FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended June 30, 1999
____________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The transition period from ___________ to __________
Commission file number _________________________________
ClimaChem, Inc.
____________________________________________________
Exact name of Registrant as specified in its charter
OKLAHOMA 73-1528549
_____________________________ __________________
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
________________________________________________________
Address of principal executive offices (Zip Code)
(405) 235-4546
__________________________________________________
Registrant's telephone number, including area code
None
_____________________________________________________
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES NO X
_____ _____
The Registrant does not have any equity securities registered under
the securities act of 1933, as amended. All outstanding shares of
Common Stock of the registrant are held directly or indirectly by
the registrant's parent company, LSB Industries, Inc.
<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 June 30, 1999, the condensed consolidated statements of
operations and cash flows for the six month and three month periods
ended June 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 quarter 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 six months ended June 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
<PAGE>
<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1999 is unaudited)
(Dollars in thousands)
June 30, December 31,
ASSETS 1999 1998
______ ________ ____________
<S> <C> <C>
Current assets:
Cash $ 2,321 $ 750
Trade accounts receivable, net 45,323 38,817
Inventories:
Finished goods 11,520 14,123
Work in process 7,157 6,290
Raw materials 16,647 16,954
__________ __________
Total inventory 35,324 37,367
Supplies and prepaid items 9,680 7,023
Income tax receivable - 2,050
Current deferred income taxes 4,887 1,338
Due from LSB and affiliates, net 1,556 2,946
Long-lived assets to be disposed of (Note 5) 4,694 -
__________ __________
Total current assets 103,785 90,291
Income tax receivable 1,750 -
Property, plant and equipment, net 78,689 82,389
Notes receivable from LSB and affiliates 13,443 13,443
Other assets, net 16,083 10,480
__________ __________
$ 213,750 $ 196,603
========= ==========
</TABLE>
(Continued on following page)
2
<PAGE>
<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1999 is unaudited)
(Dollars in thousands)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
_____________________________________ __________ ___________
<S> <C> <C>
Current liabilities:
Accounts payable $ 20,829 $ 17,416
Accrued liabilities 9,965 7,918
Accrued losses on firm purchase commitments
(Note 6) 7,500 -
Current portion of long-term debt 10,246 10,460
__________ __________
Total current liabilities 48,540 35,794
Long-term debt 138,730 127,471
Commitments and contingencies (Note 2) - -
Deferred income taxes 9,755 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 4,072 12,664
__________ __________
Total stockholders' equity 16,725 23,758
__________ __________
$ 213,750 $ 196,603
========== ==========
</TABLE>
(See accompanying notes)
3
<PAGE>
<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
(dollars in thousands)
1999 1998
________ ________
<S> <C> <C>
Businesses continuing at June 30:
Revenues:
Net sales $ 125,718 $ 128,922
Other income - 233
____________ __________
125,718 129,155
Costs and expenses:
Cost of sales 98,955 99,390
Selling, general and administrative 20,336 19,230
Interest 6,404 6,036
Other expense 487 -
Provision for losses on firm purchase
commitments (Note 6) 7,500 -
_____________ __________
133,682 124,656
_____________ __________
Income (loss) before business to be
disposed of during 1999 (7,964) 4,499
Business to be disposed of during 1999 (Note 5):
Revenues 6,374 8,172
Operating costs, expenses and interest 8,105 9,404
____________ __________
(1,731) (1,232)
Loss on disposal of business (1,971) -
___________ __________
(3,702) (1,232)
___________ __________
Income (loss) before provision (credit) for
income taxes (11,666) 3,267
Provision (credit) for income taxes (3,074) 1,700
___________ _________
Net income (loss) $ (8,592) $ 1,567
=========== =========
Total comprehensive income (loss):
Net income (loss) $ (8,592) $ 1,567
Foreign currency translation
income (loss) 1,559 (606)
__________ _________
$ (7,033) $ 961
========== =========
</TABLE>
(See accompanying notes)
4
<PAGE>
<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 1999 and 1998
(dollars in thousands)
1999 1998
________ _______
<S> <C> <C>
Businesses continuing at June 30:
Revenues:
Net sales $ 68,357 $ 70,310
Other income - 175
__________ _________
68,357 70,485
Costs and expenses:
Cost of sales 54,810 53,559
Selling, general and administrative 10,319 10,056
Interest 3,250 2,858
Other expense 311 -
Provision for losses
on firm purchase commitments (Note 6) 7,500 -
_________ _________
76,190 66,473
_________ _________
Income (loss) before business to be
disposed of during 1999 (7,833) 4,012
Business to be disposed of during 1999 (Note 5):
Revenues 3,506 3,415
Operating costs, expenses and interest 4,267 4,084
________ ________
(761) (669)
Loss on disposal of business (1,971) -
_________ ________
(2,732) (669)
__________ ________
Income (loss) before provision (credit) for
income taxes (10,565) 3,343
Provision (credit) for income taxes (3,124) 1,730
_________ _________
Net income (loss) $ (7,441) $ 1,613
========= =========
Total comprehensive income (loss):
Net income (loss) $ (7,441) $ 1,613
Foreign currency translation
income (loss) 1,337 (616)
_________ _________
$ (6,104) $ 997
========= =========
</TABLE>
(See accompanying notes)
5
<PAGE>
<TABLE>
<CAPTION>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
(Dollars in thousands)
1999 1998
______ ______
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ (8,592) $ 1,567
Adjustments to reconcile net income (loss)
to cash flows provided by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 4,608 4,707
Other 516 579
Provision for possible losses on
receivables and other assets 484 176
Provision for deferred income taxes (3,374) -
Loss on business to be disposed of 1,971 -
Inventory write-down and provision for
losses on purchase commitments 9,100 -
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (6,708) (3,275)
Inventories 1,033 1,791
Supplies and prepaid items (2,647) (1,233)
Accounts payable 3,194 (690)
Accrued liabilities 2,859 594
Due to / from LSB and affiliates 93 4,525
_________ _________
Net cash provided by operations 2,537 8,741
Cash flows from investing activities:
Capital expenditures (3,027) (2,562)
Payments made for acquisition (Note 3) (3,113) -
Purchase of option (Note 3) (2,558) -
Proceeds from sales of equipment 3 29
Deposit on real estate to LSB and
affiliates (Note 3) (1,899) -
Decrease (increase) in other assets (569) 682
_________ _________
Net cash used in investing activities (11,163) (1,851)
Cash flows from financing activities:
Payments on long-term debt (2,767) (4,236)
Net change in revolving debt 12,964 (2,305)
_________ _________
Net cash provided (used) by financing
activities 10,197 (6,541)
_________ _________
Net increase in cash from
all activities 1,571 349
Cash at beginning of period 750 3,534
_________ _________
Cash at end of period $ 2,321 $ 3,883
========= =========
</TABLE>
(See accompanying notes)
6
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 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 June 30, 1999, were
approximately $2.4 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 June 30, 1999, the Company
has deferred approximately $2.9 million associated with such
agreement, which will be amortized over the initial term of the
lease.
In January 1999, the contractor constructing the EDNC Baytown Plant
under a turnkey agreement, informed the Company that it could not
complete construction alleging a lack of financial resources. EDNC
at that time demanded that the contractor's bonding company provide
funds necessary for subcontractors to complete construction. A
substantial portion of the costs to complete the EDNC Baytown
Plant ($12.9 million), which were to be funded by the construction
contractor, have been funded by proceeds from the bonding company,
however, the nonperformance by the contractor constructing the EDNC
7
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
Baytown Plant increased the cost of the plant which is reflected in
higher rentals under the Company's leveraged lease.
In connection with the EDNC Baytown Plant, EDNC had entered into a
long-term production and supply agreement with Bayer. This
agreement provided for a commencement date of no later than
February 1, 1999. As a result of the construction delays mentioned
above, EDNC provided product to Bayer under an interim supply
agreement until the EDNC Baytown Plant became operational in June
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. Pursuant to
the Administrative Agreement, the Chemical Business installed
additional pollution control equipment to address the
compliance issues. The Chemical Business was assessed $50,000
in civil penalties associated with the Administrative
Agreement. In the summer of 1996 and then on January 28, 1997,
the subsidiary executed amendments to the Administrative
Agreement ("Amended Agreements"). The Amended Agreements
imposed a $150,000 civil penalty, which penalty has been paid.
Since the 1997 amendment, the Chemical Business has been
assessed stipulated penalties of approximately $67,000 by the
Arkansas Department of Pollution Control and Ecology
("ADPC&E") for violations of certain provisions of the 1997
Amendment. The Chemical Business believes that the El Dorado
Plant has made progress in controlling certain off-site
emissions; however, such off-site emissions have occurred and
continue to occur from time to time, which could result in the
assessment of additional penalties against the Chemical
Business by the ADPC&E for violation of the 1997 Amendment.
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
ditch near the El Dorado Plant. In 1998, the ADPC&E issued a
Consent Administrative Order ("1998 CAO") to resolve the
event. The 1998 CAO includes a civil penalty in the amount of
$183,700 which includes $125,000 to be paid over five years in
the form of environmental improvements at the El Dorado Plant.
The remaining $58,700 was paid in 1998. The 1998 CAO also
requires the Chemical Business to undertake a facility-wide
wastewater evaluation and pollutant source control program and
wastewater facility-wide wastewater minimization program.
The program requires that the subsidiary complete rainwater
drain-off studies including engineering design plans for
additional water treatment components to be submitted to the
ADCP&E by August 2000. The construction of the additional
8
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
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 is a defendant in a separate
lawsuit pending in Missouri. This lawsuit alleges a national
conspiracy, as well as a regional conspiracy, directed against
explosive customers in Missouri and seeks unspecified damages.
The Company's Chemical Business has been included in this
lawsuit because it sold products to customers in Missouri
during a time in which other defendants have admitted to
participating in an antitrust conspiracy, and because it has
been sued in the preceding described lawsuit. Based on the
information presently available to the Company, the Company
does not believe that the Chemical Business conspired with any
party, to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously
defend itself in this matter.
During the third quarter of 1997, a subsidiary of the Company
was served with a lawsuit in which approximately 27 plaintiffs
have sued approximately 13 defendants, including a subsidiary
of the Company alleging personal injury and property damage
for undifferentiated compensatory and punitive damages of
approximately $7,000,000. Specifically, the plaintiffs assert
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
9
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
approximately August 1994. Subsequent to August 1994, the
subsidiary supplied blasting materials to the reclamation
contractor at Heartland's mine. In connection with the
subsidiary's activities at Heartland, the subsidiary has
entered into a contractual indemnity to Heartland to indemnify
Heartland under certain conditions for acts or actions taken
by the subsidiary for which the subsidiary failed to take, and
Heartland is alleging that the subsidiary is liable thereunder
for Heartland's defense costs and any losses to, or damages
sustained by, the plaintiffs in this lawsuit as a result of
the subsidiary's operations. Subject to final documentation,
this litigation has been settled with the subsidiary's payment
of approximately $81,000, which was accrued at June 30, 1999.
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 $2,131,000 and $1,143,000
for the six months ended June 30, 1999 and 1998, respectively and
$1,081,000 and $556,000 for the quarterly periods ended June 30,
1999 and 1998, respectively. Management of the Company believes
these charges from LSB reasonably approximate additional general
and administrative costs which would have been incurred if the
Company had been an independent entity during such periods. These
amounts do not include reimbursements for costs described in the
next paragraph or 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
10
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
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 six months ended June 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 six months ended June 30,
1998, $900,000 was accrued at June 30, 1998, for the amount owed to
LSB by the Company as of that date. The amount accrued at June 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.
At June 30, 1999 and 1998, the Condensed Consolidated Statement of
Operations for the six month periods then ended included a current
provision for income taxes of $.3 million and $1.7 million,
respectively, for income taxes which the Company owed to LSB under
the Tax Sharing Agreement. Due to losses sustained by the Company
during the last half of 1998, the 1998 provision of $1.7 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
11
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
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 six months
ended June 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
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 during the third quarter of 1999. The final purchase price to
be paid to LSB for the real estate will be approximately $2.1
million, of which the Company has deposited approximately $1.9
million against the purchase of such real estate.
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 $382,010 and $
$237,500 for the first six months of 1999 and 1998, respectively
and $205,305 and $118,750 during the second 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
12
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
advances to LSB which generally bear interest. At June 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. The Company has
$1.6 million due from LSB and affiliates as of June 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.
13
<PAGE>
<TABLE>
<CAPTION>
Note 4: Segment Information
Six Months Ended Three Months Ended
1999 1998 1999 1998
_______ ________ _______ ________
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Sales:
Businesses continuing:
Chemical $ 69,693 $ 69,314 $ 39,031 $ 40,638
Climate Control 56,025 59,608 29,326 29,672
Business to be disposed of -
Chemical 6,374 8,208 3,506 3,461
________ ________ _______ _______
$132,092 $ 137,130 $ 71,863 $ 73,771
======= ======== ======= =======
Operating profit (loss):
Businesses continuing:
Chemical:
Recurring operations $ 2,340 $ 5,298 $ 1,024 $ 4,033
Loss on purchase
commitments (7,500) - (7,500) -
_______ ________ ________ ________
(5,160) 5,298 (6,476) 4,033
Climate Control 5,104 5,237 2,724 2,837
Business to be disposed of -
Chemical (1,489) (995) (644) (567)
_______ ________ _______ ______
(1,545) 9,540 (4,396) 6,303
Unallocated fees from Services
Agreement and general
corporate expenses, net (1,504) - (830) -
Loss on business to be disposed
of - Chemical (1,971) - (1,971) -
Interest expense (6,646) (6,273) (3,368) (2,960)
_______ ________ ________ ________
Income (loss) before benefit
for income taxes $(11,666) $ 3,267 $(10,565) $ 3,343
======= ======== ======= ========
</TABLE>
14
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
Note 5: Sale of Australian Subsidiary
____________________________________
On May 7, 1999, the Company's wholly owned subsidiary, Total Energy
Systems Limited and its subsidiaries ("TES") entered into an
agreement (the "Asset Sale Agreement") to sell substantially all
the assets of TES ("Defined Assets"). Under the Asset Sale
Agreement, TES retains its liabilities and will liquidate such
liabilities from the proceeds of the sale and from the collection
of its accounts receivables which were retained by TES pursuant to
the Asset Sale Agreement.
The loss associated with this transaction included in the
accompanying Condensed Consolidated Statements of Operations for
the six months and three months ended June 30, 1999, is
approximately $1,971,000 and is comprised of disposition costs of
approximately $.3 million, the recognition in earnings of the
cumulative foreign currency loss of approximately $1.1 million at
June 30, 1999, and approximately $.6 million related to the
resolution of certain environmental matters.
The Company received approximately $3.4 million at closing on
August 2, 1999, in net proceeds from the assets sold, exclusive of
approximately $.7 million related to an agreed to retention 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 US$1.1 million 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.
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 at June 30, 1999, by
approximately $1.6 million, representing the cost in excess of
market.
At June 30, 1999, 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, 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.
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
the contracts, exceeds the anticipated future sales prices of such
products. As a result, the accompanying Condensed Consolidated
Financial Statements include a loss provision for anhydrous ammonia
required to be purchased during the remainder of the contracts of
approximately $7.5 million. The loss provision recorded as of June 30,
1999, is based on the forward contract pricing existing at June 30,
15
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Months Ended June 30, 1999 and 1998
1999. This pricing can move upward or downward in future
periods. Based on forward pricing existing as of August 13, 1999,
the Chemical Business would be required to recognize an additional
$400,000 loss. This loss provision estimate may change in the near
term.
16
<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 June 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
<TABLE>
<CAPTION>
In October 1997, the Company was organized as a new wholly
owned subsidiary of LSB Industries, Inc. ("LSB"). The Company owns
substantially all of LSB's Chemical and Climate Control Businesses.
See Note 1 of Notes to Condensed Consolidated Financial Statements.
Information about the Company's operations in different industry
segments for the six months and three months ended June 30, 1999
and 1998 is detailed below.
Six Months Ended Three Months Ended
1999 1998 1999 1998
__________ __________ _________ _________
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Sales:
Businesses continuing:
Chemical $ 69,693 $ 69,314 $ 39,031 $ 40,638
Climate Control 56,025 59,608 29,326 29,672
Business to be disposed of (1):
Chemical 6,374 8,208 3,506 3,461
_________ ________ _______ ________
$ 132,092 $ 137,130 $ 71,863 $ 73,771
========= ======== ======= =======
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 9,592 $ 12,178 $ 4,641 $ 7,750
Climate Control 17,171 17,354 8,906 9,001
Business to be disposed of (1):
Chemical (229) 159 (71) (8)
_______ ________ _______ _______
$ 26,534 $ 29,691 $ 13,476 $ 16,743
======= ======== ======= =======
Operating profit (loss) (3):
Businesses continuing:
Chemical:
Recurring operations $ 2,340 $ 5,298 $ 1,023 $ 4,033
Loss on purchase
commitments (7,500) - (7,500) -
________ ________ _______ _______
(5,160) 5,298 (6,477) 4,033
Climate Control 5,105 5,237 2,724 2,837
Business to be disposed of (1):
Chemical (1,488) (995) (643) (567)
_________ _______ _______ _______
(1,545) 9,540 (4,396) 6,303
Unallocated fees from services
Agreement and general corporate
expenses, net (1,504) - (830) -
Loss on business to be disposed of-
Chemical (1,971) - (1,971) -
Interest expense (6,646) (6,273) (3,368) $ (2,960)
_________ _______ _______ _______
Income (loss) before income
taxes $ (11,666) $ 3,267 $(10,565) $ 3,343
========= ======= ======= =======
17
<PAGE>
<FN>
(1) On May 7, 1999, the Company's wholly owned Australian subsidiary, TES,
entered into an agreement which it closed on August 2, 1999, to sell
substantially all of its assets. 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>
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 increased from $69.3 million in the six
months ended June 30, 1998 to $69.7 million in the six months ended
June 30, 1999 and the gross profit (excluding the Australian
subsidiary and the inventory write-down in 1999) has decreased from
$12.2 million in 1998 to $11.2 in 1999. The gross profit
percentage (excluding the Australian subsidiary and the effect of
the $1.6 million inventory write-down in 1999) has decreased from
17.5% in 1998 to 16.1% in 1999. The decline in sales price exceeded
the decline in raw material costs resulting in a lower gross profit
margin.
As of June 30, 1999, the Chemical Business has commitments to
purchase approximately 200,000 tons of 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 June 30, 1999,
the Chemical Business has remaining purchase commitments of
approximately 120,000 tons under this contract. The Chemical
Business is required to purchase a minimum of 7,000 tons monthly
under another contract expiring in June 2000.
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
with manufacturing and distribution costs, to exceed anticipated
future sales prices. As a result, the accompanying Condensed
Consolidated Financial Statements include a loss provision for
anhydrous ammonia required to be purchased during the remainder of
18
<PAGE>
the contracts of approximately $7.5 million. The provision for
loss at June 30, 1999, is based on the forward contract pricing
existing at June 30, 1999, and estimated market prices for products
to be manufactured and sold during the remainder of the contracts.
This is a forward-looking statement, and there are no assurances
that such estimates will be proven 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
June 30, 1999. The Chemical Business currently has an excess
inventory of nitrogen-based products on hand. Additionally,
substantial excess stocks of competing nitrogen products on the
market have resulted in a cutback in the production level at the El
Dorado Arkansas facility. 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 August 13, 1999, the Chemical Business would be required to
recognize an additional $400,000 loss. 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 at June 30, 1999, by
approximately $1.6 million, representing the cost in excess of
market value.
In June, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries agreed to act as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. The construction of the plant was completed during the
quarter ended June 30, 1999. This plant is being operated by the
Company's subsidiary and is supplying nitric acid for Bayer's
polyurethane business under a long-term supply contract. Sales
from this plant were approximately $2.8 million during the quarter
ended June 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 to $40 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 have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, they have had an adverse effect on the Company's
consolidated results of operations. On May 7, 1999, the Company's
wholly owned Australian subsidiary entered into an agreement to
19
<PAGE>
sell substantially all of its assets. This transaction was
substantially completed on August 2, 1999. Revenues of the
Australian subsidiary for the six month and three month periods
ended June 30, 1999, and June 30, 1998, were $6.4 million, $8.2
million, $3.5 million, and $3.5 million, respectively. For the
year ended December 31, 1998, the Australian subsidiary had
revenues of $14.2 million and a net loss of $2.9 million; $3.7
million net loss for the six months ended June 30, 1999, including
a loss on sale of $2.0 million. See Note 9 of Notes to Condensed
Consolidated Financial Statements for further information
concerning this transaction.
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
Although sales of $56.0 million for the six months ended June 30,
1999, in the Climate Control Business were approximately 5% less than
sales of $59.6 million in the six months ended June 30, 1998, the gross
profit percentage improved from 29.1% in the first six months of 1998
to 30.6% in the first six months of 1999. This improvement was primarily
due to reductions in material costs in the heat pump products of the
Climate Control Business.
RESULTS OF OPERATIONS
_____________________
Six months ended June 30, 1999 vs. Six months ended June 30, 1998.
Revenues
________
Total revenues for the six months ended June 30, 1999 and 1998
were $132.1 million and $137.3 million, respectively (a decrease of
$5.2 million). Sales decreased $5.0 million and other income
decreased $.2 million.
Net Sales
_________
Consolidated net sales included in total revenues for the six
months ended June 30,1999 were $132.1 million, compared to $137.1
million for the first six months of 1998, a decrease of $5.0
million. This decrease in sales resulted from: (i) decreased sales
in the Climate Control Business of $3.5 million due to decreased
sales in this Business' Heat Pump product lines, and(ii)
decreased sales in the Chemical Business of $1.5 million due to
lower sales in the agricultural products and sales of the Company's
Australian subsidiary offset by increased sales of acid products.
20
<PAGE>
Agricultural sale prices were down dramatically due to the import
of Russian nitrate resulting in an over supply of nitrate-based
products.
Gross Profit
____________
Gross profit 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 21.3% for the
first six months of 1999, compared to 21.7% for the first six
months 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 were 16.2% in the six month period ended June
30, 1999, compared to 14.9% for the first six months of 1998. This
increase is primarily the result of increased charges of direct
costs from LSB pursuant to the Services Agreement associated with
the Nitric Acid Project, the sale of TES and the development of
new product lines in the Climate Control Business. Additionally,
the Company experienced decreased sales volume in the Climate
Control Business and the Australian subsidiary of the Chemical
Business without an equivalent corresponding decrease in SG&A.
Interest Expense
________________
Interest expense for the Company was $6.6 million during the
first half of 1999, compared to $6.3 million during the first half
of 1998. This increase in interest expense was the result of
higher average borrowings in 1999.
Income (Loss) Before Taxes
__________________________
The Company had a loss before income taxes of $11.7 million
in the first six months of 1999 compared to income before income
taxes of $3.3 million in the six months ended June 30, 1998. The
decreased profitability of $15.0 million was due to decreased
gross profits and increased SG&A expenses, the loss on the disposal
of the Australian subsidiary of $2.0 million and the inventory
write-down and provision for losses on purchase commitments of $9.1
million, as previously discussed.
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 $3.1 million for the first
six months of 1999 on a pre-tax loss of $11.7 million (a 26%
effective rate) compared to a provision for income taxes of $1.7
million in the first six months of 1998 on a pre-tax income of $3.3
million (an effective rate of 52%). The effective rates differ
from statutory rates due primarily to the Australian subsidiary
losses.
21
<PAGE>
Three months ended June 30, 1999 vs. Three months ended June 30, 1998
_____________________________________________________________________
Revenues
________
Total revenues for the three months ended June 30, 1999, and
1998 were $71.9 million, and $73.9 million, respectively (a
decrease of $2.0 million). Sales decreased $1.9 million.
Net Sales
_________
Consolidated net sales included in total revenue for the three
months ended June 30, 1999, were $71.9 million, compared to $73.8
million for the second quarter of 1998, a decrease of $1.9 million.
This decrease in sales resulted from: decreased sales in the
Chemical Business of $1.6 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, 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 21.0% for the
second quarter of 1999, compared to 22.7% 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 were 15.1% in the three months ended June 30,
1999, compared to 14.3% for the three months ended June 30, 1998.
This increase is primarily the result of increased charges of
direct costs from LSB pursuant to the Services Agreement associated
with the Nitric Acid Project, the sale of TES and the development
of new product lines in the Climate Control Business. Additionally,
the Company experienced decreased sales volume in the Climate Control
Business and the Australian subsidiary of the Chemical Business without
an equivalent corresponding decrease in SG&A.
Interest Expense
________________
Interest expense for the Company was $3.4 million in the
second quarter of 1999, compared to $3.0 million during the second
quarter of 1998. The increase in interest expense was the result of
higher average borrowing in the second quarter of 1999.
Income (Loss) Before Taxes
__________________________
The Company had a loss before income taxes of $10.6 million
in the second quarter of 1999 compared to income before income
taxes of $3.3 million in the three months ended June 30, 1998. The
decreased profitability of $13.9 million was due to decreased
gross profit and increased SG&A expenses, the loss on the disposal
of the Australian subsidiary of $2.0 million and the inventory
22
<PAGE>
write-down and provision for losses on purchase commitments of $9.1
million, as previously discussed.
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 $3.1 million for the second
quarter of 1999 on a pre-tax loss of $10.6 million (an effective
rate of 29.2%) compared to a provision for income taxes of $1.7
million in the second quarter of 1998 on a pre-tax income of $3.3
million (an effective rate of 52%). The effective rates differ
from statutory rates due primarily to the Australian subsidiary's
losses.
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 six months ended June 30,
1999 was $2.5 million, after $5.1 million for noncash depreciation and
amortization, $2.0 million loss on business to be disposed of,
$.5 million in provisions for possible losses on accounts receivable,
inventory write-down and provision for losses on purchase commitments
of $9.1 million, and the following changes in assets and liabilities:
(i) accounts receivable increases of $6.7 million; (ii) inventory
decreases of $1 million excluding the effect of the write-down;
(iii) increases in supplies and prepaid items of $2.6 million; (iv)
increases in accounts payable and accrued liabilities of $6.1 million;
and (v) $.1 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.
Cash Flow From Investing And Financing Activities
_________________________________________________
Cash used by investing activities for the six months ended
June 30, 1999 included $3.0 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, and $.6 million for increases in other
assets. The capital expenditures took place in the Chemical and
Climate Control Businesses to enhance production and product
23
<PAGE>
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).
Net cash provided by financing activities included payments
on long-term debt of $2.8 million and net increases in revolving
debt of $13.0 million.
Source of Funds
_______________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
The Company owns substantially all of LSB's Chemical and
Climate Control Businesses. On November 26, 1997, the Company
issued senior unsecured notes which were exchanged with registered
senior notes of the same amount and substantially the same terms in
April 1998 ("Notes"), in the aggregate amount of $105 million
pursuant to the terms of an indenture (the "Indenture"). The Notes
are jointly and severally and fully and unconditionally guaranteed
on a senior basis by all, except for one inconsequential
subsidiary, of the existing and all of the future subsidiaries of
the Company.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year. The Notes will mature on December 1,
2007, unless earlier redeemed. The Notes are redeemable at the
option of the Company on December 1, 2002 at 105.375% of the
principal amount declining to face amount at December 1, 2005 and
thereafter under the terms set forth in the Indenture. The Notes
are effectively subordinated to all secured indebtedness of the
Company and its subsidiaries.
LSB, certain subsidiaries of LSB that are not subsidiaries of
the Company, and certain subsidiaries of the Company are parties to
a working capital revolving line of credit evidenced by two (2)
loan agreements ("Revolving Credit Agreement") (as amended and
restated during the second quarter of 1999)with an unrelated lender
("Lender") collateralized by receivables, inventory, proprietary
rights and proceeds thereof of the Company and the subsidiaries
that are parties to the Revolving Credit Agreement. The Revolving
Credit Agreement, as amended, provides for revolving credit
facilities ("Revolver") for total direct borrowings up to $65.0
million, including the issuance of letters of credit. Under the
Revolver, the Company can borrow up to the full $65 million based
on certain percentages of eligible collateral, with LSB and certain
subsidiaries of LSB that are not the Company or subsidiaries of the
Company having a right to borrow, on a revolving basis, up to $6
million of the $65 million based on eligible collateral. As of
June 30, 1999, LSB and its subsidiaries other than the Company and
its subsidiaries have borrowed $2.3 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
Revolver provides for advances at varying percentages of eligible
24
<PAGE>
inventory and trade receivables. The Revolving Credit Agreement,
as amended, provides for interest at the lender's prime rate plus
.5% per annum or, at the Company's option, on the Lender's LIBOR
rate plus 2.875% per annum. At June 30, 1999, the effective
interest rate was 7.9%. The term of the Revolving Credit Agreement
is through December 31, 2000, and is renewable thereafter for
successive thirteen month terms. At June 30, 1999, the
availability for additional borrowings by the subsidiaries of the
Company, based on eligible collateral, approximated $15.7 million.
Borrowings by subsidiaries of the Company under the Revolver
outstanding at June 30, 1999, were $23.4 million. The annual
interest on the outstanding debt under the Revolver at June 30,
1999, at the rates then in effect would approximate $1.9 million.
The Revolving Credit Agreement also requires the payment of an
annual facility fee of 0.5% of the unused Revolver.
On May 10, 1999, a subsidiary of LSB, which is not a
subsidiary of the Company entered into a new credit facility with
a third party lender, reducing outstanding borrowings under the
Revolving Credit Agreement by $11.9 million. The event also served
to eliminate the Company's requirement to maintain certain
financial ratios, so long as availability under the Revolving
Credit Agreement does not fall below $15.0 million for three (3)
consecutive business days. If availability does drop below $15.0
million for three consecutive business days, the Revolving Credit
Agreement requires the Company to maintain certain financial ratios
and contain other financial covenants, including tangible net worth
requirements and capital expenditure limitations. At June 30,
1999, the financial covenants under the Revolving Credit Agreement
were not in effect.
In addition to the Revolving Credit Agreement discussed above,
as of June 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
June 30, 1999, DSN had outstanding borrowings of $9.6 million under
these loans. The loans have repayment schedules of 84 consecutive
monthly installments of principal and interest. The interest rate
on each of the loans is fixed and range from 8.2% to 8.9%. Annual
interest, for the three notes as a whole, at June 30, 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, which have been
waived through June 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
25
<PAGE>
the books of LSB's subsidiary, which approximated the investment's
fair value, at the date of purchase.
During the latter part of March 1999, LSB's management began
considering the realignment of certain of LSB's overhead to better
match its focus on the Company and its subsidiaries' operations.
Consistent with this realignment, in April 1999, the Company's
Board of Directors approved the acquisition of certain assets from
LSB in accordance with the terms of the Indenture to which the
Company and its subsidiaries are parties to and the loan agreement
that LSB and subsidiaries of the Company are borrowing under, which
assets are materially related to the lines of business of the
Chemical and Climate Control Businesses. These assets are real
estate and improvements located thereon in which the Climate
Control Business will conduct certain manufacturing operations, and
a subsidiary of LSB that owns an option to acquire a French HVAC
manufacturing company and all amounts due and payable from such
French manufacturer or its parent to LSB. This transaction was
closed during the second quarter of 1999, and the Company paid LSB
$2.6 million for the option and 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 the third quarter of 1999. The final purchase price to be
paid to LSB for the real estate will be approximately $2.1 million,
of which the Company has deposited approximately $1.9 million
against the purchase of such real estate.
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 these railcars to a subsidiary of
LSB, which is neither the Company nor any 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 to be provided by LSB on
behalf of the Company during 1999, and the anticipated results of
the company for 1999, the Company anticipates that the amounts to
be paid to LSB under the Services Agreement previously discussed
will be greater than the amount paid during 1998.
Future cash requirements include working capital requirements
for anticipated sales increases in all businesses, funding for
anticipated increased payments to LSB pursuant to the Services
Agreement, the Management Agreement and the Tax Sharing Agreement
and funding for future capital expenditures (including the purchase
of certain assets from LSB as discussed above). Funding for the
higher accounts receivable and inventory requirements resulting
from anticipated sales increases, funding for anticipated purchases
of certain assets from LSB and funding for payments under the
Services Agreement, Management Agreement and Tax Sharing Agreement
will be provided by cash flow generated by the Company and the
revolving credit facilities discussed elsewhere in this report.
26
<PAGE>
Currently, LSB and certain subsidiaries of LSB, including the
Company, are limited to capital expenditures of $10.0 million
annually under the Revolving Credit Agreement discussed above. In
1999, the Company has planned capital expenditures of approximately
$10.0 million, a certain amount of which it anticipates will be
financed by equipment finance contracts on a term basis and in a
manner allowed under its various loan agreements. Such capital
expenditures include approximately $1.5 million, which the Chemical
Business anticipates spending related to environmental control
facilities at its El Dorado Facility. The Company currently has no
material commitment for capital expenditures.
Management believes that cash flows from operations, the
Company's revolving credit facilities, and other sources will be
adequate to meet its presently anticipated capital expenditure,
working capital, and debt service requirements. The Company's
Chemical Business will be required to incur additional capital
expenditures as discussed in Note 2 of Notes to the Company's
Condensed Consolidated Financial Statements regarding an
Administrative Agreement and Consent Administrative Order related
to the Chemical Business' wastewater treatment system. At the date
of this report, the future cost of the expenditure for these
environmental matters has been estimated to be approximately $5.0
million, with $1.5 million being paid in 1999 ($.6 million in the
first six months of 1999) and the balance in 2000.
Year 2000 Issues
________________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, LSB undertook a project to enhance certain
of its Information Technology ("IT") systems and install certain
other technologically advanced communication systems to provide
extended functionality for operational purposes. A major part of
LSB's program was to implement a standardized IT system purchased
from a national software distributor at all of the Company and
subsidiary operations, as well as other LSB subsidiaries, and to
install a Local Area Network ("LAN"). The IT system and the LAN
necessitated the purchase of additional hardware, as well as
software. The process implemented by LSB to advance its systems to
be more "state-of-the-art" systems had an added benefit in that the
software and hardware changes necessary to achieve LSB's goals are
Year 2000 compliant.
Starting in 1996 through June 30, 1999, LSB has capitalized
approximately $1.2 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. LSB anticipates that the remaining cost to
complete this IT systems enhancement project will be less than
$50,000, and such costs will be capitalized.
27
<PAGE>
LSB's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing and
implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing scheduling systems,
the Company is 100% complete on the assessment and remediation
phases. As of the date of this report, the Company has completed
its testing and has implemented its remediated systems for all of
its businesses. The assessments also indicated that limited
software and hardware (embedded chips) used in production and
manufacturing systems ("operating equipment") also are at limited
risk. The Company has completed its assessment and identified
remedial action which will be completed in the 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 is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company. See "Special Note Regarding Forward-
Looking Statements".
Contingencies
_____________
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
28
<PAGE>
outcome. The preceding sentence is a forward-looking statement
that involves a number of risks and uncertainties that could cause
actual results to differ materially, such as, among other factors,
the following: the EIL Insurance does not provide coverage to the
Company and the Chemical Business for any material claims made by
the claimants, the claimants alleged damages are not covered by the
EIL Policy which a court may find the Company and/or the Chemical
Business liable for, such as punitive damages or penalties, a court
finds the Company and/or the Chemical Business liable for damages
to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company. See Note 2 of Notes to
Condensed Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
__________________________________________________________
General
_______
The Company's results of operations and operating cash flows
are impacted by changes in market interest rates and raw material
prices for products used in its manufacturing processes. The
Company also has a wholly owned subsidiary in Australia, for which
the Company has foreign currency translation exposure. The
derivative contracts used by the Company are entered into to hedge
these risks and exposures and are not for trading purposes. All
information is presented in U. S. dollars. See Note 5 of Notes to
Consolidated Financial Statements for a discussion of the
Australian subsidiary in 1999.
Interest Rate Risk
__________________
The Company's interest rate risk exposure results from its
debt portfolio which is impacted by short-term rates, primarily
prime rate-based borrowings from commercial banks, and long-term
rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, for an expanded analysis of
expected maturities of long-term debt and its weighted average
interest rates and discussion related to raw material price risk.
As of June 30, 1999, the Company's variable rate and fixed
rate debt which aggregated $149 million exceeded the debt's fair
market value by approximately $5.3 million. The fair value of the
Company's Senior Notes was determined based on a market quotation
for such securities.
Foreign Currency Risk
_____________________
At June 30, 1999, the Company had a wholly owned subsidiary
located in Australia, for which the functional currency is the
local currency, the Australian dollar. Since the Australian
subsidiary accounts are converted into U.S. dollars upon
consolidation using the end of the period exchange rate, declines
in value of the Australian dollar to the U.S. dollar result in
29
<PAGE>
translation loss to the Company. As a result of the commitment to
sell 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 June 30, 1999.
30
<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) the Company's
ability to develop or adopt new and existing technologies in the
conduct of its operations, (viii) anticipated financial
performance, (ix) ability to comply with the Company's general
working capital and debt service requirements, (x) ability to be
able to continue to borrow under the Company's revolving line of
credit, and (xi) ability of the EDNC Baytown Plant to generate $35
to $40 million in annual gross revenues once operational. While
the Company believes the expectations reflected in such Forward-
Looking Statements are reasonable, it can give no assurance such
expectations will prove to have been correct. There are a variety
of factors which could cause future outcomes to differ materially
from those described in this report, including, but not limited to,
(i) decline in general economic conditions, both domestic and
foreign, (ii) material reduction in revenues, (iii) material
increase in interest rates; (iv) inability to collect in a timely
manner a material amount of receivables, (v) increased competitive
pressures, (vi) inability to meet the "Year 2000" compliance of the
computer system by the Company, its key suppliers, customers,
creditors, and financial service organization, (vii) changes in
federal, state and local laws and regulations, especially
environmental regulations, or in interpretation of such, pending
(viii) additional releases (particularly air emissions into the
environment), (ix) 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 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
31
<PAGE>
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.
32
<PAGE>
<PAGE>
Independent Accountants' Review Report
Board of Directors
ClimaChem, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of ClimaChem, Inc. and subsidiaries as of June 30, 1999, and
the related condensed consolidated statements of operations for the
six-month and three-month periods ended June 30, 1999 and 1998, and
the condensed consolidated statements of cash flows for the six-
month periods ended June 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.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
August 19, 1999
33
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
______ _________________
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously reported
by the Company in Item 3 of its Form 10-K for the fiscal period
ended December 31, 1998, which Item 3 is incorporated by reference
herein.
Item 2. Changes in Securities and Use of Proceeds
______ ________________________________________
Not applicable.
Item 3. Defaults upon Senior Securities
______ _______________________________
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
______ _________________________________________________
Not applicable.
Item 5. Other Information
______ _________________
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
______ ________________________________
(A) Exhibits.
________
The Company has included the following exhibits in this
report:
4.1 Sixth Amendment to Amended and Restated Loan and
Security Agreement, dated May 10, 1999, by and
between BankAmerica Business Credit, Inc. and
CliamteMaster, Inc. International Environmental
Corporation, El Dorado Chemical Company and Slurry
Explosives Corporation, which the Company hereby
incorporates by reference from Exhibit 4.1 to the
LSB Industries, Inc. Form 10Q for the fiscal
quarter ended June 30, 1999.
15.1 Letter Re: Unaudited Financial Information
27.1 Financial Data Schedule.
(B) Reports of Form 8-K.
The Company did not file any reports on Form 8-K during
the quarter ended June 30, 1999.
34
<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 23rd day of
August 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)
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 August 19,
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 June 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
August 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,321
<SECURITIES> 0
<RECEIVABLES> 47,079
<ALLOWANCES> 1,756
<INVENTORY> 35,324
<CURRENT-ASSETS> 103,785
<PP&E> 140,837
<DEPRECIATION> 62,148
<TOTAL-ASSETS> 213,750
<CURRENT-LIABILITIES> 62,148
<BONDS> 213,750
0
0
<COMMON> 1
<OTHER-SE> 16,724
<TOTAL-LIABILITY-AND-EQUITY> 213,750
<SALES> 125,718
<TOTAL-REVENUES> 125,718
<CGS> 98,955
<TOTAL-COSTS> 133,682
<OTHER-EXPENSES> 487
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 6,404
<INCOME-PRETAX> (11,666)
<INCOME-TAX> (3,074)
<INCOME-CONTINUING> (7,964)
<DISCONTINUED> (3,702)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,592)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
