UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 2000
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.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed:
ClimaChem, Inc. and all of its wholly owned subsidiaries.
The accompanying condensed consolidated balance sheet of
ClimaChem, Inc. at March 31, 2000, the condensed consolidated
statements of operations, cash flows for the three month periods
ended March 31, 2000 and 1999 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 as it relates
to the provision for loss on firm purchase commitments as
discussed in Note 6 of Notes to Condensed Consolidated Financial
Statements. The results of operations for the three months ended
March 31, 2000, are not necessarily indicative of the results to
be expected for the full year. The condensed consolidated
balance sheet at December 31, 1999, 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, 1999, for an expanded discussion of the Company's financial
disclosures and accounting policies.
<PAGE>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 2000 is unaudited)
(Dollars in thousands)
ASSETS March 31, December 31,
2000 1999
Current assets:
Cash $ 2,641 $ 2,673
Trade accounts receivable, net 44,679 41,934
Inventories:
Finished goods 10,792 11,275
Work in process 6,782 5,503
Raw materials 11,373 8,994
------------------------
Total inventory 28,947 25,772
Supplies and prepaid items 5,236 4,314
Due from LSB and affiliates, net
(Note 3) 2,382 1,758
------------------------
Total current assets 83,885 76,451
Property, plant and equipment, net 74,800 75,667
Notes and interest receivable from
LSB and affiliates (Note 3) 14,008 13,948
Other assets, net 17,809 18,012
-----------------------
$ 190,502 $ 184,078
========================
(Continued on following page)
<PAGE>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 2000 is unaudited)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' March 31, December 31,
EQUITY 2000 1999
Current liabilities:
Accounts payable $ 19,918 $ 16,312
Accrued liabilities 17,428 13,791
Current portion of long-term
debt (Note 7) 27,749 29,644
-------------------------
Total current liabilities 65,095 59,747
Long-term debt (Note 7) 114,311 112,544
Accrued losses on firm purchase
commitments 5,256 5,652
Commitments and contingencies
(Note 2) - -
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 deficit (6,813) (6,518)
-------------------------
Total stockholders' equity 5,840 6,135
-------------------------
$ 190,502 $ 184,078
=========================
(See accompanying notes)
<PAGE>
CLIMACHEM, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(Dollars in thousands)
2000 1999
Businesses continuing at March 31:
Revenues:
Net sales $ 66,697 $ 57,361
Other income 741 340
-----------------------
67,438 57,701
Costs and expenses:
Cost of sales 52,154 44,145
Selling, general and
administrative 10,914 10,017
Interest 3,690 3,494
Provision for losses on firm
purchase commitments (Note 6) 975 -
Other expense - 176
-----------------------
67,733 57,832
-----------------------
Loss before subsidiary
disposed of during 1999 (295) (131)
Subsidiary disposed of during 1999
(Note 5)
Revenues - 2,868
Operating costs, expenses and
interest - 3,838
----------------------
- (970
Loss before provision for
income taxes (295) (1,101)
Provision for income taxes - 50
-----------------------
Net loss (295) (1,151)
Retained earnings (accumulated
deficit) at beginning of period (6,518) 12,664
----------------------
Retained earnings (accumulated
deficit) at end of period $ (6,813) $ 11,513
======================
Total comprehensive loss:
Net loss $ (295) $ (1,151)
Foreign currency translation
income - 222
---------------------
$ (295) $ (929)
======================
(See accompanying notes)
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
2000 1999
Cash flows from operating activities:
Net loss $ (295) $ (1,151)
Adjustments to reconcile net
loss to cash flows
provided (used) by operating
activities:
Depreciation, depletion and
amortization:
Property, plant and equipment 1,946 2,337
Other 224 258
Provision for possible losses
on receivables 165 293
Provision for deferred income
taxes - 100
Realization of losses on firm
purchase commitments, net of
provision (396) -
Cash provided (used) by
changes in assets and
liabilities:
Trade accounts receivable (2,741) (5,482)
Inventories (2,460) (1,035)
Supplies and prepaid items 531 (956)
Accounts payable 2,153 (1,606)
Accrued liabilities 2,947 3,811
Due to / from LSB and
affiliates (58) 907
---------------------
Net cash provided (used) by
operating activities 2,016 (2,524)
Cash flows from investing
activities:
Capital expenditures (2,236) (2,145)
Payments made for acquisition - (3,113)
Investments in and advances to
LSB and affiliates (626) (1,996)
Decrease in other assets 942 2,093
---------------------
Net cash used in investing
activities (1,920) (5,161)
Cash flows from financing
activities:
Proceeds from borrowings of long-
term debt 2,303 -
Payments on long-term debt (970) (1,782)
Net change in revolving debt (1,461) 9,006
---------------------
Net cash provided (used) by
financing activities (128) 7,224
---------------------
Net decrease in cash from all
activities (32) (461)
Cash at beginning of period 2,673 750
---------------------
Cash at end of period $ 2,641 $ 289
=====================
(See accompanying notes)
<PAGE>
CLIMACHEMC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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, substantially 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 inter-company transactions have been eliminated in
the accompanying financial statements. Certain reclassifications
have been made to the prior year consolidated financial
statements to conform to current year presentation.
Note 2: Commitments and Contingencies
Legal Matters
Following is a summary of certain legal actions involving the
Company:
A. Arch Minerals Corporation, et al. v. ICI Explosives USA,
Inc., et al. On May 24, 1996, the plaintiffs filed this
civil cause of action against EDC and five other unrelated
commercial explosives manufacturers alleging that the
defendants allegedly violated certain federal and state
antitrust laws in connection with alleged price fixing of
certain explosive products. This cause of action is pending
in the United States District Court, Southern District of
Indiana. The plaintiffs are suing for an unspecified amount
of damages, which, pursuant to statute, plaintiffs are
seeking be trebled, together with costs. Plaintiffs are also
seeking a permanent injunction enjoining defendants from
further alleged anti-competitive activities. Based on the
information presently available to EDC, EDC does not believe
that EDC conspired with any party, including, but not
limited to, the five other defendants, to fix prices in
connection with the sale of commercial explosives. This
action 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. EDC intends to vigorously defend itself in this
matter. See "Special Note Regarding Forward-Looking
Statements."
B. ASARCO v. ICI, Et Al. The U.S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and consolidated
with other lawsuits in Utah, leave to add EDC as a defendant in
that lawsuit. This lawsuit alleges a national conspiracy, as well
as a regional conspiracy, directed against explosive customers in
Missouri and seeks unspecified damages. EDC has been included in
this lawsuit because it sold products to customers in
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Missouri during a time in which other defendants have
admitted to participating in an antitrust conspiracy, and
because it has been sued in the ARCH case discussed above.
Based on the information presently available to EDC, EDC
does not believe that EDC conspired with any party, to fix
prices in connection with the sale of commercial explosives.
EDC intends to vigorously defend itself in this matter. See
"Special Note Regarding Forward-Looking Statements."
The Company including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the
ordinary course of business. In the opinion of management after
consultation with counsel, all claims, legal actions (including
those described above) and complaints are not presently probable
of material loss, are adequately covered by insurance, or if not
so covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition would not have a
material effect on the financial position of the Company, but
could have a material impact to the net income (loss) of a
particular quarter or year, if resolved unfavorably.
Other
LSB and, thus, the Company has retained certain risks associated
with its operations, choosing to self-insure up to various
specified amounts under its automobile, workers' compensation,
health and general liability programs. LSB reviews such programs
on at least an annual basis to balance the cost-benefit between
its coverage and retained exposure.
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 will
continue to provide to the Company various services, including
financial and accounting, order entry, billing, credit, payable,
insurance, legal, human resources, advertising and marketing, and
related administrative and management services, that LSB has
historically provided to the operations and businesses of the
Company. The Company will pay to, or reimburse, LSB for the costs
and expenses incurred by LSB in the performance of the Services
Agreement.
Beginning January 1, 2000, the Company began to pay directly to
service providers and employees, the majority of the costs for
services, that it has historically reimbursed to LSB.
Under the terms of the Services Agreement, the Company will pay
to, or reimburse, LSB for the value of the office facilities of
LSB, including LSB's principal offices and financial accounting
offices utilized in the performance of the Services Agreement.
LSB will determine the proportionate usage of such facilities by
LSB and the Company, and the Company will pay to, or reimburse,
LSB for its proportionate share of such usage.
Charges for such services reimbursed to LSB aggregate $109,209
and $1,050,300 for the quarters ended March 31, 2000 and 1999,
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.
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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.
In addition the Service Agreement allows for purchases of other
goods and services to the extent that the amount paid
approximates fair value that would be paid to a third party. In
the three months ended March 31, 2000, subsidiaries of the
Company purchased certain raw materials from a subsidiary of LSB,
not a subsidiary of the Company, for $1,003,000 (none in 1999).
The Company also purchased industrial supplies from subsidiaries
of LSB, which are not subsidiaries of the Company, aggregating
$494,000 in the three months ended March 31, 2000 ($149,000 in
1999).
The Company's Climate Control manufacturing subsidiaries also
lease facilities from an affiliate under various operating leases
and a capital lease. Rental expense associated with the operating
leases was $419,432 and $176,705 during the first quarter of 2000
and 1999, respectively. In December 1999, a subsidiary of the
Climate Control Business entered into a capital lease with a
subsidiary of LSB which is not a subsidiary of the Company. The
lease agreement required an initial payment of $2,000,000 for
capital improvements required in the facility, which was paid in
1999, and requires 112 monthly payments of $20,291 commencing on
September 1, 2006. The accompanying balance sheet includes
buildings and improvements under the capital lease of $3,172,000
and long-term debt includes a capital lease obligation of
$1,187,000 at March 31, 2000 ($1,172,000 at December 31, 1999)
due to the LSB subsidiary.
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. Under the Management Agreement, the Company is
to pay LSB a fee for such services which will not exceed $1.8
million annually. The fee will be paid quarterly based upon the
excess of actual earnings before interest, income taxes,
depreciation and amortization ("EBITDA") for the quarter minus
$6,500,000, not to exceed $450,000. If at the end of the calendar
year, EBITDA is less than $26 million, management fees paid to
LSB during the year shall be refunded to the Company. The maximum
management fee amount to be paid to LSB by the Company is
adjusted annually commensurate with the percentage change, if
any, in the Consumer Price Index during the preceding calendar
year. For the three months ended March 31, 2000 EBITDA as defined
in the Management Agreement exceeded $6.5 million by more than
$450,000, thus the quarterly management fee to LSB of $450,000 was
expensed in the Condensed Consolidated Statement of Operations
for the period then ended. This management fee also served to
reduce the amount due from LSB and affiliates in the Condensed
Consolidated Balance Sheet as of March 31, 2000. No management
fee was earned or paid to LSB in 1999.
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
On November 21, 1997, the Company and LSB entered into a tax
sharing agreement (the "Tax Sharing Agreement") which provides
for (i) the allocation of payments of taxes for periods during
which the Company and its subsidiaries and LSB are included in
the same consolidated group for federal income tax purposes or
the same consolidated, combined or unitary returns for
state, local or foreign tax purposes, (ii) the allocation of
responsibility for the filing of tax returns, (iii) the conduct
of tax audits and the handling of tax controversies, and (iv)
various related matters. For tax periods beginning after December
1996 and ending ten years thereafter, so long as the Company is
included in LSB's consolidated federal income tax returns or
state consolidated combined or unitary tax returns, the Company
will be required to pay to LSB an amount equal to the Company's
consolidated federal and state income tax liability calculated as
if the Company and its subsidiaries were a separate consolidated
tax group and not part of LSB's consolidated tax group. Such
amount is payable in estimated quarterly installments. If the sum
of the estimated quarterly installments is (a) greater than the
tax liability of the Company, on a consolidated basis, as
determined by LSB, under the Tax Sharing Agreement, then LSB will
refund the amount of the excess to the Company, or (b) less than
the Company's tax liability, on a consolidated basis, as
determined by LSB, under the Tax Sharing Agreement, then the
Company will pay to LSB the amount of the deficiency. For the
quarters ended March 31, 2000 and 1999, the Company did not pay
LSB and is not obligated to pay LSB any amount under the Tax
Sharing Agreement.
Under the terms of an Indenture between the Company, the
guarantors and the trustee relating to the Notes (as defined in
Note 7), 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 the first day of the first
full fiscal quarter commencing after the Issue Date of the Notes
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 quarters ended
March 31, 2000 and 1999, the Company did not make any
distributions or pay any dividends to LSB.
The Company has, at various times, maintained certain unsecured
borrowings from LSB and its subsidiaries and made loans and
advances to LSB which generally bear interest. At March 31, 2000
the Company had loans and advances due from LSB of approximately
$14.0 million, $10.0 million of which was loaned to LSB from the
proceeds of the sale of the Notes, as defined, and bears interest
at 10-3/4%, payable on June 1 and December 1 and maturing
November 2007 and approximately $4.0 million due from LSB and
affiliates related to cash advances from the Company to LSB and
affiliates prior to the sale of the Notes, as defined, plus
related interest. The loan in the approximate value of $3.4
million and related interest are due by its terms in November
2007 and bears interest at 7% per annum. At March 31, 2000 the
Company had $2.4 million due from LSB and affiliates included in
current assets related to advances, interest, note receivables
and "investments". The June 1, 2000 semi-annual interest payment
due on the $10 million was not paid by LSB. LSB has a 30-day grace
period which to pay the interest payment. The Company currently
aniticipates achieving satisfactory resolution of this matter.
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
LSB and its subsidiaries (other than the Company and its
subsidiaries), the "LSB Non-ClimaChem Entities," are dependent
upon their separate cash flows and the restricted funds which can
be distributed by the Company under the above mentioned
agreements. As of March 31, 2000, the LSB Non-ClimaChem Entities,
excluding the Automotive Products Business, had a working capital
deficit of $3.4 million (including $4.0 million of inventories
and $3.4 million of accounts receivable), and long-term debt of
$32.9 million (including that owed to the Company). For the quarter
ended March 31, 2000, the LSB Non-ClimaChem Entities had net income
of $.5 million LSB is focusing its efforts and resources on its core
businesses, primarily represented by ClimaChem. In April 2000, LSB's
Board of Directors approved a plan for the sale of its Automotive
Products Business, which was concluded on May 4, 2000. LSB is also
realigning its overhead to better match its focus on the Chemical
and Climate Control Businesses of the Company. Based on these
plans, management of LSB believes the LSB Non-ClimaChem Entities
will have sufficient operating capital to meet its obligations as
they come due, including those to the Company. If LSB management
is not successful in executing this plan, including realignment
of overhead to reduce its operating costs or realizing certain
excess and non-core assets, and if the Company is not able to
transfer funds to LSB and its affiliates as permitted under the
Indenture, the amounts due from LSB and its subsidiaries, which
aggregate $16.4 million at March 31, 2000, may not be
recoverable. As of March 31, 2000, 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; however, it is reasonably possible
that the evaluation relative to the amounts due from LSB and its
subsidiaries could change in the near term.
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 4: Segment Information
Three Months Ended March 31,
2000 1999
(in thousands)
Net sales:
Businesses continuing:
Chemical $ 35,067 $ 30,662
Climate Control 31,630 26,699
Business disposed of -
Chemical - 2,868
---------------------------
$ 66,697 $ 60,229
===========================
Operating profit (loss):
Business continuing:
Chemical $ 2,617 $ 1,462
Climate Control 2,208 2,410
Business disposed of -
Chemical - (743)
---------------------------
4,825 3,129
Unallocated fees from
Services
Agreement, Management
Agreement and general
corporate expenses, net (1,196) (674)
Interest income 410 340
Other income (expense), net 331 (278)
Interest expense:
Businesses continuing (3,690) (3,493)
Business disposed of -
Chemical - (125)
Provision for loss on firm
purchase commitments -
Chemical (975) -
--------------------------
(5,120) (4,230)
--------------------------
Loss before
provision for income taxes $ (295) $ (1,101)
===========================
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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"). The loss associated with this
transaction was $2.0 million and was comprised of disposition
costs of approximately $.3 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: Loss on Firm Purchase Commitment
The Chemical Business has a firm uncancelable commitment to
purchase anhydrous ammonia pursuant to the terms of a supply
contract (Note 2 - Commitments and Contingencies, Purchase
Commitments). At March 31, 2000, the purchase price the Chemical
Business was required to pay for anhydrous ammonia to be
purchased under the contract, which was for a significant
percentage of the Chemical Business' anhydrous ammonia
requirements, exceeded and was expected to continue to exceed the
spot market prices throughout the purchase period. Additionally,
the market for nitrate based products, while improved for the
first quarter of 2000, is expected to decline modestly in the
summer and fall months of 2000. Due to the expected sales
prices and the cost to produce the nitrate products, including
the cost of the anhydrous ammonium to be purchased under the
contract, the costs of certain of the Company's nitrate based
products are expected to exceed the anticipated future sales
prices. As a result, an additional provision for loss on the
firm purchase commitment aggregating approximately $1.0 million
in excess of the accrued liability for amounts recorded in 1999
was recorded in the first quarter of 2000. At March 31, 2000 and
December 31, 1999, the accompanying balance sheets include
remaining accrued losses under the firm purchase commitment of
$7.8 and $7.4 million, respectively ($2.5 and $1.8 million of
which is classified as current in accrued liabilities,
respectively). Due to the pricing mechanism in the contract, it
is reasonably possible that this loss provision estimate may
change in the near term. Based on the purchase price of ammonia
under the firm purchase commitment and other factors as of May
31, 2000, the Company may be required to recognize an additional
loss provision of approximately $.2 million in the second quarter
of 2000.
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
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.
In April 2000, the Company repurchased $5.0 million of the Notes
for approximately $1.2 million. In connection with this
transaction, the Company will recognize a gain of approximately
$4.0 million in the second quarter of 2000. The Company is also
in discussions with the holders of its Notes, in an effort to
restructure their terms and conditions. The Company did not make
the June 1, 2000 interest payment. Under the terms of the
indenture governing the Notes, the Company has a grace period of
thirty (30) days to make the interest payment or enter into
satisfactory agreements with the holders of the Notes before the
Notes are in default. The Company currently anticipates
achieving satisfactory resolution of this matter.
The Company is a holding company with no assets other than the
notes and accounts receivable from LSB, specified in the
accompanying Condensed Consolidated Balance Sheet, and the Notes
origination fees which have a net book value of $3.2 million at
March 31, 2000 ($3.3 million at December 31, 1999) or material
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 (AEDNC@),
("Guarantor Subsidiaries").
Set forth below are unaudited condensed consolidating financial
statements of the Guarantor Subsidiaries, the Company's
subsidiary, which is not a guarantor of the 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.
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Long-term Debt (continued)
CLIMACHEM, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(Unaudited)
As of March 31, 2000
(Dollars in thousands)
<TABLE>
GUARANTOR NON- COMPANY ELIMINATIONS CONSOLIDATED
SUBSIDIARIES GUARANTOR (PARENT)
SUBSIDIARY
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 225 $ 1,033 $ 1,383 $ - $ 2,641
Trade accounts receivable, net 41,367 3,259 53 44,679
Inventories 28,859 88 28,947
Supplies and prepaid items 4,047 95 1,094 5,236
Due from LSB and affiliates, net 2,382 2,382
------------------------------------------------------------
Total current assets 74,498 4,475 4,912 83,885
Property, plant and equipment net 74,012 787 1 74,800
Notes and interest receivable from
LSB and affiliates 14,008 14,008
Investment in and advances to
affiliates 576 92,178 (92,754) -
Other assets, net 12,034 1,951 3,824 17,809
-----------------------------------------------------------
$ 160,544 $ 7,789 $114,923 $ (92,754) $ 190,502
============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,001 $ 1,660 $ 257 $ - $ 19,918
Accrued liabilities 9,597 4,005 3,826 17,428
Current portion of long-term debt 27,749 27,749
----------------------------------------------------------
Total current liabilities 55,347 5,665 4,083 65,095
Long-term debt 9,311 105,000 114,311
Accrued losses on firm purchase
commitments 5,256 5,256
Payable to Parent 16,622 $ (16,622) -
Stockholders' equity
Common stock 60 1 1 (61) 1
Capital in excess of par value 78,982 12,652 (78,982) 12,652
Retained earnings (accumulated
deficit) (5,034) 2,123 (6,813) 2,911 (6,813)
------------------------------------------------------------
Total stockholders' equity 74,008 2,124 5,840 (76,132) 5,840
-----------------------------------------------------------
$ 160,544 $ 7,789 $114,923 $ (92,754) $ 190,502
============================================================
</TABLE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Long-term Debt (continued)
CLIMACHEM, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(Unaudited)
As of December 31, 1999
(Dollars in thousands)
<TABLE>
GUARANTOR NON- COMPANY ELIMINATIONS CONSOLIDATED
SUBSIDIARIES GUARANTOR (PARENT)
SUBSIDIARY
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 816 $ 703 $ 1,154 $ - $ 2,673
Trade accounts receivable, net 39,709 2,215 10 41,934
Inventories 25,594 178 25,772
Supplies and prepaid items 3,306 83 925 4,314
Due from LSB and affiliates, net 1,758 1,758
---------------------------------------------------------
Total current assets 69,425 3,179 3,847 76,451
Property, plant and equipment net 75,158 509 75,667
Notes and interest receivable from
LSB and affiliates 13,948 13,948
Investment in and advances to
affiliates 91,011 (91,011)
Other assets, net $ 12,353 2,004 3,655 18,012
----------------------------------------------------------
$156,936 $ 5,692 $112,461 $ (91,011) $184,078
==========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,793 $ 1,519 $ - $ - $ 16,312
Accrued liabilities 9,873 2,592 1,326 13,791
Current portion of long-term debt 29,644 29,644
----------------------------------------------------------
Total current liabilities 54,310 4,111 1,326 59,747
Long-term debt 7,544 105,000 112,544
Accrued losses on firm purchase
commitments 5,652 5,652
Payable to Parent 15,515 66 (15,581) -
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) (5,129) 1,514 (6,518) 3,615 (6,518)
---------------------------------------------------------
Total stockholders' equity 73,915 1,515 6,135 (75,430) 6,135
--------------------------------------------------------
$156,936 $ 5,692 $112,461 (91,011) $184,078
=========================================================
</TABLE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Long-term Debt (continued)
CLIMACHEM, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 2000
(Dollars in thousands)
<TABLE>
GUARANTOR NON- COMPANY ELIMINATIONS CONSOLIDATED
SUBSIDIARIES GUARANTOR (PARENT)
SUBSIDIARY
<S> <C> <C> <C> <C> <C>
Business continuing at March 31,
2000
Revenues:
Net Sales $ 58,472 $ 8,225 $ - $ - $ 66,697
Other income 381 43 2,647 (2,330) 741
-----------------------------------------------------------
58,853 8,268 2,647 (2,330) 67,438
Costs and expenses:
Cost of sales 44,898 7,256 52,154
Selling, general and
administrative 9,642 75 1,197 10,914
Interest 3,192 2,828 (2,330) 3,690
Provisions for losses on firm
purchase commitments 975 975
----------------------------------------------------------
58,707 7,331 4,025 (2,330) 67,733
Income (loss) before provision
(benefit) for income tax 146 937 (1,378) (295)
Equity in Earnings of Subsidiaries - - 704 (704) -
Provision (benefit) for income taxes 51 328 (379) - -
-----------------------------------------------------------
Net income (loss) $ 95 $ 609 $ (295) $ (704) $ (295)
===========================================================
</TABLE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Long-term Debt (continued)
CLIMACHEM, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1999
(Dollars in thousands)
<TABLE>
GUARANTOR NON- COMPANY ELIMINATIONS CONSOLIDATED
SUBSIDIARIES GUARANTOR (PARENT)
SUBSIDIARY
<S> <C> <C> <C> <C> <C>
Business continuing at March 31,
1999
Revenues:
Net Sales $ 57,361 $ - $ - $ - $ 57,361
Net Income 1 2,669 (2,330) 340
-----------------------------------------------------------
57,362 2,669 (2,330) 57,701
Costs and expenses:
Cost of sales 44,145 44,145
Selling, general and
administrative 9,339 4 674 10,017
Interest 2,999 3 2,822 (2,330) 3,494
Other expense 176 176
-----------------------------------------------------------
56,659 7 3,496 (2,330) 57,832
-----------------------------------------------------------
Income (loss) before business
disposed of and provision
(benefit) for income tax 703 (7) (827) (131)
Business disposed of during 1999:
Revenues 2,868 2,868
Operating costs, expenses and
interest 3,838 3,838
----------------------------------------------------------
(970) (970)
Loss before provision (benefit)
for income taxes (267) (7) (827) (1,101)
Equity in loss of subsidiaries (481) 481 -
Provision (benefit) for income
taxes 207 (157) 50
----------------------------------------------------------
Net income (loss) $ (474) $ (7) $(1,151) $ 481 $(1,151)
===========================================================
</TABLE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Long-term Debt (continued)
CLIMACHEM, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 2000
(Dollars in thousands)
<TABLE>
GUARANTOR NON- COMPANY ELIMINATIONS CONSOLIDATED
SUBSIDIARIES GUARANTOR (PARENT)
SUBSIDIARY
<S> <C> <C> <C> <C> <C>
Net cash flows from operations $ (1,138) $ 1,261 $ 1,893 $ - $ 2,016
Cash flows from investing activities
Capital expenditures (1,946) (289) (1) (2,236)
Investments in and advances to LSB
and Affiliates 1,441 (642) (1,425) (626)
Decrease(increase) in other assets 1,180 (238) 942
------------------------------------------------------------
Net cash provided (used) by
investing activities 675 (931) (1,664) (1,920)
Cash flows from financing
activities:
Payments on long-term debt (970) (970)
Proceeds from borrowings on long-
term debt 2,303 2,303
Net change in revolving debt (1,461) (1,461)
-----------------------------------------------------------
Net cash used by financing
activities (128) - - (128)
-----------------------------------------------------------
Net increase (decrease) in cash from
all activities (591) 330 229 (32)
Cash at the beginning of period 816 703 1,154 2,673
----------------------------------------------------------
Cash at end of period $ 225 $ 1,033 $ 1,383 $ - $ 2,641
==========================================================
</TABLE>
<PAGE>
CLIMACHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000 and 1999
Note 7: Long-term Debt (continued)
CLIMACHEM, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1999
(Dollars in thousands)
<TABLE>
GUARANTOR NON- COMPANY ELIMINATIONS CONSOLIDATED
SUBSIDIARIES GUARANTOR (PARENT)
SUBSIDIARY
<S> <C> <C> <C> <C> <C>
Net cash flows from operations $ (2,555) $ - $ 31 $ - $ (2,524)
Cash flows from investing activities
Capital expenditures (2,145) (2,145)
Payments made for acquisition (3,113) (3,113)
Advances to LSB and affiliates (1,996) (1,996)
Decrease in other assets 2,058 35 2,093
---------------------------------------------------------
Net cash provided (used) by
investing activities (5,196) 35 (5,161)
Cash flows from financing
activities:
Payments on long-term debt (1,782) (1,782)
Net change in revolving debt 9,006 9,006
---------------------------------------------------------
Net cash provided (used) by
financing activities 7,224 - 7,224
Net increase (decrease) in cash from
all activities (527) - 66 (461)
Cash at the beginning of period 744 2 4 750
--------------------------------------------------------
Cash at end of period $ 217 $ 2 $ 70 $ - $ 289
========================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with the Company's March 31, 2000 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. (ALSB@). The Company
owns substantially all of LSB's Chemical and Climate Control
Businesses. See Note 1 of Notes to Condensed Consolidated
Financial Statements. Information about the Company's operations
in different industry segments for the three months ended March
31, 2000 and 1999 is detailed below.
Three Months Ended March 31,
2000 1999
(in thousands)
Sales:
Business continuing:
Chemical $ 35,067 $ 30,662
Climate Control 31,630 26,699
Business disposed of (1):
Chemical 2,868
------------------------
$ 66,697 $ 60,229
========================
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 6,114 $ 4,951
Climate Control 8,429 8,265
Business disposed of (1):
Chemical (158)
------------------------
$ 14,543 $ 13,058
========================
Operating profit (loss) (3):
Businesses continuing:
Chemical $ 2,617 $ 1,462
Climate Control 2,208 2,410
Business disposed of (1):
Chemical - (743)
-----------------------
4,825 3,129
Unallocated fees from
Services Agreement,
Management Agreement and
general corporate expenses,
net (1,196) (674)
Interest income 410 340
Other income (expense), net 331 (278)
Interest Expense:
Businesses continuing (3,690) (3,493)
Business disposed of -
Chemical - (125)
Provision for loss on firm
purchase commitments -
Chemical (975) -
-----------------------
Loss before
provision for income taxes $ (295) $ (1,101)
========================
(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, Management Agreement, interest expense,
provision for loss on firm purchase commitments,
and income taxes.
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 $30.7 million in the
three months ended March 31, 1999 to $35.1 million in the three
months ended March 31, 2000 and the gross profit (excluding the
Australian subsidiary and the provision for loss on firm purchase
commitments) has increased from $5.0 million in 1999 to $6.1 in
2000. The gross profit percentage (excluding the Australian
subsidiary and the provision for loss on firm purchase
commitments) has increased from 16.2% in 1999 to 17.4% in 2000
primarily as a result of increased industrial acid sales to third
parties and increased volumes to Bayer. Also, ammonium nitrate
sales have increased for agricultural products due to improved
climate conditions, higher sales prices, and increased demand due
to a decrease of imports in Russian nitrate.
As of March 31, 2000, the Chemical Business had commitments
to purchase 90,000 tons of anhydrous ammonia under the take or
pay contract at a minimum volume of 2,000 tons of anhydrous
ammonia during 2000 and 3,000 tons of anhydrous ammonia during
2001 and 2002. The Company's purchase price of anhydrous ammonia
under this contract 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 this contract.
Based on the pricing index contained in this contract, prices
paid during the three months ended March 31, 2000 were higher
than the current market spot price. The purchase price(s) the
Chemical Business will be required to pay for the remaining
90,000 tons of anhydrous ammonia under this contract currently
exceeds and is expected to continue to exceed the spot market
prices throughout the purchase period. In addition, under the
contract the Company is committed to purchase 50% of its
remaining requirements of anhydrous ammonia through 2002 from
this third party at prices which approximate market prices.
Additionally, the excess supply of nitrate based products,
caused, in part, by the import of Russian nitrate, caused a
significant decline in the sales prices during 1999; although
sales prices have improved in 2000 (no improvement in sales
margins is expected in the near term due to increased cost of
anhydrous ammonia). During the second and third quarters of 1999,
this decline in sales price resulted in the cost of anhydrous
ammonia purchased under this contract when combined with
manufacturing and distribution costs, to exceed anticipated
future sales prices. As a result, in 1999 the Company recorded
loss provisions for anhydrous ammonia required to be purchased
during the remainder of the contract aggregating approximately
$8.4 million. At March 31, 2000, an additional loss provision of
approximately $1.0 million was recorded based on the forward
contract pricing existing at March 31, 2000 and estimated market
prices for products to be manufactured and sold during the
remainder of the contract. At March 31, 2000 the accrued
liability for future payments of the loss provision included in
the Condensed Consolidated Financial Statement was approximately
$7.8 million. It is reasonably possible that this loss provision
estimate may change in the near term. 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 estimate. Based on the purchase price of ammonia
under the firm purchase commitment and other factors as of May
31, 2000, the Company may be required to recognize an additional
loss provision of approximately $.2 million in the second quarter
of 2000.
The Chemical Business is a member of an organization of
domestic fertilizer grade ammonium nitrate producers which
sought relief from extremely low priced Russian ammonium
nitrate. This industry group filed a petition in July 1999 with
the U.S. International Trade Commission and the U.S. Department
of Commerce seeking an antidumping investigation and, if
warranted, relief from Russian dumping. The International Trade
Commission has rendered a favorable preliminary determination
that U.S. producers of ammonium nitrate have been injured as a
result of Russian ammonium nitrate imports. In addition, the
U.S. Department of Commerce has issued a preliminary affirmative
determination that the Russian imports were sold at prices that
are 264.59% below their fair market value. On May 19, 2000, the
U.S. and Russian governments entered into an agreement to limit
volumes and set minimum prices for Russian ammonium nitrate
exported to the United States. As a result of this agreement,
the antidumping investigation has been suspended. The U.S.
industry or Russian exporters may, however, request completion of
the investigation. If the investigation is completed with the
final affirmative findings by the Department of Commerce and the
International Trade Commission, an antidumping order will
automatically be put in place in the event of termination or
violation of the agreement.
In May 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 by this subsidiary to Bayer were approximately $7.3 million
during the quarter ended March 31, 2000. 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. See Note 5 of Notes to
Condensed Consolidated Financial Statements.
The Australian subsidiary revenues for the first quarter of
1999 were $2.9 million and the loss was $1.0 million.
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.
Sales in the Climate Control Business have increased from $26.7
million for the three months ended March 31, 1999 to $31.6
million in the three months ended March 31, 2000 and the gross
profit has increased from $8.3 million in 1999 to $8.4 million in
2000. The gross profit percentage has decreased from 31.1% in
1999 to 26.6% in 2000 primarily as a result of lower margins in
the commercial and export heat pump businesses due to increased
competitive pricing and the costs associated with new start-up
product lines.
RESULTS OF OPERATIONS
Three months ended March 31, 2000 vs. Three months ended March
31, 1999.
Revenues
Total revenues, excluding business disposed of, for the
three months ended March 31, 2000 and 1999 were $67.4 million and
$57.7 million, respectively (an increase of $9.7 million). Sales
increased $9.3 million and other income increased $.4 million.
Net Sales
Consolidated net sales, excluding business disposed of,
included in total revenues for the three months ended March 31,
2000 were $66.7 million, compared to $57.4 million for the first
three months of 1999, a increase of $9.3 million. This increase
in sales resulted from: (i) increased sales in the Climate
Control Business of $4.9 million due to an increase in modular
high rise sales, increased export sales and sales contributed by
new start-up companies, (ii) increased sales in the Chemical
Business of $4.4 million. The Chemical Business' sales increased
due to increased industrial acid sales to third parties including
Bayer and ammonium nitrate sales increases for Agricultural
Products due to improved climate conditions and a decrease of
imports in Russian nitrate.
Gross Profit
Gross profit, excluding business disposed of, was 21.8% for
the first three months of 2000, compared to 23.0% for the first
three months of 1999. The decrease in the gross profit
percentage was due primarily to lower margins in the commercial
and export heat pump business due to increased competitive
pricing and the costs associated with new start-up product lines.
This decrease was offset by increased industrial acid sales to
third parties. Also, gross profit from ammonium nitrate sales
increased due to higher sales prices and increased demand.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses,
excluding business disposed of, as a percent of net sales were
16.4% in the three month period ended March 31, 2000, compared to
17.5% for the first three months of 1999. This decrease as a
percentage of sales is primarily the result of higher sales,
however, SG&A expenses are higher in 2000 due to the
restructuring of certain administrative costs relating to the
Company's operations which reassigned personnel and their related
costs to the Companies for which they serve, the costs associated
with new start-up product lines and the management fee to LSB of
$.5 million in 2000 which was not incurred in 1999.
Interest Expense
Interest expense, excluding business disposed of, for the
Company was $3.7 million during the first three months of 2000,
compared to $3.5 million during the first three months of 1999.
The interest expense was consistent due to decreased average
borrowings offset by increased lenders' prime rates.
Provision for Loss on Firm Purchase Commitments
The Company had a provision for loss on firm purchase
commitments of $1.0 million for the three months ended March 31,
2000. 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.
Loss Before Provision for Taxes
The Company had a loss before provision for income taxes of
$.3 million in the first three months of 2000 compared to a loss
before income taxes of $1.1 million in the three months ended
March 31, 1999. The increased profitability of $.8 million was
due to improved profit margins of the Chemical Business offset by
lower margins in the commercial and export heat pump business and
the management fee due to LSB in 2000, as previously discussed.
Provision for Income Taxes
The accompanying Condensed Consolidated Financial Statements
include a provision for income taxes of $50,000 in the first
three months of 1999 on a pre-tax loss of $1.1 million (an
effective rate of 4.6%). The effective rates in 1999 differ from
statutory rates due primarily to the Australian subsidiary
losses. There is no tax provision for the three months ended
March 31, 2000 due to the level of income and the existence of
net operating loss carry-forwards.
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 three months ended
March 31, 2000 was $2.0 million, after $2.2 million for noncash
depreciation and amortization, realization of losses on purchase
commitments of $.4 million, and the following changes in assets
and liabilities: (i) accounts receivable increases of $2.7
million; (ii) inventory increases of $2.5 million;
(iii) decreases in supplies and prepaid items of $.1 million;
(iv) increases in accounts payable and accrued liabilities of
$5.1 million, and (v) an increase of $.5 million due from LSB and
affiliates. The increase in accounts receivable was primarily
due to seasonal sales of agricultural products and sales of
industrial acids in the Chemical Business offset by decreased
days of sales outstanding in the Climate Control Business due to
improved collections. The increase in inventory was due
primarily to increased production in the Climate Control
Business' and an increase in stock units. The Chemical business
inventory increased due to anticipated demands relating to the
spring fertilizer season.
The increase in accounts payable and accrued liabilities
resulted primarily from the accrual of interest expense related
to the Senior Unsecured Notes which is payable semi-annually,
increased purchasing in the heat pump business, and timing of
payments in the industrial acids business. The net increase in
the amounts due from LSB and affiliates relates to accrued
interest on certain notes receivable.
Cash Flow From Investing And Financing Activities
Cash used by investing activities for the three months ended
March 31, 2000 included $2.2 million in capital expenditures, a
net increase of $.6 million in amounts due from LSB and
affiliates related to accrued interest on certain notes
receivable and amounts paid by the Company for services provided
by LSB in 1999 and $1.0 million for decreases in other assets.
The capital expenditures took place in the Chemical and Climate
Control Businesses to enhance production and product delivery
capabilities.
Net cash used by financing activities included proceeds
from long-term debt of $2.3 million, payments on long-term debt
of $1 million and net decreases in revolving debt of $1.5
million.
Source of Funds
The Company owns substantially all of LSB's former Chemical
and Climate Control Businesses. The Company and its subsidiaries
are dependent on credit agreements with lenders and internally
generated cash flow in order to fund their operations and pay
their debts and obligations.
As of March 31, 2000, LSB and certain of its subsidiaries,
including the Company, are parties to a working capital line of
credit evidenced by two separate loan agreements ("Agreements")
with a lender ("Lender") collateralized by receivables,
inventories and proprietary rights of the parties to the
Agreements. The Agreements have been amended from time to time
since inception to accommodate changes in business conditions and
financial results. This working capital line of credit is the
primary source of liquidity for LSB and the Company.
The Agreements, as amended, required LSB and the Company to
maintain certain financial ratios and contain other financial
covenants, including capital expenditure limitations. In 1999,
the Company's financial covenants were not required to be met so
long as LSB and its subsidiaries, including the Company that are
parties to the Agreements, maintained a minimum aggregate
availability under the Revolving Credit Facility of $15.0
million. When availability dropped below $15.0 million for three
consecutive business days, LSB and the Company were required to
maintain the financial ratios discussed above and tangible net
worth requirements. Due to an interest payment of $5.6 million
made by the Company on December 30, 1999, relating to the
outstanding $105 million Senior Unsecured Notes ("Senior Notes"),
the availability dropped below the minimum aggregate availability
level required on January 1, 2000. Because LSB and the Company
could not meet the financial ratios required by the Agreements,
LSB and the Company entered into a forbearance agreement with the
Lender effective January 1, 2000. The forbearance agreement
waived the financial covenant requirements for a period of sixty
(60) days.
Prior to the expiration of the forbearance agreement, the
Agreements were amended, to provide for total direct borrowings
of $50.0 million including the issuance of letters of credit.
The maximum borrowing ability under the newly amended Agreements
is the lesser of $50.0 million or the borrowing availability
calculated using advance rates and eligible collateral less $5.0
million. The amendment increased the interest rates on
outstanding borrowings from the Lender's prime rate plus .5% per
annum to the Lender's prime rate plus 1.5% per annum the
Company's LIBOR interest rate option, or at the Lender's LIBOR
rate plus 3.875% per annum, from 2.875%. The term of the
Agreements is through December 31, 2000, and is renewable
thereafter for successive thirteen-month terms if, by October 1,
2000, LSB, the Company and Lender shall have determined new
financial covenants for the calendar year beginning on January
2001.
In April 2000, the Company repurchased $5.0 million of the
Senior Notes for approximately $1.2 million. The Company funded
the repurchase of the Senior Notes out of its working capital.
As of March 31, 2000 LSB, exclusive of the Company, and the
Company has a borrowing availability under their existing
revolver of $.3 million, and $13.6 million respectively, or $13.9
million in the aggregate and the effective interest rate was
10.5%. Borrowings under the Revolver outstanding at March 31,
2000, were $23.6 million, $25.8 million including the borrowings
of Non-ClimaChem companies. The annual interest on the
outstanding debt under the Revolver at March 31, 2000, at the
rates then in effect would approximate $2.5 million. The
Agreements also restrict the flow of funds, except under certain
conditions, to subsidiaries of the Company that are not parties
to the Agreement.
In addition to the credit facilities discussed above, as of
December 31, 1999, the Company's wholly-owned subsidiary, DSN
Corporation ("DSN"), is a party to three loan agreements with a
financial company (the "Financing Company") for three projects.
At March 31, 2000, DSN had outstanding borrowings of $7.5 million
under these loans. The loans have monthly repayment schedules 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 March 31,
2000, at the agreed to interest rates would approximate $.7
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 March, 2000, DSN obtained a waiver from the
Financing Company of the covenants financials through April 1,
2001.
During January 2000, a subsidiary of the Company obtained
financing up to $3.5 million with the City of Oklahoma City
("Lender") to finance the working capital requirements of Climate
Control's new product line of large air handlers ("Interim
financing"). The Interim financing agreement does not require
principal payments and bears interest at the LIBOR rate plus two-
tenths of one percent (.2%) per annum. The Interim financing will
be replaced with permanent financing upon the Lender's completion
of a public offering at which time the outstanding borrowings
will bear interest at LIBOR plus two-tenths of one percent (.2%)
per annum, adjusted monthly due semi-annually. Principal
payments will be required annually based on a term of sixteen
(16) years but based on a twenty (20) year amortization period.
The balance of the principal and interest is due at the end of
the sixteen year term. The loan is secured by a mortgage on the
manufacturing facility and a separate unrelated parcel of land
owned by a subsidiary of LSB.
The Company is restricted as to the funds that it may
transfer to LSB under the terms contained in an Indenture
("Indenture") covering the $105 million in Unsecured Senior Notes
issued by the Company. Under the terms of the indenture, the
Company cannot transfer funds to LSB, except for (i) the amount
of income taxes that they would be required to pay if they were
not consolidated with LSB, (the "Tax Sharing Agreement"), (ii) an
amount not to exceed fifty percent (50%) of the Company's
cumulative net income from January 1, 1998 through the end of the
period for which the calculation is made for the purpose of
proposing a dividend payment, and (iii) the amount of direct and
indirect costs and expenses incurred by LSB on behalf of the
Company and the Company's subsidiaries pursuant to a certain
services agreement and a certain management agreement to which
the companies are parties. The Company sustained a net loss of
$19.2 million in the calendar year 1999, and had a net loss of
$.3 million for the first quarter of 2000. Accordingly, no
amounts were paid to LSB by the Company under the Tax Sharing
Agreement during 1999 and the three months ended March 31, 2000
and based on the Company's cumulative losses at March 31, 2000,
and current estimates for the results of operations for the year
ended December 31, 2000, none are expected during the remainder
of 2000. For the three months ended March 31, 2000, EBITDA as
defined in the Management Agreement exceeded $6.5 million by more
than $450,000, thus the quarterly management fee to LSB of $450,000
was expensed in the Condensed Consolidated Statement of Operations
for the period then ended. This managmement fee also served to
reduce the amount due from LSB and affiliates in the Condensed
Consolidated Balance Sheet as of March 31, 2000. No management
fee was earned or paid to LSB in 1999. See Note 3 of Notes to
Condensed Consolidated Financial Statements for discussion of
the "Service Agreement" and "Management Agreement".
Beginning January 1, 2000, the Company began to pay directly
to service providers and employees, the majority of the costs for
services, that it has historically reimbursed to LSB.
LSB and its subsidiaries other than the Company and its
subsidiaries and excluding LSB's Automotive Products Business,
(the "LSB Non-ClimaChem Entities") are dependent upon their
separate cash flows and the restricted funds which can be
distributed by the Company under the above mentioned agreements.
As of March 31, 2000, the LSB Non-ClimaChem Entities, excluding
the Automotive Products Business, had a working capital deficit
of $3.4 million (including $4.0 million of inventories and $3.4
million of accounts receivable), and long-term debt of $32.9
million (including that owed by the Company). For the three months
ended March 31, 2000, the LSB Non-ClimaChem Entities had net income
approximately of $.5 million. LSB is focusing its efforts and
resources on its core businesses, primarily represented by
ClimaChem. On April 5, 2000 LSB's Board of Directors approved a
plan for the disposal of its Automotive Products Business. The
plan called for management to dispose of the Automotive Business
through a sale which was concluded on May 4, 2000. LSB is also
realigning its overhead to better match its focus on the Chemical
and Climate Control Businesses of the Company. Based on these
plans, management of LSB believes the LSB Non-ClimaChem Entities
will have sufficient operating capital to meet its obligations as
they come due, including those to the Company. If LSB management
is not successful in executing this plan, including realignment
of overhead to reduce its operating costs or realizing certain
excess and non-core assets, and if 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,
which aggregate $16.4 million at March 31, 2000 may not be
recoverable. As of March 31, 2000, 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; however, it is reasonably possible
that the evaluation relative to the amounts due from LSB and
its subsidiaries could change in the near future.
For the remainder of 2000, the Company has planned capital
expenditures of approximately $7.3 million. These capital
expenditures include approximately $2.0 million, which the
Chemical Business plans to spend under consent orders with the
State of Arkansas related to environmental control facilities at
its El Dorado facility, as previously discussed in this report.
The Company is currently exploring alternatives to finance these
capital expenditures. There are no assurances that the Company
will be able to arrange financing for its capital expenditures.
Failure to be able to make a substantial portion of these capital
expenditures, including those related to environmental matters,
could have a material adverse effect on the Company.
In March 2000, the Company retained Chanin Capital Partners
as its financial advisor to assist in evaluating alternatives
relating to the Company's liquidity and determining its
alternatives for financial restructuring. As part of the
Company's restructuring, the Company and its financial advisor
have begun discussions with an ad hoc committee of holders of the
Senior Notes, to repurchase and or restructure the Senior Notes
in order to reduce the Company's leverage and increase its equity
capitalization. The Company did not make the June 1, 2000
interest payment of $5.4 million on the Senior Notes (excluding
interest on the $5.0 million of Senior Notes repurchased by the
Company). Under the terms of the indenture governing the Senior
Notes, the Company has a grace period of 30 days to make the
interest payment or enter into satisfactory agreements with the
holders of the Senior Notes before the Senior Notes are in
default. The Company currently anticipates achieving
satisfactory resolution of this matter.
Further, as part of its restructuring of its indebtedness,
the Company has also initiated discussions to obtain a new credit
facility or expanded credit facility to repurchase the Senior
Notes and/or to replace its existing working capital lender.
As previously stated, LSB the parent of the Company, owes the
Company approximately $16.4 million, of with $10.0 million bears
an annual rate of interest of 10_%, payable semiannually on June
1 and December 1, and the principal due in 2007. The
semiannually interest payments of approximately $.5 million due
June 1, 2000, on the $10.0 million note, was not paid by LSB.
LSB has a 30-day grace period in which to pay the interest payment.
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 United States. 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 a percentage 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 interest in the results of operations since the
date of acquisition from LSB through March 31, 2000 was not
material.
Contingencies
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome. The preceding sentence is a forward looking statement
that involves a number of risks and uncertainties that could
cause actual results to differ materially, such as, among other
factors, the following: 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, 1999, for an expanded analysis
of expected maturities of long term debt and its weighted average
interest rates and discussion related to raw material price risk.
As of March 31, 2000, the Company's variable rate and fixed
rate debt, which aggregated $142.1 million, exceeded the debt's
fair market value by approximately $89.3 million ($78.8 million
at December 31, 1999). The fair value of the Company's Senior
Notes was determined based on a market quotation for such
securities.
Raw Material Price Risk
The Company has a remaining commitment at March 31, 2000 to
purchase 90,000 tons of anhydrous ammonia under a contract. The
Company's purchase price can be higher or lower than the current
market spot price. As of March 31, 2000, based on the forward
contract pricing expected during the remaining contract term and
estimated market prices for certain products to be manufactured
and sold during the remainder of the contract, a provision for
losses during the remainder of the purchase period of $1.0
million was recorded in the three months ended March 31, 2000.
See Note 6 of Notes to Condensed Consolidated Financial
Statements.
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
include, among other things, (i) ability to improve operations
and become profitable, (ii) establishing a position as a market
leader, (iii) the amount of the loss provision for anhydrous
ammonia required to be purchased or that the cost to produce
Chemical Business products will improve, (iv) declines in the
price of anhydrous ammonia, (v) obtaining a general ruling as to
Russian dumping of anhydrous ammonia (vi) amount to be spent
relating to compliance with federal, state and local
Environmental laws at the El Dorado Facility, (vii) improving
LSB's liquidity and profits through liquidation of assets or
realignment of assets or some other method, (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, (xi) adequate cash flows to meet its
presently anticipated capital requirements, (xii) ability of the
EDNC Baytown Plant to generate approximately $35 million in
annual gross revenues, (xiii) ability to make required capital
improvement, (xiv) ability to collect amounts owing to the
Company by LSB, (xv) LSB non-ClimaChem entities ability to pay
its obligations as they come due, (xvi) anticipated cost of
certain amounts of anhydrous ammonia exceed the market, (xvii) no
improvements in the gross margin of certain nitrate based
products of the Chemical Business is expected in the near future
due to increased cost of anhydrous ammonia, and (xviii) the
Company currently anticipates achieving satisfactory resolution
of the non-payment of the June 1, 2000 interest payment on its 10
3/4% Senior Notes due 2007. 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) changes in federal, state and local laws and
regulations, especially environmental regulations, or in
interpretation of such, pending (vii) additional releases
(particularly air emissions into the environment), (viii)
material increases in equipment, maintenance, operating or labor
costs not presently anticipated by the Company, (ix) the
requirement to use internally generated funds for purposes not
presently anticipated, (x) ability to become profitable, or if
unable to become profitable, the inability to secure additional
liquidity in the form of additional equity or debt, (xi) 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, (xii) changes in competition,
(xiii) the loss of any significant customer, (xiv) changes in
operating strategy or development plans, (xv) inability to fund
the working capital and expansion of the Company's businesses,
(xvi) adverse results in any of the Company's pending litigation,
(xvii) inability to obtain necessary raw materials, (xviii)
Bayer's inability or refusal to purchase all of the Company's
production at the new Baytown nitric acid plant; (xix) continuing
decreases in the selling price for the Chemical Business'
nitrogen based end products, (xx) ability of LSB to restructure
its payables, and (xxi) 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.
Independent Accountants' Review Report
Board of Directors
ClimaChem, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of ClimaChem, Inc. and subsidiaries as of March 31, 2000,
and the related condensed consolidated statements of operations
and cash flows for the three-month periods ended March 31, 2000
and 1999. 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 auditing standards generally accepted in the
United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance
sheet of ClimaChem, Inc. as December 31, 1999, 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 March 17, 2000, 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 31,1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 30, 2000
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, 1999, 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
In March 2000, the Company retained Chanin Capital Partners
as its financial advisor to assist in evaluating alternatives
relating to the Company's liquidity and determining its
alternatives for financial restructuring. As part of the
Company's restructuring, the Company and its financial advisor
have begun discussions with an ad hoc committee of the holders
of the Senior Notes to repurchase and or restructure the Senior
Notes in order to reduce the Company's leverage and increase its
equity capitalization. The Company did not make the June 1, 2000
interest payment of approximately $5.4 million on the Senior
Notes (excluding interest on the $5.0 million of Senior Notes
repurchased by the Company). Under the terms of the indenture
governing the Senior Notes, the Company has a grace period of 30
days to make the interest payment or enter into an agreement
satisfactory with the holders of the Senior Notes. The Company
currently anticipates achieving satisfactory resolution of this
matter.
LSB, the parent of the Company, owes the Company
approximately $16.4 million as of May 31, 2000, of which $10.0
million bears an annual interest rate of 10_%, payable semi-
annually on June 1 and December 1 and the principal due in 2007.
The semi-annual interest payment due on the $10.0 million of
approximately $.5 million due on June 1, 2000 was not paid by
LSB. LSB has 30-day grace period in which to pay the interest
payment.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits.
The Company has included the following exhibits in this
report:
10.1 Covenant waiver letter, dated April 10, 2000, with
CIT Group, which is incorporated by reference from
exhibit 10.50 to LSB Industries, Inc. ("LSB")
Amendment No 2 to its 1999 Form 10-K;
10.2 Seventh Amendment to Amended and Restated Loan and Security
Agreement, which the Company incorporates by reference from
exhibit 10.2 to the Company's Form 8-K, dated December 30, 1999;
10.3 Amendment to Anhydrous Ammonia Sales Agreement, dated
January 4, 2000, to be effective October 1, 1999, between Koch
Nitrogen Company and El Dorado Chemical Company, which is
incorporated by reference from LSB's Amendment No 2 to its 1999
Form 10-K. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION
HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.4 Anhydrous Ammonia Sales Agreement, dated January, 12, 2000,
to be effective October 1, 1999, between Koch Nitrogen and El
Dorado Chemical Company, which is incorporated by reference from
exhibit 10.44 to LSB's Amendment No 2 to its 1999 Form 10-K.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF A REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND
EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.
10.5 Eighth Amendment to Amended and Restated Loan and Security
Agreement dated March 1, 2000, by and between Bank of America,
N.A., which is incorporated by reference from exhibit 10.2 to
LSB's Form 8-K dated March 1, 2000.
10.6 Waiver of non-compliance of certain covenants
through April 1, 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 10.46 to LSB Industries,
Inc.'s Form 10-K for the year ended December 31,
1999.
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 March 31,
2000:
(i) Form 8-K, dated January 12, 2000 (date of event:
December 30, 1999). The item reported was Item 5
"Other Events" discussing the payment of the
December 1, 1999 interest payment on the Company's
outstanding 10 3/4% Senior Notes due 2007.
(ii) Form 8-K, dated March 10, 2000 (date of event:
March 1, 2000). The item reported was Item 5
"Other Events" discussing the amendment of the
Company's credit facility.
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 8th day of
June, 2000.
CLIMACHEM, INC.
By:
Tony M. Shelby,
Vice President - Chief Financial
Officer, (Principal Financial
Officer)
By:
Jim D. Jones
Vice President - Treasurer
(Principal Accounting Officer)
