December 1,
2007, and will not be subject to a sinking fund requirement. The
Notes will be redeemable by the Company, in whole or in part, at
any time on and after December 1, 2002, at the redemption prices
set forth herein, plus accrued and unpaid interest and Liquidated
Damages (as defined herein), if any, to the redemption date.
Notwithstanding the foregoing, at any time on or before December 1,
2000, the Company, at its option, may redeem in the aggregate up to
$35 million aggregate principal amount of the Notes at 110.750% of
the aggregate principal amount so redeemed plus accrued and unpaid
interest and Liquidated Damages (as defined), if any, to the
redemption date with the net proceeds of one or more Public Equity
Offerings (as defined), provided not less than $65 million
aggregate original principal amount of the Notes are outstanding
immediately after the occurrence of any such redemption. See
"Description of Notes Optional Redemption."
The New Notes will be, as the Old Notes (which they replace)
are, senior unsecured obligations of Company, and will, as the Old
Notes (which they replace), rank pari passu in right of payment to
all existing and future senior unsecured indebtedness of Company.
The New Notes will be, as the Old Notes (which they replace) are,
jointly and severally and fully and unconditionally guaranteed (the
"Guarantees") on an unsecured senior basis by substantially all of
the existing and future subsidiaries of the Company (the
"Guarantors"). El Dorado Nitrogen Company ("EDNC"), a current
subsidiary of the Company, is not a Guarantor. The Notes and the
Guarantees will be effectively subordinated to all existing and
future secured indebtedness of Company and its subsidiaries, and to
all existing and future secured and unsecured indebtedness of the
subsidiaries of the Company which are not Guarantors. The lender
under the Revolving Credit Facility (as defined) has a security
interest in the accounts receivable, inventory, proprietary rights,
books and records, and proceeds thereof, of certain subsidiaries of
the Company that are borrowers and guarantors under the Revolving
Credit Facility. The Company has guaranteed the obligations of
those subsidiaries of the Company that are borrowers under the
Revolving Credit Facility. In addition, certain other assets of
certain subsidiaries of the Company are subject to liens and
security interests granted in connection with certain other
existing lending and leasing arrangements. See "Description of
Other Indebtedness." After giving effect to the application of the
net proceeds received by the Company from the Initial Offering, as
of December 31, 1997, the aggregate principal amount of secured
indebtedness of the Company was approximately $31.2 million. In
addition, after giving effect to the application of the net
proceeds received by the Company from the Initial Offering, the
Company had $29.8 million of additional borrowing availability
under the Revolving Credit Facility as of December 31, 1997, and
US$2.7 million of additional borrowing availability under the TES
Revolving Facility (as defined) as of December 31, 1997. See
"Description of Other Indebtedness." The Indenture permits the
Company and the Guarantors to incur additional indebtedness,
subject to certain limitations, and contains no limitation on the
ability of the Company's parent, LSB, to incur additional
indebtedness. See "Capitalization" and "Description of Notes."
In the event of a Change of Control (as defined), holders of
the Notes will have the right to require the Company to purchase
its Notes at 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the
repurchase date. See "Risk Factors Repurchase of Notes Upon Change
of Control" and "Description of Notes." In addition, the Company
is obligated in certain instances to make offers to repurchase the
Notes at a purchase price in cash equal to 100% of the principal
amount thereof plus accrued and unpaid proceeds of certain asset
sales. See "Description of Notes Certain Covenants."
The Company has agreed to use its best efforts to issue the
New Notes on or prior to 30 business days after the effective date
of the Registration Statement. As a result, the Company will
accept for exchange any and all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time on May 16, 1998,
which is 30 days after the effective date of the Registration
Statement, unless extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m. on the Expiration Date. The Exchange
Offer is subject to certain customary conditions. The Old Notes
were sold by Company on November 26, 1997, to the Initial Purchaser
(as defined) in a transaction (the "Initial Offering") not
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(COVER PAGE CONTINUED)
registered under the Securities Act in reliance upon an exemption
under the Securities Act. The Initial Purchaser subsequently
placed the Old Notes with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act. Accordingly, the
Old Notes may not be reoffered, resold, or otherwise transferred in
the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements
of the Securities Act is available. The New Notes are being
offered hereunder in order to satisfy the obligations of Company
under the Registration Rights Agreement (as defined) entered into
between the Company, the Guarantors, and the Initial Purchaser in
connection with the Initial Offering. See "The Exchange Offer."
Based on no-action letters issued by the staff of the
Securities and Exchange Commission (the "Commission") to third
parties, the Company believes the New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise
transferred by any holder thereof (other than any such holder that
is an "affiliate" of Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that
such New Notes are acquired in the ordinary course of such holder's
business and such holder has no arrangement or understanding with
any person to participate in the distribution of such New Notes.
See "The Exchange Offer Resale of the New Notes." Each broker-
dealer (a "Participating Broker-Dealer") that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection with the
resales of New Notes received in exchange for Old Notes where such
Old Notes were acquired by such Participating Broker-Dealer as a
result of market making activities or other trading activities. The
Company has agreed that, for a period of 180 days after the
consummation of the Exchange Offer, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange
Offer will continue to hold such Old Notes and will be entitled to
all the rights and benefits and will be subject to the limitations
applicable thereto under the Indenture and with respect to transfer
under the Securities Act. The Company will pay all the expenses
incurred by it incident to the Exchange Offer. See "The Exchange
Offer."
There has not been previously any public market for the Old
Notes or the New Notes. The Company does not intend to list the
New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. The Old Notes
are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market.
However, there can be no assurance that an active market for the
New Notes will develop. See "Risk Factors Absence of a Public
Market Could Adversely Affect the Value of the Notes." Moreover,
to the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected.
The New Notes will be available initially in book-entry from,
and the Company expects that the New Notes issued pursuant to this
Exchange Offer will be issued in the form of a Global Note, which
will be deposited with, or on behalf of, The Depository Trust
Company (the "Depository") and registered in its name or in the
name of Cede & Co., its nominee. Beneficial interests in the Global
Note will be shown on, and transfer thereof will be effected
through, records maintained by the Depository and its participants.
After the initial issuance of the Global Note, New Notes in
certificated form will be issued in exchange for the Global Note on
the terms set forth in the Indenture. See "Description of
Notes Book-Entry, Delivery and Form."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including
without limitation, statements containing the words "believes,"'
"anticipates,"' "intends," "expects" and words of similar import
constitute "forward-looking statements." Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance achievements
of the Company or industry results to be materially different from
any future results, performance or achievements expressed or
implied by such forward-looking statements, including, but not
limited to, the factors discussed under "Risk Factors." Such
factors include, among others, the following: general economic and
business conditions, both domestic and foreign; industry capacity;
demographic changes; existing government regulations and changes
in, or the failure to comply with, government regulations;
legislative proposals or changes concerning pollution, protection
of the environment and the release or disposal of regulated
material; the effect of additional production capacity of anhydrous
ammonia in the western hemisphere; competition; the loss of any
significant customers; material reduction in revenues; changes in
operating strategy or development plans; inability to collect a
material amount of receivables; inability to implement on a
permanent basis the corrective actions necessary for the DSN Plant
(as defined) to operate at its stated capacity or achieve cost
savings from the corrective actions at the DSN Plant; inability to
fund the expansion of the Company's business; adverse results in
any of Company's environmental litigation and antitrust litigation
and investigation; completion of the Audit Report (as defined in
"Business--Legal Procedings") evaluating facility operations and
emissions at the El Dorado Facility (as defined in "Summary--The
Company") and other factors referenced in this Prospectus which
individually or in the aggregate could impair the Company's ability
to achieve its goals or to meet its obligations under the Notes.
Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including, without limitation, under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business."
Given these uncertainties, prospective investors 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.
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AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission
a Registration Statement on Form S-4 (together with all amendments,
exhibits, annexes and schedules thereto, the "Exchange Offer
Registration Statement") pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the New
Notes being offered hereby. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration
Statement. For further information with respect to the Company and
the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred
to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the
Exchange Offer Registration Statement, reference is made to the
exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Exchange Offer Registration
Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, at the Regional Offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web
site that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the Commission. The address of such site is
http://www.sec.gov.
As the result of the filing of the Exchange Offer Registration
Statement with the Commission, the Company and the Guarantors will
become subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and
other information with the Commission. The obligation of the
Company and the Guarantors to file periodic reports and other
information with the Commission will be suspended if the New Notes
are held of record by fewer than 300 holders as of the beginning of
any fiscal year of the Company other than the fiscal year in which
the Exchange Offer Registration Statement is declared effective.
The Company has agreed pursuant to the Indenture that, whether or
not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, the
Company will furnish to the holders of the Notes on the date it is,
or would have been (if it were subject to such reporting
obligations), required to furnish such to the Commission, subject
to any extension as allowed under the Exchange Act, and to each
prospective holder who so requests, and file with the Commission
(unless the Commission will not accept such a filing) all quarterly
and annual financial information that would be required if the
Company were subject to Sections 13 and 15(d) of the Exchange Act,
including a management's discussion and analysis of financial
condition and results of operations in each case, and, with respect
to the annual information only, a report thereon by the Company's
certified independent accountants. In addition, for so long as any
of the Notes remain outstanding, the Company and each Guarantor,
agree to make publicly available, upon request of any holder, the
information necessary to permit sales pursuant to Rule 144 and Rule
144A.
__________________
The principal executive offices of the Company are located at
16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107, and
its telephone number is (405) 235-4546.
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD
BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. THE COMPANY IS A WHOLLY OWNED
SUBSIDIARY OF LSB. THE COMPANY OWNS, THROUGH ITS SUBSIDIARIES,
SUBSTANTIALLY ALL OF THE OPERATIONS COMPRISING THE CHEMICAL
BUSINESS AND CLIMATE CONTROL BUSINESS OWNED BY LSB PRIOR TO THE
INITIAL OFFERING. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES TO THE "COMPANY" IN THIS PROSPECTUS REFERS TO CLIMACHEM,
INC. AND ITS SUBSIDIARIES AND DOES NOT REFER TO LSB AND ITS OTHER
SUBSIDIARIES. THIS SUMMARY IS ALSO QUALIFIED BY THE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS." SEE "RISK FACTORS" FOR A
DISCUSSION OF CERTAIN RISK FACTORS CONCERNING THIS OFFERING THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE INVESTMENT IN THE
NOTES.
The Company
The Company, a wholly owned subsidiary of LSB, is engaged
through its subsidiaries (all of which but one inconsequential
subsidiary are Guarantors) in the manufacture and sale of (i)
chemical products for the explosives, agricultural and industrial
acids markets (the "Chemical Business") and (ii) a broad range of
hydronic fan coils and water source heat pumps as well as other
products used in commercial and residential heating, ventilation
and air conditioning ("HVAC") systems (the "Climate Control
Business"). For the twelve months ended December 31, 1997, the
Company had net sales of $262.8 million and EBITDA (as defined) of
$21.4million.
The following is an organizational chart of the Company, which
is a wholly owned subsidiary of LSB, and subsidiaries of the
Company. All of the subsidiaries of the Company are Guarantors,
except for El Dorado Nitrogen Company. See "Description of Notes"
and Note 6(C), beginning on page F-15, to Notes to Consolidated
Financial Statements included herein.
[DIAGRAM]
The diagram is an organizational chart prepared in a top-down format.
The chart shows LSB Industries, Inc. at the highest level as the parent
of the Company. Underneath the Company, the organizational chart
divides into two segments -- one titled "Chemical Business," and the
other titled "Climate Control Business." LSB Chemical Corp. ("LSBC")
and Northwest Financial Corporation are placed under the title "Chemical
Business" as directly owned first tier subsidiaries of the Company. The
following companies are placed under LSBC as directly ownd subsidiaries
of LSBC and second tier subsidiaries of the Company: El Dorado Chemical
Company ("EDC"), El Dorado Nitrogen Company, DSN Corporation, Universal
Tech Corporation, and Total Energy Systems Limited ("TES"). Slurry
Explosive Corporation is placed under EDC as the directly owned sub-
sidiary of EDC and second tier subsidiary of the Company and both Total
Energy Systems (NZ) Ltd. and T.E.S. Mining Services Pty. Ltd. are placed
under TES as directly owned subsidiaries of TES and third tier sub-
sidiaries of the Company. Underneath the title "Climate Control Business,"
the following companies are shown as directly owned first tier subsidiaries
of the Company: Climate Mate Inc., The Environmental Group International
Limited, The Environmental Group, Inc., International Environmental
Corporation, Climate Master, Inc., CHP Corporation, and APR Corporation.
KOAX Corp. is shown as a directly owned subsidiary of CHP and second tier
subsidiary of the Company.
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Prospective investors should carefully consider the factors
set forth under "Risk Factors" of this Prospectus. Certain of the
most material risks of this offering described under "Risk Factors"
include the substantial leverage of the Company and the Company's
ability to service indebtedness, ranking of the Notes, fraudulent
conveyance considerations regarding the Guarantees of the
Guarantors, the restrictive covenants contained in the Indenture
which limit the discretion of management of the Company with
respect to certain business matters, the sensitivity of certain
portions of the Company's business to economic cycles and
availability and pricing of raw materials, the DSN Plant design
issues, environmental matters and antitrust issues involving the
Company, and the absence of a public market for the Notes that
could adversely affect the value of the Notes, all of which are
more fully discussed under "Risk Factors."
Chemical Business
The Company's Chemical Business manufactures three principal
product lines that are derived from anhydrous ammonia: (1)
fertilizer grade ammonium nitrate for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric acid
for commercial applications primarily in the paper industry. The
Chemical Business' products are sold in niche markets where the
Company believes it can establish a position as a market leader.
Agricultural Products. The Chemical Business is a major
manufacturer of fertilizer grade ammonium nitrate, which it markets
primarily in Texas, Arkansas and the surrounding regions. This
market, which is in close proximity to its El Dorado, Arkansas
facility (the "El Dorado Facility"), includes a high concentration
of pasture land and row crops which favor ammonium nitrate over
other nitrogen-based fertilizers. The Company has developed the
leading market position in Texas by emphasizing high quality
products, customer service and technical advice. Using a
proprietary prilling process, the Company produces a high
performance ammonium nitrate fertilizer that, because of its
uniform size, is easier to apply than many competing nitrogen-based
fertilizer products. The Company believes that its "E-2" brand
ammonium nitrate fertilizer is recognized as a premium product
within its primary market. In addition, the Company has developed
long term relationships with end users through its network of 21
owned and operated wholesale and retail distribution centers.
Explosives. The Chemical Business manufactures low density
ammonium nitrate-based explosives including bulk explosives used in
surface mining. In addition, the Company manufactures and sells a
branded line of packaged explosives used in construction, quarrying
and other applications, particularly where controlled explosive
charges are required. The Company's bulk explosives are marketed
primarily through five Company-owned distribution centers, three of
which are located in close proximity to the customers' surface
mines in the coal producing states of Kentucky, Missouri and West
Virginia. The Company, through its Australian subsidiary, also
manufactures and distributes bulk and packaged explosives in
Australia and New Zealand. The Company emphasizes value-added
customer services and specialized product applications for its bulk
explosives. Most of the sales of bulk explosives are to customers
who work closely with the Company's technical representatives in meeting
their specific product needs. In addition, the Company sells bulk
explosives to independent wholesalers and to other explosives
companies. Packaged explosives are used for applications requiring
controlled explosive charges and typically command a premium price
and produce higher margins. The Company believes its Slurry
packaged explosive products are among the most widely recognized in
the industry. Slurry packaged explosive products are sold
nationally and internationally to other explosive companies and
end-users.
Industrial Acids. The Chemical Business manufactures and sells
industrial acids, primarily to the food, paper, chemical and
electronics industries. The Company is the leading supplier to
third parties of concentrated nitric acid which is a special grade
of nitric acid used in the manufacture of plastics,
pharmaceuticals, herbicides, explosives and other chemical
products. In addition, the Company produces and sells regular,
blended and mixed nitric acid and a variety of grades of sulfuric
acid. The Company competes on the basis of price and service,
including on-time reliability and distribution capabilities. The
Company operates the largest fleet of tankcars in the concentrated
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nitric acid industry which provides it with a significant
competitive advantage in terms of distribution costs and
capabilities. In addition, the Company provides inventory
management as part of the value-added services it offers to its
customers.
The market in which the Company sells its agricultural products
is highly competitive and the Company's operating results could be
adversely affected if competitive factors require price reductions
or increased spending on product development, marketing, and sales.
See "Risk Factors Competition." In addition, anhydrous ammonia,
which is purchased from unrelated third parties, represents the
primary component in the production of most of the products of the
Chemical Business. The Company's results of operation and
financial condition have in the past been, and may in the future
be, adversely affected by cost increases of raw materials,
including anhydrous ammonia. See "Risk Factors Sensitivity to
Economic Cycles; Availability and Pricing of Raw Materials."
The Company has identified concentrated nitric acid as a
strategic product line for its Chemical Business due to attractive
levels of profitability, increased diversity of end markets and the
ability to compete on a value added service basis. To support
further growth in its nitric acid business, the Company undertook
the construction of a concentrated nitric acid plant (the "DSN
Plant") located at the El Dorado Facility. The DSN Plant uses a
newer and more efficient process to produce concentrated nitric
acid directly from anhydrous ammonia, in contrast to the
conventional process which requires the input of regular nitric
acid, an intermediate step, to produce concentrated nitric acid.
The DSN Plant. Since January 1, 1994, the Chemical Business
has spent approximately $32.0 million to install the DSN Plant. The
DSN Plant began limited operations in 1995, and such limited
operations continued due to certain mechanical and design problems
associated with the plant's construction and installation. As a
result of such problems, production at the DSN Plant was limited to
approximately 170 tons per day (60% of its stated capacity of 285
tons per day assuming 338 days of annual production) during the
twelve months ended September 30, 1997. In October 1997,
management completed certain corrective actions at the DSN Plant.
As a result of these corrective actions, the DSN Plant has the
capacity to operate at approximately 285 tons per day. However,
due to customer specifications and inventory constraints, among
other things, the DSN Plant has been operating at approximately 260
tons per day since the corrective actions were completed. Based on
normalized production (assuming 338 days of annual production) at
260 tons per day, the Company believes it will be able to produce
concentrated nitric acid at a cost per ton approximately $65 per
ton lower than at the production levels of 170 tons per day in the
prior period. While the Company will seek to market the additional
capacity of concentrated nitric acid output to commercial markets,
there can be no assurance that the Company will be able to sell all
of the additional capacity in this market. However, to the extent
that there is insufficient demand for the concentrated nitric acid,
the Company believes it can profitably use concentrated nitric acid
in the production of mixed and blended acids and ammonium nitrate
based fertilizer and explosives (although at lower margins than if
the production were sold as concentrated nitric acid). See "Risk
Factors DSN Plant Design Issues," "The Company Chemical
Business DSN Plant" and "Special Note Regarding Forward-Looking
Statements."
Climate Control Business
The Company's Climate Control Business manufactures and sells a
broad range of standard and custom designed hydronic fan coils and
water source heat pumps as well as other products for use in
commercial and residential HVAC systems. Demand for the Climate
Control Business products is driven by the construction of
commercial, institutional and residential buildings, the renovation
of existing buildings and the replacement of existing systems. The
Climate Control Business' commercial products are used in a wide
variety of buildings, such as hotels, motels, office buildings,
schools, universities, apartments, condominiums, hospitals, nursing
homes, extended care facilities, supermarkets and superstores. Many
of the Company's products are targeted to meet increasingly
stringent indoor air quality and energy efficiency standards.
Hydronic Fan Coils. The Climate Control Business is the
leading U. S. provider of hydronic fan coils targeted to the
commercial and institutional markets in the United States. Hydronic
fan coils use heated or chilled water, provided by a centralized
chiller and boiler, through a water pipe system to condition the
air and allow individual room control. Hydronic fan coil systems
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are quieter and have longer lives and lower maintenance costs than
comparable systems for individual room control applications. The
Company believes that its product line of hydronic fan coils is the
most extensive offered by any domestic producer. The breadth of
this product line coupled with customization capability provided by
a flexible manufacturing process are important components of the
Company's strategy for competing in the commercial and
institutional renovation and replacement markets.
Water Source Heat Pumps. The Company is a leading U.S.
provider of water source heat pumps to the commercial construction
and renovation markets. These are highly efficient heating and
cooling units which enable individual room climate control through
the transfer of heat through a water pipe system which is connected
to a centralized cooling tower or heat injector. Water source heat
pumps enjoy a broad range of commercial applications, particularly
in medium to large sized buildings with many small, individually
controlled spaces. The Company believes the market for commercial
water source heat pumps will continue to grow due to the higher
efficiency, lower operating cost and long life of such systems as
compared to other air conditioning and heating systems, as well as
to the emergence of the replacement market for these systems.
Geothermal Products. The Climate Control Business is a pioneer
in the use of geothermal water source heat pumps in residential and
commercial applications. Geothermal systems, which circulate water
through an underground heat exchanger, are among the most energy
efficient systems available. The Company believes that an aging
installed base of residential HVAC systems, coupled with the longer
life, lower cost to operate and relatively short payback periods of
geothermal systems, will continue to increase demand for its
geothermal products, particularly in the residential replacement
market.
The markets in which the Company's Climate Control Business
participates are highly competitive. The Company's operating
results could be adversely affected if competitive factors require
price reductions or increased spending on product development,
marketing and sales. See "Risk Factors Competition."
-9-
<PAGE>
<PAGE>
INITIAL OFFERING
Old Notes . . . . . . . . The Old Notes were sold by the Company on
November 26,1997 (the "Issue Date"), to
Wasserstein Perella Securities, Inc. (the
"Initial Purchaser") pursuant to a
Purchase Agreement dated as of
November 21, 1997 (the "Purchase
Agreement"), between the Company and the
Initial Purchaser. The Initial Purchaser
subsequently resold the Old Notes to
qualified institutional buyers pursuant
to Rule 144A under the Securities Act.
Registration Rights
Agreement. . . . . . . Pursuant to the Purchase Agreement, the
Company, the Guarantors and the Initial
Purchaser entered into a Registration
Rights Agreement, dated as November 26,
1997 (the "Registration Rights
Agreement"), which grants the holders of
the Old Notes certain exchange and
registration rights. The Exchange Offer
is intended to satisfy such exchange
rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered. . . . $105 million aggregate principal amount
of 10 3/4% Series B Notes due 2007 of the
Company.
The Exchange Offer. . . . $1,000 principal amount of the New Notes
in exchange for each $1,000 principal
amount of Old Notes. As of the date
hereof, $105 million aggregate principal
amount of Old Notes are outstanding. The
Company will issue the New Notes in
exchange for the Old Notes to holders of
the Old Notes on or promptly after the
Expiration Date.
Transfer Restrictions . . Based on an interpretation by the staff
of the Commission set forth in no-action
letters issued to third parties, the
Company believes that New Notes issued
pursuant to the Exchange Offer in
exchange for Old Notes may be offered for
resale, resold and otherwise transferred
by any holder thereof (other than any
such holder which is an "affiliate" of
the Company within the meaning of Rule
405 under the Securities Act) without
compliance with the registration and
prospectus delivery provisions of the
Securities Act, provided that such New
Notes are acquired in the ordinary course
of such holder's business and that such
holder does not intend to participate and
has no arrangement or understanding with
any person to participate in the
distribution of such New Notes. Each
holder accepting the Exchange Offer is
required to represent to the Company in
the Letter of Transmittal that, among
other things, the New Notes will be
acquired by the holder in the ordinary
course of business and the holder does
not intend to participate and has no
arrangement or understanding with any
person to participate in the distribution
of such New Notes.
Any Participating Broker-Dealer that
acquired Old Notes for its own account as
a result of market-making activities or
other trading activities may be a
statutory underwriter. Each
Participating Broker-Dealer that receives
New Notes for its own account pursuant to
the Exchange Offer must acknowledge that
it will deliver a prospectus in
-10-
<PAGE>
connection with any resale of such New
Notes. The Letter of Transmittal states
that by so acknowledging and by
delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit
that it is an "underwriter" within the
meaning of the Securities Act. This
Prospectus, as it may be amended or
supplemented from time to time, may be
used by a Participating Broker-Dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it
may be amended or supplemented from time
to time, may be used by a Participating
Broker-Dealer in connection with resale
of New Notes received in exchange for Old
Notes where such Old Notes were acquired
by such Participating Broker-Dealer as a
result of market-making activities or
other trading activities. The Company
has agreed that, for a period of 180 days
after the Expiration Date, it will make
this Prospectus available to any
Participating Broker-Dealer for use in
connection with any such resale. See
"Plan of Distribution."
Any holder who tenders in the Exchange
Offer with the intention to participate,
or for the purpose of participating, in
a distribution of the New Notes could not
rely on the position of the staff of the
Commission enunciated in no-action
letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction.
Failure to comply with such requirements
in such instance may result in such
holder incurring liability under the
Securities Act for which the holder is
not indemnified by the Company.
Expiration Date . . . . . 5:00 p.m., New York City time, on May 16,
1998, which is 30 days after the
effective date of the Registration
Statement, unless the Exchange Offer is
extended in which case the term
"Expiration Date" means the latest date
and time to which the Exchange Offer is
extended.
Accrued Interest on the
New Notes and the Old
Notes . . . . . . . . . . Each New Note will bear interest from its
issuance date. Holders of Old Notes that
are accepted for exchange will receive,
in cash, accrued interest thereon to, but
not including, the issuance date of the
New Notes. Such interest will be paid
with the first interest payment on the
New Notes. Interest on the Old Notes
accepted for exchange will cease to
accrue upon issuance of the New Notes.
Conditions to the
Exchange Offer. . . . . . The Exchange Offer is subject to certain
customary conditions, which may be waived
by the Company. See "The Exchange
Offer Conditions."
Procedures for Tendering
Old Notes . . . . . . . . Each holder of Old Notes wishing to
accept the Exchange Offer must complete,
sign and date the accompanying Letter of
Transmittal, or a facsimile thereof or
transmit an Agent's Message (as defined)
in connection with a book-entry transfer,
in accordance with the instructions
contained herein and therein, and mail or
-11-
<PAGE>
otherwise deliver such Letter of
Transmittal, such facsimile or such
Agent's Message, together with the Old
Notes and any other required
documentation, to the Exchange Agent (as
defined) at the address set forth herein.
By executing the Letter of Transmittal or
Agent's Message, each holder will
represent to the Company that, among
other things, the New Notes acquired
pursuant to the Exchange Offer are being
obtained in the ordinary course of
business of the person receiving such New
Notes, whether or not such person is the
holder, that neither the holder nor any
such other person (i) has any
arrangement or understanding with any
person to participate in the distribution
of such New Notes, (ii) is engaging or
intends to engage in the distribution of
such New Notes, or (iii) is an
"affiliate," as defined under Rule 405 of
the Securities Act, of the Company. See
"The Exchange Offer Purpose and Effect of
the Exchange Offer" and " Procedures for
Tendering."
Untendered Old Notes. . . Following the consummation of the
Exchange Offer, holders of Old Notes
eligible to participate but who do not
tender their Old Notes will not have any
further exchange rights and such Old
Notes will continue to be subject to
certain restrictions on transfer.
Accordingly, the liquidity of the market
for such Old Notes could be affected
adversely.
Consequences of Failure
Exchange. . . . . . . . . The Old Notes that are not exchanged
pursuant to the Exchange Offer will
remain restricted securities.
Accordingly, such Old Notes may be resold
only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the
Securities Act or pursuant to some other
exemption under the Securities Act, (iii)
outside the United States to a foreign
person pursuant to the requirements of
Rule 904 under the Securities Act, or
(iv) pursuant to an effective
registration statement under the
Securities Act. See "The Exchange
Offer Consequences of Failure to
Exchange."
Shelf Registration
Statement . . . . . . . . If applicable interpretations of the
staff of the Commission do not permit the
Company to effect the Exchange Offer or
permit a Holder to participate in the
Exchange Offer or, in the case of any
Holder of Notes that participates in the
Exchange Offer, such Holder does not
receive freely tradable New Notes on the
date of the exchange for tendered Notes,
or if for any reason the Exchange Offer
is not consummated within 180 days after
the Issue Date, or, subject to certain
conditions, upon the request of the
Initial Purchaser or the Holders of a
majority in aggregate principal amount of
the Notes, the Company will, at its cost,
file with the Commission a shelf
registration statement (the "Shelf
Registration Statement") to cover resales
of Notes by the Holders thereof. The
Company will use its best efforts to
cause the applicable registration
statement to be declared effective by the
Commission as promptly as practicable
after the date of filing. The Company has
agreed to maintain the effectiveness of
the Shelf Registration Statement for,
under certain circumstances, a maximum of
24 months from a date which is 150 days
following the Issue Date, or such shorter
period ending when (i) the securities
covered by the Shelf Registration
Statement have been sold or (ii) a
subsequent shelf registration statement
covering such securities has been
declared effective under the Securities
Act.
-12-
<PAGE>
Special Procedures for
Beneficial Owners . . . . Any beneficial owner whose Old Notes are
registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender
should contact promptly such registered
holder and instruct such registered
holder to tender on such beneficial
owner's behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in
such owner's name or obtain a properly
completed bond power from the registered
holder. The transfer of registered
ownership may take considerable time.
The Company will keep the Exchange Offer
open for not less than 30 business days
in order to provide for the transfer of
registered ownership.
Guaranteed Delivery
Procedures. . . . . . . . Holders of Old Notes who wish to tender
their Old Notes and whose Old Notes are
not immediately available or who cannot
deliver their Old Notes, the Letter of
Transmittal or any other documents
required by the Letter of Transmittal to
the Exchange Agent (or comply with the
procedures for book-entry transfer) prior
to the Expiration Date must tender their
Old Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer Guaranteed Delivery
Procedures."
Withdrawal Rights . . . . Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time,
on the Expiration Date.
Acceptance of Old Notes
and Delivery of New
Notes . . . . . . . . . . The Company will accept for exchange any
and all Old Notes which are properly
tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly following the
Expiration Date. See "The Exchange
Offer Terms of the Exchange Offer."
Use of Proceeds . . . . . There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer. See "Use of Proceeds."
Exchange Agent. . . . . . Bank One, NA
-13-
<PAGE>
<PAGE>
NEW NOTES
Issuer. . . . . . . . . . ClimaChem, Inc.
General . . . . . . . . . The form and terms of the New Notes are
the same as the form and terms of the Old
Notes (which they replace) except that
(i) the New Notes bear a Series B
designation, (ii) the New Notes have been
registered under the Securities Act and,
therefore, will not bear legends
restricting the transfer thereof, and
(iii) the holders of New Notes will not
be entitled to certain rights under the
Registration Rights Agreement, including
the provisions providing for liquidated
damages in certain circumstances relating
to the timing of the Exchange Offer,
which rights will terminate when the
Exchange Offer is consummated. See "The
Exchange Offer Purpose and Effect of the
Exchange Offer." The New Notes will
evidence the same debt as the Old Notes
and will be entitled to the benefits of
the Indenture. See "Description of
Notes." The Old Notes and the New Notes
are sometimes referred to herein
collectively as the "Notes."
Interest Rate; Payment
Dates . . . . . . . . . . Interest on the New Notes will accrue at
the rate of 10 % per annum, payable
semiannually in arrears on June 1 and
December 1 of each year, commencing
June 1, 1998.
Maturity Date . . . . . . December 1, 2007
Guarantees. . . . . . . . The New Notes will be, as the Old Notes
(which they replace) are, fully and
unconditionally guaranteed by
substantially all of the existing and all
of the future Subsidiaries of the
Company.
Original Redemption . . . The New Notes are redeemable, in whole or
in part, at the option of the Company at
any time on or after December 1, 2002, at
the redemption prices set forth herein,
plus accrued and unpaid interest, if any,
thereon, plus Liquidated Damages, if any,
to the date of redemption. In addition,
notwithstanding the foregoing, on or
prior to December 1, 2000, the Company
may redeem up to $35 million of the
aggregate principal amount of the New
Notes originally issued at a redemption
price of 110.750% of the principal amount
thereof, plus accrued and unpaid
interest, if any, thereon, plus
Liquidated Damages, if any, to the date
of redemption, with the net cash proceeds
of a Public Equity Offering (as defined);
provided, however, that at least $65
million in aggregate principal amount of
the New Notes remain outstanding
following such redemption. See
"Description of Notes Optional
Redemption."
Change of Control . . . . Upon a Change of Control of LSB or the
Company, holders of the New Notes will
have the right to require that the
Company repurchase the New Notes in whole
or in part at a redemption price of 101%
of the principal amount thereof plus
accrued and unpaid interest, if any,
thereon, plus Liquidated Damages, if any,
to the date of repurchase. See
"Description of Notes Certain
Covenants Repurchase of New Notes at the
Option of the Holder Upon a Change of
Control."
-14-
<PAGE>
Ranking . . . . . . . . . The New Notes will be, as Old Notes
(which they replace) are, senior
unsecured obligations of the Company and
will rank pari passu in right of payment
to all future and existing senior
unsecured indebtedness of the Company.
The New Notes will be effectively
subordinated to all existing and future
senior secured indebtedness of the
Company and its subsidiaries and to all
existing and future secured and unsecured
indebtedness of the subsidiaries of the
Company which are not Guarantors. As of
December 31, 1997, after giving effect to
the Initial Offering and the application
of the net proceeds therefrom, the
Company had borrowings outstanding under
the Revolving Credit Facility (as
defined) of $6.1 million, US$4.6 million
of borrowings outstanding under the TES
Revolving Facility (as defined), a
maximum of $29.8 million of availability
for borrowings under the Revolving Credit
Facility, US$2.7 million of availability
for borrowings under the TES Revolving
Facility, and $20.5 million of other
secured indebtedness, all of which is
effectively senior to the New Notes. See
"Description of Other Indebtedness."
Certain Covenants . . . . The Indenture contains certain covenants,
including limitations under certain
conditions on the ability of the Company
and its subsidiaries to: (i) incur
additional Indebtedness; (ii) incur
certain liens; (iii) engage in certain
transactions with affiliates; (iv) make
certain restricted payments; (v) agree to
payment restrictions affecting
subsidiaries; (vi) engage in unrelated
lines of business; or (vii) engage in
mergers, consolidations or the transfer
of all or substantially all of the assets
of the Company to another person. In
addition, in the event of certain Asset
Sales (as defined), the Company will be
required to use the proceeds to reinvest
in the Company's business, to repay
certain debt or to offer to purchase
Notes at 100% of the principal amount
thereof, plus accrued and unpaid
interest, if any, thereon, plus
Liquidated Damages, if any, to the date
of purchase. See "Description of
Notes Certain Covenants."
Risk Factors. . . . . . . For a discussion of certain factors that
should be considered in connection with
an investment in the Notes, see "Risk
Factors."
-15-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information presented below
for the four years ended December 31, 1997, is derived from the
audited consolidated financial statements of the Company for such
years. The information presented for the year ended December 31,
1993, is derived from unaudited financial statements of the
Company. The information in this table should be read in
conjunction with "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements
included elsewhere herein.
Year Ended December 31,
________________________________________________
1993 1994 1995 1996 1997
_________ ________ ________ ________ ________
(In thousands, except ratio, tons and per ton amount)
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net Sales.............. $184,383 $201,486 $220,743 $255,285 $262,847
Gross profit(1)........ 42,626 42,869 47,855 47,457 49,075
Operating profit(2).... 19,165 15,124 17,541 14,335 11,221
Interest expense(3).... 6,078 6,150 7,185 6,247 9,369
Income before income
taxes and extra-
ordinary charge....... 13,470 9,388 11,154 8,421 2,326
Net income (loss)(4)... 7,842 5,449 5,899 5,753 (1,972)
Other Financial Data:
Net cash provided
(used) by operating
activities........... $ 7,764 $ 10,146 $ 10,154 $ 14,963 $ (9,711)
Net cash used by invest-
ing activities....... (6,679) (13,998) (16,134) (18,950) (12,772)
Net cash provided
(used) by financing
activities........... (23) 3,054 8,235 2,684 24,908
Depreciation and amor-
tization............. 5,580 6,137 6,695 7,426 8,886
EBITDA(5).............. 25,510 23,079 25,790 23,469 21,415
Segment Information:
Chemical Business
Net sales............ $114,946 $131,572 $ 136,900 $166,164 $156,948
Gross profit(1)...... 26,739 24,904 25,397 25,400 19,356
Gross profit margin.. 23.3% 18.9% 18.6% 15.3% 12.3%
Average spot price
of anyhydrous
ammonia per
ton(6)............... $ 107.21 $ 189.74 $ 206.55 $ 188.48 $ 172.02
Tons of anhydous
ammonia consumed... 206,030 196,365 188,452 217,650 218,274
EBITDA(5)............ $ 21,935 $ 18,291 $ 18,848 $ 17,743 $ 12,623
Climate Control Business
Net sales............ $ 69,437 $ 69,914 $ 83,843 $ 89,121 $105,899
Gross profit(1)...... 15,887 17,965 22,488 22,057 29,719
Gross profit margin.. 22.9% 25.7% 26.8% 24.7% 28.1%
EBITDA(5)............ $ 3,575 $ 4,788 $ 6,942 $ 5,726 $ 8,792
</TABLE>
-16(a)-
<PAGE>
<TABLE>
<CAPTION>
Twelve Months
Ended December 31, 1997
_______________________
<S> <C>
Ratio of EBITDA to pro forma interest
expense(3)(7) 1.7x
Ratio of EBITDA to pro forma total interest,
including capitalized interest(7) 1.6x
Ratio of total debt, as adjusted, to
EBITDA(7) 6.4x
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
______________________
<S> <C>
Balance Sheet Data:
Working capital............................. $ 54,737
Property, plant and equipment, net.......... 84,329
Total assets................................ 200,875
Total debt.................................. 136,184
Total stockholders' equity.................. 27,289
_________________
<FN>
(1) Gross profit represents net sales less cost of sales.
(2) Operating profit represents net sales less cost of sales and
operating expenses before deducting interest expense and income
taxes.
(3) Interest expense is calculated in accordance with generally
accepted accounting principles and excludes capitalized interest
of $1.4 million, $2.4 million and $1.1million for the years ended
December 31, 1995, 1996, and 1997, respectively.
(4) Includes an extraordinary change in 1997 of $4.6 million ($2.9
million net of tax benefit) related to the prepayment fee and loan
origination costs of John Hancock Loan redeemed in November 1997
with the proceeds from the Initial Offering.
(5) EBITDA, as defined, is earnings before deduction for interest
expense, income taxes, depreciation and amortization and any other
noncash charges of the Company reducing net income. In 1997,
EBITDA represents earnings before an extraordinary charge of $2.9
million. EBITDA is presented here to provide additional
information about the Company's ability to meet its future debt
service, capital expenditures and working capital requirements.
EBITDA as presented herein may not be comparable to other
similarly titled measures of other companies and differs from the
definition of Consolidated Cash Flow. EBITDA is a measurement
that is not in accordance with generally accepted accounting
principles. See "Description of Notes" and Note 12 --
Extraordinary Charge of Notes to Consolidated Financial
Statements."
(6) Average spot price of anhydrous ammonia represents F.O.B. New
Orleans Barge Price, Industrial User derived from 52 week average
price as published in Green Market.
(7) Gives effect to the issuance of the Notes and application of the
net proceeds therefrom. See "Capitalization."
</FN>
</TABLE>
Investors in the Notes should carefully review and consider, among
other things, the Risk Factors set forth below, as well as the other
information included in this Prospectus before tendering the Old Notes
in exchange for the New Notes.
-16(b)-
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the factors set
forth under "Risk Factors," as well as the other information set forth
in this Prospectus before tendering the Old Notes in exchange for the
New Notes.
Substantial Leverage; Ability to Service Indebtedness
The Company has a substantial amount of debt. At December 31, 1997,
after giving effect to the Initial Offering of the Notes and the
application of the net proceeds therefrom, the aggregate consolidated
debt of the Company was approximately $136.2 million, resulting in
total debt as a percentage of total capitalization of 83%. See
"Capitalization."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the
Company's ability to obtain additional financing in the future for
refinancing indebtedness, acquisitions, working capital, capital
expenditures or other purposes may be impaired; (ii) funds available to
the Company for its operations and general corporate purposes or for
capital expenditures will be reduced because a substantial portion of
the Company's consolidated cash flow from operations will be dedicated
to the payment of the principal and interest on its indebtedness; (iii)
the Company may be more highly leveraged than certain of its
competitors, which may place it at a competitive disadvantage; (iv) the
agreements governing the Company's long-term indebtedness (including
indebtedness under the Notes) and bank loans contain certain
restrictive financial and operating covenants; (v) an event of default,
which is not cured or waived, under financial and operating covenants
contained in the Company's or its subsidiaries' debt instruments,
including the Indenture, could occur and have a material adverse effect
on the Company; (vi) the Company may be more vulnerable to a downturn
in general economic conditions; and (vii) certain of the borrowings
under debt agreements of the subsidiaries have floating rates of
interest, which causes the Company and its subsidiaries to be
vulnerable to increases in interest rates.
The terms of the Indenture allow for the incurrence of additional
Indebtedness (as defined). Except as set forth below, the incurrence of
additional Indebtedness is limited by certain conditions, including
compliance with a Consolidated Coverage Ratio (as defined). The Company
and its subsidiaries may incur, issue or guarantee certain other
additional Indebtedness without regard to compliance with the
Consolidated Coverage Ratio or any other financial ratio or covenant in
the Indenture. See "Description of Notes." If the Company or any of its
subsidiaries incurs additional Indebtedness, whether for acquisitions,
investment in its business or other general corporate purposes, the
Company's leverage could increase, which in turn could make the Company
more susceptible to the factors described above.
The ability of the Company to make principal and interest payments,
or to refinance indebtedness, including the Notes, will depend on the
Company's and its subsidiaries' future operating performance and cash
flow, which are subject to prevailing economic conditions and interest
rate levels, in addition to financial, competitive, business and other
factors affecting the Company and its subsidiaries, many of which are
beyond the Company's control. See "Description of Other Indebtedness."
Because the Company's business is conducted through its
subsidiaries, the Company's ability to make scheduled payments of
principal and interest on its indebtedness, including the Notes, will
depend on the future operating performance and cash flows of its
subsidiaries and on the ability of the Company's subsidiaries to pay
dividends or make loans to the Company. See "Special Note Regarding
Forward-Looking Statements."
Ranking of Notes
The Notes and the Guarantees issued by the Guarantors are
effectively subordinated to all existing and future secured
indebtedness of the Company and the Guarantors, including, but not
limited to, the loans outstanding under the Revolving Credit Facility,
the DSN Loans, the TES Revolving Facility, TES Capitalized Leases, the
IEC Capitalized Leases, the CM Loan, the CM Equipment Financing and the
IEC Equipment Financing (each as defined). As of December 31, 1997, and
after giving effect to the application of the net proceeds received
from the Initial Offering, the Company had approximately $31.2 million
of secured indebtedness. See "Description of Other Indebtedness."
-17-
<PAGE>
Fraudulent Conveyance Considerations
Holders of the Notes have a direct claim on the assets of the
Guarantors pursuant to the Guarantees. However, each Guarantor's
guarantee of the obligations of the Company under the Notes may be
subject to review under relevant federal and state fraudulent
conveyance statutes in a bankruptcy, reorganization or rehabilitation
case or similar proceeding or a lawsuit by, or on behalf of, unpaid
creditors of such Guarantors. If a court were to find under relevant
fraudulent conveyance statutes that, at the time the Notes were issued,
(a) a Guarantor guaranteed the Notes with the intent of hindering,
delaying or defrauding current or future creditors or (b)(i) a
Guarantor received less than reasonably equivalent value or fair
consideration for guaranteeing the Notes and (ii)(A) was insolvent or
was rendered insolvent by reason of such Guarantee, (B) was engaged, or
about to engage, in a business or transaction for which its assets
constituted unreasonably small capital, (C) intended to incur, or
believed that it would incur, obligations beyond its ability to pay as
such obligations matured (as all of the foregoing terms are defined in,
or interpreted under, such fraudulent conveyance statutes) or (D) was
a defendant in an action for money damages, or had a judgment for money
damages docketed against it (if, in either case, after final judgment,
the judgment is unsatisfied), such court could avoid or subordinate
such guarantee of the Notes to presently existing and future
indebtedness of such Guarantor and take other action detrimental to the
holders of the Notes, including, under certain circumstances,
invalidating such guarantee of the Notes.
The measure of insolvency for purposes of the foregoing
considerations will vary depending upon the federal or state law that
is being applied in any such proceeding. Generally, however, a
Guarantor would be considered insolvent if either (i) the fair market
value (or fair saleable value) of its assets is less than the amount
required to pay the probable liability on its total existing
indebtedness and liabilities (including contingent liabilities) as they
become absolute and mature or (ii) it is incurring obligations beyond
its ability to pay as such obligations mature or become due.
Restrictive Covenants
The Indenture contains numerous restrictive covenants which limit
the discretion of management of the Company with respect to certain
business matters. However, the Indenture does not prohibit the
incurrence of additional Indebtedness by the Company, subject to
certain conditions. In addition, the Revolving Credit Facility contains
financial covenants that require the Company to meet certain financial
ratios and tests and provides that a change of control (as defined in
the Revolving Credit Facility) constitutes an event of default. Should
the Company be unable to comply with the financial or other restrictive
covenants under the Revolving Credit Facility at any time in the
future, there can be no assurance that the lender would agree to any
necessary amendments or waivers. The ability of the Company to comply
with such provisions of the Revolving Credit Facility may be affected
by events beyond its control. A failure to comply with the obligations
contained in the Revolving Credit Facility, if not cured or waived,
could have a material adverse effect upon the Company and the ability
to meet its obligations, including obligations with respect to the
Notes, and could permit acceleration of the related indebtedness and
acceleration of indebtedness of other instruments, including the Notes,
that contain cross-default provisions. See "Description of Other
Indebtedness" and "Special Note Regarding Forward-Looking Statements."
Repurchase of Notes and Acceleration of Indebtedness Upon Change of
Control
Upon the occurrence of a Change of Control of LSB or the Company,
the Company will be required to make an offer to repurchase the Notes
at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, plus Liquidated Damages, if any, to the
date of repurchase. Certain events involving a Change of Control could
result in acceleration of the Revolving Credit Facility and other
indebtedness of the Company or its subsidiaries that may be incurred in
the future. There can be no assurance that the Company will have
sufficient resources to repurchase the Notes in the event it becomes
obligated to do so, particularly in the event of acceleration of, or
the need to comply with repurchase obligations with respect to, other
indebtedness. The failure to repurchase all of the tendered Notes in
the event of a Change of Control constitutes an event of default under
the Indenture which may result in the acceleration of the maturity of
the Notes. See "Description of Notes Certain Covenants Repurchase of
-18-
<PAGE>
Notes at the Option of the Holder Upon a Change of Control," " Events
of Default and Remedies," "Security Ownership of Certain Beneficial
Owners and Management" and "Special Note Regarding Forward-Looking
Statements."
Sensitivity to Economic Cycles; Availability and Pricing of Raw
Materials
A significant percentage of the Company's sales is affected by
such cyclical factors as interest rates, inflation, and the costs of
certain raw materials. Anhydrous ammonia, which is purchased from
unrelated third parties, represents the primary component in the
production of most of the products of the Chemical Business. The
primary material utilized in anhydrous ammonia production is natural
gas, and fluctuations in the price of natural gas have a significant
effect on the cost of anhydrous ammonia. The Company's Chemical
Business has contracts with two suppliers of anhydrous ammonia to
provide the Chemical Business with all of its anhydrous ammonia
requirements. If for any reason the Chemical Business is unable to
purchase anhydrous ammonia in sufficient quantities to produce its
product requirements, the lack of availability would have a material
effect on the Company. During 1995, 1996, and 1997, there were
substantial increases in the price for anhydrous ammonia. During each
of these periods, the Company's Chemical Business was unable to
increase its sales prices to cover all of the higher anhydrous ammonia
costs incurred by the Company, and in the future the Company may not be
able to pass along to its customers the full amount of increases in
anhydrous ammonia costs. Accordingly, the Company's results of
operations and financial condition have in the past been, and may in
the future be, adversely affected by cost increases of raw materials,
including anhydrous ammonia. The Company is not able to predict, as of
the date of this Prospectus, what impact, if any, will result to the
Company and the Company's earnings if the price of anhydrous ammonia
continues at or near current levels, which are high on a historical
basis, or if the price of anhydrous ammonia continues to increase
further. See "Business Chemical Business Seasonality" and " Raw
Materials," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Special Note Regarding
Forward-Looking Statements."
DSN Plant Design Issues
The Company's concentrated nitric acid plant, the DSN Plant,
located at the El Dorado Facility, encountered certain mechanical and
design problems associated with the plant's construction and
installation. As a result of such problems, production at the DSN Plant
was limited to 170 tons per day (60% of its stated capacity of 285 tons
per day assuming 338 days of annual production) during the twelve
months ended September 30, 1997. Management implemented certain
corrective actions. Since completing the corrective actions during
October 1997, the DSN Plant is currently operating at approximately 260
tons per day due to customer specifications and other inventory
constraints, among other things. Although the Company believes that it
has corrected the mechanical and design problems at the DSN Plant,
there are no assurances that the DSN Plant can sustain production at
current levels. See "Summary The Company The DSN Plant,"
"Business Chemical Business DSN Plant" and "Special Note Regarding
Forward-Looking Statements."
Competition
Substantially all of the markets in which the Company participates
are highly competitive with respect to product quality, price, design
innovations, distribution, service, warranties, reliability and
efficiency. Certain of the Company's competitors have greater
financial, marketing and other resources and brand awareness than the
Company. Competitive factors could require price reductions or
increased spending on product development, marketing and sales that
would adversely affect the Company's operating results. See
"Business Competition" and "Special Note Regarding Forward-Looking
Statements."
Controlling Interests
Jack E. Golsen, Chairman of the Board and President of LSB and the
Company, members of his immediate family (spouse and children),
entities owned by them and trusts for which they possess voting or
dispositive power as trustee (the "Golsen Group") owned as of February
28, 1998, an aggregate of 3,033,725 shares of LSB's common stock and
20,000 shares of LSB's voting preferred stock, which together represent
approximately 24% of the issued and outstanding voting securities of
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<PAGE>
LSB as of such date. The Golsen Group has options, exercisable within
60 days, rights and other convertible preferred stock which allow its
members to acquire an additional 866,843 shares of LSB's common stock.
If the Golsen Group were to acquire the additional 866,843 shares of
common stock, the Golsen Group would, in the aggregate, own 3,900,568
shares of LSB common stock, or approximately 28.6% of the issued and
outstanding shares of voting securities of LSB. Thus, the Golsen Group
may be considered to effectively control LSB. Because LSB owns all of
the issued and outstanding voting securities of the Company, the Golsen
Group may be considered to effectively control the Company. See
"Security Ownership of Certain Beneficial Owners and Management." A
corporation controlled by Jack E. Golsen has an outstanding proposal to
acquire a new series of convertible preferred stock of LSB. If this
transaction were to occur as proposed, the Golsen Group's percentage of
voting securities of LSB would increase substantially.
Control by and Possible Conflicts of Interest with LSB
The Company is a wholly owned subsidiary of LSB, and the Board of
Directors and executive officers of the Company are comprised of
various executive officers and directors of LSB. As a result, LSB
possesses the power to direct, or cause the direction of, the
management and policies of the Company.
LSB and other companies affiliated with LSB may, directly or
indirectly, compete with the Company. The potential for conflicts of
interest exist between the Company and affiliated parties for future
business opportunities that may not be presented to the Company. See
"Certain Relationships and Related Transactions."
Dependence on Key Personnel
The Company relies heavily on Jack E. Golsen, Chairman of the
Board and President of the Company. Although the Company believes it
has an experienced and capable management team, the loss of Mr.
Golsen's services may have a material adverse impact on the Company.
LSB, the parent of the Company, has an employment agreement and
severance agreement with Mr. Golsen and certain other executive
officers of the Company. See "Management Employment Contracts;
Termination of Employment and Change in Control Agreements." Although
LSB has certain key man insurance on Jack E. Golsen and Barry H.
Golsen, Vice Chairman of the Board and President of the Company's
Climate Control Business, the Company does not carry key man insurance
on any of its key employees.
Environmental Matters
The Company is subject to extensive federal, state and local
environmental laws, rules, regulations and risks relating to pollution,
the protection of the environment or the release or disposal of
hazardous or toxic materials ("Environmental Laws"). In particular, the
manufacture and distribution of chemical products are activities which
entail environmental risks and impose obligations under the
Environmental Laws, many of which provide for substantial fines and
criminal sanctions for violations, and there can be no assurance that
material costs or liabilities will not be incurred by the Company in
complying with such laws or in paying fines or penalties for violation
of such laws. The Environmental Laws and enforcement policies
thereunder relating to the Chemical Business have in the past resulted,
and could in the future result, in penalties, cleanup costs, or other
liabilities relating to the handling, manufacture, use, emission,
discharge or disposal of pollutants or other substances at or from the
Company's facilities or the use or disposal of certain of its chemical
products. Potentially significant expenditures could be required in
order to comply with the Environmental Laws, including for additional
site or operational modifications at the El Dorado Facility. In
addition, the Chemical Business currently is subject to certain civil
lawsuits and administrative consent orders relating to various
environmental matters which could result in substantial liability for
the Company. There can be no assurance that such matters will not have
a material adverse effect on the Company's operations or financial
condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Chemical Business,"
"Business Chemical Business," " Environmental Matters" and " Legal
Proceedings."
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<PAGE>
Antitrust Issues
The Company's Chemical Business is a defendant in certain pending
civil antitrust lawsuits. See "Business Legal Proceedings." Discovery
has only recently begun in the pending lawsuits, and, as a result, it
is impossible to access the likelihood of the Chemical Business'
success in these lawsuits. For several years, certain members of the
explosives industry have been the focus of grand jury investigations
being conducted by the U.S. Department of Justice (the "DOJ") in
connection with antitrust allegations involving price fixing. Certain
explosives companies, other than the Company, including all the
Company's major competitors, and individuals employed by certain of
those competitors, were indicted and have pled guilty to criminal
antitrust violations. The guilty pleas have resulted in a total of
nearly $40 million in criminal fines. In connection with the grand jury
investigation, the Company's Chemical Business received and has
complied with two document subpoenas, certain of the Company's Chemical
Business employees have been interviewed by the DOJ under grants of
immunity from prosecution, and certain of the Company's Chemical
Business employees have testified under subpoena before a grand jury
under grants of immunity in connection with the investigation. The
Company believes that it has cooperated fully with the government's
investigation. Recently, the Company was informed by an official of the
DOJ that it was not currently a target of the above investigation or of
any grand jury investigating criminal antitrust activity in the
explosives or ammonium nitrate industries.
The Company intends to vigorously defend itself in the lawsuits.
There are no assurances that the lawsuits or the investigation will not
have a material adverse effect on the Company.
Absence of a Public Market Could Adversely Affect the Value of the
Notes
The Old Notes were issued to, and the Company believes are
currently owned by, a relatively small number of beneficial owners.
Prior to the Exchange Offer, there has not been a public market for the
Old Notes. The Old Notes have not been registered under the Securities
Act and will be subject to restrictions on transferability to the
extent that they are not exchanged for New Notes by holders who are
entitled to participate in this Exchange Offer. The holders of Old
Notes (other than any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who are not
eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Old Notes. The New Notes
will constitute a new issue of securities with no established trading
market. The Company does not intend to list the New Notes on any
national securities exchange or seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation
System. The Initial Purchaser has advised the Company that it
currently intends to make a market in the New Notes, but the Initial
Purchaser is not obligated to do so and may discontinue such market
making at any time. In addition, such market making activity will be
subject to the limits imposed by the Securities Act and the Exchange
Act and may be limited during the Exchange Offer and the pendency of
any Shelf Registration Statement. Accordingly, there can be no
assurance that an active public or other market will develop for the
New Notes or as to the liquidity of the trading market for the New
Notes. If a trading market does not develop or is not maintained,
holders of the New Notes may experience difficulty in reselling the New
Notes or may be unable to sell them at all. If a market for the New
Notes develops, any such market may be discontinued at any time.
If a public trading market develops for the New Notes, future
trading prices of such securities will depend on many factors
including, among other things, prevailing interest rates, the Company's
results of operations and the market for similar securities. Depending
on prevailing interest rates, the market for similar securities and
other factors, including the financial condition of the Company, the
New Notes may trade at a discount from their principal amount.
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<PAGE>
Failure to Follow Exchange Offer Procedures Could Adversely Affect
Holders
Issuance of the New Notes in exchange for the Old Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the
Company of such Old Notes, a properly completed and duly executed
Letter of Transmittal or Agent's Message (as defined) and all other
required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders
of Old Notes for exchange. Old Notes that are not tendered or are
tendered but not accepted will, following the consummation of the
Exchange Offer, continues to be subject to the existing restrictions
upon transfer thereof, and, upon consummation of the Exchange Offer,
certain registration rights under the Registration Rights Agreement
will terminate. In addition, any holder of Old Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution
of the New Notes may be deemed to have received restricted securities,
and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection
with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as result of market-making
activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution." To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected. See
"The Exchange Offer."
Developments in Asia
The Chemical Business' Australian subsidiary Total Energy Systems
Limited ("TES") and its Australian subsidiaries' results of operations
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 TES
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. See "Special
Note Regarding Forward-Looking Statements."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain Company
obligations under the Registration Rights Agreement. The Company will
not receive any cash proceeds from the issuance of the New Notes
offered hereby. In consideration for issuing the New Notes
contemplated in this Prospectus, the Company will receive Old Notes in
like principal amount, the form and terms of which are the same as the
form and terms of the New Notes (which replace the Old Notes), except
as described herein.
The proceeds from the Initial Offering were approximately $105
million before deducting commissions, Initial Purchaser's discounts,
and estimated expenses thereof. After deducting discounts and
commissions to the Initial Purchaser, but before deducting other
expenses, the net proceeds to the Company from the Initial Offering
were $101.8 million. The net proceeds from the Initial Offering were
used to (i) repay approximately $53.2 million of borrowings, interest
and prepayment fees to retire the loans to the Company's Chemical
Business from John Hancock Mutual Life Insurance Company and others
(the "John Hancock Loan"); (ii) reduce by approximately $38.6 million
amounts outstanding under the revolving credit facilities with respect
to the Chemical Business and the Climate Control Business; and
(iii) fund a loan to the Company's parent, LSB, of $10 million. See
"Description of Notes Certain Covenants LSB Note."
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZATION
The following table sets forth the capitalization of the Company
at December 31, 1997, after giving effect to the Initial Offering and
application of the net proceeds therefrom. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the consolidated financial
statements of the Company included elsewhere herein.
As of December 31, 1997
_______________________
(In thousands)
<S> <C>
Long-term debt, including current
portion:
Revolving credit facilities.......... $ 10,728
Secured term loans:
DSN Loan.......................... 11,806
Other............................. 8,650
The Old Notes........................ 105,000
_______
Total long-term debt.......... 136,184
Stockholders' equity:
Common stock, $.10 par value; 500,000
shares authorized; 10,000 shares
issued and outstanding............ 1
Capital in excess of par............. 12,652
Cumulative translation adjustment.... (1,003)
Retained earnings(1)................. 15,639
________
Total stockholders' equity.... 27,289
________
Total capitalization.................... $163,473
========
____________
<FN>
(1) Gives effect to the early redemption of the John Hancock Loan which
resulted in the incurrence of a prepayment fee of approximately $4.2
million and write-off of John Hancock Loan deferred loan origination
costs of $0.4 million ($2.9 million, net of income taxes).
</FN>
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the
four years ended December 31, 1997, is derived from the audited
consolidated financial statements of the Company for such years. The
information presented as of December 31, 1993 and 1994, and for the
year ended December 31, 1993, is derived from unaudited financial
statements of the Company. The information in this table should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements included elsewhere herein.
Year Ended December 31,
________________________________________________
1993 1994 1995 1996 1997
_________ ________ ________ ________ ________
(In thousands, except ratio, tons and per ton amount)
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues:
Net Sales.............. $184,383 $201,486 $220,743 $255,285 $262,847
Other income........... 383 414 798 333 474
________ ________ ________ ________ ________
184,766 201,900 221,541 255,618 263,321
Costs and Expenses:
Cost of sales.......... 141,757 158,617 172,858 207,828 213,772
Selling, general and
administrative........ 23,461 27,745 30,344 33,122 37,854
Interest expense,
net(1)................ 6,078 6,150 7,185 6,247 9,369
________ ________ ________ ________ ________
171,296 192,512 210,387 247,197 260,995
________ ________ ________ ________ ________
Income before income
taxes and extra-
ordinary charge....... 13,470 9,388 11,154 8,421 2,326
Provision for income
taxes................. 5,628 3,939 5,255 2,668 1,429
_______ ________ ________ ________ ________
Income before extra-
ordinary charge....... 7,842 5,449 5,899 5,753 897
Extraordinary charge... - - - - 2,869
_______ ________ ________ ________ ________
Net income (loss)...... $ 7,842 $ 5,449 $ 5,899 $ 5,753 $ (1,972)
======= ======== ======== ======== ========
Other Financial Data:
Net cash provided
(used) by operating
activities........... $ 7,764 $ 10,146 $ 10,154 $ 14,963 $ (9,711)
Net cash used by invest-
ing activities....... (6,679) (13,998) (16,134) (18,950) (12,772)
Net cash provided
(used) by financing
activities........... (23) 3,054 8,235 2,684 24,908
Depreciation and amor-
tization............. 5,580 6,137 6,695 7,426 8,886
EBITDA(2)............. 25,510 23,079 25,790 23,469 21,415
Ratio of earnings to
fixed charges(3)..... 3.0x 2.2x 2.0x 1.6x 1.1x
Segment Information:
Chemical Business
Net sales............ $114,946 $131,582 $ 136,900 $166,164 $156,948
Gross profit(4)...... 26,739 24,904 25,397 25,400 19,356
Gross profit margin.. 23.3% 18.9% 18.6% 15.3% 12.3%
Average spot price
of anyhydrous
ammonia per
ton(5) ............. $ 107.21 $ 189.74 $ 206.55 $ 188.48 $ 172.02
Tons of anhydous
ammonia consumed... 206,030 196,365 188,452 217,651 218,274
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<PAGE>
EBITDA(2)............ $ 21,935 $ 18,291 $ 18,848 $ 17,743 $ 12,623
Climate Control Business
Net sales............. $ 69,437 $ 69,914 $ 83,843 $ 89,121 $105,899
Gross profit(4)....... 15,887 17,965 22,488 22,057 29,719
Gross profit margin... 22.9% 25.7% 26.8% 24.7% 28.1%
EBITDA(2)............. $ 3,575 $ 4,788 $ 6,942 $ 5,726 $ 8,792
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
________________________________________________
1993 1994 1995 1996 1997
_________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....... $ 29,871 $ 29,738 $ 29,926 $ 32,150 $ 54,737
Property, plant and
equipment, net....... 42,503 55,792 68,681 82,676 84,329
Total assets.......... 109,612 129,444 146,719 173,734 200,875
Total debt............ 46,514 69,140 78,959 82,588 136,184
Total stockholders'
equity.............. 21,241 24,204 28,675 32,843 27,289
__________
<FN>
(1) Interest expense is calculated in accordance with generally
accepted accounting principles and excludes capitalized
interest of $1.4 million, $2.4 million, and $1.1 million for
the years ended December 31, 1995, 1996, and 1997,
respectively.
(2) EBITDA, as defined, is earnings before deduction for interest
expense, income taxes, depreciation and amortization and any
other noncash charges of the Company reducing net income. In
1997, EBITDA represents earnings before an extraordinary
charge of $4.6 million ($2.9 million net of tax benefit).
EBITDA is presented here to provide additional information
about the Company's ability to meet its future debt service,
capital expenditures and working capital requirements. EBITDA
as presented herein may not be comparable to other similarly
titled measures of other companies and differs from the
definition of Consolidated Cash Flow. EBITDA is a measurement
that is not in accordance with generally accepted accounting
principles. See "Description of Notes" and Note 12
Extraordinary Charge of Notes to the Consolidated Financial
Statements.
(3) For purposes of calculating the ratio of earnings to fixed
charges, "earnings" represents net income before income taxes
plus fixed charges, less capitalized interest, plus
amortization of interest capitalized in prior periods. "Fixed
charges" consists of interest expense, including amortization
of debt issuance costs, capitalized interest and the portion
of rental expense which the Company believes is representative
of the interest component of rental expense.
(4) Gross profit represents net sales less cost of sales
(5) Average spot price of anhydrous ammonia represents F.O.B. New
Orleans Barge Price, Industrial User, derived from 52 week
average price as published in Green Market.
</FN>
</TABLE>
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<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 should be read in
conjunction with the Company's consolidated financial statements
included elsewhere herein.
Overview
<TABLE>
<CAPTION>
The following table contains selected historical financial
information about the Company's operating segments for each of the
three years in the period ended December 31, 1997. The information
for each of the three years in the period ended December 31, 1997,
was derived from the consolidated financial statements of the
Company included elsewhere herein and were audited by Ernst & Young
LLP independent auditors whose report with respect thereto appears
elsewhere herein.
Year Ended December 31,
____________________________
1995 1996 1997
________ ________ ________
<S> <C> <C> <C>
Net Sales
Chemical........... $136,900 $166,164 $156,948
Climate Control.... 83,843 89,121 105,899
________ ________ ________
Total............ $220,743 $255,285 $262,847
Gross Profit(1)
Chemical........... $ 25,397 $ 25,400 $ 19,356
Climate Control.... 22,488 22,057 29,719
________ ________ ________
Total $ 47,885 $ 47,457 $ 49,075
Operating Profit(2)
Chemical........... $ 12,684 $ 9,954 $ 3,846
Climate Control.... 4,857 4,381 7,375
________ ________ ________
Total............ $ 17,541 $ 14,335 $ 11,221
Identifiable Assets
Chemical........... $114,374 $133,794 $137,156
Climate Control.... 32,345 39,960 42,497
Corporate.......... - - 21,222
________ ________ ________
Total............ $146,719 $173,754 $200,875
_____________
<FN>
(1) Gross profit by industry segment represents net sales less
cost of sales.
(2) Operating profit by industry segment represents gross profit
less operating expenses before deducting interest expense and
income taxes.
</FN>
</TABLE>
Chemical Business
The Company has grown the Chemical Business through the
expansion of its El Dorado Facility and the acquisition of new
agricultural distribution centers in key geographical markets that
are freight logical to the El Dorado Facility. During the period
from December 31, 1994, through December 31, 1997, the net
investment in assets of the Chemical Business was increased from
$95.0 million to $137.2 million primarily due to the construction
of additional capacity to benefit future periods.
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<PAGE>
Beginning in 1994, the results of operations of the Chemical
Business have been adversely impacted by the high cost of anhydrous
ammonia. From its most recent cyclical low in 1986 through 1993,
the average Gulf Coast price (the "Spot Price") of anhydrous
ammonia was approximately $100 per ton. During 1994 and in each of
the years since, a tightness in supply developed which resulted in
an increase in the Spot Price of anhydrous ammonia to an average of
approximately $195 per ton. The Company believes that the
tightness in supply of anhydrous ammonia that emerged in 1994 was
a result of increased industrial usage as the U.S. economy grew, a
net consolidation of the domestic capacity and a disruption in
supply coming from the former Soviet Union. Although prices for
anhydrous ammonia vary considerably from month to month, the annual
average price has remained high for each of the last three years.
The Company currently purchases approximately 220,000 tons of
anhydrous ammonia per year under two contracts, both effective as
of January 1, 1997. The Company's purchase price of anhydrous
ammonia under these contracts can be higher or lower than the Spot
Price of anhydrous ammonia. The higher prices have been partially
passed on to customers; however, the entire cost increase could not
be offset 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 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 market price of anhydrous ammonia.
See "Special Note Regarding Forward-Looking Statements."
During 1994, the Company undertook construction of the DSN
Plant. The DSN Plant began operations in 1995, but due to certain
mechanical and design problems, production of concentrated nitric
acid during the twelve months ended December 31 1997, was limited
to an average of 170 tons per day, assuming 338 days of annual
production, or 60% of the stated capacity of 285 tons per day. The
limitations on production resulted in significant fixed costs being
expended as period costs during the second half of 1996, and the
first half of 1997, rather than being absorbed as cost of product
being produced and sold. In addition, significant amounts were
expended for engineering, consulting, and other costs to bring the
DSN Plant up to the stated capacity. During the annual maintenance
turnaround in September 1997, management implemented corrective
actions which it believes allow the DSN Plant to operate at its
stated capacity, depending upon customer specifications, and to
fully absorb the costs and produce a quality product. See "Special
Note Regarding Forward-Looking Statements." In early October 1997,
the DSN Plant was restarted and is currently operating at
approximately 260 tons per day due to inventory constraints and
customer specifications. See "Summary The Company The DSN Plant."
After the initial start up of the DSN Plant, certain residents
of El Dorado, Arkansas, and the ADPC&E (as defined) alleged that
the El Dorado Facility's air emissions were in violation of its
existing permit requirements. As a result, the Chemical Business
entered into certain agreements with the ADPC&E, including, in
1995, an administrative order which has since been amended, and
which imposed certain requirements on, and assessed penalties
against, the Company. See "Business Environmental Matters." In
addition, certain lawsuits were filed by plaintiffs living in the
El Dorado, Arkansas, community. See "Business Legal Proceedings."
In order to address the ADPC&E's concerns, and to defend itself in
these lawsuits, significant expenditures were made for consultants,
lawyers, and other related fees and expenses, as well as for
significant capital improvements to the air emission control
equipment at the El Dorado Facility. A substantial portion of the
litigation-related costs are not expected to reoccur. Furthermore,
although these expenses were absorbed by the Company as they were
incurred, the Company's EIL Insurance (as defined) has reimbursed
the Company $405,000 of its past legal fees and expenses relating
to the pending litigation (after taking into account the amount of
the retention under the EIL Insurance) and has agreed to pay such
future fees and expenses which may be incurred, subject to a
reservation of rights regarding one of the lawsuits. See
"Business Legal Proceedings."
During July 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation 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 on current
market conditions, the plant should generate approximately $50
million in annual revenues. Construction is scheduled to be
completed by the end of 1998. See "Special Note Regarding Forward-
Looking Statements."
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The Chemical Business' Australian subsidiary's, TES, results
of operations 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 TES 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. See "Special Note
Regarding Forward-Looking Statements."
Climate Control
The Climate Control Business maintains two modern, flexible
manufacturing and design facilities located in Oklahoma City,
Oklahoma. The Climate Control Business' two principal product lines
are manufactured and sold through two operating subsidiaries:
International Environmental Corporation ("IEC"), which manufactures
and markets hydronic fan coil units, and Climate Master, Inc.
("CM"), which manufactures and markets water source heat pumps,
geothermal water source heat pumps, and packaged terminal air
conditioners.
The Climate Control Business has generated an operating profit
in each year from 1993 through 1997. However, during that period,
CM sustained operating losses which were more than offset by
profitability at IEC.
CM's profitability was adversely affected by a sharp decline
in the primary market for its products sold to the new office
construction market, which was adversely affected by the passage of
the Tax Reform Act of 1986. As a result, the total sales of water
source heat pumps in the U.S. plunged from 150,000 units per year
in 1986 to 71,000 units per year in 1992. CM's sales revenue
decreased from a high of $47.8 million in 1986, prior to record
sales in 1997, to a low of $21.8 million in 1992.
Due to significant changes in its primary market, CM
implemented a strategy of diversification. Several new markets were
targeted, and new products were introduced. CM entered the original
equipment manufacturer ("OEM") business, introduced a new line of
packaged terminal air conditioners and new rooftop water source
heat pumps, entered the "shared energy savings" market (which
primarily sells highly efficient water source heat pumps to
retrofit large government installations), and emphasized and
expanded the residential geothermal water source heat pump
business. In addition, a new management team was recruited, and
CM's operations were reorganized.
These actions were implemented over the last two years and
began to improve operating performance in 1997. As a result of
these actions, CM's sales increased from $38.1 million to $51.6
million and its operating losses have narrowed from $4.2 million to
$0.9 million for the twelve months ended December 31, 1996, and
1997, respectively.
Results of Operations
Year Ended December 31, 1997, Compared to Year Ended December 31,
1996
Net Sales
Consolidated net sales for 1997 were $262.8 million, compared
to $255.3 million for 1996, an increase of $7.6 million. This
increase in sales resulted from increased sales in the Climate
Control Business of $16.8 million, primarily due to increased sales
of CM's heat pumps partially offset by decreased sales in the
Chemical Business of $9.2 million primarily due to reduced sales of
the Company's wholly owned Australian subsidiary due to expiration
of certain customer contracts and recent economic developments in
Asia.
Gross Profit
Gross profit increased $1.6 million and was 18.7% of net sales
for 1997, compared to 18.6% of net sales for 1996. The gross
profit increase was primarily attributable to increased absorption
of costs due to higher production volumes and focus on sales of
more profitable product lines in the Climate Control Business.
This improvement was offset by higher production costs in the
Chemical Business due to (i) the higher cost of anhydrous ammonia
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which was only partially passed on in the form of higher selling
prices, (ii) unabsorbed overhead costs caused by down time related
to modifications made to resolve problems associated with
mechanical failures, and (iii) environmental matters at the
Chemical Business' primary manufacturing plant. These increased
costs in 1997 were partially offset by a reduction in cost of sales
of $2.1 million through recapture of manufacturing variances of the
Chemical Business in the form of business interruption insurance
settlements.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses, as a
percent of net sales, were 14.4% and 13.0% in 1997 and 1996,
respectively. SG&A, as a percent of sales, was approximately 9.8%
in 1997 compared to 9.3% in 1996 for the Chemical Business and
21.0% in 1997 compared to 19.8% in 1996 for the Climate Control
Business. The increase in the Chemical Business was the result of
lower sales in 1997 with relatively constant SG&A expenses. Within
the SG&A of the Chemical Business, lower provisions for
uncollectible accounts receivable in 1997 were offset by increased
expense at the Company's Australian subsidiary in anticipation of
sustaining a higher level of business activity. The increase in
the Climate Control Business' SG&A was the result of increases in
sales personnel costs to support higher sales in future periods,
additional informational technology personnel to support management
information systems changes and higher freight costs due to a
change in sales mix toward greater domestic sales which carry a
higher SG&A percent.
Interest Expense
Interest expense for the Company, before deducting capitalized
interest, was approximately $10.5 million during 1997, compared to
approximately $8.7 million during 1996. During 1997 and 1997, $1.1
million and $2.4 million, respectively, of interest expense was
capitalized in connection with construction of the DSN Plant. The
1997 increase of $1.8 million before the effect of capitalization
primarily resulted from increased borrowings needed to support
capital expenditures, higher inventory balances and to meet the
operational requirements of the Company.
Provision for Income Taxes
The provision for income taxes was $1.4 million in 1997 on
pre-tax income of $2.3 million (61%) compared to $2.7 million in
1996 on pre-tax income of $8.4 million (32%). This change, as a
percentage of pre-tax income, was primarily the result of the
change in the foreign subsidiary TES' net income which decreased by
US$2.5 million from US$1.7 million in 1996 to a net loss of US$.8
million in 1997.
Extraordinary Charge
In 1997, in connection with the issuance of the Notes, a
subsidiary of the company retired the outstanding principal
associated with the John Hancock financing arrangement and incurred
a prepayment fee. The prepayment fee and loan origination costs
expensed in 1997 related to the John Hancock financing arrangement
aggregated approximately $4.6 million. The extraordinary charge of
$2.9 million is net of an income tax benefit of $1.7 million.
Net Income
The Company had a net loss of $2.0 million in 1997, compared
to net income of $5.8 million in 1996. The decreased profitability
of $7.8 million was primarily due to increased SG&A, increased
income taxes as a percentage of income and the extraordinary charge
as discussed above.
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Year Ended December 31, 1996, Compared to Year Ended December 31,
1995
Net Sales
Consolidated net sales for 1996 were $255.3 million, compared
to $220.7 million for 1995, an increase of $34.6 million or 15.6%.
This increase resulted principally from: (i) increased sales in the
Climate Control Business of $5.3 million, primarily due to the
implementation of CM's diversification strategy and the efforts of
its new management, both as described above, and (ii) increased
sales in the Chemical Business of $29.3 million. The Chemical
Business had increases of approximately $7.0 million in sales of
agricultural products and approximately $6.0 million in sales of
industrial products. These sales increases involved both volume and
price increases as higher raw material costs were passed through to
customers to the extent possible. Additionally, TES, the Company's
subsidiary located in Australia and New Zealand, had an increase in
sales of $16.0 million due to an expanded customer base.
Gross Profit
Gross profit decreased $0.4 million and was 18.6% of net sales
for 1996, compared to 21.7% of net sales for 1995. The gross profit
percentage declined in both the Chemical and Climate Control
Businesses. The gross profit of the Chemical Business was adversely
affected due to the continued high cost of anhydrous ammonia as
discussed above and higher production costs due to unabsorbed
overhead costs resulting from excessive downtime at the Chemical
Business' El Dorado Facility related to modifications made to
install air emissions abatement equipment and resolve problems
associated with mechanical and design problems at the DSN Plant.
See "Business Environmental Matters." The Climate Control Business'
gross profit decreased as a percentage of net sales due to
decreased absorption of costs resulting from lower production
volumes in certain product lines and a less favorable product mix.
Selling, General and Administrative Expense
SG&A, as a percent of net sales, was 13.0% in 1996 and 13.7%
in 1995. Climate Control Business SG&A expenses were approximately
the same in 1996 as 1995, and net sales increased by 6.3% resulting
in a lower percentage of SG&A to sales. SG&A of the Chemical
Business, as a percent of sales, was consistent with sales
increases, therefore generating no change as a percent of net
sales. The Chemical Business also incurred approximately $450,000
in 1996 for legal and consulting fees for environmental and legal
matters relating to the El Dorado Facility's air emissions. See
"Business Environmental Matters." Also in 1996, the Chemical
Business expended approximately $1.0 million to increase its
provision for one uncollectible account receivable.
Interest Expense
Interest expense for the Company, before deducting capitalized
interest, was $8.7 million during 1996, compared to $8.5 million
during 1995. During 1996, $2.4 million of interest expense was
capitalized in connection with construction of the DSN Plant,
compared to $1.4 million in 1995.
Net Income
The Company had net income of $5.8 million in 1996 compared to
net income of $5.9 million in 1995. Although 1996 consolidated net
sales increased, the consolidated gross profit declined and SG&A
increased due to the factors discussed above.
Liquidity and Capital Resources
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.
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Cash flows from operations before changes in working capital
items were $10.8 million and $14.3 million for the twelve months
ended December 31, 1997, and 1996, respectively. During the twelve
months ended December 31, 1997, net cash flows used in operating
activities were $9.7 million while the twelve months ended December
31, 1996, provided net cash flows of $15.0 million. This reduction
in cash flows provided from operations of $24.7 million resulted
from lower earnings of $4.9 million (net of extraordinary charge of
$2.9 million in 1997) and an increase in working capital of $21.2
million. The increase in working capital is due primarily to a net
decrease in accounts payable partially due to cash flow from
financing activities available to reduce accounts payable and
increased accounts receivable and inventories to support increased
sales.
Cash flows from operations before changes in working capital
items were $14.3 million and $13.6 million for the year ended
December 31, 1996, and 1995, respectively. During the year ended
December 31, 1996, and 1995, net cash provided by operations were
$15.0 million and $10.2 million, respectively. This increase in
cash flows provided from operations was due primarily to an
increase in accounts payable and accrued liabilities of $15.5
million partially offset by a net increase in accounts receivable
of $2.1 million and inventories of $7.7 million resulting from
higher sales volume in both the Chemical and Climate Control
Businesses.
The Company made capital expenditures of $9.4 million, $18.6
million and $15.9 million during the years ended December 31, 1997,
1996, and 1995, respectively. Approximately $1.3 million, $6.5
million, $11.2 million, and $11.0 million of expenditures made
during 1997, 1996, 1995, and 1994, respectively relate directly to
the construction, start-up and subsequent modification of the DSN
Plant. The Company has budgeted approximately $8.0 for capital
expenditures in 1998, which consist of approximately $5.0 million
for the Climate Control Business and approximately $3.0 for the
Chemical Business. As of the date of this Prospectus, the Company
has no material commitment for capital expenditures. See "Special
Note Regarding Forward-Looking Statements."
The Company incurred substantial indebtedness in connection
with the Initial Offering. After giving effect to the Initial
Offering and application of the net proceeds therefrom, as of
December 31 1997, the Company's indebtedness aggregated $136.2
million, consisting of $105 million of the Notes and $31.2 million
under other debt facilities, including capital leases.
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
$65 million revolving credit facility ("Revolving Credit
Facility"). The Revolving Credit Facility is evidenced by one loan
agreement for the Company's subsidiaries that are parties thereto
and separate loan agreements for LSB and its other subsidiaries
that are not subsidiaries of the Company.
Under the terms of the Revolving Credit Facility, subsidiaries
of the Company may borrow up to $65 million on a revolving basis
subject to limitations based on (i) the amount of eligible
receivables and inventory of such subsidiaries and (ii) the
aggregate amount of borrowings under the Revolving Credit Facility
by LSB and certain subsidiaries that are not subsidiaries of the
Company. Under the Revolving Credit Facility, LSB and certain
subsidiaries of LSB that are not subsidiaries of the Company have
the right to borrow on a revolving basis up to $24 million. LSB and
certain subsidiaries of LSB that are not the Company or
subsidiaries of the Company had borrowings under the Revolving
Credit Facility at December 31, 1997, and March 18, 1998, of
approximately $13.1 million and $3.3 million, respectively. Any
amounts so 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
Revolving Credit Facility. The Revolving Credit Facility, as it
relates to the subsidiaries of the Company, is secured by the
receivables, inventory, proprietary rights, general intangibles,
books and records and proceeds thereof. LSB guarantees all of the
obligations under the Revolving Credit Facility, including those of
the Company's subsidiaries. The Company guarantees only the
obligations of its subsidiaries under the Revolving Credit
Facility, and neither the Company nor its subsidiaries that are
parties to the Revolving Credit Facility guarantee the obligations
of LSB and the other subsidiaries of LSB that are not subsidiaries
of the Company under the Revolving Credit Facility. In addition, a
default by LSB and the other subsidiaries of LSB that are not
subsidiaries of the Company under the Revolving Credit Facility
will not be considered a default of the Company's subsidiaries
under the Revolving Credit Facility. The Revolving Credit Facility
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<PAGE>
will terminate on December 31, 2000, subject to the automatic
renewal for terms of 13 months each thereafter, unless terminated
by either party.
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 LSB's option, on the lender's LIBOR
rate plus 3.875% per annum (which rates are subject to increase or
reduction upon achieving specified availability and adjusted
tangible net worth, as defined).
The Company used a portion of the net proceeds from the
Initial Offering to repay a substantial portion of the unpaid
principal due by certain of its subsidiaries under their current
revolving credit facilities. See "Use of Proceeds." The Company
intends to continue to borrow, from time to time, under its
existing revolving credit facilities as the Company may deem
appropriate to finance the working capital requirements of the
Company and its subsidiaries. As of December 31, 1997, and March
18, 1998, and after giving effect to the application of the net
proceeds from the Initial Offering, the Company had availability
under the Revolving Credit Facility of approximately $29.8 million
and $32.2, respectively. In addition, as of December 31, 1997, and
March 18, 1998, and after giving effect to the application of the
net proceeds from the Initial Offering, the Company's Australian
subsidiary had availability of approximately US$2.7 million and
US$3.1 million, respectively, under its revolving credit facility.
See " Foreign Subsidiary Financing."
In addition to the Agreements discussed above, as of December
31, 1997, 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
December 31, 1997, DSN had outstanding borrowings of $13.5 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 December
31, 1997, at the agreed to interest rates would approximate $1.2
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.
Foreign Subsidiary Financing
The Company's wholly-owned Australian subsidiary, TES, has a
revolving credit working capital facility (the "TES Revolving
Facility") with Bank of New Zealand, Australia. In February 1998,
the TES Revolving Facility was increased from AUS$8.5 million
(approximately US$5.5 million) to approximately AUS10.5 million
(approximately US$7.0 million). The TES Revolving Facility allows
for borrowings based on specific percentages of qualified eligible
assets. Based on the effective exchange rate at December 31, 1997,
approximately US$4.6 million (AUS $7.1 million approximately) was
borrowed at December 31, 1997. Based on the effective exchange rate
at March 18, 1998, approximately US$3.0 million (approximately
AUS$4.5 million) was borrowed at March 18, 1998, under the TES
Revolving Credit Facility. Such debt is secured by substantially
all the assets of TES, plus an unlimited guarantee and indemnity
from LSB and certain subsidiaries of TES. The interest rate on this
debt is dependent upon the borrowing option elected by TES and had
a weighted average rate of 6.9% at December 31, 1997. 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 of New Zealand, Australia has continued to extend
credit under the Facility. The outstanding borrowing under the TES
Revolving Facility at December 31, 1997, has been classified as due
within one year in the accompanying consolidated financial
statements.
Management believes that following the Initial Offering cash
flows from operations, availability under 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. There can be no assurance that the
Company's business will generate sufficient cash flow from
operations, or that future financings will be available in an
amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to make necessary capital
expenditures, or that any refinancing would be available on
commercially reasonable terms, if at all. See "Special Note
Regarding Forward-Looking Statements."
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BUSINESS
General
The Company, a wholly owned subsidiary of LSB, is engaged,
through its subsidiaries, in the manufacture and sale of (i)
chemical products for the explosives, agricultural and industrial
acids markets and (ii) a broad range of hydronic fan coils and
water source heat pumps as well as other products used in
commercial and residential HVAC systems. For the twelve months
ended December 31, 1997, the Company had net sales of $262.8
million and EBITDA of $21.4 million.
Business Strategy
The Company is pursuing a strategy of concentrating on
businesses and product lines in niche markets where it can
establish a position as a market leader. The Company believes that
it can maximize its long-term profitability by offering specialized
products and value-added services to its customers. See "Special
Note Regarding Forward-Looking Statements."
The Chemical Business seeks to maximize profitability by (i)
being a low cost producer, (ii) focusing on a specific geographic
area where it can develop a freight and distribution advantage and
establish a leading regional presence, (iii) offering value added
services as a means of building customer loyalty and (iv)
continuing to alter the product mix towards higher margin products.
The Company has developed a geographic advantage in the Texas,
Oklahoma, Missouri and Tennessee agricultural markets by
establishing an extensive network of wholesale and retail
distribution centers for nitrogen-based fertilizer tailored toward
regional farming practices and by providing value added services.
In its continued focus toward reducing production costs, the
Company undertook construction of the DSN Plant in 1994. The
Company believes that the DSN Plant's more efficient and improved
production of concentrated nitric acid will provide for a greater
volume of third party sales of concentrated nitric acid, a
relatively high margin product. The Company has also developed a
proprietary line of explosives through a nationally recognized
branded product. Given the nature of the product, the Company
believes its branding strategy, emphasizing quality, safety and
reliability, gives it a competitive advantage over less recognized
explosive products. See "Special Note Regarding Forward-Looking
Statements."
The Climate Control Business seeks to establish leadership
positions in niche markets by offering extensive product lines,
custom tailored products and proprietary new technologies. Under
this focused strategy, the Company has developed the most extensive
line of hydronic fan coils and water source heat pumps in the U. S.
The Company has developed flexible production to allow it to custom
design units for the growing retrofit and replacement markets. The
Company believes that the Climate Control Business is one of the
leaders in commercializing new technology to satisfy increasingly
stringent indoor air quality standards. Products recently developed
by the Company include heat pipe technology for dehumidification,
specialty filters for the removal of airborne particles and gases,
ultraviolet light units for bacteria removal and highly energy
efficient dual path heat pump products. The Climate Control
Business is a pioneer in the use of geothermal water source heat
pumps in residential applications. The Company believes that an
aging installed base of residential HVAC systems, coupled with
relatively short payback periods of geothermal systems, will
continue to increase demand for its geothermal products in the
residential replacement market. See "Special Note Regarding
Forward-Looking Statements."
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Chemical Business
General
The Company's Chemical Business manufactures three principal
product lines that are derived from anhydrous ammonia: (1)
fertilizer grade ammonium nitrate for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric acid
for commercial applications primarily in the paper industry. The
Chemical Business' products are sold in niche markets where the
Company believes it can establish a position as a market leader.
See "Special Note Regarding Forward-Looking Statements."
[DIAGRAM]
The diagram is intended to illustrate the sequence of events through
which anhydrous ammonia is processed into the Chemical Business' three
principal product lines. The diagram reveals the following sequence:
(1) anhydrous ammonia is delivered to regular nitric acid plants and
concentrated nitric acid plants; (2) the regular nitric acid plants
utilize a conventional process for the manufacture of (a) fertilizer
grade ammonium nitrate which is used by ranchers and farmers and (b)
industrial grade ammonium nitrate for explosive products which are used
for surface mining, quarries, general construction and highway con-
struction; and (3) the concentrated nitric acid and mixes which are used
for herbicides, plastics, explosives, and pharmaceuticals.
Agricultural Products
The Chemical Business produces ammonium nitrate, a
nitrogen-based fertilizer, at the El Dorado Facility. In 1997, the
Company sold approximately 184,000 tons of ammonium nitrate
fertilizer to farmers, fertilizer dealers and distributors located
primarily in the south central United States.
Ammonium nitrate is one of several forms of nitrogen-based
fertilizers which include anhydrous ammonia and urea. Although, to
some extent, the various forms of nitrogen-based fertilizers are
interchangeable, each has its own characteristics which produce
agronomic preferences among end users. Farmers decide which type of
nitrogen-based fertilizer to apply based on the crop planted, soil
and weather conditions, regional farming practices and relative
nitrogen fertilizer prices.
The Chemical Business is a major manufacturer of fertilizer
grade ammonium nitrate, which it markets primarily in Texas,
Arkansas and the surrounding regions. This market, which is in
close proximity to its El Dorado Facility, includes a high
concentration of pasture land and row crops which favor ammonium
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nitrate over other nitrogen-based fertilizers. The Company has
developed the leading market position in Texas by emphasizing high
quality products, customer service and technical advice. Using a
proprietary prilling process, the Company produces a high
performance ammonium nitrate fertilizer that, because of its
uniform size, is easier to apply than many competing nitrogen-based
fertilizer products. The Company believes that its "E-2" brand
ammonium nitrate fertilizer is recognized as a premium product
within its primary market. In addition, the Company has developed
long term relationships with end users through its network of 21
owned and operated wholesale and retail distribution centers.
Explosives
The Chemical Business manufactures low density ammonium
nitrate-based explosives, including bulk explosives used in surface
mining. In addition, the Company manufactures and sells a branded
line of packaged explosives, used in construction, quarrying and
other applications, particularly where controlled explosive charges
are required. The Company's bulk explosives are marketed primarily
through five Company-owned distribution centers, three of which are
located in close proximity to the customers' surface mines in the
coal producing states of Kentucky, Missouri, West Virginia.
Additionally, the Company, through its Australian subsidiary,
manufactures and distributes bulk and packaged explosives in
Australia and New Zealand. The Company emphasizes value-added
customer services and specialized product applications for its bulk
explosives. Most of the sales of bulk explosives are to customers
who work closely with the Company's technical representatives in
meeting their specific product needs. In addition, the Company
sells bulk explosives to independent wholesalers and to other
explosives companies. Packaged explosives are used for applications
requiring controlled explosive charges and typically command a
premium price and produce higher margins. The Company believes its
Slurry packaged explosive products are among the most widely
recognized in the industry. Slurry packaged explosive products are
sold nationally and internationally to other explosive companies
and end-users.
Industrial Acids
The Chemical Business manufactures and sells industrial acids,
primarily to the food, paper, chemical and electronics industries.
The Company is the leading supplier to third parties of
concentrated nitric acid which is a special grade of nitric acid
used in the manufacture of plastics, pharmaceuticals, herbicides,
explosives, and other chemical products. In addition, the Company
produces and sells regular, blended and mixed nitric acid and a
variety of grades of sulfuric acid. The Company competes on the
basis of price and service, including on-time reliability and
distribution capabilities. The Company operates the largest fleet
of tankcars in the concentrated nitric acid industry which provides
it with a significant competitive advantage in terms of
distribution costs and capabilities. In addition, the Company
provides inventory management as part of the value-added services
it offers to its customers.
The Company has identified concentrated nitric acid as a
strategic product line for its Chemical Business due to attractive
levels of profitability, increased diversity of end markets and the
ability to compete on a value added service basis. To support
further growth in its nitric acid business, the Company undertook
the construction of the DSN Plant located at the El Dorado
Facility. The DSN Plant uses a newer and more efficient process to
produce concentrated nitric acid directly from anhydrous ammonia,
in contrast to the conventional process which requires the input of
regular nitric acid, an intermediate step, to produce concentrated
nitric acid.
DSN Plant
Since January 1, 1994, the Chemical Business has spent
approximately $32.0 million to install the DSN Plant. The DSN Plant
began limited operations in 1995, and such limited operations
continued due to certain mechanical and design problems associated
with the plant's construction and installation. As a result of such
problems, production at the DSN Plant was limited to approximately
170 tons per day (60% of its stated capacity of 285 tons per day
assuming 338 days of annual production) during the twelve months
ended December 31 1997. In October 1997, management completed
certain corrective actions at the DSN Plant. As a result of these
corrective actions, the DSN Plant has the capacity to operate at
approximately 285 tons per day, depending upon customer
specifications. Due to customer specifications and inventory
constraints, among other things, the DSN Plant has been operating
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at approximately 260 tons per day since the corrective actions were
completed. Based on normalized production (assuming 338 days of
annual production), at 260 tons per day, the Company believes that
it will be able to produce concentrated nitric acid at a cost per
ton approximately at $65 per ton lower than at the production
levels of 170 tons per day in the prior period. While the Company
will seek to market the additional capacity of concentrated nitric
acid output to commercial markets, there can be no assurance that
the Company will be able to sell all of the additional capacity in
this market. However, to the extent that there is insufficient
demand for concentrated nitric acid, the Company believes it can
profitably use the concentrated nitric acid in the production of
mixed and blended acids and ammonium nitrate based fertilizer and
explosives (although at lower margins than if the production were
sold as concentrated nitric acid). See "Summary The Company The
DSN Plant," "Risk Factors DSN Plant Design Issues," "The
Company Chemical Business DSN Plant" and "Special Note Regarding
Forward-Looking Statements."
EDNC Baytown Plant
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 an operating 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. Bayer
will purchase from EDNC all of its requirements for nitric acid to
be used by Bayer at its Baytown, Texas facility for ten years from
the date on which the EDNC Baytown Plant becomes fully operational.
EDNC will purchase from Bayer its requirements for anhydrous
ammonia for the manufacture of nitric acid as well as utilities and
other services. Subject to certain conditions, EDNC will be
entitled to sell the amount of nitric acid manufactured at the EDNC
Baytown Plant which is in excess of Bayer's requirements to third
parties. The Bayer Agreement provides that Bayer will make certain
net monthly payments to EDNC which will be sufficient for EDNC to
recover all of its costs plus a profit. 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.
If operations at the EDNC Baytown Plant are not commenced by
February 1, 1999, or upon a change in control of LSB, EDC or EDNC,
Bayer has an option to terminate the Bayer Agreement. EDNC has an
option to terminate the Bayer Agreement upon the failure of Bayer
to complete the construction of certain delivery systems prior to
January 1, 1999, and upon the occurrence of certain events of
default which remain uncured. Bayer retains the right of first
refusal with respect to any bona fide third-party offer to purchase
any voting stock of EDNC or any portion of the EDNC Baytown Plant.
It is anticipated that construction of the EDNC Baytown Plant will
cost approximately $60 million and will be completed by late 1998.
Construction financing of the EDNC Baytown Plant is to be provided
by an unaffiliated lender. Neither the Company nor EDC has
guaranteed any of the lending obligations for the EDNC Baytown
Plant.
Raw Materials
Anhydrous ammonia represents the primary component in the
production of most of the products of the Chemical Business. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operation." The Chemical Business currently purchases
approximately 220,000 tons of anhydrous ammonia per year for use in
its manufacture of its products. The Company has contracts with two
suppliers of anhydrous ammonia. One contract expires in December
1998 and the other expires in April 2000. The Chemical Business is
required to buy 120,000 tons of its annual requirements of
anhydrous ammonia under the contract expiring in 2000 and the
balance under the other contract.
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The Company believes that it could obtain anhydrous ammonia
from other sources in the event of a termination of the above-
referenced contracts, but such may not be obtainable on as
favorable terms. See "Special Note Regarding Forward-Looking
Statements."
Seasonality
The Company believes that the only seasonal products of the
Chemical Business are fertilizer and related chemical products sold
to the agricultural industry. The selling seasons for those
products are primarily during the spring and fall planting seasons,
which typically extend from February through May and from September
through November in the geographical markets in which the majority
of the Company's agricultural products are distributed. As a
result, the Chemical Business increases its inventory of ammonium
nitrate prior to the beginning of each planting season. Sales to
the agricultural markets depend upon weather conditions and other
circumstances beyond the control of the Company.
Regulatory Matters
Each of the Chemical Business' domestic blasting product
distribution centers are licensed by the Bureau of Alcohol, Tobacco
and Firearms in order to manufacture and distribute blasting
products. The Australian and New Zealand distribution centers are
subject to comparable licensing requirements imposed by their
respective controlling government authorities. The Chemical
Business is also subject to extensive federal, state and local
environmental laws, rules and regulations. See " Environmental
Matters" and " Legal Proceedings."
Competition
The Chemical Business competes with other chemical companies
in its markets, many of whom have greater financial and other
resources than the Company. The Company believes that competition
within the markets served by the Chemical Business is primarily
based upon price, service, warranty and product performance. The
Company believes that the Chemical Business is the leader in the
Texas ammonium nitrate market and is the leading producer of
concentrated nitric acid in the United States for third party
sales.
Climate Control Business
General
The Company's Climate Control Business manufactures and sells
a broad range of standard and custom designed hydronic fan coils
and water source heat pumps as well as other products for use in
commercial and residential HVAC systems. Demand for the Climate
Control Business' products is driven by the construction of
commercial, institutional and residential buildings, the renovation
of existing buildings and the replacement of existing systems. The
Climate Control Business' commercial products are used in a wide
variety of buildings, such as hotels, motels, office buildings,
schools, universities, apartments, condominiums, hospitals, nursing
homes, extended care facilities, supermarkets and superstores. Many
of the Company's products are targeted to meet increasingly
stringent indoor air quality and energy efficiency standards.
Hydronic Fan Coils
The Climate Control Business is the leading provider of
hydronic fan coils targeted to the commercial and institutional
markets in the U.S. Hydronic fan coils use heated or chilled water,
provided by a centralized chiller and boiler through a water pipe
system, to condition the air and allow individual room control.
Hydronic fan coil systems are quieter and have longer lives and
lower maintenance costs than comparable systems used where
individual room control is required. The Company believes that its
product line of hydronic fan coils is the most extensive offered by
any domestic producer. The breadth of this product line coupled
with customization capability provided by a flexible manufacturing
process are important components of the Company's strategy for
competing in the commercial and institutional renovation and
replacement markets.
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Water Source Heat Pumps
The Company is a leading U.S. provider of water source heat
pumps to the commercial construction and renovation markets. These
are highly efficient heating and cooling units which enable
individual room climate control through the transfer of heat
through a water pipe system which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to
large sized buildings with many small, individually controlled
spaces. The Company believes the market for commercial water source
heat pumps will continue to grow due to the relative efficiency and
long life of such systems as compared to other air conditioning and
heating systems, as well as to the emergence of the replacement
market for those systems. See "Special Note Regarding Forward-
Looking Statements."
Geothermal Products
The Climate Control Business is a pioneer in the use of
geothermal water source heat pumps in residential and commercial
applications. Geothermal systems, which circulate water or
antifreeze through an underground heat exchanger, are among the
most energy efficient systems available. The Company believes that
an aging installed base of residential HVAC systems, coupled with
the longer life, lower cost to operate, and relatively short
payback periods of geothermal systems will continue to increase
demand for its geothermal products, particularly in the residential
replacement market. See "Special Note Regarding Forward-Looking
Statements."
Hydronic Fan Coil and Water Source Heat Pump Market
The Company has pursued a strategy of specializing in hydronic
fan coils and water source heat pump products. The annual U.S.
market for hydronic fan coils and water source heat pumps is
approximately $225 million. Demand in these markets is generally
driven by levels of repair, replacement, and new construction
activity. The U.S. market for fan coils and water source heat pumps
products has grown on average 6% per year over the last 5 years.
This growth has been fueled by the aging of the installed base of
units, the introduction of new energy efficient systems, upgrades
to central air conditioning and increased governmental regulations
restricting the use of ozone depleting refrigerants in HVAC
systems.
Production and Backlog
Most of the Climate Control Business' production of the above-
described products occurs on a specific order basis. The Company
manufactures the units in many sizes and configurations, as
required by the purchaser, to fit the space and capacity
requirements of hotels, motels, schools, hospitals, apartment
buildings, office buildings and other commercial or residential
structures. As of December 31, 1997, the backlog of confirmed
orders for the Climate Control Business was approximately $28.8
million. The Climate Control Business believes that it will
produce substantially all of the product covered by the
December 31, 1997, backlog of confirmed orders within 1998.
Marketing and Distribution
The Climate Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors. The
Company's sales to mechanical contractors primarily occur through
independent manufacturer's representatives, who also represent
complementary product lines not manufactured by the Company.
Original equipment manufacturers generally consist of other air
conditioning and heating equipment manufacturers who resell under
their own brand name the products purchased from the Climate
Control Business in competition with the Company. Sales to original
equipment manufacturers accounted for approximately 25% of the
sales of the Climate Control Business in 1997.
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Competition
The Climate Control Business competes with approximately eight
companies, some of whom are also customers of the Company. Some of
the competitors have greater financial and other resources than the
Company. The Climate Control Business manufactures a broader line
of fan coil and water source heat pump products than any other
manufacturer in the United States, and the Company believes that it
is competitive as to price, service, warranty and product
performance.
Properties
Chemical Business
The Chemical Business primarily conducts manufacturing
operations (i) on 150 acres of a 1,400 acre tract of land located
in El Dorado, Arkansas (the "El Dorado Facility"), (ii) in a
facility of approximately 60,000 square feet located on 10 acres of
land in Hallowell, Kansas ("Kansas Facility") and (iii) in a mixed
acid plant in Wilmington, North Carolina ("Wilmington Plant"). The
Chemical Business owns all of its manufacturing facilities, with
the El Dorado Facility and the Wilmington Plant subject to
mortgages. In addition, the Chemical Business has four
manufacturing facilities in Australia and one in New Zealand that
produce bulk and packaged explosives.
As of December 31, 1997, the El Dorado Facility was utilized
at approximately 78% of capacity, based on continuous operation.
The Chemical Business operates its Kansas Facility from
buildings located on an approximate ten-acre site in southeastern
Kansas, and a research and testing facility comprising
approximately ten acres, including buildings and equipment thereon,
located in southeastern Kansas, which it owns.
In addition, the Chemical Business distributes its products
through 31 agricultural and explosive distribution centers. The
Chemical Business currently operates 21 agricultural distribution
centers, with 15 of the centers located in Texas (12 of which the
Company owns and three of which it leases); one center located in
Oklahoma which the Company owns; two centers located in Missouri
(one of which the Company owns and one of which it leases); and
three centers located in Tennessee (all of which the Company owns).
The Chemical Business currently operates six domestic explosives
distribution centers located in Hallowell, Kansas (owned); Bonne
Terre, Missouri (owned); Poca, West Virginia (leased); Owensboro
and Combs, Kentucky (leased); and Pryor, Oklahoma (leased). The
Chemical Business also has four explosives distribution centers in
Australia, all of which are leased, and one explosives distribution
center located in New Zealand, which is leased.
Climate Control Business
The Climate Control Business conducts its fan coil
manufacturing operations in a facility located in Oklahoma City,
Oklahoma, consisting of approximately 265,000 square feet. As of
December 31, 1997, the Climate Control Business was using the
productive capacity of the above-referenced facilities to the
extent of approximately 92%, based on three, eight-hour shifts per
day and a five-day week in one department and one and one-half
eight-hour shifts per day and a five-day week in all other
departments. The Climate Control Business leases its fan coil
manufacturing facility. The fan coil manufacturing facility is
leased under the terms of an agreement with Prime Financial
Corporation ("Prime"), a subsidiary of LSB but not a subsidiary of
the Company ("Prime Lease"). The term of the Prime Lease expires on
September 7, 2002, and rent is payable at an annual rate of
$475,000. The Prime Lease may be extended for a period of ten years
following the expiration of the initial term. See "Certain
Relationships and Related Transactions."
The Climate Control Business manufactures most of its heat
pump products in a leased 270,000 square foot facility in Oklahoma
City, Oklahoma, which it leases from an unrelated party. The lease
term began March 1, 1988, after renewal in October 1997, and
expires February 28, 2003, with options to renew for additional
five-year periods, and currently provides for the payment of rent
in the amount of $52,389 per month. The Company also has an option
to acquire the facility at any time in return for the assumption of
the then outstanding balance of the lessor's mortgage. As of
December 31, 1997, the productive capacity of this manufacturing
operation was being utilized to the extent of approximately 75%,
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based on two twelve-hour shifts per day and a seven-day week in one
department and one eight-hour shift per day and a five-day week in
all other departments.
All of the properties utilized by the Climate Control Business
are considered by the Company management to be suitable and
adequate to meet the current needs of that Business.
Employees
As of December 31, 1997, the Company employed 1,151 persons.
As of that date, (i) the Chemical Business employed 492 persons,
with 135 represented by unions under agreements expiring July 31,
1998, and February 5, 1999, and (ii) the Climate Control Business
employed 659 persons, none of whom are represented by a union.
Environmental Matters
The Company and its operations are subject to numerous
Environmental Laws and to other federal, state and local laws
regarding health and safety matters ("Health Laws"). In particular,
the manufacture and distribution of chemical products are
activities which entail environmental risks and impose obligations
under the Environmental Laws and the Health Laws, many of which
provide for substantial fines and criminal sanctions for
violations, and there can be no assurance that material costs or
liabilities will not be incurred by the Company in complying with
such laws or in paying fines or penalties for violation of such
laws. The Environmental Laws and Health Laws and enforcement
policies thereunder relating to the Chemical Business have in the
past resulted, and could in the future result, in penalties,
cleanup costs, or other liabilities relating to the handling,
manufacture, use, emission, discharge or disposal of pollutants or
other substances at or from the Company's facilities or the use or
disposal of certain of its chemical products. Significant
expenditures have been incurred by the Chemical Business at the El
Dorado Facility in order to comply with the Environmental Laws and
Health Laws. The Chemical Business may be required to make
additional significant site or operational modifications at the El
Dorado Facility, potentially involving substantial expenditures and
reduction, suspension or cessation of certain operations. See
"Special Note Regarding Forward-Looking Statements;" "Management's
Discussion and Analysis of Financial Condition and Results of
Operations Chemical Business" and " Legal Proceedings."
The Arkansas Department of Pollution Control & Ecology
("ADPC&E") performed an environmental inspection at the Chemical
Business' El Dorado Facility in 1994, which included a review of
the plant's compliance with Environmental Laws relating to
wastewater and stormwater discharges, air emissions, and solid and
hazardous waste practices. The reports prepared by the ADPC&E in
connection with the inspection noted, in part, that releases of
contaminants to groundwater were suspected to have occurred at the
El Dorado Facility. In 1995, the Chemical Business and the ADPC&E
entered into an administrative consent order which provided for
penalties of $150,000 (including $125,000 to be spent on
environmental improvements at the El Dorado Facility), and required
the Chemical Business to investigate the nature and extent of the
existing groundwater contamination, to take steps to reduce future
groundwater contamination, and to address certain other
environmental compliance issues at the El Dorado Facility (the
"Inspection Consent Order"). Pursuant to the Inspection Consent
Order, the Chemical Business installed additional monitoring wells
at the El Dorado Facility in accordance with a workplan approved by
the ADPC&E, and submitted the test results to ADPC&E. The results
indicated that a risk assessment should be conducted on nitrates
present in the shallow groundwater. The Chemical Business'
consultant has completed this risk assessment, and has forwarded it
to the ADPC&E for approval. The risk assessment concludes that,
although there are contaminants at the El Dorado Facility and in
the groundwater, the levels of such contaminants at the El Dorado
Facility and in the groundwater do not present an unacceptable risk
to human health and the environment. Based on this conclusion, the
Chemical Business' consultant has recommended continued monitoring
at the site for five years. The ADPC&E has not yet responded to the
Chemical Business' proposal. There can be no assurance that the
risk assessment will be approved by the ADPC&E, or that further
work will not be required.
In addition, in accordance with the Inspection Consent Order,
the Chemical Business currently plans to upgrade the El Dorado
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Facility's wastewater treatment plant, and anticipates that
significant related capital expenditures will be incurred to
complete this project. Because the Company is still investigating
this matter, the Company cannot predict the amount of such
expenditures. Furthermore, the El Dorado Facility's new wastewater
permit currently is being reviewed for renewal by the ADPC&E. The
new permit may impose additional or more stringent limitations on
the plant's wastewater discharges. The Company believes, although
there can be no assurance, that any such new limitations would not
have a material adverse effect on the Company. See "Special Note
Regarding Forward-Looking Statements."
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel located at the El
Dorado Facility failed, resulting in a release of such material to
a stormwater drain, and according to ADPC&E records, a minor fish
kill in a creek near the El Dorado Facility. The Chemical Business
and the ADPC&E are currently negotiating a proposed civil consent
administrative order to resolve this matter, which would require
the payment of a civil penalty. The Company has received a draft
of a proposed consent administrative order from the ADPC&E that, as
part of the settlement of claims by the ADPC&E resulting from the
spill, includes a proposed $201,700 civil penalty to be paid by the
Chemical Business. The proposed penalty of $201,700 includes
$125,000 which previously was agreed could be paid under the
Inspection Consent Order in the form of environmental improvements
at the El Dorado Facility. The proposed consent administrative
order is attempting to require the Chemical Business to pay, in
cash, the $125,000 in lieu of allowing the $125,000 to be paid in
the form of improvements at the El Dorado Facility as provided in
the Inspection Consent Order. The Company believes that the
proposed civil penalty is excessive and intends to seek a reduction
to such and to allow the Chemical Business to use the $125,000 of
the proposed $201,700 penalty in the manner originally provided for
in the Inspection Consent Order. The draft of the proposed consent
administrative order also requires the Chemical Business to
undertake certain additional compliance measures and equipment
improvements related to the El Dorado Facility's wastewater
treatment system over the next four years. However, in a letter
dated March 5, 1998, the U. S. Environmental Protection Agency
("EPA") advised the ADPC&E that the four year time period allowed
in the proposed consent administrative order for completion of the
additional compliance measures and modifications to the El Dorado
Facility's wastewater treatment system may be excessive and has
requested further information from the ADPC&E regarding the
compliance and modifications. The proposed consent administrative
order provides for penalties to be paid by the Chemical Business if
it fails to meet any requirements of the proposed order, with such
penalties ranging from $500 per day to $2,500 per day depending on
the number of days that the Chemical Business is not in compliance
with such order. Although the Company does not believe the
proposed consent administrative order, if completed, will have a
material adverse effect on the Company's business, there can be no
assurance that penalties and required expenditures related to the
order will not have such an effect. See "Special Note Regarding
Forward-Looking Statements." The proposed consent administrative
order purports to supersede the Inspection Consent Order. If the
proposed consent administrative order is completed in its present
form, then, to the extent that the requirements of the proposed
consent administrative order have been previously satisfied by the
Company (under the Inspection Consent Order or otherwise), the
requirements of the proposed consent administrative order will be
deemed satisfied upon approval by the ADPC&E. Any consent
administrative order settling the spill of nitric acid is subject
to final negotiations and finalization of a definitive order.
The El Dorado Facility's air permit required it to cease
operation of certain older nitric acid concentrators (the "Older
Nitric Acid Concentrators") within a certain period of time after
the initiation of operations of the DSN Plant. Due to certain
start-up problems with the DSN Plant, including excess emissions
from various emission sources, the Chemical Business and the ADPC&E
entered into certain agreements, including an administrative
consent order (the "Air Consent Order") in 1995 to resolve certain
of the Chemical Business' past violations and to permit the
Chemical Business to operate the Older Nitric Acid Concentrators
until the ADPC&E has made a final decision regarding the El Dorado
Facility's air permit, including whether the Older Nitric Acid
Concentrators may continue to operate. Although the Company expects
that the Chemical Business will be able to continue to operate the
Older Nitric Acid Concentrators, there can be no assurance that the
ADPC&E will allow it to continue to do so. The Air Consent Order
also provides for payment of a civil penalty of $50,000, which the
Chemical Business has paid, and requires installation of certain
pollution control equipment and completion of certain maintenance
activities at the El Dorado Facility to eliminate certain off-site
hazing problems. The Air Consent Order was amended in 1996 and
1997. The second amendment to the Air Consent Order (the "1997
Amendment") provided for certain stipulated penalties of $1,000 per
hour to $10,000 per day for continued off-site emission events and
deferred enforcement for other alleged air permit violations. The
1997 Amendment acknowledges that the Chemical Business has
completed the installation of the pollution control equipment and
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maintenance activities required under the Air Consent Order.
Nonetheless, the Chemical Business was assessed an additional
penalty of $150,000, as well as a payment of an additional $67,000
to fund certain environmental projects, with respect to a number of
alleged permit violations relating to off-site emissions and other
air permit conditions. The Chemical Business has paid both the
penalty and the additional sums required by the 1997 Amendment.
Since the 1997 Amendment and as of the date of this Prospectus, the
Chemical Business has been assessed stipulated penalties of
approximately $55,000 by the ADPC&E for violations of certain
provisions of the 1997 Amendment. The Chemical Business believes
that the El Dorado Facility 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 and could have a material adverse
effect on the Company. In addition, the El Dorado Facility was
identified as one of 33 significant violators of the federal Clean
Air Act in a recent review of Arkansas air programs by the EPA
Office of Inspector General. The Company is unable to predict the
impact, if any, of such designation. See "Special Note Regarding
Forward-Looking Statements."
During 1996, the Chemical Business expended approximately $6.8
million in connection with capital expenditures relating to
compliance with federal, state and local Environmental Laws at its
El Dorado Facility, including, but not limited to, compliance with
the Air Consent Order, as amended. During 1997, the Chemical
Business spent approximately $1.1 million for capital expenditures
relating to environmental control facilities at its El Dorado
Facility to comply with Environmental Laws, including, but not
limited to, the Air Consent Order, as amended, and it is
anticipated that such expenditures will total approximately $0.9
million for 1998 (excluding the implementation of any
recommendations made in the Audit Report (as defined under "Legal
Proceedings"). No assurance can be made that the actual
expenditures of the Chemical Business for such matters will not
exceed the estimated amounts by a substantial margin, which could
have a material adverse effect on the Company and its financial
condition. The amount to be spent during 1998 for capital
expenditures related to compliance with Environmental Laws is
dependent upon a variety of factors, including, but not limited to,
the occurrence of additional releases or threatened releases
(particularly air emissions) into the environment, or changes in
the Environmental Laws (or in the enforcement or interpretation by
any federal or state agency or court of competent jurisdiction).
See "Special Note Regarding Forward-Looking Statements." Failure
to satisfactorily resolve the pending noncompliance issues with the
ADPC&E, or additional orders from the ADPC&E imposing penalties, or
requiring the Chemical Business to spend more for environmental
improvements or curtail production activities at the El Dorado
Facility, could have a material adverse effect on the Company.
The Chemical Business is also involved in various lawsuits
pending in federal court relating to environmental issues at the El
Dorado Facility similar to the environmental issues discussed above
and covered by the Air Consent Order, as amended, with the ADPC&E.
The amounts to be spent during 1998, as discussed herein, for
compliance with applicable federal, state and local Environmental
Laws at the El Dorado Facility do not include expenditures, if any,
that may be required to comply with any court order resulting from
such lawsuits. See "Business Legal Proceedings."
Legal Proceedings
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"). The Carr Case, which was filed against EDC on
June 26, 1996, the Detraz Case, which was filed against EDC on
October 14, 1996, and the Citizen Suit, which was filed against EDC
on October 17, 1996, are pending in the United States District
Court, Western District of Arkansas, El Dorado Division. The
plaintiffs in the Carr Case and the Citizen Suit reside in the area
surrounding EDC's El Dorado Facility, while the plaintiffs in the
Detraz Case reside in various locations throughout the El Dorado,
Arkansas, metropolitan area. Because the parties to the Carr Case
and the Citizen Suit are substantially the same, and the cases
allege similar facts, the court consolidated these two cases,
although they are based on different legal theories. The plaintiffs
in the Citizen Suit allege violations of the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"),
as amended by the Emergency Planning Community Right-To-Know Act
("EPCRA"), the Clean Air Act and the Clean Water Act, and permits
issued to EDC under certain of these laws. Under the terms of such
laws, the plaintiffs in the Citizen Suit are seeking penalties of
up to $25,000 for each day in which EDC violated such acts, if any,
and injunctive relief requiring EDC to remediate any such alleged
violations and relating to future violations. The plaintiffs in the
Carr Case seek an unspecified amount of damages under various toxic
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tort theories for alleged bodily injury and property damage
resulting from alleged releases of toxic substances into the
environment from the El Dorado Facility, as well as punitive
damages and damages for any diminution in the value of plaintiffs'
property resulting from the alleged releases. The Detraz Case, like
the Carr Case, is based on various toxic tort theories. The
plaintiffs in the Detraz Case are seeking to have the case
certified as a class action for persons who allegedly have been
affected by emissions from the El Dorado Facility, which
certification EDC is contesting. During the first quarter of 1998,
the Company's Chemical Business agreed in principal to settle the
Carr Case, Detraz Case and Citizen Suit. The settlements of the
Carr Case and the Detraz Case, if completed, will require certain
payments to be made to the plaintiffs, which payments will be
funded primarily by the Company's EIL Insurance (as defined below).
The settlement of the Citizen Suit, if completed, will require the
Company's Chemical Business to implement at the El Dorado Facility
and at the Company's expense the reasonable and necessary
environmentally related recommendations made in the Audit Report
discussed and defined below in connection with the Carr Case.
Based on what the Company has been orally advised by the
environmental engineering firm performing the evaluation, the
Company does not believe that the implementation of such
recommendations, if any, will have a material adverse effect on the
Company. See "Special Note Regarding Forward-Looking Statements."
The settlement in the Carr Case, Detraz Case and Citizen Suit are
subject to finalization of definitive settlement agreements. The
settlement of the Detraz Case will be subject, among other things,
to court approval, while the settlement of the Citizen Suit will be
subject, among other things, to approval by the court or the United
States Environmental Protection Agency.
In January 1997, EDC entered into an agreed order (the "Carr
Order") in the Carr Case pursuant to which EDC agreed (i) not to
emit substances from the El Dorado Facility which create a nuisance
on the plaintiffs' property (as defined in the Carr Order to
include any off-site haze that reaches the plaintiffs' property),
(ii) to operate in compliance with emission limitations and certain
other requirements established by EDC's permit for the El Dorado
Facility, (iii) to establish a system for monitoring and reporting
(including to the plaintiffs) permit exceedences and releases of
reportable quantities of hazardous substances. The Carr Order
further provides that the court shall retain jurisdiction of the
issues covered by the Carr Order for the purposes of enabling the
parties in the Carr Case to apply to the court for any order that
may be necessary to interpret, carry out, modify or enforce the
Carr Order. In connection with the Carr Order, the plaintiffs have
filed two motions for contempt against EDC for violations, or
alleged violations, of the Carr Order. On one occasion, the court
held that EDC had created a nuisance at the property of one of the
plaintiffs as a result of certain emissions from the El Dorado
Facility and assessed a $500 penalty against EDC and ordered EDC to
pay plaintiffs' attorneys' fees in connection with bringing such
motion. The plaintiffs in the Carr Case withdrew the other motion
for contempt pending an audit of the operation of the El Dorado
Facility. The parties to the Carr Case entered into an audit
agreement to evaluate facility operations and emissions by an
environmental engineering firm, which environmental engineering
firm has issued an audit report as to its findings ("Audit
Report"). Other incidents have occurred or may occur in the future
which could, if the Carr Case is not settled as discussed above,
give rise to the filing of additional motions for contempt alleging
violations of the Carr Order, and, if the Company is found to have
violated the Carr Order, it could result in the possible assessment
of additional fines, penalties and costs against EDC that could
have a material adverse effect on the Company and/or the Chemical
Business. See "Special Note Regarding Forward-Looking Statements."
If the Carr Case is settled as discussed above, then the Carr Order
would be terminated as part of such settlement.
The Chemical Business maintains an Environmental Impairment
Insurance Policy ("EIL Insurance") that provides coverage to the
Chemical Business for certain discharges, dispersal, releases, or
escapes of certain contaminants and pollutants into or upon land,
the atmosphere or any water course or body of water from the El
Dorado Facility, which has caused bodily injury, property damage or
contamination to others or to other property not located on the El
Dorado Facility site. The EIL Insurance provides limits of
liability for each loss up to $10 million, except $5 million for
all remediation expenses, with the maximum limit of liability for
all claims under the EIL Insurance not to exceed $10 million for
all losses and remediation expenses. The EIL Insurance also
provides for a retention of the first $500,000 per loss or
remediation expense to be paid by the Chemical Business. The
Chemical Business has given notice of the pending legal actions in
the Carr Case, the Detraz Case and the Citizen Suit to the EIL
Insurance carrier ("EIL Carrier"), and the EIL Carrier has agreed
to provide a defense for the Company in each case. The defense
regarding the Citizen Suit has been undertaken by the EIL Carrier
subject to a reservation of rights, indicating that the EIL Carrier
may make a determination that it does not believe that any
liability in the Citizen Suit is covered by the EIL Insurance, and,
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<PAGE>
on that basis, deny coverage regarding the Citizens Suit and seek
reimbursement of its related legal expenditures paid in connection
with the Citizen Suit. The Company believes that the EIL Insurance
will provide coverage for actual damages, if any, sustained by the
plaintiffs in the Carr Case and the Detraz Case up to the limits of
the policy in excess of the $500,000 retention, but will not
provide coverage for punitive damages, and may not provide coverage
for the costs of injunctive relief and penalties resulting from the
litigation. As of Janaury 26, 1998, the Company had submitted
claims to the EIL Carrier of approximately $1.2 million for legal
and consulting fees and expenses, or approximately $700,000 in
excess of the self-insured retention. The EIL Carrier has
reimbursed the Chemical Business for $405,000 of such fees and
expenses (after taking into account the amount of the retention
under the EIL Insurance) and has agreed to pay such future fees and
expenses, subject to reservation of rights relating to the Citizen
Suit. The amount of the settlements of the Carr Case and the
Detraz Case, if completed, and the amount paid under the EIL
Insurance for legal and other expenses relating to the defense of
the Carr Case, Detraz Case and Citizen Suit reduce the amount that
may be paid under the EIL Insurance.
Arch Mineral Corporation, et al. v. ICI Explosives USA, Inc.,
et al. On May 24, 1996, the plaintiffs filed this civil cause of
action against EDC and five other unrelated commercial explosives
manufacturers alleging that the defendants allegedly violated
certain federal and state antitrust laws in connection with alleged
price fixing of certain explosive products. This cause of action is
pending in the United States District Court, Southern District of
Indiana. The plaintiffs are suing for an unspecified amount of
damages, which, pursuant to statute, plaintiffs are seeking be
trebled, together with costs. Plaintiffs are also seeking a
permanent injunction enjoining defendants from further alleged
anti-competitive activities. Based on the information presently
available to EDC, EDC does not believe that EDC conspired with any
party, including, but not limited to, the five other defendants, to
fix prices in connection with the sale of commercial explosives.
Discovery has only recently commenced in this matter. EDC intends
to vigorously defend itself in this matter. See "Special Note
Regarding Forward-Looking Statements."
ASARCO v. ICI, et al. The U. S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and consolidated
with other lawsuits in Utah, leave to add EDC as a defendant in
that lawsuit. This lawsuit alleges a national conspiracy, as well
as a regional conspiracy, directed against explosive customers in
Missouri and seeks unspecified damages. EDC 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 Arch case discussed above. Based on the information
presently available to EDC, EDC does not believe that EDC conspired
with any party, to fix prices in connection with the sale of
commercial explosives. EDC intends to vigorously defend itself in
this matter. See "Special Note Regarding Forward-Looking
Statements."
Department of Justice Investigation of Explosives Industry.
For several years, certain members of the explosives industry have
been the focus of grand jury investigations being conducted by the
DOJ in connection with criminal antitrust allegations involving
price fixing. Certain explosives companies, other than the Company,
including all the Company's major competitors, and individuals
employed by certain of those competitors, were indicted and have
pled guilty to criminal antitrust violations. The guilty pleas have
resulted in a total of nearly $40 million in criminal fines. In
connection with the grand jury investigation, the Company's
Chemical Business received and has complied with two document
subpoenas, certain of the Company's Chemical Business employees
have been interviewed by the DOJ under grants of immunity from
prosecution, and certain of the Company's Chemical Business
employees have testified under subpoena before a grand jury under
grants of immunity in connection with the investigation. The
Company believes that it has cooperated fully with the government's
investigation. Recently, the Company had been informed by an
official of the DOJ that it was not currently a target of the above
investigation or of any grand jury investigating criminal antitrust
activity in the explosives or ammonium nitrate industries. See
"Special Note Regarding Forward-Looking Statements."
Eugene Lowe, et al. v. Teresa Trucking, Inc., pending in the
Circuit Court of Lincoln County, West Virginia. During the third
quarter of 1997, EDC was served with this lawsuit in which
approximately 27 plaintiffs have sued approximately 13 defendants,
including EDC, alleging personal injury and property damage for
undifferentiated compensatory and punitive damages of approximately
$7,000,000. Specifically, the plaintiffs assert blast damage
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<PAGE>
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 EDC to provide blasting materials and personnel
to load and shoot holes drilled by employees of Heartland. Down
hole blasting services were provided by EDC at Heartland's premises
from approximately August 1991, until approximately August 1994.
Subsequent to August 1994, EDC supplied blasting materials to the
reclamation contractor at Heartland's mine. In connection with
EDC's activities at Heartland, EDC has entered into a contractual
indemnity to Heartland to indemnify Heartland under certain
conditions for acts or actions taken by EDC or for which EDC failed
to take, and Heartland is alleging that EDC 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. EDC has
provided notification of this lawsuit to its three insurance
carriers providing primary insurance coverage to EDC during the
period covered by the plaintiff's allegations. The one insurance
carrier whose policy provides for defense has indicated it will
share in the defense of this lawsuit. The remaining two insurance
carriers have indicated that they will be defending this lawsuit
under a reservation of rights. Based on information provided to
EDC by its counsel handling this matter, the Company does not
believe that this matter will have a material adverse effect on the
Company.
Year 2000 Issues
Historically, most computer programs have been written using
two digits rather than four to define the applicable year. Any of
the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or
miscalculations and is generally referred to as the "Year 2000"
problem.
The Company recognizes the need to ensure its operations will
not be adversely impacted by the Year 2000 software problem.
Starting in 1996 the Company began the process of identifying the
changes required to their computer systems to make them Year 2000
compliant. The Company conducted a comprehensive review to
identify the systems that could be affected by the Year 2000
problem and developed an implementation plan to address the
problem. The Company expects its Year 2000 date implementation
plan to be completed by the end of 1998. During the execution of
its implementation plan the company will incur internal staff costs
as well as consulting and other expenses related to modifications
necessary to prepare the systems for the year 2000. The Company
does not anticipate that the Year 2000 problem will pose any
significant operational problems or that the expenses incurred will
have a material impact on its financial position or results of
operation. However, if the modifications and conversions are not
completed timely by the Company or its material and service
providers, the Year 2000 problem may have a material impact on the
operations of the Company. In addition, the Company has sent to
their major material and service providers questionnaires as to
whether they are making, or have made, the necessary changes to
their computer programs as to the Year 2000 issues. The Company
has not received responses to these questionnaires from all of
their major material and service providers as of the date of this
Prospectus. As a result, the Company is unable to determine
whether its major material and service providers will have made the
necessary modifications in order to comply with the Year 2000
issues or whether such failure to make such modifications will have
a material adverse effect on the Company.
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<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
Directors and Executive Officers of LSB
The Company is a wholly owned subsidiary of LSB. Accordingly,
the following table lists the current executive officers and
directors of LSB. Certain of the directors and officers of LSB also
serve as directors and executive officers of the Company.
Name Age Office
_________________________ __ ____________________________
<S> <C> <C>
Jack E. Golsen........... 69 Chairman of the Board, Chief
Executive Officer and
President
Barry H. Golsen.......... 47 President of LSB's Climate
Control Business and Vice
Chairman of the Board
David R. Goss............ 57 Senior Vice President-
Operations and Director
Tony M. Shelby........... 56 Senior Vice President/Chief
Financial Officer and
Director
Jim D. Jones............. 55 Vice President-Treasurer/
Controller
David M. Shear........... 38 Vice President/General Counsel
Raymond B. Ackerman...... 75 Director
Robert C. Brown, M.D..... 67 Director
Gerald J. Gagner......... 62 Director
Bernard G. Ille.......... 71 Director
Donald W. Munson......... 64 Director
Horace G. Rhodes......... 70 Director
Jerome D. Shaffer, M.D... 81 Director
</TABLE>
Jack E. Golsen, the founder of the LSB, has served as Chairman
of the Board, Chief Executive Officer and President of LSB since
its inception in 1969. During 1996, Mr. Golsen was inducted into
the Oklahoma Commerce and Industry Hall of Honor as one of
Oklahoma's leading industrialists. Mr. Golsen has a degree from the
University of New Mexico in biochemistry.
Barry H. Golsen has served as the Vice Chairman of the Board
of LSB since August 1994, and has served for more than five years
as the President of LSB's Climate Control Business. Mr. Golsen has
both his undergraduate and law degrees from the University of
Oklahoma.
Tony M. Shelby, a certified public accountant, has served as
a director of LSB since 1971 and has served as the Senior Vice
President and Chief Financial Officer of LSB for more than five
years. Prior to becoming Senior Vice President and Chief Financial
Officer of LSB, Mr. Shelby served as Chief Financial Officer of a
subsidiary of LSB and was with the accounting firm of Arthur Young
& Co., a predecessor to Ernst & Young LLP. Mr. Shelby is a graduate
of Oklahoma City University.
David R. Goss, a certified public accountant, has served as a
director of LSB since 1971 and has served as the Senior Vice
President-Operations of LSB or in a comparable capacity for more
than five years. Mr. Goss is a graduate of Rutgers University.
Jim D. Jones, a certified public accountant, has served in his
present capacity with LSB since 1976. Prior to that time he was an
accountant with Arthur Young & Co., a predecessor to Ernst & Young
LLP. Mr. Jones is a graduate of the University of Central Oklahoma.
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<PAGE>
David M. Shear has served as the Vice President-General
Counsel of LSB since 1990. Prior to that time, Mr. Shear was in
private practice with a law firm in Boston, Massachusetts, and
served as an attorney with the Federal Trade Commission. Mr. Shear
is a graduate of Brandeis University and has a law degree from
Boston University.
Raymond B. Ackerman has served as a director of LSB since
1993. Mr. Ackerman has served as Chairman of the Board and
President of Ackerman, McQueen, Inc., the largest public relations
firm in Oklahoma from 1972 until his retirement in 1992. Mr.
Ackerman currently serves as Chairman Emeritus of Ackerman,
McQueen, Inc. Mr. Ackerman retired as a Rear Admiral from the
United States Naval Reserves. Mr. Ackerman is a graduate of
Oklahoma City University, and in 1996, he was awarded an honorary
doctorate from Oklahoma City University.
Robert C. Brown, M.D., has served as a director of LSB since
1969. Dr. Brown has practiced medicine for many years and is Vice
President and Treasurer of Plaza Medical Group, P.C. Dr. Brown is
a graduate of Tufts University and received his medical degree from
Tufts University.
Gerald J. Gagner has served as a director of LSB since June
1997. Mr. Gagner served as President, Chief Executive Officer and
director of USPCI, Inc., a New York Stock Exchange Company involved
in the waste management industry, from 1984 until 1988, when USPCI
was acquired by Union Pacific Corporation. From 1988 to the
present, Mr. Gagner has been engaged as a private investor. Mr.
Gagner is presently serving as President and a director of
Dragerton Investments, Inc., which developed and sold one of the
world's largest industrial waste landfills, and is presently
general partner of New West Investors, L.P., which has investments
principally in the financial service industry. Mr. Gagner is also
a director of Automation Robotics, A.G., a German corporation. Mr.
Gagner has an engineering degree from the University of Utah.
Bernard G. Ille has served as a director of LSB since 1971.
Mr. Ille served as President and Chief Executive Officer of First
Life Assurance Company from May 1988, until it was acquired in
March 1994. In 1991, First Life was placed in conservatorship by
the Oklahoma Department of Insurance and operated under
conservatorship until sold in March 1994. For more than five years
prior to joining First Life, Mr. Ille served as President of United
Founders Life Insurance Company. Mr. Ille is a director of Landmark
Land Company, Inc., which was the parent company of First Life. Mr.
Ille is currently a private investor. He is a graduate of the
University of Oklahoma.
Donald W. Munson has served as a director of LSB since June
1997. From January 1988, until his retirement in August 1992, Mr.
Munson served as President and Chief Operating Officer of Lennox
Industries. Prior to his election as President and Chief Operating
Officer of Lennox Industries, Mr. Munson served as Executive Vice
President of Lennox Industries' Canadian operation and Managing
Director of Lennox Industries' European operations. Prior to
joining Lennox Industries, Mr. Munson served in various capacities
with the Howden Group, a company located in the United Kingdom, and
The Trane Company, including serving as the managing director of
various companies within the Howden Group and Vice President-Europe
for The Trane Company. Mr. Munson is currently a consultant and
international distributor for the Ducane Company, a manufacturer of
certain types of residential air conditioning, air furnaces and
other equipment, and is serving as a member of the Board of
Directors of Multi-Clima, a French manufacturer of air
conditioning-heating equipment, which a subsidiary of LSB that is
not the Company or a subsidiary of the Company has an option to
acquire. See "Certain Relationships and Related Transactions --
Multi-Clima." Mr. Munson is a resident of the United Kingdom and
has degrees in engineering and business administration from the
University of Minnesota.
Horace G. Rhodes has served as a director of LSB since 1996.
Mr. Rhodes is the managing partner of the law firm of Kerr, Irvine,
Rhodes & Ables and has served in such capacity and has practiced
law for a period in excess of five years. Since 1972, Mr. Rhodes
has served as Executive Vice President and General Counsel for the
Association of Oklahoma Life Insurance Companies and since 1982 has
served as Executive Vice President and General Counsel for the
Oklahoma Life and Health Insurance Guaranty Association. Mr. Rhodes
received his undergraduate and law degrees from the University of
Oklahoma.
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Jerome D. Shaffer, M.D., has served as a director of LSB since
its inception in 1969. He is currently and has been for the last
five years a private investor. Dr. Shaffer is a graduate of Penn
State University and received his medical degree from Jefferson
Medical College.
Jack E. Golsen is the father of Barry H. Golsen. Dr. Robert C.
Brown is the brother-in-law and uncle of Jack E. Golsen and Barry
H. Golsen, respectively.
<TABLE>
<CAPTION>
Directors and Executive Officers of the Company
The following table lists the executive officers of the
Company, each of whom also serves as an executive officer of LSB,
except for James L. Wewers. The executive officers are elected by
the Board of Directors. The Board of Directors of the Company is
comprised of the directors of LSB, except Messrs. Gagner and Munson
are not directors of the Company. The term of each director of the
Company is one year. See the above table setting forth the age,
business experience and family relationship of each of the
executive officers and directors of the Company, except for James
L. Wewers.
Name Office
__________________________ _______________________________
<S> <C>
Jack E. Golsen............ Chairman of the Board, Chief
Executive Officer and President
Barry H. Golsen........... Vice Chairman of the Board and
Vice President
Tony M. Shelby............ Vice President and Chief
Financial Officer
David R. Goss............. Vice President
Jim D. Jones.............. Vice President and Treasurer
James L. Wewers........... Vice President
David M. Shear............ Secretary
</TABLE>
James L. Wewers has served for more than five years as the
President of the Chemical Business. Prior to becoming President of
the Chemical Business, Mr. Wewers was an executive with the
Chemicals Group of Gulf Oil. Mr. Wewers is a graduate of Rockhurst
College and is 51 years old.
Executive Compensation
Compensation paid to the Chief Executive Officer and the other
executive officers of the Company have in the past been, and it is
intended in the foreseeable future will be, paid by LSB. Under the
terms of the Services Agreement (as defined) between the Company
and LSB, the Company will reimburse LSB for that portion of the
compensation paid by LSB to the Company's executive officers (other
than the President, who also serves as the Chief Executive Officer,
and the Chief Financial Officer of LSB, who are also the Chief
Executive Officer and the Chief Financial Officer of the Company)
and for all direct and indirect costs and expenses for services
performed for the Company. If certain conditions contained in the
Management Agreement (as defined) between the Company and LSB are
complied with, the Company shall pay to LSB a management fee under
the Management Agreement each year during the term of the
Management Agreement. The management fee paid by the Company to
LSB, if any, under the Management Agreement will cover, among other
things, that portion of the compensation paid by LSB to the
President (Chief Executive Officer) and Chief Financial Officer for
services relating to the Company. See "Certain Relationships and
Related Transactions Contractual Arrangements." The only
executive officer of the Company whose services are solely for the
Company and/or its subsidiaries is James L. Wewers, Vice President
of the Company and President of the Chemical Business. Mr. Wewers'
annual compensation, as President of the Chemical Business,
included a salary of $200,715, $177,500, and $156,000 in 1997,
1996, and 1995, respectively, and a bonus of $70,000 for 1995. Mr.
Wewers did not receive a bonus for 1997 or 1996.
Each of the directors of the Company serves as a director of
LSB, and the directors of LSB who are not employees of LSB are
compensated by LSB for services provided as a director of LSB. The
directors of the Company receive no additional compensation for
services rendered to the Company as directors of the Company.
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<PAGE>
Employment Contracts; Termination of Employment and Change in
Control Arrangements
Termination of Employment and Change in Control Agreements
LSB has entered into severance agreements with Jack E. Golsen,
Barry H. Golsen, Tony M. Shelby, David R. Goss, Jim D. Jones, James
L. Wewers, David M. Shear, and certain other officers of LSB and
subsidiaries of LSB.
Each severance agreement provides (among other things) that
if, within 24 months after the occurrence of a change in control of
LSB, LSB terminates the officer's employment other than for cause
(as defined), or the officer terminates his employment for good
reason (as defined), LSB must pay the officer an amount equal to
2.9 times the officer's base amount (as defined). The phrase "base
amount" means the average annual gross compensation paid by LSB to
the officer and includable in the officer's gross income during the
period consisting of the most recent five-year period immediately
preceding the change in control. If the officer has been employed
by LSB for less than five years, the base amount is calculated with
respect to the most recent number of taxable years ending before
the change in control that the officer worked for LSB.
The severance agreements provide that a "change in control"
means a change in control of LSB of a nature that would require the
filing of a Form 8-K with the Securities and Exchange Commission
and, in any event, would mean when (1) any individual, firm,
corporation, entity, or group (as defined in Section 13(d)(3) of
the Exchange Act becomes the beneficial owner, directly or
indirectly, of 30% or more of the combined voting power of the
LSB's outstanding voting securities having the right to vote for
the election of directors, except acquisitions by (a) any person,
firm, corporation, entity, or group which, as of the date of the
severance agreement, has that ownership, or (b) Jack E. Golsen; his
wife; his children and the spouses of his children; his estate;
executor or administrator of any estate, guardian or custodian for
Jack E. Golsen, his wife, his children, or the spouses of his
children; any corporation, trust, partnership, or other entity of
which Jack E. Golsen, his wife, children, or the spouses of his
children own at least 80% of the outstanding beneficial voting or
equity interests, directly or indirectly, either by any one or more
of the above-described persons, entities, or estates; and certain
affiliates and associates of any of the above-described persons,
entities, or estates; (2) individuals who, as of the date of the
severance agreement, constitute the Board of Directors of LSB (the
"Incumbent Board") and who cease for any reason to constitute a
majority of the Board of Directors except that any person becoming
a director subsequent to the date of the severance agreement, whose
election or nomination for election is approved by a majority of
the Incumbent Board (with certain limited exceptions), will
constitute a member of the Incumbent Board; or (3) the sale by LSB
of all or substantially all of its assets.
Except for the severance agreement with Jack E. Golsen, the
termination of an officer's employment with LSB "for cause" means
termination because of (a) the mental or physical disability from
performing the officer's duties for a period of 120 consecutive
days or 180 days (even though not consecutive) within a 360 day
period; (b) the conviction of a felony; (c) the embezzlement by the
officer of LSB of assets resulting in substantial personal
enrichment of the officer at the expense of LSB; or (d) the willful
failure (when not mentally or physically disabled) to follow a
direct written order from LSB's Board of Directors within the
reasonable scope of the officer's duties performed during the 60-
day period prior to the change in control. The definition of
"Cause" contained in the severance agreement with Jack E. Golsen
means termination because of (a) the conviction of Mr. Golsen of a
felony involving moral turpitude after all appeals have been
completed; or (b) if due to Mr. Golsen's serious, willful, gross
misconduct or willful, gross neglect of his duties has resulted in
material damages to LSB and its subsidiaries, taken as a whole,
provided that (i) no action or failure to act by Mr. Golsen will
constitute a reason for termination if he believed, in good faith,
that such action or failure to act was in LSB's or its
subsidiaries' best interest, and (ii) failure of Mr. Golsen to
perform his duties hereunder due to disability shall not be
considered willful, gross misconduct or willful, gross negligence
of his duties for any purpose.
The termination of an officer's employment with LSB for "good
reason" means termination because of (a) the assignment to the
officer of duties inconsistent with the officer's position,
authority, duties, or responsibilities during the 60-day period
immediately preceding the change in control of LSB or any other
action which results in the diminishment of those duties, position,
authority, or responsibilities; (b) the relocation of the officer;
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<PAGE>
(c) any purported termination by LSB of the officer's employment
with LSB otherwise than as permitted by the severance agreement; or
(d) in the event of a change in control of LSB, the failure of the
successor or parent company to agree, in form and substance
satisfactory to the officer, to assume (as to a successor) or
guarantee (as to a parent) the severance agreement as if no change
in control had occurred.
Except for the severance agreement with Jack E. Golsen, each
severance agreement is effective until the earlier of (a) three
years after the date of the severance agreement, or (b) the
officer's normal retirement date from LSB; however, beginning on
the first anniversary of the severance agreement and on each annual
anniversary thereafter, the term of the severance agreement
automatically extends for an additional one-year period, unless LSB
gives notice otherwise at least 60 days prior to the anniversary
date. The severance agreement with Jack E. Golsen is effective for
a period of three years from the date of the severance agreement;
except that, commencing on the date one year after the date of such
severance agreement and on each annual anniversary thereafter, the
term of such severance agreement shall be automatically extended so
as to terminate three years from such renewal date, unless LSB
gives notices otherwise at least one year prior to the renewal
date.
Effective June 1, 1994, LSB extended until June 1, 1999, the
option period of a nonqualified stock option previously granted to
Jack E. Golsen for the purchase of 165,000 shares of LSB's Common
Stock at an exercise price of $2.625 per share (the "Extended
NQSO"). The Extended NQSO vests and becomes exercisable at 20% per
year on June 1, 1995, 1996, and 1997, and the remaining 40% becomes
exercisable on June 1, 1998. The terms of the Extended NQSO
provide, in part, that the Extended NQSO shall become immediately
exercisable upon a change in control of LSB. A "change in control"
for purposes of the Extended NQSO, shall occur upon any of the
following events: (i) consummation of any of the following
transactions: any merger, recapitalization, or other business
combination of LSB pursuant to which LSB is the non-surviving
corporation, unless the majority of the holders of Common Stock
immediately prior to such transaction will own at least 50% of the
total voting power of the then outstanding securities of the
surviving corporation immediately after such transaction; (ii) a
transaction in which any person, corporation, or other entity (A)
shall purchase any Common Stock pursuant to a tender offer or
exchange offer, without the prior consent of the Board of Directors
or (B) shall become the "beneficial owner" (as such term is defined
in Rule 13(d)(3) under the Exchange Act of securities of LSB
representing 50% or more of the total voting power of the then
outstanding securities of LSB; or (iii) if, during any period of
two consecutive years, individuals who, at the beginning of such
period, constituted the entire Board of Directors and any new
director whose election by the Board of Directors, or nomination
for election by LSB's stockholders was approved by a vote of at
least two-thirds of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election by the stockholders was previously
approved, cease for any reason to constitute a majority thereof.
Employment Agreement
In March 1996, LSB entered into an employment agreement with
Jack E. Golsen. The employment agreement requires LSB to employ
Jack E. Golsen as an executive officer of LSB for an initial term
of three years and provides for two automatic renewals of three
years each unless terminated by either party by the giving of
written notice at least one year prior to the end of the initial or
first renewal period, whichever is applicable. Under the terms of
such employment agreement, Mr. Golsen shall (i) be paid an annual
base salary at his 1995 base rate, as adjusted from time to time by
the Compensation Committee, but such shall never be adjusted to an
amount less than Mr. Golsen's 1995 base salary, (ii) be paid an
annual bonus in an amount as determined by the Compensation
Committee, and (iii) receive from LSB certain other fringe
benefits. The employment agreement provides that Mr. Golsen's
employment may not be terminated, except (i) upon conviction of a
felony involving moral turpitude after all appeals have been
exhausted, (ii) Mr. Golsen's serious, willful, gross misconduct or
willful, gross negligence of duties resulting in material damage to
LSB and its subsidiaries, taken as a whole, unless Mr. Golsen
believed, in good faith, that such action or failure to act was in
LSB's or its subsidiaries' best interest, and (iii) Mr. Golsen's
death; provided, however, no such termination under (i) or (ii)
above may occur unless and until LSB has delivered to Mr. Golsen a
resolution duly adopted by an affirmative vote of three-fourths of
the entire membership of the Board of Directors at a meeting called
for such purpose after reasonable notice given to Mr. Golsen
finding, in good faith, that Mr. Golsen violated (i) or (ii) above.
If Mr. Golsen's employment is terminated in breach of the
employment agreement, then he shall, in addition to his other
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<PAGE>
rights and remedies, receive and LSB shall pay to Mr. Golsen (i) in
a lump sum cash payment, on the date of termination, a sum equal to
the amount of Mr. Golsen's annual base salary at the time of such
termination and the amount of the last bonus paid to Mr. Golsen
prior to such termination times (a) the number of years remaining
under the employment agreement or (b) four, if such termination
occurs during the last 12 months of the initial period or the first
renewal period, and (ii) provide to Mr. Golsen all of the fringe
benefits that LSB was obligated to provide during his employment
under the employment agreement for the remainder of the term of the
employment agreement, or, if terminated at any time during the last
12 months of the initial period or first renewal period, then
during the remainder of the term and the next renewal period.
If there is a "change in control" (as defined in the severance
agreement between Mr. Golsen and LSB) and within 24 months after
such change in control Mr. Golsen is terminated, other than for
Cause (as defined in the severance agreement), then in such event,
the severance agreement between Mr. Golsen and the Company shall be
controlling.
If Mr. Golsen becomes disabled and is not able to perform his
duties under the employment agreement as a result thereof for a
period of 12 consecutive months within any two year period, the
Company shall pay Mr. Golsen his full salary for the remainder of
the term of the employment agreement and thereafter 60% of such
salary until Mr. Golsen's death.
Preferred Rights Plan
On February 17, 1989, LSB's Board of Directors declared a
dividend to its stockholders of record on February 27, 1989, of one
preferred stock purchase right on each of LSB's outstanding shares
of common stock. The rights expire on February 27, 1999. LSB issued
the rights, among other reasons, in order to assure that all of
LSB's stockholders receive fair and equal treatment in the event of
any proposed takeover of LSB and to guard against partial tender
abusive tactics to gain control of LSB. The rights will become
exercisable only if a person or group acquires beneficial ownership
of 30% or more of LSB's common stock or announces a tender or
exchange offer, the consummation of which would result in the
ownership by a person or group of 30% or more of the LSB common
stock, except any acquisition by Jack E. Golsen, Chairman of the
Board and President of LSB, and certain other related persons or
entities.
Each right (other than the rights, owned by the acquiring
person or members of a group that causes the rights to become
exercisable, which become void) will entitle the stockholder to buy
one one-hundredth of a share of a new series of participating
preferred stock at an exercise price of $14.00 per share. Each one
one-hundredth of a share of the new preferred stock purchasable
upon the exercise of a right has economic terms designed to
approximate the value of one share of LSB's common stock. If
another person or group acquires LSB in a merger or other business
combination transaction, each right will entitle its holder (other
than rights owned by that person or group, which become void) to
purchase at the right's then current exercise price, a number of
the acquiring company's common shares which at the time of such
transaction would have a market value two times the exercise price
of the right. In addition, if a person or group (with certain
exceptions) acquires 30% or more of LSB's outstanding common stock,
each right will entitle its holder (other than the rights owned by
the acquiring person or members of the group that results in the
rights becoming exercisable, which become void), to purchase at the
right's then current exercise price, a number of shares of LSB's
common stock having a market value of twice the right's exercise
price in lieu of the new preferred stock.
Following the acquisition by a person or group of beneficial
ownership of 30% or more of LSB's outstanding common stock (with
certain exceptions) and prior to an acquisition of 50% or more of
LSB's common stock by the person or group, the Board of Directors
may exchange the rights (other than rights owned by the acquiring
person or members of the group that results in the rights becoming
exercisable, which become void), in whole or in part, for shares of
LSB's common stock. That exchange would occur at an exchange ratio
of one share of common stock, or one one-hundredth of a share of
the new series of participating new preferred stock, per right.
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<PAGE>
Prior to the acquisition by a person or group of beneficial
ownership of 30% or more of LSB's common stock (with certain
exceptions), LSB may redeem the rights for one cent per right at
the option of LSB's Board of Directors. LSB's Board of Directors
also has the authority to reduce the 30% thresholds to not less
than 10%.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Security Ownership of Certain Beneficial Owners
All of the Company's issued and outstanding capital stock is
owned by LSB. As a result, the following table sets forth certain
information with respect to the beneficial ownership of the voting
common stock and voting preferred stock of LSB as of February 28,
1998, with respect to each person (including any "group" as used in
Section 13(d)(3) of the Securities Act) that the Company knows to
have beneficial ownership of more than 5% of the LSB's voting
common stock and voting preferred stock. A person is deemed to be
the beneficial owner of shares which could be acquired by such
person within 60 days of February 28, 1998, such as upon the
exercise of options. Because of the requirements of the Securities
and Exchange Commission as to the method of determining the amount
of shares an individual or entity may beneficially own, the amounts
shown as to beneficial ownership of shares of LSB for an individual
or entity may include shares also considered beneficially owned by
others.
Number
Title of Shares Percent
of Beneficially of
Beneficial Owner Class Owned(1) Class
______________________ ________________ _________________ _____
<S> <C> <C> <C>
Jack E. Golsen........ Common 3,900,568(3)(5)(6) 28.6%
and members of Voting Preferred 20,000(4)(6) 92.7%
his family(2)
Riverside Capital..... Common 1,467,397(7) 10.3%
Advisors, Inc.(7)
Ryback Management..... Common 1,835,063(8) 12.5%
Corporation
Dimensional Fund...... Common 748,800(9) 5.9%
Advisors, Inc.
Wynnefield Partners... Common 830,000(10) 6.5%
Small Cap Value,
L.P. and Nelson
Obus(10)
___________________
<FN>
(1) The Company based the information, with respect to beneficial
ownership, on information furnished by the above-named
individuals or entities or contained in filings made with the
Securities and Exchange Commission or the Company's records.
(2) Includes Jack E. Golsen and the following members of his
family: wife, Sylvia H. Golsen; son, Barry H. Golsen; son,
Steven J. Golsen; and daughter, Linda F. Rappaport. The
address of Jack E. Golsen, Sylvia H. Golsen, Barry H. Golsen,
and Linda F. Rappaport is 16 South Pennsylvania Avenue,
Oklahoma City, Oklahoma 73107. Steven J. Golsen's address is
7300 SW 44th Street, Oklahoma City, Oklahoma 73179.
(3) Includes: (a) the following shares over which Jack E. Golsen
("J. Golsen") has the sole voting and dispositive power: (i)
109,028 shares that he owns of record, (ii) 99,000 shares that
he has the right to acquire within 60 days under a non-
qualified stock option, (iii) 4,000 shares that he has the
right to acquire upon conversion of a promissory note, (iv)
133,333 shares that he has the right to acquire upon the
conversion of 4,000 shares of LSB's Series B 12% Cumulative
Convertible Preferred Stock (the "Series" B Preferred") owned
of record by him, (v) 10,000 shares owned of record by the MG
Trust, of which he is the sole trustee, and (vi) 20,000 shares
that he has the right to acquire within the next 60 days under
the LSB stock option plans; (b) 1,052,250 shares owned of
-52-
<PAGE>
record by Sylvia H. Golsen, over which she and her husband, J.
Golsen share voting and dispositive power; (c) 246,616 shares
over which Barry H. Golsen ("B. Golsen") has the sole voting
and dispositive power, 533 shares owned of record by B.
Golsen's wife, over which he shares the voting and dispositive
power, and 21,000 shares that he has the right to acquire
within the next 60 days under the LSB stock option plans; (d)
206,987 shares over which Steven J. Golsen ("S. Golsen") has
the sole voting and dispositive power and 17,000 shares that
he has the right to acquire within the next 60 days under the
LSB stock option plans; (e) 222,460 shares held in trust for
the grandchildren of J. Golsen and Sylvia H. Golsen of which
B. Golsen, S. Golsen and Linda F. Rappaport ("L. Rappaport")
jointly or individually are trustees; (f) 82,552 shares owned
of record by L. Rappaport, over which L. Rappaport has the
sole voting and dispositive power; (g) 1,042,699 shares owned
of record by SBL Corporation ("SBL"), 39,177 shares that SBL
has the right to acquire upon conversion of 9,050 shares of
LSB's nonvoting $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2 (the "Series 2 Preferred"), and
400,000 shares that SBL has the right to acquire upon
conversion of 12,000 shares of Series B Preferred owned of
record by SBL, and (h) 60,600 shares owned of record by Golsen
Petroleum Corporation ("GPC"), which is a wholly owned
subsidiary of SBL, and 133,333 shares that GPC has the right
to acquire upon conversion of 4,000 shares of Series B
Preferred owned of record by GPC. SBL is wholly owned by
Sylvia H. Golsen (40% owner), B. Golsen (20% owner), S. Golsen
(20% owner), and L. Rappaport (20% owner) and, as a result,
SBL, J. Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen, and L.
Rappaport share the voting and dispositive power of the shares
beneficially owned by SBL. SBL's address is 16 South
Pennsylvania Avenue, Oklahoma City, Oklahoma 73107. See "Risk
Factors Controlling Interest."
(4) Includes: (a) 4,000 shares of Series B Preferred owned of
record by J. Golsen, over which he has the sole voting and
dispositive power; (b) 12,000 shares of Series B Preferred
owned of record by SBL; and (c) 4,000 shares of Series B
Preferred owned of record by SBL's wholly-owned subsidiary,
GPC, over which SBL, J. Golsen, Sylvia H. Golsen, B. Golsen,
S. Golsen, and L. Rappaport share the voting and dispositive
power.
(5) Does not include 124,350 shares that L. Rappaport's husband
owns of record and 17,000 shares which he has the right to
acquire within the next 60 days under the LSB stock option
plans, all of which L. Rappaport disclaims beneficial
ownership. Does not include 219,520 shares owned of record by
certain trusts for the benefit of B. Golsen, S. Golsen, and L.
Rappaport over which B. Golsen, S. Golsen and L. Rappaport
have no voting or dispositive power.
(6) J. Golsen disclaims beneficial ownership of the shares that B.
Golsen, S. Golsen, and L. Rappaport each have the sole voting
and investment power over as noted in footnote (3) above. B.
Golsen, S. Golsen, and L. Rappaport disclaim beneficial
ownership of the shares that J. Golsen has the sole voting and
investment power over as noted in footnotes (3) and (4) and
the shares owned of record by Sylvia H. Golsen. Sylvia H.
Golsen disclaims beneficial ownership of the shares that J.
Golsen has the sole voting and dispositive power over as noted
in footnotes (3) and (4) above.
(7) Riverside Capital Advisors, Inc. ("Riverside") has advised LSB
that it owns 341,255 shares of Series 2 Preferred that is
convertible into 1,467,397 shares of Common Stock. Riverside
further advised LSB that it has voting and dispositive power
over such shares as a result of Riverside having full
discretionary investment authority over customers' accounts to
which it provides investment services. The address of
Riverside is 1650 Southeast 17th Street Causeway, Fort
Lauderdale, Florida 33316.
(8) Ryback Management Corporation ("Ryback") is the Investment
Company Advisor for Lindner Dividend Fund, a registered
investment company. Ryback has advised LSB that it owns
423,900 shares of Series 2 Preferred that is convertible into
1,835,063 shares of Common Stock. Ryback has sole voting and
dispositive power over these shares. The address of Ryback is
7711 Corondelet Avenue, Suite 700, St. Louis, Missouri 63105.
(9) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of
748,800 shares, all of which shares are held in portfolios of
DFA Investment Dimensions Group, Inc., a registered open-end
investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and
DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, all of which Dimensional
Fund Advisors, Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares. The address
of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401.
(10) Wynnefield Partners Small Cap Value, L.P. ("Wynnefield"),
together with Wynnefield Partners Small Cap Value, L.P. I
("Wynnefield I"), Channel Partnership II, L.P. ("Channel"),
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<PAGE>
Wynnefield Value Offshore Fund, Ltd. ("Wynnefield Offshore"),
and Nelson Obus, an individual ("Obus") (collectively, the
Wynnefield Group"), filed a joint group Schedule 13D. The
Schedule 13D states that Wynnefield has sole voting and
dispositive power over 425,720 shares; Wynnefield I has sole
voting and dispositive power over 214,780 shares; Channel has
sole voting and dispositive power over 24,000 shares;
Wynnefield Offshore has sole voting and dispositive power over
145,500 shares, and Obus has sole voting and dispositive power
over 20,000 shares. However, Obus has advised LSB that he
possesses voting control over the 830,000 shares officially
owned by the Wynnefield Group. The address of Wynnefield and
Obus is One Penn Plaza, Suite 4720, New York, New York 10119.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Security Ownership of Management of LSB
The following table sets forth certain information as of
December 31, 1997, with respect to the beneficial ownership of the
voting stock and voting preferred stock of LSB, the Company's
parent, by (i) each director of LSB; (ii) each executive officer of
LSB; (iii) and all current executive officers (regardless of salary
and bonus level) and directors of LSB as a group. As discussed
under "Management," each of the executive officers of the Company
also serves as an executive officer of LSB, except for James L.
Wewers, and the Board of Directors of the Company is comprised of
the directors of LSB, except Messrs. Gagner and Munson are not
directors of the Company. Unless otherwise indicated, the persons
listed in the table below have sole voting and investment powers
with respect to the shares indicated.
Number
of Shares
Beneficially Percent
Name of Beneficial Owner Title of Class Owned(1) of Class
________________________ ________________ _____________ _________
<S> <C> <C> <C>
Raymond B. Ackerman.............. Common 11,000(2) *
Robert C. Brown, M.D............. Common 218,329(3) 1.7%
Gerald J. Gagner................. Common 1,000(4) *
Barry H. Golsen.................. Common 2,161,418(5) 16.2%
Voting Preferred 16,000(5) 74.2%
Jack E. Golsen................... Common 3,103,420(6) 22.8%
Voting Preferred 20,000(6) 92.7%
David R. Goss.................... Common 216,585(7) 1.7%
Bernard G. Ille.................. Common 100,000(8) *
Donald W. Munson................. Common 1,432(9) *
Horace G. Rhodes................. Common 5,000(10) *
Jerome D. Shaffer, M.D........... Common 139,363(11) 1.1%
Tony M. Shelby................... Common 220,879(12) 1.7%
Directors and Executive
Officers as a group
(14 persons)..................... Common 4,687,394(13) 33.9%
Voting Preferred 20,000 92.7%
______________
<FN>
* Less than 1%.
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<PAGE>
(1) The Company based the information with respect to beneficial
ownership on information furnished by each director or officer,
contained in filings made with the Securities and Exchange
Commission, or contained in the Company's records. Because of
the requirements of the Securities and Exchange Commission as
to the method of determining the amount of shares an individual
or entity may own beneficially, the amount shown below for an
individual may include shares also considered beneficially
owned by others. Any shares of stock which a person does not
own, but which he or she has the right to acquire within 60
days of February 28, 1998, are deemed to be outstanding for the
purpose of computing the percentage of outstanding stock of the
class owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the
class owned by any other person.
(2) Mr. Ackerman has sole voting and dispositive power over these
shares. 1,000 of these shares are held in a trust for which Mr.
Ackerman is both the settlor and the trustee and in which he
has the vested interest in both the corpus and income. The
remaining 10,000 shares of Common Stock included herein are
shares that Mr. Ackerman may acquire pursuant to currently
exercisable non-qualified stock options granted to him by the
Company.
(3) The amount shown includes 10,000 shares of Common Stock that Dr.
Brown may acquire pursuant to currently exercisable non-
qualified stock options granted to him by the Company. The
shares, with respect to which Dr. Brown shares the voting and
dispositive power, consist of 122,516 shares owned by Dr.
Brown's wife, 15,000 shares held jointly by Dr. Brown and his
wife, 50,727 shares owned by Robert C. Brown, M.D., Inc., a
corporation wholly-owned by Dr. Brown, and 20,086 shares held
by the Robert C. Brown M.D., Inc. Employee Profit Sharing Plan,
of which Dr. Brown serves as the trustee. The amount shown does
not include 57,190 shares directly owned by the children of Dr.
Brown, all of which Dr. Brown disclaims beneficial ownership.
(4) Mr. Gagner has sole voting and dispositive power over these
shares.
(5) See footnotes (3), (4), and (6) of the table under "Security
Ownership of Certain Beneficial Owners" of this item for a
description of the amount and nature of the shares beneficially
owned by B. Golsen, including 21,000 shares B. Golsen has the
right to acquire within sixty (60) days.
(6) See footnotes (3), (4), and (6) of the table under "Security
Ownership of Certain Beneficial Owners" of this item for a
description of the amount and nature of the shares beneficially
owned by J. Golsen, including the shares J. Golsen has the
right to acquire within sixty (60) days, except 797,148 shares
owned by the children of Mr. Golsen and trusts for the benefit
of Mr. Golsen's children and grandchildren are not included in
this table since Mr. Golsen disclaims beneficial ownership of
such shares.
(7) The amount shown includes 28,000 shares that Mr. Goss has the
right to acquire within sixty (60) days pursuant to options
granted under the Company's stock option plans, over which Mr.
Goss has the sole voting and dispositive power. Mr. Goss
disclaims beneficial ownership of 2,429 shares owned by Mr.
Goss' wife, individually, and/or as custodian for Mr. Goss'
children.
(8) The amount includes (i) 10,000 shares that Mr. Ille may purchase
pursuant to currently exercisable non-qualified stock options,
over which Mr. Ille has the sole voting and dispositive power,
and (ii) 90,000 shares owned of record by Mr. Ille's wife. Mr.
Ille disclaims beneficial ownership of the 90,000 shares owned
by Mr. Ille's wife.
(9) This amount includes (i) 432 shares of Common Stock that Mr.
Munson has the right to acquire upon conversion of 100 shares
of non-voting Series 2 Preferred that he beneficially owns and
which Mr. Munson has sole voting and dispositive power, and
(ii) 1,000 shares of Common Stock owned directly by Mr. Munson.
(10) Mr. Rhodes has sole voting and dispositive power over these
shares.
(11) The amount includes (i) 95,034 shares held by Dr. Shaffer's
revocable trust over which Dr. Shaffer has the sole voting and
dispositive power; (ii) 35,000 shares held by the revocable
trust of Dr. Shaffer's wife over which Dr. Shaffer shares
voting and dispositive power; (iii) 10,000 shares that Dr.
Shaffer may purchase pursuant to currently exercisable non-
qualified stock options; and (iv) 4,329 shares that Dr. Shaffer
has the right to acquire upon conversion of 1,000 shares of
Series 2 Preferred owned by Dr. Shaffer.
(12) Mr. Shelby has the sole voting and dispositive power over
these shares, which include 28,000 shares that Mr. Shelby has
the right to acquire within 60 days pursuant to options granted
under the Company's ISOs and 15,152 shares that Mr. Shelby has
the right to acquire upon conversion of 3,500 shares of Series
2 Preferred owned by Mr. Shelby.
(13) The amount shown includes 292,600 shares of Common Stock that
executive officers, directors, or entities controlled by
executive officers and directors of the Company have the right
to acquire within 60 days.
</FN>
</TABLE>
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Formation and Capitalization of Company
The Company was formed as an Oklahoma corporation and a wholly
owned subsidiary of LSB on October 17, 1997. In November 1997, the
Company acquired its subsidiaries through capital contributions of
each subsidiary's outstanding stock from LSB to the Company, except
Northwest Financial Corporation ("Northwest"), which was
contributed to the Company by Prime, a wholly owned subsidiary of
LSB but not a subsidiary of the Company. As of the date of this
Prospectus, LSB owns 95% and Prime owns the remaining 5% of the
issued and outstanding capital stock of the Company.
IEC Lease
Prime, a subsidiary of LSB but not a subsidiary of the
Company, owns the facilities utilized by the fan coil operations of
the Climate Control Business. The Climate Control Business has
leased such facilities from Prime pursuant to a lease agreement
which provides for a term ending on March 6, 2000. The lease is
renewable by the Climate Control Business for an additional ten-
year term on the same terms, including rental amount. The rental
amount is $475,000 per year, payable in monthly installments.
EDC Purchase
In 1983, LSB Chemical Corp. ("LSBC"), a subsidiary of the
Company, acquired all of the outstanding stock of EDC from its then
four stockholders ("Ex-Stockholders"). A substantial portion of the
purchase price consisted of an earnout based primarily on the
annual after-tax earnings of EDC for a 10-year period. During 1989,
two of the Ex-Stockholders received LSBC promissory notes for a
portion of their earnout, in lieu of cash, totaling approximately
$896,000, payable $496,000 in January 1990, and $400,000 in May
1994. LSBC agreed to a buyout of the balance of the earnout from
the four Ex-Stockholders for an aggregate purchase amount of
$1,231,000. LSBC purchased for cash the earnout from two of the Ex-
Stockholders and issued multi-year promissory notes totaling
$676,000 to the other two Ex-Stockholders. Jack E. Golsen
guaranteed LSBC's payment obligation under the promissory notes.
These promissory notes have been assigned in their entirety from
LSBC to the Company, and the guarantee by Jack E. Golsen remains in
place. The unpaid balance of these notes at December 31, 1997, was
$400,000.
Multi-Clima
During 1994, a subsidiary of LSB (which is not the Company or
a subsidiary of the Company) obtained an option to acquire all of
the stock of Multi-Clima, S.A., a French manufacturer of air
conditioning and heating equipment ("Multi-Clima"). LSB's
subsidiary was granted the option as a result of the subsidiary
loaning to the parent company of Multi-Clima approximately $2.1
million. Subsequent to the loan of $2.1 million, LSB's subsidiary
has loaned to the parent of Multi-Clima an additional $1.7 million.
The amount loaned is secured by the stock and assets of Multi-
Clima. LSB's subsidiary may exercise its option to acquire Multi-
Clima by converting $150,000 of the amount loaned into equity. The
option is currently exercisable and will expire June 15, 1999. As
of the date of this Prospectus, LSB has not decided whether it will
exercise the option.
For 1997 and 1996, Multi-Clima had revenues of $14.3 million
and $16.0 million, respectively, and reported income of
approximately $400,000 for 1997 and a break-even level of
operations in 1996.
Multi-Clima manufactures chillers, which are used in central
air conditioning systems, heat pump and computer room air
conditioning and heat pump units. It is believed that the air
conditioning equipment manufactured by Multi-Clima is generally
compatible with the equipment manufactured by the Climate Control
Business. In addition, Multi-Clima may distribute equipment
manufactured by the Climate Control Business and the Climate
Control Business may distribute equipment manufactured by Multi-
Clima.
-56-
<PAGE>
Contractual Arrangements
Services Agreement
Under the services agreement (the "Services Agreement"), dated
November 21, 1997, between LSB and the Company, LSB provides to the
Company and its subsidiaries various services, including financial
and accounting, order entry, billing, credit, payable, insurance,
legal, human resources, advertising and marketing, and related
administrative and management services, that LSB has historically
provided to the operations and businesses of the Company and its
subsidiaries (other than services provided by the President or
Chief Financial Officer of LSB, whose services will be compensated
under the Management Agreement (as defined)). The Company will pay
to or reimburse LSB for all direct and indirect costs and expenses
incurred by LSB in the performance of the Services Agreement. The
term of the Services Agreement is ten years, except LSB may
terminate the Services Agreement on 30 days' written notice to the
Company if (i) the Company defaults under any of the terms or
provisions of the Services Agreement, and such default is not cured
during the 30-day notice period, or (ii) LSB sells 50% or more of
the issued and outstanding stock of the Company, or sells,
transfers or disposes of all, or substantially all, of the assets
of the Company. The historical financial statements for the Company
reflect reimbursement to LSB for services of $1.8 million during
each of 1994, 1995, and 1996, and $1,950,000 during 1997. These
amounts do not include reimbursements for costs described in the
last paragraph under this section styled "Service Agreement" or
amounts paid by LSB relating to certain of the Company's payroll
that are directly charged to the Company by LSB.
The Services Agreement provides that the Company will 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 to, or reimburse, LSB for its
proportionate share of such usage.
The Services Agreement also provides that LSB will permit
employees of the Company and its subsidiaries to participate in the
benefit plans and programs sponsored by LSB until the termination
of the Services Agreement. So long as employees of the Company and
its subsidiaries continue to participate in LSB's benefit plans and
programs, the contributions of such employees to such plans and
programs and the costs of participation by such persons in such
plans and programs will be accounted for separately from
contributions of, and costs of participation by, employees of LSB
and its other subsidiaries. The Company will pay to, or reimburse,
LSB for the costs associated with participation by the employees of
the Company and LSB's benefit plans and programs. Upon the
termination of the Services Agreement, each of LSB and the Company
will be responsible for all aspects of its respective benefit plans
and programs.
Management Agreement
The management agreement (the "Management Agreement"), dated
November 21, 1997, between LSB and the Company, provides that LSB
will provide to the Company, on a nonexclusive basis, managerial
oversight and guidance concerning the broad policies, strategic
decisions and operations of the Company and the Subsidiaries, and
such further managerial assistance as deemed reasonably necessary
by LSB.
The term of the Management Agreement is ten years. The
Management Agreement may be terminated sooner by LSB upon 30 days'
prior written notice to the Company if (i) the Company defaults
under the Management Agreement, and such default is not cured to
the reasonable satisfaction of LSB prior to the expiration of such
30-day period or (ii) LSB sells 50% or more of the issued and
outstanding stock of the Company or sells, transfers or disposes of
all, or substantially all, of the assets of the Company. LSB has
and will continue to engage in activities, some of which activities
may be in competition with the Company's activities, other than
those it will perform under the Management Agreement. The
Management Agreement will not limit or restrict the terms and
provisions of the Services Agreement.
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<PAGE>
<PAGE>
The Management Agreement provides that the Company will pay
LSB a Management Fee each calendar year during the term of the
Management Agreement of an amount not to exceed $1,800,000, subject
to adjustment under certain conditions and subject to certain
limitations. The Company shall pay LSB such annual Management Fee
on a quarterly basis based on the following: (i) if at the end of
the first quarter of the year (March 31), the Company has an
EBITDA, on a consolidated basis, for the three month period from
January 1 to March 31 of $6,500,000 or more, a Management Fee equal
to the difference between the amount of such EBITDA, on a
consolidated basis, and $6,500,000, but not to exceed $450,000,
(ii) if at the end of the second quarter of the year (June 30) the
Company has an EBITDA, on a consolidated basis, for the six month
period from January 1 to June 30 of such year of $13,000,000, a
Management Fee equal to the amount of such EBITDA, on a
consolidated basis, for the six month period less $13,000,000, but
not to exceed $900,000 less the amount of the Management Fee paid
to LSB by the Company for the first quarter of such year, (iii) if
at the end of the third quarter of the year (September 30) the
Company has an EBITDA, on a consolidated basis, for the nine month
period from January 1 to December 31 of such year of $19,500,000,
a Management Fee equal to the amount of such EBITDA, on a
consolidated basis, for the nine month period less $19,500,000, but
not to exceed $1,350,000 less the amount of the Management Fee paid
to LSB by the Company for the first and second quarter of such
year, and (iv) if at the end of such year the Company has an
EBITDA, on a consolidated basis, for the twelve months (January 1
to December 31) of $26,000,000, a Management Fee equal to the
amount of such EBITDA, on a consolidated basis, for such twelve
month period less $26,000,000, but not to exceed $1,800,000 less
the amount of the Management Fee paid to LSB by the Company for the
first three quarters of such year. If the Company's EBITDA, on a
consolidated basis, is less than $26,000,000 for such year, then
LSB shall return to the Company any Management Fees paid to LSB for
the first three quarters of such year. If the Company's EBITDA for
such year, on a consolidated basis, equals or exceeds $26,000,000
but is less than $26,000,000 plus the amount of Management Fees
paid to LSB for the first three quarters of such year, LSB shall
refund to the Company the difference between $26,000,000 plus the
amount of Management Fees paid to LSB for the first three quarters
of the year and the amount of the Company's EBITDA, on a
consolidated basis, for all of such year. As of January 1 of each
year, the quarterly and annual amount of Management Fee to be paid
by the Company to LSB shall be increased proportionately based on
the increase, if any, in the Consumer Price Index during the
preceding calendar year.
Tax Sharing Agreement
The tax sharing agreement (the "Tax Sharing Agreement"), dated
November 21, 1997, between LSB and the Company provides for (i) the
allocation of payments of taxes for periods during which the
Company and its subsidiaries and LSB are included in the same
consolidated group for federal income tax purposes or the same
consolidated, combined or unitary returns for state, local or
foreign tax purposes, (ii) the allocation of responsibility for the
filing of tax returns, (iii) the conduct of tax audits and the
handling of tax controversies, and (iv) various related matters.
For tax periods beginning after December 1996 and ending ten years
thereafter, so long as the Company is included in LSB's
consolidated federal income tax returns or state consolidated,
combined or unitary tax returns, the Company will be required to
pay to LSB an amount equal to the Company's consolidated federal
and state income tax liability calculated as if the Company and its
Subsidiaries were a separate consolidated tax group and not part of
LSB's consolidated tax group. Such amount is payable in estimated
quarterly installments. If the sum of the estimated quarterly
installments is (a) greater than the tax liability of the Company,
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, as determined by LSB, under the
Tax Sharing Agreement, then the Company will pay to LSB the amount
of the deficiency.
In addition, subsidiaries of the Company have paid to LSB $0.8
million in 1995, $3.5 million in 1996 and $1.0 million in 1997, a
portion of the net income that subsidiaries of the Company earned
on a consolidated basis and an amount equal to the amount of
federal and state income tax liability that those subsidiaries
would have been liable for on a stand-alone basis calculated as
though they were not part of LSB's consolidated group.
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Industrial Supplies, Machines and Climate Control Equipment
From January 1, 1996, to December 31, 1997, certain
subsidiaries of LSB that are not subsidiaries of the Company sold
to subsidiaries of the Company approximately $2.6 million in
industrial supplies, machine tools and certain thermostats. It is
anticipated that such transactions will continue in the future.
Affiliated Loans
The Company and its subsidiaries, at various times, maintained
certain unsecured borrowings from LSB and made loans to LSB and its
subsidiaries (other than the Company and its subsidiaries). At
September 30, 1997, the Company had loans to LSB of approximately
$22.9 million and borrowings from LSB of approximately $19.3
million. During November 1997, the Company and LSB offset all of
the amounts due to each other, except for approximately $3.4
million owed by LSB to the Company. As of December 31, 1997, LSB
owed to the Company approximately $3.4 million, bearing interest at
an annual rate of interest of 7%, and approximately $2.2 million,
without interest, which $2.2 million was received by the Company
from LSB during March 1998, exclusive of the loan described in the
paragraph below.
In addition, from the net proceeds received by the Company in
connection with the Initial Offering, the Company loaned $10
million to LSB. See "Description of Notes Certain Covenants LSB
Note."
Revolving Credit Facility
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
the Revolving Credit Facility. See "Description of Other
Indebtedness Revolving Credit Facility" for a discussion of the
Revolving Credit Facility. LSB and certain subsidiaries of LSB that
are not subsidiaries of the Company have guaranteed all of the
obligations of the Company's subsidiaries under the Revolving
Credit Facility.
Guaranty of Loans
LSB has unconditionally guaranteed the payment of the DSN
Loans, which have an unpaid balance, as of December 31, 1997, of
approximately $13.5 million. LSB has also guaranteed the lease
payments due by IEC under a lease purchase agreement, which
provides for the payment of $960,000 over a term of five years
beginning November 1996 at an annual interest rate of 7.5%. In
addition, LSB has unconditionally guaranteed repayment by (i) CM of
the CM Loan, the principal amount of which is approximately $1.3
million as of December 31, 1997, and (ii) the TES Revolving
Facility. See "Description of Other Indebtedness."
Employee Benefit Plans
Prior to the formation of the Company, the employees of the
Chemical Business and the Climate Control Business were eligible to
participate in LSB's Employee Savings Plan, health insurance plan,
and various stock option plans. Under the Services Agreement,
employees of the Company continue to be eligible for all of such
plans on the same terms and conditions as LSB's employees.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Old Notes were originally sold by the Company on the Issue
Date to the Initial Purchaser pursuant to the Purchase Agreement.
The Initial Purchaser subsequently resold the Old Notes to
qualified institutional buyers in reliance on Rule 144A under the
Securities Act. As a condition to the Purchase Agreement, the
Company and the Initial Purchaser entered into the Registration
Rights Agreement pursuant to which the Company agreed to (i) file
with the Commission promptly (but in any event on or prior to 60
days) after the Issue Date, the Exchange Offer Registration
Statement relating to the Exchange Offer for the New Notes, and
(ii) use its best efforts to cause the Exchange Offer Registration
Statement to become effective within 150 days after the Issue Date.
Upon the effectiveness of the Exchange Offer Registration
Statement, the Company will offer the New Notes in exchange for the
surrender of the Old Notes. The Registration Rights Agreement
provides further that if applicable interpretations of the staff of
the Commission do not permit the consummation of the Exchange Offer
prior to the 150th day following the Issue Date, subject to certain
conditions, in the case of any holder of Old Notes not permitted to
participate in the Exchange Offer or of any holder of Old Notes
that participates in the Exchange Offer that receives New Notes
that may not be sold without registration under state and federal
securities laws (other than due solely to the status of such holder
as an affiliate of the Company within the meaning of the Securities
Act), or if for any reason the Exchange Offer is not consummated
within 180 days after the Issue Date, or, subject to certain
conditions, upon the request of the Initial Purchaser or the
holders of a majority in aggregate principal amount of the Notes,
the Company will, at its cost, file a Shelf Registration Statement
to cover resales of Old Notes by the holders thereof. The Company
will use its best efforts to cause the applicable registration
statement to be declared effective by the Commission as promptly as
practicable after the date of filing.
Based on an interpretation of the staff of the Commission set
forth in several no-action letters to third parties (including
Shearman & Sterling (available July 2, 1998); Morgan Stanley &
Company, Incorporated (available June 5, 1998); and Exxon Capital
Holdings Corporation (available May 13, 1988)), the Company
believes that the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by
holders thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act. However, any
purchaser of Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of
distributing the New Notes (i) will not be able to rely on the
interpretation of the staff of the Commission set forth in the
above referenced no-action letters, (ii) will not be able to tender
its Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities
Act in connection with any sale or transfer of the Notes unless
such sale or transfer is made pursuant to an exemption from such
requirements.
As contemplated by these no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange
Offer is required to represent to the Company in the Letter of
Transmittal that (i) the New Notes are to be acquired by the Holder
or the person receiving such New Notes, whether or not such person
is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in
the next sentence) is not engaging and does not intend to engage in
distribution of the New Notes, (iii) the holder or any such other
person has no arrangement or understanding with any person to
participate in the distribution of the New Notes within the meaning
of the Securities Act or resale of the Exchange Securities in
violation of the Securities Act, (iv) neither the holder nor any
such other person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, and (v) the holder or
any such other person acknowledges that if such holder or any other
person participates in the Exchange Offer for the purpose of
distributing the New Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in
connection with any resale of the New Notes and cannot rely on
those no-action letters. As indicated above, each Participating
Broker-Dealer that receives a New Note for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the
Old Notes for its own account as a result of market-making
activities or other trading activities, (ii) has not entered into
any arrangement or understanding with the Company or any
"affiliate" of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in
the Exchange Offer and (iii) will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of
such New Notes. For a description of the procedures for resales by
Participating Broker-Dealers, see "Plan of Distribution."
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The Registration Rights Agreement provides that unless the
Exchange Offer would not be permitted by a policy of the
Commission, the Company will have commenced the Exchange Offer and
will use its best efforts to issue on or prior to 30 business days
after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission New Notes in exchange for
all Old Notes tendered prior thereto in the Exchange Offer. If (i)
neither of the registration statements described above is filed on
or before the 60th day following the Issue Date, (ii) neither of
such registration statements is declared effective by the
Commission on or prior to the 150th day after the Issue Date, (iii)
an Exchange Offer Registration Statement becomes effective, and the
Company fails to consummate the Exchange Offer within 30 business
days of the effective date of such registration statement, or (iv)
the Shelf Registration Statement is filed and declared effective
but thereafter ceases to be effective without being succeeded
within 30 days by another effective registration statement (each
such event, a "Registration Default"), the Company will pay
liquidated damages ("Liquidated Damages"), to each holder of Old
Notes and New Notes that are received in the Exchange Offer that
may not be sold without restriction under federal or state
securities law (together, the "Registrable Securities") during the
first 90-day period immediately following the occurrence of a
Registration Default in an amount equal to one-half of one percent
(0.5%) per annum of the principal amount of the Registrable
Securities held by such Holder during the first 90-day period
immediately following the occurrence of such Registration Default.
The amount of Liquidated Damages payable to each Holder will
increase by an additional one-half of one percent (0.5%) per annum
of the principal amount of such Registrable Securities during each
subsequent 90-day period, up to a maximum amount of Liquidated
Damages equal to two percent (2.0%) per annum of the principal
amount of such Registrable Securities, which provision for
Liquidated Damages will continue until all Registration Defaults
have been cured. All accrued Liquidated Damages will be paid on or
before the semiannual interest payment date for the Registrable
Securities. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Old Notes will be required to make certain
representations to the Company (as described in the Registration
Rights Agreement) in order to participate in the Exchange Offer and
will be required to deliver information to be used in connection
with the Shelf Registration Statement in order to have their Old
Notes included in the Shelf Registration Statement. A Holder of
Notes that sells such Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration
Rights Agreement which are applicable to such a Holder (including
certain indemnification obligations). The Company will provide a
copy of the Registration Rights Agreement to prospective investors
upon request.
The summary herein of certain provisions of the Registration
Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by, all the provisions of the
Registration Rights Agreement, a copy of which is filed as an
exhibit to the Exchange Offer Registration Statement of which this
Prospectus is a part.
Following the consummation of the Exchange Offer, holders of
the Old Notes who were eligible to participate in the Exchange
Offer but who did not tender Old Notes will not have any further
registration rights and such Old Notes will continue to be subject
to certain restrictions on transfer. Accordingly, the liquidity of
the market for such Old Notes could be adversely affected.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn
prior to 5:00 p.m., New York City time, on the Expiration Date.
The Company will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. However, Old Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form
and terms of the Old Notes except that (i) the New Notes bear a
Series B designation and a different CUSIP Number from the Old
Notes, (ii) the New Notes have been registered under the Securities
Act and hence will not bear legends restricting the transfer
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thereof and (iii) the holders of the New Notes will not be entitled
to certain rights under the Registration Rights Agreement,
including the provisions providing for liquidated damages in
certain circumstances relating to the timing of the Exchange Offer,
all of which rights will terminate when the Exchange Offer is
terminated. The New Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $105,000,000 aggregate
principal amount of Old Notes were outstanding. The Company has
fixed the close of business on April 6, 1998, as the record date
for the Exchange Offer for purposes of determining the person to
whom this Prospectus and the Letter of Transmittal will be mailed
initially.
Holders of Old Notes do not have any appraisal or dissenters'
rights under the Oklahoma General Corporation Act or the Indenture
in connection with the Exchange Offer. The Company intends to
conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of
the Commission thereunder.
The Company will be deemed to have accepted validly tendered
Old Notes when, as and if the Company has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act
as agent for the tendering holders for the purpose of receiving the
New Notes from the Company.
If any tendered Old Notes are not accepted for exchange
because of an invalid tender, the occurrence of certain other
events set forth herein or otherwise, the certificates for any such
unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Old Notes pursuant to the Exchange
Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the
exchange fees and expenses.
Expiration Date; Extensions; Amendments
The term "Expiration Date" means 5:00 p.m., New York City
time, on May 16, 1998, which is 30 days after the effective date of
the Registration Statement, unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term
"Expiration Date" will mean the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify
the Exchange Agent of any extension or oral or written notice and
will mail to the registered holders an announcement thereof, each
prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to
delay accepting any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth
below under "Conditions" shall not have been satisfied, by giving
oral or written notice of such delay, extension or termination to
the Exchange Agent or (ii) to amend the terms of the Exchange Offer
in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered
holders.
Interest on the New Notes
The New Notes will bear interest from their date of issuance.
Holders of Old Notes that are accepted for exchange will receive,
in cash, accrued interest thereon to, but not including, the date
of issuance of the New Notes. Such interest will be paid with the
first interest payment on the Notes on June 1, 1998. Interest on
the Old Notes accepted for exchange will cease to accrue upon
issuance of New Notes.
Interest on the New Notes is payable semiannually on each June
1 and December 1, commencing on June 1, 1998.
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PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must (i)
complete, sign and date the Letter of Transmittal, or a facsimile
thereof, and have the signatures thereon guaranteed if required by
the Letter of Transmittal or such facsimile, or (ii) transmit an
Agent's Message in connection with a book-entry transfer, and mail
or otherwise deliver such Letter of Transmittal or such facsimile,
or Agent's Message, together with the Old Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m. New
York City time, on the Expiration Date. To be tendered
effectively, the Old Notes, Letter of Transmittal or an Agent's
Message and other required documents must be completed and received
by the Exchange Agent at the address set forth below under
"Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. Delivery of the Old Notes may be made by book-
entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the
Exchange Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a
book-entry transfer facility to, and received by, the Exchange
Agent forming a part of a confirmation of book-entry, which states
that such book-entry transfer facility has received an express
acknowledgment from the participant in such book-entry transfer
facility tendering the Old Notes that such participant has received
and agrees (1) to participate in the Automated Tender Option
Program ("ATOP"); (ii) to be bound by the terms of the Letter of
Transmittal; and (iii) that the Company may enforce such agreement
against such participant.
By executing the Letter of Transmittal or Agent's Message each
holder will make to the Company the representations set forth above
in the third paragraph under the heading " Purpose and Effect of
the Exchange Offer."
The tender of Old Notes by a holder and the acceptance thereof
by the Company will constitute agreement between such holder and
the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal or
Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL
OR AGENT'S MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE
AGENT IS AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN
ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS ARE ENCOURAGED TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE
THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANK, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact the registered
holder promptly and instruct such registered holder to tender on
such beneficial owner's behalf. See "Instructions of Registered
Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by an Eligible
Institution (as defined) unless the Old Notes tendered pursuant
thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined). In
the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member firm of the Medallion System (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than
the registered holder of any Old Notes listed therein, such Old
Notes must be endorsed or accompanied by a properly completed bond
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power, signed by such registered holder as such registered holder's
name appears on such Old Notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, offices of corporations or other acting in a
fiduciary or representative capacity, such persons should so
indicate when signing, and evidence satisfactory to the Company of
their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a
request promptly after the date of this Prospectus to establish
accounts with respect to the Old Notes at the Book-Entry Transfer
Facility (as defined in the Letter of Transmittal) for the purpose
of facilitating the Exchange Offer, and subject to the
establishment thereof, any financial institution that is a
participant in the Book-Entry Transfer Facility's system may make
book entry delivery of Old Notes by causing such Book Entry
Transfer Facility to transfer such Old Notes into the Exchange
Agent's account with respect to the Old Notes in accordance with
Book-Entry Transfer Facility's procedures for such transfer.
Although delivery of the Old Notes may be effected through book-
entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, unless an Agent's Message is received by the
Exchange Agent, in compliance with ATOP, an appropriate Letter of
Transmittal properly completed and duly executed with any required
signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange
Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including
time of receipt), acceptance of tendered Old Notes and withdrawal
of tendered Old Notes will be determined by the Company in its sole
direction, which determination will be final and binding. The
Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although
the Company intends to notify holders of defects or irregularities
with respect to tenders of Old Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities
have been cured or waived. Any Old Notes received by the Exchange
Act that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by
the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old
Notes are not immediately available, (ii) who cannot deliver their
Old Notes, the Letter of Transmittal or any other required
documents to the Exchange Agent or (iii) who cannot complete the
procedures for book-entry transfer, prior to the Expiration Date,
may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby
and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Old Notes (or a
confirmation of book-entry transfer of such Notes into
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the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter
of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(3) such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as the
certificate(s) representing all tendered Old Notes in
proper form for transfer (or a confirmation or book-entry
transfer of such Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and all
other documents required by the Letter of Transmittal are
received by the Exchange Agent upon five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed
Delivery will be sent to holders who wish to tender their Old Notes
according to the guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a
telegram, telex, letter or facsimile transmission notice of
withdrawal must be received by the Exchange Agent at its address
set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify
the name of the person having deposited the Old Nots to be
withdrawn (the "Depositor"); (ii) identify the Old Notes to be
withdrawn (including the certificate number(s) and principal amount
of such Old Notes, or, in the case of Old Notes transferred by
book-entry transfer, the name and number of the account at the
Book-Entry Transfer Facility to be credited); (iii) be signed by
the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect
to the Old Notes register the transfer of such Old Notes into the
name of the person withdrawing the tender and (iv) specify the name
in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be
determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange
Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes
which have been tendered but which are not accepted for exchange
will be returned to the holder thereof without cost to such holder
as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes
may be re-tendered by following one of the procedures described
above under " Procedures for Tendering" at any time prior to the
Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the
Company will not be required to accept for exchange, or exchange
New Notes for, any Old Notes, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old
Notes if:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency with
respect to the Exchange Offer which, in the reasonable
judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer
or any material adverse development has occurred in any
existing action or proceeding with respect to the
Company, or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by
the staff of the Commission is proposed, adopted or
enacted, which, in the reasonable judgment of the
Company, might materially impair the ability of the
Company to proceed with Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to
the Company; or
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(c) any governmental approval has not been obtained, which
approval the Company, in its reasonable discretion, deems
necessary for the consummation of the Exchange Offer as
contemplated hereby.
If the Company determines in its reasonable discretion that
any of the conditions are not satisfied, the Company may (i) refuse
to accept any Old Notes and return all tendered Old Notes to the
tendering holder, (ii) extend the Exchange Offer and retain all Old
Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of holders to withdraw such Old
Notes (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Notes which have not been
withdrawn.
EXCHANGE AGENT
Bank One, NA has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of
Transmittal and requests for Notice of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER,
AND BY HAND AFTER 4:30 P.M.:
Bank One, NA
235 West Schrock Road
Westerville, Ohio 43081-0184
Attn: Corporate Trust Operations OHI-0184
BY HAND BEFORE 4:30 P.M.:
Bank One, NA First Chicago Trust Company
235 West Schrock Road of New York
Westerville, Ohio 43081-0184 OR 14 Wall Street, 8th Floor
Attn: Lower Level Corporate New York, New York 10005
Trust Window Attn: Corporate Trust
Operations
BY FACSIMILE: (614) 248-9987
Attn: Corporate Trust Operations
Confirm by telephone: (800) 346-5153
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
Fees and Expenses
The Company will bear the expense of soliciting tenders. The
principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telecopy, telephone or in
person by officers and regular employees of the Company and its
affiliates.
The Company has not retained any dealer-manager in connection
with the Exchange Offer and will not make any payments to broker,
dealers, or others soliciting acceptances of the Exchange Offer.
The Company, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the
Exchange Offer will be paid by the Company. Such expenses include
fees and expenses of the Exchange Agent and Trustee, accounting and
legal fees and printing costs, among others.
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Accounting Treatment
The New Notes will be recorded at the same carrying value as
the Old Notes, which is face value, as reflected in the Company's
accounting records on the date of exchange. Accordingly, no gain
or loss for accounting purposes will be recognized by the Company.
The expenses of the Exchange Offer will be expensed over the term
of the New Notes.
Consequences of Failure to Exchange
The Old Notes that are not exchanged for New Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly,
such Old Notes may be resold only (i) to the Company (upon
redemption thereof or otherwise), (ii) so long as the Old Notes are
eligible for resale pursuant to Rule 144A, to a person inside the
United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule
144A, in accordance with Rule 144 under the Securities Act, or
pursuant to another exemption from the registration requirements of
the Securities Act (and based upon an opinion of counsel reasonably
acceptable to the Company) , (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule
904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the
United States.
Resale of the New Notes
Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company
believes that a holder or other person who receives New Notes,
whether or not such person is the holder (other than a person that
is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who receives New Notes in exchange for
Old Notes in the ordinary course of business, and who is not
participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New
Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the New
Notes a prospectus that satisfies the requirements of Section 10 of
the Securities Act. However, if any holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating
in a distribution of the New Notes, such holder cannot rely on the
position of the staff or the Commission enunciated in such no-
action letters or any similar interpretive letters, and must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. The Company
has not sought, and does not intend to seek, its own no-action
letter, and there can be no assurance that the Staff of the
Commission would make a similar determination with respect to the
Exchange Offer. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes
must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Company has agreed that for
a period of 180 days after the consummation of the Exchange Offer,
it will make this prospectus, as amended and supplemented,
available to any Participating Broker-Dealer for use in connection
with any such resale. In addition, until July 15, 1998 (90 days
from the date of this prospectus), all dealers effecting
transactions in the New Notes may be required to deliver a
prospectus.
As contemplated by these no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange
Offer is required to represent to the Company in the Letter of
Transmittal that (i) any New Notes received by such holder in the
Exchange Offer will be acquired in the ordinary course of its
business; (ii) such holder has no arrangement or understanding with
any person to participate in the distribution of the New Notes
within the meaning of the Securities Act or resale of the New Notes
in violation of the Securities Act; (iii) if such holder is not a
broker-dealer, that it is not engaged in, and does not intend to
engage in, the distribution of the New Notes; (iv) if such holder
is a broker-dealer that will receive the New Notes for its own
account in exchange for Notes that were acquired as a result of
market making or other trading activities, that it will deliver a
prospectus, as required by law, in connection with any resale of
such New Notes, and (v) if such holder is an affiliate, that it
will comply with the registration and prospectus delivery
requirements of the Securities Act applicable to it. As indicated
above, each Participating Broker-Dealer that receives a New Note
for its own account in exchange for Old Notes must acknowledge that
it will deliver a Prospectus in connection with any resale of such
New Notes. For a description of the procedures for such resales by
Participating Broker-Dealer, see "Plan of Distribution."
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DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the
Notes. The Notes will be issued pursuant to the Indenture. The
following summaries of certain provisions of the Indenture are
summaries only, do not purport to be complete and are qualified in
their entirety by reference to all of the provisions of the
Indenture. Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to them in the Indenture. Wherever
particular provisions of the Indenture are referred to in this
summary, such provisions are incorporated by reference as a part of
the statements made and such statements are qualified in their
entirety by such reference. A copy of the form of Indenture is
available upon request. For purposes of this summary, the term
"Company" refers only to ClimaChem, Inc. and not to any of its
Subsidiaries. The Old Notes and the New Notes are sometimes
referred to herein collectively as the "Notes." Any descriptions
of the Notes presented in the future tense shall refer to the New
Notes, where appropriate.
General
The terms of the New Notes include those stated in the
Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), as in effect on the date of the Indenture. The form and
terms of the New Notes are the same as the form and terms of the
Old Notes (which they replace) except that (i) the New Notes bear
a Series B designation, (ii) the New Notes have been registered
under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (iii) the holder of New Notes
will not be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for liquidated
damages in certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the Exchange Offer
is consummated. The New Notes are subject to all such terms, and
holders of the New Notes are referred to the Indenture and the
Trust Indenture Act for a statement of such terms.
The Notes will be senior, unsecured, general obligations of
the Company, ranking pari passu in right of payment with all other
senior, unsecured obligations of the Company. The Notes will be
limited in aggregate principal amount to $105 million. The Notes
are jointly and severally irrevocably and unconditionally
guaranteed on a senior basis by each of the Company's present
Subsidiaries (other than EDNC) and all of its future Subsidiaries
(the "Guarantors"). The guarantees will rank pari passu in right of
payment with all other senior, unsecured obligations of the
Guarantors. The obligations of each Guarantor under its guarantee,
however, are limited in a manner intended to avoid it being deemed
a fraudulent conveyance under applicable law; provided, however,
there are no assurances that the guarantees will not be limited as
a fraudulent conveyance under applicable law. See "Risk Factors
Fraudulent Conveyance Considerations" and "Certain Bankruptcy
Limitations" below. The term "Subsidiaries" as used herein,
however, does not include Unrestricted Subsidiaries. The Notes will
be issued only in fully registered form, without coupons, in
denominations of $l,000 and integral multiples thereof.
Separate financial statements of the Guarantors are not
included herein because such Guarantors are jointly and severally
liable with respect to the Company's obligations under the
Indenture and the Notes, and the aggregate net assets, earnings and
equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on
a consolidated basis.
Principal, Maturity and Interest
The Notes will mature on December 1, 2007. The Notes will bear
interest at the rate per annum stated on the cover page hereof from
the date of issuance or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semi-
annually on June 1 and December 1 of each year, commencing June 1,
1998, to the Persons in whose names such Notes are registered at
the close of business on the May 15 or November 15 immediately
preceding such Interest Payment Date. Interest will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes will be payable, and the Notes may be
presented for registration of transfer or exchange, at the office
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or agency of the Company maintained for such purpose, which office
or agency shall be maintained in the Borough of Manhattan, The City
of New York, except as set forth below. At the option of the
Company, payment of interest may be made by check mailed to the
Holders of the Notes at the addresses set forth upon the registry
books of the Company; provided that all payments with respect to
Global Notes and certificated Notes, the Holders of which have
given wire transfer instructions to the Company and the Paying
Agent, will be required to be made by wire transfers of immediately
available funds to the accounts specified by the Holders thereof.
No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in
connection therewith. Until otherwise designated by the Company,
the Company's office or agency will be the corporate trust office
of the Trustee presently located at the office of the Trustee in
the Borough of Manhattan, The City of New York.
Holding Company Structure
The Company is a holding company for its Subsidiaries, with no
material operations of its own. Accordingly, the Company is
dependent upon the distribution of the earnings of its
Subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligations, to service its
debt obligations. In addition, the claims of the Holders of the
Notes are subject to the prior payment of all secured indebtedness
of the Guarantors. There can be no assurance that, after providing
for all such secured claims, there would be sufficient assets
available from the Company and its subsidiaries to satisfy the
claims of the Holders of the Notes. See "Risk Factors --
Substantial Coverage; Ability to Service Indebtedness."
Certain Bankruptcy Limitations
The Company is a holding company, conducting all of its
business through Subsidiaries, which have guaranteed or will
guarantee the Company's obligations with respect to the Notes (with
the exception of EDNC), and Unrestricted Subsidiaries. See "Risk
Factors." Holders of the Notes will be direct creditors of each
Guarantor by virtue of its guarantee. Nonetheless, in the event of
the bankruptcy or financial difficulty of a Guarantor, such
Guarantor's obligations under its guarantee may be subject to
review and avoidance under state and federal fraudulent transfer
laws. Among other things, such obligations may be avoided if a
court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when
the Guarantor was insolvent, was rendered insolvent, or was left
with inadequate capital to conduct its business. A court would
likely conclude that a Guarantor did not receive reasonably
equivalent value or fair consideration to the extent that the
aggregate amount of its liability on its guarantee exceeds the
economic benefits it receives in the Offering. The obligations of
each Guarantor under its guarantee will be limited in a manner
intended to cause it not to be a fraudulent conveyance under
applicable law, although no assurance can be given that a court
would give the holder the benefit of such provision. See "Risk
Factors Fraudulent Conveyance Considerations."
If the obligations of a Guarantor under its guarantee were
avoided, Holders of Notes would have to look to the assets of any
remaining Guarantors for payment. There can be no assurance in that
event that such assets would suffice to pay the outstanding
principal and interest on the Notes.
<TABLE>
<CAPTION>
Optional Redemption
The Company will not have the right to redeem any Notes prior
to December 1, 2002 (other than out of the Net Cash Proceeds of a
Public Equity Offering, as described in the next following
paragraph). The Notes will be redeemable for cash at the option of
the Company, in whole or in part, at any time on or after December
1, 2002, upon not less than 30 days nor more than 60 days notice to
each holder of Notes, at the following redemption prices (expressed
as percentages of the principal amount) if redeemed during the 12-
month period commencing December 1 of the years indicated below, in
each case (subject to the right of Holders of record on a Record
Date to receive interest due on an Interest Payment Date that is on
or prior to such Redemption Date) together with accrued and unpaid
interest and Liquidated Damages, if any, thereon to the Redemption
Date:
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Year Percentage
____ __________
<S> <C>
2002..................... 105.375%
2003..................... 103.583%
2004..................... 101.792%
2005 and thereafter...... 100.000%
</TABLE>
Until December 1, 2000, upon a Public Equity Offering of
common stock of the Company for cash, up to $35 million aggregate
principal amount of the Notes may be redeemed at the option of the
Company within 120 days of such Public Equity Offering, on not less
than 30 days, but not more than 60 days, notice to each Holder of
the Notes to be redeemed, with cash from the Net Cash Proceeds of
such Public Equity Offering, at 110.750% of principal (subject to
the right of Holders of record on a Record Date to receive interest
due on an Interest Payment Date that is on or prior to such
Redemption Date) together with accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption; provided,
however, that immediately following such redemption not less than
$65 million aggregate principal amount of the Notes are
outstanding.
In the case of a partial redemption, the Trustee shall select
the Notes or portions thereof for redemption on a pro rata basis,
by lot or in such other manner it deems appropriate and fair. The
Notes may be redeemed in part in multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at
least 30 days and not more than 60 days prior to the date fixed for
redemption to the Holder of each Note to be redeemed to such
Holder's last address as then shown upon the registry books of the
Registrar. Any notice which relates to a Note to be redeemed in
part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the
date of redemption, upon surrender of such Note, a new Note or
Notes in a principal amount equal to the unredeemed portion thereof
will be issued. On and after the date of redemption, interest will
cease to accrue on the Notes or portions thereof called for
redemption, unless the Company defaults in the payment thereof.
Certain Covenants
Repurchase of Notes at the Option of the Holder Upon a Change of
Control
The Indenture provides that in the event that a Change of
Control has occurred, each Holder of Notes will have the right, at
such Holder's option, pursuant to an irrevocable and unconditional
offer by the Company (the "Change of Control Offer"), to require
the Company to repurchase all or any part of such Holder's Notes
(provided, that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control
Purchase Date") that is no later than 35 Business Days after the
occurrence of such Change of Control, at a cash price equal to 101%
of the principal amount thereof (the "Change of Control Purchase
Price"), together with accrued and unpaid interest and Liquidated
Damages, if any, to the Change of Control Purchase Date. The Change
of Control Offer shall be made within 10 Business Days following a
Change of Control and shall remain open for 20 Business Days
following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, the Company
promptly shall purchase all Notes properly tendered in response to
the Change of Control Offer.
As used herein, a "Change of Control" means (i) any merger or
consolidation of any of the Company or LSB with or into any Person
or any sale, transfer or other conveyance, whether direct or
indirect, of all or substantially all of the assets of either of
the Company or LSB, on a consolidated basis, in one transaction or
a series of related transactions, if, immediately after giving
effect to such transaction(s), any "Person" or "group" (as such
terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) (other than an Excluded
Person) is or becomes the "beneficial owner," directly or
indirectly, of more than 50% of the total voting power in the
aggregate normally entitled to vote in the election of directors,
managers, or trustees, as applicable, of the transferee(s) or
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surviving entity or entities, (ii) any "Person" or "group" (as such
terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) (other than an Excluded
Person) is or becomes the "beneficial owner," directly or
indirectly, of more than 50% of the total voting power in the
aggregate of all classes of Capital Stock of either of the Company
or LSB then outstanding normally entitled to vote in elections of
directors, or (iii) during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such
12-month period constituted the Board of Directors of LSB (together
with any new directors whose election by such Board or whose
nomination for election by the shareholders of LSB was approved by
a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of
LSB then in office.
On or before the Change of Control Purchase Date, the Company
will (i) accept for payment Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent cash sufficient to pay the Change of Control
Purchase Price (together with accrued and unpaid interest and
Liquidated Damages, if any) of all Notes so tendered and (iii)
deliver to the Trustee Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof being purchased
by the Company. The Paying Agent promptly will pay the Holders of
Notes so accepted an amount equal to the Change of Control Purchase
Price (together with accrued and unpaid interest and Liquidated
Damages, if any), and the Trustee promptly will authenticate and
deliver to such Holders a new Note equal in principal amount to any
unpurchased portion of the Note surrendered. Any Notes not so
accepted will be delivered promptly by the Company to the Holder
thereof. The Company publicly will announce the results of the
Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make
more difficult or discourage a takeover of the Company or LSB, and,
thus, the removal of incumbent management.
The phrase "all or substantially all" of the assets of the
Company or LSB, as the case may be, will likely be interpreted
under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets or the Company or LSB, as the case
may be, has occurred.
No assurances can be given that the Company will have
available sufficient funds to acquire Notes tendered upon the
occurrence of a Change of Control. In the event that the Company is
required to purchase outstanding Notes upon the occurrence of a
Change of Control, the Company expects that it would seek third
party financing to the extent that it does not have available funds
to meet its purchase obligations. There can be no assurance that
the Company would be able to obtain such financing.
Any Change of Control Offer will be made in compliance with
all applicable laws, rules and regulations, including, if
applicable, Regulation 14E under the Exchange Act and the rules
thereunder and all other applicable Federal and state securities
laws. To the extent that the provisions of any securities laws or
regulations conflict with the terms hereof, the Company shall
comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the
Indenture or the Notes by virtue thereof.
Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock
The Indenture provides that, except as set forth in this
covenant, the Company and the Guarantors will not, and will not
permit any of their Subsidiaries to, directly or indirectly, issue,
assume, guaranty, incur, become directly or indirectly liable with
respect to (including as a result of an Acquisition), or otherwise
become responsible for, contingently or otherwise (individually and
collectively, to "incur" or, as appropriate, an "incurrence"), any
Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness) other than Permitted Indebtedness. Notwithstanding
the foregoing, if (i) no Default or Event of Default shall have
occurred and be continuing at the time of, or would occur after
giving effect on a pro forma basis to, such incurrence of
Indebtedness or Disqualified Capital Stock and (ii) on the date of
such incurrence (the "Incurrence Date"), the Consolidated Coverage
Ratio of the Company for the Reference Period immediately preceding
the Incurrence Date, after giving effect on a pro forma basis to
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such incurrence of such Indebtedness or Disqualified Capital Stock
and, to the extent set forth in the definition of Consolidated
Coverage Ratio, the use of proceeds thereof, would be at least 2.0
to 1 or, for an Incurrence Date after January 1, 2000, at least
2.25 to 1 (each, a "Debt Incurrence Ratio"), then the Company may
incur such Indebtedness or Disqualified Capital Stock and the
Guarantors may incur such Indebtedness.
Indebtedness or Disqualified Capital Stock of any Person which
is outstanding at the time such Person becomes a Subsidiary of the
Company (including upon designation of any subsidiary or other
Person as a Subsidiary) or is merged with or into or consolidated
with the Company or a Subsidiary of the Company shall be deemed to
have been incurred at the time such Person becomes such a
Subsidiary of the Company or is merged with or into or consolidated
with the Company or a Subsidiary of the Company, as applicable.
Limitation on Restricted Payments
The Indenture provides that the Company and the Guarantors
will not, and will not permit any of their Subsidiaries to,
directly or indirectly, make any Restricted Payment if, after
giving effect to such Restricted Payment on a pro forma basis, (1)
a Default or an Event of Default shall have occurred and be
continuing, (2) the Company is not permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Debt Incurrence
Ratio in the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," or (3) the aggregate
amount of all Restricted Payments made by the Company and its
Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed the
sum of (a) 50% of the aggregate Consolidated Net Income of the
Company and its Consolidated Subsidiaries for the period (taken as
one accounting period), commencing on the first day of the first
full fiscal quarter commencing after the Issue Date, to and
including the last day of the fiscal quarter ended immediately
prior to the date of each such 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 Qualified Capital
Stock (other than (i) to a Subsidiary of the Company and (ii) to
the extent applied in connection with a Qualified Exchange) after
the Issue Date.
The immediately preceding paragraph, however, will not
prohibit (i) payments to LSB pursuant to the Management Agreement,
the Services Agreement and the Tax Sharing Agreement, each as in
effect on the Issue Date, (ii) a Qualified Exchange or (iii) the
payment of any dividend on Qualified Capital Stock within 60 days
after the date of its declaration if such dividend could have been
made on the date of such declaration in compliance with the
foregoing provisions. The full amount of any Restricted Payment
made pursuant to clause (iii) (but not pursuant to clauses (i) and
(ii)) of the immediately preceding sentence, however, will be
deducted in the calculation of the aggregate amount of Restricted
Payments available to be made referred to in clause (3) of the
immediately preceding paragraph.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries
The Indenture provides that the Company and the Guarantors
will not, and will not permit any of their Subsidiaries to,
directly or indirectly, create, assume or suffer to exist any
consensual restriction on the ability of any Subsidiary of the
Company to pay dividends or make other distributions to or on
behalf of, or to pay any obligation to or on behalf of, or
otherwise to transfer assets or property to or on behalf of, or
make or pay loans or advances to or on behalf of, the Company or
any Subsidiary of the Company, except (a) restrictions imposed by
the Notes or the Indenture, (b) restrictions imposed by applicable
law, (c) existing restrictions under specified Indebtedness
outstanding on the Issue Date, (d) restrictions under any Acquired
Indebtedness not incurred in violation of the Indenture or any
agreement relating to any property, asset, or business acquired by
the Company or any of its Subsidiaries, which restrictions in each
case existed at the time of acquisition, were not put in place in
connection with or in anticipation of such acquisition and are not
applicable to any Person, other than the Person acquired, or to any
property, asset or business, other than the property, assets and
business so acquired, (e) any such restriction or requirement
imposed by Indebtedness incurred under paragraph (b) of the
definition of "Permitted Indebtedness" provided such restriction or
requirement is no more restrictive than that imposed by the Credit
Agreement as of the Issue Date, (f) restrictions with respect
solely to a Subsidiary of the Company imposed pursuant to a binding
agreement which has been entered into for the sale or disposition
of all or substantially all of the Equity Interests or assets of
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such Subsidiary, provided such restrictions apply solely to the
Equity Interests or assets of such Subsidiary which are being sold,
and (g) in connection with and pursuant to permitted refinancings,
replacements of restrictions imposed pursuant to clauses (a), (c)
or (d) of this paragraph that are not more restrictive than those
being replaced and do not apply to any other Person or assets than
those that would have been covered by the restrictions in the
Indebtedness so refinanced. Notwithstanding the foregoing, neither
(a) customary provisions restricting subletting or assignment of
any lease entered into in the ordinary course of business,
consistent with industry practice, nor (b) Liens permitted under
the terms of the Indenture shall in and of themselves be considered
a restriction on the ability of the applicable Subsidiary to
transfer such agreement or assets, as the case may be.
Limitation on Liens Securing Indebtedness
The Company and the Guarantors will not, and will not permit
any of their Subsidiaries to, create, incur, assume or suffer to
exist any Lien of any kind, other than Permitted Liens, upon any of
their respective assets now owned or acquired on or after the date
of the Indenture or upon any income or profits therefrom (any such
Lien, the "Initial Lien"), unless the Company provides, and causes
its Subsidiaries to provide, concurrently therewith, that the Notes
are equally and ratably so secured, provided that, if such
Indebtedness is Subordinated Indebtedness, the Initial Lien
securing such Subordinated Indebtedness shall be subordinate and
junior to the Lien securing the Notes with the same relative
priority as such Subordinated Indebtedness shall have with respect
to the Notes. Any such Lien thereby created in favor of the Notes
will be automatically and unconditionally released and discharged
upon the release and discharge of the Initial Lien to which it
relates.
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that (except as otherwise provided
herein) the Company and the Guarantors will not, and will not
permit any of their Subsidiaries to convey, sell, transfer, assign
or otherwise dispose of, directly or indirectly, any of its
property, business or assets, including by merger or consolidation
(in the case of a Guarantor or a Subsidiary of the Company), and
including any sale or other transfer or issuance of any Equity
Interests of any Subsidiary of the Company, whether by the Company
or a Subsidiary or through the issuance, sale or transfer of Equity
Interests by a Subsidiary of the Company, and including any sale
and leaseback transaction, in a single transaction or through a
series of related transactions, (any of the foregoing, an "Asset
Sale"), unless (l)(a) within 270 days after the date of such Asset
Sale, the Net Cash Proceeds therefrom (the "Asset Sale Offer
Amount") are applied to the optional redemption of the Notes in
accordance with the terms of the Indenture or to the repurchase of
the Notes pursuant to an irrevocable, unconditional cash offer (the
"Asset Sale Offer") to repurchase Notes at a purchase price of 100%
of principal amount (the "Asset Sale Offer Price") together with
accrued and unpaid interest and Liquidated Damages, if any, to the
date of payment, made within 240 days of such Asset Sale or (b)
within 240 days following such Asset Sale, the Asset Sale Offer
Amount is (i) invested (or committed, pursuant to a binding
commitment subject only to reasonable, customary closing
conditions, to be invested, and in fact is so invested, within an
additional 90 days) in assets and property (other than notes,
bonds, obligation and securities, except in connection with the
acquisition of a Wholly Owned Subsidiary) which in the good faith
reasonable judgment of the Board will immediately constitute or be
a part of a Related Business of the Company or such Subsidiary (if
it continues to be a Subsidiary) immediately following such
transaction or (ii) used to reduce Indebtedness permitted pursuant
to paragraph (b) of the definition "Permitted Indebtedness", (2) at
least 85% of the total consideration received for such Asset Sale
or series of related Asset Sales consists of Cash or Cash
Equivalents, (3) no Default or Event of Default shall have occurred
and be continuing at the time of, or would occur after giving
effect, on a pro forma basis, to, such Asset Sale, and (4) the
Board of Directors of the Company determines in good faith that the
Company or such Subsidiary, as applicable, receives fair market
value for such Asset Sale.
The Indenture provides that an acquisition of Notes pursuant
to an Asset Sale Offer may be deferred until the accumulated Net
Cash Proceeds from Asset Sales not applied to the uses set forth in
(l) above (the "Excess Proceeds") exceeds $5 million and that each
Asset Sale Offer shall remain open for 20 Business Days following
its commencement (the "Asset Sale Offer Period"). Upon expiration
of the Asset Sale Offer Period, the Company shall apply the Asset
Sale Offer Amount plus an amount equal to accrued and unpaid
interest and Liquidated Damages, if any, to the purchase of all
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Notes properly tendered (on a pro rata basis if the Asset Sale
Offer Amount is insufficient to purchase all Notes so tendered) at
the Asset Sale Offer Price (together with accrued interest). To the
extent that the aggregate amount of Notes tendered pursuant to an
Asset Sale Offer is less than the Asset Sale Offer Amount, the
Company may use any remaining Net Cash Proceeds for general
corporate purposes as otherwise permitted by the Indenture and
following each Asset Sale Offer the Excess Proceeds amount shall be
reset to zero. For purposes of (2) above, total consideration
received means the total consideration received for such Asset
Sales minus the amount of (a) Indebtedness which is not
Subordinated Indebtedness assumed by a transferee which assumption
permanently reduces the amount of Indebtedness outstanding on the
Issue Date or permitted pursuant to paragraph (d), (e) or (f) of
the definition "Permitted Indebtedness" and (b) property that
within 30 days of such Asset Sale is converted into Cash or Cash
Equivalents).
Notwithstanding the foregoing provisions of the prior two
paragraphs:
(i) the Company and its Subsidiaries may, in the ordinary
course of business, convey, sell, transfer, assign or
otherwise dispose of inventory acquired and held for
resale in the ordinary course of business;
(ii) the Company and its Subsidiaries may convey, sell,
transfer, assign or otherwise dispose of accounts
receivable and notes receivable consistent with
past practice for face value;
(iii) the Company and its Subsidiaries may convey, sell,
transfer, assign or otherwise dispose of assets
pursuant to and in accordance with the covenant
"Limitation on Merger, Sale or Consolidation";
(iv) the Company and its Subsidiaries may sell or
dispose of damaged, worn out or other obsolete
property in the ordinary course of business so long
as such property is no longer necessary for the
proper conduct of the business of the Company or
such Subsidiary, as applicable;
(v) the Company and its Subsidiaries may convey, sell,
transfer, assign or otherwise dispose of assets to the
Company or any of its wholly owned Guarantors;
(vi) the Company and its Subsidiaries may grant Liens not
prohibited by this Indenture; and
(vii) the Company and its Subsidiaries may convey, sell,
transfer, assign or otherwise dispose of assets having a
value of $1 million or less in a single transaction or a
series of related transactions.
All Net Cash Proceeds from an Event of Loss shall be invested
in the business of the Company, used for prepayment of
Indebtedness, or used to repurchase Notes, all within the period
and as otherwise provided above in clause 1(a) or 1(b) of the first
paragraph of this section.
In addition to the foregoing, the Company will not, and will
not permit any Subsidiary to, directly or indirectly make any Asset
Sale of any of the Equity Interests of any Subsidiary except (i)
pursuant to an Asset Sale of all the Equity Interests of such
Subsidiary or (ii) pursuant to an Asset Sale of shares of common
stock of TES with no preferences or special rights or privileges
and with no redemption or prepayment privileges, provided that
after such sale the Company or its Subsidiaries own at least 50% of
the voting and economic interest of the Capital Stock of TES.
Notwithstanding the foregoing provisions, the Company or TES
may contribute all or substantially all the assets or Equity
Interests of TES to a joint venture in which the Company or its
Subsidiaries own no less than 50% of the voting and economic
interests.
Any Asset Sale Offer shall be made in compliance with all
applicable laws, rules, and regulations, including, if applicable,
Regulation 14E of the Exchange Act and the rules thereunder and all
other applicable Federal and state securities laws. To the extent
that the provisions of any securities laws or regulations conflict
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with the terms hereof, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have
breached its obligations hereunder by virtue thereof.
Limitation on Transactions with Affiliates
The Indenture provides that neither the Company nor any of its
Subsidiaries will be permitted on or after the Issue Date to enter
into or suffer to exist any contract, agreement, arrangement or
transaction with any Affiliate (an "Affiliate Transaction"), or any
series of related Affiliate Transactions, (other than Exempted
Affiliate Transactions) (i) unless it is determined that the terms
of such Affiliate Transaction are fair and reasonable to the
Company, and no less favorable to the Company than could have been
obtained in an arm's length transaction with a non-Affiliate, and
(ii) if involving consideration to either party in excess of $2.5
million, unless such Affiliate Transaction(s) is evidenced by an
Officers' Certificate addressed and delivered to the Trustee
certifying that such Affiliate Transaction (or Transactions) has
been approved by a majority of the members of the Board of
Directors that are disinterested in such transaction and (iii) if
involving consideration to either party in excess of $5 million,
unless in addition the Company, prior to the consummation thereof,
obtains a written favorable opinion as to the fairness of such
transaction to the Company from a financial point of view from an
accounting, appraisal or investment banking firm of national
reputation. A member of the Board of Directors of the Company that
is a non-employee director of LSB will be deemed disinterested for
purposes of this covenant. For purposes of compliance with clauses
(ii) and (iii) above, total consideration for a series of related
Affiliate Transactions involving purchases or sales entered into in
the ordinary course of business will only include purchases or
sales made in the last twelve months ended on the date of the most
recent purchase.
Limitation on Merger, Sale or Consolidation
The Indenture provides that the Company will not, directly or
indirectly, consolidate with or merge with or into another Person
or sell, lease, convey or transfer all or substantially all of its
assets (computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another Person
or group of affiliated Persons or adopt a Plan of Liquidation,
unless (i) either (a) the Company is the continuing entity or (b)
the resulting, surviving or transferee entity or, in the case of a
Plan of Liquidation, the entity which receives the greatest value
from such Plan of Liquidation is a corporation organized under the
laws of the United States, any state thereof or the District of
Columbia and expressly assumes by supplemental indenture all of the
obligations of the Company in connection with the Notes and the
Indenture; (ii) no Default or Event of Default shall exist or shall
occur immediately after giving effect on a pro forma basis to such
transaction; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Net Worth of the
resulting, surviving or transferee entity or, in the case of a Plan
of Liquidation, the entity which receives the greatest value from
such Plan of Liquidation is at least equal to the Consolidated Net
Worth of the Company immediately prior to such transaction; and
(iv) immediately after giving effect to such transaction on a pro
forma basis, the resulting, surviving or transferee entity or, in
the case of a Plan of Liquidation, the entity which receives the
greatest value from such Plan of Liquidation would immediately
thereafter be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company or consummation of
a Plan of Liquidation in accordance with the foregoing, the
successor corporation formed by such consolidation or into which
the Company is merged or to which such transfer is made or, in the
case of a Plan of Liquidation, the entity which receives the
greatest value from such Plan of Liquidation shall succeed to, and
be substituted for, and may exercise every right and power of, the
Company under the Indenture with the same effect as if such
successor corporation had been named therein as the Company, and
the Company shall be released from the obligations under the Notes
and the Indenture except with respect to any obligations that arise
from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise) of all or substantially all of the
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properties and assets of one or more Subsidiaries, the Company's
interest in which constitutes all or substantially all of the
properties and assets of the Company shall be deemed to be the
transfer of all or substantially all of the properties and assets
of the Company.
Limitation on Lines of Business
The Indenture provides that neither the Company nor any of its
Subsidiaries shall directly or indirectly engage to any substantial
extent in any line or lines of business activity other than that
which, in the reasonable good faith judgment of the Board of
Directors of the Company, is a Related Business.
Future Subsidiary Guarantors
The Indenture provides that all present Subsidiaries (except
for EDNC) and future Subsidiaries of the Company jointly and
severally will guaranty irrevocably and unconditionally all
principal, premium, if any, and interest and Liquidated Damages, if
any, on the Notes on a senior basis.
Release of Guarantors
The Indenture provides that no Guarantor shall consolidate or
merge with or into (whether or not such Guarantor is the surviving
Person) another Person unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all
the obligations of such Guarantor pursuant to a supplemental
indenture in form reasonably satisfactory to the Trustee, pursuant
to which such Person shall unconditionally guarantee, on a senior
basis, all of such Guarantor's obligations under such Guarantor's
guarantee and the Indenture on the terms set forth in the
Indenture; and (ii) immediately before and immediately after giving
effect to such transaction on a pro forma basis, no Default or
Event of Default shall have occurred or be continuing.
Upon the sale or disposition (whether by merger, stock
purchase, asset sale or otherwise) of a Guarantor or all or
substantially all of its assets to an entity which is not a
Guarantor, which transaction is otherwise in compliance with the
Indenture (including, without limitation, the provisions of the
covenant "Limitations on Sale of Assets and Subsidiary Stock"),
such Guarantor will be deemed released from its obligations under
its Guarantee of the Notes; provided, however, that any such
termination shall occur only to the extent that all obligations of
such Guarantor under all of its guarantees of, and under all of its
pledges of assets or other security interests which secure, any
Indebtedness of the Company or any other Subsidiary shall also
terminate upon such release, sale or transfer.
Limitation on Status as Investment Company
The Indenture prohibits the Company and its Subsidiaries from
being required to register as an "investment company" (as that term
is defined in the Investment Company Act of 1940, as amended), or
from otherwise becoming subject to regulation under the Investment
Company Act.
Limitation on Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not
permit any Subsidiary to, directly or indirectly, enter into any
sale and leaseback transaction unless (a) immediately after giving
pro forma effect to such sale and leaseback transaction (the
Attributable Value of such sale and leaseback transaction being
deemed to be Indebtedness of the Company, if not otherwise treated
so pursuant to the definition of Indebtedness), the Company could
incur at least $1.00 of additional Indebtedness pursuant to the
Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital
Stock" and (b) such sale and leaseback transaction complies with
the covenant "Limitation on Sale of Assets and Subsidiary Stock."
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Payments for Consent
Neither the Company nor any of its Subsidiaries shall,
directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any
Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture, the Notes or
the Guarantees unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes who so consent, waive
or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement, which
solicitation documents will be mailed to all Holders of the Notes
a reasonable amount of time prior to the expiration of such
solicitation.
LSB Note
In accordance with the terms of the Indenture, the Promissory
Note, dated November 26, 1997 (the "LSB Note"), representing the
$10 million of proceeds of the Offering loaned to LSB (i) bears
interest at the rate of 10 3/4%, payable semiannually on June 1 and
December 1 of each year commencing June 1, 1998, (ii) matures on
December 1, 2007, (iii) is prepayable at par at any time prior to
maturity, (iv) is mandatorily prepayable with 50% of the net cash
proceeds (net of associated liabilities and expenses), within 30
days of the receipt of net cash proceeds, from the sale of assets
of LSB or its subsidiaries other than the Company or subsidiaries
of the Company (subject to certain customary exceptions (including
sales of inventory, accounts receivable and obsolete equipment),
currency exchangeability and transferability restrictions and an
exception for sales of assets having a value of $500,000 or less in
a single transaction or through a series of related transactions)
to the extent that such net cash proceeds are not used to prepay
other senior indebtedness which requires such prepayment under its
terms, and (v) provides that the note may not be amended by the
Company without the consent of a majority aggregate principal
amount of the Notes then outstanding. The LSB Note will be a senior
unsecured obligation of LSB and will rank pari passu in right of
payment will all existing and future senior indebtedness of LSB.
Reports
The Indenture provides that, whether or not the Company is
subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall deliver to the Trustee, to each
Holder and to each prospective Holder who so requests annual and
quarterly financial statements substantially equivalent to
financial statements that would have been included in reports filed
with the Commission, if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including,
in each case, a management's discussion and analysis of financial
condition and results of operations and, with respect to annual
information only, a report thereon by the Company's certified
independent public accountants. In addition, the Company has agreed
that it will file such reports with the Commission, whether or not
the Company is subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act, provided the Commission will accept
such filings.
Events of Default and Remedies
The Indenture defines an Event of Default as:
(i) the failure by the Company to pay any installment of
interest or Liquidated Damages on the Notes as and when
the same becomes due and payable and the continuance of
any such failure for 30 days,
(ii) the failure by the Company to pay all or any part
of the principal, or premium, if any, on the Notes
when and as the same becomes due and payable at
maturity, redemption, by acceleration or otherwise,
including, without limitation, payment of the
Change of Control Purchase Price or the Asset Sale
Offer Price, or otherwise,
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(iii) the failure by the Company or any Subsidiary to
observe or perform any other covenant or agreement
contained in the Notes or the Indenture and the
continuance of such failure for a period of 30 days
after written notice is given to the Company by the
Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal
amount of the Notes outstanding,
(iv) certain events of bankruptcy, insolvency or
reorganization in respect of the Company or any of
its Subsidiaries,
(v) a default in Indebtedness of the Company or any of its
Subsidiaries with an aggregate principal amount in excess
of $5 million at any one time (a) resulting from the
failure to pay principal or interest or (b) as a result
of which the maturity of such Indebtedness has been
accelerated prior to its stated maturity, and
(vi) final unsatisfied judgments not covered by
insurance aggregating in excess of $5 million, at
any one time rendered against the Company or any of
its Subsidiaries and not stayed, bonded or
discharged within 60 days.
The Indenture provides that if a Default occurs and is
continuing, the Trustee must, within 90 days after the occurrence
of such Default, give to the Holders notice of such Default.
If an Event of Default occurs and is continuing (other than an
Event of Default specified in clause (iv), above, relating to the
Company or any Subsidiary), then in every such case, unless the
principal of all of the Notes shall have already become due and
payable, either the Trustee or the Holders of 25% in aggregate
principal amount of the Notes then outstanding, by notice in
writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal and premium, if
any, determined as set forth below, and accrued interest and
Liquidated Damages, if any, thereon to be due and payable
immediately. If an Event of Default specified in clause (iv),
above, relating to the Company or any Subsidiary occurs, all
principal and premium, if any, and accrued interest and Liquidated
Damages, if any, thereon will be immediately due and payable on all
outstanding Notes without any declaration or other act on the part
of Trustee or the Holders. The Holders of a majority in aggregate
principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-
payment of the principal of, premium, if any, and interest and
Liquidated Damages on the Notes which have become due solely by
such acceleration, have been cured or waived, except on default
with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority.
In the case of any Event of Default occurring by reason of any
willful action (or inaction) taken (or not taken) by or on behalf
of the Company with the intention of avoiding payment of the
premium that the Company would have had to pay if the Company then
had elected to redeem the Notes pursuant to the optional redemption
provisions of the Indenture, an equivalent premium shall also
become and be immediately due and payable to the extent permitted
by law upon the acceleration of the Notes. If an Event of Default
occurs prior to December 1, 2002 by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company
with the intention of avoiding the prohibition on redemption of the
Notes prior to December 1, 2002, then the premium specified in the
Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
Prior to the declaration of acceleration of the maturity of
the Notes, the Holders of a majority in aggregate principal amount
of the Notes at the time outstanding may waive on behalf of all the
Holders any default, except a default with respect to any provision
requiring a supermajority approval to amend, which default may only
be waived by such a supermajority, and except a default in the
payment of principal of or interest on any Note not yet cured or a
default with respect to any covenant or provision which cannot be
modified or amended without the consent of the Holder of each
outstanding Note affected. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee will
be under no obligation to exercise any of its rights or powers
under the Indenture at the request, order or direction of any of
the Holders, unless such Holders have offered to the Trustee
reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in
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aggregate principal amount of the Notes at the time outstanding
will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee.
The Company is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture and the Company
is required, upon becoming aware of any default or Event of
Default, to deliver to the Trustee a statement specifying such
default or Event of Default.
Legal Defeasance and Covenant Defeasance
The Indenture provides that the Company may, at its option and
at any time, elect to have its obligations and the obligations of
the Guarantors discharged with respect to the outstanding Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company
shall be deemed to have paid and discharged the entire indebtedness
represented, and the Indenture shall cease to be of further effect
as to all outstanding Notes and Guarantees, except as to (i) rights
of Holders to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are
due from the trust funds; (ii) the Company's obligations with
respect to such Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes,
and the maintenance of an office or agency for payment and money
for security payments held in trust; (iii) the rights, powers,
trust, duties, and immunities of the Trustee, and the Company's
obligations in connection therewith; and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the
Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including nonpayment, nonpayment of guarantees,
bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance, (i) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders of the Notes,
U.S. legal tender, U.S. Government Obligations or a combination
thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest and Liquidated
Damages, if any, on such Notes on the stated date for payment
thereof or on the redemption date of such principal or installment
of principal of, premium, if any, or interest or Liquidated
Damages, if any, on such Notes, and the Holders of Notes must have
a valid, perfected, exclusive security interest in such trust; (ii)
in the case of the Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to Trustee confirming that (A) the Company
has received from, or there has been published by the Internal
Revenue Service, a ruling or (B) since the date of the Indenture,
there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion
of counsel shall confirm that, the Holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as
a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to such Trustee confirming that
the Holders of such Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing
on the date of such deposit or, insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the
Indenture or any other material agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an Officers' Certificate stating that
the deposit was not made by the Company with the intent of
preferring the holders of such Notes over any other creditors of
the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; and (vii)
the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that the
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conditions precedent provided for in, in the case of the Officers'
Certificate, clauses (i) through (vi) and, in the case of the
opinion of counsel, clauses (i) (with respect to the validity and
perfection of the security interest), (ii), (iii) and (v) of this
paragraph have been complied with.
If the funds deposited with the Trustee to effect Legal
Defeasance or Covenant Defeasance are insufficient to pay the
principal of, premium, if any, and interest on the Notes when due,
then the obligations of the Company under the Indenture will be
revived and no such defeasance will be deemed to have occurred.
Amendments and Supplements
The Indenture contains provisions permitting the Company, the
Guarantors and the Trustee to enter into a supplemental indenture
for certain limited purposes without the consent of the Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding,
the Company, the Guarantors and the Trustee are permitted to amend
or supplement the Indenture or any supplemental indenture or modify
the rights of the Holders; provided that no such modification may
without the consent of Holders of at least 66 2/3% in aggregate
principal amount of Notes at the time outstanding modify the
provisions (including the defined terms used therein) of the
covenant "Repurchase of Notes at the Option of the Holder upon a
Change of Control" and "Limitation on Sale of Assets and Subsidiary
Stock" in a manner adverse to the Holders and provided that no such
modification may, without the consent of each Holder affected
thereby (i) change the Stated Maturity on any Note, or reduce the
principal amount thereof or the rate (or extend the time for
payment) of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the
coin or currency in which, any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption
Date), or reduce the Change of Control Purchase Price or the Asset
Sale Offer Price or alter the provisions (including the defined
terms used therein) regarding the right of the Company to redeem
the Notes in a manner adverse to the Holders, or (ii) reduce the
percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment,
supplemental indenture or waiver provided for in the Indenture, or
(iii) modify any of the waiver provisions, except to increase any
required percentage or to provide that certain other provisions of
the Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Note affected thereby, or (iv) cause
the Notes or any Guarantee to become subordinate in right of
payment to any other Indebtedness.
No Personal Liability of Partners, Stockholders, Officers,
Directors
The Indenture provides that no direct or indirect stockholder,
employee, officer or director, as such, past, present or future of
the Company, the Guarantors or any successor entity shall have any
personal liability in respect of the obligations of the Company or
the Guarantors under the Indenture or the Notes by reason of his or
its status as such stockholder, employee, officer or director,
except to the extent such Person is the Company or a Guarantor.
Book-Entry, Delivery and Form
The New Notes will be issued in fully registered form, without
coupons, in denominations of $1,000 principal amount and integral
multiples thereof.
Global Notes; Book-Entry Form. Except as set forth in the
next paragraph, the New Notes will initially be issued in the form
of one or more global notes (collectively, the "Global Note"). The
Global Note will be deposited upon issuance (the "Closing Date")
with the trustee as custodian for The Depository Trust Company, New
York, New York ("DTC") and registered in the name of Cede & Co.
("Cede") as DTC's nominee.
Notes that were issued as described below under "Certificated
Securities" will be issued in the form of registered definitive
certificates (the "Certificated Securities"). Such Certificated
Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, the exchange by a qualified
institutional buyer for an interest in the Global Note representing
the principal amount of Notes being transferred.
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An investor may hold its interests in the Global Note directly
through DTC if such investor is a participant in DTC, or indirectly
through organizations which are participants in DTC (the
"Participants"). Transfers between Participants will be effected in
the ordinary way in accordance with DTC rules and will be settled
in same-day funds. The laws of some states require that certain
Persons take physical delivery of securities in definitive form.
Consequently, the ability to transfer a beneficial interest in the
Global Note to such Person may be limited.
Investors who are not Participants may beneficially own
interests in the Global Note held by DTC only through Participants,
or certain banks, brokers, dealers, trust companies and other
parties that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect
Participants"). So long as Cede, as nominee of DTC, is the
registered owner of the Global Note, Cede for all purposes will be
considered the sole holder of the Global Note. Except as provided
below, owners of beneficial interests in the Global Note will not
be entitled to have certificates registered in their names, will
not receive or be entitled to receive physical delivery of
certificates in definitive form, and will not be considered holders
thereof.
Payment of principal, redemption price and purchase price of,
and interest on the Global Note will be made to Cede, the nominee
for DTC, as the registered owner of the Global Note by wire
transfer of immediately available funds. None of the Company, the
Trustee or any paying agent will have any responsibility or
liability for any aspect of the records relating to, or payments
made on account of, beneficial ownership interests in the Global
Note or for maintaining, supervising, or reviewing any records
relating to such beneficial ownership interests.
The Company has been informed by DTC that, with respect to any
payment of principal, redemption price and purchase price of, and
interest on the Global Note, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments
in amounts proportionate to their respective beneficial interests
in the Notes represented by the Global Note, as shown on the
records of DTC, unless DTC has reason to believe that it will not
receive payment on such payment date. Payments by Participants to
owners of beneficial interests in Notes represented by the Global
Note held through such Participants will be the responsibility of
such Participants, as is now the case with securities held for the
accounts of customers registered in "street name."
Because DTC can only act on behalf of Participants, who in
turn act on behalf of Indirect Participants and certain banks, the
ability of a Person having a beneficial interest in Notes
represented by the Global Note to pledge such interest to Persons
or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar or
paying agent under the Indenture) will have any responsibility for
the performance by DTC or its Participants or Indirect Participants
of their respective obligations under the rules and procedures
governing their operations. DTC has advised the Company that it
will take any action permitted to be taken by a holder of Notes
only at the direction of one or more Participants to whose account
with DTC interests in the Global Note are credited and only in
respect of the principal amount of the Notes represented by the
Global Note as to which such Participant or Participants has or
have given such direction.
DTC has advised the Company as follows: DTC is a limited
purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and
a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic
book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other
organizations such as the Initial Purchaser. Certain of such
Participants (or their representatives), together with other
entities, own DTC. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that
clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
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Although DTC has agreed to the foregoing procedures in order
to facilitate transfers of interests in the Global Note among
Participants of DTC, they are under no obligation to perform or
continue to perform such procedures, and such procedures may be
discontinued at any time. If DTC is at any time unwilling or unable
to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, the Company will cause
Notes to be issued in definitive form in exchange for the Global
Note. None of the Company, the Trustee or any of their respective
agents will have any responsibility for the performance by DTS,
their Participants or Indirect Participants of their respective
obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial
ownership interests in Global Note.
Certificated Securities. An investor may request that their
Note be issued in certificated form, and may request at any time
that their interest in a Global Note be exchanged for a Note in
certificated form. Finally, certificated Notes may be issued in
exchange for Notes represented by the Global Note if no successor
depositary is appointed by the Company or in certain other
circumstances set forth in the Indenture.
Same-Day Settlement and Payment. The Indenture requires that
payments in respect of the Notes represented by the Global Note
(including principal, redemption price, purchase price and
interest) be made by wire transfer of immediately available funds
to the accounts specified by Cede, the nominee for DTC. With
respect to certificated securities, the Company will make all
payments of principal, redemption price, purchase price and
interest by wire transfer of immediately available funds to the
accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered
address. Secondary trading in long-term Notes and debentures of
corporate issuers not held in DTC is generally settled in clearing-
house or next-day funds. In contrast, the New Notes represented by
the Global Note are expected to be eligible to trade in the PORTAL
Market and to trade in the Depositary's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such
Notes will, therefore, be required by the Depositary to be settled
in immediately available funds. The Company expects that secondary
trading in the certificated securities will also be settled in
immediately available funds.
Concerning the Trustee
The Indenture contains certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or
otherwise. The Holders of a majority in principal amount of the
then outstanding Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to certain exceptions.
The Indenture provides that in case of Event of Default will occur
(which will not be cured), the Trustee will be required, in the
exercise of its power, to use the same degree of care and skill as
a prudent person would exercise or use under the circumstances in
the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request of any Holder of
Notes, unless such Holder will have offered to the Trustee
security and indemnity satisfactory to it against any loss,
liability or expense.
Certain Definitions
"Acquired Indebtedness" means Indebtedness or Disqualified
Capital Stock of any Person existing at the time such Person
becomes a Subsidiary of the Company, including by designation, or
is merged or consolidated into or with the Company or one of its
Subsidiaries.
"Acquisition" means the purchase or other acquisition of any
Person or substantially all the assets of any Person by any other
Person, whether by purchase, merger, consolidation, or other
transfer, and whether or not for consideration.
"Affiliate" means any Person directly or indirectly
controlling or controlled by or under direct or indirect common
control with the Company. For purposes of this definition, the term
"control" means the power to direct the management and policies of
a Person, directly or through one or more intermediaries, whether
through the ownership of voting securities, by contract, or
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otherwise, provided that, with respect to ownership interest in the
Company and its Subsidiaries a Beneficial Owner of 10% or more of
the total voting power normally entitled to vote in the election of
directors, managers or trustees, as applicable, shall for such
purposes be deemed to constitute control.
"Attributable Value" means, as to any particular lease under
which any Person is at the time liable other than a Capitalized
Lease Obligation, and at any date as of which the amount thereof is
to be determined, the total net amount of rent required to be paid
by such Person under such lease during the remaining term thereof,
including any period for which such lease has been, or may, at the
option of the lessor, be extended, discounted from the last date of
such term to the date of determination at a rate per annum equal to
the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount
of rent required to be paid under any lease for any such period
shall be the aggregate amount of rent payable by the lessee with
respect to such period after excluding amounts required to be paid
on account of insurance, taxes, assessments, utility, operating and
labor costs and similar charges. "Attributable Value" means, as to
a Capitalized Lease Obligation under which any Person is at the
time liable and at any date as of which the amount thereof is to be
determined, the discounted present value of the rental obligations
of such Person, as lessee, required to be capitalized on the
balance sheet of such Person in conformity with GAAP.
"Average Life" means, as of the date of determination, with
respect to any security or instrument, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years
from the date of determination to the date or dates of each
successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective
principal (or redemption) payment by (ii) the sum of all such
principal (or redemption) payments.
"Beneficial Owner" or "beneficial owner" has the meaning
attributed to it in Rules l3d-3 and l3d-5 under the Exchange Act
(as in effect on the Issue Date), whether or not applicable, except
that a "Person" shall be deemed to have "beneficial ownership" of
all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of
time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New
York, New York are authorized or obligated by law or executive
order to close.
"Capital Stock" means, with respect to any corporation, any
and all shares, interests, rights to purchase (other than
convertible or exchangeable Indebtedness that is not itself
otherwise capital stock), warrants, options, participations or
other equivalents of or interests (however designated) in stock
issued by that corporation.
"Capitalized Lease Obligation" means, as applied to any
Person, any lease of any property (whether real, personal or mixed)
of which the discounted present value of the rental obligations of
such Person, as lessee, in conformity with GAAP, is required to be
capitalized on the balance sheet of such Person.
"Cash Equivalent" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and
credit of the United States of America is pledged in support
thereof) or (ii) time deposits and certificates of deposit and
commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus
in excess of $500 million and (iii) commercial paper issued by
others rated at least A-1 or the equivalent thereof by Standard &
Poor's Corporation or at least P-1 or the equivalent thereof by
Moody's Investors Service, Inc., and in the case of each of (i),
(ii), and (iii) maturing within one year after the date of
acquisition.
"Consolidated Cash Flow" means, with respect to any Person,
for any period, the Consolidated Net Income of such Person for such
period adjusted to add thereto (to the extent deducted in
determining Consolidated Net Income), without duplication, the sum
of (i) consolidated income tax expense, (ii) consolidated
depreciation and amortization expense, provided that consolidated
depreciation and amortization of a Subsidiary that is a less than
Wholly Owned Subsidiary shall only be added to the extent of the
equity interest of the Company in such Subsidiary, (iii) other non-
cash charges of the Company and its Subsidiaries reducing
Consolidated Net Income for such period, (iv) Consolidated Fixed
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Charges and (v) any premium or penalty paid by the Company or any
of its Subsidiaries to prepay indebtedness as described in "Use of
Proceeds."
"Consolidated Coverage Ratio" of any Person on any date of
determination (the "Transaction Date") means the ratio, on a pro
forma basis, of (a) the aggregate amount of Consolidated Cash Flow
of such Person attributable to continuing operations and businesses
(exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of) for the Reference Period
to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of, but only to the extent
that the obligations giving rise to such Consolidated Fixed Charges
would no longer be obligations contributing to such Person's
Consolidated Fixed Charges subsequent to the Transaction Date)
during the Reference Period; provided, that for purposes of such
calculation, (i) Acquisitions which occurred during the Reference
Period or subsequent to the Reference Period and on or prior to the
Transaction Date shall be assumed to have occurred on the first day
of the Reference Period, (ii) transactions giving rise to the need
to calculate the Consolidated Coverage Ratio shall be assumed to
have occurred on the first day of the Reference Period, (iii) the
incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date (and the
application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness) shall be assumed to have
occurred on the first day of such Reference Period, and (iv) the
Consolidated Fixed Charges of such Person attributable to interest
on any Indebtedness or dividends on any Disqualified Capital Stock
bearing a floating interest (or dividend) rate shall be computed on
a pro forma basis as if the average rate in effect from the
beginning of the Reference Period to the Transaction Date had been
the applicable rate for the entire period, unless such Person or
any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period
immediately following the Transaction Date) that has the effect of
fixing the interest rate on the date of computation, in which case
such rate (whether higher or lower) shall be used.
"Consolidated Fixed Charges" of any Person means, for any
period, the aggregate amount (without duplication and determined in
each case in accordance with GAAP) of (a) interest expensed or
capitalized, paid, accrued, or scheduled to be paid or accrued
(including, in accordance with the following sentence, interest
attributable to Capitalized Lease Obligations) of such Person and
its Consolidated Subsidiaries during such period, including (i)
original issue discount and non-cash interest payments or accruals
on any Indebtedness, (ii) the interest portion of all deferred
payment obligations, and (iii) all commissions, discounts and other
fees owed with respect to bankers' acceptances and letters of
credit financings and currency and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such
period, and (b) the amount of dividends accrued or payable (or
guaranteed) by such Person or any of its Consolidated Subsidiaries
in respect of preferred stock (other than by Subsidiaries of such
Person to such Person or such Person's Wholly Owned Subsidiaries).
For purposes of this definition, interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably
determined in good faith by the Company to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person
for any period, the net income (or loss) of such Person and its
Consolidated Subsidiaries (determined on a consolidated basis in
accordance with GAAP) for such period, adjusted to exclude (only to
the extent included in computing such net income (or loss) and
without duplication): (a) all gains (but not losses) which are
either extraordinary (as determined in accordance with GAAP) or are
either unusual or nonrecurring (including any gain from the sale or
other disposition of assets outside the ordinary course of business
or from the issuance or sale of any capital stock), (b) the net
income, if positive, of any Person, other than a Wholly Owned
Consolidated Subsidiary, in which such Person or any of its
Consolidated Subsidiaries has an interest, except to the extent of
the amount of any dividends or distributions actually paid in cash
to such Person or a Wholly Owned Consolidated Subsidiary of such
Person during such period, but in any case not in excess of such
Person's pro rata share of such Person's net income for such
period, (c) the net income or loss of any Person acquired in a
pooling of interests transaction for any period prior to the date
of such acquisition, (d) the net income, if positive, of any of
such Person's Consolidated Subsidiaries to the extent that the
declaration or payment of dividends or similar distributions is not
at the time permitted by operation of the terms of its charter or
bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such
Consolidated Subsidiary.
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"Consolidated Net Worth" of any Person at any date means the
aggregate consolidated stockholders' equity of such Person (plus
amounts of equity attributable to preferred stock) and its
Consolidated Subsidiaries, as would be shown on the consolidated
balance sheet of such Person prepared in accordance with GAAP,
adjusted to exclude, to the extent included in calculating such
equity, (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of
such Person and its Consolidated Subsidiaries, (b) all upward
revaluations and other write-ups in the book value of any asset of
such Person or a Consolidated Subsidiary of such Person subsequent
to the Issue Date, and (c) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in Persons that are not
Subsidiaries.
"Consolidated Subsidiary" means, for any Person, each
Subsidiary of such Person (whether now existing or hereafter
created or acquired) the financial statements of which are
consolidated for financial statement reporting purposes with the
financial statements of such Person in accordance with GAAP.
"Credit Agreement" means each of (i) the credit agreement
dated November 21, 1997, by and among certain of the Company's
subsidiaries and BankAmerica Business Credit, Inc., and (ii) the
credit agreement, dated December 19, 1996, as amended, between TES
and Bank of New Zealand, Australia, including, in each case, any
related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, as such credit
agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to
time whether or not with the same agent, trustee, representative
lenders or holders, and, subject to the proviso to the next
succeeding sentence, irrespective of any changes in the terms and
conditions thereof. The credit agreement described under clause (i)
of this definition may be secured by accounts receivable,
inventory, proprietary rights, general intangibles, books and
records and the proceeds thereof and under clause (ii) of this
definition may be secured by all the assets of TES. Without
limiting the generality of the foregoing, the term "Credit
Agreement" shall include agreements in respect of Interest Swap and
Hedging Obligations with lenders party to the Credit Agreement and
shall also include any amendment, amendment and restatement,
renewal, extension, restructuring, supplement or modification to
any Credit Agreement and all refundings, refinancings and
replacements of any Credit Agreement, including any agreement (i)
extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder, so long as borrowers and issuers include one
or more of the Company and its Subsidiaries and their respective
successors and assigns, (iii) increasing the amount of Indebtedness
incurred thereunder or available to be borrowed thereunder,
provided that on the date such Indebtedness is incurred it would
not be prohibited by paragraph (b) of the definition "Permitted
Indebtedness," or (iv) otherwise altering the terms and conditions
thereof in a manner not prohibited by the terms hereof.
"Default" means any event, occurrence or condition that is or
with the passage of time or the giving of notice or both would be
an Event of Default.
"Disqualified Capital Stock" means (a) except as set forth in
(b), with respect to any Person, any Equity Interest of such Person
that, by its terms or by the terms of any security into which it is
convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time would be, required to be
redeemed or repurchased (including at the option of the holder
thereof) by such Person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes and (b) with
respect to any Subsidiary of such Person (including with respect to
any Subsidiary of the Company), any Equity Interest other than any
common equity with no preference, privileges, or redemption or
repayment provisions.
"Equity Interest" of any Person means any shares, interests,
participations or other equivalents (however designated) in such
Person's equity, and shall in any event include any Capital Stock
issued by, or partnership or membership interests in, such Person.
"Event of Loss" means, with respect to any property or asset,
any (i) loss, destruction or damage of such property or asset or
(ii) any condemnation, seizure or taking, by exercise of the power
of eminent domain or otherwise, of such property or asset, or
confiscation or requisition of the use of such property or asset.
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"Excluded Person" means any of (i) Jack E. Golsen, his
immediate family or a trust or similar entity existing for his
benefit or for the benefit of his immediate family or any Person
controlled directly or indirectly by him or his immediate family or
(ii) with respect to the Company, LSB.
"Exempted Affiliate Transaction" means (a) customary employee
compensation arrangements approved by a majority of disinterested
(as to such transactions) members of the Board of Directors of the
Company, (b) dividends or distributions permitted under the terms
of the covenant discussed above under "Limitation on Restricted
Payments" above and payable, in form and amount, on a pro rata
basis to all holders of Common Stock of the Company, (c)
transactions solely between the Company and any of its Subsidiaries
or solely among Subsidiaries of the Company, (d) any payments to
LSB pursuant to the Management Agreement, the Services Agreement
and the Tax Sharing Agreement, each as in effect on the date
hereof, (e) any purchase of goods or services from Affiliates who
are in turn purchasing such goods or services on an arm's length
basis from unaffiliated third parties and reselling them to the
Company and any of its Subsidiaries at their actual cost and (f)
any transactions as in effect on the Issue Date as described in
"Certain Relationships and Related Transactions IEC Lease,"
" Guaranty of Loans," " Revolving Credit Facility" and " Affiliate
Loans."
"GAAP" means United States generally accepted accounting
principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified
Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by
such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the
Issue Date.
"Indebtedness" of any Person means, without duplication, (a)
all liabilities and obligations, contingent or otherwise, of such
any Person, (i) in respect of borrowed money (whether or not the
recourse of the lender is to the whole of the assets of such Person
or only to a portion thereof), (ii) evidenced by bonds, notes,
debentures or similar instruments, (iii) representing the balance
deferred and unpaid of the purchase price of any property or
services, except trade payables incurred in the ordinary course of
its business, (iv) evidenced by bankers' acceptances or similar
instruments issued or accepted by banks, (v) relating to any
Capitalized Lease Obligation, or (vi) evidenced by a letter of
credit or a reimbursement obligation of such Person with respect to
any letter of credit; (b) all net obligations of such Person under
Interest Swap and Hedging Obligations; (c) all liabilities and
obligations of others of the kind described in the preceding clause
(a) or (b) that such Person has guaranteed or that is otherwise its
legal liability or which are secured by any assets or property of
such Person; and (d) any and all deferrals, renewals, extensions,
refinancing and refundings (whether direct or indirect) of, or
amendments, modifications or supplements to, any liability of the
kind described in any of the preceding clauses (a), (b) or (c), or
this clause (d), whether or not between or among the same parties;
and (e) all Disqualified Capital Stock of such Person (measured at
the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends). For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased
on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value to be determined in good
faith by the board of directors of the issuer (or managing general
partner of the issuer) of such Disqualified Capital Stock.
"Interest Swap and Hedging Obligation" means any obligation of
any Person pursuant to any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement, interest rate
exchange agreement, currency exchange agreement or any other
agreement or arrangement designed to protect against fluctuations
in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments
calculated by applying either a fixed or floating rate of interest
on a stated notional amount in exchange for periodic payments made
by such Person calculated by applying a fixed or floating rate of
interest on the same notional amount.
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"Investment" by any Person in any other Person means (without
duplication) (a) the acquisition (whether by purchase, merger,
consolidation or otherwise) by such Person (whether for cash,
property, services, securities or otherwise) of capital stock,
bonds, notes, debentures, partnership or other ownership interests
or other securities, including any options or warrants, of such
other Person; (b) the making by such Person of any deposit with, or
advance, loan or other extension of credit to, such other Person
(including the purchase of property from another Person subject to
an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any
such advance, loan or extension (but excluding accounts receivable
or deposits arising in the ordinary course of business); (c) other
than guarantees of Indebtedness of the Company or any Guarantor to
the extent permitted by the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," the
entering into by such Person of any guarantee of, or other credit
support or contingent obligation with respect to, Indebtedness or
other liability of such other Person; (d) the making of any capital
contribution by such Person to such other Person; and (e) the
designation by the Board of Directors of the Company of any person
to be an Unrestricted Subsidiary. The Company shall be deemed to
make an Investment in an amount equal to the fair market value of
the net assets of any subsidiary (or, if none of the Company or its
Subsidiaries has theretofore made an Investment in such subsidiary,
in an amount equal to the Investments being made), at the time that
such subsidiary is designated an Unrestricted Subsidiary, and any
property transferred to an Unrestricted Subsidiary from the Company
or a Subsidiary shall be deemed an Investment valued at its fair
market value at the time of such transfer, provided, however, if in
any such case such fair market value exceeds $2 million, such
determination of fair market value shall be based upon an opinion
or appraisal by an accounting, appraisal or investment banking firm
of national standing.
"Issue Date" means the date of first issuance of the Notes
under the Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), privilege, security interest, hypothecation or other
encumbrance upon or with respect to any property of any kind, real
or personal, movable or immovable, now owned or hereafter acquired.
"Net Cash Proceeds" means the aggregate amount of Cash or Cash
Equivalents received by the Company in the case of a sale of
Qualified Capital Stock and by the Company and its Subsidiaries in
respect of an Asset Sale plus, in the case of an issuance of
Qualified Capital Stock upon any exercise, exchange or conversion
of securities (including options, warrants, rights and convertible
or exchangeable debt) of the Company that were issued for cash on
or after the Issue Date, the amount of cash originally received by
the Company upon the issuance of such securities (including
options, warrants, rights and convertible or exchangeable debt)
less, in each case, the sum of all payments, fees, commissions and
expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in
connection with such Asset Sale or sale of Qualified Capital Stock,
and, in the case of an Asset Sale only, less the amount (estimated
reasonably and in good faith by the Company) of income, franchise,
sales and other applicable taxes required to be paid by the Company
or any of its respective Subsidiaries in connection with such Asset
Sale.
"Permitted Indebtedness" means any of the following:
(a) the Company and the Guarantors may incur Indebtedness
evidenced by the Notes and represented by the Indenture
up to the amounts specified therein as of the date
thereof;
(b) the Company and the Guarantors may incur Indebtedness
pursuant to the Credit Agreement (including any
Indebtedness issued to refinance, refund or replace such
Indebtedness) provided that the aggregate principal
amount of such Indebtedness outstanding at any time does
not exceed the greater of (i) $50 million (less, with
respect to this clause (i) only, the amount of any such
Indebtedness retired with the Net Cash Proceeds from any
Asset Sale or assumed by a transferee in an Asset Sale)
or (ii) the sum of 85% of accounts receivable that are
not more than 90 days past due and 60% of inventories,
determined in accordance with GAAP, plus, in each case,
accrued interest and such additional amounts as may be
deemed to be outstanding in the form of Interest Swap and
Hedging Obligations with lenders party to the Credit
Agreement or affiliates of such lenders;
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(c) the Company and the Guarantors, as applicable, may incur
Refinancing Indebtedness with respect to any Indebtedness
or Disqualified Capital Stock, as applicable, described
in clause (a) of this definition, incurred under the Debt
Incurrence Ratio test of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified
Capital Stock," or which is outstanding on the Issue Date
so long as such Refinancing Indebtedness is secured only
by the assets that secured the Indebtedness so
refinanced;
(d) the Company and the Guarantors may incur Indebtedness
representing Capitalized Lease Obligations in an
aggregate amount incurred on or after the Issue Date and
outstanding at any one time (including any Indebtedness
issued to refinance, replace, or refund such
Indebtedness) of up to $5 million, provided that this
clause (d) shall not limit the ability of the Company to
refinance outstanding Indebtedness pursuant to clause
(c);
(e) the Company and the Guarantors may incur other
Indebtedness not otherwise permitted pursuant to this
definition in an aggregate amount outstanding at any one
time (including any Indebtedness issued to refinance,
replace, or refund such Indebtedness) of up to $10
million;
(f) the Company and the Guarantors may incur Purchase Money
Indebtedness (including any Indebtedness issued to
refinance, replace or refund such Indebtedness),
provided, that (i) the aggregate amount of such
Indebtedness incurred on or after the Issue Date and
outstanding at any one time pursuant to this paragraph
(f) shall not exceed $2.5 million, and (ii) in each case,
such Indebtedness shall not constitute more than 100% of
the cost (determined in accordance with GAAP) to the
Company or such Guarantor, as applicable, of the property
so purchased or leased, provided that this clause (f)
shall not limit the ability of the Company to refinance
outstanding Indebtedness pursuant to clause (c);
(g) the Company and the Guarantors may incur Indebtedness
solely in respect of performance, surety or appeal bonds,
workers compensation claims, payment obligations in
connection with self insurance and other similar
requirements (to the extent that such incurrence does not
result in the incurrence of any obligation to repay any
obligation relating to borrowed money of others), all in
the ordinary course of business in accordance with
customary industry practices, in amounts and for the
purposes customary in the Company's industry;
(h) the Company may incur Indebtedness to any Wholly Owned
Subsidiary, and any Wholly Owned Subsidiary may incur
Indebtedness to any other Wholly Owned Subsidiary or to
the Company; provided that, in the case of Indebtedness
of the Company, such obligations shall be unsecured and
the date of any event that causes such Subsidiary to no
longer be a Wholly Owned Subsidiary shall be an
Incurrence Date;
(i) the Company and its Subsidiaries may incur Indebtedness
arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the
ordinary course of business (provided, however, that such
Indebtedness is extinguished within five business days of
notification of incurrence) or from endorsement of
instruments for deposit in the ordinary course of
business; and
(j) the Company and its Subsidiaries may suffer to exist
Indebtedness outstanding on the Issue Date.
"Permitted Investment" means (a) Investments in any of the
Notes; (b) Investments in Cash Equivalents; (c) Investments in
intercompany notes to the extent permitted under clause (h) of the
definition of "Permitted Indebtedness"; (d) any Investment in a
Person in a Related Business, which, after such Investment, becomes
a Subsidiary of the Company and a Guarantor of the Notes; (e)
Investments in the form of a contribution of all or substantially
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all the assets or Equity Interests of TES to a joint venture in
which the Company or its Subsidiaries own no less than 50% of the
economic and voting interests; and (f) other Investments not to
exceed $2 million.
"Permitted Lien" means (a) Liens created in connection with
the incurrence of Indebtedness under the Credit Agreement, as
described in the definition "Credit Agreement", regardless of
whether such Indebtedness is incurred under clause (b) of the
definition "Permitted Indebtedness" or the Debt Incurrence Ratio,
and Liens incurred in connection with the incurrence of
Indebtedness under Capitalized Lease Obligations and Purchase Money
Indebtedness, to the extent permitted by clause (d) or (f),
whichever is applicable, of the definition "Permitted
Indebtedness"; (b) Liens existing on the Issue Date; (c) Liens
imposed by governmental authorities for taxes, assessments or other
charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves
with respect thereto are maintained on the books of the Company in
accordance with GAAP; (d) statutory liens of carriers,
warehousemen, mechanics, materialmen, landlords, repairmen or other
like Liens arising by operation of law in the ordinary course of
business provided that (i) the underlying obligations are not
overdue for a period of more than 30 days, or (ii) such Liens are
being contested in good faith and by appropriate proceedings and
adequate reserves with respect thereto are maintained on the books
of the Company in accordance with GAAP; (e) Liens securing the
performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance
bonds and other obligations of a like nature incurred in the
ordinary course of business; (f) easements, rights-of-way, zoning,
similar restrictions and other similar encumbrances or title
defects which, singly or in the aggregate, do not in any case
materially detract from the value of the property subject thereto
(as such property is used by the Company or any of its
Subsidiaries) or interfere with the ordinary conduct of the
business of the Company or any of its Subsidiaries; (g) Liens
arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period not resulting in an
Event of Default with respect thereto; (h) pledges or deposits made
in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social
security legislation; (i) Liens securing the Notes; (j) Liens
securing Indebtedness of a Person existing at the time such Person
becomes a Subsidiary or is merged with or into the Company or a
Subsidiary or Liens securing Indebtedness incurred in connection
with an Acquisition, provided that such Liens were in existence
prior to the date of such acquisition, merger or consolidation,
were not incurred in anticipation thereof, and do not extend to any
assets other than those acquired; (k) leases or subleases granted
to other Persons in the ordinary course of business not materially
interfering with the conduct of the business of the Company or any
of its Subsidiaries or materially detracting from the value of the
relative assets of the Company or any Subsidiary; (l) Liens arising
from precautionary Uniform Commercial Code financing statement
filings regarding operating leases entered into by the Company or
any of its Subsidiaries in the ordinary course of business; and (m)
Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more
adverse to the Holders of the Notes than the terms of the Liens
securing such refinanced Indebtedness provided that the
Indebtedness secured is not increased and the Lien is not extended
to any additional assets or property.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock
company, trust, unincorporated organization or government
(including any agency or political subdivision thereof).
"Public Equity Offering" means an underwritten offering of
Common Stock of the Company for cash pursuant to an effective
registration statement under the Securities Act.
"Purchase Money Indebtedness" means any Indebtedness of such
Person to any seller or other Person incurred to finance the
acquisition (including in the case of a Capitalized Lease
Obligation, the lease) of any real or personal tangible property
which, in the reasonable good faith judgment of the Board of
Directors of the Company, is directly related to a Related Business
of the Company and which is incurred substantially concurrently
with such acquisition and is secured only by the assets so
financed.
"Qualified Capital Stock" means any Capital Stock of the
Company that is not Disqualified Capital Stock.
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"Qualified Exchange" means any legal defeasance, redemption,
retirement, repurchase or other acquisition of Capital Stock or
Indebtedness of the Company issued on or after the Issue Date with
the Net Cash Proceeds received by the Company from the
substantially concurrent sale of Qualified Capital Stock or any
exchange of Qualified Capital Stock for any Capital Stock or
Indebtedness of the Company issued on or after the Issue Date.
"Reference Period" with regard to any Person means the four
full fiscal quarters of such Person for which financial information
in respect thereof is available ended on or immediately preceding
any date upon which any determination is to be made pursuant to the
terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified
Capital Stock (a) issued in exchange for, or the proceeds from the
issuance and sale of which are used substantially concurrently to
repay, redeem, defease, refund, refinance, replace, discharge or
otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a
deferral or renewal of ((a) and (b) above are, collectively, a
"Refinancing"), any Indebtedness or Disqualified Capital Stock in
a principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, not to exceed (after deduction of (i)
reasonable and customary fees and expenses incurred in connection
with the Refinancing and (ii) any premium or penalty for prepayment
provided for in the instrument governing the Indebtedness so
refinanced or reasonably determined by the Board of Directors of
the Company as necessary to accomplish such Refinancing by means of
a tender offer or privately negotiated transaction) the lesser of
(i) the principal amount or, in the case of Disqualified Capital
Stock, liquidation preference, of the Indebtedness or Disqualified
Capital Stock so Refinanced and (ii) if such Indebtedness being
Refinanced was issued with an original issue discount, the accreted
value thereof (as determined in accordance with GAAP) at the time
of such Refinancing; provided, that (A) such Refinancing
Indebtedness of any Subsidiary of the Company shall only be used to
refinance outstanding Indebtedness or Disqualified Capital Stock of
such Subsidiary, (B) such Refinancing Indebtedness shall (x) not
have an Average Life shorter than the Indebtedness or Disqualified
Capital Stock to be so refinanced at the time of such Refinancing
and (y) in all respects, be no less subordinated or junior, if
applicable, to the rights of Holders of the Notes than was the
Indebtedness or Disqualified Capital Stock to be refinanced and (C)
such Refinancing Indebtedness shall have a final stated maturity or
redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or
Disqualified Capital Stock to be so refinanced.
"Related Business" means the business conducted (or proposed
to be conducted) by the Company and its Subsidiaries as of the
Issue Date and any and all businesses that in the good faith
judgment of the Board of Directors of the Company are materially
related businesses.
"Restricted Payment" means, with respect to any Person, (a)
the declaration or payment of any dividend or other distribution in
respect of Equity Interests of such Person or any parent or
Subsidiary of such Person, (b) any payment on account of the
purchase, redemption or other acquisition or retirement for value
of Equity Interests of such Person or any Subsidiary or parent of
such Person, (c) other than with the proceeds from the
substantially concurrent sale of, or in exchange for, Refinancing
Indebtedness, any purchase, redemption, or other acquisition or
retirement for value of, any payment in respect of any amendment of
the terms of or any defeasance of, any Subordinated Indebtedness,
directly or indirectly, by such Person or a parent or Subsidiary of
such Person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the
case may be, of such Indebtedness and (d) any Investment by such
Person, other than a Permitted Investment; provided, however, that
the term "Restricted Payment" does not include (i) any dividend,
distribution or other payment on or with respect to Equity
Interests of an issuer to the extent payable solely in shares of
Qualified Capital Stock of such issuer; or (ii) any dividend,
distribution or other payment to the Company, or to any of its
Wholly Owned Subsidiaries, by the Company or any of its
Subsidiaries.
"Stated Maturity," when used with respect to any Note, means
December 1, 2007.
"Subordinated Indebtedness" means Indebtedness of the Company
or a Guarantor that is subordinated in right of payment to the
Notes or such Guarantee, as applicable, in any respect or has a
stated maturity on or after the Stated Maturity.
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"Subsidiary," with respect to any Person, means (i) a
corporation a majority of whose Equity Interests with voting power,
under ordinary circumstances, to elect directors is at the time,
directly or indirectly, owned by such Person, by such Person and
one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, (ii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such
Person, or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof has at
least majority ownership interest, or (iii) a partnership in which
such Person or a Subsidiary of such Person is, at the time, a
general partner. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be a Subsidiary of the Company or of any
Subsidiary of the Company. Unless the context requires otherwise,
Subsidiary means each direct and indirect Subsidiary of the
Company.
"Unrestricted Subsidiary" means any subsidiary of the Company
that does not own any Capital Stock of, or own or hold any Lien on
any property of, the Company or any other Subsidiary of the Company
and that shall be designated an Unrestricted Subsidiary by the
Board of Directors of the Company; provided that (i) such
subsidiary shall not engage, to any substantial extent, in any line
or lines of business activity other than a Related Business, (ii)
neither immediately prior thereto nor after giving pro forma effect
to such designation would there exist a Default or Event of Default
and (iii) immediately after giving pro forma effect thereto, the
Company could incur at least $1.00 of Indebtedness pursuant to the
Debt Incurrence Ratio contained in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital
Stock." The Board of Directors of the Company may designate any
Unrestricted Subsidiary to be a Subsidiary, provided, that (i) no
Default or Event of Default is existing or will occur as a
consequence thereof and (ii) immediately after giving effect to
such designation, on a pro forma basis, the Company could incur at
least $1.00 of Indebtedness pursuant to the Debt Incurrence Ratio
contained in the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." Each such designation
shall be evidenced by filing with the Trustee a certified copy of
the resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the
foregoing conditions.
"Wholly Owned Subsidiary" means a Subsidiary all the Equity
Interests of which are owned by the Company or one or more wholly
owned Subsidiaries of the Company.
DESCRIPTION OF OTHER INDEBTEDNESS
Revolving Credit Facility
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
a $65 million Revolving Credit Facility. The Revolving Credit
Facility is evidenced by one loan agreement for the Company's
subsidiaries that are parties thereto and separate loan agreements
for LSB and its other subsidiaries that are not subsidiaries of the
Company.
Under the terms of the Revolving Credit Facility, subsidiaries
of the Company may borrow up to $65 million on a revolving basis
subject to limitations based on (i) 85% of the amount of eligible
receivables and 60% of the amount of eligible inventory of such
subsidiaries and (ii) the aggregate amount of borrowings under the
Revolving Credit Facility by LSB and certain subsidiaries that are
not subsidiaries of the Company. Under the Revolving Credit
Facility, LSB and certain subsidiaries of LSB that are not
subsidiaries of the Company have the right to borrow on a revolving
basis up to $24 million. Any amounts so 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 Revolving Credit Facility. The Revolving Credit
Facility, as it relates to the subsidiaries of the Company, is
secured by the accounts receivable, inventory, proprietary rights,
general intangibles, books and records and proceeds thereof. All of
the obligations under the Revolving Credit Facility, including
those of the Company's subsidiaries, are guaranteed and cross-
collateralized with certain assets by LSB. The Company has
guaranteed only the obligations of its subsidiaries under the
Revolving Credit Facility, and neither the Company nor its
subsidiaries that are parties to the Revolving Credit Facility have
guaranteed the obligations of LSB and other subsidiaries of LSB
that are not subsidiaries of the Company under the Revolving Credit
Agreement. In addition, a default by LSB and its other subsidiaries
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that are not subsidiaries of the Company under the Revolving Credit
Facility will not be considered a default of the Company's
subsidiaries under the Revolving Credit Facility. The agreement
terminates on December 31, 2000, subject to automatic renewal for
terms of 13 months each thereafter, unless terminated by either
party.
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 LSB's option, on the lender's LIBOR
rate plus 3.875% per annum (which rates are subject to increase or
reduction upon achieving specified availability and adjusted
tangible net worth, as defined).
The Revolving Credit Facility requires the Company to maintain
certain financial ratios (including adjusted tangible net worth and
debt ratios), limits the amount of capital expenditures, and
contains other covenants which restrict, among other things, (i)
the incurrence of additional debt (other than as allowed under the
loan agreements); (ii) the payment of dividends and other
distributions in respect of capital stock of the Company; (iii) the
making of certain investments; (iv) certain mergers, acquisitions
and dispositions; (v) the issuance of secured guarantees; (vi) the
granting of certain liens; and (vii) prepayment of debt (including
the Notes).
Events of default under the Revolving Credit Facility include,
among other things, for both the Company or borrower (i) the
failure to make payments of principal, interest, and fees, when
due; (ii) the inaccuracy of any representation and warranty when
made; (iii) the failure to perform covenants contained therein;
(iv) the occurrence of a change in control of LSB if any party is
or becomes the beneficial owner of more than 50% of the total
voting securities of LSB, except for Jack E. Golsen or members of
his immediate family; (v) default under any material agreement or
instrument (other than an agreement or instrument evidencing the
lending of money) which would have a material adverse effect on the
Company or its subsidiaries which are borrowers under the Revolving
Credit Facility, taken as a whole; (vi) a default under any other
agreement relating to borrowed money exceeding certain limits; and
(vii) customary bankruptcy or insolvency defaults.
The Company used a portion of the proceeds from the Initial
Offering to repay a substantial portion of the unpaid principal and
accrued interest due by certain of its subsidiaries under their
previous revolving credit facility. See "Use of Proceeds." The
Company intends to continue to borrow, from time to time, under the
Revolving Credit Facility as the Company may deem appropriate to
finance the working capital requirements of the Company and its
subsidiaries.
DSN Loans
DSN Corporation ("DSN"), a subsidiary of the Company, borrowed
from an unrelated lender approximately $18.8 million, which loans
have an unpaid balance, as of December 31, 1997, of approximately
$13.5 million ("DSN Loans"). DSN has used the loan proceeds to
acquire and/or construct assets for the Chemical Business,
including certain assets which are part of the Chemical Business'
El Dorado Facility. The proceeds of the DSN Loan were used to (i)
buy the assets relating to, and construct at, the Chemical
Business' existing El Dorado Facility, the DSN Plant, operated as
part of the Chemical Business' El Dorado Facility; (ii) construct
the Wilmington Plant; and, (iii) purchase ten rail cars ("10 Rail
Cars"). Under the terms of the DSN Loan, DSN has granted to the
lender a lien, mortgage and security interest in and to (a) the DSN
Plant, including (i) the Ground Lease between DSN (as lessee) and
Northwest Financial Corporation ("Northwest"), a subsidiary of the
Company (as lessor), in which DSN leased approximately five acres
of land at the El Dorado Facility, on which the DSN Plant is
located; (ii) the DSN Plant Ground Sublease between DSN (as lessor)
and EDC (as lessee), leasing to EDC the rights of DSN under the DSN
Plant Ground Lease; and (iii) the DSN Plant Equipment Lease between
DSN (as lessor) and EDC (as lessee), leasing to EDC the DSN Plant
and the equipment now or hereafter located at the DSN Plant or
relating to the DSN Plant; (b) the Wilmington Plant, including (i)
the Wilmington Plant Equipment Lease between DSN (as lessor) and
EDC (as lessee), leasing to EDC the Wilmington Plant and the
equipment located thereon, (ii) the Wilmington Plant Ground Lease
between DSN (as lessee) and an unaffiliated corporation (as
lessor), in which DSN leases approximately 10,000 square feet of
land in North Carolina on which the Wilmington Plant is located,
(iii) the Wilmington Plant Land Sublease between DSN (as lessor)
and EDC (as lessee), leasing to EDC the rights of DSN under the
Wilmington Plant Ground Lease; (c) the 10 Rail Cars, including the
Rail Car Lease between DSN (as lessor) and EDC (as lessee), leasing
to EDC the 10 Rail Cars, (d) general intangibles, (e) equipment
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used in connection with, or in the conduct of, DSN's business
relating to the DSN Plant and the Wilmington Plant, (f) Consulting
Agreements between DSN and EDC whereby EDC has agreed to pay to DSN
certain amounts for providing consulting work for EDC, (g) proceeds
relating to the above, and (h) books and records of DSN regarding
the above.
The DSN Loans are each for a term of seven years commencing in
1995, with the DSN Loans bearing an annual rate of interest ranging
from 8.2% to 8.9% per annum. Principal and interest on the DSN
Loans are payable monthly. The DSN Loans contain covenants (i)
requiring maintenance of an escalating tangible net worth of the
Company, (ii) restricting distributions and dividends by DSN to the
Company to 50% of DSN's annual net income, (iii) restricting a
change of control of the Company and (iv) requiring maintenance of
a debt to tangible net worth ratio. The payment and performance of
the DSN Loans are unconditionally guaranteed by the Company. Each
DSN Loan is subject to cross-collateralization provisions with
respect to the other DSN Loans. See "Business Chemical Business DSN
Plant."
TES Revolving Facility
TES, the Australian subsidiary of the Company, has an AUS$10.5
million (approximately US$7.0 million) revolving credit facility
(the "TES Revolving Facility"), which is evidenced by a loan
agreement (the "TES Revolving Facility Agreement") with Bank of New
Zealand, Australia ("BNZA"). The TES Revolving Facility was
increased from AUS$8.5 million (approximately US$5.5 million) to
AUS$10.5 million (approximately US$7.0 million) in February 1998.
Based on the effective exchange rate at December 31, 1997, and
March 18, 1998, approximately US$4.6 million (AUS$7.1 million) and
US$3.0 million (AUS$4.5 million), respectively, was borrowed under
this facility. The TES Revolving Facility is secured by a first
lien on the assets, rights, and undertakings of TES and the wholly
owned subsidiaries of TES, T.E.S. Mining Services, Pty. Ltd. ("TES
Mining") and Total Energy Systems (NZ), Ltd. ("TES (NZ)"). In
addition, LSB, TES Mining, and TES (NZ) each unconditionally
guarantee payment under the TES Revolving Facility.
Borrowings under the TES Revolving Facility bear varying rates
of interest, which had a weighted average of 6.9% at December 31,
1997. The TES Revolving Facility does not have a stated term but is
reviewed periodically by BNZA, which reserves the right to continue
the TES Revolving Facility at BNZA's discretion on terms and
conditions satisfactory to BNZA following the periodic review.
The TES Revolving Facility Agreement (i) requires TES to
maintain certain financial ratios, (ii) limits the incurrence of
additional debt (other than as expressly allowed), (iii) requires
the trade debt of EDC to be subordinated to the TES Revolving
Facility, and (iv) restricts dividends and other distributions on
TES' capital stock. TES is in technical non-compliance 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 BNZA has continued
to extend credit under the TES Revolving Facility. The outstanding
borrowing under the TES Revolving Facility at December 31, 1997,
has been classified as due within one year in the accompanying
consolidated financial statements.
The Company used a portion of the proceeds from the Initial
Offering to reduce the amounts owing by TES under the TES Revolving
Facility. See "Use of Proceeds." The Company has maintained the TES
Revolving Facility in place and intends to continue to borrow, from
time to time, under the terms thereof as TES or the Company may
deem appropriate to finance the working capital requirements of TES
and its subsidiaries. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
TES Capitalized Leases
TES has secured borrowings under a number of capitalized lease
agreements with various lenders (the "TES Capitalized Leases").
Under the terms thereof, TES may, from time to time, lease
equipment to be used in its business. TES has the right to purchase
the equipment under the Purchase Agreements for an amount equal to
the balance originally payable under the Purchase Agreement less
certain rebate amounts. Until purchased by TES, the equipment
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acquired by TES remains the property of the lender. Each TES
Capitalized Lease is for a term of five years and is payable in
monthly payments with the outstanding principal balance due under
the TES Capitalized Leases as of December 31, 1997, being
approximately US$2.7 million.
IEC and CM Equipment Financing
CM is a party to five Equipment Purchase and Security
Agreements, each dated February 1994, pursuant to which CM financed
the purchase price of certain equipment totaling $2 million (the
"CM Equipment Financing"). Each of the foregoing Equipment Purchase
and Security Agreements (a) provides for the repayment of the
purchase price over a term of five years at an interest rate of
8.5% and (b) is secured by the related equipment. As of December
31, 1997, the outstanding principal balance of the CM Equipment
Financing is approximately $562,000.
Under a loan agreement dated July 1997, IEC financed $587,000,
being the purchase price of certain equipment over a term of four
years at an interest rate of 10% per annum (the "IEC Equipment
Financing"). Such loan is secured by the equipment so purchased and
has an outstanding principal balance as of December 31, 1997, of
approximately $526,000. Under a loan agreement dated March 1995,
IEC financed $1.5 million, being the purchase price of certain
equipment, for a term of five years at a variable interest rate
equal to the 30-day commercial paper rate plus 2.45% per annum,
which loan has an outstanding principal balance as of December 31,
1997, of approximately $675,000. Each of the foregoing loans is
secured by the equipment purchased with the proceeds of such loan.
In addition, IEC has leased certain equipment under a lease-
purchase agreement, dated April 1996, which provides for the
payment of $960,000 over a term of five years at an interest rate
of approximately 7%, in which LSB guaranteed the payment of such
lease payments, and has an outstanding principal balance of
$614,000 as of December 31, 1997.
CM Loan
In July 1989, CM entered into a loan agreement (the "CM Loan")
with the Oklahoma County Financing Authority ("OCFA"), whereby the
OCFA loaned to CM $2 million. The loan is due on August 1, 2004,
and bears interest at a variable rate equal to 3% plus the current
rate under the State of Oklahoma $10 million Taxable General
Industrial Finance Bonds, Series P, with the minimum rate being 10%
and the maximum rate being equal to the highest Oklahoma statutory
rate. The loan is secured by a mortgage on all of CM's interest in
the lease covering CM's facility in Oklahoma City, Oklahoma, and
certain equipment located on such property. LSB has unconditionally
guaranteed the repayment of such loan. As of December 31, 1997, the
outstanding principal balance of this loan was approximately $1.3
million.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of
the Internal Revenue Code of 1986, as amended, applicable Treasury
regulations, judicial authority and administrative rulings and
practice. Conner & Winters, A Professional Corporation, has issued
an opinion to the Company that the exchange of Old Notes for New
Notes pursuant to the Exchange Offer will not be treated as an
"exchange" for federal income tax purposes, and there will be no
federal income tax consequences to holders exchanging Old Notes for
New Notes pursuant to the Exchange Offer. There can be no
assurance that the Internal Revenue Service (the "Service") will
not take a contrary view, and no ruling from the Service has been
or will be sought. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify
the statements and conditions set forth herein. Any such changes
or interpretations may or may not be retroactive and could affect
the tax consequences to holders. Certain holders (including
insurance companies, tax exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject
to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax advisor as to the
particular tax consequences of exchanging such holder's Old Notes
for New Notes, including the applicability and effect of any state,
local or foreign tax laws.
-94-
<PAGE>
The Exchange
The Company believes that the exchange of Old Notes for New
Notes pursuant to the Exchange Offer will not be treated as an
"exchange" for federal income tax purposes because the New Notes
will not be considered to differ materially in kind or extent from
the Old Notes. Rather, the New Notes received by a holder will be
treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no federal income tax
consequences to holders exchanging Old Notes for New Notes pursuant
to the Exchange Offer.
The New Notes
Interest Payments on the New Notes. The Old Notes and the New
Notes are debt for Federal income tax purposes. The Old Notes were
not issued with original issue discount. The stated interest on the
Initial Notes and New Notes should be considered to be "qualified
stated interest" and, therefore, will be includible in a holder's
gross income (except to the extent attributable to accrued interest
at the time of purchase) as ordinary interest income for federal
income tax purposes in accordance with a holder's tax method of
accounting. If Liquidated Damages are paid (in addition to the
accrual of interest) on the Old Notes as described above under "The
Exchange Offer; Purpose and Effect of the Exchange Offer" such
Liquidated Damages payments generally should be includable in the
Holder's gross income as ordinary income when such payment is made.
Tax Basis. A holder's adjusted tax basis (determined by taking
into account accrued interest at the time of purchase) in a New
Note received in exchange for an Old Note will equal the cost of
the Old Note to such holder, increased by the amounts of market
discount previously included in income by the holder and reduced by
any principal payments received by such holder with respect to the
New Notes and by amortized bond premium. A holder's adjusted tax
basis in a New Note purchased by such holder will be equal to the
price paid for such New Note (determined by taking into account
accrued interest at the time of purchase), increased by market
discount previously included in income by the holder and reduced by
any principal payments received by such holder with respect to a
New Note and by amortized bond premium. See "Market Discount and
Bond Premium" below.
Sale, Exchange or Retirement. Upon the sale, exchange or
retirement of a New Note, a holder will recognize taxable gain or
loss, if any, equal to the difference between the amount realized
on the sale, exchange or retirement and such holder's adjusted tax
basis in such New Note. Such gain or loss will be a capital gain or
loss (except to the extent of any accrued market discount), and
will be a (i) mid-term capital gain or loss if the New Note has
been held for more than 12 months but not more than 18 months at
the time of such sale, exchange or retirement, or (ii) long-term
capital gain or loss if the New Note has been held more than 18
months at the time of such sale, exchange or retirement.
Market Discount and Bond Premium. Holders should be aware that
the market discount provisions of the Code may affect the New
Notes. These rules generally provide that a holder who purchases
New Notes for an amount which is less than their principal amount
will be considered to have purchased the New Notes at a "market
discount" equal to the amount of such difference. Such holder will
be required to treat any gain realized upon the disposition of the
New Note as interest income to the extent of the market discount
that is treated as having accrued during the period that such
holder held such New Note, unless an election is made to include
such market discount in income on a current basis. A holder of a
New Note who acquires the New Note at a market discount and who
does not elect to include market discount in income on a current
basis may also be required to defer the deduction of a portion of
the interest on any indebtedness incurred or continued to purchase
or carry the New Note until the holder disposes of such New Note in
a taxable transaction.
If a holder's tax basis in a New Note immediately after
acquisition exceeds the stated redemption price at maturity of such
New Note, such holder may be eligible to elect to deduct such
excess as amortizable bond premium pursuant to Section 171 of the
Code.
-95-
<PAGE>
Purchasers of the New Notes should consult their own tax
advisors as to the application to such purchasers of the market
discount and bond premium rules.
HOLDERS OF THE OLD NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF
ACQUIRING, OWNING OR DISPOSING OF THE OLD NOTES AND THE NEW NOTES,
INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS, AND POSSIBLE FUTURE CHANGES IN SUCH FEDERAL TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties (including
Shearman & Sterling (available July 2, 1998); Morgan Stanley &
Company, Incorporated (available June 5, 1998); and Exxon Capital
Holdings Corporation (available May 13, 1988)), the Company
believes that a holder or other person who receives New Notes,
whether or not such person is the holder (other than a person that
is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who receives New Notes in exchange for
Old Notes in the ordinary course of business, and who is not
participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New
Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the New
Notes a prospectus that satisfies the requirements of Section 10 of
the Securities Act. However, if any holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating
in a distribution of the New Notes, such holder cannot rely on the
position of the staff or the Commission enunciated in such no-
action letters or any similar interpretive letters, and must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. Further, each
Participating Broker-Dealer that receives New Notes for its own
account in exchange for Old Notes must acknowledge that it will
deliver a Prospectus in connection with any resale of such New
Notes. The Company has agreed that for a period of 180 days after
the consummation of the Exchange Offer, it will make this
prospectus, as amended and supplemented, available to any
participating broker-dealer for use in connection with any such
resale. In addition, until July 15, 1998 (90 days from the date of
this Prospectus), all dealers effecting transactions in the New
Notes may be required to deliver a prospectus.
As contemplated by these no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange
Offer is required to represent to the Company in the Letter of
Transmittal that (i) any New Notes received by such holder in the
Exchange Offer will be acquired in the ordinary course of its
business; (ii) such holder has no arrangement or understanding with
any person to participate in the distribution of the New Notes
within the meaning of the Securities Act or resale of the New Notes
in violation of the Securities Act; (iii) if such holder is not a
broker-dealer, that is not engaged in, and does not intend to
engage in, the distribution of the New Notes; (iv) if such holder
is a broker-dealer that will receive the New Notes for its own
account in exchange for Notes that were acquired as a result of
market making or other trading activities, that it will deliver a
prospectus, as required by law, in connection with any resale of
such New Notes, (v) if such holder is an affiliate, that it will
comply with the registration and prospectus delivery requirements
of the Securities Act applicable to it. However, the Company has
not sought, and does not intend to seek, its own no-action letter,
and there can be no assurance that the Staff of the Commission
would make a similar determination with respect to the Exchange
Offer. As indicated above, each Participating Broker-Dealer that
receives a New Note for its own account in exchange for Old Notes
must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes.
The Company will not receive any proceeds from any sales of
the New Notes by Participating Broker-Dealers. New Notes received
by Participating Broker-Dealers for their own accounts pursuant to
the Exchange Offer may be sold from time to time in one or more
transactions in the over-the counter market, in negotiated
transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing
at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly
to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any
-96-
<PAGE>
such Participating Broker-Dealer and/or the purchasers of any such
New Notes. Any Participating Broker-Dealer that resells the New
Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such
resale of New Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus,
a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days from the consummation of the Exchange
Offer, the Company will send a reasonable number of additional
copies of this Prospectus and any amendment or supplement to this
Prospectus to any Particpating Broker-Dealer that requests such
documents in the Letter of Transmittal. The Company will pay all
the expenses incident to the Exchange Offer (which will not include
the expenses of any holder in connection with resales of the New
Notes). The Company has agreed to indemnify the holders of Old
Notes, including any Participating Broker-Dealer in the Exchange
Offer, against certain liabilities, including liabilities under the
Securities Act.
The Initial Purchaser has advised the Company that it
currently intends to make a market in the New Notes but is not
obligated to do so and may discontinue any such market-making at
any time without notice. Accordingly, no assurance can be given
that an active trading market will develop for, or as to the
liquidity of, the New Notes.
The Initial Purchaser or its affiliates have provided and may
in the future provide investment banking or other financial
services to LSB, the Company and their affiliates in the ordinary
course of business.
LEGAL MATTERS
The validity of the New Notes and Guarantees will be passed
upon for the Company by Conner & Winters, A Professional
Corporation, Oklahoma City, Oklahoma, and with respect to the law
of New York will be passed upon for the Company by Gilbert, Segall
and Young LLP. The authorization, execution and delivery of the
Guarantees (i) with respect to Australian and New Zealand laws
relating to the respective Guarantees of TES, TES Mining and TES
(NZ) will be passed upon by Corrs Chambers Westgarth, Brisbane,
Australia; with respect to Canadian law relating to the Guarantee
of Climate Mate, Inc. will be passed upon by McLean & Kerr,
Toronto, Canada; and with respect to the laws of the United Kingdom
relating to the Guarantee of The Environmental Group International
Limited will be passed upon by Clyde & Co., London, England. Irwin
H. Steinhorn, a shareholder and director of Conner & Winters, owns
6,250 shares of LSB's common stock.
EXPERTS
The consolidated financial statements of the Company at
December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, appearing in this Prospectus and
Registration Statement and the related financial statement schedule
appearing in the Registration Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their reports
thereon appearing herein and/or in the Registration Statement, and
are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
-97-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Auditors........................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and 1997................................................. F-3
Consolidated Statements of Operations and Retained
Earnings for the years ended December 31, 1995, 1996,
and 1997................................................. F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997................... F-5
Notes to Consolidated Financial Statements............... F-7
</TABLE>
F-1
<PAGE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
ClimaChem, Inc.
We have audited the accompanying consolidated balance sheets of
ClimaChem, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations and retained earnings and
cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of ClimaChem, Inc. at December 31, 1996 and
1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 16, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
<PAGE>
ClimaChem, Inc.
Consolidated Balance Sheets
December 31,
1996 1997
________ ________
(In Thousands)
<S> <C> <C>
Assets
Current assets (Note 6):
Cash and cash equivalents $ 1,109 $ 3,534
Trade accounts receivable, net 38,538 38,521
Inventories (Note 4) 37,306 38,760
Supplies and prepaid items 6,232 6,282
Income tax receivable (Note 7) - 2,142
Current deferred income taxes 1,307 1,345
Due from LSB and affiliates (Note 3) - 2,157
________ ________
Total current assets 84,492 92,741
Property, plant and equipment, net
(Notes 5 and 6) 82,676 84,329
Due from LSB and affiliates, net
(Note 3) - 13,443
Other assets, net 6,586 10,362
________ ________
$173,754 $200,875
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 32,908 $ 19,091
Accrued liabilities 8,609 9,075
Current portion of long-term debt
(Note 6) 10,825 9,838
________ ________
Total current liabilities 52,342 38,004
Due to LSB and affiliates, net (Note 3) 7,817 -
Long-term debt (Note 6) 71,763 126,346
Commitments and contingencies (Note 9)
Deferred income taxes (Note 7) 8,989 9,236
Stockholders' equity (Notes 6 and 8):
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
Cumulative translation adjustment 276 (1,003)
Retained earnings 19,914 15,639
________ ________
Total stockholders' equity $ 32,843 $ 27,289
________ ________
$173,754 $200,875
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Operations and Retained Earnings
Year ended December 31,
1995 1996 1997
_________ _________ _________
(In Thousands)
<S> <C> <C> <C>
Revenues:
Net sales $ 220,743 $ 255,285 $ 262,847
Other income 798 333 474
_________ _________ _________
221,541 255,618 263,321
Costs and expenses:
Cost of sales 172,858 207,828 213,772
Selling, general and
administrative 30,344 33,122 37,854
Interest (Note 3) 7,185 6,247 9,369
_________ _________ _________
210,387 247,197 260,995
_________ _________ _________
Income before provision for
income taxes and extra-
ordinary charge 11,154 8,421 2,326
Provision for income taxes
(Note 7) 5,255 2,668 1,429
_________ _________ _________
Income before extraordinary
charge 5,899 5,753 897
Extraordinary charge, net of
income tax benefit of
$1,750,000 (Note 12) - - 2,869
_________ _________ _________
Net income (loss) 5,899 5,753 (1,972)
Retained earnings at
beginning of year 11,552 15,744 19,914
Dividends to parent (1,707) (1,583) (2,303)
_________ _________ _________
Retained earnings at end
of year $ 15,744 $ 19,914 $ 15,639
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
1995 1996 1997
_________ _________ _________
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating
activities
Net income (loss) $ 5,899 $ 5,753 $ (1,972)
Adjustments to reconcile
net income (loss) to net
cash provided (used) by
operations:
Extraordinary charge,
net of tax, related to
financing activities - - 2,869
Depreciation of property,
plant and equipment 5,794 6,707 8,130
Amortization 901 719 756
Provision for losses:
Trade accounts receivable 756 280 521
Notes receivable - 1,015 175
Environmental matters - 100 -
Deferred income tax pro-
vision (credit) 265 (246) 209
Loss (gain) on sale of assets - (20) 138
Cash provided (used) by
changes in assets and
liabilities:
Trade accounts receiv-
able (4,161) (6,235) (2,384)
Inventories 904 (6,819) (3,128)
Supplies and prepaid
items (288) (1,923) (191)
Income tax receivable - - (2,142)
Accounts payable (1,384) 12,563 (13,706)
Accrued liabilities 1,468 3,069 1,014
_________ _________ _________
Net cash provided (used) by
operating activities 10,154 14,963 (9,711)
Cash flows from investing
activities
Capital expenditures (15,929) (18,554) (9,357)
Proceeds from sale of equip-
ment 136 36 194
Increase in other assets (341) (432) (3,609)
_________ _________ _________
Net cash used by investing
activities (16,134) (18,950) (12,772)
</TABLE>
Continued on following page)
F-5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
1995 1996 1997
_________ _________ _________
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing
activities
Payments on long-term and
other debt $ (7,570) $ (9,716) $(72,504)
Long-term and other
borrowings 6,336 12,644 155,000
Debt prepayment charge,
net of tax - - (2,869)
Net change in revolving
debt facilities 8,654 (1,463) (28,478)
Net change in due to LSB
and affiliates 2,522 2,802 (23,938)
Dividends paid to parent (1,707) (1,583) (2,303)
________ ________ ________
Net cash provided by
financing activities 8,235 2,684 24,908
________ ________ ________
Net increase (decrease)
in cash and cash
equivalents 2,255 (1,303) 2,425
Cash and cash equivalents
at beginning of year 157 2,412 1,109
________ ________ ________
Cash and cash equivalents
at end of year $ 2,412 $ 1,109 $ 3,534
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
December 31, 1995, 1996 and 1997
1. Basis of Presentation
ClimaChem, Inc. (the ''Company''), a wholly owned subsidiary of LSB
Industries, Inc. (''LSB'' or ''Parent''), was organized under the
laws of the State of Oklahoma in October 1997. The Company's
Certificate of Incorporation authorizes the issuance of 500,000
shares of $.10 par value common stock. Prior years' authorized,
issued and outstanding shares of common stock in the accompanying
consolidated financial statements reflect this issuance as though
it occurred at the earliest period presented. 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 have been 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 consolidated financial statements of
ClimaChem, Inc. and its subsidiaries for all periods reflect this
reorganization in a manner similar to a pooling of interests.
The consolidated financial statements include the accounts of
ClimaChem, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in the accompanying
financial statements.
The Company has historically had significant transactions with LSB
and its subsidiaries which are reflected in the accompanying
financial statements on the basis established between the Company
and LSB and its subsidiaries. See Notes 3, 7 and 8.
Certain reclassifications have been made in the financial
statements for the year ended December 31, 1996 to conform to the
financial statement presentation for the year ended December 31,
1997.
2. Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventories
Inventory is priced at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) basis, except for
certain heat pump products with a value of $8,595,000 and
$8,150,941 at December 31, 1996 and 1997, respectively, which are
priced at the lower of cost or market, with cost being determined
using the last-in, first-out (LIFO) basis. The difference between
the LIFO basis and current cost was $1,012,990 and $1,223,249 at
December 31, 1996 and 1997, respectively.
F-7
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Depreciation
For financial reporting purposes, depreciation, depletion and
amortization is primarily computed using the straight-line method
over the estimated useful lives of the assets.
Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired, which is
included in other assets in the accompanying balance sheet,
totaling $3,339,377 and $2,996,825, net of accumulated
amortization, of $3,072,692 and $3,415,244 at December 31, 1996 and
1997, respectively, and is being amortized by the straight-line
method over periods of 10 to 22 years. The carrying value of the
excess of purchase price over net assets acquired is reviewed
(using estimated future net cash flows, including expected proceeds
from disposal) if the facts and circumstances indicate that it may
be impaired. No impairment provisions were required in 1995, 1996
or 1997.
Debt Issuance Cost
Debt issuance costs are amortized over the term of the associated
debt instrument using the straight-line method. Such costs, which
are included in other assets in the accompanying balance sheet,
were $651,372 and $3,736,623 net of accumulated amortization of
$854,439 and $102,786 as of December 31, 1996 and 1997,
respectively.
Income Taxes
Taxable income of the Company is included in the consolidated
federal income tax return of LSB. The provision for or benefit from
income taxes is calculated as if the Company filed a separate
federal income tax return. To the extent a state or other taxing
jurisdiction requires or permits a consolidated, combined, or
unitary tax return to be filed, and such return includes the
Company, the principles expressed with respect to consolidated
federal income tax allocation shall apply.
Deferred income taxes result from the Company having different
bases for financial and income tax reporting principally from
utilizing different lives for income taxes purposes than for
financial reporting purposes.
Research and Development Costs
Costs incurred in connection with product research and development
are expensed as incurred. Such costs amounted to $479,000, $514,000
and $367,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Advertising Costs
Costs incurred in connection with advertising and promotion of the
Company's products are expensed as incurred. Such costs amounted to
$898,000, $893,000 and $1,160,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
F-8
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Capitalized Interest
Interest costs of $1,357,000, $2,405,000 and $1,113,000 related to
the construction of a nitric acid plant were capitalized for the
years ended December 31, 1995, 1996 and 1997, respectively, and are
being amortized over the related plant's estimated useful life.
Translation of Foreign Currency
Assets and liabilities of foreign operations, where the functional
currency is the local currency, are translated into U.S. dollars at
the fiscal year end exchange rate. The related translation
adjustments are recorded as cumulative translation adjustments, a
separate component of shareholders' equity. Revenues and expenses
are translated using average exchange rates prevailing during the
year.
Hedging
In 1997, a subsidiary of the Company entered into an interest rate
forward agreement to effectively fix the interest rate on a long-
term lease commitment to become effective August 1998 (not for
trading purposes). The Company accounts for this agreement under
the deferral method, whereby the net gain or loss upon settlement
will serve to adjust the item being hedged, the minimum lease
rentals in periods commencing with the lease execution. If the
necessary correlation (generally a correlation coefficient of
between 80% and 125%) ceases, the differential between the market
value and the carrying value will be recognized in operations as a
gain or loss. Under the interest rate forward agreement, the
subsidiary of the Company is the fixed rate payor on notional
amounts aggregating $50 million with a weighted average interest
rate of 7.12%. The agreement requires a net settlement on maturity
in August 1998, of which an unrelated third party is contractually
obligated for 50%. The subsidiary of the Company is required to
post margin in the form of bank letters of credit or treasury bills
under this interest rate hedge agreement. At December 31, 1997, the
subsidiary had issued margin in the form of letters of credit and
treasury bills of approximately $3.6 million. See Note
9 Commitments and Contingencies and Note 10 Fair Value of Financial
Instruments.
In November 1997, the Company entered into a three month natural
gas swap agreement at a price of $2.94 per MMBtu for the months of
December 1997 through February 1998 to hedge the price volatility
of ammonia (not for trading purposes). Under these swap agreements,
the Company is the fixed-price payor. Monthly payments are made or
received based on the differential between the fixed price and the
specified index price of natural gas on the settlement date. Gains
or losses resulting from the settlement of the swap transactions
are recognized in cost of sales when the inventory is sold. At
December 31, 1997, commodity contracts involving notional amounts
of 236,000 MMBtu were outstanding and are not reflected in the
accompanying balance sheet. These notional amounts do not represent
amounts exchanged by the parties; rather, they are used as the
basis to calculate the amounts due under the agreements.
Recently Issued Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("Statement 130"), which is
effective for fiscal years beginning after December 15, 1997.
Reclassifications of financial statements for earlier periods
presented for comparative purposes will be required when adopted by
the Company in 1998. The Statement establishes standards for
reporting and displaying comprehensive income. Comprehensive income
is defined as the change in equity of an enterprise during a period
F-9
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except
those resulting from investment by owners and distributions to
owners. The primary impact of the new Statement will be related to
the inclusion of foreign currency translation gains or losses in
determining "Comprehensive Income" as compared with the current
statement of operations which does not give effect to this item.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement 131"), which is effective for years
beginning after December 15, 1997. Statement 131 establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information
about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. Statement 131 is
effective for financial statements for fiscal years beginning after
December 15, 1997 and, therefore, the Company will adopt the new
requirements retroactively in 1998. Management has not completed
its review of Statement 131, but does not anticipate that the
adoption of this Statement will have a significant effect on the
Company's reported segments.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash, overnight funds and interest bearing deposits with
maturities when purchased by the Company of 90 days or less.
<TABLE>
<CAPTION>
Supplemental cash flow information includes:
Year ended December 31,
1995 1996 1997
_______ _______ _______
(In Thousands)
<S> <C> <C> <C>
Cash payments for interest and income taxes:
Interest on long-term debt and other $ 7,450 $ 8,259 $ 9,864
Income taxes:
Paid to state taxing authorities 188 263 86
Paid to Parent 840 3,500 1,013
Noncash financing and investing activities -
Long-term debt issued for property,
plant and equipment 2,398 2,165 1,108
</TABLE>
3. 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
continue to 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 and management services, that LSB has
historically provided to the operations and businesses of the
Company. The Company will pay to, or reimburse, LSB for the costs
and expenses incurred by LSB in the performance of the Services
Agreement.
F-10
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
3. Transactions With Related Parties (continued)
Under the terms of the Services Agreement, the Company will 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 to, or reimburse, LSB for its
proportionate share of such usage.
Charges for such services aggregate $1,800,000 for each of the
years ended December 31, 1995 and 1996 and $1,950,000 for the year
ended December 31, 1997. Management of the Company believes these
charges from LSB reasonably approximate additional general and
administrative costs which would have been incurred if the Company
had been an independent entity during such periods. These amounts
do not include reimbursements for costs described in the next
paragraph or amounts paid by LSB relating to certain of the
Company's payroll that are directly charged to the Company by LSB.
The Services Agreement also provides that LSB will permit employees
of the Company and its subsidiaries to continue to participate in
the benefit plans and programs sponsored by LSB. The Company will
pay to, or reimburse, LSB for the costs associated with
participation by the employees of the Company in LSB's benefit
plans and programs.
The Company also leases the facilities of one of its Climate
Control manufacturing subsidiaries from an affiliate under an
operating lease. See Note 9 Commitments and Contingencies,
Operating Leases. Rental expense associated with the lease was
$447,000 in each of the years 1995, 1996 and $475,000 in 1997.
On November 21, 1997, LSB and the Company entered into a management
agreement (the ''Management Agreement''), which provides that in
future periods 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. The fee will be paid quarterly based upon
the excess of actual earnings before interest, income taxes,
depreciation and amortization (''EBITDA'') for the quarter minus
$6,500,000, not to exceed $450,000. If at the end of the calendar
year, EBITDA is less than $26 million, management fees paid to LSB
during the year shall be refunded to the Company for the first
three quarters of the year, not to exceed $1,350,000. 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.
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 December 31,
1996, net amounts due to LSB and its subsidiaries aggregated
approximately $7.8 million. At December 31, 1997, the Company had
loans and advances due from LSB of approximately $13.4 million,
$10.0 million of which was loaned to LSB from the proceeds of the
sale of the Notes, as defined (Note 6 Long-Term Debt), and bears
interest at 10-3/4%, maturing November 2007 with the remainder of
the receivable from LSB and affiliates relating to cash advances
from the Company to LSB and affiliates prior to the sale of the
Notes, as defined, from borrowings on the Company's credit
facilities. These loans are due November 2007 and bear interest at
7% per annum. The Company also has $2.2 million due from LSB and
affiliates included in current assets related to operations under
the Services Agreement, which is non-interest bearing. Such amount
was received by the Company in March 1998. Interest expense on net
borrowings from LSB and affiliates aggregated approximately $62,000
and $338,000 for the years ended December 31, 1995 and 1996,
respectively, and interest income on net loans and advances due
from LSB and affiliates aggregated approximately $357,000 for the
year ended December 31, 1997.
F-11
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
4. Inventories
Inventories consist of:
Finished
(or
Purchased) Work-In- Raw
Goods Process Materials Total
_________ ________ _________ _______
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1996:
Climate Control products $ 2,732 $ 2,376 $ 8,125 $13,233
Chemical products 10,077 4,910 9,086 24,073
_______ _______ _______ _______
Total $12,809 $ 7,286 $17,211 $37,306
======= ======= ======= =======
December 31, 1997:
Climate Control products $ 2,920 $ 3,246 $ 6,748 $12,914
Chemical products 10,269 4,557 11,020 25,846
_______ _______ _______ _______
Total $13,189 $ 7,803 $17,768 $38,760
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
5. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of:
December 31,
1996 1997
_________ _________
(In Thousands)
<S> <C> <C>
Land and improvements $ 1,368 $ 1,340
Buildings and improvements 8,259 7,584
Machinery, equipment and automotive 114,474 124,919
Furniture and fixtures 2,358 2,593
_________ _________
126,459 136,436
Less accumulated depreciation 43,783 52,107
_________ _________
$ 82,676 $ 84,329
========= =========
</TABLE>
F-12
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
6. Long-term Debt
Long-term debt consists of the following:
December 31,
1996 1997
_________ ________
(In Thousands)
<S> <C> <C>
Secured revolving credit facility with
interest at a base rate plus a spec-
ified percentage (10.0% aggregate at
at December 31, 1997)(A) $ 35,061 $ 6,136
Secured revolving credit facility
(weighted average interest rate of
6.9% at December 31, 1997)(B) 4,145 4,592
10-3/4% Senior Notes due 2007(C) - 105,000
Secured loan(D) 13,855 11,806
Secured loan(E) 11,820 -
Secured loans(F):
10.415% to 12.72% term loans 5,542 -
Revolving credit facility (10.5% at
December 31, 1996) 1,944 -
Other, with interest rates of 8.3% to
10.90%, most of which is secured by
machinery and equipment 10,221 8,650
_________ _________
82,588 136,184
Less current portion of long-term debt 10,825 9,838
_________ _________
Long-term debt due after one year $ 71,763 $ 126,346
========= =========
<FN>
(A) In December 1994, LSB and certain of its subsidiaries (the
''Borrowing Group'') and a bank entered into a series of
asset-based revolving credit facilities which provided for an
initial term of three years. In November 1997, the Company
amended the agreement to provide for a $65 million revolving
credit facility (the ''Revolving Credit Facility'') with four
separate loan agreements (the ''Credit Facility Agreement''),
one for the subsidiaries of the Company and three for LSB and
its subsidiaries which are not subsidiaries of the Company.
Under the Revolving Credit Facility, LSB and certain
subsidiaries of LSB that are not subsidiaries of the Company
have a right to borrow on a revolving basis, up to $24 million
($13.1 million outstanding at December 31, 1997). 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 Revolving
Credit Facility. Borrowings under the Revolving Credit
Facility bear an annual rate of interest at a floating rate
based on the lender's prime rate plus 1.5% per annum or, at
the Company's option, on the lender's LIBOR rate plus 3.875%
per annum (which rates are subject to increase or reduction
based upon specified availability and adjusted tangible net
worth levels). The agreement will terminate on December 31,
2000, subject to automatic renewal for terms of 13 months
each, unless terminated by either party. The Credit Facility
Agreement also requires the payment of an annual facility fee
equal to 0.5% of the unused Revolving Credit Facility. The
Company may terminate the Revolving Credit Facility prior to
F-13
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
6. Long-term Debt (continued)
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.
Each of the Credit Facility Agreements specify a number of
events of default and requires the Company to maintain certain
financial ratios (including adjusted tangible net worth and
debt ratios), limits the amount of capital expenditures, and
contains other covenants which restrict, among other things,
(i) the incurrence of additional debt; (ii) the payment of
dividends and other distributions; (iii) the making of certain
investments; (iv) certain mergers, acquisitions and
dispositions; (v) the issuance of secured guarantees; and (vi)
the granting of certain liens.
Events of default under the Revolving Credit Facility include,
among other things, (i) the failure to make payments of
principal, interest, and fees, when due; (ii) the failure to
perform covenants contained therein; (iii) the occurrence of
a change in control of LSB if any party is or becomes the
beneficial owner of more than 50% of the total voting
securities of LSB, except for Jack E. Golsen or members of his
immediate family; (iv) default under any material agreement or
instrument (other than an agreement or instrument evidencing
the lending of money) which would have a material adverse
effect on the Company and its subsidiaries which are borrowers
under the Revolving Credit Facility, taken as a whole, and
which is not cured within the grace period; (v) a default
under any other agreement relating to borrowed money exceeding
certain limits; and (vi) customary bankruptcy or insolvency
defaults. At December 31, 1997, the Company and LSB and its
subsidiaries which are not subsidiaries of the Company were
not in compliance with certain of the financial covenants of
the Revolving Credit Facility. In March 1998, the Company
obtained a waiver of the noncompliance and an amendment to
reset the financial covenants through maturity.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of the
Company.
(B) At December 31, 1997, the Company's wholly owned Australian
subsidiary, TES, had an AUS $8.5 million (US$5.5 million)
revolving credit facility with a bank (the "TES Revolver")
which is renewed by the bank on an annual basis. In February
1998, the subsidiary renewed the TES Facility to provide for
an AUS $10.5 million (US$7.0 million) revolving credit
facility (the "Amended TES Revolver"). The Amended TES
Revolver provides for borrowings based on specified
percentages of qualified eligible assets. The interest rate on
the Amended TES Revolver is dependent upon the borrowing
option elected by TES. 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
December 31, 1997, all borrowings under the TES Revolver were
under the commercial bill option which had a weighted average
interest rate of 6.9% per annum.
The Amended TES Revolver, similar to the TES Revolver,
contains certain financial covenants with which the subsidiary
must comply. At December 31, 1997, the Company was in
technical noncompliance with certain financial covenants
contained in the TES Revolver, for which it received a no
action letter from the bank in January 1998. At the time of
closing of the Amended 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 Amended
TES Revolver. At December 31, 1996 and 1997, all borrowings
outstanding under the TES Revolver have been classified as due
within one year in the consolidated balance sheets.
F-14
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
6. Long-term Debt (continued)
The Amended TES Revolver is secured by substantially all of
the assets of TES, plus an unlimited guarantee and indemnity
from LSB and certain subsidiaries.
(C) On November 26, 1997, the Company completed the sale of $105
million principal amount of 10 3/4% Senior Notes due 2007 (the
"Notes"). The proceeds of the Notes were used to (a) fully
repay the principal and prepayment fees of a $50 million John
Hancock Mutual Life Insurance Company financing arrangement
described in Note 12 Extraordinary Charge, (b) reduce amounts
outstanding under various revolving credit facilities with
respect to the Chemical Business and the Climate Control
Business; and (c) fund a loan to LSB, the Company's parent, of
$10 million. The Notes bear interest at an annual rate of 10
3/4% payable semiannually in arrears on June 1 and December 1
of each year. The Notes are senior unsecured obligations of
the Company and rank pari passu in right of payment to all
existing senior unsecured indebtedness of the Company. The
Notes are effectively subordinated to all existing and future
senior secured indebtedness of the Company and its
subsidiaries.
The Notes were issued pursuant to an Indenture, which contains
certain covenants that, among other things, limit the ability
of the Company and its subsidiaries to: (i) incur additional
indebtedness; (ii) incur certain liens; (iii) engage in
certain transactions with affiliates; (iv) make certain
restricted payments; (v) agree to payment restrictions
affecting subsidiaries; (vi) engage in unrelated lines of
business; or (vii) engage in mergers, consolidations or the
transfer of all or substantially all of the assets of the
Company to another person. In addition, in the event of
certain asset sales, the Company will be required to use the
proceeds to reinvest in the Company's business, to repay
certain debt or to offer to purchase Notes at 100% of the
principal amount thereof, plus accrued and unpaid interest, if
any, thereon, plus liquidated damages, if any, to the date of
purchase.
Except as described below, the Notes are not redeemable at the
Company's option prior to December 1, 2002. After December 1,
2002, the Notes will be subject to redemption at the option of
the Company, in whole or in part, at the redemption prices set
forth in the indenture, plus accrued and unpaid interest
thereon, plus liquidated damages, if any, to the applicable
redemption date. In addition, until December 1, 2000, up to
$35 million in aggregate principal amount of Notes are
redeemable, at the option of the Company, at a price of
110.75% of the principal amount of the Notes, together with
accrued and unpaid interest, if any, thereon, plus liquidated
damages, if any, to the date of the redemption, with the net
cash proceeds of a public equity offering; provided, however,
that at least $65 million in aggregate principal amount of the
Notes remain outstanding following such redemption.
In the event of a Change of Control of LSB or the Company,
holders of the Notes will have the right to require the
Company to repurchase the Notes, in whole or in part, at a
redemption price of 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon, plus liquidated
damages, if any, to the date of repurchase.
The Company is a holding company with no assets or operations
other than its investments in its subsidiaries, and each of
its subsidiaries is wholly owned, directly or indirectly.
ClimaChem's payment obligations under the Notes are fully,
unconditionally and joint and severally guaranteed by all of
the existing subsidiaries of the Company, except for El Dorado
Nitrogen Company ("EDNC"). The assets, equity, and earnings of
EDNC are inconsequential for all periods presented and
management of the Company does not believe separate financial
information of the guaranteeing subsidiaries is material to
the understanding of investors of the Notes.
F-15
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
6. Long-term Debt (continued)
(D) This agreement, as amended, between a subsidiary of the
Company and an institutional lender provided for a loan, the
proceeds of which were used in the construction of a nitric
acid plant, in the aggregate amount of $16.5 million requiring
84 equal monthly payments of principal plus interest, with
interest at a fixed rate of 8.86% through maturity in 2002.
This agreement is secured by the plant, equipment and
machinery, and proprietary rights associated with the plant
which has an approximate carrying value of $30.3 million at
December 31, 1997.
In November 1997, the Company amended this agreement. The
amended agreement restates the financial and restrictive
covenants to be applicable to the Company. This agreement, as
amended, contains covenants (i) requiring maintenance of an
escalating tangible net worth, (ii) restricting distributions
and dividends from a subsidiary of the Company to the Company
to 50% of the subsidiary's annual net income, as defined,
(iii) restricting a change of control of the Company and (iv)
requiring maintenance of a debt to tangible net worth ratio.
At December 31, 1997, the Company was not in compliance with
certain of the financial covenants of the agreement. In March
1998, the Company obtained a waiver of the noncompliance and
an amendment to reset the financial covenants through December
1998, after which time the financial covenants remain the same
as those set forth in the November 1997 amendment.
(E) This agreement between a subsidiary of the Company and a
subsidiary of a bank required monthly installments of
principal and interest through July 31, 2003 at the three-
month adjusted LIBOR rate plus 4.25%. The outstanding balance
was paid in February 1997 in connection with the John Hancock
financing arrangement. See Note 12 Extraordinary Charge.
(F) This agreement between a subsidiary of the Company and two
institutional lenders provided for two series of term loans
and a revolving credit facility. The outstanding balance was
paid in February 1997 in connection with the John Hancock
financing arrangement. See Note 12 Extraordinary Charge.
</FN>
</TABLE>
Maturities of long-term debt for each of the five years after
December 31, 1997 are as follows: (in thousands) 1998 $9,838;
1999 $4,883; 2000 $9,953; 2001 $3,828; 2002 $2,682 and
thereafter $105,000.
F-16
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
7. Income Taxes
The provision for income taxes consists of:
Year ended December 31,
1995 1996 1997
_______ _______ _______
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 4,220 $ 2,456 $ 1,027
State 770 458 193
_______ _______ _______
4,990 2,914 1,220
Deferred:
Federal 230 (222) 178
State 35 (24) 31
_______ _______ _______
265 (246) 209
_______ _______ _______
Provision for income taxes $ 255 $ 2,668 $ 1,426
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The approximate tax effects of each type of temporary difference
and carryforward that are used in computing deferred tax assets and
liabilities and the valuation allowance related to deferred tax
assets at December 31, 1996 and 1997 are as follows:
December 31
1996 1997
________ _______
(In Thousands)
<S> <C> <C>
Deferred tax liabilities
Accelerated depreciation used for
tax purposes $ 8,827 $ 9,117
Inventory basis difference resulting
from a business combination 2,139 2,139
Other 271 119
________ ________
Total deferred tax liabilities 11,237 11,375
Deferred tax assets
Allowances for doubtful accounts
and other asset impairments not
deductible for tax purposes 1,655 1,735
Capitalization of certain costs
as inventory for tax purposes 1,895 1,746
Other 5 3
________ _______
Total deferred tax assets 3,555 3,484
Valuation allowance - -
________ _______
Total deferred tax assets 3,555 3,484
________ _______
Net deferred tax liabilities $ 7,682 $ 7,891
======== =======
</TABLE>
F-17
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<PAGE>
7. Income Taxes (continued)
The provision for income taxes differs from the amount computed by
applying the federal statutory rate to "Income before provision for
income taxes and extraordinary charge" due to the following:
Year ended December 31,
1995 1996 1997
_______ _______ ________
(In Thousands)
<S> <C> <C> <C>
Provision for income taxes at
federal statutory rate $ 3,904 $ 2,947 $ 814
State income taxes, net of
federal benefit 523 282 146
Amortization of excess of pur-
chase price over net assets
acquired 120 120 120
Foreign subsidiary loss (income) 655 (597) 270
Other 53 (84) 79
_______ _______ ________
Provision for income taxes $ 5,255 $ 2,668 $ 1,429
======= ======= ========
</TABLE>
At December 31, 1997, the Company has an income tax receivable of
approximately $2.1 million, including $1.75 million associated with
the extraordinary charge discussed in Note 12 Extraordinary Charge.
Such receivable amount will be recovered through offset against
future tax liabilities of the Company under its tax sharing
agreement with LSB.
8. Stockholders' Equity
Stock Options
Certain employees of the Company, including members of management
of LSB devoting time to the Company, participate in the incentive
stock option plans of LSB (the ''Stock Option Plans''). As a result
thereof, the Company has elected to follow Accounting Principles
Board Opinion No. 25, ''Accounting for Stock Issued to Employees''
(''APB 25'') and related interpretations in accounting for such
employee stock options because, as discussed below, the alternative
fair value accounting provided for under FASB Statement No. 123,
''Accounting for Stock-Based Compensation,'' requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of
the employee stock options equals the market price of the
underlying LSB stock on the date of grant, no compensation expense
is recognized.
Pro forma information regarding net income is required by Statement
123, which also requires that the information be determined as if
the Company has accounted for such employee stock options granted
subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated by LSB at
the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1996 (none granted
in 1997): risk-free interest rates of 6.0%; a dividend yield of
1.36%; a volatility factor of the expected market price of the
Company's common stock of .42; and a weighted average expected life
of the option of 6.2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
F-18
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Because the employee stock options have characteristics
significantly different from those of traded options,
and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of such
employee stock options.
<TABLE>
<CAPTION>
For purposes of pro forma disclosures, the estimated fair value of
the qualified options is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
Year ended December 31,
1995 1996 1997
_______ _______ ________
(In Thousands)
<S> <C> <C> <C>
Pro forma net income (loss) $ 5,867 $ 5,645 $ (2,381)
</TABLE>
Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be
fully reflected until 1998.
At December 31, 1997, there are 519,550 options outstanding under
the Stock Option Plans related to employees of the Company and
members of LSB management devoting time to the Company. These
options become exercisable 20% after one year from date of grant,
40% after two years, 70% after three years, 100% after four years
and lapse at the end of ten years. The exercise price of options to
be granted under this plan is equal to the fair market value of
LSB's common stock at the date of grant.
<TABLE>
<CAPTION>
Activity in the Stock Option Plans related to Company employees and
members of LSB management devoting time to the Company during each
of the three years in the period ended December 31, 1997 is as
follows:
1995 1996 1997
__________________ __________________ ____________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
________ ________ ________ ________ ______ ________
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 231,050 $ 3.11 267,050 $ 3.86 549,050 $ 4.32
Granted 59,000 5.88 332,000 4.44 - -
Exercised (23,000) 1.48 (30,000) 2.46 (29,500) 3.01
Surrendered,
forfeited
or expired - - (20,000) 2.64 - -
_______ ________ _______
Outstanding at
end of year 267,050 $ 3.86 549,050 4.32 519,550 4.39
======= ======== =======
Exercisable at
end of year 153,750 $ 2.41 149,450 $ 3.22 170,450 $ 3.96
======= ======= =======
Weighted average
fair value of
options granted
during year $ 3.01 $ 1.91 $ -
F-19
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Outstanding options to acquire 410,550 shares of stock at December 31, 1997 had
exercise prices ranging from $1.125 to $4.875 per share (109,550 of which are
exercisable at a weighted average price of $2.357 per share) and had a weighted
average exercise price of $3.848 and remaining contractual life of 3.55 years.
The balance of options outstanding at December 31, 1997 had exercise prices
ranging from $5.362 to $9.00 per share (60,900 of which are exercisable at a
weighted average price of $6.854 per share) and a weighted average exercise
price of $6.455 and remaining contractual life of 7.02 years.
9. Commitments and Contingencies
</TABLE>
<TABLE>
<CAPTION>
Operating Leases
The Company leases certain property, plant and equipment under operating lease
agreements from related parties (Note 3) and others. The Company also leases
certain precious metals under operating lease agreements from an unrelated third
party. Future annual minimum payments on operating leases with initial or
remaining terms of one year or more at December 31, 1997 are:
Related Parties Others
_______________ _________
(In Thousands)
<S> <C> <C>
1998 $ 475 $ 2,290
1999 475 1,909
2000 475 1,652
2001 475 1,596
2002 317 1,543
After 2002 - 5,751
_______ _______
$ 2,217 $14,741
======= =======
</TABLE>
Rent expense under all operating lease agreements, including month-to-month
leases, was $3,139,000 in 1995, $4,265,000 in 1996 and $4,104,000 in 1997.
Renewal options are available under certain of the lease agreements for various
periods at approximately the existing annual rental amounts.
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
$60 million and will be completed by the end of 1998. Construction financing of
F-20
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
the EDNC Baytown Plant is to be provided by an unaffiliated lender. Neither
the Company nor EDC has guaranteed any of the lending obligations for the EDNC
Baytown Plant.
Purchase Commitments
The Company purchases substantial quantities of anhydrous ammonia for use in
manufacturing its products. The Company has contracts with two suppliers of
ammonia. One contract requires the Company to purchase not less than 75,000 tons
nor more than 140,000 tons of anhydrous ammonia each contract year and is for a
term expiring in December 1998. The other requires the Company to take or pay
for an average of 10,000 tons of anhydrous ammonia per month and expires April
2000. These contracts are at floating prices. Purchases of anhydrous ammonia
under these two contracts aggregated $40,102,000 in 1997 ($30,403,000 and
$23,814,000 for the one contract effective in 1995 and 1996, respectively). The
pricing volatility of such raw material directly affects the operating '
profitability of the Company. The Company also enters into agreements with
suppliers of raw materials which require the Company to provide finished goods
in exchange therefore. At December 31, 1997, the Company had received quantities
of anhydrous ammonia in exchange for which the Company has a commitment to
provide 12,020 tons of ammonium nitrate and 20,250 tons of nitric acid. The
Company believes these agreements are generally favorable to the Company and
can meet the delivery commitments in the ordinary course of business. At
December 31, 1997, the Company has a standby letter of credit outstanding
related to its Chemical Business of $3.5 million.
The Company leases certain precious metals for use in the Company's
manufacturing process under 90 day agreements. The agreement at December 31,
1997 requires rentals generally based on 17% of the leased metals' market values
from January 1998 through March 1998, contract expiration. The agreements also
require the Company to purchase 900 ounces of platinum at $450 per ounce if the
spot price for platinum is $450 per ounce or lower at the end of the lease term.
In July 1995, the Company entered into a product supply agreement with a third
party whereby the Company is required to make minimum monthly facility fee and
other payments which aggregate $71,965. In return for this payment, the Company
is entitled to certain quantities of compressed oxygen produced by the third
party. Except in circumstances as defined by the agreement, the monthly payment
is payable regardless of the quantity of compressed oxygen used by the Company.
The term of this agreement, which has been included in the above minimum
operating lease commitments, is for a term of 15 years; however, after the
agreement has been in effect for 60 months, the Company can terminate the
agreement without cause at a cost of approximately $4.5 million. Based on the
Company's estimate of compressed oxygen demands of the plant, the cost of the
oxygen under this agreement is expected to be favorable compared to floating
market prices. Purchases under this agreement aggregated $296,000, $913,000 and
$938,000 in 1995, 1996 and 1997, respectively.
Legal Matters
Following is a summary of certain legal actions involving the Company:
A. 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 Company 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.
F-21
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
On February 12, 1996, the Company entered into a Consent Administra-
tive Agreement (''Administrative Agreement'') with the state of
Arkansas to resolve certain compliance issues associated with nitric
acid concentrators. Pursuant to the Administrative Agreement, the
Company installed additional pollution control equipment to address
the compliance issues. The Company was assessed $50,000 in civil
penalties associated with the Administrative Agreement. In the summer
of 1996 and then on January 28, 1997, the Company 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 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 stormwater drain, and according to ADPC&E records, resulted in
a minor fish kill in a drainage ditch near the El Dorado Plant.
ADPC&E has proposed a Consent Administrative Order to resolve the
event. The proposed CAO is currently being drafted by ADPC&E, and EDC
has been advised that it will include a civil penalty in the amount of
$201,700 which includes $125,000 which was previously agreed to be
paid in the form of environmental improvements at the El Dorado Plant.
The Company believes the proposed civil penalty is excessive and
intends to seek reduction of such amount to allow the Chemical
Business to use the $125,000 as originally proposed. The draft of the
proposed consent administrative order also requires the Chemical
Business to undertake certain additional compliance measures and
equipment improvements related to the El Dorado Plant's wastewater
treatment system.
B. In 1996, a lawsuit was filed against the Company's Chemical Business by a
group of residents of El Dorado, Arkansas, asserting a citizens' suit
against the Chemical Business as a result of certain alleged violations of
the Clean Air Act, the Clean Water Act, the Chemical Business' air and
water permits and certain other environmental laws, rules and regulations.
The citizens' suit requests the court to order the Chemical Business to
cure such alleged violations, if any, plus penalties as provided under the
applicable statutes. The Company's Chemical Business will assert all
defenses available to it and will vigorously defend itself.
In July 1996, several of the same individuals who are plaintiffs in the
citizens' suit referenced above filed a toxic tort lawsuit against the
Company's Chemical Business alleging that they suffered certain injuries
and damages as a result of alleged releases of toxic substances from the
Chemical Business' El Dorado, Arkansas manufacturing facility. In October
1996, another toxic tort lawsuit was filed against the Company's Chemical
Business. This subsequent action asserts similar damage theories as the
previously discussed lawsuit, except this action attempts to have a class
certified to represent substantially all allegedly affected persons. The
plaintiffs are suing for an unspecified amount of actual and punitive
damages.
The Company's insurance carriers have been notified of these matters. 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
F-22
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Financial Statements (continued)
9. Commitments and Contingencies (continued)
million limit for all losses due to bodily injury or property damage,
except $5.0 million for all remediation expenses, with the maximum limit
of liability for all claims under the EIL Insurance not to exceed $10.0
million for each loss or remediation expense and $10.0 million for all
losses and remediation expenses. The EIL Insurance also provides a
retention of the first $500,000 per loss or remediation expense that is to
be paid by the Company. The Company's Chemical Business has spent an
amount in excess of $500,000 in legal, expert and other costs in
connection with the toxic tort and citizen lawsuits described above, which
the Company expensed. The EIL Insurance carrier has assumed responsibility
for all subsequent legal, expert and other costs of defense and is paying
such legal, expert and other costs on an on-going basis, subject to a
reservation of rights relating to the citizens' suit.
During the first quarter of 1998, the Company's Chemical Business agreed
in principle to settle the toxic tort lawsuits discussed above. Settlement
of the class action toxic tort lawsuits and the citizens' suit are subject
to definitive settlement agreements. Settlement of the toxic tort lawsuit
filed in October 1996 is subject, among other things, to court approval,
while settlement of the citizens' suit is subject, among other things, to
approval by the court or the United States Environmental Protection
Agency. Substantially all of such settlement payments, upon satisfaction
of the conditions, are to be funded directly by the Company's EIL
Insurance policy carrier. The settlement of the citizens' suit, if
completed, will require the Company's Chemical Business to implement at
the El Dorado Facility and at the Company's expense reasonable and
necessary environmentally related recommendations, if any, to be made in
an environmental audit report to be issued by an independent third party
retained by the Company to evaluate facility operations and emissions. The
audit report has not yet been completed and, as a result, the costs, if
any, to implement such recommendations, if any, are not known to the
Company. However, the Company does not believe that the implementation of
such recommendations, if any, that might be contained in the audit report
will have a material adverse effect on the Company.
The amount of the settlements of these cases, if completed, and the amount
paid under the EIL Insurance for legal and other expenses relating to the
defense of these matters 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.
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.
F-23
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
For several years, certain members of the explosives industry have been
the focus of a grand jury investigation being supervised by the U.S.
Department of Justice (''DOJ'') in connection with criminal antitrust
allegations involving price fixing. Certain explosives companies, other
than the Company, including all the Company's major competitors, and
individuals employed by certain of those competitors, were indicted and
have pled guilty to antitrust violations. The guilty pleas have resulted
in nearly $40 million in criminal fines. In connection with the grand jury
investigation, the Company's Chemical Business received and has complied
with two document subpoenas, certain of the Company's Chemical Business'
employees have been interviewed by the DOJ under grants of immunity from
prosecution, and certain of the Company's Chemical Business employees have
testified under subpoena before the grand jury under grants of immunity in
connection with the investigation. The Company believes that it has
cooperated fully with the government's investigation. Recently, the
Company has been informed by an official of the DOJ that it is not
currently a target of the above investigation or of any grand jury
investigating criminal antitrust activity in the explosives or ammonium
nitrate industries.
During the third quarter of 1997, a subsidiary of the Company was served
with a lawsuit in which approximately 27 plaintiffs have sued
approximately 13 defendants, including a subsidiary 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 the limited information available,
the subsidiary's counsel believes that the exposure, if any, to the
subsidiary related to this litigation is in the $100,000 range.
The Company including its subsidiaries, is a party to various other claims,
legal actions, and complaints arising in the ordinary course of business. In
the opinion of management after consultation with counsel, all claims, legal
actions (including those described above) and complaints are not presently
probable of material loss, are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such amounts that
unfavorable disposition would not have a material effect on the financial
position of the Company, but could have a material impact to the net income
(loss) of a particular quarter or year, if resolved unfavorably.
Other
LSB and, thus, the Company has retained certain risks associated with its
operations, choosing to self-insure up to various specified amounts under its
automobile, workers' compensation, health and general liability programs. LSB
reviews such programs on at least an annual basis to balance the cost/benefit
between its coverage and retained exposure. See the Services Agreement, Note 3.
F-24
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
The Company operates a concentrated nitric acid plant which has a stated
production capacity of 285 tons per day. The Company has incurred significant
delays and costs in attempting to achieve the plant's stated capacity. The
Company anticipates maintaining an economically feasible rate of production. If
such rate of production is not maintained, the Company may sustain significant
future operating losses and possible impairment related thereto.
10. Fair Value of Financial Instruments
The following discussion of fair values is not indicative of the overall fair
value of the Company's balance sheet since the provisions of the SFAS No. 107,
''Disclosures About Fair Value of Financial Instruments,'' do not apply to all
assets, including intangibles.
The fair value of the interest rate forward agreement was estimated based on
quoted market prices of instruments with similar terms. As of December 31, 1997,
the financial instruments' fair value (which is not reflected on the
accompanying balance sheet), net to the Company's 50% interest, represented a
liability of approximately $1.8 million. A change in the settlement index (the
seven year U.S. Treasury bond) of .25% will change the fair value of the hedge
agreement by approximately $350,000, net to the Company's interest. The fair
value of the natural gas swap agreement was estimated based on market prices of
natural gas for the periods covered by the agreement. At December 31, 1997, the
fair values of such agreement represented a liability of approximately
$165,000.
Fair values for fixed rate borrowings are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on borrowings of
similar amounts and terms to those currently outstanding. Carrying values for
variable rate borrowings approximate their fair value. As of December 31, 1996
and 1997, carrying values of variable rate and fixed-rate long-term debt which
aggregated $82.6 million and $136.2 million, respectively, approximated their
estimated fair value.
As of December 31, 1996, the carrying value of the intercompany borrowings of
$7.8 million approximated its estimated fair value. At December 31, 1997, the
carrying value of the intercompany loans of $13.4 million exceeded the estimated
fair value of such loans by approximately $.8 million.
As of December 31, 1997, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities approximated
their estimated fair value.
11. Segment Information
The Company and its subsidiaries operate principally in two industries.
Chemical
This segment manufactures and sells chemical products for mining,
agricultural, electronic, paper and other industries. Production from the
Company's primary manufacturing facility in El Dorado, Arkansas, for the
year ended December 31, 1997 comprises approximately 76% of the chemical
segment's sales. Sales to customers of this segment primarily include coal
mining companies in Kentucky, West Virginia, Illinois and Indiana and
farmers in Texas and Arkansas.
F-25
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
11. Segment Information (continued)
The Chemical Business is subject to various federal, state and local
environmental regulations. Although the Company has designed policies and
procedures to help reduce or minimize the likelihood of significant
chemical accidents and/or environmental contamination, there can be no
assurances that the Company will not sustain a significant future
operating loss related thereto.
In May 1997, the Chemical Business completed constructing a concentrated
nitric acid plant (carrying value of $30.3 million at December 31, 1997);
which has a stated production capacity of 285 tons per day. The Company
incurred significant delays and costs in attempting to achieve the plant's
stated capacity. The Company anticipates maintaining an economically
feasible rate of production. If such rate of production is not maintained,
the Company may sustain significant future operating losses and possible
impairment related thereto.
The Chemical Business' Australian subsidiary's results of operations 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 this subsidiary
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 future periods resulting
in possible impairment of its long-lived assets.
Further, the Company purchases substantial quantities of anhydrous ammonia
for use in manufacturing its products. The pricing volatility of such raw
material directly affects the operating profitability of the chemical
segment.
Climate Control
This business segment manufactures and sells, primarily from its various
facilities in Oklahoma City, a variety of hydronic fan coil, water source
heat pump products as well as other HVAC products for use in commercial
and residential air conditioning and heating systems. The Company's
various facilities in Oklahoma City comprise substantially all of the
environment control operations. Sales to customers of this segment
primarily include original equipment manufacturers, contractors and
independent sales representatives located throughout the world, are
generally secured by a mechanic's lien, except for sales to original
equipment manufacturers.
Credit, which is generally unsecured, is extended to customers based on an
evaluation of the customers' financial condition and other factors. Credit
losses are provided for in the financial statements based on historical
experience and periodic assessment of outstanding accounts receivable,
particularly those accounts which are past due. The Company's periodic assess-
ment of accounts and credit loss provisions are based on the Company's best
estimate of amounts which are not recoverable. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer bases, and their dispersion across
many different industries and geographic areas. As of December 31, 1996 and
1997, the Company's accounts and notes receivable are shown net of allowance
for doubtful accounts of $2,811,000 and $3,168,000, respectively.
F-26
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. Segment Information (continued)
<TABLE>
<CAPTION>
Information about the Company's operations in different industry segments is
detailed below.
Year ended December 31,
1995 1996 1997
________ ________ ________
(In Thousands)
<S> <C> <C> <C>
Net sales:
Chemical $136,900 $166,164 $156,948
Climate Control 83,843 89,121 105,899
________ ________ ________
$220,743 $255,285 $262,847
======== ======== ========
Gross profit:
Chemical $ 25,397 $ 25,400 $ 19,356
Climate Control 22,488 22,057 29,719
________ ________ ________
$ 47,885 $ 47,457 $ 49,075
======== ======== ========
Operating profit:
Chemical $ 12,684 $ 9,954 $ 3,846
Climate Control 4,857 4,381 7,375
________ ________ ________
17,541 14,335 11,221
Other (income) expenses, net (798) (333) (474)
Interest expense 7,185 6,247 9,369
________ _______ _______
Income before provisions for
income taxes and extra-
ordinary charge $ 11,154 $ 8,421 $ 2,326
========= ======== ========
</TABLE>
F-27
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. Segment Information (continued)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
________ ________ ________
(In Thousands)
<S> <C> <C> <C>
Depreciation of property, plant
and equipment:
Chemical $ 4,310 $ 5,329 $ 6,692
======== ======== ========
Climate Control $ 1,484 $ 1,378 $ 1,438
======== ======== ========
Additions to property, plant
and equipment:
Chemical $ 17,811 $ 19,219 $ 9,389
======== ======== =======
Climate Control $ 516 $ 1,500 $ 1,076
======== ======== =======
Identifiable assets:
Chemical $114,374 $133,794 $137,156
Climate Control 32,345 39,960 42,497
Corporate assets - - 21,222
________ ________ ________
$146,719 $173,754 $200,875
======== ======== ========
</TABLE>
Revenues by industry segment include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Intersegment revenues, which are accounted for at transfer prices
ranging from the cost of producing or acquiring the product or
service to normal prices to unaffiliated customers, are not
significant.
Gross profit by industry segment represents net sales less cost of
sales. Operating profit by industry segment represents revenues
less operating expenses. In computing operating profit, none of the
following items have been added or deducted: income taxes, interest
expense or extraordinary charges.
F-28
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. Segment Information (continued)
<TABLE>
<CAPTION>
Identifiable assets by industry segment are those assets used in
the operations in each industry.
December 31,
Geographic Region 1995 1996 1997
______________________________________ _________ _________ _________
(In Thousands)
<S> <C> <C> <C>
Net sales:
Domestic $ 203,859 $ 220,632 $ 235,303
Foreign:
Australia/New Zealand 16,884 32,917 26,482
Others - 1,736 1,062
_________ _________ _________
$ 220,743 $ 255,285 $ 262,847
========= ========= =========
Income before provision for income
taxes and extraordinary charge:
Domestic $ 13,025 $ 6,846 $ 3,475
Foreign:
Australia/New Zealand (1,871) 1,705 (772)
Others - (130) (377)
_________ _________ _________
$ 11,154 $ 8,421 $ 2,326
========= ========= =========
Identifiable assets:
Domestic $ 132,683 $ 152,863 $ 180,264
Foreign:
Australia/New Zealand 14,036 20,017 19,899
Others - 874 712
_________ _________ _________
$ 146,719 $ 173,754 $ 200,875
========= ========= =========
</TABLE>
F-29
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. Segment Information (continued)
<TABLE>
<CAPTION>
Revenues from unaffiliated customers include foreign export sales
as follows:
December 31,
Geographic Region 1995 1996 1997
______________________________________ _________ _________ _________
(In Thousands)
<S> <C> <C> <C>
Mexico and Central and South America $ 2,799 $ 2,103 $ 1,415
Canada 10,018 9,255 4,634
Other 15,782 14,002 6,994
_________ _________ _________
$ 28,599 $ 25,360 $ 13,043
========= ========= =========
</TABLE>
12. Extraordinary Charge
In February 1997, certain subsidiaries of the Company entered into
a $50 million financing arrangement with John Hancock. The
financing arrangement consisted of $25 million of fixed rate notes
and $25 million of floating rate notes. In November 1997, in
connection with the issuance of the Notes described in Note
6(B) Long-Term Debt, a subsidiary of the Company retired the
outstanding principal associated with the John Hancock financing
arrangement and incurred a prepayment fee. The prepayment fee paid
and loan origination costs expensed in 1997 related to the John
Hancock financing arrangement aggregated $4,619,000 ($2,869,000 net
of income tax benefit of $1,750,000).
F-30
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER
PERSON IS AUTHORIZED IN CONNECTION
WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTINUED IN
THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY OF THE GUARANTORS.
THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER
THAN THE SECURITIES OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURIS-
DICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION
TO SUCH PERSON, NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE PROSPECTUS
MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATED ANY IMPLI- $105,000,000
CATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE CLIMACHEM, INC.
SUBSEQUENT TO THE DATE HEREOF.
OFFER TO EXCHANGE
TABLE OF CONTENTS ITS 10 3/4%
Page SERIES B SENIOR NOTES
____ FOR ANY AND ALL
Available Information......... 5 OF ITS OUTSTANDING
Summary....................... 6 10 3/4% SENIOR NOTES DUE 2007
Risk Factors.................. 17
Use of Proceeds............... 22
Capitalization................ 23
Selected Consolidated
Financial Data.............. 24
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations.............. 26
Business...................... 33
Management.................... 46
Security Ownership of Certain
Beneficial Owners and
Management................. 52
Certain Relationships and
Related Transactions....... 56
The Exchange Offer............ 60
Description of Notes......... 68
Description of Other
Indebtedness............... 91
Certain Federal Income Tax
Consequences............... 94
Plan of Distribution.......... 96
Legal Matters................. 97 APRIL 16, 1998
Experts....................... 97
Index to Financial
Statements................. F-1
