FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 1999
__________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The transition period from ____________ to ___________
Commission file number ___________________________________
ClimaChem, Inc.
____________________________________________________
Exact name of Registrant as specified in its charter
OKLAHOMA 73-1528549
______________________________ _________________
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
_______________________________________________________
Address of principal executive offices (Zip Code)
(405) 235-4546
__________________________________________________
Registrant's telephone number, including area code
None
______________________________________________________
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES NO X
_____ _____
The Registrant does not have any equity securities registered under
the securities act of 1933, as amended. All outstanding shares of
Common Stock of the registrant are held directly or indirectly by
the registrant's parent company, LSB Industries, Inc.
2
<PAGE>
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: ClimaChem,
Inc. and all of its wholly owned subsidiaries.
The accompanying condensed consolidated balance sheet of ClimaChem,
Inc. at March 31, 1999, the condensed consolidated statements of
operations and cash flows for the three month periods ended
March 31, 1999 and 1998 have been subjected to a review, in
accordance with standards established by the American Institute of
Certified Public Accountants, by Ernst & Young LLP, independent
auditors, whose report with respect thereto appears elsewhere in
this Form 10-Q. The financial statements mentioned above are
unaudited and reflect all adjustments, consisting only of
adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the interim
periods. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results to be
expected for the full year. The condensed consolidated balance
sheet at December 31, 1998, was derived from audited financial
statements as of that date. Reference is made to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998,
for an expanded discussion of the Company's financial disclosures
and accounting policies.
2
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1999 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 1999 1998
___________________________________________ _______________ ___________
<S> <C> <C>
Current assets:
Cash $ 289 $ 750
Trade accounts receivable, net 44,076 38,817
Inventories:
Finished goods 14,523 14,123
Work in process 7,336 6,290
Raw materials 16,691 16,954
__________ __________
Total inventory 38,550 37,367
Supplies and prepaid items 7,982 7,023
Income tax receivable 2,100 2,050
Current deferred income taxes 1,338 1,338
Due from LSB and affiliates, net 2,234 2,946
__________ __________
Total current assets 96,569 90,291
Property, plant and equipment, net 84,338 82,389
Notes receivable from LSB and affiliates 13,443 13,443
Other assets, net 11,267 10,480
__________ __________
$ 205,617 $ 196,603
========= ==========
</TABLE>
(Continued on following page)
3
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1999 is unaudited)
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
____________________________________________ ___________ ___________
<S> <C> <C>
Current liabilities:
Accounts payable $ 15,865 $ 17,416
Accrued liabilities 11,691 7,918
Current portion of long-term debt 10,926 10,460
__________ ___________
Total current liabilities 38,482 35,794
Long-term debt 134,626 127,471
Commitments and contingencies (Note 2) - -
Deferred income taxes 9,680 9,580
Stockholders' equity:
Common stock, $.10 par value; 500,000
shares authorized, 10,000 shares
issued 1 1
Capital in excess of par value 12,652 12,652
Accumulated other comprehensive loss (1,337) (1,559)
Retained earnings 11,513 12,664
__________ ___________
22,829 23,758
__________ ___________
Total stockholders' equity $ 205,617 $ 196,603
========== ==========
</TABLE>
(See accompanying notes)
4
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
1999 1998
____________ ___________
<S> <C> <C>
Businesses continuing at March 31:
Revenues:
Net sales $ 57,361 $ 58,614
Other income - 35
__________ _________
57,361 58,649
Costs and expenses:
Cost of sales 44,145 45,831
Selling, general and administrative 10,017 9,175
Interest 3,154 3,156
Other expense 176 -
__________ __________
57,492 58,162
__________ __________
Income (loss) before subsidiary to be
disposed of during 1999 (131) 487
Subsidiary to be disposed of during 1999 (Note 4):
Revenues 2,868 4,779
Operating costs, expenses and interest 3,838 5,342
__________ ________
(970) (563)
Loss before provision (benefit) for
income taxes (1,101) (76)
Provision (benefit) for income taxes 50 (30)
__________ _________
Net loss $ (1,151) $ (46)
========== =========
Retained earnings at beginning of period 12,664 15,639
___________ ___________
Retained earnings at end of period $ 11,513 $ 15,593
=========== ===========
Total comprehensive loss:
Net loss $ (1,151) $ (46)
Foreign currency translation
income (loss) 222 10
___________ ___________
$ (929) $ (36)
============ ============
</TABLE>
(See accompanying notes)
5
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
1999 1998
_________ __________
<S> <C> <C>
Cash flows from operations:
Net loss $ (1,151) $ (46)
Adjustments to reconcile net loss
to cash flows provided (used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 2,337 2,355
Other 258 189
Provision for possible losses on
receivables and other assets 293 51
Provision for deferred income taxes 100 111
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (5,482) (4,671)
Inventories (1,035) 2,405
Supplies and prepaid items (956) 57
Accounts payable (1,606) (111)
Accrued liabilities 3,811 1,433
Due to / from LSB and affiliates 907 2,373
___________ __________
Net cash provided (used) by operations (2,524) 4,146
Cash flows from investing activities:
Capital expenditures (2,145) (1,109)
Payments made for acquisitions (3,113) -
Proceeds from sales of equipment - 19
Advances to LSB and affiliates (1,996) -
Decrease (increase) in other assets 2,093 (1,121)
___________ __________
Net cash used in investing activities (5,161) (2,211)
Cash flows from financing activities:
Payments on long-term debt (1,782) (1,264)
Net change in revolving debt 9,006 197
__________ __________
Net cash provided (used) by financing
activities 7,224 (1,067)
__________ __________
Net increase (decrease) in cash from
all activities (461) 868
Cash at beginning of period 750 3,534
__________ __________
Cash at end of period $ 289 $ 4,402
========== ==========
</TABLE>
(See accompanying notes)
6
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Note 1: Basis of Presentation
_____________________________
The Company, a wholly owned subsidiary of LSB Industries, Inc.
("LSB" or "Parent"), was organized under the laws of the State of
Oklahoma in October 1997. The Company's Certificate of
Incorporation authorizes the issuance of 500,000 shares of $.10 par
value common stock. All of the issued and outstanding shares of
common stock of the Company are directly or indirectly owned by
LSB. The Company is a holding company which maintains operations
through various wholly owned subsidiaries. The Company owns,
through its subsidiaries, a substantial portion, but not all, of
the operations comprising the Chemical Business and Climate Control
Business as previously owned by LSB.
The condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in the
accompanying financial statements.
Note 2: Commitments and Contingencies
_____________________________________
Nitric Acid Project
___________________
In June 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC agreed to act as an agent to construct,
and upon completion of construction, operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC 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,
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 cost of the EDNC Baytown Plant will
approximate $69 million and will be completed in the second quarter
of 1999. Construction financing of the EDNC Baytown Plant is
provided by an unaffiliated lender. Neither the Company nor EDC
has guaranteed any of the repayment obligations for the EDNC
Baytown Plant. In connection with the leveraged lease, the Company
entered into an interest rate forward agreement to fix the
effective rate of interest implicit in such lease. As of March 31,
7
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
1999, the fair value of such agreement represented a liability of
$2.6 million for which the Company has issued a letter of credit
totaling the same.
In January 1999, the contractor constructing the EDNC Baytown Plant
under a turnkey agreement, informed the Company that it could not
complete construction alleging a lack of financial resources. EDNC
at that time demanded that the contractor's bonding company provide
funds necessary for subcontractors to complete construction. A
substantial portion of the costs to complete the EDNC Baytown
Plant ($12.9 million), which were to be funded by the construction
contractor, have been funded by proceeds from the bonding company;
however, the cost to the Company through its leveraged lease is
expected to be impacted by these events. As a result of the delay
in completion of the EDNC Baytown Plant, the Company's
subsidiaries, EDNC and EDC, have entered into an interim supply
agreement with Bayer to provide product from the manufacturing
facility in El Dorado, Arkansas.
In connection with the EDNC Baytown Plant, EDNC had entered into a
long-term production and supply agreement with Bayer. This
agreement provided for a commencement date of no later than
February 1, 1999. As mentioned above, EDNC is providing product to
Bayer under an interim supply agreement until the EDNC Baytown
Plant becomes operational. In connection with these agreements,
EDNC and Bayer are to determine the financial impact of the delay
on Bayer in completing the Baytown Plant as scheduled, and EDNC has
agreed to reimburse Bayer for a portion of such losses sustained by
Bayer as a result of the delay in completion of the Baytown Plant
as originally scheduled. Based on current estimates, the loss
associated with these agreements and contract provisions is not
expected to be material.
Legal Matters
_____________
Following is a summary of certain legal actions involving the
Company:
A. On February 12, 1996, the Chemical Business 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 Chemical Business installed
additional pollution control equipment to address the
compliance issues. The Chemical Business was assessed $50,000
in civil penalties associated with the Administrative
8
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Agreement. In the summer of 1996 and then on January 28, 1997,
the subsidiary executed amendments to the Administrative
Agreement ("Amended Agreements"). The Amended Agreements
imposed a $150,000 civil penalty, which penalty has been paid.
Since the 1997 amendment, the Chemical Business has been
assessed stipulated penalties of approximately $67,000 by the
Arkansas Department of Pollution Control and Ecology
("ADPC&E") for violations of certain provisions of the 1997
Amendment. The Chemical Business believes that the El Dorado
Plant has made progress in controlling certain off-site
emissions; however, such off-site emissions have occurred and
continue to occur from time to time, which could result in the
assessment of additional penalties against the Chemical
Business by the ADPC&E for violation of the 1997 Amendment.
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
ditch near the El Dorado Plant. In 1998, the ADPC&E issued a
Consent Administrative Order ("1998 CAO") to resolve the
event. The 1998 CAO includes a civil penalty in the amount of
$183,700 which includes $125,000 to be paid over five years in
the form of environmental improvements at the El Dorado Plant.
The remaining $58,700 was paid in 1998. The 1998 CAO also
requires the Chemical Business to undertake a facility-wide
wastewater evaluation and pollutant source control program and
wastewater facility-wide wastewater minimization program.
The program requires that the subsidiary complete rainwater
drain-off studies including engineering design plans for
additional water treatment components to be submitted to the
ADCP&E by August 2000. The construction of the additional
water treatment components shall be completed by August 2001
and the El Dorado plant has been mandated to be in compliance
with final effluent limits on or before February 2002. The
wastewater program is currently expected to require future
capital expenditures of approximately $5.0 million.
B. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the defendants
allegedly violated certain federal and state antitrust laws in
connection with alleged price fixing of certain explosive
products. The plaintiffs are suing for an unspecified amount
of damages, which, pursuant to statute, plaintiffs are
requesting be trebled, together with costs. Based on the
information presently available to the Company, the Company
9
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
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. This litigation has been consolidated,
for discovery purposes only, with several other actions in a
multi-district litigation proceeding in Utah. Discovery in
this litigation is in process. The Chemical Business intends
to vigorously defend itself in this matter.
The Company's Chemical Business is a defendant in a separate
lawsuit pending in Missouri. This lawsuit alleges a national
conspiracy, as well as a regional conspiracy, directed against
explosive customers in Missouri and seeks unspecified damages.
The Company's Chemical Business has been included in this
lawsuit because it sold products to customers in Missouri
during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has
been sued in the preceding described lawsuit. Based on the
information presently available to the Company, the Company
does not believe that the Chemical Business conspired with any
party, to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously
defend itself in this matter.
During 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
property damage to their residence and wells, annoyance and
inconvenience, and nuisance as a result of daily blasting and
round-the-clock mining activities. The plaintiffs are
residents living near the Heartland Coal Company ("Heartland")
strip mine in Lincoln County, West Virginia, and an unrelated
mining operation operated by Pen Coal Inc. During 1999, the
plaintiffs withdrew all personal injury claims previously
asserted in this litigation. 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
10
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
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 as a result of
the subsidiary's operations. Discovery in this litigation in
process. The Company intends to vigorously defend itself in
this matter. Based on the limited information available, the
subsidiary's counsel believes that the subsidiaries' possible
loss, if any, related to this litigation is not presently
expected to have a material adverse effect on the Company.
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 is not presently expected to have a
material effect on the financial position of the Company, but could
have a material impact to the net income (loss) of a particular
quarter or year, if resolved unfavorably.
Note 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 provides
to the Company various services to the operations and businesses of
the Company. The Company will pay to, or reimburse, LSB for the
Company's payroll that is paid by LSB and the costs and expenses
incurred by LSB in the performance of the Services Agreement.
Under the terms of the Services Agreement, the Company will also
pay to, or reimburse, LSB for the value of the office facilities of
LSB, including LSB's principal offices and financial accounting
offices utilized in the performance of the Services Agreement.
Charges for such services included in the accompanying condensed
consolidated financial statements were $1,050,300 and $587,000 for
the quarterly periods ended March 31, 1999 and 1998, respectively.
Management of the Company believes these charges from LSB
reasonably approximate additional general and administrative costs
which would have been incurred if the Company had been an
independent entity during such periods. These amounts do not
include reimbursements for costs described in the next paragraph or
11
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
amounts paid by LSB relating to certain of the Company's payroll
that are directly charged to the Company by LSB.
The Services Agreement also provides that LSB will permit employees
of the Company and its subsidiaries to continue to participate in
the benefit plans and programs sponsored by LSB. The Company will
pay to, or reimburse, LSB for the costs associated with
participation by the employees of the Company in LSB's benefit
plans and programs.
On November 21, 1997, LSB and the Company entered into a management
agreement (the "Management Agreement"), which provides that LSB
will provide to the Company, managerial oversight and guidance
concerning the broad policies, strategic decisions and operations
of the Company and the subsidiaries and the rendering of such
further managerial assistance as deemed reasonably necessary by
LSB. No amounts were paid to LSB by the Company under the
Management Agreement during the quarter ended March 31, 1999.
On November 21, 1997, the Company and LSB entered into a tax
sharing agreement (the "Tax Sharing Agreement") which provides for,
among other things, 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. 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. For the quarters ended March 31,
1999 and 1998, the Company did not pay LSB and is not obligated to
pay LSB any amount under the Tax Sharing Agreement.
Under the terms of an Indenture between the Company, the guarantors
and the trustee relating to $105 million principal amount of 10
3/4% Senior Notes due 2007 (the "Notes"), the Company is permitted
to distribute or pay in the form of dividends and other
distributions to LSB in connection with the Company's outstanding
equity securities or loans, (a) advances or investments to any
person (including LSB), up to 50% of the Company's consolidated net
income for the period (taken as one accounting period), commencing
on January 1, 1998, to and including the last day of the fiscal
quarter ended immediately prior to the date of said calculation
(or, in the event consolidated net income for such period is a
deficit, then minus 100% of such deficit), plus (b) the aggregate
12
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
net cash proceeds received by the Company from the sale of its
capital stock. This limitation will not prohibit (i) payment to
LSB under the Services Agreement, Management Agreement and the Tax
Sharing Agreement, or(ii) the payment of any dividend within 60
days after the date of its declaration if such dividend could have
been made on the date of such declaration. For the quarters ended
March 31, 1999 and 1998, the Company did not make any distributions
or pay any dividends to LSB.
In 1995, a subsidiary of LSB invested approximately $2.8 million to
purchase a fifty percent (50%) equity interest in an energy
conservation joint venture (the "Project"). The Project had been
awarded a contract to retrofit residential housing units at a U.S.
Army base which it completed during 1996. The completed contract
was for installation of energy-efficient equipment (including air
conditioning and heating equipment), which would reduce utility
consumption. For the installation and management, the project will
receive an average of seventy-seven percent (77%) of all energy and
maintenance savings during the twenty (20) year contract term. In
January 1999, the Company purchased this investment by purchasing
the stock of an LSB subsidiary that owned the Project. The Company
paid $3.1 million to LSB in connection with this purchase. This
amount equaled the book value of the investment on the books of
LSB's subsidiary, which approximated the investment's fair value,
at the date of purchase.
The Company's Climate Control Business leases the facilities of one
of its Climate Control manufacturing subsidiaries and certain
production equipment from a subsidiary of LSB that is not the
Company or a subsidiary of the Company under an operating lease.
Rental expense associated with these leases was $176,705 and
$118,750 during the first quarter of 1999 and 1998, respectively.
The Company has, at various times, maintained certain unsecured
borrowings from LSB and its subsidiaries and made loans and
advances to LSB which generally bear interest. At March 31, 1999,
the Company had loans and advances due from LSB of approximately
$13.4 million, $10.0 million of which were made to LSB from the
proceeds of the sale of the Notes and bear interest at 10-3/4%,
maturing November 2007. The remainder of the these loans to LSB
and affiliates relate to cash advances from the Company to LSB and
affiliates prior to the sale of the Notes and these loans are due
November 2007 and bear interest at 7% per annum. The Company has
$2.2 million due from LSB and affiliates as of March 31, 1999,
included in current assets, which includes approximately $2.0
million in advances to LSB as permitted under the terms of the
Indenture and the remainder related primarily to accrued interest
13
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
on the above-referenced loans and advances offset by amounts owed
to LSB under the Management Agreement, which is non-interest
bearing.
Note 4: Subsequent Event
________________________
On May 7, 1999, the Company's wholly owned subsidiary, Total Energy
Systems Limited and its subsidiaries ("TES") entered into an
agreement (the "Asset Sale Agreement") to sell substantially all
the assets of TES ("Defined Assets"). Under the Asset Sale
Agreement, TES retains its liabilities and will liquidate such
liabilities from the proceeds of the sale and from the collection
of its accounts receivables which were retained by TES pursuant to
the Asset Sale Agreement.
The gain or loss on the closing of the Asset Sale Agreement is
subject to the fluctuation in the exchange rate between Australian
dollars and U. S. dollars prior to the close. At the date of this
report, the gain or loss associated with this transaction is
expected to be comprised primarily of disposition costs of
approximately $250,000, the recognition in earnings of the
cumulative foreign currency loss at such time ($1,337,000 at
March 31, 1999) and the amount, if any, related to the resolution
of certain environmental matters.
The Asset Sale Agreement is subject to certain conditions
precedent, including the purchaser receiving proper authorization
from specifically identified government and industry regulatory
agencies in Australia, and resolution of certain environmental
matters.
The Company expects to finalize the Asset Sale Agreement in the
second quarter of 1999, but there are no assurances that the
Company will be successful in doing so.
Transactions with LSB and Affiliates
During the latter part of March 1999, LSB's management began
considering the realignment of certain of LSB's overhead to better
match its focus on the Company and its subsidiaries' operations.
Consistent with this realignment, in April 1999, the Company's
Board of Directors approved the acquisition of certain assets from
LSB in accordance with the terms of the Indenture to which the
Company and its subsidiaries are parties to and the loan agreement
that LSB and subsidiaries of the Company are borrowing under, which
assets are materially related to the lines of business of the
14
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 1999 and 1998
Chemical and Climate Control Businesses. These assets are real
estate and improvements located thereon in which the Climate
Control Business will conduct certain manufacturing operations, and
a subsidiary of LSB that owns an option to acquire a French HVAC
manufacturing company and all amounts due and payable from such
French manufacturer or its parent to LSB. This transaction was
closed during the second quarter of 1999, and the Company paid LSB
$2.6 million for the option and receivables due from the French
manufacturer and its parent. It is anticipated that the Company
will acquire the real estate discussed above from LSB during the
second or third quarter of 1999. The final purchase price to be
paid to LSB for the real estate will be approximately $2.1 million,
of which the Company has deposited approximately $1.9 million
against the purchase of such real estate.
<TABLE>
<CAPTION>
Note 5: Segment Information
___________________________
Three Months Ended March 31,
1999 1998
___________ _________
(in thousands)
(unaudited)
<S> <C> <C>
Sales:
Businesses continuing:
Chemical $ 30,662 $ 28,678
Climate Control 26,699 29,936
Subsidiary to be disposed of:
Chemical 2,868 4,746
________ ________
$ 60,229 $ 63,360
======== ========
Operating profit (loss):
Businesses continuing:
Chemical $ 1,462 $ 1,123
Climate Control 2,410 2,452
Subsidiary to be disposed of:
Chemical (743) (439)
________ _______
3,129 3,136
Unallocated fees from services
Agreement and general corporate
expenses, net (674) -
Interest income 340 354
Other income (expense), net (278) 101
Interest expense (3,618) (3,667)
_______ _______
Loss before benefit for income taxes $ (1,101) $ (76)
======== =======
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with the Company's March 31, 1999 Condensed
Consolidated Financial Statements.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
OVERVIEW
<TABLE>
<CAPTION>
In October 1997, the Company was organized as a new wholly
owned subsidiary of LSB Industries, Inc. ("LSB"). The Company owns
substantially all of LSB's Chemical and Climate Control Businesses.
See Note 1 of Notes to Condensed Consolidated Financial Statements.
Information about the Company's operations in different industry
segments for the three months ended March 31, 1999 and 1998 is
detailed below.
Three Months Ended March 31,
1999 1998
____________ ______________
(in thousands)
(unaudited)
<S> <C> <C>
Sales:
Businesses continuing:
Chemical $ 30,662 $ 28,678
Climate Control 26,699 29,936
Subsidiary to be disposed of (1):
Chemical 2,868 4,746
__________ __________
$ 60,229 $ 63,360
========== ==========
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 4,951 $ 4,430
Climate Control 8,265 8,353
Subsidiary to be disposed of (1):
Chemical (158) 166
__________ __________
$ 13,058 $ 12,949
========== ==========
Operating profit (loss) (3):
Businesses continuing:
Chemical $ 1,462 $ 1,123
Climate Control 2,410 2,452
Subsidiary to be disposed of (1):
Chemical (743) (439)
_________ __________
3,129 3,136
16
<PAGE>
Unallocated fees from services
Agreement and general corporate
expenses, net (674) -
Interest income 340 354
Other income (expense), net (278) 101
Interest expense (3,618) (3,667)
___________ ___________
Loss before income taxes $ (1,101) $ (76)
=========== ============
<FN>
(1) On May 7, 1999, the Company's wholly owned Australian
subsidiary, TES, entered into an agreement to sell
substantially all of its assets, subject to certain conditions
precedent. See Note 4 of Notes to Condensed Consolidated
Financial Statements for further information. The operating
results for TES have been presented separately in the above
table.
(2) Gross profit by industry segment represents net sales less
cost of sales.
(3) Operating profit (loss) by industry segment represents gross
profit less operating expenses before deducting interest
expense and income taxes.
</FN>
</TABLE>
Chemical Business
_________________
Sales in the Chemical Business (excluding the subsidiary to be
disposed of) have increased from $28.7 million in the three months
ended March 31, 1998 to $30.7 million in the three months ended
March 31, 1999 (an increase of 7.0%) and the gross profit
(excluding the subsidiary being disposed of) has increased from
$4.4 million in 1998 to $5.0 in 1999, and the gross profit
percentage (excluding the subsidiary to be disposed of) has
increased from 15.4% in 1998 to 16.1% in 1999.
The cost of the Chemical Business' primary raw material,
anhydrous ammonia, averaged approximately $22 per ton less in the
first quarter of 1999, than in the first quarter of 1998. The
Chemical Business purchases approximately 220,000 tons of anhydrous
ammonia per year under three contracts expiring in April, 2000,
June, 2000, and December, 2000, respectively. The Company's
purchase price of anhydrous ammonia under these contracts can be
higher or lower than the current market spot price of anhydrous
ammonia. Pricing is subject to variations due to numerous factors
contained in these contracts. Based on the price calculations
contained in the contracts, the contract expiring in April, 2000 is
presently priced above the current market spot price. The Chemical
Business is required to purchase 120,000 tons of its requirements
under a contract expiring in April, 2000, at least 24,000 tons of
its requirements under a second contract expiring in June, 2000,
and 60,000 tons of its requirements under a third contract expiring
in December, 2000, with additional quantities of anhydrous ammonia
available under each contract. Anhydrous ammonia is not being
currently supplied under the contract expiring in December, 2000,
due to that supplier's declaration of an event of force majeure as
a result of a shut down of its plant due to mechanical problems.
17
<PAGE>
The Company has been able to obtain anhydrous ammonia from other
sources on similar terms as provided in the contract expiring in
December, 2000.
The anhydrous ammonia industry added an additional one million
tons of capacity of anhydrous ammonia in the western hemisphere in
1998, and the Company believes there is approximately one million
tons of additional annual capacity of anhydrous ammonia being
constructed in the western hemisphere scheduled for completion in
1999. The Company believes this additional capacity may contribute
to a decline in the future market price of anhydrous ammonia. See
"Special Note Regarding Forward-Looking Statements".
In June, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries is acting as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant will be operated by the Company's subsidiary
and will supply nitric acid for Bayer's polyurethane business under
a long-term supply contract. Management estimates that, after the
initial startup phase of operations at the plant, at full
production capacity based on terms of the Bayer Agreement and
dependent upon the price of anhydrous ammonia, based on the price
of anhydrous ammonia as of the date of this report, the plant
should generate approximately $35 million to $50 million in annual
gross revenues. Unlike the Chemical Business' regular sales
volume, the market risk on this additional volume is much less
since the contract provides for recovery of costs, as defined, plus
a profit. It is anticipated that the construction of the nitric
acid plant at Bayer's facility in Baytown, Texas, will cost
approximately $69 million and construction will be completed in the
second quarter of 1999. The Company's subsidiary is to lease the
nitric acid plant pursuant to a leverage lease from an unrelated
third party for an initial term of ten (10) years from the date
that the plant becomes fully operational, and the construction
financing of this plant is being provided by an unaffiliated
lender.
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, such have had an adverse effect on the Company's
consolidated results of operations. On May 7, 1999, the Company's
wholly owned Australian subsidiary entered into an agreement to
sell substantially all of its assets, subject to certain conditions
precedent. See Note 4 of Notes to Condensed Consolidated Financial
Statements and Item 5 "Other Information" of Part II of this report
for further information concerning this transaction. There are no
assurances that this sale will be successfully completed.
18
<PAGE>
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
Although sales in the Climate Control Business were 10.8%
lower in the three months ended March 31, 1999, than in the three
months ended March 31, 1998, the gross profit remained
approximately $8.3 million in both periods. The gross profit
percentage of the Climate Control Business has improved from 27.8%
in the first quarter of 1998 to 31.2% in the first quarter of 1999.
RESULTS OF OPERATIONS
_____________________
Three months ended March 31, 1999 vs. Three months ended March 31,
1998.
_________________________________________________________________
Revenues
________
Total revenues for the three months ended March 31, 1999 and
1998 were $60.2 million and $63.4 million, respectively (a decrease
of $3.2 million). Sales decreased $3.1 million and other income
decreased $.1 million.
Net Sales
_________
Consolidated net sales included in total revenues for the
three months ended March 31, 1999 were $60.2 million, compared to
$63.3 million for the first three months of 1998, a decrease of
$3.1 million. This decrease in sales resulted from: (i) decreased
sales in the Climate Control Business of $3.2 million due to
decreased sales in this Business' Heat Pump and Fan Coil product
lines, offset by (ii) increased sales in the Chemical Business of
$.1 million primarily due to sales of nitric acid products pursuant
to the Bayer Agreement (see Note 2 of Notes to Condensed
Consolidated Financial Statements), offset by reduced sales of the
Australian subsidiary and reduced selling prices of the Company's
nitrogen end products due to reduced raw material cost and general
supply and demand.
Gross Profit
____________
Gross profit was 21.7% for the first three months of 1999,
compared to 20.4% for the first three months of 1998. The increase
in the gross profit percentage was due primarily to (i) improved
19
<PAGE>
product mix and pricing, as well as reduced costs of component
parts, in the Company's heat pump product line, and (ii) lower raw
material costs in the Chemical Business due to the effect of lower
prices of anhydrous ammonia in 1999.
Selling, General and Administrative Expense
____________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 17.6% in the three month period ended
March 31, 1999, compared to 15.4% for the first three months of
1998. This increase is primarily the result of increased charges
of direct costs from LSB pursuant to the Services Agreement
associated with the Nitric Acid Project, the possible sale of TES
and the development of new product lines in the Climate Control
Business. Additionally, the Company experienced decreased sales
volume in the Climate Control Business and the Australian
subsidiary of the Chemical Business without an equivalent
corresponding decrease in SG&A.
Interest Expense
_________________
Interest expense for the Company was $3.2 million during the
first quarter of 1999, compared to $3.2 million during the first
quarter of 1998.
Loss Before Taxes
_________________
The Company had a loss before income taxes of $1.1 million in
the first quarter of 1999 compared to a loss before income taxes of
$.1 million in the three months ended March 31, 1998. The
decreased profitability of $1.0 million was primarily due to
increased SG&A expenses as previously discussed.
Benefit for Income Taxes
________________________
The provision for income taxes pursuant to the terms of the
Tax Sharing Agreement as discussed in Note 3 of Notes to Condensed
Consolidated Financial Statements was $50,000 for the first quarter
of 1999 on a pre-tax loss of $1.1 million compared to a credit for
income taxes of $30,000 in the first quarter of 1998 on a pre-tax
loss of $76,000. The income tax provision in 1999 primarily
relates to state income taxes of the Chemical Business.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow, borrowings under its revolving
credit facilities, and by issuance of senior unsecured notes in
November 1997.
20
<PAGE>
Net cash used by operations for the quarter ended March 31,
1999 was $2.5 million, after $2.6 million for noncash depreciation
and amortization, $.4 million in provisions for possible losses on
accounts receivable, and the following changes in assets and
liabilities: (i) accounts receivable increases of $5.5 million;
(ii) inventory increases of $1.0 million; (iii) increases in
supplies and prepaid items of $1.0 million; (iv) increases in
accounts payable and accrued liabilities of $2.2 million; and (v)
$.9 million decrease in the amount due from LSB and affiliates.
The increase in accounts receivable was primarily due to increased
days of sales outstanding in the Climate Control Business and
seasonal sales of agricultural products in the Chemical Business.
The increase in inventory was due primarily to increases in the
Climate Control Business in anticipation of higher sales volume in
the heat pump product lines and increases in the Chemical Business
due to less than anticipated sales of the Australian subsidiary.
The increase in accounts payable and accrued liabilities resulted
primarily from the accrual of interest expense related to senior
unsecured notes which is payable semi-annually, offset by a
reduction in accounts payable.
Cash Flow From Investing And Financing Activities
__________________________________________________
Cash used by investing activities for the quarter ended
March 31, 1999 included $2.1 million in capital expenditures, a
$3.1 million payment made for an acquisition, and a $2.0 million
advance to LSB and affiliates offset by $2.1 million provided by
decreases in other assets. The capital expenditures took place in
the Chemical and Climate Control Businesses to enhance production
and product delivery capabilities. The payment made for
acquisition relates to the purchase of all of the stock of a
subsidiary of LSB that held an option to acquire an energy
conservation joint venture (see Note 3 of Notes to Condensed
Financial Statements). The advance to LSB and affiliates, as
permitted under the terms of the Indenture relating to the Notes,
was made in the first quarter of 1999. The decrease in other
assets was primarily due to the reduction of deposits made in
connection with an interest rate hedge contract related to the
EDNC Baytown Plant leveraged lease.
Net cash used by financing activities included payments on
long-term debt of $1.8 million and net increases in revolving debt
of $9.0 million.
Source of Funds
_______________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
The Company owns substantially all of LSB's Chemical and
Climate Control Businesses. On November 26, 1997, the Company
issued senior unsecured notes which were exchanged with registered
senior notes of the same amount and substantially the same terms in
April 1998 ("Notes"), in the aggregate amount of $105 million
21
<PAGE>
pursuant to the terms of an indenture (the "Indenture"). The Notes
are jointly and severally and fully and unconditionally guaranteed
on a senior basis by all, except for one inconsequential
subsidiary, of the existing and all of the future subsidiaries of
the Company.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year, commencing June 1, 1998. The Notes will
mature on December 1, 2007, unless earlier redeemed. The Notes are
redeemable at the option of the Company on December 1, 2002 at
105.375% of the principal amount declining to face amount at
December 1, 2005 and thereafter under the terms set forth in the
Indenture. The Notes are effectively subordinated to all secured
indebtedness of the Company and its subsidiaries.
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
a working capital revolving line of credit evidenced by four (4)
loan agreements ("Revolving Credit Agreement") with an unrelated
lender ("Lender") collateralized by receivables, inventory,
proprietary rights and proceeds thereof of the Company and the
subsidiaries that are parties to the Revolving Credit Agreement.
The Revolving Credit Agreement, as amended, provides for revolving
credit facilities ("Revolver") for total direct borrowings up to
$65.0 million, including the issuance of letters of credit. Under
the Revolver, the Company can borrow up to the full $65 million
based on certain percentages of eligible collateral, with LSB and
certain subsidiaries of LSB that are not the Company or
subsidiaries of the Company having a right to borrow, on a
revolving basis, up to $24 million of the $65 million based on
eligible collateral. As of March 31, 1999, LSB and its
subsidiaries other than the Company and its subsidiaries have
borrowed $16.1 million under the Revolver. Any amounts borrowed by
LSB and its subsidiaries that are not subsidiaries of the Company
will reduce the amount that the subsidiaries of the Company may
borrow at any one time under the Revolver. The Revolver provides
for advances at varying percentages of eligible inventory and trade
receivables. The Revolving Credit Agreement, as amended, provides
for interest at the lender's prime rate plus .5% per annum or, at
the Company's option, on the Lender's LIBOR rate plus 2.875% per
annum (which rates are subject to increase or reduction based upon
achieving specified availability and adjusted tangible net worth
levels). At March 31, 1999, the effective interest rate was 8.2%.
The term of the Revolving Credit Agreement is through December 31,
2000, and is renewable thereafter for successive thirteen month
terms. At March 31, 1999, the availability for additional
borrowings by the subsidiaries of the Company, based on eligible
collateral, approximated $16.7 million. Borrowings by subsidiaries
of the Company under the Revolver outstanding at March 31, 1999,
were $18.5 million.
On May 10, 1999, a subsidiary of LSB, which is not a
subsidiary of the Company entered into a new credit facility with
a third party lender, reducing outstanding borrowings under the
Revolving Credit Agreement by $11.9 million. The event also served
to eliminate the Company's requirement to maintain certain
22
<PAGE>
financial ratios, so long as availability under the Revolving
Credit Agreement does not fall below $15.0 million. If
availability does drop below $15.0 million, the Revolving Credit
Agreement requires the Company to maintain certain financial ratios
and contain other financial covenants, including tangible net worth
requirements and capital expenditure limitations. The annual
interest on the outstanding debt under the Revolver at March 31,
1999, at the rates then in effect would approximate $1.5 million.
The Revolving Credit Agreement also require the payment of an
annual facility fee of 0.5% of the unused Revolver.
In addition to the Revolving Credit Agreement discussed above,
as of March 31, 1999, the Company's wholly owned subsidiary, DSN
Corporation ("DSN"), is a party to several loan agreements with a
financial company (the "Financing Company") for three projects. At
March 31, 1999, DSN had outstanding borrowings of $10.3 million
under these loans. The loans have repayment schedules of 84
consecutive monthly installments of principal and interest. The
interest rate on each of the loans is fixed and range from 8.2% to
8.9%. Annual interest, for the three notes as a whole, at March
31, 1999, at the agreed to interest rates would approximate $.9
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, which have been waived through June 2000.
The Company's Australian subsidiary has a revolving credit
working capital facility with a bank (the "TES Revolving
Facility"). The TES Revolving Facility is approximately AUS$10.5
million (approximately US$6.5 million). The TES Revolving Facility
allows for borrowings based on specific percentages of qualified
eligible assets. At March 31, 1999, based on the effective exchange
rate, the borrowings under the TES Revolving Facility were
approximately US$7.2 million (AUS$11.6 million). The borrowings
include approximately US$1.2 million of cash disbursements not
presented to the bank for payment prior to March 31, 1999. There
are no assurances that the bank would have cleared these checks if
they were presented for payment; however, TES received adequate
customer collections subsequent to March 31, 1999, to provide
availability under their line of credit as such checks were
presented for payment. 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 6.87% at March 31, 1999. TES is in
technical noncompliance with a certain financial covenant contained
in the loan agreement involving the TES Revolving Facility.
However, this covenant was not met at the time of closing of this
loan and the bank has continued to extend credit under this
facility. The outstanding borrowing under the TES Revolving
Facility at March 31, 1999, has been classified as due within one
year in the accompanying consolidated financial statements. As
previously noted in this report, TES has entered into an Asset Sale
Agreement, as discussed in Note 4 of Notes to Condensed
Consolidated Financial Statements, for the sale of substantially
all of the assets of TES. The completion of this sale is subject
23
<PAGE>
to certain conditions, and, as a result, there are no assurances
that the Company will sell TES. Under the terms of the Indenture
to which ClimaChem is bound by, the net cash proceeds from the sale
of TES, if completed, are required (1) within 270 days from the
date of the sale to be applied to the redemption of the notes
issued under the Indenture or to the repurchase of such notes, or
(2) within 240 days from the date of such sale, the amount of the
net cash proceeds be invested in a related business of ClimaChem or
the Australian subsidiary or used to reduce indebtedness of
ClimaChem.
In 1995, a subsidiary of LSB invested approximately $2.8
million to purchase a fifty percent (50%) equity interest in an
energy conservation joint venture (the "Project"). The Project had
been awarded a contract to retrofit residential housing units at a
US Army base which it completed during 1996. The completed
contract was for installation of energy-efficient equipment
(including air conditioning and heating equipment), which would
reduce utility consumption. For the installation and management,
the Project will receive an average of seventy-seven percent (77%)
of all energy and maintenance savings during the twenty (20) year
contract term. In January 1999, the Company agreed to purchase
this investment by purchasing the stock of an LSB subsidiary that
owned the Project. The Company paid $3.1 million to LSB in
connection with this purchase. This amount equaled the book value
of the investment on the books of LSB's subsidiary, which
approximated the investment's fair value, at the date of purchase.
During the latter part of March 1999, LSB's management began
considering the realignment of certain of LSB's overhead to better
match its focus on the Company and its subsidiaries' operations.
Consistent with this realignment, in April 1999, the Company's
Board of Directors approved the acquisition of certain assets from
LSB in accordance with the terms of the Indenture to which the
Company and its subsidiaries are parties to and the loan agreement
that LSB and subsidiaries of the Company are borrowing under, which
assets are materially related to the lines of business of the
Chemical and Climate Control Businesses. These assets are real
estate and improvements located thereon in which the Climate
Control Business will conduct certain manufacturing operations, and
a subsidiary of LSB that owns an option to acquire a French HVAC
manufacturing company and all amounts due and payable from such
French manufacturer or its parent to LSB. This transaction was
closed during the second quarter of 1999, and the Company paid LSB
$2.6 million for the option and payables due from the French
manufacturer and its parent. It is anticipated that the Company
will acquire the real estate discussed above from LSB during the
second or third quarter of 1999. The final purchase price to be
paid to LSB for the real estate will be approximately $2.1 million,
of which the Company has deposited approximately $1.9 million
against the purchase of such real estate.
As a result of increased services to be provided by LSB on
behalf of the Company during 1999, and the anticipated results of
the company for 1999, the Company anticipates that the amounts to
24
<PAGE>
be paid to LSB under these agreements will be greater than the
amount paid during 1998.
Future cash requirements include working capital requirements
for anticipated sales increases in all businesses, funding for
anticipated increased payments to LSB pursuant to the Services
Agreement, the Management Agreement and the Tax Sharing Agreement
and funding for future capital expenditures (including the purchase
of certain assets from LSB as discussed above). Funding for the
higher accounts receivable and inventory requirements resulting
from anticipated sales increases, funding for anticipated purchases
of certain assets from LSB and funding for payments under the
Services Agreement, Management Agreement and Tax Sharing Agreement
will be provided by cash flow generated by the Company and the
revolving credit facilities discussed elsewhere in this report.
Currently, LSB and certain subsidiaries of LSB, including the
Company, are limited to capital expenditures of $10.0 million
annually under the Revolving Credit Agreement discussed above. In
1999, the Company has planned capital expenditures of approximately
$9.5 million, a certain amount of which it anticipates will be
financed by equipment finance contracts on a term basis and in a
manner allowed under its various loan agreements. Such capital
expenditures include approximately $2.4 million, which the Chemical
Business anticipates spending related to environmental control
facilities at its El Dorado Facility. The Company currently has no
material commitment for capital expenditures.
Management believes that cash flows from operations, the
Company's revolving credit facilities, and other sources will be
adequate to meet its presently anticipated capital expenditure,
working capital, and debt service requirements. The Company's
subsidiary has agreed to act as an agent to construct a nitric acid
plant for Bayer's Baytown, Texas, facility. See "Overview -
Chemical Business" of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding the fact
that the Company's subsidiary has agreed to act as agent to
construct a nitric acid plant. Further, the Company's Chemical
Business will be required to incur additional capital expenditures
as discussed in Note 2 of Notes to the Company's Condensed
Consolidated Financial Statements regarding an Administrative
Agreement and Consent Administrative Order related to the Chemical
Business' wastewater treatment system. At the date of this report,
the future cost of the expenditure for these environmental matters
has been estimated to be approximately $5.0 million, with $2.4
million being paid in 1999 ($443,000 in the first quarter of 1999)
and the balance in 2000.
Year 2000 Issues
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
25
<PAGE>
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, LSB undertook a project to enhance certain
of its Information Technology ("IT") systems and install certain
other technologically advanced communication systems to provide
extended functionality for operational purposes. A major part of
LSB's program was to implement a standardized IT system purchased
from a national software distributor at all of the Company and
subsidiary operations, as well as other LSB subsidiaries, and to
install a Local Area Network ("LAN"). The IT system and the LAN
necessitated the purchase of additional hardware, as well as
software. The process implemented by LSB to advance its systems to
be more "state-of-the-art" systems had an added benefit in that the
software and hardware changes necessary to achieve LSB's goals are
Year 2000 compliant.
Starting in 1996 through March 31, 1999, LSB has capitalized
approximately $1.0 million in costs to accomplish its enhancement
program. The capitalized costs include $425,000 in external
programming costs, with the remainder representing hardware and
software purchases. LSB anticipates that the remaining cost to
complete this IT systems enhancement project will be less than
$100,000, and such costs will be capitalized.
LSB's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing and
implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing scheduling systems,
the Company is 100% complete on the assessment and remediation
phases. As of the date of this report, the Company has completed
its testing and has implemented its remediated systems for all of
its businesses. The assessments also indicated that limited
software and hardware (embedded chips) used in production and
manufacturing systems ("operating equipment") also are at limited
risk. The Company has completed its assessment and identified
remedial action which will be completed in the second quarter 1999.
In addition, the Company has completed its assessment of its
product line and determined that the products it has sold and will
continue to sell do not require remediation to be Year 2000
compliant. Accordingly, based on the Company's current assessment,
the Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
26
<PAGE>
resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company; however, management does not believe that, under the most
reasonably likely worst case scenario, such potential impact would
be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company. See "Special Note Regarding Forward-
Looking Statements".
Contingencies
_____________
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome. The preceding sentence is a forward-looking statement
that involves a number of risks and uncertainties that could cause
actual results to differ materially, such as, among other factors,
the following: the EIL Insurance does not provide coverage to the
Company and the Chemical Business for any material claims made by
the claimants, the claimants alleged damages are not covered by the
EIL Policy which a court may find the Company and/or the Chemical
Business liable for, such as punitive damages or penalties, a court
finds the Company and/or the Chemical Business liable for damages
to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company. See Note 2 of Notes to
Condensed Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
__________________________________________________________
General
_______
The Company's results of operations and operating cash flows
are impacted by changes in market interest rates and raw material
prices for products used in its manufacturing processes. The
Company also has a wholly owned subsidiary in Australia, for which
27
<PAGE>
the Company has foreign currency translation exposure. The
derivative contracts used by the Company are entered into to hedge
these risks and exposures and are not for trading purposes. All
information is presented in U. S. dollars. See Note 4 of Notes to
Consolidated Financial Statements for a discussion of the
Australian subsidiary in 1999.
Interest Rate Risk
__________________
The Company's interest rate risk exposure results from its
debt portfolio which is impacted by short-term rates, primarily
prime rate-based borrowings from commercial banks, and long-term
rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, for an expanded analysis of
expected maturities of long-term debt and its weighted average
interest rates and discussion related to raw material price risk.
As of March 31, 1999, the Company's variable rate and fixed
rate debt which aggregated $146.6 million exceeded the debt's fair
market value by approximately $3.2 million. The fair value of the
Company's Senior Notes was determined based on a market quotation
for such securities.
The Company is also a party to a series of agreements under
which, upon completion of construction, it will lease a nitric acid
plant. The minimum lease payments associated therewith until
execution will be directly impacted by the change in interest
rates. To mitigate a portion of the Company's exposure to adverse
market changes related to this leveraged lease, in 1997 the Company
entered into an interest rate forward agreement whereby the Company
is the fixed rate payor on notional amounts aggregating $25
million, net to its 50% interest, with a weighted average interest
rate of 7.12%. The Company accounts for this forward under the
deferral method, so long as high correlation is maintained, whereby
the net gain or loss upon settlement will adjust the item being
hedged, the minimum lease rentals, in periods commencing with the
lease execution. As of March 31, 1999, the fair value of this
interest rate forward agreement represented a liability of
approximately $2.6 million ($3.3 million at December 31, 1998) net
to the Company's 50% interest.
Foreign Currency Risk
_____________________
The Company has a wholly owned subsidiary located in
Australia, for which the functional currency is the local currency,
the Australian dollar. Since the Australian subsidiary accounts
are converted into U.S. dollars upon consolidation using the end of
the period exchange rate, declines in value of the Australian
dollar to the U.S. dollar result in translation loss to the
Company. Additionally, any cumulative foreign currency translation
loss will impact operating results in the period the Company sells
28
<PAGE>
or disposes of substantially all of its investment in the
subsidiary. As of March 31, 1999, the Company's net investment in
this Australian subsidiary was $5.7 million ($5.8 million at
December 31,1998) with the cumulative translation loss not
recognized in results of operations aggregating approximately $1.3
million ($1.6 million at December 31, 1998).
29
<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) ability to improve operations and become
profitable on an annualized basis, (ii) construction costs of the
EDNC Baytown Plant will approximate $69 million and will be
completed by the second quarter of 1999, (iii) delay in completing
the Baytown Plant as scheduled will not result in material losses,
(iv) the sale of substantially all of the assets of the Company's
Australian subsidiary, (v) amount to be spent in 1999 relating to
compliance with federal, state and local Environmental laws at the
El Dorado Facility, (vi) Year 2000 issues, (vii) the Company's
ability to develop or adopt new and existing technologies in the
conduct of its operations, (viii) anticipated financial
performance, (ix) ability to comply with the Company's general
working capital and debt service requirements, (x) ability of the
EDNC Baytown Plant to generate $35 to $50 million in gross revenues
once operational. While the Company believes the expectations
reflected in such Forward-Looking Statements are reasonable, it can
give no assurance such expectations will prove to have been
correct. There are a variety of factors which could cause future
outcomes to differ materially from those described in this report,
including, but not limited to, (i) decline in general economic
conditions, both domestic and foreign, (ii) material reduction in
revenues, (iii) material increase in interest rates; (iv) inability
to collect in a timely manner a material amount of receivables,
(v) increased competitive pressures, (vi) inability to meet the
"Year 2000" compliance of the computer system by the Company, its
key suppliers, customers, creditors, and financial service
organization, (vii) changes in federal, state and local laws and
regulations, especially environmental regulations, or in
interpretation of such, pending (viii) additional releases
(particularly air emissions into the environment), (ix) potential
increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (x) inability to retain
management or to develop new management, (xi) the requirement to
use internally generated funds for purposes not presently
anticipated, (xii) the effect of additional production capacity of
anhydrous ammonia in the western hemisphere, (xiii) the cost for
the purchase of anhydrous ammonia increasing or the Company's
inability to purchase anhydrous ammonia on favorable terms when a
current supply contract terminates, (xiv) changes in competition,
(xv) the loss of any significant customer, (xvi) changes in
30
<PAGE>
operating strategy or development plans, (xvii) inability to fund
the working capital and expansion of the Company's businesses,
(xviii) adverse results in any of the Company's pending litigation,
(xix) inability to obtain necessary raw materials, (xx) inability
to finalize the sale of TES due to the Australian government's
failure to approve the sale or the potential buyer's inability or
refusal to complete the sale; (xxi) Bayer's inability or refusal to
purchase all of the Company's production at the new Baytown nitric
acid plant; (xxii) material increases in equipment, maintenance,
operating or labor costs not presently anticipated by the Company;
and (xxiii) other factors described "Management's Discussion and
Analysis of Financial Condition and Results of Operation" contained
in this report. Given these uncertainties, all parties are
cautioned not to place undue reliance on such Forward-Looking
Statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to
any of the Forward-Looking Statements contained herein to reflect
future events or developments.
31
<PAGE>
<PAGE>
Independent Accountants' Review Report
Board of Directors
ClimaChem, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of ClimaChem, Inc. and subsidiaries as of March 31, 1999, and
the related condensed consolidated statements of operations and
cash flows for the three month periods ended March 31, 1999 and
1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of ClimaChem,
Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated
February 19, 1999, except for paragraphs (A) and (D) of Note 6, as
to which the date is April 14, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 14, 1999
32
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
_______ _________________
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously reported
by the Company in Item 3 of its Form 10-K for the fiscal period
ended December 31, 1998, which Item 3 is incorporated by reference
herein.
Item 2. Changes in Securities and Use of Proceeds
_______ _________________________________________
Not applicable.
Item 3. Defaults upon Senior Securities
______ _______________________________
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
_______ ___________________________________________________
Not applicable.
Item 5. Other Information
______ _________________
(A) During January 1999, the Company purchased from LSB all
of the issued and outstanding capital stock of a
subsidiary of LSB that owns a 50% equity interest in an
energy conservation joint venture (the 'Project"). The
Project was awarded a contract to retrofil residential
housing units at a U. S. Army base which it completed
during 1996. The completed contract was for installation
of energy-efficient equipment (including air conditioning
and testing equipment). Under the terms of the Project,
the Project is to be paid for such installation and
management of the Project 77% of all energy and
maintenance savings during the 20-year term of the
contract. The Company paid LSB $3.1 million for the
stock of LSB's subsidiary, which was the subsidiary's
book value of this investment. See Note 3 of Notes to
Condensed Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(B) During the latter part of March 1999, LSB began
considering the realignment of certain of LSB's overhead
to better match its focus on LSB's and the Company's
operations. Pursuant to this realignment, in April 1999,
the company acquired from LSB all of the stock of a
subsidiary of LSB that owns an option to acquire a French
HVAC manufacturing company and the amounts due and
payable to LSB from the French company and/or its parent
33
<PAGE>
company and security interest to secure repayment of such
loans and advances made by LSB. The Company paid LSB the
sum of $2.6 million for all of the stock of such
subsidiary which was LSB's book value of its investment
in the option and such loans and advances. See Note 3 to
Condensed Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(C) On May 7, 1999, the Company's wholly owned Australian
subsidiary entered into an agreement (the "Asset Sale
Agreement") to sell substantially all of its assets,
subject to certain conditions precedent that must be
complied with. The conditions precedent include, but are
not limited to, Australian governmental approvals and
environmental audits. Although there are no assurances
the sale will be completed, the Company believes that
this transaction will be completed during the second
quarter of 1999. See Note 4 of Notes to Condensed
Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" of this report for further
information concerning the Asset Sale Agreement.
Item 6. Exhibits and Reports on Form 8-K
______ ________________________________
(A) Exhibits.
_________
The Company has included the following exhibits in this
report:
10.1 Asset Purchase Agreement, dated May 7, 1999,
between Quantum Explosives Pty. Limited and Total
Energy Systems Limited, Total Energy Systems
(International) Pty. Ltd. and Total Energy Systems
(NZ) Limited, which has been previously filed as
Exhibit 10.1 to LSB Industries, Inc.'s Form 10-Q
for the period ended March 31, 1999, and is
incorporated by reference. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF
SUCH REQUEST.
10.2 Stock Purchase Agreement, dated April 23, 1999,
between LSB Holdings, Inc. and the Company.
10.3 Stock Purchase Agreement, dated February 9, 1999,
between LSB Holdings, Inc. and the Company which
has been previously filed as Exhibit 10.59 to the
34
<PAGE>
Company's Form 10-K for the year ended December 31,
1998, and is incorporated herein by reference.
15.1 Letter Re: Unaudited Financial Information
27.1 Financial Data Schedule.
(B) Reports of Form 8-K.
The Company did not file any reports on Form 8-K during
the quarter ended March 31, 1999.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly
authorized, to sign this report on its behalf on this 21st day
of May 1999.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
____________________________
Tony M. Shelby,
Vice President - Chief Financial
Officer, (Principal Financial
Officer)
By: /s/ Jim D. Jones
_____________________________
Jim D. Jones
Vice President - Treasurer
(Principal Accounting Officer)
36
<PAGE>
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
_______ ___________ ___________
10.1 Asset Purchase Agreement, dated May 7, 1999,
between Quantum Explosives Pty. Limited and
Total Energy Systems Limited, Total Energy
Systems (International) Pty. Ltd. and Total
Energy Systems (NZ) Limited, which has been
previously filed as Exhibit 10.1 to LSB
Industries, Inc.'s Form 10-Q for the period
ended March 31, 1999, and is incorporated
by reference. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE FREEDOM
OF INFORMATION ACT. THE OMITTED INFORMATION
HAS BEEN FILED SEPARATELY WITH THE SECRETARY
OF THE SECURITIES AND EXCHANGE COMMISSION
FOR PURPOSES OF SUCH REQUEST.
10.2 Stock Purchase Agreement, dated April 23,
1999, between LSB Holdings, Inc. and the
Company.
10.3 Stock Purchase Agreement, dated February 9,
1999, between LSB Holdings, Inc. and the Company,
which has been previously filed as Exhibit 10.59
to the Company's Form 10-K for the year ended
December 31, 1998, and is incorporated herein
by reference.
15.1 Letter Re: Unaudited Financial Information.
27.1 Financial Data Schedule.
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made as of
the 23rd day of April, 1999, by and between LSB Holdings, Inc.
("LSB") and ClimaChem, Inc. ("CCI").
WHEREAS, MultiClima Holdings, Inc. ("MultiClima Holdings") is
a wholly-owned subsidiary of LSB; and
WHEREAS, MultiClima Holdings owns, by assignment, that (i)
certain stock option agreement dated as of June 15, 1994, by and
between Dr. Hauri AG, a corporation formed under the laws of
Switzerland, and MultiClima Holdings, whereby MultiClima Holdings
may purchase up to one hundred percent (100%) of the issued and
outstanding common stock of Compagnie Financiere du Tararois
("CFT"), an SARL formed under the laws of France, and (ii) all
loans and advances, and security and collateral for such loans and
advances, relating to Dr. Hauri AG, CFT, and Beutot S.A. (now known
as Muti Clima, S.A.), a corporation formed under the laws of
France; and
WHEREAS, CCI desires to purchase all the issued and
outstanding stock of MultiClima Holdings; and
WHEREAS, LSB desires to sell all of the issued and outstanding
stock of MultiClima Holdings to CCI.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, LSB and CCI agree as follows:
1. Stock Purchase. Pursuant to the terms and conditions
contained herein, LSB hereby agrees to sell to CCI and CCI agrees
to purchase from LSB all issued and outstanding shares of the stock
of MultiClima Holdings (the "Shares").
2. Delivery of Shares. LSB shall deliver to CCI the
certificate(s) evidencing the Shares, together with assignments
separate from the certificate(s) endorsed in favor of CCI or its
designee.
3. Purchase Price. After delivery to CCI of the
certificate(s) evidencing the Shares, CCI shall pay LSB Two Million
Five Hundred Fifty-Eight Thousand, Three Hundred Three and No/100
Dollars ($2,558,303.00).
<PAGE>
4. Miscellaneous.
4.1 Full Agreement. This Agreement embodies all
representations, warranties and agreements of the parties and
supersedes all negotiations and agreements prior to the
execution of this Agreement. This Agreement may not be
altered or modified except by an instrument in writing signed
by the parties.
4.2 Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective
successors and assigns.
4.3 Governing Law. This Agreement shall be governed by
and constructed in accordance with the laws of the State of
Oklahoma.
4.4 Section Headings. The section headings contained in
this Agreement are for convenience and reference only and
shall not in any way affect the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the day and year first above written.
LSB HOLDINGS, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
CLIMACHEM, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
Letter of Acknowledgment Re: Unaudited Financial Information
The Board of Directors
ClimaChem, Inc.
We are aware of the incorporation by reference in the Registration
Statement (Form S-4 No. 333-44905) of ClimaChem, Inc. and in the
related Prospectus of our report dated May 14, 1999, relating to
the unaudited condensed consolidated interim financial statements
of ClimaChem, Inc. that is included in its Form 10-Q for the
quarter ended March 31, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is
not a part of the registration statement prepared or certified by
accountants within the meaning of Section 7 or 11 of the Securities
Act of 1933.
/s/ Ernst & Young
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 14, 1999
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 289
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<RECEIVABLES> 46,030
<ALLOWANCES> 1,954
<INVENTORY> 38,550
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0
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<SALES> 60,229
<TOTAL-REVENUES> 60,229
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<INTEREST-EXPENSE> 3,279
<INCOME-PRETAX> (1,101)
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