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 September 30, 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 X NO
_____ _____
The Registrant does not have any equity securities registered under the
securities act of 1933, as amended. All outstanding shares of Common
Stock of the registrant are held directly or indirectly by the
registrant's parent company, LSB Industries, Inc.
<PAGE>
<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 September 30, 1999, the condensed consolidated statements of
operations for the three-month and nine-month periods ended September 30,
1999 and 1998 and the condensed consolidated statement of cash flows for
the nine month periods ended September 30, 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, except for the loss provision recognized in
the second and third quarters of 1999 on firm raw material purchase
commitments and a lower of cost or market adjustment as discussed in Note
6 to the Condensed Consolidated Financial Statements, which are, in the
opinion of management, necessary for a fair presentation of the interim
periods. The results of operations for the nine months ended
September 30, 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.
1
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 8)
(Information at September 30, 1999 is unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1999 1998
_____ _____________ ___________
<S> <C> <C>
Current assets:
Cash $ 740 $ 750
Trade accounts receivable, net 42,159 38,817
Inventories:
Finished goods 10,431 14,123
Work in process 6,431 6,290
Raw materials 9,216 16,954
____________ _________
Total inventory 26,078 37,367
Supplies and prepaid items 8,682 7,023
Income tax receivable - 2,050
Current deferred income taxes 4,837 1,338
Due from LSB and affiliates, net (Note 3) 2,926 1,047
____________ _________
Total current assets 85,422 88,392
Property, plant and equipment, net 77,612 82,389
Notes receivable from LSB and affiliates (Note 3) 13,443 13,443
Other assets, net (Note 3) 15,779 10,480
__________ _________
$ 192,256 $ 194,704
========== ==========
</TABLE>
(Continued on following page)
2
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 8)
(Information at September 30, 1999 is unaudited)
(Dollars in thousands)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
____________________________________ ____________ ___________
<S> <C> <C>
Current liabilities:
Accounts payable $ 16,199 $ 17,416
Accrued liabilities 15,156 6,019
Accrued losses on firm purchase commitments
(Note 6) 2,605 -
Current portion of long-term debt 4,017 10,460
___________ __________
Total current liabilities 37,977 33,895
Long-term debt (Note 7) 128,974 127,471
Accrued losses on firm purchase commitments
(Note 6) 4,879 -
Commitments and contingencies (Note 2) - -
Deferred income taxes 6,454 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 - (1,559)
Retained earnings 1,319 12,664
__________ _________
Total stockholders' equity 13,972 23,758
__________ _________
$ 192,256 $ 194,704
========== =========
</TABLE>
(See accompanying notes)
3
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
____ ____
<S> <C> <C>
Businesses continuing at September 30:
Revenues:
Net sales $ 184,114 $ 191,059
Other income 761 288
__________ _________
184,875 191,347
Costs and expenses:
Cost of sales 147,096 148,902
Selling, general and administrative 31,718 28,959
Interest 9,613 8,993
Provision for losses on firm purchase
commitments (Note 6) 8,439 -
___________ _________
196,866 186,854
___________ _________
Income (loss) before business disposed
of during 1999 and provision (benefit)
for income taxes (11,991) 4,493
Business disposed of (Note 5):
Revenues 7,461 11,402
Operating costs, expenses and interest 9,419 13,175
___________ ________
(1,958) (1,773)
Loss on disposal of business (1,971) -
___________ ________
(3,929) (1,773)
Income (loss) before provision (benefit) for
income taxes (15,920) 2,720
Provision (benefit) for income taxes (4,575) 1,908
___________ ________
Net income (loss) $ (11,345) $ 812
========== =========
Total comprehensive loss:
Net income (loss) $ (11,345) $ 812
Foreign currency translation
income (loss) 1,559 (930)
___________ _________
$ (9,786) $ (118)
=========== =========
</TABLE>
(See accompanying notes)
4
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
____ _____
<S> <C> <C>
Businesses continuing at September 30:
Revenues:
Net sales $ 58,395 $ 62,137
Other income 1,249 61
__________ ________
59,644 62,198
Costs and expenses:
Cost of sales 48,141 49,512
Selling, general and administrative 11,383 9,728
Interest 3,208 2,956
Provision for losses
on firm purchase commitments (Note 6) 939 -
__________ ________
63,671 62,196
__________ ________
Income (loss) before business disposed
of during 1999 and provision (benefit)
for income taxes (4,027) 2
Business disposed of (Note 5):
Revenues 1,088 3,195
Operating costs, expenses and interest 1,315 3,744
_________ ________
(227) (549)
Loss before provision (benefit) for
income taxes (4,254) (547)
Provision (benefit) for income taxes (1,501) 208
_________ ________
Net loss $ (2,753) $ (755)
Total comprehensive loss:
Net loss $ (2,753) $ (755)
Foreign currency translation loss - (324)
_________ ________
$ (2,753) $ (1,079)
========= ========
</TABLE>
(See accompanying notes)
5
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<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
____ ____
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ (11,345) $ 812
Adjustments to reconcile net income (loss)
to cash flows provided by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 6,518 7,042
Other 774 1,065
Provision for possible losses on
receivables 740 206
Provision for deferred income taxes (4,575) -
Loss on business to be disposed of 1,971 -
Inventory write-down and provision for
losses on purchase commitments 9,356 -
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (3,823) (5,376)
Inventories 2,776 859
Supplies and prepaid items (1,650) (1,499)
Accounts payable (1,418) (2,075)
Accrued liabilities 6,156 5,556
Due to / from LSB and affiliates 157 3,606
_________ _________
Net cash provided by operations 5,637 10,196
Cash flows from investing activities:
Capital expenditures (4,056) (4,229)
Payments made for acquisition (Note 3) (3,113) -
Purchase of option (Note 3) (2,558) -
Proceeds from sales of equipment 1,060 64
Proceeds from sale of business disposed of 3,491 -
Deposit on real estate to LSB and
affiliates (Note 3) (1,899) -
Increase in other assets (524) (1,892)
_________ _________
Net cash used in investing activities (7,599) (6,057)
Cash flows from financing activities:
Payments on long-term debt (2,111) (4,939)
Net change in revolving debt 4,063 (1,863)
Other financing activities - 150
_________ _________
Net cash provided (used) by financing
activities 1,952 (6,652)
Net decrease in cash from all activities (10) (2,513)
Cash at beginning of period 750 3,534
_________ _________
Cash at end of period $ 740 $ 1,021
======== =========
</TABLE>
(See accompanying notes)
6
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 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. The construction of the EDNC
Baytown Plant was completed in May 1999, and EDNC began producing and
delivering nitric acid to Bayer at that date. Sales by EDNC to Bayer out
of the EDNC Baytown Plant production during the quarter ended
September 30, 1999, were approximately $7.2 million. EDC guaranteed the
performance of EDNC's obligations under the Bayer Agreement. Under
the terms of the Bayer Agreement, EDNC is leasing the EDNC Baytown
plant pursuant to a leveraged lease from an unrelated third party
with an initial lease term of ten years. 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. Financing of the EDNC Baytown Plant was 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 September 30, 1999, the
7
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Company has deferred cost of approximately $2.8 million associated
with such agreement, which will be amortized over the initial term
of the lease.
Purchase Commitments
____________________
As of September 30, 1999, the Chemical Business has commitments to
purchase anhydrous ammonia under two contracts. 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 pricing index contained
in one of these contracts, it is presently priced above the current
market spot price. As of September 30, 1999, the Chemical Business
has remaining purchase commitments of approximately 104,000 tons
under this contract. At this time, the Company has reached an oral
agreement in principle with the supplier of anhydrous ammonia under
this contract which will allow the Company to defer quantities
required to be purchased under this take or pay contract through
2002. This agreement in principle is subject to the parties
evolving into a definitive agreement, and there are no assurances
that a definitive agreement will be finalized. The Company will
have deferred approximately $9.0 million of product from the
calendar year 1999 into future periods. Should the Company and the
supplier not ultimately consummate the definitive agreement, the
Company would be required to pay for such deferred volumes in
January 2000. The Chemical Business is required to purchase a
minimum of 7,000 tons monthly under the other contract expiring in
June 2000, the requirements of which have been waived by the
supplier for the fourth quarter of 1999.
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, which was
amended in January, 1997. Pursuant to the Administrative
Agreement, as amended, the Chemical Business has installed
additional pollution control equipment. 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
8
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
time, which could result in the assessment of additional
penalties against the Chemical Business.
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 Chemical
Business entered into 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 State of Arkansas
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
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 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
9
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
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.
C. 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
asserted 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 Heartland under certain conditions for
acts or actions taken by the subsidiary for which the
subsidiary failed to take, and Heartland alleged that the
subsidiary was 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. This
litigation has been settled with the subsidiary's payment of
approximately $81,000, which was accrued in the second quarter
of 1999.
D. On August 26, 1999, LSB and El Dorado were served with a
complaint filed in the District Court of the Western District
of Oklahoma by National Union Fire Insurance Company, seeking
recovery of certain insurance premiums totaling $2,085,800
10
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
plus prejudgment interest, costs and attorneys fees alleged to
be due and owing by LSB and El Dorado, related to National
Union insurance policies for LSB and subsidiaries dating from
1979 through 1988. The parties have entered into an agreement
in principal to settle this matter, whereby LSB will pay to
National Union the amount of $521,450. As a part of that
agreement in principal to settle this matter, the parties have
agreed in principal to adjudicate whether any additional
amounts may be due to National Union, if any, but the parties
have agreed in principal that the Company's liability for any
additional amounts due National Union shall not exceed
$650,000. Amounts expected to be paid under this settlement
were previously charged to operations.
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 is required to 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 is also
required to 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 $3,558,000 and $1,704,000
for the nine months ended September 30, 1999 and 1998, respectively
and $1,427,000 and $561,000 for the quarterly periods ended
September 30, 1999 and 1998, respectively. Management of the
Company believes these charges from LSB reasonably approximate
11
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
additional general and administrative costs which would have been
incurred if the Company had been an independent entity during such
periods. These amounts do not include reimbursements for costs
described in the next paragraph or amounts paid by LSB relating to
certain of the Company's payroll that are directly charged to the
Company by LSB.
The Services Agreement also provides that LSB will permit employees
of the Company and its subsidiaries to continue to participate in
the benefit plans and programs sponsored by LSB. The Company will
pay to, or reimburse, LSB for the costs associated with
participation by the employees of the Company in LSB's benefit
plans and programs.
On November 21, 1997, LSB and the Company entered into a management
agreement (the "Management Agreement"), which provides that LSB
will provide to the Company, managerial oversight and guidance
concerning the broad policies, strategic decisions and operations
of the Company and the subsidiaries and the rendering of such
further managerial assistance as deemed reasonably necessary by
LSB. No amounts were paid to LSB by the Company under the
Management Agreement during the nine months ended September 30,
1999, and none are expected based on current estimates for the
results of operations for the year ended December 31, 1999. Based
on the level of the Company's income for the nine months ended
September 30, 1998, $1,350,000 was accrued at September 30, 1998,
for the amount owed to LSB by the Company as of that date. The
amount accrued at September 30, 1998, was subsequently reversed
during the fourth quarter of 1998 due to losses sustained by the
Company during the three months ended December 31, 1998.
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.
The Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1999 and 1998, include a provision
(benefit) for income taxes of ($4.6) million and $1.9 million,
respectively, for income taxes under the Tax Sharing Agreement.
12
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CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
The income tax benefit for the nine-month period ended
September 30, 1999, constitutes a net operating loss carryforward
which serves to reduce existing deferred tax liabilities. Due to
losses sustained by the Company during the last half of 1998, the
1998 provision of $1.9 million was reversed during the fourth
quarter of 1998.
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
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 nine months
ended September 30, 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 the 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
13
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
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 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 receivables due from the French
manufacturer and its parent. It is anticipated that the Company
will close the acquisition of the real estate discussed above from
LSB by the first quarter of 2000. 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.
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 operating leases.
Rental expense associated with these leases was $948,868 and
$356,250 for the first nine months of 1999 and 1998, respectively
and $566,858 and $118,750 during the third 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 September 30,
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 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. Interest is
payable semiannually and the principal is payable on maturity.
The Company also has $2.9 million due from LSB and affiliates as
of September 30, 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 on the above-referenced loans and advances.
LSB and its subsidiaries (other than the Company and its
subsidiaries) are dependent upon their separate cash flows and the
restricted funds which can be distributed by the Company under the
above-mentioned agreements. As a result, the Company's losses in
14
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
1998 and the nine months ended September 30, 1999, the terms of the
Indenture have not permitted the Company to make any dividend
distributions or tax payments to LSB. The Company expects that it
will be at least 2001 before it will be permitted under the terms
of the Indenture to make dividend distributions or tax payments to
LSB.
As of September 30, 1999, LSB and its subsidiaries (excluding
restricted amounts related to the Company and its subsidiaries),
have working capital of $.5 million (including $22.1 million of
inventories and $10.7 million of accounts receivable), a
stockholders' deficit of $1.1 million (exclusive of their equity in
the Company) and long-term debt of $34.2 million ($15.0 million of
which is classified as due within one year. For the nine months
ended September 30, 1999, LSB and its subsidiaries (excluding the
Company and its subsidiaries) had a net loss of $12.6 million,
and used cash in operating activities of $.3 million.
As a result of the recent losses and the Company's present
liquidity situation, the Company is evaluating whether it will be
in a position to pay the December 1, 1999, interest payment on the
Senior Notes.
At this time, LSB and its subsidiaries, including the Company, are
considering alternatives for restructuring their balance sheets, such
as raising new capital and reducing debt. If LSB is not successful
in effecting a restructuring and the Company is not able to transfer
funds to LSB and its affiliates as permitted under the Indenture, the
recoverability of the loans and advances to LSB, including those
due in 2007, may not be recoverable.
As of September 30, 1999, the Company has not provided an allowance
for doubtful accounts against these receivables, loans and advances
since it is their present belief that LSB will be able to pay these
amounts when they come due. However, LSB has advised the Company
that it is evaluating whether it will be in a position to pay the
December 1, 1999 interest payment of $537,500 ($358,000 as of
September 30, 1999) on the $10,000,000 loan associated with the
Company's $105,000,000 Notes. If the Company does not pay the
December 1, 1999 interest payment on December 1, it has thirty
(30) days to cure such before it becomes an event of default under
the terms of the Indenture. This estimate is subject to change in
the near term.
During July 1999, a subsidiary of the Company sold 26 railcars to
a non-affiliated entity for approximately $1.1 million.
Thereafter, the entity leased the railcars to a subsidiary of LSB,
which is neither the Company nor a subsidiary of the Company. A
subsidiary of the Company has entered into a services agreement
with such LSB subsidiary pursuant to which such subsidiary is to
provide railcar services to a subsidiary of the Company. Under the
services agreement, the Company's subsidiary will pay a fee based
15
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
on each railcar unit used by such subsidiary of $1,031 per month.
The Company's subsidiary is not required to use any railcar
equipment under the services agreement, and the services agreement
may be terminated at any time on 30 days written notice.
16
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 4: Segment Information
___________________________
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
_______ ________ ________ ________
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
Businesses continuing:
Chemical $ 97,555 $ 100,814 $ 27,861 $ 31,500
Climate Control 86,559 90,245 30,534 30,637
Business disposed of - Chemical 7,462 11,403 1,088 3,195
________ _________ ________ ________
$191,576 $ 202,462 $ 59,483 $ 65,332
======== ========= ======== ========
Operating profit (loss):
Businesses continuing:
Chemical:
Recurring operations $ 1,482 $ 5,242 $ (858) $ (49)
Loss on purchase commitments (8,439) - (939) -
________ _________ ________ ________
(6,957) 5,242 (1,797) (49)
Climate Control 7,421 8,244 2,316 3,007
Business disposed of -
Chemical (1,632) (1,433) (143) (445)
________ ________ _______ _______
(1,168) 12,053 376 2,513
Unallocated fees from Services
Agreement and general corporate
expenses, net (2,842) - (1,338) -
Loss on business disposed of -
Chemical (1,971) - - -
Interest expense:
Recurring operations (9,613) (8,993) (3,208) (2,956)
Business to be disposed of -
Chemical (326) (340) (84) (104)
_______ ________ ________ ________
(9,939) (9,333) (3,292) (3,060)
________ _______ ________ ________
Income (loss) before income taxes $(15,920) $ 2,720 $ (4,254) $ (547)
======== ======= ======= =======
17
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1998 and 1998
Note 5: Business Disposed of
____________________________
On August 2, 1999 the Company sold substantially all the assets of
its wholly owned subsidiary, Total Energy Systems Limited and
its subsidiaries ("TES").
Pursuant to the sale agreement, TES retained certain of its
liabilities to be liquidated from the proceeds of the sale and from
the collection of its accounts receivables which were retained.
At closing on August 2, 1999, the Company received approximately
$3.4 million, in net proceeds from the assets sold, exclusive of
approximately $.7 million retained by buyer related to the final
reconciliation of the value of the inventory sold, after paying off
$6.4 million bank debt and the purchaser assuming approximately
$1.1 million of debt related to certain capitalized lease
obligations. The Company expects to complete the liquidation of
the assets and liabilities retained during the fourth quarter of
1999.
The loss associated with this transaction included in the
accompanying Condensed Consolidated Statement of Operations for the
nine months ended September 30, 1999, is $1,971,000 and is
comprised of disposition costs of approximately $.4 million, the
recognition in earnings of the cumulative foreign currency loss of
approximately $1.1 million and approximately $.6 million related to
the resolution of certain environmental matters.
Note 6: Inventory Write-down and Loss on Firm Purchase Commitment
___________________________________________________________________
Due to decreased selling prices for certain of the Chemical
Business' nitrogen-based products, the Chemical Business wrote down
the carrying value of certain inventories by approximately $1.6
million at June 30, 1999, representing the cost in excess of
market.
The Chemical Business also has firm uncancelable commitments to
purchase anhydrous ammonia pursuant to the terms of two contracts.
The purchase price(s) the Chemical Business will be required to pay
for anhydrous ammonia under one of these contracts, which is for a
significant percentage of the Chemical Business' anhydrous ammonia
requirements, currently exceeds and is expected to continue to
exceed the spot market prices throughout the purchase period.
At this time, the Company has reached an oral agreement in principle
with the supplier of anhydrous ammonia under this contract which will
allow the Company to defer quanities required to be purchased under
this take or pay contract through 2002. This agreement in principle
is subject to the parties evolving into a definitive agreement, and
there are no assurances that a definitive agreement will be finalized.
The Company will have deferred approximately $9.0 million of product
from the calendar year 1999 into future periods. Should the Company
and the supplier not ultimately consummate the definitive agreement,
the Company would be required to pay for such volumes not taken in
January 2000. Additionally, the current excess supply of nitrate
based products caused, in part, by the import of Russian nitrate, has
caused a significant decline in the sales prices, with no improvement
in sales prices expected in the near term. Due to the decline in
sales prices, the cost to produce the nitrate based products,
including the cost of the anhydrous ammonia to be purchased under
18
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
the contracts, exceeds the anticipated future sales prices of such
products. As a result, the accompanying Condensed Consolidated
Financial Statements for the nine months ended September 30, 1999
include provision for loss on firm purchase commitments of
anhydrous ammonia required to be purchased during the remainder of
the contracts of approximately $8.4 million of which approximately
$4.9 million is classified as a long-term liability. The loss
provision recorded for the three months ended September 30, 1999
($.9 million), is based on the forward contract pricing existing at
September 30, 1999, which primarily represents an increase from
pricing at June 30, 1999. This pricing can move upward or downward
in future periods. Based on forward pricing existing as of
November 15, 1999, the Chemical Business would not be required to
recognize an additional loss. This loss provision estimate may
change in the near term.
Note 7. Long-term Debt
_______________________
In November 1997, the Company completed the sale of $105 million
principal amount of 10 3/4% Senior Notes due 2007 (the "Notes").
Interest on the Notes is payable semiannually in arrears on June 1
and December 1 of each year, and the principal is payable in the
year 2007. The notes are senior unsecured obligations of the
Company and rank pari passu in right of payment to all existing
senior unsecured indebtedness of the Company and its subsidiaries.
The Notes are effectively subordinated to all existing and future
senior secured indebtedness of the Company.
The Company is a holding company with no assets or operations other
than its investments in its subsidiaries, and each of its
subsidiaries is wholly owned, directly or indirectly, by the
Company. The Company's payment obligations under the Notes are
fully, unconditionally, and jointly and severally guaranteed by all
of the existing subsidiaries of the Company, except for one
subsidiary, El Dorado Nitrogen Company ("EDNC").
Set forth below are unaudited condensed consolidating financial
statements of the Guarantor Subsidiaries, the Company's subsidiary
which is not a guarantor of the Senior Notes (the "Non-Guarantor
Subsidiary") and the Company. For all periods presented, EDNC was
the only Non-Guarantor Subsidiary. Separate financial statements
of each Guarantor Subsidiary have not been provided because
management has determined that they are not material to investors.
19
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
__________________________________
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet (Unaudited)
As of September 30, 1999
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ ______________ __________ ____________ ___________
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash $ (119) $ 546 $ 313 $ $ 740
Trade accounts receivable, net 39,591 2,568 - 42,159
Inventories 26,013 65 - 26,078
Supplies and prepaid items 7,730 73 879 8,682
Current deferred income taxes 4,837 - 4,837
Due from LSB and affiliates, net 1,712 - 1,214 2,926
__________ ___________ ________ __________ ____________
Total current assets 79,764 3,252 2,406 - 85,422
Property, plant and equipment net 75,363 350 1,899 77,612
Notes receivable from LSB and
affiliates - - 13,443 13,443
Investment in subsidiaries - - 110,411 (110,411) -
Other assets, net 9,695 2,367 3,717 15,779
___________ ___________ _________ _________ __________
$ 164,822 $ 5,969 $ 131,876 $(110,411) $ 192,256
=========== =========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable $ 15,015 $ 1,184 $ - $ $ 16,199
Accrued liabilities 8,295 3,095 3,766 - 15,156
Accrued losses on firm purchase
commitments 2,605 - - 2,605
Current portion of long-term
debt 4,017 - - 4,017
___________ __________ _________ __________ _________
Total current liabilities 29,932 4,279 3,766 37,977
Long-term debt 23,974 105,000 128,974
Accrued losses on firm purchase
commitments 4,879 - 4,879
Deferred income taxes 6,454 - 6,454
Investment in and advances from
affiliates 27,207 616 - (27,823) -
Stockholders' equity
Common stock 60 1 1 (61) 1
Capital in excess of par value 78,984 - 12,652 (78,984) 12,652
Retained earnings (accumulated
deficit) (6,668) 1,073 10,457 (3,543) 1,319
___________ _____________ __________ ____________ ___________
Total stockholders' equity 72,376 1,074 23,110 (82,588) 13,972
___________ _____________ __________ ____________ ___________
$ 164,822 $ 5,969 $ 131,876 $ (110,411) $ 192,256
========== ============= ========= ==========
</TABLE>
20
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
__________________________________
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet (Unaudited)
As of December 31, 1998
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATION CONSOLIDATED
____________ ______________ __________ ___________ ____________
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 744 $ 2 $ 4 $ $ 750
Trade accounts receivable, net 37,008 1,809 - 38,817
Inventories 37,367 259 - 37,367
Supplies and prepaid items 6,704 - 60 7,023
Income tax receivable - - 2,050 2,050
Current deferred income taxes 1,338 - - 1,338
Due from LSB and affiliates, net - - 1,047 1,047
__________ ___________ __________ ___________ __________
Total current assets 83,161 2,070 3,161 - 88,392
Property, plant and equipment net 82,389 - - 82,389
Notes receivable from LSB and
affiliates - - 13,443 13,443
Investment in and advances from
affiliates - - 110,686 (110,686)
Other assets, net 6,962 - 3,981 (463) 10,480
_________ __________ _________ _________ _________
$ 172,512 $ 2,070 $ 131,271 $(111,149) $ 194,704
========= ========== ========= ========= ========
LIABILITIES AND STOCKHOLDER EQUITY
Current liabilities
Accounts payable $ 15,937 $ 1,466 $ 13 $ $ 17,416
Accrued liabilities 5,078 463 941 6,019
Current portion of long-term debt 10,460 - - (463) 10,460
_________ __________ _________ _________ _________
Total current liabilities 31,475 1,929 954 (463) 33,895
Long-term debt 22,471 - 105,000 127,471
Investment in and advances from
subsidiaries 34,283 - - (34,283) -
Deferred income taxes 9,580 - - 9,580
Stockholders' equity
Common stock 60 1 1 (61) 1
Capital in excess of par value 72,797 - 12,652 (72,797) 12,652
Accumulated other comprehensive loss (1,559) - - (1,559)
Retained earnings 3,405 140 12,664 (3,545) 12,664
_________ ___________ __________ ____________ ________
Total stockholders' equity 74,703 141 25,317 (76,403) 23,758
_________ ___________ __________ ____________ ________
$ 172,512 $ 2,070 $ 131,271 $ (111,149) $ 194,704
========= =========== ========== ============ ========
</TABLE>
21
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations (Unaudited)
Nine Months Ended September 30, 1999
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ ______________ ________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Business continuing at
September 30, 1999
Revenues:
Net sales $ 174,242 $ 9,872 $ - $ $ 184,114
Other income (expense) 1,322 (502) (59) 761
__________ _________ _________ _________ _________
$ 175,564 $ 9,370 (59) $ 184,875
Costs and expenses:
Cost of sales 139,131 7,682 283 147,096
Selling, general and administrative 29,077 139 2,502 31,718
Interest 8,854 44 715 9,613
Provisions for losses on firm
purchase commitments 8,439 - 8,439
__________ _________ __________ _________ _________
185,501 7,865 3,500 196,866
========== ========= ========== ========= =========
Income (loss) before business
disposed of and provision
(benefit) for income tax (9,937) 1,505 (3,559) - (11,991)
Business disposed of during 1999:
Revenues 7,461 - - - 7,461
Operating costs, expenses and interest 9,419 - - - 9,419
_________ _________ __________ _________ _________
(1,958) (1,958)
Loss on disposal of business (1,971) - - - (1,971)
_________ _________ __________ _________ __________
(3,929) - - - (3,929)
_________ _________ __________ _________ _________
Income (loss) before provision
(benefit) for income taxes (13,866) 1,505 (3,559) - (15,920)
Provision (benefit) for income taxes (3,795) 572 (1,352) - (4,575)
_________ _________ __________ _________ _________
Net income (loss) $ (10,071) $ 933 $ (2,207) $ - $ (11,345)
========= ========= ========== ========= =========
</TABLE>
22
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations (Unaudited)
Nine Months Ended September 30, 1998
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ _____________ _______ ____________ ____________
<S> <C> <C> <C> <C> <C>
Business continuing at
September 30, 1998
Revenues:
Net sales $ 191,059 $ $ $ $ 191,059
Other income (expense) 288 288
__________ __________ _________ __________ __________
191,347 - - - 191,347
Costs and expenses:
Cost of sales 148,902 148,902
Selling, general and administrative 27,265 1,694 28,959
Interest expense (income) 9,912 (919) 8,993
__________ __________ _________ __________ __________
186,029 - (775) - 186,854
__________ __________ _________ __________ __________
Income (loss) before business
disposed of and provisions
(benefit) for income taxes 5,268 (775) 4,463
Business to be disposed of during
1999:
Revenues 11,402 11,402
Operating costs, expenses and
interest 13,175 13,175
__________ __________ _________ __________ _________
Loss on disposal of business (1,773) - - - (1,773)
Income (loss) before provision
(benefit) for income taxes 3,495 (775) 2,720
Provision (benefit) for income
taxes 2,203 (295) 1,908
___________ ___________ _________ __________ _________
Net income (loss) $ 1,292 $ - $ (480) $ - $ 812
=========== =========== ========= ========= =========
</TABLE>
23
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
_________________________________
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations (Unaudited)
Three Months Ended September 30, 1999
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ _____________ _______ ____________ ____________
<S> <C> <C> <C> <C> <C>
Business continuing at
September 30, 1999
Revenues:
Net sales $ 51,055 $ 7,391 $ - $ (51) $ 58,395
Other income (expense) 1,369 (61) 41 1,249
__________ __________ ________ __________ __________
52,424 7,230 41 (51) 59,644
Costs and expenses:
Cost of sales 41,465 6,444 283 (51) 48,141
Selling, general and administrative 10,176 110 1,097 11,383
Interest 2,829 20 359 3,208
Provisions for losses on firm
purchase commitments 939 - - 39
__________ __________ ________ __________ _________
55,409 6,574 1,739 (51) 63,671
Income (loss) before business
disposed and provisions
(benefit) for income taxes (3,301) 656 (1,698) - (4,027)
Business disposed of during 1999:
Revenues 1,088 - - 1,088
Operating costs, expenses and
interest 1,315 - - 1,315
__________ ___________ _________ __________ _________
Loss on disposal of business (227) - - - (227)
Income (loss) before provision
(benefit) for income taxes (3,212) 656 (1,698) (4,254)
Provision (benefit) for income
taxes (1,106) 250 (645) (1,501)
___________ ___________ _________ __________ _________
Net income (loss) $ (2,106) $ 406 $ (1,053) $ - $ (2,753)
=========== =========== ========= ========== =========
</TABLE>
24
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations (Unaudited)
Three Months Ended September 30, 1998
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ _____________ ________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Business continuing at
September 30, 1998
Revenues:
Net sales $ 62,137 $ - $ $ $ 62,137
Other income (expense) 61 61
__________ ____________ ________ ___________ __________
62,198 - - - 62,198
Costs and expenses:
Cost of sales 49,512 - 49,512
Selling, general and administrative 9,114 - 614 9,728
Interest expense (income) 3,268 - (312) 2,956
__________ ____________ ________ __________ __________
61,894 - 302 62,196
__________ ____________ ________ __________ __________
Income (loss) before business
disposed of and provision
(benefit) for income taxes 304 - (302) - 2
Business to be disposed of during
1999:
Revenues 3,195 - - 3,195
Operating costs, expenses and
interest 3,744 - - 3,744
__________ ____________ ________ _________ _________
Loss on disposal of business (549) - - - (549)
__________ ____________ ________ _________ _________
Loss before provision (benefit) for
income taxes (245) - (302) - (547)
Provision (benefit) for income taxes 323 - (115) 208
__________ ____________ ________ ________ _________
Net loss $ (568) $ - $ (187) $ - $ (755)
========== ============ ======== ======== =========
</TABLE>
25
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 1999
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ _____________ ________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Net cash flows from operations $ 121 $ 3,261 $ 2,255 $ - $ 5,637
Cash flows from investing activities
Capital expenditures (3,706) (350) - - (4,056)
Payments made for acquisition (3,113) - - - (3,113)
Purchase of option (2,558) - - - (2,558)
Proceeds from sale of equipment 1,060 - - - 1,060
Proceeds of sale of business disposed of 3,491 - - - 3,491
Deposit on real estate to LSB and
affiliates - - (1,899) - (1,899)
___________ _________ _________ _________ __________
Increase in other assets 1,890 (2,367) (47) - (524)
Net cash used by investing
activities (2,936) (2,717) (1,946) (7,599)
Cash flows from financing activities:
Payments on long-term debt (2,111) - - - (2,111)
Net change in revolving debt 4,063 - - - 4,063
___________ _________ _________ _________ __________
Net cash provided by financing
activities 1,952 - - - 1,952
___________ _________ __________ _________ __________
Net increase (decrease) in cash from all
activities (863) 544 309 (10)
Cash at the beginning of period 744 2 4 750
___________ _________ _________ ________ __________
Cash at end of period $ (119) $ 546 $ 311 $ - $ 740
=========== ========= ========= ========= =========
</TABLE>
26
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
Note 7: Long-term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998
(dollars in thousands)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
____________ _____________ ________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Net cash flows from operations $ 8,950 $ 9 $ 1,237 $ $ 10,196
Cash flows from investing activities
Capital expenditures (4,229) - - (4,239)
Proceeds from sale of equipment 64 - - 64
Increase in other assets (1,212) (52) (628) (1,892)
__________ ___________ _________ ___________ ___________
Net cash used by investing
activities (5,377) (52) (628) - (6,057)
Cash flows from financing activities:
Payments on long-term (4,939) - - (4,939)
Other 150 - - 150
Net change in revolving debt (1,863) - - (1,863)
__________ ___________ _________ __________ _________
Net cash used by financing
activities (6,652) - - - (6,652)
__________ __________ _________ __________ _________
Net increase (decrease) in cash from
all activities (3,079) (43) (609) - (2,513)
Cash at the beginning of period 3,893 45 (404) 3,534
__________ ___________ __________ __________ _________
Cash at end of period $ 814 $ 2 $ 205 $ $ 1,021
========== =========== ========== ========== =========
</TABLE>
Note 8. Liquidity and Management's Plans
__________________________________________
For the nine months ended September 30, 1999, and the year
ended December 31, 1998, the Company and its subsidiaries
reported net losses of $11.3 million and $2.6 million,
respectively. The Indenture to the 10 3/4% Senior Notes limits
the Company's ability to incur additional indebtedness and enter
into certain merger, acquisitions, and dispositions.
LSB and the Company's revolving credit facility provides
that as long as LSB and the Company's borrowing availability
under the revolver is not less than a minimum aggregate of $15
million for three consecutive business days, LSB and the Company
will not have to meet certain financial covenants, including
tangible net worth and debt-to-worth ratios. As of November 15,
1999, LSB and the Company, in the aggregate, have a borrowing
availability under the revolver of $20.5 million. As previously
stated, the Company has outstanding $105 million in Notes, which
require that a semi-annual interest payment of $5,643,000 be paid
on each of December 1 and June 1. If the Company were to pay the
December 1, 1999 interest payment on the $105 million Notes, such
27
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 1999 and 1998
payment could place the borrowing availability under the revolver
at less than the required $15 million, and without a waiver from
the lender, would require LSB and the Company to meet certain
financial covenants. As of the date of this report, the Company
does not believe that, without further waivers from the lender,
LSB and the Company would be in compliance with certain of those
financial covenants. If the Company does not pay the December 1,
1999 interest payment on December 1, it has thirty (30) days to
cure such before it becomes an event of default under the terms
of the Indenture. An event of noncompliance, if not waived or
remedied within the cure period provided for in the agreement,
may cause an event of default, if so declared by the lender.
Under an event of default, among other things, the lender may
declare the debt immediately due and payable. An event of
default under the Indenture to the 10 3/4% Senior Notes could
result in a default of the Revolver and certain other indebted-
ness of the Company and its subsidiaries.
In November 1999, LSB and the Company retained Banc of
America Securities LLC as its financial advisor, to provide
assistance to LSB and the Company in evaluating liquidity
alternatives and providing advice concerning alternatives
available to LSB and the Company. LSB and the Company are
considering alternatives for restructuring their balance sheets,
such as raising new capital and reducing debt. At this time, the
Company is not able to predict whether LSB and/or the Company
will be successful in effecting changes necessary to alleviate
the weakened liquidity situation of LSB and its subsidiaries. If
LSB and the Company are not successful in addressing this matter
in the near future, the recoverability and classification of
assets and the amounts and classification of liabilities may be
subject to change in the near terms.
28
<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 September 30, 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
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 nine months and three
months ended September 30, 1999 and 1998 is detailed below.
29
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
____ ____ ____ ____
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Sales:
Businesses continuing:
Chemical $ 97,555 $ 100,814 $ 27,861 $ 31,500
Climate Control 86,559 90,245 30,534 30,637
Business disposed of (1):
Chemical 7,461 11,402 1,088 3,195
__________ __________ ________ __________
$ 191,575 $ 202,461 $ 59,483 $ 65,332
========== ========== ======== ==========
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 11,291 $ 15,609 $ 1,699 $ 3,431
Climate Control 26,009 26,548 8,838 9,194
Business disposed of (1):
Chemical (118) 206 111 47
__________ _________ ________ __________
$ 37,182 $ 42,363 $ 10,648 $ 12,672
========== ========== ======== ==========
Operating profit (loss) (3):
Businesses continuing:
Chemical:
Recurring operations $ 1,482 $ 5,242 $ (858) $ (49)
Loss on purchase commitments (8,439) - (939) -
_________ __________ ________ _________
(6,957) 5,242 (1,797) (49)
Climate Control 7,421 8,244 2,316 3,007
Business disposed of (1):
Chemical (1,632) (1,433) (143) (445)
_________ __________ ________ _________
(1,168) 12,053 376 2,513
Unallocated fees from Services
Agreement and general corporate
expenses, net (2,842) - (1,338) -
Loss on business disposed of -
Chemical (1,971) - - -
Interest Expense:
Recurring operations (9,613) (8,993) (3,208) (2,956)
Business disposed of - Chemical (326) (340) (84) (104)
__________ __________ ________ ________
(9,939) (9,333) (3,292) $ (3,060)
__________ __________ ________ _________
Income (loss) before income taxes $ (15,920) $ 2,720 $ (4,254) $ (547)
========== ========== ========= =========
<FN>
(1) On August 2, 1999, the Company sold substantially all of the
assets of its wholly owned Australian subsidiary, TES. See
Note 5 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 fees from the
Services Agreement, interest expense and income taxes.
</FN>
</TABLE>
30
<PAGE>
Chemical Business
Sales in the Chemical Business (excluding the Australian
subsidiary in which substantially all of its assets were disposed
of in August, 1999) have decreased from $100.8 million in the nine
months ended September 30, 1998 to $97.6 million in the nine months
ended September 30, 1999 and the gross profit (excluding the
Australian subsidiary and the provision for loss on firm purchase
commitments) has decreased from $15.6 million in 1998 to $11.3 in
1999. The gross profit percentage (excluding the Australian
subsidiary and the provision for loss on firm purchase commitments)
has decreased from 15.5% in 1998 to 11.6% in 1999 primarily as a
result of lower unit sales prices and a $1.6 million inventory
write-down as discussed below.
As of September 30, 1999, the Chemical Business has
commitments to purchase anhydrous ammonia under two contracts. 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 pricing
index contained in one of these contracts, it is presently priced
above the current market spot price. As of September 30, 1999, the
Chemical Business has remaining purchase commitments of
approximately 104,000 tons under this contract. At this time, the
Company has reached an oral agreement in principle with the
supplier of anhydrous ammonia under this contract which will allow
the Company to defer quantities required to be purchased under this
take or pay contract through 2002. This agreement in principle is
subject to the parties evolving into a definitive agreement, and
there are no assurances that a definitive agreement will be
finalized. The Company will have deferred approximately $9.0
million of product from the calendar year 1999 into future periods.
Should the Company and the Supplier not ultimately consummate the
definitive agreement, the Company would be required to pay for such
volumes not taken in January 2000. The Chemical Business is
required to purchase a minimum of 7,000 tons monthly under the
other contract expiring in June 2000, the requirements of which
have been waived by the supplier for the fourth quarter of 1999.
During the third quarter of 1999, the supplier was unable to
deliver the required product to the Company.
As stated above, the Chemical Business has commitments to
purchase anhydrous ammonia pursuant to the terms of two contracts.
The purchase price(s) the Chemical Business will be required to pay
for anhydrous ammonia under one of these contracts currently
exceeds and is expected to continue to exceed the spot market
prices throughout the purchase period. Additionally, the current
excess supply of nitrate based products, caused, in part, by the
import of Russian nitrate, has caused a significant decline in the
sales prices; no improvement in sales prices is expected in the
near term. This decline in sales price has resulted in the cost of
anhydrous ammonia purchased under these contracts when combined
31
<PAGE>
with manufacturing and distribution costs, to exceed anticipated
future sales prices. As a result, the accompanying Condensed
Consolidated Financial Statements include a loss provision of
approximately $8.4 million for anhydrous ammonia required to be
purchased during the remainder of the contracts. The provision for
loss at September 30, 1999 is based on the forward contract pricing
existing at September 30, 1999, and estimated market prices for
products to be manufactured and sold during the remainder of the
contracts. There are no assurances that such estimates will prove
to be accurate. Differences, if any, in the estimated future cost
of anhydrous ammonia and the actual cost in effect at the time of
purchase and differences in the estimated sales prices and actual
sales prices of products manufactured could cause the Company's
operating results to differ from that estimated in arriving at the
loss provision recorded at September 30, 1999. The Chemical
Business currently has an excess inventory of nitrogen based
products on hand. During the third quarter of 1999, two of the
Chemical Businesses nitric acid plants and one of its prill plants
were temporarily shut down due to the excessive supply of ammonium
nitrate at the Chemical Business and in the market place. The
plants that have been shut down have increased the Chemical
Business' losses in the third quarter due to overhead costs that
continue even though product is not being produced at the plants
temporarily shut down. Subject to market demand and pricing for
the Chemical Business products improving, it is anticipated that
these plants will resume production in the first quarter of 2000.
There are no assurances that the Chemical Business will not be
required to record additional loss provisions in the future. Based
on the forward pricing existing as of November 15, 1999, the
Chemical Business would not be required to recognize an additional
loss on the anhydrous ammonia purchase contracts. See "Special
Note Regarding Forward Looking Statements."
Due to decreased selling prices for certain of the Chemical
Business' nitrogen-based products, the Chemical Business also wrote
down the carrying value of certain inventories by approximately
$1.6 million at June 30, 1999, representing the cost in excess of
market value.
The Chemical Business is a member of an organization of
domestic fertilizer grade ammonium nitrate producers which is
seeking protection from unfairly low priced Russian ammonium
nitrate. This industry group filed a Petition with the U.S.
Intentional Trade Commission and the U.S. Department of Commerce to
perform an antidumping investigation and, if warranted, impose
relief from Russian dumping. The International Trade Commission
has rendered a favorable preliminary determination as to the
presence of injury to U.S. producers of ammonium nitrate as a
result of Russian ammonium nitrate in the U.S. market. In
addition, the U.S. Department of Commerce has issued a preliminary
affirmative determination of "critical circumstances", which means
that if an antidumping duty order is eventually imposed, it may
apply retroactively to any shipments of Russian ammonium nitrate
32
<PAGE>
entered into the United States as early as October, 1999. It is not
known whether the antidumping Petition will be successful upon
conclusion of the U.S. Government's investigation.
In June 1999, a subsidiary of the Company completed its
obligations pursuant to an agreement to construct a nitric acid
plant located within Bayer's Baytown, Texas chemical plant complex.
This plant is being operated by a subsidiary and is supplying
nitric acid to Bayer under a long-term supply contract. Sales from
this plant were approximately $7.2 million during the quarter ended
September 30, 1999. Management estimates that, at full production
capacity based on terms of the Bayer Agreement and, based on the
price of anhydrous ammonia as of the date of this report, the plant
should generate approximately $35 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. The Company's
subsidiary is leasing the nitric acid plant pursuant to a leverage
lease from an unrelated third party for an initial term of ten (10)
years which, began on June 23, 1999. See "Special Note Regarding
Forward Looking Statements."
The results of operation of the Chemical Business' Australian
subsidiary had been adversely affected due to adverse economic
developments in certain countries in Asia. As these adverse
economic conditions in Asia continued, they had an adverse effect
on the Company's consolidated results of operations. As a result
of the economic conditions in Australia and the adverse effect of
such conditions on the Company's consolidated results of
operations, the Company entered into an agreement to dispose of
this business. On August 2, 1999 substantially all the assets were
sold and a loss of approximately $2 million was recognized.
For the year ended December 31, 1998, the Australian
subsidiary had revenues of $14.2 million and a loss of $2.9
million. Revenues for the calendar year 1999 up to the date of
sale were $7.5 million and the loss was $2.0 million excluding the
loss on the sale.
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.
33
<PAGE>
Although sales of $86.6 million for the nine months ended
September 30, 1999, in the Climate Control Business were
approximately 4.1% less than sales of $90.2 million in the nine
months ended September 30, 1998, the gross profit was approximately
$26.4 million in both periods. The gross profit percentage
increased from 29.4% in the first nine months of 1998 to 30.0% in
the first nine months of 1999.
RESULTS OF OPERATIONS
_____________________
Nine months ended September 30, 1999 vs. Nine months ended
September 30, 1998.
Revenues
________
Total revenues, including business disposed of, for the nine
months ended September 30, 1999 and 1998 were $192.3 million and
$202.7 million, respectively (a decrease of $10.4 million). Sales
decreased $10.9 million and other income increased $.5 million.
Net Sales
_________
Consolidated net sales, including business disposed of,
included in total revenues for the nine months ended
September 30,1999 were $191.6 million, compared to $202.5 million
for the first nine months of 1998, a decrease of $10.9 million.
This decrease in sales resulted from: (i) decreased sales in the
Climate Control Business of $3.7 million due to production delays
related to mechanical problems with certain new equipment, and (ii)
decreased sales in the Chemical Business of $7.2 million due to
lower sales of agricultural products and sales of the Company's
Australian subsidiary offset by increased sales of acid products.
Agricultural sale prices were down dramatically due to the import
of Russian nitrate resulting in an over supply of nitrate-based
products (see Note 6 of Notes to Condensed Consolidated Financial
Statements).
Gross Profit
____________
Gross profit, including business disposed of, excluding the
effect of the $1.6 million inventory write-down discussed in Note
6 of Notes to Condensed Consolidated Financial Statements, would
have been 19.4% for the first nine months of 1999, compared to
20.9% for the first nine months of 1998. The decrease in the gross
profit percentage was due primarily to reduced selling prices of
the Chemical Business' nitrogen based products.
34
<PAGE>
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses,
including business disposed of, as a percent of net sales were
17.2% in the nine month period ended September 30, 1999, compared
to 15.2% for the first nine months of 1998. This increase is
primarily the result of decreased sales volume in the Climate
Control division, the sale of TES, increased costs of the Company-
sponsored medical care programs for its employees due to increased
health care costs, and the development of new product lines in the
Climate Control Business. The costs associated with the new start-
up operations in 1999 by the Climate Control Business, having
minimal or no sales, contributed to the increase in dollars as well
as expense as a percent of sales, as well as increased
reimbursements to LSB of $1.9 million.
Interest Expense
________________
Interest expense, including business disposed of, for the
Company was $9.9 million during the first nine months of 1999,
compared to $9.3 million during the first nine months of 1998.
This increase in interest expense was the result of higher average
borrowings in 1999.
Provision for Loss on Firm Purchase Commitments
_______________________________________________
The Company had a provision for loss on firm purchase
commitments of $8.4 million for the nine months ended September 30,
1999. See discussion in Note 6 of Notes to Condensed Consolidated
Financial Statements.
Businesses Disposed of
______________________
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. See discussion in Note 5 of the Notes to
Condensed Consolidated Financial Statements.
Income (Loss) Before Taxes
__________________________
The Company had a loss before income taxes of $15.9 million
in the first nine months of 1999 compared to income before income
taxes of $2.7 million in the nine months ended September 30, 1998.
The decreased profitability of $18.6 million was due to decreased
gross profits and increased SG&A expenses, the loss on the disposal
of the Australian subsidiary and the inventory write-down and
provision for losses on purchase commitments, as previously
discussed.
35
<PAGE>
Provision for Income Taxes
__________________________
The credit 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 $4.6 million for the first
nine months of 1999 on a pre-tax loss of $15.9 million (a 29%
effective rate) compared to a provision for income taxes of $1.9
million in the first nine months of 1998 on a pre-tax income of
$2.7 million (an effective rate of 70%). The effective rates differ
from statutory rates due primarily to the Australian subsidiary
losses.
Three months ended September 30, 1999 vs. Three months ended
September 30, 1998
____________________________________________________________
Revenues
________
Total revenues, including business disposed of, for the three
months ended September 30, 1999, and 1998 were $60.7 million, and
$65.4 million, respectively (a decrease of $4.7 million). Sales
decreased $5.8 million.
Net Sales
_________
Consolidated net sales, including business disposed of,
included in total revenue for the three months ended September 30,
1999, were $59.5 million, compared to $65.3 million for the third
quarter of 1998, a decrease of $5.8 million. This decrease in sales
resulted from decreased sales in the Chemical Business of $5.8
million primarily due to lower sales in the agricultural products.
Agricultural sale prices were down dramatically due to import of
Russian nitrate resulting in an over supply of nitrate-based
products.
Gross Profit
____________
Gross profit for the third quarter of 1999, compared to 19.4%
for the comparable quarter of 1998. The decrease in the gross
profit percentage was due primarily to reduced selling prices of
the Chemical Business' nitrogen based products and certain
production inefficiencies in the Climate Control Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from businesses continuing at September 30,
1999, were 19.1% in the nine-month period ended September 30, 1999,
compared to 15.7% for the first nine months of 1998. This increase
is primarily the result of decreased sales volume in the Climate
Control Business, without equivalent corresponding decreases in
SG&A, costs associated with new start-up operations in 1999, by the
Climate Control Business, having minimal or no sales, and increased
cost of the Company sponsored medical care programs for its
employees due to increased health care costs and increased
reimbursements to LSB of $.9 million.
36
<PAGE>
Interest Expense
________________
Interest expense for the Company was $3.3 million in the third
quarter of 1999, compared to $3.1 million during the third quarter
of 1998. The increase in interest expense was the result of higher
average borrowing in the third quarter of 1999.
Provision for Loss on Firm Purchase Commitments
_______________________________________________
The Company had a provision for loss on firm purchase
commitments of $.9 million for the three months ended September 30,
1999. See discussion in Note 6 of the Notes to Condensed
Consolidated Financial Statements.
Business Disposed of
____________________
The Company sold substantially all the assets of a wholly
owned subsidiary in 1999. See discussion in Note 5 of the Notes to
Condensed Consolidated Financial Statements.
Loss Before Taxes
_________________
The Company had a loss before income taxes of $4.3 million in
the third quarter of 1999 compared to a loss before income taxes of
$.5 million in the three months ended September 30, 1998. The
decreased profitability of $3.8 million was due to decreased gross
profit and increased SG&A expenses, and the provision for losses on
firm, uncancelable purchase commitments of $.9 million, as
previously discussed.
Provision (Credit) for Income Taxes
___________________________________
The credit 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 $1.5 million for the third
quarter of 1999 on a pre-tax loss of $4.3 million (an effective
rate of 35%) compared to a provision for income taxes of $.2
million in the third quarter of 1998 on a pre-tax loss of $.5
million.
37
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow, borrowings under its revolving
credit facilities, and by issuance of senior unsecured notes in
November 1997.
Net cash provided by operations for the nine months ended
September 30, 1999 was $5.6 million, after $7.3 million for noncash
depreciation and amortization, $2.0 million loss on business
disposed of, $.7 million in provisions for possible losses on
accounts receivable, inventory write-down and provision for losses
on purchase commitments of $9.4 million, and the following changes
in assets and liabilities: (i) accounts receivable increases of
$3.8 million; (ii) inventory decreases of $2.8 million excluding
the effect of the write-down; (iii) increases in supplies and
prepaid items of $1.7 million; (iv) increases in accounts payable
and accrued liabilities of $4.7 million; and (v) $.2 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 decrease in
inventory was due primarily to decreases in the Chemical Business
due to seasonal fluctuation in excess of increases in the Climate
Control Business' heat pump product lines. The increase in
accounts payable and accrued liabilities resulted primarily from
increased activity in the heat pump product lines of the Climate
Control Business and accrued interest.
Cash Flow From Investing And Financing Activities
_________________________________________________
Cash used by investing activities for the nine months ended
September 30, 1999 included $4.1 million in capital expenditures,
a $3.1 million payment made for an acquisition, $2.6 million for
the purchase of an option to acquire a French HVAC manufacturer and
a $1.9 million deposit on real estate to LSB and affiliates, as
more fully discussed in Note 3 of Notes to Condensed Consolidated
Financial Statements, $3.5 million proceeds from the sale of
business disposed of as previously discussed, and $.5 million for
increases 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).
38
<PAGE>
Net cash provided by financing activities included payments
on long-term debt of $2.1 million and net increases in revolving
debt of $4.1 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
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 of the existing and all of the future
subsidiaries of the Company, except one, El Dorado Nitrogen
Company. See Note 7 of Notes to Condensed Consolidated Financial
Statements.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year. 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.
The Company sustained a net loss of $2.6 million in the
calendar year 1998 and a net loss of $11.3 million, which includes
the $8.4 million loss provision on the anhydrous ammonium
contractual purchase commitments, for the nine months ended
September 30, 1999. Accordingly, the Company and its subsidiaries
did not transfer funds to LSB in 1998 and the first nine months of
1999, except for reimbursement of costs and expenses incurred by
LSB on their behalf, or in connection with certain agreements. LSB
and the Company's revolving credit facility provides that as long
as LSB and the Company's borrowing availability under the revolver
is not less than a minimum aggregate of $15 million for three
consecutive business days, the Company will not have to meet
certain financial covenants, including tangible net worth and debt-
to-worth ratios. As of November 15, 1999, LSB and the Company, in
the aggregate, have a borrowing availability under the revolver of
$20.5 million. As previously stated, the Company has outstanding
$105 million in Notes, which require that a semi-annual interest
39
<PAGE>
payment of $5,643,000 be paid on each of December 1 and June 1. If
the Company were to pay the December 1, 1999 interest payment on
the $105 million Notes, such payment could place the borrowing
availability under the revolver at less than the required $15
million, and without a waiver from the lender, would require the
Company to meet certain financial covenants. As of the date of
this report, the Company does not believe that, without further
waivers from the lender, the Company and LSB would be in compliance
with certain of those financial covenants. As a result, the Company
is evaluating whether it will be in a position to make the December 1,
1999 interest payment. See Note 8 of Notes to Condensed Consolidated
Financial Statements.
As part of the proceeds from the issuance of the Senior Notes,
the Company made a $10 million loan to LSB. LSB has advised the
Company that it is evaluating whether it will be in a position to
pay the December 1, 1999 interest payment of $537,500 on the $10
million loan discussed above.
LSB and the Company have retained Banc of America Securities
LLC to provide assistance to them in considering alternatives for
restructuring their balance sheets, such as raising new capital and
reducing debt.
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
a working capital line of credit evidenced by two (2) separate loan
agreements ("Revolving Credit Agreements") with an unrelated lender
("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of certain
of the subsidiaries that are borrowers under the Revolving Credit
Agreements. The Revolving Credit Agreements, as amended during the
second quarter of 1999, provide for revolving credit facilities
("Revolver") for total direct borrowings up to $65.0 million,
including the issuance of letters of credit. The Revolver provides
for advances at varying percentages of eligible inventory and trade
receivables. Under the Revolver, the Company can borrow up to the
full $65 million, 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 $6 million of the $65 million.
As of September 30, 1999, LSB and its subsidiaries other than the
Company and its subsidiaries have borrowed $2.7 million under the
Revolver. Any amounts borrowed by LSB and its subsidiaries that
are not subsidiaries of the Company reduce the amount that the
subsidiaries of the Company may borrow at any one time under the
Revolver. The Revolving Credit Agreements, as amended, provide for
interest at the lender's prime rate plus .5% per annum or, at the
Company's option, at the Lender's LIBOR rate plus 2.875% per annum.
At September 30, 1999, the effective interest rate was 8.30%. The
term of the Revolving Credit Agreements is through December 31,
2000, and is renewable thereafter for successive thirteen-month
terms. At September 30, 1999, the availability for additional
borrowings by the subsidiaries of the Company, based on eligible
collateral, approximated $21.4 million. Borrowings by subsidiaries
of the Company under the Revolver outstanding at September 30,
1999, were $16.0 million. The Revolving Credit Agreements, as
amended, require the Company to maintain certain financial ratios
and contain other financial covenants, including tangible net worth
requirements and capital expenditure limitations. The Company's
financial covenants are not required to be met so long as the
Company and its subsidiaries that are parties to the Revolving
Credit Agreements maintain a minimum aggregate availability under
the Revolving Credit Facility of $15.0 million. Should the
availability drop below $15 million for three consecutive business
days, the Company would be required to maintain the financial
ratios discussed above.
40
<PAGE>
In May of 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 Agreements by $11.9 million.
In addition to the credit facilities discussed above, as of
September 30, 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
September 30, 1999, DSN had outstanding borrowings of $8.9 million
under these loans. The loans have repayment schedules of 84
consecutive monthly installments of principal and interest through
maturity in 2002. 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 September 30, 1999, at the agreed to interest rates
would approximate $.8 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. In October 1999, DSN obtained a
waiver from the Financing Company of the covenants through
September 2000.
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 1999, the Company purchased this investment by
purchasing the stock of the 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.
41
<PAGE>
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 receivables due from the French
manufacturer and its parent. It is anticipated that the Company
will close the real estate acquisition discussed above from LSB
during 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.
During July 1999, a subsidiary of the Company sold 26 railcars
to a non-affiliated entity for approximately $1.1 million.
Thereafter, the entity leased the railcars to a subsidiary of LSB,
which is neither the Company nor a subsidiary of the Company. A
subsidiary of the Company has entered into a services agreement
with such LSB subsidiary pursuant to which such subsidiary is to
provide railcar services to a subsidiary of the Company. Under the
services agreement, the Company's subsidiary will pay a fee based
on each railcar unit used by such subsidiary of $1,031 per month.
The Company's subsidiary is not required to use any railcar
equipment under the services agreement, and the services agreement
may be terminated at any time on 30 days written notice.
As a result of increased services provided by LSB on behalf of
the Company during 1999, the Company has paid greater amounts to
LSB under the Services Agreement previously discussed.
42
<PAGE>
A subsidiary of the Company is currently negotiating a $3.5
million loan with the City of Oklahoma City to finance the working
capital requirements of Climate Control's new product line of large
air handlers, which the lender has approved subject to the
development of definitive loan agreements. Consummation of this
loan is subject to agreement on various terms and conditions, and
there is no assurance that the loan will be closed. The loan, if
completed, will be secured by a mortgage on the manufacturing
facility and a separate, unrelated parcel of property.
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 Agreements discussed above. In
1999, LSB has planned capital expenditures of approximately $10.0
million. The majority of the planned capital expenditure will be
made by the Company, 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 $1.5 million ($.7 million in the
nine months ended September 30, 1999), which the Chemical Business
anticipates spending related to environmental control facilities at
its El Dorado Facility as previously discussed in this report. The
Company currently has no material commitment for capital
expenditures.
43
<PAGE>
Foreign Subsidiary
__________________
As previously discussed in this report, on August 2, 1999, the
Company substantially completed an agreement to sell substantially
all of the assets of TES, effectively disposing of this portion of
the Chemical Business. Under the terms of the Indenture to which
the Company is bound, the net cash proceeds from the sale of TES,
are required (i) 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 (ii) within 240 days from
the date of such sale, the amount of the net cash proceeds be
invested in a related business of the Company or the Australian
subsidiary or used to reduce indebtedness of the Company. All of
the proceeds received by the Company, through the date of this
report (approximately US$4.5 million), have been applied to reduce
the indebtedness of the Company. The Company expects that the
remaining net proceeds from the disposition of TES will be
reinvested in related businesses of the Company or used to retire
additional indebtedness of the Company.
Joint Venture and Option to Purchase
____________________________________
During the second quarter of 1999, the Company purchased from
a subsidiary of LSB, an option which expires June 15, 2005, to
purchase a French manufacturer of HVAC equipment whose product line
is compatible with that of the Company's Climate Control Business
in the USA. In addition to the option, the Company acquired all
amounts due and payable by the French HVAC manufacturer or its
parent to LSB. As of the date of this report, the decision has not
been made to exercise the option to acquire the stock of the French
manufacturer.
In 1995, a subsidiary of LSB invested approximately $2.8
million to purchase a fifty percent (50%) 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 the 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 equity interests in
44
<PAGE>
the 1999 results of operations since the date of acquisition from
LSB through September 30, 1999 was not material.
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
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, the Company 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 the Company's program was to implement a standardized IT
system purchased from a national software distributor at all of the
Company and subsidiary operations, 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 the Company to advance its systems to be more
"state-of-the art" had an added benefit in that the software and
hardware changes necessary to achieve the Company's goals are Year
2000 compliant.
Starting in 1996 through September 30, 1999, the Company has
capitalized approximately $1.3 million in costs to accomplish its
enhancement program. The capitalized costs include $.4 million in
external programming costs, with the remainder representing
hardware and software purchases. As of September 30, 1999, this IT
Systems enhancement project has been substantially completed.
The Company'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
45
<PAGE>
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 was completed in the third 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
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 has created contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, 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,
46
<PAGE>
the following: 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.
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 September 30, 1999, the Company's variable rate and
fixed rate debt which aggregated $133.0 million exceeded the debt's
fair market value by approximately $15.8 million. The fair value
of the Company's Senior Notes was determined based on a market
quotation for such securities.
Foreign Currency Risk
_____________________
During 1999, the Company sold its wholly owned subsidiary
located in Australia, for which the functional currency was the
local currency, the Australian dollar. Since the Australian
subsidiary accounts were converted into U.S. dollars upon
consolidation with the Company using the exchange rate at June 30,
1999, declines in value of the Australian dollar to the U.S. dollar
resulted in translation loss to the Company. As a result of the
sale of the Australian subsidiary, which was closed on August 2,
1999, the cumulative foreign currency translation loss of
approximately $1.1 million has been included in the loss on
disposal of the Australian subsidiary at September 30, 1999.
47
<PAGE>
<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward Looking Statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements in this report other
than statements of historical fact are Forward Looking Statements that
are subject to known and unknown risks, uncertainties and other factors,
which could cause actual results and performance of the Company to differ
materially from such statements. The words "believe", "expect",
"anticipate", "intend", "will", and similar expressions identify Forward
Looking Statements. Forward Looking Statements contained herein relate
to, among other things, (i) ability to improve operations and become
profitable on an annualized basis, (ii) establishing a position as a
market leader,(iii)the amount of the loss provision for anhydrous ammonia
required to be purchased, (iv) declines in the price of anhydrous
ammonia, (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) improving liquidity and profits through
liquidation of assets or realignment of assets or some other method,
(viii) ability to pay December 1,1999 interest payment on ClimaChem's
$105 million in Senior Notes, (ix) anticipated financial performance,
(x) ability to comply with the Company's general working capital and debt
service requirements, (xi) ability to be able to continue to borrow under
the Company's revolving line of credit, (xii) adequate cash flows to meet
its presently anticipated capital requirements and (xiii) ability of the
EDNC Baytown Plant to generate approximately $35 million in annual gross
revenues once operational,(xiv) nitric acid plants resuming production
in the first quarter of 2000, (xv) consummation of an oral agreement with
one of the Chemical Business' suppliers of anhydrous ammonia. 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) material increases in equipment, maintenance, operating
or labor costs not presently anticipated by the Company, (x) the
requirement to use internally generated funds for purposes not presently
48
<PAGE>
anticipated,(xi) ability to become profitable, or if unable to become
profitable, the inability to secure additional liquidity in the form of
additional equity or debt, (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 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) Bayer's inability or refusal to purchase all of the
Company's production at the new Baytown nitric acid plant; (xxi)
continuing decreases in the selling price for the Chemical Business'
nitrogen based end products, and (xxii) other factors described in
"Management's Discussion and Analysis of Financial Condition and Results
of Operation" contained in this report. Given these uncertainties, all
parties are cautioned not to place undue reliance on such Forward-Looking
Statements. The Company disclaims any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
Forward Looking Statements contained herein to reflect future events or
developments.
49
<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 September 30, 1999,
and the related condensed consolidated statements of operations for
the nine-month and three-month periods ended September 30, 1999 and
1998, and the condensed consolidated statements of cash flows for
the nine-month periods ended September 30, 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.
Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 15, 1999
50
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
___________________________
On August 26, 1999, LSB and El Dorado were served with a complaint
filed in the District Court of the Western District of Oklahoma by
National Union Fire Insurance Company, seeking recovery of certain
insurance premiums totaling $2,085,800 plus prejudgment interest, costs
and attorneys fees alleged to be due and owing by LSB and El Dorado,
related to National Union insurance policies for LSB and subsidiaries
dating from 1979 through 1988. The parties have entered into an
agreement in principal to settle this matter, whereby LSB will pay to
National Union the amount of $521,450. As a part of that agreement
in principle to settle this matter, the parties have agreed in principle
to adjudicate whether any additional amounts may be due to National
Union, but the parties have agreed in principle that the Company's
liability for any additional amounts due National Union shall not
exceed $650,000.
The Eugene Lowe, et al v. Teresa Trucking, Inc. litigation has been
settled with the subsidiaries' payment of approximately $81,000.
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
___________________________
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
__________________________________________
(A) Exhibits.
The Company has included the following exhibits in this
report:
10.1 Waiver of non-compliance of certain covenants through
September 30, 2000 included in a Loan Agreement dated
October 31, 1994, as amended between DSN Corporation and
the CIT Group/Equipment Financing, Inc., which the
Company hereby incorporates by reference from Exhibit
10.1 to LSB Industries, Inc.'s Form 10-Q for the quarter
ended September 30, 1999.
51
<PAGE>
10.2 Rail Car Service Agreement, dated July 29, 1999, between
Prime Financial Corporation and El Dorado Chemical
Company.
15.1 Letter Re: Unaudited Financial Information
27.1 Financial Data Schedule.
(B) Reports of Form 8-K. The Company filed the following report
on Form 8-K during the quarter ended September 30, 1999:
(i) Form 8-K, dated August 17, 1999 (date of event:
August 2, 1999). The item reported was Item 2
"Acquisition on Disposition of Assets" discussing the
disposition of substantially all of the assets of the
Company's Australian subsidiaries.
52
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly
authorized, to sign this report on its behalf on this 22nd day of
November, 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)
53
RAILCAR SERVICES AGREEMENT
This RAILCAR SERVICES AGREEMENT, dated as of the 29th day of July, 1999
("Agreement"), is entered into by and between Prime Financial Corporation, an
Oklahoma corporation ("PFC"), with its principal office at 16 South
Pennsylvania, Oklahoma City, Oklahoma 73107, and El Dorado Chemical Company,
an Oklahoma corporation ("EDC"), with its principal place of business at
655 Craig Road, Suite 322, St. Louis, Missouri 63141.
W I T N E S S E T H:
WHEREAS, PFC is the lessee of certain railcars; and
WHEREAS, EDC desires to obtain and utilize certain railcar services
provided by PFC; and
WHEREAS, PFC is willing to provide such railcar services to EDC in
accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree
as follows:
1. Scope of Services. Pursuant to the terms and conditions of this
Agreement, PFC shall provide certain consulting personnel and those units of
railroad rolling stock which are specifically described on the Equipment
Schedule attached hereto as Exhibit A, together with all attachments,
additions, accessories, and appliances attached thereto or incorporated
therein (referred to herein collectively as the "Equipment" or individually
as a "Unit") in order to provide the railcar services to EDC as required
under this Agreement.
2. Term. The term of this Agreement shall commence on August 1, 1999
(the "Commencement Date") and will continue unless terminated by one of the
parties hereto at any time upon thirty (30) days written notice to the other
party;
3. Service Fees. In the event EDC elects to utilize the Services
provided by PFC hereunder, EDC shall provide PFC thirty (30) days written
notice of EDC's intent to utilize the Services associated with respect to
the Equipment or any Unit and pay PFC a fee based on each Unit provided by
PFC of $1,031.43 per month (the "Services Fee"). Each payment shall be due
on the first day of each month that such Unit is in use by EDC and payable
at such address as PFC may designate. EDC's obligation to pay the Services
Fee shall remain in effect only for so long as EDC elects to utilize the
Services associated with any Unit.
4. Railcar Services. PFC shall provide the following railcar services
(the "Services") to EDC:
<PAGE>
4.1 Equipment Use. PFC shall furnish and make available for use by
EDC the Equipment.
4.2 Consulting Services. PFC shall provide EDC with information and
guidance and consult with EDC to assist EDC in (i) the performance of
required maintenance on the Equipment or any Unit as provided under this
Agreement, and (ii) proper use of the Equipment or any Unit in accordance
with applicable regulations established by The Association of American
Railroads ("AAR"), the United States Department of Transportation, the
Federal Railroad Administration and every other state, federal or
provincial agency having jurisdiction over the condition, maintenance,
repair or safety of the Equipment ("FRA"), the Interstate Commerce
Commission ("ICC") or other relevant state, federal or provincial agency.
4.3 Regulatory Filing. PFC will comply with all regulatory filing
requirements that may exist with respect to the Equipment.
4.4 Degree of Care. PFC shall perform the Services with the reason-
able degree of care, skill and prudence customarily exercised by others
in business of a similar type.
5. Option Rights. EDC shall not have any purchase rights with respect
to the Equipment or any Unit.
6. Return. In the event EDC elects not to continue its use of a particu-
lar Unit or PFC terminates this Agreement as provided herein, EDC shall arrange
for the return of the Unit at a location in North America as PFC or its assignee
shall designate. EDC shall notify PFC in writing of any election by EDC not to
continue to use any Units no less than sixty (60) days prior to the return of
any Unit by EDC to PFC.
7. Railroad Mileage Compensation. All sums received by PFC for mileage
compensation due to usage of the Equipment by EDC shall be paid to EDC.
8. Insurance. EDC shall maintain, at its expense, and at all times
during its use and possession of the Equipment or any Unit "all-risk" physical
damage insurance and comprehensive general liability insurance (covering bodily
injury and property damage) on in such amounts, against such risks, in such form
and with such insurers as shall be satisfactory to PFC; provided, that the
amount of "all-risk" physical damage insurance shall not on any date be
less than the greater of the full replacement value of the Equipment or any Unit
as of such date, and the amount of general liability insurance shall not on any
date be less than Seventy-Five Million Dollars ($75,000,000.00) per occurrence.
Such insurance policy will, among other things, name PFC as an additional named
insured or as loss payee (as the case may be), require that the insurer give PFC
at least thirty (30) days prior written notice (at the address for notice to
PFC set forth in Section 17 hereof) of any alteration in or cancellation of the
2
<PAGE>
terms of such policy. At PFC's option, EDC shall furnish to PFC a certificate
or other evidence satisfactory to PFC that such insurance coverage is in effect.
9. Compliance with Laws; Operation and Maintenance; Additions.
9.1 Use of Equipment by EDC. EDC will use the Equipment or any Unit
in a careful and proper manner, will comply with and conform to all govern-
mental laws, rules and regulations and industry association rules and
regulations relating thereto, and will cause the Equipment or any Unit
to be operated in accordance with the manufacturer's or supplier's
instructions or manuals. Without limitation to the generality of the
foregoing, EDC will (i) cause the Equipment or any Unit to be used and
maintained in compliance with all rules and recommendations of AAR and
FRA and, if mandated, modified so that it will qualify for unrestricted
interchange in the United States and Canada and remain suitable for
loading, transporting and unloading nitric acid and concentrated nitric
acid (the "Commodity"); (ii) will not permit any Unit to be loaded
improperly or in excess of the load limit stenciled thereon; and (iii)
will not permit any Unit to be outside the continental United States
at any time.
9.2 Maintenance of Equipment by EDC. During the period the Equipment
or any Unit is in use by or in the possession of EDC, EDC will keep and
maintain the Equipment or any Unit in good repair, condition and working
order and in compliance with all rules and recommendations of AAR and FRA
or other organization having jurisdiction over the Equipment. EDC shall
also furnish all parts, replacements, mechanism, devices and servicing
required therefor so that the value, condition and operating efficiency
thereof will at all times be maintained and preserved, reasonable wear
and tear excepted. All repairs, parts, mechanisms, devices, replacements
and modifications shall immediately, without further act, become the
property of the owner of the Equipment and part of the Equipment or any
Unit. PFC shall reimburse EDC for all costs incurred by EDC in the
performance of its maintenance obligations hereunder.
9.3 Alteration of Equipment. EDC will not make or authorize any
improvement, change, addition or alteration to the Equipment or any Unit
(i) if such improvement, change, addition or alteration will impair the
originally intended function or use of the Equipment or any Unit or impair
the value of Equipment or any Unit as it existed immediately prior to such
improvement, the change, addition or alteration; (ii) unless the parts
installed are in compliance with all rules and recommendations of AAR
and FRA; or (iii) if any parts installed in or attached to or otherwise
becoming a part of the Equipment or any Unit as a result of any such
improvement, change, addition or alteration shall not be readily remov-
able without damage to the Equipment or any Unit (unless such improve-
ment is mandated by AAR, FRA or other agency or organization having
jurisdiction over the Equipment). All such parts shall be and remain
3
<PAGE>
free and clear of any liens and shall become part of the Equipment or any
Unit, unless it can be removed without damaging or diminishing the value
of the Equipment or any Unit.
10. Inspection. PFC or its authorized representatives may at any reason-
able time or times inspect the Equipment or any Unit. EDC will at all times
requested by PFC cooperate with and assist PFC in locating and gaining access
to the Equipment.
11. Identification. EDC shall, at its own expense, attach to and cause
to be maintained on each Unit a notice satisfactory to PFC disclosing PFC's
interest in such Unit as a lessee. EDC will cause each Unit to be kept
marked and numbered with the identifying mark and number set forth in Exhibit A.
No Unit will bear any running marks other than those registered in the name
of PFC or other marks as PFC may from time to time require. EDC will not
place or permit any such Unit to be placed in operation or use the same until
such marks and numbers shall have been so marked on all sides thereof and
will replace or cause to be replaced promptly any such marks and numbers that
may be removed, defaced, obliterated or destroyed.
12. Loss or Damage. During the period the Equipment or any Unit is in
use by or in the possession of EDC, all risk of loss, theft, damage or destruc-
tion to such Equipment or Unit, however incurred or occasioned, shall be
borne by EDC.
13. General Indemnity. EDC assumes liability for, and shall indemnify,
protect, save and keep harmless PFC and its agents, servants, officers,
directors, employees, attorneys, affiliates, successors and assigns (each,
an "Indemnitee") from and against any and all liabilities, obligations,
losses, damages, penalties, claims, actions, suits, costs and expenses,
including legal expenses, of whatsoever kind and nature, imposed on, incurred
by or asserted against any Indemnitee, in any way relating to or arising out
of EDC's possession or use of the Equipment or any part or Unit thereof;
provided, however, that EDC shall not be required to indemnify any Indemnitee
for loss or liability arising from acts or events which occur after the Equip-
ment or any Unit has been returned to PFC in accordance with this Agreement,
or for loss or liability resulting solely from the willful misconduct or gross
negligence of such Indemnitee. The provisions of this Section 13 shall
survive the expiration or earlier termination of this Agreement.
14. Event of Default. An event of default under this Agreement ("Event of
Default") shall occur if PFC fails to receive any Services Fee or other amount
owing hereunder within ten (10) days after the date the same is due or if EDC
performs or observes any warranty, covenant, condition or agreement to be
performed or observed by it with respect to this Agreement and such failure
shall continue unremedied for thirty (30) days. PFC may terminate this Agree-
ment if an Event of Default shall occur.
4
<PAGE>
15. Assignment of Duties. PFC may, without the consent of, or notice
to, EDC, retain any affiliate of PFC to perform all or any part of the Services.
PFC may retain non-affiliates of PFC to perform the Services.
16. Further Assurances. EDC will, at its own expense, promptly and duly
execute and deliver to PFC such further documents and assurances and take such
further action as PFC may from time to time request in order to more effectively
carry out the intent and purpose of this Agreement and to establish and protect
the rights, interests and remedies created or intended to be created in favor
of PFC hereunder. To the extent permitted by applicable law, EDC hereby
authorizes PFC to file any financing statements and memoranda without the
signature of EDC. EDC will qualify to do business, and remain qualified in good
standing, in each jurisdiction in which the nature of its activities from time
to time may require.
17. Notices. Any notice required or permitted to be given by either
party hereto to the other shall be in writing, and any such notice shall become
effective upon personal delivery thereof 24 hours following delivery to or
deposit with a recognized overnight delivery service or three days after the
date on which it shall have been deposited in the United States mail with
return receipt requested, addressed as follows:
(i) if to PFC, at
Prime Financial Corporation
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
Attention: President
(ii) if to EDC, at
El Dorado Chemical Company
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
Attention: President
18. Miscellaneous. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating
the remaining provision hereof, and any such prohibition or unenforceability
in any jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction. To the extent permitted by applicable
law, EDC hereby waives any provision of law which renders any provision hereof
prohibited or unenforceable in any respect.
5
<PAGE>
19. Amendment. No term or provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which the enforcement of the change, waiver,
discharge or termination is sought.
20. Entire Agreement. This Agreement and the agreements referred to
herein contain the full, final and exclusive statement of the agreement between
PFC and EDC relating to the Services.
21. Title and Possession. This Agreement shall constitute an agreement
of services, and nothing herein shall be construed as conveying to EDC any
right, title or interest in the Equipment or any Unit. The Equipment or Unit
will at all times during the term of this Agreement be and remain personal
property and title thereto will remain with the owner thereof.
22. Assignment. This Agreement may be assigned by PFC, without the
consent of EDC, to any of the following: (a) any party or entity affiliated
with, or an affiliate of, PFC; (b) any party or entity with whom PFC and/or
its parent company may merge or consolidate or to whom PFC may sell all, or
substantially all, of its assets, and (c) any party or entity PFC may
retain to perform the Services.
23. Captions. The headings of the Sections are for convenience of
reference only, are not a part of this Agreement and shall not be deemed to
affect the meaning or construction of any of the provisions hereof.
24. Execution in Counterparts. This Agreement may be executed by the
parties hereto on any number of separate counterparts, but all such counterparts
shall together constitute but one and the same instrument.
25. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
26. Subject and Subordinate. This Agreement is subject and subordinate
to that certain Lease Agreement dated July 29, 1999 (the "Lease"), between
Transamerica Equipment Financial Services Corporation ("TEFSC"), as lessor,
and PFC, as lessee, and TEFSC's right to repossess each unit of Equipment and
to avoid and terminate this Agreement with respect to the Equipment so
repossessed upon such repossession. EDC consents and agrees to the assignment
to TEFSC of (i) all monies due or to become due to PFC under this Agreement;
and (ii) all rights and privileges of PFC under this Agreement. EDC promises
and agrees to settle all claims against PFC directly with PFC and hereby
waives, relinquishes and disclaims as to TEFSC all counterclaims, rights of
set-off, and defenses EDC may have against PFC, including any right to with-
hold payment of or to refrain from paying, any monies that are due or to
become due under the terms of this Agreement, except that EDC shall not be
liable to TEFSC for monies paid to PFC in accordance with the terms of this
Agreement prior to the time TEFSC notifies EDC to pay TEFSC directly. EDC
6
<PAGE>
agrees and acknowledges that TEFSC has not assumed and will not have any
obligation or liabilities under this Agreement to EDC or to any other person
by reason of the aforementioned assignment or otherwise.
IN WITNESS WHEREOF, PFC and EDC have each caused this Agreement to be
duly executed all as of the date first above written.
PRIME FINANCIAL CORPORATION,
an Oklahoma corporation
By: /s/ Tony M. Shelby
_________________________________
Title:_______________________________
EL DORADO CHEMICAL COMPANY,
an Oklahoma corporation
By: /s/ David R. Goss
_________________________________
Title: VP
_______________________________
7
<PAGE>
<PAGE>
EXHIBIT A
EQUIPMENT SCHEDULE
Description Number of Cars Marks Car Numbers
___________ ______________ _____ ___________
Nitric Acid Railcars 26 EDCX 6014-6024,
6026-6033,
6200-6205,
6207
8
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 November 15, 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 September 30, 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 LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 740
<SECURITIES> 0
<RECEIVABLES> 43,765
<ALLOWANCES> 1,606
<INVENTORY> 26,078
<CURRENT-ASSETS> 85,422
<PP&E> 141,005
<DEPRECIATION> 67,393
<TOTAL-ASSETS> 192,256
<CURRENT-LIABILITIES> 37,977
<BONDS> 128,974
0
0
<COMMON> 1
<OTHER-SE> 13,971
<TOTAL-LIABILITY-AND-EQUITY> 192,256
<SALES> 184,114
<TOTAL-REVENUES> 184,875
<CGS> 147,096
<TOTAL-COSTS> 196,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,439
<INTEREST-EXPENSE> 9,613
<INCOME-PRETAX> (15,920)
<INCOME-TAX> (4,575)
<INCOME-CONTINUING> (11,345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,345)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
