FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 1998
____________________________________
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from _______________ to _____________
Commission file number 1-7677
_________________________________________
LSB INDUSTRIES, INC.
____________________________________________________
Exact name of Registrant as specified in its charter
DELAWARE 73-1015226
______________________________ _______________
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
_______________________________________________________
Address of principal executive offices (Zip Code)
(405) 235-4546
__________________________________________________
Registrant's telephone number, including area code
None
______________________________________________________
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES x NO
________ _______
<PAGE>
The number of shares outstanding of the Registrant's voting Common
Stock, as of October 31, 1998 was 11,999,686 shares excluding
3,108,990 shares held as treasury stock.
<PAGE>
<PAGE>
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB
Industries, Inc. and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB
Industries, Inc. at September 30, 1998, the condensed consolidated
statements of operations for the nine month and three month periods
ended September 30, 1998 and 1997 and the consolidated statements
of cash flows for the nine month periods ended September 30, 1998
and 1997 have been subjected to a review, in accordance with
standards established by the American Institute of Certified Public
Accountants, by Ernst & Young LLP, independent auditors, whose
report with respect thereto appears elsewhere in this Form 10-Q.
The financial statements mentioned above are unaudited and reflect
all adjustments, consisting only of adjustments of a normal
recurring nature, which are, in the opinion of management,
necessary for a fair presentation of the interim periods. The
results of operations for the nine months and three months ended
September 30, 1998 are not necessarily indicative of the results to
be expected for the full year. The condensed consolidated balance
sheet at December 31, 1997, was derived from audited financial
statements as of that date.
2
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<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 1998 is unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1998 1997
_________________________________________ ___________ ____________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,322 $ 4,934
Trade accounts receivable, net of allowance 59,261 52,191
Inventories:
Finished goods 31,956 36,429
Work in process 9,533 8,582
Raw materials 24,722 23,189
___________ __________
Total inventory 66,211 68,200
Supplies and prepaid items 9,410 7,595
___________ __________
Total current assets 136,204 132,920
Property, plant and equipment, net (Note 5) 97,849 118,331
Investments and other assets, net of allowance 19,548 19,402
___________ __________
$ 253,601 $ 270,653
========== ==========
</TABLE>
(Continued on following page)
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 1998 is unaudited)
(Dollars in thousands)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
_____________________________________ ___________ ___________
<S> <C> <C>
Current liabilities:
Drafts payable $ 1,766 $ 737
Accounts payable 22,070 28,137
Accrued liabilities 22,172 16,196
Current portion of long-term debt 12,509 15,874
___________ __________
Total current liabilities 58,517 60,944
Long-term debt (Notes 5 and 7) 149,528 165,067
Contingencies (Note 6)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,485
shares issued and outstanding (1,539
in 1997) 141 146
Stockholders' equity (Note 4):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 15,107,776 shares
issued (15,042,356 in 1997) 1,511 1,504
Capital in excess of par value 38,327 38,257
Accumulated other comprehensive loss (1,933) (1,003)
Accumulated deficit (24,820) (29,773)
___________ __________
61,085 56,985
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 3,080,190 shares
(2,293,390 in 1997) 15,470 12,289
___________ __________
Total stockholders' equity 45,415 44,496
___________ __________
$ 253,601 $ 270,653
=========== ==========
</TABLE>
(See accompanying notes)
4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
1998 1997
(Note 1)
____________ ____________
<S> <C> <C>
Revenues:
Net sales $ 244,242 $ 239,037
Other income, including $3.6 million of
Tower income in 1997 ($676,000 in 1998)
(Note 5) 1,471 4,630
Gain on sale of the Tower (Note 5) 12,993 -
___________ ___________
258,706 243,667
Costs and expenses:
Cost of sales 192,318 194,195
Selling, general and administrative 45,548 47,652
Interest 13,062 10,382
___________ ___________
250,928 252,229
___________ ___________
Income (loss) before provision for
income taxes 7,778 (8,562)
Provision for income taxes 275 188
___________ ___________
Net income (loss) $ 7,503 $ (8,750)
========== ===========
Net income (loss) applicable to
common stock (Note 3) $ 5,077 $ (11,176)
========== ==========
Weighted average common shares
outstanding (Note 3):
Basic 12,502 12,904
Diluted 13,352 12,904
Income (loss) per common share (Note 3):
Basic $ .41 $ (.87)
=========== ==========
Diluted $ .39 $ (.87)
=========== ==========
</TABLE>
(See accompanying notes)
5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 1998 and 1997
(dollars in thousands, except per share amounts)
1998 1997
(Note 1)
__________ ___________
<S> <C> <C>
Revenues:
Net sales $ 78,773 $ 76,536
Other income, including Tower income of
$820,000 in 1997 (none in 1998) (Note 5) 146 1,203
___________ __________
78,919 77,739
Costs and expenses:
Cost of sales 63,145 61,995
Selling, general and administrative 14,732 16,474
Interest 4,223 3,986
___________ ___________
82,100 82,455
___________ ___________
Loss before provision for income taxes (3,181) (4,716)
Provision for income taxes 15 63
___________ ___________
Net loss $ (3,196) $ (4,779)
=========== ==========
Net loss applicable to
common stock (Note 3) $ (3,999) $ (5,582)
=========== ===========
Weighted average common shares
outstanding (Note 3):
Basic 12,185 12,832
Diluted 12,185 12,832
Loss per common share (Note 3):
Basic $ (.33) $ (.44)
============ ===========
Diluted $ (.33) $ (.44)
============ ===========
</TABLE>
(See accompanying notes)
6
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
1998 1997
___________ __________
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ 7,503 $ (8,750)
Adjustments to reconcile net income (loss)
to cash flows used by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 8,948 7,809
Other 1,226 888
Provision for possible losses
on receivables and other assets 1,588 1,394
Loss (gain) on sale of assets (13,584) 282
Recapture of prior period provisions for
loss on loans receivable secured by
real estate - (1,383)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (7,863) (6,254)
Inventories 1,105 2,540
Supplies and prepaid items (2,115) (672)
Accounts payable (5,255) (6,616)
Accrued liabilities 6,428 (166)
___________ _________
Net cash used by operations (2,019) (10,928)
Cash flows from investing activities:
Capital expenditures (6,157) (7,141)
Principal payments on notes receivable 308 263
Proceeds from sales of equipment and
real estate properties 1,742 87
Proceeds from sale of the Tower (Note 5) 29,266 -
Increase in other assets (3,096) (3,101)
___________ __________
Net cash provided (used) in investing
activities 22,063 (9,892)
Cash flows from financing activities:
Payments on long-term debt (19,878) (26,290)
Long-term and other borrowings 150 54,451
Net change in revolving debt 1,373 (2,618)
Net change in drafts payable 358 (127)
Dividends paid (Note 4):
Preferred Stocks (2,426) (2,424)
Common Stock (124) (389)
Purchases of treasury stock (Note 4) (3,181) (1,112)
Net proceeds from issuance of common stock 72 191
___________ __________
Net cash provided (used) by financing activities (23,656) 21,682
___________ __________
Net increase (decrease) in cash (3,612) 862
Cash and cash equivalents at beginning of period 4,934 1,620
__________ __________
Cash and cash equivalents at end of period $ 1,322 $ 2,482
========== ==========
</TABLE>
(See accompanying notes)
7
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Note 1: Basis of Presentation Certain amounts in the Statements
______________________________
of Operations for the nine month and three month periods ended
September 30, 1997 have been reclassified to conform to the 1998
presentation of certain other expense items previously included in
selling, general and administrative expenses.
Note 2: Income Taxes At December 31, 1997, the Company had
_____________________
regular-tax net operating loss ("NOL") carryforwards for tax
purposes of approximately $64 million (approximately $31 million
alternative minimum tax NOLs). Certain amounts of regular-tax NOL
expire beginning in 2000.
The Company's provision for income taxes for the nine months ended
September 30, 1998 of $275,000 is for current state income taxes
and federal alternative minimum tax.
Note 3: Earnings Per Share In 1997, the Financial Accounting
___________________________
Standards Board issued Statement No. 128, Earnings Per Share.
Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share
excludes any dilutive effect of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
Net income or loss applicable to common stock is computed by
adjusting net income or loss by the amount of preferred stock
dividends. Basic income or loss per common share is based upon the
weighted average number of common shares outstanding during each
period after giving appropriate effect to preferred stock
dividends. Diluted income or loss per share is based on the
weighted average number of common shares and dilutive common
equivalent shares outstanding and the assumed conversion of
dilutive convertible securities outstanding, if any, after
appropriate adjustment for interest, net of related income tax
effects on convertible notes payable, as applicable. The Company
has stock options, convertible preferred stock, and a convertible
note payable which are potentially dilutive. All of these
potentially dilutive securities were antidilutive for the nine
months ended September 30, 1997, and the three months ended
September 30, 1998 and 1997. Certain convertible preferred stock
and certain stock options were antidilutive for the nine month
period ended September 30, 1998, and are therefore excluded from
the calculation of diluted earnings (loss) per share.
8
<PAGE>
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Note 3: Earnings Per Share (continued) The following table sets forth the
_______________________________________
computation of basic and diluted earnings per share:
(dollars in thousands, except per share amounts)
Nine Months
Ended September 30,
1998 1997
__________ __________
<S> <C> <C>
Numerator:
Net income (loss) $ 7,503 $ (8,750)
Preferred stock dividends (2,426) (2,426)
___________ _____________
Numerator for 1998 and 1997 basic
and 1997 diluted earnings per
share - income (loss) available
to common stockholders $ 5,077 $ (11,176)
Preferred stock dividends on
preferred stock assumed to be
converted in 1998 195 -
__________ ___________
Numerator for 1998 diluted earnings
per share $ 5,272 $ (11,176)
========== ===========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 12,502 12,904
Effect of dilutive securities:
Employee stock options 119 -
Convertible preferred stock 727 -
Convertible note payable 4 -
___________ ____________
Dilutive common shares 850 -
___________ ____________
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 13,352 12,904
=========== ============
Basic earnings (loss) per share $ .41 $ (.87)
=========== ============
Diluted earnings (loss) per share $ .39 $ (.87)
=========== ============
<PAGE>
Three Months
Ended September 30,
1998 1997
___________ __________
<S> <C> <C>
$ (3,196) $ (4,779)
(803) (803)
____________ ___________
$ (3,999) $ (5,582)
- -
____________ ____________
$ (3,999) $ (5,582)
============ ============
12,185 12,832
- -
- -
- -
_____________ ___________
- -
_____________ ___________
12,185 12,832
============ =========
$ (.33) $ (.44)
============ ==========
$ (.33) $ (.44)
============ ==========
</TABLE>
9
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<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Note 4: Stockholders' Equity The table below provides detail of activity in
_____________________________
the stockholders' equity accounts for the nine months ended September 30,
1998: (in thousands)
Common Stock Non- Capital
_______________ redeemable in excess
Par Preferred of par
Shares Value Stock Value
______ ______ __________ _________
(In thousands)
<S> <C> <C> <C> <C>
Balance at December 31,
1997 15,042 $ 1,504 $ 48,000 $ 38,257
Net income
Foreign currency
translation adjustment
Comprehensive income (Note 9)
Conversion of 54 shares of
redeemable preferred stock
to common stock 2 5
Exercise of stock options 64 7 65
Dividends declared:
Common Stock ($.01 per share)
Series B 12% preferred
stock ($9.00 per share)
Series 2 preferred
stock ($2.44 per share)
Redeemable preferred
stock ($10.00 per share)
Purchase of treasury stock _______ _______ ________ ________
Balance at (1)
September 30, 1998 15,108 $ 1,511 $ 48,000 $ 38,327
<PAGE>
Accumulated Retained
Other Com- Earnings Treasury
prehensive (Accumu- Treasury Stock
Income lated Stock- Prefer-
(Loss) deficit) Common red Total
___________ _________ _________ __________ __________
<S> <C> <C> <C> <C> <C>
$(1,003) $(29,773) $(12,289) $ (200) $44,496
7,503 7,503
(930) (930)
________
6,573
5
72
(124) (124)
(180) (180)
(2,231) (2,231)
(15) (15)
(3,181) (3,181)
________ _________ ________ ________ _______
$(1,933) $(24,820) $(15,470) $ (200) $45,415
======== ========= ======== ========= =======
<FN>
(1) Includes 3,080 shares of the Company's Common Stock held in treasury.
Excluding the 3,080 shares held in treasury, the outstanding shares of
the Company's Common Stock at September 30, 1998 were 12,028.
</FN>
</TABLE>
10
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Note 5: Sale of the Tower In March 1998, a subsidiary of the
_________________________
Company closed the sale of the Tower office building. The Company
realized net proceeds of approximately $29.3 million from the sale.
Proceeds from the sale were used to retire the outstanding
indebtedness of approximately $12.6 million in March 1998, for
which this property served as collateral. Approximately $16.5
million of the remaining proceeds were used to reduce indebtedness
outstanding under the Company's Revolving Credit Facility. The
Company recognized a gain on the sale of the property of
approximately $13 million in the first quarter of 1998.
Note 6: Commitments and Contingencies
______________________________________
Nitric Acid Project
___________________
In June 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC is acting as an agent to construct, and
upon completion of construction, will operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. EDC has guaranteed the performance of EDNC's obligations
under the Bayer Agreement. Under the terms of the Bayer Agreement,
EDNC is to lease the EDNC Baytown Plant pursuant to a leveraged
lease from an unrelated third party with an initial lease term of
ten years from the date on which the EDNC Baytown Plant becomes
fully operational. Upon expiration of the initial ten-year term
from the date the EDNC Baytown Plant becomes 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. It is anticipated that
construction of the EDNC Baytown Plant will cost approximately $65
million and will be completed in the first quarter of 1999.
Construction financing of the EDNC Baytown Plant is being provided
by an unaffiliated lender. Neither the Company, EDC nor EDNC has
guaranteed any of the lending obligations for the EDNC Baytown
Plant. In connection with the leveraged lease, the Company entered
into an interest rate forward agreement to fix the effective rate
of interest implicit in such lease. As of September 30, 1998, the
fair value of such agreement represented a liability of $7.3
million for which the Company has posted margin and letters of
credit totaling the same. Bayer has agreed to reimburse the
Company for 50% of the ultimate cost of the hedging contract
associated with the interest rate forward agreement. See Note 8,
"Changes in Accounting", for the expected accounting upon adoption
of SFAS #133.
11
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
EDNC has agreed in the Bayer Agreement that, prior to completion of
EDNC's Baytown Plant, EDNC will deliver to Bayer a certain amount
of Bayer's needs for nitric acid at Bayer's Baytown Plant. In
1998, EDNC began delivering nitric acid to Bayer that it has
purchased from EDC and unaffiliated third party vendors.
Debt Guarantee
______________
The Company has guaranteed approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft
Company, in exchange for an ownership interest, to which no value
has been assigned as of September 30, 1998. The Company has made
investments in and advances to the aviation company totaling $1.2
million as of September 30, 1998 and is accruing losses of the
aviation company based on its ownership percentage (44.2% as of
September 30, 1998). The Company has recorded losses of $3.4
million ($1.1 million during the first nine months of 1998) related
to the debt guarantee and advances. The debt guarantee relates to
a $2 million term note and up to $600,000 of a $2 million revolving
credit facility. The $2 million term note requires interest only
payments through September 1998; thereafter, it requires monthly
principal payments of $11,111 plus interest beginning in October
1998 until it matures on August 8, 1999, at which time all
outstanding principal and unpaid interest are due. In the event of
default of this note, the Company is required to assume payments on
the note with the term extended until August, 2004. The $2 million
revolving credit facility, on which a subsidiary of the Company has
guaranteed up to $600,000 of indebtedness, has an outstanding
balance of $2.0 million at September 30, 1998. As of the date of
this report, the aviation company is in default on the required
payments for both of the above-described debt instruments, subject
to expiration of grace periods. In the event the aviation company
does not pay the delinquent amounts within the allowed grace
periods, the lenders could require the Company to honor its
guarantees. Under the terms of these note instruments, upon
written notice from the lenders, if the aviation company does not
cure its conditions of default within a specified period of time,
the guarantors become primarily responsible for the payments of the
notes. The $600,000 guarantee is on a line of credit that has a
maturity date of November 18, 1998; therefore, if not refinanced or
otherwise cured, it may become due and payable by the Company in
the fourth quarter of 1998.
As of the date of this report, no demand has been made upon the
Company's guarantees for either the $2.0 million note or the line
of credit. The aviation company continues to have discussions with
potential investors who appear to have adequate resources to
complete the certification process and begin commercial production.
12
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Should the potential investors ultimately provide funding to the
aviation company, it is expected that the Company will not be
required to perform for the full amount under the $2.0 million note
guarantee, and may also recover a portion of its investment in and
advances to the aviation company previously written off.
Legal Matters
_____________
Following is a summary of certain legal actions involving the
Company:
A. In 1987, the U.S. Environmental Protection Agency ("EPA")
notified one of the Company's subsidiaries, along with
numerous other companies, of potential responsibility for
clean-up of a waste disposal site in Oklahoma. In 1990, the
EPA added the site to the National Priorities List. Following
the remedial investigation and feasibility study, in 1992 the
Regional Administrator of the EPA signed the Record of
Decision ("ROD") for the site. The ROD detailed EPA's
selected remedial action for the site and estimated the cost
of the remedy at $3.6 million. In 1992, the Company made
settlement proposals which would have entailed a collective
payment by such subsidiaries of the Company of $47,000. The
site owner rejected this offer and proposed a counteroffer of
$245,000 plus a reopener for costs over $12.5 million. The
EPA rejected the Company's offer, allocating 60% of the
cleanup costs to the potentially responsible parties and 40%
to the site operator. The EPA estimated the total cleanup
costs at $10.1 million as of February 1993. The site owner
rejected all settlements with the EPA, after which the EPA
issued an order to the site owner to conduct the remedial
design/remedial action approved for the site. In August 1997,
the site owner issued an "invitation to settle" to various
parties, alleging the total cleanup costs at the site may
exceed $22 million.
No legal action has yet been filed. The amount of the
Company's cost associated with the clean-up of the site is
unknown due to continuing changes in the estimated total cost
of clean-up of the site and the percentage of the total waste
which was alleged to have been contributed to the site by the
Company. As of September 30, 1998, the Company has accrued an
amount based on a preliminary settlement proposal by the
alleged potential responsible parties; however, there is no
assurance such proposal will be accepted. The amount accrued
is not material to the Company's financial position or results
of operations. This estimate is subject to material change in
the near term as additional information is obtained.
13
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
B. A subsidiary of the Company submitted to the State of Arkansas
a "Groundwater Monitoring Work Plan" which was approved by the
State of Arkansas. Pursuant to the Groundwater Monitoring Work
Plan, the subsidiary has performed phase I and II groundwater
investigations, and submitted a risk assessment report to the
State of Arkansas. The risk assessment report is currently
being held in abeyance by the State of Arkansas. On August
10, 1998, the subsidiary entered into a Consent Administrative
Agreement ("CAA") with the State of Arkansas, which requires
the implementation of interim measures to reduce the
concentrations of nitrates in the shallow groundwater.
On February 12, 1996, the subsidiary entered into a Consent
Administrative Agreement ("Administrative Agreement") with the
State of Arkansas to resolve certain compliance issues
associated with nitric acid concentrators. Pursuant to the
Administrative Agreement, the subsidiary installed additional
pollution control equipment to address the compliance issues.
The subsidiary was assessed $50,000 in civil penalties
associated with the Administrative Agreement. In the summer of
1996 and then on January 28, 1997, the subsidiary executed
amendments to the Administrative Agreement ("Amended
Agreements"). The Amended Agreements imposed a $150,000 civil
penalty, which penalty has been paid. Since the 1997
amendment, the Chemical Business has been assessed stipulated
penalties of approximately $67,000 by the Arkansas Department
of Pollution Control and Ecology ("ADPC&E") for violations of
certain provisions of the 1997 Amendment. The Chemical
Business believes that the El Dorado Plant has made progress
in controlling certain off-site emissions; however, such off-
site emissions have occurred and continue to occur from time
to time, which could result in the assessment of additional
penalties against the Chemical Business by the ADPC&E for
violation of the 1997 Amendment.
During May, 1997, approximately 2,300 gallons of caustic
material spilled when a valve in a storage vessel failed,
which was released to a storm water drain, and according to
ADPC&E records, resulted in a minor fish kill in a drainage
ditch near EDC's El Dorado, Arkansas, facility ("El Dorado
Facility"). The referenced CAA resolves this spill by
requiring EDC to implement wastewater minimization
characterization, and enhanced treatment in order to meet more
stringent effluent limits by February 1, 2002. The CAA
includes a civil penalty in the amount of $183,700 which
includes $42,000 that has already been paid by funding an
environmental project in the community, and $125,000 which
14
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
will be paid in the form of environmental improvements at the
El Dorado Plant over a five year period. EDC paid stipulated
penalties in the amount of $5,000 relating to upset conditions
occurring in September, 1998.
C. 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.
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.
During the third quarter of 1997, a subsidiary of the Company
was served with a lawsuit in which approximately 27 plaintiffs
have sued approximately 13 defendants, including a subsidiary
of the Company alleging personal injury and property damage
for undifferentiated compensatory and punitive damages of
approximately $7,000,000. Specifically, the plaintiffs assert
blast damage claims, nuisance (road dust from coal trucks) and
personal injury claims (exposure to toxic materials in
blasting materials) on behalf of residents living near the
Heartland Coal Company ("Heartland") strip mine in Lincoln
County, West Virginia. Heartland employed the subsidiary to
provide blasting materials and personnel to load and shoot
15
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
holes drilled by employees of Heartland. Down hole blasting
services were provided by the subsidiary at Heartland's
premises from approximately August 1991, until approximately
August 1994. Subsequent to August 1994, the subsidiary
supplied blasting materials to the reclamation contractor at
Heartland's mine. In connection with the subsidiary's
activities at Heartland, the subsidiary has entered into a
contractual indemnity to Heartland to indemnify Heartland
under certain conditions for acts or actions taken by the
subsidiary for which the subsidiary failed to take, and
Heartland is alleging that the subsidiary is liable thereunder
for Heartland's defense costs and any losses to or damages
sustained by, the plaintiffs in this lawsuit. Discovery has
only recently begun in this matter, and the Company intends to
vigorously defend itself in this matter. Based on limited
information available, the subsidiary's counsel believes that
the exposure, if any, to the subsidiary related to this
litigation is in the $100,000 range.
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 adequately covered by insurance, or if
not so covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition is not presently expected
to have a material effect on the financial position of the Company,
but could have a material impact on the results of operations for
a particular quarter or year, if resolved unfavorably.
Note 7: Long-Term Debt In November, 1997, the Company's wholly
______________________
owned subsidiary, ClimaChem, Inc. ("ClimaChem"), completed the sale
of $105 million principal amount of 10 3/4% Senior Notes due 2007,
which Senior Notes were exchanged with registered senior notes of
the same amount and substantially the same terms in April, 1998
(the "Notes"). Interest on the Notes is payable semiannually in
arrears on June 1 and December 1 of each year, and the principal is
payable in the year 2007. The Notes are senior unsecured
obligations of ClimaChem and rank pari passu in right of payment to
all existing senior unsecured indebtedness of ClimaChem and its
subsidiaries. The Notes are effectively subordinated to all
existing and future senior secured indebtedness of ClimaChem.
Except as described below, the Notes are not redeemable at
ClimaChem's option prior to December 1, 2002. After December 1,
2002, the Notes will be subject to redemption at the option of
ClimaChem, in whole or in part, at the redemption prices set forth
in the indenture relating to the Notes between ClimaChem, the
16
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
guarantors and the trustee ("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 the Notes is
redeemable, at the option of ClimaChem, 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; 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 the Company or ClimaChem,
holders of the Notes will have the right to require ClimaChem 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.
ClimaChem owns substantially all of the companies comprising the
Company's Chemical and Climate Control Businesses. ClimaChem is a
holding company with no assets or operations other than its
investments in its subsidiaries, and each of its subsidiaries is
wholly owned, directly or indirectly, by ClimaChem. ClimaChem's
payment obligations under the Notes are fully, unconditionally and
joint and severally guaranteed by all of the existing subsidiaries
of ClimaChem, except for El Dorado Nitrogen Company ("EDNC"). The
assets, equity, and earnings of EDNC are currently inconsequential
to ClimaChem. Separate financial statements and other disclosures
concerning the guarantors are not presented herein because
management has determined they are not material to investors.
Summarized consolidated balance sheet information of ClimaChem and
its subsidiaries as of December 31, 1997 and September 30, 1998 and
the results of operations for the nine month and three month
periods ended September 30, 1998 and September 30, 1997, are
detailed below.
17
<PAGE>
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Note 7: (continued)
____________________
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
______________________________
(In thousands)
(unaudited)
<S> <C> <C>
Balance sheet data:
Current assets $ 90,625 $ 92,741
Property, plant and equipment 81,057 84,329
Notes receivable from LSB and affiliates 13,443 13,443
Other assets 11,173 10,362
__________ __________
Total assets $ 196,298 $ 200,875
========== ==========
Current liabilities $ 38,109 $ 38,004
Long-term debt 121,782 126,346
Other 9,236 9,236
Stockholder's equity 27,171 27,289
_________ _________
Total liabilities and stockholder's equity $ 196,298 $ 200,875
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
__________________________________________________
(In thousands)
(unaudited)
<S> <C> <C> <C> <C>
Operations data:
Total revenues $ 202,718 $ 200,877 $ 65,390 $ 62,541
Costs and expenses:
Costs of sales 160,099 161,684 52,660 50,021
Selling, general
and administrative 30,566 28,005 10,217 9,287
Interest 9,333 6,587 3,060 2,332
_________ __________ __________ __________
199,998 196,276 65,937 61,640
_________ __________ __________ ___________
Income (loss) before
provision for
income taxes 2,720 4,601 (547) 901
Income tax provision 1,908 1,821 208 320
_________ __________ ___________ __________
Net income (loss) $ 812 $ 2,780 $ (755) $ 581
========== ========== =========== ==========
</TABLE>
18
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Note 7: (continued)
____________________
At September 30, 1998, the Company and ClimaChem were not in
compliance with certain financial covenants related to debt
instruments other than the Notes. In November, 1998, the Company
and ClimaChem obtained waivers for such noncompliance and
amendments to reset the covenants where applicable. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" - "Sources of Funds" for further discussion
of such waivers and debt instruments.
Note 8: Changes in Accounting Effective January 1, 1998, the
______________________________
Company changed its method of accounting for the costs of computer
software developed for internal use to capitalize costs incurred
after the preliminary project stage as outlined in Statement of
Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). These costs
capitalized will be amortized over their estimated useful life.
Prior to 1998, these costs were expensed as incurred. The effect
of this change on net income for the nine months ended September
30, 1998 was not material.
In the second quarter of 1998, the Accounting Standards Executive
Committee of the Securities and Exchange Commission released
Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of
start-up activities, including organization costs, be expensed as
incurred. As of September 30, 1998, the start-up costs the Company
has capitalized on its balance sheet are immaterial. SOP 98-5 is
effective for fiscal years ending after December 15, 1998. The
Company expects to adopt SOP 98-5 no later than the first quarter
of 1999.
In June, 1998, the Financial Accounting Standards Board issued
Statement No. 133 ("SFAS #133"), Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its
issuance. The Company has not yet determined when this new
Statement will be adopted. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. 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
19
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
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 Interest Rate Forward
Agreement discussed in Note 6, "Nitric Acid Project", 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. The amount
included in accumulated other comprehensive income or loss will be
amortized to income over the initial term of the leveraged lease.
Note 9: Comprehensive Income Effective January 1, 1998, the
_____________________________
Company adopted Financial Accounting Standard No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). The provisions of SFAS 130
require the Company to classify items of other comprehensive income
in the financial statements and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance
sheet. The Company has also made similar reclassifications for all
prior periods for comparative purposes. Other comprehensive income
for the nine month and three month periods ended September 30, 1998
and 1997 is detailed below.
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
___________ ____________
9/30/98 9/30/97 9/30/98 9/30/97
____________________________________________________
(In thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ 7,503 $ (8,750) $ (3,196) $ (4,779)
Foreign currency
translation loss (930) (859) (324) (309)
_______ ________ __________ _________
Comprehensive income
(loss) $ 6,573 $ (9,609) $ (3,520) $ (5,088)
======= ========= ======== ========
</TABLE>
Note 10: Proposed Transaction
______________________________
During August, 1998, the Company announced its intent, subject
to satisfactory completion of certain conditions, to spin-off the
Automotive Products Business ("Automotive") to its shareholders as
a dividend. The shares in Automotive would be distributed by the
Company to the Company's shareholders on a pro-rata basis, with the
exact number of shares of Automotive to be issued in connection
with the spin-off to be determined. The spin-off of Automotive is
subject to, among other things, receipt by the Company from the
Internal Revenue Service or an opinion of counsel of confirmation
of tax-free treatment, certain Securities and Exchange Commission
filings, arrangement for lines of credit for Automotive, and the
20
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
Company's Board of Directors' approval. There are no assurances
that the Company will spin-off Automotive.
21
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with a review of the Company's September 30,
1998 Condensed Consolidated Financial Statements.
Certain statements contained in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
be deemed forward-looking statements. See "Special Note Regarding
Forward-Looking Statements".
OVERVIEW
General
_______
The Company is pursuing a strategy of focusing on its more
profitable businesses and concentrating on businesses and product
lines in niche markets where the Company has established or
believes it can establish a position as a market leader. In
addition, the Company is seeking to improve its liquidity and
profits through liquidation of selected assets that are on its
balance sheet and on which it is not realizing an acceptable return
and does not reasonably expect to do so. In this connection, the
Company has come to the conclusion that its Automotive and
Industrial Products Businesses are non-core to the Company and the
Company is exploring various alternatives to maximize shareholder
value from these assets.
On August 5, 1998, the Company announced its intent, subject
to satisfactory completion of certain conditions, to spin-off the
Automotive Products Business ("Automotive") to its shareholders as
a dividend. The shares in Automotive would be distributed to LSB
shareholders on a pro-rata basis, with the exact number of shares
of Automotive to be issued in connection with the spin-off to be
determined. The spin-off of Automotive is subject to, among other
things, receipt by the Company from the Internal Revenue Service or
an opinion of counsel of confirmation of tax-free treatment,
certain Securities and Exchange Commission filings, arrangement for
lines of credit for Automotive, and LSB Board of Directors'
approval. Subject to completion of the above conditions,
management believes that the spin-off will be completed in the
first quarter of 1999. There are no assurances that the Company
will spin-off Automotive.
Information about the Company's operations in different
industry segments for the nine months and three months ended
September 30, 1998 and 1997 is detailed below.
22
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
_________________ __________________
1998 1997 1998 1997
______ _____ ______ _______
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Sales:
Chemical $112,218 $122,853 $ 34,695 $ 32,658
Climate Control 89,894 77,526 30,637 29,704
Automotive Products 31,274 27,245 10,076 10,208
Industrial Products 10,856 11,413 3,365 3,966
________ ________ ________ _________
$244,242 $239,037 $ 78,773 $ 76,536
======== ======== ======== =========
Gross profit (1):
Chemical $ 15,762 $ 16,388 $ 3,453 $ 3,605
Climate Control 26,499 22,469 9,178 8,786
Automotive Products 6,985 3,311 2,019 1,085
Industrial Products 2,678 2,674 978 1,065
________ ________ ________ _________
$ 51,924 $ 44,842 $ 15,628 $ 14,541
======== ======== ======== =========
Operating profit (loss) (2):
Chemical $ 5,702 $ 5,288 $ 91 $ 554
Climate Control 10,395 7,721 4,083 3,330
Automotive Products (337) (4,447) (408) (1,559)
Industrial Products (780) (880) (262) (170)
________ ________ ________ _________
14,980 7,682 3,504 2,155
General corporate expenses
and other (7,133) (5,862) (2,462) (2,885)
Interest expense (13,062) (10,382) (4,223) (3,986)
Gain on sale of the Tower 12,993 - - -
________ ________ ________ _________
Income (loss) before pro-
vision for income taxes $ 7,778 $ (8,562) $ (3,181) $ (4,716)
======== ======== ======== =========
<FN>
(1) Gross profit by industry segment represents net sales less cost of sales.
(2) Operating profit (loss) by industry segment represents revenues less
operating expenses before deducting general corporate expenses, interest
expense and income taxes and, in 1998, before gain on sale of the Tower.
</FN>
</TABLE>
Chemical Business
_________________
Although sales in the Chemical Business have declined from
$122.9 million in the nine months ended September 30, 1997, to
$112.2 million in the nine months ended September 30, 1998 (a
decrease of 8.7%), the operating profit has increased from $5.3
million in the first nine months of 1997 to $5.7 million in the
first nine months of 1998 (an increase of 7.8%).
23
<PAGE>
During the first nine months of 1997, limitations on
production, as a result of certain mechanical and design problems
relating to the construction and start-up of a concentrated nitric
acid plant, resulted in significant fixed costs being expended as
period costs rather than being absorbed as cost of product being
produced and sold. In addition, significant amounts were expended
for engineering, consulting, and other costs to bring the nitric
acid plant up to its stated capacity.
Additionally, the cost of the Chemical Business' primary raw
material, anhydrous ammonia, averaged approximately $186 per ton in
the first nine months of 1997, compared to approximately $160 per
ton in the first nine months of 1998. The Chemical Business
purchases approximately 220,000 tons of anhydrous ammonia per year
under two contracts, both effective as of January 1, 1997. The
Company's purchase price of anhydrous ammonia under these contracts
can be higher or lower than the current market spot price of
anhydrous ammonia. Pricing is subject to variations due to
numerous factors contained in these contracts. Based on the price
calculations contained in the contracts, one contract is presently
priced above the current market spot price. The Chemical Business
is required to purchase approximately one half of its requirements
from each of the suppliers under the terms of the contracts.
The ammonia industry has added an additional one million tons
of capacity of anhydrous ammonia in the western hemisphere in 1998
and the Company believes there is approximately one million tons of
additional annual capacity of anhydrous ammonia being constructed
in the western hemisphere scheduled for completion in 1999. The
Company believes this additional capacity may contribute to a
decline in the future market price of anhydrous ammonia.
In 1998, the Chemical Business has been adversely affected by
the extreme drought conditions in the mid-south market during the
primary fertilizer season, followed by excess wet conditions and
floods in the fall season, resulting in substantially lower volume
and lower sales prices for certain of its products sold in its
agricultural markets.
During July, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries is acting as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. This plant, when constructed, will be operated by the
Company's subsidiary and will supply nitric acid for Bayer's
polyurethane business under a long-term supply contract.
Management estimates that, after the initial startup phase of
operations at the plant, at full production capacity based on terms
24
<PAGE>
of the Bayer Agreement and dependent upon the price of anhydrous
ammonia, based on the price of anhydrous ammonia as of the date of
this report, the plant should generate approximately $35 million to
$50 million in annual gross revenues. It is anticipated that the
construction of the nitric acid plant at Bayer's facility in
Baytown, Texas, will cost approximately $65 million and
construction is scheduled to be completed in the first quarter of
1999. The Company's subsidiary is to lease the nitric acid plant
pursuant to a leverage lease from an unrelated third party for an
initial term of ten (10) years from the date that the plant becomes
fully operational, and the construction financing of this plant is
being provided by an unaffiliated lender.
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic
developments in Asia have had a negative impact on the mining
industry in Australia which the Company's Chemical Business
services. As these adverse economic conditions in Asia have
continued, such have had an adverse effect on the Company's
consolidated results of operations in 1998. The Company has
received an offer to sell its Australian subsidiary. There are no
assurances that the Company would sell the Australian subsidiary.
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pump, 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.
As indicated in the above table, the Climate Control Business
reported improved sales (an increase of 16.0%) and improved
operating profit (an increase of 34.6%) for the first nine months
of 1998 as compared to the first nine months of 1997.
Automotive and Industrial Products Businesses
_____________________________________________
As indicated in the above table, during the nine months ended
September 30, 1998 and 1997, respectively, the Automotive and
Industrial Products Businesses recorded combined sales of $42.1
million and $38.7 million, respectively, and reported operating
25
<PAGE>
losses (as defined above) of $1.1 million and $5.3 million,
respectively. The net investment in assets of these Businesses has
decreased consistently during the last three years and the Company
expects to realize further reductions in future periods. See
"Overview - General" for a discussion of the Company's intent to
spin-off the Automotive Business, subject to numerous conditions
precedent.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 vs. Nine Months Ended
September 30, 1997
___________________________________________________________
Revenues
________
Total revenues for the nine months ended September 30, 1998
and 1997 were $258.7 million and $243.7 million, respectively (an
increase of $15.0 million). Sales increased $5.2 million and other
income decreased $3.2 million. Additionally, in March, 1998, a
subsidiary of the Company closed the sale of an Oklahoma City
office building ("the Tower"). The Company recognized a pre-tax
gain on the sale of the Tower of approximately $13.0 million in the
first quarter of 1998. The decrease in other income of $3.2
million was primarily due to non-recurring operations of the Tower,
which was sold in March, 1998.
Net Sales
_________
Consolidated net sales included in total revenues for the nine
months ended September 30, 1998 were $244.2 million, compared to
$239.0 million for the first nine months of 1997, an increase of
$5.2 million. This increase in sales resulted principally from:
(i) increased sales in the Climate Control Business of $12.4
million, primarily due to increased volume and price increases in
both the heat pump and fan coil product lines, and (ii) increased
sales in the Automotive Products Business of $4.0 million primarily
due to improved volume of units being shipped to original equipment
manufacturers and new customers, offset by (iii) decreased sales in
the Industrial Products Business of $.6 million due to decreased
sales of machine tools, and (iv) decreased sales in the Chemical
Business of $10.6 million primarily due to lower sales volume in
the U.S. of agricultural and blasting products and decreased
business volume of its Australian subsidiary. Sales were lower in
the Chemical Business during the first nine months of 1998,
compared to the first nine months of 1997, as a result of adverse
weather conditions in its agricultural markets during the spring
and fall planting seasons. Blasting sales in the Chemical Business
declined as a result of elimination of certain low profit margin
26
<PAGE>
sales and decreased volume in the Australian subsidiary resulting
from adverse economic developments in Asia.
Gross Profit
____________
Gross profit was 21.3% for the first nine months of 1998,
compared to 18.8% for the first nine months of 1997. The increase
in the gross profit percentage was due primarily to (i) increased
absorption of costs due to higher production volumes and improved
experience with returns and allowances in the Automotive Products
Business, (ii) lower production costs in the Chemical Business due
to the effect of lower prices of anhydrous ammonia in 1998, (iii)
lower unabsorbed overhead costs caused by excessive downtime
related to problems associated with mechanical failures at the
Chemical Business' primary manufacturing plant in the first half of
1997, and (iv) lower material costs as a result of improved unit
cost of certain raw materials in the Climate Control Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 18.6% and 19.9% in the nine month periods
ended September 30, 1998 and 1997, respectively. This decrease is
primarily the result of (i) a comprehensive cost reduction program
implemented by the Company, (ii) increased sales volume in the
Climate Control and Automotive Products Businesses without an
equivalent corresponding increase in SG&A, (iii) decreased
professional fees related to general litigation, and (iv) decreased
SG&A on the operations of the Tower since it was sold in March of
1998 but was included for the full nine months in 1997.
Interest Expense
________________
Interest expense for the Company was approximately $13.1
million during the nine months ended September 30, 1998, compared
to approximately $11.5 million, before deducting capitalized
interest, during the nine months ended September 30, 1997. During
the first nine months of 1997, $1.1 million of interest expense was
capitalized in connection with construction of the DSN Plant. The
1998 increase of $1.6 million before the effect of capitalization
primarily resulted from increased borrowings.
Income (Loss) Before Tax
________________________
The Company had income before income taxes of $7.8 million in
the first nine months of 1998 compared to a loss before income
taxes of $8.6 million in the nine months ended September 30, 1997.
The increased profitability of $16.4 million was primarily due to
27
<PAGE>
the gain on the sale of the Tower and increased sales and gross
profits as previously discussed, partially offset by increased
interest expense.
Provision For Income Taxes
__________________________
As a result of the Company's net operating loss carryforward
for income tax purposes as discussed elsewhere herein and in Note
2 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the nine months ended
September 30, 1998 and the nine months ended September 30, 1997 are
for current state income taxes and federal alternative minimum
taxes.
Three Months Ended September 30, 1998 vs. Three Months Ended
September 30, 1997.
____________________________________________________________
Revenues
________
Total revenues for the three months ended September 30, 1998
and 1997 were $78.9 million and $77.7 million, respectively (an
increase of $1.2 million). Sales increased $2.2 million and other
income decreased $1.0 million. Other income decreased because the
three month period ended September 30, 1997 included operations of
the Tower, which was sold in March, 1998.
Net Sales
_________
Consolidated net sales included in total revenues for the
three months ended September 30, 1998 were $78.8 million, compared
to $76.5 million for the third quarter of 1997, an increase of $2.3
million. This increase in sales resulted principally from: (i)
increased sales in the Chemical Business of $2.0 million primarily
due to sales of nitric acid products pursuant to the Bayer
Agreement (see Note 6 of Notes to Condensed Consolidated Financial
Statements), offset by reduced sales of the Australian subsidiary,
and (ii) increased sales in the Climate Control Business of $.9
million due to price increases and improved demand for the heat
pump products offered by this business, offset by (iii) decreased
sales in the Industrial Products Business of $.6 million due to
decreased sales of machine tools, and (iv) decreased sales in the
Automotive Products Business of $.1 million.
Gross Profit
____________
Gross profit was 19.8% for the third quarter of 1998, compared
to 19.0% for the third quarter of 1997. The increase in the gross
profit percentage was due primarily to (i) increased absorption of
28
<PAGE>
costs due to higher production volumes and improved experience with
returns and allowances in the Automotive Products Business, and
(ii) lower material costs caused by improved unit cost of certain
raw materials in the Climate Control Business.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 18.7% in the three month period ended
September 30, 1998, compared to 21.5% for the third quarter of
1997. This decrease is primarily the result of (i) a comprehensive
cost reduction program implemented by the Company, (ii) increased
sales volume in the Climate Control Business without an equivalent
corresponding increase in SG&A, (iii) decreased professional fees
related to general litigation, and (iv) decreased SG&A on the
operations of the Tower since it was sold in March of 1998.
Interest Expense
________________
Interest expense for the Company was $4.2 million during the
third quarter of 1998, compared to $4.0 million during the third
quarter of 1997. The increase of $.2 million primarily resulted
from increased borrowings.
Loss Before Taxes
_________________
The Company had a loss before income taxes of $3.2 million in
the third quarter of 1998, compared to a loss before income taxes
of $4.7 million in the three months ended September 30, 1997. The
difference is composed principally of improved sales and gross
profit and a reduction in SG&A, offset by a reduction in other
income due to the sale of the Tower.
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 and borrowings under its revolving
credit facilities, and more recently, by the issuance of senior
unsecured notes by a wholly owned subsidiary and the sale of the
Tower. See "Sources of Funds" below.
Net cash used by operations for the nine months ended
September 30, 1998 was $2.0 million, after adding back to income
$10.2 million for noncash depreciation and amortization, $1.6
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million in provisions for possible losses on accounts receivable,
notes receivable and a loan guarantee and subtracting from income
$13.6 million in gains from sales of the Tower and other real
estate properties and includes the following changes in assets and
liabilities: (i) accounts receivable increases of $7.9 million;
(ii) inventory decreases of $1.1 million; (iii) increases in
supplies and prepaid items of $2.1 million; and (iv) increases in
accounts payable and accrued liabilities of $1.2 million. The
increase in accounts receivable is due to increased sales and
extended terms to new customers in the Automotive Products
Businesses, increased sales in the Climate Control Business (see
"Results of Operations" for discussion of increase in sales) and
seasonal sales of agricultural products and initial sales under the
Bayer Agreement in the Chemical Business. The decrease in
inventory was due primarily to a decrease at the Chemical Business
due to seasonal sales of agricultural products offset by inventory
increases in the Climate Control Business necessary to meet
increased sales demand. The increase in supplies and prepaid items
resulted primarily from an increase in maintenance and
manufacturing supplies in the Chemical Business. The increase in
accounts payable and accrued liabilities is primarily due to
accrued interest expense related to senior unsecured notes which
are payable semi-annually.
Cash Flow From Investing And Financing Activities
_________________________________________________
Cash provided by investing activities for the nine months
ended September 30, 1998 included cash proceeds of $29.3 million
received on the sale of the Tower (see Note 5 of Notes to Condensed
Consolidated Financial Statements) and proceeds from sales of other
property of $1.7 million offset by $6.2 million in capital
expenditures and $3.1 million used to increase other assets. The
capital expenditures took place primarily in the Chemical and
Climate Control Businesses to enhance production and product
delivery capabilities. The increase in other assets includes
approximately $900,000 of cash advances to a start-up aviation
company as discussed later in this report under "Debt Guarantee"
and approximately $600,000 of deposits made in connection with an
interest rate hedge contract related to the agreement with Bayer.
See Note 6 of Notes to Condensed Consolidated Financial Statements.
Net cash used by financing activities included (i) payments on
long-term debt of $19.9 million, including the $12.6 million payoff
of the mortgage on the Tower, (ii) net decreases in revolving debt
of $1.4 million, after application of net proceeds of $16.5 million
from the sale of the Tower, (iii) increases in drafts payable of
$.4 million, (iv) dividends of $2.5 million, and (v) treasury stock
purchases of $3.2 million.
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During the first nine months of 1998, the Company declared and
paid dividends totaling $2.5 million, as follows: (i) $9.00 per
share on each of the outstanding shares of its Series B 12%
Cumulative Convertible Preferred Stock; (ii) $2.44 per share on
each outstanding share of its $3.25 Convertible Exchangeable Class
C Preferred Stock, Series 2; (iii) $.01 per share on each
outstanding share of its Common Stock; and (iv) $10.00 per share on
each outstanding share of its Convertible Noncumulative Preferred
Stock.
Source of Funds
_______________
The Company is a diversified holding Company and its liquidity
is dependent, in large part, on the operations of its subsidiaries
and credit agreements with lenders.
ClimaChem, Inc., a wholly owned subsidiary of the Company,
owns substantially all of the Company's Chemical and Climate
Control Businesses. ClimaChem, Inc. and its subsidiaries
(collectively "ClimaChem") issued in November, 1997, senior
unsecured notes which were exchanged with registered senior notes
of the same amount and substantially the same terms in April, 1998
("Notes") in the aggregate amount of $105 million pursuant to the
terms of an indenture (the "Indenture"). The Notes are jointly and
severally and fully and unconditionally guaranteed on a senior
basis by all, except for one inconsequential subsidiary, of the
existing and all of the future subsidiaries of ClimaChem. The
Company is neither an issuer of, nor a guarantor under, the Notes.
Interest on the Notes is payable semiannually on June 1 and
December 1 of each year, commencing June 1, 1998. The Notes will
mature on December 1, 2007, unless earlier redeemed. The Notes are
redeemable at the option of ClimaChem on December 1, 2002, at
105.375% of the principal amount declining to face amount at
December 1, 2005 and thereafter under the terms set forth in the
Indenture. The Notes are effectively subordinated to all secured
indebtedness of ClimaChem and its subsidiaries.
Under the terms of the Indenture, ClimaChem can transfer funds
to the Company in the form of cash dividends or other distributions
for (i) the amount of taxes that ClimaChem would be required to pay
if they were not consolidated with the Company and (ii) an amount
not to exceed fifty percent (50%) of ClimaChem's net income for the
year in question and (iii) the amount of direct and indirect costs
and expenses incurred by the Company on behalf of ClimaChem
pursuant to a certain services agreement and a certain management
agreement to which ClimaChem and the Company are parties.
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The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by four separate loan
agreements ("Revolving Credit Agreements") with an unrelated lender
("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of certain
of the subsidiaries that are borrowers under the Revolving Credit
Agreements. The Revolving Credit Agreements, as amended, provide
for revolving credit facilities ("Revolver") for total direct
borrowings up to $65.0 million, including the issuance of letters
of credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Revolving Credit Agreements, as amended, provide for interest at
the lender's prime rate plus .5% per annum or, at the Company's
option, on the Lender's LIBOR rate plus 2.875% per annum (which
rates are subject to increase or reduction based upon achieving
specified availability and adjusted tangible net worth levels). At
September 30, 1998, the effective interest rate was 8.75%. The
term of the Revolving Credit Agreements is through December 31,
2000, and is renewable thereafter for successive thirteen month
terms. At September 30, 1998, the availability for borrowings,
based on eligible collateral, approximated $52.2 million ($34.7
million applicable to ClimaChem). Borrowings under the Revolver
outstanding at September 30, 1998, were $20.6 million ($4.3 million
applicable to ClimaChem). Availability for additional borrowings
under the Revolver at September 30, 1998 approximated $31.6 million
($30.4 million applicable to ClimaChem). The Revolving Credit
Agreements, as amended, require the Company to maintain certain
financial ratios and contain other financial covenants, including
tangible net worth requirements and capital expenditure
limitations. At September 30, 1998, the Company and ClimaChem were
not in compliance with certain of these financial covenants. In
November, 1998, the Company and ClimaChem obtained waivers for such
noncompliance and amendments to reset the covenants to amounts the
Company and ClimaChem expect to achieve in future periods. The
annual interest on the outstanding debt under the Revolver at
September 30, 1998 at the rates then in effect would approximate
$1.8 million. The Revolving Credit Agreements also require the
payment of an annual facility fee of 0.5% of the unused revolver.
In addition to the Revolving Credit Agreements discussed
above, as of September 30, 1998, the Company's wholly-owned
subsidiary, DSN Corporation ("DSN"), is a party to several loan
agreements with a financial company (the "Financing Company") for
three projects. At September 30, 1998, DSN had outstanding
borrowings of $11.6 million under these loans. The loans have
repayment schedules of 84 consecutive monthly installments of
principal and interest. The interest rate on each of the loans is
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fixed and range from 8.2% to 8.9%. Annual interest, for the three
notes as a whole, at September 30, 1998, at the agreed to interest
rates would approximate $1.0 million. The loans are secured by the
various DSN property and equipment. The loan agreements require
ClimaChem to maintain certain financial ratios, including tangible
net worth requirements. At September 30, 1998, ClimaChem was not
in compliance with the tangible net worth covenant of these
agreements. In November, 1998, ClimaChem obtained a waiver for
such noncompliance and a waiver through September, 1999 for future
noncompliance, if appropriate. The Company expects to reset
covenants in the fourth quarter of 1998 as it relates to periods
ending on or after December 31, 1999.
The Company's Australian subsidiary has a revolving credit
working capital facility (the "TES Revolving Facility"). The TES
Revolving Facility is approximately AUS$10.5 million (approximately
US$6.0 million). The TES Revolving Facility allows for borrowings
based on specific percentages of qualified eligible assets. At
September 30, 1998, based on the effective exchange rate, the total
availability under the TES Revolving Facility was approximately
US$6.0 million (AUS$10.5 million), with approximately US$3.2
million (AUS$5.6 million approximately) being borrowed at September
30, 1998. Availability for additional borrowings under the TES
Revolving Facility at September 30, 1998 approximated US$2.8
million (AUS$4.9 million). Such debt is secured by substantially
all the assets of TES, plus an unlimited guarantee and indemnity
from LSB and certain subsidiaries of TES. The interest rate on
this debt is dependent upon the borrowing option elected by TES and
had a weighted average rate of 7.23% at September 30, 1998.
Technically, TES is not in compliance with a certain financial
covenant contained in the loan agreement involving the TES
Revolving Facility. However, this covenant was waived at the time
of closing of this loan and the Bank of New Zealand, Australia has
continued to extend credit under this facility. The outstanding
borrowing under the TES Revolving Facility at September 30, 1998,
has been classified as due within one year in the accompanying
condensed consolidated financial statements.
LSB's cash flows are dependent on the cash flows of its
subsidiaries. With the issuance of the Notes in 1997, significant
limitations exist on the cash flows from the ClimaChem subsidiaries
which may be distributed to LSB and its subsidiaries other than
ClimaChem to meet the cash flow requirements of LSB and its
subsidiaries other than ClimaChem. The cash flow requirements of
LSB and its subsidiaries other than ClimaChem include those related
to development and general operations of its subsidiaries other
than ClimaChem, as well as treasury stock purchases and dividend
payments on its preferred stock.
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The primary source of funds for the Company is from its
ClimaChem subsidiary. The Company can receive funds directly from
ClimaChem equal to 50% of ClimaChem's net income and payments
pursuant to (i) a Management Agreement, (ii) a Services Agreement,
(iii) a Tax Sharing Agreement, and (iv) other affiliated
transactions, all of which are provided for by the terms of the
Indenture dated November 26, 1997, between ClimaChem and a trustee
for the Note holders.
As discussed earlier in this report, the Company intends to
spin-off the Automotive Products Business ("Automotive"). When the
planned spin-off of Automotive is accomplished as presently
intended, the liquidity and capital resources required by
Automotive will no longer be included in the Company's financial
statements and Automotive will not be a party to the Revolver. See
"Overview - General" within this MD&A.
The Company, excluding ClimaChem, does not have any material
commitments for capital expenditures.
Management believes that cash flows from revolving credit
facilities of the Company, excluding ClimaChem, the funds from
ClimaChem and other sources will be adequate to meet the
anticipated requirements of the Company, excluding ClimaChem.
ClimaChem has expended approximately $6.0 million for capital
expenditures up to and including September, 1998. Planned capital
expenditures for the balance of 1998 are $3.0 million. ClimaChem's
1999 budget for capital expenditures has not been finalized, but
expenditures will probably equal or exceed those in 1998.
Management believes that ClimaChem's cash flow from
operations, ClimaChem's revolving credit facilities, and other
sources will be adequate to meet the presently anticipated capital
expenditure, working capital, debt service, and permitted dividend
requirements of ClimaChem.
The Company's Chemical Business may be required to incur
additional capital expenditures as discussed in Note 6 of Notes to
Condensed Consolidated Financial Statements regarding a
"Groundwater Monitoring Work Plan" and the Consent Administrative
Agreement related to the Chemical Business' wastewater treatment
system. At the date of this report, the cost of the expenditures
for these environmental matters has not been determined.
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<PAGE>
Joint Ventures and Options to Purchase
______________________________________
Prior to 1997, the Company, through a subsidiary, loaned $2.8
million to a French manufacturer of HVAC equipment whose product
line is compatible with that of the Company's Climate Control
Business in the USA. Under the loan agreement, the Company has the
option to exchange its rights under the loan for 100% of the
borrower's outstanding common stock. The Company obtained a
security interest in the stock of the French manufacturer to secure
its loan. During 1997 the Company advanced an additional $1
million to the French manufacturer bringing the total of the loan
at December 31, 1997 to $3.8 million. As of September 30, 1998 the
balance of the loan remained $3.8 million. As of the date of this
report, the decision has not been made to exercise such option and
the $3.8 million loan, less a $1.5 million valuation reserve, is
carried on the books as a note receivable in other assets.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) limited partner
interest in an energy conservation joint venture (the "Project").
The Project had been awarded a contract to retrofit residential
housing units at a US Army base which it completed during 1996.
The contract involved the installation of energy-efficient
equipment (including air conditioning and heating equipment), which
is expected to reduce utility consumption. For the installation
and management, the Project receives an average of seventy-seven
percent (77%) of all energy and maintenance savings during the
twenty (20) year contract term. The Project spent approximately
$17.5 million to retrofit the residential housing units at the US
Army base. The Project received a non-recourse loan from a lender
to finance approximately $14.0 million of the cost of the Project.
The Company is not guaranteeing any of the lending obligations of
the Project.
During 1995, the Company executed a stock option agreement to
acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company"), which owns the remaining fifty
percent (50%) equity interest in the Project discussed above, to
enhance the marketing of the Company's air conditioning products.
The stock option has a four (4) year term, and a total option
granting price of $1.0 million and annual $100,000 payments for
yearly extensions of the stock option thereafter for up to three
(3) years. Through the date of this report the Company has made
option payments aggregating $1.3 million and has loaned the
Optioned Company approximately $1.4 million. The Company has
recorded reserves of $1.1 million against the loans. Upon exercise
of the stock option by the Company, or upon the occurrence of
certain performance criteria which would give the grantors of the
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<PAGE>
stock option the right to accelerate the date on which the Company
must elect whether to exercise, the Company shall pay certain cash
and issue promissory notes for the balance of the exercise price of
the subject shares. The total exercise price of the subject shares
is $4.0 million, less the amounts paid for the granting and any
extensions of the stock option. As of the date of this report, no
decision to exercise this option has been reached by the Company.
Debt Guarantee
______________
The Company and one of its subsidiaries have guaranteed
approximately $2.6 million of indebtedness of a startup aviation
company in exchange for an ownership interest. The debt guarantee
relates to two note instruments. One note for which the subsidiary
had guaranteed up to $600,000 had a balance of approximately $2.0
million as of September 30, 1998. The other note in the amount of
$2.0 million requires monthly principal payments of $11,111 plus
interest beginning in October 1998 through August 8, 1999, at which
time all outstanding principal and accrued interest are due. In
the event of default of the $2.0 million note, the Company is
required to assume payments on the note with the term extended
until August, 2004. As of the date of this report, the aviation
company is delinquent on the required payments for both of the
above-described debt instruments. In the event the aviation
company does not pay the delinquent amounts within the allowed
grace period, the lenders may require the Company to honor its
guarantees. Under the terms of these note instruments, upon
written notice from the lenders, if the aviation company does not
cure its conditions of default within a specified period of time,
the guarantors become primarily responsible for the payments of the
notes. The $600,000 guarantee is on a line of credit that has a
maturity date of November 18, 1998. Therefore, if not refinanced
or otherwise cured, it may become due and payable by the Company in
the fourth quarter of 1998.
As of the date of this report, no demand has been made upon
the Company's guarantees for either the $2.0 million note or the
line of credit. The aviation company continues to have discussions
with potential investors who appear to have adequate resources to
complete the certification process and begin commercial production.
Should the potential investors ultimately provide funding to the
aviation company, it is expected that the Company will not be
required to perform for the full amount under the $2.0 million note
guarantee, and may also recover a portion of its investment in and
advances to the aviation company previously written off.
In the first nine months of 1998, the aviation company made
capital calls on its shareholders. In contemplation of a sale of
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<PAGE>
the aviation company to an additional investor and pursuant to such
capital calls, the Company invested an additional $860,000 and
loaned an additional net amount of $33,000 to the aviation company
in exchange for additional stock. These transactions increased the
Company's ownership interest to approximately 44.2%. Prior to
funding, if any, by third parties, the Company may be requested to
make additional purchases of capital stock of the aviation company
and/or make additional advances.
Availability of Company's Loss Carry-overs
__________________________________________
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carry-overs from prior periods to reduce the federal income tax
payments which it would otherwise be required to make with respect
to income generated in such future years. Such benefit, if any is
dependent on the Company's ability to generate taxable income in
future periods, for which there is no assurance. Such benefit if
any, will be limited by the Company's reduced NOL for alternative
minimum tax purposes which is approximately $31 million at
September 30, 1998. As of December 31, 1997, the Company had
available NOL carry-overs of approximately $64 million. These NOL
carry-overs will expire beginning in the year 2000. Due to its
recent history of reporting net losses, the Company has established
a valuation allowance on a portion of its NOLs and thus has not
recognized the full benefit of its NOLs in the accompanying
Condensed Consolidated Financial Statements.
The amount of these carry-overs has not been audited or
approved by the Internal Revenue Service ("IRS") and, accordingly,
no assurance can be given that such carry-overs will not be reduced
as a result of audits in the future. In addition, the ability of
the Company to utilize these carry-overs in the future will be
subject to a variety of limitations applicable to corporate
taxpayers generally under both the Internal Revenue Code of 1986,
as amended, and the Treasury Regulations. These include, in
particular, limitations imposed by Code Section 382 and the
consolidated return regulations.
Year 2000 Issue
_______________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability
37
<PAGE>
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, the Company undertook a project to enhance
certain of its IT systems and install certain other technologically
advanced communication systems to provide extended functionality
for operational purposes. A major part of the Company's program
was to implement a standardized IT system purchased from a national
software distributor at all of the Company and subsidiary
operations, and to install a Local Area Network ("LAN"). The IT
system and the LAN necessitated the purchase of additional
hardware, as well as software. The process implemented by the
Company to advance its systems to be more "state-of-the-art"
systems had an added benefit in that the software and hardware
changes necessary to achieve the Company's goals are Year 2000
compliant.
Starting in 1996 through September 30, 1998, the Company has
capitalized approximately $850,000 in costs to accomplish its
enhancement program. The capitalized costs include $422,000 in
external programming costs with the remainder representing hardware
and software purchases. The Company anticipates that the remaining
cost to complete this IT systems enhancement project will be less
than $100,000 and such costs will be capitalized.
The Company's plan to identify and resolve the Year 2000 Issue
involved the following phases: assessment, remediation, testing,
and implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. Based on assessments, the Company determined that
it was required to modify or replace certain portions of its
software and hardware so that those systems will properly utilize
dates beyond December 31, 1999. For its IT exposures which include
financial, order management, and manufacturing systems, the Company
is 100% complete on the assessment and remediation phases. As of
the date of this report, the Company has completed its testing and
has implemented its remediated systems for all of its businesses
except a portion of the Chemical Business. The uncompleted testing
and remediation procedures represent approximately 10% and 25%,
respectively, of the total Year 2000 Program testing and
remediation phase. Completion of the remaining testing and
implementation phase is expected by December 31, 1998. The
assessments also indicated that limited software and hardware
(embedded chips) used in production and manufacturing systems
("operating equipment") also are at limited risk. The Company has
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<PAGE>
completed its assessment and identified remedial action which will
take place in the second quarter 1999. In addition, the Company
has completed its assessment of its product line and determined
that the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant. Accordingly, based
on the Company's current assessment, the Company does not believe
that the Year 2000 presents a material exposure as it relates to
the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company, however, management does not believe such potential impact
to be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company.
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.
39
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<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) establishment of a plan to dispose of non-
core assets, (ii) ability to complete the spin-off of the
Automotive Products Business, (iii) the EDNC Baytown Plant will
cost approximately $65 million, will be completed by the first
quarter of 1999 and, when the EDNC Baytown Plant is fully
operational, the annual sales volume from such plant will be
approximately $35 million to $50 million, (iv) ability to meet
presently anticipated capital expenditures, working capital, debt
service and dividend requirements,(v) amount to be spent in 1998
relating to compliance with federal, state and local Environmental
laws at the El Dorado Facility, (vi) additional capacity for the
production of anhydrous ammonia constructed in 1998, and being
constructed in 1999, may contribute to the decline of its future
market prices, (vii) improve liquidity and profits through
liquidation of assets, (viii) anticipated financial performance,
(ix) ability to comply with the Company's general working capital
requirements, (x) ability to comply with revised financial
covenants under the Revolver, (xi) ability to be able to continue
to borrow under the Company's revolving line of credit, (xii)
ability to use NOL carry-overs from prior years, (xiii)
contingencies should not have a material adverse impact on the
Company's liquidity, (xiv) ability to be in compliance with certain
financial covenants contained in certain loan agreements, (xv)
ability to complete resolution of the Year 2000 Issues in a timely
manner, and (xvi) capital expenditures for the balance of 1998 and
for 1999. While the Company believes the expectations reflected in
such Forward-Looking Statements are reasonable, it can give no
assurance such expectations will prove to have been correct. There
are a variety of factors which could cause future outcomes to
differ materially from those described in this report, including,
but not limited to, (i) decline in general economic conditions,
both domestic and foreign, (ii) material reduction in revenues,
(iii) inability to collect in a timely manner a material amount of
receivables, (iv) increased competitive pressures, (v) costs cannot
40
<PAGE>
be reduced or cost reduction projects are not completed on
schedule, (vi) contracts are not obtained or projects are not
finalized within a reasonable period of time or on schedule, (vii)
inability to dispose of non-core businesses or assets in a
reasonable manner or on reasonable terms due to the inability to
dispose of such on prices or terms satisfactory to the Company or
inability to spin-off such businesses due to legal impediments,
(viii) changes in federal, state and local laws and regulations,
especially environmental regulations, or in interpretation of such,
(ix) additional releases (particularly air emissions into the
environment), (x) potential increases in equipment, maintenance,
operating or labor costs not presently anticipated by the Company,
(xi) inability to retain management or to develop new management,
(xii) the requirement to use internally generated funds for
purposes not presently anticipated, (xiii) inability to become
profitable, or if unable to become profitable, the inability to
secure additional liquidity in the form of additional equity or
debt, (xiv) inability by others to complete construction of
additional capacity for the production of anhydrous ammonia, (xv)
the effect of additional production capacity of anhydrous ammonia
in the western hemisphere, (xvi) the cost for the purchase of
anhydrous ammonia not reducing or continuing to increase or the
cost for natural gas increases, (xvii) changes in operating
strategy or development plans, (xviii) inability to fund the
expansion of the Company's businesses, (xix) adverse results in any
of the Company's pending litigation,(xx) NOL carry-overs are
limited or reduced as a result of future audits by the IRS or being
limited or reduced by limitations applicable to corporate
taxpayers, including, without limitation, limitations imposed by
code Section 382 and the consolidated return limitations, 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.
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<PAGE>
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of LSB Industries, Inc. and subsidiaries as of September 30,
1998, and the related condensed consolidated statements of
operations for the nine month and three month periods ended
September 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the nine month periods ended September
30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of LSB
Industries, Inc. as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated March 16, 1998, except for the fourth paragraph of
Note 5(A), as to which the date is April 8, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 20, 1998
42
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
______ __________________
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously reported
by the Company in Item 3 of its Form 10-K for the fiscal period
ended December 31, 1997, which Item 3 is incorporated by reference
herein, except as described in the Company's Forms 10-Q for the
quarters ended March 31, 1998 and June 30, 1998.
Item 2. Changes in Securities and Use of Proceeds
______ _________________________________________
Not applicable.
Item 3. Defaults Upon Senior Securities
______ _______________________________
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
______ ____________________________________________________
Not applicable.
Item 5. Other Information
_______ _________________
(A) During the third quarter, the Company announced its
intent, subject to satisfactory completion of certain
conditions, to spin-off the Automotive Products Business
("Automotive") to its shareholders as a dividend. The
shares in Automotive would be distributed to LSB
shareholders on a pro-rata basis, with the exact number
of shares of Automotive to be issued in connection with
the spin-off to be determined. The spin-off of
Automotive is subject to, among other things, receipt by
the Company from the Internal Revenue Service or an
opinion of counsel of confirmation of tax-free treatment,
certain filings with the Commission, arrangement for
lines of credit for Automotive, and LSB Board of
Directors' approval. Subject to completion of the above
conditions, management believes that the spin-off will be
completed in the first quarter of 1999. There are no
assurances that the Company will spin-off Automotive.
(B) The Company's common stock and its $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2 (the
"Series 2 Preferred") are currently listed for trading on
43
<PAGE>
the New York Stock Exchange ("NYSE"). The Company
recently fell below the NYSE continued listing criteria
for net tangible assets available to the holders of the
Company's common stock and the three year average net
income. Based on a business plan submitted to the NYSE,
the NYSE has agreed to continue the listing of the
Company's common stock and Series 2 Preferred subject to
certain quarterly reviews. There are no assurances that
the Company will be able to comply with the business plan
presented to the NYSE and that the Company's common stock
and Series 2 Preferred will continue to be listed on the
NYSE.
Item 6. Exhibits and Reports on Form 8-K
______ ________________________________
(A) Exhibits. The Company has included the following
________
exhibits in this report:
4.1 Fourth Amendment to Amended and Restated Loan and
Security Agreement between the Company and BankAmerica
Business Credit, Inc. ("BABC"). Substantially identical
amendments have been entered into by each of L & S
Bearing Co. and Summit Machine Tool Manufacturing Corp.
with BABC, and such are hereby omitted and will be
provided upon the Commission's request.
4.2 Fourth Amendment to Amended and Restated Loan and
Security Agreement between BABC and Climate Master, Inc.,
International Environmental Corporation, El Dorado
Chemical Company and Slurry Explosive Corporation.
10.1 Waiver letter dated November 17, 1998, from The CIT
Group.
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule.
(B) Reports of Form 8-K. The Company did not file any
___________________
reports on Form 8-K during the quarter ended September
30, 1998.
44
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this report on its behalf on this 23rd day of
November, 1998.
LSB INDUSTRIES, INC.
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, Controller and
Treasurer(Principal Accounting
Officer)
45
<PAGE>
EXHIBIT INDEX
_____________
Exhibit Sequential
No. Description Page No.
_______ ___________ ___________
4.1 Fourth Amendment to Amended and Restated
Loan and Security Agreement between the
Company and BankAmerica Business Credit,
Inc. ("BABC"). Substantially identical
amendments have been entered into by each
of L & S Bearing Co. and Summit Machine
Tool Manufacturing Corp. with BABC, and
such are hereby omitted and will be provided
upon the Commission's request. 47
4.2 Fourth Amendment to Amended and Restated
Loan and Security Agreement between BABC
and Climate Master, Inc., International
Environmental Corporation, El Dorado
Chemical Company and Slurry Explosive
Corporation. 56
10.1 Waiver letter dated November 17, 1998, from
The CIT Group. 68
15.1 Letter Re: Unaudited Interim Financial
Information. 69
27.1 Financial Data Schedule. 70
46
FOURTH AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (the "Amendment") is dated as of November 19,
1998, and entered into by and between BANKAMERICA BUSINESS CREDIT,
INC. ("Lender") and LSB INDUSTRIES, INC. ("Borrower").
WHEREAS, Lender and Borrower have entered into that certain
Amended and Restated Loan and Security Agreement dated as of
November 21, 1997 as amended by that certain First Amendment to
Amended and Restated Loan and Security Agreement dated as of March
12, 1998, that certain Second Amendment to Amended and Restated
Loan and Security Agreement dated as of June 30, 1998, and that
certain Third Amendment to Amended and Restated Loan and Security
Agreement dated as of August 14, 1998 (as so amended, the
"Agreement");
WHEREAS, two Events of Default have occurred under the
Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events
of Default and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default
and amend the Agreement subject to the terms and conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in the Agreement and this Amendment, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
ARTICLE I
__________
Definitions
___________
Section 1.01. Definitions. Capitalized terms used in this
____________
Amendment, to the extent not otherwise defined herein, shall have
the same meanings as in the Agreement, as amended hereby.
Section 1.02. New Definitions. The following new definitions
________________
are hereby added to the Agreement and read as follows:
"Automotive Subsidiaries" means the following LSB
_________________________
Guarantor Subsidiaries: L&S Automotive Products Co., LSB Extrusion
Co., International Bearings, Inc., Rotex Corporation, and
Tribonetics Corporation.
"Automotive Termination Date" means the date that LSB
___________________________
obtains alternative financing for the Automotive Subsidiaries
in accordance with the provisions of Section 6.16(b) and
indefeasibly repays all Obligations attributable to the Automotive
Subsidiaries.
<PAGE>
"Springing Covenant Event" means three consecutive Business
________________________
Days when the aggregate Availability of the LSB Consolidated
Borrowing Group under all of the LSB-Related Loan Agreements is
less than Fifteen Million Dollars ($15,000,000) on each such
Business Day."
ARTICLE II
__________
Amendments
__________
Section 2.01. Amendment to Section 9.16. Section 9.16 of the
________________________
Agreement is hereby amended to read in its entirety as follows:
"9.16 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
<TABLE>
<CAPTION>
LSB Adjusted Tangible Net Worth. The LSB Adjusted
________________________________
Tangible Net Worth increased by an amount equal to the purchase
price paid by Borrower for its treasury stock for purchases from
January 1, 1998 through termination of this Agreement, which amount
shall not exceed $6,000,000, will not be less than the following
amounts at the end of each of the Fiscal Quarters during the
following Fiscal Years:
Fiscal Quarters in the
Following Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
______________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 $34,500,000
First Fiscal Quarter
during Fiscal Year
Ending December 31, 1999 The LSB Adjusted Tangible Net Worth
as of December 31, 1998 less
$4,500,000 and less all Dividends
actually paid by LSB in cash from
January 1, 1999 until the date of
calculation.
Second Fiscal Quarter
during Fiscal Year
Ending December 31, 1999 The LSB Adjusted Tangible Net Worth
as of March 31, 1999 and less all
Dividends actually paid by LSB in
cash from January 1, 1999 until the
date of calculation.
Third Fiscal Quarter
during Fiscal Year
Ending December 31, 1999
and each Fiscal Quarter
during each Fiscal Year
ending thereafter: The LSB Adjusted Tangible Net Worth
as of June 30, 1999 plus fifty
percent (50%) of the profits for
each fiscal quarter thereafter, if
any, and less all Dividends actually
paid by LSB in cash from January 1,
1999 until the date of calculation."
</TABLE>
-2-
<PAGE>
Section 2.02. Amendment to Section 9.17. Section 9.17 of the
_________________________ _____________
Agreement is hereby amended to read in its entirety as follows:
"9.17 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
<TABLE>
<CAPTION>
LSB Debt Ratio. The ratio of Debt of the LSB
_______________
Consolidated Borrowing Group to the LSB Adjusted Tangible Net
Worth increased by an amount equal to the purchase price paid
by Borrower for its treasury stock for purchases from January
1, 1998 through termination of this Agreement, which amount
shall not exceed $6,000,000, will not be greater than the
following ratios at the end of each of the Fiscal Quarters
during the following Fiscal Years:
Fiscal Quarters in the
Following Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
_______________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 5.00 to 1
Fiscal Year Ending
December 31, 1999 5.00 to 1 5.00 to 1 5.00 to 1 5.00 to 1
Each Fiscal Quarter during each
Fiscal Year ending thereafter: 5.00 to 1."
</TABLE>
Section 2.03. Sale of Automotive Subsidiaries.
________________________________
Notwithstanding any provision in the Agreement to the contrary,
Borrower and Lender hereby agree that, unless the Automotive
Termination Date occurs on or before January 15, 1999, Borrower
will pay Lender on January 15, 1999 a fee in the amount of
$250,000, which fee may be charged to Borrower's account as a
Revolving Loan.
ARTICLE III
_____________
Waivers
__________
Section 3.01. Waiver of Events of Default.
___________________________
(a) The Lender hereby waives the following Events of
Default: (i) the LSB Borrowing Group's Adjusted Tangible Net Worth
for the Fiscal Quarter ending September 30, 1998 was less than
$43,900,000, in breach of Section 9.16 of the Loan Agreement; and
(ii) the LSB Borrowing Group's Debt Ratio for the Fiscal Quarter
ending September 30, 1998 was greater than 3.75 to 1.0, in breach
of Section 9.17 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and shall
only be effective to the extent described above. The waiver is
limited to the facts and circumstances referred to herein and shall
not operate as (i) a waiver of or consent to non-compliance with
any other section or provision of the Loan Agreement, (ii) a waiver
of any right, power, or remedy of the Lender under the Loan
-3-
<PAGE>
Agreement (except as provided herein), or (iii) a waiver of any
other Event of Default or Event which may exist under the Loan
Agreement.
ARTICLE IV
____________
Ratifications, Representations and Warranties
________________________________________________
Section 4.01. Ratifications. The terms and provisions set
_____________
forth in this Amendment shall modify and supersede all inconsistent
terms and provisions set forth in the Agreement and, except as
expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement, including, without limitation, all
financial covenants contained therein, are ratified and confirmed
and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower
_______________________________
hereby represents and warrants to Lender that the execution,
delivery and performance of this Amendment and all other loan,
amendment or security documents to which Borrower is or is to be a
party hereunder (hereinafter referred to collectively as the "Loan
Documents") executed and/or delivered in connection herewith, have
been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower.
ARTICLE V
___________
Conditions Precedent
____________________
Section 5.01. Conditions. The effectiveness of this
__________
Amendment is subject to the satisfaction of the following
conditions precedent (unless specifically waived in writing by the
Lender):
(a) Lender shall have received all of the following,
each dated (unless otherwise indicated) as of the date of this
Amendment, in form and substance satisfactory to Lender in its
sole discretion:
(i) Company Certificate. A certificate executed by
___________________
the Secretary or Assistant Secretary of Borrower certifying (A)
that Borrower's Board of Directors has met and adopted, approved,
consented to and ratified the resolutions attached thereto which
authorize the execution, delivery and performance by Borrower of
the Amendment and the Loan Documents, (B) the names of the officers
of Borrower authorized to sign this Amendment and each of the Loan
Documents to which Borrower is to be a party hereunder, (C) the
specimen signatures of such officers, and (D) that neither the
Articles of Incorporation nor Bylaws of Borrower have been amended
since the date of the Agreement;
(ii) No Material Adverse Change. There shall have
__________________________
occurred no material adverse change in the business, operations,
financial condition, profits or prospects of Borrower, or in the
-4-
<PAGE>
Collateral since September 30, 1998, and the Lender shall have
received a certificate of Borrower's chief executive officer to
such effect;
(iii) Other Documents. Borrower shall have executed
________________
and delivered such other documents and instruments as well as
required record searches as Lender may require.
(b) All corporate proceedings taken in connection with
the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender and its legal counsel,
Jenkens & Gilchrist, a Professional Corporation.
ARTICLE VI
___________
Miscellaneous
______________
Section 6.01. Survival of Representations and Warranties.
____________________________________________
All representations and warranties made in the Agreement or any
other document or documents relating thereto, including, without
limitation, any Loan Document furnished in connection with this
Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and
warranties or the right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of
______________________
the Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended
hereby.
Section 6.03. Severability. Any provision of this Amendment
_____________
held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision
so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER
______________
LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF OKLAHOMA AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF OKLAHOMA.
Section 6.05. Successors and Assigns. This Amendment is
_______________________
binding upon and shall inure to the benefit of Lender and Borrower
and their respective successors and assigns; provided, however,
that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
Lender may assign any or all of its rights or obligations hereunder
without the prior consent of Borrower.
-5-
<PAGE>
Section 6.06. Counterparts. This Amendment may be executed
_____________
in one or more counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
Section 6.07. Effect of Waiver. No consent or waiver,
_________________
express or implied, by Lender to or of any breach of or deviation
from any covenant or condition of the Agreement or duty shall be
deemed a consent or waiver to or of any other breach of or
deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in
exercising, and no course of dealing with respect to, any right,
power, or privilege under this Amendment, the Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or privilege
under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege. The rights and remedies
provided for in the Agreement and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by
law.
Section 6.08. Headings. The headings, captions and
_________
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
Section 6.09. Releases. As a material inducement to Lender
_________
to enter into this Amendment, Borrower hereby represents and
warrants that there are no claims or offsets against, or defenses
or counterclaims to, the terms and provisions of and the other
obligations created or evidenced by the Agreement or the other Loan
Documents. Borrower hereby releases, acquits, and forever
discharges Lender, and its successors, assigns, and predecessors in
interest, their parents, subsidiaries and affiliated organizations,
and the officers, employees, attorneys, and agents of each of the
foregoing (all of whom are herein jointly and severally referred to
as the "Released Parties") from any and all liability, damages,
losses, obligations, costs, expenses, suits, claims, demands,
causes of action for damages or any other relief, whether or not
now known or suspected, of any kind, nature, or character, at law
or in equity, which Borrower now has or may have ever had against
any of the Released Parties, including, but not limited to, those
relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the
Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of
commercial reasonableness or special relationships, such as
fiduciary, trust or confidential relationships, (d) allegations of
dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference
or negligence, (e) allegations of tortious interference with
present or prospective business relationships or of antitrust, or
(f) slander, libel or damage to reputation, (hereinafter being
collectively referred to as the "Claims"), all of which Claims are
hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on
___________________
demand (i) all costs and expenses reasonably incurred by Lender in
connection with the preparation, negotiation and execution of this
Amendment and the other Loan Documents executed pursuant hereto and
any and all subsequent amendments, modifications, and supplements
hereto or thereto, including, without limitation, the costs and
fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any
rights under the Agreement, this Amendment and/or other Loan
-6-
<PAGE>
Documents, including, without limitation, the costs and fees of
Lender's legal counsel and the allocated cost of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER
___________________
WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL
AGREEMENTS BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER"
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
______________________________
Tony M. Shelby, Vice President
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Michael J. Jasaitis
________________________________
Michael J. Jasaitis,
Vice President
-7-
<PAGE>
<PAGE>
ACKNOWLEDGED AND AGREED TO:
_______________________________
Each of the following "LSB Guarantor Subsidiaries" hereby
acknowledges the execution of and consents to the terms and
conditions of that certain Fourth Amendment to Amended and Restated
Loan and Security Agreement dated as of November 19, 1998 between
LSB Industries, Inc., and BABC.
L&S AUTOMOTIVE PRODUCTS, CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
MOREY MACHINE TOOL MANUFACTURING
CORPORATION
By: /s/ Tony M. Shelby
_____________________________________
Tony M. Shelby,
Vice President acting on
behalf of each of the above.
-8-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Fourth
Amendment to Amended and Restated Loan and Security Agreement dated
as of November 19, 1998, between LSB Industries, Inc. and
BankAmerica Business Credit, Inc. ("Creditor") and reaffirms its
obligations under (i) that certain Continuing Guaranty with
Security Agreement (the "Guaranty") dated as of November 21, 1997,
and (ii) that certain Cross-Collateralization and Cross-Guaranty
Agreement (the "Cross-Collateralization Agreement") dated as of
November 21, 1997, each made by the undersigned in favor of the
Creditor, and acknowledges and agrees that the Guaranty and the
Cross-Collateralization Agreement remain in full force and effect
and the Guaranty and the Cross-Collateralization Agreement are
hereby ratified and confirmed.
Dated as of November 19, 1998.
LSB INDUSTRIES, INC.
L&S BEARING CO.
SUMMIT MACHINE TOOL MANUFACTURING CORP.
L&S AUTOMOTIVE PRODUCTS CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
MOREY MACHINERY MANUFACTURING
CORPORATION
By: /s/ Tony M. Shelby
________________________________
Tony M. Shelby, Vice President
acting on behalf of each of the
above
-9-
S FOURTH AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (the "Amendment") is dated as of November 19,
1998, and entered into by and between BANKAMERICA BUSINESS CREDIT,
INC. ("Lender") and CLIMATE MASTER, INC. ("Climate Master"),
INTERNATIONAL ENVIRONMENTAL CORPORATION ("IEC"), EL DORADO CHEMICAL
COMPANY ("EDC") and SLURRY EXPLOSIVE CORPORATION ("Slurry")
(Climate, IEC, EDC, and Slurry being collectively referred to
herein as "Borrower").
WHEREAS, Lender and Borrower have entered into that certain
Amended and Restated Loan and Security Agreement dated as of
November 21, 1997 as amended by that certain First Amendment to
Amended and Restated Loan and Security Agreement dated as of March
12, 1998, that certain Second Amendment to Amended and Restated
Loan and Security Agreement dated as of June 30, 1998, and that
certain Third Amendment to Amended and Restated Loan and Security
Agreement dated as of August 14, 1998 (as so amended, the
"Agreement");
WHEREAS, two Events of Default have occurred under the
Agreement;
WHEREAS, the Borrower desires that the Lender waive the Events
of Default and amend the Agreement in certain respects; and
WHEREAS, the Lender is willing to waive the Events of Default
and amend the Agreement subject to the terms and conditions
contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in the Agreement and this Amendment, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
ARTICLE I
_________
Definitions
___________
Section 1.01. Definitions. Capitalized terms used in this
___________
Amendment, to the extent not otherwise defined herein, shall have
the same meanings as in the Agreement, as amended hereby.
Section 1.02. New Definitions. The following new definitions
_______________
are hereby added to the Agreement and read as follows:
"Automotive Subsidiaries" means the following LSB
_______________________
Guarantor Subsidiaries: L&S Automotive Products Co., LSB Extrusion
Co., International Bearings, Inc., Rotex Corporation, and
Tribonetics Corporation.
<PAGE>
"Automotive Termination Date" means the date that LSB
___________________________
obtains alternative financing for the Automotive Subsidiaries in
accordance with the provisions of Section 6.16(b) of the Amended
and Restated Loan and Security Agreement, dated November 21, 1997,
as amended, between Lender and LSB and indefeasibly repays all
Obligations attributable to the Automotive Subsidiaries.
"Springing Covenant Event" means three consecutive
________________________
Business Days when the aggregate Availability of the LSB
Consolidated Borrowing Group under all of the LSB-Related Loan
Agreements is less than Fifteen Million Dollars ($15,000,000) on
each such Business Day."
ARTICLE II
__________
Amendments
__________
Section 2.01 Amendment to Section 9.16. Section 9.16 of the
_________________________ ___________
Agreement is hereby amended to read in its entirety as follows:
"9.16 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
<TABLE>
<CAPTION>
CCI Adjusted Tangible Net Worth. The CCI Adjusted
_______________________________
Tangible Net Worth will not be less than the following amounts at
the end of each of the Fiscal Quarters during the following Fiscal
Years:
Fiscal Quarters
in the
Following
Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
_____________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year
Ending
December 31, 1998 $18,500,000
First Fiscal
Quarter during
Fiscal Year Ending
December 31, 1999 The CCI Adjusted Tangible Net Worth as of
December 31, 1998 less $1,500,000.
____
Second Fiscal
Quarter during
Fiscal Year Ending
December 31, 1999 The CCI Adjusted Tangible Net Worth as of
March 31, 1999.
-2-
<PAGE>
Third Fiscal Quarter
during Fiscal Year
Ending December 31,
1999 and each
Fiscal Quarter
during each Fiscal
Year ending there-
after: The CCI Adjusted Tangible Net Worth as of
March 31, 1999 plus fifty percent (50%) of
CCI's profits for the prior fiscal quarter
without taking into account any losses."
</TABLE>
-3-
<PAGE>
Section 2.02. Amendment to Section 9.17. Section 9.17 of the
________________________ ___________
Agreement is hereby amended to read in its entirety as follows:
"9.17 At all times (i) prior to the Automotive
Termination Date and (ii) after the Automotive Termination
Date but only if a Springing Covenant Event has occurred
whereafter such financial covenant shall remain in effect
until the termination of this Agreement, the following
financial covenant shall be in effect:
<TABLE>
<CAPTION>
Debt Ratio. The ratio of Debt of the CCI Consolidated
__________
Group to the CCI Adjusted Tangible Net Worth will not be greater
than the following ratios at the end of each of the Fiscal Quarters
during the following Fiscal Years:
Fiscal Quarters
in the Following
Fiscal Years 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
_________________ ___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Fiscal Year Ending
December 31, 1998 7.75:1
Fiscal Year Ending
December 31, 1999
and 7.75:1 7.75:1 7.75:1 7.75:1
Each Fiscal Quarter during each Fiscal
Fiscal Year ending thereafter: 7.75:1"
</TABLE>
ARTICLE III
___________
Waivers
_______
Section 3.01. Waiver of Events of Default.
___________________________
(a) The Lender hereby waives the following Events of
Default: (i) the CCI Adjusted Tangible Net Worth for the Fiscal
Quarter ending September 30, 1998 was less than $23,000,000, in
breach of Section 9.16 of the Loan Agreement; and (ii) the CCI
Consolidated Group's Debt Ratio for the Fiscal Quarter ending
September 30, 1998 was greater than 6.35 to 1.0, in breach of
Section 9.17 of the Loan Agreement.
(b) The foregoing waiver is only applicable to and shall
only be effective to the extent described above. The waiver is
limited to the facts and circumstances referred to herein and shall
not operate as (i) a waiver of or consent to non-compliance with
any other section or provision of the Loan Agreement, (ii) a waiver
of any right, power, or remedy of the Lender under the Loan
Agreement (except as provided herein), or (iii) a waiver of any
other Event of Default or Event which may exist under the Loan
Agreement.
-4-
<PAGE>
ARTICLE IV
__________
Ratifications, Representations and Warranties
______________________________________________
Section 4.01. Ratifications. The terms and provisions set
_____________
forth in this Amendment shall modify and supersede all inconsistent
terms and provisions set forth in the Agreement and, except as
expressly modified and superseded by this Amendment, the terms and
provisions of the Agreement, including, without limitation, all
financial covenants contained therein, are ratified and confirmed
and shall continue in full force and effect. Lender and Borrower
agree that the Agreement as amended hereby shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Representations and Warranties. Borrower
_______________________________
hereby represents and warrants to Lender that the execution,
delivery and performance of this Amendment and all other loan,
amendment or security documents to which Borrower is or is to be a
party hereunder (hereinafter referred to collectively as the "Loan
Documents") executed and/or delivered in connection herewith, have
been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower.
ARTICLE V
__________
Conditions Precedent
_____________________
Section 5.01. Conditions. The effectiveness of this
__________
Amendment is subject to the satisfaction of the following
conditions precedent (unless specifically waived in writing by the
Lender):
(a) Lender shall have received all of the following,
each dated (unless otherwise indicated) as of the date of this
Amendment, in form and substance satisfactory to Lender in its
sole discretion:
(i) Company Certificate. A certificate executed by
___________________
the Secretary or Assistant Secretary of Borrower certifying (A)
that Borrower's Board of Directors has met and adopted, approved,
consented to and ratified the resolutions attached thereto which
authorize the execution, delivery and performance by Borrower of
the Amendment and the Loan Documents, (B) the names of the officers
of Borrower authorized to sign this Amendment and each of the Loan
Documents to which Borrower is to be a party hereunder, (C) the
specimen signatures of such officers, and (D) that neither the
Articles of Incorporation nor Bylaws of Borrower have been amended
since the date of the Agreement;
(ii) No Material Adverse Change. There shall have
___________________________
occurred no material adverse change in the business, operations,
financial condition, profits or prospects of Borrower, or in the
Collateral since September 30, 1998, and the Lender shall have
received a certificate of Borrower's chief executive officer to
such effect;
-5-
<PAGE>
(iii) Other Documents. Borrower shall have executed
________________
and delivered such other documents and instruments as well as
required record searches as Lender may require.
(b) All corporate proceedings taken in connection with
the transactions contemplated by this Amendment and all
documents, instruments and other legal matters incident
thereto shall be satisfactory to Lender and its legal counsel,
Jenkens & Gilchrist, a Professional Corporation.
ARTICLE VI
____________
Miscellaneous
_______________
Section 6.01. Survival of Representations and Warranties.
___________________________________________
All representations and warranties made in the Agreement or any
other document or documents relating thereto, including, without
limitation, any Loan Document furnished in connection with this
Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and
warranties or the right of Lender to rely thereon.
Section 6.02. Reference to Agreement. The Agreement, each of
______________________
the Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended
hereby.
Section 6.03. Severability. Any provision of this Amendment
____________
held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision
so held to be invalid or unenforceable.
Section 6.04. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER
______________
LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF OKLAHOMA AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF OKLAHOMA.
Section 6.05. Successors and Assigns. This Amendment is
_______________________
binding upon and shall inure to the benefit of Lender and Borrower
and their respective successors and assigns; provided, however,
that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
Lender may assign any or all of its rights or obligations hereunder
without the prior consent of Borrower.
Section 6.06. Counterparts. This Amendment may be executed
____________
in one or more counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together
shall constitute one and the same instrument.
-6-
<PAGE>
Section 6.07. Effect of Waiver. No consent or waiver,
________________
express or implied, by Lender to or of any breach of or deviation
from any covenant or condition of the Agreement or duty shall be
deemed a consent or waiver to or of any other breach of or
deviation from the same or any other covenant, condition or duty.
No failure on the part of Lender to exercise and no delay in
exercising, and no course of dealing with respect to, any right,
power, or privilege under this Amendment, the Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or privilege
under this Amendment, the Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege. The rights and remedies
provided for in the Agreement and the other Loan Documents are
cumulative and not exclusive of any rights and remedies provided by
law.
Section 6.08. Headings. The headings, captions and
________
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
Section 6.09. Releases. As a material inducement to Lender
________
to enter into this Amendment, Borrower hereby represents and
warrants that there are no claims or offsets against, or defenses
or counterclaims to, the terms and provisions of and the other
obligations created or evidenced by the Agreement or the other Loan
Documents. Borrower hereby releases, acquits, and forever
discharges Lender, and its successors, assigns, and predecessors in
interest, their parents, subsidiaries and affiliated organizations,
and the officers, employees, attorneys, and agents of each of the
foregoing (all of whom are herein jointly and severally referred to
as the "Released Parties") from any and all liability, damages,
losses, obligations, costs, expenses, suits, claims, demands,
causes of action for damages or any other relief, whether or not
now known or suspected, of any kind, nature, or character, at law
or in equity, which Borrower now has or may have ever had against
any of the Released Parties, including, but not limited to, those
relating to (a) usury or penalties or damages therefor, (b)
allegations that a partnership existed between Borrower and the
Released Parties, (c) allegations of unconscionable acts, deceptive
trade practices, lack of good faith or fair dealing, lack of
commercial reasonableness or special relationships, such as
fiduciary, trust or confidential relationships, (d) allegations of
dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference
or negligence, (e) allegations of tortious interference with
present or prospective business relationships or of antitrust, or
(f) slander, libel or damage to reputation, (hereinafter being
collectively referred to as the "Claims"), all of which Claims are
hereby waived.
Section 6.10. Expenses of Lender. Borrower agrees to pay on
__________________
demand (i) all costs and expenses reasonably incurred by Lender in
connection with the preparation, negotiation and execution of this
Amendment and the other Loan Documents executed pursuant hereto and
any and all subsequent amendments, modifications, and supplements
hereto or thereto, including, without limitation, the costs and
fees of Lender's legal counsel and the allocated cost of staff
counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any
rights under the Agreement, this Amendment and/or other Loan
Documents, including, without limitation, the costs and fees of
Lender's legal counsel and the allocated cost of staff counsel.
Section 6.11. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER
__________________
WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL
-7-
<PAGE>
AGREEMENTS BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER":
CLIMATE MASTER, INC.
By: /s/ Tony M. Shelby
___________________________________
Tony M. Shelby
Vice President
INTERNATIONAL ENVIRONMENTAL CORPORATION
By: /s/ Tony M. Shelby
____________________________________
Tony M. Shelby
Vice President
EL DORADO CHEMICAL COMPANY
By: /s/ Tony M. Shelby
__________________________________
Tony M. Shelby
Vice President
-8-
<PAGE>
SLURRY EXPLOSIVE CORPORATION
By: /s/ Tony M. Shelby
__________________________________
Tony M. Shelby
Vice President
-9-
<PAGE>
"LENDER"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Michael J. Jasaitis
___________________________________
Michael J. Jasaitis, Vice President
-10-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
___________________________
The undersigned hereby acknowledges the execution of, and
consents to, the terms and conditions of that certain Fourth
Amendment to Amended and Restated Loan and Security Agreement dated
as of November 19, 1998, between Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Corporation, Slurry Explosive Corporation and BankAmerica Business
Credit, Inc. ("Creditor") and reaffirms its obligations under that
certain Continuing Guaranty (the "Guaranty") dated as of November
21, 1997, made by the undersigned in favor of the Creditor, and
acknowledges and agrees that the Guaranty remains in full force
and effect and the Guaranty is hereby ratified and confirmed.
Dated as of November 19, 1998.
CLIMACHEM, INC.
By: /s/ Tony M. Shelby
______________________________
Tony M. Shelby, Vice President
-11-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
_____________________________
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Fourth
Amendment to Amended and Restated Loan and Security Agreement dated
as of November 19, 1998, between Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Corporation, Slurry Explosive Corporation and BankAmerica Business
Credit, Inc. ("Creditor") and each reaffirms its obligations under
that certain Continuing Guaranty with Security Agreement (the
"Guaranty") dated as of November 21, 1997, and acknowledges and
agrees that such Guaranty remains in full force and effect and each
Guaranty is hereby ratified and confirmed.
Dated as of November 19, 1998.
LSB INDUSTRIES, INC.
LSB CHEMICAL CORP.
L&S AUTOMOTIVE PRODUCTS CO.
L&S BEARING CO.
INTERNATIONAL BEARINGS, INC.
LSB EXTRUSION CO.
ROTEX CORPORATION
TRIBONETICS CORPORATION
SUMMIT MACHINE TOOL MANUFACTURING
CORP.
MOREY MACHINERY MANUFACTURING
CORPORATION
CHP CORPORATION
KOAX CORP.
APR CORPORATION
CLIMATE MATE, INC.
THE ENVIRONMENTAL GROUP, INC.
UNIVERSAL TECH CORPORATION
By: /s/ Tony M. Shelby
_______________________________
Tony M. Shelby, Vice President
acting on behalf of each of the
above
-12-
The CIT Group/
Equipment Financing
550 CIT Drive
P. O. Box 490
Livingston, NJ 07030-0480
November 17, 1998
THE
CIT
GROUP
Jim Jones
Vice President and Treasurer
LSB Industries
16 South Pennsylvania Avenue
Oklahoma City, OK 73107
Dear Mr. Jones:
Reference is made to that certain Loan and Security Agreement,
dated as of October 31, 1994, as amended, a Loan and Security
Agreement, dated as of April 5, 1995, as amended, and a Loan and
Security Agreement dated as of November 15, 1995, as amended, by
and between The CIT Group/Equipment Financing, Inc. ("Lender") and
DSN Corporation ("Borrower").
Borrower has informed Lender that ClimaChem was not in compliance
with the Tangible Net Worth covenant contained in Section 6.10, and
the Leverage Ratio covenant of the above referenced Agreement for
the period ended September 30, 1998, and will be unable to meet
these requirements through and including the quarter ending
September 30, 1999.
Borrower has requested, that notwithstanding anything to the
contrary in the Agreement, that Lender waive these instances of
non-compliance for these periods.
Lender hereby waives these instances of non-compliance for the
periods mentioned above, provided that such waiver is subject to
the following conditions:
(1) This waiver is strictly limited to the Tangible Net Worth and
Leverage Ratio Covenants of the Agreement.
(2) The waiver is strictly limited to the specific periods above.
Lender also agrees to consider resetting the covenants sixty (60)
days from the date of this waiver, along with a determination of
the fee. However, the reset of the covenants is subject to
approval by Lender's Credit Committee.
Sincerely,
THE CIT GROUP/Equipment Financing, Inc.
By /s/ Anthony Joseph
______________________________________
Anthony G. Joseph
Vice President
An affiliate of
The Dai-Ichi Kangyo Bank, Limited
Letter of Acknowledgment Re: Unaudited Financial Information
The Board of Directors
LSB Industries, Inc.
We are aware of the incorporation by reference in the Registration
Statement (Form S-8 No. 33-8302) pertaining to the 1981 and 1986
Incentive Stock Option Plans, the Registration Statement (Form S-8
No. 333-58225) pertaining to the 1993 Stock Option and Incentive
Plan, the Registration Statement (Form S-8 No. 333-62831, No. 333-
62835, No. 333-62839, No. 333-62843, and No. 333-62841) pertaining
to the registration of an aggregate of 225,000 shares of common
stock pursuant to certain Non-Qualified Stock Option Agreements
for various employees and the Registration Statement (Form S-3
No. 33-69800) of LSB Industries, Inc. and in the related Prospectuses
of our report dated November 20, 1998, relating to the unaudited
condensed consolidated interim financial statements of LSB Industries,
Inc. which are included in its Form 10-Q for the quarter ended
September 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is
not a part of the registration statement prepared or certified by
accountants within the meaning of Section 7 or 11 of the Securities
Act of 1933.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
November 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $ 1,322
<SECURITIES> 0
<RECEIVABLES> 61,124
<ALLOWANCES> 1,863
<INVENTORY> 66,211
<CURRENT-ASSETS> 136,204
<PP&E> 191,451
<DEPRECIATION> 93,602
<TOTAL-ASSETS> 253,601
<CURRENT-LIABILITIES> 58,517
<BONDS> 149,528
141
48,000
<COMMON> 1,511
<OTHER-SE> (4,096)
<TOTAL-LIABILITY-AND-EQUITY> 253,601
<SALES> 244,242
<TOTAL-REVENUES> 258,706
<CGS> 192,318
<TOTAL-COSTS> 237,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,062
<INCOME-PRETAX> 7,778
<INCOME-TAX> 275
<INCOME-CONTINUING> 7,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,503
<EPS-PRIMARY> .41
<EPS-DILUTED> .39
</TABLE>
