UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to ___________
Commission File Number:
CLIMACHEM, INC.
(Exact Name of Registrant as Specified in its Charter)
Oklahoma 73-1528549
_______________________ ______________________
(State of Incorporation) (I.R.S. Employer
Identification No.)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
_______________________________________ ___________
(Address of Principal Executive Officers) (Zip Code)
Registrant's Telephone Number, Including Area Code: (405) 235-4546
_______________
Securities Registered Pursuant to Section 12(b) of the Act: NONE
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(Facing Sheet Continued)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for the
shorter period that the Registrant has had to file the reports),
and (2) has been subject to the filing requirements for the past
90 days. YES X NO ____.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __________. This paragraph is not
applicable to the Registrant.
All outstanding shares of capital stock of the registrant
are held directly or indirectly by the registrant's parent
company, LSB Industries, Inc.
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FORM 10-K CLIMACHEM, INC.
TABLE OF CONTENTS
Page
______
PART I
Item 1. Business
General 1
Segment Information and Foreign
and Domestic Operations and Export Sales 2
Chemical Business 2
Climate Control Business 7
Employees 9
Research and Development 9
Environmental Matters 9
Item 2. Properties
Chemical Business 12
Climate Control Business 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a vote of Security Holders 14
Item 4A. Executive Officers of the Company 15
PART II
Item 5. Market for Company's Common Equity
and Related Stockholder Matters 16
Market Information 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview 19
Results of Operations 27
Liquidity and Capital Resources 30
Impact of Year 2000 35
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
General 35
Interest Rate Risk 35
Raw Material Price Risk 38
Foreign Currency Risk 38
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Page
____
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
Special Note Regarding Forward-Looking Statements 39
PART III 40
PART IV 41
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 42
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PART I
______
Item 1. BUSINESS
_________________
General
_______
The Company, a wholly owned subsidiary of LSB Industries,
Inc. ("LSB"), is engaged, through its subsidiaries, in the
manufacture and sale of (i) chemical products for the
explosives, agricultural and industrial acids markets (the
"Chemical Business"), and (ii) a broad range of hydronic fan
coils and water source heat pumps as well as other products used
in commercial and residential air conditioning systems (the
"Climate Control Business").
Business Strategy
_________________
The Company is pursuing a strategy of concentrating on
businesses and product lines in niche markets where it can
establish a position as a market leader. The Company believes
that it can maximize its long-term profitability by offering
specialized products and value-added services to its customers.
See "Special Note Regarding Forward-Looking Statements".
The Chemical Business seeks to maximize profitability by (i)
being a low cost producer, (ii) focusing on a specific geographic
area where it can develop a freight and distribution advantage
and establish a leading regional presence, (iii) offering value
added services as a means of building customer loyalty, and (iv)
continuing to alter the product mix towards higher margin
products. The Company has developed a geographic advantage in
the Texas, Arkansas, Missouri and Tennessee agricultural markets
by establishing an extensive network of wholesale and retail
distribution centers for nitrogen-based fertilizer tailored
toward regional farming practices and by providing value added
services. The Company has also developed a proprietary line
of explosives through a nationally recognized branded product.
Given the nature of the product, the Company believes its
branding strategy, emphasizing quality, safety and reliability,
gives it a competitive advantage over less recognized
explosive products. See "Special Note Regarding
Forward-Looking Statements."
The Climate Control Business seeks to establish leadership
positions in niche markets by offering extensive product lines,
custom tailored products and proprietary new technologies. Under
this focused strategy, the Company has developed an
extensive line of hydronic fan coils and water source heat pumps
in the U.S. The Company has developed flexible production to
allow it to custom design units for the growing retrofit and
replacement markets. The Company believes that the Climate
Control Business is one of the leaders in commercializing new
technology to satisfy increasingly stringent indoor air quality
standards. Products recently developed by the Company include
heat pump technology for dehumidification, specialty filters for
the removal of airborne particles and gases, ultraviolet light
units for bacteria removal and highly energy efficient dual path
heat pump products. The Climate Control Business is a pioneer in
the use of geothermal water source heat pumps in residential and
commercial applications. The Company believes that longer life,
lower cost to operate, and relatively short paycheck periods
of geothermal systems, as compared with air-to-air systems, will
continue to increase demand for its geothermal products. See
"Special Note Regarding Forward-Looking Statements."
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Segment Information and Foreign and Domestic Operations and Export Sales
________________________________________________________________________
Schedules of the amounts of sales, operating profit and
loss, and identifiable assets attributable to each of the
Company's lines of business and of the amount of export sales of
the Company in the aggregate and by major geographic area for
each of the Company's last three fiscal years appear in Note 13
of the Notes to Consolidated Financial Statements included
elsewhere in this report.
A discussion of any risks attendant as a result of a foreign
operation or the importing of products from foreign countries
appears below in the discussion of each of the Company's
business segments.
All discussions which follow are that of the Businesses
continuing and accordingly exclude the Australian subsidiary
operations sold during 1999. See Note 4 of Notes to the
Consolidated Financial Statements.
Chemical Business
_________________
General
_______
The Company's Chemical Business manufactures three principal
product lines that are derived from anhydrous ammonia: (1)
fertilizer grade ammonium nitrate for the agricultural industry,
(2) explosive grade ammonium nitrate for the mining industry and
(3) concentrated, blended and mixed nitric acid for industrial
applications. In addition, the Company also produces sulfuric
acid for commercial applications primarily in the paper industry.
The Chemical Business' products are sold in niche markets where
the Company believes it can establish a position as a market
leader. See "Special Note Regarding Forward-Looking Statements".
The Chemical Business' principal manufacturing facility is
located in El Dorado, Arkansas ("El Dorado Facility"), and its
other manufacturing facilities are located in Hallowell, Kansas,
Wilmington, North Carolina, and Baytown, Texas.
For each of the years 1999, 1998 and 1997, approximately
26%, 29% and 31% of the respective sales of the Chemical Business
consisted of sales of fertilizer and related chemical products
for agricultural purposes, which represented approximately 14%,
15% and 17% of the Company's consolidated sales for each
respective year. For each of the years 1999, 1998, and 1997
approximately 35%, 47% and 53% of the sales of the Chemical
Business consisted of sales of ammonium nitrate and other chemical-
based blasting products for the mining industry, which
represented approximately 18%, 24% and 29% of the
Company's 1999, 1998 and 1997 consolidated sales of,
respectively. For each of the years 1999, 1998 and 1997,
approximately 39%, 24% and 16% of the sales of the Chemical
Business consisted of Industrial Acids for sale in the food,
paper, chemical and electronics industries, which represented
approximately 20%, 13% and 9% of the Company's 1999, 1998 and
1997 consolidated sales respectively. Sales of the Chemical
Business accounted for approximately 52%, 52% and 55% of the
Company's 1999, 1998 and 1997 consolidated sales, respectively.
Agricultural Products
_____________________
The Chemical Business produces ammonium nitrate, a nitrogen-
based fertilizer, at the El Dorado Facility. In 1999, the
Company sold approximately 135,000 tons of ammonium nitrate
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fertilizer to farmers, fertilizer dealers and distributors
located primarily in the south central United States
(143,000 and 184,000 tons in 1998 and 1997, respectively).
Ammonium nitrate is one of several forms of nitrogen-based
fertilizers which includes anhydrous ammonia and urea. Although,
to some extent, the various forms of nitrogen-based fertilizers
are interchangeable, each has its own characteristics which
produce agronomic preferences among end users. Farmers decide
which type of nitrogen-based fertilizer to apply based on the
crop planted, soil and weather conditions, regional farming
practices and relative nitrogen fertilizer prices.
The Chemical Business is a manufacturer of fertilizer grade
ammonium nitrate, which it markets primarily in Texas, Arkansas
and the surrounding regions. This market, which is in close
proximity to its El Dorado Facility, includes a high
concentration of pasture land and row crops which favor ammonium
nitrate over other nitrogen-based fertilizers. The Company has
developed a leading market position in Texas by emphasizing high
quality products, customer service and technical advice. Using a
proprietary prilling process, the Company produces a high
performance ammonium nitrate fertilizer that, because of its
uniform size, is easier to apply than many competing nitrogen-
based fertilizer products. The Company believes that its "E-2"
brand ammonium nitrate fertilizer is recognized as a premium
product within its primary market. In addition, the Company has
developed long term relationships with end users through its
network of 20 wholesale and retail distribution centers.
In 1998 and 1999, the Chemical Business has been adversely
affected by the drought conditions in the mid-south market during
the primary fertilizer season, along with the importation of low
priced Russian ammonium nitrate, resulting in lower sales volume
and lower sales price for certain of its products sold in its
agricultural markets. The Chemical Business is a member of an
organization of domestic fertilizer grade ammonium nitrate
producers which is seeking relief from unfairly 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 were
264.59% below their fair market value. As a result of the Commerce
Department's preliminary ruling, all imports of Russian ammonium
nitrate are currently subject to potential antidumping duty
liability. The Department of Commerce is due to issue a final
determination by May 22, 2000 and the International Trade
Commission by July 5, 2000. The relief currently in place will
remain only if both agencies make final affirmative
determinations. It is not known, therefore, whether the
antidumping action will be successful upon conclusion of the U.S.
Government's investigation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Special Note Regarding Forward-Looking Statements".
Explosives
__________
The Chemical Business manufactures low density ammonium
nitrate-based explosives including bulk explosives used in
surface mining. In addition, the Company manufactures and sells
a branded line of packaged explosives used in construction,
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quarrying and other applications, particularly where controlled
explosive charges are required. The Company's bulk explosives
are marketed primarily through eight distribution centers, five
of which are located in close proximity to the customers'
surface mines in the coal producing states of Kentucky, Missouri,
Tennessee, and West Virginia. The Company emphasizes value-added
customer services and specialized product applications for its
bulk explosives. Most of the sales of bulk explosives are to
customers who work closely with the Company's technical
representatives in meeting their specific product needs. In
addition, the Company sells bulk explosives to independent
wholesalers and to other explosives companies. Packaged
explosives are used for applications requiring controlled
explosive charges and typically command a premium price and
produce higher margins. The Company's Slurry packaged explosive
products are sold nationally and internationally to other
explosive companies and end-users.
In August, 1999, the Company sold substantially all the
assets of its wholly owned Australian subsidiary, Total Energy
Systems Limited and its subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 of Notes to Consolidated Financial
Statements.
Industrial Acids
________________
The Chemical Business manufactures and sells industrial
acids, primarily to the food, paper, chemical and electronics
industries. The Company is a leading supplier to third parties
of concentrated nitric acid which is a special grade of nitric
acid used in the manufacture of plastics, pharmaceuticals,
herbicides, explosives, and other chemical products. In
addition, the Company produces and sells regular, blended and
mixed nitric acid and a variety of grades of sulfuric acid. The
Company competes on the basis of price and service, including on-
time reliability and distribution capabilities. The company
provides inventory management as part of the value-added
services it offers to its customers.
EDNC Baytown Plant
__________________
Subsidiaries within the Company's Chemical Business entered
into a series of agreements with Bayer Corporation ("Bayer")
(collectively, the "Bayer Agreement"). Under the Bayer
Agreement, El Dorado Nitrogen Company ("EDNC") acted as an agent
to construct and, upon completion of construction, is operating a
nitric acid plant (the "EDNC Baytown Plant") at Bayer's Baytown,
Texas chemical facility.
Under the terms of the Bayer Agreement, EDNC leases the EDNC
Baytown Plant pursuant to a leveraged lease from an unrelated
third party with an initial lease term of ten years from the date
on which the EDNC Baytown Plant became fully operational (in May
1999). Bayer will purchase from EDNC all of its requirements for
nitric acid to be used by Bayer at its Baytown, Texas facility
for ten years following May 1999. EDNC will purchase from Bayer
its requirements for anhydrous ammonia for the manufacture of
nitric acid as well as utilities and other services. Subject to
certain conditions, EDNC is entitled to sell to third parties the
amount of nitric acid manufactured at the EDNC Baytown Plant
which is in excess of Bayer's requirements. The Bayer Agreement
provides that Bayer will make certain net monthly payments to
EDNC which will be sufficient for EDNC to recover all of its
costs, as defined, plus a profit. The Company estimates that at
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full production capacity based on terms of the Bayer Agreement
and subject to the price of anhydrous ammonia, the EDNC Baytown
Plant is anticipated to generate approximately $35 million in
annual gross revenues. See "Special Note Regarding Forward-
Looking Statements". Upon expiration of the initial ten-year
term from the date the EDNC Baytown Plant became operational, the
Bayer Agreement may be renewed for up to six renewal terms of
five years each; however, prior to each renewal period, either
party to the Bayer Agreement may opt against renewal.
EDNC and Bayer have an option to terminate the Bayer
Agreement upon the occurrence of certain events of default if not
cured. Bayer retains the right of first refusal with respect to
any bona fide third-party offer to purchase any voting stock of
EDNC or any portion of the EDNC Baytown Plant.
In January, 1999, the contractor constructing the EDNC
Baytown Plant informed the Company that it could not complete
construction alleging a lack of financial resources. The Company
and certain other parties involved in this project demanded the
contractors bonding company to provide funds necessary for
subcontractors to complete construction. The Company, the
contractor, the bonding company and Bayer entered into an
agreement which provided that the bonding company pay $12.9
million for payments to subcontractors for work performed prior
to February 1, 1999. In addition, the contractor agreed to
provide, on a no cost basis, project management and to incur
certain other additional costs through the completion of the
contract. Because of this delay, an amendment was entered into
in connection with the Bayer Agreement. The amendment extended
the requirement date that the plant be in production to May 31,
1999, and fully operational by June 30, 1999. The construction
of the EDNC Baytown Plant was completed in May 1999, and EDNC
began producing and delivering nitric acid to Bayer at that time.
Sales by EDNC to Bayer out of the EDNC Baytown Plant production
during 1999, were approximately $17.2 million. 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. See "Special Note Regarding Forward-Looking
Statements" and Note 2 of Notes to Consolidated Financial
Statements.
Raw Materials
_____________
Anhydrous ammonia represents the primary component in the
production of most of the products of the Chemical Business. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Chemical business normally purchases
approximately 200,000 tons of anhydrous ammonia per year for use
in its manufacture of its products. Due to lower sales in 1999,
the Company's purchases of anhydrous ammonia were approximately
151,000 tons.
During 1999, the Chemical Business purchased its raw
material requirements of anhydrous ammonia from three suppliers
at an average cost per ton of approximately $145 compared to
approximately $154 per ton in 1998 and approximately $184 per ton
in 1997. During the second half of 1999, the majority of the
Chemical Business' raw material purchases were made under one
contract as supply contracts with the other two suppliers were
terminated. In October, 1999, the Chemical Business renegotiated
its remaining contract, which provides the Chemical Business with
an extended term to purchase the anhydrous ammonia it was
required to purchase as of December 31, 1999 (96,000 tons).
Under the renegotiated contract, the Chemical Business is to
purchase the 96,000 tons at a minimum of 2,000 tons of anhydrous
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ammonia per month during 2000 and 3,000 tons per month in 2001
and 2002, at prices which could exceed or be less than the then
current spot market price for anhydrous ammonia. In addition,
under the renegotiated requirements contract the Company is
committed to purchase 50% of its total requirements of
anhydrous ammonia through 2002 from this third party at prices
which will approximated the then current spot market price. In
January, 2000, the supplier under this requirement contract
agreed to supply the Chemical Business other requirements for
anhydrous ammonia for a one (1) year term at approximately the
then current spot market price, which one (1) year agreement is
terminable on 120 days notice.
During the second half of 1998 and during 1999, an excess
supply of nitrate based products, caused, in part, by the import
of Russian nitrate, caused a significant decline in the sales
prices. This decline in sales price has resulted in the cost of
anhydrous ammonia purchased under the above contract when
combined with manufacturing and distribution costs, to exceed
anticipated future sales prices. See "Special Note Regarding
Forward-Looking Statements" and Note 12 of Notes to Consolidated
Financial Statements.
The Company believes that it could obtain anhydrous ammonia
from other sources in the event of a termination of the above-
referenced contract.
Seasonality
___________
The Company believes that the only seasonal products of
the Chemical Business are fertilizer and related chemical
products sold to the agricultural industry. The selling seasons
for those products are primarily during the spring and fall
planting seasons, which typically extend from February through
May and from September through November in the geographical
markets in which the majority of the Company's agricultural
products are distributed. As a result, the Chemical Business
increases its inventory of ammonium nitrate prior to the
beginning of each planting season. Sales to the agricultural
markets depend upon weather conditions and other circumstances
beyond the control of the Company. The agricultural markets
serviced by the Chemical Business have sustained a drought
resulting in a lack of demand for the Chemical Business'
fertilizer products during the 1998 and 1999 fall and spring
planting seasons and have had a material adverse effect of the
Company.
Regulatory Matters
__________________
Each of the Chemical Business' domestic blasting product
distribution centers are licensed by the Bureau of Alcohol,
Tobacco and Firearms in order to manufacture and distribute
blasting products. The Chemical Business is also subject to
extensive federal, state and local environmental laws, rules and
regulations. See "Environmental Matters" and "Legal
Proceedings".
Competition
___________
The Chemical business competes with other chemical companies
in its markets, many of whom have greater financial and other
resources than the Company. The Company believes that
competition within the markets served by the Chemical Business is
primarily based upon price, service, warranty and product
performance.
Developments in Asia
____________________
During 1999, the Chemical Business sold substantially
all of the assets of its Australian subsidiary.
See "Management's Discussion and Analysis of Financial Condition
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and Results of Operations" and Note 4 to Consolidated Financial
Statements for a discussion of the terms of the sale and the loss
sustained by the Company as a result of the disposition of the
Chemical Business' Australian subsidiary.
Climate Control Business
________________________
General
_______
The Company's Climate Control Business manufactures and
sells a broad range of standard and custom designed hydronic fan
coils and water source heat pumps as well as other products for
use in commercial and residential heating ventilation and air
conditioning ("HVAC") systems. Demand for the Climate Control
Business' products is driven by the construction of commercial,
institutional and residential buildings, the renovation of
existing buildings and the replacement of existing systems. The
Climate Control Business' commercial products are used in a wide
variety of buildings, such as: hotels, motels, office buildings,
schools, universities, apartments, condominiums, hospitals,
nursing homes, extended care facilities, supermarkets and
superstores. Many of the Company's products are targeted to meet
increasingly stringent indoor air quality and energy efficiency
standards. The Climate Control Business accounted for
approximately 48%, 48% and 45% of the Company's 1999, 1998 and
1997 consolidated sales, respectively.
Hydronic Fan Coils
__________________
The Climate Control Business is a leading provider of
hydronic fan coils targeted to the commercial and institutional
markets in the U.S. Hydronic fan coils use heated or chilled
water, provided by a centralized chiller or boiler through a
water pipe system, to condition the air and allow individual room
control. Hydronic fan coil systems are quieter and have longer
lives and lower maintenance costs than comparable systems used
where individual room control is required. The breadth of the
product line coupled with customization capability provided by a
flexible manufacturing process are important components of the
Company's strategy for competing in the commercial and
institutional renovation and replacement markets. See "Special
Note Regarding Forward-Looking Statements".
Water Source Heat Pumps
_______________________
The Company is a leading U.S. provider of water source heat
pumps to the commercial construction and renovation markets.
These are highly efficient heating and cooling units which enable
individual room climate control through the transfer of heat
through a water pipe system which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to
large sized buildings with many small, individually controlled
spaces. The Company believes the market for commercial water
source heat pumps will continue to grow due to the relative
efficiency and long life of such systems as compared to other air
conditioning and heating systems, as well as to the emergence of
the replacement market for those systems. See "Special Note
Regarding Forward-Looking Statements".
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Geothermal Products
___________________
The Climate Control Business is a pioneer in the use of
geothermal water source heat pumps in residential and commercial
applications. Geothermal systems, which circulate water or
antifreeze through an underground heat exchanger, are among the
most energy efficient systems available. The Company believes
the longer life, lower cost to operate, and relatively short
payback periods of geothermal systems, as compared with air-to-
air systems, will continue to increase demand for its geothermal
products. The Company is specifically targeting new residential
construction of homes exceeding $200,000 in value. See "Special
Note Regarding Forward-Looking Statements".
Hydronic Fan Coil and Water Source Heat Pump Market
____________________________________________________
The Company has pursued a strategy of specializing in
hydronic fan coils and water source heat pump products. The
annual U.S. market for hydronic fan coils and water source heat
pumps is approximately $325 million. Demand in these markets is
generally driven by levels of repair, replacement, and new
construction activity. The U.S. market for fan coils and water
source heat pump products has grown on average 14% per year over
the last 4 years. This growth is primarily a result of new
construction, the aging of the installed base of units, the
introduction of new energy efficient systems, upgrades to central
air conditioning and increased governmental regulations
restricting the use of ozone depleting refrigerants in HVAC
systems.
Production and Backlog
______________________
Most of the Climate Control Business' production of the
above-described products occurs on a specific order basis. The
Company manufactures the units in many sizes and configurations,
as required by the purchaser, to fit the space and capacity
requirements of hotels, motels, schools, hospitals, apartment
buildings, office buildings and other commercial or residential
structures. As of December 31, 1999, the backlog of confirmed
orders for the Climate Control Business was approximately $22.1
million as compared to approximately $21.1 million at December
31, 1998. A customer generally has the right to cancel an order
prior to the order being released to production. Past experience
indicates that customers generally do not cancel orders after the
Company receives them. As of February 29, 2000, the Climate
Control Business had released substantially all of the December
31, 1999 backlog to production. All of the December 31, 1999
backlog is expected to be filled by December 31, 2000. See
"Special Note Regarding Forward-Looking Statements".
Marketing and Distribution
__________________________
Distribution
____________
The Climate Control Business sells its products to
mechanical contractors, original equipment manufacturers and
distributors. The Company's sales to mechanical contractors
primarily occur through independent manufacturer s
representatives, who also represent complementary product lines
not manufactured by the Company. Original equipment
manufacturers generally consist of other air conditioning and
heating equipment manufacturers who resell under their own brand
name the products purchased from the Climate Control Business in
competition with the Company. Sales to original equipment
manufacturers accounted for approximately 27% of the sales of the
Climate Control Business in 1999 and approximately 13% of the
Company's 1999 consolidated sales.
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Market
______
The Climate Control Business depends primarily on the
commercial construction industry, including new construction and
the remodeling and renovation of older buildings. In recent
years this Business has introduced geothermal products designed
for residential markets for both new and replacement markets.
Raw Materials
_____________
Numerous domestic and foreign sources exist for the
materials used by the Climate Control Business, which materials
include aluminum, copper, steel, electric motors and compressors.
The Company does not expect to have any difficulties in obtaining
any necessary materials for the Climate Control Business. See
"Special Note Regarding Forward-Looking Statements".
Competition
___________
The Climate Control Business competes with approximately
eight companies, some of whom are also customers of the Company.
Some of the competitors have greater financial and other
resources than the Company. The Climate Control Business
believes it manufactures a broader line of fan coil and water
source heat pump products than any other manufacturer in the
United States, and the Company believes that it is competitive as
to price, service, warranty and product performance.
Joint Venture and Option to Purchase
____________________________________
In 1995, a subsidiary of LSB invested approximately $2.8
million to purchase a fifty percent (50%) limited partner
interest in an energy conservation joint venture (the "Project").
The Project was 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 acquired this investment by purchasing from LSB 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 management of the Company believes approximated
the investment's fair value, at the date of purchase.
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 the Climate Control Business. As a result
of the approval, in April 1999 the Company purchased from a
subsidiary of LSB (not the Company or a subsidiary of the
Company), an option to acquire a French HVAC manufacturing
company and all amounts due and payable from such French
manufacturer or its parent to LSB. The Company paid LSB
$2.6 million for the option and receivables due from the French
manufacturer and its parent. This amount equaled the net book
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value of the investment on the books of LSB's subsidiary, which
management of the Company believes approximated the investment's
fair value, at the date of purchase.
Employees
_________
As of December 31, 1999, the Company employed 1,321 persons.
As of that date, (a) the Chemical Business employed 537 persons,
with 106 represented by unions under agreements expiring in
August, 2001, and February, 2002, and (b) the Climate Control
Business employed 784 persons, none of whom are represented by a
union. Effective January 1, 2000, the Company assumed 177
employees from LSB.
Research and Development
________________________
The Company incurred approximately $713,000 in 1999,
$377,000 in 1998, and $367,000 in 1997 on research and development
relating to the development of new products or the improvement of
existing products. All expenditures for research and development
related to the development of new products and improvements are
expensed by the Company.
Environmental Matters
_____________________
The Company and its operations are subject to numerous
Environmental Laws and to other federal, state and local laws
regarding health and safety matters ("Health Laws"). In
particular, the manufacture and distribution of chemical products
are activities which entail environmental risks and impose
obligations under the Environmental Laws and the Health Laws,
many of which provide for substantial fines and criminal
sanctions for violations. There can be no assurance that material
costs or liabilities will not be incurred by the Company in
complying with such laws or in paying fines or penalties for
violation of such laws. The Environmental Laws and Health Laws
and enforcement policies thereunder relating to the Chemical
Business have in the past resulted, and could in the future
result, in penalties, cleanup costs, or other liabilities
relating to the handling, manufacture, use, emission, discharge
or disposal of pollutants or other substances at or from the
Company's facilities or the use or disposal of certain of its
chemical products. Significant expenditures have been incurred
by the Chemical Business at the El Dorado Facility in order to
comply with the Environmental Laws and Health Laws. The Chemical
Business will be required to make additional significant site or
operational modifications at the El Dorado Facility, involving
substantial expenditures. See "Special Note Regarding Forward-
Looking Statements"; "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Chemical Business"
and "Legal Proceedings."
Due to a consent administrative order ("CAO") entered
into with the Arkansas Department of Environmental Quality
("ADEQ"), the Chemical Business has installed additional
monitoring wells at the El Dorado Facility in accordance with a
workplan approved by the ADEQ, and submitted the test results to
ADEQ. The results indicated that a risk assessment should be
conducted on nitrates present in the shallow groundwater. The
Chemical Business' consultant has completed this risk assessment,
and has forwarded it to the ADEQ for approval. The risk
assessment concludes that, although there are contaminants at the
El Dorado Facility and in the groundwater, the levels of such
contaminants at the El Dorado Facility and in the groundwater do
not present an unacceptable risk to human health and the
environment. Based on this conclusion, the Chemical Business'
consultant has recommended continued monitoring at the site for
five years.
10
<PAGE>
A second consent order was entered into with ADEQ in
August, 1998 (the "Wastewater Consent Order"). The Wastewater
Consent Order recognizes the presence of nitrate contamination in
the groundwater and requires the Chemical Business to undertake
on-site bioremediation, which is currently underway. Upon
completion of the waste minimization activities referenced below,
a final remedy for groundwater contamination will be selected,
based on an evaluation of risk. There are no known users of
groundwater in the area, and preliminary risk assessments have
not identified any risk that would require additional
remediation. The Wastewater Consent Order included a $183,700
penalty assessment, of which $125,000 will be satisfied over five
years at expenditures of $25,000 per year for waste minimization
activities. The Chemical Business has documented in excess of
$25,000 on expenditures for 1998 and 1999.
The Wastewater Consent Order also required installation
of an interim groundwater treatment system (which is now
operating) and certain improvements in the wastewater collection
and treatment system (discussed below). Twelve months after all
improvements are in place, the risk will be reevaluated, and a
final decision will be made on what additional groundwater
remediation, if any, is required. There can be no assurance that
the risk assessment will be approved by the ADEQ, or that further
work will not be required.
The Wastewater Consent Order also requires the Chemical
Business to undertake a facility wide wastewater evaluation and
pollutant source control program and facility wide wastewater
minimization program. The program requires that the subsidiary
complete rainwater drain off studies including engineering design
plans for additional water treatment components to be submitted
to the State of Arkansas by August 2000. The construction of the
additional water treatment components is required to be completed
by August, 2001 and the El Dorado plant has been mandated to be
in compliance with the final effluent limits on or before
February 2002. The aforementioned compliance deadlines, however,
are not scheduled to commence until after the State of Arkansas
has issued a renewal permit establishing new, more restrictive
effluent limits. Alternative methods for meeting these
requirements are continuing to be examined by the Chemical
Business. The Company believes, although there can be no
assurance, that any such new effluent limits would not have a
material adverse effect on the Company. See "Special Note
Regarding Forward-Looking Statements." The Wastewater Consent
Order provided that the State of Arkansas will make every effort
to issue the renewal permit by December 1, 1999; however, the
State of Arkansas has delayed issuance of the permit. Because
the Wastewater Consent Order provides that the compliance
deadlines may be extended for circumstances beyond the reasonable
control of the Company, and because the State of Arkansas has not
yet issued the renewal permit, the Company does not believe that
failure to meet the aforementioned compliance deadlines will
present a material adverse impact. The State of Arkansas has
been advised that the Company is seeking financing from Arkansas
authorities for the projects required to comply with the
Wastewater Consent Order and the Company has requested that the
permit be further delayed until financing arrangements can be
made, which requests have been met to date. The wastewater
program is currently expected to require future capital
expenditures of approximately $10.0 million. Negotiations for
securing financing are currently underway. The company believes,
although there can be no assurance, that the renewal permit will
continue to be delayed, and that financing can be secured under
terms that will not have a material adverse effect on the
Company. See "Special Note Regarding Forward-Looking
Statements."
11
<PAGE>
Due to certain start-up problems with the DSN Plant,
including excess emissions from various emission sources, the
Chemical Business and the ADEQ entered into certain agreements,
including an administrative consent order (the "Air Consent
Order") in 1995 to resolve certain of the Chemical Business' past
violations. The Air Consent Order was amended in 1996 and 1997.
The second amendment to the Air Consent Order (the "1997
Amendment") provided for certain stipulated penalties of $1,000
per hour to $10,000 per day for continued off-site emission
events and deferred enforcement for other alleged air permit
violations. In 1998, a third amendment to the Air Consent Order
provided for the stipulated penalties to be reset at $1,000 per
hour after ninety (90) days without any confirmed events. In
addition, prior to 1998, the El Dorado Facility was identified as
one of 33 significant violators of the federal Clean Air Act in a
review of Arkansas air programs by the EPA Office of Inspector
General. The Company is unable to predict the impact, if any, of
such designation. See "Special Note Regarding Forward-Looking
Statements." Effective May 1, 2000, the Chemical Business will
be operating under a new air permit. This air permit supercedes
all air-related consent administrative orders other than the Air
Consent Order discussed above.
During 1998 and 1999, the Chemical Business expended
approximately $.7 million and $.9 million, respectively, in
connection with compliance with federal, state and local
Environmental Laws at its El Dorado Facility, including, but not
limited to, compliance with the Wastewater Consent Order, as
amended. The Company anticipates that the Chemical Business may
spend up to $10.0 million for future capital expenditures
relating to environmental control facilities at its El Dorado
Facility to comply with Environmental Laws, including, but not
limited to, the Wastewater Consent Order, as amended, with $2.0
million being spent in 2000 and the balance being spent in 2001.
No assurance can be made that the actual expenditures of the
Chemical Business for such matters will not exceed the estimated
amounts by a substantial margin, which could have a material
adverse effect on the Company and its financial condition. The
amount to be spent during 2000 and 2001 for capital expenditures
related to compliance with Environmental Laws is dependent upon a
variety of factors, including, but not limited to, obtaining
financing through Arkansas authorities, the occurrence of
additional releases or threatened releases into the environment,
or changes in the Environmental Laws (or in the enforcement or
interpretation by any federal or state agency or court of
competent jurisdiction). See "Special Note Regarding Forward-
Looking Statements." Additional orders from the ADEQ imposing
penalties, or requiring the Chemical Business to spend more for
environmental improvements or curtail production activities at
the El Dorado Facility, could have a material adverse effect on
the Company.
Item 2. PROPERTIES
___________________
Chemical Business
_________________
The Chemical Business primarily conducts manufacturing
operations (i) on 150 acres of a 1,400 acre tract of land located
in El Dorado, Arkansas (the "El Dorado Facility"), (ii) in a
facility of approximately 60,000 square feet located on ten acres
of land in Hallowell, Kansas ("Kansas Facility"), (iii) in a
mixed acid plant in Wilmington, North Carolina ("Wilmington
Plant"), and (iv) in a nitric acid plant in Baytown, Texas
("Baytown Plant"). The Chemical Business owns all of its
manufacturing facilities except the Baytown Plant. The
Wilmington Plant and the DSN Plant are subject to mortgages. The
Baytown Plant is being leased pursuant to a leveraged lease from
an unrelated third party.
12
<PAGE>
As of December 31, 1999, the El Dorado Facility was utilized
at approximately 71% of capacity, based on continuous operation.
The Chemical Business operates its Kansas Facility from
buildings located on an approximate ten acre site in southeastern
Kansas, and a research and testing facility comprising
approximately ten acres, including buildings and equipment
thereon, located in southeastern Kansas, which it owns.
In addition, the Chemical Business distributes its products
through 28 agricultural and explosive distribution centers. The
Chemical Business currently operates 20 agricultural distribution
centers, with 16 of the centers located in Texas (13 of which the
Company owns and 3 of which it leases); ; 1 center located in
Missouri(leased); and 3 centers located in Tennessee (owned).
The Chemical Business currently operates 8 domestic explosives
distribution centers located in Hallowell, Kansas (owned); Bonne
Terre, Missouri (owned); Poca, West Virginia (leased); Owensboro,
Martin and Combs, Kentucky (leased); Pryor, Oklahoma (leased);
and Dunlap, Tennessee (owned).
Climate Control Business
________________________
The Climate Control Business conducts its fan coil
manufacturing operations in a facility located in Oklahoma City,
Oklahoma, consisting of approximately 265,000 square feet. The
Company owns this facility subject to a mortgage. As of December
31, 1999, the Climate Control Business was using the productive
capacity of the above referenced facilities to the extent of
approximately 84%, based on three, eight-hour shifts per day and
a five-day week in one department and one and one half eight-hour
shifts per day and a five-day week in all other departments.
The Climate Control Business manufactures most of its heat
pump products in a 270,000 square foot facility in Oklahoma City,
Oklahoma, which it leases from an unrelated party. The lease
term began March 1, 1988, and expires February 28, 2003, with
options to renew for additional five-year periods. The lease
currently provides for the payment of rent in the amount of
$52,389 per month. The Company also has an option to acquire the
facility at any time in return for the assumption of the then
outstanding balance of the lessor s mortgage. As of December 31,
1999, the productive capacity of this manufacturing operation was
being utilized to the extent of approximately 82%, based on two
nine-hour shifts per day and a five-day week in one department,
and one eight-hour shift per day and a five-day week in all other
departments. In addition, the Company leases 60,000 square feet
for the manufacturing of coaxial condensers.
All of the properties utilized by the Climate Control
Business are considered by the Company management to be suitable
and adequate to meet the current needs of that Business.
Item 3. LEGAL PROCEEDINGS
__________________________
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
13
<PAGE>
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."
ASARCO v. ICI, Et Al. The U.S. District Court for the
Eastern District of Missouri has granted ASARCO and other
plaintiffs in a lawsuit originally brought against various
commercial explosives manufacturers in Missouri, and
consolidated with other lawsuits in Utah, leave to add EDC as a
defendant in that lawsuit. This lawsuit alleges a national
conspiracy, as well as a regional conspiracy, directed against
explosive customers in Missouri and seeks unspecified damages.
EDC has been included in this lawsuit because it sold products to
customers in Missouri during a time in which other defendants
have admitted to participating in an antitrust conspiracy, and
because it has been sued in the ARCH case discussed above. Based
on the information presently available to EDC, EDC does not
believe that EDC conspired with any party, to fix prices in
connection with the sale of commercial explosives. EDC intends
to vigorously defend itself in this matter. See "Special Note
Regarding Forward-Looking Statements."
On August 26, 1999, LSB and EDC were served with a
complaint filed in the District Court of the Western District of
Oklahoma by National Union Fire Insurance Company, seeking
recovery of certain insurance premiums totaling $2,085,800 plus
prejudgment interest, costs and attorneys fees alleged to be due
and owing by LSB and EDC, related to National Union insurance
policies for LSB and subsidiaries dating from 1979 through 1988.
The parties entered into an agreement to
settle this matter in 1999, whereby LSB paid $200,000 in December
1999 and agreed to pay an additional $300,000 to National Union.
The $300,000 is payable annually in installments of $100,000 plus
interest. As a part of the agreement to settle this matter, the
parties have agreed to adjudicate whether any additional amounts
may be due to National Union, but the parties have agreed that
the Company's liability for any additional amounts due National
Union shall not exceed $650,000. Amounts expected to be paid
under this settlement by EDC were fully accrued at December 31,
1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
___________________________________________________________
Not applicable.
14
<PAGE>
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers
<TABLE>
<CAPTION>
The following table lists the executive officers of the
Company, each of whom also serves as an executive officer of LSB,
except for James L. Wewers.
Name Office
___________________ __________________________________________
<S> <C>
Jack E. Golsen Chairman of the Board, Chief Executive
Officer and President
Barry H. Golsen Vice Chairman of the Board and Vice
President
Tony M. Shelby Vice President and Chief Financial Officer
David R. Goss Vice President
Jim D. Jones Vice President and Treasurer
James L. Wewers Vice President
David M. Shear Secretary
</TABLE>
____________________________________________________________________
The Company's officers serve one-year terms, renewable on an
annual basis by the Board of Directors. All of the individuals
listed above have served in substantially the same capacity with
LSB and/or its subsidiaries for the last five years.
Family Relationships
____________________
The only family relationship that exists among the executive
officers of the Company is that Jack E. Golsen is the father of
Barry H. Golsen.
15
<PAGE>
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_________________________________________________________________
Market Information
__________________
The Company is a wholly owned subsidiary of LSB. As such,
the Company does not have any shares of common equity that trade
in the public market.
Under the terms of the Indenture of Senior Unsecured
Notes, the Company cannot transfer funds to LSB in the
form of cash dividends or other distributions or advances, except
for (i) the amount of taxes that the Company would be required to
pay if they were not consolidated with LSB and (ii) an amount
not to exceed fifty percent (50%) of the Company's net income
from January 1, 1998 through the end of the period for which the
calculation is made for the purpose of proposing a payment, and
(iii) the amount of direct and indirect costs and expenses
incurred by LSB on behalf of the Company pursuant to a certain
services agreement and a certain management agreement to which
the Company and LSB are parties. The Company and LSB are parties
to a services agreement, management agreement and tax sharing
agreement, and under the Indenture of Senior Unsecured
Notes the Company may pay amounts to LSB under each
such agreement. In addition, under the Indenture of Senior
Unsecured Notes, the Company may enter into other
transactions with LSB under certain conditions. Due to certain
limitations contained in the "Management Agreement," the Company
was unable to make any payments to LSB under the "Management
Agreement" during 1999. In addition, due to losses sustained by
the company for 1999, no payment for taxes were made by the
Company to LSB under the "Tax Sharing Agreement" during 1999.
See Note 7 of Notes to Consolidated Financial Statements and Item
7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
16
<PAGE>
<PAGE>
Item 6. SELECTED FINANCIAL DATA
________________________________
<TABLE>
<CAPTION>
Years ended December 31,
1999(1) 1998 1997 1996 1995
_______ ________ _______ _____ ____
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Statement of
Operations Data:
Net sales $251,923 $ 255,730 $ 262,847 $255,285 $ 220,743
======== ========== ========== ======== =========
Total revenues $254,416 $ 257,198 $ 263,740 $255,618 $ 221,541
======== ========== ========== ======== =========
Interest expense $ 14,586 $ 13,897 $ 9,761 $ 6,247 $ 7,185
======== ========== ========== ========= ==========
Income (loss) before
extraordinary charge $(19,182) $ (2,569) $ 897 $ 5,753 $ 5,899
======== ========== ========= ========= =========
Net income (loss) $(19,182) $ (2,569) $ (1,972) $ 5,753 $ 5,899
======== ========== ========= ========= =========
</TABLE>
17
<PAGE>
Item 6. SELECTED FINANCIAL DATA (CONTINUED)
______________________________________________
<TABLE>
<CAPTION>
Years ended December 31,
1999(1) 1998 1997 1996 1995
______ ____ ______ ____ ____
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Balance:
Sheet Data:
Total assets $184,078 $196,603 $200,875 $173,734 $146,719
======== ======== ======== ========= ========
Long-term debt,
including
current portion $142,188 $137,931 $136,184 $ 82,588 $ 78,959
======== ======== ======== ======== ========
Total stockholders'
equity $ 6,135 $ 23,758 $ 27,289 $ 32,843 $ 28,675
======== ======== ======== ======== ========
<FN>
(1) In August 1999, the Chemical Business sold substantially all
of the assets of its wholly-owned subsidiary, Total Energy Systems
Limited and its subsidiaries. See Note 4 of Notes to Consolidated
Financial Statements.
</FN>
</TABLE>
18
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
________________________________________________________________
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with a review of the Company's December 31, 1999
Consolidated Financial Statements, Item 6 "SELECTED FINANCIAL
DATA" and Item 1 "BUSINESS" included elsewhere in this report.
Certain Statements contained in this "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations" may be deemed forward-looking statements. See
"Special Note Regarding Forward-Looking Statements".
Overview
________
During August 1999, the Company's Chemical Business sold
substantially all of the assets of its Australian subsidiary.
Revenues for 1999 to the date of the sale of the assets of the
Australian subsidiary were $7.5 million and the loss sustained by
the Australian subsidiary was $2.0 million, excluding the loss of
$2.0 million as a result of the sale.
The Company has historically had material transactions with
its parent, LSB, and LSB's subsidiaries (which are not the
Company or subsidiaries of the Company) described below and in
Notes 3, 8, 9 and 10 of Notes to Consolidated Financial
Statements.
Included in the Company's loss for 1999 is a loss
provision of $8.4 million as discussed in Note 12 of Notes to
Consolidated Financial Statements and elsewhere in the report.
This loss provision was caused, in part by the Chemical Business'
requirements to buy a large percentage of its anhydrous ammonia
requirements (its primary raw material) at prices in excess of
the then market price and the oversupply of nitrate based
products in 1999 caused, in part, by the importation of Russian
anhydrous ammonia at prices substantially below the then market
price, resulting in the Chemical Business costs to produce its
nitrate based products exceeding the then anticipated future
sales prices.
During 1999, the Chemical Business had commitments to
purchase anhydrous ammonia under three contracts. The Company's
purchase price of anhydrous ammonia under one of these contracts
could 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 1998 and
1999 were substantially higher than the current market spot
price. As of December 31, 1999, the Chemical Business is to
purchase 96,000 tons at a minimum of 2,000 tons of anhydrous
ammonia per month during 2000 and 3,000 tons per month in 2001
and 2002 under this contract. 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. The purchase
price(s) the Chemical Business will be required to pay for the
remaining 96,000 tons of anhydrous ammonia under this contract
currently exceeds and is expected to continue to exceed the spot
market prices throughout the purchase period. 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; although sales prices have improved in 2000 (no
19
<PAGE>
improvement in sales margins is expected in the near term due to
increased cost of anhydrous ammonia). During 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, the accompanying Consolidated Financial
Statements included a loss provision of approximately $8.4
million for anhydrous ammonia required to be purchased during the
remainder of the contract ($7.4 million remaining accrued
liability as of December 31, 1999). The provision for loss at
December 31, 1999 was based on the forward contract pricing
existing at June 30, 1999 and September 30, 1999 (the date the
provisions were recognized), and estimated market prices for
products to be manufactured and sold during the remainder of the
contract. 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 in
arriving at the loss provision recorded during 1999.
The Chemical Business is a member of an organization of
domestic fertilizer grade ammonium nitrate producers which is
seeking relief from unfairly 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. As a result of the
Commerce Department's preliminary ruling, all imports of Russian
ammonium nitrate are currently subject to potential antidumping
duty liability. The Department of Commerce is due to issue a
final determination by May 22, 2000 and the International Trade
Commission by July 5, 2000. The relief currently in place will
remain only if both agencies make final affirmative
determinations. It is not known, therefore, whether the
antidumping action will be successful upon conclusion of the U.S.
Government's Investigation.
Certain statements contained in this overview may be
considered forward-looking statements. See "Special Note
Regarding Forward-Looking Statements." The following table contains
selected historical financial information about the Company's
operating segments for each of the three years in the period ended
December 31, 1999. The information for each of the three years
in the period ended December 31, 1999, was derived from the
consolidated financial statements of the Company included elsewhere
herein.
20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
___________________________________
(In Thousands)
<S> <C> <C> <C>
Net sales:
Businesses continuing:
Chemical $127,407 $125,761 $130,466
Climate Control 117,055 115,785 105,899
__________________________________
244,462 241,546 236,365
Business disposed of -- Chemical(1) 7,461 14,184 26,482
__________________________________
$251,923 $255,730 $262,847
==================================
Gross profit (loss): (2)
Businesses continuing:
Chemical $ 13,458 $ 18,590 $ 16,710
Climate Control 34,909 32,234 29,719
__________________________________
48,367 50,824 46,429
Business disposed of -- Chemical (118) (242) 2,649
__________________________________
$ 48,249 $ 50,582 $ 49,078
==================================
Operating profit (loss): (3)
Businesses continuing
Chemical $ (1,353) $ 5,877 $ 4,874
Climate Control 8,628 9,723 8,481
__________________________________
7,275 15,600 13,355
Business disposed of -- Chemical (1) (1,632) (2,467) (52)
__________________________________
$ 5,643 $ 13,133 $ 13,303
==================================
Unallocated fees from Services Agreement
and general corporate expenses, net (4,526) (2,881) (2,109)
Interest income 1,512 1,445 419
Other income, net 981 23 474
Interest expense:
Business disposed of (326) (434) (720)
Business continuing (14,260) (13,463) (9,041)
Loss on businesses disposed of (1,971) - -
Provision for loss on firm purchase
commitments -- Chemical (8,439) - -
Provision for impairment on long-lived
assets (3,913) - -
___________________________________
Income (loss) before provision (benefit)
for income taxes and extraordinary
charge $(25,299) $ (2,177) $ 2,326
==================================
Total assets:
Business Continuing:
Chemical 102,185 116,655 117,257
Climate Control 61,781 40,498 42,497
Corporate 20,112 22,653 21,222
Business disposed of -- Chemical - 16,797 19,899
__________________________________
$184,078 $196,603 $200,875
==================================
21
<PAGE>
(1) In August 1999, the Company sold substantially all the assets of its
wholly owned Australian subsidiary. See Note 4 of Notes to 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 by industry segment represents gross profit less
operating expenses before deducting fees from the Service Agreement,
interest expense, income taxes, provisions for loss on firm purchase
commitments, provision for impairment on long-lived assets, or
extraordinary charges.
</FN>
</TABLE>
22
<PAGE>
Chemical Business
_________________
Net Sales in the Chemical Business (excluding the Australian subsidiary in
which substantially all of its assets were disposed of in August, 1999) were
$127.4 million for the year ended December 31, 1999 and $125.8 million for the
year ended December 31, 1998. The sales volume from the Chemical Business' El
Dorado Plant was down substantially in 1999 (535,000 tons) from the 1998 level
(615,000) tons. This decline in sales volume was offset by sales from the EDNC
Baytown Plant completed in May, 1999 (See Item 1 "Business" included elsewhere
in this report). The gross profit (excluding the Australian subsidiary and the
provision for loss on firm purchase commitments) decreased to $13.5 million (or
10.6% of net sales) in 1999 from $18.6 million (or 14.8% of net sales) in 1998.
The decrease in the gross profit was primarily a result of depressed volumes and
declining sales prices from the import of Russian nitrate based products and
unabsorbed overhead resulting from the lower volumes and manufacturing costs.
During the third and fourth quarters of 1999, two of the plants were
temporarily shut down due to the excessive supply of ammonium nitrate at the
Chemical Business and in the market place. The plants that were shut down
increased the Chemical Business' losses due to overhead costs that continue even
though product was not being produced at the plants temporarily shut down. These
plants have resumed production in the first quarter of 2000. There are no
assurances that the Chemical Business will not be required to record additional
loss provisions in the future. Based on the forward pricing existing as of
March 31, 2000, the Chemical Business would not be required to recognize an
additional loss on the anhydrous ammonia purchase contracts. See "Special Note
regarding Forward Looking Statements".
In May, 1999, a subsidiary of the Company completed its obligations, as an
agent, 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 $17.2 million
during 1999. Management estimates that, at full production capacity based on
terms of the 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 sold in August, 1999, substantially all the assets of it's Australian
subsidiary and a loss of approximately $2.0 million was recognized. See Note
4 of Notes to Consolidated Financial Statements.
The Australian subsidiary had revenues for the calendar year 1999 up to
the date of sale of $7.5 million and a loss of $2.0 million, excluding the
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loss on the sale. For the year ended December 31, 1998, revenues were $14.2
million and the loss was $2.9 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 of $117.1 million for the year ended December 31, 1999, in the
Climate Control Business were approximately 1.1% greater than sales of $115.8
million for the year ended December 31, 1998. The gross profit was approximately
$34.9 million and $32.2 million in 1999 and 1998, respectively. The gross profit
percentage increased to 29.8% for 1999 from 27.8% for 1998. This increase is
primarily due to an improved market and manufacturing efficiency relating to
the heat pump portion of the Climate Control Business.
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.
Under the terms of the Services Agreement, the Company will pay to, or
reimburse, LSB for the value of the office facilities of LSB, including LSB's
principal offices and financial accounting offices utilized in the performance
of the Services Agreement. LSB will determine the proportionate usage of such
facilities by LSB and the Company, and the Company will pay to, or reimburse,
LSB for its proportionate share of such usage.
Charges for such services aggregate $4,780,000, $2,265,000 and $1,950,000
for the years ended December 31, 1999, 1998 and 1997, 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 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 Services Agreement allows for purchases of other goods and
services to the extent that the amount paid approximates fair value that would
24
<PAGE>
be paid to a third party. In 1999, subsidiaries of the Company purchased certain
raw materials with LSB's assistance and paid $461,000 to LSB in commissions on
such purchases. The Company also purchased $1,076,000 in industrial supplies, in
1999, from subsidiaries of LSB which are not subsidiaries of the Company.
The Company's Climate Control manufacturing subsidiaries also lease
facilities from a subsidiary of LSB (which is not the Company or a subsidiary of
the Company) under various operating leases and a capital lease. See Note 10
Commitments and Contingencies, Operating Leases. Rental expense associated with
the operating leases aggregated $1,806,000, $475,000 and $475,000 for the years
ended December 31, 1999, 1998 and 1997, 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 million for capital improvements required at
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 $1,172,000 due to the LSB
subsidiary.
In 1995, a subsidiary of LSB invested approximately $2.8 million to
purchase a fifty percent (50%) limited partner interest in an energy
conservation joint venture (the "Project"). The Project was 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 acquired this investment by
purchasing from LSB 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 management of the Company believes approximated the
investment's fair value, at the date of purchase.
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 the Climate Control Business. As a result
of the approval, in April 1999 the Company purchased from a subsidiary of LSB
(not the Company or a subsidiary of the Company), an option to acquire a French
HVAC manufacturing company and all amounts due and payable from such French
manufacturer or its parent to LSB. The Company paid LSB $2.6 million for the
option and receivables due from the French manufacturer and its parent. This
amount equaled the net book value of the investment on the books of LSB's
subsidiary, which management of the Company believes approximated the
investment's fair value, at the date of purchase.
During July 1999, a subsidiary of the Company sold 26 railcars to a non-
affiliated entity for approximately $1.1 million. Thereafter, the entity leased
the railcars to a subsidiary of LSB, which is neither the Company nor a
subsidiary of the Company. A subsidiary of the Company has entered into a
services agreement with such LSB subsidiary pursuant to which such subsidiary is
to provide railcar services to a subsidiary of the Company. Under the services
25
<PAGE>
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.
In 1999, the Company advanced LSB $2 million pursuant to a provision in the
bond indenture. The advance is payable on demand and bears interest at 10-3/4%
per annum payable on demand.
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 for the first three quarters of the year, not to exceed
$1,350,000. The maximum management fee amount to be paid to LSB by the Company
is adjusted annually commensurate with the percentage change, if any, in the
Consumer Price Index during the preceding calendar year. No payments were made
to LSB under the Management Agreement in 1999, 1998, or 1997.
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 deter-
mined by LSB, under the Tax Sharing Agreement, then the Company will pay to LSB
the amount of the deficiency. The Company paid approximately $1.0 million to
LSB in 1997 (none in 1999 or 1998) under the tax sharing arrangement.
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
26
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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) pay-
ment 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. Based on the terms stated above, the Company declared and
paid to LSB a dividend, in the fourth quarter of 1998, in the amount of $406,000
representing 50% of the Company's consolidated net income for the nine months
ended September 30, 1998 (none in 1999 or 1997).
The Company has, at various times, maintained certain unsecured borrowings
from LSB and its subsidiaries and made loans and advances to LSB which generally
bear interest. At December 31, 1999 and 1998, the Company had loans and advances
due from LSB of approximately $13.4 million, $10.0 million of which was loaned
to LSB from the proceeds of the sale of the Notes, as defined (Note 7 Long-
Term Debt), and bears interest at 10-3/4%, maturing November 2007 and $3.4
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, from borrowings
on the Company's credit facilities. This loan is due by its terms in November
2007 and bears interest at 7% per annum. At December 31, 1999 and 1998, the
Company had $2.4 million and $2.9 million, respectively, due from LSB and
affiliates included in current assets related to advances as discussed
previously, interest and refunds due associated with operations under the
Services Agreement or refunds under the management agreement. At December 31,
1999, LSB had not made the December 1 interest payment to the Company for the
loans described above. LSB made the December 1 interest payment in March 2000.
The Company earned interest income on net loans and advances due from LSB and
affiliates aggregating approximately $1,474,000, $1,316,000 and $357,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
_____________________
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
_____________________________________________________________________
Net Sales
_________
Consolidated net sales of Businesses continuing included in total
revenues for 1999 were $244.5 million, compared to $241.5 million for 1998,
an increase of $3.0 million. This increase in sales resulted principally
from: (i) increased sales in the Climate Control Business of $1.2 million
primarily due to increased heat pump sales offset by production delays related
to mechanical problems with certain new equipment and (ii) lower sales of $16.6
million from the Chemical Business other than the EDNC Baytown Plant offset by
increased sales to Bayer and other customers by EDNC of $18.4 million from
the Baytown Plant which began operations in May 1999. Lower volumes of the
Company's nitrogen based products were sold at a lower price in 1999 due
primarily to the import of Russian nitrate resulting in an over supply of
nitrate based products in the primary market areas for the Chemical Business'
agricultural products (see Note 12 of Notes to Consolidated Financial
Statement).
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<PAGE>
Gross Profit
____________
Gross profit of Businesses continuing as a percent of net sales was
19.8% for 1999, compared to 21.0% for 1998. The decrease in the gross profit
percentage was the result of decreases in the Chemical Business. The decrease
in the Chemical Business was primarily the result of lower sales volumes and
reduced selling prices for the Company's nitrogen based products. See
"Overview Chemical Business" elsewhere in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion of the Chemical Business' decreased sales. The decrease in the gross
profit percentage was offset by an increase in the Climate Control Business due
primarily to an improved focus on sales of more profitable product lines.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a percent of
net sales from Businesses continuing for 1999 were 18.7% compared to 15.8% for
1998. This increase is primarily the result of decreased sales volume in the
Chemical Products Business without equivalent corresponding decreases in SG&A
and increased cost of the Company sponsored medical care programs for its
employees due to increased health care costs. Additionally, costs associated
with new start-up operations in 1999, by the Climate Control Business, having
minimal or no sales, increased warranty accrual on a certain line of products.
LSB has been restructuring the alignment of certain overhead costs to match
the benefit and cost. As a result of this restructuring, LSB increased the
the billing for services performed under the "Services Agreement" in 1999 by
approximately $2.5 million over the amount charged in 1998.
Interest Expense
________________
Interest expense for continuing businesses of the Company was $14.3 million
for 1999, compared to $13.5 million for 1998. The increase of $.8 million
primarily resulted from increased borrowings and lenders' prime rates during the
last half of 1999. The increased borrowings were necessary to support capital
expenditures, higher accounts receivable balances and to meet the operational
requirements of the Company. See "Liquidity and Capital Resources" of this
Management's Discussion and Analysis.
Provision for Loss on Firm Purchase Commitments
_______________________________________________
The Company had a provision for loss on firm purchase commitments of $8.4
million for the year ended December 31, 1999 to provide for losses resulting
from cost of remaining anhydrous ammonia to be purchased pursuant to the firm
purchase commitment in the Chemical Business when combined with the manufac-
turing and distribution costs exceeded the anticipated future sales price.
See discussion in Note 12 of the Notes to Consolidated Financial Statements.
Provision for Impairment on Long-lived Assets
_____________________________________________
The Company had a provision for impairment on long-lived assets of $3.9
million for the year ended December 31, 1999 associated with two out of service
chemical plants which are to be sold or dismantled. See discussion in Note 2
of the Notes to Consolidated Financial Statements.
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Business Disposed of
____________________
The Company sold substantially all the assets of its wholly owned subsidiary
in 1999. See discussion in Note 4 of the Notes to Consolidated Financial
Statements.
Income (Loss) Before Income Taxes
_________________________________
The Company had a loss before income taxes of $25.3 million for 1999,
compared to loss before income taxes of $2.2 million for 1998. The decreased
profitability of $23.1 million was due to decreased gross profits and increased
SG&A expenses, the loss on the disposal of the Australian subsidiary, lower
ammonium nitrate sales prices and volume, excluding EDNC, from the Chemical
Business, the provision for losses on purchase commitments, and the provision
for impairment on long-lived assets as previously discussed.
Provision (benefit) For Income Taxes
____________________________________
The benefit for income taxes pursuant to the terms of the Tax Sharing
Agreement as discussed in Note 8 of Notes to Consolidated Financial Statements
was $6.1 million for 1999 on a pre-tax loss of $25.3 million, compared to a
provision for income taxes of $.4 million for 1998 on a pre-tax loss of $2.2
million. The effective rates differ from statutory rates due primarily to the
Australian subsidiary losses and the valuation allowance on the net operating
loss carryforward in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
_____________________________________________________________________
Net Sales
_________
Consolidated net sales of Business continuing for 1998 were $241.5
million, compared to $236.4 million for 1997, a decrease of $5.1 million or
2.2%. This sales decrease resulted principally from decreased sales in the
Chemical Business of $17.04.8 million primarily due to lower sales volume
of agricultural and blasting products. Sales were lower in the Chemical
Business during 1998, compared to 1997, as a result of adverse weather
conditions in its agricultural markets during the spring and fall planting
seasons and Blasting sales in the Chemical Business declined as a result of
elimination of certain low profit margin sales. These decreases were offset
by increased sales in the Climate Control Business of $9.9 million, primarily
due to increased volume and price increases in both the heat pump and fan coil
product lines.
Gross Profit
____________
Gross profit of Businesses continuing increased $4.4 million and was 21.0%
of net sales for 1998, compared to 19.6% of net sales for 1997. The increase in
the gross profit percentage was due primarily to lower production costs in the
Chemical Business due to the effect of lower prices of anhydrous ammonia in
1998, and high unabsorbed overhead costs in 1997 caused by excessive downtime
related to problems associated with mechanical failures at the Chemical
Business' primary manufacturing plant in the first half of 1997.
Selling, General and Administrative Expense
__________________________________________
Selling, general and administrative ("SG&A") expenses as a percent of net
sales of Business continuing for 1998 were 15.8% compared to 14.9% for 1997.
This increase is primarily the result of the decrease in sales of the Chemical
Business with an increase in SG&A expenses relating to higher provisions for
29
<PAGE>
uncollectible accounts receivable in 1998. This increase is offset by increased
sales in the Climate Control Business offset by increased SG&A expenses relating
to additional information technology personnel to support management information
system changes and higher variable costs due to a change in sales mix toward
greater domestic sales which carry a higher SG&A percent.
Interest Expense
________________
Interest expense for Business continuing for the Company, before deducting
capitalized interest, was $13.5 million during 1998, compared to $10.1 million
during 1997. During 1997, $1.1 million of interest expense was capitalized in
connection with construction of the DSN Plant. The increase of $3.4 million
before the effect of capitalization primarily resulted from increased borrowings
and higher interest rates associated with the 10 3/4% unsecured senior notes
issued November 26, 1997. The increased borrowings were necessary to support
capital expenditures, higher accounts receivable balances and to meet the
operational requirements of the Company. See "Liquidity and Capital Resources"
of this Management's Discussion and Analysis.
Business Disposed of
____________________
The Company sold substantially all the assets of its wholly owned
subsidiary in 1999. See discussion in Note 4 of the Notes to Consolidated
Financial Statements.
Income (Loss) Before Taxes and Extraordinary Charge
____________________________________________________
The Company had a loss before income taxes and extraordinary charge of $2.2
million in 1998, compared to income before income taxes and extraordinary charge
of $2.3 million in 1997. The decreased profitability of $4.5 million was
primarily due to increased SG&A and interest expense offset by increased gross
profit as discussed above.
Provision for Income Taxes
__________________________
The provision for income taxes was $.4 million in 1998 on a pre-tax loss
of $2.2 million, compared to $1.4 million in 1997 on pre-tax income of $2.3
million. The effective tax rate is greater than the statutory rate due to losses
associated with the Company's Australian subsidiary, which provides no current
benefit due to its cumulative tax loss position.
Extraordinary Charge
____________________
In 1997, in connection with the issuance of the 10 3/4% unsecured senior
notes due 2007, a subsidiary of the Company retired the outstanding principal
associated with a certain financing arrangement and incurred a prepayment fee.
The prepayment fee and loan origination costs expensed in 1997 related to the
financing arrangement aggregated approximately $4.6 million. The extraordinary
charge of $2.9 million is net of an income tax benefit of $1.7 million.
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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 year ended December 31, 1999 was
$1.7 million, after $10.0 million for noncash depreciation and amortization,
$2.0 million loss on business disposed of, $.1 million in provisions for
possible losses on accounts receivable and other, provision for losses on
purchase commitments of $8.2 million, $3.9 million in provisions for impairment
of long-lived assets, $6.2 million deferred income tax benefit, and the
following changes in assets and liabilities: (i) accounts receivable increases
of $3.7 million; (ii) inventory decreases of $3.9 million; (iii) increases in
supplies and prepaid items of $.2 million; and (iv) increases in accounts
payable and accrued liabilities of $2.0 million. The increase in accounts
receivable was primarily due to increased sales in the fourth quarter in the
Climate Control Business. The decrease in inventory was primarily due to
reduction in the Chemical Business inventories due to plant shut-downs
partially offset by increases in the Climate Control Business due to a build
up of inventory in the plant due to an increase in confirmed orders during
the fourth quarter. The net increase in accounts payable and accrued
liabilities is primarily due to increases in: (i) purchases of raw materials
and purchased goods and accrued warranty and sales incentives in the Climate
Control Business; (ii) deferred lease liability relating to the Baytown Plant
in the Chemical Business. These increases were partially offset by decreases
in liabilities associated with purchases of raw materials in the Chemical
Business.
Cash Flow From Investing and Financing Activities
__________________________________________________
Cash used by investing activities for the year ended December 31, 1999
included $6.7 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, $10.0 million proceeds from the sale of a business disposed
of as previously discussed, $1.0 million proceeds from sale of equipment, and
$.9 million for increases in other assets. The payment made for acquisition
relates to the purchase of all of the stock of a subsidiary of LSB that held an
investment in an energy conservation joint venture (see Note 3 of Notes to
Financial Statements).
Net cash provided by financing activities included payments on long-term
debt of $6.9 million, net increase is due from LSB and affiliates of $1.0
million, and net increases in revolving debt of $8.3 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 December 31, 1999, 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
31
<PAGE>
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.
As of December 31, 1999, the Agreements provided for revolving credit
facilities ("Revolver") for total direct borrowing up to $65 million with
advances at varying percentages of eligible inventory and trade receivables.
At December 31, 1999, the effective interest rates was 9.0% and the availability
for additional borrowings, based on eligible collateral, approximated $12.3
million. Borrowings under the Revolver outstanding at December 31, 1999, were
$25.1 million. The annual interest on the outstanding debt under the Revolver
at December 31, 1999, at the rates then in effect would approximate $2.3
million. The Agreements also require the payment of an annual facility fee of
0.5% of the unused Revolver and restrict the flow of funds, except under certain
conditions, to subsidiaries of the Company that are not parties to the Revolving
Credit Agreements.
The Agreements, as amended, required LSB and the Company to maintain
certain financial ratios and contain other financial covenants, including
tangible net worth requirements and 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 was required to maintain the
financial ratios discussed above. 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, 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. Under the forbearance agreement, the Lender agreed not to
take action against the Company for a period of sixty (60) days as a result of
such failure.
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 provides for an increase in the interest rate from the Lender's prime
rate plus .5% per annum to the Lender's prime rate plus 1.5% per annum, or at
LSB's and ClimaChem's option, 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, the Company and Lender shall have determined new financial covenants
for the calendar year beginning on January 2001. The Agreements, as amended,
require LSB and the Company to maintain certain financial ratios and certain
other financial covenants, including net worth and interest coverage ratio
requirements and capital expenditure limitations.
As of March 31, 2000 LSB and the Company have a borrowing availability
under the revolver of $.2 million, and $11.0 respectively, or $11.2 in the
aggregate.
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<PAGE>
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 December 31, 1999, DSN had outstanding borrowings of $8.2
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 December 31, 1999, 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 rations, including tangible net worth requirements. In April, 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. Currently, the financing agreement requires the Company to make
interest payments on a quarterly basis at the Lender's LIBOR rate plus two-
tenths of one percent (.2%) per annum. After the Lender obtains financing
through the U.S. Department of Housing and Urban Development ("HUD"), the
Company will be required to make principal payments on an annual basis over a
term of sixteen (16) years but based on a twenty (20) year amortization period.
Interest payments will be required on a semi-annual basis at the rate charged
to the Lender by HUD at the time of the funding. 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 covering the $105 million in Unsecured
Senior Notes issued by the Company. Under the terms of the indenture,
ClimaChem 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
the Company, (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 manage-
ment agreement to which the companies are parties. The Company sustained a
net loss of $19.2 million in the calendar year 1999, and a net loss of $2.6
million for the calendar year 1998. Accordingly, no amounts were paid to LSB
by the Company under the Tax Sharing Agreement, nor under the Management
Agreement during 1999 and based on ClimaChem's cumulative losses at
December 31, 1999, and current estimates for the results of operations for
the year ended December 31, 2000, none are expected during 2000. Due to
these limitations, LSB and its non-ClimaChem subsidiaries have limited
resources to satisfy their obligations, including those to the Company.
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
December 31, 1999, the LSB Non-ClimaChem Entities a had a working capital
deficit of $2.3 million (including $4.7 million of inventories and $2.6 million
33
<PAGE>
of accounts receivable), and long-term debt of $32.8 million (including that
owned by the Company), $3.6 million of which is due within one year. For the
year ended December 31, 1999, the LSB Non-ClimaChem Entities had a net loss of
$15.9 million (including $10.0 million associated with discontinued operations),
and used cash in operating activities of approximately $2.2 million. LSB is
focusing its efforts and resources on its core businesses, which represent
that of the Company. LSB's Board of Directors has approved a plan for the
disposal of its Automotive Products Business. The plan calls for management to
dispose of the Automotive Business through sale. LSB is also realigning its
overhead to better match its focus on the Chemical and Climate Control Busi-
nesses 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, other than dividend obligations under its outstanding preferred
stock, as they come due, including those to the Company. If LSB 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 $15.7 million at December 31, 1999, may not be
recoverable. As of December 31, 1999, the Company has not provided an
allowance for doubtful accounts against these receivables, loans and
advances since it is their present belief that LSB will be able to pay
these amounts when they come due; however, it is reasonably possible that
the evaluation relative to the amounts due from LSB and its subsidiaries
could change in the near term.
In 2000, the Company has planned capital expenditures of approximately $9.5
million. These capital expenditures include approximately $2.0 million, which
the Chemical Business is obligated 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 anticipates that
the Chemical Business may spend up to $10 million for future capital expendi-
tures relating to the environmental control facilities at its El Dorado
Facility, with $2.0 million being spent in 2000 and the balance being spent in
2001. 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 or to make the necessary changes
to the Indenture in order to borrow the funds required to finance certain
of these 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.
As previously mentioned, LSB's and ClimaChem's primary credit facility
terminates on December 31, 2000, unless the parties to the agreements agree to
new financial covenants for 2001 prior to October 1, 2000. While there is no
assurance that the Company will be successful in extending the term of such
credit facility, the Company believes it has a good working relationship with
the lender and that it will be successful in extending such facility or
replacing such facility from another lender with substantially the same terms
during 2000.
In March 2000, LSB and ClimaChem retained Chanin Capital Partners as
financial advisors to assist in evaluating all of the alternatives relating
to the LSB and ClimaChem's liquidity and to assist the companies in
determining their alternatives for restructuring their capitalization and
improving their financial condition. The Company has also initiated discussions
with third party lenders to explore the possibility of obtaining an additional
credit facility or expanded credit facility with which to initiate
discussions with ClimaChem's holders of the Senior Notes, which, at
December 31, 1999, were trading at 25% of their face value. There is no
34
<PAGE>
assurance that the Company or ClimaChem will be successful in obtaining the
additional credit facility or expanded credit facility.
The Company has planned for up to $9.5 million of capital expenditures for
2000, most of which is not presently committed. Further, a significant portion
of this is dependent upon obtaining acceptable financing. The Company expects
to delay these expenditures as necessary based on the availability of adequate
working capital and the availability of financing. Recently, the Chemical
Business has obtained relief from certain of the compliance dates under its
waste water management project and expects that this will ultimately result in
the delay in the implementation date of such project. Construction of the
wastewater treatment project is subject to the Company obtaining financing
to fund this project. There are no assurances that the Company will be able
to obtain the required financing. Failure to construct the wastewater
treatment facility could have a material adverse effect on the Company.
Foreign Subsidiary
___________________
As previously discussed in this report, in August, 1999, the Company sold
substantially all of the assets of its wholly owned Australian subsidiary,
effectively disposing of this portion of the Chemical Business. All of the
proceeds received by the Company have been applied to reduce the indebtedness of
ClimaChem, or have been reinvested in related businesses of ClimaChem in
accordance with the Indenture of Senior Unsecured Notes.
Impact of Year 2000
____________________
In 1999, the Company completed its project to enhance certain of its
Information Technology ("IT") systems and certain other technologically advanced
communication systems. Over the life of the project, the Company capitalized
approximately $1.3 million in costs to accomplish its enhancement program. The
capitalized costs included $.4 million in external programming costs, with the
remainder representing hardware and software purchases. The time and expense of
the project did not have a material impact on the Company's financial condition.
As a result of these modifications, the Company did not incur any significant
problems relating to Year 2000 issues. There was no interruption of business
with key suppliers or downturn in economic activity caused by problems with
Year 2000 issues. As of the date of this report, the Company has not been
notified of any warranty issues relating to Year 2000 for the products it has
sold and therefore, the Company believes it should have no material exposure
to contingencies related to the Year 2000 issue for the products it has sold.
The Company will continue to monitor its computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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 10 of Notes to Consolidated
Financial Statements.
35
<PAGE>
Item 7A. 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. All information is presented in U. S. dollars.
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.
The Company is also a party to a series of agreements under which it is
leasing a nitric acid plant. The minimum lease payments associated therewith,
prior to execution in June 1999, were directly impacted by the change in
interest rates. To mitigate a portion of the Company's exposure to adverse
market changes related to this leveraged lease, in 1997 the Company entered
into a interest rate forward agreement whereby the Company was the fixed rate
payor on notional amounts aggregating $25 million, net to its 50% interest,
with a weighted average of 7.12%. The Company accounted for this forward under
the deferral method, so long as high correlation was maintained, whereby the net
gain or loss upon settlement adjusted the item being hedged, the minimum lease
rentals, in periods commencing with the lease execution. As of December 31,
1999, the Company has deferred costs of approximately $2.7 million associated
with such agreement, which is being amortized over the initial term of the
lease. The following table provides information about the Company's interest
rate sensitive financial instruments as of December 31, 1999.
36
<PAGE>
<TABLE>
<CAPTION>
Years Ending December 31,
2000 2001 2002 2003 2004 Thereafter Total
through
2007
________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Expected maturities of long-term debt:
Variable rate debt $25,151 $ - $ - $ - $ - $ - $ 25,151
Weighted average
interest rate (1) 9.00% - % - % - % - % - % 9.00%
Fixed rate debt $ 4,493 $5,782 $ 374 $ 366 $ 195 $105,827 $117,037
Weighted average
interest rate (2) 10.60% 10.72% 10.73% 10.73% 10.73% 10.73% 10.68%
_____________________
<FN>
(1) Interest rate is based on the average rate of debt outstanding as of
December 31, 1999. Interest is generally at a floating rate based on
the lender's prime rate plus .5% per annum, or at the Company's option,
under its Revolving Credit Agreements, on the lender's LIBOR rate plus
2.875% per annum. During the first quarter of 2000, the Revolving
Credit Agreements were amended which included an increase in the floating
rate based on the Lender's prime rate plus 1.5% per annum, or at the
Company's option, on the Lender's LIBOR rate plus 3.875% per annum. The
effect of this change in interest rate based on the Lender's prime rate
at December 31, 1999, increased the weighted average interest rate to 10.0%
for 2000 and the total weighted average interest rate to 10.0%.
(2) Interest rate is based on the aggregate of debt outstanding as of
December 31, 1999.
</FN>
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Estimated Estimated
Fair Carrying Fair Carrying
Value Value Value Value
_______________________________________________
(in thousands)
<S> <C> <C> <C> <C>
Variable Rate:
Bank debt and
equipment financing $ 25,151 $ 25,151 $ 16,802 $ 16,802
Fixed Rate:
Bank debt and
equipment financing 12,103 12,037 16,409 16,129
Subordinated notes 26,250 105,000 105,000 105,000
________________________________________________
$ 63,503 $142,188 $138,211 $137,931
================================================
</TABLE>
The fair market 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 commitment to purchase 96,000 tons of anhydrous ammonia
under a contract. The Company's purchase price can be higher or lower than the
current market spot price. Based on the forward contract pricing existing
during 1999, and estimated market prices for products to be manufactured and
sold during the remainder of the contract, the accompanying Consolidated
Financial Statements included a loss provision of approximately $8.4 million for
anhydrous ammonia required to be purchased during the remainder of the contract.
Foreign Currency Risk
_____________________
During 1999, the Company sold its wholly owned subsidiary located in
Australia, for which the functional currency was the local currency, the
Australian dollar. Since the Australian subsidiary accounts were converted
into U.S. dollars upon consolidation with the Company using the exchange rate
at June 30, 1999, declines in value of the Australian dollar to the U.S. dollar
resulted in translation loss to the Company. As a result of the sale of the
Australian subsidiary, which was closed on August 2, 1999, the cumulative
foreign currency translation loss of approximately $1.1 million has been
included in the loss on disposal of the Australian subsidiary at December 31,
1999.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
_______ ___________________________________________
The Company has included the financial statements and supplementary
financial information required by this item immediately following Part IV
of this report and hereby incorporates by reference the relevant portions of
those statements and information into this Item 8.
38
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements.
39
<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 per-
formance 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 final 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 realign-
ment 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, and (xv) LSB non-ClimaChem Entities' ability to
pay its obligations as they came due. While the Company believes the expecta-
tions 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 environ-
ment), (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, (xvii) adverse results in any of the Company's pending litigation,
(xviii) 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 and to pay 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.
40
<PAGE>
PART III
Because all of the Company's outstanding capital stock is owned directly
or indirectly by its parent, LSB Industries, Inc., the Company is not required
to file a definitive proxy statement, and, as a result, the Company will provide
the information required by Part III of this report by amending this report on
or before April 29, 1999, to include such information (except for the informa-
tion of the Company's executive officers included under Item 4A of Part I of
this report), and incorporate such by reference.
41
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Company
appear immediately following this Part IV:
Pages
_____
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1999
and 1998 F-2
Consolidated Statements of Operations for each of
the three years in the period ended December 31,
1999 F-3
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1999 F-4
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1999 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-47
Quarterly Financial Data (Unaudited) F-48
(a) (2) Financial Statement Schedule
____________________________
The Company has included the following schedule in this report:
II - Valuation and Qualifying Accounts F-49
The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information
appears in the Company's Consolidated Financial Statements, including the
notes to those statements.
<PAGE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
ClimaChem, Inc.
We have audited the accompanying consolidated balance sheets of ClimaChem,
Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index at
Item 14(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of ClimaChem, Inc. at December 31, 1999 and 1998, and the
consolidated results of its operations and cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 17, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Balance Sheets
December 31,
1999 1998
___________________
(In Thousands)
<S> <C> <C>
Assets
Current assets (Note 7):
Cash and cash equivalents (Note 2) $ 2,673 $ 750
Trade accounts receivable, net 41,934 38,817
Inventories (Note 5) 25,772 37,367
Supplies and prepaid items 4,314 7,023
Income tax receivable (Note 8) - 2,050
Current deferred income taxes - 1,338
Due from LSB and affiliates (Note 3) 2,263 2,946
_______ ________
Total current assets 76,956 90,291
Property, plant and equipment, net (Notes 6 and 7) 75,667 82,389
Due from LSB and affiliates, net (Note 3) 13,443 13,443
Other assets, net 18,012 10,480
_______ _______
$184,078 $196,603
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 16,312 $17,416
Accrued liabilities (Note 12) 13,791 7,918
Current portion of long-term debt (Note 7) 29,644 10,460
________ _______
Total current liabilities 59,747 35,794
Long-term debt (Note 7) 112,544 127,471
Accrued losses on firm purchase commitments
(Note 12) 5,652 -
Deferred income taxes (Note 8) - 9,580
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 7 and 9):
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 (deficit) (6,518) 12,664
_______ _______
Total stockholders' equity 6,135 23,758
_______ _______
$184,078 $196,603
======= =======
</TABLE>
See accompanying notes.
F-2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Operations
Year ended December 31,
1999 1998 1997
__________________________
(In Thousands)
<S> <C> <C> <C>
Revenues:
Net sales $ 244,462 $ 241,546 $ 236,365
Interest and other income 2,493 1,468 893
______________________________
246,955 243,014 237,258
Costs and expenses:
Cost of sales 196,095 190,722 189,936
Selling, general and administrative
(Note 3) 45,618 38,105 35,183
Interest (Note 3) 14,260 13,463 9,041
Provision for loss on firm purchase
commitments (Note 12) 8,439 - -
Provision for impairment on long-lived
assets (Note 2) 3,913 - -
____________________________
268,325 242,290 234,160
____________________________
Income (loss) before business disposed of,
provision for income taxes and extra-
ordinary charge (21,370) 724 3,098
Business disposed of (Note 4):
Revenues 7,461 14,184 26,482
Operating costs, expenses and interest 9,419 17,085 27,254
____________________________
(1,958) (2,901) (772)
Loss on disposal of business (1,971) - -
____________________________
(3,929) (2,901) (772)
____________________________
Income (loss) before provision (benefit)
for income taxes and extraordinary charge (25,299) (2,177) 2,326
Provision (benefit) for income taxes (Note 8) (6,117) 392 1,429
____________________________
Income (loss) before extraordinary charge (19,182) (2,569) 897
Extraordinary charge, net of income
tax benefit of $1,750,000 (Note 7) - - 2,869
____________________________
Net loss $ (19,182) $ (2,569) $ (1,972)
============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands)
Accumulated
Other
Common Stock Capital in Comprehensive
__________________ Excess of Income Retained
Shares Par Value Par Value (Loss) Earnings Total
_____________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,000 $ 1 $12,652 $ 276 $19,914 $32,843
Net loss - - - - (1,972) (1,972)
Foreign currency translation
adjustment - - - (1,279) - (1,279)
_______
Total comprehensive loss (3,251)
Dividends to Parent - - - - (2,303) (2,303)
______________________________________________________________________
Balance at December 31, 1997 10,000 1 12,652 (1,003) 15,639 27,289
Net loss - - - - (2,569) (2,569)
Foreign currency translation
adjustment - - - (556) - (556)
_______
Total comprehensive loss (3,125)
Dividends to Parent - - - - (406) (406)
_______________________________________________________________________
Balance at December 31, 1998 10,000 1 12,652 (1,559) 12,664 23,758
Net loss - - - - (19,182) (19,182)
Foreign currency translation
adjustment - - - 1,559 - 1,559
________
Total comprehensive loss (17,623)
________________________________________________________________________
Balance at December 31, 1999 10,000 $ 1 $ 12,652 $ - $ (6,518) $ 6,135
========================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
1999 1998 1997
____________________________________
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(19,182) $ (2,569) $(1,972)
Adjustments to reconcile net loss to
net cash provided (used) by
operations:
Extraordinary charge, net of tax,
related to financing activities - - 2,869
Inventory write-down and provision
for loss on firm purchase commit-
ments, net of amount realized 8,175 - -
Provision for impairment on long-
lived assets 3,913 - -
Depreciation of property, plant and 8,830 9,545 8,130
equipment
Amortization 1,138 1,324 756
Provision for losses:
Trade accounts receivable 828 971 521
Notes receivable - 854 175
Environmental matters and other 195 (387) -
Deferred income tax provision (benefit) (6,192) 351 209
Loss (gain) on sales of assets - (30) 138
Loss on business disposed of 1,971 - -
Cash provided (used) by changes in
assets and liabilities:
Trade accounts receivable (3,661) (1,484) (2,384)
Inventories 3,892 904 (3,128)
Supplies and prepaid items (186) (1,252) (191)
Income tax receivable - 92 (2,142)
Accounts payable (1,325) (1,598) (13,706)
Accrued liabilities 3,285 (2,859) 1,014
___________________________________
Net cash provided (used) by operating activities 1,681 3,862 (9,711)
</TABLE>
(Continued on following page)
F-5
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
1999 1998 1997
__________________________________
(In Thousands)
<S> <C> <C> <C>
Cash flows from investing activities
Payment made for acquisition of limited
partner interest in business (Note 3) $ (3,114) $ - $ -
Purchase of receivables and option
to acquire business (Note 3) (2,558) - -
Capital expenditures (6,688) (7,418) (9,357)
Proceeds from sales of equipment 1,045 65 194
Proceeds from the sale of business
disposed of 9,981 - -
Increase in other assets (870) (1,072) (3,609)
____________________________________
Net cash used by investing activities (2,204) (8,425) (12,772)
Cash flows from financing activities
Payments on long-term and other debt (6,867) (4,690) (72,504)
Long-term and other borrowings, net of
origination fees - (583) 155,000
Debt prepayment charge, net of tax - - (2,869)
Net change in revolving debt facilities 8,269 6,348 (28,478)
Net change in due to/from LSB and affiliates 1,044 1,110 (23,938)
Dividends paid to parent - (406) (2,303)
_________________________________
Net cash provided by financing activities 2,446 1,779 24,908
_________________________________
Net increase (decrease) in cash and cash
equivalents 1,923 (2,784) 2,425
Cash and cash equivalents at beginning of year 750 3,534 1,109
__________________________________
Cash and cash equivalents at end of year $ 2,673 $ 750 $ 3,534
==================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. Basis of Presentation
ClimaChem, Inc. (the "Company"), a wholly owned subsidiary of
LSB Industries, Inc. ("LSB" or "Parent"), was organized under
the laws of the State of Oklahoma in October 1997. The Company's
Certificate of Incorporation authorizes the issuance of 500,000
shares of $.10 par value common stock. 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.
Prior to November 21, 1997, all of the Company's subsidiaries
were wholly-owned subsidiaries of LSB, directly or through one or
more intermediaries, and were contributed to the Company,
following its formation, by LSB or other subsidiaries in exchange
for all of the outstanding common stock of the Company. These
exchanges have been accounted for as a reorganization of entities
under common control and, accordingly, reflect LSB's and its
subsidiaries' historical cost of such subsidiaries and net
assets. Accordingly, the consolidated financial statements of
ClimaChem, Inc. and its subsidiaries for all periods reflect this
reorganization in a manner similar to a pooling of interests.
The consolidated financial statements include the accounts of
ClimaChem, Inc. and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in the
accompanying financial statements.
The Company has historically had significant transactions with
LSB and its subsidiaries which are reflected in the accompanying
consolidated financial statements on the basis established
between the Company and LSB and its subsidiaries. See Notes 3, 8,
9 and 10.
2. Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
F-7
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Inventories
Inventory is priced at the lower of cost or market, with cost
being determined using the first-in, first-out (FIFO) basis,
except for certain heat pump products with a value of $8,351,000
and $7,095,000 at December 31, 1999 and 1998, respectively, which
are priced at the lower of cost or market, with cost being
determined using the last-in, first-out (LIFO) basis. The
difference between the LIFO basis and current cost was $822,000
and $1,062,000 at December 31, 1999 and 1998, respectively.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. For financial
reporting purposes, depreciation, depletion and amortization is
primarily computed using the straight-line method over the
estimated useful lives of the assets ranging from 3 to 30 years.
Property, plant and equipment leases which are deemed to be
installment purchase obligations have been capitalized and
included in property, plant and equipment. Maintenance, repairs
and minor renewals are charged to operations while major renewals
and improvements are capitalized.
Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired, which is
included in other assets in the accompanying consolidated balance
sheets, totaling $2,312,000 and $2,654,000, net of accumulated
amortization, of $4,100,000 and $3,758,000 at December 31, 1999
and 1998, respectively, and is being amortized by the straight-
line method over periods of 15 to 19 years.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
F-8
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
For the year ended December 31, 1999, the Company recognized
impairment totaling $3.9 million associated with two chemical
plants which are to be sold or dismantled. The 1999 provision for
impairment represents the difference between the net carrying
cost and the estimated salvage value for the nonoperating plant
to be dismantled and the difference between the net carrying cost
and the estimated selling price less cost to dispose for the
plant to be sold. The Company has made estimates of the future
cash flows related to its Chemical Business in order to determine
recoverability of the Company's remaining cost. Based on these
estimates, no additional impairment was indicated at December 31,
1999; however, it is reasonably possible that the Company may
recognize additional impairments in this business in the near
term if the Company experiences continued or further
deterioration of the chemical business.
Debt Issuance Cost
Debt issuance costs are amortized over the term of the associated
debt instrument using the straight-line method. Such costs, which
are included in other assets in the accompanying consolidated
balance sheets, were $3,416,000 and $3,878,000, net of
accumulated amortization, of $987,000 and $525,000 as of December
31, 1999 and 1998, respectively.
Revenue Recognition
The Company recognizes revenue at the time title of the goods
transfers to the buyer.
Income Taxes
Taxable income of the Company is included in the consolidated
federal income tax return of LSB. The provision for or benefit
from income taxes is calculated as if the Company filed a
separate federal income tax return. To the extent a state or
other taxing jurisdiction requires or permits a consolidated,
combined, or unitary tax return to be filed, and such return
includes the Company, the principles expressed with respect to
consolidated federal income tax allocation shall apply.
Deferred income taxes result from the Company having different
bases for financial and income tax reporting principally from
utilizing different lives for income taxes purposes than for
financial reporting purposes.
F-9
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Research and Development Costs
Costs incurred in connection with product research and
development are expensed as incurred. Such costs amounted to
$713,000, $377,000 and $367,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Advertising Costs
Costs incurred in connection with advertising and promotion of
the Company's products are expensed as incurred. Such costs
amounted to $1,536,000, $1,152,000 and $1,160,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Capitalized Interest
Interest costs of $1,113,000 related to the construction of a
nitric acid plant were capitalized in 1997 (none in 1999 or 1998)
and are being amortized over the related plant's estimated useful
life.
Translation of Foreign Currency
Assets and liabilities of foreign operations, where the
functional currency is the local currency, are translated into
U.S. dollars at the fiscal year end exchange rate. The related
translation adjustments are recorded as cumulative translation
adjustments, a separate component of stockholders' equity.
Revenues and expenses are translated using average exchange rates
prevailing during the year.
Hedging
In 1997, the Company entered into an interest rate forward
agreement to effectively fix the interest rate on a long-term
lease commitment (not for trading purposes). In 1999, the Company
executed the long-term lease agreement and terminated the forward
at a net cost of $2.8 million. The Company has accounted for this
hedge under the deferral method (as an adjustment of the initial
term lease rentals). At December 31, 1999, the remaining deferred
loss included in other assets approximated $2.7 million. The
deferred cost recognized in operations amounted to $169,000 in
1999 (none in 1998 or 1997). See Recently Issued Pronouncements
below and Note 10 - Commitments and Contingencies.
F-10
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Recently Issued Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt
this new Statement January 1, 2001. The Statement will require
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that do not qualify or are not designated
as hedges must be adjusted to fair value through operations. If
the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The
Company has not yet determined what all of the effects of SFAS
133 will be on the earnings and financial position of the
Company; however, the Company expects that the deferred hedge
loss discussed under Accounting Policies - Hedging, will be
accounted for as a cash flow hedge upon adoption of SFAS 133,
with the effective portion of the hedge being classified in
equity in accumulated other comprehensive income or loss at the
date of adoption. The amount included in accumulated other
comprehensive income or loss will be amortized to operations over
the initial term of the leveraged lease.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash, overnight funds and interest bearing deposits with
maturities when purchased by the Company of 90 days or less.
Under the Company's Revolving Credit Facility (Note 7 - Long-Term
Debt) cash received by the Company on collection of trade
accounts receivable is deposited in cash collection accounts.
Cash in the collection accounts is applied against the
outstanding balance under the Company's revolving credit
agreement within 1-2 business days following receipt. The cash
balance held in the collection accounts at December 31, 1999 and
1998 aggregated $2,188,000 and $1,593,000, respectively.
F-11
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
<TABLE>
<CAPTION>
Supplemental cash flow information includes:
Year ended December 31,
1999 1998 1997
__________________________________
(In Thousands)
<S> <C> <C> <C>
Cash payments for interest and income taxes:
Interest on long-term debt and other $ 14,525 $ 14,079 $ 9,864
Income taxes:
Paid to state taxing authorities 17 65 86
Paid to Parent - 1,908 1,013
Noncash financing and investing activities--
Long-term debt issued for property, plant
and equipment 471 523 1,108
</TABLE>
3. Transactions With Related Parties
On November 21, 1997, the Company and LSB entered into a services
agreement (the "Services Agreement") pursuant to which LSB will
continue to provide to the Company various services, including
financial and accounting, order entry, billing, credit, payable,
insurance, legal, human resources, advertising and marketing, and
related administrative and management services, that LSB has
historically provided to the operations and businesses of the
Company. The Company will pay to, or reimburse, LSB for the costs
and expenses incurred by LSB in the performance of the Services
Agreement.
Under the terms of the Services Agreement, the Company will pay
to, or reimburse, LSB for the value of the office facilities of
LSB, including LSB's principal offices and financial accounting
offices utilized in the performance of the Services Agreement.
LSB will determine the proportionate usage of such facilities by
LSB and the Company, and the Company will pay to, or reimburse,
LSB for its proportionate share of such usage.
Charges for such services aggregate $4,780,000, $2,265,000 and
$1,950,000 for the years ended December 31, 1999, 1998 and 1997,
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.
F-12
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
3. Transactions With Related Parties (continued)
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 Services 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
1999, subsidiaries of the Company purchased certain raw materials
with LSB's assistance and paid $461,000 to LSB in commissions on
such purchases. The Company also purchased $1,076,000 in
industrial supplies, in 1999, from subsidiaries of LSB which are
not subsidiaries of the Company.
The Company's Climate Control manufacturing subsidiaries also
lease facilities from an affiliate under various operating leases
and a capital lease. See Note 10 - Commitments and Contingencies,
Operating Leases. Rental expense associated with the operating
leases aggregated $1,772,000, $475,000 and $475,000 for the years
ended December 31, 1999, 1998 and 1997, 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 million 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 $1,172,000 due to the LSB subsidiary.
In 1995, a subsidiary of LSB invested approximately $2.8 million
to purchase a fifty percent (50%) limited partner interest in an
energy conservation joint venture (the "Project"). The Project
was 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 acquired 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 management of the Company believes approximated
the investment's fair value, at the date of purchase.
F-13
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
3. Transactions With Related Parties (continued)
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 the Climate Control Business. As a result
of the approval, in April 1999 the Company purchased from a
subsidiary of LSB, an option to acquire a French HVAC
manufacturing company and all amounts due and payable from such
French manufacturer or its parent to LSB. The Company paid LSB
$2.6 million for the option and receivables due from the French
manufacturer and its parent. This amount equaled the net book
value of the investment on the books of LSB's subsidiary, which
management of the Company believes approximated the investment's
fair value, at the date of purchase.
During July 1999, a subsidiary of the Company sold 26 railcars to
a non-affiliated entity for approximately $1.1 million.
Thereafter, the entity leased the railcars to a subsidiary of
LSB, which is neither the Company nor a subsidiary of the
Company. A subsidiary of the Company has entered into a services
agreement with such LSB subsidiary pursuant to which such
subsidiary is to provide railcar services to a subsidiary of the
Company. Under the services agreement, the Company's subsidiary
will pay a fee based on each railcar unit used by such subsidiary
of $1,031 per month. The Company's subsidiary is not required to
use any railcar equipment under the services agreement, and the
services agreement may be terminated at any time on 30 days
written notice.
In 1999, the Company advanced LSB $2 million pursuant to a
provision in the bond indenture which allows the Company to make
up to a $2 million investment in any other "person," as defined.
The advance bears interest at 10-3/4% per annum payable on
demand.
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 for the
first three quarters of the year, not to exceed $1,350,000. The
maximum management fee amount to be paid to LSB by the Company is
F-14
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
3. Transactions With Related Parties (continued)
adjusted annually commensurate with the percentage change, if
any, in the Consumer Price Index during the preceding calendar
year. No payments were made to LSB under the Management Agreement
in 1999, 1998, or 1997.
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. The Company
paid approximately $1.0 million to LSB in 1997 (none in 1999 or
1998) under the tax sharing arrangement.
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
F-15
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
3. Transactions With Related Parties (continued)
have been made on the date of such declaration. Based on the
terms stated above, the Company declared and paid to LSB a
dividend, in the fourth quarter of 1998, in the amount of
$406,000 representing 50% of the Company's consolidated net
income for the nine months ended September 30, 1998 (none in 1999
or 1997).
The Company has, at various times, maintained certain unsecured
borrowings from LSB and its subsidiaries and made loans and
advances to LSB which generally bear interest. At December 31,
1999 and 1998, the Company had loans and advances due from LSB of
approximately $13.4 million, $10.0 million of which was loaned to
LSB from the proceeds of the sale of the Notes, as defined (Note
7 - Long-Term Debt), and bears interest at 10-3/4%, maturing
November 2007 and $3.4 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, from borrowings on
the Company's credit facilities. This loan is due by its terms in
November 2007 and bears interest at 7% per annum. At December 31,
1999 and 1998, the Company had $2.4 million and $2.9 million,
respectively, due from LSB and affiliates included in current
assets related to advances as discussed previously, interest and
refunds due associated with operations under the Services
Agreement or refunds under the management agreement. At December
31, 1999, LSB had not made the December 1 interest payment to the
Company for the loans described above. LSB made the December 1
interest payment in March 2000. The Company earned interest
income on net loans and advances due from LSB and affiliates
aggregating approximately $1,474,000, $1,316,000 and $357,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
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 December 31, 1999, the LSB Non-ClimaChem
Entities had a working capital deficit of $2.3 million (including
$4.7 million of inventories and $2.6 million of accounts
receivable), and long-term debt of $32.8 million (including that
owed to the Company), $3.6 million of which is due within one
year. For the year ended December 31, 1999, the LSB Non-ClimaChem
Entities had a net loss of $15.9 million (including $10.0 million
associated with discontinued operations), and used cash in
operating activities of approximately $2.2 million. LSB is
focusing its efforts and resources on its core businesses, which
represent that of the Company. LSB's Board of Directors has
approved a plan for the disposal of its Automotive Products
F-16
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
3. Transactions With Related Parties (continued)
Business. The plan calls for management to dispose of the
Automotive Business through sale. 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 (other than dividend
obligation under its outstanding preferred stocks), 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 aggre-
gate $15.7 million at December 31, 1999, may not be recoverable.
As of December 31, 1999, the Company has not provided an
allowance for doubtful accounts against these receivables,
loans and advances since it is their present belief that LSB
will be able to pay these amounts when they come due; however,
it is reasonably possible that the evaluation relative to the
amounts due from LSB and its subsidiaries could change in the
near term.
4. 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"), of the Chemical Business. Pursuant to
the sale agreement, TES retained certain of its liabilities to be
liquidated from the proceeds of the sale and from the collection
of its accounts receivables which were retained. In connection
with the closing in August 1999, the Company received
approximately $3.6 million in net proceeds from the assets sold,
after paying off $6.4 million bank debt and the purchaser
assuming approximately $1.1 million of debt related to certain
capitalized lease obligations. The Company substantially
completed the liquidation of the assets and liabilities retained
during the fourth quarter of 1999.
The loss associated with the disposition included in the
accompanying consolidated statements of operations for the year
ended December 31, 1999 is $2.0 million 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 and approximately $.6 million related
to the resolution of certain environmental matters.
F-17
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
5. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
Finished
(or Purchased) Work-In- Raw
Goods Process Materials Total
__________________________________________
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1999:
Climate Control products $ 6,260 $ 3,141 $ 6,581 $15,982
Chemical products 5,015 2,362 2,413 9,790
_______________________________________
Total $ 11,275 $ 5,503 $ 8,994 $25,772
=======================================
December 31, 1998:
Climate Control products $ 3,233 $ 2,442 $ 6,673 $12,348
Chemical products 10,890 3,848 10,281 25,019
________________________________________
Total $ 14,123 $ 6,290 $ 16,954 $37,367
========================================
</TABLE>
6. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of:
<TABLE>
<CAPTION>
December 31,
1999 1998
____________________
(In Thousands)
<S> <C> <C>
Land and improvements $ 1,411 $ 1,340
Buildings and improvements (A) 11,352 8,037
Machinery, equipment and automotive 124,459 130,951
Furniture and fixtures 3,968 3,277
___________________
141,190 143,605
Less accumulated depreciation 65,523 61,216
___________________
$ 75,667 $ 82,389
===================
<FN>
(A) Includes capital lease of $3,173,000 in 1999 with a related
party as discussed in Note 3.
</TABLE>
F-18
<PAGE>
7. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31,
1999 1998
__________________
(In Thousands)
<S> <C> <C>
Secured revolving credit facility with
interest at a base rate plus a specified
percentage (9.0% aggregate rate at
December 31, 1999) (A) $ 25,071 $ 11,793
Secured revolving credit facility - 5,009
10-3/4% Senior Notes due 2007 (B) 105,000 105,000
Secured loan (C) 7,128 9,570
Other, with interest at rates of 6.2% to
13.0%, most of which is secured by
machinery and equipment 4,989 6,559
__________________
142,188 137,931
Less current portion of long-term debt 29,644 10,460
__________________
Long-term debt due after one year $112,544 $127,471
==================
</TABLE>
(A) In December 1994, LSB and certain of its subsidiaries (the
"Borrowing Group") and a bank entered into a series of asset-
based revolving credit facilities which provided for an
initial term of three years. The agreement has been amended
at various dates since 1994 with the latest being executed
on March 1, 2000. The amended agreement provides for a $50
million revolving credit facility (the "Revolving Credit
Facility") with separate loan agreements (the "Loan
Agreements") for the subsidiaries of the Company and for LSB
and its subsidiaries which are not subsidiaries of the
Company. Under the Revolving Credit Facility, LSB and
certain subsidiaries of LSB that are not subsidiaries of the
Company have a right to borrow on a revolving basis, up to
$2.5 million ($2.4 million outstanding at December 31,
1999). Any amounts borrowed by LSB and its subsidiaries
F-19
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
7. Long-Term Debt (continued)
that are not subsidiaries of the Company will reduce the
amount that the subsidiaries of the Company may borrow at
any one time under the Revolving Credit Facility. Borrowings
under the Revolving Credit Facility bear an annual rate of
interest at a floating rate based on the lender's prime rate
plus 1.5% (prime rate plus .5% at December 31, 1999) per
annum or, at the Company's option, on the lender's LIBOR
rate plus 3.875% (LIBOR rate plus 2.875% at December 31,
1999) per annum. The agreement will terminate on December
31, 2000, unless the parties to the Revolving Credit
Facility agree on acceptable financial covenants for the
fiscal year beginning January 2001 on or before October 1,
2000. The Loan Agreements also require a "permanent reserve"
of $5 million which reduces the Borrowing Group's borrowing
availability. The Company may terminate the Revolving Credit
Facility prior to maturity; however, should the Company do
so, it would be required to pay a termination fee of
$500,000. While there is no assurance that the Company will
be successful in extending the term of such credit facility,
the Company believes it has a good working relationship with
the lender and that it will be successful in extending such
facility or replacing such facility from another lender with
substantially the same terms during 2000.
Each of the Loan Agreements specify a number of events of
default and require the Company to maintain certain
financial ratios (including net worth and an interest
coverage ratio), limits the amount of capital expenditures,
and contains other covenants which restrict, among other
things, (i) the incurrence of additional debt; (ii) the
payment of dividends and other distributions; (iii) the
making of certain investments; (iv) certain mergers,
acquisitions and dispositions; (v) the issuance of secured
guarantees; and (vi) the granting of certain liens.
Events of default under the Revolving Credit Facility
include, among other things, (i) the failure to make
payments of principal, interest, and fees, when due; (ii)
the failure to perform covenants contained therein; (iii)
the occurrence of a change in control of LSB if any party is
or becomes the beneficial owner of more than 50% of the
total voting securities of LSB, except for Jack E. Golsen or
members of his immediate family; (iv) default under any
material agreement or instrument (other than an agreement or
F-20
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
instrument evidencing the lending of money) which would have
a material adverse effect on the Company and its
subsidiaries which are borrowers under the Revolving Credit
Facility, taken as a whole, and which is not cured within
the grace period; (v) a default under any other agreement
relating to borrowed money exceeding certain limits; and
(vi) customary bankruptcy or insolvency defaults.
The Revolving Credit Facility is secured by the accounts
receivable, inventory, proprietary rights, general
intangibles, books and records, and proceeds thereof of the
Company.
(B) On November 26, 1997, the Company completed the sale of $105
million principal amount of 10-3/4% Senior Notes due 2007
(the "Notes"). The Notes bear interest at an annual rate of
10-3/4% payable semiannually in arrears on June 1 and
December 1 of each year. The Notes are senior unsecured
obligations of the Company and rank pari passu in right of
payment to all existing senior unsecured indebtedness of the
Company. The Notes are effectively subordinated to all
existing and future senior secured indebtedness of the
Company and its subsidiaries.
The Notes were issued pursuant to an Indenture, which
contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to: (i)
incur additional indebtedness; (ii) incur certain liens;
(iii) engage in certain transactions with affiliates; (iv)
make certain restricted payments; (v) agree to payment
restrictions affecting subsidiaries; (vi) engage in
unrelated lines of business; or (vii) engage in mergers,
consolidations or the transfer of all or substantially all
of the assets of the Company to another person. In addition,
in the event of certain asset sales, the Company will be
required to use the proceeds to reinvest in the Company's
business, to repay certain debt or to offer to purchase
Notes at 100% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon, plus liquidated
damages, if any, to the date of purchase.
F-21
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
Except as described below, the Notes are not redeemable at
the Company's option prior to December 1, 2002. After
December 1, 2002, the Notes will be subject to redemption at
the option of the Company, in whole or in part, at the
redemption prices set forth in the indenture, plus accrued
and unpaid interest thereon, plus liquidated damages, if
any, to the applicable redemption date. In addition, until
December 1, 2000, up to $35 million in aggregate principal
amount of Notes are redeemable, at the option of the
Company, at a price of 110.75% of the principal amount of
the Notes, together with accrued and unpaid interest, if
any, thereon, plus liquidated damages, if any, to the date
of the redemption, with the net cash proceeds of a public
equity offering; provided, however, that at least $65
million in aggregate principal amount of the Notes remain
outstanding following such redemption.
In the event of a Change of Control of LSB or the Company,
holders of the Notes will have the right to require the
Company to repurchase the Notes, in whole or in part, at a
redemption price of 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon, plus
liquidated damages, if any, to the date of repurchase.
The Company is a holding company with no material assets
(other than the notes and accounts receivable from LSB,
specified in the accompanying consolidated balance sheets,
and the Notes origination fees which have a net book value
of $3.3 million and $3.7 million as of December 31, 1999 and
1998, respectively) or material operations other than its
investments in its subsidiaries, and each of its
subsidiaries is wholly owned, directly or indirectly.
ClimaChem's payment obligations under the Notes are fully,
unconditionally and joint and severally guaranteed by all of
the existing subsidiaries of the Company, except for El
Dorado Nitrogen Company ("EDNC").
Set forth below are condensed consolidating financial
statements of the Guarantor Subsidiaries, the Company's
subsidiary which is not a guarantor of the Senior Notes (the
"Non-Guarantor Subsidiary") and the Company. For all periods
presented, EDNC was the only Non-Guarantor Subsidiary.
Separate financial statements of each Guarantor Subsidiary
have not been provided because management has determined
that they are not material to investors. The statement of
operations for 1997 has not been presented because the
operations of the non-guarantor subsidiary were
inconsequential.
F-22
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
<TABLE>
<CAPTION>
Consolidating Balance Sheet
As of December 31, 1999
(Dollars in thousands)
Non-
Guarantor Guarantor Company
Subsidiaries Subsidiary (Parent) Eliminations Consolidated
_________________________________________________________________________
<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 - - 2,263 2,263
________________________________________________________________________
Total current assets 69,425 3,179 4,352 76,956
Property, plant and equipment, net 75,158 509 - 75,667
Due from LSB and affiliates - - 13,443 13,443
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>
F-23
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
<TABLE>
<CAPTION>
Consolidating Balance Sheet
As of December 31, 1998
(Dollars in thousands)
Non-
Guarantor Guarantor Company
Subsidiaries Subsidiary (Parent) Eliminations Consolidated
__________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 744 $ 2 $ 4 $ 750
Trade accounts receivable, net 37,008 1,809 - 38,817
Inventories 37,367 - - 37,367
Supplies and prepaid items 6,704 259 60 7,023
Income tax receivable - - 2,050 2,050
Current deferred income taxes 1,338 - - 1,338
Due from LSB and affiliates, net - - 2,946 2,946
______________________________________________________________________
Total current assets 83,161 2,070 5,060 90,291
Property, plant and equipment, net 82,389 - - 82,389
Due from LSB and affiliates - - 13,443 13,443
Investment in and advances to
affiliates - - 110,686 $(110,686) -
Other assets, net 4,641 1,858 3,981 10,480
_______________________________________________________________________
$170,191 $ 3,928 $133,170 $(110,686) $196,603
=======================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,695 $ 1,708 $ 13 $ 17,416
Accrued liabilities 5,078 - 2,840 7,918
Current portion of long-term debt 10,460 - - 10,460
_______________________________________________________________________
Total current liabilities 31,233 1,708 2,853 35,794
Long-term debt 22,471 - 105,000 127,471
Deferred income taxes 9,580 - - 9,580
Payable to Parent 26,031 2,079 - (28,110) -
Stockholders' equity:
Common stock 60 1 1 (61) 1
Capital in excess of par value 72,797 - 12,652 (72,797) 12,652
Accumulated other comprehensive
loss (1,559) - - (1,559)
Retained earnings 9,578 140 12,664 (9,718) 12,664
________________________________________________________________________
Total stockholders' equity 80,876 141 25,317 (82,576) 23,758
________________________________________________________________________
$170,191 $ 3,928 $133,170 $(110,686) $196,603
=========================================================================
</TABLE>
F-24
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
<TABLE>
<CAPTION>
Consolidating Statement of Operations
Year ended December 31, 1999
(Dollars in thousands)
Non-
Guarantor Guarantor Company
Subsidiaries Subsidiary (Parent) Eliminations Consolidated
___________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Business continuing at
December 31, 1999
Revenues:
Net sales $225,956 $ 18,397 $ 109 $244,462
Other income (expense) 1,467 (373) 9,965 $ (8,566) 2,493
___________________________________________________________________________
227,423 18,024 10,074 (8,566) 246,955
Costs and expenses:
Cost of sales 179,862 15,594 639 196,095
Selling, general and
administrative 41,367 254 3,997 45,618
Interest 11,477 62 11,287 (8,566) 14,260
Provisions for losses on firm
purchase commitments 8,439 - - 8,439
Provisions for impairment on
long-lived assets 3,913 - - 3,913
___________________________________________________________________________
245,058 15,910 15,923 (8,566) 268,325
____________________________________________________________________________
Income (loss) before business
disposed of and provisions
(benefit) for income taxes (17,635) 2,114 (5,849) - (21,370)
Business disposed of during 1999:
Revenues 7,461 - - 7,461
Operating costs, expenses and
interest 9,419 - - 9,419
___________________________________________________________________________
(1,958) - - - (1,958)
Loss on disposal of business (1,971) - - - (1,971)
___________________________________________________________________________
(3,929) - - - (3,929)
___________________________________________________________________________
Income (loss) before equity
in loss of subsidiaries and
provision (benefit) for
income taxes (21,564) 2,114 (5,849) - (25,299)
Equity in loss of subsidiaries - - (13,333) 13,333 -
Provision (benefit) for
income taxes (6,857) 740 - (6,117)
____________________________________________________________________________
Net income (loss) $(14,707) $ 1,374 $(19,182) $ 13,333 $ (19,182)
============================================================================
</TABLE>
F-25
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
<TABLE>
<CAPTION>
Consolidating Statement of Operations
Year ended December 31, 1998
(Dollars in thousands)
Non-
Guarantor Guarantor Company
Subsidiaries Subsidiary (Parent) Eliminations Consolidated
___________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Business continuing at
December 31, 1998
Revenues:
Net sales $241,546 $ - $ - $241,546
Other income (expense) 146 - 12,298 $(10,976) 1,468
_________________________________________________________________________
241,692 - 12,298 (10,976) 243,014
Costs and expenses:
Cost of sales 190,722 - - 190,722
Selling, general and
administrative 37,489 - 616 38,105
Interest expense 13,151 - 11,288 (10,976) 13,463
_________________________________________________________________________
241,362 - 11,904 (10,976) 242,290
_________________________________________________________________________
Income before business
disposed of and provisions
for income taxes 330 - 394 - 724
Business to be disposed of
during 1999:
Revenues 14,184 - - 14,184
Operating costs, expenses
and interest 17,085 - - 17,085
________________________________________________________________________
(2,901) - - (2,901)
________________________________________________________________________
Income (loss) before
provision for income taxes (2,571) - 394 (2,177)
Equity in loss of subsidiaries - - (2,781) 2,781 -
Provision for income taxes 210 - 182 392
________________________________________________________________________
Net income (loss) $ (2,781) $ - $ (2,569) $ 2,781 $ (2,569)
=========================================================================
</TABLE>
F-26
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 1999
(Dollars in thousands)
Non-
Guarantor Guarantor Company
Subsidiaries Subsidiary (Parent) Eliminations Consolidated
_______________________________________________________________________
<S> <C> <C> <C> <C> <C>
Cash flows provided (used) by
operating activities $ 4,180 $ 3,538 $ (6,037) $ 1,681
Cash flows from investing activities:
Capital expenditures (6,179) (509) - (6,688)
Payments made for acquisition
of limited partner interest
in business (3,114) - - (3,114)
Purchase of receivable and
option to acquire business (2,558) - - (2,558)
Proceeds from sale of equipment 1,045 - - 1,045
Proceeds from the sale of
business disposed of 9,981 - - 9,981
Increase in other assets (467) (315) (88) (870)
_______________________________________________________________________
Net cash used by investing activities: (1,292) (824) (88) (2,204)
Cash flows from financing activities:
Payments on long-term debt (6,867) - - (6,867)
Net change in revolving debt 8,269 - - 8,269
Net change in due to/from LSB
and affiliates (4,218) (2,013) 7,275 1,044
_______________________________________________________________________
Net cash provided (used) by
financing activities (2,816) (2,013) 7,275 2,446
_______________________________________________________________________
Net increase in cash from all
activities 72 701 1,150 1,923
Cash at the beginning of period 744 2 4 750
_______________________________________________________________________
Cash at the end of period $ 816 $ 703 $ 1,154 $ 2,673
=======================================================================
</TABLE>
F-27
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 1998
(Dollars in thousands)
Non-
Guarantor Guarantor Company
Subsidiaries Subsidiary (Parent) Eliminations Consolidation
________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Cash flows provided (used) by
operating activities $ 3,298 $ (369) $ 933 $ 3,862
Cash flows from investing activities:
Capital expenditures (7,418) - - (7,418)
Proceeds from sale of equipment 65 - - 65
Decrease (increase) in other assets 1,797 (1,991) (878) (1,072)
_____________________________________________________________________
Net cash used by investing activities (5,556) (1,991) (878) (8,425)
Cash flows from financing activities:
Payments on long-term debt (4,690) - - (4,690)
Long-term and other borrowing (583) - - (583)
Net change in revolving debt 6,348 - - 6,348
Net change in due to/from LSB
and affiliates (1,966) 2,317 759 1,110
Dividends paid to parent - - (406) (406)
____________________________________________________________________
Net cash provided (used) by
financing activities (891) 2,317 353 1,779
____________________________________________________________________
Net increase (decrease) in
cash from all activities (3,149) (43) 408 (2,784)
Cash at the beginning of period 3,893 45 (404) 3,534
_____________________________________________________________________
Cash at the end of period $ 744 $ 2 $ 4 $ 750
=====================================================================
</TABLE>
In February 1997, certain subsidiaries of the Company's
Chemical Business entered into a $50 million financing
arrangement with John Hancock. The financing arrangement
consisted of $25 million of fixed rate notes and $25 million
of floating rate notes. In connection with the issuance of
the Notes, a subsidiary of the Company retired the
outstanding principal associated with the John Hancock
financing arrangement and incurred a prepayment fee. The
prepayment fee paid and loan origination costs expensed in
1997 related to the John Hancock financing arrangement
aggregated $4,619,000 ($2,869,000 net of income tax benefit
of $1,750,000).
F-28
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
(C) This agreement, as amended, between a subsidiary of the
Company and an institutional lender provides for a loan, the
proceeds of which were used in the construction of a nitric
acid plant, in the aggregate amount of $16.5 million
requiring 84 equal monthly payments of principal plus
interest, with interest at a fixed rate of 8.86% through
maturity in 2002. This agreement is secured by the plant,
equipment and machinery, and proprietary rights associated
with the plant which has an approximate carrying value of
$27.1 million at December 31, 1999.
This agreement, as amended, contains covenants (i) requiring
maintenance of an escalating tangible net worth, (ii)
restricting distributions and dividends from a subsidiary of
the Company to the Company to 50% of the subsidiary's annual
net income, as defined, (iii) restricting a change of
control of the Company and (iv) requiring maintenance of a
debt to tangible net worth ratio. At December 31, 1999, the
lender had waived compliance of certain financial covenants
through September 30, 2000. In March 2000, the subsidiary of
the Company obtained a waiver of these covenants through
April 2001.
Maturities of long-term debt for each of the five years after
December 31, 1999 are as follows: (in thousands) 2000-$29,644;
2001-$5,782; 2002-$374; 2003-$366; 2004-$195 and thereafter-
$105,827.
8. Income Taxes
<TABLE>
<CAPTION>
The provision (benefit) for income taxes consists of:
Year ended December 31,
1999 1998 1997
_____________________________
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ - $ 35 $1,027
State 75 6 193
______________________________
75 41 1,220
Deferred:
Federal (5,297) 299 178
State (895) 52 31
______________________________
(6,192) 351 209
______________________________
Provision (benefit) for income
taxes $(6,117) $392 $1,429
==============================
</TABLE>
F-29
<PAGE>
<PAGE>
8. Income Taxes (continued)
<TABLE>
<CAPTION>
The approximate tax effects of each type of temporary difference
and carryforward that are used in computing deferred tax assets
and liabilities and the valuation allowance related to deferred
tax assets at December 31, 1999 and 1998 are as follows:
December 31,
1999 1998
__________________
(In Thousands)
<S> <C> <C>
Deferred tax liabilities
Accelerated depreciation used for tax purposes $ 9,360 $10,174
Inventory basis difference resulting from a
business combination 2,133 2,133
Other 90 69
__________________
Total deferred tax liabilities 11,583 12,376
Deferred tax assets
Accounts and accruals not deductible for tax purposes:
Accrued liabilities 3,723 406
Allowances for doubtful accounts and notes
receivable 1,589 1,691
Other 1,792 433
Capitalization of certain costs as inventory
for tax purposes 1,064 1,604
Net operating loss carryforward 5,361 -
__________________
Total deferred tax assets 13,529 4,134
Valuation allowance 1,946 -
__________________
Total deferred tax assets 11,583 4,134
__________________
Net deferred tax liabilities $ - $ 8,242
==================
</TABLE>
F-30
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
<TABLE>
<CAPTION>
The provision for income taxes differs from the amount computed
by applying the federal statutory rate to "Income (loss) before
provision for income taxes and extraordinary charge" due to the
following:
Year ended December 31,
1999 1998 1997
_____________________________
(In Thousands)
<S> <C> <C> <C>
Provision (benefit) for income taxes
at federal statutory rate $(8,855) $(762) $814
State income taxes (820) 38 146
Amortization of excess of purchase
price over net assets acquired 120 120 120
Foreign subsidiary loss 1,375 1,016 270
Change in valuation allowance 1,946 - -
Other 117 (20) 79
___________________________
Provision (benefit) for income taxes $(6,117) $ 392 $1,429
===========================
</TABLE>
At December 31, 1998, the Company had an income tax receivable of
approximately $2.05 million, including $1.75 million associated
with the extraordinary charge discussed in Note 7 - Long-term
Debt. In 1999, the income tax receivable was reclassified to non-
current deferred income taxes because the amount is expected to
be realized through offset against future tax liabilities of the
Company under its tax sharing agreement with LSB.
9. Stockholders' Equity
Stock Options
Certain employees of the Company, including members of management
of LSB devoting time to the Company, participate in the incentive
stock option plans of LSB (the "Stock Option Plans"). As a result
thereof, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
F-31
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Stockholders' Equity (continued)
("APB 25") and related interpretations in accounting for such employee
stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that
were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the employee stock options
equals the market price of the underlying LSB stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income is required by
Statement 123, which also requires that the information be
determined as if the Company has accounted for such employee
stock options granted subsequent to December 31, 1994 under the
fair value method of that Statement. The fair value for these
options was estimated by LSB at the date of grant using a Black-
Scholes option pricing model with the following weighted average
assumptions for 1999 and 1998, respectively (none granted in
1997): risk-free interest rates of 6.04% and 5.75%; a dividend
yield of .0% and .5%; a volatility factor of the expected market
price of LSB's common stock of .48 and .57; and a weighted
average expected life of the option of 6.9 and 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of such employee stock options.
<TABLE>
<CAPTION>
For purposes of pro forma disclosures, the estimated fair value
of the qualified options is amortized to expense over the
options' vesting period. The Company's pro forma information
follows:
Year ended December 31,
1999 1998 1997
_______________________________
(In Thousands)
<S> <C> <C> <C>
Pro forma net loss $(26,007) $(3,208) $(2,381)
</TABLE>
Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect was not
fully reflected until 1998.
F-32
<PAGE>
<PAGE>
9. Stockholders' Equity (continued)
Qualified Stock Option Plan
At December 31, 1999, there are 610,000 options outstanding under
the Qualified Stock Option Plans related to employees of the
Company and members of LSB management devoting time to the
Company. These options become exercisable 20% after one year from
date of grant, 40% after two years, 70% after three years, 100%
after four years and lapse at the end of ten years. The exercise
price of options to be granted under this plan is equal to the
fair market value of LSB's common stock at the date of grant.
On April 22, 1998, the Company terminated 85,000 qualified stock
options (the "terminated options"), previously granted and
replaced the terminated options with newly granted options (the
"replacement options"). The replacement options were granted at
the fair market value of the Company's stock on April 22, 1998,
have a life and vesting schedule based on the terminated options.
<TABLE>
<CAPTION>
Activity in the Qualified Stock Option Plans related to Company
employees and members of LSB management devoting time to the
Company during each of the three years in the period ended
December 31, 1999 is as follows:
1999 1998 1997
_________________ __________________ __________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 462,550 $4.39 519,550 $4.39 549,050 $4.32
Granted 579,500 1.29 85,000 4.19 - -
Exercised - - (55,000) 1.13 (29,500) 3.01
Canceled, forfeited
or expired (5,000) 1.25 (87,000) 6.15 - -
________ ________ ________
Outstanding at end
of year 1,037,500 2.68 462,550 4.39 519,550 4.39
========= ======== ========
Exercisable at end
of year 313,000 $4.02 248,750 $4.43 170,450 $3.96
========= ======== ========
Weighted average fair
value of options
granted during year $ .71 $2.22 $ -
</TABLE>
F-33
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Stockholders' Equity (continued)
Outstanding options to acquire 1,015,050 shares of stock at
December 31, 1999 had exercise prices ranging from $1.25 to $4.88
per share (294,000 of which are exercisable at a weighted average
price of $4.19 per share) and had a weighted average exercise
price of $2.57 and remaining contractual life of 6.41 years. The
balance of options outstanding at December 31, 1999 had exercise
prices ranging from $5.36 to $9.00 per share (19,000 of which are
exercisable at a weighted average price of $8.04 per share) and a
weighted average exercise price of $7.68 and remaining
contractual life of 2.64 years.
Non-qualified Stock Options Plans
Certain outside directors and certain key employees of the
Company participate in LSB's Non-qualified Stock Option Plan. The
exercise prices of the options are based on the market value of
LSB's common stock at the date of grant. These options have
vesting terms and lives specific to each grant but generally vest
over 48 months and expire five or ten years from the grant date
(except for the 1998 grants discussed below).
In 1999, the LSB Board of Directors granted 100,000 options to
employees, 60,000 options to outside directors and 207,000
options to employee-directors of the Company at the price equiva-
lent to LSB's stock price at the date of grant. The options vest
over 48 months and have contractual lives of either five or ten
years. In 1998, the LSB Board of Directors granted employees
of the Company 175,000 stock options, at the price equivalent to
LSB's stock price at the date of grant. Options to two key
employees for 100,000 shares have a nine-year vesting schedule
while the remaining 75,000 vest over 48 months. These options
expire ten years from the date of grant. During 1998, the Company
granted 52,500 options (none in 1997 or 1996), respectively, under
LSB's Outside Director Plan. The granted options vested over six
months and expire ten years from the date of grant. In 1997, the
LSB Board of Directors granted employees of the Company 50,000
options that vest over 60 months and expire ten years from the
date of grant.
F-34
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
9. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Activity in the Non-qualified Stock Option Plans related to
Company employees and members of LSB management or directors
devoting time to the Company during each of the three years in
the period ended December 31, 1999 is as follows:
1999 1998 1997
_________________ ________________ __________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
_______________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 343,750 $3.80 116,250 $3.03 66,250 $2.15
Granted 367,000 1.30 227,500 4.19 50,000 4.19
Surrendered, forfeited,
or expired (49,250) 2.88 - - - -
________ _______ _______
Outstanding at end
of year 661,500 2.55 343,750 3.80 116,250 3.03
======== ======== ========
Exercisable at end
of year 100,000 $3.49 118,750 $3.05 49,750 $2.00
======== ======== ========
Weighted average fair
value of options
granted during year $ .69 $2.61 $2.00
</TABLE>
Outstanding options to acquire 392,000 shares of stock at
December 31, 1999 had exercise prices ranging from $1.25 to
$1.375 per share all of which are exercisable at a weighted
average exercise price of $1.31 and have a remaining contractual
life of 7.08 years. The balance of options outstanding at
December 31, 1999 had exercise prices ranging from $4.13 to $4.25
per share (none of which are exercisable) and a weighted average
exercise price of $4.19 and remaining contractual life of 8.23
years.
10. Commitments and Contingencies
Operating Leases
The Company leases certain property, plant and equipment under
operating lease agreements from related parties (Note 3) and
others. The Company also leases certain precious metals under
F-35
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
operating lease agreements from an unrelated third party. Future
annual minimum payments on operating leases with initial or
remaining terms of one year or more at December 31, 1999 are as
follows:
Related
Parties Others
_______________________
(In Thousands)
2000 $1,790 $ 9,965
2001 1,177 9,713
2002 1,177 9,405
2003 1,141 8,783
2004 666 13,964
After 2004 3,888 39,825
______ ________
$9,839 $ 91,655
====== ========
Rent expense under all operating lease agreements, including
month-to-month leases, was $9,880,000 in 1999, $3,903,000 in
1998 and $4,104,000 in 1997. Renewal options are available under
certain of the lease agreements for various periods at
approximately the existing annual rental amounts.
Nitric Acid Project
The Company's wholly owned subsidiary, EDNC, operates a nitric
acid plant (the "Baytown Plant") at Bayer's Baytown, Texas
chemical facility in accordance with a series of agreements with
Bayer Corporation ("Bayer") (collectively, the "Bayer
Agreement"). Under the Bayer Agreement, EDNC converts ammonia
supplied by Bayer in nitric acid based on a cost plus
arrangement. Under the terms of the Bayer Agreement, EDNC is
leasing the Baytown Plant pursuant to a leveraged lease from an
unrelated third party with an initial lease term of ten years.
The schedule of future minimum payments on operating leases above
includes $7,664,000 in 2000, $7,665,000 in 2001, $7,665,000 in
2002, $7,666,000 in 2003, $13,001,000 in 2004, and $35,707,000
after 2004 related to lease payments on the EDNC Baytown Plant.
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.
F-36
<PAGE>
10. Commitments and Contingencies (continued)
Purchase Commitments
As of December 31, 1999, the Chemical Business has a long-term
commitment to purchase anhydrous ammonia. The commitment requires
the Company to take or pay for a minimum volume of 2,000 tons of
anhydrous ammonia during each month of fiscal 2000 and 3,000 tons
per month in 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. The Company
has also committed to purchase 50% of its remaining quantities of
anhydrous ammonia through 2002 from this third party at prices
which approximate market. See Note 12 - Inventory Write-down and
Loss on Firm Purchase Commitment. During 1999, the Chemical
Business terminated two other anhydrous ammonia purchase
contracts at no cost which otherwise were not scheduled to end
until June 2000 and December 2000 by their terms. Purchases of
anhydrous ammonia under these three contracts aggregated $21.9
million in 1999 ($31.9 million and $40.1 million in 1998
and 1997, respectively). The Company also enters into agreements
with suppliers of raw material which require the Company to
provide finished goods in exchange therefore. The Company did not
have a significant commitment to provide finished goods with
its suppliers under the exchange agreements at December 31, 1999.
At December 31, 1999 the Company has a standby letter of credit
outstanding related to its Chemical Business of $3.5 million.
A subsidiary of the Company leases certain precious metals for
use in the subsidiary's manufacturing process. The agreement at
December 31, 1999 requires rentals generally based on 25.25% of
the leased metals' market values, except for platinum, from
December 2, 1999 through December 1, 2000, contract expiration.
The agreement also requires rentals of $440 per ounce for the
usage of platinum.
In July 1995, the Company entered into a product supply agreement
with a third party whereby the Company is required to make
minimum monthly facility fee and other payments which aggregate
$71,965. In return for this payment, the Company is entitled to
certain quantities of compressed oxygen produced by the third
party. Except in circumstances as defined by the agreement, the
monthly payment is payable regardless of the quantity of
compressed oxygen used by the Company. The term of this
agreement, which has been included in the above minimum operating
lease commitments, is for a term of 15 years; however, after the
agreement has been in effect for 60 months, the Company can
terminate the agreement without cause at a cost of approximately
$4.5 million. Based on the Company's estimate of compressed
F-37
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
oxygen demands of the plant, the cost of the oxygen under this
agreement is expected to be favorable compared to floating market
prices. Purchases under this agreement aggregated $912,000, $938,000
and $938,000 in 1999, 1998 and 1997, respectively.
Legal Matters
Following is a summary of certain legal actions involving the
Company:
A. On February 12, 1996, the Chemical Business entered into a
Consent Administrative Agreement ("Administrative Agreement")
with the state of Arkansas to resolve certain compliance
issues associated with nitric acid concentrators which was
amended in January 1997. Pursuant to the Administrative
Agreement, as amended, the Chemical Business installed
additional pollution control equipment. The Chemical
Business believes that the El Dorado Plant has made
progress in controlling certain off-site emissions; however,
such off-site emissions have occurred and may continue from
time to time, which could result in the assessment of
additional penalties against the Chemical Business.
During May 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a stormwater drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
ditch near the El Dorado Plant. In 1998, the Chemical
Business entered into a Consent Administrative Order ("1998
CAO") to resolve the event. The 1998 CAO includes a civil
penalty in the amount of $183,700 which includes $125,000 to
be paid over five years in the form of environmental
improvements at the El Dorado Plant. The remaining $58,700
was paid in 1998. The 1998 CAO also requires the Chemical
Business to undertake a facility-wide wastewater evaluation
and pollutant source control program and wastewater
minimization program. The program requires that the
subsidiary complete rainwater drain-off studies including
engineering design plans for additional water treatment
components to be submitted to the State of Arkansas by
August 2000. The construction of the additional water
treatment components is required to be completed by August
2001 and the El Dorado plant has been mandated to be in
compliance with the final effluent limits on or before
February 2002. The aforementioned compliance deadlines,
however, are not scheduled to commence until after the State
of Arkansas has issued a renewal permit establishing new,
F-38
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
more restrictive effluent limits. Alternative methods
for meeting these requirements are continuing to be
examined by the Chemical Business. The Company believes,
although there can be no assurance, that any such new
effluent limits would not have a material adverse effect
on the Company. The Wastewater Consent Order provides that
the State of Arkansas will make every effort to issue the
renewal permit by December 1, 1999. The State of Arkansas
has delayed issuance of the permit. Because the Wastewater
Consent Order provides that the compliance deadlines may
be extended for circumstances beyond the reasonable control
of the Company, and because the State of Arkansas has not
yet issued the renewal permit, the Company does not believe
that failure to meet the aforementioned compliance deadlines
will present a material adverse impact. The State of Arkansas
has been advised that the Company is seeking financing from
Arkansas authorities for the projects required to comply with
the Wastewater Consent Order and the Company has requested
that the permit be further delayed until financing arrange-
ments can be made, which requests have been met to date.
The wastewater program is currently expected to require
future capital expenditures of approximately $10.0 million.
Negotiations for securing financing are currently underway.
The Company believes, although there can be no assurance,
that the renewal permit will continue to be delayed, and
that financing can be secured under terms that will not
have a material adverse effect on the Company. Construction
of the wastewater treatment project is subject to the Company
obtaining financing to fund this project. There are no assurances
that the Company will be able to obtain the required financing.
Failure to construct the wastewater treatment facility could
have a material adverse effect on the Company.
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. Discovery has only recently commenced
in this matter. The Chemical Business intends to vigorously
defend itself in this matter.
F-39
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
The Company's Chemical Business has been added as a
defendant in a separate lawsuit pending in Missouri. This
lawsuit alleges a national conspiracy, as well as a regional
conspiracy, directed against explosive customers in Missouri
and seeks unspecified damages. The Company's Chemical
Business has been included in this lawsuit because it sold
products to customers in Missouri during a time in which
other defendants have admitted to participating in an
antitrust conspiracy, and because it has been sued in the
preceding described lawsuit. Based on the information
presently available to the Company, the Company does not
believe that the Chemical Business conspired with any party,
to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously
defend itself in this matter.
The Company including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the
ordinary course of business. In the opinion of management after
consultation with counsel, all claims, legal actions (including
those described above) and complaints are not presently probable
of material loss, are adequately covered by insurance, or if not
so covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition would not have a
material effect on the financial position of the Company, but
could have a material impact to the net income (loss) of a
particular quarter or year, if resolved unfavorably.
Other
LSB and, thus, the Company has retained certain risks associated
with its operations, choosing to self-insure up to various
specified amounts under its automobile, workers' compensation,
health and general liability programs. LSB reviews such programs
on at least an annual basis to balance the cost-benefit between
its coverage and retained exposure. See the Services Agreement,
Note 3.
11. Fair Value of Financial Instruments
The following discussion of fair values is not indicative of the
overall fair value of the Company's balance sheet since the
provisions of the SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," do not apply to all assets, including
intangibles.
F-40
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
11. Fair Value of Financial Instruments (continued)
Fair values for fixed rate borrowings, other than the Notes, are
estimated using a discounted cash flow analysis that applies
interest rates currently being offered on borrowings of similar
amounts and terms to those currently outstanding. The fair value
of the Notes was determined based on a quotation for such
securities. As of December 31, 1999 and 1998, carrying values of
variable rate debt which aggregated $25.2 million and $17.4
million, respectively, approximated estimated fair value. As of
December 31, 1999 and 1998, carrying values of fixed rate debt
which aggregated $117.0 million and $120.5 million, respectively,
had estimated fair values of approximately $38.4 million and
$120.8 million, respectively.
At December 31, 1999 and 1998, the carrying value of the
intercompany loans of $15.4 million and $13.4 million,
respectively, exceeded the estimated fair value of such loans
(assuming full realization) by approximately $1.7 million and
$.7 million, respectively.
As of December 31, 1999, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued
liabilities approximated their estimated fair value.
12. Inventory Write-down and Loss on Firm Purchase Commitment
During 1999, the Chemical Business had a firm uncancelable
commitment to purchase anhydrous ammonia pursuant to the terms of
a supply contract (Note 10 - Commitments and Contingencies,
Purchase Commitments). At June 30, 1999, the date the Company
recognized the provision for loss under the supply agreement and
wrote down the inventory, the purchase price the Chemical
Business was required to pay for anhydrous ammonia 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 at that time was saturated with an excess supply of
products caused, in part, by the import of Russian ammonium
nitrate and significantly depressed selling prices for the Company's
products. Due to the decline in 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 the
Company's nitrate based products exceeded the anticipated future
sales prices. As a result, provisions for losses on the firm
F-41
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
12. Inventory Write-down and Loss on Firm Purchase Commitment
(continued)
purchase commitment aggregating $8.4 million were recorded ($7.5
million in the second quarter of 1999 and $.9 million in the
third quarter of 1999). At June 30, 1999, the Company's
Chemical Business wrote down the carrying value of certain
nitrate-based inventories by approximately $1.6 million. At
December 31, 1999, the accompanying balance sheet includes
remaining accrued losses under the firm purchase commitment of
$7.4 million ($1.8 million of which is classified as current
in accrued liabilities). Substantially all of the inventory
written down was sold during 1999. Due to the pricing mechanism
in the contract, it is reasonably possible that this loss provision
estimate may change in the near term.
13. Segment Information
Factors Used By Management to Identify the Enterprise's
Reportable Segments and Measurement of Segment Profit or Loss and
Segment Assets
ClimaChem, Inc. has two reportable segments: the Chemical
Business and the Climate Control Business. The Company's
reportable segments are based on business units that offer
similar products and services. The reportable segments are each
managed separately because they manufacture and distribute
distinct products with different production processes.
The Company evaluates performance and allocates resources based
on operating profit or loss. The accounting policies of the
reportable segments are the same as those described in the
summary of significant accounting policies.
Description of Each Reportable Segment
Chemical
This segment manufactures and sells fertilizer grade
ammonium nitrate for the agriculture industry, explosive
grade ammonium nitrate for the mining industry and
concentrated, blended and mixed nitric acid for industrial
applications. Production from the Company's primary
manufacturing facility in El Dorado, Arkansas, for the year
ended December 31, 1999 comprises approximately 72% of the
chemical segment's sales. Sales to customers of this segment
primarily include farmers in Texas and Arkansas, coal mining
companies in Kentucky, Missouri and West Virginia, and
industrial users of acids in the South and East regions of
the United States.
F-42
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
The Chemical Business is subject to various federal, state
and local environmental regulations. Although the Company
has designed policies and procedures to help reduce or
minimize the likelihood of significant chemical accidents
and/or environmental contamination, there can be no
assurances that the Company will not sustain a significant
future operating loss related thereto.
In 1999, the Chemical Business sold its Australian
subsidiary and incurred a loss upon disposition of
$2.0 million. (See Note 4 - Business Disposed Of.)
Further, the Company purchases substantial quantities of
anhydrous ammonia for use in manufacturing its products. The
pricing volatility of such raw material directly affects the
operating profitability of the Chemical segment. (See Note
12 - Inventory Write-down and Loss on Firm Purchase
Commitment.)
Climate Control
This business segment manufactures and sells, primarily from
its various facilities in Oklahoma City, a variety of
hydronic fan coil, water source heat pump products and other
HVAC products for use in commercial and residential air
conditioning and heating systems. The Company's various
facilities in Oklahoma City comprise substantially all of
the Climate Control segment's operations. Sales to customers
of this segment primarily include original equipment
manufacturers, contractors and independent sales
representatives located throughout the world which are
generally secured by a mechanic's lien, except for sales to
original equipment manufacturers.
Credit, which is generally unsecured, is extended to customers
based on an evaluation of the customers' financial condition and
other factors. Credit losses are provided for in the financial
statements based on historical experience and periodic assessment
of outstanding accounts receivable, particularly those accounts
which are past due. The Company's periodic assessment of accounts
and credit loss provisions are based on the Company's best
estimate of amounts which are not recoverable. Concentrations of
credit risk with respect to trade receivables are limited due to
the large number of customers comprising the Company's customer
bases, and their dispersion across many different industries and
geographic areas. As of December 31, 1999 and 1998, the Company's
accounts and notes receivable are shown net of allowance for
doubtful accounts of $4,085,000 and $4,346,000, respectively.
F-43
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Information about the Company's operations in different industry
segments is detailed below.
Year ended December 31,
1999 1998 1997
___________________________
(In Thousands)
<S> <C> <C> <C>
Net sales:
Businesses continuing:
Chemical $127,407 $125,761 $130,466
Climate Control 117,055 115,785 105,899
________________________________
244,462 241,546 236,365
Business disposed of - Chemical 7,461 14,184 26,482
________________________________
$251,923 $255,730 $262,847
================================
Gross profit (loss):
Businesses continuing:
Chemical $ 13,458 $ 18,590 $16,710
Climate Control 34,909 32,234 29,719
________________________________
48,367 50,824 46,429
Business disposed of - Chemical (118) (242) 2,649
________________________________
$ 48,249 $ 50,582 49,078
=================================
Operating profit (loss):
Businesses continuing:
Chemical $ (1,353) $ 5,877 $ 4,874
Climate Control 8,628 9,723 8,481
________________________________
7,275 15,600 13,355
Business disposed of - Chemical (1,632) (2,467) (52)
________________________________
5,643 13,133 13,303
Unallocated fees from Services
Agreement and general corporate (4,526) (2,881) (2,109)
expenses, net
Interest income 1,512 1,445 419
Other income, net 981 23 474
Interest expense:
Business disposed of (326) (434) (720)
Businesses continuing (14,260) (13,463) (9,041)
Loss on businesses disposed of (1,971) - -
Provision for loss on firm purchase
commitments - Chemical (8,439) - -
Provision for impairment on long-
lived assets (3,913) - -
______________________________
Income (loss) before provision
(benefit) for income taxes and
extraordinary charge $(25,299) $(2,177) $ 2,326
===============================
F-44
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements
13. Segment Information (continued)
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
_________________________
(In Thousands)
<S> <C> <C> <C>
Depreciation of property, plant and equipment:
Businesses continuing:
Chemical $ 7,283 $7,019 $ 6,348
Climate Control 1,547 1,553 1,438
Business disposed of - Chemical - 973 344
_________________________
Total depreciation of property, plant and equipment $ 8,830 $9,545 $8,130
=========================
Additions to property, plant and equipment:
Businesses continuing:
Chemical $ 3,670 $5,221 $9,389
Climate Control 3,489 2,720 1,076
___________________________
Total additions to property, plant and equipment $ 7,159 $7,941 $10,465
===========================
Total assets:
Businesses continuing:
Chemical $102,185 $116,655 $117,257
Climate Control 61,781 40,498 42,497
Corporate assets 20,112 22,653 21,222
Business disposed of - Chemical - 16,797 19,899
______________________________
Total assets $184,078 $196,603 $200,875
==============================
</TABLE>
Revenues by industry segment include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Intersegment revenues, which are accounted for at transfer prices
ranging from the cost of producing or acquiring the product or
service to normal prices to unaffiliated customers, are not
significant.
Gross profit by industry segment represents net sales less cost
of sales. Operating profit by industry segment represents gross
profit less selling, general and administrative expenses. In
computing operating profit, none of the following items have been
added or deducted: general corporate expenses, income taxes,
interest expense, provision for loss on firm purchase
commitments, provision for impairment on long-lived assets or
extraordinary charges.
F-45
<PAGE>
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Total assets by industry segment are those assets used in the
operations of each industry. Corporate assets are those
principally owned by the parent company not involved in the two
identified industries.
<TABLE>
<CAPTION>
Information about the Company's domestic and foreign operations
for each of the three years in the period ended December 31, 1999
is detailed below:
Geographic Region 1999 1998 1997
____________________________________________________________________________
(In Thousands)
<S> <C> <C> <C>
Sales:
Businesses continuing:
Domestic $241,198 $239,257 $235,303
Foreign 3,264 2,289 1,062
___________________________
244,462 241,546 236,365
Foreign business disposed of - Chemical 7,461 14,184 26,482
____________________________
$251,923 $255,730 $262,847
============================
Income (loss) before provision for
income taxes and extraordinary
charge:
Businesses continuing:
Domestic $(21,086) $ 964 $ 3,475
Foreign (284) (240) (377)
____________________________
(21,370) 724 3,098
Foreign business disposed of - Chemical (1,958) (2,901) (772)
Loss on disposal of foreign business
- Chemical (1,971) - -
____________________________
$(25,299) $(2,177) $ 2,326
============================
Long-lived assets:
Domestic $75,667 $77,724 $78,283
Foreign - Business disposed of - 4,665 6,046
_____________________________
$75,667 $82,389 $84,329
=============================
</TABLE>
F-46
<PAGE>
ClimaChem, Inc.
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Revenues by geographic region include revenues from unaffiliated
customers, as reported in the consolidated financial statements.
Revenues earned from sales or transfers between affiliates in
different geographic regions are shown as revenues of the
transferring region and are eliminated in consolidation.
<TABLE>
<CAPTION>
Revenues from unaffiliated customers include foreign export sales
as follows:
December 31,
Geographic Region 1999 1998 1997
_________________________________________________________________
(In Thousands)
<S> <C> <C> <C>
Canada $ 5,954 $ 7,051 $ 4,634
Middle East 4,431 5,055 5,956
Mexico and Central and South America 1,144 493 1,415
Other 4,240 5,077 1,038
_____________________________
$15,769 $17,676 $13,043
=============================
</TABLE>
F-47
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
Three months ended
March 31 June 30 September 30 December 31
______________________________________________
<S> <C> <C> <C> <C>
1999
Total Revenue $ 60,1990 $ 72,003 $ 61,037 $ 61,186
=============================================
Gross profit on net sales $ 13,019 $ 13,616 $ 11,920 $ 9,694
=============================================
Net loss $ (1,151) $ (7,441) $ (2,753) $ (7,837)
=============================================
1998
Total revenues $ 63,782 $ 74,308 $ 65,734 $ 53,374
=============================================
Gross profit on net sales $ 12,949 $ 16,743 $ 12,672 $ 8,218
=============================================
Net income (loss) $ (46) $ 1,613 $ (755) $ (3,381)
=============================================
</TABLE>
In the second quarter of 1999, the Company incurred a loss of
$2.0 million on the disposal of its Australian subsidiary - TES.
The Company recorded provisions for losses on firm purchase commitments
of $7.5 million and $.9 million in the second quarter and third
quarter of 1999, respectively, and recorded a provision for impairment
on long-lived assets of $3.9 million in the fourth quarter of 1999.
Total revenues, as reported above, includes interest income
of $340,000, $387,000, $387,000 and $398,000 and $354,000, $408,000,
$344,000 and $339,000 for the quarter ended March 31, June 30,
September 30 and December 31, 1999 and 1998, respectively.
In the fourth quarter of 1998, the Company's Climate Control
group recorded an adjustment to inventory which reduced gross profit
by $1.5 million and the Company's Chemical group recorded a pro-
vision for loss of approximately $.8 million for a note receivable
which increased the Company's net loss.
F-48
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ClimaChem, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Additions Deductions
__________ ___________
Balance at Charged to Write-offs/ Balance
Beginning Costs and Costs at End
Description of Year Expenses Incurred of Year
_________________________________________________________________________________
<S> <C> <C> <C> <C>
Accounts receivable-allowance
for doubtful accounts (1):
1999 $ 1,802 $ 828 $1,089 $1,541
=============================================
1998 $ 1,478 $ 971 $ 647 $1,802
=============================================
1997 $ 1,296 $ 521 $ 339 $1,478
=============================================
Notes receivable-allowance for
doubtful accounts (1):
1999 $ 2,544 $ - $ - $2,544
=============================================
1998 $ 1,690 $ 854 $ - $2,544
=============================================
1997 $ 1,515 $ 175 $ - $1,690
=============================================
Accrual for plant turnaround:
1999 $ 1,104 $1,420 $1,226 $1,298
=============================================
1998 $ 1,263 $2,264 $2,423 $1,104
=============================================
1997 $ 382 $2,647 $1,766 $1,263
=============================================
<FN>
(1) Deducted in the balance sheet from the related assets to which the
reserve applies.
</TABLE>
F-49
<PAGE>
(a)(3) Exhibits
2.1. Stock Purchase Agreement and Stock Pledge Agreement between
Dr. Hauri AG, a Swiss Corporation, and LSB Chemical Corp., which the
Company hereby incorporates by reference from Exhibit 2.2 to the LSB's
Form 10-K for fiscal year ended December 31, 1994.
2.2 Stock Option Agreement dated as of May 4, 1995, optionee, LSB Holdings,
Inc., an Oklahoma corporation, an option to purchase, which the Company
hereby incorporates by reference from Exhibit 2.1 to LSB's Form 10-K
for fiscal year ended December 31, 1995.
3.1. Certificate of Incorporation of ClimaChem, Inc., which
the Company hereby incorporates by reference from Exhibit 3.1 to the
Company's Registration Statement, No. 333-44905.
3.2. Bylaws of ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit 3.2 to the Company's
Registration Statement, No. 333-44905.
4.1. Indenture, dated as of November 26, 1997, by and among
ClimaChem, Inc., the Subsidiary Guarantors and Bank One, N.A., as
trustee, which the Company hereby incorporates by reference from
Exhibit 4.1 to LSB Industries, Inc.'s Form 8-K, dated November 26,
1997.
4.2. Form 10 3/4% Series B Senior Notes due 2007, which the
Company hereby incorporates by reference from Exhibit 4.3 to the
Company's Registration Statement, No. 333-44905.
4.3. Promissory Note, dated November 26, 1997, executed by LSB
Industries, Inc. in favor of ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's
Registration Statement, No. 333-44905.
4.4. Amended and Restated Loan and Security Agreement, dated
November 21, 1997, by and between BankAmerica Business Credit, Inc.,
and Climate Master, Inc., International Environmental Corporation, El
Dorado Chemical Company and Slurry Explosive Corporation, which the
Company hereby incorporates by reference from Exhibit 10.2 to the
Company's Registration Statement, No. 333-44905.
4.5. First Amendment to Amended and Restated Loan and Security
Agreement, dated March 12, 1998, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental
Corporation, El Dorado Chemical Company and Slurry Explosive
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.53 to the Company's Registration Statement, No. 333-44905.
4.6. Third Amendment to Amended and Restated Loan and Security
Agreement, dated August 14, 1998, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental
Corporation, El Dorado Chemical Company and Slurry Explosive
Corporation, which the Company hereby incorporates by reference from
Exhibit 4.1 to LSB Industries, Inc.'s Form 10-Q for the quarter ended
June 30, 1998.
4.7. Fourth Amendment to Amended and Restated Loan and
Security Agreement, dated November 19, 1998, between BankAmerica
Business Credit, Inc., and Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Company and Slurry
Explosive Corporation, which the Company hereby incorporates by
reference from Exhibit 4.1 to LSB Industries, Inc.'s Form 10-Q for the
quarter ended September 30, 1998.
42
<PAGE>
4.8. Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated April 8, 1999, between BankAmerica Business Credit,
Inc., and Climate Master, Inc., International Environmental
Corporation, El Dorado Chemical Company and Slurry Explosive
Corporation, which the Company hereby incorporates by reference from
Exhibit 4.16 to LSB Industries, Inc.'s Form 10-K for the fiscal year
ended December 31, 1998.
4.9. Waiver Letter, dated March 16, 1998, from BankAmerica
Business Credit, Inc., which the Company hereby incorporates by
reference from Exhibit 10.55 to the Company's Registration Statement,
No. 333-44905.
4.10. First supplement to indenture dated as of February 9,
1999 which is incorporated by reference from Exhibit 4.19 to LSB's
Form 10-K for the year ended December 31, 1998.
4.11. Sixth Amendment, dated May 10, 1999, to Amended and Restated
Loan and Security Agreement between BankAmerica Business Credit, Inc.,
and Climate Master, Inc., International Environmental Corporation, El
Dorado Chemical Company and Slurry Explosive Corporation, which the
Company hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1999.
10.1. Continuing Guaranty, dated November 21, 1997, between
ClimaChem, Inc. and BankAmerica Business Credit, Inc., which the
Company hereby incorporates by reference from Exhibit 10.3 to the
Company's Registration Statement, No. 333-44905.
10.2. Services Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit 10.4 to the Company's
Registration Statement, No. 333-44905.
10.3. Management Agreement, dated November 21, 1997, between
LSB Industries, Inc. and ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit 10.5 to the Company's
Registration Statement, No. 333-44905.
10.4. Tax Sharing Agreement, dated November 21, 1997, between
LSB Industries, Inc. and ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit 10.6 to the Company's
Registration Statement, No. 333-44905.
10.5. Severance Agreement, dated January 17, 1989, between LSB
Industries, Inc. and Jack E. Golsen, which the Company hereby
incorporates by reference from Exhibit 10.48 to LSB Industries, Inc.'s
Form 10-K for fiscal year ended December 31, 1988. LSB Industries, Inc.
also entered into identical agreements with Tony M. Shelby, David R.
Goss, Barry H. Golsen, David M. Shear, and Jim D. Jones, and the
Company will provide copies thereof to the Commission upon request.
43
<PAGE>
<PAGE>
10.6. Employment Agreement and Amendment to Severance Agreement, dated
January 12, 1989 between LSB Industries, Inc. and Jack E. Golsen,
dated March 21, 1996, which the Company hereby incorporates
by reference from Exhibit 10.15 to LSB Industries, Inc.'s
Form 10-K for fiscal year ended December 31, 1995.
10.7. Letter Amendment, dated May 14, 1997, to Loan and Security Agreement
between DSN Corporation and The CIT Group/Equipment Financing, Inc.,
is incorporated by reference from Exhibit 10.1 to LSB Industries,
Inc.'s Form 10-Q for the fiscal quarter ended March 31, 1997.
10.8. Amendment to Loan and Security Agreement, dated November 21, 1997,
between DSN Corporation and The CIT Group/Equipment Financing, Inc.,
which the Company hereby incorporates by reference from Exhibit
10.19 to the Company's Registration Statement, No. 333-44905.
10.9. Guaranty Agreement, dated November 21, 1997, executed by ClimaChem,
Inc. in favor of The CIT Group/Equipment Financing, Inc., which
which the Company hereby incorporates by reference from Exhibit 10.20
to the Company's Registration Statement, No. 333-44905.
10.10. Promissory Note, dated July 14, 1989, from Climate Master, Inc.
to Oklahoma County Finance Authority, which the Company hereby
incorporates by reference from Exhibit 10.21 to the Company's
Registration Statement, No. 333-44905.
10.11. Extension of Maturity on Promissory Note, dated February 7, 1997,
relating to the Promissory Note, dated July 14, 1989, from Climate
Master, Inc., to Oklahoma County Finance Authority, which the
Company hereby incorporates by reference from Exhibit 10.22 to the
Company's Registration Statement, No. 333-44905.
10.12. Mortgage of Tenant's Interest in Lease, dated July 1, 1989, executed
by Climate Master, Inc. in favor of the Oklahoma County Finance
Authority, which the Company hereby incorporates by reference
from Exhibit 10.23 to the Company's Registration Statement, No.
333-44905.
10.13. Project Loan Agreement, dated July 1, 1989, between Climate Master,
Inc., and the Oklahoma County Finance Authority, which the Company
hereby incorporates by reference from Exhibit 10.24 to the
Company's Registration Statement, No. 333-44905.
10.14. Promissory Note, dated June 2, 1997, executed by International
Environmental Corporation in favor of ORIX Credit Alliance, Inc.,
which the Company hereby incorporates by reference from Exhibit 10.30
to the Company's Registration Statement, No. 333-44905.
10.15. Security Agreement-Mortgage on Goods and Chattels, dated April 18,
1997, executed by International Environmental Corporation in favor
of ORIX Credit Alliance, Inc., which the Company hereby incorporates
by reference from Exhibit 10.31 to the Company's Registration
Statement, No. 333-44905.
10.16. Lease Agreement, dated March 7, 1988, between Northwest Financial
Corporation and International Environmental Corporation, which the
Company hereby incorporates by reference from Exhibit 10.32
to the Company's Registration Statement, No. 333-44905.
44
<PAGE>
10.17. First Amendment, dated August 17, 1995, to Lease Agreement
dated March 7, 1988, between Prime Financial Corporation and
International Environmental Corporation, which the Company hereby
incorporates by reference from Exhibit 10.33 to the Company's
Registration Statement, No. 333-44905.
10.18. Assignment, dated August 17, 1995, between Northwest
Financial Corporation and Prime Financial Corporation, which the
Company hereby incorporates by reference from Exhibit 10.34 to the
Company's Registration Statement, No. 333-44905.
10.19. Loan and Security Agreement, dated March 14, 1995,
between International Environmental Corporation and MetLife Capital
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.35 to the Company's Registration Statement, No. 333-44905.
10.20. Lease Agreement, dated April 3, 1996, between Amplicon
Financial and International Environmental Corporation, which the
Company hereby incorporates by reference from Exhibit 10.36 to the
Company's Registration Statement, No. 333-44905.
10.21. Equipment Purchase and Security Agreement, dated February 1, 1994,
between U.S. Amada Ltd. and Climate Master, Inc., which the Company
hereby incorporates by reference from Exhibit 10.37 to the Company's
Registration Statement, No. 333-44905. Climate Master has entered
into three other Equipment Purchase and Security Agreements
which are substantially identical in all material respects except the
principal amount is $380,000, $88,000, and $330,000, respectively.
Copies of each of the foregoing will be provided to the Commission upon
request.
10.22. Loan and Security Agreement (DSN Plant), dated October 31, 1994,
between DSN Corporation and The CIT Group, which the Company
hereby incorporates by reference from Exhibit 10.1 to LSB Industries,
Inc.'s Form 10-Q for the fiscal quarter ended September 30, 1994.
10.23. Loan and Security Agreement (Mixed Acid Plant), dated April 5, 1995,
between DSN Corporation and The CIT Group, which the Company hereby
incorporates by reference from Exhibit 10.25 to LSB Industries,
Inc.'s Form 10-K for the fiscal year ended December 31, 1994.
10.24. First Amendment to Loan and Security Agreement (DSN Plant), dated
June 1, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc., which the Company hereby incorporates by reference
from Exhibit 10.13 to the Company's Registration Statement, No.
333-44905.
10.25. First Amendment to Loan and Security Agreement (Mixed Acid Plant),
dated November 15, 1995, between DSN Corporation and The CIT Group/
Equipment Financing, Inc., which the Company hereby incorporates by
reference from Exhibit 10.15 to the Company's Registration Statement,
No. 333-44905.
45
<PAGE>
10.26. Loan and Security Agreement (Rail Tank Cars), dated November 15, 1995,
between DSN Corporation and The CIT Group/Equipment Financing, Inc.,
which the Company hereby incorporates by reference from Exhibit 10.16
to the Company's Registration Statement, No. 333-44905.
10.27. First Amendment to Loan and Security Agreement (Rail Tank Cars), dated
November 15, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc., which the Company hereby incorporates by reference
from Exhibit 10.17 to the Company's Registration Statement, No. 333-
44905.
10.28. Letter Amendment, dated May 14, 1997, to Loan and
Security Agreement between DSN Corporation and The CIT Group/Equipment
Financing, Inc., which the Company hereby incorporates by reference
from Exhibit 10.1 to LSB Industries, Inc.'s Form 10-Q for the fiscal
quarter ended March 31, 1997.
10.29. Amendment to Loan and Security Agreement, dated
November 21, 1997, between DSN Corporation and The CIT Group/Equipment
Financing, Inc., which the Company hereby incorporates by reference
from Exhibit 10.19 to the Company's Registration Statement, No.
333-44905.
10.30. Baytown Nitric Acid Project and Supply Agreement, dated
June 27, 1997, by and among El Dorado Nitrogen Company, El Dorado
Chemical Company and Bayer Corporation, which the Company hereby
incorporates by reference from Exhibit 10.2 to LSB Industries, Inc.'s
Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST
FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.31. First Amendment to Baytown Nitric Acid Supply Agreement, dated
February 1, 1999, between El Dorado Nitrogen Company and Bayer
Corporation, which the Company hereby incorporates by reference
from Exhibit 10.30 to LSB Industries, Inc.'s Form 10-K for the
fiscal year ended December 31, 1998. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION
ORDER CF #7927, DATED JUNE 9, 1999, GRANTING A REQUEST FOR CONFI-
DENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.32. Service Agreement, dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company, which the Company hereby incor-
porates by reference from Exhibit 10.3 to LSB Industries, Inc.'s
Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT
OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION
ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.33. Ground Lease, dated June 27, 1997, between Bayer Corporation and
El Dorado Nitrogen Company, which the Company hereby incorporates
by reference from Exhibit 10.4 to LSB Industries, Inc.'s Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST
FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
46
<PAGE>
10.34. Participation Agreement, dated as of June 27, 1997, among El Dorado
Nitrogen Company, Boatmen's Trust Company of Texas as Owner Trustee,
Security Pacific Leasing corporation, as Owner Participant and a
Construction Lender, Wilmington Trust Company, Bayerische Landesbank,
New York Branch, as a Construction Lender and the Note Purchaser,
and Bank of America National Trust and Savings Association, as
Construction Loan Agent, which the Company hereby incorporates by
reference from Exhibit 10.5 to LSB Industries, Inc.'s Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION
WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION
ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.35. Lease Agreement, dated as of June 27, 1997, between Boatmen's
Trust Company of Texas as Owner Trustee and El Dorado Nitrogen
Company, which the Company hereby incorporates by reference
from Exhibit 10.6 to LSB Industries, Inc.'s Form 10-Q for the fiscal
quarter ended June 30, 1997.
10.36. Security Agreement and Collateral Assignment of Construction
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen
Company, which the Company hereby incorporates by reference
from Exhibit 10.7 to LSB Industries, Inc.'s Form 10-Q for the fiscal
quarter ended June 30, 1997.
10.37. Security Agreement and Collateral Assignment of Facility Documents,
dated as of June 27, 1997, made by El Dorado Nitrogen Company and
consented to by Bayer Corporation, which the Company hereby
incorporates by reference from Exhibit 10.8 to LSB Industries,
Inc.'s Form 10-Q for the fiscal quarter ended June 30, 1997.
10.38. Amendment to Loan and Security Agreement, dated March 16, 1998,
between The CIT Group/Equipment Financing, Inc., and DSN Corporation,
which the Company hereby incorporates by reference from Exhibit
10.54 to the Company's Registration Statement, No. 333-44905.
10.39. Sales Contract, dated December 7, 1998, between Solutia, Inc. and
El Dorado Chemical Company, which the Company hereby incorporates
by reference from Exhibit 10.39 to LSB Industries, Inc.'s Form
10-K for the fiscal year ended December 31, 1998. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF COMMISSION ORDER CF #7927, DATED JUNE 9, 1999, GRANTING
A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION
ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
10.40. Agreement, dated March 23, 1999, among El Dorado
Chemical Company, El Dorado Nitrogen Company, Bayer Corporation, ICF
Kaiser Engineers, Inc., ICF Kaiser International, Inc., and Acstar
Insurance Company, which the Company hereby incorporates by reference
from Exhibit 10.41 to LSB Industries, Inc.'s Form 10-K for the fiscal
year ended December 31, 1998.
47
<PAGE>
10.41. Union Contract, dated as of August 1, 1998, between EDC
and the International Association of Machinists and Aerospace Workers,
which the Company hereby incorporates by reference from Exhibit 10.42
to LSB Industries, Inc.'s Form 10-K for the year ended December 31,
1998.
10.42. Stock Purchase Agreement, dated February 9, 1999, by and between
LSB Holdings, Inc. and ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit to the Company's Form 10-K
for the fiscal year ended December 31, 1998.
10.43. Covenant Waiver Letter, dated April 10, 2000, between The CIT
Group and DSN Corporation, which the Company hereby incorporates
by reference from Exhibit 10.46 to LSB Industries, Inc.'s
Form 10-K for the fiscal year ended December 31, 1999.
10.44. Rail Car Service Agreement, dated July 29, 1999, between Prime
Financial Corporation and El Dorado Chemical Company, which the
Company hereby incorporates by reference from Exhibit 10.2 to the
Company's Form 10-Q for the fiscal quarter ended September 30, 1999.
10.45. Seventh Amendment to Amended and Restated Loan and Security
Agreement, dated January 1, 2000, by and between Bank of America, N.A.
and Climate Master, Inc., International Environmental Corporation, El
Dorado Chemical Company, and Slurry Explosive Corporation, which the
Company hereby incorporates by reference from Exhibit 10.2 to the
Company's Form 8-K dated December 30, 1999.
10.46 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. 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.
10.47 Anhydrous Ammonia Sales Agreement, dated January 12, 2000,
to be effective October 1, 1999, between Koch Nitrogen Company and
El Dorado Chemical Company. 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.
10.48 Eighth Amendment to Amended and Restated Loan and Security
Agreement, dated March 1, 2000, by and between Bank of America, N.A.
and Climate Master, Inc., International Environmental Corporation,
El Dorado Chemical Company, and Slurry Explosive Corporation, which
the Company hereby incorporates by reference from Exhibit 10.2 to the
Company's Form 8-K dated March 1, 2000.
48
<PAGE>
10.49 Loan Agreement dated December 23, 1999 between Climate Craft, Inc.
and the City of Oklahoma City which the Company hereby incorporates
by reference from Exhibit 10.49 to LSB's Form 10-K for fiscal year
ended December 31, 1999.
21.1. Subsidiaries of the Company
23.1. Consent of Independent Auditors
27.1. Financial Data Schedule
(b) REPORTS ON FORM 8-K. The Company filed the following report
on Form 8-K during the fourth quarter of 1999.
(i) Form 8-K, dated December 30, 1999 (date of event: December
30, 1999). The item reported was Item 5, "Other Events", discussing the
payment of interest on the Company's subsidiary, ClimaChem's $105 million
of outstanding 10 3/4% Senior Notes due 2007 and related failure to meet
certain adjusted tangible net worth and debt ratio requirements under the
Company's revolving credit facility.
49
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this report on its behalf of this 14th day of April,
2000.
CLIMACHEM, INC.
By: /s/ Jack E. Golsen
____________________________
Jack E. Golsen
Chairman of the Board and
President
(Principal Executive Officer)
By: /s/ Tony M. Shelby
______________________________
Tony M. Shelby
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
______________________________
Jim D. Jones
Vice President, Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.
Dated: April 14, 2000 By: /s/ Jack E. Golsen
_________________________
Jack E. Golsen, Director
Dated: April 14, 2000 By: /s/ Tony M. Shelby
_________________________
Tony M. Shelby, Director
Dated: April 14, 2000 By: /s/ David R. Goss
_________________________
David R. Goss, Director
Dated: April 14, 2000 By: /s/ Barry H. Golsen
___________________________
Barry H. Golsen, Director
50
<PAGE>
Dated: April 14, 2000 By: /s/ Robert C. Brown
___________________________
Robert C. Brown, Director
Dated: April 14, 2000 By: /s/ Bernard G. Ille
___________________________
Bernard G. Ille, Director
<PAGE>
Dated: April 14, 2000 By: /s/ Jerome D. Shaffer
_____________________________
Jerome D. Shaffer, Director
Dated: April 14, 2000 By: /s/ Raymond B. Ackerman
_____________________________
Raymond B. Ackerman, Director
Dated: April 14, 2000 By: /s/ Horace Rhodes
_____________________________
Horace Rhodes, Director
51
Consent of Independent Auditors
We consent to 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 March 17, 2000 with
respect to the consolidated financial statements and schedule of
ClimaChem, Inc. incorporated by reference in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,673
<SECURITIES> 0
<RECEIVABLES> 43,475
<ALLOWANCES> 1,541
<INVENTORY> 25,772
<CURRENT-ASSETS> 76,956
<PP&E> 141,260
<DEPRECIATION> 65,593
<TOTAL-ASSETS> 184,078
<CURRENT-LIABILITIES> 59,747
<BONDS> 112,854
0
0
<COMMON> 1
<OTHER-SE> 6,134
<TOTAL-LIABILITY-AND-EQUITY> 184,078
<SALES> 244,462
<TOTAL-REVENUES> 246,955
<CGS> 196,095
<TOTAL-COSTS> 241,713
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,260
<INCOME-PRETAX> (25,299)
<INCOME-TAX> (6,117)
<INCOME-CONTINUING> (19,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,182)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
