<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998
REGISTRATION NO. 333-44905
--------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------------------------------------
CLIMACHEM, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 6749 73-1528549
- ---------------------------- -------------------------- -------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
16 SOUTH PENNSYLVANIA
OKLAHOMA CITY, OKLAHOMA 73107
TELEPHONE: (405) 235-4546
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
JACK E. GOLSEN COPY TO:
CHIEF EXECUTIVE OFFICER IRWIN H. STEINHORN, ESQ.
ClimaChem, Inc. Conner & Winters
16 South Pennsylvania 211 North Robinson, Suite 1700
Oklahoma City, Oklahoma 73107 Oklahoma City, Oklahoma 73102
Telephone: (405) 235-4546 Telephone: (405) 272-5711
- ------------------------------
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
<TABLE>
<CAPTION>
Primary
Standard
Jurisdiction Industrial I.R.S. Employer
of Classification Identification
Exact Name of Additional Registrants* Incorporation Number Number
- ----------------------------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
APR Corporation Oklahoma 3585 73-1415062
CHP Corporation Oklahoma 3585 73-1094496
Climate Master, Inc. Delaware 3585 93-0857025
Climate Mate Inc. Canada 3585 N/A
DSN Corporation Oklahoma 2819 73-1456545
El Dorado Chemical Company Oklahoma 2873 73-1183488
International Environmental Corporation Oklahoma 3585 73-0754306
KOAX Corp. Oklahoma 3585 73-1284158
LSB Chemical Corp. Oklahoma 7392 73-1207958
Northwest Financial Corporation Oklahoma 6749 73-1131584
Slurry Explosive Corporation Oklahoma 2892 73-1330903
The Environmental Group, Inc. Oklahoma 3585 73-1431586
The Environmental Group International England 3585 N/A
Limited
Total Energy Systems Limited (1) Australia 2892 N/A
T.E.S. Mining Services Pty. Ltd. (1) Australia 2892 N/A
Total Energy Systems (NZ) Limited (1) New Zealand 2892 N/A
Universal Tech Corporation Oklahoma 8731 73-1364261
</TABLE>
*Address and telephone number of principal executive offices are the same as
those of ClimaChem, Inc., except as indicated below.
(1) The address and telephone number of the principal executive offices of
Total Energy Systems Limited and its subsidiaries, T.E.S. Mining Services Pty.
Ltd. and Total Energy Systems (NZ), Ltd., are Irvieta House, Level 9, 172
Edwards Street, Brisbane, Queensland, Australia 4000; 617-3-221-4406.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
----------
practicable after this Registration Statement becomes effective.
- ---------------------------------------------------------------
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) FEE
------------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C>
10 3/4% Series B Senior Notes
due 2007...................... $105,000,000 100% $105,000,000 $31,818(3)
Guarantees of 10 3/4 Series B
Senior Notes due 2007......... $105,000,000 (2) (2) None
</TABLE>
- -----------------------------
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) No further fee is payable pursuant to Rule 457(n).
(3) The registration fee was previously paid.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
CLIMACHEM, INC.
CROSS REFERENCE SHEET PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 ITEM LOCATION IN PROSPECTUS
-------------------------------------------------------- -----------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside Outside Front Cover Pages
Back Cover Pages of Prospectus..........................
2. Inside Front and Outside Back Cover Pages of Inside Front cover Page; Outside Back Cover
Prospectus.............................................. Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and Summary; Risk Factors; Selected Financial
Other Information....................................... Data
4. Terms of the Transaction................................ Summary; The Exchange Offer; Description
of Notes; Certain Federal Income Tax
Considerations; Plan of Distribution
5. Pro Forma Financial Information......................... Not Applicable
6. Material Contracts with the Company Being Acquired. Not Applicable
7. Additional Information Required for Reoffering by Not Applicable
Persons and Parties Deemed to be Underwriters...........
8. Interests of Named Experts.............................. Not Applicable
9. Disclosure of Commission Position on Indemni- Not Applicable
fication for Securities Act Liabilities.................
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants............. Not Applicable
11. Incorporation of Certain Information by Reference....... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants...... Not Applicable
13. Incorporation of Certain Information by Reference....... Not Applicable
14. Information with Respect to Registrants other than S-2 Summary; The Company; Capitalization;
or S-3 Registrants...................................... Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3 Companies............... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
16. Information with Respect to S-2 or S-3 Companies........ Not Applicable.
17. Information with Respect to Companies Other Than S-2 Not Applicable.
or S-3 Companies........................................
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are Not Applicable
to be Solicited.........................................
19. Information if Proxies, Consents or Authorizations are Management; Certain Relationships and
not to be Solicited, or in an Exchange Offer............ Related Transactions; Security Ownership of
Management
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 24, 1998
PROSPECTUS
MARCH 24, 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
__________, 1998 (THE DATE THAT IS 30 DAYS FOLLOWING
THE LATER OF THE DATE OF THIS PROSPECTUS AND THE DATE THE
EXCHANGE OFFER IS OTHERWISE COMMENCED), 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.
-1-
<PAGE>
(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 ___________, 1998 (the date that is 30 days following the later of the date
of this Prospectus and the date the Exchange Offer is otherwise commenced),
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 registered
under the Securities Act in reliance upon an exemption
-2-
<PAGE>
(COVER PAGE CONTINUED)
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."
-3-
<PAGE>
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.
-4-
<PAGE>
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, 13/th/ 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.
-5-
<PAGE>
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 owned
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 placed under EDC as the directly owned subsidiary 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 subsidiaries 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.
-6-
<PAGE>
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 nitric
acid industry
-7-
<PAGE>
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.
-8-
<PAGE>
Hydronic fan coil systems 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>
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 connection with
-10-
<PAGE>
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 , 1998 (the date that
is 30 days following the later of the date of this
Prospectus and the date the Exchange Offer is otherwise
commenced), 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
-11-
<PAGE>
instructions contained herein and therein, and mail or
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
-12-
<PAGE>
(ii) a subsequent shelf registration statement covering
such securities has been declared effective under the
Securities Act.
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's 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>
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
3/4% 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>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT RATIO, TONS AND PER TON AMOUNTS)
<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 47,885 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 extraordinary 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
investing 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 amortization ..... 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
anhydrous ammonia per
ton(6) .......................... $107.21 $189.74 $206.55 $188.48 $172.02
Tons of anhydrous 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>
-16a-
<PAGE>
<TABLE>
<CAPTION>
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
-----------------------
BALANCE SHEET DATA:
<S> <C>
Working capital..................... $ 54,737
Property, plant and equipment, net.. 84,329
Total assets........................ 200,875
Total debt.......................... 136,184
Total stockholders' equity.......... 27,289
</TABLE>
- -------------
(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."
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.
-16b-
<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 finan
cial, 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
-17-
<PAGE>
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."
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
-18-
<PAGE>
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 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
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<PAGE>
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 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."
-20-
<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>
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.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
(IN THOUSANDS)
Long-term debt, including current portion:
<S> <C>
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
========
</TABLE>
____________
(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).
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<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIO, TONS AND PER TON AMOUNTS)
<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
extraordinary 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 extraordinary 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
investing 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 amortization ......... 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 anhydrous
ammonia per ton(5) .................. $107.21 $189.74 $206.55 $188.48 $172.02
Tons of anhydrous ammonia
consumed ............................ 206,030 196,365 188,452 217,651 218,274
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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%
EBITA(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
</TABLE>
- -------------
(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.
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<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
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
----------- ---------- ---------
NET SALES
<S> <C> <C> <C>
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
</TABLE>
- -------------
(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.
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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<PAGE>
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 which was
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<PAGE>
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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<PAGE>
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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<PAGE>
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 will terminate on
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<PAGE>
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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<PAGE>
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."
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
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<PAGE>
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 construction; 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
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.
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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 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
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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.
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
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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.
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
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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.
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.
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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%, 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.
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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 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."
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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 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
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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 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
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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, 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
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$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
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
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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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MANAGEMENT
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.
<TABLE>
<CAPTION>
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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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.
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.
<TABLE>
<CAPTION>
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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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; (c) any purported
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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
rights and
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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
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.
<TABLE>
<CAPTION>
AMOUNTS
TITLE OF SHARES PERCENT
OF BENEFICIALLY OF
BENEFICIAL OWNER CLASS OWNED(1) CLASS
- ----------------------------------------------- ---------------- ------------------ --------
<S> <C> <C> <C>
Jack E. Golsen and ............................ Common 3,900,568(3)(5)(6) 28.6%
members of his family(2) Voting Preferred 20,000(4)(6) 92.7%
Riverside Capital Advisors, Inc.(7) ........... Common 1,467,397(7) 10.3%
Ryback Management Corporation ................. Common 1,835,063(8) 12.5%
Dimensional Fund Advisors, Inc. ............... Common 748,800(9) 5.9%
Wynnefield Partners Small Cap Value, L.P. and
Nelson Obus(10) ............................... Common 830,000(10) 6.5%
</TABLE>
- -------------
(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 record by Sylvia H. Golsen,
over which she and her husband, J. Golsen share voting and dispositive
power;
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<PAGE>
(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"), Wynnefield Value Offshore Fund, Ltd.
("Wynnefield Offshore"), and Nelson Obus, an individual ("Obus")
(collectively, the Wynnefield Group"), filed
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<PAGE>
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.
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.
<TABLE>
<CAPTION>
AMOUNTS
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....................... Common 4,687,394(13) 33.9%
as a group (14 persons) Voting Preferred 20,000 92.7%
</TABLE>
- -------------
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<PAGE>
* Less than 1%.
(1) The Company based the information with respect to beneficial ownership on
information furnished by each director or officer, contained in filings
made with the Securities and Exchange Commission, or contained in the
Company'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
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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-
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<PAGE>
Clima may distribute equipment manufactured by the Climate Control Business and
the Climate Control Business may distribute equipment manufactured by Multi-
Clima.
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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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.
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
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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."
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
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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 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.
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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
________________, 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
___________, 1998 (the date that is 30 days following the later of this
Prospectus and the date the Exchange Offer is otherwise commenced), 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 power, signed by such
registered
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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 the
Exchange Agent's account at the
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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 retendered 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 of New York
235 West Schrock Road 14 Wall Street, 8/th/ Floor
Westerville, Ohio 43081-0184 OR New York, New York 10005
Attn: Lower Level Corporate Attn: Corporate Trust Operations
Trust Window
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.
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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.
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
___________________, 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
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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."
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
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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 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.
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
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(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:
<TABLE>
<CAPTION>
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
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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 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
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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 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
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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
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.
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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 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.
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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 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.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the 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,
(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
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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
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.
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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 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.
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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.
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.
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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.
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
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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 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.
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"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
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."
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"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.
"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
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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.
"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.
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"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.
"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
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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;
(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
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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 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
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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.
"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.
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"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.
"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
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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 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.
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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 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.
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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 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.
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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.
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
-94-
<PAGE>
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.
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.
-95-
<PAGE>
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
___________________, 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 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"
-96-
<PAGE>
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>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<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>
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>
ClimaChem, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
--------------------
<S> <C> <C>
(In Thousands)
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>
ClimaChem, Inc.
Consolidated Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
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 extraordinary
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>
ClimaChem, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
--------------------------------
<S> <C> <C> <C>
(In Thousands)
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 provision (credit) 265 (246) 209
Loss (gain) on sales of assets - (20) 138
Cash provided (used) by changes in assets and
liabilities:
Trade accounts receivable (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 sales of equipment 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>
ClimaChem, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
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>
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>
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>
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 from
F-9
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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.
Supplemental cash flow information includes:
<TABLE>
<CAPTION>
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>
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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
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>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of:
<TABLE>
<CAPTION>
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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
-------------------
<S> <C> <C>
(In Thousands)
Secured revolving credit facility with interest at a base rate plus a specified
percentage (10.0% aggregate rate 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 at 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
===================
</TABLE>
(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 maturity; however, should
F-13
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
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>
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>
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.
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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
The provision for income taxes consists of:
YEAR ENDED DECEMBER 31,
1995 1996 1997
--------------------------
(In Thousands)
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 $5,255 $2,668 $1,429
==========================
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)
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
==================
F-17
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
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)
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
purchase 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
========================
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.
Because the employee stock options have
F-18
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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)
Pro forma net income (loss) $5,867 $5,645 $(2,381)
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.
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:
<TABLE>
<CAPTION>
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 $ -
</TABLE>
F-19
<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
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)
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
============================
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
the EDNC
F-20
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 12, 1996, the Company entered into a Consent
Administrative Agreement ("Administrative Agreement") with the state
of Arkansas to resolve certain compliance issues associated with
nitric acid concentrators. Pursuant to the Administrative Agreement,
the 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 ss 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>
ClimaChem, Inc.
Notes to Consolidated 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>
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>
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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
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
assessment 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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
Information about the Company's operations in different industry segments is
detailed below.
YEAR ENDED DECEMBER 31,
1995 1996 1997
--------------------------------
(In Thousands)
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 provision for
income taxes and extraordinary
charge $ 11,154 $ 8,421 $ 2,326
================================
F-27
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31,
1995 1996 1997
------------------------------
(In Thousands)
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
==============================
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>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
Identifiable assets by industry segment are those assets used in the operations
in each industry.
Information about the Company's domestic and foreign operations is detailed
below:
DECEMBER 31,
GEOGRAPHIC REGION 1995 1996 1997
- -------------------------------------------------------------------------------
(In Thousands)
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
================================
F-29
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
Revenues from unaffiliated customers include foreign export sales as follows:
DECEMBER 31,
GEOGRAPHIC REGION 1995 1996 1997
- -------------------------------------------------------------------------
(In Thousands)
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
===========================
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
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH
PERSON, NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATED ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
----
Available Information.................................................. 5
Summary................................................................ 6
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..................................................... 59
Description of Notes.................................................. 68
Description of Other Indebtedness...................................... 91
Certain Federal Income Tax Consequences................................ 94
Plan of Distribution................................................... 96
Legal Matters.......................................................... 97
Experts................................................................ 97
Index to Financial Statements..........................................F-1
PROSPECTUS
$105,000,000
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
______________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company and each of the Guarantors (except as set forth below) are
incorporated under the laws of the State of Oklahoma. Section 1031 of the
Oklahoma General Corporation Act authorizes indemnification of the Company's
directors and officers in a variety of circumstances, which may include
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
Climate Master, Inc. ("CM") is incorporated under the laws of the
State of Delaware. Section 145 of the Delaware General Corporation Law (the
"Delaware Law") authorizes indemnification of CM's directors and officers under
a variety of circumstances which may include liabilities under the Securities
Act.
The general effect of the foregoing is to provide that each of the
domestic Registrants will indemnify its directors and officers against all
liabilities and expenses actually and reasonably incurred in connection with the
defense or settlement of any judicial or administrative proceedings in which
they have become involved by reason of their status as corporate directors or
officers, if they acted in good faith and in the reasonable belief that their
conduct was neither unlawful (in the case of criminal proceedings) nor
inconsistent with the best interests of a particular Registrant. With respect to
legal proceedings by, or in the right of, a Registrant, in which a director or
officer is adjudged liable for improper performance of his duty to the
Registrant or another enterprise which such person served in a similar capacity
at the request of the Registrant, indemnification is limited by such provisions
to that amount which is permitted by the court.
The Environmental Group International Limited ("TEGI") is incorporated
under the laws of the United Kingdom. Article 13(a) of TEGI's Articles of
Association provides that every director or other officer of TEGI shall be
indemnified out of the assets of TEGI against all losses or liabilities which he
may sustain or incur in or about the execution of the duties of his office or
otherwise in relation thereto, including any liability incurred by him in
defending any proceedings, whether civil or criminal, or in connection with any
application under certain provisions of the Companies Act of 1985 in which
relief is granted to him by the court, and no director or other officer shall be
liable for any loss, damage or misfortune which may happen to or be incurred by
TEGI in the execution of the duties of his office or in relation thereto;
provided that Article 13 shall only have effect insofar as its provisions are
not avoided by certain provisions of the Companies Act of 1985.
Climate Mate Inc. ("CMI") is incorporated under the laws of the
Province of Ontario, Canada. Section 2.08 of CM's Bylaws provides that, except
as provided in the Business Corporations Act of 1982--Ontario, every director
and officer of CMI, every former director and officer of CMI, and every person
who acts or acted at CMI's request as a director or officer of another
corporation of which CMI is, or was, a shareholder or creditor, and his heirs or
legal representatives, shall at all times be indemnified and saved harmless by
CMI from and against all costs, charges and expenses, including an amount paid
to settle any action or satisfy a judgment reasonably incurred by him in respect
of any civil, criminal or administrative action or proceeding to which he is
made a party by reason of, or having been a director or officer of, CMI or such
other corporation if (a) he acted honestly and in good faith with a view to the
best interests of CMI, and (b) in the case of a criminal or administrative
action or proceeding that is enforced by monetary penalty, he had reasonable
grounds for believing that his conduct was lawful.
Total Energy Systems Limited ("TES") and T.E.S. Mining Services Pty.
Ltd. ("TES Mining") are registered under the law of Queensland, Australia.
Article 26.1 of the TES Articles of Association provide that every officer,
II-1
<PAGE>
auditor or agent of TES is indemnified by the Company for all liabilities
incurred by him in his capacity as, or by reason of his holding the position of,
officer, auditor or agent, as the case may be, to the extent permitted by law,
and such indemnity extends to any liability incurred by him in defending any
proceedings, whether civil or criminal, in which judgment is given in his favor
or in which he is acquitted or in connection with any application in relation to
any such proceedings in which relief is granted to him by the court under law.
Article 38(a) of the T.E.S. Mining Articles of Association provides that no
director or manager, secretary or other officer of TES Mining acting in good
faith and within the scope of his duties or what he believes to be the scope of
his duties shall be liable for any loss, damage or misfortune which may occur
whether the same be occasioned by any mistake, error, oversight or omission on
his part or not.
Total Energy Systems (NZ) Limited ("TES (NZ") is incorporated under the
laws of New Zealand. Article 11.1 of the Constitution of TES (NZ) provides that
the board of TES (NZ) may cause TES (NZ) to indemnify a director and former
director and former employee or employee of TES (NZ) or a related company for
costs incurred by him or her in any proceeding that relates to (a) liability for
any act or omission in his or her capacity as a director or employee and (b) in
which judgment is given in his or her favor or in which he or she is acquitted
or which is discontinued. Article 11.1 provides further that the board may
cause TES (NZ) to indemnify a director or an employee or former director or
former employee of TES (NZ) or a related company in respect of (a) liability to
any person other than TES (NZ) or a related company for any act or omission in
his or her capacity as a director or employee; or (b) costs incurred by the
director or employee in defending or settling any claim or proceeding relating
to any liability under the foregoing sentence, provided that the liability is
not criminal or (in the case of a director) in respect of a breach of the duty
to act in good faith and in the best interests of TES (NZ) or (in the case of an
employee) in respect of a breach of any fiduciary duty owed to TES (NZ) or a
related company.
LSB, the Company or a Guarantor Subsidiary maintains officers' and
directors' liability insurance which insures against liabilities that officers
and directors of each Registrant may incur in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1 Purchase Agreement, dated November 26, 1992, between ClimaChem,
Inc. and certain subsidiaries of ClimaChem, and Wasserstein Perella
Securities, Inc.*
3.1 Certificate of Incorporation of ClimaChem, Inc.*
3.2 Bylaws of ClimaChem, Inc.*
3.3 Certificate of Incorporation of APR Corporation*
3.4 Bylaws of APR Corporation*
3.5 Certificate of Incorporation of CHP Corporation*
3.6 Bylaws of CHP Corporation*
3.7 Articles of Incorporation of Climate Master, Inc.*
3.8 Bylaws of Climate Master, Inc.*
3.9 Certificate of Incorporation of Climate Mate Inc.*
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
3.10 Bylaws of Climate Mate Inc.*
3.11 Certificate of Incorporation of DSN Corporation*
3.12 Bylaws of DSN Corporation*
3.13 Certificate of Incorporation of El Dorado Chemical Company*
3.14 Bylaws of El Dorado Chemical Company*
3.15 Certificate of Incorporation of International Environmental
Corporation*
3.16 Bylaws of International Environmental Corporation*
3.17 Certificate of Incorporation of KOAX Corp.*
3.18 Bylaws of KOAX Corp.*
3.19 Certificate of Incorporation of LSB Chemical Corp.*
3.20 Bylaws of LSB Chemical Corp.*
3.21 Certificate of Incorporation of Northwest Financial Corporation*
3.22 Bylaws of Northwest Financial Corporation*
3.23 Certificate of Incorporation of Slurry Explosive Corporation*
3.24 Bylaws of Slurry Explosive Corporation*
3.25 Certificate of Incorporation of The Environmental Group, Inc.*
3.26 Bylaws of The Environmental Group, Inc.*
3.27 Memorandum and Articles of Association of The Environmental Group
International Ltd.*
3.28 Certificate of Incorporation and Memorandum and Articles of
Association of T.E.S. Mining
Services Pty. Ltd.*
3.29 Certificate of Incorporation and Constitution of Total Energy
Systems (NZ) Limited*
3.30 Memorandum of Association of Total Energy Systems Limited*
3.31 Certificate of Incorporation of Universal Tech Corporation*
3.32 Bylaws of Universal Tech Corporation*
4.1 Indenture, dated as of November 26, 1997, by and among ClimaChem,
Inc., the Subsidiary Guarantors and Bank One, NA, as trustee, is
incorporated by reference from Exhibit 4.1 to LSB Industries,
Inc.'s Form 8-K, dated November 26, 1997.*
4.2 Registration Rights Agreement, dated as of November 26, 1997, by
and among ClimaChem, Inc., the Guarantors, and the Initial
Purchaser, is incorporated by reference from Exhibit 4.2 to LSB
Industries, Inc.'s Form 8-K, dated November 26, 1997.*
4.3 Form of 10 3/4% Senior Notes due 2007 and 10 3/4% Series B Senior
Notes due 2007 (included in Exhibit 4.1 as Exhibit A)*
II-3
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
5.1 Opinion of Conner & Winters, A Professional Corporation**
5.2 Opinion of Gilbert, Segall & Young, LLP**
5.3 Opinion of Corrs Chambers Westgarth**
5.4 Opinion of McLean & Kerr**
5.5 Opinion of Clyde & Co.**
5.6 Opinion of Bell Gully Buddle Weir**
8.1 Opinion of Conner & Winters with respect to certain tax matters
(included in Exhibit 5.1)**
10.1 Promissory Note, dated November 26, 1997, executed by LSB
Industries, Inc. in favor of ClimaChem, Inc.*
10.2 Amended and Restated Loan and Security Agreement, dated November
21, 1997, by and between BankAmerica Business Credit, Inc. and
Climate Master, Inc., International Environmental Corporation, El
Dorado Chemical Company, and Slurry Explosive Corporation.*
10.3 Continuing Guaranty, dated November 21, 1997, between ClimaChem,
Inc. and BankAmerica Business Credit, Inc.*
10.4 Services Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc.*
10.5 Management Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc.*
10.6 Tax Sharing Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc.*
10.7 Agreement for Purchase and Sale of Anhydrous Ammonia, dated as of
January 1, 1997, between El Dorado Chemical Company and Farmland
Industries, Inc. is incorporated by reference from Exhibit 10.10 to
LSB Industries, Inc.'s Form 10-K for the fiscal year ended December
31, 1996.*
10.8 Lease Agreement, dated November 12, 1987, between Climate Master,
Inc. and West Point Company and amendments thereto is incorporated
by reference from Exhibits 10.32, 10.36, and 10.37 to LSB
Industries, Inc.'s Form 10-K for the fiscal year ended December 31,
1988.*
10.9 Severance Agreement, dated January 17, 1989, between LSB
Industries, Inc. and Jack E. Golsen, is incorporated by reference
from Exhibit 10.48 to LSB Industries, Inc.'s Form 10-K for the
fiscal year ended December 31, 1988. LSB Industries, Inc. also
entered into identical agreements with Tony M. Shelby, David R.
Goss, Barry H. Golsen, David M. Shear, and Jim D. Jones, and the
Company will provide copies thereof to the Commission upon
request.*
10.10 Employment Agreement and Amendment to Severance Agreement, dated
January 12, 1989, between LSB Industries, Inc. and Jack E. Golsen,
dated March 21, 1996, is incorporated by reference from Exhibit
10.15 to LSB Industries, Inc.'s Form 10-K for the fiscal year ended
December 31, 1995.*
II-4
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
10.11 Processing Agreement, dated January 1, 1994, between Monsanto
Company and El Dorado Chemical Company is incorporated by reference
from Exhibit 10.22 to LSB Industries, Inc.'s Form 10-K for the
fiscal year ended December 31, 1994.*
10.12 Loan and Security Agreement (DSN Plant), dated October 31, 1994,
between DSN Corporation and The CIT Group/Equipment Financing, Inc.
is incorporated by reference from Exhibit 10.1 to LSB Industries,
Inc.'s Form 10-Q for the fiscal quarter ended September 30, 1994.*
10.13 First Amendment to Loan and Security Agreement (DSN Plant), dated
June 1, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc.*
10.14 Loan and Security Agreement (Mixed Acid Plant), dated April 5,
1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc. is incorporated by reference from Exhibit 10.25 to
LSB Industries, Inc.'s Form 10-K for the fiscal year ended December
31, 1994.*
10.15 First Amendment to Loan and Security Agreement (Mixed Acid Plant),
dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc.*
10.16 Loan and Security Agreement (Rail Tank Cars), dated November 15,
1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc.*
10.17 First Amendment to Loan and Security Agreement (Rail Tank Cars),
dated November 15, 1995, between DSN Corporation and the CIT
Group/Equipment Financing, Inc.*
10.18 Letter amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment
Financing, Inc. is incorporated by reference from Exhibit 10.1 to
LSB Industries, Inc.'s Form 10-Q for the fiscal quarter ended March
31, 1997.*
10.19 Amendment to Loan and Security Agreement, dated November 21, 1997,
between DSN Corporation and The CIT Group/Equipment Financing,
Inc.*
10.20 Guaranty Agreement, dated November 21, 1997, executed by ClimaChem,
Inc. in favor of The CIT Group/Equipment Financing, Inc.*
10.21 Promissory Note, dated July 14, 1989, from Climate Master, Inc. to
Oklahoma County Finance Authority*
10.22 Extension of Maturity on Promissory Note, dated February 7, 1997,
relating to the Promissory Note, dated July 14, 1989, from Climate
Master, Inc. to Oklahoma County Finance Authority*
10.23 Mortgage of Tenant's Interest in Lease, dated July 1, 1989,
executed by Climate Master, Inc. in favor of the Oklahoma County
Finance Authority*
10.24 Project Loan Agreement, dated July 1, 1989, between Climate Master,
Inc., and the Oklahoma County Finance Authority*
10.25 Hire-Purchase Agreement, dated November 21, 1994, between Total
Energy Systems Limited and Toyota Finance Australia Limited*
10.26 Lease Agreement, dated October 25, 1996, between Total Energy
Systems Limited and Sanwa Australia Finance Limited. Total Energy
Systems Limited has entered into a second Lease Agreement which is
substantially identical, copies of which will be provided to the
Commission upon request.*
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
10.27 Master Lease Agreement, dated October 10, 1995, between Total
Energy Systems (NZ) Limited and GE Capital (NZ) Limited*
10.28 Master Lease Agreement, dated December 15, 1994, between Total
Energy Systems Limited and KE Financial Corporation Limited*
10.29 Land Lease, dated March 1, 1995, between DSN Corporation and Koch
Sulphur Products Company*
10.30 Promissory Note, dated June 2, 1997, executed by International
Environmental Corporation in favor of ORIX Credit Alliance, Inc.*
10.31 Security Agreement-Mortgage on Goods and Chattels dated April 18,
1997, executed by International Environmental Corporation in favor
of ORIX Credit Alliance, Inc.*
10.32 Lease Agreement, dated March 7, 1988, between Northwest Financial
Corporation and International Environmental Corporation*
10.33 First Amendment, dated August 17, 1995, to Lease Agreement dated
March 7, 1988, between Prime Financial Corporation and
International Environmental Corporation*
10.34 Assignment, dated August 17, 1995, between Northwest Financial
Corporation and Prime Financial Corporation*
10.35 Loan and Security Agreement, dated March 14, 1995, between
International Environmental Corporation and MetLife Capital
Corporation*
10.36 Lease Agreement, dated April 3, 1996, between Amplicon Financial
and International Environmental Corporation*
10.37 Equipment Purchase and Security Agreement, dated February 1, 1994,
between U. S. Amada Ltd. and Climate Master, Inc. Climate Master
has entered into three other Equipment Purchase and Security
Agreements which are substantially identical in all material
respects except the principal amount is $380,000, $88,000, and
$330,000, respectively. Copies of each of the foregoing will be
provided to the Commission upon request.*
10.38 Facility Letter, dated August 20, 1997, between Bank of New
Zealand, Australia, and Total Energy Systems Limited**
10.39 Variation Letter, dated February 10, 1998, between Bank of New
Zealand, Australia, and Total Energy Systems Limited**
10.40 Debenture Charge, dated March 7, 1995, between Total Energy Systems
Limited and Bank of New Zealand. T.E.S. Mining Services Pty. Ltd.
and Total Energy Systems (NZ) Limited are each parties to
substantially identical Debentures, copies of which will be
provided to the Commission upon request.*
10.41 Master Commercial Hire and Purchase Agreement (New South Wales),
dated November 14, 1994, between G.E. Capital Australia Limited and
Total Energy Systems Limited*
10.42 Master Commercial Hire Purchase Agreement (Western Australia),
dated November 14, 1994, between G.E. Capital Australia Limited and
Total Energy Systems Limited*
II-6
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
10.43 Master Commercial Hire Purchase Agreement (Queensland), dated
November 14, 1994, between G.E. Capital Australia Limited and Total
Energy Systems Limited*
10.44 Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to be
effective January 1, 1997, between Koch Nitrogen Company and El
Dorado Chemical Company is incorporated by reference from Exhibit
10.1 to the Quarterly Report on Form 10-Q of LSB Industries, Inc.,
the parent of the Company, as filed on August 19, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.*
10.45 Baytown Nitric Acid Project and Supply Agreement dated June 27,
1997, by and among El Dorado Nitrogen Company, El Dorado Chemical
Company and Bayer Corporation is incorporated by reference from
Exhibit 10.2 to the Quarterly Report on Form 10-Q of LSB
Industries, Inc., the parent of the Company, as filed on August 19,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS
IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25,
1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.*
10.46 Services Agreement, dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company is incorporated by reference from
Exhibit 10.3 to the Quarterly Report on Form 10-Q of LSB
Industries, Inc., the parent of the Company, as filed on August 19,
1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS
IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25,
1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.*
10.47 Ground Lease dated June 27, 1997, between Bayer Corporation and El
Dorado Nitrogen Company is incorporated by reference from Exhibit
10.4 to the Quarterly Report on Form 10-Q of LSB Industries, Inc.,
the parent of the Company, as filed on August 19, 1997.*
10.48 Participation Agreement, dated as of June 27, 1997, among El Dorado
Nitrogen Company, Boatmen's Trust Company of Texas as Owner
Trustee, Security Pacific Leasing Corporation, as Owner Participant
and a Construction Lender, Wilmington Trust Company, Bayerische
Landesbank, New York Branch, as a Construction Lender and the Note
Purchaser, and Bank of America National Trust and Savings
Association, as Construction Loan Agent is incorporated by
reference from Exhibit 10.5 to the Quarterly Report on Form 10-Q of
LSB Industries, Inc., the parent of the Company, as filed on August
19, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER
25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.*
II-7
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
10.49 Lease Agreement, dated as of June 27, 1997, between Boatmen's Trust
Company of Texas as Owner Trustee and El Dorado Nitrogen Company is
incorporated by reference from Exhibit 10.6 to the Quarterly Report
on Form 10-Q of LSB Industries, Inc., the parent of the Company, as
filed on August 19, 1997.*
10.50 Security Agreement and Collateral Assignment of Construction
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen
Company is incorporated by reference from Exhibit 10.7 to the
Quarterly Report on Form 10-Q of LSB Industries, Inc., the parent
of the Company, as filed on August 19, 1997.*
10.51 Security Agreement and Collateral Assignment of Facility Documents,
dated as of June 27, 1997, made by El Dorado Nitrogen Company and
consented to by Bayer Corporation is incorporated by reference from
Exhibit 10.8 to the Quarterly Report on Form 10-Q of LSB
Industries, Inc., the parent of the Company, as filed on August 19,
1997.*
10.52 Union Contracts, dated August 5, 1995, by and between EDC and the
Oil, Chemical and Atomic Workers, the International Association of
Machinists and Aerospace Workers, and the United Steel Workers of
America, dated November 1, 1995, is incorporated by reference from
Exhibit 10.7 to LSB Industries, Inc.'s Form 10-K for the fiscal
year ended December 31, 1995.*
10.53 First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica Business
Credit, Inc. and Climate Master, Inc., International Environmental
Corporation, El Dorado Chemical Company and Slurry Explosive
Corporation.**
10.54 Amendment to Loan and Security Agreement, dated March 16, 1998,
between The CIT Group/Equipment Financing, Inc. and DSN
Corporation.**
10.55 Waiver Letter, dated March 16, 1998, from BankAmerica Business
Credit, Inc.**
12.1 Ratio of Earnings to Fixed Charges**
21.1 Subsidiaries of ClimaChem, Inc.*
23.1 Consent of Ernst & Young LLP**
23.2 Consent of Conner & Winters, A Professional Corporation (included
in Exhibit 5.1)**
23.3 Consent of Gilbert, Segall & Young, LLP (included in Exhibit 5.2)**
23.4 Consent of Corrs Chambers Westgarth (included in Exhibit 5.3)**
23.5 Consent of McLean & Kerr (included in Exhibit 5.4)**
23.6 Consent of Clyde & Co. (included in Exhibit 5.5)**
23.7 Consent of Bell Gully Buddle Weir (included in Exhibit 5.6)**
24.1 Powers of Attorney (included in signature pages to the original
Registration Statement as previously filed)*
25.1 Statement of Eligibility of Trustee on Form T-1*
27.1 Financial Data Schedule**
99.1 Form of Letter of Transmittal**
II-8
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- ----------
99.2 Form of Notice of Guaranteed Delivery*
99.3 Form of Tender Instruction*
99.4 Exchange Agent Agreement, dated February ___, 1998, between Bank
One, NA, as Exchange Agent, and each of the Registrants*
* Previously filed.
**Filed herewith.
(b) Financial Statement Schedule
Report of Independent Auditors
Schedule II - Valuation of Qualifying Allowances
The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information appears
in the Company's Consolidated Financial Statements, including the notes thereto.
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the indemnification provisions described herein, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business date of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned registrants hereby undertake to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
II-9
<PAGE>
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration
statemento r any material change to such information in the
registration statement.
(2) For the purpose of determining liability under the Securities Act,
each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered therein, and
the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) Remove from registration by means of a post-effective registration
statement any of the securities that remain unsold at the termination
of the offering.
II-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ClimaChem, Inc.
We have audited the 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, and have issued our report thereon dated
March 16, 1998 (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedule listed in Item 21(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Oklahoma City, Oklahoma
March 16, 1998
II-11
<PAGE>
ClimaChem, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
Balance Charged Deductions
at to Write-offs/ Balance
Beginning Costs and Costs at End
Description of Year Expenses Incurred of Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts Receivable-allowance for doubtful
accounts (1):
1997 $1,296 $ 521 $339 $1,478
1996 $1,424 $ 280 $408 $1,296
1995 $1,433 $ 756 $765 $1,424
Notes Receivable-allowance for doubtful accounts
(1):
1997 $1,515 $ 175 $ - $1,690
1996 $ 500 $1,015 $ - $1,515
1995 $ 500 $ - $ - $ 500
</TABLE>
(1) Deducted in the balance sheet from the related assets to which the reserve
applies.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
ClimaChem, Inc.
By: /s/ Jack E. Golsen
------------------------------------
Jack E. Golsen, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen President, Chief Executive Officer, March 23, 1998
- -------------------- Chairman of the Board and Director
Jack E. Golsen (Principal Executive Officer)
* Vice President, Vice Chairman March 23, 1998
- -------------------- of the Board and Director
Barry H. Golsen
* Vice President and Chief Financial March 23, 1998
- -------------------- Officer and Director
Tony M. Shelby (Principal Financial Officer)
* Vice President and Director March 23, 1998
- --------------------
David R. Goss
* Vice President and Treasurer March 23, 1998
- -------------------- (Principal Accounting Officer)
Jim D. Jones
* Director March 23, 1998
- --------------------
Raymond B. Ackerman
</TABLE>
II-13
<PAGE>
<TABLE>
<S> <C> <C>
* Director March 23, 1998
- --------------------
Robert C. Brown
* Director March 23, 1998
- --------------------
Bernard G. Ille
* Director March 23, 1998
- --------------------
Horace G. Rhodes
* Director March 23, 1998
- --------------------
Jerome D. Shaffer
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
APR Corporation
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, Chairman of the
Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ------------------------------ --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
- ------------------- and Director
Jack E. Golsen
* President; Director March 23, 1998
- ------------------- (Principal Executive Officer)
Barry H. Golsen
* Vice President, Treasurer March 23, 1998
- ------------------- Secretary and Director
David R. Goss (Principal Accounting Officer)
* Vice President March 23, 1998
- ------------------- (Principal Financial Officer)
Tony M. Shelby
</TABLE>
*By : /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
CHP Corporation
By: /s/ Jack E. Golsen
------------------------------------
Jack E. Golsen, Chairman of the
Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------- ----------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
- -------------------- and Director
Jack E. Golsen
* President and Director March 23, 1998
- -------------------- (Principal Executive Officer)
Barry H. Golsen
* Vice President, Secretary March 23, 1998
- -------------------- and Director
David R. Goss
* Vice President March 23, 1998
- -------------------- (Principal Financial/Accounting
Tony M. Shelby Officer)
</TABLE>
*By: /s/ Jack E. Golsen
------------------
Jack E. Golsen
Attorney-in-fact
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Climate Master, Inc.
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen,
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
- ------------------- and Director
Jack E. Golsen
* Chief Executive Officer, Co-Chairman March 23, 1998
- ------------------- of the Board and Director
Steven J. Golsen (Principal Executive Officer)
* Executive Vice President and March 23, 1998
- ------------------- Director
Barry H. Golsen
* Vice President, Secretary and March 23, 1998
- ------------------- Director
David R. Goss
* Vice President and Treasurer March 23, 1998
- ------------------- (Principal Financial/Accounting
Tony M. Shelby Officer)
</TABLE>
*By: /s/ Jack E. Golsen
------------------
Jack E. Golsen
Attorney-in-fact
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Climate Mate Inc.
By: /s/ David R. Goss
-----------------------------------
David R. Goss, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- ------------------- --------------------------------- --------------
<S> <C> <C>
/s/ David R. Goss President, Treasurer and Director March 23, 1998
- ------------------- (Principal Executive/Financial/
David R. Goss Accounting Officer)
* Director March 23, 1998
- -------------------
Arlene Wolfe
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
DSN Corporation
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- -------------------------------- ---------------
<S> <C> <C>
/s/ Jack E. Golsen President, Chairman of the Board March 23, 1998
- ------------------- and Director
Jack E. Golsen (Principal Executive Officer)
* Vice President and Director March 23, 1998
- -------------------
Barry H. Golsen
* Vice President, Treasurer and March 23, 1998
- ------------------- Director (Principal Financial/
Tony M. Shelby Accounting Officer)
* Vice President, Secretary and March 23, 1998
- ------------------- Director
David R. Goss
</TABLE>
*By: /s/ Jack E. Golsen
--------------------
Jack E. Golsen
Attorney-in-fact
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
El Dorado Chemical Company
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, Chairman of the
Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- ------------------------- ---------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
------------------- and Director
Jack E. Golsen
* President, Treasurer and Director March 23, 1998
------------------- (Principal Executive/Financial/
James L. Wewers Accounting Officer)
* Senior Vice President and Director March 23, 1998
-------------------
Phil Gough
* Senior Vice President and Director March 23, 1998
-------------------
Dick Milliken
* Senior Vice President and Director March 23, 1998
-------------------
Paul Rydlund
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
The Environmental Group, Inc.
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, Chairman of the
Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ---------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board and Director March 23, 1998
- -------------------
Jack E. Golsen
* President and Director March 23, 1998
- ------------------- (Principal Executive Officer)
Barry H. Golsen
* Executive Vice President March 23, 1998
- ------------------- and Director
Steven J. Golsen
* Secretary, Treasurer and March 23, 1998
- ------------------- Director (Principal Financial Officer)
David R. Goss
* Controller March 23, 1998
- ------------------- (Principal Accounting Officer)
Jerry Snellen
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
The Environmental Group
International Limited
By: /s/ Barry H. Golsen
-----------------------------------
Barry H. Golsen, Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ Barry H. Golsen Director March 23, 1998
-------------------- (Principal Executive Officer)
Barry H. Golsen
* Assistant Secretary and Director March 23, 1998
--------------------
Cathy Horton
* Director March 23, 1998
-------------------- (Principal Financial/Accounting
David R. Goss Officer)
</TABLE>
*By: /s/ Jack E. Golsen
---------------------
Jack E. Golsen
Attorney-in-fact
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
International Environmental Corporation
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen,
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ----------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
- ------------------- and Director
Jack E. Golsen
* Chief Executive Officer, March 23, 1998
- ------------------- Co-Chairman of the Board
Barry H. Golsen and Director
(Principal Executive Officer)
* Vice President, Secretary, March 23, 1998
- ------------------- Treasurer and Director
David R. Goss
* Vice President March 23, 1998
- ------------------- (Principal Financial/Accounting
Tony M. Shelby Officer)
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Koax Corp.
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, Chairman of the
Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ----------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
- ------------------- and Director
Jack E. Golsen
* President and Director March 23, 1998
- ------------------- (Principal Executive Officer)
Barry H. Golsen
* Vice President and Director March 23, 1998
- -------------------
David R. Goss
* Vice President March 23, 1998
- ------------------- (Principal Financial/Accounting
Tony M. Shelby Officer)
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
LSB Chemical Corp.
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- --------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chief Executive Officer, Chairman March 23, 1998
- ------------------- of the Board and Director
Jack E. Golsen (Principal Executive Officer)
* President and Director March 23, 1998
- -------------------
James L. Wewers
* Vice President and Director March 23, 1998
- -------------------
Barry H. Golsen
* Vice President, Secretary and March 23, 1998
- ------------------- Director (Principal Financial/
Tony M. Shelby Accounting Officer)
* Vice President, Treasurer March 23, 1998
- ------------------- and Director
David R. Goss
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Northwest Financial Corporation
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ---------------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen President, Chief Executive Officer, March 23, 1998
- ------------------- Chairman of the Board and Director
Jack E. Golsen (Principal Executive Officer)
* Vice President, Treasurer, March 23, 1998
- ------------------- Secretary and Director
Tony M. Shelby (Principal Financial/Accounting Officer)
* Vice President and Director March 23, 1998
- -------------------
Barry H. Golsen
</TABLE>
*By: /s/ Jack E. Golsen
------------------
Jack E. Golsen
Attorney-in-fact
II-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Slurry Explosive Corporation
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, Chief Executive
Officer and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- --------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chief Executive Officer, Chairman March 23, 1998
- ------------------- of the Board and Director
Jack E. Golsen (Principal Executive Officer)
* President and Director March 23, 1998
- -------------------
William Manion
* Vice President and Director March 23, 1998
- -------------------
James L. Wewers
* Vice President, Treasurer, March 23, 1998
- ------------------- Secretary and Director
Paul Keeling (Principal Accounting Officer)
* Vice President and Director March 23, 1998
- ------------------- (Principal Financial Officer)
Tony M. Shelby
* Vice President and Director March 23, 1998
- -------------------
David R. Goss
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
T.E.S. Mining Services Pty. Ltd.
By: /s/ James L. Wewers
-----------------------------------
James L. Wewers, Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------------- ----------------------------- --------------
<S> <C> <C>
/s/ James L. Wewers Director March 23, 1998
-------------------- (Principal Executive Officer)
James L. Wewers
* Director March 23, 1998
-------------------- (Principal Financial/Accounting
Kevin J. Harman Officer)
* Director March 23, 1998
--------------------
Paul Rydlund
* Director March 23, 1998
--------------------
William R. Manion
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Total Energy Systems Limited
By: /s/ James L. Wewers
-----------------------------------
James L. Wewers,
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------- ----------------------------- --------------
<S> <C> <C>
/s/ James L. Wewers Vice President and March 23, 1998
- -------------------- Chairman of the Board
James L. Wewers (Principal Executive Officer)
* Managing Director March 23, 1998
- -------------------- (Principal Financial/Accounting
Kevin Harman Officer)
* Director March 23, 1998
- --------------------
Paul Rydlund
* Director March 23, 1998
- --------------------
William Manion
* Director March 23, 1998
- --------------------
Peter Geroff
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on March 23, 1998.
Total Energy Systems (NZ) Limited
By: /s/ James L. Wewers
-----------------------------------
James L. Wewers, Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------- ----------------------------- --------------
<S> <C> <C>
/s/ James L. Wewers Director March 23, 1998
- -------------------- (Principal Executive Officer)
James L. Wewers
* Director March 23, 1998
- -------------------- (Principal Financial/Accounting
Kevin Harman Officer)
* Director March 23, 1998
- --------------------
Paul Rydlund
* Director March 23, 1998
- --------------------
William R. Manion
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on behalf by the undersigned, thereunto duly authorized, in the City of
Oklahoma City, State of Oklahoma on March 23, 1998.
Universal Tech Corporation
By: /s/ Jack E. Golsen
-----------------------------------
Jack E. Golsen, Chairman of the
Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ---------------------------------------- --------------
<S> <C> <C>
/s/ Jack E. Golsen Chairman of the Board March 23, 1998
- ------------------- and Director
Jack E. Golsen
* President and Director March 23, 1998
- ------------------- (Principal Executive Officer)
Oldrich Machacek
* Vice President and Director March 23, 1998
- -------------------
James L. Wewers
* Vice President, Treasurer, March 23, 1998
- ------------------- Secretary and Director
Tony M. Shelby (Principal Financial/Accounting Officer)
* Assistant Secretary and Director March 23, 1998
- -------------------
David M. Shear
</TABLE>
*By: /s/ Jack E. Golsen
-------------------
Jack E. Golsen
Attorney-in-fact
II-31
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
1 Purchase Agreement, dated November 26, 1992, between ClimaChem,
Inc. and certain subsidiaries of ClimaChem, and Wasserstein Perella
Securities, Inc.*
3.1 Certificate of Incorporation of ClimaChem, Inc.*
3.2 Bylaws of ClimaChem, Inc.*
3.3 Certificate of Incorporation of APR Corporation*
3.4 Bylaws of APR Corporation*
3.5 Certificate of Incorporation of CHP Corporation*
3.6 Bylaws of CHP Corporation*
3.7 Articles of Incorporation of Climate Master, Inc.*
3.8 Bylaws of Climate Master, Inc.*
3.9 Certificate of Incorporation of Climate Mate Inc.*
3.10 Bylaws of Climate Mate Inc.*
3.11 Certificate of Incorporation of DSN Corporation*
3.12 Bylaws of DSN Corporation*
3.13 Certificate of Incorporation of El Dorado Chemical Company*
3.14 Bylaws of El Dorado Chemical Company*
3.15 Certificate of Incorporation of International Environmental Corporation*
3.16 Bylaws of International Environmental Corporation*
3.17 Certificate of Incorporation of KOAX Corp.*
3.18 Bylaws of KOAX Corp.*
3.19 Certificate of Incorporation of LSB Chemical Corp.*
3.20 Bylaws of LSB Chemical Corp.*
3.21 Certificate of Incorporation of Northwest Financial Corporation*
3.22 Bylaws of Northwest Financial Corporation*
3.23 Certificate of Incorporation of Slurry Explosive Corporation*
3.24 Bylaws of Slurry Explosive Corporation*
3.25 Certificate of Incorporation of The Environmental Group, Inc.*
3.26 Bylaws of The Environmental Group, Inc.*
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
3.27 Memorandum and Articles of Association of The Environmental Group
International Ltd.*
3.28 Certificate of Incorporation and Memorandum and Articles of
Association of T.E.S. Mining Services Pty. Ltd.*
3.29 Certificate of Incorporation and Constitution of Total Energy Systems
(NZ) Limited*
3.30 Memorandum of Association of Total Energy Systems Limited*
3.31 Certificate of Incorporation of Universal Tech Corporation*
3.32 Bylaws of Universal Tech Corporation*
4.1 Indenture, dated as of November 26, 1997, by and among ClimaChem,
Inc., the Subsidiary Guarantors and Bank One, NA, as trustee, is
incorporated by reference from Exhibit 4.1 to LSB Industries, Inc.'s
Form 8-K, dated November 26, 1997.*
4.2 Registration Rights Agreement, dated as of November 26, 1997, by and
among ClimaChem, Inc., the Guarantors, and the Initial Purchaser, is
incorporated by reference from Exhibit 4.2 to LSB Industries, Inc.'s
Form 8-K, dated November 26, 1997.*
4.3 Form of 10 3/4% Senior Notes due 2007 and 10 3/4% Series B Senior
Notes due 2007 (included in Exhibit 4.1 as Exhibit A)*
5.1 Opinion of Conner & Winters, A Professional Corporation**
5.2 Opinion of Gilbert, Segall & Young, LLP**
5.3 Opinion of Corrs Chambers Westgarth**
5.4 Opinion of McLean & Kerr**
5.5 Opinion of Clyde & Co.**
5.6 Opinion of Bell Gully Buddle Weir**
8.1 Opinion of Conner & Winters with respect to certain tax matters
(included in Exhibit 5.1)**
10.1 Promissory Note, dated November 26, 1997, executed by LSB Industries,
Inc. in favor of ClimaChem, Inc.*
10.2 Amended and Restated Loan and Security Agreement, dated
November 21, 1997, by and between BankAmerica Business Credit, Inc.
and Climate Master, Inc., International Environmental Corporation, El
Dorado Chemical Company, and Slurry Explosive Corporation.*
10.3 Continuing Guaranty, dated November 21, 1997, between ClimaChem,
Inc. and BankAmerica Business Credit, Inc.*
10.4 Services Agreement, dated November 21, 1997, between LSB Industries,
Inc. and ClimaChem, Inc.*
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
10.5 Management Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc.*
10.6 Tax Sharing Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc.*
10.7 Agreement for Purchase and Sale of Anhydrous Ammonia, dated as of
January 1, 1997, between El Dorado Chemical Company and Farmland
Industries, Inc. is incorporated by reference from Exhibit 10.10 to LSB
Industries, Inc.'s Form 10-K for the fiscal year ended December 31,
1996.*
10.8 Lease Agreement, dated November 12, 1987, between Climate Master,
Inc. and West Point Company and amendments thereto is incorporated
by reference from Exhibits 10.32, 10.36, and 10.37 to LSB Industries,
Inc.'s Form 10-K for the fiscal year ended December 31, 1988.*
10.9 Severance Agreement, dated January 17, 1989, between LSB Industries,
Inc. and Jack E. Golsen, is incorporated by reference from Exhibit 10.48
to LSB Industries, Inc.'s Form 10-K for the fiscal year ended December
31, 1988. LSB Industries, Inc. also entered into identical agreements
with Tony M. Shelby, David R. Goss, Barry H. Golsen, David M. Shear,
and Jim D. Jones, and the Company will provide copies thereof to the
Commission upon request.*
10.10 Employment Agreement and Amendment to Severance Agreement, dated
January 12, 1989, between LSB Industries, Inc. and Jack E. Golsen,
dated March 21, 1996, is incorporated by reference from Exhibit 10.15
to LSB Industries, Inc.'s From 10-K for the fiscal year ended
December 31, 1995.*
10.11 Processing Agreement, dated January 1, 1994, between Monsanto
Company and El Dorado Chemical Company is incorporated by
reference from Exhibit 10.22 to LSB Industries, Inc.'s Form 10-K for the
fiscal year ended December 31, 1994.*
10.12 Loan and Security Agreement (DSN Plant), dated October 31, 1994,
between DSN Corporation and The CIT Group/Equipment Financing,
Inc. is incorporated by reference from Exhibit 10.1 to LSB Industries,
Inc.'s Form 10-Q for the fiscal quarter ended September 30, 1994.*
10.13 First Amendment to Loan and Security Agreement (DSN Plant), dated
June 1, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc.*
10.14 Loan and Security Agreement (Mixed Acid Plant), dated April 5, 1995,
between DSN Corporation and The CIT Group/Equipment Financing,
Inc. is incorporated by reference from Exhibit 10.25 to LSB Industries,
Inc.'s Form 10-K for the fiscal year ended December 31, 1994.*
10.15 First Amendment to Loan and Security Agreement (Mixed Acid Plant),
dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc.*
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
10.16 Loan and Security Agreement (Rail Tank Cars), dated November 15,
1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc.*
10.17 First Amendment to Loan and Security Agreement (Rail Tank Cars),
dated November 15, 1995, between DSN Corporation and the CIT
Group/Equipment Financing, Inc.*
10.18 Letter amendment, dated May 14, 1997, to Loan and Security Agreement
between DSN Corporation and The CIT Group/Equipment Financing,
Inc. is incorporated by reference from Exhibit 10.1 to LSB Industries,
Inc.'s Form 10-Q for the fiscal quarter ended March 31, 1997.*
10.19 Amendment to Loan and Security Agreement, dated November 21, 1997,
between DSN Corporation and The CIT Group/Equipment Financing,
Inc.*
10.20 Guaranty Agreement, dated November 21, 1997, executed by
ClimaChem, Inc. in favor of The CIT Group/Equipment Financing, Inc.*
10.21 Promissory Note, dated July 14, 1989, from Climate Master, Inc. to
Oklahoma County Finance Authority*
10.22 Extension of Maturity on Promissory Note, dated February 7, 1997,
relating to the Promissory Note, dated July 14, 1989, from Climate
Master, Inc., to Oklahoma County Finance Authority*
10.23 Mortgage of Tenant's Interest in Lease, dated July 1, 1989, executed by
Climate Master, Inc. in favor of the Oklahoma County Finance Authority
10.24 Project Loan Agreement, dated July 1, 1989, between Climate Master,
Inc., and the Oklahoma County Finance Authority*
10.25 Hire-Purchase Agreement, dated November 21, 1994, between Total
Energy Systems Limited and Toyota Finance Australia Limited*
10.26 Lease Agreement, dated October 25, 1996, between Total Energy
Systems Limited and Sanwa Australia Finance Limited. Total Energy
Systems Limited has entered into a second Lease Agreement which is
substantially identical, copies of which will be provided to the
Commission upon request.*
10.27 Master Lease Agreement, dated October 10, 1995, between Total Energy
Systems (NZ) Limited and GE Capital (NZ) Limited*
10.28 Master Lease Agreement, dated December 15, 1994, between Total
Energy Systems Limited and KE Financial Corporation Limited*
10.29 Land Lease, dated March 1, 1995, between DSN Corporation and Koch
Sulphur Products Company*
10.30 Promissory Note, dated June 2, 1997, executed by International
Environmental Corporation in favor of ORIX Credit Alliance, Inc.*
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
10.31 Security Agreement-Mortgage on Goods and Chattels dated April 18,
1997, executed by International Environmental Corporation in favor of
ORIX Credit Alliance, Inc.*
10.32 Lease Agreement, dated March 7, 1988, between Northwest Financial
Corporation and International Environmental Corporation*
10.33 First Amendment, dated August 17, 1995, to Lease Agreement dated
March 7, 1988, between Prime Financial Corporation and International
Environmental Corporation*
10.34 Assignment, dated August 17, 1995, between Northwest Financial
Corporation and Prime Financial Corporation*
10.35 Loan and Security Agreement, dated March 14, 1995, between
International Environmental Corporation and MetLife Capital
Corporation*
10.36 Lease Agreement, dated April 3, 1996, between Amplicon Financial and
International Environmental Corporation*
10.37 Equipment Purchase and Security Agreement, dated February 1, 1994,
between U. S. Amada Ltd. and Climate Master, Inc. Climate Master has
entered into three other Equipment Purchase and Security Agreements
which are substantially identical in all material respects except the
principal amount is $380,000, $88,000, and $330,000, respectively.
Copies of each of the foregoing will be provided to the Commission upon
request.*
10.38 Facility Letter, dated August 20, 1997, between Bank of New Zealand,
Australia, and Total Energy Systems Limited**
10.39 Variation Letter, dated February 10, 1998, between Bank of New
Zealand, Australia, and Total Energy Systems Limited**
10.40 Debenture Charge, dated March 7, 1995, between Total Energy Systems
Limited and Bank of New Zealand. T.E.S. Mining Services Pty. Ltd. and
Total Energy Systems (NZ) Limited are each parties to substantially
identical Debentures, copies of which will be provided to the
Commission upon request.*
10.41 Master Commercial Hire and Purchase Agreement (New South Wales),
dated November 14, 1994, between G.E. Capital Australia Limited and
Total Energy Systems Limited*
10.42 Master Commercial Hire Purchase Agreement (Western Australia), dated
November 14, 1994, between G.E. Capital Australia Limited and Total
Energy Systems Limited*
10.43 Master Commercial Hire Purchase Agreement (Queensland), dated
November 14, 1994, between G.E. Capital Australia Limited and Total
Energy Systems Limited*
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
10.44 Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to be
effective January 1, 1997, between Koch Nitrogen Company and El
Dorado Chemical Company is incorporated by reference from Exhibit
10.1 to the Quarterly Report on Form 10-Q of LSB Industries, Inc.,
the parent of the Company, as filed on August 19, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.*
10.45 Baytown Nitric Acid Project and Supply Agreement dated June 27, 1997,
by and among El Dorado Nitrogen Company, El Dorado Chemical
Company and Bayer Corporation is incorporated by reference from
Exhibit 10.2 to the Quarterly Report on Form 10-Q of LSB Industries,
Inc., the parent of the Company, as filed on August 19, 1997.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.*
10.45 Services Agreement, dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company is incorporated by reference from
Exhibit 10.3 to the Quarterly Report on Form 10-Q of LSB Industries,
Inc., the parent of the Company, as filed on August 19, 1997.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.*
10.47 Ground Lease dated June 27, 1997, between Bayer Corporation and El
Dorado Nitrogen Company is incorporated by reference from Exhibit
10.4 to the Quarterly Report on Form 10-Q of LSB Industries, Inc., the
parent of the Company, as filed on August 19, 1997.*
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
10.48 Participation Agreement, dated as of June 27, 1997, among El Dorado
Nitrogen Company, Boatmen's Trust Company of Texas as Owner
Trustee, Security Pacific Leasing Corporation, as Owner Participant and
a Construction Lender, Wilmington Trust Company, Bayerische
Landesbank, New York Branch, as a Construction Lender and the Note
Purchaser, and Bank of America National Trust and Savings Association,
as Construction Loan Agent is incorporated by reference from Exhibit
10.5 to the Quarterly Report on Form 10-Q of LSB Industries, Inc., the
parent of the Company, as filed on August 19, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997,
GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.*
10.49 Lease Agreement, dated as of June 27, 1997, between Boatmen's Trust
Company of Texas as Owner Trustee and El Dorado Nitrogen Company
is incorporated by reference from Exhibit 10.6 to the Quarterly Report on
Form 10-Q of LSB Industries, Inc., the parent of the Company, as filed
on August 19, 1997.*
10.50 Security Agreement and Collateral Assignment of Construction
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen
Company is incorporated by reference from Exhibit 10.7 to the Quarterly
Report on Form 10-Q of LSB Industries, Inc., the parent of the Company,
as filed on August 19, 1997.*
10.51 Security Agreement and Collateral Assignment of Facility Documents,
dated as of June 27, 1997, made by El Dorado Nitrogen Company and
consented to by Bayer Corporation is incorporated by reference from
Exhibit 10.8 to the Quarterly Report on Form 10-Q of LSB Industries,
Inc., the parent of the Company, as filed on August 19, 1997.*
10.52 Union Contracts, dated August 5, 1995, by and between EDC and the
Oil, Chemical and Atomic Workers, the International Association of
Machinists and Aerospace Workers, and the United Steel Workers of
America, dated November 1, 1995, is incorporated by reference from
Exhibit 10.7 to LSB Industries, Inc.'s Form 10-K for the fiscal year
ended December 31, 1995.*
10.53 First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica Business
Credit, Inc. and Climate Master, Inc., International Environmental
Corporation, El Dorado Chemical Company and Slurry Explosive
Corporation.**
10.54 Amendment to Loan and Security Agreement, dated March 16, 1998,
between The CIT Group/Equipment Financing, Inc. and DSN
Corporation.**
10.55 Waiver Letter, dated March 16, 1998, from BankAmerica Business
Credit, Inc.**
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ---------------------------------------------------------------------------- --------
<C> <S> <C>
12.1 Ratio of Earnings to Fixed Charges**
21.1 Subsidiaries of ClimaChem, Inc.*
23.1 Consent of Ernst & Young LLP**
23.2 Consent of Conner & Winters, A Professional Corporation (included in
Exhibit 5.1)**
23.3 Consent of Gilbert, Segall & Young, LLP (included in Exhibit 5.2)**
23.4 Consent of Corrs Chambers Westgarth (included in Exhibit 5.3)**
23.5 Consent of McLean & Kerr (included in Exhibit 5.4)**
23.6 Consent of Clyde & Co. (included in Exhibit 5.5)**
23.7 Consent of Bell Gully Buddle Weir (included in Exhibit 5.6)**
24.1 Powers of Attorney (included in signature pages to the original
Registration Statement as previously filed)*
25.1 Statement of Eligibility of Trustee on Form T-1*
27.1 Financial Data Schedule**
99.1 Form of Letter of Transmittal**
99.2 Form of Notice of Guaranteed Delivery*
99.3 Form of Tender Instruction*
99.4 Exchange Agent Agreement, dated February ____, 1998, between Bank
One, NA, as Exchange Agent, and each of the Registrants*
</TABLE>
*Previously filed.
**Filed herewith.
-8-
<PAGE>
EXHIBIT 5.1
CONNER & WINTERS
A PROFESSIONAL CORPORATION
LAWYERS
ONE LEADERSHIP SQUARE
211 NORTH ROBINSON, SUITE 1700
OKLAHOMA CITY, OKLAHOMA 73102-7101
March 18, 1998
ClimaChem, Inc.
16 South Pennsylvania
Oklahoma City, Oklahoma 73107
Re: ClimaChem, Inc.; 10 3/4% Senior Notes Due 2007; Form S-4 Registration
----------------
Statement; Our File No. 7539.2
--------------------------------
Ladies and Gentlemen:
We are special counsel to ClimaChem, Inc., an Oklahoma corporation (the
"Company"), and the Guarantors named in the Registration Statement, all of whom
are subsidiaries of the Company (the "Guarantors," and together with the
Company, the "Issuers"), and have acted as such in connection with the filing of
a Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"). The Registration
Statement covers up to $105,000,000 in aggregate principal amount of ClimaChem's
10 3/4% Series B Senior Notes due 2007 (the "New Notes") offered in exchange for
up to $105,000,000 in aggregate principal amount of outstanding 10 3/4% Senior
Notes due 2007 originally issued and sold in reliance upon an exemption from
registration under the Securities Act (the "Old Notes"). The Old Notes are, and
the New Notes will be, unconditionally guaranteed (the "Guarantees") by the
Guarantors. The Old Notes were issued under, and the New Notes will be issued
under, the Indenture, dated November 26, 1997 (the "Indenture"), among the
Issuers and Bank One, NA, as trustee. The exchange will be made pursuant to an
exchange offer (the "Exchange Offer") contemplated by the Registration
Statement. Capitalized terms used, but not otherwise defined, herein shall have
the meanings assigned to them in the Registration Statement.
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of the following:
(a) Indenture;
(b) New Notes;
<PAGE>
ClimaChem, Inc.
March 18, 1998
Page 2
(c) Guarantees to be issued by the Guarantors;
(d) (i) Certificate of Good Standing of the Company, an Oklahoma
corporation ("Company's Certificate"); (ii) Certificate of Good
Standing of APR Corporation, an Oklahoma corporation ("APR"); (iii)
Certificate of Good Standing of CHP Corporation, an Oklahoma
corporation ("CHP"); (iv) Certificate of Good Standing of Climate
Master, Inc., a Delaware corporation ("CM"); (v) Certificate of Good
Standing of DSN Corporation, an Oklahoma corporation ("DSN"); (vi)
Certificate of Good Standing of El Dorado Chemical Company, an
Oklahoma cor poration ("EDC"); (vii) Certificate of Good Standing of
International Environmental Corporation, an Oklahoma corporation
("IEC"); (viii) Certificate of Good Standing of KOAX Corp., an
Oklahoma corporation ("KOAX"); (ix) Certificate of Good Standing of
LSB Chemical Corp., an Oklahoma corporation ("LSBC"); (x) Certificate
of Good Standing of Northwest Financial Corporation, an Oklahoma
corporation ("NFC"); (xi) Certificate of Good Standing of Slurry
Explosive Corporation, an Oklahoma corporation ("Slurry"); (xii)
Certificate of Good Standing of The Environmental Group, Inc., an
Oklahoma corporation ("TEG"); and (xiii) Certificate of Good Standing
of Universal Tech Corporation, an Oklahoma corporation ("UT"), each
issued by the Secretary of State of Oklahoma on November 12 or 14,
1997, except the Certificate of Good Standing of CM was issued by the
Secretary of State of Delaware on November 18, 1997;
(e) Certificate of Incorporation of each of the Company, APR, CHP, CM,
DSN, EDC, IEC, KOAX, LSBC, NFC, Slurry, TEG, and UT, each certified by
the Secretary of State of Oklahoma on November 14, 1997, except the
Certificate of Incorporation of CM was certified by the Secretary of
State of Delaware on November 18, 1997;
(f) Bylaws, as amended, of each of the Company, APR, CHP, CMI, DSN, EDC,
IEC, KOAX, LSB, LSBC, NFC, Slurry, TEG and UT;
(g) Unanimous Written Consent of the Board of Directors of the Company,
dated November 21, 1997, relating to the Indenture and the Notes;
(h) Unanimous Written Consent by each Board of Directors of the following
entities, each dated November 21, 1997, relating to the Indenture and
the Guarantees: APR, CHP, CMI, CM, DSN, EDC, IEC, KOAX, LSBC, NFC,
Slurry, TEG, and UT; and
<PAGE>
ClimaChem, Inc.
March 18, 1998
Page 3
(i) Minute Books of the Company and the Guarantors other than Climate
Mate, Inc., a Province of Ontario, Canada corporation ("CMI"), The
Environmental Group International Limited, a United Kingdom
corporation ("TEGI"), Total Energy Systems Limited, an Australian
corporation ("TES"), T.E.S. Mining Services Pty. Ltd., an Australian
corporation ("TES Mining"), and Total Energy Systems (NZ) Limited, a
New Zealand corporation ("TES (NZ)") (CMI, TEGI, TES, TES Mining, and
TES (NZ) are collectively referred to as the "Foreign Guarantors").
The documents and instruments listed above in (a) through (i) are referred
to herein as the "Documents."
We have examined the originals or copies, certified or otherwise identified
to our satisfaction, of all such records of the Company and the Guarantors, as
we have deemed necessary or appropriate. We have also examined certificates of
public officials, including certificates not identified above, certificates of
officers or representatives of the Company and the Guarantors, and such other
documents, certificates and corporate or other records as we have deemed
necessary or appropriate as a basis for the opinion set forth herein.
In connection with this opinion, we have relied upon, among other things,
(a) the opinion issued by Corrs Chambers Westgarth, Australian counsel, dated
March 13, 1998, relating to TES, TES Mining and TES (NZ); (b) the opinion of
Clyde & Co., United Kingdom counsel, dated March 6, 1998, relating to TEGI; and
(c) the amended opinion issued by McLean & Kerr dated January 21, 1998, relating
to CMI (collectively, the "Opinions of Foreign Counsel"). Based upon the
Opinions of Foreign Counsel, we have assumed for the purposes of this opinion
that each of the Foreign Guarantors is duly incorporated, validly existing and
in good standing under the laws of each Foreign Guarantor's respective
jurisdiction of incorporation and that the Foreign Guarantors have duly
authorized the execution, delivery, and performance of the Indenture and
Guarantees under the laws of each Foreign Guarantors' respective jurisdiction of
incorporation.
We have assumed that the Indenture as it relates to the Foreign Guarantors
and the Guarantees issued by the Foreign Guarantors and the transactions
contemplated thereunder do not conflict with, or constitute a default under (a)
any law, rule or regulation of Australia, New Zealand, Canada or the United
Kingdom to which the Foreign Guarantors or any of their properties may be
subject; (b) any judicial or regulatory order or decree of any governmental
authority of Australia, New Zealand, Canada or the United Kingdom applicable to
the Foreign Guarantors; or (c) any
<PAGE>
ClimaChem, Inc.
March 18, 1998
Page 4
consent, approval, license, authorization or
validation of, or filing, recording, or registration with any governmental
authority of Australia, New Zealand, Canada or the United Kingdom applicable to
the Foreign Guarantors.
In our examination we have assumed, without the duty to investigate, the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all docu ments submitted to us as certified or
photostatic copies, and the authenticity of the originals of such copies. We
have also assumed the due authorization, execution and delivery of all documents
re ferred to herein by all parties thereto other than the Company and the
Guarantors. As to certain facts material to this opinion, we have relied upon
certificates, statements and representations of officers and other
representatives of the Company and the Guarantors.
Based solely on our review of the foregoing Documents, and in reliance
thereon and on the Opinions of Foreign Counsel and the Opinion of New York
Counsel (as defined below), and subject to the assumptions, qualifications,
limitations and exceptions set forth herein, we are of the following opinion:
1. Each of the Company and the Guarantors (other than the Foreign
Guarantors) is a corporation duly incorporated and validly existing in good
standing under the laws of its respective jurisdiction of incorporation.
2. The execution and delivery of the Indenture has been duly authorized
by the Company and the Guarantors (other than the Foreign Guarantors), and the
Indenture constitutes a legal, valid and binding obligation of the Issuers,
enforceable against the Issuers in accordance with the terms thereof.
3. The New Notes have been duly authorized and, when duly executed by the
proper officers of the Company, duly authenticated by the Trustee and issued by
the Company in accordance with the terms of the Indenture and the Exchange
Offer, will constitute legal, valid and binding obligations of the Company, will
be entitled to the benefits of the Indenture and will be enforceable against
the Company in accordance with their terms.
4. The Guarantees (other than those executed by the Foreign Guarantors)
have been duly authorized and, when the New Notes have been duly executed and
authenticated, and the Guarantees have been duly executed in accordance with the
terms of the Indenture, and the New Notes have been delivered to the holders as
described in the Prospectus, the Guarantees will constitute legal, valid and
binding obligations of the Guarantors, will be entitled to the
<PAGE>
ClimaChem, Inc.
March 18, 1998
Page 5
benefits of the Indenture, and will be enforceable against the Guarantors in
accordance with their terms.
Based on the provisions of the Internal Revenue Code of 1986, as amended,
and the regulations promulgated thereunder, applicable judicial authority and
current administrative rulings and practice, all as of the date of this letter,
and all of which may change at any time, we are of the opinion that, as stated
in the section titled "Certain Federal Income Tax Consequences" contained in the
Registration Statement, 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.
We have expressed the foregoing opinions subject to the following
exceptions, qualifications and limitations:
1. The opinions expressed herein are limited to the laws of the State of
Oklahoma, the General Corporation Law of the State of Delaware, the
federal laws of the United States and, in reliance upon the Opinion of
New York Counsel referred to below, the substance of laws of the State
of New York, in each case to the extent typically applicable to
transactions contemplated by the Exchange Offer and not accepted from
the scope of the opinions set forth above, and we do not express any
opinion with respect to the laws of any other country, state or
jurisdiction. We call your attention to the fact that we are members
of the Bar of the State of Oklahoma, and are not members of the Bar of
Delaware or the Bar of New York. With respect to the applicability of
the laws of the State of New York, we note that Section 12.8 of the
Indenture provides that the Indenture, New Notes, and the Guaranties
are to be governed by the substantive laws of the State of the New
York. Accordingly, insofar as our opinions set forth above encompass
an opinion that the Indenture, the New Notes, and the Guaranties are
valid, binding obligations and are enforceable against the Company and
the Guarantors, as applicable, we have assumed that all matters
pertaining to the validity, binding effect and enforceability are
governed solely by the substantive laws of the State of New York
(without regard to choice of law or conflict of law of principals),
and in rendering such opinions as to the validity, binding effect and
enforceability of the Indenture, the New Notes, and the Guarantees
under the substantive laws of the State of New York, we have relied
exclusively upon the opinion of the New York law firm of Gilbert,
Segall and Young, LLP, dated March 9, 1998 ("Opinion of New York
<PAGE>
ClimaChem, Inc.
March 18, 1998
Page 6
Counsel"). We do not express any opinion as to choice of law or
conflicts of law, including, without limitation, any opinion with
respect to Section 12.8 of the Indenture (and any corresponding
provision of the New Notes) or the appropriate choice of law with
respect to the Indenture, the New Notes or the Guaranties.
2. This opinion is limited to the matters stated herein, and no opinion
is implied or may be inferred beyond the matters expressly stated.
3. Although we express no opinion as to such, with respect to the
Documents' choice of law provision applicable to the construction of
contracts, Oklahoma follows the Restatement (Second) Conflict of Laws
(S)(S) 187 and 188. See Dean Witter Reynolds, Inc. v. Shear, 796 P.2d
296 (Okla. 1990). Section 187(2)(b) of such Restatement provides in
pertinent part that:
[t]he law of the state chosen by the parties ... will be
applied, even if the particular issue is one which the
parties could not have resolved by an explicit provision
..., unless ... application of the law of the chosen state
-----------------------------------------------------
would be contrary to a fundamental policy of a state which
----------------------------------------------------------
has a materially greater interest than the chosen state in
----------------------------------------------------------
the determination of the particular issue and which, under
----------------------------------------------------------
the rule of (S) 188, would be the state of the applicable
---------------------------------------------------------
law in the absence of an effective choice of law by the
-------------------------------------------------------
parties. (Emphasis added).
-------
4. Provisions of the Documents which purport to indemnify any party
against or release any party from, liability for any acts are
unenforceable to the extent such acts are determined to be unlawful,
negligent, reckless, or constitute willful misconduct.
5. Those provisions of the Documents purporting to exculpate any party
from any violation of usury laws by the ipso facto reduction of
interest in excess of the maximum rate, and/or the application of such
excess interest to principal or return thereof to the Company are
unenforceable based on Oklahoma Preferred Finance & Loan Corporation
v. Morrow, 497 P.2d 221 (1972).
<PAGE>
ClimaChem, Inc.
March 18, 1998
Page 7
6. The enforceability and effectiveness of the provisions of the
Indenture, the New Notes and the Guarantees are limited by, and
subject to (a) applicable bankruptcy, fraudulent conveyance or
fraudulent transfer laws, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights generally now or
hereafter in effect; or (b) applicable laws or principles of equity
which may effect the exercise of certain rights and remedies and which
may restrict the enforcement of certain remedies or the availability
of certain equitable remedies.
7. As to enforceability of that portion of the Documents that provide if
any provisions of the Documents are determined to be illegal, invalid
or unenforceable, the remaining provisions remain in full force and
effect where any such provision is an essential part of the Documents,
and the parties would not have entered into the documents absent that
provision.
This letter speaks only as of the date hereof and is limited to present
statutes, regulations ad administrative and judicial interpretations. We
undertake no responsibility to update or supplement this letter after the date
hereof.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our firm in the Registration Statement and the
Prospectus covering the Notes constituting a part thereof under the caption
"Legal Matters."
Very truly yours,
CONNER & WINTERS
A Professional Corporation
/s/ Conner & Winters, P.C.
IHS/MHB/plh
<PAGE>
EXHIBIT 5.2
GILBERT, SEGALL AND YOUNG LLP
430 Park Avenue
New York, New York 10022-3592
(212) 644-4000
Facsimile: (212) 644-4051
-------
March 9, 1998
ClimaChem, Inc.
16 South Pennsylvania
Oklahoma City, Oklahoma 73107
Re: ClimaChem, Inc.; 10 3/4% Series B Senior Notes Due 2007
-------------------------------------------------------
Ladies and Gentlemen:
We are special New York counsel to ClimaChem, Inc., an Oklahoma corporation
(the "Company"), and the Guarantors named in the Registration Statement
hereinafter defined (the "Guarantors," and together with the Company, the
"Issuers"). In this connection we have reviewed that certain Registration
Statement on Form S-4 (the "Registration Statement") filed by the Issuers on
January 26, 1998 under the Securities Act of 1933, as amended (the "Securities
Act"). The Registration Statement covers up to $105,000,000 in aggregate
principal amount of the Company's 10 3/4% Series B Senior Notes due 2007 (the
"New Notes") offered in exchange for up to $105,000,000 in aggregate principal
amount of outstanding 10 3/4% Senior Notes due 2007 originally issued and sold
by the Company in reliance upon an exemption from registration under the
Securities Act (the "Old Notes"). The Old Notes are, and the New Notes will be,
unconditionally guaranteed (the "Guarantees") by the Guarantors. The Old Notes
were issued under, and the New Notes will be issued under, an Indenture, dated
as of November 26, 1997 (the "Indenture"), among the Issuers and Bank One, NA,
as trustee. Capitalized terms used, but not otherwise defined, herein shall have
the meanings assigned to them in the Indenture.
We have examined and are familiar with copies identified or otherwise
established to our satisfaction of the following:
(a) the Indenture;
(b) the form of New Notes included as Exhibit A to the Indenture; and
(c) the form of Guarantee to be issued by the Guarantors included as
Exhibit B to the Indenture.
<PAGE>
ClimaChem, Inc.
March 9, 1998
Page 2
We have assumed for the purposes of this opinion that each of the Issuers
is duly incorporated, validly existing and in good standing under the laws of
each Issuer's respective jurisdiction of incorporation, that the Company has
duly authorized the execution, delivery and performance of the New Notes, that
each of the Issuers has duly authorized the execution, delivery and performance
of the Indenture, that each of the Guarantors has duly authorized the execution,
delivery and performance of the Guarantees and that the Indenture has been duly
executed and delivered by the Issuers. We have further assumed that (a) the
authorization, execution, delivery and performance by the Issuers of their
respective obligations, if any, under the Indenture, the New Notes and the
Guarantees do not conflict with, or constitute a default under, any law, rule,
regulation or judicial order or decree of any governmental authority in the
respective jurisdictions in which the Issuers are incorporated, and (b)
immediately after the execution and delivery of the Guarantees, none of the
Guarantors will be, or by such execution and delivery will be deemed to be,
insolvent.
In our examination of the Indenture we have assumed, without any
investigation, the genuineness of all signatures, the legal capacity of natural
persons, the conformity to original documents of all documents submitted to us
as photostatic copies, and the authenticity of the originals of such copies. We
have also assumed the due authorization, execution and delivery of all documents
referred to herein by all parties thereto other than the Company and the
Guarantors. As to certain facts material to this opinion, we have relied upon
statements and representations of representatives of the Company and the
Guarantors and of counsel to the Company and the Guarantors.
Based solely on our review of the Indenture and the forms of the New Notes
and the Guarantees, and subject to the assumptions, qualifications, limitations
and exceptions set forth herein, we are of the following opinion:
1. The Indenture constitutes a legal, valid and binding obligation of the
Issuers under the laws of the State of New York, enforceable in accordance with
the terms thereof.
2. The New Notes, when duly executed by the proper officers of the
Company, duly authenticated by the Trustee and issued by the Company in
accordance with the terms of the Indenture (assuming qualification of the
Indenture under the Trust Indenture Act of 1939, as amended), will constitute
legal, valid and binding obligations of the Company, will be entitled to the
benefits of the Indenture and will be enforceable against the Company in
accordance with their terms.
<PAGE>
ClimaChem, Inc.
March 9, 1998
Page 3
3. When the New Notes have been duly executed and authenticated, and the
Guarantees have been duly executed in accordance with the terms of the
Indenture, the Guarantees will constitute legal, valid and binding obligations
of the Guarantors, will be entitled to the benefits of the Indenture, and will
be enforceable against the Guarantors in accordance with their terms.
We have expressed the foregoing opinion subject to the following
exceptions, qualifications and limitations:
1. The opinions expressed herein are limited to the laws of the State of
New York and applicable federal laws of the United States, and we do not
express any opinion with respect to the laws of any other country, state
or jurisdiction.
2. This opinion is limited to the matters stated herein, and no opinion is
implied or may be inferred beyond the matters expressly stated.
3. The enforceability and effectiveness of the provisions of the Indenture,
the New Notes and the Guarantees are limited by, and subject to (a)
applicable bankruptcy, fraudulent conveyance or fraudulent transfer
laws, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights generally now or hereafter in effect; and
(b) applicable laws or principles of equity (whether applied in a court
of equity or at law) which may affect the exercise of certain rights and
remedies and which may restrict the enforcement of certain remedies or
the availability of certain equitable remedies.
4. Provisions of the Indenture which purport to indemnify any party
against, or release any party from, liability for any acts may be
unenforceable to the extent such acts are determined to be unlawful,
negligent, reckless or constitute willful misconduct.
This opinion speaks only as of the date hereof and we undertake no
responsibility to update or supplement this opinion after the date hereof.
In rendering its opinion to you with respect to the legality, validity and
enforceability of the Indenture, the New Notes and the Guarantees, Conner &
Winters, P.C. may rely on this opinion as if it were addressed to them.
<PAGE>
ClimaChem, Inc.
March 9, 1998
Page 4
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm in the Registration Statement and the
Prospectus covering the New Notes constituting a part thereof under the caption
"Legal Matters." The foregoing, however, shall not constitute an admission by
us that we are experts as provided in Sections 7 and 11 of the Securities Act.
Very truly yours,
/s/ Gilbert, Segall and Young LLP
<PAGE>
EXHIBIT 5.3
CORRS
CHAMBERS
WESTGARTH
LAWYERS
13 March 1998 Contact:
Bruce Atkins (07) 3228 9828
ClimaChem, Inc.
16 South Pennsylvania Partner:
Oklahoma City, John Kelly
OKLAHOMA 73107
UNITED STATES OF AMERICA Our reference
PC5417615
Dear Ladies and Gentlemen:
1. Introduction
We are the lawyers for Total Energy Systems Limited ACN 010 876 150 (TES),
Total Energy Systems (NZ) Ltd. (DN/682396) (TES (NZ)), and T.E.S. Mining
Services Pty. Ltd. ACN 010 975 676 (TES Mining) in connection with TES, TES
(NZ), and TES Mining executing the documents described below (the
Transaction Documents).
The Transaction Documents are:
(a) Indenture, dated 26 November 1997 ("Indenture"), between ClimaChem,
Inc. (ClimaChem), Bank One, NA as the Trustee, and TES, TES (NZ), TES
Mining, The Environmental Group, Inc., International Environmental
Corporation, Climate Master, Inc., CHP Corporation, KOAX Corp., APR
Corporation, Climate Mate, Inc., The Environmental Group International
Limited, LSB Chemical Corp., El Dorado Chemical Company, Slurry
Explosive Corporation, Universal Tech Corporation, Northwest Financial
Corporation, and DSN Corporation (hereinafter collectively referred to
as "the Guarantors").
(b) Registration Rights Agreement, dated 26 November 1997, between
Wasserstein Perella Securities, Inc. ("Initial Purchaser"), ClimaChem
and the Guarantors ("Registration Rights Agreement").
(c) Guarantees of ClimaChem's 10 3/4% Senior Notes, Series B, due 2007
issued by TES, TES (NZ), and TES Mining (hereinafter collectively
referred to as "the Guarantees").
<PAGE>
13 March 1998 Page 2
ClimaChem, Inc.
2. Definitions
In this opinion:
"Relevant Jurisdictions" means the State of Queensland, the Commonwealth of
Australia and New Zealand.
3. Documents
In connection with this opinion we have examined the following documents
and instruments:
(a) The Indenture;
(b) The Registration Rights Agreement;
(c) The Guarantees;
(d) A copy of the certificate of incorporation and the memorandum and
articles of association of TES;
(e) An extract of a memorandum of unanimous resolutions of the directors
of TES in relation to the execution and delivery of the Transaction
Documents;
(f) A copy of the certificate of incorporation and the constitution of TES
(NZ);
(g) An extract of a memorandum of unanimous resolutions of the directors
of TES (NZ) in relation to the execution and delivery of the
Transaction Documents;
(h) A copy of the certificate of incorporation and the memorandum and
articles of association of TES Mining;
(i) An extract of a memorandum of unanimous resolutions of the directors
of TES Mining in relation to the execution and delivery of the
Transaction Documents;
(j) The annexed legal opinion from Bell Gully Buddle Weir dated 13 March
1998;
(k) Such other documents and instruments as we considered necessary.
<PAGE>
13 March 1998 Page 3
ClimaChem, Inc.
4. Assumptions
For purposes of this opinion we have assumed (without making any
investigation):
(a) The authenticity of all seals and signatures;
(b) The completeness and the conformity to the originals of all copies of
the documents and instruments submitted to us;
(c) That the copies of the documents and instruments referred to in
subparagraphs (d), (e), (f), (g), (h), and (i) of paragraph 3 of this
opinion are true and correct copies of the original documents and
instruments of which they purport to be copies or extracts;
(d) That all facts stated in the documents referred to in subparagraphs
(d), (e), (f), (g), (h), and (i) of paragraph 3 of this opinion are,
and continue to be, correct, and no relevant matter has been withheld
from us, whether deliberately or inadvertently (and we have no reason
to believe that this is not the case);
(e) That all acts of internal management relating to the entry into, and
execution of, the Transaction Documents by TES, TES (NZ), and TES
Mining have been duly performed and, without limitation, that:
(i) the resolutions of the directors referred to in paragraphs
3(e), 3(g) and 3(i) were properly passed and documented;
(ii) all directors who consented to and made such resolutions
were entitled to do so;
(iii) all provisions relating to the declaration of the directors'
interests or the power of interested directors to vote
and/or resolve on relevant issues were duly observed.
(a) That none of TES, TES (NZ), and TES Mining are conducting, nor will
they seek to conduct, any relevant transactions or any associated
activities in a manner or for a purpose not evident on the face of the
Transaction Documents which might render the Transaction Documents or
any of them or any relevant transactions or associated activities
illegal, void, voidable or unenforceable;
<PAGE>
13 March 1998 Page 4
ClimaChem, Inc.
(b) That in so far as any obligation of TES, TES (NZ) or TES Mining under
the Transaction Documents is to be performed outside the Relevant
Jurisdictions, its performance will not be illegal or ineffective by
virtue of the law of the place of performance;
(c) That TES, TES (NZ) and TES Mining were each solvent (within the
meaning of Section 95A of the Corporations Law or within the meaning
of Section 4 of the Companies Act 1993 (New Zealand) respectively) at
the time which each entered into the Transaction Documents and each
will not become insolvent (within the meaning of the relevant
provision) because of, or because of matters including, entering into
the Transaction Documents or any of them;
(d) All representations and warranties made in the Transaction Documents
in favour of, or for the benefit of, TES, TES (NZ) or TES Mining by
any other party to the Transaction Documents, are true and correct;
(e) The annexed legal opinion from Bell Gully Buddle Weir is true, correct
and complete in respect of the matters with which it deals.
We do not have actual knowledge of anything which would render any of these
assumptions wholly or partly incorrect.
5. Qualifications
This opinion is subject to the following qualifications:
(a) This opinion relates solely to matters governed by, and should be
interpreted in accordance with, the laws of the Relevant Jurisdictions
as in force and as interpreted at 9:00 a.m. on the date of this
opinion in respect of the laws of Queensland or the Commonwealth of
Australia or as in force and as interpreted at 9:00 a.m. (New Zealand
time) on the date of the annexed letter of advice in respect of the
laws of New Zealand, and we have no obligation to inform you of any
change in the relevant law occurring after the date of this opinion or
the date of the annexed letter of advice as the case may be;
(b) We express no opinion as to any laws other than the laws of Queensland
and the Commonwealth of Australia and in respect of the laws of New
Zealand we rely on the annexed legal opinion from Bell Gully Buddle
Weir;
(c) Enforcement of any of the Transaction Documents is subject to:
<PAGE>
13 March 1998 Page 5
ClimaChem, Inc.
(i) applicable laws from time to time in effect relating to
bankruptcy, liquidation, admini-stration, receivership,
composition, compro-mise, arrangement, insolvency,
reorganization, moratorium, court schemes and refusals to
enforce payments in the nature of, or relating to, penalties
or forfeitures;
(ii) other laws of general application affecting the enforcement
of creditors' rights and remedies; and
(iii) statutes imposing limitation periods within which suits,
actions or proceedings can be brought;
(d) Claims against TES, TES (NZ), and TES Mining may become statute barred
and any provision in any of the Transaction Documents negating any
defences of set off or counterclaim may not be effective in all
circumstances;
(e) Equitable remedies (including, without limitation, injunctions and
orders for specific performance) are discretionary and may not be
awarded by the courts;
(f) Where under any of the Transaction Documents any of TES, TES (NZ), and
TES Mining is required to make any payments on demand, courts may
require that such be given a reasonable time after demand is made to
comply with the demand before the payee will be permitted to realise
or enforce any security for a failure to satisfy the demand;
(g) Any or all of the Transaction Documents may be unenforceable, invalid,
void or at the action of TES, TES (NZ) or TES Mining voidable, if a
commercial benefit does not accrue to TES, TES (NZ) or TES Mining
respectively from executing the Transaction Documents and undertaking
the obligations thereunder;
(h) We express no opinion as to whether the representations and warranties
made, or given to be made, or given by TES, TES (NZ) and TES Mining in
any of the Transaction Documents are correct, except insofar as (and
to the extent that) any such representation or warranty relates to a
matter which is the subject of this opinion (in which case our opinion
on those matters is given in the terms set out in this opinion);
(i) A court may set aside a contract against a party on the application of
another party if that party entered into that contract as a result of
fraud, duress or
<PAGE>
13 March 1998 Page 6
ClimaChem, Inc.
unconscionable conduct on the part of the first mentioned party;
(j) We have relied on searches conducted at the offices of the Australian
Securities Commission on 14 January 1998 in respect of TES and TES
Mining, but we note and rely on the fact that the records of the
Australian Securities Commission available for public search may not
be complete or up to date;
(k) We express no opinion as to:
(i) whether a judgment would be entered in a court in the
Relevant Jurisdictions for an amount other than one
expressed in Australian or New Zealand currencies
respectively, although decisions of English courts allowing
judgments in a foreign currency have been followed in
Australian and New Zealand courts;
(ii) as to the date upon which a conversion from foreign currency
would be made for the purposes of enforcement of any
judgment;
(l) A provision that a calculation, determination or certificate will be
conclusive and binding or conclusive evidence will not apply to a
calculation, determination or certificate which is fraudulent,
manifestly inaccurate on its face or determined on an arbitrary basis
and will not necessarily prevent a court from inquiring into the
merits of any claim in relation to any such calculation, determination
or certificate;
(m) We express no opinion on any provision in any of the Transaction
Documents requiring written amendments and waivers insofar as it
suggests that oral or other modifications, amendments or waivers could
not be effectively agreed upon or granted by or between the parties or
by a duly authorised agent;
(n) An obligation to pay an amount may be unenforceable if the amount is
held to constitute a penalty and the obligation of TES, TES (NZ) or
TES Mining under any of the Transaction Documents to pay interest on
overdue amounts at a rate higher than the rate applying before the
amount fell due may be held to constitute a penalty if it is not a
genuine pre-estimate of the damage;
(o) Court proceedings may be stayed in the subject of the proceedings is
concurrently before another court;
<PAGE>
13 March 1998 Page 7
ClimaChem, Inc.
(p) An indemnity for legal costs or against liability for breach of any
law may be unenforceable;
(q) A court will not give effect to a choice of laws to govern any of the
Transaction Documents or to a submission to the jurisdiction of
certain courts if to do so would be contrary to public policy in the
Relevant Jurisdiction (but we are not aware of any reason why that
would be so in relation to any of the Transaction Documents);
(r) Section 243H of the Corporations Law prohibits a public company and a
child entity of a public company from giving financial benefit to a
related party of that public company except as permitted by Divisions
4 or 5 of Part 3.2A of the Corporations Law, and we express no opinion
in relation to the application of that section;
(s) To the extent that any of the Transaction Documents requires TES, TES
(NZ) or TES Mining to offer, allot or issue corporate securities to
third parties, TES, TES (NZ) or TES Mining cannot do so unless and
until it complies with the requirements of the Corporations Law or the
Companies Act 1993 (New Zealand) respectively relating to the offer,
issue or allotment of corporate securities.
(t) In order to be validly executed none of the Transaction Documents must
take effect as a deed.
(u) We express no opinion as to whether the respective obligations
undertaken by TES, TES (NZ) and TES Mining pursuant to the Transaction
Documents may cause a default in any of the obligations to any party
to whom TES, TES (NZ) or TES Mining respectively has granted a charge
over its assets.
2. Opinion
Based upon the assumptions and subject to the qualifications set out above,
we are of the opinion that:
(a) TES has been duly incorporated under the laws of its place of
incorporation and is validly registered and existing under the
Corporations Law;
(b) TES has power to enter into and to perform its obligations under each
of the Transaction Documents and has taken all necessary corporate and
other action to authorise the execution, delivery and performance, in
<PAGE>
13 March 1998 Page 8
ClimaChem, Inc.
accordance with its terms of each of the Transaction Documents,
including, without limitation, the Guarantees.
(c) TES Mining has been duly incorporated under the laws of its place of
incorporation and is validly registered and existing under the
Corporations Law;
(d) TES Mining has power to enter into and to perform its obligations
under each of the Transaction Documents and has taken all necessary
corporate and other action to authorise the execution, delivery and
performance, in accordance with its terms of each of the Transaction
Documents, including, without limitation, the Guarantees.
Based upon the assumptions and subject to the qualifications set out above
and in reliance upon the matters set out in the annexed legal opinion from
Bell Gully Buddle Weir, we are of the opinion that:
(a) TES (NZ) has been duly incorporated under the laws of its place of
incorporation and is validly registered and existing under the laws of
New Zealand;
(b) TES (NZ) has power to enter into and to perform its obligations under
each of the Transaction Documents and has taken all necessary
corporate and other action to authorise the execution, delivery and
performance, in accordance with its terms of each of the Transaction
Documents, including, without limitation, the Guarantees.
We consent to the reference to our firm under the heading "Legal Matters" and to
the filing of this opinion as an exhibit to the Registration Statement on Form
S-4 and Prospectus included therein. In addition, this opinion may be relied on
by Conner & Winters, A Professional Corporation.
Yours faithfully,
CORRS CHAMBERS WESTGARTH
/s/ John Kelly
John Kelly
Partner
<PAGE>
EXHIBIT 5.4
McLEAN & KERR
BARRISTERS & SOLICITORS
Suite 2800
130 Adelaide Street West Telephone: (418) 364-5371
Toronto, Canada M5H 3P5 FAX (418) 365-8571
January 21, 1998
AMENDED
ClimaChem, Inc.
16 South Pennsylvania
Oklahoma City, Oklahoma 73107
Re: Climate Mate Inc.
-----------------
Dear Sir:
We are special counsel to Climate Mate Inc., a corporation organized under
the laws of the Province of Ontario, Canada (the "Company"). We have been
requested to render certain opinions in connection with the authorization,
execution and delivery of the Indenture (as defined below) and the Guarantee (as
defined below). We have been advised of and rely on the following information:
1. that the Company is a wholly owned subsidiary of ClimaChem, Inc.
("ClimaChem");
2. ClimaChem has issued $105,000,000 in aggregate principal amount of its 10
3/4% Senior Notes, due 2007 (the "Old Notes"), and has agreed to offer to
exchange (the "Exchange Offer") the Old Notes for up to $105,000,000 in
aggregate principal amount of ClimaChem's 10 3/4% Senior Notes, Series B,
due 2007 (the "New Notes"), pursuant to the terms of a Registration Rights
Agreement, dated November 26, 1997, between ClimaChem, the Company, the
other listed guarantors, and Wasserstein Perella Securities, Inc.;
3. the Company has guaranteed the Old Notes, and has agreed to guarantee the
New Notes, pursuant to the terms of the Indenture (as defined below) under
which the Old Notes were issued and the New Notes will be issued; and
4. the Exchange Offer is to be undertaken by means of a Registration Statement
on Form S-4 ("Registration Statement")
<PAGE>
ClimaChem, Inc.
January 21, 1998
Page 2
to be filed with the Securities and Exchange Commission and the prospectus
contained therein (the "Prospectus").
In connection with this opinion, we have examined the following documents
and instruments:
1. photostatic copy of Indenture dated as of November 26, 1997 (the
"Indenture"), between ClimaChem, as issuer, BankOne, NA, as trustee,
and the following as Guarantors, the Company, Total Energy Systems
Limited, T.E.S. Mining Services Pty, Ltd., Total Energy Systems (NZ)
Ltd., The Environmental Group, Inc., International Environmental
Corporation, Climate Master, Inc., CHP Corporation, KOAX Corp., APR
Corporation, The Environmental Group International Limited, LSB
Chemical Corp., El Dorado Chemical Company, Slurry Explosive
Corporation, Universal Tech Corporation, Northwest Financial
Corporation, and DSN Corporation and any future newly created,
acquired or designated subsidiary of ClimaChem;
2. photostatic copy of Guarantee by the Company of ClimaChem's 10 3/4% of
Senior Notes, Series B, due 2007 (the "Guarantee");
3. photostatic copy of the Certificate of Incorporation of the Company
effective August 16, 1991 and Bylaw No. 1 of the Company dated August
16, 1991;
4. Written Resolutions of the Directors of the Company dated the 21/st/
day of November, 1997 in connection with, inter alia, Form S-4
Registration Statement;
5. Written Resolutions of the Directors of the Company dated the 21/st/
day of November 1997 in connection with, inter alia, ClimaChem Senior
Notes due 2007, which resolutions provide for, inter alia, the
authorization, execution and delivery of the Indenture and the
Guarantee; and
6. Certificate of Status of the Company dated January 21, 1998.
Our opinions with respect to the matters referred to below are subject to
the following qualifications and reservations:
1. we have assumed the genuineness of all signatures and the authenticity
of all documents submitted to us as
<PAGE>
ClimaChem, Inc.
January 21, 1998
Page 3
originals and the conformity with the originals of all documents
submitted to us as copies thereof;
2. our opinions set forth below are confined to the laws of the Province
of Ontario and the laws of Canada applicable therein, and
3. the Company is referred to incorrectly with a "," before the word,
"Inc."
Based upon and relying on the foregoing, we are of the opinion that:
1. the Company is incorporated and existing under the laws of the
Province of Ontario, Canada;
2. the Company has the corporate power to enter into, and perform its
obligations under, the Indenture and the Guarantee; and
3. the Company has taken all necessary corporate action of the Company to
authorize the execution, delivery and performance of the Indenture
and, when issued, the Guarantee.
The opinions expressed herein are limited to the laws of the Province of
Ontario, Canada. We express no opinion as to any other laws or the laws of any
other jurisdiction.
This opinion may be relied upon only by ClimaChem, Inc. and counsel to
ClimaChem, Inc. in Oklahoma, Conner & Winters, A Professional Corporation, and
Securityholders or Holders, as defined in the Indenture, who exchange their Old
Notes for New Notes. It may not be relied upon by any other person or for any
other purpose, nor may it be quoted in whole or in part or otherwise referred
to, without our prior written consent. We specifically consent to the reference
to our firm under the heading "Legal Matters" in the Registration Statement and
the Prospectus included therein and to the filing of this opinion as to
authorization, execution and delivery of the Indenture and the Guarantee as an
exhibit to the Registration Statement.
Very truly yours,
McLEAN & KERR
BARRISTERS & SOLICITORS
/s/ McLean & Kerr
<PAGE>
EXHIBIT 5.5
CLYDE & CO. 51 Eastchcap,
An International London EC3M 1JP
Law Firm Telephone: 01 1-623 1244
Telex: 884886 Clyde G.
Facsimile: 0171-623-5427
DX: 1071 London/City.
London
Guildford
Cardiff
Hong Kong
Singapore
Durai
Paris
Associate office:
St. Petersburg -
Musin & Parness
Our ref. Your ref. Date:
KXW/CBH/9504784 6 March 1998
Dear Sirs:
Registration Statement on Form S-4; Our File No. 7539.2
We have acted as English legal advisers to The Environmental Group International
Limited, a company incorporated under the laws of England ("the Company"), and a
wholly owned subsidiary of ClimaChem, Inc. ClimaChem has issued US$105,000,000
in aggregate principal amount of its 10 3/4% Senior Notes, due 2007 ("the Old
Notes"), and has agreed to offer to exchange ("the Exchange Offer") the Old
Notes for up to US$105,000,000 in aggregate principal amount of ClimaChem's 10
3/4% Senior Notes, Series B, due 2007 ("the New Notes"), pursuant to the terms
of a Registration Rights Agreement dated 26 November 1997 between ClimaChem, the
Company, the other listed guarantors and Wasserstein Perella Securities, Inc.
The Company has guaranteed the Old Notes and has agreed to guarantee the New
Notes, pursuant to the terms of the Indenture (as defined) under which the Old
Notes were issued and the New Notes will be issued. The Exchange Offer is to be
undertaken by means of a Registration on Form S-4 ("Registration Statement") to
be filed with the Securities and Exchange Commission and the prospectus
contained therein (the "Prospectus").
In connection with this opinion, on 21 January 1998 we have examined the
following documents and instruments:
<PAGE>
6 March 1998
PAGE 2
1. Copy of Indenture, dated 26 November 1997 ("the Indenture") between
ClimaChem, BankOne, NA, as trustee, and the Company, Total Energy Systems
Limited, T.E.S. Mining Services Pty. Ltd., Total Energy Systems (NZ) Ltd.,
the Environmental Group, Inc., International Environmental Corporation,
Climate Master, Inc., Climate Mate, Inc., CHP Corporation, KOAX
Corporation, APR Corporation, LSB Chemical Corp., El Dorado Chemical
Company, Slurry Explosive Corporation, Universal Tech Corporation,
Northwest Financial Corporation and DSN Corporation (collectively "the
Guarantors").
2. Copy of Guarantee by the Company of ClimaChem's 10 3/4% of Senior Notes,
Series B, due 2007 ("the Guarantee").
3. Original Certificate of Incorporation and copies of Memorandum and Articles
of Association.
4. Unanimous written consent of the directors of the Company relating to the
execution and delivery of the Indenture and the Guarantee.
5. Such other documents and instruments as we have considered necessary.
Based upon the foregoing, and on the assumption of the copies' conformity to the
original documents, and of the accuracy and completeness of information (as of
21 January 1998) disclosed by a Companies House search and by the Central
Registry of Winding-up Petitions and that the Information has not since 21
January 1998 been materially altered or added to, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing under
the laws of England and is a dormant company (within the meaning of
section 250 Companies Act 1985).
2. The Company has the power to enter into and perform its obligations
under the Indenture and the Guarantee and has taken all necessary
corporate and other action to authorise the execution, delivery and
performance of the Indenture and, when issued, the Guarantee.
The opinions expressed herein are limited to English law. We have not made any
investigations of, and do not express any opinion as to any other laws or the
laws of any other jurisdiction.
<PAGE>
6 March 1998
Page 3
We consent to the reference to our firm under the heading "Legal Matters" and to
the filing of this opinion as an exhibit to the Registration Statement and
Prospectus included therein. This opinion, given for the benefit of ClimaChem,
Inc., may be relied on by Conner & Winters, a Professional Corporation, and
those holders of the New Notes who acquired them as a result of the Exchange
Offer, but by no other person.
Yours sincerely,
/s/ Clyde & Co.
Clyde & Co.
<PAGE>
EXHIBIT 5.6
BELL GULLY BUDDLE WEIR Telephone 64 4 473 7777
IBM Centre Facsimile 64 4 473 3845
171 Featherston Street
P. O. Box 1291
Wellington, New Zealand
BELL/GULLY Barristers and Solicitors
Corrs Chambers Westgarth
Waterfront Plaza
1 Eagle Street
GPO 9926 Our ref M.W. Freeman/C. M. A. O'Brien
Queensland 4001 E-mail
Australia
Attention: John Kelly
13 March 1998
Dear Sirs:
TOTAL ENERGY SYSTEMS (NZ) LIMITED
We acted as your New Zealand solicitors in connection with the execution by
Total Energy Systems (NZ) Limited (the "Company") of:
1. an indenture (the "Indenture") dated 26 November 1997 between ClimaChem,
Inc., the parties named therein as "Guarantors" and Bank One, NA, as the
"Trustee");
2. a registration rights agreement (the "Registration Rights Agreement") dated
26 November 1997 between Wasserstein Perella Securities, Inc., as the
"Initial Purchaser," ClimaChem, Inc. and the Guarantors; and
3. a guarantee (the "Guarantee") given by the Company.
(In this opinion, the Indenture, the Registration Rights Agreement, and the
Guarantee are each referred to as a "Transaction Document" and together as the
"Transaction Documents").
This opinion relates solely to, and is to be construed in accordance with, New
Zealand law in force on the date and at the time of delivery of this opinion.
It is given on the basis that it will be construed in accordance with New
Zealand law.
<PAGE>
13 March 1998
Page 2
1. For purposes of this opinion, we have examined and relied upon:
(a) a copy of the final draft of each Transaction Document;
(b) a certified copy of the constitution of the Company;
(c) a facsimile copy of an executed certificate addressed to us dated 12
March 1998 from a director of the Company ("Director's Certificate") a
copy of which is attached;
(d) a facsimile copy of resolutions in writing passed by the board of
directors of the Company dated 21 November 21997 and of resolutions in
writing passed by the shareholder of the Company dated 22 January 1998
(each a "Resolution," together the "Resolutions"); and
(e) such other documents as we considered necessary in order that we give
this opinion.
2. For the purposes of this opinion, we assumed:
(a) the authenticity of all signatures, seals and markings on the
documents examined by us;
(b) the authenticity and completeness of the documents examined by us;
(c) the conformity:
(i) to the original of the copy and counterpart documents; and
(ii) to the executed documents of the copy of the relevant draft
document examined by us;
(d) that:
(i) each of the parties to the Transaction Documents (other than
the Company) has the capacity and the power to enter into
and perform its obligations under the Transaction Document;
<PAGE>
13 March 1998
Page 3
(ii) each Transaction Document has been duly authorised and executed
by each party to it (other than the Company; and
(iii) in executing and performing the Transaction Documents each such
party is or will be complying with all laws applicable to it;
(e) that each Transaction Document is valid, binding and enforceable under
its proper law;
(f) that, (as we have not reviewed, nor advised on the provisions of the
Transaction Documents) the performance by the Company of its
obligations under any Transaction Document will not be contrary to any
official directive of, or be impossible to perform, illegal or
ineffective by virtue of, any law of any jurisdiction which applies to
the Transaction Documents;
(g) that:
(i) To the extent that it is necessary, in order to ensure the
validity, effectiveness, performance or enforceability of any
Transaction Document, that the Transaction Document or details
of it be filed or registered or that any other instrument
relating to it be executed, delivered, filed or registered, such
has been completed; and
(ii) to the extent that any stamp or similar tax on any Transaction
Document is payable, such has been paid;
(h) that none of the parties to any Transaction Document is, or will be,
seeking to conduct any relevant transaction or any associated activity
in any manner or for a purpose not evident on the face of the
Transaction Document which might render the Transaction Document or any
relevant transaction or associated activity illegal, void or voidable;
(i) that, in respect of any matters other than the Transaction Documents,
the Company was not in breach of, or in conflict with:
<PAGE>
13 March 1998
Page 4
(i) Any law or agreement binding it or its assets; or
(ii) its constitution;
(j) that each Transaction Document was properly executed on behalf of each
party to the Transaction Document;
(k) that no receiver has been appointed to, or step taken to liquidate, any
party to a Transaction Document;
(l) that, other than the Company, in the case of each of he parties to each
Transaction Document:
(i) It is solvent and able to pay its due debts; and
(ii) the value of the consideration or benefit received by it under
the transactions contemplated by the Transaction Document was
not less than the value of the consideration or benefit provided
by it under those transactions; and
(m) that the matters set out in the Directors Certificate are true,
correct, and complete.
We have not taken steps to verify these assumptions other than, in relation
to the application of subparagraph (k) to the Company, the search of the
Companies Office referred to in paragraph 4(s) below.
3. Based on and subject to the preceding paragraphs, and subject to the
qualifications and reservations set out in paragraph 4, we are of the
opinion that:
(a) the Company is duly and validly incorporated under the laws of New
Zealand; and
(b) the Company has:
(i) the corporate power to execute and to perform its obligations
under each Transaction Document; and
<PAGE>
13 March 1998
Page 5
(ii) taken all necessary corporate action to authorise the execution,
delivery and performance by it of the Transaction Document.
We express no opinion on the enforceability of any Transaction Document.
4. This opinion is given subject to the qualification that we confined our
searches to searches of the public records of the Company at the offices of
the Registrar of Companies on 13 March 1998. We assume that the records
disclosed by each search are true, complete and accurate and are up-to-
date. However, a search of the offices of the Registrar of Companies may
not reveal whether:
(i) an application to liquidate a company has been made; or
(ii) a resolution for liquidation has been passed or a receiver or
liquidator has been appointed; or
(iii) if a company has been made subject to statutory management,
since notice of these matters may not be filed at the offices of the
Registrar of Companies immediately or, even if filed, may not be available
for immediate inspection.
5. This opinion is addressed to you personally for the purposes of the
Transaction Documents and Registration Statement on Form S-4 to be filed
with the Securities and Exchange Commission in relation to the exchange
offer by ClimaChem, Inc. of the already issued principal amount of its 10
3/4 per cent U.S.$105,000,000 in aggregate Senior Notes, due 2007 (the "Old
Notes") for up to U.S.$105,000,000 in aggregate principal amount of
ClimaChem's 10 3/4 per cent Senior Notes Series B, due 2007 (the "New
Notes"), pursuant to the terms of the Registration Rights Agreement. This
opinion may be disclosed to and relied upon by:
(a) ClimaChem, Inc.;
(b) ClimaChem, Inc.'s legal advisors, including Conner & Winters; and
(c) "Security Holders" or "Holders" (in either case, as defined in the
Indenture) who exchange their Old Notes for New Notes.
<PAGE>
13 March 1998
Page 6
This opinion may not, without our prior written consent, be:
(a) relied on by or disclosed to another person; or
(b) relied on for another purpose; or
(c) filed with another government or another agency or another person or
quoted or referred to in a public document.
For the avoidance of doubt, we consent to the reference to our firm under
the heading "Legal Matters" in, and to the filing of this opinion as an
exhibit to, the Registration Statement and Prospectus included therein.
This opinion is strictly limited to the matters stated in it. It does not apply
by implication to other matters.
Yours faithfully
BELL GULLY BUDDLE WEIR
/s/ Bell Gully Buddle Weir
<PAGE>
EXHIBIT 10.38
Bank of New Zealand LEVEL 7
A division of National Australia CENTRAL PLAZA ONE
Bank Limited 345 QUEEN STREET
A.C.N. 004044937 BRISBANE QLD 4000
Brisbane Branch
DX 246
20/th/ August 1997 TELEPHONE (07) 32345633
FAX (07) 32345644
POSTAL ADDRESS
The Directors GPO BOX 1447
Total Energy Systems Ltd. BRISBANE QLD 4001
Level 9, 371 Queen Street, AUSTRALIA
BRISBANE QLD 4000
Dear Sirs,
We refer to your current facilities with the Bank of New Zealand, Australia, a
division of the National Australia Bank Limited ACN 004 044 937 (the "Bank"),
the terms and conditions of which are contained in the Bank of New Zealand,
A.R.B.N. 000 000 288 Letter of Offer dated 19/th/ December 1996 (the "Facility
Letter") and the subsequent variation dated 11/th/ April 1997 ("Variation
Letter").
We are pleased to advise that the Bank has approved your request for an
increase, variation and continuation of the facilities on amended terms and
conditions. Upon your acceptance of this offer and on completion of all terms
and conditions including the "Standard Terms and Conditions for Letter of Offer"
which is attached hereto shall replace in its entirety the terms and conditions
contained in the Facility Letter and the Variation Letter.
TERMS AND CONDITIONS:
1. BORROWER: Total Energy Systems Limited
A.C.N. 010 876 150
2. FACILITY TYPE/
AMOUNT: Facility 1
Overdraft / Commercial Bill Acceptance / Discount /
Trade Letter of Credit / Bills of Lading Surrendered /
Trade Bills Discounted / Bank Guarantee / Forward
Exchange cover Facility mix (the "Facility") up to an
aggregate of $10,500,000 (the "Facility Limit") (an
increase of $2,000,000)
The Bank will procure the Commercial Bill Acceptance
Discount Facility offered
1
<PAGE>
under the Facility for the
Borrower through the Treasury Division of National
Australia Bank
In addition the overdraft facility shall be further
subject to the terms comprised in the annexed copy of
the Banks "Terms and Conditions for the BNZA Business
Cheque Account".
The Bank will provide the Borrower with a Trade Letter
of Credit Facility which will be utilised from time to
time by the Bank issuing a Trade Letter of Credit to a
beneficiary nominated by the Borrower and subsequently
negotiating, amending, discounting or otherwise
transacting with the Borrower under that Trade Letter
of Credit.
"Trade Letter of Credit" means a written undertaking by
the Bank given to the seller at the request, and on the
instructions, of the borrower to pay at sight or at a
determinable future date up to a stated sum of money,
within a prescribed time limit and against stipulated
documents. A Trade Letter of Credit will be issued by
the Bank subject to the Uniform Customs and Practice
for Documentary Credits (1993 Revision).
"Trade Letter of Credit Facility" means the facility
for the issuance of Trade Letters of Credit by the Bank
to the nominated Beneficiary.
The Borrower may utilise either or all of the
Overdraft, Commercial Bill acceptance / Discount, Bills
of Lading Surrendered, Trade Bills Discounted, Bank
Guarantee, Forward Exchange facilities and the Trade
Letter of Credit Facility from time to time provided
that, the Indebtedness of the Borrower shall at no time
exceed the approved Facility Limit.
"Indebtedness" means any indebtedness or liability of
the Borrower to the Bank, whether actual or contingent,
present or future, in respect of any monies borrowed or
raised or any financial accommodation
2
<PAGE>
whatsoever including (without limitation) under or in
respect of any acceptance, endorsement, guarantee,
undertaking, performance bond, indemnity, cheque
encashment authority or letter of credit, interest or
currency exchange, hedge or arrangement of any kind
(including an interest rate fixing arrangement) or any
other obligation of the Borrower to the Bank however
described or however arising under the Overdraft,
Overdraft, Commercial Bill Acceptance / Discount, Bills
of Lading Surrendered, Trade Bills Discounted, Bank
Guarantee, Forward Exchange facilities or Trade Letter
of Facility.
Facility 2
Revolving Lease / Lease Purchase facility of $500,000
(The terms and conditions for which will be fully set
out in one or more agreements which will be entered
into by the borrower with the Bank from time to time).
3. PURPOSE: Facility 1
Continuation and increase of $2,000,000 in existing
Facility.
Facility 2
To assist with ongoing leasing requirements.
4. INTEREST RATE: Facility 1 - Overdraft Option.
-----------------------------
BNZA Base Lending Rate Corporate plus a margin of 0.5%
per annum.
BNZA Base Lending Rate Corporate is currently 9.0% per
annum but is subject to change from time to time in
line with market trends. Whilst the Borrower is not
notified of changes made to the said Base Rate, there
is regular publication of same made nationwide in the
press.
Interest will be calculated daily on the outstanding
balance of the Account upon which the Facility is drawn
and will be charged to such Account monthly in arrears
until the outstanding balance of such Account has been
repaid in full.
3
<PAGE>
For so long as moneys payable by the Borrower under any
Facility remain unpaid after the due date, the Borrower
will pay interest upon such moneys from the date such
moneys become due and payable up to and including the
day of payment. Such interest will be calculated at
the rate of 4.0 per cent per annum plus the BNZA Base
Lending Rate Corporate.
If the aggregate usage under the Facility exceeds the
Facility Limit, then the interest rate applicable to
that amount which exceeds the Facility Limit shall be
the aggregate of the BNZA Base Lending Rate Corporate
and 4.0% per annum and shall be charged against any
account or accounts upon which the overdraft option
operates.
Facility 1 - Refinancing usage under Import Letter of
-----------------------------------------------------
Credit / trade Bills Discounted / Bills of Lading
-------------------------------------------------
Surrendered Option
------------------
Draft and Letters of Credit will be refinanced by the
Bank at the Bank's Market Rate on the date that
refinancing is requested, plus a margin of 1.5% per
annum.
"Bank's Market Rate" means on any day the rate is
quoted, usually with notice to the Borrower, at or
about 10.30am (Sydney Time) on that day as its Market
Rate for the tenor of the refinancing.
5. FEES: An Establishment Fee of $7,500 is payable by the
Borrower on acceptance of this Offer.
Facility 1
----------
The Borrower shall pay to the Bank a Line Fee
calculated monthly in arrears at 0.25% per annu7m of
the aggregate of the Facility limit.
Facility 1 - Overdraft Option
-----------------------------
The Bank's standard scale of account fees from time to
time will be charged to the account upon which the
Facility is utilised monthly in arrears.
4
<PAGE>
Facility 1 - Commercial Bill / Acceptance / Discount
----------------------------------------------------
Option
------
Discount Fee - Commercial Bills will be discounted by
the Bank at the Bank's Yield Rate on the date of
acceptance or discount of Commercial Bills.
"Bank's Yield Rate" means on any day the rate quoted,
usually with notice to the Borrower, at or about
10.30am (Sydney Time) on that day as its Yield Rate for
the tenor of the Commercial Bills.
Activation Fee - The Borrower shall pay to the Bank an
Activation Fee on the aggregate face value amount of
all Commercial Bills drawn at the rate of 1.5% per
annum (previously 1.75% per annum). The Activation Fee
shall be calculated on a basis of a year of 365 days,
be paid in advance for the term of the Commercial Bills
and charged to or on account of the Borrower on or
about the date of acceptance of the Commercial Bills.
Facility 1 - Bank Guarantee Option
----------------------------------
The Bank's standard Bank Guarantee Fee from time to
time will apply. Currently, the Bank Guarantee Fee is
1.6% per annum on the face value of Bank Guarantees
issued by the Bank or $120.00 (One Hundred and twenty
Dollars) whichever is the greater sum. The Bank
Guarantee fee will be charged six monthly in advance to
or on account of the borrower. An Establishment Fee of
0.8% of the face value of Bank Guarantees will be
charged upon issuance.
Facility 1 - Import Letter of Credit / Trade Bills
--------------------------------------------------
Discounted / Bills of Lading Surrendered Option.
-----------------------------------------------
The Bank's standard Letter of Credit Establishment Fee
from time to time will apply. Currently the Letter of
Credit Establishment Fee is charged at the rate of
0.375% of the face value thereof with a minimum fee of
$100 being applicable, and the current rates are $25
for Cable Costs and 15c for Stamp Duty.
5
<PAGE>
The Bank's standard Letter of Credit Negotiation Fee
from time to time will apply. Currently the Letter of
Credit Negotiation Fee is charged at the rate of 0.25%
of the face value thereof with a minimum fee of $50
being applicable. Cable Costs are also applicable, and
the current rate is $10.
The Bank's standard Letter of Credit Amendment Fee from
time to time will apply. Currently the Letter of
Credit Amendment Fee is charged at the rate of $25 per
amendment. Any increase in the amount of the Letter of
Credit will be charged at 0.375% of the face value
thereof, no minimum. Cable Costs are also applicable,
and the current rate is $20.
The Bank's standard Sight Import Collection Fees from
time to time will apply. Currently the Sight Import
Collection Fee is charged at the rate of 0.25% of the
face value thereof with a minimum fee of $40 being
applicable. Cable Costs are also applicable, and the
current rate is $20.
The Bank's standard Term Import Collection Fees from
time to time will apply. Currently the Term Import
Collection Fee is charged at the rate of 0.25% of the
face value thereof with a minimum fee of $50 being
applicable. Cable Costs are also applicable, and the
current rate is $25.
Facility 1 - Forward Exchange Option
------------------------------------
The Bank's standard Forward Exchange Contract fees from
time to time will apply. Currently the Establishment
Fee is $15, if under AUD100,000 equivalent (no
establishment fee payable if over AUD100,000
equivalent), the Amendment / Extension Fee is $15 and
the Cancellation Fee is $15.
For your information, we have annexed hereto a copy of
the Bank's current "Your Guide to Banking Fees and
Charges" which sets out the fees and charges applicable
6
<PAGE>
to a range of services through Bank of New Zealand
Australia as a division of National Australia Bank
Limited at any of its banking suites or branches of
National Australia Bank Limited.
6. TERMINATION OF
OVERDRAFT: Facility 1 - Overdraft Option
-----------------------------
The Bank may at any time terminate the Overdraft
Facility by notice in writing to the Borrower (a
"Termination"), but such Termination shall not
prejudice the Bank's right of payment or repayment
hereunder.
Upon Termination, the debit balance of the Overdraft
account shall be immediately due and payable to the
Bank on demand.
7. TERMS &
REDUCTIONS: Facilities are made available subject to
satisfactory periodic review by the Bank.
The next periodic review by the Bank is due on 31/st/
December 1997 ("Expiry Date"). Following the review any
agreement for continuation of the Facilities shall be
at the Bank's absolute discretion and on terms and
conditions satisfactory to the Bank.
8. SECURITY: The following securities previously given to the Bank
shall continue to secure, inter alia, all obligations
of the Borrower to the Bank including in respect of
Facilities:
a) First registered Mortgage Debenture over the
assets, rights, and undertakings of T.E.S. Mining
Services Pty. Ltd.
b) Unlimited Guarantee and Indemnity given by T.E.S.
Mining Services Pty Ltd.
c) First registered Mortgage Debenture over the
assets, rights, and undertaking of the Borrower.
7
<PAGE>
d) Unlimited Guarantee and Indemnity given by LSB
Industries, Inc.
e) First registered Mortgage Debenture over the
assets, rights, and undertakings of Total Energy
Systems (NZ) Ltd.
f) Unlimited Guarantee and Indemnity given by Total
Energy Systems (NZ) Ltd.
9. CONDITIONS
PRECEDENT: It is a conditions precedent to any utilisation of
the Facilities or in respect of any continuation
or increase hereby granted that the Bank has
received the following in form and substance
acceptable to it:
a) An original All-Risk Insurance Policy for the full
replacement value of all stock-in-trade,
machinery, equipment, furniture and effects
charged to the Bank pursuant to Security described
in Clause 8 a), c), and e) hereof with interest of
the Bank and mortgage noted and with an Insurer
satisfactory to the Bank.
b) The acknowledgment and consent of LSB Industries,
Inc., Total Energy Systems (NZ) Ltd., and T.E.S.
Mining Services Pty. Ltd. as guarantor and/or
surety(ies) in respect of the Facilities and the
within terms and conditions is to be endorsed on
the duplicate copy of this Letter of Offer
immediately following acceptance by the Borrower.
c) Provision of the Commercial Bill Acceptance /
Discount facility will be subject to satisfactory
completion by the Borrower of all forms from time
to time required by the Treasury Division of the
National Australia Bank including a Power of
Attorney in favour of the National Australia Bank
Limited to
8
<PAGE>
execute and deal with bills of exchange on the
Borrowers behalf.
10. OPERATING
COVENANTS: a) The maximum exposure under the Forward
Exchange Cover (FEC) Facility Option is
USD2,000,000.
b) The Borrower is not to engage in any further
borrowings, excluding leasing transactions in the
normal course of business, without the Bank's
prior consent, with such consent not to be
unreasonably withheld.
Leasing transactions include finance leases and
hire purchase agreements.
c) Drawings under Facility 1 are not to exceed the
aggregate of:
- 70% of the following trade debtors aged less
than 60 days:
. Mt Isa Mines
. BHP
. Robe River
. Leighton Contractors
Hammersley Iron
Eltin Contracting Ltd
Henry Walker Iron Ore Pty Ltd., and
- 50% of the above-mentioned trade debtors
aged between 60-90 days; and
- 50% of all other trade debtors aged less
than 90 days;
- 50% of inventory not subject to reservation
of title or "Romalpa" agreements and
excluding inventory aged greater than 150
days; and
- 25% of the written down value of Plant and
Equipment (excluding revaluation reserve).
Drawings under the FEC Facility Option are
assessed as being 10 per cent of the face value of
the underlying Forward Contracts, i.e.
9
<PAGE>
Contracts totaling USD$2mil equates to facility
drawings of USD$0.2mil.
d) Interest Cover not to reduce below 3.0 times.
(previously 2.0 times)
To be monitored on a half yearly basis.
Interest cover is defined as:
Net profit before interest, depreciation and tax
expense divided by interest expense.
Interest Expense includes interest charges in
respect of financial leases.
e) Gearing not to exceed 1.4 times.
To be monitored on a quarterly basis.
Gearing is defined as:
Total liabilities divided by tangible net worth.
Total Liabilities are defined as the aggregate of
all current and non-current liabilities less all
shareholders' loans, outstanding royalty payments
owed to Slurry Explosives Corporation and Trade
Creditor Payments aged over 90 days owed to LSB
Industries, Inc.
Group subsidiaries.
Tangible Net Worth is defined as shareholders
funds plus all shareholders loans, outstanding
royalty payments owed to Slurry Explosives
Corporation and Trade Creditor Payments aged over
90 days owed to LSB Industries, Inc. Group
subsidiaries, but excludes any asset revaluation
reserves and all intangible items including
goodwill, future income tax benefits, tradenames,
patents, licences, etc.
f) A total of $3,500,000 in shareholders' loans
provided by LSB Industries, Inc. are to remain
subordinated to the Bank's Facilities.
10
<PAGE>
g) A material event of default that is continuing by
LSB Industries, Inc. or any of its subsidiaries,
when taken as a whole group, in respect of any of
their obligations shall constitute an event of
default in respect of the Facilities.
Material is defined as an event that the Bank
considers will have a significant bearing on the
ability of the group to continue trading as a
going concern.
Continuing is defined as an event that is not
remedied within a 3 month period.
h) There is to be a change in the ownership of the
Borrower without the Bank's prior written consent.
i) Should conversion of debt currently recorded as
trade creditors from El Dorado Chemical
Corporation not be converted into non-voting, non-
participating preference shares by 31/st/ December
1997, the Bank will require a subordination of the
debt to the Bank's Facilities.
11. REPORTING
REQUIREMENTS: a) Annual Audited Financial Statements of the
Borrower to be provided to the Bank by
30/th/ June.
b) Monthly Profit & Loss and Balance Sheet accounts
of the Borrower are to be provided to the Bank
within 30 days.
c) The following is to be certified on a monthly
basis (within 15 days) by an officer of the
Borrower:
- Full Aged Debtors Listing;
- Full Aged Creditors Listing;
- Statement certifying as to level and form of
inventory not subject to retention of title
clauses.
11
<PAGE>
d) Annual Profit & Loss/Balance Sheet/Cash Flow
Budgets to be provided to the Bank by 31/st/
January each year.
e) Audited Annual and Unaudited Quarterly financial
statements of LSB Industries, Inc. to be provided
within 90 days of balance date.
f) Quarterly certificate given by a director of the
Borrower confirming that all statutory payments
have bene accounted for is to be provided to the
Bank within 15 days of each quarter's end.
12. TRUST: a) The Borrower has advised that it is not a
trustee of any trust fund or settlement.
b) The Borrower has advised that the guarantors are
not trustees of any trust or hold any property
subject to or impressed by any trust.
13. STANDARD TERMS
AND CONDITIONS: By the Borrower's acceptance of this Offer, the
Borrower will be deemed to have acknowledged and
agreed that the Bank's Terms and Conditions of
Accounts, a copy of which is attached hereto, are
incorporated as terms and conditions applicable to
this Offer. Any inconsistent terms and conditions
in this offer shall prevail over the Bank's
Standard Terms and Conditions of Accounts.
14. ACCEPTANCE: This offer remains open for acceptance for a
period of 14 days after the date of this letter or
any such further period as the Bank may agree.
This offer may only be accepted by the Borrower by
delivery to the Bank of all of the following:
i) The attached copy of this Letter of Offer with the
form of acceptance
12
<PAGE>
annexed thereto duly executed by the Borrower.
Where the Borrower is a corporation, its common
seal should be affixed in accordance with its
Articles of Association, and the affixation of the
common seal should be further witnessed by an
independent Justice of the Peace.
ii) The form of Acknowledgment and Confirmation
annexed to the attached copy of this Letter of
Offer duly executed by each of the named Guarantor
or sureties. Where the Guarantor or Surety is a
corporation, its common seal should be affixed in
accordance with its Articles of Association, and
the affixation of the common seal should be
further witnessed by an independent Justice of the
Peace.
15. COUNTERPARTS: This Letter of Offer may consist of a number of
counterparts and the counterparts taken together
constitute one and the same instrument.
We are pleased to have been able to assist you with your requirements and should
there by any aspect you wish to discuss, please do not hesitate to contact
Gregory Carter or Mark Parry.
Yours faithfully
/s/ G. F. Carter /s/ L. E. Redsell
G. F. Carter L. E. Redsell
Senior Manager Assistant Manager
Business Banking Business Banking
13
<PAGE>
ACCEPTANCE
----------
We acknowledge receipt of your letter dated 20/th/ August 1997 of which this is
a copy and hereby accept the terms and conditions contained therein as well as
the "Standard Terms and Conditions for Letter of Offer" which is attached
thereto.
The Borrower acknowledges that the Borrower has agreed to pay or reimburse the
Bank on demand for all legal, valuation and other costs and out-of-pocket
expenses incurred or to be incurred by the Bank in connection with the security
whether or not the Facilities are drawn down or utilised by the Borrower.
Dated this 22/nd/ day of September, 1997.
GIVEN under the Common Seal )
of Total Energy Systems Ltd. )
By the authority of a ) /s/ K. J. Harman
resolution of the Board of ) ---------------------------
Directors previously given ) Director
and in the presence of )
K. J. Harman, a Director )
and of R. A. Rodgers ) /s/ R. A. Rodgers
the Secretary and in the ) ----------------------------
presence of: ) Secretary
E. Thomas, J. P. )
A Justice of the Peace
- ----------------------
14
<PAGE>
ACKNOWLEDGMENT AND CONFIRMATION BY GURANTOR OR
----------------------------------------------
SURETY
------
By our execution hereunder we each separately acknowledge and confirm to the
Bank that we have read and understood the terms and conditions set out in the
Letter of Offer and the attached "Standard Terms and Conditions for Letter of
Offer" given by the Bank on 20/th/ August 1997 to Total Energy Systems Ltd. (the
"Borrower") and confirm that our respective unlimited obligations as
Guarantor/Surety (either alone or jointly with others as the case may be) under
the Guarantee/Security which we have previously given to the Bank for the
obligations of the Borrower to the Bank (and which we acknowledge has not been
revoked or otherwise discharged) are continuing.
Dated this 22/nd/ day of September, 1997.
GIVEN under the Common Seal )
of Total Energy Systems (NZ) Ltd. )
By the authority of a ) /s/ K. J. Harman
resolution of the Board of ) ---------------------------
Directors previously given ) Director
and in the presence of )
K. J. Harman, a Director )
and in the ) ---------------------------
presence of: )
E. Thomas, J. P. )
A Justice of the Peace )
GIVEN under the Common Seal )
of LSB Industries, Inc. )
By the authority of a ) /s/ Tony Shelby
resolution of the Board of ) ---------------------------
Directors previously given ) Director
and in the presence of )
Tony M. Shelby, a Director )
and of James Wm. Murray ) /s/ James Wm. Murray
the Assistant Secretary and ) ---------------------------
in the presence of: ) Assistant Secretary
Notary Public
- -------------
15
<PAGE>
GIVEN under the Common Seal )
of T.E.S. Mining Services Pty. Ltd. )
By the authority of a ) /s/ K. J. Harman
resolution of the Board of ) ---------------------------
Directors previously given ) Director
and in the presence of )
K. J. Harman, a Director )
and of R. A. Rodgers ) /s/ R. A. Rodgers
the Secretary and in the ) ---------------------------
presence of: ) Secretary
E. Thomas, J. P. )
A Justice of the Peace
- ----------------------
16
<PAGE>
EXHIBIT 10.39
Bank of New Zealand BRISBANE 4-069
A division of National Australia LEVEL 7, 345 QUEEN STREET
Bank Limited BRISBANE 4000
A.C.N. 004044937 Phone: (07) 3234 5633
Fax: (07) 3234 5644
10 February 1998
Mr. R. A. Rodgers
Total Energy Systems Ltd.
GPO Box 167
BRISBANE Q 4001
Dear Mr. Rodgers
As a result of the discussions which have taken place since we issued our Letter
of Offer dated 20 August, 1997, the Bank is prepared to amend clause 10 of the
Standard Terms and Conditions attached to that letter, in the following manner:
(a) the existing two paragraphs comprising clause 10, will become 10(a); and
(b) the following additional sub-clause will be added as 10(b):
"(b) Notwithstanding the provisions of paragraph (a) of this clause 10 and
of clause 2(e), the Bank shall waive any misrepresentation or breach
of warranty which may occur after the facilities have been drawn down,
if that misrepresentation or breach does not, in the opinion of the
Bank, have any adverse effect on the ability of the borrower and/or
its guarantors to service and/or repay the facilities."
IN ADDITION the Bank is prepared to confirm (and by this letter does confirm)
that notwithstanding the provisions of clause 2 of the Standard Terms and
Conditions, the Bank will not act on any default by any Relevant Corporation
which:
(a) is a subsidiary of LSB Industries, Inc.; and
(b) does not undertake any business operations or activities in Australia,
unless the Bank is of the opinion that the default will impact on:
(i) the continuing ability of TES and/or LSB to trade; or
<PAGE>
(ii) the continuing ability of TES and its guarantors to service and repay the
facilities.
Yours faithfully
/s/ Greg Carter
Greg Carter
Senior Manager
Business Banking
<PAGE>
EXHIBIT 10.53
FIRST AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(the "Amendment") is dated as of March 12, 1998, and entered into by and between
BANKAMERICA BUSINESS CREDIT, INC. ("Lender") and CLIMATE MASTER, INC. ("Climate
Master"), INTERNATIONAL ENVIRONMENTAL CORPORATION ("IEC"), EL DORADO CHEMICAL
CORPORATION ("EDC") and SLURRY EXPLOSIVE CORPORATION ("Slurry") ("Climate, IEC,
EDC, and Slurry being collectively referred to herein as "Borrower").
WHEREAS, Lender and Borrower have entered into that certain Loan and
Security Agreement dated as of November 21, 1997 (the "Agreement");
WHEREAS, certain Events of Default have occurred under the Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events of Default
and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default and to amend
the Agreement subject to the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
---------
Definitions
-----------
Section 1.01. Definitions. Capitalized terms used in this Amendment, to
-----------
the extent not otherwise defined herein, shall have the same meanings as in the
Agreement, as amended hereby.
Section 1.02. New Definition. A new definition is added to Section 1.1 of
--------------
the Agreement and reads as follows:
"CCI Special Dividend' has the meaning specified in Section 9.14."
-------------------- ------------
<PAGE>
ARTICLE II
----------
Amendments
----------
Section 2.01. Amendment to Definition of "CCI Adjusted Tangible Net Worth."
-----------------------------------------------------------
The definition of "CCI Adjusted Tangible Net Worth" contained in Section 1.1 of
the Agreement is hereby amended in its entirety to read as follows:
"CCI Adjusted Tangible Net Worth" means, at any date: (a) the book
-------------------------------
value (after deducting related depreciation, obsolescence, amortization,
valuation, and other proper reserves as determined in accordance with GAAP)
at which the CCI Adjusted Tangible Assets would be shown on a consolidated
balance sheet of the CCI Consolidated Group at such date prepared in
accordance with GAAP plus the CCI Special Dividend less (b) the amount at
---- ----
which the CCI Consolidated Group's liabilities, including all deferred tax
liabilities, would be shown on such balance sheet prepared in accordance
with GAAP.
Section 2.01. Amendment to Definition of "Swap Transaction Reserves." The
-----------------------------------------------------
definition of "Swap Transaction Reserves" contained in Section 1.1 of the
Agreement is hereby amended in its entirety to read as follows:
"Swap Transaction Reserves" means all reserves which the Lender from
-------------------------
time to time establishes for amounts that are liabilities owed by EDC to
the Bank and for which Lender has agreed to indemnify the Bank. As of
March 10, 1998, the amount of the Swap Transaction Reserves is $5,000,000.
Section 2.03. Amendment to Section 9.14. Section 9.14 of the Agreement is
-------------------------
hereby amended to read in its entirety as follows:
"9.14. Distributions and Restricted Investments. Borrower shall not
----------------------------------------
(a) directly or indirectly declare or make, or incur any liability to make,
any Distribution, or (b) make any Restricted Investments, except: (i)
Borrower may make and receive Distributions and Restricted Investments to
and from CCI, the other CCI Borrower Subsidiaries, the CCI Guarantor
Subsidiaries, and all other members of the LSB Consolidated Borrower Group;
(ii) in addition to (i) above, each Borrower may make Restricted
Investments to any subsidiary of LSB other than to CCI and the members of
the LSB Consolidated Borrowing Group, provided, however, that (other than
Restricted Investments permitted under section (i) above to CCI and the
members of the LSB Consolidated Borrower Group) the sum of all such
Restricted Investments from each such Borrower and all other members of the
LSB Consolidated Borrowing Group shall not exceed $200,000 in the aggregate
per annu7m; (iii) each Borrower may make Restricted Investments in
Affiliates outstanding as of the date hereof, and (iv) each Borrower may
-2-
<PAGE>
make other Restricted Investments constituting Acquisitions not otherwise
permitted above in this Section as long as such Restricted Investments when
aggregated with all other Restricted Investments for the same Acquisition
from all members of the LSB Borrowing Group do not exceed $2,000,000 in
cash investments and issued and/or assumed interest-bearing debt per
Acquisition and $10,000,000 in cash investments and issued and/or assumed
interest-bearing debt in the aggregate for all such Acquisitions per annum;
provided, however, that interest-bearing debt of the acquired company which
Lender in its sole and absolute discretion agrees to refinance as a working
capital facility shall not be included in the $2,000,000 and the
$10,000,000 limitations; and further provided that nothing in this
subsection (iv) shall be construed to imply Lender's willingness to advance
to provide any such refinancing, and (v) CCI may make the Distributions
described on Schedule 10.8. In addition to the foregoing, CCI may make
Distributions to LSB (referred to herein as the "CCI Special Dividend") in
an amount not to exceed on an annual basis fifty percent (50%) of CCI's net
income plus the tax liability of LSB solely attributable to CCI.
Notwithstanding any provision to the contrary contained herein, the Account
currently owing to EDC by its Affiliate, TES, may be converted to preferred
stock to be owned and controlled by EDC."
Section 2.04. Amendment to Section 9.16. Section 9.16 of the Agreement is
-------------------------
hereby amended to read in its entirety as follows:
"9.16. CCI Adjusted Tangible Net Worth. The CCI Adjusted Tangible Net
-------------------------------
Worth will not be less than the following amounts at the end of each of the
---------
Fiscal Quarters during the following Fiscal Years:
<TABLE>
<CAPTION>
Fiscal Quarters in the
Following Fiscal Years 1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
- ---------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 $18,000,000 $21,500,000 $24,500,000 $26,500,000
First Fiscal Quarter
during Fiscal Year
Ending December 31,
1999 The CCI Adjusted Tangible Net Worth as of December 31,
1998, less $1,500,000.
----
Second Fiscal Quarter
During Fiscal Year
Ending December 31,
1999 The CCI Adjusted Tangible Net Worth as of March 31,
1999.
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Third Fiscal Quarter
During Fiscal Year
Ending December 31,
1999, and each
Fiscal Quarter during
each Fiscal Year
ending thereafter The CCI Adjusted Tangible Net Worth as of March 31,
19999, plus fifty percent (50%) of CCI's profits for
the prior fiscal quarter without taking into account
any losses."
</TABLE>
Section 2.05. Amendment to Section 9.17. Section 9.17 of the Agreement is
-------------------------
hereby amended to read in its entirety as follows:
"9.17. Debt Ratio. The ratio of Debt of the CCI Consolidated Group to
----------
the CCI Adjusted Tangible Net Worth will not be greater than the following
ratios at the end of each of the Fiscal Quarters during the following
Fiscal Years:
<TABLE>
<CAPTION>
Fiscal Quarters in the
Following Fiscal Years 1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
- ---------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 8.50:1 7.10:1 6.00:1 5.60:1
Fiscal Year Ending
December 31, 1999 and 5.60:1 5.60:1 5.60:1 5.60:1
</TABLE>
Each Fiscal Quarter during each Fiscal Year ending thereafter: 5.60:1"
ARTICLE III
-----------
Waivers
-------
Section 3.01. Waiver of Events of Default.
---------------------------
(a) The Lender hereby waives the following Events of Default: (i) the
CCI Adjusted Tangible Net Worth for the Fiscal Quarter ending December 31, 1997
was less than $21,000,000, in breach of Section 9.16 of the Loan Agreement, and
(ii) the CCI Consolidated Group's Debt Ratio for the Fiscal Quarter ending
December 31, 1997 was greater than 7.7 to 1.0, in breach of Section 9.17 of the
Loan Agreement.
(b) The foregoing waiver is only applicable to and shall only be
effective to the extent described above. The waiver is limited to the facts and
circumstances referred to herein and shall not operate as (i) a waiver of or
consent to non-compliance with any other section or provision of the Loan
Agreement, (ii) a waiver of any right, power, or remedy of the Lender under the
Loan
-4-
<PAGE>
Agreement (except as provided herein), or (iii) a waiver of any other Event of
Default or Event which may exist under the Loan Agreement.
ARTICLE IV
----------
Ratifications, Representations and Warranties
---------------------------------------------
Section 4.01. Ratifications. The terms and provisions set forth in this
-------------
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement, including, without
limitation, all financial covenants contained therein, are ratified and
confirmed and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be legal, valid,
binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower hereby represents
------------------------------
and warrants to Lender that the execution, delivery and performance of this
Amendment and all other loan, amendment or security documents to which Borrower
is or is to be a party hereunder (hereinafter referred to collectively as the
"Loan Documents") executed and/or delivered in connection herewith, have been
authorized by all requisite corporate action on the part of Borrower and will
not violate the Articles of Incorporation or Bylaws of Borrower.
ARTICLE V
---------
Conditions Precedent
--------------------
Section 5.01. Conditions. The effectiveness of this Amendment is subject
----------
to the satisfaction of the following conditions precedent (unless specifically
waived in writing by the Lender):
(a) Lender shall have received all of the following, each dated
(unless otherwise indicated) as of the date of this Amendment, in form and
substance satisfactory to Lender in its sole discretion:
(i) Company Certificate. A certificate executed by the Secretary
-------------------
or Assistant Secretary of Borrower certifying (A) that Borrower's
Board of Directors has met and adopted, approved, consented to and
ratified the resolutions attached thereto which authorize the
execution, delivery and performance by Borrower of the Amendment and
the Loan Documents, (B) the names of the officers of Borrower
authorized to sign this Amendment
-5-
<PAGE>
and each of the Loan Documents to which Borrower is to be a party
hereunder, (C) the specimen signatures of such officers, and (D) that
neither the Articles of Incorporation nor Bylaws of Borrower have been
amended since the date of the Agreement;
(ii) No Material Adverse Change. There shall have occurred no
--------------------------
material adverse change in the business, operations, financial
condition, profits or prospects of Borrower, or in the Collateral
since December 31, 1997, and the Lender shall have received a
certificate of Borrower's chief executive officer to such effect;
(iii) Other Documents. Borrower shall have executed and
---------------
delivered such other documents and instruments as well as required
record searches as Lender may require.
(b) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to Lender
and its legal counsel, Jenkens & Gilchrist, a Professional Corporation.
ARTICLE VI
----------
Miscellaneous
-------------
Section 6.01. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in the Agreement or any other document or
documents relating thereto, including, without limitation, any Loan Document
furbished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and warranties or the
right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of the Loan
----------------------
Documents, and any and all other agreements, documents or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Agreement as amended hereby, are hereby amended so that any
reference therein to the Agreement shall mean a reference to the Agreements
amended hereby.
Section 6.03. Severability. Any provision of this Amendment held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
-6-
<PAGE>
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
--------------
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN THE STATE OF OKLAHOMA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF OKLAHOMA.
Section 6.05. Successors and Assigns. This Amendment is binding upon and
----------------------
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns; provided, however, that Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Lender. Lender may assign any or all of its rights or obligations
hereunder without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
Section 6.07. Effect of Waiver. No consent or waiver, express or implied,
----------------
by Lender to or of any breach of or deviation from any covenant or condition of
the Agreement or duty shall be deemed a consent or waiver to or of any other
breach of or deviation from the same or any other covenant, condition or duty.;
No failure on the part of Lender to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power or privilege under this
Amendment, the Agreement or any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies provided for in the
Agreement and the other Loan Documents are cumulative and not exclusive of any
rights and remedies provided by law.
Section 6.08. Headings. The headings, captions and arrangements used in
--------
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 6.09. Releases. As a material inducement to Lender to enter into
--------
this Amendment, Borrower hereby represents and warrants that there are no claims
or offsets against, or defenses or counterclaims to, the terms and provisions of
and the other obligations created or evidenced by the Agreement or the other
Loan Documents. Borrower hereby releases, acquits and forever discharges
Lender, and its successors, assigns, and predecessors in interest, their
parents, subsidiaries and affiliated organizations, and the officers, employees,
attorneys, agents of each of the foregoing (all of whom are herein jointly and
severally referred to as the "Released Parties") from any and all liability,
----------------
damages, losses, obligations, costs, expenses, suits, claims, demands, causes of
action for damages or any other relief, whether or not
-7-
<PAGE>
now known or suspected, of any kind, nature or character, at law or in equity,
which Borrower now has or may have ever had against of the Released Parties,
including, but not limited to, those relating to (a) usury or penalties or
damages therefor, (b) allegations that a partnership existed between Borrower
and the Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of commercial
reasonableness or special relationships, such as fiduciary, trust or
confidential relationships, (d) allegations of dominion, control, alter ego,
instrumentality, fraud, misrepresentation, duress, coercion, undue influence,
interference or negligence, (e) allegations of notorious interference with
present or prospective business relationships or of antitrust, or (f) slander,
libel or damage to reputation (hereinafter being collectively referred to as the
"Claims"), all of which Claims are hereby waived.
------
Section 6.10. Expenses of Lender. Borrower agrees to pay on demand (i)
------------------
all costs and expenses reasonably incurred by Lender in connection with the
preparation, negotiation and execution of this Amendment and the other Loan
Documents executed pursuant hereto and any and all subsequent amendments,
modifications, and supplements hereto or thereto, including, without limitation,
the costs and fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by Lender in
connection with the enforcement or preservation of any rights under the
Agreement, this Amendment and/or other Loan Documents, including, without
limitation, the costs and fees of Lender's legal counsel and the allocated cost
of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER
------------------
LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN THE LENDER AND
BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN LENDER AND BORROWER.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
first above written.
"BORROWER"
CLIMATE MASTER, INC.
By: /s/ Tony M. Shelby
---------------------------------------------------
Tony M. Shelby
Vice President
INTERNATIONAL ENVIRONMENTAL CORPORATION
By: /s/ Tony M. Shelby
---------------------------------------------------
Tony M. Shelby
Vice President
EL DORADO CHEMICAL COMPANY
By: /s/ Tony M. Shelby
---------------------------------------------------
Tony M. Shelby
Vice President
SLURRY EXPLOSIVE CORPORATION
By: /s/ Tony M. Shelby
---------------------------------------------------
Tony M. Shelby
Vice President
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Michael J. Jasaitis
---------------------------------------------------
Michael J. Jasaitis
Vice President
-9-
<PAGE>
CONSENT AND REAFFIRMATIONS
--------------------------
The undersigned hereby acknowledges the execution of, and consents to, the
terms and conditions of that certain First Amendment to Amended and Restated
Loan and Security Agreement dated as of March 12, 1998, between Climate Master,
Inc., International Environmental Corporation, El Dorado Chemical Corporation,
Slurry Explosive Corporation and BankAmerica Business Credit, Inc. ("Creditor")
and reaffirms its obligations under that certain Continuing Guaranty (the
"Guaranty") dated as of November 21, 1997, made by the undersigned in favor of
the Creditor, and acknowledges and agrees that the Guaranty remains in full
force and effect and the Guaranty is hereby ratified and confirmed.
Dated as of March 12, 1998.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
-----------------------------------------
Tony M. Shelby
Vice President
-10-
<PAGE>
CONSENTS AND REAFFIRMATIONS
---------------------------
Each of the undersigned hereby acknowledges the execution of, and consents
to, the terms and conditions of that certain First Amendment to Amended and
Restated Loan and Security Agreement dated as of March 12, 1998, between Climate
Master, Inc., International Environmental Corporation, El Dorado Chemical
Corporation, Slurry Explosive Corporation and BankAmerica Business Credit, Inc.
("Creditor") and each reaffirms its obligations under that certain Continuing
Guaranty with Security Agreement (the "Guaranty") dated as of November 21, 1997,
and acknowledges and agrees that such Guaranty remains in full force and effect
and each Guaranty is hereby ratified and confirmed.
Dated as of March 12, 1998.
LSB INDUSTRIES, INC.
LSB CHEMICAL CORP.
L&S AUTOMOTIVE PRODUCTS CO.
L&S BEARING CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
MOREY MACHINERY MANUFACTURING
CORPORATION
CHP CORPORATION
KOAX CORP.
APR CORPORATION
CLIMATE MATE INC.
THE ENVIRONMENTAL GROUP, INC.
UNIVERSAL TECH CORPORATION
By: /s/ Tony M. Shelby
-----------------------------------------------
Tony M. Shelby
Senior Vice President acting on
behalf of each of the above
-11-
<PAGE>
EXHIBIT 10.54
AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------
This Amendment to Loan and Security Agreement ("Amendment") is made as of
March 16, 1998, by and between THE CIT GROUP/EQUIPMENT FINANCING, INC.
("Lender") and DSN CORPORATION ("Borrower").
WHEREAS, Lender and Borrower entered into a Loan and Security Agreement
dated as of October 31, 1994, as amended, a Loan and Security Agreement dated as
of April 5, 1995, as amended, and a Loan and Security Agreement dated as of
November 15, 1995, as amended (collectively, "Loan Agreement") pursuant to which
Lender made certain loans and advances (collectively, "Loans") to Borrower upon
the terms and conditions set forth in the Loan Agreements and the related Loan
Documents; and
WHEREAS, pursuant to that certain Amendment to Loan and Security Agreement
dated as of November 2, 1997, Lender agreed to, among other things, the
establishment of minimum Adjusted Tangible Net Worth amounts and Debt to Worth
Ratios for ClimaChem, Inc. ("ClimaChem"); and
WHEREAS, Borrower has requested that Lender waive ClimaChem's noncompliance
ClimaChem's Adjusted Tangible Net Worth and Debt to Worth Ratio as at December
31, 1997, and that Lender agree to reset such covenants on a quarterly basis for
1998;
WHEREAS, Lender has agreed to the waiver and modification to the Loan
Agreements as set forth in this Amendment.
NOW, THEREFORE, in consideration of the terms and conditions herein, and of
any loans or other credit facilities heretofore, now or hereafter made to or for
the benefit of Borrower by Lender, the parties hereto agree to the following
amendment to each of the Loan Agreements:
1. Tangible Net Worth. Section 6.10 of each of the Loan Agreements is
------------------
amended and restated in its entirety to read as follows:
"Tangible Net Worth. ClimaChem shall maintain at all times, on a
------------------
consolidated basis, a minimum Adjusted Tangible Net Worth and shall
not exceed a Debt to Worth Ratio as provided in Exhibit "A" attached
hereto. Such financial covenant shall be measured as of the dates
provided in Exhibit "A." The term "Tangible Net Worth" is defined as
total stockholder equity after deducting any treasury stock plus
----
deferred income tax liability less all assets that are considered
----
intangible assets under GAAP."
2. Representations and Warranties. Borrower represents and warrants as
------------------------------
follows:
<PAGE>
(a) Each of the representations and warranties contained in each of
the Loan Agreements is, except where date specific to a different time,
hereby reaffirmed as of the date hereof, each as if set forth herein;
(b) The execution, delivery and performance of this Amendment are
within Borrower's powers, have been duly authorized by all necessary
action, have received all necessary approvals, if any, and do not
contravene any law or any contractual restrictions binding on Borrower;
(c) This Amendment is a legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms; and
(d) No event has occurred and is continuing or would result from this
Amendment which constitutes a Default or Event of Default under the Loan
Agreements, as amended and modified hereby.
3. Further Assurances. Borrower shall, at its expense, do, execute and
------------------
deliver to Lender such further acts and documents as the Lender shall, from time
to time, require for assuring and confirming to Lender the rights created or
intended to be created in connection with this Amendment or for carrying out the
intention or facilitating the performance of the terms of any Loan Document or
for assuring the validity, perfection, priority or enforceability of any Lien
under any Loan Document.
4. Miscellaneous. This Amendment shall be part of each of the Loan
-------------
Agreements, the terms of which are incorporated herein, and the breach of any
representation, warranty or covenant contained herein, shall constitute an Event
of Default under each of the Loan Agreements and Lender shall be entitled to
exercise all rights and remedies it may have under the Loan Agreements and
applicable law. Borrower agrees to pay all costs, expenses and attorneys' fees
incurred by Lender in connection with the negotiation and preparation of this
Amendment and any other documents in connection herewith and in carrying out or
enforcing the terms of this Amendment. Lender is not waiving any rights under
any of the Loan Agreements and, except as previously provided herein or as
previously modified in a writing signed by Lender, all of the terms, covenants,
and conditions of each of the Loan Agreements remain unmodified and in full
force and effect. Capitalized terms used herein and not otherwise defined shall
have the same meaning as set forth in the Loan Agreements. This Amendment may
be executed in counterparts, which counterparts, when so executed and delivered,
shall together constitute but one original.
5. Effective Date. This Amendment shall be effective upon execution by
--------------
the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to be
effective as of the first date above written.
"Borrower" "Lender"
DSN CORPORATION THE CIT GROUP/EQUIPMENT
FINANCING, INC.
By: /s/ James L. Wewers By: /s/ Anthony Jones, Jr.
----------------------------- -----------------------------------------
Its: President Its: Vice President
---------------------------- ----------------------------------------
In order to induce Lender to execute the above Amendment, each of the
undersigned hereby represents, warrants and agrees that the undersigned has
reviewed and approved the Amendment and agrees that nothing contained therein
shall diminish, alter, amend or otherwise affect the undersigned's obligations
under its Guaranty to Lender ("Guaranty"). Each of the undersigned further
confirms that its Guaranty shall continue in full force and effect and agrees
that it continues to be liable under such Guarantor in accordance with the tenor
and effect thereof. Each of the undersigned consents to the transactions
contemplated in connection with the Amendment. Each of the undersigned further
confirms that it has no defense, counterclaim or offset right whatsoever with
respect to its obligations under its Guaranty.
LSB CHEMICAL CORP.,
an Oklahoma corporation
By: /s/ Tony M. Shelby
-----------------------------------------
Its: V. P.
----------------------------------------
CLIMACHEM, INC.
an Oklahoma corporation
By: /s/ Tony M. Shelby
-----------------------------------------
Its: V. P.
----------------------------------------
<PAGE>
EXHIBIT "A"
Tangible Net Worth Debt to Worth Ratio
------------------ -------------------
. March 31, 1998 27,487,000 6.235:1
. June 30, 1998 29,923,000 5.637:1
. September 30, 1998 31,559,000 5.130:1
. December 31, 1998 32,674,000 4.907:1
<PAGE>
EXHIBIT 10.55
BANKAMERICA BUSINESS CREDIT, INC.
_________________________________________
Michael J. Jasaitis, Vice President
55 Lake Ave., Suite 900 * Pasadena, CA 91101
* (626) 578-6097 * Fax (626) 578-6143
March 16, 1998
Mr. Jim Jones
LSB Industries, Inc.
16 Pennsylvania
Oklahoma City, OK 73101
Dear Jim:
As we discussed today by telephone, we have agreed to waive the financial
covenant default of Section 9.15 of the Amended and Restated Loan and Security
Agreements dated November 21, 1997 (the "Waiver Request") as of 12/31/97 for the
LSB Industries, Inc. ("LSB") and the ClimaChem Borrowing Groups ("CCI") which
occurred because LSB and CCI's capital expenditures during 1997 exceeded
$6,000,000.
This waiver will be formally documented shortly, but the Waiver Request does not
need any further credit approval by BankAmerica Business Credit, Inc.
No other terms and/or conditions of our Loan and Security Agreement are changed
by this letter.
Please call me if you have any questions.
Sincerely,
/s/ Michael J. Jasaitis
Michael J. Jasaitis
<PAGE>
EXHIBIT 12.1
ClimaChem, Inc.
Ratio of Earnings to Fixed Charges
For purposes of these computations, "earnings" represent net income before
income taxes plus fixed charges, less capitalized interest plus amortization of
interest capitalized in prior periods. "Fixed charges" consist 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.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1993 1994 1995 1996 1997(1)
------- ------- ------- ------- ----------
(In Thousands, Except Ratios)
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes(2) $13,470 $ 9,388 $11,154 $ 8,421 $ 2,326
Interest expense 5,949 6,021 7,056 6,068 9,191
Amortization of debt issuance
costs 129 129 129 179 178
Interest portion of rental
expense 592 1,117 1,074 1,471 1,306
Current period amortization of
interest capitalized in
prior periods 73 73 73 100 291
------- ------- ------- ------- -------
Earnings $20,213 $16,728 $19,486 $16,239 $13,292
======= ======= ======= ======= =======
Fixed Charges:
Interest expense $ 5,949 $ 6,021 $ 7,056 $ 6,068 $ 9,191
Capitalized interest - 491 1,357 2,405 1,113
Amortization of debt issuance
costs 129 129 129 179 178
Interest portion of rental
expense 592 1,117 1,074 1,471 1,306
------- ------- ------- ------- -------
Fixed Charges $ 6,670 $ 7,758 $ 9,616 $10,123 $11,788
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 3.0x 2.2x 2.0x 1.6x 1.1x
======= ======= ======= ======= =======
</TABLE>
(1) The Company has not presented Pro Forma Ratio of Earnings to Fixed Charges
for these periods inasmuch as such amounts do not differ from the
historical amounts by greater than 10%.
(2) Before extraordinary charge in 1997 of $4.6 million ($2.9 million net of
tax benefit).
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 16, 1998, in Amendment No. 1 to the Registration
Statement (Form S-4 No. 333-44905) and related Prospectus of ClimaChem, Inc. for
the registration of $105,000,000 of its 10 3/4% Senior Notes, Series B, due
2007.
/s/ Ernst & Young LLP
Ernst & Young LLP
Oklahoma City, Oklahoma
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001053518
<NAME> CLIMACHEM, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,534
<SECURITIES> 0
<RECEIVABLES> 38,521
<ALLOWANCES> 1,478
<INVENTORY> 38,760
<CURRENT-ASSETS> 92,741
<PP&E> 136,436
<DEPRECIATION> 52,107
<TOTAL-ASSETS> 200,875
<CURRENT-LIABILITIES> 38,004
<BONDS> 126,346
0
0
<COMMON> 1
<OTHER-SE> 27,288
<TOTAL-LIABILITY-AND-EQUITY> 200,875
<SALES> 262,847
<TOTAL-REVENUES> 263,321
<CGS> 213,772
<TOTAL-COSTS> 213,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,369
<INCOME-PRETAX> 2,326
<INCOME-TAX> 1,429
<INCOME-CONTINUING> 897
<DISCONTINUED> 0
<EXTRAORDINARY> 2,869
<CHANGES> 0
<NET-INCOME> (1,972)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
10 3/4% SENIOR NOTES DUE 2007
OF
CLIMACHEM, INC.
PURSUANT TO PROSPECTUS DATED ____________, 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON ________________,
1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY CLIMACHEM, INC.
TO: BANK ONE, NA (THE "EXCHANGE AGENT")
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 of New York
235 West Schrock Road 14 Wall Street, 8/th/ Floor
Westerville, Ohio 43081-0184 OR New York, New York 10005
Attn: Lower Level Corporate Attn: Corporate Trust Operations
Trust Window
BY FACSIMILE: (614) 248-9987
Attn: Corporate Trust Operations
Confirm by telephone: (800) 346-5153
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF THIS INSTRUMENT VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Please read carefully the instructions accompanying this Letter of Transmittal
before completing this Letter of Transmittal.
The undersigned acknowledges receipt and review of the Prospectus, dated
_____________, 1998 (the "Prospectus") of ClimaChem, Inc. (the "Company") and
this related Letter of Transmittal (the "Letter of Transmittal"), which together
describe the Company's offer (the "Exchange Offer") to exchange $1,000 principal
amount of its 10 3/4% Series B Senior Notes due 2007 (the "New Notes"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement, for each $1,000
principal amount of its outstanding 10 3/4% Senior Notes due 2007 (the "Old
Notes"), of which $105,000,000 principal amount is outstanding.
The term "Expiration Date" means 5:00 p.m., New York City time, on
________________, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term will mean the latest date and time to
which the Exchange Offer is extended. The term "Holder" with respect to the
Exchange Offer means any person in whose name Old Notes are registered on the
books of the Company or any other person who has obtained a properly completed
bond power from the registered holder. Capitalized terms used but not defined
herein have the respective meanings set forth in the Prospectus.
This Letter of Transmittal is to be used by holders of Old Notes if (a)
certificates representing the Old Notes are to be physically delivered to the
Exchange Agent, (b) tender of the Old Notes is
<PAGE>
to be made by book entry transfer to the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in the Prospectus under the caption "The Exchange Offer-
Procedures for Tendering" by any financial institution that is a participant in
the Book-Entry Transfer Facility and whose name appears on a security position
listing as the owner of Old Notes (such participants acting on behalf of
holders, are referred to herein, together with such holders, as "Authorized
Holders") or (c) tender of the Old Notes is to be made according to the
guaranteed delivery procedures described in the Prospectus under the capition
"The Exchange Offer-Guaranteed Delivery Procedures." See Instruction 2. Delivery
of documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Act.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:______________________________________
Account Number:_____________________________________________________
Transaction Code Number:____________________________________________
Principal Amount of Tendered Old Notes:_____________________________
If Holders desire to tender Old Notes pursuant to the Exchange Offer and
(a) time will not permit this Letter of Transmittal, certificates representing
Old Notes or other required document to reach the Exchange Agent prior to the
Expiration Date or (b) the procedures for book-entry transfer cannot be
completed prior to the Expiration Date, such Holders may effect a tender of such
Old Notes in accordance with guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer-Guaranteed Delivery
Procedures." See Instruction 2 below.
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING (SEE INSTRUCTION 2):
Name of Registered or Authorized Holder(s):_________________________
Window Ticket No. (if any):_________________________________________
Date of Execution of Notice
of Guaranteed Delivery:_____________________________________________
Name of Eligible Institution
that Guaranteed Delivery:___________________________________________
If Delivered by Book-Entry Transfer,
the Account Number:_________________________________________________
Transaction Code Number:____________________________________________
[_] CHECK HERE IF YOU AREA BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER
THE EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS
-2-
<PAGE>
AVAILABLE TO ANY PARTICIPATING BROKER DEALER FOR USE IN CONNECTION WITH
RESALES OF THE EXCHANGE OLD NOTES.
Name:_______________________________________________________________
Address:____________________________________________________________
____________________________________________________________________
Attention:__________________________________________________________
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the certificate numbers and principal
amount of Old Notes should be listed on a separate signed schedule affixed
hereto.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES.
BOX 1
DESCRIPTION OF OLD NOTES*
<TABLE>
<CAPTION>
Names and Addresses of Aggregate Principal Principal Amount
Registered Holder(s) Certificate Amount Represented Tendered, if Less
(Please fill in, if blank) Number(s) by Certificate(s) Than All**
- ---------------------------- -------------- ---------------------- -----------------
<S> <C> <C> <C>
______________________ __________ __________________ ________________
______________________ __________ __________________ ________________
______________________ __________ __________________ ________________
Total: ________________
</TABLE>
* Need not be completed if Old Notes are tendered by book-entry transfer.
** Unless indicated in the column labeled "Principal Amount Tendered," a Holder
will be deemed to have tendered the entire aggregate principal amount indicated
in the column labeled "Aggregate Principal Amount Represented by
Certificate(s)." The minimum tender is $1,000 in principal amount of Old Notes.
All other tenders must be in integral multiples of $1,000.
-3-
<PAGE>
BOX 2
SPECIAL REGISTRATION
INSTRUCTIONS
(See Instructions 4,5 and 6)
To be completed ONLY if certificates for Old Notes in a principal amount
not tendered, or New Notes issued in exchange for Old Notes accepted for
exchange, are to be issued in the name of someone other than the undersigned.
Issue certificate(s) to:
Name_________________________________________________________________________
(Please Print)
Address______________________________________________________________________
_____________________________________________________________________________
(Include Zip Code)
_____________________________________________________________________________
(Tax Identification or Social Security Number)
BOX 3
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 4, 5 and 6)
To be completed ONLY if certificates for Old Notes in a principal amount
not tendered, or New Notes issued in exchange for Old Notes accepted for
exchange, are to be sent to someone other than the undersigned, or to the
undersigned at an address other than that shown above.
Deliver certificate(s) to:
Name_________________________________________________________________________
(Please Print)
Address______________________________________________________________________
_____________________________________________________________________________
(Include Zip Code)
_____________________________________________________________________________
(Tax Identification or Social Security Number)
BOX 4
BROKER-DEALER STATUS
[_] Check this box if the Beneficial Owner of the Old Notes is a Participating
Broker-Dealer and such Participating Broker-Dealer acquired the Notes for
its own account as a result of market-making activities or other trading
activities. IF THIS BOX IS CHECKED, PLEASE SEND A COPY OF THIS LETTER OF
TRANSMITTAL TO DAVID M. SHEAR, GENERAL COUNSEL OF THE COMPANY, VIA
FACSIMILE: (405) 236-1209.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
-4-
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to ClimaChem, Inc. (the "Company"), the principal
amount of Old Notes indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Old Notes tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to, or upon the order of, the Company
all right, title and interest in and to the Old Notes tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent its
agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company) with respect to the tendered Old Notes with
the full power of substitution to (a) present such Old Notes and all evidences
of transfer and authenticity to, or transfer ownership of, such Old Notes on the
account books maintained by the Book-Entry Transfer Facility to, or upon, the
order of, the Company, (b) deliver certificates for such Old Notes to the
Company and deliver all accompanying evidences of transfer and authenticity to,
or upon the order of, the Company and (c) present such Old Notes for transfer on
the books of the Company and receive all benefits and otherwise exercise all
rights of beneficial ownership of such Old Notes, all in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good, valid and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claims, when the same are acquired
by the Company. The undersigned hereby further represents that any New Notes
acquired in exchange for Old Notes tendered hereby will have been acquired in
the ordinary course of business of the person receiving such New Notes, whether
or not such person is the undersigned, that neither the undersigned nor any
other such person has any arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the
undersigned nor any such other person is an "affiliate," as defined in Rule 405
under the Securities Act of 1933, as amended, of the Company. In addition, the
undersigned and any such person acknowledge that (a) any person participating in
the Exchange Offer for the purpose of distributing the New Notes must, in the
absence of an exemption therefrom, comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale of the New Notes and cannot rely on the position of the Staff of the
Securities and Exchange Commission enunciated in no-action letters and (b)
failure to comply with such requirements in such instance could result in the
undersigned or such person incurring liability under the Securities Act for
which the undersigned or such person is not indemnified by the Company. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be necessary or desirable to
complete the assignment, transfer and purchase of the Old Notes tendered hereby.
If the undersigned is a broker-dealer that will receive New Notes, it represents
that the Old Notes to be exchanged for the New Notes were acquired as a result
of market-making activities or other trading activities, and it acknowledges
that it will deliver a Prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a Prospectus, the
undersigned will not be deemed to admit that it is an underwriter within the
meaning of the Securities Act. Unless otherwise notified in accordance with the
instructions set forth in Box 4 under "Broker-Dealer Status," the Company will
assume that the undersigned is not a Participating Broker-Dealer.
For purposes of the Exchange Offer, 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.
If any Old Notes tendered herewith are not accepted for exchange pursuant
to the Exchange Offer for any reason, certificates for any such unaccepted Old
Notes will be returned promptly after the Expiration Date, without expense, to
the undersigned at the address shown below or to a different address as may be
indicated herein in Box 3 under "Special Delivery Instructions."
All authority conferred or agreed to be conferred by this Letter of
Transmittal will survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned
-5-
<PAGE>
under this Letter of Transmittal will be binding upon the undersigned's heirs,
personal representative, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
Unless otherwise indicated in Box 2 under "Special Registration
Instructions," please issue the certificates (or electronic transfers)
representing the New Notes issued in exchange for the Old Notes accepted for
exchange and any certificates (or electronic transfers) for Old Notes not
tendered or not exchanged, in the name(s) of the undersigned. Similarly, unless
otherwise indicated in Box 3 under "Special Delivery Instructions," please send
the certificates, if any, representing the New Notes issued in exchange for the
Old Notes accepted for exchange and any certificates for Old Notes not tendered
or not exchanged (and accompanying documents, as appropriate) to the undersigned
at the address shown below in the undersigned's signature(s). In the event that
both "Special Registration Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange in the name(s) of, and return
any certificates for Old Notes not tendered or not exchanged to, the person(s)
so indicated. The undersigned understands that the Company has no obligation
pursuant to the "Special Registration Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the registered
Holder(s) thereof if the Company does not accept for exchange any of the Old
Notes so tendered.
Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver the Old Notes, this Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures." See Instruction 2 regarding the
completion of this Letter of Transmittal printed below.
The lines below must be signed by the registered holder(s) exactly as their
name(s) appear(s) on the Old Notes or by a participant in the Book-Entry
Transfer Facility, exactly as such participant's name appears on a security
position listing as the owner of the Old Notes, or by person(s) authorized to
become registered holder(s) by a properly completed bond power from the
registered holder(s), a copy of which must be transmitted with this Letter of
Transmittal. If Old Notes to which this Letter of Transmittal relate are held
of record by two or more joint holders, then all such holders must sign this
Letter of Transmittal.
PLEASE SIGN HERE WHETHER OR NOT
NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X_____________________________________________________ _________________
Date
X_____________________________________________________ _________________
Date
Area Code and Telephone Number:_________________________________
-6-
<PAGE>
If signature is by a trustee, executor, administrator, guardian, attorney-
in-fact, officer of a corporation or other person acting in a fiduciary or
representative capacity, then such person must (a) set forth his or her full
title below and (b) submit evidence satisfactory to the Company of such person's
authority so to act. See Instruction 5 regarding the completion of this Letter
of Transmittal printed below.
Name(s):_______________________________________________________________________
(Please Print)
Capacity:______________________________________________________________________
Address:_______________________________________________________________________
(Include Zip Code)
MEDALLION SIGNATURE GUARANTEE
(If required by Instruction 5)
Certain Signatures must be Guaranteed by an Eligible Institution
Signature(s) Guaranteed by an Eligible
Institution:___________________________________________________________________
(Authorized Signature)
_______________________________________________________________________________
(Title)
_______________________________________________________________________________
(Name of Firm)
_______________________________________________________________________________
(Address, Include Zip Code)
_______________________________________________________________________________
(Area Code and Telephone Number)
Dated:___________________________________________________________________
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITION
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR OLD NOTES
OR BOOK-ENTRY CONFIRMATIONS. Certificates representing the tendered Old Notes
(or a confirmation of book-entry transfer into the Exchange Agent's account with
the Book-Entry Transfer Facility for tendered Old Notes transferred
electronically), as well as a properly completed and duly executed copy of this
Letter of Transmittal (or facsimile thereof), a Substitute Form W-9 (or
facsimile thereof) and any other documents required by this Letter of
Transmittal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. The method of delivery of certificates for
Old Notes and all other required documents is at the election and sole risk of
the tendering holder and delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is by mail, registered mail with
return receipt requested, properly insured, is recommended. As an alternative
to delivery by mail, the holder may wish to use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to assure timely
delivery. Neither the Company nor the Exchange Agent is under an obligation to
notify any tendering holder of the Company's acceptance of tendered Old Notes
prior to the completion of the Exchange Offer.
-7-
<PAGE>
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old
Notes but whose Old Notes are not immediately available and who cannot deliver
their certificates for Old Notes (or comply with the procedures for book-entry
transfer prior to the Expiration Date), the Letter of Transmittal and any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their Old Notes according to the guaranteed
delivery procedures set forth below. Pursuant to such procedures:
(a) such tender must be made by or through a firm which is a member of a
registered national securities exchange or of the National Association
of Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the United States (an "Eligible
Institution");
(b) prior to the Expiration Date, the Exchange Agent must have received
from the holder and the 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 or numbers of the
tendered Old Notes, and the principal amount of tendered Old Notes and
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 tendered Old Notes (or a confirmation of book-entry transfer into
the Exchange Agent's account with the Book-Entry Transfer Facility for
Old Notes transferred electronically) and any other required documents
will be deposited by the Eligible Institution with the Exchange Agent;
and
(c) such properly completed and executed Letter of Transmittal and
certificates representing the tendered Old Notes in proper form for
transfer (or a confirmation of book-entry transfer into the Exchange
Agent's account with the Book-Entry Transfer Facility for Old Notes
transferred electronically) must be received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration
Date.
Any Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery relating to such Old Notes prior to the
Expiration Date. Failure to complete the guaranteed delivery procedures
outlined above will not, of itself, affect the validity or effect a revocation
of any Letter of Transmittal form properly completed and executed by a Holder
who attempted to use the guaranteed delivery person.
3. TENDER BY HOLDER. Only a holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered holder and who wishes to tender should arrange with such holder to
execute and deliver this Letter of Transmittal on such owner's behalf or must,
prior to completing and executing this Letter of Transmittal and delivering such
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.
4. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in
integral multiples of $1,000 in principal amount. If less than the entire
principal amount of Old Notes is tendered, the tendering holder should fill in
the principal amount tendered in the column labeled "Principal Amount Tendered"
of the box entitled "Description of Old Notes" (Box 1) above. The entire
principal amount of Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated. If the entire principal amount
of Old Notes is not tendered, Old Notes for the principal amount of Old Notes
not tendered and New Notes exchanged for any Old Notes tendered will be sent to
the Holder at his or her registered address (or transferred to the account of
the Book-Entry Facility designated above), unless a different address (or
account) is provided in the appropriate box on this Letter of Transmittal, as
soon as practicable following the Expiration Date.
-8-
<PAGE>
5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURE. If this Letter of Transmittal is signed by
the registered holder(s) of the Old Notes tendered herewith, the signatures must
correspond with the name(s) as written on the face of the tendered Old Notes
without alteration, enlargement, or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility, the
signature must correspond with the name as it appears on the security position
listing as the owner of the Old Notes.
If any of the tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any tendered
Old Notes are held in different names on several Old Notes, it will be necessary
to complete, sign, and submit as many separate copies of the Letter of
Transmittal documents as there are names in which tendered Old Notes are held.
If this Letter of Transmittal is signed by the registered holder or
Authorized Holder, and New Notes are to be issued and any untendered or
unaccepted principal amount of Old Notes are to be reissued or returned to the
registered holder or Authorized Holder, then, the registered holder or
Authorized Holder need not and should not endorse any tendered Old Notes nor
provide a separate bond power. In any other case (including if this Letter of
Transmittal is not signed by the Authorized Holder), the registered holder or
Authorized Holder must either properly endorse the Old Notes tendered or
transmit a properly completed separate bond power with this Letter of
Transmittal (in either case, executed exactly as the name(s) of the registered
holder(s) appear(s) on such Old Notes, and, with respect to a participant in the
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Old Notes, exactly as the name(s) of the participant(s)
appear(s) on such security position listings), with the signature(s) on the
endorsement or bond power guaranteed by an Eligible Institution unless such
certificates or bond powers are signed by an Eligible Institution.
If this Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others 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 this Letter of Transmittal.
No medallion signature guarantee is required if (i) this Letter of
Transmittal is signed by the registered holder(s) of the Old Notes tendered
herewith (or by a participant in the Book-Entry Transfer Facility whose name
appears on a security position listing as the owner of the Tendered Notes) and
the issuance of New Notes (and any Old Notes not tendered or not accepted) are
to be issued directly to such registered holder(s) (or, if signed by a
participant in the Book-Entry Transfer Facility, any New Notes or Old Notes not
tendered or not accepted are to be deposited to such participant's account at
such Book-Entry Transfer Facility) and neither the "Special Delivery
Instructions" (Box 3) nor the "Special Registration Instructions" (Box 2) has
been completed, or (ii) such Old Notes are tendered for the account of an
Eligible Institution. In all other cases, all signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders
should indicate, in the applicable box, the name and address (or account at the
Book-Entry Transfer Facility) in which the New Notes and/or substitute Old Notes
for principal amounts not tendered or not accepted for exchange are to be sent
(or deposited), if different from the name and address or account of the person
signing this Letter of Transmittal. In the case of issuance in a different
name, the employer identification number or social security number of the person
named must also be indicated and the indicated and the tendering holders should
complete the applicable box.
If no such instructions are given, the New Notes (and any Old Notes not
tendered or not accepted) will be issued in the name of and sent to the
Authorized Holder of the Old Notes or deposited at such Authorized Holders'
account at the Book-Entry Transfer Facility.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the sale and transfer of Old Notes to it or its order pursuant to
the Exchange Offer. If, however, a
-9-
<PAGE>
transfer tax is imposed for any reason other than the transfer and sale of Old
Notes to the Company or its order pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
on any other person) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption from taxes therefrom is not
submitted with this Letter of Transmittal, the amount of transfer taxes will be
billed directly to such tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
8. TAX IDENTIFICATION NUMBER. Federal income tax law required that a
holder of any Old Notes which are accepted for exchange must provide the Company
(as payor) with its correct taxpayer identification number ("TIN"), which, in
the case of a holder who is an individual, is his or her social security number.
If the Company is not provided with the correct TIN, the Holder may be subject
to a $50 penalty imposed by Internal Revenue Service. (If withholding results in
an over-payment of taxes, a refund may be obtained.) Certain holders (including,
among other, all corporations and certain foreign individuals) are not subject
to these backup withholding and reporting requirements. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (a) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of
failure to report a interest or dividends or (b) the Internal Revenue Service
has notified the holder that such holder is no longer subject to backup
withholding. If the Old Notes are registered in more than one name or are not in
the name of the actual owner, see the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for information on which
TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of tendered Old Notes
will be determined by the Company, in its sole discretion, which determination
will be final and binding. The Company reserves the right to reject any and all
Old Notes not validly tendered or any Old Notes, the Company's acceptance of
which would, in the opinion of the Company or its counsel, be unlawful. The
Company also reserves the right to waive any conditions of the Exchange Offer or
defects or irregularities in tenders of Old Notes as to any ineligibility of any
holder who seeks to tender Old Notes in the Exchange Offer. The interpretation
of the terms and conditions of the Exchange Offer (includes this Letter of
Transmittal and the instructions hereto) by the Company shall 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. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old Notes,
but shall not incur any liability for failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to
amend, waive, or modify specified conditions in the Exchange Offer in the case
of any tendered Old Notes.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or
contingent tender of Old Notes on transmittal of this Letter of Transmittal will
be accepted.
12. MUTILATED, LOST, STOLEN, OR DESTROYED OLD NOTES. Any tendering holder
whose Old Notes have been mutilated, lost, stolen, or destroyed should contact
the Exchange Agent at the address indicated above for further instruction.
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<PAGE>
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the first address specified on page one of
this Agreement. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED OLD NOTES AND ISSUANCE OF NEW NOTES; RETURN OF
OLD NOTES. Subject to the terms and conditions of the Exchange Offer, the
Company will accept for exchange all validly tendered Old Notes as soon as
practicable after the Expiration Date and will issue New Notes therefor as soon
as practicable thereafter. For purposes of the Exchange Offer, the Company
shall be deemed to have accepted tendered Old Notes when, as and if the Company
has given written and oral notice thereof to the Exchange Agent. If any
tendered Old Notes are not exchanged pursuant to the Exchange Offer for any
reason, such unexchanged Old Notes will be returned, without expense, to the
undersigned at the address shown above (or credited to the undersigned's account
at the Book-Entry Transfer Facility designated above) or at a different address
as may be indicated under "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuit to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer--Withdrawal of Tenders."
_______________________________________________________________________________
PAYOR'S NAME: CLIMACHEM, INC.
Substitute Form W-9 Department of the Treasury
Internal Revenue Service
_______________________________________________________________________________
Part 1-- PLEASE PROVIDE YOUR TAXPAYER Social Security Number
IDENTIFICATION NUMBER ("TIN") or TIN
IN THE BOX AT RIGHT AND CERTIFY
BY SIGNING AND DATING BELOW _____/_____/_____
______________________________________________________________________________
Part 2-- Check the box if you are NOT subject to
backup withholding under the provisions
of section 3408(a)(1)(C) of the Internal
Revenue Code because (1) you have not been
notified that you are subject to backup with-
holding as a result of failure to report all interest
of dividends or (2) the Internal Revenue Service
has notified you that you are no longer subject to
backup withholding. [_]
______________________________________________________________________________
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
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<PAGE>
Part 3--
______________________________________________________________________________
Name (if joint names, list first and circle the name of the person or entity
whose number you enter in Part I below. See instructions if your name has
changed.)
______________________________________________________________________________
SIGNATURE DATE Awaiting TIN -- [ ]
______________________________________________________________________________
Address
______________________________________________________________________________
PAYER'S REQUEST City, State and ZIP Code
FOR TAXPAYER
___________________________________________________________
IDENTIFICATION List account number(s) here (optional)
NUMBER (TIN)
_____________________________________________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
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